Nationwide Mutual Fire Insurance Company v. Guster Law Firm, LLC
MEMORANDUM OPINION AND ORDER: As further set out in order, the court GRANTS Nationwide's motion for summary judgment based on Guster Law's lack of an insurable interest in the insured property, 34 , and DENIES Guster Properties and Guster Law's motion for summary judgment, 37 . This case is DISMISSED with prejudice. Signed by Judge Abdul K Kallon on 03/28/13. (CVA)
2013 Mar-28 PM 04:05
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
NATIONWIDE MUTUAL FIRE
Plaintiff / Counter Defendant,
GUSTER LAW FIRM, LLC, et
Defendants / Counter Claimants
Civil Action Number
MEMORANDUM OPINION AND ORDER
A fire destroyed commercial property insured by Nationwide Mutual Fire
Insurance Company. Nationwide’s investigation of the ensuing claim revealed
discrepancies in the details outlined in the insurance applications, including,
among other things, the age of the property, the identity of the true owner, and its
occupancy and habitability status. Nationwide subsequently filed this action
against its insured, Guster Law Firm, LLC, alleging that Guster Law had no
insurable interest in the property and that its applications contained material
misrepresentations or were fraudulent. Nationwide seeks a declaratory judgment
as to the rights and liabilities of the parties under both the commercial property
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and general liability policies.1 Doc. 1. Guster Law and Guster Properties, LLC,
the true owner of the insured property, filed a counterclaim alleging breach of
contract, bad faith refusal to pay the insurance claims, and reformation of the
named insured in the insurance policies due to mutual mistake. Doc. 15.
Nationwide moved for summary judgment contending that it is not liable for
the loss, doc. 34, and Guster Law subsequently filed a cross motion for summary
judgment, doc. 37. Both motions and the related motions to strike are fully
briefed. Docs. 40, 42-44, 46, 48. For the reasons stated below, the court
GRANTS Nationwide’s motion for summary judgment based on Guster Law’s
lack of an insurable interest in the property.
I. MOTIONS TO STRIKE
Nationwide moves to strike Guster Law’s brief opposing Nationwide’s
motion for summary judgment, doc. 40, and Guster Law’s reply brief to its motion
for summary judgment, doc. 46, for exceeding the court’s page limitations, and, on
hearsay and authentication grounds, several exhibits Guster Law submitted. Docs.
43 and 48. The court GRANTS Guster Law’s motions for leave to exceed the
The court exercises subject matter jurisdiction over this action pursuant 28 U.S.C. §
1332, based upon the parties’ diversity of citizenship and an amount in controversy exceeding
$75,000.00, exclusive of interest and costs. Docs. 1, 15. The parties do not contest personal
jurisdiction or venue, see id., and the court finds adequate grounds alleged to support both
personal jurisdiction and venue.
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page limits which it filed concurrently with the challenged briefs, docs. 39 and 45,
and DENIES Nationwide’s motions to strike the briefs as MOOT.
Regarding the exhibits, Nationwide moves to strike as unauthenticated
hearsay, Exhibits A (Loan Applications - docs. 40-1), B (Recorded Interview of
Syndey Brooks - doc. 40-2), C (Appraisal Report of Joseph & Company - doc. 403), F (Affidavit of Eric Guster - doc. 40-6), G (Document from Nationwide’s
Website - doc. 40-7), J (Birmingham Fire & Rescue Run Report - doc. 40-10), and
A from docs. 46-1 to 46-11 (“A2” - Loan Application documents). See docs. 43
and 48. Except for Mr. Guster’s affidavit and the appraisal, the challenged
exhibits are documents Guster Law can authenticate and introduce at trial by
calling the individuals who prepared the documents or through Mr. Guster’s
testimony. See FED. R. EVID. 901. Therefore, the court may consider these
documents at the summary judgment stage. See Macuba v. Deboer, 193 F.3d
1316, 1323 (11th Cir. 1999) (“a district court may consider a hearsay statement in
passing on a motion for summary judgment if the statement could be ‘reduced to
admissible evidence at trial’ or ‘reduced to admissible form.’”) (citations omitted).
Accordingly, the court DENIES the motion to strike Exhibits A, A2, B, G, and J.
Likewise, the court DENIES the motion to strike the rest of the documents
since these documents aided the court in evaluating Guster Law’s contentions
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regarding the insurable interest and reformation contentions. Docs. 43 and 48.
II. SUMMARY JUDGMENT STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56(c), summary judgment is proper
“if the pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.” FED. R. CIV. P. 56(c). “Rule 56(c)
mandates the entry of summary judgment, after adequate time for discovery and
upon motion, against a party who fails to make a showing sufficient to establish
the existence of an element essential to that party’s case, and on which that party
will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986). The moving party bears the initial burden of proving the absence of a
genuine issue of material fact. Id. at 323. The burden then shifts to the
nonmoving party, who is required to “go beyond the pleadings” to establish that
there is a “genuine issue for trial.” Id. at 324 (citation and internal quotation
marks omitted). A dispute about a material fact is genuine “if the evidence is such
that a reasonable jury could return a verdict for the nonmoving party.” Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The court must construe the
evidence and all reasonable inferences arising from it in the light most favorable to
the non-moving party. Id. However, “mere conclusions and unsupported factual
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allegations are legally insufficient to defeat a summary judgment motion.” Ellis v.
England, 432 F.3d 1321, 1326 (11th Cir. 2005) (per curiam) (citing Bald
Mountain Park, Ltd. v. Oliver, 863 F.2d 1560,1563 (11th Cir. 1989)).
III. FACTUAL BACKGROUND
On June 16, 2010, Guster Law, through its principal and sole member, Eric
Guster, an attorney and a licensed real estate agent, applied for commercial
liability and property insurance policies with the Sydney Brooks Insurance
Agency. Docs. 35-3 and 35-4. Mr. Guster called Sydney Brooks, the principal of
the Sydney Brooks Agency, and relayed that Guster Law needed an insurance
policy to close on a loan for renovation of a commercial property.2 Docs. 35-2 at
16; 34 at 5; 37 at 2; 42 at 4. Based on the information Mr. Guster provided,
Brooks entered background information on the applications and faxed the
applications to Mr. Guster for completion. Doc. 35-1 at 22-24. Mr. Guster
allegedly called Brooks sometime thereafter to relay that “everything looked
good” on the applications. Id. at 22.
