When One Company Fails to Collect and Remit Excise Taxes, Its Insurer Takes It to Court Over Application Misrepresentations
Telecommunications equipment and services provider Call One allegedly failed to collect and remit certain excise taxes and infrastructure maintenance fees owed by its customers between 2008 and 2018.
One former employee of Call One notified the managing director of sales and marketing several times after discovering the mistake in 2010. However, the fees remained uncollected.
By 2019, Call One received a subpoena from the state of Illinois, requesting documents related to Call One’s collection and payment of taxes. The company turned to its insurer for defense costs.
Call One held a professional liability insurance policy through Berkley Insurance Company and its affiliate, the Carolina Casualty Insurance Company. It began its insurance relationship in 2011, and subsequently renewed the policy each year.
The most recent renewal in relation to the subpoena occurred in June 2018.
Berkley agreed to cover the costs of defense arising from the subpoena. But it emphasized that its coverage only extended to the subpoena.
In the underlying suit, Call One reached a settlement “pursuant to which Call One agreed to pay a specified sum in exchange for dismissal of the suit,” per court filings.
Meanwhile, Berkley was also learning about a pending lawsuit against Call One for alleged Illinois False Claims Act (IFCA) violations, i.e., failure to collect taxes and fees from customers. This lawsuit was filed under seal by the State of Illinois in 2018, which coincided with Call One’s renewal.
When Call One submitted a claim to Berkley regarding payment for defense against the IFCA lawsuit, Berkley denied coverage.
The insurer cited misrepresentations in its application for insurance coverage, noting that Call One had an inclination that it would be subject to a suit.
Call One filed a motion to dismiss.
A misrepresentation in an insurance application is “a statement of something as a fact which is untrue and affects the risk undertaken by the insurer.” Call One argued that any such misrepresentation claim fails “because Berkley has not identified an actionable misrepresentation in the 2018 renewal application.”
However, according to Berkley, several points were relevant to its denial: First and foremost, former executive chairman and board member H. Edward Wynn filed a derivative complaint against Call One, describing “widespread misconduct of Call One’s current and former officers.” Hired specifically to help sell the company, Wynn was privy to company accounting records. Here he learned of material accounting deficiencies in Call One’s records.
Further, Berkley noted, when the company chose not to sell in 2017, it instead brought on a new CFO, who quickly left in mid-2018 upon discovering Call One’s failure to collect and remit taxes from its customers.
And through all this, Berkley alleged that Call One never disclosed this information during the renewal process in 2018.
Scorecard: With all this in mind, the judge sided with Berkley. Call One’s motion to dismiss was denied; Berkley is not on the hook for defense costs for the underlying suit.
Takeaway: Companies should be collecting and remitting taxes per their state’s requirements. Failure to do so will, obviously, result in legal action. &