Courts do not Have the Power to Rewrite an Insurance Policy
Damage by Thief to Real Property Clearly Excluded
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Posted on September 7, 2021 by Barry Zalma
When Richard Hermanns bought his first citrus grove in 2009, he hired Richard McKenzie – who had experience with starting and managing citrus groves – to take care of things for him. He relied on McKenzie for everything: clearing the land, buying the supplies, planting the trees, keeping the trees healthy, maintaining the groves, and picking the fruit. McKenzie, in turn, billed Hermanns for materials purchased and labor expended. Hermanns left everything in McKenzie’s hands and did not visit the groves often. That error eventually resulted in litigation called The Travelers Indemnity Company Of Connecticut v. Richard Mckenzie & Sons, Inc., Hermanns Real Estate Ventures, LLC, No. 18-13172, United States Court of Appeals, Eleventh Circuit (August 26, 2021) attempting to provide coverage for the damage done by the thief.
FACTS
Hermanns’ trust in McKenzie was a mistake. Hermanns would later allege that McKenzie billed him for hundreds of thousands of dollars’ worth of trees that were never planted, fertilizer that was never applied, and diesel fuel that was never delivered. He also stole some of Hermanns’ diesel fuel for his own use. And through his negligence, McKenzie damaged Hermanns’ groves: He planted only 115 trees per acre instead of the industry-standard 150, planted many of the trees too deep, failed to apply enough fertilizer and pesticides, failed to dig enough drainage ditches, and generally did a bad job of caring for the trees. Hermanns discovered McKenzie’s fraud, theft, and negligence and fired him.
Hermanns sued McKenzie in Florida state court. His original complaint alleged facts about McKenzie falsely billing Hermanns and stealing from him, and based on that it asserted claims for breach of contract, breach of fiduciary duty, and an equitable accounting. The complaint had no claim for negligence. Almost a year later, and two days after finding out that McKenzie had an insurance policy issued by Travelers, Hermanns successfully moved to amend the complaint to add a claim for negligence. Hermanns notified Travelers of the amended complaint against McKenzie. Travelers disclaimed coverage.
In the state court litigation, Hermanns and McKenzie entered into a settlement agreement. They settled the three non-negligence claims for $200,000, which was to be paid by McKenzie personally. But as to the negligence claim, they attempted to bring that part of the settlement within the “Coblentz doctrine,” meaning McKenzie would not be on the hook for paying it. Their attempt consisted of agreeing that McKenzie owed to Hermanns $2,965,750 in damages for the negligence claim, but that Hermanns would not try to collect any of the judgment from McKenzie. Instead, Hermanns could only go after Travelers for those damages.
Travelers sued seeking a declaratory judgment action against McKenzie and Hermanns declaring that, based on the insurance policy’s provisions, it had no duty to defend against or indemnify McKenzie for Hermanns’ original state court complaint, or his amended state court complaint, or the state court consent judgment that had been entered for Hermanns against McKenzie.
Travelers moved for summary judgment on all the claims and counterclaims. The district court granted summary judgment in favor of Travelers on all of the claims and counterclaims. The court ruled that Travelers had no duty to defend McKenzie against Hermanns’ complaint.
ANALYSIS
If Hermanns and McKenzie lose on the duty to defend, they lose on everything. And the district court ruled that they lost on the duty to defend. One of the bases for its ruling was that the damages alleged in Hermanns’ amended complaint were not covered by the insurance policy because of applicable policy exclusions and because there was no duty to defend, there was no wrongful refusal by Travelers to defend McKenzie. Therefore, the settlement agreement is unenforceable.
A Coblentz agreement can be enforced only if the plaintiff can make several showings. The plaintiff must show coverage, wrongful refusal to defend, and that the settlement was reasonable and made in good faith.
Under Florida law, an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage. Florida law requires courts to determine whether an insurer has a duty to defend its insured based only on the eight corners of the complaint and the policy and only as the complaint’s alleged facts are fairly read.
The “facts” the court must consider in evaluating the duty to defend come solely from the complaint, regardless of the actual facts of the case and regardless of any later developed and contradictory factual record. Regardless of the rules of interpretation and the broad duty to defend, the lawsuit must be for something covered by the insurance policy. The insurer has no duty to defend when the pleadings show the applicability of a policy exclusion.
The insurance policy specifies a number of situations in which it does not apply. The trial court relied on the exclusion that applies to property damage to “[t]hat particular part of real property on which you . . . are performing operations, if the ‘property damage’ arises out of those operations.” The Eleventh Circuit concluded that the damage alleged in Hermanns’ complaint meets each requirement set out in the exclusion’s text.
The only property damage the complaint alleges was caused by McKenzie’s negligence is damage to real property, a point that Hermanns and McKenzie conceded. That consequence and fix alleged indicates that McKenzie’s negligence, as distinguished from his intentional acts, damaged only the citrus groves, meaning the citrus trees and possibly the land on which they grew; trees, as well as land, are real property under Florida law.
The only fair reading of the complaint is that McKenzie’s operations were on all of the property that the complaint alleges was damaged: the groves. There is no other property to which the complaint refers or could be referring when it alleges that McKenzie’s negligence “has caused damages to [Hermanns]” that required clearing “70 to 100 acres of land to compensate for the past improper care.”
The Eleventh Circuit noted that any damage certainly arose out of McKenzie’s operations. The complaint alleges that kind of causal connection between the property damage and McKenzie’s operations. The Eleventh Circuit was compelled, by Florida precedent to never rewrite contracts, add meaning that is not present, or otherwise reach results contrary to the intentions of the parties. That means when contractual language is clear and unambiguous, an appellate court cannot indulge in construction or interpretation of its plain meaning.
An insurance policy can both provide coverage and also exclude some things that might otherwise fall within that coverage. That’s not a conflict. It’s just an exclusion. The Eleventh Circuit concluded that the plain meaning of the provisions is clear, the farm caretaker endorsement and the exclusion taken together mean that coverage extends to property damage caused by the insured’s farm care-taker operations, but not if the damage is to real property, such as citrus groves.
Hermanns’ and McKenzie’s contended that reading the exclusions as did the trial court makes the coverage provided by the farm care-taker endorsement illusory.
The Eleventh Circuit resolved that claim concluding that if the policy’s coverage and exclusion provisions do not negate one another, the coverage is not illusory, and there is no ambiguity, so the plain language of the exclusion controls. Coverage is illusory under Florida law only if the insurance policy grants coverage with one hand and then with the other completely takes away the entirety of that same coverage. Completeness is key. A policy is illusory only if there is an internal contradiction that completely negates the coverage it expresses to provides or if the exclusion completely swallows the insuring provision.
It may be that McKenzie does not like the terms of the insurance coverage that he purchased. However, after the fact wishes are not enough to change before the fact choices and the Eleventh Circuit had no authority to rewrite the insurance contracts to grant his wishes and cure buyer’s remorse.
Because the negligence claim in Hermanns’ amended complaint alleges only damage that falls within the exclusion, Travelers had no duty to defend McKenzie against Hermanns’ lawsuit, and there was no loss coverage.
ZALMA OPINION
Before entering into litigation on an insurance coverage issue it is best to do what the Eleventh Circuit did in this case: read the entire policy. Although the plaintiffs’ counsel tried valiantly to find a way around clear and unambiguous exclusions the acts complained of were simply excluded. The court, by ruling on the one exclusion, avoided all of the intentional acts and lack of fortuity since the insured was obviously a thief who did the damage intentionally and fraudulently. Either way there was no coverage and Travelers should not have been required to defend through trial and appeal this case.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.
He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.
He is available at
http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4