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Pfeiffer v. American Alternative Insurance Corp.

United States District Court, D. Rhode Island

November 12, 2015



Ronald R. Lagueux, Senior United States District Judge.

This matter is before the Court on Defendant American Alternative Insurance Corporation’s Motion for Summary Judgment on Count I of the Complaint filed by Plaintiff Mark Pfeiffer, in his capacity as Receiver of the Central Coventry Fire District (“the Receiver”). By prior agreement of the parties, Count II has been dismissed without prejudice. Count III, which alleges that Defendant acted in bad faith when it refused to pay or settle Plaintiff’s claim, has been severed and stayed. Count IV, for declaratory judgment, is not the subject of the present summary judgment motion. The Court, having reviewed the parties’ submissions and heard oral argument, now renders its decision denying Defendant’s motion for partial summary judgment for the reasons explained below.


The Town of Coventry, Rhode Island, is divided into several autonomous districts for the purpose of funding and providing fire-fighting and rescue services to residents. The Central Coventry Fire District (“the District”) is a quasi-municipal corporation with authority to tax the businesses and residents within its geographical area. Every year the District develops a budget establishing the amount of money needed to fund its fire-fighting operations. The budget is presented to the District’s taxpayers for their approval at a public meeting. Owners of real property are then billed based on the assessed value of their property, multiplied by a factor (the tax rate) calculated to generate the necessary revenues. By statute and the District’s Charter, the tax bills constitute a lien on the property.[1]

In 2010, the District’s Tax Collector, Jeanne Graemiger, made an error and used, as a basis for budgetary calculations, the full value of a commercial property which actually spanned two districts. The tax rate was calculated using the erroneous property value, and, consequently, all the tax bills were based on an inaccurate calculation. With the exception of the single over-valued property, everyone else’ tax bills were too low. The one commercial property, owned by Commerce Park Associates 5, LLC (“Commerce Park”), was overvalued by over $2 million. When it received the inflated tax bill - nearly $800, 000 more than it had been charged in 2009 - Commerce Park visited the Tax Collector’s office to complain. Realizing her error, Graemiger corrected the bill, reducing Commerce Park’s bill by $790, 505. She did not disclose her assessment error to anyone in the District. She did not disclose, or seek the required approval for, the abatement granted to Commerce Park. Nor did she correct the erroneous property valuation on the tax rolls. The result was a budget shortfall of approximately $790, 505 for the fiscal year 2010-11.[2]The Treasurer of the District, Thomas Lacolle, was aware of the budget shortfall but made no investigation into its cause. In addition, Lacolle failed to notify the District’s taxpayers of the revenue shortfall for 2010. Because no correction was made to the underlying property valuation in the tax rolls, the following year, when the budget was calculated and approved by the voters and the tax bills sent, the mistake was repeated. Commerce Park again protested and again Graemiger adjusted its bill without notice to anyone else in the District.

Had the Commerce Park property been valued properly, the tax rate set by the District would have been higher. All the taxpayers in the District would have been taxed at the higher rate, so that the taxes generated would cover the required budget. Because the tax bills were calculated based on an erroneous formula for two consecutive years, the District suffered a total budgetary shortfall of approximately $1.6 million.

Due to the ensuing fiscal troubles, on October 15, 2012, a special master was appointed by the Rhode Island Superior Court to oversee the District’s finances. The special master soon thereafter made a claim to the District’s insurer, Defendant herein, to cover the loss incurred in the two erroneous tax billing cycles. That claim was denied, and this lawsuit ensued.

The insurance policy

Plaintiff makes his claim under the “Faithful Performance of Duty” endorsement to the policy’s “Public Employee Dishonesty Coverage, ” which was drafted expressly to cover the District’s Tax Collector and Treasurer. The endorsement adds to the policy the following “Covered Cause of Loss:”

Failure of any “employee” to faithfully perform his or her duties as prescribed by law, when such failure has as its direct and immediate result a loss of your covered property.

Under the Public Employee Dishonesty Coverage Form, coverage is provided for “loss of, and loss from damage to, covered property, ” which includes “Money, ” “securities” and “property other than money and securities.” Covered property is further described under “General Conditions, ” section 12, as property “that you own or hold; or for which you are legally liable.”

Duties of Tax Collector and Treasurer

While “faithful performance” is not defined in the policy, the duties of the Tax Collector and the Treasurer are set forth in the District’s Charter and by-laws. Moreover, at least for the purposes of considering the issues on summary judgment, there is no dispute between the parties that both the Treasurer and the Tax Collector made some serious missteps. Section 9 of the Charter states that the Treasurer must submit a monthly report to the Board of Directors, and must, once a year, “fully report the condition of the treasury of the District, showing receipts and expenditures of the preceding year” at a public meeting. The bylaws specify further that the Treasurer’s monthly report to the Board “show receipts and expenditures to date as compared with the annual budget, as well as a balance sheet showing cash assets, liabilities and equities to date.”

According to Section 10 of the Charter, the Tax Collector is “responsible for the preparation of the tax roll, ” and must submit monthly reports to the Treasurer and report annually at a public meeting. The by-laws add the maintenance of “timely and accurate records of payments received and amounts owed for each District taxpayer” and ...

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