Erie Ins. Exchange v. Cotten

[Cite as Erie Ins. Exchange v. Cotten, 2017-Ohio-9.]

COURT OF APPEALS
STARK COUNTY, OHIO
FIFTH APPELLATE DISTRICT

JUDGES:
ERIE INSURANCE EXCHANGE, : Hon. W. Scott Gwin, P.J.
: Hon. John W. Wise, J.
: Hon. Craig R. Baldwin, J.
Plaintiff-Appellee :
:
-vs- : Case No. 2016CA00132
:
THOMAS W. COTTEN, ET AL :
: OPINION
Defendant-Appellant

CHARACTER OF PROCEEDING: Civil appeal from the Stark County Court of
Common Pleas, Case No. 2014 CV 02684

JUDGMENT: Affirmed

DATE OF JUDGMENT ENTRY: January 3, 2017

APPEARANCES:

For Appellee Erie Insurance For Appellant Pekin Insurance

KENNETH CALDERONE SHAUN BYROADS
Hanna, Campbell & Powell, LLP Kreiner & Peters Co., LPA
3737 Embassy Parkway, Ste. 100 Box 6599
Akron, OH 44333 Cleveland, OH 44101
Stark County, Case No. 2016CA00132 2

Gwin, P.J.

{¶1} Appellant appeals the June 8, 2016 judgment entry of the Stark County

Court of Common Pleas granting Erie’s motion for summary judgment.

Facts & Procedural History

{¶2} On February 15, 2014, an explosion and fire leveled a detached garage

located on a residential property in Hartville, Ohio that was owned by Thomas and

Kimberly Cotten. The home was insured by appellee Erie Insurance Company (“Erie”).

Cotten was in the structure at the time and was seriously injured as a result. The Hartville

Police Department, Hartville Fire Department, Stark County Sheriff’s Office, and federal

investigators from the Bureau of Alcohol Tobacco and Firearms responded to the scene.

In addition, as firefighters were putting out “hot spots” to prevent further explosions, Brian

Peterman (“Peterman”), a fire investigator for the State of Ohio Division of State Fire

Marshall’s Office, arrived at the location. As they worked in the debris, the responders

and investigators noticed chemicals, tubing, and other items used to manufacture

explosive devices. The Summit County Bomb Squad subsequently took possession of

some of the discovered items.

{¶3} On February 18, 2014, Brian Churchwell (“Churchwell”) of Churchwell Fire

Consultants, who had been tasked by Erie to investigate the explosion in relation to

potential insurance claims, entered onto the property with consent of Cotten’s wife.

Churchwell prepared a report of his findings and Peterman drafted a supplemental report

on the incident. Peterman concluded that “the use of dangerous chemicals consistent

with manufacturing of fireworks and explosives contributed to the cause of the explosion”

and that, based on his education, training, and experience, “the illegal assembly and
Stark County, Case No. 2016CA00132 3

possession of chemicals and substances for manufacturing fireworks and explosives

created a substantial risk of serious physical harm.”

{¶4} In Churchwell’s report and affidavit, he states that, at the scene, he “found

numerous items consistent with the manufacturing and handling of fireworks or similar

explosive devices and materials.” Churchwell opined that, “it is my opinion to a

reasonable degree of certainty that the presence of explosive, firework-related materials

at the Cottens’ premises contributed to the explosion and fire on February 15, 2014. The

presence of those fireworks materials substantially increased the risk of a hazardous

event, including the explosion and the fire that occurred.”

{¶5} Audice Barnette, a resident living near the home of the Cottens’, submitted

an affidavit stating after the initial explosion, she heard additional explosions and

firecrackers.

{¶6} On August 25, 2014, Cotten was indicted on one count of manufacturing or

processing explosives in violation of R.C. 2923.17(B), a felony of the second degree, and

one count of inducing panic in violation of R.C. 2917.31(A)(3)(C)(3), a felony of the fourth

degree. Cotten entered pleas of “no contest” to both charges in 2015. The trial court thus

found Cotten guilty of the charges and sentenced Cotton to five (5) years of community

control. This conviction and sentence was upheld on appeal in State v. Cotten, 5th Dist.

