National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. F.D.I.C.

• Decision Date: 17 April 1998
• Docket Number: No. 79825,79825
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Plaintiff /Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as successor in interest to Resolution Trust Corporation, as receiver for Pioneer Savings And Loan Association, Defendant /Appellant.
• Court: Kansas Supreme Court

Page 357

957 P.2d 357

264 Kan. 733

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Plaintiff /Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as successor in

interest to Resolution Trust Corporation, as

receiver for Pioneer Savings And Loan

Association, Defendant /Appellant.

No. 79825.

Supreme Court of Kansas.

April 17, 1998.

Syllabus by the Court

The United States Court of Appeals for the Tenth Circuit certified the following question under the Uniform Certification of Questions of Law Act, K.S.A. 60-3201 et seq.: Does the failure by an insured to provide a proof of loss within the time limit provided by a fidelity bond of the type involved here justify denial of coverage under the bond without the insurer showing that it has been substantially prejudiced by the untimely proof of loss? We hold, under the facts submitted by the certifying court, that the answer is "no."

Gregory E. Gore, Counsel, Federal Deposit Insurance Corporation, argued the cause, and Ann S. DuRoss, assistant General Counsel, Roberta Clark, Acting Senior Counsel, and Jerome A. Madden, Counsel, all of Washington, D.C., and Patricia A. Reeder, of Woner, Glenn, Reeder & Girard, P.A., of Topeka, were with him on the briefs for appellant.

Thomas W. Rynard, of Craft Fridkin & Rhyne, of Kansas City, MO, argued the cause, and Kenton E. Snow, of the same firm, was with him on the brief for appellee.

ALLEGRUCCI, Justice:

This case is before the court on a question certified by the United States Court of Appeals for the Tenth Circuit pursuant to the Uniform Certification of Questions of Law Act, K.S.A. 60-3201 et seq. The United States District Court granted summary judgment in favor of National Union Fire Insurance Company (National Union), which issued fidelity bonds to Pioneer Savings and Loan Association (Pioneer), and against the Federal Deposit Insurance Corporation (FDIC), which by that time had succeeded to the interest of the Resolution Trust Corporation (RTC), receiver for Pioneer. After FDIC's appeal had been briefed and argued in the Tenth Circuit Court of Appeals, Judge Wade Brorby, Circuit Judge presiding, submitted the following question of state law to this court for an answer: Does the failure by an insured to provide a proof of loss within the time limit provided by a fidelity bond of the type involved here justify denial of coverage under the bond without the insurer showing that it has been substantially prejudiced by the untimely proof of loss?

The following undisputed facts are taken from the Tenth Circuit Court of Appeals' order submitting the certified question to this court:

"(National Union) issued two fidelity-discovery bonds to Pioneer Savings & Loan (Pioneer). The first bond covered the period from July 1, 1991 to July 1, 1992; the second covered the period from July 1, 1992 to July 1, 1993. [Citation omitted.] The fidelity bonds insured against dishonest or fraudulent acts committed by employees of the insured. [Citation omitted.] As discovery bonds, they covered only losses discovered during the coverage period. [Citation omitted.] National Union's bonds required that notice of loss be provided 'at the earliest practicable moment, not to exceed 30 days,' after discovery of the loss and that proof of loss with full particulars be provided within six months after such discovery."

National Union filed a declaratory judgment action in the United States District Court, and the district court granted National Union's motion for summary judgment. Nat. Union Fire Ins. Co. v. Resolution Trust Corp., 923 F.Supp. 1402, 1404 (D.Kan.1996). It held that RTC's late filing of the proof of loss barred its recovering under the fidelity bonds. 923 F.Supp. at 1408. FDIC appealed from the entry of summary judgment against it.

The United States District Court stated that this was an issue of first impression in that "Kansas courts have not addressed whether the notice-prejudice rule which applies to notice of loss provisions of a fidelity bond would also apply to the bond's proof of loss requirement." 923 F.Supp. at 1407. The federal district court's consideration began with the premise that the notice-prejudice rule, as first applied in Kansas courts, stated that it was necessary for an insurer to demonstrate that it had been substantially prejudiced by the delay in order for the insurer to avoid coverage on the ground that the insured did not give notice of loss within the time period specified in the policy. Soon this court decided that the rule applied to notice provisions in fidelity bonds as well as in insurance contracts. School District v. McCurley, 92 Kan. 53, 142 P. 1077 (1914). Then, according to the district court, when this court was called on to decide whether the rule applied to proof of loss provisions in insurance contracts as well as to notice of loss provisions in insurance contracts, it declined to extend the rule. 923 F.Supp. at 1407. The federal court reasoned that the courts of this state would treat the proof of loss provisions the same whether in insurance policies or in fidelity bonds. Thus, the federal court concluded that this court would not apply the notice-prejudice rule to proof of loss provisions.

