James B. Lansing Sound, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa, a Pennsylvania Corporation

This is an appeal in a diversity of citizenship insurance case in which California law controls. James B. Lansing Sound, Inc. (“JBL”), a Delaware corporation with its principal place of business in California, appeals a judgment by the district court, sitting without a jury, denying recovery in JBL’s action for breach of its comprehensive employee dishonesty insurance policy against National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National”). The case was tried on stipulated facts pursuant to a Pre-Trial Conference Order limiting the issues of fact and law to be tried.

Two of JBL’s employees perpetrated a complex fraud on JBL, which sought recovery from National Union. The insurance company denied liability because it contend ed that JBL should offset amounts received from payments made by one of the employees to JBL for equipment fraudulently sold. The district court agreed and also subjected JBL’s losses to allocation with those under a second insurance company’s dishonesty policy. Finally, the court held that the measure of JBL’s loss was the cost to JBL to remanufacture the sound equipment, and did not include commissions paid to one of the defrauding…