United States Court of Appeals
For the First Circuit
No. 03-1322
FIREMAN'S FUND INSURANCE COMPANY,
Plaintiff, Appellee,
v.
SPECIAL OLYMPICS INTERNATIONAL, INC., AND
SPECIAL OLYMPICS OF MASSACHUSETTS, INC.,
Defendants, Appellants.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Judith G. Dein, U.S. Magistrate Judge]
Before
Selya, Circuit Judge,
Coffin, Senior Circuit Judge,
and Lynch, Circuit Judge.
David Lee Evans with whom Theodore J. Folkman and Hanify &
King were on brief for appellants.
John B. Farley with whom Gregory R. Faulkner, Ralph W.
Johnson, III, Salvatore N. Fornaciari, and Halloran & Sage LLP were
on brief for appellee.
October 10, 2003
COFFIN, Senior Circuit Judge. Between 1991 and 1999, an
employee of appellant Special Olympics of Massachusetts, Inc.
(SOMA),1 conducted a fraudulent fund-raising campaign – ostensibly
on behalf of the organization – that raised more than $1 million.
He used most of the funds for personal expenses. SOMA filed a
claim with appellee Fireman's Fund Insurance Co. under an employee
fidelity policy covering losses stemming from employee dishonesty.
The insurer disputed coverage and initiated this declaratory
judgment action. On cross motions for summary judgment, the
district court concluded that the stolen funds belonged to the
putative donors rather than SOMA and that the organization
therefore did not suffer a loss covered by the policy. It
consequently granted summary judgment for the insurer. See 249 F.
Supp. 2d 19 (D. Mass. 2003). We agree with the district court's
conclusion, but have chosen a slightly different path.
I. Background
Gerald Tenglund was hired in 1990 as an area manager for SOMA,
whose mission is to provide opportunities for high quality sports
training and competition for Massachusetts athletes with mental
retardation and other related disabilities. A year later, he
started a fund-raising campaign using SOMA's name but without the
organization's knowledge. Although area managers were not
1
SOMA is an affiliate of Special Olympics International,
which also is a party in this case. For convenience, we refer
primarily to SOMA in our discussion.
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permitted to conduct direct marketing activities, Tenglund hired
telemarketers to solicit funds. He deposited the donated money
into an unauthorized checking account that he opened using SOMA's
taxpayer identification number. Between August 1992 and June 1999,
Tenglund deposited more than $1.1 million into the account and
withdrew all but $6,200.2 A small amount of the money was spent to
fund authorized Special Olympics activities and to pay a stipend to
the telemarketers; the remainder was used solely for Tenglund's
personal expenses.
SOMA learned of the illicit fund-raising in April 1999 when
one of the donors contacted its state office about an improperly
endorsed check that had been returned by her bank. SOMA gained
control of the unauthorized account in late May 1999 and Tenglund
was terminated in July. With the help of an auditor, SOMA
subsequently was able to determine the amount of money that had
passed through the account since 1992.
During the relevant time period, SOMA was insured against
losses resulting from employee theft under crime insurance policies
issued by Fireman's Fund.3 The policies indemnified SOMA for loss
of "Covered Property," including cash, attributable to "Employee
dishonesty," which was defined in relevant part as "dishonest acts
2
The bank retained records for only seven years, and account
activity before August 1992 was therefore not available.
3
The policies were the same, but covered different time
periods.
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committed by an employee . . . with the manifest intent" to cause
loss to the employer and to obtain financial benefit for the
employee or a third party. See Coverage Form A at 1-2 ¶¶ A(1),(2),
D(3). The policies exclude "indirect loss," which is defined in
relevant part as
Loss that is an indirect result of any act or
occurrence covered by this insurance
including, but not limited to, loss resulting
from:
a. Your ability to realize income
that you would have realized had
there been no loss of, or loss from
damage to, Covered Property.
Policy General Provisions at 1 ¶A(3).
SOMA submitted a proof of loss form that listed the amount at
issue as $1,092,800. Fireman's Fund denied the claim on the
grounds that (1) SOMA did not suffer a direct loss covered by the
policies, (2)Tenglund was not a covered employee, and (3) the
notice of loss was untimely. We address only the first point
because we agree with the district court's conclusion that SOMA did
not experience a covered loss, a determination that compels
judgment for the insurer.4
II. Discussion
We review a district court's grant of summary judgment de
novo, assessing the facts and inferences to be drawn from them in
4
The district court likewise did not address the other two
grounds.
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the light most favorable to the non-moving party. Sparks v.
