## Facts

- E. Udolf, Inc. operated a retail men’s clothing store and carried employee-dishonesty insurance issued by Aetna.
- The owner and corporate officer, Leonard Udolf, was in the store part time and relied on others for daily operations.
- The store manager, Kenneth Auer, managed operations and had authority to hire and fire; the bookkeeper, Anna Shukis, handled financial records. Both were expected to report significant problems to Udolf.
- In 1981, Shukis discovered that employee Lynn Bjork had misappropriated about $6,000 and reported it to Auer.
- Auer and Shukis did not report the theft to Udolf; they allowed Bjork to repay the $6,000 over time and continue working.
- From 1981 to 1983, Bjork embezzled an additional $48,715.08.
- After discovery of the later losses, Bjork was terminated and the store made a claim under the policies.
- The policies excluded coverage for loss from dishonest acts committed after the insured (or a partner or officer not in collusion) learns of any dishonest act by that employee.
- Aetna denied coverage for the post-1981 losses, asserting the store had learned of Bjork’s dishonesty in 1981 through Auer and/or Shukis.

## Issues

1. Whether a manager’s and bookkeeper’s knowledge of an employee’s prior dishonesty, acquired within their duties and subject to a duty to report, is imputed to a corporate insured for purposes of an employee-dishonesty policy exclusion triggered by the insured’s knowledge.
2. Whether allowing restitution and continued employment constitutes “collusion” with the dishonest employee so that the exclusion is not triggered by the manager’s knowledge.

## Decision

- The Connecticut Supreme Court affirmed judgment for Aetna.
- The court held that Auer’s and Shukis’s 1981 knowledge of Bjork’s theft was imputable to the corporate insured because it was acquired within the scope of their responsibilities and they had a duty to report it.
- The court held that Auer’s decision to permit restitution and continued employment was not “collusion” within the meaning of the policy.
- Because the insured (through imputed knowledge) had learned of Bjork’s dishonesty in 1981, the exclusion barred coverage for the later embezzlements.

## Legal Principles

- A corporation is charged with knowledge acquired by its agents acting within the scope of their authority when the agents have a duty to communicate the information to the corporation.
- Under employee-dishonesty/fidelity coverage, an exclusion may bar coverage for losses caused by an employee after the insured learns of any dishonest act by that employee.
- “Collusion” in this context requires cooperative participation in the dishonest scheme; mere failure to report, poor judgment, or leniency (including permitting restitution) does not constitute collusion.

## Conclusion

The court ruled that the manager’s and bookkeeper’s awareness of an employee’s initial theft was imputed to the corporate insured and triggered the policy’s knowledge-based exclusion, and that permitting restitution and continued employment did not amount to collusion; therefore, the insurer owed no coverage for the employee’s subsequent embezzlements.


E. Udolf, Inc. v. Aetna Cas. & Sur. Co., 214 Conn. 741, 573 A.2d 1211 (1990)