Opinion ID: 1290650
Heading Depth: 1
Heading Rank: 1

Heading: Garnishment

Text: The employee fidelity insurance policy in this case indemnified the insured against loss due to employee dishonesty, not against liability to third parties. Coverage for the latter was expressly excluded (by the legal fees exclusion). In this case the insurer's liability to the insured accrued under the terms of the policy when (1) the employee of the insured committed a covered dishonest or fraudulent act to obtain a financial benefit and (2) the insured thereby sustained a loss of money, securities or other property. The action by the bank against the insured resulting in a default judgment against the latter established the first condition, the dishonest or fraudulent act. [2] The bank asserts in this case against the insurer that the second condition, the fact and the amount of the loss by the insured, will be established by evidence, thereby mooting the insured's lack of filing of a notice and proof of loss with the insurer as required by the policy. In addition, the fact of the insured's loss appears to be uncontroverted. Instead, the insurer defends essentially upon the basis that the amount of the loss has not been ascertained by the filing of a proof of loss, a condition precedent to recovery. W.Va.Code, 38-5-10 [1931] [3] provides for garnishment in aid of execution, also called a suggestion proceeding. Garnishment is an ancillary statutory proceeding which has long been resorted to in aid of the collection of judgments. Its purpose is to divert to the judgment creditor a payment due the judgment debtor by a third person. Emmons-Hawkins Hardware Co. v. Sizemore, 106 W.Va. 259, 260, 145 S.E. 438, 439 (1928). If it appears from the answer of the garnishee that he is indebted or liable to the judgment debtor, or has personal property belonging to the judgment debtor, the court will order him to pay the debt or deliver the property to a receiver for distribution to the judgment creditor. W.Va.Code, 38-5-15 and -19 [1931]. If the garnishee fails to answer, or if the judgment creditor alleges that the garnishee has failed to disclose fully his debts due to the judgment debtor, the court or jury impanelled will hear proof, inquire and make a determination as to the questions at issue, that is, as to the existence and the amount of any debts due to the judgment debtor by the garnishee. W.Va.Code, 38-5-17 and -18 [1931]. See syl. pt. 9, Lutz v. Williams, 79 W.Va. 609, 91 S.E. 460 (1917); syl. pt. 2, Lanham v. Lanham, 30 W.Va. 222, 4 S.E. 273 (1887). The word `garnishment' is derived from the Norman French word `garnir,' meaning to warn. [citation omitted] Thus, a summons of garnishment under our statutes is a warning to the garnishee not to pay the money or deliver the property of the judgment debtor in his hands, upon penalty that if he does he may subject himself to personal judgment. Lynch v. Johnson, 196 Va. 516, 520, 84 S.E.2d 419, 421 (1954). Garnishment [in aid of execution on a judgment] is, in effect, a suit by the [judgment debtor], in the name of the [judgment creditor], against the garnishee, and he [the judgment creditor] generally occupies toward the garnishee the same position that his debtor occupied; his rights are no higher. Crane v. Standard Lumber & Mfg. Co., 77 W.Va. 617, 620, 87 S.E. 1018, 1019-20 (1916). Thus, a judgment creditor in a garnishment proceeding is subrogated to the rights of the judgment debtor against the garnishee. We now consider whether the proceeds of an employee fidelity insurance policy may be subject to garnishment. Employee fidelity insurance (sometimes called fidelity guaranty insurance) is a contract whereby one for consideration agrees to indemnify the insured against loss arising from want of integrity, fidelity or honesty of employees or other persons holding positions of trust. The insurer is liable to the insured only in the event of a loss sustained by the insured. See 13 M. Rhodes, Couch Cyclopedia of Insurance Law 2d §§ 46:2, 46:219 (rev. 1982); 9A J. Appleman and J. Appleman, Insurance Law And Practice § 5661 (rev. 1981). Employee fidelity insurance is direct [indemnity-against-loss] insurance procured by [the insured] in favor of himself, as contrasted with bonds running to the benefit of members of the public harmed by the misconduct of the covered individual, which bonds are third-party beneficiary contracts. Ronnau v. Caravan International Corp., 205 Kan. 154, 159, 468 P.2d 118, 122 (1970). See also 13 M. Rhodes, Couch Cyclopedia of Insurance Law 2d § 46:1 at 10 (rev. 1982). That the insured may be liable to a third party for a loss of money resulting from employee dishonesty does not transform a policy covering the insured against a direct loss into one indemnifying against liability. 