It isn’t often we talk risk management and insurance, but when they involve serious employee misconduct we’re always interested! When employees break employer rules (or the law), it’s important for employers to know how to respond in every capacity, whether it be discipline or recovering lost income.
In National Union Fire Insurance Company of Pittsburgh v. Cargill, Inc., a long-term employee was entrusted to process sales on behalf of Cargill, including the negotiation of sales contracts, entering sales into its accounting system, communicating need to fulfillment specialists, and handling all invoices for those transactions (you can imagine where this is going). Over the course of eight years, the employee ran a scheme where she would inflate the prices of grain sold in false sales contracts, manipulate receivable balances, customer payments, and inventory records to reflect those sales. This led to Cargill shipping more grain to its Albany location, where the employee would sell the grain at prices below the stated sale price. Over the course of the scheme, the employee cleared $3,000,000 in embezzled funds.
As part of its insurance policy with National Union, Cargill was insured against employee theft. An investigator for National Union found that the employee’s misrepresentations induced Cargill into shipping grain to its Albany location under the pretense it would be sold at a significantly higher price. The investigator calculated Cargill’s losses at over $29,000,000 in freight costs plus the $3 million the employee diverted to her bank accounts.
National Union notified Cargill of its belief that its insurance policy only covered the money embezzled from Cargill, and not the shipping costs. It then filed suit to obtain a declaration in its favor, and Cargill countered for breach of contract. Cargill moved for a judgment on the pleadings, which was granted, concluding the entire $32 million calculated by the report was covered. National Union appealed.
National Union argued that several facts were still in dispute, thus making the judgment on the pleadings inappropriate. However, the “disputed” facts by National Union were actually those found by National Union’s own investigation, which National Union acknowledged as “definitive and binding.”
National Union also argued that, under Minnesota law, that the employee’s misconduct fell within the terms of the insurance policy requiring it to pay the $29 million in shipping costs. Under Minnesota law, an insurance policy must be interpreted giving terms their plain and ordinary meaning, but the burden of proving coverage rests with the insured party. In this case, the policy covered employee “theft” and “taking,” and any losses that resulted “directly from” the theft were covered by the policy.
The court found that while the employee never actually took control of the grain that was shipped, she took “implicit control over the grain” by exercising her authority to direct the transfer and sale of the grain. As such, it constituted a “taking.” In addition, while National Union argued the shipping costs did not result “directly from” the theft, the court found that National Union’s own investigator concluded Cargill would not have paid for the shipping of the grain but for the employee’s scheme, and there were no other intervening causes that could account for the loss. Therefore, the employee’s conduct “undisputedly induced Cargill to ship grain to Albany.” As a result, National Union’s motion was denied.
Often, employers see the successful termination of an employee as the end to a problem. However, there are many steps an employer can take to protect itself from loss. While it was clear Cargill realized a loss through its own employee’s theft, it was able to show the 10-fold losses it incurred as a result of that theft, and have that loss paid for by its insurance company. If you, or your organization, need assistance in dealing with employee misconduct resulting in substantial financial loss, contact Wiley Reber Law, for legal advice that works.