Insurance Coverage Update
May 2013
Illinois Federal Court Finds “Extended Period to Discover Loss” Terminates When
Substitute Employee Theft Coverage Becomes Effective
Midway Truck Parts, Inc. v. Federated Ins. Co.
(U.S. District Court—Northern District of Illinois)
By: Kelli A. Biggam
An Illinois Federal District Court recently interpreted
an “Extended Period to Discover Loss” provision in a
fidelity policy as unambiguously terminating coverage
as soon as substitute employee theft insurance
purchased by the insured becomes effective. Midway
Truck Parts, Inc. v. Federated Ins. Co., No. 11CV9060,
2013 U.S. Dist. LEXIS 20554 (N.D. Ill. Feb. 15, 2013)
(granting the insurer’s motion for summary judgment).
The insured, Midway Truck Parts, Inc. (“Midway”),
obtained a commercial lines policy from Federated
Insurance Company (“Federated”) with a “Crime and
Fidelity Coverage Part” effective October 6, 2008 to
October 6, 2009. Federated provided coverage for
employee theft discovered during the policy period or
during the period of time provided in the policy’s
“Extended Period To Discover Loss Condition.” Under
that provision, Federated would pay for loss sustained
prior to the effective date of the policy cancellation
and discovered by Midway within one year of
cancellation. But the extended period would terminate
if Midway obtained other insurance “replacing in
whole or in part” the Federated coverage.
Midway purchased an insurance policy from Travelers
Casualty and Surety Company of America (“Travelers”)
effective October 6, 2009 to October 6, 2010. On
September 30, 2010, Midway discovered that its
former employee stole money from Midway, who
notified both Federal and Travelers. Travelers paid
Midway its policy limit of $500,000, but Federated
declined coverage on the basis that Midway’s
coverage terminated under the Extended Period
provision on October 6, 2009 when Midway obtained
the Travelers coverage.
In Midway’s suit against Federated to recover the
remainder of its loss, the parties agreed that Midway
discovered its loss after Federated’s policy period, and
that coverage depended on the interpretation of the
“replace” language in the Extended Period provision.
The term “replace” was not defined in Federated’s
policy.
Federated argued that under the unambiguous
“replace” language, coverage terminated when
Midway obtained the Travelers policy because that
Travelers policy served as a substitute insurance
policy. Midway contended that the “replace” language
was ambiguous and could be interpreted as meaning
that coverage is replaced only when, during the policy
period, the insured elects to terminate the policy prior
to the scheduled expiration date and purchases
coverage from a second insurer. Under Midway’s
interpretation, the Travelers coverage did not
“replace” the Federated coverage because the
effective period of the Travelers policy was “separate
and distinct from Federated’s”. According to Midway,
the Extended Period therefore did not terminate once
Midway purchased the Travelers coverage.
The court granted summary judgment for Federated,
finding the “replace” language was unambiguous and
should be given its “plain, ordinary, and popular
meaning”. The court consulted Webster’s dictionary,
which defines “replace” as “to take place of: serve as a
substitute for or successor of: succeed, supplant.” The
court held that “the plain meaning of this provision
indicates that the Extended Period ends as soon as the
(former) insured purchases substitute employee theft
insurance and that substitute insurance becomes
effective.”
In rejecting Midway’s ambiguity argument, the court
noted that a term is not ambiguous simply because it
is susceptible of two interpretations. Both
interpretations must be reasonable, and the court
must construe the policy language “reasonably to
avoid absurd results.” The court believed Midway’s
interpretation of the language was unreasonable
because, under Midway’s interpretation, Federated
would be obligated to pay its policy limits for an
Extended Period where it collects no insurance
premiums at the same time the insured is paying
premiums to one of Federated’s competitors. In
contrast, the court found Federated’s interpretation
reasonable because Federated would not have to
© 2013 Aronberg Goldgehn. All rights reserved. The above material is intended for general information and promotional purpose s, and should not be
relied on or construed as professional advice. Under the Illinois Rules of Professional Conduct, the above information may be considered advertising
material. The transmission of this information is not intended to create, and receipt of it does not create, a lawyer -client relationship.
Insurance Coverage Update
cover Midway’s loss when Midway has employee theft
coverage with another carrier.
Comment: Midway is an example of courts’ use of
dictionaries such as Webster’s Dictionary or Black’s Law
Dictionary to provide definitions for undefined terms,
and courts’ focus on a term’s “plain and ordinary”
meaning. It is also an example of courts’ refusal to find
ambiguities where a proposed alternate interpretation
May 2013
of a policy term would generate “absurd results.”
If you have any questions about this Insurance Coverage
Update, please contact the author listed below or the
Aronberg Goldgehn coverage attorney with whom you
normally consult:
Kelli A. Biggam
[email protected] (312-755-3171)
© 2013 Aronberg Goldgehn. All rights reserved. The above material is intended for general information and promotional purpose s, and should not be
relied on or construed as professional advice. Under the Illinois Rules of Professional Conduct, the above information may be considered advertising
material. The transmission of this information is not intended to create, and receipt of it does not create, a lawyer -client relationship.