Oklahoma Court Holds the Policyholder Can Also Be the Vandal

Earlier this week an Oklahoma federal court addressed a mortgagee’s claim for vandalism loss – a topic we also discussed in Wednesday’s post.  In American Modern Home Ins. Co. v. Tulsa Fed. Credit Union, 2015 WL 2372549, 2015 U.S. Dist. LEXIS 64491 (E.D.Okla., May 18, 2015), the court rejected an insurer’s argument that because the vandalism was done by the insured, it could not constitute the covered peril of “vandalism” in a situation in which the policy neglected to define that term.

shutterstock_118758637The insured owned a house and secured a homeowners policy that also extended coverage to his mortgagee.  The mortgage company instituted foreclosure proceedings and the policyholder vacated the dwelling, but only after removing fixtures and damaging property to the tune of $246,025.  The mortgagee’s subsequent insurance claim was denied, and litigation ensued.

The contract of insurance covered fire and also the perils of vandalism, malicious mischief, and burglary.  The terms “vandalism” and “malicious mischief” were not further defined, but the policy excluded burglary loss if it was “committed by an insured.”  In addition, there was an exclusion for “Intentional Loss” which was defined to mean “any loss arising out of any act committed . . . by or at the direction of an insured.”  Finally, there was a mortgage clause that informed the policyholder that “[i]f we deny your claim, that denial will not apply to a valid claim of the mortgagee” so long as the mortgage company has notified the insurer of any change in the ownership,  occupancy, or risk, paid any premium due, and submitted a sworn proof of loss in a timely manner.

The basis for the carrier’s denial was that because the removal and damage was done by the insured, it could not constitute vandalism, malicious mischief, or burglary pursuant to the policy’s terms.

The lawsuit was initiated by the insurer, and the mortgagee responded with a motion for judgment on the pleadings, asking, in pertinent part, that the court hold that even if the policyholder intentionally caused the loss himself it was still entitled to recover as mortgagee.  On Monday of this week, Judge Ronald White agreed and granted that portion of the motion.  In the words of his opinion:

Vandalism is defined by the Merriam-Webster dictionary as:  “the act of deliberately destroying or damaging property.”  Vandalism is also defined as:  “deliberately mischievous or malicious destruction or damage of property.”  The court is aware that some definitions of vandalism include that it be done to another’s property.  As the term is not defined in the Policy, however, an ambiguity exists.  In the event of ambiguity in an insurance policy provision, “a policy of insurance is to be construed strictly against the insurer and in favor of the insured.”  Spears v. Shelter Mut. Ins. Co., 73 P.3d 865, 868 (Okla. 2003).  The court, therefore, finds that the definition of “vandalism” under the Policy does not include that it be done to another’s property.

The judge also noted that the clause protecting the mortgage company’s interests was a standard mortgage clause rather than what Oklahoma law labels as a loss payable clause.  As in the Illinois case discussed in Wednesday’s post, the latter gives the lender only a derivative right which is completely dependent upon the validity of the borrower’s claim against the insurer.  The former, however, creates an independent contract between the insurer and the mortgage company so as to protect the mortgagee from the borrower’s misconduct and to shield its own interest in the property insured.  According to the judge, that furnished an independent basis for granting the motion.  As he explained:

It appears, then, that [the insurer] American Modern is arguing a distinction without a difference.  If the standard mortgage clause protects [the mortgagee] TFCU from any act of Mr. Beel, and American Modern agrees that includes fire caused by Mr. Beel, it also protects TFCU from vandalism by Mr. Beel.  Accordingly, TFCU’s motion is granted in part. . . .  Mr. Beel’s acts cannot defeat TFCU’s coverage[.]

The balance of the motion seeking dismissal of the insurer’s claims that the mortgage company had not complied with the policy’s requirements concerning cooperation in the loss investigation was left for discovery and trial.

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Posted in Ambiguity, Homeowners Coverage, Loss Payees, Mortgagees, Theft or Dishonesty, Vandalism
About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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