PDF DownloadBanning Benefits for Bad Behavior
Unraveling the Illegal Act Exclusion

By Crystal M. Patterson

Probate & Property Magazine: May/June 2009, Volume 23, Number 3

Real Property|Trust & Estate

Crystal M. Patterson is a shareholder in the Minneapolis, Minnesota, firm of Fredrikson & Byron, P.A.

Employee benefit plans and insurance policies routinely include provisions that exclude payment of benefits for injuries that are sustained while the beneficiary or insured is engaged in an illegal activity. The exclusions are commonly referred to as "illegal act" or "criminal act" exclusions. The rationale underlying the illegal act exclusion is that the plan sponsor or insurer does not want to reward illegal behavior by providing benefits to cover injuries sustained while the beneficiary is committing acts that are generally deemed to be against public policy. Understanding the scope of the exclusion can provide useful insights to attorneys and plan sponsors who draft and implement the exclusion.

Scope of the Exclusion

The scope and application of an illegal act exclusion are often disputed after a purportedly illegal act has occurred, the beneficiary under a plan or policy seeks benefits for injuries sustained while engaged in the act, and the plan or insurer denies benefits based on the exclusion. Although beneficiaries often allege that the plan's decision to deny benefits was arbitrary and capricious based on a variety of considerations such as the nature of the offense, the age of the beneficiary, and the causal relationship between the activity and the injuries, the overwhelming position of the courts is to expansively interpret the criminal act exclusion and uphold the denial of benefits.

Felonies, Misdemeanors, and Traffic Infractions

Beneficiaries frequently argue that policy or plan language excluding coverage for "illegal" or "criminal" acts is ambiguous and thus should be narrowly construed to include only intent-based crimes or seriously egregious acts. Courts have regularly taken a more expansive view, however, and concluded that felonies, misdemeanors, and traffic infractions are covered by the exclusion, even when the plan or policy language refers only to "crimes" or "illegal acts."

Felonies. The commission of a felony is routinely deemed a sufficient basis to deny benefits under an illegal act exclusion. Thus, coverage has been properly denied to plan participants or insureds who kill another individual when driving while intoxicated or are killed themselves while driving under the influence. Baker v. Provident Life & Accident Ins. Co., 171 F.3d 939, 942–43 (4th Cir. 1999); Weisenhorn v. Transamerica Occidental Life Ins. Co., 769 F. Supp. 302, 305–06 (D. Minn. 1991). Similarly, denial of benefits has been approved when the plan participant is injured while assaulting another individual or is killed while fleeing the scene of a felony. James v. Louisiana Laborers Health & Welfare Fund, 29 F.3d 1029, 1034 (5th Cir. 1994); Murdock v. Monumental Life Ins. Co., 2 P.3d 963, 965–66 (Utah Ct. App. 2000).

Misdemeanors and Traffic Infractions. Misdemeanors and traffic infractions also have been routinely found to be within the scope of the exclusion, despite beneficiary pleas that such "lesser" offenses are not truly criminal and thus not within the spirit or letter of the exclusion. For example, in Celardo v. GNY Automobile Dealers Health & Welfare Trust, 318 F.3d 142, 144 (2d Cir. 2003), the Second Circuit approved a plan's denial of benefits to a plan beneficiary/plaintiff (Celardo) who was injured in a car accident. At the time of the accident, Celardo was driving a Corvette that was uninsured, unregistered, and uninspected after sitting dormant in a garage for over seven years. In addition, Celardo had taken "dealer license plates" from a car provided to him by his employer and placed them on the Corvette. While driving the Corvette, Celardo crossed a double-yellow line as he tried to pass another vehicle, lost control of the car, and crashed into a tree. Celardo was cited with 10 traffic infractions and ultimately pled guilty to two of the offenses after the remaining eight charges were dropped.

The employee benefit plan covering Celardo denied his request for benefits, citing an exclusion for "'charges incurred resulting from . . . participation in or in consequence of having participated in an illegal act.'" Celardo argued that the plan's denial was arbitrary and capricious because he was charged with "mere 'traffic infractions.'" The Second Circuit disagreed, stating that "While Celardo would have us hold that 'illegal' means 'criminal,' this interpretation contravenes the plain, common-sense meaning of 'illegal.'" Citing the dictionary definition of "illegal" as "'contrary to or violating a law or rule or regulation or something else (as an established custom) having the force of law,'" the Second Circuit concluded that the plan properly interpreted the traffic infractions as falling within the plan's "illegal act" exclusion. Celardo, 318 F.3d at 146; see also Sisters of the Third Order of St. Francis v. Swedish American Group Health Benefit Trust, 901 F.2d 1369, 1372 (7th Cir. 1990) (affirming the denial of health benefits to a plan participant who was injured in a single-car accident while he was intoxicated under an exclusion for "'expenses incurred . . . [w]hile engaged in any illegal or criminal enterprise or activity'").

