.

Insurance

(256 Fed. 601.) to Salt Lake and he testified: "I

“I In Belleview Loan & Bldg. Asso. V. knew then that he was overdrawn Jeckel, 104 Ky. 159, 46 S. W. 482, it too much.” The president of the in- was held that if a party taking a sured stated to the general auditor guaranty from a surety conceals of the surety company that "Hayes from him facts which go to increase being short $1,000 or so in Wood- his risk, and suffers him to enter into land, was entirely different from his the contract under false impressions being short $7,000 or $8,000 in Salt as to the real state of facts, such conLake City.” If there was a differ- cealments will amount to a fraud, beence, it was but a difference in de- cause the party is bound to make the gree. Hayes, having been permit- disclosure, and the omission to make ted habitually to overdraw his ac- it, under the circumstances, is count prior to going to Salt Lake, equivalent to an affirmation that the thereafter continued to indulge his facts do not exist. Of similar imhabit and largely increased his over- port is Deposit Bank v. Hearne, 104 draft. No examination of his ac- Ky. 819, 48 S. W. 160; Hebert v. Lee, count was made while he was at Salt 118 Tenn. 133, 12 L.R.A.(N.S.) 247, Lake.

121 Am. St. Rep. 989, 101 S. W. 175, The parties to the contract were 11 Ann. Cas. 1029. "There is no not on a plane of equal opportunity principle of law better settled than for information, and the fact that that persons proposing to become Hayes's account was overdrawn, and sureties to a corporation for the that he was in the habit of over- good conduct and fidelity of an ofdrawing the same at

ficer to whose custody its moneys, and before the time notes, bills, and other valuables are Adelity-information- when the contract intrusted, have the right to be treatoverdrawing of account.

was entered into, ed with perfect good faith. If the di

was one that should rectors are aware of secret facts manot have been withheld from the terially affecting and increasing the surety company. It is not conceiv

It is not conceiv- obligation of the sureties, the latter able that the surety, if advised of are entitled to have these facts disthat habit, would have entered into closed to them.” 1 Morse, Bkg. p. the contract. In Frost on Guaranty 226. Insurance, § 74, it is said: “The Not only was there failure to dischronic defaulter, for the pur

close to the surety company the pose of becoming a 'risk' under a habitual overdraft of Hayes, but the fidelity insurance policy, is persona application for the fidelity bond connon grata to the insurer. The tained statements warranted to be surety companies, as a matter true, one of which was: That there of prudence and business policy, had never come to the notice or invariably decline a 'risk' who has knowledge of the employer any act, been guilty of serious arrears in fact, or information tending to indiany previous employment. The rea- cate that the employee was sonableness of this position has worthy of confidence, and that his never been questioned, either by the employer knew “no reason why you courts or the public, so far as we are cannot safely become surety for aware."

him." We think that there was a Where the insured states in its ap

clear breach of the warranty of plication that nothing is known con

want of knowledge of facts tending cerning the employee's habits affect to indicate that Hayes was unworthy ing his title to confidence, when the

of confidence, and of the warranty fact was the employee was engaged that his habits were good, and that in hazardous speculation with the

his employer knew of no reason why knowledge of the insured, there can

the bonding company should not bebe no recovery upon the bond.

come surety for him. United States Fidelity & G. Co. v. Petition for rehearing denied May Blackly, 117 Ky. 127, 77 S. W. 709. 12, 1919.

un

ANNOTATION.

Duty of employer applying for fidelity insurance to notify insurer that

employee had overdrawn his account.

General rule.

