SUPREME COURT OF ARIZONA
En Banc
EMPLOYERS MUTUAL CASUALTY ) Arizona Supreme Court
COMPANY, an Iowa corporation, ) No. CV-07-0280-PR
)
Plaintiff/Counterdefendant/ ) Court of Appeals
Appellant, ) Division One
) No. 1 CA-CV 05-0702
v. )
)
DGG & CAR, INC., d/b/a METROL ) Maricopa County
SECURITY SERVICES, an Arizona ) Superior Court
corporation, ) No. CV2003-004967
)
Defendant/Counterclaimant/ )
Appellee. )
)
) O P I N I O N
_________________________________ )
Appeal from the Superior Court in Maricopa County
The Honorable Paul A. Katz, Judge
REVERSED AND REMANDED
________________________________________________________________
Memorandum Decision of the Court of Appeals, Division One
Filed Dec. 14, 2006
VACATED
________________________________________________________________
RAYMOND, GREER & SASSAMAN, P.C. Phoenix
By Randy L. Sassaman
Michael J. Raymond
Attorneys for Employers Mutual Casualty Company
FEOLA & TRAICA, P.C. Phoenix
By Steven Feola
Robert J. Traica
And
Richard A. Alcorn Phoenix
Attorneys for DGG & CAR, Inc., d/b/a
Metrol Security Services
________________________________________________________________
R Y A N, Justice
¶1 Businesses sometimes buy employee fidelity or
commercial crime insurance policies to protect them against loss
from employee theft. In this case we must determine whether a
standard form insurance policy treats the loss from a series of
thefts by a single employee as one occurrence.
I
A
¶2 The facts crucial to our decision are not in dispute.
In 2002, DGG & CAR, Inc., doing business as Metrol Security
Services (“Metrol”), discovered that John Wallace Brown, an
accounting employee, had embezzled more than $500,000 during a
five-year period by forging company checks.
¶3 Metrol had purchased employee fidelity policies from
Employers Mutual Casualty Co. (“EMC”) covering two plan years,
2000-2001 and 2001-2002. Under the policies, EMC agreed that it
would “pay for loss of, and loss from damage to, Covered
Property resulting directly from the Covered Cause of Loss.”
Covered property included money; the “Covered Cause of Loss” was
“Employee dishonesty.” The policy defined “Employee dishonesty”
as “dishonest acts committed by an ‘employee’ . . . with the
manifest intent to” cause loss and obtain a financial benefit.
2
¶4 The EMC policy promised that EMC would “pay . . . for
loss that you sustain through acts committed or events occurring
at any time and discovered by you during the Policy Period.”
Such coverage was limited, however, to a set amount per
occurrence of loss. Under the policy, “[t]he most [EMC] will
pay for loss in any one ‘occurrence’” was $50,000, with a $250
deductible. In turn, the policy defined “Occurrence” as meaning
“all loss caused by, or involving, one or more ‘employees,’
whether the result of a single act or series of acts.” This
latter provision became the focus of the dispute between Metrol
and EMC.
B
¶5 Metrol filed a claim with EMC seeking reimbursement
for the full amount of the company’s loss, arguing that each act
of theft was a separate occurrence. EMC countered that Brown’s
series of thefts constituted a single occurrence and thus Metrol
was entitled only to $50,000.
¶6 EMC filed a declaratory judgment action seeking a
ruling that it owed only $50,000. Metrol counterclaimed,
alleging breach of contract, bad faith, and other claims.
Cross-motions for summary judgment grappling with the definition
of occurrence followed. The superior court concluded that the
policy was ambiguous as to whether each act of theft
attributable to Brown was itself an occurrence, or whether all
3
acts of theft were a single occurrence. The court concluded
Metrol was entitled to recover up to $50,000 for each theft.
The parties eventually agreed to a stipulated judgment in favor
of Metrol, conditioned on EMC’s right to appeal the superior
court’s resolution of the cross-motions for summary judgment.
¶7 In a memorandum decision, the court of appeals
reversed. Employers Mut. Cas. Co. v. DGG & CAR, Inc., 1 CA-CV
05-0702, ¶ 1 (Ariz. App. Dec. 14, 2006) (mem. decision). The
court reasoned that a series of thefts committed by one employee
constituted one occurrence. Id. at ¶ 19. Consequently, the
court concluded that Metrol’s recovery was subject to the policy
limit of $50,000 for the series of thefts. Id. at ¶ 33.
