(Article from Insurance Law Alert, July/August 2024)
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Holding
Reversing a trial court decision, a Louisiana appellate court ruled that an insured was not “legally obligated to pay” damages and was therefore not entitled to coverage under a liability policy. Hodge v. Louisiana Farm Bureau Mutual Ins. Co., No. 55,656 (La. App. Ct. June 26, 2024).
Background
The coverage dispute arose out of an accident in which an employee of Billy Ray Hodge negligently drove one of Hodge’s tractors into an irrigation system located on property owned by Sherman Shaw. At the time of the accident, Hodge was leasing that property from Shaw pursuant to a verbal agreement and was using the irrigation system located on that property, but there was no agreement with respect to a lease of the irrigation system itself.
After the accident, Shaw did not file a claim with his property insurer, nor did he assert a claim against Hodge. However, Hodge contacted Farm Bureau, his own liability insurer, who sent an adjuster to assess the damage. Hodge claims that in response to assurances by the Farm Bureau adjuster, Hodge replaced the irrigation system. When Farm Bureau later denied coverage, Hodge sued, alleging detrimental reliance and breach of the duty of good faith. Farm Bureau asserted several affirmative defenses, including a policy exclusion for property that is “rented, occupied, and/or loaned” to Hodge or within his “care, custody, or control.”
A trial court denied Farm Bureau’s summary judgment motion, finding that issues of fact existed as to whether Hodge leased the irrigation system in connection with his lease of the land, or had custody or control over it. Following a bench trial, the court ruled the exclusion did not apply and that Hodge was entitled to coverage for the cost of replacing the system.
Decision
Applying a manifest error standard of review, the appellate court reversed, ruling that coverage was unavailable because Hodge was never “legally obligated to pay” the cost of replacing the system, as required by the liability policy. Rather, the court explained, Hodge “decided on his own that he was 100 percent at fault.” As such, Farm Bureau had no obligation to fund Hodge for his expenditure.
The court further held that the policy exclusion provided an independent basis for Farm Bureau’s coverage denial. The court explained that Hodge was the only person that operated the irrigation system, and was solely responsible for maintaining and upgrading it. The court concluded that those facts squarely implicated an exclusion that applied to physical possession and control over property.
Finally, the court ruled that the theory of detrimental reliance did not apply. While Hodge allegedly relied on a statement by the adjuster prior to placing the order for the new system, the record indicated that he was on notice within several days that Farm Bureau was asserting coverage defenses, and did not cancel the order.
Comments
The decision highlights an important distinction between first-party property insurance, which covers losses sustained by the insured, and third-party liability insurance, which typically requires underlying liability (i.e., “legally obligated to pay as damages”) owed by the insured to a third-party claimant. For third-party liability coverage to be implicated, the insured must generally establish liability by virtue of an underlying judgment or settlement agreement, neither of which were present here.