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FORT SMITH TOBACCO & CANDY v. AM. GUAR. & L. INS.

September 5, 1962

FORT SMITH TOBACCO & CANDY COMPANY, PLAINTIFF,
v.
AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, DEFENDANT.



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 policy.

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 plaintiff, Fort Smith Tobacco & Candy Company, is a corporation incorporated under the laws of the State of Arkansas with its principal office and place of business in Fort Smith, Arkansas.

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 Company.

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:

Cigarettes                                       $5,672.77
Drugs and sundries                                 1,215.23
Appliances                                         7,388.13
Miscellaneous items                                3,193.63
Fort Chaffee account                               6,215.10
Cash collections                                   2,851.65
                                                 ----------
    Total                                        $26,536.51

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 23, 1959.

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 loss.)

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
  Section 2(b)."

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 thereto.

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 Agency stated:

    "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
  report."

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.
    "This matter involving Robert D. Hardcastle was
  more complicated because Hardcastle took the position
  that he was responsible for a definite amount of loss
  that he had computed or had kept a record of while
  his dishonest acts were in progress. The insured at
  that time discovered a substantial inventory shortage
  and felt that Hardcastle was fully responsible for
  that condition. I recall talking to Mr. Bradney on a
  couple of different occasions concerning the progress
  of his investigation and we were promised a full
  report as soon

  as all of the investigation could be completed.
  Regardless of our inquiries considerable time passed
  by before we received a report on April 26, 1960,
  advising that Mr. Bradney was no longer with the firm
  and that his services had been terminated because of
  his dereliction of his duties. Unfortunately this
  case was among those that were neglected. The
  Casualty Adjustment Company is now endeavoring to put
  this file in the best possible shape to give us the
  benefit of the investigation that was done. We hope
  to know more about the entire situation within the
  next few weeks.
    "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
  appropriate."

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,
  1959.";

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 of plaintiff.)

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
  Insured for:

"INSURING AGREEMENTS

"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
  Agreement I.

"GENERAL AGREEMENTS

"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
  occurred; and
    "(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
  Period.

"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
  period;"

Section 2(b) under Exclusions reads:

"Exclusions

"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;"

Section 4 reads:

"Loss Caused by Unidentifiable Employees

    "Section 4. If a loss is alleged to have been
  caused by the fraud or dishonesty of any one or more
  of the Employees and the Insured shall be unable to
  designate the specific Employee or Employees causing
  such loss, the Insured shall nevertheless have the
  benefit of Insuring Agreement I, subject to the
  provisions of Section 2(b) of this Policy, provided
  that the evidence submitted reasonably proves that
  the loss was in fact

  due to the fraud or dishonesty of one or more of the
  said Employees, and provided, further, that the
  aggregate liability of the Company for any such loss
  shall not exceed the Limit of Liability applicable to
  Insuring Agreement I."

Section 8 reads:

"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 ...

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