First Sec. Bank & Trust v. New Hampshire Ins. Co.
| Decision Date | 09 June 1989 |
| Docket Number | No. 89-176,89-176 |
| Citation | 441 N.W.2d 188,232 Neb. 493 |
| Court | Nebraska Supreme Court |
| Parties | FIRST SECURITY BANK & TRUST, Appellant, v. NEW HAMPSHIRE INSURANCE COMPANY, Appellee. |
Syllabus by the Court
1. Demurrer: Pleadings. When ruling on a demurrer, a court must assume that the pleaded facts, as distinguished from legal conclusions, are true as alleged and must give the pleading the benefit of any reasonable inference from the facts alleged, but cannot assume the existence of a fact not alleged, make factual findings to aid the pleading, or consider evidence which might be adduced at trial.
2. Insurance: Bonds: Fraud. Discovery of a loss under a fidelity bond occurs when the insured learns facts or obtains knowledge which would justify a careful and prudent person in charging another with dishonesty or fraud.
3. Insurance: Fraud. A loss is discovered once an insured has obtained facts that would cause a reasonable person to recognize that there had been dishonesty or fraud resulting in loss.
4. Insurance: Fraud: Words and Phrases. Discovery of a loss requires discovery of both the loss and the dishonesty.
5. Insurance. To constitute discovery of the loss, the insured must have more than a mere suspicion that a covered loss has occurred.
6. Insurance: Contracts: Fraud: Liability: Time. Where the liability of the insurer is expressly limited in an indemnity or fidelity contract to losses discovered within a specified time, there is no liability unless the fraud, dishonesty, or negligence causing the loss not only occurs but is discovered within the time limit, and the mere fact that the discovery of a fraud during that period is prevented by the concealment thereof will not extend the period of indemnity.
7. Insurance: Notice. The provisions of Neb.Rev.Stat. § 44-358 (Reissue 1988) have no application to insurance policy provisions requiring the giving of notice of loss.
James B. Cavanagh, of Erickson & Sederstrom, P.C., Omaha, for appellant.
John R. Baylor, of Baylor, Evnen, Curtiss, Grimit & Witt, Lincoln, for appellee.
The plaintiff, First Security Bank & Trust, commenced this action to recover losses it alleged it sustained as the result of dishonest and fraudulent acts of James Gillette, an employee and officer of the bank at the time the acts took place. The plaintiff's second amended petition alleged that the losses were covered under the terms of a bankers blanket bond and an excess bank employee dishonesty blanket bond issued to the plaintiff by the defendant, New Hampshire Insurance Company.
The defendant filed a motion to make the second amended petition more definite and certain and to strike redundant or irrelevant matter from the petition. The motion also contained language that, "in the alternative," the defendant demurred to paragraph 10 of the petition, all of the allegations in respect to the excess bank employee dishonesty Blanket Bond, and all "conclusionary statements" in regard to a cause of action for violation of lending limits contained in the petition.
The plaintiff failed to attach copies of the bonds involved to the petition, but sufficient language of the bonds is alleged in the petition and a subsequent stipulation between the parties so that the issues raised by the demurrer can be determined.
Each bond contained a provision that the bond insured against "loss sustained by the Insured at any time but discovered during the Bond Period." (Emphasis supplied.) Each bond also contained a provision that "[a]t the earliest practicable moment after discovery of any loss hereunder the Insured shall give the Underwriter written notice thereof and shall also within six months after such discovery furnish to the Underwriter affirmative proof of loss with full particulars." (Emphasis supplied.)
The stipulation alleged that each bond was canceled and terminated at noon on April 20, 1983.
The petition did not allege a specific date on which the plaintiff discovered the alleged losses, but did allege the following:
8. In January and February, 1983 the plaintiff was first advised by state and federal regulators and law enforcement agencies that James Gillette may have been involved in activities which were apparent violations of the federal statutes although the factual basis for the claimed violations was not revealed. On February 1, 1983 the plaintiff gave notice to the defendant of the advisement from the regulators, and gave further notice on April 13, 1983.
