Aetna Indem. Co. v. J.R. Crowe Coal & Mining Co.

• Decision Date: 27 April 1907
• Docket Number: 2,354.
• Citation: 154 F. 545
• Parties: AETNA INDEMNITY CO. v. J. R. CROWE COAL & MINING CO.
• Court: U.S. Court of Appeals — Eighth Circuit

154 F. 545

AETNA INDEMNITY CO. v. J. R. CROWE COAL & MINING CO.

No. 2,354.

United States Court of Appeals, Eighth Circuit.

April 27, 1907

[Copyrighted Material Omitted]

W. B Homer (Botsford, Deatherage & Young, on the brief), for plaintiff in error.

W. F Guthrie (Boyle, Guthrie & Smith, on the brief), for defendant in error.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

ADAMS Circuit Judge.

The mining company brought its action against the indemnity company to recover on a contract whereby the latter undertook to indemnify the former to the extent of $5,000 against loss which might be occasioned by embezzlement or larceny of its funds by David C. Graves, its bookkeeper and cashier, during the year beginning June 1, 1903, and ending June 1, 1904. The defendant agreed to indemnify against 'fraudulent or dishonest acts' of Graves 'amounting to embezzlement or larceny,' subject, however, to a condition in the following words:

That it 'shall be notified in writing, * * * of any fraudulent or dishonest act on the part of the employee, which may involve a loss for which the company is responsible hereunder, immediately after the occurrence of such act shall have come to the knowledge of the employer.'

An embezzlement amounting to some $7,000 occurred while the contract was in force, and a preliminary notice of its possibility was given the defendant on May 28, 1904, and a final notice of its actual occurrence was given June 24, 1904. After refusal by defendant to reimburse the plaintiff to the extent of $5,000, this suit was instituted in the Circuit Court, and resulted in a judgment for $4,409.23; that being the amount of embezzlement found to have occurred during the year covered by the contract. On this writ of error taken by defendant the proceedings below are challenged (1) because the contract was not signed by Graves, (2) because immediate notice of loss was not given, (3) because of breach of warranties made in the statement upon the faith of which the contract was made, (4) because the verdict was excessive and contrary to the court's instructions, (5) because erroneous instructions were given to the jury

Did the failure of Graves to sign the contract invalidate it?

It seems to have been originally prepared with the intention of having him sign it, but for some unexplained reason it was not done. While the contract is denominated a bond, it has few, if any, of the characteristics of a bond. It is essentially a contract of indemnity. Graves was mentioned in it, nor as principal, but as an independent party. No reference was made to him in the body of the instrument, except in one clause, which is to the effect that Graves will save the indemnity company harmless from any loss or damage it might sustain. Two separate and distinct contracts between different parties appear to have been contemplated; one between plaintiff and the indemnity company, consisting of a contract of indemnity, and the other between Graves and the indemnity company, consisting of a contract of guaranty. In the former, Graves was not concerned; in the latter, plaintiff was not concerned. The execution of the contract by Graves is, in terms, made neither a consideration for nor condition of the creation of liability by the indemnity company. The bare fact that these separable contracts were possibly originally intended to be incorporated in one writing does not render them any the less separable and distinct in their nature and purpose.

Moreover, if there were any doubt on this subject, defendant subsequently adopted the instrument, as it was actually signed, as the contract between itself and plaintiff. The instrument sued on was a renewal of that contract. The latter was made June 14, 1901, and insured the plaintiff against the misconduct of Graves for the period of one year from June 1, 1901, to June 1, 1902. After the year had expired, an obligation for a new consideration paid by plaintiff was executed by defendant extending the insurance so as to cover the year ending June 1, 1903. A like extension followed covering the in question occurred. These different extensions were all based upon and recognized the original contract of June 14, 1901, known and numbered by the defendant as bond F. 1,774. The last renewal bore date June 30, 1903, and reads as follows:

'In consideration of the payment of the sum of $20.00, being the premium for the third year upon bond F. 1,774 of the AEtna Indemnity Company for $5,000, * * * said bond is hereby continued in force until June 1, 1904, subject to all the conditions and covenants thereof.'

