Barbara Streit v. Metropolitan Casualty Insuran

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-3203
BARBARA STREIT and
WESLEY STREIT,
Plaintiffs-Appellees,
v.
METROPOLITAN CASUALTY
INSURANCE COMPANY,
Defendant-Appellant.
____________________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 15 cv 2461 — Sharon Johnson Coleman, Judge.
____________________
ARGUED DECEMBER 6, 2016 — DECIDED JULY 17, 2017
____________________
Before WOOD, Chief Judge, ROVNER and SYKES, Circuit
Judges.
SYKES, Circuit Judge. On August 5, 2014, Wesley Streit Jr.
set fire to the house where he lived with his parents, Barbara
and Wesley Streit. At the time of the fire, the Streits’ home
was insured by Metropolitan Insurance Company. Under the
Streits’ insurance policy, Wesley Jr.’s act of arson triggered a
2 No. 16-3203
contractual exclusion of coverage. The Streits still submitted
a claim, but pursuant to the policy’s language, Metropolitan
refused to cover the fire damage. Barbara and Wesley Streit
sued, claiming that the exclusion in the Metropolitan policy
was inconsistent with the Illinois Standard Fire Policy. The
district court granted partial summary judgment in favor of
the Streits, ruling that the Metropolitan policy impermissibly
narrowed the coverage mandated by the Illinois Standard
Fire Policy. We affirm. The Illinois Standard Fire Policy sets a
minimum threshold for what fire-insurance policies must
cover, and Metropolitan failed to provide that coverage.
I. Background
Metropolitan Casualty Insurance Company issued a
homeowner’s insurance policy to Barbara and Wesley Streit
that was effective from November 25, 2013, to November 25,
2014. The policy insured the Streits’ home against risk of fire
damage but contained an exclusion for losses arising from
intentional actions by the policyholders.
The excluded events are listed below:
A. Intentional Loss, meaning any loss arising
out of any intentional or criminal act commit-
ted:
1. by you or at your direction; and
2. with the intent to cause a loss.
This exclusion applies regardless of whether
you are actually charged with or convicted of a
crime.
In the event of such loss, no one defined as you
or your is entitled to coverage, even people de-
No. 16-3203 3
fined as you or your who did not commit or
conspire to commit the act causing the loss.
The policy goes on to define “you” and “your” as:
[T]he person or persons named in the Declara-
tions and if a resident of the same household:
A. the spouse of such person or persons;
B. the relatives of either; or
C. any other person under the age of twenty-
one in the care of any of the above.
On August 5, 2014, Wesley Jr. committed an intentional
act, which caused a loss, by setting fire to his parents’ home.
(He has since pleaded guilty to a charge of aggravated
arson.) Because he is the son of Barbara and Wesley and
resided in their household at the time of the fire, Wesley Jr.
was a “you” or “your” as defined by the insurance policy. So
when the Streits submitted a claim to Metropolitan under
the policy for losses and damages resulting from the arson,
Metropolitan refused to pay.
The Streits sued Metropolitan in the Northern District of
Illinois based on diversity jurisdiction. See 28 U.S.C. § 1332.
Although the insurance policy itself excludes coverage for
their son’s intentional act, the Streits argued that such an
exclusion conflicts with the Illinois Standard Fire Policy—a
standard baseline policy promulgated by the Illinois Direc-
tor of Insurance pursuant to statutory authority. The Streits
moved for partial summary judgment, which the district
judge granted. The judge held that the Metropolitan policy
must conform to the Standard Fire Policy but that a material
question of fact remained as to whether the Streits played
any role in directing or consenting to their son’s arson. The
4 No. 16-3203
Streits and Metropolitan then stipulated that the Streits were
innocent of any wrongdoing related to the fire, and based on
that stipulation, the court entered judgment in favor of the
Streits in the amount of $235,000. Metropolitan appealed.
II. Analysis
Under Illinois law the Director of Insurance is required to
“promulgate such rules and regulations as may be necessary
to effect uniformity in all basic policies of fire and lightning
insurance issued in this State, to the end that there be con-
currency of contract where two or more companies insure
the same risk.” 215 ILL. COMP. STAT. 5/397 (1978). Pursuant to
this authority, the Director of Insurance promulgated the
Illinois Standard Fire Policy.
