Corwin Chrysler-Plymouth, Inc. v. Westchester Fire Ins. Co., CHRYSLER-PLYMOUT

• Decision Date: 22 May 1979
• Docket Number: No. 9539,INC,CHRYSLER-PLYMOUT,9539
• Parties: CORWIN, a corporation, Plaintiff, Appellee, and Cross- Appellant, v. WESTCHESTER FIRE INSURANCE COMPANY, a corporation, Defendant, Appellant, and Cross-Appellee. Civ.
• Court: North Dakota Supreme Court

Page 638

279 N.W.2d 638

CORWIN CHRYSLER-PLYMOUTH, INC., a corporation, Plaintiff, Appellee, and Cross- Appellant, v. WESTCHESTER FIRE INSURANCE COMPANY, a corporation,

Defendant, Appellant, and Cross-Appellee.

Civ. No. 9539.

Supreme Court of North Dakota.

May 22, 1979.

Wickham Corwin, of Conmy, Feste & Bossart, Fargo, for plaintiff, appellee, and cross-appellant.

John E. Rowell, of Nilles, Hansen, Selbo, Magill & Davies, Fargo, for defendant, appellant, and cross-appellee.

VANDE WALLE, Justice.

Westchester Fire Insurance Company ("Westchester") issued an insurance policy to Corwin Chrysler-Plymouth, Inc. ("Corwin"), insuring against employee defalcations. After one of Corwin's employees embezzled cash funds from it, Corwin sought reimbursement for the embezzlement from Westchester by filing a claim in accordance with the terms of the insurance policy. Westchester paid part of the claim to Corwin, but denied that the insurance policy covered the remaining loss. Corwin then sued Westchester in the district court to recover its full loss. The district court ordered Westchester to pay Corwin the remaining embezzlement loss, and, because it found that Westchester acted in bad faith in refusing to pay the remaining amount, ordered Westchester to pay compensatory damages to Corwin. Westchester appeals the district court's judgment to this court. Corwin cross-appeals the district court's judgment, arguing that it should have been awarded not only compensatory damages but also exemplary damages. We affirm.

Between April 16, 1971, and April 16, 1974, Westchester insured Corwin against, among other things:

"I. Loss of Money, Securities and other property which the Insured shall sustain through any fraudulent or dishonest act or acts committed by any of the Employees, acting alone or in collusion with others, . . . "

After April 16, 1974, the expiration date of Westchester's fidelity coverage, Corwin was insured under a policy issued by the General Insurance Company of America ("SAFECO").

In October, 1974, one of Corwin's employees confessed to having embezzled over.$19,000. Corwin presented to Westchester a claim for, and a formal proof of loss of, $19,739.60, the loss from the embezzlement, based on auditing reports and the employee's confession. The proof of loss submitted by Corwin included a schedule prepared by John Renner, a certified public accountant, indicating that the employee had embezzled $4,589.04 after the expiration of the insurance policy issued by Westchester. In February, 1975, Westchester paid $14,650.56 to Corwin in an attempt to satisfy the claim. This amount was calculated in the following manner:

                Total amount of embezzlements .............. $19,739.60
                Amount of final two entries on
                 Renner analysis (according to
                 John Renner's schedule, the
                 amount embezzled after the
                 expiration of Westchester's
                 policy) ........................ $4,589.04
                Amount of deductible under
                 policy ............................ 500.00
                                                  ---------
                Amount paid to Corwin ...................... $14,650.56
                                                             ----------
                

Corwin accepted this amount but reserved its right to collect the balance of its claim from Westchester.

In May, 1975, the embezzling employee stated, in an expanded written confession, that she embezzled approximately.$19,000 during four months in 1973. She also explained that, contrary to John Renner's assumption in his preparation of the schedule attached to Corwin's proof of loss, she had not limited her embezzlement to the proceeds from new and used cars. Finally, she stated that she took, at most, only $500 from Corwin in the period following the expiration of the policy issued by Westchester.

After John Renner saw the employee's expanded confession, he attempted to clarify and revise his initial analysis of the situation in a letter to Corwin, which provided, in pertinent part:

"In our review, we limited our work to the area of new and used car sales, as it was in that account receivable control account that the manipulated accounts were lodged. Accordingly, it would be possible that other accounts were manipulated at an earlier date and then ultimately lodged in the vehicle accounts after April 1, 1974. However, to analyze the individual accounts, other than the vehicle accounts, so as to determine exactly which accounts were involved in the lapping process, and the period involved, would be a very time consuming and impractical task. Regardless of the specific accounts involved in the embezzlement, and Without regard to the time that the money involved was actually taken, it would appear that our letter of November 19, 1974, sets forth, as close as possible, the total loss incurred by your company." (Emphasis in original.)

