Summary: The insuring agreements of many of the forms that provide coverage for employee dishonesty promise to cover dishonest acts carried out with the manifest intent of causing the employer to sustain direct loss and obtain financial gain for the employee. Therefore, three elements must be addressed in order to determine if a loss falls within coverage: manifest intent; direct loss; and financial gain. Although seemingly clear, courts have wrestled with various interpretations and permutations of the coverage forms. Yet, each new case brings a slightly different spin to be addressed.

Two of the terms have proved particularly vexing—”direct loss” and “manifest intent.” With direct loss, the question arises as to whether “direct” equates with “proximate.” And, what is a “manifest intent”? Webster's Collegiate Dictionary (Tenth Edition) defines manifest as “1: readily perceived by the senses and esp. by the sight 2: easily understood or recognized by the mind; obvious.” Even here, courts are divided as to the proper approach to take in arriving at whether an act was committed with an intent “easily understood or recognized by the mind; obvious.”

In the following discussion, we discuss these three elements of the employee dishonesty insuring agreement, and review the legal thinking for each.

Topics covered:

Introduction

Direct loss v. proximately caused loss

Financial benefit

Manifest intent

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Introduction

Many forms covering employee dishonesty state that the insurer will cover dishonest acts “committed by an 'employee', whether identified or not, acting alone or in collusion with another person, except [the named insured] or a partner, with the manifest intent to cause [the named insured] to sustain loss, and also obtain financial benefit (other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions) for: (a) the 'employee': or (b) any person or organization intended by the 'employee' to receive that benefit” (ISO employee dishonesty coverage form CR 00 01 10 90). The insuring agreement of ISO BP 00 03 01 06 businessowners coverage form, in the optional coverage for employee dishonesty, contains an extensive promise to pay: “We will 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 (except you or your partner) with the manifest intent to… (1) cause you to sustain loss or damage; and also (2) obtain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment) for… (a) any employee; or (b) any other person or organization.”

The American Association of Insurance Services (AAIS) employee dishonesty coverage form AP-308 covers “risks of direct loss or damage, unless the loss is limited or caused by a peril that is excluded, resulting from 'dishonest acts' committed by any of [the named insured's] employees or leased employees, acting alone or in collusion with other persons, that occur within the policy period.” The coverage form defines “dishonest acts” as “dishonest or fraudulent acts committed with the apparent intent to cause [the named insured] to sustain loss or damage and to obtain financial benefit for the employee or for any other person or organization. The financial benefit does not include salaries, commissions, bonuses, fees, profit sharing or other employee benefits.”

Three elements, therefore, must generally be addressed in claiming coverage. First, there must be a direct loss. Second, the dishonest act must have been committed with a “manifest intent” to cause the employer to sustain a loss. Third, the employee must have had the intent to obtain financial benefit either for himself, or for another person or organization. Many seemingly dishonest acts can simply be ascribed to poor business sense and lack of judgment. For example, in the case of Municipal Securities v. Insurance Company of North America, 829 F.2d 7 (6th App. 1987) an over-eager securities trader exceeded the trading limit imposed upon her by her firm and attempted to recoup losses by making increasingly improper trades. Her actions cost the firm almost $1 million, but were not found to be dishonest.

We should note that ISO commercial crime forms CR 00 22 07 02 and CR 00 23 07 02 could be found much more restrictive in coverage, because they promises to pay for “loss of or damage to 'money', 'securities' and 'other property' resulting directly from 'theft' committed by an 'employee', whether identified or not, acting alone or in collusion with other persons.” “Theft” means “the unlawful taking of 'money', 'securities', or 'other property' to the deprivation of the Insured.” “Money” is defined as “currency, coins and bank notes in current use and having a face value; and travelers checks, register checks and money orders held for sale to the public.” In at least one of the cases discussed later in this article, that narrow definition would have meant an employee's dishonest act was not insured against (Auto Lenders Acceptance Corporation v. Gentilini Ford, Inc., 854 A.2d 378 [New Jersey 2004]).

Finally, in many of the cases discussed herein, the coverage form referred to is a fidelity bond; because the language in the bonds is similar to the employee dishonesty forms, and because the intent is to provide coverage for the insured, we include them.

This is not to say that a case involving a fidelity bond will necessarily be interpreted in the same manner as an employee dishonesty form in regards to a perceived ambiguity. In the case of Tri City National Bank v. Federal Insurance Company, 674 N.W.2d 617 ( Wis. App. 2003), the court noted that the “wording of fidelity bonds is not construed strictly against the drafter because the justification behind the rule—unequal bargaining power—has been eliminated.” This was because the bankers blanket bond was developed jointly by the banking industry and the insurers that provided surety coverage. Thus, neither party could be said to have unequal bargaining power.