Insurance Policy Exclusions: When an Employee Isn’t an “Employee”

May 5, 2017

Insurance policies are as much a part of everyday life as death and taxes. With homeowners’ policies, automobile policies, general commercial liability policies, and many others, individuals and businesses often operate with a sense that they are protected against every kind of mishap. However, insurance companies continually limit the scope of the coverage they will provide with exclusions. In Illinois, the interpretation of policy exclusions and, often, the question of whether the insured will receive coverage, is premised on whether the policy language is ambiguous. Indeed, many confused insureds are dismayed after receiving a denial letter from their carrier after filing a claim.

For instance, take the recent Seventh Circuit’s decision in Telamon Corp. v. Charter Oak Fire Insurance Co., et al.  In Telamon, Telamon had a series of consulting services agreements with J. Starr Communications and its sole employee and owner, Juanita Berry, from 2005 through 2011. Berry’s responsibilities at Telamon included asset recovery, where she was supposed to sell outdated telecommunication equipment to salvagers. Instead, Berry pocketed the profits of those sales, netting nearly $5.2 million dollars for herself. Telamon submitted claims to two of its insurers in order to recover its losses from Berry’s scheme. The first policy Telamon turned to was a crime insurance policy with Travelers Insurance. The second policy was a general commercial insurance policy with Charter Oak. Both of these insurers denied coverage, and Telamon brought suit against them.

The Seventh Circuit affirmed the district court’s holding that the Traveler’s crime insurance policy only covered theft by an employee. The Travelers policy’s definition of an employee included any person who “is leased to the insured under a written agreement between the insured and a labor leasing firm, while that person is subject to the insured’s direction and control and performing services for the insured.” While the court accepted that Berry was a person subject to a written agreement, the Court determined that J. Starr Communications was not a “labor leasing firm,” and therefore Berry was not an employee subject to the Travelers policy.

The Court then turned to the Charter Oak policy. While the court found that this loss would have been covered by the Charter Oak policy, it also fell into one of the policy’s exclusions, therefore excluding coverage. Specifically the Charter Oak policy contained an exclusion for criminal conduct committed by a person to whom the stolen property was entrusted for any purpose. Because the old telecommunications equipment was entrusted to Berry for the removal and selling of the equipment to salvagers, Berry’s conduct also fell into the policy’s exclusion.

Telamon’s inability to recover its losses from its insurance providers illustrates an important point that affects everyone looking to insure themselves. Prior to obtaining any insurance policy, the coverages and exclusions must be carefully examined. It may not be until many years after the purchase of a policy that insureds become aware that they were not covered from potential loss. It is for this reason that insurance policies should be reviewed by legal professionals. You will find these legal professionals at Rock Fusco & Connelly, LLC.