Title: First SEC. Bank v. New Hampshire Ins.

State: nebraska

Issuer: Nebraska Supreme Court

Document:

441 N.W.2d 188 (1989) 232 Neb. 493 FIRST SECURITY BANK & TRUST, Appellant, v. NEW HAMPSHIRE INSURANCE COMPANY, Appellee. No. 89-176. Supreme Court of Nebraska. June 9, 1989. *190 James B. Cavanagh, of Erickson & Sederstrom, P.C., Omaha, for appellant. John R. Baylor, of Baylor, Evnen, Curtiss, Grimit & Witt, Lincoln, for appellee. HASTINGS, C.J., BOSLAUGH, WHITE, CAPORALE, SHANAHAN, GRANT, and FAHRNBRUCH, JJ. BOSLAUGH, Justice. The plaintiff, First Security Bank & Trust, commenced this action to recover losses it alleged it sustained as the result of dishonest and fraudulent acts of James Gillette, an employee and officer of the bank at the time the acts took place. The plaintiff's second amended petition alleged that the losses were covered under the terms of a bankers blanket bond and an excess bank employee dishonesty blanket bond issued to the plaintiff by the defendant, New Hampshire Insurance Company. The defendant filed a motion to make the second amended petition more definite and certain and to strike redundant or irrelevant matter from the petition. The motion also contained language that, "in the alternative," the defendant demurred to paragraph 10 of the petition, all of the allegations in respect to the excess bank employee dishonesty Blanket Bond, and all "conclusionary statements" in regard to a cause of action for violation of lending limits contained in the petition. The plaintiff failed to attach copies of the bonds involved to the petition, but sufficient language of the bonds is alleged in the petition and a subsequent stipulation between the parties so that the issues raised by the demurrer can be determined. Each bond contained a provision that the bond insured against "loss sustained by the Insured at any time but discovered during the Bond Period." (Emphasis supplied.) Each bond also contained a provision that "[a]t the earliest practicable moment after discovery of any loss hereunder the Insured shall give the Underwriter written notice thereof and shall also within six months after such discovery furnish to the Underwriter affirmative proof of loss with full particulars." (Emphasis supplied.) The stipulation alleged that each bond was canceled and terminated at noon on April 20, 1983. The petition did not allege a specific date on which the plaintiff discovered the alleged losses, but did allege the following: d) The confidentiality of criminal investigations and Grand Jury proceedings made it impossible for the plaintiff to *191 obtain information as to the true nature of the activities of Gillette; The trial court treated the defendant's motion as a general demurrer and found that coverage was limited to losses discovered within the bond period, that the provisions of the bonds regarding proof of loss were mandatory, that the plaintiff's allegations that it was excused from compliance with the provisions of the bonds were not effective, that Neb.Rev.Stat. §§ 44-357 and 44-358 (Reissue 1988) were not applicable, that the provisions of the bonds were not void as against public policy, and that the second amended petition failed to state a cause of action. The plaintiff elected to stand upon its petition, and the petition was dismissed. The plaintiff has appealed. Since the appeal is from the orders of the trial court sustaining the defendant's demurrer and dismissing the petition, this court must accept the "`truth of facts well pled and the factual and legal inferences which may be reasonably deduced from such facts, but does not accept conclusions of the pleader.'" Security Inv. Co. v. State, 231 Neb. 536, 538, 437 N.W.2d 439, 442 (1989), citing Weiner v. Hazer, 230 Neb. 53, 430 N.W.2d 269 (1988). Additionally, Security Inv. Co. 231 Neb. at 538, 437 N.W.2d at 442, citing Schuyler State Bank v. Cech, 228 Neb. 588, 423 N.W.2d 464 (1988). In order to state a cause of action on the bonds, it was incumbent upon the plaintiff to allege facts showing that (1) the losses had been discovered within the bond period; (2) written notice of the losses had been given to the underwriter at the earliest practicable moment after discovery of the losses; and (3) proof of loss with full particulars had been furnished to the underwriter within 6 months after discovery of the losses. The term "discovery," as used in fidelity insurance policies and particularly in bankers blanket bonds, has been defined in a large number of cases. In Pacific-Southern Mortg. Trust Co. v. Ins. Co. of N.A., 166 Cal. App. 3d 703, 709-11, 212 Cal. Rptr. 754, 757-58 (1985), the court stated: When "discovery of the loss" occurs has been the subject of a great deal of litigation (see Woods, William H., "Conditions to Recovery: Notice, Proof of Loss and Timeliness of Filing Suit" in Bankers and Other Financial Institution Blanket Bonds (A.B.A.1979) p. 395). "Discovery" has been variously defined as occurring *192 when "facts giving rise to a later claim are discovered by the insured, when a claim is made against the insured that may result in a judgment, or when a claim or judgment is settled" (USLIFE Savings & Loan Assn. v. National Surety Corp., 115 Cal. App. 3d 336, 346, 171 Cal. Rptr. 393; Continental Ins. Co. v. Morgan, Olmstead, Kennedy & Gardner, Inc., 83 Cal. App. 3d 593, 607, 148 Cal.Rptr. 57), or as "knowledge which would justify a careful and prudent [person] in charging another with fraud or dishonesty" (Hidden Splendor Mining Co. v. General Ins. Co. of America (10th Cir.1966) 370 F.2d 515, 517, and cases cited therein). (Emphasis in original.) In Utica Mut. Ins. v. Fireman's Fund Ins. Companies, 748 F.2d 118, 121-23 (2d Cir.1984), the court stated: Courts have consistently held that a loss is discovered once an insured has obtained facts that would cause a reasonable person to recognize that there had been dishonesty or fraud resulting in loss. See, e.g., American Sur. Co. v. Pauly, 170 U.S. 133, 147, 18 S. Ct. 552, 557, 42 L. Ed. 977 (1898); Fidelity & Deposit Co. v. Hudson United Bank, 653 F.2d 766, 774 (3d Cir.1981); Perkins v. Clinton State Bank, 593 F.2d 327, 334-35 (8th Cir.1979); Hidden Splendor Mining Co. v. General Ins. Co., 370 F.2d 515, 517 (10th Cir.1966). New York law, *193 which governs in this case, also requires that the time of discovery be determined according to an objective test, based on the conclusions that a reasonable person would draw from the facts known to the insured. See Security Mut. Ins., 31 N.Y.2d at 441-43, 340 N.Y.S.2d at 906-07, 293 N.E.2d at 78-90. (Emphasis in original.) In United States Fidelity & Guar. Co. v. Empire State Bank, 448 F.2d 360, 364-66 (8th Cir.1971), the court said: Suspicion alone does not satisfy the test of discovery. Jefferson Bank & Trust Co., supra. In Perkins v. Clinton State Bank, 593 F.2d 327, 333-35 (8th Cir.1979), the court said: The meaning of "discovery" in timely notice provisions has been judicially construed in several cases dealing with losses due to dishonest employees. See, e.g., American Surety Co. v. Pauly, 170 U.S. 133, 144-47, 18 S. Ct. 552, [556-57] 42 L. Ed. 977 (1898); United States Fidelity & Guaranty Co. v. Empire State Bank, 448 F.2d 360, 364-65 (8th Cir.1971); Federal Deposit Insurance Corp. v. Aetna Casualty & Surety Co., 426 F.2d 729, 738-39 (5th Cir.1970); Hidden Splendor Mining Co. v. General Insurance Co., *194 370 F.2d 515, 519 (10th Cir.1966); American Employers' Insurance Co. v. Cable, 108 F.2d 225, 226-27 (5th Cir.1939); Midland Bank & Trust Co. v. Fidelity & Deposit Co., 442 F. Supp. 960, 971-73 (D.N.J.1977); Alfalfa Electric Cooperative, Inc. v. Travelers Indemnity Co., 376 F. Supp. 901, 906 (W.D.Okl.1973); National Mutual Casualty Co. v. Cypret, 207 Ark. 11, 179 S.W.2d 161, 164 (1944); Fidelity & Deposit Co. v. Cunningham, 181 Ark. 954, 28 S.W.2d 715, 719 (1930). Arkansas law accords with the generally accepted definition of discovery as construed in connection with blanket employee fidelity bonds, and has been stated by the Arkansas Supreme Court as follows: "Under the terms of a bond indemnifying the assured against the larceny or embezzlement of the principal and requiring notice by the assured to the insurer on their becoming aware of same, to render the notice necessary, more than mere suspicion is required; circumstances must have existed and been known by the assured, which would have induced the belief in an ordinarily prudent person that a larceny or embezzlement had been committed." Fidelity & Deposit Co. v. Cunningham, 181 Ark. 954, 28 S.W.2d at 719. From the foregoing authorities, "discovery" of fraud or dishonesty is deemed to occur when the insured actually becomes aware of sufficient facts which would lead a reasonable person to believe that an insured loss has occurred. Mere suspicion of an insured loss by the insured is not sufficient to trigger the notice requirement. See Federal Deposit Insurance Corp. v. Lott, 460 F.2d 82, 86-87 (5th Cir.1972).... The well established rule is that the insured under a blanket employee's fidelity bond is not bound to give notice until he has acquired knowledge of some specific fraudulent or dishonest act. As early stated: "[N]either negligence nor inattention, nor any failure to discover what by diligence might have been discovered, nothing, in fact, short of actual discovery by the bank of dishonesty or a positive breach of an imperative condition, will defeat claims for loss caused by that dishonesty, unless it is otherwise provided in the contract." American Employers' Insurance Co. v. Cable, 108 F.2d at 227. In Nat'l Newark & Essex Bank v. American Insurance Co., 76 N.J. 64, 80-81, 385 A.2d 1216, 1224 (1978), the court said: Of course, there is a vast difference between a fire insurance