No Fortuity No Coverage

Known Loss Defeats Claim

For an insured to recover for a loss it must be fortuitous, i.e., contingent or unknown at the time the policy was acquired. In Construction Contractors Employer Group, LLC v. Federal Insurance Company, United States Court of Appeals, Sixth Circuit, No. 15-4352, 2016 WL 3675572 (July 11, 2016) the Sixth Circuit Court of Appeal was faced with an insured who purchased employee-theft insurance after discovering the theft and attempted to recover under the policy.

FACTS

Construction Contractors Employer Group (“Construction Contractors”) discovered that an employee had misappropriated certain funds and that another $1 million was missing. It then purchased an employee-theft insurance policy with Federal Insurance Company (“Federal Insurance”). After Federal Insurance executed the policy, Construction Contractors determined that the same employee had misappropriated the missing $1 million.

Federal Insurance denied Construction Contractors’ claim for the $1 million, and Construction Contractors filed suit. The district court granted Federal Insurance’s motion for summary judgment, concluding that any loss caused by one employee is considered a “single loss” under the policy and that Construction Contractors had “discovered” the loss before the execution of the policy.

Associated General Contractors of Northwest Ohio (“Associated General”) is a non-profit corporation and trade organization for commercial construction contractors. In April 2002, Construction Contractors outsourced its daily operations to AlphaCare Services, Inc. (“AlphaCare”), which was owned and managed by William H. Cook, III, Gerald L. Tillman, and John E. Moon (“Moon”). After working together for a number of years Moon informed Construction Contractors’ president Kevin Smith that Construction Contractors did not have enough assets to meet its obligations even though the subscribers had paid Construction Contractors enough money to fulfill their respective obligations. Moon later, in a Perry Mason moment, explained that he had been falsifying Construction Contractors’ financial statements and that the company had substantial unpaid tax liabilities.

Construction Contractors terminated its agreement with AlphaCare. The next day, it hired Peter VanDenBerghe as interim Chief Financial Officer and Treasurer. VanDenBerghe began reviewing Construction Contractors’ accounts.

Because Moon was responsible for remitting and reporting taxes, VanDenBerghe suspected that Moon was the reason for the more than $1 million loss. Focusing his investigation on Moon, in October 2012, VanDenBerghe determined that Moon had committed wire fraud by transferring over $900,000 from Construction Contractors’ account to AlphaCare’s account between May 2009 and June 2012. In November 2012, the investigation further revealed that Moon had charged Construction Contractors for $30,000 worth of health care premiums and health savings account deposits for AlphaCare employees. VanDenBerghe continued his investigation, as approximately $1 million was still unaccounted for.

On or about January 10, 2013, Construction Contractors applied for a crime-coverage insurance policy, which included coverage for employee theft, from Federal Insurance. The application instructed Construction Contractors to list “all employee theft, forgery, computer fraud or other crime losses discovered … in the last five years, itemizing each loss separately.” Construction Contractors disclosed the following: “Since 2002, [Construction Contractors] was in contract with AlphaCare [ ] to provide specific management duties for [it]. Those duties included the direct management of the corporate bookkeeping and payroll processing. Effective July 31, 2012, [Construction Contractors] terminated its contract with [AlphaCare] for breach of contract. [AlphaCare] was contractually responsible for processing our participants’ payroll and remitting payroll taxes to the proper taxing authorities. A subsequent review of [AlphaCare’s] performance has indicated [its] failure to report, reconcile and remit certain payroll taxes. ¶ A subsequent review of [Construction Contractors’] accounting records indicated unauthorized transfers from [Construction Contractors] owned accounts to ACS owned accounts from 2009 to 2012. Further investigation is in process, and the potential for criminal prosecution is being evaluated by our company attorneys.”

Federal Insurance issued the policy to Construction Contractors, extending coverage from March 22, 2013, through July 1, 2013, and insuring up to $1 million in covered losses. Three provisions of the policy are relevant to this case. First, Construction Contractors purchased a “Loss Discovered” option, which excludes “any loss that an Insured is aware of prior to the inception date of [the] Policy.”

Second, under the “Limits of Liability” section, the policy stated the following: “All loss resulting from a single act or any number of acts of the same Employee or Third Party, and all loss whether such act or acts occurred before or during the Policy Period, will be treated as a single loss and the applicable Limit of Liability set forth in Item 2 of the Crime Declarations will apply, subject to Section X, Liability for Prior Losses.”

Third, the section entitled “Liability for Prior Losses” provided that, for the Loss Discovered option, “coverage will be available for loss sustained at any time and Discovered during the Policy Period.” After the execution of the policy, in May 2013, Construction Contractors detected the method by which Moon had misappropriated the missing $1 million. VanDenBerghe determined that from 2002 until May 2009, Moon had committed check theft by having subscribers write checks to Construction Contractors using AlphaCare’s account number.

Based on this discovery, Construction Contractors submitted a claim for the $1 million check theft to Federal Insurance, which denied the claim. Construction Contractors then filed suit in the district court, seeking declaratory and monetary relief for breach of contract. Both parties filed motions for summary judgment. The district court properly granted Federal Insurance’s motion, concluding that any loss caused by one employee was a single loss under the policy and that Construction Contractors was aware of the loss before the policy’s inception date. Construction Contractors appeals.

ANALYSIS

Ohio state law dictates that interpretations of insurance contracts are questions of law for a court to answer. Ohio courts examine the insurance contract as a whole and presume that the intent of the parties is reflected in the language used in the policy.

Discovery of loss does not occur until the insured discovered facts showing that dishonest acts occurred and appreciates the significance of those facts. Mere suspicion of loss is not sufficient to demonstrate that an insured discovered the loss.

Construction Contractors claims that if the policy is narrowly construed as required by Ohio law, the check-theft loss is a covered loss under its policy with Federal Insurance. First, it asserts that the check-theft loss is covered under the “Employee Theft Coverage” provision of the policy because Moon was a covered employee when he misappropriated funds. Second, it argues that the Loss-Discovered provision applies because it did not “discover” the check-theft loss until it determined that

Both the check-theft loss and the wire-fraud loss were the result of a single actor, Moon, and the provision provides that all actions of a single actor constitute a single loss for purposes of the policy. Federal Insurance contends that because Construction Contractors had already discovered the wire fraud before the inception of the policy, it derivatively “discovered” the check theft, as both constitute a single loss.

The “Liability for Prior Losses” section includes the “Loss Discovered” option — i.e., the coverage option for losses “sustained at any time and Discovered during the Policy Period.”  Thus, if a loss arises under the “Loss Discovered” option, the single-loss provision applies.

The undisputed facts demonstrate that Construction Contractors knew of the wire-fraud loss before executing the insurance policy with Federal Insurance. Because Construction Contractors discovered the wire fraud prior to the policy’s execution and the check theft and wire fraud constitute a single loss, the check-theft loss is excluded from coverage under the policy.

ZALMA OPINION

In addition to the conclusion that the loss occurred before the policy was acquired and partially disclosed to Federal. To attempt to say that the theft, which they knew had occurred before acquiring the policy, was a different loss because they learned it was committed by using checks, did not change the fact of theft by a single employee. Buying the policy and attempting the claim was the result of a serious misrepresentation or concealment of a material fact.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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