MC Carran-Ferguson. . .NOT

Sometimes, a cigar is just a cigar. Sometimes, it's a crime.

By Eugene Wollan, ESQ.

When I learned that the theme of this issue would be the McCarran-Ferguson Act, a subject that as a litigator I find professionally important but personally not very exciting, I racked my brain trying to figure out a gimmick that would permit me to start off saying something relevant and/or witty about McCarran-Ferguson and the segue into the subject I really felt like writing about. No such gimmick having come to mind, I decided to be a maverick and go ahead with my subject of choice anyhow.

Up in Smoke

The following fascinating item appeared recently in, of all places, a publication titled The Military Advocate, vol. VIII, no. 3: (1)

A Charlotte, NC, man, having purchased a case of very rare, very expensive cigars, insured them against fire among other things. Within a month, having smoked his entire stockpile of cigars and without having made even his first premium payment on the policy, the man filed a claim against the insurance company. In his claim, the man stated the cigars were lost "in a series of small fires." The insurance company refused to pay, citing the obvious reason that the man had consumed the cigars in the normal fashion. The man sued...and won.

In delivering the ruling, the judge, agreeing that the claim was frivolous, stated nevertheless that the man held a policy from the company in which it had warranted that the cigars were insurable and also guaranteed that it wold insure against fire, without defining what it considered to be "unacceptable fire," and was obligated to pay the claim. Rather than endure a lengthy and costly appeal process, the insurance company accepted the ruling and paid the man $15,000 for the rare cigars he lost in "the fires." After the man cashed the check, however, the company had him arrested on 24 counts of arson. With his own insurance claim testimony from the previous case being used against him, the man was convicted of intentionally burning his insured property and sentenced to 24 months in jail and a $24,000 fine.

Questions of Coverage

Insurance is intended to protect against the slings and arrows of outrageous fortune, not self-inflicted wounds.

I confess that, not being an investigative journalist with Pulitzer Prize ambitions, I did not make any effort to identify the individuals or the cases described, but he coverage questions that meet the eye of an insurance lawyer are, to say the least, fascinating. An investigative journalist would probably study the complete record of the insurance case and interview the claims people and lawyers involved on the defense side to obtain answers to some of these questions, but I must be content here simply to raise them.

1. It is universally accepted principle of contract law in general, and insurance contract law in particular, that the creation of a valid contractual relationship requires a "meeting of the minds." The behavior of the insured in this case strongly suggest a preexisting intent to do exactly what he did, i.e., perpetrate what is known in technical, legal terminology as a scam, hardly suitable meeting place for the mind of the underwriter. Was this issue raised?
2. It is also said that the creation of a valid contract, including one of insurance, requires the exercise of good faith on both sides. It is at least a plausible inference that this was not the case here, inferentially, on the part of the insured. Was this issued raised?
3. The timing of the procurement of the insurance and the subsequent "acceptable fire," before even the first premium had been paid, strongly suggest that when he obtained the coverage the insured had this specific sequence of events in mind. His failure to disclose that intention to the insurer would surely constitute a basis for either rescission of the policy on the ground of fraud or declination of the claim on the basis of material nondisclosure. Was this issue raised?
4. Closely related is the equally general principle that property insurance does not cover the deliberate destruction of the insured property by the insured himself or herself. In other words, insurance is intended to protect against the slings and arrows of outrageous fortune, but not against self-inflicted wounds. Was this issue raised?
5. A more specific application of this principle is, of course, the standard arson defense. There is no express language in the typical property insurance policy that excludes loss caused by the insured's own willful destruction of the insured property, of which arson is the most common example, and that defense is sometimes difficult to prove; but once proven, its validity was a complete defense has never (until now) been questioned. Proof was, of course, hardly an issue in the North Carolina case, but the trial judge in the case may be the only jurist in the history of Anglo-American common law who failed to recognize the principle, and instead invented the notion that it was incumbent on the insurer to define "what it considered to be an 'unacceptable fire'..." That his decision offends both morality and common sense goes without saying.
6. There is also a principle in property insurance law known as "increase in hazard." If I insure an ordinary residential structure and then decide to start manufacturing fireworks in the basement, I have increased the hazard sufficiently to incur a duty to apprise the insurer of the altered circumstances of the risk. It wold certainly seem that the North Carolina insured, the moment he first lit a match and applied it to the far end of one of his cigars, increased the hazard to the insured property. Was this issue raised?
7. The insured's description in the claim of having lost the cigars "in a series of small fires" was at best disingenuous and at worst, and more likely, deliberately misleading. The possibility jumps out of a defense of fraud and false swearing in the submission of the claim. Was this issue raised?
8. One of the underlying themes running through all of these comments is the notion that insurance covers only fortuities and not inevitabilities. To illustrate this concept, consider the following excerpt from Volume I of Business Insurance Law and Practice Guide, published in 1989 by Matthew Bender. (The extract is from the chapter on "Property Insurance," which I co-authored with my late partner Arthur Brook; my purpose in quoting it here is not, in Walt Whitman's phrase, to advertise myself, but simply because, having said it once, I do not see any particular reason to try to say it better the second time around.)

