Law Tanning Co LLC v. Westfield Insurance Company et al

Filing 38

ORDER signed by Judge Lynn Adelman on 12/6/18 denying Law Tanning's motion for summary judgment and granting in part and denying in part Westfield's motion for summary judgment. A Telephonic Status Conference is set for 1/15/19 at 11:00 AM to schedule further proceedings on Westfield's counterclaim alleging that Law Tanning breached the policy by failing to cooperate and by prematurely commencing this suit. The court will initiate the call. Counsel must call the court prior to the call at 414-297-1285 to provide contact information. (cc: all counsel) (jad)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
LAW TANNING CO., LLC,
Plaintiff,
v.

Case No. 17-C-1703

WESTFIELD INSURANCE COMPANY,
Defendant.

DECISION AND ORDER
Law Tanning Company, LLC, commenced this action in Wisconsin state court
against Westfield Insurance Company. It alleges that Westfield breached its duty to pay
Law Tanning for losses it sustained as a result of an embezzlement scheme perpetrated
by one of its employees. Westfield removed the case to federal court under the diversity
jurisdiction, 28 U.S.C. § 1332, and filed a counterclaim against Law Tanning. Before me
now are the parties’ cross-motions for summary judgment on the issue of whether Law
Tanning is entitled to coverage.
I. BACKGROUND
Law Tanning operates a small tanning business in Milwaukee, Wisconsin. In
June 2017, it discovered that its longtime office manager, Randy Draeger, had been
stealing from it by writing unauthorized checks to himself on the company’s account.
Over the course of 17 years, Draeger had written approximately 1,940 checks to
himself. The total amount he stole exceeded $2.8 million.
At the time that Law Tanning discovered Draeger’s scheme, it had commercialcrime insurance through Westfield that covered employee theft. The policy in force at

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the time of the discovery had a policy period that ran from August 31, 2016 to August
31, 2017. Westfield also issued Law Tanning an identical policy for the prior policy
period, August 31, 2015 to August 31, 2016. The policy limit for employee theft under
each policy was $25,000 with no deductible.
Upon discovering Draeger’s scheme, Law Tanning terminated him and filed a
claim with Westfield. In its claim to Westfield, Law Tanning reported that, between
August 31, 2015 and June 2017, Dragger had written checks to himself totaling
$568,226.69 and that, between April 2000 and August 31, 2015, Draeger had written
checks to himself totaling $2,281,884.31. Law Tanning also advised Westfield that
Draeger had repaid $711,840.70 to Law Tanning by surrendering the funds in his
company 401(k) account, and that therefore its total loss was $2,138,270.30.
In response to Law Tanning’s claim, Westfield determined that Draeger’s entire
scheme was a single “occurrence” within the meaning of the policy and that therefore
the most Law Tanning could receive under the policy was $25,000, the per-occurrence
policy limit. Law Tanning disagreed with this determination. It took the position that
every check that Draeger wrote to himself qualified as a separate “occurrence.”
Because Draeger never wrote a check greater than $25,000, Law Tanning believed that
the policy limit did not apply to its claim.
Under Law Tanning’s theory that every check qualified as a separate occurrence,
Law Tanning could only claim the losses that it sustained between August 31, 2015 and
August 31, 2017, which was the period within which Westfield’s policies were in force.
During this period, Draeger wrote 173 illegal checks to himself, totaling $568,226.69.
The remainder of the theft occurred prior to August 31, 2015, when Law Tanning was

