Sager v. Farm Bureau Mut. Ins. Co.

• Decision Date: 12 May 2004
• Docket Number: No. 02-1433.,02-1433.
• Citation: 680 N.W.2d 8
• Parties: Ramona SAGER, Appellant, v. FARM BUREAU MUTUAL INSURANCE CO., Appellee.
• Court: Iowa Supreme Court

680 N.W.2d 8

Ramona SAGER, Appellant, v. FARM BUREAU MUTUAL INSURANCE CO., Appellee.

No. 02-1433.

Supreme Court of Iowa.

May 12, 2004.

Rehearing Denied June 1, 2004.

John Werden of Van Dyke & Werden, P.L.C., Carroll, for appellant.

James Pugh and Paul S. Swinton of Morain, Burlingame & Pugh, P.L.C., West Des Moines, for appellee.

STREIT, Justice.

A battalion of Beanie Babies has marched a legal question before us. While on a quest to torch his wife Ramona's Beanie Baby collection, Robert Sager nearly burnt down the family house. Ramona now seeks to collect under the couple's homeowners policy with Farm Bureau for Robert's pyromaniacal actions. The policy, however, contains an exclusion for "intentional loss" at the hand of "an insured." In a matter of first impression, we hold Iowa's standard fire insurance policy, as set forth in Iowa Code section 515.138 (1999), renders the exclusion unenforceable. We reverse and remand for further proceedings.

I. Facts and Prior Proceedings

The facts are stipulated. Robert Sager intentionally set a fire in the basement of a house he shared with his wife Ramona in DeWitt. Angry after Ramona told him she was ending their relationship, Robert torched Ramona's Christmas decorations in the basement of their house.¹ The fire quickly spread, and portions of the house were soon engulfed in flames. Robert's pyromaniacal act caused approximately $100,000 damage to the house and its contents. Not surprisingly, Robert and Ramona later divorced.

At the time of the fire, Robert and Ramona were named insureds under a homeowners policy with Farm Bureau Mutual Insurance Company. When Ramona sought payment, Farm Bureau denied her claim. To justify its nonpayment, Farm Bureau cited exclusions in the policy for "intentional loss" and "concealment or fraud."

The "intentional loss" exclusion barred recovery for "any loss arising out of any act committed ... (1)[b]y or at the direction of an `insured' ... and (2)[w]ith the intent or expectation of causing a loss." Farm Bureau contended this exclusion precluded payment to Ramona because Robert, an insured, had purposefully started the fire.

The "concealment or fraud" exclusion barred coverage where an insured

(1) Intentionally concealed or misrepresented any material fact or circumstance;

(2) Engaged in fraudulent conduct; or

(3) Made false statements;

relating to [the] insurance.

Farm Bureau denied Ramona benefits under this exclusion because its "own investigation revealed substantial inaccuracies in [Ramona's `Sworn Statement in Proof of Loss'] regarding the extent of damage to personal property." In a deposition conducted at Farm Bureau's invitation, Robert alleged many items in Ramona's sworn proof of loss statement were, in fact, undamaged or salvageable.

After Farm Bureau denied her claim, Ramona sued to recover under the policy. In the district court, Ramona argued the "intentional loss" exclusion was unenforceable because it (1) did not meet the minimum provisions of Iowa's standard fire insurance policy, as set forth in Iowa Code section 515.138 (1999), and (2) was ambiguous due to a formatting error. The district court dismissed. First, the court ruled Vance v. Pekin Insurance Co., 457 N.W.2d 589 (Iowa 1990), controlled, and, as a result, Ramona—albeit an "innocent coinsured spouse"—could not recover under a policy which barred recovery if "an insured" intentionally caused the loss. Second, the court held the formatting errors in the policy did not render the "intentional loss" exclusion ambiguous.

Although Farm Bureau had also argued Ramona could not recover under the policy because she had misrepresented the extent of her loss, the district court declined to "answer whether such misrepresentation bars Ramona from recovery."

The court of appeals reversed and remanded for entry of judgment in favor of Ramona. First, the court distinguished Vance; in Vance, we were not presented with the statutory argument, i.e., whether a policy which bars an innocent coinsured spouse from recovering violates Iowa Code section 515.138, our state's standard fire insurance policy. Pointing to the great weight of authority, the court of appeals concluded the "intentional loss" exclusion in the Sagers' policy violated the minimum protections afforded by the statute, and was therefore unenforceable. As a result, the court did not reach whether formatting errors also rendered the exclusion unenforceable. Second, the court of appeals determined "reasonable fact finders could differ on whether the inaccuracies on Ramona's proof of loss form rose to the level of material misrepresentations or fraud." Since this case was tried on stipulated facts, however, the court did not remand. The court of appeals reasoned the district court was in no better position than it to judge credibility, making a remand inefficient. The court simply held "Farm Bureau cannot establish the applicability of the concealment of fraud exclusion as a matter of law, [and therefore] it is not entitled to affirmance on this alternate ground."

