Sadly, it is not unusual for an employee to embezzle funds from an employer. For that reason most businessowners policies provide limited coverage for losses incurred as a result of the dishonesty of an employee. The limits available are negotiable. Most business owners believe their employees are honest and there is no need for such coverage. Those business owners are naive and need the insurance more than most. The results of such naivete can be exceedingly expensive and no matter how skilled the lawyers will not result in coverage not acquired.

Plaintiff North Fullerton Surgery Center (the Center) appealed from a trial court grant of summary judgment to defendant Franklin Mutual Insurance Company (FMI) declaring that, with respect to FMI’s Businessowners Policy that was issued to the Center, the policy’s coverage for employee dishonesty was limited to $10,000. FMI cross-appeals from a June 30, 2011 order dismissing its counterclaim, which sought a declaration that FMI’s coverage is excess over the coverage provided to the Center by non-party Westchester Fire Insurance Company (Westchester). A New Jersey Court appellate court resolved the issue in North Fullerton Surgery Center v. Franklin Mutual Insurance Co., A-5985-11T4 (N.J.Super.App.Div. 10/25/2013) [enhanced version available to lexis.com subscribers], and dealt with the insured victim who tried to get recovery from a policy that provided limited coverage.

FACTS

The Center operates a surgery center in Montclair, New Jersey. For several years the Center employed Heidi Facchini as a nurse administrator, tasked to serve as the facility’s bookkeeper and office manager. Facchini was authorized to buy supplies, had check-signing authority, and controlled the use of the Center’s credit card.

The Center alleged that over a five-to-seven-year span, on approximately 300 different occasions, Facchini stole, embezzled, and defrauded it of over one million dollars. The Center claims that she stole or misappropriated as much as $1 million.

The Center was insured under the FMI Businessowners Policy from 2003 through the date the Center discovered Facchini’s actions. As such, the Center alleges that FMI is liable to the Center under the policy for the losses caused by Facchini. In addition to the FMI policy, the Center’s losses resulting from Facchini’s actions also were covered by a Business and Management Indemnity Policy issued by Westchester. After a dispute revolving around the scope of the Business and Management Indemnity Policy, Westchester settled with the Center, ultimately paying $832,000 in satisfaction of its loss coverage caused by Facchini.

THE FMI POLICY

The FMI Businessowners Policy provided for several levels and types of coverage. “Coverage D” covered loss to money and securities used in the Center’s business. Under the Declarations, the policy insured the Center’s business personal property with a limit of $1,000,000. The same Declarations provided for a $10,000 limit for losses to money and securities.

The basic policy specifically excluded coverage for loss to “accounts, bills, deeds, evidence of debt, money or securities, notes, and gold, silver, or other precious metals. Valuable papers and records.”

The policy also excluded the “unexplained or mysterious disappearance of property including money and securities, or shortages disclosed on taking inventory. Acts of appropriation or pilferage. Criminal, dishonest, or fraudulent acts by, or instigated by, you or your directors, employees, officers, partners, or trustees or other insureds, or by anyone given possession of property, (including because of false pretense, trick, or similar act by person) other than a bailee for hire.”

Notwithstanding the exclusions the FMI Businessowners Policy expressly included supplemental coverage “Employee Dishonesty Coverage ·Part I.” This endorsement obligated FMI to indemnify the Center for specific losses due to employee dishonesty up to the limit shown in the Declarations, which was $10,000. Notwithstanding the wording of the policy the Center advised the court that it believed it had secured from FMI at least $1,000,000 in coverage for losses caused by employee dishonesty.

FMI did not deny coverage for the Center’s claim. Rather, it took the position that Facchini’s thefts over five years constituted one occurrence, specifically relying upon the employee dishonesty endorsement’s provisions that “[a] series of similar or related acts is one occurrence” and “[t]he limit is not cumulative from year to year even if the acts take place over a period of years.”

ANALYSIS

As a general principle, an interpretation of an insurance contract is a legal question. An insurance policy is a contract that will be enforced as written when its terms are clear in order that the expectations of the parties be fulfilled. When interpreting language in an insurance policy, the words used should be given their ordinary meaning. The language in the policy underscores the basic notion that the premium paid by the insured does not buy coverage for all damage but only for that type of damage provided for in the policy. Thus, limitations on coverage in an insurance policy are designed to restrict and shape coverage otherwise afforded. Exclusionary clauses in an insurance policy must be enforced as long as they are unambiguous and not contrary to public policy.

The endorsement cannot be read in isolation. Since the endorsement is the only provision that provides for the very coverage that the Center seeks, its terms control. The Center also is foreclosed from claiming that the language of the endorsement renders the exclusion inapplicable. The Declarations clearly state the coverage for “Employee Dishonesty” is limited to $10,000. New Jersey courts place particular emphasis on an insurance policy’s declaration page when determining the reasonable expectations of the insured. It is the declaration page, the one page of the policy tailored to the particular insured and not merely boilerplate, which must be deemed to define coverage and the insured’s expectation of coverage.

Here, the Declarations clearly identified and informed the Center of the nature of the Center’s purchased insurance, the scope of that coverage, the policy’s coverage limits, and premium charges. The FMI Businessowners Policy unequivocally provided only a maximum of $10, 000 for losses caused by Facchini.

The Declarations set the contours of the parties’ reasonable expectations. The employee dishonesty endorsement here definitively and unambiguously states, “[a] series of similar or related acts is one occurrence”. Facchini’s continuous embezzlement from the Center was not so attenuated or unusual that the insured could have expected those acts to be unrelated. Thus, Facchini’s persistent and repetitive thefts are precisely the type of “similar or related acts” contemplated by the endorsement, and thus were properly determined to be one $10,000-compensible occurrence by the Law Division. The judgment was affirmed and the Center was limited to $10,000.

ZALMA OPINION

Greed, when dealing with investors in the stock market, is good for the stock broker. Greed is not good when seeking coverage from an insurer it did not promise to provide. The Center purchased insurance specifically to protect itself against the embezzlement perpetrated by Facchini. It collected over $800,000 from that policy. The amount collected did not provide full indemnity for its losses so it sought recovery, up to the highest court in the state of New Jersey, from a second policy that clearly and unambiguously refused to insure the risk of employee dishonesty for more than a $10,000 policy limit. The risk was covered, the indemnity paid, and the greed of the Center and its lawyers resulted in a great deal of legal expense that should never have been expended.

Insurance policies are nothing more than contracts and courts will enforce the clear language of a contract of insurance. The only coverage in the FMI policy for employee dishonesty was by the endorsement that overrode the exclusions and gave a limited $10,000 coverage.

This is the type of case that should encourage the adoption of the British rule that loser pays the winner’s attorneys fees and costs. FMI paid much more than its $10,000 limit to defend this action so both parties lost and FMI has no way to recover the costs and fees it spent to win.

   By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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