& D. Co. v. Courtney (1902) 186 U. S. Where, in an application for a bond 342, 46 L. ed. 1193, 22 Sup. Ct. Rep. insuring the fidelity of an employee or 833, affirming (1900) 43 C. C. A. 331, in a certificate of renewal thereof, an 103 Fed. 599, it was said that the overemployer is called on to answer ques- drafts in themselves might not have tions concerning the integrity and been fraudulent, and that the question habits of an employee and the state of good faith was properly left to the of his accounts, said answers being jury. made the basis of the contract, the em- In United States Fidelity & G. Co. ployer is bound to exercise good faith v. Citizens' Nat. Bank (Ky.) supra, it therein, and the better rule seems to was pointed out that the officers of the be that the failure of the employer to bank did not consider that there was notify the insurer that the employee any evil intent on the part of the emhad overdrawn his account, where the ployee in regard to the overdrafts employer may be charged with knowl- there involved, and their good faith edge of the overdraft, will avoid the in the matter was submitted to the obligation. Carstairs v. American jury. Bonding & T. Co. (1902) 54 C. C. A. Two Missouri cases to the same ef85, 116 Fed. 449, affirming (1901) 112 fect are Commercial Bank v. American Fed. 620; Fidelity & C. Co. v. Bank of Bonding Co. (1916) 194 Mo. App. 224, Timmonsville (1905) 71 C. C. A, 299, 187 S. W. 99, and Commercial Bank v. 139 Fed. 101; Bank of Hardinsburg & Maryland Casualty Co. (1916) Mo. Trust Co. v. American Bonding Co. App. —, 187 S. W. 103, both cases in(1913) 153 Ky. 579, 156 S. W. 394; volving the same set of facts. In both Willoughby v. Fidelity & D. Co. (1906) instances the court disposed of the 16 Okla. 546, 7 L.R.A. (N.S.) 548, 85 question of the overdrafts involved by Pac. 713, 8 Ann. Cas. 603, affirmed in holding the findings of the referee (1907) 205 U. S. 537, 51 L. ed. 920, 27 thereon to be binding on it. In each Sup. Ct. Rep. 790. And see the re- case the referee found that the bank ported case (NATIONAL SURETY Co. v. had exercised good faith in making its GLOBE GRAIN & MILL. Co. ante, 552). representations, and that the overSee also United States Fidelity & G. drafts had been properly treated as Co. v. Ridgley (1903) 70 Neb. 622, 97 loans. N. W. 836. Compare Fidelity & D. Co. Another Missouri case somewhat v. Courtney (1902) 186 U. S. 342, 46 similar is Long Bros. Grocery Co. v. L. ed. 1193, 22 Sup. Ct. Rep. 833, affirm- United States Fidelity & G. Co. (1908) ing (1900) 43 C. C. A. 331, 103 Fed. 130 Mo. App. 421, 110 S. W. 29, wherein 599; United States Fidelity & G. Co. v.

it appeared that in the renewal certifiCitizens' Nat. Bank (1912) 147 Ky. cate of a bond a grocery company stat285, 143 S. W. 997.

ed that the accounts of the employee In the reported case (NATIONAL had been examined and found correct, SURETY Co. v. GLOBE GRAIN & MILL. and that there was no reason known Co.) the decision is rested on the gen- why the bond should not be continued. eral rule of insurance law that a pol- It was held that there was no obligaicy is avoided by the misstatement or tion on the employee to notify the inconcealment of a material fact.

surer of an overdraft, since it was in Some cases, however, are inclined the nature of a debt, and did not af. to take a more lenient view of the im- fect the integrity of the employee, port of an overdraft, and consequently which the court considered the subject base their decisions on the good faith of the policy. of the employers making the represen- In two cases, Willoughby v. Fideltations in question. Thus, in Fidelity ity & D. Co. (Okla.) and Fidelity & D. Co. v. Courtney (U. S.) supra, ambiguous, and manifestly covers the wherein it appeared that the repre- certificate asked for by the [Bonding sentations of the integrity of the & Trust Company] as a condition employee had been made by an precedent to the renewal of its bond.” agent of the employer, it was re- Since no examination had been made marked that a party seeking to recover of the books and acounts of Essner, it on a contract must assume its bur- was said that “there was then a clear dens, as well as its benefits, and that and absolute noncompliance with this the employer could not take advantage essential requirement." of the contract made by the agent and In Fidelity & C. Co. v. Bank of Timrepudiate his authority to make the monsville (1905) 71 C. C. A. 299, 139 representations.

Fed. 101, it appeared that the casualty Mustrations.

company had renewed their bond proIn Carstairs v. American Bonding &

tecting the bank from loss by reason T. Co. (1902) 54 C. C. A. 85, 116 Fed.

