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Overcoming Dishonest or Criminal Acts Exclusions in Insurance Policies

Many Tennessee businesses have commercial general liability policies, and many other types of policies and endorsements, which contain exclusions for any loss resulting from dishonest or criminal acts. These exclusions will most likely apply to employees, partners and directors of the business.

Sometimes, in insurance policy litigation, there is no way to defeat a policy exclusion for dishonest or criminal acts. For example, if the insurance company can prove that the loss resulted solely and exclusively as a result of the theft or other illegal conduct by an employee of the insured business, the insurance company will not have to pay the claim. Where, however, the loss could have resulted from both the dishonest or criminal act of an employee and some other concurrent cause, the insurance company may not be able to rely successfully on the exclusion.

While no published Tennessee opinion addresses a fact situation where there was a dishonest or criminal acts exclusion in an insurance policy along with concurrent causation (causation of a loss resulting from an employee’s dishonest or criminal conduct and some other cause), the opinion of the Supreme Court of Tennessee in Allstate Insurance Company v. Watts, 811 S.W.2d 883 (1991) would apply directly to such a case.

The Watts opinion is very significant because, in it, the Supreme Court rejected a “but for” or “chain of events” interpretation of a policy exclusion in favor of a concurrent cause interpretation.  To understand how a Tennessee court would analyze a dishonest or criminal acts exclusion in an insurance policy, you need to understand the significant facts of that case which were:

  • Crafton had a homeowner’s policy with Allstate
  • Crafton let his friend Cole back his truck partially into Crafton’s garage so that they could work on it
  • Crafton and Cole could not loosen a lug nut
  • Watts showed up with a welding torch
  • Before lighting his torch, Watts asked Crafton if there were any flammable materials in the garage
  • Crafton said “no”
  • Watts applied the welding torch to the lug nut
  • As Watts used the torch, sparks set fire to a pan of liquid under the truck
  • As Crafton tried to move the ignited pan, he spilled it on Watts
  • Watts was burned
  • Watts sued Crafton for being negligent because he told Watts there was nothing flammable in the garage and because he spilled the flaming pan
  • Crafton requested coverage from Allstate
  • Allstate filed a declaratory judgment lawsuit requesting that the court rule that the loss was not covered

The basis for Allstate’s claim that it should not have to provide coverage was a policy exclusion which excluded coverage for any loss “arising out of” the maintenance of any vehicle. The trial court held that Allstate had to cover the claim. The Court of Appeals of Tennessee held that Allstate did not have to cover the claim because, but for the fact that Crafton was engaged in the maintenance of the vehicle, Watts would not have been burned and no loss would have occurred.

The Supreme Court of Tennessee reversed the Court of Appeals. It pointed out that there were two concurrent causes of the loss:  The maintenance of the vehicle and Crafton’s negligence.  It agreed that, if the exclusion was interpreted using a “but for” or “chain of events” analysis, the loss would not be covered. That was so because, but for Crafton and Cole being engaged in maintaining Cole’s vehicle, Watts would never have been injured.

The Supreme Court expressly rejected the application of the “but for” or “chain of events” analysis to the exclusion at issue. It noted that exclusions in insurance policies had to be construed against the insurance company.  It then held that such an exclusion could not apply unless the insurance company could prove that the loss did not result “in substantial part” from a risk it covered.  In other words, Allstate had to provide coverage because the injury to Watts resulted, in substantial part, from the negligence of Crafton even though Watt’s injury would never have occurred if Crafton had not been engaged in conduct for which coverage was excluded.

Under Watts, where an employee of a business is involved in a dishonest or criminal act, but the loss is also substantially caused by some event which follows the employee’s conduct, there should still be coverage.