                                            Filed:   November 20, 2000

                   UNITED STATES COURT OF APPEALS

                       FOR THE FOURTH CIRCUIT


                            No. 95-1899
                           (CA-94-1391-A



General Analytics Corporation,

                                                Plaintiff - Appellee,

          versus


CNA Insurance Companies, etc.,

                                               Defendant - Appellant.



                             O R D E R



     The court amends its opinion filed June 7, 1996, as follows:

     On the cover sheet, section 2 -- the caption is corrected to

read “d/b/a Valley Forge Insurance ....”

                                         For the Court - By Direction



                                         /s/ Patricia S. Connor
                                                  Clerk
PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

GENERAL ANALYTICS CORPORATION,
Plaintiff-Appellee,

v.

CNA INSURANCE COMPANIES, d/b/a
                                                               No. 95-1899
Valley Forge Insurance Company,
d/b/a Continental Casualty
Company,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Albert V. Bryan, Jr., Senior District Judge.
(CA-94-1391-A)

Argued: December 4, 1995

Decided: June 7, 1996

Before HALL and NIEMEYER, Circuit Judges, and BUTZNER,
Senior Circuit Judge.

_________________________________________________________________

Vacated and remanded by published opinion. Judge Niemeyer wrote
the opinion, in which Judge Hall and Senior Judge Butzner joined.

_________________________________________________________________

COUNSEL

ARGUED: Paul William Grimm, NILES, BARTON & WILMER,
Baltimore, Maryland, for Appellant. Scott William Woehr, DOYLE
& BACHMAN, Washington, D.C., for Appellee. ON BRIEF: Mary
Alice McNamara, NILES, BARTON & WILMER, Baltimore, Mary-
land, for Appellant.

_________________________________________________________________

OPINION

NIEMEYER, Circuit Judge:

When an unidentified employee of General Analytics Corporation
altered purchase orders that the company had received from the Inter-
nal Revenue Service (IRS) for computer equipment, General Analyt-
ics purchased and shipped products to the IRS that it had not ordered.
As a result, the IRS refused to accept delivery, and General Analytics
incurred a loss of over $94,000.

General Analytics made a claim for the loss under an employee
dishonesty insurance policy that had been issued to it by CNA Insur-
ance Companies. When CNA Insurance denied coverage, General
Analytics filed this action, and the district court granted General Ana-
lytics' motion for summary judgment. Because the question of
whether the employee conduct in this case constituted "employee dis-
honesty" within the meaning of the insurance policy may be answered
only by resolving disputed facts, we vacate the district court's judg-
ment and remand the case for further proceedings.

I

General Analytics, a computer and telecommunications company
engaged in the business of providing equipment and related services
to the federal government, regularly sells computer equipment to the
IRS. On four separate occasions in 1993, however, the IRS refused
to accept delivery of products shipped by General Analytics because
the products were different from those that the IRS had ordered.

After investigating the discrepancies, General Analytics discovered
that in each instance, after it had received the purchase order from the
IRS, an unidentified employee at General Analytics had altered it,
"whiting-out" product, quantity, and price information on the govern-
ment form and inserting different product, quantity, and price infor-

                  2
mation. Accordingly, when filling these altered IRS orders, a General
Analytics employee ordered products from Pioneer Research Corpo-
ration, a supplier, that the IRS had not ordered. When General Analyt-
ics shipped the products to the IRS, the IRS refused to accept
delivery. Because Pioneer refused return of the products and General
Analytics could not sell them to other customers, General Analytics
sustained a loss of $94,419.62. Patricia Trenery, a General Analytics
employee, acknowledged that she had processed the four altered IRS
orders and prepared the General Analytics purchase orders to Pioneer,
but she denied altering any IRS purchase orders.

General Analytics presented a claim for the loss to CNA Insurance
under an employee dishonesty policy that CNA Insurance has issued
to General Analytics. CNA Insurance denied the claim, explaining
that General Analytics had failed to demonstrate that an employee had
acted with the intent of benefiting himself or some third person, as
required by the insurance policy.11 CNA noted that Trenery, who was
the prime suspect for the IRS purchase order alterations, might have
acted dishonestly merely "to retaliate against [General Analytics] for
re-assigning her to a new job she did not like."

