250_C033
FIDELITY COVERAGE
ENDED WHEN PRESIDENT DISCOVERED LOAN OFFICER’S DISHONEST ACT
|
Crime/Dishonesty
Insurance |
Course of
Discovery |
|
Bond
Termination Provisions |
Forged
Signatures |
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:
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