WESCOTT ELECTRIC COMPANY v. CINCINNATI INSURANCE COMPANY
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE GENE E.K. PRATTER ON 3/8/2018. 3/8/2018 ENTERED AND COPIES E-MAILED.(sme, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
WESCOTT ELECTRIC COMPANY,
CINCINNATI INSURANCE COMPANY,
MARCH 8, 2018
This disheartening story of prolonged and significant employee theft presents a
straightforward case of contract construction where the plain language of the insurance policy
dictates the result.
Over the course of ten years, an employee of the Wescott Electric Company stole nearly
$3 million from Wescott. During that time, Wescott had four consecutive insurance policies
issued by the Cincinnati Insurance Company. Wescott discovered the theft during the policy
period of the fourth insurance policy, and Cincinnati paid the policy limit of $100,000 for a
single “occurrence” of employee theft.
Unsatisfied with its payout, Wescott brought this suit against Cincinnati, arguing (1) that
it is entitled to coverage not only under the fourth policy, but also under the third policy; and (2)
that the employee’s theft constituted more than one “occurrence” under either policy. Cincinnati
filed this motion to dismiss.
As to Wescott’s first argument, as discussed in greater detail below, the third policy
covered only those losses discovered “during the Policy Period,” and the third policy period
ended five months before Wescott discovered the theft. Therefore, the Court concludes that the
third policy does not provide coverage for Wescott’s loss; only the fourth policy does. As to the
second argument, again, as discussed below, the fourth policy defines one “occurrence” of
employee theft as “[a] series of acts whether or not related.” Therefore, the employee theft in
this case constituted only one “occurrence.”
Cincinnati’s motion to dismiss is therefore granted.
James Bryan, an employee of Wescott, stole nearly $3 million from the company
between 2003 and 2013. The theft was in bits and pieces, with Mr. Bryan stealing a few hundred
thousand dollars each year. During the last year of the scheme — the only period at issue in this
case — Mr. Bryan stole $700,000 worth of copper wire, which he sold for scrap.
The Insurance Policies
During the ten-year period of the theft, Wescott had four consecutive insurance policies
with Cincinnati. Each policy lasted for three years, and the parties refer to each policy by the
year it took effect.
The 2004 Policy and the 2007 Policy contain substantially the same
language. The 2010 Policy and the 2013 Policy are also substantially the same.
All four are discovery-based policies, meaning that coverage depends on when Wescott
discovered a given loss. However, the two sets of policies provide different discovery windows:
the 2004 and 2007 Policies provide coverage for any loss discovered up to a year after the policy
period, but the 2010 and 2013 Policies require a loss to be discovered during the policy period.
A. 2004 Policy and 2007 Policy
The 2004 Policy and the 2007 Policy provide coverage for losses discovered up to a year
after the policy period: “[Cincinnati] will pay only for covered loss discovered no later than one
year from the end of the policy period.” Am. Compl. Ex. A, Ex. B.
Wescott does not claim coverage under these policies, both of which ended well over a
year before Wescott’s 2013 discovery of Mr. Bryan’s theft. However, as explained below, these
policies are still relevant only because Wescott argues that the Court should reform the 2010
Policy to include the one-year discovery window found in the 2004 and 2007 Policies.
B. 2010 Policy and 2013 Policy
The 2010 Policy and the 2013 Policy each provide coverage for $100,000 per
“occurrence” of employee theft. In the two provisions most important for this case, the policies
(1) require that any loss be discovered during the policy period, and (2) define “occurrence”
1. Discovery Window
Unlike the one-year discovery window in the 2004 and 2007 Policies, both the 2010 and
2013 Policies require that any loss be discovered during the policy period. Specifically:
Coverage is provided . . . for which a Limit of Insurance is
[$100,000] and applies to loss that you sustain resulting directly
from an “occurrence” taking place at any time which is
“discovered” by you during the Policy Period . . . .
See Am. Compl. Ex. C, Ex. D (emphasis added). The policy period (and, therefore, the time to
discover a loss) for the 2010 Policy was January 31, 2010 to January 31, 2013. The policy
period for the 2013 Policy was January 31, 2013 to January 31, 2016. Wescott discovered the
theft on July 1, 2013 — after the end of the 2010 Policy.
