Motive Not Required for Dishonest Employee Recovery

December 31, 2002 (PLANSPONSOR.com) - A Federal appeals court ruled that a drug-testing company could collect on its dishonest employee insurance policy, despite no apparent intention to deceive.

The US 3rd Circuit Court of Appeals reversed a decision by Senior US District Judge John Fullam of the US District Court for the Eastern District of Pennsylvania that employer Scirex was not entitled to benefits after workers botched four clinical trials by fudging paperwork, according to a Legal Intellgencer story. Fullam ruled for the insurer, Federal Insurance.

The appeals judges said their decision held even though¬†the employees apparently had nothing to gain and honestly believed they were doing nothing wrong — because motive and intent are “irrelevant to the concept of dishonesty,” the judges ruled.

But, according to the Legal Intelligencer, the court upheld Fullam’s decision limiting coverage to $280,000 because the conduct by the Scirex nurses was a series of related events that amounted to a single “occurrence” for insurance purposes.

Flawed Observations

Scirex’s lawyer Joseph Roda argued that the nurses’ repeated failure to follow protocol and accurately record their observations ruined four enormous studies valued at $156,000 to $575,000, according to court documents. As a result, Roda contended, Scirex was entitled to recover up to the $280,000 policy limit for each study, for a total of $880,786.

But Federal Insurance’s lawyer, Alfred Putnam argued that even if the nurses’ conduct was covered, it was not a series of separate acts but a related course of conduct, according to court documents.

Chief 3rd Circuit Judge Edward Becker agreed, saying that the policy’s occurrence clause was designed to limit liability and that, in the insurance industry, the term “occurrence” is commonly understood to mean all loss caused by a single act or related events, the Legal Intelligencer said.

Becker said Scirex’s interpretation “would lead us to grant a separate recovery for each forged check passed as part of an employee’s forgery scheme, a result that has been squarely rejected.”

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