HNRK Coverage Corner

This week at the Coverage Corner, we take a look across the river at a decision from the U.S. District Court for the District of New Jersey that held a dishonest employee’s multi-year scheme to steal money from his employer was one occurrence subject to the per-occurrence limit for a single policy year.  Whether a loss is the result of a single occurrence or multiple occurrences can be a critical question in coverage litigation.  We have previously written about the issue in the context of wildfire liability coverage and, like today’s issue, employee theft.

In today’s case, Raymond’s Restaurant Corporation d/b/a Raymond’s (Montclair) et ano. v. The Travelers Indemnity Company of America, et ano., the court declined to apply the continuous trigger theory and distinguished the facts of the case from a New Jersey Supreme Court precedent that found, under different circumstances, that each instance of an employee’s theft was a separate occurrence.

Background

Raymond’s, the operator of two New Jersey restaurants, obtained insurance policies from Travelers and a Travelers affiliate that provided coverage up to $25,000 per occurrence for losses resulting from “employee dishonesty.”  Between February 2020 and January 2022, a timeline that spanned multiple policy periods, a Raymond’s employee stole more than $1 million from the company by writing checks to himself and using the company account to pay his personal debts. 

Citing the “employee dishonesty” coverage, Raymond’s submitted a claim to Travelers.  Travelers, through its affiliate, paid just $25,000—the per-occurrence limit—and Raymond’s sued for breach of contract and for the bad faith denial of its claim.  The parties agreed to stay discovery pending dispositive motions, and both sides cross-moved for summary judgment.

Multi-Year Embezzlement Was a Single Occurrence

On summary judgment, the chief issue was whether the employee’s misconduct was a single occurrence or multiple occurrences over several policy periods.  Raymond’s argued that the embezzlement supported a “continuous trigger” theory that would implicate multiple policy periods (and thus multiple per-occurrence limits).   Courts in New Jersey and elsewhere have often applied a continuous trigger in cases that, for example, involved coverage in asbestos-related cases or long-term environmental injuries.

The court here disagreed that the doctrine applied to Raymond’s facts, citing policy language  that defined “occurrence” as “all loss or damage covered by the same ‘employee(s)’ whether the result of a single act or a series of acts.”  In the court’s view, the employee’s theft from Raymond’s was an ongoing scheme to defraud—i.e., a series of acts—and thus a single occurrence.  And because the Court found the policy language unambiguous, it rejected Raymond’s request to reform the policy to meet the “reasonable expectations” of the insured.  This doctrine, the court explained, is not available where the policy language is clear.

Distinguishing Auto Lenders

In ruling for Travelers, the Court distinguished the Raymond’s theft from a pattern of credit-applications frauds that were at the heart of a New Jersey Supreme Court decision that considered how to interpret “occurrence” in the context of an employee dishonesty claim.  In Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 854 A.2d 378 (N.J. 2004), an employee of a car dealership falsified a number of credit applications, which over eleven months led to the sale of twenty-seven cars to customers who would not have qualified for financing.  The insurance policy in that case provided in relevant part that “all loss or damage” involving “a single act or series of related acts[] is considered one occurrence.”  The Auto Lenders court held that although the employee “may have acted in the same manner when perpetrating each fraudulent sale, for each sale he caused a separate, direct loss” and that “[e]ven though [the employee] may have employed similar techniques for each fraud-induced sale, the fact remains that, by virtue of [his] conduct, [the dealership] was required to relinquish possession of twenty-seven cars on twenty-seven separate occasions to twenty-seven distinct customers.” 

Critically, the Auto Lenders court also noted that the credit-application scheme in that case was different than “any of the myriad of embezzlement-type cases where an employee steals cash or checks from an employer as part of an ongoing scheme to defraud.”  The Raymond’s court seized on this observation and concluded that the Raymond’s theft fell squarely into the category of “ongoing schemes” and thus a single occurrence under the policy.