On October 18, 2016, the U.S. Court of Appeals for the Fifth Circuit released its opinion in Apache Corporation v. Great American Insurance Company.  This is one of the first appellate decisions to consider coverage for a social engineering fraud loss under “traditional” commercial crime policy wording since the widespread introduction of social engineering fraud endorsements.  In holding that the loss did not trigger indemnity under the Computer Fraud coverage, the Fifth Circuit adopted the interpretive approach to Computer Fraud coverage taken by the Ninth Circuit in Pestmaster Services v. Travelers (which we discussed in our August 4, 2016 post) and applied it in the context of social engineering fraud.

The Facts

Apache is an oil production company which is headquartered in Texas and which operates internationally.  In March 2013, an Apache employee in Scotland received a call from a person claiming to be a representative of Petrofac, a legitimate vendor of Apache.  The caller instructed the employee to change the bank account information which Apache had on record for Petrofac.  The Apache employee advised that such a change request would not be processed without a formal request on Petrofac letterhead.

A week later, Apache’s accounts payable department received an email from a @petrofacltd.com email address.  Petrofac’s legitimate email domain name is @petrofac.com.  The email advised that Petrofac’s bank account details had changed, and included as an attachment a signed letter on Petrofac letterhead setting out the old and new account numbers and requesting that Apache “use the new account with immediate effect.”

An Apache employee called the telephone number on the letterhead and confirmed the authenticity of the change request.  Next, a different Apache employee approved and implemented the change.  A week later, Apache was transferring funds for payment of Petrofac’s invoices to the new bank account.

Within a month, Petrofac advised Apache that it had not received payment of approximately $7 million which Apache had transferred to the new account.  Apache recovered some of the funds, but still incurred a net loss of approximately $2.4 million.

The Computer Fraud Coverage

Apache maintained a Crime Protection Policy with Great American, but it does not appear that the policy included social engineering fraud coverage.  Apache asserted a claim under its Computer Fraud coverage, which provided that:

We will pay for loss of, and loss from damage to, money, securities and other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises or banking premises:

 a) to a person (other than a messenger) outside those premises; or

 b) to a place outside those premises.

In Great American’s view, no indemnity was available because the @petrofacltd.com email did not cause the transfers in issue, and because the coverage was limited to losses resulting from hacking and other incidents of unauthorized computer use.

The Fifth Circuit accepted Great American’s position.  Noting that there was no Texas law directly on point, the Court embarked on what it described as a “detailed — but numbing — analysis” of the authorities interpreting the Computer Fraud coverage.  Chief among these was the Ninth Circuit’s recent decision in Pestmaster, in which that Court interpreted the coverage to require an unauthorized transfer of funds, rather than simply any transfer which involved both a computer and a fraud at some point.

The Fifth Circuit contrasted that requirement with the lengthy chain of events that had resulted in Apache’s loss:

Here, the “computer use” was an email with instructions to change a vendor’s payment information and make “all future payments” to it; the email, with the letter on Petrofac letterhead as an attachment, followed the initial telephone call from the criminals and was sent in response to Apache’s directive to send the request on the vendor’s letterhead.  Once the email was received, an Apache employee called the telephone number provided on the fraudulent letterhead in the attachment to the email, instead of, for example, calling an independently-provided telephone contact for the vendor, such as the pre-existing contact information Apache would have used in past communications.  Doubtless, had the confirmation call been properly directed, or had Apache performed a more thorough investigation, it would never have changed the vendor-payment account information.  Moreover, Apache changed the account information, and the transfers of money to the fraudulent account were initiated by Apache to pay legitimate invoices. 

The Court observed that the authorities generally refuse to extend the scope of the Computer Fraud coverage to situations where the fraudulent transfer is not a direct result of computer use, but rather results from other events.

In concluding that no indemnity was available under the Computer Fraud coverage, the Court held that:

The email was part of the scheme; but, the email was merely incidental to the occurrence of the authorized transfer of money.  To interpret the computer-fraud provision as reaching any fraudulent scheme in which an email communication was part of the process would, as stated in Pestmaster…, convert the computer-fraud provision to one for general fraud.  …  We take judicial notice that, when the policy was issued in 2012, electronic communications were, as they are now, ubiquitous, and even the line between “computer” and “telephone” was already blurred.  In short, few — if any — fraudulent schemes would not involve some form of computer-facilitated communication.  [emphasis added]


The Fifth Circuit’s decision in Apache is broadly significant to the fidelity insurance industry not only because, like Pestmaster, it reaffirms the intended scope of the Computer Fraud coverage, but also because it reinforces the purpose behind insurers’ introduction of discrete social engineering fraud coverage in the last few years, i.e., the lack of coverage for social engineering frauds under traditional computer and funds transfer coverages.

The proliferation of social engineering fraud has undoubtedly exposed insureds to greater risk.  However, insurers have responded by underwriting discrete social engineering fraud coverages.  There is no need for courts to depart from the traditional interpretation of computer fraud and funds transfer fraud coverages in order to address this perceived problem, because a solution is already available.

As a practical matter, Apache confirms that insureds need Social Engineering Fraud coverage for these types of  losses.  The decision provides greater certainty on the part of insureds, insurers and brokers as to the intended scope of each coverage, and makes it easier for all industry participants to ensure that insureds obtain the coverages they require for the types of potential losses that they face.

Apache Corporation v. Great American Insurance Company, 2016 WL 6090901 (5th Cir.)

In our April 14, 2015 post, we analyzed the decision of the U.S. District Court for the Western District of Texas in Tesoro Refining & Marketing Company LLC v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania and its implications for what constitutes “unlawful taking” for the purposes of the Employee Theft coverage.  The Fifth Circuit Court of Appeals recently affirmed the District Court’s grant of summary judgment in favour of National Union.

The Facts

The insured (“Tesoro”) was a refiner and marketer of petroleum products.  In 2003, Tesoro began selling fuel to Enmex, a petroleum distributor, on credit.  The manager of Tesoro’s Credit Department, Leavell, managed Enmex’s account.

By late 2007, Enmex’s credit balance had grown to $45 million, and Leavell (and Tesoro’s auditors) became concerned about Enmex’s ability to pay down the outstanding debt.  In discussions with Tesoro’s auditors in December 2007, Leavell represented that the Enmex account was secured by a $12 million letter of credit (LOC).

Between December 2007 and March 2008, a series of documents purporting to be LOCs (and, in one case, a security agreement) were created in Leavell’s password-protected drive on Tesoro’s server.  Leavell provided these to the auditors as evidence of Enmex’s creditworthiness.

