Editor's note: Steven A. Meyerowitz, Esq., is a director of FC&S Legal. FC&S and PC360 are both owned by Summit Professional Networks.

An insurance policy's criminal acts exclusion barred coverage of costs the insured would have to incur to clean-up a house contaminated by the tenant's manufacturing of methamphetamine, a Kentucky appeals court has decided.

The case

After Neighborhood Investments, LLC, leased a house in Louisville, Kentucky to a tenant, the tenant was arrested for manufacturing methamphetamine in the house. The authorities determined that the byproducts of the methamphetamine production had contaminated the house and had rendered it uninhabitable; accordingly, they prohibited Neighborhood from re-leasing the house to any other tenant until the premises had been decontaminated.

Neighborhood sued its insurance carrier, Kentucky Farm Bureau Mutual Insurance Company, seeking an order that the policy it had purchased from Farm Bureau covered these substantial decontamination expenses; Farm Bureau argued that the policy unambiguously excluded such coverage.

The trial court granted summary judgment in favor of Farm Bureau, and Neighborhood appealed.

The policy

The criminal acts exclusion provided:

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

….

h. Dishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose:

(1) Acting alone or in collusion with others; or

(2) Whether or not occurring during the hours of employment.

This exclusion does not apply to acts of destruction by your employees (including leased employees); but theft by employees (including leased employees) is not covered.

 

The appellate court's decision

The appellate court affirmed.

In its decision, it explained that three requirements had to be met to trigger the policy's criminal acts exclusion:

• A loss
• Caused by a dishonest or criminal act,
• Committed by “anyone” Neighborhood “entrust[ed]” with “the property for any purpose.”

After easily determining that the contamination caused by the tenant's methamphetamine production was a “loss” and that the tenant's methamphetamine production constituted a “criminal act,” the appellate court examined whether the tenant qualified as “anyone” whom Neighborhood had “entrust[ed]” with “the property for any purpose.”

The appellate court then found that, within the common and ordinary meaning of the word, Neighborhood had “entrusted” its house to the tenant when it leased the house to him.

The case is Neighborhood Investments, LLC v. Kentucky Farm Bureau Mut. Ins. Co., No. 2013–CA–000375–MR (Ky. Ct. Ap. March 28, 2014). Attorneys involved include: Randall L. Wright St., Matthews, KY, for Appellant; Valerie W. Herbert, Louisville, KY, for Appellee.

FC&S legal comment

At least one other court has reached the same conclusion. See Vision Financial Group, Inc. v. Midwest Family Mut. Ins. Co., 355 F.3d 640 (7th Cir.2004) (“entrusted” clearly encompassed a lessee-lessor relationship).

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