Opinion ID: 797692
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Heading: Coverage Under the Cincinnati Bond

Text: 16 The interpretation of an insurance policy is a question of law that is reviewed de novo. Cont'l Corp., 892 F.2d at 543 (citing Kraemer Bros. v. United States Fire Ins. Co., 89 Wis.2d 555, 278 N.W.2d 857, 860 (1979)); Folkman v. Quamme, 264 Wis.2d 617, 665 N.W.2d 857, 864 (2003). An insurance policy is construed to give effect to the intent of the parties as expressed in the language of the policy, which is interpreted as a reasonable person in the position of the insured would understand it. Folkman, 665 N.W.2d at 864; Danbeck v. Am. Family Mut. Ins. Co., 245 Wis.2d 186, 629 N.W.2d 150, 153 (2001). If the language of the policy is plain and unambiguous, it is enforced as written, without resort to rules of construction. Folkman, 665 N.W.2d at 864; Danbeck, 629 N.W.2d at 154. Policy language is interpreted not in isolation but in the context of the policy as a whole. Folkman, 665 N.W.2d at 866. If the policy language is ambiguous, it is construed against the insurer and in favor of coverage. Id. at 864; Frost ex rel. Anderson v. Whitbeck, 257 Wis.2d 80, 654 N.W.2d 225, 230 (2002) (If terms in an insurance policy are ambiguous, they should be construed against the insurance company that drafted the policy.); Danbeck, 629 N.W.2d at 154. 17 This last principle, however, generally does not apply where the policy in question is a standard fidelity or Bankers Blanket Bond, drafted by representatives from both the banking and insurance industries. Tri City Nat'l Bank v. Fed. Ins. Co., 268 Wis.2d 785, 674 N.W.2d 617, 621-22 (Ct.App.2003) (citing State Bank of Viroqua v. Capitol Indem. Corp., 61 Wis.2d 699, 214 N.W.2d 42, 43 n. 1 (Wis. 1974)) (These bonds are not the usual contracts of adhesion and the familiar rule of interpreting a contract strictly against the insurer and liberally in favor of the insured should not apply.); Sharp v. Fed. Sav. & Loan Ins. Corp., 858 F.2d 1042, 1046 (5th Cir.1988) (the principle that insurance contracts are to be construed against the underwriter does not apply when the contract was in fact a joint effort of both insurers and the insureds). As best we can tell, the language of the Cincinnati Bond appears to generally — but not uniformly — resemble an older version of the standard Bankers Blanket Bond. Accordingly, any ambiguity in language unique to the Cincinnati Bond may be resolved by reference to the general practice of construing ambiguities against the insurer/drafter and in favor of coverage. 18 A brief history of the standard Bankers Blanket Bond is in order. The Surety Association of America drafted the first American Bankers Blanket Bond in 1916. Edward G. Gallagher, A Concise History of Standard Form No. 24, 1986 Edition, in ANNOTATED FINANCIAL INSTITUTION BOND 5, 5 (Michael Keeley ed., 2d ed.2004). By 1941 the Bond had undergone several revisions — with input from the American Bankers Association and other trade groups — and was termed the Bankers Blanket Bond, Standard Form No. 24. Broeman, An Overview of the Financial Institution Bond, supra, at 443; Gallagher, A Concise History, supra, at 6. Additional revisions were made over the years, and beginning with the 1986 revision, the Bond was renamed the Financial Institution Bond, Standard Form No. 24. Gallagher, A Concise History, supra, at 5. The standard Bond contains six Insuring Agreements (Insuring Agreements A-F) which cover the insured financial institution against loss arising from specified dishonest, fraudulent, or criminal acts. Broeman, An Overview of the Financial Institution Bond, supra, at 440. 19 Because there are several revisions of the Bond in circulation, courts initially ought to determine which version, if any, the policy in question adopts; case law interpreting one revision may be unhelpful or even irrelevant to the task of interpreting another. The language of the Cincinnati Bond is not entirely consistent with the standard Bond version, the 1986 revision, in use at the time it was issued. For example, the Cincinnati Bond adds eight Insuring Agreements to the standard Bond's six, covering such additional risks as Directors' and Officers' Expenses in Defending Suits, All Risk Safe Deposit Box, and Audit Expense. Insuring Agreement E, at issue here, is called All Risk Forgery and most closely resembles Insuring Agreement E as it appeared in the 1951 and 1969 revisions of the standard Bond, though it does not precisely track the language of either of these versions. 