Employers Mutual Casualty Co. v. DGG & Car, Inc.

SUPREME COURT OF ARIZONA
En Banc

EMPLOYERS MUTUAL CASUALTY ) Arizona Supreme Court
COMPANY, an Iowa corporation, ) No. CV-07-0280-PR
)
Plaintiff/Counterdefendant/ ) Court of Appeals
Appellant, ) Division One
) No. 1 CA-CV 05-0702
v. )
)
DGG & CAR, INC., d/b/a METROL ) Maricopa County
SECURITY SERVICES, an Arizona ) Superior Court
corporation, ) No. CV2003-004967
)
Defendant/Counterclaimant/ )
Appellee. )
)
) O P I N I O N
_________________________________ )

Appeal from the Superior Court in Maricopa County
The Honorable Paul A. Katz, Judge

REVERSED AND REMANDED
________________________________________________________________

Memorandum Decision of the Court of Appeals, Division One
Filed Dec. 14, 2006

VACATED
________________________________________________________________

RAYMOND, GREER & SASSAMAN, P.C. Phoenix
By Randy L. Sassaman
Michael J. Raymond
Attorneys for Employers Mutual Casualty Company

FEOLA & TRAICA, P.C. Phoenix
By Steven Feola
Robert J. Traica
And

Richard A. Alcorn Phoenix
Attorneys for DGG & CAR, Inc., d/b/a
Metrol Security Services
________________________________________________________________

R Y A N, Justice

¶1 Businesses sometimes buy employee fidelity or

commercial crime insurance policies to protect them against loss

from employee theft. In this case we must determine whether a

standard form insurance policy treats the loss from a series of

thefts by a single employee as one occurrence.

I

A

¶2 The facts crucial to our decision are not in dispute.

In 2002, DGG & CAR, Inc., doing business as Metrol Security

Services (“Metrol”), discovered that John Wallace Brown, an

accounting employee, had embezzled more than $500,000 during a

five-year period by forging company checks.

¶3 Metrol had purchased employee fidelity policies from

Employers Mutual Casualty Co. (“EMC”) covering two plan years,

2000-2001 and 2001-2002. Under the policies, EMC agreed that it

would “pay for loss of, and loss from damage to, Covered

Property resulting directly from the Covered Cause of Loss.”

Covered property included money; the “Covered Cause of Loss” was

“Employee dishonesty.” The policy defined “Employee dishonesty”

as “dishonest acts committed by an ‘employee’ . . . with the

manifest intent to” cause loss and obtain a financial benefit.

2
¶4 The EMC policy promised that EMC would “pay . . . for

loss that you sustain through acts committed or events occurring

at any time and discovered by you during the Policy Period.”

Such coverage was limited, however, to a set amount per

occurrence of loss. Under the policy, “[t]he most [EMC] will

pay for loss in any one ‘occurrence’” was $50,000, with a $250

deductible. In turn, the policy defined “Occurrence” as meaning

“all loss caused by, or involving, one or more ‘employees,’

whether the result of a single act or series of acts.” This

latter provision became the focus of the dispute between Metrol

and EMC.

B

¶5 Metrol filed a claim with EMC seeking reimbursement

for the full amount of the company’s loss, arguing that each act

of theft was a separate occurrence. EMC countered that Brown’s

series of thefts constituted a single occurrence and thus Metrol

was entitled only to $50,000.

¶6 EMC filed a declaratory judgment action seeking a

ruling that it owed only $50,000. Metrol counterclaimed,

alleging breach of contract, bad faith, and other claims.

Cross-motions for summary judgment grappling with the definition

of occurrence followed. The superior court concluded that the

policy was ambiguous as to whether each act of theft

attributable to Brown was itself an occurrence, or whether all

3
acts of theft were a single occurrence. The court concluded

Metrol was entitled to recover up to $50,000 for each theft.

The parties eventually agreed to a stipulated judgment in favor

of Metrol, conditioned on EMC’s right to appeal the superior

court’s resolution of the cross-motions for summary judgment.

