I grew up about 20 miles from the Canadian border and know quite a lot about Canada, but shamefully, not that much about Canadian insurance law.
So this story in a Canadian legal publication caught my eye — it’s about a series of Canadian court decisions that say that if one family member or another insured burns down the house or otherwise intentionally destroys the insured property, the policy’s exclusion for intentional acts keeps even an innocent co-insured from recovery.
As the story indicates, this is a vexing issue to try to balance. As with many things about insurance coverage, trying to resolve questions often requires one to think pretty deeply about human nature and human conduct. There is an argument that if an innocent insured can collect for the intentional acts of another, there is an incentive for fraud or collusion. With acts like actually torching a house, this moral hazard is somewhat lessened, I think, because arson is a serious crime and volunteering to take up residence at the graybar hotel so your co-insured can collect insurance proceeds is, 999 times out of 1,000, going to act as a pretty powerful disincentive. Most of the time, the criminal will seek to benefit himself and any benefit to a co-insured will be incidental or unplanned. Besides, collusion is not really what the issue is here. This question posits a co-insured who is not colluding or engaging in fraud, but instead is the victim of aggression or criminal plotting by a crooked or nutty current or former spouse or some such sleaze; or possibly the victim of bizarre or crazed conduct by a drug-addicted, emotionally whack or otherwise out-of-control family member, such as a teenager. Maybe the co-insured just doesn’t know what some dirtbag family member is up to. Hey, don’t scoff, if you’ve ever known dirtbags, you do your best to tune them out.
In the United States, how innocent co-insureds are treated varies. In my totally unscientific, quick and dirty survey of four jurisdictions and some texts and periodicals, I found most courts looked to give a recovery to the the co-insured, particularly because it was often the intention of the destroyer to deprive the victim of both property and security, if not life itself. Remember, no one is saying the slimeball arsonist should get anything except an extended working vacation at the rock pile. The question is whether the innocent co-insured should get zero, half (or other proportionate share) or all the recovery.
In Yerardi v. Pacific Indemnity, 436 F.Supp.2d 223 (2006), a federal district court in Massachusetts said there could be no recovery for the wife where there was an accusation she colluded with her husband to commit arson, because the policy unequivocally said no co-insured could recover for the intentional acts of another. Same result, the court said, for intentional misrepresentation by a co-insured — bango, you’re both done. Might the court have had a different take if there was a clearly innocent co-insured? It looks to me like the answer is yes. The court cited an older Massachusetts case that was a hit before your mother was born, a real golden oldie, straight from the nostalgia file, back in 1938, that said insureds were joint and nonseparable. The court said this had not been revisited, unlike in other jurisdictions. Which suggests to me the court might have given some thought to the feasibility of a different result in the facts presented a more compelling justification.
Other courts have found, as in Republic Ins. Co. v. Jernigan, 753 P.2d 229 (Colo. 1988), that the "separation of insureds" or "severablility of insurance" clause means that the policy applies separately to each insured as if that insured was the only insured. In Jernigan, the innocent co-insured wife was entitled to half the proceeds of the policy where the husband intentionally torched the house but she didn’t know of the plan. However, there is something a little odd here. It’s like when you look at a movie where they are supposed to be playing chess and the board is cockeyed, with a white square at the far bottom left of the player instead of the far bottom right. Your chess board is wanked, your game is going to be wanked too.
Here, the "severability" clause relied upon by the court actually is in the Conditions of the liability section of the policy, not in the first part of the policy, which deals with property insurance. In the Conditions following the property section, sometimes there is a statement that if "you" or "any insured person" intentionally harms the property "for the purpose of obtaining insurance benefits," then the policy is void. Now, this leaves a lot of room for coverage for destruction caused by a vindictive spouse or messed up kid, because they are burning the place down to deprive someone of property or maybe even trying to kill them. But it would apply where, as in the case here, it appears the husband wanted to collect on the insurance.
Other times, such as in the standard HO3 homeowners policy, it won’t say anything like that in the property coverage Conditions, but it will say no insured can be paid more than his or his interest in the property, and one of the exclusions will preclude coverage if committed by "an insured" with the intent to cause "a loss." It will also say, in a section of Conditions that apply to both property and liability coverages, that any material misrepresentation by an insured, before or after a loss, voids the entire policy. It seemed odd that the Colorado court would rely on on the Conditions for third-party liability coverage when the issue was first-party property coverage — for example, I wouldn’t try to apply the anti-concurrent cause language from the first-party property section of the policy to the liability section, it just wouldn’t make sense, and that is why the policy has different sections, because not all stuff applies to everything. In coverage, there usually is no one clear right answer, but there is rather a range of answers that range in credibility from high to Anthony Weiner.
Another court noticed this, the cockeyed chess board. In Montgomery Mutual Ins. Co., 170 F.Supp.2d 618 (W.D. VA 2001), the court said the Conditions in the liability section, such as the severability clause, could not be applied to a first-party property loss. However, the standard HO3 intentional acts exclusion had been replaced by a Virginia-required endorsement: instead of saying no loss was insured if inflicted intentionally by an insured, the exclusion said there was "no coverage for an insured who commits or directs an act with the intent to cause a loss." The court therefore allowed a mother to recover after her son set fire to the house, after firing a gun at the home and before driving a pickup into the flames. The son couldn’t have recovered, but the mother could.
Voquardson v. Hartford Ins. Co. of the Midwest, 264 Neb. 337 (2002), gives a pretty good discussion of how courts tend to break these things down: if the policy unambiguously says that loss caused intentionally by "an insured" or "any insured" is excluded, it precludes coverage for everyone. But courts look for just about any way they can find around this. Sometimes, the policy conflicts with a statute or there is a colorable argument that it conflicts, and the court will pounce all over that and find for an innocent co-insured.
Not scientific at all, really. As with most coverage questions, there is a high degree of art involved. But then again, why else do coverage law if not for the art? I always tell newer people who are just learning the field, we are not computers, we are artists. One of my names for insurance coverage is the Briar Patch, not only because it is full of thorns that will hang you up, and not just because it is easy to get lost if you don’t keep a detailed record of your analytical trail, but because there is always another level, another thicket, beyond where your analysis is. The goal is to go so deep in the Briar Patch, to understand the policy so thoroughly, to understand the philosophy so completely, that arguments will be many layers beyond those of an opponent and will ring with credibility and logic, rather than mere partisanship. Easy to say, hard to do.
(Image above found at http://www.flickr.com/photos/38521378@N00/4465002520/).