Erlin-Lawler Enterprises, Inc. v. Fire Ins. Exch

In Erlin-Lawler Enterprises, Inc. v. Fire Ins. Exch. (1968) 267 Cal. App. 2d 381, property belonging to a closely held corporation was destroyed in a fire and an officer and shareholder, along with an ex-officer and ex-shareholder, were convicted of arson. The corporation sued the insurer to recover policy benefits. The trial court entered judgment in favor of the insurer based on the corporation being the alter ego of the two arsonists. On appeal, the corporation pointed out that the shareholder arsonist owned only 50 percent of the shares. The other 50 percent were owned by his ex-wife and the other arsonist's ex-wife as their separate property. The two women were officers and at least one of them took an active, full-time role in the operation of the corporation's business. Neither had any role in the arson. Finding no dispositive California law on the issue of whether a corporation could recover from its insurer under these circumstances, the appellate court conducted a lengthy review of the law in other jurisdictions and concluded there could be no bright-line rule: "From the cases decided in the other jurisdictions, the following basic rule may be deduced: The arsonist's status as an officer, stockholder, employee or agent of an insured corporation does not necessarily preclude the corporation from recovering upon the policy of insurance. The basic function of the court is to see that no one takes advantage of his own wrong. . . . An analysis must be made in each case to see if the arsonist will benefit by the recovery on the policy, either directly or indirectly." ( Erlin-Lawler Enterprises, Inc. v. Fire Ins. Exch., supra, 267 Cal. App. 2d at p. 385.) The court reversed the defense judgment and remanded the matter for findings on various factual matters such as whether the arsonist shareholder was in dominant control of the corporation, whether the cash used to set up the corporation came from separate property of the wives, whether the couples separated before or after the fire, etc. ( Id. at pp. 387-388.)