Charles V. Sonson v. United Services Automobile Association (2013)

MEMORANDUM OF DECISION

The plaintiff, Charles V. Sonson, a domiciliary of Virginia, commenced the present action against the defendant, United Services Automobile Association (“USAA”), an inter-insurance exchange organized under the laws of Texas and having a principal place of business in the city of San Antonio, by a summons and complaint filed on August 31, 2007.

The plaintiff's complaint alleges that the defendant issued to the plaintiff a Virginia personal automobile insurance policy covering four different vehicles owned or operated by the plaintiff.   One of those vehicles was a 2006 Ferrari model F430, which is the subject of the present action.   On January 24, 2007, the plaintiff was operating the vehicle on a race track in Sonoma, California, when he lost control of the car and crashed into a guardrail resulting in severe damage to the vehicle.   Thereafter, the plaintiff reported the loss to the defendant, who then proceeded to investigate and evaluate the loss.   On February 22, 2007, the defendant sent the plaintiff a reservation of rights letter informing him that it might deny coverage based on the racing exclusion and fraud provisions of the policy.   Thereafter, on May 30, 2007, the defendant purported to rescind coverage on the 2006 Ferrari F430 on the ground that the plaintiff had misrepresented to the defendant that the vehicle would be registered in the state of Delaware and garaged in Williamsburg, Virginia at the plaintiff's home.   The plaintiff's complaint contains a single count alleging breach of the defendant's obligations as insurer under the terms of the policy.

In its answer the defendant admitted that it issued the automobile policy in question but denied the remaining allegations of the complaint.   The defendant also asserted five special defenses:  1) the plaintiff intentionally, recklessly or negligently misrepresented or concealed material facts at the time the policy was applied for;  2) coverage for damage to the Ferrari is barred by the racing exclusion of the policy;  3) the plaintiff's claims are barred by provisions of the policy regarding fraudulent statements or actions made in connection with an accident or loss;  4) the plaintiff did not have an insurable interest in the Ferrari;  5) the plaintiff's claims are barred to the extent that the plaintiff received compensation from others for his losses.¹  The case was tried before the court from March 13 to March 15, 2013.   Thereafter, the parties filed post-trial briefs.

THE FACTS

The plaintiff testified that he first joined USAA as a member shortly before his graduation from the United States Air Force Academy in 1978.   He was purchasing his first car, a Chevrolet Corvette, and obtained insurance from the defendant.   The defendant is an inter-insurance exchange which issues policies of insurance to its members who, for the most part, are present or former members of the armed forces of the United States and their dependents.   After the defendant completed his military service as an Air Force pilot, he was employed as a pilot by United Airlines.   He remained a member of the defendant and insured numerous motor vehicles with them over the years.

In late 2005 and early 2006, the plaintiff became interested in high performance automobiles and attended the Skip Barber Racing School to learn how to operate such vehicles.   He gave serious thought to organizing his own racing team and organized a limited liability company, Century Jets Racing, LLC, for that purpose.   He subsequently learned that the financial commitment required to organize a racing team was greater than he was comfortable with.

On February 23, 2006, the plaintiff phoned defendant's San Antonio, Texas headquarters and was connected to Paul Daniel Houlihan, one of the defendant's member services representatives.   Each of the defendant's member services representatives undergoes training with the defendant and is licensed by each state for which the representative is acting as an underwriter.   The plaintiff asked Houlihan whether the defendant would issue an insurance policy on a Star Mazda open-wheel racing car.   Houlihan informed the plaintiff that the defendant did not issue policies on racing cars.   Houlihan's notes of that conversation were captured by the defendant's O–Docs system.   That system is used to note any matters discussed between representatives and members in the course of the underwriting process that are not otherwise recorded.  (Ex. 31.)

Shortly thereafter, the plaintiff learned that he could acquire a Ferrari model F430 Challenge Race Car. The car in question was either in Italy (where it was manufactured) or in transit to the United States.   Ferrari manufactures the F430 in two versions.   The first version is intended for operation on public highways and complies with all state and federal safety and emissions standards.   The second version is intended for operation on race tracks and is not “street legal.”   The racing version does not meet emissions standards and does not have all safety equipment required for registration in the United States.   The plaintiff arranged to purchase the racing version of the car from the Ferrari of Washington dealership located in Dulles, Virginia, and to have the purchase financed through the Putnam Leasing Company, Inc. in Greenwich.   The lease, dated March 1, 2006, was signed on behalf of the lessee, Century Jets Racing, LLC by the plaintiff, the sole member of that LLC. The plaintiff also signed a personal guaranty of the lease.  (Exs. 1 & 39.)   The vehicle invoice for the Ferrari was $234,131, which included $5,341 for the installation of a passenger's seat in the car.²  (Ex. 2.)

