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Limits of Liability



Tracey Santor is Vice President, Fidelity and Field Operations with St. Paul Travelers in Hartford, Connecticut. Armen Shahinian is a member, and Andrew S. Kent is an associate, with Wolff & Samson PC in West Orange, New Jersey.

I. Introduction

Fidelity policies do not always cover the full dollar amount of an insured's loss. At the most basic level, coverage under fidelity policies is often subject to a deductible. Coverage is also subject to a specified limit of liability. The insured cannot recover from its insurer the deductible amount or any covered loss that exceeds the applicable limit of liability. Other policy terms may further limit the type of loss covered and the total amount recoverable under the policy. Determining the limits of the insurer's potential liability is a threshold matter in handling and responding to a fidelity claim.

This chapter discusses common policy provisions that limit or affect the insurer's potential liability for fidelity claims, including provisions that: (i) apply a deductible and a limit of liability for a single loss or occurrence; (ii) prevent or restrict multiple recoveries for losses sustained during consecutive policy periods; (iii) limit coverage to loss incurred during specified time periods (i.e., "loss sustained" policies); and (iv) restrict or limit coverage for loss covered by other insurance. How such policy provisions will apply with respect to a given claim will vary depending upon such factors as the language of the policy, the specific facts underlying the claim, and any applicable law governing the claim. In analyzing such issues, the claims professional must first determine whether the claim constitutes a single loss under the policy, subject to a single deductible and limit of liability. If the claim involves loss occurring over an extended period, the claim professional will need to determine whether the claim implicates recoveries under more than one policy or policy period.

II. Common Policy Provisions Limiting Liability

A. The Purpose of Policy Provisions Limiting Liability

Policy provisions limiting the amount of coverage are not mere technicalities - they are central to the bargain struck between the insurer and the insured. In most crime and fidelity policies 1, the per occurrence limits of insurance and deductible amounts are prominently set forth in the declarations (i.e., on the first page of the policy). These are primary factors, together with the size of the insured and its loss history, in determining the premium to be charged for the policy. When considering how much coverage to purchase, an insured must balance how much premium it is prepared to pay with how much risk it is prepared to absorb. For example, an insured may consider various coverage options and purposely opt for a higher per-occurrence deductible, or a lower per-occurrence limit of insurance, in order to save on premium.2 In so doing, the insured should understand and specifically take into account the fact that fidelity policies treat multiple thefts by the same employee as one occurrence. That treatment allows the insured to aggregate multiple smaller-scale thefts by a single employee into a single claim, subject to a single deductible, thereby permitting the insured to enjoy the premium savings of opting for a policy with a higher deductible. The following are examples of common policy provisions of potential relevance to issues concerning limitations of liability.

B. Declarations

1. Policy Number

Insurers commonly include a policy number or bond number on each policy. For successive policy periods with the same insured, the policy number often remains the same. However, in some instances, a suffix may be added to designate either how many years such a policy was issued to that insured or to specify the year in which the policy period commenced, e.g., Policy Number CCP QO0432, followed the next year by Policy Number CCP QO0432-2 or CCP QO0432-06.

2. Policy Period

The declarations may set a specific policy period, usually from 12:01 a.m. on a specified date to 12:01 a.m. on the same day of the following year, or until cancelled.

3. Insuring Agreements, Limits of Insurance and Deductible

These are dollar amounts specified as the per-"occurrence," Of, in the case of the Financial Institution Bond, "Single Loss", limits and deductibles per insuring agreement. Financial Institution Bonds may also includes an aggregate limit of liability.

4. Cancellation of Prior Insurance

The declarations also sometimes include a provision stating that by acceptance of the policy, the insured gives the insurer notice canceling prior policies or bonds. That provision is generally followed by a blank space in which the prior policies are to be listed by policy number. Such provision may also require a countersignature by the insured acknowledging that cancellation.3 In the authors' experience, it is not uncommon to find that this provision was not completely filled out by the agent or broker that prepared the policy or to find that the insurer never received back from the insured a countersigned copy of the declarations.