The parties disagree on the source of the information on the applications.
Nationwide contends that Mr. Guster provided the information, filled in personally
Nationwide contends that Mr. Guster only told Brooks that he was closing on a loan for a
commercial property and did not mention renovations. Docs. 44 at 3 ¶ 3; 35-1 at 16.
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the sections marked by handwritten X’s which Brooks had purportedly left blank,
and that Mr. Guster faxed the completed applications back to Brooks. Id. at 24;
doc. 34 at 5 ¶ 2. Brooks testified that he and Mr. Guster did not have any
conversations about the substantive questions on the applications, and that Mr.
Guster completed those portions of the applications. Doc. 35-1 at 25. Allegedly,
Mr. Guster subsequently delivered the originals to Brooks. Id. at 22-24.
Mr. Guster disagrees and asserts that he met Brooks at his office, that
Brooks filled out the applications, and that, although he is a skilled legal
practitioner, he signed without reading or verifying their accuracy. Doc. 35-2 at
18. Mr. Guster contends further that Brooks lost the original, partially handwritten
applications and instead submitted typewritten applications to Nationwide’s
underwriting department. Doc. 46 at 3 ¶ 3 (citing doc. 40-2 at 4). Presumably,
Mr. Guster is maintaining that the documents he signed are different from the
documents Nationwide produced in this case. However, allegedly, Mr. Guster’s
contention is a quintessential red herring because he purportedly testified that,
except for his missing signature, his personal copies of the “missing” original
applications match the copies Nationwide submitted into evidence. Docs. 35-2 at
17-18; 44 at 2. Thus, Nationwide asserts that even if Brooks misplaced the
original applications, the applications it submitted as evidence are identical to the
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originals. Doc. 35-2 at 19.
In any event, as part of the application process, Brooks apparently visited
the insured premises to verify that the property actually existed and to determine
square footage. Doc. 35-1 at 7-9. The parties agree that Brooks never entered the
building. Id. Nonetheless, Guster Law contends the inspection of the outside
placed Nationwide on notice of the conditions and details of the property,
including the inside conditions that Nationwide claims Guster Law never
disclosed. Doc. 46 at 3-4 ¶ 5.
The application details
Nationwide contends that Guster Law provided fraudulent or material
misrepresentations in its applications. See doc. 34. Although Mr. Guster
acknowledges that many of the answers are incorrect, he denies that he provided
the disputed information and maintains that he never personally filled in anything
on the applications. Doc. 35-2 at 18-19. The incorrect information Mr. Guster
denies providing includes representations: (1) that Guster Law had a 10 year
business history instead of eight, docs. 35-1 at 25; 35-3 at 3; 35-4 at 3; 35-2 at 18;
(2) that Guster Law had “gross annual receipts [of] $125,000,” instead of actual
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receipts of at least $300,000,3 docs. 35-1 at 26; 35-3 at 3; 35-4 at 3; (3) that Guster
Law has never “been involved in any lawsuits” or “ha[s] any judgments or liens...
rendered against [it],” docs. 35-3 at 3; 35-4 at 3; 35-2 at 18; and (4) that “the roof,
wiring, heating, and/or plumbing systems [have] been updated” and that the
property had battery operated smoke detectors and fire extinguishers, when in fact
there were none, doc. 35-3 at 4-5.
Mr. Guster testified that he “told [Brooks] [he] did some work on [the
building] but the years [related to the improvements], [Mr. Guster] didn’t know
where [Brooks] got that,” but that Mr. Guster did “not necessarily” disagree with
the information “because work had been done on the building before. And [Mr.
Guster] was continuing doing work.” Doc. 35-1 at 19. Mr. Guster also admitted
that he intentionally listed “Guster Law Firm LLC DBA: Guster Law Firm LLC”
as the named insured, even though Guster Properties, a separate entity in which
Mr. Guster was also the principal, owned the building. Docs. 35-2 at 20-21; 35-4
at 3; 35-3 at 3; see also 35-1 at 26. However, Mr. Guster neither admits nor denies
the accuracy of the following information: (1) Guster Law had not had any losses
within the past five years, doc. 35-3 at 3; (2) the building was originally
Mr. Guster explained this discrepancy by stating that he thought Brooks asked him about
net income. Doc. 35-2 at 18.
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constructed in 1974 (though records later revealed the early 1900’s), and was
utilized as a law office, id. at 4; doc. 35-5 at 4; (3) that he lived on site, doc. 35-3
at 5; and (4) that no crimes had occurred on the property within the past three
years (though there were issues with vagrants removing boarded up doors and
trespassing on the property six to seven months before the applications), docs. 354 at 4; 35-5 at 4. Mr. Guster acknowledges that the applications he signed contain
language that “[t]he applicant has read, understands and agrees to abide by the
terms and conditions outlined in this application,” that a “reasonable inquiry has
been made to obtain the answers to questions on this application,” and that
“[h]e/she certifies that the answers are true, correct and complete to the best of
his/her knowledge.” Docs. 35-3 at 2; 35-4 at 2.
