In today’s work world, it’s common to see more and more people working under contracts as opposed to full-time employment. The line between contractor and employee can become quite blurred, with a contractor performing the same duties as an employee. How does the use of a contractor impact insurance coverage for “employee dishonesty?” This question was recently addressed in a decision from the Ontario Superior Court of Justice.

Background

The employer is a landlord who owns a number of properties, She began to acquire properties in the late 1990s, and had originally hired a property management company to care for the properties in exchange for a percentage of rental income, plus expenses. Over time she decided she preferred to work with a property manager under her employ rather than being one of several clients of a larger property management business. She posted an ad for a property manager in 2008 and hired the employee in October of that same year. He was originally given a six-month contract, and subsequently signed additional contracts, providing for more pay as the employer’s property portfolio grew in size.

The employee’s tasks included collecting rent (often in cash) and depositing it into the employer’s bank account. He was also responsible for snow removal and repairs in the rental units. Since he did not own many of his own tools, the employer provided him with a company credit card. The employee would occasionally use the credit card for personal purchases. The employer did not approve of this, but tolerated it and took money to pay the personal expenses out of the employee’s monthly payments. She also loaned the employee money to purchase a truck, again taking payment for the truck out of the employee’s monthly payments.

The events of 2012

The relationship between the employee and employer began to deteriorate in 2012. She requested the employee stop using the corporate credit card for personal expenses, but he continued to do so. In July of 2012 the employee told the employer he had “lost” more than $11,000 in rental collections because they had “fallen off the back of his bike.” Following this, the employee asked for his responsibilities to be limited to maintenance. The employer agreed to this and hired another employee to collect rent (the “second employee”). It wasn’t long before things went south with this arrangement. In September 2012 the second employee reported that a number of tenants had claimed they already paid their rent, in cash, to the employee. Some of the tenants provided receipts for this. After the employer had determined the employee had stolen, she attempted to confront him, but learned that he had disappeared, emptying his office of all its contents, including furniture and the filing cabinets containing all business records.

Dealing with the insurance company

The employer reached out to her insurance broker with a view of making a claim for her losses on her policy. The employer had a difficult time accounting for how much had been stolen from her, but eventually calculated $149,208.54 in missing rents. The employee’s claim was denied, though, with the insurer determining the employee was not actually an employee, but a contractor. The employer’s dishonesty policy stated

“employee’ means a person “while in the regular service of the Insured in the ordinary course of the Insured’s business … and whom the Insured compensates by salary, wages or commissions and has the right to govern and direct in the performance of such service, but does not mean any… contractor”

The court did not agree with the insurer. In looking back at the genesis of the relationship between the employer and the employee, writing “From (the employer’s) perspective, she expected him to follow her direction, carry out the tasks assigned by her, and imposed reporting obligations on him. Certainly during the first phase of their relationship, that is how things unfolded. This evidence is consistent with the view that (the employer) was treating (the employee) as her employee, which she submits was her intention. I accept that this was her intention”

The court awarded the employer $58,761 for losses covered under the insurance policy, but did not find the insurer to be in bad faith, stating that a claim that succeeds after being initially denied is not in and of itself bad faith.

It’s natural to turn to an insurance company when faced with a financial loss. However, insurance companies may deny a claim, resulting in complex, technical and lengthy disputes. It’s important to make sure you have an experienced lawyer to help in situations such as this. The insurance team at HMC Lawyers provides coverage opinions and advice to our clients, both nationally and internationally, and actively represent our clients on coverage disputes. We have spent many years litigating insurance matters, and believe that the best advocacy for our clients is forward-thinking, while looking to avoid risk and explore all areas of resolution available to our clients. To discuss an insurance coverage matter or related dispute, call 1-800-480-3534 or contact us online.