American Bonding Company of Baltimore v. Morrow

• Decision Date: 23 July 1906
• Citation: 96 S.W. 613,80 Ark. 49
• Parties: AMERICAN BONDING COMPANY OF BALTIMORE v. MORROW
• Court: Arkansas Supreme Court

96 S.W. 613

80 Ark. 49

AMERICAN BONDING COMPANY OF BALTIMORE v. MORROW

Supreme Court of Arkansas

July 23, 1906

Appeal from Prairie Chancery Court; John M. Elliott, Chancellor reversed.

STATEMENT BY THE COURT.

The American Bonding Company of Baltimore is a foreign corporation doing business in the State of Arkansas as a surety company, and on August 31, 1900, executed to the Bank of DeVall's Bluff, of DeVall's Bluff, Arkansas, a surety bond in the sum of $ 5,000, undertaking to indemnify said bank against any loss sustained on account of any larceny or embezzlement committed by its cashier, G. C Strong, during the term of one year commencing on the first day of September, 1900. The bond contained the following among other conditions and stipulations, viz.:

"This bond shall not lapse at the end of the above if it shall be continued in force by a renewal receipt or receipts executed by the surety, but shall continue in force for the term or terms of such renewal. The liability of the surety, however shall not be cumulative.

"That all the representations made by the employer, his or its officers, to the surety are warranted by the employer to be true; that the employee has not, to the knowledge of the employer, his or its officers, been in arrears or a defaulter in the position covered by this bond, or in any other position, and that the employer, his or its officers, upon becoming aware of the employee gambling, speculating or committing any disreputable, lewd or unlawful act will immediately notify the surety in writing.

"That the surety's liability hereunder shall cease immediately as subsequent acts of the employee from and after discovery by the employer, his or its officers, if any default hereunder on the part of the employee."

This bond was issued upon a written application signed by officers of the bank, containing various statements in response to questions propounded, the truth of which were declared to be warranties by the applicant.

Renewal receipts were subsequently issued by the surety, extending the period of the suretyship from September 1, 1901, for one year, and from September 1, 1902, for another year.

The renewal receipts were in the following form (omitting caption):

"In consideration of the sum of twenty-five dollars, the American Bonding & Trust Company, of Baltimore City, hereby guaranties the fidelity of George C. Strong in favor of Bank of DeVall's Bluff from the first day of September, 1901, to the first day of September, 1902, in the same amount, in the same position, and subject to all the covenants and conditions set forth and expressed in the surety bond No 44228 of this company, heretofore issued on the first day of September, 1900."

The last renewal receipt extending the bond for one year from September 1, 1902, was issued upon a written application signed by the president of the bank and containing the following among other questions and answers, viz.: "4. (a) Has applicant uniformly given satisfaction in his personal conduct and habits?" Answer. "Yes." "(b) Has he kept his accounts correctly and made proper settlements of all cash and securities entrusted to his care?" Answer. "Yes," "(c) Have you any knowledge or any information or are you aware of any habit of the applicant or of any circumstances unfavorably affecting the risk to the surety on the bond applied for? If so, state particularly." Answer. "No." "5. Is he now or has he been from any cause indebted to the bank or its officers? If so, give particulars, stating amount, how incurred, and how payment is secured." Answer. "Does not owe the bank or its officers." "6. Is he now or about to be engaged or entrusted in any other business or employment than the bank's service?" Answer. "No." "11. In case of applicant handling cash or securities, how often will the same be examined and compared with the books, accounts and vouchers and by whom?" Answer. "The auditing committee monthly." "12. (a) At what date and by whom were the applicant's books and accounts (including cash, securities and vouchers, if any) inspected and examined?" Answer. "August 15, by auditing committee, W. J. Wilkins and J. I. Booe." "(b) Were they at that time in every respect correct and proper, securities and funds on hand to balance?" Answer. "They were."

The plaintiff, W. H. Morrow, as receiver of the bank of DeVall's Bluff, brought suit at law against said company to recover the sum of $ 11,038.56, alleged to have been misappropriated and used by the cashier Strong (which said misappropriation, it is alleged, amounted to larceny or embezzlement) during the said three years covered by said bond and the several renewals thereof. The defendant answered, and the cause was transferred to the chancery court upon the motion of defendant alleging "that the transactions and defalcations, if any, as charged against said Strong in the complaint embraced money and various items of account extending over a period of three years, and are of such an intricate nature and so intermingled upon the books and among the papers of the said bank that it is impossible to ascertain accurately the amount of defalcation, if any, or the amount due from said Strong to said bank without the did of a master in chancery."

Said defendant, in its answer, denied that Strong, by acts amounting to larceny or embezzlement, had appropriated the funds of the bank; alleged untruthfulness of the answers to questions in the several applications for the bond, and renewal receipts were set forth as breaches of the contract which released the surety from liability. It is also set forth as a defense that, according to the terms of the bond, the surety is in no event liable for an amount in excess of $ 5,000.

On final hearing the chancellor found that Strong's defalcation during the period named in the bond was $ 1,150.50; during the period named in the first renewal receipt, $ 4,066.72, and during the period of the second renewal receipt, $ 5,851.34, and rendered a decree against the surety company for $ 10,068.06, from which decree an appeal is prosecuted.

Decree reversed.

Ratcliffe & Fletcher, for appellant.

1. All the answers to the questions propounded were warranties, compliance with which were made conditions precedent to any liability on the part of the company, and the burden is upon the receiver to show performance. 38 L.R.A. 297. It is not a question of substantial compliance. The bonding company is entitled to a strict compliance with the conditions and warranties before recovery can be had. 53 Ark. 353; 58 Ark. 565; Ib. 277; Ib. 528; 65 Ark. 240; 22 Wall. 47; 103 F. 427; 95 Fed. III. Being purely a matter of contract, if the bank has failed to comply with its contract, there can be no recovery in this suit. 183 U.S. 402; 125 F. 887; 99 F. 242; 126 F. 89.

2. The court erred in holding that the bond and renewals thereof constituted three distinct bonds, covering as many periods of time. It distinctly provides that "the liability of the surety shall not be cumulative." The renewal bond was a new contract only in so far as it extended the indemnity of the original bond to another year; but there was but one bond with one penalty. 75 S.W. 1076.

M. J. Manning, for appellee.

1. Statements or agreements of the insured which are inserted or referred to in a policy are not always warranties. Whether they be warranties or representations depends upon the language in which they are expressed, the apparent purpose of the insertion or reference, and sometimes upon the relation they bear to other parts of the policy or application. All reasonable doubts as to whether they are warranties or not should be resolved in favor of the assured. 58 Ark. 533. The statements made by the officers of the bank were made in good faith, and were substantially correct. There was no agreement that the declaration was a part of the contract, or that its truth was a condition precedent to recovery, but that the employee had not, to the knowledge of the employer, his or its officers, been in arrears, or a defaulter. 103 F. 431. Conditions on which forfeiture of the contract is claimed being construed strongly against the insurer, the burden is upon it to clearly establish its defense in this case. 41 F. 506; 51 F. 723; 111 U.S. 341; 63 F. 48. Statements made on knowledge or knowledge and belief are not untrue unless shown to have been knowingly false. 100 U.S. 614; 95 U.S. 673. The auditing committee being composed of men of reasonable ability and business experience, the bank was not required to employ expert bank accountants to make the examinations. 68 F. 464; 80 F. 766; Ib. 773.

OPINION

MCCULLOCH, J., (after stating the facts.)...