Nationwide Mutual Fire Insura v. Kasey McDermott

Filing

OPINION filed : The judgment of the district court is AFFIRMED, decision not for publication. Richard F. Suhrheinrich, Eric L. Clay, and John M. Rogers (Authoring), Circuit Judges.

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 1

NOT RECOMMENDED FOR PUBLICATION
File Name: 15a0144n.06
No. 14-1623

UNITED STATES COURTS OF APPEALS
FOR THE SIXTH CIRCUIT
NATIONWIDE MUTUAL FIRE INSURANCE
COMPANY,
Plaintiff-Appellee,
v.
KASEY MCDERMOTT,
Defendant-Appellant.

BEFORE:

)
)
)
)
)
)
)
)
)
)
)

FILED
Feb 24, 2015
DEBORAH S. HUNT, Clerk

ON APPEAL FROM THE
UNITED STATES DISTRICT
COURT FOR THE EASTERN
DISTRICT OF MICHIGAN

SUHRHEINRICH, CLAY, and ROGERS, Circuit Judges.

ROGERS, Circuit Judge. This case involves a dispute about whether defendant-appellant
Kasey McDermott’s Nationwide Homeowner Policy covers her for fire loss caused by the
intentional acts of a co-insured.

On January 13, 2012, McDermott’s then-husband, Brien

Mathews, accidentally started a fire—while manufacturing and smoking marijuana in their
basement—that burned down their home.

McDermott’s insurer, Nationwide Mutual Fire

Insurance Company, paid McDermott $160,209.50 for the loss. After learning that Mathews’
marijuana lab caused the fire, however, Nationwide challenged its liability through a declaratory
action filed in district court. Following discovery, the district court held: (1) that the policy did
not cover McDermott’s loss; and (2) that Nationwide was entitled to subrogation for payments
made to McDermott following the fire before it learned of the fire’s cause.

On appeal,

McDermott challenges the denial of her insurance coverage and her liability to Nationwide for

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 2

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
payments made. Because McDermott failed to notify Nationwide of a change in use of her
residence, namely that Mathews had set up a marijuana growing operation in the basement of her
home, McDermott cannot recover under the terms of the policy, and Nationwide is entitled to
subrogation.
In September 2005, McDermott purchased the residence located at 202 South
Woodbridge Street in Bay City, Michigan, obtained a mortgage through Chase, and entered into
a homeowner-insurance agreement with Nationwide. The insurance policy, which had been
renewed annually, was in full force and effect on January 13, 2012, the date of the fire.
In 2010, Brien Mathews, McDermott’s then-husband, became a licensed medical
marijuana patient and caregiver pursuant to M.C.L. § 333.26421 et seq. After obtaining his
“registry identification card,” Mathews worked “up to eight hours a day” to operate and expand
his marijuana operation, an operation that, at the time of the fire, served four patients, including
himself. From 2010 to 2012, Mathews spent upwards of $20,000 on lab equipment, purchasing
dirt, fertilizer, and “[t]ons of lighting.” The operation took place almost exclusively in two
rooms in the basement of McDermott’s home, though occasionally Mathews stored marijuana in
the garage.
After Mathews began growing and distributing marijuana, he learned of a process known
as “butane extraction,”1 which involves drawing liquid butane through chopped marijuana leaves

1

Mathews performed butane extraction in the following manner: First, he took a length of polyvinyl chloride (PVC)
pipe and affixed a “coffee filter on the end of it.” He then filled the interior of the pipe with chopped marijuana
leaves. A cap with a “little hole drilled in the top” was attached to the pipe, opposite the coffee filter. Mathews then
inserted the spray nozzle of a butane can through the hole in the cap of the PVC pipe, and emptied its contents into
the chopped marijuana leaves. The butane would rush out of the can, pass through the leaves to “strip the
Cannabinoids,” and then strain through the coffee filter on the other end of the pipe. Mathews would empty six cans
through the PVC pipe, let the THC-infused butane run into a glass jar, and then pour the contents of the jar onto a
pie plate. Once in the pie plate, the butane would take “hours and hours to evaporate,” at which point only the
honey oil would remain.

-2-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 3

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
to extract THC2 and produce “honey oil,” a THC-rich substance users smoke. Honey oil would
sell for four to eight times as much as marijuana. Mathews understood that butane extraction
was risky, because “butane was highly flammable.” He knew that he “didn’t want to have any
source of ignition around the butane.” He also knew “not to smoke” when he was using butane,
and to keep it away from “open flame” and “any object that sparks.”
On January 13, 2012—the day of the fire—Mathews was performing butane extractions
when a flame he had lit to smoke some of the honey oil ignited butane that had not yet
evaporated. The resulting fire consumed the house and most of their possessions. Though
McDermott knew that Mathews had been growing marijuana in the basement, she claims that she
did not know about the butane extractions or that butane was flammable.
At the time of the fire in January 2012, McDermott had a Nationwide Homeowner Policy
that provided coverage for “accidental direct physical loss to [the] property” described therein.
The policy specified which types of losses were not covered, such as those caused by an
intentional act of the insured or those “occurring while hazard [was] increased by a means within
the control and knowledge of an insured.” Further, in a Michigan Amendatory Endorsement to
the policy, Nationwide informed McDermott that she had “a duty to notify [Nationwide] as soon
as possible of any change which may affect the premium risk under th[e] policy,” including
“changes . . . in the occupancy or use of the residence premises.” Nationwide reserved the right
to
void this policy, deny coverage under this policy, or at [Nationwide’s] election, assert any
other remedy available under applicable law, if [McDermott], or any other insured person
seeking coverage under this policy, knowingly or unknowingly concealed,
misrepresented or omitted any material fact or engaged in fraudulent conduct at the time
the application was made or at any time during the policy period.

