Opinion Date: 09/11/2012
Issues: Whether the employee-theft clause entitled the plaintiff-Tooling, Manufacturing & Technologies Association (TMTA) to recover under the CrimeShield Policy (the Policy); Defoe v. Spiva; Diversity jurisdiction; Corrigan v. U.S. Steel Corp.; Garden City Osteopathic Hosp. v. HBE Corp.; Consideration of Michigan appellate court opinions; Ziegler v. IBP Hog Mkt., Inc.; Insurance policy interpretation; Citizens Ins. Co. v. Pro-Seal Serv. Group, Inc.; Auto-Owners Ins. Co. v. Churchman; Heniser v. Frankenmuth Mut. Ins. Co.; Whether the TMTA Insurance Agency (Agency) was covered by the Policy; Whether the employee theft provision covered the TMTA's claims; "Directly," "direct," and "direct loss" defined; "Direct is direct" approach; "Proximate cause" approach; Whether the court should apply the "proximate cause" definition for "directly"; Direct Mtg. Corp. v. National Union Fire Ins. Co. (D UT); Fireman's Fund Ins. Co. v. Special Olympics Int'l, Inc. (D MA); Massachusetts Mut. Life Ins. Co. v. Certain Underwriters at Lloyd's of London (DE Ch.); Vons Cos., Inc. v. Federal Ins. Co. (9th Cir.); Acorn Inv. Co. v. Michigan Basic Prop. Ins. Ass'n (Unpub. MI App.); Whether Acorn was distinguishable; Effect of the fact the pilfering employee owed a fiduciary duty to both the TMTA and the Agency
Court: U.S. Court of Appeals Sixth Circuit
Case Name: Tooling, Mfg., & Tech. Ass'n v. Hartford Fire Ins. Co.
e-Journal Number: 52613
Judge(s): Batchelder and Norris (Stranch joined in Sections I & II.A.); Concurring in part, Dissenting in part - Stranch
In an issue of first impression, the court declined to apply the "proximate cause" definition for "directly" because it found that the "direct is direct" approach more persuasive. The court held that as the Agency was a separate entity from the insured-TMTA, both legally and for the purposes of the Policy, the employee's theft of commissions intended for the Agency did not directly result in a loss to TMTA - there was an intermediate step between his theft and TMTA's loss, no matter how closely aligned the Agency and TMTA were. Thus, the court held that the Policy did not show that the parties intended to cover the TMTA's losses due to the employee's misdirection of Agency commissions. Concluding that it could not consider the Agency a party directly covered by the Policy and the Policy did not provide for the TMTA to recover funds that were diverted from the Agency, the court held that there was no breach of the insurance contract. The insurance policy at issue was a type of employee fidelity policy designed to transfer the risk of employee theft from the TMTA to defendant-Hartford (the insurer). "The TMTA's decision to insure against employee theft was prescient - almost immediately after the parties signed the Policy a TMTA employee began diverting funds into his own accounts that would have otherwise, in the fullness of time, accrued to the TMTA." The problem for the court was that the pilfering employee, third-party defendant-Tyler, diverted funds not from the TMTA but from the Agency - a limited liability corporation controlled by the TMTA and from which the TMTA received a significant portion of its income. The Agency was not a named insured under the Policy. Hartford refused to pay on the Policy because of its view that the Agency, not the TMTA, suffered the loss and the Agency was not a named insured. The TMTA appealed to enforce its interpretation of the Policy, arguing that the Agency was covered because the TMTA was covered, and that any loss to the Agency was actually a direct loss to the TMTA - direct losses being covered under the Policy's express terms. The court held that the Agency had no rights or benefits under the Policy, and the Policy did not cover any of the Agency's losses due to employee theft. The court also held that the Policy covered the TMTA only for "loss of or damage to 'money', 'securities' and 'other property' which results [immediately and without any intervening space, time, agency, or instrumentality] from 'theft' by an 'employee.'" On its face, this definition would exclude the type of loss sustained by the TMTA from coverage under the Policy. The court noted that regardless of the impetus for the "directly resulting from" language within employee fidelity policies, state courts and federal courts interpreting state law were split on how to interpret the provision. The court concluded that at least a simple majority of courts that have considered the issue favor a "direct is direct," or analogous reasoning, approach in employee fidelity bonds or insurance contracts. By claiming that it was "inevitable" and "inescapable" that it would suffer a loss due to Tyler's actions, the TMTA was essentially arguing that the court should apply the "proximate cause" definition for "directly." Declining to do so, the court affirmed the district court's judgment for Hartford.
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