A difficult situation is presented when an innocent co-insured/spouse has lost jointly-owned, insured property because a co-insured/spouse intentionally destroys it. By virtue of the fact that both spouses own the property and are entitled to the insurance proceeds to be paid, if any, a tension in public policy exists. Punishing the innocent spouse by complete forfeiture of policy proceeds is harsh, but allowing the culpable spouse to benefit from his or her wrong-doing provides improper, expensive, and dangerous incentives.
Texas law has historically viewed the stronger interest as punishment of the culpable spouse and held that when a co-insured or spouse destroyed jointly-owned, insured property the other co-insured or spouse, even if innocent, could not recover on the insurance policy. See Jones v. Fid. and Guar. Ins. Co., 250 S.W.2d 281, 283 (Tex. Civ. App.—Waco 1952, writ ref’d) (holding that an innocent spouse cannot recover on the policy where the other spouse willfully destroyed the insured property, even after a divorce made them tenants in common); Bridges v. Commercial Standard Ins. Co., 252 S.W.52 511, 512 (Tex. Civ. App.—Eastland 1952, no writ) (holding that an innocent spouse cannot recover where the other spouse willfully destroyed the property because either: (1) the property was the separate property of the culpable spouse or (2) the innocent spouse only had a homestead interest in the property, which is a joint-interest); Western Fire Ins. Co. v. Sanchez, 671 S.W.2d 666, 669-70 (Tex. Civ. App.—Tyler 1984, writ ref’d n.r.e.) (holding that an innocent spouse cannot recover on the policy where the other spouse willfully destroyed the property, even though the property was the separate property of the innocent spouse, because the culpable spouse had a homestead interest in the property). At the time Jones was adopted, it was the majority and traditional rule in the United States. Kulubis v. Texas Farm Bureau Underwriters Ins. Co., 706 S.W.2d 953, 954 (Tex. 1986). According to the Texas Supreme Court, the rationale for the Jones rule was to prevent fraudulent losses from being covered by fire insurance policies as a matter of public policy. Id. at 955 (citing Jones, 250 S.W.2d at 281-82). Although the Jones rule could be perceived as harsh to an innocent co-insured/spouse, by prohibiting any insurance recovery, the stronger public policy consideration was prevention of the wrongdoer from benefiting from his wrongful acts either directly or indirectly.
In recent years, courts in Texas have modified the Jones rule, generally now referred to as the “innocent spouse” doctrine, in an effort to balance public policy considerations. This modification began when the Texas Supreme Court decided Kulubis v. Texas Farm Bureau Underwriters Ins. Co., 706 S.W.2d 953 (Tex. 1986). In Kulubis, the husband and wife owned a mobile home that the wife’s parents gifted to them jointly after their marriage. The husband and wife insured the home in both of their names. Several years later when the wife served the husband with divorce papers, he burned the home and the personal property inside. The wife was innocent of any complicity in the arson. Under these facts the court re-examined the public policy behind the Jones rule and noted that since that rule’s adoption several other states had adopted a different rule. Id. at 954-55.
The new rule in other states was based upon the public policy that an innocent co-insured should be permitted to recover based upon the insured’s reasonable expectations about the meaning of the policy. Id. The Kulubis court also noted three other public policy considerations: (1) Prevention of fraud upon the insurance company; (2) prevention of unjust enrichment by the insurance company; and (3) refusal to impute the criminal acts of the wrongdoer to an innocent victim. Id. at 955. Based upon the trend in other jurisdictions and these public policy considerations, the Texas Supreme Court held that “the more enlightened reasoning dictates that the illegal destruction of jointly owned property by one co-insured shall not bar recovery under an insurance policy by an innocent co-insured.” Id. The Kulubis court held that this was in keeping with the reasonable expectations of an innocent co-insured and upheld all the other public policy considerations. Id. The Kulubis court also held that because the insured property was a gift made to each spouse, each spouse owned an undivided one-half interest of it as separate property. Therefore, by allowing the innocent spouse recovery of the insurance proceeds for her one-half as her separate property, neither the culpable spouse nor his community benefited.
Importantly, the facts presented in Kulubis do not offer guidance as to the more common community property issue. Because Texas is a community property state, spouses often own their most significant, insured property as an undivided interest in community property. Consequently, both spouses have an undivided interest in any insurance proceeds from the destruction of such property. Recognizing this problem, the Kulubis court specifically stated that it was not to be understood as either affirming or denying that community property would be treated the same way since those facts were not before it. Id. at 955.
