No one in Grand Prairie, Weatherford, Fort Worth, Dallas, or anywhere else in the North Texas area would want to be in a situation where their spouse deliberately sets the house on fire. This is something that might happen in a divorce setting or maybe it is just the result of a really bad fight. So what happens as it relates to insurance?
A San Antonio Court of Appeals opinion issued in 1996, sheds some light on this question. Here is some background. The style of the case is Sanders v. Commonwealth Lloyd’s Insurance Company.
Jan and Dan Saunders’ house was completely burned down by a fire. The insurance company investigated the claim and concluded that Dan was responsible for setting the fire. Dan was convicted of a felony of conspiring to burn down the house which was later reversed and he was acquitted. In the meantime, the insurance company, Commonwealth Lloyd’s, denied the claim.
The innocent spouse, Jan Sanders, filed suit for breach of contract and bad faith against Commonwealth. In the trial of a breach of contract claim brought by Jan, the jury found that Dan was responsible for the arson fire that destroyed the house. Although Commonwealth treated Jan as an innocent spouse, it refused to pay any part of the claim because the house was community property. At the time of the claim denial, current law supported Commonwealth’s decision not to pay Jan any proceeds under the insurance policy. Later in 1993, when case law changed, Commonwealth agreed to pay Jan one-half of the available insurance proceeds, plus interest.
In the lawsuit where Jan sued for bad faith, Commonwealth filed a Motion for Summary Judgment which the trial court granted. Jan appealed.
In this case, this appeals court upheld the decision of the trial court rendering summary judgment for Commonwealth. In its holding, this court said that an insurance company that can prove that it possessed a reasonable basis for denying or delaying a claim for payment even if that basis is eventually determined to be erroneous enjoys immunity from statutory bad faith under the Texas Deceptive Trade Practices Act and under the Texas Insurance Code. In this case, Commonwealth had a reasonable basis to deny Jan’s claim as a matter of law. At the time of the claim, there was a United States Fifth Circuit case applying Texas law directly on point specifically holding that an innocent spouse could not recover insurance proceeds for her interest in the community property of the house destroyed by a fire that was intentionally set by or at the direction of the culpable spouse. Therefore, the insurance company, Commonwealth, possessed a reasonable basis for denying payment.
There are a couple of things relevant about this case.
One, is that the law changed while this case was pending. The law had been that if the fire was intentionally set by one of the insureds, then neither could recover under the policy of insurance. That law changed. The change allowed an innocent spouse to recover her portion of the proceeds. An example of how this would work is like this; if the house and contents are owned fifty / fifty by the husband and wife, then the innocent spouse would be entitled to the proceeds covering half the property.
Second, is that when the insurance company has a reasonable basis for denying or delaying payment of a claim, then they cannot be successfully sued for acting in bad faith in violation of the DTPA or the Insurance Code.
Last, is that an experienced Insurance Law Attorney needs to be consulted in these matters.
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