Lawrence J. Sher
Pollak, Vida & Barer

Reprinted, by permission, from the March 7, 2000, issue of
Mealey's Litigation Report: Insurance Bad Faith.

On a dark and quiet night filled with mystery and intrigue, the two-story, four bedroom house at 12576 Sycamore in Santa Monica erupted into flames. The fire spread rapidly, and soon there was little left of Michael and Susan Johnson's dream house or of the possessions they had accumulated in their seven year marriage.

The fire department's arson investigator sifted through the rubble, found an unsophisticated timing device, and analyzed the burn patterns. The investigator concluded that the fire was unquestionably an arson. The Johnsons filed a claim with their insurer, which conducted an investigation that determined that Mr. Johnson set the fire, but that Mrs. Johnson knew nothing of Mr. Johnson's arson. Thus, the insurer had to decide whether to pay or deny the claim.

Clearly, Mr. Johnson was not entitled to insurance benefits: both the insurance policy and Insurance Code §533 bar coverage for claims that result from the "wilful act" of an insured. Insurance Code §533 is an implied exclusionary clause (intentional acts exclusion) that is written into all insurance contracts pursuant to statute. J.C. Penney Cas. Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1019.

The insurer, however, had to answer a more difficult question: whether Mrs. Johnson, as a so-called innocent co-insured, would be barred from recovering insurance benefits. This article discusses the development of the law regarding innocent co-insureds and concludes that it is unclear whether a California court would hold that Ms. Johnson is entitled to recover policy benefits.

I. Early Decisions

The early decisions held that an innocent co-insured could not recover under an insurance policy when another insured purposely set fire to the insured property. These courts reasoned that co-insureds under the policy had a joint responsibility, as joint owners of the insured property, to abide by the policy's conditions. Matyuf v. Phoenix Ins. Co. (1933) 27 Pa.D&C.2d 351; Jones v. Fidelity and Guarantee Ins. Corp. (Tex. App. 1952) 250 S.W.2d 281; Klemens v. Badger Mut. Ins. Co. (Wis. 1959) 99 N.W.2d 865. These older cases based their holdings upon the theory that joint obligations came from joint ownership of the property. Morgan v. Cincinnati Ins. Co. (Mich. App. 1979) 282 N.W.2d 829; Short v. Oklahoma Farmers Union Ins. (Okla. 1980) 619 P.2d 588. Under this property-obligations analysis, Mrs. Johnson would not be permitted to recover insurance benefits for the fire her husband set intentionally.

II. Decisions Based Upon Contract Language

Modernly, most, but not all, courts look at the language of the insurance contract -- not the ownership of the property -- to determine whether co-insureds have joint or several obligations under the policy. Where the courts have determined that the obligations under the policy are several, the innocent co-insureds have been permitted to recover. Hosey v. Seibels Bruce Group (Ala. 1978) 363 So.2d 751; Hoyt v. New Hampshire Fire Ins. Co. (N.H. 1942) 29 A.2d 121. Conversely, where the policy unambiguously imposes joint obligations, courts have held that the innocent co-insureds are barred from recovering. Fernandez v. Cigna Property and Cas. Ins. Co. (N.Y. App. 1992) 590 N.Y.S.2d 925; Woodhouse v. Farmers Union Mut. Ins. Co. (Mont. 1990) 785 P.2d 192.

In some cases the court is faced with a policy that it considers ambiguous regarding whether the obligations are joint or several. In those cases the court will typically construe the policy against the insurer, and rule that the insured can recover under the policy. Richards v. Hanover Ins. Co. (Ga. 1983) 299 S.E.2d 561; McCracken v. Government Employees Ins. Co. (S.C. 1984) 325 S.E.2d 62; Samhammer v. Home Mut. Ins. Co. of Binghamton (N.Y. App. 1986) 507 N.Y.S.2d 499; Economy Fire and Cas. Co. v. Warren (Ill. App. 1979) 390 N.E.2d 361. However, a number of the courts that have ruled that the insured can recover where the policy is ambiguous have stated that they would have reached the opposite result had the insurer stated unambiguously in the policy that the obligations were joint. Richards, McCracken, Samhammer, Warren, supra.

The Johnsons' policy, like many policies in California, contains language that unambiguously precludes coverage where the loss arises from the intentional act of an insured. Thus, if the Johnsons' insurer were to make its coverage determination based upon the "modern" approach, which looks at the language of its policy, the insurer would deny the claim on the ground that the policy imposes joint obligations on the insureds. As a general rule, California courts recognize and enforce against all insureds insurance policy exclusions that unambiguously deny coverage where "an" or "any" insured engages in certain activities. Fire Ins. Exchange v. Altieri (1991) 235 Cal.App.3d 1352; Western Mutual Ins. Co. v. Yamamato (1994) 29 Cal.App.4th 1474, 1487; Allstate Ins. Co. v. Condon (1988) 198 Cal.App.3d 148, 152-154; and Allstate Ins. Co. v. Gilbert (9th Cir. 1988) 852 F.2d 449, 453.