The general liability and commercial property insurance policies
Based on the representations Guster Law made, Nationwide issued two
policies to Guster Law for General Liability and Commercial Property. Docs. 1-3
and 1-4. Relevant to this lawsuit, the commercial policy contains language stating
that “[t]his Coverage Part is void in any case of fraud by you as it relates to this
Coverage Part at any time. It is also void if you, or any other insured, at any time,
intentionally conceal or misrepresent a material fact concerning . . . 2. The
Covered Property; [or] 3. Your interest in the Covered Property; . . .” Doc. 1-3 at
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26. Likewise, the general liability policy contains language stating that “[b]y
accepting this policy, you agree: a. The statements in the Declarations are accurate
and complete; b. Those statements are based upon representations you made to us;
and c. We have issued this policy in reliance upon your representations.” Doc. 1-4
The fire damage and the resulting investigation
On July 26, 2010, about a month after Nationwide issued the policies, a fire
destroyed the insured property. Doc. 35-5 at 2-3. Thereafter, Guster Law
submitted a claim for $446,835, plus $30,000 for demolition. Doc. 35-16. During
the investigation, Nationwide found several discrepancies between the
representations in the applications and the state of the insured building, including
that Guster Properties actually owned the building and that the insured property
had no walls or flooring, no fire load, incomplete electrical and plumbing systems,
no HVAC system, and only had electrical service in a single outlet. Doc. 35-5 at
2-6; see also, supra, Section A. Nationwide learned also that the property had
been vacant for several years, was dilapidated, and that Mr. Guster had retained a
contractor to perform various repairs, including reinforcing the foundation, at an
estimated cost of $250,000. Doc. 35-5 at 2-6. In all, the renovations needed to
complete the property included: reinforcing the structure, replacing damaged
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wood, hanging and finishing sheet rock, installing and finishing five bathrooms
and two kitchens, installing three HVAC units, restoring exterior molding,
installing vinyl siding, and painting. Id. Nationwide contends that it would not
have issued the policies if Mr. Guster had disclosed this information. Docs. 35-17
at 3; 35-18 at 13, 25, 45.
Nationwide retained Cause and Origin Investigator Cliff Carlisle to assist in
determining the cause of the fire. Doc. 35-6 at 2-4. Ultimately, Carlisle
determined that the fire had an incendiary origin based on burn patterns indicating
localized burning, the three areas of origin, and the presence of an ignitable liquid.
Id. Lt. Michael Pate, Fire Investigator with the Birmingham Fire & Rescue
Service, also opined that the fire had an incendiary origin. Doc. 35-5 at 3. As a
result of its investigation, Nationwide denied Guster Law’s claim. Doc. 35-16.
In a nutshell, Nationwide asserts that Guster Law made misrepresentations,
omissions, incorrect statements, or concealed facts in its applications that were
either fraudulent, material to Nationwide’s acceptance of the risk or hazard
assumed, or such that Nationwide would not have agreed to provide the same
coverage for the premium it quoted, or would have rejected Guster Law’s
application. Doc. 34 at 14-16, 18 (citing Ala. Code. §§ 27-14-7 and 6-5-101, 102
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(1975)). Alternatively, Nationwide asserts that Guster Law has no insurable
interest and that the polices are void ab initio. Id. at 21. To no surprise, Guster
Law disagrees and asserts that (1) the misrepresentations, if any, were innocent,
and that the policies prohibit Nationwide from relying on the statements to rescind
the policies, (2) Nationwide cannot show that the alleged misrepresentations were
material or that Nationwide would not have issued the policies if the correct
information was known, and (3) that Guster Law has an insurable interest, or,
alternatively, that the court should reform the insurance contracts to substitute
Guster Properties, the true owner of the subject property, for Guster Law based on
a mutual mistake. Docs. 15, 37. The court addresses each of these contentions in
Nationwide is not entitled to void the policies based on
misrepresentations or fraud
Again, Nationwide contends that the policies are void because Guster Law
made misrepresentations, omissions, incorrect statements, or concealed facts that
were either fraudulent or material to its decision to issue the policies. Nationwide
is correct that under Alabama law, material misrepresentations or suppressions in
insurance applications may constitute fraud that is sufficient to void the resulting
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policy. Ala. Code §§ 6-5-100 to 102; 12-14-7(a)(1).4 Indeed, Guster Law’s
Ala. Code § 27-14-7 (1975). “Application for policy – Representations and
misrepresentations, etc.” states:
(a) All statements and descriptions in any application for an insurance policy or annuity
contract, or in negotiations therefor, by, or in behalf of, the insured or annuitant shall be deemed
to be representations and not warranties. Misrepresentations, omissions, concealment of facts and
incorrect statements shall not prevent a recovery under the policy or contract unless either:
(2) Material either to the acceptance of the risk or to the hazard assumed
by the insurer; or
(3) The insurer in good faith would either not have issued the
policy or contract, or would not have issued a policy or contract at
the premium rate as applied for, or would not have issued a policy
or contract in as large an amount or would not have provided
coverage with respect to the hazard resulting in the loss if the true
facts had been made known to the insurer as required either by the
application for the policy or contract or otherwise.
Ala. Code § 27-14-7. Alabama outlines claims for legal fraud as follows:
§ 6–5–100 Fraud—right of action generally.
Fraud by one, accompanied with damage to the party defrauded, in all cases gives
a right of action.
§ 6–5–101 Same—misrepresentation of material facts.
Misrepresentations of a material fact made willfully to deceive, or recklessly
without knowledge, and acted on by the opposite party, or if made by mistake and
innocently and acted on by the opposite party, constitute legal fraud.
§ 6–5–102 Suppression of material facts.
Suppression of a material fact which the party is under an
obligation to communicate constitutes fraud. The obligation to
communicate may arise from the confidential relations of the
parties or from the particular circumstances of the case.
Ala. Code §§ 6–5–100-102.
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applications included language indicating that knowingly and intentionally
providing materially false information or concealing material information in the
application process constituted actionable insurance fraud. Doc. 1-3 at 11.
Additionally, Guster Law’s commercial property policy stated that any such fraud
automatically voids the policy. Id. at 26. Nonetheless, as outlined below, factual
issues remain that preclude this court from finding that Nationwide is entitled to
void the policies.
