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Liberty Mutual units prevail in dispute with school district

Court ruling

Dismissal of litigation filed against Liberty Mutual Insurance Co. units against an Ohio school district that was seeking reimbursement of funds stolen by a former employee has been upheld by a federal appeals court based on a policy exclusion for employees.

The school district in Cuyahoga Heights, Ohio, was the victim of a criminal fraud and theft scheme orchestrated by the district’s former director of information technology, who was convicted of conspiracy to commit mail fraud, laundering conspiracy and wire fraud in 2013, according to Wednesday’s ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Cuyahoga Heights Local School District v. Netherlands Insurance Co. and Midwestern Indemnity Co.

In 2013, the district filed suit in state court against its former superintendent, seeking recovery of some of the money it lost as a result of the fraud, on charges including negligent hiring and supervision, according to the ruling.

It reported the complaint to its insurers, Liberty Mutual units Netherlands Insurance and Midwestern Indemnity, seeking defense and indemnification.

Netherlands had issued an errors and omission policy, which provided up to $1 million for each wrongful act and $1 million in the aggregate, while Midwestern had issued the school district an umbrella policy.

The state court issued a judgement in the school district’s favor for $4.2 million, but the insurers declined to participate in the proceedings because they believed the insurance policies did not insure the former superintendent against litigation by the district, according to the ruling.

The school district then filed suit in U.S. District Court in Cleveland against the insurers, seeking coverage for the judgment it obtained against the former superintendent.

The District Court ruled in the insurers’ favor, which was upheld by a unanimous three-judge appeals court panel.

The insurance policies included an exclusion for claims made by the district against its employees for losses arising out of the course of their employment, said the ruling.

“Thus, an employee is not an ‘insured’ for purposes of such a claim,” said the ruling. “Those circumstances exist here,” the ruling said. “By the district’s own characterization … the loss arose in the course of (the former superintendent’s) employment,” said the ruling.

The policies “clearly and unambiguously explain that (the former superintendent) is not an ‘insured’ in such circumstances,” said the ruling in affirming the lower court’s ruling.

Liberty Mutual’s attorney had no comment, while the school district ‘s attorneys could not immediately be reached for comment.

In February, a federal appeals court agreed with a Swiss Re Ltd. unit that another insurer should contribute $2.6 million to a $15.8 million settlement the unit reached with a school district in a sexual abuse case. 





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