Watson v. United Services Auto. Ass'n

• Decision Date: 10 July 1997
• Docket Number: No. C7-96-110,C7-96-110
• Parties: Elizabeth A. WATSON, Respondent, Keith Watson, Plaintiff, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, petitioner, Appellant.
• Court: Minnesota Supreme Court

Page 683

566 N.W.2d 683

Elizabeth A. WATSON, Respondent, Keith Watson, Plaintiff, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, petitioner, Appellant.

No. C7-96-110.

Supreme Court of Minnesota.

July 10, 1997.

Syllabus by the Court

Insurance policy which purports to exclude an innocent co-insured spouse from coverage based upon the intentional or fraudulent acts of the other insured spouse conflicts with the Minnesota standard fire insurance policy and must be reformed.

Eric A. Nerness, William L. Davidson, Lind, Jensen & Sullivan, Minneapolis, for Appellant.

Kenneth F. Daniels, James J. Moran, Kenneth F. Daniels & Assoc., Golden Valley, for Respondent.

Heard, considered, and decided by the court en banc.

OPINION

ANDERSON, Justice.

United Services Automobile Association Casualty Insurance Company (USAA) appeals from a decision holding that it was required to compensate its innocent co-insured, respondent Elizabeth Watson. Elizabeth Watson sustained losses when her estranged husband, plaintiff Keith Watson, who was also an insured under the USAA policy, intentionally set fire to their mobile home. The district court ordered judgment in favor of USAA. The court concluded that the clear language of the USAA insurance policy issued to Elizabeth and Keith Watson excluded coverage for the loss.

The Minnesota Court of Appeals reversed the district court on the ground that the USAA insurance policy did not conform to the minimum coverage requirements set forth in Minn.Stat. § 65A.01 (1996), the Minnesota standard fire insurance policy. The court of appeals then reformed USAA's policy to conform to the minimum requirements mandated by Minn.Stat. § 65A.01 and remanded to the district court for an order allowing Elizabeth Watson to recover her proportionate share of the insured loss. USAA appeals and raises the issue of whether an insurance policy which purports to exclude coverage for an innocent co-insured spouse based upon the intentional acts of the other insured spouse is valid and enforceable under Minnesota law. We affirm.

On the evening of January 13, 1994, a mobile home and its contents located at 569 East Gull River Road in Brainerd, Minnesota were completely destroyed by fire. The Brainerd Fire Department investigated the fire and in its report listed the ignition factor as "undetermined."

At the time of the fire, the mobile home and the real estate on which it was located were being purchased by Elizabeth Watson and Keith Watson as joint tenants under the terms of a contract for deed. Elizabeth and Keith Watson lived in the mobile home together from 1986 until April 1991, when they separated and Elizabeth Watson moved out. Keith Watson continued to live in the home. After she left in 1991, Elizabeth Watson did not have a key to the home. Nonetheless, by Keith Watson's account, Elizabeth Watson "took care of" payment of real estate taxes on the property, while he paid the homeowner's insurance premiums. Elizabeth Watson petitioned to dissolve the parties' marital relationship and a marriage dissolution hearing was held on December 28, 1993, more than two weeks before the fire. At the hearing, a dissolution of the Watsons' marriage was granted, but the dissolution decree was not filed until January 31, 1994, 18 days after the fire. The record shows that both parties were experiencing some financial difficulties at the time of the fire.

Elizabeth and Keith Watson were named insureds on a homeowner's insurance policy issued by USAA, which policy covered the mobile home and its contents. The policy provided coverage of up to $27,800 for the dwelling, $27,800 for personal property, and $5,560 for loss of use. After the fire, the Watsons prepared a loss report. They provided the report to USAA on January 14, 1994. That same day, USAA inspected the loss site and advanced the Watsons $10,000 pursuant to the policy. ¹

Elizabeth Watson subsequently submitted a claim to USAA for further insurance proceeds under the policy. ² USAA then conducted an investigation of the fire. As part of the investigation, USAA elicited two statements from Keith Watson in which he stated that he was in Aitkin, Minnesota on a construction job during the time of the fire. He denied intentionally starting the fire or arranging to have the fire set. USAA, however, determined that the fire involved arson. USAA based its conclusion upon the elimination of all accidental sources of ignition, the pattern and progress of the fire, and the presence of kerosene in one of the carpet and padding samples taken from the living room of the home. Accordingly, USAA denied Elizabeth Watson's claim for insurance proceeds under two provisions in the policy which excluded coverage for intentional acts and concealment or fraud relating to the policy. The "intentional loss" provision contains the following language:

SECTION I--EXCLUSIONS

We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

* * * * * *

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.

