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AIG units not liable for claims by financial services firm

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A federal appeals court has affirmed a lower court ruling and held two American International Group Inc. units are not obligated to provide coverage under a fidelity bond and an error and omissions policy issued to a financial services firm, in part because it filed its claim too late.

Southfield, Michigan-based Hantz Financial Services Inc. had obtained a fidelity bond from National Union Fire Insurance Co. of Pittsburgh, Pa., and an E&O policy from American International Specialty Lines Insurance Co., both of which are units of AIG, according to Tuesday’s ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Hantz Financial Services Inc. et al. v. American International Specialty Lines Inc.

In March 2008, the company learned that a Hantz-registered investment representative had been embezzling client funds by depositing checks written or endorsed by clients directly into his own bank accounts. The representative committed suicide two days later, according to the ruling.

Hantz then sought coverage under its fidelity bond and E&O coverage for misappropriation of $2.6 million in client funds. National Union denied coverage for the claim, while American Surplus Lines did not communicate a final coverage decision prior to the ensuing litigation but indicated the policy’s wrongful act exclusion might preclude coverage.

Hantz then filed suit against both AIG units, and the U.S. District Court in Detroit granted the units summary judgment dismissing the case.

Hantz appealed, but a three-judge panel of the 6th Circuit unanimously upheld the lower court’s ruling.

In the case of the fidelity bond, the panel agreed with the lower court that Hantz had filed its lawsuit after the bond’s 24-month contractual limitation provision had expired.

The appeals court also held the wrongful act exclusion in the E&O policy barred coverage. One of Hantz’s arguments was that the policy excluded coverage “committed with knowledge,” that the term “knowledge” was ambiguous, and that because Hantz had no knowledge of the wrongful act, it was covered under the policy.

“Hantz’s argument relies upon a strained reading of the exclusion, creating possible ambiguities where none exist,” said the ruling, in affirming denial of coverage.