For Want of a Union Mortgage Clause Lender Gets Nothing

Loss Payable Clause Limits Recovery Only if Insured Can Recover

Barry Zalma

Sep 17, 2024

Transcript

THE JURY FINDING

The jury ultimately determined that AMC principal, Russel Maxon, had intentionally started the fire, which, in turn, meant that coverage was excluded under AMC’s policy. The Weatherspoons appealed, challenging the court’s decision to grant the motion for judgment as a matter of law as well as two evidentiary rulings made during trial.

FACTUAL BACKGROUND

The Weatherspoons originally owned and operated T-Spoons, a malt beverage store in McLaughlin, South Dakota. In July 2017, they entered into a contract for deed to sell T-Spoons to Russel and Tracy Maxon. The Maxons purchased the property through their company, AMC, and began operating T-Spoons. Pursuant to the contract for deed, the Maxons were required to insure the property and list the Weatherspoons as “loss payees.” AMC purchased property coverage under a commercial general liability insurance policy issued by Acuity in August 2017 and listed the Weatherspoons as loss payees.

On April 15, 2018, the T-Spoons building was damaged by a fire that originated in the basement. Acuity hired Chris Rallis to investigate the fire who concluded that the fire was intentionally set and believed Russel had started it because Russel was the only person who had access to the building immediately prior to the fire. Rallis reasoned, though not noted in his investigation report, that Russel had a motive to start the fire because AMC was struggling financially. Beer distributors had stopped delivering to T-Spoons because the Maxons had written bad checks, and Russel had supplied T-Spoons with inventory by purchasing beer from a retail source. Special Agent Derek Hill of the Bureau of Alcohol, Tobacco, and Firearms (ATF) also conducted an investigation and determined the fire was intentionally started by Russel.

Following the fire, the Weatherspoons filed a proof of loss with Acuity in an effort to claim damages relating to the T-Spoons fire. Acuity denied the claim, reasoning that the Weatherspoons’ ability to collect, as loss payees, was dependent on whether AMC could make a compensable claim. After Acuity denied the Weatherspoons’ claim, it sued for declaratory judgment naming the Weatherspoons and AMC as defendants.

THE TRIAL

The case was tried to a jury. Acuity presented the testimony of Special Agent Hill via a videotaped trial deposition. special Agent Hill testified that he is a certified fire investigator and related his training, education, and experience regarding fire investigations. He is also a federal law enforcement agent. Special Agent Hill was able to determine that the fire had started in the basement and had originated in multiple locations. He also found plastic water bottles in the basement that contained gasoline. Following his investigation, Special Agent Hill determined that the fire had been intentionally started. He also believed Russel had been responsible because “there was nobody else present” in the building before the fire started.

Acuity’s fire investigator, Rallis, testified he spoke with Russel who said that he had been in the building doing laundry in the basement before the fire started, that there were multiple points of origin for the fire, starting “near the back door, down the stairway and into the basement area and throughout the basement area.” Rallis also determined the fire started and was spread using “a trailer and booster technique[.]” Rallis concluded the fire was intentionally started. Rallis also believed that Russel had a “[f]inancial motive” to start the fire.

Following its deliberation, the jury returned a verdict in which ten of the twelve jurors found it was more likely than not that Russel intentionally started the fire.

ANALYSIS

The Weatherspoons are not parties to the AMC-Acuity contract. They are loss payees whose ability to assert a claim is governed by a key provision of the contract, an endorsement entitled “Loss Payable Clauses.”

The “Loss Payable” clause listed in the schedule as the “applicable clause” provides as follows: “[We] Adjust losses with you; and b. Pay any claim for loss or damage jointly to you and the Loss Payee, as interests may appear. The circuit court determined that “jointly,” as used in Paragraph 1(b), restricted the Weatherspoons’ ability to collect to the extent that AMC could collect.

The Loss Payable Clause only permits payment for loss jointly between the insured and the loss payee. As loss payees the Weatherspoons were only permitted to collect if and when AMC collected, and, consequently, the circuit court did not err when it granted Acuity’s motion for judgment as a matter of law.

The jury returned a verdict that found Russel had intentionally started the fire at T-Spoons on April 15, 2018. Pursuant to the dishonesty or criminal acts exclusion within the insurance contract, AMC was therefore precluded from collecting loss damages. The circuit court’s decisions regarding judgment as a matter of law were not in error, and therefore, are affirmed.

The Weatherspoons’ ability to recover under the AMC-Acuity policy as loss payees depends upon AMC’s ability to recover. Because the jury found that Russel intentionally started the fire, AMC was precluded from receiving loss benefits. Therefore, Acuity could, and did, properly deny the Weatherspoons’ claim for loss damages.

ZALMA OPINION

The reason the Weatherspoons’ recovered nothing is because their contract only required AMC to list them as loss payees rather than as lenders under a Union Mortgage Clause ISO form 438.BFU which allows the lender to collect even if the named insured may not because of fraud or other intentional act while the loss payable form (required by their contract) only allows them to collect jointly with the named insured.