1

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

____________

No. 96-11465

____________

LYNCH PROPERTIES INC,

Plaintiff - Appellant,

versus

POTOMAC INSURANCE COMPANY OF ILLINOIS,

Defendant - Appellee.

Appeal from the United States District Court

For the Northern District of Texas

May 19, 1998

Before JONES, EMILIO M. GARZA, and PARKER, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Lynch Properties, Inc. (“Lynch Properties”) appeals the

district court’s grant of summary judgment for Potomac Insurance of

Illinois (“Potomac”). The district court held that an employee

dishonesty insurance policy issued by Potomac to Lynch Properties

did not cover the misappropriation of money by a Lynch Properties

employee from a customer’s separate personal bank account. We

affirm.

I

Potomac Insurance of Illinois (“Potomac”) issued a master
2

insurance policy to Lynch Properties, covering liability, property

loss, and employee dishonesty. This action arose when Lynch

Properties discovered that Eva Bartlett, a bookkeeper whom it

employed, had misappropriated money from the separate personal bank

account of Martha Lynch (“Mrs. Lynch”). Mrs. Lynch, the mother of

Harry Lynch, president of Lynch Properties, paid Lynch Properties

an annual lump sum fee to manage her property and investments

pursuant to an oral contract. Mrs. Lynch also paid Lynch

Properties to perform bookkeeping services for her personal bank

accounts. These bookkeeping services included writing checks to

pay bills, reconciling bank account statements, and preparing

financial statements. The personal bank accounts in question were

held first at Cullen Frost Bank, and later at Comerica Bank, all in

Mrs. Lynch’s own name. The funds in the personal bank accounts did

not derive from Lynch Properties investments or property, and no

formal written agreement existed for Lynch Properties’ handling of

these funds.

Eva Bartlett kept the books for Mrs. Lynch’s investment and

personal bank accounts and handled requests for spending money by

Mrs. Lynch. At least every week, Bartlett prepared a $600 check

drawn on Mrs. Lynch’s personal accounts, obtained an authorized

signature on the check, went to the bank, cashed the check, and

then gave the cash to a courier service for delivery to Mrs. Lynch.

Only Mrs. Lynch, Harry Lynch, and Mrs. Lynch’s other son, Bill

Lynch, had the authority to sign checks drawn on these personal

accounts. By periodically drawing up an extra $600 check, which
3

she had Harry Lynch sign, and then cashing the check and pocketing

the cash, Bartlett ultimately misappropriated approximately $19,000

from Mrs. Lynch’s personal bank accounts. 

When Lynch Properties discovered that funds were missing from

the personal bank accounts, it reimbursed Mrs. Lynch and filed a

claim under the employee dishonesty portion of the policy issued by

Potomac. Potomac denied coverage after investigating the claim,

and this suit followed. The district court granted Potomac’s

summary judgment motion, concluding that no material dispute of

fact existed to show that Lynch had suffered a loss under the

policy. Lynch Properties’ timely appeal followed. 

II

We review a district court’s grant of summary judgment motion

de novo. See New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d

336, 338 (5th Cir. 1996). We also review district court

determinations of state law de novo. See Salve Regina College v.

Russell, 499 U.S. 225, 239, 111 S. Ct. 1217, 1221, 113 L. Ed. 2d

190 (1991). Summary judgment is appropriate where the record

discloses “that there is no genuine issue of material fact and that

the moving party is entitled to a judgment as a matter of law.”

FED. R. CIV. P. 56(c). The moving party bears the initial burden

of identifying those portions of the pleadings and discovery in the

record that it believes demonstrate the absence of a genuine issue

of material fact, but is not required to negate elements of the

nonmoving party’s case. See Celotex Corp v. Catrett, 477 U.S. 317,

325, 106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). Once the
4

moving party meets this burden, the nonmoving party must set forth

specific facts showing a genuine issue for trial and not rest upon

the allegations or denials contained in its pleadings. See FED. R.

