Penalosa Co-op. Exchange v. Farmland Mut. Ins. Co.

• Decision Date: 13 April 1990
• Docket Number: No. 64042,64042
• Citation: 14 Kan.App.2d 321,789 P.2d 1196
• Parties: PENALOSA COOPERATIVE EXCHANGE, Appellee, v. FARMLAND MUTUAL INSURANCE COMPANY, Appellant.
• Court: Kansas Court of Appeals

Page 1196

789 P.2d 1196

14 Kan.App.2d 321

PENALOSA COOPERATIVE EXCHANGE, Appellee, v. FARMLAND MUTUAL INSURANCE COMPANY, Appellant.

No. 64042.

Court of Appeals of Kansas.

April 13, 1990.

Review Denied June 5, 1990.

Syllabus by the Court

1. Insurance is a matter of contract. The parties to a contract of insurance may choose whatever terms they wish, and courts will enforce the policy as written so long as its terms do not conflict with pertinent statutes or with public policy.

2. If a dispute arises as to the meaning of the terms chosen by the parties courts will attempt to determine what the parties intended. To determine this intent, courts will consider the policy as a whole and will examine the language used by the parties, taking into account the situation of the parties, the nature of the subject matter, and the purpose to be accomplished.

3. If, after examining the entire policy, there is no uncertainty about its meaning, the policy will be enforced as written.

4. If there is genuine uncertainty about which one of two or more possible meanings is the proper meaning, courts will determine the meaning by applying the doctrine of "reasonable expectations" or the rule of liberal construction.

5. Because insurance contracts are typically adhesion contracts in which the terms are drafted by the insurer and not negotiated between the parties, courts have required insurers to state their intended meaning clearly and distinctly. If the meaning is not stated clearly, and a reasonable person in the insured's position would have understood the words of the policy to mean something other than what the insurer intended, that understanding will control.

6. Based on the rule that the drafter of a contract must suffer the consequences if he does not make the terms clear, courts will construe an ambiguous policy in the way most favorable to the insured.

7. On the facts of this case, it is held that (1), in a policy insuring against employee dishonesty, a provision defining an "occurrence" as related acts during the policy period is ambiguous, and (2) a reasonable person in the insured's position would, after reading the policy as a whole, expect acts of embezzlement in two separate policy periods to constitute two separate occurrences, thereby entitling the insured to recover the policy limits for each policy period.

Daniel H. Diepenbrock, of Neubauer, Sharp, McQueen, Dreiling & Morain, P.A., Liberal, for appellant.

Gerald L. Green, of Gilliland & Hayes, P.A., Hutchinson, for appellee.

Before GERNON, P.J., DAVIS, J., and STEVEN P. FLOOD, District Judge, assigned.

DAVIS, Judge:

The defendant, Farmland Mutual Insurance Company, issued a policy insuring plaintiff, Penalosa Cooperative Exchange, against employee dishonesty. Plaintiff filed two claims based upon employee embezzlement for two policy periods. Defendant paid the first claim but denied the second on the grounds that the embezzlement resulted from a series of similar or related acts which, under the policy, constituted a single occurrence. The trial court, on stipulated facts, granted summary judgment to plaintiff for its second claim of $100,000. The defendant appeals. We affirm.

Wayne Winter was employed by plaintiff as its general manager from June 1, 1979, until January 7, 1986. During that time, he embezzled at least $740,000. Of that sum, $228,900 was embezzled on 14 different occasions between July 19, 1984, and May 31, 1985, and $511,100 was embezzled on 12 different occasions between June 7, 1985, and December 17, 1985. On each occasion, Winter committed the embezzlement by transferring plaintiff's funds by wire or by check to a commodities broker for speculation in the commodities market.

Farmland originally issued its policy to plaintiff from June 1, 1984, through June 1, 1985. The policy was renewed from June 1, 1985, through June 1, 1986. The limit of liability for loss caused by employee dishonesty was $100,000.

Plaintiff filed two claims with Farmland for $100,000 each. Farmland paid $100,000 under the policy in effect from June 1, 1984, to June 1, 1985, but denied the second claim. Farmland argues that the unambiguous terms of its policy allow plaintiff to recover only once for a single occurrence.

Because the facts were submitted by stipulation, and because the construction of a written instrument is a question of law, our standard of review is de novo. Lightner v. Centennial Life Ins. Co., 242 Kan 29, Syl. p 1, 744 P.2d 840 (1987); American States Ins. Co. v. Hartford Accident & Indemnity Co., 218 Kan. 563, Syl. p 4, 545 P.2d 399 (1976).

The question for resolution requires that we interpret the policy of insurance issued by Farmland. Before dealing with the applicable policy provisions, it will be helpful to set forth the rules to be applied in our interpretation of Farmland's policy.

