Fort Smith Tobacco & Candy Co. v. American Guar. & L. Ins. Co.

• Decision Date: 05 September 1962
• Docket Number: No. 1585.,1585.
• Citation: 208 F. Supp. 244
• Parties: FORT SMITH TOBACCO & CANDY COMPANY, Plaintiff, v. AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Western District of Arkansas

208 F. Supp. 244

FORT SMITH TOBACCO & CANDY COMPANY, Plaintiff, v. AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, Defendant.

No. 1585.

United States District Court W. D. Arkansas, Fort Smith Division.

September 5, 1962.

Bethell & Pearce, Fort Smith, Ark., for plaintiff.

Harper, Harper, Young & Durden, Fort Smith, Ark., for defendant.

JOHN E. MILLER, Chief Judge.

On March 15, 1961, the plaintiff filed its complaint in the Sebastian Circuit Court, Fort Smith District. In due time the case was removed to this court by the defendant.

The plaintiff seeks to recover judgment against the defendant under the provisions of a Comprehensive Dishonesty, Disappearance and Destruction Policy, issued by defendant effective February 1, 1959, for loss of money and other property sustained through the fraudulent or dishonest act of an employee of the plaintiff.

The plaintiff alleged that the policy was in full force and effect and that the plaintiff sustained the loss of money and property "as a result of the fraudulent or dishonest act of an employee in the amount of $23,684.86, after allowing credit for all recoveries." That the plaintiff has complied with all the provisions of the policy and has made demand upon the defendant for the payment of the loss in accordance with the provisions of the policy of insurance, but defendant has failed and neglected to perform its obligations under the contract.

It prayed judgment for the sum of $20,000, the maximum amount of liability stated in the policy, together with a penalty of 12 percent and a reasonable attorney's fee.

On April 19, 1961, defendant filed its answer in which it denied, "that when said policy of insurance was in full force and effect, plaintiff sustained a loss of money and property, as a result of a fraudulent or dishonest act of an employee, in the amount of $23,684.86, after allowing credit for all recoveries or any other sum."

Denied that the plaintiff has complied with the provisions of the policy and that plaintiff has made demand upon defendant for the payment of said loss in accordance with the provisions of the policy.

The defendant further alleged in paragraph No. 1 of the answer that plaintiff's complaint "fails to state a claim upon which relief can be granted."

The plaintiff, Fort Smith Tobacco & Candy Company, is a corporation incorporated under the laws of the State of Arkansas with its principal office and place of business in Fort Smith, Arkansas.

The defendant, American Guarantee and Liability Insurance Company, is a corporation engaged in the insurance business, organized and existing under the laws of the State of New York with its principal office and place of business in Chicago, Illinois, and is authorized to engage in business in Arkansas.

The court has jurisdiction because of diversity of citizenship of the parties and the amount involved.

Fort Smith Tobacco & Candy Company, hereinafter called the plaintiff, is presently and has been engaged in the wholesale business and distribution of cigarettes, tobacco, cigars, candy, appliances, drugs and sundries, and miscellaneous items in the Fort Smith trade area since 1940. Although the plaintiff is a separate corporation, it is a subsidiary of the Mid-Continent Wholesale Company, located at Denver, Colorado, which, as the parent organization, functions as an accounts payable office and supervises all business actions and activities of the plaintiff. Mr. J. H. Friedman has been since the organization of plaintiff, and is presently, President and Manager. However, he has no official capacity with Mid-Continent Wholesale Company, even though the two corporations are affiliated and have common ownership to some extent.

The defendant, through its Denver Agency Company, issued its Comprehensive Dishonesty, Disappearance and Destruction Policy, No. 1310259, to Mid-Continent Wholesale Company, which policy became effective at noon February 1, 1959, and was in full force and effect from that date. In an endorsement attached thereto, the name of the insured was amended to include the plaintiff along with fifteen other subsidiaries of Mid-Continent Wholesale Company.

This policy replaced a prior policy issued by the Indemnity Insurance Company of North America, which had been in effect from July 1, 1957, to the beginning of the period that the defendant's policy became effective at noon on February 1, 1959.

On April 19, 1961, simultaneously with the filing of its answer, the defendant submitted certain interrogatories to the plaintiff in accordance with the provisions of Rule 33, Fed.R.Civ.P., 28 U.S.C. A.

