OUSTING AMBIGUITIES

Rough Notes, May 2008 by Malecki, Donald S

A look at ISO's Latest revisions to its crime forms

When it comes to an otherwise covered loss under employee dishonesty insurance, involving a series of thefts over many years, employers often come to the shocking realization that they may be grossly underinsured.

The reason is that there are limitations. The first such limitation is that loss is limited to each occurrence, a subject that was discussed in the April 2008 issue of this column. The second limitation is that the policy limits are not cumulative from year to year. This means that no matter how many years the embezzlements continue, the employer gets only one bite of the apple. In other words, only one limit applies under the applicable discovery or loss sustained form.

A case in point is Landico, Inc. v. American Family Mutual Insurance Company, 559 N.W.2d 438 (Ct. App. MN 1997), where a policy was written for a two-year period subject to a limit of $100,000 per occurrence. During the first policy period, an employee embezzled $47,424, and $102,697 during the second policy period. When the insurer paid the named insured only $100,000, the named insured filed suit seeking the remainder of its unpaid claim.

The court ruled in favor of the insurer, holding that there were no ambiguities with the meaning of "occurrence" and the non-cumulation clause. In fact, the only reasonable interpretation of the non-cumulation clause, according to the court, was that if no claim were to be filed in a given one-year period, the named insured with a limit of $100,000 could not accumulate it and claim $200,000 during the next policy year.

When discussing this subject, it is difficult to make any generalizations because many employee dishonesty coverage forms are not standard. So, instead of utilizing ISO forms, insurers use their own independently filed forms. As a result of some differing policy language, it is difficult to pin down the precise language relied on by courts in cases of dispute.

One thing for sure is that many of the employee dishonesty claims that have gone before the courts have resulted in coverage based on ambiguities. This includes the non-cumulation clause, despite its apparent clarity to contain limits when losses transgress more than one policy period.

In the case of Sherman & Hemstreet, Inc. v. Cincinnati Insurance Co., 594 S.E.2d 648 (Sup. Ct. Ga. 2004), a policy was written for two three-year terms with an occurrence limit of $50,000 and an embezzlement over a period of four years totaling $160,670.

Four years after the original policy took effect, the named insured (employer) discovered that due to an ongoing embezzlement by one employee, it had sustained losses in each of three years of the original policy and during the first year of the three-year renewal policy. The named insured therefore submitted a claim seeking to recover $50,000 for each year of the original three-year policy and $10,670 for the first year of the renewed policy. When the insurer paid the named insured $50,000, explaining that this was the extent of the coverage, the employer filed suit.

The trial court ruled in favor of the named insured. The court of appeals held that under the unambiguous terms of the original (three-year) policy, the named insured's coverage was limited to $50,000 for the entire three-year period. The problem was with the renewal policy and whether the named insured could recover the $10,670 because the renewed policy set a new limit of $50,000 independent of the original policy.

In this regard, the insurer argued it did not owe the $10,670 loss sustained by the named insured in the fourth year of coverage because of the policy's non-cumulation clause limited recovery "regardless of the number of years [the] insurance remains in force or the number of premiums paid."

A crack in the armor was that the court of appeals viewed the non-cumulation clause to be ambiguous because it could be construed to mean either (1) that the insurer's maximum aggregate liability, regardless of the number of policies it issued, was $50,000, or (2) that the liability limit for the original policy could not be "carried over" to increase the liability limit for the renewed policy, although both policies indemnified the named insured for up to $50,000.

Since ambiguities are construed strongly against the drafter, the court held that the insurer owed the $10,670, because the renewal policy was considered a separate policy that allowed a separate recovery for embezzlement.

One adverse case too many

With adverse decisions mounting against insurers, ISO finally decided to amend the language of its forms in 2006 for a number of reasons, including to strengthen the intent to hold coverage to the limit per occurrence regardless of the number of years the insurance remains in force. One of the cases cited by ISO that helped to determine that some change was necessary with its crime coverage forms is Auto Lenders Acceptance Corporation v. Gentilini Ford, Inc. 816 Atl.2d 1068 (Sup. Ct. N.J. 2003).