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not insured by Westfield. The insurer immediately preceding Westfield was
Frankenmuth Mutual Insurance Company. Law Tanning’s policies with Frankenmuth did
not include coverage for employee theft. However, in its claim to Westfield, Law
Tanning argued that certain provisions of Westfield’s policy required it to pay for losses
sustained because of employee theft that occurred during the Frankenmuth policy
periods. Thus, Law Tanning believed that Westfield was required to reimburse it for the
entire loss sustained between April 2000 and August 31, 2015.
After Law Tanning exchanged letters with Westfield regarding its claim, but
before Westfield made a formal coverage decision, Law Tanning commenced this
action to establish coverage under the policy. Westfield filed a counterclaim seeking a
declaratory judgment establishing that it has no obligation to indemnify Law Tanning
beyond the $25,000 policy limit. Westfield’s counterclaim also alleges that Law Tanning
breached the policy by failing to cooperate with Westfield’s investigation into the claim
and prematurely commencing this lawsuit. As an affirmative defense, Westfield alleges
that it is entitled to a set-off in the amount that Draeger repaid Law Tanning following
the discovery of his theft.
The parties have filed cross-motions for summary judgment. In its motion,
Westfield contends that Law Tanning cannot recover more than $25,000 because its
entire loss was caused by a single occurrence, to which the policy limit of $25,000
applies. However, Westfield also contends that Law Tanning is not entitled to recover
even this amount. Here, Westfield notes that Draeger repaid Law Tanning more than he

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stole during the Westfield policy periods. Therefore, Westfield contends, Law Tanning
did not sustain any loss at all during those periods. 1
Law Tanning, in turn, seeks summary judgment on its claim. It contends that the
policy renders Westport liable for the entire amount that Draeger stole, less the amount
that Draeger eventually repaid.
II. DISCUSSION
Summary judgment is required where “there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). When considering a motion for summary judgment, I view the evidence in the
light most favorable to the non-moving party and must grant the motion if no reasonable
juror could find for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 255
(1986).
The primary issue raised by the present motions is whether Draeger’s 17-year
theft was a single “occurrence” or was made up of 1,940 separate “occurrences.” The
parties also raise issues concerning other policy provisions, and Westport raises the
issue of whether Draeger’s partial repayment prevents Law Tanning from claiming that it
suffered any loss during the Westfield policy periods. Because the definition of
“occurrence” affects the parties’ remaining arguments, I start with that issue.
With respect to all issues, the parties agree that Wisconsin substantive law
applies. Under Wisconsin law, a court interpreting an insurance policy must attempt to

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Westfield has not moved for summary judgment on its counterclaim alleging that Law
Tanning breached the policy by failing to cooperate and prematurely filing this suit.
Westfield states that it will pursue this counterclaim if I do not dismiss all of Law
Tanning’s claims pursuant to the current motion for summary judgment. See ECF No.
21 at 9.

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identify the intentions of the parties as expressed by the language of the policy. Day v.
Allstate Indem. Co., 332 Wis. 2d 571, 584 (2011). If words or phrases are susceptible to
more than one reasonable construction, they are ambiguous. Id. at 585. Any ambiguity
in the policy is construed in favor of the insured. Id.
A.

Definition of “Occurrence”
Westport’s policy provides that it will pay for loss resulting directly from theft

committed by an employee. Commercial Crime Coverage Form § A.1. The parties
agree that any loss caused by Draeger’s embezzlement would fall within this provision.
However, as is relevant here, the provision applies only to “loss [that the insured
sustained] resulting directly from an ‘occurrence’ taking place during the Policy Period
shown in the Declarations . . . which is ‘discovered’ [by the insured] during the Policy
Period shown in the Declarations.” Id. § A. For purposes of this policy language,
“occurrence” is defined as:
(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 . . . .
Id. § F.17.a. The coverage form states that “[t]he most [Westfield] will pay for all loss
resulting directly from an ‘occurrence’ is the applicable Limit Of Insurance shown in the
Declarations.” Id. § B. The limit of insurance shown in the declarations is $25,000.
Westfield contends that the entirety of Draeger’s 17-year theft counts as a single
occurrence because the policy defines all acts committed by a single employee, either
alone or in collusion with others, as a single occurrence. Law Tanning, in turn, contends

