Gulf Underwriters Ins. Co. v. Ksi Services, Inc.

• Decision Date: 16 February 2006
• Docket Number: No. 1:05CV875.,1:05CV875.
• Parties: GULF UNDERWRITERS INSURANCE COMPANY, Plaintiff, v. KSI SERVICES, INC., Defendant.
• Court: U.S. District Court — Eastern District of Virginia

416 F.Supp.2d 417

GULF UNDERWRITERS INSURANCE COMPANY, Plaintiff, v. KSI SERVICES, INC., Defendant.

No. 1:05CV875.

United States District Court, E.D. Virginia.

February 16, 2006.

Jody Helen Schwarz, Wiley Rein & Fielding LLP, Washington, DC, for Plaintiff.

Wayne Gormly Travell, Leach Travell PC, Vienna, VA, for Defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

In this diversity declaratory judgment action, an insurer seeks a declaration that an errors and omissions policy provides no coverage to an entity claiming to be a third-party beneficiary of the policy by virtue of the operation of an exclusion barring coverage for an insured's dishonest or criminal acts.

For the reasons that follow, the declaration must issue.

I.

The material facts are undisputed and may be succinctly stated.¹ Plaintiff, Gulf Underwriters Insurance Company ("Gulf'), is a Connecticut corporation engaged in the insurance business with its principal place of business in New York. Gulf issued a Specialty Errors and Omissions Liability Insurance policy, Policy No. GU6617675 A ("Policy"), to Merit Title, L.C. ("Merit"), a now-defunct escrow services firm with its principal place of business in Fairfax, Virginia. KSI Services, Inc. ("KSI") is a Virginia corporation engaged in real estate development with its principal place of business hi Virginia.

In various transactions between 1999 and 2003, KSI placed approximately $1.1 million in escrow with Merit. Margaret Dean, then Merit's bookkeeper, embezzled from Merit a total of approximately $1.4 million in more than 130 separate instances between 1999 and 2003. Dean was subsequently arrested and charged with felony embezzlement. She pled guilty on July 20, 2004, admitting the elements and particulars of the embezzlement charge. Merit then sued Dean and her husband in Fairfax County Circuit Court inter alia, for breach of fiduciary duty, conversion, fraud, and unjust enrichment. Dean and her husband did not defend, and Merit obtained a default judgment on December 19, 2003 in the amount of approximately $1.1 million.² Notwithstanding the judgment, Merit was unable to recover the bulk of the outstanding embezzled funds from Dean and her husband, and consequently went out of business on July 19, 2004. KSI, therefore, did not recover the money it had placed in escrow with Merit.

Casting about for a means to recover the lost escrowed funds, KSI fastened on the Policy Gulf issued to Merit. Specifically, KSI seeks satisfaction from Gulf as a third-party beneficiary of the Policy Gulf issued to Merit for losses it alleges were caused by Merit's negligent supervision of Dean.³ Gulf contends that two Policy exclusions independently bar recovery under the Policy. First, while the Policy insured Merit against "wrongful acts"⁴ committed by an "insured," which the Policy defined as "Merit, L.C., Merit's partners, officers directors, or employees insofar as they were acting within the scope of their job duties," it specifically excluded coverage for dishonest acts, and noted that:

... Damages or Claim Expenses ... arising directly or indirectly out of . [a]n act or omission that a jury, court or arbitrator finds dishonest, fraudulent, criminal, malicious, or was committed while knowing it was wrongful. ("Dishonesty Exclusion")

Second, the Policy also excluded from coverage "Damages or Claim Expenses . . . for the breach of express warranties, guarantees or contracts." ("Breach of Contract Exclusion"). Given these Policy provisions, the question presented is whether, as a matter of law, either Policy exception bars coverage for Merit's losses.

II.

Virginia law⁵ is clear and well-settled on the governing standard for interpreting contracts, including insurance policies: Virginia strictly adheres to the "plain meaning" rule, meaning that "[w]here an agreement is complete on its face and is plain and unambiguous in its terms, the court is not at liberty to search for its meaning beyond the instrument itself ... because the writing is the repository of final agreement of the parties." See Pacific Insurance Co. v. American National Fire Insurance Co., 148 F.3d 396, 405 (4th Cir.1998) (quoting Lerner v. Gudelsky Co., 230 Va. 124, 334 S.E.2d 579 (1985)); Schneider v. Continental Casualty Co., 989 F.2d 728, 731 (4th Cir.1993) (applying Lerner and the "plain meaning" rule to the insurance policy context). Thus, the analysis in this case properly begins with the language of the Policy, and ends there where, as here, the pertinent Policy language has a clear and unambiguous plain meaning.

