People engaged in criminal conduct or conduct intended to causedamage to another often try to buy insurance coverage in casethey’re caught in the act. The attempt fails because they run afoulof the definition of insurance: it only protects against eventsthat are contingent or unknown at the time the policy is acquired.A Mississippi farmer named Mitchell Scruggs learned this lesson thehard way, after several years in court in multiple cases.

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Patent Infringement Claim

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Monsanto Company develops, manufactures, licenses, and sellsagricultural chemicals, agricultural biotechnology and otheragricultural products. After much research, Monsanto developedgenetically modified seeds that had several favorable traits, suchas resistance to herbicides and certain insects and pests.

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Monsanto structured its marketing strategy for its geneticallymodified seeds carefully. Seed companies and farmers who wished touse Monsanto’s patented seeds were required to enter into alicensing agreement with Monsanto, which limited the use of itsseeds to one growing season. Farmers couldn’t resell or supply theseeds to any other person, and they couldn’t save any seed toreplant the next year. These restrictions were publicized in tradejournals and through public meetings with farmers, and they alsoappeared on the product label.

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When Monsanto determined that Scruggs had replanted its seeds,it filed suit against him in the U.S. District Court for theNorthern District of Mississippi on Sept. 7, 2000. The companyalleged that Scruggs “knowingly, intentionally and willfullyplanted unlicensed seed without authorization from Monsanto andused such seed in violation of Monsanto’s patent rights.”

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Scruggs denied Monsanto’s allegations and brought numerouscounterclaims against it. Scruggs also asked his insurer, FarmlandMutual Insurance Company, to represent him in the case. The insurerrefused because the wrongful acts Scruggs was accused of wereintentional and not covered by insurance. During the federal courtcase, Scruggs appealed the denial of coverage to the MississippiSupreme Court, which agreed with Farmland that there was nocoverage and no duty to defend.

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After extensive litigation on the patent infringement claim, thejury found that Scruggs had willfully infringed Monsanto’s patentsand awarded the company $8.9 million in compensatory damages.Monsanto Company v. Scruggs.

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Did the Agent Fail to Advise?

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Beginning in the 1990s, Scruggs purchased a general liabilitypolicy and an umbrella policy for all his farming activities fromhis agent, Greg Bost, who found coverage through Farmland. Afterlosing the patent infringement case and the appeal on the denial ofcoverage claim (Farmland Mut. Ins. Co. v. Scruggs, 886 So.2d 714 (Miss.2004)), Scruggs sued Bost and his employer, the NowellInsurance Agency, in Mississippi state court, arguing that, amongother things, Bost and Nowell negligently failed to advise him thathe needed to purchase patent infringement insurance.

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Scruggs testified in his deposition in the state action that hedidn’t mention patent infringement to Bost or ask him aboutpatent-infringement coverage before the policy was issued, nor didhe mention it before the renewal.

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Interestingly, Scruggs testified in his deposition that herenewed his policy with Farmland for a second time in April 2001,even after Monsanto had sued him and afterFarmland had denied coverage for the patent infringement claim. Healso testified that he renewed his coverage despite Bost remindinghim that Farmland had determined that no patent infringementcoverage existed.

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As for Scruggs’s allegations regarding Bost’s and Nowell’sfailure to advise, the state circuit court judge found that no dutyarose, “because neither Defendants nor Plaintiff even mentionedpatent infringement coverage.” Finally, the circuit judge foundthat Bost and Nowell couldn’t be held liable for not realizing thepotential for the patent infringement suit, because “theMississippi Supreme Court has held that request for ‘full coverage’does not require an insurance agent to provide coverage for allconceivable risks or perils.”

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The Court’s Analysis

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The Mississippi Supreme Court found that Scruggs’s actions wereboth intentional and illegal, and therefore uninsurable as a matterof law. Agreeing with the circuit judge, the Supreme Court alsoheld that Bost and Nowell couldn’t be liable for any form ofnegligence. The Supreme Court said, even if Bost and Nowell didhave some duty to recognize Scruggs’s need for patent-infringementinsurance and failed to inform him that he needed it, they couldn’tbe liable for that omission, as insurance coverage for Scruggs’sintentional actions could not exist in Mississippi as a matter oflaw.

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According to the Supreme Court’s opinion, in general, it’sagainst public policy for an insurance contract to provide coveragefor the intentional or willful misconduct of an insured. Peopleshould not be allowed to insure themselves against acts prohibitedby law. From the face of Monsanto’s complaint, only intentionaltorts (wrongful acts) were alleged, and Scruggs’ pattern of conductwas one of intentional acts. Indeed, the Mississippi Supreme Courtnoted, it took a preliminary injunction by a federal court to stopScruggs from using or selling the seeds. Thus, the Supreme Courtfound, the circuit court’s grant of summary judgment in Bost andNowell’s favor was correct. Scruggs v. Bost, 2014 WL5375946 (Miss., Oct. 23, 2014).

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Insurance is not a panacea for every possible wrong conducted byan insured. It must only provide defense and indemnity to aninsured for events that are fortuitous, accidental, contingent andunknown at the time the policy is acquired. In addition, an insuredwho has acted improperly is obligated to inform the insurer offacts material to its decision to insure or not insure. In thiscase Scruggs was involved in a criminal scheme to steal Monsanto’sproprietary seeds and did so with an intent to profit from the workof Monsanto. In so doing Scruggs could have no claim against theagents for not obtaining appropriate insurance for his farmingbusiness because there is no insurance policy that could be legallysold in Mississippi that would cover his criminal and intentionalacts. He must pay, therefore, from his own pockets the more than $8million verdict.

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Barry Zalma, Esq., CFE, is a California attorney, insuranceconsultant and expert witness specializing in insurance coverage,claims handling, bad faith and fraud. Contact him at [email protected].

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Meet Barry Zalma at the upcoming 19th annual America’sClaims Event, June 17-19 in Austin. For more information on theevent or to register, click here. Use Code PC360AE & Save$100.

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