Court Rules Hotel Management Company Gets No Coverage for Fraud Activity

The court determined the insurer was off the hook for fraudulent kickbacks totaling more than $3 million.
By: | July 17, 2020

In 2014, the U.S. Attorney for the Eastern District of Pennsylvania filed criminal complaints against Kenneth Kapikian and Dennis Gagliardi, charging them with wire fraud, conspiracy to commit money laundering, and aiding and abetting.

Kapikian was the general manager of Sheraton University City Hotel. Gagliardi was the hotel’s chief engineer. The U.S. Attorney’s allegations held that from May 2008 through December 2013, the duo submitted false invoices totaling $2,328,977 for services that were never rendered.

Additional fraudulent schemes resulted in kickbacks equaling $710,406.

In 2015, Kapikian and Gagliardi entered guilty pleas to numerous counts of wire fraud and conspiracy to commit money laundering.

Sheraton University City Hotel receives management services from Meyer Jabara Hotels LLC. In 2014, as the allegations against Kapikian and Gagliardi were coming to light, Sheraton notified Meyer Jabara of the impending investigation. In its letter, Sheraton indicated there were “financial irregularities” at the hotel and that Meyer Jabara should contact its insurer.

Meyer Jabara held a professional liability insurance policy through Gemini Insurance Company with limits of liability of $1 million for each claim. When Meyer Jabara notified Gemini, the insurer’s administrator acknowledged receipt of notice.

After Kapikian and Gagliardi plead guilty, Sheraton Hotel sent a demand letter to Meyer Jabara in the amount of $5.4 million for losses and damages arising from the criminal scheme. Meyer Jabara forwarded the letter to its insurer.

At first, Gemini agreed to defend Meyer Jabara regarding Sheraton’s claim subject to a complete reservation of its rights to disclaim coverage. A few months later, Meyer Jabara specifically requested Gemini pay the full $1 million liability limit as contribution toward any settlement reached.

Gemini and Meyer Jabara reached an agreement “whereby Gemini would advance an indemnity payment of $975,000.00 under the insurance policy as contribution to Meyer Jabara’s settlement with [Sheraton]. However, the agreement provided Gemini had the right to first initiate a coverage action to determine its coverage obligations under the insurance policy, and, if Gemini prevailed on such action, Meyer Jabara would reimburse the full advanced indemnity payment to Gemini.”

In 2017, Gemini filed a civil complaint seeking a declaration as to whether Gemini had a duty to defend or indemnify Meyer Jabara. Gemini also presented a claim of negligence against the defendants in the underlying suit, claiming Kapikian, Gagliardi and their cohorts were directly liable for their own negligence.

Trial court ruled, in 2019, in favor of Gemini’s motion for summary judgement, stating the Sheraton claim was excluded from coverage under the policy and Meyer Jabara must repay the $975,000 indemnity payment.

In appeals court, the court affirmed the order.

Scorecard: Meyer Jabara is not covered under the professional liability policy, because the underlying suit against the Sheraton’s employees was negligence on their part and not on the part of the hotel.

Takeaway: Thorough background checks and vetting procedures are important when hiring, but regular monitoring and enforcement of company protocols can also help to catch malfeasance before it escalates. As always, confer with your broker to determine which scenarios or circumstances might preclude coverage under your policy. &

Autumn Demberger is a freelance writer and can be reached at [email protected].

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