250_C029

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EMPLOYEE'S EMBEZZLEMENT OF MONEY FROM HOSPITAL'S MEDICAL STAFF CHECKING ACCOUNT NOT COVERED

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Meriter Health Services, Inc. (Meriter) was a health care services corporation and holding company of various entities, including Meriter Hospital, Inc. (Hospital). In August 2004, it discovered that Nancy Malek (Malek), one of its employees, had embezzled nearly $500,000 between 1991 and 2004 from a checking account opened in the name of the Medical Staff of Meriter Hospital (Staff). Malek was subsequently convicted of mail fraud in United States District Court after pleading guilty to the charge of embezzling from Meriter.

 

Staff consisted solely of physicians accredited to practice at the Hospital as independent contractors or having the professional privilege to practice there. They were not Meriter employees or paid by Meriter. The Staff existed to augment the quality of professional services by the physicians who provided services at Meriter. The checking account embezzled from was funded entirely by annual dues paid by Staff member physicians. The dues paid for Staff stipends and honoraria, donations to charities, retreats, conferences, continuing medical education and salary to Staff personnel, including Malek, who was the Medical Staff Coordinator. Disbursements from the account were to be directed by the Staff executive committee.

 

At the time of the embezzlement, Meriter had a commercial crime insurance policy issued by Travelers Casualty and Surety Company of America (Travelers) that covered, among other things, loss of money attributable to employee dishonesty. The "Ownership of Property; Interests Covered" provision limited coverage to property Meriter owned or held, or for which it was legally liable. Meriter submitted a claim that Travelers denied in part based on the fact that the embezzled funds were the property of Staff and that Staff was not a named insured or joint named insured entity on the policy. Meriter filed a complaint, citing breach of contract for Traveler's denial of coverage, arguing that the embezzlement was a covered loss and that it had performed all its obligations required under the policy. Travelers moved for, and received, summary judgment. Meriter moved for partial summary judgment, which was denied.

 

The circuit court ruled that Meriter materially misrepresented that the Staff bank account was audited, that Travelers relied on the misrepresentation, and that the misrepresentation contributed to the loss, resulting in it not having to indemnify Meriter. Meriter appealed.

 

The Court of Appeals of Wisconsin ruled that Meriter did not own or hold funds in Staff's checking account that was funded by physicians' dues and, as a result, was not legally liable for Malek's embezzlement. This was because the funds were not covered property under the employee dishonesty coverage of the commercial crime policy, even though Hospital was required to maintain a medical staff and Meriter's employees oversaw the account. It determined that Meriter lacked signatory authority and could not withdraw funds from the account or deposit funds into it, did not report or pay taxes on the interest, did not exercise any internal controls, and that coverage did not apply to Meriter's vicarious liability. In addition, Meriter did not claim to be a bailee or trustee of the account. For these reasons, it concluded that the circuit court did not err by entering summary judgment for Travelers and affirmed its judgment.

 

Meriter Health Services, Inc., Plaintiff-Appellant, v. Travelers Casualty and Surety Company of America, Defendant-Respondent. No. 2007AP1983. Submitted on Briefs Jan 14, 2008. Opinion Filed July 17, 2008. 758 N.W.2d 112,2008 WI App 132