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Wolff & Samson PC
Counsellors At Law Fidelity & Surety Scott D. Baron is a partner and Andrew S. Kent is an senior attorney with Wolff & Samson PC in West Orange, New Jersey. There is an old French proverb, Le Diable chie toujours au mκme endroit, a PG version of which has become a staple of American crime dramas: "a criminal always returns to the scene of the crime." In the context of commercial crime policies providing coverage for employee dishonesty, this adage takes on special significance. This is because dishonest employees will literally return to the scene of the crime, that is, the workplace, five days a week, month after month, possibly for years, all the while exposing their employers to loss in the form of continuous and multiple thefts, embezzlement" kickback schemes, and the like. Protecting against this type of long-term risk1 is one of the primary reasons for employee theft insurance.2 Knowing the amount of coverage available in the event of such losses is essential to both insureds, in deciding how much insurance to purchase, and to underwriters, in calculating premiums.3 In order to provide certainty as to that issue, modem commercial crime policies contain a single loss limitation.4 Such provisions typically define as a single "occurrence" all loss caused by (i) one or more dishonest acts by a single employee, and/or (ii) an ongoing scheme by one or more employees to defraud, or steal from, the employer. To that end, the standard Commercial Crime Policy,5 which provides for a single loss limitation per "occurrence," defines "occurrence," as it respects employee theft coverage, as follows: "'Occurrence' means all loss caused by, or involving, one or more 'employees', whether the result of a single act or a series of acts.6 The Financial Institution Bond 7 approaches this issue using somewhat different language, defining "Single Loss" (as opposed to "occurrence") as all covered loss resulting from. . . "all acts or omissions. . . caused by any person (whether an Employee or not) or in which such person is implicated[.]"8 Note, however, that with respect to crimes not involving employees of the insured, the Financial Institution Bond defines "Single Loss" as all covered loss resulting from "anyone act or series of related acts of burglary, robbery",9 etc. As discussed below, other crime policies have employed terms defining as a single occurrence all loss caused by or resulting from a "series of acts" or, alternatively, a "series of related acts.10 Each such "occurrence" (or, in the case of the Financial Institution Bond, "single loss") is subject to (i) a "per occurrence" limit of insurance and (ii) a "per occurrence" deductible amount, both of which are typically set forth on the declarations page of the policy. The per occurrence limit of insurance and deductible amount are central to the bargain struck between the insurer and the insured and are primary factors, together with the size of the insured and its loss history, in determining the premium to be charged for the policy.11 Predictability in the application of these policy terms is needed in order for the insured to know what it is buying, for the insurer to know what it is selling, and for agents and brokers to know what recommendations to make as to the amount of coverage and the appropriate deductible for their specific accounts. Take, for example, an insured that deals in large sums of money, but believes that its own safeguards provide adequate protection against petty thefts. Such an insured may primarily wish to insure against the risk of large-scale insider-frauds and, for that reason, may seek a policy with a $10,000,000 per-occurrence limit of insurance. Of course, the higher the limit of insurance, the higher the premium will be for the policy. However, by absorbing the risk of smaller-scale employee thefts and accepting, for example, a $50,000 per-occurrence deductible, that insured may be able to obtain the insurance it wants at an acceptable premium. The business of another insured,' such as a retailer or warehouse, may primarily consist of small-scale transactions in consumer goods of less than $500. Such an insured may be concerned chiefly about petty theft. Purchasing a crime policy with a deductible of less than $500, however, would naturally be relatively expensive. Fortunately, because crime policies treat multiple thefts by the same employee as one occurrence, that insured may be able to obtain appropriate, affordable crime coverage, providing for a $2,500 per- occurrence deductible. The plurality of courts have found such single loss provisions to be unambiguous and have interpreted them in a manner so as to find a single occurrence in cases involving long-term and repeated acts of dishonesty by employees. 12 Unfortunately, there are exceptions, the most recent and notable of which is the decision by the New Jersey Supreme Court in Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc.,13 a case which, if followed and applied broadly, could adversely affect the interests of both insurers and insureds in understanding and making business decisions regarding per-occurrence limits and deductibles in crime policies. In Gentilini, a dishonest credit manager at an auto dealership, Mr. Carpenter, assisted twenty-seven separate customers in falsifying their credit applications in order to purchase vehicles under installment sales contracts.14 The fraud consisted of providing the customers with phony or altered paystubs and, in some cases, false drivers licenses, copies of which would be submitted to an auto financing company. Contemporaneous with each sale, the dealer would assign the installment sales contracts to the financing company, which would fund the credit portion of the purchases.15 The contract between the dealer and the financing company, however, required the dealer to repurchase the installment sales contracts in the event, among other things, of any inaccuracies in the subject credit applications.16 When the fraud was discovered, the financing company sued the dealer.17 The dealer settled the case and sought to recover its loss from its insurer under an employee dishonesty extension to a commercial property policy. 