Crime Coverage — Who Is an Employee and Who Is an Authorized Representative?
In a recent case, a parent company took out a crime insurance policy for itself and its subsidiaries. When a property manager for its subsidiary stole funds through forged checks over several years, the policyholder sought a recovery under the crime insurance policy. Unfortunately for the policyholder, there was no insurance coverage.
In C.S. McCrossan Inc. v. Federal Insurance Co., No. 18-1949 (8th Cir. Aug. 6, 2019), the parent policyholder obtained a crime policy for employee theft and forgery. The coverage grants required the insurance company to pay the parent for direct loss of money sustained by an insured resulting from theft or forgery committed by an employee and from forgery or alteration of a financial instrument committed by a third party. The policy excluded coverage for loss committed by any authorized representative of an insured.
Two companies owned commercial rental properties. Each had agents managing the properties. Those agents, in turn, hired a management company to actually manage the properties. One of the companies also retained the same management company directly. The owner of the management company had an administrative person (who happened to be the daughter of the owner and principal) handle many of the management duties. She was also the primary user of the property management computer system, the sole copy of which was on her computer. But, she did not have check writing/signing authority.
It turns out that the administrative person for several years stole substantial sums from the two companies that owned the rental properties by faking invoices and forging the principal’s signature on checks payable to the administrative person. After being caught and pleading guilty to fraud charges, the parent company submitted a claim to the insurance company seeking coverage for the losses. The insurer denied the claim and the policyholder sued. Summary judgment motions were made by both sides and the district court granted summary judgment to the insurance company. The circuit court affirmed.
In affirming, the circuit court agreed with the district court that one of the two companies that owned the rental properties was not an insured. That company was wholly-owned by an individual connected to the policyholder, but was not owned or controlled by the policyholder. As the court stated, “Ownership and common management by [policyholder] individuals, even [policyholder] board members, does not meet [the ownership and control test to be an insured].” Because it was not a subsidiary, it was not an insured.
As to the other company, the insurer conceded that it was an insured because it was a subsidiary. But the court held that the “authorized representative” exclusion applied. The district court found and the circuit court agreed that the thief was an authorized representative of the insured company. Applying relevant Minnesota precedent, the court found that the company had made the management company its agent and that the company knew that the thief worked for the management company on its accounts and did not object to her working there. The court held that the exclusion unambiguously applied in these circumstances, where the company empowered the thief to act on its behalf, which enabled her crime.
The court discussed the limits of this exclusion, because not every employee working for an authorized representative is also an authorized representative. Here, the court outlined the facts that made her an authorized representative, including all the duties that she had in managing the property on behalf of the management company and that she was principally in charge of the sole copy of the property management system on her computer. The insured company’s witness also testified that she knew the thief was responsible for co-managing the properties. Accordingly, held the court, her role at the management company authorized her to conduct the activities that led to her crimes, so the exclusion applied. The court noted that the exclusion applied to acts committed by any authorized representative, not just authorized representatives with authority to sign checks. The court also concluded that while exclusions are construed narrowly against the insurer, viewing the record most favorably to the policyholder, the authorized representative exclusion unambiguously excluded coverage because of the thief’s acts as the management company’s authorized representative.
Finally, the court rejected coverage under the employee theft coverage grant because the thief, while an authorized representative of the company, was not an employee of the company. In sum, concluded the court, none of the thief’s acts were covered by the plain and ordinary meaning of the insurance policy.