2

THC is tetrahydrocannabinol, the principal psychoactive constituent of the cannabis plant.

-3-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 4

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
Should Nationwide void McDermott’s policy under this clause, McDermott would have to
reimburse Nationwide for any claim payments previously made.
After the January 2012 fire, McDermott filed a claim for coverage. Nationwide issued
checks totaling $160,209.50 to pay for McDermott’s losses and to provide for temporary
accommodations. However, once investigators discovered that Mathews had been “operating an
illegal marijuana and THC manufacturing facility in the basement” and had started the fire while
performing butane extractions, Nationwide informed McDermott that her claim was not covered
under the policy.
Nationwide subsequently sought relief in district court, requesting that the district court
issue a declaration “that [Nationwide] has no duty to provide coverage to Kasey McDermott”
pursuant to the policy, and a judgment against McDermott in the amount of $160,209.50 for
payments already rendered on her behalf. McDermott, in response, alleged that Nationwide
breached the parties’ insurance contract and violated Michigan’s fire insurance policies, Mich.
Comp. Laws § 500.2833, by failing to cover her claims.
On March 29, 2013, Nationwide filed a motion for summary judgment. The district
court, in two separate opinions, granted Nationwide’s motion, finding that: (1) the policy did not
cover McDermott’s losses because the fire was not an accident, and, in any event, McDermott
was barred from recovery under the Increased Hazard exclusion; and (2) as a result, Nationwide
was entitled to subrogation in the amount of $139,841.04 for payments made on McDermott’s
behalf. On this appeal, McDermott challenges the district court’s ruling, arguing that, as an
innocent co-insured under Michigan law, she is entitled to recover under the policy despite her
then-husband’s conduct, and should not be “required to reimburse Nationwide.” In response,
Nationwide offers numerous grounds for denying coverage to McDermott, including that: (1) the

-4-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 5

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
policy only covers accidental fires, and the fire started by Mathews was not accidental;
(2) McDermott failed to report a change in the use of the residence premises as required by the
policy; (3) the “increased hazard” exclusion bars coverage; (4) the “intentional acts” exclusion
bars coverage because McDermott is not an innocent co-insured; and (5) the “Michigan wrongful
conduct rule” bars coverage. However, we need not reach most of Nationwide’s arguments
because McDermott’s failure to report a change in the use of her residence premises
independently requires affirmance.
Because McDermott failed to notify Nationwide of the change in use of her basement—
notification expressly required by the policy—the district court correctly denied coverage. The
“Michigan Amendatory Endorsement” to McDermott’s policy provided that McDermott had “a
duty to notify [Nationwide] as soon as possible of any change which may affect the premium
risk under th[e] policy,” including, but not limited to, “changes . . . in the occupancy or use of the
residence premises.” (Emphasis added.) In the same endorsement, Nationwide reserved the
right to
void this policy, deny coverage under this policy, or at [Nationwide’s] election,
assert any other remedy available under applicable law, if [McDermott], or any
other insured person seeking coverage under this policy, knowingly or
unknowingly concealed, misrepresented or omitted any material fact or engaged in
fraudulent conduct at the time the application was made or at any time during the
policy period.
(Emphasis added.)
McDermott’s duty to notify Nationwide of a change in use of the insured residence and
Nationwide’s accompanying right to void the policy should McDermott “omit[] any material fact
. . . at any time during the policy period” are

enforceable provisions under M.C.L.

§ 500.2833(1)(f). M.C.L. § 500.2833(1)(f) permits such provisions provided the fire insurance
policy expressly “contain[s] . . . [t]hose conditions which result in the suspension or restriction of
-5-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 6

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
insurance.” McDermott failed to fulfill the notification condition by not informing Nationwide
of Mathews’ marijuana growing operation.

During their depositions, both McDermott and

Mathews admitted that they had not informed Nationwide that in 2010, Mathews set up a
marijuana growing operation in their basement, effectively “changing” the use of the basement
from an area “simply used for storage and [their] washer and dryer to an area where [Mathews
was] manufacturing and processing marijuana.”

