“Prior loss clause” of commercial crime policy limited coverage for fraudulent employee expense reimbursements that occurred during the bond period and in the immediate prior bond period, but no earlier.

by Christopher J. Graham and Joseph P. Kelly

Emcor Group, Inc. v. Great American Insurance Co., Case No. ELH-12-0142 (D. Md. Mar. 27, 2013):

Insurer wrote three successive one-year commercial crime policies December 1, 2002 and December 1 2005. Insured submitted a claim for a loss resulting from a COO and VP’s fraudulent expense reimbursements running between 1999 and 2005. Each policy contained a “Prior Loss Clause”, which read as follows:

Loss Sustained During Prior Insurance: a. If you, or any predecessor in interest sustained loss during the period of any prior insurance that you or the predecessor in interest could have recovered under that insurance except that the time within which to discover loss had expired, we will pay for it under this insurance, provided: (1) this insurance became effective at the time of cancellation or termination of the prior insurance; and (2) this loss would have been covered by this insurance had it been in effect when the acts or events causing the loss were committed or occurred
Insurer denied the claim, arguing that the Prior Loss Clause applied only to the most recent prior insurance, i.e. the policy written by Insurer covering December 1, 2003 to December 1, 2004, not Insured’s prior policy with another insurance company, which ran from 1999 to 2002. Insured sued and both parties filed motions for summary judgment.

Issue #1: Did the Prior Loss Clause apply to all of the Insured’s previous policies? No.

The Court held the “this insurance” language of the Prior Loss Clause unambiguously referred to the contract immediately prior, not to the Insured’s older policies. The court looked to the Maryland Code’s definition of “insurance” as “a contract to indemnify or to pay or provide a specified or determinable amount or benefit on the occurrence of a determinable contingency.” (Ins. Section 1–101(s)). Because only the 2003–2004 policy terminated when the 2004–2005 policy went into effect, only prior losses incurred during the 2003–2004 policy were covered.

Issue #2: Was Insurer judicially estopped from claiming the Prior Loss Clause applied only to the previous year’s policy because it had settled with another insured under the same policy language and circumstances? No.

A settlement is not a final determination by a court; therefore it does not bind the insurer in the current proceeding.

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