K & W Builders, Inc. v. Merchants & Business Men's Mutual Insurance

Present: All the Justices

K & W BUILDERS, INC., DEFINED
BENEFIT TRUST NO. 1
OPINION BY
v. Record No. 970279 CHIEF JUSTICE HARRY L. CARRICO
January 9, 1998
MERCHANTS AND BUSINESS MEN'S
MUTUAL INSURANCE COMPANY, ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF SALEM
Roy B. Willett, Judge

This controversy involves a fire insurance policy issued by

Merchants and Business Men's Mutual Insurance Company

(Merchants), covering a building in the City of Salem owned by K

& W Builders, Inc., Defined Benefit Trust No. 1 (K&W), and

occupied by Ahmad Thiab (Thiab) and A and N Food, Inc. (A&N)

under an assignment of lease to A&N. Thiab and A&N were the

named insureds in the policy, and K&W was listed as an additional

insured.
Thiab and A&N used the building for the operation of a

restaurant known as "Mixers." On April 3, 1994, the building and

its contents were destroyed by fire. K&W made claim against

Merchants for the loss of the building. However, Merchants

discovered evidence that the fire had been set by or at the

direction of Thiab or A&N, or both of them, and that one or both

had intentionally misrepresented and concealed material facts

during the investigation into the cause of the fire. Relying

upon a fraud provision and a dishonest act exclusion in its

policy, Merchants denied the claim.

On January 4, 1995, K&W filed a motion for judgment against

Merchants seeking recovery of $208,000, the face amount of the
policy, plus the sum of $17,446.77, "which represents lost rent."

As an affirmative defense, Merchants alleged that "Ahmad Thiab

and/or A and N Food, Inc." had engaged in "fraudulent conduct" by

deliberately setting the fire and had "committed concealment" and

"made material misrepresentations," all in violation of the terms

of the policy "so as to render the policy null and void as to all

insureds," even an insured who is "innocent of any wrongdoing." 1

K&W filed a motion for summary judgment, asserting that

there was "no genuine issue as to any material fact" and that it

was "entitled to judgment as a matter of law." Following

argument, the trial court denied the motion, accepting Merchants'

interpretation of the policy that
any act of Ahmad Thiab and/or A and N Food,
Incorporated which violates the "concealment,
misrepresentation or fraud" provision or falls within
the scope of the "dishonest or criminal act" exclusion
contained in the policy at issue will void any coverage
to which [K&W] might otherwise be entitled,
irrespective of whether [K&W] was involved to any
extent in the commission of such act.

Prior to trial, the parties stipulated that the only issues

that should be submitted to the jury were "whether the fire was

set by or at the direction of A and N Food, Inc. and/or Ahmad

Thiab, and whether A and N Food, Inc. and/or Ahmad Thiab made

material misrepresentations to [Merchants] during the course of

its investigation of this fire loss." The parties also agreed

that these issues would be submitted to the jury in a special
1
Merchants conceded below that it "found no evidence that K
& W was involved with or participated in the wrongful acts of
Thiab and A & N."
verdict form.

The jury found that the fire had been set by or at the

direction of Thiab and a representative of A&N and that Thiab and

a representative of A&N had made material misrepresentations to

Merchants. Then, consistent with its prior ruling, the trial

court entered judgment in favor of Merchants, and we awarded K&W

this appeal.

As noted previously, Thiab and A&N were the named insureds

in Merchants' policy and K&W was listed as an additional insured.

The policy states that "[t]hroughout this policy the words 'you'

and 'your' refer to the Named Insured shown in the Declarations"

and the words "'we,' 'us' and 'our' refer to the Company

providing this insurance."
The fraud provision of the policy, relied upon by Merchants

when it denied coverage for K&W's claim, is found in the part of

the policy related to commercial property coverage. In pertinent

part, the provision reads as follows:
This Coverage Part is void in any case of fraud by you
as it relates to this Coverage Part at any time. It is
also void if you or any other insured, at any time,
intentionally conceal or misrepresent a material fact
. . . .

The dishonest act exclusion of the policy, also relied upon

by Merchants when it denied coverage for K&W's claim, reads in

pertinent part as follows:
We will not pay for loss or damage caused by or
resulting from any of the following:

. . . .

h. Dishonest or criminal act by you, any of your
partners, employees, directors, trustees, authorized
representatives or anyone to whom you entrust the
 property for any purpose.

