The opinion of the court was delivered by: John E. Miller, Chief Judge.
On March 15, 1961, the plaintiff filed its complaint in the
Sebastian Circuit Court, Fort Smith District. In due time the
case was removed to this court by the defendant.
The plaintiff seeks to recover judgment against the defendant
under the provisions of a Comprehensive Dishonesty, Disappearance
and Destruction Policy, issued by defendant effective February 1,
1959, for loss of money and other property sustained through the
fraudulent or dishonest act of an employee of the plaintiff.
The plaintiff alleged that the policy was in full force and
effect and that the plaintiff sustained the loss of money and
property "as a result of the fraudulent or dishonest act of an
employee in the amount of $23,684.86, after allowing credit for
all recoveries." That the plaintiff has complied with all the
provisions of the policy and has made demand upon the defendant
for the payment of the loss in accordance with the provisions of
the policy of insurance, but defendant has failed and neglected
to perform its obligations under the contract.
It prayed judgment for the sum of $20,000, the maximum amount
of liability stated in the policy, together with a penalty of 12
percent and a reasonable attorney's fee.
On April 19, 1961, defendant filed its answer in which it
denied, "that when said policy of insurance was in full force and
effect, plaintiff sustained a loss of money and property, as a
result of a fraudulent or dishonest act of an employee, in the
amount of $23,684.86, after allowing credit for all recoveries or
any other sum."
Denied that the plaintiff has complied with the provisions of
the policy and that plaintiff has made demand upon defendant for
the payment of said loss in accordance with the provisions of the
The defendant further alleged in paragraph No. 1 of the answer
that plaintiff's complaint "fails to state a claim upon which
relief can be granted."
The defendant, American Guarantee and Liability Insurance
Company, is a corporation engaged in the insurance business,
organized and existing under the laws of the State of New York
with its principal office and place of business in Chicago,
Illinois, and is authorized to engage in business in Arkansas.
The court has jurisdiction because of diversity of citizenship
of the parties and the amount involved.
Fort Smith Tobacco & Candy Company, hereinafter called the
plaintiff, is presently and has been engaged in the wholesale
business and distribution of cigarettes, tobacco, cigars, candy,
appliances, drugs and sundries, and miscellaneous items in the
Fort Smith trade area since 1940. Although the plaintiff is a
separate corporation, it is a subsidiary of the Mid-Continent
Wholesale Company, located at Denver, Colorado, which, as the
parent organization, functions as an accounts payable office and
supervises all business actions and activities of the plaintiff.
Mr. J.H. Friedman has been since the organization of plaintiff,
and is presently, President and Manager. However, he has no
official capacity with Mid-Continent Wholesale Company, even
though the two corporations are affiliated and have common
ownership to some extent.
The defendant, through its Denver Agency Company, issued its
Comprehensive Dishonesty, Disappearance and Destruction Policy,
No. 1310259, to Mid-Continent Wholesale Company, which policy
became effective at noon February 1, 1959, and was in full force
and effect from that date. In an endorsement attached thereto,
the name of the insured was amended to include the plaintiff
along with fifteen other subsidiaries of Mid-Continent Wholesale
This policy replaced a prior policy issued by the Indemnity
Insurance Company of North America, which had been in effect from
July 1, 1957, to the beginning of the period that the defendant's
policy became effective at noon on February 1, 1959.
On April 19, 1961, simultaneously with the filing of its
answer, the defendant submitted certain interrogatories to the
plaintiff in accordance with the provisions of Rule 33,
Fed.R.Civ.P., 28 U.S.C.A.
On May 9, 1961, the plaintiff responded to the interrogatories
and stated that, according to the plaintiff's best information
and belief, the loss complained of was as follows:
Drugs and sundries 1,215.23
Miscellaneous items 3,193.63
Fort Chaffee account 6,215.10
Cash collections 2,851.65
That the fact that a loss had occurred was discovered on or about
September 15, 1959, but the plaintiff does not know exactly when
it occurred. The extent of the loss claimed was not fully
discovered until an audit was completed sometime after October
That plaintiff was repaid the sum of $2,851.65 by Robert D.