On March 20, 2006, the plaintiff phoned the defendant's headquarters and spoke with Jamie Talavera, another of the defendant's member services representatives.³  The plaintiff told her that he was interested in adding a 2006 Ferrari automobile to his policy.   When speaking with a member seeking to obtain new insurance or to add a new vehicle to an existing policy, the defendant's member services representatives use two separate and distinct data entry programs.   The first program is a screen flow in which the representative records underwriting information which eventually finds its way into the declarations page of the member's insurance policy.   The screen flow program prompts the representative to record the year, make, model and VIN ⁴ of the vehicle being added to the policy.   The program also requires the representative to obtain information as to where the vehicle is or will be registered, where the vehicle will be principally garaged, and how the vehicle will be used.⁵  The screen flow program requires that, with some minor exceptions not relevant to the issues of this case, each screen be completed before the representative can advance to the next screen.

The second program is named “O–Docs.”   That program allows the representative to record any information regarding a conversation with a member for underwriting purposes which would not be included in a policy declaration.   For example, information about the plaintiff's inquiry as to the possibility of insuring a Star Mazda vehicle was recorded on O–Docs because, in accordance with the defendant's consistent refusal to insure racing cars, no policy or amendment to an existing policy could have resulted from the plaintiff's conversation with Houlihan.   The O–Docs system does not allow for entries to be erased or corrected, even to fix typographical errors.

Talavera's O–Docs notes indicated that she initiated the process of adding the Ferrari to the plaintiff's existing automobile policy.  (Ex. 31.)   Those notes further confirmed that Talavera advised the plaintiff that, pursuant to the defendant's policies, coverage would automatically apply to the vehicle once it was purchased, provided that all information regarding the vehicle was given to the defendant within thirty days.   The notes also recorded that Talavera confirmed that the Ferrari would be parked in a garage.   However, the telephone connection between the plaintiff and Talavera was broken before she could obtain all the information regarding the identity and proposed use of the Ferrari.   Talavera attempted to regain contact with the plaintiff without success.   In accordance with the defendant's procedures for such cases, she saved the information provided to her by the plaintiff in the defendant's electronic files.

Later the same day, the plaintiff re-established contact with the defendant and was connected to Shawn Waling, another member services representative employed by the defendant.   Waling was able to retrieve the plaintiff's file from the defendant's data base.   In accordance with the defendant's company procedures, he proceeded to verify all of the information which Talavera had previously recorded by asking the plaintiff to confirm that it was correct.   When Waling reached the point in the underwriting process where Talavera's conversation with the plaintiff had left off, he began to collect additional information by asking the plaintiff open-ended questions.   For example, Waling testified that he would not ask, “Will the car be used for personal purposes?” or “Will the car be used for business purposes?”   Instead, he was trained to ask “How will the car be used?”   The process was designed to allow the member to provide the representative, in the member's own words, with the information necessary for the underwriting process.   The O–Docs entries for the plaintiff's conversation with Waling shows that Waling completed the underwriting process and arranged for insurance binders to be sent to the plaintiff and to “Mary Curtis.”  (Presumably an employee of the Ferrari of Washington dealership.)

On the next day, March 21, 2007, the defendant issued a new declarations page to the plaintiff's existing policy, adding the 2006 Ferrari as an insured vehicle.   The declarations page noted that the car would be “principally garaged at” the plaintiff's home address in Williamsburg, Virginia.  (Ex. 3.) The testimony of the participants in the March 20, 2006 phone calls are in conflict as to what information the plaintiff provided to the defendant concerning the Ferrari, its registration, garaging and intended use.

The plaintiff claims that in those telephone calls with defendant's member services representatives, he advised one or both of them that the Ferrari was “not street legal” and would not be registered in any state because it could not be registered without significant modifications to the vehicle (which he had no intention of undertaking).   The plaintiff pointed out that the VIN assigned to the vehicle identified it as one which was not built to be “street legal.”   He claimed that he informed the defendant's representative(s) that if he did register the vehicle, it would first be registered in Delaware (the state in which the plaintiff mistakenly believed the vehicle entered the United States), and then re-registered in Virginia (where the plaintiff lived).   He claimed that he further informed the defendant's representative(s) that he did not know where the vehicle would be garaged:  and that he was told in response:  “That's alright, we will just use your home address.”   The plaintiff also claims that he was never asked whether he intended to race the Ferrari, but did inform the representative(s) that he intended to use it to “do some fun things.”   The plaintiff testified that he was never asked how he was going to use the car or who would be driving it.

