Recently, in Construction Contractors Employers Group, LLC v. Federal Insurance Company, the Sixth Circuit Court of Appeals affirmed an adverse ruling against a policyholder over its claim to recover one million dollars that was misappropriated by an employee. Although the plaintiff, Construction Contractors, had an employee theft insurance policy, the defendant insurer, Federal, was able to successfully argue that the one million dollar misappropriation was part of a “single occurrence” which encompassed an earlier loss that the plaintiff had discovered prior to purchasing the insurance policy.
The background: In 2002, Construction Contractors had an agreement with AlphaCare Services, Inc. whereby AlphaCare was to manage the payroll portion of Construction Contractors’ business. In 2012, AlphaCare informed Construction Contractors that it did not have sufficient funds to meet its payroll obligations even though there should have been money for Construction Contractors to do so. Construction Contractors terminated AlphaCare and hired someone to investigate the matter. It was subsequently discovered that one of AlphaCare’s executives had engaged in a pattern of malfeasance, which included wire fraud. Although Construction Contractors was able to trace some of the missing money to the wire fraud, it was unable to locate approximately $1 million that was missing.
Shortly thereafter, Construction Contractors applied for a crime coverage insurance policy to protect against employee theft. After the policy incepted, Construction Contractors discovered that the $1 million that was missing was attributable to the same AlphaCare executive through a scheme of check theft. Once it had made this discovery, Construction Contractors submitted a claim to Federal for the $1 million loss. Federal denied the claim on the ground that the loss was a “single loss” under the policy because it was caused by the same person and also because it was a “known loss” that occurred prior to the policy’s inception date. Construction Contractors filed a lawsuit, but was ultimately unsuccessful at both the trial court and appellate court levels.
The reason: Three policy provisions were implicated in this case. First, Construction Contractors purchased a “Loss Discovered” option, which excluded any loss that Construction Contractors was aware of prior to the policy’s inception date. Second, the policy stated that all loss resulting from a single act or from any number of acts of the same employee would be treated as a single loss. Third, the policy stated that coverage would be available for loss sustained and discovered during the policy period. “Discovered” was defined, in large part, as knowledge acquired by an executive or insurance representative and which would cause a reasonable person to believe that a covered incident had occurred, or that an occurrence had arising during the policy period. The policy explicitly stated that losses could be excluded even if the exact amount or details are not known.
Having considered the policy, the reviewing court did not agree with Construction Contractors that the loss was not “discovered” until Construction Contractors determined the cause of the $1 million loss, or that the loss was not a “single loss” under the policy. Rather, the court agreed with Federal that the loss was a “single loss” because it was committed by the same actor and it also agreed with Federal that Construction Contractors had “derivatively” discovered the check theft when it discovered the wire fraud—even if Construction Contracts did not know the exact amount or the details surround the loss.
The moral of the story: Depending on the policy language, losses that may encompass facts which are unknown in their entirety, but in which the circumstances give rise to a general notice of loss, may result in the forfeiture of coverage if the policy at issue contains language that allows two instances to be bundled into a “single loss” even where some of the facts making up the loss are not known to the policy holder.