Gateway State Bank v. North River Ins. Co.
| Decision Date | 21 May 1986 |
| Docket Number | No. 85-1190,85-1190 |
| Citation | 387 N.W.2d 344 |
| Parties | GATEWAY STATE BANK, A Corporation, Appellee, v. The NORTH RIVER INSURANCE COMPANY, A Corporation, Appellant. |
| Court | Iowa Supreme Court |
Thomas J. Shields of Lane & Waterman, Davenport, and Edward P. McNeela and Neal R. Novak of McNeela & Griffin, Ltd., Chicago, Ill., for appellant.
Richard W. Farwell and James D. Bruhn of Shaff & Farwell, Clinton, for appellee.
Considered by UHLENHOPP, P.J., and McGIVERIN, LARSON, SCHULTZ and CARTER, JJ.
This appeal involves the interpretation of a banker's blanket bond. Gateway State Bank initiated a declaratory judgment action against North River Insurance Company, claiming the loss the bank incurred was covered under the terms of the bond. Thereafter, both parties moved for summary judgment and the district court granted summary judgment for the bank. The insurance company appeals and asserts the terms of the bond do not cover the bank's loss. Since we agree with the insurance company, we reverse.
The facts are not in dispute. On February 5, 1982, North River Insurance Company issued a banker's blanket bond in favor of Gateway State Bank. Thereafter, the bank made three loans or "extensions of credit" to Russell Hayward, Jr. d/b/a Hayward Construction Company. Besides being in the excavation business, Hayward traded and purchased heavy construction equipment. The purpose of the loans was purportedly to finance equipment purchases. The loans were granted on September 8, 1982, in the amount of $78,000; September 14, 1982, in the amount of $30,000; and December 1, 1982, in the amount of $228,650.
In each case, the bank extended credit in exchange for promissory notes executed by Hayward. Additionally, Hayward purportedly gave the bank a first lien on several pieces of equipment. In many instances, however, Hayward did not own the piece of equipment on the date of the loan or the equipment was encumbered by prior liens.
Hayward also supplied the bank with some false serial numbers of the purported collateral. The bank did not confirm or verify the serial numbers of the equipment pledged as collateral. The bank's president had examined a couple of pieces of equipment when he drove past Hayward's place of business. Otherwise, the bank never attempted to verify Hayward's ownership interest in the collateralized equipment or searched for liens against the equipment.
The latter part of December 1982 or early January 1983, the bank discovered Hayward's misrepresentations when other creditors of Hayward were claiming interests in the same collateral in which the bank thought it had a superior lien. Thereafter, Hayward defaulted on the loans and the bank was unable to collect on the promissory notes or the collateral. The bank attempted to recover for this loss under its banker's blanket bond. The insurance company specifically denied any and all liability under the terms of the bond.
November 10, 1983, the bank filed a petition for declaratory judgment against the insurance company. The petition sought a declaration of the rights and obligations of the parties pursuant to the banker's blanket bond. Specifically, the bank claimed its losses on the Hayward loans were covered under Clause B(1) and Clause E of the bond. March 15, 1985, the insurance company filed a motion for summary judgment claiming the losses sustained by the bank were not covered under the terms of the bond. The bank filed a resistance to the insurance company's motion and filed its own motion for summary judgment on March 22. July 31 the district court simply ruled on the motions for summary judgment as follows:
Plaintiff's motion for summary judgment is granted.
Defendant's motion for summary judgment is overruled. The insurance company filed its notice of appeal on August 19.
Initially, we note that the trial court did not state its conclusions for sustaining the bank's motion for summary judgment and overruling the insurance company's motion for summary judgment. See Iowa R.Civ.P. 118. We recognize that if a court does overrule a motion it is clear the trial court saw no merit in any of the grounds asserted therein. Lewis v. State, 256 N.W.2d 181, 196 (Iowa 1977). However, if the district court had stated whether it found coverage under Clause B or Clause E, or under both clauses, it would have eliminated unnecessary issues for appellate review. As it stands, the insurance company must argue every ground that the bank asserts is covered under the policy. See Iowa R.Civ.P. 118 advisory committee comment. Therefore, we review both Clause B(1) and Clause E of the banker's blanket bond.
Whether or not the bank's loss was covered under either clause of the bond depends on the construction we place on the terms of the bond. We turn to familiar principles of construction involving an insurance contract.
The cardinal principle of contract construction is that the intent of the parties must control and except in cases of ambiguity, this is determined by what the contract states. Iowa R.App.P. 14(f)(14). Since an insurance policy is a contract of adhesion, we construe its provisions in a light favorable to the insured. Connie's Construction Co. v. Fireman's Fund Insurance Co., 227 N.W.2d 207, 210 (Iowa 1975). On the other hand, in examining an insurance policy, the words and phrases of the policy should not be strained to impose liability that was not intended and was not purchased. State Farm Auto Insurance Co. v. Malcolm, 259 N.W.2d 833, 835 (Iowa 1977); Central Bearings Co. v. Wolverine Insurance Co., 179 N.W.2d 443, 445 (Iowa 1970).
The insurer assumes a duty to define, in clear and explicit terms, any limitation or exclusions to coverage expressed by broad promises. Skyline Harvestore Systems, Inc. v. Centennial Insurance Co., 331 N.W.2d 106, 107 (Iowa 1983). If exclusionary language of the insurance is unambiguous, intent is then to be determined by what the contract itself states. Rich v.
Dyna Technology, Inc., 204 N.W.2d 867, 871 (Iowa 1973).
I. Insuring Clause B is known as "on premises" coverage and provides in relevant part that the insurance company will indemnify the bank for:
(Emphasis added.)
The bank claims its loss is covered under Clause B(1)(b) because Hayward made false and fraudulent representations to obtain the loans or extensions of credit. The insurance company counters that the loss which the bank claims is covered under Clause B is expressly excluded from coverage by Section 2(e) of the bond which states:
EXCLUSION
Section 2. This bond does not cover:
....
(e) loss resulting directly or indirectly from the complete or partial non-payment of, or default upon, any loan or transaction in the nature of a loan or extension of credit, whether involving the insured as a lender or as a borrower, including the purchase, discounting or other acquisition of false or genuine accounts, invoices, notes, agreements or Evidences of Debt, whether such loan or transaction was procured in good faith or through trick, artifice, fraud or false pretenses, except when covered under Insuring Agreements (A), (D) or (E);
We need not decide whether the bank's loss resulted from "false pretenses" covered under Clause B(1). It is obvious that Section 2(e) expressly precludes coverage for the bank's claim under Clause B. The policy clearly and explicitly excludes a claim under Clause B for a loss resulting from the default on a loan even when it was procured by false pretenses.
II. Section 2(e) does not, however, preclude coverage under Clause E. That provision states:
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