Taxes and Penalties Not Covered Under a Liability Insurance Policy

William B. Kessler Memorial Hospital, et al. v. North River Insurance Company (N.J. Sup. Ct. App. Div.; November 15, 2013)

Relying on the policy’s exclusion for coverage of fines, penalties, or taxes, an insurer argued that any liability for violation of I.R.S. Section 941 was not a covered event. The policyholder argued that because the policy promised to “defend any Claim,” even if ultimate liability was to be unfounded, there was still a colorable claim for a defense from the insurer. Specifically, the policyholder noted that the definition for “Insured Person Claim” never specifically referred to the definition of “Loss,” and that accordingly, there was a broad basis for a defense of any claim. Calling the policyholder’s argument “overly-simplistic,” it disagreed, stating that to find in favor of the policyholder would “transform a liability insurance policy into a contract for unlimited legal services.” Since the exposure to which the policyholders were exposed was a fine, penalty, or tax, and since those were expressly excluded under the policy, there could be no coverage.