(Editor's Note: The following article is written by MelodyS. Mosley, a partner at Cummins & White, LLP.)

Late one evening, a woman awakened to find her home on fire.Although she escaped unharmed, the house was completely destroyed.A fire department investigation later revealed her husband hadintentionally set the fire. The couple technically owned the hometogether but planned to divorce, and the woman wanted to stay inthe house. The home was insured, and so the wife submitted a claim.But was their homeowners' coverage still valid based on theintentional act of her husband? Did the wife have a right torecover? In California and in a growing number of states, theanswer is “yes.”

Traditionally, when property was jointly owned, the innocentspouse would be out of luck because of the typical policy languagebarring coverage for fire damage because of the intentional act ofa co-insured. The theory behind this result was to ensure theguilty party did not profit from the act. Now, however, recentcourt decisions are making it harder to enforce intentional actexclusions for “innocent co-insureds” in homeowners' fire losses nomatter how the exclusion is worded.

Proving Arson

Arson is significant in both human and economic terms. Accordingto the Unites States Fire Administration in 2010—the mostrecent year for which data are available—there were 16,200intentionally set residential fires nationwide that killed 260people and injured 750. These fires caused nearly $500 million indamage. One in every 10 fires in the U.S. today is intentionallyset and the average dollar loss for all types of arson is $17,289.

It can be difficult to prove that an insured set a fire, as opposed to someone else. Witnessesare scarce, as arsonists usually work alone. Proof often is basedon circumstantial evidence such as a strong motive, including heavydebt, loss of employment, recent or pending divorce, gamblingproblems, tax liens against the insured property, and pendingforeclosure or bankruptcy. Sometimes, the act is rooted in revengeor is the result of domestic violence. Other times, an insuredsimply wants to finagle a remodeled house.

Assuming that a qualified fire expert has shown that the firewas intentionally set—in addition to establishing a strongmotive—attention is focused on the insured's whereabouts at thetime of the fire. Determining whether there was a forced entry canbe important in figuring out who entered the house. Cell phonerecords and bank statements (showing debit card transaction datesand locations) can be helpful as well. Of course, the insured'swhereabouts do not tell the whole story, as an insured may havehired or asked someone else to do the job.

If arson is confirmed and sufficient evidence exists to showthat a named insured was involved, then insurance carriers can denycoverage to the guilty party based on the fact that the insuredacted intentionally. Such conduct is against public policy andusually prescribed by a state insurance code even if it is notspecified in the policy of insurance.

Innocent Co-Insureds

As a general rule, where the insurance policy excludesintentional acts committed by “the” insured, courts have held thatthis exclusion applies only to the wrongdoer and that the innocentinsured is entitled to coverage. On the other hand, where thepolicy excludes intentional acts committed by “any” insured or “an”insured, courts have held that none of the insureds, including theinnocent co-insured, is entitled to coverage. As a result, mostinsurers adopted policy language that voids coverage based onintentional acts by “any insured.”

Intentional Act Exclusion in Fire Policies: TheCalifornia Supreme Court Weighs In

In California, the State Supreme Court stepped in to addressthis issue. In Century-National Ins. Co. v. Garcia, 51Cal.4th 564 (2011), the court phrased the question as follows: “Mayan insurer enforce an exclusion clause in a fire insurance policythat denies coverage to innocent insureds for damages from a fireintentionally caused by a co-insured, or does such a clauseimpermissibly reduce coverage that is statutorilymandated?”

The facts of the case were undisputed. Jesus Garcia, his wife,Theodora, and their adult son were insureds under a fire insurancepolicy issued by Century-National Insurance Company. The Garciasfiled a claim with Century-National for damage caused by a fireintentionally set by their son. Century-National denied the claimbased on an exclusion in the policy for the intentional act orcriminal conduct of “any insured.” The trial court sustainedCentury-National's demurrer, finding that the policy excludedcoverage for innocent co-insureds. The California Court of Appealsagreed, and the Garcias appealed.