of the fraud or dishonesty of a cash449, affirming (1901) 112 Fed. 620, it

ier. At the time of the renewal the appeared that one Essner was em

company had submitted to the bank ployed as manager by a restaurant questions concerning the cashier. An company, that the restaurant company

answer thereto stated that he was not procured from the Bonding & Trust

indebted to the bank, whereas he was Company a “fidelity bond,” protecting

in fact indebted by note and on small them from loss by reason of any dis

overdrafts. The bond contained the honesty on the part of said Essner,

following: “Any wilful misstatement and that this bond was renewed an

or suppression of fact by the employer nually. A certificate given by the res

in any statement or declaration to the taurant company to the Bonding & company concerning the employed, or Trust Company prior to the last re- in any claim made under this bond or newal stated that “the books and ac

renewal thereof, renders this bond counts of Essner had been examined void from the beginning.” The court and found correct, and all moneys

held that the false answers were in handled by him accounted for.” A some instances material and that they clause in the bond stated that any came within the meaning of the phrase material misstatement or suppression "wilful misstatement,” which was inof fact by the employer in “any state. terpreted as meaning any “material ment or declaration to the company, false statement, made with knowledge etc., shall render this bond void from of its falsity,

made volunta. the beginning." It was shown that rily," regardless of the intent to de.. Essner drew on a bank account kept ceive. in the name of the restaurant company In Bank of Hardinsburg & Trust Co in payment of his salary, and that

V. American Bonding Co. (1913) 153 prior to the last renewal there were

Ky, 579, 156 S. W. 394, it appeared that overdrafts on this account to the

the cashier of a bank applied to a amount of $3,700. It was also shown

bonding company for fidelity insurthat the treasurer who signed the

ance. The company obtained from the foregoing certificate had not exam- bank's president a statement, noted as ined the books and accounts of Essner, the basis of the bond, in which the as stated, but had relied entirely on said president averred that the cashthe report handed him by the book

ier's accounts had been correctly keeper. The court said: "In this case, kept, and that he was not at the time the parties to the contract have seen indebted to the bank or its officers. fit to expressly declare that certain The fidelity bond and several renewals statements made by the restaurant thereon were issued, and suit was company, relative to the duties and

later brought to recover funds wrongaccounts of the employed, etc.,

fully converted by the cashier. It do and shall constitute an essential

wn that the president and dipart, and form the basis, of their con- rectors had not examined the books, as tract. This declaration is clear, un- stated in the application for the bond,

a

but had taken the word of the cashier that a bank had requested and obon the matter, and that prior thereto tained the renewal of a “fidelity bond" and at that time the cashier was in- covering the acts of its president, one debted to the bank on overdrafts of McKnight, for one year. A certificate his account, and had also forged sev. had been filed with the company stateral notes which were treated as as- ing that the accounts of the president sets of the bank. It was held that an had been examined and found correct, examination of the books of the bank and that no reason existed, to the by the president could not have failed knowledge of the bank, why the bond to show these overdrafts, and that the should not be continued. As a matter material statements concerning the of fact, several overdrafts had been dealings of the cashier with the bank, made by the president on the account examinations of his books, etc., were of a firm of which he was a partner, false.

The original bond, of which the one In Willoughby v. Fidelity & D. Co. in question was a renewal, stated that (1906) 16 Okla. 546, 7 L.R.A.(N.S.) it and any renewals thereof were is548, 85 Pac. 713, 8 Ann. Cas. 603, it sued in reliance on the statements and appeared that a fidelity company had representations which constituted an given a bond of $1,000, insuring to essential part of the contract. The the bank of which the plaintiff was court held that the overdrafts in themthe receiver the fidelity and honesty of selves might not have been fraudulent, its president. The bond stipulated and that the bank might have been that it was made on the faith of cer- satisfied with the president's explanatain warranties made by the employer, tion thereof, and that furthermore the and that statements of an officer or jury had been left to determine whethdirector should be considered the er or not there were such "surroundstatements of the employer. The war- ing circumstances as to authorize ranty was made in this instance by the them (the jury) to infer that the bank assistant cashier, who stated that the must have known of the fraud, and president was not at the time, and had therefore to find that the bank could not been, indebted to the bank. At the not possibly have been satisfied with time, however, the president was in- the conduct of the president." It was debted to the bank on his own over- pointed out that any knowledge posdraft of $35,693.24, and the assistant sessed or acquired by an officer or dicashier was aware of the falsity of the rector of the bank concerning the answer. The court pointed out that, fraudulent purposes or conduct of Mcas in life and fire insurance policies, Knight should be considered as the so too in the case of fidelity insurance, knowledge of the bank. The court a false or fraudulent material mis- also said that "the information sorepresentation would avoid the policy; licited was such as was proper to be and that the misrepresentation was asked of and communicated by the particularly glaring in showing bad bank, and as the renewal was presumfaith. It was also held that since "it ably made upon the faith of the stateis the well-settled law that a party ments contained in the certificate, the seeking to recover upon a contract bank ought not to be heard, while seekcannot claim the benefits arising ing to obtain the benefits of the stiputherefrom and at the same time re- lations agreed to be performed by the pudiate its burdens," the receiver, who surety, to deny the authority of its was suing on the bond, could not ques- officer to make the representations tion the authority of the assistant which induced the surety to again bind cashier to make the statements and itself to be answerable for the faithwarranties which induced the com- ful performance by McKnight of the pany to make the contract.