Because McDermott failed to satisfy the

notification condition in her policy and, by so doing, knowingly omitted—in her representations
to Nationwide—a “material fact . . . during the policy period,” she is not entitled to recovery.
The Court of Appeals of Michigan has previously held a provision similar to the
notification requirement here enforceable. In McGrath v. Allstate Insurance Company, 802
N.W.2d 619 (Mich. Ct. App. 2010), the insured sought coverage under her homeowner’s
insurance policy for water damage caused when a pipe ruptured due to lack of heat in the house.
Id. at 621. Unbeknownst to Allstate, the insured had moved out of her residence approximately
two years before the damage occurred. Id. at 625. The insured’s policy covered losses to the
insured’s occupied “residence premises,” which it defined as her “dwelling.” The policy further
provided:
In reliance on the information you have given us, Allstate agrees to provide the
coverages indicated on the Policy Declarations. In return, you must pay the
premium when due and comply with the policy terms and conditions, and inform
us of any changes in title, use or occupancy of the residence premises. . . .
No suit or action may be brought against us unless there has been full compliance
with all policy terms.
Id. (emphasis added). The court found that “because [the insured] did not reside on the Gaylord
property, she did not occupy it, which [wa]s a change requiring notification.” Id. The court then
held that because the “failure to notify Allstate about the change in occupancy violated the terms

-6-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 7

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
of the contract, . . . Allstate could properly deny coverage for a loss that occurred more than two
years [after the change in occupancy].” Id. at 626. This reasoning was later adopted in an
opinion in Smith v. Allstate Insurance Company, No. 11-cv-15411, 2013 WL 4604211, at *1
(E.D. Mich. Aug. 29, 2013), when the court denied coverage to an insured’s daughter following
the insured’s death because “[t]he death of the named insured . . . was a material change in the
use or occupancy of the Property, and [the daughter’s] failure to inform [Allstate] of this change,
[as required by the policy] . . . [wa]s a sufficient basis for denial of coverage.” Id. at *5. Like
the insured in McGrath, McDermott failed to satisfy one of the terms of her contract, namely her
duty to notify Nationwide of a material change in the use of her premises. Consequently,
Nationwide can deny coverage for the losses—losses caused by the change in use—that occurred
approximately two years after Mathews set up the marijuana growing operation.
The district court did not address whether coverage could be denied because of
McDermott’s failure to report a change in use, and McDermott contends that whether the use
did, in fact, change is a question of fact for the jury. McDermott argues:
The policy does not envision every “change” be reported to the insurance
company. Using Nationwide’s analysis, policyholders would be required to call
their insurance company every time they bought a houseplant or had visitors. The
insurer would have to be called every morning, when children left for school and
when parents left for work and would have to be called again, when the family
returned to re-occupy the dwelling and especially if the insured turned on the
oven to cook dinner or a teen-ager smoked a cigarette. And even if the parent did
not know the teen-ager was smoking a cigarette, be it nicotine or marijuana, and
accidentally caused a fire, there would be no insurance coverage because the
unknowing parent had not reported this “change” to Nationwide.
Though McDermott correctly asserts that her policy “d[id] not envision [that] every
‘change’ be reported to the insurance company,” the policy did require that McDermott report
changes in the use of the residence that would affect the premium risk. To equate setting up a
marijuana growing operation—an operation not likely contemplated by insurance companies at
-7-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 8

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
the time of drafting a standard fire insurance policy—to buying a houseplant or entertaining
guests—both activities an insurance company would reasonably expect a homeowner to do—
mischaracterizes the extent of the change in use at issue.

Far from merely adding one

houseplant, at the time of the fire, Mathews had approximately 28 marijuana plants growing in
the basement. Two rooms in the basement had been converted into growing rooms—with one
housing plants in the “vegetative state” and the other serving as the “flower room”—and
Mathews had spent upwards of $20,000 on lab equipment, including “[t]ons of lighting” and
numerous cans of butane. Bay County Sheriff Deputy Jeffrey Wolpert, who investigated the fire,
testified that he had never seen a marijuana processing facility as elaborate as the one in
McDermott’s basement. Further, according to Nationwide’s representative, had McDermott
informed Nationwide of Mathews’ marijuana operation, Nationwide would have declined
coverage altogether, because such an operation is an increased hazard and “an unacceptable
risk.”

Thus, because McDermott failed to report the change in use of the premises to

Nationwide—a change in use that would have had a great impact on the premium risk—she
cannot recover under the policy. To hold otherwise would make Nationwide liable for a risk it
did not assume. Though “[e]xclusionary clauses in insurance policies are strictly construed in
favor of the insured[,] . . . coverage under a policy is lost if any exclusion within the policy
applies to an insured’s particular claims. . . . It is impossible to hold an insurance company liable
for a risk it did not assume.” Auto-Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich.
1992) (internal citations omitted).
Because McDermott is not entitled to recover under the policy, Nationwide is also
contractually entitled to subrogation. The mortgage clause clearly and unambiguously provides,
“[i]f [Nationwide] pay[s] the mortgagee for loss and den[ies] payment to you[,] . . . [Nationwide

-8-

Case: 14-1623

Document: 31-1

Filed: 02/24/2015

Page: 9

No. 14-1623, Nationwide Mutual Fire Ins. Co. v. McDermott
is] subrogated to all the rights of the mortgagee granted under the mortgage on the property.” At
oral argument, McDermott conceded that should we find that coverage was correctly denied,
Nationwide would be entitled to subrogation.
The judgment of the district court is affirmed.

-9-