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Q: Business Law ( Answered 5 out of 5 stars,   0 Comments )
Subject: Business Law
Category: Business and Money > Finance
Asked by: morb-ga
List Price: $15.00
Posted: 20 Jun 2005 04:40 PDT
Expires: 20 Jul 2005 04:40 PDT
Question ID: 535038
If a General Partner in a limited partnership commits provable or
arguable fraud, and lawyers thereafter and prior to the running of any
applicable statutes of limitation, demand compensation for the
defrauded limited partners in an out-of-court or arbitration setting,
is there any kind of business liability or other insurance which will
cover any part or the whole of said compensation for the fraud so
committed? If so, under what conditions?

Request for Question Clarification by hagan-ga on 20 Jun 2005 07:55 PDT
Without more detail, my initial impression is that insurance is NEVER
available for intentional acts, and fraud is an intentional act.  When
you speak of "fraud," do you mean intentional, knowing deception, or
are you speaking more generally of negligent misrepresentation?
And what jurisdiction are we discussing?

Clarification of Question by morb-ga on 22 Jun 2005 05:02 PDT
Intentional or arguably purposeful fraud by the General Partner.
Jurisdiction would be Superior Court in California were the matter to
go to court.
Subject: Re: Business Law
Answered By: hagan-ga on 22 Jun 2005 06:57 PDT
Rated:5 out of 5 stars
It is generally against public policy for insurance to cover
intentional wrongful acts.  California Civil Code Section 1668
provides that "All contracts which have for their object, directly or
indirectly, to exempt anyone from the responsibility for his own
fraud, or willful injury to the person or property of another, or
violation of law, whether willful or negligent, are against the policy
of the law." Further on this point, California Insurance Code 533
provides that "[a]n insurer is not liable for a loss caused by the
wilful act of the insured.?  So the short answer to your question is
No, there is no insurance coverage available for fraud.

HOWEVER.  Lawyers are well aware of this public policy, and the
prohibition against insurance coverage of intentional fraud.  When
compensation is sought from an individual, it?s foolish to limit
yourself to only his assets ? the smart move is to keep as many
options open as you can.  So I would be very surprised if the ONLY
allegation against this general partner is intentional fraud.  There
is usually a way to frame an allegation of fraud so that it can be
argued either way ? that the fraud was knowing and intentional, OR
that it was the result of negligently not being aware of the true
facts.  Usually you have a complaint that alleges both.

Insurance MAY be available for negligent misrepresentation.  It is not
against the policy of the law to indemnify a person against
negligence, even when negligence results in a deception.  Only
intentional conduct is beyond the ambit of insurance coverage.

So at that point, it will depend on what the actual policy says. 
Let?s go over a few scenarios.

The partnership itself will probably have some kind of business
liability coverage.  It may or may not list the individual partners
themselves as insured persons.  If it does not, and only covers the
business enterprise, then the general partner probably will not be
covered under it for his acts that are not in furtherance of the
business enterprise.  Without more specifics about the acts of fraud,
it?s hard to be sure, but you seem to be talking about acts ?within?
the partnership, such as bookkeeping, investing profits, and the like.
 Those are probably not acts of ?XYZ business? in the sense that the
policy covers.  Again, tho, it will depend on the policy language.

If the insurance policy instead covers ?General Partner Zaphod
Beeblebrox? against liability for acts ?within the course and scope of
his duties as General Partner? or some such language, then we have to
look at what kind of damages are covered.

Commercial General Liability policies (known as CGL policies) usually
cover liability caused by *physical injury* or *property damage*. 
Here, you appear to be claiming only an economic loss caused by the
General Partner?s (wink wink) ?negligent misrepresentation and breach
of fiduciary duty? (wink wink).  If all the business has is a CGL
policy, it is unlikely to cover such damages.  See, for example,
_Chatton v. National Union Fire Ins. Co._ (1992) 10 Cal.App.4th 846,
857; _Waller v. Truck Ins. Exchange, Inc._ (1995) 11 Cal.4th 1, 22. 
(CGL policies also frequently cover ?advertising? liability, as well
as libel and slander ? I don?t think those fit here.)  Moreover, CGL
policies usually exclude professional liability for errors and
omissions ? such as bookkeeping errors and the like.

Instead, what you need is a business liability policy that covers
economic losses as well as physical losses.  An umbrella policy may
include such a clause, as will an Errors & Omissions (E&O) policy.  If
there is such a policy, then we?re in business.  The lawyer for the
defrauded partners will very likely allege that Beeblebrox committed
his acts of negligent misrepresentation and breach of fiduciary duty
within the course and scope of his duties as general partner, and that
will trigger a duty in the insurance company to defend.  (The duty to
defend is broader than the duty to indemnify.  The insurer is
obligated to defend if there is ANY POSSIBILITY OF COVERAGE.  _Horace
Mann Ins. Co. v. Barbara B._ (1993) 4 Cal.4th 1076.)  Once the insurer
is on the hook for the defense, there is likely going to be settlement
money available.  Of course, whether there is actual coverage for a
judgment will depend on what the judgment says.

Oddly enough, this kind of ?artful pleading? by the defrauded victim?s
lawyers can result in a kind of collusion between the victim and the
perpetrator.  It is in BOTH their interests to keep the proof of
intentional fraud to a minimum, and highlight the possible negligence
instead.  This results in a conflict between the insurer and the
perpetrator.  The insurer?s interests are best served by proof of
intent and malice.  The insured perpetrator wants to prove that it was
all a mistake.  Complicating the issue is the fact that the insurer is
obligated to provide a defense, so the insurance company is the one
paying the lawyer for the perpetrator.  In California, this requires
the insurance company to provide what they call ?Cumis counsel,? which
is an independent lawyer, paid by the insurer but not part of its
?stable? of in-house lawyers, to advise the insured.

(The general partner probably also has homeowner?s insurance. 
Homeowner?s insurance usually includes liability coverage, but in 99%
of cases, homeowner?s insurance very carefully excludes coverage for
business activities.  So we won?t bother to go into that ? in any
event, the same principles apply.)

I hope this was helpful.  Please let me know if I can provide any
further assistance.
morb-ga rated this answer:5 out of 5 stars and gave an additional tip of: $10.00
The answer was thorough and addressed tangential issues that my
question failed to encompass. I am very pleased with the answer.

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