Last December, the Quebec Court of Appeal set the record
straight regarding the number of occurrences under a fidelity
The decision dealt with an insured, Comité paritaire de
l'industrie des services automobiles de la région de
Montréal ("CPA"), which became aware of a fraud
committed by one of its employees: its director of financial
services and material resources created three different accounts in
which he deposited substantial sums qualified as vacation pay. He
then instructed a third party payroll company to issue cheques made
payable to him. From 1988 to 2009, nearly $2m were diverted.
CPA was insured by Northbridge General Insurance Corporation
("Northbridge") under a policy, which was renewed from
1998 to 2009. Each of the policies included fidelity coverage.
Following the discovery of the fraud, CPA notified Northbridge of
the loss and sought an indemnity under the policies' fidelity
coverage. When Northbridge denied coverage, CPA filed an
action in which it claimed the payment of an indemnity of over $1m,
representing the sums stolen by its employee during the multiple
At trial, Northbridge contended that the embezzled
money was excluded. According to the policies, the insurer
agreed to indemnify the insured for any loss of money due to the
actions of a dishonest employee who had the manifest intent to gain
financial benefits other than salaries, commissions, fees,
compensatory salaries or any other benefits earned by the employee
in the normal course of employment. As the embezzled money was made
out to the dishonest employee as vacation pay, Northbridge argued
that the loss was excluded.
This argument was rejected on the fact that the embezzlement of
funds by the employee was held not to have been perpetrated
"in the normal course of his employment". The trial judge
held that there was nothing "normal" in the planning and
execution of the scam.
Northbridge was however successful in arguing that CPA was only
entitled to one policy limit of $100,000 per occurrence on the
basis that the fraud constituted a single occurrence, even though
the employee's fraudulent actions were perpetrated over nearly
eleven years during which fidelity coverage was provided. The trial
judge concluded that the policy clearly and unambiguously
stipulated that a series of fraudulent acts will be considered as a
single occurrence, and awarded the insured the sum of $100,000.
Both parties appealed. CPA contended that the judge erred in
finding that the fraud constituted a single occurrence. Northbridge
argued that the trial judge erred in refusing to apply the
exclusion regarding financial benefits earned in the normal course
The Court of Appeal dismissed Northbridge's arguments. It
held that the exclusion could not apply to the dishonest act of an
employee which took advantage of his position in the insured's
organization to conceal the fraudulent deposits, but was rather
intended to prevent coverage for claims in cases of
employer-employee quarrels involving entitlement to salary,
commission or benefit, i.e. risks that are under the internal
control of the insured. As the so-called vacation pay at issue
constituted ill-gotten gains for the employee, they were found to
not be within the purview of the exclusion clause.
The Court of Appeal reviewed the policy and held that the
fidelity coverage offered one limit of $100,000 per occurrence.
"Occurrence" was defined as a "loss caused by,
or involving, one or more "employees", resulting from a
single act or a series of acts". The policy further
stipulated that "if an employee perpetrates many thefts or
diversions that are similar or related, or if more than one
employee are involved therein, [the insurer] will consider those
acts as a single loss" and contained a non-stacking
provision where an occurrence takes place in consecutive policy
periods. Accordingly, the Court found that the trial judge did not
err in awarding the indemnity of $100,000 to CPA.
In its reasons, the Court referred to the British Columbia Court
of Appeal decision in Kofsky v. Zurich Insurance Company,
2000 BCCA 664, which found that such a limitation to coverage is
just and reasonable since "[t]he risk that the insured may
be the subject of a long term scheme of fraud by an employee
properly belongs to the insured because the employer is in the best
position to prevent or discover employee dishonesty."
Consequently, CPA's appeal was also dismissed.
In light of this decision, you must as an employer keep your
eyes peeled, and check your fidelity coverage limits!
1 Excerpts of the policy were translated into
2 Comité paritaire de l'industrie des
services automobiles de la région de Montréal (CPA
Montréal) c. Société d'assurances
générales Northbridge (Lombard General Insurance
Company of Canada), 2015 QCCA 2039
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