Innocent co-insured persons who have not done anything wrong risk losing their insured benefits when they are insured by Liberty Mutual. This may seem like an unfair criticism of me since Liberty Mutual won the watch case. But in the moment of truth, every insurer must make a claims decision that shows whether it is a customer-friendly insurer or one that will use a sharp policy language to give a hard result to its customers. Unfortunately, Liberty Mutual showed its true colors in this latest case.1
Facts from Liberty Mutual’s card read:
On August 30, 2018, a home owned by plaintiffs Christina Taylor and Donald Taylor (collectively, “plaintiffs”😉 was damaged by fire. The fire started when the Plaintiff’s adult daughter, Zoe, intentionally set fire to the bed spread of Plaintiff’s bed in the bedroom. Zoe started the fire after getting angry at her father because of an argument they had earlier in the day. Zoe used a lighter to ignite the bedspread to upset her father.
After starting the fire, Zoe tried unsuccessfully to put it out herself. But the fire eventually spread from the top of the bed and caused damage to other parts of the home. When the fire spread, Zoe went out and called the fire department to respond to the scene. Although Zoe initially denied it, she later admitted that she started the fire in the home. (quotes omitted)
The rest of the facts contained in the policyholder’s card show:
Christina and Donald Taylor (hereafter Taylor) owned a home at 301 S. Summit Street, El Dorado, Kansas. Taylor’s 18-year-old daughter, Zoe, lived with her parents.
Earlier in the day, on August 30, 2018, Zoe had an argument with her father. When her parents were away, Zoe used a lighter to burn a blanket on her dad’s side of the bed. She did this to upset her father, not to cause a loss. Zoe stated that she did not intend to start a fire and before the fire damaged anything other than the blanket, she thought she had extinguished the fire.
When Zoe realized that a fire was spreading, she went out and called the fire brigade. Initially, Zoe denied having started the fire. Zoe later admitted that “she did not plan to start the fire and became frightened when the fire started.” When Zoe was asked if she did it on purpose, she said “she was going to burn the blanket on her dad’s side of the bed for fun, because she was upset with him,” and after putting out the fire and leaving the room, she realized the fire was not off.
… During the adaptation process, Liberty Mutual became aware of the following facts:
• Zoe had medical problems;
• Zoe took Prozac or similar medicine;
• Zoe was treated with seizure medication related to a form of epilepsy;
• Zoe took mind-altering medicine;
• Zoe had been hospitalized for 15 days the month before the fire started and
took new medications;
• the Taylor family was concerned about Zoe’s mental state; and,
• Donald did not believe that Zoe’s actions when he started the fire were intentional
due to her mental illness. (Quotes excluded)
Zoe was not a named insured but was “insured” by definition because she was a resident relative of the named insured. There was no “for-profit arson” for the fire. Zoe was obviously a mentally anxious 18-year-old.
The policy contained the following exceptions:
h. Intentional loss, which means any loss that arises as a result of an act committed:
(1) By or on behalf of an “insured”; and
(2) Intended to cause loss.
The Federal Court of Appeals analyzed Kansas law and found that Liberty Mutual could deny the fire loss during this exclusion:
[T]he Taylors claims that … it is not clear that even though Zoe intended to light the bedspread on fire, she thought it was “substantially certain” that the fire would damage the house. In all cases, ‘[i]t is not necessary. . . that the damage is of the same nature and magnitude as it intended.’… As long as Zoe intended to start the fire and understood that the fire would damage the bedspread, the exception applies.
Zoe’s medical history does not change the outcome in this case. Kansas recognizes a presumption of reason that the Taylor family must refute. Shelter Mut. Ins. Co. v. Williams fd rel. Williams, 804 P.2d 1374, 1383 (Kan. 1991). There is no evidence in the medical record that Zoe experienced a seizure or suffered from side effects from a previous seizure during the incident. In addition, there is no evidence that Zoe’s medication disturbed her basic understanding of the nature and consequences of the fire. No reasonable jury member could conclude that Zoe was unaware that igniting a bedspread would cause it to burn.
