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The Fidelity Law Journal The Fidelity Law Journal published by The Fidelity Law Association Volume XIV, October 2008 Cite as XIV Fid. L.J. ___ (2008) WWW.FIDELITYLAW.ORG The Fidelity Law Journal is published annually. Additional copies may be purchased by writing to: The Fidelity Law Association, c/o Wolff & Samson PC, One Boland Drive, West Orange, New Jersey 07052. The opinions and views expressed in the articles in this Journal are solely of the authors and do not necessarily reflect the views of the Fidelity Law Association or its members, nor of the authors’ firms or companies. Publication should not be deemed an endorsement by the Fidelity Law Association or its members, or the authors’ firms or companies, of any views or positions contained herein. The articles herein are for general informational purposes only. None of the information in the articles constitutes legal advice, nor is it intended to create any attorney-client relationship between the reader and any of the authors. The reader should not act or rely upon the information in this Journal concerning the meaning, interpretation, or effect of any particular contractual language or the resolution of any particular demand, claim, or suit without seeking the advice of your own attorney. The information in this Journal does not amend, or otherwise affect, the terms, conditions or coverages of any insurance policy or bond issued by any of the authors’ companies or any other insurance company. The information in this Journal is not a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends upon the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law. Copyright © 2008 Fidelity Law Association. All rights reserved. Printed in the USA. For additional information concerning the Fidelity Law Association or the Journal, please visit our website at http://www.fidelitylaw.org. Information which is copyrighted by and proprietary to Insurance Services Office, Inc. (“ISO Material”) may be included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers. WWW.FIDELITYLAW.ORG “LOSS? WHAT LOSS?”: UNIQUE CLAIMS ON CRIME POLICIES/FIDELITY BONDS David T. DiBiase David J. Billings I. INTRODUCTION Fidelity bonds and crime policies1 are contracts of indemnity. They indemnify an insured from loss of or to covered property sustained as a direct result of “theft” or “employee dishonesty.”2 Many insureds who are defrauded one way or another by an employee fail to grasp that “[d]ishonesty in the abstract cannot be compensated in damages, and in a suit to recover on the bond the dishonesty must have resulted in pecuniary loss.”3 Indemnity is available only for covered losses resulting directly from the dishonesty of the insured’s employee. Insurers, insureds and courts have grappled with creative claims of loss and even more creative ways to calculate losses supposedly sustained as a consequence of an employee’s dishonest acts. In each instance, the basic requirement an insured must meet is to “show” the loss. As an insured will tell the insurer on a fidelity claim “show me the money,” the insurer can and should respond by telling the insured “show me the loss.” 1 Hereinafter referred to as “fidelity bonds,” except when a particular policy form, such as a financial institution bond, is at issue. 2 Hereinafter employee dishonesty. No distinction will be made in this article between “Theft” and “Employee Dishonesty” insuring agreements. The “Loss” discussion herein applies equally to both. 3 Am. Employers’ Ins. Co. v. Roundup Coal Mining Co., 73 F.2d 592, 595 (8th Cir. 1934). David T. DiBiase is a partner, and David J. Billings is a senior associate, with Anderson, McPharlin & Conners, LLP in Los Angeles, California 271 WWW.FIDELITYLAW.ORG 272 Fidelity Law Association Journal, Vol. XIV, October 2008 In order to adequately address claims that include questionable loss assumptions, one needs to look to the basic rule underlying fidelity insurance. Simply stated, to recover on a fidelity bond, an insured must sustain an actual pecuniary loss. “Loss under a fidelity policy or bond refers to actual loss, as distinguished from a theoretical or bookkeeping loss.”4 The first inquiry under a fidelity bond is whether the insured “suffered a loss through any dishonest or criminal conduct of its employee.”5 “Loss must be actually suffered by the employer in order to warrant recovery on a bond conditioned against the dishonesty of an employee.”6 Fidelity bonds typically provide coverage for a direct loss of “money,” “securities,” or “other property” with “other property” generally defined as “tangible” property other than money or securities. Recovery under a first-party indemnity policy foundationally requires the insured to suffer an actual out-of-pocket loss for coverage to attach.7 Insureds frequently fail to grasp this requirement and pursue unique claims of “loss” under fidelity bonds. This article discusses the foundational requirement that viable, covered fidelity bond claims must involve an actual pecuniary loss of covered property. This paper will examine certain unique claims of loss made by insureds, and study court decisions which have for the most part made clear that loss means loss. 4 COUCH ON INSURANCE § 160:61 (1998). 