Dairy Queen of Fairbanks, Inc. v. Travelers Indem. Co. of America, S-1954

• Decision Date: 29 January 1988
• Docket Number: No. S-1954,S-1954
• Citation: 748 P.2d 1169
• Parties: DAIRY QUEEN OF FAIRBANKS, INC., Mark Durante and Ralph Durante, d/b/a Dairy Queen of Fairbanks, and Hi-Count, Inc., Appellants, v. TRAVELERS INDEMNITY COMPANY OF AMERICA, A Foreign Corporation, Appellee.
• Court: Alaska Supreme Court

Page 1169

748 P.2d 1169

DAIRY QUEEN OF FAIRBANKS, INC., Mark Durante and Ralph

Durante, d/b/a Dairy Queen of Fairbanks, and Hi-Count, Inc., Appellants, v. TRAVELERS INDEMNITY COMPANY OF AMERICA, A Foreign

Corporation, Appellee.

No. S-1954.

Supreme Court of Alaska.

Jan. 29, 1988.

John F. Rosie, Fairbanks, for appellants.

Louis R. Veerman, Guess & Rudd, Anchorage, for appellee.

Before MATTHEWS, C.J., and RABINOWITZ, BURKE, COMPTON and MOORE, JJ.

OPINION

PER CURIAM.

Mark and Ralph Durante appeal from a jury verdict in a declaratory judgment action brought against them by Travelers Indemnity Company (Travelers). The Durantes owned a Dairy Queen in Fairbanks that was destroyed on August 16, 1984 by an explosion and fire. Travelers denied coverage under a fire insurance policy on the bases of arson and false swearing. We affirm.

I. Facts and Proceedings.

The Durantes agreed to purchase the Dairy Queen in November 1983 for $950,000. They concede that they immediately fell into arrears because their debt service exceeded their income. At the time of the explosion, they owed substantial sums to the First Interstate Bank, the Internal Revenue Service, Dairy Queen International, and various suppliers and other creditors. The property was listed for sale from June 1, 1984 to the date of the explosion. Ralph Durante, during this same period, was also facing financial difficulties in his trucking business. ¹

The Dairy Queen was destroyed on August 16, 1984 at 5:24 a.m. Two explosions and a resulting fire destroyed the entire building and its contents, and damaged property in a two block radius. The fire inspector concluded that the probable cause was arson.

After the Durantes made a claim for loss on the property, Travelers took sworn statements from each of them. Mark swore that on the night of the explosion he was out with friends at several local bars, went home with a dancer he called "Rainbow," and was there with her when the explosion occurred. Ralph testified that he was in his truck on the Dalton Highway between Fairbanks and Prudhoe Bay, and did not arrive back in Fairbanks until about 2:00 a.m. on August 17.

One of the disputes at trial was Ralph's location on the night of the explosion. The Durantes produced records of Sourdough Express showing that Ralph had signed out with a truckload at 6:00 a.m. on August 15 and returned at 3:00 a.m. on August 17. The Durantes also called three truck drivers who testified that they saw Ralph on the Dalton Highway or heard him on the CB radio at the time in question.

In response, Travelers produced the testimony of "Rainbow," whose real name is Korlina Henson. She testified that Ralph had come to Mark's house on the morning of the fire, that Mark and Ralph had discussed the fire as an "insurance scam," and that they had admonished her never to tell anyone that she had met Ralph. Travelers also called Patricia Manning, who testified that Ralph was at her house late the night before the explosion.

Prior to trial, the Durantes moved for summary judgment, arguing that there was insufficient evidence to implicate them in any act of arson. The Durantes appeal the denial of that motion.

The jury returned separate special verdicts against both Mark and Ralph on the issues of arson and false swearing, ² and the superior court entered judgment accordingly. The Durantes challenge numerous jury instructions, including the standard of proof, the exclusion of certain evidence, and the special verdict form, as well as the court's refusal to give several proposed jury instructions.