The Taylors argue that the phrase “intent to cause a loss” in the exclusion is ambiguous because it “depends on the nature of the property or the use of the property.” The Taylor family points to an example of a candle that causes accidental fire damage to a home, a loss that everyone agrees would be covered by the policy. Id. The Taylors claim that ‘[i]If an ordinary person needs to agree with the nature of the property, it is unclear to understand the exception. In addition, the Taylor family claims that the exemption is ambiguous because it does not specify that the exemption only applies to “covered property.”
These distinctions are artificial. As discussed above, intent with the Thomas test is defined. Given the function of a candle, an insured usually does not intend to cause damage by lighting it. Rather, the value of the light depends on its burning. An insured’s use of the light does not cause harm to the insured. Finally, the exception does not require that the addition of the phrase “to covered property” be clear. If the property was not already covered, no exception would be needed.2
This case indicates that under Kansas law and the language of this policy, innocent insured persons can have their benefits denied by another insured person’s wrongdoing – even one insured person by definition.
This is not the case in all states, and the analysis must be made on the basis of a policy formulation. An excellent article written on the subject, The battle between the courts and the coverage – How to deal with the innocent co-insured,3 said:
As lawyers, we are trained from the beginning of our law education to analyze the meaning of the written word. We are also tasked with ensuring that all documents we prepare clearly define each party’s responsibilities and obligations. A poorly worded phrase or sentence or misplaced word can dramatically change an individual’s rights under a contract.
There is no principal in any area of insurance law [sic] more obvious than the issue of coverage for the innocent co-insured. The insured’s right to recover and the carrier’s right to refuse coverage are often determined by a word of two or three letters preceding the word insured. For example, whether a wife, who is completely innocent of her husband’s attempt to burn down their home, has any rights to recover under the homeowner’s policy can be determined by the words “an”, “it” or “someone”.
Seventy years ago, when courts were asked to determine an insurance company’s obligation towards an innocent co-insured, they assumed that the insurance contract was considered joint. The innocent co-insured could not recover in most cases where an insured committed an excluded act. See Leane English Cervin, The Problem of the Innocent Co-Insured Spouse: Three Theories on Recovery, 17 Val. UL Rev. 849, 857 (1983); Matyuf v. Phoenix Insurance Co., 27 Pa.D & C2d 351 (1933). According to the old view, the courts assumed that the phrase “the insured” meant the named insured and that it meant the same thing throughout the contract. The old view was based on ancient concepts, such as marital unity and tenancy in its entirety. It was a harsh and unfair rule because it denied coverage in almost all circumstances.
In response to the harshness of the old rule, another doctrine was developed. This doctrine was called the “theory of rebuttable presumption” and enabled the innocent co-insured spouse to disprove the presumption of a joint obligation by proving that his / her interest in the property was separable. Hoyt v. New Hampshire Fire Insurance Co., 92 NH 242, 29 A.2d 121 (1942). The innocent co-insured spouse had the obligation to show a separable interest in the insured property. However, the shortcoming in the theory of rebuttable presumptions was essentially the same as in the old rule: it was based on a connection between joint ownership of the property and a common contractual obligation. This analysis, based on a property motive, ignored the scope of the parties’ rights and obligations under the insurance contract.
Instead of the nerdy exercise of analyzing this property insurance law on innocent insured, perhaps the best lesson from this case is to think about the type of insurer you are buying your insurance from. Liberty Mutual did not have to deny this claim. Yes, they won, and their analysis proved to be correct in a court of law. For many of us in the insurance industry, the decision to reject claims really shows what kind of company Liberty Mutual is currently and something about its claims culture. They should make it an advertised example of what you can expect if you insure with Liberty Mutual.
“Do not let your children play with matches” is a warning that has much more financial significance if your insurer is Liberty Mutual Insurance Company.
We have let our virginity leaf fade over time, and it is only in virginity that you will find some form of magic, some kind of courage.
– Sean Penn
1 Taylor v. LM Ins. Corp.no. 20-3166 (10th about July 11, 2022).
3 Jay Barry Harris, Emily L. Kaplan. The battle between the courts and the coverage – How to deal with the innocent co-insured.