Why it matters

Which party—the insured or the insurer—bears the loss caused by the inevitable delays that occur when a potentially liable third party does not accept responsibility for a loss suffered by the insured and covered by its policy, as well as the costs and risks of pursuing such claims? According to a new opinion from the Texas Court of Appeals, the policy puts the burden on the insurer. Lloyd’s of London declined to pay for a $16 million theft, arguing that the insured was required to exhaust all possible remedies against the thief before turning to its policy. But combined with a two-year limit for insureds to bring suit when a claim has been denied, the court said the insured should be paid now with the insurer bearing the loss until the third parties (possibly) pay up.

Detailed Discussion

Cardtronics owns and operates ATMs. Pursuant to a series of contracts, Cardtronics leased money from Bank of America, which was transported by Mount Vernon Money Center, an armored car company.

Mount Vernon’s president had other ideas, however, and stole millions of dollars from Cardtronics and other clients. When the theft – estimated to be around $50 million, $16 million of which came from Cardtronics – was discovered in 2010, Cardtronics notified its insurer, Lloyd’s of London.

Seeking recovery of its $16 million, Cardtronics requested payment from Lloyd’s. The policy required that the insurer accept or reject the claim within 15 days or extend the deadline for additional time to reach a decision. Lloyd’s repeatedly extended the deadline without rejecting Cardtronics’ claim for more than one year before finally refusing to pay.

Although the policy provided coverage for contingent cash in transit as well as losses resulting from theft, the insurer pointed to a provision regarding armored motor vehicle companies. Subparagraph E.4.A. provided that Lloyd’s would only pay for the amount of loss of contingent cash in transit that Cardtronics “cannot recover” under its agreement with an armored motor vehicle company or under any insurance carried either by that company or on behalf of its customers.

To comply with a two-year deadline in the policy, Cardtronics filed suit against Lloyd’s in Texas state court. The insured argued that it could not recover from Mount Vernon (which had filed for bankruptcy) or its insurers before the deadline lapsed, and so it was impossible for Cardtronics to exhaust its remedies.

Lloyd’s response: The applicable policy provision was contingent in nature and therefore it was not contractually responsible to pay anything until all possible remedies had been exhausted. The appellate court disagreed.

Although the insurer argued that “the Cardtronics policy is explicitly ‘contingent’ on an inability to recover from other sources,” the court said that “the policy does not contain such an express requirement.”

“Further, all insurance is contingent, explicitly or implicitly, on the insured’s experience of an actual loss that cannot be recovered immediately. If Cardtronics had recovered the stolen money and incurred no other losses before filing a proof of claim, then Cardtronics would not be entitled to a recovery from [Lloyd’s],” the court wrote. “But those are not the facts before us, and there is nothing in the policy language that requires Cardtronics to exhaust every possibility of recovery to establish that it ‘cannot recover’ under its contract with Mount Vernon or through any insurance policies purchased by Mount Vernon.”

In fact, the policy only required Cardtronics to bring one lawsuit – a case against the insurer within two years of discovery of the loss. Lloyd’s argument that policy coverage was not triggered until the amount of loss was conclusively determined was unreasonable, the panel wrote.

“[B]ecause the policy is silent as to a deadline for when Cardtronics must demonstrate what it ‘cannot recover’ before payment from [Lloyd’s] is triggered, the ‘conclusive determination’ language urged by [Lloyd’s] interpretation is unduly restrictive and too stringent a test,” the court said.

Cardtronics clearly suffered a compensable loss, the panel said, and the policy required the insured to pursue its claim even with uncertainty regarding its amount. The insured could not harmonize the exhaustion requirement with the two-year deadline for filing suit, the court determined, adding that Lloyd’s retained its subrogation rights and could pursue any claims upon Cardtronics’ later receipt of funds from third parties.

“[W]e hold that ‘cannot recover’ applies at the time of the proof of loss, which gives meaning to all provisions of the policy and therefore is not unreasonable,” the panel said. “Contracts should be interpreted to avoid rendering a provision meaningless, such as the deadlines imposed by the policy. It is therefore reasonable to interpret subparagraph E.4.A’s ‘cannot recover’ to mean ‘cannot recover at the time the insured submits its proof of loss within 120 days of when the insured learns of the loss.’”

To read the decision in Certain Underwriters at Lloyd’s of London v. Cardtronics, click here.