Insured’s Breach of Fiduciary Duty to Clients Excluded

Thievery by Controller Effectively Excluded by E & O Policy

Errors and Omissions insurance is designed to protect an insured against liability due to errors and omissions by the insured. It does not, however, cover every potential error or omission and will usually exclude commingling funds held by a fiduciary or failure to protect the property.

In Campbell Property Management, LLC v. Lloyd’s Syndicate 3624, Lloyd’s of London Underwriters, Case No. 3:18-cv-00237, the United States District Court For The District Of North Dakota Eastern Division (April 10, 2020) Lloyd’s moved to dismiss a suit filed by Campbell Property Management, LLC’s (“CPM”). CPM asserted claims for breach of contract and insurance bad faith stemming from Lloyd’s denial of coverage. Relying on a policy exclusion, Lloyd’s motion sought to dismiss the amended complaint for failure to state a claim.


At the motion to dismiss stage, the Court is required to accept the amended complaint’s factual allegations as true. CPM is a North Dakota limited liability company that provides professional property management services to 54 business entities. Lloyd’s issued a Professional Liability Errors and Omissions Policy (“Policy”) to CPM effective from March 15, 2017 to March 15, 2018.

The Policy provided coverage for amounts CPM “becomes legally obligated to pay . . . for any Wrongful Act by the Insured or by anyone for whom the Insured is legally responsible.” The term Wrongful Act was defined as “any actual or alleged breach of duty, negligent act, error, omission, or Personal Injury committed” in the performance of professional services as a property manager.

Limiting the insuring agreement the Policy excludes coverage for claims “based upon or arising out of any actual or alleged commingling of or inability or failure to safeguard funds” (“commingling exclusion”). The Policy also bars coverage for claims “alleging fraud, dishonesty, criminal conduct, or any knowingly wrongful, malicious, or deliberate acts or omissions” (“deliberate acts exclusion”).

As a professional property management company, CPM assumed a fiduciary responsibility to oversee its client entities’ operating accounts. To that end, CPM created separate client accounts, consisting of a checking account and a savings account, for each of the 54 business entities. The clients retained ownership of the accounts, which CPM accessed to manage their income, expenses, and rental security deposits. Choice Financial, a Fargo, North Dakota, bank, handled a majority of the client accounts.

Choice Financial informed CPM that Mickey Haarstad—the company’s controller—had initiated 155 electronic transfers from the client accounts to her personal account. The transfers occurred from September 29, 2014 to January 9, 2018 and totaled $1,294,967.58. CPM, closing the barn door after the cash ran away, locked down its accounting software and removed Haarstad’s access to the company’s bank accounts the same day Choice Financial revealed the improper transfers. Prior to that day, no owner, member, director, officer, or manager at CPM knew about Haarstad’s transfers.

Each of the 54 client entities then made claims against CPM for their losses. CPM recovered $1,025,000 through a separate commercial lines insurance policy regarding employee theft. The claim under the Lloyd’s Policy was for the remaining $269,967.58 in losses. Lloyd’s denied coverage.


In seeking dismissal of the complaint, Lloyd’s relied solely on the commingling exclusion. That exclusion consists of two prongs. The first precludes coverage for claims “based upon or arising out of any actual or alleged commingling of . . . funds.” The second has the same effect for claims “based upon or arising out of any actual or alleged . . . inability or failure to safeguard funds.” Lloyd’s contends both prongs apply because (1) Haarstad commingled funds from the client accounts with her personal account, and (2) CPM failed to safeguard the client accounts from Haarstad’s theft.


Although the Policy does not define “commingling” where a term in an insurance policy is undefined, the North Dakota Supreme Court routinely turns to dictionaries to ascertain the term’s plain, ordinary meaning. Beyond question, Haarstad combined funds in the client accounts with her personal account, thereby creating a common fund.

Examining the Policy itself, there is no language that limits the exclusion to commingling with CPM’s funds alone. In North Dakota, “arising out of” is broadly construed to mean “causally connected with, not ‘proximately caused by.'” That means the exclusion bars coverage for claims causally connected with any commingling. So long as CPM became legally obligated to pay the claims, the identity of the actor that commingled the funds is irrelevant.

The Policy’s deliberate acts exclusion already bars coverage for fraudulent, dishonest, or knowingly wrongful conduct. That exclusion would plainly apply if CPM were to deliberately combine client funds with its own, obviating the need for a specific commingling exclusion. The deliberate acts exclusion allows for an innocent insured exception but there is no such exception to the commingling exclusion. Instead, it applies to “any actual or alleged commingling” without qualification, evincing an intent to preclude claims predicated on commingling even where the insured is a nonparticipant. Giving meaning and effect to each clause of the Policy compels a determination that the commingling exclusion’s first prong applies here.

The court concluded, therefore, that but for Haarstad commingling the funds in the client accounts with her personal account, the claims against CPM would not have arisen.  The Policy therefore unambiguously precludes coverage. CPM’s breach of contract claim necessarily fails as a result.

Inability or Failure to Safeguard

Simply put, a failure to maintain fiduciary accounts equates to a failure to safeguard funds. The allegations in the amended complaint illustrate that CPM owed a fiduciary duty to maintain the client accounts and that Haarstad stole just shy of $1.3 million from those accounts over more than three years. Regardless of precautionary measures, CPM actually failed to protect the client accounts from theft, resulting in claims against CPM for the attendant losses. That is enough to defeat coverage under the commingling exclusion’s second prong.

Insurance Bad Faith

A claim for insurance bad faith is available only where an insurer acts unreasonably by failing to compensate an insured for a loss covered by a policy, unless the insurer has a proper cause for refusing payment. It is axiomatic there is no breach of the duty of good faith and fair dealing when there is no potential for coverage. Because there was no coverage available to CPM the insurance bad faith claim warranted dismissal.


There is no possible cause of action for bad faith if, as here, the court concludes there is no coverage for the claim. Since the claim made was excluded by clear and unambiguous exclusions there was no coverage for the claimed loss. CPM should have been happy its CGL paid for the employee theft. That it did not cover the total loss was not a reasonable excuse to try to drag another insurer – that did not insure against the risk of loss – into defending a breach of contract and tortious claim of bad faith because it refused to pay a claim it did not owe.

© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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