Brown v. Underwriters at Lloyd's, 34414

• Decision Date: 21 November 1958
• Docket Number: No. 34414,34414
• Citation: 332 P.2d 228,53 Wn.2d 142
• Court: Washington Supreme Court
• Parties: Wendell P. BROWN, d/b/a Wendell Brown Agency, Appellant, v. UNDERWRITERS AT LLOYD'S, Respondent.

Page 142

53 Wn.2d 142

332 P.2d 228

Wendell P. BROWN, d/b/a Wendell Brown Agency, Appellant, v. UNDERWRITERS AT LLOYD'S, Respondent.

No. 34414.

Supreme Court of Washington, En Banc.

Nov. 21, 1958.

Leavy & Taber, Pasco, for appellant.

Minnick & Hahner, James B. Mitchell, Walla Walla, for respondent.

FOSTER, Justice.

The appellant, a licensed real-estate broker, sued the respondent on a policy of insurance insuring him against any claim for 'breach of duty as real estate agents * * * by reason of any negligent act, error, or omission,' and brings the case here by appeal from a judgment for the defendant insurance carrier. The full insuring clause is set out in the margin. ¹

The policy contains many exclusionary provisions, among which is the following:

'(c) brought about or contributed to by the dishonest, fraudulent, criminal or malicious act or omission of the Assured or any employee of the Assured, * * *.'

Appellant was employed by the owner to sell a building in Pasco, and, in the course of the negotiations which resulted in a sale, represented that the heating and cooling system was adequate, when, in fact, that was not so. In this respect, however, the appellant had made no independent investigation but relied upon the information supplied him by the owner.

The purchaser, upon discovering the heating and cooling system to be inadequate, sued the appellant for the damage sustained and recovered a judgment exceeding $3,000, which the appellant paid. Respondent rejected the promptly tendered defense of the action because of the exclusionary provision previously noticed.

It is abundantly clear from the findings that the only representations made by appellant to the purchaser were the statements made to him by the owner. When this was made clear by the discovery deposition of the purchaser, the tender of defense to respondent was renewed, but was again declined for the same reason as before.

In the trial of the purchaser's action against the appellant, the court instructed the jury respecting the liability for fraudulent representation as follows:

'* * * under the law a real estate agent is under a duty to exercise reasonable care and diligence to ascertain the truth or falsity of information furnished him by his principal, and such agent is responsible for such representations inducing a buyer to purchase property of his principal, if such agent knew the statements were false, or in the exercise of reasonable care and diligence on his part, should have known the statements to be false, or if he made such statements as positive assertions calculated to convey the impression to the buyer that he had actual knowledge of their truth, when in fact he had no such knowledge; * * *.'

After judgment for the purchaser in the damage case, respondent declined to have any connection with an appeal for the reason previously assigned; whereupon, appellant paid the judgment and brought this action against the respondent upon its policy of malpractice insurance.

By the findings of fact herein, which we must accept as true, there was evidence that the appellant believed his statements respecting the heating and cooling system were true, and there was no evidence that the appellant knew the statements to be false. Finding No. 11 is set out in the margin. ²

The issue is whether a misrepresentation, made by the appellant to induce the sale, which was in fact false, but believed by him to be true, is within the exclusionary clause of the policy or not. The trial court held that it was. This is wrong.

Appellant forthrightly concedes that false statements, although innocently made, are actionable. Power v. Esarey, 37 Wash.2d 407, 224 P.2d 323; Pratt v. Thompson, 133 Wash. 218, 233 P. 637. But, this is not to say that such statements are fraudulent.

In an unbroken line of decisions beginning with the organization of this court, the law has been that fraud is never presumed, but must be proved by clear, cogent and convincing evidence. Dobbin v. Pac. Coast Coal Co., 25 Wash.2d 190, 170 P.2d 642; Pickle v. Lincoln County State Bank, 61 Wash. 545, 112 P. 654; Anchor Buggy Co. v. Houtchens, 59 Wash. 697, 109 P. 1019.

In Dunlap v. Seattle Nat. Bank, 93 Wash. 568, 161 P. 364, 367, it is said:

'* * * If, when all the facts and circumstances are taken together, they are consistent with an honest intent, proof of fraud is wanting.'

