Opinion ID: 2539402
Heading Depth: 1
Heading Rank: 7

Heading: Issue 2: The phrase does your bank require contained in the application also refers to actual performance.

Text: The bank's next argument concerns the meaning of the phrase does your bank require contained in Question 3 of the application. As mentioned, Question 3 states: The correspondent account, suspense account, or transit account is used most often by dishonest employees. Does your bank require that all correspondent accounts, suspense accounts, and transit accounts be balanced regularly and balanced by a second person at least monthly? (Emphasis added.) The bank argues that the Court of Appeals panel erred in holding that the phrase meant more than simply having a policy in place. It contends that the definitions of require merely relate to standards of performance, not actual performance. KBS responds that the common and ordinary meaning of require includes not only a policy, i.e., the right to demand performance, but also the power to compel or enforce a demand. More specifically, it contends that require mandates some level of actual performance in support of the bank policy and that simply creating a procedure is insufficient. KBS cites the present case as evidence: If the bank had actually required a second person to balance the accounts, Steward's policy-violating actions could not have gone undetected for almost 3 years. The trial court had granted the bank's motion in limine to exclude certain testimony that would have demonstrated that the bank had a policy but did not fully enforce it. For example, Ray Pritchett, an expert retained by KBS, would have testified that according to his investigation  which was based on Kennedy and Coe's external audit findings  bank president Bush was notified prior to 2002 that the bank's policies regarding reconcilements and segregation and rotation of duties were not being followed. Pritchett also would have testified that when Steward went on her vacations, no other employee performed the reconcilement function because no one else had been trained to do it. He concluded that, [f]or the entire time Paula Steward was the head bookkeeper, there was a complete lack of separation and rotation of duties in her area. Pritchett opined that Paula Steward did nothing to conceal the way she handled the aforementioned checks; they were there for anyone observing bank policy to see. The trial court ruled this expert testimony was irrelevant because it concerned actual performance by bank employees. In support of the trial court's exclusionary ruling, the bank argued in its brief to the Court of Appeals that KBS seems to argue that because something did not happen, [the bank] did not `require' it. A reasonable construction of the meaning of `to require,' consistent with its dictionary definition, is to `have need of' or `to call on authoritatively.' Webster's Unabridged Dictionary of the English Language (2001). On its face the question about balancing of accounts has this meaning when properly construed in its `plain, ordinary and popular sense' by a `reasonably prudent insured.' [Citation omitted.] The question asks if [the bank] has a `requirement' with regard to the balancing of certain accounts, not whether compliance with the requirement is always enforced. (Emphasis added.) The bank elaborated on KBS's position that purportedly mandated perfection, i.e., required meant always follow bank policies. It contended this position reduced the bond to an absurdity because if employees always had to follow the bank policies, there would be no losses and therefore never anything for a bond to actually cover. The panel rejected the bank's argument, holding: This argument would have merit if KBS sought to rescind the bond because of isolated and infrequent instances of lapses in adherence to the bank's policies. But here, the thrust of KBS's proffered testimony was a virtual collapse of oversight which was readily apparent to the bank's management. No fair reading of Question 3 would permit the bank to answer it in the affirmative if Pritchett's observations of the bank's operations are true.  (Emphasis added.) Slip op. at 19. The panel continued, specifically holding that require meant more than the bank's mere issuance of a policy: Question 3 was prefaced by the observation that `[t]he correspondent account, suspense account, or transit account is used most often by dishonest employees.' In answering Question 3 it was readily apparent to Bush, an experienced banker, that the purpose of Question 3 was to provide KBS with insight into the risk it was being asked to underwrite in renewing the bond. In this context, the meaning of the word `requires' in the question is crystal clear. That meaning could not possibly include the practice of issuing pieces of paper with the word `Policy' at the top and then ignoring them.  (Emphasis added.) Slip op. at 19.