C. Policy Provisions, Conditions and Definitions

1. Definition of Occurrence" or "Single Loss"

Such provisions typically define as a single "occurrence" or single loss all loss caused by the same person or employee or resulting from a common series of acts.

2. Discovery or Loss Sustained Coverage

Prior to 1997, the basic scope of coverage under the Commercial Crime Policy was for loss sustained from acts committed during the policy period and discovered during that period or within a specified period thereafter. While crime policies remain available on such "loss sustained" forms 4, the Commercial Crime Policy, the Crime Protection Policy, and the Financial Institution Bonds 5 are all "discovery" policies. Discovery policies provide coverage for loss sustained at any time, provided that the loss is discovered during the policy period or during a short period thereafter.6

3. Prior Insurance Provisions

The Loss Sustained Form, and other fidelity policies providing coverage on a "loss sustained" basis, also provide coverage for loss sustained during the periods of prior policies under which coverage is no longer available, subject to and as limited by certain express conditions. Prior insurance clauses set forth those conditions. Prior insurance provisions generally do not appear in discovery policies, as discovery policies in any event cover loss sustained prior to the policy period.7

4. Non-Cumulation of Limit of Insurance

These clauses specify that limits of insurance are not cumulative from year to year or from policy period to policy period.

5. Other Insurance

Other insurance provisions restrict coverage under the policy for loss that is recoverable under other insurance policies.

6. Loss Covered Under More Than One Insuring Agreement

These provisions address the insurer's limitation of liability for claims covered by more than one of the basic coverages of the same policy. In such cases, the Financial Institution Bond limits liability to the highest applicable "single loss" limitation. The Commercial Crime Policy and the Crime Protection Policy limit coverage to the lesser of the actual amount of the loss or the sum of the limits of insurance applicable to the claim. However, a fidelity claim will rarely, if ever, be covered by more than one coverage in the same policy. This is because most policies exclude coverage for loss caused by employees, except as otherwise covered under the coverage specific to employee dishonesty or employee theft.

7. Deductible Amount

These provisions specify that as respects a single occurrence or a single loss, the insurer's liability is only for loss in excess of the deductible amount, subject to any applicable limit of liability.

III. Types of Limits

A. Definition of Occurrence or Single Loss

Fidelity policies generally provide that limits of liability, as well as deductibles, shall apply on a per "occurrence" or "single loss" basis. The applicable dollar amounts of these limits and deductibles are prominently set forth on the declarations page of the policy. The terms "Occurrence" or "Single Loss" are generally defined to include all loss caused by or involving the same person or employees, whether the result of a single act or a series of acts. The express purpose of these provisions is to treat a single dishonest employee, or group of employees colluding together, or a single scheme regardless of the duration thereof, as a single cause of loss. Such loss is subject to a single deductible and a single limit of liability.

1. Occurrence

With respect to fidelity claims, the Commercial Crime Policy defines occurrence as follows: "all loss caused by, or involving, one or more 'employees', whether the result of a single act or a series of acts."8 The Crime Protection Policy adds three words (italicized) to this definition: "all loss or losses caused by, or involving, one or more employees, whether the result of a single act or a series of related acts”9 Other fidelity policies have defined occurrence for the same basic purpose, using different language.10

As may be expected, insureds sustaining large, long-term losses have sought to recover in excess of the applicable limitations of liability, arguing that such losses were caused by multiple occurrences or by alleging that ambiguities exist in the policy. The majority of courts considering such issue have found such single occurrence limits to be unambiguous, and have interpreted them in a manner so as to find a single occurrence in cases involving long-term and repeated acts of dishonesty by employees.11 What is unambiguous to most courts, however, may be ambiguous to some. A minority of courts have strained to find multiple occurrences, and to permit multiple recoveries, where the plain terms of the policy appear to compel a different result. 12 Thus, whether a claim implicates one occurrence, or multiple occurrences, may depend not only upon the particular facts of the claim, but also upon the law of the jurisdiction a court would apply in deciding the case.

a. Loss Caused By a Single Employee or Group of Employees.

