UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

MARK WINSTON; JACQUELINE

DEVEREAUX,

Plaintiffs-Appellees,

v. No. 95-2705

STATE FARM FIRE AND CASUALTY

COMPANY,

Defendant-Appellant.

MARK WINSTON; JACQUELINE

DEVEREAUX,

Plaintiffs-Appellants,

v. No. 95-2783

STATE FARM FIRE AND CASUALTY

COMPANY,

Defendant-Appellee.

Appeals from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Claude M. Hilton, District Judge.

(CA-95-162-A)

Argued: June 6, 1996

Decided: September 5, 1996

Before ERVIN, NIEMEYER, and HAMILTON, Circuit Judges.

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Reversed and remanded by unpublished opinion. Judge Ervin wrote

the opinion, in which Judge Niemeyer and Judge Hamilton joined.
COUNSEL

ARGUED: Stephen Anthony Horvath, TRICHILO, BANCROFT,

MCGAVIN, HORVATH & JUDKINS, P.C., Fairfax, Virginia, for

Appellant. Kevin Roger Hildebeidel, STEPHEN K. CHRISTENSON,

P.C., Fairfax, Virginia, for Appellees. ON BRIEF: Stephen K. Christenson, STEPHEN K. CHRISTENSON, P.C., Fairfax, Virginia; Donald E. Coulter, Manassas, Virginia, for Appellees.

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Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

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OPINION

ERVIN, Circuit Judge:

State Farm appeals following a jury verdict in favor of Mark Winston and Jacqueline Devereaux, arguing that the district court erred

when it allowed the jury to consider the issue of materiality and when

it failed to instruct the jury on the meaning of"clear and convincing."

Winston and Devereaux have cross-appealed, challenging the district

court's refusal to submit the question of State Farm's good faith to the

jury, as well as its instructions on the issues of arson and misrepresentation. For the reasons that follow, we reverse and remand for a new

trial.

I.

Mark Winston and Jacqueline Devereaux, to whom we will refer

as "Devereaux" for simplicity, own a house in Manassas, Virginia.

The house burned on February 15, 1993, and Devereaux promptly

sought to recover under a State Farm fire insurance policy. State Farm

suspected arson and conducted an investigation. Devereaux claimed

that she spent the evening of February 15 at her parents' home, and

discovered the raging fire when she returned home. The home and its

contents were almost totally destroyed.

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State Farm retained a fire investigator, who concluded that the fire

was caused by flammable liquids being poured into a wall register.

The insurer's investigation also uncovered what it considered to be

possible motives for Devereaux to set fire to the property: the house

was in terrible condition, and Devereaux may have been having financial difficulties. State Farm could not confirm Devereaux's explanation of her whereabouts the night of the fire. It also contended that

Devereaux had removed a number of valuables from the home prior

to the fire, and inflated the values of some possessions in her insurance claim. State Farm denied Devereaux's claim.

Devereaux filed an action alleging bad-faith breach of contract in

Virginia state court; State Farm filed a counterclaim seeking a declaration that the policy was void based on material misrepresentation

and arson. State Farm also removed the action to federal court based

on diversity of citizenship. At trial, the jury deliberated for about an

hour, then returned a judgment in Devereaux's favor for $74,567.94.

The district court denied State Farm's motion to set aside the verdict

and denied Devereaux's motion for attorney's fees and prejudgment

interest. The district court also denied State Farm's request for a

declaratory judgment.

II.

A.

State Farm defended against Devereaux's claim of liability under

the policy based, in part, on its contention that Devereaux made material misrepresentations in the course of its investigation. The policy

contained the following provision:

This policy is void as to you and any other insured, 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.1

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1 The Code of Virginia dictates that fire insurance policies contain the

following provision:

This entire policy shall be void, if whether before or after a loss,

the insured has wilfully concealed or misrepresented any mate-

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State Farm now contends that the district court should have decided

the question of materiality, and erred by submitting the issue to the

jury.

State Farm argues that Virginia law, which applies in this diversity

action, dictates that materiality be decided by the court, not the jury.

See Harrell v. North Carolina Mutual Life Ins. Co., 213 S.E.2d 792,

794 (Va. 1975); Old Republic Life Ins. Co. v. Bales, 195 S.E.2d 854,

856 (Va. 1973); Chitwood v. Prudential Ins. Co. of Am., 143 S.E.2d

915, 918 (Va. 1965); Scott v. State Farm, 118 S.E.2d 519-23 (Va.