After Kulubis, the Fifth Circuit addressed the “innocent spouse” doctrine under Texas law, first in Norman v. State Farm Fire and Casualty Company, 804 F.2d 1365 (5th Cir. 1986) and then again in Webster v. State Farm Fire and Casualty Company, 953 F.2d 222 (5th Cir. 1992). In both cases the Fifth Circuit declined to extend the Kulubis holding to community property because the court determined that the most important public policy consideration, since it involved public safety and morals, was that the wrongdoer not benefit from his or her own wrongdoing. Norman, 804 F.2d at 1366 (holding that the innocent spouse cannot recover on the policy where the other spouse willfully destroyed insured community property), Webster applied the old Jones ruling in a case where the property had already been divided prior to the lawsuit. Webster, 953 F.2d at 223 (holding that the innocent spouse cannot recover on the policy where the other spouse willfully destroyed insured community property, even though the property had been partitioned into separate property by the time of the lawsuit on the insurance contract).
In Travelers Company v. Wolfe, 838 S.W.2d 708 (Tex. App.—Amarillo, 1992, no writ), the Amarillo Court of Appeals addressed the “innocent spouse” doctrine and rejected Webster. In Wolfe, the husband destroyed their community property and the insurance company denied a claim for the loss. Subsequently, the divorce court granted the innocent wife a divorce and awarded her any rights she had under the insurance policy as her sole and separate property. The wife then sued the insurer. The Wolfe court refused to follow the factually similar decisions of the Fifth Circuit and instead decreed that its decision would be controlled by the Texas Supreme Court’s Kulubis decision and rationale. Id. at 711-12. Consequently, the Wolfe court seized upon the Kulubis court’s rationale and statement that “[w]e are not to be understood as holding that an innocent spouse is barred from recovering under an insurance policy covering community property.” Id. at 712 (citing Kulubis, 706 S.W.2d at 955). Accordingly, the court held that the innocent spouse could recover because at the time she “established her claim . . . her right to receive the proceeds . . . was her separate property by virtue of the final divorce decree” so the culpable spouse would not benefit. Id. at 712. The Texas appellate courts then became split on the issue when the Fort Worth Court of Appeals rejected Amarillo’s Wolfe opinion and instead aligned itself with the Fifth Circuit. In Chubb Lloyds Insurance Company of Texas v. Kizer, 943 S.W.2d 946 (Tex. App.—Fort Worth 1997, writ denied), the court noted that at all times pertinent to the case, the spouses were still married. Id. at 952. This fact, coupled with the court’s determination that the overriding public policy consideration was to prevent the wrongdoer from benefiting from his wrongdoing led to its decision that the innocent wife could not recover because it would benefit the community interest shared by the husband. Id.
The Texas Supreme Court changed its rationale but still supported the innocent spouse doctrine in its next review of the issue in Texas Farmers Ins. Co. v. Murphy, 996 S.W.2d 873 (Tex. 1999). Following the Wolfe court’s rationale, the appeals court held that the innocent spouse could recover because the community had been partitioned prior to trial. Id. Disagreeing with the appeals court’s bases for its holding, the Texas Supreme Court clarified its opinion in Kulubis by stating that implicit in that decision was a review of the insurance policy at issue, which did not contain terms that prevented a recovery by the innocent spouse in that case. Id. at 876. Therefore, the reasonable expectations of the innocent spouse were such that she should recover. Id. The Court stated that all cases addressing the issue since Kulubis shared a shortcoming, they focused on public policy without first evaluating the insurance policy language to determine the contractual rights of the parties. Id. at 878. The Court went on to note that the policy in question, like many Texas homeowners policies, contained a condition that barred coverage for “all insureds if any one of them commits a fraud or intentionally conceals or misrepresents a material fact.” Id. at 879. However, the insurer had failed to preserve this defense. Id. at 879-80. The court then reaffirmed the public policy that a culpable co-insured/spouse could not recover from his or her wrongdoing. Id. at 881. However, it also stated that innocent co-insureds/spouses should be allowed to recover their interests according to their contractual rights under the policy. Id. Therefore, while the ruling was unfavorable to the insurer in that particular case, subsequent insurers were given a guide as to how to reserve rights to prevent an innocent spouse from recovery.
The most recent case addressing the “innocent spouse” doctrine, McEwin v. Allstate Texas Lloyds, 118 S.W.3d 811 (Tex. App.—Amarillo 2003, no pet. h.), focuses on the same policy condition that the Texas Supreme court said would bar coverage for all insureds in Murphy, rather than public policy considerations. The McEwin court found the policy provision voiding recovery by both insureds in cases of fraud to be unambiguous under these facts. Id. at 815. Its terms were to be interpreted according to their plain meanings, in the absence of a definition. Id. The plain meaning or general “gist of fraud is successfully using cunning, deception or artifice to cheat another to the other’s injury.” Id. at 816. The fire and the husband’s loss report that failed to disclose that he intentionally started the fire caused the insurer to incur expenses and constituted fraud on the insurer. Id. Therefore, the clause voided the policy as to both insureds. Id.
In summary, while the law in Texas still seems to support an innocent spouse’s right to recover, in the absence of a contractual provision in a policy preventing recovery is enforceable. Therefore the onus is on insurers to make sure that their policies contain a provision.