Stark No. 2015 CA 00094, 2015-Ohio-5405.

{¶7} On November 20, 2014, Erie filed a complaint for declaratory judgment

against Thomas and Kimberly Cotten as to whether Erie owed coverage for the Cottens’

claimed property loss. The Erie policy contained a provision providing, “this entire policy

is void if before or after a loss you or anyone we protect has intentionally concealed or
Stark County, Case No. 2016CA00132 4

misrepresented any material fact or circumstance concerning this insurance.” After the

Cottens filed an answer to the complaint, Erie filed a motion for partial summary judgment

as to whether it was entitled to a declaration that it owed no coverage for the Cottens’

first-party property damage claim arising from the explosion and fire. The Cottens did not

respond to Erie’s motion for summary judgment.

{¶8} On August 4, 2015, the trial court granted Erie’s motion for summary

judgment, finding no coverage exists under the Erie policies as to the Cottens’ first-party

property damage claims. The trial court found the large quantities of explosives and other

materials suitable for manufacturing fireworks that Cotten purchased, received, and

maintained in his garage substantially increased the risk of a hazardous event, i.e., the

explosion and fire that occurred on February 15, 204, thus voiding coverage for property

damage under the subject policies. Further, that Cotten made material

misrepresentations about his purchase and use of the firework materials, which violated

the policy conditions and voided coverage.

{¶9} On May 4, 2015, appellant Pekin Insurance (“Pekin”) filed a subrogation

lawsuit against Cotten. Pekin alleged it insured neighboring homeowner Keith Perrin

(“Perrin”) and that Perrin’s house was damaged by the explosion. Pekin paid $81,575.04

to Perrin. Pekin alleged Cotten was negligent and thus liable for the monies Pekin paid

to Perrin. This case was consolidated with the case Erie filed against the Cottens.

{¶10} On October 27, 2015, Erie filed an amended complaint, seeking a

declaratory judgment that Erie owes no duty to defend or indemnify Cotten with respect

to Pekin’s claims. Pekin filed an answer and counterclaim, arguing the Erie policy

provides coverage to the Cotten so that Pekin may be paid by Erie the $81,575.04 it paid
Stark County, Case No. 2016CA00132 5

Perrin. Erie filed a motion for summary judgment and Pekin filed a cross-motion for

summary judgment.

{¶11} The trial court issued a judgment entry on June 8, 2016 granting Erie’s

motion for summary judgment. The court found there was overwhelming evidence and

inconsistent statements made by Cotten that demonstrate Cotten intentionally concealed

or misrepresented facts material to the investigation. First, the trial court found that while

Cotten denied manufacturing fireworks in his sworn statement and deposition, the Ohio

Fire Marshal found evidence of numerous explosive chemicals used for manufacturing

fireworks and the bomb squad found un-exploded homemade fireworks. The trial court

specifically cited to the conclusion of the Ohio Fire Marshall that Cotten’s illegal assembly

and possession of chemicals and substances for manufacturing fireworks created a

substantial risk of serious physical harm. The trial court also specifically cited the

conclusion of Erie’s expert that the explosion likely resulted from the presence of

aluminum powder and other materials which were utilized in the manufacturing of

fireworks. Further, that Cotten made numerous purchases from websites selling

materials for making fireworks, including a book on how to make fireworks. Thus, the trial

court found Cotten’s denials that he was making fireworks to be a material

misrepresentation.

{¶12} The trial court also found Cotten made other intentional misrepresentations

during the investigation that were material to the investigation and determination of

coverage by Erie, including: Cotten’s initial testimony was that he bought firework fuses

to give to a friend, however, he later stated he bought them to sell to a local gunsmith and

used some to make rockets for himself; Cotten initially testified he purchased bags of
Stark County, Case No. 2016CA00132 6

aluminum powder to sell at gun shows, but later testified he bought and sold it for a friend;

Cotten first testified cardboard tubes were premade fireworks purchased from Wholesale

Fireworks and he only had 10-12 of them, he then admitted he bought the tubes online;

Cotten initially denied selling other items at gun shows, but then testified he sold other

items at a gun show; and Cotten could not explain the large amount of money ($28,418)

in his bank account in the several months prior to the explosion.

