                                    ___________

                                    No. 95-3083
                                    ___________


Leo McCullough, doing business          *
as Video Unlimited,                     *
                                        *
              Appellee,                 *
                                        *   Appeal from the United States
     v.                                 *   District Court for the
                                        *   District of Nebraska.
State Farm Fire & Casualty              *
Company,                                *
                                        *
              Appellant.                *

                                    ___________

                     Submitted:     January 9, 1996

                           Filed:   April 4, 1996
                                    ___________

Before MAGILL, REAVLEY,* and HANSEN, Circuit Judges.
                               ___________

MAGILL, Circuit Judge.


     Appellee Leo McCullough insured his videotape rental business, Video
Unlimited, against fire and theft under a policy issued by appellant State
Farm Fire and Casualty Company (State Farm).        McCullough submitted claims
under the policy for a fire and for a subsequent burglary.          State Farm
denied coverage, alleging that McCullough had committed arson and fraud,
thereby voiding the policy.    After a bench trial, the district court1 found
that McCullough's son, who was McCullough's de facto business partner,




     *THE HONORABLE THOMAS M. REAVLEY, United States Circuit
     Judge for the Fifth Circuit, sitting by designation.
          1
        On agreement of the parties and pursuant to 28 U.S.C.
§ 636(c), the case was referred to a United States Magistrate Judge
for disposition.
had committed arson, and ruled that McCullough was barred from recovering
for losses caused by the fire.      The district court also held that, under
Nebraska law, McCullough's fraud and arson did not void the entire policy.
The district court held State Farm liable for losses stemming from the
unrelated burglary, and State Farm appeals.      Because we disagree with the
district court's interpretation of Nebraska law, we reverse its judgment
for McCullough on his theft claim.


                                       I.


     McCullough purchased Video Unlimited, a videotape rental business in
South Sioux City, Nebraska, in 1990 from his son and daughter-in-law, who
remained involved with the business.2       McCullough obtained fire and theft
insurance from State Farm on Video Unlimited with an $8000 limit.          The
business struggled, and in 1991 it operated with losses averaging $495 per
month.   During 1992, these average losses reached $2563 per month.         In
September 1992, McCullough increased the insurance coverage on Video
Unlimited to an $80,000 limit.


     Video Unlimited suffered a fire on January 4, 1993.           McCullough
claimed that the fire caused a loss of $21,633 in smoke and water damage
and a projected loss of $48,588 income to the business.             McCullough
promptly reported this as an accidental fire to State Farm.        On the same
day as the fire, State Farm provided    McCullough with a $3000 supplementary
advance payment under the policy.    On January 16, 1993, Video Unlimited was
burglarized, and $25,789 in video merchandize was stolen.


     On March 29, 1993, McCullough submitted separate proofs of




     2
      McCullough's daughter-in-law worked at Video Unlimited, and
McCullough's son managed the business and was responsible for
staffing, purchasing, bank deposits, bill paying, and tax form
filing for sales tax.

                                      -2-
loss for his fire and theft claims to State Farm.                     State Farm denied
                           3
McCullough's claims, alleging that the January 4th fire had been caused
by arson and that McCullough had misrepresented his projected loss of
income.       State Farm returned McCullough's premium of $149.73 on June 11,
1993.    McCullough brought suit in Nebraska state court to recover under his
insurance policy with State Farm, and State Farm removed the case to the
federal district court under diversity jurisdiction.


        The    district        court    found    that   McCullough    had    intentionally
misrepresented       the       amount    of     projected   future   income,    which   was
incompatible with the monthly losses incurred by Video Unlimited before the
fire.    The district court also found that McCullough's son, who was his de
facto partner, had intentionally set the fire.               Although McCullough claimed
that a malfunctioning hot plate behind a sales counter had started the
fire, an expert witness testified that the hot plate could not have been
the cause of the fire, which originated in the basement.                     Investigators
found evidence that the fire had multiple points of origin, and that
accellerants had been used at the fire scene.                 Consistent with a case of
arson, firefighters had discovered a soda machine obstructing the stairway
to the basement, impeding their access to the fire.                         Finally, Video
Unlimited's burglar alarm indicated that no entries had occurred in                     the
building during the night before and morning of the fire, and McCullough's
son was the only person who had the opportunity to cause the fire.                      The
district court denied McCullough's claim based on fire damage, and it
granted judgment to State Farm on its $3000 counterclaim for the advance
payment.


