Coverage For Innocent Spouse?

Insurance attorneys in the Dallas and Fort Worth area will eventually find themselves in a situation like that presented in a 1999, Texas Supreme Court case.  The case is styled, Texas Farmers Insurance Company v. Murphy.

Mr. Murphy obtained homeowners insurance with Texas Farmers in 1993.  Seven days later the home was ransacked and intentionally burned down.  Mr. Murphy submitted a proof of loss claiming $115,000 for damage to the structure and $69,000 for damage to personal property.

Texas Farmers filed a declaratory judgment action seeking a determination that it need not pay the insurance because Mr. Murphy had set or caused the fire to be set.  While the action was pending, Mrs. Murphy filed for divorce and obtained a partition of one-half interest in claims against Texas Farmers.

A jury found that Mr. Murphy had intentionally set the fire, that Mrs. Murphy was an innocent spouse who had no prior knowledge of, nor did she participate in, the setting of the fire and that Mrs. Murphy did not find out about her husband’s actions until after the fire.  The trial court rendered a take nothing judgment against both Mr. and Mrs. Murphy.

The court of appeals affirmed the judgment as to Mr. Murphy, but reversed the judgement as to Mrs. Murphy.  The court of appeals recognized that the U.S. 5th Circuit Court of Appeals had twice held that allowing an innocent spouse to recover under the policy would reward the wrongdoer since the wrongdoer spouse would be entitled to a community property interest in the insurance proceeds.  However, the court of appeals held that since Mr. and Mrs. Murphy were divorced, and the community property had already been partitioned, Mr. Murphy would not get any benefit from the insurance proceeds, and therefore, Mrs. Murphy was entitled to recover under the policy.

This supreme court affirmed the court of appeals, but for different reasons.  The Court noted that the general rule is that the illegal destruction of jointly owned property by one co-insured shall not bar recovery under an insurance policy by an innocent co-insured.  However, the Court has never expressly decided whether the general rule applies to community property.

Numerous cases have addressed the issue of whether an innocent co-insured is entitled to recover under the policy, but the cases focus on the public policy of not awarding the wrongdoer rather than the language in the insurance policy.  Whether the innocent co-insured is entitled to recover under the policy is a question of construction of the insurance contract.  The pertinent clause in the standard homeowners policy on which Texas Farmers attempted to rely to bar recovery by Mrs. Murphy states as follows:

Concealment of Fraud.  This policy is void as to you and 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.

Since Texas Farmers failed to obtain a jury finding on the applicability of the exclusionary clause in the policy, any defense based on the exclusion has been waived.

The next issue is whether public policy should prevent recovery by Mrs. Murphy since the property destroyed was community property.  The Court has articulated a public policy that a wrongdoer should not be awarded for wrongdoing.  Thus, in prior cases, Texas courts have generally conditioned the innocent spouse’s right to recover under the policy on whether and when the community interests in the insurance policy had been severed.  However, a rule conditioning an innocent spouse’s recovery on partition or divorce is neither practical or satisfactory.  The better view is that public policy does not prevent nor overcome the innocent spouse’s contractual right to recover his or her one-half interest in the policy benefits.  Of course, an insurance company is free to contractually exclude or void any coverage to all insureds if any insured intentionally destroys the covered property as long as such exclusionary language is approved by the Insurance Commissioner.