In Chicago Title Insurance Company v. Northland Insurance Company, ____ So.3d ____ (Fla. 4th DCA March 3, 2010), an attorney acting on behalf of a title company misappropriated funds that were intended to be used to satisfy a mortgage.  As a result, Chicago Title had to pay to satisfy the mortgage.  Chicago Title then sued the attorney and the title company. 

Northland, the title company’s Errors and Omissions insurance carrier denied coverage and refused to defend.  Chicago Title and the title company eventually entered into a consent judgment, and Chicago Title sued Northland for payment of the consent judgment.  The trial court found that exclusions in the Northland policy precluded coverage.  This appeal followed.

On appeal, Chicago Title argued that the underlying lawsuit contained a negligence count and that negligence was covered under the Northland policy.  However, the 4th DCA held that:

We agree with the trial court that semantics cannot avoid the obvious.  Where the application of one or more policy exclusions applies to the face of the complaint, no duty to defend exists, even if the complaint alleges facts that would otherwise give rise to a covered claim….

Any liability based on negligence stems from and is depended on the misappropriation of funds by the attorney.

Typically, if one of the counts in a complaint fall within coverage, then the defendant’s insurer must provide a defense, and it must defend all counts.  However, what the 4th DCA is holding here is that when the underlying complaint clearly sets forth facts that render the entire claim excluded (i.e. an intentional misappropriate of funds), the insurer is not required to defend simply because the complaint attempts to plead the case back into coverage by sticking in a "negligence" count.  The fact that the underlying complaint pled a negligence count (which is a covered cause of loss), does not create coverage where the facts of the claim as set forth in the complaint clearly demonstrate an excluded cause of loss (theft by the attorney). 

It seems that the E & O policy would cover negligent acts that resulted in a funds shortage, such as an accounting error that resulted in a shortfall to pay the mortgage.  However, the policy did contain an "Additional Exclusion Endorsement" which may even preclude coverage in this context.