        State Farm argued that arson and fraud voided McCullough's insurance
policy, and that State Farm was not liable for losses




          3
       See Appellant's App. at 45 (June 7, 1993 letter denying
recovery for fire loss); Appellant's App. at 54 (June 9, 1993
letter denying recovery for theft loss).

                                                -3-
incurred during the subsequent burglary.        McCullough's policy contained a
clause titled "Concealment, Misrepresentation or Fraud," which provided:


     This policy is void in any case of fraud by you as it relates
     to the policy at any time. It is also void if you or any other
     insured intentionally conceal or misrepresent a material fact
     concerning . . . a claim under this policy.


Mem. Op. & Order at 10 (July 11, 1995).


     The district court, while suggesting that "[h]ad the theft occurred
after the submission of the proof of loss on the fire, [State Farm] might
be in a better position to argue the avoidance,"       id. at 16, held that "the
mere success of a fraud-based defense on the fire claim does not void the
policy    as   to   the   theft   claim     notwithstanding   the   'concealment,
misrepresentation or fraud' policy provision involved in this case."         Id.
Because State Farm had presented "no evidence . . . showing that the fire
and theft were related events or that the theft claim involved independent
fraudulent conduct by the insured," id., State Farm was held liable for the
theft claim.


     McCullough does not challenge the district court's findings of fact
as to arson and misrepresentation, nor does he challenge the district
court's judgment in favor of State Farm on his claim for             fire-related
losses.   The sole issue before this Court is whether the commission of
arson and fraud voided McCullough's insurance policy, preventing recovery
for the subsequent burglary.


                                          II.


     Nebraska law determines the rights of the parties in this diversity
action, see Bell Lumber & Pole Co. v. United States Fire Ins. Co., 60 F.3d
437, 441 (8th Cir. 1995), and this Court reviews




                                       -4-
the district court's interpretation of Nebraska law de novo.                See Salve
Regina College v. Russell, 499 U.S. 225, 231 (1991).


     Under Nebraska law, "[a]n insurance policy is to be construed as any
other contract to give effect to the parties' intentions at the time the
contract was made.    When the terms of the contract are clear, they are to
be accorded their plain and ordinary meaning."        Thorell v. Union Ins. Co.,
492 N.W.2d 879, 882 (Neb. 1992).       We agree with State Farm that the plain
meaning of the "concealment, misrepresentation, or fraud" clause in its
policy   with    McCullough   was   clear:   that   the   entire   policy   would   be
immediately void if McCullough committed fraud against State Farm.              It is
undisputed that McCullough did commit fraud against State Farm through his
son's commission of arson and his own report of the arson fire as an
accident.       State Farm therefore proved its affirmative defense, see
Robinson v. State Farm Mut. Auto. Ins. Co., 197 N.W.2d 396, 398 (Neb.
1972), and could be liable for McCullough's subsequent theft claim only if
Nebraska law prohibits the voiding of the policy.


     Although not cited by the district court, McCullough relies on Neb.
Rev. Stat. § 44-358 to support his argument that State Farm may not avoid
liability on his theft claim unless the arson and fraud contributed to the
burglary.   The statute, titled "Policies; misrepresentations; warranties;
conditions; effect," provides, in part:


     The breach of a warranty or condition in any contract or policy
     of insurance shall not avoid the policy nor avail the insurer
     to avoid liability, unless such breach shall exist at the time
     of the loss and contribute to the loss, anything in the policy
     or contract of insurance to the contrary notwithstanding.


Because the district court found no evidence of a connection




                                        -5-
between the arson and the burglary,4 McCullough contends that § 44-358
mandates that State Farm be liable for his theft losses.      We disagree.