Charged, Not Charged, and Plea Deals

Courts have also routinely approved application of the criminal act exclusion even if the beneficiary was never charged with or convicted of a crime. The overriding rationale appears to be that there are numerous reasons why prosecuting authorities choose to charge, dismiss, and accept plea agreements for criminal acts. Because those reasons may be different from the policy considerations of the plan, the plan should not be bound by the prosecuting authority's decision.

For example, in Lampen v. Albert Trostel & Sons Co. Employee Welfare Plan, 832 F. Supp. 1287, 1288 (E.D. Wis. 1993), the plaintiff Lampen was injured in an automobile accident for which he was cited with inattentive driving, but not driving while intoxicated, even though his blood alcohol level was 0.2%. The employee benefit plan covering Lampen excluded payment for health claims resulting from "'bodily injury resulting directly or indirectly from . . . the commission of an act of crime.'" The plan administrator concluded that Lampen had been engaged in a crime at the time of his injury and denied benefits. Lampen challenged the denial on the grounds that, inter alia, he had not been charged with or convicted of a crime. Dismissing Lampen's argument, the court stated:

The terms of the Plan do not require a conviction. There are a myriad of reasons why a person may not be charged with a crime which have no bearing on his or her guilt or innocence—someone may rob a store and die from wounds from battle with police after incurring medical expenses but before being charged with any crime. This could not mean that she has not robbed the store or committed the crime, requiring a plan such as the one covering Mr. Lampen to cover her expenses.

Concluding that benefits had been properly denied under the criminal act exclusion, the court granted summary judgment in favor of the plan administrator. Lampen, 832 F. Supp. at 1292–93.

Similarly, in Berg v. Board of Trustees, 725 F.2d 68, 71 (7th Cir. 1984), the Seventh Circuit concluded that conviction of a felony was not a prerequisite to application of a felony exclusion. Plaintiff Anthony Berg, a minor, was injured while attempting to construct a pipe bomb. Berg, vis-à-vis his father, was covered by a union welfare plan that excluded coverage for services rendered "'as a result of the commission of a felony.'" Based on such exclusion, the plan administrator denied benefits. Berg challenged the denial, arguing that because he was not convicted of a felony, the exclusion did not apply. Rejecting Berg's argument, the court stated:

Apparently in recognition that Section 4.07 of the Plan does not require a conviction of a felony, but only the "commission of a felony," plaintiffs argue that the term "felony" itself requires a conviction in a competent court. We find no legal or logical support for this argument.

 . . . Illinois does not define "felony" with any reference to whether there has been a "conviction." A "felony" occurs upon commission of the proscribed acts regardless of whether there later is a successful prosecution.

Plaintiffs' definition of "felony" derives no more support from logic than it does from the law. Under plaintiffs' analysis the trustees are powerless to deny benefits to one clearly not entitled to them simply because the state chooses not to prosecute. Contrary to plaintiffs' claim, the trustees are not usurping the state's power to punish felons by denying benefits; the trustees are simply protecting Plan assets from improper claims. The trustees should not be dependent upon the state's decision to prosecute to accomplish this goal. The illogic of plaintiffs' position is best illustrated by the situation in which a Plan participant is killed during the commission of a felony. As the state cannot prosecute a dead man, the trustees would be unable to deny benefits although the injuries were not covered by the Plan.

Concluding that the plan administrator's decision was not arbitrary and capricious, the court affirmed the district court's grant of summary judgment in favor of the plan administrator. Berg, 725 F.2d at 70–71; see also Chapter v. Monfort of Colorado, Inc., 20 F.3d 286, 288 (7th Cir. 1994) (coverage properly denied even though beneficiary had not been convicted of a crime and, because of brain injuries, would be unable to stand trial).

The Fifth Circuit in James, 29 F.3d at 1029, similarly concluded that a conviction is not a prerequisite for application of a felony exclusion in an employee benefit plan. Plaintiff James sustained a gunshot wound after physically beating his wife. James was not arrested, charged, or convicted as a result of the incident, but the plan administrator of the employee benefit plan covering James denied benefits based on a plan exclusion for injuries sustained in the course of committing a felony. Discarding James's argument that a conviction was necessary for the exclusion to apply, the court stated:

The failure of the state criminal justice system to prosecute an individual for alleged felonious activity by no means constitutes an affirmative finding that the individual is absolved of any crime. Unlike the Plan, the State has neither the resources nor the obligation to prosecute a suspect in connection with each and every felony, potentially or actually committed.