policy and a fidelity bond. While discovery of the insured loss under the former is self-evident and not difficult to date, serious difficulties inhere in pinpointing the exact time of discovery of a loss under the latter. "Discovery" of a loss under a fidelity bond occurs when the insured learns facts or obtains knowledge which would justify a careful and prudent person in charging another with dishonesty or fraud. American Surety Co. v. Pauly, 170 U.S. 133, 18 S. Ct. 552, 42 L.Ed. *195 977 (1898); Federal Deposit Ins. Corp. v. Aetna Casualty & Surety Co., 426 F.2d 729, 739 (5 Cir.1970); Alfalfa Electric Coop., Inc. v. Travelers Indemnity Co., 376 F. Supp. 901, 906 (W.D.Okl.1973); Prior Lake State Bank v. National Surety Corp., 248 Minn. 383, 80 N.W.2d 612, 616 (1957). Mere suspicions of irregularities or improper conduct do not require the insured to report such acts. American Surety Co. v. Pauly, supra; Prior Lake State Bank v. National Surety Corp., supra; Federal Deposit Insurance Corp. v. Lott, 460 F.2d 82, 86-87 (5 Cir.1972). It is apparent from the allegations of the petition that the plaintiff had not "discovered" a loss when it received advice that James Gillette may have violated certain federal statutes. The allegations in paragraph 9 of the petition suggest that discovery did not take place until about March 29, 1984, when the proof of loss was filed, nearly a year after the bonds had been canceled and terminated. It is only actual, discovered losses which, when they have been reported to the insurer, are sufficient to constitute notice of loss. Mere suspicions, are not discovered losses. Mere suspicions, when reported to the insurer, do not alert the insurer that an actual loss has occurred. Suspicions do not disclose specific, articulable facts which demonstrate discovery of a loss has occurred. A report of anything short of an actual discovered loss is insufficient to alert the insurer that a loss has been discovered. In this case, when the plaintiff notified the defendant that Gillette may have violated certain federal statutes, it did not put the defendant on notice that an actual loss had been discovered. The notice served only to report mere suspicions of a possible loss. The petition fails to allege any subsequent notice to the defendant upon discovery of an actual loss. A proof of loss filed nearly a year after the bonds had been canceled and terminated could not satisfy the requirement that the proof of loss be filed within 6 months after discovery of a loss that had to be discovered during the bond period. In Dunbar v. National Surety Corporation, 140 Neb. 833, 834, 2 N.W.2d 116, 117 (1942), the plaintiff sued on a fidelity bond which covered losses "`discovered during the term of this bond or within fifteen months after the date of any termination of the surety's liability.'" The plaintiff attempted to excuse his failure to discover the loss within the time specified in the policy by alleging that he "`did not and could not discover said fraud until July, 1939, after a complete audit of his books and accounts.'" Id. at 835, 2 N.W.2d at 117. This court held that the policy provision was controlling and that the defendant's demurrer to the petition should have been sustained. In referring to the policy provision concerning discovery of the loss, this court said: "It is well settled that where the liability of the insurer is expressly limited in an indemnity or fidelity contract to losses discovered within a specified time, there is no liability unless the fraud, dishonesty or negligence causing the loss not *196 only occurs but is discovered within the time limit, and the mere fact that the discovery of a fraud during that period is prevented by the concealment thereof by the defaulter will not extend the period of indemnity. The insured is bound to discover the loss during the prescribed period, and if he fails to do so the insurance company is not liable." 14 R.C.L. 1267, sec. 443. Dunbar, supra at 836-37, 2 N.W.2d at 117-18. In this case, the plaintiff failed to allege discovery of the loss within the period of the bonds, a fact essential to recovery on the bonds. In American Surety Co. v. Bankers' Savings & Loan Ass'n, 59 F.2d 577 (8th Cir.1932), a suit on a fidelity bond in which the plaintiff had failed to give prompt notice of discovery of a loss, the court said at 580: In Ach v. Farmers Mut. Ins. Co., 191 Neb. 407, 215 N.W.2d 518 (1974), we held that Neb.Rev.Stat. § 44-358 (Reissue 1988) had no application to a policy provision requiring prompt notice of the occurrence of a loss. In that case we said: Ach, supra at 408-09, 215 N.W.2d at 519-20. There is no merit to the plaintiff's contention that the policy provision requiring proof of loss within 6 months after discovery of the loss is contrary to the public policy of this state. *197 The judgment of the district court is affirmed. AFFIRMED.