Tri City National Bank v. Federal Ins. Co.

• Decision Date: 09 December 2003
• Docket Number: No. 03-0305.,03-0305.
• Citation: 2004 WI App 12,674 N.W.2d 617,268 Wis.2d 785
• Parties: TRI CITY NATIONAL BANK, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Respondent.
• Court: Wisconsin Court of Appeals

268 Wis.2d 785

2004 WI App 12

674 N.W.2d 617

TRI CITY NATIONAL BANK, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Respondent.

No. 03-0305.

Court of Appeals of Wisconsin.

Submitted on briefs October 7, 2003.

Decided December 9, 2003.

On behalf of the plaintiff-appellant, the cause was submitted on the briefs of Dennis L. Fisher, Steven F. Stanaszak, and Joseph M. Engl of Meissner, Tierney, Fisher & Nichols, S.C., of Milwaukee. On behalf of the defendant-respondent, the cause was submitted on the brief of Donald L. Mrozek, pro hac vice, Stephen R. Swofford, pro hac vice, and Randal N. Arnold of Hinshaw & Culbertson, of Milwaukee.

A nonparty brief was filed by Thomas N. Klug of Borgelt, Powell, Peterson & Frauen, S.C., of Milwaukee, on behalf of the Surety Association of America.

A nonparty brief was filed by John E. Knight and Kirsten E. Spira of Boardman, Suhr, Curry & Field, LLP, of Madison, on behalf of the Wisconsin Bankers Association.

Before Fine, Schudson and Curley, JJ.

¶ 1. CURLEY, J.

Tri City National Bank (Tri City) appeals from the trial court judgment and order dismissing its suit against Federal Insurance Company (Federal). Tri City sued Federal, seeking reimbursement under a fidelity bond issued to Tri City by Federal, for monies paid to two mortgage companies in the form of settlements as the result of the fraudulent acts of two Tri City employees. We determine that because the standard fidelity bond issued to Tri City contained language limiting losses to those "resulting directly" from an employee's dishonest or fraudulent acts and the fraudulent acts here did not result in any direct losses to the bank, no coverage existed for Tri City's claimed losses. Consequently, we affirm the trial court.¹

I. BACKGROUND.

¶ 2. Tri City is a national bank with various branches in the greater- Milwaukee area. As a national bank, it is required to have "adequate fidelity coverage" pursuant to federal law. 12 C.F.R. § 7.2013 (2003).² To comply, it purchased a Financial Institution Bond— Standard Form No. 24 revised to January 1986—from Federal. During the term of the bond, two employees of a Tri City branch bank participated in a scheme with an outsider to fraudulently obtain mortgage loans for insufficiently funded borrowers who did not otherwise qualify for the loans. The scheme operated by having the outsider recruit a buyer for property owned by him or one of his businesses and having the buyer apply for a mortgage loan with one of two mortgage companies. The conspiring bank employees would then send a phony verification to the mortgage company indicating that the buyer had an account at Tri City with sufficient sums to cover the down payment. Once the mortgage was approved, one of the two conspiring bank employees would issue bank cashier's checks for the recruited borrower to use at the closing, despite the lack of sufficient funds in a Tri City account, giving the false impression that the borrower was using personal funds for the down payment. Once the closing took place, the outside co-conspirator took the loan proceeds to the bank, paid for the cashiers check, and paid off the bank employees. At least seventy-four loans were procured in this fashion. Neither the mortgage lenders nor other bank personnel were aware of the scheme. It was only discovered after multiple defaults in the loans brought the scheme to light.³

¶ 3. Following the detection of the fraudulent scheme, the mortgage companies sued Tri City to recover their losses. In their pleadings, the lenders alleged that the actions of Tri City's employees were material misrepresentations made by agents of Tri City, and consequently, the bank was responsible. They also claimed that the loan defaults, and thus the companies' losses, were a "direct and proximate result" of the false representations made by Tri City's employees.

¶ 4. After receiving notice of the suit, Tri City promptly notified Federal and requested confirmation that the bond covered the bank for either judgments or settlements paid to the mortgage companies resulting from the fraud. Federal denied coverage on the ground that the bond's language only covered losses "resulting directly from dishonest or fraudulent acts" of Tri City employees. Federal asserted that the losses were not the direct result of the dishonest and fraudulent acts of Tri City's employees.

¶ 5. Tri City proceeded to settle the actions brought by the mortgage companies for $4,250,000. Afterwards, Tri City demanded reimbursement from Federal for the settlement amounts, but Federal continued to deny coverage. As a result, Tri City commenced a declaratory judgment action against Federal alleging that, by virtue of the fidelity bond, Federal was obligated to indemnify Tri City for the settlement amounts. Federal moved to dismiss for failure to state a claim upon which relief can be granted, pursuant to WIS. STAT. § 802.06(2)6 (2001-02). After briefing and oral argument, the trial court entered an extensive memorandum order granting the motion to dismiss. The trial court reasoned that while Tri City experienced losses because of the bank employees' dishonest and criminal actions, those actions—the basis of the claims asserted by the mortgage companies—did not "give rise to a [l]oss directly resulting from dishonest or fraudulent acts" of the employees.

