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

Scruggs denied Monsanto’s allegations and brought numerous counterclaims against it. Scruggs also asked his insurer, Farmland Mutual Insurance Company, to represent him in the case. The insurer refused because the wrongful acts Scruggs was accused of were intentional and not covered by insurance. During the federal court case, Scruggs appealed the denial of coverage to the Mississippi Supreme Court, which agreed with Farmland that there was no coverage and no duty to defend.

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

Did the Agent Fail to Advise?

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

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

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

As for Scruggs’s allegations regarding Bost’s and Nowell’s failure to advise, the state circuit court judge found that no duty arose, “because neither Defendants nor Plaintiff even mentioned patent infringement coverage.” Finally, the circuit judge found that Bost and Nowell couldn’t be held liable for not realizing the potential for the patent infringement suit, because “the Mississippi Supreme Court has held that request for ‘full coverage’ does not require an insurance agent to provide coverage for all conceivable risks or perils.”

The Court’s Analysis

The Mississippi Supreme Court found that Scruggs’s actions were both intentional and illegal, and therefore uninsurable as a matter of law. Agreeing with the circuit judge, the Supreme Court also held that Bost and Nowell couldn’t be liable for any form of negligence. The Supreme Court said, even if Bost and Nowell did have some duty to recognize Scruggs’s need for patent-infringement insurance and failed to inform him that he needed it, they couldn’t be liable for that omission, as insurance coverage for Scruggs’s intentional actions could not exist in Mississippi as a matter of law.

According to the Supreme Court’s opinion, in general, it’s against public policy for an insurance contract to provide coverage for the intentional or willful misconduct of an insured. People should not be allowed to insure themselves against acts prohibited by law. From the face of Monsanto’s complaint, only intentional torts (wrongful acts) were alleged, and Scruggs’ pattern of conduct was one of intentional acts. Indeed, the Mississippi Supreme Court noted, it took a preliminary injunction by a federal court to stop Scruggs from using or selling the seeds. Thus, the Supreme Court found, the circuit court’s grant of summary judgment in Bost and Nowell’s favor was correct. Scruggs v. Bost, 2014 WL 5375946 (Miss., Oct. 23, 2014).

Insurance is not a panacea for every possible wrong conducted by an insured. It must only provide defense and indemnity to an insured for events that are fortuitous, accidental, contingent and unknown at the time the policy is acquired. In addition, an insured who has acted improperly is obligated to inform the insurer of facts material to its decision to insure or not insure. In this case Scruggs was involved in a criminal scheme to steal Monsanto’s proprietary seeds and did so with an intent to profit from the work of Monsanto. In so doing Scruggs could have no claim against the agents for not obtaining appropriate insurance for his farming business because there is no insurance policy that could be legally sold in Mississippi that would cover his criminal and intentional acts. He must pay, therefore, from his own pockets the more than $8 million verdict.

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

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