Dishonesty Exclusion Bars Coverage For Claim Based On Actions Of Contractor Authorized To Conduct Operations On Behalf Of Insured

Applying California law, a California state appeals court has held that a policy exclusion barring coverage for “any [c]laim . . . [b]ased upon or arising out of any . . . act or omission . . . which is . . . dishonest, fraudulent, malicious, or criminal” applied to a claim involving dishonest behavior on the part of a contractor authorized to conduct operations on behalf of the insured. ELJAC Enters., Inc. v. Berkshire Hathaway Specialty Ins. Co., 2023 WL 2338883 (Cal. Ct. App., Mar. 3, 2023). Consequently, the insurer was “not required to provide a defense under the terms of the policy[.]”

The insured travel agency operated a branch office of a national travel management company. The agency authorized a contractor to exercise its right to utilize the national travel management company’s accounts to book airline travel. The contractor improperly “accumulate[d] approximately $300,000 in unearned commissions” by booking airline travel through the national travel management company’s account and then canceling the reservation directly through the airline.

Both the airline and the national travel management company made demands on the insured travel agency for the unearned commissions. The insured tendered the claims to its insurer, which denied coverage on the grounds that the policy did “not provide coverage for dishonest, fraudulent, malicious, or criminal acts.” Coverage litigation ensued. The trial court granted the insurer’s motion for summary judgment on the insured’s complaint for declaratory relief, breach of contract, and unfair competition. The trial court also denied the insured’s cross-motion for summary adjudication on certain duty issues, including the duty to defend. The insured appealed.

The insurer prevailed on all counts. The court held that the “exclusion of claims arising out of the dishonest acts of [the insured] or persons for whom it was liable eliminated any reasonable potential for coverage” and thus the insurer “was not required to provide a defense under the terms of the policy[.]” The policy covered independent contractors working under contract with the insured if they were conducting the insured’s travel agency operations. The court thus held that even a claim based on the insured’s negligent supervision of the contractor “would have ‘arisen from’ the dishonest conduct” of the contractor and would be excluded from coverage. In so holding, the court stated that “California courts have interpreted the terms ‘arising out of’ or ‘arising from’ broadly[.]” According to the court, “this language . . . broadly links a factual situation with the event creating liability, and connotes a minimal causal connection or incidental relationship.”