Court Opinion

ID: 1022502
Source: CourtListenerOpinion
Date Created: 2013-07-04 23:23:07.143909+00
Date Added: 2024-06-11T12:16:09.543734
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                              No. 06-1362

GULF UNDERWRITERS INSURANCE COMPANY,

                                              Plaintiff - Appellee,

           versus

KSI SERVICES, INCORPORATED,

                                             Defendant - Appellant.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. T. S. Ellis, III, District
Judge. (1:05-cv-00875-TSE)

Argued:   January 31, 2007                    Decided:   May 1, 2007

Before WILKINSON, NIEMEYER, and SHEDD, Circuit Judges.

Affirmed by unpublished opinion. Judge Niemeyer wrote the opinion,
in which Judge Wilkinson and Judge Shedd joined.

ARGUED: Wayne Gormly Travell, LEACH & TRAVELL, P.C., Vienna,
Virginia, for Appellant.     Jonathan M. Jacobs, WILEY, REIN &
FIELDING, L.L.P., Washington, D.C., for Appellee. ON BRIEF: Daniel
J. Standish, WILEY, REIN & FIELDING, L.L.P., Washington, D.C., for
Appellee.

Unpublished opinions are not binding precedent in this circuit.
NIEMEYER, Circuit Judge:

     KSI Services, Inc., a Virginia real estate developer, engaged

Merit Title LLC to provide it with escrow services.       Over the

course of several years, KSI Services entrusted over $1.1 million

in escrow funds to Merit Title pursuant to this arrangement.

During the same period, Margaret Dean, Merit Title’s bookkeeper,

embezzled approximately $1.4 million in over 130 transactions, and

Merit Title thereafter went into bankruptcy, unable to return the

entrusted funds to KSI Services.   The bookkeeper subsequently pled

guilty to a criminal charge of embezzlement.

     Merit Title submitted claims for its losses to two insurance

companies -- one that provided Merit Title with a fidelity bond and

another, Gulf Underwriters Insurance Company, which had issued

Merit Title an errors and omission policy.       The fidelity bond

yielded payment to Merit Title of $100,000 for the loss resulting

from Merit Title’s bookkeeper’s dishonesty.     Gulf Underwriters,

however, denied coverage, contending that Merit Title’s loss was

excluded from errors and omissions coverage as “arising out of” a

dishonest or criminal act.

     After KSI Services obtained a default judgment against Merit

Title in a Virginia state court in the amount of $827,151.52, plus

interest and costs, Gulf Underwriters commenced this action against

KSI Services seeking a declaratory judgment that it does not owe

coverage for the loss under the errors and omissions policy because

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of, among other reasons, the exclusion for dishonest or criminal

acts.   KSI Services filed a counterclaim seeking indemnity for the

judgment it obtained against Merit Title, claiming a total of

$860,501.52 plus interest.

     The district court granted summary judgment in favor of Gulf

Underwriters, and KSI Services filed this appeal.      We review the

district court’s judgment de novo.    See In re Wallace and Gale Co.,

385 F.3d 820, 828 (4th Cir. 2004).

     The errors and omissions policy issued by Gulf Underwriters

provides that Gulf Underwriters will pay on behalf of Merit Title

“those sums . . . that [Merit Title] become[s] legally obligated to

pay as damages or claim expenses because of claims as a result of

a wrongful act in performing insured services for others.”         A

“wrongful act” is defined as, among other things, a “negligent act,

error or omission” of Merit Title’s “officers, directors and

employees,” while acting “within the scope of their duties for

[Merit Title].”   The relevant exclusion from coverage provides:

     We [Gulf Underwriters] are not obligated to pay damages
     or claim expenses or defend claims for or arising
     directly or indirectly out of . . . [a]n act or omission
     that a jury, court or arbitrator finds dishonest,
     fraudulent, criminal, malicious or was committed while
     knowing it was wrongful.

