Green v. U.S. Fidelity & Guaranty Co.

• Decision Date: 24 April 1916
• Parties: GREEN v. UNITED STATES FIDELITY & GUARANTY CO. ET AL.
• Court: Tennessee Supreme Court

185 S.W. 726

135 Tenn. 117

GREEN v. UNITED STATES FIDELITY & GUARANTY CO. ET AL.

Supreme Court of Tennessee.

April 24, 1916

Appeal from Chancery Court, Knox County; R. H. Sansom, Special Chancellor.

Bill by John W. Green, receiver of the insolvent Knoxville Banking & Trust Company, against the United States Fidelity & Guaranty Company and others. Demurrers to bill sustained, and complainant appeals. Reversed and remanded.

D. C Webb, Hugh M. Tate, and Wright & Jones, all of Knoxville, for appellant.

Shields & Cates and Jerome Templeton, all of Knoxville, for appellees.

WILLIAMS J.

The bill of complaint was filed by John W. Green, receiver of the insolvent Knoxville Banking & Trust Company, to recover on a bond executed by W. H. Gass, as principal obligor, and the fidelity company, as surety. The bond in the sum of $10,000 was exacted of Gass to save harmless the bank from any pecuniary loss it might sustain by reason of the fraud or dishonesty of Gass in connection with his duties as president of the indemnified institution.

The original bond was effective for the period of February 1 1908, to February 1, 1909, and there were executed from year to year by the fidelity company "continuation certificates," the last of which bore date of February 1, 1912, for a period expiring one year from that date. The pertinent provisions of the bond and the certificates of renewal are set out in the body of the opinion.

The bond and the last renewal certificate were made exhibits to the bill of complaint.

Demurrers were filed by the two defendants and sustained by the special chancellor, the grounds of which sufficiently appear in the discussion of the case that follows. The receiver appealed to this court, and has assigned errors.

The dishonesty of Gass, as charged, consisted in his withdrawals of funds while he was practically insolvent, by means of overdrafts made without authority, which he subsequently covered by notes, not accepted by the bank, and executed for the purpose of concealing the fraudulent character of such withdrawals, and that this was accomplished by reason of his official position.

"All of said funds were in the control of defendant W. H. Gass by virtue of his position as president and were by him fraudulently taken and converted to his own use," and therefore amounted to embezzlement or larceny.

It was alleged that "claim had been made upon, and all notices given to, the defendant fidelity company according to the terms of the bond exhibited."

"The wrongful acts of said Gass complained of, and which resulted in said pecuniary loss, were all discovered within six months after the termination of said Gass' relation with the bank, which termination took place at the end of the last extension period of said bond."

Before passing to a consideration of the various provisions of the bond that are involved in the contentions of the respective parties on the demurrer, we shall advert to the rules of construction applicable to such contracts of fidelity insurance.

It is now well settled that such contracts are to be likened to contracts of insurance; and therefore they are not to be construed by the liberal principles applied to personal suretyship, but by the more exacting rules of the law of insurance. The language of the bond contract is that selected and employed by the fidelity company issuing it for a consideration, and, when ambiguous or doubtful, must be given the strongest interpretation in favor of the person indemnified which it will reasonably bear. This rule of construction has been adopted both in England and in this country. Anderson v. Fitzgerald, 4 H. L. Cas. 484; American Surety Co. v. Pauly, 170 U.S. 133, 18 S.Ct 552, 42 L.Ed. 977; Railroad v. Fidelity & G. Co., 125 Tenn. 690, 148 S.W. 671.

However, "this rule cannot be availed of to refine away terms of a contract expressed with sufficient clearness to convey the plain meaning of the parties." Guarantee Co. v. Mechanics' Savings Bank, 183 U.S. 419, 22 S.Ct. 131, 46 L.Ed. 253; Seay v. Georgia Life Ins. Co., 132 Tenn. 673, 179 S.W. 312.

Counsel for the obligor, on one of the grounds of the demurrer, contend that the default of Gass was neither embezzlement nor larceny, and that therefore it may not be held to respond, the contract obligation on its part being to make good "such pecuniary loss as might be sustained by the employer by reason of the fraud or dishonesty of said employé * * * amounting to embezzlement or larceny." For authority counsel refer to the case of Ætna Indemnity Co. v. Crowe Coal & M. Co., 154 F. 545, 83 C. C. A. 431.

