The Court of Appeals for the Third Circuit recently found that an accounting firm whose employee embezzled and misappropriated client funds is required to reimburse its insurer’s defense costs in excess of the applicable sublimit because, despite the fraud, the employee rendered “professional services” as defined by his firm’s professional liability insurance policy.

In CAMICO Mutual Insurance Co. v. Hefler, Radetich & Saitta, LLP, CAMICO insured Hefler, a Philadelphia accounting firm, under a claims-made Accountants Professional Liability insurance policy that provided limited cover for third-party losses arising out of the firm’s misappropriation, misuse, theft or embezzlement of funds.  CAMICO policy was asked to cover Hefler’s alleged misappropriation of settlement monies it was assigned to administer.  It was  alleged that a senior claims analyst defrauded three separate class actions of tens of millions of dollars by working with co-conspirators to file false claims.  Specifically, in the civil suit that followed the analyst’s criminal prosecution, CAMICO defended Hefler subject to a reservation of rights that expressly preserved its ability to recover defense costs and expenses exceeding a $100,000 sublimit concerning misappropriation, fraud and embezzlement.

Eventually, CAMICO sought declaratory judgment from the United States District Court for the Eastern District of Pennsylvania that it owed no defense or obligation beyond the $100,000 sublimit and was entitled to reimbursement of its excess costs.  After the trial court granted summary judgment in favor of CAMICO, Hefler appealed to the Court of Appeals for the Third Circuit, arguing that the sublimit did not apply because Penta’s fraud did not satisfy the policy’s “professional services” trigger.  More specifically, Hefler suggested that Penta’s actions fell outside the sublimit because his fraudulent administration of settlement funds did not produce fees or commissions for the benefit of his employer, Hefler.  The Third Circuit summarily rejected this argument as an overly restrictive reading of the policy that would gut the sublimit wherever an employee engaged in independent criminal conduct.  As a result, the Third Circuit affirmed the trial court’s declaration and ordered Hefler to reimburse CAMICO for defense costs and fees incurred in excess of the $100,000 sublimit.

While particularly poignant in the context of professional liability, the Third Circuit’s reasoning is also instructive in other niches where defense or indemnity may turn on whether an employee’s independent criminal acts fall outside the ambit of coverage.

Thanks to Adam Gomez for his contribution to this post.  If you have any questions, please email Paul at .