By September 2008, the Enmex balance had reached almost $89 million.  In October 2008, a document purporting to be a new $24 million LOC was created on Leavell’s drive.  A PDF version of this document, with a Bank of America logo added, was created a few days later and saved in the Credit Department’s shared folder.

In December 2008, Tesoro presented the $24 million LOC to Bank of America, which confirmed that the LOC was not valid.  Tesoro ceased selling fuel to Enmex, and was not paid for some of the fuel it had already sold.  Tesoro submitted a crime claim to National Union, alleging that Leavell had forged the LOCs and the security agreement, resulting in Tesoro’s loss.

The Employee Theft Coverage

The insuring agreement provided that:

We will pay for loss of or damage to “money”, “securities” and “other property” resulting directly from “theft” committed by an “employee”, whether identified or not, acting alone or in collusion with other persons.

For the purposes of this Insuring Agreement, “theft” shall also include forgery.

“Theft” was defined as “the unlawful taking of property to the deprivation of the insured.”  Unlike some other forms of the theft coverage, National Union’s insuring agreement defined “theft” to include forgery.

Interpreting the Insuring Agreement

Tesoro contended that the District Court erred in holding that an “unlawful taking”, whether by forgery or by other means, was required to create coverage under this insuring agreement.  In Tesoro’s view, the sentence in the insuring agreement addressing forgery created coverage for losses from any employee forgery, irrespective of whether there was any unlawful taking by the employee.

National Union contended that the employee theft insuring agreement always required proof that an “unlawful taking” had occurred, irrespective of the form of that taking.  National Union took the position that the term “include”, as used in the sentence addressing forgery, meant that a forgery that is within the category of “theft” is covered, but the insuring agreement does not create coverage for acts of forgery wholly distinct from “theft”.

The Court accepted National Union’s interpretation, holding that:

Tesoro’s interpretation isolates the sentence addressing forgery from its context.  Context is key and can in part be provided by a document’s title… This insuring agreement is titled “Employee Theft”… When an “Employee Theft” insuring agreement contains a sentence explaining that “theft”, a defined term, shall also include forgery, that sentence is making clear that a forgery that leads to “theft” is covered.

The Court also noted that Tesoro’s proposed interpretation would nullify the “Acts of Employees” exclusion when applied to the Forgery or Alteration insuring agreement.  Such an interpretation would result in the policy excluding all employee forgery involving commercial paper from the Forgery or Alteration insuring agreement, while covering all forms of employee forgery under the Employee Theft insuring agreement.

There was no “Unlawful Taking” by Leavell

Tesoro further contended that, even if it was required to prove an “unlawful taking” under the Employee Theft coverage, it could still do so, insofar as Leavell’s conduct met the requirements of the Texas criminal offence of theft (in particular, theft by deception).  The Court did not endorse Tesoro’s equating of the policy’s “unlawful taking” requirement with any act constituting a theft under state criminal law, but accepted it arguendo for the limited purpose of determining whether summary judgment could be properly granted in favour of National Union.

The Court noted that proving theft by deception would require Tesoro to show that the forged security documents were a substantial or material factor in inducing it to continue selling fuel to Enmex.  The Court held that the available evidence did not support that conclusion.  Indeed, Tesoro had continued selling fuel to Enmex during periods in which it knew that the receivable was not secured.  Thus, Tesoro could not demonstrate that it was induced to do anything differently as a result of the alleged deception.  On that basis, the Court held that summary judgment had been properly granted to National Union.


For those Employee Theft coverages that include forgery within the meaning of theft, the Fifth Circuit’s decision in Tesoro Refining provides guidance as to how to interpret and apply the provision, including ascertaining whether the alleged forgery actually induced the insured to do anything it would not have done in the absence of the forgery.  The Court’s finding on causation is significant, notwithstanding that it came in the context of analyzing the Texas criminal offence of theft by deception.

As a general observation, we suggest that caution be exercised in relying on criminal law provisions and concepts as an interpretive guide to fidelity policies.  In Tesoro Refining, the Court made it clear that it was analyzing the Texas provision solely because Tesoro had advanced the argument as a basis for denying summary judgment to National Union.  Other courts in the United States and Canada have cautioned against too easily equating fidelity coverage concepts and criminal law concepts.  In Iroquois Falls Community Credit Union Limited v. Co-operators General Insurance Company, for example, the Court of Appeal for Ontario overturned the motions court’s grant of summary judgment to an insured credit union, specifically rejecting the holding that the credit union had to have notice of criminal conduct before it was obligated to put its insurer on notice. 

More broadly, the Court’s overall interpretive approach (reading and interpreting the policy as a whole, including the headings and related insuring agreements and exclusions) is of assistance to fidelity insurers in rebutting arguments which seek to create ambiguity by interpreting a particular sentence (or even a subset of words within a sentence) without regard to the intended scope of coverage as evidenced by the headings and related insuring agreements and exclusions in the policy.

Tesoro Refining & Marketing Company LLC v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, 2016 U.S. App. LEXIS 13838 (5th Cir.)

In our January 6, 2015 post, we analyzed the decision of the U.S. District Court for the Central District of California in Pestmaster Services, Inc. v. Travelers Casualty and Surety Company of America and its implications for the interpretation of the Computer Fraud and Funds Transfer Fraud coverages.  On July 29, 2016, the Ninth Circuit Court of Appeals released a brief opinion affirming the District Court’s interpretations of these coverages.

The Facts

Pestmaster, a pest control business, was insured under a Travelers Wrap+ policy.  In 2009, Pestmaster hired a payroll company, Priority 1, to handle its payroll and payroll tax obligations.  Pestmaster executed an ACH authorization which authorized Priority 1 to obtain payment of Priority 1’s approved invoices by initiating ACH transfers of funds from Pestmaster’s bank account to Priority 1’s bank account.  These amounts included both payroll and payroll taxes, the latter of which Priority 1 was supposed to remit to the IRS.

In 2011, Pestmaster discovered that Priority 1 had failed to remit $373,000 in payroll taxes, and had instead diverted these funds to its own uses.  Pestmaster sought indemnity from Travelers under both its Funds Transfer Fraud and Computer Fraud coverages.

