January 1, 2004 by Richard Davidson
Some years ago, I visited a commercial client to review his cover prior to renewal. I could tell that his mind was not fully attentive to matters I was discussing with him. He then turned to me and posed an alarming question: “why are we wasting time doing this, because when something happens, and we need to make a claim the insurance company will find an excuse not to pay.”
Needless to say, I asked the client to elaborate on his statement. He called one of his employees into the office and asked the gentleman to relate an experience involving an insurance claim. The individual’s house in question had suffered a large fire and the insurer involved refused to pay the claim – accusing the insured’s 16-year-old son of having set the fire. Both the police and fire marshal’s office had investigated the incident, and had cleared the son of any wrongdoing. The insurer was still not satisfied. The insured did not have the money to fix the damage to the property, and the place had been left open to the elements allowing for rapid deterioration.
I could not believe what I had just heard, and promised to look into the matter. It was then that I ran into the Supreme Court case of Scott vs. Wawanesa Mutual Insurance Co. The court ruled that “innocent co-insureds” could not recover in cases where one of a group of co-insureds committed a criminal act damaging insured property. The circumstances of the case were that the insured couple’s son had caused a fire to the family home, resulting in it burning down. The insurers denied the claim based on the exclusion in the homeowner’s policy, which excludes any loss arising from the criminal act of any person insured by the policy.
The court held that the definition of persons insured by the policy included the son and made him an insured person hence the application of the exclusion. The policy definitions read: “you” and “your” means the person(s) named as “insured on the coverage summary page, and while living in the same household, his or her wife or husband, the relatives of either or any person under 21 in their care.
An exclusion in the policy also noted: “We do not insure loss or damage resulting from any intentional or criminal acts or failure to act by:
Any person insured by this policy; or
Any other person at the direction of any insured by this policy”.
The effect of this decision is not only to render the parents incapable of collecting under the policy, but in the event there is a mortgage involved, the mortgage lender is also unable to collect due to the standard “mortgage clause” – which only protects the lender against a material representation by the insured. The fact that there has been little interest in the plight of the innocent co-insured in such circumstances is probably due to there not being any major organized interest group involved.
The closest “organized group” would be mortgage lenders, who ultimately can look to their contingent fire policies for relief. This situation, which leaves the homeowner unprotected, also allows for the possibility under the terms of a mortgage for the mortgage lender’s contingent insurers to subrogate the loss against the homeowner.
The closest coverage circumstances relating to the above situation is found in marine hull insurance, which holds a “sister ship” clause to cover a situation where two ships with the same owner may collide. This clause permits the claims of both ships to be treated in the same way as if they had unrelated owners. The clause reads: “Should the vessel hereby insured come into collision with or receive salvage services from another vessel belonging wholly or in part to the same owners or under the same management, the assured shall have the same rights under this insurance as they would have were the other vessel entirely the property of owners not interested in the vessel hereby insured, but in such cases the liability for the collision or the amount payable for the services rendered shall be referred to a sole arbitrator to be agreed upon between the underwriters and the assured.”
In the commercial general liability (CGL) policy, the cross liability and separation of interests clauses have the same effect. The “sister ship” clause could perhaps be adapted to fit a homeowners’ policy. Possible wording could be: “Should the property hereby insured be damaged by any intentional or criminal acts or failure to act of any person insured by this policy, or by any other person acting at the direction of any person insured by this policy, which acts or failure to act are carried out without the knowledge or involvement of any other person or persons insured by this policy, such innocent persons shall have the same rights of indemnity that they would have had had such actions been carried out by some person not insured by this policy.”
A clause of this nature would protect the innocent co-insured without benefiting the wrong doer. If such a clause can be put into commercial policies why cannot they appear in personal insurance policies? It is not disputed that the definition of insured was widened to include persons such as children and visiting relatives to avoid having to do numerous endorsements, or that the exclusion of innocent co-insureds was deliberate, but that is the ultimate outcome. Now, it is time to set the wrong right.
Some commentators have suggested that since the Supreme Court decision was only in favor 4-3, therefore the decision might be revisited. But, in the meantime, it does represent the law in the circumstances outlined in this article.
What was the result of my client’s employee’s case? He could not afford a lawyer and had to find someone willing to handle the case on a contingency fee basis. I referred him to a public adjuster who handled the case successfully. The next time I saw the homeowner, he was all smiles and said the insurer had okayed repairs to the house as well as payment for its contents.
The protection against risk offered through insurance coverage has always been based on a principal of “good faith”. And, while the terms and limits of cover outlined in a policy are critical to the effective function of insurance – for both the insured and the insurer – the wording and the legal interpretation thereof can sometimes result in an unintentional and unfair outcome. Such a case could be made for the “innocent co-insured” in current homeowners’ coverage.