The Dishonesty Exception to coverage under the Policy makes clear that Gulf has no liability under the Policy for losses arising out of criminal conduct of an "insured." While it is undisputed that Dean was employed by Merit when she committed the embezzlement at issue, and that her crime was the actual cause of Merit's inability to repay KSI the money held in escrow on KSI's behalf, it is hotly disputed whether Dean was an "insured" under the Policy. Nor is this an inconsequential dispute; if Dean is an "insured" under the Policy, the Dishonesty Exception bars recovery. And in this regard, the Policy defines an "insured" as including "employees insofar as they were acting within the scope of their job duties." The question, then, is whether Dean was acting within the scope of her job duties when she committed the embezzlement at issue.

The question of what acts fall within the scope of an employee's duties has long been grist for the litigation mill. Courts in Virginia and elsewhere have wrestled with this question not always reaching uniform results. In general, courts in Virginia and elsewhere identify several factors that must be considered in determining whether an employee's acts fall within the scope of the employee's job duties. Those factors are: (i) the extent to which the employee was motivated by a desire to serve the employer in engaging in the tortious conduct; (ii) whether the tortious conduct was committed during the time the employee was on duty; (iii) whether the tortious conduct was committed while the employee was on the employer's premises or on premises where the employee's duties would naturally cause the employee to go; and (iv) the extent to which the impetus for the tortious conduct was causally related to the employee's employment. See, e.g., Gina Chin & Associates v. First Union Bank, 260 Va. at 533, 542-46, 537 S.E.2d 573 (2000).⁶ While there is some general agreement that these are the relevant factors to be considered, there is less agreement on the relative importance of each factor.

In this regard, states are sharply divided over the amount of emphasis to be placed on each factor: Some states look primarily to the employee's motivation for committing the tort;⁷ others lend more weight to various objective factors.⁸ Under the employee motivation approach, the critical inquiry is whether and to what extent the employee's tortious action was motivated by a desire to benefit his employer. The remaining factors are relevant, but not essential. Under this approach, liability is typically imposed only if the employee was motivated, at least in part, by a desire to serve the employer.⁹

Under the totality of the circumstances approach, an employee's subjective motivation for committing the tort is relevant, but not essential to a finding that the employee was acting within the scope of employment. Rather, the inquiry is a more objective one, focusing chiefly on whether the tortious or intentional wrongful conduct was sufficiently related in time, place, and causation to the employee's duties to be attributable to the employer's business.¹⁰ The question, then, is which approach Virginia follows.

It is easier to say which approach Virginia does not follow than to say which one it does. In Gina Chin, the Supreme Court of Virginia made clear that Virginia has rejected the employee motivation approach. See Gina Chin, 260 Va. at 541, 537 S.E.2d 573. Gina Chin involved a First Union employee who submitted false checks and payment invoices as part of a forgery scheme to withdraw money from certain client accounts. When the defrauded client sued First Union to recover the money it had lost, First Union argued that because the employee was not motivated by an intent to further First Union's business, the fraud was outside the employee's scope of employment and hence First Union was not vicariously liable. In rejecting this argument, the Supreme Court of Virginia held that "our prior precedents do not support such an interpretation by implication, and we expressly reject it now." Id. (internal citations omitted).¹¹

While the Supreme Court of Virginia has not embraced the totality of the circumstances approach with the same clarity with which it has rejected the employee motivation test, the caselaw nonetheless leaves little doubt that the totality of the circumstances test is Virginia's preferred approach. On the same day the Supreme Court of Virginia issued Gina Chin, it also reversed a trial court's grant of summary judgment in a companion case, Majorana v. Crown Central Petroleum Corporation, 260 Va. 521, 539 S.E.2d 426 (2000). Majorana presented the question whether a gas station owner was vicariously liable for an employee who assaulted a customer while on duty. The employer denied liability on the ground that the employee acted outside the scope of his employment. Noting that the plaintiff had presented evidence that the assault took place at the regular place of employment during normal business hours, and that the employee committed the assault while performing the business of his employer for which the victim was the employer's customer, the Supreme Court of Virginia held that the plaintiff had presented a jury question with respect to whether the employee was acting within the scope of his employment. Id. at 527, 539 S.E.2d 426.¹² Majorana reflects the Supreme Court's view that the...