     Because the damages claimed by KSI Services against Merit

Title arose directly or indirectly from the dishonest or criminal

act of Merit Title’s employee, coverage for the damages is excluded

under the plain terms of the policy.

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     KSI Services asserts that its claim against Merit Title is

based on Merit Title’s negligent supervision of its dishonest

employee, and negligent supervision is a distinct “wrongful act”

that is covered by the error and omissions policy.              This argument,

however, overlooks the fact that while Merit Title’s negligent

supervision may have been a contributing cause of the loss, an

equally important cause of the loss was the bookkeeper’s criminal

acts.   The policy language excluding coverage for damages arising

“directly or indirectly” out of criminal acts contemplates multiple

causes of liability and does not restrict the exclusion’s operation

to circumstances in which the criminal act was the liability’s

direct or sole cause or even its proximate or primary cause.             Thus,

so long as one of the direct or indirect causes of the loss was a

criminal act, the exclusion operates to deny coverage.

     In claiming coverage, KSI Services also relies on a line of

cases from other jurisdictions construing the language of policies

issued by National Union Fire Insurance Company.           See Watkins Glen

Central Sch. Dist. v. Nat’l Union Fire Ins. Co., 732 N.Y.S.2d 70

(N.Y. App. Div. 2001); Durham City Bd. of Educ. v. Nat’l Union Fire

Ins. Co., 426 S.E.2d 451 (1993); Bd. of Public Educ. v. Nat’l Union

Fire Ins. Co., 709 A.2d 910 (Pa. Sup. Ct. 1998).               These cases are

typified   by   the   holding   in   Watkins    Glen   where    liability   was

asserted   against     a   school    district    for   negligently    hiring,

supervising, and retaining a teacher who sexually abused a student.

                                      -4-
732 N.Y.S.2d at 71.           The school district’s insurance company,

National     Union    Fire   Insurance    Company,      invoked    the   policy’s

criminal     act     exclusion,    claiming     that   the   teacher’s     sexual

misconduct, as a cause of the potential liability, relieved the

insurer of any duty to defend or indemnify.                  Id. at 73.       The

Watkins Glen court did not refer to the specific language of the

National Union policy’s exclusion, stating only that it was the

same exclusion at issue in Board of Public Education, 709 A.2d at

912 (quoting an exclusion for “any claim arising out of . . .

assault      or    battery”),     and   holding   that    the     exclusion   was

inapplicable.        Id.   The court reasoned that “liability as against

the school district is predicated upon its conceptually independent

negligent supervision.”           Id.    The court reasoned that to deny

coverage “would completely undermine the purpose of” the errors and

omissions policy, which was intended to insure against negligent

acts, including negligent supervision.            Id. at 74.

       The observation of the Watkins Glen court that a claim of

negligent supervision is different from a claim of assault and

battery, while true, is irrelevant to this case.                   The relevant

language here excludes damages arising directly or indirectly out

of any criminal act. The analysis under this language thus differs

from   the    analysis     required     under   the    National    Union   policy

language.

                                        -5-
     Moreover, we note that a number of courts, construing language

generally similar to that before the Watkins Glen court, have ruled

contrary to the Watkins Glen line of cases.          See Continental Cas.

Co. v. H.S.I. Fin. Servs., 466 S.E.2d 4, 5 (Ga. 1996); St. Paul

Fire & Marine Ins. Co. v. Aragona, 365 A.2d 309, 313 (Md. Ct. Spec.

App. 1976); Stouffer & Knight v. Continental Cas. Co., 982 P.2d

105, 110 (Wash. Ct. App. 1999).

     Generally, protection from dishonest or criminal acts is

provided by fidelity bonds, not by errors and omissions policies

that exclude damages arising out of dishonest or criminal acts.

And that is so in this case where the unambiguous language of the

policy   excludes   damages   caused    in   whole   or   in   part    by   the

bookkeeper’s dishonest or criminal acts.         Accordingly, we affirm

the judgment of the district court.

                                                                      AFFIRMED

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