18 At issue in Gentilini, among other things, 19 was whether the auto dealership's alleged loss was one "occurrence" for purposes of the policy's per-occurrence limitation of insurance or, alternatively, whether the claim implicated twenty-seven separate "occurrences." The policy in Gentilini, which. contained a $5,000 per-occurrence limitation for employee dishonesty claims, defined "occurrence" in a manner that is similar, although not identical, to the standard Commercial Crime Policy: All loss or damage:Citing to subparagraph (1) of the above-quoted provision, the insurer argued that this provision "limits occurrences to one per employee/wrongdoer.21 The Gentilini court did not directly address the insurer's proffered interpretation of this provision of the policy. Instead, the court stated that it would not read the subject provision "literally," concluding that to do so would always limit all losses to a single recovery "because losses of that type must, by their very nature, be 'caused by one or more persons."22 The court, therefore, determined to restrict the meaning of the subject provision "so as to enable fair fulfillment of the stated policy objective.23 Applying that doctrine, the Gentilini court concluded that. "a fair reading" of the subject provision "simply means that for each loss of property covered by the policy there can only be one recovery, regardless of the number of employees that may have caused the loss.24 In adopting that "fair" interpretation, however, the Gentilini court ignored the fact that the subject loss limitation expressly applied to "all loss or damage," rather than to "each loss." The Gentilini court also ignored a basic maxim of contract construction by rendering the "caused by one or more persons" clause entirely superfluous.25 By way of example, if ten employees got together and stole the contents of their employer's safe, that loss would clearly be viewed the result of "a single act or series of related acts." Even in the absence of the "caused by one or more persons" clause, as interpreted by the Gentilini, court, the subject example would be deemed to be one "occurrence," and the insured's recovery would be subject to the applicable single loss limitation. It is difficult to imagine a scenario in which a single (employee dishonesty) loss caused by multiple persons would not involve "a single act or series of related acts." Thus, under the Gentilini court's reading, the policy's "caused by one or more persons" language would appear to have no practical effect. The Gentilini court also ruled, as a matter of law,26 that the subject claim, repeated similar dishonest acts by the same employee, "did not involve 'a single act or series of related acts."27 On this issue, the Gentilini court quoted and stated its agreement with a point made by the dissenting judge in the Appellate Division decision on appeal 28 that "the common pattern of these transactions cannot fairly be said to transform them into a single event.29 Of course, the policy at issue defined "occurrence," not as a "single event," but as all loss or damage involving "a series of related acts[.]" In equating "occurrence" with a "single event," both the Gentilini court and the dissenting appellate division judge below appear to have based their understanding of the term "occurrence," not upon the policy definition before it, but upon how the term is used or understood, with or without a definition, in entirely different types of policies, which equate "occurrence" with an "event" or "incident.33 Illustrative of this mistake in reasoning is the fact that the only "occurrence" case cited by the dissent in the Appellate Division's decision in Gentilini, which the dissent found "entirely inapposite," had to do with whether, under a liability policy, the drowning death of two brothers was one occurrence "where one had jumped in to save the other.31 The cited case, for its part, had defined "occurrence" as "an accident, including injurious exposure to conditions which results, during the policy term, in bodily injury or property damage.32 The term "accident," however, was not defined in the policy, and the court therefore applied the "generally accepted definition" that "an 'accident' is a sudden and fortuitous. event, unexpected by the person to whom it happens.33 Harmonizing that policy's definition of "occurrence" with its understanding of the undefined term "accident," the court concluded that the two deaths were "so closely linked in time and space as to be considered by the average person to be one event," and therefore constituted a single "occurrence.34 The express policy terms at issue in Gentilini, in contrast, did not define "occurrence" as an "accident" or a "single. event." Nevertheless, because the Gentilini court apparently imported those concepts into its understanding of the term "occurrence," the court was unwilling to view one employee's ongoing scheme, involving twenty-seven acts of credit fraud, as one occurrence, notwithstanding the policy's definition of one "occurrence" as including a "series of related acts." In finding multiple occurrences, the Gentilini court also emphasized its view that, under the facts of the case, the auto dealer suffered a direct loss of property each time that it parted with an automobile in exchange for a fraud-induced and "faulty" installment sales contract, noting that the "purchaser and the terms of each sale are unique. . . .35 On this point, the Gentilini court cited the case of Appalachian Insurance Co. v. Liberty Mutual Insurance Co.36 for the proposition that the number of occurrences "is determined by reference to cause of loss.37 The Gentilini court's citation to Appalachian is curious, however, because that decision would appear to compel the opposite result than that which the Gentilini court ultimately reached. Appalachian, which concerned a liability insurance policy, stated the "general rule" that an "occurrence is determined by cause or causes of the resulting injury.38 Applying that "general rule",39 the court in Appalachian found only one cause (that is, the insured's adoption of certain discriminatory employment practices) and, hence, a single "occurrence" underlying a multi-plaintiff class-action suit based on numerous employee complaints spanning a period of several years. Thus, despite its reference to the Appalachian case, the Gentilini court appears to have counted "occurrences" based, not by the cause of injury (a single dishonest employee), but upon the effect, or number of injuries allegedly sustained by that cause (the sale of twenty-seven automobiles to twenty-seven uncreditworthy people). The Gentilini court, however, did not expressly reject the long line of cases finding a single "occurrence" in "embezzlement-type cases where an employee steals cash or checks from an employer as part of an ongoing scheme. to defraud.40 Rather, the Gentilini court simply rejected the analogy between embezzlement-type cases and the facts of the case before it.41 In the view of the Gentilini court, Mr. Carpenter's repeated acts of fraud "did not involve 'a single act or series of related acts'" because each act of fraud involved "distinct sales to separate purchasers, for separate automobiles" and "the terms of each sale are unique.42 In support of that conclusion, the Gentilini court