James, 29 F.3d at 1034. The court in Helton v. ACS Group, 964 F. Supp. 1175, 1181 (E.D. Tenn. 1997), reached a similar result, finding that a conviction was not necessary for a felony exclusion to apply because the plan at issue referred only to a felony, not conviction of a felony. The Helton court reasoned that "the plan administrator was not required to pay the plaintiff's benefits claim merely because of the exercise of prosecutorial discretion not to charge the plaintiff with a felony . . . . [as] there was no legal requirement that the plan administrator abdicate responsibility for making a decision on the plaintiff's claim to the Tennessee Attorney General or to a district attorney general." Helton, 964 F. Supp. at 1181; see also SGI/ARGIS Employee Benefit Trust Plan v. Canada Life Assurance Co. , 151 F. Supp. 2d 1044, 1048 (E.D. Ark. 2001) (upholding a denial of benefits based on a criminal act exclusion and stating that driving while intoxicated "is illegal whether a person is convicted of the crime or not").

Indeed, even presenting an affidavit from the local prosecuting authority stating that it would not have actually prosecuted the crime appears to not be enough to avoid application of a criminal act exception. In Steele v. Life Ins. of N. Am., 408 F. Supp. 2d 627, 629 (C.D. Ill. 2006), the court affirmed an accidental death insurer's denial of benefits to the widow of a plan participant (William) who was killed in an accident in which he was "'driving while intoxicated, while on a suspended license from two prior DUI's.'" In support of her argument that William was not engaged in a felony, the widow presented an affidavit from the Vermillion County state's attorney stating that although he could have charged William with a felony for driving while intoxicated when his license was already suspended for two prior such offenses, the state's attorney would not have done so. The court found that it was "immaterial" whether the state's attorney would have prosecuted or whether a conviction would have occurred because the "undisputed evidence before this court demonstrates that William committed the offense which is all that is required . . . ."

Finally, courts are willing to treat plea deals the same as convictions for purposes of determining whether an illegal act exclusion applies. For example, the court in Century-Nat'l Ins. Co. v. Glenn, 104 Cal. Rptr. 2d 73, 76 (Ct. App. 2001), found that a homeowner's plea of nolo contendre has the "same effect as a guilty plea" for purposes of determining whether he had committed the felony of willfully discharging a firearm into a crowd of teenagers. Thus, the homeowner was precluded from receiving defense and indemnity benefits from Century-National for a suit commenced by a teenager who was shot. Century-Nat'l, 104 Cal. Rptr. 2d at 76; see also North Atl. Cas. & Sur. Ins. Co. v. William D. , 743 F. Supp. 1361, 1365–66 (N.D. Cal. 1990) (deeming a nolo contendre plea sufficient to find both an intentional and criminal act, thereby precluding coverage).

Adult "Crimes" and "Juvenile Offenses"

Beneficiaries frequently argue that the exclusion should not be applied because the person for whom benefits are sought was a juvenile at the time of the act leading to the injury and thus could not have committed a "crime." Courts have taken a dim view of this argument.

In Allstate Ins. Co. v. Burrough, 120 F.3d 834, 836 (8th Cir. 1997), the Eighth Circuit upheld an insurance company's denial of benefits for injuries sustained when the insured, Burrough, "who was approximately 14 at the time, stole a .22 caliber handgun from his grandfather's residence" and provided the handgun to a minor friend who then used it to shoot and paralyze a third-party, Williams. Williams's mother, Bell, sought coverage under the Burrough family's homeowner's coverage as a means for compensating her son, Williams, for his injuries. The homeowner's policy insuring Burrough contained an exclusion for "'bodily injury or property damage intended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of, any insured person.'" Granting Allstate's request for a declaration that it was not obligated to defend or indemnify Burrough, the district court found that Burrough had committed the offense of furnishing a deadly weapon to a minor, in violation of Ark. Code Ann. § 5-73-109 and that the criminal act exclusion therefore applied.

On appeal, Bell argued that although furnishing a gun to a minor is a criminal act under Arkansas law when committed by an adult, it is merely a delinquent act when committed by a minor, and thus the criminal act exclusion could not apply as a matter of law. Rejecting Bell's argument, the Eighth Circuit stated:

[I]t is undisputed that Burrough furnished a .22 caliber handgun to Hauser, who at the time was a minor. . . .

