2002 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-23-2002

Scirex Corp v. Fed Ins Co

Precedential or Non-Precedential: Precedential

Docket No. 02-1172

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Recommended Citation

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PRECEDENTIAL 

 Filed December 23, 2002 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 02-1172 

SCIREX CORPORATION, 

 Appellant 

v. 

FEDERAL INSURANCE COMPANY 

On Appeal From the United States District Court 

For the Eastern District of Pennsylvania 

(D.C. Civil Action No. 00-cv-1129) 

District Judge: Honorable John P. Fullam 

Argued: October 15, 2002 

Before: BECKER, Chief Judge, ROTH and ROSENN, 

Circuit Judges. 

(Filed December 23, 2002) 

 JOSEPH F. RODA (ARGUED) 

 Roda & Nast 

 801 Estelle Drive 

 Lancaster, PA 17601 

 Counsel for Appellant 

 ALFRED W. PUTNAM, JR. (ARGUED) 

 Drinker, Biddle & Reath 

 18th & Cherry Streets 

 One Logan Square 

 Philadelphia, PA 19103 

 Counsel for Appellee 

 

OPINION OF THE COURT 

BECKER, Chief Judge. 

Plaintiff Scirex Corp. ("Scirex"), a firm specializing in 

clinical testing of new drugs for pharmaceutical companies, 

brought this suit against defendant Federal Insurance 

Company ("Federal") in the District Court for the Eastern 

District of Pennsylvania, seeking payment under Federal’s 

"Blanket Employee Dishonesty" policy, which covered losses 

caused by Scirex employees’ fraudulent and dishonest acts. 

Although the protocols for the four clinical trials at issue 

required Scirex’s nurses to observe patients for eight 
hours and record their observations every thirty minutes, 

in many cases the nurses sent patients home after as 

little as an hour, yet they recorded and submitted 

observations allegedly covering the full eight hours. Their 

misrepresentations made it impossible for supervisors to 

discover the breaches of protocol until a former employee 

tipped them to the practice, at which advanced point the 

four studies were unfit for Food and Drug Administration 

review, and therefore were worthless. 

Scirex replicated the studies, which cost a combined $1.2 

million, at no charge to the sponsors. Federal, however, 

refused to cover Scirex’s losses. It defended on the ground 

that the nurses’ actions were not dishonest because they 

had acted on their belief that strict adherence to protocol 

was unnecessary, and that while their actions might have 

been negligent, "dishonesty" implies a cognizance of one’s 

wrongdoing that they did not possess. Federal also 

maintained that even if the nurses’ actions were dishonest, 

its policy covered only "direct" losses, and Scirex’s losses 

more strongly resembled ordinary business expenses from 

failed ventures than losses, such as false claims of working 

overtime, due directly to employee dishonesty. Finally, 

Federal contended that even if it were liable for Scirex’s 

losses, it would be liable only in the amount of $280,000, 

the policy limit for one occurrence, because the losses 

across the four ruined studies were related. 

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Following a bench trial, the District Court held that 

Scirex could not recover against Federal because 

"dishonesty" implies a culpable intent, and the nurses’ 

"stubborn belief that the drug companies . . . were 

imposing unnecessary requirements" did not equate to 

dishonesty. Scirex Corp. v. Fed. Ins. Co., 2001 U.S. Dist. 

LEXIS 19088, *8-9 (E.D. Pa. 2001). It therefore denied 

Scirex’s claim, but noted in dicta that, were the nurses’ 

actions to be found dishonest, the losses they caused would 

be direct, and therefore Federal’s policy would cover them. 

Id. at *11. It also opined that, at all events, the policy would 

limit Federal’s liability to $280,000, the ceiling for one 

occurrence. Id. at *14. 

Because we conclude that the nurses’ actions were 

dishonest, as well as negligent, we hold that they are 

covered by Federal’s policy, and we reverse the District 

Court’s holding to the contrary. We are satisfied that, 

whatever may be said of the decision to send patients home 

early in violation of protocol, the nurses’ practice of 

submitting records containing observations they did not 

make is ineluctably and irrefutably dishonest. However, we 

agree with the District Court that the nurses’ actions 

directly caused Scirex’s losses. Pennsylvania law equates 

"direct cause" with "proximate cause," Jefferson Bank v. 

