Passing Stolen Company Checks: Is it a Forgery, and When Does it Occur?

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1 Passing Stolen Company Checks: Is it a Forgery, and When Does it Occur? By Duane A. Daiker As the economy slows, employee theft is on the rise. Recent studies have shown that instances of employee theft are increasing, and that employee theft is one of the largest categories of property crime in the nation. 1 Savvy employers are protecting their financial interests with commercial crime coverage. Given the current trends, insurers are likely to find themselves facing an onslaught of commercial crime claims. This paper will examine one particular aspect of commercial crime coverage forgery of company checks. A quick perusal of on-line news services will show an increasing prevalence of employees, particularly bookkeepers and accountants, stealing and then forging company checks for personal gain. Relevant Policy Language The Insurance Services Office, Inc. (ISO) overhauled their standard form commercial crime policy language in 2000 to include employee dishonesty and forgery coverage. The relevant Insuring Agreement language provides as follows: 1. Employee Theft We will pay for loss of or damage to money, securities and other property resulting directly from theft committed by an employee, whether indentified or not, acting alone or in collusion with other persons. For the purposes of this Insuring Agreement, theft shall also include forgery. 2. Forgery Or Alteration a. We will pay for loss resulting from forgery or alteration of checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in money that are: (1) Made or drawn upon by you; or (2) Made or drawn by one acting as your agent; or that are purported to have been so made or drawn. A full copy of the Insuring Agreement is attached as Appendix A. 1 A study by Richard Hollinger, professor of Criminology at the University of Florida, is described in More consumers, workers shoplift as economy slows, USA TODAY, June 18, 2008.

2 Thus, Insuring Agreement (A)(1) appears to provide coverage for an insured s monetary losses resulting from an employee s theft, including an employee s forgery. Forgery, means the signing of the name of another person or organization with intent to deceive. See Insuring Agreement, F(7). Forgery does not mean a signature of one s own name signed with or without authority, in any capacity, for any purpose. See id. The Insuring Agreement also defines employee as [a]ny natural person... while in your service and for 30 days immediately after termination of service, unless such termination is due to theft or any dishonest act committed by the employee. See Insuring Agreement, F(5)(a)(1)(a). Thus, the definition of employee places an important temporal limitation on coverage, so the acts of former employees are only covered for 30 days following termination. Coverage for Use of Stamped Signatures: Is it a Forgery? Issues occasionally arise over the application of forgery coverage for stamped signatures. Traditionally such signatures have been applied by rubber stamps, but the more modern implementation is the use of computer-generated replica signatures. Such stamped or electronic replica signatures clearly stimulate efficiency in a commercial setting, but bring about their own practical issues. Businesses who fail to properly secure their signature stamp, whether physical or digital, can face claims of negligence when dealing with their own banks to try and recover lost funds from unauthorized checks bearing the signature stamp. However, those same businesses that cannot recover from their bank, may well be able to recover under their commercial crime policy. A federal district court has recently held that endorsing the name of another without actual authority constitutes a forgery under a commercial crime policy containing a definition of forgery that is virtually identical to the language of the ISO Insuring Agreement. See Great Am. Ins. Co. v. AFS/IBEX Fin. Servs., Inc., 2008 WL , at *10-12 (N.D. Tex. Jul. 21, 2008). A copy of Great American is attached to this paper as Appendix B. Great American involved a claim by an insured to recover losses stemming from checks issued by the defendant made payable to Charles McMahon Insurance Agency (the Agency ). See id. at *1. Charles McMahon, Jr. (the Agency s office manager and son of the Agency s owner) fraudulently induced the defendant to issue 127 checks made payable to the Agency and then endorsed the checks Charles McMahon Insurance Agency and deposited the funds into his own personal bank account. See id. at *2. McMahon had authority to endorse checks payable to the Agency and write checks out of the Agency s account for legitimate business purposes. McMahon, of course, did not have authority to endorse the fraudulently induced checks. See id. The issue in Great American was whether the checks were forged. The commercial crime policy in that case defined forgery as the signing of the name of another person or organization with intent to deceive; it does not mean a signature which consists in whole or in part of one s own name signed with or without authority, in any capacity for any purpose. Id. at *8. The Court held that McMahon: 2

3 did not engage in forgery under the [commercial crime policy] if he had actual authority to endorse Charles McMahon on the checks at issue in this case. However, if McMahon Jr. exceeded the scope of his authority, his endorsements were unauthorized and constitute forgeries. Id. at 11 (citing First Coppell Bank v. Smith, 742 S.W. 2d 454, 460 (Tex. Ct. App. 1987); Yeager v. U.S., 32 F. 2d 402 (D.C. Cir. 1929); Montana v. Richards, 906 P. 2d 222 (Mont. 1995); Territory v. Forrest, 27 Haw. 209 (Haw. 1923)). The Court found the uncontroverted evidence established that McMahon lacked authority to endorse checks procured by fraud in the name of the Agency. See id., at *12. While McMahon was an agent of the Agency with endorsement authority, the undisputed evidence showed that he exceeded the scope of his endorsement authority. See id. There was no issue that Agency did not explicitly or implicitly authorize McMahon to endorse the fraudulent checks on behalf of the Agency. See id. Accordingly, the Court entered summary judgment in favor of the insured. While Great American did not involve the use of a signature stamp per se, the applicable rule would seem to cover any such circumstances. An endorsement of a check by an employee who is exceeding his or her authority, falls within coverage for forgery. Thus, the unauthorized use of a signature stamp or digital replica signature will likely be found to be a forgery under the ISO Insuring Agreement. Coverage for Utterance by Former Employees: When Does the Theft Occur? The language of the Insuring Agreement provides coverage for losses caused by an employee of the insured. The definition of employee injects an interesting timing limitation for this coverage, stating as follows: 5. Employee : a. Employee means: (1) Any natural person: (a) While in your service and for the first 30 days immediately after termination of service, unless such termination is due to theft or any dishonest act committed by the employee; Insuring Agreement F(5) (emphasis added). Thus, there is a limited term of coverage for the actions of former employees, extending to 30 days following termination, so long as the termination is not a result of theft or a dishonest act. Particularly as it relates to the passing of forged checks, this time limitation can present serious coverage issues for the insured and raise coverage defenses for the insurer. In your 3

