Continental Corp. v. Aetna Cas. & Sur. Co.

• Decision Date: 22 December 1989
• Docket Number: No. 88-3165,88-3165
• Citation: 892 F.2d 540
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: The CONTINENTAL CORPORATION, Plaintiff-Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Defendant-Appellant.

Page 540

892 F.2d 540

58 USLW 2398

The CONTINENTAL CORPORATION, Plaintiff-Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Defendant-Appellant.

No. 88-3165.

United States Court of Appeals Seventh Circuit.

Argued April 20, 1989.

Decided Dec. 22, 1989. ^*

As Amended on Denial of Rehearing March 14, 1990.

Christopher T. Kolb, David B. Halling, Halling & Cayo, Milwaukee, Wis., Stanley Block, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., for plaintiff-appellee.

Francis D. Morrissey, Thomas A. Doyle, Baker & McKenzie, Chicago, Ill., for defendant-appellant.

Before CUDAHY, FLAUM and KANNE, Circuit Judges.

CUDAHY, Circuit Judge.

This appeal arises from a diversity action between two major insurance companies involving the interpretation of the terms of a fidelity bond issued by Aetna Casualty & Surety Company ("Aetna") to Continental Corporation ("Continental"). Continental sought indemnification from Aetna for significant losses it sustained due to the malfeasance of a former corrupt employee of its subsidiary, American Title Insurance ("American"). The former employee is now serving time for issuing fraudulent title insurance commitments and policies. The district court ruled that the provision of the fidelity bond excluding losses resulting from contracts of insurance did not apply to the employee's dishonest acts and that, therefore, Continental's losses were covered. The court granted summary judgment to Continental and, in two separate trials involving damages issues, awarded Continental comprehensive relief, including indemnification of expenses incurred in settling a racketeering conspiracy case filed against American by a competitor. We reverse.

I.

While Michael Maciejewski was employed as a manager at American, he engaged in a real estate fraud scheme with an investor, John Huber. Maciejewski facilitated the scheme by issuing fraudulent and deceptive title insurance commitments and policies that intentionally omitted disclosure of prior mortgages or other encumbrances on property. This practice enabled Huber to trade and mortgage properties without apprising other parties to the real estate transaction (e.g., lenders and buyers) of the true status of the title. Maciejewski resigned from American on March 31, 1983. Two months later, Maciejewski began working for a competitor, Safeco Title Insurance Company ("Safeco"), where he duplicated his earlier scam using Safeco title policies. Eventually the fraud was exposed and Maciejewski and Huber were convicted and sentenced to prison.

Maciejewski's chicanery generated a deluge of claims against American by customers who discovered that their titles or mortgage interests were not as represented in the title policies. American settled these claims for approximately $3.2 million.

Meanwhile, Safeco had filed a racketeering conspiracy suit against American alleging, inter alia, that American was a corporate perpetrator acting in concert with Maciejewski, Huber and others in a scheme to defraud Safeco. Appellant's Supp.App. at 32. Safeco's voluminous complaint charged that American knew of Maciejewski's fraud when Safeco contacted American for a reference on Maciejewski, and that high-ranking American officials actively aided Maciejewski after he moved to Safeco and abetted his schemes there in order to mitigate American's losses. Safeco claimed that American was liable for Maciejewski's perpetration of the real estate fraud scheme under the theory of respondeat superior and as a co-conspirator engaged in unlawful racketeering activity for its own unjust enrichment. The complaint alleged that American was responsible for the "passing of the consequences of the Plan on to ... Safeco as the new deceived title company," which, as a result, suffered significant losses under its own Safeco title policies that were fraudulently issued by Maciejewski while he was employed by Safeco. See Appellant's Supp.App. at 56.