Talavera testified that at the time her telephone conversation with the plaintiff terminated, she did not believe that she had yet obtained the VIN for the vehicle.   She stated that if a member had advised her that a vehicle would not be registered, it would have stopped the process of adding the vehicle to an existing policy, unless the vehicle was recognized as being a type of unregistered vehicle for which the defendant routinely offers coverage.   Such vehicles would include snow mobiles, mo-peds and the like.   She also testified that if the member could not state where the vehicle would be garaged, the process would be halted until the location was confirmed.   Her O–Docs notes confirm that she had determined that the Ferrari would be garaged, but apparently had not confirmed the location of the garage.   Talavera testified that, in the case of a high value vehicle like a Ferrari, it was important to determine that the vehicle would be protected in a garage rather than being parked on the street or in a driveway.   She also stated that, if a member had responded to the question of how a vehicle was to be used by saying it would be devoted to doing “some fun things,” it would have prompted her to make further inquiries to determine that the planned use of the vehicle was consistent with the defendant's underwriting standards.   Those standards did not permit the defendant to insure vehicles used in racing or those used commercially (i.e. rental cars, taxis, livery cabs, etc.).

When Talavera was questioned on cross examination about an entry on O–Docs showing that the Ferrari was classified by the defendant as a “Gray Market Vehicle,” she explained that when the defendant's computer program does not recognize a VIN as one associated with a “street legal” vehicle, the representative is prompted to make additional inquiries.   She pointed out that the defendant was founded to insure members of the armed forces and their families, and that it is not uncommon for members to acquire automobiles in foreign countries with VINs that are not customarily used for vehicles destined for sale in the United States.   In such cases the member services representative, upon determining that the vehicle can and will be registered within the United States, may override the computer and allow the vehicle to be insured as a “Gray Market Vehicle.”

Waling testified that he completed obtaining information from the plaintiff regarding the Ferrari that the plaintiff wished to add to his existing policy.   Waling confirmed Talavera's testimony concerning the defendant's underwriting processes.   He further testified that the underwriting process would have stopped:  1) if there was any information suggesting that the Ferrari might be used for racing;  2) if the plaintiff had stated he did not know where the Ferrari would be garaged;  3) if he had not been assured that the car would be registered in the United States;  or 4) if he was told that the car would not be driven on the public highway and would be transported in a car carrier between racing venues.   He testified that, in some cases, the defendant insures vehicles which are not registered.   Typically this occurs when a member of the armed forces places his car in storage while he is on an extended deployment.   However, any such information would be reflected in an O–Docs entry.

Information collected in the screen flow process is capable of being retrieved from electronic storage.   Copies of screens (Ex. 33) show that the defendant's representatives verified that the plaintiff had stated: 1) the Ferrari would be used for “pleasure/work/school” and 2) he would be the principal driver of the Ferrari and that no other members of the plaintiff's family, including his son (classified as a youthful operator) would be an occasional user of that vehicle.   Waling also testified that he was uncertain as to whether he made the original entry “Gray Market Vehicle” (which overrode the exception generated by the VIN number assigned to the Ferrari) or verified the car status as a “Gray Market Vehicle.”   However, Waling was certain that he was informed by the plaintiff that the Ferrari was at the time, or soon would be “street legal,” and would be registered in the United States.

The defendant claims that the insurance policy it issued to the plaintiff contains two provisions which provide a basis for denying coverage for the damages which the Ferrari suffered in the January 24, 2007 crash.

The first provision states:

FRAUD

We do not provide coverage for any insured who has made fraudulent statements or engaged in fraudulent conduct in connection with any accident or loss for which coverage is sought under this policy.

The second provision provides:

EXCLUSIONS

We will not pay for:

7.  Loss to your covered auto or any non-owned auto, located inside a facility designed for racing, for the purpose of:

a.  Competing in;  or

b. Practicing or preparing for;

any prearranged or organized racing or speed contest.

In late March 2006, the Ferrari arrived at the Ferrari Washington dealership, and the plaintiff was notified.   Within a few days, the plaintiff traveled from his home in Williamsburg to the dealership.   At that time he spoke with a representative of the dealership who offered to store the Ferrari at the dealership, without charge, apparently perceiving a marketing benefit from having the racing model of the F–430 on the premises.   Thereafter, the plaintiff arranged to have the dealership transport his Ferrari to Homestead, Florida, where Ferrari North America sponsored an annual Ferrari owners day in April 2006 at which the owners were trained in operating their vehicles on a race track.   After that event, the plaintiff participated in a race at Homestead driving his Ferrari.   The plaintiff testified that he was aware of the racing exclusion set forth in the policy issued by the defendant and was willing to assume the risk of the loss of the vehicle while it was being raced.⁶

In May the Ferrari was transported to Sonoma, California where the plaintiff participated in a race at the Infineon Racetrack.   The Ferrari suffered minor damage which the plaintiff had repaired.   In June the Ferrari was transported to Quebec, Canada where the plaintiff planned to participate in another race.   Those plans were frustrated when the engine of the Ferrari caught fire on a practice day and suffered extensive damage.   The car was transported to Ferrari Washington for repairs.   The plaintiff testified that he paid over $88,000 to have the Ferrari repaired.   He made no claim against the defendant because he was aware that he was engaged in practicing for a race and the Ferrari was therefore excluded from coverage under the terms of his policy.   Repairs to the Ferrari required several months.

