Innocent co-insureds who have not done anything wrong are at jeopardy of losing their insured benefits when insured by Liberty Mutual. This may seem an unfair criticism by me since Liberty Mutual won the coverage case. But, every insurer, at the moment of truth, has to make claims decisions that demonstrate if it is a pro-customer insurer or one that is going to use sharp policy language to provide a harsh result to its customers. Unfortunately, Liberty Mutual showed its true colors in this recent case.1

The facts from Liberty Mutual’s brief stated:

On August 30, 2018, a home owned by Plaintiffs Christina Taylor and Donald Taylor (collectively, ‘Plaintiffs’) was damaged by fire. The fire began when Plaintiffs’ adult daughter, Zoe, intentionally set fire to the bed spread of Plaintiffs’ bed in the master bedroom. Zoe started the fire after becoming angry with her father due to an argument they had earlier in the day. Zoe used a lighter to ignite the bed spread in order to upset her father.

After starting the fire, Zoe unsuccessfully attempted to extinguish it herself. However, the fire ultimately spread from the top of the bed and caused damage to other portions of the home. As the fire spread, Zoe went outside and called the fire department to respond to the scene. Although initially denying it, Zoe later admitted that she started the fire in the home. (citations omitted)

The rest of the facts found in the policyholder’s brief indicates:

Christina and Donald Taylor (hereinafter ‘Taylors’) owned a home at 301 S. Summit Street, El Dorado, Kansas. The Taylors 18 year old daughter, Zoe, was living with her parents.

Earlier in the day, August 30, 2018, Zoe argued with her father. When her parents were gone Zoe used a lighter to burn a blanket on her father’s side of the bed. She did this to upset her father, not to cause a loss. Zoe stated that she did not intend to start a fire and before the fire damaged anything other than the blanket she believed she had extinguished the fire.

Realizing a fire was spreading, Zoe went outside and called the fire department. Initially, Zoe denied starting the fire. Later, Zoe admitted that ‘she wasn’t planning on starting the fire and got scared once the fire got started.’ When Zoe was asked if she did it on purpose she said ‘she intended to burn the blanket on her dad’s side of the bed for fun, because she was upset with him,’ then after putting the fire out and leaving the room she realized the fire was not out.

…During the adjustment process Liberty Mutual became aware of the following facts:

• Zoe had medical problems;

• Zoe was on Prozac or similar medication;

• Zoe was being treated with seizure medication related to a form of epilepsy;

• Zoe was taking mind-altering medication;

• Zoe had been hospitalized for 15 days the month before the fire started and
was taking new medications;

• the Taylors were concerned about Zoe’s mental state; and,

• Donald did not believe Zoe’s acts in starting the fire were intentional
because of her mental illness. (Citations omitted)

Zoe was not a named insured but was “an insured” by definition because she was a resident relative of the named insureds. There was no “arson for profit” motive for the fire. Zoe obviously was a mentally troubled 18-year-old.

The policy contained the following exclusion:

h. Intentional Loss, meaning any loss arising out of any act committed:

(1) By or at the direction of an ‘insured’; and

(2) With the intent to cause a loss.

The federal appellate court analyzed Kansas law and found that Liberty Mutual could deny the fire loss under that exclusion:

[T]he Taylors argue that…it is not clear that, although Zoe intended to light the bedspread on fire, she believed it was ‘substantially certain’ the fire would damage the house. However, ‘[i]t is not essential . . . that the harm be of the same character and magnitude as that intended.’….As long as Zoe intended to start the fire, and understood the fire would damage the bedspread, the exclusion applies.

Zoe’s medical history does not alter the result in this case. Kansas recognizes a presumption of sanity that the Taylors must rebut. Shelter Mut. Ins. Co. v. Williams ex rel. Williams, 804 P.2d 1374, 1383 (Kan. 1991). No evidence exists in the record that Zoe was experiencing a seizure or suffering from the side effects of a previous seizure during the incident. Additionally, there is no evidence that Zoe’s medication interfered with her basic understanding of the nature and consequences of fire. No reasonable juror could conclude that Zoe was unaware that lighting a bedspread would cause it to burn.

