Barbara Streit v. Metropolitan Casualty Insuran, 2017 U.S. App. LEXIS 12750

Background

Metropolitan issued a homeowner’s fire policy to Barbara and Wesley Streit covering Nov 25, 2013–Nov 25, 2014 that excluded coverage for any "Intentional Loss" caused by "you" or at your direction.
"You/your" was defined to include the named insureds and household residents (including their son, Wesley Streit Jr.).
On Aug 5, 2014 Wesley Jr. set fire to the Streits’ home; he pleaded guilty to aggravated arson. Metropolitan denied the Streits’ claim under the policy’s intentional-loss exclusion.
The Streits sued, arguing the exclusion conflicted with the Illinois Standard Fire Policy promulgated by the Director of Insurance; the district court granted partial summary judgment for the Streits and later entered judgment for $235,000 after the parties stipulated the Streits were innocent.
The Seventh Circuit affirmed, holding the Metropolitan policy unlawfully narrowed the coverage required by the Illinois Standard Fire Policy because it barred recovery by innocent co-insureds.

Issues

Issue	Streit’s Argument	Metropolitan’s Argument	Held
Whether Metropolitan’s policy exclusion (no coverage if any insured intentionally causes loss) conflicts with the Illinois Standard Fire Policy	The Standard Policy only suspends coverage for losses caused by "the insured" whose control or knowledge increased the hazard, so innocent co-insureds may recover	The policy’s plain exclusion validly bars all insureds when any insured intentionally causes the loss	The Standard Fire Policy controls; Metropolitan’s broader exclusion conflicts with the Standard Policy and is invalid — innocent co-insureds may recover
Whether allowing recovery to innocent co-insureds violates Illinois public policy or statutes	Recovery by innocent co-insureds is consistent with public policy because the tortfeasor is not indemnified; the Standard Policy’s limitation prevents indemnifying the wrongdoer	The district court’s and Streits’ reading would undermine public policy against indemnifying willful misconduct and possibly conflict with statutes	Court held no public-policy or statutory bar: the Standard Policy prevents recovery by the acting insured but preserves recovery for innocent co-insureds, which does not indemnify the wrongdoer

Key Cases Cited

Lundquist v. Allstate Ins. Co., 732 N.E.2d 627 (Ill. App. Ct. 2000) (rules/regulations promulgated under the Insurance Code have force of statute and policies must conform to the Standard Policy)
Margolin v. Pub. Mut. Fire Ins. Co., 281 N.E.2d 728 (Ill. App. Ct. 1972) (administrative rules adopted under statutory authority are binding)
Osbon v. Nat’l Union Fire Ins. Co., 632 So. 2d 1158 (La. 1994) (interpreting "the insured" to refer to the specific insured who caused the loss)
Icenhour v. Cont’l Ins. Co., 365 F. Supp. 2d 743 (S.D. W. Va. 2004) (Standard Policy construction permits innocent co-insured recovery after arson by another insured)
Century‑Nat’l Ins. Co. v. Garcia, 246 P.3d 621 (Cal. 2011) (identical policy language protects innocent co-insureds)
Trinity Universal Ins. Co. v. Kirsling, 73 P.3d 102 (Idaho 2003) (majority of authorities allow innocent co-insured recovery under similar language)
Nangle v. Farmers Ins. Co. of Ariz., 73 P.3d 1252 (Ariz. Ct. App. 2003) ("the insured" vs "an insured" distinction evidences intent to protect innocent co-insureds)
Lane v. Sec. Mut. Ins. Co., 747 N.E.2d 1270 (N.Y. 2001) (persuasive authority on Standard Policy interpretation favoring innocent co-insureds)
Watson v. United Servs. Auto. Ass’n, 566 N.W.2d 683 (Minn. 1997) (similar construction of exclusion preserves coverage for innocent co-insureds)
Borman v. State Farm Fire & Cas. Co., 521 N.W.2d 266 (Mich. 1994) (cases construing "the insured" exclusion to avoid barring innocent parties)
Davis v. Commonwealth Edison Co., 336 N.E.2d 881 (Ill. 1975) (Illinois public policy disfavours indemnifying willful misconduct but does not bar recovery by innocent co-insureds)