Lynch Properties, Inc. v. Potomac Insurance , 140 F.3d 622 ( 1998 )

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
____________
No. 96-11465
____________
LYNCH PROPERTIES INC,
Plaintiff - Appellant,
versus
POTOMAC INSURANCE COMPANY OF ILLINOIS,
Defendant - Appellee.
Appeal from the United States District Court
For the Northern District of Texas
May 19, 1998
Before JONES, EMILIO M. GARZA, and PARKER, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Lynch Properties, Inc. (“Lynch Properties”) appeals the
district court’s grant of summary judgment for Potomac Insurance of
Illinois (“Potomac”). The district court held that an employee
dishonesty insurance policy issued by Potomac to Lynch Properties
did not cover the misappropriation of money by a Lynch Properties
employee from a customer’s separate personal bank account. We
affirm.
I
Potomac Insurance of Illinois (“Potomac”) issued a master
1
insurance policy to Lynch Properties, covering liability, property
loss, and employee dishonesty. This action arose when Lynch
Properties discovered that Eva Bartlett, a bookkeeper whom it
employed, had misappropriated money from the separate personal bank
account of Martha Lynch (“Mrs. Lynch”). Mrs. Lynch, the mother of
Harry Lynch, president of Lynch Properties, paid Lynch Properties
an annual lump sum fee to manage her property and investments
pursuant to an oral contract. Mrs. Lynch also paid Lynch
Properties to perform bookkeeping services for her personal bank
accounts. These bookkeeping services included writing checks to
pay bills, reconciling bank account statements, and preparing
financial statements. The personal bank accounts in question were
held first at Cullen Frost Bank, and later at Comerica Bank, all in
Mrs. Lynch’s own name. The funds in the personal bank accounts did
not derive from Lynch Properties investments or property, and no
formal written agreement existed for Lynch Properties’ handling of
these funds.
Eva Bartlett kept the books for Mrs. Lynch’s investment and
personal bank accounts and handled requests for spending money by
Mrs. Lynch. At least every week, Bartlett prepared a $600 check
drawn on Mrs. Lynch’s personal accounts, obtained an authorized
signature on the check, went to the bank, cashed the check, and
then gave the cash to a courier service for delivery to Mrs. Lynch.
Only Mrs. Lynch, Harry Lynch, and Mrs. Lynch’s other son, Bill
Lynch, had the authority to sign checks drawn on these personal
accounts. By periodically drawing up an extra $600 check, which
2
she had Harry Lynch sign, and then cashing the check and pocketing
the cash, Bartlett ultimately misappropriated approximately $19,000
from Mrs. Lynch’s personal bank accounts.
When Lynch Properties discovered that funds were missing from
the personal bank accounts, it reimbursed Mrs. Lynch and filed a
claim under the employee dishonesty portion of the policy issued by
Potomac. Potomac denied coverage after investigating the claim,
and this suit followed. The district court granted Potomac’s
summary judgment motion, concluding that no material dispute of
fact existed to show that Lynch had suffered a loss under the
policy. Lynch Properties’ timely appeal followed.
II
We review a district court’s grant of summary judgment motion
de novo. See New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d
336, 338 (5th Cir. 1996). We also review district court
determinations of state law de novo. See Salve Regina College v.
Russell, 499 U.S. 225, 239, 111 S. Ct. 1217, 1221, 113 L. Ed. 2d
190 (1991). Summary judgment is appropriate where the record
discloses “that there is no genuine issue of material fact and that
the moving party is entitled to a judgment as a matter of law.”
FED. R. CIV. P. 56(c). The moving party bears the initial burden
of identifying those portions of the pleadings and discovery in the
record that it believes demonstrate the absence of a genuine issue
of material fact, but is not required to negate elements of the
nonmoving party’s case. See Celotex Corp v. Catrett, 477 U.S. 317,
325, 106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). Once the
3
moving party meets this burden, the nonmoving party must set forth
specific facts showing a genuine issue for trial and not rest upon
the allegations or denials contained in its pleadings. See FED. R.
