Scirex Corporation v. FEDERAL INSURANCE COMPANY On Appeal From the United States District Court For the…

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

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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.
2
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

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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

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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

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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 fraudulently-
claimed 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.

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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

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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.,

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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

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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.

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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’

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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

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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

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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,

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parties to bear their own costs.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
17

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