Scofflaws Demand Insurance Protection for Their Crimes
Insurance is designed to protect the persons insured against fortuitous events that are neither intended or expected by the insured. When a person is convicted of a crime it is axiomatic that the conduct resulting in the conviction was not fortuitous but was intentional and expected.
In Darwin National Assurance Company v. Luzerne County Transportation Authority, Stanley J. Strelish and Robb A. Henderson, United States District Court, M.D. Pennsylvania Civil Action No. 3:14-2417 | (03/30/2016) the USDC for the Middle District of Pennsylvania was asked to provide coverage to two criminals who were named as insured in a liability insurance policy.
In June 2014, a Pennsylvania statewide investigating grand jury issued a Presentment containing written findings of fact and a recommendation that criminal charges be filed against defendants Strelish and Henderson (collectively, the “Individual Defendants”). The Individual Defendants allegedly conspired to defraud PennDOT by intentionally submitting inflated and false county bus ridership data to PennDOT to obtain excess grant monies. Strelish held the position of Executive Director since 2007 and had overall responsibility for LCTA. Henderson held the position of Operations Manager since 2008 and supervised all LCTA bus drivers.
On September 23, 2014, the government filed Criminal Informations against Strelish and Henderson, respectively, in Pennsylvania state court. The Criminal Informations allege that Strelish and Henderson conspired to create false bus ridership data, which Strelish then submitted to PennDot to obtain excess grant monies, and the monies were then used to pay various operating expenses of LCTA, including the salaries of the Individual Defendants. Strelish and Henderswon were charged with multiple crimes.
The Individual Defendants tendered the Criminal Informations to the plaintiff insurer under the Public Officials Liability and Employment Practices Liability Insurance Policy which the plaintiff issued to LCTA. On September 3, 2015, Strelish executed a document titled, “Guilty Plea Agreement and Colloquy of Defendant Stanley Strelish” (“Plea Agreement”), in his criminal proceeding to several counts of tampering with public records, a felony of the third degree. At a hearing on September 8, 2015, the Court of Common Pleas of Dauphin County accepted Strelish’s plea and sentenced Strelish to five years of probation and ordered him to pay a $5,000 fine.
Plaintiff’s Motion for Summary Judgment
On June 29, 2015, the plaintiff filed a motion for summary judgment along with a supporting brief and a statement of material facts. Henderson and Strelish filed cross-motions.
The Public Officials Liability and Employment Practices Liability Insurance Policy contains, in relevant part, the following provisions regarding coverage for the liability of public officials:
The Insurer shall not pay Loss, but shall only pay Defense Expenses, from any Claim brought about or contributed to in fact by:
A. any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured;
B. any willful violation by any Insured of any law, statute, ordinance, rule or regulation; or
C. any Insured gaining any profit, remuneration or advantage to which such Insured is not legally entitled.
The applicability of Exclusions to any specific Insured may be determined by an admission of such Insured, a finding, or final adjudication in the proceeding constituting the Claim or in a proceeding separate from or collateral to the Claim.
Prior to defendant Strelish’s guilty plea, the parties agreed that Strelish and Henderson are Insured because they were employees of LCTA. Although the insurer paid some defense expenses, the insurer refused to provide further coverage.
The acts in Strelish’s admission fit within exclusion A(1) of the list, which is “any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured.” Strelish pled guilty to a felony of the third degree and admitted to committing a criminal act. As such, the court found that the plaintiff has fulfilled its burden in proving that the Section III.A(1) exclusion applies to Strelish’s claim. Strelish is not covered under the insurance contract, and he is obligated to reimburse the plaintiff for the $50,000 in Defense Expenses the plaintiff advanced to him.
Interpretation of Insurance Contract
Determining the scope of coverage involves interpretation of the insurance contract, which is a question of law for the court to decide. The initial burden of establishing coverage under an insurance policy rests with the insured, however the insurer bears the burden of establishing the applicability of an exclusion under an insurance policy.
With respect to all charged offenses other than dealing in proceeds of unlawful activities, Loss excludes as “fines” and “penalties” the sentencing alternatives including monetary payments upon conviction of these charges.
Limit of Liability
The court agrees with the plaintiff’s conclusion that the Section III.A exclusion bars Strelish from receiving coverage for his criminal proceeding, thereby rendering his cross-motion for summary judgment moot. The court concluded that, regardless of whether Strelish reimburses the plaintiff all or none of the $50,000 owed, the plaintiff is nevertheless obligated to pay Henderson Defense Expenses up to the Limit of Liability of $100,000 per the insurance contract.
Counterclaims for Bad Faith & Breach of Contract
With respect to Henderson’s counterclaim for bad faith, the plaintiff argues that the counterclaim should be dismissed because the plaintiff’s position is grounded in a reasonable basis.
Where an insurer defends itself on the grounds that a policy exclusion applies, the burden shifts to the insurer to prove the applicability of exclusions or limitations on coverage.
Further, in light of the court’s rulings above, it cannot be said that the plaintiff has breached any duty to LCTA. The plaintiff’s motion for summary judgment will therefore be granted with respect to LCTA’s counterclaim for breach of contract
The policy provided coverage for defense costs until a defendant is convicted. Both defendants were engaged in a massive criminal conspiracy and lost coverage for everything, other than defense costs, regardless of the broad nature of the policy. To do otherwise would be to allow the defendants to profit from their crime.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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