No Coverage Because Employee Intentionally Stole From Clients, Not Firm

A Michigan federal district court, applying Michigan law, granted summary judgment to two insurers, finding no coverage in a $2.6 million theft claim because the employee had stolen the funds from clients, and not directly from the policyholder, while knowing he was committing a wrongful act.

For approximately 8 years, an employee of the policyholder, Hantz Financial Services, Inc. (“Hantz”), stole more than $2.6 million in funds given to him by clients to invest or purchase insurance. The employee deposited the funds either directly into his personal account or into a dummy business account with an “HFS” acronym. Two clients filed an arbitration claim with FINRA against Hantz, the employee, and the employee’s supervisor in 2008. Hantz launched an investigation and notified its insurers, National Union and AISLIC, of the potential claims. In all, 23 clients were affected. Hantz had judgment entered against it on some of the claims and settled with others. Hantz also resolved the regulatory action with FINRA by paying penalties. National Union denied coverage and AISLIC did not give a written coverage opinion. Hantz subsequently filed suit against its insurers.

Applying Michigan law, the Court issued summary judgment for National Union and AISLIC. The Court reasoned that the Financial Institutions Bond that National Union issued to the policyholder covered loss to the policyholder “resulting directly from dishonest or fraudulent acts committed by an employee” (emphasis added). The court found that Hantz’s losses derived from third-party claims for negligent supervision and from having to reimburse clients. Thus, the court held that because the employee’s theft was not from the policyholder itself, but instead from the clients, the loss was not direct.

The court also held that AISLIC was relieved of coverage due to an exclusion in its E&O policy that barred losses arising from wrongful acts that were committed with the knowledge that they were wrongful. The court reasoned that Hantz admitted that the employee intended to steal the money and conceal his actions, and there was no dispute that he had knowledge that his actions were wrongful. The court rejected Hantz’s arguments that the claims against Hantz were for negligent supervision, not theft, and that the negligent supervision was not committed knowingly, on the basis that the negligent supervision claims “arose out of” the intentional wrongful act of theft. Hantz Fin.Serv.Inc. v. Nat’l Union Fire Ins.Co. of Pittsburgh, PA, No. 13-cv-11197 (E.D. Mich. Sept. 17, 2015)

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