First Defiance Financial Corp. v. Progressive Casualty Insurance
688 F.3d 265
6th Cir.2012Background
- First Defiance Financial Corporation and its insured entities held a fidelity insurance policy with Progressive, covering losses from dishonest acts by employees.
- Jeffrey Hunt, a dual employee of First Defiance and Online Brokerage Services, diverted client funds from discretionary brokerage accounts.
- Nineteen clients' funds totaling $859,213.35 were stolen; First Defiance reimbursed clients $931,921.31 in total losses.
- Progressive disputed coverage; Cincinnati Insurance provided a separate no-deductible policy paying $50,000 for similar losses.
- District court held the First Defiance losses were covered and awarded $564,006.75; Progressive appealed, and First Defiance cross-appealed.
- Key issues included whether the stolen funds were “covered property,” whether the loss was direct, and whether Hunt acted with manifest intent.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the stolen client funds qualify as covered property | First Defiance held responsible for client funds via fiduciary duties. | Property must be owned/held by insured; noncustodial client funds are not covered. | Covered property; funds fit third prong and insured bears responsibility for property. |
| Whether Hunt's theft caused a direct loss to the banks | The theft of client funds directly caused losses to First Defiance. | Losses to third parties or through third-party transactions are not direct losses to insured. | Yes, direct loss under policy terms. |
| Whether Hunt had manifest intent to cause the loss | Fiduciary relationship makes theft with purpose to benefit others or employer apparent. | Manifest intent must be proven by objective standard; thefts may not demonstrate intent to harm the insurer. | Yes, manifest intent satisfied. |
| Whether Cincinnati Insurance's $50,000 payment should reduce Progressive's recovery | Settlement/other policy payments should reduce the Progressive liability. | Two policies cover different risk levels; credits should be applied against total loss under the other policy. | Not to subtract Cincinnati's $50,000; remand for calculation. |
Key Cases Cited
- Vons Cos., Inc. v. Fed. Ins. Co., 212 F.3d 489 (9th Cir. 2000) (direct-loss interpretation limits fidelity coverage to actual employee fraud losses)
- Lynch Props., Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622 (5th Cir. 1998) (no coverage where insured not legally liable for customer funds prior to theft)
- Universal Mortg. Corp. v. Wurttembergische Versicherung AG, 651 F.3d 759 (7th Cir. 2011) (no direct loss where insured’s losses were due to contract provisions, not employee dishonesty)
- Tri City Nat’l Bank v. Fed. Ins. Co., 268 Wis.2d 785, 674 N.W.2d 617 (App. 2003) (no direct loss where employee’s dishonesty led third-party claims)
- Aetna Cas. & Sur. Co. v. Kidder, Peabody & Co., 246 A.D.2d 202, 676 N.Y.S.2d 559 (1998) (historical distinction between fidelity coverage and general liability)
- Lynch, 140 F.3d 622, as above (as above) (reiterated on coverage limits and pre-loss responsibility)