cited to the case of North River Insurance Co. v. Huff,43 noting that the court in Huffhad found "that several loan transactions involving the same manner of financing were separate occurrences because [the] transactions' occurred at separate times, involved different borrowers, were for different purposes, and had separate collateral.44 Huff, for its part, concerned a directors and officers liability policy, which defined "occurrence" as "any claim or claims made involving one or more insureds arising out of the same act, interrelated acts, errors, omissions or scheme.45 The case involved the alleged negligence of certain bank officers in approving four unprofitable loans. Each of. the subject loans was underwritten and approved on its own merits. The only similarity between the loans was that they all involved the same method of financing, a "loan swap." During the time period in question, the same bank officers had considered and rejected proposals for six to twelve other loan swaps. Noting that the four unprofitable loans were made to "different borrowers, were for different purposes, and had separate collateral," the Huff court concluded that the subject loans "cannot be found to be interrelated."46 In reaching this conclusion, the Huff court emphasized that it was not the bank's loan swap program that caused the subject damage, but the insured's alleged negligence in approving the unprofitable loans.47 Thus, Huff concerned separate and independent business decisions, some of which were allegedly negligent, others of which were not. The transactions in Gentilini, in contrast, were all linked by a common element-Mr. Carpenter's continued criminal intent. Apparently, the Gentilini court read Huff to hold that "separate" loans to separate borrowers could not be "interrelated48 Based on that analysis, the Gentilini court concluded that separate car sales, to separate buyers, could not constitute a "a series of related acts." As discussed in greater detail below, this disconnect between "separate" transactions and "related" acts may be of significance for claims under the standard Commercial Crime Policy because that policy does not use the term "related" in defining "occurrence.49 The distinction apparently drawn by the Gentilini court, between "related acts" (embezzlement schemes constituting "an ongoing scheme to defraud") and cases involving "separate" transactions is problematic at best. Few fair-minded lay people would consider Mr. Carpenter's actions unrelated. After all, Mr. Carpenter used the exact same means and method to perpetrate his ongoing scheme. One has to wonder whether the court would have viewed Mr. Carpenter's acts as "unrelated" if, instead of deciding an insurance coverage case, it were deciding whether - Mr. Carpenter's acts were sufficiently "related" to support a criminal RICO conviction against him. Moreover, from the standpoint of the reasonable expectations of the insured, it is absolutely insignificant whether an employee causes injury to his employer through repeated dishonest transactions or through repeated thefts of checks or cash. Gentilini offers literally no guidance as to where courts should draw the line between "a series of related acts" and cases involving so- called "separate" transactions. Kickback schemes, for example, where an employee makes purchases at inflated prices in exchange for secret payments to the employee, are a well-known form of employee fraud.50 Each such kickback, however, could be said to arise from a "separate" transaction and/or involve a separate vendor. Under the rationale of Gentilini, the employer's losses might not be viewed a series of related acts. That would be a very unfortunate result for the insured employer, if coverage for its aggregate loss were reduced or eliminated by multiple applications of a per-occurrence deductible. Thus, to maintain the level of coverage that they thought they were already getting, insureds may now have to obtain more expensive policies with lower deductibles. In sum, the Gentilini decision is bad for insurers and bad for insureds. The holding is inconsistent with how other courts across the nation have ruled in similar cases, construing similar policy terms. The stated rationale for the decision is undermined, rather than supported, by the cases cited therein. Gentilin turned on its head a policy provision the clear and obvious intent of which was to limit the insurer's liability,51 rendering it either meaningless or as actually expanding the insurer's liability. Finally, the Gentilini court's determination, as a matter of law, that Mr. Carpenter's crime spree did not involve a "series of related acts," deviates sharply from how the average person, or the average insured, would understand that clause. It is virtually inevitable that insureds seeking to avoid. per- occurrence limitations in fidelity policies will cite Gentilini as authority for finding multiple occurrences for losses caused by the fraudulent acts of a single employee or by the ongoing scheme of several employees, except, of course, in cases where multiple applications of a per-occurrence deductible would result in less coverage. Outside of New Jersey, an insurer will be able to respond to such claims by arguing that that the decision in Gentilini is against the clear weight of authority from other jurisdictions, as discussed in the next section of this article,52 and that it ignored the plain language and the purpose of the policy at issue in the case. In New Jersey, however, or in other jurisdictions not bound by local precedents on the single/multiple occurrence issue in this context, it may also prove advantageous to develop arguments to distinguish Gentilini and/or to narrow its application. First and foremost, as discussed in the preceding section, the Gentilini court drew a distinction between "embezzlement-type" cases and cases involving "separate" transactions.53 Thus, in cases involving "embezzlement-type" losses,Gentilini would arguably not apply, even in New Jersey. It is also important to note that the policy at issue in Gentilini was not a crime or fidelity policy, but rather was a commercial property insurance policy. The subject employee dishonesty coverage in Gentilini appeared in an optional endorsement, entitled "Master Pak for Property," modifying and providing various upgrades to the terms of a "Business and Personal Property Coverage Form.54 Thus, the $5,000 per-occurrence limitation in Gentilini was part of a pre-printed form. In contrast, per-occurrence limitations and deductibles in standard crime and fidelity policies are negotiated and customized to the needs, desires, and budget of the particular insured.55 The fact that these per-occurrence limits and deductibles are negotiated and are largely determinative of the premium charged is highly. significant in the context of determining the reasonable expectations of the insured.56 In such cases, it may be advisable to examine the underwriting history of the insured's account. The facts of a particular case may show, for example, that an insured purposely opted for a higher per-occurrence deductible in order to save on the premium, with the understanding that losses caused by a single employee would be aggregated and viewed as a single occurrence. 