Repayment was for “damages representing amounts allegedly owed under an express written contract” and, thus, wasn’t “Loss” under management liability policy

by Christopher Graham and Joseph Kelly

South Carolina

Singletary v. Beazley Insurance Co., Case No. 2:13-cv-1142 (D. S.C. Nov. 5, 2013)

D&O insurance, as far as insurers are concerned, isn’t a means for insureds to transfer liability for contract obligations to their insurers. D&O policies frequently include exclusions for contractual liability. Wording varies. And the exclusions are frequently litigated, as you’ll see from earlier posts to this blog.

Beazley, the D&O insurer here, addressed contractual liability through an exception to the definition of Loss — for “damages representing amounts allegedly owed under an express written contract, including a guarantee or obligation to make payments.” The issue was whether the insured’s $500,000 repayment to the Social Security Administration fell within that exception to the Loss definition. This Federal District Court concluded that it did.

The insured, Family Assistance Management Services, was required to repay that amount as a result of a claim by the Social Security Administration. The Administration appointed Family Assistance as “representative payee” for social security and supplemental security income beneficiaries. “A representative payee is appointed by the [Administration] only after the commissioner conducts an investigation of the person or entity to determine that such appointment is in the interest of the individual due the [Social Security] benefits.”

Family Assistance’s former employee embezzled funds intended for those beneficiaries. The Administration found Family Assistance “did not adequately have controls over the receipt and disbursement of Social Security and Supplemental Security Income benefits” and, “as a result, the funds of beneficiaries were at at risk for improper safekeeping and use.”

So why did the $500,000 repayment qualify as for “damages representing amounts allegedly owed under an express written contract . . . ?” Family Assistance’s arrangement with the Social Security Administration was subject to a “Form SSA-11” which “includes a term requiring that the representative payee [(Family Assistance)] ‘[r]eimburse the amount of any loss suffered by any claimant due to misuse of Social Security or SSI funds by me/my organization.'” The Form SSA-11 was an express written contract. The $500,000 was damages representing amounts allegedly owed under that contract.

Tags: D&O, loss, contract exclusion

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