2. Definition of Occurrence
Both policies define an “occurrence” of employee theft broadly:
(1) An individual act;
(2) The combined total of all separate acts whether or
not related; or
(3) A series of acts whether or not related;
committed by an “employee” acting alone or in
collusion with other persons, during the Policy Period
shown in the Declarations, before such Policy Period or
The Current Coverage Dispute
Once Wescott discovered the theft in July 2013, it informed Cincinnati.
Wescott initially argued that it was entitled to greater coverage, it now claims coverage only for
losses from the final year of Mr. Bryan’s theft — in other words, for the theft that occurred
during the last seven months of the 2010 Policy and the first five months of the 2013 Policy.
That final year breaks down as follows: Mr. Bryan stole over $300,000 from July 2012 to
January 31, 2013 (the last day of the 2010 Policy), and he stole roughly the same amount from
February 1, 2013 (the first day of the 2013 Policy) to July 1, 2013.
Cincinnati paid Wescott only $100,000, the limit for one “occurrence” of employee theft
under the 2013 Policy.
In August 2017, Wescott brought a claim for a single count for breach of contract against
Cincinnati in state court. Cincinnati removed to this Court in October 2017. In December, after
Wescott filed an amended complaint, Cincinnati filed this motion to dismiss.
STANDARD OF REVIEW
A Rule 12(b)(6) motion to dismiss tests the sufficiency of a complaint. To survive a
motion to dismiss, the plaintiff must plead “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). Specifically, “[f]actual allegations must be enough to raise a right to
relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The
question is not whether the claimant “will ultimately prevail . . . but whether his complaint [is]
sufficient to cross the federal court’s threshold.” Skinner v. Switzer, 562 U.S. 521, 530 (2011)
(citation and internal quotation marks omitted).
In evaluating the sufficiency of a complaint, the Court adheres to certain well-recognized
parameters. For one, the Court “must consider only those facts alleged in the complaint and
accept all of the allegations as true.” ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994).
Also, the Court must accept as true all reasonable inferences emanating from the allegations, and
view those facts and inferences in the light most favorable to the nonmoving party. See Revell v.
Port Auth., 598 F.3d 128, 134 (3d Cir. 2010).
That admonition does not demand that the Court ignore or even discount reality. “[T]he
tenet that a court must accept as true all of the allegations contained in a complaint is
inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.” Ashcroft, 556 U.S. at 678. If a claim
“is vulnerable to 12(b)(6) dismissal, a district court must permit a curative amendment, unless an
amendment would be inequitable or futile.” Phillips v. County of Allegheny, 515 F.3d 224, 236
(3d Cir. 2008).
Wescott is entitled to coverage for a single “occurrence” of employee theft under only the
2013 Policy. The Court reaches this conclusion in two steps. First, only the 2013 Policy
provides coverage because the theft was not discovered until after the 2010 Policy ended.
Second, under the 2013 Policy, only one “occurrence” of employee theft has transpired.
Only the 2013 Policy provides coverage.
Of the four insurance policies involved in this case, only the 2013 Policy provides
coverage. In this section, the Court’s analysis proceeds by process of elimination: the 2004,
2007, and 2010 Policies do not provide coverage.
A. The 2004 and 2007 Policies do not provide coverage.
Wescott concedes that the 2004 and 2007 Policies cannot provide coverage. See Resp. to
Mot. Dismiss ¶ 6. Both of these policies stated that Cincinnati “will pay only for covered loss
discovered no later than one year from the end of the policy period.” The policies ended in 2007
and 2010, respectively, and the theft was not discovered until 2013.
B. The 2010 Policy does not provide coverage.
The plain text of the 2010 Policy precludes coverage of losses discovered after the close
of the policy period, and the policy should not be reformed to include the larger discovery
windows expressly present in the 2004 and 2007 Policies.
1. The plain text of the 2010 Policy precludes coverage.
The 2010 Policy applies only to loss “which is ‘discovered’ by [Wescott] during the
Policy Period.” Am. Compl. Ex. C. The policy period ended on January 31, 2013, but the theft
was not discovered until July 1, 2013. By the plain language of the contract, the theft was
discovered 5 months too late for the 2010 Policy to provide coverage.
