There’s an excellent, but sad and haunting, nonfiction book written by Jeff Hobbs called  “The Short and Tragic Life of Robert Peace.”  It’s about a kid who grew up among poverty, gangs and tough guys in a rough section of Newark, but who was naturally gifted and ended up at Yale. Unfortunately, he couldn’t outrun his upbringing. He returned to Newark with a degree in science and ended up using his education to build an illegal pot growing facility in a friend’s basement. Some gang members didn’t appreciate the competition, and things ended badly for him.

I thought about that book when reading a recent decision from the Southern District of New York, United Specialty Ins. Co. v. Barry Inn Realty, which similarly involved an illegal pot-growing operation.  Barry leased part of a building to Castelliano, who said he would be opening a sports bar and restaurant there. Months went by and the restaurant never opened. Nor did Barry exercise its right under the lease to inspect the premises. It turns out that Castelliano had basically gutted part of the building, and installed a sprinkler system and illegal wiring. He was growing and selling pot. The NYPD executed a search warrant, and busted Castelliano.

There was no evidence that Barry had any idea that the pot-growing operation existed.  In fact, Barry had run a background check on Castelliano that came up clean before leasing the space to him. Unfortunately for Barry, though, the extreme humidity needed to grow pot caused significant damage throughout the building, and required major demolition and replacement costs. Barry filed an insurance claim for the damage.

The policy contained an “illegal acts” exclusion, reading as follows:  “[The carrier] will not pay for loss or damage caused directly or indirectly by…[d]ishonest or criminal acts by…anyone to whom [the policyholder] entrusts the property for any purpose.”  (Emphasis added.)  The carrier, United Specialty, denied the claim based on the exclusion, and coverage litigation resulted.

In an effort to get around the exclusion, Barry Inn focused on the “entrustment”   requirement. Barry argued that it hadn’t really “entrusted” the property to Castelliano, because Castelliano had lied had about his intentions.  This was a tough argument to make, because the dictionary definition of “entrust” doesn’t focus on the recipient’s intent.  Webster’s defines “entrust,” for example, as “to deliver something in trust to.”

The Court upheld the coverage denial, writing: “In arguing that Barry did not entrust the Premises to Castelliano, Barry cites a number of cases in which a recipient of property lied about his or her in identity and no entrustment was found. In each of those cases, however, the recipient’s identity was ‘solely self-generated,’ and the insured never investigated the recipient’s identity…[The] course of dealing [here] establishes that Barry and Castelliano had a ‘consensual relationship’ and that Castelliano’s status was accepted by Barry…[I]t is immaterial that Castelliano abused Barry’s confidence and had an undisclosed intent to use the Premises to grow marijuana…[I]t is clear from the record that Barry intended to surrender, deliver, or transfer possession of the Premises to Castelliano.”

This decision may seem unfair, because Barry got duped. A couple of points to consider, though. First, insurance is always a poor substitute for proper controls.  In business, trust but verify. Barry may have believed that proper procedures had been followed, because Barry had run a background check on Castelliano.  But that wasn’t enough. Had Barry monitored the situation properly after signing the lease, Barry might have been able to avoid or minimize the damage. Second, despite all the wonderful ads you see on TV with cute little lizards and guys named “Mayhem” who have your best interests at heart, you can’t rely on insurance.  Insurance companies are in business for profit, and if they can figure out a way to deny large claims, they will.  When you buy insurance, you’re really buying a right to sue an insurance company.  Which is why the first point in this paragraph is so important.