Liability insurance coverage for the tort of conversion.

• Author: Reed, Scott O.

THE TORT of conversion, or the wrongful withholding of property, has received little attention from the standpoint of liability insurance coverage issues. Prosser called it the "forgotten tort."(1) Apparently it is not well understood and therefore not popular with the plaintiffs' bar. Few reported decisions have determined whether the tort imposes a duty on a liability insurer to defend or indemnify its insured in an action for conversion.

But this is beginning to change. "Shotgun" complaints in business and employment disputes often now include conversion allegations--that the defendant wrongfully withheld such items as customer lists, securities or even a former employee's personal papers or effects. Landlord-tenant disputes or feuds among neighbors also breed conversion allegations. If a complaint consists of other clearly non-covered counts, such as breach of contract, the existence of a duty to defend conversion allegations would be of critical importance to the liability insurer's duty to defend the entire case.

In the body of law on a liability insurer's duty to defend or indemnify its insured for conversion allegations, the vast majority of the decisions involve commercial general liability policies.(2) The courts conclude, by and large, that allegations of conversion are not covered, although a minority view permits coverage under certain circumstances.

THE TORT OF CONVERSION

Conversion is a common law tort, being derived from the ancient common law action in trover.(3) The Restatement of Torts (Second) defines it in Section 222(A)(1):

Conversion is the intentional exercise of dominion

or control over a chattel which so seriously

interferes with the right of another to control

it so that the actor may justly be required to

pay the other the full value of the chattel.

The gist of the tort is that the defendant's interference with the plaintiff's property rights is so severe that recompense for the damage to the property will not suffice, and the plaintiff is not required to accept the property back if tendered. Mere assertion of an ownership interest in the property without disturbance of possession or other interference with possessory rights is not severe enough to be classified as conversion. According to the common law, the plaintiff is awarded the full value of the property as damages, and the defendant is given title to the property. Essentially, the result of a successful conversion action is a forced sale of the property to the defendant. The tort does not include interference with rights to real property. It can include interference with a plaintiff's rights in tangible and intangible personal property, although to date the tort has primarily involved tangible property.(4)

Given the increasing number of instruments of intangible property, it can be expected that this tort may involve intangible property in a greater degree in the future.(5) Section 242 of the Restatement acknowledges that documents can be converted.

The Restatement gives several examples of the tort. Under Section 226, a party can commit conversion of property by intentional destruction or material alteration of the property "so as to change its identity or character." Under Section 227, a party can use property in a manner that is a serious violation of the owner's right to control his use of it, or which, under Section 228, exceeds the owner's authorization. A party may commit conversion pursuant to Section 229 by receiving property with the intent to acquire (either for himself or for a third party) an interest the donor does not have the power to transfer. Another example of conversion (Section 237) is the recipient's refusal to surrender possession of property to the owner, and, according to Section 241A, a negotiable instrument is converted "when it is paid on a false endorsement."

All these examples involve either alteration of the property or exercise over its control to the exclusion of the rights of the owner. In other words, property can be damaged and therefore converted, but it also can be converted without being damaged.

For insurance coverage purposes, an important question is the defendant's intent in holding or altering the property. It is clear that conversion is an "intentional" tort in that, as Section 224 of the Restatement puts it, one who does not intentionally exercise dominion or control over a chattel is not liable for conversion even though his act or omission is negligent." But the difficult question is whether a party commits the tort of conversion by exercising control over property in the belief that he or she has the authority to do so.

The scholarly authorities are unanimous that parties who exercise unauthorized control over property in the belief that they were entitled to do so are still liable for conversion. Section 244 of the Restatement emphasizes that a defendant is not relieved from liability for conversion by a belief that the party (1) has possession of the property or is entitled to its possession, (2) has the owner's consent or (3) is otherwise privileged to act.

One commentator notes that the intent required to commit the tort "is not necessarily a matter of conscious wrongdoing," but is rather the intent to exercise control or dominion over the goods which is in fact inconsistent with the plaintiff's rights.(6) In other words, a good faith purchaser or auctioneer of stolen goods is still liable in conversion, and a mistake of law or fact is no defense.

GENERAL LIABILITY POLICIES

Most of the reported decisions dealing with coverage for the tort of conversion have arisen under commercial general liability and similar liability policies. The threshold question for coverage under these policies is whether the intentional tort of conversion constitutes a covered "occurrence." Other issues are whether covered "property damage" or "personal injury" is presented under these policies, and whether certain exclusions apply.

Although case law is not consistent on some of these issues, the weight of authority imposes on an insurer no duty to defend or indemnify its insured for conversion allegations against it, at least where the conversion arises from "loss of use" of property rather than its destruction or alteration.

1. Is Conversion an "Occurrence"?

   As a general proposition, the act of taking or retaining possession of property is intentional. One can think of few situations in which a party possesses property negligently, or without the intent to do so. The tort of conversion is premised on the intentional exercise of control over property, and even if the defendant is mistaken about his or her right to exercise control, the tort of conversion has still been committed.

   An "occurrence" is defined in standard general liability policies as property damage or bodily injury that is neither expected nor intended from the standpoint of the insured. Bodily injury is not at issue in conversion. In a situation having all the elements of common law conversion, the insured normally "expected or intended" to possess the property.

   Insurers can argue that acts of conversion cannot have resulted in an occurrence because the possession of the property must, by definition, have been intentional. Insureds can argue in response that, where the evidence shows that they were mistaken or negligent about the extent of their rights in the property, they did not "expect or intend" to commit the tort of conversion and therefore did not expect or intend to cause the plaintiff any damages resulting from the tort.

   These positions have been weighed by the courts in a number of factual contexts. The result has been that most courts accept the insurer's view that no "occurrence" is involved if the converted property has not been damaged or destroyed, although there is a sizeable minority view to the contrary.(7)

   One of the more frequently cited early cases on this issue helped to establish the majority view. In Corvallis Sand & Gravel Co. v. Oregon Automobile Insurance Co.(8) the State of Oregon brought a statutory ejectment action against the insured for "wrongfully withholding" possession of a portion of the bed of the Willamette River. The state sought possession of the property, as well as rents and profits representing the land's value during the time the insured allegedly wrongfully withheld it.

   The insurer declined the insured's tender of defense. Its declination letter was not specific, advising the insured only that there was no coverage. The policy contained an exclusion for bodily injury or property damage "caused intentionally by or at the direction of the insured."

   The Oregon Supreme Court affirmed a judgment for the insurer, adopting the reasoning of the trial court. That court had concluded that there was no covered "occurrence or accident" and that "liability for property damage" does not include "an intentional withholding of possession and consequent damages which arise only from a wrongful taking or withholding."

   Because real property was at issue in Corvallis, the tort of conversion was not technically alleged against the insured. However, the court's analysis of the "occurrence" issue has been applied in the closely analogous context of conversion of personal property. Whether real or personal property is the subject of the action makes little difference in determining whether an "occurrence" is involved, but it is frequently determinative of whether "personal injury" has been alleged under a number of policies.(9)

   Another earlier decision reaching the same result on "occurrence" is Nortex Oil & Gas Corp. v. Harbor Insurance Co.(10) The insured operated producing oil wells whose bore holes slanted at a deviation from vertical. As a result, the insured's wells drew oil and gas from underneath neighboring land that was subject to producing leases. The owners of those leases sued the insured for trespass on the leasehold estates and conversion of the oil and gas from beneath the...