Texas Farmers Ins. Co. v. Murphy

• Decision Date: 26 August 1999
• Citation: 996 S.W.2d 873
• Parties: (Tex. 1999) TEXAS FARMERS INSURANCE COMPANY, PETITIONER v. DAISY MURPHY, RESPONDENT NO. 98-0661
• Court: Texas Supreme Court

Page 873

996 S.W.2d 873 (Tex. 1999)

TEXAS FARMERS INSURANCE COMPANY, PETITIONER v. DAISY MURPHY, RESPONDENT

NO. 98-0661

IN THE SUPREME COURT OF TEXAS

Argued on January 14, 1999

Decided July 1, 1999.

Rehearing Overruled August 26, 1999.

ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE FIRST DISTRICT OF TEXAS

[Copyrighted Material Omitted] JUSTICE GONZALES delivered the opinion of the Court, in which CHIEF JUSTICE PHILLIPS, JUSTICE BAKER, JUSTICE ABBOTT, JUSTICE HANKINSON, and JUSTICE O'NEILL joined.

The question posed is whether an innocent spouse can recover insurance proceeds when the other co-insured spouse has intentionally destroyed the covered community property. The court of appeals based its affirmative answer on the fact that the spouses partitioned the community before the trial began. 982 S.W.2d 79. We affirm the court of appeals' judgment, but for different reasons: (1) the policy contractually entitles the co-insured spouse to recover, absent defenses not preserved in this case, and (2) the public policy defenses presented in this case do not overcome the co-insured's contractual right of recovery.

I

On September 23, 1993, Robert Murphy obtained a binder on a standard homeowners insurance policy covering his and his wife Daisy Murphy's home and contents. On September 30, 1993, the Murphys' home burned down. Robert sought reimbursement under the policy. Texas Farmers Insurance Company investigated the claim and concluded that Robert intentionally caused the fire.

On February 19, 1994, Farmers filed suit seeking a declaratory judgment of nonliability under the insurance policy. Farmers alleged that public policy prohibits arsonists from recovering for their losses. Farmers further alleged that Robert misstated and willfully concealed material facts, vitiating coverage under the insurance policy's concealment clause. Robert counterclaimed for breach of contract and violations of the Texas Insurance Code. In December 1995, Daisy intervened and filed her own claim for the policy benefits.

Meanwhile, Daisy filed for divorce, and on March 8, 1996, she and Robert executed a partition agreement to divide their community interests in any proceeds from the policy. Robert and Daisy's divorce became final on October 11, 1996.

The trial was held March 12-14, 1996. The court submitted a jury charge asking whether Robert caused the fire and whether Daisy had prior knowledge of or participated in the arson. Farmers did not submit or request questions asking whether Robert or Daisy intentionally misrepresented or concealed any material facts. The jury found that Robert burned down the home but that Daisy was innocent of prior knowledge of or complicity in the arson. On October 17, 1996, the trial court, notwithstanding the jury's innocent-spouse finding, rendered a take-nothing judgment against both Robert and Daisy.

The court of appeals reversed the take-nothing judgment against Daisy and rendered judgment that she take half of the amount the jury awarded for the Murphys' loss. In its petition for review, Farmers argues that both the policy language and public policy prohibit Daisy's recovery.

II

Until 1986, the deliberate destruction of jointly-owned property by one co-insured barred recovery by other co-insureds, even when they were innocent and the policy did not expressly bar such recovery.¹ In Kulubis v. Texas Farm Bureau Underwriters Insurance Co.,² we reexamined that rule. Betty Kulubis sued to recover homeowners policy benefits covering a mobile home that her husband intentionally destroyed in a fit of rage after she served him a divorce citation. Citing public policy and Betty's "reasonable expectations," we held that she was entitled to recover her share of the insurance proceeds.³

In Kulubis, we indicated "that the proper test to be applied was what a reasonable person would have understood the fire insurance policy to mean." ⁴ In support of that test, we cited several out-of-state cases that construed the terms of homeowners policies to allow recovery by innocent co-insureds of those who had deliberately destroyed their jointly-owned property.⁵ The paramount question in those cases was whether the contract terms supported such a recovery. Although the Kulubis opinion did not cite any policy provisions, the same paramount question was implicit in our analysis there. And Kulubis's implicit answer was yes. Indeed, our review of the Kulubis record confirms that the policy did not explicitly bar Betty's recovery.⁶ In short, based on the policy terms, Betty would have reasonably understood the policy to provide such coverage.

