Exclusion for Prior Dishonest Acts Can’t Scrap Coverage for Stolen Metal (PA)
In National Retail Systems Inc v. Markel Insurance Company, the Eastern District of Pennsylvania examined ambiguous language in an insurance coverage dispute arising out of employee theft. The federal judge held that an exclusion barring coverage for “prior dishonest acts” did not apply to cases of collusion where only one of the conspirators had a known history of dishonesty.
Keystone Freight Corp. terminated Brian Allison in 2004 after discovering he had punched in for work but was never seen for the entire day. Keystone then rehired Allison in 2015. Between 2015 and 2016, Allison and co-worker Joseph Allen stole 74 Keystone trailers and miscellaneous metal, conspiring to sell the trailers as scrap and split the proceeds.
Keystone sought in coverage for the scrapped trailers under a commercial crime policy with Markel, which provides coverage for any theft of money or property committed by an employee acting alone or in collusion with other people. Markel denied coverage in July 2016, citing the policy’s prior-dishonest-act exclusion, which states that the policy does not cover loss caused by an employee who had also committed theft or any other dishonest act before the policy’s inception. Markle argued that the exclusion applied Keystone knew Allison had committed a dishonest act given that it had fired Allison in 2004 for stealing company time. Plaintiffs argued that the exclusion did not apply since only Allison and not Allen had a known history for dishonest acts.
The court sided with plaintiffs, holding that Markle owed coverage for the scrapped trailers because the policy is ambiguous as applied to the facts of the case. The court reasoned that while the policy plainly contemplates and covers employee thefts committed by more than one person, it did not specifically address circumstances where one of multiple colluding employees triggers the prior-dishonest-act exclusion. In other words, since the exclusion applied to Allison but not Allen, an ambiguity arose since the two men acted together to steal the trailers. Leaning heavily on the well-established principle that ambiguities in policy exclusions are to be construed against the insurer, the court found that this ambiguity cut in favor of coverage. The court noted that if Markel had intended to exclude coverage under such circumstances, it could have said so expressly in the policy.
This case represents a win for insureds and a cautionary tale for insurers underscoring the importance of precise drafting, particularly when it comes to policy exclusions.
Thanks to Andrew Debter for his contribution to this post. Please email Georgia Coats with any questions.