Opinion
No. CV08 5023551S
April 9, 2009
MEMORANDUM OF DECISION RE DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND PLAINTIFF'S COUNTER MOTION
1.
In this case the plaintiff and defendant entered into an insurance contract in November of 2002. The plaintiff alleges the contract provided coverage for "employee dishonesty." In August 2007 the plaintiff discovered the dishonesty of a former employee who worked as a bookkeeper. The plaintiff claims it promptly notified the defendant of its loss and complied with the policy's conditions. The plaintiff demanded to be reimbursed for its loss but the defendant has refused "which refusal constitutes a breach of the contract."
The defendant has now moved for summary judgment based upon the policy's cancellation-of-dishonest-employee condition. The plaintiff has also filed a motion for summary judgment asking the court to conclude there was coverage under the policy. The standards to be applied in deciding a motion for summary judgment are well known. If there is a disputed issue of material fact the court should not grant such a motion since a party has a constitutional right to a jury trial. However, if there is no such disputed issue the motion should be granted to avoid the expense and burden of unwarranted litigation. The court will first discuss the defendant's motion. The issues raised by both motions are interrelated.
2.
The defendant's position is straightforward. The policy contains this provision:
Cancellation as to Any Employee. This insurance is cancelled as to any 'employee':
(a) Immediately upon discovery by:
(1) You; or
(2) Any of your partners, officers or directors not in collusion with the 'employee;'
(b) On the date specified in a notice mailed to you. That date will be at least 30 days after the date of mailing . . ."
of any dishonest act committed by that 'employee' whether before or after becoming employed by you.
In a letter from C.A. White to the defendant which contained a proof of loss and supporting documentation, the plaintiff admitted that the employee in question previously stole money from C.A. White in 1998. The proof of loss "lists five entities incurring losses, each with a date of August 30, 2007." Reimbursement is thus being sought for losses due to dishonest acts by the same employee subsequent to such acts she committed in 1998. Summary judgment is thus appropriate because there was, and can be, no coverage under the contract of insurance for this dishonest employee subsequent to 1998.
The defendant then structures its brief by saying the plaintiff's "sole argument that the policy's cancellation-of-dishonest-employee condition is not applicable is that the condition does not apply because the 1998 dishonesty was discovered by the insured prior to the inception of the policy, and the cancellation-of-dishonest-employee condition only applies if the pertinent employee is discovered to be dishonest during the present policy period."
The defendant states this is not Connecticut law and cites numerous cases. In Community Savings Bank vs. Federal Insurance Company, 960 F.Sup. 16 (D.Conn, 1997) the court notes CSB contracted with the defendant to obtain insurance coverage from July 1, 1992 through June 30, 1993, id. page 17. Coverage was provided under the contract by means of a bond. Under the policy, reimbursement for the losses incurred due to the dishonest acts of an employee was provided subject to a Section 12aa of the policy. The court held such a fidelity bond was valid. Section 12aa provided that coverage terminates as to any employee,
immediately on the Assured, or any of its directors, trustees or officers not acting in collusion with such employee, learning of any dishonest act committed by such employee at any time, whether in the employment of the Assured or otherwise, whether or not such act is of the type covered under this bond, and whether against the Assured or any other person or entity. See page 20.
The court went on to note that the record indicated that certain CSB directors not in collusion with the dishonest employee learned of his dishonest acts in 1990. The court went on to hold that because CSB learned of the dishonest acts in August 1990, coverage was terminated under the bond for that employee from that date forward, id. This in a policy that otherwise provided coverage and was effective from July 1, 1992 and June 30, 1993.
The real implications of this reasoning are more succinctly stated in C. Douglas Wilson Company v. Insurance Company of North America, 590 F 2d 1275 (CA 5) where the court appeared to accept the defendant company's reasoning that since Wilson Company knew of the employee dishonesty before the effective date of the fidelity bond, the bonds never went into effect. See also Cooper Sportswear Mfg. Company v. Hartford Casualty Insurance Company, 818 F Supp. 721, 725 (D.N.J. 1993).
