Dishonesty/fraud exclusion barred coverage for claim arising out of Insured’s employee’s embezzlement of customer funds

by Chris Graham and Joseph Kelly

National Reimbursement Group, Inc. v. Gemini Insurance Company, Case No. 5:13-CV-145(MTT) (M.D. Ga Aug. 21, 2013)

The Insured provides medical billing and collection services to its customers. The Insured was advised by a special agent of the Department of Health and Human Services that he was investigating a former employee of the Insured for embezzlement from one of Insured’s customers.

The Insured gave Gemini notice of a potential claim for negligent supervision under its professional liability policy issued by Gemini. Gemini denied coverage. The Insured’s customer then made a demand for repayment of its losses relating to the embezzlement. The Insured made another coverage demand and Gemini again denied. The Insured settled with its customer and then filed suit against Gemini.

Gemini moved to dismiss arguing the Insured’s claim was excluded under three exclusions under the policy, including a dishonesty/fraud exclusion. Applying Georgia law, the court granted Gemini’s motion to dismiss.

The dishonesty/fraud exclusion bars coverage for claims “Arising Out of any actual or alleged … [c]riminal, fraudulent, dishonest, or knowingly wrongful act or omission committed by or with the knowledge of any Insured.” The policy defined “Arising Out Of” as “connected to, incidental to, originating from or growing out of, directly or indirectly resulting from.” The court concluded that the Insured’s negligent supervision claim wouldn’t exist but for the embezzlement so it arose out of the embezzlement.

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