CIV. P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-

57, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986). Factual

controversies are construed in the light most favorable to the

nonmovant, but only if both parties have introduced evidence

showing that an actual controversy exists. See Little v. Liquid

Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). “We do

not, however, in the absence of any proof, assume that the

nonmoving party could or would prove the necessary facts.” Id.;

Lujan v. National Wildlife Fed’n, 497 U.S. 871, 888, 110 S. Ct.

3177, 3189, 111 L. Ed. 2d 695 (1990).

This case comes before us through diversity jurisdiction, and

we accordingly apply Texas law as we believe the Texas Supreme

Court would. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78-79, 58

S. Ct. 817, 822, 82 L. Ed. 518 (1938). The Texas Supreme Court has

stated that the rules of interpretation and construction generally

applicable to contracts are equally applicable to insurance

contracts. See National Union Fire Ins. Co. v. CBI Indus., Inc.,

907 S.W.2d 517, 520 (Tex. 1994). Effectuating the true intent of

the parties as expressed in the insurance policy is the primary

concern of the court. See Forbau v. Aetna Life Ins. Co., 876

S.W.2d 132, 133 (Tex. 1994). We construe the policy to give effect

to each term in the contract and to avoid rendering any term a

nullity. See Ideal Mut. Ins. Co. v. Last Days Evangelical Ass’n,
5

783 F.2d 1234, 1238 (5th Cir. 1986). However, “[n]o one phrase,

sentence, or section [of a contract] should be isolated from its

setting and considered apart from the other provisions.” Forbau,

876 S.W.2d at 132-33. We also attempt to interpret uniformly the

provisions of the policy where, as here, the provisions at issue

are similar across jurisdictional borders. See National Union Fire

Ins. Co., 907 S.W.2d at 522. Thus, when no Texas court has

interpreted a particular provision, we look to the courts of other

states for guidance as to how the Texas Supreme Court might

interpret an issue. See Dickson v. State Farm Lloyds, 944 S.W.2d

666, 668 (Tex. App. 1997, n.w.h.) (interpreting insurance policy

provision no Texas court had previously addressed by looking to the

courts of other states).

If the provisions of the insurance contract can be given a

“definite or certain legal meaning,” then the insurance policy is

not ambiguous. See National Union Fire Ins., 907 S.W.2d at 520.

Disagreement over the meaning or interpretation of a term is not

sufficient to make a provision ambiguous or to create a question of

fact. See D.E.W., Inc. v. Local 93, Laborers’ Int’l Union, 957

F.2d 196, 199 (5th Cir. 1992). However, if an ambiguity exists in

a provision of a policy, that provision is interpreted in favor of

the insured. See Toops v. Gulf Coast Marine Inc., 72 F.3d 483, 486

(5th Cir. 1996).

III

In the part of the policy that covers property loss due to

employee dishonesty, Potomac promises to pay Lynch Properties for
6

the loss of Covered Property resulting directly from a Covered

Cause of Loss. “Covered property” is defined as money, securities,

and property other than money and securities. The “covered cause

of loss” is defined as employee dishonesty. However, another

provision, the “Interest Covered” provision, limits property loss

coverage to property (a) “[t]hat you own or hold,” or (b) “[f]or

which you are legally liable,” with “you” being the named insured,

Lynch Properties. 

The district court found that the employee dishonesty policy

was not ambiguous and that the “Interest Covered” provision

excepted this particular loss from coverage under the policy

because Lynch Properties neither owned, held, nor was legally

liable for the funds. It found the connection between Lynch

Properties and the funds in Mrs. Lynch’s personal accounts to be

tenuous, specifically finding that these funds were private, in

Mrs. Lynch’s name, and completely separate from the funds that

Lynch Properties maintained in its own accounts. Moreover, it

found that no written agreement for management of the separate

personal bank accounts existed, and that Mrs. Lynch’s arrangement

with Lynch Properties was based on family ties. As a result, the

court concluded that “the capacity in which Lynch handled Ms.