The plaintiff testified that, following the damages to the Ferrari suffered in Quebec, he decided that he would no longer race the car.   He claims that he informed Arnold Poundstone, a Ferrari mechanic employed by Ferrari Washington, of that decision.   The plaintiff did not use the car again until December 2006, when he had the repaired Ferrari transported to the track at Homestead, Florida in order to drive it on a “track day.”   The plaintiff testified that on such track days, racetracks allow owners of high performance cars to drive their vehicles at elevated speeds.   The tracks charge a fee of $500 or $600 for use of their facilities.   On track days, there is no formal competition or timing of laps.

In January 2007, the plaintiff had the Ferrari transported to the Infineon Race Track in Sonoma, California to participate in another track day scheduled for January 24, 2007.   The car was accompanied by the mechanic Arnold Poundstone, who was present to provide mechanical help on the Ferrari as needed.   On that day, prior to taking the Ferrari on the race course, the plaintiff drove a rental car on the course with Richard Spenard, a Canadian Hall of Fame race car driver.   The plaintiff denied that Spenard was acting as his coach, but admitted that he “probably paid him something” for his services that day.   The plaintiff also denied that Poundstone and Spenard constituted his racing team by “any racing standards.”

After completing his inspection of the course with Spenard, the plaintiff drove the Ferrari on two runs, each lasting approximately twenty minutes.   After each run, Poundstone inspected the tires on the Ferrari.   On these runs the Ferrari was driven at speeds of up to ninety miles per hour on straightaways and about seventy miles per hour on curves.⁷  On his third run, he lost control of the car on a curve at a speed of approximately seventy miles per hour and collided with a guard rail, causing extensive damage to the front of the Ferrari.   The plaintiff suffered minor injuries in the crash but did not require hospitalization.   While operating the Ferrari on the track, the plaintiff wore a firesuit, helmet, and boots.   The plaintiff was uncertain as to whether he also wore racing gloves.

The plaintiff immediately reported the accident to the defendant.   The defendant then assigned an adjuster, Aaron Hill, to investigate the loss.   On February 1, 2007, Hill interviewed the plaintiff in a telephone conversion which was recorded and transcribed.  (Ex. 25.)   After learning that the accident had occurred on a closed circuit at Infineon, Hill asked the plaintiff whether he had been in a speed contest or had been racing other vehicles.   The plaintiff denied that he had been engaged in such activities, stating:  “No, no, none of that ․ This is kinda like a circuit where you just drove around and a lotta times Ferrari and Porsche put on these things where ․ they have, like a little circuit you can drive the car around to try to get the handling characteristics and ․ they sometimes ․ have some people there coaching and advising and everything ․ not quite ready for the race.”

On February 22, 2007, the plaintiff was interviewed again by Hill on the telephone, and a transcript was made of their conversation.⁸  (Ex. 26.)   Hill asked the plaintiff how the Ferrari had gotten from the east coast to California.   The plaintiff replied that it had been transported by the dealer, Ferrari of Washington.   He further stated that the dealer supported him on the “days we have at motor sports complexes, which ․ basically are just driving experiences and things like that.”   In response to further questioning by Hill, the plaintiff admitted that he had a driving coach at Infineon on the day of the accident.   When asked whether he had raced the car in the past, the plaintiff stated that he had done so, about a year or so ago.

On February 22, 2007, the defendant wrote a letter to the plaintiff informing him that the plaintiff's claimed loss might not be covered based on the fraud and racing clauses contained in the insurance policy.   That letter further stated that the defendant was not waiving any other rights.

At the same time that the defendant's claims department was investigating the plaintiff's loss, the defendant's underwriting department was reviewing the circumstances under which the plaintiff had obtained coverage for the Ferrari.   When the plaintiff had filed his claim in connection with the January 24, 2007 crash, the defendant had learned, for the first time that:  (1) the Ferrari had not been registered in either Delaware or Virginia;  (2) the Ferrari could not have been registered in any state because the competition model of the F430 Ferrari lacked safety features and emission controls required to register motor vehicles for use on the public highways;  and (3) the Ferrari had never been garaged in Williamsburg.

Kevin Todd testified that he was the underwriter employed by the defendant who was assigned to review the plaintiff's initial application for coverage following the January 24, 2007 accident.   Following that review, Todd decided to rescind the coverage of the Ferrari under the plaintiff's policy.   Todd testified that had the defendant been informed that the Ferrari would be principally garaged outside of Sonson's care, custody and control, it would not have issued a new declarations page including the Ferrrari as an insured vehicle under the policy.   Todd also testified that had the defendant been aware that the Ferrari would not be registered, further inquiry would have revealed that it was a racing car, and the defendant would not have insured it.

