Exactly Who is Insured Under Your Insurance Policy?
The insurance application process is often the only time a policyholder thinks of who should be covered under a policy. Most policies have a “named insured” and other “insureds” specifically listed. “Additional insureds” can also be added by endorsement or operation of specific language in the policy. A recent case demonstrates the importance of considering these issues not only at the time the policy is placed, but also on a regular basis as business progresses.
In C.S. McCrossan Inc. v. Federal Insurance Company, the Eighth Circuit Court of Appeals upheld denial of coverage under a crime policy for losses of two companies affiliated with McCrossan. An individual working for the property manager of the two affiliates created false invoices and paid herself by forging checks in excess of $800,000. McCrossan made claims under its crime policy with Federal Insurance Company for both employee theft and forgery. Federal denied the claims.
The first hurdle to coverage was whether either of the McCrossan affiliates were insureds under the policy. The policy provided coverage for “subsidiaries” but only if the named insured either directly or through a subsidiary owned more than 50% of the outstanding voting shares. Federal Insurance agreed that one of the affiliates was an insured, but denied that the second affiliate was. Because that other affiliate was owned by a shareholder of McCrossan, and not McCrossan or its subsidiaries, the court held it was not an insured under the policy.
Next, the court held that the property manager was not an employee of McCrossan. Under the language of the policy, to be included as an employee, there had to be a contractual relationship with either the bad actor or an entity “acting on behalf of” the bad actor. The property management agreement was between the McCrossan affiliate and the property management company, not the bad actor. The court held that the property management company was not acting on behalf of the individual relating to the fraud.
Finally, the policy contained an exclusion relating to the forgery provision for acts of authorized representatives. While the bad actor was not an employee, because she had authority to do bookkeeping and other functions, the court held that she was an authorized representative and therefore the policy’s exclusion applied.
There are a handful of concepts to take away from this case. First, if you want coverage for your subsidiaries and affiliates, make sure that your policy defines them appropriately. If a common shareholder is what matters to you, make sure the definition in the policy reflects that or that the affiliated companies are explicitly listed as insureds. Second, identify where your potential loss is most likely to come from. How “employee” is defined can have a significant impact on how broad or narrow your coverage is, or how broadly or narrowly an exclusion is interpreted. Not all policies are worded in the same way–it is important to work with your insurance agent or broker to identify and properly cover the most likely risks. Third, look closely at the exclusions in your policy. Many times the exclusions can swallow much of the coverage that you would ordinarily expect from a policy. While the language in some exclusions may not be subject to negotiation, often times it is. Again, it is important to understand your primary risks and choose your insurance accordingly. Finally, and not addressed in the opinion, is the fact that there may be insurance coverage available from other parties. If you will be doing significant business with vendors or other agents, it pays to ask for copies of their insurance policies so that you have them on hand if an issue arises.
In future blogs, I will be discussing common insurance issues that are faced by businesses, including who should be included as insureds, common exclusions and how to avoid gaps in insurance coverage.
C.S. McCrossan Inc. v. Federal Insurance Company, (No. 18-1949) (8th Cir. Aug. 6, 2019) https://ecf.ca8.uscourts.gov/opndir/19/08/181949P.pdf