Applying Minnesota law, the United States Court of Appeals for the Eighth Circuit has held that a bank’s fidelity bond provides coverage for claims by third-parties alleging that a bank employee used their money in a fraudulent investment scheme. Avon State Bank v. Bancinsure, Inc., 2015 WL 3465985 (8th Cir. June 2, 2015).

A bank employee convinced two individuals to invest funds in what turned out to be scam. The employee misrepresented the nature of the transaction so that the investors would write checks directly to the bank. The employee then wired the funds to the source of the investment scam. After the investors realized they would not get their promised returns, they filed suit against the bank. A jury returned a verdict in their favor, finding that the employee had breached his duty to disclose material information about the investment and that he had done so while in the scope of his employment with the bank.

The bank sought coverage for the claim under its fidelity bond, which required the insurer to indemnify the bank for any “loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.” The bond covered only property “held by the Insured in any capacity” or “for which the Insured is legally liable,” and it required that the employee at issue act with “manifest intent . . . to cause the Insured to sustain such loss” or “to obtain improper benefit for the Employee or another person or entity.”

The court held that the bond affords coverage for the investors’ claim. The insurer argued that the bond covers only first-party losses and not third-party claims. The court disagreed, finding no such limitation in the policy language and noting that Minnesota courts have permitted bond coverage for an insured’s loss of third-party property in its possession and theft committed against a third party by the insured’s employee. The insurer also argued that the loss was not “direct” because the bank did not own or hold the invested funds and was not legally liable for them. The court rejected this argument, finding that the bank possessed the funds, even if briefly, when the investors wrote checks to the bank for amounts that were then wired to the source of the investment scam. The court also rejected the insurer’s argument that the employee failed to act with “manifest intent,” ruling that the employee acted with intent to obtain an improper benefit for himself. Finally, the insurer contended that the bank failed to comply with the bond’s proof-of-loss requirement. The court disagreed, finding that the bank complied with the bond’s six-month notification requirement by providing proof of loss within six months of the entry of the judgment. Moreover, the court held, even if the proof-of-loss was untimely, the bank had not been prejudiced by any delay.