Fraud based on material misrepresentation
To prove fraud based on misrepresentation, Nationwide must show a
misrepresentation of a material fact, reliance, and that it sustained damages as a
proximate result of the misrepresentation. Sherrin v. Nw. Nat. Life Ins. Co., 2 F.3d
373, 378 (11th Cir. 1993) (citing Earnest v. Pritchett–Moore, 401 So. 2d 752, 754
(Ala. 1981)); AmerUs Life Ins. Co. v. Smith, 5 So. 3d 1200, 1207 (Ala. 2008). A
“material fact” is “a fact of such a nature as to induce action on the part of the
complaining party.” Graham v. First Union Nat. Bank of Georgia, 18 F. Supp. 2d
1310, 1317 (M.D. Ala. 1998) (citing Bank of Red Bay v. King, 482 So. 2d 274
(Ala. 1985). “Further, the misrepresentation need not be the sole inducement. It is
sufficient if it materially contributes and is of such a character that the
[complaining] party would not have consummated the contract had he known the
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falsity of the statement.” Id. (citation omitted). Critically, “fraud under Alabama
law need not include an intent to deceive or defraud.” Eley v. Travelers Ins. Co.,
Inc., No. 2:09-cv-958-MEF, 2011 WL 671681 at *28 (M.D. Ala. Feb. 18, 2011).
Here, Nationwide contends (1) that Guster Law misrepresented that the
building was constructed in 1974, that it occupied and owned the building, and
that the building had undergone no structural repairs, see docs. 35-3 and 35-4; (2)
that these misrepresentations were material because Nationwide would not have
issued the policies if it had known of these facts, see docs. 34 at 23; 35-17; 35-18
at 45; (3) that it clearly relied on the information in determining whether to issue
the policies; and (4) that it sustained damages as a result of issuing the policies.
Although the applications clearly contain misrepresentations,5 the court agrees
with Guster Law that issues of fact preclude this court from finding as a matter of
law that the misrepresentations were necessarily “material.” Alabama courts have
held consistently that an insurance company’s reliance on its own underwriters as
evidence that it would not have issued a policy based on the material
Guster Law’s contention that the misrepresentations were innocent and that it lacked an
intent to defraud, doc. 40 at 16, misses the mark because Alabama law does not require
fraudulent intent to establish a claim for fraud based upon misrepresentation of a material
existing fact: “Misrepresentations of material fact made willfully to deceive, or recklessly
without knowledge, and acted on by the opposite party, or if made by mistake and innocently and
acted on by the opposite party, constitute legal fraud.” See Ala. Code § 6–5–101. Thus, even if
Guster Law innocently misrepresented material facts, it can still be liable for fraud if Nationwide
relied on those facts. See id.
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misrepresentations is not necessarily dispositive.6 Moreover, the materiality of a
misrepresentation is generally a jury question. Nationwide Mut. Fire Ins. Co. v.
Pabon, 903 So. 2d 759, 766 (Ala. 2004) (citations omitted). Consequently, as it
relates to the alleged fraudulent misrepresentations of material facts, Nationwide
failed to carry its burden.
Fraud based on suppression of material facts
Nationwide claims also that Guster Law fraudulently suppressed material
facts. To state a claim for fraud based on the suppression of material facts,
Nationwide must prove: (1) a duty on the part of Guster Law to disclose facts; (2)
concealment or non-disclosure of material facts; (3) Guster Law’s knowledge of
the facts and their materiality; (4) reliance; and (5) resulting damages. Sherrin, 2
F.3d at 378 (citing Wolff v. Allstate Life Ins. Co., 985 F.2d 1524 (11th Cir. 1993)
and Hardy v. Blue Cross and Blue Shield of Ala., 585 So. 2d 29, 32 (Ala. 1991)).
As discussed infra, the Eleventh Circuit found that, “under Alabama law, the
uncontradicted testimony of an insurance company’s underwriter that a misrepresentation was
material and that the company in good faith would not have issued the policy as written, is not
necessarily dispositive.” Bennett v. Mutual of Omaha Ins. Co., 976 F.2d 659, 661 (11th Cir.
1992) (citing State Farm Fire and Cas. Co. v. Oliver, 658 F. Supp. 1546, 1553 (N.D. Ala. 1987)
(“[T]he insurance company cannot be allowed automatically to avoid coverage simply because its
own employee testified that the company would not have undertaken the risk had it known the
truth as to the particular fact. If this were the law, insurance companies would be sorely tempted
to defend, as State Farm has done here, almost every claim of loss.”), aff’d, 854 F.2d 416 (11th
Cir. 1988); see also Caribbean I Owners’ Ass’n, Inc. v. Great Am. Ins. Co. of New York, 600 F.
Supp. 2d 1228, 1242 (S.D. Ala. 2009) (“[T]he mere fact that [the insurer] has offered affidavits
from its underwriting personnel...stating [his] belief that the omission of this information does
not conclusively make it so.”).
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“[W]hether a duty to disclose arises in the particular circumstances of a case
depends on the relationship of the parties, the value of a particular fact, the relative
knowledge of the parties and other circumstances.” Graham, 18 F. Supp. 2d at
1319 (citing Hines v. Riverside Chevrolet–Olds, Inc., 655 So. 2d 909, 918 (Ala.
1994)). For the same reasons stated in Subsection 1, supra, a factual question
remains as to whether the information Guster Law suppressed in the applications
was material and whether Guster Law knew of its materiality. Consequently, as it
relates to the purported suppression of material facts, Nationwide also failed to
carry its burden.
Nationwide is not entitled to rescind the policies pursuant to Ala. Code
§§ 27-14-7(a)(2) or (3)
Nationwide contends alternatively that it is entitled to rescind the policies
under Alabama statutes §§ 27-14-7(a)(2) and (3),7 which allow rescission for even
innocent material misrepresentations. Guster Law counters that the policy
language requires intentional misrepresentations and argues that Nationwide’s
own language waives the statutory language of § 27-14-7(a) by excusing innocent
misrepresentations. Doc. 37 at 7. To no surprise, Nationwide disagrees and
counters that § 27-14-7 is read into all insurance contracts and that the law is clear
See footnote 4 for the full text of Ala. Code § 27-14-7.
