Innocent coinsureds may recover their share of losses notwithstanding fraudulent statements by other coinsured party

Law Reporter, Oct 2002

Watts v. Farmers Ins. Exch. , 120 Cal. Rptr. 2d. 694 (St. App. 2002).

A California appellate court held that innocent coinsureds may recover their percentage share of losses under a fire insurance policy notwithstanding another coinsured party's fraudulent statements.

Here, a husband and wife filed a claim for losses under their homeowner's fire insurance policy. After its investigation, the insurer denied the claim, finding that the wife had made fraudulent statements regarding an earlier fire in the house and the losses suffered in the fire under investigation. The policy contained a provision excluding coverage where "you have intentionally concealed or misrepresented any material fact or circumstance relating to this insurance." The policy was also governed by state law providing that all fire policies should be on a standard form. The form stated that a policy was void if the insured had willfully concealed or misrepresented any material fact regarding the insurance or had engaged in fraud or false swearing related to the policy.

The couple sued the insurer under various theories, including that it had engaged in an unfair business practice by failing to consider the interests of each spouse separately and failing to follow state and common law rules applicable to an innocent coinsured. The trial court granted defendant's motion to strike that allegation, finding that under Erlin-Lawler Enters., Inc. v. Fire Ins. Exch., 73 Cal. Rptr. 182 (Ct. App. 1968), an insurer is not required to consider the interests of the insureds separately if the insured property was community property. The trial court later granted defendant summary judgment, finding that the wife had made material misrepresentations regarding the claim.

Reversing as to the husband's claim, the appellate court noted that Erlin-Lawler, which involved coverage of property belonging to a closely-held corporation, contained dicta stating that an innocent spouse could not recover for a loss of community property resulting from the other spouse's wrongful conduct. Nevertheless, the court found that the dicta did not constitute controlling California authority at the time of the fire here but merely represented a recitation of authority from other jurisdictions. The court found that the current case law favors permitting innocent coinsureds to recover up to their share of a property's value unless the policy language at issue clearly excludes this possibility. The court explained that nearly every court that had recently addressed the issue of whether the nature of the community property relationship barred an innocent spouse's recovery had determined that the relevant policy language-not the manner in which the property was held-determined whether the innocent spouse would be allowed to recover.

Adopting that standard here, the court found that policy language stating that the insurer would not provide coverage "if you have intentionally concealed or misrepresented any material fact or circumstance relating to this insurance" did not clearly preclude recovery to an innocent coinsured for another coinsured's wrongdoing. Moreover, the court noted that the language the California legislature included in the state's standard form policy did not specifically say that the act of any insured would be attributed to all insureds. Consequently, the court reasoned that the legislature intended that the coverage be severable and that innocent coinsureds be able to recover for their proportionate share of the damaged property. Therefore, the court remanded for further proceedings to determine whether the husband qualified as an innocent coinsured.

Plaintiffs' Counsel

*Joseph Andrews, Los Angeles, Cal.