The California Supreme Court reversed, holding that anintentional acts exclusion in a fire policy cannot bar coverage toinnocent insureds because of the intentional conduct of “any”insured. The court explained that the requirements for a firepolicy in California are dictated by Insurance Code Sections 2070and 2071. Pursuant to Section 2070, a fire insurance policy thatdoes not conform to the standard provisions set forth in Section2071 must provide fire coverage that is at least “substantiallyequivalent” or more favorable to the insured than coverage providedby the standard form fire insurance policy. The court found thatCentury-National's policy provided less coverage than thestandard fire policy (Section 2071), because the standard firepolicy provisions must be read as including the willful actsexclusion in Insurance Code Section 533. (Section 533 uses the term“the” insured.) Therefore, the exclusion did not bar coverage forinnocent co-insureds for the intentional act of “any” insured.

The court surveyed cases from other jurisdictions, includingArizona, Idaho, Iowa, Louisiana, Massachusetts, Michigan,Minnesota, New York, Nebraska, and West Virginia, where courts haveheld that a clause that excludes coverage for an innocentco-insured based on the intentional act exclusion impermissiblyreduced statutorily mandated coverage and was invalid.

The court noted that although California is not bound to followout-of-state authorities, “they reflect a broad consensus as to theproper interpretation of the common standard form fire policy.” Ina practical sense, the decision levels the playing field forinnocent co-insureds who previously suffered when an insured suchas a teenage son or estranged spouse intentionally set fire totheir homes—situations that could happen to anyone.

Impact on Fire Insurance Claims

In California, the results of the Century-Nationaldecision are evident in changes to the intentional actsprovision. Many policies still exclude coverage forintentional acts by “any” insured, but some newer policies includeadditional language such as: “We will cover the insurableinterest of an innocent co-insured who did not cause or in any waycontribute to the intentional loss.”

The Century-National decision specifically states thatthird-party liability insurance is not subject to the requirementsof the state standard form policy. A final footnote to theCentury-National case suggests the analysis may not applyin other contexts also:

“Because our analysis concerns a fire policy subject to therequirements of Sections 2070 and 2071, it should not be read asnecessarily affecting the validity of clauses that deny coveragefor the intentional acts of “any” insured in other contexts.”

Remaining to be litigated are issues concerning the rights ofco-insureds in other types of policies such as auto policies andthe rights of co-insureds in non-fire losses. Also unresolved isthe amount owed to innocent co-insureds. Courts examining thisissue have looked to how title was held and have looked to protectthe interests of others, such as mortgagees on the policy.

For example, in Nationwide Mut. Fire Ins. Co. v.Pittman (1986) 82 N.C. App. 756, 348 S.E.2d 350, the courtheld that recovery for the innocent spouse was properly calculatedso that the innocent spouse would receive half the amount of theagreed-upon loss left over after the mortgagees were paid, ratherthan half of the total loss with the innocent spouse then beingresponsible for payment of the mortgages. In that case, bothspouses were jointly and severally liable on the notes.

There have been other cases discussing how to value the innocentinsured's interest. For example:

• An innocent insured wife was allowed to recover one half of theinsurance proceeds (where the property was owned by the couple astenants by the entireties) even though she continued to live withher wrongdoer husband after the fire. (Maravich v. AetnaLife and Cas. Co., (1986) 350 PA Super. 392, 504 A.2d896.)
• A wife was found to be entitled to recover the entire value ofa property from an insurance carrier when her husband committedsuicide immediately after setting fire to a property they ownedjointly with right of survivorship. The court stated that thewife owned an undivided one-half interest in the entire propertyand as a named insured, she could only conclude that her interest,consisting of the entire property, enjoyed the protection of thepolicy. The court noted that there was no possibility in thissituation that the wrongdoer would profit from his criminal act ashe was deceased. (Felder v. North River Ins. Co.(1988) 148 Wis.2d 130, 435 N.W.2d 263.)

Thorough Investigations

In claims involving arson fires, it is more important than everto conduct a complete and thorough investigation to examine eachinsured's conduct and whether they were involved in the fire. Onoccasion, an insured who is “innocent” of being involved in thefire has acted in violation of other provisions, such as the fraudor concealment clauses. If you are able to prove that one insuredis involved, then it will be necessary to check the current statusof your jurisdiction's rulings as to recovery for innocentco-insureds, and the amount which each can recover, in addition toevaluating the mortgage company's interest.