175 East 74th Corp. v. Hartford Accident & Indemnity Co., 51 N.Y.2d 585, 593, 435 N.Y.S.2d 584, 588, 416 N.E.2d 584, 587 (1980). A loss occurs generally under an employee fidelity insurance policy when money or other covered property is misappropriated from the insured through employee dishonesty or fraud. See American National Insurance Co. v. United States Fidelity & Guaranty Co., 215 So.2d 245, 249 (Miss.1968); Alberts v. American Casualty Co., 88 Cal.App.2d 891, 898-99, 200 P.2d 37, 41 (1948). Loss under such a policy does not require misappropriation plus a requirement that the insured pay the damages also sustained by a third party as a result of the misappropriation. American National, supra, 215 So.2d at 249. On the other hand, in a situation not involving a misappropriation of the insured's property but damage sustained by a third party as a result of the fraudulent misrepresentations of the insured's employee, it is clear that the third party's obtaining a judgment against the insured does not result in a loss under the employee fidelity insurance policy. See Ronnau v. Caravan International Corp., 205 Kan. 154, 161, 468 P.2d 118, 123-24 (1970); 38 C.J.S. Garnishment § 110.d. at 319 (1943). Once a loss is sustained by the indemnitee under an employee fidelity insurance policy as the result of employee dishonesty or fraud in the form of misappropriation of the indemnitee's money or property, the indemnitor is indebted to the indemnitee, and a judgment creditor of the indemnitee may subject to garnishment the debt of the indemnitor to the indemnitee. See American National Insurance Co. v. United States Fidelity & Guaranty Co., 215 So.2d 245, 248-49 (Miss.1968); 18 M. Rhodes, Couch Cyclopedia of Insurance Law 2d § 74:100 (rev. 1983). In the case now before us the bank is not relying upon its judgment against the insured to establish a loss. The misappropriation of the insured's checking account funds by its employee unquestionably resulted in a loss. The next two questions concerning the right to garnishment of the employee fidelity insurance proceeds are whether the facts that (1) the insured did not submit to the insurer/garnishee a formal notice and proof of loss as required by the policy and that, consequently, (2) the amount of the loss has not been ascertained are sufficient to defeat the bank's right to subject the insurance proceeds to garnishment. We conclude that neither of these omissions bars garnishment. The failure of an insured/judgment debtor to furnish proof of loss does not preclude garnishment of the insurance proceeds, according to the weight of, and, in our opinion, the better reasoned, authorities, since the judgment creditor as subrogee to the insured's rights may make such proof if the insured fails to do so, and since the insurer normally cannot show prejudice to its investigative rights. See American National Insurance Co. v. United States Fidelity & Guaranty Co., 215 So.2d 245, 250 (Miss.1968); Second New Haven Bank v. Kobrite, Inc., 86 Ill.App.3d 832, 835, 41 Ill.Dec. 947, 949, 408 N.E.2d 369, 371 (1980); 18 M. Rhodes, Couch Cyclopedia of Insurance Law 2d § 74:87 (rev. 1983); 45 C.J.S. Insurance § 982(2).a. (1946); 6 Am.Jur.2d Attachment And Garnishment § 167 (1963). Cf. Republic Mutual Insurance Co. v. State Farm Mutual Automobile Insurance Co., 413 F.Supp. 649, 653 (S.D.W.Va.1976) (the identity of the person giving notice of the claim to the insurer is immaterial, if in fact notice is given). [4] Here, the insurer does not claim that its investigative rights with respect to the existence and the amount of the insured's loss have been prejudiced by the lack of a formal notice and proof of loss. Indeed, it will have an