The U.S. District Court for the Northern District of Illinois recently granted an insurer’s motion for summary judgment, finding no coverage on the ground that the underlying complaint alleged solely intentional conduct that was not covered under the Errors and Omissions insurance policy at issue. Audit Bureau of Circulations v. Axis Specialty Insurance Company, No. 08-cv-3089 (N.D.Ill. Aug. 27, 2009). A copy of the District Court’s opinion can be found here.
Audit Bureau of Circulations (the “ Insured”) was insured under a Specialty Errors & Omissions Liability Insurance Policy (the “Policy”). The Insured was named as a defendant in a number of related class action lawsuits in which several publishers and distributors of periodicals were also named as defendants. The class action complaints generally alleged that the named defendants engaged in a fraudulent scheme pursuant to which they falsely increased the publications’ circulation numbers in order to inflate charges to the advertisers who placed their ads in the publications. As to the Insured, it was specifically alleged that the Insured aided and abetted the other defendants in the alleged fraud.
The Insured sought a defense and indemnification for the class actions under the Policy. The Policy provided coverage for “Wrongful Acts” in performing “Insured Services.” The Policy defines “Wrongful Acts” in relevant part as:
Conduct or alleged conduct by You or any person or organization for whom You are legally liable: (1) a negligent act, error or omission….
The Insurer denied coverage for Audit Bureau on the ground that the sole allegation against the Insured was for the intentional aiding and abetting of fraud, which the Insurer asserted did not qualify as a “negligent act, error or omission.” The Insured, however, was eventually dismissed from the class action lawsuits, and filed a lawsuit against the Insurer seeking coverage for defense costs incurred in defending the class action lawsuits. The Insurer moved for summary judgment.
The District Court granted the Insurer’s motion for summary judgment, finding no coverage for the Insured. In reaching its decision, the Court examined the allegations in the class action complaints, noting that the complaints “never mentioned negligence, gross negligence or anything other than knowing and intentional misconduct….” The Court also considered that each element of the tort of aiding and abetting fraud required either the knowledge of, existence of or assistance in committing fraud, and therefore, the underlying plaintiff would not be able to hold the Insured liable for “negligent acts, errors or omissions,” in pursuing the class actions.
In noting that the sole theory of recovery asserted against the Insured in the class actions was for intentional aiding and abetting of a fraud, the District Court rejected the Insured’s argument that the Court should consider facts outside the four corners of the complaints. The Court stated that the “facts” which the Insured asked the Court to consider were not in fact unplead facts but were irrelevant alternative theories of recovery which were not espoused in the class actions. The Court also rejected as irrelevant the Insured’s arguments that the Insurer had allegedly provided a defense under a reservation of rights in similar cases in the past, and that the Insurer’s former CEO had opined at his deposition that the Policy would provide coverage for the defense of the class actions as the opinion was in part based on the analysis of an exclusion not asserted by the Insurer.