As stated, many fidelity policies define "occurrence" with reference to the acts of a single employee or a group of employees acting in collusion. Courts examining these clauses have reached different conclusions about the application thereof. A brief review of some of the applicable court decisions follows below. A majority of courts appear to accept as a general rule of law that a single dishonest employee should be viewed as a single "cause" of loss and that all injuries caused by that employee constitute a single occurrence. A minority of courts, however, have rejected that approach.13

A leading and often-cited case is the decision of the United States Court of Appeals for the Tenth Circuit in Business Interiors, Inc. v. The Aetna Casualty and Surety Co. 14 The subject policy included a provision stating: "As respects anyone employee, dishonest or fraudulent acts of such employee during the policy period shall be deemed one occurrence for the purpose of applying the deductible." 15 It is unclear from the decision whether the policy included a similar definition of "occurrence" with respect to the policy's limit of insurance, although the decision references the insured's contention that the policy limit applied separately for "each separate loss.”16 The insured further contended that "each of its "employee's forty acts of forgery or material alteration constitutes a separate loss and should be deemed a separate occurrence.”17 The court rejected that contention and held that "the employee's fraudulent acts constituted a single loss[.]”18 In so holding, the Business Interiors court applied the "general" rule that an "occurrence is determined by the cause or causes of the resulting injury”. 19 Under that rule, the court observed that the "cause" of the insured's loss was "the continued dishonesty of one employee.”20 The court further noted its agreement with the district court's observation that "the probable intent of the employee with respect to the last thirty-nine checks was essentially the intent to continue the dishonesty, not to commit an entirely new and different act of dishonesty.”21

The case of Wausau Business Ins. Co. v. U.S. Motels Management, Inc.22 involved an employee who, over the course of approximately four years, cheated her employer out of hundreds of thousands of dollars, utilizing "a fairly broad repertoire of tactics.”23 The subject policy defined "occurrence" as "all loss caused by, or involving, one or more 'employees,' whether the result of a single act or series of acts.”24 The court observed that it "finds nothing ambiguous in this definition.”25 Rejecting the insured's argument that "its dishonest employee's various embezzlement ploys were separate and distinct occurrences," the court cited to the "cause" analysis from the Business Interiors and Appalachian cases, and explained as follows:

[T]he question is not whether the employee's various methods of embezzling were related, as defendant suggests, but whether the cause of loss was related. The cause of defendant's loss was the dishonesty of one employee. Although the employee appears to have been particularly creative in finding ways to bilk the defendant, her intent throughout undoubtedly was the same: to steal the defendant's money. 26

The court in American Commerce Insurance Brokers v. Minnesota Mutual Fire and Casualty Co.27 declined to adopt the "cause" analysis applied in the Business Interiors case, finding such analysis to be "unduly restrictive," at least to the extent that a strict application thereof would always find the acts of a single dishonest employee as one cause of loss or one occurrence.28 Instead, the American Commerce court focused its analysis on what constituted a "series of related acts," finding two occurrences where the same employee continuously stole funds using two different methods.29

The case of Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc.,30 involved a commercial property policy, which extended limited coverage for employee dishonesty and which contained the following variant on the definition of occurrence:

All loss or damage: (1)Caused by one or more persons; or
(2)Involving a single act or series of related acts is considered one occurrence.31

