American Empire Ins. Co. of SD v. Fidelity & Dep. Co. of Md.

• Decision Date: 03 April 1969
• Docket Number: No. 24385.,24385.
• Citation: 408 F.2d 72
• Parties: AMERICAN EMPIRE INSURANCE COMPANY OF SOUTH DAKOTA et al., Appellants, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

408 F.2d 72 (1969)

AMERICAN EMPIRE INSURANCE COMPANY OF SOUTH DAKOTA et al., Appellants, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee.

No. 24385.

United States Court of Appeals Fifth Circuit.

March 6, 1969.

Rehearing Denied April 3, 1969.

W. Warren Cole, Jr., Black, Cobb, Cole, Crotty & Sigerson, Daytona Beach, Fla., for appellants.

Harry T. Gray, Francis P. Conroy, George Stelljes, Jr., Delbridge L. Gibbs, Jacksonville, Fla., Marks, Gray, Yates, Conroy & Gibbs, Jacksonville, Fla., of counsel, for appellee.

Before JONES, WISDOM and DYER, Circuit Judges.

DYER, Circuit Judge:

Fidelity and Deposit (F & D) sought a declaratory judgment to have its liability determined on a fidelity bond issued by it to certain named insureds as defendants. To avoid a multiplicity of suits in various courts, it was stipulated that certain parties claiming to have interests protected by the bond be permitted to intervene.¹ The District Court rendered summary judgment against the intervenors on their claims and their counterclaims, holding that they were neither named insureds in, nor third party beneficiaries of the bond. This appeal followed. We affirm.

The facts are undisputed. The fidelity bond issued by F & D provided for the indemnification of the four corporate named insureds for any losses caused by "fraudulent or dishonest" acts of their employees. The defendant corporations operated as brokers or clearinghouses for insurance companies but sold no insurance of their own. Hail Pool managed a pool created by certain insurance companies to cover hail damage to crops owned by farmers who were insureds of these companies. Hail Pool collected the premiums for these companies and paid any losses suffered by the companies' insureds. At the end of the year any excess was remitted to the participants of the pool. Foreign Management and Pan American acted as intermediaries between insurance companies and reinsurance companies. They transmitted reinsurance premiums from the reinsured company to the reinsurer and remitted return premiums from the reinsurer to the reinsured. The named insureds had the following in common: F. Wylly Clarke was the Chief executive officer and controlled each corporation; each corporation was a named insured in the fidelity bond issued by F & D; each corporation was in possession of premium monies belonging to insurance companies; and each corporation was found to have substantial shortages in its premium accounts.²

The claims made on the bond by the named insureds attributed the shortages to the dishonesty of Clarke acting alone and/or in collusion with others. F & D disclaimed liability under the bond. The plaintiff and the defendants stipulated that American Empire Insurance Company could intervene as the class representative for the Pool Participants who were claiming loss of their premium monies held by Hail Pool and that Stuyvesant Insurance Company could intervene as the class representative for the underwriters who were claiming loss of reinsurance premiums and return premiums entrusted to Foreign Management and Pan American. In addition to seeking recovery on the bond the intervenors counterclaimed for punitive damages, alleging that F & D fraudulently refused to acknowledge its liability under the bond to the named insureds. The District Court granted a partial summary judgment finding that "* * * there is no genuine issue as to any material fact that would sustain the right of any one of the intervenors * * * to recover under the bond * * either as a named insured or as a third party beneficiary protected by the bond * * *." The District Court likewise denied the intervenor's counterclaim for punitive damages.

The sole issue to be resolved in this appeal is whether or not the intervenors are third party beneficiaries of the bond, as they insist. To support this, intervenors urge that it was the underwriting intent of F & D that the intervenors were to be beneficiaries of the bond. This must be concluded, the intervenors say, because of (1) the probable lack of liability of F & D to the named insureds; (2) correspondence exchanged between F & D and the named insureds' president Clarke, and (3) the terms of the bond itself.

Intervenors' attempt to prognosticate the outcome of a trial on the merits of F & D's liability to the named insureds in the bond gives us little pause. F & D's liability vel non has not been decided by the District Court and is not now before this Court. Whether the underwriter may or may not have a defense against its named insureds is not relevant in considering F & D's liability to the Pool Participants as third party beneficiaries of the bond.

