Editor’s note: Steven A. Meyerowitz, Esq., is a director of FC&S Legal. FC&S and PC360 are both owned by Summit Professional Networks.

An intermediate appellate court in New York, reversing a trial court’s decision, has ruled that insureds were entitled to coverage under the “In Transit” clause of an insurance bond for losses they sustained while their cash was being processed at a vault in between the Federal Reserve Bank, where it was picked up, and the insureds’ check-cashing businesses and ATMs, where it was to be delivered.

The case

CashZone Check Cashing Corporation, a check cashing agency, entered into an “Armored Car Service Agreement” with Mount Vernon Money Center (MVMC), an armored car company, under which MVMC would retrieve currency on CashZone’s behalf from the Federal Reserve Bank of New York, Monday through Friday, and take the money to the MVMC vault, where it would be sorted, counted, and bundled for delivery to CashZone and CashZone’s owner, Metropolitan National Bank (together with CashZone, the “plaintiffs”). Cash for the plaintiffs’ ATMs would be loaded into ATM cassettes. At the ATM locations, MVMC would replace the ATM cassettes that had been in the machines with replenished ATM cassettes. MVMC agreed to maintain custody of CashZone’s funds at all times from its pickup from the Federal Reserve Bank to its delivery to CashZone’s facilities and not to commingle funds with its own funds or with other customers’ funds.

MVMC owned and operated several cash vaults within which it processed the cash collected from the Federal Reserve Bank in preparation for its ultimate delivery, along with the residual cash remaining in the retrieved ATM cassettes. On a weekly basis, MVMC held tens of millions of dollars for its customers for a certain period of time.

According to the plaintiffs, Robert Egan, the president and sole shareholder of MVMC, with the assistance of Bernard McGarry, MVMC’s chief operating officer, arranged to use their customers’ funds to finance MVMC’s business operations, commingling customer funds to help conceal their misappropriation of the stolen funds, a practice referred to by the plaintiffs and by the prosecutor in the criminal prosecution of Egan and McGarry as “playing the float.”

Both men ultimately pleaded guilty to bank fraud and conspiracy. CashZone and Metropolitan, upon learning of Egan’s arrest, calculated their losses to be approximately $446,564.12. They tendered proof of that loss with their claim to Vigilant Insurance Company, from which they had purchased an insurance bond, seeking payment under the bond’s “In Transit” clause.

The insurer denied coverage of the plaintiffs’ loss, reasoning that at the time of the loss, the property at issue had not been “in transit” as that term was defined by the bond, but, rather, had been within the vault of MVMC.

The plaintiffs went to court for a declaration that their loss of $446,564.12 was covered under the “In Transit” clause of the insurance bond and for damages for breach of contract. The parties cross-moved for summary judgment.

The trial court granted the insurer’s motion, declaring that the insurer was not obligated to provide coverage under the “In Transit” clause of the bond. It reasoned that paragraph 3(A) of the “In Transit” clause did not apply because the money was not stolen while it was in an armored vehicle or while the vehicle was being loaded or unloaded, or during an incidental stop, but, rather, during a substantive interruption of the transit process, while the money was inside MVMC’s premises for sorting and processing.

Coverage for “In Transit” losses began, the trial court held, when MVMC picked up the money at the Federal Reserve Bank, and ended when MVMC delivered the currency to the MVMC vault for sorting and processing prior to delivery to ATMs; transit then resumed when the cash was taken from the MVMC vault and placed in an armored vehicle, and ended when delivery to the plaintiffs’ facility was complete. Whether the stopover at the vault was completed on the same day as the pickup from the Federal Reserve Bank, or lasted overnight, the trial court said, it was more than an “incidental” interruption of transit.

The plaintiffs appealed.

The bond

The “In Transit” clause of the bond provided that the insurer would pay for:

 

3. Loss of Property resulting directly from common law or statutory larceny, misplacement, mysterious unexplainable disappearance, damage or destruction, while the Property is in transit anywhere:

A. in an armored motor vehicle, including loading and unloading thereof,

B. in the custody of a natural person acting as a messenger of the ASSURED, or

C. in the custody of a Transportation Company and being transported in a conveyance other than an armored motor vehicle, provided, however, that covered Property transported in such manner is limited to [records, securities and negotiable instruments].

Coverage under this INSURING CLAUSE begins immediately on the receipt of such Property by the natural person or Transportation Company and ends immediately on delivery to the premises of the addressee or to any representative of the addressee located anywhere.

 

The appellate court’s decision

The appellate court reversed, holding that the “In Transit” clause of the bond covered the plaintiffs’ loss.

The appellate court reasoned that MVMC was responsible for picking up the cash from the Federal Reserve Bank and delivering it to CashZone locations, and it found that the transit process “was never completed for the portion of the funds that, through the ‘trick and false device’ of failing to segregate the funds as required, MVMC instead commingled them in order to facilitate and conceal its larceny. The transit for those funds was never completed.”

The appellate court specifically rejected the insurer’s argument that the “In Transit” clause provided for coverage in the armored car scenario only when the money was inside of, or being loaded onto or unloaded from, an “armored vehicle.” In the appellate court’s view, MVMC’s act of collecting money from the Federal Reserve Bank and transporting it to an MVMC vault, to place it in the form necessary for its transportation and delivery to the CashZone locations, was “one continuous shipment process.” It added that the stop at MVMC’s vault was “expressly understood by all” as a necessary component of the act of delivery of cash by armored car from the Federal Reserve Bank to the plaintiffs’ locations. The appellate court ruled:

“As long as the cash remained in the possession of the armored car service making the delivery, and the stop was in service to that delivery, we consider the property to have been ‘in transit’ until the contemplated delivery was completed.”

The case is CashZone Check Cashing Corp. v. Vigilant Ins. Co. (N.Y.App.Div. 1st Dep’t March 11, 2014). Attorneys involved include: Herrick, Feinstein LLP, New York (Alan R. Lyons of counsel), for appellants; Rosner, Nocera & Ragone, LLP, New York (Joseph Goljan, John A. Nocera and John P. Foudy of counsel), for respondents.

 

FC&S legal comment

Other cases have reached a different result. See, e.g., Actors Fed. Credit Union v. CUMIS Ins. Soc., Inc., No. 11 Civ 2129 (S.D.N.Y. Sept. 17, 2012) (“in transit” language unambiguously limits coverage to the period during which the funds either are in an armored vehicle or are being loaded onto or unloaded from that vehicle); Palm Desert Natl. Bank v. Federal Ins. Co., 473 F.Supp.2d 1044 (C.D. Cal. 2007), affd 300 Fed Appx 554 (9th Cir. 2008 ) (“in transit” coverage extends to thefts outside of the armored car itself only when they occur during incidental stops in transit, such as for meals, gas, or during overnight stops); see, also, United Bank of Pueblo v. Hartford Acc. & Indem. Co., 529 F.2d 490 (10th Cir. 1976); Ore & Chem. Corp. v. Eagle Star Ins. Co., 489 F.2d 455 (2d Cir.1973); Tivoli Corp. v. Jewelers Mut. Ins. Co., 932 S.W.2d 704 (Tex. App. 1996).

Originally published on FC&S Legal: The Insurance Coverage Law Information Center. FC&S Legal is the industry’s ONLY single-source, comprehensive portal developed specifically for insurance coverage law professionals. To find out more, visit www.fcandslegal.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent professional person should be sought.