Progressive Casualty Ins. Co., 965 F.2d 1274, 1281-82 (3d 

Cir. 1992), and the nurses’ conduct rendered those studies 

worthless to their sponsors, and therefore worthless to 

Scirex. Finally, although we believe that Federal’s policy 
covers Scirex’s losses, we agree with the District Court that 

Federal’s liability is limited to $280,000 for the four studies. 

I. Background Facts and Procedural History 

In 1997 and 1998, Scirex conducted four clinical studies 

for three different sponsors. Each tested a pain medication 

for patients who had undergone dental surgery, and each 

had a protocol, written by the pharmaceutical company 

sponsoring the study, which specified in great detail the 

procedures to be followed in that study. The four protocols 

required patients to remain under the observation of Scirex 

nurses, at Scirex’s clinic, for at least eight hours after being 

given the first medication dose. Because the effects of pain 

 3 

 

medication to some extent vary by individual, the 

pharmaceutical companies anticipated that there would be 

a certain number of test subjects for whom the medication 

would be ineffective, and for these subjects, the protocols 

mandated providing supplemental pain medication. 

Subjects who received such supplemental medication were 

termed "rescued," while those who took only the drug being 

studied were termed "unrescued." 

Although the protocols provided for rescuing certain 

subjects, they did not provide for treating those subjects 

otherwise differently; specifically, they stated that 

"[s]ubjects are required to remain at the study facility for 

the entire eight-hour postdosing observation period, even if 

the supplemental analgesic medication is taken." (R.W. 

Johnson Protocol.) During one of the four studies, however, 

Algos, the study’s sponsor, told Scirex that rescued patients 

did not have to remain in the clinic for the full eight hours. 

That excepting instruction applied only to Algos’s study, 

and even then, only to rescued subjects. The other three 

studies were to proceed strictly according to protocol. 

During the course of a subject’s eight-hour stay, the 

protocols required Scirex’s nurses to observe the subject 

and record their observations. The records had to be 

"timely, accurate and complete," because they were what 

the FDA evaluated: "[t]imely, accurate, and complete 

reporting and analysis of safety information from clinical 

trials is crucial for the production of subjects, investigators, 

and the sponsor, and is mandated by regulatory agencies 

worldwide." (R.W. Johnson Protocol.) Nurse Mary Ellen 

Conforto, a Scirex supervisor and tenured employee, 

testified that she understood the need for the records to be 

accurate, and agreed that if a patient were released early, 

the records should have reflected the change. She 

explained, however, that it was common for nurses to fill 

out a patient’s record ahead of time, in order to cut down 

on paperwork at the end of the day, and that the nurses in 

doing this would predict and record in advance the time 

that a patient would leave if he or she remained for the 

required eight hours. Still, she acknowledged that if a 

patient whose record had been so prepared then left earlier 
than anticipated, an addendum to that patient’s record 

should have been prepared and submitted. 

 4 

 

Despite these understandings, over the course of the four 

studies, at various times Scirex nurses released both 

rescued and unrescued patients early, that is, before eight 

hours had passed, but they submitted records for those 

patients that made it appear that the nurses had followed 

the protocols and observed them for the full eight hours. 

These discrepancies were discovered when Scirex received a 

tip from an ex-employee, following which it conducted an 

"audit" of test subjects that involved calling them and 

asking what time they were discharged. The audit showed 

that unrescued patients were often released early, 

sometimes after as little as one hour. One of the audits 

reported that "[a]ll of the unrescued subjects stated they 

were discharged from the unit before the completion of the 

8-hour follow-up period, indicating follow-up periods of 1 to 

7 hours. However, in all cases the nurses’ notes indicated 

the subjects were discharged after 8 hours." (Compliance 

Audit Report, Algos Protocol.) As the FDA’s clinical testing 

requirements are exacting and inflexible, the discrepancies 

between the actual release times and the recorded release 

times rendered the four studies worthless, and Scirex had 

to make financial amends to the pharmaceutical 

companies. Indeed, Scirex performed each study again 

without charge to its sponsor. 

