Canada: Telamon: U.S. District Court Finds Insured's Vice-President To Be Independent Contractor Falling Outside Crime Policy's Employee Theft Coverage

Last Updated: April 27 2016
Article by David S. Wilson and Christopher McKibbin

In Telamon Corp. v. Charter Oak Fire Ins. Co., the U.S. District Court for the Southern District of Indiana held that a Vice-President of Major Accounts who provided management and marketing services to a telecommunications company was not an "Employee" within the meaning of the employee theft coverage afforded by its Travelers Wrap+ policy, but rather an independent contractor.

The Facts

The insured, Telamon Corporation ("Telamon"), is a telecommunications company headquartered in Indiana. Telamon installed telecommunications equipment for customers such as AT&T. The alleged defaulter, Juanita Berry, operated a one-person telecommunications consulting company, J. Starr Communications, Inc. ("J. Starr").

Pursuant to a Consulting Services Agreement dated June 1, 2005 between Telamon, Berry and J. Starr, and subsequent renewals thereof (the "CSAs"), J. Starr agreed to provide Berry's services to Telamon. The CSAs specifically provided that Berry provided these services as an independent contractor. Berry initially worked with Telamon as a senior sales consultant, primarily due to her existing relationship with AT&T. In 2007, Berry transitioned into an account management role, and oversaw sales and installation projects for AT&T and other accounts.

In 2009, Berry assumed the title of Vice-President of Major Accounts and, in that capacity, was the most senior representative of Telamon's Dayton, New Jersey facility. Consistent with her title, she had "operational oversight" with respect to that facility, including engineering, installation, warehouse inventory management and other responsibilities. Telamon allowed Berry to hold meetings with clients, hire and fire Telamon personnel, set employee salaries and approve expenses. She also had access to Telamon's project accounting software, which permitted her to review and manage projects for which she was responsible.

Meanwhile, commencing in 2007, Berry spearheaded Telamon's "AT&T Asset Recovery Program", through which Telamon removed old telecommunications equipment from AT&T sites and returned it to Telamon facilities. Unbeknownst to Telamon executives, Berry also allegedly directed Telamon employees to package and ship the equipment to a Florida company known as WestWorld Telecom ("WestWorld").

In 2010, Telamon accounting personnel discovered unusual updates in Telamon's project accounting system, including purchases being charged to jobs for which the material charged was not compatible. These entries were traced back to Berry. A subsequent physical inventory of the Dayton warehouse revealed that a significant amount of telecommunications equipment was missing. Subsequent investigation revealed Berry's alleged diversion of this equipment to WestWorld, and payments by WestWorld to J. Starr, rather than to Telamon.

The Employee Theft Coverage

Telamon terminated Berry and submitted claims to its crime insurer, Travelers, and its property insurer, Charter Oak Fire, for over $5 million. Travelers declined coverage on the basis that Berry was not an "Employee" within the meaning of the crime coverage. The relevant portions of the definition provided that:

Employee means ...

any natural 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. ...

Employee does not mean

any ... independent contractor or representative or other person of the same general character not specified in paragraphs 1. through 5., above.

Travelers reasoned that the CSAs made it clear that Berry worked as an independent contractor, and that J. Starr could not reasonably be considered to be a labour leasing firm. Telamon disputed Travelers' position, contending that J. Starr was a labour leasing firm because it had provided Berry's consulting services to Telamon in exchange for payments; as Berry was a "leased employee", the exception for independent contractors could not apply.

On Travelers' and Telamon's cross-motions for summary judgment, the District Court rejected Telamon's contentions. The Court examined non-fidelity authority on the interpretation of the term "labor leasing firm", finding that it meant a company that is in the business of placing its employees at client companies for varying lengths of time in exchange for a fee. The Court concluded that J. Starr was not such a company:

There is nothing in the CSAs to support Telamon's interpretation of J. Starr as a labor leasing firm. The CSAs that governed Berry's employment identify J. Starr and Berry as the "Consultant" and "independent contractor," and expressly state that "[t]he personnel performing services under this Agreement [i.e., Berry] shall... not be employees of [Telamon]."

Moreover, the evidence establishes that J. Starr was a one-person consulting company in the business of selling telecommunications equipment to, inter alia, WestWorld Telecom. Indeed, Telamon's Chief Operating Officer, Stanley Chen, testified that J. Starr and Berry sold telecommunications equipment before, during, and after Berry's involvement with Telamon. Berry provided sales consulting services primarily aimed at Telamon's major client, AT&T. Thus, J. Starr was not in the business of providing employees to client companies in exchange for a fee and was not, therefore, a "labor leasing firm" within the meaning of the Travelers Crime Policy. Instead, Berry was an independent contractor pursuant to the terms of her employment with Telamon. Telamon even admits this fact. Therefore, Berry falls outside the coverage grant for theft by "Employees" under the Crime Policy. [citations omitted]

As a result, the Travelers policy did not afford coverage in respect of Berry's alleged acts.

Conclusion

Telamon provides a good illustration of the employee-independent contractor distinction found in most crime policies. The decision demonstrates the importance of assessing whether an alleged defaulter comes within the definition of "Employee" in a theft claim; here, Berry was held out by Telamon as a Vice President, and exercised considerable power over Telamon's operations and personnel, but performed these duties as an independent contractor. With more work relationships moving away from the traditional employment contract model, it is essential that fidelity claims professionals ensure that the precise legal status of the alleged defaulter's work relationship with the insured is established as part of the coverage analysis.

Telamon also provides specific guidance with respect to the meaning of "labor leasing firm" and, arguably, similar terms used in other fidelity coverages. Although J. Starr did, in the narrowest and most technical sense, supply its (only) worker to another company for payment, the Court rejected Telamon's attempts to characterize J. Starr as a labour leasing firm, instead focusing on the clear provisions of the CSAs to the effect that Berry served as an independent contractor, rather than as an employee. This finding is of assistance to fidelity claims professionals who are confronted with creative arguments which attempt to bring similarly-situated workers within the definition of "Employee".

Telamon Corp. v. Charter Oak Fire Ins. Co. and Travelers Cas. and Surety Co. of Am., 1:13-cv-382-RLY-DML (S.D. Ind. December 10, 2015) [Note: this decision recently came to our attention and does not appear to be accessible online; please contact us if you would like a copy.]

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Authors
David S. Wilson
Christopher McKibbin
Events from this Firm
8 Nov 2018, Conference, Toronto, Canada

This year’s program is entitled “An Analysis of Fidelity Claims for the Modern World.” The program will address important substantive and practical issues germane to today’s fidelity claims handling.

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