Standard fidelity policies provide coverage for loss of money, securities, and other property directly resulting from employee theft. While most fidelity policies define what constitutes a security, insureds often argue its definition is far more expansive than the policy language provides. But, a recent case from the Eastern District of Virginia clarified the scope of a security under a fidelity policy.
In Heartland Construction, Inc. v Travelers Casualty and Surety Company of America, Case. No. 2:21CV43 (RCY) (E.D.Va. Aug. 30, 2022), the insured, Heartland Construction, Inc. (“Heartland”), allegedly entered into a fixed-priced construction contract pursuant to which it would provide construction management services and second and third tier subcontracts. Heartland asserted Matt Hemmis, its president, created a new contract, or altered the existing one, to create a less favorable, cost-plus construction contract between Heartland and the general contractor. Heartland also asserted that Hemmis stole or destroyed a hard copy of the executed version of the fixed-price construction contract that was in Heartland’s paper files. Heartland later learned about Hemmis’ alleged actions, but the general contractor refused to make payment under the fixed-price construction contract.
Heartland sought coverage under a commercial crime policy issued by Travelers Casualty and Surety Company of America (“Travelers”) under the following insuring agreements: Employee Theft, Forgery and Alteration, On Premises, Computer Fraud, and Claim Expenses. The parties filed cross-motions for summary judgment seeking a determination of the coverage issues under each insuring agreement. After the parties filed their cross-motions for summary judgment, the court ruled on a motion to dismiss filed earlier by Travelers and dismissed Heartland’s claims under every insuring agreement other than employee theft based on an exclusion removing coverage for loss caused by the insured’s employee except under employee theft.
On summary judgment, the court ruled in favor of Travelers, holding there was no coverage under the employee theft insuring agreement. In making its determination, the court found the issue of whether the fixed-price construction contract constituted a “security” under the policy dispositive. Heartland argued the fixed-price contract was a security because it was a subcontract that represented Heartland’s money, and thus met the policy’s definition of security. Travelers argued that a construction contract does not represent property or money, and the policy’s definition of “Securities” was limited to tangible property with intrinsic monetary value that can be redeemed for specific property.
The court first looked to the policy’s definition of “Securities,” which provided:
[W]ritten negotiable and non-negotiable instruments or contracts representing Money or property including:
- Tokens, tickets, revenue, and other stamps (whether represented by actual stamps, or unused value in a meter) in current use; and
- Evidences of debt issued in connection with any Credit, Debit, or Charge Card, which cards are not issued by the Insured; but do not include Money.
Relying on the doctrine of noscitur a sociis, the court determined “Securities” could only be read to include instruments or contracts representing money that are similar to “tokens, tickets, revenue and other stamps (whether represented by actual stamps, or unused value in a meter) in current use.” The court then found, based on dictionary definitions, the terms token, ticket, revenue, and stamp all supported the contention that “Securities” under the policy must have some intrinsic value or the ability to be redeemed for specific property. Thus, the court determined “Securities,” as defined by the policy, must be instruments or contracts representing money or having intrinsic monetary value.
The court then considered whether Heartland’s alleged fixed-price construction contract represented money or had intrinsic monetary value. Because the fixed-price construction contract only established a legal relationship allowing Heartland the opportunity to earn money through performance as specified in the contract, the court concluded Heartland’s claim to money was conditioned on its performance under the contract rather than any intrinsic value in the contract itself. Accordingly, the court held the fixed-price construction contract was not a security under the policy, and no coverage existed under the employee theft insuring agreement.
