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Summit Real Estate Management, LLC v. Mid-Century Insurance Co.

Court of Appeals of Oregon

June 19, 2019

SUMMIT REAL ESTATE MANAGEMENT, LLC, an Oregon limited liability company, Plaintiff-Appellant,
v.
MID-CENTURY INSURANCE COMPANY, a California corporation, Defendant-Respondent, and NIELSEN INSURANCE, INC., an Oregon corporation, Defendant.

          Argued and submitted October 23, 2018

          Multnomah County Circuit Court 15CV16805; A163203 Robert Durham, Senior Judge.

          Stephen M. Feldman argued the cause for appellant. Also on the briefs was Perkins Coie LLP.

          R. Daniel Lindahl argued the cause for respondent. Also on the brief were Ronald J. Clark and Bullivant Houser Bailey PC.

          Before Lagesen, Presiding Judge, and DeVore, Judge, and James, Judge.

         Case Summary: This appeal arises out of an insurance claim by Summit Real Estate Management, LLC, (Summit) for losses resulting from eight years of embezzlement by its longtime bookkeeper. Summit was insured during that period under annual policies issued by Mid-Century Insurance Company (Mid-Century) that covered "direct loss" from employee dishonesty, so long as the loss was discovered within one year from the end of the policy period. The employee dishonesty coverage also included what is known as a "prior insurance" provision, whereby Mid-Century agreed to pay for losses that occurred "during the period of any prior insurance" and that would have been covered "except that the time within which to discover loss or damage had expired." The trial court granted Mid-Century's motion for summary judgment, rejecting Summit's contentions [298 Or.App. 165] that (1) the policies provided continuous coverage for undiscovered losses dating back through multiple policy periods; (2) limitations on the coverage were inconsistent with ORS 742.246; (3) Mid-Century should be bound to coverage based on oral representations by its agent; and (4) Summit was entitled to recover the costs of using its own employees and an outside audit to document its insurance claim. Held: The text of the "prior insurance" provision could only be plausibly understood to extend coverage for losses in the immediately preceding policy period-the "prior insurance" that had been displaced when the current period of employee dishonesty coverage began. ORS 742.246 applies only to standard fire insurance policies, whereas the policies in question were multi-peril policies. As for oral representations by Mid-Century's agents, those representations created no more than inferences or implications about the extent of coverage and were insuffcient, as a matter of law, to bind Mid-Century to terms that were inconsistent with the written policy. Finally, the trial court correctly granted summary judgment with regard to coverage for costs Summit incurred in substantiating its claim. Those costs were indirect consequences of the dishonest acts rather than the "direct loss" of business property, money, or securities.

         [298 Or.App. 166] DeVORE, J.

         This appeal arises out of an insurance claim by Summit Real Estate Management, LLC, (Summit) for losses resulting from eight years of embezzlement by its longtime bookkeeper. Summit was insured during that period under annual policies issued by Mid-Century Insurance Company (Mid-Century) that covered "direct loss" from employee dishonesty, so long as the loss was discovered within one year from the end of the policy period. Notwithstanding that one-year discovery period, the "employee dishonesty" coverage also included what is known as a "prior insurance" provision, whereby Mid-Century agreed to pay for losses that occurred "during the period of any prior insurance" and that would have been covered "except that the time within which to discover loss or damage had expired."

         The primary questions on appeal concern two different aspects of that employee dishonesty coverage. First, the parties disagree over the operation of the prior insurance provision. Summit argues that it provides continuous coverage for undiscovered losses dating back through multiple policy periods, while Mid-Century argues that "prior insurance" means immediately prior-in effect, a one-year lookback to the preceding annual policy period. Second, Summit argues that it was entitled to recover the costs of using its own employees and an outside audit to document its insurance claim, while Mid-Century contends that those costs were not "direct losses" within the meaning of the policies. The trial court agreed with Mid-Century on both issues, granted summary judgment in its favor, and denied Summit's cross-motion for summary judgment. We, too, agree with Mid-Century's construction of the policies, and we affirm the judgment.

         We view the evidence and all reasonable inferences that may be drawn from the evidence in the light most favorable to the party against whom summary judgment was granted-in this case, Summit. See OHSU v. Oregonian Publishing Co., LLC, 362 Or. 68, 78-79, 403 P.3d 732 (2017) (applying that standard when reviewing the grant of summary judgment in the context of cross-motions). Because this appeal turns primarily on the meaning of provisions [298 Or.App. 167] in insurance policies, which is a question of law, a relatively brief summary of the pertinent facts suffices to frame the issues.

