In Construction Contractors Employer Group, LLC v. Federal Insurance Company, No. 15-4352, 2016 U.S. App. LEXIS 12710 (6th Cir. July 11, 2016), the Sixth Circuit Court of Appeals affirmed the trial court’s determination that a crime-coverage policy that was purchased by a trade organization after it determined that a third-party administrator was stealing funds  from it by various means did not provide coverage for losses since all the losses were considered one loss under the policy’s plain terms.

Construction Contractors Employer Group, LLC (“Construction Contractors”), a subsidiary of a non-profit corporation and trade organization for commercial construction contractors, was formed to carry out various employment functions for regional construction employers called subscribers. Those subscribers would transfer funds to Construction Contractor’s accounts to cover gross payroll, taxes, benefits and administrative costs. Construction Contractors would then disburse the money to satisfy the subscribers’ payroll and tax obligations. Early on, the company outsourced the subscribers’ payroll functions to AlphaCare Services, Inc. (“AlphaCare”). In July 2012, one of AlphaCare’s owners, John E. Moon, admitted, among other things, that he had been falsifying Construction Contractors’ financial statements and that the company had substantial unpaid tax liabilities. Construction Contractors terminated the agreement with AlphaCare and began reviewing the accounts, eventually determining that it owed unpaid taxes back to 2005 of over $1.25 million, plus penalties and interest and that AlphaCare had failed to remit $715,000 in Ohio unemployment taxes for the first quarter of 2012. By late fall 2012, the investigation had determined that Moon had committed wire fraud by transferring over $900,000 from Construction Contractors’ account to AlphaCare’s but more than $1 million was still unaccounted for.

In an apparent attempt to force the horse back into the barn, in January 2013, Construction Contractors applied for a crime-coverage insurance policy with Federal Insurance Company. The application disclosed that Construction Contractors was conducting a review that had thus far determined that AlphaCare failed to report, reconcile and remit certain payroll taxes and unauthorized transfers between 2009 and 2012 and that the investigation was still in progress. Federal issued a policy extending coverage from March 2013 to July 2013 for up to $1 million in losses that contained three key provisions: 1) a loss-discovered option that excluded any losses of which Construction Contractors was aware prior to the effective date of the policy; 2) a limit of liability provision that provided that all losses from a single act or multiple acts by the same employee or third party would be treated as a single loss; and 3) a provision that provided coverage “for loss sustained at any time and Discovered during the Policy Period.” (emphasis added). “Discovered” was defined as “knowledge acquired by an Executive or Insurance Representative of an Insured which would cause a reasonable person to believe a covered loss has occurred or an occurrence has arisen that may subsequently result in a covered loss.” The excluded losses included those sustained prior to the inception of coverage, even when the exact amount or details of the loss are unknown.

Construction Contractors determined that Moon committed check theft by having subscribers make checks payable to Construction Contractors using AlphaCare’s account number. Construction Contractors then filed a claim for check theft under the policy, which Federal denied. In effect, Construction Contractors sought to separate the wire fraud that was discovered prior to the inception of the policy from the check fraud that was arguably discovered after the policy date, notwithstanding the single-loss provision. Construction Contractors filed the case in district court seeking declaratory and monetary relief for breach of contract. After the parties both filed motions for summary judgment, the court granted Federal’s motion, holding that any loss caused by one employee was a single loss under the policy and that Construction Contractors was aware of the loss before the policy’s inception. On appeal, Construction Contractors argued that Moon was a covered employee, that the loss discovered provision did not apply because it did not discover the check theft until after the policy was issued and that the single-loss provision in the Limits of Liability section only operated to limit covered losses to $1 million, not to define whether the policy covers a loss. The appeals court rejected those arguments and concluded that under the plain language of the policy, if the loss falls under the loss-discovered provision, the single loss language applies. As such, since the wire fraud was discovered prior to the policy’s inception and the wire and check fraud constituted a single loss, coverage under the policy was excluded.