Melia R. Johnson v. South State Insurance Company

Supreme Court of South Carolina, Case No. 22507; writ issued October 23, 1985, heard February 13, 1986, decided March 19, 1986 (Gregory, Justice, for the Court; Ness, C. J., and Harwell, Chandler and Finney, JJ., concurring). Counsel of record were James J. Raman, Spartanburg, for the petitioner policyholder, and James W. Hudgens of Ward, Barnes, Long, Hudgens, Adams & Wilkes, Spartanburg, for the respondent insurer. The complete opinion appears below, transcribed from the official reporter via the Caselaw Access Project (case.law), Harvard Law School’s open archive of published U.S. case law. What was removed: the reporter’s head matter — the docket number, the repeated case caption, the parallel-citation line, the court line, the counsel-of-record block, and the writ-issued / heard / decided date lines — summarized in this line instead. Every repair made to the remaining text, in full: one word broken across lines rejoined (“sever-able” to “severable”); three stray-character scan artifacts cleaned (“In 1977,,” to “In 1977,”, “additional .living expenses” to “additional living expenses”, and “voids the entire policy..” to “voids the entire policy.”); three scan misreadings restored (“postion” to “position” inside the quotation from Kerr; “McGee v. Glove Indemnity Co.” to “Globe”; “Appleman and Appelman” to “Appleman and Appleman”); and the scan’s mixed curly and straight quotation marks and apostrophes normalized to straight marks. Left exactly as printed: the Court refers to the petitioner, Melia R. Johnson, as “his home” in the second paragraph. The opinion’s single footnote — which annotates the citation to State v. Horne and has nothing to do with insurance — is placed by the archive at the very end of the text; we have kept it at the end, labeled, rather than move it. No word of the Court’s has been changed, condensed, reordered, or paraphrased.

The full opinion

Gregory, Justice:

Petitioner Melia R. Johnson commenced this action against Respondent South State Insurance Company [the Company] to recover fire insurance benefits. A jury returned a verdict for Johnson. The Court of Appeals reversed. Johnson v. South State Insurance Co., 286 S. C. 235, 332 S. E. (2d) 778 (S. C. App. 1985). This Court granted certiorari. We reverse the opinion of the Court of Appeals, and reinstate the jury verdict.

Petitioner contracted with the Company to insure his home in Cherokee County. In 1977, the house was destroyed by fire. Johnson submitted a claim to the Company, including a sworn “Proof of Loss” regarding the contents of the house. The Company investigated the fire, and thereafter denied the entire claim, alleging fraud in the contents claim. This action followed.

At trial, the Company argued that fraud as to the contents voided the entire contract, including loss of dwelling and additional living expenses. Their position was based on a clause within the insurance policy. The trial judge ruled, however, that the policy was severable; therefore, fraud as to contents would not defeat other recovery under the policy. The jury returned a verdict for Johnson as to dwelling and expenses, but returned a verdict for the Company as to contents because of Petitioner’s fraudulent acts. The Company appealed.

The Court of Appeals reversed, holding the policy was not severable, and fraud as to one portion voided the entire contract. We disagree.

In Trakas v. Globe & Rutgers Fire Ins., 141 S. C. 64, 139 S. E. 176 (1927), this Court held that an insurance policy was severable where it separately stated items covered (i.e. dwelling, contents, etc.). However, in Evans v. Century Ins. Co. Ltd., 201 S. C. 273, 22 S. E. (2d) 877 (1942), the Trakas rule was restated as follows:

… [I]n the absence of fraud or any act condemned by public policy, the contract is divisible, and recovery may be had for the loss of property not affected by the particular warranty broken. 201 S. C. at 280, 22 S. E. (2d) at 880.

This rule has been cited with approval in subsequent cases. See Nabors v. South Carolina Farm Bureau, 273 S. C. 126, 255 S. E. (2d) 337 (1979); See also Mulkey v. United States Fidelity & Guaranty Co., 243 S. C. 121, 132 S. E. (2d) 278 (1963).

Although the rule was phrased with a fraud exception, neither Evans, nor Nabors or Mulkey dealt with situations where fraud was found to be present. The Trakas rule, as restated in these later cases is, at best, dicta.