The case of Verenco, Inc. v. Fidelity Casualty Company of New York, 219 50 2d 508 (La. 1969) is instructive. The policy in that case contained a clause which said in Section 7:
The coverage of this policy shall not apply to any employee from and after the time that the insured or any partner or officer thereof not in collusion with such employee shall have knowledge or information that such employee has committed any fraudulent or dishonest act in the service of the insured or otherwise, whether such act be committed before or after the date of employment by the insured.
In Vernaco, the plaintiff argued this language "is vague and ambiguous and should be construed against the insurer who wrote the policy." Reference in the policy language is made to knowledge obtained in the future; the language says there shall be no coverage "from and after the time that insured . . . shall have knowledge . . . that such employee committed any fraudulent or dishonest act." Thus the plaintiff argued knowledge of past dishonest acts prior to the effective date of the policy "could not be a basis for excluding coverage on account of dishonest acts performed after the effective date of the policy," id., p. 510.
The court rejected this argument at pages 510-11:
As we read the exclusion clause, the coverage under the policy does not apply 'from and after' the moment the insured 'shall have knowledge' of a dishonest act committed by the employee. In the context of this factual situation this means that no coverage ever obtained insofar as Walden was concerned because the insured obtained knowledge of Walden's dishonest acts at least in November 1961 prior to the inception date of the policy in July 1962. The futurity implied in 'shall have knowledge' is coverage after that fact — meaning there can be no coverage after the insured 'shall have obtained knowledge' whether the knowledge was obtained before or after the effective date of the policy.
We think it is implicit in these situations that the parties approach the installation of the policy assuming that all employees are honest until they are known to be otherwise. Thus, if the insured then has knowledge of a dishonest person in his employ, he is aware, by the terms of the exclusion clause, that he is not insured for the dishonest acts of that employee. A contrary view of the exclusion clause such as the plaintiff urges us to adopt would permit the insured to obtain insurance against the dishonest acts of employees he knows were dishonest before employment, although the exclusion clause plainly indicates there can be no coverage after the insured 'shall have knowledge' of dishonesty of his employees. Our interpretation is supported by the very language of the exclusion clause for it explicitly applies to dishonest acts committed before or after the date of employment by the insured.
Given this case law the defendant argues that summary judgment is mandated by the terms of the policy. The court will discuss cases cited by the defendant in more detail later in the opinion.
3.
The plaintiff, in opposing the motion, relies on a basic principle of insurance law. Ambiguities are resolved against the insurance company where policy language raises a dispute over coverage, Hanson v. Ohio Casualty Company, 239 Conn. 537, 544-45 (1996), this is so says the court because the company draws up these insurance contracts. Also mentioned is Ceci v. National Indemnity Company, 225 Conn. 165 (1993) where it says at pages 175-76, ". . . if it is reasonably possible to do so, every provision of an insurance policy must be given operative effect . . . because parties ordinarily do not insert meaningless provisions in their agreements." Finally, Western World, Inc. Co. v. Stack Oil, Inc., 922 F 2d 118 121 (CA 2, 1990) is cited where the court says: "Where recovery under a policy turns on the interpretation of an exclusionary clause, the insurer bears the burden of demonstrating that the loss is excluded under the express terms of the policy." Cf G R Tire Dist., Inc. v. Allstate Insurance Company, 177 Conn. 58, 66 (1979).
Before moving on to discuss the merits of the dispute, the issue of burden of proof should be addressed. There is a clear distinction in the policy between exclusions and conditions. The clause in question in Form A attached to the policy is defined as a condition. The cancellation as to dishonest employees clause appears to be a condition precedent to coverage under the policy, Young v. American Fidelity Insurance Company, 2 Conn.App. 282, 288-89 (1984). This would make sense in that any information relative to whether the cancellation clause was complied with is exclusively in the insurance claimant's knowledge and possession so that it is not unfair to place the burden on the claimant to show that the clause has been complied with. The court will now try to resolve the merits of the dispute.