Citing to subparagraph (1) of the above-quoted provision, the insurer argued that this provision "limits occurrences to one per employee/wrongdoer.”32 The Gentilini court did not directly address the insurer's proffered interpretation of this provision of the policy. Instead, the court stated that it would not read the subject provision "literally/, concluding that to do so would always limit all losses to a single recovery, "because losses of that type must, by their very nature, be 'caused by one or more persons.”33 The court therefore decided to restrict the meaning of the subject provision, "so as to enable fair fulfillment of the stated policy objective. “34 Applying that reasoning, the Gentilini court concluded that "a fair reading" of the subject provision "simply means that for each loss of property covered by the policy there can only be one recovery, regardless of the number of employees that may have caused the loss. “35 Under that logic, the court was able to find twenty-seven occurrences caused by the same employee. In adopting its "fair" interpretation, however, the Gentilini court ignored the fact that the subject loss limitation expressly applied to "all loss or damage/' rather than to "each loss." The Gentilini court also ignored a basic maxim of contract construction by rendering the "caused by one or more persons" clause entirely superfluous, as a single "loss" caused by more than one employee would invariably involve a series of related acts.

The Gentilini court, like the court in Business Interiors, also cited to the Appalachian case for the proposition that the number of occurrences "is determined by reference to cause of loss.”36 The holding in Gentilini, however, is irreconcilable with the "cause" approach applied in Business Interiors, Appalachian and other cases. The Gentilini court appears to have counted occurrences based not on the cause of injury (i.e., a single dishonest employee), but rather, on the number of injuries allegedly sustained by that cause (Le., twenty-seven transactions tainted by fraud).

The case of Ran-Nan, Inc. v. General Accident Insurance Co. of America37involved a policy deeming "occurrence" as "all loss caused by, or involving, one or more 'employees/ whether the result of a single act or series of acts.”38 There, the insurer took the position that there was only one occurrence with respect to losses that, as described by the court, arose from "independent pilfering schemes by two different employees working separately.”39 The court rejected the insurer's interpretation, observing that "[t]he more natural reading of the policy... is that the 'involving' clause signifies a group of employees conspiring together to steal.”40 Although the result would have been the same by simply applying the policy's express definition of "occurrence' the Ran-Nan court also based its holding upon the "general principle" of law that the number of "occurrences" is determined by counting the "causes" of the insured's total loss, rather than the number of injurious effects. 41Because there were "two independent causes" of the insured's loss, the Ran-Nan court concluded that there had been "two 'occurrences' of employee dishonesty.,”42

The court in Omne Services Group, Inc. v. Hartford Insurance Co.43held that, under either New Jersey44 or Pennsylvania law, a several month payroll fraud/kickback scheme involving a single employee constituted a single "occurrence/' where the subject crime policy defined "occurrence" as "all loss caused by, or involving, one or more 'employees.”45 The court's emphasis on the words "all loss, "one" and "employees,” appeared to indicate the court's satisfaction that the issue before it could be resolved based upon the plain language of the policy. Nevertheless, the court then turned its analysis to the Appalachian and Business Interiors cases for the proposition that the number of occurrences is determined by the number of causes of the resulting injuries.46Under that standard, the Omne court viewed the acts of a single dishonest employee as a single cause of loss.

b. Loss Caused By a "Series of (Related) Acts"

The Commercial Crime Policy defines as one "occurrence" all loss, "whether the result of a single act or a series of acts." Other policies, including the Crime Protection Policy, employ the phrase "series of related acts." A majority of courts construing and applying such provisions have found a single "occurrence" in situations involving multiple thefts or embezzlements by a single employee or group of colluding employees, even where the schemes extended over the course of months or years.47

The case of Scirex Corp. v. Federal Insurance Co.48concerned a group of dishonest nurses, who falsified data and thereby rendered worthless "four clinical studies for three different sponsors”49conducted by their employer. The subject policy stated that "[a]ll losses resulting from an actual or attempted fraudulent or dishonest act or series of related acts at the premises. . . whether committed by one or more persons will be deemed to be one occurrence or event." However, nowhere did the policy expressly state that its single loss limitation, or "Limit of Insurance," applied to one "occurrence." The court nevertheless observed that "the accepted purpose of defining 'an occurrence or event' is to limit liability" and that "in the insurance industry 'occurrence' is commonly understood to mean all loss caused by a single or related events.”50Noting that the "the nurses themselves did not seem to distinguish among the four studies in terms of their responsibilities," the Scirex court affirmed as not clearly erroneous the lower court's finding that the insured's losses resulted from a "series of related acts.”51

