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The Rough Notes Company Inc.



July 28
07:55 2017

Construction Contractors Employer Group purchased a policy from Federal Insurance with an effective date of March 23, 2013. In July 2012, prior to starting the application process, Construction had started an investigation because it had been notified of an unexpected lack of funds situation. The investigation was completed in May 2013, at which time the claim was the new carrier. Federal denied the loss because Construction had discovered the loss prior to the policy application. Construction argued that as an open investigation, they didn’t have enough information to know whether or not a loss had occurred.

See below how the courts decided when asked to consider when the loss had actually been discovered.

Construction Contractors was insured by a Crime Policy issued by Federal Insurance effective March 22, 2013 through July 1, 2013. The policy was issued after Construction first applied for coverage in January 2013. Contractors filed a loss with Federal in May, 2013 and the insurer denied the claim, alleging that Construction had known of the loss before the policy period. Construction sued Federal and then appealed after a court ruled in favor of the insurance company.

Upon appeal the circumstances of the case were fully reviewed. Construction was a subsidiary of Associated General Contractors which was formed in 2001 to handle the trade organization’s many employment functions such as accepting funds for payroll, tax, employee benefit and administration obligations.

In 2002, Construction outsourced its duties to AlphaCare which was managed by part-owner William Cook. In July 2012, another AlphaCare owner, John Moon, reported to Construction that it did not have the necessary funds to meet its obligations, even though member companies had continued to deposit required funds. Moon reported that he had been submitting false financial statements to Construction to shield that the latter had amassed substantial federal and state liabilities for unpaid taxes. Construction terminated AlphaCare’s contract and hired a new CFO.

The CFO began investigating the work performed by AlphaCare and suspected that its managing owner/partner, Cook, may have been responsible for the irregularities. By October, 2012, the CFO determined the extent of losses caused by Moon’s actions. It was determined that wire fraud was involved, but not the exact details of how the fraud was accomplished. However, in May 2013, the CFO determined that AlphaCare, via Cook, required client construction firms to deposit funds that were made out in the name of Construction, but which used an account number that belonged to AlphaCare. After this determination, the claim was made to Federal.

The higher court reviewed the circumstances, focusing on the same elements used by the lower court. One, it examined the loss history information that Construction was required to provide Federal. The information included that AlphaCare was being investigated for possible criminal prosecution for unauthorized fund transfers. The court noted that coverage was subject to a “Loss Discovered” option that barred coverage for any loss of which the applicant/policyholder had previous knowledge. Second, the policy’s wording defined any and all losses involving acts of the same employee or third party as a single act. Third, the court evaluated the policy definition of a Discovered Loss. The term included knowing of circumstances that a reasonable party would recognize would likely result in a loss.

After review of each party’s arguments, the court held that, under both the Loss Discovered and single act wording, Construction was aware of a loss before the policy term. The lower court decision in favor of Federal was affirmed.

Construction Contractors Employer Group L.L.C. v. Federal Insurance Company, Defendant-Appellee. USCTApp, 6th Circuit. No 15-4352. Filed July 11, 2016. Affirmed. Westlaw 829 F 3d 449


The crime coverage forms are different because employee dishonesty is a crime that typically takes place over a number of years. Once the loss is discovered, often the employee is not aware of the total amount that he or she has embezzled but it can add up. Coverage limits do not stack. The coverage form in effect at the time of the loss will respond but the limits available to pay for the loss will vary based on whether coverage had remained in force throughout the loss period and whether the coverage had remained with a single carrier throughout that same period.

Read the PF&M explanation of how the ISO employee dishonesty coverage form responds to a multi-year employee dishonesty loss.


 Loss Sustained During Prior Insurance Issued by Us or Any Affiliate

A person or persons may engage in numerous dishonest acts over a period of years before being caught. However, all such acts are considered one occurrence. If the named insured maintains continuous coverage with the same insurance company or group of insurance companies, coverage applies back to the date that the continuous insurance began. However, the limits of insurance do not accumulate because of the multiple years. Instead, the highest limit available during the total period is available to settle the total loss over the years when they occurred. This condition now has three parts and includes three examples because of some confusion and court cases such as Auto Lenders Acc Ace. Corp.v Gentilini Ford, Inc., 181 N.J. 245, 854 A.2d 378 2004.