         Summit is a real estate management and investment company. For nearly 20 years prior to the events giving rise to this action, Summit had worked with Mid-Century's authorized agent, Nielsen Insurance, Inc. (Nielsen), to procure insurance for Summit's business. Among other types of insurance, Summit and Nielsen discussed coverage for acts of employee dishonesty.

         In 2004, Nielsen procured that type of coverage for Summit under a multi-peril policy numbered 03494-37-34, which described explicitly a "policy period" that ran from August 1, 2004, to August 1, 2005. Given that, the declarations then stated,

"This policy will continue for successive policy periods as follows: If we elect to continue this insurance, we will renew this policy if you pay the required renewal premium for each successive policy period subject to our premiums, rules and forms then in effect."

(Boldface in original.) For the next three years, Summit paid the renewal premium and obtained employee dishonesty coverage under that same policy form (the "2004-08 Policy Form").

         Beginning on August 1, 2008, Nielsen procured insurance for Summit under Mid-Century Policy Number 60466-70-72, which utilized a different multi-peril policy form. Like the previous form, the declarations in each successive year described a 12-month "policy period," then stated that the policy would continue for successive policy periods if renewed. Summit paid the renewal premiums and, for annual periods through August 1, 2013, obtained "employee dishonesty" coverage as an additional "optional coverage" under that multi-peril policy form (the "2008-13 Policy Form").

         The 2008-13 Policy Form, which we later discuss in greater detail, provides that Mid-Century will "pay for direct loss of or damage to Business Personal Property and 'money' and 'securities' resulting from dishonest acts [298 Or.App. 168] committed by any of your employees acting alone or in collusion with other persons," but that Mid-Century will "pay only for covered loss or damage discovered no later than one year from the end of the Policy Period." Those provisions are then followed by a paragraph governing "prior insurance." That paragraph obligates Mid-Century to pay for loss sustained "during the period of any prior insurance that you could have recovered under that insurance except that the time within which to discover loss or damage had expired," if (1) the optional employee dishonesty coverage "became effective at the time of cancellation or termination of the prior insurance" and (2) the loss would have been covered if the optional coverage had "been in effect when the acts or events causing the loss or damage were committed or occurred."

         In July 2013, Summit discovered that its bookkeeper, Rodney Chun, had been embezzling from the company. Summit immediately notified Nielsen, which in turn notified Mid-Century of Summit's claim of loss resulting from employee dishonesty. Mid-Century informed Summit that it would need to provide documentation verifying the embezzlement loss, and Nielsen advised Summit that an audit by an accounting firm would be the best and most effective means of complying with the documentation requirement. Summit engaged Williamson & Associates, LLP, an accounting firm, to perform an audit to determine the scope of the embezzlement. The audit determined that, between February 2005 and July 2013, Chun had stolen at least $856, 700.

         Summit submitted a formal proof of loss to Mid-Century, including a copy of the audit report. Summit sought reimbursement for the $856, 700 that had been embezzled, for $25, 245 that it paid for the audit, and for $8, 000 in employee time spent investigating the embezzlement and assisting Williamson & Associates with the audit.

         In response, Mid-Century agreed to cover $327, 600 of Summit's claim, representing payment only for those funds that were embezzled after August 1, 2010. Mid-Century determined that, because the embezzlement was not discovered until July 2013, two policies had been implicated by "loss or damage discovered no later than one year [298 Or.App. 169] from the end of the Policy Period": the policy in effect from August 1, 2011 to August 1, 2012, and the policy in effect from August 1, 2012 to August 1, 2013. Mid-Century agreed to pay for losses that occurred during those periods and further agreed that, under the prior insurance provision in the policy in effect from August 1, 2011 to August 1, 2012, Summit was also entitled to recover for losses that would have been covered under insurance in effect for the policy period from August 1, 2010 to August 1, 2011. Mid-Century denied coverage for any embezzlement that occurred in previous policy periods (i.e., everything before August 1, 2010). Mid-Century also denied coverage for the amounts Summit sought for the audit and for its own employee time; as for those amounts, Mid-Century told Summit ...


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