Wade Clark Mulcahy LLP

<p style="text-align: justify;">In <em>Leithbridge Company v. Greenwich Insurance Company</em>, the insured commenced a declaratory judgment action, in the Eastern District Court of Pennsylvania, against its insurer, Greenwich Insurance Company, for a declaration that it was owed defense and indemnification for an underlying lawsuit. By way of brief background, in the underlying action, it was alleged that the underlying plaintiffs bought a house through the insured. It was further alleged that prior to closing, they received a fraudulent email purporting to be from their title company instructing them to deposit the balance of the purchase money and closing costs. The underlying plaintiffs deposited the funds and subsequently learned of the fraudulent nature of the email. The underlying plaintiffs thereafter brought an action against the insured, alleging the insured “was negligent in safeguarding their personal information, and that because of that negligence, ‘the confidential personal and transactional information of the plaintiffs fell into the hands of scammers, who were thus enabled to perpetrate a fraud upon plaintiffs and steal their purchase money.’” The insured had a Real Estate Professional Errors and Omissions Policy with Greenwich that covered “an act or omission ... in the performance of real estate services”. The insured’s claim for coverage was denied by Greenwich.</p>
<p style="text-align: justify;">In the declaratory judgment action, Greenwich argued no coverage existed under the policy pursuant to an exclusion that stated, in relevant part, Greenwich need “not defend or pay any claim: ... based on or arising out of ... the conversion, commingling, defalcation, misappropriation or improper use of funds or other property …”. The insured argued that the exclusion did not apply considering the underlying complaint sounded in negligence and not the underlying conversion. Thus, the insured argued, the court need only consider whether the alleged conversion constituted a “breach of duty.” The Court rejected the insured’s argument stating that when determining whether coverage existed, the manner in which the plaintiff framed its claims was not determinative. The Court further held that the alleged conversion was central to the underlying plaintiffs' negligence claim considering, without the alleged conversion, there would have been no breach of duty. As such, the Court concluded that the exclusion applied because the underlying plaintiffs' loss arose from the alleged conversion.</p>
<p style="text-align: justify;">This case illustrates the notion that the counts alleged in an underlying plaintiff’s complaint are not determinative for coverage determinations. Rather, the factual allegations within the four corners of the complaint are key to coverage determinations.</p>
<p style="text-align: justify;">Thanks to Rachel Thompson for her contribution to this post. If you have any questions or comments, please contact <a href="mailto:chayes@wcmlaw.com">Colleen Hayes</a>.</p>