Social Security Administration v. Employers Mutual Liability Insurance

Hammond, J., delivered the opinion of the Court. This appeal must determine whether a corporate insurer under a fidelity or indemnity bond is liable to a defrauded employer for interest on the principal sum embezzled by an employee. ⁴⁹⁵ The appellant is a federal credit union. An assistant treasurer, a Miss Mand, perpetrated a series of embezzlements of money belonging to her employer by purportedly making loans to fictitious persons and pocketing the proceeds. From June 1957 to February 1962 she entered on the credit union’s records some one hundred twenty such loans, totalling $50,890.

According to the stipulation of facts: “The repayment of all these loans was kept current by Mand by payments as required under the terms prescribed by the Plaintiff at the time that the loans were granted, and one of the loans was completely repaid with interest. Of the total amount of the repayments, $6,885.36 was credited [by Mand] to interest on the books of the Plaintiff.” On May 11, 1962, Mand voluntarily disclosed her peculations. At all times here pertinent the credit union was insured by the appellee, a Wisconsin insurance company duly qualified to do business in Maryland, under a “credit union blanket bond,” which stated that the insurer’s liability was a sum equal to the “total assets of the insured” at the time a loss was incurred up to a then applicable limit of $1,000,000 as to any loss. By the bond the insurer, among other things, agreed “to indemnify the insured for direct loss of, or damage to, any property, as defined herein, caused by the fraud or dishonesty of any of the insured’s employees * * Under the policy definition, “property” included “money.” The bond conditions required the giving of written notice of any loss, and then provided: “and within 90 days after giving such notice the insured shall file with the company an itemized proof of claim duly sworn to.

The company shall have 30 days after proof of claim is filed in which to investigate the claim. No action shall be brought against the company under this bond unless begun within twelve months after the insured shall learn of the loss * * The insured complied with the conditions as to notice and proof of loss, claiming some $41,000. After making its own ⁴⁹⁶ audit, the insurer on September 17, 1962, tendered a check for $34,138.86, which was $6,885.36 less than the insured sought. The tendered check was accepted on the agreement of the insurer that it was without prejudice to the insured’s right to claim and sue for the additional $6,885.36 in dispute.

The theory of the insured is that its dishonest employee was liable to. it for interest on the money she stole, from the date of its misappropriation, and, under the bond, the insurer stands in the shoes of the employee. (It contends primarily that the sum of $6,885.36 represents interest on the money stolen and, alternatively, that it should not have been applied to reduce the total of the amount stolen but rather treated as the employee purported to treat it — as interest on the “loans” she made to herself under fictitious names.) The insurer contends that since the bond in terms affords it a period of thirty days after proof of loss has been filed, “in which to investigate the claim,” its liability to pay a loss did not arise until the expiration of the thirty days, and only then would interest begin to run. (In its computation of the loss suffered, the insurer treats the sum of $6,885.36 as repayment of stolen principal.) In deciding whether interest is payable by the guarantor of the honest conduct of another who has defaulted, the Courts have usually stated the crucial question to be whether interest is due from the time of defalcation or from the time demand is made on the guarantor, and have divided in their answers. See annotation in 57 A. L. R. 2d 1317, 1324-1325, and 11 Appleman, Insurance Law and Practice, Sec. 6426, p. 195.

The true distillate of the authorities, as we read them, is that interest is due from the time of defalcation if it is a part of the loss or damage guaranteed against, up to but not above the penalty of the bond or insurance policy, and the guarantor also must pay interest on the sum for which he is liable under the contract instrument, from the time he should have paid the loss. Some, if not most, of the differences in the results of the cases have come from failure to. distinguish between, on the one hand, interest which is owed because it is part of the fundamental obligation of the guarantor under his contract, and, on the other, interest which is chargeable against the guarantor ⁴⁹⁷ because he did not pay whatever amount he was liable to pay when, under the contract, he should have paid it. Other differences in result have flowed from failure to recognize, in the particular case, that the amount of the stolen corpus equalled or exceeded the full penalty of the bond or insurance policy and that, therefore, the guarantor could not be liable for any additional amount, including interest which was part of the loss, but only, if at all, for interest due because he did not pay the loss, when he should have. See Banking Com’n v. National Surety Corp. (Wisc.), 11 N. W. 2d 171 ; Guarantee Co. v. Mechanics’ Sav.

Bank & Trust Co. (6th Cir.), 80 F. 766 (in which interest was allowed from time of defalcation to time of notice to the guarantor but not during the three months’ period subsequent to the giving of notice given the insurer by the policy to investigate a claim) ; Totowa v. American Surety Co. of N. Y. (N. J.), 188 A. 2d 586 ; Massachusetts Bonding & Ins. Co. v. United States (9th Cir.), 97 F. 2d 879, 881 . In McShane v. Howard Bank, 73 Md. 135 , this Court adopted the view that interest ran from the dates of defalcation of the cashier of a bank who had embezzled its funds under the pretense that he had borrowed them.

The condition of his bond was that it would be void “if the above bound [cashier] * * * do and shall well and faithfully discharge the duties imposed upon him as the cashier of said bank * * (p. 146) After pointing out that the terms of the contract control and that a surety’s obligation is to be strictly construed and his liability is not to be extended by mere implication beyond the letter of his contract, Judge McSherry, for the Court, said at pages 159-160: “*** was the Superior Court right in instructing the jury to allow interest on each of the items making up the total defalcation of Ridgaway, from the respective dates of those items? Generally speaking, the rule is that interest should be left to the discretion of the jury; but this rule is not without exceptions, and amongst its exceptions are cases on bonds or on contracts to pay money on a day certain, and cases where the money has been used. * * * Ridgaway improperly ⁴⁹⁸ and unlawfully took and applied to his own use, the money of the bank, and his obvious duty is to put the bank in the precise position it would have occupied had the money not been taken and retained by him. As between him and the bank the duty on his part to pay interest on each sum he embezzled from the time of embezzlement was as positive as the duty to repay the money itself. The whole sum and the interest on each item make up the true measure of damages against him for wrongfully taking and detaining or using the money of the bank.

The extent of his liability fixes the extent of the responsibility of his sureties whenever the latter are answerable for him. Gott v. State, 44 Md. 339 .” Below, Judge Prendergast concluded that the unconditional promise of the surety in McShane fixed liability at the moment each theft took place, but that under the bond in the case before us the insurer did not undertake to pay losses “when and as they occurred, unconditionally, but rather only after notice and an opportunity to check each item of loss,” and that “[i]t was then, and not before, that its liability became fixed.” He found that the cases in which there were policy provisions for notice, proof of loss and an opportunity to investigate had been uniform in holding that “interest may not be allowed until after the expiration of that time [the end of the period for investigation] ” and, in agreeing, said: “When corporate suretyship, as we know it today, replaced that unsatisfactory system [gratuitous