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Note: Federal Insurance Company issued a fidelity policy insuring Pacific Enterprises and its subsidiaries in the event of "direct losses of Money, Securities and other property caused by Theft or forgery by any identifiable Employee(s) of any Insured". The forgery coverage provision provided that the insurer "shall be liable for direct losses caused by forgery or alteration of, on, or in any check, draft, promissory note, bill of exchange or similar written promise, order or direction to pay a sum certain in money, made or drawn by, or drawn upon the insured". A subsidiary of the insured, Thrifty Corporation, permitted its own majority-owned subsidiary, FTM Sports Corporation, to use Thrifty's letter of credit facility. Under this arrangement, the sports company would submit applications for LCs through the. insured's subsidiary and would have four to six months to cover its obligations. An investigation by the insured into accounting irregularities by the sports company revealed fraudulent activities by an officer of the sports company. The officer had applied for commercial LCs for the purchase of inventory from two other corporations to which the officer had ties, forged documents that indicated goods had been shipped even though no inventory actually changed hands, and presented the forged documents to the paying bank which honored the drawings. Some of the proceeds were deposited in an account for the insured's subsidiary. The officer was convicted of forging and negotiating bills of lading in interstate commerce, and the insured's subsidiary and the sports company successfully sued the officer on various grounds. The fraudulent activities resulted in losses of US$39 million as found in several criminal and civil cases that resulted. The insured reported its loss to the insurer, but the insurer declined coverage for the forgery claim "on the ground that altered financial statements are not orders to pay money and that there was no direct loss of money or securities". It declined coverage on the theft claim "on the grounds that there was no theft loss, and since [the sports company] was not an insured and the thief was its employee, there was no theft by an employee of the insured". The insured subsequently sued the insurer for breach of contract, breach of implied covenant of good faith, and declaratory relief and the insurer moved for summary judgment. The U.S. District Court for the Central District of California, Collins, J., granted the insurer's motion for summary judgment, noting "that [the insured] failed to raise a genuine issue of material fact as to whether the funds [paying bank] advanced in response to the forged letters of credit directly caused the...increase in the [insured's subsidiary's] concentrated ac-count." On appeal, the U.S. Court of Appeals for the Ninth Circuit, Nelson, O'Scannlain and Kleinfeld, C.JJ., reversed the award of summary judgment. The appellate court observed that " the district court held that [ the insured] had the burden of proving the amount of its loss because that is the law in general liability insurance cases. However, it is often difficult to know the amount of an employee's misappropriations...".The appellate court found that though it was impossible to trace the proceeds of the LCs, "this should at most go to the weight of [the insured's] evidence, not function as a bar to its claims". Referring to the civil and criminal court findings that the fraud resulted in a US$39 million loss to the insured's subsidiary, it stated that "though not res judicata, these judgments are evidence of which judicial notice may be taken. The insured does not have to prove the exact amount of its loss to preclude summary judgment. Its evidence established a genuine issue of fact that the fraud caused [the insured] an actual loss in excess of its deductible ... ".

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