A first-party property insurance exclusion that purports to eliminate coverage for “any” insured when another insured commits arson is broader than allowed by California law and, therefore, unenforceable. ( Century-National Insurance Co. v. Garcia (2011) WL 537627)
Facts
Jesus Garcia was named as an insured on a homeowner’s policy issued by Century-National Insurance Company (Century-National). The policy included first-party property coverage and third-party liability coverage. Mr. Garcia’s wife and adult son were not named as insureds on the policy but, according to the definitions in the policy, both nonetheless qualified as insureds.
Mr. and Mrs. Garcia’s son intentionally set fire to the house, causing substantial damage. Mr. and Mrs. Garcia then submitted a claim to Century-National for the arson damage. Century-National denied Mr. and Mrs. Garcia’s claim based on an exclusion for “loss arising out of any act committed by or at the direction of any insured ….” (In other words, Century-National’s policy purported to eliminate coverage for any insured – even an insured that was innocent of wrongdoing – if any other insured intentionally had caused damage.)
After denying the claim, Century-National filed a complaint seeking a declaration that it had no duty to pay Mr. and Mrs. Garcia’s loss because the policy excluded coverage for the intentional act of “any” insured. Mr. and Mrs. Garcia, in turn, filed a cross-complaint alleging causes of action for breach of contract and bad faith.
The trial court upheld the validity of Century-National’s exclusion, and the Court of Appeal upheld the ruling in an unpublished ruling. The California Supreme Court then granted review.
Holding
The California Supreme Court reversed, and ruled that an exclusion in a first- party fire policy for intentional acts of “any” insured does not apply to an innocent co-insured.
Insurance Code section 2071 sets forth California’s “standard form” fire policy, and the standard form fire policy does not contain an expressed exclusion for intentional acts. However, Insurance Code section 533 precludes coverage for intentional acts of “the” insured, and section 533 is deemed to be an implied exclusion in every insurance policy. Thus, section 2071’s standard form fire policy impliedly contains section 533’s exclusion for intentional acts of “the” insured.
Pursuant to section 2070, a policy’s coverage for fire must be “substantially equivalent” to or “more favorable” than the coverage set forth by the standard form policy. Because Century-National’s policy purported to exclude coverage for fire damage caused by the intentional act of “ any ” insured, Century’s National’s policy was not “substantially equivalent” to the standard form policy and section 533’s implied-in-law exclusion for intentional acts of “ the ” insured. Because Century-National’s innocent co-insured exclusion was broader than allowed by sections 2070 and 2071, the exclusion was not enforceable.
Comment
Although the Supreme Court’s ruling in Garcia is extremely significant, there are several important points to bear in mind.
First, the Garcia case invalidates a first-party property exclusion that purports to eliminate coverage for an innocent insured when a co-insured intentionally causes a fire loss. The Supreme Court expressly noted that its ruling might not necessarily invalidate first-party property exclusions for an innocent insured when a co-insured causes some other type of loss.
Second, the fact that an innocent co-insured exclusion is invalid in connection with an intentionally-caused fire loss does not automatically mean the insurer is responsible paying the entire amount of the loss. For example, if one insured intentionally burns community property, the innocent insured’s recovery under an insurance policy might well be limited to recovering the value of his or her share of the damaged community property.
Third, a first-party property policy often will contain a lender’s loss payable clause (often by way of an endorsement) that protects a secured lender’s rights, even if an insured intentionally burns (or otherwise damages) the property. An insurer faced with a loss fire loss (or other loss) that an insured intentionally-caused must always independently evaluate the rights of any lender under a loss payable clause.
Fourth, the Supreme Court previously has recognized that, at least in the context of third-party liability insurance, an insurer may exclude coverage for the intentional act of “any” (or “an”) insured, provided the exclusion is clear, conspicuous and unambiguous. Insurance Code sections 2070 and 2071, which were at issue in the Garcia case, do not apply to an innocent co-insured exclusion in connection with third-party liability insurance.