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Middleburg Volunteer Fire Dep't, Inc. v. McNeil & Co., Inc.

United States District Court, E.D. Virginia, Alexandria Division

November 13, 2014

MIDDLEBURG VOLUNTEER FIRE DEPARTMENT, INC., Plaintiff,
v.
MCNEIL & COMPANY, INC., ET AL., Defendants

Decided: November 14, 2014.

Page 641

For Middleburg Volunteer Fire Department, Inc., Plaintiff: Jon F. Mains, LEAD ATTORNEY, Jon F Mains & Associates LLC, Fairfax, VA.

For McNeil & Company, Inc, Arch Insurance Co., Defendants: Andrew Clark Hall, William Gerald Gandy, LEAD ATTORNEYS, Wilson Elser Moskowitz Edelman & Dicker LLP (McLean), McLean, VA.

Page 642

MEMORANDUM OPINION

T.S. Ellis, III, United States District Judge.

In this removed diversity insurance coverage dispute, plaintiff alleges a breach of contract claim against defendants, asserting that defendants' denial of coverage for the embezzlement of almost $500,000 by plaintiff's treasurer constitutes a breach of the insurance policy defendants issued to plaintiff. In response, defendants argue that coverage was properly denied on the basis of plaintiff's misrepresentation in the renewal survey (hereinafter " Renewal Survey" ) submitted to defendants in support of plaintiff's request to increase the policy's commercial crime coverage limit from $50,000 to $250,000. Defendants also contend that they are entitled to void the Policy based on the Policy's " Concealment, Misrepresentation Or. Fraud" clause and the Policy's " Joint Insured" clause. Finally, defendants argue that an accord and satisfaction occurred when plaintiff cashed the $50,000 check defendants submitted for the full amount of the limit of the policy in effect prior to the renewal request. At issue, therefore, on cross-motions for summary judgment, are the following 3 questions:

(1) Whether an insurance company may void an insurance policy where, as here, an officer of the insured did not disclose his ongoing embezzling activities in response to the insured's question in the Renewal Survey as to whether there were any changes in the insured's " operations or exposures."
(2) Whether an insurance company may void an insurance policy based on the policy clause that allows the insurance company to void a policy when the insured intentionally conceals a material fact concerning the insurance where, as here, an officer of the insured intentionally concealed his ongoing embezzling activities and a second policy clause imputed this officer's knowledge of his embezzling activities to the insured.
(3) Whether an accord and satisfaction occurred where, as here, the insurance company sent the insured a letter and a $50,000 check indicating that the check was for the full amount of the insurance policy's pre-fraud limits, and the insured subsequently cashed the check without protest and then remained silent for a year-and-a-half before contesting defendants' coverage position.

I.

The material facts are essentially undisputed

Page 643

and may be succinctly stated.[1]

o Plaintiff Middleburg Volunteer Fire Department Inc. (" Middleburg" ) is a volunteer organization dedicated to fighting fires in Middleburg, Virginia. Defendant McNeil & Company Inc. (" McNeil" ) is a New York Corporation that provides insurance programs and risk management services for emergency service organizations and other specialty markets nationwide. Defendant Arch Insurance Company (" Arch" ) is a Missouri corporation that is a leading insurer in the United States, and McNeil underwrites policies for Arch that fall within the parameters of McNeil's underwriting authority from Arch.[2]
o Defendants issued an insurance policy to Middleburg with policy number MEPK07344305 (hereinafter " the Policy" ) containing commercial crime coverage for up to $50,000.
o As relevant here, ¶ E(1)(b) of the Policy's Commercial Crime Coverage form (hereinafter " ¶ E(1)(b)" ) states:

[t]his insurance is void in any case of fraud by you as it relates to this insurance at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:

(1) This insurance;
(2) The property covered under this insurance;
(3) Your interest in this insurance; or
(4) A claim under this insurance.
o Also pertinent here, ¶ E(1)(h) of the Policy's Commercial Crime Coverage form (hereinafter " ¶ E(1)(h)" ) reads: " [if] any insured, or partner, 'member' or officer of that insured has knowledge of any information relevant to this insurance, that knowledge is considered knowledge of every [i]nsured."
o On November 17, 2006, Paul Draisey, who was then an employee of the Independent Insurance Center, wrote a letter to McNeil proposing that McNeil add Middleburg as a potential insurance client. In the letter, Draisey explained that Middleburg was in his hometown, and that he had been approached about joining Middleburg as an administrative member to provide assistance in public relations and fundraising. McNeil accepted Draisey's proposal and added Middleburg as a client. McNeil then issued the Policy to Middleburg, which contained $50,000 in commercial crime coverage. Shortly thereafter, Draisey formed his own company, the Draisey Insurance Agency, which then handled Middleburg's account.
o On January 1, 2008, Draisey became Middleburg's treasurer, a position he held until April 16, 2012.
o It is undisputed that between April 23, 2009 and March 26, 2012, Draisey embezzled almost $500,000 from Middleburg. It is also uncontroverted that throughout this period in which Draisey was embezzling money from Middleburg, Middleburg's other officers and employees were unaware of Draisey's embezzling activities.

Page 644

o On November 18, 2011, in the midst of his embezzling activities, Draisey, in his capacity as Middleburg's treasurer, filled out the Renewal Survey for the policy period from December 11, 2011 to December 11, 2012. One of the questions in the Renewal Survey was " whether there were any changes in the operations or exposures of the organization." Draisey responded " Yes-See Agent Notes." In the Agent Notes section, Draisey requested an increase in the Policy's commercial crime coverage limit from $50,000 to $250,000, but did not disclose that he was embezzling money from Middleburg. Draisey signed the Renewal Survey affirming that his answers were " true, accurate, and complete" to the " best of [his] ...

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