A principal owner of an insurance agency was found to have wrongfully diverted over $1 million from the agency over a period of two years after an agreement had become effective for the purchase of another agency. The buyers were unable to make payments and, in accordance with the agreement, the assets of the acquired agency were returned to its former owners.

The sellers brought a lawsuit against the buyers, their accounting firm and their associate who committed the wrongful acts. With respect to the buyers and their agency, it was alleged that "negligent failure to develop and maintain appropriate accounting and managerial systems" allowed the individual to commit mis-appropriations. It was also alleged that the agency misrepresented the reason why it was not able to meet obligations, as they became due, and the nature of the wrongful acts committed by its associate.

The agency's professional liability insurer asserted that it did not provide coverage for the claims against the agency, and brought a declaratory judgment action for a determination that it was not obligated to defend or indemnify its insured. The policy under review applied to liability "....arising out of the conduct of the business of the Insured in rendering services for others as a general insurance agent, insurance agent or insurance broker, and including activities as an insurance consultant or notary public and any advertising activities...."

The quoted portion of the insuring agreement and an exclusion for "any liability assumed by the Insured under contract, unless the Insured would have been legally liable in the absence of such contract," were central to resolution of the questions of coverage.

The trial court determined that coverage was applicable, holding that the alleged misappropriations arose out of the insured's business as a general insurance agent, and that the described exclusion was limited to claims in which the insured has assumed the liability of another. The insurer appealed.

The appeal court found it clear that the policy covered only losses arising out of the conduct of the insured as an insurance agency. In this case, the loss arose out of the inability of the agency to pay a corporate debt. The court said: "Properly handling business revenue to ensure that business expenses are paid is a responsibility of every business. It is not a professional act associated with providing insurance services."

The judgment of the trial court was reversed in favor of the insurance company and against the insured.

(EMPLOYERS REINSURANCE CORPORATION, Appellant v. CASWELL ET AL., Respondents. Minnesota Court of Appeals. No. C2-90-300. September 1, 1992. CCH 1992 Fire and Casualty Cases, Paragraph 3921.)