Nationwide Mutual Fire Insurance Co. v. Citizens Bank & Trust Co. , 431 S.W.3d 292 ( 2014 )

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SUPREME COURT OF ARKANSAS
No. CV-13-333
NATIONWIDE MUTUAL FIRE Opinion Delivered JANUARY 23, 2014
INSURANCE COMPANY APPEAL FROM THE CRAWFORD
APPELLANT COUNTY CIRCUIT COURT
[NO. 17-CV-2010-756]
V.
HONORABLE GARY COTTRELL,
CITIZENS BANK & TRUST COMPANY JUDGE
APPELLEE
AFFIRMED.
DONALD L. CORBIN, Associate Justice
Appellant, Nationwide Mutual Fire Insurance Company, appeals the order of the
Crawford County Circuit Court granting summary judgment to Appellee, Citizens Bank &
Trust Company, on Appellee’s complaint for wrongful denial of its claim as a named
mortgagee and additional insured on a dwelling fire policy. Appellant contends that the
circuit court erred as a matter of law because Appellant’s rescission of the fire policy due to
the insureds’ fraud voided ab initio the policy. The Arkansas Court of Appeals certified this
case to us as one involving an issue of first impression that is of significant public interest;
jurisdiction is therefore properly in this court pursuant to Arkansas Supreme Court Rule 1-
2(b)(1), (b)(4), and (d)(2) (2013). We find no error in the circuit court’s order granting
summary judgment to Appellee, and we affirm.
This case was decided on cross-motions for summary judgment, and the parties
stipulated jointly to the following facts. Danny Ludwick completed an application and
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supplemental application for insurance coverage from Appellant on a home located in Van
Buren, Arkansas. Appellant relied on the information in the application and supplemental
application, and issued a policy insuring the dwelling and its contents for the period May 6,
2009, through May 6, 2010. The policy in question named Appellee as the “First
Mortgagee” and contained a standard mortgage clause. The dwelling was destroyed by fire
on December 16, 2009, and Appellee had a valid mortgage on the dwelling at the time of the
application and at the time of the fire.
The parties jointly stipulated further to the following facts. During Appellant’s
investigation of the fire, Appellant learned of two previous fire losses sustained by Danny and
Tracy Ludwick that were not disclosed on their application and supplemental application for
insurance. Appellant’s underwriting department determined that, according to Appellant’s
underwriting guidelines, Appellant would not have issued the policy in question if the two
undisclosed fire losses had been disclosed at the time the Ludwicks submitted their application.
Based on the material misrepresentations in the application and supplemental application,
Appellant voided the policy back to its inception and refunded the premiums paid by the
Ludwicks.
The parties jointly stipulated still further to the following. Appellee submitted a timely
claim to Appellant. Appellant denied Appellee’s claim, not on the basis of a policy exclusion,
but on the basis that the policy was void back to its inception.
As noted, the parties filed cross-motions for summary judgment on the foregoing joint
stipulation of facts. Appellant contended in its motion that its rescission of the policy voided
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the policy ab initio and thereby extinguished not only the Ludwicks’ interest but also
Appellee’s interest as mortgagee. In support of its motion, Appellant offered the affidavit of
Rodney Boles, who had conducted an investigation on behalf of Appellant of the Ludwicks’
claim regarding their fire loss on December 16, 2009. Boles averred that “[a] data base search
was conducted for prior losses associated with the Ludwicks,” which revealed that “the
Ludwicks made a fire claim with Farm Bureau on December 16, 2009. . . . [and] with
Allstate on February 19, 2007.” Boles also averred that, pursuant to his requests from the Van
Buren Rural Fire District No. 6, he learned that “[t]hree prior fire reports, in addition to the
report on the current claim by the Ludwicks . . . indicated fires occurred on February 18,
2007, February 16, 2008, April 21, 2009, and December 16, 2009.” Boles opined that, based
on his investigation, he determined there had been a total of three prior undisclosed fire losses.
Also in support if its motion, Appellant offered the affidavit of Mason Green, an
authorized underwriter for Appellant. Green averred that at the time of application, the
Ludwicks had disclosed one prior fire loss to an “outside shop” only that occurred in 2007.
Green further averred that Appellant relied on the accuracy of this information when it issued
the policy, and that if all the prior fire losses had been disclosed, the policy would not have
been issued.