(Emphasis added.) The "concealment or fraud" provision of the policy contains the following language:

SECTIONS I AND II--CONDITIONS

* * * * * * 2. Concealment or Fraud. The entire policy will be void if an insured has:

a. before a loss, willfully; or

b. after a loss, willfully and with intent to defraud;

concealed or misrepresented any material fact or circumstance relating to this insurance.

(Emphasis added.)

Following the denial of coverage, Elizabeth Watson served a complaint upon USAA alleging that USAA in bad faith failed to pay her benefits in the amount of $58,300. USAA filed an answer denying liability for the loss under the terms of the policy and under Minn.Stat. § 65A.01, subd. 3 (1996), the Minnesota standard fire insurance policy. USAA alleged that its policy did not cover a loss caused by the insured; that its policy was void or voidable due to material misrepresentations relating to the insurance; and that its policy was void or voidable and/or the loss was not covered because the risk of hazard of loss was increased. See Minn.Stat. § 65A.01, subd. 3 (excluding coverage for losses occurring "while the hazard is increased by any means within the control or knowledge of the insured"). USAA also counterclaimed for the return of the $10,000 it had advanced to Elizabeth and Keith Watson, plus costs and disbursements. USAA subsequently filed a motion to join Keith Watson as a plaintiff in the action brought by Elizabeth Watson, which motion was granted by the district court.

A jury trial was held from October 17 to 19, 1995. USAA presented the testimony of a specialist in fire debris analysis who had analyzed four samples of burned carpet and padding that were taken from the Watsons' mobile home. The specialist testified that of the four samples, only one revealed the presence of any ignitable liquid residue. The specialist recognized that residue as having the characteristics of burned kerosene. Elizabeth Watson also testified at trial, and stated that she was at her father's home in Nisswa at the time of the fire.

The jury returned a special verdict on October 19, 1995. The jury was asked to determine whether the fire at the Watsons' home was an incendiary fire (intentionally set), and found that the fire was incendiary in origin. The jury also found that Keith Watson had participated in, arranged for, or aided or abetted the setting of the fire. ³ The jury further found that Keith Watson had willfully and with intent to defraud, concealed or misrepresented to USAA material facts or circumstances concerning this loss. The jury was not asked to decide whether Elizabeth Watson was an innocent insured.

The district court filed its findings, conclusions, order, and memorandum on October 20, 1995. The court found that Elizabeth and Keith Watson's home had been damaged in the amount of $26,500 for the loss of dwelling and $13,000 in personal property loss. The court also found that under the USAA insurance policy, losses are not insured when the loss arises out of any act " 'by or at the direction of an insured.' " (Emphasis added.) The court then found that the fire had been caused by or at the direction of Keith Watson, an insured. Based upon these findings, the court concluded that the USAA policy did not cover the Watsons' loss, and dismissed the action. The court awarded USAA costs and disbursements against Keith Watson, but did not award costs and disbursements against Elizabeth Watson.

In its accompanying memorandum of law, the district court stated that it had entered judgment in favor of USAA "reluctantly" and urged reversal on appeal. The court stated that it "feels compelled to follow Minnesota precedent" set by Reitzner v. State Farm Fire and Cas. Co., Inc., 510 N.W.2d 20 (Minn.App.1993), under which an innocent co-insured may be excluded from coverage if the terms of the insurance policy are clear and unambiguous. The court pointed out that public policy favored coverage of innocent co-insureds in this situation. The court also noted that Elizabeth Watson had the expectation of coverage and had no way to separate herself from the loss caused by Keith Watson. The court observed that it was a "gross miscarriage of justice" to allow USAA to "escape" coverage to Elizabeth Watson.

On November 2, 1995, USAA moved for an order granting judgment against both Elizabeth Watson and Keith Watson, jointly and severally, for the $10,000 advancement. USAA also moved to amend the district court's order to provide for an award of costs and disbursements against Elizabeth Watson. On December 1, 1995, the court filed its amended findings, conclusions, order, and memorandum. The court ordered Elizabeth Watson to pay USAA costs and disbursements...