In Valley Furniture & Interiors, Inc. v. Transportation Ins. Co.52the court looked at the dictionary definitions of "series" and "related" and found the phrase "series of related acts" unambiguous.53 Note that, because the definition of the word "series”54 itself utilized the term "relationship," courts have at times struggled with whether inserting the term "related" adds anything of substance to the phrase "series of acts." In any event, the court in Valley Furniture construed the phrase to implicate "a succession of logically or casually connected acts, linked in time, place, opportunity, pattern, and method”55 Applying that standard, the court found a six-year payroll fraud scheme involving three employees to be a "series of related acts."

The Minnesota Supreme Court in the American Commerce case adopted a similar understanding of the phrase "series of related acts," i.e., acts that are "connected by time, place, opportunity, pattern, and, most importantly, method or modus operandi.”56 By that measure, focusing chiefly on the element of modus operandi, the court in American Commerce found two occurrences where the same employee repeatedly stole from his employer, but utilized two separate methods of embezzlement. 57

By the standards set forth in Valley Furniture and American Commerce, the multiple acts of dishonesty committed by the dishonest employee in Gentilini, which occurred in the same place, in the same manner, using the same modus operandi, repeated twenty-seven times in less than one year, would very clearly constitute a "series of related acts." The Gentilini court, however, found otherwise. Gentilini did not expressly reject cases finding a single "occurrence" in "embezzlement-type cases where an employee steals cash or checks from an employer as part of an ongoing scheme to defraud.”58 The Gentilini court instead drew a distinction between such cases and the facts of the case before it, which involved twenty- seven "distinct sales to separate purchasers, for separate automobiles." In support of its holding, the Gentilini court cited to North River Ins. Co. v. Huff,59 noting that the court in Huff had found "that several loan transactions involving the same manner of financing were separate occurrences because [the] transactions 'occurred at separate times, involved different borrowers, were for different purposes, and had separate collateral. "60 The holding in Gentilini appears to have been based upon the court's conclusion that "separate" transactions with "separate" parties cannot be viewed as "related”.61

The apparent distinction drawn by the Gentilini court between "separate" transactions and "related acts" transactions ignored the fact that the employee's dishonest acts were "related" in important respects, including time, place, modus operandi and, significantly, a continuing criminal intent. Indeed, the Minnesota Supreme Court in American Commerce rejected such a distinction. There, the insured's employee pocketed numerous insurance premiums paid to him in cash by various of his employer's customers. The insured argued that those "wrongful acts should not be deemed part of a 'series of related acts'," because they each "occurred on separate occasions, in separate transactions, and each results in a separate, measurable loss to the insured." The court, however, found that the employee's acts were clearly "related" as that term is "commonly used" and, therefore, constituted one occurrence, explaining as follows:

We cannot so restrict the plain and ordinary meaning of the word 'related' such that acts of embezzlement which follow each other in time, take place at the same business, and are committed by the same employee are not "related" as that word is commonly used.62

2. Single Loss

The Single Loss language in the Financial Institution Bond significantly differs from the definition of occurrence in crime policies. With respect to fidelity claims, the Financial Institution Bond defines Single Loss in relevant part as "all covered loss... resulting from... all acts or omissions... caused by any person (whether an employee or not) or in which such person is implicated.”63 In this context, '" loss' is a broad term that covers all losses from the acts of an employee,"64 or other person.65 Under this definition, all loss resulting from the acts of "such" person, or in which that person is implicated, are treated as a single claim, subject to a single application of the deductible and to a single limit of liability. The definition of Single Loss focuses on the wrongdoer66 and "unambiguously refers to any and all acts perpetrated by the same person.”67 The conduct in question need not constitute a series of related acts.68Thus, two thefts by the same employee, even if committed years apart, in different locations, and using entirely different methods, should be regarded as a Single Loss.

