Neither Bond Nor E&O Policy Covers Entity Losses from Employee Theft of Client Funds
Applying Michigan law, the United States District Court for the Eastern District of Michigan has held that a fidelity bond did not provide coverage for an employee’s theft of client funds because the insured’s losses were suffered indirectly through reimbursing client losses. Hantz Fin. Servs., Inc. v. Nat’l Union Fire Ins. Co., 2015 WL 5460632 (E.D. Mich. Sept. 17, 2015). In addition, the court held that an E&O policy did not provide coverage for claims arising out of the employee’s theft because the employee intended to steal client funds.
The employee of the insured financial services company stole investment funds from the company’s clients by depositing client checks meant for investments or insurance directly into his personal account. After discovery of the scheme, several clients brought suit against the company, and with the bond insurer’s consent, the company settled the clients’ suits and fully repaid to its clients the funds misappropriated by the employee. The company then sought coverage for the amounts it paid to its clients under a fidelity bond and an E&O policy.
The court held that the bond did not provide coverage for the losses resulting from settling the clients’ claims for misappropriation of their investment funds. The bond provided coverage for “[l]oss resulting directly from dishonest or fraudulent acts committed by an Employee with the manifest intent to cause the insured to sustain such loss.” The court interpreted “[l]oss resulting directly from” to mean a direct loss immediately flowing from the employee’s conduct. Because the insured’s only loss was reimbursement of client funds stolen by the employee and the bond did not cover indirect third party losses, the insured’s reimbursement of its clients’ funds was not a direct loss. In addition, the court held that the employee did not manifestly intend that the insured reimburse the clients and sustain a loss. Although the insured settled the clients’ claims with the bond insurer’s consent, the court held that the bond insurer was not estopped from denying coverage because the bond insurer explicitly cautioned that its consent to settlement provided no indication that the settlement might be covered under the bond.
The court also held that the insured’s E&O policy did not provide coverage for the settlement of the client’s claims. The E&O policy barred coverage for claims “arising out of . . . any actual or alleged Wrongful Act committed with knowledge that it was a Wrongful Act.” The exclusion applied because the employee “intended to steal the money, and schemed, plotted, and concealed his actions.”
The court held that the exclusion also applied to the allegations against the insured for negligent supervision of the employee for two reasons. First, the allegations of negligent supervision arose out of the employee’s intentional acts. Second, even if the employee’s intentional acts and the insured’s negligent supervision were concurrent causes of the claims, the exclusion would apply because there is no coverage for a loss concurrently caused by covered and uncovered acts.
