Stop & Shop Companies, Inc. v. Federal Ins. Co., s. 97-1678

• Decision Date: 05 November 1997
• Docket Number: Nos. 97-1678,97-1784,s. 97-1678
• Citation: 136 F.3d 71
• Parties: The STOP & SHOP COMPANIES, INC., Plaintiff, Appellee, v. FEDERAL INSURANCE COMPANY, Defendant, Appellant. The STOP & SHOP COMPANIES, INC., Plaintiff, Appellant, v. FEDERAL INSURANCE COMPANY, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 71

136 F.3d 71

The STOP & SHOP COMPANIES, INC., Plaintiff, Appellee, v. FEDERAL INSURANCE COMPANY, Defendant, Appellant.

The STOP & SHOP COMPANIES, INC., Plaintiff, Appellant, v. FEDERAL INSURANCE COMPANY, Defendant, Appellee.

Nos. 97-1678, 97-1784.

United States Court of Appeals First Circuit.

Heard Nov. 5, 1997.

Decided Feb. 12, 1998.

Leonard F. Clarkin with whom Harry C. Beach, Wellesley, MA, was on brief, for Federal Insurance Company.

Joseph L. Kociubes with whom Victor H. Polk, Jr., and Denise Jefferson Casper, Boston, MA, were on brief, for The Stop & Shop Companies, Inc.

Michael Roster, Michael H. Hudnall, Stanford, CA, Robert A. Lewis, and William Carpenter on brief for Stanford University Hospital, amicus curiae.

Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and STAHL, Circuit Judge.

COFFIN, Senior Circuit Judge.

This is an insurance coverage dispute involving a crime insurance policy issued by Federal Insurance Company ("Federal") to Stop & Shop Companies, Inc. ("Stop & Shop"). Federal appeals the district court's finding that it must indemnify Stop & Shop for loss arising out of theft by officers of Hamilton Taft & Company ("Hamilton Taft"), a company employed by Stop & Shop to process and pay taxes. Federal also challenges the district court's calculation of damages, and Stop & Shop cross-appeals denial of its attorney's fees. We conclude that the authorized representative exclusion in the crime insurance policy bars recovery by Stop & Shop. We therefore reverse the district court's holding that Federal must indemnify Stop & Shop, and leave the attorney's fees decision intact.

FACTUAL AND PROCEDURAL BACKGROUND

The material facts are essentially undisputed. In February 1990, Stop & Shop purchased a crime insurance policy from Federal which provided coverage for "direct losses caused by the ... disappearance, wrongful abstraction or Computer Theft of Money and Securities...." ¹ The policy excluded coverage for loss due to the "[t]heft or any other fraudulent, dishonest or criminal act ... by any [e]mployee, director, trustee or authorized representative of the Insured whether acting alone or in collusion with others." Because we find that the issue in this case turns on the exclusion clause, we detail only briefly the somewhat unusual circumstances surrounding the losses suffered by Stop & Shop.

Stop & Shop entered into a tax service agreement in 1987 with Hamilton Taft, by which Stop & Shop would deposit funds with Hamilton Taft and Hamilton Taft would then use these funds to remit timely payments to taxing authorities on behalf of Stop & Shop. The agreement allowed Hamilton Taft to commingle Stop & Shop funds with deposits from other customers and to use the money for its own investments and expenses so long as tax payments owed by Stop & Shop were made when due. In 1989, Connie Armstrong assumed control of the company, becoming Hamilton Taft's sole shareholder, director and chief executive officer.

In 1990, Stop & Shop renewed its contract with Hamilton Taft, after making certain revisions. These included changing the language, "This agreement may not be assigned to persons who are not employees of Hamilton Taft" to "This agreement may not be assigned by Hamilton Taft."

In the relevant period for this case, Stop & Shop had tax payments due on October 18, 1990, October 25, 1990, January 17, 1991, and January 24, 1991, totalling $5,257,474 for October, and $7,632,269 for January. On these dates, Hamilton Taft employees prepared the checks and recorded them as payments made in their accounting logs. As was standard practice with amounts in excess of $100,000, the checks were then sent to the front office for an officer's counter-signature. The checks were not, however, mailed in the required period of time.

