COMMERCIAL PROPERTY – VANDALISM DAMAGE TO LEASED PREMISES – DISHONEST OR CRIMINAL ACTS EXCLUSION – ENTRUSTMENT EXCLUSION
Winking Group, LLC v. Aspen American Ins. Co.(SDNY decided 1/18/2018)
Many commercial property insurance policies exclude coverage for loss or damage caused by or resulting from a dishonest or criminal act of the named insured and certain categories of persons related to the named insured:
2. We will not pay for loss or damage caused by or resulting from any of the following:
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.
If a tenant intentionally trashes the leased property while being evicted, does this exclusion apply to negate property coverage? If an order of eviction has issued, can it be said that the leased property is still "entrusted" to the tenant?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. (Emphasis added.)
In this case, the federal District Court said yes to both questions.
Winking Group leased Manhattan premises to Ming Dynasty, Inc, which in turn subleased the premises to East Market, Inc., which occupied the premises with Winking's knowledge and consent from 2009 to early January 2015.
In 2014, Ming Dynasty sued East Market for nonpayment of rent. The parties agreed to a stipulation of settlement whereby East Market was to vacate the premises no later than January 10, 2015. On or around January 10, 2015, a notice of eviction was posted on the door of the premises, and East Market was evicted. After the eviction notice was posted, Winking did not retrieve the keys to the property, and it did not change the locks until January 23, 2015.
Also around January 10, 2015, the premises were vandalized. On January 15, 2015, the property's manager told the New York City Police Department that East Market had caused the damage to the premises.
Aspen denied coverage for the vandalism damage on the basis of the policy's dishonest or criminal act ("entrustment") exclusion. Winking commenced this breach of contract action, contending in opposition to Aspen's summary judgment motion that the entrustment exclusion did not apply because: (1) it was disputed whether East Market vandalized the premises; and (2) even if East Market did vandalize the premises, it was after Winking had revoked its entrustment of the leased premises.
The District Court rejected both arguments and granted summary judgment to Aspen. As to Winking's second argument in opposition to the motion, the court held:
Plaintiff argues that the entrustment exclusion does not apply to the facts of this case because Plaintiff terminated its entrustment by evicting East Market from the premises on January 5, 2015. This argument is unpersuasive. Construing the entrustment exclusion in Plaintiff's favor, but interpreting it in accordance with its plain meaning, it is sufficient that the vandalism was causally related to Plaintiff's initial entrustment of the premises to East Market. See, e.g., Lexington Park Realty LLC, 992 N.Y.S.2d at 1-2 (holding that the entrustment exclusion applied where plaintiff's tenant did not return cabinets and appliances after the termination of the lease agreement); see also Easy Corner, Inc. v. State Nat'l Ins. Co., 56 F. Supp. 3d 699, 707 (E.D. Pa. —) (applying Pennsylvania law, granting summary judgment based on a similar entrustment exclusion because "the loss [was] causally connected to the act of entrustment: because of [the employee's] prior management of the bar, [the employee] had a key and was able to access the building easily"). The entrustment exclusion applies broadly to "loss or damage caused by or resulting from" a dishonest or criminal act by "anyone to whom you entrust the property for any purpose," and includes no language suggesting that the parties intended to limit its application to acts occurring before the conclusion of the parties' legal relationship. See, e.g., id. (applying Pennsylvania law, holding that "entrustment exclusions . . . apply even after the temporal termination of an entrustment, provided that there is a causal connection between the between the act of entrustment and the resulting loss"); Su v. New Century Ins. Servs., Inc., No. 12 Civ. 3894, 2013 WL 5775160, at *4 (C.D. Cal. Oct. 25, 2013) (internal quotation marks omitted) (applying California law, finding that "[e]ven if the loss occurs after the entrustment of the property has terminated, the exclusion still applies so long as there is a causal connection between the act of entrustment and the resulting loss"); F.D. Stella Prods. Co. v. Gen. Star Indem. Co., No. 03 Civ. 5151, 2005 WL 3436388 (N.D. Ill. Dec. 12, 2005) (applying Illinois law, holding that an entrustment exclusion "applies even if the dishonest or criminal act occurs after the entrustment has terminated"). Nor has Plaintiff proffered any evidence of the parties' intent to limit the entrustment exclusion's applicability.
Plaintiff also argues that this case is distinguishable from the cases cited by Aspen because, here, East Market was legally evicted, as opposed to the parties' relationship coming to its natural conclusion, or concluding in some other way. Plaintiff provides no legal authority for the proposition that East Market's formal eviction is legally relevant to the scope of the entrustment exclusion.
This exclusion has been held also to apply to:
- a vacating tenant's damage to the leased premises and removal of most of the business personal property -- Grover Commercial Enterprises, Inc. v. Aspen Insurance UK, Ltd., Case No. 3D14-1987 (Fla. 3d DCA Sept. 7, 2016); and
- contamination damage from a tenant's operation of a methamphetamine lab in a home -- Neighborhood Investments, LLC v. Kentucky Farm Bureau Mut. Ins. Co., 430 S.W.3d 248 (Ky. Ct. Ap. March 28, 2014).