II. ANALYSIS.

¶ 6. When an appellate court reviews a motion to dismiss for failure to state a claim, its review is de novo. Kohlbeck v. Reliance Constr. Co., 2002 WI App 142, ¶ 9, 256 Wis. 2d 235, 647 N.W.2d 277. "In determining whether a party has stated a claim, we are concerned only with the legal sufficiency of the complaint." Id. We accept all alleged facts and reasonable inferences as true, but draw all legal conclusions independently. Town of Eagle v. Christensen, 191 Wis. 2d 301, 311-12, 529 N.W.2d 245 (Ct. App. 1995).

¶ 7. The resolution of this matter also requires us to interpret the fidelity bond Federal issued to Tri City. Fidelity bonds insure an employer against employee infidelity. See LEE R. RUSS & THOMAS F. SEGALLA, 11 COUCH ON INSURANCE § 160:1 (3d ed. 1998). Thus, such bonds are a form of insurance. When insuring a bank, this type of policy is often referred to as a "Bankers' Blanket Bond," see id., § 167:52, with "blanket" meaning it covers all employees, see LEE R. RUSS & THOMAS F. SEGALLA, 7 COUCH ON INSURANCE § 100:1 (3d ed. 1998). The fidelity bond purchased here is an example of a "Bankers' Blanket Bond." ¶ 8. When reviewing an insurance policy, "[a] construction of an insurance policy that gives reasonable meaning to every provision of the policy is preferable to one leaving part of the language useless or meaningless." Frost v. Whitbeck, 2002 WI 129, ¶ 21, 257 Wis. 2d 80, 654 N.W.2d 225. "[P]olicies should be given a reasonable interpretation and not one [that] leads to absurd results." Nichols v. American Employers Ins. Co., 140 Wis. 2d 743, 751, 412 N.W.2d 547 (Ct. App. 1987). Additionally,

[t]he intended role of the coverage should be kept in mind when construing policy language; the nature and purpose of the policy as a whole have an obvious bearing on the insured's reasonable expectations as to the scope of coverage and on whether the risk involved was, or should have been, contemplated by the insurer in computing its rates.

Shelley v. Moir, 138 Wis. 2d 218, 222, 405 N.W.2d 737 (Ct. App. 1987). Finally, "a policy may not be construed to bind the insurer to a risk which it did not contemplate and for which it received no premium." Id.

¶ 9. Initially, the parties disagree as to the rules of construction that apply to what Tri City asserts is ambiguous language in the contract. Tri City asserts that all ambiguous language must be strictly construed against the drafter. Federal disagrees. It contends that there is no ambiguous language in the bond; and, even if there were, because of the unique history of the bond language, the general rule of construing ambiguous language against the drafter is not followed. We agree with Federal that the general rules of construction do not apply. ¶ 10. In Aetna Casualty & Surety Co. v. Kidder, Peabody & Co., 676 N.Y.S.2d 559 (App. Div. 1998),appeal denied, 93 N.Y.2d 805, 711 N.E.2d 643 (1999), a New York appellate court delved into the history of fidelity bonds. The court concluded that the earliest versions of the standard-form bonds were drafted over thirty years ago by a joint committee of the stock exchange and the insurance communities whose mission was "to refine the exact meaning of [the term] employee dishonesty" in order to stem the tide of judicial decisions that broadened the policies beyond what was contemplated by the parties while ensuring that employers would have coverage for the acts of employee-thieves. Id. at 565.

Memoranda generated by the insurance industry and stock exchanges in connection with the industry-wide drafting of the standard blanket fidelity policies over the last 30 years, demonstrating the significant discussion of standard coverage provisions by organized groups of underwriters as well as insureds, also reflect these meanings. The standard-form bonds that provided the basic language of the present bonds were drafted during the 1970's. At that time, a joint committee of the stock exchange and insurance-industry communities reviewed fidelity bonding concerns in light of claims by underwriters that the increasing loss ratio of the bonds was reducing the attractiveness of fidelity coverage. The expressed intent of the underwriters was to refine the exact meaning of employee dishonesty under the bonds as a means of addressing judicial decisions expanding coverage beyond that originally contemplated, while ensuring that employers who had the misfortune of hiring potential embezzlers (although not necessarily limited to embezzlement) could purchase such protection.

Id. (citation omitted). ¶ 11. As a result, as explained in ...