Tuesday, July 20, 2010

Company gets insurance coverage for paying former employee the CEO's salary

Answering the question from my last post:

Yes. Which makes me wonder whether underwriters should start thinking about an exclusion for -- I don't know, reckless indifference to not receiving your salary for over a year? Or more generally, radical stupidity? Or gross negligence where the claim is a first-party claim? I realize that such exclusions would lead to endless litigation over definitions, but still . . . In any event, the actual policy clauses at issue were much more mundane.

In my last post I described the facts of FundQuest Inc. v. Travelers Cas. & Sur. Co., 2010 WL 2223301 (D. Mass), in which Curran, a low-level employee, managed to embezzle the CEO's salary for sixteen months when the human resources department accidentally began direct depositing the salary into Curran's bank account.

FundQuest attempted to recover its loss through a Financial Institution Bond issued by Travelers. Travelers agreed to reimburse FundQuest for the amount placed in Curran's account while Curran remained employed by FundQuest. It denied coverage for the amount FundQuest placed in Curran's account after Curran left FundQuest.

The United States District Court for the District of Massachusetts held that FundQuest was entitled to be reimbursed for the entire amount.

The insuring agreement provided coverage for "[l]oss resulting from dishonest or fraudulent acts committed by an Employee . . ." Another section of the policy provided coverage for "[l]oss of property resulting directly from . . . (b) theft, false pretenses, common-law or statutory larceny, committed by a person present in an office or on the premises of the Insured . . ."

"Employee" was defined as "a natural person in the service of the Insured at any of the Insured's offices or premises covered hereunder whom the Insured compensates directly by salary or commissions and whom the Insured has the right to direct and control while performing services for the Insured."

The court held that the "acts that gave life to the machinery that caused the loss" occurred while Curran was employed by FundQuest. Curran's "dishonest passivity - maintaining his silence after learning that he was receiving a grossly inflated paycheck - began at FundQuest and simply continued uninterrupted after he left."

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