Mutual Sec. Life Ins. Co. by Bennett v. Fidelity and Deposit Co. of Maryland

• Decision Date: 27 December 1995
• Docket Number: No. 49A02-9506-CV-373,49A02-9506-CV-373
• Citation: 659 N.E.2d 1096
• Parties: MUTUAL SECURITY LIFE INSURANCE COMPANY, By its Liquidator, Donna D. BENNETT, Appellant-Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee-Defendant.
• Court: Indiana Appellate Court

Page 1096

659 N.E.2d 1096

MUTUAL SECURITY LIFE INSURANCE COMPANY, By its Liquidator Donna D. BENNETT, Appellant-Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee-Defendant.

No. 49A02-9506-CV-373.

Court of Appeals of Indiana.

Dec. 27, 1995.

Transfer Denied May 17, 1996.

Fred R. Biesecker, John T. Murphy, Ice Miller Donadio & Ryan, Indianapolis, for appellant.

Julia Blackwell Gelinas, Sandra Boyd Williams, Locke Reynolds Boyd & Weisell, Indianapolis, for appellee.

OPINION

NAJAM, Judge.

STATEMENT OF THE CASE

Mutual Security Life Insurance Company ("MSL"), by its Liquidator, Donna D. Bennett (the "Liquidator"), appeals from the grant of summary judgment in favor of Fidelity and Deposit Company of Maryland ("F & D"). F & D provided insurance coverage to MSL under a blanket fidelity bond which insured losses resulting directly from dishonest or fraudulent acts to a limit of $1,000,000. MSL's complaint alleges such losses. F & D moved for summary judgment on the grounds that MSL's claim is barred by the provision in the bond which automatically terminates coverage immediately upon the taking over of the insured by a receiver, liquidator, or by state or federal officials. Following a hearing, the trial court entered summary judgment in favor of F & D.

We affirm.

ISSUES

MSL presents four issues for our review which we restate as follows:

1. Whether the automatic termination upon takeover provision of the fidelity bond issued to MSL violates the public policy of Indiana.

2. Whether the rider to the bond amended the automatic termination provision and required a 30-day written notice before termination could take effect.

3. Whether the trial court erred by not equitably tolling the discovery period under the bond.

4. Whether the trial court erred by not permitting additional investigation into discovery of losses covered by the bond prior to the takeover by the Liquidator.

FACTS

MSL is an insurance company incorporated in Indiana. F & D issued a financial institution bond to MSL for a period from January 1, 1990, to January 1, 1991. By its terms, the fidelity bond provides coverage for losses discovered by the insured during the bond period, but it terminates immediately upon takeover by a receiver or other liquidator or by state or federal officials.

On October 5, 1990, the Marion Circuit Court granted a petition filed by the Commissioner of the Indiana Department of Insurance that sought to rehabilitate MSL. The petition included a Consent to Order of Rehabilitation executed by MSL. F & D was notified of a potential claim under the bond by letter dated November 13, 1990.

On December 3, 1990, the Commissioner petitioned for an order of liquidation of MSL. The petition was granted on December 6, 1991. The Commissioner was appointed Liquidator and seeks recovery under the fidelity bond.

DISCUSSION AND DECISION

Standard of Review

In reviewing a motion for summary judgment, this court applies the same standard as applied by the trial court. Walling v. Appel Serv. Co. (1994), Ind.App., 641 N.E.2d 647, 648-49. Summary judgment "shall be rendered forthwith if the designated evidentiary matter shows that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Ind.Trial Rule 56(C). All facts and inferences from the designated evidentiary material are liberally construed in favor of the non-moving party. Walling, 641 N.E.2d at 649.

The construction of a written insurance contract is a question of law for which summary judgment is particularly appropriate. Pennington v. American Family Ins. Group (1993), Ind.App., 626 N.E.2d 461, 464. When interpreting an insurance policy, our goal is to ascertain and enforce the intent of the parties as manifested in the contract for insurance. Lexington Ins. Co. v. American Healthcare Providers (1993), Ind.App., 621 N.E.2d 332, 335, trans. denied. If language in an insurance policy is clear and unambiguous, it should be given its plain and ordinary meaning. Tate v. Secura Ins. (1992), Ind., 587 N.E.2d 665, 668. An unambiguous insurance contract must be enforced according to its terms, including those terms that limit the insurer's liability. Pennington, 626 N.E.2d at 464.

