Expert Commentary

Policy Must Say What Insurer Means

Insurance policies are interpreted based on the wording of the policy rather than the unwritten intent of the underwriter who wrote the policy. When the language of a policy is clear and unambiguous, it will always be applied as written.


Claims Practices
March 2014

Certain Underwriters at Lloyd's, London, appealed the trial court's determination that Underwriters' insured, Cardtronics, Inc., suffered a covered loss under the policy that had to be paid without Cardtronics first exhausting its claims against responsible third parties. In Certain Underwriters at Lloyd's of London v. Cardtronics, Inc., 2014 Tex. App. LEXIS 2750 (Tex. App. Dist. 14 Mar. 11, 2014), a Texas appellate court was called on to resolve the issue.

Background

This commercial insurance coverage dispute arose from a theft of over $16 million from Cardtronics, which owned and operated automated teller machines (ATMs). The theft was committed by the former president of Mount Vernon Money Center (Mount Vernon), an armored car company. Under an "Armored Carrier Agreement," Cardtronics leased currency from Bank of America, N.A. (BOA), and made the currency available to Mount Vernon. Pursuant to an "ATM Management Service Agreement" between Mount Vernon and Cardtronics, Mount Vernon provided cash replenishment services to Cardtronics' ATMs. Mount Vernon was charged with picking up the currency from BOA, storing it in its vaults, and transporting it as needed to ATMs owned and operated by Cardtronics.

The Policy

An insurance policy styled as "Automated Teller Machine and Contingent Cash in Transit" insurance provided that Underwriters "will pay for loss of 'money' and 'securities' outside the 'premises' in the care and custody of a 'messenger' or an armored motor vehicle company resulting directly from 'theft', disappearance or destruction." The policy also covered additional risks, such as the risks of employee theft, forgery, or alteration of checks and other instruments, theft of money from Cardtronics' premises, safe robberies, computer fraud, funds transfer fraud, fraudulent money orders, and counterfeit paper currency.

A condition in the policy limited Underwriters' obligation to pay to only the amount of loss for contingent cash in transit that Cardtronics "cannot recover" under its agreement with an armored motor vehicle company or under any insurance carried either by that company or on behalf of its customers.

Facts

Mount Vernon's president was charged with bank fraud and conspiracy to commit bank and wire fraud. Upon discovery of the theft, Cardtronics quickly notified Underwriters of its loss. The Federal Bureau of Investigation (FBI) seized over $19 million from two Mount Vernon locations, and a receiver was appointed to oversee Mount Vernon's operations. The receiver filed a report showing that almost $50 million belonging to Mount Vernon's customers was missing from either Mount Vernon's vaults or its customers' ATMs.

In June, Cardtronics timely tendered proof of loss to Underwriters for over $16 million and requested payment. Nearly 1 year after Cardtronics' first request for payment, Underwriters notified Cardtronics in writing that the policy would not be paid until the completion of proceedings against Mount Vernon and its insurers so that "any shortfall in recovery" could be "conclusively determined." A few months later, Underwriters denied coverage.

A few months before the date it was contractually required to file suit, Cardtronics sued Underwriters under its insurance policy for breach of the policy, breach of the Texas Insurance Code, breach of the Prompt Payment Act, and breach of the duty of good faith and fair dealing. Both filed motions for summary judgment, and the trial court granted Cardtronics' motion. After the trial court's ruling, Underwriters paid Cardtronics $13,348,826.69, representing the $16,177,510 in cash stolen by the armored car company less the $5,000 deductible and the $2,823,683.31 distribution received by Cardtronics from the FBI-seized cash. Pursuant to Underwriters' subrogation rights under the policy, Underwriters requested that Cardtronics transfer to it "all [of its] rights of recovery against any person or organization for any loss [it] sustained and for which [Underwriters has] paid or settled." Cardtronics complied.

Analysis

The legal issue in this case is whether the terms of the insurance policy require the insured or the insurer to bear the loss caused by inevitable delays that occur when a potentially liable third party does not accept responsibility for a loss suffered by the insured and covered by its policy, as well as the costs and risks of pursuing such claims.

Underwriters contended that this provision "clearly" required Cardtronics to exhaust its remedies against those specified third parties before Underwriters would be required to pay any covered loss. Underwriters denied coverage based on subparagraph E.4.A of the policy, which provided that Underwriters would only pay "the amount of loss you cannot recover" from Mount Vernon or its insurers.

Texas courts interpret insurance policies according to the rules of contract interpretation. The court decides whether an ambiguity exists by looking at the contract as a whole in light of the circumstances present when the contract was entered into and by applying proper canons of construction.

The policy did not actually contain the word "exhaust" or any derivative thereof, although the parties agreed that it could have been drafted to contain such an explicit requirement. The policy did not require Cardtronics to carry any additional coverage for losses incurred in connection with an armored car company. Nor did it require Cardtronics to mandate that its motor carriers be insured.

By the policy's plain terms, Cardtronics was required to submit a proof of loss within 120 days of learning of the facts underlying that arrest. The policy then required Underwriters to accept or reject the claim within 45 days and pay it within 5 days of that decision. When Underwriters failed to do so, Cardtronics was obligated to bring suit within 2 years of learning of the facts leading to the arrest, if it was unable to recover its loss before that time.

Underwriters argued that the policy's use of the word "contingent" mandated the interpretation that Underwriters' liability under the policy was contingent on the ultimate inability of Cardtronics to recover some amount of its loss. All insurance is, by definition, contingent on the occurrence of some event.

The only duties expressly imposed on the policyholder in the event of a loss are those set forth in subparagraph E.1.G of the policy, titled "Duties in the Event of Loss." Nowhere in the policy—not even in this section setting forth the insured's duties in the event of a loss—did it state that Underwriters need not pay the loss unless there had been a final adjudication concerning the responsibility of specified third parties to pay for the insured's loss. Nor did the policy require the policyholder to institute suit or make a claim against a potentially responsible third party, nor did it contain any terms governing the recovery of expenses relating to seeking payment from a third party. It only required that the policyholder notify Underwriters of the loss; submit to an examination under oath if requested; provide a detailed, sworn proof of loss within 120 days of learning of the loss; and cooperate with Underwriters in the investigation and settlement of any claim.

Underwriters' alternative interpretation, that the policy's coverage would not be triggered until the amount of the loss was conclusively determined, was not reasonable. The policy did not require Cardtronics to exhaust its remedies against third parties such as Mount Vernon before filing suit against Underwriters or obtaining a recovery in such a suit. In the event that Underwriters must pay a claim before any third-party claims were resolved, Underwriters retained its subrogation rights and would be entitled to pursue such claims, subject to the distribution scheme set forth in the policy for any recovery.

Because the time limits contained in the policy could not be reconciled with a policy construction requiring Cardtronics to determine conclusively what it "cannot recover" from Mount Vernon and its insurers, the trial court did not err in concluding that Cardtronics had no duty to exhaust its remedies. Because coverage was triggered immediately, and Underwriters did not dispute that Cardtronics suffered a covered loss, Cardtronics' claim was immediately payable.

Conclusion

This is a lawsuit that could, and should, have been avoided. The insurer knew that its insured incurred a covered loss. It knew that the insured had exercised diligence in obtaining money from available sources. It knew that the thief was in jail, his corporation was in bankruptcy, and claims had been made to the bankruptcy court. It took the unusual position that it had no duty to pay until all possible sources of recovery had been exhausted without the word appearing in the policy. It knew that, if it paid, it would receive an assignment of all rights of recovery and could get back its money if possible. The policy wording used by the Underwriters needed to be rewritten if exhaustion was what was intended.


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