The Pennsylvania Superior Court has held that two men who held senior management roles at a hotel and used their positions to cause the hotel to make payments to a fake company that they created were performing “Professional Services” within the meaning of a professional liability policy while doing so.  Gemini Ins. Co. v. Meyer Jabara Hotels LLC, 2020 WL 1649888 (Pa. Super. Ct. Apr. 3, 2020).  Because the policy excluded coverage for losses arising out of criminal acts committed by employees while rendering Professional Services, the court held that no coverage was available.

A hotel management company supplied a hotel with a general manager and a chief engineer.  The two created a fake company that would bill the hotel for services never rendered and then they approved the fake company’s invoices.  They also encouraged otherwise-legitimate vendors to inflate invoices in exchange for kickbacks.  Eight years and about $3 million dollars later, the hotel detected “financial irregularities” and alerted the authorities.  After pleading guilty to wire fraud and money laundering, the general manager was sentenced to five years in prison and the engineer to one year.  Both were ordered to pay restitution though most of the money was, predictably, gone.

After the fraud was discovered, the hotel demanded that the management company pay back the stolen funds, and the management company tendered the claim to its professional liability insurer.  The insurer agreed to advance its policy limits, subject to an agreement that the insurer could initiate a coverage action and, if successful, obtain reimbursement of the advanced funds.

The insurer asserted that coverage was barred by the policy’s Dishonesty/Criminal Acts Exclusion, which provided that there would be no coverage for losses arising out of criminal acts “committed by” an “Insured.”  The policy defined Insured to include employees of the management company “while rendering Professional Services on behalf of” the management company.  Professional Services were defined generally as hotel management services performed for others pursuant to a management contract.

The insured management company contended that the convicted fraudsters were not Insureds for purposes of triggering the exclusion because “stealing money is not a ‘Professional Service.’”  The Superior Court disagreed, noting that the pair “used their authority and their time on duty . . . to have the opportunity to commit their crimes.”  The court also stated that there was no requirement that an insured company’s employee commit a crime to benefit the insured company in order for the exclusion to apply.  The Superior Court further noted that if criminal activity inherently fell outside the definition of Professional Services, as the management company urged, the Criminal Acts Exclusion would be read out of the policy entirely.  The court focused on how the employees’ job duties and related authority enabled the criminal scheme, and did not suggest that any on-the-job criminality would qualify as a Professional Service.

The insured separately argued that the insurer waived its right to dispute coverage when the insurer filed, and then settled, subrogation claims against businesses that participated in the inflated invoice/kickback component of the scheme.  The Superior Court concluded that the insurer had consistently reserved its right to contest coverage despite pursuing subrogation claims, first in the agreement to advance the policy limits subject to a coverage action, and then later in its complaint, which sought a subrogation recovery only to the extent that the insurer was unable to recover the advanced funds from the management company.  The insurer’s pursuit of a subrogation recovery could not create coverage where none existed, the court ruled.  The court did note that the insurer’s recovery from the management company would be reduced by any amounts that it recovered in subrogation settlements with others.