{¶13} The trial court found Cotten violated the policy conditions and voided

coverage under the Erie policy. Thus, Pekin is not entitled to coverage for its third-party

subrogation claim.

{¶14} Additionally, the trial court found the coverage was voided under the

“increased hazard” clause that provides that, “unless we agree beforehand, coverage is

suspended if the hazard is substantially increased by any means within the control or

knowledge of anyone we protect.”

{¶15} The trial court granted Erie’s motion for summary judgment and found no

coverage exists under the Erie policies as to Pekin’s third-party subrogation claim. Pekin

appeals the June 8, 2016 judgment entry of the Stark County Court of Common Pleas

and assigns the following as error:

{¶16} “I. THE TRIAL COURT COMMITTED REVERSIBLE ERROR BY FINDING

THOMAS COTTEN MADE “INTENTIONAL MISREPRESENTATIONS” AND VOIDING

COVERAGE FOR PEKIN’S INNOCENT THIRD PARTY LIABILITY CLAIMS.

{¶17} “II. THE TRIAL COURT COMMITTED REVERSIBLE ERROR BY FINDING

THE ‘INCREASED HAZARD PROVISION’ FROM THE FIRST PARTY SECTION OF
Stark County, Case No. 2016CA00132 7

THE ERIE POLICY APPLIES AND SUSPENDS COVERAGE FOR PEKIN’S INNOCENT

THIRD PARTY CLAIM.”

Summary Judgment

{¶18} Civ.R. 56 states, in pertinent part:

Summary judgment shall be rendered forthwith if the pleadings,

depositions, answers to interrogatories, written admissions, affidavits,

transcripts of evidence, and written stipulations of fact, if any, timely filed in

the action, show that there is no genuine issue of material fact and that the

moving party is entitled to judgment as a matter of law. No evidence or

stipulation may be considered except as stated in this rule. A summary

judgment shall not be rendered unless it appears from the evidence or

stipulation, and only from the evidence or stipulation, that reasonable minds

can come to but one conclusion and that conclusion is adverse to the party

against whom the motion for summary judgment is made, that party being

entitled to have the evidence or stipulation construed mostly strongly in the

party’s favor. A summary judgment, interlocutory in character, may be

rendered on the issue of liability alone although there is a genuine issue as

to the amount of damages.

{¶19} A trial court should not enter a summary judgment if it appears a material

fact is genuinely disputed, nor if, construing the allegations most favorably towards the

non-moving party, reasonable minds could draw different conclusions from the

undisputed facts. Hounshell v. Am. States Ins. Co., 67 Ohio St.2d 427, 424 N.E.2d 311

(1981). The court may not resolve any ambiguities in the evidence presented. Inland
Stark County, Case No. 2016CA00132 8

Refuse Transfer Co. v. Browning-Ferris Inds. of Ohio, Inc., 15 Ohio St.3d 321, 474 N.E.2d

271 (1984). A fact is material if it affects the outcome of the case under the applicable

substantive law. Russell v. Interim Personnel, Inc., 135 Ohio App.3d 301, 733 N.E.2d

1186 (6th Dist. 1999).

{¶20} When reviewing a trial court’s decision to grant summary judgment, an

appellate court applies the same standard used by the trial court. Smiddy v. The

Wedding Party, Inc., 30 Ohio St.3d 35, 506 N.E.2d 212 (1987). This means we review

the matter de novo. Doe v. Shaffer, 90 Ohio St.3d 388, 2000-Ohio-186, 738 N.E.2d 1243.

{¶21} The party moving for summary judgment bears the initial burden of

informing the trial court of the basis of the motion and identifying the portions of the record

which demonstrates absence of a genuine issue of fact on a material element of the non-

moving party’s claim. Drescher v. Burt, 75 Ohio St.3d 280, 662 N.E.2d 264 (1996). Once

the moving party meets its initial burden, the burden shifts to the non-moving party to set

forth specific facts demonstrating a genuine issue of material fact does exist. Id. The

non-moving party may not rest upon the allegations and denials in the pleadings, but

instead must submit some evidentiary materials showing a genuine dispute over material

facts. Henkle v. Henkle, 75 Ohio App.3d 732, 600 N.E.2d 791 (12th Dist. 1991).

