Puget Sound Nat. Bank v. St. Paul Fire and Marine Ins. Co.

• Decision Date: 24 May 1982
• Docket Number: No. 8718-5-I,8718-5-I
• Citation: 645 P.2d 1122,32 Wn.App. 32
• Parties: PUGET SOUND NATIONAL BANK, and Continental Bank of Burien, Respondents/Cross-Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellant/Cross-Respondent.
• Court: Washington Court of Appeals

Page 32

32 Wn.App. 32

645 P.2d 1122

PUGET SOUND NATIONAL BANK, and Continental Bank of Burien Respondents/Cross-Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY Appellant/Cross-Respondent.

No. 8718-5-I.

Court of Appeals of Washington, Division 1.

May 24, 1982.

Karr, Tuttle, Koch, Campbell, Mawer & Morrow, John Kruger, Philip Talmadge, Seattle, for appellant.

Johnson, Lane & Gallagher, Edward M. Lane, Tacoma, for respondent.

RINGOLD, Judge.

This is an appeal and cross-appeal from a judgment entered against defendant St. Paul Fire and Marine Insurance Company (St. Paul) in favor of plaintiffs Continental Bank of Burien (the bank) and Puget Sound National Bank. ¹ The parties also ask this court to clarify the effect on this judgment of the 1980 change in the legal interest rate. We affirm the judgment of the trial court and decline to apply the new interest rate to a judgment entered before the effective date of the new legislation.

Continental Bank was organized in 1969 as a state-chartered commercial bank. Ralph Dreitzler, Jr. was one of the organizing directors of the bank and served as a director until January 1976. During this time Dreitzler was also president and principal owner of an insurance brokerage firm (Dreitzler & Co.). In 1970 Dreitzler proposed and the bank's board of directors approved a program for insurance premium financing. Under the program, which Dreitzler was authorized to set up and supervise, the bank would loan money to Dreitzler's clients for their insurance premiums. Each insured would assign to the bank the right to cancel the insurance policy, as well as the right to the unearned portion of the insurance premium, as security for the loan. In the event of a loan default, the bank could cancel the insurance policy and recoup its loss from the unearned premium in the hands of the insurer. Since the bank was to hold the insurance policies as collateral, it regarded these loans as secured by cash.

Although at first the operations of the program were carried out by the bank's staff interacting directly with the borrowers, by 1974 Dreitzler had set up the procedures so that all contact between the bank and the loan customers channeled through him. Preparation of loan forms, verification of signatures, and monthly payments on many loans were handled by Dreitzler or Dreitzler & Co. employees. Once a loan was booked at the bank the principal amount was deposited into a Dreitzler & Co. account rather than paid directly to the borrowers. Payment coupon books and routine audit notices were also sent directly to Dreitzler. If an account became seriously overdue the bank notified Dreitzler, rather than the borrower. The bank allowed Dreitzler to hold the insurance policies which comprised the collateral for the loans.

Following criticism of these program procedures by state bank examiners in 1974, the bank's Board of Directors reviewed the procedures and approved certain "safeguards" suggested by Dreitzler: obtaining personal and corporate guarantees from Dreitzler and Dreitzler & Co.; limiting premium financing loans to a maximum duration of 10 months; requiring a down payment of at least 10 percent; and providing for customer credit checks at the option of the bank.

In 1975, the bank obtained two fidelity bonds from St Paul, which provided an aggregate coverage of $1,300,000 against losses due to dishonest or fraudulent acts of employees. The bond application was filled out by Dreitzler as the procuring agent and signed by the cashier of the bank. It stated in part that all signatures are obtained in the presence of a bank employee or notary, that all data and collateral are verified as genuine before payout of funds, that coupon payment books are delivered directly to borrowers, and that the bank had not sustained any losses in the previous 6 years.

In 1975 the bank also hired over Dreitzler's objection its first full-time internal auditor. In January, 1976, the auditor observed that audit notices for premium financing loan customers were being mailed to Dreitzler instead of to the borrowers themselves. The auditor corrected the addresses and mailed the notices. The response of the "borrowers" revealed that many of the premium financing loans then outstanding were fraudulent. The customers either had no knowledge of such loans or had in fact financed their insurance premiums with the bank through Dreitzler, but in an amount much less than the promissory notes indicated.

