1. Insurance_fidelity bond_ambiguous language_knowledge of dishonest
act_interpreted for insured
Ambiguous language in a fidelity bond was correctly interpreted for the insured, and
summary judgment was correctly granted for plaintiff, where a bank contended that a provision
ending coverage when it first learned of a dishonest act by an employee applied only to
knowledge gained after the bond became effective, while defendant-insurer contended that the
provision applied to knowledge gained at any time.
2. Appeal and Error_cross-appeal_mootness
A cross-appeal was moot where it was dependent on another issue correctly resolved for
plaintiff by the trial court.
Forman Roassabi Black, P.A., by T. Keith Black, and Wright,
Robinson, Osthimer & Tatum, by Thomas S. Schaufelberger, pro
hac vice, for defendant-appellant Colonial American Casualty
and Surety Company, and for defendant/cross-appellee Community
Bank Services, Inc.
Pinto Coates Kyre & Brown, P.L.L.C., by David L. Brown and
Deborah J. Bowers, for plaintiff-appellee/cross-appellant.
ELMORE, Judge.
Defendant Colonial American Casualty and Surety Company
(Colonial) appeals from judgment entered following a memorandum and
order denying its motion for summary judgment against plaintiff
Home Savings Bank, SSB of Eden (Home Savings), and granting summaryjudgment in favor of Home Savings against Colonial. Home Savings
cross-appeals from that portion of the memorandum and order
granting summary judgment in favor of defendant Community Bank
Services, Inc. (Community) against Home Savings. For the reasons
stated below, we (1) affirm the memorandum and order granting
summary judgment in favor of Home Savings against Colonial, and
therefore affirm the subsequent judgment, and (2) dismiss Home
Savings' cross-appeal as moot.
The relevant facts are as follows: Colonial sold to Home
Savings, a North Carolina State Savings Bank, a fidelity bond
effective for the period 1 January 2001 to 1 January 2002. The
bond was sold to Home Savings by and through Colonial's agent,
Community. The bond provided, among other things, for
indemnification of Home Savings in the event of a loss caused by
dishonest or fraudulent acts committed by an employee, subject to
certain limitations expressly contained therein.
Colonial required Home Savings to complete an application
before agreeing to issue the bond. On 8 December 2000, Home
Savings' President, W. Thomas Flynt, met with a representative of
broker Community and completed the application for bond coverage.
In its written discovery responses, Colonial stated that it drafted
the application, which “basically follows” a standard form widely
used in the bond industry. Flynt testified at his deposition that
he responded truthfully to each question on the application. The
application for bond coverage did not contain any questions asking
if Home Savings was aware of any prior dishonest or fraudulentconduct on the part of its employees, and Home Savings did not
divulge any such knowledge.
At the inception of the bond's coverage period on 1 January
2001, Marsha Rice Gibson was employed by Home Savings as an
assistant vice president. Gibson had worked for Home Savings since
October 1984, when she was hired as a teller. In 1985, Home
Savings' management became aware that Gibson had been convicted in
1981 of embezzling funds from a previous employer, Northwestern
Bank.
(See footnote 1)
After obtaining assurances in August 1981 from its fidelity
bond carrier at the time, CNA Insurance, that Gibson would continue
to be covered as an insured employee under its then-current
fidelity bond, Home Savings retained Gibson as an employee. Gibson
remained in the employ of Home Savings until May 2001, when it was
discovered that Gibson had, over several years, embezzled over one
million dollars from certain customer accounts at Home Savings.
(See footnote 2)
On 2 July 2001, Gibson entered a plea of guilty in federal court to
one count of “theft, embezzlement, misapplication by a bank
official.”
