The executive director of two agencies serving the elderly, who won a case brought by the State of West Virginia against him for excessive compensation and benefits, has been denied insurance coverage under the agency’s policy.  A federal District Court in West Virginia has held that the claim is barred by an exclusion of claims involving “wages, salaries and benefits.”  (Graham v. National Union Insurance Co. of Pittsburgh, S.D. WV, No 1:10-00453, 2/17/11.)

Robert Graham was accused by the State in 2004 of misappropriating or otherwise misusing corporate resources of two nonprofits of which he was executive director.  The State alleged, among other things, that he collected excess compensation and benefits.  Graham tendered the claim to the agencies’ carrier, but was denied coverage.  After a trial court entered summary judgment in his favor in September, 2009, he again sought to recover his legal fees.  The carrier denied again, and Graham sued the carrier.

There was no question that Graham was a named insured or that his alleged misfeasance would have qualified as a “wrongful act” under the policy.  But the Court said that “an insurer has a duty to defend an action against its insured only if the claim stated in the underlying complaint could, without amendment, impose liability for risks the policy covers.”  The carrier argued that four exclusions applied, but the Court focused only on one.

The Court said that the State’s claim “focused on Graham’s excessive compensation and disproportionately generous benefits package as one of the central ways in which Graham abused his position and misappropriated his employer’s resources.”  It said the compensation package was “one of the central evidentiary pillars” on which the State based its case.  Therefore the claim was directly “attributable to wages, salaries and benefits,” and “under the plain language of the exclusion, which is unambiguous, National Union had no duty to defend Graham in the underlying lawsuit.”

Graham argued that he was covered under a claim of fraud so long as the validity of the claim had not been proved.  But the Court said the not yet proved language modified the exclusion only for fraud, and not for wages, salaries and benefits.

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This is not a persuasive opinion.  The ordinary rule of insurance requires the carrier to defend an insured if any claim could be covered under its policy.  The Court notes here that the State alleged, “among other things,” that the employee had obtained excessive compensation, and that the excessive compensation was “one of the central ways in which Graham abused his position and misappropriated his employer’s resources.”  That suggests there were other claims that did not necessarily involve excessive compensation.  The carrier might have been correct that they were all barred by some exclusion as well, but the Court’s failure to even mention the other claims and the other exclusions undercuts the credibility of the opinion.  These claims are precisely the type that an executive expects to be insured, especially when they prove to be unfounded.