Fidelity Nat'l Title Ins. Co., 294 F.3d 259, 265 (lst Cir. 2002).
Under Massachusetts law, which governs this diversity case, see
Lexington Ins. Co. v. Gen. Accident Ins. Co. of Am., 338 F.3d 42,
46 (lst Cir. 2003), we construe an insurance policy de novo under
the general rules of contract interpretation, see Brazas Sporting
Arms v. Am. Empire Surplus Lines Ins. Co., 220 F.3d 1, 4 (lst Cir.
2000). The "baseline rule" in Massachusetts is that "insurance
contracts must be interpreted to reflect the intention of the
parties as manifested by the policy language," Lexington Ins. Co.,
338 F.3d at 47, and, absent ambiguity, "'the words of an insurance
contract . . . "must be construed in their usual and ordinary
sense,"'" Utica Mut. Ins. Co. v. Weathermark Investments, 292 F.3d
77, 80 (lst Cir. 2002) (citation omitted).
An insurance policy is to be read "'as a whole "without
according undue emphasis to any particular part over another."'"
Mission Ins. Co. v. U.S. Fire Ins. Co., 401 Mass. 492, 497, 517
N.E.2d 463, 466 (1988) (quoted in Utica Mut., 292 F.3d at 80)
(citation omitted); see also Cochran v. Quest Software, 328 F.3d 1,
7 (lst Cir. 2003) ("[C]ourts may not single out an isolated word or
phrase at the expense of the language as a whole."); USM Corp. v.
Arthur D. Little Sys., Inc., 28 Mass. App. Ct. 108, 116, 546 N.E.2d
888, 893 (1989) ("The object of the court is to construe the
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contract as a whole, in a reasonable and practical way, consistent
with its language, background, and purpose.").
In this case, the district court found that SOMA was not the
owner of the money embezzled by Tenglund during his nearly eight-
year scheme and that the organization therefore had no loss and no
coverage under the policies. In the court's view, the victims of
Tenglund's theft were the potential donors who were deceived into
believing that their donations were supporting SOMA. The court
recognized that SOMA may have suffered a loss in reputation and
perhaps a decrease in future donations as a result of Tenglund's
fraud, but observed that such a loss would affect only an
intangible asset that was not covered by the policies. In
addition, the court noted that SOMA would suffer a loss if it chose
to reimburse the deceived donors, but stated that such
reimbursement also would not trigger coverage because it would fall
within the policies' "indirect loss" exclusion.
On appeal, SOMA presses its claim that, under principles of
Massachusetts gift law, the funds turned over to Tenglund by the
donors were fully consummated gifts to the organization, bringing
the theft of this newly acquired property within the policies'
coverage. SOMA argues that this loss was "direct" – it was money
taken from the organization itself – and it thus did not fall
within the policy exclusion for "indirect loss."
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SOMA's theory may in part accurately state the law; if the
donations had become SOMA's property under state gift law before
Tenglund diverted the funds, his theft would appear to have
resulted in a direct loss to the organization. The technicalities
of gift law are not, however, dispositive. Even if Massachusetts
law would view the donations as fully delivered and thus SOMA's
property once they were deposited into the unauthorized bank
account – an issue we need not and do not consider – the question
remains whether this loss of property, albeit direct, would fall
within the policies' coverage.
Based on our reading of the fidelity policy as a whole, we
conclude that it would not. Pivotal to our determination is the
definition of employee dishonesty that appears in Coverage Form A
of the policy, at ¶D(3), which limits coverage to dishonest acts
"committed . . . with the manifest intent" to cause the employer to
sustain loss, as well as with the intent to obtain financial
benefit for the employee or a third party.
The manifest intent requirement was added to fidelity policies
about twenty-five years ago to narrow the scope of employee
dishonesty provisions in the face of court decisions that had been
broadly construing coverage. See, e.g., Resolution Trust Corp. v.
Fid. & Deposit Co. of Md., 205 F.3d 615, 638 (3d Cir. 2000);
Michael Keeley, Employee Dishonesty Claims: Discerning the
Employee's Manifest Intent, 30 Tort & Ins. L.J. 915, 919 (Summer
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1995). The goal of the new language was to confine coverage to
classic episodes of employee dishonesty, a category in which
embezzlement is the prime example. See, e.g., Gen. Analytics Corp.
v. CNA Ins. Cos., 86 F.3d 51, 53-54 (4th Cir. 1996) (employee
dishonesty policies are "designed to provide coverage for a
specific type of loss characterized by embezzlement, which involves
the direct theft of money"); Keeley, supra, at 919, 924.
