Termination of Coverage Based on Knowledge of Prior Crimes is the Issue

This case presents an insurance coverage dispute involving a commercial crime policy issued by Travelers to Waupaca Northwoods. The case is Waupaca Northwoods, LLC v. Travelers Casualty and Surety Company of America, 2011 WL 1563278 (E.D.Wis.).

 

Waupaca notified its insurer that one of its employees, Neider, had taken company assets while employed as a plant manager at a plant in Idaho . Specifically, it was alleged that Neider had stolen supplies and inventory over an extended period of time. After an investigation, Travelers denied coverage on the grounds that Waupaca had known that Neider had committed dishonest acts in the past.

 

Travelers discovered that in 1998, Neider was employed at a company called Pace International. He was terminated there because it was learned that Neider had used company assets for his own personal use. The insurer also learned that Shaffer was Neider's supervisor at Pace and allegedly knew of Neider's activities. This was important to the insurer since Waupaca purchased parts of Pace, and Shaffer became a vice-president at Waupaca. The insurer noted that the crime policy in question here had the following condition: this policy terminates as to any employee as soon as a partner, any management staff member, or any employee with managerial or supervisory responsibility with the employee becomes aware of any dishonest or fraudulent employment related act involving an amount in excess of $1,000.

 

The insurer contended that Neider committed a dishonest employment act while employed at Pace and did so with Shaffer's knowledge. Therefore, since Shaffer is a member of management at Waupaca, under the terms of the crime policy, his knowledge of Neider's past dishonest act means that the crime policy is terminated. Travelers said that it made no sense to allow a corporate manager to retain secret knowledge of his employees' previous dishonest acts and then obtain a valid policy covering potential theft. And, the whole point of the termination clause is to prevent a company from obtaining insurance for losses that it has the ability to predict and prevent.

 

Waupaca argued that the termination clause does not apply because Shaffer's knowledge was obtained before the policy was even active. The insured said that the key phrase in the termination clause provides that the crime policy terminates “as soon as” a manager learns of dishonest conduct, and this implies that the dishonest conduct, or at least the knowledge of it, must occur while the policy is in effect. Shaffer learned about Neider's conduct ten years before the crime policy at issue here became effective and so, the termination clause does not apply.

 

The United States District Court said that if an insurer intends to exclude losses caused by any of its insured's employees who have a prior record of dishonesty from its theft coverage, the insurer must use language that makes its intent clear to the insured. The court found that Travelers failed to do so in this instance. Accepting the insured's reasoning, the court found that, by stating that the coverage provided under the crime policy terminates as soon as a manager becomes aware of the employee's dishonest conduct, the policy suggest that such awareness must be in the present or future, not the past. The court ruled that a provision that terminates coverage based on prior events makes no sense; otherwise, the policy would terminate before it ever became effective as to that employee with a history of dishonesty.

 

The court also found the policy language to be ambiguous. The policy terminates when a manager becomes aware of any dishonest or fraudulent employment related act, and this seems to suggest that if a manager became aware of a dishonest act prior to coverage, the clause is not triggered. And, when the policy says it will terminate upon a manager becoming aware of dishonesty, the policy suggests that coverage will exist for some given period of time before it could terminate. The policy, could not, in other words, terminate upon its very inception. Based on the wording, the court said that a reasonable person would likely expect that the provision is aimed only at knowledge that is gained after the effective date of the policy, not before.

 

Traveler's motion for summary judgment was denied.

 

Editor's Note: The court in this case had to decide if the termination clause in a crime policy that was based on prior knowledge applied to knowledge of current crimes or crimes in the past. One of the insured's managers/officers knew of the employee's past dishonest acts, but hired the employee anyway. The insurer thought this fulfilled the terms of the termination clause. The court said the language in the clause was not as clear cut as the insurer thought, and regardless of the insurer's intent, the policy language simply did not convey the intent the insurer claimed it had. Once again, a policy's alleged ambiguous language derails what to the insurer seemed to be an obvious basis for a declination of coverage.