Watson v. United Services Automobile Association

Elizabeth Watson (plaintiff) and her estranged husband, Keith Watson, were joint tenants making installment payments toward owning a mobile home. The couple lived together from 1986 to 1991 until they separated. Elizabeth moved out and no longer had a key but paid the property taxes. Keith paid the premiums on the couple’s homeowner’s insurance policy with United Services Automobile Association (USAA) (defendant). Elizabeth filed for divorce, and the hearing was held on December 28, 1993. The divorce was granted, but the decree was not filed until January 31, 1994. Both Elizabeth and Keith were experiencing financial difficulties at the time. On January 13, 1994, the mobile home and its contents were destroyed by fire. Keith stated he was in another town on a construction job during the time of the fire, and Elizabeth said she was at her father’s home nearby. The day after the fire, the Watsons submitted a loss report to USAA, which inspected the loss site and advanced the Watsons $10,000 pursuant to the policy. USAA determined the cause of the fire to be arson. The policy excluded coverage for intentional loss “by or at the direction of an insured,” and was void if there had been fraud. USAA denied Elizabeth’s claim under those two provisions. Elizabeth sued, alleging a bad-faith denial of her $58,300 claim. A jury determined the fire was intentionally set and that Keith had participated in or arranged the setting of the fire and had defrauded USAA. The jury did not address whether Elizabeth was innocent. The district court found that the USAA policy did not cover the Watsons’ loss, dismissed the action, and ordered Keith to repay the $10,000 advance. Elizabeth appealed. The appellate court reversed on the grounds that USAA was required to have no less coverage than the Minnesota standard fire insurance policy, under which Elizabeth could have recovered. USAA appealed, arguing the policy unambiguously precluded coverage.