E. Udolf, Inc. v. Aetna Casualty & Surety Company

E. Udolf, Inc. (the store) (plaintiff) was a retail men’s-clothing store. The store’s only officer, director, and shareholder was Leonard Udolf, who was at the store 10 to 20 percent of the time. In Udolf’s absence, the store was run by Kenneth Auer, the store manager, who handled the store’s operations; Auer had the authority to hire and fire employees and was expected to report all activities to Udolf. An employee of the store, Lynn Bjork, misappropriated $6,000. In 1981 Anna Shukis, the store’s bookkeeper, discovered the misappropriations and informed Auer. Both Shukis and Auer were expected to report Bjork’s misappropriations to Udolf. Instead, Auer and Shukis allowed Bjork to make restitution for the $6,000 and remain employed. From 1981 through 1983, Bjork misappropriated an additional $48,715.08 from the store. Bjork was immediately fired by Auer under orders of Udolf. The store notified Aetna Casualty and Surety Company and Fire and Casualty Insurance Company of Connecticut (the insurers) (defendants) of the losses incurred from Bjork’s misappropriations. The insurers refused to indemnify the store because the store had imputed knowledge of Bjork’s previous misappropriation, which excluded coverage for Bjork’s misappropriation. The company sued the insurers. The trial court entered judgment for the insurers, reasoning that Auer and Shukis’s knowledge of Bjork’s 1981 misappropriation was imputed to the store, and any subsequent losses caused by Bjork’s dishonesty were excluded by coverage. The store appealed.