Home Life Ins. Co. v. Clay

• Decision Date: 28 April 1989
• Docket Number: No. 62649,62649
• Parties: HOME LIFE INSURANCE COMPANY, Plaintiff-Appellant/Cross-Appellee, v. Dean C. CLAY, Defendant-Appellee, and First National Bank of Howard, Kansas, Defendant-Appellee/Cross-Appellant, v. RELIANCE INSURANCE COMPANY, Third-Party Defendant, and The Kansas Bankers Surety Co., Third-Party Defendant/Appellant.
• Court: Kansas Court of Appeals

Page 666

773 P.2d 666

13 Kan.App.2d 435

HOME LIFE INSURANCE COMPANY, Plaintiff-Appellant/Cross-Appellee, v. Dean C. CLAY, Defendant-Appellee, and First National Bank of

Howard, Kansas, Defendant-Appellee/Cross-Appellant, v. RELIANCE INSURANCE COMPANY, Third-Party Defendant, and The Kansas Bankers Surety Co., Third-Party Defendant/Appellant.

No. 62649.

Court of Appeals of Kansas.

April 28, 1989.

Review Denied June 22, 1989.

Syllabus by the Court

1. Where neither a debtor nor a creditor directs how an offset is to be applied, the court may apply it as justice may require.

2. Failure to produce records and documents within a party's control raises a presumption that the evidence which would be disclosed by those records is unfavorable to that party.

3. Uncontradicted evidence that is not improbable or unreasonable cannot be disregarded unless it is shown to be untrustworthy, and such uncontradicted evidence should ordinarily be regarded as conclusive.

4. A party must make reasonable efforts to mitigate damages. Recovery will not be allowed for damages that a party should have foreseen and could have avoided by reasonable effort without undue risks, expense, or humiliation.

5. An offer to a wronged party of something other than that to which he or she is entitled as compensation is not admissible in mitigation; nor can the party who is bound to make compensation in money compel the wronged party to accept it in another medium.

6. The amount of damages for the conversion of a chattel may, in the discretion of the court, be diminished by the tender of return of like-kind property to that which was converted.

7. A bond is a type of insurance contract subject to the same general rules of construction and interpretation as are contracts in general.

8. An insurance contract must be construed by consideration of all pertinent provisions and never by critical analysis of a single isolated provision.

9. Exceptions, limitations, and exclusions to insuring agreements require a narrow construction on the theory that the insurer, having affirmatively expressed coverage through broad premises, assumes a duty to define any limitations on that coverage in clear and explicit terms.

10. A potential claim is a demand, challenge, or pretention naturally and probably expected to come into existence at some future time, though not now existing.

Kenneth M. Clark, of Gott, Young & Bogle, P.A., Wichita, for plaintiff-appellant/cross-appellee Home Life Ins. Co.

Michael E. McMahon and J. Michael Morris, of Klenda, Mitchell, Austerman & Zuercher, Wichita, for defendant-appellee/cross-appellant First Nat. Bank of Howard.

Thomas L. Theis and Jeffrey W. Jones, of Sloan, Listrom, Eisenbarth, Sloan & Glassman, Topeka, for third-party defendant/appellant Kansas Bankers Sur. Co.

Before REES, P.J., and DAVIS and LARSON, JJ.

LARSON, Judge:

Home Life Insurance Company (Home Life) appeals from a judgment for conversion against Dean C. Clay and First National Bank of Howard (Bank). Bank appeals the amount of the court's allowance in mitigation of damages. Kansas Bankers Surety Co. (KBS) appeals from the court's ruling affording insurance coverage to Bank.

The insurance coverage issue has previously been before this court in Home Life Ins. Co. v. Clay, 11 Kan.App.2d 280, 719 P.2d 756, rev. denied 239 Kan. 693 (1986).

Between May of 1975 and May of 1980, Clay was under written employment contracts with Home Life as a field underwriter. During his tenure with Home Life, Clay sold between $11 and $12 million in face amounts of life insurance coverage and made the million dollar round table all five years, as well as certain of Home Life's other top sales awards.

During the period from October 1979 through May 1980, Clay converted checks totalling $11,774.75 from Home Life to its customers by obtaining the customers' endorsements followed by his own and depositing them to his personal account. He separately converted checks totalling $102,550.39 by forging Home Life's endorsement followed by his own and depositing the checks into his personal checking account at Bank.

Bank accepted each of the converted checks for deposit to Clay's personal account without any inquiry or investigation. Bank had no written authorization showing Clay had authority to endorse checks on behalf of Home Life. Prior to October 1979, Bank was aware that Clay's personal checking account was frequently overdrawn.