Funds Transfer Fraud

The Funds Transfer Fraud coverage indemnified Pestmaster for direct loss of money or securities contained in its transfer account on deposit at a financial institution, directly caused by Funds Transfer Fraud.  Funds Transfer Fraud was defined as:

an electronic, telegraphic, cable, teletype or telephone instruction fraudulently transmitted to a Financial Institution directing such institution to debit your Transfer Account and to transfer, pay or deliver Money or Securities from your Transfer Account which instruction purports to have been transmitted by you, but was in fact fraudulently transmitted by someone other than you without your knowledge or consent …

The Ninth Circuit affirmed the District Court’s holding that the Funds Transfer Fraud insuring agreement does not cover transactions that are authorized by the insured:

… Pestmaster argues that the transfer of funds from its bank account to Priority 1’s bank account is covered by the Funds Transfer Fraud provision.  The district court found that this provision “does not cover authorized or valid electronic transactions … even though they are, or may be, associated with a fraudulent scheme.” We agree that there is no coverage under this clause when the transfers were expressly authorized.

Computer Fraud

The Computer Fraud coverage indemnified Pestmaster for direct loss of money, securities or other property directly caused by Computer Fraud, i.e., the use of a computer to cause a transfer of money, securities or other property from inside the insured’s premises or the insured’s bank’s premises.  The Ninth Circuit interpreted Travelers’ wording as requiring an unauthorized transfer, which is consistent with the Computer Fraud jurisprudence requiring an element of unauthorized access or a “hacking” incident.  The Ninth Circuit continued:

When Priority 1 transferred funds pursuant to authorization from Pestmaster, the transfer was not fraudulently caused.  Because computers are used in almost every business transaction, reading this provision to cover all transfers that involve both a computer and fraud at some point in the transaction would convert this Crime Policy into a “General Fraud” Policy.  While Travelers could have drafted this language more narrowly, we believe protection against all fraud is not what was intended by this provision, and not what Pestmaster could reasonably have expected this provision to cover.  [emphasis added]

As such, coverage was not available in respect of the authorized transfers.

The Court remanded to the District Court the narrow issue of whether two individual transactions, made shortly before the discovery of the fraud and totalling $11,991, were unauthorized transfers.


The Ninth Circuit’s decision in Pestmaster provides an endorsement of fidelity insurers’ intentions as to the proper scope of the Computer Fraud and Funds Transfer Fraud coverages.  The Court’s observation with respect to the Computer Fraud coverage is of particular significance, insofar as it represents one of the clearest articulations as to how the merely-incidental involvement of a computer at some stage in a fraudulent transaction is insufficient to trigger indemnity.  Insureds often point to such merely-incidental involvement of a computer in attempting to bring a loss within the Computer Fraud coverage, even though this is not the intended scope of the coverage, and notwithstanding that there are other products (such as Social Engineering Fraud coverage) which may respond to certain types of losses involving authorized computer transfers.

Pestmaster Services, Inc. v. Travelers Casualty and Surety Company of America, 2016 WL 4056068 (9th Cir.)

On July 8, 2016, the U.S. District Court for the Western District of Washington released its decision in Aqua Star (USA) Corp. v. Travelers Casualty and Surety Company of America.  The decision offers guidance to fidelity insurers with respect to the application of the “authorized entry” exclusion found in the base wording of many commercial crime policies (sometimes referred to as the “authorized access” exclusion), and illustrates how this exclusion may operate in the context of a social engineering fraud loss.

The Facts

The insured, Aqua Star (USA) Corp. (“Aqua Star”), is a seafood importer that had a pre-existing relationship with a legitimate vendor, Zhanjiang Longwei Aquatic Products Industry Co. Ltd. (“Longwei”).  In the summer of 2013, Longwei’s computer system was hacked.  The hacker apparently monitored email exchanges between an Aqua Star employee and a Longwei employee before intercepting those email exchanges and using “spoof” email domains to send fraudulent emails to the Aqua Star employee.  In the spoofed emails, the hacker directed the Aqua Star employee to change the bank account information Aqua Star had on record for Longwei for future wire transfer payments.

The Aqua Star employee inserted the revised banking information into Aqua Star’s computer system.  This revised information was then used to create Wire Confirmation Detail instructions that were transmitted to Aqua Star’s bank, the Bank of America.  As a result, $713,890 was wired to the hacker’s account before the fraud came to light.

The Travelers Coverage

Aqua Star maintained a Wrap+ Crime Policy with Travelers.  The policy covered Aqua Star for its “direct loss of, or direct loss from damage to, Money, Securities, and Other Property directly caused by Computer Fraud”, as defined.  Travelers relied on Exclusion G to the policy, which provided that the policy:

will not apply to loss resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the Insured’s Computer System. 

As a general observation, this type of exclusion is intended to encompass (among other things) social engineering fraud losses.  At present, social engineering fraud coverage is typically added to commercial crime policies by endorsement, with the endorsement providing that the exclusion in the base wording does not apply in respect of coverage afforded by the endorsement.  The intent is to reinforce that only social engineering fraud coverage, and not the “traditional” computer or funds transfer fraud coverages, responds to social engineering fraud losses.

It is not clear from the Court’s decision whether Aqua Star also maintained social engineering fraud coverage.

The Decision

On the parties’ cross-motions for summary judgment, the Court confined itself to the question of whether Exclusion G applied to the loss, and did not opine on whether the loss fell prima facie within coverage.  The Court held that, on its face, Exclusion G clearly applied to the facts.  The “revised” banking details were information, which fell within the meaning of “Electronic Data”.  The employee in question was a natural person and had the authority to enter banking details into Aqua Star’s computer system.  As a result, the exclusion applied.

Aqua Star advanced two substantive arguments in an effort to avoid the application of the exclusion.  First, Aqua Star asserted that the exclusion did not apply because, in order to initiate the wire transfers, an Aqua Star employee had to enter data into the computer system of a third party (i.e., its bank, the Bank of America).  The Court rejected this contention, observing that:

Although entering data into a third party’s computer system may have been the final step that led to Aqua Star’s loss, necessary intermediate steps prior to the transfer involved entering Electronic Data into Aqua Star’s own Computer System. Aqua Star does not explain why the involvement of a third party computer system would render Exclusion G inapplicable.

Second, Aqua Star contended that Exclusion G was actually intended to preclude coverage where a fraud is perpetrated by an authorized user of an insured’s computer system, such as an employee or legitimate customer.  The Court did not accept this argument either, but did note that:

the clear language of the policy does not limit the exclusion to fraud perpetrated by an authorized user, although … it certainly could apply in that situation [as well]. 

As a result, Exclusion G applied to the loss.