     Section 44-358, created "to protect the insured," Zimmerman v.
Continental Casualty Co., 150 N.W.2d 268, 271 (Neb. 1967), is a part of
every insurance policy in Nebraska by construction.      See Security State
Bank of Eddyville v. Aetna Ins. Co., 183 N.W. 92, 93 (Neb. 1921).          First
enacted in 1913, § 44-358 largely incorporates Nebraska common-law; see,
e.g., Havlik v. St. Paul Fire & Marine Ins. Co., 127 N.W. 248, 249 (Neb.
1910) (noting that Nebraska follows minority rule that misrepresentations
do not void policy unless they affect risk); Springfield Fire & Marine Ins.
Co. v. Winn, 43 N.W. 401, 402-03 (Neb. 1889) (same).


     Under § 44-358, an insurer may not void a policy because an insured
misrepresents   proof   of   loss   unless   the   insurer   relied   on    the
misrepresentation to its injury.    See Omaha Paper Stock Co. v. California
Union Ins. Co., 262 N.W.2d 175, 179 (Neb. 1978).      The statute, however,
"does not deprive an insurance company of the defense of fraud."       Sorter
v. Citizens Fund Mut. Fire Ins. Co., 39 N.W.2d 276, 279 (Neb. 1949).
Instead, § 44-358


     requires fair play; that an applicant for insurance must
     exercise towards the company the same good faith which may
     rightfully be expected of it; and that there be fair dealing by
     both parties. If untrue statements of the insured, material to
     the risk, are made to the company




     4
      State Farm argues that the district court erred in finding no
connection between the fire and the burglary, alleging that either
the fire damaged Video Unlimited's burglar alarm, or that
McCullough staged the burglary. While it is certainly possible,
perhaps even likely, that the burglar alarm was damaged in the
fire, or that an arsonist would turn to burglary, State Farm had an
opportunity at trial to produce evidence to prove these
allegations.    State Farm did not present such evidence, and we
discern no clear error in the district court's findings of fact.
See Fed. R. Civ. P. 52(a) (standard of review).

                                     -6-
      and they are believed and acted upon by it . . . it is clear
      that the company was deceived to its injury, and the statute
      does not deprive it of a remedy.


Id.   Thus, so long as the requirements of § 44-348 were met, State Farm had
the option of avoiding the contract.      See Glockel v. State Farm Mut. Auto.
Ins. Co., 400 N.W.2d 250, 256 (Neb. 1987) ("[I]n Nebraska there is a
common-law right to rescind or avoid insurance policies for material
misrepresentations, which is recognized in and limited by § 44-358.").


      To avoid liability, State Farm had the burden of proving that
McCullough's misrepresentation and fraud "were made knowingly with intent
to deceive, that the insurer relied and acted upon such statements, and
that the insurer was deceived to its injury."           White v. Medico Life Ins.
Co., 327 N.W.2d 606, 609-10 (Neb. 1982).           See also Vackiner v. Mutual of
Omaha Ins. Co., 156 N.W.2d 163, 164-65 (Neb. 1968) ("A set of circumstances
in which an insurer possesses a conditional power to avoid its contract is
the following: A misrepresentation in the application for policy was made
knowingly by the insured with intent to deceive.            The misrepresentation
deceived the insurer to its injury." (citing § 44-358)).


      The   district    court's      findings      demonstrate     that       McCullough
intentionally deceived State Farm both through the arson itself and when
he immediately reported the fire as an accident.               State Farm relied on
McCullough's     misrepresentation    when    it    provided     him   with    a   $3000
supplemental advance payment.     On the undisputed findings of the district
court, we conclude that McCullough's arson and fraud constitute a breach
"so material and substantial as to defeat the objects of the parties in
making the contract," Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526
F. Supp. 623, 648 (D. Neb. 1980) (quoting Olson v. Pedersen, 231 N.W.2d
310, 315 (Neb. 1975)), aff'd without opinion, 676 F.2d 707 (8th Cir. 1982),
and gave State




                                        -7-
Farm the right to void the policy.


