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Seventh Circuit Finds No Insurance Coverage for Multi-Million Dollar Fraud Scheme Losses

Getting taken to the cleaners by a dishonest employee or contractor is headache enough for any business, but having  no fraud coverage insurance coverage is a world of hurt.  Businesses are well advised to analyze their policies carefully to make sure they have proper coverage.

In the case of an Indiana telecom company called Telamon, its two different insurance policies provided no relief, according to the Seventh Circuit Court of Appeals (Telamon Corp. v. Charter Oak, No. 16-1205, 7th Cir. (2017)). Telamon engaged independent consultant Juanita B. to provide services, and her role eventually expanded well beyond the original agreement. She was named vice president of major accounts and became senior manager for the company’s business in New York and New Jersey. In that capacity, she oversaw the removal of old telecommunications equipment from AT&T sites to sell to salvagers. Juanita pocketed the profits, for a total of $5.2 million in losses for the company by the time it discovered her scheme.  

When Telamon tried to recover through its policies, the insurers denied the claims because one maintained she was not an actual employee, while the other maintained she was. Telamon had a crime insurance policy with Travelers Casualty & Surety and a general commercial insurance policy with Charter Oak Fire Insurance. In federal court, Telamon asserted that its loss was covered under both policies and that the insurers acted in bad faith. The district court granted summary judgment for the insurers.

Applying Indiana law, the Seventh Circuit affirmed. Telamon’s Travelers policy covered theft by “an employee,” defined as “any natural person … who is leased to the Insured under a written agreement between the Insured and a labor leasing firm, while … subject to the Insured’s direction and control and performing services for the Insured.” To prevail, Telamon had to show both that Juanita’s consulting business was a “labor leasing firm” and that she was subject to Telamon’s control. Telamon argued that a “labor leasing firm” is any business concern that sells another person’s work for a specified time and fee. The court disagreed that Juanita’s one-woman business met this definition. “[It] was not a firm in the business of leasing labor; it was just [Juanita’s] vehicle for providing her own services,” or her corporate alter ego. Her firm “was a legal convenience, and nothing more.” Thus she was not an “employee” for purposes of the Travelers policy.

Telamon fared no better with its Charter Oak claim, which covered direct physical loss subject to specific exclusions. These included “any [d]ishonest or criminal act by … employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.” Charter Oak argued the exclusions applied to Juanita. Since Indiana has no case on point defining “authorized representative,” the court adopted the First Circuit definition of “a person or company empowered to act on an entity’s behalf.” It concluded this description fit Juanita’s role with Telamon, since she had oversight of the company’s operations in the New York/New Jersey region, most notably the title of “vice president of major accounts.” It did not matter, in the court’s view, that Juanita’s role expanded beyond the terms in the original written agreements. Telamon had entrusted her with the property she stole, therefore her role fell within the Charter Oak policy exclusions and the losses were not covered.

The court also shot down Telamon’s argument that both insurers had breached the duty of good faith, a standalone tort in Indiana. Telamon asked the court to recognize a tort of bad faith in handling an insurance claim, even though no such tort exists in Indiana. It declined to do so, writing, “We see no reason to ignore the Indiana Supreme Court’s apparent satisfaction with the status quo.” Ruling the company had not sufficiently shown ill will on the part of the insurers, it rejected this claim.Our Chicago insurance dispute attorneys handle coverage disputes between businesses or individuals and their insurance carriers. Super Lawyers named Illinois partner dispute attorneys Peter Lubin, Vincent DiTommaso and Patrick Austermuehle Super Lawyers or Rising Stars in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. DiTommaso Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience in litigating complex class action, copyright, non-compete agreement, trademark and libel suits, consumer rights and many different types of business and commercial litigation disputes including lawsuits between businesses or between shareholders and owners of the same business.  Our Chicago and Naperville partnership dispute lawyers handle emergency business law suits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, LLC members, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud. You can contact us by calling (630) 333-0000 or our toll free number (877) 990-4990.  You can also contact us online here.