Criminal Acts of an Insured Bars Coverage for All Insureds

Insurer filed a lawsuit seeking a declaration that it owed no duty to defend or indemnify the insureds based on several exclusions. The insured was accused of the knowing violation of the rights of another and of criminal acts. This case is General Star Indemnity Company v. Mid-Atlantic Youth Services Corporation, 201 WL 3862539 (M.D.Pa.).

 

An underlying lawsuit against the insureds alleged that Mid-Atlantic Youth Services (MAYS) operated juvenile detention facilities and that it was involved in a conspiracy in which two county judges received kickbacks for maintaining a high rate of occupancy in these facilities. (As part of this conspiracy, the judges would often violate the civil rights of the juveniles appearing before them.) MAYS tendered the complaint to its insurer, General Star. The insurer denied coverage and filed a declaratory judgment action.

 

The United States District Court noted that in cases that concern an insurer's duty to defend, the court must compare the coverage available under the insurance policy with the factual allegations contained in the four corners of the underlying complaint. The court then proceeded to address the issue of possible coverage under the general liability policy of MAYS.

 

Under coverage A, bodily injury and property damage coverage, the duty to defend applies when the complaint against the insured alleges negligence. In the underlying complaint against MAYS, the court found no allegations of negligence. Rather, the insureds were accused of intentional conspiratorial activity and malicious, reckless, and/or wanton actions. The court said that such activities are not negligent and cannot be considered accidents under the plain language of the occurrence-based insurance policy. Thus, the allegations against MAYS were not the result an occurrence and the insurer has no duty to defend.

 

With respect to coverage B, personal and advertising injury liability, the court said that the underlying complaints clearly alleged that MAYS was part of a conspiracy in which false imprisonment was committed with the knowledge that it had been procured by violating constitutional rights. So, even though the claims against the insured would otherwise fall under the protection of coverage B, the alleged knowing violations of the underlying plaintiffs' rights trigger the knowing violation exclusion and excuse the insurer from its duty to defend the insured.

 

The court also said that the duty to defend was excused due to the criminal acts exclusion in the policy. This exclusion denied coverage for any occurrence, claim, claims expense, loss, cost or expense arising out of, resulting from, caused or contributed to by any criminal, malicious, dishonest, or fraudulent act committed by or at the direction of any insured. The court ruled that where the “any insured” language appears in exclusions, the acts of one insured triggered the exclusions against all the insureds. The act of one insured in this case precludes coverage for all insureds.

 

The court ruled that, based on the allegations of the complaint and the wording in the policy, the insurer had no duty to defend the insureds. And, since there is no duty to defend, there is no duty to indemnify. The motion of the insurer was granted.

 

Editor's Note: This case is presented to highlight two points.

 

First, an insurer's duty to defend an action brought against its insured is to be determined by the allegations contained in the pleadings. Sometimes, a court may look beyond the complaint to see if any other alleged facts could trigger coverage; however, a majority of jurisdictions look to the wording in the complaint against the insured. This is, of course, the “four-corners rule” and the court in this case followed that rule.

 

Second, this is another example of a court finding that the actions of “an insured” or “any insured” can be used to prevent coverage for all insureds. Exclusions are meant to be applied narrowly so as to give the insured as much coverage as is reasonable, but many courts have not been reluctant to apply an exclusion to all the insureds if the exclusionary language is worded as in this case.