Citing Rockingham Mut. Ins. Co. v. Hummel, 219 Va. 803, 250

S.E.2d 774 (1979), K&W argues that when, as here, the interests

of coinsureds are severable, an innocent insured is not barred

from recovery by the wrongdoing of another insured over whom the

innocent insured exercises no control. In Hummel, the insured

property was owned by husband and wife as tenants by the

entirety. The property was destroyed by fire and the insurer

paid the insureds the amount of the loss. The insurer later

discovered that the husband had intentionally burned the property

and sought to recover the amount it had paid. The wife claimed

she was entitled to retain a share of the insurance proceeds.
The insurance policy covering the property named both the

husband and the wife as the "Named Insured" and provided that the

policy would be void "in case of any fraud . . . by the insured."

Id. at 804, 250 S.E.2d at 775. We held that because the husband

and wife's legal interest in the insured property was joint and

not severable, the wife's claim was subject to the general rule

that "[w]hen the interests of the insureds are deemed joint and

nonseparable, . . . the innocent insured may not recover under

the policy following a fraudulent act on the part of the other

coinsured." Id. at 805, 250 S.E.2d at 776.

It follows from this holding, K&W argues, that because it

had no joint interest with either A&N or Thiab and was innocent

of any wrongdoing, it was entitled to recover for its loss.

However, we made an additional holding in Hummel, a holding with

dispositive effect here:
 Furthermore, the form of the insurance contract was
joint; the "Named Insured" was [the husband and the
wife]. Thus under the policy and as the "insured",
each spouse had . . . the joint duty to refrain from
defrauding the insurer. If either spouse violated
[this duty], the breach was chargeable to the "Named
Insured" preventing either spouse from recovering any
amount under the policy.

Id. at 806, 250 S.E.2d at 776. 2 Hence, even absent a joint

interest between insureds and notwithstanding that one of the

insureds may be innocent of any wrongdoing, resort must be had to

the form of the insurance contract to determine the rights and

liabilities of the parties.
At this point, it is necessary to resolve a dispute between

the parties over whether the word "you," as used in the policy,

refers only to the named insureds, Thiab and A&N, or to all the

insureds, including K&W, which was listed as an additional

insured. K&W accuses Merchants of vacillating on the subject,

saying at one point in the course of this proceeding that "you"

includes only the named insureds and at another point that it

includes all the insureds, whether listed as named insureds or as

an additional insured.

2
K&W also cites Aetna Ins. Co. v. Carpenter, 170 Va. 312,
196 S.E. 641 (1938). There, the insurer denied coverage on the
ground that the insured's 15-year-old daughter, acting as the
insured's agent, deliberately set the fire. We affirmed a
verdict in favor of the insured, holding there was no proof of
either the incendiarism or the agency. Id. at 325, 196 S.E. at
647. We did recognize the rule that "no fraudulent acts of an
agent or of a third person, even though the incendiary be a
relative, will void the policy unless the insured is implicated
in the fraud." Id. at 327, 196 S.E. at 647. However, Carpenter
is inapposite. The case involved no policy provisions similar to
those at issue here. Indeed, we said that if the insurer desired
to avoid coverage for the willful or deliberate act of an agent,
it should have included an express exception on the subject.
 To resolve the dispute, we will agree with K&W that "you"

includes all the insureds. When so included, K&W maintains,

"there can be little doubt that [a] guarantee [contained in the

policy] protects K&W as an innocent insured."

Entitled "Control of Property," this "guarantee" provision

is found in the part of the policy relating to commercial

property coverage. The provision reads as follows:
Any act or neglect of any person other than you beyond
your direction or control will not affect this
insurance.

After quoting this language, K&W concludes that "an innocent

insured is not its co-insured's keeper, and if a co-insured acts

improperly -- outside the innocent insured's direction or control

-- such misconduct 'will not affect this insurance' with respect

to the innocent insured." If the Control of Property provision

is not so interpreted, K&W contends, there is ambiguity

concerning "the question of whether the fraud clause or dishonest

acts exclusion negate[s] coverage for all insureds based upon the

acts of any coinsured."

However, to reach the conclusion K&W argues for, one must

read the word "you," as used in the Control of Property

provision, as though K&W were the only insured, resulting in this

reading:
Any act or neglect of any person other than K&W beyond
K&W's direction or control will not affect this
insurance.

