C.S. Mccrossan Inc. v. Fed. Ins. Co.

• Decision Date: 06 August 2019
• Docket Number: No. 18-1949,18-1949
• Citation: 932 F.3d 1142
• Parties: C.S. MCCROSSAN INC. Plaintiff - Appellant v. FEDERAL INSURANCE COMPANY Defendant - Appellee
• Court: U.S. Court of Appeals — Eighth Circuit

932 F.3d 1142

C.S. MCCROSSAN INC. Plaintiff - Appellant

v.FEDERAL INSURANCE COMPANY Defendant - Appellee

No. 18-1949

United States Court of Appeals, Eighth Circuit.

Submitted: March 14, 2019

Filed: August 6, 2019

Daniel J. Brown, Timothy J. Droske, DORSEY & WHITNEY, Minneapolis, MN, for Plaintiff-Appellant.

Anthony James, Joel Timothy Wiegert, MEAGHER & GEER, Minneapolis, MN, for Defendant-Appellee.

Before GRUENDER, BENTON, and GRASZ, Circuit Judges.

BENTON, Circuit Judge.

C.S. McCrossan Inc. sued Federal Insurance Company for coverage under a crime insurance policy. Both moved for summary judgment. The district court¹ granted the Company’s motion. C.S. McCrossan Inc. v. Federal Ins. Co. , 2018 WL 2180256 (D. Minn. Mar. 29, 2018). McCrossan appeals. Having jurisdiction under 28 U.S.C. § 1291, this court affirms.

I.

The Company issued McCrossan an insurance policy for "Employee Theft" and "Forgery":

(A) The Company shall pay the Parent Organization for direct loss of Money , Securities , or Property sustained by an Insured resulting from Theft or Forgery committed by an Employee acting alone or in collusion with others.

....

(D) The Company shall pay the Parent Organization for direct loss sustained by an Insured resulting from Forgery or alteration of a Financial Instrument committed by a Third Party .

(bolded words in original, defined in policy). The policy excluded from coverage certain loss "committed by any authorized representative of an Insured ." An Insured under the policy included McCrossan and its subsidiaries.

Blakeley Properties, LLC and Stewart Properties, LLC own commercial rental properties. Brookstone, Inc. and Valhalla Investments, Inc. were Blakeley’s and Stewart’s respective agents to "manage, operate, control, rent and lease" several properties.

Both hired Balderson Management, Inc. to manage these properties. Blakeley separately hired Balderson as well.

Balderson’s owner and principal, Cynthia Balderson, managed properties with the help of an "administrative person," as relevant here, her daughter Stephanie Castillo. Castillo was the primary user of Balderson’s property management system, the sole copy of which was on her computer. Unlike Cynthia, her duties (and authority) did not include signing checks from any accounts.

Castillo stole around $570,000 from Blakeley and $250,000 from Stewart over the course of several years. She created fake invoices in the property management system, printed checks (from Blakeley’s and Stewart’s accounts) payable to herself or for her benefit, manipulated the system to show payment to a vendor, and forged Cynthia’s signature on each check. She pled guilty to eight counts of theft by swindle and was sentenced to 80 months’ imprisonment. State v. Stephanie Lantgen Castillo , No. 27-CR-15-503 (Minn. Dist. Ct. Hennepin Cty. Nov. 23, 2015) (sentencing order).

McCrossan submitted a claim to the Company, seeking coverage under the "Forgery" and "Employee Theft" insuring clauses. The Company denied the claim. McCrossan sued for breach of the insurance policy. Both parties moved for summary judgment. The district court granted summary judgment to the Company. It concluded Stewart was not an Insured under the policy; Castillo was an authorized representative of Blakeley, precluding coverage under "Forgery;" and Castillo was not Blakeley’s employee, precluding coverage under "Employee Theft." McCrossan appeals.

II.

This court reviews de novo "the district court’s grant of summary judgment and its interpretation of state insurance law."

Grinnell Mut. Reinsurance Co. v. Schwieger , 685 F.3d 697, 700 (8th Cir. 2012). "The question is whether the record, viewed most favorably to the non-moving party, shows no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Volk v. Ace Am. Ins. Co. , 748 F.3d 827, 828 (8th Cir. 2014).

In this diversity action, Minnesota substantive law controls this court’s analysis of the insurance policy. Jerry’s Enters., Inc. v. U.S. Specialty Ins. Co. , 845 F.3d 883, 887 (8th Cir. 2017). This court is "bound by the decisions of the Minnesota Supreme Court" when interpreting Minnesota law. Integrity Floorcovering, Inc. v. Broan-Nutone, LLC , 521 F.3d 914, 917 (8th Cir. 2008). "If the Minnesota Supreme Court has not spoken on a particular issue, [this court] must attempt to predict how the Minnesota Supreme Court would decide an issue and may consider relevant state precedent, analogous decisions, considered dicta ... and any other reliable data." Id.

