In EMCOR Group, Inc. v. Great American Insurance Company, the Fourth Circuit Court of Appeals applied a prior insurance provision in a Commercial Crime Policy to restrict coverage to only the immediate prior year that the insured maintained fidelity coverage, rather than the previous five years, as asserted by the insured.  The decision highlights the importance of properly analyzing and applying prior insurance provisions in loss-sustained forms in multi-year loss scenarios.

The Facts

EMCOR is a construction and building maintenance company.  In 2005, it reported a $10 million employee dishonesty loss to Great American in respect of allegedly fraudulent acts of employees occurring between December 1, 1999 and December 1, 2003.  This loss was reported under EMCOR’s December 1, 2004-December 1, 2005 Commercial Crime Policy (the “2004 Policy”).

EMCOR’s Commercial Crime Policies

EMCOR maintained three successive one-year commercial crime insurance policies with Factory Mutual from December 1, 1999 to December 1, 2002.  It then maintained three successive one-year policies with Great American from December 1, 2002 to December 1, 2005.  Factory Mutual and Great American are not affiliated.  The last of these policies, the 2004 Policy, included a provision cancelling the 2003-2004 policy (the “2003 Policy”).

The 2004 Policy indemnified EMCOR for employee dishonesty, subject to Condition 14, which provided that Great American would pay “only for loss that [EMCOR] sustain[ed] through acts committed or events occurring during the Policy Period.”  Condition 14 was, in turn, subject to Condition 10, which provided that:

Loss Sustained During Prior Insurance

 If you, or any predecessor in interest, sustained loss during the period of any prior insurance that you … could have recovered under that insurance except that the time within which to discover loss had expired, we will pay for it under this insurance, provided:

 (1)        this insurance became effective at the time of cancellation or termination of the prior insurance; and

 (2)        this loss would have been covered by this insurance had it been in effect when the acts or events causing the loss were committed or occurred.

[emphasis added]

EMCOR asserted that Great American was obligated to indemnify it in respect of losses sustained as far back as December 1, 1999, when Factory Mutual went on risk.  Great American maintained that it was only obligated to cover losses arising from acts that occurred during the 2004 Policy period or the 2003 Policy period (i.e., only fraudulent acts after December 1, 2003).   The competing approaches were based on their differing interpretations of the terms “this insurance”, “any prior insurance” and “the prior insurance” in Condition 10.

The District Court had accepted Great American’s position, noting that, while Condition 10 included the phrase “any prior insurance”, this was qualified by the term “the prior insurance” in Condition 10(a)(1).  This, coupled with the “Cancellation of Prior Insurance” provision on the declarations page of the 2004 Policy, identified the 2003 Policy as “the” prior insurance to which Condition 10 referred.  Accordingly, Great American was liable only in respect of losses arising from fraudulent acts occurring after December 1, 2003.

On appeal, EMCOR contended that the phrase “any prior insurance” unambiguously referred to all prior insurance it maintained, back to 1999, and that the only limitation on Great American’s liability was that such prior policies had to be maintained continuously, without any intervening uninsured period.  EMCOR argued in the alternative that the provision was ambiguous and should be construed against Great American’s position.

The Fourth Circuit affirmed the District Court’s decision, holding that:

Condition 10 obligated Great American to provide coverage for losses based on acts occurring during “any prior insurance” period, but only if “this insurance became effective at the time of cancellation or termination of the prior insurance.”  Nothing in that limiting language suggests that “prior insurance” means any and all commercial crime insurance EMCOR held for all time, regardless of which insurer provided coverage or when such coverage was provided.

The Court also rejected EMCOR’s contention that the term “this insurance” in Condition 10 referred to all of Great American’s policies, as opposed to the 2004 Policy only; by implication, this supported the conclusion that “the prior insurance” meant only the 2003 Policy, rather than all policies covering the December 1, 1999-2004 periods.

The Court concluded that Condition 10 unambiguously applied to limit coverage to only those losses resulting from fraudulent acts occurring during the 2003 and 2004 Policy periods:

Our conclusion is not altered by the general dictionary definitions advanced by EMCOR of the term “insurance” as the “state of being insured,” such that the use of “this insurance” in Condition 10 would include all commercial crime insurance policies EMCOR has had.  Within the four corners of the 2004 policy, the phrase “this insurance” unambiguously refers only to the 2004 policy.  We will not read into the contract EMCOR’s tortured interpretation of the 2004 policy language.  Additionally, because we conclude that the language of the 2004 policy is unambiguous, we do not address EMCOR’s alternative arguments regarding the proper approach for resolving contract ambiguity.

Accordingly, EMCOR had coverage solely for losses sustained after December 1, 2003, by which point the employees’ alleged dishonest conduct had ceased.

Interestingly, while the District Court had mentioned the one-year post-expiry discovery period under the 2003 Policy as support for its conclusion, the Fourth Circuit did not address this issue, basing its decision solely on its interpretation of Condition 10 of the 2004 Policy.

Conclusion

EMCOR Group demonstrates the necessity of careful analysis of prior insurance provisions in loss-sustained forms when dealing with multi-year loss scenarios.  Some other forms of prior insurance or superseded suretyship provisions reflect an intention to provide coverage retroactively for the entire period that an insured has continuously maintained fidelity coverage; Condition 10 of the 2004 Policy did not.  The Fourth Circuit carefully read and distinguished between “any prior insurance” and “the prior insurance”, and refused to find an ambiguity in the latter term merely from the fact that it was used in proximity to the former term.

EMCOR Group, Inc. v. Great American Insurance Company, 2016 WL 304106 (4th Cir.)