Ashwell & Company v. Transamerica Insurance Company

• Citation: 407 F.2d 762
• Decision Date: 03 March 1969
• Docket Number: No. 16787.,16787.
• Parties: ASHWELL & COMPANY, Inc., Plaintiff-Appellee, v. TRANSAMERICA INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

407 F.2d 762 (1969)

ASHWELL & COMPANY, Inc., Plaintiff-Appellee, v. TRANSAMERICA INSURANCE COMPANY, Defendant-Appellant.

No. 16787.

United States Court of Appeals Seventh Circuit.

February 13, 1969.

Rehearing Denied March 3, 1969.

John P. Hampton, Roger D. Doten, Dent, Hampton & Doten, Chicago, Ill., for appellant.

A. Denison Weaver, Chicago, Ill., for appellee.

Before FAIRCHILD, CUMMINGS and KERNER, Circuit Judges.

KERNER, Circuit Judge.

Plaintiff Ashwell sued defendant Transamerica in a diversity action to recover certain fidelity losses (sustained prior to December, 1966) under a bond issued to it by Transamerica which insured Ashwell against losses caused by the dishonest acts of its employees. Transamerica answered and counterclaimed for reformation of the bond. Ashwell replied raising three affirmative defenses to the counterclaim. Transamerica amended its counterclaim to include an additional count claiming Ashwell owed an unpaid premium. Ashwell moved to dismiss the count seeking reformation or, in the alternative, for summary judgment. After both parties filed various affidavits and exhibits, the court granted the motion for summary judgment from which Transamerica now appeals.

The facts (as they appear from the pleadings, affidavits and exhibits) show that in late 1963, a partner in Ashwell requested Robert L. Slaughter (an insurance agent) to obtain a "Brokers' Blanket Bond" (Standard Form 14) for Ashwell from American Surety Co. After the bond was issued, Transamerica acquired American Surety. On July 1, 1964, Ashwell was incorporated and Transamerica rewrote the bond in order to reflect this change.

In December of 1966, certain negotiations or inquiries were had between Slaughter and Transamerica with a view to continuing the bond with lower coverage. By its terms, the primary bond would have expired on November 30 or December 1, 1966. If the court below was correct in holding that the bond was not a discovery bond,¹ then there would be no need to consider these negotiations as Ashwell would be covered for $100,000 of loss discovered before December 1, 1967, if sustained prior to December 1, 1966.

On January 15, 1967, Ashwell discovered a fidelity loss of $250,000 caused by one of its employees. It was not disputed below that at least $102,500 of the loss was sustained prior to December 1, 1966. Ashwell then complied with the bond by filing a notice and proof of loss and all other conditions precedent to recovery of $100,000 from Transamerica. When Transamerica refused to pay more than $50,000, alleging that the bond was a discovery bond and had been reduced to $50,000 by the December, 1966, negotiations, Ashwell sued.

The primary bond form requested and as rewritten by Transamerica in 1964 was Standard Form 14 which provided:

In consideration of an agreed premium, the TRANSAMERICA INSURANCE COMPANY, a corporation of the State of California, with its Home Office in the City of Los Angeles, hereinafter referred to as Underwriter, hereby undertakes and agrees to indemnify and hold harmless

ASHWELL & COMPANY, INC., Chicago, Illinois hereinafter referred to as Insured, to an amount not exceeding ______

ONE HUNDRED THOUSAND AND 00/100 . . . Dollars ($100,000.00) from and against any losses sustained by the Insured subsequent to noon of the date hereof and while this bond is in force, subject however, to the paragraph of this bond entitled INDEMNITY AGAINST LOSS UNDER PRIOR BOND OR POLICY, and discovered by the Insured subsequent to noon of the date hereof, and prior to the expiration of twelve months after the termination of this bond as an entirety as provided in the first paragraph of Section 10 or in any other manner.

* * * * * *

THE LOSSES COVERED BY THIS BOND ARE AS FOLLOWS:

FIDELITY

(a) Any loss through any dishonest, fraudulent or criminal act of any of the Employees, committed anywhere and whether committed alone or in collusion with others, including loss of Property through any such act of any of the Employees. * * *

This is not a discovery bond. This suit arose because Transamerica, in reissuing the bond in 1964, attached a discovery rider to Standard Form 14, allegedly without authority, which attempted to convert the primary bond to a discovery bond.² This rider was attached to the primary bond despite the fact that a note on the rider excludes its application to bonds covering insureds in Ashwell's type of business, i. e., note brokers.³

As briefed by the parties before us and as decided by the court below, the issue on which this case turns is one of construction of the bond and the rider. The court below found conflicts between the bond and the rider and held for Ashwell on the basis of the rule that ambiguities in an insurance contract are to be resolved in favor of the insured. We do not find it necessary to reach this issue. We see the question before us to be whether Ashwell has established, as a matter of law, that the rider was attached by mistake and should be deleted by reformation.

The crucial factual issue on which this cause turns is whether Transamerica correctly issued a discovery bond as ordered or whether a discovery bond was not ordered but Transamerica erroneously attached a discovery rider to the primary bond. In regard to this issue, in support of its motion for summary judgment, Ashwell submitted the affidavits of Robert L. Slaughter and his father and a copy of the original application to show that a discovery bond was not ordered.⁴ Ashwell also submitted the affidavit of Donald G. Reid, its partner responsible for ordering the insurance, who stated that he never requested the issuance of a discovery bond nor conversion to that form. In opposition, Transamerica submitted various affidavits and exhibits of which none had reference to the bond as originally issued, and, therefore, have no bearing on this issue. It also submitted the affidavit of Josiah B. Pritchard, its Bond Manager, which contained only one final paragraph regarding the original 1964 bond:

10. On July 1, 1964, Transamerica Insurance Company intended to issue to plaintiff and plaintiff intended to receive a broker\'s blanket bond insuring plaintiff, among other things, against losses sustained by plaintiff at any time but discovered after noon on the first day of July, 1964, and prior to the termination or cancellation of such bond as an entirety. Emphasis added.

Federal Rule of Civil Procedure 56(e) governs the form of affidavits to be submitted in support and in opposition to motions for summary judgment. As amended in 1963, it states (1963 amendments in italics):

(e) FORM OF AFFIDAVITS; FURTHER TESTIMONY; DEFENSE REQUIRED Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith. The court may permit affidavits to be supplemented or opposed by depositions, answers to interrogatories, or further affidavits. When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him.

The Committee Comments explain what necessitated the addition of the last two...