CIV. P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-
57, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986). Factual
controversies are construed in the light most favorable to the
nonmovant, but only if both parties have introduced evidence
showing that an actual controversy exists. See Little v. Liquid
Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). “We do
not, however, in the absence of any proof, assume that the
nonmoving party could or would prove the necessary facts.” Id.;
Lujan v. National Wildlife Fed’n, 497 U.S. 871, 888, 110 S. Ct.
3177, 3189, 111 L. Ed. 2d 695 (1990).
This case comes before us through diversity jurisdiction, and
we accordingly apply Texas law as we believe the Texas Supreme
Court would. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78-79, 58
S. Ct. 817, 822, 82 L. Ed. 518 (1938). The Texas Supreme Court has
stated that the rules of interpretation and construction generally
applicable to contracts are equally applicable to insurance
contracts. See National Union Fire Ins. Co. v. CBI Indus., Inc.,
907 S.W.2d 517, 520 (Tex. 1994). Effectuating the true intent of
the parties as expressed in the insurance policy is the primary
concern of the court. See Forbau v. Aetna Life Ins. Co., 876
S.W.2d 132, 133 (Tex. 1994). We construe the policy to give effect
to each term in the contract and to avoid rendering any term a
nullity. See Ideal Mut. Ins. Co. v. Last Days Evangelical Ass’n,
4
783 F.2d 1234, 1238 (5th Cir. 1986). However, “[n]o one phrase,
sentence, or section [of a contract] should be isolated from its
setting and considered apart from the other provisions.” Forbau,
876 S.W.2d at 132-33. We also attempt to interpret uniformly the
provisions of the policy where, as here, the provisions at issue
are similar across jurisdictional borders. See National Union Fire
Ins. Co., 907 S.W.2d at 522. Thus, when no Texas court has
interpreted a particular provision, we look to the courts of other
states for guidance as to how the Texas Supreme Court might
interpret an issue. See Dickson v. State Farm Lloyds, 944 S.W.2d
666, 668 (Tex. App. 1997, n.w.h.) (interpreting insurance policy
provision no Texas court had previously addressed by looking to the
courts of other states).
If the provisions of the insurance contract can be given a
“definite or certain legal meaning,” then the insurance policy is
not ambiguous. See National Union Fire Ins., 907 S.W.2d at 520.
Disagreement over the meaning or interpretation of a term is not
sufficient to make a provision ambiguous or to create a question of
fact. See D.E.W., Inc. v. Local 93, Laborers’ Int’l Union, 957
F.2d 196, 199 (5th Cir. 1992). However, if an ambiguity exists in
a provision of a policy, that provision is interpreted in favor of
the insured. See Toops v. Gulf Coast Marine Inc., 72 F.3d 483, 486
(5th Cir. 1996).
III
In the part of the policy that covers property loss due to
employee dishonesty, Potomac promises to pay Lynch Properties for
5
the loss of Covered Property resulting directly from a Covered
Cause of Loss. “Covered property” is defined as money, securities,
and property other than money and securities. The “covered cause
of loss” is defined as employee dishonesty. However, another
provision, the “Interest Covered” provision, limits property loss
coverage to property (a) “[t]hat you own or hold,” or (b) “[f]or
which you are legally liable,” with “you” being the named insured,
Lynch Properties.
The district court found that the employee dishonesty policy
was not ambiguous and that the “Interest Covered” provision
excepted this particular loss from coverage under the policy
because Lynch Properties neither owned, held, nor was legally
liable for the funds. It found the connection between Lynch
Properties and the funds in Mrs. Lynch’s personal accounts to be
tenuous, specifically finding that these funds were private, in
Mrs. Lynch’s name, and completely separate from the funds that
Lynch Properties maintained in its own accounts. Moreover, it
found that no written agreement for management of the separate
personal bank accounts existed, and that Mrs. Lynch’s arrangement
with Lynch Properties was based on family ties. As a result, the
court concluded that “the capacity in which Lynch handled Ms.
