The Federal District Court predicted that Nevada courts would not find coverage under a commercial crime policy for the insured's use of funny money. CP Food & Bev. v. United States Fire Ins. Co., 2018 U.S. Dist. LEXIS 133331 (D. Nev. Aug. 6, 2018).
The insured, CP Food & Beverage, Inc. (CP), ran a club where patrons could buy "funny money" to tip waitresses or pay topless dancers. The waitresses and dancers could turn the funny money into CP for cash. Some employees overcharged customers' credit cards by charging the credit card multiple times for the same bill, charging for bottles of alcohol that the employees kept for themselves, and charging for funny money that the customer never purchased and then cashing in the funny money with CP.
After the scheme was discovered, CP paid chargebacks to the customers' credit cards in a total amount of $768,617.91, both in response to its contractual requirements with the credit card companies and also as part of an agreement with law enforcement. CP also spent hundreds of thousands of dollars in professional fees to investigate and resolve issues with law enforcement.
CP had a commercial crime policy with U.S. Fire. The policy covered "loss of or damage to 'money', 'securities' and 'other property' resulting directly from 'theft' committed by an 'employee', whether identified or not, acting alone or in collusion with other persons." U.S. Fire denied the claim for the credit card chargebacks and professional fees. CP filed suit for breach of contract and U.S. Fire moved for summary judgment.
U.S. Fire contended CP was seeking to recover for its liability to the customers, which was not covered. CP responded that the employees stole from CP and the loss was covered.
The court employed the "direct means direct" rule, meaning that the employer's property must be stolen and the employer's third-party liability to a defrauded customer was not covered. The policy language covered loss resulting "directly" from an employee's theft. Further, the policy defines theft as "the unlawful taking of property to the deprivation of the insured." Therefore, the policy contemplated a loss when the insured was deprived of property, not when the third party later sued the insured or required repayment under a contractual provision.
The losses here did not "directly" result from the thefts. Likewise, CP's investigative costs did not directly result from the employees' theft. Instead, they resulted from CP attempting to investigate the thefts, to assure law enforcement that the owners were not involved in the scheme, and to support CP's insurance claim. U.S. Fire's motion for summary judgment was granted.