In Kulubis, we also held that public policy supported Betty's right to recover her share of the insurance proceeds. Barring her recovery would have unjustly enriched Texas Farm by freeing it of its contractual obligation to her.⁷ Moreover, denying Betty any recovery despite her contractual right to it would have imputed her estranged husband's criminal wrongdoing to her, the target and victim of his outrage.⁸ On the other hand, allowing Betty, a completely innocent spouse, to recover did not work a fraud on the insurance company.⁹ Moreover, because she had a separate, rather than a community interest in her mobile home, her recovery did not directly benefit her husband.¹⁰

Although in Kulubis we stated that in general, "the illegal destruction of jointly owned property by one co-insured shall not bar recovery under an insurance policy by an innocent co-insured," we expressly did not decide whether the principle applied to community property.¹¹ The question we reserved presents a more difficult public policy dilemma. Fire insurance proceeds generally take the place of the destroyed property.¹² If the destroyed property is community property, any proceeds will become community property in which the culpable spouse will necessarily have an interest unless there is a divorce or partition agreement.¹³

Here, of course, we have a partition agreement. Any insurance benefits Daisy receives will now become her separate property. But this does not make the issue of recovery as simple as the one Kulubis addressed. In Kulubis, the spouses' interests in the insured property were separate from the outset. The innocent spouse could recover even without a partition or divorce. Here, to condition recovery under a policy covering community property on a post-arson partition or divorce in order to deny a benefit to the culpable spouse raises three difficult issues.

First, should courts craft a rule that may encourage partition or divorce? Second, by what date must the spouses partition or divorce - before the incident occurs, the claim is made, the insurer denies coverage, the start of trial, or the final judgment? Third, can any rule be crafted to allow innocent spouses to recover and ensure that the culpable spouse never benefits? If spouses partition or divorce but still live together or share their resources, the culpable spouse can still indirectly benefit. Not surprisingly, several post-Kulubis cases have struggled with these issues.

The Fifth Circuit decided Norman v. State Farm Fire & Casualty Co.¹⁴ shortly after the Kulubis decision. The jury found that Mr. Norman intentionally burned down his community-owned home. The Fifth Circuit held that because Mr. Norman would benefit from Mrs. Norman's recovery, public policy barred Mrs. Norman from recovering under the policy, even if she was innocent.¹⁵ Of Kulubis's various public policy considerations, that a wrongdoer not benefit from his wrongdoing was, in the Fifth Circuit's judgment, "by far the dominant one."¹⁶ The court warned that a rule permitting recovery whenever an insurance company could not prove both spouses' complicity would encourage collusion and threaten public safety.

The Fifth Circuit extended Norman's holding in Webster v. State Farm Fire & Casualty Co.¹⁷ Guy and Etta Webster filed a claim with State Farm after their house burned down. State Farm denied the Websters' claim, contending that Guy had committed arson. The Websters divorced and then sued State Farm for breach of contract. Etta moved for summary judgment that, because her share of the property was separate by virtue of the divorce, she was entitled to one half of the proceeds regardless of whether Guy caused the fire. The Fifth Circuit held that no contract breach occurred because "[a]t all points of time pertinent to State Farm's decision to deny recovery - the date the policy was issued, the date of the fire, the date the Websters filed their claim, and the date the claim was refused - the property was community."¹⁸ The court acknowledged that the result was harsh, but pointed out that "[h]ad State Farm compensated Etta alone when the Websters filed their claim, Guy, the arsonist, would have benefitted from his wrongdoing because the payment would have constituted community property."¹⁹

The Seventh Court of Appeals rejected Webster's reasoning in Travelers Cos. v. Wolfe.²⁰ After fire destroyed Ralph Wolfe's community-owned business, he submitted a claim to the Charter Oak Fire Insurance Company to recover losses under a commercial multi-peril insurance policy. Charter Oak denied the claim, alleging that Ralph caused the fire. Two months later, Ralph and Maryon Wolfe divorced. Maryon then sued Charter Oak, claiming that whether or not Ralph destroyed the property, she was entitled to recover benefits as the owner of an undivided one-half interest in the insurance policy and destroyed property. The court of appeals agreed, explaining that "[w]e are not faced with the problem of how to compensate Maryon for her community property interest in insurance proceeds without benefitting Ralph, the wrongdoer, for at the time Maryon established her claim to one half of the loss, the claim, and her right to receive the proceeds, was her separate property by virtue of the final divorce decree."²¹

In Chubb Lloyds Insurance Co. v. Kizer,²² the Second...