20 As noted above, Insuring Agreement E in the Cincinnati Bond covers loss by reason of the Insured . . . having in good faith and in the usual course of business . . . extended any credit or assumed any liability or otherwise acted upon any security, document, or other written instrument which proves to have been a forgery or to have been altered or raised or counterfeit. Cincinnati argues that the in good faith and in the usual course of business language imposes a duty on the Bank to follow sound banking practices in connection with the events underlying the claim, and that this is a condition for coverage. We disagree. Although we interpret the policy as a whole, to interpret in good faith and in the usual course of business as together imposing a prerequisite normative standard of banking conduct ignores the independent meaning of each phrase. Rabinovitz v. Travelers Ins. Co., 11 Wis.2d 545, 105 N.W.2d 807, 811 (1960) (Some meaning must be given to each sentence, phrase, and word used, and when this may fairly and properly be done, no part of the language used can be rejected as superfluous or unmeaning.). 21 Neither phrase is defined by the policy, but the Bank points to section 401.201(19) of the Wisconsin Statutes, adopting the UCC definition of good faith as honesty in fact in the conduct or transaction concerned. We have stated that 'good faith' usually establishes a subjective standard, and pointed out that [m]any negligent acts are committed with pure hearts and empty heads. State Bank of the Lakes v. Kan. Bankers Sur. Co., 328 F.3d 906, 909 (7th Cir.2003). Cincinnati asserts there are material issues of fact regarding whether the Bank was selectively ignorant in extending credit to Kust; 5 however, its corporate designee conceded that Bank employees acted honestly and in good faith, with no knowledge of Kust's fraudulent scheme. 6 We hold the good-faith requirement does not impose a sound business practices prerequisite to coverage. 22 This leaves the question of whether the phrase in the usual course of business means consistent with sound business practices or otherwise imposes a particular standard of conduct on the Bank for its loss to be covered. On its face, the phrase does not suggest a duty of care but, rather, a certain category of acts — i.e., those usually conducted in the banking business. Because the language of the Cincinnati Bond is not standard in this respect, 7 bond-specific case law provides little guidance. However, Wisconsin courts that have addressed this phrase in other contexts have understood it to mean actions normally taken by a bank. Fid. & Deposit Co. of Md. v. Peoples Exch. Bank of Thorp, 270 Wis. 415, 71 N.W.2d 290, 292 (1955) (The check here was complete and regular on its face and, so far as the . . . bank was concerned, it had no notice of any infirmity in it or any defect in the title of the person cashing it, and took it in the usual course of business.); Banking Comm'n v. First Wis. Nat'l Bank of Milwaukee, 234 Wis. 60, 290 N.W. 735, 749 (1940) (The usual course of business upon a bank loan is to credit the account of the borrowing customer and respond to checks.). 23 This is the interpretation the district court adopted in its well-reasoned opinion, and we agree. Because the Bank acted upon the kinds of documents that it would normally act upon in its business, such as leases, checks, securities, etc., rather than documents outside that usual course, the Bank acted in the usual course of business. 8 Fid. & Deposit Co. of Md., 71 N.W.2d at 292. 24 Cincinnati also argues that Insuring Agreement E covers only losses directly caused by forgery and not losses arising from loans made on forged documents describing nonexistent assets or transactions. Here, Cincinnati argues, the forged signatures on the leases did not directly cause the Bank's loss, the absence of collateral did. This argument ignores the plain language of Insuring Agreement E, which covers loss by reason of the Insured having in good faith and in the usual course of business . . . extended any credit or . . . otherwise acted upon any . . . document . . . which proves to have been a forgery. The Bank's loss easily comes within this language; the Bank sustained a loss because it extended credit to West Town based on vehicle leases which proved to be forgeries. 