No. 05-579 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

2006 MT 344 

FRONTLINE PROCESSING CORP., 

Plaintiff, 

v. 

AMERICAN ECONOMY INSURANCE CO., 

Defendant. 

ORIGINAL PROCEEDING: Certified Question, United States District Court 

District of Montana, Butte Division 

The Hon. Sam E. Haddon, Presiding Judge 

COUNSEL OF RECORD: 

For Plaintiff: 

 Herbert I. Pierce, III, Jeffrey J. Oven, Bryan P. Wilson, Crowley, 

Haughey, Hanson, Toole & Dietrich, PLLP, Billings, Montana 

 

For Defendant: 

Carey E. Matovich, Brooke B. Murphy, Matovich & Keller, P.C., 

Billings, Montana 

 For Amicus Curiae: 

 Lawrence A. Anderson, Montana Trial Lawyers Association, 

 Great Falls, Montana 

Submitted on Briefs: June 1, 2006 

 Decided: December 27, 2006 

Filed: 

__________________________________________ 

Clerk 
 Justice Patricia O. Cotter delivered the Opinion of the Court. 

¶1 In April 2003, plaintiff Frontline Processing Corporation (Frontline), a credit 

card processing company, brought this action in the United States District Court for the 

District of Montana for breach of contract and violation of Montana’s Unfair Trade 

Practices Act. Defendant American Economy Insurance Company (American 

Economy) moved for partial summary judgment based in part on its argument that the 

definition of the term “direct loss” in the insurance contract at issue precluded Frontline 

from recovering many of the damages that it claims are covered and payable under the 

policy. The District Court denied summary judgment in July 2005, on the basis that 

there was no clear Montana precedent. 

¶2 By order dated September 27, 2005, and pursuant to M. R. App. P. 44, the 

United States District Court for the District of Montana, Great Falls Division, certified 

the following question to this Court: 

Does the term “direct loss” when used in the context of employee 

dishonesty coverage afforded under a businessowner’s liability policy, 

include consequential damages that were proximately caused by the alleged 

dishonesty, or is the construction of the term “direct loss” limited to those 

damages that directly result from the alleged employee dishonesty? 

¶3 We accepted the question in our order dated October 12, 2005, and for the 

reasons set forth below, we conclude that the term “direct loss” when used in the 

context of employee dishonesty coverage afforded under a business owner’s liability 

policy, means all losses proximately caused by an employee’s dishonesty. 

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BACKGROUND 

¶4 In accordance with M. R. App. P. 44, the United States District Court certified 

the facts set forth below in paragraphs 5-17. 

¶5 Frontline is a credit card processing company based in Bozeman, Montana. 

Chris Kittler is the owner and president of Frontline. 

¶6 Ron Reavis was employed as Frontline’s Chief Financial Officer until February 

2001. 

¶7 Frontline purchased a special Businessowner’s Policy (Policy) from American 

Economy in August 1999. At that time, Frontline also purchased $250,000.00 in 

optional coverage for employee dishonesty. 

¶8 During his employment at Frontline, Reavis was allegedly responsible for filing 

Frontline’s payroll taxes, corporate income taxes, and Kittler’s personal income taxes. 

¶9 Frontline claims that while employed at Frontline, Reavis engaged in dishonest 

acts such as forging Kittler’s signature on Frontline checks, using the company credit 

card for his own purposes, and deliberately failing to file Frontline’s payroll taxes and 

corporate income taxes. 

¶10 As a result of the alleged dishonest acts of Reavis, Frontline retained Heartland 

Business Intelligence (Heartland) to conduct a forensic examination of Reavis’s 

computer activities to determine the degree and extent of Reavis’s alleged theft. 

Frontline claims Heartland’s fees in the amount of $24,050.20 are covered under the 

Policy. 

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¶11 Frontline similarly retained Karen S. Runyon (Runyon) to perform a forensic 

handwriting analysis of certain Frontline checks to determine which ones, if any, 

Reavis forged. Frontline claims that the $3,812.50 fee for Runyon’s analysis is also 

covered under the Policy. 

¶12 Frontline also retained Galusha, Higgins & Galusha (Galusha) to investigate, 

evaluate, and rectify the financial situation that Reavis allegedly had caused. It claims 

that Galusha’s fees in the amount of $57,654.81 are covered by the Policy. 

¶13 Frontline also seeks coverage costs, interest, penalties, and fees assessed by the 

Internal Revenue Service (IRS) as a result of Reavis’s alleged deliberate failure to pay 

Frontline’s and Kittler’s taxes. 