(1) Insurance is a matter of contract. The parties to a contract of insurance may choose whatever terms they wish, and courts will enforce the policy as written so long as the terms do not conflict with pertinent statutes or with public policy. Western Casualty & Surety Co. v. Trinity Universal Ins. Co., 13 Kan.App.2d 133, Syl. p 1, 764 P.2d 1256 (1988), aff'd 245 Kan. 44, 775 P.2d 176 (1989).

(2) If a dispute arises as to the meaning of the terms chosen by the parties, courts will attempt to determine what the parties intended. To determine this intent, courts will consider the policy as a whole and will examine the language used by the parties, taking into account the situation of the parties, the nature of the subject matter, and the purpose to be accomplished. American Media Inc. v. Home Indemnity Co., 232 Kan. 737, Syl. p 1, 658 P.2d 1015 (1983); Mah v. United States Fire Ins. Co., 218 Kan. 583, Syl. p 1, 545 P.2d 366 (1976).

(3) If there is no uncertainty about the meaning of the policy, it will be enforced as written. American Media, 232 Kan. 737, Syl. p 5, 658 P.2d 1015; Nash v. Adkins, 11 Kan.App.2d 326, 328-29, 720 P.2d 1129 (1986).

(4) If there is uncertainty about the meaning of the policy, courts determine the meaning by applying rules of construction. These rules do not apply unless the court first determines that the policy is ambiguous. A policy is not ambiguous unless, viewing it as a whole, there is genuine uncertainty as to which one of two or more possible meanings is the proper meaning. Patrons Mut. Ins. Ass'n v. Harmon, 240 Kan. 707, 713, 732 P.2d 741 (1987). Ambiguity may not be created by viewing the policy in fragmentary segments. Farm Bureau Mut. Ins. Co. v. Horinek, 233 Kan. 175, 180, 660 P.2d 1374 (1983); Nash v. Adkins, 11 Kan.App.2d at 329, 720 P.2d 1129. And the rules of construction do not " 'authorize a perversion of the language, or the exercise of inventive powers for the purpose of creating an ambiguity where none exists.' " Topeka Tent & Awning Co. v. Glen Falls Ins. Co., 13 Kan.App.2d 553, 556, 774 P.2d 984 (1989) (quoting Central Security Mutual Ins. Co. v. DePinto, 235 Kan. 331, 333, 681 P.2d 15 [1984].

Where genuine ambiguity exists, courts will apply one of the two following rules:

(1) The first is the doctrine of "reasonable expectations". This doctrine comes in many forms. See Jerry, Understanding Insurance Law § 25D (1987). The version recognized in Kansas is relatively narrow. Recognizing that insurance contracts are typically adhesion contracts in which the terms are drafted by the insurer and not negotiated between the parties, courts have required insurers to state their intended meaning clearly and distinctly. If the meaning is not stated clearly, and a reasonable person in the insured's position would have understood the words of the policy to mean something other than what the insurer intended, that understanding will control. Gowing v. Great Plains Mutual Ins. Co., 207 Kan. 78, 80-82, 483 P.2d 1072 (1971); see also American Media, 232 Kan. 737, Syl. p 6, 658 P.2d 1015; Fowler v. United Equitable Ins. Co., 200 Kan. 632, 633-34, 438 P.2d 46 (1968).

(2) The second is the rule of liberal construction. If the intent of the parties cannot be determined from the contract, courts will construe the policy in the way most favorable to the insured. Lightner, 242 Kan. at 36, 744 P.2d 840; American Media, 232 Kan. 737, Syl. p 4, 658 P.2d 1015. This rule is simply a rule of construction to aid the court in determining the intent of the parties, and its basis is that the drafter of a contract must suffer the consequences if he does not make the terms clear. Lightner, 242 Kan. at 36, 744 P.2d 840.

The applicable provisions of the policy are:

"II. CRIME INSURANCE

"A. PROPERTY COVERED

We cover money, securities, personal property and stock owned by you while within your place of business.

....

"C. CONDITIONS

"1. Employee Dishonesty

"The following conditions apply to this peril:

....

"b. Dishonest or fraudulent acts or a series of similar or related acts of any employee acting alone or in collusion with others during the policy period shall be deemed to be one occurrence for applying the limit of liability.

"c. Loss is covered only if discovered not later than one year from the end of the policy period, and then this insurance shall apply only to loss sustained during the policy period.

"d. If more than one insured is covered under this policy, our liability shall not exceed the amount for which we would be liable if there was only one insured.

"e. Regardless of the number of years this policy shall continue in force, the limit of liability shown in the declarations shall not be cumulative from year to year.

....

"3. Employee Dishonesty; Destruction and Disappearance; Burglary, Robbery or Theft and Depositors Forgery

"The following conditions apply to these perils:

"a. Our liability for loss in any one occurrence shall not exceed the amount stated in the declarations for that peril.

"b. All loss incidental to an actual or attempted fraudulent, dishonest or criminal act or series of related...