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Atlas Assurance Co. of America v. J. Mistic (8/9/91), 822 P 2d 897
Notice: This is subject to formal correction
before publication in the Pacific Reporter.
Readers are requested to bring typographical
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THE SUPREME COURT OF THE STATE OF ALASKA
ATLAS ASSURANCE COMPANY OF )
AMERICA, ) Supreme Court File No.
Petitioner, ) S-3727
) Superior Court File No.
v. ) 3AN 88-12569 CI
JEANNIE MISTIC f/k/a JEANNIE ) O P I N I O N
) [No. 3733 - August 9, 1991]
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Karen L. Hunt, Judge.
Appearances: Timothy R. Byrnes, Hughes,
Thorsness, Gantz, Powell & Brundin,
Anchorage, for Petitioner. Sema E. Lederman,
Hansen & Lederman, Anchorage, for Respondent.
Before: Rabinowitz, Chief Justice,
Burke, Matthews, Compton and Moore, Justices.
We granted Atlas Assurance Company's petition for
review in part, specifying the following issues for
(1) When an insured intentionally burns
down a house, is an innocent co-insured
nevertheless entitled to recover some portion
of the insurance proceeds?
(2) What portion of the proceeds may
the innocent co-insured recover?
(3) Does the validity of the innocent
insured's claim affect the insurer's right of
(4) Under the facts of this case, what
effect, if any, did the divorce decree and
property division ordered between the co-
insureds have upon the respective rights of
the parties herein?
I. FACTUAL AND PROCEDURAL BACKGROUND
Jeannie Mistic and Del Kirk Rutzebeck were married in
1980. They had two children. The couple purchased
real property in Halibut Cove on which they built a
house. They lived there until Mr. Rutzebeck burned
down the house in 1987.1 They owned the house jointly
as tenants in common. First Interstate Bank (First
Interstate) held a deed of trust note as mortgagee.
The property was insured by Atlas Assurance Company of
America (Atlas) for $42,000, with First Interstate
named as loss payee. The damage to the property
exceeded its insured value. The damage was later
estimated to be $100,000.
Mistic executed a proof of loss, asking that First
Interstate be paid. Atlas paid First Interstate
$42,378.04 to satisfy the loan and received an
assignment of the deed of trust note and deed of trust.
Payments on the note ceased in October 1987. Mistic
and Rutzebeck were divorced on June 29, 1988. Issues
of child custody, child support, spousal support,
damages, and division of property were reserved for
later adjudication. On September 30, 1988, Atlas filed
a notice of default on the deed of trust note,
beginning foreclosure of only Rutzebeck's interest in
On December 22, 1988, Judge Rene J. Gonzalez entered
judgment on the issues of property division, child
custody, child support, and waste of marital property.
He awarded the Halibut Cove property to Mr. Rutzebeck,
but ordered that he sell it and "deposit the proceeds
into the registry of the court after paying all liens
and encumbrances thereon and costs of sale for
determination and award of a lump sum child support
payment . . . ." In dividing the marital property,
Judge Gonzalez found that:
While there is a presumption that an
equal division of marital property is a just
division, in this case, the Defendant
[Rutzebeck] willfully destroyed and wasted
substantial marital property and Plaintiff is
entitled to one-half the value of the
property destroyed in addition to her share
of the marital estate under an equitable
Pursuant to the court's direction, Mistic quitclaimed
her interest in the property to Rutzebeck. She has not
On December 30, 1988, Mistic filed suit against Atlas
for allegedly refusing to pay her or her mortgagee
First Interstate under the contract of insurance.
Judge Hunt granted a temporary restraining order
postponing the foreclosure sale, and Atlas voluntarily
postponed the sale indefinitely after that order
In October 1988 Rutzebeck sold the property and paid
Atlas the full amount owing on the deed of trust note.
He then deposited the balance of the proceeds with the
court in accordance with Judge Gonzalez's order.