As a result of the underwriting investigation, the defendant sent a letter to the plaintiff dated May 30, 2007 rescinding the plaintiff's coverage for the Ferrari retroactively to March 21, 2006, the initial date of coverage.  (Ex. 7.) The bases for the rescission were the material misrepresentations made to the defendant by the plaintiff regarding the Ferrari and the use which the plaintiff intended to make of that vehicle.

RESCISSION

The defendant claims that at the time coverage of the Ferrari was initiated material misrepresentations made by the plaintiff to the defendant's member services representatives with respect to the Ferrari's garaging and registration.   The defendant further claims that these misrepresentations entitle the defendant to rescind coverage of the Ferrari retroactively under Virginia law.⁹  Virginia Code Ann. § 38.2–309 (2010) provides in relevant part:  “All statements, declarations, and descriptions in any application for an insurance policy ․ shall be deemed representations and not warranties.   No statement in an application or in any affidavit made before or after loss under the policy shall bar a recovery upon a policy of insurance unless it is clearly proved that such answer or statement was material to the risk when assumed and was untrue.”

In interpreting this statute, the Virginia Supreme Court has stated:  “When an insurance carrier seeks to void a policy for alleged material omissions or misrepresentations [pursuant to Va.Code Ann. § 38.2–309], the insurer must show, by clear proof, two facts:  (1) the statement or omission on the application was untrue;  and (2) the insurance company's reliance on the false statement or omission was material to the company's decision to undertake the risk and issue the policy.”  Montgomery Mutual Insurance Co. v. Riddle, 587 S.E.2d 513, 515, 266 Va. 539 (2003).   Where an insured provides a material misrepresentation of fact to an insurer when obtaining a policy, the policy is void ab initio.   See Hawkeye–Security Insurance Co. v. Government Employees Insurance Co., 154 S.E.2d 173, 174, 207 Va. 944, 947 (1967).   Additionally, “[w]hether a representation is made and the terms of on which it is made [the first element] are questions for the trier of fact;  but when ․ a misrepresentation is proved, its materiality [the second element] is a question of law for the court.”  Id., 794.

Neither § 38.2–309 nor supporting case law explicitly define the “clear proof” standard.   The Virginia Supreme Court has held in another context, however, that the clear proof standard is lower than the “proof beyond a reasonable doubt” standard.   See Norfolk & Portsmouth Bar Ass'n v. Drewry, 172 S.E. 282, 286, 161 Va. 833 (1934) (to discipline or disbar attorney, clear proof, but not proof beyond reasonable doubt, is required).   Also, in the context of the § 38.2–309 clear proof standard, specifically, the Virginia Supreme Court has stated:  “[T]his Court construes § 38.2–309 of the Virginia Code to place no burden on the insurance company to conduct any investigation ․ it is not what the insurance company knew or should have known only what it knew based upon the information provided to it in the application.”  Nationwide Mutual Insurance Co. v. Fondufe, 73 Va.Cir. 338, 338 (2007).   In addition, “[t]he burden of clearly proving the affirmative defense of materiality of a misrepresentation is not carried when the court, to find the fact, must resort to assumption and conjecture.”  (Emphasis added.)   Harrell v. North Carolina Mutual Insurance Co., 213 S.E.2d 792, 796, 215 Va. 829 (1975).   Finally, regarding the type of evidence the court may consider under the § 38.2–309 clear proof standard, the court in Smith v. Colonial Insurance Co. of California, 515 S.E.2d 775, 258 Va. 30 (1999), held that it was proper to consider the written portion of an application, which was not “a model of clarity and does not contain the actual questions posed by the agent” because the evidence was “nevertheless the embodiment of the discussion between the applicant and the agent.”  Id., 777.

A.

Truthfulness and the Plaintiff's Credibility

Regarding the first element (truthfulness), the plaintiff claims that in his telephone calls with the defendant's member services representatives, he truthfully stated that:  (1) the Ferrari was “not street legal” and would not be registered (as corroborated by the VIN);  (2) he did not know where the vehicle would be garaged (and was told “that's alright, we will just use your home address”);  and (3) he intended to use the Ferrari to “do some fun things,” though he was never asked how he would use the car or who would be driving it.

The defendant contends that the evidence shows that the plaintiff did not inform its representatives that the car was not and would not become street legal.   Many of the defendant's members (insureds) are active duty military personnel and their dependants, who are often assigned to duties outside of the United States.   The testimony of the defendant's employees established that it is not uncommon for a member to acquire a vehicle in another country bearing a VIN number indicating that it does not fully comply with all requirements to permit its registration in the United States.   Often such vehicles can be easily modified to comply with domestic standards and thereafter are registered within the United States.   In such cases, the member services representative is authorized to override the program and note that the vehicle being insured is a “Gray Market Vehicle.”

