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ETNA INDEMNITY CO. v. J. R. CROWE COAL & MINING CO.

(Circuit Court of Appeals, Eighth Circuit. April 27, 1907.)

No. 2,354.

1. INSURANCE EMPLOYER'S LIABILITY BOND-SIGNATURE OF SERVANT. Where the execution by a servant of an employer's liability bond was not made a consideration for nor a condition of the creation of liability by the insurer, but the latter thereafter continued the bond, which was not signed by the servant, three times for a further new consideration, subject to the conditions and covenants of the bond, defendant was not entitled to object that it was not liable on the last renewal, because the bond was not originally signed by the servant as contemplated.

[Ed. Note.-For cases in point, see Cent. Dig. vol. 28, Insurance, § 1041. Guaranty insurance, see note to American Credit Indemnity Co. v. Wood, 19 C. C. A. 271.]

2. SAME-NOTICE.

An employer's liability bond provided that the insurer should indemnify the employer against fraudulent or dishonest acts of the employé amounting to embezzlement or larceny, subject to the condition that the insurer should be notified in writing of any fraudulent or dishonest act on the part of the employé which might involve a loss for which the company was responsible, immediately after the occurrence of such act should have come to the employer's knowledge. Held, that the notice required was one which would charge the employé with the commission of a felony, and hence the employer was not bound to give such notice until it had acquired knowledge sufficient to justify a reasonable man in making such a charge.

3. SAME EVIDENCE.

In an action on an employer's liability bond, evidence held to sustain a finding that plaintiff gave immediate notice of the employé's default, after acquiring knowledge that such default amounted to the crime of embezzlement or larceny, against which the bond only granted indemnity. 4. SAME-RENEWAL-CONTRACT-REPRESENTATIONS.

An original employer's liability bond was issued in 1901, insuring plaintiff against the employé's misconduct for a year. It was renewed for a new consideration for the succeeding year, and again for the years 1903 and 1904; the renewal reciting that it was made in consideration of $20 premium, and continued the bond in force to June 1, 1904, "subject to all the covenants and conditions thereof." Held, that the renewal did not include a statement issued February 24, 1903, in which plaintiff represented that checks signed by the insured employé should be safeguarded by certain other signatures, so that a failure to perform such representation did not relieve defendant from liability on the bond. 5. SAME-CORRESPONDENCE-CONSTRUCTION.

Where there is doubt and uncertainty concerning the effect of correspondence on an employer's liability bond, such doubt should be resolved in favor of sustaining the contract as executed in favor of the insured. [Ed. Note. For cases in point, see Cent. Dig. vol. 28, Insurance, § 295.] 6. SAME-NATURE OF CONTRACT.

An employer's liability bond is essentially a contract of indemnity against loss, governed by the rules applicable to ordinary life and fire insurance policies.

7. SAME-APPLICATION FOR INSURANCE-ACCEPTANCE.

An application for insurance is a proposition to the insurance company which must be accepted as made, if at all.

[Ed. Note. For cases in point, see Cent. Dig. vol. 28, Insurance, §§ 196, 198.]

154 F.-35

8. SAME-ACTION ON POLICY-TRIAL-INSTRUCTIONS CONSTRUCTION.

In an action on an employer's liability bond, the court charged that the employer's statement, made by plaintiff and pleaded by defendant as being the basis and part of the contract, was confessed by the pleadings and admitted to have been executed and delivered to plaintiff by defendant. Held, that such instruction should be construed to mean that plaintiff admitted only that the statement was executed and delivered for some -purpose, and not that it was the basis of the contract.

9. PLEADING-REPLY-FAILURE TO VERIFY-EFFECT.

Rev. St. Mo. 1899, § 746 [Ann. St. 1906, p. 731], provides that, when any petition or other pleading shall be founded on any instrument of writing charged to have been executed by the other party, the execution of the instrument shall be adjudged confessed, unless the party charged to have executed the same denies its execution by verified answer or replication. Held, that where a verified answer pleaded that a written instrument had been made by plaintiff to defendant, and was the basis of an employer's liability bond sued on, plaintiff's failure to verify its replication of general denial only admitted the execution and delivery of such instrument, and was sufficient to join issue on the question whether the statement was the basis of the contract.

10. WRIT OF ERROR-PRESUMPTIONS-VERDICT.

Where the record on a writ of error does not clearly show that the jury's finding was contrary to the instructions of the court when taken as a whole, it will be presumed that the jury followed the instructions, and that the verdict is right.

[Ed. Note. For cases in point, see Cent. Dig. vol. 3, Appeal and Error, § 3757.]

