The Building One case involved a manager of a subsidiary who essentially highjacked it for the personal enrichment of himself and his cronies. A key aspect of the operation was to have the parent company pay for costs and expenses through regular requisitions from the subsidiary. Unbeknownst to the parent company, the subsidiary submitted requisitions for fabricated expenses and previously paid expenses. Payments for the fabricated expenses and false charges were remitted to dummy corporations controlled by the manager or his associates. (In this way, the money was siphoned out of the company.) Cf. Hanson PLC v. National Union, 794 P.2d 66, 71-72 (Wash. App. 1990). To cover up the submission of these false expenses, the manager cooked the books of the subsidiary by shifting on paper the costs associated with one job to other jobs, so as to make the older jobs appear profitable. A key component of the claim was the insured’s contention that the subsidiary aggressively took on more and more work (often below cost) in order to have additional cost centers against which to transfer real and fake invoices, all to cover-up, perpetuate, and facilitate the theft and embezzlement from the parent company. Compare J.R. Norton Co. v. Fireman’s Fund Ins. Co., 569 P.2d 857, 860 (Ariz. App. 1977).

Building One timely submitted its sworn proof of loss, but the insurer refused to make any payment. Building One initiated a suit for coverage, including seeking an award of its attorneys’ fees on the grounds that the carrier denied coverage unreasonably and in bad faith. National Union’s fundamental contention was that the policy indemnified the insured only for the amounts it could prove were embezzled (and not for the full monetary loss due to the employee’s misconduct). Shortly before trial was to begin, the court denied National Union’s motion for summary judgment and adopted the rulings on the meaning of the policy sought by the insured. (After the summary-judgment decision rejecting National Union’s defenses to payment, the case settled.)

As to manifest intent, the court held that questions of fact precluded summary judgment in the insurer’s favor. The court next addressed the insurer’s contention that the losses suffered by Building One were not “sustain[ed] resulting directly from” the employee’s bad acts. The court held that “direct losses” covered by the Blanket Crime Policy at issue included all amounts of monetary loss that were proximately caused. See generally Imperial Ins. Inc. v. Employers’ Liability Assur. Corp., 442 F.2d 1197, 1198-99 (D.C. Cir. 1970) (“The loss here was a pecuniary depletion of [the insured’s] monetary assets. . . Moreover, the definition of [covered] money . . . does not clearly exclude liability to compensate for payments made from the insured’s funds, if due to the misconduct described.”); James B. Lansing Sound, Inc. v. National Union, 801 F.2d 1560, 1566 (9th Cir. 1986); Couch on Insurance § 161:58 (Supp. 2002). After holding that the covered loss of money is whatever the insured shows to be proximately caused from the covered misconduct of its employee, the Building One court found that factual disputes barred summary judgment.

The court then addressed two final arguments of the insurance company.

First, the court found that the insurance policy covers the money lost by the insured in performing the contracts entered into by its subsidiary (contracts that it would not have entered had it known the true facts). As the court held, “in rejecting National Union’s motion for summary judgment on this issue, the Court rejects National Union’s argument that simply because the contracts themselves were not misappropriated or created fraudulently, losses deriving therefrom are non-compensable under the insuring agreement. Although the ‘resulting directly’ language of the insuring agreement limits the scope of the insurer’s risk significantly, it does not limit that risk solely to the money that is eventually found in the embezzler’s pocket.” See also Peoples Bank & Trust Co. v. Aetna Cas. & Sur. Co., 113 F.2d 629, 631-32 (6th Cir. 1997); Southside Motor Co. v. Transmerica Ins. Co., 380 So.2d 470, 472 (Fla. App. 1980); Citizen’s State Bank v. New Amsterdam Cas. Co., 224 N.W 251, 453 (Minn. 1929). This ruling was significant because the amounts lost by Building One were “far more extensive than the gains [the employee] received.”

Second, the court rejected the application of Exclusion (m), which bars coverage for “damages of any type for which the Insured is legally liable, except direct compensatory damages arising from a loss covered under this Policy.” In construing this provision, though the court recognized that third-party claims standing alone were insufficient to trigger coverage, once coverage was triggered, “the exception to exclusion (m) provides enough latitude that all compensatory damages associated with the employee’s dishonesty are covered, not just the amounts the employee embezzled, but also those proximately related to the entire scheme.” Compare Arlington Trust Co. v. Hawk-Eye Security Inc. 301 F. Supp. 854 (E.D. Va. 1969).

In short, the court recognized that “Employee Dishonesty” coverage is not artificially limited to employee embezzlement and instead affords coverage for whatever “Loss of Money . . . the Insured shall sustain resulting directly from” covered misconduct, so long as the requisite causal link is shown between the actual money loss and the employee’s misconduct.

Finally, it’s worth noting that the Building One case involved the policyholder’s effort to adduce proof of wrongdoing with the requisite manifest intent without the direct testimony of the malefactor, who refused to testify as to his intent and state of mind due to the pendency of an eventually successful criminal prosecution. In the fidelity-insurance context, such a lack of direct evidence of manifest intent will not lead to a failure of proof. To the contrary, there is a unique rule in this area that the malefactor’s invocation of the Fifth Amendment privilege may be used against the insurance company as evidence that covered loss occurred. See Robert Johnston, Inferring Dishonesty: The Fifth Amendment and Fidelity Coverage, available at http://www.spriggs.com/news/pdfs/ACFB9AE.PDF.)