In providing a detailed analysis of Exclusion G to the Travelers Wrap+ policy, Aqua Star reflects the intended boundary between social engineering fraud coverage and “traditional” computer fraud and funds transfer fraud coverages.  Courts have generally interpreted the computer fraud coverage as being intended to cover loss due to unauthorized hacking by third parties (see, for example, Pestmaster, which we discussed in our January 6, 2015 post), not employees’ authorized entries of data that are induced by external fraud.

To address this perceived gap, many insurers have introduced social engineering fraud endorsements to respond to the latter scenario.  The “authorized entry” exclusion reinforces insurers’ intent that the two coverages respond to different loss scenarios.  In our view, it is appropriate to keep this context in mind in assessing both the applicability of “authorized entry” exclusions and the dividing line between social engineering fraud coverage and other coverages.

Aqua Star (USA) Corp. v. Travelers Casualty and Surety Company of America, 2016 WL 3655265 (W.D. Wash.)

In Telamon Corp. v. Charter Oak Fire Ins. Co., the U.S. District Court for the Southern District of Indiana held that a Vice-President of Major Accounts who provided management and marketing services to a telecommunications company was not an “Employee” within the meaning of the employee theft coverage afforded by its Travelers Wrap+ policy, but rather an independent contractor.

The Facts

The insured, Telamon Corporation (“Telamon”), is a telecommunications company headquartered in Indiana.  Telamon installed telecommunications equipment for customers such as AT&T.  The alleged defaulter, Juanita Berry, operated a one-person telecommunications consulting company, J. Starr Communications, Inc. (“J. Starr”).

Pursuant to a Consulting Services Agreement dated June 1, 2005 between Telamon, Berry and J. Starr, and subsequent renewals thereof (the “CSAs”), J. Starr agreed to provide Berry’s services to Telamon.  The CSAs specifically provided that Berry provided these services as an independent contractor.  Berry initially worked with Telamon as a senior sales consultant, primarily due to her existing relationship with AT&T.  In 2007, Berry transitioned into an account management role, and oversaw sales and installation projects for AT&T and other accounts.

In 2009, Berry assumed the title of Vice-President of Major Accounts and, in that capacity, was the most senior representative of Telamon’s Dayton, New Jersey facility.  Consistent with her title, she had “operational oversight” with respect to that facility, including engineering, installation, warehouse inventory management and other responsibilities.  Telamon allowed Berry to hold meetings with clients, hire and fire Telamon personnel, set employee salaries and approve expenses.  She also had access to Telamon’s project accounting software, which permitted her to review and manage projects for which she was responsible.

Meanwhile, commencing in 2007, Berry spearheaded Telamon’s “AT&T Asset Recovery Program”, through which Telamon removed old telecommunications equipment from AT&T sites and returned it to Telamon facilities.  Unbeknownst to Telamon executives, Berry also allegedly directed Telamon employees to package and ship the equipment to a Florida company known as WestWorld Telecom (“WestWorld”).

In 2010, Telamon accounting personnel discovered unusual updates in Telamon’s project accounting system, including purchases being charged to jobs for which the material charged was not compatible.  These entries were traced back to Berry.  A subsequent physical inventory of the Dayton warehouse revealed that a significant amount of telecommunications equipment was missing.  Subsequent investigation revealed Berry’s alleged diversion of this equipment to WestWorld, and payments by WestWorld to J. Starr, rather than to Telamon.

The Employee Theft Coverage

Telamon terminated Berry and submitted claims to its crime insurer, Travelers, and its property insurer, Charter Oak Fire, for over $5 million.  Travelers declined coverage on the basis that Berry was not an “Employee” within the meaning of the crime coverage.  The relevant portions of the definition provided that:

Employee means …

 any natural person . . . who is leased to the Insured under a written agreement between the Insured and a labor leasing firm, while that person is subject to the Insured’s direction and control and performing services for the Insured. …

 Employee does not mean

 any … independent contractor or representative or other person of the same general character not specified in paragraphs 1. through 5., above.

Travelers reasoned that the CSAs made it clear that Berry worked as an independent contractor, and that J. Starr could not reasonably be considered to be a labour leasing firm.  Telamon disputed Travelers’ position, contending that J. Starr was a labour leasing firm because it had provided Berry’s consulting services to Telamon in exchange for payments; as Berry was a “leased employee”, the exception for independent contractors could not apply.

On Travelers’ and Telamon’s cross-motions for summary judgment, the District Court rejected Telamon’s contentions.  The Court examined non-fidelity authority on the interpretation of the term “labor leasing firm”, finding that it meant a company that is in the business of placing its employees at client companies for varying lengths of time in exchange for a fee.  The Court concluded that J. Starr was not such a company:

There is nothing in the CSAs to support Telamon’s interpretation of J. Starr as a labor leasing firm.  The CSAs that governed Berry’s employment identify J. Starr and Berry as the “Consultant” and “independent contractor,” and expressly state that “[t]he personnel performing services under this Agreement [i.e., Berry] shall… not be employees of [Telamon].”

 Moreover, the evidence establishes that J. Starr was a one-person consulting company in the business of selling telecommunications equipment to, inter alia, WestWorld Telecom.  Indeed, Telamon’s Chief Operating Officer, Stanley Chen, testified that J. Starr and Berry sold telecommunications equipment before, during, and after Berry’s involvement with Telamon.  Berry provided sales consulting services primarily aimed at Telamon’s major client, AT&T.  Thus, J. Starr was not in the business of providing employees to client companies in exchange for a fee and was not, therefore, a “labor leasing firm” within the meaning of the Travelers Crime Policy.  Instead, Berry was an independent contractor pursuant to the terms of her employment with Telamon.  Telamon even admits this fact.  Therefore, Berry falls outside the coverage grant for theft by “Employees” under the Crime Policy.  [citations omitted]

As a result, the Travelers policy did not afford coverage in respect of Berry’s alleged acts.


Telamon provides a good illustration of the employee-independent contractor distinction found in most crime policies.  The decision demonstrates the importance of assessing whether an alleged defaulter comes within the definition of “Employee” in a theft claim; here, Berry was held out by Telamon as a Vice President, and exercised considerable power over Telamon’s operations and personnel, but performed these duties as an independent contractor.  With more work relationships moving away from the traditional employment contract model, it is essential that fidelity claims professionals ensure that the precise legal status of the alleged defaulter’s work relationship with the insured is established as part of the coverage analysis.

