E. Udolf, Inc. v. Aetna Cas. and Sur. Co., 13838

• Decision Date: 01 May 1990
• Docket Number: No. 13838,13838
• Citation: 214 Conn. 741,573 A.2d 1211
• Court: Connecticut Supreme Court
• Parties: E. UDOLF, INC. v. AETNA CASUALTY AND SURETY COMPANY, et al.

Page 1211

573 A.2d 1211

214 Conn. 741

E. UDOLF, INC. v. AETNA CASUALTY AND SURETY COMPANY, et al.

No. 13838.

Supreme Court of Connecticut.

Argued March 1, 1990.

Decided May 1, 1990.

William F. Gallagher, with whom, on the brief, was Gwen B. Weltman, New Haven, for appellant (plaintiff).

John T. Harris, with whom, on the brief, were Gregory T. D'Auria and Peter R. Reynolds, Hartford, for appellees (named defendant, et al.).

Henry C. Ide, Hartford, for appellee (defendant, Fire and Cas. Ins. Co. of Connecticut).

Before SHEA, CALLAHAN, GLASS, HULL and FRANCIS X. HENNESSY, JJ.

HULL, Associate Justice.

The sole issue in this appeal is whether the plaintiff, E. Udolf, Inc., was entitled to coverage under certain employee dishonesty insurance policies issued by the defendants, Aetna Casualty and Surety Company (Aetna) and Fire and Casualty Insurance Company of Connecticut (Fire and Casualty), for the misappropriation of monies by an employee of the plaintiff. The plaintiff notified the defendants of losses it had incurred as a result of an employee's dishonesty and sought from the defendants indemnification, plus interest, for those losses. Upon the defendants' refusals to pay its claim, the plaintiff instituted the present action. The matter was thereafter tried to the court and judgment was rendered in favor of the defendants. From this judgment the plaintiff appeals. We find no error.

The underlying facts as found by the trial court are as follows. The plaintiff is a small corporation that operates a retail men's clothing store in the city of Hartford. During the relevant period, 1980 through 1983, the plaintiff employed between eight and ten employees. The only officer, director and shareholder of the plaintiff was Leonard Udolf, who was present in the store approximately 10 to 20 percent of the time. In his absence the store was run by Kenneth Auer, the store manager. Auer was the overseer of the store and was principally in charge of its operations in the absence of Leonard Udolf. He was expected, however, to report all relevant activities to Leonard Udolf.

During the years 1980 and 1981, Lynn Bjork, an employee of the plaintiff, misappropriated $6000 from the plaintiff. To effect the misappropriations, she substituted her personal checks for money generated by the plaintiff's sales, and then simply put these checks in her desk rather than depositing them into the plaintiff's account. In the spring of 1981, during one of Leonard Udolf's frequent absences from the store, Anna Shukis, the plaintiff's bookkeeper, discovered the misappropriations and immediately informed Auer of them. Auer and Shukis were expected to inform Leonard Udolf of activities such as Bjork's misappropriations. They, however, did not consult with Leonard Udolf, but rather agreed with one another to allow Bjork to repay the $6000 and remain employed by the plaintiff. Thereafter, Bjork repaid the $6000.

Beginning in late 1981, and continuing until February, 1983, Bjork again misappropriated monies from the plaintiff, totaling $48,715.08. These misappropriations were discovered in February, 1983, and Bjork was immediately fired by Auer on the direct order of Leonard Udolf.

Pursuant to employee dishonesty insurance policies that the plaintiff had purchased from Aetna and from Fire and Casualty, ¹ the plaintiff notified the two companies of the losses incurred as a result of Bjork's misappropriations. Both Aetna and Fire and Casualty refused to indemnify the plaintiff for those losses, claiming that the language of the policies excluded coverage for Bjork's actions. Aetna's refusal to pay was based on the following provision contained in section 7 of its policy: "The coverage of Insuring Agreement I shall not apply to any Employee from and after the time that the Insured or any partner or officer thereof not in collusion with such Employee shall have knowledge or information that such Employee has committed any fraudulent or dishonest act in the service of the Insured or otherwise, whether such act be committed before or after the date of employment by the Insured." Fire and Casualty's refusal was based on similar language contained in section 1(3) of its policy: "Insurance hereunder shall be deemed cancelled as to any Employee immediately upon discovery by the Insured, or any partner or officer, of any fraudulent or dishonest act of such Employee."