                                     III.


     Having concluded that State Farm had the right to void McCullough's
policy, we must decide precisely when the policy was voided.     The district
court suggested that McCullough's fraud could not vitiate the policy until
after he had submitted formal proofs of loss.   See Mem. Op. & Order at 16.
We find no basis for this construction in the terms of § 44-358, which
requires only that a breach "exist at the time of the loss and contribute
to the loss" before an insurer may void the policy.


     Requiring State Farm to cover McCullough's postarson theft claim
would reward him for concealing the arson while punishing State Farm for
thoroughly investigating a suspicious claim before denying it.    Neither the
district court nor McCullough have directed us to any Nebraska case or,
indeed, to case law from any jurisdiction, which requires an insurer to
maintain a policy after an insured has committed arson.   Rather, Nebraska
adheres to the sound rule that no arsonist should ever be allowed to profit
from his crime; see, e.g., Continental Ins. Co. v. Gustav's Stable Club,
Inc., 317 N.W.2d 734, 738 (Neb. 1982) ("Of course, the insured's wilful
burning of the property would be an absolute defense to an action upon the
policy." (quotations omitted)).5


     5
     In applying a similar standard under Missouri law, this Court
explained the rationale supporting this rule:

     'To permit a recovery under a policy of fire insurance by
     one who has been convicted of burning the property
     insured, would be to disregard the contract, be
     illogical, would discredit the administration of justice,
     defy public policy and shock the most unenlightened
     conscience.    To sustain such a judgment would be to
     encourage and give support to the current thoughtless and
     carping criticisms of the legal procedure, and to justify
     the jibe that the administration of the law is [a]
     legalized lottery.'
Connecticut Fire Ins. Co. v. Ferrara, 277 F.2d 388, 391 (8th Cir.)
(quoting Eagle, Star & British Dominions Ins. Co. v. Heller, 140
S.E. 314, 323 (Va. 1927)), cert. denied, 364 U.S. 903 (1960).

                                     -8-
        We note that, under Nebraska law, an insurer may be estopped from
voiding a contract "if after an unreasonable time after knowledge of the
facts    giving     rise   to   the   right,          the   [insurer]    fails    to    declare   a
rescission," Calvert Fire Ins. Co., 526 F. Supp. at 650, or if the insurer
fails to return a premium after the misrepresentation is known, see
Dairyland Ins. Co. v. Kammerer, 327 N.W.2d 618, 621 (Neb. 1982).                          We find
no    basis   for    estoppel    in    this       case.       State     Farm   timely    declared
McCullough's policy void after a thorough investigation of his claims, see
Calvert Fire Ins. Co., 526 F. Supp. at 650 (insurer need not act prior to
full knowledge of breach), and State Farm returned McCullough's premium
within days of denying his claim and declaring the policy void.


        McCullough breached his insurance contract on January 4, 1993, when
his    son    committed    arson      and    he       collected    $3000   from    State    Farm.
McCullough's breach therefore existed at the time of, and contributed to,
State Farm's loss of $3000.            The requirements of § 44-358 were satisfied
on the very day of the fire, twelve days before the burglary occurred.                            We
hold that § 44-358 did not require State Farm to maintain McCullough's
policy beyond the moment of McCullough's breach and its own injury, and
that the policy was therefore void prior to the theft losses.


                                                 IV.


        McCullough     cannot    rely       on    §    44-358     to   protect    him   from   the
consequences of his wrongdoing in this case.                    Due to McCullough's material
breach, the proper resolution of this matter is to void the contract
between the parties as of the day of the fire, when State Farm was injured
by McCullough's fraud.          We affirm the district court's judgment of $3000
on State Farm's counterclaim,




                                                 -9-
and we reverse its judgment for McCullough on his theft claim.


     Accordingly, we affirm in part, and reverse in part, the judgment of
the district court.


     A true copy.


           Attest:


                CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                 -10-
