Insurance Policy – Crime Protection

Businesses in Hurst, Euless, Bedford, De Soto, Grand Prairie, Arlington, Fort Worth, Dallas, Mansfield, Southlake, Grapevine, or any other city in Texas have various kinds of insurance policies to protect their bussiness. One of those kinds of insurance is called Crime Protection Policies. Here is a recent case dealing with this type of insurance coverage.
The case is, Great American Insurance Company v. AFS/IBEX Financial Services, Inc. The opinion in this case was issued on July 22, 2010, and authored by Circuit Judge Carl E. Stewart. This is from the United States Court of Appeals for the Fifth Circuit.
In this case, Great American Insurance Company (GAIC) issued crime protection policies to AFS/IBEX Financial Services, Inc. (AFS). After suffering a loss caused by the forgery of certain checks, AFS submitted a claim to GAIC. GAIC denied coverage and filed this lawsuit asking the court to affirm their decision.
Here are some facts of the case: AFS provides premium financing in the insurance industry. In connection with this business, AFS entered into an agreement with Charles McMahon, Sr. (Sr), who owns the Charles McMahon Insurance Agency. This agreement contemplated that Sr would create and sign premium finance applications on behalf of insureds. AFS would then send a check to the insurance company for the purchase price of the insurance, and the insureds would send regular payments to AFS.
Sr’s son, Charles McMahon, Jr. (Jr) was the office manager at Sr’s agency and was responsible for submitting applications for premium financing to AFS. Jr exploited this relationship by submitting approximately 122 false applications for premium financing to AFS. These fraudulent applications induced AFS to issue 127 checks made payable to “Charles McMahon Insurance Agency.” Jr endorsed these checks “Charles McMahon Insurance Agency” and deposited the funds into his own personal bank account. Jr never endorsed the checks with his own name or signature. Sr was aware that his son had responsibility for submitting financing applications to AFS, but was not aware of his son’s fraud. Sr allowed Jr to endorse checks payable to the agency and to write checks out of the agency’s account for legitimate business purposes.
After Jr’s scheme was uncovered, AFS submitted a claim to GAIC for $519,110.58 under the forgery coverage provision of its Crime Protection Policy (SAA). GAIC claimed that no forgery occurred as that term is defined in the policy.
The threshold question in this case is whether AFS’s loss was caused by a forgery such that the forgery provision of the SAA policy was implicated. The relevant portion of the SAA policy states:
2. Forgery or Alteration a. We will pay for loss resulting directly from forgery or alteration of checks, … that are:
(1) made or drawn by or drawn upon you; or (2) made or drawn by one acting as your agent;
that are purported to have been so made or drawn …
GAIC admits that the SAA policy insured AFS against losses for the forgery or alteration of checks, and that the numerous checks issued by AFS were covered under the SAA policy. It disputes, however, that a forgery occurred such that the coverage contemplated by the SAA policy was triggered. According to the SAA policy,
Forgery means the signing of the name of another person or organization with intent to deceive; it does not mean a signature which consists in whole or in part of one’s own name signed with or without authoriy in any capacity, for any purpose.
In arguement to the court, GAIC tried to get the court to adopt the UCC definition of forgery found in the Texas Business & Commerce Code, Section 3.405.
The court said that GAIC’s arguement conflicts with the basic principles of Texas insurance law. Under Texas law, an insurance policy, like other contracts, is the law between the parties. In interpreting an insurance contract, terms are given their plain, ordinary meaning unless the parties intended the term to have a different, technical meaning. When terms are defined in the insurance policy, those definitions control. The SAA policy specifically defines the term”forgery.” Consequently, its definition controls and there is no merit to GAIC’s arguement that the court should look outside the four corners of the insurance agreement and define it according to the UCC definition. As noted above, the SAA policy defines forgery as “the signing of the name of another person or organization with intent to deceive.
GAIC argued that because the words “Charles McMahon” are part of the endorsement (Charles McMahon Insurance Agency) and also part of the endorser’s name (Charles McMahon Jr.), the endorsements at issue are not forgeries under the SAA policy. This reading distorts the phrase “a signature which consists in whole or in part of one’s own name” to mean that there would be no forgery and therefore no coverage when an endorser shares any part of the name he or she is signing even though the endorser purports to be signing the name of another for a deceitful purpose.
In this case, the court found there was a forgery and that the forgery was covered under the policy. This case is another well reasoned example of how courts will look at and interpret insurance policies.