The U.S. Court of Appeals for the Seventh Circuit recently upheld a judgment in favor of an insurance company against a bank in an action seeking a declaration that a clause in a fidelity insurance policy required the insurer to defend and indemnify the bank in the underlying action, where the employee perpetrator of an embezzlement scheme sent instructions via phone and never entered the bank's premises to carry out the crime. A copy of the opinion is attached.
An officer ("Officer") of a corporation ("Corporation") in charge of accounting at Corporation embezzled over $17 million from Corporation by instructing plaintiff bank ("Bank") to prepare more than 570 cashier's checks to pay her personal debts from Corporation's account at Bank. After Officer was sentenced to prison, Corporation and Bank began litigating the issue of which of them should bear the loss. Bank separately filed suit against defendant insurance company ("Insurer") in federal court, seeking a declaration that Insurer was required under Bank's insurance policy ("Policy") to defend and indemnify Bank against any losses resulting from the embezzlement.
Specifically, Bank relied on Clause 2 of the Policy, which provided that Insurer would indemnify Bank for "Loss of Property resulting directly from . . . false pretenses, or common law or statutory larceny, committed by a natural person while on the premises of" Bank. The parties agreed that the embezzlement was accomplished by phone rather than "on the premises" and that Officer sent an employee of Corporation to Bank to pick up the checks.
The lower court concluded that the fact that Officer carried out the scheme by phone, and did not enter Bank's premises rendered Clause 2 inapplicable, and entered judgment in Insurer's favor. Bank appealed. The Seventh Circuit affirmed.
After addressing an issue involving alignment of the parties for purposes of diversity jurisdiction, the Seventh Circuit noted that federal courts have uniformly held that a fraud orchestrated from outside a financial institution's premises is not covered by Clause 2, an industry-wide provision in fidelity-type insurance policies. The Court further observed that the purpose of an "on premises" clause is to exclude from coverage the type of fraud that was perpetrated here.
In rejecting Bank's assertion that the opinions relied on were irrelevant because Officer committed larceny rather than fraud, the Seventh Circuit pointed out that the distinction Bank sought to draw did not alter the so-called "on-premises" requirement. In so doing, the Court stressed that in order for Clause 2 to be applicable here, a person entering Bank's premises would have to be capable of being convicted of larceny even though under the facts in this case, that person lacked the mental state required for conviction of larceny.
Finding Bank unable to explain the relevance of the distinction between larceny and fraud with respect to the applicability of the on-premises requirement in Clause 2, the Seventh Circuit concluded that Clause 2 did not apply here because Officer never entered the Bank's premises to commit the crime, and Insurer was thus not required to indemnify or defend Bank in its litigation with Corporation.
Accordingly, the Seventh Circuit affirmed the lower court's judgment.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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