In the recent decision of CP Food & Beverage, Inc. v. United States Fire Insurance Company, the U.S. District Court for the District of Nevada held that coverage was not available under a crime policy where the insured’s employees had defrauded the insured’s customers through misuse of customer credit cards. The decision makes important findings regarding the appropriate test for “direct loss” causation in a crime policy, and reaffirms the general principle that crime policies are not intended to indemnify insureds for their vicarious liability arising from employees’ theft of third parties’ property.
The Facts
CP Food & Beverage Inc. (“CP”) operated an adult entertainment club. Customers could purchase “funny money” to tip performers and service staff. The performers and service staff could turn the funny money back to CP for cash. Several employees of CP overcharged customers’ credit cards through various methods, including charging cards multiple times for the same bill; charging cards for alcohol which the employees kept for themselves; and charging cards for funny money which the employees kept and cashed in with CP.
After the scheme came to light, CP paid chargebacks to its customers’ credit cards totalling $768,617, both in response to its contractual requirements with the credit card companies and as part of an agreement with law enforcement. CP also incurred significant professional fees to investigate and resolve issues with law enforcement and customers.
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