Nautilus Survives Motion to Dismiss Property Claim for Business Losses Caused by Rogue Employee in China
In late 2008, Nautilus attempted to terminate the manager of its Shanghai subsidiary, Xu Xiaobin. But Mr. Xu refused to cooperate or turn over key items including the subsidiary's business license and "chop" (carved ink notary stamp), both of which are needed in order to conduct business in China. Mr. Xu even hired his own security detail to overpower the security that Nautilus' U.S. representative had hired to take control of the Shanghai office.
After its U.S. executives were unable to resolve the dispute, Nautilus had to shut down its operations and form a new Chinese subsidiary. That took about 9 months and Nautilus had to write off more than $1 million in accounts receivable for the original subsidiary. Nautilus sought coverage for these related expenses (employee severance, legal fees, etc.) from its property insurer, Allianz. Allianz denied coverage and, after Nautilus filed suit, Allianz moved for judgment on the pleadings.
Judge Benjamin Settle mostly denied Allianz's motion on March 8, 2012. In brief summary, Judge Settle ruled that:
The employee dishonest acts exclusion did not necessarily eliminate coverage because Mr. Xu may not have been an employee at the relevant point in time. In other words, Mr. Xu may have caused the damage after Nautilus terminated him, or at least attempted to do so.
The voluntary parting exclusion did not necessarily apply because there were facts to indicate that Mr. Xu took the property in question without Nautilus' consent or authorization.
The accounts receivable coverage provision is ambiguous such that it should be construed to provide coverage even though Nautilus' inability to collect on accounts was the result of its inability to prove that the underlying transactions occurred.
The direct physical loss requirement in the insuring agreement did not require a physical alteration to the condition of the property. Rather, it was sufficient that Nautilus contended that the equipment had been lost.