Private Bank Trust v. Progressive Casual

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-2515
PRIVATE BANK &
TRUST COMPANY,
Plaintiff-Appellant,
v.
PROGRESSIVE CASUALTY
INSURANCE COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 03 C 6031—Amy J. St. Eve, Judge.
____________
ARGUED DECEMBER 1, 2004—DECIDED MAY 27, 2005
____________
Before FLAUM, Chief Judge, and EVANS and SYKES, Circuit
Judges.
SYKES, Circuit, Judge. This is an insurance coverage dis-
pute arising from a fraud that caused a loss to the Private
Bank & Trust Company. A man using a false identity,
phony corporate documents, and stolen checks opened a cor-
porate account at Private Bank’s branch office in Wilmette,
Illinois. Two days later, when the funds were cleared for
use, he withdrew more than $400,000 from the account by
telephone. The fraud was eventually discovered, and the
2 No. 04-2515
bank filed a claim with its insurer, Progressive Casualty
Insurance Company. Progressive denied the claim, Private
Bank sued, and the district court granted summary judg-
ment in favor of the insurance company.
We affirm. The financial institution bond at issue in this
case covers losses “resulting directly from theft, false pre-
tenses . . . or . . . larceny committed by a person present in
an office or on the premises of the Insured.” The perpetrator
of the fraud in this case was not present in the bank at the
time he made the telephone withdrawal which caused the
bank’s loss. The bond’s fraud coverage is expressly limited
to losses that occur when the perpetrator of the fraud is
present on the premises of the insured. We decline to adopt
a rule of construction that would expand the bond’s “on
premises” fraud coverage to include losses from off-premises
transactions that are preceded by on-premises fraudulent
acts.
I. Background
On April 14, 2003, a man purporting to be “Lawrence
Goodman” entered Private Bank’s branch office in Wilmette
and opened a corporate checking account. Representing
himself as an employee of BBI Enterprises, Inc., “Goodman”
presented an Illinois driver’s license; articles of incorpora-
tion and an IRS Employer Identification Number for BBI
Enterprises; and an employee identification card purport-
edly issued by BBI which, like the driver’s license, showed
“Goodman’s” photograph. “Goodman” deposited two checks
worth a total of $461,057.18 drawn on the account of Lear
Corporation and made payable to “BBI Enterprises, Ltd.”
The Private Bank employee who opened the account for
“Goodman” did not require his endorsement but instead
endorsed both checks with a bank stamp.
Two days later, as soon as the deposited funds were
cleared for use, “Goodman” purchased approximately 1,160
No. 04-2515 3
gold coins from a Chicago merchant who also owned an
account at Private Bank. “Goodman” telephoned the bank
and requested a transfer of $400,200 from the recently
opened BBI account into the account of the gold dealer.
Private Bank honored the telephonic request and the funds
were transferred. Approximately two weeks later, Private
Bank discovered that “Goodman” was actually one Robert
A. Manola and the two checks he presented for deposit were
stolen. The company Manola pretended to represent was a
sham entity created for the purpose of stealing money from
the real BBI Enterprises.
Apparently not satisfied with the proceeds of the fraudu-
lent telephone transfer, Manola returned to the bank a few
weeks later and attempted to withdraw the remaining money
from the account. He was promptly arrested. However,
Private Bank could not recover the funds it had transferred
out of the account, so it filed a claim with Progressive under
the “on premises” fraud coverage of its Financial Institution
Bond. The “on premises” clause of the bond provides:
The Underwriter . . . agrees to indemnify the Insured
for:
(B)(1) Loss of Property resulting directly from . . .
(b) theft, false pretenses, common-law or stat-
utory larceny, committed by a person present in
an office or on the premises of the Insured
while the Property is lodged or deposited within
the offices or premises located anywhere.
Progressive denied the bank’s claim and this lawsuit en-
sued. The parties filed cross-motions for summary judgment.
The district court granted Progressive’s motion, holding
that the “on premises” fraud coverage of the insuring agree-
ment required that the person causing the loss be physi-
cally present on the insured’s premises when the loss
occurs. The loss in this case occurred when Manola initiated
the $400,200 telephone transfer while off the bank’s
4 No. 04-2515
premises. Citing this court’s decision in Alpine State Bank
v. Ohio Casualty Insurance Co., 941 F.2d 554 (7th Cir.
1991), the district court rejected the bank’s argument that
Manola’s presence on the bank’s premises at the time he
opened the account was sufficient to trigger the bond’s “on
premises” fraud coverage. Because Manola was not present
in the bank when he made the withdrawal that caused the
bank’s loss, the court concluded that the “on premises”
fraud coverage did not apply.1 Private Bank appeals.
