Abilene Savings Association v. Westchester Fire Insurance Company, St. Paul Fire and Marine Insurance Company

TUTTLE, Circuit Judge:

This Texas diversity case involves the question whether the failure by an insured to furnish proof of loss to its insurer within the time specified by the bond contract precludes recovery on the bond. Appellee, Abilene Savings Association, as successor to Western Commercial Savings and Loan Association, brought this action against appellant, Westchester • Fire Insurance Company, seeking indemnity under a savings and loan blanket bond for losses sustained by Western Commercial through the misappropriation of funds by a person covered by the bond. The district court, following a jury trial on special interrogatories, held for Abilene Savings. We reverse.

The salient facts are not disputed. Westchester Fire Insui'ance Company (Westchester) provided Western Commercial with blanket bond coverage from November, 1967 until April, 1968. Among other things the bond covered losses occasioned by the dishonest, fraudulent, or criminal acts of Western Commercial’s employees.

During the years 1966 and 1967 an officer of Western Commercial, in five separate transactions, wrongfully misapplied funds belonging to the company. Shortly thereafter a federal examiner uncovered documentary evidence of such misapplication, and on February 28, 1968 Western Commercial sent notice to West-chester of a possible loss under the bond.¹

The bond provided, via rider, that “Within 100 days after discovery of loss under said bond by ¿he Insured . . . the Insured shall furnish to the (Insurer) affirmative proof of loss with full particulars in writing, including dates and items of loss, duly sworn to.” ²

Abilene Savings, into which Western Commercial was merged in December of 1968, subsequently stipulated that it discovered the loss, as contemplated by the bond, on February 28, 1968 when notice was first sent to Westchester. Except for a letter dated February 29, 1968 indicating that the federal examiner’s investigation had turned up evidence of misappropriation, neither Western Commercial nor its successor Abilene Savings communicated with Westchester again until October 24, 1969 when the vice-president of Abilene Savings informed Westchester that the dishonest employee had been indicted by a Federal Grand Jury, and listed the charges against him. On November 26, 1969 an instrument designated “Affirmative Proof of Loss” was submitted to Westchester, but was returned to Abilene Savings on the grounds that it was deficient in several respects. A fully-documented proof of loss was finally forwarded to West-chester on February 6, 1970, nearly two years after the stipulated discovery date.

Following the failure of Westchester to indemnify it, Abilene Savings commenced this action in the United States District Court for the Northern District of Texas. The jury, responding to written questions submitted by the trial court, found that proof of loss had been furnished within a reasonable time after discovery of loss and that Westchester had not been prejudiced by the delay in filing. Judgment was accordingly entered in favor of Abilene Savings and this appeal was taken.

TEXAS LAW

We start with the proposition that under Texas law, which is binding on us in this diversity litigation, blanket bonds such as the one before us are to be construed in the same manner as insurance contracts generally. Great American Insurance Company v. Lang-deau, 379 S.W.2d 62 (Tex.1964). The general rule in Texas is that furnishing timely proof of loss, where such is an express requirement of an insurance contract, is a condition precedent to recovery in the absence of waiver or estoppel. See, e. g., Members Mutual Ins. Co. v. Cutaia, Tex., 476 S.W.2d 278; United States Fidelity and Guaranty Company v. Bimco Iron and Metal Corporation, 464 S.W.2d 353 (Tex.1971); New Amsterdam Casualty Company v. Hamblen, 144 Tex. 306, 190 S.W.2d 56 (1945); Scottish Union and National Insurance Company v. Clancy, 83 Tex. 113, 18 S.W. 439 (1892); Providence Washington Insurance Company v. Whitley, 71 S.W.2d 359 (Tex.Civ.App., Galveston 1934, writ dismissed). In the instant case the bond expressly provided that within 100 days after discovery of loss, proof thereof was to be furnished to Westchester. It is clear, of course, that Abilene Savings did not file its proof of loss within the time required by its contract, for an adequate proof of loss was not submitted to West-chester until nearly two years had elapsed since discovery. Since the proof of loss requirement can be properly characterized as a condition precedent to recovery, Abilene Savings’ failure to furnish such proof within 100 days invalidates its claim for indemnity, unless an exception to the general rule applies.

