Liability Insurance Coverage for the Tort of Conversion
Reed, Scott O., Defense Counsel Journal
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. …