Gulf Insurance Company (Gulf) issued a financial institution bond to Capital Bank & Trust Company (Capital) for the period December 12, 2002 to December 12, 2003. It provided coverage for “[l]oss resulting directly from dishonest or fraudulent acts” committed by its employees. In October 2003, Capital discovered that James White, a senior vice-president and loan officer, had forged the signatures of two of Capital’s presidents in a number of loan transactions over several years. This resulted in losses that exceeded $1,700,000. The signatures that White forged allowed him to process the loans without obtaining the required president’s approval in advance. Capital notified Gulf that it had discovered the forgeries and submitted a claim under the bond in June 2004. Gulf refused to pay and Capital sued Gulf for breach of contract.
John Brunner had served as Capital’s president from February 2001 to June 2003. When he was deposed, he stated that he discovered that White forged his (Brunner’s) signature on a variety of loan documents in 2001. Brunner stated that he confronted White, who admitted to the forgeries. Brunner told him that his actions violated bank policy and that they should not be repeated. Brunner also brought the issue to the attention of the chairman of the board but no action was taken because White was Capital’s top performing loan officer, his forgeries involved problem loans, and did not negatively affect loan performance. Of particular note was that Brunner did not document any of the information he discovered regarding the forgeries and loans involved.
After completing discovery, Gulf moved for summary judgment to dismiss the claim on the grounds that the bond excluded it. Gulf cited two provisions in the bond that excluded coverage:
The exclusion for “loss arising out of or in connection with any circumstances known to [Capital] prior to the inception [of the bond]
The termination provision that stated that coverage “terminates as to any [e]mployee…as soon as [Capital] learns of any dishonest of fraudulent act committed [by] any such [employee] while employed by [Capital].”
Capital opposed the motion and cross-moved for summary judgment on its claim. The trial court granted Gulf’s motion and denied Capital’s cross motion. Capital appealed.
On appeal, Capital argued that White’s conduct in 2001 was not dishonest or fraudulent within the bond’s meaning because the forgeries in question did not result in any monetary loss to Capital. It stated that White’s signature was forged on credit renewals and extensions that did not advance new funds to customers but only extended the time to repay the loan and no loss occurred. As a result, use of the signature did not constitute a fraudulent or dishonest act triggering the termination provision. Even if there was no loss as a result of the 2001 forgeries, the bond’s language did not require that a loss occur in order for the conduct to be considered dishonest or fraudulent.
The appellate court noted that there was no factual dispute as to the acts White committed in 2001 and determining whether or not such acts constituted dishonest or fraudulent act[s] within the meaning of the bond presented a question of law for the court. It determined that the express terms of the bond provided that dishonest or fraudulent acts plus loss presented the basis for a claim. This meant that loss was not an element of a dishonest or fraudulent act. As a result, White’s forgeries constituted dishonest acts and Capital was aware of this conduct in 2001, before the bond in question was issued, and coverage as to White terminated immediately on the bond’s inception date. It affirmed the trial court’s decision.
Supreme Court, Appellate Division, Third Department, New York. Capital Bank & Trust Company, Appellant, v. Gulf Insurance Company, Respondent. Jan 26, 2012. 91 A.D.3d 1251, 937 N.Y.S.2d 463
