Court Opinion

ID: 9686663
Source: CourtListenerOpinion
Date Created: 2023-08-24 16:00:31.114868+00
Date Added: 2024-06-11T18:15:17.655078
License: Public Domain

McCORMICK, Justice
(dissenting).
The $4,000,000 question in this appeal concerns the effect of a coverage rider on a surety bond. Plaintiff Bankers Life Company purchased a blanket surety bond from defendant Aetna Life and Casualty Company in 1980 to obtain coverage of certain losses including losses due to investments in forged securities. In 1981 Bankers Life lost approximately $17,000,000 through investments in five forged notes. Bankers Life asserts it is entitled to recover $5,000,-000 of its losses on the bond, but Aetna contends a rider limits the coverage to $1,000,000. In this action on the bond, the trial court held that Bankers Life was entitled to recover the amount claimed. I would reverse.
Bankers Life bases its claim on the theory that even for securities losses the rider *171did not change the coverage stated in the opening paragraph of the bond for purposes of the PROVIDED clause in the non-reduction of liability section. Its argument proceeds as follows: The rider limits coverage for securities losses under clause (E) to $1,000,000 but is expressly subject to the non-reduction of liability section. Because multiple losses are involved here, the non-reduction of liability section comes into play. If the losses were not caused by the act or omission of one person, they would each be payable up to the clause (E) coverage limit of $1,000,000. If the losses were caused by different persons, therefore, Bankers Life could recover $5,000,000 altogether. Because the losses were caused by the act or omission of one person, however, the exception to non-reduction of liability in subsection (c) applies. When that exception applies, recovery “is limited to the sum above stated in the opening paragraph of [the] bond....” Bankers Life asserts that the stated amount is $5,000,000. Thus the amount stated in the opening paragraph is treated as a ceiling on accumulated losses from the acts or omission of one person. In this case the result is the same as it would be if the losses were not covered by the subsection (c) exception. In both situations, Bankers Life could recover $5,000,-000. If the same person had caused a sixth loss, however, Bankers Life says it would be limited to the $5,000,000 recovery because subsection (c) would limit its cumulative recovery to $5,000,000.
Aetna’s response to this argument is that the rider reduced the coverage for clause (E) losses to $1,000,000. The rider had the effect, according to Aetna, of modifying the coverage stated in the opening paragraph of the bond as if it had originally been written as part of that provision. Thus Aetna contends that when the non-reduction of liability section refers back to the sum stated in the opening paragraph of the bond, it refers to the sum originally stated as modified by the rider. Under Aetna’s theory the non-reduction of liability section allows multiple recovery up to $1,000,000 for each clause (E) loss unless one of the exceptions in the PROVIDED clause applies. Because the parties agree subsection (c) applies here, the loss is treated as a single loss and the limitation applies. That limitation, in the opening paragraph as modified by the rider, is $1,000,-000.
The fundamental problem with the Bankers Life argument is that it attributes a meaning to the language of the bond that shortcircuits two basic principles of construction. One is the principle that a policy rider becomes a part of the insurance policy as if it were incorporated in the language of the policy that it affects. See Motor Vehicle Casualty Co. v. LeMars Mutual Insurance Co., 254 Iowa 68, 72, 116 N.W.2d 434, 436 (1962). The other principle is that in ascertaining the meaning of the bond the instrument should be read as a whole. See Stover v. State Farm Mutual Insurance Co., 189 N.W.2d 588, 591 (Iowa 1971). An ambiguity can be said to exist concerning the meaning of an insurance contract only if uncertainty exists after application of the relevant canons of construction. See Fraternal Order of Eagles v. Illinois Casualty Company, 364 N.W.2d 218, 221 (Iowa 1985). Only then can it be determined if the policy is fairly susceptible to two meanings. See Farm Bureau Mutual Insurance Co. v. Sandbulte, 302 N.W.2d 104, 108 (Iowa 1981). The question in this case thus is reduced to whether, after application of the canons of construction, the bond is reasonably susceptible to the meaning urged by Bankers Life.
The linchpin of the Bankers Life argument is the language in the non-reduction of liability section of the bond limiting recovery for multiple losses in four situations “to the sum above stated in the opening paragraph of this bond....” In arguing that this language affords $5,000,000 cumulative coverage for multiple losses caused by the act of one person, Bankers Life makes an end-run around the canons of construction that a policy rider rewrites the language that it affects and that the policy is to be read and construed as a *172whole. When these canons are applied, the argument collapses.
Under the first canon, the amount stated in the opening paragraph of the bond was modified by the rider in this case for clause (E) losses with the same legal effect as if the rider were included in that paragraph. See 1 G. Couch, Cyclopedia of Insurance Law § 4:24 at 378 (2d ed. 1984) (“a rider or slip attached to a policy or certificate of insurance is, prima facie at least, a part of the contract to the same extent, and with like effect, as if actually embodied therein”). It is a contradiction of the principle, totally without support in the authorities, to assert that a policy rider that modifies coverage is to be narrowly and strictly construed. The provisions of the rider erase and supersede inconsistent provisions of the bond. 13A J. Appleman, Insurance Law and Practice § 7539 at 171-72 (rev. ed. 1976). The construction urged by Bankers Life is therefore based on a legally untenable premise that the amount stated in the opening paragraph of the bond remained unaffected by the rider.
