A “might have been”
[T]here are commonly used, basic provisions that could have had an impact on a [timber sale].
By Bruce D. Hicks, CPCU, CLU
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry expert contributors to Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from The Rough Notes Company’s digital solutions. The contributors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
Generally, there is a significant distinction between liability exposures faced by homeowners and businesses. That’s natural since the scope and scale of exposures are directly related to what homeowners and businesses do on a daily basis.
Our featured case, Dye v. Farmers & Mechanics Mutual Insurance Company, involves a crossover between the two worlds. Jones Hauling, a business that included a tree-harvesting service, approached a homeowner, Andrea Dale Dye, with a request. The business was originally hired by a neighbor of Dye to remove trees from their property. Jones could access the trees only via Dye’s property, so it sought permission to do so for the duration of their job.
Jones Hauling also harvested and sold timber. Recognizing an additional opportunity, Larry Jones asked Dye if she was interested in selling the timber from trees on her property. As a result of their meeting, Dye agreed both to giving permission to cross her land as well as to Jones harvesting her trees. The two parties also executed a separate timber sale contract to facilitate the latter item.
The completion of harvesting the adjacent properties was, rather than an ending, just the beginning. It turned out that Jones had, for some reason, also harvested trees from a second neighbor’s property. That action was discovered by that additional property’s owners. They sued Dye, alleging both theft and property damage.
Dye was denied coverage by her insurer, Farmers & Mechanics. Later, her arguments for insurance protection were denied in an initial trial as well as when she appealed the lower court loss. She was found ineligible for coverage because her homeowners policy contained an exclusion of loss arising from business activity. While Dye pointed out that she was innocent of performing any business activity, the insurer and the courts countered that the policy exclusion stipulated that such activity was barred if it arose from her (otherwise) insured location, regardless of the party doing the work (in this case, Jones Hauling).
It was unfortunate for Dye that she could not rely on her homeowners policy for protection. Worse still, the activity that caused the loss did not directly involve her. Reading our summarized case (see page 8) appears to be logical. But let’s take another look at the matter.
Let’s reexamine Dye’s situation, which changed over the course of the dispute with her neighbors. Initially, her neighbors alleged that Dye was guilty of both theft of property (timber) and property damage.
Her insurer denied coverage based on their position that there was no covered occurrence. It would be difficult to expect any form of insurer response to charges that involved a deliberate, illegal act and other damage arising from that act. The cause of the loss was not accidental, so it wasn’t an occurrence. It turned out that the opening reason for denial was moot as Dye did not cut down nor did she take possession of any timber from her neighbor’s land.
Dye might have been more successful by arguing that she should not have been a part of the lawsuit as the liability for the loss appeared to fall squarely on Jones Hauling. One item of note is that Jones Hauling and Dye entered into a timber sale contract. Is there any part of that agreement worth consideration?
Let’s be clear, we have no knowledge of the actual timber sale contract used between Jones Hauling and Dye, so some unique features may exist. However, there are commonly used, basic provisions that could have had an impact on a situation similar to the one experienced by Dye.
Timber sale contracts generally include the following:
Agreement. This usually identifies the agreement date, seller, buyer, state law that applies to the contract, terms of sale, conditions under which the buyer becomes the owner of the harvested timber.
Timber description. This usually includes defined terms such as the geographic area of the harvest, harvesting process, duration of the contract, species, volume and quality/characteristics of the timber to be cut down and removed.
Buyer responsibilities. This provides the beginning/ending dates of the harvesting, information on insurance in effect during contract (usually general liability, commercial auto liability and workers compensation). Any information on whether a performance bond must be secured and, if so, its terms. Insurance/bonds are at the expense of the buyer. Note: The buyer should also agree to add the seller as an additional insured under its insurance. The buyer typically has to commit to adherence to laws applicable to the operation, including forestry best practices, securing required permits and licenses.
Seller responsibilities. This includes providing access to the sale area and identifying the route(s) to be used by the buyer. The seller must designate whether it or the buyer is to mark the timber to be harvested. If it is done by the seller, there must be an agreement on the process used for marking. Once marked, it is up to the buyer to harvest only the properly marked trees.
Indemnification. Generally the buyer should agree to hold the seller harmless against any causes of action related to harvesting the timber, including damages, attorney fees and other legal costs.
Considering the typical provisions that should exist under a timber sale, protection should have been in place for the legal and financial consequences of timber being removed from property that did not belong to the seller. Questions that should have come to mind were whether the timber sale contract was adequate and/or did Dye pursue the proper legal arguments.
Second, Farmers & Mechanics argued that the policy’s business exclusion also barred coverage. The insurer argued (and the courts agreed) that the insurance policy’s business exclusion barred coverage for business activity occurring on the insured location. This may be a simplification, but Dye’s argument may have been in error. Rather than relying on having no direct involvement with the harvesting, the proper strategy might have been to challenge whether any of the improper harvesting actually took place on the insured location.
Uncertainty concerning the performance of the harvesting company, existing protections under the sales contract as well as whether the insured location was actually involved could have resulted, at least, with Dye receiving the benefits of a legal defense under her policy.
The author
Bruce D. Hicks, CPCU, CLU, is an Indiana-based insurance coverage expert. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010.
