Case Name: BANKERS LIFE COMPANY, Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Appellant
Court: Iowa Supreme Court
Jurisdiction: Iowa
Decision Date: 1985-04-17
Citations: 366 N.W.2d 166
Docket Number: No. 84-280
Parties: BANKERS LIFE COMPANY, Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Appellant.
Judges: All Justices concur except McCORMICK, UHLENHOPP and LARSON, JJ., who dissent.
Reporter: North Western Reporter 2d
Volume: 366
Pages: 166–173

Head Matter:
BANKERS LIFE COMPANY, Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Appellant.
No. 84-280.
Supreme Court of Iowa.
April 17, 1985.
Glenn L. Smith and Hugh J. Cain of Duncan, Jones, Riley & Finley, Des Moines, for appellant.
Kent M. Forney, David J.W. Proctor and William F. Fanter of Bradshaw, Fowler, Proctor & Fairgrave, Des Moines, for ap-pellee.

Opinion:
WOLLE, Justice.
This case demonstrates how the language and structure of an insurance contract can obscure its meaning when its basic fabric consists of standardized printed forms. Bankers Life Company (Bankers Life) purchased from defendant Aetna Casualty & Surety Company (Aetna) a blanket surety bond which provided coverage for securities losses of the type Bankers Life thereafter sustained. While the bond was in force, Bankers Life lost in excess of $5,000,000 on five separate promissory notes which were part of a massive securities fraud perpetrated by OPM Leasing Services, Inc. (OPM). Bankers Life brought this action to recover $5,000,000, contending that the bond obligated Aetna to pay it $1,000,000 on each of the five notes. Aetna countered that a rider attached to the bond limited its total liability to $1,000,000. The trial court decided that Aetna was required to indemnify Bankers Life for $5,000,000 of its securities losses. The court concluded that its construction of the bond language was entirely consistent with Humboldt Trust & Savings Bank v. Fidelity & Casualty Co., 255 Iowa 524, 122 N.W.2d 358 (1963), a case in which our court construed a blanket bond strikingly similar to that issued by Aetna. We affirm.
The trial court decided the case as a jury-waived law action tried on stipulated facts. In February of 1980 Bankers Life purchased the bond from Aetna to cover certain business losses including those embraced within the following language pertinent to securities losses. The opening paragraph of the bond provides:
In consideration of an agreed premium, THE AETNA CASUALTY AND SURETY COMPANY, a corporation of the State of Connecticut, with its Home Office in the City of Hartford, hereinafter referred to as Underwriter, hereby undertakes and agrees to indemnify and hold harmless BANKERS LIFE COMPANY (See name of Insured Rider) hereinafter referred to as Insured, to an amount not exceeding FIVE MILLION AND NO/100 DOLLARS ($5,000,000). From and against any losses sustained by the Insured subsequent to noon of the date hereof and while this bond is in force....
(Emphasis added). The coverage clause, clause (E), states in part:
SECURITIES. (E) Any loss through the Insured's having, in good faith and in the course of business . purchased or otherwise acquired, accepted or received, or sold or delivered, or given any value, extended any credit or assumed any liability, on the faith of, or otherwise acted upon any securities, documents, or other written instruments which proved to have been counterfeited or forged as to the signature . or raised or otherwise altered....
Attached to the bond is Rider SR 5374b upon which Aetna heavily relies for its contention that its maximum total liability here is $1,000,000 rather than $5,000,000:
1. The total liability of the Underwriter under Insuring Clause (E) of the attached bond . is limited to the sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000), it being understood, however, that such liability shall be a part of and not in addition to the amount of the attached bond; subject, nevertheless, to the Reinstatement or Non-Reduction of Liability Section, as the case may be, of the attached bond.
(Emphasis added). The non-reduction of liability clause of the bond referred to in the Rider provides:
NON-REDUCTION OF LIABILITY. Section 8. Payment of loss under this bond shall not reduce the liability of the Underwriter under this bond for other losses whenever sustained. PROVIDED, however, that the total liability of the Underwriter under this bond on account of (a) any loss or losses caused by any one act of burglary, robbery or hold-up, or attempt thereat, in which no Employee, General Agent of the Insured, Soliciting Agent or Servicing Agent is concerned or implicated, or (b) any loss or losses with respect to any intentional or negligent act or omission on the part of any person (whether one of the Employees, General Agents of the Insured, Soliciting Agents or Servicing Agents or not) resulting in damage to or destruction or misplacement of Property, or (c) any loss or losses other than those specified in (a) and (b) preceding, caused by acts or omissions of any person (whether one of the Employees, General Agents of the Insured Soliciting Agents or Servicing Agents or not) or acts or omissions in which such person is concerned or implicated, or (d) any loss or losses with respect to any one casualty or event, is limited to the sum above stated in the opening paragraph of this bond irrespective of the total amount of such loss or losses.
(Emphasis added).