Example: Alice stole $50,000 two years ago, $20,000 last year, and $30,000 this year, for a total of $100,000. Alice’s employer carried a $50,000 limit of insurance each of these three years. These limits cannot be added together even though the dishonest acts took place during each of these years because this provision treats the series of thefts as a single occurrence. $50,000 is the maximum limit available for this single occurrence.

 (1) Loss Sustained Partly during this Insurance and Partly during Prior Insurance

If a loss is sustained in part during the current insurance and in part during prior policies and there was no break in coverage, the loss in the current policy period is settled first. The losses in the prior periods are then settled.

(2) Loss Sustained Entirely during Prior Insurance

If a loss is sustained entirely during a previous policy period and there was no break in coverage between the date of loss and the current policy and the current policy covers the loss, the insurance company settles the loss under the most recent previous insurance first. It then settles the remaining amounts during previous insurance.

(3) When the insurance company settles losses under k. (1). And k. (2) above:

  • The highest single limit of insurance available during any policy period when the loss occurred is available for the loss.
  • No settlement is paid until the deductible that applies under the current policy is satisfied. That deductible is the only one applied to the entire loss settlement, regardless of the number of policy periods involved.


Low down Bob has been stealing from Below Ground Enterprises for three years. Below Ground discovers the loss this year and calculates that the amount of loss is $100,000.

Scenario 1: The limit of insurance on the current policy is $100,000. However, it was only $25,000 three years ago. The insurance company pays $100,000.

Scenario 2: The limit was reduced from $100,000 to $25,000 two years ago. The insurance company still pays Below Ground $100,000 because the limit of insurance was $100,000 at the time of the occurrence.

 Loss Sustained During Prior Insurance Not Issued by Us or Any Affiliate

(1) This condition applies only if there was no lapse in coverage between the current coverage and the previous coverage. Even a one-day lapse in coverage nullifies this important benefit. If a loss sustained in a previous policy term is discovered after the end of that policy’s discovery period, coverage applies under the current policy if both the old and new policy have the same coverage and one immediately replaces the other. The limit of insurance available is the lesser of the two policy limits.

Example: Number One, Inc. moved its coverage from STU Accident and Casualty Insurance Company to ABC Indemnity Company. It had been with STU for five years. Number One discovered a loss that occurred during the STU policy but after the discovery period expired. ABC Indemnity covers the loss for either the limit of insurance under the STU policy or the limit under its policy, whichever is less.

 The coverage available under this condition cannot be combined with the coverage available under Condition k. to increase the insurance limits. The limits under Condition k. are taken into consideration with the limits of the previous company and the lesser is the one chosen.

Note: The important distinction is that the highest limit is used to settle claims if coverage is continuously with one company or group. If coverage moves between companies, the lowest limit is used to settle claims. This creates a significant gap in coverage if coverage moves from one insurance company to another.


Many clients are more concerned about preventing theft from the outsiders than from their own employees. However, the sad fact is that employees are able to cause much more financial losses than anyone could on the outside. Employee dishonesty limits are often very low because the client just doesn’t understand the exposure. A court case or two from PF&M, written in a concise and easy to follow format, may provide the incentive.

See below to review two cases you might want to use.


DGG & CAR, Inc., doing business as Metrol Security Services (Metrol) discovered that John Wallace Brown (Brown), an accounting employee, had embezzled more than $500,000 over a five-year period by forging company checks. Metrol purchased employee fidelity policies from Employers Mutual Casualty Company (EMC) for the plan years 2000 to 2001 and 2001 to 2002. Covered property was money and employee dishonesty was defined as dishonest acts committed by an employee with the manifest intent to cause loss and obtain a financial benefit. The policy promised to pay loss sustained through acts committed or events occurring at any time and discovered during the policy period, subject to a $50,000 limit per occurrence. Occurrence was defined as all loss caused by or involving one or more employees, whether the result of a single act or a series of acts. This definition was the point of dispute between Metrol and EMC.

Metrol filed a claim seeking reimbursement for its entire loss, arguing that each act of theft was a separate occurrence. EMC stated that Brown’s series of thefts constituted a single occurrence and that it owed only $50,000, filing a declaratory judgment action to that effect. Metrol counterclaimed, alleging breach of contract and bad faith. Cross motions for summary judgment followed, focused on the definition of occurrence. The trial court concluded that the policy was ambiguous as to whether each act of theft was itself an occurrence or whether all acts of theft were a single occurrence. It awarded Metrol up to $50,000 for each theft. In a memorandum decision, the court of appeals reversed, reasoning that a series of thefts committed by one employee constituted one occurrence and that Metrol’s recovery was subject to the $50,000 occurrence limit for the series of thefts. Metrol petitioned for a review by the Supreme Court because the case concerned a matter of first impression in Arizona and because the definition of occurrence regularly appears in employee fidelity and commercial crime insurance policies.

