Fraudulent Activity Exclusions Eliminate Insurer’s Duty to Defend
Audit Bureau of Circulations (Audit Bureau) filed suit against Axis Specialty Insurance Company (Axis) for court costs and attorney’s fees relating to Axis’ failure to defend Audit Bureau in several lawsuits. Axis filed a motion for summary judgment, which was granted.
Audit Bureau purchased an Errors and Omissions policy from Axis. The policy stated that Axis would insure Audit Bureau against any sum it became “legally obligated to pay as Damages or Claim Expenses because of Claims as the result of a Wrongful Act in performing Insured Services for others.” To determine whether an insurer has a duty to defend, the court looks to the allegations in the complaint of the underlying action. If the allegations of the complaint do not fall (or potentially fall) within the policy coverage, the insurer does not have a duty to defend. The complaint in the underlying litigation alleged that Audit Bureau intentionally aided and abetted in the perpetuation of a fraud.
The policy purchased by Audit Bureau for Errors and Omissions from Axis excluded coverage for fraudulent activities. Therefore, because the underlying litigation was based upon fraud, Axis did not have a duty to defend Audit Bureau.
Audit Bureau argued that the policy was ambiguous and attempted to argue that other theories of recovery were possible, such as negligence. However, negligence was not alleged in the complaint and the court refused to infer that other “possible theories of recovery” be read into the complaint.