The exchange of correspondence between Clarke and F & D, the intervenors argue, furnishes evidence of the underwriting intent to protect the intervenors. On January 16, 1962, Clarke wrote F & D as follows:

In setting up USAFORM Hail Pool, Inc. we will maintain two bank accounts; one a premium account, and the other a general account. Management fees and overwriting commissions will be deducted from premiums and put in the general account which belongs solely to Hail Pool. The premium account belongs to the Pool Companies; however, from this account will be paid losses and loss adjustment expenses incurred, and recognized Pool expenses.

Several of the Pool Companies have approached us and asked if our fidelity bond could be extended to protect them in case of loss in the premium account due to dishonesty of Hail Pool\'s employees. I am wondering if this is not now covered under the bond as follows:

"Ownership of Money or Other Property

"Section 5. The Insured property may be owned by the Insured or held by the Insured in any capacity whether or not the Insured is liable for the loss thereof, or may be property as respects which the Insured is legally liable."

I really don\'t know how to interpret the above unless the Pool participants were named as assureds under the bond. Would this be possible? If they are not named, does our bond protect the companies against loss on the funds in the premium account?

In reply, the Vice President of F & D wrote Clarke:

I have discussed with Mr. Henderson and our executives at our Home Office, your question as to the extent of cover of the "Ownership of Money or Other Property Clause" as appearing in the bond. It is our opinion that the funds in the "Premium Account" are covered against loss through any of the acts covered by our bond caused by employees of our USAFORM as defined therein.

The premiums in the "Premium Account", although they may belong to the Pool members, constitute money "belonging to USAFORM", or in which Hail Pool has a pecuniary interest, or for which the corporate entity is legally liable, or held by the Corp., in any capacity whether legally liable therefor or not.

We cannot extend the bond to the Pool\'s participants since they do not qualify as "joint insureds". Our liability is confined to USAFORM Hail Pool, Inc., and we cover only the losses which it may sustain through acts covered by the bond. If funds in the "Premium Account" are embezzled by the employees of Hail Pool, therefore, we would reimburse the Corp. for such funds either as property held by USAFORM in any capacity as respects which it is legally liable to others, viz, the Pool\'s participants. In other words such property is covered by the bond but not directly in favor of the Pool\'s participants.

The Pool\'s participants are not eligible to be Joint Insureds under the bond under our rules because to include them as such would make the bond liable for the acts of their employees, in addition to the acts of USAFORMS employees.

We believe the above interpretation should satisfy the Pool\'s participants as to a possible loss in the "premium account" due to dishonesty of Hail Pool\'s employees.

Thereafter Clarke wrote one of the Pool Participants:

While we cannot arrange with Fidelity and Deposit to extend coverage to the pool companies as "joint insureds", it is true that we are covered against losses which may be sustained through acts covered by the Commercial Blanket Bond. This, in turn, means that the pool companies would be protected.

If the correspondence may be considered as evidence of underwriting intent, about which we have grave doubts because the bond's language is clear and unambiguous, we read the letters to say no more than that the Pool Participants could be indirectly benefited by the bond since an insured loss of the Premium Account funds would be covered and Hail Pool would then be paid under the terms of the bond. To include the Pool Participants within the coverage of the bond would result in the inclusion of their employees. It is obvious that such was not the intent of the parties.

Going one step further the intervenors argue that the correspondence is not just evidence of underwriting intent, it is a constituent part of the bond. This is both novel and unsound. There was no correspondence by F & D with the Pool Participants. The Pool Participants were never named as additional insureds. F & D refused to name any of them in its fidelity bond. None of the Pool Participants paid any premium to F & D for protection under the bond or applied to F & D directly for fidelity insurance on the Pool operations. Buxton v. International Indemnity Company, 1920, 47 Cal.App. 583, 191 P. 84, and Aetna Insurance Company v. Eisenberg, 8 Cir. 1961, 294 F.2d 301, relied on by intervenors are inapposite. In Buxton the court held that a letter agreement preceding the issuance of a policy, that the policy would cover certain risks, became a part of the insurance contract subsequently issued. Here F & D never recognized the right of any Pool Participant, nor did F & D ever send a letter to a Pool Participant giving any interpretation of the bond, or indicating that its coverage extended to anyone other than the named insureds. In Eisenberg, the contract specifically gave the customers...