All Loss Attributable to Employee Misconduct Constitutes a Single Loss, Outside the Scope of Policy Period, Rules Sixth Circuit
08.15.16
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(Article from Insurance Law Alert, July/August 2016)
For more information, please visit the Insurance Law Alert Resource Center. The Sixth Circuit ruled that all loss caused by one employee’s misconduct was a “single loss” under an employee-theft policy and that there was no coverage under the policy because the employer had “discovered” the loss prior to executing the insurance policy. Constr. Contractors Emp’r Grp., LLC v. Federal Ins. Co., 2016 WL 3675572 (6th Cir. July 11, 2016).
Construction Contractors provided payroll, tax and other administrative services to subscribing construction companies. In 2012, various financial discrepancies were discovered, leading to an internal investigation. The investigation revealed that a particular employee had committed wire fraud and approximately $1 million remained unaccounted for. In 2013, Construction obtained a crime coverage policy from Federal. The policy covered losses “sustained at any time and Discovered during the Policy Period,” but excluded “any loss that an Insured is aware of prior to the inception date of [the] policy.” The policy also contained a “Limits of Liability” provision, which stated that all loss resulting from a single act or any number of acts from the same employee are treated as a single loss subject to the applicable limit of liability.
Several months after the policy incepted, Construction discovered that the same employee had committed check theft and was responsible for the missing $1 million. Based on this discovery, Construction submitted a claim to Federal, which denied coverage. An Ohio federal district court ruled in Federal’s favor, concluding that all loss caused by the employee was a single loss under the policy and that Construction was aware of the loss before the policy’s inception date. The Sixth Circuit affirmed, rejecting Construction’s argument that the Limits of Liability provision operates only to cap covered losses to the $1 million policy limit, rather than define whether the policy covers a loss.