If you are leasing your property, or plan to lease property, you may want to review your property insurance policy to see if it contains an “entrustment” exclusion that could preclude coverage for a loss.
An example of an “entrustment exclusion” is as follows:
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;
(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.
In a recent Florida case,1 the insured, a commercial property owner, leased real property to a tenant to operate a restaurant, and also leased business personal property located on the premises. The lease agreement provided that the tenant would be in “complete and exclusive possession” of all leased property upon commencement of the lease term and upon termination of the lease, would return the real and business personal property to the insured. When the tenant vacated the premises, the insured discovered that the tenant had not only damaged the premises, but had removed most of the business personal property!
You can guess what happened next. The insured filed a claim with its insurer for theft and vandalism. However, the insurer denied the claim—citing the entrustment exclusion above—on the basis that the tenant’s actions constituted dishonest or criminal behavior by someone to whom the insured had entrusted the property. It was undisputed that the tenant took the business personal property and damaged the real property. Therefore, the issue was whether the insured “entrusted” the property to the tenant. Because neither the policy nor the Florida insurance code defined the word entrust, the Fourth District Court of Appeal looked to the plain meaning of the word:2
“Entrust” is defined as ‘ “to confer a trust on,” or “to commit to another with confidence.’ ” Neighborhood Invs., LLC v. Kentucky Farm Bureau Mut. Ins. Co., 430 S.W.3d 248, 253-54 (Ky. Ct. App. 2014) (quoting Merriam-Webster Collegiate Dictionary (11th ed. 2005)); see also F.D. Stella Prods., Co. v. Gen. Star Indem. Co., No. 03 C 5151, 2005 U.S. Dist. LEXIS 32793, at *13-14 (N.D. Ill. Dec. 12, 2005) (quoting definition of “entrust” from Webster’s Third New International Dictionary as “1. to confer trust upon; deliver something to (another) in trust. 2. to commit or surrender to another with a certain confidence regarding his care, use or disposal of”).
The court, affirming the trial court’s summary judgment in favor of the insurer, concluded that under the plain meaning of the term entrust and the facts, the insured “entrusted” its property to the tenant because it “surrendered possession of its real and business personal property to the tenant” and “did so with confidence that [the tenant] would use the property in accordance with the terms of the Lease and would not damage, steal, or dispose of [the insured’s] property in violation of the Lease.”3
Even though the word “tenant” was not included in the policy exclusion, the court determined that it still encompassed a landlord-tenant relationship based on the language “anyone to whom you entrust the property for any purpose.”