Telamon also provides specific guidance with respect to the meaning of “labor leasing firm” and, arguably, similar terms used in other fidelity coverages.  Although J. Starr did, in the narrowest and most technical sense, supply its (only) worker to another company for payment, the Court rejected Telamon’s attempts to characterize J. Starr as a labour leasing firm, instead focusing on the clear provisions of the CSAs to the effect that Berry served as an independent contractor, rather than as an employee.  This finding is of assistance to fidelity claims professionals who are confronted with creative arguments which attempt to bring similarly-situated workers within the definition of “Employee”.

Telamon Corp. v. Charter Oak Fire Ins. Co. and Travelers Cas. and Surety Co. of Am., 1:13-cv-382-RLY-DML (S.D. Ind. December 10, 2015) [Note: this decision recently came to our attention and does not appear to be accessible online; please contact us if you would like a copy.]

Blaneys Fidelity Year in Review

In 2015, American and Canadian courts released a number of decisions of interest to fidelity claims professionals.   We are pleased to present Blaneys Fidelity Year in Review, which provides summaries of the decisions that appeared on Blaneys Fidelity Blog in 2015.  Blaneys Fidelity Year in Review is available here.

Blaneys Podcast: Fidelity Subrogation and Fraud Recovery

For those fidelity claims professionals dealing with fraud recovery and subrogation in Canada, the Blaneys Podcast series now features our podcast on fraud recovery and fidelity subrogation.  The podcast sets out the different strategies available for identifying and pursuing fraud recovery targets and for maximizing recoveries from defaulters, beneficiaries, co-conspirators, auditors and financial institutions.  The podcast is available here; SoundCloud users may access the podcast here.

Fidelity at the OBA: A Primer on Insurance Coverage (Toronto, May 12, 2016)

The Ontario Bar Association is presenting a program on insurance coverage issues on May 12 in Toronto.  Blaneys’ Chris McKibbin will be presenting on Computer Fraud and Funds Transfer Fraud Coverages in Fidelity and Commercial Crime Policies.  The program also includes presentations on recent developments regarding the duty of good faith and the duty to defend; the “lack of fortuity” defence; and a perspective from the Bench, presented by the Honourable Mr. Justice Jamie K. Trimble.  Co-chairs Laura Hodgins of Liberty and Andrew Mercer of Mercer Law have assembled a fantastic group of speakers, and the program is eligible for four substantive hours of CPD credit.  The program agenda is available here.

On February 18, 2016, the U.S. District Court for the Northern District of California released its decision in Western Alliance Bank v. National Union Fire Insurance Company of Pittsburgh, Pa.  The Court dismissed a creditor bank’s direct action against a fidelity insurer for indemnity in respect of alleged thefts by the debtor insured’s employees of assets over which the bank held a security interest.  The decision reinforces the first-party nature of commercial crime coverage and is consistent with other recent U.S. and Canadian case law on “third party direct actions” against fidelity insurers.

The Facts

Sorrento Networks GmbH (“Sorrento”) carried on business in the fibre optic industry.  In 2011, Sorrento granted a security interest in all of its personal property (including insurance proceeds) to Western Alliance Bank (the “Bank”).

In January 2014, Sorrento’s president announced that the company was going out of business, and asked all employees worldwide to leave company property where it was.  The next month, Sorrento’s president attended at Sorrento’s office in Stuttgart, Germany, only to find that almost all of the company’s property was missing.

The Bank sued Sorrento’s crime insurer, National Union, contending that the property must have gone missing as a result of employee theft and that, because the Bank held a continuing security interest over both those assets and any insurance proceeds accruing to Sorrento, it was entitled to recover its loss from National Union.

The National Union Coverage

Under the terms of its Commercial Crime Policy, National Union agreed to indemnity Sorrento for “loss of or damage to … ‘other property’ resulting directly from ‘theft’ committed by an ‘employee’” and “for loss of or damage to ‘other property’” resulting from either a “robbery” or a “safe burglary.”

The policy included a non-assignment clause, which provided that the insured’s “rights and duties under this policy may not be transferred without [National Union’s] written consent.”  The policy also stated that “this policy is for [the insured’s] benefit only”; that “[i]t provides no rights or benefits to any other person or organization”; and that “[a]ny claim for loss that is covered under this policy must be presented by” the insured.

National Union brought a preliminary motion to challenge the Bank’s right to assert the claim.  The District Court granted National Union’s motion, with leave to the Bank to amend its pleading.  The Court’s reasoning rests on two conclusions:

  • The Bank’s Security Interest extended to Insurance Proceeds, not the Insurance Policy: The Court noted that, while the Bank held a security interest over insurance proceeds owing to Sorrento, it did not hold a security interest over the policy itself. A creditor’s claim to insurance proceeds conferred by a security agreement is not the same as a creditor’s right to bring an action on its debtor’s behalf.  The security interest alone did not confer standing on the Bank to pursue the claim.
  • There was No Valid Assignment of the Policy (nor could there be): The Court held that the Bank could not sue as assignee of Sorrento’s benefits under the policy, for the simple reason that Sorrento did not assign those rights to the Bank (nor could it have done so, given the non-assignment provision in the policy).

The Court also rejected the Bank’s claim for breach of the implied covenant of good faith and fair dealing, holding that, without contractual privity or a valid assignment, the Bank lacked standing to pursue this claim.

The Court granted leave to the Bank to amend, but the general tenor of the decision suggests that it might be difficult for the Bank to amend in such a way as to assert a cognizable cause of action against National Union.

A Canadian Comparison

“Third party direct actions” have been successfully challenged in Canada on the basis of standing.  A 2013 Ontario decision, Swinkels, dealt with this issue in the context of an alleged investment advisor fraud.  The plaintiff invested funds with an advisor who, she alleged, had stolen the funds.  The plaintiff commenced a direct action against the fidelity insurer of one of the companies to which the advisor had been connected.

The decision involves numerous complex issues (including the advisor’s status as an alleged alter ego of the insured), but the Court made it clear that the bond in issue was intended to provide first-party indemnification, rather than third-party liability coverage, and that the bond would not respond absent: (i) the insured sustaining the underlying loss; and, (ii) the insured bringing the corresponding claim for indemnification.  The Court granted summary judgment dismissing the plaintiff’s action.


Generally speaking, fidelity insurance is a form of first-party property insurance; as such, third parties lack standing to assert a direct claim.  Although third party direct actions are becoming increasingly rare, they still arise from time to time.  However, U.S. and Canadian courts appear to generally accept that such claims are misconceived, in that they try to convert fidelity insurance into a form of third-party coverage.