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that the policy’s definition of “occurrence” is ambiguous. Law Tanning notes that the
definition joins three items (“individual act,” “combined total of all separate acts,” and
“series of acts”) using the word “or,” and that therefore it is reasonable to interpret the
definition to mean that an occurrence can be any one of these three items. Law Tanning
then contends that Draeger’s theft consisted of 1,940 individual acts—one act per
check—and that therefore it is reasonable to view his theft as consisting of 1,940
“occurrences.”
Law Tanning’s interpretation is not reasonable because it leads to an absurd
result. Blasing v. Zurich American Ins. Co., 356 Wis. 2d 63, 70 (2014) (“insurance
policies should be given a reasonable interpretation and not one which leads to an
absurd result”); Olguin v. Allstate Ins. Co., 71 Wis. 2d 160, 165 (1976) (same). There is
no doubt that Draeger’s 17-year scheme comprised either many “separate acts” or one
“series of acts,” and that therefore it meets the definition of “occurrence” under either
prong (2) or prong (3). Under these prongs, the scheme would constitute one
“occurrence.” According to Law Tanning, however, the scheme could also reasonably
be viewed as comprising multiple “individual acts,” and therefore could also satisfy the
first prong of the definition 1,940 separate times. But accepting this possibility leads to
an absurd result: the exact same facts would constitute both one occurrence and many
occurrences. This is a contradiction. Either the scheme is one occurrence or it is
multiple occurrences; it can’t be both simultaneously. Cf. Ennis v. Western Nat. Mutual
Ins. Co., 225 Wis. 2d 824, 835 (Ct. App. 1999) (construing insurance policy to avoid
absurd result in which person is both insured and uninsured based on the same facts).
Thus, the only reasonable interpretation of the policy is one under which “individual act”

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means an isolated act of dishonesty by an employee. Under this interpretation, if the
employee commits one act of dishonesty and no others, he or she commits an
individual act; if the employee commits multiple acts, he or she commits either a number
of separate acts or a series of acts. In both cases, there is only one occurrence.
This interpretation is reinforced by reading the definition of “occurrence” as a
whole. By defining “occurrence” to include not only an individual act but also the
combined total of all separate acts and a series of acts by an employee, the policy
makes clear that a single occurrence includes all dishonest conduct by a single
employee (or group of colluding employees). Indeed, if Law Tanning’s interpretation
were accepted, there would be no reason to include prongs (2) and (3) in the definition.
If any single act within a set of multiple acts could be taken out of the set and deemed
an “individual act,” then the definition of “occurrence” would collapse into a single
meaning: every act committed by an employee would be a separate occurrence. Thus,
to give effect to the entire definition, both an isolated act of employee dishonesty and
multiple acts of dishonesty by the same employee must be treated as a single
occurrence. See Day, 332 Wis.2d at 585 (“An insurance policy is to be construed,
whenever possible, ‘so as to give a reasonable meaning to each provision of the
contract, and [] courts must avoid a construction which renders portions of a contract
meaningless, inexplicable or mere surplusage.’”).
Law Tanning contends that if Westfield intended to treat isolated acts and
multiple acts the same, then it should not have defined “occurrence” to include an
individual act. According to Law Tanning, Westfield should have defined “occurrence”
as only the combined total of all separate acts or a series of acts. (Br. at 7–8, ECF No.

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22.) But omitting “individual act” from the list, as Law Tanning suggests, might raise the
question of whether an isolated act is covered at all. That is, if the definition mentioned
only “separate acts” and “series of acts,” then it would be arguable that an employee
would have to commit at least two acts before his or her conduct could give rise to an
“occurrence.” Thus, including “individual act” on the list of occurrences provides
additional clarity. In any event, regardless of whether Westfield could have drafted the
definition even more clearly than it did, the fact remains that the definition as it stands is
susceptible to only one reasonable interpretation. Therefore, it is not ambiguous.
Law Tanning also suggests that the policy defines “occurrence” as both an
individual act and multiple acts so that Westfield has the option to use whatever
definition results in the least amount of coverage. (Reply Br. at 2, ECF No. 24.) Law
Tanning notes that because it purchased a policy with no deductible, Westfield’s
obligation to pay is minimized by treating all of Draeger’s acts as a single occurrence,
so that it must pay the policy limit only once. Law Tanning then speculates that if the
policy had a per-occurrence deductible, Westfield would be arguing that Draeger
actually committed multiple individual acts and therefore multiple occurrences, with the
result that Law Tanning would have to pay separate deductibles for every check he
wrote. But regardless of whether this is true, the fact remains that the only reasonable
interpretation is one in which multiple acts by a single employee are treated as one
occurrence. Thus, if the policy had a per-occurrence deductible, and if Westfield had
argued that Draeger’s scheme consisted of multiple occurrences, then I would have
rejected Westfield’s argument.