At the time of these events, Scirex had an insurance 

policy with Federal that had a limit of $280,000 and 

covered direct loss caused by any fraudulent or dishonest 

acts committed by its employees. It provided that: 

 The most we will pay for any loss under Blanket 

 Employee Dishonesty for any loss caused by any 

 employee whether acting alone or in collusion with 

 others, either resulting from a single act or any 

 number of acts, regardless of when those acts occurred 

 during the period of this insurance or prior insurance, 

 is the amount of loss, not to exceed the Limit of 

 Insurance for Blanket Employee Dishonesty shown in 

 the Declarations. 

(Policy at 6, "Limits of Insurance.") A separate provision 

limited liability for multiple related acts, stating that "[a]ll 

losses resulting from an actual or attempted fraudulent or 

dishonest act or series of related acts at the premises . . . 

 5 

 

whether committed by one or more persons will be deemed 

to be one occurrence or event." (Policy at 7.) 

Scirex submitted a claim to Federal under this policy, 

contending that the actions of the nurses in sending 

patients home early, and submitting data sheets that 
falsely indicated that the patients had remained for the 

required eight hours, were "fraudulent or dishonest" and 

were therefore covered under the policy. It ultimately 

sought compensation for the loss of its investment in the 

four studies, an amount that included employee salaries, 

facility rentals, and other task-specific expenses. It claimed 

$185,000 on the R.W. Johnson study, $575,408 on the 

Forest Labs study, and a combined $473,679 on the two 

Algos studies, for a total of approximately $1.23 million. 

In response to Scirex’s claim, Federal’s claim adjuster, 

Patricia Duffy, testified that "for the purposes of the 

discussion with the insured, I accepted the fact that what 

they were presenting to me seemed to be fraudulent-- or 

seemed to be a dishonest act." (Duffy Dep. at 17.) She 

therefore requested that the claim be paid at policy limits. 

Upon receiving Duffy’s request, however, an attorney at 

Federal’s home office questioned whether Scirex’s loss had 

been "direct." The policy does not define"direct" or "direct 

loss," and eventually Federal denied the claim, finding that 

Scirex’s losses were more akin to ordinary expenses from a 

failed business venture than losses, such as fraudulentlyclaimed overtime, caused by employee dishonesty. It also 

asserted that even if there had been a direct loss, Scirex 

would have been entitled only to one policy limit of 

$280,000, rather than four, because the four ruined 

studies constituted only a single "occurrence or event." 

Scirex subsequently filed suit for the losses it incurred, up 

to the limit of $280,000, on each study. 

At trial, Federal asserted for the first time that the 

nurses’ actions had not been "fraudulent or dishonest." The 

District Court agreed, based on its finding that the Scirex 

nurses did not believe their conduct to be wrongful. The 

Court reasoned that "the words ‘fraudulent’ and ‘dishonest’ 

both focus on the intent of the actor, and connote 

intentional conduct by the actor as wrongful," Scirex, 2001 

U.S. Dist. LEXIS 19088 at *9, but the nurses acted on their 

 6 

 

"stubborn belief that [they] were right and that the drug 

companies were imposing unreasonable and unnecessary 

requirements." Id. at *8-9. It reasoned that they "gained no 

personal benefit from their actions," although it 

acknowledged that by sending patients home early, they 

might have gained "a slight reduction in paperwork, 

yielding an earlier end to their workday." Id. at *9. In 

summary, the Court found that while the nurses’ actions 

might have been ill-considered, they did not believe they 

were being duplicitous or dishonest, and therefore their 

actions were not dishonest within the meaning of the 

policy. It accordingly found against Scirex. The District 

Court also stated that, although the nurses’ actions ruined 

four studies, the losses all stemmed from a "series of 

related acts," and therefore only $280,000 would be 

recoverable if coverage were found to exist. Id. at *14. 