The precise meaning of the phrase has remained somewhat
elusive, however, engendering much discussion about the necessary
level of culpability; the debate centers on whether the employee
must specifically have desired to cause a loss to the employer, or
whether it is enough that a loss was substantially certain to
result from the dishonest conduct. See Resolution Trust, 205 F.3d
at 638-643 (comparing the two "manifest intent" approaches to the
concepts of general intent and specific intent in criminal and tort
law); Keeley, supra, at 916; Christopher Kirwan, Mischief or
"Manifest Intent"? Looking for Employee Dishonesty in the Uncharted
World of Fiduciary Misconduct, 30 Tort & Ins. L.J. 183, 186 (Fall
1994).
That debate is not pertinent here, however, other than to
confirm that, at the very least, covered employee misconduct must
reflect some level of intent to cause a loss to the employer.
Here, by contrast, the facts reveal a scheme that was carefully
crafted to bypass the insured entirely; although Tenglund
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capitalized on the organization's sympathetic charitable mission,
his deception was directed at individual donors. And, unlike the
classic case of embezzlement, in which the employer's existing
funds are diminished by the dishonest employee's conduct,
Tenglund's scheme generated new funds, unanticipated by SOMA,
specifically for his own benefit. This scenario falls outside even
a broad interpretation of what it means for an employee to have
"manifest intent to . . . [c]ause [the employer] to sustain loss."
Contrary to SOMA's assertion, Tenglund's obvious intention to
enrich himself reflects neither an expectation that his dishonesty
would inflict a loss on his employer nor the inevitability of such
an outcome.
SOMA acknowledges that courts typically deem third-party
losses as outside the coverage of fidelity policies, see, e.g.,
Lynch Props., Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622, 624
(5th Cir. 1998) (no coverage where employee misappropriated funds
from the personal account of a client and not from the covered
employer); Cont'l Cas. Co. v. First Nat'l Bank of Temple, 116 F.2d
885, 887 (5th Cir. 1941) (employees' diversion of new bank deposits
to cover prior thefts would be losses of third parties and not the
bank "if the money actually went into the bank . . . and the bank
did not suffer diminution of its assets"); Cont'l Bank, N.A. v.
Aetna Cas. & Sur. Co., 164 Misc.2d 885, 889, 626 N.Y.S.2d 385, 388
(N.Y. Sup. Ct. 1995)("Coverage was not triggered because the loss
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resulted from transactions in a customer's account."), but it seeks
to distinguish the cases so holding from the present circumstances
by emphasizing that Tenglund's theft was of money nominally SOMA's.
With respect to intent, however, these cases are equivalent in
that the dishonest employees' misappropriations were structured to
avoid diminishing the assets of their employers, undoubtedly in
part to minimize the risk of detection. See, e.g., Lynch Props.,
Inc. v. Potomac Ins. Co. of Ill., 962 F. Supp. 956, 962 (N.D. Tex.
1996), aff'd, 140 F.3d 622 (5th Cir. 1998) ("All inferences from
[the employee's] behavior indicate that she did not want [her
employer] involved in, or harmed by, her embezzlement."); Cont'l
Bank, 164 Misc.2d at 888, 626 N.Y.S.2d at 387 ("The manifest intent
of these scoundrels was to make money, not to cause [their
employer] to lose money."). As in these other cases, Tenglund used
his employment both to design and to mask his artifice, but his
financial target was the funds of outsiders. Even if a legal
technicality had converted the funds to SOMA's ownership in the
course of the fraud, the character of the deception – the "intent"
– would have remained unchanged.
We acknowledge that Tenglund's fraudulent activity may, in
fact, have had a financial impact on SOMA either by reducing
genuine donations that would have been made if the money had not
already been "contributed," or by tainting subsequent fund-raising
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efforts by SOMA. While we are sympathetic to SOMA's concern for
its good name, we are constrained by the confines of the policies.
In sum, SOMA's fidelity insurance policies, consistent with
the industry standard, contained provisions that unambiguously
limited coverage to episodes of employee dishonesty that involved
conduct intended to lead to a diminution in the insured's assets.
SOMA offers no facts that would permit a factfinder to conclude that
Tenglund's fraudulent scheme was directed at the organization's
resources. Without any evidence of such "manifest intent," SOMA is
unable to prove a loss within the coverage of the policy. The
district court therefore properly granted summary judgment for
Fireman's Fund.
Affirmed.
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