The Standard Fire Policy insures “against all direct loss
by fire … , except as hereinafter provided.” Standard Fire
Policy, at 1, http://insurance.illinois.gov/prop_cas_is3_
checklists/statutes/StandardFirePolicy.pdf (capitalization
omitted) (last visited July 17, 2017). The Policy provides the
following express limitations on coverage:
This Company shall not be liable for loss by
fire or other perils insured against in this poli-
cy caused, directly or indirectly by: (a) enemy
attack by armed forces, including action taken
by military, naval or air forces in resisting an
actual or an immediately impending enemy at-
tack; (b) invasion; (c) insurrection; (d) rebellion;
(e) revolution; (f) civil war; (g) usurped power;
(h) order of any civil authority except acts of
destruction at the time of and for the purpose
of preventing the spread of fire, provided that
No. 16-3203 5
such fire did not originate from any of the per-
ils excluded by this policy; (i) neglect of the in-
sured to use all reasonable means to save and
preserve the property at and after a loss, or
when the property is endangered by fire in
neighboring premises; (j) nor shall this Com-
pany be liable for loss by theft.
Id. at 2, lines 11–24.
The Standard Fire Policy also lists conditions that sus-
pend insurance coverage. These include losses occurring
(a) while the hazard is increased by any means
within the control or knowledge of the insured;
or
(b) while a described building, whether in-
tended for occupancy by owner or tenant, is
vacant or unoccupied beyond a period of sixty
consecutive days; or
(c) as a result of explosion or riot, unless fire
ensue, and in that event for loss by fire only.
Id. at 2, lines 31–37.
Though the Illinois Supreme Court has yet to address the
question, both the statutory text and Illinois appellate courts
make clear that in the event of a conflict between an insur-
er’s policy and the Standard Fire Policy, the latter controls.
The Director of Insurance is required by statute to promul-
gate rules and regulations “to effect uniformity” among fire-
insurance policies and to ensure “that there be concurrency
of contract.” § 397. “Rules and regulations promulgated
pursuant to authority delegated by specific provisions of the
Insurance Code have the force of statute.” Lundquist v.
6 No. 16-3203
Allstate Ins. Co., 732 N.E.2d 627, 630 (Ill. App. Ct. 2000)
(citing Margolin v. Pub. Mut. Fire Ins. Co., 281 N.E.2d 728, 733
(Ill. App. Ct. 1972)); cf. Williams v. New York Cent. R.R. Co.,
84 N.E.2d 399, 403 (Ill. 1949) (“The rules adopted by the
Interstate Commerce Commission in the exercise of its
authority to set standards of equipment are an integral part
of the act and have the force of the statute.”). Furthermore,
“[a]ll policies written in the State of Illinois must conform to
the requirements of the Standard Policy.” Lundquist,
732 N.E.2d at 630 (citing ILL. ADMIN. CODE tit. 50, § 2301.100
(1961)); see also D’Agostino v. #7 Zimmie’s, Inc., 77 F. Supp. 3d
719, 727 (N.D. Ill. 2014) (“[T]he [Illinois Administrative]
Code provisions can clarify statutory law … .”).
The coverage provided by the Metropolitan policy fails
to conform to that required by the Standard Fire Policy.
Under the Metropolitan policy, an intentional loss caused by
any insured party suspends coverage for all insured par-
ties—even those who were innocent of any wrongdoing. By
contrast, the Standard Fire Policy suspends coverage if “the
hazard is increased by any means within the control or
knowledge of the insured.” Standard Fire Policy, at 2, lines 31–
32 (emphasis added).
The term “the insured” is not defined in the Standard
Fire Policy. But as noted by many states interpreting identi-
cal language, the inclusion of the word “the” as opposed to
“an” serves as a limitation. See, e.g., Osbon v. Nat’l Union Fire
Ins. Co., 632 So. 2d 1158, 1159–60 (La. 1994) (“[T]he phrase
‘the insured’ refers to a specific insured, namely, the insured
who (1) is responsible for causing the loss and (2) is seeking
to recover under the policy.”). If one insured party commits
an intentional harm but another insured party is innocent of
No. 16-3203 7
any wrongdoing, then the insurance coverage is suspended
only as to the insured who caused the loss. An innocent
coinsured may still recover. See Icenhour v. Cont’l Ins. Co.,
365 F. Supp. 2d 743, 751 (S.D. W. Va. 2004) (“The Standard
Policy exclusion, as construed, permits an innocent co-
insured to recover policy proceeds even when a fellow
insured engages in arson that destroys the insured property
and premises.”); Century-Nat’l Ins. Co. v. Garcia, 246 P.3d 621,
624 (Cal. 2011) (explaining that identical language found in
California’s Standard Policy “protect[s] the ability of inno-
cent insureds to recover for their fire losses despite neglect-
ful or intentional acts of a coinsured); Trinity Universal Ins.