The trial court concluded that, under the terms of the policies, the plaintiff was not entitled to recovery of the losses it had incurred as a result of Bjork's actions. The basis of the court's conclusion was its determination that the knowledge of Auer and Shukis concerning misappropriations committed by the plaintiff's employees was imputed to the plaintiff. The court thus reasoned that because the 1980-81 misappropriations by Bjork constituted "fraudulent or dishonest act[s]" within the scope of section 7 of Aetna's policy, and section 1(3) of Fire and Casualty's policy, and because the plaintiff, by imputation of Auer's and Shukis' knowledge, became aware of those misappropriations no later than the summer of 1981, any subsequent losses caused by a "fraudulent or dishonest act" on the part of Bjork were excluded from coverage under the policies. In so concluding, the court rejected the plaintiff's claim that, because Auer and Shukis did not inform Leonard Udolf of Bjork's 1980-81 misappropriations, they were in collusion with Bjork. The court stated that while the failure of Auer and Shukis to notify Leonard Udolf may have been an act of poor judgment, it was not a fraudulent act and therefore was not collusive.

On appeal, the plaintiff claims that the trial court erred in: (1) imputing to the plaintiff the knowledge of Auer and Shukis concerning Bjork's prior misappropriations of the plaintiff's monies; (2) finding that Bjork's prior misappropriations were "fraudulent or dishonest" under the terms of the policies; and (3) finding that Auer and Shukis were not in collusion with Bjork.

I

We first consider whether the trial court erred in imputing to the plaintiff the knowledge of Auer and Shukis concerning Bjork's prior misappropriations of the plaintiff's monies. The plaintiff concedes thatgenerally, " ' "notice to, or knowledge of, an agent while acting within the scope of his authority and in reference to a matter over which his authority extends, is notice to, or knowledge of, the principal." 2 Mechem on Agency (2d Ed.) § 1803.' Lane v. United Electric Light & Water Co., 88 Conn. 670, 674, 92 A. 430 (1914); Reardon v. Mutual Life Ins. Co., 138 Conn. 510, 516, 86 A.2d 570 (1952)." West Haven v. United States Fidelity & Guaranty Co., 174 Conn. 392, 395, 389 A.2d 741 (1978). As stated in the Restatement (Second) of Agency § 272, "a principal is affected by the knowledge of an agent concerning a matter as to which he acts within his power to bind the principal or upon which it is his duty to give the principal information." The plaintiff argues, however, that this agency principle should not apply in the context of employee dishonesty insurance, citing as authority for its position American Employers' Ins. Co. v. Cable, 108 F.2d 225 (5th Cir.1939), Miami National Bank v. Pennsylvania Ins. Co., 314 F.Supp. 858 (S.D.Fla.1970), Phoenix Indemnity Co. v. Union Finance Co., 54 So.2d 188 (Fla.1951), and Peurifoy v. Loyal, 154 S.C. 267, 151 S.E. 579 (1930).

The trial court was unpersuaded by the plaintiff's argument and the cases on which it was based, and relied instead primarily on Ritchie Grocer Co. v. Aetna Casualty & Surety Co., 426 F.2d 499 (8th Cir.1970), in concluding that the knowledge of Auer and Shukis concerning Bjork's 1980-81 activities should be imputed to the plaintiff. The similarities between Ritchie and the instant case are striking. At issue in Ritchie was the same policy exclusion as in the present case: " 'The coverage of this Policy shall not apply to any Employee from and after the time that the Insured or any partner or officer thereof not in collusion with such Employee shall have knowledge or information that such Employees (sic) has committed any fraudulent or dishonest act in the service of the Insured or otherwise....' " Id., 501.

The underlying facts involved in Ritchie Grocer Co. were as follows. Joseph Polk, the manager of a branch office of the plaintiff's wholesale grocery business, received an application for employment from Wayne Kemp. Prior to hiring Kemp, Polk inquired into Kemp's reputation for trustworthiness and discovered that several months earlier Kemp and two other boys had broken into a gas station and had stolen some tires and money. Notwithstanding that information, Polk hired Kemp as a truck driver for the plaintiff. Id., 501-502. During the eighteen months that Kemp was employed by the plaintiff, he misappropriated $17,486.20, for which the plaintiff made a claim under its fidelity policy. Id., 503. The insurance company defended on the grounds that Polk's knowledge of Kemp's prior "fraudulent or dishonest" act made him a known risk and excluded him from coverage under the policy's terms. Id., 501. The District Court held in favor of the insurance company on this ground and the Eighth Circuit Court of Appeals affirmed, reciting the general agency principle that knowledge of an agent acquired in the ordinary discharge of his duties for the corporation is generally to be imputed to the principal. Id., 500.

The trial court in the present case also relied on Alfalfa Electric Cooperative, Inc. v. Travelers Indemnity Co., 376 F.Supp. 901 (W.D.Okla.1973), as support for its decision to impute to the plaintiff the knowledge of Auer and Shukis. In Alfalfa Electric Cooperative, Inc., the court imputed to an employer the knowledge of an office manager concerning prior fraudulent or dishonest acts of an employee. Id., 907.

The cases relied upon by the trial court and the cases cited by both the plaintiff and the defendants lack any...