731 F.Supp.3d 1013
W.D. Tenn.2024Background
- International Paper (IP) employed Sitaraman Jagannath, who arranged purchases from two suppliers (DGS and Mid‑South) owned/controlled by his half‑brother; IP’s diversity program used Tier 1/Tier 2 arrangements involving markups/commissions.
- IP’s Crime Policy (July 1, 2019–2020) provided $15,000,000 Employee Dishonesty coverage (with $1,000,000 deductible) and $500,000 Expense Coverage; subrogation and Recoveries provisions preserve insurer rights after payment.
- IP discovered the relationship in late 2019, fired/removed Jagannath, pursued criminal and civil claims, and settled its civil suit with the defendants for $15,000,000.
- Beazley (insurer) repeatedly reserved rights and did not pay under the policy or object to the settlement; IP then sued Beazley for coverage of five categories of loss (including Tier‑1 overpayments, Tier‑2 commissions, unpaid amounts to majority suppliers, legal fees, and claim‑preparation expenses).
- The court addressed cross motions for summary judgment, ruling that the Tennessee made‑whole doctrine applies, Beazley did not waive subrogation by reserving rights, IP did not materially breach the policy by settling, and several coverage/exclusion issues remain for trial while some claims were resolved as a matter of law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Subrogation / Made‑Whole & waiver | Made‑whole bars insurer subrogation until IP is made whole; subrogation arises only upon insurer payment; insurer waived nothing | IP breached subrogation clause by releasing tortfeasors and thus extinguished insurer rights | Made‑whole doctrine applies; genuine disputes on whether IP is made whole; insurer did not waive subrogation but may have waived right to allege breach; insurer’s all‑claims SJ denied |
| Did Jagannath receive funds / requirement to prove receipt | Receipt by employee not required; policy covers "financial benefit" and permits unidentified employees | Insurer: no evidence Jagannath received funds, so no Employee Theft coverage | Court: insurer’s receipt‑requirement rejected; factual evidence (settlement language, invocation of Fifth) raises triable issue whether Jagannath financially benefited |
| Overpayments to vendors = "Employee Theft" | Overpayments and diverted funds constitute an "unlawful taking" under Tenn. theft law and policy | Insurer: overpayments are merely bad bargains or payments to third‑party contractors, not theft | Triable issue: under Tennessee theft statute and policy language, a reasonable juror could find unlawful taking; insurer’s SJ denied on overpayments |
| $2.703M settlement payments to majority suppliers — Voluntary Exchange Exclusion | Payments were not "knowingly" voluntary (made under duress/without knowledge) and may involve collusion | Payments were voluntary purchases to third parties, made with knowledge and after Jagannath’s termination; exclusion applies | Court granted insurer SJ for $2.703M: undisputed that payments were knowingly made to third parties and not in collusion with employee, so exclusion bars coverage |
| $1.939M alleged Tier‑2 commissions — Direct loss / Voluntary Exchange | Commissions were passed through by majority suppliers and are a proximate/direct financial loss caused by employee theft | Insurer: majority suppliers did not pass costs along; alternatively loss is indirect or excluded as voluntary payment | Triable issues of fact on whether commissions were passed to IP, whether loss is "direct" (proximate cause), and whether exclusion applies; SJ denied for now |
| Expense Coverage ($958,599) and Legal Fees | Expenses to establish/quantify covered loss are covered if reasonable and pre‑approved where required | Insurer: costs are not reasonable or were incurred without prior written consent; legal fees exclusion applies | Court denied IP summary judgment: reasonableness and consent are factual questions for trial; legal‑fees exclusion may bar some costs but Expense Coverage exception applies pending factual development |
| Affiliates & Prior Employees exclusion interpretation | Exclusion should apply only when third party acts alone (not when colluding with employee) to avoid conflict with Employee Theft coverage | Insurer: exclusion covers losses caused by agents/contractors even if colluding; otherwise exclusion would be meaningless | Court found the clause ambiguous and construed it for the insured: exclusion applies only when third party acts alone; SJ on this defense denied (factual disputes remain) |
Key Cases Cited
- Abbott v. Blount Cnty., 207 S.W.3d 732 (Tenn. 2008) (Tennessee Supreme Court reaffirmed made‑whole doctrine governs insurer subrogation regardless of policy language)
- Wimberly v. Am. Cas. Co., 584 S.W.2d 200 (Tenn. 1979) (early Tennessee made‑whole/subrogation analysis: insurer not subrogated until insured made whole)
- York v. Sevier Cnty. Ambulance Auth., 8 S.W.3d 616 (Tenn. 1999) (equitable principles control subrogation; insurer not entitled to reimbursement until insured made whole)
- Health Cost Controls, Inc. v. Gifford, 108 S.W.3d 227 (Tenn. 2003) (made‑whole doctrine applied regardless of policy language)
- Hayes Fam. P’ship v. Tenn. Farmers Mut. Ins. Co., 683 S.W.3d 754 (Tenn. Ct. App. 2023) (intermediate court holding insured’s prepayment/release forfeited insurer subrogation rights; discussed but distinguished)
- State v. Gentry, 538 S.W.3d 413 (Tenn. 2017) (Tennessee theft statute analysis; theft defined broadly and informed interpretation of “unlawful taking”)
- Frazier Indus. Co. v. Navigators Ins. Co., 149 F. Supp. 3d 512 (D.N.J. 2015) (distinguishes contractor overpayment scenarios — payments to contractor not theft, but employee’s diverted share can be theft)
- Aetna Cas. & Surety Co. v. Tenn. Farmers Mut. Ins. Co., 867 S.W.2d 321 (Tenn. Ct. App. 1993) (insured’s release of tortfeasor held to extinguish insurer subrogation rights in that context)