The bank filed a proof of loss with St. Paul in February, 1976, and in March charged off, as required by state law, the loans which were determined to be uncollectible. Cf. RCW 30.04.130. In 1979 the bank obtained a judgment against Dreitzler and Dreitzler & Co. in the amount of $1,201,311.04, plus attorneys fees and interest. After foreclosure of various security interests and sale of Dreitzler's assets, the bank realized a net recovery of $186,735.80 on this judgment.

The present action against St. Paul for recovery under the bonds was commenced in 1977. Following trial in March 1980, the trial court made findings of fact and conclusions of law, denied the bank's request for sanctions under CR 37, and entered judgment for the bank in the amount of $1,352,997. Both parties appeal.

A. COVERAGE OF DREITZLER'S ACTS UNDER THE BONDS

Each bond, allowing for minor differences in language not relevant to the present inquiry, provides for indemnification of Continental Bank "for any loss ... through any dishonest or fraudulent act of any of the Employees ...." "Employee" is defined as "one or more of the Insured's officers, clerks and other employees while employed in, at or by any of the Insured's offices ...."

St. Paul first argues that Dreitzler was not an "Employee" of the bank and his acts were therefore not covered by the bonds. We find it unnecessary to decide whether Dreitzler was an "Employee", i.e. a common law employee of the bank, in order to determine whether his fraudulent acts were within the purview of the bonds. To limit coverage to loss caused by "Employees" would ignore the director's exclusionary clause, which excludes coverage for any "loss resulting from any act or acts of any director of the Insured other than one employed as ... an Employee of the Insured, except when performing acts coming within the scope of the usual duties of an Employee." (Emphasis added.) If only "Employees," as defined in the bond, were covered, then the latter part of the exclusion would be superfluous, since the clause already provides coverage for those directors who are "Employees" and excludes those who are not. The latter part of the exclusionary clause, if it is to be given effect at all, must be read as providing coverage for non-"Employee" directors who perform acts ordinarily performed by "Employees" resulting in loss to the bank. Ambiguous exclusionary clauses in insurance policies are construed strictly against the insurer. Dairyland Ins. Co. v. Ward, 83 Wash.2d 353, 517 P.2d 966 (1974).

St. Paul next argues that Dreitzler did not perform acts coming within the scope of the usual duties of an "Employee." St. Paul assigns error to the relevant findings and conclusions of the trial court:

During the period from the Spring of 1970 through January 23 of 1976, Ralph Dreitzler prepared forms for the use in the premium loan financing program, made credit determinations on loans to customers, computed down payments and calculated interest and discounts, prepared the notes, insurance premium collateral agreements and notices to insurance companies, obtained signatures of customers on the instruments, caused said loans to be booked at the bank, received the disbursement (sic) of loan proceeds through his company account at the Continental Bank of Burien, prepared for mailing and mailed notice of assignment to insurance companies, received verifications for the borrowers for transmittal to them, retained payment books, collected monthly payments on the loans, kept accounting on all payments received and disbursed to the bank in a lump sum the aggregate amounts of these monthly payments just before delinquency each month, held the collateral (being the insurance policies), followed up on delinquencies and obtained and delivered paid in full notes. In performing said functions, this court finds that Ralph F. Dreitzler, Jr. was performing in three capacities: 1) insurance agent; 2) officer of the Dreitzler Corporation; and 3) as an unsalaried employee of the Continental Bank of Burien performing acts coming within the scope of the usual duties of an employee. Continental Bank had the right to control the program, but left such control entirely in the hands of R. F. Dreitzler, Jr.

Finding of Fact 7.

That Ralph F. Dreitzler in performing the acts set forth in the Findings of Fact above was performing acts coming within the scope of the usual duties of an employee ... and that in said performance committed such dishonest and fraudulent acts alone or in collusion with others so as to come within the coverage of the bonds proximately resulting in the losses sustained by Continental Bank of Burien, therefore causing St. Paul Fire and Marine Insurance Company to be liable upon their bond to said plaintiffs in the amounts hereinafter set forth.

Conclusion of Law 3. (As amended by order of April 18, 1980).

At trial an expert testified that the usual duties of an bank employee include holding loan collateral and interacting directly with the bank's borrowers in matters relating to their loans such as preparation of documents, distribution of payment books, performance of audits, and the like. The court's determination that Dreitzler was "performing acts coming within the scope of the usual duties of an employee" was supported by substantial evidence and will not be disturbed on appeal. Thorndike v. Hesperian Orchards, Inc., 54 Wash.2d 570, 343 P.2d 183 (1959).

St. Paul argues, however, that a finding that...