Lynch’s funds falls short of that involved in the cases Lynch cites

to demonstrate that the ‘hold’ or ‘legally liable’ provisions

trigger coverage in this case.” We agree.

A

We first examine whether Lynch Properties “held” the funds
7

that Bartlett misappropriated from Mrs. Lynch’s separate personal

bank accounts. Lynch Properties presents numerous cases that it

claims stand for the principle that employee dishonesty policies

cover the loss of third-party property possessed or held by the

insured by an employee. The policy language or manner in which the

property was possessed or held in each cited case differs, however,

from that in this case. See Fidelity & Deposit Co. v. USAFORM Hail

Pool, Inc., 523 F.2d 744, 753-54 (5th Cir. 1975) (involving funds

held in a trust account); Elmer Fox & Co. v. Commercial Union Ins.

Co., 274 F. Supp. 235, 239-40 (D. Colo. 1967) (interpreting an

employee dishonesty policy that covered property “held by the

Insured in any capacity”); Alberts v. American Cas. Co., 200 P.2d

37, 39-41 (Cal. Ct. App. 1948) (interpreting a contract that

covered any case in which insured might be liable as “bailee,

trustee or agent, and whether or not the plaintiffs are legally

liable for the loss thereof”); American Employers’ Ins. Co. v.

Johnson, 47 S.W.2d 463, 464, 466 (Tex. Civ. App. 1932, writ dism’d

w.o.j.) (interpreting policy that covered any “pecuniary loss . .

. (including that for which the Employer is responsible) by any act

or acts of fraud, . . . [or] embezzlement”). Whether the Potomac

policy covers Bartlett’s misappropriation of funds from Mrs.

Lynch’s personal bank accounts must be answered by reference to

this contract’s specific language that defines the property

covered. See Cumis Ins. Soc’y v. Republic Nat’l Bank, 480 S.W.2d

762, 766 (Tex. Civ. App. 1972, writ ref’d n.r.e.). 

Potomac’s policy uses only the word “hold” in place of the
 

1 The 1969 version of Standard Form 24 provided coverage in

relevant part for:

(A) Loss through any dishonest or fraudulent act of any

of the Employees, committed anywhere and whether

committed alone or in collusion with others, including

loss, through any such act of any of the Employees, of

property held by the Insured for any purpose or in any

capacity and whether so held gratuitously or not and

whether or not the Insured is liable therefor.

Karen Wildau, Evolving Law of Third-Party Claims Under Fidelity

Bonds: When is Third Party Recovery Allowed?, 25 Tort & Ins. L. J.

92, 99 (1989). Property was defined by the 1969 bond as “[m]oney

. . . and all other instruments . . . in which the Insured has an

interest . . . or which are held by the Insured for any purpose or

in any capacity and whether so held gratuitously or not and whether

or not the Insured is liable therefore.” Id. at 93. The 1980

version of Standard Form 24 amended this language to cover only:

Property (1) owned by the Insured, (2) held by the

Insured in any capacity, or (3) for which the Insured is

legally liable. This bond shall be for the sole use and

benefit of the Insured named in the Declarations.

Id. at 94. Significantly, this definition of property omitted all

mention of property “held by the Insured for any purpose.” Id. at

94. Standard Form 24 was again altered in 1986, but the provisions

relating to property described above were not changed. Id.

Potomac’s policy is even more restrictive than the 1986 version of

Standard Form 24 because it has omitted “in any capacity” that

8

broad language in the above cases. While no Texas court has

addressed the meaning of “hold” without the accompanying phrase “in

any capacity,” see Cumis Ins. Soc., Inc., 480 S.W.2d at 763

(interpreting a contract which covers for the loss of property

which is “held by the Insured in any capacity, and whether or not

the Insured is liable therefore”), Financial Institution Bond,

Standard Form No. 24, the industry standard form issued by the

Surety Association of America on which this policy is based,

provided a broad definition of property coverage in the version

published in 1969.1 By 1980, the Surety Association had
previously followed “hold.”

