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Conversion Exclusion Doesn't Completely Bar Arson Recovery

By Robyn Hagan Cain on October 05, 2012 | Last updated on March 21, 2019

A reasonable person might think, "If I intentionally set my trucks on fire, my insurance policy won't cover it. Because, yeah. Arson."

That reasonable person might be wrong.

In an unpublished opinion, the Fourth Circuit Court of Appeals ruled this week that State Farm was required to pay Wells Fargo for two torched trucks because the insurance policy's conversion exclusion did not unambiguously bar coverage.

It probably helped that Wells Fargo didn't set the fires.

The question in this case was whether certain insurance policies exclude coverage to a loss payee when the primary insured caused the loss by intentionally burning insured trucks. Applying Virginia law, the district court concluded that the exclusion did not bar coverage and granted the insured's loss payee judgment on the pleadings.

In April and May 2008, Wells Fargo Equipment Finance, Inc. loaned RODO, Inc. funds for the purchase of three trucks. 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 issued insurance policies to Miriam Trucking covering the trucks. The policies named Wells Fargo as the loss payee for the trucks. In December 2008, Miriam Trucking intentionally set the trucks on fire.

Wells Fargo filed claims with State Farm for the trucks, which State Farm refused to pay. Wells Fargo sued for breach of contract, and the district court granted Wells Fargo judgment on the pleadings.

The loss payable endorsement in the policies stated:

(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.

Virginia insurance law is pretty standard: "Clear and unambiguous language" gets its plain meaning, while ambiguous clauses are construed to provide coverage.

Here, the district court concluded that the insurance policies created an obligation to the loss payee, Wells Fargo, even if the primary insured, Miriam Trucking, was barred from recovery by its asserted arson. The court reasoned that the alleged arson of the primary insured did not unambiguously qualify as "conversion" under the conversion exclusion clause.

The Fourth Circuit noted that courts commonly reach the same conclusion regarding insurance policies.

While an arsonist can't personally recoup the cost of his intentionally-destroyed items under an insurance policy, a party that holds a security interest in those items may be able to recover.

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