A.B.S. Clothing Collection, Inc. v. Home Ins. Co.

• Decision Date: 19 May 1995
• Docket Number: No. B077598,B077598
• Citation: 41 Cal.Rptr.2d 166,34 Cal.App.4th 1470
• Court: California Court of Appeals Court of Appeals
• Parties: A.B.S. CLOTHING COLLECTION, INC., Plaintiff and Appellant, v. The HOME INSURANCE CO., Defendant and Respondent.

Page 166

41 Cal.Rptr.2d 166

34 Cal.App.4th 1470

A.B.S. CLOTHING COLLECTION, INC., Plaintiff and Appellant, v. The HOME INSURANCE CO., Defendant and Respondent.

No. B077598.

Court of Appeal, Second District, Division 7, California.

May 19, 1995.

Review Denied Aug. 10, 1995.

Revere, Rykoff & Wallace, Frank Revere and Timna Horowitz and Janette S. Bodenstein, Los Angeles, for plaintiff and appellant.

David T. DiBiase and Gary J. Valeriano, Los Angeles, for defendant and respondent.

JOHNSON, Associate Justice.

INTRODUCTION

This breach of contract action by a policyholder against its insurance company raises the following question. When an employee embezzles funds from an employer over a period of years during which the employer carries insurance against employee dishonesty from the same insurer, may the employer recover up to the insurer's limit of liability for each year in which the embezzlement occurs?

This is a question of first impression in California. Courts in other jurisdictions have generally held if coverage is based on a series of separate, independent contracts, then the employer is entitled to recover up to the limit of liability for each policy period in which a loss occurs. On the other hand, if there is but one continuous contract, then the employer's recovery cannot exceed the limit of liability stated in the contract regardless of the number of years the coverage has been in force, the number of policies issued or the number of premiums the employer has paid.

In this action the trial court determined in summary judgment proceedings the policies issued to the employer over a period of years constituted one continuous contract under which the insurer's liability was non-cumulative. Therefore, the insurer's liability did not exceed an amount equal to its liability for one policy period. It was undisputed the insurer had paid the insured an amount equal to its liability for one policy period. Therefore, the trial court held the insurer had not breached the contract and was entitled to summary judgment.

We have determined the trial court applied the correct legal principles to this case. However, upon independent review of the policy provisions contained in the record, (National Union Fire Ins. Co. v. Lynette C. (1991) 228 Cal.App.3d 1073, 1077, 279 Cal.Rptr. 394), we have concluded those provisions do not support a finding the policies constituted one continuous, non-cumulative contract. Therefore, it was error to enter summary judgment for the insurer.

FACTS AND PROCEEDINGS BELOW

Plaintiff, A.B.S. Clothing Collection, Inc. (A.B.S.) is a corporation engaged in the manufacturing and sale of clothing. In 1989 A.B.S. contracted with defendant Home Insurance Company (Home) for commercial insurance, including commercial crime coverage which indemnifies A.B.S. for losses resulting from employee dishonesty.

The original policy issued by Home provided a "policy period" of April 4, 1989, to April 4, 1990, and a $100,000 limit of liability for loss under the crime coverage. Home issued two subsequent policies covering policy periods from April 4, 1990, to April 4, 1991, and April 4, 1991, to April 4, 1992. Each policy stated it was a "renewal of" the preceding policy and carried a different policy number. Except for the policy periods and policy numbers the provisions of each policy were identical, so far as we can tell from the record. A.B.S. paid an annual premium for the crime coverage. The premium for the last two policy periods was $1,675.

In May 1991, A.B.S. presented a claim to Home under its crime coverage. The claim showed that between July 1988 and May 1991 two employees had stolen a total of at least $1.4 million from an A.B.S. checking account. The yearly breakdown of the loss was:

                 April 4, 1988 to April 4, 1989:  $100,692.27
                April 4, 1989 to April 4, 1990:   $557,636.97
                April 4, 1990 to April 4, 1991:   $779,388.45
                April 4, 1991 to April 4, 1992:   $78,181.62
                

Home acknowledged the validity of A.B.S.' claim and issued a draft in the amount of $100,000 which it contended represented the limit of its liability under the employee dishonesty coverage.

A.B.S. disputed Home's interpretation of its liability and contended Home was liable up to its limit of liability of $100,000 for each policy period coverage was in effect as well as for the year preceding the original policy under the extension of coverage provisions contained in that policy. Thus, according to A.B.S., Home was liable for $378,181.62 calculated as follows: $100,000 for the 1988-1989 policy period, $100,000 for the 1989-1990 policy period, $100,000 for the 1990-1991 policy period and $78,191.62 for the 1991-1992 policy period.

As a result of this dispute over the extent of Home's liability, A.B.S. initiated this action for breach of contract and tortious breach of contract.

