Last December, the Quebec Court of Appeal set the record straight regarding the number of occurrences under a fidelity bond[1].

The decision dealt with an insured, Comité paritaire de l'industrie des services automobiles de la région de Montréal ("CPA"), which became aware of a fraud committed by one of its employees: its director of financial services and material resources created three different accounts in which he deposited substantial sums qualified as vacation pay. He then instructed a third party payroll company to issue cheques made payable to him. From 1988 to 2009, nearly $2m were diverted.

CPA was insured by Northbridge General Insurance Corporation ("Northbridge") under a policy, which was renewed from 1998 to 2009. Each of the policies included fidelity coverage. Following the discovery of the fraud, CPA notified Northbridge of the loss and sought an indemnity under the policies' fidelity coverage.  When Northbridge denied coverage, CPA filed an action in which it claimed the payment of an indemnity of over $1m, representing the sums stolen by its employee during the multiple policy periods.

At trial, Northbridge contended that the embezzled money was excluded. According to the policies, the insurer agreed to indemnify the insured for any loss of money due to the actions of a dishonest employee who had the manifest intent to gain financial benefits other than salaries, commissions, fees, compensatory salaries or any other benefits earned by the employee in the normal course of employment. As the embezzled money was made out to the dishonest employee as vacation pay, Northbridge argued that the loss was excluded.  

This argument was rejected on the fact that the embezzlement of funds by the employee was held not to have been perpetrated “in the normal course of his employment”. The trial judge held that there was nothing "normal" in the planning and execution of the scam.

Northbridge was however successful in arguing that CPA was only entitled to one policy limit of $100,000 per occurrence on the basis that the fraud constituted a single occurrence, even though the employee's fraudulent actions were perpetrated over nearly eleven years during which fidelity coverage was provided. The trial judge concluded that the policy clearly and unambiguously stipulated that a series of fraudulent acts will be considered as a single occurrence, and awarded the insured the sum of $100,000.

Both parties appealed. CPA contended that the judge erred in finding that the fraud constituted a single occurrence. Northbridge argued that the trial judge erred in refusing to apply the exclusion regarding financial benefits earned in the normal course of employment.

The Court of Appeal dismissed Northbridge’s arguments. It held that the exclusion could not apply to the dishonest act of an employee which took advantage of his position in the insured's organization to conceal the fraudulent deposits, but was rather intended to prevent coverage for claims in cases of employer-employee quarrels involving entitlement to salary, commission or benefit, i.e. risks that are under the internal control of the insured. As the so-called vacation pay at issue constituted ill-gotten gains for the employee, they were found to not be within the purview of the exclusion clause.

The Court of Appeal reviewed the policy and held that the fidelity coverage offered one limit of $100,000 per occurrence. "Occurrence" was defined as a "loss caused by, or involving, one or more "employees", resulting from a single act or a series of acts". The policy further stipulated that "if an employee perpetrates many thefts or diversions that are similar or related, or if more than one employee are involved therein, [the insurer] will consider those acts as a single loss" and contained a non-stacking provision where an occurrence takes place in consecutive policy periods. Accordingly, the Court found that the trial judge did not err in awarding the indemnity of $100,000 to CPA.

In its reasons, the Court referred to the British Columbia Court of Appeal decision in Kofsky v. Zurich Insurance Company, 2000 BCCA 664, which found that such a limitation to coverage is just and reasonable since "[t]he risk that the insured may be the subject of a long term scheme of fraud by an employee properly belongs to the insured because the employer is in the best position to prevent or discover employee dishonesty."  Consequently, CPA's appeal was also dismissed.

In light of this decision, you must as an employer keep your eyes peeled, and check your fidelity coverage limits!