June 12, 2021

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Is Mental Incapacity Defense Available to Insureds to Defeat the Intentional-Loss Exclusion?

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In a matter of first impression, the Supreme Court of Kentucky recently held that a mental incapacity defense was available to insureds to defeat the intentional-loss exclusion in an insurance policy.1 In that case, the insureds’ teenage son, who was in a disturbed mental state, started a house fire in a suicide attempt. After the fire damaged the house to the point it became uninhabitable for an extended period of time, the insureds made a claim for property damage under their homeowners policy. The insurer denied the claim relying upon the intentional-loss exclusion within the policy.

The trial court granted summary judgment in favor of the insureds on the basis that from their son’s subjective viewpoint, he lacked the mental capacity to form the intent to damage the home when he set the fire. The Kentucky Court of Appeals reversed, holding that the intentional-act exclusion should be viewed objectively to exclude from coverage actions that could be reasonably expected to cause a loss.

The Supreme Court of Kentucky agreed with the lower appellate court that actions should be judged objectively, and that the son’s act of starting the fire was an intentional act that could be reasonably expected to cause a loss under the intentional-loss exclusion. The supreme court held, however, that an insured may still be able to pursue payment under a policy if the insured was suffering from a lack of mental capacity at the time of the act. To defeat the intentional-act exclusion based upon a mental incapacity, the insured must show that at the time of the act, not just that they did not know right from wrong, but that they did not understand the nature and quality of their actions so that they were rendered unable to understand the physical nature of their consequences. Finally, the court noted that this standard results in a high burden on the insured but provides adequate protection for the insured’s reasonable expectation of insurance coverage for property damage.
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1 Foreman v. Auto Club Property-Casualty Ins. Co., 617 S.W.3d 345 (2021).

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