The District Court had jurisdiction under 28 U.S.C. 
S 1332. We have jurisdiction under 28 U.S.C.S 1291. 

Although the District Court made certain fact findings 

which would be subject to deferential review, primarily at 

issue on appeal are the District Court’s legal conclusions 

that Federal’s insurance policy does not cover the Scirex 

nurses’ acts, and that if it does cover those acts, Scirex is 

entitled to only one payout for the four studies, over which 

we exercise plenary review. 

II. Discussion 

A. Does Federal’s Policy Cover the Nurses’ Acts? 

1. Were the nurses’ acts dishonest? 

Federal’s policy covers "fraudulent or dishonest acts." We 

will assume that the nurses did not commit fraud in 

ordering patients’ early discharge and failing to record 

those discharges accurately; aside from a very slight 

reduction in their workload, they did not benefit from their 

questionable conduct. The District Court noted this lack of 

fraud, but also found no dishonesty because the word 

" ‘dishonest’ focus[es] upon the intent of the actor, and 

connote[s] intentional conduct perceived by the actor as 

wrongful." Scirex, 2001 U.S. Dist. LEXIS 19088 at *9. "The 

evidence as a whole makes clear that Ms. Conforto and the 

 7 

 

other nurses honestly believed that they were substantially 

complying with the requirements of the protocols. In their 

view . . . there was no real need to keep the patients at the 

clinic when they wanted to go home early." Id. at *8. 

Dishonesty, the Court concluded, must mean something 

more than an error in judgment. 

In its brief, Federal enthusiastically endorses this view. If 

the evidence supports the notion that the nurses honestly 

believed they were substantially complying with the 

protocols’ requirements, it asks, how can their acts be fairly 

termed "dishonest?" Federal points to many cases where 

courts have held that "willfulness and an intent to deceive 

must be present in order for an employee’s actions to be 

dishonest." Rock Island Bank. v. Aetna Cas. & Sur. Co., 706 

F.2d 219, 222 (7th Cir. 1983); see also Jellico Grocery Co. 

v. Sun Indem. Co., 272 Ky. 276 (1938) (finding no 

dishonesty where an employee violated express instructions 

not to extend credit to a certain customer, to the employer’s 

detriment, because there was no showing of intent); Couch 

on Insurance S 161:27 (stating that mere irregularities, 

mistakes, negligence, errors in judgement or incompetence, 

committed without intent to deceive, do not constitute 

fraud or dishonesty).1 

Federal relies most heavily on Universal Credit Co. v. 

United States Guarantee Co., 183 A. 806 (Pa. 1936). In that 

case, an insurer contracted to indemnify an employer for all 

direct pecuniary losses sustained by "any act or acts of 

fraud, dishonesty, larceny, embezzlement, forgery or 
wrongful extraction" committed by any of its employees. Id. 

_________________________________________________________________ 

1. Neither party’s brief contained a discussion on choice of law in this 

diversity case. Under Pennsylvania’s choice of law rules, a court must 

first determine whether a conflict of law exists, and if no conflict exists, 

it may apply Pennsylvania law. Keystone Aerial Surveys, Inc. v. 

Pennsylvania Property & Cas. Ins. Guar. Ass’n, 777 A.2d 84, 94 (Pa. 

Super. 2001). In supplemental briefing, the parties agreed that no 

material conflict exists among the states that have connections to this 

case, and we agree, so we apply Pennsylvania law. However, given that 

the laws governing fidelity bonds are substantially the same nationally 

and no Pennsylvania case directly controls, we willingly look to 

precedents in other jurisdictions to determine how Pennsylvania law 

would resolve the issue. 

 8 

 

In order to ascertain whether any of the employer’s vehicles 

had been sold without repayment of the amount loaned, an 

employee, Gregory, was charged with the duty of checking 

the cars at the dealer’s place of business. He recorded the 

results of his inspection on a report that contained the 

printed statement: "I have personally seen and checked the 

auto numbers on the cars listed above, and certify that the 

information given is correct." In reality, Gregory had relied 

on the dealer for his information and had not personally 

checked to see whether particular cars were on hand. As a 

result, the dealer doublesold some cars and thereby 

suffered a loss. Id. 

