Innocent Co-Insureds

If an insured commits an intentional act such as arson, should an innocent co-insured be precluded from coverage for the resulting property damage? Three recent decisions suggest that the answer to this question may turn on the use a single word in the insurance policy: "any" or "an". The three decisions, USAA Cas. Ins. Co. v. Gordon, 707 So.2d 1185 (Fla. 1998), Kundahl v. Erie Insurance Group, 703 A.2d 542 (Penn. 1997), and K&W Builders, Inc. v. Merchants and Business Men's Mut. Ins. Co., 495 S.E.2d 473 (Va. 1998), all involve an innocent co-insured seeking coverage for property damage caused by the intentional acts of another insured.

In USAA, a husband sought coverage under his homeowners' policy for property damage intentionally inflicted by his estranged wife. The insurer, while acknowledging that the husband played no role in the property destruction, denied coverage to the husband on the basis of the "intentional loss" exclusion, which provided:

We do not insure for loss directly or indirectly caused by any of the following:

h. Intentional Loss, meaning any loss arising out of any act committed:

(1) by or at the direction of any insured;
and
(2) with the intent to cause loss.

[Emphasis added]

The Court said that whether an "innocent insured" like the husband can collect insurance proceeds for damage unilaterally caused by a co-insured depends upon whether the insurance policy provides "joint" or "several" coverage. Relying on the "intentional loss" exclusion, the Court held that it had "no trouble concluding that exclusion (h), which excludes coverage for damage caused by `any insured,' unambiguously results in joint property coverage." Accordingly, the Court denied coverage to the husband as a result of the intentional acts of his co-insured wife.

In Kundahl, a wife brought suit against her homeowners' and automobile insurer to recover for loss of her house and car after her husband intentionally set fire to the house. The relevant exclusionary language of the homeowners' policy was:

We do not cover loss resulting directly or indirectly from any of the following:

(15) Caused by intentional acts, meaning any loss arising from an act committed by or at the direction of anyone we protect with the intent to cause a loss. [Emphasis added]

Similarly, the intentional acts exclusion of the automobile policy provided that the company would not pay for loss "caused intentionally by or at the direction of you or a relative." [Emphasis added]

As in USAA, the Court in the Kundahl case noted that if the parties' interests in the policy are joint, then the innocent co-insured would be precluded from coverage because of the intentional acts of another co-insured. On the other hand, if the parties' interests are several, an innocent co-insured cannot be denied coverage as a result of the intentional actions of another insured. Examining the exclusionary language in the homeowners' policy, the Court emphasized that the policy specifically precluded coverage where the intentional act by "anyone we protect" caused the ensuing loss. Moreover, the Court found that the reference to a loss caused by "anyone we protect" unequivocally denotes joint responsibility because "the term `anyone' is naturally inclusive as opposed to exclusive." Accordingly, the Court held that if any one insured violates the terms of the policy, coverage must be denied to all insureds.

The Court also held that the language of the automobile policy "unequivocally imposes joint obligations on its insureds" because the policy's definition of "you" included the subscriber and the subscriber's spouse if the spouse lives at the same residence. Noting that the wife not only lived with her husband at the time he set fire to their house but also was a signatory to the insurance contract, the Court held that the wife was precluded from coverage under the automobile policy as a result of the intentional acts of her husband.

Finally, in K&W Builders the owner of a building sued its property insurer seeking coverage for damage resulting from arson committed by the co-insureds who were occupants of the building. A jury found that the fire had been set by or at the direction of the insured occupants of the building. As grounds for its denial of coverage, the insurer pointed to the fraud provision and the dishonest act exclusion of the policy. The fraud provision of the policy provided, in pertinent part:

This Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact... [Emphasis added]

The dishonest act exclusion of the policy, also relied upon by the insurer when it denied coverage, precluded coverage for "dishonest or criminal act by you, any of your partners, employees, directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose." The Court interpreted the two provisions to mean "that coverage will be void in the event K&W or either of its coinsureds acted fraudulently or intentionally, concealed or misrepresented a material fact ... or commits a dishonest or criminal act." Accordingly, the Court held that the property insurer properly disclaimed coverage to the "innocent co-insured."

The policy provisions discussed in USAA, Kundahl, and K&W Builders are in stark contrast to provisions using the term "an insured" or "the insured" in the intentional acts or dishonest acts exclusion. See, e.g., Taryn E.F. v. Joshua M.C., 505 N.W.2d 418 (Wis. 1993). In Taryn, the parents of a sexually molested daughter brought an action for damages against a minor babysitter, his parents, and their homeowners' insurer. All parties agreed that the homeowners' policy would not provide coverage to the minor babysitter who engaged in the intentional act of molestation. The plaintiffs claimed, however, that because the babysitter's parents were innocent insureds who did not participate in or encourage their son's acts, they were entitled to coverage despite the fact that coverage was precluded for their son.

The intentional acts exclusion in the Taryn case provided:

The insurance afforded by this policy shall not apply to any damages to property or for bodily injury attributable to a willful, malicious, wanton or otherwise intentional act of the "insured" or performed at an "insured's" direction or for any outrageous conduct on the part of any "insured" consisting of any intentional, wanton, malicious acts, or, in addition, any act that would constitute wanton disregard for the rights of others. [Emphasis added]

The Court, relying on the latter part of the exclusion containing the phrase "any insured," concluded that such language unambiguously precluded coverage for "all liability incurred by each and any insured as a result of certain conduct by any of the persons insured by the policy." Accordingly, as the minor babysitter was an insured under the policy, his co-insured parents were also precluded from coverage because of the intentional acts of their son.

The Taryn Court distinguished the policy language contained in the homeowners' policy from the language of a policy examined in another case, Northwestern Nat'l Ins. Co. v. Nemetz, 400 N.W.2d 33 (Wis. App. 1986). In Nemetz, the policy excluded coverage for damages "expected or intended by an insured person" and damages "intended or expected by the insured." [Emphasis added] Relying on the use of the words "the" and "an," as opposed to "any," the Nemetz Court held that the exclusionary clauses precluded coverage for the insured who committed the excludable acts, but not for the innocent co-insured.

Although the plaintiffs in Taryn argued that there was no logical or grammatical difference between "an" and "any," the Court disagreed:

"An" is an indefinite article used before nouns beginning with a vowel or, sometimes, a soft consonant ... instead of the related indefinite article "a."... "A" is "used as a function word before most singular nouns [or] to suggest limitation in number. ... "Any" is defined as "one indifferently out of more than two: one or some indiscriminately of whatever kind ... one, no matter what one. ... Thus, the distinction between "an" and "any" is that the former refers to one object (an oak tree) and the latter refers to one or more objects of a certain type (any person).

Unlike the phrase "the insured" or "an insured," the phrase "any insured" unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent co-insured. See Chacon v. American Family Mut. Ins. Co., 788 P.2d 748 (Col. 1990), citing Sales v. State Farm Fire & Cas. Co., 849 F.2d 1383, 1385 (11th Cir. 1988). Thus, according to the majority view, if an intentional acts exclusion or similar exclusion uses the term "an insured" or "the insured," as opposed to "any insured," an innocent co-insured will most likely not be denied coverage despite the intentional acts of other co-insureds.