 

2 Although an insured may very well “hold” property in ways

other than a bailment))an issue about which we decline to

speculate))Lynch fails to suggest any other way it may have “held”

either the cash or the funds in the account under these facts.

Accordingly, we limit our discussion of the term “hold” to

bailment. 

9

significantly limited property coverage by means of restricting the

definition of “Interest Covered.” These changes reflect, as

several commentators have noted, an intent to restrict coverage.

See Karen Wildau, Evolving Law of Third-Party Claims Under Fidelity

Bonds: When is Third Party Recovery Allowed?, 25 TORT & INS. L. J.

92, 93-94 (1989); Duncan L. Clore, Suits Against Financial

Institutions: Coverage and Considerations, 20 FORUM 84, 85-86

(1984). Therefore, we reject Lynch Properties’ argument that the

scope of the word “hold” is equivalent to the phrase “hold in any

capacity,” and as such, we do not find the cases Lynch Properties

presents to be persuasive. 

Lynch Properties’ citation to cases mentioning bailment

suggests that it believes that a bailment arrangement is one way in

which it might have “held” Mrs. Lynch’s misappropriated funds.2

See, e.g., American Empire Ins. Co, 408 F.2d at 77. On the facts

of this case, however, Lynch Properties never had a bailment over

the cash or the funds in those accounts. Under Texas law, the

elements of a bailment are: (1) delivery of personal property by

one person to another to be used for a specific purpose; (2)

acceptance of such delivery; and (3) an express or implied contract

that the purpose will be carried out and the property will then be
10

returned or dealt with as otherwise directed. See Braniff Airways,

Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1038 (5th Cir. 1987).

Assuming bank accounts are personalty, Mrs. Lynch never “delivered”

her personal bank accounts to Lynch Properties because they

remained listed in her name at the bank, which means that no

bailment existed over the accounts or the funds in the accounts.

Furthermore, Bartlett’s physical possession of the cash did not

result in Lynch Properties “holding” the cash because no bailment

existed with respect to Bartlett’s wrongful physical possession of

cash from Mrs. Lynch’s personal bank accounts. When Bartlett

intended to wrongfully take funds from Mrs. Lynch’s personal bank

accounts, she always accomplished this act by having Harry Lynch

sign an extra check. No evidence exists in the summary judgment

record that when Bartlett cashed that extra check, she took that

cash with the intention of returning it to Mrs. Lynch. Thus, no

bailment resulted, and Lynch Properties did not “hold” the cash as

a result of Bartlett’s wrongful possession of that cash.

Lynch Properties also argues that it “clearly held” the checks

that Bartlett took but fails to explain why the loss of the checks

should be equated with the loss of the funds from Mrs. Lynch’s

personal bank accounts. By arguing that it “held” the checks,

Lynch Properties is in effect arguing that an employee’s theft of

property that an employer does not “hold” using property that an

employer “holds” causes the employer to constructively “hold”

property that it otherwise would not “hold.” Lynch Properties

cites no authority to support its argument, and indeed it could not
11

on the facts of this case. See Texas Pac. Indem. Co. v. Atlantic

Richfield Co., 846 S.W.2d 580, 530 (Tex. App. 1993, writ denied)

(explaining that the coverage of an employee dishonesty policy

“cannot be extended by implication, or enlarged by construction,

beyond the actual terms of the agreement entered into by the

parties”). Only Martha, Harry, and Bill Lynch had signature

authority on Mrs. Lynch’s separate personal bank accounts.

Bartlett did not simply wrongfully take a check and cash it.

Rather, she prepared an extra check and had Harry Lynch sign it.

