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Client alert: Employee theft

Recent developments in fidelity coverage litigation

Financial, Executive and Professional Risks (FINEX)

By Angela Lee | September 11, 2020

Employee dishonesty and in-house fraud require risk managers to take a closer look at fidelity insurance policies.

Many businesses have been forced to face a harsh reality – some of their employees are dishonest. This unfortunate fact has focused attention on fidelity insurance as a way to effectively manage the risk of in-house fraud.

Fidelity insurance is a complex area that requires careful scrutiny of the policy or bond at issue. While employee dishonesty coverage may seem straightforward – i.e., an employee steals from the company and the policy indemnifies – it is not nearly this simple.

This article highlights recent developments in Sherwin-Williams Co. v. Beazley Ins. Co.,1 and M&C Holdings Delaware Partnership et al v. Great American Insurance Co.2 – in both cases, pending dispositive motions were denied and the respective courts held that the insurers failed to show that any of its policy exclusions preclude coverage – at least for now.

Insurer must cover Sherwin-Williams $3.5 million theft

In the case of Sherwin-Williams Co. v. Beazley Ins. Co., the U.S. District Court for the District of Minnesota denied the insurer’s motion for summary judgment and held that Beazley failed to show that any of its policy exclusions preclude coverage. The coverage action arose from an approximately $3.5 million claim in which a former employee of The Valspar Corporation (“Valspar) allegedly approved numerous inflated invoices submitted by AmeriCoats, a contracted toll-manufacturer.

Beazley issued a crime policy to Valspar, a predecessor to Sherwin-Williams. The policy includes an Employee Theft Insuring Clause which provides that “the insurer shall indemnify the Insured or any Plan for loss of or damage to Money, Securities or Property resulting directly from Employee Theft of Employee Forgery.”3 Employee Theft was defined in the policy as “the unlawful taking of Money, Securities or Property to the deprivation of an Insured by an Employee, whether identified or not, acting alone or in collusion with others.”4

Beazley argued that the definition of Employee Theft was not met as required as the former employee did not “take” the payments – he was not part of Valspar’s Accounts Payable Department, did not issue any payments to AmeriCoats, divert them to himself or exercise any control over those payments.5

In addition to arguments concerning coverage under the Employee Theft clause, Beazley further argued that even if Employee Theft was involved, the alleged loss was excluded under Exclusion B.1. of the policy as it “was caused directly or indirectly by AmeriCoats – a contractor, independent contractor, subcontractor, or similar person or entity.”6 As a toll-manufacturer, Beazley contended that AmeriCoats was a third-party contractor and as such, Exclusion B.1 would preclude coverage under the policy. Sherwin-Williams argued that the term “contractor” was ambiguous and did not specifically include toll-manufacturing relationships.7 Further, Sherwin-Williams raised a causation argument, stating that AmeriCoats could not cause the loss. Rather, all it could do was submit an invoice – AmeriCoats could not cause the invoice to be approved or paid.

Finally, Beazley argued that should the court decide that Exclusion B.1. did not apply, then coverage would be barred by Exclusion A.18 which bars coverage for loss resulting from “the Insured knowingly having given or surrendered Money…in any exchange or purchase with a Third Party, not in collusion with an Employee.”8 The court rejected all arguments raised by Beazley. With respect to the whether or not the overcharges constituted Employee Theft, the court detailed that “taking” for the purposes of Employee Theft can be broadly construed and is not limited to “hands in the till” or physical control over a specific item.9 On the issue of causation, the court held that “a more reasonable” interpretation of the contractor exclusion is that it does not cover losses caused by a third party alone.10 The court further found that a reasonable jury could conclude that the former employee caused or colluded to cause the alleged loss together with AmeriCoats. As a matter of law, the court could not conclude that Valspar “knowingly gave or surrendered money to AmeriCoats or anyone working for AmeriCoats.”11

Court rejects insurer’s attempt to dismiss $1.9 million crime loss

In the case of M&C Holdings Delaware Partnership et al v. Great American Insurance Co., the hotel operator defeated the insurer’s motion to dismiss its suit alleging that the insurer wrongfully denied coverage and acted in bad faith by denying the hotel’s $1.9 million claim. The U.S. District Court for the Southern District of Ohio held that the hotel operator had suffered an “insurable loss” and rejected Great American’s argument that the claim was barred under the policy’s suit limitations provision.12

Millennium operates hotels throughout the United States and pays commissions to travel agencies in exchange for customer bookings. A New York based employee engaged in a fraudulent scheme to divert commission payments in excess of $1.9 million from legitimate agencies and to collect commissions on behalf of fictitious agencies. Upon discovering the scheme, Millennium filed a claim under its crime insurance policy issued by Great American.

Great American denied the claim arguing that Millennium did not suffer a “loss” under the policy because the majority of the claim was allegedly a “bookkeeping loss” not insured by the policy.13 In addition, the insurer contended that the fraudulent scheme misappropriated money that Millennium owed to third-party travel agencies and accordingly, the hotel is not the party that suffered a direct loss.

Great American further claimed that Millennium’s lawsuit was barred as it did not comply with the policy’s suit limitations clause, which requires that legal action be brought against the insurer within two years of the loss discovery date. Millennium stated in its proof of loss that it discovered the loss in June 2017 but filed the suit more than two years later in February 2020. Millennium argued that Great American waived its ability to enforce the limitations provision as the insurer indicated that the loss would be covered under the policy during its investigation. Furthermore, Millennium could not reasonably have been expected to file a lawsuit prior to Great American’s determination of coverage while also complying with its duty to cooperate with the carrier’s investigation.

The court agreed with Millennium and held that the hotel suffered a direct loss upon actual disbursement of the hotel’s funds caused by the employee’s fraud. In addition, the court again agreed with Millennium and denied the insurer’s motion as questions were raised as to whether Great American any action, misleading or not, suggesting that the claim would be covered, causing Millennium to delay filing suit. While the court acknowledges that Great American may ultimately prevail on the issues raised in the motion, its attempts to do so through a motion to dismiss was not well taken in light of the allegations of the complaint.


Fidelity insurance policies are constantly evolving in response to new and unexpected claims scenarios. Having a quality crime insurance policy in place and a broker who can help you navigate the terms and conditions as well as the claims process is invaluable.


1 Sherwin-Williams Company, The v. Beazley Insurance Company Inc., case number 18-02964, in the U.S. District Court for the District of Minnesota.

2 M&C Holdings Delaware Partnership et al v. Great American Insurance Co., case number 1:20-cv-00121, in the U.S. District Court for the Southern District of Ohio.

3 MEMORANDUM, OPINION AND ORDER. Defendant’s Motion for Summary Judgment 73 is DENIED (Written Opinion) Signed by Judge Donovan W. Frank on July 23, 2020. Available at

4 Ibid.

5 Ibid.

6 Ibid.

7 Ibid.

8 Ibid.

9 Ibid.

10 Ibid.

11 Ibid.

12 Report and Recommendation. Defendant’s Motion to Dismiss 23 is DENIED (Written Opinion) Signed by Judge Karen L. Litkovitz on July 29, 2020. Available at

13 Ibid.


This Willis Towers Watson publication is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. If you would like additional information, please contact us. Some of the information in this publication may be compiled by third party sources, whilst we consider these to be reliable, we do not guarantee and are not responsible for the accuracy of such. The views expressed herein are not necessarily those of Willis Towers Watson. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates, for example: Willis Towers Watson Northeast, Inc. in the United States, Willis Canada Inc., in Canada.


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