SEPTEMBER 2013 BAD FAITH CASES: COURT GRANTS DECLARATORY JUDGMENT IN INSURER’S FAVOR, ENFORCING CLAIMS MADE POLICY’S $100,000 SUBLIMIT FOR INSURED’S ILLEGAL ACTIONS (Philadelphia Federal)
The insurer sought a declaratory judgment relieving it of its duty to provide a defense to the insured under a claims made policy, asserting that a $100,000 policy sublimit applied to the claims against the insured. The insured filed counterclaims (1) seeking defense and indemnification beyond that limit; and (2) for bad faith.
The insured company administers class action settlement funds. One of the company’s employees embezzled several million dollars of settlement proceeds, and subsequently pled guilty to federal charges of mail and wire fraud. After learning of the fraud, some members of a settlement class brought suit against the insured. The insurer initially provided a defense, but then filed a declaratory judgment action seeking to eliminate any future duty to provide a defense; and to further recover costs and expenses which exceeded the $100,000 sub-limit provided in the policy.
The $100,000 sub-limit in the policy included language stating that the “maximum amount payable for each covered Claim arising from, related to or in connection with any Insured’s misappropriation, misuse, theft or embezzlement of funds shall be $100,000 in excess of the Per Claim Deductible.” This required the court to determine if the employee had engaged in the type of conduct described by the policy language; if the employee qualified as an insured since he stopped working for defendant four years before the policy was issued; and finally whether the employee was performing professional services.
First, the court determined that the term “misuse” should be interpreted in its ordinary sense, and that the employee had misused the funds. Furthermore, the employee had engaged in misappropriation, embezzlement, and theft of client funds as those terms are legally defined. Second, the court determined the acts at issue took place during a time covered by the policy’s retroactive period. Finally, the court found that the employee was providing professional services as an employee at the time the illegal actions took place, and thus was an insured under the policy.
Therefore, the $100,000 policy sublimit applied. Based on this determination, the court granted summary judgment in the insurer’s favor on the bad faith count.