57 Even in the absence of such specific facts in the underwriting file, the presence of a relatively high deductible would tend to support the conclusion that the parties intended and expected that multiple (related) losses would be aggregated and treated as a single occurrence. As explained by one court: 58 Assume an employee embezzles $100 from a company on 155 separate occasions for a total embezzlement of $15,500. Further assume that, as in this case, the deductible for the insurance policy is $250 and the coverage limit $10,000 for each occurrence. If aU 155 acts constitute one occurrence because they are part of a "series of related acts," the insurance company would pay $10,000. However, if we were to adopt American Commerce's position and determine that 155 occurrences arose, the insurance company would pay nothing because the monetary value of each act of embezzlement would be lower than the deductible.59The amount of premium paid, as compared with the magnitude of an alleged multi-occurrence claim, could also be a factor for consideration by a court in determining the reasonable expectations of the parties with respect to the application of per-occurrence limits. The issue of premium was not discussed in the Gentilini decision. The court in American Commerce, however, did consider the issue and rejected as "unreasonable" the insured's multiple-occurrence argument, explaining as follows: Under American Commerce's interpretation, an insured could receive $10,000 for each separate act of embezzlement, without limit. The record reflects that its total premium for business protection, which included coverage for business personal property and data processing equipment, in addition to coverage for employee dishonesty, was $563 per year. We conclude that American Commerce's interpretation would allow a potentially unlimited windfall of recovery and is simply incommensurate with the $563 per year premium under the policy.60Note that the above analysis from the American Commerce case, comparing the policy premium with the policy limits, would appear to be of less force under the standard Financial Institution Bond which, in addition to single loss limits, also includes an aggregate limit of liability. In contrast, the standard Commercial Crime Policy and the standard Crime Protection Policy61 generally include only per-occurrence limits of insurance. Thus, as noted in American Commerce, an interpretation that renders ineffectual those policies' per-occurrence limits would lead to the absurd result of removing all monetary limits to coverage.62 Gentilini may also be distinguishable based upon variations in language between the single loss provision in that case and the single loss provision appearing in other policies. By way of example, whereas the policy in Gentilini defined "occurrence" with reference to "all loss or damage," the same term is defined in the Crime Protection Policy with reference to "all loss or losses." Arguably, the reference to "losses" in the Crime Protection Policy more clearly conveys that a single "occurrence" may consist of multiple and separate thefts or frauds.63 It is also noteworthy that the Commercial Crime Policy and the Crime Protection Policy both use the phrase "series of acts," rather than "series of related acts" as was used in the policy in the Gentilini. While that distinction may seem minor, a close analysis of the Gentilini decision and the Huff decision cited therein reveals that both courts shared the perception that "separate" transactions could not accurately be described as "related" or "interrelated." Also, the decision in Reedy Industries, Inc. v. Hartford Insurance Co. of Illinois64 briefly notes, in dicta, that the two subject clauses, with and without the term "related," are "similar, but not identical.65 In the same brief discussion, the Reedy court observed that the Minnesota Court of Appeals' decision in the American Commerce case (which by then had been reversed by the Minnesota Supreme Court) had "held that the phrase 'series of related acts' in a fidelity policy was ambiguous because the term 'related' is susceptible of more than one reasonable interpretation.66 In so noting, the court in Reedy clearly rejected the insured's argument that the phrase "single act or series of acts" is ambiguous. Thus, insurers defending claims under the Commercial Crime Policy or the Crime Protection Policy may fairly argue that the clause "single act or series of acts" is both broader than the parallel provision in Gentilini and is less likely to give rise to ambiguities as it applies to the facts of a given claim. The "Single Loss" provision in the Financial Institution Bond is even more different from that in Gentilini as it does not use the term "occurrence" at all and hence should be less apt to be viewed by courts as implicating a "single event.67 Also, with respect to multiple dishonest acts by the same employee, the Financial Institution Bond treats as a single loss all covered loss resulting from all acts or omissions "caused by any person (whether an Employee or not) or in which such person is implicated " This language very clearly and unambiguously applies to multiple acts involving the same person. The provision is not susceptible to the strained interpretation applied in Gentilini, in which the policy provision rendering one occurrence "all loss or damage" . . . "caused by one or more persons" was construed to limit recovery only where a single loss of property was caused by multiple employees.68 Finally, in the case of a claim brought by a sophisticated insured, it may be possible that the court should be less zealous interpreting perceived ambiguities in insurance policies than was done in favor of the insured (a local auto dealer) by the court in Gentilini. The Supreme Court of New Jersey has itself noted that a "sophisticated insured cannot seek refuge in the doctrine of strict construction pretending it is the corporate equivalent of the unschooled, average consumer.69 The plurality of courts considering the issue herein have enforced single loss provisions as intended and have allowed one recovery, and one application of the deductible, for loss caused by the same employee(s) or the same scheme.70 As set forth below, however, the Gentilini decision was not the first time