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Reserve Ins. Co. v. General Ins. Co. of America





APPEAL from the Circuit Court of Cook County; the Hon. IRVING NORMAN, Judge, presiding.


This appeal arises out of plaintiff Reserve Insurance Company's (Reserve) suit against defendants General Insurance Company of America (General) and Continental Casualty Company (Continental) to recover damages for losses sustained as a result of certain alleged dishonest acts of Harry O'Brien (O'Brien), the manager of Reserve's bond department. General and Continental had issued successive Insurance Companies Blanket Bonds, Standard Form No. 25 (fidelity bonds), to Reserve which provided indemnity

"* * * from and against any losses sustained by the Insured subsequent to noon of the date hereof and while this bond is in force, * * *, and discovered by the Insured subsequent to noon of the date hereof and prior to the expiration of twelve months after the termination of this bond * * *.

(A) Any loss through any dishonest or fraudulent act of any of the Employees, committed anywhere and whether committed alone or in collusion with others, * * *."

General's bond terminated as of noon of April 23, 1968, and Continental's became effective soon thereafter.

The dishonest acts, alleged by Reserve, consisted of O'Brien's execution of four construction bonds to Concrete Construction Services, Inc. (CCSI), contrary to specific instructions from Reserve's officers. Three of these bonds were issued during the term of General's fidelity bond: (1) the Cathedral bond on October 12, 1967; (2) the Wierton bond on January 8, 1968, and (3) the Cascade bond on February 27, 1968. The last bond issued by O'Brien, the Clarksburg bond, was issued on June 18, 1968, during the term of Continental's fidelity bond. CCSI defaulted on these bonds sometime after April 23, 1968.

The first claims on the CCSI bonds reached Reserve's management on December 5, 1968. General was notified on December 10, 1968, and on December 11, 1968, was requested to attend a meeting with Reserve to develop a plan whereby their respective exposures would be held to a minimum. General did not attend this meeting. From January 1969 through November 1970, Reserve paid out a total of $664,919.59 to settle the claims arising out of CCSI's defaults on the projects bonded by Reserve's employee. On May 20, 1969, General sent Reserve a letter denying coverage under its fidelity bond. On June 29, 1970, Reserve filed its complaint in the circuit court of Cook County against General and Continental (70 L 9179). This suit was dismissed for want of prosecution on June 30, 1975. On February 17, 1976, the plaintiff's motion to vacate the judgment of dismissal was granted and the case was restored to the trial calendar. In June 1977, Reserve refiled its complaint (77 L 4858).

Each of the defendants moved for summary judgment, Continental arguing that the loss was sustained when the bonds were issued by O'Brien, and General asserting that a loss was not sustained until CCSI's default on the construction bonds. The trial court granted Continental's motion, and denied General's, finding that General was liable for the losses related to the first three bonds and Continental was liable on the fourth, assuming liability was in fact established. Reserve and Continental settled on the fourth bond and Continental *fn1 was dismissed from the suit. Reserve and General proceeded to trial. Following a jury verdict in favor of Reserve for $664,919.59, the trial judge awarded Reserve prejudgment interest from the date of each payment it had made on the bond claims in the amount of $245,806.94. General appeals contending (1) that its fidelity bond had terminated before Reserve suffered any losses; (2) that the trial court erred in awarding prejudgment interest; and (3) that the trial court erred in certain evidentiary rulings and in refusing one of the defendant's instructions.


Defendant General first contends that its fidelity bond is unambiguous and that there are four prerequisites to recovery under it: (1) actual loss within the bond term which (2) results from dishonest acts (3) committed within the term and (4) discovered within 12 months after the bond expired. Although General concedes that the dishonest acts were committed within the term of its bond, it claims that the commission of the dishonest act is a concept entirely dissimilar to a loss sustained; that the policy covers only losses sustained; and that Reserve did not suffer any losses when the acts were committed. The defendant advances three lines of cases to support its argument that the bond should be construed so that the time of Reserve's losses falls beyond the term of its bond. The first line of cases holds, according to the defendant, that losses are not sustained until a claim or judgment is actually paid. (Cary v. National Surety Co. (1933), 190 Minn. 185, 251 N.W. 123; State Bank of New Prague v. American Surety Co. (1939), 206 Minn. 137, 288 N.W. 7; First State Bank v. Standard Acc. Ins. Co. (5th Cir. 1938), 94 F.2d 726; Ronnau v. Caravan International Corp. (1970), 205 Kan. 154, 468 P.2d 118; Foxley Cattle Co. v. Bank of Mead (1976), 196 Neb. 587, 244 N.W.2d 205.) The second line of cases assertedly holds that losses are not sustained until the claim or liability accrues. (Ocean Accident & Guarantee Corp. v. Old Nat. Bank (6th Cir. 1925), 4 F.2d 753; National City Bank v. National Security Co. (6th Cir. 1932), 58 F.2d 7; Hooker v. New Amsterdam Casualty Co. (W.D. Ky. 1940), 33 F. Supp. 672; Mount Vernon Bank & Trust Co. v. Aetna Casualty & Surety Co. (E.D. Va. 1963), 224 F. Supp. 666; Fidelity Savings & Loan Association v. Republic Insurance Co. (9th Cir. 1975), 513 F.2d 954; Jefferson Bank & Trust Co. v. Central Surety & Insurance Corp. (Mo. 1966), 408 S.W.2d 825.) The third, or the Illinois view, assertedly holds that a loss is sustained when the claim is reduced to judgment. People ex rel. Nelson v. Citizens Trust & Savings Bank (1933), 273 Ill. App. 128; National Slovak Society of the United States of America v. Matlocha (1940), 307 Ill. App. 41, 29 N.E.2d 946; Hinchcliff v. Insurance Co. of North America (1934), 277 Ill. App. 109; Otter Creek Lumber Co. v. McElwee (1890), 37 Ill. App. 285.