III. Insurance Code §2070

The Johnsons' insurer, however, cannot deny the Johnsons' claim based on the "modern" approach without first considering Insurance Code §2070, which requires fire insurance policies to provide coverage that, "with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured" than that contained in "standard form fire insurance policy" set forth in Insurance Code §2071. Unlike the Johnsons' policy, the §2071 standard form fire insurance policy does not contain an intentional acts exclusion.

However, although the §2071 standard fire policy does not contain an intentional acts exclusion, Insurance Code §533 does. Section 533 states that "[a]n insurer is not liable for loss caused by the wilful act of the insured . . . ." The California Supreme Court has held that §533 is "an implied exclusionary clause which by statute is to be read into all insurance policies." J. C. Penney Cas. Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1019 (citation omitted). Because §533 is a statute, it is given its plain meaning and is not construed against the insurer. Id. at 1020, fn. 9. Thus, the issue presented is whether, given that the statutory §533 exclusion bars coverage where the insured engages in conduct that causes the loss, a California court will uphold an intentional acts exclusion, that bars coverage where an insured engages in intentional conduct that causes the loss.

In determining whether to pay Mrs. Johnson's claim, her insurer must be mindful that its policy arguably does not comply with Insurance Code §2070 because it provides coverage that is less favorable to the insured than the coverage provided by the §2071 standard fire policy, inasmuch as its policy excludes coverage where any insured engages in intentional conduct that causes a loss, whereas §533, which is implied in all insurance contracts, bars coverage only where the insured engages in the intentional conduct. No California court has addressed this issue.

The courts of other jurisdictions that have addressed this issue (Michigan, Georgia, Louisiana, Minnesota, and New York) have uniformly held that where the carrier's intentional acts exclusion was broader than language contained in the standard fire policy (because the standard fire policy excluded intentional acts of "the" insured and the policy in question excluded the intentional acts of "any" insured), the portion of the policy that did not comply with the standard fire policy was void. Thus, all five courts held that the policy had to be reformed (rewritten) to extend coverage to the innocent co-insured, who was permitted to recover policy benefits. Ponder v. Allstate Ins. Co. (E.D. Mich. 1990) 729 F.Supp. 60; Fireman's Fund Ins. Co. v. Dean (Ga. App. 1994) 441 S.E.2d 436; Osbon v. National Union Fire Ins. Co. (La. 1994) 632 So.2d 1158; Watson v. United Services Auto. Assn. (Minn. 1997) 566 N.W.2d 683; Lane v. Security Mut. Ins. Co. (N.Y. Sup.Ct. 1998) 668 N.Y.S.2d 1021.

The reasoning employed in this line of cases is illustrated by the following excerpt from Dean, which, like the three other courts, followed Ponder:

"[T]he Standard Fire Policy sets forth a minimum coverage upon which an insured can rely and insurance coverage must be conformed to that provided by the Standard Fire Policy.
"In Georgia the clear mandate of [the statute] requires that the language of Fireman's Fund's insurance policy be as favorable to the insured as the language in the Standard Fire Policy. . . . Therefore, the minimum coverage allowed in Georgia creates several obligations as to each co-insured and Fireman's Fund's insurance contract must be reformed to conform with the minimum coverage provided in the Standard Fire Policy." Dean, supra, 441 S.E.2d at 438 (citations omitted; emphasis added).

Similarly, in Osbon, the court held that the insurance policy at issue had to be reformed to conform to the Standard Fire Policy because the intentional acts exclusion did not provide coverage equivalent to or in excess of the coverage required by statute. Osbon, supra, 632 So.2d at 1161.

Taken together, Ponder, Osbon, Dean, Watson, Lane, as well a case decided by the Michigan Supreme Court, Borman v. State Farm Fire and Cas. Co. (Mich. 1994) 521 N.W.2d 266, stand for the proposition that, where an insurance policy states unambiguously that the obligations of the insureds are joint and not several, the court will void that provision and reform the insurance contract so that the obligations among the insureds are several and not joint, so that the insurance contract does not provide the insured with coverage that is less favorable than that contained in the standard fire policy. All of the courts that have addressed this issue have so ruled. Thus, each of the courts to rule on this issue have held that the innocent insured is permitted to recover notwithstanding an unambiguous policy provision to the contrary.

IV. Criticism of the Ponder Line of Cases

The Ponder decision has been criticized as follows:

"It is interesting to note that the `joint responsibility' doctrine was the view taken by the vast majority of courts at the time of the development of standard fire policies, including the 1943 New York standard fire policy. Under this theory, while there may be multiple insureds for coverage purposes, there is but one insured -- the insured -- for policy obligations purposes. It is not surprising, therefore, that a reference to `the insured' is made in the fraud provision of those policies, rather than to `an insured' or `any insured.' So long as the view of the courts was that insurance policy obligations were jointly shared by the insured, and were not severable as to individual insurance, recovery by innocent co-insureds was not an issue. It might be further deduced that the fraud provision was originally intended to incorporate this view; therefore, it may be said that the intent of the original drafters of the standard fire policies was not to cover the losses of an innocent insured . . . .
"Under the legal environment at the time of the development of the standard policy, innocent co-insureds could not recover for loss arising out of fraud by other insureds. Therefore, the Michigan court [in Ponder] has actually held that today's policies must provide broader coverage, in the area of innocent co-insureds, than that provided by the standard fire policy." Fire, Casualty & Surety Bulletins (March 1992) Misc. Property, p. CA-4 (emphasis added).

