Reversing a summary judgment by a district court, the U.S. Court of Appeals for the Fifth Circuit recently decided that The Times-Picayune Publishing Corporation, based in New Orleans, is entitled to recover the entire amount of long-term embezzlement losses discovered during the period of an excess fidelity insurance policy, after payment of the primary policy limits in effect at discovery.
According to an announcement released by Anderson Kill & Olick P.C., the excess insurer, Zurich American Insurance Company, refused to pay most of the claim and had been awarded summary judgment by the district court, because a large part of the embezzlement preceded Zurich’s insurance and Zurich took a restrictive position as to coverage of prior loss.
In an opinion filed Aug. 15, 2005 (No. 04-30602), the Fifth Circuit rejected Zurich’s position and reversed the summary judgment, finding that when the policies were read as a whole, “the scope of Zurich’s liability clearly expands in favor of the Times-Picayune.”
Anderson Kill & Olick’s statement described the case and the court’s decision as follows:
“The crime insurance policies at issue in this case, which are commonly-used standard form policies, pay the policyholder for losses due to employee theft upon discovery. Because experience demonstrates that employee theft often is concealed and repeated over a long period, the policies are triggered by discovery of a theft loss. If some or all of the thefts took place in earlier policy periods, they will be covered under the current policy’s ‘prior loss’ clause if the policyholder had prior policies continuously in effect that would have covered the theft if it had been discovered earlier. Thus the prior loss clause clearly expands coverage, but Zurich asserted that it restricted coverage under the particular facts of The Times-Picayune’s claim.
“During Zurich’s policy period, The Times-Picayune discovered a loss of $2,205,879 resulting from long-term embezzlement by an employee. Of that amount, $1,040,006 was stolen prior to Zurich’s policy, and $1,165,873 was stolen during the policy period. The Times-Picayune was continuously insured by fidelity insurance policies at the primary level during all six years of the embezzlement, and it had excess policies during all but the first year of embezzlement. After the primary fidelity insurance company paid its $1,000,000 limit under the policy in effect at the time of discovery, The Times-Picayune sought coverage for its remaining losses under Zurich’s policy, which had a limit of $1,500,000, but Zurich denied coverage for all but $165,873, based on a ‘prior loss’ clause in the primary insurance policy, to which Zurich followed form.
“The Times-Picayune argued that the Zurich excess policy picks up where the Federal primary policy leaves off, providing seamless excess coverage for all losses discovered during the policy period until the Zurich Policy itself is exhausted by payments. The Zurich policy adopted by reference all of the provisions and terms of the primary policy, with ‘drop-down’ and insuring clauses promising that if the primary policy was exhausted, Zurich would ‘continue in force as primary insurance.’
“Relying solely on the prior loss clause, Zurich argued that the underlying policy’s $1,000,000 limit had to be exhausted separately for each prior policy period, so that the losses in any given policy period had to exceed $1,000,000 before Zurich had to pay. Accepting that argument and relying on a 1934 federal decision, First National Bank of Amarillo v. Continental Casualty Co., 71 F.2d 838 (5th Cir. 1934), the trial court entered summary judgment in favor of Zurich.
“The Fifth Circuit reversed, finding Amarillo inapplicable and finding error in the trial court’s exclusive focus on the prior loss clause and failure to give effect to entire excess policy, including its insuring and drop down clauses. Amarillo was distinguished not only on its different facts and policy language, but also for reasons of choice of law and federal jurisprudence. Although it was decided by the Fifth Circuit, Amarillo was on appeal from a federal district court in Texas, with no choice of law discussion. It pre-dated the landmark U.S. Supreme Court decision in Erie R.R. v. Tompkins, 58 S. Ct. 817 (1938), which held that federal courts sitting in diversity should apply state substantive law and federal procedural law. In The Times-Picayune’s case, the parties agreed that Louisiana law should apply, and so the Fifth Circuit rejected the trial court’s reliance on Amarillo, finding it ‘inappropriate to treat such a pre-Erie Texas case, particularly one that went uncited between 1936 and the decision of the district court in this case, as controlling authority respecting an insurance contract dispute under Louisiana law.’
“On the coverage question, the Fifth Circuit held that the district court’s ‘assumption that the Prior Loss clause exclusively controls because some of the embezzlement losses were incurred before the inception date of the Zurich policy was error, because it prevented the district court from giving proper effect to the excess policy’s insuring and drop down clauses. When these clauses are properly understood in light of the excess policy as a whole, the scope of Zurich’s liability clearly expands in favor of the Times-Picayune.’
“After examining those clauses, the Fifth Circuit agreed with The Times-Picayune’s position that ‘Zurich’s duty to pay is triggered by a single condition: the exhaustion of the underlying primary policy by actual payment of benefits.’ To the extent Zurich and the district court had developed an alternative interpretation of the excess policy, the Fifth Circuit found that ‘all they have done is manufactured an ambiguity and it is elementary under Louisiana law that such ambiguities are construed in favor of coverage.’
“The Times-Picayune is represented in this matter by Edward J. Stein of Anderson, Kill & Olick, P.C. in New York, and James R. Swanson of Correro, Fishman, Haygood, Phelps, Walmsley & Casteix, LLP in New Orleans.”
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