4 typical employment theft, the former employee no longer has access to company property following termination. Normally, the opportunity for theft of physical property is much diminished after termination. Stolen checks, however, present far more danger of postemployment loss. If a former employee steals blank checks prior to termination, such checks can certainly be forged and uttered at a later date, even well beyond the 30 day post-termination coverage window. The key question is: when does the theft (which includes forgery) occur? It depends on the trigger for the theft under the insuring language. Is the act of physically taking the blank (or possibly signed or stamped) checks a theft? In the traditional sense, yes, but perhaps not for purposes of the policy language. Theft of the checks with the signatures on them without presentment for payment or deposit would not appear to be covered. The Insuring Agreement defines theft as the unlawful taking of property to the deprivation of the Insured. See Insuring Agreement, F(20). Insuring Agreement (A)(1), however, requires theft of money, securities, or other property, and checks do not constitute money, securities, or other property, as those terms are defined. 2 Under a reasonable interpretation of the Insuring Agreement, a loss of money by theft has not occurred until the checks were presented for payment or deposit. As a result, a coverage defense will likely arise for the utterance of stolen checks that are not presented until more than 30 days following the former employee s termination. That analysis would not change simply because the checks were forged during employment. For purposes of Insuring Agreement (A)(1), the term theft includes forgery. Inclusion of forgery within the definition of theft, however, appears only to make clear that loss of money from theft by forgery by an employee, of course is covered under Insuring Agreement (A)(1). Given the definition of theft (the unlawful taking of property of the deprivation of the Insured), a reasonable interpretation of the Insuring Agreement is that a loss of money from theft by forgery could not have occurred until the stolen checks were presented for payment or deposit. Nothing in the express language of Insuring Agreement (A)(1) would suggest that 2 The Insuring Agreement limits money to currency, coins and bank notes in current use and having a face value, along with travelers checks, register checks, and money order held for sale to the public. The definition does not include blank business checks. Checks arguably could constitute other property, but other property is defined as any tangible property other than money and securities that has intrinsic value. There may be an argument that stolen checks that are stamped with an authorized signature have intrinsic value because the amount of the check could be filled in and then cashed. It is impossible, however, to quantify the intrinsic value of such property. Furthermore, the term intrinsic value, suggests that the loss of the property causes immediate loss of value to the insured, which is not the case with checks, regardless of whether the checks are forged. In fact, a stolen check may never be uttered and may never cause a loss. 4

5 inclusion of the term forgery within the definition of theft is intended to broaden coverage to include claims where the loss was not simultaneous with the theft by forgery. Such claims, however, would appear to be covered under Insuring Agreement (A)(2), which is an optional coverage that may not be available in all policies. Insuring Agreement (A)(2) provides specific coverage for loss resulting from forgery, but does not limit the loss to those caused by an employee thus providing a much broader scope of coverage. The interpretation of Insuring Agreement (A)(1) with regard to the timing of forgery is an issue that has yet to be addressed in a reported opinion, but may arise in claims handling particularly during these difficult economic times. Proposed Changes to Insuring Agreement A(1) 3 It seems highly unlikely that the intent of the Insuring Agreement A(1) was to include coverage for losses result from employee forgery for checks stolen during employment but negotiated more than 30 days following termination. However, claimants have argued that a forgery under A(1) is completed when a signature (or signature stamp) is affixed without authority to expand coverage under this section. Seemingly, this would overlap with option forgery coverage provided by A(2) and doesn t belong in A(1). That being the case, the language of the Insuring Agreement could be easily altered to preserve the true spirit of the language and clearly exclude unintended coverage. and The proposed changes include (new language is underlined for identification): 1. Employee Theft We will pay for loss of or damage to money, securities and other property resulting directly from theft committed by a person who at the time the loss is sustained is an employee, whether indentified or not, acting alone or in collusion with other persons. F. Definitions 7. Forgery means the signing of the name of another person or organization with intent to deceive coupled with the presentment of the forged instrument to another; it does not mean a signature which consists in whole or in part of one s own name signed with or without authority, in any capacity, for any purpose. 3 Many thanks to Gerald Carozza of Selective Insurance Company for the inspiration for this change, for drafting the proposed language, and for making these suggestions to the ISO for future updates. 5

6 This language would clarify that the loss must occur within the employment period (which includes an additional 30 days after termination), and precisely define a forgery as both the fraudulent signing and presentment of the instrument, eliminating the ambiguity in the current language. About the Author Duane A. Daiker is a partner in the Surety & Fidelity Practice Group at Shumaker, Loop & Kendrick, LLP in Tampa, Florida. Mr. Daiker practices extensively in the area of surety and fidelity claims, commercial litigation, and appeals. He is Board Certified by the Florida Bar as an appellate specialist. DUANE A. DAIKER Shumaker, Loop & Kendrick LLP 101 East Kennedy Blvd., Suite 2800 Tampa, Florida (813) ddaiker@slk-law.com 6

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