Presenting a live 90-minute webinar with interactive Q&A Fidelity Bonds: Advocating Direct Loss from Employee Theft, Fraudulent Transactions and Other Covered Events Navigating the Scope of Coverage From Policyholder and Insurer Perspectives WEDNESDAY, OCTOBER 8, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Margo S. Brownell, Partner, Maslon Edelman Borman & Brand , Minneapolis Joseph P . Ceronsky, Maslon Edelman Borman & Brand , Minneapolis CharCretia V. Di Bartolo, Partner, Hinshaw & Culbertson , Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Direct Loss in Fidelity Bonds Scope of Coverage Presented by Margo Brownell CharCretia DiBartolo Joseph Ceronsky HINSHAW & CULBERTSON, LLP MASLON EDELMAN BORMAN & BRAND, LLP. October 8, 2014
Fidelity Coverage - Background • Various forms of fidelity coverage • (e.g. Financial Institution Bond, Commercial Crime Policy, Financial Institution Crime Policy) • Stand alone policy or “add - on” coverage • Provide coverage for employee dishonesty or theft, forgery, counterfeit money, burglary, robbery, theft, larceny, some electronic (telefacsimile fraud, funds transfer fraud, computer fraud) • Standard Form 24 6
Fidelity Coverage - Background • First Party Coverage--Not a Liability Policy • “Although employee dishonesty policies may cover the loss of third-party property in the possession of the insured, these polices do not serve as liability insurance to protect employers against tortious acts committed against third-parties by their employees .” Lynch Props., Inc. v. Potomac Ins. Co of Ill., 140 F.3d 622, 629 (5 th Cir. 1998) (citation omitted). • Some courts have held that Bonds provide coverage for the liability of the Insured for the loss of third party funds in certain circumstances, but the majority of courts hold that third party losses are not covered by a fidelity bond or policy. 7
• Historically, the FIB is a risk sharing agreement between banks and insurers. • E.g., banks are in business of making loans so no coverage for loss resulting from bad loans. • Banks less able to protect against loss resulting from employee crime (i.e. embezzlement) so the bond provides coverage for this risk. 8
Rules of Construction: Does Contra Proferentem Apply? • “Standard fidelity bonds are drafted by sophisticated parties (representatives of the banking and insurance industries); therefore, the traditional rule of construing any ambiguity in favor of coverage does not apply.” First State Bank v. Ohio Cas. Ins. Co. , 555 F.3d 564, 568 (7th Cir. 2009) see also: Tri City Nat'l Bank v. Fed. Ins. Co. , 674 N.W.2d 617, 621-622 (Wis. Ct. App. 2003) FDIC v. Insurance Co. of N. Am. , 105 F.3d 778, 786-787 (1st Cir. 1997); Sharp v. Federal Savings and Loan Insurance Corp. , 858 F.2d 1042, 1046 (5th Cir. 1988) 9
• “ This, however, does not change the fact that, as between Aetna and Home [Savings and Loan], Home had little say in the drafting of this particular bond…. While specific evidence regarding Home's and Aetna's intentions here might persuade us to do otherwise, the absence of such evidence leaves us with the basic rule of construing the bond, where unclear, in Home's favor .” Home Sav. & Loan v. Aetna Casualty & Sur. Co. , 817 P.2d 341, 347 n.5 (Utah Ct. App.1991) (distinguishing Sharp ) see also: Am. Cas. Co. v. Etowah Bank , 288 F.3d 1282, 1285 (11th Cir. 2002) (applying Georgia law) FDIC v. Oldenburg , 34 F.3d 1529, 1545 (10th Cir. 1994) (applying Utah Law) Fountainebleau Community Bank v. Fidelity & Deposit Co. , 1994 U.S. Dist. LEXIS 3880 (E.D. La. Mar. 30, 1994) (applying Louisiana Law) Transamerica Ins. Co. v. FDIC , 465 N.W.2d 713, 715-16 (Minn. Ct. App. 1991), aff’d in part and rev’d in part on other grounds , 489 N.W.2d 224 (Minn. 1992). 10
Insuring Agreement (A) Dishonesty • Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others. • Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent: (a) To cause the Insured to sustain such loss, and (b) To obtain improper financial benefit for the Employee or another person or entity. 11
Who Is An “Employee”? Common Elements: (1) Right to direct and control in the performance of duty. (2) Direct compensation by wages, salaries or commissions. 12
Who Is An “Employee”? "Employee" does not mean: (1) Any agent, broker, factor, commission, merchant, consignee, independent contractor or representative of the same general character. 13
Who Is An “Employee”? Endorsements may expand or alter who is considered to be an employee: (1) Independent Contractor Endorsement (2) Designated Agent As Employee Endorsement (3) Agent Extension Endorsement 14
Who Is An “Employee”? Brokers as " employees“ U.S. Fire Ins. Co. v. Nine Thirty FEF Investments, LLC and Nine Thirty VC Investments LLC , Index No. 603284/09 (N.Y. Sup. Ct. October 1, 2013) • Outside Investment Advisor Rider provided coverage for loss resulting directly from dishonest acts of any Outside Investment Advisor named in the schedule • Exclusion (x) – excluded coverage for loss resulting directly from dishonest acts of a broker 15
New Hampshire Ins. Co. v. MF Global, Inc. , 970 N.Y.S.2d 16, 108 A.D. 3d 463 (N.Y.App. Div. July 16, 2013) • MF Global was a commodities futures broker and Clearing Member of CME • A commodities broker in MF Global's Tennessee office made unauthorized trades and sustained a $141 million loss on commodities futures • CME Clearing House demanded an intraday settlement to cover the loss • MF Global paid CME and sought coverage under fidelity policy 16
New Hampshire Ins. Co. v. MF Global, Inc. , 970 N.Y.S.2d 16, 108 A.D. 3d 463 (N.Y.App. Div. July 16, 2013) • Remanded for a determination of whether the rogue trader was an "employee ." 17
New Hampshire Ins. Co. v. MF Global, Inc. , 970 N.Y.S.2d 16, 108 A.D. 3d 463 (N.Y.App.Div. July 16, 2013) • "Employee" defined as "(i) a person under an implied contract of employment or services with the insured; (ii) a person working under the direct control and supervision of the insured; or (iii) a person who is paid by the insured under their payroll system." • "[E]mployee does not mean any independent broker . . . remunerated on a sales or commission basis unless specifically agreed by the insurer and endorsed on the bond." 18
New Hampshire Ins. Co. v. MF Global, Inc. , 970 N.Y.S.2d 16, 108 A.D. 3d 463 (N.Y.App. Div. July 16, 2013) • Factual questions as to whether trader was an "employee" - Paid on a commission basis - 1099 not W-2 - no evidence of who supervised or in what capacity – who directed or controlled? 19
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