The Fifth Circuit recently upheld the dismissal on summary judgment of a policyholder’s claim under a commercial crime insurance policy, affirming the trial court’s narrow interpretation of the terms “owned” and “loss,” concluding that the policyholder did not “own” the funds at issue or suffer a “loss” when it loaned those funds to the fraudsters. In so holding, the court ignored state court precedent concerning construction of those same terms.
In Cooper Industries, Ltd. v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 16-20539 (5th Cir. Nov. 20, 2017), Cooper invested its pension-plan assets into what proved to be a multimillion-dollar Ponzi scheme. Over the course of many years, Cooper invested more than $175 million into various equity and bond investments managed by fraudsters who used the investment funds in furtherance of the Ponzi scheme. After discovering the fraud, Cooper recouped a large portion of its investment and sought coverage from its commercial crime insurer for the unrecovered $35 million. The policy limited coverage to “loss” of property that Cooper “owned.” Neither term was defined in the policy.
The insurer denied coverage and in ensuing litigation moved for summary judgment on the grounds that Cooper’s claim did not establish “loss” of property that was “owned” by Cooper. The trial court granted the insurer’s motion for summary judgment on both issues, holding that Cooper did not “own” its lost earnings within the meaning of the crime policy and that Cooper suffered no “loss” when it loaned funds to the criminals because the fraudulent transfer did not occur until after it relinquished ownership of the funds.
The Fifth Circuit agreed and rejected Cooper’s arguments that the term “own” included equitable ownership, not only legal ownership, and that “loss” occurred at the moment it loaned the principal to the fraudsters, not at some later point in time. Despite Texas state law precedent supporting Cooper’s interpretation of “own” in a number of legal contexts (criminal, tax, trust, forfeiture and takings law), the court based its reasoning on the “common dictionary definition” of “own,” which did not define ownership in equitable terms. In doing so, the court distinguished the Texas precedent by finding that the prior courts’ interpretations of the same terms were in different contexts and, thus, “not helpful in construing the meaning of an everyday or common word used in a contract not controlled by Texas takings law.”
This decision underscores the importance of defining key policy terms, such as “loss.” The decision also highlights the dangers of relying too heavily on so-called “plain meaning,” even where key policy terms have been the subject of prior court decisions, and policyholders should not assume that precedent interpreting the same word or phrase will necessarily trump “common understanding.” Policyholders should therefore be mindful of these issues during policy negotiation, placement and renewal, and consult with knowledgeable brokers or coverage counsel to ensure that their insurance contract reflects their actual coverage intent and expectations.