On November 30, 1989, Judge Hunt granted summary
judgment on the following issues: (1) that Atlas had a
right to deny any claim of Rutzebeck because he
intentionally destroyed the insured property; (2) that
Rutzebeck intentionally caused the fire; (3) that Atlas
had a right to subrogate to Rutzebeck's interest in the
property; (4) that Atlas breached its insurance policy
agreement with Mistic. This last issue is the subject
II. STANDARD OF REVIEW
This review involves questions of law. Therefore our
"duty is to adopt the rule of law that is most
persuasive in light of precedent, reason, and policy."
Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979).
A. When an Insured Intentionally Burns Down
a House, is an Innocent Co-insured
Nevertheless Entitled to Recover Some
Portion of the Insurance Proceeds?
The parties agree that an innocent co-insured is
entitled to recover unless the policy clearly precludes
it. Case law supports this position.
Public policy dictates that an insured who
intentionally sets fire to property covered by the
insurance contract may not recover thereon. See Dairy
Queen v. Travelers Indem. Co., 748 P.2d 1169, 1172
(Alaska 1988). We have not addressed whether an
innocent co-insured is likewise precluded from
recovery. "Generally speaking, the determination of
the question whether an innocent coinsured may recover
on fire insurance after another coinsured has
intentionally burned the covered property ordinarily
depends upon whether the interests of the coinsureds
are joint or severable." Annotation, Right of Innocent
Insured to Recover Under Fire Policy Covering Property
Intentionally Burned by Another Insured, 11 A.L.R. 4th
1228, 1229 (1982). Modern authority favors allowing
recovery by an innocent co-insured unless the policy
clearly states otherwise:
The minority view . . . , previously the
majority view, denies an innocent spouse
recovery either because the underlying
property ownership is an indivisible tenancy
by the entirety, or because the wrongdoing of
one spouse is imputed to the other under a
theory of oneness of the married couple. The
present majority view . . . allows an
innocent or divorced spouse to recover even
though the co-insured spouse is at fault.
The majority view courts reason that policy
language excluding coverage must be explicit
or that what is in question is the spouse's
interest in the insurance policy, not the
interest in the real property, or that the
fault of the wrongdoing spouse cannot be
imputed to the innocent spouse.
Commercial Union Ins. Co. v. State Farm Fire & Casualty Co., 546
F. Supp. 543, 546 (D. Colo. 1982) (citations omitted)
(rights and obligations under homeowner's insurance
policy are several and not joint. Therefore innocent
spouse may recover even though co-insured spouse is at
fault). Other courts have found that the innocent co-
insured's rights and obligations are severable,
focusing on the parties' intent in forming the
insurance contract. E.g. Richards v. Hanover Ins. Co.,
299 S.E.2d 561 (Ga. 1983) (obligation of insureds to
"use all reasonable means to save and preserve
property" was several, not joint. Therefore innocent
co-insured spouse was entitled to recovery if she could
prove she did not participate in wrongful conduct);
St. Paul Fire & Marine Ins. Co. v. Molloy, 433 A.2d
1135 (Md. 1981) (unless policy clearly shows parties
intended that obligations of co-insureds be joint, they
will be treated as several and innocent co-insured may
recover); Samhammer v. Home Mut. Ins. Co., 507 N.Y.S.2d
499, 503 (N.Y. App. Div. 1986).
Where policy language clearly precludes recovery if any
of the co-insureds wrongfully cause the loss, the
courts will deny recovery to an innocent co-insured.
E.g. Spezialetti v. Pacific Employers Ins. Co., 759
F.2d 1139, 1140 (3d Cir. 1985); Amick v. State Farm
Fire & Casualty Co., 862 F.2d 704, 705-06 (8th Cir.
1988) (provision barring recovery due to fraud of any
co-insured not void as against public policy); Sales v.
State Farm Fire & Casualty Co., 849 F.2d 1383, 1385
(11th Cir. 1988); Bryant v. Allstate Ins. Co., 592 F.
Supp. 39, 41 (E.D. Ky. 1984).