Home Savings thereafter made a claim under the bond for the
loss caused by Gibson's embezzlement and submitted supportingdocumentation as requested by Colonial. By letter to Home Savings
dated 12 November 2001, Sandra M. Bourbon, claims counsel for
Colonial's parent company, Zurich North America, rejected Home
Savings' claim, noting that Home Savings was aware of Gibson's 1981
embezzlement conviction at the time Colonial issued the 2001-2002
bond. As the sole basis for rejecting Home Savings' claim,
Bourbon's letter cited language contained in Section 12 of the
bond, which provided in pertinent part as follows:
This bond terminates as to any employee or any partner,
officer, or employee of any processor (a) as soon as any
director, titled officer or risk manager of any Insured
not in collusion with such person learns of any dishonest
or fraudulent act committed by such person at any time,
whether in the employment of the Insured or otherwise,
whether or not of the type covered under Insuring
Agreement (A), against the Insured or any other person or
entity . . . .
. . . .
Termination of the bond as to any Insured terminates
liability for any loss sustained by such Insured which is
discovered after the effective date of such termination.
In closing, Bourbon's letter stated “we conclude that [Home
Savings'] claim would not be covered under the bond, as the
coverage pertaining to Marsha Rice Gibson was terminated once the
bank became aware of her prior dishonesty.”
Home Savings responded by filing a complaint in Rockingham
County Superior Court on 5 April 2002, seeking a declaratory
judgment obligating Colonial to pay Home Savings the policy limits
of liability under the bond and asserting a claim for breach of
contract against Colonial, and also bringing claims against bond
broker Community for breach of contract, breach of fiduciary duty,
and negligence. On 8 August 2002, the trial court denied therespective motions to dismiss brought by defendants Colonial and
Community pursuant to N.C. Gen. Stat. § 1A-1, Rule 12(b)(6). On 24
March 2003, defendants Colonial and Community each filed motions
for summary judgment. On 2 April 2003, Home Savings filed a cross-
motion for summary judgment against Colonial, asserting
specifically that Home Savings “is entitled to recover for its loss
under the terms of the applicable fidelity bond up to the limits of
the bond.”
On 14 April 2003, a hearing was held on the cross-motions for
summary judgment of Home Savings and Colonial, and on Community's
motion for summary judgment. By its memorandum and order entered
21 April 2003, the trial court: (1) denied Colonial's motion for
summary judgment against Home Savings; (2) allowed Home Savings'
motion for summary judgment against Colonial; (3) allowed
Community's motion for summary judgment; and (4) denied Home
Savings' motion for summary judgment against Community.
(See footnote 3)
Regarding
the cross-motions of Colonial and Home Savings, the trial court
stated as follows:
These parties disagree about the language in the
policy's “TERMINATION OR CANCELLATION” section on pages
20 and 21 [of the bond] . . . which reads in pertinent
part, “(t)his bond terminates as to any employee or . .
. officer . . . as soon as any director, titled officer
or risk manager of any Insured not in collusion with suchperson learns of any dishonest or fraudulent act
committed by such person at any time . . . .” The
disagreement centers on the words “as soon as . . .
learns.”
[Home Savings] contends that this language pertains
only to knowledge first obtained after the policy's
effective date. Defendant Colonial contends that it also
pertains to knowledge of dishonesty of the employee
obtained for the first time by [Home Savings] in 1985.
. . . .
[Home Savings'] contention that the language “as
soon as . . . learns” implies learning or discovery after
the effective date of the policy is a reasonable one in
the context here in which a new policy is being issued by
a new insurer, and the new insurer has not been misled as
of the effective date by the insured in the preceding
application. If the language in question is not clear as
contended by [Home Savings], then it is at least
ambiguous and must be construed in [Home Savings'] favor.
Thereafter, on 12 May 2003, the trial court entered judgment
in favor of Home Savings against Colonial in the amount of
$1,000,000.00, representing the principal sum due under the bond,
plus interest and costs.
Colonial now appeals from the 21 April 2003 memorandum and
order allowing Home Savings' motion for summary judgment, and the
subsequent judgment entered 12 May 2003. Home Savings cross-
appeals from the 21 April 2003 memorandum and order granting
summary judgment in favor of Community.