Western Alliance Bank featured an added twist, in that the Bank held a security interest over any insurance proceeds accruing to Sorrento.  However, the District Court distinguished between an interest in insurance proceeds and an interest in the policy itself in holding that the Bank lacked standing to assert a claim under Sorrento’s Commercial Crime Policy.

Western Alliance Bank v. National Union Fire Insurance Company of Pittsburgh, Pa., 2016 WL 641648 (N.D. Cal.)

In EMCOR Group, Inc. v. Great American Insurance Company, the Fourth Circuit Court of Appeals applied a prior insurance provision in a Commercial Crime Policy to restrict coverage to only the immediate prior year that the insured maintained fidelity coverage, rather than the previous five years, as asserted by the insured.  The decision highlights the importance of properly analyzing and applying prior insurance provisions in loss-sustained forms in multi-year loss scenarios.

The Facts

EMCOR is a construction and building maintenance company.  In 2005, it reported a $10 million employee dishonesty loss to Great American in respect of allegedly fraudulent acts of employees occurring between December 1, 1999 and December 1, 2003.  This loss was reported under EMCOR’s December 1, 2004-December 1, 2005 Commercial Crime Policy (the “2004 Policy”).

EMCOR’s Commercial Crime Policies

EMCOR maintained three successive one-year commercial crime insurance policies with Factory Mutual from December 1, 1999 to December 1, 2002.  It then maintained three successive one-year policies with Great American from December 1, 2002 to December 1, 2005.  Factory Mutual and Great American are not affiliated.  The last of these policies, the 2004 Policy, included a provision cancelling the 2003-2004 policy (the “2003 Policy”).

The 2004 Policy indemnified EMCOR for employee dishonesty, subject to Condition 14, which provided that Great American would pay “only for loss that [EMCOR] sustain[ed] through acts committed or events occurring during the Policy Period.”  Condition 14 was, in turn, subject to Condition 10, which provided that:

Loss Sustained During Prior Insurance

 If you, or any predecessor in interest, sustained loss during the period of any prior insurance that you … could have recovered under that insurance except that the time within which to discover loss had expired, we will pay for it under this insurance, provided:

 (1)        this insurance became effective at the time of cancellation or termination of the prior insurance; and

 (2)        this loss would have been covered by this insurance had it been in effect when the acts or events causing the loss were committed or occurred.  [emphasis added]

EMCOR asserted that Great American was obligated to indemnify it in respect of losses sustained as far back as December 1, 1999, when Factory Mutual went on risk.  Great American maintained that it was only obligated to cover losses arising from acts that occurred during the 2004 Policy period or the 2003 Policy period (i.e., only fraudulent acts after December 1, 2003).   The competing approaches were based on their differing interpretations of the terms “this insurance”, “any prior insurance” and “the prior insurance” in Condition 10.

The District Court had accepted Great American’s position, noting that, while Condition 10 included the phrase “any prior insurance”, this was qualified by the term “the prior insurance” in Condition 10(a)(1).  This, coupled with the “Cancellation of Prior Insurance” provision on the declarations page of the 2004 Policy, identified the 2003 Policy as “the” prior insurance to which Condition 10 referred.  Accordingly, Great American was liable only in respect of losses arising from fraudulent acts occurring after December 1, 2003.

On appeal, EMCOR contended that the phrase “any prior insurance” unambiguously referred to all prior insurance it maintained, back to 1999, and that the only limitation on Great American’s liability was that such prior policies had to be maintained continuously, without any intervening uninsured period.  EMCOR argued in the alternative that the provision was ambiguous and should be construed against Great American’s position.

The Fourth Circuit affirmed the District Court’s decision, holding that:

Condition 10 obligated Great American to provide coverage for losses based on acts occurring during “any prior insurance” period, but only if “this insurance became effective at the time of cancellation or termination of the prior insurance.”  Nothing in that limiting language suggests that “prior insurance” means any and all commercial crime insurance EMCOR held for all time, regardless of which insurer provided coverage or when such coverage was provided.

The Court also rejected EMCOR’s contention that the term “this insurance” in Condition 10 referred to all of Great American’s policies, as opposed to the 2004 Policy only; by implication, this supported the conclusion that “the prior insurance” meant only the 2003 Policy, rather than all policies covering the December 1, 1999-2004 periods.

The Court concluded that Condition 10 unambiguously applied to limit coverage to only those losses resulting from fraudulent acts occurring during the 2003 and 2004 Policy periods:

Our conclusion is not altered by the general dictionary definitions advanced by EMCOR of the term “insurance” as the “state of being insured,” such that the use of “this insurance” in Condition 10 would include all commercial crime insurance policies EMCOR has had.  Within the four corners of the 2004 policy, the phrase “this insurance” unambiguously refers only to the 2004 policy.  We will not read into the contract EMCOR’s tortured interpretation of the 2004 policy language.  Additionally, because we conclude that the language of the 2004 policy is unambiguous, we do not address EMCOR’s alternative arguments regarding the proper approach for resolving contract ambiguity.

Accordingly, EMCOR had coverage solely for losses sustained after December 1, 2003, by which point the employees’ alleged dishonest conduct had ceased.

Interestingly, while the District Court had mentioned the one-year post-expiry discovery period under the 2003 Policy as support for its conclusion, the Fourth Circuit did not address this issue, basing its decision solely on its interpretation of Condition 10 of the 2004 Policy.


EMCOR Group demonstrates the necessity of careful analysis of prior insurance provisions in loss-sustained forms when dealing with multi-year loss scenarios.  Some other forms of prior insurance or superseded suretyship provisions reflect an intention to provide coverage retroactively for the entire period that an insured has continuously maintained fidelity coverage; Condition 10 of the 2004 Policy did not.  The Fourth Circuit carefully read and distinguished between “any prior insurance” and “the prior insurance”, and refused to find an ambiguity in the latter term merely from the fact that it was used in proximity to the former term.

EMCOR Group, Inc. v. Great American Insurance Company, 2016 WL 304106 (4th Cir.)

On January 14, 2016, the U.S. District Court for the Northern District of Ohio released its decision in National Credit Union Administration Board v. CUMIS Insurance Society, Inc., following a trial that focused on the issue of the application of the termination provision in a fidelity bond issued to a credit union.  The Court held that, based on facts known to the president of the credit union’s Board of Directors, the provision applied to terminate coverage.  The decision is significant in that knowledge of the manager’s dishonesty was effectively imputed to the president, even though the president was not aware of any one specific dishonest act by the manager.  The more traditional view is that the termination clause is triggered only by subjective knowledge of dishonesty (in contrast with discovery provisions, which are typically based on a “reasonable person” standard).  The Court’s decision in NCUAB v. CUMIS suggests that, in some cases, an objective standard may implicitly be applied to a supervisor’s subjective knowledge for the purposes of the termination provision.

