The Law

Legal Spotlight

A look at the latest decisions affecting the industry.
By: | August 4, 2014 • 6 min read

Insurer Must Pay $2 Million Claim

On a normal day, Armored Money Services (AMS) would pick up about $2 million from various New York agent locations for the Omnex Group Inc., a provider of money transfer services.

That money would then be held in a secure vault and deposited within a few days into a bank account in Omnex’s name.

But on Feb. 8, 2010, Robert Egan, president of AMS, was arrested by the FBI and charged with bank fraud. The contents of the vault — about $19 million — were seized by the federal government and later put in the care of a trustee.

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It ultimately was discovered that the company owed more than $68 million to its customers on top of the $2 million owed to Omnex. Egan and the COO of the company, Bernard McGarry — both of whom eventually pleaded guilty and were imprisoned — admitted to “playing the float, i.e., using the continual influx of cash to cover the operating expenses of AMS and the affiliated company, repay prior obligations to other customers, and make officer loans,” according to a New York appeals court.

In May, the appeals court upheld a lower court decision that ruled U.S. Fire Insurance Co. should pay Omnex Group the $2 million it lost that February day, minus a $100,000 deductible as set forth in the company’s commercial crime policy.

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A lower court judge, Ira Gammerman of the New York Supreme Court, had ruled that the policy covered loss of money in the custody of a “messenger” resulting from theft, disappearance or destruction.

“In its opposing papers,” the judge said during a hearing in December 2012, “the insurance company spends a great deal of time in opposition arguing why this is not a theft, but I don’t care whether it’s a theft or not. It’s a disappearance and disappearance is one of the covered events.”

He also ruled that a section in the policy that excluded losses resulting from seizure or destruction of property by governmental action did not apply, saying the seizure by the government “was not the contributing cause of the plaintiff’s loss, rather it was the fraud committed [by AMS] … .”

Summary: U.S. Fire Insurance Co. must pay a wire transfer company $2 million, which disappeared along with $68 million owed by an armored car company.

Takeaway: Although the term “disappearance,” was not defined in the policy, the court ruled that its “plain ordinary meaning” should apply.

Policy Voided Due to Misrepresentation

Namco Financial Exchange Corp. sought a commercial crime policy for
primary and excess coverage from Liberty Mutual, Zurich American Insurance Co., Axis Insurance Co., and Twin City Fire Insurance Co., for the period of Aug. 15, 2007 to Aug. 15, 2008.

In response to a question on the insurance application, Namco said it did not keep proceeds from IRS Section 1031 transactions — which have to do with tax-deferred property gains — separate from its operating funds.  Because of that response, the insurers denied issuance of policies.

Lockton, Namco’s broker, relayed the rejections to the company and informed Namco that “as a condition of coverage, proceeds from 1031 transactions are to be held in bank accounts segregated from those of your operating funds … .” The broker instructed Namco to “confirm that this is done,” before returning an updated insurance application.

Namco followed those instructions as to the application, but the company’s procedures never changed, according to the U.S. District Court for the Central District of California, which dismissed a lawsuit against the insurers.

The lawsuit was filed by Heidi Kurtz, who was appointed trustee of the company after it went into Chapter 7 bankruptcy in 2009. Kurtz submitted insurance claims contending that Namco had misappropriated in excess of $35 million. When the claims were denied, she filed suit.

The federal court rejected her arguments that the insurance policy (not the application) did not require the funds be segregated; that the insurers needed to prove the misrepresentation on the application was intentional; that the insurers should have investigated the company after it changed its answer to that one question; and that the insurers did not promptly respond to the claim request.

“In this case,” wrote Judge Dolly M. Gee, “there is uncontroverted testimony from each insurer that it would not have issued the policy if [Namco] had answered the question differently.” She granted the insurers a summary judgment in the lawsuit in April.

Summary: Four insurance companies need not pay claims in excess of $35 million to the trustee of a bankrupt company.

Takeaway: Even if a company’s procedures are arguably in compliance with an insurance policy’s requirements, a material misrepresentation in applying for that policy will void coverage.

Contractor Ordered to Repay Insurer

Thomas VanDuinen, who operated Northern Building Co., was selected in 2008 to perform work at Midway International Airport in Chicago under the supervision of Parsons Infrastructure & Technology Group Inc., which served as project manager.

Hanover Insurance Co. issued a surety bond on Northern’s behalf.

Hanover became involved in the project in 2009 when two subcontractors complained that Northern failed to pay them a total of $205,950, halting the project.

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Hanover demanded collateral and indemnification from Northern under its agreement, a demand which was refused by the general contractor.

In March 2011, Hanover filed suit against Northern and VanDuinen to force compliance. The insurer sought $127,086 of contract funds, which it was eventually paid although it had been held for a time by the Federal Aviation Administration (FAA) when the work was stopped.

Hanover also sought payment for attorneys’ fees and costs incurred in resolving the performance and payment claims against the bond. Those fees now total $76,000.

Hanover eventually stepped into Northern’s role as general contractor and arranged for completion of the project.

In September 2012, Hanover paid $127,452 to a trustee for one of the subcontractors, which had filed for bankruptcy. That amount settled both subcontractor claims. Earlier, Hanover agreed to resolve Parson’s bond claim for performance, and $127,086, which had been withheld from Northern by the FAA, was paid to Hanover.

