WHITTAKER CORPORATION v. PACIFIC INDEMNITY COMPANY

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Court of Appeal, Second District, Division 2, California.

WHITTAKER CORPORATION, a California Corporation, Plaintiff, Respondent and Cross-Appellant, v. PACIFIC INDEMNITY COMPANY, a Corporation, Defendant, Appellant and Cross-Respondent.

Civ. 59232.

Decided: February 02, 1981

Gibson, Dunn & Crutcher by John H. Sharer, Los Angeles, Kramer, Levin, Nessen, Kamin & Soll by Steven T. Atkins and Jeffrey T. Golenbock, New York City, for plaintiff, respondent and cross-appellant. Jones & Wilson by Robert E. Jones, and Timothy W. Kenna, Los Angeles, for defendant, appellant and cross-respondent.

In an action to recover under a fidelity bond the trial court awarded judgment in favor of the Whittaker Corporation (Whittaker) and against Pacific Indemnity Company (Pacific) in the amount of $697,909.70 plus costs in the amount of $5,235.09. The damages consisted of $350,000, which Whittaker paid in settlement of a class action brought against it on behalf of certain of its shareholders, and some $233,000 in costs and attorneys fees incurred in defending said action. Pacific has appealed. Whittaker has cross-appealed seeking pre-judgment interest. We reverse the judgment and dismiss the cross-appeal.

Whittaker Corporation, effective March 1, 1968, obtained fidelity coverage for itself and its subsidiaries in an aggregate sum of $2,500,000. At that time the primary carrier was Argonaut Insurance Company which provided $250,000 in coverage and the excess of $2,250,000 was provided by Fireman's Fund Insurance Company.

Effective March 1972, the foregoing coverage was replaced by Pacific which provided coverage in the amount of $1,000,000. The life of the bond was two years or until November 1, 1974.

Early in 1972, prior to the inception of the Pacific coverage, Whittaker, while in negotiation for sale of a wholly owned subsidiary, Crown Aluminum Industries, Inc. (Crown), discovered that the book value of Crown's inventory exceeded by approximately $6,300,000, the actual value of the physical inventory. This inventory “shortage” was reported to Argonaut, the primary carrier. The sale of Crown was aborted. An investigation disclosed that the discrepancy was attributable to the conduct of Crown employees who had fraudulently altered company records to reflect an inflated inventory as support for a financial statement which overstated Crown's worth. The primary motive for such conduct, it appears, was to personally benefit the employees in terms of bonuses and increased compensation, etc. Whittaker filed a proof of loss with Argonaut and Fireman's Fund in September of 1972, and in February 1974, Whittaker filed suit against Argonaut and Fireman's Fund.

In September of 1974, the class action (hereafter referred to as the Spiekermann action) was filed against Whittaker in the United States District Court for the Eastern District of New York. This action sought damages on behalf of persons who had allegedly purchased shares in Whittaker in reliance upon the falsely inflated net worth of Crown. Whittaker retained counsel and commenced the defense of the Spiekermann action.

On September 9, 1976, some two years later, Whittaker first made claim against Pacific. When Pacific denied the claim, Whittaker instituted the present action. At about the same time Whittaker amended its pending complaint against Argonaut and Fireman's Fund to allege the pendency of the Spiekermann action and to pray for additional damages as a result.

Prior to trial of the instant action, Whittaker settled its case against Fireman's Fund and Argonaut for an aggregate of $1,520,000, and received by way of settlement an additional $1,025,000 from its accounting firm.

The undisputed facts are that certain of Whittaker's employees engaged in fraudulent conduct for the purpose of benefiting themselves, viz-a-viz their employer, which conduct, among other things, created a liability to third parties on the part of Whittaker. The fraud was complete and fully disclosed prior to the effective date of Pacific's policy. The Spiekermann action was based entirely on that fraud and was the only element of the entire matter which was not fully developed and known prior to the inception of Pacific's policy. It seems clear to us, however, that the possibility of such an action being filed was imminently foreseeable at the time the fraud was discovered.

The trial court's view of the matter was that the Spiekermann action was a “loss” covered by Pacific's policy and that it was only “discovered” on the date it was filed—a date which fell during the period of Pacific's policy coverage—hence Pacific was obligated to compensate Whittaker for that “loss”, because the policy provided for coverage for losses “sustained or discovered” during the policy period. We disagree.

