Summary Judgment Granted to Insurer Based on Policy's Special Employee Theft Exclusion

COMMERCIAL PROPERTY – EMPLOYEE DISHONESTY COVERAGE – SPECIAL EMPLOYEE THEFT EXCLUSION

Albany Airport HIE, LLC v. The Hanover Ins. Grp., Inc.
(NDNY, decided 8/7/2019)

Plaintiffs owned two hotels in the Albany, New York area. In 2010, plaintiffs entered into a management agreement with Bullock Hospitality LLC ("Bullock Hospitality") to manage both hotels. Tod Hanlon signed the management agreement as the sole member and manager of Bullock Hospitality.

In August 2014 Citizens Insurance Company of America issued a commercial package policy listing eight named insureds, including the two plaintiffs and Bullock Hospitality.  The policy's GOLD FORM BROADENING ENDORSEMENT's Employee Theft section contained this exclusion:

(8)  Special Employee Theft Exclusions 

We will not pay for:  

(a)   Loss resulting from "theft" or any other dishonest act committed by: 

(i) You; or
(ii) Any of your partners or "members"; 

Whether acting alone or in collusion with other persons.

The policy defined "you" and "your" to mean "the Named Insured shown in the Declarations"and "member" to mean "an owner of a limited liability company represented by its membership interest who, if a natural person, may also serve as a `manager.'"

In February 2015, plaintiffs reported to Citizens that their former hotel manager, Tod Hanlon, had stolen over $700,000 from them by depositing checks intended for the hotels into his own bank account.  Based on the fact that the reported loss had resulted from theft by a member (Hanlon) of a named insured (Bullock Hospitality), Citizens denied the plaintiffs' claim.

Plaintiffs sued for coverage and, after discovery was complete, my senior associate, Scott Mancuso, and I drafted and filed a motion for summary judgment on behalf of the defendant insurers.  Although you might think (as I did) that the district judge walking off the bench while I was standing at the podium and making my rebuttal argument (no joke) was a bad sign, the court GRANTED summary judgment to my clients, dismissing the complaint:

It is undisputed Tod Hanlon was a member or sole member of Bullock Hospitality at the time he stole monies from plaintiffs. It is undisputed Bullock Hospitality was a named insured. The policy excludes coverage for theft committed by a named insured or by any partner or member of a named insured. There are no triable issues of material fact regarding the applicability of Special Employee Theft Exclusion 8.a. Plaintiffs seek what the policy simply does not cover—an alleged theft by a member of a named insured.

"[P]arties cannot create ambiguity from whole cloth where none exists, because provisions `are not ambiguous merely because the parties interpret them differently.'" Universal Am. Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 25 N.Y.3d 675, 680 (2015) (quoting Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347, 352 (1996)). The instant exclusion is not ambiguous. To the extent Ms. Copesky of the PLRB found the exclusion inapplicable, it appears her opinion was based on incorrect or incomplete information. The existence of a conflicting interpretation, based upon incorrect information, does not render the policy "subject to ... other reasonable interpretation." Parks Real Estate Purchasing Grp., 472 F.3d at 42. An interpretation based on incorrect facts cannot be deemed reasonable.

The PLRB opinion is unreasonable in that it found Bullock Hospitality was an "additional insured." Adams Decl., Ex. 6. To the contrary, it is undisputed that Bullock Hospitality was in fact a "named insured." Defs.' SMF ¶ 6. This distinction is key as the relevant policy provision excludes coverage for loss resulting from theft by "you" or "any of your partners or members." As the policy defined "you" and "your" to mean "the named insured," it is significant that Bullock Hospitality was in fact a "named insured" rather than an "additional insured." The PLRB opinion correctly notes that "you" and "your" do not refer to any "additional insureds." Adams Decl., Ex. 6.  

Based on the incorrect premise that Bullock Hospitality was an "additional insured" instead of a "named insured," Ms. Copesky concluded "it appears that Bullock is not likely considered `you' for purposes of the exclusion as they are an additional insured and not the primary named insured." Id. She went on to find that plaintiffs and Bullock Hospitality would not constitute partners within the meaning of the policy, nor would Bullock Hospitality "fall into the other categories for excluding coverage: members, partners, etc." Id. To reiterate, the PLRB's interpretation, in conflict with defendants', does not render the exclusion ambiguous.  

Defendants have carried their burden to show the Special Employee Theft Exclusion applies, that there are no disputed issues of fact, and that they are entitled to judgment as a matter of law. To the extent that plaintiffs urge criticism of Citizens' and Hanover's responsibilities during the underwriting process and their alleged failure to insert policy language to identify, control, or eliminate the resulting risk at the underwriting stage, those arguments have been considered and are found to be without merit.  

Accordingly, defendants' motion for summary judgment dismissing the second cause of action for breach of contract will be granted. Any dispute over whether Hanover issues insurance policies and whether it issued the instant policy is moot as defendants' motion for summary judgment will be granted and the Complaint will be dismissed in its entirety.

As members of PLRB, my clients had requested a coverage opinion of one of PLRB's staff attorneys before making a coverage decision.  The PLRB attorney concluded, based on "incorrect or incomplete information", that the policy's Special Employee Theft Exclusion did not apply to negate employee theft coverage.  In opposition to my client's motion, plaintiffs' counsel argued that the PLRB opinion rendered the Special Employee Theft Exclusion ambiguous, precluding summary judgment.  The court rejected that argument, noting:

"[P]arties cannot create ambiguity from whole cloth where none exists, because provisions `are not ambiguous merely because the parties interpret them differently.' *** The existence of a conflicting interpretation, based upon incorrect information, does not render the policy subject to ... other reasonable interpretation." Parks Real Estate Purchasing Grp., 472 F.3d at 42. An interpretation based on incorrect facts cannot be deemed reasonable.

I love the whole cloth quote.  Have used it before and will likely use it again.