In May of 1980, James Woodall, the manager of Home Life's Wichita, Kansas, branch office, became concerned about Clay's enhanced lifestyle. Woodall discovered deposit slips showing large deposits being made to Clay's account. When Woodall expressed concern to Home Life's sales department, Home Life sent one of its in-house attorneys, Tom Coughlin, to Wichita to investigate the matter and confront Clay.

On or about May 28, 1980, at a meeting involving Clay, Coughlin, and Woodall, Clay admitted he had converted numerous checks. The following day, Clay met with Coughlin and discussed in detail the usage of the converted funds. Coughlin prepared an itemization of Clay's expenditures. According to Clay, Coughlin determined that $51,150 could realistically be recovered from Clay's purchases and expenditures; Coughlin estimated that Clay's vested commissions were worth $20,000; and Coughlin offered that, if Clay could come up with $46,157 in cash, the matter could be settled. According to Coughlin, Clay agreed to liquidate assets and deliver the proceeds to Home Life.

Clay contacted his brother, Orson Clay, president of a Texas insurance company, who agreed to co-sign a note for $46,000 to be used to settle with Home Life. On or about May 29, 1980, Clay informed Coughlin and Woodall that he had secured the money. Coughlin verified Clay's ability to secure these funds the following week by a telephone conversation with Clay's brother.

One of the items that Clay purchased with the converted funds was a single engine Cessna 206, purchased for $23,000 which, with the addition of substantial equipment, had a value of $30,000. On several occasions prior to commencement of this litigation, Clay offered to deliver to Home Life various items of personal property, including the airplane. These offers were declined by Home Life.

In connection with these restitution efforts, Clay delivered to Home Life a check from Eagle Manufacturing in the sum of $11,054.12, which Home Life refused to negotiate or apply against Clay's indebtedness for fear it might effect a release. The check subsequently became worthless.

According to Anthony Larosa, manager of contract services for Home Life, all compensation due to Clay prior to January 1, 1980, had been paid. As soon as the conversion was discovered, Home Life began withholding payment of commissions earned by Clay and accumulated them in his compensation account. According to Home Life's records, the balance of Clay's compensation account was $24,441.79, which included first-year commissions, renewal commissions, a persistency bonus, and service fees earned subsequent to January 1, 1980.

Fred Liebau, Jr., assistant manager of Home Life's Wichita office, acting on Coughlin's instructions, contacted Bert Blackard, the president of Bank, to arrange a meeting to discuss Clay's bank account. Clay contacted Blackard and gave him permission to discuss his affairs with Home Life. A meeting was set up, although Liebau did not tell Blackard he intended to be accompanied by Home Life's attorney.

On June 5, 1980, Coughlin and Liebau met twice with Blackard at Bank's office. When Liebau introduced Coughlin to Blackard, Blackard became upset because of the unannounced presence of an attorney. When Coughlin stated that Bank could be liable to Home Life for acceptance of the forged checks, Blackard requested that Home Life's representatives leave.

After a few minutes, Coughlin and Liebau returned and were readmitted to Bank. Liebau stated the purpose of the meeting was investigatory. Coughlin told Blackard that Home Life would not sue Bank because there was not enough money involved and Liebau stated that Home Life wanted to avoid adverse publicity.

At no time during the meeting did either Coughlin or Liebau tell Blackard that Home Life intended to assert a claim against Bank. Nor did Coughlin retract his earlier statement that Bank could be held liable. The matter was referred to by Coughlin as "our problem" or the "Clay problem." No copies of converted checks were examined at the meetings.

Shortly after the June 5, 1980, meeting, Blackard reviewed certain checks in question. On checks payable to Home Life, Clay had first handwritten Home Life's name and then signed his own name under the endorsement. On Home Life's checks, Clay had obtained a proper endorsement of the payee and then signed his own name before depositing the check to his personal account.

Blackard called David Brace, Bank's attorney, to seek his opinion on Bank's potential liability. Brace researched the question and drafted a letter to Blackard which was never mailed. In that letter, Brace used the word "claim," which was his language, not Blackard's. Brace informed Blackard orally that there were cases going both ways on Bank's liability. Brace never advised Blackard to put Bank's bond carrier on notice regarding the facts of the incident.

Blackard testified that he would not give notice to the bond carrier until he had actual notice that a lawsuit had been filed against Bank. On or about January 14, 1982, Blackard received a telephone call from Home Life's lawyer, who advised Blackard that Home Life was going to file suit. Shortly thereafter, Blackard gave Reliance Insurance Company (Reliance) notice of the expected suit. Reliance provided Bank with a forgery indemnity coverage during the period between November 9, 1978 to November 9, 1981. In Bank's notice to Reliance, Blackard stated he had been told no claim would be made against Bank.

After...