¶7 In a memorandum decision, the court of appeals

reversed. Employers Mut. Cas. Co. v. DGG & CAR, Inc., 1 CA-CV

05-0702, ¶ 1 (Ariz. App. Dec. 14, 2006) (mem. decision). The

court reasoned that a series of thefts committed by one employee

constituted one occurrence. Id. at ¶ 19. Consequently, the

court concluded that Metrol’s recovery was subject to the policy

limit of $50,000 for the series of thefts. Id. at ¶ 33.

¶8 We granted Metrol’s petition for review because this

case concerns a matter of first impression in Arizona and

because the definition of “occurrence” in the policy commonly

appears in employee fidelity or commercial crime insurance

policies.1 See ARCAP 23(c)(3). We have jurisdiction under

Article 6, Section 5 of the Arizona Constitution and Arizona

Revised Statutes, (“A.R.S.”) section 12-120.24 (2003).

II

¶9 The interpretation of an insurance contract is a

question of law we review de novo. Sparks v. Republic Nat’l

1
See Edward Gallagher, Limit of Liability, in Commercial
Crime Policy 451 (Randall I. Marmor & John J. Tomaine, 2d ed.
2005).

4
Life Ins. Co., 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982).

In interpreting an insurance policy, we apply “a rule of common

sense” thus, “when a question of interpretation arises, we are

not compelled in every case of apparent ambiguity to blindly

follow the interpretation least favorable to the insurer.”

State Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 251, 257,

782 P.2d 727, 733 (1989) (stating ambiguity exists when policy

“presents conflicting reasonable interpretations”). “[N]either

language nor apparent ambiguity alone is dispositive.” Id.

Rather, even if a policy is apparently ambiguous, a decision to

require coverage follows after consideration of “legislative

goals, social policy, and examination of the transaction as a

whole.” Id. at 258, 782 P.2d at 734. Moreover, “[t]he

‘ambiguity’ rule applies only after the court is unable to

determine how the language of the policy applies to the specific

facts of the case.” Preferred Risk Mut. Ins. Co. v. Lewallen,

146 Ariz. 83, 85, 703 P.2d 1232, 1234 (App. 1985). Accordingly,

the core question is whether the policy language is, in fact,

ambiguous under the facts of this case.

A

¶10 The EMC policy treats “all loss” caused by or

involving an employee, resulting from a “series of acts,” as a

single occurrence. John Brown’s embezzlement, although

including a number of thefts, was a “series of acts,” each one

5
following the other. The policy plainly considers the loss

resulting from the embezzlement of a single employee an

occurrence, with an attendant $50,000 policy limit. The

majority of courts in interpreting similar policy language in

corresponding factual situations have so concluded. E.g.,

Glaser v. Hartford Cas. Ins. Co., 364 F. Supp. 2d 529, 535-37

(D. Md. 2005) (holding, under identical definition, that a

single occurrence arose when an employee committed a series of

dishonest acts, despite the employee’s use of different means to

defraud at different times); Wausau Bus. Ins. Co. v. U.S. Motels

Mgmt., Inc., 341 F. Supp. 2d 1180, 1183-84 (D. Colo. 2004)

(rejecting company’s attempt to distinguish single employee’s

various embezzlements because occurrence is determined by cause

and the cause of all loss was the employee’s dishonesty);

Bethany Christian Church v. Preferred Risk Mut. Ins. Co., 942 F.

Supp. 330, 333-35 (S.D. Tex. 1996) (holding policy language

identical to that in EMC’s policy made all defalcations a single

occurrence); Diamond Transp. Sys., Inc. v. Travelers Indem. Co.,

817 F. Supp. 710, 712 (N.D. Ill. 1993) (holding loss over

several years a single occurrence under same language); Reliance

Ins. Co. v. Treasure Coast Travel Agency, Inc., 660 So. 2d 1136,

1137 (Fla. Dist. Ct. App. 1995) (holding, based on definition

identical to that of the EMC policy, that “although this

employee’s embezzlements occurred over a four year period, they

6
constitute a single occurrence”); Jefferson Parish Clerk of the

Court v. Fid. & Deposit Co., 673 So. 2d 1238, 1245 (La. Ct. App.

1996) (“This language is inclusive of any scheme to cause loss

to the insured, and therefore we agree with the trial court that

only one occurrence of employee dishonesty can be found under

this definition.”); see also Bus. Interiors v. Aetna Cas. & Sur.

