From the desk of Jeff Eberhard: Under Oregon law, insurance policies are generally construed in favor of the insured where terms are ambiguous or coverage unclear. However, well-drafted clauses can save on paying out costly claims. In this case update, we take a look at how a claimant whose bookkeeper was embezzling funds over the course of eight years was properly denied coverage for the majority of that time despite language that, Claimant argued, suggested continuing coverage for the entirety of the time at issue.
Case Pointer: In this case, we gain insight into what an effective employee dishonesty clause looks like as well as how Oregon courts are likely to interpret well-drafted “prior insurance” provisions. Additionally, the court solidifies the meaning of “direct loss” in a manner favorable to insurance companies. How does it so limit the term? Read on to find out.
Summit Real Estate Management, LLC v. Mid-Century Insurance Company, 298 Or. App. 164 (June 19, 2019).
The facts in this case were straight forward. Petitioner Summit Real Estate Management (“Summit”) was insured under a series of annual Mid-Century Insurance Company (“Mid-Century Insurance”) policies that covered “direct loss” from employee dishonesty so long as the loss was discovered within one year of the end of the policy period. Mid-Century Insurance also agreed to pay for other losses that occurred “during the period of any prior insurance” – the meaning of the “prior insurance” clause was one of the issues in this case.
Summit first obtained coverage under the Mid-Century Insurance policy in 2008. In July 2013, Summit discovered in that its bookkeeper had been embezzling from the company. Mid-Century Insurance informed Summit that it needed to document and verify the embezzlement loss, so Summit hired an auditing agency that verified a loss of $856,700 between February 2005 and July 2013 when the theft was discovered. Summit sought reimbursement for that loss, the $25,245 it paid for the audit, and $8,000 in its own employee time spent investigating the embezzlement. Mid-Century Insurance agreed to pay only $327,600 – the amount of funds embezzled after August 1, 2010, and denied coverage as to over $500,000. Summit sued for the remaining balance, but lost at summary judgment. Summit appealed, and the Court of Appeals affirmed summary judgment.
The parties disagreed over the operation of the policy’s “prior insurance” provision, which read, in relevant part:
“(h) If you (or any predecessor in interest) sustained loss or damage during the period of any prior insurance that you could have recovered under that insurance except that the time within which to discover loss or damage had expired, we will pay for it under this Optional Coverage, provided:
(1) This Optional Coverage became effective at the time of cancellation or termination of the prior insurance; and
(2) The loss or damage would have been covered by this Optional Coverage had it been in effect when the acts or events causing the loss or damage were committed or occurred.”
Summit took the position that it was owed for all prior years of embezzlement under this clause, while Mid-Century Insurance argued it referred only to the year immediately prior – effectively a one-year lookback to the preceding annual policy period.
The parties also disagreed over what was covered under the “direct loss” provision. Summit believed it was entitled to reimbursement for the $25,245 it paid for the audit, and $8,000 in its own employee time spent investigating the embezzlement. Mid-Century Insurance disagreed, arguing that those expenses were remote and consequential, rather than direct. This policy provided that Mid-Century Insurance would “pay for direct loss of or damage to Business Personal Property and ‘money’ and ‘securities’ resulting from dishonest acts committed by any of your employees acting alone or in collusion with other persons.”
In affirming the trial court’s summary judgment for Mid-Century Insurance, the court of appeals looked first to Summit’s argument that the relevant coverage limitations were invalid as a matter of law under ORS 742.246(2), which provides that “any provision restricting or abridging the rights of the insured under the policy must be preceded by a sufficiently explanatory title printed or written in type not smaller than eight-point capital letters.” This argument failed, as the following subsection of that chapter specifically limited its application to “standard fire insurance policies,” which was not at issue here.
Second, the court rejected Summit’s argument that the “prior insurance” section of the policy was broad and did not include any limitations on lookback times when a claim was made. The first subparagraph of the policy’s “prior insurance” provision “plainly contemplates that the ‘Optional Coverage’ is displacing whatever ‘prior insurance’ had just terminated.” In short, Summit’s policy allowed it to file a claim under the previous year’s insurance as long as the claim was made within 12 months of the end of that insurance period. Because Summit filed its claim in July 2013, it was able to utilize its 2013 and 2012 policy terms. In addition, under the 2012 policy’s “prior insurance” provisions, Summit was entitled to reimbursement for damages arising within the 2010-2011 coverage period. If Summit’s position were to be accepted, it would mean, effectively, that there would never have been cancellation or termination of the prior insurance.
The court also addressed Summit’s attempt to bind Mid-Century Insurance to the representations of its agent (Nielsen Insurance – who had been voluntarily dismissed at the trial court level). This argument carried no water. Essentially, Summit argued that because Nielsen never mentioned limitations or restrictions on the scope of relevant coverage, it bound Mid-Century Insurance to coverage with no limitations. In rejecting this argument, the court noted that, for purposes of an oral binder, there must be more than mere inferences or implications and terms must be clear and easily understood. There was no such clear understanding here, and so Summit’s third argument failed.
Ultimately, coverage provided in the August 2012-2013 policy created a lookback period that extended as far back as the August 2010-2011 insurance period. Therefore, Mid-Century Insurance’s payment of $327,000 had been proper.
Finally, Summit attempted to obtain coverage for the $25,245 it paid for the audit and $8,000 in employee time under the “direct loss” clause of its policy. The court considered the plain meaning of “direct loss” in the context of Mid-Century Insurance’s policy, determining that it required a proximate, not remote, relationship between the employee dishonesty and resulting loss/damage. Here, the expenses incurred in substantiating and investigating the loss were merely damage from the dishonest acts, as opposed to damage caused by the dishonest acts. With those definitions in mind, the court held that the dishonest bookkeeper’s actions were the proximate cause only of the stolen funds but not the expenses incurred in subsequent investigation.
Ultimately, the Oregon Court of Appeals rejected each and every one of Summit’s four arguments and affirmed the trial court’s summary judgment for Mid-Century Insurance.