Affirming a Michigan district court decision, the Sixth Circuit ruled that a fidelity policy covering loss resulting “directly” from employee theft required an immediate and/or uninterrupted causal connection between the theft and the insured’s loss, rather than proximate causation. Applying this so-called “direct is direct” approach, the court concluded that an insured company was not entitled to fidelity coverage for theft-related losses sustained by a limited liability corporation controlled by the insured, and from which the insured received a significant portion of its income. Tooling, Mfg. & Techs. Ass’n v. Hartford Fire Ins. Co., 2012 WL 3931802 (6th Cir. Sept. 11, 2012).
TMTA, the insured company, controlled and derived a sizable portion of its income from a separate limited liability corporation (“LLC”). Although TMTA procured employee theft coverage from Hartford, the LLC was not listed as a named or additional insured under the policy. Therefore, following an incident of theft from the LLC, Hartford denied coverage on the grounds that its policy did not cover the LLC’s losses. At the center of the ensuing coverage dispute was interpretation of the term “directly” in the provision that required the insured’s loss to result “directly” from theft. TMTA argued that its injury was direct because it was a natural and unavoidable consequence of the theft from the LLC. In contrast, Hartford argued that the injury was indirect, because the losses were sustained by the LLC, rather than TMTA. The district court granted summary judgment in favor of Hartford and the Sixth Circuit affirmed.
The Sixth Circuit concluded that the employee’s theft of funds from the LLC did not “directly” result in loss to TMTA, no matter how closely aligned the two entities were. In so ruling, the court applied a “direct is direct” approach, rejecting a more lenient proximate cause standard. Noting a split across jurisdictions on this issue, the court joined the “weight of the authorities” in defining “direct” as “immediate” under Michigan law.
This ruling contrasts with two other recent Sixth Circuit decisions, both decided under Ohio law. In Retail Ventures, Inc. v. National Union Fire Ins. Co., 2012 WL 3608432 (6th Cir. Aug. 23, 2012), the Sixth Circuit rejected a “direct means direct” approach and instead held that the phrase “resulting directly from” in a commercial crime insurance policy imposed a traditional proximate cause standard. And in First Defiance Financial Corp. v. Progressive Cas. Ins. Co., 688 F.3d 265 (6th Cir. 2012) (discussed in our September 2012 Alert), the Sixth Circuit held that fidelity policies issued to financial institutions provided coverage for the theft of funds from client brokerage accounts by an employee.