Co., 751 F.2d 361, 362-63 & n.1 (10th Cir. 1984) (“[T]he cause

of Business Interiors’ loss was the continued dishonesty of one

employee . . . . [T]he employee’s fraudulent acts constituted a

single loss.”). Metrol argues that these cases are

distinguishable, yet in each case, under policy language

identical or similar to EMC’s, a court rejected the contention

that dishonest acts of a single employee against the company can

be parsed as Metrol contends.

B

¶11 Metrol nonetheless maintains that the policy is

ambiguous. For example, it argues that the phrase “all loss” in

the definition of occurrence is unclear because it uses the word

“loss” in the singular. To clearly encompass the entire loss

attributable to Brown, Metrol claims that the policy needed to

refer to losses. But using the singular “loss” does not mean

that the phrase “all loss” somehow can be read as “each loss.”

¶12 Metrol makes a second, equally unpersuasive, argument

to suggest the word loss is ambiguous. It argues that any time

7
the term “loss” is used in employee fidelity or commercial crime

policies the term refers to each individual theft in a series of

thefts. See Lincoln Technical Inst. v. Fed. Ins. Co., 927 F.

Supp. 376, 378-79 (D. Ariz. 1994) (stating there was a “loss

sustained” “each time” an employee stole money). Metrol argues

that to treat “all loss” attributable to one employee as one

occurrence is inconsistent with the district court’s opinion in

Lincoln Technical.

¶13 For three reasons, this argument does not help Metrol.

First, in their effort to secure coverage for loss that occurred

before an increase in the applicable policy limits took effect,

the plaintiffs in Lincoln Technical argued that the term “loss

sustained” in a commercial crime policy was ambiguous. Id. at

378. Thus, the critical issue was when the loss was

“sustained.” Id. at 378-79. The issue here is the construction

of the defined term “occurrence.”

¶14 Second, even assuming that a “loss” occurred each time

Brown embezzled from Metrol, the policy here expressly groups

“all loss” attributable to an employee’s act or series of acts

into a single “occurrence.”

¶15 Third, Metrol’s alternate reading of the definition of

“occurrence” is unpersuasive. Metrol argues that the policy

definition of “[o]ccurrence” - “all loss caused by, or

involving, one or more ‘employees,’ whether the result of a

8
single act or series of acts,” - should be interpreted only as

preventing an insured business from claiming that the number of

occurrences is determined by the number of employees involved in

a single theft or the number of acts leading up to a single

theft. But because the policy only covers “loss,” not acts, the

number of employees or acts involved is irrelevant in

determining the amount of the “loss.” See Wilson, 162 Ariz. at

258, 782 P.2d at 734.

C

¶16 Metrol next asserts that we should reject the plain

meaning of the phrase “all loss” in the definition of occurrence

because it would treat all dishonest acts of employees resulting

in multiple instances of loss as a single occurrence. Metrol

argues that because all covered losses necessarily result from

either an act or a series of acts by employees, a literal

reading of the policy would limit coverage to a total of $50,000

even when the thefts were unrelated. Metrol complains that such

an interpretation would “nullif[y]” coverage. But this case

does not present us with a situation involving unrelated thefts

by multiple employees. Because the plain language of the policy

covers the situation in this case, we need not consider whether

the policy is ambiguous as applied to other circumstances. See

Preferred Risk Mut. Co., 146 Ariz. at 85, 703 P.2d at 1234. Nor

can we conclude that a policy that provides up to $50,000 in

9
coverage for an employee’s series of thefts is illusory.