4. (a)
The court will first discuss two preliminary matters. The plaintiff's first argument is that in relying on the cancellation for dishonest employee clause which is listed as subparagraph (a), the defendant fails to mention subparagraph (b). Subparagraph (a) reads the insurance is cancelled as to any employee immediately upon discovery of a dishonest act whether before or after employment by the insured. Subparagraph (b) without any reference to (a) then states in relevant part as to cancellation:
(b) On the date specified in a notice mailed to you. That date will be at least thirty days after the date of mailing . . ."
As Ceci points out in the quoted reference previously made, every provision of an insurance contract (and the court might add any contract) must be given effect. The plaintiff argues that (a) and (b) raise issues of ambiguity. Does subparagraph (b) make the "immediately" language of (a) inoperative? Subparagraph (b) implies the policy was still in effect after any "discovery" of the prior dishonest activity in 1998. But both provisions can be given rational meaning. On the one hand the company, by putting this condition in the policy, wants to make it clear under (a) that the policy is cancelled (or there is no coverage thereunder) immediately upon discovery by the identified company managers of dishonesty — the predicate for this result lies with the company and its knowledge, it is not dependent on any action by the insurer.
But there must be some official recordation of the cancellation. It does not lie in the air. And in these situations employee theft against the claimant has already been made known to the insurer by a claim. If the company did not send any notice of cancellation after receiving such a claim which included reference to prior dishonesty, one could see the argument being made — oh, we sent in our claim and our revelation of knowledge of prior dishonesty (i.e., prior to the present claim) and you did not formally give us notice of cancellation — therefore you waived the operation of the condition. In fact, the January 7, 2008 letter sent by Travelers to C.A. White underlines this purpose; the letter states coverage is denied because the dishonest employee's prior dishonest acts in 1998 meant that the policy was immediately cancelled based on the claimant's knowledge of the prior acts.
As to the second sentence of (b) that says notice of cancellation will be as to a date "at least thirty days after the date of mailing," the plaintiff argues that this language "is obviously designed to enable the insured to replace that employee before the cancellation takes place." But how could that be? The cancellation provision in subsection (a) in effect bars coverage for the defalcations of the dishonest employee and makes clear the policy is cancelled no matter what actions the insured might take as to the employee. This provision gives the insurer time to decide whether, as to any claim made, or about to be made, it should make a reservation of rights under the policy and the court supposes allows the company to decide to reinstate coverage if circumstances seem to justify it. These parties are in an ongoing insurance relationship and the insurer would not necessarily have an interest in terminating the whole relationship, if it was not in its interest to do because of the cancellation rights, the policy condition gave it as to the loss inflicted on the insured due to the actions of one employee. The court cannot resolve these motions based on any suggested ambiguity between subparagraphs (a) and (b).
(b)
The insured also refers to the "application form" required to be filled out to secure the policy. A section K states "K. Loss Experience. List all fidelity and crime losses discovered or sustained in the last three years. Check here if none." The type of loss definition in K includes "Employee Dishonesty, Forgery, etc." At the bottom of K it states: "Please attach details of all losses including description, corrective action taken, and amount covered by insurance." The plaintiff argues that this form is highly pertinent. It gives the prospective buyer of insurance the "distinct impression" that losses due to dishonest employee activity would not result in cancellation upon a new claim for loss due to dishonest employee activity if the prior loss occurred three years before the application. Such an impression is further reinforced by the "opaque" nature of the cancellation clause itself.
The court does not accept this argument. Either the cancellation clause is ambiguous or not ambiguous. If it is ambiguous, the plaintiff would prevail on the position it takes on these summary judgment motions; if not and the defendant's construction is correct, then the opposite result would occur.
The point is that interpretation of an insurance contract is a question of law for the court State v. Rowe, 279 Conn. 139, 153 (2006) and in so trying to interpret the cancellation clause, the court is limited to the language of the clause.