Lynch’s funds falls short of that involved in the cases Lynch cites
to demonstrate that the ‘hold’ or ‘legally liable’ provisions
trigger coverage in this case.” We agree.
A
We first examine whether Lynch Properties “held” the funds
6
that Bartlett misappropriated from Mrs. Lynch’s separate personal
bank accounts. Lynch Properties presents numerous cases that it
claims stand for the principle that employee dishonesty policies
cover the loss of third-party property possessed or held by the
insured by an employee. The policy language or manner in which the
property was possessed or held in each cited case differs, however,
from that in this case. See Fidelity & Deposit Co. v. USAFORM Hail
Pool, Inc., 523 F.2d 744, 753-54 (5th Cir. 1975) (involving funds
held in a trust account); Elmer Fox & Co. v. Commercial Union Ins.
Co., 274 F. Supp. 235, 239-40 (D. Colo. 1967) (interpreting an
employee dishonesty policy that covered property “held by the
Insured in any capacity”); Alberts v. American Cas. Co., 200 P.2d
37, 39-41 (Cal. Ct. App. 1948) (interpreting a contract that
covered any case in which insured might be liable as “bailee,
trustee or agent, and whether or not the plaintiffs are legally
liable for the loss thereof”); American Employers’ Ins. Co. v.
Johnson, 47 S.W.2d 463, 464, 466 (Tex. Civ. App. 1932, writ dism’d
w.o.j.) (interpreting policy that covered any “pecuniary loss . .
. (including that for which the Employer is responsible) by any act
or acts of fraud, . . . [or] embezzlement”). Whether the Potomac
policy covers Bartlett’s misappropriation of funds from Mrs.
Lynch’s personal bank accounts must be answered by reference to
this contract’s specific language that defines the property
covered. See Cumis Ins. Soc’y v. Republic Nat’l Bank, 480 S.W.2d
762, 766 (Tex. Civ. App. 1972, writ ref’d n.r.e.).
Potomac’s policy uses only the word “hold” in place of the
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broad language in the above cases. While no Texas court has
addressed the meaning of “hold” without the accompanying phrase “in
any capacity,” see Cumis Ins. Soc., Inc., 480 S.W.2d at 763
(interpreting a contract which covers for the loss of property
which is “held by the Insured in any capacity, and whether or not
the Insured is liable therefore”), Financial Institution Bond,
Standard Form No. 24, the industry standard form issued by the
Surety Association of America on which this policy is based,
provided a broad definition of property coverage in the version
published in 1969.1 By 1980, the Surety Association had
1
The 1969 version of Standard Form 24 provided coverage in
relevant part for:
(A) Loss through any dishonest or fraudulent act of any
of the Employees, committed anywhere and whether
committed alone or in collusion with others, including
loss, through any such act of any of the Employees, of
property held by the Insured for any purpose or in any
capacity and whether so held gratuitously or not and
whether or not the Insured is liable therefor.
Karen Wildau, Evolving Law of Third-Party Claims Under Fidelity
Bonds: When is Third Party Recovery Allowed?, 25 Tort & Ins. L. J.
92, 99 (1989). Property was defined by the 1969 bond as “[m]oney
. . . and all other instruments . . . in which the Insured has an
interest . . . or which are held by the Insured for any purpose or
in any capacity and whether so held gratuitously or not and whether
or not the Insured is liable therefore.” Id. at 93. The 1980
version of Standard Form 24 amended this language to cover only:
Property (1) owned by the Insured, (2) held by the
Insured in any capacity, or (3) for which the Insured is
legally liable. This bond shall be for the sole use and
benefit of the Insured named in the Declarations.
Id. at 94. Significantly, this definition of property omitted all
mention of property “held by the Insured for any purpose.” Id. at
94. Standard Form 24 was again altered in 1986, but the provisions
relating to property described above were not changed. Id.
