Dishonest/Fraudulent Acts Exclusion Inapplicable Despite Jury’s Finding Of Fraudulent Conduct

The Dishonest/Fraudulent Acts Exclusion did not apply to preclude coverage despite the fact that a jury verdict form in the underlying case contained a specific finding that the insured engaged in aEURoefraudulent, malicious, oppressive, wanton, willful or recklessaEUR? conduct according to the United States District Court for the Southern District of West Virginia. Executive Risk Indemnity, Inc. v. Charleston Area Medical Center, Inc., et al., 2011 U.S. Dist. LEXIS 51239 (May 12, 2011).

The insurance coverage dispute arose out of an underlying lawsuit filed against Charleston Area Medical Center (aEURoeCAMCaEUR?) by Dr. R.E. Hamrick, Jr. In September 2004, CAMC determined that Dr. HamrickaEUR(TM)s proposed plan for self-funding his professional liability was inadequate and actuarially unsound. Based on that determination, CAMC explained to Dr. Hamrick that his insurance coverage had lapsed. As a result, his clinical privileges were revoked. Dr. Hamrick then filed a complaint against CAMC seeking injunctive relief of reinstatement of his clinical privileges as well as punitive damages. After Dr. HamrickaEUR(TM)s clinical privileges were restored, Dr. HamrickaEUR(TM)s claim for damages proceeded to the circuit court, and CAMC notified Executive Risk Indemnity, Inc. (aEURoeExecutive RiskaEUR?) of the claim.

Dr. Hamrick subsequently amended his complaint to include claims for defamation and invasion of privacy. The defamation and invasion of privacy claims were later presented to the jury, and the jury returned a sizable verdict against CAMC. In Section 1 of the verdict form, entitled aEURoeLiability,aEUR? the jury simply indicated that they found in favor of Dr. Hamrick. In Section 2 of the verdict form, entitled aEURoeDamages,aEUR? the jury awarded Dr. Hamrick $5 million in compensatory damages. In Section 3, labeled aEURoePunitive Damages,aEUR? the jury found that CAMC had engaged in aEURoefraudulent, malicious, oppressive, wanton, willful, or reckless conduct with respect to Dr. Hamrick,aEUR? and awarded $20 million in punitive damages. Finally, in Section 4, entitled aEURoeOther,aEUR? the jury found that CAMC had acted in aEURoebad faith, vexatiously, wantonly, or for oppressive reasons with respect to Dr. Hamrick.aEUR?

Following the verdict, CAMC moved for remittitur of damages. The circuit court granted the motion and reduced the damages award to $2 million in compensatory damages, and $8 million in punitive damages. Thereafter, the parties settled the underlying litigation for $11.5 million. The settlement amount consisted of the remittitur award of $10 million, post-judgment interest and attorneyaEUR(TM)s fees.

Executive Risk provided Directors, Officers and Trustees liability insurance to CAMC. Upon CAMCaEUR(TM)s exhaustion of a $200,000 claim retention, the Executive Risk policy provided coverage in the aggregate net limit of $10 million, with a punitive damages limit of $5 million. The Executive Risk policy contained a Dishonest/Fraudulent Acts Exclusion which provided that Executive Risk would not pay aEURoeLoss for Claims brought about or contributed to in fact (1) by any dishonest or fraudulent act or omission or any willful violation of any statute, rule or law by an Insured.aEUR?

Executive Risk argued that at least some portion of the underlying settlement fell under the Dishonest/Fraudulent Acts Exclusion and was therefore not covered. Executive Risk never directly suggested that there was no coverage as a result of the juryaEUR(TM)s findings, but instead maintained that the juryaEUR(TM)s findings necessitated an allocation between covered and non-covered claims.

The Court disagreed, noting that CAMC established that coverage existed under the terms of the Executive Risk policy. The Court acknowledged that in the underlying litigation, the jury found that CAMC breached a duty owed to Dr. Hamrick by communicating that he lacked adequate insurance, that he had not demonstrated the actuarial soundness of his self-insurance plan, and that he was not qualified for clinical privileges. Thus, CAMCaEUR(TM)s breach of duty constituted a aEURoewrongful actaEUR? covered by the policy. Furthermore, punitive damages were expressly encompassed within the policy definition of aEURoeLossaEUR? by virtue of a Punitive Damages endorsement.

The burden therefore shifted to Executive Risk to prove the facts necessary to support an applicable exclusion to coverage. Relying on the jury verdict form, Executive Risk argued that the juryaEUR(TM)s findings in Sections 3 and 4 of the form triggered the Dishonest/Fraudulent Acts Exclusion.

The Court rejected Executive RiskaEUR(TM)s argument that the last two sections of the jury verdict form transformed the claim into one involving dishonest or fraudulent conduct. The Court noted that these findings related to damages and attorneyaEUR(TM)s fees, as only Section 1 of the jury form assessed liability. Further, the claims presented to the Hamrick jury were for defamation and invasion of privacy, not fraud. As Dr. Hamrick never asserted a cause of action predicated on fraudulent or dishonest conduct, the jury could not have found in his favor on such a claim. Further, the Court noted that Executive Risk did not point to any dishonest or fraudulent act or omission on the part of CAMC. Thus, the mere fact that the jury made predicate findings with regard to punitive damages and attorneyaEUR(TM)s fees did not alter the nature of the conduct giving rise to the claim. Executive Risk therefore failed to prove that the Dishonest/Fraudulent Act Exclusion applied here. Therefore, the Court held that there was coverage for the aEURoeLoss.aEUR?

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