The Pennsylvania Supreme Court said, "[i]t seems too 

clear to require citation of authority to support it that 

negligence is not fraud, and acts resulting from mistake of 

judgment are not acts of fraud or dishonesty any more than 

acts done negligently," id. at 807, and it found no 

insurance coverage. Notably, however, the fidelity bond in 

Universal Credit Co. covered only "acts done for the purpose 

of harm or with a view to personal profit," id. at 806, 

qualifying language that does not exist in Federal’s bond 

with Scirex. 

Moreover, many cases expressly hold motive and intent 

irrelevant to the concept of dishonesty. In National Newark 

and Essex Bank v. American Ins. Co., 385 A.2d 1216 (N.J. 

1978), a bank manager made records that misstated the 

value of securities pledged as collateral for loans. When the 

borrower defaulted and the bank learned that the loans 

were inadequately secured, the bank filed a claim under a 

bond covering losses resulting from "dishonest or 

fraudulent acts" of employees. At the same time, however, 

the bank informed the insurer that there was no evidence 

of any "defalcation, mysterious disappearance, kiting 

operation or other purported [criminal] act." Id. at 1220. 

The insurer denied the claim based on this concession, on 

the grounds that the employee’s acts were not dishonest or 

fraudulent. The New Jersey Supreme Court held that the 

employee’s acts of "misrepresenting or failing to disclose 

important facts concerning the loans" were dishonest, id., 
and noted that, in a fidelity bond, the words "dishonest" 

and "fraudulent" "extend beyond criminal acts and are to 

 9 

 

be given a broad signification and taken most strongly 

against the surety company." Id. at 1222. It concluded that 

those words "encompass[ ] any acts which show a want of 

integrity or a breach of trust." Id. 

Other courts are in accord. See, e.g., Mortgage Corp. of 

New Jersey v. Aetna Casualty & Sur. Co., 115 A.2d 43, 46 

(N.J. Super. 1955) ("[W]here an employee . . . is employed 

to perform a series of acts and to certify a set of facts on 

physical inspections, and that employee certifies to those 

facts, without having made the physical inspection .. . he 

is unfaithful to his employer," and his lack of integrity 

"brings him squarely within the definition of‘dishonest.’ "); 

First National Bank of West Hamlin v. Maryland Casualty 

Co., 354 F. Supp. 189, 193 (S.D. W.Va. 1973) (holding that 

an employee acts dishonestly when he certifies that 

automobiles are on the car dealer’s premises when in fact 

he does not know if they are). 

In this case, Scirex’s nurses understood that they were to 

record their observations of test subjects every thirty 

minutes for eight hours, yet in many cases their records 

included "observations" for times when the patients were 

sitting at home. Even worse, these fictionalized records 

falsely implied that the patients had remained in the clinic 

for the full eight hours, and therefore that the tests had 

proceeded according to protocol. Thus, not only did the 

nurses fictionalize the records, they made it virtually 

impossible to discover the fictionalization until disclosure 

by the informant. Faced with such flagrant 

misrepresentation in a field characterized by strict 

adherence to procedure, we conclude that the nurses’ 

conduct was clearly dishonest, as well as highly unfaithful. 

Our conclusion is buttressed by our practice of construing 

a policy’s ambiguities against its drafter. See Medical 

Protective Company v. Watkins, 198 F.3d 100, 105 (3d Cir. 

1999). 

