Is it the End for the Innocent Spouse’

Since 1986, Texas has recognized an innocent insured exception to otherwise non-covered claims. The innocent insured doctrine usually involves arson or other intentional destruction of property by one insured and a claim for coverage by another insured—often the “innocent spouse”—who was ignorant of, and did not participate in, the intentional conduct. In many states, there may be a contractual exclusion for intentional destruction of property, often applying to the conduct of “an insured” or “any insured.” The analysis, then, frequently focuses on policy construction, and the application of the severability clause. In Texas, arson is not specifically excluded, but is a public policy defense under a homeowners policy. The analysis, however, is similar. While coverage is barred as to the insured that started the fire, or otherwise destroyed the property—either under express policy provisions or public policy rationale—the innocent insured may still recover.

In Kulubis v. Texas Farm Bureau Undw’rs Ins. Co., 706 S.W.2d 953 (Tex. 1986), in which the court first recognized the rights of an innocent spouse, the court reasoned that the innocent spouse had a reasonable expectation of coverage, based on the policy terms, that would be defeated if her husband’s conduct deprived her of coverage. Kulubis involved somewhat unusual facts. The husband destroyed the couple’s mobile home after his wife served him with divorce papers. The wife was not only innocent, she was the intended victim of the destruction. In addition, she had a separate, rather than community, interest in the property. After Kulubis, several federal courts, and at least one state court, refused to apply the same reasoning to situations involving community property, as to do so would benefit the wrongdoing spouse as well. The courts based their decisions principally on public policy grounds, to prevent benefit to a wrongdoer. See, e.g., Webster v. State Farm Fire & Cas. Co., 953 F. 2d 222 (5th Cir. 1992); Chubb Lloyds Ins. Co. v. Kizer, 943 Sw2d 946 (Tex. App.—Fort Worth 1997, writ denied).

What Kulubis and subsequent cases did not resolve is the effect of the Concealment or Fraud provision of the policy when there is one complicit and one innocent insured. This provision typically provides that:

“This policy is void as to you and as to any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance, made false statements or committed fraud relating to this insurance, whether before or after a loss.” (Emphasis added.)

If construed literally, this provision voids coverage for any insured, if one insured conceals or misrepresents material facts.

This issue was raised, briefly, in Texas Farmers Ins. Co. v. Murphy, 996 S.W.2d 873 (Tex. 1999). In Murphy, the jury found the husband committed arson, but his wife was innocent. The trial court rendered a take nothing judgment. The court of appeals, rejecting the reasoning of the federal courts, reversed, and rendered judgment for half the loss to the innocent spouse. On petition for review the Texas Supreme Court, after first noting that many jurisdictions limit the concealment clause to the culpable party, refused to reach this issue, finding it was not properly preserved. The court rejected the public policy rationale of the federal courts. Instead, the court reasoned that the policy language should control. The Fraud or Concealment provision, although included in the policy and referencing concealment by “any insured,” was not pleaded or proven by the insurer. Therefore, the court refused to rely on it. Instead, the court held that the wife, as “an insured” under the policy, was entitled to coverage for damage from fire—a covered peril. The court also rejected the distinction between community and separate property, concluding that, “public policy does not overcome an innocent spouse’s right to recover her or his one-half interest in the policy benefits.” Id. at 881.

The doctrine of the innocent insured was recently re-visited in McEwin v. Allstate Texas Lloyds, 118 S.W.3d 811 (Tex. App.—Amarillo 2003, no pet.). A fire occurred at the McEwin’s house. The house was insured under a Homeowners Form B (HO-B) policy, designating both husband and wife as named insureds. It was discovered that the husband, James, had instigated the fire. His wife, Kathy, was apparently uninvolved and unaware of his plans. The McEwins submitted a proof of loss that did not address the cause of the fire. Allstate made some initial advances and paid off the mortgage holder, but then denied the claim based on arson and on the “Concealment or Fraud” provision of the policy. Kathy McEwin sued, asserting she was entitled to benefits as an innocent spouse, relying on Kulubis. The court disagreed and granted summary judgment to Allstate. On appeal, the judgment was affirmed.

The court reasoned, in part, that the innocent insured doctrine did not supersede other policy provisions. Because the “Concealment or Fraud” provision voided the policy as to the named insured (“you”) and any other insured, if any insured made an intentional misrepresentation there could be no coverage. The court also found that Article 21.19, TEX. INS. CODE (Vernon 1981), an anti-technicality statute, did not apply where the misrepresentation was in the arson and loss report, not the proof of loss. Art. 21.19 provides that:

“Any provision in any contract or policy of insurance issued or contracted for in the State which provides that the same shall be void or voidable, if any misrepresentations or false statements be made in proofs of loss or of death, as the case may be, shall be of no effect, and shall not constitute any defense to any suit brought upon such contract or policy, unless it be shown upon the trial of such suit that the false statement made in such proofs of loss or death was fraudulently made and misrepresented a fact material to the question of the liability of the insurance company upon the contract of insurance sued on, and that the insurance company was thereby misled and caused to waive or lose some valid defense to the policy.”

TEX. INS. CODE Art. 21.19 (Vernon 1981). The statute has been construed to impose a burden on the insurer to establish a three-part test: the statement was fraudulently made, material, and caused the insurer to lose a valid defense. Not surprisingly, there are few reported cases voiding policies, and more cases finding the statute did not apply. See, e.g., Delta Lloyds Ins. Co. v. Williamson, 720 S.W.2d 232,233 (Tex. App.—Beaumont 1986, no writ)(elements not established); but see Trinity Univ. Ins. Co. v. Sweatt, 978 S.W.2d 267 (Tex. App.—Fort Worth 1998, no writ) (rendering policy void where insured committed arson).

While it remains to be seen, the McEwin opinion may give new life to the Concealment or Fraud provision, which many insurers have ignored because of the apparent impact of Article 21.19. And, in so doing, it will make it difficult, if not impossible, for the innocent spouse to recover in cases involving arson or other intentional destruction of property.

Beth D. Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons L.L.P.

Topics Texas Fraud Property