The application form is not part of the policy. At the time it was submitted to the insurance applicant, the insurer would have no way of knowing that there was a past history of dishonest employee activity two, three, four, ten years prior to the submission of the application. The section seems geared to inquiring about recent cases of dishonesty and what steps or corrective activity were taken to insure in the applicant's recent activities to insure employee dishonesty is prevented — it explicitly asks for corrective action taken and a description of the loss. The degree of risk at or near the time the application is filed is what would drive the company's decision to provide or not provide insurance.
(c)
The issue then turns on the interpretation of the cancellation clause quoted in the beginning of the memorandum: "This insurance is cancelled as to any 'employee' (a) immediately upon discovery by (1) you; or (2) any of your partners, officers, or directors not in collusion with the 'employee' of any dishonest act committed by that 'employee 'whether before or after becoming employed by you . . ."
As noted, the interpretation of an insurance contract is a question of law for the court. The court has gone to Couch on Insurance, 3d, Russ Segalla for assistance and unfortunately there is a general discussion of the purposes and general validity of these fidelity bond clauses in insurance contracts, but no explicit and specific discussion of the effect of differences in the language of these dishonest employee cancellation causes as to the ambit of their application.
As far as generalities go, in Vol. 11 at § 162:21, Couch says . . ."A policy of fidelity insurance may protect the insurer against the insured's continuing to employ a known defaulter by specifying that the coverage of the policy shall terminate as to any employee upon the discovery of his or her default." Even more to the point perhaps, is the language of § 162:22 where Verneco v. Fidelity and Casualty Company of New York, supra, is cited. In that section it states:
A policy may provide that the insurer shall be liable only as to losses occurring through dishonest or fraudulent acts prior to the time the insured had notice of a default on the part of an employee. Such a provision is neither against public policy nor ambiguous ( Verneco cited).
A fidelity policy precluding coverage after the insured discovers or has knowledge or information that the employee has committed any fraudulent or dishonest act in the service of the insured or otherwise, whether such act be committed before or after the date of employment by the insured, does not require that the fraudulent or dishonest acts be those which would give rise to a claim under the policy but precludes coverage after knowledge of 'any' fraudulent or dishonest act.
As is usual with Couch, numerous cases are cited. The court agrees, of course, with what the general law in this area is stated to be. The numerous cases cited by the defendant support and follow these propositions.
But a cite to general law, though helpful, is not determinative as to how a court, faced with the interpretation of an insurance policy and, more to the point, a particular clause in that policy, should construe the ambit of such a clause. In other words, the question always presents itself as to whether in a particular case the insurer used language in a cancellation clause reflecting the general protection sought to be achieved by these fidelity bonds or afforded itself less protection than was permissible. Thus, in another section of Couch where Verneco is cited, § 160:15 it says in a balanced way:
As in the case of all insurance contracts, the measure of the liability of the insurer is that which is expressed by the terms of the contract. Stated otherwise, a fidelity bond cannot be extended by implication or enlarged by construction beyond the actual terms of the agreement entered into by the parties. And as applied to fidelity bonds, this concept leads to the conclusion that a surety cannot be held liable beyond the terms of his bond.
As said in a case cited by Couch: "In constructing fidelity bonds, courts follow the liberal rules applicable to insurance contracts. However, the bond cannot be extended by implication, or enlarged by construction beyond the actual terms of the agreement entered into by the parties," FDIC v. Aetna Casualty Insurance Company, 426 F.2d 729, 736 (CA5, (1970), see also Great American Insurance Company v. Langdeau, 379 SW 2d 62, 65 (Tex., 1964).
5. (a)
The court will now review the cases cited by the defendant along with the language of their cancellation clauses.
In Larson v. Peerless Insurance Company, 362 SW 2d 863 (Tex.Civ.App. 1962) the clause read:
"This bond shall terminate as to future acts of any employee immediately upon discovery by the insured, or, if a corporation, by any director thereof, or by any officer thereof not in collusion with such employee, of any fraudulent or dishonest act on the part of such employee, whether in the service of the employee or otherwise."