In this case Atlas concedes that "it is not clear"from
the language of the policy whether Mistic is precluded
from recovery. The policy's concealment or fraud
provision states: "We do not provide coverage if you
have intentionally concealed or misrepresented any
material fact or circumstance relating to this
insurance." No concealment or fraud is alleged, and
there is no provision specifically barring recovery for
losses caused by an intentional act of any insured.
Under the modern view, Mistic's rights under the
contract of insurance are considered severable and she
is entitled to recover.
B. What Portion of the Proceeds May the
Innocent Co-insured Recover?
Atlas contends that it is entitled to prevail no matter
what portion of the policy proceeds the innocent co-
insured may be entitled to recover because its
subrogation rights are a distinct question. In the
alternative, Atlas suggests that the innocent co-
insured's recovery should be limited to no more than
half the damages or half the policy limits. Atlas
argues that allowing the innocent co-insured to recover
full proceeds would encourage fraud because an insured
could convey a fractional interest in property to a co-
insured and then burn the property, thereby
guaranteeing payment of the entire proceeds to the co-
insured. Full recovery would also confer a windfall on
an innocent co-insured who receives the full value of
the property above her interest therein.
Mistic argues that she is entitled to half the policy
limits under the contract of insurance. She bases this
on case law from other jurisdictions and her
interpretation of the policy language.
The contract itself contains a clause limiting
liability where there is more than one insured. It
2. Insurable Interest and Limit of
Liability. Even if more than one person has
an insurable interest in the property
covered, we shall not be liable:
a. for an amount greater than the
interest of a person insured under this
b. for more than the limit of
liability that applies.
Thus by its own terms the contract limits payment to a co-insured
to the lesser of the person's interest or the contract
limits. Mistic's interest in the property at the time
the claim was paid was greater than the contract
limits, so the upper limit would be $42,000.
"The vast majority of courts which have reached this
issue, and which have allowed recovery at all, have
held that the innocent coinsured may only recover one-
half of the insurance proceeds, up to the policy
limits." Lewis v. Homeowners Ins. Co., 432 N.W.2d 334
(Mich. App. 1988) (footnote omitted). For example, in
Republic Ins. Co. v. Jernigan, 719 P.2d 331, 333 (Colo.
App. 1985), the court determined that a husband and
wife still held the property as joint tenants after the
husband intentionally burned it. Therefore the wife,
as owner of an undivided one-half interest, was
entitled to only one-half the damages claimed, "limited
of course by the total policy limits." Id. at 333-34.
At least one court has allowed the innocent spouse to
recover one-half of the proceeds even where she
continued to live with the wrongdoer spouse after the
fire, reasoning that any benefit to the wrongdoer was
indirect. Maravich v. Aetna Life & Casualty Co., 504
A.2d 896, 907 (Pa. Super. 1986).
Occasionally courts allow the innocent spouse to
recover the full amount of the damage, but only if the
wrongdoer spouse died in the fire. American Economy
Ins. Co. v. Liggett, 426 N.E.2d 136 (Ind. App. 1981);
Felder v. North River Ins. Co., 435 N.W.2d 263 (Wis.
App. 1988). These courts reason that there is no
danger of the wrongdoer profiting by the wrongdoing.
Id. at 266; Liggett at 140. Mistic seeks only one-half
the policy limits, which is less than one-half the
Few of these cases discuss the effect on the innocent
spouse's share of the proceeds if the insurer pays a
mortgagee. In North Carolina the spouse is entitled to
half the amount of the loss after the mortgagees are
paid. Lovell v. Rowan Mut. Fire Ins. Co., 274 S.E.2d
170 (N.C. 1981). In Lovell the insurer later
foreclosed on the mortgages, but the court declined to
determine the rights to the foreclosure proceeds since
the question was not before it. Id. at 174. In that
case, unlike the present case, the policy limits were
higher than the mortgage debt, so there was something
left over to split in half.
We conclude that the innocent co-insured in this case
is entitled to recover one-half of the damages or one-
half of the contract limits, whichever is less, in
accordance with the terms of the contract of insurance.