Federal explains that it is common nursing practice to fill 

out observation reports ahead of time, then to change them 

if the actual observation does not fit the expected 

observation. (See Federal Br. at 17-18.) From that it argues 

that the nurses failed to change their pre-recorded 

observations because "they did not perceive an early 

 10 

 

discharge to be an adverse event that needed to be 

recorded," (id.), the implication being that they were 

negligent, not dishonest. We disagree, for, even if the 

nurses were merely negligent in deciding that an early 

discharge is a trivial event, they were dishonest in 

submitting records implying that no early discharges took 
place. Indeed, Federal relies upon Nurse Conforto’s 

testimony that it is nursing practice to record observations 

ahead of time, yet she herself testified that she could think 

of no reason why the record of a patient who was released 

early should not note that. (Conforto Dep. at 93.6-9.) We 

therefore reverse the District Court’s holding that the 

nurses’ actions were not dishonest within the meaning of 

Federal’s policy. 

2. Were Scirex’s losses direct? 

Even though we conclude that the nurses’ actions were 

dishonest, that does not end our inquiry because Federal’s 

policy covers only "direct" losses. The District Court stated 

in dicta its belief that the losses were direct, but on appeal 

Federal seeks to affirm the denial of coverage on the 

alternate ground that the losses were indirect. See 

University of Maryland v. Peat Marwick Main & Co. , 923 

F.2d 265, 275 (3d Cir. 1991) (Court of Appeals can affirm 

the judgment below on any ground, including a ground not 

relied upon in the decision below). Federal’s policy covers 

only "direct loss caused by fraudulent or dishonest acts," 

and the loss must occur "to money, securities, or other 

property." It maintains that Scirex’s losses are not covered 

for two reasons: because they are "ordinary and legitimate 

business expenses," not direct losses; and because they are 

not recoverable losses "to money, securities, or other 

property." We examine each contention in turn. 

Federal’s first argument is that Scirex’s losses are 

indirect, likening them to ordinary operating expenses for a 

business venture that ultimately fails. It seeks conceptually 

to distinguish direct losses from indirect losses by means of 

example: 

 If the nurses had falsified their work to make it appear 

 that they were entitled to overtime and Scirex had paid 

 them $1,000 in fictitious overtime, then Scirex would 

 11 

 

 have incurred a "direct loss" in that amount. Similarly, 

 if the nurses had pilfered office supplies worth 

 $100,000, then Scirex would have sustained a "direct 

 loss" in that amount. 

(Federal Br. at 36.) The implication is that covered losses 

must be ones that relate to the employees themselves, 

rather than ones that occur because an employee does his 

or her job negligently, dishonestly or improperly. 

Here, according to Federal, Scirex seeks to recover what 

amounts to ordinary expenses. Although Scirex seeks to 

recover for the labor, equipment, and expertise that went 

into the studies, Federal contends that "Scirex was not 

‘tricked’ into incurring these expenses by the nurses’ 

alleged misconduct. Insofar as they may be called‘losses,’ 

they are losses only because Scirex was unable to charge 

the sponsors for the studies on which they were incurred. 
That is an ‘indirect’ loss." [Federal Br. at 36-37.] It cites 

several cases to support its position. See, e.g., Lynch Props., 

Inc. v. Potomac Ins. Co., 962 F. Supp. 956 (N.D. Tex. 1996) 

(embezzlement of customer’s funds held to be "direct" loss; 

embezzler’s employer’s obligation to replace those funds 

held "indirect" loss); Continental Bank, N.A. v. Aetna Cas. & 

Sur. Co., 626 N.Y.S. 2d 385, 387-88 (N.Y. Sup. Ct. 1995) (in 

policy containing "directly from" language, no coverage for 

insured whose employees caused "actual loss" to customers 

of insured). 

Scirex counters that it "made a substantial investment in 

[the] studies, and up to the time of the employee 

falsifications, those studies were valuable. When the 

employees falsified data in the studies, however, those 

studies became worthless, and Scirex’ investment was lost. 

This was a ‘direct loss’ within the meaning of the policy." 

(Scirex Rep. Br. at 9.) It submits that our jurisprudence 

favors that interpretation. 

