Diving into criminal act exclusions.
Feb. 2017  |  Bad Faith Update  |  Vol. 3 Iss. 4

Pitts v. Loenberger

Protecting the Wrong Interests

The Eastern District Court of Appeals handed down its opinion in Pitts v. Loenberger earlier this month. While the central issue of the opinion focused on the issue of coverage and the applicability of a criminal act exclusion, the Eastern District detailed the claims handling conduct by the various carriers involved.
The Pitts case stems from a tragic accident in 2011 in which six year-old Hunter Pitt was accidently struck and run over by his school bus driven by Loenberger. At the time of the accident, Loenberger was employed with a school district insured by MUSIC and United Educators (UE). Music was notified of the accident the following day and noted that there were no coverage issues and that Loenberger was between 90-100% at fault for the accident.
A few days later, MUSIC informed UE of the accident. In the subsequent months, MUSIC learned that a prosecutor was considering charging Loenberger with 2nd Degree Involuntary Manslaughter for Hunter Pitts death based upon Loenberger’s negligence in operating the bus.
This is when the coverage struggle began.
Coverage Fight
Loenberger was eventually charged with 2nd Degree Involuntary Manslaughter and MUSIC retained counsel to defend Loenberger in the criminal matter as MUSIC had determined that it would be in its “interest to defend” and “control…the criminal matter…since the outcome could impact [the civil] claim.”  The criminal attorney retained by MUSIC advised Loenberger to plead guilty to avoid jail time but MUSIC failed to advise that any plea could affect Loenberger’s insurance coverage for the civil claim.
This was important as the insurance at issue provided that coverage was excluded for “Any fraudulent, dishonest, malicious, criminal or intentional wrongful act or omission by a Covered Party.”
Following Loenberger’s guilty plea, the Pitts demanded MUSIC pay their policy limits to settle the civil claim. MUSIC refused to do so and the negligence suit was filed. Rather than settling the case, MUSIC and UE began to take the position that the guilty plea entered by Loenberger negated any coverage afforded by UE or MUSIC based on the criminal act exclusion. However, the carriers did not inform Loenberger of any coverage issues or send Loenberger any reservation of rights letter, even though one had been prepared. Communications cited by the Eastern District indicated MUSIC and UE were attempting to utilize the presence of the criminal act exclusion to leverage settlement discussions with the Pitts.
Nearly seven and a half months after Loenberger’s guilty plea, counsel for the Pitts approached counsel retained by MUSIC to defend Loenberger in the civil suit about entering into a R.S.Mo. §537.065 agreement if the carriers had issued a reservation of rights. It was only at this time that Loenberger and his counsel learned that a reservation of rights had been issued. Shortly thereafter, Loenberger and his counsel demanded any reservation be withdrawn. However, MUSIC and UE decided to file a declaratory judgment action to determine the applicability of the criminal act exclusion.
After MUSIC and UE refused to withdraw the reservation, Loenberger executed a R.S.Mo. §537.065 agreement with the Pitts and the civil claim proceeded to a bench trial.
The Court entered judgment against Loenberger shortly thereafter in the amount of $11,494,637.38 plus interest.
Garnishment Action
Once the judgment in the civil claim became final, the Pitts filed a Rule 90 Garnishment against MUSIC to collect the amount of the judgment entered against Loenberger. Both MUSIC and the Pitts moved for summary judgment on the issue of coverage.
The garnishment court found coverage existed and ruled in favor of the Pitts. MUSIC appealed this decision to the Eastern District.
Eastern District Opinion
The Eastern District ultimately affirmed the trial court’s finding of coverage for the accident. The Court concluded that the accident in which Hunter Pitt was killed, was just that, an accident. No allegations of intentional conduct had ever been made nor had anyone ever alleged the death of Hunter Pitt was anything other than an accident. The Eastern District went on to note that simply because the prosecutor pursued charges against Loenberger, did not mean that coverage should not be extended.
As a separate basis for finding coverage existed, the Eastern District went on to find that MUSIC had waived any ability to assert the criminal act exclusion by attempting to defend the civil claim while failing to promptly inform Loenberger of any coverage issue and failing to issue a reservation of rights.
Questionable Claims Handling
In addition to affirming the finding of coverage, the Eastern District highlighted some claims handling conduct on the part of MUSIC and UE that it found “particularly noteworthy.” Of importance to the Court was MUSIC retaining counsel to defend Leonberger against the criminal charges and then attempting to deny coverage after Leonberger plead guilty to those criminal charges based on the advice of the criminal defense attorney retained by MUSIC.
In addition, the Eastern District opinion highlights MUSIC and UE’s attempts to utilize a potential coverage dispute in settlement discussions with the Pitts. On several different occasions, internal discussions note a strategy on the part of MUSIC and UE to use the coverage ‘dispute’ as leverage to force a settlement with the Pitts. However, documents reveal this public position ran counter to the advice of MUSIC’s claims personnel and opened the door for potential extra-contractual liability according to those same claims personnel.
The 2011 accident was a tragic event and the result of an accident. The subsequent actions of UE and MUSIC, while tragic, were no accident. Rather than protecting their insured and compensating a family for a horrible loss, MUSIC and UE instead chose to protect their own interests by leveraging a coverage dispute of their own making into avoiding their coverage obligations.
The bad faith claim remains pending and its outcome will certainly make for an interesting epilogue to this case.
"I've been working on bad faith cases for over 30 years. If you need help, contact me for advice."

- Kirk Presley
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