Schrödinger’s Coverage: When a Risk is Covered and Not Covered by Insurance

by Reed Smith
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When is a person an “employee” under one insurance policy but not an employee under another?   Conflicting or inconsistent definitions across multiple policy lines issued to the same company can give rise to significant gaps in insurance coverage, as a recent opinion of the U.S. Court of Appeals for the Seventh Circuit instructs, Telamon Corp. v. Charter Oak Fire Insurance Co., Nos. 16-1205 & 16-1815 (7th Cir. March 9, 2017).

Telamon hired Juanita Berry in 2005 under a series of consulting agreements with her personal communications company, J. Starr Communications. Over the next six years, Berry’s job responsibilities expanded beyond the terms of the consulting agreements, with Telamon eventually naming her Vice President of Major Accounts, the senior-most manager in one of the company’s divisions on the East Coast.  Part of Berry’s job was to oversee an asset recovery program under which Telamon removed old AT&T equipment and sold it to salvagers.  But without the company’s knowledge, Berry personally removed the old equipment and sold it, keeping the money for herself.  By the time Telamon discovered the scheme, Berry had embezzled $5.2 million.  Telamon fired Berry, and the government indicted her on wire fraud and tax evasion charges.  She was convicted and sentenced to five years in prison.

Telamon sought to recover under two insurance policies: a commercial crime policy issued by Travelers Casualty & Surety Company of America; and a first-party commercial property policy issued by Charter Oak Fire Insurance Company.  The crime policy covered theft committed by an “Employee,” which included individuals “leased to the Insured” under an agreement with a “labor leasing firm.”  But Travelers asserted that Berry did not fit this bill because the consulting agreements were between Telamon and Berry’s consulting business, which Travelers claimed was not a “labor leasing firm.”  The property policy contained an exclusion for criminal acts by “employees,” as well as “authorized representatives or anyone . . . to whom you entrust the property for any purpose.”  On this point, Charter Oak asserted that Berry was an employee for purposes of applying the exclusion because she was at least an “authorized representative” and someone entrusted with the property.  The district court concluded that neither policy covered the loss, and Telamon appealed.  The Court of Appeals affirmed, agreeing with both Travelers and Charter Oak that Berry did not fit within the definition of “Employee” under the crime policy but was at the same time considered an employee for purposes of the exclusion in the property policy.

What’s a policyholder to do under these circumstances?

Coverage Does Not Exist in a Vacuum—Adopt a Holistic Approach to Risk Management. Different insurance policies are designed to cover different risks.  Accordingly, there is a natural tendency to review a policy only with respect to the particular risks covered, and to not focus on its interplay with other coverage.  The better approach is to review all insurance policies together to identify overlap and potential gaps.  For many companies, policy language, such as that in Telamon’s policies, may be adequate to cover a similar loss scenario.  The policy language in Telamon’s crime and property policies is by no means unusual, but no two companies are exactly alike with respect to their structure, business practices, hiring and personnel needs and human resources policies.  It is also likely that a company such as Telamon has other insurance policies, as well, each with similar, but not identical, definitions, and containing different restrictions based on employee or agent status capacity.  The key to avoiding gaps such as that identified by the Seventh Circuit is to analyze key policy language at the time of placement or renewal of insurance to determine whether the policies cover all of the appropriate persons.  In addition to undertaking a holistic review of all of their insurance policies, companies should consult with coverage counsel to make sure that they are specifically insured against important risks and that appropriate personnel are covered.  A comprehensive coverage review can help to spot these and other gaps in corporate insurance programs.  Many insurance policies may be negotiable and should be tailored to the company’s individual needs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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