2. The 2010 Policy should not be rewritten to cover the theft.
Wescott seeks to avoid this straightforward rule by arguing that the Court should rewrite
the 2010 Policy to include the larger, one-year discovery window found in the 2004 and 2007
Policies: “[Cincinnati] will pay only for covered loss discovered no later than one year from the
end of the policy period.” If the 2010 Policy had included this one-year discovery window, then
it would have covered the theft, which was discovered only five months after the end of the 2010
Wescott argues that it reasonably expected the 2010 Policy to contain the same one-year
discovery window as the 2004 and 2007 Policies. The change to the stricter discovery rules in
the 2010 Policy, Wescott contends, “was never properly explained to Wescott and was simply
included in the 2010 Policy which consisted of hundreds of pages.” Resp. to Mot. Dismiss ¶ 8.
For two reasons, this contention is insufficient to rewrite the 2010 Policy.
2008 Notice to Policyholders
Cincinnati announced the change in discovery-based coverage in a 2008 “Notice to
Policyholders.” That notice stated, in part, that the discovery-based coverage rules were being
2008 Notice to Policyholders
Crime and Fidelity Coverage
This is a summary of the major changes to the Crime and Fidelity
Coverage Forms and related endorsements. . . .
The crime and fidelity coverage has been restructured. . . . A third
difference is between a discovery version of coverage versus a loss
sustained version. The difference between discovery and loss
sustained has to do with when coverage will apply and will not be
Am. Compl. Ex. C. Thus, two years before the change in policy language, Cincinnati announced
the shift in discovery-based coverage.
Wescott alleges that it never received the 2008 notice. Even taking this contention as
true, Wescott has not provided reason enough to reform the 2010 Policy to match its 2004 and
2007 predecessors, as discussed immediately below.
Pennsylvania Case Law
Pennsylvania case law on changes to insurance policies weighs against reforming the
2010 Policy. 1 As a general rule, “even the most clearly written exclusion will not bind the
insured where the insurer or its agent has created in the insured a reasonable expectation of
coverage.” Reliance Ins. Co. v. Moessner, 121 F.3d 895, 903 (3d Cir. 1997) (emphasis added);
cf. Robert E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 HARV. L.
REV. 961, 967 (1970) (“The objectively reasonable expectations of applicants and intended
beneficiaries regarding the terms of insurance contracts will be honored even though painstaking
study of the policy provisions would have negated those expectations.”).
Two Pennsylvania Supreme Court cases stand as guideposts for determining whether an
insured’s expectation of coverage is objectively reasonable, even when it is contravened by the
plain text of the insurance policy.
a) Standard Venetian Blind
In the first case, an insured sought coverage under a policy containing two clauses that
expressly excluded the insured’s losses from coverage. See Standard Venetian Blind Co. v.
American Empire Ins. Co., 469 A.2d 563 (Pa. 1983). The exclusions were found in lines (n) and
(o) of the policy’s exclusions section. Id. at 565. The insured argued that it had not read or
Wescott does not dwell on these cases, but the “reasonable expectations” rule is the only
way Wescott could possibly achieve the outcome it seeks — namely, for the Court to read
language from the 2004 and 2007 Policies into the 2010 Policy.
understood the exclusions. The court held that because the exclusions were “clearly worded and
conspicuously displayed,” the insured could not avoid their enforcement just by arguing that “he
failed to read” or “did not understand” them. Id. at 567.
In this case, the discovery period could not be clearer: “Coverage . . . applies to loss . . .
which is ‘discovered’ by you during the Policy Period” — not losses discovered up to one year
after the policy period. And the Cincinnati discovery period was far more “conspicuously
displayed” than lines (n) and (o) of an exclusions section at issue in Standard Venetian Blind: the
discovery period here was paragraph A.1, the very first paragraph, of the “Commercial Crime
Coverage Form.” See Am. Compl. Ex. C, Ex. D.
The second case refined the rule announced in Standard Venetian Blind. See Tonkovic v.
State Farm Mut. Auto. Ins. Co., 521 A.2d 920 (Pa. 1987). There, an insurer unilaterally limited
the scope of insurance coverage, against the specific request of an insured. The court sided with
the insured, holding that when an insured “applies and prepays for specific insurance coverage,
the insurer may not unilaterally change the coverage provided without an affirmative showing
that the insured was notified of, and understood, the change, regardless of whether the insured
read the policy.” Id. at 925.