II. What is the Applicable Standard of Proof for an Arson and False Swearing Defense Raised by an Insurer?

The superior court ruled that Travelers was required to prove arson and false swearing by a preponderance of the evidence and gave the jury an instruction to this effect. ³ The Durantes argue that the standard should have been "clear and convincing evidence," citing several cases on this point from other jurisdictions. See Carpenter v. Union Ins. Soc'y of Canton, 284 F.2d 155 (4th Cir.1960) (applying South Carolina law); Mize v. Harford Ins. Co., 567 F.Supp. 550, 551-52 (W.D.Va.1982) (applying Virginia law); Jonas v. Northeastern Mutual Fire Ins. Co., 44 Wis.2d 347, 171 N.W.2d 185, 187 (1969). ⁴

Travelers responds by pointing out that the majority rule favors the preponderance standard. See, e.g., Fondren v. Allstate Ins. Co., 790 F.2d 1533, 1535 (11th Cir.1986) (applying Alabama law); Ferguson v. American Family Mut. Ins. Co., 566 F.Supp. 1090, 1093 (E.D.Mo.1983) (applying Missouri law); Godwin v. Farmers Ins. Co. of Am., 129 Ariz. 416, 631 P.2d 571, 574 (App.1981); Dean v. Insurance Co. of North America, 453 N.E.2d 1187, 1194 (Ind.App.1983); Neises v. Solomon State Bank, 236 Kan. 767, 696 P.2d 372, 378-79 (1985); George v. Travelers Indem. Co., 81 Mich.App. 106, 265 N.W.2d 59, 62 (1978); Mutual of Enumclaw Ins. Co. v. McBride, 295 Or. 398, 667 P.2d 494, 495 (1983) (applied to defenses of fraud and false swearing; arson not at issue); Bufkin v. Texas Farm Bureau Mut. Ins. Co., 658 S.W.2d 317, 320 (Tex.App.1983); see also 21B J.A. Appleman & J. Appleman, Insurance Law and Practice § 12682, at 89 (Rev. ed. 1980).

Gabaig v. Gabaig, 717 P.2d 835, 838-39 (Alaska 1986), involved a fraudulent conveyance action. There, in regard to the appropriate burden of proof we said:

Existence of a fraudulent intent is a question of fact, often proven by circumstantial evidence. First National Bank of Fairbanks v. Enzler, 537 P.2d 517, 521-22 (Alaska 1975); AS 34.40.090. This court has stated that fraud is established by a preponderance of the evidence; clear and convincing proof is not required. Saxton v. Harris, 395 P.2d 71, 72 (Alaska 1964). (Footnote omitted.) ⁵

In the earlier case of Saxton v. Harris, 395 P.2d 71 (Alaska 1964), this court affirmed a judgment for plaintiffs who claimed they were fraudulently induced to invest in an oil lease. There we held: "No more than a preponderance of the evidence is necessary to establish fraud. Clear and convincing proof is not required." ⁶ Id. at 72.

The most common rationale for a clear and convincing standard of proof is a "general principle that the burden of proof of an act of a criminal nature asserted as a defense in a civil action is somewhere in between the standard requirement of proof beyond a reasonable doubt in a criminal case and the preponderance of evidence requirement in the ordinary civil case." Carpenter, 284 F.2d at 162. See also City of Madison v. Geier, 27 Wis.2d 687, 135 N.W.2d 761, 763 (1965) (establishing clear and convincing standard in municipal forfeiture action for drag racing). These courts express concern over the "serious social consequences or harsh or far reaching effects on individuals" of finding someone responsible for a criminal act in a civil case. Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349, 360 (Ind.1982) (establishing clear and convincing standard for punitive damages in breach of contract case). But see Dean, 453 N.E.2d at 1194 (establishing preponderance standard for arson defense despite Travelers ). The Alaska courts have not recognized these concerns.

Those jurisdictions that adopt the preponderance standard do so on the grounds that the cases present "a simple breach of contract," Neises, 696 P.2d at 378, and that "[t]he stakes are solely financial and aim at compensation rather than punishment." Mutual of Enumclaw, 667 P.2d at 499. Perhaps more importantly, these courts recognize that "[s]trong principles of public policy deny the insured the right to recover when he intentionally sets on fire property covered by the insurance contract." Neises, 696 P.2d at 378. It would hinder this public policy to require proof by a higher standard than usual for civil cases.

We would be adopting an anomalous position if we embraced the clear and convincing standard for arson and false swearing defenses while maintaining the preponderance standard announced in Saxton for fraud cases. There is a fairly strong common law basis for the higher standard in fraud cases, but not in arson cases. Thus, many jurisdictions with the clear and convincing standard for fraud cases decline to extend this standard to arson or false swearing defenses raised by insurers. See, e.g., Godwin, 631 P.2d at 573-74; Mutual of Enumclaw, 667 P.2d at 495, 497. ⁷

Given our holdings in Gabaig and Saxton, and our conclusion that the public policy arguments favoring the preponderance of the evidence standard are compelling, we hold that the superior court did not err in instructing the jury that Travelers was required to prove arson and false swearing by a preponderance of the evidence. ⁸

AFFIRMED.

1 Travelers offered expert testimony that the Durantes' Dairy Queen business was destined to fail within a short time.

2 In its special...