The Facts

In 1989, St. Paul Croatian Federal Credit Union (“SPC”) hired Anthony Raguz as a loan officer.  Raguz worked his way up and became manager in 1996.  SPC provided real estate, motor vehicle and other forms of secured loans.  Historically, SPC had had a delinquency rate of approximately 1 to 2 per cent.

In 2000, Raguz began making fraudulent loans in exchange for kickbacks.  Many of these loans quickly became delinquent.  To conceal this, Raguz began to manipulate SPC’s books to ensure that the loans would not be recorded as delinquent, so as to avoid having to report them to SPC’s Board and to SPC’s regulator, the National Credit Union Administration (“NCUA”).  Raguz engaged in several forms of concealment:

  • Covering Loans: to cover a loan, Raguz would create a loan for a fictional entity and then use those loan proceeds to make payments on delinquent (or imminently delinquent) loans, thus keeping them off reports to NCUA;
  • Resetting Loans: Raguz would take an existing loan balance, plus accrued interest, and “reset” it as a new loan. Removing the interest component would keep the loan off certain delinquency reports; and,
  • Burning Loans: making the loans appear to have been paid off by setting up another fraudulent transaction.

Raguz’s concealment had the effect of ensuring that the reports provided to the Board and to NCUA recorded a delinquency rate of zero, for the entire loan portfolio, for the entire period from 2002 to 2010.  Each month during that period, Raguz reported the zero delinquency rate to the Board, and provided the Board with fraudulent reports to substantiate that figure.

SPC’s loan portfolio expanded at a tremendous rate, growing from $42 million in 2001 to $240 million in 2010.  At some point, the Board became concerned about the rapid expansion of the loan portfolio, and asked Raguz for a breakout of each loan and the nature of the security held.  Raguz refused to provide this information, and the Board did nothing to discipline him.  The Board also expressed concerns with respect to the reported zero delinquency rate and asked Raguz about it “from time to time” but “never got a straight answer.”

In early 2010, NCUA began to have concerns about SPC’s operations.  In April 2010, NCUA put SPC into conservatorship and liquidated it.  NCUA then submitted a claim to CUMIS under SPC’s bond.  CUMIS denied the claim on several bases, including the ground that the president of the Board, Robert Calevich (“Calevich”), had been aware that Raguz had reported zero delinquencies on all loans, of all types, since 2002 and that Raguz failed to respond to the Board’s repeated inquiries concerning the zero delinquency rate, the volume of loans, and specific details of particular types of loans.

The CUMIS Coverage

The CUMIS bond carried coverage for Employee Dishonesty which included a provision providing coverage for fraudulent loans in certain limited circumstances.  The focus of the trial was on the bond’s termination provision:

Termination Or Limitation Of Coverage For Employee Or Director 

This Bond’s coverage for an “employee” or “director” terminates immediately when one of your “directors,” officers or supervisory staff not in collusion with such person learns of … [a]ny dishonest or fraudulent act committed by such “employee” or “director” at any time, whether or not related to your activities or of the type covered under this Bond; … 

Termination of coverage for an “employee” or “director” … terminates our liability for any loss resulting from any act or omission by that “employee” or “director” occurring after the effective date of such termination.

At trial, CUMIS contended that Calevich’s knowledge of the historical delinquency rates (1 to 2 per cent), coupled with Calevich’s failure to follow up on the Board’s requests for explanations from Raguz in the face of Raguz’s implausible representations, amounted to knowledge of Raguz’s dishonesty.

NCUA made two counterarguments.  First, NCUA contended that, as a factual matter, there were no “delinquencies” because Raguz’s manipulations ensured that no loan, as recorded on SPC’s books, ever went into delinquency.  Thus, when Raguz told the Board that there were no delinquencies to report, he was, technically speaking, not being dishonest.  The Court rejected this argument as “circular logic”, holding that, irrespective of Raguz’s manipulations, there were reportable delinquencies throughout the relevant time period, and that Raguz’s false reports to the Board were “dishonest in every sense of the word.”

NCUA also contended that, although Raguz made implausible representations to the Board, the Board did not learn of Raguz’s fraudulent loans until 2010, with the result that the termination provision was not engaged until then.  The Court rejected this argument as well, holding that the termination provision was broader than the indemnity provision and extended to any dishonest or fraudulent act, whether or not related to SPC’s activities and whether or not covered by the bond.  In this regard, the Court’s reasoning mirrors the 2009 decision of the Court of Appeal for Ontario in Iroquois Falls Community Credit Union.

The Court then got to the nub of the case, i.e., whether knowledge of Raguz’s dishonesty could effectively be imputed to Calevich based on what amounted to wilful blindness.  CUMIS did not point to any one specific delinquent loan known to Calevich.  However, the Court carefully weighed Calevich’s evidence at trial and noted that:

Calevich … testified that, during the entire seven year time period that he served as St. Paul’s secretary/treasurer … there were delinquencies at St. Paul.  The Board, including Calevich, became concerned when the reported delinquencies suddenly “stopped.”  This was because, based on his long-time experience as a Board member, Calevich “knew in fact there had to be at least some delinquencies” at St. Paul.  The Board was so concerned, in fact, that it raised this issue directly with Raguz “from time to time,” which implies the Board questioned Raguz regarding the zero delinquency rate on more than one occasion.  Raguz, however, never provided a “solid answer that [the Board] could rely on.”

 Taken as a whole, the above testimony and evidence shows that Calevich knew Raguz was falsely representing that St. Paul had a zero delinquency rate in financial reports to the Board.  [citations omitted]

As a result, the termination provision applied in respect of Raguz.


The Court’s decision in NCUAB v. CUMIS calls to mind the White Queen of Lewis Carroll’s Through the Looking-Glass, who claimed that she could believe “six impossible things before breakfast”.  Although CUMIS could not point to any one specific dishonest act known to Calevich, the evidence supported the finding that Calevich had to have known that Raguz’s representations and reports to the Board were implausible, to the point of impossibility.  Based on this, the Court was willing to conclude that there was sufficient knowledge of dishonesty to engage the termination provision.  NCUAB v. CUMIS provides fidelity claims personnel with an example of a court willing to bridge the gap between a known fact and a fact that certainly (or almost certainly) must be true, based on other available evidence.  The result suggests that a court may be prepared to use an objective test to decide whether knowledge of dishonesty can effectively be imputed on this basis.

