Town of Ira v. Vt. League of Cities & Towns—Prop. & Cas. Intermunicipal Fund, Inc.

• Decision Date: 31 October 2014
• Docket Number: No. 13–373.,13–373.
• Citation: 109 A.3d 893,2014 VT 115
• Court: Vermont Supreme Court
• Parties: TOWN OF IRA v. VERMONT LEAGUE OF CITIES AND TOWNS—PROPERTY AND CASUALTY INTERMUNICIPAL FUND, INC.

109 A.3d 893

2014 VT 115

TOWN OF IRA

v.VERMONT LEAGUE OF CITIES AND TOWNS—PROPERTY AND CASUALTY INTERMUNICIPAL FUND, INC.

No. 13–373.

Supreme Court of Vermont.

Oct. 31, 2014.

Patrick J. Bernal of Witten, Woolmington, Campbell & Bernal, P.C., Manchester Center, for Plaintiff–Appellee/Cross–Appellant.

Kaveh S. Shahi of Clearly Shahi & Aicher, P.C., Rutland, for Defendant–Appellant/Cross–Appellee.

Present: REIBER, C.J., DOOLEY, SKOGLUND, ROBINSON and CRAWFORD, JJ.¹

Opinion

DOOLEY, J.

¶ 1. Plaintiff Town of Ira brought this action to recover from its insurer, Vermont League of Cities and Towns–Property and Casualty Intermunicipal Fund, Inc. (PACIF), certain losses related to the embezzlement of town funds by the Town's former treasurer. On summary judgment, the trial court found that the Town was entitled to interest on the embezzled amount up to the policy limit and that this amount mooted the Town's claim for audit and attorney's fees, as well as insurer's counterclaims to recoup certain sums already paid. It also granted judgment to insurer on the Town's claim that insurer acted in bad faith by not paying for all of the items it claimed. We affirm.

¶ 2. The Town purchased a policy from insurer that included coverage of losses due to employee embezzlement. The coverage limit was $500,000. In November 2009, an audit revealed to the Town that its long-time elected treasurer had embezzled over $300,000 in funds from town accounts. The audit also reported that the lost interest on the embezzled funds totaled $346,427. For these amounts and others, the Town obtained a judgment against the former treasurer for $1,157,883. The Town sought the coverage limit of $500,000 from insurer. Insurer paid only a part of that amount, essentially reflecting funds actually taken and not including interest on that amount. The Town sued in this action for the difference. On cross-motions for summary judgment, the trial court ruled for the Town, holding specifically that the Town could recover lost interest in addition to the amount embezzled.

¶ 3. The insurance policy involved is a fidelity policy, which indemnifies for certain criminal conduct. Agreement H, paragraph a, of Section IV of the policy, labeled as a “commercial blanket bond,”² provides in pertinent part:

The Fund agrees, subject to limitations, terms and conditions of this Coverage, to indemnify the Named Member against any loss of money or “other property,” which the Named Member shall during the term of this Coverage sustain or discover it has sustained through ... embezzlement ... committed by any one of its officials or Employees, acting alone or in collusion with others.

The Town argues that the “loss of money”³ that it “sustained through embezzlement” includes not only the amount embezzled but also the “time value of money,” that is, the interest lost because the money was not available to invest or hold to earn interest. The insurer argues that the language covers only the amount actually embezzled, at least for an insured that is not in the business of investing or lending money.

¶ 4. The trial court sided with the Town, noting generally that the policy language “is at least broad enough to create an ambiguity as to whether interest ... [is] covered” and that the ambiguity “must be construed in favor of coverage.” The court amplified:

PACIF's interpretation of contract so as to exclude interest the embezzled funds could have earned from the definition of “loss of money ... sustained through ... embezzlement” is overly restrictive. It ignores that prejudgment interest is designed to make a plaintiff whole.... Interest does that by adequately compensating the plaintiff for the time value of money, a fundamental economic concept.... As such, interest⁴ qualifies as a “loss of money ... sustained through ... embezzlement” under the policy.