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Finally, I note that my interpretation is consistent with those of other courts that
have interpreted similar language in commercial-crime policies. See Wescott Elec. Co.
v. Cincinnati Ins. Co., 310 F. Supp. 3d 521, 527 (E.D. Penn. 2018) (finding definition
identical to Westfield’s unambiguous and that employee’s “series of acts” in stealing
copper wire qualified as a single “occurrence” because they were committed by a single
employee); Bethany Christian Church v. Preferred Risk Mut. Ins. Co., 942 F. Supp. 330,
334 (S.D. Tex. 1996) (“This policy language does not . . . distinguish between a single
act versus a series of acts. What is critical in the policy language is the sum total of the
loss caused by ‘dishonest acts committed by an “employee,” whether identified or not,
acting alone or in collusion with other persons. . . .’”); Employers Mut. Cas. Co. v. DGG
& CAR, Inc., 218 Ariz. 262, 264–65 (2008) (“[An employee’s] embezzlement, although
including a number of thefts, was a ‘series of acts,’ each one following the other. The
policy plainly considers the loss resulting from the embezzlement of a single employee
an occurrence, with an attendant $50,000 policy limit. The majority of courts in
interpreting similar policy language in corresponding factual situations have so
concluded.”).
For these reasons, I conclude that Draeger’s embezzlement scheme was a
single occurrence, and that therefore “all loss” resulting from that scheme is subject to
the per-occurrence policy limit of $25,000.
B.

Whether Law Tanning Incurred Any Loss
As discussed in the prior section, Law Tanning’s recovery for all loss resulting

from Draeger’s embezzlement is limited to $25,000. But Westfield contends that Law
Tanning is not entitled to recover even this amount because Draeger repaid Law

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Tanning more than he stole during the time period in which Westfield’s policies were in
force. Draeger stole $568,226.69 during this period, but he has since repaid
$711,840.70 by surrendering the funds in his company 401(k) account. Thus, argues
Westfield, Law Tanning did not sustain a loss during the policy period.
Westfield’s argument is flawed. The policy does not cover only those losses that
the insured sustained during the policy period. Instead, it covers any loss no matter
when it was sustained so long as it was discovered during the policy period (or the
extended period to discover a loss, which does not apply here) and resulted directly
from an occurrence that took place during the policy period. See Commercial Crime
Coverage Form § A. 2
Here, it is undisputed that Law Tanning discovered Draeger’s embezzlement
scheme and the resulting losses in June 2017, which was during Westfield’s 2016–17
policy period. Moreover, as just discussed, Draeger’s scheme amounted to a single
“occurrence.” That “occurrence” began in April 2000 and ended in June 2017. Thus, the
“occurrence” that caused Law Tanning’s entire loss took place, at least in part, during
Westfield’s 2016–17 policy period. No language in the policy provides that, when a loss
is caused by a single occurrence taking place partly during the policy period and partly
outside the policy period, Westfield will only pay for that part of the loss that is sustained
2

The full text of this provision appears below:
Coverage is provided under the following Insuring Agreements for which a
Limit Of Insurance is shown in the Declarations and applies to loss that
you sustain resulting directly from an “occurrence” taking place during the
Policy Period shown in the Declarations, except as provided in Condition
E.1.k. or E.1.l., which is “discovered” by you during the Policy Period
shown in the Declarations or during the period of time provided in the
Extended Period to Discover Loss Condition E.1.g.

Commercial Crime Coverage Form § A.

