Opinion ID: 444372
Heading Depth: 2
Heading Rank: 1

Heading: Utica's Appeal

Text: 16 Compliance with the notice requirements set forth in an insurance contract is a condition precedent to recovery under New York law, and failure by the insured to comply with such requirements relieves the insurer of liability. See Gardner-Denver Co. v. Dic-Underhill Constr. Co., 416 F.Supp. 934, 936 (S.D.N.Y.1976) (citing Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 340 N.Y.S.2d 902, 905, 293 N.E.2d 76, 79 (1972)). 17 An insurance company is entitled to require notice at the earliest time practicable after a loss has occurred. Prompt notice permits the insurer to investigate the facts on which the claim is predicated and to adjust its books in order to maintain a proper reserve fund in light of the insured's claim. New York law permits an insurance company to assert the defense of non-compliance without showing that the lack of timely notice prejudiced the insurer in any way. Id. 18 The fidelity bond involved in this case required Utica to notify Fireman's Fund of any loss as soon as practicable, which simply means that notice had to be given within a reasonable time of the discovery of loss. See Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 19, 416 N.Y.S.2d 559, 563, 389 N.E.2d 1080, 1084 (1979). Whether Utica complied with the notice provisions, therefore, depends on when Utica discovered that there had been misconduct resulting in a loss. 19 Utica argues that the district court erred, legally and factually, in determining when the loss was discovered because the court failed to give adequate consideration to Utica's subjective conclusions concerning the known facts. 20 The court below held that Utica had discovered the loss by February 22, 1979, because, by that date, Utica's officers were in full possession of the information necessary for them to have determined that a loss had occurred. Utica principally contends that--although it knew the material facts concerning the adjusted trading by February--Utica did not discover the loss, as a matter of law, until July 1979 because (1) it maintained a good faith and reasonable belief in Turner's honesty until July, and (2) it did not recognize the significance of the facts until that date. 21 Courts have consistently held that a loss is discovered once an insured has obtained facts that would cause a reasonable person to recognize that there had been dishonesty or fraud resulting in loss. See, e.g., American Sur. Co. v. Pauly, 170 U.S. 133, 147, 18 S.Ct. 552, 557, 42 L.Ed. 977 (1898); Fidelity & Deposit Co. v. Hudson United Bank, 653 F.2d 766, 774 (3d Cir.1981); Perkins v. Clinton State Bank, 593 F.2d 327, 334-35 (8th Cir.1979); Hidden Splendor Mining Co. v. General Ins. Co., 370 F.2d 515, 517 (10th Cir.1966). New York law, which governs in this case, also requires that the time of discovery be determined according to an objective test, based on the conclusions that a reasonable person would draw from the facts known to the insured. See Security Mut. Ins., 31 N.Y.2d at 441-43, 340 N.Y.S.2d at 906-07, 293 N.E.2d at 78-90. 22 The district court applied this legal standard in finding that by February 22nd Utica's officers had the information necessary for them to have determined that a loss had occurred. The court's holding implicitly incorporates the objective legal standard since it is based on what Utica's officers reasonably could or should have concluded. 23 The question, therefore, is not whether the district court applied the correct legal standard--which it did--but, rather, whether the legal standard was applied correctly. Utica argues that the court erred in its application of the law to the facts because it failed to give adequate consideration to the subjective conclusions drawn by Utica in light of the known facts--conclusions that Utica asserts were reasonable. 3 24 First, Utica argues that, until July, it maintained a reasonable and good faith belief in Turner's honesty. Utica's good faith defense, however, is vitiated by its knowledge of the facts and its duty to inquire. 25 The unusual nature of adjusted trading in this case, together with Turner's furtive and unauthorized conduct, was sufficient to have alerted a reasonable person to the fact that there may have been dishonesty or fraud. Although Turner asserted that the transactions in question would result in a wash--so that there would be no profit or loss--the February 22nd memorandum, prepared by the chairman of Utica, showed that Utica believed that the transactions did not wash. The memo stated: 26 If all of the transactions washed--or were completely offsetting--there would be no problem. It appears that they do not wash to the effect that there is excess commission to the broker. 27 Utica's good faith belief in Turner's honesty was unreasonable in light of the information Utica had acquired by February. 28 Further, although Utica asserts that it was justified in believing in Turner's honesty until July when it was advised by outside counsel that adjusted trading was actually illegal, New York law imposes a duty of inquiry on the insured. See Security Mut. Ins., 31 N.Y.2d at 441, 340 N.Y.S.2d at 906, 293 N.E.2d at 78; Blackman v. American Home Assurance Co., 58 A.D.2d 723, 724, 396 N.Y.S.2d 291, 293 (3d Dep't 1977). If Utica was uncertain of the legality of Turner's conduct, then Utica should have promptly obtained legal advice as part of its general inquiry into the transactions in question. 4 29 Second, Utica argues that it was not required to give notice of loss based solely on a hunch or intuitive feeling that there had been misconduct. Utica contends that the facts it had acquired by February caused it to merely suspect that Turner may have acted in a dishonest or fraudulent manner, and to surmise that a loss may have resulted. Utica asserts, however, that such suspicions were not sufficient to require notice. 30 Although Utica is correct that mere suspicions do not trigger the notice requirement, an insured cannot disregard the known facts. 5 [W]hen the insured learns the facts constituting the alleged dishonesty his prior suspicions, if any, are converted to knowledge which he cannot ignore and which constitutes 'discovery.'  Perkins, 593 F.2d at 335 (quoting Alfalfa Elec. Coop. Inc. v. Travelers Indem. Co., 376 F.Supp. 901, 906 (W.D.Okla.1973)). 31 The district court determined the legal consequences of the known facts correctly: although the initial exposure of irregularities in Utica's bond portfolio--in December 1978--may have given rise to mere suspicions, once Utica knew the facts upon which this claim is predicated--by the end of February 1979--Utica's suspicions were transformed into knowledge constituting discovery. 6 32 The record thus indicates that, contrary to Utica's argument, the court did give adequate consideration to Utica's subjective conclusions, but rejected them as unreasonable in light of the known facts and the insured's duty of inquiry. 33 Adopting Utica's arguments concerning when a loss is discovered would broaden the definition of discovery and would effectively eliminate the insured's duty to inquire into the facts. It would permit the insured to avoid making a reasonable assessment of the information presented, and would undermine the ability of the insurer to make a timely investigation and adjust its reserve funds. 34 We agree with the district court's holding that Utica had sufficient facts by the end of February to have determined that there had been a loss, and hereby affirm the court's decision.