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Sep 2014

The Massachusetts Appeals Court recently held that a dishonest/criminal acts exclusion in a first-party property insurance policy precluded all coverage – even for innocent co-insureds -- for fire damage intentionally caused by one of several insureds.

In USF Insurance Company v. Langlois, 86 Mass. App. Ct. 60 (2014), the Langlois Family Trust held legal title to certain real estate in Haverhill, which it leased to Smith’s Tavern of Haverhill, Inc. Four brothers of the Langlois family served as directors of the Smith’s Tavern Corporation. Two of the brothers, Robert and David, were also trustees of the Langlois Family Trust. The other two brothers, Richard J. and Bruce were, respectively, first and second successor trustees of the Trust. All four were named the beneficiaries of the Trust, as joint tenants with rights of survivorship.

In November 2010, Bruce set fire to the building, confessing that he did so out of animosity toward his estranged brothers. 

The insurance policy in effect at the time of the arson included as “Named Insureds” both the Langlois Family Trust and Smith’s Tavern of Haverhill, Inc. The policy contained an exclusionary provision stating that USF would not pay for loss or damage caused by “dishonest or criminal acts by you, any of your partners, members, officers, managers employees, directors, trustees, or anyone to whom you entrust the property for any purpose.”

The insurer, USF, brought a declaratory judgment action, asserting that coverage was excluded by the criminal acts exclusion.  The defendants conceded that the corporation was barred from recovery, as Bruce was a director of the corporation at the time he committed the arson, but argued that the Langlois Family Trust, as an “innocent coinsured”, should not be precluded from recovery.

The Court held that the case was controlled by a 1938 Massachusetts Supreme Judicial Court case, holding that “if the coinsured’s interests in an insurance policy are joint and nonseverable, the innocent coinsured may not recover fire insurance after the blamable coinsured intentionally burned the covered property.” Kosier v. Continental Ins. Co., 299 Mass. 601, 604 (1938).

In the present case, the Court held that the Trust’s and corporation’s interests were inextricably intertwined and, therefore, nonseverable. In so finding, the Court relied on the following facts: all four brothers were directors of the corporation; each shared a twenty-five percent (25%) interest; two of the four brothers were named trustees of the trust with the other two brothers listed as successor trustees; and all four brothers were named beneficiaries of the trust each holding joint interests with rights of survivorship.

The Court also relied on the language in the insurance policy, which excluded recovery for “loss or damage caused by anyone to whom you entrust the property for any purpose.” Because the trust entrusted the corporation with the care of the building, the exclusionary provision applied.

Ultimately, despite the technical “innocence” of the coinsured trust, the trust and the corporation were inextricably intertwined and Bruce’s unilateral actions left the entire insurance policy subject to the exclusionary provision such that the Langlois Family Trust was barred from recovery.

This case confirms the modern applicability of the rule first announced in the Kosier case over 75 years ago, i.e., that the an innocent coinsured’s entitlement to coverage under a fire insurance policy after another coinsured has intentionally destroyed the insured property generally depends upon whether the coinsureds’ interests in the property are joint or severable, coverage being unavailable where the coinsureds’ interests are considered joint and nonseverable. Interestingly (and sadly), the intentional burning down of a coinsured’s property apparently has happened with enough frequency over the years that this insurance coverage principle is the subject of an entire A.L.R. Annotation. See, “Right of innocent insured to recover under fire policy covering property intentionally burned by another insured”, 11 A.L.R.4th 1228. According to the A.L.R. Annotation the rule set forth in the Langlois decision is consistent with the majority view on the issue around the country.

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