South-Western Legal Studies in Business

Consequential Losses Part of Direct Loss under Fidelity Policy
Description

Montana high court held that expenses incurred by an employer investigating dishonesty by an employee are part of direct losses that would be covered by a fidelity policy that covers acts of employee dishonesty.

Topic Insurance
Key Words

Fidelity Policy; Employee Dishonesty Policy; Direct Loss

C A S E   S U M M A R Y
Facts

Kittler owned Frontline, a credit card processing company. Reavis was CFO. Frontline bought an employee dishonesty policy from American Economy Insurance. Frontline accused Reavis of dishonest acts, including forging checks, using company credit card for personal use, and intentionally failing to file payroll taxes. It hired experts to examine Reavis’ activities. The fees were $85,000. Frontline also paid interest and penalties to the IRS due to Reavis’ failure to file taxes. Frontline requested American pay these costs under the dishonesty policy. It refused, claiming these expenses were not direct losses covered by the policy. Frontline sued in federal district court. The judge asked the Montana high court to answer this question: Does the term “direct loss,” when used in the context of employee dishonesty coverage … include consequential damages that were proximately caused by the alleged dishonesty?

Decision

Question answered. A fidelity policy or employee dishonesty policy is insurance in which the insurer agrees to indemnify an employer against a loss arising from the lack of integrity or honesty of an employee. Direct loss in such a policy means all losses proximately caused by an employee’s dishonesty. This includes consequential damages incurred by the insured that were proximately caused by the alleged dishonesty, so the policy does apply to the costs incurred by Frontline.

Citation

Frontline Processing Corp. v. American Economy Insurance, 149 P.3d 906 (Sup. Ct., Mont., 2006)

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