When a fire loss occurs, one of the initial criteria examined by insurance companies in order to confirm coverage is the identity of the insured(s) that is making a claim. It sounds like a simple task to look at the declarations page of the insurance policy and locate the name of the insured. However, there are different types of named insureds. It may be an individual, or it may be two or more individuals, such as a husband and wife. It could be a partnership or a corporation. As easy as this determination sounds, the answer can be complex if one insured person within a group of persons who qualify for coverage under the policy is implicated in causing the loss, which, by exclusions in the policy language, precludes coverage. What coverage, if any, is provided to those “innocent” insureds who took no part in the act that caused the loss? Several factors must be considered in reaching a conclusion.
General guidelines can be derived from insurance coverage case law involving intentional acts, including arson, that are committed by some but not all insureds, although it is essential to examine the facts of each claim that is presented. Earlier cases arose under homeowners insurance policies where either the husband or wife singularly committed arson, and the other spouse sought to recover under the policy. Thus, the legal principle originally was known as “the innocent spouse doctrine.” Over time, as with the legal issue expanded to encompass partnerships and corporations, the principle became identified as “the innocent co-insured doctrine.”
A. Definition of “Insured”
The policy’s definition of “insured” usually states that it is the “named Insured as shown in the Declarations.” Commercial policies may indicate elsewhere in the policy that “the organization’s members, partners and their spouses, managers and executive officers/directors” are included as insureds, but it is the Named Insured, usually the singular corporate identity that is critical to the determination of coverage.
B. Legal Analysis
Focusing on the law of New York, which is in accordance with the majority view with respect to the innocent co-insured doctrine, the determination of who is entitled to coverage turns on the question of whether the interests of the alleged co-insureds are joint or severable. Where the interests of the co-insureds are considered “joint and nonseparable,” an innocent co-insured may not recover on a fire insurance policy following an act of arson by another insured. Hartford Fire Ins. Co. v. Advocate, 560 N.Y.S.2d 331 (App. Div. 1990), rev’d on other grounds, 576 N.Y.S.2d 80 (Ct. App. 1991), citing Annot., Right of Innocent Insured to Recover Under Fire Policy Covering Property Intentionally Burned by Another Insured, 11 A.L.R.4th 1228, 1229 [1982]. The Advocate case involved a partnership in which Mr. Advocate, a lawyer and partner in an entity known as “One-Five-Three Associates” (from which he rented his office space) deliberately caused a fire that substantially damaged the partnership’s building and contents. His motive was to destroy his business and personal records so that his wife could not obtain them in their pending divorce action. The partnership’s insurer paid the building loss and subrogated against Mr. Advocate to recover its payment to the partnership.
In a creative argument, Mr. Advocate tried to defeat the subrogation action by arguing that the partnership’s insurer should not have paid the loss because it was aware that the loss had been intentionally caused, and the policy excluded coverage if an insured caused the fire. The court disagreed and looked to partnership law to determine whether the partnership’s policy covered this intentional action committed by one member of the partnership. Stating that “a partnership is bound by a partner’s wrongful act where the partner, acting in the ordinary course of business, causes loss or injury to any person,” the court ruled that “the interests of the innocent partnership and Advocate are not joint because Advocate did not act within the scope of partnership business when he procured the fire.” Accordingly, the partnership’s insurer was permitted to pursue its subrogation action against Mr. Advocate.
In so ruling, the court relied on prior “innocent spouse” cases, even though the general trend in homeowners coverage cases is to recognize spouses as individuals, not a single entity, whereas corporations and often partnerships (if interests are joint) are usually considered singular. Citing Reed v. Federal Ins. Co., 523 N.E. 480 (1988), in which coverage was not barred for the innocent co-insured daughter to whom the insured property had been transferred prior to her father intentionally causing the fire that destroyed it, the Advocate court acknowledged two competing public policy concerns: the reluctance to impute one individual’s fraud to another; and an interest in discouraging arson for profit.
The Advocate court also referenced Krupp v. Aetna Life & Cas. Co., 479 N.Y.S.2d 992 (1984), which held that a homeowners policy must be construed to separately cover the interests of each spouse for property that was held jointly as tenants by the entirety. The analysis focused on whether the rights of the insureds were considered to be joint or several. The court held that the policy language was ambiguous and therefore held against the insurer, finding that the spouses’ interests were separate and that the innocent spouse was entitled to her one-half interest in the policy proceeds.
A more recent case, Lloyds of London v. Bellettieri, Fonte & Laudonio, 2008 WL 2150121 (NY Sup. April 28, 2008) (unreported disposition), recognizes the critical factor of joint versus several interest but does not reach a conclusion pending further findings of fact. One of the partners in a law firm, Bellittieri, pleaded guilty to bank and mail fraud arising from a check-kiting scheme. The “innocent” partners, Fonte and Laudonio, sought coverage under the firm’s malpractice policies after professional liability suits were brought against the firm. They argued that the policy’s criminal acts exclusion did not apply to insureds “who did not participate or acquiesce or remain passive after having personal knowledge of the wrongdoing.” As a preliminary matter, Lloyds argued that the policies were void ab initio because the fraud was on-going at the time that the initial policy was issued, and that the insurance applications therefore contained misrepresentations of material fact. None of the partners was willing to accept service on behalf of the law firm, and Lloyd’s therefore sought a default judgment against the Named Insured, i.e., the partnership. The court declined to do so, raising numerous questions as to the status of each partner’s potential coverage if judgment were rendered against the partnership and concluding that “the principal issues to be decided here are whether any misrepresentation in the applications voids the policies, even as to innocent insureds,” when “it appears that the interests of [all the partners and the firm] are joint” and Lloyds had not shown that their interests “are capable of severance.”
C. Conclusion
Cases that address the innocent co-insured doctrine with respect to commercial property policies derive their reasoning from innocent spouse cases that analyze the issue in the context of homeowners policies, although the respective conclusions are often the opposite due to the distinction that spouses (or other relatives) are considered individually with severable interests, whereas partnerships and corporations are considered singularly with joint interests. One variable, however, is whether the act of the guilty co-insured was committed within the scope of the insured’s business. If not, as in the Advocate case, a court is likely to analogize such circumstances to the innocent spouse cases and award coverage to the innocent co-insureds. On the other hand, if the intentional act that caused the loss was undertaken for the purported benefit to the corporation, a coverage denial is likely to be upheld.
– Kathleen F. Munroe