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“that an insured who misrepresents a material fact on their application for
insurance coverage should not receive the benefits under the policy, under any
circumstance.” Doc. 34 at 19. (citing Ex parte Quality Ins. Co. v. Ruben, et al.,
962 So. 2d 242, 247 (Ala. 2006)). Indeed, courts generally read § 27-14-7 into all
insurance contracts. See, e.g., Thomas v. Liberty Nat. Life Ins. Co., 368 So. 2d
254, 258 (Ala. 1979) (“This Court has a long history of cases holding that, where a
statute governs the rights, obligations, and duties of an insurer or insured, that
statute is read into and becomes a part of the insurance contract.”) (citation
omitted); Allstate Ins. Co. v. Swann, 27 F.3d 1539, 1543-44 (11th Cir. 1994)
(finding that § 27-14-7 provided three separate grounds for the rescission of a
policy based on misrepresentations in the application). However, Nationwide’s
reliance on this generalized principle ignores that the Eleventh Circuit has held
that Alabama courts apply this principle only in situations where the insurance
policy uses stricter language than the statute. See State Farm Fire and Cas. Co. v.
Oliver, 658 F. Supp. 1546 (N.D. Ala. 1987), aff’d, 854 F.2d 416 (11th Cir. 1988).
In Oliver, State Farm issued a policy which contained the following key
paragraph: “If you or any other insured under this policy has intentionally
concealed or misrepresented any material fact or circumstance relating to this
insurance, whether before or after a loss, this policy is void as to you and any other
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insured.” Oliver, 658 F. Supp. at 1550 (emphasis added). Instead of invoking the
contractual language, State Farm relied on § 27-14-7(a)(3) to rescind the policy.
Id. The Olivers countered that a threshold issue existed regarding whether State
Farm waived its remaining defenses under sections 27-14-7(a)(2) and (3) because
the insurance contract referred only to intentional misrepresentations or
concealments. Oliver, 854 F.2d at 419. State Farm argued that the parties could
not override § 27-14-7(a) contractually. Id. The district court disagreed and held
that State Farm contractually waived its statutory defenses under § 27-14-7(a).
Oliver, 658 F. Supp. at 1550. The Eleventh Circuit affirmed and found that
Alabama courts have read § 27-14-7 into the policy “when the contract attempted
to impose more stringent conditions on the insured than in the statute, but have
refused to read the statute into the contract when the contract sets less stringent
standards on the insured.” 854 F.2d at 420. In short, because State Farm’s policy
stated that the Olivers had to “intentionally” conceal or misrepresent facts, the
court found that State Farm could not rely on the lower standard of “innocent”
misrepresentations outlined in § 27-14-7 to rescind the policy. See id.
Similar to Oliver, the Commercial Property policy Nationwide issued
contains the following language: “This Coverage Part is void in any case of fraud
by you as it relates to this Coverage Part at any time. It is also void if you, or any
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other insured, at any time, intentionally conceal or misrepresent a material fact
concerning [the coverage].” Doc. 1-3 at 26 (emphasis added). In light of this
language, Nationwide contracted with Guster Law for a “less stringent standard”
than in § 27-14-7(a), and, as such, the court cannot read § 27-14-7(a) into the
Commercial Property policy. Therefore, Nationwide’s motion premised on this
However, because the General Liability policy contains no such language,
see doc. 1-4, § 27-14-7(a) applies to that policy. See e.g., Pabon, 903 So. 2d at
766. Consequently, the court must address whether §§ 27-14-7(a)(2) and (3) bar
Guster Law’s claim under the General Liability policy.
The General Liability Policy
To trigger § 27-14-7(a), the insurer must show that the applicant made a
misrepresentation in the application, and that this misrepresentation was a material
contributing influence that induced the insurer to issue the policy. See Caribbean
I Owners’ Ass’n, Inc. v. Great Am. Ins. Co. of New York, 600 F. Supp. 2d 1228,
1240 (S.D. Ala. 2009) (citing Alfa Life Ins. Corp. v. Lewis, 910 So. 2d 757, 762
(Ala. 2005). The insurer does not have to show that the insured had an intent to
deceive. Rather, “even if innocently made, an incorrect statement that is material
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to the risk assumed by the insurer or that would have caused the insurer in good
faith not to issue the policy in the manner that it did provides a basis for the
insurer to avoid the policy.” Alfa Life Ins. Corp., 910 So. 2d at 762.
§ 27-14-7(a)(2) - Misrepresentation material to the risk of
Again, generally, the materiality of a misrepresentation on an insurance
application is a jury question. Pabon, 903 So. 2d at 766 (citations omitted).
Although courts rarely find that a misrepresentation is material as a matter of law,
see, e.g., Bennett v. Mutual of Omaha Ins. Co., 976 F.2d 659, 661 (11th Cir.
1992), some misrepresentations, whether made intentionally or innocently,
increase the risk of loss as a matter of law and are therefore material to the
issuance of the policy. See, e.g., Lewis, 910 So. 2d at 762;8 Clark v. Alabama
Farm Bureau Mut. Cas. Ins. Co., 465 So. 2d 1135, 1140 (Ala. Civ. App. 1984).
Unfortunately for Nationwide, the limited cases that have found materiality as a
matter of law are distinguishable from this case. In fact, Nationwide does not
In Lewis, the life insurance application at issue stated “IF ANY ANSWER TO THE
FOLLOWING QUESTIONS IS ‘YES,’ THE PROPOSED INSURED IS NOT ELIGIBLE FOR
COVERAGE,” and the insured incorrectly answered “no” to a question concerning whether she
was ever diagnosed with congestive heart failure. Lewis, 910 So. 2d at 762. The court held that
regardless of the fact that the insured innocently wrote the incorrect answer, the answer was
obviously material to the insurer’s risk of loss since the insurer made clear that this issue was
dispositive on the issuance of coverage. Id. Therefore, the court found that the insurer was
entitled to rescind the policy pursuant to section 27-14-7(a)(2). Id. at 763.
Page 21 of 36
point to any case that granted summary judgment based on misrepresentations that
are similar to those here. See docs. 34, 42, 44. Instead, Nationwide relies solely
on the testimony of its underwriter Kristen Cheatwood to establish materiality.
