Important Initial Victory for Insurers in “Kids for Cash” Cases

A Judge sitting in the Middle District of Pennsylvania has handed down two significant decisions for the insurers in the well-known cases, Markel International Insurance Co. v. Western PA Child Care, LLC, et al., 2011 U.S. Dist. LEXIS 31878 (2011), and Alea London, et al. v. PA Child Care, LLC, et al., 2011 U.S. Dist. LEXIS 34553 (2011).  Both cases arise out of an alleged conspiracy in which Western PA Child Care (“Western”) was providing kickbacks to two Luzerne County judges in exchange for the judges sending juveniles to Western’s facility.  Id. at 2.  Markel International Insurance Co. (“Markel”) and Alea London (“Alea”), the insurers for Western, both filed declaratory judgment actions seeking a declaration that they have no duty to defend or indemnify Western in the underlying lawsuits.

In the Markel case, Judge A. Richard Caputo was faced with Western’s motion to dismiss Markel’s Complaint for failure to state a claim.  Two of Markel’s policy exclusions were at issue: First, whether the injury or damage alleged in the underlying suit was caused by an “occurrence” and second, whether the injury was caused by or at the direction of the insured with knowledge that the act would violate the rights of another.  Markel, supra at 4-5.  Judge Caputo found in favor of the insurer on both issues, holding that there was no single “occurrence” and that Plaintiff’s Complaint contained sufficient factual allegations to allege that the injury was caused by Western’s actions done with knowledge that it was violating the constitutional rights of others.  Id. at 11, 13.  As a result, Western’s motion to dismiss was denied.  Id. at 16.

In addition, it is worth noting that Judge Caputo’s opinion, in dicta, states that an insurer’s duty to defend is broader than its duty to indemnify.  Id. at 10.  As a result, upon finding that Markel did not have a duty to defend, the court did not even consider whether it had a duty to indemnify.  Id. at 15.

Contrary to the Markel action, in the Alea case, Judge Caputo granted Western’s motion to dismiss based on his holding that an exclusion in the policy for injury “arising out of the willful violation of a penal statute” did not preclude coverage.  Alea, supra at 2-3.  However, by Order on March 31, 2011, Judge Caputo granted Alea’s motion for reconsideration and the dismissal was vacated.  Id. at 10.  In a change of opinion, the judge apparently recognized that, at the very least, Western violated a statute which forbids the giving or taking of compensation to public officials in an attempt to influence their decisions.  Id. at 8-9.

Although both cases are in the initial pleading phases, the decisions by Judge Caputo represent a significant victory for the insurers in these cases.  While summary judgment motions have not been filed, it is only a matter of time before they are, and these decisions signal a likelihood that the insurers will obtain the declaration that they seek.