Criminal Acts Exclusion Examined
October 6, 2014
The insured landlord brought a declaratory judgment action against the insurer to recover expenses paid to decontaminate a house where the tenant had manufactured methamphetamine. This case is Neighborhood Investments v. Kentucky Farm Bureau Mut. Ins. Co., 430 S.W.3d 248 (2014).
Neighborhood leased a house to McCormick. During the lease, McCormick was arrested for manufacturing methamphetamine (meth) in the house. It was later determined that the byproducts of the meth production had contaminated the house and made it uninhabitable. Neighborhood was prohibited by the authorities from re-leasing the house until the premises was decontaminated.
Neighborhood filed a declaratory action against its insurer, Kentucky Farm Bureau Mutual for a determination of whether the insurance policy covered the decontamination expenses. The insurer denied coverage and the circuit court granted summary judgment in favor of the insurer. Neighborhood appealed.
The Court of Appeals of Kentucky noted that the circuit court found that the dishonest or criminal acts exclusion disposed of the claim of coverage. The appeals court said that, from a plain reading of the exclusion, three requirements must be met in order to trigger the exclusion: a loss caused by a dishonest or criminal act committed by anyone that Neighborhood entrusted with the property for any purpose. In this instance, there was a loss caused by a criminal act, so the issue for the appeals court was whether that act was committed by someone that Neighborhood “entrusted” with the property.
Neighborhood contended that the insurer misunderstood the difference between leasing and entrusting. A lease, said the insured, is not entrusting real property to a tenant; it is the exchange of most, if not all, of the rights associated with ownership of a parcel of real property for a period of time. The insured thus contended that the word “lease” used as a legal term of art is not synonymous with the word “entrust.”
Neither party to this lawsuit cited any Kentucky case law on the meaning of “entrust” so the appeals court looked to the dictionary. The court found that the word “entrusted” conveys the idea of the delivery or surrender of possession of property by one to another with a certain confidence regarding the other's care, use, or disposal of the property. The word clearly suggests, said the court, the existence of a consensual bailment situation where the person delivering the property expects the person to whom possession is delivered to use the property for the purpose intended by the owner and stated by the recipient.
The court ruled that Neighborhood certainly delivered and surrendered possession of the house to McCormick and expected McCormick would not use the house for any kind of criminal enterprise. Therefore, the court found that within the common and ordinary meaning of the word, Neighborhood “entrusted” its house to McCormick. The opinion of the circuit court was affirmed.
Editor's Note: In this matter of first impression, the Court of Appeals of Kentucky found that since the policy itself did not define the term “entrust,” the common and ordinary dictionary meaning of the word would suffice to determine the issue of coverage in this instance.