Fortuity---By the Book

"A loss must be 'fortuitous' to be covered. There is nothing in the policy that says so, either in the way of an affirmative coverage requirement or by the way of a specific exclusion of non-fortuitous losses. Nonetheless, the fortuity requirement has always been considered an essential component of any insured loss for reasons of public policy and fairness. A renowned American jurist, Augustus Hand, explained the concept by pointing out that if this requirement did not exist, every insurance company would become a 'guarantor' and an insurance policy is free from any defect. (2) When a question of non-fortuity arises, it is usually in a context similar to the one that Judge Hand had before him: the insured property was subject to a latent pre-existing defect which made the occurrence of the loss inevitable at the time the insurance was taken out. There have been relatively few cases litigating this kind of question, but the courts have sustained non-fortuity defenses by insurers in a number of diverse situations.

"ILLUSTRATION: The decision by Judge Hand was in a case involving a crack in a boiler on a vessel, in which it appeared that the crack existed from the time the boiler was manufactured, which was long before the policy took effect.

"In another case, frozen fish were spoiled in transit, and the court said that even under an all-risk policy there would be coverage for 'an event caused by the consummation during the period of coverage of an in-dwelling fault in the goods that had existed prior to that coverage.' (3)

"A Minnesota court has held that damage to an opal in the form of a crack that developed during the policy term was not covered, because it was the result of an inherent flaw predating the inception of the policy. (4)

"A Texas court has held that an all-risk policy did not cover damage to shower stalls constructed with-out shower pans, because the loss was, under those circumstances inevitable and not the result of the intervention of any fortuity. (5)

"There have also been a few instances in which a court has concluded that a loss was non-fortuitous on the ground that it was the result of the policy holder's deliberate act.

"ILLUSTRATON: In one situation, the captain of a tugboat took his boat and the vessel it was towing through an ice field, with the result that the towed boat hit an ice floe and sank. The court said that the loss was not a fortuity, but the result of a deliberate attempt to break through a known barrier. (6) "ILLUSTRATION: In another example, the owners of a poodle made a claim under their insurance policy for a rug that had been ruined by innumerable stains. The court said that, while two or three such incidents might be considered fortuitous, 'One cannot stand by and see damage being done, allow it to be done and then collect for the total loss. In other words, one cannot be present and see a fire when it first originates and at a time when something can be done to extinguish it, then go off and allow the damage to be done and attempt to collect for the total damage.' (7)

"As a matter of local color, I might point out that this last decision is known in the trade as The Case of the Piddling Poodle, whose name, incidentally was Andre."

[A number of more recent cases have applied a "subjective" test, i.e., it is not enough to sustain a non-fortuity defense merely that the loss was in fact inevitable, but it must have been known to the insured to be so. A comparison of the two approaches, subjective v. objective, must await another time.]

Insurer Had Last Laugh

The thought comes to mind that the insurer in the North Carolina case just possibly might have deliberately refrained from raising any of these defenses on the theory that a subsequent criminal conviction of this too-clever-by-half insured would be a far more satisfactory outcome than simple nonpayment of his claim. Whether or not the strategy was planned all along, however, it certainly scored one for the home team.

