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A federal appeals court has affirmed a lower court's summary judgment, holding a Chubb Ltd. unit was justified in denying coverage for a crime policy on the basis that any loss caused by one employee is considered a single loss under the policy.
The 6th U.S. Circuit Court of Appeals in Cincinnati also agreed with the lower court that Federal insurance Co. had justifiably denied the claim by Toledo, Ohio-based Construction Contractors Employer Group L.L.C. on the basis Construction Contractors had previously discovered the loss, according to Monday's ruling in Construction Contractors Employer Group L.L.C. v. Federal Insurance Co.
Construction Contractors, a unit of Associated General Contractors of Northwest Ohio, carries out various employment functions for regional construction employers called subscribers, according to the ruling.
In April 2002, Construction Contractors outsourced its daily operations to Toledo-based AlphaCare Services Inc. In July 2012, one of AlphaCare's owners, John R. Moon, informed Construction Contractors it did not have enough assets to meet its obligations even though the subscribers had paid Construction Contractors to fulfill their respective obligations.
Mr. Moon later explained he had been falsifying Construction Contractors' financial statements and the company had substantial tax liabilities.
An investigation determined that Mr. Moon had transferred more than $900,000 from Construction Contractors' account to AlphaCare's account, and had also charged Construction Contractors for an additional $30,000 worth of health care premiums. About another $1 million was still unaccounted for, according to the ruling.
In January 2013, Construction Contractors applied for a crime coverage insurance policy from Federal Insurance, which Federal issued, extending coverage from March 2013 to July 2013 and insuring up to $1 million in covered losses.
The policy stated all losses from single act or number of acts of the same employee will be treated as a single loss. It also provided that the policy excluded coverage for loss sustained prior to the inception date of any coverage, as well as those where the exact amount or details are unknown.
After execution of the policy, in May 2013, Construction Contractors learned Mr. Moon had misappropriated the missing $1 million by committing check theft, having subscribers write checks to Construction Contractors using AlphaCare's account number.
Construction Contractors submitted a claim for the $1 million check theft to Federal Insurance, which denied the claim. Construction Contractors then filed suit in U.S. District Court in Toledo charging breach of contract.
The District Court granted Federal Insurance's motion for summary judgment, which a three-judge appeals court panel unanimously affirmed.
“The district court properly determined that all of the loss attributable to Moon was a single loss under the policy and that Construction Contractors had 'discovered' that loss prior to the execution of the policy,” said the ruling.
The “undisputed factors demonstrate that Construction Contractors knew of the wire-fraud loss before executing the insurance policy with Federal Insurance.
“Because Construction Contractors discovered the wire fraud prior to the policy's execution and the check theft and wire fraud constitute a single loss, the check-theft loss is excluded from coverage under the policy,” said the ruling, in affirming the lower court decision.
A statement issued by the U.S. Department of Justice in May said Mr. Moon has been charged with conspiracy and wire fraud.
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