¶8 We granted Metrol’s petition for review because this
case concerns a matter of first impression in Arizona and
because the definition of “occurrence” in the policy commonly
appears in employee fidelity or commercial crime insurance
policies.1 See ARCAP 23(c)(3). We have jurisdiction under
Article 6, Section 5 of the Arizona Constitution and Arizona
Revised Statutes, (“A.R.S.”) section 12-120.24 (2003).
II
¶9 The interpretation of an insurance contract is a
question of law we review de novo. Sparks v. Republic Nat’l
1
See Edward Gallagher, Limit of Liability, in Commercial
Crime Policy 451 (Randall I. Marmor & John J. Tomaine, 2d ed.
2005).
4
Life Ins. Co., 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982).
In interpreting an insurance policy, we apply “a rule of common
sense” thus, “when a question of interpretation arises, we are
not compelled in every case of apparent ambiguity to blindly
follow the interpretation least favorable to the insurer.”
State Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 251, 257,
782 P.2d 727, 733 (1989) (stating ambiguity exists when policy
“presents conflicting reasonable interpretations”). “[N]either
language nor apparent ambiguity alone is dispositive.” Id.
Rather, even if a policy is apparently ambiguous, a decision to
require coverage follows after consideration of “legislative
goals, social policy, and examination of the transaction as a
whole.” Id. at 258, 782 P.2d at 734. Moreover, “[t]he
‘ambiguity’ rule applies only after the court is unable to
determine how the language of the policy applies to the specific
facts of the case.” Preferred Risk Mut. Ins. Co. v. Lewallen,
146 Ariz. 83, 85, 703 P.2d 1232, 1234 (App. 1985). Accordingly,
the core question is whether the policy language is, in fact,
ambiguous under the facts of this case.
A
¶10 The EMC policy treats “all loss” caused by or
involving an employee, resulting from a “series of acts,” as a
single occurrence. John Brown’s embezzlement, although
including a number of thefts, was a “series of acts,” each one
5
following the other. The policy plainly considers the loss
resulting from the embezzlement of a single employee an
occurrence, with an attendant $50,000 policy limit. The
majority of courts in interpreting similar policy language in
corresponding factual situations have so concluded. E.g.,
Glaser v. Hartford Cas. Ins. Co., 364 F. Supp. 2d 529, 535-37
(D. Md. 2005) (holding, under identical definition, that a
single occurrence arose when an employee committed a series of
dishonest acts, despite the employee’s use of different means to
defraud at different times); Wausau Bus. Ins. Co. v. U.S. Motels
Mgmt., Inc., 341 F. Supp. 2d 1180, 1183-84 (D. Colo. 2004)
(rejecting company’s attempt to distinguish single employee’s
various embezzlements because occurrence is determined by cause
and the cause of all loss was the employee’s dishonesty);
Bethany Christian Church v. Preferred Risk Mut. Ins. Co., 942 F.
Supp. 330, 333-35 (S.D. Tex. 1996) (holding policy language
identical to that in EMC’s policy made all defalcations a single
occurrence); Diamond Transp. Sys., Inc. v. Travelers Indem. Co.,
817 F. Supp. 710, 712 (N.D. Ill. 1993) (holding loss over
several years a single occurrence under same language); Reliance
Ins. Co. v. Treasure Coast Travel Agency, Inc., 660 So. 2d 1136,
1137 (Fla. Dist. Ct. App. 1995) (holding, based on definition
identical to that of the EMC policy, that “although this
employee’s embezzlements occurred over a four year period, they
6
constitute a single occurrence”); Jefferson Parish Clerk of the
Court v. Fid. & Deposit Co., 673 So. 2d 1238, 1245 (La. Ct. App.
1996) (“This language is inclusive of any scheme to cause loss
to the insured, and therefore we agree with the trial court that
only one occurrence of employee dishonesty can be found under
this definition.”); see also Bus. Interiors v. Aetna Cas. & Sur.