Having reread these comments, I still see no way to tie them into McCarran-Ferguson. (8) I hope they are of some interest nonetheless.

Endnotes

1. Yes, Virginia, there is such a thing as a military advocate. In fact, stereotypes and clichis to the contrary notwithstanding, the Judge Advocate officers of the Armed Services are today, by and large, an exceptionally well-trained, capable, and effective group of practicing lawyers. The fact that I am a retired JAG Reserve Officer myself has nothing to do with that observation.
2. Mellon v. Federal Ins. Co., 14 F.2d 997 (S.D.N.Y. 1926).
3. Green v. Cheetham, 293 F.2d 933, 937 (2d Cir. 1961).
4. Chute v. North River Ins. Co., 172 Minn. 13, 214 N.W. 473 (1927), reprinted in 55 A.L.R. 938 (1928).
5. Merrimack Mut. Fire Ins. Co., v. McCaffree, 486 S.W.2d 616 (Tex. Ct. App. 1972).
6. Newtown Creek Towing Co. v. Aetna Ins. Co., 163 N.Y. 114, 57 N.E. 302 (1900).
7. Aetna Ins. V. Sachs, 186 F. Supp. 105 (E.D. Mo. 1960).
8. I have even stretched so far as to attempt to work in some connection to the fact that Pat McCarran and Homer Ferguson, the two sponsors of the legislation, were both extremely conservative---if not indeed ultraconservative---Republican Senators. This effort, too, ended in dismal failure.

Eugene Wollan, Esq., was formerly senior partner and now serves as counsel for the law firm of Mound, Cotton Wollan in New York, NY. A graduate of Harvard College and Harvard Law School, Wollan has specialized for more than 40 years in insurance coverage and claims litigation, commercial insurance litigation, and reinsurance controversies. He has served as counsel, arbitrator, and expert witness in insurance disputes in the United States and the United Kingdom. He is a member of the Association Internatioinale de Droit des Assurances (AIDA) and is certified as an arbitrator by the AIDA Reinsurance and Insurance Arbitration Society (ARIAS-US).



Sometimes, a cigar is just a cigar. Sometimes, it's a crime.

By Eugene Wollan, ESQ.

When I learned that the theme of this issue would be the McCarran-Ferguson Act, a subject that as a litigator I find professionally important but personally not very exciting, I racked my brain trying to figure out a gimmick that would permit me to start off saying something relevant and/or witty about McCarran-Ferguson and the segue into the subject I really felt like writing about. No such gimmick having come to mind, I decided to be a maverick and go ahead with my subject of choice anyhow.

Up in Smoke

The following fascinating item appeared recently in, of all places, a publication titled The Military Advocate, vol. VIII, no. 3: (1)

A Charlotte, NC, man, having purchased a case of very rare, very expensive cigars, insured them against fire among other things. Within a month, having smoked his entire stockpile of cigars and without having made even his first premium payment on the policy, the man filed a claim against the insurance company. In his claim, the man stated the cigars were lost "in a series of small fires." The insurance company refused to pay, citing the obvious reason that the man had consumed the cigars in the normal fashion. The man sued...and won.

In delivering the ruling, the judge, agreeing that the claim was frivolous, stated nevertheless that the man held a policy from the company in which it had warranted that the cigars were insurable and also guaranteed that it wold insure against fire, without defining what it considered to be "unacceptable fire," and was obligated to pay the claim. Rather than endure a lengthy and costly appeal process, the insurance company accepted the ruling and paid the man $15,000 for the rare cigars he lost in "the fires." After the man cashed the check, however, the company had him arrested on 24 counts of arson. With his own insurance claim testimony from the previous case being used against him, the man was convicted of intentionally burning his insured property and sentenced to 24 months in jail and a $24,000 fine.

Questions of Coverage

Insurance is intended to protect against the slings and arrows of outrageous fortune, not self-inflicted wounds.

I confess that, not being an investigative journalist with Pulitzer Prize ambitions, I did not make any effort to identify the individuals or the cases described, but he coverage questions that meet the eye of an insurance lawyer are, to say the least, fascinating. An investigative journalist would probably study the complete record of the insurance case and interview the claims people and lawyers involved on the defense side to obtain answers to some of these questions, but I must be content here simply to raise them.