Under the circumstances here the judgment of the trial court rests solely on that court's interpretation of certain language in Pacific's policy. That being a question of law we are free to adopt our own independent interpretation and make our own independent determination of just what the intent and reasonable expectations of the parties were at the time of executing the contract. (Estate of Platt, 21 Cal.2d 343, 131 P.2d 825; Parsons v. Bristol Development Co., 62 Cal.2d 861, 44 Cal.Rptr. 767, 402 P.2d 839; Estate of Shannon, 231 Cal.App.2d 886, 42 Cal.Rptr. 278.)

In our opinion the resolution of this case requires only an examination of the insuring clauses of the policy. The policy is in a form which contains several insuring clauses. Whether or not the individual insured has purchased the various coverages described in those clauses is indicated by the insertion of a dollar amount of coverage after each clause on the first page of the policy.

That first page of the policy contains the following:

The five insuring clauses referred to above read as follows:

INSURING CLAUSE I—COMMERCIAL BLANKET EMPLOYEE DISHONESTY COVERAGE

The Company shall be liable for such losses of Money, Securities and other property caused by any fraudulent or dishonest act or acts committed by any Employees of any Insured acting alone or in collusion with others.

INSURING CLAUSE II—COVERAGE WITHIN PREMISES

The Company shall be liable for such losses caused by the actual destruction, disappearance or wrongful abstraction of Money and Securities within or from the Premises, Banking Premises or a night depository chute or safe maintained by any bank or trust company.

Coverage under this Insuring Clause shall also include:

(A) loss of, or damage to other property by Robbery or attempt thereat within the Premises,

(B) loss of, or damage to such property contained within any safe which results from Safe Burglary or attempt thereat within the Premises,

(C) damage to a locked safe, cash drawer, cash box or cash register within the Premises by felonious entry or attempt thereat or loss by felonious abstraction of such container from within the Premises and

(D) damage to the Premises by such Safe Burglary, Robbery or felonious abstraction or by or following burglarious entry into the Premises or attempt thereat.

INSURING CLAUSE III—COVERAGE OUTSIDE PREMISES

The Company shall be liable for such losses caused by the actual destruction, disappearance or wrongful abstraction of Money and Securities outside the Premises, while being conveyed by the Insured, a partner, an Employee, an armored motor vehicle company or any other person who is duly authorized by the Insured to have custody thereof or while temporarily within the home of the Insured, a partner, an Employee or any such other person.

Coverage under this Insuring Clause shall also include:

(A) loss of, or damage to other property by Robbery or attempt thereat outside the Premises while the property is being conveyed by the Insured, a partner, an Employee or an armored motor vehicle company and

(B) loss by theft of such property while temporarily within the home of the Insured, a partner or an Employee.

INSURING CLAUSE IV—MONEY ORDERS AND COUNTERFEIT PAPER CURRENCY COVERAGE

The Company shall be liable for such losses caused by the acceptance in good faith:

(A) in exchange for merchandise, Money or services, of any post office or express money order, issued or purporting to have been issued by any post office or express company, if such money order is not paid upon presentation, or

(B) in the regular course of business, of counterfeit United States or Canadian paper currency.

INSURING CLAUSE V—DEPOSITORS FORGERY COVERAGE

The Company shall be liable for such losses caused by forgery or alteration of, on or in any check, draft, promissory note, bill of exchange, or similar written promise, order or direction to pay a sum certain in money, made or drawn by, or drawn upon or as a direction to the insured, or made or drawn by one acting as agent of the Insured, or purporting to have been made or drawn as hereinbefore set forth, including:

(A) any check or draft made or drawn in the name of the Insured, payable to a fictitious payee and endorsed in the name of the fictitious payee,

(B) any check or draft procured in a face to face transaction with the Insured or with one acting as agent of the Insured by anyone impersonating another and made or drawn payable to the one impersonated and endorsed by anyone other than the one impersonated and

(C) any payroll check, payroll draft or payroll order made or drawn by the Insured payable to bearer as well as to a named payee and endorsed by anyone other than the named payee without authority from the payee;

whether or not any endorsement mentioned in sub-division (A), (B) or (C) of this paragraph be a forgery within the law of the place controlling the construction thereof.

Mechanically reproduced facsimile signatures shall be treated the same as handwritten signatures.

