Opinion ID: 1550967
Heading Depth: 1
Heading Rank: 4

Heading: The Questions Involved.

Text: One of the broad questions which arise under the assignments of error is whether the surety company fulfilled its part of the reinsurance contract in retaining the stipulated amount of risk of liability relative to the trust company. As we have already stated, the facts show that $100,000 risk of loss was retained under the surety bond itself; and we think the facts also show that there was at all times a further risk of loss on the part of the surety company  at first under the $125,000 bond, and next under the $75,000 bond. It is to be noted that the questions of the termination of liability under the $125,000 bond and the beginning of liability under the $75,000 bond are raised, not by the trust company, nor by the surety company, but by plaintiff in error, who was not a party to the bonds. The contention of the plaintiff in error that risk of loss under the $75,000 bond was reduced below the requisite amount by reason of the two provisions above mentioned in the bond is, we think, without merit. The amount of deposits which the obligee in the bond might make with the trust company was not subject to the control of the surety company; so that it was quite possible for the obligee to make at any time deposits with the trust company in such an amount that there would be a liability under the $75,000 bond to the full amount, notwithstanding the collateral and the other bond. It was the taking of the risk of such liability, and not the certainty that such liability would exist, that constituted the performance of its contract by the surety company. The provision of the reinsurance contract relative to the retention by the surety company of risk of loss did not increase or diminish the risk of loss of the reinsuring companies. That provision was in reality simply to furnish evidence of good faith. The second broad question, and the most important one, which arises under the assignments of error, is whether the surety company, in obtaining the reinsurance contract from the Independence Company, was guilty of wrongful and fraudulent concealment of material facts. Generally speaking, the same principles of law as to false representations and concealments govern in reinsurance as in original insurance. 24 Am. & Eng. Encyc. Law, p. 261; 33 C. J. § 723, p. 49; Sun Mutual Ins. Co. v. Ocean Ins. Co., 107 U. S. 485, 510, 1 S. Ct. 582, 27 L. Ed. 337; Phnix Ins. Co. v. Erie Trans. Co., 117 U. S. 312, 323, 6 S. Ct. 750, 29 L. Ed. 873. The strictest good faith is required on the part of one seeking original insurance, and also on the part of one seeking reinsurance. The duty exists on the part of each to disclose his knowledge of all material facts. 33 C. J. § 723, p. 49; 7 Michie's Encyc. of U. S. Rep. pp. 155, 156. The cases having to do with original insurance are therefore of value in reinsurance cases. In the leading case of Daniels v. Hudson River Ins. Co., 12 Cush. (Mass.) 416, 425 (59 Am. Dec. 102), the court said: The terms `misrepresentation' and `concealment' have a known and definite meaning in the law of insurance; and it is that meaning and sense, in which we are to presume the parties intended to use them in their contract of insurance, unless there is something to indicate a different intent. `Misrepresentation' is the statement of something as fact, which is untrue in fact, and which the assured states, knowing it to be not true, with an intent to deceive the underwriter, or which he states positively as true, without knowing it to be true, and which has a tendency to mislead, such fact in either case being material to the risk. `Concealment' is the designed and intentional withholding of any fact material to the risk, which the assured, in honesty and good faith, ought to communicate to the underwriter; mere silence on the part of the assured, especially as to some matter of fact which he does not consider it important for the underwriter to know, is not to be considered as such concealment. In Johnson v. Insurance Co., 93 Wis. 223, 228, 67 N. W. 416, 417, the court said: Where a policy is issued without any application by the assured, and without any questions being put to him as to matters material to the risk, and it contains a clause that it shall be void if any fact material to the risk is concealed by the insured, it will not be invalidated by the fact that the assured did not disclose such material facts, if he did not intentionally or fraudulently conceal them. Wood, Ins. 388; Van Kirk v. Insurance Co., 79 Wis. 627, 48 N. W. 798; Alkan v. Insurance Co., 53 Wis. 136, 10 N. W. 91; Dunbar v. Insurance Co., 72 Wis. 500, 40 N. W. 386. To the same effect see Clark v. Ins. Co., 40 N. H. 333, 77 Am. Dec. 721; Continental Ins. Co. v. Ford, 140 Ky. 406, 131 S. W. 189; Conn. Fire Ins. Co. v. Colorado, etc., Co., 50 Colo. 424, 116 P. 154, Ann. Cas. 1912C, 597. In Cooley's Briefs on Insurance, vol. 2, p. 1206, the rule is stated: The duty thus imposed on the applicant for insurance to disclose facts relating to the risk is, of course, limited to the disclosure of facts known to him. He cannot be expected to disclose facts of which he is ignorant  citing numerous cases. That the pivotal test is good faith is supported by the following cases: Union Mut. L. Ins. Co. v. Wilkinson, 13 Wall. 222, 230, 20 L. Ed. 617; Moulor v. American Life Ins. Co., 111 U. S. 335, 345, 4 S. Ct. 466, 28 L. Ed. 447; Stewart v. Wyoming Ranch Co., 128 U. S. 383, 388, 9 S. Ct. 101, 32 L. Ed. 439; Miller v. Maryland Casualty Co. (C. C. A.) 193 F. 343; Mutual Life Ins. Co. v. Hurni Packing Co., 260 F. 641 (C. C. A. 8). The same test is applied in actions for deceit. Fidelity & Deposit Co. v. Drovers' State Bank, 15 F.