The circuit court entered its order, without explanation, granting Appellee’s motion
and denying Appellant’s motion. This appeal followed.
Summary judgment may only be granted when there are no genuine issues of material
fact to be litigated, and the moving party is entitled to judgment as a matter of law. Cannady
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v. St. Vincent Infirmary Med. Ctr., 2012 Ark. 369, ___ S.W.3d ___. Ordinarily, on a
summary-judgment appeal, when determining if there are genuine issues of material fact in
dispute, we would view the evidence in the light most favorable to the party resisting the
motion, and resolve any doubts and inferences against the moving party. Id.; Hobbs v. Jones,
2012 Ark. 293, 412 S.W.3d 844. However, when, as here, the parties agree on the facts, we
simply determine whether the appellee was entitled to summary judgment as a matter of law.
Hobbs, 2012 Ark. 293, 412 S.W.3d 844; Barton Land Servs., Inc. v. SEECO, Inc., 2013 Ark.
231, ___ S.W.3d ___. As to the issues of law presented, our review is de novo. Hobbs, 2012
Ark. 293, 412 S.W.3d 844.
For reversal, Appellant contends that the circuit court erred in granting summary
judgment to Appellee because, when Appellant properly rescinded the policy, the policy was
void ab initio; therefore, there was no policy in which Appellee had an interest. Stated
another way, Appellant contends that, after proper rescission, the policy was void ab initio as
if the policy never existed, and Appellee cannot rely on a provision in a policy that no longer
exists. Citing Black’s Law Dictionary 1568 (7th ed. 1999), Appellant relies on the following
definition of “void ab initio:” “null from the beginning, as from the first moment when a
contract is entered into.” If the policy is void and a nullity, contends Appellant, Appellee can
have no interest in it.
The law is clear that Appellant had a common-law right to rescind its policy on the
basis of the material misrepresentation or omission of prior fire losses. See Ferrell v. Columbia
Mut. Cas. Ins. Co., 306 Ark. 533, 537, 816 S.W.2d 593, 595 (1991) (citing Old Colony Life
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Ins. Co. v. Fetzer, 176 Ark. 361, 3 S.W.2d 46 (1928) (“It is undisputed that at common law
an insurance company could retroactively rescind coverage because of fraud or material
misrepresentation.”)). Appellant emphasizes that rescission of a contract and cancellation of
a contract are two distinct remedies based on different grounds. Appellant cites the following:
Rescission of a contract and cancellation of a contract are two distinct remedies, based
on different grounds, 17 G.J. Couch, Couch Cyclopedia of Insurance Law, §§ 67:33, 67:54
(R.A. Anderson, ed., 2d rev. ed. 1983). Cancellation takes effect only prospectively,
while rescission voids the contract ab initio.
Ferrell, 306 Ark. at 537, 816 S.W.2d at 595.
Appellee does not dispute Appellant’s right to rescind the Ludwicks’ policy. Rather,
Appellee responds that because Appellant wrongly denied Appellee’s claim (not the Ludwicks’
claim) for the policy proceeds, the circuit court properly granted summary judgment to
Appellee. Appellee’s response is premised on the parties’ clear and unambiguous stipulation
that the mortgage clause in the policy is a standard mortgage clause. Appellee cites Arkansas
case law holding that a standard mortgage clause serves as a separate contract between the
mortgagee and the insurer, see, e.g., Farmers Home Mut. Fire Ins. Co. v. Bank of Pocahontas, 355
Ark. 19, 129 S.W.3d 832 (2003), and argues in response that Appellee’s separate contract with
Appellant was not defeated by the rescission of Appellant’s contract with the Ludwicks.
Appellee relies on this court’s previous observation:
Both this court and the court of appeals have held that, generally, a standard mortgage
clause serves as a separate contract between the mortgagee and the insurer, as if the mortgagee had
independently applied for insurance. Dalrymple v. Royal-Globe Ins. Co., 280 Ark. 514, 659
S.W.2d 938 (1983); Columbia Mut. Ins. Co. v. Home Mut. Fire Ins. Co., 74 Ark. App.
166, 47 S.W.3d 909 (2001). Thus, the rights of a named mortgagee in an insurance
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policy are not affected by any act of the insured, including improper and negligent acts.
Dalrymple, supra.
