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Risk Management Who knew what when? Crime coverage definitions can make or break a case By Donald S. Malecki, CPCU
When one or more employees are suspected of committing an act of dishonesty and others in the company are aware of it, they sometimes look the other way, because they do not want to get involved in what can materialize into thorny, costly, and time-consuming situations. Employers in particular do not want to falsely accuse an employee without solid information, because the accusation could backfire and cause the employer to be confronted with a civil action for damages. In fact, this recently happened in the case Peterborough Oil Company, Inc. v. Great American Insurance Company, 397 F.Supp. 2d 230 (U.S.D.C. D. Mass. 2005). The plaintiff oil company in the above case owns and operates gas stations and convenience stores throughout Massachusetts. A manager reported some cash shortages at her station and store. Another manager contacted the police, reported a larceny by an employee and told the police that the manager who had first reported the shortages was the suspect. As a result, the implicated manager was suspended without pay and her employment was terminated. As it turned out, the surveillance tapes revealed that yet another employee was repeatedly playing lottery scratch tickets without paying for them. It was learned at the time of the terminated manager’s eligibility hearing for unemployment compensation that there was proof that the surveillance tapes showed someone else was responsible for the shortages. Counsel for the accused informed the oil company that if it ignored the evidence and continued to prosecute the former manager, it might be confronted with a malicious prosecution claim. These words of warning were ignored, the criminal trial proceeded and the accused was found to be not guilty. Following that verdict, the former manager then filed a civil action against her former employer, the oil company, alleging malicious prosecution and emotional distress. The primary issue of this case was whether there was coverage under the employer’s CGL policy for the allegation of malicious prosecution or if this claim was not covered because of the employment discrimination exclusion. As it turned out, the insurer providing the oil company’s CGL policy was required to pay the defense costs and damages, since malicious prosecution, which is a covered offense under personal injury liability coverage, was held to be outside the particular employment discrimination exclusion involved. Although Peterborough is an interesting case worth reading, the point is that employers sometimes are confronted with a dilemma when an employee is suspected of committing acts of dishonesty. They need to be careful that they have the proof necessary to show beyond a reasonable doubt that the person or persons accused did, in fact, commit the acts or crime. If employers are not careful, or persist in pursuing a criminal action, such as in this case, they can be confronted with a costly legal action. Another concern should be that their crime insurance does not become inapplicable based on the information they have about these crimes. Who must know to nullify coverage The standard ISO Crime form condition dealing with cancellation as to any employee states that the insurance is considered canceled immediately upon discovery when “you or any of your partners, officers or directors not in collusion with the employee learn of any theft or any other dishonest act committed by the employee whether before or after becoming employed by you.” A potential problem is what is meant by “you” when the named insured is a corporation. It may have no effect, because a corporation in and of itself cannot do anything without its agents. It is a universal problem affecting various forms of property and casualty insurance, particularly uninsured and underinsured motorist coverages. Fortunately, for corporations, when the word “you” is ambiguous, coverage may likely apply to it. A recent case in point is Century Business Services, Inc. et al. v. Utica Mutual Insurance Company, et al. 122 Federal Appendix 196 (U.S. Ct. App. 6th Cir. 2005). The case arose from the misdeeds of a subsidiary’s president who began borrowing money, subject to a promissory note and the payment of interest. This borrowing was with the knowledge of the company’s controller. After the controller left employment, he was replaced by another person who became aware of this borrowing, the promissory notes, and the partial repayment to cover earlier transactions. All told, between October 1998 and February 2000, the president borrowed over $3 million, with a total repayment of $550,000. Following an internal investigation, the president’s employment was terminated and the president was convicted of wire fraud. The dispute was over this company’s two employee dishonesty coverage forms. The primary policy had a limit of $1 million and the excess policy had a limit of $4 million. The company’s general manager testified that he became aware of the borrowing when he was examining the company’s account statements in September 1999. The primary insurer, as a result, denied coverage, maintaining that this constituted a discovery of the president’s dishonest acts by a corporate officer thereby considering coverage to have been canceled as of then. Also, an important question that had to be answered was whether the president acted with manifest intent to cause a loss, as required by the policy. This intent was found to be applicable. Major obstacle The court rejected the primary insurer’s denial. It disagreed that the general manager’s discovery of the president’s loans in September 1999 constituted discovery of the president’s dishonest acts by a corporate officer on the ground that the general manager was not an officer. The major obstacle for the insurer was to show that the word “you” in the cancellation condition should be read as encompassing employees, such as the general manager. The problem for the insurer was that the named insured submitted several compelling arguments showing that the term “you” is reasonably susceptible to a definition that does not encompass all employees of the company. If “you,” for example, were to include all employees, the second clause of the above noted cancellation provision, which covers “any of your partners, officers or directors not in collusion with the employee” would be rendered superfluous. In the end, the insurers were required to provide coverage. One of the observations here pertinent to producers is that they, too, are confronted with a problem in handling an insured’s crime coverage exposures because they are usually handling a company’s insurance needs with the very people who generally could be accused of embezzlements. Producers need to be diplomatic in their sales approach and not be offensive, yet come away with limits that are higher than what corporate officers generally want to purchase. It is no easy task. Of course, if it turns out that the limits are too low, it is the producer who is usually blamed. That is an unjustified accusation, because it is the insured who is the best judge of what its limits should be. ISO 2006 changes In the coming months, there will likely to be many articles and much commentary about ISO’s forthcoming commercial crime and fidelity coverage revisions which are to take effect in most jurisdictions on or after May 1, 2006. The revisions were prompted in part because of the enactment of federal laws particularly germane to matters involving these coverages, and because of several adverse court decisions. None of the court decisions being relied on by ISO affects the subject of this article. It is important to note, however, that this condition concerning cancellation, which was the subject of dispute and discussion here, is being retitled with the new forms as “Termination As To Any Employee.” This condition, however, still uses the word “you” without any further explanation, which can lead to further and like decisions as in the above Century Business Services case. More important perhaps is the new exclusion being added to the commercial crime coverage forms titled “Acts of Employees Learned Of You Prior To The Policy Period.” This new exclusion is said by ISO to have been developed in response to a case involving a financial institution bond written for commercial banks. In this case, the North Carolina Appellate Court upheld the trial court’s ruling that the employee termination provision of the fidelity bond could be applied only in situations where the insured first learns of an employee’s dishonesty after the bond is issued. This new exclusion is intended to reinforce the intent that commercial crime insurance is not intended to cover employees who have committed theft or dishonesty prior to issuance of the policy. Although this court case involved a financial institutional bond, it is said that the same terms and conditions of that bond appear as part of the commercial crime coverage form and policy. It appears, overall, that in the coming months there is going to be a general “tightening” of coverage conditions that purchasers of commercial crime forms will need to understand. * The author |
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