A Theft is a Taking of Property

A Decision Finding Theft Can Be a Taking of More than Money Costs National Union $22,114,883 Plus Interest

Aug 31, 2021

BACKGROUND

National Union issued a commercial crime insurance policy to Cargill, effective October 1, 2014, through June 15, 2016 (Policy). The Policy provides up to $25 million in insurance coverage with a $10 million deductible. The employee theft clause of the Policy (Employee Theft Clause) provides that National Union, “will pay for loss of or damage to ‘money’ ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee’ whether identified or not, acting alone or in collusion with other persons.” The Policy defines “theft” as, “unlawful taking of property to the deprivation of the Insured.”

This dispute arose from the fraudulent actions of Cargill’s former employee, Diane Backis. Cargill employed Backis as a “Merchant/Admin Leader” in Cargill’s Albany, New York, grain facility. Cargill discovered uncharacteristically large accounts-receivable balances, which triggered a fraud investigation. Assisted by the Federal Bureau of Investigation (FBI), Cargill determined that between approximately December 2006 through June 2016, Backis misrepresented the prices that customers were willing to pay for corn and sorghum and made fraudulent entries in Cargill’s accounting system to memorialize these fictitious higher prices. Backis’s actions led Cargill to sell commodities at lower prices, leading Cargill to sustain approximately $32 million in losses, calculated as the “purchase price of corn and sorghum [that Cargill paid] less the cash receipts from corn and sorghum sales from June 1, 2007 through May 31, 2016.” Backis subsequently pleaded guilty to one count of mail fraud and one count of filing a false tax return after admitting that she deposited at least $3,115,610.89 of Cargill’s customers’ payments into her personal bank accounts.

Cargill notified National Union of a purported employee-theft loss under the Policy. The parties jointly retained an independent “Investigative Specialist” to investigate the facts and determine the quantum of loss as to Cargill’s claim and to create a “FRISC Report.” The Policy provides that the FRISC Report “issued by the Investigative Specialist will be definitive as respects the facts and the quantum of loss and shall be provided to both” Cargill and National Union. (Emphasis added.)

The FRISC Report determined that, “[a]s a result of Ms. Backis’ purchase of corn and sorghum at Albany’s cost above selling price from [fiscal year] 2008 through her termination, Cargill was adversely impacted $32,15,192, which includes $3,115,611 in theft of cash.” Cargill sought insurance coverage for the loss it sustained as a result of Backis’s actions identified in the FRISC Report. National Union denied coverage.

National Union sued seeking a declaratory judgment as to its contractual obligations contending it was only liable for the theft of cash which was below the deductible. Cargill filed a counterclaim alleging breach of contract and now moves for judgment on the pleadings.

ANALYSIS

Insurance Coverage

The parties dispute whether Cargill has demonstrated that Backis’s actions resulted in a loss of other property “resulting directly from theft.” The relevant “Insuring Agreement” in dispute is the Employee Theft Clause, which provides that National Union “will pay for loss of or damage to ‘money,’ ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee.’” “Property” is limited to property that Cargill owns, leases, or is holding for others. The disputed terms of the Policy are addressed in turn below.

“Resulting Directly From”

The parties dispute whether the losses Cargill sustained were the direct result of Backis’s theft.

The Policy does not define “directly.” Accordingly, the Court must apply the ordinary and popular meaning of the term. Black’s Law Dictionary defines “directly” as “[i]n a straightforward manner, ” “[i]n a straight line or course, ” or “[i]mmediately.” Black’s Law Dictionary 557 (10th ed. 2014).

The FRISC Report provides that as part of her fraudulent scheme, Backis represented to Cargill in various ways, including through falsified sales contracts, that she was selling sorghum and yellow corn commodities at higher prices than she was. In fact, Backis was selling these commodities at competitive market prices. Ultimately, this fraudulent scheme led Cargill to sell commodities below cost between June 1, 2007, and May 31, 2016, the fraud period identified in the FRISC Report.

Backis’s actions caused Cargill necessarily to lose money because Cargill sold commodities below cost. Moreover, any doubts as to whether the losses here resulted “directly” from Backis’s actions were resolved in favor of the insured. Because Cargill’s losses at issue resulted directly from Backis’s actions, this term of the Policy is satisfied.

“Theft”

The Policy provides coverage for “theft, ” which the Policy defined as “the unlawful taking of property to the deprivation of the Insured.”

The parties dispute the relatedness of Backis’s direct theft of approximately $3 million with the additional losses that Cargill sustained in excess of $25 million as a result of Backis selling commodities below cost. Cargill argues that “Backis admitted in her plea agreement to stealing more than $25,000,000 from Cargill” whereas National Union argues that the FRISC Report definitively concluded that there is “no connection between Backis’s embezzlement and the pricing misrepresentations.” National Union maintains that Backis’s pricing-misrepresentation scheme is separate from her embezzlement scheme.

A taking requires exercise of possession or control. The parties also disputed whether a “taking” requires physical possession of the purportedly stolen property. Because the term “taking” is not defined by the policies, case law interpretations are relevant. The Black’s Law Dictionary definition of “taking” does not require physical possession of the seized article, but does require, at a minimum, that the actor exert control over the article such that possession or control is transferred.

The Policy at issue here does not define a “taking.” And Minnesota law does not limit a “taking” under employee theft insurance coverage to physical takings. For these reasons, there is no basis for the Court to impose such a limitation. A “taking” requires “an implicit transfer of possession or control.” Black’s Law Dictionary 1682 (10th ed. 2014). The FRISC Report provides that “Backis controlled the pricing and recordkeeping elements of the sale” of corn and sorghum.

The court noted it was obligated to resolve any doubts concerning the meaning of language contained in the Policy in favor of the insured. Accordingly, if any doubt remains as to what constitutes “theft, ” the Policy must be construed in Cargill’s favor.

Backis’s conduct constitutes a “theft” under the Policy as a matter of law, and Cargill’s losses resulted directly from Backis’s theft. Accordingly, Cargill’s motion for judgment on the pleadings was granted.

Prejudgment Interest

Cargill argued that it is entitled to prejudgment interest in the amount of 10 percent per annum, or $6,058 per day, beginning on April 28, 2016, pursuant to Minn. Stat. § 60A.0811.

The court concluded, therefore, that:

Defendant Cargill, Inc.’s motion for judgment on the pleadings, is GRANTED.
Judgment shall be entered against Plaintiff National Union Fire Insurance Company of Pittsburgh, Pa., and in favor of Defendant Cargill, Inc., in the amount of $22,114,883 plus 10 percent prejudgment interest per annum, or $6,058 per day, beginning on April 28, 2016, and ending on the date that judgment is entered in this case, pursuant to Minn. Stat. § 60A.0811, subdiv. 2(a).

ZALMA OPINION

Why this was a question that took a trial is difficult to understand since “theft” is something any juror could understand. Yet, National Union tried to convince the court to ignore the plea agreement Ms. Backis entered into with the government that she successfully stole more than $32,15,192, which included $3,115,611 in cash. If only the theft of cash was covered it was an amount less than the deductible. Since the theft included more than cash National Union must pay more than $22 million (application of $10,000 deductible) plus interest at the rate of 10%. If National Union appeals and loses the interest will continue to grow at $6,058 per day,

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4