The recent victory of Cargill Inc. against an AIG unit for defrauding an employee is poised to expand coverage on commercial crime insurance policies, a prospect likely to spark resistance from insurers.
A March 7 decision by the U.S. Court of Appeals for the Eighth Circuit expands the scope of damages covered by a corporate crime insurance policy that typically covers fraud, dishonesty and theft. It was a rare win for the policyholder in an insurance area lacking case law, lawyers say.
An appeals court ruled that National Union Fire Insurance Co., a division of AIG, must cover not only $3 million that a Cargill employee embezzled, but also $29 million in general business losses that the agricultural giant claims it suffered in result of employee fraud.
In coverage disputes, insurers traditionally argue that they are only responsible for direct losses — as opposed to other incidental losses — from the insured incident. But the Cargill dispute drew the attention of industry watchers because case law on this particular issue — the extent of employee theft criminal insurance policies’ coverage — was sparse.
“The Eighth Circuit has opened up the possibility of different expenses being recoverable” under tort insurance, said Shevani Jaisingh, senior counsel at TittmannWeix, which represents the insurers.
The ruling is likely to have a far-reaching impact, particularly in Eighth Circuit states, because AIG’s insurance language is common among tort policies, insurance attorneys say. Carriers may consider tightening policy terms and raising premiums to avoid covering wider company losses resulting from fewer employee thefts, they say.
“The court recognizes that crime does a lot of harm to a company, more than what a bad actor can steal from themselves,” said Bradley Nash, a partner representing policyholders at Hoguet Newman Regal & Kenney LLP.
Theft by an employee
The ruling will help businesses if they can prove a link between the employee’s actions and additional losses, insurance lawyers say.
The case stems from Cargill’s discovery in 2016 of an embezzlement scheme led by sales manager Diane Bakis. She later pleaded guilty to stealing more than $3 million from the company by inflating grain price forecasts for Cargill’s Albany, New York, market and falsifying invoices.
A joint investigation by Cargill and National Union found in 2019 that Bakis transferred $3 million into her personal bank accounts and that Cargill lost another $29 million in transportation costs it paid to transport the grain from the Midwest to Albany as a result of the Buckeyes scheme.
National Union claims it is not on the hook for the shipping costs because Cargill would have shipped the grain to Albany anyway. But the Eighth Circuit disagreed, affirming the decision of the U.S. District Court for the District of Minnesota.
“Cargill would not have paid approximately $29 million in transportation costs but for the Bakis scheme,” Judge Jane Kelly said in the Eighth Circuit ruling. “The insurance policy covers Cargill’s loss, not Backis’ profit.”
The decision would not be binding in other circuits. But this case is still likely to be cited outside the Eighth Circuit, said Laura Gregory, a partner at Sloane and Walsh LLP, which represents the insurers.
“Other states don’t have a lot of litigation practice on crime insurance disputes,” she said. “I imagine this case will come up in a nationwide briefing for policyholders.”
That AIG is a national carrier would also lend weight to the case when other courts evaluate the issue, Nash said.
Cargill’s coverage terms are common among crime policies, said Lauren Silvestri Burke of Morgan Lewis & Bockius LLP. “The exact same policy language will appear across the country because it’s based on standard coverage forms,” she said.
Cargill’s victory also highlighted the importance of an investigation provision in the policy, which allows the policyholder to join the insurer in preparing a fraud incident report. The report’s findings were used to dictate the insurer’s coverage decisions.
The ruling underscores that expert reports can be persuasive to courts about factual findings, especially in cases where the expert is jointly employed by the parties, Jaisingh said.
In most coverage disputes, the court is often the sole arbiter of what happened and what coverage policyholders are entitled to, said Syed S. Ahmad, a partner at Hunton Andrews Kurth LLP who represents policyholders.
But here, the court accepted the investigation as undisputed facts, as required by policy, he said.