Potomac’s policy is even more restrictive than the 1986 version of
Standard Form 24 because it has omitted “in any capacity” that
8
significantly limited property coverage by means of restricting the
definition of “Interest Covered.” These changes reflect, as
several commentators have noted, an intent to restrict coverage.
See Karen Wildau, Evolving Law of Third-Party Claims Under Fidelity
Bonds: When is Third Party Recovery Allowed?, 25 TORT & INS. L. J.
92, 93-94 (1989); Duncan L. Clore, Suits Against Financial
Institutions: Coverage and Considerations, 20 FORUM 84, 85-86
(1984). Therefore, we reject Lynch Properties’ argument that the
scope of the word “hold” is equivalent to the phrase “hold in any
capacity,” and as such, we do not find the cases Lynch Properties
presents to be persuasive.
Lynch Properties’ citation to cases mentioning bailment
suggests that it believes that a bailment arrangement is one way in
which it might have “held” Mrs. Lynch’s misappropriated funds.2
See, e.g., American Empire Ins. Co, 408 F.2d at 77. On the facts
of this case, however, Lynch Properties never had a bailment over
the cash or the funds in those accounts. Under Texas law, the
elements of a bailment are: (1) delivery of personal property by
one person to another to be used for a specific purpose; (2)
acceptance of such delivery; and (3) an express or implied contract
that the purpose will be carried out and the property will then be
previously followed “hold.”
2
Although an insured may very well “hold” property in ways
other than a bailment))an issue about which we decline to
speculate))Lynch fails to suggest any other way it may have “held”
either the cash or the funds in the account under these facts.
Accordingly, we limit our discussion of the term “hold” to
bailment.
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returned or dealt with as otherwise directed. See Braniff Airways,
Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1038 (5th Cir. 1987).
Assuming bank accounts are personalty, Mrs. Lynch never “delivered”
her personal bank accounts to Lynch Properties because they
remained listed in her name at the bank, which means that no
bailment existed over the accounts or the funds in the accounts.
Furthermore, Bartlett’s physical possession of the cash did not
result in Lynch Properties “holding” the cash because no bailment
existed with respect to Bartlett’s wrongful physical possession of
cash from Mrs. Lynch’s personal bank accounts. When Bartlett
intended to wrongfully take funds from Mrs. Lynch’s personal bank
accounts, she always accomplished this act by having Harry Lynch
sign an extra check. No evidence exists in the summary judgment
record that when Bartlett cashed that extra check, she took that
cash with the intention of returning it to Mrs. Lynch. Thus, no
bailment resulted, and Lynch Properties did not “hold” the cash as
a result of Bartlett’s wrongful possession of that cash.
Lynch Properties also argues that it “clearly held” the checks
that Bartlett took but fails to explain why the loss of the checks
should be equated with the loss of the funds from Mrs. Lynch’s
personal bank accounts. By arguing that it “held” the checks,
Lynch Properties is in effect arguing that an employee’s theft of
property that an employer does not “hold” using property that an
employer “holds” causes the employer to constructively “hold”
property that it otherwise would not “hold.” Lynch Properties
cites no authority to support its argument, and indeed it could not
10
on the facts of this case. See Texas Pac. Indem. Co. v. Atlantic
Richfield Co., 846 S.W.2d 580, 530 (Tex. App. 1993, writ denied)
(explaining that the coverage of an employee dishonesty policy
“cannot be extended by implication, or enlarged by construction,
beyond the actual terms of the agreement entered into by the
parties”). Only Martha, Harry, and Bill Lynch had signature
authority on Mrs. Lynch’s separate personal bank accounts.
Bartlett did not simply wrongfully take a check and cash it.
Rather, she prepared an extra check and had Harry Lynch sign it.