Pursuant to a blanket fidelity bond issued by Aetna, Continental sought indemnification from Aetna for the $3.2 million settlement of customer claims arising from Maciejewski's preparation of fraudulent title policies, for related attorneys' fees and for expenses sustained in defending the pending Safeco litigation. The fidelity bond at issue is the "Form 25 Insurance Companies Blanket Bond" used by sureties--which are themselves insurance companies--to provide fidelity coverage to members of their own insurance industry. This bond provides that Aetna will indemnify Continental for "loss resulting directly from one or more dishonest or fraudulent acts of an Employee ... whether committed alone or in collusion with others." See Insuring Agreement A, Appellant's Supp.App. at 20. The bond expressly defines a covered "employee" to include only persons "employed in, at, or by any of the Insured's offices ... and who are compensated ... and whom the Insured has the right to govern and direct...." Appellant's Supp.App. at 21. The agreement also contains the following indemnification clause:

The Underwriter will indemnify the Insured against court costs and reasonable attorneys' fees incurred and paid by the Insured in defending any suit or legal proceeding brought against the Insured to enforce the Insured's liability or alleged liability on account of any loss, claim or damages which, if established against the Insured, would constitute a valid and collectible loss sustained by the Insured under the terms of this bond.

See Insuring Agreement F.

Of central importance in the present dispute is exclusion (j) of the fidelity bond, which states:

THIS BOND DOES NOT COVER:

(j) Loss or expense resulting from (a) liability of the Insured under contracts or purported contracts of insurance, indemnity, or suretyship, except (1) loss resulting directly or indirectly from liability for the return of unearned premiums upon cancellation of such contracts or (2) loss resulting directly from fraudulent or dishonest acts of an Employee in adjusting or paying fictitious or fraudulent claims asserted under valid contracts of insurance, indemnity or suretyship; or (b) liability of the Insured because an inspection, title search, survey or report was made, not made or improperly made.

See Appellant's Supp.App. at 22.

When Aetna refused to indemnify Continental for its extensive losses, Continental commenced this action. Aetna moved for summary judgment on the ground that the losses resulted from fraudulent contracts of insurance issued by Maciejewski and, therefore, were exempt from coverage under exclusion (j) as a matter of law. The district court denied Aetna's motion and suggested instead that, on the contrary, the matter was as a matter of law covered under the bond. These observations prompted Continental to move for summary judgment, which the district court granted on the liability aspect of the controversy and then set the case for a trial limited to the issue of damages.

Prior to the damages trial, Aetna issued a subpoena for the deposition of Continental's former vice president, who had chaired the insurance industry committee that had drafted the exclusion (j) language contained in the fidelity bond. Upon motion by Continental, however, the district court quashed the subpoena, reasoning that the testimony was not relevant to the damages trial nor would it affect his decision on a future motion to reconsider the question of liability under exclusion (j). See Appellant's App. at 14. Following the litigation of damages issues at a trial conducted on July 14, 1987, the district court denied Aetna's requested reconsideration of the liability issue and ordered Aetna to indemnify Continental for its $3.2 million settlement of claims under the title insurance contracts. The court also awarded indemnification of Continental's attorneys' fees, including fees incurred in defending the pending Safeco case. With respect to Safeco-related attorneys' fees, the court concluded without elaboration that, based on a reading of Safeco's complaint, Aetna had an obligation under the bond to provide a defense to the Safeco litigation on American's behalf. See Appellant's App. at 37.

On October 6, 1987, the Safeco litigation was ultimately settled by Continental for $1.85 million and additional reimbursement was sought from Aetna under the bond's indemnification clause. Aetna filed a Rule 16 motion requesting that Continental be required to file an amended complaint incorporating the new Safeco-related claims and that Aetna be afforded an opportunity to file responsive pleadings and to engage in discovery relevant to these claims. The court denied Aetna's motion. Aetna also moved for summary judgment on the ground that the bond did not cover losses arising from the Safeco settlement. The court denied this motion stating that it had already determined coverage of Safeco-related matters at the earlier damages trial. See Appellant's App. at 48-49. After a two-day trial on the issue of damages relating to the Safeco litigation, the court reiterated that the allegations in Safeco's complaint and assertions made during pretrial proceedings exposed American to liability to Safeco for Maciejewski's dishonest acts while he was an American employee. See Appellant's App. at 54. Accordingly, the court awarded Continental recovery for all its Safeco-related losses, including the $1.85 million settlement and related attorneys' fees. Id. at 52, 59.

On appeal, Aetna's challenge to the district court's disposition of this matter is two-fold. First, Aetna disputes the district court's determination that the losses resulting from Maciejewski's issuance of fraudulent title insurance policies were covered under the fidelity bond notwithstanding exclusion (j). Second, Aetna objects to the district court's ruling that Aetna was liable for indemnification of Continental's losses relating to the settlement of the Safeco litigation. With respect to both issues, Aetna contends that it was not liable...