Standard of Review
Summary judgment is properly granted where “the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that any party is entitled to a
judgment as a matter of law.” N.C. Gen. Stat. § 1A-1, Rule 56(c)
(2003). “On appeal, this Court's standard of review involves atwo-step determination of whether (1) the relevant evidence
establishes the absence of a genuine issue as to any material fact,
and (2) either party is entitled to judgment as a matter of law.”
Guthrie v. Conroy, 152 N.C. App. 15, 21, 567 S.E.2d 403, 408 (2002)
(citations omitted).
Colonial's Appeal
[1] In the present controversy between Colonial and Home
Savings, neither party contends that any material facts are in
dispute. Rather, the parties' dispute arises from their differing
interpretations of the bond's terms, specifically the language
concerning termination of coverage as to any employee upon Home
Savings learning that the employee has committed a dishonest or
fraudulent act. In its lone assignment of error, Colonial argues
the trial court erred in ruling that because Home Savings first
learned of Gibson's 1981 embezzlement before the bond's coverage
period commenced, as a matter of law the termination clause did not
disqualify Gibson from coverage, resulting in coverage under the
bond for the loss caused by Gibson's subsequent embezzlement.
Colonial contends that the termination clause must be interpreted
to disqualify Gibson from coverage, essentially arguing that the
bond terminated as to Gibson at its inception because Home Savings
was aware before the coverage period began of her prior dishonest
conduct. We disagree with Colonial's assertions.
Colonial urges this Court to resolve the controversy in its
favor by adopting the construction of the bond's termination clause
it advocated unsuccessfully before the trial court. Simply put,
Colonial argues that the termination clause operates to disqualifyfrom coverage any employee whom Home Savings knows to have
committed a dishonest act, regardless of whether Home Savings first
learned of the act before or after the bond's coverage period
commenced. Home Savings maintains the trial court correctly
construed the termination clause as requiring that it discover, for
the first time only after commencement of the coverage period, an
employee's dishonest conduct in order for the bond coverage to
terminate as to that employee.
At the outset, we note that in North Carolina, fidelity bonds
“are in the nature of contracts of insurance, and are subject to
rules of construction applicable to insurance policies generally.”
Thomas & Howard Co. of Shelby, Inc. v. American Mut. Liability Ins.
Co., 241 N.C. 109, 113, 84 S.E.2d 337, 340 (1954). It is well-
settled in North Carolina that:
'[w]here the language used in the policy is ambiguous and
reasonably susceptible to more than one interpretation,
judicial construction is necessary.' If there is
uncertainty or ambiguity in the language of an insurance
policy regarding whether certain provisions impose
liability, the language should be resolved in the
insured's favor. Moreover, exclusions from liability are
not favored, and are to be strictly construed against the
insurer.
Eatman Leasing, Inc. v. Empire Fire & Marine Ins. Co., 145 N.C.
App. 278, 281, 550 S.E.2d 271, 273 (2001), rev. denied, 356 N.C.
298, 570 S.E.2d 503, (2002) (emphasis added).
Our Supreme Court has stated as follows regarding judicial
construction of fidelity bond language:
[W]e must place such bonds in the general class of
insurance policies, and construe them upon the same
general principles; that is, most strongly against the
company, and most favorably to their general intent and
essential purpose. In [American Surety Co. v. Pauly, 170
U.S. 133, 42 L. Ed. 977 (1898)], Justice Harlan, speakingfor a unanimous Court, says on page 144: “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 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.”
Bank of Tarboro v. Fidelity and Deposit Co., 128 N.C. 271, 275-76,
38 S.E. 908, 910 (1901) (citations omitted). Moreover, our Supreme
Court has further stated that in construing fidelity bond terms,
“if the language of the instrument or instruments is ambiguous,
they must be construed most strongly against the [insurer], who
chose words to suit itself and sold them to the bank for
compensation for the purpose of indemnifying against loss
occasioned by unfaithful officers.” Hood v. Davidson, 207 N.C.
329, 334, 177 S.E. 5, 9 (1934).
We have carefully examined the language of the fidelity bond
at issue in the present case with the foregoing principles in mind.
