Great Am. Ins. Co. v. Langdeau

• Decision Date: 06 May 1964
• Docket Number: No. A-9810,A-9810
• Citation: 379 S.W.2d 62
• Parties: GREAT AMERICAN INSURANCE CO., Petitioner, v. C. H. LANGDEAU, Receiver of Southern Industrial Life Insurance Co., et al., Respondents.
• Court: Texas Supreme Court

Page 62

379 S.W.2d 62

GREAT AMERICAN INSURANCE CO., Petitioner, v. C. H. LANGDEAU, Receiver of Southern Industrial Life Insurance Co., et al., Respondents.

No. A-9810.

Supreme Court of Texas.

May 6, 1964.

Rehearing Denied June 10, 1964.

Brown, Sparks & Erwin, Will G. Barber with firm, Austin, for petitioner.

John R. Grace, Waggoner Carr, Atty. Gen., Dudley D. McCalla, Joe R. Long and Kerns B. Taylor, Asst. Attys. Gen., Austin, for respondents.

GREENHILL, Justice.

This is a suit to recover on a fidelity bond. C. H. Langdeau, the Receiver of Southern Industrial Life Insurance Company and also the Liquidator of that company for the State Board of Insurance, filed this suit against Great American Insurance Company of New York, which is the surety on the bond and which is herein referred to as 'the surety company.' The bond was issued in accordance with Art. 14.08 of the Texas Insurance Code, to cover the officer responsible for handling the company's funds. ¹ Trial was before a jury, and the jury findings were in favor of the surety company. On the fact questions submitted to it, the jury found that the conduct of the bonded employee had not been of the type protected against by the fidelity bond. The Court of Civil Appeals reversed, holding that as a matter of law the acts by the bonded employee constituted that type conduct for which the bond provided protection. 369 S.W.2d 944. The surety company's application for writ of error was granted on the question of whether it was error for the Court of Civil Appeals to hold there was no fact issue for the jury.

Article 14.08 of the Texas Insurance Code provides that a mutual assessment company organized under Chapter 14 shall designate 'some officer who shall be responsible in the handling of the funds of the corporation.' Under the statute, the company must file for the designated officer a surety bond, 'which said bond shall obligate the principal and surety to pay such pecuniary loss as the association shall sustain through acts of fraud, dishonesty, forgery, theft, embezzlement, wrongful abstraction or willful misapplication on the part of such offier, either directly and alone, or in connivance with others, while employed as such officer or exercising powers of such office.'

The bond issued by the surety company to cover Ralph Derrell Huffman is an individual fidelity bond. The bond provided for the surety company to pay 'the amount of all direct losses, which Ralph Derrell Huffman * * * may, while in any position and at any location in the service of the Employer, directly or by collusion with others, cause to the Employer, including loss of money and other personal property in the Employer's custody or possession, whether or not the Employer is liable therefor, not exceeding, however, the amount of Twenty Thousand Dollars ($20,000.00), through larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wilful misapplication, or any other act of fraud or dishonesty. * * *' In construing fidelity bonds, courts follow the liberal rules applicable to insurance contracts rather than the strict rules of suretyship. Irvin Jacobs & Co. v. Fidelity & Deposit Co., 202 F.2d 794 (7th Cir. 1953). However, the bond cannot be extended by implication, or enlarged by construction, beyond the actual terms of the agreement entered into by the parties. American Surety Co. v. Gracey, Tex.Civ.App., 252 S.W. 263 (1923, no writ).

The fidelity bond here provides protection for acts of fraud and dishonesty as well as the other crimes or wrongs above listed. At one time the Texas Legislature had provided for a bond that was broader in coverage. The original legislation was part of the Act that provided for co-operative life insurance companies. It provided coverage for the 'faithful performance of duties.' Acts 31st Leg., 1st C.S., 1909, sec. 2, p. 287. In 1929, legislation was enacted to regulate local mutual aid associations, and it also provided for a 'faithful performance of duties' bond. Acts, 41st Leg., R.S.1929, Sec. 5(5), p. 565. Then in 1933, the Legislature changed the bond to the 'fraud and dishonesty' type. Acts, 43d Leg., R.S.1933, sec. 1, p. 577. When the Texas Insurance Code was adopted in 1951, a 'faithful performance of duties' bond was required for Chapter 11 mutual life companies. Texas Insurance Code, art. 11.05. However, for Chapter 14 mutual assessment companies, a 'fraud and dishonesty' bond was all that was required. Texas Insurance Code, art. 14.08 (as quoted previously). Thus, the bond in the present case does not guarantee a faithful performance of duties. Minor v. Mechanics Bank, 26 U.S. (1 Pet.) 46, 7 L.Ed. 47 (1828); First State Bank v. Metropolitan Casualty Ins. Co., 125 Tex. 113, 79 S.W.2d 835, 98 A.L.R. 1256 (1935). It indemnifies only for crimes or wrongs listed, including fraud and dishonesty. In does not purport to protect against acts of negligence, carelessness, incompetency, or failure to follow instructions. American Surety Co. of New York v. Greek Catholic Union, 284 U.S. 563, 569, 52 S.Ct. 235, 76 L.Ed. 490 (1932); Jellico Grocery Co. v. Sun Indemnity Co. of New York, 272 Ky. 276, 114 S.W.2d 83 (Ky. 1938). The Receiver does not dispute the scope of the bond's coverage. He contends that the conduct of Huffman was fraudulent and dishonest.