Although Whittaker was covered only by insuring Clauses I and V, and although insuring Clause I is the only one at issue in this case, we have set out all of the available clauses because they delineate the general contours of the coverage afforded by this type of insurance and when read in context, demonstrate that liability to third parties was not contemplated by the parties.

The policy nowhere contains any of the usual language found in liability policies to the effect that the insurer will pay any damages which the insured may become legally obligated to pay as a result of certain designated tortious conduct. Nor does the policy contain any provision giving Pacific the right or imposing on Pacific the obligation to defend an action brought against Whittaker by third persons.

Whittaker, however, contends, and the trial court agreed, that insuring Clause I can be interpreted to cover the attorneys fees and the settlement amount paid out by Whittaker as “losses” of money or “other property.”

The cardinal rule of interpretation is that contracts are to be interpreted so as to give effect to the mutual intent of the parties. Civ.Code, § 1636.) Corollary rules to aid achievement of that result are that the whole of the contract is to be considered with each clause helping to interpret the other (Civ.Code, § 1641) and however broad may be the terms of a contract, it extends only to those things concerning which the parties appear to have intended to contract (Civ.Code, § 1648).

Whittaker, on the other hand, relies heavily on the rule that in case of ambiguity or uncertainty, the language of a contract should be interpreted against the party causing the ambiguity. (Civ.Code, § 1654.)

As to insurance contracts “Any ambiguity or uncertainty in the policy will be construed against the insurer in order to achieve the object of coverage for the losses to which the policy relates.” (Emphasis added.) (1 Witkin, Summary of Cal.Law (8th ed. 1973) Contracts, § 536.)

The emphasized phrase is the key to the rule. We reiterate that the underlying purpose of the rules for interpreting contracts are to give effect to the mutual intent of the parties. Courts should not use the rule requiring interpretation of an ambiguity against one of the parties as a device to rewrite the contract and to create an obligation which was never intended or reasonably expected. (Hellman v. Great American Ins. Co., 66 Cal.App.3d 298, 136 Cal.Rptr. 24.)

The literal terms of the policy carry less weight than the substance of the transaction and we will not indulge in a forced construction of the terms simply to favor the insured over the insurer, (Pacific Indem. Co. v. Liberty Mut. Ins. Co., 269 Cal.App.2d 793, 75 Cal.Rptr. 559; Pacific Employers Ins. Co. v. Maryland Casualty Co., 65 Cal.2d 318, 54 Cal.Rptr. 385, 419 P.2d 641) especially where the insured is, as here, a large corporation whose executives are sophisticated businessmen. In addition to the above referenced insuring clauses, the policy here contains the following:

“The Company's liability under this bond shall apply only to Money, Securities and other property owned by the Insured or as respects which the insured is legally liable, or held by the Insured in any capacity whether or not the Insured is liable …”

“Money means only currency, coin, bank notes, and bullion.”

The clear implication to be drawn from the above referenced clauses is that the policy contemplates a direct loss by theft, embezzlement or fraudulent means of money or property in the possession of Whittaker and not simply the paying out of money by Whittaker in satisfaction of a liability to a third party.

“Other Property”, as that term is used in the insuring clause, patently refers to forms of property other than money or securities and does not refer to other methods of loss.

In short, Whittaker, here, erroneously persuaded the trial court to convert an ordinary fidelity bond into a comprehensive liability insurance policy. The policy cannot be reasonably interpreted as indicating that such a result was intended by the parties at the time of contracting.

Whittaker has not cited us to any California authority, nor has our research disclosed any, which supports its contention that money paid on account of attorneys fees and settlement of third party liability claims constitutes the kind of loss contemplated by the ordinary fidelity bond, such as we have here. The two federal circuit cases, i. e., Imperial Insurance, Inc. v. Employer's Liability Assurance Corp., D.C.Cir., 442 F.2d 1197; National Surety Corp. v. Rauscher, Pierce & Co., 5th Cir., 369 F.2d 572, which Whittaker cites in support of its position, we find to be based on unpersuasive rationale and factually distinguishable.

The judgment is reversed. The cross-appeal is dismissed. Defendant to recover costs.

COMPTON, Associate Justice.

FLEMING, Acting P. J., and BEACH, J., concur. Hearing denied; BIRD, C.J., dissenting.