We agree with the trial court's conclusion that the construction of
the termination clause advanced by Home Savings -- i.e., that
coverage as to any employee under the bond only terminates where
Home Savings initially discovers, after the coverage period's
commencement, the employee's dishonest conduct -- is a reasonable
one. Significantly, the termination clause provides that the bond
“terminates . . . as soon as” Home Savings “learns” of any
dishonest conduct by an employee. Use of the present, rather than
past, tense here suggests an intent by the parties that coverage
under the bond must first commence before discovery of an
employee's dishonest conduct will operate to terminate it. Thisinterpretation is supported by the deposition testimony of
Colonial's claims counsel, Bourbon, that “you have to have the bond
for the coverage to terminate . . . you have to have the bond
issued before . . . the termination provision can apply to the bond
claim.”
We conclude that a reasonable reading of the termination
clause “could produce either the reading offered by [Home Savings]
or the reading offered by [Colonial]; therefore, the policy is
ambiguous.” Scottsdale Ins. Co. v. Travelers Indem. Co., 152 N.C.
App. 231, 234, 566 S.E.2d 748, 750 (2002); see also Wachovia Bank
& Trust Co. v. Westchester Fire Insurance Co., 276 N.C. 348, 354,
172 S.E.2d 518, 522 (1970) (“ambiguity in the terms of an insurance
policy is not established . . . unless, in the opinion of the
court, the language of the policy is fairly and reasonably
susceptible to either of the constructions for which the parties
contend.”) There was evidence before the trial court, in the form
of Colonial's discovery responses, that “Colonial drafted the . .
. bond[,]” the text of which “derives primarily from the Surety
Association of America (“SAA”) Standard Form 24” and which
“Colonial then enhanced . . . with those changes routinely being
offered in the marketplace.” With respect to the termination
clause presently at issue, Colonial's discovery responses
specifically acknowledge, and Sandra Bourbon, Colonial's 30(b)(6)
designee, confirmed in her deposition, that Colonial modified that
part of the Standard Form 24's language, albeit not in a way
material to the portions of that clause giving rise to the parties'
present dispute. Based on the principles endorsed by our Supreme Court
regarding construction of fidelity bond language in Bank of Tarboro
v. Fidelity and Deposit Co., supra, and Hood v. Davidson, supra, as
well as on the well-settled principle that ambiguous terms in a
policy of insurance are to be resolved in the insured's favor, see
Eatman Leasing, Inc. v. Empire Fire & Marine Ins. Co., supra, we
conclude that the trial court did not err in determining that the
termination clause did not operate to disqualify Gibson from
coverage under the bond. We affirm the trial court's order for
summary judgment in favor of Home Savings and the subsequent entry
of judgment against Colonial.
Home Savings' Cross-Appeal
[2] In granting bond broker Community's cross-motion for
summary judgment against Home Savings, the trial court stated as
follows in its memorandum and order entered 21 April 2003:
As to the summary judgment motions pertaining to
defendant Community Bank Services, Inc., the conclusion
that summary judgment is appropriate against defendant
Colonial [in favor of Home Savings] negates any
alternative liability of defendant Community dependent
upon a lack of coverage by defendant Colonial, therefore
. . . defendant Community's cross motion [is] allowed.
We conclude that by affirming the trial court's grant of
summary judgment in favor of Home Savings, Home Savings' cross-
appeal with respect to Community is rendered moot and is hereby
dismissed. “A case is 'moot' when a determination is sought on a
matter which, when rendered, cannot have any practical effect on
the existing controversy.” Roberts v. Madison County Realtors
Ass'n, 344 N.C. 394, 398-99, 474 S.E.2d 783, 787 (1996); see also
In re Peoples, 296 N.C. 109, 147, 250 S.E.2d 890, 912 (1978)(“Whenever, during the course of litigation it develops that the
relief sought has been granted or that the questions originally in
controversy between the parties are no longer at issue, the case
should be dismissed[.]”), cert. denied, 442 U.S. 929, 61 L. Ed. 2d
297.
Affirmed in part and dismissed in part.
Judges BRYANT and GEER concur.
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