(2d) 306 (C. C. A. 8); Pittsburgh L. & T. Co. v. Northern Central Life Ins. Co. (C. C. A.) 148 F. 674. Applying the foregoing principles to the facts as outlined above, we are of the opinion that there was no substantial evidence upon which to base a verdict of fraudulent concealment of material facts. It is, of course, conceded that, if the trust company or Bell was insolvent at the time of the making of the contract of reinsurance in February, 1924, or if it were true that Bell had been guilty of mismanagement and misuse of the public funds and falsification of the books of the trust company in 1922, such facts and each of them would be material to the risk under the reinsurance contract. It must be further conceded that if such facts were known to the surety company and were concealed from the reinsuring company, a valid defense would exist in its favor. There was, however, no evidence that such facts, or any of them, were known to the surety company. The test is to be made as of the time of making the reinsurance contract. At that time the financial condition of the trust company, as shown by its statement, was sound. It was doing a large and lucrative business. Its reputation where it was doing business was good. Mr. Bell's financial standing was thought to be excellent. The mercantile reports on him were highly favorable. The only thing shown by the record which in any degree tends to offset all this is the knowledge by the surety company that some 18 months prior there had been an investigation by state authorities touching certain alleged mismanagement of state funds by the state treasurer in company with Bell. This report had been investigated by the surety company, and the result of the investigation was such that the matter was dismissed from further consideration; and now in February, 1924, the surety company was about to become itself surety on a new bond of the trust company for $1,100,000. All of the facts, when considered together, we think, fail to furnish any substantial evidence of fraudulent concealment. But it is contended that when Mr. Tompkins, in February, 1924, told Mr. Zwinggi, the agent of the surety company, about the letter which he (Tompkins) had written Mr. Cobb some 18 months prior, relative to Mr. Bell and the state treasurer, this constituted notice of facts sufficient to put the surety company upon inquiry, and it then became the duty of the surety company to make an investigation, and, if such investigation had been made, the surety company would have learned that both the trust company and Bell were insolvent; that the surety company thus became charged with knowledge of the insolvency of both the trust company and Bell, and, being thus charged with that knowledge, it was guilty of fraudulent concealment in not disclosing it to the defendant. The argument does not appear to us to be sound. In the final analysis it bases one presumption upon another presumption. The first presumption is that, if the surety company had investigated, it would have obtained knowledge of the insolvency of the trust company and of Bell. The second presumption is that, if the surety company failed to disclose such knowledge, it would be guilty of a fraudulent concealment. The second presumption, viz. of fraudulent concealment, is thus based upon the first presumption, of knowledge. But a presumption, in order to be valid, must be based upon facts, not upon another presumption. 9 Encyc. of Evid. p. 880; United States v. Ross, 92 U. S. 281, 23 L. Ed. 707; Manning v. Ins. Co., 100 U. S. 693, 698, 25 L. Ed. 761; United States v. Carr, 132 U. S. 644, 653, 10 S. Ct. 182, 33 L. Ed. 483; Looney v. Metropolitan R. Co., 200 U. S. 480, 488, 26 S. Ct. 303, 50 L. Ed. 564; Cunard S. S. Co. v. Kelley (C. C. A.) 126 F. 610, 615; Uhlman v. Brewing Co. (C. C.) 53 F. 485; U. S. F. & G. Co. v. Bank, 145 F. 273, 279 (C. C. A. 8); Vernon v. United States, 146 F. 121 (C. C. A. 8); Missouri, K. & T. Railway v. Foreman, 174 F. 377, 383 (C. C. A. 8); Smith v. Pennsylvania R. Co. (C. C. A.) 239 F. 103; Ringrose v. Sloane (D. C.) 266 F. 402; Atchison, T. & S. F. Ry. Co. v. De Sedillo, 219 F. 686, 689 (C. C. A. 8); Wagner v. United States, 8 F.(2d) 581, 586 (C. C. A. 8); In re Elias (D. C.) 240 F. 448; Keen v. United States, 11 F.(2d) 260 (C. C. A. 8); Niederluecke v. United States, 21 F.(2d) 511 (C. C. A. 8). Furthermore, we do not think that the statement of Tompkins to Zwinggi was sufficient to put the surety company upon inquiry. That statement did not relate to a present situation, but to Tompkins' letter, 18 months old, about a prior situation, and that situation which he had called attention to 18 months before, had been investigated at that time and dismissed from further consideration. There was nothing in the situation as it existed in February, 1924, that would incite the surety company to a new investigation. It is further contended that a showing of fraudulent concealment was not necessary to constitute a defense, but that it was sufficient to show a mere nondisclosure of material facts which might have been known by the surety company. The reply to this contention is twofold: First, the answer of defendant setting up its defense expressly charges that the surety company was at the time in possession of the facts, and fraudulently and intentionally concealed said facts from the defendant, well knowing that, if such facts had been disclosed, the defendant would have declined to reinsure any part of said