For multiple injuries, or multiple acts, to result in a Single Loss, the only fact that need be established is that a common employee or other person is implicated in those acts. Thus, for example, if two employees each steal or embezzle funds from the insured, but also assist each other in doing so, each employee is "implicated" in the other's thefts, and all of the thefts are viewed as a "Single Loss.”69

B. The Deductible

The deductible amount is not truly a limit of liability, but it may strongly impact the amount of the insurer's liability. An inexperienced insured may mistakenly believe that the deductible operates to reduce the insurer's maximum liability. This is not so. The insurer's maximum liability corresponds with the full dollar amount of its limit of insurance. Thus, a policy with $100,000 limit of liability and a $10,000 deductible, in the event of a covered loss in the amount of $110,000, will provide $100,000 in protection, not $90,000. Communicating that fact to an unknowing insured will be received as welcomed news. The insured, however, should also be made to understand that the deductible applies on a per occurrence basis, rather than merely once per policy period. Thus, an insured with multiple, separate and unrelated losses will only be able to recover on those of its individual covered losses that exceed the applicable deductible amount.

As stated above, some courts have resisted enforcing, as written, per Occurrence limits of liability by finding multiple "occurrences" in situations involving repeated acts of dishonesty by the same employee. In such jurisdictions, insurers may feel constrained to use the same logic by requiring multiple applications of the deductible amount. Presumably, the courts in such jurisdictions would not alter their analysis of the "occurrence" issue based on whether it applied to policy limits or deductibles. As explained the Supreme Court of California in a related context:

To construe a policy provision narrowly so as to find only one claim and thus limit the deductible, but to construe the same language expansively so as to find multiple claims and thereby increase covera e, would be a result-oriented approach that we decline to follow.70

Depending upon the facts and amounts involved in a claim, multiple applications of the deductible may reduce or even eliminate coverage. One court, explaining why it disfavored an insured's argument for finding multiple occurrences, offered the following poignant example of what could result from such an approach:

Assume an employee embezzles $100 from a company on 155 separate occasions for a total embezzlement of $15,500. Further assume that, as in this case, the deductible for the insurance policy is $250 and the coverage limit $10,000 for each occurrence. If all 155 acts constitute one occurrence because they are part of a "series of related acts," the insurance company would pay $10,000. However, if we were to adopt American Commerce's position and determine that 155 occurrences arose, the insurance company would pay nothing because the monetary value of each act of embezzlement would be lower than the deductible.71

Of course, in any jurisdiction, an insurer may encounter a claimant seeking to aggregate truly separate and unrelated losses, involving separate employees, into a single claim in order to avoid the deductible. In such cases, the claims professional should develop appropriate facts, and explain to the insured the insurer's basis for concluding that the subject losses are indeed separate occurrences, subject to separate deductibles.

C. Aggregate Limits

Some fidelity policies, including the Financial Institution Bond, include an aggregate limit of liability.72 Individual fidelity bonds, such as administrators' bonds or public official bonds, classically contain only an aggregate limit of liability, also called a penal sum, and do not include per occurrence limits.73 Under the aggregate limit provision of the Financial Institution Bond, once the insurer has made payments74equal to the stated aggregate limit in connection with loss discovered during the policy periods, 75tthe insurer's liability is exhausted. Care must be taken to monitor all payments76under such a policy. When it appears possible that the aggregate limit will be exhausted, it is good practice to alert the insured sufficiently in advance of that event so that it may plan its affairs accordingly.

It is important to note that recoveries by the insured generally do not affect the application of the aggregate limit of liability provision.77By way