Opinion
Docket No. 124595.
Decided March 2, 1992, at 9:15 A.M.
Joseph Falcone, P.C. (by Joseph Falcone), for Bralko Holdings, Ltd.
Mager, Monahan, Donaldson Alber (by Lita Masini Popke), for Insurance Company of North America.
Before: MacKENZIE, P.J., and SAWYER and JANSEN, JJ.
Bralko Holdings, Ltd., appeals from an order of the circuit court granting summary disposition in favor of Insurance Company of North American (ICNA) in Bralko's garnishment action against a broker's blanket fidelity bond issued by ICNA covering third-party-defendant Barbret-LaBadie, Inc. We affirm.
In the underlying action, Bralko obtained a $100,000 consent judgment against Barbret-LaBadie on a claim based upon the payment of $100,000 in commissions to Barbret-LaBadie by Bralko for the sale of certain partnership interests. An offering circular for the partnership interests had prohibited the payment of commissions. In an effort to enforce the judgment, Bralko brought this garnishment action to collect on the judgment under the $25,000 broker's fidelity bond issued by ICNA to Barbret-LaBadie.
The underlying litigation also involved a direct action by plaintiffs against defendants as well as a shareholders derivative action. That case was the subject of an opinion by this Court in Koerber v Alter, unpublished opinion per curiam, decided April 6, 1988 (Docket No. 79369). This case has also previously been before this Court on a prior grant of summary disposition in favor of Bralko, resulting in a reversal in Bralko Holdings, Ltd v Ins Co of North America, unpublished opinion per curiam, decided October 4, 1989 (Docket No. 109574).
The trial court issued a written opinion holding that ICNA was not indebted on the bond to Barbret-LaBadie and, therefore, not subject to the garnishment action. We agree.
The only question before us is whether Bralko may collect under the bond. Bralko argues that the insurance policy at issue insures against liability, not just against loss. We disagree. At issue is an insurance policy known as a "broker's blanket bond." A broker's blanket bond such as the one at issue here is a form of fidelity bond. See 9A Appleman, Insurance Law Practice, § 5735, p 490. Fidelity insurance indemnifies the insured against a loss from want of honesty or fidelity of its employees. Id. at § 5661, p 294. The policy at issue here provided that ICNA would indemnify and hold harmless Barbret-LaBadie "from and against any losses, as hereinafter set forth." The losses covered under the bond include loss "through any dishonest or fraudulent act of any of the Employees, committed anywhere and whether committed directly or by collusion with others, including loss of Property through any such act of any of the Employees."
The leading case in this area is Ronnau v Caravan Int'l Corp, 205 Kan. 154; 468 P.2d 118 (1970). In Ronnau, the plaintiff obtained a judgment against the defendant on a count seeking compensatory and punitive damages for fraudulent misrepresentation. The plaintiff recovered more than $57,000 on this count and sought to garnish the proceeds of a fidelity bond issued to the defendant by Insurance Company of North America.
The Kansas Supreme Court rejected the argument that the fidelity bond insured against liability as well as loss. The court noted that a fidelity bond "is an indemnity insurance contract whereby one for consideration agrees to indemnify the insured against loss arising from the want of integrity, fidelity or honesty of employees or other persons holding positions of trust." Id. at 159. It is insurance procured for the benefit of the insured, not third parties, and the insurer is liable only in the event of a loss by the insured. Id. The Ronnau court explained the differences between indemnity against loss and indemnity against liability:
There is a well-recognized difference between contracts of indemnity against loss and contracts of indemnity against liability. In the former, the insurance company does not become liable until the insured has suffered a proven loss, whereas in the latter, the obligation of the insurance company becomes fixed when the liability attaches to the insured. [ Id. at 160.]
The conclusion in Ronnau that fidelity bonds only indemnify against loss, and not against liability, has been followed in a number of other jurisdictions. See, e.g., Anderson v Employers Ins of Wausau, 826 F.2d 777, 780 (CA 8, 1987); Commercial Bank of Bluefield v St. Paul Fire Marine Ins Co, 175 W. Va. 588; 336 S.E.2d 552 (1985); Foxley Cattle Co v Bank of Mead, 196 Neb. 587; 244 N.W.2d 205 (1976); see also Falcon v Beverly Hills Mortgage Corp, 166 Ariz. App. 311; 802 P.2d 1010 (1990); 175 East 74th Corp v Hartford Accident Indemnity Co, 51 N.Y.2d 585; 435 N.Y.S.2d 584; 416 N.E.2d 584 (1980).
Bralko endeavors to distinguish Ronnau by pointing to the "hold harmless" language in the bond at issue in this case and the fact that Ronnau makes no mention of a "hold harmless" clause in the bond at issue in Ronnau. However, it provides little explanation of how the "hold harmless" language translates into liability coverage beyond observing that the "hold harmless" language must mean something and, therefore, it must mean liability coverage. We disagree.
The question to be answered is from what, exactly, was ICNA holding its insured harmless. Turning to the policy, it provides that the insurer will indemnify and hold the insured harmless from losses sustained by the insured. The policy does not, by its terms, provide that the insurer will hold the insured harmless from its liability. Thus, whatever differences in meaning the drafters of the policy intended between the terms "indemnify" and "hold harmless," those differences are within the context of insuring against loss, not against liability. At most, the policy insures against the loss sustained when a judgment is paid. Because the insured has yet to pay anything on the judgment, it has yet to sustain a loss.
In fact, certain language of the policy not at issue here appears to include within coverage any loss sustained by the loss of property belonging to third parties and in the insured's custody. Such coverage, however, is without regard to whether "the Insured is liable therefor."
We caution that this is not the interpretation of the policy that we draw. As explained in the text of the opinion, our interpretation is much narrower.
Viewed another way, the insured, Barbret-LaBadie, has not only yet to incur a loss, it cannot incur a loss under the meaning of the policy. Bralko's theory against the insured was that the insured had no right to the commissions it received. Bralko received a judgment for the refund of those commissions. How, then, can it be said that Barbret-LaBadie has suffered a loss? One cannot lose that to which he is not entitled. That is, if Barbret-LaBadie was not entitled to the $100,000 in commissions, then it does not suffer a loss. Rather, it is merely returning money that belonged to Bralko; Barbret-LaBadie has lost nothing.
Taken to an extreme, Bralko's theory would allow an insured to rob a bank of a large sum of money and then claim a "loss" on its fidelity bond when called upon to return the money to the bank.
In summary, we hold that a blanket or fidelity bond, such as the one at issue here, insures against loss, but not against liability. Accordingly, the relevant inquiry is whether the insured has suffered a loss, not whether the insured is liable to a third party. Because there has been no showing of a loss by the insured in this case, ICNA was not liable on the fidelity bond to the insured and, therefore, the bond was not subject to garnishment by Bralko in its collection efforts with regard to its judgment against the insured.
Affirmed. ICNA may tax costs.