Co., 751 F.2d 361, 362-63 & n.1 (10th Cir. 1984) (“[T]he cause
of Business Interiors’ loss was the continued dishonesty of one
employee . . . . [T]he employee’s fraudulent acts constituted a
single loss.”). Metrol argues that these cases are
distinguishable, yet in each case, under policy language
identical or similar to EMC’s, a court rejected the contention
that dishonest acts of a single employee against the company can
be parsed as Metrol contends.
B
¶11 Metrol nonetheless maintains that the policy is
ambiguous. For example, it argues that the phrase “all loss” in
the definition of occurrence is unclear because it uses the word
“loss” in the singular. To clearly encompass the entire loss
attributable to Brown, Metrol claims that the policy needed to
refer to losses. But using the singular “loss” does not mean
that the phrase “all loss” somehow can be read as “each loss.”
¶12 Metrol makes a second, equally unpersuasive, argument
to suggest the word loss is ambiguous. It argues that any time
7
the term “loss” is used in employee fidelity or commercial crime
policies the term refers to each individual theft in a series of
thefts. See Lincoln Technical Inst. v. Fed. Ins. Co., 927 F.
Supp. 376, 378-79 (D. Ariz. 1994) (stating there was a “loss
sustained” “each time” an employee stole money). Metrol argues
that to treat “all loss” attributable to one employee as one
occurrence is inconsistent with the district court’s opinion in
Lincoln Technical.
¶13 For three reasons, this argument does not help Metrol.
First, in their effort to secure coverage for loss that occurred
before an increase in the applicable policy limits took effect,
the plaintiffs in Lincoln Technical argued that the term “loss
sustained” in a commercial crime policy was ambiguous. Id. at
378. Thus, the critical issue was when the loss was
“sustained.” Id. at 378-79. The issue here is the construction
of the defined term “occurrence.”
¶14 Second, even assuming that a “loss” occurred each time
Brown embezzled from Metrol, the policy here expressly groups
“all loss” attributable to an employee’s act or series of acts
into a single “occurrence.”
¶15 Third, Metrol’s alternate reading of the definition of
“occurrence” is unpersuasive. Metrol argues that the policy
definition of “[o]ccurrence” - “all loss caused by, or
involving, one or more ‘employees,’ whether the result of a
8
single act or series of acts,” - should be interpreted only as
preventing an insured business from claiming that the number of
occurrences is determined by the number of employees involved in
a single theft or the number of acts leading up to a single
theft. But because the policy only covers “loss,” not acts, the
number of employees or acts involved is irrelevant in
determining the amount of the “loss.” See Wilson, 162 Ariz. at
258, 782 P.2d at 734.
C
¶16 Metrol next asserts that we should reject the plain
meaning of the phrase “all loss” in the definition of occurrence
because it would treat all dishonest acts of employees resulting
in multiple instances of loss as a single occurrence. Metrol
argues that because all covered losses necessarily result from
either an act or a series of acts by employees, a literal
reading of the policy would limit coverage to a total of $50,000
even when the thefts were unrelated. Metrol complains that such
an interpretation would “nullif[y]” coverage. But this case
does not present us with a situation involving unrelated thefts
by multiple employees. Because the plain language of the policy
covers the situation in this case, we need not consider whether
the policy is ambiguous as applied to other circumstances. See
Preferred Risk Mut. Co., 146 Ariz. at 85, 703 P.2d at 1234. Nor
can we conclude that a policy that provides up to $50,000 in
9
coverage for an employee’s series of thefts is illusory.