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during the policy period. To the contrary, other provisions of the policy confirm that the
entire loss will be covered so long as the occurrence took place partly within the policy
period. Specifically, Condition E.1.k.(1) sets out a procedure for settling a loss that
resulted from an “occurrence” taking place partly during the policy period and partly
during the policy period of prior insurance. 3 Because Westfield could not settle a loss
unless it was covered by the policy, this provision shows that a loss will be covered
even if it was caused by an occurrence taking place partly during and partly outside the
policy period. 4
3

This condition states:
If you “discover” loss during the Policy Period shown in the Declarations,
resulting from an “occurrence” taking place:
(a) Partly during the Policy Period shown in the Declarations; and
(b) Partly during the policy period(s) of any prior cancelled insurance that
we or any affiliate issued to you or any predecessor in interest;
and this insurance became effective at the time of cancellation of the prior
insurance, we will first settle the amount of loss that you sustained during
this policy period. We will then settle the remaining amount of loss that
you sustained during the policy period(s) of the prior insurance.

Commercial Crime Coverage Form § E.1.k.(1).
4

It is true that Condition E.1.k.(1) applies only when the prior policy was issued by
Westfield or one of its affiliates. But this does not alter the underlying point that a loss
will be covered in full even if it was caused by an occurrence taking place partly outside
the policy period. No part of the policy extends coverage to losses caused by an
occurrence taking place partly during a prior Westfield policy period. Rather, Condition
E.1.k.(1) assumes that a loss caused by an occurrence taking place partly outside the
policy period is already covered by the applicable insuring agreement (which in this
case is § A.1 of the commercial-crime form) and merely provides a settlement
procedure to use when a prior Westfield policy happened to be in effect during the prior
period. In contrast, another subpart of Condition E.1.k., in addition to providing a
settlement procedure, expressly extends coverage to a loss that the insured sustained
from an occurrence taking place entirely during a prior Westfield policy period but that
the insured did not discover until the current Westfield policy period. See Condition
E.1.k.(2). This difference shows that the coverage discussed in Condition E.1.k.(1) must
have been conferred by another policy provision. Here, that is § A.1 of the commercialcrime form.

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Because Westfield’s 2016–17 policy covers all losses caused by Draeger’s
scheme no matter when they were sustained (subject to the $25,000 policy limit),
Draeger’s partial repayment did not eliminate Law Tanning’s right to recovery. Draeger
stole a total of $2,850,111 from Law Tanning between August 2000 and June 2017 but
repaid only $711,840.70. Thus, Law Tanning sustained an actual net loss of
$2,138,270.30 directly from a single occurrence that took place and was discovered
during Westfield’s 2015–16 policy period.
C.

Remaining Arguments
In their briefs, the parties raise other arguments involving other policy provisions.

First, Westfield contends that Law Tanning cannot recover under Westfield’s 2015–16
policy because Draeger’s scheme was discovered during the 2016–17 policy period.
This argument is effectively moot, since no separate “occurrence” took place during the
earlier policy year and Law Tanning has not argued that it is entitled to “stack”
coverages from the two policy years and apply them both to a single occurrence.
Second, Westfield contends that its policy does not cover any occurrences that
took place entirely within the policy periods of policies issued by Law Tanning’s prior
insurer, Frankenmuth Mutual. Again, however, it is unnecessary to consider this
argument because I have found that this case involves only one occurrence and Law
Tanning has not argued that it is entitled to stack coverages from multiple policies.
III. CONCLUSION
For the reasons stated, IT IS ORDERED that Law Tanning’s motion for summary
judgment is DENIED.

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IT IS FURTHER ORDERED that Westfield’s motion for summary judgment is
GRANTED IN PART and DENIED IN PART. The motion is granted as to Westfield’s
claim that the most Law Tanning can recover under the policy is $25,000. The motion is
denied as to Westfield’s claim that Law Tanning did not suffer any covered loss at all.
FINALLY, IT IS ORDERED that a telephonic status conference will be held on
January 15, 2019 at 11:00 a.m. to schedule further proceedings on Westfield’s
counterclaim alleging that Law Tanning breached the policy by failing to cooperate and
by prematurely commencing this suit.
Dated at Milwaukee, Wisconsin, this 6th day of December, 2018.

s/Lynn Adelman
LYNN ADELMAN
District Judge

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