The opinion
STATE OF MAINE ee ‘SUPERIOR COURT
CUMBERLAND, ss. 7) EVIL ACTION \y
“+ 3. 5s “DOCKET NO. CV-00-016
: aA : : _ AN _ boas
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ACADIA INSURANCE COMPANY,
Plaintiff
V. DECISION AND JUDGMENT
KEISER INDUSTRIES, INC.,
Defendant
\
This matter is before the court on the complaint of the plaintiff Acadia
Insurance Company ("Acadia") seeking a declaratory judgment that there is
no coverage under the policy of commercial insurance (“Policy”) issued by it
to the defendant Keiser Industries, Inc., ("Keiser") for losses caused by the
dishonest acts of a Keiser employee. The Policy had an initial one year term
beginning March 9, 1997. It was renewed for additional one year terms
commencing March 9, 1998 and ‘March 9, 1999.
Keiser claims that there is coverage and has counterclaimed for the
policy limits.
I. BACKGROUND
In September 1996 Glenn Searl was hired by Keiser to do operations
work. In mid-December of that year he became Chief Operating Officer. In
early 1997 he was made President and a director of the company and paid
an annual salary of $80,000.! In February or March 1997, Searl was
provided with a company credit card. Keiser had no written policy
regarding its employees taking cash advances or using the company's credit
cards for personal charges.
Robert ("Mac") Young was the Chief Financial Officer of Keiser and, as —
of August 6, 1997, was also its Secretary. Young was responsible for issuing
checks, paying bills and keeping records of financial transactions. Bruce
Winstanley was an assistant controller at Keiser. Young and Winstanley first
became aware of Searl's personal use of the company credit card in March
1997 and maintained an accurate account of his personal purchases and
cash advances.
In March 1998 an annual audit for fiscal year 1997 ("FY '97") was
conducted by Bradley ("Scott") Belanger, Keiser's outside auditor.2 Belanger
discovered that Searl had made personal charges on the company credit
card that appeared to total approximately $40,000. The actual amount was
later determined to be $71,173.68. Belanger reported this discovery to
Keiser’s Board of Directors in March 1998.
Bruce Saunders, Chairman of Keiser’s Board, questioned Searl about .
the charges. Searl was contrite and acknowledged that what he had done
was wrong. He promised to repay the charges within two weeks. Searl said
he had a condominium and an expensive automobile that could be liquidated
1In 1998 his salary was increased to $135,000.
2The company's fiscal year was the calendar year.
2
and applied to the debt. ‘Saunders admonished Searl not to use the company
credit card for personal purposes again without the Board's prior approval.
Searl acknowledged the admonition, apologized for his actions and assured
Saunders that he would follow his directive.
The Board accepted Searl’s explanation and treated his conduct as an
error in judgment based in part on a determination that Searl was a
trustworthy employee and was under a lot of pressure dealing with company
issues. In 1998, the Board did not reduce or dock Searl’s pay and did not
report the matter to Acadia.
Belanger conducted the company's annual audit for fiscal year 1998
(“FY ‘98”) in early March 1999. Over the course of that fiscal year, Keiser
had experienced serious cash problems that greatly concerned its Board. As
a result of the audit, Belanger discovered that Searl had continued to use the
company credit card to make additional personal charges and cash advances
totalling more than $195,649.55. Belanger informed the Board of this
discovery and the Board immediately suspended Searl’s employment. Young
did not provide Belanger with copies of the company's ledger tracking
Searl's credit card activity between the FY ‘97 and FY ‘98 audits and did not
tell Belanger that Searl’s debt had been increasing during that period.
In March 1999 Searl promised to repay the money within a few
weeks. In April 1999 the Board took Searl’s credit card away. On May 27,
1999, the Board terminated his employment because he failed to make the
promised repayments.
In April 1999 John Bowman was hired as a consultant and CEO of
3
Keiser. On June 14, 1999, he filed a claim and a sworn proof of loss with
Acadia alleging that Searl had engaged in a pattern of dishonest conduct and
unauthorized borrowing which was discovered by Keiser in the spring of
1998. Keiser also submitted a spreadsheet detailing its claim for losses in
FY '97 and FY '98.
Acadia contends that there is no coverage because the Policy was
canceled upon discovery of Searl's conduct in 1998 and because Acadia was
prejudiced by Keiser’s failure to timely report the loss as required by the
Policy.