that a court awarded multiple recoveries in such cases. Like the court in Gentilini, some other courts have construed against insurers in this context such terms as "occurrence" and "related," and/or have disregarded defined policy terms in favor of "general" rules or understandings of such terms in other contexts. Such decisions, however, remain in the minority and/or are aberrations. As stated, one goal of the subject single loss provision is to apply a single loss limitation to situations where one employee or common group of employees caused loss through multiple and even varied acts of dishonesty. Decisional law construing one-loss-per- employee provisions is scarce and inconsistent. An examination of available case law reveals that courts are more apt to base their rulings in this context on whether a crime claim arises from a "series of (related) acts. " A leading and often-cited case is the decision of the United States Court of Appeals for the Tenth Circuit in Business Interiors, Inc. v. The Aetna Casualty and Surety Co.71 The subject policy included a provision stating: "As respects anyone employee, dishonest or fraudulent acts of such employee during the policy period shall be deemed one occurrence for the purpose of applying the deductible."72 It is unclear from the decision whether the policy included a similar definition of "occurrence" with respect to the policy's limit of insurance, although the decision references the insured's contention that the policy limit applied separately for "each separate loss.73 The insured further contended that "each of' its "employee's forty acts of forgery or material alteration constitutes a separate loss and should be deemed a separate occurrence.74 The court rejected that contention and held that "the employee's fraudulent acts constituted a single loss[.]75 In so holding, the Business Interiors court applied the "general" rule that an "occurrence is determined by the cause or causes of the resulting injury.76 Under that rule, the court observed that the "cause" of the insured's loss was "the continued dishonesty of one employee."77 The court further noted its agreement with the district court's observation that "the probable intent of the employee with respect to the last thirty- nine checks was essentially the intent to continue the dishonesty, not to commit an entirely new and different act of dishonesty.78 The case of Ran-Nan, Inc. v. General Accident Insurance Co. of America79 involved a policy defining "occurrence" as "all loss caused by, or involving, one or more 'employees,' whether the result of a single act or series of acts.80 There, the insurer took the position that there was only one occurrence with respect to losses that, as described by the court, arose from "independent pilfering schemes by two different employees working separately."81 The court rejected the insurer's interpretation, observing that "[t]he more natural reading of the policy. . . is that the 'involving' clause signifies a group of employees conspiring to steal together.82 Although the result would have been the same by simply applying the policy's express definition of "occurrence," the Ran-Nan court then entered into a discussion concerning, and based its holding upon, "general principles" of law applied in liability insurance cases in which the number of "occurrences" is determined by counting the "causes" of the insured's total loss.83 Because there were "two independent causes" of the insured's loss, the Ran-Nan court concluded that there had been "two 'occurrences' of employee dishonesty. 84 The court in Omne Services Group, Inc. v. Hartford Insurance Co.85 held that, under either New Jersey or Pennsylvania law, a several month payroll fraud/kickback scheme involving a single employee constituted a single "occurrence," where the subject crime policy defined "occurrence" as "all loss caused by, or involving, one or more 'employees.",86 The court's emphasis on the words "all loss," "one," and "employees" appeared to indicate the court's satisfaction that the issue before it could be resolved based upon the plain language of the policy. Nevertheless, the court then turned its analysis to the Appalachian, Doria, and Business Interiors cases for the proposition that the number of occurrences is determined by the number of causes of the resulting injuries.87 The case of Wausau Business Insurance Co. v. U.S. Motels Management, Inc.88 involved an employee who, over the course of approximately four years, cheated her employer out of hundreds of thousands of dollars, employing "a fairly broad repertoire of tactics.89 The subject policy defined "occurrence" as "all loss caused by, or involving, one or more 'employees,' whether the result of a single act or series of related acts",90 as to which the court observed that it "finds nothing ambiguous in this defmition.91 Rejecting the insured's argument that "its dishonest employee's various embezzlement ploys were separate and distinct occurrences," the court cited to the "cause" analysis from the Business Interiors and Appalachian cases and explained as follows: [T]he question is not whether the employee's various methods of embezzling were related, as defendant suggests, but whether the cause of loss was related. The cause of defendant's loss was the dishonesty of one employee. Although the employee appears to have been particularly creative in finding ways to bilk the defendant, her intent throughout undoubtedly was the same: to steal the defendant's money.92As is readily apparent, a common theme in the above-cited cases, as well as in Gentilini, is that the courts in those cases sought to determine the number of "occurrences" based upon a general rule of law equating the number of occurrences with the number of causes of loss, rather than simply following the policy's express definition of occurrence. Courts applying this approach have generally concluded that a single dishonest employee, or group of employees conspiring together, or a ,single scheme,93 represents a single "cause" of loss and, hence, a single "occurrence." While the result in these cases conforms to the intentions expressed in the single loss provision, the approach is inherently problematic. This is because courts that use their own understanding of the term "occurrence," which is not grounded in the policy's express definition thereof, may import into their analysis concepts that are foreign to, and at variance with, the language and purpose of a crime policy. A prime example is the tendency of some courts to equate, as a general rule of law, the term "occurrence" with the terms "accident," "incident," or "event." That rule works well with respect to property and casualty coverage, or liability insurance, which insure against accidents. A ten-car pile-up may