Losses Reported By Property Insurer’s Customers Constitute “Claims” Under Insurer’s E&O Policy – Insurance Laws and Products

The United States District Court for the Western District of
Louisiana, applying Louisiana law, has held that losses reported by
customers of an insurance company, for which the customers had no
coverage due to the alleged theft of premiums and negligence of the
insurance company’s employee, constituted “Claims”
under the company’s professional liability policy. Landmark Am. Ins. Co. v. Esters, 2022 WL
1720379 (W.D. La. May 3, 2022). The court also held that,
although a theft exclusion barred coverage for the customers’
claims for losses arising out of the theft of premiums, the insurer
had a duty to defend against the claims arising out of the
employee’s negligence.

After a hurricane made landfall, the insurance company’s
customers began reporting property losses to the company. The
company discovered that some customers did not have policies in
place because one of the company’s employees had stolen
customer premiums intended for purchasing or renewing policies, and
that some customer policies were not renewed as a result of the
employee’s actions unrelated to the theft of premiums. The
insurance company sought coverage from its E&O insurer,
asserting that some of the losses were “theft claims”
resulting from the employee’s theft of premiums, while some of
the losses were “non-theft claims” resulting from the
employee’s negligence. The company’s E&O insurer denied
coverage and asserted it had no duty to defend on the grounds that
no “Claim” was made under the policy and that the
policy’s conduct, theft, contract, breach of express or implied
warranty or guarantee, and prior knowledge exclusions applied. The
customers subsequently filed a class action against the insured
company. The E&O insurer refused to consent to the settlement
between the insured company and its customers. The E&O insurer
filed a declaratory judgment action against the insured company and
its customers, who in turn filed counterclaims against the
insurer.

The court held that the losses reported by the company’s
customers were “Claims” made under the policy. The policy
defined “Claim” to mean “a written demand for
monetary or non-monetary relief . . . including the service of
suit[.]” The court determined that the insured company had
investigated the reports and recognized them as claims made against
itself for its failure to procure property insurance for the
customers, that the settlement releases signed by the customers
stated that each customer has “made a claim against” the
insured company, and that counsel for the customers had sent demand
letters to the insured company. Additionally, the court held that
the counterclaims against the insurer and the class action filed by
the customers were lawsuits that satisfied the definition of a
“Claim.”

The court also held that the theft exclusion barred coverage for
the “theft” claims as to which the employee actually
misappropriated premiums, but that the other exclusions raised by
the E&O insurer did not apply. First, the crime or fraud
exclusion did not bar coverage. The court determined that the
“innocent insured” exception to an exclusion precluding
coverage for “[a]ctual dishonest, fraudulent, criminal,
intentionally wrongful or malicious act, error, or omission”
by an insured applied because the insured company had no knowledge
of and did not ratify or acquiesce in the employee’s theft of
premiums. Second, the contract exclusion did not apply because, in
the court’s view, the insurer forfeited its right to raise the
exclusion when it denied coverage and refused to consent to the
insured’s settlement with the customers. Third, the breach of
express or implied warranty or guarantee exclusion did not apply
because there were no allegations or evidence that the employee had
breached any express or implied warranty or guarantee by assuring
customers that they had insurance coverage for their properties
when they did not. Fourth, the prior knowledge exclusion did not
apply because there was no evidence that the insured knew when its
policy was renewed that its employee was going to steal premiums.
The court concluded that the insurer had a duty to defend against
the “non-theft claims,” but not against the “theft
claims.”

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