Farmers & Merchants Bank v. Home Ins. Co.

• Decision Date: 26 June 1987
• Citation: 514 So.2d 825
• Parties: FARMERS & MERCHANTS BANK v. HOME INSURANCE COMPANY, et al. HOME INSURANCE COMPANY v. FARMERS & MERCHANTS BANK. The JOHNSON AGENCY, INC., and Robert L. Griffith v. FARMERS & MERCHANTS BANK. 85-1118, 85-1119, 85-1177, 85-1178, 85-1189 and 85-1190.
• Court: Alabama Supreme Court

Page 825

514 So.2d 825

FARMERS & MERCHANTS BANK v. HOME INSURANCE COMPANY, et al.

HOME INSURANCE COMPANY v. FARMERS & MERCHANTS BANK.

The JOHNSON AGENCY, INC., and Robert L. Griffith v. FARMERS & MERCHANTS BANK.

85-1118, 85-1119, 85-1177, 85-1178, 85-1189 and 85-1190.

Supreme Court of Alabama.

June 26, 1987.

Rehearing Denied Sept. 18, 1987.

W. Eugene Rutledge and Kay S. Kelly, Birmingham, for appellant/cross-appellee Farmers & Merchants Bank.

Stanley A. Cash of Huie, Fernambucq & Stewart, Birmingham, and Dennis R. Yeager and Richard Imbrogno of Yeager & Lang, New York City, for appellee/cross-appellant Home Ins. Co.

James S. Lloyd and Michael E. Henderson of Clark & Scott, Birmingham, for appellees/cross-appellants The Johnson Agency, Inc., and Robert L. Griffith.

JONES, Justice.

These appeals and cross-appeals arise from a summary judgment entered in a consolidated action. We affirm the judgment.

In July 1975, Farmers & Merchants Bank of Centre (the "Bank") purchased an insurance policy from The Johnson Agency (the "Agency")--the insurance agency with which the Bank transacted all of its insurance business. This new policy was secured on the request of a vice president of the Bank to protect against monetary losses resulting from the negligence of the Bank's officers or directors. ¹

The Bank's president and board of directors approved the purchase of the new insurance policy. Robert L. Griffith, president of the Agency, prepared the policy application to obtain the insurance from Home Insurance Company ("Home"), and later delivered the executed policy to the Bank.

The Home policy, issued to the Bank through the Agency, consisted of two parts styled "DIRECTORS AND OFFICERS LIABILITY" and "COMPANY REIMBURSEMENT LIABILITY"--a standard policy form. The first section provided coverage for Bank directors and officers (reimbursement to the directors and officers directly) under circumstances in which the Bank was not required or permitted to indemnify its directors and officers for losses incurred by them while acting in their capacities as officers and directors. ² The second section provided coverage for losses sustained by the Bank (reimbursement to the Bank) because of the Bank's indemnifying its officers and directors under circumstances in which the Bank was required or permitted to indemnify. ³ The policy was renewed every three years, the latest renewal being made for the period of July 17, 1981, through July 17, 1984.

No claims were made against Home under the policy until January 1983, when a lawsuit was filed against the Bank and one of its officers, alleging fraudulent and dishonest practices. By letter, dated January 21, 1983, Home's lawyer advised Griffith and the Agency of Home's position regarding the lawsuit:

"Further, the complaint is primarily directed against the corporate defendant, the Farmers and Merchants Bank. Under the Policy, the Bank is only an insured to the extent that it may indemnify its directors and officers for covered loss incurred by them. Since the acts alleged in the complaint could not lead to covered loss, there can be no such derivative coverage under the Policy as to the Bank."

Griffith stated that he told the Bank's president of Home's notification of denial of coverage and that he forwarded a copy of Home's letter to the Bank.

In September 1983, the Bank's president notified Griffith of another lawsuit against the Bank and certain of its directors and officers and requested that Home defend the Bank and the officers and directors. Again, by letter to Griffith and the Agency dated September 29, 1983, Home's lawyer set out Home's position:

"Please also inform the Bank that it is not an insured under the Policy, except to the extent that it may indemnify its directors and officers for covered loss incurred by them. In all other respects, the Policy does not cover the Bank, and does not provide for payment of the Bank's legal expenses or for providing a defense for the Bank.

"....

"The Bank is not an insured under the Policy, except to the extent that it may indemnify its directors and officers. Accordingly, to the extent that the complaint asserts claims against the Bank, they would not be covered. Similarly, costs of defense incurred by the Bank would not be covered."

