Judge: Insurance company has duty to defend, but not indemnify, firm and former employee

By Nicholas Malfitano | May 27, 2015

PHILADELPHIA – A federal judge has partially ruled in favor of an insurance company that sought a declaratory judgment that it had a duty to defend, but not indemnify, a public accounting firm that was once its client and one of their CPAs.

Navigators Insurance Company initiated litigation against Resnick Amsterdam Leshner, a Blue Bell–based accounting firm and one of its former employees, Arthur Felderstein in September, claiming it had no duty to defend or indemnify the firm in a pending state court action in which the plaintiff alleges the defendants breached confidentiality by disclosing personal and financial information to a third-party.

Navigators Insurance Company insured Resnick under an accountant’s professional liability policy, effective Nov. 1, 2012 through Nov. 1, 2013.

Felderstein, a certified public accountant who was then employed by Resnick, was covered under the policy. On Feb. 8, 2013, during the coverage period, Phillip Cannella and First Senior Financial Group (FSFG) filed a civil action against Resnick and Felderstein in the Montgomery County Court of Common Pleas, alleging “wrongful conduct” had transpired during the parties’ business relationship.

It was the claim of Cannella and FSFG that despite Felderstein’s assurances all information concerning Cannella and FSFG would be kept confidential, he emailed “derogatory and damaging” information about them to a third party for posting on a website titled “TruthaboutCannella.com.”

The information was allegedly transmitted via emails from Felderstein to the third party on Feb. 14, 2010, Feb. 15, 2011 and March 6, 2011.

Navigators defended Resnick and Felderstein in the lawsuit against Cannella and FSFG for over a year-and-a-half, before filing a declaratory judgment action on Sept. 8.

Navigators explained since the alleged wrongful conduct took place during a period of time before it afforded coverage to Resnick and Felderstein, Felderstein would have to have “reasonably” known those actions would be the basis of a claim. Navigators feel as a matter of law, this proviso included in its policy ensures it has no duty to further insure or defend Resnick and Felderstein in the underlying action.

However, Resnick and Felderstein allege that Navigators must continue to defend them because the policy obligates it to defend even “false and fraudulent” claims, such as those made in the underlying action.

They argue that there are factual disputes about what had occurred and what they knew or had reason to know prior to the effective date of the policy.

Judge Timothy J. Savage, of the U.S. District Court for the Eastern District of Pennsylvania, ruled on the matter May 18.

“The Navigators policy provides coverage for defense and indemnity for any claim made during the policy period against Resnick and its employees arising out of the performance of professional services,” Savage wrote.

“Because the policy is a ‘claims made and reported’ policy, it covers claims that accrued, but were not made and not reported, before the policy went into effect. Simply put, coverage is determined when the claim is made, not when the conduct forming the basis of the claim occurred.”

Savage also provided a timeline to support his rationale.

“Navigators does not dispute that the claim was made and timely notice was given during the policy period. Resnick promptly reported a claim to Navigators on January 23, 2013, upon receipt of notice,” Savage said.

“Additionally, the underlying complaint was filed on Feb. 2, 2013 in the Montgomery County Court of Common Pleas, more than three months after the policy became effective.”

It was Savage’s perspective that even though the claim arose before the policy took effect, it doesn’t preclude coverage in the case of a claims-made policy, such as the one offered by Navigators in this case.

“Navigators rests its argument regarding prior knowledge on the allegations made in the underlying action – allegations that Resnick and Felderstein vehemently deny as false. Navigators elevates these allegations to established facts. However, they have not been proven and remain disputed,” Savage opined.

“Ignoring its insured’s denial that Felderstein sent the e-mails containing the confidential information forming the basis of the claim, Navigators insists that Resnick and Felderstein knew or had reason to know that the claim could be made. If Felderstein did not do what the plaintiffs in the underlying action allege he did, neither he nor Resnick could have known of the claim until the underlying action was threatened or commenced.”

Savage stated clearly the allegation that Felderstein sent emails with confidential information about Cannella and FSFG did not amount to him having knowledge his alleged actions could give rise to a future claim to be made.

“It is not proof,” Savage said. “On the contrary, Resnick and Felderstein have not only denied the allegation, they have presented evidence demonstrating that the e-mails were fabricated.

“In other words, they maintain that the claim is groundless and fraudulent. Therefore, because both the policy itself and established legal principles require the insurer to defend even groundless, false, or fraudulent claims against the insured, Navigators is not relieved of its duty to defend Resnick and Felderstein.”

However, though Savage concluded Navigators must defend Resnick and Felderstein, it does not have to indemnify them because their policy states they would have no obligation to do so if Resnick and Felderstein were found liable of the conduct they are accused of engaging in, and obviously would have no need to indemnify them if they were found not to have sent the damaging emails.

“Nevertheless, no matter what the outcome of the underlying lawsuit, Navigators will have no duty to indemnify Resnick and Felderstein. Thus, we conclude that Navigators has a duty to defend Resnick and Felderstein, but it has no duty to indemnify them,” Savage said.

The plaintiff was represented by Sean Robins of Marks O’Neill O’Brien Doherty & Kelly, in Philadelphia.

The defendants were represented by Alan C. Milstein and Jeffrey P. Resnick of Sherman Silverstein Kohl Rose & Podolsky in Moorestown, N.J., and A. Jordan Rushie of Mulvihill and Rushie in Philadelphia.

U.S. Eastern District Court of Pennsylvania case 2:14-cv-05158

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com

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