¶17 Citing A.B.S. Clothing Collection, Inc. v. Home
Insurance Co., 41 Cal. Rptr. 2d 166, 174 (Cal. Ct. App. 1995)
(finding the same policy language as EMC’s ambiguous), and Karen
Kane, Inc. v. Reliance Insurance Co., 202 F.3d 1180, 1185 (9th
Cir. 2000) (relying on A.B.S. Clothing), Metrol counters that
the policy itself suggests that multiple occurrences may be
covered in a plan year. The policy states, “[t]he most we will
pay for loss in any one ‘occurrence’ is the applicable Limit of
Insurance shown in the Declarations,” suggesting the possibility
of more than one occurrence. (Emphasis added.) Yet the policy
language defines “occurrence” to include “all loss” attributable
to any employee or employees. Because these two provisions
conflict, Metrol argues, a policyholder cannot determine when
“any one” occurrence ends and another begins. Although there
may be more than one “occurrence” per year under the policy, it
does not follow that losses resulting from a single employee’s
embezzlement scheme are themselves separate occurrences. See
Wausau, 341 F. Supp. 2d at 1183-84 (“The cause of [the
insured’s] loss was the dishonesty of one employee. Although
the employee appears to have been particularly creative in
finding ways to bilk [the insured], her intent throughout
undoubtedly was the same: to steal [the insured’s] money;”
therefore the employee’s “embezzlement scheme” constituted one
10
occurrence.) (citations omitted); see also Glaser, 364 F. Supp.
2d at 529.2
D
¶18 Metrol also contends that the phrase “series of acts”
in the definition of occurrence is ambiguous. It argues that
the phrase could apply to a series of thefts or a series of acts
leading up to a theft. See Karen Kane, 202 F.3d at 1187
(suggesting same). The policy, however, defines occurrence in
terms of “all loss” that results from “a single act” or “series
of acts.” Accordingly, only acts from which loss results – the
acts of theft – are considered part of the occurrence. Further,
even if preparatory acts are part of a “series of acts,” the
language is nevertheless broad enough to encompass not only a
series of preparatory acts leading up to a theft, but also each
series of preparatory acts leading up to each theft. There is
no ambiguity.
E
¶19 Metrol asserts that because certain courts have found
this policy language ambiguous it must be subject to more than
2
The court of appeals indicated that “[t]he term ‘series’
implies some sort of relationship between the acts, and not
merely the fact that the same person committed them.” Employers
Mut., 1 CA-CV 05-0702, slip op. at ¶ 31. Because the acts in
this case were caused by Brown’s dishonesty, we need not decide
whether the same policy would treat a series of unrelated acts
by the same employee as a single occurrence.
11
one reasonable interpretation. Varying judicial
interpretations, however, do not automatically render an
insurance policy ambiguous. Wilson, 162 Ariz. at 257-58, 782
P.2d at 733-34. Further, the cases Metrol relies upon - A.B.S.
Clothing, Karen Kane, and Auto Lenders Acceptance Corp. v.
Gentilini Ford, Inc., 854 A.2d 378, 397 (N.J. 2004) - are not
persuasive in light of the plain language in EMC’s policy.
¶20 A.B.S. Clothing, for example, addressed similar policy
language in a distinct scenario. There, the issue was whether
an insured business was entitled to a policy-limit recovery each
year for an employee’s embezzlements when the insured business
maintained a policy with the insurance company for a number of
years. 41 Cal. Rptr. 2d at 167-68. This issue is distinct from
whether an insured business is entitled to multiple recoveries
in a single plan year for the acts of one employee discovered
that year.
¶21 Karen Kane, which cited and relied upon A.B.S.
Clothing, is similarly distinguishable. Karen Kane, 202 F.3d at
1185-88. Karen Kane said nothing about whether the policy
contemplated multiple recoveries for multiple acts discovered in
a single plan year. See id. at 1187. To the contrary, the
court stated that “[i]f ‘occurrence’ is construed as limited by
policy period, then [the employee’s] approximately 150
individual acts of theft, spanning over three years, constitute
12
three separate ‘series of acts,’ one for each of the three
policy periods and recoverable within each period as such.” Id.
(emphasis added). Moreover, to the extent the Ninth Circuit
panel relied on A.B.S. Clothing, it did so because, as a federal
court sitting in diversity, it was bound to follow what it
perceived to be California law. Id. at 1183.
¶22 In addition, Metrol argued before this Court that it
is entitled to recover for close to 300 “acts,” but it has not
argued that it is entitled to recover for two “series of acts”
in two plan years.