The employer knew that the employee misappropriated $500 before the bond was contracted for. The insurer was not advised of the dishonest act. The court construed the foregoing language to refer to acts by the employee "occurring after plaintiff discovers fraudulent or dishonest acts. The misappropriation of $2,441.50 was a future act which occurred after plaintiff had notice of (the employee's) misappropriation of the $500 . . ." Thus "the $2,441.50 item was expressly excluded from coverage by (the terms of the bond)," id., p. 864. The language of the bond in Larson is very similar to the language in this case even to the point of using the word "immediately."
In Fidelity Casualty Company v. Central Bank of Houston, 672 SW 2d 641 (Tex.App, 1984), the language of the bond said that: "This bond shall be deemed terminated or cancelled as to any employee (a) as soon as the insured shall learn of any dishonest or fraudulent act on the part of such employee." This language appeared in a renewal bond.
The court reasoned that "a renewal policy does not reinstate coverage for an employee that had already been terminated by a known dishonest act; it simply continues whatever coverage existed at the time of the renewal. To hold otherwise would be contrary to the principle that an insurer does not agree to insure a bank from losses caused by an officer known to be dishonest prior to the losses," cite to Ritchie Grocer Company v. Aetna, 426 F.2d 499 (CA8, 1970). In other words, as to this employee, the renewal bond was void from its inception, id., p. 647. The "as soon as" language in this bond is equivalent to "immediately" in Larson, supra and the case now before the court.
In Employers' Liability Assurance Corporation v. Southern Produce, 129 SO 2d 247 (La, 1961), the language of the bond said: "this bond shall terminate (a) as to any employee . . . upon discovery by the employer of any act which may be made the basis of a claim hereunder." The bond was issued in 1951. Thefts by the employee occurred in 1954 and twice in 1957. The company argued there was no coverage after 1954. The company argued that the failure to report the dishonest acts only cancelled the policy in effect from October 1953 to October 1954. Each renewal constituted a separate contract, thus the 1954 concealment had no effect on the bond's validity (or coverage provided by the bond) which was issued for the period October 1956 to October 1957. The court did not accept this argument. Apart from use of the word "immediately," this language and the situation addressed are similar to the case now before the court.
Not all of the cases cited by the defendant are clearly supportive of its position, however.
In St. Joe Paper's Company v. Hartford Accident and Indemnity Company, 359 F2d 579 (CA5, 1966), the bond language was more extensive. It said:
1. The coverage . . . shall not apply . . . from and after the time that the insured or any partner or officer thereof not in collusion with such employee shall have knowledge or information that such employee has committed any fraudulent or dishonest act in the service of the insured or otherwise, whether such act be committed before or after the date of the employment by the insured;
2. This bond shall be deemed cancelled as to any employee: (a) immediately upon discovery by the insured, or by any partner or officer thereof not in collusion with such employee, of any fraudulent or dishonest act on the part of such employee.
Interestingly, in holding that coverage was not provided, the court appeared to refer just to the first clause when it said . . ."we simply hold that the proof herein set forth was more than ample to support a finding by the jury that prior to the inception of these policies, St. Joe's Paper Company came into the possession of both information and knowledge that Jones (the employee) had committed a dishonesty which, under the recited terms of the policies, barred recovery," id., page 583.
In Cooper Sportswear v. Hartford Casualty, Inc., 818 F.Sup. 721 (D.N.J. 1993), the relevant language of the bond mirrored the language, in two paragraphs, in St. Joe's Paper Company v. Hartford, supra. Again, as in the latter case, the court explicitly relied on Section 7 of the policy which as the court said:
. . . excludes coverage for any employee from the time the employer has 'knowledge or information' that the employee has acted fraudulently or dishonestly. Here the insured had such 'knowledge or information' prior to the issuance of Hartford's policy. Hartford, therefore, is entitled to summary judgment and the dismissal of Cooper's complaint, id. p. 725.
Section 15 and its "immediately upon discovery" language is not alluded to by the court.
