Murray v. Greenwich Ins. Co., 533 F.3d 644 (8th Cir. 2008)
Reversing District Court Judge Schiltz, Judge Bye authored an opinion (Smith and Colloton were on the panel) which found that an exclusion barred otherwise available coverage under a professional liability policy for alleged advertisement soliciting investors to buy real estate in Florida.
The alleged conduct included false advertising claims in connection with misrepresentations about the profitability of a real estate scheme calling for the acquisition of two Condominium Escrow Reservation Agreements. The pertinent exclusions D(1) and D(3) provided:
D. based on or arising out of:
1. the conversion, commingling, defalcation, misappropriation or improper use of funds or other property; [or]
...
3. the inability or failure to pay, collect or safeguard funds held for others.
Id. at 647.
The district court had concluded that the negligent misrepresentation claim alleged conduct separate from the improper use or failure to safeguard funds, i.e., the clients were wrongfully induced to deposit funds which were then mishandled. The court broadly read the “arising out of” language in the exclusion to extend it to bar any coverage, including a defense duty. It reasoned:
Each of the claims asserted within the underlying complaint, either directly or by incorporation, allege an injury originating from, or having its origin in, growing out of, or flowing from the failure to return the deposited funds. See Associated Indep. Dealers, Inc. [v. Mut. Serv. Ins. Cos., 304 Minn. 179, 229 N.W.2d 516, 518 (1975)]. “But for” the failure to refund those deposits as promised, there would have been no claims. In other words, had the funds not been mishandled the claims alleged in the complaint would not have arisen. Thus, each of the claims is causally connected to and arose out of the failure to return the entrusted deposits. Accordingly, we conclude the exclusion applies and Greenwich has no duty to defend.
Id. at 650.
This broad reading of the exclusionary language, while consistent with other opinions of the Eighth Circuit applying Minnesota law, does not properly gauge the circumstances in which liability could attach for negligent misrepresentation, which in and of itself could create liability, and a damage remedy, whether or not the funds were then subsequently mishandled.
The court is simply looking at the mostly likely set of circumstances that might arise where mishandling of funds would be an aspect of liability, and assuming that no other possible scenario could arise consistent with the allegations of the complaint. It is premature to make this assumption in light of the breadth of those allegations and the rule against interpreting exclusions broadly.