Il. DISCUSSION
A. Coverage and Cancellation
It is not seriously challenged that Searl engaged in dishonest acts in
both FY '97 and FY '98 or that Keiser suffered significant losses as a result of
that dishonesty. The question is whether the Policy covers Keiser for these
losses. -
Interpretation of an insurance policy is a question of law. Jack v.
Tracy, 1999 ME 13, 4 8, 722 A.2d 869, 871. Standard insurance policies
are to be construed against the insurer, with the unambiguous language
interpreted according to its plain and commonly accepted meaning. Id. An
insurance policy is ambiguous if it is reasonably susceptible to different
interpretations. Apgar v. Commercial Union Ins. Co., 683 A.2d 497, 498
(Me. 1996). In determining whether the Policy is ambiguous, this Court -
must evaluate the instrument as a whole to see “how far one clause is
explained, modified, limited or controlled by the others.” Id.
4
In relevant part, the Policy provides that
This insurance is canceled as to any "employee":
a
Immediately upon discovery by
(1) You; or
(2) Any of your partners, officers or directors not in collusion
with the "employee", of any dishonest act committed by that
“employee” whether before or after becoming employed by you.
According to the Policy, “employee dishonesty” means
[D]ishonest acts committed by an “employee”, whether
identified or not, acting along or in collusion with other persons,
except you or a partner, with the manifest intent to:
(1)
(2)
Cause you to sustain loss; and also
‘Obtain financial benefit ... for:
(a) The “employee”; or
(b) Any person or organization intended by the
“employee” to receive that benefit.
By its terms, the Policy covers acts of dishonesty by an employee that
cause the loss of “money,” “securities,” and “property other than money
and securities” and becomes canceled as to that employee immediately upon
discovery of the dishonest acts by an officer or director who is not in
collusion with the dishonest employee. In the context of this case, the
issues of coverage and cancellation turn on when Keiser discovered, or
should have discovered, that Searl engaged in dishonest acts that caused the
claimed loss.
Keiser's proof of loss executed in 1999 reflects that its Board became
aware of Searl’s FY ‘97 conduct in the spring of 1998. By March 1998 the
5
Board knew that Searl had made personal charges of at least $40,000 on the
company card -- the equivalent of nearly one-half of his gross annual salary ©
for 1997. That sum was later determined to be over $7 1,000 -- equivalent
to almost 90% of his 1997 annual salary. Although the Board did not have a
policy concerning an employee's personal use of a company credit card, it
knew that Searl did not have authority or permission to use it in that
fashion. It knew that the amount in question was excessively large,
particularly in view of Searl's salary level. It also knew that Searl had
acknowledged to Board Chairman Saunders that his conduct was wrong.
Finally, it knew within two weeks of Saunders’ initial discussion with Searls
in March 1998 that Searls failed to keep his promise to repay the money.
In March 1998, the Board considered Searl's conduct to be an error in
judgment, not a dishonest act. However, this determination was not
objectively reasonable under the circumstances. The Board had a significant
collection of knowledge and facts regarding Searls' acts of dishonesty.
Neither his words of contrition, nor his convenient and unkept promise of
repayment could transform that dishonesty to a mere error in judgment. To
compound matters, the Board allowed Searl to keep the credit card when it
should have taken it from him. Failing that, it took no action to monitor his
use of the card even after his promised repayment failed to materialize.
Having in mind the totality of the circumstances known to the Board in
March 1998, it should have considered Searl’s conduct to be dishonest at
that time.
The Policy also provides for cancellation when the dishonest conduct
6
is discovered by any officer of the company who is not in collusion with the
dishonest employee. The term “officer” is not defined in the Policy. The
Maine Business Corporation Act (“MBCA”) identifies the officers. of a
corporation as the president, treasurer, and, if the bylaws provide, one or
more vice presidents. 13-A M.R.S.A. § 714(1) (1981 & Supp. 2000). The
MBCA also allows the Board to elect or appoint any other officers or assistant
- officers as are deemed necessary. Id. § 714(5).
As of August 6, 1997, Young was the Secretary of Keiser. However, his
duties were purely ministerial and only required him to perform the clerk's
function of certifying resolutions when the clerk was unavailable. A clerk is
not an officer under Maine law. See id. § 714(1) & 11(E). The court
concludes that Young was not.an officer within the meaning of the Policy
which is material to a consideration of the "collusion" provision of the Policy.