In Jefferson Bank v. Progressive Casualty Ins. Co., 965 

F.2d 1274 (3d Cir. 1992), plaintiff bank sought 

indemnification under 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 granted other mortgages on the same 

 12 

 

property, at least one of which was recorded, and when the 

customer defaulted on all loans, the plaintiff bank was 

unable to take possession of the property. 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 caused not by 

the forged signature of the notary, but by the fact that the 

building was so heavily encumbered. We disagreed, holding 

that under Pennsylvania law, the "direct cause of a loss" 

does not have to be the "sole cause" or "immediate cause," 

but need only be a proximate or substantial cause: 

 [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. 

Id. at 1281-82. 

We believe that Jefferson Bank’s proximate cause 

approach is proper here, and under that test, we conclude 

that the nurses’ acts directly caused Scirex’s losses. It is 

uncontested that their failure to follow protocol and their 

deceptive recordkeeping singlehandedly rendered the 

studies worthless. We find Scirex’s reasoning persuasive: it 

is in the business of producing products, pharmaceutical 

studies, that are tailored specifically to individual clients’ 
needs. It produces a study only when commissioned by a 

particular sponsor, and for that reason, it has relatively 

little overhead or ongoing costs of doing business. Rather, 

as Scirex states, "the salaries of the employees who 

conducted the ruined studies, as well as the cost of office 

space and supplies allocated to the four studies, would not 

have been incurred if Scirex had not contracted to produce 

those studies." [Scirex Rep. Br. at 18.] 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. 

Federal also submits that, to recover under its policy, 

"the loss must occur to money, securities or other 

 13 

 

property," and that Scirex cannot recover under any of 

these categories. (Fed. Br. at 35.) It concludes that this is 

not a "loss to money" because money has not been stolen, 

and while it might (as Scirex argues) be a loss to property, 

that would lead to no recovery because the policy values 

property as the least of: (1) actual cash value of the 

property on the day the loss was discovered; (2) cost to 

repair; or (3) cost of replacing the property with material of 

like kind and quality. While Scirex would favor (3), the cost 

of replacing the studies, Federal submits that the policy 

would force choice (1), which would yield the value of the 

studies on the day the nurses’ actions were discovered. 

Since the studies were at that point already ruined, Federal 

argues that they were valueless and therefore Scirex could 

recover nothing. Even if Scirex could recover under its 

desired option (3), Federal submits, it would recover only 

the cost of replacing a study of like kind, which is an 

imperfectly-conducted study. 

We agree that this is not a "loss to money," because if it 

were, certainly it would be an indirect loss and therefore 

not covered under the policy. Scirex’s theory is that it made 

a product, pharmaceutical studies, which it sold for money. 

By damaging the product, the nurses’ actions directly 

caused a loss, but under this theory, it is a direct loss only 

to property, that is, the studies. Any loss "to money" would 

be indirect, because it would be a derivative loss caused by 

Scirex’s inability to sell its damaged product. If Scirex is to 

show a direct loss, that loss must therefore be to property. 

In our view, this is a loss "to property," and it is therefore 

subject, at least in theory, to the policy’s property valuation 

rubric. But we disagree that this taxonomy leads to a 

recovery of zero, because it is possible to read the policy in 

two ways. The "strict literalism" method, which Federal 

supports, would force us to ascertain property value at the 

time the loss was discovered, which here would lead to a 

trivial recovery since the botched studies had no real value. 

We agree with Scirex that such a reading would essentially 

render the policy’s property protections illusory, because it 

would effectively protect goods only in their damaged state 

-- by definition, once losses are discovered, the damage has 
already been done. Such protection is no protection at all, 

 14 

 

and we will not reach that result when a reasonable 

alternative interpretation is present. 

We conclude that the policy’s property valuation language 

is not designed to limit recovery in this situation. By fixing 

the amount of recovery to "the actual cash value of the 

property on the day the loss was discovered," the policy 

seems to us to anticipate a loss to property whose market 

value fluctuates over time. In such situations, the policy 

language would preempt any debate over the proper time of 

valuation, but it is not useful where, as here, there is no 

real market for the product -- the studies are produced at 

a fixed price specially for one consumer, and they are 

valueless to all others. Applying the policy language literally 

in this situation would render recovery almost impossible 

for any producer of custom-made products, a clearly 

counter-intuitive result that we are unwilling to reach. 