Upon discovering that its October and January tax payments had not been made, Stop & Shop contacted Hamilton Taft, which ultimately responded by paying the October liability on January 31, 1991, and the January liability on March 8, 1991. Around the same time, a former Hamilton Taft comptroller reported to about thirty Hamilton Taft clients that the company's executives, most notably Armstrong, were diverting client funds intended for tax payments and using these funds for their personal use or for investment in other Armstrong-owned companies. In late March, three Hamilton Taft clients petitioned the company into involuntary bankruptcy, and a Trustee was appointed. The Trustee calculated the loss from improper diversion of client funds at over $55 million. In January 1992, the Trustee demanded that Stop & Shop repay the bankrupt estate for the January and March 1991 tax payments made by Hamilton Taft, arguing that these payments were voidable preferences. ²

Litigation proceeded in federal court in California, where the Ninth Circuit ultimately agreed that the January and March payments were voidable preferences subject to repayment. Shortly thereafter, Stop & Shop settled with the Trustee for a portion of its tax liability. It then filed a claim in district court for indemnification by Federal for its remaining loss; upon Federal's motion for a transfer of venue, the case was moved to Massachusetts. Federal argued that it had no obligation to indemnify because Stop & Shop's loss was not direct and the policy's authorized representative exclusion barred recovery for theft perpetrated by Hamilton Taft executives. The district court found direct loss and held the exclusion inapplicable. The court then awarded damages to Stop & Shop but denied its request for attorney's fees. Each side appeals.

DISCUSSION

Although the parties raise multiple issues on appeal, our conclusion on the exclusion clause issue makes it unnecessary to discuss the remaining ones. We therefore begin with Federal's claim that the clause bars coverage, and Stop & Stop's response that the clause is inapplicable because the responsible Hamilton Taft executives diverted funds for their personal gain and not for the benefit of the company.

Construction of insurance contracts and application of their terms to facts are matters of law, which we review de novo. Preferred Mut. Ins. Co. v. Travelers Companies, 127 F.3d 136, 137 (1st Cir.1997). Exclusionary clauses must "state clearly what items are to be excluded and any ambiguity is to be interpreted strictly in the insured's favor." American Home Assur. Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 28 (1st Cir.1986) (applying, as we do here, Massachusetts law). Ambiguity exists where the language is susceptible to more than one rational interpretation. Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st. Cir.1997). But where the policy's language is plain, we interpret and enforce it according to the ordinary meaning of the words contained in the policy's provisions. Bird v. Centennial Ins. Co., 11 F.3d 228, 232 (1st Cir.1993); Cody v. Connecticut General Life Ins. Co., 387 Mass. 142, 146, 439 N.E.2d 234, 237 (1982). "[L]ack of ambiguity is a relative status, not an absolute one.... [I]t is sufficient if the language employed is such that a reasonable person, reading the document as a whole and in a realistic context, clearly points toward a readily ascertainable meaning." Fashion House, Inc. v. K mart Corp., 892 F.2d 1076, 1085 (1st Cir.1989).

The question for us is whether the actions of Hamilton Taft executives in diverting funds for their own gain fall under Federal's authorized representative exclusion. The district court found that the term "authorized representative" was ambiguous based on several factors: it was not defined in either the policy or case law, other crime insurance contracts included express terms excluding coverage, the parties' course of conduct in amending the Agreement suggested their specific intention that Hamilton Taft and not Armstrong be Stop & Shop's authorized representative, and no public policy reasons precluded coverage. Resolving the ambiguity in favor of the insured, the court therefore determined that Stop & Shop was covered under the policy for the losses sustained.

We find each of these reasons lacking in force and conclude that the language in context is susceptible to only one definition exclusion of coverage. In the absence of a statutory definition, or any relevant state law construction of the term, we begin by turning to the lexical meaning, as Massachusetts courts frequently do, see, e.g., Gordon v. Safety Ins. Co., 417 Mass. 687, 690, 632 N.E.2d 1187, 1189 (1994), and to a thoughtful federal case, Colson Services Corp. v. Ins. Co. of North America, 874 F.Supp. 65 (S.D.N.Y.1994), which provide us with thorough and specific explanations of the term. Black's Law Dictionary 133-34 (6th ed.1990) defines "authorized" as possessed of control or power delegated by a principal to his agent, and "representative" as "a person or thing that ... in some way corresponds to, stands for, replaces, or is equivalent to, another person or thing .... includ[ing] an agent, an officer of a corporation or association ... or any other person empowered to act for another," id. at 1302. Webster's Third New International Dictionary (Unabridged) 146 (1966) defines "authorized," inter alia, as "endorse[d], empower[ed]," and "representative" as "standing for or in the place of another: action for another or others: constituting the agent for another especially through delegated authority," id. at 1926-27. The court in Colson relied on the Webster 's meaning, concluding that a company given authority by another company to act as its agent in choosing investments was an "authorized representative" under the relevant crime insurance policy. 874 F.Supp. at 68.

These definitions persuade us that an "authorized representative" can be either a person or company empowered to act on an entity's behalf. Stop & Shop accepts this definition, but insists that in this case only Hamilton Taft was its authorized representative and that...