U.S. court rules “direct means direct” loss under commercial crime policy

The U.S. District Court of Nevada recently held that coverage was precluded under a commercial crime policy for employee theft via the defrauding of customers’ credit cards. 

In CP Food & Beverage, Inc. v. United States Fire Insurance Company, the insured, CP Food & Beverage Inc. (CP), operated an adult entertainment establishment at which customers could purchase “funny money” to tip performers and service staff. The employees could then provide the funny money to CP to be converted back to cash. Numerous employees wrongfully overcharged customers’ credit cards through various methods, using the stolen funds to purchase funny money and alcohol from CP. CP was ultimately required to pay chargebacks to its customers’ credit cards amounting to almost $770,000, resulting from both an agreement with law enforcement and its contractual obligations with credit card companies.
 
CP claimed the loss under the Employee Theft coverage part of its commercial crime insurance policy. In granting the insurer’s motion for summary judgment, the court followed established precedent in adopting the “direct means direct” approach to causation, which requires the loss to follow immediately in time and place from the occurrence at issue. In so doing, proximate causation was found not to be sufficient. The court noted that the policy contemplated a loss when the insured is deprived of property, not when a third party is deprived of property and the third party later sues the insured or requests repayment required under a contractual provision. On the facts of the case, the employees stole customers’ money through unauthorized charges to their credit cards, which they then used for their own gain. The theft was of the customers’ funds, and not of CP’s.
 
The result in the case was not unexpected, as commercial crime insurance policies are generally not intended to provide third party coverage for an insured’s vicarious liability arising from employee theft of third party property. Rather, the typical commercial crime policy will state that only property that is owned by the insured, held by the insured for others, or for which the insured is legally liable and is not within the premises of the insured’s client, is covered. However, there are extended forms of commercial crime insurance that can include coverage for the theft of third party client property.