We recognize that Burrough, who was fourteen years old when he handed over the handgun to Hauser, could not be charged with or convicted of a § 5-73-109(a) offense in a criminal proceeding. Arkansas's juvenile courts would have exclusive jurisdiction over Burrough with respect to a § 5-73-109(a) offense . . . . Therefore, for the act of furnishing a deadly weapon to Hauser, Burrough could only be adjudged a juvenile delinquent in a juvenile court.

Although Burrough's status as a juvenile prevents him from being tried as an adult, the offense he committed is still a criminal act. Neither § 5-73-109(a) nor the provisions dealing with juvenile delinquency incorporate an age-based exception to the offense of furnishing a deadly weapon to a minor. . . .

Regardless of whether he could be tried as an adult or be adjudged a juvenile delinquent, under the plain language of the Arkansas Criminal Code, Burrough committed an act defined as criminal. Hence, he committed a criminal act for purposes of Allstate's criminal acts exclusion.

Accordingly, the court upheld the trial court's determination that the criminal act exclusion applied.

Several other federal courts have also concluded that an illegal act exclusion can apply to minors, notwithstanding the fact that the minor could not be charged with a crime, but only a juvenile act. For example, the court in Allstate Ins. Co. v. Cutcher, 920 F. Supp. 796, 798–99 (N.D. Ohio 1996), held that under Ohio law, a criminal act exclusion was properly applied to a juvenile adjudged to be delinquent after he struck another child, who fell into a river and drowned. Noting that the Ohio legislature had adopted a criminal code that defines crimes without regard to the age of the perpetrator, the court reasoned:

The Juvenile Code does not affect the definition of criminal conduct as set forth in the Criminal Code. Instead, the Juvenile Code simply prevents treatment and conviction of a juvenile as a criminal. A child's status vis-à-vis the meaning given to his conduct in the Criminal Code is no different from that of an adult who, for whatever reason, is not convicted of a crime despite having committed acts defined by Ohio law as a crime. The child's act remains a "criminal" act under the law of Ohio, even though he cannot be convicted of a crime. The legal status and the character of the act, as defined under Ohio law, remains unchanged regardless of the institution or outcome of a criminal proceeding.

Cutcher, 920 F. Supp. at 798; see also Allstate Ins. Co. v. Dillard, 859 F. Supp. 1501, 1504 (M.D. Ga. 1994) (concluding that policy provision excluding coverage for "bodily injury 'which may reasonably be expected to result from the intentional or criminal acts of an insured person'" operated to preclude defense and indemnity benefits to a homeowner whose minor grandson shot his playmate), aff'd, 70 F.3d 1285 (11th Cir. 1995).

The court in Allstate Ins. Co. v. Carmer, 794 F. Supp. 871, 873 (S.D. Ind. 1991), similarly held that a criminal act exclusion applied to the acts committed by a 14-year-old boy because the acts constituted a violation of the Indiana Criminal Code. The court reasoned that the "question is not . . . whether the actor could be prosecuted criminally" because the criminal code "does not say 'this is a criminal act unless you are a juvenile.'" Indeed, the injuries for which health benefits were sought and denied in Berg (discussed above) were sustained while the insured's son, a minor, was constructing an illegal pipe bomb. Berg , 725 F.2d at 69. Nevertheless, the court held that the criminal act exception applied.

Causation Required?

Finally, courts have shown at least some willingness to require a plan sponsor seeking to deny benefits to show a direct causal relationship between the illegal act and the injuries for which benefits are sought. The plaintiff in Celardo argued that the plan's exclusion applied only when the injuries for which benefits are sought are actually caused by the illegal act. Celardo, 318 F.3d at 147. Celardo argued that because his traffic law violation of placing dealer license plates on a nondealer, unregistered, uninsured, and uninspected car did not actually cause his injuries, the plan's denial of benefits was arbitrary and capricious. Acknowledging that Celardo had a "decent argument" for those offenses, the Second Circuit nevertheless found that Celardo's illegal act of crossing a double-yellow line to pass another vehicle immediately before he crashed was likely causally related to his injuries. Thus, the plan's denial of benefits on that basis was not arbitrary and capricious. Id.; see also Minnesota Life Ins. Co. v. Scott, 330 F. Supp. 2d 661, 667 (E.D. Va. 2004) (stating that "it is not enough that the commission of the crime and the death occur concurrently").