National Credit Union Administration Board v. CUMIS Insurance Society, Inc., 2016 WL 165379 (N.D. Ohio)

Guest Co-Author: John Tomaine

The recent decision of the U.S. District Court for the District of New Jersey in Frazier Industrial Company v. Navigators Insurance Company provides a useful example of judicial analysis of the Employee Theft coverage in the context of a bid-rigging scheme between an insured’s employee and an outside contractor.  The Court analyzed the plain wording of the Commercial Crime Policy in issue to find that, although kickbacks paid to the employee by the contractor represented a covered Employee Theft loss, the portion of the excess payments retained by the contractor was not covered.

The Facts

Frazier Industrial (“Frazier”) was a manufacturer of structural steel storage systems.  Frazier’s sales to its customers included installation services, which Frazier typically contracted out to independent contractors.  The independent contractor’s price was included in Frazier’s quote to its customer, and the customer paid Frazier for both sales and installation.  CTC was one independent contractor utilized by Frazier.

In March 2011, Frazier learned that its Vice President – Operations, identified as “JMG”, had engaged in a bid-rigging scheme with CTC whereby:

(i)         JMG identified projects with considerable profit margins;

(ii)        if CTC’s bid for the project was substantially below Frazier’s internal budget, JMG would inform CTC that it could increase its bid (and by how much), while still winning the contract; and,

(iii)       JMG approved the inflated bid and CTC would split the padded amount with JMG, after it was paid by Frazier.

Frazier alleged that the padded sums amounted to at least $1,938,000 and that, of this, JMG received over $960,000 from CTC.

The Employee Theft Coverage

Frazier maintained a Commercial Crime Policy with Navigators which contained the following Employee Theft insuring agreement:

We will pay for loss of or damage to “money”, “securities” and “other property” resulting directly from “theft” committed by an “employee”, whether identified or not, acting alone or in collusion with other persons.

“Theft” was in turn defined as “the unlawful taking of property to the deprivation of the Insured.”

Frazier contended that the entire amount of its loss was covered by the Policy, insofar as JMG had colluded with CTC in the bid-rigging scheme and Frazier had incurred a loss as a result.  Navigators’ position was that the portion of the funds retained by CTC did not constitute an unlawful taking by JMG and that, consequently, that portion of the loss did not come within coverage.

The Court held that it was necessary to first assess coverage in respect of the excess amounts paid by Frazier to CTC and then, secondly, the portion paid by CTC to JMG.  With respect to the amount paid by Frazier to CTC, the Court reviewed the case law on payments to third parties induced by dishonest employees (including Tesoro Refining, which we discussed in our April 14 post), and observed that:

Courts have generally found that payments to third-parties do not qualify as a “loss” under commercial crime policies.  This is the case even where the employer’s loss was as a result of the employee colluding with the third party.  In finding so, courts rely on the understanding that such payments are not an “unlawful taking” by the employee and are, therefore, outside the scope of the policies.  In cases where courts have found a loss under the policy, the entire transaction was a fraudulent setup by the employee and the insured never received the good or service from the third-party, thus negating the employer’s authorization.  [citations omitted]

In the Court’s view, the bid-rigging scheme, which involved the provision of actual services albeit at inflated prices, was not a fraudulent setup from the outset, and Frazier had received some benefit.  The fact that JMG exercised control over the bidding process did not change this conclusion.  Thus, the Court concluded that the excess payments to CTC did not constitute an Employee Theft loss:

Frazier bought insurance from Navigators to protect it from employee theft, not against a less favorable deal from a deceitful contractor. … Frazier does not assert that the underlying transaction was fraudulent and that the independent contractor did not perform its work. … In addition, Frazier has not argued nor demonstrated that CTC’s bids were either unreasonably priced or not the lowest for a particular job — the latter likely to be the case otherwise JMG’s choice of CTC would have raised suspicions.  Rather, Frazier set an internal budget and expected that any independent contractor it chose would make a profit on their service. As such, Frazier was not “unknowingly deprived of money.”  Consequently, the “loss” that Frazier claims here is — at its core — an inability to obtain the lowest price, and that is not a basis to raise a claim under the Crime Policy.  [citations omitted]

The Court reached a different conclusion with respect to CTC’s payments to JMG, holding that the payments to JMG were not payments to a third party and that Frazier had not consented to such payments.  The Court concluded that:

In each case, Frazier authorized a payment intended only for CTC, as compensation for the respective installation.  JMG’s scheme resulted in him receiving a portion of these payments, fraudulently profiting from compensation that Frazier did not intend for him.  Thus, the employee’s actions are no different than if he inflated the bids himself and skimmed a portion off-the-top, before forwarding the payments on to the unsuspecting contractor. … Put another way, the payment to CTC was merely a pretext for JMG to receive his share.  Consequently, the fact that JMG had the money pass through an intermediary prior to reaching his pocket does not change the fundamental nature of the employee’s actions — an “unlawful taking” — nor its effect — to the “deprivation of the insured.”  [citations omitted]

The Court briefly considered, and rejected, the application of the indirect loss exclusion to the CTC loss, holding that, on the wording of the exclusion there in issue, there was no “inability to realize income that [Frazier] would have realized had there been no loss of or damage to ‘money.’”  The exclusion might have applied, had Frazier been seeking income it could have realized from the profits taken by the employee (such as interest).  However, no such claim was advanced.


Frazier Industrial provides an example of the distinction that may be drawn between employee benefits and third-party benefits in bid-rigging and similar schemes, and demonstrates the importance of careful factual analysis of the flow of funds in a dishonest scheme involving benefit to both an employee and a third party.  The decision is also instructive in distinguishing between schemes which involve a real transaction through which the insured receives some actual benefit, and schemes which are wholly fraudulent and fictitious from the outset.

[Editors’ Note: Our guest co-author, John Tomaine, is the owner of John J. Tomaine LLC, a fidelity insurance and civil mediation consultancy in New Jersey.  After over thirty-one years with the Chubb Group of Insurance Companies, he retired as a Vice President in 2009.  He is an attorney admitted in Connecticut and New Jersey, and holds a Master’s Degree in Diplomacy and International Relations.  He is available to serve as an expert witness in fidelity claim litigation and to consult on fidelity claim and underwriting matters.]

Frazier Industrial Company v. Navigators Insurance Company, 2015 WL 8134055 (D.N.J.)