The defendant further claims that it would not have agreed to insure a high value car, such as the plaintiff's Ferrari, without knowing both that the car would be garaged and also where that garage would be located.   The defendant asserts that the evidence establishes that had the plaintiff informed the defendant's representatives that the Ferrari would be used to “do some fun things,” the plaintiff would have been asked for more details as to the vehicle's proposed use.   If those additional inquiries had revealed that the Ferrari would only be operated on race tracks, the defendant would have refused to cover the vehicle.

The defendant relies on the testimony of Jamie Talavera that:  (1) if a member had advised her that a vehicle would not be registered, or if the member could not state where the vehicle would be garaged, it would have halted the process of adding the vehicle to the policy;  (2) if a member had advised her that the vehicle would be used for “some fun things,” it would have prompted further inquiry;  and (3) a “Gray Market Vehicle” classification, such as the Ferrari at issue, can arise when the member services representative overrides the computer upon determining that a vehicle (often foreign) can and will be registered within the United States.

The defendant also relies on Shawn Waling's testimony that the underwriting process would have stopped if:  (1) there was any information that the Ferrari would be used for racing;  (2) the plaintiff had stated he did not know where the Ferrari would be garaged;  (3) he had not been assured that the car would be registered;  or (4) he had been told that the car could not be driven on the public highway and would be transported between racing venues.

In weighing the evidence, the court notes that on February 23, 2006, the plaintiff had been unequivocally advised by Paul Daniel Houlihan, one of the defendant's member services representatives, that the defendant had a firm policy against insuring racing automobiles.   This conversation took place less than a week before the plaintiff signed the lease to acquire the racing version of the F430 Ferrari.

The plaintiff's version of events preceding the defendant's decision to insure the Ferrari does not stand up to scrutiny.   Each of the defendant's employees who testified regarding the underwriting process was clear as to the safeguards built into the system.   The testimony was also clear that the employees' training would have alerted them to the truth regarding the Ferrari had the plaintiff, in fact, told them:  1) he did not know where the car would be registered in the United States;  2) he did not know whether the car would be registered in the United States;  3) he did not know where the car would be garaged;  or 4) he intended to use the car to “do some fun things.”

In addition, the plaintiff has served as an Air Force officer and as a commercial pilot.   It is common knowledge that both of these professions require the ability to routinely communicate accurate and precise information.   The plaintiff's testimony that he managed to successfully obtain coverage from the defendant while giving muddled and imprecise answers to direct questions is simply not credible.   The court is led to the conclusion that the plaintiff did not candidly advise the defendant's representatives of the truth regarding the Ferrari and his intentions with respect to its use;  rather, the plaintiff intentionally supplied them with untruthful information designed to mislead the defendant and cause it to issue an insurance policy covering a risk (racing vehicles) that it does not insure.

The court finds that the evidence clearly demonstrates that the plaintiff's version of the material elements of his conversations with the defendant's member services representatives on March 20, 2006 is a fabrication.   Accordingly, the court finds with respect to the first element that the defendant has clearly proven that the plaintiff misrepresented information to the defendant's member services representatives.

B

Materiality

With respect to the second element (materiality), the Virginia Supreme Court has stated:  “[A plaintiff's] representation would be material to the risk if it would reasonably influence the insurance company in deciding whether to issue the policy.”  Time Insurance Co. v. Bishop, 425 S.E.2d 489, 492, 245 Va. 48 (1993).   Additionally, the Fourth Circuit has held that “an underwriter's sworn statements, particularly when uncontradicted, are sufficient to demonstrate the materiality of the misrepresentation.”  TIG Insurance Co. v. Robertson, Cecil, King & Pruitt, 116 Fed.Appx. 423, 426 (4th Cir.Va.2004).

In the present case, in addition to the testimony described above, Kevin Todd (the underwriter who decided to rescind the plaintiff's policy) testified that if the defendant had known the true location of where the vehicle was to be garaged, it would not have issued the policy.   Todd also testified that if the defendant were aware that the plaintiff's vehicle would not be registered, further inquiry would have revealed that the vehicle was a racing vehicle which the defendant would not insure.   In addition, Jamie Talavera testified that, in the case of a high value vehicle like a Ferrari, it was important to determine that the vehicle would be protected in a garage rather than being parked on the street or in a driveway.   As evidenced by Nationwide Mutual Insurance Co. v. Fondufe, supra, the defendant in this case was under no obligation to conduct any investigation beyond the plaintiff's representations.   Thus, this court finds that facts regarding the garaging and registration of the Ferrari would “reasonably influence” the defendant's judgment in providing coverage to the plaintiff.