See docs. 35-17 at 3; 35-18 at 13, 25, 45. However, as Guster Law correctly
points out, courts are reluctant to accept a “self-serving evaluation” by an insurer’s
employee. See doc. 37 at 12 (citing Oliver, 658 F. Supp. at 1553) (“[T]he
insurance company cannot be allowed automatically to avoid coverage simply
because its own employee testified that the company would not have undertaken
the risk had it known the truth as to the particular fact. If this were the law,
insurance companies would be sorely tempted to defend, as State Farm has done
here, almost every claim of loss.”); see also Bennett v. Mutual of Omaha Ins. Co.,
976 F.2d 659, 661 (11th Cir. 1992) (“[U]nder Alabama law, the uncontradicted
testimony of an insurance company’s underwriter that a misrepresentation was
material and that the company in good faith would not have issued the policy as
written, is not necessarily dispositive.”) (citation omitted). Based on the case law
and the record before this court, this court cannot conclude as a matter of law that
Guster Law made material misrepresentations in its application, nor can it agree
with Guster Law either, see doc. 37 at 5-11, that it is due summary judgment under
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§ 27-14-7(a)(3) - Insurer would not have issued policy at all
or at same terms
Nationwide relies next on § 27-14-7(a)(3) for its contention that the
misrepresentations factored into its decision to issue the policy. To establish a
defense under § 27-14-7(a)(3), an insurer “need only have presented evidence that
the [applicant] made the misrepresentation and that [the insurer] would not have
issued the ... policy had it known the actual facts.” Allstate Ins. Co. v. Swann, 27
F.3d 1539, 1543 (11th Cir. 1994); see also First Fin. Ins. Co. v. Tillery, 626 So. 2d
1252, 1256 (Ala. 1993) (stating that an insurer has the right to expect applicants
for policies to tell the truth and finding that Alabama has written this public policy
into law in Section 27–14–7). The insurer does not have to show an intent to
deceive; rather, it can raise the defense even if the misrepresentation was
unintentional and innocently made. Pabon, 903 So. 2d at 766 (citation omitted).
Also, reliance on Section 27-14-7(a)(3) does not hinge on the adequacy or
existence of the insurer’s own investigation. To the contrary, that “the insurer
could make its own investigation also does not lessen its right to rely on the
representations in the application.” Id. at 767 (citation omitted); Caribbean I
Owners’ Ass’n, Inc., 600 F. Supp. 2d at 1240.
The key question with regard to the availability of Section 27-14-7(a)(3) as
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a defense is the good faith of the insurer in refusing to issue the policy. Henson v.
Celtic Life Ins. Co., 621 So. 2d 1268, 1275 (Ala. 1993). Moreover, an insurer
relying on § 27-14-7(a)(3) has the burden of demonstrating that its underwriting
guidelines in dealing with similar misrepresentations are universally applied.
Sharp Realty & Mgmt., LLC v. Capitol Specialty Ins. Corp., CV-10-AR-3180-S,
2012 WL 2049817 (N.D. Ala. May 31, 2012) (citing Mega Life and Health Ins.
Co. v. Pienozek, 516 F.3d 985, 989 (11th Cir. 2008)). In that regard, Nationwide
offers the affidavit and deposition of Kristen Cheatwood, who testified that had
Guster Law properly disclosed the characteristics of the property, particularly that
it was vacant and that Guster Law was not the true owner, Nationwide would not
have issued the policies based on Nationwide’s underwriting policies. Docs. 3517; 35-18 at 45. Unfortunately, Nationwide failed to provide evidence of
universal application of its underwriting policy or similar situations in which it
denied coverage. Therefore, similar to the materiality issue, the court cannot
conclude as a matter of law that Nationwide in good faith would not have issued
the policies. As the Eleventh Circuit found in a case interpreting § 27-14-7(a)(3),
“under Alabama law, the uncontradicted testimony of an insurance company’s
underwriter that a misrepresentation was material and that the company in good
faith would not have issued the policy as written, is not necessarily dispositive.”
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Bennett, 976 F.2d at 661. In light of the disputed issues regarding the universal
application of Nationwide’s underwriting policies, the court cannot conclude as a
matter of law that either Guster Law or Nationwide is due to prevail on the general
liability policy based on § 27-14-(a)(3). Accordingly, both parties’ motions on
this basis fail.
Insurable interest and reformation of contract
As stated previously, although Guster Properties actually owned the insured
property, Guster Law applied for the policies and represented in the applications
that it owned the property. Consequently, citing Alabama Code § 27-14-4,9
Nationwide asserts that it is due summary judgment because Guster Law had no
Ala. Code § 27-14-4 states:
(a) No contract of insurance of property or of any
interest in property, or arising from property, shall
be enforceable as to the insurance except for the
benefit of persons having an insurable interest in the
things insured as at the time of the loss.
(b) “Insurable interest,” as used in this section,
means any actual, lawful and substantial economic
interest in the safety or preservation of the subject
of the insurance free from loss, destruction or
pecuniary damage or impairment.
(c) The measure of an insurable interest in property
is the extent to which the insured might be
damnified by loss, injury, or impairment thereof.
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insurable interest in the subject property at the time of the loss and that the
insurance policies are void ab initio “because Guster Law did not maintain any
personal property on the premises, it is not on the loan and was not paying rent to
Guster Properties at the time of the loss.” Doc. 34 at 23. Guster Law counters that
it has an insurable interest, or, alternatively, that the court should reform the
insurance contracts to substitute Guster Law for Guster Properties.
Guster Law asks the court to reform the policies to replace Guster Properties
as the insured because the parties allegedly made a “mutual mistake.” Doc. 40 at
23-28. When a written contract purportedly does not express the parties’
intentions, Alabama law allows reformation in situations including fraud, mutual
mistake, or unilateral mistake which the other party knew or suspected at the time,
“so far as it can be done without prejudice to the rights acquired by third persons
in good faith and for value.” Ala. Code § 8-1-2. However, the party seeking
reformation must show a “mutual misunderstanding concerning a basic
assumption on which the contract was made.” Finley v. Liberty Mut. Ins. Co., 456
So. 2d 1065, 1067 (Ala. 1984) (citation omitted).
