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WSFS Financial Corp. v. Great American Insurance Co.

Superior Court of Delaware

May 31, 2019

WSFS FINANCIAL CORPORATION and WILMINGTON SAVINGS FUND SOCIETY, FSB, Plaintiffs,
v.
GREAT AMERICAN INSURANCE COMPANY, Defendant.

          Submitted: February 15, 2019

         Upon Defendant Great American Insurance Company's Partial Motion to Dismiss GRANTED in part and DENIED in part

          Adam V. Orlacchio, Esquire, Blank Rome LLP, Wilmington, Delaware, Justin Lavella, Esquire, Dominique A. Meyer, Esquire, Blank Rome LLP, Washington, D.C. Attorneys for Plaintiffs WSFS Financial Corporation and Wilmington Savings Fund Society, FSB.

          Brian D. Ahern, Esquire, Eckert Seamans Cherin & Mellott, LLC, Wilmington, Delaware, Michael A. Graziano, Esquire, Eckert Seamans Cherin & Mellott, LLC, Washington, D.C, Attorneys for Defendant Great American Insurance Company.

          Eric M. Davis, Judge

         I. INTRODUCTION

         This civil action is assigned to the Complex Commercial Litigation Division of the Court. On September 12, 2018, Plaintiffs WSFS Financial Corporation ("WSFS Corp.") and Wilmington Savings Fund Society, FSB ("WSFS Bank") (collectively, "WSFS") filed a complaint (the "Complaint") against Defendant Great American Insurance Company ("Great American"). WSFS contends that Great American breached the terms of an insurance agreement (the "Subject Bond")[1] by failing to indemnify WSFS for losses associated with the misconduct by one of WSFS' employees. WSFS asserts three claims for relief: Declaratory Judgment (Count I), Breach of the Subject Bond (Count II); and Bad Faith: Breach of the Implied Covenant of Good Faith and Fair Dealing (Count III).

         On November 8, 2018, Great American filed its Defendant's Partial Motion to Dismiss (the "Motion to Dismiss"). Through the Motion to Dismiss, Great American moves to dismiss (i) Counts I and II to the extent those counts are predicated on the categories of loss identified in paragraphs 55 through 59 of the Complaint, [2] and (ii) Count III for failing to state a claim upon which relief can be granted. For the reasons set forth below, the Court will GRANT in part and DENY in part the Motion to Dismiss.

         II. RELEVANT FACTS[3]

         A. Factual Background

         Great American is an Ohio insurance company with its principal place of business in Ohio. Great American is licensed to transact business in Delaware. As alleged, Great American was, at all times relevant to the Complaint, engaged in the business of writing and selling insurance policies and fidelity bonds to Delaware citizens.

         WSFS is a Delaware corporation with its principal place of business in Wilmington, Delaware. On February 16, 2016, WSFS Corp. obtained the Subject Bond from Great American on its own behalf, as well as on behalf of its subsidiaries, including WSFS Bank. The Subject Bond provides insurance coverage for losses resulting from WSFS' employees' dishonesty or fraudulent conduct.

         WSFS Bank is a wholly-owned subsidiary of WSFS Corp. WSFS Bank is a federally-chartered savings bank with its principal place of business in Wilmington, Delaware.

         On April 29, 2013, WSFS Bank hired Mr. Tae Kim as Vice President and Director of Select Markets in WSFS Bank's Commercial Banking Division. Mr. Kim was a Relationship Manager at Citibank N.A. before joining WSFS Bank. At Citibank N.A., Dr. Zahid Aslam became Mr. Kim's customer. According to a Search Warrant Application filed by the Federal Bureau of Investigation on April 13, 2016, Mr. Kim approved false and misleading loan applications from customers such as Dr. Aslam in exchange for financial consideration. Mr. Kim engaged in this fraudulent scheme while working at Citibank and WSFS. On August 7, 2017, Mr. Kim pleaded guilty to Conspiracy to Commit Bank Fraud and Attempt to Commit Bank Fraud in the United States District Court for the District of Delaware.

         WSFS submitted a proof of loss to Great American to recover losses from Mr. Kim's fraudulent loans. Great American accepted coverage and paid $1, 665, 532.14 to WSFS.

