Many of us have been there. You have a sympathetic and seemingly honest insured. There is no question, however, that the loss before you—arson of a residence, business, warehouse, or automobile; theft of jewelry, business personal property, or inventory; or destruction of an automobile—resulted from the intentional acts of another insured. The facts of how the loss occurred, the property destroyed or taken, and the relationship between the insureds may vary, but the theme is the same: a non-fortuitous loss caused by an insured with a claim presented by an apparently innocent co-insured.
Do you deny the claim, pay the entire claim, or pay a portion of the claim? Does the possibility that the guilty insured might profit from the payment on the claim impact the decision to pay the claim?
“An,” “Any,” or “The” Insured
The question of how to respond to claims presented by innocent co-insureds has been answered differently over the years. For many jurisdictions, the answer to the question depends on three small words: “an,” “any,” and “the.” The intentional acts provisions generally fall into the following categories:
- We do not insure for loss caused directly or indirectly by any of the following…intentional loss, meaning any loss arising out of any act committed by or at the direction of an insured.
- Concealment of Fraud: This policy shall be void if any insured has intentionally concealed or misrepresented any material fact or circumstance relating to the insurance.
- Coverage is excluded for loss resulting from the willful acts of the insured.
Generally, courts have found no coverage is owed for the innocent co-insured where the policies exclude coverage for loss resulting from intentional acts by “an” or “any” insured, and have found coverage where the exclusion is for intentional acts of “the” insured. The rationale is that “an insured” or “any insured” applies to all insureds, whereas the acts of “the insured” will only bar recovery to the offending insured.
Severability of Insureds’ Interests
Courts also look to see if the policy terms are meant to apply jointly or severally to all insureds. Such severability provisions generally provide: “This insurance applies separately to each insured. This condition will not increase our limit of liability.” Severability clauses are found as general clauses applying to the entire policy, to the property coverage (Section I), or to the liability coverage (Section II).
In USAA Ins. Co. v. Gordon, a Florida case, the policy contained a severability clause under Section II liability coverages but not under Section I property coverages or under the general conditions applying to the entire policy. The court held that the innocent husband could not recover under the policy for property damage resulting from his wife’s intentional acts, finding the policy’s severability clause applied only to Section II.
Required Minimum Coverage Provision
Every state has implemented a standard form fire policy by statute. Such statutes are strictly enforced, and where policies do not meet the minimum coverages, courts will reform the policies so that they do. These standard form fire policies have been the source of reformation of policies resulting in recovery by innocent co-insureds.
In Century-National Insurance Company v. Garcia, a California case, a husband and wife presented a claim for damage to their property, which was destroyed when their adult son, also an insured under the policy, set the home on fire. The carrier denied the claim based on the policy’s exclusion for loss resulting from the intentional acts of any insured. Both the trial court and appellate court agreed with the insurer’s position.
However, the California Supreme Court reversed the rulings, finding that the policy did not meet California’s statutory fire policy coverage requirements. The court explained that because California Insurance Code Section 533 represents “an implied exclusionary clause which by statute is to be read into all insurance policies…, the standard form fire policy is properly read as excluding coverage for losses caused by ‘the wilful act of the insured.’” (italics added). The court held that because the parents did not cause the loss, they were entitled to recover under the policy.
Similarly, the Minnesota Supreme Court in Watson v. USAA found a policy failed to meet the state’s standard form fire policy and allowed the innocent co-insured wife coverage, although her husband intentionally set fire to her mobile home and the policy contained an exclusion for intentional acts and a concealment or fraud provision for acts committed by “an insured.”
The foregoing approach to the innocent co-insured dilemma has been followed in cases in many jurisdictions across the country, including Arizona, Idaho, Iowa, Louisiana, Massachusetts, Michigan, New York, Nebraska, and West Virginia.
It is important to note, however, that because the rulings are premised on the minimum requirements of statutory fire policies, they generally do not apply to liability, automobile, or other non-fire policies.
Better Practices Pointer
There appears to be a non-uniform approach to the innocent co-insured issue within the property coverage context across the country. If there is no case law on point, in states that have adopted a statutory fire policy, it is important to confirm that the provisions of your policy meet the minimum coverages specified in the standard form fire policy in the jurisdiction where your claim arises. If the statutory form fire policy or the statutory intentional acts exclusion is framed to exclude coverage for intentional acts by the insured, the better practice is to allow coverage for the innocent co-insured, even if the policy language is framed by reference to “an” or “any” insured.