## Facts

- Elizabeth and Keith Watson bought a mobile home and land as joint tenants and insured the home under a USAA homeowner’s policy.
- The couple separated in 1991; Elizabeth moved out and Keith remained in the home. Keith paid the policy premiums, and Elizabeth paid certain property expenses.
- A dissolution hearing occurred on December 28, 1993; the decree was filed on January 31, 1994.
- On January 13, 1994, the mobile home and contents were destroyed by fire; the fire department listed the ignition factor as undetermined.
- USAA investigated, advanced $10,000 under the policy, then concluded the loss resulted from arson.
- The policy excluded coverage for intentional loss caused “by or at the direction of an insured” and voided coverage for fraud by “an insured.”
- USAA denied Elizabeth’s claim on the ground that Keith, a co-insured, participated in the arson and committed fraud, which USAA argued barred coverage for both insureds.
- A jury found the fire was intentionally set and that Keith participated in or arranged it and committed fraud; the litigation proceeded on the premise that Elizabeth was not involved.
- The district court enforced USAA’s “an insured” exclusions, entered judgment for USAA, dismissed Elizabeth’s action, and ordered Keith to repay the advance.
- The court of appeals reversed, holding the policy was less favorable than Minnesota’s statutory standard fire policy (Minn. Stat. § 65A.01), reformed the policy to the statutory language, and remanded to permit Elizabeth to recover her proportionate share.

## Issues

1. Whether Minn. Stat. § 65A.01 permits an insurer to enforce policy language (“an insured”) that denies recovery to an innocent co-insured spouse based on another insured’s arson or fraud.
2. Whether a nonconforming fire policy must be reformed to provide at least the minimum protections of the Minnesota standard fire insurance policy.
3. Whether an innocent co-insured may recover a proportionate interest in the insured property despite a co-insured’s intentional burning and fraud.

## Decision

- The Minnesota Supreme Court affirmed the court of appeals.
- The court held that a fire policy provision excluding an innocent co-insured spouse based on another insured’s intentional or fraudulent acts conflicts with Minn. Stat. § 65A.01 and must be reformed.
- The policy was reformed from “an insured” to the statutory “the insured” in the intentional-loss and fraud provisions.
- As reformed, Elizabeth, as an innocent co-insured, was entitled to recover her proportionate interest in the insured loss.

## Legal Principles

- Minnesota’s standard fire policy statute, Minn. Stat. § 65A.01, establishes mandatory minimum fire-insurance coverage; insurers may not provide coverage less favorable than the statutory standard.
- Policy language tying forfeiture to wrongdoing by “an insured” is less favorable than the statutory form using “the insured” because it can impute one insured’s misconduct to bar recovery by an innocent co-insured.
- When a fire insurance policy does not conform to the statutory minimum terms, the remedy is reformation to the statutory standard.
- Under the statutory standard, fraud or intentional burning by one insured does not automatically void coverage for an innocent co-insured; the innocent co-insured may recover a proportionate interest.

## Conclusion

Minnesota law requires fire policies to provide coverage at least as favorable as the statutory standard fire policy; therefore, an insurer cannot use “an insured” intentional-loss or fraud provisions to defeat an innocent co-insured spouse’s claim, and the policy must be reformed to permit the innocent co-insured to recover a proportionate share.


Watson v. United Servs. Auto. Ass’n, 566 N.W.2d 683 (Minn. 1997)