On review, the Supreme Court determined that the loss resulting from the embezzlement of a single employee, even though including a number of thefts, was a series of acts, each following the other and that the policy plainly considered such loss as a single occurrence and subject to the $50,000 limit per occurrence. It determined that most courts interpret similar language in similar situations the same way.

Metrol also maintained that the policy was ambiguous and stated that the phrase “all loss” in the definition of occurrence is unclear because it uses the word in the singular. It argued that the word “loss” is ambiguous and that when used in these policies actually refers to each individual theft in a series of thefts and that a loss was sustained each time an employee stole money. The court studied these arguments and found Metrol’s reading of all definitions unpersuasive. Metrol also stated that, because certain courts had found this language ambiguous, it must be subject to more than one reasonable interpretation. The court rejected this argument as well and stated that varying judicial interpretations do not automatically render an insurance policy ambiguous. Metrol pointed out that it was entitled to recover for nearly 300 “acts” but did not argue that it was entitled to recover for two “series of acts” in two plan years.

The Supreme Court concluded that Metrol had not suggested any public policy that supported its construction of the policy. For this and all the other reasons stated, it vacated the court of appeals decision, reversed the decision of the superior court and remanded to the trial court for proceedings consistent with its opinion.

Supreme Court of Arizona, En Banc. Employers Mutual Casualty Company, an Iowa corporation, Plaintiff/Counterdefendant/Appellant, v. DGG & CAR, Inc., d/b/a Metrol Security Services, an Arizona corporation, Defendant/Counterclaimant/Appellee. No CV-07-0280-PR. Feb 14, 2008. 218 ARIZ. 262, 183 P.3d 513


Christee Lee Hartse was an employee of American Commerce Insurance Brokers, Inc .(American). American discovered that Hartse took advantage of her access to company funds by using a variety of techniques to embezzle more than $190,000. This substantial amount of money was stolen during a thirteen month period starting in January, 1991.

After discovering the loss, American looked to their insurer, Minnesota Mutual Fire and Casualty Insurance Company (MMFC), for payment under their Employment Dishonesty policy. Originally MMFC agreed to pay its policy limits of $10,000, considering Hartse’s various theft schemes to be one occurrence. In supporting its settlement decision, MMFC relied on the policy’s wording that defined a series of related acts to be a single occurrence. American filed suit to collect under the basis that Hartse’s activities represented multiple occurrences that would enable the company collect its total loss.

MMFC filed cross motions, asking that the court recognize that it was obligated to pay according to a single occurrence. However, before a decision was issued, the carrier re-evaluated Hartse’s embezzlement methods and conceded that there were two distinct occurrences. The carrier offered to pay its policy limits for both occurrences ($20,000). The trial court reviewed the parties’ arguments and ruled that MMFC was obligated to pay $20,000 for two occurrences; one involving fraudulently handling transactions with American’s clients and the other for fraudulent transactions with MMFC. American appealed the decision favoring the insurer.

An appellate court interpreted the situation similarly to American. It also saw the reference to “a series of related acts” as ambiguous and ordered that the case be remanded. MMFC took its turn to appeal, claiming that the policy’s wording and intent toward occurrences was clear. A higher court reviewed the situation. It focused attention on whether the wording was ambiguous and what were the number of occurrences. After reviewing the competing arguments, the court decided that applying a broadest reading of occurrences would, depending on the size of losses, result in bad public policy by generating either limitless collections on large occurrences or no payments on minor occurrences (which all fall under a deductible). The higher court also reviewed relevant cases on the matter. In the end it decided that a reasonable reading of the policy would result in recognizing two distinct occurrences. It reversed the appellate court’s decision, re-establishing the lower court order to pay American $20,000.

American Commerce Insurance Brokers, Inc., Respondent, vs. Minnesota Mutual Fire and Casualty Company, petitioner, Appellant. No. C9-95-499. State Of Minnesota Supreme Court Filed: July 18,1996. [downloaded 9/11/02]


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