PIERRE, S.D. (Legal Newsline) - The South Dakota Supreme Court has affirmed that an "innocent insured" cannot collect her share of an insurance claim due to the conviction of her co-insured husband in connection with the arson of their business.
Justice Steven L. Zinter authored the Dec. 19 opinion of the unanimous court.
Ila and Gary Fedderson owned and operated restaurant and bowling business, Whiskey Flow, in Howard, S.D.
In August 2008 they purchased an insurance policy from Columbia Insurance Group which covered damage by fire but contained a "Concealment or Fraud Condition" which would void the insurance contract if "any insured intentionally concealed or misrepresented a material fact or committed fraud or false swearing in connection with the policy."
After Whiskey Flow was destroyed by fire in September 2008, the Feddersons submitted a $1 million claim to Columbia.
"In their proof of loss statement, the Feddersons swore that an '[u]nknown party started [the] fire.' Ila and Gary also swore that '[t]he ... loss did not originate by any act, design or procurement on the part of your insured, or this affiant ...'"
Gary Fedderson, after the proof of loss statement was submitted, was convicted of conspiracy to commit arson and insurance fraud in connection with the fire.
Columbia declined to pay the claim ,and Ila Fedderson filed suit to gain the portion of the claim that related to her 50 percent interest in Whiskey Flow.
Ila Fedderson claimed she was an "innocent insured," so Gary Fedderson's actions did not void the policy as to her interests in the business. However, the circuit court granted Columbia's motion for summary judgment. Ila Fedderson then appealed.
Ila Fedderson argued on appeal that the fraud condition in the contract did not apply because Gary Fedderson was not an "insured" as Whiskey Flow was the named insured in the policy.
"Ila's theory of recovery is premised on both Gary's and her status as insureds," Zinter wrote. "Ila and Gary signed the proof of loss statement as 'insureds.'
"The Whiskey Flow business entity was insured as an 'Individual.' The policy provided that when the insured business entity was denominated as an "Individual," then "you [Ila] and your spouse [Gary]" are the 'insureds' with respect to the business. Therefore, Gary was an 'insured' within the meaning of the 'any insured' language in the fraud condition."
Ila Fedderson also argued that "the fraud condition does not indicate whether a co-insured's liability for fraud is joint or several ... that we should adopt the several liability view because Columbia's fraud condition is ambiguous on the joint versus several liability question."
"In this case," Zinter wrote, "the insurance company explicitly voided the policy if 'any insured' misrepresented a material fact or committed fraud relating to the policy. The language is unambiguous.
"Because the language in Ila's policy unambiguously voided the policy for fraud or misrepresentation by 'any insured,' we need not engage in general joint versus several liability analysis. Under Columbia's condition, Ila was specifically responsible for Gary's fraud."
Finally, Ila Fedderson argued she was entitled to recover under the "Control of Property Condition" in the contract which allowed that "any act or neglect of any person other than you beyond your direction or control will not affect this insurance."
She argued that because she was not involved in the arson and Gary Fedderson's acts were not taken at her direction and control then the control of property condition either affirms her right to recover or, at least, crates an ambiguity due to the conflict between the control or property condition and the fraud condition.
Zinter replied, "Ila's argument, which assumes that the word 'you' only includes her, ignores the indisputable fact that there are other insureds under the policy. And because the act or neglect in question was not attributed to a person or entity other than [an insured], the Control of Property provision simply does not apply ...
"Further, no conflict or ambiguity existed between the control of property and the concealment or fraud conditions. Under both conditions, co-insureds were contractually responsible for the acts of the other co-insureds.
"Gary's misrepresentation and fraud voided the policy. We affirm the circuit court's grant of Columbia's motion for summary judgment."