K & W Builders, Inc. v. Merchants and Business Men's Mut. Ins. Co., 1

• Decision Date: 09 January 1998
• Docket Number: No. 1,No. 970279,1,970279
• Court: Virginia Supreme Court
• Parties: K & W BUILDERS, INC., Defined Benefit Trustv. MERCHANTS AND BUSINESS MEN'S MUTUAL INSURANCE COMPANY, et al. Record

Page 473

495 S.E.2d 473

255 Va. 5

K & W BUILDERS, INC., Defined Benefit Trust No. 1 v. MERCHANTS AND BUSINESS MEN'S MUTUAL INSURANCE COMPANY, et al.

Record No. 970279.

Supreme Court of Virginia.

Jan. 9, 1998.

Frank K. Friedman, Roanoke (Mary C. Malone, Richmond; Michael J. Aheron; Woods, Rogers & Hazelgrove; Osterhoudt, Ferguson, Natt, Aheron & Agee, Roanoke, on briefs), for appellant.

Leisa Kube Ciaffone (Guy M. Harbert, III; Gentry, Locke, Rakes & Moore, on brief), Roanoke, for appellees.

Present: All the Justices.

CARRICO, Chief Justice.

This controversy involves a fire insurance policy issued by Merchants and Business Men's Mutual Insurance Company (Merchants), covering a building in the City of Salem owned by K & W Builders, Inc., Defined Benefit Trust No. 1 (K & W), and occupied by Ahmad Thiab (Thiab) and A and N Food, Inc. (A & N) under an assignment of lease to A & N. Thiab and A & N were the named insureds in the policy, and K & W was listed as an additional insured.

Thiab and A & N used the building for the operation of a restaurant known as "Mixers." On April 3, 1994, the building and its contents were destroyed by fire. K & W made claim against Merchants for the loss of the building. However, Merchants discovered evidence that the fire had been set by or at the direction of Thiab or A & N, or both of them, and that one or both had intentionally misrepresented and concealed material facts during the investigation into the cause of the fire. Relying upon a fraud provision and a dishonest act exclusion in its policy, Merchants denied the claim.

On January 4, 1995, K & W filed a motion for judgment against Merchants seeking recovery of $208,000, the face amount of the policy, plus the sum of $17,446.77, "which represents lost rent." As an affirmative defense, Merchants alleged that "Ahmad Thiab and/or A and N Food, Inc." had engaged in "fraudulent conduct" by deliberately setting the fire and had "committed concealment" and "made material misrepresentations," all in violation of the terms of the policy "so as to render the policy null and void as to all insureds," even an insured who is "innocent of any wrongdoing." ¹

K & W filed a motion for summary judgment, asserting that there was "no genuine issue as to any material fact" and that it was "entitled to judgment as a matter of law." Following argument, the trial court denied the motion, accepting Merchants' interpretation of the policy that

any act of Ahmad Thiab and/or A and N Food, Incorporated which violates the "concealment, misrepresentation or fraud" provision or falls within the scope of the "dishonest or criminal act" exclusion contained in the policy at issue will void any coverage to which [K & W] might otherwise be entitled, irrespective of whether [K & W] was involved to any extent in the commission of such act.

Prior to trial, the parties stipulated that the only issues that should be submitted to the jury were "whether the fire was set by or at the direction of A and N Food, Inc. and/or Ahmad Thiab, and whether A and N Food, Inc. and/or Ahmad Thiab made material misrepresentations to [Merchants] during the course of its investigation of this fire loss." The parties also agreed that these issues would be submitted to the jury in a special verdict form.

The jury found that the fire had been set by or at the direction of Thiab and a representative of A & N and that Thiab and a representative of A & N had made material misrepresentations to Merchants. Then, consistent with its prior ruling, the trial court entered judgment in favor of Merchants, and we awarded K & W this appeal.

As noted previously, Thiab and A & N were the named insureds in Merchants' policy and K & W was listed as an additional insured. The policy states that "[t]hroughout this policy the words 'you' and 'your' refer to the Named Insured shown in the Declarations" and the words " 'we,' 'us' and 'our' refer to the Company providing this insurance."

The fraud provision of the policy, relied upon by Merchants when it denied coverage for K & W's claim, is found in the part of the policy related to commercial property coverage. In pertinent part, the provision reads as follows:

This Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact....

The dishonest act exclusion of the policy, also relied upon by Merchants when it denied coverage for K & W's claim, reads in pertinent part as follows:

We will not pay for loss or damage caused by or resulting from any of the following:

....

h. Dishonest or criminal act by you, any of your partners, employees, directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.

Citing Rockingham Mut. Ins. Co. v. Hummel, 219 Va. 803, 250 S.E.2d 774 (1979), K & W argues that when, as here, the interests of coinsureds are severable, an innocent insured is not barred from recovery by the wrongdoing of another insured over whom the innocent insured exercises no control. In Hummel, the insured property was owned by husband and wife as tenants by the entirety. The property was destroyed by fire and the insurer paid the insureds the amount of the loss. The insurer later discovered that the husband had intentionally burned the property and sought to recover the amount it had paid. The wife claimed she was entitled to retain a share of the insurance proceeds.

The insurance policy covering the property named both the husband and the wife as the "Named Insured" and provided that the policy would be void "in case of any fraud ... by the insured." Id. at 804, 250 S.E.2d at 775. We held that because the husband and wife's legal interest in the insured property was joint and not severable, the wife's claim was subject to the general rule that "[w]hen the interests of the insureds are deemed joint and nonseparable, ... the innocent insured may not recover under the policy following a fraudulent act on the part of the other coinsured." Id. at 805, 250 S.E.2d at 776.

It follows from this holding, K & W argues, that because it had no joint interest with either A & N or Thiab and was innocent of any wrongdoing, it was entitled to recover for its loss. However, we made an additional holding in Hummel, a holding with dispositive effect here:

Furthermore, the form of the insurance contract was joint; the "Named Insured" was [the husband and the wife]. Thus under the policy and as the "insured", each spouse had ... the joint duty to refrain from defrauding the insurer. If either spouse violated [this duty], the breach was chargeable to the "Named Insured" preventing either spouse from recovering any amount under the policy.

Id. at 806, 250 S.E.2d at 776. ² Hence, even absent a joint interest between insureds and notwithstanding that one of the insureds may be innocent of any wrongdoing, resort must be had to the form of the insurance contract to determine the rights and liabilities of the parties.

At this point, it is necessary to resolve a dispute between the parties over whether the word "you," as used in the policy, refers only to the named insureds, Thiab and A & N, or to all the insureds, including K & W, which was listed as an additional insured. K & W accuses Merchants of vacillating on the subject, saying at one point in the course of this proceeding that "you" includes only the named insureds and at another point that it includes all the insureds, whether listed as named insureds or as an additional insured.

To resolve the dispute, we will agree with K & W that "you" includes all the insureds. When so included, K & W maintains, "there can be little doubt that [a] guarantee [contained in the...