11. SAME ASSIGNMENT OF ERRORS-INCORPORATION IN BRIEF.

Under Circuit Court of Appeals rule 24 (150 Fed. li), declaring that the brief for the plaintiff in error shall contain a specification of the errors relied on, and shall set out separately and particularly each error asserted and intended to be urged, an objection that a false or misleading issue had been tried to the prejudice of plaintiff in error could not be reviewed, where no such error was so assigned.

[Ed. Note. For cases in point, see Cent. Dig. vol. 3, Appeal and Error, § 3094.]

12. SAME-RIGHT TO ALLEGE ERROR.

Where the trial of an alleged false issue was induced by defendant's own procurement, over plaintiff's objection, defendant could not object thereto on a writ of error.

[Ed. Note. For cases in point, see Cent. Dig. vol. 3, Appeal and Error, $$ 3591, 3593.]

13. SAME-PREJUDICE.

Where a judgment was for the right party and in the interest of substantial justice, it will not be reversed on a writ of error because the court proceeded on an erroneous theory.

[Ed. Note. For cases in point, see Cent. Dig. vol. 3, Appeal and Error, § 4034.]

14. SAME-SCOPE OF REVIEW-DAMAGES-EXCESSIVENESS.

Where a verdict returned in the federal court has been allowed to stand by the trial judge, it cannot be set aside on appeal as excessive.

[Ed. Note. For cases in point, see Cent. Dig. vol. 3, Appeal and Error, § 3948.]

15. SAME-INSTRUCTIONS.

Where, in an action on a fidelity bond, the court gave an instruction with reference to the allowance of a credit in favor of defendant, whether the verdict contravened such instruction was reviewable on a writ of error.

16. SAME PREJUDICE.

Where, in an action on a fidelity bond, the verdict returned was in strict accord with the proof touching the amount of the employé's embezzlement, and under no theory was defendant entitled to a credit which the jury disallowed, defendant was not entitled to a reversal because the disallowance of such credit was contrary to an ambiguous instruction with reference thereto.

[Ed. Note.-For cases in point, see Cent. Dig. vol. 3, Appeal and Error, § 4231.]

Sanborn, Circuit Judge, dissenting.

In Error to the Circuit Court of the United States for the Western District of Missouri.

W. B. Homer (Botsford, Deatherage & Young, on the brief), for plaintiff in error.

W. F. Guthrie (Boyle, Guthrie & Smith, on the brief), for defendant in error.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

ADAMS, Circuit Judge. The mining company brought its action against the indemnity company to recover on a contract whereby the latter undertook to indemnify the former to the extent of $5,000 against loss which might be occasioned by embezzlement or larceny. of its funds by David C. Graves, its bookkeeper and cashier, during the year beginning June 1, 1903, and ending June 1, 1904. The defendant agreed to indemnify against "fraudulent or dishonest acts" of Graves "amounting to embezzlement or larceny," subject, however, to a condition in the following words:

That it "shall be notified in writing, of any fraudulent or dishonest act on the part of the employee, which may involve a loss for which the company is responsible hereunder, immediately after the occurrence of such act shall have come to the knowledge of the employer."

An embezzlement amounting to some $7,000 occurred while the contract was in force, and a preliminary notice of its possibility was given the defendant on May 28, 1904, and a final notice of its actual occurrence was given June 24, 1904. After refusal by defendant to reimburse the plaintiff to the extent of $5,000, this suit was instituted in the Circuit Court, and resulted in a judgment for $4,409.23; that being the amount of embezzlement found to have occurred during the year covered by the contract. On this writ of error taken by defendant the proceedings below are challenged (1) because the contract was not signed by Graves, (2) because immediate notice of loss was not given, (3) because of breach of warranties made in the statement upon the faith of which the contract was made, (4) because the verdict was excessive and contrary to the court's instructions, (5) because erroneous instructions were given to the jury. Did the failure of Graves to sign the contract invalidate it?

It seems to have been originally prepared with the intention of having him sign it, but for some unexplained reason it was not done. While the contract is denominated a bond, it has few, if any, of the characteristics of a bond. It is essentially a contract of indemnity. Graves was mentioned in it, nor as principal, but as an independ

ent party. No reference was made to him in the body of the instrument, except in one clause, which is to the effect that Graves will save the indemnity company harmless from any loss or damage it might sustain. Two separate and distinct contracts between different parties appear to have been contemplated; one between plaintiff and the indemnity company, consisting of a contract of indemnity, and the other between Graves and the indemnity company, consisting of a contract of guaranty. In the former, Graves was not concerned; in the latter, plaintiff was not concerned. The execution of the contract by Graves is, in terms, made neither a consideration for nor condition of the creation of liability by the indemnity company. The bare fact that these separable contracts were possibly originally intended to be incorporated in one writing does not render them any the less separable and distinct in their nature and purpose.

