In CAMICO Mutual Insurance Co. v. Heffler, Radetich & Saitta, L.L.P., the United States Court of Appeals for the Third Circuit recently held that a $100,000 sub-limit for claims involving employee misappropriation, misuse, theft or embezzlement in a claims made accountants professional liability insurance policy applied, requiring the insured to repay litigation costs the insurer advanced in excess of the limit.  The decision illustrates the risk insureds sometimes run when they rely on insurance for such costs.

In 2002, Heffler, Radetich & Saitta, L.L.P. (“Heffler”), an accounting firm, was appointed by a court as the claims administrator for a $490 million class action settlement.  Christopher Penta, a senior claims analyst at Heffler from 2001 to 2004, was assigned to help administer the settlement, and Heffler was paid for the work he performed.  Unfortunately, Penta participated in a scheme to defraud the class members.  His co-conspirators submitted false claims to him, and he shepherded the claims through to payment, personally approving them or ensuring that others did so.  His co-conspirators then shared some of the proceeds with him, so that he received approximately $4 million, about 10% of the total fraud proceeds.  In 2008, Penta and his co-conspirators were charged with mail fraud and wire fraud, to which Penta pled guilty.  A class member then commenced a new class action against Heffler, seeking damages resulting from Penta’s crimes, and alleging breach of fiduciary duty, accountant malpractice, and negligent supervision.

Heffler provided its insurer, CAMICO Mutual Insurance Co. (“CAMICO”), with timely notice, and CAMICO funded its defense, subject to a reservation of the right to recover defense costs and expenses in excess of a $100,000 sub-limit concerning misappropriation, misuse, theft, or embezzlement.  Subsequently, CAMICO sued Heffler for a declaration that it had no defense obligation beyond the $100,000 sub-limit, also asserting claims for unjust enrichment, money had and received, and recovery of overpayment.  Heffler counterclaimed for declaratory relief and for bad faith; the parties made cross motions for summary judgment; CAMICO prevailed; and Heffler appealed.

The Third Circuit affirmed.  Addressing the main issue in the case, it held that the $100,000 sub-limit was applicable.  The sub-limit applied to “Damages and Claim Expenses for each covered Claim arising from, related to or in connection with any Insured’s misappropriation, misuse, theft or embezzlement of funds.”  Because Penta and his co-conspirators dishonestly obtained funds belonging to the underlying class members, the court had little difficulty determining that the claim arose from his misappropriation of funds.  Heffler argued that Penta was not an “Insured” because he was not employed by Heffler when the claim was made in 2008, but the court rejected that argument based on the definition of an “Insured,” which includes anyone who was performing “Professional Services for the benefit of the Named Insured or a Predecessor Firm on or after the Retroactive Date,” which was in 1943.  Heffler also argued that Penta was not performing “Professional Services” for Heffler’s benefit, because none of his ill-gotten gains inured to the benefit of Heffler.  But the court rejected that argument too, concluding that “independent criminal conduct” of the “type” engaged in by Penta “by definition” does not inure to the benefit of the employer, so that Heffler’s reading of the language of the sub-limit would render it “superfluous,” contrary to established canons of contract interpretation.  Finally, having determined that the $100,000 sub-limit applied, the Third Circuit agreed with the district court’s award to CAMICO of $87,531.76 in fees and costs incurred in the defense in excess of that sub-limit.

Heffler is non-precedential, and it may not appear to involve much heavy lifting.  Possibly the court was too facile when it reasoned that the sub-limit would become “superfluous” if the court concluded that Penta was not performing “Professional Services for the benefit” of Heffler.  There are many cases where employees engage in dishonest conduct that has a more obvious benefit to the employer than Penta’s, and where the sub-limit would clearly apply even if it did not apply here.  But the fact that the court did not probe this issue is an instructive reminder of how hard it is to show that an employee’s conduct was wholly without benefit to its employer for the purpose of applying this kind of insurance policy language.