In this Canadian judgment, the insured sought an indemnity on the basis that its misappropriation of trust funds which rendered it liable to a third-party claimant arose in connection with the rendering or failing to render professional services as contemplated by the Errors & Omissions section of the policy.
The insurer successfully argued that the relevant section provided no cover because the policy exclusions removed coverage for any intentional, dishonest, fraudulent, or criminal act or omission or any act committed with knowledge that it was wrongful.
Default judgment had been taken by the third-party claimant against the insured where that claimant had pleaded without rebuttal that the insured had not only breached a trust arrangement but also deliberately deceived the claimant so as to acquire the trust funds in question. The conduct was deliberate, contemptuous, and high-handed.
The court held that the insured’s omission to rebut those allegations constituted and established facts which did not require proof of intention or fraud in the insurance action. The insured, under the policy, committed an intentional, dishonest, and fraudulent act in misappropriating the trust funds and thereby becoming liable to the third-party claimants.
The court said that those uncontroverted facts triggered the section exclusion which provided that the policy did not apply to claims, direct or indirectly based upon, attributable to, arising out of, or in connection with any intentional, dishonest, fraudulent, or criminal act or omission.
The only question was whether there was a relevant endorsement which overrode that exception. The endorsement debated provided coverage to third party claims “for which an Insured is legally liable to a third party for failure to advance or secure mortgage funds as a result of any dishonest or fraudulent act by one or more Insureds.”
On the facts, the court was satisfied that the insured’s dishonest or fraudulent act did not involve a failure to advance or secure mortgage funds. Accordingly, there was no right of recovery under the policy.