On May 8, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Aptuit, LLC v. Columbia Casualty Co., 2014 NY Slip Op. 31250(U), holding that the criminal acts exclusion to a pharmaceutical company’s professional liability policy applied to claims arising from criminal acts of an employee of the company, rejecting the insured’s arguments that the exclusion did not apply because the employee acted outside the scope of his authority and the company was unaware of his misconduct.
The insured, Aptuit, was sued by certain of its clients for providing fabricated pre-clinical trial data created by Aptuit’s employee. Aptuit’s professional liability carrier assumed the defense of the claims, but reserved the right to disclaim coverage under the policy’s criminal acts exclusion, which provided:
Coverage does not apply to any professional liability based on or arising out of a dishonest, fraudulent, criminal or malicious act by any Insured. The Company shall provide the Insured with a defense of such claim unless or until the dishonest, fraudulent, criminal or malicious act has been determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not. Such defense will not waive any of its rights under this Policy.
(Emphasis in original.) The policy defined “Insured” to include employees of the Company, but only with respect to “professional services” rendered on Aptuit’s behalf, which was in turn defined as “those services performed by Aptuit or by any other insured on behalf of Aptuit for a fee [or other remuneration]  includ[ing] pre-clinical research and other professional services for the pharmaceutical/biotechnology industry.”
Aptuit’s employee was criminally prosecuted and convicted in Scotland of “altering pre-clinical data designed to support applications to perform clinical trials.” Prior to the conviction, Aptuit filed suit against the insurer seeking a declaratory judgment compelling the insurance company to defend and indemnify it against the customer lawsuits. Finding the policy “clear and unambiguous,” the court rejected Aptuit’s argument that the employee “is not deemed an Insured [and therefore his actions do not trigger the criminal acts exclusion] because by committing criminal actions [he] was acting outside the scope of his employment, and thus was not rendering professional services on behalf of Aptuit”:
[T]his Court fails to find in the definitions of “Insured” and “Professional Services,” or within any other provision in the Policy, language specifying or inferring that criminal conduct does not constitute professional services or/and is outside the scope of employment. . . .
[I]f Aptuit’s contention is true then any criminal conduct committed by an “insured” would never be deemed a “professional service.” Such an interpretation would forego the need for the Criminal Acts Exclusion since hypothetically all criminal conduct could be deemed out of the realm of “professional services” and scope of employment. This is an unreasonable interpretation and likely not to be the intention of the parties at the time of contracting.
The court likewise rejected Aptuit’s argument that “the parties did not intend the scope of the Criminal Acts Exclusion to exclude coverage for the criminal acts of [an employee] without the actual knowledge of the criminal acts by Aptuit.” Again, the policy contained no language so limiting the exclusion, and the court declined to “infer ambiguity from such silence.” Justice Ramos did find a question of fact as to whether certain customer claims fell outside the exclusion because they “resulted from factual errors rather than exclusively [from the employee’s] fraudulent conduct.” He therefore denied the insurer’s motion for summary judgment and ordered a deposition on the factual issues.
This decision illustrates that the axiom that exclusionary clauses in insurance policies are narrowly construed in favor of coverage has its limits. To escape the exclusion, there must be a reasonable interpretation, grounded in the language of the policy, under which coverage is allowed.