DECEMBER 2012 BAD FAITH CASES: COURT REJECTS INSURED’S BAD FAITH CLAIM BECAUSE ITS COVERAGE ACTION WAS DENIED UNDER CARRIER’S “DISCOVERY” AFFIRMATIVE DEFENSE (New Jersey Federal)
In Diebold, Inc. v. Cont’l Cas. Co., the insured party, a servicer of automated teller machines (“ATM”), brought an action against its carrier for coverage under the parties’ “Commercial Crime Policy” and bad faith. The loss at issue originated when one of the insured’s subcontractors, hired to replenish cash at various ATM’s owned by the insured’s clients, began to steal large sums of money. From 1998 to 2001, one of the insured’s subcontractors would replenish the ATM machines with insufficient amounts of cash.
During this period, the insured’s clients launched a series of complaints seeking to recover the stolen funds. In 2000, the FBI launched an investigation into the matter.
Around this time, the insured began to move its customers away from the subcontractor at issue. Although the insured’s contracts with its clients stated that it would not be liable for losses in money caused during transport to an ATM, yet, the insured made a business decision to compensate its clients for losses caused by its subcontractor. Originally, the insured sought to recover the missing funds from the subcontractor’s carrier. This became impossible, however, when that carrier won its lawsuit in bankruptcy court against the subcontractor, voiding the applicable policy on the basis of equitable fraud.
The insured filed a proof of loss with its carrier in 2007. However, the carrier denied coverage on the basis of a discovery clause in the parties’ policy, which stated that there would be no coverage after the “discovery” of a loss occurs. The insured filed an action for coverage and bad faith. After the court denied the carrier’s motion to dismiss, the parties filed cross-motions for summary judgment.
The carrier asserted an affirmative defense under the “discovery clause,” arguing that the insured first became aware of its loss during the period between 1998 and 2001. Thus, the carrier argued, it was not liable under the policy because the insured’s claim was made well after it first discovered evidence of the loss. The insured countered that the carrier had not produced evidence suggesting when the subcontractor first stole funds from its clients.
However, the court disagreed, reasoning that the insured bears the burden of production in this case because it was more likely than the carrier to first discover evidence of the missing funds. Examining the evidence that was produced, the court recognized that the date of discovery was likely sometime in 2000. At that time, an FBI investigation, with which the insured willingly complied, commenced into the activities of the subcontractor. Moreover, the insured began to move its customers away from that specific subcontractor because it received complaints of missing funds.
Nevertheless, the insured argued that these facts were irrelevant and that it did not discover the loss until a later time because its Director of Risk Management was not aware of the investigation. It claims that the officer who attended meetings and approved the reimbursements to customers with the FBI was not a part of the Risk Management team.
However, the court disagreed that these “corporate formalities” should permit the insured to avoid the carrier’s “discovery” defense. Based on the evidence it received, the court held that the insured’s Risk Management team was aware of facts in 2000 that would lead a reasonable person to conclude that a loss occurred. As such, the court denied the insured’s coverage action.
Without the success of the predicate coverage claim, the court concluded, the insured’s bad faith claim should be denied. Such a claim is not independent of the insured’s coverage action and was therefore denied.