II. Discussion
The facts of this case are undisputed. We are presented
with a question of insurance policy interpretation, which is
a question of law that is reviewed de novo. Alpine, 941 F.2d
at 559 (citing First Nat’l Bank Co. v. Ins. Co. of N. Am., 606
F.2d 760, 768 (7th Cir. 1979)). Under Illinois law, which
governs this case, “an insurance policy that contains no
ambiguity is to be construed according to the plain and
ordinary meaning of its terms, just as would any other
contract.” Nat’l Fid. Life Ins. Co. v. Karaganis, 811 F.2d 357,
361 (7th Cir. 1987); U.S. Fire Ins. Co. v. Schnackenberg, 429
N.E.2d 1203, 1205 (Ill. 1981). The precise question here is
whether the “on premises” fraud coverage in a standard
financial institution bond covers a loss that results from an
off-premises fraudulent withdrawal that is preceded by
fraudulent acts committed on the insured bank’s premises.
The bond at issue in this case is a Financial Institution
Bond Standard Form No. 24, the descendant of a series of
1
The district court held in the alternative that even if the bond’s
“on premises” coverage applied, the “erroneous deposits” exclusion,
contained in “exclusion (n),” precluded coverage. Because we
affirm the district court’s conclusion that the bond’s “on premises”
fraud coverage does not apply, we need not discuss the applicabil-
ity of the exclusion.
No. 04-2515 5
bonds once known as “banker’s blanket bonds.” First mar-
keted by Lloyd’s of London in 1911, the blanket bond
combines in a single instrument various types of unrelated
coverage that were previously the subject of separate
policies. See 9A JOHN ALAN APPELMAN & JEAN APPELMAN,
INSURANCE LAW AND PRACTICE § 5701, at 375-76 (1981);
Peter I. Broeman, An Overview of the Financial Institution
Bond, Standard Form No. 24, 110 BANKING L.J. 439, 442-43
(1993). The first American banker’s blanket bond, developed
by the Surety Association of America in cooperation with
the American Bankers Association in 1916, covered employee
dishonesty, loss of property on premises or in transit
through robbery or theft, as well as other risks. Broeman,
supra at 443. The bond achieved its present general form in
1941 when Standard Form 24 appeared. Id. In 1986 the
phrase “banker’s blanket bond” was officially dropped in
favor of the present name to discourage the erroneous belief
that the contract covered any and all losses incurred by
banks. Id. at 442. Although generalizations about the pur-
pose of any insurance policy must always be evaluated in
light of specific policy language, it has been said that the
financial institution bond generally protects against risks
of dishonesty, both internal and external, but does not cover
losses caused by poor management or insure against risks
inherent in banking operations. See APPELMAN, supra,
§ 5701, at 380.
The “on premises” insuring agreement is one of four basic
insuring agreements in Private Bank’s bond (additional
coverage was purchased through optional insuring agree-
ments and riders). Section (B)(1)(a) of the “on premises”
agreement covers losses resulting directly from robbery,
burglary, misplacement, and “mysterious unexplainable
disappearances.” Section (B)(1)(b), the section at issue here,
covers losses “resulting directly from . . . theft, false pre-
tenses, common-law or statutory larceny committed by a
person present in an office or on the premises of the Insured.”
6 No. 04-2515
Before 1980 the “on premises” requirement applied uni-
formly to losses now classified in both section (B)(1)(a) and
section (B)(1)(b) of the bond, but in the revision undertaken
in that year, false pretenses, theft, and larceny were split
off from the other covered acts. Currently, while robbery,
burglary, misplacement, and “mysterious unexplainable dis-
appearances” continue to be covered if the act takes place
while the property is on the insured’s premises, coverage for
losses resulting directly from theft, false pretenses, and
larceny requires that the loss result from an act committed
by a person present on the insured’s premises. See Oritani
Sav. & Loan Ass’n v. Fid. & Deposit Co. of Md., 989 F.2d
635, 639 (3d Cir. 1993) (reproducing text of the pre-1980
“On Premises” insuring agreement).
Private Bank contends that its loss of $400,200 in connec-
tion with Manola’s fraud qualifies as a loss resulting di-
rectly from false pretenses committed by a person “present
on the premises” of the bank. No one disputes that Manola
was on the bank’s premises when he opened the checking
account and deposited the stolen checks, but there is also no
question that he was off the bank’s premises when he
withdrew most of the money, causing the loss. Private Bank
argues that it was the fraudulent deposit, not the subse-
quent telephonic withdrawal, that “directly caused” the
bank’s loss.
This view, however, conflicts with this circuit’s case law
addressing “on premises” fraud coverage in similar bank
frauds. Alpine involved a coverage dispute over bank losses
stemming from a fraudulent scheme that resembled Manola’s
in relevant respects. In Alpine a bank customer misappro-
priated over $100,000 in checks drawn to the order of his
employer. Alpine, 941 F.2d at 556. After endorsing the stolen
checks with his employer’s “for deposit only” stamp, the cus-
tomer deposited the checks in his personal account at the
bank. Id. He later withdrew some of the money in cash
while on the bank’s premises, but the amount disbursed
No. 04-2515 7
in that fashion was within the bond’s $10,000 deductible;
the question confronting the court was whether there was
coverage for the bank’s loss in excess of the $10,000 de-
ductible.
