Federal court holds that “Single Loss” and retroactive date provisions precluded coverage for fraudulent scheme that began prior to retroactive date, despite insured's intention to seek damages for only that portion of the scheme that began after the retroactive date

by Carlton Fields

On August 9, 2012, the U. S. District Court for the Southern District of Florida issued its Order granting summary judgment to United States Fire Insurance Company ("U.S. Fire"), and against ABCO Premium Finance LLC ("ABCO"). ABCO Premium Finance LLC v. American International Group, Inc., United States Fire Insurance Company, and National Union Fire Insurance Company of Pittsburgh, Pa., Case No. 1:11-cv-23020-RNS, United States District Court for the Southern District of Florida and subsequently entered a Final Judgment in favor of National Union Fire Insurance Company. U.S. Fire issued a financial institution bond to ABCO, and National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union") issued an excess policy that followed the form of the bond.

The Order establishes how a "Single Loss" provision in a financial institution bond, in conjunction with a retroactive date provision, precludes coverage for the entire loss when part of the loss began prior to the retroactive date. The parties agreed that the retroactive date provision restricted coverage to events after that date, but disagreed on the correct interpretation of the "Single Loss" term as used in the retroactive date provision.

The retroactive date provision at issue provided, in part, that the bond applied "only to a Single Loss … which was sustained in its entirety after the Retroactive Date… . All acts or omissions causing or contributing to such Single Loss … must occur after the Retroactive Date for coverage under this bond/policy to apply." The bond defined "Single Loss" as "all covered loss … resulting from (a) any one act or series of related acts of burglary, robbery or attempted threat, in which no Employee is implicated, or (b) any one act or series of related unintentional or negligent acts or omissions on the part of any person (whether an Employee or not) resulting in damage to or destruction or misplacement of Property, or (b)any one act or series of related unintentional or negligent acts or omissions on the part of any person (whether an Employee or not) resulting in damage to or destruction or misplacement of Property, or (c) all acts or omissions other than those specified in (a) or (b) preceding, caused by any person (whether an Employee or not) or in which such person is implicated ..." (Emphasis added.)

ABCO did not dispute that the fraud at issue began well approximately two years prior to the retroactive date, but responded that it only sought to recover losses incurred after the retroactive date. ABCO made a two-step argument in support of its position. First, the term "Single Loss" was defined as "all covered loss." Second, the retroactive date provision excluded from coverage any losses that were sustained before the retroactive date. Thus, ABCO argued, the term "Single Loss" presupposed that the loss occurred after the retroactive date because otherwise it would not be considered "covered loss." In other words, there could never be a "Single Loss" that would be precluded from coverage by the retroactive date because the term "Single Loss" was defined as "all covered loss."

The Court rejected ABCO’s argument, stating that the purpose of specifying a retroactive date in an insurance policy is to limit coverage to occurrences after a certain date. The Court found that ABCO’s interpretation of the bond language completely ignored the retroactive date provision’s further limitation of the term "Single Loss" to one which was "sustained in its entirety after the retroactive date." The Court held that the "language of the retroactive provision is clear and unambiguous that the bond only covers fraudulent schemes that began entirely after the retroactive date." Based on the Single Loss and retroactive date provisions, the Court held that ABCO’s claim was barred from coverage under the bond.

A "Single Loss" provision combined with a retroactive date provision can play an important role in appropriately limiting coverage available to insureds prior to a certain date. Such provisions should be considered for insureds whose internal checks and balances cannot be vouched for prior to a certain date, e.g. where there has been a change of control that date.

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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