When employees violate internal policies that result in losses to their employers and clients, compliance, risk management, in-house counsel, and other key personnel are often left scrambling to do damage control. A recent federal appeals court opinion demonstrates how crime insurance policies can step up and provide both recovery for those losses and peace of mind for those responding to the incident. In particular, employee theft coverage within crime policies can insure policyholders against not only employee misconduct but also much of the downstream effects those actions can have on the company’s bottom line. This article provides a summary of how companies can incorporate crime insurance policies into their compliance and risk management programs and the benefits they can receive as a result.
Summary of the Cargill case at the Eighth Circuit
Cargill is a global food corporation specializing in producing, transporting, and trading agricultural commodities like grain and livestock. The company purchased a commercial crime insurance policy containing a coverage grant for “Employee Theft.”[1] The policy covered “theft,” which was defined as “the unlawful taking of property to the deprivation of the Insured.” The policy also provided that Cargill’s loss must have resulted “directly from” employee theft. A long-tenured employee at one of Cargill’s grain facilities in New York oversaw portions of the grain storage and rail transportation operations. She developed a scheme to embezzle money from Cargill by internally misrepresenting the price at which she could sell the grain in the Albany market, causing Cargill to ship excess grain to Albany. The employee then entered false sales contracts into Cargill’s accounting system and manipulated the system to show grain sales at prices higher than those for which the grain actually sold.
Upon discovering this scheme, Cargill notified its insurer and cooperated with the subsequent investigation. All told, Cargill had suffered approximately $32 million in losses—$3 million the employee embezzled plus $29 million in excess freight costs from surplus grain shipments to Albany. However, the insurer agreed to cover only those funds the employee embezzled and denied coverage for the excess freight costs.
Seeking affirmation of its partial denial of coverage, the insurer filed suit in Minnesota federal court. Cargill prevailed in an early motion asking the trial court to determine if it had sustained covered losses resulting directly from the employee’s misconduct. The court agreed with Cargill, awarding both the $3 million the employee stole as well as the $29 million in costs.
The Eighth Circuit affirmed the trial court’s ruling. On appeal, the insurer argued that the employee’s conduct was not a “taking” of the grain, as required by the employee theft insuring agreement. The court rejected that claim, recognizing that the employee’s “implicit control” over the grain, including by controlling the pricing and recordkeeping elements of the sale, was sufficient to constitute an unlawful taking under the policy and did not require physical seizure of the products.
The insurer also argued that Cargill’s loss of $29 million in freight costs did not result “directly from” the employee’s conduct since those two occurrences were too disjointed in the causal chain. The Eighth Circuit also dispatched that argument, agreeing with the trial court that Cargill would not have paid the freight costs if not for the employee’s scheme and that no other intervening causes could account for those losses. As a result, the court agreed that Cargill had shown that the employee’s conduct constituted “employee theft” under the crime insurance policy and that its losses resulted directly from that theft.
Cargill’s victory, which centered around the meaning of “employee theft” under commercial crime policies and the scope of recoverable damages flowing from employee theft, can provide guidance for analyzing coverage for other claims redressing similar losses. The remainder of this article explains how.
