Fraud Exclusion Bars Coverage for RICO and Fraud Suit

An Illinois federal court has held that a fraud exclusion applied to an underlying complaint alleging counts for violations of the federal Racketeer Influenced Corrupt Organizations (RICO) Act and for common law fraud.  Gen. Star Nat. Ins. Co. v. Adams Valuation Corp., 2014 WL 4783027 (N.D. Ill. Sept. 23, 2014).  Notably, the exclusion did not have an in fact or final adjudication requirement.

An insured appraisal firm and its principal were named as defendants in a lawsuit that alleged that the insureds “engaged in a massive scheme to defraud two banks out of millions of dollars through the making of unsupportable and improper insider loans.”  The insureds sought coverage from their real estate E&O insurer, which denied coverage based on a fraud exclusion that barred coverage in connection with claims arising out of “a dishonest, fraudulent, criminal or malicious act or omission, or intentional misrepresentation . . . committed by, at the direction of, or with the knowledge of any Insured.”

In the ensuing coverage action, the court granted judgment on the pleadings for the insurer, holding that the fraud exclusion relieved the insurer of its duty to defend as a matter of law.  The court held that liability under the RICO Act required a showing that the insureds committed or agreed to engage in “racketeering activity,” which is defined under the RICO Act to include only specified criminal acts.  The court also noted that the common law fraud counts required a showing that the insureds committed or assisted in dishonest or fraudulent acts or omissions or intentional misrepresentations.  Because there was no possible circumstance where the insured could be found liable without triggering the exclusion, the court held that the insurer had no duty to defend.