In Am. Auto. Ins. Co. v. Sec. Income Planners & Co., a federal district court in New York recently held that the American Auto Insurance Company had the duty to defend negligence claims against Security Income Planners & Co., LLC, despite plea allocution by the insured’s president and CFO where he admitted to intentional conduct.
American Auto insured Security Income under a life insurance agents errors and omissions policy, which included a “Commingling, Misappropriation or Conversion” exclusion, as well as an “Improper Personal Profit” exclusion. After a criminal investigation, the president/CFO admitted he “engaged in a scheme constituting a systematic ongoing course of conduct with the intent to defraud ten or more people by false or fraudulent pretenses, representations or promises, and obtained property from one or more such persons.” With the assistance of a knowledgeable and clever attorney, several of the defrauded individulas brought an action against Security Income and the the president/CFO for unjust enrichment and misrepresentation, and later amended the complaint to include allegations of negligence, negligent training and supervision, and breach of fiduciary duty.
American Auto denied coverage to Security Income based on the two policy exclusions noted above. A coverage battle ensued. The court rejected American Auto’s position, holding that the two exclusions did not apply to the negligent supervision claim against Security Income. The court reasoned that negligence and negligent supervision claims arising from fraudulent or intentional acts were not excluded by the policy’s “Comingling, Misappropration or Conversion” and “Improper Personal Profit” exclusions because the claim for negligent supervision did not allege Security Income comingled, misapprpriated, or converted any funds or gained any improper personal profit through its alleged negligent supervision.
With regard to at least the duty to defend, insurers must realize that the actual facts are largely irrelevant. The allegations contained in the complaint, if assumed to be true, control the insurer’s duty to defend. If the principle — and policy forms and exclusions – is worth defending, be prepared for lengthy litigation where a trial may be required to determine whether plaintiff’s allegations are true and the insurer’s duty to indemnify is triggered.
Thanks to Joe Fusco for this post. If you have any questions or comments, please email Paul at