General Analytics filed suit against CNA Insurance for breach of
the insurance policy. The parties filed cross-motions for summary
judgment, together with a joint stipulation of facts. According to both
_________________________________________________________________

1 The policy provision in question defines employee dishonesty as fol-
lows:

       "Employee Dishonesty" . . . means only dishonest acts commit-
       ted by an "employee," whether identified or not, acting alone or
       in collusion with other persons, except you or a partner, with the
       manifest intent to:

       (1) Cause you to sustain loss; and also

       (2) Obtain financial benefit (other than employee benefits
       earned in the normal course of employment, including: sal-
       aries, commissions, fees, bonuses, promotions, awards,
       profit sharing or pensions) for:

        (a) The "employee"; or

        (b) Any person or organization intended by the "em-
       ployee" to receive that benefit.

                  3
parties, the sole legal issue presented to the district court was
"whether there is sufficient evidence to establish that [General Ana-
lytics'] losses were caused by an employee acting with the `manifest
intent' to obtain financial benefit for the employee or a third party
. . . within the meaning of the policy provision."

The district court concluded that there were no genuine issues of
material fact and entered summary judgment for General Analytics in
the amount of $94,695.12, together with prejudgment interest from
April 14, 1994, the date that General Analytics submitted its written
claim to CNA Insurance.22 In entering judgment in favor of General
Analytics, the court reasoned:

       The language of the policy is clear and unambiguous. The
       requirement of "manifest intent" to benefit a third party is
       satisfied when the intent of the employee is apparent or
       obvious. Such intent can be objectively determined from the
       acts of the employee and the surrounding circumstances.
       United States Fidelity & Guar. v. Citizens Bank of Tazewell,
       718 F. Supp. 471 (W.D. Va. 1989). The absence of any
       requirement in the policy that the dishonest employee be
       identified would indicate that direct proof of the subjective
       intent or motive of the employee is not a necessary compo-
       nent of a claim. The court finds that the stipulated facts are
       sufficient to establish the manifest intent of an employee of
       [General Analytics] to benefit a third party at the expense of
       [General Analytics].

This appeal followed.
_________________________________________________________________

2 CNA Insurance also appeals the district court's award of prejudgment
interest calculated from the date on which General Analytics first filed
its claim with CNA Insurance. CNA Insurance contends that prejudg-
ment interest should be calculated from the date on which it denied Gen-
eral Analytics' claim. Because further proceedings on remand may
render this issue moot, we do not address it here.

                  4
II

Because this case invokes diversity jurisdiction, we look to Vir-
ginia law in construing the CNA Insurance policy. While we have
been unable to find any Virginia case interpreting the specific policy
language involved here, Virginia courts construe insurance policies in
accordance with traditional principles of contract law. See Allstate
Ins. Co. v. Eaton, 448 S.E.2d 652, 655 (Va. 1994); see also S. F. v.
West Am. Ins. Co., 463 S.E.2d 450, 452 (Va. 1995).

Establishing intent is central to proving coverage under employee
dishonesty policies. Such policies are designed to provide coverage
for a specific type of loss characterized by embezzlement, which
involves the direct theft of money. See Michael Keeley, Employee
Dishonesty Claims: Discerning the Employee's Manifest Intent, 30
Tort & Ins. L.J. 915, 919 (1995). To limit coverage to that type of
loss, CNA Insurance's employee dishonesty policy at issue here cov-
ers dishonest employee conduct only when it is accompanied by (1)
an intent to cause General Analytics to sustain a loss and (2) an intent
to benefit the employee or some third person. The policy requires
both intents and demands that they be "manifest," i.e., readily per-
ceived or obvious. See First Fed'l Sav. & Loan Ass'n v. TransAmer-
ica Ins. Co., 935 F.2d 1164, 1166-67 n.3 (10th Cir. 1991).

Because employee dishonesty policies like CNA Insurance's
require proof that the employee have acted to accomplish a particular
purpose, they require that the insured establish a specific intent, anal-
ogous to that required by the criminal law. Thus, if a dishonest act has
the unintended effect of causing a loss to the employer or providing
a benefit to the employee, the act is not covered by the policy. See
id. at 1166-67 (holding that unintended benefit to third party does not
satisfy policy requiring that employee have acted with manifest intent
to benefit himself or third party). Stated succinctly, employee dishon-
esty coverage insures against "loss caused by a thief," as opposed to
a fool or a saboteur, "who happens to be an employee of the insured."
Robin V. Weldy, A Survey of Recent Changes in Financial Institu-
tions Bonds, 12 Forum 895, 897 (1977).