5 In re Schluter, Green & Co., 93 F.2d 810 (4th Cir. 1938). 6 COUCH ON INSURANCE § 160:56 (1998). 7 See F.D.I.C. v. United Pac. Ins. Co., 20 F.3d 1070, 1080 (10th Cir. 1994) (“A fidelity insurance contract indemnifies against loss, and the insured under a fidelity bond has the burden of proving that it suffered an actual loss by a preponderance of the evidence.”); Am. Empire Ins. Co. of S.D. v. Fid. & Deposit Co. of Md., 408 F.2d 72, 77 (5th Cir. 1969) (fidelity insurer’s “liability does not arise until the insured has suffered a proven loss”); see also Am. Employers’ Ins. Co. v. Roundup Coal Mining Co., 73 F.2d 592 (8th Cir. 1934). WWW.FIDELITYLAW.ORG “Loss? What Loss?” 273 II. ACTUAL PECUNIARY LOSS Dishonest employees frequently manipulate an insured’s books and records to disguise their defalcations. But a fraudulent entry by an employee in the books and records of an insured, which does not result in an actual loss of covered property, does not give rise to a covered claim on a fidelity bond. The principle that an insured must suffer an actual, present loss in order to recover under a bond that protects against dishonesty of employees is firmly rooted in the history of precedents interpreting fidelity policies. In American Employers’ Insurance Co. v. Roundup Coal Mining Co.,8 a dated but still relevant decision, the fidelity bond insured against the fraud, dishonesty, or embezzlement by employees of the insured. After addressing and enforcing the discovery provisions of the fidelity bond in question, the court went on to address the insured’s claim of loss based upon supposed payments/deposits received from customers that its employee failed to credit on the books of the company. However, the insured did not present any admissible evidence to establish that the employee actually took the cash receipts. Instead, the insured introduced a series of self-serving declarations that pointed out the difference between the ledger accounts of various customers and the amounts that these customers claimed they actually owed. In reversing the trial court judgment in favor of the insured, the court found certain declarations inadmissible and concluded the claim wanted for lack of proof of a true loss to the insured. The court reasoned as follows: [E]ven if it had been proven that the books were incorrect as claimed, this would not have proved that Bunker appropriated or embezzled the difference. It is argued that defendant’s bond insured against Bunker’s dishonesty, but the mere fact that he may have been dishonest is not a sufficient basis for recovery.9 The American Employers decision thus stands for the proposition that the actual loss must be proven by way of admissible evidence. 8 73 F.2d 592 (8th Cir. 1934). 9 Id. at 595. WWW.FIDELITYLAW.ORG 274 Fidelity Law Association Journal, Vol. XIV, October 2008 The same principle was discussed by the court in In Re Schluter, Green & Co. v. Jamison.10 The insured’s employee admitted to the unauthorized use of money and securities of the insured’s customers. Her dishonesty fell into three general types of misconduct: (1) she sold customers’ securities for cash and deposited the proceeds into the insured’s bank account; (2) she took money from customers that was to be used to buy securities, but instead deposited the funds in the insured’s bank account and, in some instances, paid out fictitious profits from the account when customers subsequently ordered a sale to cover up that she had never bought the securities in the first place; and (3) she sold customer securities and deposited the funds into the insured’s account without making payment to the customer. The court acknowledged that her conduct was dishonest, but noted as follows: The conduct of Miss Seay may fairly be described as dishonest or criminal; but it does not follow that thereby the company suffered a loss. On the contrary, it appears that the money derived from her unlawful behavior was deposited in the company’s bank account and, unless the company thereafter lost the funds as the result of dishonesty or criminal conduct, the company suffered no detriment.11 While the court acknowledged that the few instances where the employee paid out fictitious profits to cover up her misdeeds would be an actual loss, it found that the broad jury instruction that any loss by a customer from the misconduct of the employee was recoverable under the bond made for reversible error.
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