Professional Liability Policy Provides Coverage for Innocent Co-Insureds

In Evanston Ins. Co. v. Agape Sr. Primary Care, Inc., No. 14-2268, 2016 WL 192748 (4th Cir. Jan. 15, 2016), the Fourth Circuit affirmed the South Carolina District Court’s finding that a professional liability policy provided coverage to the innocent co-insureds of a man who posed as a physician.

Evanston provided professional liability insurance to Agape, which provided physicians to nursing homes and similar facilities. Ernest Addo, who had assumed the identity of Dr. Arthur Kennedy, obtained employment with Agape and sought coverage with Evanston under an existing policy. Addo filled out a separate application representing that he was Arthur Kennedy, and Evanston issued an endorsement adding Kennedy to the policy. The policy was subsequently renewed. All named insureds, including Addo/Kennedy submitted new applications for coverage.

During the second policy year, Addo’s true identity was discovered and was later convicted of aggravated identity theft. Several lawsuits were filed against Agape and other Named Insureds. Others alerted Agape of their intent to file suit. Evanston filed a declaratory judgment action seeking a determination as to whether it had a duty to defend and/or indemnify the parties named in underlying lawsuits (both filed and unfiled).

In order to vitiate the policy on the ground of fraudulent misrepresentation, it is necessary that the insurer show not only the falsity of the statement challenged, but also that the falsity was known to the applicant, was material to the risk, was made with the intent to defraud the insurer and relied upon by the insurer in issuing the policy. The District Court agreed that Evanston had satisfied the elements of material misrepresentation with regard to Addo’s application for insurance and was entitled to void coverage as to Addo. The major dispute was whether Addo’s misrepresentations could be imputed to the Agape defendants. The District Court concluded that the applications for insurance and provisions of the policy demonstrated an intent to provide coverage for multiple co-insureds. Each doctor submitted his or her own application, and Agape submitted its own application. Individual physicians were listed as insureds. Based on this, Agape cited McCracken v. Government Employees Ins. Co., 325 S.E.2d 62 (S.C. 1985), for the proposition that, “in the absence of any statute or specific policy language denying coverage to a co-insured for the arson of another co-insured, the innocent co-insured shall be entitled to recover his or her share of the insurance proceeds.”

The District Court opinion noted Evanston could easily have included provisions limiting coverage in the face of fraud by one discrete applicant, but did not, and that South Carolina and other states emphasize the existence of such provisions, when they are present, in order to limit coverage.

The Fourth Circuit affirmed, concluding that South Carolina law and its principles of equity demanded that coverage for the innocent co-insureds remain in place. The court cited to three factors that tipped the equity scales in the favor of the insured: (1) Evanston could have included forfeiture language in the policy; (2) neither Agape nor any of its employees had any knowledge of Addo’s fraud, rendering them “innocent”; and, (3) public interest would not be served through recession.

About Kelsey J. Brudvig
Senior Shareholder

Kelsey Brudvig is a Shareholder practicing in the areas of retail & hospitality law and professional liability. She defends national and regional leaders in the retail, hospitality, and entertainment sectors doing business in South Carolina in claims involving premises liability, loss prevention, food adulteration, third party torts, and alcohol liability. Kelsey can be reached directly at