“Wrongful Acts” Exclusion Bars Coverage of Claims against Accounting Firm

A federal district court in New York has ruled that the “wrongful acts” exclusion in a professional liability insurance policy issued to an accounting firm excluded coverage for claims against the accounting firm allegedly arising from fraud and misrepresentation by the firm’s clients.

The Case

Customers of Cambridge Credit Counseling Corp. (“CCCC”) and Cambridge/Brighton Budget Planning Corp. sued the two companies, alleging that they had engaged in fraud and misrepresentation, and obtained a judgment for $259,085,983.  The customers then sued the companies’ accounting firm, alleging violations of the Credit Repair Reorganization Act (“CROA”). The complaint alleged that the accounting firm had violated the CROA when it prepared and filed federal tax returns that misstated the nature of CCCC and Cambridge/Brighton to the government and that created an effective marketing tool for CCCC and Cambridge/Brighton to use to promote their alleged credit improvement services to prospective customers.

The accounting firm sought coverage from its insurer under a claims-made professional liability insurance policy. The insurer disclaimed coverage, relying on, among other things, the policy’s wrongful acts exclusion. The firm sued, and the insurer moved for summary judgment.

The Court’s Decision

In its decision, the court observed that the policy’s wrongful acts exclusion precluded coverage for “any liability based in whole or in part on any knowingly wrongful, dishonest, fraudulent, criminal or malicious act committed by or at the direction of any ‘Insured’ in the course of providing ‘professional services.'” Stated differently, the court continued, where claims against an insured were based “in whole or in part” on fraudulent conduct, coverage was excluded.

The court then found that the complaint against the accounting firm clearly contained allegations that the accounting firm had performed acts that constituted or resulted in the commission of, or attempts to commit, fraudulent or deceptive practices on consumers, or had made untrue and misleading statements, or had included knowingly false statements, in the IRS Form 990 returns that the firm had prepared.  Therefore, the court ruled, coverage was precluded regardless of whether there also were allegations of negligence in the complaint against the accounting firm.

Accordingly, the court granted the insurer’s motion for summary judgment, concluding that the claims against the accounting firm fell entirely within the policy’s wrongful acts exclusion and the insurer had no duty to defend.

The case is Silverman Neu, LLP v. Admiral Ins. Co., No 11-cv-05542 (JFB) (AKT) (E.D.N.Y. March 28, 2013).