Aetna Casualty & Surety Co. v. Commercial State Bank

• Decision Date: 11 June 1926
• Parties: ÆTNA CASUALTY & SURETY CO. v. COMMERCIAL STATE BANK OF RANTOUL.
• Court: U.S. District Court — Eastern District of Illinois

13 F.2d 474 (1926)

ÆTNA CASUALTY & SURETY CO. v. COMMERCIAL STATE BANK OF RANTOUL.

District Court, E. D. Illinois.

June 11, 1926.

Acton, Acton & Snyder, of Danville, Ill., for plaintiff.

Gunn, Penwell & Lindley, of Danville, Ill., and Dobbins & Dobbins, of Champaign, Ill., for defendant.

LINDLEY, District Judge.

Originally defendant brought suit at law against the plaintiff to recover upon a surety bond of $10,000 dated December 23, 1920, and effective January 1, 1921, indemnifying the defendant against the fraud or dishonesty of its cashier, one Robinson, as hereinafter set forth. Three annual premium payments were averred to have been made in due course, and defendant sought to recover for losses in each of the three years, 1921, 1922, and 1923. Plaintiff thereupon filed its bill in equity, herein, seeking an injunction against the suit at law, a discovery, an accounting, and a final adjudication upon the questions and amounts of liabilities. The defendant filed its answer, presenting what it claimed to be a true accounting, and, by way of petition for affirmative relief, repeated its averments of the suit at law, seeking to recover judgment against plaintiff as surety upon said bond.

At the outset we meet the question of whether defendant's right to recover, if it has one, is limited to the amount of $10,000 or to that of $10,000 for each of three years. The bond provided that, in consideration of an annual premium of 25 cents per $100 of liability, the plaintiff was bound to pay to defendant such pecuniary loss as the defendant should sustain of money or other personal property, including that for which defendant should be legally liable, through the fraud, dishonesty, theft, embezzlement, wrongful abstraction, misapplication, or misappropriation or any other dishonest or criminal act or omission of the cashier, while the latter held his position, "during the term commencing with the 1st day of January, 1921." Liability was conditioned upon defendant giving plaintiff notice of loss promptly, upon discovery thereof, and filing with plaintiff within three months thereafter itemized statement of claim. Either party was permitted to terminate the agreement by giving thirty days' notice of such desire. No liability attached for losses not discovered within two years after the termination of the bond. Three annual premiums were paid, and defendant is claiming for losses occurring in each of the three years, 1921, 1922, and 1923, aggregating over $30,000. Plaintiff contends that the proper interpretation of this agreement is that the total liability cannot exceed the penalty of the bond, $10,000, that the parties intended that there should be one contract, affording insurance of $10,000 for the entire period, irrespective of how many years the premiums should be paid, and that there was not insurance of $10,000 for each year in which a premium was paid.

The bond must be regarded as an insurance contract, subject to the rules of construction applicable to insurance policies generally, and not to the rules applied to ordinary sureties for accommodations. The governing law is that of insurance, not that of suretyship. People v. Rose, 174 Ill. 310, 51 N. E. 246, 44 L. R. A. 124; U. S. Fidelity Co. v. First National Bank, 233 Ill. 475, 84 N. E. 670; Guarantee Co. v. Bank, 80 F. 766, 26 C. C. A. 146. Contracts of insurance guaranteeing honesty and fidelity are made for the purpose of furnishing, for an adequate compensation, indemnity to the insured, and should therefore be liberally construed to accomplish the purpose for which they are made. American Surety Co. v. Pauly, 170 U. S. 133, 18 S. Ct. 552, 42 L. Ed. 977; Guarantee Co. v. Bank, 80 F. 766, 26 C. C. A. 146; U. S. Fidelity Co. v. Bank, 233 Ill. 475, 84 N. E. 670.

