Court Finds Ambiguity in Dishonesty Exclusion in Inland Marine All Risk Policy
April, 2002
In Transcap Associates, Inc. v. CIGNA Ins. Co., No. 99-C-5292 (N.D. Ill.), the court found an ambiguity in a dishonesty exclusion in an inland marine all risk policy and as a result awarded summary judgment to the insured for two million dollars.
Facts
Transcap, the insured, provided purchase order financing to manufacturers, here Ulysses Memory Corporation, which needed funds in order to meet purchase orders placed by its customers. As part of the financing process, Transcap acquired ownership rights to the component parts that Ulysses would use to fill the orders. Upon receipt of a purchase order, Ulysses would assign it to Transcap which then instructed a warehouser to ship the product to fill the order exclusively upon Transcap’s written direction. Transcap would collect payment proceeds of the purchase order from the customer, deduct its cost and fees, and remit the net proceeds to the manufacturer.
Transcap had sought insurance coverage that would, among other things, cover the risk of theft or misappropriation of Trancap’s inventory by manufacturers and warehousers. The insured’s commercial inland marine all risk insurance policy contained the following exclusion:
Dishonesty: We won’t cover loss caused or resulting from any dishonest act or omissions done either by you, your partners, your officers or your employees (whether they are working or not), or by anyone authorized to act for you.
Transcap and Ulysses entered into a tripartite warehouse agreement with MGV acting as the warehouser. Both Ulysses and MGV agreed that MGV would ship Transcap products exclusively upon the written direction of Transcap. In August 1998, without Transcap’s knowledge or authorization, MGV shipped over two million dollars worth of Transcap inventory. The inventory was not returned and no payments were made. The insurer’s general adjuster reported continued uncertainty with respect to the applicability of the dishonesty exclusion, noting the key question as being whether MGV was authorized to act for Transcap. Despite the adjuster’s recommendation to do so, the insurer never obtained a coverage opinion and denied coverage.
The insurer, relying on the exclusion for losses caused by the dishonest acts of Transcap or “anyone authorized to act on Transcap’s behalf,” argued that MGV was authorized to act on Transcap’s behalf.
Analysis
The court found that the nature of the policy, an all risk policy, contradicted the insurer’s argument that the policy was issued solely to “cover accidental damage to property.” Finding the phrase “anyone authorized to act for you” in the dishonesty exclusion ambiguous, the court construed the language in favor of Transcap.
While the purchase order assignment agreement and the warehousing agreement granted certain contractual rights and authorities with respect to the storage of Transcap’s goods, those contracts did not render all parties entering into that type of contract “authorized to act on Transcap’s behalf.” The court observed that to read the dishonesty exclusion to exclude anyone and everyone to which Transcap granted a contractual right would render the policy a nullity. If an insurer intended to exclude a loss where a warehouseman-bailor’s dishonest acts were a contributing factor, it should have drafted the exclusion to cover this precise situation. The notion that a bailee is “authorized to act for” a bailor, wrote the court, would lead to an impermissibly absurd result. Thus, the court distinguished those authorized to act for an insured from those to whom an insured has merely entrusted property.
Also, the court also summarily dismissed the insurer’s argument that the loss was excluded by an exclusion for mysterious disappearance of property, since all parties agreed that the property was missing because of the unauthorized shipment by MGV.
Practice Pointer:
The phrase “anyone authorized to act for you” will not be applied where there is merely a general business relationship, or, as here, a bailment. This is particularly so where the loss itself occurred due to an act taken without authorization from the insured or its agents.
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