Innocent co-insured can recover on fire insurance policy despite other insured's false statement regarding the loss

Mr. and Mrs. Bobby Watts were owners of a house in Compton. They moved out of the house in 1995 after their daughter became a witness to a murder and the house became the object of drive-by shootings. The house was damaged in 1995 when an incendiary device was thrown into the house. The house was again damaged by fire in 1998. Farmers insured the house in 1998.

The Watts submitted a proof of loss for the fire damage in 1998. Farmers rejected the claim on the grounds that Mrs. Watts had concealed in an interview that the home had been damaged in an earlier 1982 fire. Mrs. Watts had pled guilty to arson in connection with the 1982 fire. Mrs. Watts admitted that she set fire to a chair when she became angry with her husband and the fire spread. Apparently, Mr. Watts was not in the chair at the time.

Also, a number of items of personal property listed on the proof of loss appeared to be identical to items previously identified as damaged or destroyed in connection with the 1995 incident. Mrs. Watts stated that she prepared this list, not her husband.

The policy provides no coverage for any intentional concealment or misrepresentation by "the insured" of any material fact relative to the policy.

The Watts sued Farmers. Farmers moved for summary judgment. The motion was granted and judgment was entered in favor of Farmers. The Court of Appeal reversed.

The Court of Appeal held that an innocent co-insured could recover for his or her percentage share of the loss despite the transgressions of the other insured.

In order to establish a defense based on false swearing in connection with an insurance claim, the insurer must prove that the insured made statements that were (1) false, (2) material, and (3) knowingly and willfully made.

It was indisputable that the prior 1982 fire and Mrs. Watts' conviction were material to the investigation of the later 1998 fire loss. The appellate court also agreed that Mrs. Watts' statements were knowingly and willfully false and that a reasonably jury would agree.

When asked the question, "Now before this fire in January and the previous time when they threw the Molotov cocktail and hit your son's car, had you ever had any other fires at that house that you're aware of?" she answered by saying, "No, ain't nobody did nothing to my house."

The appellate court rejected the Watts' argument that perhaps Mrs. Watts did not understand the question. The questions were simple and unambiguous on their face. The answers clearly denied that an earlier fire had occurred. The court reasoned that the only reasonable inference to be drawn from straightforward questions and untruthful answers is that Mrs. Watts was deliberately attempting to mislead the interrogator.

The only issue remaining was whether Mr. Watts should be denied a recovery because of his wife's materially and willfully false statements made during Farmer's investigation of the fire loss.

The appellate court noted a split among various out-of-state courts, some of which held that where title was held as community property, both spouses would be denied a recovery. However, the modern trend is to allow a recovery to the innocent spouse. The couples' marital status and how title is held should not decide coverage issues. Instead, the modern trend, as adopted by the appellate court, focuses upon the language of the policy.

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. On the other hand, where a 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.

Since the standard fire insurance policy statutorily prescribed by the California Legislature precludes recovery only to "the insured" and not "any insured", who makes a fraudulent material misrepresentation, Mr. Watts was not precluded from recovering his share of the insurance proceeds.

(Watts v. Farmers Insurance Exchange (June 5, 2002, 2nd Dist.) 2001 WL 1225562.)