Construction Contractors was insured by a
Crime Policy issued by Federal Insurance effective March 22, 2013 through July
1, 2013. The policy was issued after Construction first applied for coverage in
January 2013. Contractors filed a loss with Federal in May, 2013 and the
insurer denied the claim, alleging that Construction had known of the loss
before the policy period. Construction sued Federal and then appealed after a court
ruled in favor of the insurance company.
Upon appeal the circumstances of the case
were fully reviewed. Construction was a subsidiary of Associated General
Contractors which was formed in 2001 to handle the trade organization’s many
employment functions such as accepting funds for payroll, tax, employee benefit
and administration obligations.
In 2002, Construction outsourced its duties
to AlphaCare which was managed by part-owner William Cook. In July 2012,
another AlphaCare owner, John Moon, reported to Construction that it did not
have the necessary funds to meet its obligations, even though member companies
had continued to deposit required funds. Moon reported that he had been
submitting false financial statements to Construction to shield that the latter
had amassed substantial federal and state liabilities for unpaid taxes.
Construction terminated AlphaCare’s contract and hired a new CFO.
The CFO began investigating the work
performed by AlphaCare and suspected that its managing owner/partner, Cook, may
have been responsible for the irregularities. By October, 2012, the CFO
determined the extent of losses caused by Moon’s actions. It was determined
that wire fraud was involved, but not the exact details of how the fraud was
accomplished. However, in May 2013, the CFO determined that AlphaCare, via
Cook, required client construction firms to deposit funds that were made out in
the name of Construction, but which used an account number that belonged to
AlphaCare. After this determination, the claim was made to Federal.
The higher court reviewed the circumstances,
focusing on the same elements used by the lower court. One, it examined the
loss history information that Construction was required to provide Federal. The
information included that AlphaCare was being investigated for possible
criminal prosecution for unauthorized fund transfers. The court noted that
coverage was subject to a “Loss Discovered” option that barred coverage for any
loss of which the applicant/policyholder had previous knowledge. Second, the
policy’s wording defined any and all losses involving acts of the same employee
or third party as a single act. Third, the court evaluated the policy
definition of a Discovered Loss. The term included knowing of circumstances
that a reasonable party would recognize would likely result in a loss.
After review of each party’s arguments, the
court held that, under both the Loss Discovered and single act wording,
Construction was aware of a loss before the policy term. The lower court
decision in favor of Federal was affirmed.
Construction Contractors Employer Group
L.L.C. v. Federal Insurance Company, Defendant-Appellee. USCTApp, 6th
Circuit. No 15-4352. Filed July 11, 2016. Affirmed. Westlaw 829 F 3d 449