Here, by contrast, Wescott has not alleged that it “specifically requested” the one-year
discovery window when it purchased the 2010 Policy. See id. at 925. Nor can Wescott allege
that it “never received a copy of the policy” before it went into effect. See id. at 924. Nor,
finally, can Wescott allege that Cincinnati waited to unilaterally change the policy language until
after Wescott had agreed to renew its insurance.
To the contrary, Cincinnati notified its
customers of impending policy changes as early as 2008 — two years before Wescott renewed
In sum, Pennsylvania law recognizes a “crucial distinction” between two types of cases:
(1) cases like Standard Venetian Blind, in which “the insured received precisely the coverage
that he requested but failed to read the policy to discover clauses that are the usual incident of the
coverage applied for”; and (2) cases like Tonkovic, in which “one applies for a specific type of
coverage and the insurer unilaterally limits that coverage, resulting in a policy quite different
from what the insured requested.” Tonkovic, 521 A.2d at 925.
Because this case falls decidedly in the Standard Venetian Blind camp, the Court rejects
Wescott’s request that the Court rewrite discovery window in the 2010 Policy. Only the 2013
Policy provides coverage in this case.
The entire theft was one “occurrence” under the 2013 Policy.
The Court finds three reasons why only one “occurrence” transpired under the 2013
Policy. First, as Wescott concedes, the plain meaning of “occurrence” found in the definition
section of the “Commercial Crime Coverage Form” demonstrates that Wescott suffered only one
Second, Wescott’s preferred definition of “occurrence,” located in a special
deductible endorsement, applies only to the endorsement itself. Finally, cases cited by Wescott
are unpersuasive because they analyze insurance policies containing provisions different from
those in the 2013 Policy.
A. The plain meaning of “occurrence” is undisputed.
“Where the language of an insurance policy is clear and unambiguous, it must be given
its plain and ordinary meaning.” 12th Street Gym, Inc. v. General Star Indemn. Co., 93 F.3d
1158, 1165 (3d Cir. 1996). Here, the 2010 and 2013 Policies limit coverage to $100,000 per
“occurrence” of employee theft, and define occurrence as follows:
Commercial Crime Coverage Form (Discovery Form)
(1) An individual act;
(2) The combined total of all separate acts whether
or not related; or
(3) A series of acts whether or not related;
committed by an “employee” acting alone or in
collusion with other persons, during the Policy
Period shown in the Declarations, before such
Policy Period or both.
Am. Compl. Ex. C, Ex. D. This definition is unambiguous: Mr. Bryan’s “series of acts” in
stealing the copper wire qualify as a single “occurrence” because they were “committed” by a
single employee — Mr. Bryan — both before and during the policy period. Even Wescott agrees
that this definition “limit[s] the amount of coverage for all thefts occurring during the 2013
Policy period to $100,000.” Mem. in Opposition to Mot. Dismiss, at 17.
B. A separate definition of “occurrence” in a special deductible endorsement applies only
to the endorsement itself.
Wescott argues that the Court should apply a different definition of “occurrence”
altogether. Wescott’s preferred definition of “occurrence” comes in the policy’s “Special Per
Occurrence Deductible Endorsement,” which reads:
Special Per Occurrence Deductible Endorsement
This endorsement modifies insurance provided under the
Crime and Fidelity Coverage Part
A. Special Per Occurrence Deductible
1. . . . [Changes the amount that Cincinnati will deduct per
occurrence] . . .
2. This endorsement does not apply to any of the forms listed in
Paragraphs a. and b.:
a. . . . Commercial Crime Coverage Form, A.
Insuring Agreements, 1. Employee Theft . . . .
For the purpose of this endorsement only, any definition of
“occurrence” is deleted in its entirety and the following
definition is added to:
3. Commercial Crime Coverage Form
“Occurrence” means all loss, damage, or a sequence of loss or
damage, casualties or disasters arising from a single happening
Am. Compl. Ex. D (emphases added).
Section A states that the endorsement does not apply to the Employee Theft section of the
Commercial Crime Coverage Form — the very section under which Wescott filed a claim for
Mr. Bryan’s theft. Wescott argues that the exclusion in Section A.2 (“This endorsement does not
apply to . . . Employee Theft”) applies only to Section A (entitled “Special Per Occurrence
Deductible”), not to Section B (entitled “Definition”). But the plain text of Section A.2 states
that the exclusion applies to the entire endorsement, not just one section of the endorsement.