Lynch Properties also failed to adduce any evidence that Harry
Lynch signed checks on Mrs. Lynch’s personal bank accounts as Lynch
Properties’ representative and not as Martha Lynch’s son. As the
district court noted, this family authorization requirement
evidences the tenuousness of the connection between Lynch
Properties as the insured company and the funds in Mrs. Lynch’s
personal bank accounts. Accordingly, even though Lynch Properties
had possession of the checks, the possession of those checks did
not result in it “holding” the funds in Mrs. Lynch’s personal bank
accounts or the cash from those accounts.
Pointing to several portions of the deposition of Darryl
Davis, a Potomac supervisor whom Potomac designated as its
representative for purposes of its deposition, Lynch Properties
also argues that Potomac admitted that Lynch Properties “held” the
funds in Mrs. Lynch’s personal accounts. We have reviewed the
deposition and do not find any specific testimony that could be
construed as Davis admitting that Lynch Properties “held” the funds
11
in Mrs. Lynch’s personal bank accounts. Accordingly, we reject
this contention by Lynch Properties.
B
Turning to the “legally liable” provision, we again note that
the parties have not brought to our attention relevant cases.
Lynch Properties presents various cases that interpret fidelity
bonds and employee dishonesty insurance policies that cover
“whether or not the Plaintiff is legally liable.” See USAFORM Hail
Pool, Inc., 523 F.2d at 752-53 (interpreting policy that provided
coverage where “the Insured property may be owned by the Insured or
held by the Insured in any capacity whether or not the Insured is
liable for the loss thereof, or may be as respects which the
Insured is legally liable”); American Employers Ins. Co., 47 S.W.2d
at 464-65 (interpreting policy which covered “money or other
personal property (including that for which the Employer is
responsible)”). We do not find these cases to be persuasive
because when the Surety Association of America altered Standard
Form 24, on which Potomac’s policy is based, by replacing “whether
or not the Plaintiff is legally liable” with “legally liable,” it
intended to narrow the coverage of the policy. See Wildau, supra,
at 93-94; Clore, supra, at 84.
On the other hand, the cases that Potomac presents are
irrelevant because they decide whether third parties have standing
to directly bring suit against an insurer to recover for the loss
of their property by an employee of the insured. See 175 East 74th
Corp. v. Hartford Accident & Indem. Co., 416 N.E.2d 584, 587-88
12
(N.Y. 1980); Louisiana, Through Dep’t of Transp. and Dev. v. Acadia
Parish Police Jury, 631 So. 2d 611, 614 (La. Ct. App. 1994). Such
cases are irrelevant because Lynch Properties, the named insured,
brings this action.
Employee dishonesty policies insure against the risk of
property loss through employee dishonesty. See 175 East 74th
Corp., 416 N.E.2d at 587. Liability policies, by contrast, require
an insurer to discharge an obligation of the insured to a third
party for some act of the insured or its employee. Id. at 587.
Although employee dishonesty policies may cover the loss of third-
party property in the possession of the insured, see, e.g., First
Nat’l Bank v. Fidelity & Cas. Co., 634 F.2d 1000 (5th Cir. 1981),
these polices do not serve as liability insurance to protect
employers against tortious acts committed against third-parties by
their employees. See Gulf Bldg. Servs. v. Travelers Indem. Co.,
435 So. 2d 477, 479 (La. Ct. App. 1983) (holding that an employee
dishonesty insurance policy did not cover damage to a customer’s
property resulting from a fire set by the insured’s employee
working in the customer’s building). Mere insertion of the words
“legal liability” into an employee dishonesty policy does not
transform the policy into a liability policy. See, e.g., Acadia
Ins. Co. v. NcNeil, 116 F.3d 599, 602-03 (1st Cir. 1997); First
Nat’l Bank v. Lustig, 975 F.2d 1165, 1166-67 (5th Cir. 1992);
Anderson v. Employers Ins., 826 F.2d 777, 780 (8th Cir. 1987); 175
East 74th Corp., 416 N.E.2d at 587-88.
