White Dairy Co. v. St. Paul Fire and Marine Insurance Co.

• Decision Date: 21 November 1963
• Docket Number: Civ. A. No. 63-90.
• Citation: 222 F. Supp. 1014
• Parties: WHITE DAIRY COMPANY, Inc., an Alabama Corporation, Plaintiff v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota Corporation, Defendant.
• Court: U.S. District Court — Northern District of Alabama

222 F. Supp. 1014

WHITE DAIRY COMPANY, Inc., an Alabama Corporation, Plaintiff v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota Corporation, Defendant.

Civ. A. No. 63-90.

United States District Court N. D. Alabama, S. D.

October 31, 1963.

As Amended November 21, 1963.

Hogan, Callaway & Vance, Robert S. Vance, Birmingham, Ala., for plaintiff.

Lange, Simpson, Robinson & Somerville, and Edward O. Conerly, Birmingham, Ala., for defendant.

LYNNE, Chief Judge.

Suing upon a series of fidelity bonds, plaintiff claims damages in excess of $43,000 sustained as the result of defalcations committed by its employee, Mrs. Jacqueline Chandler, extending over a period during which three bonds and one purported binder issued by defendant were in force.

On January 1, 1958, defendant issued to plaintiff its bond No. 400AA1728, which provided $2,500 coverage with respect to each of plaintiff's employees. On January 1, 1959, defendant issued to plaintiff its bond No. 400AA3547, which provided $2,500 coverage with respect to each of plaintiff's employees and by endorsement¹ provided $7,500 excess coverage (or a total of $10,000) for plaintiff's "Cashier". On January 1, 1960, defendant issued to plaintiff its bond No. 400 FR 261, which, together with the attached excess endorsement, provided $10,000 coverage with respect to plaintiff's "Cashier". On January 1, 1961, defendant's "Authorized Representative" in Birmingham, Molton, Allen & Williams, Inc., issued to plaintiff a "30 Day Binder", describing the risk bound as: "Extending present Blanket Bond in St. Paul—deleting Specific Excess Changing from Blanket Position Bond to Commercial Blanket Bond — Increasing Penalty from $2,500 to $100,000."

Each of such bonds was separate and complete in itself and was for an indefinite duration. Each was similar though not identical. Each succeeding bond expressly terminated or cancelled the bond previously in effect.

During the years 1958, 1959 and 1960, Mrs. Chandler embezzled cash both from daily receipts and from the Christmas and petty cash funds. Her duties included the handling of monies turned in daily by drivers of plaintiff's milk trucks and her modus operandi consisted simply in converting to her own use cash from company funds passing through her hands. The amounts handled by her were large and she was enabled to conceal her defalcations by applying one day's receipts to the funds for which she was accountable for the previous day. While "kiting" cash receipts to cover past withdrawals, she continued to make additional withdrawals in amounts ranging from $10 to $500. When her fraudulent appropriations were discovered on January 11, 1961, she had taken a total of approximately $43,609.96. No other employee of plaintiff was implicated in or responsible for such loss.

On or about April 3, 1961, plaintiff filed proof of loss in such amount, claiming $10,000 under defendant's 1960 bond insisting that it was issued on behalf of Jacqueline Chandler, employed in the position of Cashier.² Thereafter, on April 6, 1961, defendant rejected and returned such proof of loss by letter stating: "* * * our investigation has disclosed that Mrs. Chandler was not employed in the position of cashier by the White Dairy Company, Inc. and according to our bond, your (sic) company's coverage is $2500."

Admittedly, loose nomenclature was used in job descriptions in the White Dairy office in which Mrs. Chandler was employed. But this court expressed the opinion from the bench that she occupied the position of cashier included in the excess endorsements attached to the 1959 and 1960 bonds. Mature reflection has confirmed that impression. She was the sole custodian of the Christmas fund. Her primary responsibility was to receive and recapitulate the daily receipts after the drivers had checked in at the several windows. On the following morning she was required to lock the bag containing the funds and deliver it to Brinks for deposit in the bank. In short, she had charge of the money which belonged to plaintiff.

Consideration of the effect of the purported thirty-day binder and the authority of its local representative to obligate it in the amount stated therein and to the terms of a Commercial Blanket Bond "in ordinary use by the Company" is pretermitted for the reason that the undisputed evidence reveals that Mrs. Chandler committed no act of embezzlement after December 31, 1960.

