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Central National Life Insurance Co. v. Fidelity and Deposit Co.

decided: July 9, 1980.


Appeal from the United States District Court for the Southern District of Illinois. Peoria Division. No. S-Civ-74-97 -- Robert D. Morgan, Judge.

Before Fairchild, Chief Judge, Sprecher, Circuit Judge, and Hoffman, Senior District Judge.*fn*

Author: Hoffman

This is an appeal from the granting of a motion for summary judgment*fn1 in favor of Fidelity and Deposit Company of Maryland (Fidelity) in an action filed by Central National Life Insurance Company (Central National) on a fidelity bond whereby Fidelity agreed to indemnify Central National for any loss incurred due to the dishonest or fraudulent acts of Central National's employees. In turn, Fidelity, while denying any liability to Central National, filed a third party action against Louis K. Risken and C. Ritchey Smiley, two of the three group agents who allegedly conspired with one Leon Clough, Central National's group vice president, the employee who allegedly committed the dishonest or fraudulent acts.*fn2

The issue presented on summary judgment was not whether Clough committed dishonest or fraudulent acts which resulted in a loss to Central National. In fact, for the purposes of this case at its present stage, Fidelity concedes that such occurred.*fn3 What Fidelity claims is that Central National failed to comply with three conditions precedent to the imposition of liability upon Fidelity in that Central National failed to (1) give notice within a reasonable time after discovery of its alleged loss, (2) file a Sworn Proof of Loss within six months after discovery of the alleged loss, and (3) bring legal proceedings for recovery within twenty-four months from the date of the discovery of the alleged loss. These defenses resolve themselves into a single issue. When was the loss resulting from dishonest or fraudulent acts discovered?*fn4


In American Surety Company v. Pauly (No. 1), 170 U.S. 133, 144, 18 S. Ct. 552, 556, 42 L. Ed. 977 (1898),*fn5 it is said:

If, looking at all its provisions, the bond is fairly and reasonably susceptible of two constructions, one favorable to the bank and the other favorable to the Surety Company, the former, if consistent with the objects for which the bond was given, must be adopted, and this is for the reason that the instrument which the court is invited to interpret was drawn by the attorneys, officers or agents of the Surety Company. This is a well established rule in the law of insurance.

Equally well settled is the fact that summary judgment under Rule 56, Fed.R.Civ.P., should be granted only where it is perfectly clear that there is no dispute about either the facts of the controversy or the inferences to be drawn from such facts. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962). Accordingly, even though there may be no dispute about the basic facts, still summary judgment will be inappropriate, if the parties disagree on the inferences which may reasonably be drawn from those undisputed facts. Winters v. Highlands Ins. Co., 569 F.2d 297, 299 (5th Cir. 1978): Exnicious v. United States, 563 F.2d 418, 423-24 (10th Cir. 1977).*fn6

We make no suggestion as to the final result of this case. We conclude solely that, on the record presently made, the district court should not have decided the disputed issues in the case by summary judgment.


Leon Clough was first employed on March 10, 1969 by Central National as the manager of Central National's Group Insurance Department. On February 2, 1970, he was elevated to the position of Vice President in charge of the Group Insurance Department. As such, Clough was vested with wide authority in fixing rates, selecting agents, approving presigned policies, etc. A large number of policies were issued through the agencies of Risken, Smiley and Pigg.*fn7

Clough, in fixing the rates for the risks involved, specified low rates in several instances, thus resulting in losses to Central National which became known in the late spring or early summer of 1971. For example, he established the Western Conference group rate at 47 cents per thousand dollars of coverage, whereas it should have been 94 cents per thousand. As management had advised Clough when he was hired, Clough was to consult with Central National's actuary before making quotations on groups whose monthly premiums were equal to or in excess of $3000; and was further told to use Central National's reinsurer's manual (the Lincoln National table) in quoting rates on groups whose monthly premiums did not reach $3000. Moreover, Clough was instructed not to guarantee rates beyond a period of 12 months. He was likewise requested to develop commission schedules for Central National.

Undeniably, Clough violated these instructions. When the low rate on the Western Conference group came to light, he was reprimanded and told not to repeat such a practice.*fn8 Thereafter, other transactions became known, including a subsequent attempt to again quote a low premium to another group, the awarding of excessive commissions to agents, the guarantee of rates beyond 12 months, and his general failure to follow instructions.

On August 25, 1971, Clough's employment by Central National was terminated. His personnel file assigned "Misconduct" as one of the reasons for his discharge. The Board of Directors authorized the discharge at a meeting on that date.*fn9

Harris Rowe, the Chairman of the Central National's Board, thereafter interviewed Risken, an agent who had written a substantial number of group policies through Clough, and inquired whether or not Risken had made any payments of money to Clough. Risken assured Rowe that he had not. This occurred in September, 1971.

Subsequently, Central National became involved in litigation with several groups on policies written by Risken as agent. During the course of discovery proceedings in one of these cases Central National learned, for the first time on December 9, 1972 nearly sixteen months after Clough's termination that Clough had been receiving money from the three group agents, including Risken. The payments were on a periodic basis, nearly monthly, commencing December 12, 1969 and ending October 28, 1971, and aggregated approximately $45,000.

The first written notice given by Central National to Fidelity was on February 5, 1973. Thereafter, on May 11, 1973, Central National filed with Fidelity its sworn Proof of Loss. Central National and Fidelity then stipulated that the time for filing suit was suspended as of October 15, 1973 with the understanding that if the time for filing suit had already expired as of October 15, 1973, the defense that the suit was barred by reason of the two year bond limitation for filing suit would not be waived. The action was filed on September 6, 1974. Thus, if the loss due to the dishonest or fraudulent acts of Clough was first discovered on December 9, 1972, the notice, sworn Proof of Loss, and filing of the action may have been timely; otherwise, the action must fail.

Obviously, Central National knew, in the summer of 1971, that losses had been, and would be, incurred by reason of Clough's actions. But the policy issued by Fidelity does not insure against "losses"; it provides coverage for "Any loss through any dishonest or fraudulent act of any of the Employees." The issue for our determination is whether we may conclude, as a matter of law, that Central National had knowledge that Clough's actions were "dishonest or fraudulent" which is not otherwise defined in Fidelity's policy.*fn10 We hold that ...

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