The bank in Alpine argued, as Private Bank does here,
that the loss occurred when the customer deposited the
stolen funds. Id. at 561. We rejected this argument, relying
on an earlier circuit precedent, Bradley Bank v. Hartford
Accident & Indemnity Co., 737 F.2d 657, 661 (7th Cir. 1984).
Bradley Bank held that “[i]n no sense . . . did the mere act
of accepting the deposits while [the bank’s] customer was
present irrevocably commit the [bank] to allow withdrawals
from the account” even when “the bank’s standard policy
was to credit customer accounts immediately upon deposit.”
Id.; see also Mitsui Mfrs. Bank v. Fed. Ins. Co., 795 F.2d
827, 832 (9th Cir. 1986) (“[A]ccepting deposited items and
immediately crediting them to an account does not consti-
tute constructive payment.”). We concluded that absent a
policy irrevocably committing the bank to allowing with-
drawals at the moment of deposit, a loss occurs for purposes
of the “on premises” fraud coverage in a financial institution
bond only when the person who withdraws the money is
physically present on the bank’s premises at the time of the
withdrawal. Alpine, 941 F.2d at 561; see also Bradley Bank,
737 F.2d at 661.
There is no evidence that Private Bank’s operating poli-
cies irrevocably committed it to allowing “Goodman” to
withdraw the money he deposited using the stolen checks.
Nor has the bank identified any language in the bond that
might, under the circumstances of this case, lead us to
question the holdings or application of Alpine and Bradley
Bank. We note that other circuits are in agreement with our
interpretation of the bond’s “on premises” coverage. See
Oritani, 989 F.2d at 639 (“on premises” requirement un-
ambiguously excludes coverage when loss is due to telephonic
withdrawal); Southern Nat’l Bank of N.C. v. United Pac.
8 No. 04-2515
Ins. Co., 864 F.2d 329, 333 (4th Cir. 1989) (“ ‘on premises’
language is designed to limit coverage to losses sustained
because of the fraudulent act of a person physically present
at the bank”); Mitsui, 795 F.2d at 831 (“on premises” cov-
erage requires that “the depositor or his representative be
on the premises at the time of ‘payment’ or ‘withdrawal’ ”).
Nothing in the language of the “on premises” clause sug-
gests that coverage is extended for losses that occur through
telephonic banking. Indeed, “[c]ommentators, including those
in the banking industry, have emphasized that the ‘on prem-
ises’ requirement in standard blanket bonds is designed to
exclude coverage for losses from fraud perpetrated by tele-
phone or computer, except in those rare instances where the
perpetrator phones or uses a computer hook-up from the
property of the bank itself or from the property of a custo-
dian entrusted by the bank to safeguard the funds.” South-
ern Nat’l Bank, 864 F.2d at 332, (citing AMERICAN BANKER’S
ASSOCIATION, DIGEST OF BANK INSURANCE § 1.3.12 (4th ed.
1981 & Supp. 1984); see also J. Kelly Reyher, A Brief
Review of the Financial Institution Bond Standard Form
No. 24 and Commercial Crime Policy, 563 PLI/LIT. 57, 67
(1997).
Private Bank urges us to treat its loss as the result of a
single fraudulent scheme, the crucial components of which
occurred on the bank’s premises. The bank concedes that it
would not have suffered a loss but for Manola’s telephonic
withdrawal. It argues, however, that no loss would have
occurred if Manola had not opened the checking account or
deposited the stolen checks in the first place. Private Bank
thus asks us to adopt a rule of construction whereby losses
are covered under the “on premises” insuring agreement if
the “principal” fraudulent acts or “most” of the fraudulent
scheme occurs on the bank’s premises.
We decline to gloss the bond’s language in this way. Any
such rule of construction would be difficult to articulate,
much less apply. Would the rule focus on the sheer number
No. 04-2515 9
of constituent acts leading up to the loss or the relative sig-
nificance of the acts? How much of the fraudulent scheme
would have to occur “on premises” in order to bring a loss
from an off-premises transaction within the bond’s “on-
premises” coverage? How would the significance of the acts
be evaluated under a “quality” over “quantity” approach?
Alpine and Bradley Bank already evaluate the bond’s “on
premises” coverage in light of bank policy; if the bank irre-
vocably commits itself to permitting withdrawals as soon as
deposits are received, then the loss can be said to occur at
the time of deposit, triggering coverage for a subsequent off-
premises transaction (assuming no other policy exclusions
apply). But we see no reason to broaden this caveat into an
across-the-board rule that “on premises” coverage for losses
from off-premises fraudulent transactions is to be determined
on a case-by-case basis in light of the totality of circum-
stances preceding the loss.
Because the perpetrator of the fraud against Private Bank
was not on the premises of the bank at the time he made
the telephonic withdrawal that caused the bank’s loss, the “on
premises” coverage of the financial institution bond does not
apply. The district court properly granted summary judgment
to Progressive.
AFFIRMED.
10 No. 04-2515
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-27-05