¶23 Finally, the New Jersey Supreme Court held that, under
at least some circumstances, language like that employed by EMC
may be subject to a different construction. In Gentilini Ford,
the court found multiple occurrences, allowing for multiple
recoveries, when an employee used fraudulent credit applications
to sell individual cars to individual car buyers. 854 A.2d at
397. The court explained that with each sale the employee
“caused a separate, direct loss of property to [the dealer] by
inducing it to part with an automobile in exchange for a faulty
installment sales contract.” Id. “In these circumstances,” the
court continued, “in which each purchaser and the terms of each
sale are unique, the similarity of the acts do not transform
them into one continuous event subject to a single recovery
under the policy.” Id. at 398. The court expressly noted,
13
however, that the case before it did not involve an embezzlement
scheme. Id. Moreover, to reach its conclusion, the court
specifically declined to “adhere to the text’s literal
limitation because to do so here would nearly vitiate the
coverage that both parties clearly contemplated.” Id. at 397.
Metrol has never suggested that it reasonably expected coverage
broader than the literal language of the policy.3
III
¶24 When “the provisions of the contract are plain and
unambiguous upon their face, they must be applied as written,
and the court will not pervert or do violence to the language
used, or expand it beyond its plain and ordinary meaning or add
something to the contract which the parties have not put there.”
D.M.A.F.B. Fed. Credit Union v. Employers Mut. Liab. Ins. Co.,
96 Ariz. 399, 403, 396 P.2d 20, 23 (1964); see also Pawelczyk v.
Allied Life Ins. Co., 120 Ariz. 48, 52, 583 P.2d 1368, 1372
(App. 1978) (“Courts must give effect to agreements as they are
written, however, and ambiguities will not be found or created
where they do not exist in order to avoid a harsh result.”).
¶25 In any event, Metrol has not suggested any public
3
Metrol never argued to this Court that cases addressing the
reasonable expectations of consumers subject to standard form
contracts apply here. See, e.g., Darner Motor Sales, Inc. v.
Universal Underwriters Ins. Co., 140 Ariz. 383, 389-90, 682 P.2d
388, 394-95 (1984) (recognizing the doctrine of reasonable
expectations in contract law).
14
policy that supports its construction of the contract. Under
Metrol’s interpretation, a dishonest employee would dictate the
terms of the employer’s recovery by the amount he chose to steal
each time during the policy period. In fact, Metrol’s
interpretation actually hurts insureds who suffer small – often
less detectable – losses during the policy period because a
number of small thefts – each less than the policy deductible –
would be treated separately, preventing an insured from
recovering at all in such cases. See Am. Commerce Ins. Brokers
v. Minn. Mut. Fire and Cas. Co., 551 N.W.2d 224, 229-30 (Minn.
1996) (concluding that an insured’s similar interpretation of a
comparable policy was “problematic as a matter of public
policy”); cf. EOTT Energy Corp. v. Storebrand Int’l Ins. Co., 52
Cal. Rptr. 2d 894, 900-01 (Cal. Ct. App. 1996) (holding that
“[a]s used in the policy, the term ‘occurrence’ reasonably
contemplates that multiple claims could, in at least some
circumstances, be treated as a single occurrence or loss. It
appears reasonable to us that the term ‘occurrence’ . . . is
effectively referring to a loss” and thus not subject to a
separate deductible, which, because each theft was less than the
deductible would in effect result in no recovery).4 Accordingly,
4
The parties and the appeals court spent time analyzing
Arizona Property and Casualty Insurance Guaranty Fund v. Helme,
153 Ariz. 129, 735 P.2d 451 (1987). But Helme involved a policy
defining an occurrence as “any incident, act or omission, or
15
Metrol’s interpretation of the policy would visit harsh results
on other subscribers to similar policies.
IV
¶26 For the foregoing reasons, we vacate the court of the
appeals’ decision, reverse the judgment of the superior court
and remand for proceedings consistent with this opinion.
_______________________________________
Michael D. Ryan, Justice
CONCURRING:
_______________________________________
Ruth V. McGregor, Chief Justice
_______________________________________
Rebecca White Berch, Vice Chief Justice
_______________________________________
Andrew D. Hurwitz, Justice
_______________________________________
W. Scott Bales, Justice
series of related incidents, acts or omissions resulting in
injury,” id. at 134, 735 P.2d at 456, and simply concluded that
two separate instances of malpractice by physicians that led to
a patient’s death were separate occurrences because they were
unrelated. This case involves different policy language and a
very different issue.
16