We conclude that the nurses’ actions caused a direct loss 

to property, and the policy’s property valuation language 

does not limit Scirex’s recovery. 

B. Did the Nurses’ Actions Cause a Single Loss or 

 Four? 

Scirex claims that the nurses’ repeated failure to follow 

protocol and accurately record their observations ruined 

four enormous studies valued at $185,000, $575,000, 

$317,000, and $156,000 respectively. It seeks recovery up 

to the $280,000 policy limit for each study, for a total of 

$880,786. Federal argues that the entire recovery, if there 

is one, should be limited to $280,000. The District Court in 

dicta concluded that the various instances of dishonesty 

were sufficiently related to constitute one occurrence or 

event, and limited the recovery to $280,000. We agree. 

The policy’s Limits of Liability Clause reads: 

 The most we will pay for any loss under Blanket 

 Employee dishonesty for any loss caused by an 

 employee whether acting alone or in collusion with 

 others, either resulting from a single act or any 

 number of acts, regardless of when those acts occurred 

 during the period of this insurance or prior insurance, 

 is the amount of loss, not to exceed the Limit of 

 15 

 

 Insurance for Blanket Employee Dishonesty shown in 

 the Declarations. 

 * * * 

 All losses resulting from an actual or attempted 
 fraudulent or dishonest act or series of related acts at 

 the premises . . . whether committed by one or more 

 persons will be deemed to be one occurrence or event. 

Stipulation P35(c) (emphasis added). 

Scirex argues that the key word in the first passage is 

"any," which can be interpreted to mean "each" as well as 

"all." It further submits that the "each" interpretation is 

more reasonable than the "all" interpretation because the 

policy uses the singular "loss" rather than the plural 

"losses." "Each loss," it concludes, is a more natural 

reading than "all loss," and any ambiguity should be 

resolved against Federal. (Scirex Br. at 23.) Regarding the 

second passage, Scirex suggests that its purpose is merely 

to define what constitutes "one occurrence or event," and it 

points out that no language suggests that Federal will pay 

only one policy limit per occurrence or event. 

Reading the policy language as a whole, however, we are 

satisfied that it limits Federal’s liability to $280,000 for an 

event or series of related events. Although it does not say so 

explicitly, the accepted purpose of defining "an occurrence 

or event" is to limit liability, and in the insurance industry 

"occurrence" is commonly understood to mean all loss 

caused by a single act or related events. See , e.g., Couch on 

Insurance, S 160:61; see also Appalachian Ins. Co. v. Liberty 

Mut. Ins. Co., 676 F.2d 56, 61 (3d Cir. 1982) (if there is but 

one cause for all of the losses, they are part of a single 

occurrence). Scirex’s interpretation, which would make 

possible a separate recovery for each loss even if those 

losses are part of the same occurrence, would lead us to 

grant a separate recovery for each forged check passed as 

part of an employee’s forgery scheme, a result that has 

been squarely rejected. See, e.g., Business Interiors, Inc. v. 

Aetna Cas. & Sur. Co., 751 F.2d 361 (10th Cir. 1984) 

(concluding that the employee’s fraudulent acts constituted 

a single loss for policy purposes). 

 16 

 

The District Court found that, "as to all of the four 

studies in question, plaintiff ’s losses resulted from a ‘series 

of related acts’: The same nurses were involved in all of the 

alleged wrongdoing, they acted in concert, and all of the 

alleged wrongful acts constituted a series of related acts." 

Scirex, 2001 U.S. Dist. LEXIS 19088 at *14. This finding is 

not clearly erroneous, for the nurses themselves did not 

seem to distinguish among the four studies in terms of 

their responsibilities. We therefore conclude that their 

conduct caused a single loss. Federal’s policy limits its 

liability to $280,000 per loss, so that is the amount to 

which Scirex is entitled for its ruined studies. 

III. Conclusion 

For the foregoing reasons the judgment of the District 

Court will be reversed and the case remanded with 

directions to enter judgment for Scirex for $280,000, 
parties to bear their own costs. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

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