But the decided weight of authority is to the effect that it is not necessary in order to his relief that the employer introduce such proof as would convict the delinquent employé of the crime of larceny or embezzlement as defined in the criminal law. Champion Ice Mfg. Co. v. American Bonding Co., 115 Ky. 863, 75 S.W. 197, 103 Am. St. Rep. 356; City Trust, etc., Co. v. Lee, 204 Ill. 69, 68 N.E. 485; Rankin v. U.S. Fidelity & G. Co., 86 Ohio St. 267, 99 N.E. 314; 19 Cyc. 518.

The reasoning of these cases, which leads us to adopt the rule they announce, is: That the parties were not contracting on the basis of an enforcement of the criminal laws of the state; that, if only indemnity for losses suffered by reason of technical larceny or embezzlement had been intended, that purpose could have been expressed clearly and in fewer words; that the words "larceny and embezzlement," in the bond, are used as generic terms to indicate the dishonesty and fraudulent breach of any duty or obligation upon the part of the officer in connection with his duties as president.

We think it manifest that, if the other and narrower construction were given the bond contract, and if that fact were understood by the commercial public, fidelity companies using that form of bond would do very little business. It is not unfair to give the bond the meaning assigned it by a majority of the decisions that antedated its issuance.

A point yet more seriously pressed by the counsel of the obligor is: That the only bond (or renewal) remaining in force covered a period from February 1, 1912, to February 1, 1913, and that it is not alleged in the bill that the loss claimed was sustained, or the acts of Gass out of which such loss arose were committed, within the period so covered.

This involves a consideration of the nature of the contract embodied in the bond and the renewal thereof.

The original bond, issued in 1908, contained the following clauses:

"Now, therefore, this bond witnesseth that for the consideration of the premises the company shall, during the term above mentioned, or any subsequent renewal of such term, and subject to the conditions and provisions herein contained, at the expiration of three months next after proof satisfactory to the company, as hereinafter mentioned, make good and reimburse to the said employer such pecuniary loss as may be sustained by the employer by reason of the fraud or dishonesty of the said employé in connection with the duties of his office or position amounting to embezzlement or larceny, and which shall have been committed during the continuance of said term, or of any renewal thereof, and discovered during said continuance or any renewal thereof, or within six months thereafter, or within six months after the death or dismissal or retirement of said employé from the service of the employer, within the period of this bond, whichever of these events shall first happen; the company's total liability on account of said employé under this bond or any renewal thereof not to exceed the sum of ten thousand ($10,000) dollars. * * *

Provided, further, that the company shall not be liable under this bond for the amount of any balance that may be found due the employer from the employé, and which may have accrued prior to the date thereof, and which may be discovered within the period of this bond or of any renewal thereof; it being the true intent and meaning of this bond that the company shall be responsible as aforesaid for moneys, securities, or properties diverted from the employer within the period specified in this bond. * * *

That the company upon execution of this bond shall not thereafter be responsible to the employer under any bond previously issued to the employer on behalf of said employé, and upon the issuance of any bond subsequent hereto upon said employé in favor of said employer all responsibility hereunder shall cease and determine, it being mutually understood that it is the intention of this provision that but one (the last) bond shall be in force at one time, unless otherwise stipulated between the employer and the company."

The last renewal receipt or continuation certificate recited that in consideration of $25 the obligor company continues in force the bond in the sum of $10,000 in behalf of W. H. Gass, president, in favor of Knoxville Banking & Trust Company, for the period beginning the 1st day of February, 1912, and ending on the 1st day of February, 1913, "subject to all the covenants and considerations of said original bond."

The contention of the obligor is that the original bond and each renewal thereof, is a separate contract, and that it was necessary for complainant to allege that the claimed defaults of Gass occurred on some specified date or in some specified period, in order to a determination whether they were covered by any and which of such separate contracts of indemnity, and whether they were discovered within the time limited therefor.

We are of opinion that, if there is not to be found in the instant indemnity contract language providing to the contrary, the bond and the continuation certificate are to be deemed to constitute...