Federal Insurance Co. v. Axos Clearing LLC, No. 18-2653 (8th Cir. 2020)
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After Federal issued a Financial Institution Bond to COR, COR paid $2,080,000 to settle claims by investors that a former COR registered representative had conspired with others to defraud investors by carrying out a "pump-and-dump" scheme in a risky penny-stock called VGTel. COR then filed a claim with its liability insurer for VGTel and other settlement payments, which it later settled for $3,625,000 above the policy's deductible. COR also filed a claim under Federal's Bond to recover its losses for the VGTel settlements. Federal denied coverage and filed a declaratory judgment action.
The Eighth Circuit agreed with the district court that Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 854 A.2d 378 (N.J. 2004), stands for the proposition that, under New Jersey law, COR's payments to settle third-party liability claims based on an employee's dishonest acts directed at the third parties were not a direct loss under Insuring Clause 1.B of the Bond. Furthermore, the district court did not err in dismissing COR's Clause 1.D counterclaim because COR failed to show that admissible evidence would be available at trial to prove that the employee personally committed a covered dishonest act. Accordingly, the court affirmed the district court's judgment.
Court Description: [Loken, Author, with Shepherd and Erickson, Circuit Judges] Civil case - Bonds. The district court properly interpreted New Jersey law when it concluded that Axos's predecessor's payments to settle third-party claims based on an employee's dishonest acts directed at the third parties were not a direct loss under the Insuring Clause of the Financial Institution Bond at issue; nor did the district court err in dismissing Axos's counterclaim under a separate clause as Axos failed to show that admissible evidence would be available at trial to prove the employee personally committed a covered dishonest act.
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