To support its contention of a mutual mistake, Guster Law claims that it
Page 26 of 36
provided Brooks an appraisal identifying Guster Properties as the owner.10 See
doc. 40 at 26. Unfortunately for Guster Law, an appraisal obtained in November
2009 does not establish ownership rights in June 2010. See docs. 40-3, 35-3, 35-4.
After all, Guster Properties may have obtained the appraisal in anticipation of a
potential sale of the property to Guster Law. Moreover, since Guster Law admits
that it informed Brooks that it needed the insurance policies to close on a
commercial loan for renovation of a building, see doc. 40-6 at 3, a seven month
old appraisal identifying Guster Properties as the owner does not eliminate the
possibility that Guster Law may have subsequently obtained the property in
conjunction with the loan application that triggered the need for the insurance
policy. Put differently, even if the court overlooks Nationwide’s evidentiary
objections and finds that Guster Law provided an appraisal to Brooks, that fact is
not dispositive evidence of a mutual mistake justifying reformation.
Reformation is inappropriate here given that Mr. Guster testified that he
applied for the policies on behalf of “Guster Law Firm, LLC,” even though Guster
Properties owned the property and is a separate legal entity from Guster Law.
Doc. 35-2 at 20-21; see also doc. 40 at 7. To reform the contracts under these
Again, Nationwide challenges this testimony and the supporting documents as hearsay.
See doc. 43. The court does not have to address Nationwide’s contention to resolve this matter.
Page 27 of 36
facts, the court would have to ignore the actual applications and evidence that
Nationwide believed that Guster Law owned the property since Mr. Guster listed it
as the named insured. Docs. 34 at 24; 44 at 10. As stated previously, Guster
Law’s contention that the appraisal it provided should have placed Nationwide on
notice that Guster Properties owned the property is unavailing. Likewise, while
Guster Law contends in its reply brief in support of its own motion for summary
judgment that it also provided Nationwide the deed to the property that identified
Guster Properties as the owner, doc. 46 at 15, the only evidence it provided to
support this bare assertion is an alleged email dated December 2010, i.e., well after
the policies were issued, which states, “INVESTIGATION - CONFIRMED THAT
GUSTER PROPERTIES LLC IS LISTED ON THE DEED AS THE OWNER,
GUSTER LAW FIRM IS NOT LISTED[.] Guster Law Firm does not have an
insurable interest in the property.” Doc. 46-16 at 2. However, this evidence hurts
Guster Law’s contention because it indicates, based on the date and the language,
that during the investigation of Guster Law’s claim, Nationwide learned that
Guster Law was not listed on the deed, and, therefore, determined that Guster Law
did not have an insurable interest.
Finally, Guster Law also contends, without any support, that Nationwide
knew the “identity of the lien holder during the application process [because
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Nationwide’s agent] sent confirmation of insurance coverage to Renasant Bank[.]”
Id. at 16 (citing doc. 40-1 “Exhibit A”). However, it is not clear from a review of
Exhibit A that Nationwide ever received any of the documents at issue. Rather,
the first page of the document simply lists “Renasant Bank” as the holder of the
first mortgage and “Guster Law Firm, LLC” as the named insured. Doc. 40-1 at 2.
This evidence appears to hurt, rather than support, Guster Law’s contention.
In short, based on this record, the court finds that Guster Law committed a
unilateral mistake when it named Guster Law as the insured and that Guster Law
has provided no acceptable evidence that Nationwide had knowledge of this
alleged mistake. Alabama law is clear that courts should refrain from reforming
policies because of unilateral mistakes. See e.g., American and Foreign Ins. Co. v.
Tee Jays Mfg. Co., Inc., 699 So. 2d 1226, 1227-28 (Ala. 1997); Greil v. Tillis, 170
Ala. 391, 394 (Ala. 1910) (“[G]enerally an unexplained signing [of a contract],
without excuse for neglecting to read, or to make inquiry, and without any fraud,
deceit, or misrepresentation being practiced on the maker or grantor by which he
was induced to execute the paper, is not ground for relief, or defense to an action
on this paper.”) (emphasis in original). The court finds persuasive that Mr. Guster
is an attorney and a sophisticated businessman who entered into an arms length
agreement with Nationwide for the policies on behalf of Guster Law. Mr. Guster
Page 29 of 36
cannot now claim that he intended to obtain the policies for Guster Properties and
that the court should overlook his unilateral mistake and reform the contract. The
court declines to do so since the Supreme Court has held that in situations
involving a sophisticated businessman, like Mr. Guster, courts must honor and
enforce contracts in absence of some compelling and countervailing reason
making enforcement unreasonable. See M/S Bremen v. Zapata Off-Shore Co., 407
U.S. 1, 12 (1972).
Insurable interest as a non-owner
The court must next consider whether Guster Law has an insurable interest
in the property. In Alabama, ownership of an insurable interest is not restricted to
the owner of the property. Rather, anyone with a “substantial economic interest in
the safety or preservation of the [property...] free from loss, destruction or
pecuniary damage or impairment” can have an insurable interest. Ala. Code § 2714-4. As a result, Alabama courts have held that any person who has a
“reasonable expectation of pecuniary benefit from the continued existence of the
subject of insurance [has] a valid insurable interest.” National Sec. Fire. & Cas.
Ins. Co. v. Brannon, 47 Ala. App. 319, 323 (Ala. Ct. Civ. App. 1971); see also
Brewton v. Ala. Farm Bureau Mut. Cas. Ins. Co., Inc., 474 So. 2d 1120 (Ala.
1985). As the Brannon court explained,
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It seems to be settled law everywhere that a policy of insurance is
void Ab initio, unless the insured has an insurable interest in the
property, and the reason for the rule most commonly assigned is that
if the insured has no insurable interest in the property insured, the
insured is wagering that a loss or damage to the property will occur
and the insurer is wagering that it will not, thereby supplying the
insured with an incentive to injure or destroy the insured property,
which is against public policy.
47 Ala. App. at 324. Courts have labeled this “the general rule of law condemning
any mere gambling element of insurance.” Id. at 323 (citations omitted).