To constitute fraudulent and dishonest conduct, the employee must have some degree of intent to perform the wrongful action. There must be the physical act plus the mental state for there to be fraud. Cowan v. Clay County Board of Education, Tex.Civ.App., 41 S.W.2d 513, 515 (1931, wr. ref.). See cases collected in 17A Words and Phrases 69, 'Fraud.' The intent need not be of the degree required for criminal conduct. Citizens' Trust & Guaranty Co. v. Globe & Rutgers Fire Ins. Co., 4 Cir., 229 F. 326 (1915); Prior Lake State Bank v. National Surety Corp., 248 Minn. 383, 80 N.W.2d 612, 57 A.L.R.2d 1306 (Minn.1957). On the other hand mere negligence, carelessness or incompetence is insufficient. Irvin Jacobs & Co. v. Fidelity & Deposit Co., 202 F.2d 794 (7th Cir. 1953); Village of Plummer v. Anchor Cas Co., 240 Minn. 355, 61 N.W.2d 225 (Minn.1953); Salley v. Globe Indemnity Co., 133 S.C. 342, 131 S.E. 616, 43 A.L.R. 971 (S.C.1926); Humbird Cheese Co. v. Fristad, 208 Wis. 283, 242 N.W. 158 (Wis.1932); 50 Am.Jur., Suretyship, §§ 335-338 (1944). If the employee has knowledge of and aids in concealing another person's wrongful conduct, it has been held that he, himself, is guilty of that same wrongful conduct. Shaw v. Cone, Tex.Civ.App., 56 S.W.2d 667, 670 (1933, wr. dism.).

There are Texas cases on fidelity bonds with fact situations bearing some similarity to the instant case. In Austin v. Neiman, 14 S.W.2d 794 (Tex.Comm.App., 1929), the receiver of an insolvent bank sued Neiman, the former bookkeeper and assistant cashier, together with the surety company, for aiding and assisting the bank's president in wrongfully converting the bank's funds. The fidelity bond protected against misapplication wrongful abstraction, and embezzlement.

The evidence showed that every few weeks, Neiman balanced the sum total of individual deposits as shown in the active ledger with the sum total of individual deposits actually in the personal accounts. Since money had been removed from various personal accounts, the ledger would not balance with the actual total of the personal accounts. Neiman denied personal knowledge of the abstraction of funds; but he was the one who personally posted the money when received to the individual ledger, posted the totals to the general ledger, and struck the balance. The Commission of Appeals held it was impossible for Neiman not to have discovered the unlawful abstraction. He kept the books in balance and the only way this could be done was by false entries. Recovery on the bond was allowed.

The Neiman case was followed in Shaw v. Cone, Tex.Civ.App., 56 S.W.2d 667 (1933, wr. dism.). This suit was also brought on a fidelity bond for loss arising from the alleged embezzlement, wrongful abstration and willful misapplication of the bank's funds by the employee, Cone. Cone manipulated certain books of the bank and customers' passbooks so as to conceal the wrongful acts of the bank's officers. Cone's testimony that he was ignorant that the officers were wrongfully abstracting bank money was disbelieved. Cone's actions of concealment of the missing funds by false book entries showed that he aided and assisted in the wrongful taking.

Both the Neiman and the Shaw cases recognized that an intent to do a wrongful act, or knowledge that others were acting wrongfully, was necessary. We concur in that legal test.

In the case before us, the evidence of Huffman's conduct does not conclusively show that he either participated in the wrongdoing or that he had knowledge of the wrongdoing.

The State Insurance Examiners found that over $270,000 of Southern Industrial funds were missing and could not be accounted for. Consequently, in June, 1960, Southern Industrial Company was adjudged delinquent and insolvent, and placed in receivership. The Receiver argues that Huffman, as the principal bonded officer breached his duty by signing checks in blank and by failing to take greater responsibility in the management of the company's investments. Because it is necessary for us to decide whether there was or was not 'some evidence' to support the jury's finding that Huffman did not commit any acts of misconduct insured against, the evidence as to Huffman's conduct must be set out in some detail.

Huffman's Conduct

Huffman first worked in the insurance field during the summer of 1956, when he entered the employment of W. L. Bridges, Jr. Since Huffman was then going to college, this job was only for the summer. In 1958, Huffman graduated, and he approached Bridges about permanent employment. Bridges hired him.

Bridges controlled or operated an extensive network of business enterprises. His...