“Theft of Funds” Exclusion Precludes Coverage Where All Underlying Claims “Arose Out of” Theft

The United States District Court for the Southern District of Florida, applying Florida law, has held that a policy’s “theft of funds exclusion” precluded coverage for an insured law firm under its professional liability policy for the entirety of an underlying lawsuit, as all of the causes of action arose out of, were related to, or involved a theft, thereby implicating the exclusion. Houston Specialty Ins. Co. v. Fenstersheib, 2022 WL 4880148 (S.D. Fla. Sept. 30, 2022).

The insured was a personal-injury law firm that referred hundreds of its clients to a group of medical providers who agreed to treat the clients in exchange for guaranteed payments from the clients’ eventual settlements or judgments. To guarantee payment, the medical providers received written contractual liens executed by the insured that required the insured to withhold recovered monies and pay the providers. In July 2019, the medical providers filed suit against the insured, alleging that one of the insured’s employees had embezzled over $6 million of the settlement receipts, much of which was owed to the medical providers pursuant to the terms of various lien agreements. The underlying complaint asserted nine claims for civil theft, conversion, breach of fiduciary duty, constructive fraud, negligence, negligent retention, breach of contract, promissory estoppel, and accounting.

The insured tendered the underlying lawsuit for coverage, and the insurer agreed to defend pursuant to a reservation of rights. However, the policy excluded coverage for “[a]ny claim arising out of, relating to, or involving improper commingling of client funds, conversion of anyone’s funds, theft of anyone’s funds, the wire transfer of anyone’s funds . . . a counterfeit check, or a check bearing anyone’s forged or bogus signature.” As such, while the underlying lawsuit was pending, the insurer filed a declaratory judgment action and asked the court to declare that it owed no duty to defend or indemnify the insured in connection with the underlying lawsuit pursuant to this “theft of funds” exclusion.

After considering the parties’ cross-motions for summary judgment, the court held that the policy’s “theft of funds” exclusion barred coverage for the underlying lawsuit. In so holding, the court rejected the insured’s argument that the exclusion did not apply to the non-theft-related causes of action. The court explained that the insured’s reading of the policy ignored key words that expanded the category of claims excluded by this provision: the “arising out of, relating to or involving” lead-in language. The court stressed that this lead-in language must be construed broadly to mean “originated from, having their origin in, growing out of, flowing from, incident to, or having a connection with.” Accordingly, the court concluded that the “theft of funds” exclusion precluded coverage in its entirety, as all the claims arose out of the embezzlement of funds by the insured’s employee. The court further held that the insurer was entitled to reimbursement of the expenses it incurred in the defense of the insured because it specifically reserved its right to recoup when it undertook the defense and the insured accepted the defense subject to such reservation.


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