Simon Marketing v. Gulf Insurance Company
(2007) ___ Cal.App.4th ____, 07 C.D.O.S. 3781

Covered Property Provisions Of Business Theft Policy Did Not Cover Detrimental Economic Harm To The Insured Absent Distinct Physical Loss Of Property

The Court of Appeal, Second District, affirmed an order of the Los Angeles County Superior Court granting summary judgment in favor of the insurers, holding that the “Covered Property” provisions of the insured’s policies did not cover detrimental economic harm to the insured caused by the dishonest acts of an employee where such harm was unaccompanied by a distinct physical loss of property.

Gulf Insurance Company (“Gulf”) issued an insurance policy to Simon Marketing, Inc. and Simon Worldwide, Inc. (collectively referred to as “Simon”) providing that Gulf would “pay for loss of, and loss from damage to, Covered Property, resulting directly from the Covered Cause of Loss,” up to $500,000.00 with a $15,000.00 deductible. “Covered Property” was defined as “[m]oney,” “securities,” and “property other than money and securities.” “Covered Cause of Loss” was defined as “Employee Dishonesty” which in turn was defined as dishonest acts committed by an employee that “(1) [c]ause [Simon] to sustain loss; and also (2) [o]btain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions, or employee benefits earned in the normal course of employment) for: (a) [t]he ‘employee’’ or (b) [a]ny person or organization intended by the employee to receive that benefit.”

Federal Insurance Company (“Federal”) issued a similar insurance policy to Simon providing that Federal would be liable for “direct losses of Money, Securities or other property caused by Theft or forgery by any Employee of any Insured.” “Theft” was defined as the unlawful taking of money, securities or other property to the deprivation of the insured.”

Both policies contained a “loss of income” exclusion for Simon’s “inability to realize income that [Simon] would have realized had there been no loss of, or loss from damage to Covered Property.” The Gulf Policy also excluded “[p]ayment of damages of any type for which [Simon is] legally liable” and the Federal policy excluded fees, costs and expenses incurred in prosecuting or defending legal proceedings as well as any loss the proof of which involved a profit and loss comparison.

Simon provided marketing and promotional services to McDonald’s Corporation including designing the games “Who Wants to Be a Millionaire” and “Monopoly.” From 1988 to 2001, Simon’s director of security, Jerome Jacobson, was responsible for placing throughout the nation McDonald’s high-value winning game tickets. Without Simon’s knowledge, Jacobson organized a scheme to provide specific individuals with the winning tickets. Simon contended that Jacobson stole winning tickets valuing $21 million and received kickbacks from the winners. In August 2001, Jacobson was arrested by the FBI and eventually pled guilty.

After Jacobson’s conduct was exposed, Simon was involved in various lawsuits. The first consisted of several consumer lawsuits. This litigation settled without any contribution from Simon. The second was litigation between Simon and McDonald’s that settled with Simon receiving $15.6 million from McDonald’s and its insurer. The third type was an action brought by Stone Street Capital, Inc. against Simon, McDonalds and a Jacobson co-conspirator. Simon contributed $175,000 to the settlement of the lawsuit. The fourth type involved Simon incurring $50,000 in expenses defending a class action lawsuit in Canada.

Simon filed an action against Gulf and Federal seeking coverage under the policies for losses to property caused by theft or forgery committed by Simon’s employees. Specifically, Simon alleged damages from: 1) the complete loss of its business (estimated between $60 million and $100 million); 2) out-of-pocket expenses of $38.6 million in winding down its business; 3) payment of $175,000 to settle the Stone Street lawsuit; 4) defenses costs of $100,000 in the Canada class action and Stone Street action; 5) over $3 million in insurance proceeds paid in settlement of the class action that should have gone to Simon; and 6) Simon’s professional liability insurers paying in excess of $15 million for replacement game prizes. However, Simon admitted it was “not seeking reimbursement for the value of the pieces of paper which were the winning game pieces” because it was McDonald’s, and not Simon, that paid the winners that presented the pieces of paper.

Relying upon Vons Companies, Inc. v. Federal Ins. Co. (9th Cir. 2000) 212 F.3d 489, 491-492, the trial court found that the polices provided coverage for “direct losses” caused by employee theft and did not cover the insured’s vicarious liability for the tortious acts of its employee. The trial court held the Simon’s litigation costs associated with the lawsuits were not “direct losses” and were not covered. Simon timely appealed.

In affirming the trial court’s decision, the Court of Appeal stated that the “threshold requirement for recovery under a contract of property insurance is that the insured property has sustained physical loss or damage.” The Court of Appeal clarified that the trial court’s reference to “direct losses” meant “physical damage to insured property.” The Court of Appeal further stated that the requirement that loss by “physical damage” precluded claims for detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property. Accordingly, the Court of Appeal held that the termination of Simon’s business, its settlement payments, defense costs and the costs of winding up its business did not constitute “physical damage to property” and, accordingly, the bulk of Simon’s claimed damages were excluded under both policies’ loss of income exclusion.

Finally, the Court of Appeal rejected Simon’s contention that the theft of the McDonald’s game pieces was a covered loss. The Court of Appeal noted that merely inserting the words “legal liability” into any employment dishonesty policy did not transform the policy into a liability policy. The Court of Appeal stated that while direct loss could be sustained as a result of an employee’s theft of property for which Simon was legally liable (i.e., as a bailee or trustee), there was no evidence establishing that Simon was a bailee or trustee. However, the Court of Appeal stated that even if it assumed that there was a covered loss as a result of theft of the game pieces, Simon’s claim still failed because it was McDonald’s, and not Simon, who paid for the stolen prizes. Accordingly, the Court of Appeal affirmed the trial court’s grant of summary judgment in favor of the insurers.

This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases. This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

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This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.