Frazier Industrial Co. v. Navigators Insurance, 149 F. Supp. 3d 512

Background

Frazier Industrial bought two identical commercial crime policies from Navigators covering losses from “theft” by an employee; relevant policy period is Sept. 14, 2010–June 30, 2011 with $1M per-occurrence limit and $10,000 deductible.
Frazier discovered that its VP of Operations (JMG) colluded with an independent contractor, Coast to Coast Installations (CTC), to inflate contractor bids; CTC received inflated sums and JMG received a share.
Frazier alleges padded sums totaled at least $1.938M and JMG received over $960,000; Frazier fired JMG and entered a settlement where JMG agreed to repay $2M (reduced by insurance recoveries).
Navigators denied coverage, arguing the losses were not "theft" under the policy; litigation followed and the parties filed cross-motions for summary judgment.
The court framed two threshold questions: (1) whether payments to CTC (the inflated amounts) constitute employee theft; and (2) whether the amounts taken by JMG (his share) constitute employee theft and are barred by policy exclusions.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether inflated payments to the independent contractor (CTC) are "employee theft" under the policy	The payments were part of the employee’s scheme and therefore constitute theft	Payments to a third party for contracted services are not an unlawful taking by the employee and thus not covered	Not theft; payments to CTC are not covered (plaintiff’s claim for those amounts denied)
Whether the portion of the payments received by JMG (employee) is "employee theft"	JMG stole a portion of funds he was not authorized to receive; his receipt is an unlawful taking	Characterizes the payments as self-dealing or authorized payments to a party that incidentally benefited the employee (citing Mitchell-style authority)	Held to be "unlawful taking" by the employee and covered under the policy (plaintiff entitled to recover employee’s share)
Whether policy exclusions ("indirect loss" and employee dishonest-act exclusion) bar recovery for JMG’s share	The loss to Frazier was direct—actual funds taken from Frazier’s bank account and profit Frazier would have realized	Argues the loss was theoretical or an indirect loss (customers paid installation) and exclusions apply	Exclusions do not apply; loss from employee’s taking is direct and not an indirect/"theoretical" loss
Whether Frazier’s damages evidence suffices for summary judgment (admissibility of JMG statements)	Forensic accounting and JMG’s admissions support damages exceeding policy limits	JMG’s statements are hearsay and undermine the accounting conclusions	Court may consider JMG’s statements as statements against interest; genuine disputes about damage calculations remain, so plaintiff’s motion on exceeding policy limits denied

Key Cases Cited

Selective Ins. Co. of Am. v. Hudson E. Pain Mgmt. Osteopathic Med., 46 A.3d 1272 (N.J. 2012) (policy interpretation principles; read coverage broadly and exclusions narrowly)
Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255 (N.J. 1992) (interpret insurance policy language by plain and ordinary meaning)
Longobardi v. Chubb Ins. Co., 582 A.2d 1257 (N.J. 1990) (courts should not strain to impose coverage beyond policy language)
Clark v. Hartford Fire Ins. Co., 562 F.3d 943 (8th Cir. 2009) (employee-approved unreasonable rates where services not provided can be theft under crime policy)
Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 854 A.2d 378 (N.J. 2004) (proximate-cause analysis for direct loss from employee dishonesty)
F.D.I.C. v. United Pac. Ins. Co., 20 F.3d 1070 (10th Cir. 1994) (discusses "theoretical" losses in insurance contexts)
Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary judgment standard)
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (standard for genuine issue of material fact)