1. It is universally accepted principle of contract law in general, and insurance contract law in particular, that the creation of a valid contractual relationship requires a "meeting of the minds." The behavior of the insured in this case strongly suggest a preexisting intent to do exactly what he did, i.e., perpetrate what is known in technical, legal terminology as a scam, hardly suitable meeting place for the mind of the underwriter. Was this issue raised?
2. It is also said that the creation of a valid contract, including one of insurance, requires the exercise of good faith on both sides. It is at least a plausible inference that this was not the case here, inferentially, on the part of the insured. Was this issued raised?
3. The timing of the procurement of the insurance and the subsequent "acceptable fire," before even the first premium had been paid, strongly suggest that when he obtained the coverage the insured had this specific sequence of events in mind. His failure to disclose that intention to the insurer would surely constitute a basis for either rescission of the policy on the ground of fraud or declination of the claim on the basis of material nondisclosure. Was this issue raised?
4. Closely related is the equally general principle that property insurance does not cover the deliberate destruction of the insured property by the insured himself or herself. In other words, insurance is intended to protect against the slings and arrows of outrageous fortune, but not against self-inflicted wounds. Was this issue raised?
5. A more specific application of this principle is, of course, the standard arson defense. There is no express language in the typical property insurance policy that excludes loss caused by the insured's own willful destruction of the insured property, of which arson is the most common example, and that defense is sometimes difficult to prove; but once proven, its validity was a complete defense has never (until now) been questioned. Proof was, of course, hardly an issue in the North Carolina case, but the trial judge in the case may be the only jurist in the history of Anglo-American common law who failed to recognize the principle, and instead invented the notion that it was incumbent on the insurer to define "what it considered to be an 'unacceptable fire'..." That his decision offends both morality and common sense goes without saying.
6. There is also a principle in property insurance law known as "increase in hazard." If I insure an ordinary residential structure and then decide to start manufacturing fireworks in the basement, I have increased the hazard sufficiently to incur a duty to apprise the insurer of the altered circumstances of the risk. It wold certainly seem that the North Carolina insured, the moment he first lit a match and applied it to the far end of one of his cigars, increased the hazard to the insured property. Was this issue raised?
7. The insured's description in the claim of having lost the cigars "in a series of small fires" was at best disingenuous and at worst, and more likely, deliberately misleading. The possibility jumps out of a defense of fraud and false swearing in the submission of the claim. Was this issue raised?
8. One of the underlying themes running through all of these comments is the notion that insurance covers only fortuities and not inevitabilities. To illustrate this concept, consider the following excerpt from Volume I of Business Insurance Law and Practice Guide, published in 1989 by Matthew Bender. (The extract is from the chapter on "Property Insurance," which I co-authored with my late partner Arthur Brook; my purpose in quoting it here is not, in Walt Whitman's phrase, to advertise myself, but simply because, having said it once, I do not see any particular reason to try to say it better the second time around.)

Fortuity---By the Book

"A loss must be 'fortuitous' to be covered. There is nothing in the policy that says so, either in the way of an affirmative coverage requirement or by the way of a specific exclusion of non-fortuitous losses. Nonetheless, the fortuity requirement has always been considered an essential component of any insured loss for reasons of public policy and fairness. A renowned American jurist, Augustus Hand, explained the concept by pointing out that if this requirement did not exist, every insurance company would become a 'guarantor' and an insurance policy is free from any defect. (2) When a question of non-fortuity arises, it is usually in a context similar to the one that Judge Hand had before him: the insured property was subject to a latent pre-existing defect which made the occurrence of the loss inevitable at the time the insurance was taken out. There have been relatively few cases litigating this kind of question, but the courts have sustained non-fortuity defenses by insurers in a number of diverse situations.

"ILLUSTRATION: The decision by Judge Hand was in a case involving a crack in a boiler on a vessel, in which it appeared that the crack existed from the time the boiler was manufactured, which was long before the policy took effect.

