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New Jersey Appellate Division Limits Gentilini Ford

November 5, 2013

A recent decision from the New Jersey Appellate Division has important implications for fidelity insurance policies as they relate to limits of liability for employee dishonesty coverage, appearing to limit the holding in Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 854 A.2d 378, 181 N.J. 245 (2004), to its specific facts.

In its 2004 Gentilini Ford opinion, the New Jersey Supreme Court construed a commercial property insurance policy so as to allow the insured to recover the limit of coverage for each instance of fraud in a common scheme. The policy contained a $5,000 limitation of liability for employee dishonesty claims per “occurrence.” It provided that all loss “(1) Caused by one or more persons; or (2) Involving a single act or series of related acts; is considered one occurrence.”

At issue in Gentilini was the application of the above-quoted language to the acts of a single dishonest employee who, by assisting customers in submitting fraudulent loan applications, caused the insured to finance and sell 27 automobiles to non-creditworthy customers. 

The Gentilini court held that the 27 sales “did not involve ‘a single act or series of related acts,’ but were distinct sales to separate purchasers, for separate automobiles,” noting that, in each instance, the “purchaser and the terms of each sale are unique[.]” In so holding, the Gentilini court rejected any analogy between the facts of the case before it and “the myriad of embezzlement-type cases” from other jurisdictions in which courts have found a single “occurrence” where “an employee steals cash or checks from an employer as part of an ongoing scheme to defraud.” The Gentilini court, however, did not expressly state whether New Jersey courts should follow a single-occurrence approach in “embezzlement-type cases.”

On October 15, 2013, in North Fullerton Surgery Center v. Franklin Mutual Insurance Co., ___ A.3d ___, ___ N.J. Super. ___, 2013 WL 5762560 (N.J. Super. A.D. 2013), a New Jersey intermediate appellate court appears to have resolved the issue, and further appears to limit the holding of Gentilini Ford to its facts and policy language. In New Jersey, a published decision of the Appellate Division has the force of binding precedent upon trial-level courts (unless contradicted by another Appellate Division decision or until overruled by the Supreme Court).

The loss in North Fullerton Surgery Center was caused by the insured’s dishonest bookkeeper/office manager, who had authority to buy supplies, sign checks, handle cash and use the insured’s credit card. Over the course of five years, this dishonest bookkeeper made transfers from the insured's checking account to her own bank account, self-dealing credit card purchases and outright thefts of cash, totaling in excess of $1 million.

The insured had purchased a “Businessowners Policy” with a “business personal property” limit of $1,000,000. According to its basic terms, the policy did not cover the loss of “money” and it expressly excluded loss due to the dishonest acts of employees, “except to the extent otherwise specifically provided” in the policy. Employee dishonesty coverage was added by an endorsement, which provided that the insurer

will pay up to the limit of liability shown above, your loss of money, securities and other business personal property because of dishonest or fraudulent acts involving your employees (whether acting alone or in collusion with others). A series of similar or related acts is one occurrence.

A blank space appeared in the policy next to the words “Limit of Liability.” The declarations page, however, stated that the coverage limit for employee dishonesty was $10,000 per occurrence.

Under these facts and policy language, the insurer was willing to pay $10,000 toward the loss. The insured, however, argued that it should be able to recover up to $1 million, relying in part upon Gentilini Ford. Rejecting that argument, and affirming summary judgment in favor of the insurer, the North Fullerton court held that the employee’s embezzlements constituted a single “occurrence” under the plain terms of the policy, and that the policy’s single $10,000 limit of liability for employee dishonesty applied.

In so holding, the North Fullerton court opined that the holding in Gentilini Ford

clearly did not intend to globally apply to all insurers’ employee dishonesty coverages. Indeed, the [Gentilini] Court went out of its way to recognize that conventional, incremental embezzlement losses – as in the present case – are quite unlike the unique losses of twenty-seven, high value pieces of business inventory caused by the dealership's disloyal employee.

The North Fullerton court also distinguished the policy before it from that at issue in Gentilini Ford in two important ways.

First, the applicable dollar limitation of liability for employee dishonesty claim in North Fullerton appeared upon the policy’s declarations page. On that point, the court noted that “New Jersey courts place particular emphasis on an insurance policy’s declaration page when determining the reasonable expectations of the insured,” and quoted an earlier New Jersey Supreme Court decision for the proposition that such “reasonable expectations of coverage raised by the declaration page cannot be contradicted by the policy’s boilerplate unless the declaration page itself so warns the insured.” This is a very important limitation upon the reach of Gentilini, because fidelity insurance policies recite single-occurrence limitations of liability (and single-occurrence deductibles) on their declarations pages. Such limitations and deductible are central to the parties’ bargain and directly impact upon the premium charged. If an insured desires a higher coverage limit, it is generally available for a higher premium. If the insured does not do so, courts are less apt to accept creative interpretational arguments aimed at achieving levels of coverage that the insured elected not to purchase.

Second, the North Fullerton court observed that, unlike the policy language in Gentilini, the policy before the court “definitively and unambiguously states, ‘[a] series of similar or related acts is one occurrence’” (emphasis supplied by the North Fullerton court). The court found that “[t]here is nothing unclear about this description . . . .” Applying that language, the court observed that the continuous embezzlements by the subject employee were “not so attenuated or unusual that the insured could have expected those acts to be unrelated.” The fact that the appellate court took what seems to be a minor difference between this language in the North Fullerton policy and the similar language in Gentilini and relied upon it, at least in part, to distinguish Gentilini, seems to demonstrate how New Jersey courts may be seeking to confine the holding in Gentilini.

In any event, barring contrary advice from the New Jersey Supreme Court, it appears that New Jersey courts will hold that Gentilini Ford is not applicable to the typical claim made against employee dishonesty coverage, where the employee’s dishonesty causes the employer to part with cash (or the like) through an ongoing scheme over a period of time. The application of Gentilini Ford must be limited to the unique circumstance where each time the employee perpetrates his or her scheme, separate property is transferred to a separate recipient under separate terms.

For more information, please contact:
Armen Shahinian, Chair, Fidelity and Surety Group | (973) 530-2002 |
Adam P. Friedman, Member of the Firm | (973) 530-2029 |
Andrew S. Kent, Counsel | (973) 530-2054 |