13.4 The Rights of the “innocent” Coinsured

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

13.4 THE RIGHTS OF THE "INNOCENT" COINSURED²³⁶

13.401 In General. Another problematic issue in arson fraud cases involves the rights of an insured who played no role in setting the fire. Perhaps the most common example is where one insured spouse sets the fire without the knowledge and consent of the other. Although the question is sometimes referred to as the "innocent spouse" issue, the rights of an innocent insured do not depend upon the existence of a marital relationship.

13.402 The Language of the Policy Is Controlling. The Virginia Supreme Court has clearly and unequivocally mandated that where the policy language provides that a wrongful act of one insured voids coverage to all insureds, then no insured shall recover. ²³⁷ The court has declared that the appropriate focus is upon whether the language of the policy imposes joint or

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several obligations upon the insureds. ²³⁸ Where the obligation is joint, a failure to abide by that obligation by any one insured will void the policy as to all insureds. ²³⁹

The rule may seem to be little more than a self-evident statement that the policy means what it says. However, the issue has seen extensive litigation in Virginia and elsewhere over the past several decades. A historical examination of this litigation in Virginia leaves little doubt as to the state of the law and resolves issues that remain troubling in other jurisdictions.

In Hummel, the first case in which the Virginia Supreme Court addressed this issue, the insured husband intentionally set fire to insured property that he owned jointly with his wife as tenants by the entirety. ²⁴⁰ The policy identified both Mr. and Mrs. Hummel as "the insured" and provided that the policy would be void "in case of any fraud . . . by the insured." ²⁴¹ Noting that this was a case of first impression, ²⁴² the court concluded that

[i]n this case, the legal interest in the subject matter of this policy of insurance was joint and not severable. The property was owned in tenancy by the entirety and, in Virginia, once such an estate is established neither spouse can sever it by his or her sole act . . . . Furthermore, the form of the insurance contract was joint; the "Named Insured" was "Harold Lee and Mildred Hummel." Thus, under the policy and as the "insured," each spouse had the joint obligation to use all reasonable means to save and preserve the property. Likewise, each spouse had the joint duty to refrain from defrauding the insurer. If either spouse violated any one of these duties, the breach was chargeable to the "Named Insured" preventing either spouse from recovering any amount under the policy. ²⁴³

It is unclear from the language of the opinion whether the decision was based upon the fact that the Hummels held the property as tenants by

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the entirety or the fact that each spouse had a joint duty under the language of the policy to refrain from committing fraud, or both. This is potentially significant, as fire insurance policies provide coverage to a multitude of insureds who hold a joint interest in an insured property. However, only spouses are capable of holding that insured property as tenants by the entirety. Therefore, if the holding in Hummel is dependent on the existence of the tenancy by the entirety estate, then it is only the innocent spouse that fails to recover. Unmarried coinsureds cannot hold property as tenants by the entirety, and therefore, an unmarried innocent coinsured would not be barred from recovering under the policy.

The court clarified its Hummel ruling in K & W Builders, Inc. v. Merchants & Business Men's Mutual Insurance Co.²⁴⁴ The property in that case was intentionally burned by tenants who were identified in the policy as the "named insureds." The jury found that the tenants also concealed and misrepresented material facts during the insurance company's investigation of the loss. Thus, there was a clear violation of the following fraud and concealment provision: "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." ²⁴⁵

The owner of the property, who was innocent of any wrongdoing and who was listed in the policy as an "additional insured," claimed that the tenants' misconduct could not bar his claim. However, the court concluded that the plain meaning of the fraud and concealment clause voided coverage for all insureds if any insured violated the provision. ²⁴⁶

In reaching its holding, the court clarified Hummel in a significant respect. The court found that it is the language of the policy that controls, and the form of ownership of the property is not a relevant consideration:

Hence, even absent a joint interest between insureds and notwithstanding that one of the insureds may be innocent of any wrongdoing, resort must be had to the form of the insurance contract to determine the rights and liabilities of the parties. ²⁴⁷

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Therefore, if the policy imposes a joint obligation upon the insureds to refrain from committing fraud and to refrain from concealing or misrepresenting material facts, then a violation of that duty by either insured voids coverage as to all insureds, regardless of the nature of the insureds' ownership interests in the damaged property.

13.403 Policy Language Excluding Coverage to the Innocent Coinsured.

A. The Fraud and Concealment Provision. A second controversial question pertaining to this issue is just what language is sufficient to warrant a denial of coverage to an innocent coinsured. In many jurisdictions, the answer to the question depends upon whether the pertinent clause uses the term "an insured" or "the insured."

The adoption of this rule in Virginia would have interesting repercussions. Section 38.2-2105 of the Virginia Code, in which the General Assembly mandates the language to be employed in a fire insurance policy, ²⁴⁸ uses the term "the insured" in its fraud and concealment clause. If the above rule were adopted, the insurers would have faced a situation where the legislature mandated the use of ambiguous language.

In K & W Builders, the court found that the language of the policy did not violate the letter of or the public policy underlying section 38.2-2105, which prescribes the terms that must be contained in fire insurance policies in Virginia. The statute requires the following language:

This entire policy shall be void, if...