Here is the federal court's discussion:

"As a general rule, Kansas courts apply the notice-prejudice rule to notice of loss provisions in both insurance contracts and fidelity bonds. See, e.g., School Dist. No. 1 v. McCurley, 92 Kan. 53, 142 P. 1077 (1914) (late notice under contractor's surety bond did not defeat recovery absent showing of prejudice). Defendant argues that the notice-prejudice rule also applies to a proof of loss notice provision. The court disagrees.

"Kansas courts have not extended the notice-prejudice rule to cover noncompliance with proof of loss provisions in insurance contracts. See, e.g., Bowling v. Illinois Bankers' Life Ass'n, 141 Kan. 377, 41 P.2d 1012 (1935); Brown v. Great American Ins. Co. of N.Y., 170 Kan. 281, 224 P.2d 989 (1950) (insurer rightfully denied coverage after insured failed to comply with insurance contract requirement that he submit a proof of loss within sixty days of loss); Lyon v. Kansas City Fire & Marine Ins. Co., 176 Kan. 411, 271 P.2d 291 (1954) (insurer could deny coverage for insured's noncompliance with proof of loss provision of insurance contract). In Lyon, 271 P.2d at 294, the Kansas Supreme Court stated that compliance with an insurance contract's proof of loss requirement is a condition precedent to the insured recovering under the contract. Absent a waiver of the proof of loss requirement, an insured's failure to timely submit a proof of loss statement permits the insurer to deny coverage without showing that the delay caused it substantial prejudice. Id." 923 F.Supp. at 1407.

The federal court concluded that the condition-precedent analysis used by this court for the proof of loss provision in an insurance contract in Lyon v. Kansas City Fire & Marine Ins. Co., 176 Kan. 411, 271 P.2d 291 (1954), also would be applied to a proof of loss provision in a fidelity bond. 923 F.Supp. at 1407. Thus, the notice-prejudice rule would not be applied to a proof of loss provision in fidelity bonds: "Under Kansas law ... defendant's failure to submit Pioneer's proof of loss statement within the required time was a condition precedent to recovering for Pioneer's losses under the bond. Thus, plaintiff may deny coverage under the fidelity bond for defendant's noncompliance with the bond's proof of loss requirements." 923 F.Supp. at 1408.

In the federal court, FDIC argued that the analysis for fidelity bonds need not run parallel to that for insurance contracts. In particular, FDIC contended that instead of applying the proof of loss rule from Lyon to the proof of loss requirement in a fidelity bond, Kansas courts would extend the notice-prejudice rule to the fidelity bond's proof of loss deadline. The federal court rejected the argument on the ground that it blurred the distinction between a bond's notice of loss and proof of loss provisions. 923 F.Supp. at 1407-08.

FDIC's other argument posited a distinction between the functions of a bond issuer and an insurer. It, too, was rejected by the federal court:

"Defendant further argues that Kansas court decisions on insurance contracts are not analogous to the instant action because the issuer of a fidelity bond is not the equivalent to the insurer of an insurance contract. The court notes that this distinction bears no impact on its analysis. Under Kansas law, a surety for a fidelity bond functions in a capacity similar to that of the insurer under an insurance contract. See Republic County v. United States Fidelity & Guaranty Co., 96 Kan. 255, 258, 150 P. 590 (1915) (the bonds that a surety issues 'are to be interpreted to accomplish indemnity against loss sustained'). Like an insurer, a bonding company is a compensated surety that indemnifies the insured for covered losses. Thus, the court concludes that plaintiff functions in a capacity similar to that of an insurer." 923 F.Supp. at 1408.

The parties' arguments to this court roughly follow those considered by the federal district court. National Union urges the court to pattern its decision in this case on the insurance contract cases in which the notice-prejudice rule was not applied to the proof of loss provisions. FDIC would distinguish the insurance contract cases relied on by the federal court and by National Union. It urges the court to perpetuate a line of Kansas cases in the "modern trend," holding that an untimely proof of loss will not defeat coverage unless there is an express forfeiture provision in the bond or policy or the carrier has demonstrated substantial prejudice on account of the late submission. National Union maintains that the "modern trend" is to treat both notices and proofs of loss as conditions precedent to recovery.

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