Bass, Berry & Sims attorney Chris Lazarini provided comment on the case of Hantz Financial Services, Inc. vs. National Union Fire Ins. Co. of Pittsburgh in which Hantz Financial sought coverage under its Fidelity Bond and E&O Policy relating to theft of $2.6 million in client funds by an employee. The Court granted summary judgment in favor of Hantz’s insurers. The Court found no coverage under the Fidelity Bond because the employee had stolen directly from firm clients and therefore the firm’s loss was indirect and not covered. The Court found the E&O carrier not liable because the Policy excluded losses arising out of a wrongful act committed with knowledge that it was wrongful.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Hantz Financial Services, Inc. vs. National Union Fire Ins. Co. of Pittsburgh, No. 13-cv-11197 (E.D. Mich., 9/17/15)
*A broker-dealer who must reimburse clients for the theft of the clients’ assets by an employee of the broker-dealer suffers only an indirect loss from the misappropriation.
**Under Michigan insurance law, where a covered claim, such as negligent supervision, combines with an excluded claim, such as employee theft, no coverage exists.Over an eight-year period, broker-dealer Hantz Financial’s employee stole more than $2.6 million dollars from clients, using a variety of schemes, causing Hantz to pay out more than $3 million dollars in judgments, settlements and regulatory fines. Hantz filed this action after National Union denied coverage under its Fidelity Bond and American International Specialty Lines Insurance Co., Inc. (“AISLIC”) failed to respond to the claim on its Errors and Omissions (“E&O”) Policy. The Court finds that neither insurer assumed the risk of Hantz’s loss and grants Defendants’ motion for summary judgment.
The Fidelity Bond covered losses “resulting directly from dishonest or fraudulent acts committed by an Employee with the manifest intent: (a) to cause the insured to sustain a loss” and excluded “indirect or consequential loss[es].” National Union argued that the loss was not covered, because the employee stole money from Hantz’s clients, not Hantz and, therefore, Hantz’s loss was indirect. Citing Sixth Circuit precedent, the Court notes that the word “directly” signals that the loss must be an immediate result of the employee’s conduct, as opposed to a remote or incidental result. The Court then finds that, because Hantz acknowledged that the stolen money belonged to its clients, its loss – reimbursing those clients – was not the direct result of the employee’s theft. The conclusion is bolstered, the Court states, by the Bond’s requirement that the employee have the manifest intent to cause the insured to sustain the loss. The Court finds that no reasonable jury could conclude that the employee manifestly intended that Hantz would reimburse its clients.
AISLIC argued that the loss fell within an E&O Policy exclusion stating that it was not liable for a loss “arising out of . . . any actual or alleged Wrongful Act committed with knowledge that it was a Wrongful Act.” AISLIC argued that the employee’s efforts to conceal his theft showed knowledge that his acts were wrong. Hantz countered that the “Wrongful Act” at issue was its negligence in supervising its employee, a failure it committed without knowledge that it was wrong. Citing multiple cases, the Court interprets “arising out of” broadly and agrees with AISLIC that Hantz’s claim “arises out of” the employee’s theft. The Court reasons that Hantz’s interpretation renders the exclusion meaningless, because whenever an employee commits a dishonest or criminal act, allegations framed in negligence can be asserted against the employer. The Court further finds that, even if the loss was concurrently caused by the combination of a covered cause (negligent supervision) and an excluded clause (employee theft), in Michigan the excluded event trumps and coverage does not exist.