On March 9, 2017, the Seventh Circuit Court of Appeals released its decision in Telamon Corporation v. Charter Oak Fire Insurance Company. The decision affirms the ruling of the U.S. District Court for the Southern District of Indiana, which had held that the insured’s Vice-President of Major Accounts was not an “employee” within the meaning of a crime policy, as her services were provided to the insured by an outside entity pursuant to a series of consulting services agreements (see our April 25, 2016 post for more detail).

The Facts

Juanita Berry worked for Telamon from 2005 to 2011. Her work was governed by a series of Consulting Services Agreements (the “Agreements”) between Telamon and J. Starr Communications, Berry’s one-woman company through which she provided her services. The terms of the Agreements remained largely unchanged during Berry’s six-year association with Telamon. Her role did not. Berry’s responsibilities expanded well beyond those described in the Agreements, and she eventually became Telamon’s Vice-President of Major Accounts, making her the company’s senior manager in the New York and New Jersey region.

In that capacity, Berry oversaw Telamon’s AT&T Asset Recovery Program, which was supposed to remove old telecommunications equipment from AT&T sites and sell it to salvagers. Berry removed the equipment and sold it, but she pocketed the profits. By the time that Telamon discovered this conduct in 2011, it had incurred $5.2 million in losses. Telamon fired Berry and she was later convicted of wire fraud and tax evasion.

The Employee Theft Coverage

Telamon submitted a claim under its Travelers Wrap+ crime policy and, separately, to its property insurer, Charter Oak. Travelers concluded that there was no coverage available under the crime policy in respect of Berry’s conduct because Berry was not an employee within the meaning of the policy. The relevant portions of the definition provided that:

Employee means …

any natural person . . . who is leased to the Insured under a written agreement between the Insured and a labor leasing firm, while that person is subject to the Insured’s direction and control and performing services for the Insured. …

Employee does not mean

any … independent contractor or representative or other person of the same general character not specified in paragraphs 1. through 5., above.

Travelers reasoned that the Agreements made it clear that Berry worked as an independent contractor, and that J. Starr could not reasonably be considered to be a labour leasing firm. Telamon disputed Travelers’ position, contending that J. Starr was a labour leasing firm because it had provided Berry’s consulting services to Telamon in exchange for payments; as Berry was a “leased employee”, the exception for independent contractors could not apply. The District Court accepted Travelers’ position and granted summary judgment dismissing the claim. Telamon appealed.

Before the Seventh Circuit, Telamon asserted that the plain meaning of a “labor leasing firm” is a company “in the business of placing its employees at client companies for varying lengths of time in exchange for a fee”; in Telamon’s view, all that it needed to demonstrate was that J. Starr was a business concern that sold another person’s work for a specified time and for a specified fee.

The Seventh Circuit held that, even accepting that definition, J. Starr could not reasonably come within it:

We will accept that definition for purposes of this opinion. Yet even so, we cannot conclude that J. Starr meets it. It is true that the Agreements were contracts between Telamon and J. Starr under which the former obtained the right to Berry’s labor. But J. Starr was not a firm in the business of leasing labor; it was just Berry’s vehicle for providing her own services. To classify her corporate alter ego as a “labor leasing firm” would be to elevate form over substance.

The cases Telamon cites to support its position underscore our point. The “labor leasing firm” in Pacific Employers had multiple branches and specialized “in providing industrial clients with daily workers.” … Similarly, the firm in Torres “hire[d] individuals and place[d] them with client companies for varying lengths of time,” including at least six with the company litigating its insurance coverage. … There is no way to squeeze J. Starr into the same box. Berry’s company was a legal convenience, and nothing more. Because it was not a “labor leasing firm,” she was not an “Employee” for purposes of the Travelers policy. [citations omitted]

Consequently, no coverage was available under the Travelers policy.

Conclusion

Telamon provides useful appellate guidance on the employee-independent contractor distinction found in most crime policies. The Seventh Circuit’s decision reinforces the importance of assessing whether an alleged defaulter comes within the definition of “Employee” in a theft claim. In this case, Berry was held out by Telamon as a Vice-President and exercised considerable power over Telamon’s operations and personnel, but performed these duties as an independent contractor. With more work relationships moving away from the traditional employee-employer model, fidelity claims professionals must ensure that the precise legal status of the alleged defaulter’s work relationship vis-à-vis the insured is established as part of the coverage analysis.

Telamon also provides specific guidance with respect to the meaning of “labor leasing firm” and, arguably, similar terms used in other fidelity coverages. Although J. Starr did, in the narrowest and most technical sense, supply its (only) worker to another company for payment, the Court rejected Telamon’s attempts to characterize J. Starr as a labour leasing firm, even accepting Telamon’s proposed definition of the term for the purposes of the analysis. This finding is of assistance to fidelity claims professionals who must address creative arguments which attempt to bring similarly-situated workers within the definition of “Employee”.

Telamon Corporation v. Charter Oak Fire Insurance Company, 2017 WL 942656 (7th Cir.)