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First Insurance Funding Corp. v. Federal Insurance Co.

March 28, 2002

FIRST INSURANCE FUNDING CORPORATION, PLAINTIFF-APPELLANT,
v.
FEDERAL INSURANCE COMPANY, DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 00 C 8135--John W. Darrah, Judge.

Before Bauer, Ripple and Manion, Circuit Judges.

The opinion of the court was delivered by: Ripple, Circuit Judge

ARGUED FEBRUARY 20, 2002

Defrauded of over $4.3 million, First Insurance Funding Corporation ("First Insurance") sought indemnification for these losses under the terms of a financial institution bond that its parent corporation had purchased from Federal Insurance Co. ("Federal"). When Federal denied the claim for coverage, First Insurance filed this action seeking a declaratory judgment of Federal's obligation to indemnify for these losses. In addition, First Insurance alleged that Federal's actions constituted not only a breach of contract but also an unreasonable and vexatious denial of coverage in violation of the Illinois Insurance Code. Upon Federal's motion, the district court dismissed the complaint concluding that the bond did not cover the losses for which First Insurance sought indemnification. In the district court's determination, this ruling also foreclosed First Insurance's claim against Federal under the Illinois Insurance Code. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I. BACKGROUND

A. Facts

Operating from Northbrook, Illinois, First Insurance serves as an insurance premium finance company. In this role, it provides loans to businesses that seek to finance the payment of their annual insurance premiums. Typically, these businesses obtain financing from First Insurance through an independent insurance broker. More precisely, a business seeking insurance coverage hires an independent insurance broker for a dual purpose; the broker not only procures insurance coverage for the business but also obtains the necessary financing for this purchase from an insurance premium finance company such as First Insurance.

If the broker and its business client select First Insurance to finance the transaction, the parties document the loan through a standardized finance agreement. To expedite the loan application process, First Insurance provides brokers with blank premium finance agreements as well as related computer software. Using this material, the broker assists its business client in filling out the loan agreement. Once the broker and client complete and sign the finance agreement, they forward the document to First Insurance which then must review and approve the application. Once First Insurance approves the loan, it disburses the loan amount to the broker who, in turn, pays the insurance premium on behalf of its client.

Beginning in 1996, First Insurance provided funding for a significant volume of legitimate premium finance loans for clients of Colesons Insurance Group ("Colesons")--an independent insurance broker. Colesons had received authorization from First Insurance to select it from among vendors offering premium financing to Colesons' business clients. In submitting its clients' loan applications, Colesons used the blank premium finance agreements and related software provided by First Insurance. Based on these legitimate transactions, Colesons developed a reputation with First Insurance for trustworthy business dealings.

However, at some time prior to August 2000, certain individuals associated with Colesons began submitting fraudulently altered premium finance agreements to First Insurance. Specifically, these documents bore forged signatures of Colesons' clients that purportedly sought premium finance loans from First Insurance. The fraudulently altered documents shared certain similarities. Each premium finance agreement bore Colesons' warranty that the client's signature was genuine. In addition, when preparing the altered documents, the forgers used the software program that First Insurance had provided Colesons. In reliance on these forged and fraudulently altered documents, First Insurance disbursed over $4.3 million to Colesons.

Upon discovering the fraudulent transactions, First Insurance promptly sought indemnification for its losses under the terms of a financial institution bond that its parent corporation had purchased from Federal. This bond, which served as an insurance policy, provided coverage against losses resulting from certain fraudulent or dishonest conduct perpetrated against First Insurance. Citing, among other reasons, Exclusion 3.m of the bond, Federal denied the request for indemnification. Exclusion 3.m provides that:

This bond does not directly or indirectly cover . . . loss caused by any agent, broker, factor, commission merchant, independent contractor, intermediary, finder or other representative of the same general character of the ASSURED.

R.12, Ex.A. Federal reasoned that Colesons served as an intermediary, finder or other representative of First Insurance. As such, in Federal's estimation, the terms of the bond did not cover the ...


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