Insurance policies typically exclude coverage for certain events or circumstances. The exclusionary language, however, must be clear and explicit. In addition, if the insurance claims coverage for an event or occurrence involving the exclusionary language, the burden is on the insurance company to demonstrate that the exclusion applies to the insured’s circumstances. If there is any ambiguity in the insurance contract requiring interpretation of the meaning, the court will adopt the meaning most favorable to the insured. In a recent case, the court was required to interpret whether an innocent insured was precluded from recovering under her homeowner’s policy when her estranged husband burned down their house in his third suicide attempt. The Court had previously reviewed the issue in the case in Sager v. Farm Bureau Mutual Insurance Company, 680 N.W.2d 8 (Iowa 2004).
The plaintiff owned her home in joint tenancy with her estranged husband. After several tumultuous decades of domestic abuse, the plaintiff finally told her husband that she was leaving him. She had plans to return to the home after divorcing her husband, but until the divorce was final, he remained in the marital home. Because of the break-up, the husband unsuccessfully attempted to commit suicide. A few days later, in a second attempt to commit suicide, he poured gasoline throughout the house and set fire to the home. He died a few days after the fire.
The plaintiff and her husband were both named insureds under their homeowner’s policy that was purchased in 1989. The premiums were paid up, and the plaintiff filed a claim with the insurance company to cover the loss. An insurance inspector visited the home and determined that the cause of the fire was arson. It was undisputed that the plaintiff was not involved in setting the fire, but because the fire was intentionally set by one of the policyholders, the plaintiff’s personal claim was denied.
Previously, the Iowa Supreme Court held in Sager that based on the standard policy language required under Iowa statute, the insurance company could not exclude coverage when “the insured” caused an intentional loss so as to exclude an innocent co-insured from recovering under the policy. But, after that decision, the Iowa legislature amended the required language in Iowa’s standard fire insurance forms to provide an exclusion from coverage when “an insured” or “any insured” caused an intentional loss. The question is whether the amended language was intended only to bar an insured from recovering for the intentional damage or destruction to the insured property caused by that insured person, or whether the language was intended to bar recovery by any insured when any other insured intentionally damaged or destroyed the insured property.
Litigation around the issue originally started when the bank brought a foreclosure action against the plaintiff. The plaintiff, in answering the foreclosure petition brought a third-party action against the insurance company for coverage. The insurance company paid the balance of the mortgage to the mortgage company under the mortgagee clause of the policy. The claims by the plaintiff for payments over and above the mortgage balance were denied. Both the insurance company and the plaintiff brought competing summary judgment motions. The district court denied both parties’ motion stating that the Sagercase controlled and the plaintiff had insurance coverage as an innocent insured. At trial over the issues, a different trial court judge ruled
that the plaintiff, even as an innocent co-insured, could not collect under the insurance policy. The plaintiff appealed.
Upon review, the Iowa Supreme Court reviewed the requirements that the insurance company had to prove for the exclusion to be effective. The first was that there had to be an intentional loss. There is little dispute that an intentional loss was proven because the plaintiff’s husband poured gasoline throughout the house, turned on the stove, and lit the fire. This caused extensive damage to the home. The insurance company also had to prove the act was done by or at the direction of a named insured. The husband was also one of the named insureds on the insurance policy, and he committed the actions causing the damage. He admitted to friends who talked to him immediately before the fire what he had done, and he recounted his actions to emergency personnel when he was in the emergency room.
The plaintiff argued that her husband had intended to commit suicide, but his actions were not intentional in damaging the home, but the court stated that in the husband’s intention to commit suicide, he took intentional acts that caused damage to the home.
The court held that the exclusion under the policy did apply to the plaintiff’s situation. The plaintiff argued that she should recover under the policy as an innocent spouse, that a severability clause in the policy meant she had different interests than her husband, and that under the reasonable expectations doctrine, she should recover for her loss. The court rejected each of these arguments.
The court held that under Iowa precedent the use of the words” any insured” in the policy is an unambiguous phrase precluding coverage for all insureds. The court also reiterated Iowa’s long-standing principle that the policy’s severability-of-interest clauses have no effect on insurance policy exclusions. The Court also held that the plaintiff had no reasonable expectation that her policy would cover this event because a reasonable person understands that “an insured” in an exclusion bars coverage for all insureds.
Finally, the court reviewed the plaintiff’s policy in the context of the minimum fire coverage required under Iowa law as had been done in the Sager case. The court noted that during the next legislative session after the Sager case, the legislature replaced the language that permitted an innocent co-insurer to recover under the minimum policy requirements. The court held that it is “clear from the timing of the amendments and the explanation of the bill that the legislature intended to amend section 515.109, narrow the intentional acts that are compensable under the standard policy, and overrule our holding inSager.” Because of these legislative changes, the court affirmed the lower court’s decision and held that the insurance company properly denied coverage to the plaintiff under the intentional loss exclusion.
The legislative language at issue was actually included in an Omnibus Bill enacted at the end of the session with no debate. It is probably a stretch for the Court to assume that the legislature knew about the Sager opinion and changed the law because of it. Nonetheless, the legislature did change the language.
The Court’s opinion may have broader implications. Insurance policies are non-negotiable “adhesion” contracts, which is why when language in the contract is ambiguous, the court will interpret the language to favor the insured. In this case, however, the Court held that the exclusion language was clear and that the changes made to the standard insurance policy in Iowa had been changed by the legislature. The Court believed that change resulted in an innocent co-insured not being able to recover.
Perhaps a more serious problem with the decision is the impact it could have on property ownership and insurance coverage. If an innocent insured can be completely dispossessed of their property interest in insured property by the intentional acts of any other insured, the lesson for each person is to insure their respective interests. This is less of a problem in community property states. In those states, the caselaw on the insurance issue generally protects the one-half interest of an innocent spouse in community property.
In any event, if the legislature did not intend to change the language of the standard insurance policy to create an opposite outcome from Sager, then the legislature needs to revise the prior change to make it clear to the Court their legislative intent. Postell v. American Family Mut. Ins. Co., No. 12-0098, 2012 Iowa Sup. LEXIS 102 (Iowa Sup. Ct. Nov. 16, 2012).