by Chris Graham and Joseph Kelly

Piles Chevrolet Pontiac Buick, Inc. v. Auto Owners Ins. Co., Nos. 2011-CA-002317-MR, 2011-CA-002340-MR (Kent. App. May 17, 2013)

Insured’s bookkeeper, along with her husband, defrauded Insured of over $572,000. Bookkeeper wrote unauthorized checks to herself, her husband, and her husband’s business, hid them in a pile of legitimate checks to be signed, and presented the pile of checks to authorized persons for signature. She also purchased vehicles from Insured (a car dealer), and used her knowledge of Insured’s bookkeeping system to make sure their checks for the purchase price of those vehicles were never cashed. In total, bookkeeper engaged in 28 vehicle transactions and 45 unauthorized checks.

The umbrella Policy between Insurer and Insured covered $15,000 for commercial crime caused by employee dishonesty, $10,000 for loss of property caused by forgery or alterations to negotiable instruments, each per occurrence.

“Occurrence” is defined under the Policy as “all loss caused by, or involving one or more `employees’, whether the result of a single act or series of acts.”

Insurer denied coverage for the full amount of loss Insured sustained, and Insured filed suit seeking coverage of the full loss. The key issue at summary judgment was whether bookkeeper’s actions were one occurrence or multiple occurrences under the policy. Trial court held that bookkeeper’s actions were one occurrence, and ordered Insurer to pay $35,000. Both parties appealed but the Court affirmed, resolving the issues before it as follows:

Issue #1: Did the bookkeeper’s fraudulent actions constitute one occurrence of fraud under the Policy? Yes.

The Court noted that the facts clearly established an ongoing scheme by bookkeeper and her husband to defraud Insured and that the Policy clearly defines “occurrence” as “all loss caused by, or involving one or more `employees’, whether the result of an act or series of acts.”

Issue #2: Was the loss recoverable under the forgery and alteration section of the Policy? Yes.

Insurer unsuccessfully argued that the forgery and alteration coverage language excluding any “loss resulting from any dishonest or criminal act committed by any [Insured] employees . . . whether acting alone or in collusion with other person.” Bookkeeper was not an employee of Insured when she drafted the first 13 fraudulent checks. She was performing work for Insured, but was paid by and was under the control of a third party during that period.

Insurer also unsuccessfully argued that bookkeeper didn’t forge or alter checks, but instead deceived her superiors to sign legitimate checks. As “forgery” was not defined under the Policy, the Court afford the word its plain meaning which under the applicable criminal statute defined a forged instrument as “a written instrument which has been falsely made, completed, or altered.” Court held bookkeeper was essentially altering checks prior to their completion, and thus the checks were forgeries.