Third Circuit Affirms Applicability of ‘Misappropriation’ Limitation Clause in Professional Liability Policy to Class-Action Fraud Scheme

On October 10, 2014, the Third Circuit Court of Appeals affirmed a lower court’s ruling that a professional liability insurance policy’s “misappropriation” sub-limit clause applied to limit the amount of defense costs owed to an insured whose employee plead guilty to mail and wire fraud in Camico Mutual Ins. Co. v. Heffler, Radetich & Saiita, LLP, 2014 U.S. App. LEXIS 19636 (3d Cir. Oct. 10, 2014).

Christian Penta was a senior claims analyst for Heffler, Radetich & Saiita, LLP, an accounting firm that distributes settlement funds to claimants in class action suits. Heffler was insured by a claims-made Accountants Professional Liability Insurance Policy issued by the CAMICO Mutual Insurance Company. Penta plead guilty to fraud charges after using his position to steal tens of millions from a $490 million settlement fund created during a class action suit against BankAmerica Corporation. Heffler was subsequently sued in a civil action by the wronged class members, and tendered the claim to CAMICO for a defense.

CAMICO defended under a reservation of rights, arguing that it was entitled to reimbursement for Heffler’s defense costs in excess of $100,000 since the Heffler policy contained a sub-limit for claims concerning “misappropriation, misuse, theft, or embezzlement.” CAMICO then filed a declaratory judgment action asserting that claim and several others against Heffler. In part, Heffler argued that the “misappropriation” sub-limit had not been triggered by Penta’s “fraud.”

The Third Circuit disagreed; it noted that although Heffler’s employee was technically engaged in “fraud,” Penta’s conduct undoubtedly constituted “misappropriation” under the CAMICO policy in that he took “another’s property or money dishonestly [for his] own use.”  Accordingly, the court held that the sub-limit was triggered and affirmed the lower court’s order to Heffler to reimburse CAMICO $87,531.76 in fees and costs.


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