In National Union Fire Insurance Company of Pittsburg v. Cargill, Inc.1, the Eight Circuit Court of Appeals, applying Minnesota law, recently addressed whether damages associated with an employee’s embezzlement scheme would be covered under a policy for employee theft.
Cargill, which owned a grain storage facility, discovered that an employee engaged in a multi-year scheme to embezzle funds. In her scheme, the employee had misrepresented the price at which grain could be sold and then created false sales contracts in Cargill’s accounting system. This induced Cargill into shipping and selling grain when it would otherwise not have. After discovering the employee’s scheme, Cargill notified its commercial crime insurer, National Union.
Pursuant to the terms of the policy, Cargill and National Union jointly appointed an investigator to investigate the scheme and assess the amount of the loss claimed. The third-party investigator, after more than two years of investigation, determined that Cargill incurred about $32.1 million in losses. The report noted that only $3 million was a result of embezzlement by the employee, while most of the remaining cost—about $28 million—was due to freight costs to ship the grain. It is this unusual result, where the costs to enable the embezzlement disproportionately outweighed what the employee pocketed, that makes this decision noteworthy.
The crime policy provided coverage for employee “theft,” which was defined as “the unlawful taking of property to the deprivation of the Insured.” National Union argued that the employee’s fraudulent conduct did not amount to a “taking,” which was an undefined term in the policy. The Court disagreed, finding that although the employee never physically seized the grain, her conduct led to an “implicit transfer of control,” which would not have occurred but for her actions. Since the employee “had controlled the pricing and recordkeeping elements of the goods,” the employee had the decision-making authority that amount to “control” of the grain. In this instance, the court stated that where relevant, legal analysis should look to if and how data was manipulated to determine if any “true” data had been stolen, hidden, or replaced. The court also emphasized that when employees go beyond the scope of their duties and improperly wield what would be otherwise proper decision-making authority, this constitutes a “theft” of authority.
Moreover, the Court found that Cargill’s $29 million loss in freight costs could be characterized as resulting “directly from” the employee’s conduct. National Union had asserted that, even if they were liable for the loss, they would only indemnify Cargill for the $3 million the employee pocketed. The Court, however, found that for purposes of insurance coverage, it is not important whether the damages incurred in furtherance of employee theft are disproportionately greater than the embezzlement itself.
The Cargill case provides some necessary framework for evaluating coverage under crime policies when employee embezzlement occurs. However, the Court leaves some questions unanswered. What occurs if the employee had embezzled from a profitable route; would shipping costs be considered covered damages? What occurs if the insurer can demonstrate that the insured substantially benefited from shipping at below-cost; would the shipping costs be considered a part of routine business and therefore not covered? These questions indicate that even factually similar events may lead to different rulings on damage calculation, classification, and even coverage.
For more information on this topic, please contact Theresa Guertin at TGuertin@sdvlaw.com.
Thank you to Noah Kim for contributing to this Case Alert.
161 F.4th 615 (8th Cir. 2023).