9. Plaintiff submitted a formal proof of loss to the defendant on March 29, 1984 which was the soonest that the plaintiff had sufficient factual information which it could submit with regard to the defalcations of James Gillette. Prior to that time, the plaintiff did not have sufficient factual information for the following reasons:
a) The methods employed by Gillette to remove funds from the plaintiff or loan monies to Newt Copple were done in such a manner as to conceal the true nature of the transaction;
b) Documents were removed from the plaintiff's custody or destroyed by Gillette making it difficult, if not impossible, to reconstruct the transactions;
c) Much of the knowledge of the true nature of the transactions was known only to Gillette, Newt Copple, and federal and state regulators or law enforcement agencies, which were conducting criminal investigations and a Grand Jury investigation;
d) The confidentiality of criminal investigations and Grand Jury proceedings made it impossible for the plaintiff to obtain information as to the true nature of the activities of Gillette;
e) It was not until information regarding the criminal investigations became public that the plaintiff was able to formulate factual information as to Gillette's activities.
10. The delay, if any, of the plaintiff filing a proof of loss within any time constraints established by the Bonds is excused, waived and any purported time constraints are of no effect for the following reasons:
a) The plaintiff's inability, through no fault of its own, to file a formal proof of loss setting forth the particulars of any defalcation or fraud;
b) Much of the factual basis for the claims could not reasonably have been known by the plaintiff to file a proof of loss because of the secrecy and confidentiality of the criminal investigations;
c) Any time restriction within which to file a formal proof of loss with particulars is against public policy and contrary to Nebraska Statute, § 44-357;
d) Any delay in filing a formal proof of loss has not in any manner prejudiced the rights of the defendant or its ability to investigate or defend;
e) The plaintiff has at all times acted in good faith;
f) The time period for filing a formal proof of loss should be tolled.
The trial court treated the defendant's motion as a general demurrer and found that coverage was limited to losses discovered within the bond period, that the provisions of the bonds regarding proof of loss were mandatory, that the plaintiff's allegations that it was excused from compliance with the provisions of the bonds were not effective, that Neb.Rev.Stat. §§ 44-357 and 44-358 (Reissue 1988) were not applicable, that the provisions of the bonds were not void as against public policy, and that the second amended petition failed to state a cause of action. The plaintiff elected to stand upon its petition, and the petition was dismissed. The plaintiff has appealed.
Security Inv. Co. 231 Neb. at 538, 437 N.W.2d at 442, citing Schuyler State Bank v. Cech, 228 Neb. 588, 423 N.W.2d 464 (1988).
In order to state a cause of action on the bonds, it was incumbent upon the plaintiff to allege facts showing that (1) the losses had been discovered within the bond period; (2) written notice of the losses had been given to the underwriter at the earliest practicable moment after discovery of the losses; and (3) proof of loss with full particulars had been furnished to the underwriter within 6 months after discovery of the losses.
The term "discovery," as used in fidelity insurance policies and particularly in bankers blanket bonds, has been defined in a large number of cases.
In Pacific-Southern Mortg. Trust Co. v. Ins. Co. of N.A., 166 Cal.App.3d 703, 709-11, 212 Cal.Rptr. 754, 757-58 (1985), the court stated:
When "discovery of the loss" occurs has been the subject of a great deal of litigation (see Woods, William H., "Conditions to Recovery: Notice, Proof of Loss and Timeliness of Filing Suit" in Bankers and Other Financial Institution Blanket Bonds (A.B.A.1979) p. 395). "Discovery" has been variously defined as occurring when "facts giving rise to a later claim are discovered by the insured, when a claim is made against the insured that may result in a judgment, or when a claim or judgment is settled" (USLIFE Savings & Loan Assn. v. National Surety Corp., 115 Cal.App.3d 336, 346, 171 Cal.Rptr. 393; Continental Ins. Co. v. Morgan, Olmstead, Kennedy & Gardner, Inc., 83 Cal.App.3d 593, 607, 148 Cal.Rptr. 57), or as "knowledge which would justify a careful and...
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