Thus, Mistic is entitled to recover $21,000.
C. Does the Innocent Insured's Claim Affect
the Insurer's Right of Subrogation?
Atlas argues that it is entitled as matter of equity to
subrogate against an arsonist, and that this is an
exception to the general rule that an insurer may not
subrogate against its own insured. Atlas contends that
it was proceeding solely against Rutzebeck's separate
assets, and that Mistic has no right to demand that it
waive its subrogation rights. If the foreclosure had
followed the normal course, Atlas would have only been
substituted as owner of Rutzebeck's half of the
property. Atlas says it voluntarily waived any claim
against Mistic's half interest.
Mistic argues that Atlas cannot subrogate against its
own insured unless the contract expressly allows it.
She argues that the contract only allows Atlas to
subrogate against her if it denies her claim, which it
did not, and that absent an express exclusion, the
common law rule applies. Mistic argues that Atlas
could have either brought a declaratory judgment action
to determine its rights under the contract or sued
Rutzebeck. By accepting the full amount of the
mortgage from Rutzebeck, Atlas was unjustly enriched
and defeated Mistic's reasonable expectations under the
contract. Mistic urges that the proper approach would
have been to require Atlas to sue Rutzebeck in order to
recoup its losses.
In Alaska, "[i]t is well settled that an insurer cannot
recover by means of subrogation against its own
insured." Graham v. Rockman, 504 P.2d 1351, 1356
(Alaska 1972). "Since subrogation is an equitable
doctrine, equity principles apply in determining its
availability." Alaska Ins. Co. v. RCA Alaska
Communications, Inc., 623 P.2d 1216, 1217 (Alaska 1981)
(tenant is co-insured of landlord, therefore insurer
may not subrogate against tenant for tenant's
negligence in starting fire).
An insurer may waive subrogation rights against a co-
insured by express contract language. See State v.
Oriental Fire & Marine Ins. Co., 776 P.2d 776 (Alaska
1989) (waiver provision by its own terms extends only
to risks covered by the policy). Atlas has not done
this. The mortgage clause of the Atlas contract
contains the following language:
If we pay the mortgagee for any loss and
deny payment to you:
a. we are subrogated to all the rights
of the mortgagee granted under the mortgage
on the property; or
b. at our option, we may pay to the
mortgagee the whole principal on the mortgage
plus any accrued interest. In this event, we
shall receive a full assignment and transfer
of the mortgage and all securities held as
collateral to the mortgage debt.
Subrogation shall not impair the right
of the mortgagee to recover the full amount
of the mortgagee's claim.
This is not a waiver of subrogation rights, but an
express assertion of a right to subrogate against the
insured in certain circumstances. It does not apply to
Mistic's claim because Atlas did not deny her claim.
What this means in the context of this case is that
when Atlas paid the approximate sum of $42,000 to First
Interstate, Atlas could not be subrogated for the
$21,000 of that sum which was attributable to Mistic's
obligation to pay the deed of trust note. Atlas'
right to subrogate as to the remainder of the sum which
it paid is not an issue, thus Atlas stands in the
position of First Interstate as the holder of a secured
deed of trust note only as to the half of the sum which
D. Under the Facts of this Case, What Effect Does
the Divorce Decree and Property Division Have
Upon the Respective Rights of the Parties?
Atlas argues that the property division negates any
claims Mistic may have had. Because Atlas proceeded
only against Mr. Rutzebeck's half of the property,
Atlas claims, any harm to Ms. Mistic must be premised
on an interest she had in his portion of the property.