{¶22} The Erie policy at issue in this case contains a provision that expressly voids

the policy in the case of an intentional concealment or misrepresentation of any material

fact or circumstance concerning the insurance. This provision provides as follows, “this

entire policy is void if before or after a loss you or anyone we protect has intentionally

concealed or misrepresented any material fact or circumstance concerning this

insurance.” The question in this assignment of error is whether Cotten made
Stark County, Case No. 2016CA00132 9

representations during the claims investigation process that justified voiding the Erie

policy. Erie contends Cotten’s material misrepresentations include the denial of

manufacturing fireworks and the numerous misrepresentations he made to Erie about

what he was buying and what he was doing with his purchases, such as fuses, aluminum

powder, cardboard tubes, and gun show sales.

{¶23} The materiality of a misrepresentation is a mixed question of law and fact

that, under most circumstances, should be determined by the trier of fact. Abon, Ltd. V.

Transcontinental Ins. Co., 5th Dist. Richland No. 2004-CA-0029, 2005-Ohio-3052.

However, materiality “can be decided as a matter of law if reasonable minds could not

differ on the question.” Id., citing Long v. Insurance Co. of N. Am., 670 F.2d 930 (10th

Cir. 1982).

{¶24} “A misrepresentation will be considered material if a reasonable insurance

company, in determining its course of action, would attach importance to the fact

misrepresented.” Id. Most courts have construed materiality broadly, emphasizing that

the subject of the misrepresentation need not ultimately prove to be significant to the

disposition of the claim, so long as it was reasonably relevant to the insurer’s investigation

at the time. Id., citing Fine v. Bellefonte Underwriters Ins. Co., 725 F.2d 179 (2nd Cir.

1984).

{¶25} A false sworn answer is material if it “may be said to have been calculated

either to discourage, mislead, or deflect the company’s investigation in any area that

might seem to the company, at that time, a relevant or productive area to investigate.” Id.

Quoting Dadurian v. Underwriters at Lloyd’s, London, 787 F.2d 256 (1st Cir. 1986).

Stated another way, a misrepresentation is material when it pertains to a fact “that
Stark County, Case No. 2016CA00132 10

significantly affects the rights or obligations of the insurer.” Parker v. State Farm Fire

Cas., N.D. Ohio No. C87-2683, 1988 WL 1058394 (Nov. 4, 1988). Since the purpose of

requiring answers to questions is to protect the insurer against false claims, the materiality

of false answers should be judged at the time of the misrepresentation. Freeland v.

Grange Mutual Cas. Co., 10th Dist. Franklin No. 14AP-206, 2014 WL 5867039. A

condition of the Erie policy in this case requires Cotten’s cooperation in the investigation

or handling of a loss and in the case of the loss. Pursuant to the policy, Cotten was

required to submit to statements and examinations under oath and cooperate with Erie in

their investigation of the loss.

{¶26} Pekin argues that Cotten’s denial of manufacturing fireworks is not a

material misrepresentation because Cotten never admitted or made any contradictory

statements about manufacturing fireworks and there is no evidence from any outside

sources showing Cotten was lying about manufacturing fireworks. Pekin contends since

Cotten answered all the questions Erie asked and he never admitted to lying, there was

no material misrepresentation. However, the mere fact that Cotten answered Erie’s

questions and did not admit to manufacturing fireworks does not mean he did not make

a material misrepresentation given the evidence presented by Erie.

{¶27} Responders to the scene noted chemicals, tubing, and other items used to

manufacture explosive devices. They also found un-exploded, homemade fireworks.

Peterman, from the Ohio Fire Marshal’s office, found evidence at the scene of chemicals

used for making fireworks; concluded the use of dangerous chemicals consistent with the

manufacturing of fireworks and explosives contributed to the cause of the explosion; and

found the illegal assembly and possession of chemicals and substances for
Stark County, Case No. 2016CA00132 11

manufacturing fireworks and explosives created a substantial risk of serious physical

harm. Churchwell stated in his report that he found numerous items consistent with the

manufacturing and handling of fireworks and opined that the presence of explosive,

firework-related materials at the Cottens’ premises contributed to the explosion and fire

on February 15, 2014. Cotten testified during his deposition that he made various

purchases from websites selling materials for making fireworks such as Skylighter, Inc.

and pyrocreations.com. Cotten also confirmed he purchased a book about the

introduction to the practice of pyrotechnics.

