K & W BUILDERS, INC.
MERCHANTS AND BUSINESS
MEN’S MUTUAL INSURANCE COMPANY, ET AL.
January 9, 1998
Record No. 970279
K & W BUILDERS, INC., DEFINED
BENEFIT TRUST NO. 1
MERCHANTS AND BUSINESS MEN’S
MUTUAL INSURANCE COMPANY, ET AL.
OPINION BY CHIEF JUSTICE HARRY L. CARRICO
FROM THE CIRCUIT COURT OF THE CITY OF SALEM
Roy B. Willett, Judge
Present: All the Justices
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
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
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 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. 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.
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
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
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
Any act or neglect of any person other than K&W beyond
K&W’s direction or control will not affect this
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
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
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.
 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."
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.