be regarded as a single accident or event, as would an earthquake that destroys five homes. A drunk driver striking two pedestrians in the span of five minutes, or an earthquake followed an hour later by an aftershock, however, may present a closer case. All courts would presumably agree, however, that two collisions, or two earthquakes, each a month apart, represent more than one occurrence, despite the fact that there may only have been one "cause" for the resulting injuries, i.e., a habitually careless driver, or an earthquake- prone fault-line. In this context, the dividing line between one "cause", or multiple "causes," is whether the resulting injuries are "closely linked in time and space.94 Fidelity policies, in contrast to property, casualty, or liability insurance, do not protect against accidents; they insure against the volitional acts of dishonest employees. The risk posed by a dishonest employee is entirely different than the risk posed by an unplanned accident or event. A dishonest employee has the ability and propensity to plan, to cover his tracks, to "lie in wait" for extended periods, and to seek out and exploit various weaknesses in his employer's risk management systems. The risk is long-term, and the injuries to the employer may be numerous. What links such injuries to a single "cause" is not their proximity "in time and space," b t rather the employee's malevolent intent. The courts in Business Interiors and U.S. Motels Management recognized that link; the court in Gentilini did not. That common element of intent was also disregarded by the Supreme Judicial Court of Massachusetts in Slater v. United States Fidelity and Guaranty Co.95 Slater concerned a physician's equipment policy, with endorsements extending coverage to losses due to theft, as well as losses of currency, subject to a $250 per-occurrence limit. The policy did not define "occurrence.96 The claim concerned multiple petty thefts committed by a single employee over a two-year period.97 Drawing upon the "time and distance" analysis from car accident cases and construing ambiguities in favor of the insured, the Slater court permitted multiple recoveries, reasoning as follows: In the present case, the "occurrence" which occasioned Dr. Slater's losses was not the common scheme, and the subject matter of the policy was losses, not schemes. Although the receptionist may have taken the money pursuant to a common scheme, each act of appropriating money for her own use necessarily was preceded by a decision to adhere to and effectuate that scheme, which could have been interrupted at any time before the $9,000 was taken. The scheme, without more, could not have caused the losses.98The better approach to counting occurrences in this context, and one more in keeping with basic tenants of contract law, is simply to enforce the plain language of the policy, defining "occurrence" to include "all loss caused by, or involving, one or more 'employees', whether the result of a single act or a series of acts.99 There is "nothing ambiguous in this definition,"100 and, therefore, there is no need for courts to expound upon how the term "occurrence" is used in other contexts where such a definition is lacking. From the standpoint of the reasonable expectations of the insured, it is simply unrealistic to conclude that a businessperson purchasing crime coverage, when reading such a single loss provision, would draw an analogy to single- or multiple-car accidents. To the contrary, a reasonable businessperson will more likely be concerned with the risk of multiple thefts by a dishonest employee or employees and will focus closely on that exposure when considering different premiums for different levels of coverage and higher or lower per-occurrence deductibles. The Commercial Crime Policy defines as one "occurrence" all loss .. . "whether the result of a single act or a series of acts." Other policies, including the policy at issue in Gentilini, employ the phrase "series of related acts." A majority of courts construing and applying such provisions have found a single "occurrence" in situations involving multiple thefts or embezzlements by a single employee or group of colluding employees, even where the schemes extended over the course of months or years. tOt Certain courts, however, have found the terms "occurrence" and/or "series of (related) acts" to be ambiguous in the context of fidelity claims and, resolving perceived ambiguities against the insurer, have found multiple occurrences in situations involving a single ongoing scheme to defraud. ,br> The unreported case of Shemitz Lighting, Inc. v. Hartford Fire Insurance Co.102 concerned multiple forged checks, as well as diverted third-party checks, by the insured's bookkeeper. The subject policy included a $10,000 per-occurrence limitation, providing (identically to Gentilini) as follows: "All loss or damage: (a) Caused by one or more persons; . or (b) involving a single act or series of related acts; is considered one occurrence." The court, while acknowledging that the above language "elaborates on the company's limits of liability per 'occurrence,'" nevertheless viewed the term "occurrence" as "undefined." The court therefore applied its own legal interpretation of the term. The court reviewed a number of cases from different jurisdictions, which applied different approaches in various contexts (that is, fidelity policies, professional liability policies, auto policies) in finding single or multiple "occurrences." The court then noted that "the very fact that in so many jurisdictions other courts have considered the same, or similar, policy language in so many contexts" supported the conclusion that the subject policy language was ambiguous. The court, applying the "doctrine of reasonable expectations," observed that the insured would find it "difficult" to understand whether liability was limited to "$10,000 for each act of dishonesty; $10,000 for each employee; $10,000 for each policy period; or $10,000 for each coverage period." Construing the perceived ambiguity against the insurer and noting that "each of the plaintiff s losses were caused by a separate act of embezzlement," the court held that each act of embezzlement was a separate occurrence. Other courts have found the subject single-loss limitation language ambiguous in the context of successive insurance policies and have held that a series of dishonest acts extending through two policy periods represented two covered occurrences.103 However, in none of these cases did the court find multiple occurrences in a given scheme within a single policy period. Rather, these courts permitted one recovery per policy period. 