Wednesday, April 11, 2007
C.A.: Game Maker’s Losses Due to Employee’s Fraud Not Insured
By TINA BAY, Staff Writer
Damages suffered by the designer of McDonald’s “Monopoly” game pieces as a result of a former employee’s theft scheme were not direct losses covered under its property insurance policies, the Court of Appeal for this district ruled yesterday.
In a March 13 opinion ordered published yesterday, Div. Eight affirmed a summary judgment order by Los Angeles Superior Court Judge Ernest Hiroshige against Simon Marketing, Inc., which designed “Monopoly,” “Who Wants to Be a Millionaire” and other promotional games for McDonald’s and its franchisees.
Simon sued Gulf Insurance Company and Federal Insurance Company in the wake of litigation spawned by the fraud of former employee Jerome Jacobson.
Gulf and Federal had issued policies to Simon that provided coverage for losses resulting directly from the theft of property by its employees. Both policies specifically excluded from coverage any loss of business income due to the theft, as well as damages paid of any type for which Simon was “legally liable.”
Simon claimed that damages it incurred in connection with Jacobson’s theft of Mc Donald’s game pieces qualified as direct losses covered under its insurance policies.
From 1988 to 2001, Jacobson—then-director of security for Simon—was responsible for seeding high-value winning game tickets across the country in McDonald’s giveaway contests. Without his employer’s knowledge, Jacobson organized an illegal network through which he funneled high-value winning game tickets to specific individuals, who rewarded him with kickbacks.
The game pieces Jacobson stole had a total redemption value of nearly $21 million, according to Simon.
The FBI arrested Jacobson and other collaborators in August 2001. He ultimately pled guilty and was sentenced to prison.
After Jacobson’s fraud was exposed, Simon allegedly expended over $100,000 defending a class action suit in Canada and a suit filed by a capital company in Maryland state court. The company paid $175,000 to settle the Maryland case over $3 million to settle the class action. The class action settlement was funded by insurance proceeds, which were paid to McDonald’s.
In addition, Simon and McDonald’s settled consolidated consumer lawsuits filed in Illinois, with insurers funding the multimillion dollar settlement.
In its own lawsuit against McDonald’s after the fast food giant terminated its contract, Simon obtained $15.6 million in settlement money.
The company claimed in its suit against Gulf and Federal that its litigation defense costs and the $175,000 paid to settle the Maryland lawsuit were “covered losses” under the insurers’ respective policies. Also included in covered losses, Simon claimed, were the complete loss of its business that was worth an estimated $100 million, the $38.6 million it spent out-of-pocket to wind down operations, and the $3 million in insurance money paid to McDonald’s in the class action—which it claimed it should have received.
During discovery, Simon asserted it was not seeking reimbursement for the “value of the pieces of paper” that comprised were the winning game pieces Jacobson stole. Similarly, a deponent designated by Simon testified the company was not seeking compensation for the value of the stolen prizes.
Simon did not dispute the fact that McDonald’s, not it, was the one that paid any party who presented a winning game piece for redemption.
In opposing Gulf and Federal’s summary judgment motions, however, Simon contended that it “held” the game pieces stolen by Jacobson and therefore its losses were covered under the theory that it was a bailee or trustee for McDonald’s.
Rejecting Simon’s argument, Hiroshige held the insurers’ policies provided coverage only for “direct losses” caused by Jacobson’s theft and not Simon’s vicarious liability for Jacobson’s conduct. Simon’s litigation expenses fell into the latter category, Hiroshige said.
Writing for Div. Eight, Justice Madeleine Flier agreed.
“Simply put, it was McDonald’s, and not Simon, who paid for the stolen prizes,” Filer wrote.
“The fact is that, when it comes to the game pieces, Simon has in effect admitted that it suffered no direct loss of property,” he continued. “Obviously, if the game pieces had any value apart from the cost of the paper or materials, their value was their redemption value. But even if this were not so, it is true that the replacement contests were funded by McDonald’s…and not by Simon.”
Justices Laurence D. Rubin and Paul Boland concurred in the opinion.
The case is Simon Marketing v. Gulf Insurance Company, B188740.
Copyright 2007, Metropolitan News Company