Under this version, since the act or neglect in question was

attributed to Thiab and A&N, a person or entity other than K&W

beyond K&W's direction or control, the insurance provided by
Merchants' policy would not be affected. However, this is an

impermissible reading because it ignores the indisputable fact

that there are other insureds under the policy.

With "you" interpreted as including K&W, the only proper

reading of the Control of Property provision is as follows:
Any act or neglect of any person other than Thiab, A&N,
or K&W beyond Thiab, A&N, or K&W's direction or control
will not affect this insurance.

Under this reading, since the act or neglect in question was not

attributed to a person or entity other than Thiab, A&N, or K&W,

the Control of Property provision simply does not apply, and,

contrary to K&W's contention, there is no ambiguity concerning

"the question of whether the fraud clause or dishonest acts

exclusion negate[s] coverage for all insureds based upon the acts

of any coinsured."
Indeed, the reading we give the Control of Property

provision is entirely consistent with the view that the fraud

clause and dishonest acts exclusion negate coverage for all

insureds based upon the acts of any coinsured. The fraud clause

provides that coverage is void "in any case of fraud by you" or

"if you or any other insured . . . intentionally conceal or

misrepresent a material fact." We read this language to mean

that coverage will be void in the event K&W or either of its

coinsureds acted fraudulently or intentionally concealed or

misrepresented a material fact. The dishonest acts exclusion

provides that the insurer "will not pay for loss or damage caused

by . . . [a d]ishonest or criminal act by you." We read this

language to mean that the insurer will not pay for loss or damage
in the event any one of the three insureds commits a dishonest or

criminal act. This exclusion, however, contains additional

language demonstrating the error of K&W's position that an

innocent insured is entitled to coverage notwithstanding the

wrongdoing of others. Although a particular insured might be

innocent of wrongdoing, the exclusion bars coverage for loss or

damage caused by the dishonest or criminal act of that insured's

"partners, employees, directors, trustees, authorized

representatives or anyone to whom [that insured] entrust[s] the

property for any purpose."
Similar to the situation in Hummel, the three insureds here

had the joint duty to refrain from defrauding the insurer and

committing dishonest or criminal acts. And, as in Hummel, if any

one of the insureds violated that duty, "the breach was

chargeable to the [other insureds] preventing [all the insureds]

from recovering any amount under the policy." 219 Va. at 806,

250 S.E.2d at 776.

K&W argues, however, that "[e]ven if the policy language

could be read unambiguously to support the insurer's restrictive

interpretation, a clause barring an innocent insured from

recovery based on occurrences fully outside his control runs

afoul of Va. Code § 38.2-2105 and the public policy underlying

that statute." Code § 38.2-2105, which prescribes standard

language for inclusion in a fire insurance policy, reads as

follows:
This entire policy shall be void, if whether before or
after a loss, the insured has wilfully concealed or
misrepresented any material fact or circumstance
concerning this insurance or the subject thereof, or
 the interest of the insured therein, or in case of any
fraud or false swearing by the insured relating
thereto.

K&W says that "[p]lainly, this language speaks in terms of

actions by the insured -- not any other possible insured -- as

the trigger for voiding coverage" and that this "is consistent

with the concept that an innocent insured (who does not share a

joint interest in property with the wrongdoer) should not lose

coverage based on the unratified wrongdoing of a coinsured."
In response to an argument by Merchants that "nothing in Va.

Code § 38.2-2105 prevents 'the insured' as used in that section

'from being defined as all of the identified insureds,'" K&W

submits that "[t]o the contrary, basic rules of grammar reveal

that 'the insured' is singular and 'all insureds' is plural."

Furthermore, K&W asserts, "[o]ther courts have viewed 'the

insured' in this context as referencing the individual wrongdoing

insured and not all innocent co-insureds."

We disagree with K&W. With due deference to the other

courts whose decisions K&W cites, we do not think it is

reasonable to read the term "the insured" in Code § 38.2-2105 as

encompassing only a wrongdoing insured. Had this been the

General Assembly's intention, it could have expressed the

intention merely by prescribing a standard provision stating that

a policy shall be void as to any insured who engages in the

proscribed conduct, thus insulating an innocent insured against a

coinsured's wrongdoing.

We are not at liberty to substitute the italicized language

for the words the General Assembly actually used. And without
such substitution, the fraud provision and the dishonest acts

exclusion of Merchants' policy do not run afoul of Code § 38.2-

2105 and the public policy underlying that statute.

Finding no error in the judgment of the trial court, we will

affirm the judgment.

Affirmed.