Hardcastle, the employee described in paragraph 3 of plaintiff's
complaint. (The plaintiff alleged that Mr. Hardcastle was the
employee "whose fraudulent or dishonest act" caused the alleged
That proof of loss was furnished to defendant on or about
September 21, 1959, through its representative who was authorized
to investigate and adjust the loss. A copy of the document
referred to as "proof of loss" was attached to the response and
will be referred to hereinafter.
The plaintiff further stated, "Proof of part of the loss will
be supported both as to its existence and as to its amount by
inventory computations through comparing amounts as reported by
Mr. Hardcastle with quantities actually found to be on hand,
coupled with his admissions
of falsification and alteration of reports and inventories."
On June 1, 1962, plaintiff propounded to defendant certain
interrogatories under the provisions of Rule 33, Fed.R.Civ.P.,
which were responded to by defendant on June 19, 1962. In answer
to the interrogatories, the defendant stated that the plaintiff
had not submitted adequate proof of employee dishonesty, nor
adequate proof that the loss claimed occurred while the policy in
question was in force. The defendant further stated:
"It appears that any loss claimed by plaintiff
occurred prior to the effective date of the policy
involved and at a time when other insurance was in
force to cover the alleged loss, which was admittedly
discovered within time to have allowed plaintiff to
make claim under such other insurance.
"It appears that any loss claimed cannot be
established except by an inventory computation, and
therefore the same is excluded from the policy under
The interrogatories were answered for defendant by J.T. Whalen,
who stated that he did not know exactly the date upon which the
plaintiff was advised that one of the defenses would be that the
loss was covered by a prior bond or policy. Neither did the
defendant know when the plaintiff was first notified that
defendant was denying liability under the policy.
By interrogatory No. 5 the defendant was requested to advise
the date upon which it first notified plaintiff that it was
denying liability and to state the manner in which such denial
was made known to the plaintiff and the circumstances pertaining
Interrogatory No. 6 referred to a letter dated April 28, 1960,
addressed to James T. Whalen, Zurich Insurance Co., 135 So.
LaSalle Street, Chicago, Ill., and signed Denver Agency Company
by Patricia Muhr, Claim Department, in which letter the Denver
"Your Denver Claims office referred us to you for
information regarding the above claim. According to
information we have received, this claim has been
denied. But nothing written has ever been received on
this; evidently any denial made was made verbally.
"Would you be good enough to write Ft. Smith
Tobacco Company denying the claim officially and send
a carbon copy of the letter of Mr. Bershof of
Mid-Continent Wholesale Company and another carbon to
the Denver Agency Company. If this claim has not been
denied, please send the above letter with a status
Interrogatory No. 7 referred to a letter dated May 4, 1960,
from J.T. Whalen, Claim Department of the Zurich Insurance
Company, addressed to Miss Patricia Muhr, Claim Department, the
Denver Agency, in which he stated:
"We received your letter dated April 28, 1960. When
we received notice of this loss by telephone from our
Denver Branch Office, we referred the matter to
Casualty Adjustment Company for the purpose of
conducting an investigation in our behalf. Mr.
Bradney of that firm undertook to handle the claim.
Shortly thereafter this same insured reported another
loss involving an employee by the name of Ralph R.
Guthray and Mr. Bradney likewise handled that claim
which came to a conclusion that was satisfactory to
the insured within a reasonable time.
"In view of the circumstances outlined above, we do
not consider it advisable to write to the insured
along the lines you mentioned until we are more
certain that such correspondence would be
In the interrogatory the defendant was asked if the above
letter was written in behalf of the defendant and also to state
the relationship of Zurich Insurance Company to the defendant. In
answer to interrogatories 5, 6 and 7, the defendant stated:
"On September 15, 1960, a letter was addressed to
the Denver Agency Company authorizing it to notify
Mr. Bershof that there was no evidence to support a
claim for any loss that occurred after February 1,
but that it did not know on what date the Denver Agency Company
may have notified Mr. Bershof as authorized. (Mr. Bershof was an
official of Mid-Continent Wholesale Company, the parent company
Defendant, through Mr. J.T. Whalen, further stated in response
to interrogatories 6 and 7.