{¶28} Based upon the evidence presented, reasonable minds could only arrive at

the conclusion that, in response to specific inquiries by Erie, Cotten misrepresented

whether he was manufacturing fireworks. Misrepresentations regarding whether Cotten

was manufacturing fireworks pertain to the material matter as it significantly affects the

rights or obligations of Erie as it affects whether the loss is covered. Further, whether

Cotten was manufacturing fireworks is something a reasonable insurance company would

attach importance to in determining coverage under its policy, and its exposure to other

claims, including subrogation claims. See Parker v. State Farm Fire Cas., N.D. Ohio No.

C87-2683, 1988 WL 1058394 (Nov. 4, 1988); Nationwide Mut. Ins. Co. v. Skeens, 2nd

Dist. Miami No. 07-CA-29, 2008-Ohio-1875.

{¶29} Additionally, Cotten made other misrepresentations regarding whether he

bought firework materials, how much and what he bought, what he used the materials for,

and where or how much he sold them. Cotten first stated he purchased a few hundred

feet of fuse to use with his friend’s homemade cannon; then he stated at his deposition

that he acquired most of the fuse to sell at cost to a local gunsmith and used some of it
Stark County, Case No. 2016CA00132 12

to make rockets for himself. In his sworn statement, Cotten stated the numerous

cardboard tubes found at the scene were premade fireworks he purchased from

Wholesale Fireworks in Youngstown and he only had 10-12 of them; however, at his

deposition when he was presented with evidence of purchases from online sellers, he

stated he bought them online and sold the tubes to a gunsmith. Cotten initially testified

he purchased bags of aluminum powder to sell at gun shows, but later testified he bought

and sold it for a friend. Cotten initially denied selling other items at gun shows, but then

testified he sold other items at a gun show.

{¶30} Cotten’s testimony about what he was buying, what he was using it for, and

where he was selling it were material, as a reasonable insurance company would attach

importance to these facts. These facts were relevant to the policy’s increased-hazard

condition, Erie’s potential exposure to liability claims, and possible subrogation claims.

Reasonable minds could come to no other conclusion but that the total effect of Cotten’s

changing testimony and omissions constitutes material misrepresentations.

{¶31} Accordingly, we find the trial court did not err in granting Erie’s motion for

summary judgment and in finding no coverage exists under the Erie policies as to Pekin’s

third-party subrogation claim based upon the provision in the Erie policy that expressly

voids the policy in the case of an intentional misrepresentation of any material fact or

circumstance concerning the insurance. Appellant’s first assignment of error is overruled.

II.

{¶32} In their second assignment of error, Pekin argues the trial court erred in

applying the increased hazard provision to deny coverage. Contained within the “rights

and duties” clause of Section 1 of the Erie policy, the Property Protection section, is an
Stark County, Case No. 2016CA00132 13

increased hazard provision. The provision provides that, “unless we agree beforehand,

coverage is suspended if the hazard is substantially increased by any means within the

control or knowledge of anyone we protect.” Section 2 of the Erie policy is the Home and

Liability Protection section. The “rights and duties” clause in Section 1 of the policy does

not contain the increased hazard provision.

{¶33} Pekin contends since the increased hazard clause is not contained in

Section 2, the clause only applies to first party coverage, not to liability coverage. Erie

concedes the increased hazard clause only applies to first party coverage, not to liability

coverage. However, based upon our disposition of Pekin’s first assignment of error, we

find their second assignment of error moot.

{¶34} Based on the foregoing, we overrule appellant’s first assignment of error

and find appellant’s second assignment of error moot. The June 8, 2016 judgment entry

of the Stark County Court of Common Pleas is affirmed.

By Gwin, P.J.,

Wise, J., and

Baldwin, J., concur