The most recent case interpreting South Carolina law in this area is Kerr v. State Farm Fire & Casualty Co., 552 F. Supp. 992 (D.S.C. 1982) aff’d in part, rev’d in part on other grounds, 731 F. (2d) 227 (4th Cir. 1984). In Kerr, the Federal District Court held that fraud will only void provisions tainted by the fraud. The facts of Kerr were very close to those of the instant case, in marked contrast to Evans, Mulkey and Nabors. We agree with the holding of Kerr, and reverse Evans, Mulkey and Nabors insofar as their dicta is inconsistent with the Kerr analysis.

It is well-established under South Carolina law that forfeitures of insurance contracts are not favored. Trakas, 141 S. C. at 68, 139 S. E. at 177. Regarding other types of insurance, this Court has consistently held that an insurer must establish a causative link between a policy exclusion and a loss before recovery may be defeated. See South Carolina Ins. Co. v. Collins, 269 S. C. 282, 237 S. E. (2d) 358 (1977); McGee v. Globe Indemnity Co., 173 S. C. 380, 175 S. E. 849 (1934); Reynolds v. Life & Casualty Ins. Co. of Tennessee, 166 S. C. 214, 164 S. E. 602 (1932); See also Kerr v. State Farm Fire & Casualty Co. We see no reason to abandon these established principles. In the instant case, the fraud only concerned the contents, and that recovery was properly voided. However, recovery shall not be defeated on the dwelling and living expenses because the fraud did not affect these items.

We are mindful that the result reached today has been accepted only in a minority of jurisdictions. See Kerr; Fratto v. Northern Ins. Co. of N. Y., 242 F. Supp. 262 (W. D. Pa. 1965), aff’d 359 F. (2d) 842 (3rd Cir. 1966); Sullivan v. Hartford Fire Ins. Co., 89 Tex. 665, 36 S. W. 73 (1896). An overwhelming majority of jurisdictions hold that any fraud or misrepresentation as to any portion of property under an insurance policy voids the entire policy. See 45 C.J.S. Insurance §1021; 5A Appleman and Appleman, Insurance Law and Practice, § 3595 (1982); 44 Am. Jur. (2d) §§ 1371-1376; Vance, Law of Insurance, § 143 (1951); Keeton, Insurance Law, § 7.2(b) (1971). We are unpersuaded by this position. “Only their number, not their reasoning, lends support to the insurer’s position.” Kerr, 552 F. Supp. at 995, citing South Carolina Ins. Co. v. Collins. This Court has consistently spearheaded changes in the law. See e.g. State v. Horne, 282 S. C. 444, 319 S. E. (2d) 703 (1984).

Accordingly, the opinion of the Court of Appeals is reversed, and the jury verdict is reinstated.

Reversed.

Ness, C. J. and Harwell, Chandler and Finney, JJ., concur.

The opinion’s footnote, annotating the citation to State v. Horne:

South Carolina is one of a small number of jurisdictions to adopt the crime of feticide.

What it decided

A fire destroyed Melia Johnson’s Cherokee County house in 1977. Johnson submitted a claim, including a sworn proof of loss on the contents. South State investigated and then “denied the entire claim, alleging fraud in the contents claim” — dwelling, contents and additional living expenses, all of it, on the strength of a clause in the policy.

The jury split it. It found for Johnson on the dwelling and living expenses, and for the insurer on the contents “because of Petitioner’s fraudulent acts.” The Court of Appeals threw that verdict out, holding the policy was not severable and fraud as to one part voided the whole contract. The Supreme Court of South Carolina reversed the Court of Appeals and reinstated the jury’s verdict.

The reasoning runs in four steps:

1. Trakas (1927) already held these policies severable “where it separately stated items covered (i.e. dwelling, contents, etc.).”
2. The fraud exception everyone had been quoting was dicta. Later cases restated Trakas as applying only “in the absence of fraud” — but, the Court observed, “neither Evans, nor Nabors or Mulkey dealt with situations where fraud was found to be present. The Trakas rule, as restated in these later cases is, at best, dicta.” The Court then did something unusual and said so plainly: “We agree with the holding of Kerr, and reverse Evans, Mulkey and Nabors insofar as their dicta is inconsistent with the Kerr analysis.”
3. Two settled principles pointed the same way — “forfeitures of insurance contracts are not favored,” and “an insurer must establish a causative link between a policy exclusion and a loss before recovery may be defeated.”
4. So the taint stops where the fraud stops: “In the instant case, the fraud only concerned the contents, and that recovery was properly voided. However, recovery shall not be defeated on the dwelling and living expenses because the fraud did not affect these items.”