Co. v. Kirsling, 73 P.3d 102, 106 (Idaho 2003) (“The great
weight of persuasive authority shows that courts have found
language referring to ‘the insured,’ such as that found in the
standard policy exemptions, provides coverage to an inno-
cent co-insured.”); Nangle v. Farmers Ins. Co. of Ariz., 73 P.3d
1252, 1257 (Ariz. Ct. App. 2003) (“The increased hazard
provision in Arizona’s Standard Policy, by using the term
‘the insured’ rather than ‘any insured’ or ‘an insured,’
evidences an intent to allow recovery by innocent coin-
sureds.”); see also Volquardson v. Hartford Ins. Co. of the Mid-
west, 647 N.W.2d 599, 609 (Neb. 2002); Lane v. Sec. Mut. Ins.
Co., 747 N.E.2d 1270, 1272 (N.Y. 2001); Watson v. United Servs.
Auto. Ass’n, 566 N.W.2d 683, 691 (Minn. 1997); Osbon, 632 So.
2d at 1160; Borman v. State Farm Fire & Cas. Co., 521 N.W.2d
266, 268–70 (Mich. 1994); Fireman’s Fund Ins. Co. v. Dean,
441 S.E.2d 436, 438 (Ga. Ct. App. 1994).
Under the Illinois Standard Fire Policy, Wesley Jr.’s in-
tentional act of arson suspended insurance coverage only as
to him. Barbara and Wesley Streit may still recover. Any
8 No. 16-3203
attempt by Metropolitan to proscribe their recovery is
invalid and unlawful.
Despite Metropolitan’s contentions to the contrary, this
understanding of the Standard Fire Policy is not jeopardized
by any public policy concerns. True, Illinois public policy
holds that an agreement “to indemnify against willful
misconduct would, as a general rule, be … unenforceable.”
Davis v. Commonwealth Edison Co., 336 N.E.2d 881, 885 (Ill.
1975). This is rooted in the common-sense principle best
stated by Judge Cardozo: “[N]o one shall be permitted to
take advantage of his own wrong.” Messersmith v. Am. Fid.
Co., 133 N.E. 432, 433 (N.Y. 1921). But under the Standard
Fire Policy, the insured does not recover damages caused by
his own wrong. 1 The Standard Fire Policy suspends cover-
age for loss occurring “while the hazard is increased by any
means within the control or knowledge of the insured.”
Standard Fire Policy, at 2, lines 31–32. Both public policy and
the Standard Fire Policy prevent an insured party from
intentionally destroying his property in order to reap the
insurance profits. Barbara and Wesley Streit do not seek
insurance coverage for damage caused by their own inten-
tional actions but rather for the intentional actions of some-
1 According to Metropolitan, the district court’s understanding of the
Standard Fire Policy violates public policy. In support Metropolitan
quotes from the district court’s opinion: “Nowhere does the Standard
Policy exclude coverage for intentional conduct, including arson, and
therefore fires caused by intentional conduct must be covered … .” But
Metropolitan cuts off the most crucial part of that sentence: “[F]ires
caused by intentional conduct must be covered if all other conditions are
met.” One of these “other conditions” that must be met is that the hazard
may not be caused or increased by the insured.
No. 16-3203 9
one else—their son. This does not conflict with Illinois public
policy.
Finally, the Standard Fire Policy’s treatment of innocent
coinsureds is not foreclosed by any Illinois statute. The only
statute cited by Metropolitan that even mentions innocent
insureds provides the following:
(a) No company issuing a policy of property
and casualty insurance may use the fact that an
applicant or insured incurred bodily injury as a
result of a battery or other violent act commit-
ted against him or her by a spouse or person in
the same household as a sole reason for a rat-
ing, underwriting, or claims handling decision.
(b) If a policy excludes property coverage for
intentional acts, the insurer may not deny
payment to an innocent co-insured who did
not cooperate in or contribute to the creation of
the loss if the loss arose out of a pattern of
criminal domestic violence and the perpetrator
of the loss is criminally prosecuted for the act
causing the loss. …
215 ILL. COMP. STAT. 5/155.22b (2004).
This statute creates a baseline rule that applies to all
types of insurance policies, not just fire insurance. It pro-
vides guidance if a policy excludes coverage for intentional
acts. It does not explain when a policy must (or must not)
exclude coverage for intentional acts. This question, left
open by the statute, is answered by the Standard Fire Policy:
The Standard Fire Policy suspends coverage for intentional
10 No. 16-3203
losses only as to the acting insured. Coverage for innocent
insureds like Barbara and Wesley remains intact.
Because the Metropolitan policy fails to provide the min-
imum coverage outlined in the Standard Fire Policy, the
judgment of the district court is
AFFIRMED.