There are three theories that dominate the issue of whether an innocent co-insured should be entitled to recover under a fire insurance policy for the acts of a wrongdoing co-insured: the “old rule,” the “rebuttable presumption rule,” and the “modern rule.” See Right of Innocent Insured to Recover Under Fire Policy Covering Property Intentionally Burned by Another Insured, 11 A.L.R. 4th 1228 (Supps. 1982 and 1997); see also, Note, The Problem of the Innocent Co-Insured Spouse: Three Theories on Recovery, 17 VAL. U. L.REV. 849, 855-69 (1983).
When a particular jurisdiction governs the “old rule,” an intentional act by one insured will completely bar the innocent co-insured’s recovery. The recovery is precluded on the theory that spouses who hold joint interests in the insured property automatically have joint obligations under the insurance policy. Allowing the innocent co-insured to recover indirectly, therefore, benefits the wrongdoing insured and violates the state’s public policy. See, e.g., Vance v. Perkin Insurance Co., 457 N.W.2d 589, 591 (Iowa 1990).
In those jurisdictions applying the “rebuttable presumption” rule, the courts look at the specific rights and obligations of the co-insureds under the policy. See, Dolcy v. Rhode Island Joint Reinsurance Assn., 589 A.2d 313 (R.I. 1991), where the innocent co-insured can rebut the “presumption” that he or she has joint obligations under the policy and can show that his or her interest under the policy are severable from those of the wrongdoing insured, the innocent co-insured may recover. See, Mercantile Trust Co. v. New York Underwriters Ins., 376 F.2d 502 (7th Cir. 1967).
The modern view focuses on a contract analysis and on the intent of the parties based upon the insurance policy language. See, e.g., Commercial Union Ins. Co. v. State Farm Fire & Cas. Co., 546 F.Supp. 543, 546 (D. Colo. 1982), where the policy language permits recovery, an innocent co-insured may collect insurance proceeds despite the intentional acts of the wrongdoing co-insured.
There are nine community property jurisdictions within the United States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under community property principles, each spouse owns an undivided and indivisible 50 percent interest in the whole property. Ownership is indivisibly shared as a joint and common interest in the ownership. A question arises as to whether community property principles factor into the analysis of whether the innocent co-insured should be compensated for an intentional fire loss? Because both spouses hold an indivisible joint interest in the whole of community property, when the community residence is destroyed by arson, a full payment to the innocent co-insured under the policy for the loss indirectly flows to the guilty spouse who is a participant in the marital community. Payment to the innocent co-insured, therefore, indirectly rewards the interest of the guilty spouse because the claim payment will be 100 percent of the property lost.
There are mechanisms to avoid this windfall benefit, which rewards the guilty spouse. Community property states provide that when the parties divorce, the undivided and indivisible interest that each has in the whole of the property is severed so that the property can be distributed on a 50 percent basis. This also occurs when creditors pursue debt obligation that is the sole obligation of one spouse by attempting to sever community interests to attach community property to the extent of 50 percent. It can be argued that when the guilty spouse sets an intentional fire — that intentional act, by itself, automatically results in a division of the marital community property so that only the 50 percent interest of the innocent co-insured is payable, while the guilty spouse’s interest is forfeited.
A question arises as to how community property jurisdictions have treated the innocent co-insured exception.
A number of community property jurisdictions have examined the issue of recovery of insurance proceeds by an innocent co-insured where the destroyed property is community property. In each of these cases, the court has allowed recovery to the innocent co-insured. The Supreme Court of Texas examined the issue in Texas Farmers Ins. Co. v. Murphy, 996 S.W. 2d 873 (Texas 1999). In Murphy, the husband intentionally burned down the couple’s home, which was community property. The couple then divorced. The Murphy court held that innocent spouses should recover under the contract, regardless of partition or divorce. Id. at 881. Thus, even if the couple stayed married and the arsonist was to benefit from the insurance recovery, the innocent co-insured could still recover. Id. The Murphy case implicitly overruled two, Fifth Circuit cases that had held an innocent co-insured could not recover under a fire policy on the basis that the arsonist should not be able to benefit, even indirectly, from his bad acts. See Norman v. State Farm Fire & Casualty Co., 804 F.2d 1365 (5th Cir. 1986), (ruling that based on Texas law, one who burns down his community property must not benefit from recovery based on his co-insured being permitted to recover); Webster v. State Farm Fire & Casualty Co., 953 F.2d 222 (5th Cir. 1992).
Other courts examining the issue have also ruled that the innocent co-insured should recover. See Delph v. Potomac Ins. Co., 620 P.2d 1282 (N.M. 1980), (holding that insured husband’s arson could only void policy as to husband, and not as to innocent co-insured, even though destroyed property was community property); Madsen v. Thresheren’s Mutual Ins. Co., 439 N.W.2d 607 (Wis. Ct. App. 1989), (holding that innocent co-insured spouse could recover even though her husband intentionally burned down house and business, provided that recovery was tailored to prevent benefit to wrongdoer, even though insureds remained married).
In Watts v. Farmers Ins. Exchange, the California Court of Appeals held that an innocent co-insured should recover regardless of how the property is classified, based on his reasonable expectations of coverage under the policy. The Watts court stated that:
Conditioning an innocent spouse’s ability to recover insurance benefits on the manner in which title to damaged property is held makes little sense, and [we] see no reason why we should follow an approach deemed outmoded and unnecessarily harsh by nearly every other jurisdiction in the United States. Community property laws exist to protect the innocent spouse from losing his or her rights due to the individual misdeeds of the other spouse. They should not be used as a weapon by an insurance company to reap a windfall where one spouse, acting alone, has violated the terms of the policy and the policy does not explicitly warn that this will be the outcome.
The Watts case is also helpful in that it summarizes the relevant cases from other jurisdictions regarding this issue and notes the trend to allow recovery based on the innocent co-insured’s reasonable expectations.
When adjusting an arson case where one spouse may be guilty in causing the loss and another innocent co-insured is involved, the fact that the loss occurred in a community property state will not forfeit coverage for the innocent co-insured.
Steven Plitt is a national legal expert on insurance law and insurance agent issues. He is the current author of the national treatise Couch on Insurance 3d.
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