Printer Friendly

Must insured first prove prima facie case? An LLC is not an employee.

When an insured acquires an insurance policy the insured promises, among other things, to first prove that when presenting a claim for indemnity the insured will establish a prima facie (on its face) case that coverage is available. In Network F.O.B., Inc. v. Great American Ins. Co. of New York, Slip Copy, 2014 WL 3048369 (D.Minn.) the District Court for the District of Minnesota was asked to rule upon the motion for summary judgment by defendant Great American Insurance Company of New York (Great American) who claimed there were no facts that would support the claim.


This suit arose out of the theft of funds by non-party Laura Schwartz from her employer, plaintiff Network F.O.B., Inc. (Network). Schwartz worked for Network as a billing and bookkeeping clerk and, at all times relevant to the instant dispute, was classified as an independent contractor for tax purposes.

Schwartz's employment was initially governed by an Independent Contractor Agreement (2006 Agreement), which was signed by Network and Schwartz in her individual capacity. Schwartz established an LLC, LM ENT Services (LM ENT), which executed a new Independent Contractor Agreement (2009 Agreement) with Network. Schwartz engaged in numerous fraudulent transactions and stole approximately $183,000 from Network. Eventually Schwartz was convicted of six counts of theft by swindle.

Great American provided insurance coverage to Network for business, property and commercial operations pursuant to an insurance contract (Policy). The Policy provided coverage for "loss of or damage to money, securities and other property resulting directly from theft committed by an employee." Network tendered a claim to Great American for its losses resulting from the theft by Schwartz. Great American informed Network that the claim was not covered by the Policy because Schwartz was not an "employee" of Network within the meaning of the Policy.


Insurance Coverage

State law governs the interpretation of insurance policies. The parties agreed that Minnesota law governs this action. In Minnesota, the interpretation of an insurance policy is a question of law. Under Minnesota law, the insured has the initial burden of establishing a prima facie case of coverage.

The policy defines the key term "employee", since only theft by an employee is covered. It states that "'Employee' means: (1) any natural person: (a) while in your service and for the first 30 days immediately after termination of service ...; (b) who you compensate directly by salary, wages or commissions; and (c) who you have the right to direct and control while performing services for you ... [paragraph] (b) 'Employee' does not mean any agent, broker, factor, commission merchant, consignee, independent contractor or representative of the same general character not specified in paragraph 5.a."

Network argues that because Schwartz, a natural person, committed and was convicted of the underlying theft, the court need not consider the fact that her employment relationship with Network flowed through a corporate entity. It was undisputed that Schwartz established LM ENT as an LLC. Thereafter, Network and LM ENT executed the 2009 Agreement, which detailed their relationship and identified LM ENT as an independent contractor. Thus, the proper analysis is whether LM ENT--not Schwartz--was an employee of Network as defined by the Policy since the theft was by Schwartz acting as LM ENT.

The Policy provides coverage only for the activities of those workers who are natural persons. If all potential "employees" were natural persons, however, such a provision would be superfluous. The provision contemplates and rejects a definition of "employee" that includes non-natural entities, such as an LLC. As a result, LM ENT --as an LLC rather than a natural person --was not an employee within the scope of the Policy at issue in this case. Therefore, Network cannot establish a prima facie case of coverage. LM ENT is not, nor can it be, a natural person. Summary judgment is warranted.


If Network wanted coverage for the actions of Schwartz acting as LM ENT it needed a different policy than the one it purchased. It needed one that insured against theft by employees or by independent contractors retained to deal with the funds of the insured. It bought limited coverage and could not convince the trial court to stretch the meaning of the policy from "employee" to any person or entity that steals from it.

It took a certain amount of chutzpah (Yiddish for unmitigated gall) to argue that a limited liability company is a natural person and was intended to be insured by the insurer. The District Court simply refused to fall for the argument and simply read the policy as written.

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, "MOM and the Taipei Fraud;" "Zalma on Insurance Fraud--2013, "Zalma on California Claims Regulations--2013; "Rescission of Insurance in California--2013;" "Random Thoughts on Insurance", a collection of posts on his blog; "Zalma on Diminution in Value Damages--2013," "Zalma on Insurance," "Heads I Win, Tails You Lose," "Arson for Profit," and others that are available at lzalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma's new e-book, "Getting the Whole Truth" which is available at Getting-the-Whole-Truth_ p_254.html.

Specialty Technical Publishers publishes Mr. Zalma's book, "Insurance Claims: A Comprehensive Guide", where you can get additional details on this subject by purchasing the book in print or digital format at http://www.

Mr. Zalma's reports on World Risk and Insurance News' web based television programing, or at the bottom of the home page of his website at
COPYRIGHT 2014 CINN Group, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2014 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:ON MY RADAR
Author:Zalma, Barry
Publication:Insurance Advocate
Geographic Code:1U4MN
Date:Sep 29, 2014
Previous Article:Dipping your toe into the social media as an agent.
Next Article:Richtberg succeeds Fazioli as IIAANY president at 107th Annual Convention.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters