The California Court of Appeal has held that employee dishonesty coverage for property for which an insured is “legally liable” applies when property has been bailed or entrusted to the insured, and is not third-party liability insurance. ( Simon Marketing v. Gulf Ins. Co. (2007) 2007 WL 738975)
Facts
Simon Marketing, Inc. performed promotional and marketing services for McDonald’s Corporation. As part of these services, Simon designed promotional games for McDonald’s and its franchisees.
Jerome Jacobson, Simon’s director of security, was responsible for “seeding” high-value winning game tickets across the nation in McDonald’s giveaway contests. Unbeknownst to Simon, Jacobson organized a network of accomplices and co-conspirators to funnel high-value winning game tickets to specific individuals. According to Simon, Jacobson stole game pieces with a total redemption value of approximately $21 million, and received kickbacks from the putative “winners.” When the “winners” presented the game pieces, McDonald’s (not Simon) issued payments. Jacobson ultimately was arrested, pled guilty and was sentenced to prison.
Federal Insurance Company and Gulf Insurance Company issued policies providing coverage for “direct” losses to property caused by theft or forgery committed by Simon’s employees. Federal’s policy included coverage for theft of property for which Simon was “legally liable.”
After Jacobson’s dishonesty was discovered, McDonald’s terminated its contracts with Simon. In addition, Simon became embroiled in various pieces of litigation with McDonald’s, consumers, and other third parties. McDonald’s ultimately held new giveaway contests, which McDonald’s and its insurers funded.
Simon sued its insurers, Federal and Gulf, essentially alleging that Simon had gone out of business as a result of Jacobson’s fraud. Among other things, Simon alleged (1) the complete loss of its business; (2) out-of-pocket expenses incurred in winding down its business affairs; (3) payments to settle lawsuits; and (4) defense costs incurred in some of the lawsuits. The trial court granted summary in judgment in favor of Federal and Gulf, and Simon appealed.
Holding
The Court of Appeal affirmed, rejecting Simon’s contention that coverage existed because Simon was “legally liable” for the theft of the game pieces. The Court noted that coverage in an employee dishonesty policy for theft of property for which an insured is “legally liable” does not transform the policy into a liability policy. Instead, coverage for theft of property for which an insured is “legally liable” is intended to apply to property for which the insured is a bailee or trustee. In any event, noted the Court, McDonald’s (not Simon) had paid for the stolen prizes by funding new giveaway contests.
The Court also noted that the litigation costs associated with the various lawsuits were not “direct” losses, but rather related to Simon’s liability for third party losses caused by the tortious acts of Jacobson. In addition, the Court held that the failure of Simon’s business because McDonald’s and others cancelled its contracts with Simon did not constitute physical loss or damage to insured property. Similarly, the Court held that payments to settle litigation, costs of defense and costs of winding up its business did not constitute physical damage to property.
Comment
The reasoning of this case is somewhat obscure, largely because the two policies contained insuring agreements and exclusions with somewhat differing language. Ultimately, the Court relied on the fact that both policies essentially were property insurance policies and that it was McDonald’s (not Simon) that paid to fund the new contests.