As a state of mind, intent is often difficult to prove. And because
it is abstract and private, intent is revealed only by its connection with

                   5
words and conduct. See FDIC v. St. Paul Fire and Marine Ins. Co.,
942 F.2d 1032, 1035 (6th Cir. 1991) (noting that while intent "is
thought to refer to a subjective phenomenon that takes place inside
people's heads," the law is concerned only with"the external behavior
ordinarily thought to manifest internal mental states"). Thus, evidence
of both words and conduct is probative of intent, see, e.g., Municipal
Securities, Inc. v. Insurance Co. of North America , 829 F.2d 7, 9 (6th
Cir. 1987), and, because context illuminates the meaning of words
and conduct, evidence of the circumstances surrounding such words
or conduct, including the motive of the speaker or actor, similarly is
admissible.

Thus, for example, the mere fact that a person discharges a firearm,
killing a bystander, does not establish that the person holding the fire-
arm shot the bystander with the intent to kill him. On the other hand,
evidence that the person had just quarreled with the bystander
(motive), that the person said, after shooting the bystander, "He
deserved it" (subjective expression), and that the person was seen
aiming the firearm at the bystander (conduct) tends to establish the
person's intent to kill the bystander.

It is readily apparent that determining intent is fact-intensive, and
when the circumstantial evidence of a person's intent is ambiguous,
the question of intent cannot be resolved on summary judgment. See
First Nat'l Bank v. Lustig, 961 F.2d 1162, 1166-67 (5th Cir. 1992).

CNA Insurance argues that the district court erred in concluding
that "the employee's subjective intent or motive is not a necessary
component of an employee dishonesty claim, and . . . that [such] evi-
dence . . . is irrelevant when evaluating such a claim." Rather, CNA
Insurance maintains that "whether an employee manifestly intended
to confer a financial benefit on a third party . . . requires the fact
finder to determine the true purpose of the dishonest employee" from
all of the "relevant evidence . . . both objective and subjective."
According to CNA Insurance, "Trenery's true purpose was to injure
[General Analytics] as a payback for perceived injustices" and, there-
fore, the incidental benefit in the form of profits conferred on Pioneer
when it refused return of the merchandise does not satisfy the policy's
requirement that Trenery act with the intent to benefit a third person.

                  6
General Analytics responds that the "external manifestations of
internal `intent' . . . speak for themselves." Distinguishing "motive"
from "intent," General Analytics contends that "[r]egardless of why
the dishonest [General Analytics] employee whited-out the forged
Government delivery orders . . . she manifestly did it intentionally."
According to General Analytics, it can recover under CNA Insur-
ance's policy because this case involves an employee's intentional
conduct that conferred a financial benefit on Pioneer.

From our review of the record presented on the cross-motions for
summary judgment, we conclude that a dispute of material fact
remains on the issue of whether the dishonest employee's acts in this
case were accompanied by the "manifest intent" to benefit the
employee or a third person. General Analytics presented undisputed
evidence that one of its employees altered purchase orders that it
received from the IRS. General Analytics also established that by
causing it to fill the altered purchase orders, the dishonest employee
conferred a benefit on Pioneer in the form of profits from the sale and
caused a loss to General Analytics from ordering useless products. It
accordingly argues that the dishonest employee must have acted with
the intent to benefit Pioneer because we must assume that he acted
with the knowledge of the natural and probable consequences of his
actions and, therefore, knew that the issuance of the purchase orders
to Pioneer would benefit it. While such conduct could have been
accompanied by both the intent to benefit Pioneer and the intent to
injure General Analytics, the evidence in this case of employee intent
to benefit Pioneer is ambiguous, allowing for the possibility that the
employee conduct was not accompanied by that intent.

CNA Insurance presented evidence that Trenery, who is suspected
of the dishonest conduct, was unhappy with the way General Analyt-
ics had fired her previous boss and that Trenery had testified on his
behalf in a lawsuit against General Analytics. Moreover, the evidence
shows that Trenery had no connection with Pioneer and had no appar-
ent reason to provide a benefit to Pioneer. Finally, there is no evi-
dence to suggest that Trenery or any other employee knew that
Pioneer would refuse return of the products. Thus, the record contains
ample support for CNA Insurance's theory that in altering purchase
orders and thereby causing General Analytics to sustain a loss, Tren-

                   7
ery acted out of revenge and not for the purpose of benefiting herself
or Pioneer.

Accordingly, we vacate the summary judgment and remand the
case for further proceedings.

VACATED AND REMANDED

                  8
