B & H Supply Co. v. Insurance Co. of North America

311 S.E.2d 643 (1984)

B & H SUPPLY COMPANY, INC.
v.
INSURANCE COMPANY OF NORTH AMERICA.

No. 8321SC208.

Court of Appeals of North Carolina.

February 21, 1984.

Morrow & Reavis, by John F. Morrow and Clifton R. Long, Jr., Winston-Salem, for plaintiff-appellee/cross-appellant.

Petree, Stockton, Robinson, Vaughn, Glaze & Maready, by Dudley Humphrey and Leon E. Porter, Jr., Winston-Salem, for defendant-appellant.

PHILLIPS, Judge.

Defendant's Appeal

The primary question raised by defendant's appeal is whether the failure of the insured to comply with Section 8 of the insurance policy, which required plaintiff to file a sworn proof of loss within four months of the discovery of the loss, relieved the insurer of liability. The trial court's holding that it did not was based on the rule adopted by our Supreme Court in Great American Insurance Co. v. C.G. Tate Construction Co., 303 N.C. 387, 279 S.E.2d 769 (1981). In that case it was held that unexcused delay in notifying the insurer of a loss or claim does not relieve the company of its policy obligations if the delay does not materially prejudice the insurer and the insured acted in good faith. The trial court's ruling was well based, in our judgment, though, as our later discussion shows, plaintiff's delay in filing a proof of loss was excused; for even if the delay had not been excused, it benefited rather than prejudiced defendant and the insured's good faith was clearly established.

Defendant nevertheless contends that Great American v. Tate has no application to this case because the policy involved there insured against liability while the policy here insured against embezzlement. The basis stated for adopting the rule there enunciated, and rejecting the strict breach of contract rule earlier followed, was that, unlike other contracts, the terms of insurance policies are not freely negotiated, but are mostly imposed by the companies; and the Court's declared purpose in adopting the rule was to prevent insurance companies from unjustly using harmless breaches of policy notice and filing terms as a basis for escaping their policy obligations. The Court did not limit this salutary rule to liability insurance cases, and no sound reason exists for doing so, in our opinion. Indeed, if anything, the rule is needed more in embezzlement insurance cases, where delay in filing proofs of loss is much less likely to harm insurers than it is in liability insurance cases, where the defenses of no negligence and contributory negligence often depend upon early investigation.

But the trial court's decision that plaintiff's failure to file timely proof of loss did not relieve defendant of liability was correct, we think, for another and stronger reason. Since long before Great American v. Tate our law has been that despite policy terms to the contrary insurance companies, through their agents and employees, can waive the timely filing of notice or proof of loss, and that when such waivers are made and insureds rely thereon, the companies are estopped to maintain otherwise. One of the better statements of this principle is in Dibbrell v. Georgia Home Insurance Co., 110 N.C. 193, 209, 14 S.E. 783, 788 (1892), where it was said:

The usual stipulation in a policy that no agent of the company is authorized to change its terms and conditions, and that they shall not be waived except in writing endorsed on the policy, does not apply to conditions to be performed after the loss is incurred.... Where ... the insured is led by the conduct of an agent of the company ... to believe that the stipulations will not be insisted on ... the condition is deemed waived without the endorsement on the policy.

This rule has been reiterated and followed in many cases since then, including Brandon v. Nationwide Mutual Insurance Co., 301 N.C. 366, 271 S.E.2d 380 (1980).

