Saturday, June 10, 2023 | Back issues
Courthouse News Service Courthouse News Service

Fire Department Denied Fraud Insurance Payout

RICHMOND, Va. (CN) - A volunteer fire department is not entitled to recover $250,000 from its insurer related to a fraud and suicide scandal, a federal judge ruled.

The case and its outcome are both tied to the activities of Paul Draisey who in November 2006 wrote a letter to McNeil & Co. suggesting it add the fire department Middleburg, Va., as a client.

Draisey, at the time an employee of nonparty Independent Insurance Center, told the insurer that Middleburg was in his hometown, and that he'd recently been approached about joining the fire department to assist in public relations and other activities.

Acting on Draisey's suggestion, McNeil issued a policy to the department, that included $50,000 in commercial crime coverage.

Shortly thereafter, Draisey formed his own company, the Draisey Insurance Agency, and began to handle the fire department's account.

Then, on Jan. 1, 2008, Draisey was hired to serve as the department's treasurer, a position he held until April 16, 2012.

According to the opinion written by U.S. District Judge T.S. Ellis III, among the few undisputed facts in the case is that during his employment as treasurer, Draisey embezzled almost $500,000 from the department, and none of his fellow officers, or the department's employees, was aware of these activities.

Also undisputed is that on Nov. 18, 2011, while in the midst of his criminal activities, Draisey filled out renewal documents for the insurance policy, and requested an increase in its crime coverage from $50,000 to $250,000.

In court documents, McNeil & Company noted Draisey did not disclose he was embezzling money from the department and also that he asserted his statements on the renewal forms were "true, accurate, and complete." Based on these assurances, the insurer increased the crime coverage limit to $250,000.

By the spring of 2012, however, the department began to suspect irregularities in Draisey's handing of its finances, Ellis wrote. On April 16, 2012, Draisey committed suicide, but not before sending a note to the insurer making reference to the $250,000 crime coverage and his acts.

Now fully aware of the extent of Draisey's activities, the department submitted a claim for what it believed was the full amount of its coverage, but the insurer balked, saying under the circumstances, the $250,000 coverage had been revoked and that the department was only entitled to $50,000.

The insurer included a check for that amount with its letter, and the department deposited it. It wasn't until a year-and-a-half had elapsed that the department contested the denial of the coverage to which it felt entitled, and demanded an additional $200,000 in payment.

When defendant Arch Insurance Co., whose policies are underwritten by McNeil, denied the request, the fire department sued.

After reviewing the facts of the case, Judge Ellis concluded that there was no affirmative misrepresentation in Draisey's response to the insurer's "renewal survey," as the question posed to him therein was insufficiently precise to call for disclosure of Draisey's ongoing embezzling activities."

"Accordingly, defendants are not entitled to summary judgment on this ground," he wrote. "But a different result is required with respect to defendants' argument that defendants can void the Policy" pursuant to the policy's "Concealment, Misrepresentation or Fraud" provision.

It is clear from the facts of the case that Draisey did intentionally conceal his embezzlement from the insurer.

Although Draisey was an agent for both parties through the multiple hats he wore at the time of his criminal activities, Ellis ruled "Middleburg ought to bear the loss, as Middleburg trusted Draisey enough to appoint him as its treasurer, and thus had a much greater opportunity to prevent and detect Draisey's intentional concealment than defendants, who simply dealt with Draisey as an insurance broker.

"This result comports with the common sense principle that no one should be able to obtain insurance coverage to cover losses for embezzling activities they are engaging in or planning to engage in," Ellis continued. "More generally, no one should be able to obtain insurance coverage for a loss the person or entity is deliberately causing or intends to cause. To conclude otherwise converts insurance from a means by which an insured deals with risk that criminal fraud by someone would occur in the future to a guarantee of reimbursement for the insured's ongoing or criminal planned conduct. This is the antithesis of insurance."

The Middleburg Volunteer Fire Department could not be reached for comment.


Read the Top 8

Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.