On October 19, 1999, a metal shed on the residential property of Jack and Dot Melder (Melder) caught fire and the shed and its contents, including a tractor and a number of tools, supplies and equipment, were destroyed. The Melders submitted a claim for the damage to Louisiana Farm Bureau Mutual Insurance Company (Farm Bureau), seeking coverage for the loss under their homeowner's policy. Farm Bureau denied the claim, based on the policy "business use exclusion." In September, 2003, the Melders sued and stipulated that their damages did not exceed $50,000. In a bench trial, the trial court ruled in favor of the Melders and awarded damages totaling $50,000 for the loss of the shed, tools and equipment, penalties and attorney fees due to Farm Bureau's arbitrary and capricious denial of the claim. Farm Bureau appealed.

The Melders had lived in the country since 1970. Mr. Melder retired as a school principal in 1987. He kept a small herd of ten to fifteen cattle on his property both before and after his retirement and also baled hay for his own use and for others, using the destroyed tractor for the hay baling activity. The Melders also had a farm liability policy with Farm Bureau that provided liability coverage for their farming operations. Since at least 1988, the Melders filed income tax returns with a "Schedule F," showing they were engaged in farming and showing income and expenses attributable to it. They also depreciated the cost of the tractor and other items of equipment as business expenses. They claimed losses of over $130,000 for those years and used those losses as deductions against income on their tax returns. Because of health problems, Mr. Melder sold all the cattle a few months before the fire occurred.

The Farm Bureau homeowner's policy defined business as a trade, profession or occupation including farming (emphasis added). The insured location included the residence, other structures and grounds as covered, except for those structures used in whole or in part for business (emphasis added) and farm barns or outbuildings used, intended for use as, or formerly used as farm barns or outbuildings. The policy also excluded motor vehicles, except motor vehicles not subject to motor vehicle registration used exclusively to service an insured's residence. After the fire, the Farm Bureau adjuster discussed the use of the shed and equipment with Mr. Melder. Based on the conversation and the information provided by Mr. Melder, the claim was denied. This was because the shed was used to store equipment and machines used to maintain the farm, the tractor was used in the farming operation for hay baling and most of the other items destroyed constituted business property.

The trial court found that the business activities exclusion did not apply because there was no business activity in progress at the time of the loss. Farm Bureau claimed that the trial court erred in that finding, as well as for awarding damages for the tractor in spite of the policy exclusion and in awarding penalties and attorney fees. Farm Bureau also cited errors in relying on Mr. Melder's testimony that he was not engaged in business when his income tax returns clearly stated otherwise and in finding the policy covered everything on the residential premises except for a barn that was not affected by the loss.

The appellate court stated that insurance policies are agreements between parties and are interpreted using ordinary contract principles. If the language is clear and unambiguous, it must be enforced as written. In addition, insurance companies have the right to limit coverage any way they wish, as long as the limitations do not conflict with statutory provisions or public policy. In the trial court proceeding, Mr. Melder was candid and clear in his testimony about being engaged in farming and everything damaged or destroyed had a dual purpose, including use in a farming operation. He filed "Schedule F" with his tax return every year and stated that agriculture was a good write-off and that was one reason he kept a small herd of cattle for so many years. Although he and Mrs. Melder characterized the farming operation as a hobby rather than a business, they undoubtedly treated it as a business for tax purposes for almost thirty years.

The trial court failed to mention that the policy defined business as any trade, profession or occupation including farming. The appellate court found this provision to be unambiguous. Mr. Melder never denied he was engaged in farming but characterized it as a hobby instead of a business. Based on that admission and on the record as a whole, the appellate court concluded that the trial court was clearly wrong in its findings, reversed the judgment of the trial court and rendered judgment in favor of Farm Bureau.

Jack and Dot G. Melder, Plaintiffs-Appellees, v. Louisiana Farm Bureau Mutual Insurance Company, Defendant-Appellant. Louisiana Court of Appeal, First Circuit. No. 2003 CA 2674. Filed February 11, 2005. Reversed 2005 CCH Personal and Commercial Liability Cases. Paragraph 1064.