City Loan Savings Company v. Employers' Liability Assurance Company, 249 F.Sup. (N.D. Ohio, 1964) concerned a policy with language requiring notice of the discovery of dishonest acts, language that said the bond was deemed cancelled "immediately upon discovery" of a dishonest act, and a warranty that contained a representation by the employer that it had no knowledge of a dishonest act by the employee. (Emphasis by this court.) The court held there could be no coverage relying on the discovery language. At page 655 the court said:
(2) There can be no recovery for any loss due to the dishonesty of C.J. Lonsway under the bonds in suit by reason of the actual discovery by the officers of City Loan of specific acts of dishonesty as of February 23, 1956 and, again, thereafter, all as found by this court in its finding of fact Nos. 24 through 53. Such discovery voided coverage of the bond issued as of May 15, 1957 and hence, voided all prior bond coverage, as to C.J. Lonsway by reason of the warranty by plaintiff contained in the 1957 bond. Such discovery terminated bond coverage, as to C.J. Lonsway, under the bonds issued both prior to and on May 15, 1957 by the express terms of the bonds concerning termination. In addition, such discovery, without notice to the surety until June 9, 1958, precludes recovery for the dishonesty of C.J. Lonsway under any of the bonds in suit by reason of the notice provisions of the bonds.
In C. Douglas Wilson Company v. Insurance Company of North America and Hartford Indemnity, 590 F.2d 1275 (CA 4 1979), the court, at page 1279, held:
"Since we conclude that Barksdale's false certification of pre-advances constitutes dishonesty as a matter of law and that Wilson had knowledge of it before the inception of the INA and Hartford policies, and since Wilson concedes that it did not notify INA and Hartford of Barksdale's dishonesty, we sustain the conclusion of the district court that under the terms of their respective policies, INA and Hartford cannot be held liable for Wilson's losses."
The court in footnote 3 quoted the provision of the INA policy it was relying upon which said the policy is deemed terminated or cancelled "as soon as the insured shall learn of any dishonest act on the part of such employee."
The Hartford policy is also quoted from which states coverage shall not apply to any dishonest employee "from and after" the insured "shall have knowledge" that the employee committed a dishonest act. The dissent notes the Hartford policy had an additional clause stating the bond would be cancelled "immediately upon discovery by the insured" of a dishonest act by the employee. This clause was not mentioned by the majority.
The defendant cites other cases in a reply brief which it filed. J.S. Fraering, Inc. v. Employers Mutual Liability Insurance Co., 242 F 2d 609 (CA 5, 1957) has a cancellation clause indicating, like the one before the court, that the policy is to be cancelled "immediately upon discovery of a dishonest act by a particular employee." The case is not that helpful because it is not clear whether there was a failure to notify the company of thefts during the policy period. Clearly these bonds authorize cancellation where discovery of dishonest acts occurring during the policy coverage are not reported.
Home Savings Loan v. Aetna Casualty Surety Company, 817 P.2d 341 (Utah, 1991) is also cited. In that case the relevant language is contained in Section 11 of the policy. It states: "This bond shall be deemed terminated or cancelled as to any employee (a) as soon as the insured shall learn of any dishonest or fraudulent act on the part of such employee . . ."
The court then reasons to the following effect at page 349:
In Ritchie Grover and Verneco, the insureds hired employees who were already known to be dishonest. It was consistent with the policy enunciated by Couch on Insurance to deny insurance coverage for losses caused by subsequent dishonest conduct of those employees: the risk of such losses properly fell upon the insureds who, despite awareness of employee dishonesty, opted to hire the employees. However, in the present case, Glad's dishonesty did not become known by Home until after he had already engaged in the dishonest conduct that caused the losses for which recovery was sought under the Aetna bond. Ritchie Grocer and Verneco, therefore, are not decisive as to whether Home was covered for those losses."
The case did not deal with the precise question presently before the court — whether knowledge of dishonest acts prior to the inception of the policy in effect voided policy coverage ab initio pursuant to the precise language of the cancellation clause.