In Texas either waiver or estoppel will excuse non-compliance with a condition, but since Abilene Savings failed to raise either of these defenses, we need not consider them here.³ It is argued instead that Texas courts follow a liberal rule inasmuch as they are reluctant to declare a forfeiture on insurance policies for failure to make formal proof of loss where no provision for forfeiture is contained in the contract. Concededly the bond contract at issue here contained no provision for forfeiture. However, that fact alone does not in this case preclude application of the general rule that failure to comply with a condition precedent negates recovery on the bond.

The policy against forfeitures has, of course, long provided a judicial perspective for viewing insurance contract disputes involving noncomplianee with conditions precedent. However, the doctrine is limited and requires some affirmative action by the parties which the courts can seize upon as justification for overriding explicit contractual provisions. As the Texas Supreme Court said, “While it is a maxim that forfeitures are odious, the law is not eager to relieve against them; it takes no initiative; and in itself presents no remedy against the contract the parties have themselves made.” Equitable Life Assurance Society v. Ellis, 105 Tex. 526, 147 S.W. 1152, 1156 (1912). We are of the opinion that the case before us presents a situation in which the specific terms of the contract are controlling.

We note that neither Western Commercial nor its successor Abilene Savings made an independent effort to determine how much it had lost, but instead relied on the federal government to furnish the details. Following the correspondences of February 28 and 29, 1968, the insured did not again communicate with West-chester for nearly 20 months, even though its officers knew that proof of loss had to be furnished within a specified time. No attempt was made to secure from Westchester an extension of the time within which to furnish proof. Moreover, the insured’s officers understood the requisites of a formal proof of loss, which normally include an audit of company records, yet no audit was undertaken. The facts thus indicate that Abilene Savings made little or no effort to comply with the terms, of its contract even though it was fully aware of the nature and purport of the proof of loss requirement. The burden was on the insured here to effect substantial compliance with its end of the deal, but in that respect it has been deficient. We do not find in the Texas case law any indication that studied inaction of this sort is sufficient to invoke the policy against forfeiture. That doctrine is applied only where equity and good conscience dictate that recovery be had and this is not such a situation.⁴

Appellee relies chiefly on Aetna Life Insurance Company v. Tipps, 98 S.W.2d 375 (Tex.Civ.App.1936, affd. 132 Tex. 213, 121 S.W.2d 324 (1938) which involved an insurance policy requiring only “due proof”, not as here proof within a specified time. In affirming the Court of Appeals decision upon which appellee relied, the Texas Supreme Court recognized the clear distinction between specific time requirements in an insurance contract and those which are general. It said,

“The policy contains no requirement to furnish the company the usual notice and proof of loss within a specifed time. In fact no element of time enters into the requirement other than that ‘due proof’ of disability be furnished after it had existed for a period of six months ‘during the continuance of this policy’. . . . How long after, or what shall be considered ‘due proof’ is not specified in the policy. Cases cited by the company in support of its contention that the clause in question was not complied with . . . are not in point. The requirements to be met in those cases as conditions precedent to recovery are specific. In the present case the requirement is wholly general.” 121 S.W.2d 327.

Moreover, the court concluded that the due proof requirement had in fact been complied with and thus, while the Tipps ease is distinguishable from the instant one, it nonetheless supports the principle which we find is controlling in this case. Cf. Connecticut General Life Insurance Company v. Kornegay, 93 S.W.2d 164 (Tex.Civ.App. Beaumont 1936, writ dismissed).

Where the parties have bargained freely and on equal terms their contract ought not be extended by implication or enlarged by construction beyond the- actual terms of the agreement entered into by the parties. Great American Insurance Company v. Langdeau, supra. They have made their own contract and it is not for the court “to vary their terms in order to protect them from the consequences of their . . . failures in nonobservance of obligations assumed.” Dorroh-Kelly Mercantile Company v. Orient Insurance Company, 104 Tex. 199, 135 S. W. 1165, 1167 (1911). The obligation assumed in this instance by Western Commercial was to furnish Westchester with proof of loss within 100 days after discovery, and, absent circumstances which would require a different result, that obligation is binding.

Notwithstanding the above appellee urges that it is entitled to recovery on the basis of Article 5546, Vernon’s Tex.Civ. Statutes which provides:

“No stipulation in a contract requiring notice to be given of a claim for damages as a condition precedent to the right to sue thereon shall ever be valid unless such stipulation is reasonable. Any such stipulation fixing the time within which such notice shall be given at a less period than ninety days shall be void. . . . ” (Emphasis added.)

