In Thornburgh Insulation, Inc. v. J.W. Terrill, Inc., 2007 WL 2701303 (Mo.App. E.D.,2007), two insured companies brought an action against the insurer with which they each maintained commercial crime policies. The companies asserted a breach of contract claim to recover losses resulting from employee embezzlement, and vexatious refusal to pay a claim to recover statutory penalties.

 

On the parties' cross-motions for summary judgment, the lower court granted the insureds' motion and ordered the insurer to pay the full amount of loss to each insured. The insurer appealed.

 

The Missouri Court of Appeals affirmed the decision in part, and reversed and remanded in part, holding that the employee's embezzlement scheme was one “occurrence” under the commercial crime policies, for purposes of policy limits, and that the insurer's refusal to pay more than the policy limit was not vexatious so as to permit imposition of statutory penalties.

According to the court, the case turned on the definition of the term “occurrence” within the policy provisions for employee dishonesty coverage. The court determined that an employee's embezzlement scheme was one “occurrence” under the commercial crime policies maintained by the two affiliated insured companies for which the employee worked. The policies defined an “occurrence” as “all loss caused by or involving, one or more employees, whether the result of a single act or series of acts,” and therefore the insured companies were not entitled to coverage for each and every fraudulent check cashed as part of the embezzlement scheme, as the losses occurred through one common cause.

In addition, under Missouri law, to recover under statutory provision permitting penalties against an insurer for the insurer's vexatious refusal to pay on an insurance claim, a party must show that the insurer's refusal to pay was willful and without reasonable cause as it would appear to a reasonable and prudent person , and there may be no vexatious refusal where the insurer has reasonable cause to believe and does believe there is no liability under its policy and it has a meritorious defense.

Here, the court determined that the insurer's refusal to pay more than the limit of liability on the crime policy maintained by the insured companies for losses the companies sustained due to the embezzlement scheme was not vexatious so as to permit imposition of statutory penalties, as the insurer had reasonable cause to believe it had a meritorious defense to paying the full amount of the loss based on the policy definitions and the absence of applicable state case law.

Further, the court reasoned, the insurer did not unreasonably delay payment to the insured companies on losses covered by the policy so as to permit imposition of statutory penalties, because although the insurer investigated the claims and may have requested duplicative information from the insureds in the course of the investigation, the delay from the time the investigator's report was submitted to the insurer to the time the insurer made the payment was less than two months.