After the fact wishes are not enough to change before the fact choices


By: Matt Boyer

The Eleventh Circuit declines to find that a policy’s coverage is illusory simply because the policy does not cover the damages the insured wants it to cover   

On August 26, 2021, the Eleventh Circuit Court of Appeals published its opinion in The Travelers Indemnity Company of Connecticut v. Richard McKenzie & Son, Inc., Hermanns Real Estate Ventures, LLC, Docket No.: 18-13172, on appeal from the U.S. District Court for the Middle District of Florida.  Like most insurance coverage disputes, this case arose out of underlying civil claims and the coverage sought for such claims under a policy of insurance. Under a distinctly “Florida” set of facts, the claims, in this case, are related to the care and management of citrus groves owned by appellant Hermanns.  As the allegations go, Hermanns, a more or less absentee owner, hired co-appellant Richard McKenzie to care for the groves, with McKenzie billing Hermanns for all supplies and labor.  Subsequently, the relationship went south, with Hermanns contending that McKenzie fraudulently charged him for unperformed work and unpurchased supplies and negligently cared for the groves, causing them to be damaged.  As a result, Hermanns sued McKenzie, asserting claims for breach of contract, breach of fiduciary duty, and an equitable accounting, but asserted no claim for negligence.  However, approximately a year later, after finding out that McKenzie had an insurance policy issued by Travelers, Hermanns amended his Complaint to add a claim of negligence.  Hermanns notified Travelers of his amended complaint against Travelers and Travelers disclaimed coverage.   

Following the denial of coverage by Travelers, Hermanns and McKenzie entered into a settlement agreement under which McKenzie personally paid Hermanns $200,000 for the non-negligence claims. McKenzie and Hermanns also agreed as part of the settlement that they would enter into a consent judgment by which McKenzie was liable for nearly $3 million in damages for the negligence claim, but that Hermanns would not attempt to collect that part of the judgment against McKenzie and only pursue recovery of it against Travelers.  Travelers filed a declaratory judgment action against McKenzie and Hermanns, seeking a declaration that it did not have a duty to defend or indemnify McKenzie from the claims in Hermanns’ original or amended complaints or the consent judgment entered against McKenzie.  Travelers also sought to have the court rule that the consent judgment was unenforceable because it was the result of collusion and was for an unreasonable amount of money.  Hermanns asserted counterclaims for breach of contract based on Travelers’ failure to defend and indemnify McKenzie and a declaratory judgment that the consent judgment was enforceable.   

The federal trial court granted summary judgment in favor of Travelers, finding that the consent judgment was unenforceable because it was for an unreasonable amount and collusive and entered into in bad faith.  The court also held that the Travelers policy did not provide coverage for the allegations in Hermanns’ complaint.  In regard to the coverage question, the court relied on the “expected or intended injury” exclusion and certain sub-sections of the “damage to property” exclusion precluding coverage for damage to real property caused by the insured’s (McKenzie’s) operations. Based on those two exclusions, the trial court found that Travelers had no duty to defend McKenzie against Hermanns’ complaint.   

In its ruling, the Court of Appeals found that the Travelers policy did exclude coverage for the claims alleged by Hermanns and, therefore, Travelers had no duty to defend McKenzie in the underlying lawsuit.  Further, because the presence of coverage and wrongful refusal to defend are required showings in order to enforce the type of settlement entered into by Hermanns and McKenzie (in Florida, a Coblentz agreement), the panel also affirmed the lower court’s holding that the consent judgment was not enforceable against Travelers.    

Acknowledging that an insurer’s duty to defend is broad, the Court of Appeals also noted that Florida is an “eight corners” state.  Therefore, the evaluation of the duty to defend is based only on the facts within the four corners of the complaint, as fairly read and regardless of the actual facts of the case or any later developed contradictory factual record, and the coverage terms within the four corners of the policy. As to Hermanns’ theft and improper billing claims, which made up the entirety of his original complaint, the Court of Appeals found that they were precluded from coverage under the “expected or intended injury” exclusion. Turning to the Hermanns’ negligence cause of action set forth in his Amended Complaint, the Court of Appeals’ analysis focused on the j.(5) exclusion found in standard commercial general liability coverage forms, which precludes coverage for property damage to a particular part of real property on which the insured is performing operations, if the property damage arises out of those operations. In particular, the Court’s analysis focused on the application of that exclusion to the coverage provided to McKenzie under a Farm Care-Taker endorsement to the policy.   

