Court Rules that “Direct Means Direct” in Crime Policy, Rejecting Proximate Cause Analysis

A Nevada federal district court has applied the “direct means direct” rule to conclude that losses an insured suffered from payment card chargebacks when certain employees made fraudulent charges on customers’ payment cards were only the “indirect” result of employee theft, and therefore not covered under the insured’s commercial crime policy.  CP Food & Beverage, Inc. v. U.S. Fire Ins. Co., No. 1:16-cv-02421-APG-GWF (D. Nev. Aug. 6, 2018).

The insured operated a club where patrons could buy “funny money” to tip waitresses and pay topless dancers.  In turn, the waitresses and dancers could redeem the “funny money” for cash from the insured.  Certain of the insured’s employees overcharged customers’ credit cards, including by charging for “funny money,” and then redeeming it for cash without the knowledge or consent of the cardholders.  After some customers complained to the police and disputed certain charges, the insured incurred hundreds of thousands of dollars in performing an investigation and ultimately paid $768,617.91 in chargebacks to customers.

The insured submitted a claim under its commercial crime policy, which covered “loss of or damage to ‘money’, ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee’, whether identified or not, acting alone or in collusion with other persons.”  The insured argued that because the employees exchanged the “funny money” for cash from the insured, and because the insured had to reimburse customers for the fraudulent credit card charges, the employees stole from the insured and the loss was therefore covered under the policy.  The insurer declined coverage for the claim.

In coverage litigation that followed, the court granted summary judgment in favor of the insurer, finding no coverage under the policy.  The court noted that “[c]ourts addressing similar policy language about a loss resulting directly from an employee’s theft have fallen into two camps,” with some “view[ing] the policy language as equivalent to a proximate cause analysis” while “[o]thers employ the ‘direct means direct’ rule.”  Noting the absence of binding precedent, the court predicted that Nevada would follow the “direct means direct” rule.  The court reasoned that the “policy’s plain language,” which covered “direct” loss, supported this view, and it noted that “[i]f proximate cause were sufficient, that would render the word ‘directly’ superfluous.”  The court then applied the “direct means direct” rule and found that the loss to the insured did not directly result from the employees’ theft, as there were intervening steps between the employees’ theft and the insured’s loss.  For that reason, the court found no coverage under the policy.


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