Logical Construction: Federal Court Relies on Practical Considerations in Finding No Coverage for Lost Future Earnings

In 3M Co. v. National Union Fire Insurance Co., 2015 U.S. Dist. LEXIS 131197 (D. Minn., September 28, 2015) a federal judge for the District of Minnesota determined that a policyholder was not entitled to coverage for earnings on its investment in a trading company engaged in a Ponzi scheme because it did not own the earnings. The policyholder invested its employee-benefit plan assets in the trading company. The investment took the form of a limited partnership in the trading company. In 2009, the trading company was investigated and sued by the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission. As a result, the trading company’s assets were distributed through receivership, and the policyholder recovered its entire investment. Nevertheless, the policyholder made a claim under its Blanket Crime Policy for the loss of “legitimate earnings” from the trading company’s “legitimate [investment] vehicles.” For the purposes of deciding the coverage question, the court presumed that the policyholder could accurately quantify the “legitimate earnings” to which it was entitled. The Blanket Crime Policy contained three relevant Endorsements: (a) Endorsement 3 added the policyholder’s employee-benefit plans as insureds, and was intended to comply with the bonding requirements of the Employee Retirement Income Security Act (ERISA); (b) Endorsement 8, which stated that insured property may be: (1) owned by the insured, (2) held by the insured in any capacity, or (3) property for which the insured is legally liable; and (c) Endorsement 10, which provided coverage for direct losses to money, securities, or other property caused by theft or forgery by any employee. The first issue before the court was whether the coverage provided under Endorsement 10 required that the loss be to insured property, which the court found to mean property owned by the insured. The policyholder argued that the use of the word “may” in Endorsement 8, along with other terms throughout the policy, meant that it was not required that the property in question be insured property. The court disagreed, finding that Endorsement 8 was intended to limit coverage for Employee Dishonesty to only losses occurring to insured property. The court further ruled that the use of the word “may” in Endorsement 8 was intended to mean that property would be insured property so long as one of three conditions applied. Although there were multiple issues before the court, the entire matter was resolved by addressing only whether the policyholder owned the earnings. The second issue before the court was whether the policyholder did, in fact, own the earnings. As a preliminary matter, the court found that the earnings were owned by the trading company, not the policyholder. Thus, relying on Delaware law, and the way in which the policyholder structured its investment in the trading group as a limited partnership, the court stated that a limited partner does not have an ownership interest in “specific limited partnership property.” Although the policyholder had a right to distributions from the partnership, which would have included the earnings, the policyholder did own any such earnings until the distributions were made. The insured made a last-ditch effort to argue that, since Endorsement 3 required compliance with ERISA’s bonding requirements, the coverage was intended to incorporate property rights as defined under ERISA. A regulation to ERISA provided that plan assets included the equity interest in the partnership itself as well as the assets owned by the partnership. The court rejected this argument because the regulation was meant to affect fiduciary responsibilities, not redefine property rights. The court opted to abide by state-law principles in interpreting the insurance contract, finding that the non-inclusion of a definition of the term “owned” in the policy reflected an intend to rely on its plain and ordinary meaning. Accordingly, the court held that the policyholder did not own the earnings that were lost and, as such, was not entitled to coverage for same. This case puts on a clinic of policy interpretation principles. Despite clever arguments by the policyholder, and despite Endorsement language that was less than crystal clear, the court in this case demonstrated that not every instance of an ambiguity or undefined term favors the policyholder. By considering the practical realities of the policy language and invoking the plain meaning of common words, the court reached a decision that most accurately captured the insurer’s intent in issuing the coverage.

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