A federal court in North Carolina recently found the employee theft coverage in a crime coverage policy to be ambiguous and thus construed the coverage broadly in favor of the insured. Colony Tire Corp. v. Fed. Ins. Co., 2016 WL 6683590 (E.D. N.C. Nov. 14, 2016).
The insured, an automotive parts retailer, filed a claim with its insurer after the principals of a company the insured hired to handle the insured’s payroll and taxes embezzled money from the insured. The policy’s employee theft insuring clause provided coverage for loss of money sustained by the insured “resulting from theft or forgery committed by an employee,” which was defined to include “any contractual independent contractor.” The term “contractual independent contractor” was defined to require a written contract between the insured and either a natural person who undertakes to perform the services or “an entity acting on behalf of such a natural person independent contractor.” Since the contract for payroll and tax services was with the corporation, and not the principals, the question was whether the corporation was “acting on behalf of” the principals when it contracted with the insured such that the corporation qualified as a “contractual independent contractor.”
Central to the court’s analysis was the construction of the undefined term “acting on behalf of.” The court opined that the phrase could reasonably indicate either of two meanings — acting “within the scope of a formal agency relationship” or acting “for the benefit” of another. It concluded that the phrase was thus ambiguous and construed it broadly in favor of the insured to include either meaning. The court concluded that because the purpose of the corporation’s existence was to facilitate the principals’ embezzlement and enable their lavish lifestyles, the corporation was “acting on behalf of” the principals when it contracted with the insured. Thus, the court concluded, the principals were “contractual independent contractors” and the monetary loss was covered under the policy’s employee theft coverage.