Recently, a California Appeals Court denied coverage under a homeowner’s policy for damages caused by a fire intentionally set by the insureds’ son. In Century Nat’l Ins. Co. v. Garcia, No. B209616, (Cal. App., 2d Dist. Dec. 2, 2009), an appeals court held that the policy’s exclusion for willful acts of “any” insured precluded coverage, even for innocent co-insureds, such as the plaintiffs.

In Garcia, Plaintiffs were named insureds under a fire insurance policy. In May 2007, a fire occurred at the insureds’ home and the couple filed a claim shortly thereafter. The insurance adjuster that inspected the premises suspected arson and the insurer retained a fire investigator who determined that the fire started in the bedroom of the insureds’ son. The investigation revealed that the fire was intentionally set.

At the time of the fire, the Plaintiffs were insured under a policy that excluded coverage for “Intentional Loss,” defined as any loss arising out of any act committed by or at the direction of any insured having the intent to cause a loss.” The policy also excluded coverage for losses caused by “Dishonesty, Fraud, or Criminal Conduct of any Insured.” The policy defined “Insured” to include “relatives if permanent residents of the residence premises.”

The insurer commenced a declaratory judgment action seeking a declaration that it had no duty to pay the insureds’ claim because the loss resulted from the intentional or criminal acts of an insured. The insureds cross-claimed for breach of contract, breach of the covenant of good faith and fair dealing, and reformation. They alleged that their son was not a named insured on the policy and did not have an insurable interest in the property (although they conceded he was their son and lived at the property at the time of the loss). The insureds also alleged that the policy’s definition of intentional loss violated California Insurance Code § 2071 because the policy used the words “any insured” rather than “the insured,” and thus effectively denied them insurance coverage.

The trial court entered judgment in favor of the insurer on the cross-claim finding that: (1) the policy defined “any insured” to include relatives of the homeowners; (2) courts generally interpret policies which exclude coverage for criminal and intentional acts to exclude coverage of innocent co-insureds; and (3) California’s public policy of denying coverage for willful wrongs is embodied in the insurance statutes. The court entered judgment on the cross-complaint and the insurer dismissed its complaint.

On appeal, the insureds argued that the policy violated §§ 533 and 2071 of the California Insurance Code, which they argued required policy language to refer to “the insured,” not “any insured.” The insureds argued that because they were innocent co-insureds, they were entitled to indemnity since they played no role in their son’s conduct. In affirming the trial court, the Appellate Court determined that the policy language precluded recovery and that the policy language was not prohibited by the Insurance Code.

In reviewing the question of whether an innocent co-insured is entitled to coverage under a policy exclusion, the Court relied on Fire Ins. Exch. v. Altieri, 235 Cal. App. 1352 (1991) which held that where the policy exclusion language referred to “the insured,” coverage would be extended to co-insureds. That Court also determined, however, that where the policy exclusion language referred to “an insured,” or “any insured,” coverage would not be extended to innocent co-insureds. The Court also cited Watts v. Farmers Ins. Exch., 98 Cal. App. 4th (2002), which held that an innocent co-insured may recover his or her percentage share of the property unless the policy contains language excluding that possibility. Watts explained the basis for the distinction between “the insured” and “any insured by noting that, generally, where a policy precludes recovery as a result of fraud on the part of “the” insured, the recovery is precluded only as to the insured who committed the fraud and the innocent co-insured is allowed to recover. Conversely, where the policy precludes recovery as a result of fraud on the part of “any” insured, the effect of the fraudulent acts of one insured precludes recovery as to all insureds, even innocent co-insureds.

The Court held that the policy did not provide coverage since: (1) the policy defined insured as a relative of the named insured; (2) the policy excluded coverage for intentional loss; and (3) the Insureds admitted that their son’s conduct was intentional.

The Court also rejected the insureds’ argument that the policy language violated §§ 533 and 2071 of the Insurance Code. The Court concluded that the policy complied with § 2071 because the addition of the provision at issue was not inconsistent with the fire coverage of the standard form policy, which does not address intentional acts. Concerning § 533, the Court determined that this section does not govern mandatory requirements for policy language, but rather provides the basis for exclusion of coverage. The Court thus determined that the policy could, consistent with § 533, exclude coverage for willful acts of “any” insured.

For a complete copy of the opinion, please click here.