1961)). The cases on which State Farm relies all involve the issue of

materiality in the context of applications for insurance, not loss investigations. Our research has revealed no cases addressing whether the

issue of materiality in the context of an insurer's loss investigation is

an issue for the court or the jury.

Virginia's Model Jury Instructions define a "material fact" as "one

which influences a person to act or not to act." Instr. No. 39.020

(1993, Civil Ed.).2 A representation in the context of an insurance

application is "material to the risk if it would reasonably influence the

insurance company in deciding whether to issue the policy." Time Ins.

Co. v. Bishop, 425 S.E.2d 489, 492 (Va. 1993). Similarly, material

misrepresentations during loss investigations would reasonably influence the insurance company not to pay a submitted claim. Without

specific guidance from the Virginia courts that loss investigations are

different from applications for these purposes, we shall rely on the

closest analogy, and rule that materiality in the context of a loss

investigation is a question for the court. Therefore, the district court

erred in submitting this issue to the jury.

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rial fact or circumstance concerning this insurance or the subject

thereof, or the interest of the insured therein, or in case of any

fraud or false swearing by the insured relating thereto.

Va. Code § 38.2-2105(A) (1994). Sections 38.2-2107 and 38.2-2108

allow provisions that deviate from the language prescribed by § 38.2-

2105 provided they are at least as favorable as the standard provisions

and approved by the Insurance Commission.

2 We note that the Model Jury Instructions contain no instruction concerning the materiality of statements made during a loss investigation.

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The jury found only that Devereaux made no material misrepresentations. We cannot now know whether the jury found that Devereaux

made no misrepresentations, or found that she made misrepresentations that were immaterial. Thus we cannot find this error harmless.3

Furthermore, we reject Devereaux's contention that, even if it were

error to submit the issue of materiality to the jury, State Farm invited

this error by proposing the instructions used by the district court. State

Farm's proposed instruction on the definition of materiality was submitted to the jury, but State Farm submitted this jury instruction only

after the court declined to decide the issue of materiality. State Farm

cannot now be faulted for so proceeding.

B.

State Farm argues that the district court should have instructed the

jury on the definition of "clear and convincing" evidence. With minimal legal analysis, State Farm concludes that "[t]he probability that

the jury held the defendant to a heightened standard of proof and the

resultant prejudice to the defendant requires that the decision be overruled." Apparently State Farm believes that the jury considered "clear

and convincing" to mean the same thing as "beyond a reasonable

doubt." This argument is without merit. The district court explained

to the jury that "clear and convincing evidence" is a higher standard

than "preponderance of the evidence." We find no error, because "the

charge [was] accurate on the law and [did] not confuse or mislead the

jury." Hardin v. Ski Venture, Inc., 50 F.3d 1291, 1294 (4th Cir. 1995).

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3 In its subsequent order denying State Farm's motion to set aside the

jury verdict, the district court stated that "the Court found the statements

to be material when it sent the case to the jury." Joint Appendix at 297

(Order of Aug. 31, 1995). This suggests that State Farm may have prevailed had the jury simply found that Devereaux had in fact made misrepresentations. Still later, the court ruled that"the defendant State Farm

has failed to show by a preponderance of the evidence that the plaintiffs

misrepresented or concealed material facts." Joint Appendix at 299

(Order of September 20, 1995). But the court specifically stated that it

was "guided by the jury's determination" that Devereaux had not misrepresented material facts. Thus, this ruling is not an accurate indication of

how the district court would have ruled if it had considered the issue of

materiality in the first instance.

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III.

A.

Devereaux argues on cross-appeal that the trial court erred when it

refused to submit the issue of State Farm's bad faith to the jury. She

sought attorneys' fees under a Virginia statute:

[I]n any civil case in which an insured individual sues his

insurer to determine what coverage, if any, exists under his

present policy or bond or the extent to which his insurer is

liable for compensating a covered loss, the individual

insured shall be entitled to recover from the insurer costs

and such reasonable attorney fees as the court may award.

However, these costs and attorney's fees shall not be

awarded unless the court determines that the insurer, not acting in good faith, has either denied coverage or failed or

refused to make payment to the insured under the policy.

Va. Code § 38.2-209(A) (1994). Devereaux argues that because the

jury is the "court" for fact-finding purposes, the statute by its terms

does not preclude submission of the issue to the jury; moreover, she

argues, the Supreme Court of Virginia has tacitly approved jury consideration of an insurer's good faith. Brief of Appellee at 23-24 (citing State Farm Mut. Auto. Ins. Co. v. Floyd, 366 S.E.2d 93, 96 (Va.

