The United States Court of Appeals for the Third Circuit, applying Pennsylvania law, has held that a policy sublimit for misappropriation, misuse, theft, or embezzlement of funds applied to a suit against an insured class action settlement administrator based on the actions of one of its employees in approving fraudulent claims.  CAMICO Mut. Ins. Co. v. Heffler, Radetich & Saitta, LLP, 2014 WL 5070473 (3d Cir. Oct. 10, 2014).  The court further held that the insurer was entitled to recoup the amounts it had paid above the sublimit because the policy expressly provided for reimbursement.

The employee of the insured administrator had participated in a scheme to siphon several million dollars of settlement proceeds to his co-conspirators and subsequently pled guilty to mail fraud and wire fraud.  Following the discovery of the scheme, members of one of the settlement classes sued the administrator for damages resulting from the employee’s actions.  The administrator’s insurer had funded the defense against the class-members’ claims but sought a declaratory judgment that the policy’s $100,000 sublimit for claims “arising from, related to or in connection with any Insured’s misappropriation, misuse, theft or embezzlement of funds” should apply, and to recoup the amounts it had paid over the sublimit.

On appeal from the grant of summary judgment to the insurer, the court first considered whether the employee’s conduct constituted misappropriation, misuse, theft, or embezzlement of funds.  The court found that misappropriation is a technical term with a specific legal definition, “the application of another’s property or money dishonestly to one’s own use.”  The court determined that the employee’s actions in approving false claims had funneled funds to which class members were entitled to the employee and his co-conspirators instead, and at minimum the employee had misappropriated funds, which was behavior sufficient to invoke the sublimit.

The court then looked to whether the employee was an insured to whom the sublimit applied, i.e., whether he was performing professional services for the named insured.  The administrator argued that the employee’s actions were not professional services because the benefits derived from the actions did not inure to it as the named insured.  The court held that this narrow interpretation of the definition of professional services would render the provision superfluous.  The court determined that, because the employee was engaged in the professional service of claims administration at the time that he was employed by the named insured, and the benefit of that claims administration inured to the named insured, the employee performed professional services as defined by the policy.  The court also rejected the insured’s argument that the employee was not an insured because he no longer worked for the administrator at the time the claim was made.  The court held that the employee’s status as an insured should be determined at the time the conduct in question occurred, and the employee therefore was an insured to whom the sublimit applied.

Finally, the court held that the insurer was entitled to recoup its litigation costs from the insured in excess of the sublimit.  Although Pennsylvania law does not normally allow insurers to recoup defense costs, reimbursement is possible when the contract expressly provides for it.  The court found that the plain language of the policy stated that the insured was obligated to reimburse the insurer if the insurer paid expenses or damages in excess of any applicable sublimit.