The vital nub of the controversy between the parties is their disagreement as to the total extent of defendant's liability under the three bonds in question. Plaintiff contends that, without benefit of the thirty-day binder, it is $22,500. Defendant, laying to one side its contention that Mrs. Chandler was not plaintiff's cashier, insists that it could not exceed $10,000.

It must be conceded that a company engaged in issuing fidelity bonds may, by clear and unambiguous language, limit its liability to a single stated amount. This is so whether its obligation is continuing or separate and distinct from year to year. Of course the problem of the draftsman is complicated by a choice of words which will, at the same time, attempt to confine the protection afforded to that for which the premium is fixed and charged without putting the insured on notice that it may obtain the coverage it requires by changing companies each year.

The cases which have considered the problem have approached it from a consideration of the nature of the obligation assumed by the insurer, whether the indemnity afforded is continuing from year to year or is separate and distinct for each year involved. While it might be of academic interest to analyze and attempt to reconcile the cases collected in the margin,³ this court is content to observe that language efficacious to limit total liability to a stated amount when the obligation is a continuing one might be ineffective where the fidelity insurer issues a separate and distinct bond each year.

That a determination of the issue of liability under a fidelity bond, or bonds, effective in successive years, transcends a mere exercise in semantics is graphically illustrated by two opinions from the same court.

In Massachusetts Bond. & Ins. Co. v. Julius Seidel Lbr. Co., 279 F.2d 861 (8th Cir. 1960), Judge Sanborn, in this court's opinion, reached the right result by concluding from the language used in the basic contract and the "schedule adjustment lists" that there was a continuing obligation. At page 865 of 279 F.2d he points out that "there was no termination of the bond or policy, no change in annual premium, and only an insignificant change in the schedule coverage for losses attributable to Feldmeier." (Emphasis supplied.)

Fifteen years before, in the case of Globe Indemnity Co. v. Wolcott & Lincoln, 152 F.2d 545 (8th Cir. 1945), he dealt with two bonds which he held to be separate obligations. Pertinent to our problem, he wrote:

"The provision of paragraph 4 of the rider attached to the second bond that `liability under the prior bond and the attached bond on account of any office shall not be cumulative in amounts,' cannot, we think, be taken and understood to be a limitation of the aggregate amount of the liabilities of the appellant under both bonds. The liability of the appellant under the first bond and its liability under the second bond were not cumulative liabilities, but were separate liabilities, for separate amounts, under separate contracts of insurance. Hence an agreement that these distinct liabilities should not be cumulative in amounts would be meaningless." (Emphasis supplied.)

Turning now to the contracts upon which plaintiff's claims are rested, it may be stated categorically that the three bonds are separate and distinct, the 1959 bond expressly terminating the 1958 bond and the 1960 bond expressly terminating the 1959 bond.

Each bond expressly agrees to indemnify plaintiff for any loss sustained by it through any act of fraud or dishonesty committed by any employee subsequent to the effective date of the bond and prior to its cancellation while the bond was in force as to the employee causing the loss and which loss is discovered not later than three years following the cancellation of such bond as an entirety.⁴

In 1958, Mrs. Jacqueline Chandler, plaintiff's cashier, embezzled in excess of $2,500; in 1959 and 1960, respectively, she embezzled in excess of $10,000. The loss in each year was discovered January 11, 1961, well within the three-year period of each bond.

With reference to the limit of liability (excluding excess insurance) each bond provides: "The sum of $2,500.00 shall be available on account of each Employee whose dishonest or fraudulents act(s) shall cause or contribute to any loss(es) covered by this Bond, and the payment of premiums during the currency of this Bond shall not render such sum cumulative from year to year or period to period * * *." (Emphasis supplied.)

Plaintiff paid premiums for the bonds in force in 1958 in the amount of $554.63; in 1959, in the amount of $747.37, and in 1960, in the amount of $1,059.74. The increasing premiums were apparently attributable to the broadening of the coverage from year to year.

The condition of each bond, captioned "Continuity of Prior Coverage", has a dual aspect. Paragraph E(1)⁵ provides indemnity for any loss occurring during the term of any prior bond, whether or not issued by defendant Company, if (a) defendant's bond would have covered such loss had it occurred during its effective period, and (b) such prior insurance had not terminated prior to the date of defendant's bond, and (c) the discovery period under such prior insurance had elapsed prior to the discovery of such loss, provided (d) defendant's liability would be limited to the amount of coverage afforded by the prior bond or the amount of indemnity granted by its bond, whichever is less.

While the foregoing condition is inapplicable to the facts of this case, it sheds...