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Whitney Equipment Co., Inc. v. Travelers Casualty and Surety Company of America

United States District Court, W.D. Washington, Seattle

January 3, 2020

WHITNEY EQUIPMENT COMPANY, INC., Plaintiff,
v.
TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant.

          ORDER GRANTING IN PART CROSS-MOTIONS FOR SUMMAR JUDGMENT

          Robert S. Lasnik United States District Judge

         This matter comes before the Court on the parties' cross-motions for summary judgment. Dkt. # 28 and Dkt. # 31. The Court, having reviewed the memoranda, declarations, and exhibits submitted by the parties, [1] finds as follows:

         BACKGROUND

         Defendant Travelers Casualty and Surety Company of America (“Travelers”) provided Employee Theft coverage to plaintiff Whitney Equipment Company, Inc., from June 1, 2016, to the present. The relevant coverage provision includes Travelers' promise to reimburse Whitney for its “direct loss of . . . Money . . . directly caused by Theft . . . committed by an Employee” and discovered by the insured during the policy period. Dkt. # 32-1 at 51. “Theft” is defined as “the intentional unlawful taking of Money . . . to the Insured's deprivation.” Dkt. # 32-1 at 64. In 2017, Whitney discovered that its controller, Patricia Davis, had been using a company credit card for personal use. In a negotiated settlement signed on May 25, 2017, Davis agreed to separate from Whitney, repay $41, 288 (plus accounting and legal fees), and release all claims against the company.

         Shortly thereafter, Whitney discovered that Davis had intentionally and purposefully manipulated the company's enterprise resource planning (“ERP”) system to reduce project costs and increase company assets. The effect of these unauthorized and improper entries was to overstate Whitney's profitability and trigger the company's bonus policy, pursuant to which Whitney pays a predetermined percentage of profits to its employees in the form of bonuses and a company-wide paid vacation. Davis was aware of both the policy and the process through which Whitney's owners reviewed the company's financials and determined whether the bonus policy was implicated: she had, in the past, participated in the owners' meetings, presenting the financial data and forecasts and taking part in the discussion. In 2015, based solely on Davis' fraudulent representations regarding the company's year-to-date financials and yearly performance forecasts, Whitney allocated and paid $138, 207.32 for a company-wide trip to Hawaii, $48, 397.12 in 2015 for employee bonuses, and $48, 169.73 in 2016 for employee bonuses. Dkt. # 33 at ¶ 19.

         While investigating the fraudulent ERP entries, Whitney discovered additional unauthorized credit card charges by Davis.

         Whitney notified Travelers of a potential claim in July 2017 and filed a proof of loss totaling $393, 885 in May 2018. Dkt. # 30-1 at 138.[2] Travelers determined that its policy covers Davis' improper credit card use, but that the vacation and bonus payments do not fall within the policy's definition of “Theft” and/or were not directly caused by a covered “Theft.” Dkt. # 30-1 at 63-64. Travelers also cited a number of exclusions to justify its coverage denial. Whitney initiated this lawsuit in October 2018, asserting breach of contract, breach of duty of good faith, negligence, Insurance Fair Conduct Act (“IFCA”), and Consumer Protection Act (“CPA”) claims against Travelers. Dkt. # 1-2 and Dkt. # 18. Both parties seek a summary determination of the coverage issue in their favor. In the alternative, Travelers seeks judgment on the bad faith claims on the ground that its coverage determination, even if not correct, was reasonable.

         ANALYSIS

         A. Policy Interpretation Under Washington Law

In Washington, insurance policies are construed as contracts. An insurance policy is construed as a whole, with the policy being given a fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance. If the language is clear and unambiguous, the court must enforce it as written and may not modify it or create ambiguity where none exists. If the clause is ambiguous, however, extrinsic evidence of intent of the parties may be relied upon to resolve the ambiguity. Any ambiguities remaining after examining applicable extrinsic evidence are resolved against the drafter-insurer and in favor of the insured. A clause is ambiguous when, on its face, it is fairly susceptible to two different interpretations, both of which are reasonable.

Panorama Village Condominium v. Allstate Ins. Co., 144 Wn.2d 130, 137 (2001) (internal citation and quotation marks omitted). See also Kut Suen Lui v. Essex Ins. Co., 185 Wn. 2d 703, 710, 712 (2016). In order to determine whether coverage exists, the Court applies a two-step process. First, the insured bears the burden of showing that the loss falls within the scope of the policy's insuring agreement. If it does, the insurer bears the burden of showing that specific policy language excludes the loss in order to avoid coverage. Probuilders Specialty Ins. Co. v. Coaker, 145 F.Supp.3d 1058, 1063 (W.D. Wash. 2015) (citing McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 731 (1992)).

         B. Scope of the Coverage Provision

         In this case, the first step of the analysis is to determine whether Whitney's expenditure of funds on bonuses and a company-paid vacation based on Davis' manipulation of Whitney's financial data falls within the Employee Theft provision. Travelers does not dispute that Whitney lost money, that the loss was discovered by the insured during the policy period, or that Davis was an employee. Nor does Travelers provide any evidence to contradict Whitney's showing that Davis' malfeasance was intentional. The issues, then, are whether Davis' conduct constitutes theft and whether her conduct directly caused a direct loss of money.

         1. “Theft”

         For purposes of the insuring agreement, theft is defined as “the intentional unlawful taking of Money . . . to the Insured's deprivation.” Dkt. # 32-1 at 64. The average person purchasing insurance would read this definition to include Davis' conduct. Davis set out to enrich herself at Whitney's expense, intentionally manipulating the company's financial data to “earn” payments to which she had no right. Although her scheme was more complicated than reaching into the till to grab some cash[3] or turning in a fraudulent vendor receipt to ...


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