Financial Institutions Bond Covers Loss
This insurance coverage dispute arises from a fraudulent scheme perpetrated against First State Bank of Monticello , causing a $307,000 loss. This case is First State Bank of Monticello v. Ohio Casualty Insurance Company, 555 F.3d 564 (2009).
Stilwell repeatedly exchanged bad checks for the insured bank's money orders/instruments backed by the resources of the bank and as good as cash. The bank filed a claim for the loss with its insurer, Ohio Casualty under Standard Form No. 24 Financial Institution Bond. The insurer denied the claim and this lawsuit followed. The district court held that the loss was covered and granted summary judgment in favor of First State Bank. The insurer appealed.
The United States Court of Appeals, Seventh Circuit, noted the following facts. In order to acquire cash, Stilwell devised a scheme whereby he would draw checks on one of his accounts at Tuscola National Bank and tender them to First State Bank. (Even though Stilwell's account at Tuscola National Bank was empty or near empty, that bank allowed him to maintain negative balances for months at a time, returning some items and paying others that Stilwell directed to be paid.) First State Bank unwittingly allowed Stilwell to exchange his worthless checks for the bank's money orders, giving him access to immediately available funds. Stilwell carried out this scheme for three months. The insured sold Stilwell 130 bank money orders for a total of $1,945,672.16. The scheme collapsed when Tuscola National Bank froze Stilwell's accounts and left the insured holding worthless checks totaling $307,000.
Stilwell entered into an agreement with First State Bank to repay the bank in a series of installments but he died before fulfilling that agreement. First State then filed a claim with its insurer to recover the loss, but the insurer denied coverage, asserting that Stilwell's scheme was not covered under the bond's on premises fraud coverage, or was excluded because it fell under exclusion (h) of the bond that excludes losses caused by an employee. The insurer asserted that the bank did not suffer a loss as that term is understood in the bond; or if there was a loss, it did not result directly from Stilwell's scheme, or if the loss was attributable to the scheme, the failure of the bank's employees to follow bank policy was an intervening and the predominant cause of the loss and exclusion (h) applied.
The first part of Ohio Casualty's argument was that the insured did not suffer a loss because it received a valid and enforceable instrument, namely Stilwell's check drawn on his account at Tuscola National Bank. If First State Bank incurred any loss, the insurer argued that it would have occurred later when First State was unable to collect on the checks. That, the insurer asserts, would hot have been a covered loss because that event would neither have taken place on First State's premises nor resulted directly from any false pretenses. The appeals court said that it was true that First State Bank did not experience a loss at the precise moment Stilwell exchanged his checks for the bank's money orders; however, the insured did experience an actual loss when Tuscola National Bank refused to honor Stilwell's checks. Once that occurred, the insured necessarily had fewer available assets. That the act of nonpayment occurred off premises is of no moment. Insuring agreement B in the bond requires only that the false pretenses be committed by a person on the premises and that is what happened.
The insurer also argued that Stilwell's conduct did not amount to false pretenses. But the court said that failure to have sufficient funds is prima facie evidence that the offender knows that it will not be paid by the depository and that he or she has the intent to defraud. Stilwell knew that he did not have any funds at Tuscola National Bank on the dates in question and there is no evidence in the record to overcome the statutory presumption that Stilwell intended to defraud.
As for the argument that the loss did not result directly from on premises false pretenses, the court said that the insured's assets were depleted as a result of Stilwell's fraudulent transactions and this suffices to satisfy the common and ordinary understanding of a loss resulting directly from a fraud occurring on the bank's premises. The loss suffered by the insured flowed directly from Stilwell's on premises fraud.
Ohio Casualty's argument that the loss was caused by the employees' failure to follow bank policy and thus, causing exclusion (h) to apply, was said by the appeals court to be based on an overbroad reading of the exclusion. Stilwell's on premises fraud was the actual and direct cause of the loss; the bank employees' failure to prevent the loss does not trigger exclusion (h). To hold otherwise, the court ruled, would be to eviscerate much of the coverage granted under the bond.
The ruling of the district court was affirmed. The loss was covered under the terms of the bond.
Editor's Note: The U.S. Court of Appeals reviewed the language in the Standard Form No. 24 Financial Institutions Bond and decided that the bond clearly applied to this loss. Applying the bond's language to the facts, the court found that the insuring agreement, which covers losses resulting directly from theft or false pretense occurring on the premises, was fulfilled.