Home moved for summary judgment on the ground it had not breached its contract with A.B.S. because the unambiguous provisions of its contract limited its liability to the sum of $100,000 regardless of the number of years the coverage was in force, the number of policies issued or the number of premiums paid. The trial court determined there were no material questions of fact, there was no ambiguity in the coverage provisions regarding Home's limit of liability, and Home's construction of the limit of liability provision was correct as a matter of law. Home's motion for summary judgment was granted and a judgment was subsequently entered in favor of Home. A.B.S. appealed from the judgment.

DISCUSSION

I. AN INSURER SEEKING TO LIMIT THE AMOUNT OF ITS LIABILITY TO THE INSURED FOR LOSSES INCURRED DURING SUCCESSIVE YEARS OF COVERAGE MUST SHOW BY CLEAR AND UNAMBIGUOUS POLICY LANGUAGE THAT THE PARTIES INTENDED TO ENTER INTO ONE CONTINUOUS CONTRACT.

The question whether an insured is entitled to recover the limit of liability for each year a fidelity policy is in effect, when an employee's dishonesty takes place in each year, has been the subject of decisions in other jurisdictions since at least 1896. (De Jernette v. Fidelity & Casualty Co. (Ct.App.1896) 98 Ky. 558, 33 S.W. 828, 830.) Remarkably, it has taken nearly a century for this question to reach a California appellate court. This long delay, however, has provided us with a wealth of case law on which to draw for an answer.

The courts which have addressed the question have approached it from a consideration of the nature of the obligation assumed by the insurer: whether the indemnity afforded is based on separate and distinct contracts for each year involved or is based on a single continuous contract of insurance which remains in effect until cancelled by one of the parties. Over the years, the rule has developed " 'that a renewal of a fidelity policy or bond constitutes a separate and distinct contract for the period of time covered by such renewal unless it appears to be the intention of the parties as evidenced by the provisions thereof that such policy or bond and the renewal thereof shall constitute one continuous contract.' " (City of Miami Springs v. Travelers Indem. Co. (Fla.Ct.App.1978) 365 So.2d 1030, 1032, quoting from Krey Packing Co. v. Employers' Liability Assur. Corp. (Mo.Ct.App.1939) 127 S.W.2d 780, 782; accord, among others, Great American Indemnity Co. v. State (Tx.Ct.Civ.App.1950) 229 S.W.2d 850, 853; Massachusetts Bonding & Ins. Co. v. Board of Co. Com'rs (1937) 100 Colo. 398, 68 P.2d 555, 556.)

Where indemnity is afforded through separate and distinct contracts for specific policy periods the insurer is generally held liable up to its limit of liability for each policy period. (E.g., White Dairy Co. v. St. Paul Fire and Marine Insurance Co. (N.D.Ala.1963) 222 F.Supp. 1014, 1017-1018; City of Miami Springs v. Travelers Indem. Co., supra, 365 So.2d at p. 1031; Great American Indemnity Co. v. State, supra, 229 S.W.2d at p. 853.) On the other hand, where the terms of the contract, taken as a whole, establish an intention the policy be continued indefinitely, subject to the payment of an annual premium, the contract is a continuous one and the insurer's limit of liability is the amount stated in the contract regardless of the number of years involved or number of premiums paid. (E.g., Columbia Hospital v. United States Fidelity & G. Co. (D.C.Cir.1951) 188 F.2d 654, 657; United States Fidelity & Guarantee Co. v. Barber (6th Cir.1934) 70 F.2d 220, 226; Scranton Volunteer Fire Co. v. United States F. & G. Co. (2d Cir.1971) 450 F.2d 775, 776; Santa Fe General Office Credit Union v. Gilbert (1973) 12 Ill.App.3d 693, 299 N.E.2d 65, 71.)

It has been argued determining the limit of an insurer's liability on the basis of whether the contract is "separate" or "continuous" produces unfair results in the case of the insured whose contract is continuous. Suppose, for example, employers A and B have identical coverage, identical policy limits of $100,000 and suffer identical losses of $100,000 each year for four years as the result of employee dishonesty. Suppose, further, each employer first discovers its loss in the fourth year. Employer A, whose contract is deemed "continuous," would recover only $100,000 of its $400,000 loss. Employer B, which had a separate contract in each year a loss occurred, would recover its full loss of $400,000. Furthermore, because employer A suffered a loss of $100,000 in the first year coverage was in effect but did not discover this loss until the fourth year, employer A made premium payments for three years for coverage which in fact did not exist. Employer A, it appears, would have been better off if it had placed its coverage with different insurance companies each year. (See In re Endeco, Inc. (8th Cir.1983) 718 F.2d 879, 882; Columbia Hospital v. United States Fidelity & G. Co., supra, 188 F.2d at p. 600 (Clark, J. dissenting); White Dairy Co. v. St. Paul Fire and Marine Insurance Co., supra, 222 F.Supp. at p. 1018.)

This apparent...