Liability Insurers Owe No Duty To Defend Insureds Alleged To Have Engaged In A Corrupt Scheme To Incarcerate Youth Offenders For Money


[author: James Mirro]

In a pair of opinions filed on June 20 and 21, 2012, the Third Circuit Court of Appeals emphasized Pennsylvania’s “firmly established” public policy against providing insurance coverage for criminal and other intentional acts. In Travelers v. Mericle, et al., 2012 WL 2335984 (3d Cir. 2012) and Colony Insurance Co. v. Mid-Atlantic Youth Services, 2012 WL 2354435 (3d Cir. 2012), the Circuit Court affirmed the lower court’s opinions holding that the insurers owed no duty to defend or indemnify the insureds.

Both cases arose from a scheme in which two county judges, in Luzerne County, Pennsylvania, accepted money from the owner of two private juvenile facilities. In exchange, the judges imposed harsh sentences on juveniles in cases before them, in order to ensure that the facilities would be used. When the scheme was uncovered, the aggrieved juveniles sued various defendants including the insureds.

The defendant-insureds were a construction company and its owner (in Mericle), and a company that managed the juvenile detention facilities and its owner (in Mid-Atlantic). Each tendered the tort complaint against him to his general liability insurer, seeking defense and indemnity. The insurers filed declaratory judgment actions, asking the Court for declarations that they owed no duty to defend or indemnify the insureds in the underlying actions. In each case, the District Court granted the insurers’ motions for summary judgment, relieving them of liability under the policies.

The Third Circuit held that, under Pennsylvania law, the duty to defend is determined solely by the allegations contained within the four corners of the complaint, with a focus on the facts alleged in the complaint rather than the causes of action pled. On this basis, the Circuit Court held that the allegations of the underlying complaints included only claims of intentional conduct by the insureds for their financial benefit, not negligence, thereby not triggering any duty on the part of the insurer to defend. Next, the Court held that there was no “accident” or “occurrence” alleged that might trigger coverage under the policies.  It agreed with the lower court that “[r]eckless, malicious, or purposeful conspiratorial activities are not ‘negligent’ and cannot be considered ‘accidents’ under the plain language of an occurrence-based [policy].”

The Circuit Court then held that coverage was excluded under two separate policy exclusions: first, coverage was excluded for any personal injury “arising out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured.” The Court emphasized Pennsylvania’s public policy against providing insurance coverage for intentional acts and added that “Mericle ‘should not be able to avoid financial responsibility by shifting the penalty for his criminal act to an insurance carrier.’” The Court reached the same result as to the insureds in the companion case. Second, coverage was excluded as to injuries “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another,” because the tort complaints alleged that the insureds knowingly violated the juveniles’ rights.

On this basis, the Circuit Court affirmed the District Court’s decisions denying a defense and indemnity to each of the insureds under their general liability policies.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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