The cases relied on by the defendant (1) considered notice provisions when losses were discovered rather than when the losses were sustained (see National City Bank; Jefferson; Mount Vernon; Cary; State Bank of New Prague); (2) determined that the bonds in question were not third-party beneficiary contracts intended to cover the losses of the third-party plaintiffs (Ronnau; Foxley Cattle Co.); (3) considered the time when the insured could claim indemnity from its insurer for covered losses under a hold harmless clause (People ex rel. Nelson); (4) considered when an agent's cause of action accrues against its principal for the breach of a sales contract (Otter Creek); (5) considered the admissibility of evidence pertaining to the employee's alleged dishonest acts to ascertain that loss or damage had definitely been sustained (National Slovak Society); (6) in a garnishment proceeding, considered a "no action" clause whereby the defendant was obliged to indemnify the insured for its liability as a carrier "only to the amount which they are obliged to pay and do pay" (Hinchcliff at 120); (7) determined that the insured had suffered no loss at all because it failed to prove that its employee had acted dishonestly (First State Bank); (8) considered whether a loss could be sustained by a voluntary payment without an adjudication of liability (Ocean Accident & Guarantee Corporation); and (9) determined that no funds at all had been diverted from the plaintiff bank by its employee (Calistoga National Bank v. Fidelity & Deposit Co. (1935), 5 Cal.App.2d 248, 42 P.2d 1051). In Fitchburg Sav. Bank v. Massachusetts Bonding & Ins. Co. (1931), 274 Mass. 135, 174 N.E. 324, the court rejected the defendant's claim that the plaintiff had not suffered a loss until it exhausted all its remedies against its dishonest employee and held that the loss occurred on the dates the employee diverted its funds. The court in Imperial Insurance, Inc. v. Employers' Liability Assurance Corp. (D.C. Cir. 1970), 442 F.2d 1197, considered whether the payments the plaintiff made to third parties fell within the type of losses, i.e., "Loss of Money, Securities and other property," covered by the bond. Finally, in Auto Truck Steel Body Co. v. Chicago Bonding & Insurance Co. (1920), 218 Ill. App. 230, the court awarded the plaintiff its full pecuniary loss less the sum of $19.31. In excluding the sum of $19.31, the court found that this loss had occurred during the time the defendant's renewal bond was in force and that the bond had been issued in reliance on the plaintiff's false representations as to its employee's honesty during the term of the original bond.

We do not find the foregoing cases supportive of the defendant's construction of its fidelity bond. On the contrary, Hooker, Fidelity Savings & Loan Association, State Bank of New Prague, and Cary, support the plaintiff's position.

In Hooker, the court interpreted a banker's blanket bond that indemnified the insured "against any loss of money, * * * sustained * * * through any dishonest act of any of the Employees." The defendant in Hooker raised the same argument that defendant relies on here. The court said:

"Defendant's contention that the loss was not sustained while the bond was in effect, because the actual payment was not made until after the bond expired is too technical to receive much consideration. The dishonest acts causing the ultimate payment of the liability took place while the bond was in effect. The liability was incurred at that time; the loss, when paid, relates back to the date of liability." (Emphasis added.) Hooker, 33 F. Supp. 672, 673-74.

In Fidelity Savings & Loan Association, defendant Republic had issued a fidelity bond covering "losses sustained by the Insured at any time but discovered during the bond period." While the bond was in force, Fidelity merged with another savings and loan association, Trans-Bay Federal, and assumed its liabilities. These liabilities included unliquidated claims based upon fraudulent acts by Trans-Bay employees which were committed at times before the merger. The plaintiff defended the Trans-Bay lawsuits and sued the bonding company to recover its litigation expenses. The court viewed the question as whether any claim against Trans-Bay, if established, would constitute a loss sustained by Fidelity. The court held that the losses occurred prior to the merger and therefore were not covered by the bond, stating:

"Case law interpreting the notice provision of the banker's blanket bond supports the view that `the word "loss" refers to a condition in which the insured would be subjected to a claim or demand "out of which a legal liability might arise," and not to an adjudicated liability.' [Citations.] Thus, the `loss' occurs at the time of the activity giving rise to the claim against the insured and not at the time of trial proceedings or entrance of judgment." (Emphasis added.) Fidelity, 513 F.2d 954, 956.

In State Bank of New Prague, the plaintiff alleged that on April 1, 1933, one Conners deposited $800 in his account with the plaintiff bank, and that the plaintiff's cashier had misappropriated it. Conners recovered from the bank which then sued the defendant on its fidelity bond which was effective from February 24, 1933, to February 24, 1934. This bond proved indemnity for pecuniary loss sustained by the plaintiff as the employer of the cashier for the latter's dishonest conduct. The defendant argued on appeal that the defalcation was not within the coverage of its bond because while it resulted from an act within the coverage, it was not discovered until after the bond had terminated. The court rejected this argument, stating:

"The policy does not expressly provide that it only shall cover losses discovered during the coverage period. Nor is it susceptible of that construction. The plain meaning of the language is that it covers losses resulting from acts of defalcation of the employe committed during the coverage period. Where, as here, the insurance is to indemnify the insured against loss through the fraudulent and dishonest acts of his employe in connection with the duties of his employment, the insurance covers all losses due to such acts committed during the coverage term, whether discovered during that time or afterwards. [Citations.] We decided Cary v. ...

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