Indiana Court of Appeals Applies “Dishonest Act” and “Unexplained Disappearance” Exclusions in Employer’s Claim That Former Employee Stole Missing Tools

Michael R. Giordano

Williams v. Pekin Ins., Inc. 

2024 WL 901885 (Ind. Ct. App. 2024) 

A contractor entrusted tools to its employee but demanded their return when his employment ended.  When the employee failed to do so, the contractor reported the tools as stolen and sued the former employee for replevin. The former employee returned some tools, but upon doing an inventory, the contractor contended that many tools were still missing. As a result, he submitted an insurance claim to the property insurer.   

Upon receiving the claim, the insurer investigated, including conducting interviews of the contractor’s owner and the former employee. The insurer could not determine whether the former employee stole the tools but concluded that the contractor’s loss was excluded under one of two exclusions, which are referenced in the reported decision as the “Dishonest Act/Entrusted Person” and “Unexplained Disappearance” Exclusions: 

  • Dishonest Act/Entrusted Person Exclusion – [The insurer] will not pay for a “loss” caused by or resulting from dishonest acts by anyone entrusted with the property.  
  • Unexplained Disappearance Exclusion – [The insurer] will not pay for a “loss” caused by or resulting from unexplained disappearance. 

The contractor sued the insurer for breach of contract claiming that the loss of the tools was covered.  The insurer moved for summary judgment based on the exclusions, which the trial court granted. On appeal, the contractor argued an issue of fact prevented the granting of summary judgment, as the burden of proof was on the insurer to establish the exclusions applied. The Court of Appeals, however, found that the contractor’s own contention—that the former employee stole the tools—demonstrated the “dishonest act” element of the Dishonest Act/Entrusted Person Exclusion. As a result, the insurer had only to prove that the former employee was a person “entrusted” with the contractor’s tools.  

While the contractor admitted it at first entrusted the former employee with its tools, the contractor argued the entrustment ended when the contractor demanded that those tools be returned.  The Court of Appeals rejected “such a narrow construction” and found that the exclusion required “nothing more than a ‘casual connection’ between the act of entrustment and the resulting loss.” Id. at *3. That the contractor “no longer had confidence” in the former employee, the Court of Appeals explained, “is irrelevant under the terms of the Policy. Thus, the Dishonest Act/Entrusted Person Exclusion applied, and the “Unexplained Disappearance” Exclusion did not need to be addressed. 

This decision demonstrates the common-sense application of the Dishonest Act/Entrusted Person Exclusion, which, as the Court of Appeals recognized, is meant to bar coverage for the insured’s “misplaced confidence” in another.