These renewals, executed for valuable consideration received and appropriated by defendant, clearly affirm the original contract notwithstanding the absence of Graves' signature and estop it from asserting its invalidity when repeatedly so affirmed by it.

Was immediate notice of loss, within the meaning of the contract, given to defendant? This question is presented on an exception taken to the action of the trial court in refusing to instruct the jury to return a verdict for defendant. Our consideration is therefore limited to an inquiry whether there was any substantial evidence before the jury tending to show that the required notice was given.

The contract of indemnity obligated defendant to reimburse plaintiff for the pecuniary loss it might sustain by reason of fraudulent or dishonest acts of Graves amounting to embezzlement or larceny. The notice required to be given was, in the language of the contract, 'of any fraudulent or dishonest act of Graves involving a loss for which the company is responsible'; that is, a loss arising out of embezzlement or larceny by the employe. This notice was required to be given, not immediately after any fraudulent or dishonest act amounting to embezzlement should be committed, but only 'immediately after the occurrence of such act shall have come to the knowledge of the employer.' From this analysis of the contract it appears that the notice required was one that would charge the employe with the commission of a felony, and was required to be given only after knowledge should have come to the employer of the commission of such offense.

In the case of Fidelity & Deposit Co. v. Courtney, 186 U.S. 342, 22 Sup.Ct. 833, 46 L.Ed. 1193, an indemnity contract much like the one now before us, requiring 'immediate notice,' of a default, was under consideration, and it was held that a notice given 'with due diligence under the circumstances of the case, and without unnecessary or unreasonable delay,' would answer the requirement of the contract; that 'immediate notice' is given when it is reasonably immediate.

In American Surety Co. v. Pauly, 170 U.S. 133, 145, 18 Sup.Ct. 552, 557, 42 L.Ed. 977, the Supreme Court, in considering the knowledge required to move an employer to give a notice like that required in this case, approved an instruction given by the trial court in the following words:

'And in considering this issue you are to inquire, first, when it was that the plaintiff became satisfied that the cashier had committed dishonest or fraudulent acts which might render the defendant liable under this policy. He may have had suspicions of irregularities. He may have had suspicions of fraud. But he was not bound to act until he had acquired knowledge of some specific fraudulent or dishonest act which might involve the defendant in liability for misconduct.'

And in doing so observed as follows:

'It may well be held that the surety company did not intend to require written notice of any action upon the part of the cashier that might involve loss, unless the bank had knowledge, not simply suspicion, of the existence of such facts as would justify a careful and prudent man in charging another with fraud or dishonesty. If the company intended that the bank should inform it of mere rumors or suspicions, * * * such intentions ought to have been clearly expressed in the bond.'

These authorities place a reasonable and practical construction upon contracts of the kind in question, one under which the rights of both parties are fairly respected and protected. The serious effect of making a criminal charge upon the character, business social standing, and future prospects of an employe, as well as a proper appreciation of the personal responsibility assumed in making a false charge by an employer, reasonably call for great circumspection and caution in making it. Immediate notice-- that is, literally speaking, instantaneous notice-- is not required to be given, but only such notice as reasonable diligence, under all the circumstances of the case, dictates after knowledge of facts requiring it is obtained. And this is not required to be given on mere rumor of irregularities or suspicion of dishonesty; neither is absolute or complete knowledge of an accomplished crime necessary before the employer is required to act, but only such knowledge of facts as would justify a careful and prudent man in believing a crime to have been committed.

We are accordingly brought to a consideration of the question whether there is any substantial evidence in the record tending to show that plaintiff gave 'immediate notice,' as just defined, after it had acquired 'knowledge,' as just defined, of any dishonest acts of its employe amounting to embezzlement or larceny.

A general consideration of the evidence will suffice to answer the question. Graves had been a trusted employe of plaintiff for five or six years; had during those years been advanced on his merits from the position of bookkeeper to that of secretary and cashier. He handled from $50,000 to $80,000 per month. Until the events next referred to occurred, no suspicion had befallen him. On April 22, 1904, plaintiff...