Insurance is a contract of personal indemnity and does not follow the title in the land. When parties enter into lease agreements of real or personal property both the lessor and lessee have an insurable interest in the property. Either one or both can individually insure his interest. Prudent lessors and lessees enter into lease agreements that require both the lessor and lessee are insured against the risk of loss of the property. In Denman v. Tallahatchie Ducks, LLC, 12-60522 (5th Cir. 05/31/2013) [enhanced version available to lexis.com subscribers], the Fifth Circuit was called upon to resolve a dispute between a landlord and tenant over the right to the proceeds of an insurance policy when the lease agreement did not require the lessee to insure the interest of the lessor.
Dr. Mark McIlwain and Tallahatchie Ducks, LLC (Ducks), entered into a 10-year hunting lease agreement with Dr. Stuart Denman, Julia Denman, and Denman Farms, LLC (Denman). The lease agreement also contained provisions regarding a hunting lodge that was to be built on the land during the lease period. Prior to the expiration of the lease, the hunting lodge was built and subsequently burned down. Dr. McIlwain collected the fire insurance proceeds. Denman filed suit for breach of contract demanding, inter alia, specific performance and/or actual and punitive damages. Holding that the lease should be construed as written, the district court rendered judgment in favor of Ducks.
Both parties were represented by counsel at the time they entered into a lease. The land subject to the lease was approximately 2,000 acres located in Tallahatchie County, Mississippi and owned by Denman. The lease period was for a term of 10 years, from August 2007 through August 2017. The lease provided that Ducks would pay $65,000 per year during the term of the lease for deer and duck hunting rights on the land. The lease also provided that Ducks intended to build a hunting lodge on the land. Additionally, the lease contained provisions for liability insurance and fire and extended risk insurance.
The lease provided the following language in pertinent part:
3. Renter intends to construct a hunting lodge on the premises at his expense. Upon the expiration of the primary ten (10) year term, the hunting lodge shall become the property of the Owner.
4. Renter shall maintain insurance on the hunting lodge against fire and extended risks on a replacement cost basis. Renter is responsible to insure its contents. For purposes herein, "replacement cost basis" shall mean the actual replacement cost of the hunting lodge from time to time. The cost of insurance will be paid by the renter during the primary ten (10) year term. Owner shall be responsible to maintain, at his expense, said insurance during any renewal of this lease. The responsible party shall furnish the other party with proof of insurance. Further, Renter shall pay property taxes on the hunting lodge, utilities and all maintenance of the hunting lodge during the primary ten (10) year term.
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8. Renter must maintain liability insurance and list Owner as an additional insured.
Ducks completed construction of the hunting lodge on the leased property in late 2007. The total cost of construction was just under $500,000. To finance the construction of the lodge, First Metro Bank extended a loan on Dr. McIlwain's line of credit for the approximate amount of $400,000 which Dr. McIlwain subsequently loaned to Tallahatchie Ducks, LLC. Additionally, Dr. McIlwain made personal loans to the LLC totaling the approximate amount of $275,000. The money loaned to the LLC by Dr. McIlwain was used in part toward the construction and maintenance of the lodge and in part toward the operation and maintenance of the LLC. Dr. McIlwain also obtained a fire and extended risk insurance policy with StarNet Insurance Company to insure the lodge and its contents.
The lodge burned down on February 7, 2010 and the fire was deemed an accident. Dr. McIlwain reported the burning of the lodge to his insurance company and ultimately collected $438,000 in insurance proceeds to cover the loss. Dr. McIlwain used the insurance proceeds to repay himself for the loans he made to the LLC.
Ducks, after applying the proceeds to the debt, considered the lease terminated and found it financially impossible to rebuild the lodge. The lease was subsequently terminated.
Denman filed suit against Ducks for breach of contract, asserting negligence, unjust enrichment, conversion, and conspiracy. Denman's prayer for relief included specific performance via replacement of the lodge and/or actual and punitive damages. The trial judge ruled against Denman, providing the following reasoning:
In light of this analysis, the district court concluded that the lease must be "enforced as written" and ruled in favor of Ducks, thereby denying Denman any compensatory or equitable relief.
After considering the parties' arguments as briefed on appeal, and after reviewing the record, the plain, unambiguous language of the "Lease of Duck & Deer Hunting Rights Agreement" at issue, the applicable statutory, state and federal case law, the district court's well-reasoned interpretation of the lease, and its judgment and reasoning, the Fifth Circuit affirmed the district court's judgment and adopted its analysis in full.
This is a perfect example of what happens when experienced professionals who know their business well but know nothing about insurance entered into an extremely lessor favorable agreement that was defeated by ignorance of insurance. By failing to require Ducks to insure the lodge in the name of both the lessor and lessee allowed Ducks to take the case, not rebuild the lodge and terminate the lease. Had Denman required that it be named as an insured or purchased its own insurance it would have taken possession of a $500,000 structure at the termination of the 10 year lease. Instead it received nothing.
Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" "Heads I Win, Tails You Lose - 2011," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.
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