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Dataflow, Inc. v. Peerless Insurance Co.

United States District Court, N.D. New York

September 30, 2014



LAWRENCE E. KAHN, District Judge.


This matter, which arises out of a dispute regarding an insurance contract, returns to the Court on Plaintiffs Dataflow, Inc. ("Dataflow Inc."), Dataflow, LLC ("Dataflow LLC"), and Dataflow Reprographics, LLC's ("Reprographics") (collectively, "Plaintiffs"), and Defendant Peerless Insurance Co.'s ("Defendant") Motions for summary judgment. Dkt. Nos. 56 ("Defendant's Motion"); 56-36 ("Defendant's Memorandum"); 58 ("Plaintiffs' Motion"); 58-18 ("Plaintiffs' Memorandum"). Both sides filed Responses, and each replied. Dkt. Nos. 66 ("Defendant's Response"); 69 ("Plaintiffs' Response"); 79 ("Plaintiffs' Reply"); 81 ("Defendant's Reply"). For the following reasons, the Court grants in part and denies in part each Motion.


The material facts of this case are not in dispute. Dataflow Inc., Dataflow LLC, and Reprographics are three related legal entities under the same ownership. Dkt. No. 58-1 ("Plaintiffs' SMF") ¶ 7. Dataflow LLC and Reprographics are the product of smaller businesses acquired by Dataflow Inc. and then reincorporated separately. Id . ¶¶ 8-11. The businesses jointly engage in blueprint and microfilm services in New York and northern Pennsylvania. Dkt. No. 58-6 ("McCormick Affidavit") ¶ 2.

Plaintiffs hired Brian Steele ("Steele") to work in their accounting department in 2000. Pls.' SMF ¶ 13. Steele was promoted to Manager of Accounting of all three entities in 2005. Id . ¶ 14. Plaintiffs claim that Steele, while he held the Manager of Accounting position, stole approximately $1.2 million[1] from Plaintiffs' accounts through various means, including: (1) forging the owners' signature on checks; (2) creating an electronic version of an owner's signature to endorse checks for his personal benefit; (3) signing his own name to negotiate Plaintiffs' checks; (4) directing Plaintiffs' funds directly to his personal accounts using electronic automated clearinghouse transfers; (5) taking money from Plaintiffs' petty cash stores; (6) falsely claiming overtime hours and unused vacation time as time worked; and (7) using Plaintiffs' corporate credit cards to make personal purchases. Id . ¶¶ 20-30. Plaintiffs discovered this series of larcenies in March 2010 when Steele took a medical leave of absence. McCormick Aff. ¶ 20. Steele was promptly fired and charged with felony grand larceny and forgery, to which he pleaded guilty. Id . ¶¶ 20-21.

Some employees perform work for all three Dataflow entities, including the entire accounting department; these employees are compensated through a master account held by Dataflow Inc. Id . ¶ 8. Dataflow Inc., Dataflow LLC, and Reprographics all contribute funds to the master account that are then paid out to employees in a single paycheck. Id . ¶¶ 8-9; see also Dkt No. 58-7 ("McCormick Exhibits") at Exs. 1a, 2, 3. While Steele was a Dataflow employee, his salary was drawn from this master account. McCormick Aff. ¶¶ 8-9. A handful of employees only perform work for either Dataflow LLC or Reprographics and are therefore compensated by one paycheck bearing the respective entity's name. Def.'s Resp. SMF ¶ 18.

In October 2007, Plaintiffs bought insurance policies from Defendant for each of the three Dataflow entities. Pls.' SMF ¶ 1. The policies each lasted one year and covered, inter alia, loss resulting from employee dishonesty and theft. Id . ¶¶ 1-3, 5. The maximum recovery for each instance of employee dishonesty on each policy was $25, 000 for Dataflow LLC and Reprographics, and $75, 000 for Dataflow Inc. Def.'s SMF ¶ 23. Plaintiffs purchased identical policies in October 2008, and again in October 2009. Pls.' SMF ¶¶ 2-3. After discovering Steele's theft, Plaintiffs filed claims with Defendant seeking coverage for their loss. Id . ¶ 34. Defendant denied Plaintiffs' claims except for one instance of theft from Dataflow, Inc., and paid out the $75, 000 maximum for that instance. Id . ¶ 43. Plaintiffs then commenced this action in New York Supreme Court, Broome County, and Defendant removed the action to the Northern District of New York. Dkt. No. 1 ("Removal Petition").


A. Summary Judgment

Summary judgment is proper where "there is no genuine issue as to any material fact, " and "the movant is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). "An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Niagara Mohawk Power Corp. v. Hudson River-Black River Regulating Dist., 673 F.3d 84, 94 (2d Cir. 2012). If the moving party will not bear the burden at trial, it may, in order to meet its summary-judgment burden of production, either: (1) "submit affirmative evidence that negates an essential element of the nonmoving party's claim"; or (2) "demonstrate to the Court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim." Celotex, 477 U.S. at 330-32 (Brennan, J., dissenting). If the moving party carries its burden of production, the nonmoving party must raise some genuine issue of material fact; "metaphysical doubt as to material facts" is not enough. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). However, the burden of persuasion remains at all times with the moving party, who must affirmatively demonstrate entitlement to judgment as a matter of law. Celotex, 477 U.S. at 332.

B. Insurance Contract Coverage Disputes[2]

Under New York law, insurance contract disputes are treated as breach of contract claims, with some caveats. See MBIA Inc. v. Fed. Ins. Co., 652 F.3d 152, 158 (2d Cir. 152); Morgan Stanley Grp., Inc. v. New Eng. Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000). To the extent the parties' intent cannot be clearly inferred from the writing of a contract, terms are to be interpreted "according to common speech and consistent with the reasonable expectations of the average insured." Cragg v. Allstate Indem. Corp., 950 N.E.2d 500, 501 (N.Y. 2011). If any ambiguities in the contract terms remain, they must be resolved in favor of coverage. Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co., 314 N.E.2d 37, 39 (N.Y. 1974).


This action centers on several terms in the operative insurance Policies issued by Defendant to Plaintiffs. The parties disagree on: (1) whether Steele was an "employee" of Dataflow LLC and Reprographics; (2) whether Steele's scheme to steal and divert money from Plaintiffs' account constitutes one or multiple instances of employee dishonesty; (3) whether Plaintiffs' losses would nevertheless have been covered under other provisions of the Policies; and (4) whether other terms of the Policies limit Plaintiffs' recovery.

A. "Employee" and "Direct" Compensation

Under the section of the Policies entitled "Employee Dishonesty, " Defendant states that it:

will pay for direct loss of or damage to Business Personal Property, including money' and securities, ' resulting from dishonest acts committed by any of your employees acting alone or in collusion with other persons (except you or your partner) with the manifest intent to: (a) Cause you to sustain loss or damage; and also (b) Gain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee ...

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