"In another case, frozen fish were spoiled in transit, and the court said that even under an all-risk policy there would be coverage for 'an event caused by the consummation during the period of coverage of an in-dwelling fault in the goods that had existed prior to that coverage.' (3)

"A Minnesota court has held that damage to an opal in the form of a crack that developed during the policy term was not covered, because it was the result of an inherent flaw predating the inception of the policy. (4)

"A Texas court has held that an all-risk policy did not cover damage to shower stalls constructed with-out shower pans, because the loss was, under those circumstances inevitable and not the result of the intervention of any fortuity. (5)

"There have also been a few instances in which a court has concluded that a loss was non-fortuitous on the ground that it was the result of the policy holder's deliberate act.

"ILLUSTRATON: In one situation, the captain of a tugboat took his boat and the vessel it was towing through an ice field, with the result that the towed boat hit an ice floe and sank. The court said that the loss was not a fortuity, but the result of a deliberate attempt to break through a known barrier. (6)

"ILLUSTRATION: In another example, the owners of a poodle made a claim under their insurance policy for a rug that had been ruined by innumerable stains. The court said that, while two or three such incidents might be considered fortuitous, 'One cannot stand by and see damage being done, allow it to be done and then collect for the total loss. In other words, one cannot be present and see a fire when it first originates and at a time when something can be done to extinguish it, then go off and allow the damage to be done and attempt to collect for the total damage.' (7)

"As a matter of local color, I might point out that this last decision is known in the trade as The Case of the Piddling Poodle, whose name, incidentally was Andre."

[A number of more recent cases have applied a "subjective" test, i.e., it is not enough to sustain a non-fortuity defense merely that the loss was in fact inevitable, but it must have been known to the insured to be so. A comparison of the two approaches, subjective v. objective, must await another time.]

Insurer Had Last Laugh

The thought comes to mind that the insurer in the North Carolina case just possibly might have deliberately refrained from raising any of these defenses on the theory that a subsequent criminal conviction of this too-clever-by-half insured would be a far more satisfactory outcome than simple nonpayment of his claim. Whether or not the strategy was planned all along, however, it certainly scored one for the home team.

Having reread these comments, I still see no way to tie them into McCarran-Ferguson. (8) I hope they are of some interest nonetheless.

Endnotes

1. Yes, Virginia, there is such a thing as a military advocate. In fact, stereotypes and clichis to the contrary notwithstanding, the Judge Advocate officers of the Armed Services are today, by and large, an exceptionally well-trained, capable, and effective group of practicing lawyers. The fact that I am a retired JAG Reserve Officer myself has nothing to do with that observation.
2. Mellon v. Federal Ins. Co., 14 F.2d 997 (S.D.N.Y. 1926).
3. Green v. Cheetham, 293 F.2d 933, 937 (2d Cir. 1961).
4. Chute v. North River Ins. Co., 172 Minn. 13, 214 N.W. 473 (1927), reprinted in 55 A.L.R. 938 (1928).
5. Merrimack Mut. Fire Ins. Co., v. McCaffree, 486 S.W.2d 616 (Tex. Ct. App. 1972).
6. Newtown Creek Towing Co. v. Aetna Ins. Co., 163 N.Y. 114, 57 N.E. 302 (1900).
7. Aetna Ins. V. Sachs, 186 F. Supp. 105 (E.D. Mo. 1960).
8. I have even stretched so far as to attempt to work in some connection to the fact that Pat McCarran and Homer Ferguson, the two sponsors of the legislation, were both extremely conservative---if not indeed ultraconservative---Republican Senators. This effort, too, ended in dismal failure.

Eugene Wollan, Esq., was formerly senior partner and now serves as counsel for the law firm of Mound, Cotton Wollan in New York, NY. A graduate of Harvard College and Harvard Law School, Wollan has specialized for more than 40 years in insurance coverage and claims litigation, commercial insurance litigation, and reinsurance controversies. He has served as counsel, arbitrator, and expert witness in insurance disputes in the United States and the United Kingdom. He is a member of the Association Internatioinale de Droit des Assurances (AIDA) and is certified as an arbitrator by the AIDA Reinsurance and Insurance Arbitration Society (ARIAS-US).