¶ 5. In evaluating the trial court decision, we start with the principles under which we evaluate coverage claims.⁵ Interpretation of an insurance policy,⁶ like other contracts, involves the resolution of a question of law and, therefore, our review is plenary and nondeferential. Co–op. Ins. Cos. v. Woodward, 2012 VT 22, ¶ 8, 191 Vt. 348, 45 A.3d 89. We give effect to the plain meaning of the terms of the policy if the meaning is unambiguous. Id. ¶ 9. We give policy language a “practical, reasonable, and fair interpretation, consonant with the apparent object and intent of the parties.” Bradford Oil Co. v. Stonington Ins. Co., 2011 VT 108, ¶ 10, 190 Vt. 330, 54 A.3d 983 (quotation omitted). We do, however, construe policy language in favor of the insured where there is ambiguity. Id.; Trinder v. Conn. Attorneys Title Ins. Co., 2011 VT 46, ¶ 11, 189 Vt. 492, 22 A.3d 493. Although here we are dealing with a fidelity policy, rather than a liability policy, we see no reason why these principles should not apply in this instance. See 11 S. Plitt et al., Couch on Insurance § 160:19 (3d ed. 2014) (“[B]onds and contracts which guarantee the fidelity of employees, ... if written for profit and in the course of a business undertaken therefor, are essentially insurance contracts rather than contracts of strict or pure suretyship, and are to be construed as insurance contracts [.]”); Southside Motor Co. v. Transamerica Ins. Co., 380 So.2d 470, 471 (Fla.Dist.Ct.App.1980) (applying liberal construction in favor of insured to fidelity bond).⁷

¶ 6. We also start with an understanding of what is at issue. As discussed in the early leading case of Bank of Brighton v. Smith, 94 Mass. (12 Allen) 243 (Mass.1866), there are two types of prejudgment interest involved in this situation. The first is interest “from the time of the misappropriation of the funds intrusted to [the employee] ... as constituting a part of the damages occasioned by his misconduct.” Id. at 251. In addition, the surety may be liable for a second type of interest—that on the amount owed under the surety agreement:

If the surety becomes charged by the default of the [employee] for the amount of the [bond] or any portion of it, it is his duty to pay the same on demand; and if he neglects or refuses, the general principle ... applies, and the interest is added by way of damages for his own default, not as enlarging in any degree his liability for the misconduct of the [employee].

Id. at 252. The court differentiated the two types of interest for a reason different from why we do so in this case—there, to determine whether the coverage limit of the bond applies to each type of interest.⁸ Id.; see also Cambridge Trust Co. v. Commercial Union Ins. Co., 32 Mass.App.Ct. 561, 591 N.E.2d 1117, 1121–22 (1992) (same).

¶ 7. This appeal involves only the first type of interest, with the one exception being insurer's challenge that the judgment improperly includes interest on interest. Insurer's main argument is that the policy does not allow recovery of the first type of interest. We have not in the past addressed this question of whether the covered loss incurred by the insured under a fidelity policy includes interest on the amount of money stolen by an employee,

although courts in many jurisdictions have addressed it and the decisions are decisively, but not unanimously, in support of the Town's position. There appear to be two primary rationales for this rule. Two New Jersey Supreme Court decisions reflect these rationales. The first decision is Borough of Totowa v. American Surety Co. of New York, 39 N.J. 332, 188 A.2d 586 (1963), a similar case in which a municipal treasurer embezzled funds and the municipality sought interest on the funds taken from the date of the embezzlement. In affirming an award of interest, the court reasoned:

We think the surety on an official bond should answer for the same damages for which the principal obligor is liable. The surety underwrites the principal's behavior; it vouches for him. The liability of the principal and the surety upon the bond is in terms one and the same. We see no reason to interpolate a limitation confining the surety's liability to a part of the total wrong of the principal obligor.

....

The loss of use of the moneys was part and parcel of the injury the unfaithful official inflicted upon the Borough. When the surety made it[s] engagement it knew that if the principal obligor breached the condition of the bond, the ensuing loss would include the loss of the use of the moneys misappropriated as well as the moneys themselves. Unless the Borough receives reimbursement for both principal and interest, it will not be made whole. It will suffer a loss in the face of the surety's promise that it would not.

Id. at 595.

¶ 8. The second decision is In re Estate of Lash, 169 N.J. 20, 776 A.2d 765 (2001), which involved misappropriation of funds by an estate administrator and recovery by the estate from the issuer of an estate administration bond. The court characterized the rule that the surety is liable for the same damages as the fiduciary as a presumption. Id. at 770 (“[U]nless there is a bond provision to the contrary, the surety's liability is coextensive with the principal's liability[.]”). It held that the lost interest was damages payable under the bond. Id. at 774 ; accord

Hack v. Am. Sur. Co., 96 F.2d 939, 946 (7th Cir.1938) (“The surety undertook to answer for the default of its principals .... The measure of its liability is the liability of the bank's officers.”); Soc. Security Admin. v. Emp'rs Mut. Liab. Ins. Co., 234 Md. 493, 199 A.2d 918, 921–22 (1964) ; Edmunds–Bouvier Savs. & Loan Ass'n v. New Amsterdam Cas. Co., 389 Pa. 79, 132 A.2d 181, 183–85 (1957). We recognize that fidelity insurance grew out of suretyship law and is not liability insurance. For this reason, we are particularly persuaded by the holding of Estate of Lash that we should presume that the employer's recovery from the insurer should be the same as that from the offending employee but should enforce a contrary provision in the policy if there is one. On the point that paying back...