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The Eighth Circuit Court of Appeals affirmed this week that Travelers Casualty and Surety Company did not have to cover Tactical Stop-Loss's losses stemming from a major shareholder's criminal scheme.
Tactical Stop-Loss and an affiliate (the Tactical Group) administer trust accounts for insurance companies that provide stop-loss coverage to employee benefit-plan sponsors. Tactical Group purchased a Crime Policy (Policy) from Travelers Casualty and Surety Company insuring against loss from theft or forgery by an employee "acting alone or in collusion with other persons."
The policy excluded losses resulting "directly or indirectly from any fraudulent, dishonest or criminal act by ... an Officer-Shareholder, whether acting alone or in collusion with others." Officer-Shareholder was defined as any officer who has a 25 percent or greater ownership interest.
Tactical Group's former Chief Executive Officer, James E. Fox, a 40 percent shareholder, fraudulently transferred $930,104.31 from Tactical Group's operating account to his personal bank account with the assistance of Chief Operating Officer Terry M. Griffith, who was not a shareholder.
Griffith confronted Fox in 2006 after she noticed transfers from Tactical Group's operating account to an unknown bank account. Fox admitted he was transferring money to his personal account. Rather than blow the whistle, Griffith helped Fox conceal his ongoing embezzlement in exchange for a better salary and jobs for her family members. Tactical Group discovered the loss and submitted an indemnity claim under the Policy in April 2008, a few days after Fox committed suicide.
The sworn Proof of Loss stated that the cause of loss was "Griffith acting either alone or in collusion with Fox to misappropriate company funds and funds belonging to the Company's clients." In an earlier Notice of Claim letter, Tactical Group explained that its claim was not based on Fox's actions "as we realize that said loss is excluded." However, "evidence that we have now uncovered demonstrates that Griffith not only aided and abetted Fox in stealing from [Tactical Group and clients] but that her conduct was intentional and unlawful, both by her silence and her affirmative acts."
The district court concluded that the Officer-Shareholder exclusion unambiguously denies coverage for the loss, even if caused in part by employee Griffith's dishonesty, because the undisputed evidence shows that "acts alleged to have been committed by Griffith were all part of her active participation" in Fox's criminal scheme, and the Officer-Shareholder exclusion unambiguously excludes "losses attributable to the Officer-Shareholder [Fox] and the 'other' colluding with him."
The Eighth Circuit Court of Appeals agreed, noting that the Officer-Shareholder exclusion includes losses "resulting directly or indirectly" from the Officer-Shareholder's dishonesty, reflecting a clear intent to exclude such a loss even if the colluder's acts were a "but for" cause.
Do you agree with the Eighth Circuit that the Travelers policy precludes coverage for a theft or forgery indemnity claim because Griffith acted with Fox to embezzle from the company?