A federal appeals court upheld coverage for a $32 million theft loss under a business malpractice policy this week.1 The theft by the employee took place over several years and involved an elaborate scheme accomplished primarily by altering numerous transactional and financial documents related to grain sales.
The insurer argued that this elaborate scheme was not “theft” because it did not involve a physical taking of the property. The court disagreed finding:
Cargill’s policy provided coverage for employee “theft,” which was defined in the policy as “unlawful taking of property to the detriment of the insured.”; Additionally, the insured’s loss must have been caused “directly from” employee theft to be covered by the policy.
‘Take’ is not defined in the policy, but both parties rely on the same definition: ‘[t]he act of seizing a thing, with or without removing it, but with an implied transfer of possession or control.’ taking, Black’s Law Dictionary (11th edition 2019). Addressing several arguments about how Backi’s control of the grain sales was not a “taking” of the grain, National Union argues that her fraudulent conduct did not amount to theft. We do not agree. Backis implicitly took control of the grain so that her conduct constituted an unlawful taking. She exercised her authority to direct the transfer and sale of the grain. Looks Sherwin-Williams Co. v. Beazley Ins. Co., No. 18-02964, (D. Minn. July 23, 2020) (concluding that a reasonable jury could find that an employee’s control over his employer’s invoice approvals amounted to employee theft). She also lied to Cargill and manipulated its financial records to get the company to ship its grain to Albany. Looks Cumulus Invs., LLC v. HiscoxInc., 520 F.Supp. 3d 1141, 1151 (D. Minn. 2021) (concluding that employee lies, falsification of documents, and manipulation of financial data constituted an “unlawful taking” of investors’ money). It is true that Backis never physically seized the grain, but a “taking” includes “implied transfer” of control, and National Union concedes that under this definition a physical seizure was not necessary. According to the report, Backis “controlled the pricing and accounting of sales” of the grain, and but for Backis’ misrepresentations, Cargill would have shipped only a minimal amount of grain to Albany. This control constituted an illegal taking according to the insurance.
Business crime policy is important. The crimes are often committed by trusted employees with access to money and financial documents. The policyholder had employed the employee for 30 years and was clearly trusted. The once-trusted employee now resides in a federal prison.
Crime policies often have statements that require immediate action and notification to the insurer when a suspected crime has been committed. Valuation of these losses is often complex and requires auditors to determine the size of the loss.
My experience has been that the greater the crime loss, the more the insurer looks closely at policy provisions trying to come up with excuses not to pay the claim.
The papers said it was a crime of passion and he told me there was no passion in it.
—Cormac McCarthy, “No Country for Old Men”
1 National Union Fire Ins. Co. of Pittsburgh v. CargillNo. 21-3141 (8Th Cir. 7 March 2023).