Fourth Circuit Holds Conversion Exclusion Does Not Bar Coverage to Loss Payee

Finds Conversion Exclusion Does Not Exclude Coverage to Loss Payee When the Loss Resulted From Primary Insured’s Intentional Burning of Insured Trucks

Post by Logan Wells

On October 4, 2012, in an unpublished opinion, the U.S. Court of Appeals for the Fourth Circuit affirmed the judgment of the U.S. District Court for the Eastern District of Virginia, finding that an insurance policy’s conversion exclusion did not exclude coverage to a loss payee when the primary insured caused the loss by intentionally burning insured trucks.

In Wells Fargo Equipment Finance, Inc. v. State Farm Fire and Casualty Co., Wells Fargo loaned RODO, Inc. funds for the purchase of three trucks in April and May of 2008. The loan contracts granted Wells Fargo a security interest in the trucks. In July 2008, RODO assigned the loan contracts and trucks to Miriam Trucking. In August 2008, State Farm Fire and Casualty Co. (“State Farm Fire”) issued an insurance policy to Miriam covering two of the trucks, and State Farm Mutual Automobile Insurance Co. (“State Farm Auto”) issued an insurance policy covering the third truck. Both policies named Wells Fargo as the loss payee with respect to the trucks.

On December 13, 2008, Miriam intentionally set fire to and destroyed two of the trucks. Thereafter, Wells Fargo filed claims with State Farm Fire and State Farm Auto (collectively “State Farm”), which State Farm refused to pay. Wells Fargo brought suit against State Farm alleging, inter alia, breach of contract and moved for judgment on the pleadings as to these claims. State Farm defended, contending coverage was barred by the Loss Payable Endorsement in both policies. The endorsement provided, in pertinent part:

With respect to coverage provided by this endorsement, the provisions of the coverage form apply unless modified by the endorsement.

(a) We will pay, as interest may appear, you and the loss payee named in the policy for “loss” to a covered “auto.”

(b) The insurance covers the interest of the loss payee unless the “loss” results from conversion, secretion or embezzlement on your part.

(Emphasis added). The district court granted a judgment on the pleadings in favor of Wells Fargo, holding that the insurance policies created an obligation to the loss payee even if the primary insured was barred from recovery by its asserted arson, and reasoned that the alleged arson of the primary insured did not unambiguously qualify as “conversion” under the conversion exclusion clause

On appeal, the Fourth Circuit Court of Appeals agreed with the district court and found that the conversion exclusion did not unambiguously apply to bar coverage to the loss payee. In so finding, the Fourth Circuit noted that their decision accords with that reached by the majority of courts that have considered a comparable question. See Gibraltar Fin. Corp. v. Lumbermens Mut. Cas. Co., 513 N.E.2d 681, 683 (Mass. 1987); Foremost Ins. Co. v. Allstate Ins. Co., 486 N.W.2d 600, 606 (Mich. 1992); Bennett Motor Co. v. Lyon, 380 P.2d 69, 71 (Utah 1963); Nat’l Cas. Co. v. Gen. Motors Acceptance Corp., 161 So. 2d 848, 852 (Fla. Dist. Ct. App. 1964); Nationwide Mut. Ins. v. Dempsey, 495 S.E.2d 914, 916 (N.C. 1998); Pittsburgh Nat’l Bank v. Motorists Mut. Ins. Co., 621 N.E.2d 875, 879 (Ohio App. 1993). Accordingly, the Fourth Circuit found the district court properly granted judgment to Wells Fargo.