The Court also stated, without hedging, that it knew it was in the minority: “An overwhelming majority of jurisdictions hold that any fraud or misrepresentation as to any portion of property under an insurance policy voids the entire policy.” Its answer, quoting Kerr: “Only their number, not their reasoning, lends support to the insurer’s position.”

What it did NOT decide

This case is often summarized as good news. Read what it actually cost the policyholder before you file it that way.

• It did not excuse the fraud, and it did not restore the contents claim. The jury found for the insurer on contents, and the Supreme Court’s own words are that the contents “recovery was properly voided.” Johnson lost that entire coverage part. The holding is about containment, not forgiveness.
• It did not say every policy is severable. The rule descends from Trakas, where the policy “separately stated items covered.” The Court never quotes the clause South State relied on, and never analyzes what wording would or would not survive. A differently structured policy, or a concealment-and-fraud condition written to reach the whole contract in express terms, is a question this opinion leaves open.
• It did not define fraud. What Johnson did to earn the contents verdict is never described. The jury decided that, and the Supreme Court did not review it.
• It did not address criminal exposure. This is a civil coverage decision. Insurance fraud is separately a crime, and nothing in this opinion touches that.
• It did not decide bad faith, penalties, or attorney’s fees, and it did not decide the amount of any recovery. The judgment reinstated a verdict; it did not value a loss.
• It did not decide the innocent co-insured problem. There is one petitioner here. Whether fraud by one insured affects a spouse or co-owner’s recovery is a different question that this opinion does not reach.
• It is a 1986 statement of a minority rule, and the Court flagged it as one. That is not a reason to distrust it — it is the reason to have current South Carolina authority confirmed before anyone relies on it in a live dispute. Law that runs against the national tide is the kind that gets revisited.

Why it matters to policyholders

The contents inventory is the most dangerous document in a fire claim. It is long, it is written from memory about things that no longer exist, and it is sworn. A carrier that wants out of a large dwelling claim will often go at the contents list first — an examination under oath, a line-by-line challenge, a receipt that does not match — because in most states, proving fraud on any part of the claim voids all of it.

South Carolina is one of the places that answer does not automatically work. Under Johnson, the insurer has to connect the alleged fraud to the coverage it wants to defeat. Fraud on the contents voids the contents. The dwelling and the additional living expenses stand unless the fraud reached them.

What to do with that:

• Treat the inventory as sworn testimony, because it is. Do not estimate a purchase price and present it as a known one. Do not list an item you cannot honestly say you owned. Where you are reconstructing from memory, say so on the face of the document. An honest “best recollection, not documented” line is defensible. A confident, wrong number is not.
• If the carrier denies everything over a contents dispute, ask it to connect the dots — in writing. Which statement, on which line, and which coverage part does it affect? Johnson is authority that the answer matters. South Carolina’s statutory standards for improper claim practices are the backdrop for how that denial has to be handled.
• Understand what a total fire loss on the dwelling side is worth before you negotiate it. South Carolina today has a valued-policy statute for a total fire loss of a dwelling; the dwelling half of a claim like Johnson’s may be governed by more than an adjuster’s estimate. Read the current statute against your own facts rather than assuming either way.
• A fraud allegation is a lawyer’s problem, immediately. A public adjuster documents the damage, builds and supports the inventory, prepares the post-loss paperwork, negotiates the amount and invokes appraisal. The moment an insurer alleges fraud, schedules an examination under oath, or denies a whole claim on a concealment condition, that is legal work — and if the answer is a bad-faith action, that is a lawsuit, which we refer out. Nichols v. State Farm is where that tort comes from.

The honest one-line version of this case: in South Carolina, lying about the contents will cost you the contents. It should not, by itself, cost you the house. More South Carolina authority is on our South Carolina hub.

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