A call final week reinforces a harsh actuality for policyholders who conduct enterprise by companies or restricted legal responsibility corporations: if the particular person or officer controlling the corporate commits fraud in the midst of an insurance coverage declare, the insurer can normally deny protection not simply to that wrongdoer, however to all the enterprise. 1 The case includes the “harmless insured” doctrine, which is what I wrote my juris doctoral thesis about in 1982 and famous in “Is a 22-Yr-Outdated Punk Legislation Scholar’s Doctoral Thesis About The Cheap Expectations Doctrine of Insurance coverage Contract Interpretation Silly or Standing the Take a look at of Time?”
The case concerned the Press Bar and Parlor in St. Cloud, Minnesota, which was destroyed by hearth on February 17, 2020. The hearth was later decided to have been deliberately set by Andrew Welsh, who was the chief govt officer of Timeless Bar, Inc., and the managing member of Horseshoe Membership, LLC. Each corporations had been insured beneath a businessowners coverage (BOP) issued by Illinois Casualty Firm.
After the hearth, Andrew Welsh and Jessie Welsh, his former spouse and the one different proprietor of the 2 corporations, submitted a sworn proof of loss to the insurance coverage firm. The doc falsely claimed that the hearth was of unknown origin and had not been attributable to any intentional act. A legislation enforcement investigation, nevertheless, concluded that Andrew had used gasoline to set the hearth. He later pleaded responsible to arson and admitted that the scheme was designed to acquire insurance coverage proceeds. Based mostly on these info, Illinois Casualty denied the declare beneath three separate exclusions within the coverage. One was for misrepresentation and fraud, one other for dishonest or prison acts, and a 3rd for intentional acts supposed to trigger loss.
The enterprise entities and Jessie Welsh filed swimsuit, asserting that the actions of Andrew Welsh shouldn’t be imputed to them and that they had been entitled to protection as harmless events. The District Courtroom disagreed and granted abstract judgment to the insurance coverage firm. The Eighth Circuit affirmed.
In doing so, the appellate courtroom made a number of crucial determinations. First, it held that though Andrew Welsh was not individually named within the coverage, his function because the controlling officer meant that his conduct was successfully the conduct of the company insureds. Second, the courtroom rejected the applying of Minnesota’s harmless co-insured doctrine to company entities, discovering no precedent in Minnesota legislation to increase these client protections past particular person insureds. Third, the courtroom discovered that the coverage exclusions clearly utilized as a result of the misrepresentations in regards to the origin of the hearth had been made by a person with precise authority to behave on behalf of the insured companies.
This ruling is particularly essential for individuals who function companies by formal authorized entities. It demonstrates that Minnesota courts will strictly apply company ideas within the insurance coverage context, even in instances of significant wrongdoing by a single controlling particular person. Companies and LLCs, by legislation, can act solely by their brokers. When an agent commits fraud whereas exercising authority on the corporate’s behalf, comparable to submitting a declare or signing a proof of loss, the authorized penalties of that fraud fall squarely on the insured entity.
What makes the result much more sobering is that Jessie Welsh, who held an possession curiosity and performed an administrative function within the enterprise, was left with no path to restoration. The courtroom dominated that she lacked standing as a result of she was not a named insured beneath the coverage. The harmless co-insured doctrine, which has protected particular person spouses and companions in previous Minnesota choices, didn’t prolong to her scenario as a co-owner of an organization.
Enterprise homeowners ought to perceive that protection beneath a business insurance coverage coverage will be jeopardized not simply by arson or dishonesty, however by who submits the declare and the way they do it. When one particular person controls the circulate of knowledge to the insurance coverage firm, and that particular person lies, all the declare can unravel.
Company entities might not profit from the identical equitable doctrines that shield people. As courts see it, companies are anticipated to bear the dangers of these they empower to behave on their behalf. That’s a reminder that honesty within the claims course of just isn’t solely one of the best coverage, it could be the one path to preserving protection.
These conditions are delicate, and the harmless insured ought to at all times search unbiased authorized counsel when confronted with any implication that one other might have dedicated fraud or misrepresentations.
Thought For The Day
“The reality will set you free, however first it can make you depressing.”
—James A. Garfield
1 Timeless Bar v. Illinois Casualty Co., No. 24-2245 (8th Cir. July 22, 2025). See additionally, Timeless Bar appellate transient and Illinois Casualty appellate transient.