¶14 The “employee dishonesty” coverage afforded by the Policy provides as follows: 

A. Employee Dishonesty 

i. We [American Economy] will pay for direct loss of or damage to 

Business Personal Property and “money” and “securities” resulting 

from dishonest acts committed by any of your employees acting 

alone or in collusion with other persons (except you or your partner) 

with the manifest intent to: 

1. Cause you to sustain loss or damages; and also 

2. Obtain financial benefit (other than salaries, commissions, 

fees, bonuses, promotions, awards, profit sharing, pensions or 

other employee benefits earned in the normal course of 

employment) for: 

a. Any employee; or 

b. Any other person or organization. 

(Emphasis added by the U. S. District Court.) 

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¶15 American Economy maintains that the costs, fees, interest and penalties assessed 

by the IRS, as well as the fees paid to Heartland, Runyon, and Galusha, are not “direct 

losses” within the meaning of the phrase, and are therefore not covered losses under the 

Policy. 

¶16 Frontline maintains that the Policy does afford coverage for costs, fees, interest 

and penalties assessed by the IRS, as well as fees paid to Heartland, Runyon, and 

Galusha because Frontline alleges these losses were proximately caused by Reavis’s 

dishonest conduct.1

 

¶17 For purposes of this certified question only, American Economy concedes that 

Reavis had “manifest intent” as defined in the Policy.

¶18 Based on these facts, the federal court certified the question to this Court. Under 

M. R. App. P. 44(c), this Court may answer a question of law certified to it by another 

qualifying court. Therefore, our review is purely an interpretation of the law as applied 

to the agreed facts underlying the question. Rich v. State Farm Mut. Auto. Ins. Co., 

2003 MT 51, ¶ 11, 314 Mont. 338, ¶ 11, 66 P.3d 274, ¶ 11.

DISCUSSION 

¶19 Frontline argues, among other things, that several jurisdictions have interpreted 

“direct loss” to mean all losses proximately caused by an employee’s dishonest activity. 

See, e.g., Jefferson Bank v. Progressive Cas. Ins. Co., 965 F.2d 1274, 1281 (3rd Cir. 

1992); Auto Lenders v. Gentilini Ford., 854 A.2d 378, 386-87 (N.J. 2004); Mid-

 

1 For purposes of this certified question only, American Economy admits these losses were 

occasioned by Reavis’s alleged dishonesty. 

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America Bank of Chaska v. American Cas. Co., 745 F. Supp 1480, 1485 (D. Minn. 

1990). It maintains that the disputed claimed expenses were losses proximately caused 

by Reavis’s actions. Frontline further avers that incurrence of the disputed claimed 

expenses was mandated by the policy’s investigation and mitigation of damages 

provisions. 

¶20 American Economy counters that the losses Frontline is claiming are 

consequential, not direct losses, and therefore are not covered by the policy. It relies on 

cases from jurisdictions that have expressly declined to apply a proximate cause 

analysis to the term “direct loss,” holding instead that a narrower standard was 

appropriate. See, e.g., Tri City Nat. Bank v. Federal Ins. Co., 674 N.W.2d 617, 625 

(Wis. App. 2003); RBC Mortg. Co. v. National Union Fire Ins. Co., 812 N.E.2d 728, 

733 (Ill. App. 1st Dist. 2004). American Economy further maintains that the disputed 

claims represent monies that Frontline owes to third parties, thus making them third 

party liabilities and not direct losses. Relying on Vons Companies, Inc. v. Federal Ins. 

Co., 212 F.3d 489 (9th Cir. 2000), and numerous other cases from the First, Fifth, Sixth 

and Seventh Circuits, American Economy urges us to adopt the Ninth Circuit’s rule that 

“direct means direct” and that in the absence of a third party claim clause, a policy 

covering “direct losses” does not provide indemnity for vicarious liability for tortious 

acts of a dishonest employee. Additionally, the insurer argues that the policy did not 

require Frontline to incur the expenses it is claiming. 

¶21 As noted above, the policy before us insures Frontline against direct losses 

caused by the dishonesty of its employees. Many jurisdictions have construed “direct 

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loss” or similar language in a fidelity bond or insurance policy. A fidelity policy, also 

known as an employee dishonesty policy, is a form of insurance in which the insurer 

agrees “to indemnify an employer against a loss arising from the lack of integrity or 

honesty of an employee . . . .” Black’s Law Dictionary 804 (Bryan A. Garner, ed., 7th

ed., West 1999). Under a liability policy, by contrast, the policy holder is insured 

against or indemnified for, vicarious liability to a third party claimant. RBC, 812 

N.E.2d at 733. The policy before us is clearly the former—i.e., it is an employee 

dishonesty, or fidelity, policy. See ¶ 7. 