¶17 Citing A.B.S. Clothing Collection, Inc. v. Home

Insurance Co., 41 Cal. Rptr. 2d 166, 174 (Cal. Ct. App. 1995)

(finding the same policy language as EMC’s ambiguous), and Karen

Kane, Inc. v. Reliance Insurance Co., 202 F.3d 1180, 1185 (9th

Cir. 2000) (relying on A.B.S. Clothing), Metrol counters that

the policy itself suggests that multiple occurrences may be

covered in a plan year. The policy states, “[t]he most we will

pay for loss in any one ‘occurrence’ is the applicable Limit of

Insurance shown in the Declarations,” suggesting the possibility

of more than one occurrence. (Emphasis added.) Yet the policy

language defines “occurrence” to include “all loss” attributable

to any employee or employees. Because these two provisions

conflict, Metrol argues, a policyholder cannot determine when

“any one” occurrence ends and another begins. Although there

may be more than one “occurrence” per year under the policy, it

does not follow that losses resulting from a single employee’s

embezzlement scheme are themselves separate occurrences. See

Wausau, 341 F. Supp. 2d at 1183-84 (“The cause of [the

insured’s] loss was the dishonesty of one employee. Although

the employee appears to have been particularly creative in

finding ways to bilk [the insured], her intent throughout

undoubtedly was the same: to steal [the insured’s] money;”

therefore the employee’s “embezzlement scheme” constituted one

10
occurrence.) (citations omitted); see also Glaser, 364 F. Supp.

2d at 529.2

D

¶18 Metrol also contends that the phrase “series of acts”

in the definition of occurrence is ambiguous. It argues that

the phrase could apply to a series of thefts or a series of acts

leading up to a theft. See Karen Kane, 202 F.3d at 1187

(suggesting same). The policy, however, defines occurrence in

terms of “all loss” that results from “a single act” or “series

of acts.” Accordingly, only acts from which loss results – the

acts of theft – are considered part of the occurrence. Further,

even if preparatory acts are part of a “series of acts,” the

language is nevertheless broad enough to encompass not only a

series of preparatory acts leading up to a theft, but also each

series of preparatory acts leading up to each theft. There is

no ambiguity.

E

¶19 Metrol asserts that because certain courts have found

this policy language ambiguous it must be subject to more than

2
The court of appeals indicated that “[t]he term ‘series’
implies some sort of relationship between the acts, and not
merely the fact that the same person committed them.” Employers
Mut., 1 CA-CV 05-0702, slip op. at ¶ 31. Because the acts in
this case were caused by Brown’s dishonesty, we need not decide
whether the same policy would treat a series of unrelated acts
by the same employee as a single occurrence.

11
one reasonable interpretation. Varying judicial

interpretations, however, do not automatically render an

insurance policy ambiguous. Wilson, 162 Ariz. at 257-58, 782

P.2d at 733-34. Further, the cases Metrol relies upon - A.B.S.

Clothing, Karen Kane, and Auto Lenders Acceptance Corp. v.

Gentilini Ford, Inc., 854 A.2d 378, 397 (N.J. 2004) - are not

persuasive in light of the plain language in EMC’s policy.

¶20 A.B.S. Clothing, for example, addressed similar policy

language in a distinct scenario. There, the issue was whether

an insured business was entitled to a policy-limit recovery each

year for an employee’s embezzlements when the insured business

maintained a policy with the insurance company for a number of

years. 41 Cal. Rptr. 2d at 167-68. This issue is distinct from

whether an insured business is entitled to multiple recoveries

in a single plan year for the acts of one employee discovered

that year.

¶21 Karen Kane, which cited and relied upon A.B.S.

Clothing, is similarly distinguishable. Karen Kane, 202 F.3d at

1185-88. Karen Kane said nothing about whether the policy

contemplated multiple recoveries for multiple acts discovered in

a single plan year. See id. at 1187. To the contrary, the

court stated that “[i]f ‘occurrence’ is construed as limited by

policy period, then [the employee’s] approximately 150

individual acts of theft, spanning over three years, constitute

12
three separate ‘series of acts,’ one for each of the three

policy periods and recoverable within each period as such.” Id.

(emphasis added). Moreover, to the extent the Ninth Circuit

panel relied on A.B.S. Clothing, it did so because, as a federal

court sitting in diversity, it was bound to follow what it

perceived to be California law. Id. at 1183.

¶22 In addition, Metrol argued before this Court that it

is entitled to recover for close to 300 “acts,” but it has not

argued that it is entitled to recover for two “series of acts”

in two plan years.