The statute on its face applies only to requirements for giving notice and thus we are faced with the threshold question as to its applicability to proof of loss stipulations. On this issue there would appear to be a split of Texas authority ⁵ which we do not here attempt to resolve. Even if we assume that the statute does apply to proof of loss provisions, the 100 days requirement in the bond here at issue is not thereby rendered automatically void. Inasmuch as the bond provision exceeds 90 days it is void only if the provision itself is unreasonable, and that is a question of fact for the jury to determine. See, e. g., Missouri, K & T Ry of Texas v. Newton, 60 Tex.Civ.App. 110, 127 S.W. 873 (1910, writ refused). That question was not before the jury in the trial below, and since appellee neither submitted a requested instruction on the issue nor objected when none was given, it must be deemed to have waived the point.⁶

For the foregoing reasons we are of the opinion that Abilene Savings cannot recover on this bond. The contract is unambiguous and the parties thereto, being on equal terms, should be held to the obligations they assumed.

The judgment is reversed and the case is remanded to the trial court with directions to enter a judgment for the defendant on its motion N.O.V.

1 . Notice was also sent to St. Paul Fire and Marine Insurance Company which provided coverage from June, 1965, to November, 1967, and which was an original defendant to this action. However, the District Court entered summary judgment in favor of St. Paul and it is not involved in this appeal.

2 . Although we do not consider it essential to the construction we place upon this bond, it is nevertheless noted that the requirement for furnishing proof of loss within 100 days was expressly made a “condition” of the bond. The language is “The Foregoing Insuring Agreements and General Agreements are Subject To the Following Conditions and Limitations” of which a sub-part entitled “Loss-Notice-Proof-Legal Proceedings” is one. The rider, specifying that proof of loss shall be furnished within 100 days, merely modifies this provision. The rider provides that “(t)he attached bond shall be subject to all its terms, agreements, limitations, and conditions except as herein modified” which indicates that the terms of the original proof of loss provision were altered, but not its status as a condition.

3 . Since waiver may be effective even after the time for performance has passed, United States F & G v. Bimco Iron and Metal Corp., supra, there may have been a question of fact as to the existence of waiver in this case. We note that long after the 100 day limit had elapsed, West-chester continued to act as though it were nonetheless contemplating indemnification of the loss to Abilene Savings. For instance when Abilene Savings first submitted the instrument designated “Affirmative Proof of Loss” on November 26, 1969, Westchester returned the instrument to Abilene Savings on the grounds that it was incomplete and required greater detail. Having complied with this request for more information, Abilene Savings was assured by Westchester that its claim was receiving “closest attention”. Indeed not until this suit was brought is there any indication that West-chester intended not to indemnify Abilene Savings because of failure to furnish proof of loss within the time specified in the contract.

4 . For instance courts have granted recovery despite failure of timely proof where formal proof of loss would be an idle ceremony, Continental Insurance Company of New York v. Nabors, 6 S.W.2d 151 (Tex.Civ.App. Ft. Worth 1928), where proofs were timely filed but the insurer rejected them as unsatisfactory, Sun Mutual Insurance Company v. Mattingly, 77 Tex. 162, 13 S.W. 1016 (1890), where the insured was too ill to attend to business, Love v. Northwestern National Life Insurance Company, 119 F.2d 251 (C.A.5 1941). In addition it has been held that ignorance of the existence of an insurance policy, unmixed with negligence, excuses an untimely filing. Whitehead v. National Casualty Company, 273 S.W.2d 678 (Tex.Civ.App. Ft. Worth, 1954, Error refused). None of these mitigating circumstances is present in the instant case.

5 . Compare Texas Farm Bureau Mutual Insurance Company v. Carnes, 416 S.W.2d 863 (Tex.Civ.App. Corpus Christi 1967, writ refused) with Austin v. Aetna Casualty and Surety Company, 300 S.W. 638 (Tex.Comm.App., Judgment adopted by Texas Sup.Ct., 1927).

6 . The trial court instructed the jury to ascertain whether proof of loss in this case was filed within a reasonable period of time after discovery of loss. Although the jury responded in the affirmative, that determination does not constitute a finding that the bond provision stipulating a shorter time was unreasonable.