Moreover, if there were any doubt on this subject, defendant subsequently adopted the instrument, as it was actually signed, as the contract between itself and plaintiff. The instrument sued on was a renewal of that contract. The latter was made June 14, 1901, and insured the plaintiff against the misconduct of Graves for the period of one year from June 1, 1901, to June 1, 1902. After the year had expired, an obligation for a new consideration paid by plaintiff was executed by defendant extending the insurance so as to cover the year ending June 1, 1903. A like extension followed covering the year ending June 1, 1904. During this latter period the embezzlement in question occurred. These different extensions were all based upon and recognized the original contract of June 14, 1901, known and numbered by the defendant as bond F. 1,774. The last renewal bore date June 30, 1903, and reads as follows:

"In consideration of the payment of the sum of $20.00, being the premium for the third year upon bond F. 1,774 of the Etna Indemnity Company for $5,000, said bond is hereby continued in force until June 1, 1904, subject to all the conditions and covenants thereof."

*

These renewals, executed for valuable consideration received and appropriated by defendant, clearly affirm the original contract notwithstanding the absence of Graves' signature and estop it from asserting its invalidity when repeatedly so affirmed by it.

Was immediate notice of loss, within the meaning of the contract, given to defendant? This question is presented on an exception taken to the action of the trial court in refusing to instruct the jury to return a verdict for defendant. Our consideration is therefore limited to an inquiry whether there was any substantial evidence before the jury tending to show that the required notice was given.

The contract of indemnity obligated defendant to reimburse plaintiff for the pecuniary loss it might sustain by reason of fraudulent or dishonest acts of Graves amounting to embezzlement or larceny. The notice required to be given was, in the language of the contract, "of any fraudulent or dishonest act of Graves involving a loss for which the company is responsible"; that is, a loss arising out of embezzlement or larceny by the employé. This notice was required to be given, not immediately after any fraudulent or dishonest act

amounting to embezzlement should be committed, but only "immediately after the occurrence of such act shall have come to the knowledge of the employer." From this analysis of the contract it appears that the notice required was one that would charge the employé with the commission of a felony, and was required to be given only after knowledge should have come to the employer of the commission of such offense.

In the case of Fidelity & Deposit Co. v. Courtney, 186 U. S. 342, 22 Sup. Ct. 833, 46 L. Ed. 1193, an indemnity contract much like the one now before us, requiring "immediate notice," of a default, was under consideration, and it was held that a notice given "with due diligence under the circumstances of the case, and without unnecessary or unreasonable delay," would answer the requirement of the contract; that "immediate notice" is given when it is reasonably immediate.

In American Surety Co. v. Pauly, 170 U. S. 133, 145, 18 Sup. Ct. 552, 557, 42 L. Ed. 977, the Supreme Court, in considering the knowledge required to move an employer to give a notice like that required in this case, approved an instruction given by the trial court in the following words:

"And in considering this issue you are to inquire, first, when it was that the plaintiff became satisfied that the cashier had committed dishonest or fraudulent acts which might render the defendant liable under this policy. He may have had suspicions of irregularities. He may have had suspicions of fraud. But he was not bound to act until he had acquired knowledge of some specific fraudulent or dishonest act which might involve the defendant in liability for misconduct."

And in doing so observed as follows:

"It may well be held that the surety company did not intend to require written notice of any action upon the part of the cashier that might involve loss, unless the bank had knowledge, not simply suspicion, of the existence of such facts as would justify a careful and prudent man in charging another with fraud or dishonesty. If the company intended that the bank should inform it of mere rumors or suspicions, * such intentions ought to have been clearly expressed in the bond."

These authorities place a reasonable and practical construction upon contracts of the kind in question, one under which the rights of both parties are fairly respected and protected. The serious effect of making a criminal charge upon the character, business, social standing, and future prospects of an employé, as well as a proper appreciation of the personal responsibility assumed in making a false charge by an employer, reasonably call for great circumspection and caution in making it. Immediate notice that is, literally speaking, instantaneous notice-is not required to be given, but only such notice as reasonable diligence, under all the circumstances of the case, dictates after knowledge of facts requiring it is obtained. And this is not required to be given on mere rumor of irregularities or suspicion of dishonesty; neither is absolute or complete knowledge of an accomplished crime necessary before the employer is required to act, but only such knowledge of facts as would justify a careful and prudent man in believing a crime to have been committed.

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