1988)). Floyd, however, involved a common-law claim of bad faith

failure to settle with a third party, not the statutory availability of

attorneys fees in an action between insurer and insured.

The district court correctly concluded that the statutory reference

to "court" did not mean "jury," and decided the issue itself.

Devereaux's argument is counter-intuitive--"court" is not the same as

"fact-finder"--and we cannot assume that the Virginia legislature

chose the word "court" lightly.4 The district court did not err in refusing to submit this issue to the jury.

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4 The previous version of this statute, § 38.1-32.1, specifically provided

that an insured may recover "such reasonable attorney fees as the trial

judge may award if it is determined by such trial judge in such case that

the insurer has not in good faith either denied coverage or failed or

refused to make payment to the insured under such policy." CUNA Mut.

Ins. Soc. v. Norman, 375 S.E.2d 724, 726 (Va. 1989) (emphasis added).

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Because the district court's determination that State Farm did not

act in bad faith was a finding of fact, we review it for clear error. Fed.

R. Civ. P. 52(a); Waters v. Gaston County, 57 F.3d 422, 425 (4th Cir.

1995). The Virginia Supreme Court has explained the inquiry to be

used in determining whether a denial of insurance coverage has been

made in good faith, noting that the proper standard is reasonableness.

CUNA Mut. Ins. Soc. v. Norman, 375 S.E.2d 724, 727 (Va. 1989).

Several of the non-exclusive factors offered by that court are at issue

here, specifically, "whether the insurer had made a reasonable investigation of the facts and circumstances underlying the insured's claim;

whether the evidence discovered reasonably supports a denial of liability; [and] whether it appears that the insurer's refusal to pay was

used merely as a tool in settlement negotiations." Id. The district court

here found,

In the instant action, State Farm conducted an investigation

of the facts and circumstances and, based on the incendiary

nature of the fire and on several inconsistencies in Plaintiff

Devereaux's statement as to her whereabouts at the time of

the fire and in the claim forms that she filed, State Farm

denied coverage. This Court finds that State Farm's decision

to deny coverage was a reasonable action in light of its

investigation and was not done in bad faith.

Joint Appendix at 298 (Order of August 31, 1995).

The district court's conclusions were not clearly erroneous.

Devereaux has failed to convince this court that State Farm's investigation was not conducted in good faith based on the information

available.

B.

Devereaux argues that if this court were to remand the case, it must

consider the following errors, which she claims benefitted State Farm.

She contends that the district court erred in instructing the jury that

it could find that she made misrepresentations by the "greater weight

of the evidence." Under Virginia law, fraud must be proven by clear

and convincing evidence. Evaluation Research Corp. v. Alequin, 439

S.E.2d 387, 390 (Va. 1994). But misrepresentations in the insurance

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application context--to which we again turn by way of analogy--are

governed by Virginia Code § 38.2-309, providing that an insured's

statements will not prevent recovery under the policy "unless it is

clearly proved that such answer or statement was material to the risk

when assumed and was untrue" (emphasis added). The Virginia

Supreme Court has held that it was error for a trial court to require

"clear, cogent, and convincing" evidence of fraud in an insurance

application. Old Republic Life Ins. Co. v. Bales , 195 S.E.2d 854, 856-

57 (Va. 1973).

Finally, Devereaux argues that the trial court erred when it

instructed the jury that State Farm could prove that she set the fire by

"showing clear and convincing evidence that the fire was incendiary

in origin, that the insureds had the motive to set the fire and that the

insureds had an opportunity to set the fire." She contends that this

standard amounts to a presumption of guilt for homeowners whose

homes burn--"[a]ny homeowner has access to their own property,

and, according to the insurance company, has a motive: to obtain the

insurance money." She also complains that the instruction was based

on criminal arson cases. As State Farm points out, however, the standard in criminal cases is higher than civil cases, so this could not have

prejudiced Devereaux. Furthermore, there was additional evidence of

Devereaux's possible motive to set the fire--which went beyond a

bare allegation that she wanted the insurance proceeds--including the

fact that if she were to sell the house "as is" she would actually owe

money.

In sum, Devereaux has not persuaded this court that there were

errors in the jury charge.

IV.

Because the district court erred when it refused to decide the issue

of materiality, this case must be remanded for retrial. However, we

find no merit in the remaining assignments of error argued by either

party.

REVERSED AND REMANDED

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