In response to this letter, the Bank's president requested that Griffith advise another insurer of this second lawsuit so that the other insurer could act to protect the Bank under the Bank's blanket bond.

In November 1983, the Bank's president told Griffith of counterclaims filed against the Bank and certain directors and officers in a third lawsuit. Again, the Bank requested that Home provide the Bank and its directors and officers with a defense in the case. The response of Home's lawyer to this claim against the policy was dated November 3, 1983, and it stated:

"As I requested in our telephone conversation of November 10, 1983, please immediately inform the Bank and the directors and officers (the 'Insureds') that the coverage provided by the Policy does not include assumption by Home of the defense of claims made against the Insureds. Rather, under the Policy the Insureds are to prepare and present their own defense, and seek reimbursement for the costs reasonably incurred in defending claims which fall within the coverage of the Policy.

"Please also inform the Bank that it is not an insured under the Policy, except to the extent that it may indemnify its directors and officers for covered loss incurred by them. In all other respects, the Policy does not cover the Bank, and does not provide for payment of the Bank's legal expenses or for providing a defense for the Bank."

Following Home's third letter denying coverage, the Bank (in the Cherokee Circuit Court) filed a declaratory judgment action styled Farmers & Merchants Bank v. The Johnson Agency, Inc., and Robert L. Griffith ("F & M v. Agency "), asking the trial court to find the defendants liable for losses in excess of $7 million allegedly suffered by the Bank because of the negligent acts of the Bank's directors and officers. The Bank alleged both breach of contract and fraud against the defendants, basing its claims on the Home policy sold to the Bank by Griffith.

In a separate action styled Farmers & Merchants Bank v. The Home Insurance Company, The Johnson Agency, Inc., and Robert L. Griffith ("F & M v. Home "), the Bank sought declaratory relief to the effect 1) that Home was obligated to defend the Bank and certain of its directors and officers in the two actions against the Bank and its directors and officers and in the third action against the Bank alone; and 2) that Home was obligated to pay, on behalf of the Bank and its directors and officers, any losses suffered in connection with those actions. The Bank also alleged that Home had breached the contract of insurance and had committed the tort of bad faith failure to perform its obligations under the insurance contract.

The defendants filed motions to dismiss, along with supporting affidavits. The trial court treated the actions as consolidated and treated the defendants' motions as motions for summary judgment. After the motions had been briefed and argued, the trial court granted summary judgment in favor of the defendants on the Bank's claims of breach of contract and denied the defendants' motions for summary judgment as to the Bank's misrepresentation claim in F & M v. Agency. In F & M v. Home, the court granted summary judgment in favor of Home as to the Bank's breach of contract claim as it related to Home's duty to defend the pending suits against the Bank, as well as the claims against the Bank's officers and directors; however, the trial court denied the defendants' motions to the extent that the Bank claimed coverage for reimbursement of the officers and directors, stating that "Home has not denied coverage for such indemnification but has reserved its rights until the respective lawsuits are concluded." The trial court denied the defendants' summary judgment motions as to the Bank's claims against Home for bad faith and fraud.

The defendants filed motions for reconsideration of the trial court's order and in support of their motions filed the affidavit of Griffith. The trial court reconsidered its order and granted summary judgment in favor of the defendants on the fraud and bad faith claims on the ground that these claims were barred by the statute of limitations. The trial court held that "the series of notices [the letters from Home's lawyer] to the Bank ... stated Home's position as to coverage in a clear and unquestionable fashion and constituted as a matter of law a discovery by the Bank of the alleged fraud which commenced the running of the statute of limitations." The Bank appealed; Home, Agency, and Griffith cross-appealed.

On appeal, the Bank advances alternative arguments in contract and in tort. It first maintains that the contract of insurance provides direct coverage to the Bank for the losses made the basis of the Bank's claims under the policy. We find, however, as did the trial court, that the Bank is not the insured under the provisions of the first insuring clause and, therefore, may not bring a direct action against Home under this clause. Rather, the plain terms of this first insuring clause provide direct coverage only to the officers and directors. The Bank, then, in order to recover the losses it sustained as a result of the officers' and directors' negligence, must pursue its claim directly against these officers and directors.

The second insuring clause very plainly provides primary insurance coverage to the Bank to the extent the Bank has indemnified its officers and directors for covered losses incurred by those officers and directors. We agree with the trial court that the second insuring clause has no application to the instant cases, where there has been no claim of indemnification by the Bank.

In further support...