The “dishonest entrustment” exclusion is an important way for property insurers to limit their exposure.  The exclusion precludes coverage for losses arising from the dishonesty of an insured, anyone with an interest in the property, or anyone to whom the covered property is entrusted.

The Appellate Division, First Department, recently expanded the scope of its ruling, finding that the dishonesty exclusion applies broadly to any property entrusted by the insured to others.

In Lexington Park Realty LLC v National Union Fire Ins. Co. of Pittsburgh, PA, the insured leased covered premises to a tenant who removed kitchen cabinets and appliances during its conversion of the property to a youth hostel. After closing the hostel, the tenant did not return the cabinets or appliances. The policy at issue contained an exclusion that precluded coverage for loss due to “‘[d]ishonest or criminal act[s]’ committed by anyone to whom the insured plaintiffs entrusted the subject property for any purpose.” The insured argued that term “entrustment” did not apply to fixtures but instead only to chattel.

Citing to the decision in AXA v. RAI, (a case involving WCM) and noting that it involved the “loss of art works consigned to a gallery,” the First Department held that “the terms of the policy at issue do not limit what can be entrusted, that property may be entrusted to another under a triple net lease agreement, and that the entrustment refers to the entirety of the premises unless otherwise specified.”

Thanks to Steve Kaye for his contribution to this post.  For more information, please write to Mike Bono.