Insurance Law

E&O Carrier’s Duty to Defend Was Triggered because Allegations that the Insureds Mismanaged Debtor’s Trust Account Concerned Professional Services for Others

In C.M. Meiers, [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the Bankruptcy Court for the Central District of California found that handling of an insurance trust account implicated “professional services” and, therefore, ruled against an E&O carrier that denied coverage for an underlying claim based on the improper handling of such an account.

In the underlying case, the bankruptcy trustee for the insured entity sued the entity’s former directors and officers for improper handling of the entity’s insurance trust account and the misappropriation of the funds in that account. As an insurance agent, the entity was statutorily required to maintain an insurance trust account. The directors and officers tendered their defense to their E&O carrier, which denied coverage based on the position that the claim did not assert wrongful acts in connection with professional services for others, as required for coverage under the policy. The directors and officers assigned their claims against the carrier to the trustee, which filed a suit for breach of contract and bad faith against the carrier. The trustee filed a motion for summary judgment, which the court granted in part and denied in part.

The court granted the trustee’s motion based on his breach of contract cause of action and held that the underlying action arose out of the directors’ and officers’ professional services for others. In reaching this conclusion, the court held that the handling of an insurance trust account by an insurance agent was a statutory requirement that required specialized skill, and rejected as inapposite the case law holding that an attorney’s handling of a client trust account does not constitute a professional service. However, the court denied the trustee’s motion on his bad faith cause of action on the basis that inferences could be made both ways regarding whether the carrier’s denial was reasonable.

In re: C.M. Meiers Co., Inc. v. Essex Ins. Co., 527 B.R. 388 (C.D. Cal. Mar. 20, 2015).

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