The evidence also demonstrates that the plaintiff was well aware of the materiality of the misrepresentations he made to the defendant's member services representatives.   He knew that the defendant would not insure racing cars and that he was leasing a racing car.   He did not have any intention of modifying the car to make it “street legal” or to have it registered.   He fabricated portions of his conversations with the defendant's member services representatives in order to account for the erroneous information recorded with respect to the garaging and registration of the vehicle;  and his fabrications were made for the express purpose of obtaining insurance on the Ferrari.   He was well aware that the defendant would not insure the Ferrari had it been informed of the truth.   The court finds that the defendant has therefore clearly proven that the plaintiff's misrepresentations were material.

Since the defendant has sustained the burden imposed on it by Virginia Code Ann. § 38.2–309, the court finds that it acted properly to rescind its coverage of the Ferrari retroactively to March 21, 2006.   The retroactive rescission of the policy renders moot all other issues in this case.   Nevertheless, the court will consider the following issues raised by the parties each of which assumes the existence of coverage for the Ferrari:  1) Does the fraud exclusion in the policy apply?   2) Does the racing exclusion in the policy apply? and 3) Did the plaintiff have an insurable interest in the Ferrari?

II

FRAUD EXCLUSION

The defendant claims that the plaintiff's loss is excluded from coverage by the following provision of the policy:

FRAUD

We do not provide coverage for any insured who has made fraudulent statements or engaged in fraudulent conduct in connection with any accident or loss for which coverage is sought under this policy.

The defendant claims that in his recorded statement of February 22, 2007, the plaintiff made the following fraudulent statements:  1) he had only raced the Ferrari on one occasion;  2) that he had all relevant paperwork for the Ferrari including its registration;  and 3) the Ferrari could be registered.   A transcript of the plaintiff's February 22, 2007 phone call with the defendant's representative, Charles Simpson, was introduced in evidence as Exhibit 26.   That exhibit includes a “transcriptionist's note” stating:  “Due to poor recording quality, there are many inaudibles throughout the transcript.”

The court agrees with the defendant that the transcript includes the statements which the defendant relies on.   However, without a complete copy of the conversation between the plaintiff and Simpson, the court cannot find that the defendant has sustained its burden of demonstrating by clear and convincing evidence that the plaintiff acted fraudulently in submitting a claim to the defendant.   Accordingly, the court finds that had the policy not been rescinded by the defendant, the fraud exclusion would not have barred the plaintiff's recovery.

III

RACING EXCLUSION

The defendant contends that the plaintiff is excluded from coverage because the activities he was engaged in at the time of the loss fall under the policy's “racing exclusion.”   The plaintiff argues that when the accident occurred, he was not racing, nor was he practicing or preparing for a race.   He was simply driving a race car on a track (or, to adopt his characterization of the activity, doing a “fun thing”).

The Virginia Supreme Court has stated:  “When an insurer drafts policy language setting forth exclusions that limit coverage under a policy, the insurer is required to use language that clearly and unambiguously defines the scope of the exclusions.”  Lower Chesapeake Associates v. Valley Forge Insurance Co., 532 S.E.2d 325, 331, 260 Va. 77 (2000).  “[T]o bar coverage, exclusionary language must clearly bring the particular event, thing, or circumstances in question within its scope.”  Moore v. State Farm Mutual Auto Insurance Co., 448 S.E.2d 611, 613, 248 Va. 432 (1994).   Also, “[e]xclusionary language in an insurance policy will be construed most strongly against the insurer and the burden is upon the insurer to prove that an exception applies.”  PBM Nutritionals, LLC v. Lexington Insurance Co., 724 S.E.2d 707, 713, 283 Va. 624 (2012).

In the present case, the insurance policy states that the defendant will not cover loss for the purpose of “a. Competing in;  or b. Practicing or preparing for;  any prearranged or organized racing or speed contest.”   The evidence in this case shows that when the accident occurred, the plaintiff was participating in a “track day” at Infineon race track in Sonoma, California, in which there was no formal competition or timing of laps.   However, the plaintiff was accompanied by a mechanic and a driving coach, he was traveling at approximately seventy miles per hour on curves and ninety miles per hour on straightaways, he was wearing a fire suit, helmet, boots, and possibly gloves, and he was driving at approximately seventy miles per hour when he collided with the guardrail.

