Kids for Cash Insurance Dispute Decided by Third Circuit.

We have previously reported on the Kids for Cash scandal.  Recently, the Court of Appeals for the Third Circuit affirmed a pair of district court rulings finding no coverage for developers involved in the  scandal.

In Travelers Property Casualty Company of America v. Mericle, the district court entered a declaratory judgment in favor of Travelers holding that it had no duty to defend or indemnify Robert Mericle or Mericle Construction, Inc. for paying kickbacks to state judges. Mericle appealed, arguing that the underlying events constituted an “occurrence” under Coverage A and that the contractual exclusions for intentional acts under Coverage B were inapplicable as a matter of Pennsylvania law.

In an opinion penned by Judge Anthony Scirica, the Third Circuit noted at the onset that coverage disputes in Pennsylvania are governed by the “four corners” rule that limits coverage to those allegations contained exclusively within the complaint. Under that rule, the facts alleged, not the pleaded cause of action, is determinative of coverage. As applied to the Coverage A issue, the Court explained that the term “occurrence” in an insurance contract turns on the fortuity of events and cannot exist when the facts indicate that the underlying incident was the expected or intended result of an insured’s actions. The Court therefore found Mericle’s argument that the complaint omitted an express allegation of intentional conduct unavailing in light of countless factual references in the complaint detailing the Luzerne conspiracy.

In respect of the Coverage B issues, the Third Circuit easily found the insurance contract’s exculpatory provisions applicable. Under Coverage B, Travelers covenanted with Mericle to provide coverage for injuries arising out of offenses like false arrest, detention, or imprisonment, but also excepted from coverage injuries stemming from the willful violation of a penal statute or ordinance. Despite these exclusions, Mericle argued that the complaint alleged negligence in addition to intentional acts, and that the penal statute and knowing violation exclusions did not apply to bar coverage. In support of its position, Mericle pointed to the language of the complaint where the plaintiffs alleged that defendants “knew or should have known” the effects of their conspiracy. The Court, however, remained unconvinced and held that notwithstanding the language of negligence, the facts alleged only intentional conduct. Moreover, the Court acknowledged Pennsylvania’s deep-seated public policy against providing insurance coverage for intentional acts and found Mericle’s conduct sufficient to trigger the penal statute and knowing violation exclusions.

Similarly, the Third Circuit affirmed the district court’s finding of no coverage in Colony Insurance Company v. Mid-Atlantic Youth Services (MAYS), another case arising out of the same judicial kickback scheme. In that case, MAYS and its owner Robert Powell were accused of paying $2.6 million to Luzerne County judges in exchange for favorable rulings that would remand juveniles to detention facilities managed by the defendants. In its appeal from the district court, MAYS mimicked the issues in Travelers Property Casualty Company of America v. Mericle and was equally unsuccessful. The Court of Appeals employed the same line of reasoning and ultimately found that under the “four corners” rule the facts of the complaint alleged intentional acts sufficient to trigger the insurance contract’s exclusions and deny the defendants the right to coverage.

Special thanks to Adam Gomez for his contributions to this post.  For more information, please contact Bob Cosgrove at rcosgrove@wcmlaw.com.