The parties agree that each of the forged notes caused a loss of substantially more than $1,000,000 and that each of the losses was "either caused or was concerned with the acts or omissions of the same person," OPM.
The trial court accurately summarized the parties' differing constructions of that bond language and its own reasons for accepting the Bankers Life position in the following excerpts from its well-reasoned opinion:
Bankers Life claims Aetna's liability is limited by the Rider to $1 million for each of the five losses and that Aetna is liable for an additional $4 million under the Bond. Banker's Life contends the Rider is subject to the terms of the Non-Reduction of Liability Clause which refers to the $5 million coverage limitation in the opening paragraph of the Bond. Thus, Banker's Life contends it may recover $1 million for each of the five related losses up to a total of $5 million. Had there been a sixth loss related to the O.P.M. frauds, Banker's Life concedes there would be no further coverage under the Bond. Aetna simply takes the position its liability under the Bond is limited to $1 million pursuant to the Rider. Aetna claims the language of the Rider substitutes the $1 million coverage limitation for the $5 million limitation of the opening paragraph of ' the Bond. Therefore, Aetna contends it has no further liability under the Bond.
The Court concludes the Non-Reduction of Liability Clause language, "is limited to the sum above stated in the opening paragraph of this bond", modifies each subparagraph of that section including (A), (B), (C) and (D). The Proviso of the Non-Reduction of Liability Section contains four disjunctive subparagraphs each of which is subject to the final clause reinstating the sum stated in the opening paragraph. Referring to the opening paragraph of the bond, the Court concludes Bankers Life coverage for the O.P.M. frauds is limited "to an amount not exceeding FIVE MILLION AND NO/100 DOLLARS ($5,000,000)." Reading the Rider, Non-Reduction of Liability Clause and Opening Paragraph of the Bond together, the Bond provides coverage in this situation in an amount of $1 million for each related loss up to a total of $5 million.
We agree with the trial court's construction of the bond. A reasonable person reading the bond must finally decide what meaning to give to the non-reduction of liability paragraph which is specifically referred to in the rider on which Aetna's construction depends. The first sentence of the non-reduction paragraph replenishes the amount of the bond available after each loss is paid. The final sentence of the non-reduction paragraph limits the total amount of replenishment to "the sum above stated in the opening paragraph of the bond," $5,000,000 as Bankers Life contends and not $1,000,000 as Aetna contends.
Aetna argues that this construction of the bond improperly divorces the rider limitation of $1,000,000 for securities losses from the general coverage clause limitation of $5,000,000. Aetna contends that when the non-reduction of liability clause refers back to the sum stated in the opening paragraph of the bond, it refers not to the $5,000,000 sum there stated but to the $1,000,000 sum stated in the rider. Bankers Life sensibly responds that the two limitations are not one, but rather that they represent different limitations whose application to the facts of this case must be ascertained from the wording of the bond itself.
We recognize that riders, like endorsements, are entitled to receive full weight as integral parts of the insurance agreement; they are "as much a part of the policy as any provision therein unmodified by an endorsement or rider." Hawkeye Clay Works v. Globe & Rutgers Fire Insurance Co., 202 Iowa 1270, 1277, 211 N.W. 860, 864 (1927). But riders, like all other provisions of the bond, are subject to our cardinal rule of construction that what the entire instrument means in a given context is to be determined by what the contract itself says. Iowa R.App.P. 14(f)(14). The rider is entitled to the weight it is due but not more weight than its wording deserves.
Well-established principles of insurance law govern our construction of the wording of this bond. A bond, like an insurance policy, is a contract of adhesion whose "provisions will be construed in a" light most favorable to the insured." City of Cedar Rapids v. Northwestern National Insurance Co., 304 N.W.2d 228, 231 (Iowa 1981); accord Connie's Construction Co. v. Fireman's Fund Insurance Co., 227 N.W.2d 207, 210 (Iowa 1975). As a corollary to that rule, we narrowly and strictly construe language in clauses through which an insurer attempts to condition or make exception to broad coverage otherwise provided in an insuring agreement. See State Farm Automobile Insurance Co. v. Malcolm, 259 N.W.2d 833, 835 (Iowa 1977). That rule was expressed as follows in Zenti v. Home Insurance Co., 262 N.W.2d 588, 590 (Iowa 1978), quoted in City of Cedar Rapids v. Northwestern National Insurance Co., 304 N.W.2d at 230:
The insurer, having affirmatively expressed coverage through broad promises, assumes a duty to define any limitation or exclusionary clause in clear and explicit terms.
Here, Aetna held out $5,000,000 in coverage in the opening paragraph and did not perform its duty to define clearly and explicitly any intent it had (if that was the purpose of the rider) to take back $4,000,-000 of that coverage under the circumstances of this ease.
