Losses Reported by Property Insurer’s Customers Constitute “Claims” Under Insurer’s E&O Policy

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.”