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Northern disputed Hanover’s arguments in the litigation, but a district court in Illinois issued a summary judgment in favor of the insurer. A three-judge panel on the U.S. 7th Circuit Court of Appeals upheld that decision in May.

“Northern has tried to make this into a multi-issue, complex proceeding. But it is actually very simple,” the federal appeals court judges wrote, noting that the agreement was “clear and unambiguous in all relevant aspects. Northern clearly breached it; Hanover did not.”

The court also offered some “closing advice” to Northern to “carefully consider” how long it wanted to continue to “drag his case out. Hanover’s attorney expenses are only going to increase.”

Summary: The court ruled the general contractor must pay the insurer $200,000, which includes $76,000 in attorneys’ fees.

Takeaway: An actual liability for a breach of the bond is not necessary for a surety bond agreement to be triggered. The insurer needs only a claim against the bond to trigger its rights and responsibilities.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

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The Profession

For This Pharmaceutical Risk Director, Managing Risk Means Being Part of the Mission to Save Lives

Meet Eric Dobkin, director, insurance and risk management, for Merck & Co. Inc.
By: | September 28, 2018 • 5 min read

R&I: What was your first job?
My first job out of undergrad was as an actuarial trainee at Chubb.I was a math major in school, and I think the options for a math major coming out are either a teacher or an actuary, right? Anyway, I was really happy when the opportunity at Chubb presented itself. Fantastic company. I learned a lot there.

R&I: How did you come to work in risk management?
After I went back to get my MBA, I decided I wanted to work in corporate finance. When I was interviewing, one of the opportunities was with Merck. I really liked their mission, and things worked out. Given my background, they thought a good starting job would be in Merck’s risk management group. I started there, rotated through other areas within Merck finance but ultimately came back to the Insurance & Risk Management group. I guess I’m just one of those people who enjoy this type of work.

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R&I: What is risk management doing right?
I think the community is doing a good job of promoting education, sharing ideas and advancing knowledge. Opportunities like this help make us all better business partners. We can take these ideas and translate them into actionable solutions to help our companies.

R&I: What could the risk management community be doing a better job of?
I think we have made good advancements in articulating the value proposition of investing in risk management, but much more can be done. Sometimes there is such a focus on delivering immediate value, such as cost savings, that risk management does not get appropriate attention (until something happens). We need to develop better tools that can reinforce that risk management is value-creating and good for operational efficiency, customers and shareholders.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
I’d actually say there hasn’t been as much change as I would have hoped. I think the industry speaks about innovation more often than it does it. To be fair, at Merck we do have key partners that are innovators, but some in the industry are less enthusiastic to consider new approaches. I think there is a real need to find new and relevant solutions for large, complex risks.

R&I: What emerging commercial risk most concerns you?
Cyber risk. While it’s not emerging anymore, it’s evolving, dynamic and deserves the attention it gets. Merck was an early adopter of risk transfer solutions for cyber risk, and we continue to see insurance as an important component of the overall cyber risk management framework. From my perspective, this risk, more than any other, demands continuous forward-thinking to ensure we evolve solutions.

R&I: What’s the biggest challenge you’ve faced in your career?
Sticking with the cyber theme, I’d say navigating through a cyber incident is right up there. In June 2017, Merck experienced a network cyber attack that led to a disruption of its worldwide operations, including manufacturing, research and sales. It was a very challenging environment. And managing the insurance claim that resulted has been extremely complex. But at the same time, I have learned a tremendous amount in terms of how to think about the risk, enterprise resiliency and how to manage through a cyber incident.

R&I: What advice might you give to students or other aspiring risk managers?
Have strong intellectual curiosity. Always be willing to listen and learn. Ask “why?” We deal with a lot of ambiguity in our business, and the more you seek to understand, the better you will be able to apply those learnings toward developing solutions that meet the evolving risk landscape and needs of the business.

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R&I: What role does technology play in your company’s approach to risk management?
We’re continuing to look for ways to apply technology. For example, being able to extract and leverage data that resides in our systems to evaluate risk, drive efficiencies and make things like property-value reporting easier. We’re also looking to utilize data visualization tools to help gain insights into our risks.

R&I: What are your goals for the next five to 10 years of your career?
I think, at this time, I would like to continue to learn and grow in the type of work I do and broaden my scope of responsibilities. There are many opportunities to deliver value. I want to continue to focus on becoming a stronger business partner and help enable growth.

R&I: What is your favorite book or movie?
I’d say right now Star Wars is top on my list. It has been magical re-watching and re-living the series I watched as a kid through the eyes of my children.

R&I: What is the riskiest activity you ever engaged in? When I was about 15, I went to a New York Rangers versus Philadelphia Flyers game at the Philadelphia Spectrum. I wore my Rangers jersey. I would not do that again.

Eric Dobkin, director, insurance & risk management, Merck & Co. Inc

R&I: What is it about this work you find most fulfilling or rewarding?
I am passionate about Merck’s mission of saving and improving lives. “Inventing for Life” is Merck’s tagline. It’s funny, but most people don’t associate “inventing” with medicine. But Merck has been inventing medicines and vaccines for many of the world’s most challenging diseases for a long time. It’s amazing to think the products we make can help people fight terrible diseases like cancer. Whatever little bit I can do to help advance that mission is very fulfilling and rewarding.

R&I: What do your friends and family think you do?
Ha! My kids think I make medicine. I guess they think that because I work for Merck. I suppose if even in a small way I can contribute to Merck’s mission of saving and improving lives, I am good with that. &




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]