104 An issue exists as to whether the insertion of the term "related" in the phrase "series of. . . acts" makes it more or less likely that a court will find multiple occurrences within a single scheme to defraud.105 On the one hand, without the term "related," the phrase "series of acts" is arguably more broad and could bring a wider variety of dishonest acts within the ambit of a single "occurrence." On the other hand, the use of the term "related" would appear to make the phrase more specific and, therefore, less prone to being perceived as ambiguous. A review of relevant case law, however, reveals that the term "related" in this context may be regarded as superfluous, as . ambiguous, 106 or, alternatively, limiting the applicability of the single loss provision to acts that are closely connected in some manner. In Valley Furniture & Interiors, Inc. v. Transportation Insurance Co.,107 the court looked at the dictionary definitions of "series" and "related" and found the phrase "series of related acts" unambiguous.108 However,. because the definition of the word series itself used the term "relationship," it is unclear whether inserting the term "related" adds anything of substance to the phrase "series of acts." In any event, the court in Valley Furniture construed the phrase to implicate "a succession of logically or casually connected acts, linked in time, place, opportunity, pattern, and method."110 Applying that standard, the court found a six-year payroll fraud scheme involving three employees to be a "series of related acts." The Minnesota Supreme Court in the American Commerce case adopted a similar understanding of the phrase "series of related acts," that is, acts that are "connected by time, place, opportunity, pattern, and, most importantly, modus operandi."111 By that measure, the court in American Commerce found two occurrences where the same employee repeatedly used two separate methods of embezzlement.112 Rejecting the contention that the term "related" was ambiguous as used in the policy in that case, the court explained as follows: We cannot so restrict the plain and ordinary meaning of the word "related" such that acts of embezzlement which follow each other in time, take place at the same business, and are committed by the same employee are not "related" as that word is commonly used.113By the standards set forth in Valley Furniture and American Commerce, the multiple acts of dishonesty committed by Mr. Carpenter in Gentilini, occurring in the same place, in the same manner and using the same modus operandi, would very clearly constitute a' "series of related acts." The Gentilini court, however, based upon its expansive reading of the Huff case, drew a distinction between "separate" transactions and "related acts.114 That distinction, which was quite tenuous under the facts in Gentilini, cannot represent a general rule of law.115 Depending upon the facts of a case, at some point even otherwise "separate" transactions must be viewed as "related." Scirex Corp. v. Federal Insurance Co., 116 for example, concerned a group of dishonest nurses, who falsified data and thereby rendered worthless "four clinical studies for three different sponsors,"117 conducted by their employer. The subject policy stated as follows: The most we will pay for any loss under Blanket Employee dishonesty for any loss caused by an employee whether acting alone or in collusion with others, either resulting from a single act or any number of acts, regardless of when those acts occurred during the period of this insurance or prior insurance, is the amount of loss, not to exceed the Limit of Insurance for Blanket Employee Dishonesty shown in the Declarations.118The policy also stated that "[a]ll losses resulting from an actual or attempted fraudulent or dishonest act or series of related acts at the premises. . . whether committed by one or more persons will be deemed to be one occurrence or event" However, nowhere did the policy expressly state that its single loss limitation, or "Limit of Insurance," applied to one "occurrence" or "event" The court nevertheless observed that "the accepted purpose of defining 'an occurrence or event' is to limit liability," and that "in the insurance industry 'occurrence' is commonly understood to mean all loss caused by a single act or related events."119Noting that the "the nurses themselves did not seem to distinguish among the four studies in terms of their responsibilities," the Scirex court affirmed as not clearly erroneous the lower court's finding that the insured's losses resulted from a "series of related acts.120 While insurers may justifiably believe that Gentilini was wrongly decided, it is, unfortunately, now binding precedent in the State of New Jersey; and it may ultimately be followed by some courts, particularly in jurisdictions that are especially zealous in favor of finding or expanding coverage in favor of insureds. Splitting loss, however, by multiplying occurrences may also reduce coverage due to the application of the per-occurrence deductible. On this point, while Gentilini permitted the insured "to recover up to $5000 for each fraudulently induced sale," the ruling also reflected that that those recoveries would be "subject to any applicable deductibles under the policy.121 The rule should be applied no differently in cases where it would result in less coverage. As poignantly observed by the Supreme of California in the Bay Cities case: To construe a policy provision narrowly so as to find only one claim and thus limit the deductible, but to construe the same language expansively so as to find multiple claims and thereby increase coverage, would be a result-oriented approach that we decline to follow. 122Or, as one court articulated the general principle of law: They cannot have it both ways. They can't have their cake and eat it too. What's good for the goose is good for the gander. It's a two way street. It takes two to tango. These aphorisms about double standards and reciprocity are not often jurisprudential, but they articulate an aspect of fair play and substantial justice. 