Westchester received a copy of John Renner's letter, but, relying on Renner's first analysis, continued to refuse to pay the balance of Corwin's claim. Westchester never contacted Renner to obtain an explanation of his revised analysis, and the claims manager representing Westchester rejected an invitation to meet with him in person.

Frustrated because of its inability to collect its full claim under the insurance policy, Corwin then sued Westchester in the district court. In its complaint, Corwin asked for a declaratory judgment on the issue of the coverage and for compensatory and punitive damages. Westchester answered by denying further liability under the policy. Westchester also commenced a third-party action against SAFECO, alleging that the loss representing the unpaid balance of Corwin's claim occurred during the period covered by SAFECO's policy. The third-party action against SAFECO was subsequently dismissed with prejudice by stipulation of the parties. By this stipulation, SAFECO agreed to pay to Corwin $500, which was to be set off against any amount recovered by Corwin from Westchester.

After discovery, the district court conducted a trial of this matter. The employee, testifying on behalf of Corwin, described the manner in which she embezzled the money. Most important in this regard was her testimony that after the fall of 1973, although sometimes taking small amounts to make the accounts balance, she never took large sums. She admitted, however, that until she confessed, in October, 1974, she continued to manipulate the books to hide her initial embezzlements. She did this by "lapping" as money was paid in on new accounts, she debited new accounts receivable and credited this money to the old accounts that she created when she initially embezzled the money. Next, testifying in Corwin's behalf, John Renner explained the manner in which he determined the amount embezzled and the reasons for his submission of the second letter to clarify his initial analysis. Finally, Charles Corwin, an official of Corwin Chrysler-Plymouth, Inc., testified about the frustration experienced and the costs incurred by Corwin in its attempt to recover its claim from Westchester under the policy. He also stated that after Westchester paid the initial amount to Corwin under the policy, it never asked for further substantiation or proof of Corwin's claim.

On behalf of Westchester, William Wyatt, the claims manager representing Westchester, testified that there were two defects in Corwin's claim: first, that Corwin never established that the money representing the unpaid balance of its claim was embezzled during the period of Westchester's coverage rather than SAFECO's coverage; and, second, that the loss to Corwin actually occurred after Westchester's coverage ended because the employee continued to conceal her embezzlement through the "lapping" process after April 16, 1974 the expiration date of Corwin's policy with Westchester. With regard to the second argument, Westchester argued that Corwin's loss under the policy occurred not when the employee first removed money from Corwin's possession, but when she transferred money received by Corwin from new accounts to accounts that she created to hide her initial embezzlements.

The district court concluded that Westchester was liable under the policy for the balance of Corwin's claim, that Corwin was entitled to compensatory damages because Westchester acted in bad faith in denying its coverage, ¹ and that Corwin was not entitled to exemplary damages because Westchester had not acted with "fraud, oppression or malice."

Westchester raises two issues on appeal:

"1. Whether, for the purpose of construing the terms of a fidelity loss policy, a loss occurs when a dishonest employee either takes funds or misapplies funds to conceal an earlier taking?"

"2. Whether the trial court's finding that Westchester by its refusal to pay Corwin's claim for the disputed amount breached its obligation to deal with Corwin in good faith was clearly erroneous?"

Corwin raises one issue on cross-appeal:

"Did the trial court err in its finding that the conduct of Westchester towards its insured was not malicious or oppressive, therefore rendering an award of punitive damages inappropriate?"

I

Westchester argues that the district court erred in concluding that, under the terms of the insurance policy, Corwin suffered its loss when the employee removed the embezzled money from Corwin's possession. Citing Couch on Insurance 2d, § 46:185 at 236-237 (1965), and cases cited therein, it argues that amounts embezzled after April 16, 1974, the expiration date of its coverage, to conceal amounts embezzled prior to that date, are not covered under its policy. It appears to argue, in essence, that the time at which funds diverted from proper accounts through "lapping" is the time when the loss occurs under the policy. A necessary corollary to this argument is that the money taken to conceal the initial embezzlements, and transferred to the accounts from which the funds were first embezzled, somehow reimburses the insured for that initial embezzlement loss. Westchester concedes,...