In this case, the policy stated “[t]he property covered under
13
this insurance is limited to property . . . for which you are
legally liable.” Lynch Properties argues that it was legally
liable for the misappropriation because Bartlett was responsible
for writing checks, having Harry Lynch sign them, and balancing
Mrs. Lynch’s separate personal accounts. It does not argue,
however, that it was legally liable for the funds prior to their
theft. Instead, it argues only that once Bartlett misappropriated
the funds, it became liable to Mrs. Lynch to replace those funds
and that Potomac must indemnify it for that reimbursement because
Bartlett stole the funds in the course of her duties at Lynch
Properties. While Lynch Properties thereby argues how it may be
vicariously liable for Bartlett’s acts,3 this argument fails to
show how it was “legally liable” for the stolen property itself,
that is, for the funds in Mrs. Lynch’s account. Acceptance of
Lynch Properties’ argument would mean that Potomac’s policy would
cover any loss where an employee takes a customer’s property in the
course of their employment responsibilities, regardless of whether
the employer had any interest in the property itself. Furthermore,
it would transform this policy, which insures property loss for
which Lynch Properties is legally liable, into a policy insuring
any vicarious liability arising from an employee’s dishonesty.
This argument is foreclosed by the plain language of the “Interest
3
We express no opinion as to whether Lynch Properties or
Bartlett would be liable to Mrs. Lynch for Bartlett’s
misappropriation of money. Lynch Properties has reimbursed Mrs.
Lynch for the missing money, and this issue is not before us. We
merely hold that the words “legally liable” refer to the property
interest that Lynch Properties must have to trigger coverage under
the employee dishonesty policy.
14
Covered” provision, which requires that the employer have some
interest in the misappropriated property, whether that be because
the employer owns, holds, or is legally liable for the property.
Cf. Hudiburg Chevrolet, Inc. v. Globe Indem. Co., 394 S.W.2d 792
(Tex. 1965) (holding that insurance contract provisions that cover
property at a specified location for which the insured is liable
insure against loss of the property and do not indemnify the
insured against tort or contractual liability to the owner of the
property).
Our conclusion is reinforced by the fact that the employee
dishonesty insurance policy under which Lynch Properties seeks
indemnification is part of a master policy issued by Potomac. This
master policy includes both liability and property coverage. Under
the liability part of the policy, Potomac agrees to pay amounts for
which Lynch Properties is legally liable. Liability coverage is
triggered by an “occurrence,” which the policy defines as “an
accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” Under Texas
law, intentional and volitional acts are not “occurrences” that can
trigger liability coverage. See Union Mut. Ins. Cos. v. Stotts,
837 F. Supp. 814, 816 (N.D. Tex. 1993); Argonaut Southwest Ins. Co.
v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). Similarly, under the
property coverage, section III.F of the “Special Extended Coverage
Endorsement” specifically excludes losses “caused by any willful or
dishonest act or omission of the Insured or . . . any employee of
any Insured.” Without deciding the applicability of either of
15
these policies, the existence of these other parts of the master
policy indicates that the words “legally liable” in the “Interest
Covered” provision of the employee dishonesty policy were intended
only to limit the property that would be covered under that policy,
and not to extend coverage to the theft of customer property by the
insured’s employees where the insured has no interest in the
misappropriated property.
III
In light of our conclusion that Mrs. Lynch’s misappropriated
funds do not fall within the “Interest Covered” under the employee
dishonesty policy issued by Potomac, we decline to address the
other grounds on which the district court based its decision.
Furthermore, because Potomac accordingly had a reasonable basis on
which to deny Lynch Properties’ claim, we affirm the district
court’s denial of Lynch Properties’ extra-contractual state law
claims for failure to pay Lynch Properties’ claim. See Aranda v.
Insurance Co., 748 S.W.2d 210, 213 (Tex. 1988).
For the foregoing reasons, the decision of the district court
is AFFIRMED.
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