opportunity to be heard and offer any evidence on the existence and the amount of such loss on the trial of those issues in the garnishment proceeding as provided by the post-judgment garnishment statute. This ties in with the question of whether garnishment of the employee fidelity insurance proceeds is allowable even though the amount of the loss has not been ascertained. There is a split of authorities on this point. In general, a debt or claim which is uncertain or contingent, in the sense that it may never become due and payable, is not garnishable. American National Insurance Co. v. United States Fidelity & Guaranty Co., 215 So.2d 245, 248 (Miss. 1968); 38 C.J.S. Garnishment § 87 (1943); 6 Am.Jur.2d Attachment And Garnishment § 126 (1963). A contingent interest is one in which liability is not certain and absolute, but depends upon some independent event. Fico, Inc. v. Ghingher, 287 Md. 150, 160, 411 A.2d 430, 436 (1980). Thus, a tort claim of the judgment debtor not yet liquidated as to liability or damages by a judgment or a settlement is a contingent debt and is not subject to garnishment. See Ronnau v. Caravan International Corp., 205 Kan. 154, 162, 468 P.2d 118, 124 (1970); American National Insurance Co. v. United States Fidelity & Guaranty Co., 215 So.2d 245, 248 (Miss. 1968); 38 C.J.S. Garnishment § 91 (1943); 6 Am.Jur.2d Attachment And Garnishment §§ 126-27 (1963). The split of authorities is on the question of whether debts for which liability is fixed but for which payment is not yet due (unmatured debts) or the amount owed is not yet determined (unliquidated debts) are subject to post-judgment garnishment under the language of the statute in the jurisdiction. The weight of, and, in our opinion, the better reasoned, authorities view such debts as not being contingent, and as being subject to garnishment because a contingency which will render a debt or claim not subject to garnishment is one that affects the debt itself, as distinguished from one that affects only its amount or the time or manner of its payment. 6 Am.Jur.2d Attachment And Garnishment § 126 (1963). This distinction was stated in the following manner in Johnson v. Johnson, 111 R.I. 183, 188, 300 A.2d 642, 645 (1973) (collecting cases at n. 1): Garnishment is allowed on an unliquidated claim where there is a certainty as to liability but a contingency as to amount. Where an obligation to pay exists, even though the amount of that obligation is undetermined, garnishment will lie where the amount is capable of definite ascertainment by the contract, or by the facts then known, or by testimony to be taken. See also Fico, Inc. v. Ghingher, 287 Md. 150, 160-61, 411 A.2d 430, 436-37 (1980); American National Insurance Co. v. United States Fidelity & Guaranty Co., 215 So.2d 245, 248 (Miss.1968) (proceeds of employee fidelity insurance subject to garnishment prior to determination of amount due); Parker, Peebles & Knox v. El Saieh, 107 Conn. 545, 554-55, 141 A. 884, 888 (1928) (proceeds of fire insurance subject to garnishment prior to determination of amount due); Brainard v. Rogers, 74 Cal. App. 247, 239 P. 1095 (1925) (proceeds of fire insurance subject to garnishment prior to the furnishing of proofs of loss and prior to adjustment, or determination of the amount, of the loss); 38 C.J.S. Garnishment § 87 at 293 (1943); 6 Am.Jur.2d Attachment And Garnishment §§ 127, 168 (1963). W.Va.Code, 38-5-10 [1931] clearly provides for the garnishment of unmatured debts: ... which debt or liability could be enforced, when due, or which property could be recovered, when it became returnable[.] W.Va.Code, 38-5-18 [1931] provides for the fact finder to determine the amount of the debt, if at issue. In answer to the first certified question, we, in summary, hold that a judgment creditor (here, the bank) may maintain a garnishment proceeding in aid of execution to reach the proceeds of a judgment debtor's (the insured's) employee fidelity insurance policy when (as here) the judgment debtor has sustained a loss within the meaning of that policy, even though a formal notice and proof of loss has not been furnished to the insurer and even though the amount of the loss has not been determined at the time the garnishment proceeding is brought.