TIMING OF EMPLOYEE TERMINATION AND DEFINITION OF “INSURED”, APPLICABILITY OF “DISHONEST ACT” EXCLUSION, AND “DIRECT PHYSICAL LOSS” CLARIFIED
Whether exclusions apply often depends on how closely the facts may be read, including, in this case, the timing of the employee’s departure.
A motion decided by Judge Settle of the U.S. District Court for the Western District of Washington on March 8th in an insurance law case—Nautilus Group, Inc. v. Allianz Global Risks US, No. C11–5281BHS—presents interesting issues regarding the meaning of who the “insured” is, the “dishonest act” exclusion, “voluntary parting and fraudulent act or false pretense” exclusion, and the meaning of “direct physical loss”.
The insured, Nautilus Group, Inc. (parent), conducted business in China through a subsidiary. The parent attempted to terminate the Chinese subsidiary’s highest ranking employee, but the employee, in essence, refused to leave. The parent was unable to negotiate a severance deal with the employee. The employee, apparently attempting to obtain leverage over the parent, took with him the subsidiary’s business license, company seal (“chop”) and other documents and items. According to the parent, the loss of the chop and business license rendered Nautilus unable to conduct business in China and resulted in losses of uncollected accounts receivable and employee severance costs totaling about $1.8 million.
Allianz issued Nautilus an insurance policy that covered “all risks of direct physical loss or damage to Insured Property at Insured Location(s)” during the Policy period. The “Insured” were defined as Nautilus “and its subsidiary,” including “legal representatives.” The Policy does not cover “loss resulting from the voluntary parting with title or possession of any property if induced by any fraudulent act or false pretense.” The Policy also does not “cover loss or damages directly or indirectly caused by or resulting from … any dishonest act, including but not limited to theft … by the Insured or any … officer or employee….” The Policy, however, does “cover acts of direct physical loss or damage … intentionally caused by an employee of the Insured … and done without knowledge of the Insured.”
Allianz argued that no coverage because of the exclusion for the “dishonest acts” of the insured or the employee. “Insured” was defined to include Nautilus’s “legal representatives”. The Court, on a motion for judgment on the pleadings, rejected that argument because the Court decided that Nautilus could possibly prove that the employee had been removed as Nautilus’s legal representative and terminated at the time the employee misappropriated the property.
Next, Allianz argued no coverage under the “voluntary parting…and fraudulent act or false pretense” exclusion. Allianz argued that the “exclusion clearly applies when—as here—an employee is entrusted with the possession of company property and misappropriates that property.” Nautilus countered that “no fraudulent act or false pretense was involved in (the employee’s) ultimate taking of the Property after he was terminated….” The Court agreed with Nautilus, as there are facts that showed that the employee “absconded with the Property without Nautilus’s consent or authorization.”
Next, Allianz argued no coverage for the accounts receivable loss because of the definition of “accounts receivable records” in the policy. Allianz argued that Nautilus’s accounts receivable records are intact and Nautilus is unable to recover the money owed because it does not have sufficient supporting documentation to prove that the business relationships actually existed or occurred. Nautilus, while not contesting the state of its business records, countered by arguing that the phrase “accounts receivable records” is ambiguous and that the Court should construe the phrase in favor of coverage. The Court agreed with Nautilus.
Allianz next argued that Nautilus must show “direct physical loss or damage to” covered property to state a valid claim and that this “requires proof that the property at issue has been physically altered.” The Court, however, found that, with regard to the policy, at least two portions support Nautilus’s position that there is coverage for its alleged loss of the property. The Court observed: “First, if ‘physical loss’ was interpreted to mean ‘damage,’ then one or the other would be superfluous. The fact that they are both included in the grant of coverage evidences an understanding that physical loss means something other than damage. Second, the Policy contains an exclusion for an employee’s theft of covered property. If theft was not a covered risk, then this provision would be unnecessary. Therefore, the Court finds that a reasonable person purchasing insurance would understand the contract to cover theft of covered personal property as ‘physical loss.’”