What the court has found difficult in analyzing these cases is the issue of what should be before the courts in the interpretation of contract language. Public policy considerations are all well and good but what do they have to do with the appropriate interpretation of contract language at least as long as the party arguing for coverage does not advance an interpretation of contract language that would actually violate public policy. If public policy considerations suggest certain language should be included in these fidelity bonds, the legislature can amend our statutes to so provide.
(b)
The plaintiff relies on Home Savings Bank v. Colonial American Casualty Surety Company, 598, SE 2d 265 (N.C.App. 2004). In that case a Ms. Gibson was employed at Home Savings at the inception of bond coverage which covered the period of January 1, 2001 to January 1, 2002. She had worked at Home Savings (the bank) since 1984. The bank became aware of a 1981 conviction for embezzlement at another bank. In May 2001 the bank discovered Gibson had embezzled over a million dollars from it. Colonial had written a bond with the previously mentioned coverage period. It contained the following clause which Colonial relied upon to reject the bank's claim under the policy.
This bond terminates as to any employee or any partner, officer, or employee of any processor (a) as soon as any director, titled officer or risk manager of any insured not in collusion with such person learns of any dishonest or fraudulent act committed by such person at any time, whether in the employment of the insured or otherwise, whether or not of the type covered under Insuring Agreement (A), against the insured or any other person or entity.
Cross motions for summary judgment were filed as here. Before the trial court the bank contended the foregoing language "pertains only to knowledge first obtained after the policy's effective date. Defendant Colonial contends that it also pertains to knowledge of the dishonesty of the employee obtained for the first time by (Home Savings) in 1985," id., p. 268.
The trial court ruled that:
[Home Savings'] contention that the language as soon "as . . . learns" implies learning or discovery after the effective date of the policy is a reasonable one in the context here in which a new policy is being issued by a new insurer, and the new insurer has not been misled as of the effective date by the insured in the preceding application. If the language in question is not clear as contended by Home Savings], then it is at least ambiguous and must be construed in [Home Savings'] favor
The appellate court agreed with the trial court and stated as follows:
We have carefully examined the language of the fidelity bond at issue in the present case with the foregoing principles in mind. We agree with the trial court's conclusion that the construction of the termination clause advanced by Home Savings — i.e., that coverage as to any employee under the bond only terminates where Home Savings initially discovers, after the coverage period's commencement, the employee's dishonest conduct — is a reasonable one. Significantly, the termination clause provides that the bond ' terminates . . . as soon as' Home Savings 'learns' of any dishonest conduct by an employee. Use of the present, rather than past tense here suggests an intent by the parties that coverage under the bond must first commence before discovery of an employee's dishonest conduct will operate to terminate it. This interpretation is supported by the deposition testimony of Colonial's claims counsel, Bourbon, that 'you have to have the bond for the coverage to terminate . . . you have to have the bond issued before . . . the termination provision can apply to the bond claim.'
We conclude that a reasonable reading of the termination clause 'could' produce either the reading offered by [Home Savings] or the reading offered by [Colonial]; therefore, the policy is ambiguous . . .
Applying all of the foregoing case law to the problem before the court regarding the ambit of the cancellation clause in this case, some, if not all, of the cases cited by the defendant rule for the insurer on fact patterns similar to the one before the court and rely on cancellation clauses having language similar to the cancellation clause in this case. But, as noted, not all of the cases cited clearly support its position, see Fidelity Casualty Co. v. Central Bank, supra, St. Joe's Paper Company v. Hartford Accident, supra, City Loan Savings Company v. Employer's Liability, supra (see warranty clause), C. Douglas Wilson Company v. Hartford Indemnity, supra (see language of Hartford policy), Cooper Sportswear v. Hartford Casualty, supra. There is no Connecticut appellate authority on the issue and as to the cases cited by the defendant, except as to one sixteen-year-old case, the rest range in age from twenty to thirty to forty years old. The court, in light of this, although cognizant of the public policy arguments, set forth in the cases, will rely on previously quoted language in § 160:15 of Couch which explicitly states . . ."a fidelity bond cannot be extended by implication or enlarged by construction beyond the actual terms of the agreement entered into by the parties."
