Last month, in Utica Mut. Ins. Co. v. Amity Ins. Agency, 84 Mass App. Ct. 1111 (Mass. App. Ct. 2013), available here, the Massachusetts Appeals Court issued a favorable decision to an E&O insurer in a duty to defend case.

The insured in Utica was an insurance agency.  One of its employees committed fraud by accepting payments from and furnishing copies of insurance policies to a client without ever actually securing those policies.  The client sued the insured, who did not dispute its employee’s fraudulent conduct.  After the insured and the client entered into a settlement agreement, the insured sought reimbursement from its E&O insurer for the funds expended to defend and settle the client’s lawsuit.

The insurer brought a declaratory judgment action.  The trial court granted summary judgment to the insurer, finding, inter alia, that it had no duty to defend (and thus no duty to indemnify) because the underlying suit did not allege “wrongful acts.”  This ruling was affirmed on appeal.  The panel first observed that the policy defined “wrongful acts” as “any negligent act, error, or negligent omission to which this insurance applies.”  It then set out the standard in Massachusetts for determining the duty to defend:

The duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer that may aid in its interpretation of the allegations in the complaint. An important caveat for present purposes is that ‘[i]t is the source from which the plaintiff’s personal injury originates rather than the specific theories of liability alleged in the complaint which determines the insurer’s duty to defend.’

Citing Bagley v. Monticello Ins. Co., 430 Mass. 454, 458 (1999).  The Utica court determined that the source of the allegations in the client’s underlying complaint was the “intentional, criminal conduct” of the insured’s employee, “which cannot be viewed as a negligent act, error, or omission.”  The court thus found that no “wrongful act” had been alleged and the E&O policy’s insuring agreement was not satisfied.

Insurers should revisit Utica when addressing claims for defense and indemnity that are based upon intentional underlying conduct.