(Editor’s Note: The following article is written by Melody S. 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 had intentionally set the fire. The couple technically owned the home together but planned to divorce, and the woman wanted to stay in the house. The home was insured, and so the wife submitted a claim. But was their homeowners’ coverage still valid based on the intentional act of her husband? Did the wife have a right to recover? In California and in a growing number of states, the answer is “yes.”

Traditionally, when property was jointly owned, the innocent spouse would be out of luck because of the typical policy language barring coverage for fire damage because of the intentional act of a co-insured. The theory behind this result was to ensure the guilty party did not profit from the act. Now, however, recent court decisions are making it harder to enforce intentional act exclusions for “innocent co-insureds” in homeowners’ fire losses no matter how the exclusion is worded.  

Proving Arson

Arson is significant in both human and economic terms. According to the Unites States Fire Administration in 2010—the most recent year for which data are available—there were 16,200 intentionally set residential fires nationwide that killed 260 people and injured 750. These fires caused nearly $500 million in damage. One in every 10 fires in the U.S. today is intentionally set 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. Witnesses are scarce, as arsonists usually work alone. Proof often is based on circumstantial evidence such as a strong motive, including heavy debt, loss of employment, recent or pending divorce, gambling problems, tax liens against the insured property, and pending foreclosure or bankruptcy. Sometimes, the act is rooted in revenge or is the result of domestic violence. Other times, an insured simply wants to finagle a remodeled house.

Assuming that a qualified fire expert has shown that the fire was intentionally set—in addition to establishing a strong motive—attention is focused on the insured’s whereabouts at the time of the fire. Determining whether there was a forced entry can be important in figuring out who entered the house. Cell phone records and bank statements (showing debit card transaction dates and locations) can be helpful as well. Of course, the insured’s whereabouts do not tell the whole story, as an insured may have hired or asked someone else to do the job.

If arson is confirmed and sufficient evidence exists to show that a named insured was involved, then insurance carriers can deny coverage to the guilty party based on the fact that the insured acted intentionally. Such conduct is against public policy and usually prescribed by a state insurance code even if it is not specified in the policy of insurance.

Innocent Co-Insureds

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

Intentional Act Exclusion in Fire Policies: The California Supreme Court Weighs In 

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

The facts of the case were undisputed. Jesus Garcia, his wife, Theodora, and their adult son were insureds under a fire insurance policy issued by Century-National Insurance Company. The Garcias filed a claim with Century-National for damage caused by a fire intentionally set by their son. Century-National denied the claim based on an exclusion in the policy for the intentional act or criminal conduct of “any insured.” The trial court sustained Century-National’s demurrer, finding that the policy excluded coverage for innocent co-insureds. The California Court of Appeals agreed, and the Garcias appealed. 

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

The court surveyed cases from other jurisdictions, including Arizona, Idaho, Iowa, Louisiana, Massachusetts, Michigan, Minnesota, New York, Nebraska, and West Virginia, where courts have held that a clause that excludes coverage for an innocent co-insured based on the intentional act exclusion impermissibly reduced statutorily mandated coverage and was invalid.

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

Impact on Fire Insurance Claims 

In California, the results of the Century-National decision are evident in changes to the intentional acts provision.  Many policies still exclude coverage for intentional acts by “any” insured, but some newer policies include additional language such as: “We will cover the insurable interest of an innocent co-insured who did not cause or in any way contribute to the intentional loss.” 

The Century-National decision specifically states that third-party liability insurance is not subject to the requirements of the state standard form policy. A final footnote to the Century-National case suggests the analysis may not apply in other contexts also:

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

Remaining to be litigated are issues concerning the rights of co-insureds in other types of policies such as auto policies and the rights of co-insureds in non-fire losses. Also unresolved is the amount owed to innocent co-insureds. Courts examining this issue have looked to how title was held and have looked to protect the 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 court held that recovery for the innocent spouse was properly calculated so that the innocent spouse would receive half the amount of the agreed-upon loss left over after the mortgagees were paid, rather than half of the total loss with the innocent spouse then being responsible for payment of the mortgages. In that case, both spouses were jointly and severally liable on the notes.

There have been other cases discussing how to value the innocent insured’s interest. For example:

  • An innocent insured wife was allowed to recover one half of the insurance proceeds (where the property was owned by the couple as tenants by the entireties) even though she continued to live with her wrongdoer husband after the fire.  (Maravich v. Aetna Life and Cas. Co., (1986) 350 PA Super. 392, 504 A.2d 896.)
  • A wife was found to be entitled to recover the entire value of a property from an insurance carrier when her husband committed suicide immediately after setting fire to a property they owned jointly with right of survivorship.  The court stated that the wife owned an undivided one-half interest in the entire property and as a named insured, she could only conclude that her interest, consisting of the entire property, enjoyed the protection of the policy.  The court noted that there was no possibility in this situation that the wrongdoer would profit from his criminal act as he 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 ever to conduct a complete and thorough investigation to examine each insured’s conduct and whether they were involved in the fire. On occasion, an insured who is “innocent” of being involved in the fire has acted in violation of other provisions, such as the fraud or concealment clauses. If you are able to prove that one insured is involved, then it will be necessary to check the current status of your jurisdiction’s rulings as to recovery for innocent co-insureds, and the amount which each can recover, in addition to evaluating the mortgage company’s interest.