risk, and intending thereby to deceive the defendant and induce it to participate in said risk. This plainly was a defense of fraudulent concealment, and not of mere nondisclosure. Secondly, we think that it was indispensable to a valid defense to show either intentional concealment of known material facts, or bad faith in refusing to ascertain such facts. It is true that many of the older cases, especially those relating to marine insurance, support the doctrine contended for by plaintiff in error. But we think the more modern doctrine, especially as related to classes of insurance other than marine, makes good faith on the part of the insured a determining factor, except in those cases where specific questions have been asked and answered. An exhaustive discussion of the change from the old rule in marine insurance to the modern rule in other classes of insurance, together with the reasons underlying the change, will be found in an opinion by present Chief Justice Taft, then Circuit Judge, in the case of Penn Mut., etc., Ins. Co. v. Mechanics', etc., Co., 72 F. 413, 38 L. R. A. 33, a life insurance case. He sums up his discussion in the following words:    We think the modern tendency, even of Massachusetts decisions, is to require that a nondisclosure of a fact not inquired about shall be fraudulent, before vitiating the policy, and, as already stated, this view is founded on the better reason. The subject is by no means as clear, upon the authorities, as could be wished, and the text-writers find much difficulty in reconciling the cases. In Elliott on Insurance the author states as follows (page 81): While the decisions are not uniform, there is high authority for the view that under modern conditions the concealment of a material fact through inadvertence or mistake, and without fraudulent intent, will not invalidate a contract of insurance. This tendency also appears by the enactment of statutes providing that false representations shall not invalidate the contract unless they increase the risk or are fraudulently made. See, also, Northwestern S. S. Co. v. Maritime Ins. Co. (C. C.) 161 F. 166, 178; Keatley v. Grand Fraternity (D. C.) 198 F. 264; El Dia Ins. Co. v. Sinclair (C. C. A.) 228 F. 833, 839, 840; Nat. Bank of Asheville v. Fidelity & Casualty Co. of New York (C. C. A.) 89 F. 819; Collins v. Iowa Mfrs'. Ins. Co., 184 Iowa, 747, 169 N. W. 199; Hall v. People's Mut. Fire Ins. Co., 6 Gray (Mass.) 185; Brunswick-Balke-Collender Co. v. Northern Assur. Co., 142 Mich. 29, 105 N. W. 76; Boggs & Leathe v. American Ins. Co., 30 Mo. 63. It would serve no useful purpose, even if time and space would permit, for us to review the large number of cases cited by plaintiff in error. Leaving out of consideration marine insurance cases, it is sufficient to say that in our judgment the best-considered cases fall into one of the following classes: (1) Where insured, having actual knowledge of material facts, has intentionally failed to disclose them truthfully. (2) Where insured, though not having actual knowledge of material facts, yet has intentionally, and in bad faith, refused to become acquainted with the facts. In the instant case we think there was no substantial evidence showing either intentional concealment of known material facts or bad faith in refusing to ascertain such facts. There are numerous assignments of error touching the rejection of offered evidence. By many of the offers it was sought to show the insolvency of the trust company and Bell at the time of the reinsurance contract and prior thereto, or to show mismanagement and wrongful acts on the part of Bell at and prior to the time of the state investigation of the state treasurer. Such offered evidence was rejected, and we think rightly so, because it was not shown nor offered to be shown that the surety company had any knowledge of the facts sought to be proved. A number of the offers sought to introduce newspapers, dated in 1922, containing purported accounts of the alleged doings of the state treasurer and Bell as brought out in the state investigation. Such offers were rejected as not competent evidence of the facts purported to be stated, and further because it was not shown nor offered to be shown that the surety company had any knowledge of the newspaper publications. It is suggested, however, that such newspaper accounts were admissible as constituting notice to the surety company, which should have incited an inquiry on its part, which would have led up to the facts. The offer of these newspaper accounts is but an attempt to introduce a third presumption into the line of proof to establish fraudulent concealment of material facts by the surety company. The line of proof would then be somewhat as follows: A presumption of notice based upon the fact of newspaper publication; a presumption of knowledge of the facts based upon the presumption of notice; and, finally, a presumption of fraudulent concealment based upon the presumption of knowledge of the facts. As already stated, attempted proof of this character is not allowable. We have considered the other errors assigned, but find none of them of such character as to require reversal. What we have said in reference to this case applies without substantial change to the other cases. The same issues were involved; and verdicts were directed for plaintiff at the close of the evidence as in the case at bar. While the evidence differed in some respects, we do not think the differences were such as to change the result. We find no errors requiring a reversal in any of the cases, and the judgments are accordingly affirmed.