Farm Bureau sought further review, which we granted. Farm Bureau contends the court of appeals (1) erred in holding Iowa Code section 515.138 renders the intentional loss exclusion in the policy unenforceable and (2) failed to hold Ramona's misrepresentations "material." Should we affirm the court of appeals' decision, Farm Bureau also asks us to provide guidance on how much Ramona is entitled to recover.

II. Standard of Review

Our review is for errors at law. Iowa R.App. P. 6.4. Factual findings made by the trial court are binding on appeal if supported by substantial evidence. Id. 6.14(6)(a). This case was tried on stipulated facts in the district court. That is,

To save expense, and to simplify the issue, the facts were agreed upon by the parties, upon which the court should render judgment. The parties, in effect, said to the court, "these are the facts, and now we wish judicially to know what are the rights of the parties thereunder."

Logan v. Hall, 19 Iowa 491, 495 (1865) (citations and emphasis omitted). Because this law action was tried on stipulated facts, then, our review is "limited to assigned error in the district court's application of law pertinent to the controversy." Stewart v. DeMoss, 590 N.W.2d 545, 547 (Iowa 1999).

III. Merits

A. The Problem of the Innocent Coinsured Spouse

1. Vance

In Vance v. Pekin Insurance Company, we held that where one spouse had intentionally set fire to the family home, an innocent coinsured spouse could not recover under a homeowners policy which clearly and unequivocally excluded coverage from losses resulting from the intentional acts of "an insured." 457 N.W.2d at 593 (emphasis added). In Vance, we adopted the so-called "best reasoned rule," according to which "recovery depends ... on a contract analysis of the insurance policy provisions." Id. (citing Leane E. Cerven, Note, The Problem of the Innocent Co-Insured Spouse: Three Theories of Recovery, 17 Val. U.L.Rev. 849, 867-68 (1983)). We explicitly noted this contract analysis followed the recent trend in other courts away from analyses centering upon property rationales or the marital status of the parties. See id. We have consistently applied this contract analysis ever since. See, e.g., Jensen v. Jefferson County Mut. Ins. Ass'n, 510 N.W.2d 870, 872 (Iowa 1994)

; Webb v. Am. Family Mut. Ins. Co., 493 N.W.2d 808, 812-13 (Iowa 1992). Other courts have followed suit. See, e.g., Watson v. United Serv. Auto. Ass'n, 566 N.W.2d 683, 688 (Minn.1997) ("The majority of courts use a contract-based theory which focuses on a contractual analysis of the insurance policy provisions ..."; policies which contain "an insured" bar recovery to an innocent coinsured spouse); Noland v. Farmers Ins. Co., 319 Ark. 449, 892 S.W.2d 271, 272-73 (1995); Volquardson v. Hartford Ins. Co., 264 Neb. 337, 647 N.W.2d 599, 605-06 (2002); Wagner v. Midwestern Indem. Co., 83 Ohio St.3d 287, 699 N.E.2d 507, 511 (1998); McAllister v. Millville Mut. Ins. Co., 433 Pa.Super. 330, 640 A.2d 1283, 1289 (1994); Utah Farm Bureau Ins. Co. v. Crook, 980 P.2d 685, 686 (Utah 1999). See generally 10 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 149:49 (2003) ("whether arson by one coinsured spouse bars innocent coinsured spouse from recovering under policy depends not on property rationales or marital rights and obligations, but on contract analysis of insurance policy provisions....").

Vance contained an intentional loss exclusion similar to the case at bar. In Vance, we interpreted the phrase "an insured" in the policy to mean "an unspecified insured" who intentionally sets fire to the house. 457 N.W.2d at 593. That is, under the express terms of such a policy, if any insured sets fire to the house, all insureds are barred from recovering. Id. As a threshold matter, then, we find the provisions of the insurance contract at issue in this case bar Ramona's claim. As in Vance, the policy explicitly excludes coverage for "any loss arising out of any act committed ... (1)[b]y or at the direction of an `insured' ... and (2)[w]ith the intent or expectation of causing a loss." (Emphasis added.) Applying a contract analysis, Robert's malfeasance plainly bars Ramona's right to recover.

2. Iowa Code § 515.138

After Vance was decided, however, a new question arose in other jurisdictions: If an innocent coinsured spouse is denied coverage under the express terms of the policy, do those policy provisions then violate the mandatory coverage provisions in state statutes? Citing a relatively recent Minnesota decision, Watson v. United Services Automobile Association, 566 N.W.2d 683 (Minn.1997), Ramona claims her policy, if interpreted to bar an innocent coinsured spouse from recovery, violates the mandatory minimum coverage set by Iowa statute.

Found in Iowa Code section 515.138, our state's standard fire insurance policy "lists various permissible standard provisions for...