duties of his employment." In Fidelity & D. Co. v. Courtney In United States Fidelity & G. Co. (1902) 186 U. S. 342, 46 L. ed. 1193, 22 V. Citizens' Nat. Bank (1912) 147 Ky. Sup. Ct. Rep. 833, affirming (1900) 43 285, 143 S. W. 997, it appeared that a C. C. A. 331, 103 Fed. 599, it appeared guaranty company had insured the

.

bank against the dishonesty of its cash- If defendant thought it material to be ier, and had granted several annual adyised of such facts, it should have renewals thereon, always requiring stipulated in the contract for notice of statements from the bank certifying them.” that the accounts and books of the In Commercial Bank V. American cashier had been examined and found Bonding Co. (1916) 194 Mo. App. 224, correct, and that he was not then in 187 S. W. 99, one Meier, a bookkeeper default, etc. Prior to the last two re- of the bank, gave a bond of the bondnewals the cashier had been in the ing company to cover any defalcations. habit of making overdrafts, which In the application for the bond it was were not concealed, but which were stated by the president of the bank often settled by notes forged by him. that Meier was not indebted to the The guaranty company insisted that bank, was engaged in no other busithe continuation certificates contained ness, that his accounts were correct, misrepresentations by the bank, which etc. A clause stated that these anavoided their obligation, but the court swers should be considered warpointed out that the president and di

ranties, and should form part of the rectors of the bank were not expert

bond and any renewal thereof. On a accountants and had testified that no

renewal the cashier of the bank cerdiscrepancies were found, and that the

tified that Meier's accounts had been question had been decided by the jury

examined and found correct, and that

he was not in default. It was also in favor of the bank. In the case of Long Bros. Grocery

provided in the bond that it should Co. v. United States Fidelity & G. Co.

continue in force by virtue of a re

newal, but that the liability should (1908) 130 Mo. App. 421, 110 S. W. 29, it appeared that a salesman employed

not be cumulative. Meier had over

drawn his account at the bank withby a grocery company obtained a bond

out its consent at the time of the insuring his fidelity to his employer.

renewal of the bond, which, on discovLater, the guaranty company issued a renewal certificate on the bond on the

ery, he was required to reduce and faith of a statement by the grocery

pay off. On Meier's default it was as

serted that the bank had not exercised company that the salesman's accounts had been examined and found correct,

good faith in its failure to notify the and that they knew of no reason why

bonding company of these overdrafts.

The court held that the referee had the bond should not be continued. The

decided the question of good faith salesman had been permitted to draw

when he declared: “I do not find that on account of his commissions, and prior to the issuing of the renewal cer

the bank was prohibited from making tificate his account had been over

loans to Meier or to his auto company, drawn $315.03. The guaranty com

or to his picture show company, nor pany insisted that they were relieved was Meier deprived of the right to of obligation by reason of the false engage in other business under his representation in the above-mentioned contract with the bond or with the renewal certificate, when to the knowl- bank.” It was pointed out that a reedge of the grocery company the sales- newal of a policy was a separate and man's accounts were largely over- distinct contract; that the warranties drawn. It was held that by the terms

made in the original application, while of the bond the guaranty company was

running through a renewal, were warto be notified only of acts affecting

ranties only that the original statethe integrity of the salesman, and ments were true, and not such as there was no duty to state that he had would render void the bond if there been paid more than he had earned occurred a change of condition beby way of commission. The court con- tween the employer and employee. tinued: “Nor can it be said that in There being nothing to show that the voluntarily permitting Knauber to statements in the renewals were to be overdraw his account, the integrity held as warranties, it was held that of Knauber in anywise was affected. they were merely representations, and

4 A.L.R.-36.