S&K Motors v. Harco National Insurance Leaves Commercial Crime Insurer at a Loss
November, 2009
Introduction
In S & K Motors v. Harco Nat'l, 213 P.3d 630 (Wash. App. 2009), the Washington Court of Appeals examined the whether an insured's excluded losses from a series of employee thefts could be considered when assessing whether the insured had been "fully compensated." The court determined they could, and reaffirmed the broad scope of the made-whole doctrine in Washington.
Facts
In February of 2007, S & K Motors, a car dealership doing business as Pinnacle Mazda, discovered that its finance manager, Stephen Casino, had been stealing from the dealership. Rather than depositing cash receipts, such as down payments on purchased cars, Casino converted the money for his own use. After Pinnacle confronted him, Casino confessed to taking a combined total of $21,590.00 over the prior three months. Casino begged to keep his job, promising to repay the pilfered funds and to not steal again. Pinnacle agreed, and a contract was executed whereby Pinnacle would garnish Casino's wages until the debt was repaid. Pinnacle soon learned that Casino had been less than forthright about his thefts. In reality, he had stolen $27,590.00 before executing the agreement with Pinnacle-$6,000.00 more than originally thought. He continued to steal after Pinnacle agreed to keep him on. Nevertheless, Pinnacle allowed Casino to keep his job for a second time, adding the additional stolen funds to Casino's debt. Casino kept stealing and Pinnacle fired him on May 1, 2007. All told, Casino took approximately $72,305.00, $44,715.00 of which was taken after Pinnacle became aware of the thefts. Of that amount, Pinnacle recovered $26,561.00.
Four days after reporting Casino's actions to the police, Pinnacle filed a claim with its employee-loss insurer, Harco National, seeking indemnification for Casino's thefts. Harco denied the claim, originally citing an out of date provision in the policy, but later arguing that the $26,561.00 Pinnacle garnished from Casino compensated it for the losses incurred before discovery of Casino's actions-the only amounts covered under the policy. Therefore, according to Harco, paying the claim would result in a double recovery.
Pinnacle disagreed and filed suit, alleging bad faith and violations of Washington's insurance fair conduct and consumer protection acts. Pinnacle argued that under both the terms of the policy and Washington law, Harco was not entitled to benefit from any third-party recovery of the pilfered funds because Pinnacle had not been "fully compensated" for its total loss, i.e. the money Casino stole both before and after Pinnacle discovered his misdeeds. Both sides moved for summary judgment. The trial court found for Harco. Pinnacle appealed.
Analysis
The Court of Appeals of Washington, First Division, reversed. It began by examining the policy at issue. Harco insured Pinnacle under a commercial crime policy. The insuring agreement provided that Harco would indemnify Pinnacle for any loss it sustained resulting from an "occurrence," which the policy defined as either an individual act or series of acts, related or unrelated, committed by an employee during the policy period. A condition in the policy provided that any theft coverage terminated as to an employee upon Pinnacle learning of any theft or other acts of dishonesty by the employee. Pursuant to Washington law, the policy also provided that Harco would be entitled to benefit from any recovery from third-parties only if Pinnacle was "fully compensated" for its loss.
The court decided that resolution of the case turned on whether Casino's pre- and post-discovery thefts were separate "losses" under the policy. If they were, then the $26,561.00 recovered from Casino "fully compensated" Pinnacle for its "loss," and Harco could invoke its recovery rights to avoid payment. However, if the sum total of Casino's thefts were one "loss," then Pinnacle had not been fully compensated, recovering only $26,561.00 of the $72,305.00 stolen, and Harco could not benefit.
The court reasoned that because both Harco and Pinnacle assumed a single "loss" equated to a single "occurrence," then the issue was whether Casino's thefts constituted one "occurrence" under the terms of the policy. The court held they were.
Harco argued that the term "occurrence" must be read in concert with the policy provision excluding coverage for thefts after the employer learns of an employee's dishonest ways. According to Harco, an occurrence lasted only as long as the thefts remained undiscovered. Any contrary reading of the policy, it argued, would essentially provide Pinnacle the economic equivalent of coverage for the undeniably excluded post-discovery thefts because Pinnacle could apply the $26,561.00 it recovered from Casino against those thefts. This would diminish Pinnacle's losses and, essentially, shift an excluded risk back on to Harco. Harco argued such a reading would vitiate the purpose behind the discovery exclusion and render it meaningless.
The court disagreed. It first concluded that a plain reading of the term "occurrence" under the policy would include all of Pinnacle's lost funds because Casino's thefts were clearly a series of acts by an employee. Citing Sherry v. Financial Indemnity Company, 160 Wash. 2d 611, 615, 160 P.3d 31 (Wash. 2007), it opined that Harco's reasoning assumed a relationship between coverage and reimbursement that did not exist. "Coverage," it concluded, "concerns whether an insurer contracted to pay a particular loss." "Reimbursement," on the other hand, "concerns only whether an insured has been fully compensated for its loss." Furthermore, the question of reimbursement "does not depend upon whether the loss is fully or partially insured. Nor does it depend upon whether the insured itself was the cause of some part of the loss."
Thus, an entire "occurrence" may or may not be covered, but it must be considered in total when determining whether the insured was fully compensated, and consequently whether the insurer has any right to reimbursement or a set-off. The court reasoned that this result would not render the policy's limitation of coverage clause meaningless because that provision operated to limit what portion of Pinnacle's loss was covered, not to define the scope of the loss itself. In the words of the court; "[t]he amount Harco is required to pay under the policy now is the same as what it would have paid if Pinnacle had fired Casino on the spot and immediately reported its loss to Harco." Additionally, the court rejected Harco's contention that an implied term in the agreement between Pinnacle and Casino required Pinnacle to apply the garnishments against covered losses first. The court reasoned that Casino's subsequent thefts rendered the agreement unenforceable and, even if the agreement was still valid, Harco had no rights to enforce any of its terms, apparent or implied, because it was not a party to the contract.
Learning Points
Harco demonstrates several basic points of insurance law. First, courts read policies according to their plain terms and in favor of insureds. The court did not hesitate to find all of Casino's thefts constituted one "loss" primarily because of the manner in which the policy defined an "occurrence," despite Harco's colorable argument that doing so would contravene Harco's intent to exclude any coverage for losses incurred after the insured learned of an employee's thieving ways.
Second, Harco reinforces that, at least under Washington law, an insured's culpability for a loss has no relevancy when determining whether they have been fully compensated or "made whole." Clearly, Pinnacle knew Casino was prone to theft when it agreed to retain him as an employee. However, though the case facts are silent on this issue, Pinnacle must have failed to take adequate steps to prevent Casino from being in a position to continue stealing. Furthermore, it did this not once, but twice. Whatever its reasons, it is certainly difficult to argue Pinnacle was nothing more than Casino's unwitting victim.
Lastly, Harco serves as a cautionary tale. Any insurer looking to withhold indemnity payments to its insured because of the insured's prior recoveries must think expansively about whether the insured has been fully compensated for its loss. The insurer must consider the totality of the insured's losses, covered or uncovered, to determine the scope of its rights-or whether it has any at all.
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