Lynch Properties also failed to adduce any evidence that Harry

Lynch signed checks on Mrs. Lynch’s personal bank accounts as Lynch

Properties’ representative and not as Martha Lynch’s son. As the

district court noted, this family authorization requirement

evidences the tenuousness of the connection between Lynch

Properties as the insured company and the funds in Mrs. Lynch’s

personal bank accounts. Accordingly, even though Lynch Properties

had possession of the checks, the possession of those checks did

not result in it “holding” the funds in Mrs. Lynch’s personal bank

accounts or the cash from those accounts. 

Pointing to several portions of the deposition of Darryl

Davis, a Potomac supervisor whom Potomac designated as its

representative for purposes of its deposition, Lynch Properties

also argues that Potomac admitted that Lynch Properties “held” the

funds in Mrs. Lynch’s personal accounts. We have reviewed the

deposition and do not find any specific testimony that could be

construed as Davis admitting that Lynch Properties “held” the funds
12

in Mrs. Lynch’s personal bank accounts. Accordingly, we reject

this contention by Lynch Properties. 

B

Turning to the “legally liable” provision, we again note that

the parties have not brought to our attention relevant cases.

Lynch Properties presents various cases that interpret fidelity

bonds and employee dishonesty insurance policies that cover

“whether or not the Plaintiff is legally liable.” See USAFORM Hail

Pool, Inc., 523 F.2d at 752-53 (interpreting policy that provided

coverage where “the Insured property may be owned by the Insured or

held by the Insured in any capacity whether or not the Insured is

liable for the loss thereof, or may be as respects which the

Insured is legally liable”); American Employers Ins. Co., 47 S.W.2d

at 464-65 (interpreting policy which covered “money or other

personal property (including that for which the Employer is

responsible)”). We do not find these cases to be persuasive

because when the Surety Association of America altered Standard

Form 24, on which Potomac’s policy is based, by replacing “whether

or not the Plaintiff is legally liable” with “legally liable,” it

intended to narrow the coverage of the policy. See Wildau, supra,

at 93-94; Clore, supra, at 84. 

On the other hand, the cases that Potomac presents are

irrelevant because they decide whether third parties have standing

to directly bring suit against an insurer to recover for the loss

of their property by an employee of the insured. See 175 East 74th

Corp. v. Hartford Accident & Indem. Co., 416 N.E.2d 584, 587-88
13

(N.Y. 1980); Louisiana, Through Dep’t of Transp. and Dev. v. Acadia

Parish Police Jury, 631 So. 2d 611, 614 (La. Ct. App. 1994). Such

cases are irrelevant because Lynch Properties, the named insured,

brings this action.

Employee dishonesty policies insure against the risk of

property loss through employee dishonesty. See 175 East 74th

Corp., 416 N.E.2d at 587. Liability policies, by contrast, require

an insurer to discharge an obligation of the insured to a third

party for some act of the insured or its employee. Id. at 587.

Although employee dishonesty policies may cover the loss of thirdparty property in the possession of the insured, see, e.g., First

Nat’l Bank v. Fidelity & Cas. Co., 634 F.2d 1000 (5th Cir. 1981),

these polices do not serve as liability insurance to protect

employers against tortious acts committed against third-parties by

their employees. See Gulf Bldg. Servs. v. Travelers Indem. Co.,

435 So. 2d 477, 479 (La. Ct. App. 1983) (holding that an employee

dishonesty insurance policy did not cover damage to a customer’s

property resulting from a fire set by the insured’s employee

working in the customer’s building). Mere insertion of the words

“legal liability” into an employee dishonesty policy does not

transform the policy into a liability policy. See, e.g., Acadia

Ins. Co. v. NcNeil, 116 F.3d 599, 602-03 (1st Cir. 1997); First

Nat’l Bank v. Lustig, 975 F.2d 1165, 1166-67 (5th Cir. 1992);

Anderson v. Employers Ins., 826 F.2d 777, 780 (8th Cir. 1987); 175

East 74th Corp., 416 N.E.2d at 587-88. 