Neither expressly nor by fair implication does the rider erase the last sentence of the non-reduction paragraph or the $5,000,000 limitation in the bond's first paragraph to which that sentence expressly refers. Aetna's attempt to erase those parts of the bond by implication strains the entire fabric of the bond much more than the trial court's construction which gives controlling effect to their express wording under the facts of this case.
Before this bond was issued Bankers Life wrote to Aetna's agent expressing its understanding that Aetna would "issue a new bond to avoid a lot of endorsements." Aetna responded with a bond pieced together from standardized printed forms, including seven separate riders. ' Now Aetna asks us to derive from the wording it selected a meaning which we find was not clearly expressed'. Aetna could have added to the rider such words as, "With respect to losses under Insuring Clause (E) the limitation in this rider replaces the sum stated in the opening paragraph of this bond." Aetna could also, or in the alternative, have given the rider the eraser effect it may have wanted by providing in the last sentence of the non-reduction of liability clause that liability would be limited to the sum above stated in the opening paragraph of this bond "or any lesser sum provided in any rider limiting coverage," or words to that effect. The bond as issued, however, does not express or fairly imply such a modification of the literal meaning of the language of this bond.
The trial court also found Bankers Life's position entirely consistent with our decision in Humboldt Trust & Savings Bank v. Fidelity & Casualty Co., 255 Iowa 524, 122 N.W.2d 358 (1963). We agree. The pertinent clauses of the bank bond construed in Humboldt Trust, even the wording and punctuation of those clauses, were for all practical purposes indistinguishable from those here. The opening paragraph of the bond limited coverage of all losses to $130,000; a similar rider limited forgery coverage to $2500; and a similar non-reduction of liability paragraph allowed replenishment of the coverage after payment of losses, but "limited to the sum above stated in the opening paragraph of this bond." Although our Humboldt Trust opinion did not quote or refer to all pertinent clauses in that bond, Aetna does not challenge the trial court's specific finding that the bond language there was "identical to the Aetna bond in this case" except for the dollar limitation amounts specified in the opening paragraph of the bond and its rider.
In Humboldt Trust our court held that the clause in the rider subjecting it to the non-reduction of liability paragraph renewed full liability on the bond after each loss, effectively generating a potential liability for forgery in the amount of $130,000 even though the rider's limit was only $2500. Id. at 526-27, 122 N.W.2d at 359-60. Although our Humboldt Trust opinion did not specifically mention the subpara-graph (c) part of the non-reduction clause which refers to losses "caused by acts or omissions of any person . or acts or omissions in which such person is concerned or implicated .," it did refer to the subparagraph (d) part of the non-reduction clause which provides for "any loss or losses with respect to any one casualty or event." Humboldt Trust held that the reference back to "the sum above stated in the opening paragraph of this bond" overrides those limiting subparagraphs in the non-reduction of liability clause. Neither the bond language nor the facts of Humboldt Trust are distinguishable from those here. The trial court correctly found it controlling.
Like the trial court, we are mindful that Humboldt has been criticized by several federal courts which have expressed their preference for a contrary construction of the bond. See Roodhouse National Bank v. Fidelity and Deposit Co., 426 F.2d 1347, 1351 (7th Cir.1970); Securities and Exchange Commission v. Arkansas Loan and Thrift Corp., 297 F.Supp. 73, 81 (W.D.Ark.1969), aff'd 427 F.2d 1171 (8th Cir. 1970); Federal Savings and Loan Insurance Corp. v. Aetna Insurance Co., 279 F.Supp. 161, 163-63 (N.D.Ill.1968); see also Benton State Bank v. Hartford Accident and Indemnity Co., 452 F.2d 5, 7-8 (8th Cir. 1971) (adopting contrary construction without mentioning Humboldt Trust); Maryland Casualty Co. v. Clements, 15 Ariz.App. 216, 222-24, 487 P.2d 437, 443-45 (1971) (same). The district court questioned the reasoning of those decisions and concluded that the Humboldt Trust construction of this bond produced a reasonable result. We agree. None of those decisions from other jurisdictions satisfactorily explains how the rider expressly or by fair implication nullifies the last paragraph of the non-reduction clause or the general coverage limitation in the opening paragraph to which it refers.
Aetna had full and fair opportunity to draft the language of this bond in such a way as to avoid our Humboldt Trust decision and limit unequivocally the amount of any securities loss involving acts or omissions of one person or enterprise. When Aetna selected a rider and put together a bond identical to that in Humboldt Trust, it should reasonably have expected Iowa courts to follow the foursquare Humboldt Trust opinion as precedent in construing the bond's meaning.
We find the trial court correctly construed the terms of the blanket surety bond and properly entered judgment for Bankers Life for the full amount of coverage provided by the bond on the facts of this case, $4,000,000 in addition to the $1,000,000 Aetna voluntarily paid.
AFFIRMED.
All Justices concur except McCORMICK, UHLENHOPP and LARSON, JJ., who dissent.