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New Development—Parent's Attempt to Disregard Separate Identity of Subsidiary Rejected
In the litigation context, parent companies typically contend that a court should respect the separate identity of their subsidiaries. In an interesting twist, a trade association argued that the separate identity of its limited liability company subsidiary should be disregarded in a coverage dispute with its insurance carrier. The association formed an insurance agency to collect commission payments on insurance policies sold to its members, and then purchased an employee fidelity policy for the association and several affiliated companies (but not its subsidiary insurance agency). An association employee, who was also the general manager of the insurance agency, subsequently embezzled funds from the agency. The association sued its carrier to recover the loss under the employee fidelity policy after the carrier denied coverage. The carrier argued the association should not recover because its uninsured subsidiary incurred the loss. The association contended that the agency’s separate identity should be disregarded because the agency’s sole purpose was to serve as a conduit for commissions payable to the association. The federal district court granted summary judgment in favor of the carrier, and the Sixth Circuit affirmed. The Sixth Circuit reasoned that the loss was incurred directly by the agency and refused to disregard the agency’s separate identity. Tooling, Mfg. & Techs. Ass’n v. Hartford Fire Ins. Co., No. 10-2480, 2012 WL 3931802 (6th Cir. Sept. 11, 2012) (applying Michigan law).
Takeaway: It is good practice to remind clients who form and acquire new subsidiaries to consider insurance coverage issues carefully when doing so. In particular, an employee fidelity policy generally is not intended to cover third party claims, and fidelity coverage was narrowly construed in this case.