Applying the foregoing to the language of this cancellation clause, let us repeat it:
2. Additional Condition Cancellation as to Any Employee: This insurance is cancelled as to any 'employee';
(a) Immediately upon discovery by:
(1) You; or
(2) Any of your partners, officers or directors not in collusion with the employee of any dishonest act committed by that 'employee' whether before or after becoming employed by you.
If we leave all the old case law aside, and in addition, "public policy goals" but keep in mind Couch's admonition as to how these clauses are to be interpreted, it seems, at least to the court, that a common sense reading of this language does not favor the defendants' position.
The language does not talk in terms of "coverage" which might imply the policy as to the particular employee is void from inception. It uses the word "cancellation" which assumes there is an operative policy providing coverage prior to any cancellation. Then it says not just upon discovery of a dishonest act the policy is cancelled but says, "immediately upon discovery." This clearly seems to indicate the discovery contemplated is contemplated as taking place during the term of the current contract of insurance and the operation of the fidelity bond. And the word "discovery" is used instead of "knowledge." How can it be said you "immediately discovered" something before the policy or bond term even began?
True, there is an element of ambiguity in the language referring to a dishonest act committed by the employee "before or after becoming employed" by (the insured). But ambiguity does not help the insurer and the language could refer to claims of dishonesty by a former employer, not the insured, made known to or learned by the present employer after the employee was hired. Is it so improbable that a complaint of theft or embezzlement may be made by a former employer after the employee has left that employment and gotten a job with the employer involved in the coverage dispute with insurance company who also claims it suffered loss due to dishonest acts.
The defendant's position appears to be summed up at one point in its reply brief where it makes two arguments. First, that "plaintiff's position is nonsensical because it would improperly make the condition's subparagraph a meaningless. As plaintiff observes, 'every provision of an insurance policy must be given operative effect' . . . Ceci v. National Indemnity Company, 225 Conn 165, 175-76 (1993)." But that assumes a conclusion to make a point. The plaintiff's position is "meaningless" only in the context of an argument that interprets (a) as unequivocally barring coverage if at the inception to agreed-upon coverage the employer had knowledge of prior dishonest acts by the employee who inflicts loss on the employer after the contract's inception. In other words interpretation of the clause is a predicate to any argument about its ambit.
Secondly, it is said that "under plaintiff's theory, an employer would be encouraged to keep its dishonest employee a secret because coverage would continue until after an insurer was able to discover the dishonesty and send a notice of cancellation." Again, a policy argument favoring the insurer's interests is being advanced to dictate interpretation of contract language.
But let us look more closely at the argument. Something is certainly "held in secret" if you are not asked about it. And more to the point, let us look at real life contexts. An employee commits a dishonest act, he or she is discovered but is not terminated, perhaps because restitution is made. The employer determines it is an incident not likely to repeat, etc. — in other words the employer, in deciding not to terminate, has to be attentive to its own interests and with those interests in mind, decides it's more rational from an economic point of view not to terminate. It appears to make little sense to keep such an employee who might cause serious loss to a company on some theory that "oh well, if he or she financially injures my company again, I can always secure coverage under a policy that may be negotiated months or years after the first act of dishonesty." These are not motivations seriously to be contemplated.
Certainly the plaintiff's interpretation increases the risk borne by the insurer under the policy but the answer to that is to draft policies with clauses like some of those previously discussed in the case law that avert the risk presented by the present policy language. Furthermore, these policies with their fidelity bonds are sold in the market place by competing insurance companies; it won't do to draw up a policy, at the very least ambiguous on the scope of the risk assumed by the insurer, then when a claim is made under it, to import into it all the protections that could have been achieved with clearer policy language because of public policy considerations.
The plaintiff's motion is granted; that of the defendant is denied.