Here defendant paid an annual premium for insurance. Under plaintiff's theory, if there were a loss of $10,000 the first year, not discovered until the end of the three years' period, then, though defendant had paid premiums for the second and third years, it would have no protection for those years, no insurance, for the reason that the penalty of the bond would be completely exhausted by the first year's losses, and nothing would remain to cover losses in the second and third years. In such case, the second and third years' premiums would be paid by defendant for nothing whatever. No sane man would say that this was the intention of defendant, and the court is most loathe to believe that it was the intent of plaintiff, a widely known insurance company, dependent upon the good will and esteem of the public and its customers for its commercial welfare, so to frame its contract of indemnity as to extract premiums from the insured without giving anything in return. Brief indeed would be its life of business prosperity and public esteem, were it known that it would be guilty of such a game of "heads I win, tails you lose." Rather than impute to it such an abhorrent suggestion of lack of commercial integrity and fair dealing, the court prefers to find as he believes the facts clearly indicate, that each year's premium was to buy one year's insurance of $10,000. There is no fact or circumstance warranting a finding that the parties intended that the first year's premium bought insurance of $10,000, but that the three years' premiums bought insurance of only $3,333 1/3 per year.

In this respect the court finds itself in accord with the well-considered cases upon the subject. In Maryland Casualty Co. v. Bank, 246 F. 892, 159 C. C. A. 164 (certiorari denied 246 U. S. 670, 38 S. Ct. 345, 62 L. Ed. 931), the court, in considering a bond which mentioned the date of commencement of liability, but not expressly the date of its termination, said: "The contract made by the delivery and acceptance of the policy with the rider attached stated in the body of it the date of the commencement of the period within which the losses insured against must occur or have occurred. The policy recited that its consideration was `a premium, payable in advance, based upon an annual rate per hundred dollars of suretyship.' * * * That contract was what is known in the insurance business as a `term policy,' under which the insurance contracted for covers only losses occurring before the expiration of the stated term. Further action of the parties, having the effect of creating a new contract, was required to make the defendant liable for any loss or losses occurring after January 10, 1914. Such further action, if taken, would not, in the absence of a stipulation to that effect, either increase or diminish the amount for which the insurer, under its original contract, had already become liable in consequence of losses incurred during the period covered by that contract, though such losses had not been discovered when a new contract was made having the effect of insuring against losses occurring in a later period." Other cases that support this reasoning are Procter Coal Co. v. U. S. F. & G. Co. (C. C.) 124 F. 424; Fla. Cent. & P. R. Co. v. A. Surety Co., 99 F. 674, 41 C. C. A. 45; De Jernette v. Fidelity Co., 98 Ky. 558, 33 S. W. 828; Long v. U. S. F. & G. Co., 130 Mo. App. 421, 110 S. W. 29; Bank v. Bonding Co., 194 Mo. App. 224, 187 S. W. 99; U. S. F. & G. Co. v. Williams, 96 Miss. 10, 49 So. 742; Hawley v. U. S. Fid. Co., 100 App. Div. 12, 90 N. Y. S. 893, affirmed by Court of Appeals in 184 N. Y. 549, 76 N. E. 1096; Maccabees v. Surety Co., 196 Mich. 27, 163 N. W. 7; Brady v. Insurance Co., 11 Mich. 425; Danvers Sav. Bank v. National Surety Co., 166 F. 671, 92 C. C. A. 423, and cases cited in 25 C. J. § 16, pp. 1109 and 1110. Courts in which an opposite conclusion has been reached have grounded their decisions upon a finding that the parties by their contract evidenced an intention to restrict the liability to one penalty without regard to the number of premiums paid. The court has discovered nothing in this record to warrant such finding.

It may well be that the contract is a continuing one. Whether a formal new contract is made at the end of the year, however, is manifestly not the test. The coal jobber who has a contract for the purchase of certain of the output of a mine from month to month, or year to year, has one continuing contract, but each payment of the prescribed price buys an additional ton of coal. The continuity of the contract has no bearing except to fix the prices. So the question here is, What did the defendant buy the first year, what did he buy the second year, and what did he buy the third...