Farmers Home Mut. Fire Ins. Co., 355 Ark. at 24, 129 S.W.3d at 835 (emphasis added).
Appellee cites us to an insurance treatise that recognizes the Arkansas rule as the general rule:
Under the standard or union mortgage clause, an independent or separate contract or
undertaking exists between the mortgagee and the insurer, which cannot be defeated
by improper or negligent acts of the mortgagor, whether done or permitted prior or
subsequently to, or at the time of, the issuance of the policy.
The means of accomplishing this protection is some form of language that the
insurance with respect to the mortgagee shall not be invalidated by the mortgagor’s
acts or neglect. The words “any acts” as used in a standard mortgage clause do not
refer merely to acts prohibited by the contract or to a failure to comply with the terms
of the contract, but literally embrace any act of the mortgagor.
4 Couch on Insurance § 65:48 (3d ed.) (footnotes omitted).
We acknowledge Appellant’s argument in reply that rescission voids a policy regardless
of whether the policy’s mortgage clause is a standard mortgage clause. Appellant’s position
is that by its very terms, the mortgage clause relates only to denials of claims, cancellation, and
nonrenewals. Appellant’s position, however, overlooks the effect of our law treating the
mortgagee as having an independent contract unaffected by the acts of the insured.
We conclude that, under the foregoing Arkansas law, as stated in Farmers Home Mutual
Fire Insurance Co., 355 Ark. at 24, 129 S.W.3d at 835, the standard mortgage clause serves as
a separate contract between Appellant and Appellee “as if the [Appellee] had independently
applied for insurance.” Because Arkansas law views Appellee’s contract as independent of the
Ludwicks’ contract, we conclude that Appellant’s rescission of the Ludwicks’ policy based on
the acts of the Ludwicks does not affect Appellee’s independent contract with Appellant.
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We note that our conclusion today is consistent with the long-settled law of our
neighboring state, Oklahoma. The Oklahoma Supreme Court has held that a “mortgagee’s
contract was completely independent of the insured’s rights and would be valid even though
the insurance policy was void ab initio.” Okla. State Union of Farmers’ Educ. & Coop. Union
of Am. v. Folsom, 325 P.2d 1053, 1056 (Okla. 1958) (citing W. Assur. Co. v. Hughes, 66 P.2d
1056) (Okla. 1936)).
Alternatively, Appellant argues that if Appellee is entitled to rely on the policy, then
Appellee is bound by the terms and conditions of the policy, which, according to Appellant
have not been satisfied here. Specifically, Appellant points to the policy language on
“concealment or fraud.” Finally, Appellant argues alternatively and additionally that it did not
“deny” the Ludwicks’ claim; therefore, the terms and conditions of the policy relating to
denial of claims do not apply here.
Appellant’s first alternative argument fails for essentially the same reason its primary
argument failed, which is that Appellant overlooks the independence of the two contracts.
That is, Appellee’s right to recover the proceeds as mortgagee is not as an insured person
under the Ludwicks’ policy, but as a person or mortgagee protected under the separate and
independent contract. Appellant’s second alternative argument also fails for the same reason.
Appellee’s contract of insurance with Appellant as mortgagee is independent of the Ludwicks’
contract with Appellant and is not affected by any acts of the Ludwicks. Therefore, Appellee’s
right to the proceeds is not dependent upon satisfaction of the terms of the Ludwicks’ policy
on denial of the Ludwicks’ claim.
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In sum, the undisputed facts are that the policy at issue contained a standard mortgage
clause, which according to Arkansas law, operates as an independent contract between an
insurance company and a named mortgagee. Farmers Home Mut. Fire Ins. Co., 355 Ark. 19,
129 S.W.3d 832. That independent contract with the mortgagee cannot be defeated by any
act of the insured. Id. Thus, even though an insurance company is entitled to common-law
rescission of its insured’s policy based on the insured’s fraud or misrepresentation, those
fraudulent acts and the rescission of the policy have no effect on the independent contract
with the mortgagee. Accordingly, and because there is no dispute that Appellee made a
timely claim for payment here, we conclude that the summary judgment in favor of Appellee
is correct as a matter of law.
Affirmed.
Watts, Donovan & Tilley, P.A., by: Jim Tilley, for appellant.
Gant Law Firm, by: Paul D. Gant; and Amanda B. Hurst, for appellee.
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