123Indeed, just a few months before its ruling in the Gentilini case, the New Jersey Supreme Court, in Benjamin Moore & Co. v. Aetna Casualty & Surety Co.124 discussed the application of per-occurrence deductibles in the context of liability claims arising from long-term environmental hazards. In such cases, science does not provide an accurate method of determining when the subject "occurrence" took place. The New Jersey courts, therefore, apply a "continuous-trigger" rule that regards such claims as arising from separate "occurrences" under each of the successive insurance policies that were in force during the years of the environmental contamination. Loss is then shared pursuant to a pro-rata formula between the respective insurers, that is, the carrier for one of ten years is allocated ten percent of the loss, up to that carrier's policy limits. At issue in Benjamin Moore was whether insurers in such cases could take the benefit of the full amount of the policy deductibles, or whether insureds could pro-rate the deductibles. Rejecting the position of the insureds, the court explained as follows: Benjamin Moore and CSR cannot have it both ways. There is simply no principled basis to treat progressive environmental damage as separate occurrences in order to access insurance coverage but as a fractionalized single occurrence in determining the applicability of deductibles.125Splitting loss into multiple occurrences a la Gentilini may also have ramifications on when a loss is "discovered." The Commercial Crime Policy (discovery form) covers "loss that you sustain through acts committed or events occurring at any time and discovered by you. . . during the policy period." "Discovery" for this purpose is defined as occurring "when you first become aware of facts which would cause a reasonable person to assume that a loss covered by this policy has been or will be incurred, even though the exact amount or details of loss may not then be known." Suppose, for example, under facts similar to those in Gentilini, an insured under a Commercial Crime Policy "discovers" during the policy period that an employee committed fraud in three "separate" transactions. An investigation ensues, but it is not until several months after the policy period that the insured learns that the same employee committed similar frauds in connection with twenty-four other "separate" transactions. Would coverage exist with respect to the later- discovered transactions? Under the Gentilini ,rationale, evidently not. If each of the twenty-seven transactions is deemed to be a separate "occurrence" under Gentilini for purposes of policy limits defining "occurrence" to include "all loss" caused by a "series of acts," then, by the same logic, those "separate" transactions could not fairly be viewed as mere "details" of one large "loss" for the purposes of the timeliness of the "discovery" thereof. As observed by the New Jersey Supreme Court in Benjamin Moore, an insured "cannot have it both ways.126 Regarding each transaction as involving a separate loss under Gentilini, an insurer could argue that, in order for there to "discovery of loss" under the applicable policy language, "there must be discovery of both the loss and the dishonesty.127 Ironically, such an argument would run counter to what insurers have more commonly argued in "discovery" cases, that is, that "discovery," and the notice and suit deadlines that begin to run upon discovery, occurred earlier than as contended by the insured. 128 A case that comes fairly close to the above-discussed hypothetical is FDIC v. Fidelity & Deposit Co. of Maryland. 129 That case concerned a fidelity claim arising from twenty-seven suspect loan transactions and primarily involved the actions of a single dishonest employee. The insured learned of dishonest acts of that employee. in connection with various loan transactions and filed a proof of loss with the insurer that detailed "some" of the subject suspect loans.130 Among the issues on appeal was whether, for purposes the policy's discovery period, the insured had timely "discovered" two specific loan losses that were not referenced on the (otherwise timely) proof of claim. The insurer argued that the insured did not discover the subject loan losses during the policy period. The insured, however, argued that because the policy limited liability for all loss resulting from a single employee's dishonest actions, the loans were all "part of one huge loss." The insured thus maintained that it satisfied the policy's "discovery" requirement with respect to the entirety of its "loss" when it discovered the employee's basic scheme. 131 Observing that "loss" is "a broad term that covers all losses arising from the acts of an employee," the Fifth Circuit concluded that the "proof of loss need not have pinpointed every single loan loss."m However, the Fifth Circuit limited the scope of its ruling by noting that it was "unwilling to create a situation in which, as long as [the insured] can find some acts or omissions during the bond period committed by the same actor, it has unlimited time to investigate and add later losses caused by unrelated actions." Instead, the Fifth Circuit reasoned, it would "look for loans that arose out of the same pattern of conduct or scheme that was originally discovered." 133 The FDIC case thus stands for the proposition that timely discovery of a scheme brings into the policy period only loss arising out of "related" transactions. Under Gentilini, however, losses arising out of separate transactions do not constitute "a series of related acts." Applying the logic of both cases, it would appear that the discovery by an insured of an employee's fraud in one or more "separate" transactions during a given policy period would not trigger coverage for additional fraudulent transactions uncovered after the policy period. Again, the insured cannot (or should not) have its cake and eat it too. ,br> The possibility of permitting multiple "discoveries" within the same scheme demonstrates some of the unfortunate fallout that can result from bad decisional law such as Gentilini. Such an approach would undermine the general rule that "discovery" occurs only once, in a single policy year,134 thus raising the possibility of separate claims against successive insurers. That approach would also provide a strong incentive for insurers to cancel or decline to renew coverage at the first sign of a claim, so as to avoid having to cover subsequently discovered fraudulent transactions involving the same employee. Additionally, the approach would make it very difficult for the former employers of a dishonest employee to obtain new crime coverage, because insurers may not wish to cover newly "discovered" losses tracing back to the earlier activities of that former employee. It is too still early to know whether Gentilini will be followed by other courts or, if so, whether it will be broadly applied or viewed as restricted to the facts and the precise policy terms at issue in the case. Gentilini was not the first time, nor will it be the last, that a court will accommodate an insured's efforts to avoid a. single loss limitation provision by perceiving ambiguities in policy language that other courts have found clear and unambiguous. It is hoped that this article will be of assistance to practitioners in understanding where Gentilini went wrong, and how it may be distinguished, or, alternatively, some of the implications to insurers and insureds if Gentilini gains a following in other jurisdictions.
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