25 Insuring Agreement D in the Cincinnati Bond, entitled Forgery, Alteration and Unauthorized Signatures, covers (among other things) loss resulting directly from . . . Forgery or alteration of, on or in any Negotiable instrument . . ., Acceptance, withdrawal order, receipt for the withdrawal of Property, Certificate of Deposit or Letter of Credit. Insuring Agreements D and E thus cover similar and potentially overlapping categories of loss, but the language of each is distinct: the former covers loss resulting directly from the forgery or alteration of certain documents, the latter covers loss by reason of the Bank having extended any credit or otherwise acted upon a document which proves to have been a forgery. The coverage granted in Insuring Agreement E does not simply duplicate the coverage granted in Insuring Agreement D; Cincinnati's interpretation essentially conflates the two. 26 Cincinnati asserts that courts have overwhelmingly held that Insuring Agreement E does not cover losses from loans based on forged documents describing fictitious transactions or assets. This is not true. Of the cases Cincinnati cites, only four are appellate decisions. Two of the four concerned not loss causation but the so-called actual physical possession prerequisite to coverage under Insuring Agreement E. 9 See Republic Nat'l Bank of Miami v. Fid. & Deposit Co. of Md., 894 F.2d 1255, 1262-63 (11th Cir.1990) (holding that the condition precedent of actual physical possession was unmet and suggesting in dicta that the standard Bankers Blanket Bond imposes a requirement of commercially reasonable reliance before Insuring Agreement E will cover a loss); Nat'l City Bank of Minneapolis v. St. Paul Fire & Marine Ins. Co., 447 N.W.2d 171, 177 (Minn.1989) (holding that the actual physical possession condition was not met and likewise suggesting in dicta a sound business practices reliance requirement). Another of Cincinnati's cited cases held that the record evidence established a fraud but not a forgery because the documents in question were not signed in the name of another. Charter Bank Nw. v. Evanston Ins. Co., 791 F.2d 379, 382 (5th Cir.1986). Here, it is undisputed that the leases were forgeries. 27 The remaining appellate decision Cincinnati cites on this point was scantily reasoned. Georgia Bank & Trust v. Cincinnati Insurance Co., 245 Ga.App. 687, 538 S.E.2d 764, 766 (2000), involved a Cincinnati Bond similar to the one at issue here. Georgia Bank & Trust extended credit based on forged documents confirming the existence of certain accounts that served as collateral for the loan. When the debtor defaulted, Georgia Bank filed a claim for its loss with Cincinnati. The Georgia court of appeals cited both Insuring Agreements D and E in its very brief opinion; without specifically addressing the language of either, the court accepted Cincinnati's argument that its Bond does not cover losses resulting from the nonexistence of assets assigned by a forged instrument. The court concluded that the blanket bond did not protect the bank from its bad business deal. Even if the signature on the confirmation was authentic, the bank would have suffered the loss, because the assets did not exist. Id. This conclusion ignores the practical reality of the situation; but for the forged documents purporting to verify the existence of the collateral, credit would not have been extended in the first place, and there would have been no loss. It also ignores the plain language of Insuring Agreement E, which covers loss by reason of the Bank having . . . extended any credit . . . or otherwise acted upon any . . . document that proves to have been a forgery. As here, the loss at issue in Georgia Bank easily fit within this coverage language. The case is unpersuasive and we decline to follow it. 28 So the Bank's loss is covered by Insuring Agreement E, and we are left with Cincinnati's argument that Exclusion H applies because Bank employees caused the loss. This argument is a nonstarter. Exclusion H states: The Bond does not cover loss caused by an Employee.... Cincinnati insists the Bank's employees caused the loss by failing to properly investigate the collateral presented by Kust. Had they done so, Cincinnati argues, they would have discovered the forgeries. As the district court noted, however, this interpretation of Exclusion H would eliminate coverage under Insuring Agreements D and E in all cases, as bank employees are intermediaries in every forgery-related bank loss. Exclusions are intended to subtract from or limit coverage in specified circumstances. Cont'l Corp., 892 F.2d at 546; Bulen, 371 N.W.2d at 394. They do not operate as complete cancellations of coverage granted in the insuring agreements. To the contrary, under Wisconsin law exclusions are narrowly construed, especially if their effect is uncertain. Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65, 73 (2004); Cardinal v. Leader Nat'l Ins. Co., 166 Wis.2d 375, 480 N.W.2d 1, 3 (1992). We reject Cincinnati's expansive interpretation of Exclusion H; the exclusion does not apply here.