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Tuesday, March 23, 2010

Ind. Decisions - 7th Circuit decides one Indiana case today, and a case involving Wellpoint

In Estate of Wavie Luster v. Allstate (ND Ind., Miller), a 17-page opinion, Judge Posner writes:

This diversity suit for breach of an insurance contract was dismissed on summary judgment. The suit is governed, so far as the substantive issues are concerned, by Indiana law, and the plaintiff’s appeal presents issues of both contract interpretation and Indiana insurance law.

Mrs. Luster was a widow living alone in her house in Merrillville, Indiana. She had a homeowner’s insurance policy from Allstate. In October 2001, when she was 83, she was injured in a fall and after being released from the hospital moved into an extended-care facility. She executed a power of attorney to her lawyer, Rick Gikas, who is the representative of her estate in this litigation. She never returned home, and died in April 2006, some four and a half years after her fall. Gikas had notified Allstate of his power of attorney and had directed the company to bill the insurance premiums to his law office. No one lived in the house after she left it.

Three months after her death—her house still unoccupied— a fire caused extensive damage. Gikas submitted a claim on behalf of the estate. An investigation indicated that the fire may well have been started by burglars, but the plaintiff denies this and the district judge made no finding.

In the course of the investigation Allstate discovered that the house had been unoccupied for four and a half years before Mrs. Luster’s death, and denied the claim, precipitating this suit. Allstate continued billing Gikas for premiums, however, and he continued paying them until October 2008, more than two years after the fire, when Allstate—which claims not to have known that the policy was still in force until its lawyers read the estate’s summary-judgment brief that month—purported to cancel the policy retroactively to November 2001, and returned the premiums for the subsequent period to the estate. * * *

When one considers the very limited circumstances in which the Indiana legislature has approved cancellation of homeowner policies even when there is notice by the insurer, see Ind. Code § 27-7-12-6, as there was not here, it seems unlikely that the Indiana courts would permit cancellation in a case like ours. * * *

So the plaintiff is entitled to a remand, but it wants more and argues that Allstate waived denial of coverage by continuing to collect premiums for more than two years after learning, when the fire occurred, that the house had long been unoccupied. Eventually, as we know, it did return all the premiums that it had collected since 30 days after Luster had moved out of the house. * * *

Continued acceptance of premiums after cancellation can, as we also said, fool the insured into thinking he’s covered and therefore deflect him from seeking substitute protection. And if as a result of being deceived in this way he fails to obtain substitute coverage and incurs a loss as a result, the company is estopped to deny coverage. Home Ins. Co. v. Strange, 123 N.E. 127, 129 (Ind. App. 1919); Sur v. Glidden-Durkee, 681 F.2d 490, 493-94 (7th Cir. 1982) (Indiana law); see also Hargis v. United Farm Bureau Mutual Ins. Co., 388 N.E.2d 1175, 1179 (Ind. App. 1979); C.A. Enterprises, Inc. v. Employers Commercial Union Ins. Co., 376 N.E.2d 534, 536 (Ind. App. 1978). But since Allstate could not cancel the policy retroactively, it remained in force until October 2008, when Allstate cancelled it prospectively, as the policy permitted it to do. So during that period the Luster estate remained covered by the policy except (because the house continued to be unoccupied) for losses attributable to an increase in hazard by reason of nonoccupancy, or to vandalism. The coverage was not as comprehensive as it would have been had the house not been unoccupied; but that was not Allstate’s fault. * * *

Failure to attend to the distinction between cancellation and a denial of coverage is the Achilles’s heel of the plain tiff’s argument that the continued collection of premiums barred Allstate from denying coverage for the loss caused by the fire. A denial of coverage is governed by estoppel (or its synonym in Indiana, “implied waiver”), and relief from the denial requires proof of prejudice in order to avoid conferring windfalls on insureds. (Besides the cases cited earlier, see Terre Haute First Nat’l Bank v. Pacific Employers Ins. Co., 634 N.E.2d 1336, 1338 (Ind. App. 1993); Allstate Ins. Co. v. Tozer, 392 F.3d 950, 956 (7th Cir. 2004) (Indiana law).) There is no such proof in this case. Cancellation is governed by waiver in its conventional sense of the voluntary relinquishment of a known right.

By accepting premiums for years after learning (or being deemed to have learned, since it was properly notified, even if the notice got lost in Allstate’s bureaucracy) of the change of occupancy that would have entitled it to cancel Mrs. Luster’s policy, Allstate waived its right to cancel, as we said. Each check that Gikas sent and that Allstate cashed after it knew the house was unoccupied was an offer made and accepted to continue the policy in force. The right to cancel is not an exclusion of coverage for particular losses but, as we explained earlier, an option for the insurer to exercise or not as it pleases. Aetna Ins. Co. v. Robinson, 10 N.E.2d 601, 605 (Ind. 1937). The insurer’s continuing to accept premiums after learning that circumstances entitling it to exercise its option have arisen is evidence that he’s decided not to exercise it; and after a reasonable time has elapsed, the right to exercise the option (like any other contract offer) lapses, Farmers’ Conservative Mutual Ins. Co. v. Neddo, supra, No. 09-2483 17 40 N.E.2d at 405; Lititz Mutual Ins. Co. v. Lengacher, supra, 248 F.2d at 854. The problem for the plaintiff is that the district court’s decision was based not on cancellation but on the hazard exclusion. Still, the plaintiff is entitled to a hearing on whether the exclusion applies (and Allstate to a hearing on the applicability of the vandalism exception, should the hazard exclusion be found inapplicable), and therefore the judgment is reversed and the case remanded. REVERSED AND REMANDED.

The Wellpoint decision mentioned in the heading is Wellpoint v. IRS, an appeal from the US Tax Court. Judge Posner authors this opinion also.

Posted by Marcia Oddi on March 23, 2010 12:29 PM
Posted to Ind. (7th Cir.) Decisions