In sum, the court finds that in March 1998 the Board discovered, or
should have discovered, that Searl engaged in dishonest acts against Keiser
that caused the claimed loss. Thus, by its terms, the Policy was canceled as
to Searl from and after that discovery.
B. Prejudice
The Policy imposed a notice of loss requirement on Keiser as a
condition precedent to coverage:
Duties in the Event of Loss: After you discover a loss or
situation that may result in loss of, or loss from damage to,
Covered Property you must:
a. Notify us as soon as possible.
b. Submit to examination under oath at or request and give us
a signed statement of your answers.
c. Give us a detailed, sworn proof of loss within 120 days. |
d. Cooperate with us in the investigation and settlement of
-any claim.
For an insurer to avoid “either its duty to defend or its liability [under
a policy] based on an insured’s delay in giving notice, a liability insurer must
show (a) that the notice provision was in fact breached, and (b) that the
insurer was prejudiced by the insured’s delay.” Ouellette v. Maine Bonding
& Cas. Co., 495 A.2d 1232, 1235 (Me. 1985). Keiser gave the notice of loss
to Acadia on June 14, 1999. Based on the determination that Keiser should
have been aware by March 1998 that Searl's conduct was dishonest, the
court concludes that Keiser breached the Policy's requirement that notice
be given "as soon as possible". This leads to consideration of the issue of
whether Acadia was prejudiced by any resulting delay in notification. The
insurer bears the burden of proof to demonstrate prejudice. Id.
The court finds that Acadia has sustained its burden and has shown
that it was prejudiced in several respects by the lack of a timely notice.
Acadia lost the opportunity to attempt to recover some or all of the amount
of the FY '97 losses by levying upon the condominium and the expensive
automobile which Searl professed to own at the time. Keiser's forbearance
enabled Searl to continue his dishonest conduct for more than one year after
its initial discovery by which time his assets were dissipated. The delay also
deprived Acadia of the opportunity to conduct a timely investigation of the
matter.
Ill. DECISION
Based upon the foregoing, and pursuant to Rule 79(a) M.R. Civ. P., the -
Clerk is directed to enter this Decision and Order on the Civil Docket bya
notation incorporating it by reference, as follows:
1. As to the plaintiffs complaint, it is adjudged and declared that the
Policy issued by Plaintiff to Defendant does not cover the claimed losses
caused by the acts of Defendant's employee, Glenn Sear.
2. As to the defendant's counterclaim, Judgment is entered for
Plaintiff.
Dated: July 20, 2001 \
Justice, Superior Court
Date Filed _01-07-00 CUMBERLAND Docket No, _CV 00-016
County
Action __ DECLARATORY JUDGEMENT
ACADIA INSURANCE COMPANY KEISER INDUSTRIES, INC.
VS.
Plaintiff's Attorney Defendant’s Attorney
THOMAS S. MARJERISON ESQ 774-7000
PO BOX 4600, PORTLAND ME 04112
WILLIAM W. WILLARD ESQ 774-1200
PO BOX 9729, PM 04104
Date of
Entry
2000
Jan. 10 Received 01-07-00:
Complaint Summary Sheet filed.
" " Complaint for Declaratory Judgment with Exhibits A,B,C, and D filed.
" " Unserved Summons on Keiser Industries, Inc. filed.
Jan. 24 Received 01.20.00:
Notice and Acknowledgment af service filed showing receipt of service onl.
upon defendant Keiser Industries, to William W. Willard, Esq.
Feb. 7 Received 2-4-00.
Defendant's notification of discovery service filed.
Defendant's request fox production of documents propounded upon plaintif!
served on Thomas Marjerison, Esq. on 2-3-00.
“n Counterclaim Summary Sheet filed.
un Defendant's Answer and Counterclaim filed.
Feb. 09 Received 02-09-00:
Plaintiff's Answer to Defendant's Counterclaim filed.
Feb. 10 Received 02-10-00:
Scheduling Order filed. (Delahanty, J.).
Scheduling Order filed. Discovery deadline is October 10, 2000.
On 02-10-00 Copies mailed to Thomas S. Marjerison, Esq. and William Willa:
Esq.
Feb. 14 Received 2-11-00.
Plaintiff's Notification of Discovery Service filed.
Plaintiff's objections to defendant's request for production of documents
served on William W. Willard, Esq. on 2-10-00.
Feb. 24: Received 2-24-00.
Plaintiff's Notification of Discovery Service, filed.
Plaintiff's Response to Defendant's Request for Production of Documents
served on William Willard, Esq. on 2-18-00.