Moreover, courts have found these provisions are “[m]erely declaratory of those
legal principles which have long governed the concept of insurable interest in this
State,” and that the theories of waiver and estoppel are an integral part of this
concept. Brewton, 474 So. 2d at 1122 (citing National Security Fire & Casualty
Co. v. Hester, 298 So. 2d 236, 239 (Ala. 1974)). “[T]hese theories only require
that the insureds act in good faith and have some sort of pecuniary interest in the
insured property at the time of the loss....” Id. (citing Hester, 298 So. 2d at 244).
Since it is undisputed that Guster Law did not own the property insured, the
court must decide whether Guster Law had a “substantial economic interest in the
safety or preservation of the [property]” such that it still has an insurable interest
in the property. See Ala. Code § 27-14-4. To that end, Guster Law contends that
“Mr. Guster clearly has an interest in the preservation of the same properties in
Page 31 of 36
which either the law firm or the property holding company have a respective
interest. This is more than enough to give Guster an insurable interest in the
subject property.” Doc. 40 at 26. Put differently, Guster Law maintains that it has
an insurable interest because it shares the same owner as Guster Properties.
Indeed, when asked whether Guster Law had an interest in the property, Mr.
Guster responded, “Yes, because I own both companies.” Doc. 35-2 at 21.
Unfortunately for Guster Law, sharing a common owner with Guster Properties
does not mean that Guster Law has an insurable interest in property owned by
In Brannon, the Court of Civil Appeals of Alabama held that an undisclosed
gratuitous agent of a principal has no insurable interest in the property. 47 So. 2d
at 781. In that case, Brannon, the uncle of the actual owner of the property,
applied for and received insurance coverage on the subject property in his name.
Id. at 777-78. Although the owner of the property (Brannon’s nephew) approved
of Brannon’s actions, especially since Brannon rented the property, paid the bills
and taxes, handled repairs, and paid the surplus of the rent to the nephew, the court
held nonetheless that Brannon had no insurable interest in the property, and that
the policy was void ab initio. Id. at 778-82. The court reached this conclusion
even though it found that Brannon had no intent to deceive the insurance company
Page 32 of 36
and wanted simply to preserve the property based on his “love and affection for
his nephew.” Id. at 780-81. Instead, the court found it significant that Brannon
did not disclose to the insurer the true condition of the title – i.e., that he did not
own the property. Id. at 781; compare Brewton, 474 So. 2d at 1123 (holding that
non-owner of home to whom the owner had promised to devise the home did not
have a insurable interest since she had no title, no actual or constructive
possessory interest in it, and did not suffer any economic loss from its
destruction); with Hester, 298 So. 2d at 594-600 (holding that non-owners who
were in possession of property, had an option contract to purchase the property
that was irrevocable for several months, partially paid the purchase price,
disclosed the true ownership of the property to the insurance agent when applying
for the insurance, and made substantial improvements to the insured premises had
an insurable interest).
Guster Law had an even more tenuous interest in the insured property than
Brannon. In addition to the failure to disclose to Nationwide that it was not the
true owner, Guster Law was not occupying the insured property, had not taken a
loan out related to the property, and had not invested any money in the
improvements made to the property. In fact, according to Mr. Guster, Guster Law
had not rented the insured space from Guster Properties and no contractual
Page 33 of 36
relationship existed between the two entities. See doc. 35-2 at 21-22.
Notwithstanding Guster Law’s plan to use the property as its law office, the fact
remains that Guster Law suffered no pecuniary loss from the fire. In that respect,
even if the court found that Guster Law had an insurable interest, the court is at a
loss as to what Guster Law can recover since it technically did not suffer a loss.
Rather, Guster Properties, which took out a loan for $152,388.25 for the
renovations to convert the property to a law office, is the entity that suffered a
loss. See doc. 40-1 at 5. That the two entities share a common principal does not
eliminate the fact that they are two separate legal entities. Moreover, while Mr.
Guster, doing business as Guster Law, was arguably acting as an undisclosed
gratuitous agent for Guster Properties, because Mr. Guster failed to disclose the
true ownership of the property, just like in Brannon, Guster Law has no insurable
interest in the property. See Brannon, 47 So. 2d at 782. Accordingly, the court
finds that Guster Law has failed to provide evidence sufficient to prove that it had
an insurable interest, and that Guster Law may not proceed with its claims against
Nationwide related to the policies. Therefore, the court GRANTS Nationwide’s
motion for summary judgment.
Guster Law’s Counterclaims
In light of the court’s ruling that Guster Law has no insurable interest, the
Page 34 of 36
counterclaims for bad faith refusal to pay and breach of contract that Guster Law
and Guster Properties raise fail. See doc. 15. There simply cannot be a breach of
contract when the first element of such a claim is the existence of a valid contract.
See Ex parte Coleman, 861 So. 2d 1080, 1085 (Ala. 2003); Armstrong Bus. Servs.,
Inc. v. AmSouth Bank, 817 So. 2d 665, 673 (Ala. 2001). Likewise, there is no bad
faith refusal to pay if a valid contract does not exist. See Nat’l Sec. Fire & Cas.
Co. v. Bowen, 417 So. 2d 179, 183 (Ala. 1982). Alternatively, the bad faith claim
fails also because Nationwide had arguable reasons to deny Guster Law’s claim,
i.e., whether Guster Law had an insurable interest and whether the
misrepresentations in the applications entitled Nationwide to rescind the polices
under Section 27-14-7. See Bowen, 417 So. 2d at 183 and Gulf Atl. Life Ins. Co. v.
Barnes, 405 So. 2d 916, 924 (Ala. 1981).
Based on the totality of the evidence, the court GRANTS Nationwide’s
motion for summary judgment based on Guster Law’s lack of an insurable interest
in the insured property, doc. 34, and DENIES Guster Properties and Guster Law’s
motion for summary judgment, doc. 37. This case is DISMISSED with
Page 35 of 36
DONE the 28th day of March, 2013.
ABDUL K. KALLON
UNITED STATES DISTRICT JUDGE
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