2020 IL App (2d) 190501
Ill. App. Ct.2020Background:
- 3BC Properties owned and operated four Dunkin' Donuts and purchased identical State Farm business owners policies with an Employee Dishonesty rider (a fidelity-bond/salary-and-benefits exclusion).
- From 2016–2017, manager Brenda Vazquez falsified time records for herself and four relatives, producing over $66,000 in overpayments.
- 3BC reported the fraud, tendered claims to State Farm, and State Farm denied coverage relying on the policy language excluding salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment.
- 3BC sued for a declaratory judgment; the trial court granted summary judgment for State Farm, relying on Mortell and similar authorities holding that unearned wages/commissions remain excluded.
- 3BC appealed to the Illinois Appellate Court, Second District; the appellate court affirmed.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether amounts fraudulently obtained as payroll (wage theft) are excluded by the policy's salary/employee-benefits exclusion | Vazquez's payments were not earned in the normal course of employment, so they are not "salaries" or covered employee benefits and should be covered by the dishonesty rider | The exclusion plainly covers employer-to-employee payments (including salaries/commissions) even if obtained by fraud; unearned wages retain their character as salaries and are excluded | Affirmed for State Farm: the exclusion is unambiguous and bars recovery for wage theft; the court follows Mortell and the majority of authorities |
Key Cases Cited
- Mortell v. Insurance Co. of North America, 120 Ill. App. 3d 1016 (Illinois appellate court holding salary exclusion bars coverage for fraudulently obtained commissions)
- Hartford Accident & Indemnity Ins. Co. v. Washington Nat'l Ins. Co., 638 F. Supp. 78 (N.D. Ill. 1986) (interpreting the same rider and holding unearned commissions/salaries excluded)
- Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847 (5th Cir. 2003) (federal appellate decision endorsing exclusion for unearned salaries/commissions)
- R&J Enterprizes v. Gen. Cas. Co. of Wisconsin, 627 F.3d 723 (8th Cir. 2010) (timecard manipulation held excluded under similar clause)
- Resolution Trust Corp. v. Fidelity & Deposit Co. of Maryland, 205 F.3d 615 (3d Cir. 2000) (authority relying on the plain-language exclusion)
- Oxford Bank & Trust v. Hartford Accident & Indemnity Co., 298 Ill. App. 3d 199 (1998) (distinguishable Illinois decision finding coverage for direct check-kiting theft)