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Are home insurers thwarting
California laws?

By Joe Frey

The California Department of Insurance is investigating whether or not insurance companies are circumventing the state's insurance laws by denying coverage to homeowners whose family members commit fraud or other illegal acts, has learned. The results of the investigation could spur insurance departments across the country to review state laws and order changes to insurance policy language.

The spark

Policyholders who have not committed fraud are known as "innocent coinsureds."

The inquiry stems from federal judge Ronald Lew's decision on April 28, 1999, that Safeco Insurance Co., based in Seattle, must change its homeowners policy language in order to meet California's insurance code, which allows policyholders who have not committed insurance fraud (known as "innocent coinsureds") to collect damages under their insurance policies even though illegal acts are committed by a coinsured, such as a spouse.

Safeco had denied payment to Robert "Skip" Rawstron, an insurance agent based in Westlake Village, Calif., under his homeowners policy after his wife, Carla, falsified $50,000 in receipts for damage from the 1994 Northridge earthquake. Carla Rawstron was convicted of insurance fraud and sentenced to 60 days in jail on Oct. 6, 1998, and was ordered to pay $43,000 in restitution to Safeco.

Skip Rawstron's lawyer, Jeffrey Sax of Parker Mills & Patel in Los Angeles, says Rawstron has maintained his innocence throughout the case, that Safeco has not been able to establish any proof he knew of his wife's acts, and is claiming Safeco has wrongfully denied him payment for the actual damages his property sustained. Rawstron, who ironically still currently sells Safeco homeowners policies, is suing the company for roughly $2.5 million.

Safeco's spokesperson, Le Roi Brashears, says the company can't comment on any pending litigation.

One little magic word

The language in question is found in the "concealment or fraud" section of every California homeowners policy. California's insurance code requires the following paragraph:

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof . . . [emphasis added].

Sources say that Safeco's policy language "contravenes the insurance code."

Safeco's homeowners policy, however, along with policies from dozens of other California home insurers, uses the words "an insured" to define who is insured under the policy. The words an insured can jeopardize the rights of everyone listed on a policy, even if only one insured acts illegally, according to Judge Lew's decision. "The insured" affords coverage to policyholders who are innocent of any wrongdoing.

Sources close to the California insurance department investigation have characterized Safeco's policy language as "contravening the insurance code." Sources also say the California insurance department investigators are trying to determine whether or not to require all insurance companies to change their policy language.

Dana Spurrier, a spokesperson for California's insurance department, would not comment on the matter.

Other states address the issue

The potentially litigious language isn't limited to California. Insurers in states that have accepted suggested homeowners policy language from the Insurance Services Office (ISO) might be violating the law. The ISO provides sample policy language that can then be adopted by any state.

Back in 1991, for example, the New Hampshire Department of Insurance nipped the problem in the bud after the ISO proposed a change in homeowners policy language, inserting "an insured" instead of "the insured." Department officials determined that ISO's proposed language was contrary to public policy. The department asked the ISO for a change in the language because ISO's language "wasn't in the best interest of the consumers in New Hampshire," according to Bob Stanton, current director of fraud investigations and former director for property/casualty insurance licensing at the department.

As it stands now, "there's no protection for the innocent insureds" in Colorado's laws.

The Colorado Division of Insurance is currently investigating the potential effects of Judge Lew's April 28 decision in the California Rawstron case and is looking into potential changes it can make in order to protect innocent coinsureds. As it stands now, "there's no protection for the innocent insureds" in Colorado's laws, says Kenney Shipley, assistant commissioner at the division of insurance. "We are concerned about this issue and are looking into whether or not we can recommend legislative changes."

The Minnesota Supreme Court ruled in Watson vs. USAA in 1997 that the words an insured, which appeared in USAA's homeowners policies, violated the state's minimum insurance requirements that innocent coinsureds be allowed to collect for damages under their insurance policies. USAA was ordered to change its policy language.

However, not everyone agrees that using "an insured" is harmful. has obtained documents from the Kansas Department of Insurance that dismiss the difference between the insured and an insured. Former assistant commissioner of insurance in Kansas, Bob Kennedy, wrote on April 28, 1999, "We do not believe that the minor . . . difference between the use of 'the insured' vs. 'an insured' . . . violate[s] any Kansas law or allow[s] an insurance company to deprive an 'innocent' spouse his or her rights under a homeowner[s] policy."

The hubbub over "an" vs. "the" is sure to heat up even more. Sax of Parker Mills & Patel is contemplating a nationwide class action lawsuit against any insurer that has denied payment to an innocent coinsured. He says that the lawsuit could trigger the federal Racketeering Influenced and Corrupt Organization (RICO) statute. Under RICO, defendants (like insurance companies) are subject to triple damages if they lose the lawsuit.


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