Admiralty Fund v. Peerless Ins. Co.

• Decision Date: 26 May 1983
• Court: California Court of Appeals Court of Appeals
• Parties: , Fed. Sec. L. Rep. P 99,234 ADMIRALTY FUND, the Income Fund of Boston, Inc., Competitive Capital Fund and Seaboard Leverage Fund, Plaintiffs and Appellants, v. PEERLESS INSURANCE COMPANY, Defendant and Respondent. Civ. 64733.

Page 753

191 Cal.Rptr. 753

143 Cal.App.3d 379, Fed. Sec. L. Rep. P 99,234

ADMIRALTY FUND, the Income Fund of Boston, Inc., Competitive Capital Fund and Seaboard Leverage Fund, Plaintiffs and Appellants, v. PEERLESS INSURANCE COMPANY, Defendant and Respondent.

Civ. 64733.

Court of Appeal, Second District, Division 3, California.

May 26, 1983.

Hearing Denied July 20, 1983.

Greenberg, Bernhard, Weiss, Rosin & Fern, Inc. and Herbert A. Bernhard, Stephen H. Marcus, and Michael J. Finkle, Los Angeles, for plaintiffs and appellants.

Anderson, McPharlin & Conners and Eric N. Winter, Los Angeles, for defendant and respondent.

KLEIN, Presiding Justice.

Plaintiffs and appellants Admiralty Fund, The Income Fund of Boston, Inc., Competitive Capitol Fund and Seaboard Leverage Fund (Funds) appeal from a judgment entered pursuant to the granting of defendant and respondent Peerless Insurance Company's (Peerless) motion for summary judgment.

For the reasons hereinafter expressed, we conclude that equitable tolling principles may be applicable to the loss discovery provision in the fidelity insurance contract in issue in the present case.

Since the trial court in granting the summary judgment on the theory that there was "no triable issue as to the facts surrounding the loss discovery provision" did not consider the application of such principles, we reverse and remand.

PROCEDURAL AND FACTUAL BACKGROUND

On October 10, 1975, the Funds filed a second amended complaint against Peerless and other insurance companies for damages and declaratory relief. The Funds' complaint alleged that on or about January 28, 1960, Peerless entered into a written insurance agreement whereby Peerless insured the Funds against loss up to $500,000 resulting from the occurrence of certain described "insured risks," including loss through any fraudulent or dishonest acts committed by employees of the Funds.

The complaint further set forth that between December 31, 1959, and September 18, 1970, while the policy was in full force and effect, the Funds suffered losses as a result of the occurrence of insured risks, that it performed all conditions, covenants and promises to be performed under the policy, and that Peerless breached the agreement by refusing to pay for the losses.

On September 12, 1975, Peerless filed its answer denying the allegations and setting forth certain affirmative defenses.

Thereafter discovery was undertaken by Peerless, and on November 21, 1977, Peerless moved for a summary judgment, claiming On December 13, 1977, the Funds filed opposition to Peerless' motion for summary judgment. ¹

that its policy with the Funds expired on September 18, 1970, and that under its terms, the policy provided indemnity only for loss "discovered not later than one year from the end of the policy period," and that since the Funds did not discover any loss prior to September 18, 1971, Peerless was entitled to judgment.

On December 15, 1977, Peerless' motion for summary judgment was heard and granted. ²

Thereafter, on January 9, 1978, the Funds filed a motion for "Vacation or Modification of Order Granting Peerless' ... Motion for Summary Judgment," which motion was heard on April 11, 1978, and only partially granted. The minute order reflects, inter alia, that the summary judgment granted to Peerless on December 15, 1977, and thereafter prepared and submitted to the trial court had not been signed as of April 11, 1978; that Peerless now was to have an order for a summary judgment but no final summary judgment was to be entered prior to the termination of the action.

Finally, after the actions pending against other defendant insurance companies had been settled and dismissed, a request was made to enter Peerless' summary judgment, which judgment was filed February 5, 1981.

The Funds timely appealed.

CONTENTIONS

The Funds main contention is that the trial court erred in not applying tolling principles to the one year discovery period triggered by the Funds suffering an impossibility of discovery during that period due to the adverse domination and control by the very defalcating "employees" who caused the losses.

The Funds also assert that Peerless should have been required to show prejudice resulting from the alleged late discovery, and that there existed a question of fact as to when discovery occurred since the wrongdoers' knowledge of their own fraudulent acts may have constituted "discovery" within the time frame of the policy.

Finally, the Funds claim that there was no evidence to show that the parties agreed to strictly construe the one year discovery period in the manner interpreted by the trial court, namely, as a "quid pro quo" for Peerless' assumption of coverage for past losses.

Peerless seeks to support the trial court's rulings.