This point is well-taken. With §2071, California adopted the New York standard fire policy, which was drafted at a time it was assumed and understood that an innocent co-insured would be barred from recovery if another co-insured committed fraud or intentionally destroyed the insured property. Thus, Ponder arguably gives more protection to innocent insureds than was contemplated by the California Legislature at the time it adopted the New York fire policy as codified in §2071.

V. Other Bases for Departing from the Ponder Line of Cases

Even if a California court was not persuaded that Ponder improperly expanded insurers' obligations to innocent co-insureds, it could still conclude that the Johnsons' policy does not violate §2070. First, §2070 states that a fire insurance policy that varies from the standard fire policy must be substantially equivalent to or more favorable to the insured, with respect to the peril of fire, than the standard fire policy, when the non-conforming policy is viewed in its entirety. Like most California homeowner's policies, the Johnsons' policy, when viewed in its entirety, arguably is more favorable to the insured than the standard fire policy. This is because, although the Johnsons' policy contains a less favorable intentional acts exclusion, it contains other, more favorable policy provisions such that the Johnsons' policy, taken as a whole, is more favorable to the insured as to the peril of fire than the standard fire policy. The more favorable provisions include the replacement cost provision and the additional living expenses provision. Thus, the value of these provisions arguably outweighs the limitation of coverage that results from the broader intentional acts exclusion in the Johnsons' policy. If a court were to so conclude, it would hold that the Johnsons' policy does not violate §2070.

A second possible basis for a court concluding that the Johnsons' policy does not violate §2070 is found in Insurance Code §2080, which states in pertinent part:

"Except as otherwise provided in this article, clauses imposing specified duties and obligations upon the insured and limiting the liability of the insurer may be attached to the standard form." (Emphasis added).

Section 2080 permits an insurer to limit its liability on a fire policy. This suggests that an insurer is permitted to broaden the intentional acts exclusion to bar coverage where "any" insured (as opposed to "the" insured) engages in intentional conduct that causes the loss.

On its face, §2080 appears to conflict with §2070, which states that the insurer must provide coverage that, from the insured's perspective, is at least as favorable as the coverage contained in §2071. Although there is a seeming conflict between §2070 and §2080, the court, when construing a statute, will ascertain the intent of the legislature and construe the statute so that it is consistent with the legislative purpose. In so doing, the court will attempt to resolve conflicts by taking into account the "evils to be remedied" and the history of legislation upon the same subject. United Business Commission v. City of San Diego (1979) 91 Cal.App.3d 156, 170; DeYoung v. City of San Diego (1983) 147 Cal.App.3d 11, 18. Additionally, there are legal maxims that state: "An interpretation which gives effect is preferred to one which makes void" and "[i]nterpretation must be reasonable." Civil Code §§3540, 3541, respectively.

This being the case, a California court could have a principled basis for ruling that an insurer is permitted, pursuant to §2080, to limit its liability so long as the insurance, taken as a whole from the insured's perspective, provides more favorable coverage with respect to the peril of fire than the §2071 standard fire policy. In other words, a court may uphold a broader intentional acts exclusion, such as the one in the Johnsons' policy, if the insurer provides coverage as to some other aspect of the fire policy that is greater than that contained in the standard fire policy, so that "when viewed in its entirety" the insured's policy provides coverage that is equivalent to or more favorable to the insured than that contained in the standard form fire policy.

Thus, §2070 and §2080 can be reconciled by reading §2080 as permitting an insurer to limit its liability by, for example, excluding coverage for losses caused by the intentional act of any insured, so long as the insurance policy provides the insured with coverage, as to the peril of fire, that is more favorable than the coverage contained in the standard fire policy. If a California court were to conclude that this is the proper interpretation of §2070 and §2080, the court ought to uphold the policy's intentional acts exclusion on the ground that the insurer's fire coverage is more favorable than the standard policy, inasmuch as it provides replacement cost coverage and additional living expenses coverage, among other benefits to an insured

VI. Conclusion

None of the courts that have considered the Ponder court's reasoning have held that an innocent co-insured should be refused policy benefits. Rather, all of the recent out-of-state cases that have addressed the issue have held that an insurer cannot enforce an intentional acts exclusion that bars coverage for "an" insured where the standard fire policy bars coverage only to "the" insured that intentionally causes the loss. As noted, no California court has published an opinion on this issue, and none of the out-of-state cases have considered the arguments raised in this article concerning the California Insurance Code. Thus, it is unclear whether a California court would follow Ponder or hold, based on the arguments raised in this article, that the Johnsons' insurer could properly deny Mrs. Johnson coverage for the fire.

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