Moreover, in giving effect to the canon that a policy should be construed as a whole, a policy should not be given a construction that has the effect of defeating the purpose of one of its provisions. Here the parties agree that the non-reduction of liability section allows serial recovery up to $1,000,000 for each loss for multiple losses unless an exception in the PROVIDED clause applies. The exceptions are a limitation on recovery otherwise available for multiple losses. Thus it is clear that the purpose of subsection (c), which Bankers Life admits applies here, is to provide less protection when losses are caused by one person than when losses are caused by the acts or omissions of persons acting independently.
Obviously this limitation is based on the idea that an insured ordinarily should be able to discover wrongdoing of one person sooner than it might discover the wrongdoing of several persons acting separately. This limiting purpose of the PROVIDED clause is confirmed by sections 9 and 10 of the bond. Section 9 provides that losses under the PROVIDED clause in section 8 “shall not be cumulative in amounts from year to year or from period to period.” Section 10 expressly limits losses subject to subsection (c) of the PROVIDED clause that are also covered by a prior bond to the greater of the coverage of one of the two bonds.
Only the construction advocated by Aet-na gives consistent effect to the limiting purpose of the PROVIDED clause. The Bankers Life construction would give an insured up to $5,000,000 in coverage for clause (E) multiple losses regardless of whether the losses were caused by one person or more than one person. In addition it would afford greater protection when large multiple losses are caused by one person than when they are caused by two or more. For example, assume two losses of $5,000,000, each caused by the act of one person. ■ Under the Bankers Life view, the insured would recover $5,000,000 altogether on the bond. Under Aetna’s view, the total recovery would be $1,000,-000. Assume two losses of $5,000,000, caused by the act of separate persons. Under both views, total recovery would be limited by the rider to $1,000,000 for each loss for a total of $2,000,000.
The example can be carried further. Assume three $5,000,000 forgeries by one person. Bankers Life would allow recovery of $5,000,000, the purported coverage limit. If the three forgeries were acts of separate persons, however, the Bankers Life theory would allow total recovery of only $3,000,-000, because no exception in the PROVIDED clause would apply. Aetna would allow total recovery of $1,000,000 in the case of three $5,000,000 forgeries by one person and $3,000,000 based on three separate recoveries of $1,000,000 in the case of three $5,000,000 forgeries by separate persons. Contrary to the clear purpose of the non-reduction of liability section, Bankers Life thus claims more protection against multiple losses caused by one person than against multiple losses caused by persons acting independently.
*173After the relevant canons of construction are applied to the bond, the bond is not reasonably susceptible to the meaning urged by Bankers Life. Rather the construction advocated by Bankers Life is strained and unreasonable. I believe the trial court erred in adopting it.
In entering judgment for Bankers Life the trial court relied on Humboldt Trust & Savings Bank v. Fidelity & Casualty Company of New York, 255 Iowa 524, 122 N.W.2d 358 (1963). The facts and bond in the Humboldt Trust case were like those here, and that case would be controlling unless we overrule it. The case has never been followed, has been criticized elsewhere, and is unsound.
In Humboldt Trust, the opening paragraph of the bond limited general coverage to $130,000, a rider limited forgery coverage to $2,500, and the non-reduction of liability section contained language identical to that involved here. The bank discovered nine forgeries by one person, all but one for more than $2,500. The bank contended it was covered to $2,500 for each forgery, and the insurer contended total coverage was limited by the rider and non-reduction of liability section to $2,500. In holding for the bank, this court characterized the reference to the non-reduction of liability section to the amount stated in the opening paragraph of the bond as a “reservation” of full coverage: “This clearly renews full liability on the bond after each loss. It automatically immediately becomes a bond of $130,000.” Id. at 526, 122 N.W.2d at 359. The court thus held liability was identical “whether nine separate forgeries were committed by one person or whether nine forgeries were committed by nine people.” Id. at 527, 122 N.W.2d at 360. This construction differs from that advocated by Bankers Life because the Humboldt Trust holding did not recognize the $130,000 originally stated in the opening paragraph as a ceiling on cumulative recovery for multiple forgery losses caused by one person. Instead it treats the coverage as fully replenished for each loss. This construction turns the purpose of the non-reduction of liability section on its head and totally ignores the distinction between multiple losses caused by one person and those caused by more than one person. Thus it nullifies the significance of subsection (c).
Every other court that has considered the provisions of a non-reduction of liability section like that in this bond has either expressly or impliedly rejected the Humboldt Trust holding. See Howard, Weil, Labouisse, Friedrichs, Inc., v. Insurance Co. of North America, 557 F.2d 1055 (5th Cir.1977); Benton State Bank v. Hartford Accident and Indemnity Co., 452 F.2d 5 (8th Cir.1971); Roodhouse National Bank v. Fidelity and Deposit Company of Maryland, 426 F.2d 1347 (7th Cir.1970); Securities and Exchange Commission v. Arkansas Loan and Thrift Corp., 297 F.Supp. 73 (W.D.Ark.1969), aff'd, 427 F.2d 1171 (8th Cir.1970); Federal Savings and Loan Insurance Corp. v. Aetna Insurance Co., 279 F.Supp. 161 (N.D.Ill.1968); Maryland Casualty Company v. Clements, 15 Ariz.App. 216, 487 P.2d 437 (1971). All of these courts have adopted an interpretation of the non-reduction of liability section consistent with that urged by Aetna in this case. I believe the reasoning of those courts is correct and the reasoning of this court in the Humboldt Trust case was not. As with other precedent that has been rejected on reconsideration, we should overrule Humboldt Trust. See Kersten Co., Inc. v. Department of Social Services, 207 N.W.2d 117, 121 (Iowa 1973).
Because I believe the bond is not fairly susceptible to the meaning ascribed by the trial court, I would reverse the judgment.
UHLENHOPP and LARSON, JJ., join this dissent.