Atlas contends that Judge Gonzalez's award of the
property to Rutzebeck extinguished any right Mistic had
in the property. Atlas also argues that Mistic is
bound by Judge Gonzalez's orders under principles of
res judicata and collateral estoppel because she never
Mistic argues that the divorce did not void Atlas'
obligation to pay her claim under the contract. She
argues that the parties' interests must be analyzed as
of the date of her claim; otherwise it would encourage
insurance companies to delay paying claims. Mistic
asserts that Atlas did not pay her claim, but rather it
bought an assignment of the deed of trust. She claims
that what she lost was one-half the value of the lien
because the marital estate was reduced by the amount of
the lien. Mistic argues that her interest in the
proceeds is a personal property interest, so it does
not depend on her remaining a record owner of the
The issue we asked the parties to brief in this section
is what effect the divorce and property division had on
the rights of the parties in this case. We conclude
that the property division had no effect on the rights
of the parties as far as Mistic's claim against Atlas
is concerned. The ultimate issue is whether Atlas
breached the insurance contract by paying the mortgagee
and taking an assignment of the deed of trust note and
deed of trust, without ever paying Mistic or crediting
Mistic with the value of her claim.
Judge Hunt ruled that Atlas did breach the contract.
It is undisputed that plaintiff made a
timely and proper claim for her insured
interest under the policy. Defendant never
denied the claim, which denial is a condition
precedent to subrogating itself to her
interest in the insured property. Therefore,
when it paid the mortgagee the full value of
the note, $21,000 of the amount paid was
payment of plaintiff's claim under the
policy. When Atlas bought the note, it had a
real value of $21,378.04. When the property
sold and Atlas was paid as holder of the Deed
of Trust Note, it was entitled to receive
only the $21,378.04 value of the note plus
costs, etc. However, it was paid and
accepted the full $42,378.04 value of the
note thereby, in fact, receiving the benefit
of subrogating itself to plaintiff's claim.
Because it has not denied her claim (and
having demonstrated no basis for doing so),
it breached its contract with plaintiff.
Thus it was the failure of Atlas, when accepting payment from
Rutzebeck, to pay Mistic or credit Mistic with the
value of her claim, which Judge Hunt believed triggered
the breach. We agree. Although this occurred after
the divorce and property division, the timing is
Mistic's rights were fixed as of the time of the
insured loss. Pursuant to Judge Gonzalez's order,
Mistic quitclaimed her interest in the Halibut Cove
property to Rutzebeck. Her quitclaim deed to Rutzebeck
did not purport to convey her interest in the insurance
proceeds, nor was this interest acknowledged or divided
by the decree. We conclude that the decree has no
effect on the obligation of Atlas to pay Mistic her
half of the insurance proceeds.
Summary judgment on the issues under review herein is
AFFIRMED. This case is REMANDED for further
1 Mistic refuses to concede in her brief that Mr. Rutzebeck
intentionally burned down the house. Judge Rene J.
Gonzalez in their later divorce action found that
Rutzebeck "willfully and intentionally"destroyed the
property. Judge Karen L. Hunt in this action entered
summary judgment that Rutzebeck intentionally burned
down the house. We declined review of that question.
2 Judge Gonzalez valued and divided the marital property as
Mistic Value Rutzebeck
Fishing boat equity $60,000 Halibut Cove property $58,000
Fishing boat lease $10,000 ($100,000 value remaining after
Fishing boat accounts $31,636 fire minus $42,000 debt to
Life insurance $10,000 Jeep $ 6,000
Freezer truck $10,000 Four-wheeler $ 2,000
Ford Bronco $ 1,000 Skiff & motor $ 5,000
TOTAL $122,636 TOTAL $71,000
Thus the total marital estate as listed was $193,636.
Since the value of the property destroyed was $100,000,
the marital estate would have been worth $293,636 if
Rutzebeck had not burned the house. If the property
had been divided equally, Mistic would have received
$146,818. She ended up with $24,182 less than that.
If Judge Gonzalez had divided the marital estate as
listed equally and then added $50,000 to Mistic's share
as one-half the value of the marital property
destroyed, Mistic would have received $146,818, exactly
what she would have gotten had there been no fire and
an equal division. Judge Gonzalez did not believe an
equal division was equitable under the circumstances.
However, he either made a mistake in his calculations
or neglected to factor in the marital property