¶23 Finally, the New Jersey Supreme Court held that, under

at least some circumstances, language like that employed by EMC

may be subject to a different construction. In Gentilini Ford,

the court found multiple occurrences, allowing for multiple

recoveries, when an employee used fraudulent credit applications

to sell individual cars to individual car buyers. 854 A.2d at

397. The court explained that with each sale the employee

“caused a separate, direct loss of property to [the dealer] by

inducing it to part with an automobile in exchange for a faulty

installment sales contract.” Id. “In these circumstances,” the

court continued, “in which each purchaser and the terms of each

sale are unique, the similarity of the acts do not transform

them into one continuous event subject to a single recovery

under the policy.” Id. at 398. The court expressly noted,

13
however, that the case before it did not involve an embezzlement

scheme. Id. Moreover, to reach its conclusion, the court

specifically declined to “adhere to the text’s literal

limitation because to do so here would nearly vitiate the

coverage that both parties clearly contemplated.” Id. at 397.

Metrol has never suggested that it reasonably expected coverage

broader than the literal language of the policy.3

III

¶24 When “the provisions of the contract are plain and

unambiguous upon their face, they must be applied as written,

and the court will not pervert or do violence to the language

used, or expand it beyond its plain and ordinary meaning or add

something to the contract which the parties have not put there.”

D.M.A.F.B. Fed. Credit Union v. Employers Mut. Liab. Ins. Co.,

96 Ariz. 399, 403, 396 P.2d 20, 23 (1964); see also Pawelczyk v.

Allied Life Ins. Co., 120 Ariz. 48, 52, 583 P.2d 1368, 1372

(App. 1978) (“Courts must give effect to agreements as they are

written, however, and ambiguities will not be found or created

where they do not exist in order to avoid a harsh result.”).

¶25 In any event, Metrol has not suggested any public

3
Metrol never argued to this Court that cases addressing the
reasonable expectations of consumers subject to standard form
contracts apply here. See, e.g., Darner Motor Sales, Inc. v.
Universal Underwriters Ins. Co., 140 Ariz. 383, 389-90, 682 P.2d
388, 394-95 (1984) (recognizing the doctrine of reasonable
expectations in contract law).

14
policy that supports its construction of the contract. Under

Metrol’s interpretation, a dishonest employee would dictate the

terms of the employer’s recovery by the amount he chose to steal

each time during the policy period. In fact, Metrol’s

interpretation actually hurts insureds who suffer small – often

less detectable – losses during the policy period because a

number of small thefts – each less than the policy deductible –

would be treated separately, preventing an insured from

recovering at all in such cases. See Am. Commerce Ins. Brokers

v. Minn. Mut. Fire and Cas. Co., 551 N.W.2d 224, 229-30 (Minn.

1996) (concluding that an insured’s similar interpretation of a

comparable policy was “problematic as a matter of public

policy”); cf. EOTT Energy Corp. v. Storebrand Int’l Ins. Co., 52

Cal. Rptr. 2d 894, 900-01 (Cal. Ct. App. 1996) (holding that

“[a]s used in the policy, the term ‘occurrence’ reasonably

contemplates that multiple claims could, in at least some

circumstances, be treated as a single occurrence or loss. It

appears reasonable to us that the term ‘occurrence’ . . . is

effectively referring to a loss” and thus not subject to a

separate deductible, which, because each theft was less than the

deductible would in effect result in no recovery).4 Accordingly,

4
The parties and the appeals court spent time analyzing
Arizona Property and Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129, 735 P.2d 451 (1987). But Helme involved a policy
defining an occurrence as “any incident, act or omission, or

15
Metrol’s interpretation of the policy would visit harsh results

on other subscribers to similar policies.

IV

¶26 For the foregoing reasons, we vacate the court of the

appeals’ decision, reverse the judgment of the superior court

and remand for proceedings consistent with this opinion.

_______________________________________
Michael D. Ryan, Justice

CONCURRING:

_______________________________________
Ruth V. McGregor, Chief Justice

_______________________________________
Rebecca White Berch, Vice Chief Justice

_______________________________________
Andrew D. Hurwitz, Justice

_______________________________________
W. Scott Bales, Justice

series of related incidents, acts or omissions resulting in
injury,” id. at 134, 735 P.2d at 456, and simply concluded that
two separate instances of malpractice by physicians that led to
a patient’s death were separate occurrences because they were
unrelated. This case involves different policy language and a
very different issue.

16