To be sure, Section B states that the endorsement applies to (and alters) the definition
section of the Commercial Crime Coverage Form, including the definition of “occurrence.” But
that alteration is made “[f]or the purpose of th[e] endorsement only” — that is, for the purpose of
changing how Cincinnati calculates deductions and for no other purpose.
As a “Special Per Occurrence Deductible Endorsement,” this document changes how
Cincinnati calculates deductions, nothing more. It does nothing to alter — or render ambiguous
— the definition of “occurrence” for any other purpose.
C. Wescott’s case law is not on point.
Wescott argues that several cases from other jurisdictions support its contention that there
were multiple “occurrences” under the 2013 Policy. 2
For two reasons, these cases are not on point. First, none involved the “Special Per
Occurrence Deductible Endorsement” analyzed here. Second, and more fundamentally, these
cases all analyzed a dense thicket of relation-back provisions in their insurance policies. The
2004 and 2007 Policies in this case contain some of these provisions, including provisions for
See, e.g., Karen Kane, Inc. v. Reliance Ins. Co., 202 F.3d 1180, 1185 (9th Cir. 2000);
Spartan Iron & Metal Corp. v. Liberty Ins. Corp., 6 Fed. App’x 176 (4th Cir. 2001); Glaser v.
Hartford Cas. Ins. Co., 364 F. Supp. 2d 529 (D. Md. 2005); Basler Turbo Conversions, LLC v.
HCC Ins. Co., 601 F. Supp. 2d 1082 (E.D. Wis. 2009); Dataflow, Inc. v. Peerless Ins. Co., No.
11-CV-1127, 2014 WL 4881534 (N.D.N.Y. Sept. 30, 2014); ABS Clothing Collection, Inc. v.
Home Ins. Co., 41 Cal. Rptr. 2d 166 (Cal. Ct. App. 1995); E.J. Zeller, Inc. v. Auto Owners Ins.
Co., 2014 OH 4994, 2014 WL 5803028 (Ohio Ct. App. 2014); First United Methodist Church of
Stillwater, Inc. v. Phila. Indemn. Ins. Co., 2016 OK 59, 2016 WL 5724860 (Okla. Ct. Civ. App.
“Loss Sustained During Prior Insurance,” 3 “Loss Covered Under This Insurance and Prior
Insurance Issued by Us or Any Affiliate,” 4 and “Non-Cumulation of Limit of Insurance.” 5
But the 2010 and 2013 Policies do not include these relation-back provisions, and
Wescott has not argued that these policies should be reformed to include them. Because the
cases cited by Wescott do not respond to the questions posed by the unique set of policy
provisions in the 2010 and 2013 Policies, they do not change the answers.
8. Loss Sustained During Prior Insurance
If you, or any predecessor in interest, sustained loss during the period of any prior
insurance that you or the predecessor in interest could have recovered under that
insurance except that the time within which to discover loss had expired, we will
pay for it under this insurance, provided:
The insurance under this Condition is part of, not in addition to, the Limits of
Insurance applying to this insurance and is limited to the lesser of the amount
This insurance became effective at the time of cancellation or termination
of the prior insurance; and
The loss would have been covered by this insurance had it been in effect
when the acts or events causing the loss were committed or occurred:
This insurance as of its effective date; and
The prior insurance had it remained in effect.
9. Loss Covered Under This Insurance and Prior Insurance Issued by Us or Any
Affiliate: If any loss is covered:
Partly by this insurance; and
Partly by any prior cancelled or terminated insurance that we or any affiliate had
issued to you or any predecessor in interest;
The most we will pay is the larger of the amount recoverable under this insurance or
the prior insurance.
10. Non-Cumulation of Limit of Insurance: Regardless of the number of years this
insurance remains in force or the number of premiums paid, no Limit of Insurance
cumulates from year to year or period to period.
For the foregoing reasons, Cincinnati’s motion to dismiss is granted. An appropriate
BY THE COURT:
S/Gene E.K. Pratter
GENE E.K. PRATTER
UNITED STATES DISTRICT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?