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Are You Really Covered?

An interesting federal appeals court case affirms an insurance coverage rule that all businesses that carry professional liability insurance should know.

The case involved an accounting firm’s professional liability policy that started on July 1, 2008, which covered the firm in the event that it was held to be liable for, “an act or omission in the performance of professional services by you or by any person for whom you are legally liable.” The policy stated that there would be coverage only if “none of you” had a basis to believe that there the wrongful act had been committed before the policy date of July 2008. The policy defined “you” to include any partner or employee of the accounting firm.

After July of 2008, when the policy coverage started, the firm was sued by a number of clients accusing a firm employee – an account clerk – of stealing funds from their client accounts for a six-year period beginning in 2002. The accused accounting clerk had no role in procuring the insurance. The firm sought coverage under the “claims made” policy but the insurer denied the claim because the employee, herself, was aware of her own wrongful acts before the coverage began in July 2008. The accounting firm argued that because it had no knowledge of the account clerk’s theft when it signed the policy in July of 2008, coverage should not have been denied.

The appeals court agreed with the insurer. The court held that the knowledge of the accounting clerk, herself, of her wrongful acts sufficed to warrant the insurer’s denial of coverage. This was true even if the firm’s partners, managers and owners could prove that they did not know about the thefts when they signed the policy documents in July of 2008.

The court cited some other case examples that stand for the same principle, including a case in which an investment firm’s employee stole money from client accounts without the firm’s knowledge. The firm acquired professional liability insurance after the thefts. When the firm discovered the employee’s misconduct and its clients sued, the firm sought coverage, which was denied because the employee had prior knowledge of his thefts.

The lesson is, if you are a business owner or officer who signs a professional liability policy, do not presume – as common sense might seem to dictate – that your business will be covered merely because you lacked knowledge of an employee’s wrongful acts at the time you obtained the policy. Every word in an insurance policy can have significant meaning, such as the word “you” in the accounting firm’s case (which included the word “employees”). This is why business owners and officers often seek legal counsel’s advice in determining the scope and meaning of an insurance policy before signing on the dotted line.

About Josh Glikin

Josh Glikin has extensive experience in business and intellectual property litigation. His experience includes representing U.S. and international clients in trademark, false advertising and patent disputes in federal courts throughout the nation. Through litigation, dispute resolution, and negotiating licensing solutions, he successfully assists clients in protecting their trademarks and names, trade secrets and technology from unlawful use and copying by competitors, former employees and others. Mr. Glikin also has achieved success for clients in a variety of contract, tax, employment and securities fraud actions in both federal and state courts. Mr. Glikin routinely lectures to colleagues and business professionals on intellectual property, electronic discovery and other business law topics.

To reach Josh, please email him at glikin@bowie-jensen.com.

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