Does Crime Pay? Insurance for Criminal Acts

Article excerpt

Sometimes yes, if you have insurance, and sometimes no. But the battle between policyholders and insurers continues

ONE might fairly wonder why there ever should be a question of insurance coverage for criminal acts. After all, the purpose of insurance is to guard against unforeseen events, not to insure conduct that is so heinous that society has imposed special penalties to discourage it. But, as claims professionals can attest, claims for criminal acts are being presented, and in many cases, courts are finding coverage.

This article considers three areas--first, the traditional bases on which courts have refused to permit coverage for criminal acts; second, the evolving theories on which some jurisdictions now permit coverage for certain types of conduct and claims; and third, the new exclusions and arguments that insurers have developed to counter or limit their exposure for such claims.

CONTRACTUAL LIMITATIONS TO COVERAGE

Courts traditionally have refused to permit coverage for criminal conduct because to do so is antithetical to the entire concept of insurance, whether based on express policy provisions or implied concepts of fortuity and risk transfer. Alternatively, courts have concluded that it would be against public policy to indemnify criminals against the consequences of their intentional acts. Such concerns sometimes merge, as in cases in which courts have looked to public policy concerns to enunciate standards for interpreting insurance contracts.

A. Contractual Considerations

The principal focus of these coverage disputes has been on policy wordings that purport to limit coverage for various types of intentional acts.(1) In general, the disputes concern (1) "occurrence"-based general liability insurance for "bodily injury"; (2) "personal injury" coverage that may be added to general liability (GL) policies by broad form endorsements or, more recently, as a standard part of GL policies; and (3) "claims made" errors and omissions policies.

1. Accidents and Occurrences

Since 1965, most GL policies have been written on m "occurrence" basis, which typically is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

a. "Accident"

An "accident" is something that "arises from extrinsic causes," "occurs unexpectedly or by chance" or "happens without intent or through carelessness."(2)

b. "Expected or Intended"

The resulting injuries also must not have been "expected or intended." In recent years, this requirement has been extracted from the definition of "occurrence" and set out as a separate policy exclusion.

States differ as to whether an objective or subjective standard should be applied to determine intent. An objective standard asks whether a reasonable person, standing in the shoes of the insured, would have expected or intended the injuries to occur. By contrast, a subjective standard requires proof that this specific insured concededly meant to cause harm.

In recent years, a slight majority of jurisdictions have adopted a "subjective" approach, including Alabama, Arizona, California, Delaware, Idaho, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New Jersey, New York, Ohio, Virginia, Washington and West Virginia.

States that still follow an "objective" approach include Arkansas, Hawaii, Iowa, Minnesota, Mississippi, Montana, Nebraska, North Dakota, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Vermont, Wisconsin and Wyoming.

Finally, states such as Illinois and Indiana have adopted a compromise position under which "expected" takes on an objective connotation, but "intended" implies a subjective viewpoint.

Whether courts use a subjective or objective test, an intent to injure generally is inferred as a matter of law if the insured's conduct is inherently harmful. …