DISCUSSION

1. The role of the reviewing court.

In its motion for summary judgment, Peerless set forth that the Funds admitted in interrogatories that their first notice of fraudulent or dishonest acts giving rise to the claim of loss came in "early 1973." On its face, the policy terminated September 18, 1970, and the one year "discovery" period ended September 18, 1971. Therefore, Peerless argued, the policy by its terms did not apply in this fact situation and Peerless The Funds did not dispute these facts. ⁴ However, the Funds contended that equitable tolling principles based on impossibility of discovery, should apply to the discovery of loss clause, and if applied here would present an issue of material fact as to the alleged impossibility of discovery and any period thereof.

was therefore entitled to summary judgment. ³

The trial court rejected the Funds' theory of the proffered applicable law. Using a strict interpretation of the loss discovery provision, the trial court perceived no disputed facts. Thus, the trial court's legal conclusion foreclosed any further factual determination.

On review, this court is equally entitled, and here particularly is required, to interpret the contract clause in question because the interpretation thereof is the central legal issue to the decision in this case. (See Bareno v. Employers Life Ins. Co. (1972) 7 Cal.3d 875, 881, 103 Cal.Rptr. 865, 500 P.2d 889; Lewis v. City of Los Angeles (1982) 137 Cal.App.3d 518, 522, 187 Cal.Rptr. 273.)

Therefore, our analysis of this summary judgment concerns not the trial court's factual determinations but rather the issues of law ruled on below.

2. Novel question presented on these facts.

California has long recognized the validity of discovery of loss provisions in fidelity insurance policies. (See F.S. Smithers & Co., Inc. v. Federal Ins. Co. (9th Cir.1980) 631 F.2d 1364, 1367 (interpreting California law); Isaac Upham Co. v. United States etc. Co. (1922) 59 Cal.App. 606, 608, 211 P. 809.) Generally, the courts have strictly enforced such provisions so that neither difficulty in discovering insured losses nor employee concealment excuse the insured's performance. (13 Couch on Insurance (Rev.ed. 2d 1982) § 46.194, pp. 149-150.)

Thompson v. American Surety of New York (8th Cir.1930) 42 F.2d 953, 956 held that a company could not recover on a fidelity bond that covered an employee's defalcations despite the company's failure to discover the losses after diligent effort. Similarly, in the case of Fidelity & Cas. Co. v. Hoyle (4th Cir.1933) 64 F.2d 413 the Fourth Circuit upheld a discovery of loss clause even though "discovery of the default was prevented by a falsification of employee's books [citation], or by other means taken to conceal it." (Id., at p. 416).)

However, these cases differ from the present situation of adverse domination and control, in which the very persons that control a company also perform the wrongdoings. Where such facts exist, there is no one to oversee those in charge, and so the concepts of diligence in uncovering an insurable loss and employee concealment are inapposite.

To date, no California decision has discussed the effect that adverse domination and control of the insured by persons who commit the fraudulent or dishonest acts has on a discovery of loss clause. Thus the parties herein present a novel question for California law: whether adverse domination and control of an insured mutual fund during the discovery of loss period, with the resultant alleged impossibility of discovery of an insurable loss, calls for the tolling of the discovery of loss period.

3. California law favors the insured over the insurer whenever possible.

California law treats insurance policies as contracts and so interprets policies according to basic contractual principles. (Boyer v. United States Fidelity & Guaranty Co. (1929) 206 Cal. 273, 276, 274 P. 57; Sullivan v. Union Oil Co. of Cal. (1940) 16 Cal.2d 229, 237-238, 105 P.2d 922; Walters v. Marler (1978) 83 Cal.App.3d 1, 22, 147 Cal.Rptr. 655.) Nevertheless, the courts have favored the insured whenever possible. (Pacific etc. Co. v. Williamsburg (1910) 158 Cal. 367, 369-370, 111 P. 4.) When an ambiguity in a policy's language appears, the courts will construe the terms against the insurance company. (Holz Rubber Co., Inc.

v. American Star Ins. Co. (1975) 14 Cal.3d 45, 55, 120 Cal.Rptr. 415, 533 P.2d 1055; Beaumont-Gribin-Von Dyl Management Co. v. California Union Ins. Co. (1976) 63 Cal.App.3d 617, 622, 134 Cal.Rptr. 25.) "If semantically permissible, the insurance contract will be given such construction as will fairly achieve its manifest object of securing indemnity to the insured for losses to which the insurance relates." (Beaumont-Bribin-Von Dyl Management Co. v. California Union Ins. Co., supra, at p. 622, 134 Cal.Rptr. 25; Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115, 95 Cal.Rptr. 513, 485 P.2d 1129.)

Thus, the general tenor of insurance policy interpretation manifests a concern for fulfilling the purpose of the insurance, that is, to indemnify the insured in case of loss. "[O]rdinarily such indemnity should...