"The letter dated April 28, 1960, was received and
recognized as a subject matter for American Guarantee
& Liability Insurance Company. The Denver Agency
Company was an agent for the American Guarantee &
Liability Insurance Company at that time.
"A letter dated May 4, 1960, was addressed to the
Denver Agency Company in behalf of American Guarantee
& Liability Insurance Company which is an affiliate
of Zurich Insurance Company."
The policy issued by defendant and upon which plaintiff bases
its claim provides, inter alia, in Item 3 that the limit of
liability under Insuring Agreement No. I, Employee Dishonesty
Coverage — Form 5, is $20,000.
The policy further provides:
"The Company, in consideration of the payment of
the premium, and subject to the Declarations made a
part hereof, the General Agreements, Conditions and
Limitations and other terms of this Policy, agrees
with the insured, in accordance with such of the
insuring agreements hereof as are specifically
designated by the insertion of an amount of insurance
in the Table of Limits of Liability, to pay the
"EMPLOYEE DISHONESTY COVERAGE — FORM B
"I. Loss of Money, Securities and other property
which the Insured shall sustain through any
fraudulent or dishonest act or acts committed by any
of the Employees, acting alone or in collusion with
others, the amount of insurance on each of such
Employees being the amount stated in the Table of
Limits of Liability applicable to this Insuring
"Loss Under Prior Bond or Policy
"(1) the insurance under this General Agreement C
shall be a part of and not in addition to the amount
of insurance afforded by the applicable Insuring
Agreement of this Policy;
"(2) such loss would have been covered under such
Insuring Agreement had such Insuring Agreement with
its agreements, conditions and limitations as of the
time of such substitution been in force when the acts
or events causing such loss were committed or
"(3) recovery under such Insuring Agreement on
account of such loss shall in no event exceed the
amount which would have been recoverable under such
Insuring Agreement in the amount for which it is
written as of the time of such substitution, had such
Insuring Agreement been in force when such acts or
events were committed or occurred, or the amount
which would have been recoverable under such prior
bond or policy had such prior bond or policy
continued in force until the discovery of such loss,
if the latter amounts be smaller."
Under Conditions and Limitations the policy provides:
"Section 1. Loss is covered under Insuring
Agreement I of this Policy only if discovered not
later than two years from the end of the Policy
Period. Except under Insuring Agreement I, loss is
covered under this Policy only if discovered not
later than one year from the end of the Policy
"Subject to General Agreement C:
"(b) Insuring Agreement I applies only to loss
sustained by the Insured through fraudulent or
dishonest acts committed during the Policy Period by
any of the Employees engaged in the regular service
of the Insured within the territory designated above
or while such Employees are elsewhere for a limited
Section 2(b) under Exclusions reads:
"Section 2. This Policy does not apply:
"(b) under Insuring Agreement I, to loss, or to
that part of any loss, as the case may be, the proof
of which, either as to its factual existence or as to
its amount, is dependent upon an inventory
computation or a profit and loss computation;
provided, however, that this paragraph shall not
apply to loss of Money, Securities or other property
which the Insured can prove through evidence wholly
apart from such computations, is sustained by the
Insured through any fraudulent or dishonest act or
acts committed by any one or more of the Employees;"
"Loss Caused by Unidentifiable Employees
"Loss — Notice — Proof — Action Against Company
"Section 8. Upon knowledge or discovery of loss or
of an occurrence which may give rise to a claim for
loss, the Insured shall: (a) give notice thereof as
soon as practicable to the Company or any of its
authorized agents and, except under Insuring
Agreements I and V, also to the police if the loss is
due to a violation of law; (b) file detailed proof of
loss, duly sworn to, with the Company within four
months after the discovery of loss.
"Upon the Company's request, the Insured shall
submit to examination by the Company, subscribe the
same, under oath if required, and produce for the
Company's examination all pertinent records, all at
such reasonable times and places as the Company shall
designate, and shall cooperate with the ...