¶22 The claims asserted by Frontline are for business expenses and losses it incurred 

as a result of its employee’s dishonesty. While American Economy equates the claims 

for which Frontline seeks recovery—those of the analysts, the accountants and the 

IRS—with the classic third party claims for which there would typically be no coverage 

under a fidelity policy, Frontline maintains that these are losses proximately caused by 

the employee’s dishonest conduct which the policy was intended to cover. We turn to 

the cases cited by the parties for guidance in answering this question. 

¶23 In Vons, upon which American Economy relies, Vons was insured for employee 

dishonesty by Federal Insurance Company. The policy coverage was limited to Vons’ 

direct losses incurred as a result of employee misconduct. An employee of Vons 

engaged in a dishonest act which resulted in Vons being sued by defrauded third 

parties. Vons settled these third party claims, and then submitted a proof of loss to 

recover the amount it paid in the settlement. Vons argued the loss from the settlement 

of the liability suit was a “direct loss” incurred due to the actions of the employee. 

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Vons, 212 F.3d at 490-91. The Ninth Circuit rejected this argument, finding that 

coverage did not extend to Vons’ liability settlement of third party claims for losses 

arising out of the tortious conduct of its employees. Vons, 212 F.3d at 492. The federal 

court continued that “direct means direct” and the third party claims were not direct. 

Vons, 212 F.3d at 492. 

¶24 Similarly, in Tri City Nat. Bank, employees of a branch of the Tri City Bank 

participated in a scheme to obtain fraudulent mortgage loans for insufficiently funded 

borrowers. Ultimately, these borrowers defaulted on the fraudulently-obtained loans, 

the scheme was discovered, and the mortgage companies sued Tri City to recover their 

losses. Tri City sought confirmation from Federal Insurance Company (Federal) that 

the fidelity bond in place covered Tri City for either judgments or settlements paid to 

the mortgage companies resulting from the fraud. Federal denied coverage on the 

ground that the bond covered only those losses “resulting directly from dishonest or 

fraudulent acts” of Tri City employees. Tri City settled the claims brought by the 

mortgage companies and then sought indemnity from Federal for the settlement 

amounts. Federal again denied coverage. Tri City, 674 N.W.2d at 617-20. 

¶25 The Wisconsin Court of Appeals noted that Tri City’s claimed losses arose from 

settlements with third parties and were not the direct result of its employees’ 

dishonesty; in fact Tri City’s liability to the mortgage companies did not come into 

being until nearly three years after the fraudulent conduct occurred. Tri City, 674 

N.W.2d at 623. See also Aetna Cas. & Sur. Co. v. Kidder, Peabody, 676 N.Y.S.2d 559, 

246 A.D.2d 202 (N.Y. A.D. 1 Dept. 1998) (If an employee’s dishonesty causes losses to 

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a third party, which then leads to litigation concluding in a judgment or settlement, the 

insured has not incurred a “direct loss” under a fidelity bond; the insured’s loss is 

“indirect.”); RBC; and Finkle v. St. Paul Fire and Marine Ins. Co., 2002 WL 1359672 

(D. Conn.) (not reported in F. Supp.2d). 

¶26 Here, unlike in the cases above, Frontline’s disputed claims are not the result of 

lawsuits by or settlements made to third parties. Rather, as argued by Frontline, they 

arise from costs incurred to investigate the extent of Reavis’s alleged dishonest conduct 

and to mitigate and remedy the discovered damage. In making this argument, Frontline 

relies in part upon three cases from the Third Circuit Court of Appeals—Jefferson Bank 

v. Progressive Casualty Ins. Co., 965 F.2d 1274 (1992); Resolution Trust Corp. v. 

Fidelity & Deposit Co., 205 F.3d 615 (2000), and Scirex Corp. v. Federal Ins. Co., 313 

F.3d 841 (2002). In these cases, the courts employ a “proximate cause” standard in 

determining whether the claim presented by the insured is or is not the type of “direct 

loss” covered by the policy. 

¶27 In Jefferson Bank, plaintiff Jefferson Bank sought indemnification for direct 

losses resulting from a loan created with the aid of an imposter notary, who affixed her 

invalid notarization to the mortgage, and then failed to record it. The customer 

subsequently placed other mortgages on the same property, at least one of which was 

recorded, and when the customer defaulted on all loans, Jefferson Bank was unable to 

take possession of the property. Jefferson Bank, 965 F.2d at 1275-76. Progressive, the 

defendant insurer, argued that the Bank’s loss was not covered under the bond’s 

coverage for losses “resulting directly from” fraudulent signatures, because the loss was 

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not caused by the notary’s forged signature, but rather by the fact that the building was 

so heavily encumbered. Jefferson Bank, 965 F.2d at 1280-81. The Third Circuit held 

that under Pennsylvania law, the “direct cause of a loss” does not have to be the “sole” 

or “immediate” cause, but need only be a proximate or substantial cause. The Federal 

Court opined that: 

“[D]irect cause” or “immediate cause” is a nebulous and largely 

indeterminate concept, and one that does not enjoy favor under 

Pennsylvania law. As we have suggested, Pennsylvania, consistent with 

general notions of proximate causation, requires that plaintiffs in 

negligence cases show substantiality, rather than immediacy, in order to 

demonstrate proximate cause. 

