(Article from Insurance Law Alert, September 2018)
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A Nevada federal district court ruled that a night club was not entitled to coverage under a commercial crime policy for losses arising from a theft scheme orchestrated by employees. CP Food & Beverage, Inc. v. U.S. Fire Ins. Co., 2018 WL 3993408 (D. Nev. Aug. 6, 2018).
CP operated a club where patrons could purchase “funny money” to tip waitresses or pay dancers who, in turn, gave the funny money back to CP in exchange for cash. After receiving multiple complaints, CP discovered that certain employees were overcharging customers’ credit cards and keeping the profits for themselves. CP paid chargebacks to customers’ credit cards and incurred substantial expenses in investigating and resolving the theft with both law enforcement and defrauded customers. CP sought coverage from U.S. Fire, which denied coverage on the basis that CP’s losses did not “result[ ] directly from theft” as required by the policy. In ensuing litigation, the court granted U.S. Fire’s summary judgment motion.
Addressing this matter of first impression under Nevada law, the court ruled that “direct means direct,” such that a loss is covered only if CP sustained a direct theft of its own property. The court rejected a proximate causation standard, explaining that “[i]f proximate cause were sufficient, that would render the word ‘directly’ superfluous.” Applying the “direct means direct” standard, the court concluded that there was no coverage because the employees stole money from the customers, not CP, and because CP’s losses were incurred indirectly through its restitution/disgorgement to customers and law enforcement. The court also held that CP’s investigative expenses did not result “directly” from the theft because CP undertook the investigation to demonstrate to law enforcement that the club owners were not involved in the scheme.