Issue One: Automatic Termination Clause

The fidelity bond issued to MSL by F & D applies to losses discovered by MSL, the insured, during the bond period. Section 12 of the fidelity bond provides that the bond shall terminate "as an entirety ... immediately upon the taking over of the Insured by a receiver or other liquidator or by State or Federal officials...." The parties do not dispute that the appointment of the Liquidator on October 5, 1990, constitutes the "taking over" of MSL. Although termination pursuant to takeover clauses are not explicitly prohibited by statute, the Liquidator asserts that the provision violates the public policy of this State.

If there is no statute or rule prohibiting an agreement, the question of whether it is void on public policy grounds is a question of law to be determined from the surrounding circumstances of each case. See Straub v. B.M.T. by Todd (1994), Ind., 645 N.E.2d 597, 599. Our supreme court has enumerated the factors to be considered in determining whether contracts not prohibited by statute or clearly tending to injure the public, but nevertheless alleged to contravene public policy, should be enforced. Fresh Cut, Inc. v. Fazli (1995), Ind., 650 N.E.2d 1126. These factors are: (1) the nature of the subject matter of the contract; (2) the strength of the public policy underlying the statute; (3) the likelihood that refusal to enforce the bargain or term will further that policy; (4) how serious or deserved would be the forfeiture suffered by the party attempting to enforce the bargain; and (5) the parties' relative bargaining power and freedom to contract. Id. at 1130.

Whether the automatic termination upon takeover provision in a blanket fidelity bond purchased to satisfy a statutory requirement violates Indiana public policy presents an issue of first impression. In considering the factors identified in Fresh Cut, we first recognize that the nature of the subject matter of the insurance contract is a fidelity bond which commonly allocates obligations and risks between the insured and the insurer. Indiana Code § 27-1-7-14 requires that "[a]ll officers and home office employees [of an insurance company] having control of or access to moneys or securities" be bonded against pecuniary loss to the company caused "by any act or acts of fraud, dishonesty, forgery, theft, embezzlement, wrongful abstraction, or willful misapplication." MSL relies upon this statute to support its argument that the automatic termination upon takeover clause frustrates the public policy of protecting Indiana insurance policyholders. F & D counters that the statute permits the use of the blanket bond issued by F & D and that the bond language does not conflict with any of the requirements contained in Indiana Code § 27-1-7-14. Additionally, F & D points out that the statute requires that the bond be filed with and approved by the Department of Insurance which "presumably" did approve the bond issued by F & D.

MSL further asserts that the automatic termination upon takeover term violates the Liquidator's mandate to marshall and distribute assets as required by Indiana Code §§ 27-9-3-7 and 27-9-3-13. The result, argues the Liquidator, is to deny a critical asset to her and to the policyholders of the insolvent company, resulting in additional burdens on Indiana taxpayers. F & D contends that, although the Liquidator has the power to take possession of the assets of MSL, the bond had terminated as of October 5, 1990, the date of the takeover. ¹ The Liquidator could not take possession of an asset that did not exist.

Public policy arguments similar to those advanced by MSL were considered and rejected by the Sixth Circuit in Federal Deposit Ins. Corp. v. Aetna Casualty and Sur. Co. (6th Cir.1990), 903 F.2d 1073. In upholding the validity of an automatic termination upon takeover provision in a fidelity bond, the court noted:

Were courts free to refuse to enforce contracts as written on the basis of their own conceptions of the public good, the parties to contracts would be left to guess at the content of their bargains, and the stability of commercial relations would be jeopardized. The power to refuse to enforce contracts on the ground of public policy is therefore limited to occasions where the contract would violate "some explicit public policy" that is "well defined and dominant...."

Id. at 1077 (quoting St. Paul Mercury Ins. Co. v. Duke Univ. (4th Cir.1988), 849 F.2d 133, 135); accord California Union Ins. Co. v. American Diversified Sav. Bank (9th Cir.1991), 948 F.2d 556 (automatic termination upon takeover provision in fidelity bond not violative of public policy).

MSL argues that the analysis applied by the courts in California Union and Aetna Casualty is not applicable in the present case because those cases were decided under a statute which in effect approved the use of termination clauses in fidelity bonds. However, the similarity to these cases is stronger than the Liquidator suggests. Indiana Code § 27-1-7-14 provides that the amount and form of an insurance company fidelity bond "shall be approved ... by the department [of Insurance] and shall be filed with the department within such time as it may prescribe." The Indiana Department of Insurance should at least be aware of the automatic termination provision in this standard form bond. If the Department had believed that this provision was contrary to Indiana public policy it could have disapproved the bond or brought proposed amendments to the legislature. See Robbins v. McCarthy (1991), Ind.App., 581 N.E.2d 929, 932, trans. denied.

Although we have not previously addressed the validity of an automatic termination upon takeover...