         Later, WSFS submitted an amended proof of loss to recover six categories of damages: (1) $265, 711.06 incurred "in establishing the existence and the amount of its loan losses and in mitigating those losses;" (2) $748, 929.82 in employee benefits it paid to Mr. Kim; (3) $292, 892.35 in costs WSFS allegedly incurred to fund and carry Mr. Kim's fraudulent loans; (4) $19, 950.00 WSFS paid to an accounting firm in connection with preparing its Form 10-K filings for the relevant years; (5) $3, 750.75 for legal advice about WSFS's public disclosure obligations related to the fraud; and (6) an unknown amount as compensation for the time that WSFS employees spent addressing the implications and costs of the fraud.

         Great American requested additional information in support of WSFS' claim for $265, 711.06, but denied the remaining five categories of losses. In response, WSFS filed the Complaint, alleging that Great American breached the Subject Bond and the implied covenant of good faith and fair dealing by not indemnifying WSFS for all of WSFS' alleged losses.

         Rider 18 to the Subject Bond requires Great American to reimburse all:

"[L]oss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others, which acts are committed by the Employee with the intent
(1) to cause the Insured to sustain such loss; or
(2) to obtain financial benefit for the Employee, or another Person or Entity.
Notwithstanding the foregoing, it is agreed that with regard to Loans and Trading this Bond covers only loss resulting directly from dishonest or fraudulent acts committed by an Employee with the intent to cause the Insured to sustain such loss and which results in a financial benefit for the Employee. However, where the proceeds of a dishonest or fraudulent act committed by an Employee arising from Loans and/or Trading are actually received by person with whom the Employee was acting in collusion, but said Employee fails to derive a financial benefit therefrom, such a loss will nevertheless be covered hereunder as if the Employee had obtained such benefit provided the Insured establishes that the Employee intended to participate therein.
Salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other Employee benefits shall not constitute improper financial benefit."[4]

         Rider 18 modified Insuring Agreement A, which states,

Loss resulting directly from dishonest or fraudulent acts committed by an Employee, acting alone or in collusion with others. Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:
(1) to cause the Insured to sustain such loss; and
(2) to obtain an improper financial benefit for the Employee or another person or entity. However, if some or all of the Insured's loss results directly or indirectly from
a. Loans, that portion of the loss involving any Loan is not covered unless the Employee also was in collusion with one or more parties to the Loan transactions and has received, in connection therewith, an improper financial benefit with a value of at least $2, 500; and
b. trading, that portion of the loss is not covered unless the Employee also has received, in connection therewith, an improper financial benefit.
As used in this Insuring Agreement, an improper financial benefit does not include any employee benefits received in the course of employment, including but not limited to: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions.
As used in this Insuring Agreement, loss does not include any employee benefits (including but not limited to: salaries commissions, fees, bonuses, promotions, awards, profit sharing or pensions) intentionally paid by the Insured.[5]

Rider 11 to the Subject Bond on "Investigative Claims Expense" states:

The Underwriter [Great American] shall indemnify the Insured for reasonable expenses incurred by the Insured in establishing the existence and the amount of any direct loss covered by the Insuring Agreements of this bond, in excess of the applicable deductible amount, as stated in Item 4 of the Declarations. The reasonableness of such expenses shall be determined by the Underwriter, and shall not include internal corporate expenses of the Insured, such as employee wages.

         Section 2(v) of the Subject Bond excludes coverage for consequential losses:

This bond does not cover . . . [i]ndirect or consequential loss of any nature including, but not limited to, fines, penalties, multiple or punitive damages;

         B. Procedural Background

         On September 12, 2018, WSFS filed the Complaint against Great American for declaratory judgment, breach of the Subject Bond, and breach of the implied covenant of good faith and fair dealing.

         On November 8, 2018, Great American filed the Motion to Dismiss, moving to dismiss Counts I and II for five of the six losses for which WSFS seeks to recover. The Motion to Dismiss also seeks dismissal of Count III because WSFS has not sufficiently alleged bad faith. WSFS did not move to dismiss WSFS' claim for $265, 711.06. Great American also filed Defendants' Brief in Support of its Partial Motion to Dismiss. WSFS filed Plaintiffs' Answering Brief in Opposition to Defendants' Partial Motion to Dismiss (the "Opposition") on November 30, 2018. On December 20, 2018, Great American filed Defendants' Reply Brief in Support of its Partial Motion to Dismiss (the "Reply"). The Court held a hearing on the Motion to Dismiss, the Opposition and the Reply on February 15, 2019. At the conclusion of the hearing, the Court took the matter under advisement.

         III.STANDARD OF ...


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