Other courts have used an even stricter interpretation, requiring the administrator or insurer to make fact-based findings of causation if the plan language specifies that benefits are excluded only if the illegal act caused the injuries. For example, the court in Murdock adopted a "but for" test that allows a plan to deny benefits only if the beneficiary's injury was proximately related to his or her commission of a crime. Murdock, 2 P.3d at 965. This approach appears to require the plan administrator or insurer to make specific findings of fact regarding the causal relationship between the illegal or criminal act and the injuries for which benefits are sought. In Smathers v. Multi-Tool, Inc./Multi-Plastics, Inc. Employee Health and Welfare Plan, 298 F.3d 191, 193 (3d Cir. 2002), the Third Circuit reversed the district court's decision affirming a plan administrator's denial of health benefits. Smathers was intoxicated when he was injured in a motorcycle accident. The plan administrator concluded that because Smathers was injured while he was intoxicated, "'it was reasonable to conclude that Smathers' illegal DUI "contributed to" the [a]ccident and the resulting medical charges.'" Concluding that such an inference was not sufficient to establish causation, the Third Circuit reversed and remanded to the district court to further remand to the plan administrator for further findings on the causation issue. Similarly, the court in Boyd v. United Transp. Union Ins. Ass'n, No. C05-1413JLR, 2006 WL 2350175, at *6–7 (W.D. Wash. Aug. 11, 2006), denied a plan's motion for summary judgment, finding that there were genuine fact issues for whether the plan participant's disability was causally related to the high level of stress associated with his participation in mail fraud, wire fraud, racketeering, bribery, embezzlement, and a multi-year conspiracy for such crimes.

Other courts have taken a more permissive view, however, and condoned application of the exclusion when it is reasonable to conclude that the illegal act contributed to the injury. For example, in Sorrells v. Sun Life Assurance Co. of Canada, 85 F. Supp. 2d 1221, 1225 (S.D. Ala. 2000), the court upheld an accidental death insurer's decision to deny benefits under a policy provision that excluded coverage for any "'loss which is due to or results from . . . committing or attempting to commit an assault, felony or other illegal act.'" The policyholder, Sorrells, died as a result of injuries sustained in an accident that occurred while he was intoxicated. Sorrells's beneficiary argued that Sun Life improperly denied death benefits because "Mr. Sorrells' intoxication was not a cause of the accident." Rejecting that argument, the court noted that

there is no evidence in the record to suggest that there was any other cause of the accident. . . . Given the well-documented and well-known effects of intoxication on a person's ability to operate a motor vehicle, and given the absence of evidence of any other cause of the accident, the court concludes that there is no conflicting evidence which would require a trial on the issue.

In other words, the court broadly concluded that unless the beneficiary provided specific evidence of an alternative cause of Sorrells's death/loss, the court would infer that the intoxication was the cause.

Based on these diverging views on the necessity of showing a causal relationship between the injury and the illegal act and about who bears the burden of showing or negating that causal relationship, causation may be a beneficiary's best argument to obtain coverage.

Drafting Strategies

Whether a plan sponsor or insurer includes an illegal or criminal act exclusion in the plan or policy's governing language is, in the first instance, a business and policy decision for the sponsor or insurer. If a plan sponsor or insurer elects to include such an exclusion in the plan document or policy, the case law discussed above illustrates that certain drafting strategies will ensure its broadest application:

  • Specifically reference felonies, misdemeanors, and illegal acts as included with the exclusion. This will cast the broadest net to encompass as many "bad acts" as possible. Alternatively, if the plan sponsor or insurer wants to carve out exceptions to the exclusion, such as coverage for injuries sustained during traffic accidents not involving alcohol, but for which the insured is liable, the policy or plan language should explicitly say so.
  • Clearly state that application of the exclusion is not contingent on whether the crime is actually charged by a prosecuting authority, a plea deal is reached, or the charges are dropped. The focus should be the commission of the act—not any subsequent action by a prosecuting authority.
  • Explicitly provide that application of the exclusion is not contingent on whether the beneficiary is an adult or a juvenile. Again, the focus should be on the commission of the act—not whether the act is chargeable as a "crime" or a "juvenile offense."
  • Avoid using language that suggests the exclusion applies only when the criminal act caused the injuries for which benefits are sought. The exclusion should clearly state that it applies if the injuries are sustained while a criminal act is being committed.

Implementation of these basic drafting strategies will minimize potential ambiguities in the plan or policy language and maximize the sponsor or insurer's likelihood of prevailing in the event its application of the exclusion is challenged.

Conclusion

A criminal act exclusion is an enforceable way for a plan sponsor or insurer to limit its liability to plan participants and beneficiaries for injuries sustained while a plan participant or insured is engaged in a criminal activity. Because the scope and application of the exclusion has been litigated often, plan sponsors and insurers have the benefit of much case law to guide the drafting of their exclusions to ensure that the provisions may be applied under the desired circumstances and that such application will withstand challenge.

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