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Arson By Principal Burns LLC (NY)

August 5, 2011

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When an insured intentionally damages or destroys insured property, there is little question that a claim made by that insured for such damage would not be covered.  But a more interesting question is created where there is an "innocent" co-insured or business partner who seeks coverage for the loss.
The issue recently surfaced in <a href="http://pdf.wcmlaw.com/pdf/jmm.pdf" target="_blank" rel="noopener"><em>JMM Properties, LLC v. Erie Ins. Co.</em></a>  The carrier insured a building owned by a limited liability company.   Jeffrey Truman, one of the LLC’s three principals, intentionally set the insured property on fire in order to recover the insurance proceeds.
After the insurance company denied coverage based on Truman’s arson, the insured’s other two partners sued for coverage, arguing that the criminal acts by Truman did not constitute acts by the insured-LLC because Truman's acts were not authorized by the LLC.
But the court disagreed and ruled that the insurer properly denied coverage. First, the LLC’s operating agreement granted Truman the power to manage the LLC’s business, including the power to file insurance claims.  Therefore, Truman’s filing of a false insurance claim was deemed a false filing by the LLC which defeated coverage.  The court also ruled that Truman’s criminal conduct in setting fire to the building bound the LLC.   As is the case with corporations and partnerships, a principal’s criminal acts can bind the LLC which is a hybrid of a corporate entity and a partnership.
Thanks to Mendel Simon for his contribution to this post.  If you would like more information, please write to <a href="mailto:mbono@wcmlaw.com" target="_blank" rel="noopener">Mike Bono</a>.
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