Defendant contends, however, that this principle does not apply to this case because Dillon was neither its employee nor agent, but operated and functioned as an independent agent. But nomenclature is not to be confused with reality; and the reality in this case, according to the evidence, was that Dillon was the company's only conduit for receiving information from plaintiff about a loss and for getting proof of loss forms to him and that he thus was the company's agent and representative for that purpose, which is all that now concerns us. The evidence was and the trial court found that this large corporation has no employees anywhere that insureds are instructed to contact in regard to losses or claims, and that the company authorized Dillon to process proofs of loss for the plaintiff and other insureds. This uncontested finding was warranted by events that both preceded and followed the loss in question. In the past plaintiff had not contacted the company directly about losses, but had dealt with Dillon, the so-called independent agent who sold and serviced the policy; and Dillon, in turn, informed the company, obtained a proof of loss form from it, submitted it to the policyholder, and upon it being completed, returned it to the company. A similar course was followed in regard to the losses involved in this case. When the first embezzlement was discovered the insured notified Dillon and asked if it would be alright if they tried to collect from the employee, rather than the company. Dillon told plaintiff he would check with the company and after doing so, according to the testimony, told plaintiff that the arrangement suggested suited the company, but to keep him informed. At that time Dillon neither furnished plaintiff a proof of loss form nor suggested the necessity of one; but he did furnish plaintiff a proof of loss form after the subsequent embezzlements were discovered and reported. These unrefuted facts caused the trial court to conclude, correctly, in our judgment, that defendant had received prompt notice of the loss. It necessarily follows from these findings and conclusions that the defendant also waived its right to insist upon a sworn to proof of loss under Section 8 of the policy. To hold otherwise would permit insurers to avoid their obligations because of their own failings, an absurdity that the law cannot contribute to.

Having decided that the trial court correctly concluded that the insured's right to recover for the first loss was not barred by the absence of a timely proof of loss, we must next determine whether defendant is entitled to any set offs against the $9,486.57 that is otherwise due plaintiff. Defendant contends that it is entitled to three set offs, none of which were allowed by the trial court. But the first set off claimed, for the policy stated deductable in the amount of $250, cannot be considered on the merits, since an examination of the record reveals that appellant failed to properly preserve this exception for appeal. See Rule 10(a), North Carolina Rules of Appellate Procedure.

The second set off defendant claims is the $4,391.06 that plaintiff collected from Martin after the first embezzlement was discovered and reported. These funds were received after the insurer, through its agent Dillon, waived a proof of loss for the purpose of allowing the insured an opportunity to collect the loss without filing a claim. This arrangement, it should be noted, was intended to benefit both parties, since if collection was made without resorting to the insurance coverage the cost of plaintiff's insurance thereafter would not be increased thereby, whereas if the insurer paid the loss it would be. Since the waiver cannot be separated from the collections it was given to facilitate, equity requires that the insurer's liability be credited accordingly and we so hold.

The third set off that defendant claims is the nearly $13,000 profit that the insured made from the transaction involving the embezzler's house. The insured received nothing, however, from the note and deed of trust it obtained from the embezzler; the profit at issue arose from the insured's venture in buying the Martin property at a public foreclosure sale and holding it for a year, which anybody else, including the defendant, could have done. We know of no legal theory under which defendant might be entitled to a profit so made, appellant cites no authority in support of its claim, and we therefore deny it.

Thus, though defendant is indebted to plaintiff in the sum of $9,486.57 because of the first embezzlement, it is entitled to set off against that claim the sum of $4,391.06, and upon remand the judgment will be reduced by that amount and allow plaintiff to recover of the defendant the sum of $5,095.51.

Plaintiff's Cross-Appeal

The sole question presented by plaintiff's cross-appeal is whether the court erred in concluding that plaintiff is barred from recovering for the second series of embezzlements by Martin. In our opinion the court's conclusion in this regard was correct. Section 7 of the policy excludes from coverage any employee that to the employer's knowledge had committed a dishonest act while in its employment; and Section 18 provides for cancellation of coverage as to any individual immediately upon the insured discovering any dishonest or fraudulent act by that individual. Since these provisions had not been eliminated from the policy by any amendments or endorsements executed during the interim, they necessarily remained in force unless they were waived by the acts of the local agent Dillon. First of all, no authority has been found for the proposition that under North Carolina law a local agent can waive substantive conditions of coverage such as employee dishonesty in an embezzlement policy—a different matter entirely from waiving things that are supposed to be done after an insured loss has already occurred. But even if the law authorized such waivers, the evidence fails to show that one was made. Thus, since coverage for the embezzling employee terminated before the second embezzlements occurred, the court correctly ruled that defendant is not liable for them.

As to defendant's appeal, judgment modified and remanded.

As to plaintiff's cross-appeal, judgment affirmed.

WELLS and BRASWELL, JJ., concur.