More recently, in Streeter v. Vaughan, 39 Wash.2d 225, 235 P.2d 193, 198, the court through Judge Donworth said:

'Appellant's statement that he thought that the two cows were reported 'suspect' because they had been vaccinated may have been erroneous professional advice, but there is no showing that appellant acted fraudulently in the sense that he knew that this opinion was false. Appellant expressed his professional opinion which, in the light of subsequent tests of the cattle, was proven to be wrong. This does not constitute actionable fraud.'

A representation of fact believed to be true but which proves to be false is actionable, and our law as of right ought to and does afford a remedy for the damage sustained by the representee, but it is a non sequitur to say that such a representation is fraudulent.

This view was very well expressed by Dean Keeton of the University of Texas law school in the following paragraph:

'A representator is, of course, not dishonest if he is convinced of the existence of the facts asserted to exist. He may, however, be negligent either because he has not discovered, remembered or adverted to certain information that the ordinary man would have discovered, remembered or adverted to, or because the ordinary person possessed of the information that he had would have arrived at a different conclusion.' 1 Okla.L.Rev. 21, 29 (1948). Professor Fowler Vincent Harper of the Yale University law school in his text, A treatise on the Law of Torts, p. 457, § 222, expressed the same view in the following paragraph:

'From what has been said, it is obvious that much of the confusion in the law of deceit arises from the failure to distinguish between three totally different sets of legal ideas and the principles of social policy from which these ideas derive. Unfortunately for the clear and expedient development of the law and for its understanding and rational exposition, courts and many writers have treated all liability for loss in particular transactions caused by language which misrepresented the facts upon which the injured person formulated his judgment, as deceit or fraud. This practice of calling a thing 'fraud' or kindred names has resulted in stretching legal ideas to the point where their misapplication is likely to produce results completely out of line with the policy which the various legal principles are designed to promote.' (Emphasis supplied.)

Over a hundred years ago, the supreme court of North Carolina in Tilghman v. West, 43 N.C. 183, 184, declared:

'* * * Fraud cannot exist, as a matter of fact, where the intent to deceive does not exist: for it is emphatically the action of the mind which gives it existence. * * *' Michigan was one of the first states which sanctioned recovery for statements of fact honestly made but which subsequently proved to be false. Notwithstanding that history, in 1908 the supreme court of Michigan in Aldrich v. Scribner, 154 Mich. 23, 117 N.W. 581, 583, 18 L.R.A.,N.S., 379, said:

'* * * The law would be justly subject to reproach if it afforded no redress in such case. In Michigan the law does give redress in such a case, and that redress may be obtained in an action for fraud. It may seem somewhat unjust to characterize such conduct as fraudulent, but the court was apparently placed in the dilemma of either so characterizing it or of altogether denying compensation, and it chose the least objectionable of these two alternatives. * * *' (Emphasis supplied.)

In Webster's New International Dictionary, 2d Ed. (1940), fraudulent is defined:

'Using fraud; tricky; deceitful. Characterized by, founded on, or proceeding from, fraud; of the nature of fraud. Obtained or performed by artifice.'

Black's Law Dictionary, 4th Ed., 788, 789, says of fraud:

'It [fraud] consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional. * * *'

It cannot be overemphasized that we are here dealing with an exclusionary clause which excepts from coverage losses 'brought about or contributed to by the dishonest, fraudulent, criminal or malicious act or omission of the Assured or any employee of the Assured, * * *.'

Fraud, in this connection, must embrace dishonesty. It is said in 50 Am.Jur. 1126, § 335:

'* * * There must be something more than mere negligence or a mistake of judgment on the part of the employee; the loss must be traced to his fraud or dishonest act. But a fact question of liability for loss may be fairly raised by evidence showing that the employee had such a reckless, wilful, and wanton disregard for the interests of his employer that his acts palpably subjected the employer to likelihood of loss.'

No presumption of knowledge arises from the mere fact that the representation was false. Smith v. Badlam, 112 Vt. 143, 146, 22 A.2d 161, 162.

The supreme court of Kentucky in Jellico Grocery Co. v. Sun Indemnity Co. of New York, 272 Ky. 276, 114 S.W.2d 83, 85, said:

'The company held a policy in the Standard Accident Insurance Company insuring it against fraud, dishonesty, forgery, theft, larceny, embezzlement misappropriation, wrongful abstraction, or willful misapplication of funds by any of its employees. * * * the defalcations must emanate from some moral turpitude on the part of the employee; that such dishonesty or fraud will not be presumed; that the burden of proving the fraud or dishonesty was on the party charging the fraud; that it is a universal rule that...