"The interpretation of an insurance contract is a question of law." Jerry’s Enters. , 845 F.3d at 887, citing Midwest Family Mut. Ins. Co. v. Wolters , 831 N.W.2d 628, 636 (Minn. 2013). Minnesota courts use "general principles of contract law" to interpret an insurance policy. Midwest Family , 831 N.W.2d at 636, citing Thommes v. Milwaukee Ins. Co. , 641 N.W.2d 877, 879 (Minn. 2002). The policy "must be construed as a whole, and unambiguous language must be given its plain and ordinary meaning." Id. , quoting Henning Nelson Constr. Co. v. Fireman’s Fund Am. Life Ins. Co. , 383 N.W.2d 645, 652 (Minn. 1986). "Provisions in an insurance policy are to be interpreted according to both ‘plain, ordinary sense’ and ‘what a reasonable person in the position of the insured would have understood the words to mean.’ " Id. , quoting Farmers Home Mut. Ins. Co. v. Lill , 332 N.W.2d 635, 637 (Minn. 1983). Exclusions are "construed strictly against the insurer." Syfco v. Encompass Indem. Co. , 761 F.3d 867, 871–72 (8th Cir. 2014), citing Thommes , 641 N.W.2d at 880. "An insured party bears the initial burden of demonstrating coverage, and the insurer then bears the burden of establishing an applicable exclusion." Restaurant Recycling, LLC v. Employer Mut. Cas. Co. , 922 F.3d 414, 417 (8th Cir. 2019), citing Midwest Family , 831 N.W.2d at 636.

A.

McCrossan seeks recovery for Blakeley’s and Stewart’s losses. The policy covers loss to an Insured. The Company admits Blakeley is an Insured.

Stewart, however, is not. An Insured includes McCrossan and "any Subsidiary ." Subsidiary is defined in the policy, as, in relevant part:

any entity while more than fifty percent (50%) of the outstanding securities representing the present right to vote for election of or to appoint directors, trustees, managers, members of the Board of Managers or equivalent positions of such entity are owned, or controlled, by the Parent Organization , directly or through one or more Subsidiaries .

While the policy was in effect, Stewart was wholly-owned by a McCrossan individual. Without citing authority, McCrossan argues Stewart is an Insured because it was not in a "materially different position" than other McCrossan-related entities the Company admits are covered. The policy’s language calls for ownership or control by McCrossan. Ownership and common management by McCrossan individuals, even McCrossan board members, does not meet this test. Because Stewart does not meet the policy’s definition of Subsidiary, it is not an Insured. See Depositors Ins. Co. v. Dollansky , 919 N.W.2d 684, 691 (Minn. 2018) ("We determine whether an insurance policy provides coverage by looking to the language of the insurance policy itself."). The district court properly granted summary judgment to the Company on McCrossan’s claims for Stewart’s loss.

B.

As for Blakeley’s loss, McCrossan claims coverage under the "Forgery" and "Employee Theft" insuring clauses.

The Company admits McCrossan met its initial burden to demonstrate coverage under the "Forgery" clause. The Company argues, however, that the "Authorized Representative" exclusion applies, which excludes from coverage:

loss or damage due to Theft , Forgery , Computer Fraud , Funds Transfer Fraud , Money Orders And Counterfeit Currency Fraud , Credit Card Fraud or other fraudulent, dishonest or criminal act (other than Robbery or Safe Burglary ) committed by any authorized representative of an Insured , whether acting alone or in collusion with others, provided that this Exclusion (A)(14) shall not apply to otherwise covered loss under Insuring Clauses (A), Employee Theft Coverage, or (I), Client Coverage, resulting from Theft or Forgery committed by an Employee acting in collusion with such authorized representative.

The parties dispute whether Castillo was an "authorized representative" of Blakeley, a term not defined in the policy.

The most relevant case is National City Bank of Minneapolis v. St. Paul Fire & Marine Ins. Co. , 447 N.W.2d 171 (Minn. 1989). There, an insured bank sought coverage under a bond after making a loan in reliance on fake stock certificates. Id. at 173. At issue was whether the insured bank complied with the bond’s requirement that "the Insured, its correspondent bank or other authorized representative" physically possess the certificates before making the loan. Id. at 174. The insured bank received the certificates after making the loan; another bank had them while the insured bank negotiated it. Id. The court concluded the lack of agency relationship precluded the other bank from being an "authorized representative" of the insured bank under the bond. See id. at 176. "It was a mere coincidence" that the other bank had the certificates while the insured bank negotiated the loan. Id. "[T]hus there was no act making [the other bank] an ‘authorized representative’ of [the insured bank]." Id. (agreeing with the trial court that the other, possessing bank "did not serve as an authorized representative of [the insured bank] in this transaction for the purposes of possessing the certificates as contemplated under the [b]ond").

This court is bound by the Minnesota Supreme Court’s instruction that "being an ‘authorized representative’ has an agency requirement." Id. Here, it is undisputed that Blakeley made Balderson its agent for property management, Blakeley knew Castillo worked at Balderson on its accounts, and Blakeley did not object to her working there....