On May 9, 1961, the plaintiff responded to the interrogatories and stated that, according to the plaintiff's best information and belief, the loss complained of was as follows:

                Cigarettes                 $ 5,672.77
                Drugs and sundries           1,215.23
                Appliances                   7,388.13
                Miscellaneous items          3,193.63
                Fort Chaffee account         6,215.10
                Cash collections             2,851.65
                                           __________
                    Total                  $26,536.51
                

That the fact that a loss had occurred was discovered on or about September 15, 1959, but the plaintiff does not know exactly when it occurred. The extent of the loss claimed was not fully discovered until an audit was completed sometime after October 23, 1959.

That plaintiff was repaid the sum of $2,851.65 by Robert D. Hardcastle, the employee described in paragraph 3 of plaintiff's complaint. (The plaintiff alleged that Mr. Hardcastle was the employee "whose fraudulent or dishonest act" caused the alleged loss.)

That proof of loss was furnished to defendant on or about September 21, 1959, through its representative who was authorized to investigate and adjust the loss. A copy of the document referred to as "proof of loss" was attached to the response and will be referred to hereinafter.

The plaintiff further stated, "Proof of part of the loss will be supported both as to its existence and as to its amount by inventory computations through comparing amounts as reported by Mr. Hardcastle with quantities actually found to be on hand, coupled with his admissions of falsification and alteration of reports and inventories."

On June 1, 1962, plaintiff propounded to defendant certain interrogatories under the provisions of Rule 33, Fed.R.Civ. P., which were responded to by defendant on June 19, 1962. In answer to the interrogatories, the defendant stated that the plaintiff had not submitted adequate proof of employee dishonesty, nor adequate proof that the loss claimed occurred while the policy in question was in force. The defendant further stated:

"It appears that any loss claimed by plaintiff occurred prior to the effective date of the policy involved and at a time when other insurance was in force to cover the alleged loss, which was admittedly discovered within time to have allowed plaintiff to make claim under such other insurance.

"It appears that any loss claimed cannot be established except by an inventory computation, and therefore the same is excluded from the policy under Section 2(b)."

The interrogatories were answered for defendant by J. T. Whalen, who stated that he did not know exactly the date upon which the plaintiff was advised that one of the defenses would be that the loss was covered by a prior bond or policy. Neither did the defendant know when the plaintiff was first notified that defendant was denying liability under the policy.

By interrogatory No. 5 the defendant was requested to advise the date upon which it first notified plaintiff that it was denying liability and to state the manner in which such denial was made known to the plaintiff and the circumstances pertaining thereto.

Interrogatory No. 6 referred to a letter dated April 28, 1960, addressed to James T. Whalen, Zurich Insurance Co., 135 So. LaSalle Street, Chicago, Ill., and signed Denver Agency Company by Patricia Muhr, Claim Department, in which letter the Denver Agency stated:

"Your Denver Claims office referred us to you for information regarding the above claim. According to information we have received, this claim has been denied. But nothing written has ever been received on this; evidently any denial made was made verbally.

"Would you be good enough to write Ft. Smith Tobacco Company denying the claim officially and send a carbon copy of the letter of Mr. Bershof of Mid-Continent Wholesale Company and another carbon to the Denver Agency Company. If this claim has not been denied, please send the above letter with a status report."

Interrogatory No. 7 referred to a letter dated May 4, 1960, from J. T. Whalen, Claim Department of the Zurich Insurance Company, addressed to Miss Patricia Muhr, Claim Department, the Denver Agency, in which he stated:

"We received your letter dated April 28, 1960. When we received notice of this loss by telephone from our Denver Branch Office, we referred the matter to Casualty Adjustment Company for the purpose of conducting an investigation in our behalf. Mr. Bradney of that firm undertook to handle the claim. Shortly thereafter this same insured reported another loss involving an employee by the name of Ralph R. Guthray and Mr. Bradney likewise handled that claim which came to a conclusion that was satisfactory to the insured within a reasonable time.

"This matter involving Robert D. Hardcastle was more complicated because Hardcastle took the position that he was responsible for a definite amount of loss that he had computed or had kept a record of while his dishonest acts were in progress. The insured at that time discovered a substantial inventory shortage and felt that Hardcastle was fully responsible for that condition. I recall talking to Mr. Bradney on a couple of different occasions concerning the progress of his investigation and we were promised a full report as soon as all of the investigation could be completed. Regardless of our inquiries considerable time passed

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