## Facts

- Auto-Owners employed Kenneth B. Wulf in its claims division; he handled subrogation and salvage files and received checks payable to Auto-Owners.
- Incoming checks were opened by clerical staff, attached to claim files, and sent to the adjuster; no independent record of such checks was kept.
- Adjusters were expected to return checks to clerical staff for transmittal to Auto-Owners’ main office.
- In 1991, Wulf opened a Bank One account titled “Auto-Owners, Kenneth B. Wulf,” using a post office box as the address.
- Bank One did not request, and Wulf did not provide, documentation showing authority to open or use an account on Auto-Owners’ behalf.
- Wulf used a “Auto Owners Insurance Deposit Only” stamp to endorse checks payable to Auto-Owners and deposited them into the account.
- Over nearly eight years, Wulf deposited about $546,000 in checks intended for Auto-Owners.
- The scheme was discovered in 1998 when another Auto-Owners employee found irregularities while Wulf was on vacation.
- Auto-Owners sued Bank One under Indiana’s version of UCC § 3-405, claiming Bank One failed to exercise ordinary care in opening the account, substantially contributing to the loss.

## Issues

1. Whether Ind. Code § 26-1-3.1-405 (UCC § 3-405) applies to a bank’s conduct in opening an account in the employer’s name that is later used by an employee to deposit fraudulently endorsed employer checks.
2. If § 3-405 applies, whether the bank’s alleged failure to follow reasonable commercial account-opening practices constitutes lack of “ordinary care” that substantially contributed to the employer’s loss.

## Decision

- The Indiana Supreme Court affirmed summary judgment for Bank One.
- The court held that § 3-405 did not impose liability on Bank One based on alleged deficiencies in account-opening procedures under these facts.
- Because § 3-405 was inapplicable to the asserted account-opening theory, disputes about industry standards for opening business accounts did not create a triable issue under the statute.

## Legal Principles

- UCC § 3-405 is a loss-allocation rule for employee fraudulent endorsements of instruments entrusted to the employee; the default allocation places the loss on the employer.
- The statute allows shifting loss to a bank only to the extent the bank failed to exercise ordinary care in a manner that substantially contributed to the loss in the processing/payment of instruments covered by § 3-405.
- The ordinary-care inquiry under § 3-405 focuses on conduct tied to handling, taking, or paying instruments with endorsements, not generalized negligence theories about opening accounts, absent statutory application to that conduct.

## Conclusion

The court concluded that Indiana’s UCC § 3-405 did not reach a claim premised on allegedly careless account-opening, so Auto-Owners could not use that statute to recover its employee-fraud losses from Bank One and summary judgment for the bank was proper.


Auto-Owners Ins. Co. v. Bank One, 879 N.E.2d 1086 (Ind. 2008)