The plaintiff testified that he was not practicing or preparing for a race because, shortly after the June 2006 fire which damaged the Ferrari in Canada, he decided that he would no longer drive the Ferrari in racing events.   The only corroboration offered by the plaintiff for this claim was his own testimony that he had not signed up to participate in a series of races sponsored by Ferrari scheduled to be held in 2007.   The plaintiff claimed that he had informed the mechanic, Arnold Poundstone, of his decision to retire the Ferrari from racing.   However, he did not call Poundstone as a witness or provide any evidence whatsoever to support his claim.   It is clear, that unless the Ferrari were to be substantially modified it could not be driven on any public highway.   No evidence was presented that the plaintiff made any plans to either modify the Ferrari or to sell the vehicle.   The court concludes that, like the plaintiff's version of his telephone conversions with the defendant's member services representatives, the plaintiff's claim that he had abandoned racing the Ferrari was a self-serving fabrication.

The court finds that the evidence establishes, without question, that the plaintiff was “practicing or preparing for” a “prearranged or organized racing or speed contest” at the time of the loss.   Under such circumstances, the court finds that the racing exclusion would have applied had the policy not been appropriately rescinded by the defendant.

IV

INSURABLE INTEREST

In a special defense, the defendant asserts that:  “The plaintiff's claims are barred in whole or in part to the extent that the plaintiff does not have an insurable interest in said vehicle.”   In its post-trial brief, the defendant claims that the plaintiff did not have an insurable interest in the vehicle because he was neither the owner nor the lessee of the vehicle at the time of the accident.   The defendant relies on Va.Code Ann. § 38.2–303, which provides:

A.  No insurance contract on property or on any interest therein or arising therefrom shall be enforceable except for the benefit of persons having an insurable interest in the property insured.

B. As used in this section “insurable interest” means any lawful and substantial economic interest in the safety or preservation of the subject of insurance free from loss, destruction or pecuniary damage.

The evidence shows that the plaintiff made the down payment for the Ferrari with his personal check in the amount of $26,590.49 and paid for the installation of a passenger's seat with another personal check in the amount of $5,341.00.  (Ex. 41.)   The plaintiff testified that he was the sole member of Century Jets Racing, LLC, the entity which leased the Ferrari from Putnam Leasing Company, Inc. The lease shows that the plaintiff guaranteed the payment of all sums due under the lease.  (Exs. 1 & 39.)   The court concludes that the plaintiff had an insurable interest in the Ferrari.   Therefore, had coverage on the Ferrari not been rescinded, the court would have found in favor of the plaintiff with respect to the defendant's special defense.

CONCLUSION

For the reasons stated above, the court enters judgment in favor of the defendant and against the plaintiff.

David R. Tobin, J.T.R.

FOOTNOTES

FN1. After the conclusion of evidence the defendant conceded that there was no evidence that the plaintiff had received compensation for the damage to the Ferrari from a third party..  FN1. After the conclusion of evidence the defendant conceded that there was no evidence that the plaintiff had received compensation for the damage to the Ferrari from a third party.

FN2. The racing version of the F430 apparently leaves the factory with a single seat for the driver of the vehicle..  FN2. The racing version of the F430 apparently leaves the factory with a single seat for the driver of the vehicle.

FN3. Talavera testified that the defendant has over 3,000 member services representatives, each of which is licensed by the states for which they are underwriting insurance coverage..  FN3. Talavera testified that the defendant has over 3,000 member services representatives, each of which is licensed by the states for which they are underwriting insurance coverage.

FN4. Vehicle Identification Number..  FN4. Vehicle Identification Number.

FN5. Pleasure, work, farm, business or storage..  FN5. Pleasure, work, farm, business or storage.

FN6. The plaintiff acknowledged that the terms of his lease (Exs. 1 & 39) required him to keep the Ferrari insured at all times.   He knew that racing would void his coverage not only for himself, but also for Putnam Leasing Company, Inc. (the named lessor) and All Points Capital Corporation (to which the lease was assigned), but he believed that his personal guarantee of the lease was sufficient to protect the financial interests of those entities..  FN6. The plaintiff acknowledged that the terms of his lease (Exs. 1 & 39) required him to keep the Ferrari insured at all times.   He knew that racing would void his coverage not only for himself, but also for Putnam Leasing Company, Inc. (the named lessor) and All Points Capital Corporation (to which the lease was assigned), but he believed that his personal guarantee of the lease was sufficient to protect the financial interests of those entities.

FN7. The plaintiff testified that in competitive races, Ferraris would be driven at speeds of up to 130 miles per hour..  FN7. The plaintiff testified that in competitive races, Ferraris would be driven at speeds of up to 130 miles per hour.

FN8. A note on the transcript appended by the “transcriptionist” states:  “Due to poor recording quality, there are many inaudibles throughout the transcript.”.  FN8. A note on the transcript appended by the “transcriptionist” states:  “Due to poor recording quality, there are many inaudibles throughout the transcript.”

FN9. The plaintiff maintains that all statements he made to the defendant's member services representatives were entirely truthful..  FN9. The plaintiff maintains that all statements he made to the defendant's member services representatives were entirely truthful.

Tobin, David R., J.T.R.