The Eighth Circuit is set to decide this question in 3M Company, et al. v. National Union Fire Insurance Company of Pittsburgh, Pa., et al., Appeal No. 15-3495. The answer will likely determine whether a blanket crime policy and multiple excess policies cover $176 million in partnership earnings 3M lost because of its partners’ massive Ponzi scheme.
Between 1999 and 2009, 3M invested over $100 million of its Employee Retirement Income Security Act (“ERISA”) plan assets and the earnings on those investments with an entity named WG Trading Company, L.P. Stephen Walsh and Paul Greenwood controlled WG Trading and were its general partners. 3M and two of its ERISA plans were limited partners in WG Trading. Unbeknownst to 3M, Walsh and Greenwood were fraudsters. They diverted hundreds of millions of dollars from WG Trading and another partnership for their personal use and to conceal the fraud.
When the fraud finally came to light, 3M was able to recover the principal it had placed with WG Trading in 1999, but not any of the profit it claims to have legitimately earned and reinvested through WG Trading between 1999 and 2009. As a result, 3M made a claim with its fidelity insurers. The insurers denied the claim. Litigation ensued.
In September of 2015, the United States District Court for the District of Minnesota granted summary judgment in favor of 3M’s fidelity insurers. It found that ownership of the stolen property is a requirement for coverage under the policies because of an ownership provision included in an endorsement and that 3M never owned the lost earnings. Rather, because the earnings had been reinvested in WG Trading as opposed to distributed to 3M, the earnings were WG Trading’s property, not 3M’s property, under applicable state partnership laws. The ownership endorsement relied upon by the district court provides, in relevant part, as follows:
The insured property may be owned by the Insured, or held by the Insured in any capacity whether or not the Insured is legally liable, or may be property as respects which the Insured is legally liable.
3M attacks the district court’s reasoning on multiple fronts. It says that the employee dishonesty insuring agreement through which it seeks coverage is not subject to the ownership endorsement and covers any direct loss of money, securities, or other property due to theft by a 3M employee or 3M ERISA fiduciary, and that the term theft is defined in the employee dishonesty insuring agreement as any deprivation of property. 3M thus argues that it is entitled to coverage because it was deprived of the earnings as a result of the thefts of Walsh and Greenwood, 3M ERISA fiduciaries, regardless of whether 3M technically owned the earnings. 3M alternatively argues that the fact it had a right to receive the earnings prior to the time they were stolen sufficiently establishes ownership as that concept is defined under the policies. 3M also argues that ERISA applies, not state partnership law, and it owned the earnings under ERISA even if they were never distributed.
The insurers, on the other hand, argue that the district court is correct. They say that, because of the ownership endorsement, the policy only covers property owned by the insured, held by the insured, or for which the insured is legally liable. They argue that there is no coverage under the policies for property owned by third-parties which the insured does not hold and for which the insured is not legally liable – such as the earnings in the case at bar that were owned and held by WG Trading when stolen.
The ownership endorsement at issue includes standard fidelity policy language. As such, the Eighth Circuit’s opinion will likely have precedential value for attorneys addressing similar issues throughout the nation and be instructive for other industry participants.