Parish of East Baton Rouge v. Fidelity & Cas. Co. of NY

• Decision Date: 29 March 1974
• Docket Number: Civ. A. No. 71-199.
• Citation: 373 F. Supp. 440
• Parties: PARISH OF EAST BATON ROUGE and City of Baton Rouge v. The FIDELITY & CASUALTY COMPANY OF NEW YORK.
• Court: U.S. District Court — Middle District of Louisiana

373 F. Supp. 440

PARISH OF EAST BATON ROUGE and City of Baton Rouge v. The FIDELITY & CASUALTY COMPANY OF NEW YORK.

Civ. A. No. 71-199.

United States District Court, M. D. Louisiana.

March 29, 1974.

Joseph F. Keogh, Parish Atty., Edward V. Fetzer, Asst. Parish Atty., Baton Rouge, La. for the Parish of East Baton Rouge and the City of Baton Rouge.

David W. Robinson, Watson, Blanche, Wilson, Posner & Thibaut, Baton Rouge, La. for The Fidelity & Casualty Co. of New York.

Robert L. Kleinpeter, Baton Rouge, La. for third party defendant Bryan Clemmons.

E. GORDON WEST, District Judge:

This diversity case, originally filed in the State Court and removed to this Court by the defendant pursuant to the provisions of Title 28, United States Code, Section 1446, concerns the interpretation of a fidelity bond issued by the defendant on January 1, 1961, to insure the faithful performance by the Sheriff of East Baton Rouge Parish of his duties as Tax Collector for the City of Baton Rouge and Parish of East Baton Rouge (hereinafter plaintiffs). The original bond, in the amount of $50,000.00, was issued on January 1, 1961, to cover the period January 1, 1961, to January 1, 1962. For each of the ten years subsequent to the issuance of the original bond, rather than issue new bonds each year, continuation certificates were issued, continuing the bond in force until January 1st the following year. The last of these certificates entered into evidence continued the bond in effect until January 1, 1972.

During the years 1968, 1969, and 1970, while the bond was in effect by virtue of the annual continuation certificates, certain sums of money collected by the office of the Sheriff of East Baton Rouge Parish were stolen by the Chief Deputy Tax Collector. A total of some $460,000.00 was stolen, of which amount $180,000.00 represented taxes which had been collected by the Sheriff and which the Sheriff was obligated to pay over to the plaintiffs.

Plaintiffs made demand upon the defendant for the sum of $150,000.00 contending that the defendant was liable for an amount up to $50,000.00 for each of the three years in which losses occurred. The defendant, on the other hand, has paid to the plaintiffs the sum of $50,000.00 which it contends is its limit of liability under the bond and under the terms of the various continuation certificates.

The defendant has filed a motion to dismiss which the Court has taken under submission. Both parties were allowed to file briefs and whatever evidence they wished on the matter. Thus under Rule 12(b), Federal Rules of Civil Procedure, the motion shall be treated as one for summary judgment and disposed of pursuant to Rule 56.

The essential facts necessary to the decision of this case are not in dispute. The original bond, executed in 1961, covering the period January 1, 1961 to January 1, 1962 contained no provision with regard to cumulative liability or renewal of the bond for subsequent years. Each annual renewal, or continuation of the bond was accomplished through the use of continuation certificates, issued by the defendant and obviously accepted for ten consecutive years by the plaintiffs. Each of these certificates contains, in clear and unambiguous language, the following provision:

"This premium is paid and is accepted upon the express stipulation that the liability of the Company under the bond herein described shall not be cumulative, and that in no event shall the aggregate liability of the Company for any one or more defaults of the Principal, during any one or more years of the suretyship under the said bond, as extended by this or any other extension of the term thereof, exceed the amount set forth in said bond or any existing certificate changing the amount of said bond."

It is the position of the defendant that its liability is thus clearly limited and defined by the language contained in each continuation certificate. The plaintiffs, on the other hand, urge the Court to find that a separate contract for each calendar year resulted from the procedure employed by the defendant in continuing the bond, with a resulting separate liability, each in the face amount of the original bond for each year that the bond was thus continued in force.

The interpretation of fidelity bonds and the effects of renewal and continuation upon the surety's liability has been a troublesome area for the courts for many years, with varying results. But it is fair to say that:

"The rule generally recognized is that a renewal of a fidelity policy or bond constitutes a separate and distinct contract, for the period of time covered by such renewal, unless it appears to be the intention of the parties, as evidenced by the provisions thereof, that such policy or bond and the renewal thereof shall constitute one continuous contract." 25 C.J. 1109 § 16.

and that:

"Under the view usually taken of renewals it has been held that the insurer's liability is not limited to the amount named in the original fidelity contract, but that there is a liability for the amount fixed by such original contract for a loss occurring during its life and likewise a liability for the amount fixed in any renewal for a loss occurring during its life. When, however, as may be the case, a fidelity policy or bond and the renewals thereof are intended by the parties to constitute one continuous contract, the liability of the insurer is limited to the sum named in the original bond." 25 C.J. 1110 § 16.

It is also basic law that:

"The extent of liability of the company under a contract of fidelity insurance depends on the terms of the contract. While the general rule that contracts of insurance, where they are ambiguous, will be construed against the company applies, nevertheless the liability of the company cannot be extended beyond the terms of the contract." 45 C.J.S. Insurance § 980.

Thus, in order to determine the extent of liability of the issuer of a fidelity bond, it is necessary to look to the terms of the agreement itself, which must be considered to be the law between the parties. It is well settled law that by express provision contained either in the bond itself, or in a renewal certificate, the extent of liability thereunder may be determined or limited. See 7 A.L.R.2d 946.

Even in the absence of language limiting liability or excluding cumulative liability some courts have considered fidelity bonds and renewals thereof as continuous contracts with the result that the total liability is limited to the amount expressed in the original instrument. See Leonard v. Aetna Casualty & Surety Co., 80 F.2d 205 (CA 4 — 1935); John Church Co. v. Aetna Indemnity Co., 13 Ga.App. 826, 80 S.E. 1093 (1909).

Others, such as Krey Packing Co. v. Employers' Liability Assurance Corp., 127 S.W.2d 780 (Mo.App.1939) have reached the opposite conclusion and viewed each renewal as a separate contract, with the result of cumulative liability.

The plaintiffs rely heavily on the reasoning in Krey, emphasizing the fact that the original bond here, as in the Krey case, contains no provision relating to renewals or continuances of the original bond, and is for a definite term of one year. However, the...