Arguing that the j.(5) exclusion was not applicable, Hermanns and McKenzie alleged that the damages in the complaint did not fall within the exclusion and, even if they did, the exclusion is invalid because it conflicts with the Farm Care-Taker endorsement or results in illusory coverage under that endorsement.  Noting that trees and land are real property under Florida law and that Hermanns’ operations for McKenzie were broad, the Court of Appeals affirmed the district court’s finding that the negligence claim in Hermanns’ complaint alleged only property damage to the particular part of real property – the land and trees within Hermanns’ citrus groves – on which McKenzie was performing operations and that such property damage arose out of those operations.  The Court also noted that the alleged property damage did, in fact, occur while McKenzie was performing its operation because the damage to the groves was done when McKenzie underplanted and failed to properly maintain the trees that were planted.   

As to Hermanns’ and McKenzie’s second argument, the panel began its analysis by establishing several principles guiding its interpretation of the policy: (1) that the policy’s terms were to be interpreted in accordance with their plain language as bargained for by the parties; (2) that the court may not rewrite contracts, add meaning that is not present, or reach results contrary to the intention of the parties; and (3) when contractual language is clear and unambiguous, the court cannot indulge in construction or interpretation of its plain meaning.  The Court also noted that true ambiguity exists only when the language at issue is reasonably susceptible to more than one interpretation and that policy terms are not ambiguous simply because they are complex, require analysis, or even if they may be confusing to persons not trained or experienced in the form and language of insurance policies.  Guided by these interpretive boundaries, the Court of Appeals found that the Farm Care-Taker endorsement clearly excluded the application of only the three specified exclusions set forth in the endorsement.  The endorsement, by failing to note or reference any other exclusions, did not somehow supersede or negate the application of all other exclusions set forth in the policy.    

The Court of Appeals also found that the application of exclusion j.(5) was not in conflict with the coverage provided under the Farm Care-Taker endorsement.  Though the Farm Care-Taker endorsement extended coverage for farm care-taker operations, j.(5) simply applied to exclude certain damages that might otherwise fall within that grant of coverage.  As the Court found, such is “par for the insurance course.”  Here, as the Court of Appeals plainly stated, the Farm Care-Taker endorsement provided McKenzie coverage for farm care-taker operations, but not if the damages were to real property such as the citrus groves.  The Court went on to affirm that such an interpretation did not create illusory coverage, as Hermann’s and McKenzie asserted.    

Coverage is illusory under Florida law only if the policy grants coverage on one hand and then with the other takes away the entirety of that same coverage.  As the Court of Appeals found, completeness is key.  “[T]here is a dispositive difference between complete contradiction or complete negation and mere excepting some or many or even most things from coverage.”  Exclusions may be significant without completely contradicting the grant of coverage.  Though exclusion j.(5), in application, may exclude coverage for a signification portion of coverage provided under the Farm Care-Taker endorsement, it did not preclude coverage for all farm care-taker operations.  It does not exclude coverage for all property damage, only property damage to real property.  As long as “the category of coverage is bigger than the category of exclusion; it is possible to do the covered activity without also doing the excluded activity” and coverage is not illusory.   

In the opinion, the Eleventh Circuit provides a clear and concise explanation of the applicable standards for policy interpretation.  From explanation of Florida’s “eight corners” rule, to how exclusions are to be interpreted, to what actually constitutes ambiguity in a policy provision, to what qualifies as illusory coverage, the opinion serves as a great primer and resource for policy construction and application.  What is also notable for insurance professionals and coverage practitioners is not only the systematic way in which the Court of Appeals conducted its policy interpretation but also its adherence to the plain and unambiguous language of the policy.  Though exclusion j.(5), a standard exclusion in most commercial general liability policies, may be unfamiliar to someone “not trained or experienced in the form and language of insurance policies” and its application may be complex or require analysis, those are not valid bases on which to find it ambiguous.  And, simply because an exclusion ultimately does what it was intended to do, preclude coverage for some of the risks that fall within a broader grant of coverage, that does not make the coverage illusory.  Ultimately, though an insured, in hindsight, may not like the terms of its coverage or wish that it had purchased different coverage, the Eleventh Circuit held that courts do not have the authority to rewrite insurance policies to cure buyer’s remorse.   

For additional questions, please contact Matt Boyer at