In this case, the policy stated “[t]he property covered under
 

3 We express no opinion as to whether Lynch Properties or

Bartlett would be liable to Mrs. Lynch for Bartlett’s

misappropriation of money. Lynch Properties has reimbursed Mrs.

Lynch for the missing money, and this issue is not before us. We

merely hold that the words “legally liable” refer to the property

interest that Lynch Properties must have to trigger coverage under

the employee dishonesty policy.

14

this insurance is limited to property . . . for which you are

legally liable.” Lynch Properties argues that it was legally

liable for the misappropriation because Bartlett was responsible

for writing checks, having Harry Lynch sign them, and balancing

Mrs. Lynch’s separate personal accounts. It does not argue,

however, that it was legally liable for the funds prior to their

theft. Instead, it argues only that once Bartlett misappropriated

the funds, it became liable to Mrs. Lynch to replace those funds

and that Potomac must indemnify it for that reimbursement because

Bartlett stole the funds in the course of her duties at Lynch

Properties. While Lynch Properties thereby argues how it may be

vicariously liable for Bartlett’s acts,3 this argument fails to

show how it was “legally liable” for the stolen property itself,

that is, for the funds in Mrs. Lynch’s account. Acceptance of

Lynch Properties’ argument would mean that Potomac’s policy would

cover any loss where an employee takes a customer’s property in the

course of their employment responsibilities, regardless of whether

the employer had any interest in the property itself. Furthermore,

it would transform this policy, which insures property loss for

which Lynch Properties is legally liable, into a policy insuring

any vicarious liability arising from an employee’s dishonesty.

This argument is foreclosed by the plain language of the “Interest
15

Covered” provision, which requires that the employer have some

interest in the misappropriated property, whether that be because

the employer owns, holds, or is legally liable for the property.

Cf. Hudiburg Chevrolet, Inc. v. Globe Indem. Co., 394 S.W.2d 792

(Tex. 1965) (holding that insurance contract provisions that cover

property at a specified location for which the insured is liable

insure against loss of the property and do not indemnify the

insured against tort or contractual liability to the owner of the

property). 

Our conclusion is reinforced by the fact that the employee

dishonesty insurance policy under which Lynch Properties seeks

indemnification is part of a master policy issued by Potomac. This

master policy includes both liability and property coverage. Under

the liability part of the policy, Potomac agrees to pay amounts for

which Lynch Properties is legally liable. Liability coverage is

triggered by an “occurrence,” which the policy defines as “an

accident, including continuous or repeated exposure to

substantially the same general harmful conditions.” Under Texas

law, intentional and volitional acts are not “occurrences” that can

trigger liability coverage. See Union Mut. Ins. Cos. v. Stotts,

837 F. Supp. 814, 816 (N.D. Tex. 1993); Argonaut Southwest Ins. Co.

v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). Similarly, under the

property coverage, section III.F of the “Special Extended Coverage

Endorsement” specifically excludes losses “caused by any willful or

dishonest act or omission of the Insured or . . . any employee of

any Insured.” Without deciding the applicability of either of
16

these policies, the existence of these other parts of the master

policy indicates that the words “legally liable” in the “Interest

Covered” provision of the employee dishonesty policy were intended

only to limit the property that would be covered under that policy,

and not to extend coverage to the theft of customer property by the

insured’s employees where the insured has no interest in the

misappropriated property.

III

In light of our conclusion that Mrs. Lynch’s misappropriated

funds do not fall within the “Interest Covered” under the employee

dishonesty policy issued by Potomac, we decline to address the

other grounds on which the district court based its decision.

Furthermore, because Potomac accordingly had a reasonable basis on

which to deny Lynch Properties’ claim, we affirm the district

court’s denial of Lynch Properties’ extra-contractual state law

claims for failure to pay Lynch Properties’ claim. See Aranda v.

Insurance Co., 748 S.W.2d 210, 213 (Tex. 1988).

For the foregoing reasons, the decision of the district court

is AFFIRMED.