Jefferson Bank, 965 F.2d at 1281. 

¶28 Also, in Scirex, the Third Circuit applied the proximate cause standard, relying 

on Jefferson, stating, “Pennsylvania law equates ‘direct cause’ with ‘proximate cause.’” 

Scirex, 313 F.3d at 843-44. In Scirex, nurse employees for the insured, Scirex (a 

pharmaceutical-testing company), failed to follow protocol and engaged in deceptive 

record keeping, both of which rendered certain drug studies worthless. As a result, 

Scirex was unable to procure and produce results for its contracted sponsor, and Scirex 

was forced to replicate the studies using $1.2 million of its own funds. Scirex sought 

indemnity for the replication costs from its insurer, Federal, under a blanket employee 

dishonesty policy. Federal denied the claim, prompting Scirex to sue Federal for the 

losses. The federal district court held that “Scirex’s losses were directly tied to these 

studies, and by rendering those studies worthless, the nurses’ behavior proximately, and 

therefore directly, caused Scirex’s losses.” Scirex, 313 F.3d at 843-45, 850. 

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¶29 In 2004, the New Jersey Supreme Court was asked to consider whether the use 

of a proximate cause test for evaluating the nature of a loss was appropriate under an 

employee dishonesty policy that requires a direct loss. Auto Lenders, 854 A.2d 378. 

The New Jersey Court noted that “the majority of federal courts that have addressed 

this question have concluded that the term ‘direct loss’ or its equivalent does, in fact, 

call for the application of a proximate-causation standard.” Auto Lenders, 854 A.2d 

386. Citing Scirex (applying proximate cause test to “direct loss”), F.D.I.C. v. National 

Union Fire Ins. Co., 205 F.3d 66, 76 (2d Cir. 2000) (applying proximate cause test to 

policy language covering “loss resulting directly from” employee dishonesty), 

Resolution Trust Corp., Jefferson Bank, and First Nat. Bank of Louisville v. Lustig, 961 

F.2d 1162, 1167-68 (5th Cir. 1992), the New Jersey Court adopted “the conventional 

proximate cause test as the correct standard to apply when determining whether a loss 

resulted from the dishonest acts of an employee.” It stated, “[o]ur interpretation 

comports with our general principles of insurance law, including our practice of 

interpreting coverage provisions broadly. . . . There being no sound reason why a 

proximate-cause analysis should not be employed when determining whether a loss is 

direct under a fidelity insurance policy, we will apply that approach to such policies, 

including the policy at issue in this appeal.” Auto Lenders, 854 A.2d at 387. 

¶30 We are persuaded that a proximate cause analysis is appropriate in determining 

whether a loss is “direct” under a fidelity insurance policy. Such a position comports, 

as well, with our tradition of applying a causation standard to various types of losses 

claimed under insurance policies. See, e.g., Green v. Milwaukee Mechanics’ Ins. Co., 

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77 Mont. 505, 252 P. 310 (1926) (Insurer of a fire insurance policy containing an 

“explosion” exemption, is liable for both the fire and explosion damage where the 

explosion is caused by a pre-existing fire “since the fire is the proximate cause of the 

whole loss and the explosion is a mere incident.”); Newman v. Kamp, 140 Mont. 487, 

493-94, 374 P.2d 100, 104 (1962) (For claimant to prevail in industrial accident claim, 

he must establish by a preponderance of evidence that such injury was the proximate 

cause of his present condition.); Life Ins. Co. of North America v. Evans, 195 Mont. 

242, 247, 637 P.2d 806, 808 (1981) (In a negligence action, where an accidental injury 

aggravates or triggers a pre-existing dormant disease or physical infirmity, the accident 

may be said to have been the proximate cause of the resulting disability within the 

terms and meaning of an ordinary accident insurance policy.). 

¶31 For the foregoing reasons, we answer the certified question by concluding that 

the term “direct loss” when used in the context of employee dishonesty coverage 

afforded under a business owner’s liability policy, applies to consequential damages 

incurred by the insured that were proximately caused by the alleged dishonesty. We do 

not address or resolve the question of whether all of the claims presented by Frontline 

for payment under the policy were proximately caused by the dishonest actions of 

Reavis, as this is beyond the scope of the certified question. 

¶32 Question answered. 

/S/ PATRICIA COTTER 

 

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We Concur: 

/S/ JAMES C. NELSON 

/S/ BRIAN MORRIS 

/S/ JOHN WARNER 

/S/ JIM RICE 

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