JUNE 2012 BAD FAITH CASES: APPELLATE COURT AFFIRMS SUMMARY JUDGMENT TO CARRIER BECAUSE ENTRUSTMENT EXCLUSION APPLIES TO REAL PROPERTY (Third Circuit)
In 3039 B St. Assocs. v. Lexington Ins. Co., the Third Circuit heard an appeal from the district court’s grant of summary judgment to the carrier in a dispute over the coverage of stolen property. The case arose from the theft of several radiators from the insured’s warehouse. After the carrier denied coverage on the basis of a policy exclusion barring coverage for goods lost through the activity of an entrusted individual, the insured sued the carrier.
The district court granted summary judgment and refused to reconsider the motion.
The theft occurred when the president of the insured corporation permitted a former employee to scavenge metal from the warehouse to “clean the place up.” The president of the insured company told the individual that he was permitted to take “the loose stuff” only. However, the former employee took 66 radiators, which had to be dismounted from the walls of the building. He claimed that he had been authorized to remove the radiators as well as other scrap metal.
After reporting the theft to its carrier, the insured’s claim was denied on the basis of an “entrustment exclusion” contained within the policy. This clause bars coverage over a loss that occurs when property is entrusted to another party. Because the warehouse had been entrusted to the former employee and alleged thief, the carrier declined coverage.
The insured claimed that the stolen radiators were parts of the warehouse structure, preventing them from become subject of a bailment entrusted to another person. The court disagreed, reasoning that the exclusion does not merely apply to personal property, but also real property such as the warehouse. The fixed nature of the radiators does not change the fact that it was still entrusted to another person.
Moreover, the court reasoned, the term bailment does not appear in the policy. Because the insured entrusted the warehouse to a third party, any loss occurring as a result was excluded from the policy. The Third Circuit therefore affirmed the district court’s ruling and held that the carrier was properly awarded summary judgment.