EMPLOYEE DISHONESTY COVERAGE BARRED BY INSURED'S PRIOR KNOWLEDGE

EMPLOYEE DISHONESTY COVERAGE BARRED BY INSURED'S PRIOR KNOWLEDGE 250_C002

EMPLOYEE DISHONESTY COVERAGE BARRED BY INSURED'S PRIOR KNOWLEDGE

A federal court concluded that coverage was barred under employee dishonesty insurance in a 3-D policy because of the insured employer's undisclosed knowledge, before the inception of the policy, of dishonesty committed by an employee whose acts resulted in a loss for which claim was made. The following pertinent provisions of the policy were determining:

"The coverage of Insuring Agreement I shall not apply to any employee from and after the time that the insured or any partner or officer thereof not in collusion with such employee shall have knowledge or information that such employee has committed any fraudulent or dishonest act in the service of the insured or otherwise, whether such act be committed before or after the date of employment by the insured....

"Insuring Agreement I shall be deemed canceled as to any employee ....immediately upon discovery by the insured, or by any partner or officer thereof not in collusion with such employee, of any fraudulent or dishonest act on the part of such employee."

The insured, a clothing manufacturer and importer, maintained a warehouse at its headquarters location along with executive offices and manufacturing facilities. The record showed that the insured notified its insurance brokers, five months after applying for the policy, that an employee had committed dishonest acts. The employee was later identified as the warehouse manager and claim was made for allegedly stolen cash and merchandise in the amount of $500,000. The insured commenced legal action when the insurer denied the claim, having determined that the insured had prior information about dishonest acts by the employee. The insurer moved for summary judgment.

The federal court observed that there was not a New Jersey case in point, but said that courts in other jurisdictions consistently held that policy language "which excludes fidelity coverage for an employee if the insured had learned of a dishonest act by that employee prior to the inception of the policy....is legally enforceable."

The evidence was clear that the insured had substantial information, before the effective date of the policy, that the warehouse manager "had committed fraudulent and dishonest acts." A private investigation firm had been retained which implicated the suspected employee, in meetings with the insured's secretary-treasurer, prior to the inception of the insurance. Written reports, prepared for the meetings and including statements by other employees, were introduced in evidence. A memo verified that the secretary-treasurer had asked the investigation firm to have two undercover operatives watch the suspected person.

The insurance company's motion for summary judgment was granted.

(COOPER SPORTSWEAR MANUFACTURING COMPANY, INC., Plaintiff v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant; HARTFORD CASUALTY INSURANCE COMPANY, Third-Party Plaintiff v. PAGNOTTA, Third-Party Defendant. United States District Court, District of New Jersey. Civ. A. No. 91-1895 (WGB). February 23, 1993. 818 F.Supp. 721. CCH 1993-94 Fire and Casualty Cases, Paragraph 4393.)