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FOOTE v. FEDERAL INS. CO.

October 24, 1990

FOOTE, CONE AND BELDING COMMUNICATIONS, INC., Plaintiff,
v.
FEDERAL INSURANCE COMPANY, Defendant



The opinion of the court was delivered by: NORGLE

 CHARLES R. NORGLE, UNITED STATES DISTRICT JUDGE

 Before the court is defendant Federal Insurance Company's ("Federal") motion for summary judgment. For the reasons discussed below, the motion is denied.

 FACTS

 In 1972, plaintiff Foote, Cone and Belding Communications, Inc. ("FCB"), a corporate holding company for a number of marketing communications firms, hired James T. Arnold ("Arnold") to work as a field representative in one of its advertising offices. Before his employment with FCB, Arnold held a similar position at another advertising agency, Clinton E. Frank Company ("Clinton Frank"). Arnold was fired from Clinton Frank for embezzling $ 69,576.50 from a client account. To accomplish the embezzlement, Arnold had created a fictitious business to which he signed over company checks under the guise of expenses incurred for the client account.

 At the time Arnold was hired by FCB, two FCB employees were aware of his prior embezzlement: Louis Scott, an officer and chairman of the executive committee who had authority for hiring Arnold; and Edward Ratcliffe, an account supervisor for FCB who had previously been Arnold's supervisor at Clinton Frank. As a precondition to his employment at FCB, Arnold executed a promissory note in favor of Clinton Frank which states that its purpose is to repay "an indebtedness created by the fraud, embezzlement, misappropriation and defalcation of James Arnold while acting in a fiduciary capacity as an employee of Clinton E. Frank." Before his hiring at FCB, Arnold gave a copy of this promissory note to Scott.

 In 1973, Scott spoke with Norman Brown, who had just become general manager of FCB's Los Angeles office. Scott discussed with Brown the status and background of the employees in FCB's Los Angeles office. At that time, Scott told Brown that Arnold had a "problem" with a previous employer. *fn1" Federal does not assert that Brown was told about the specific nature of this "problem," and the court will not engage in speculation.

 In 1978, Scott spoke to Welton Mansfield, Arnold's immediate supervisor and an officer at FCB, and told him that Arnold had a problem with a previous employer. Mansfield claims that he was not given any details regarding the problem but was told to "be alert" and that Arnold had been discharged by his previous employer for cause. Federal does not assert that Mansfield was given the specifics of the "cause," and the court will not engage in speculation.

 On February 25, 1982 FCB obtained from Federal an Executive Risk Policy (the "Policy") which, among other things, provides coverage for losses incurred by FCB as a result of employee theft. According to Paragraph 4.6(B), the Policy excluded coverage for:

 
loss caused by an Employee if an elected or appointed officer of the Insured possesses knowledge of any act or acts of Theft, fraud or dishonesty committed by such Employee : (a) in the service of the Insured or otherwise during the term of employment by the Insured, or (2) prior to employment by the Insured provided that such conduct involved Money, Securities or other property valued at $ 10,000 or more. . . . [Emphasis in original.]

 Paragraph 4.16 of the Policy states that:

 
For the purposes of this policy and the exclusion contained in paragraph 4.6(b), knowledge by the Insured means knowledge possessed by a partner, director or an elected or appointed officer who is aware of the employment of a person and of that person's prior acts of Theft, fraud or dishonesty. [Emphasis in original.]
 
At the sole discretion of the Company [Federal], coverage may be extended to any individual upon written application by the Insured ...

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