…the Taylors argue that the phrase ‘intent to cause a loss’ in the exclusion is ambiguous because it ‘is dependent on the character of the property or the use of the property.’ The Taylors point to an example of a candle causing unintentional fire damage to a home, a loss all agree would be covered by the policy. Id. The Taylors argue that ‘[i]f an ordinary person needs to infer the character of the property,’ to understand the exclusion, it is unclear. Additionally, the Taylors argue the exclusion is ambiguous because it does not specify that the exclusion only applies ‘to covered property.’

These distinctions are artificial. As discussed above, intent is defined using the Thomas test. Given the function of a candle, an insured ordinarily does not intend to cause a loss by lighting it. Rather, the value of the candle depends on it being burned. An insured’s use of the candle does not result in damage to the insured. Finally, the exclusion does not require the addition of the phrase ‘to covered property’ to be clear. If the property was not already covered, no exclusion would be necessary.2

This case indicates that under Kansas law and this policy’s language, innocent insureds can have their benefits denied by the wrongful act of another insured—even an insured by definition.

This is not the case in every state, and the analysis must be on a policy wording basis. An excellent paper written on the topic, The Battle Between The Courts And Coverage – How To Handle The Innocent Co-Insured,3 stated:

As lawyers, we are trained from the beginning of our law school education to analyze the meaning of the written word. We are also instructed to take great care that any document we draft clearly defines each party’s responsibilities and duties. A poorly drafted phrase or sentence or misplaced word can dramatically alter an individual’s rights under a contract.

In no area of insurance law is this principal [sic] more evident than the issue of coverage for the innocent co-insured. The insured’s right to recover and the carrier’s right to deny coverage is often determined by a two or three-letter word preceding the word insured. For example, whether a wife, who is completely innocent of her husband’s attempt to burn down their home, has any rights to recover under the homeowner’s policy can be determined by the words ‘an,’ ‘the’ or ‘any.’

Seventy years ago, when courts were asked to determine an insurance carrier’s obligation to an innocent co-insured, they assumed that the insurance contract was considered joint. The innocent co-insured could not recover in most circumstances where one insured committed an excluded act. See Leane English Cervin, The Problem of the Innocent Co-Insured Spouse: Three Theories on Recovery, 17 Val. U. L. Rev. 849, 857 (1983); Matyuf v. Phoenix Insurance Co., 27 Pa.D&C2d 351 (1933). Under the old view, courts assumed that the phrase ‘the insured’ meant the named insured, and that it meant the same thing throughout the contract. The old view was based on archaic concepts, such as marital unit and tenancy by entirety. It was a harsh and unfair rule because it denied coverage in almost all circumstances.

In response to the harshness of the old rule, another doctrine developed. This doctrine was called the ‘rebuttable presumption theory,’ and allowed the innocent co-insured spouse to rebut the presumption of a joint obligation by proving that his/her interest in the property was severable. Hoyt v.New Hampshire Fire Insurance Co., 92 N.H. 242, 29 A.2d 121 (1942). The innocent co-insured spouse had the burden of demonstrating a separable interest in the insured property. The flaw in the rebuttable presumption theory, however, was essentially the same as in the old rule: it was based upon a link between co-ownership of the property and a joint contractual obligation. This analysis, under a property rationale, ignored the extent of the parties’ rights and duties as dictated by the insurance contract.

Rather than the nerdy exercise of analyzing this property insurance law about innocent insureds, perhaps the best lesson from this case is to think about the type of insurer that you purchase your insurance from. Liberty Mutual was not forced to deny this claim. Yes, they won, and their analysis was proven correct in a court of law. To many of us in the insurance business, the decision to deny the claims truly shows what type of company Liberty Mutual currently is and something about its claims culture. They should make it an advertised example of what you can expect if you insure with Liberty Mutual.

“Don’t let your children play with matches” is a warning that takes on a lot more financial significance if your insurer is Liberty Mutual Insurance Company.

Thought For The Day

We’ve let the blade of our innocence dull over time, and it’s only in innocence that you find any kind of magic, any kind of courage.
—Sean Penn
1 Taylor v. LM Ins. Corp., No. 20-3166 (10th Cir. July 11, 2022).
2 Id.
3 Jay Barry Harris, Emily L. Kaplan. The Battle Between The Courts And Coverage – How To Handle The Innocent Co-Insured.