SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-2987-98T5
CONESTOGA TITLE INSURANCE CO.,
Plaintiff/Third Party
Plaintiff-Respondent,
v.
PREMIER TITLE AGENCY, INC., f/k/a
STEWART TITLE AGENCY OF SALEM COUNTY,
ROBERT M. WURSTER, PATRICIA J. WURSTER,
GEORGE HAMPTON, BEVERLY HAMPTON,
KEVIN MARK MARINI, WILLIAM McINTYRE,
JANET M. McINTYRE, PATRICIA J. McMAHON,
MARGARET M. McMAHON, RICHARD K. HUMPHREYS,
SHERRY J. HUMPHREYS, JOHN T. SEGICH,
LAURA M. SEGICH, FREDERICE HUMPHREYS,
WILLIAM T. SMITH, SUSAN P. SMITH,
BANK UNITED OF TEXAS, FSB, d/b/a
COMMONWEALTH UNITED MORTGAGE,
Defendants,
v.
OLD REPUBLIC INSURANCE COMPANY
a/k/a OLD REPUBLIC SURETY COMPANY,
FRONTIER INSURANCE COMPANY,
PREMIER TITLE AGENCY, INC.,
f/k/a STEWART TITLE AGENCY OF
SALEM COUNTY,
Third-Party
Defendants-Appellants.
__________________________________
Argued February 14, 2000 - Decided February 25, 2000
Before Judges Petrella, Conley and Coburn.
On appeal from the Superior Court of New
Jersey, Law Division, Salem County.
Roger P. Sauer argued the cause for appellant
Old Republic Insurance Company (Friedman
Siegelbaum, attorneys; Mr. Sauer and Lindsey
H. Taylor, on the brief).
R. James Kravitz argued the cause for
respondent (Fox, Rothschild, O'Brien &
Frankel, attorneys; Mr. Kravitz, of counsel
and on the brief).
Wolff & Samson, attorneys for amici curiae
The Surety Association of America and American
Insurance Association (Edward G. Gallagher and
Martha L. Perkins, of counsel; Armen
Shahinian, on the brief).
The opinion of the court was delivered by
COBURN, J.A.D.
This is an action on a fidelity bond by the assignee of the
insured. The Law Division judge found in favor of the assignee,
plaintiff Conestoga Title Insurance Company ("Conestoga"), and
entered judgment in the amount of $385,470.59. The bond issuer,
defendant Old Republic Insurance Company ("Old Republic"), appeals.
We reverse because the thefts resulting in the claim under the bond
were committed not by an employee of the insured but by its alter
ego, an individual who was the insured's sole director, officer,
and stockholder.
Although a bench trial occurred, the relevant facts are
undisputed. Conestoga, a title insurance company, authorized
defendant Premier Title Agency, Inc. ("Premier") to issue title
insurance policy commitments on its behalf and required that
Premier obtain fidelity insurance. Premier obtained that insurance
from Old Republic based on a written application that included the
following information: "Number of employees by position[:]
Officials [-] 1 President[;] Accounting [-] 1 Accountants[;] Other
[-] 1 Secretary/Reception." It also recited "TOTAL NUMBER OF
EMPLOYEES [-] 2 + 1 owner." The application is used to calculate
premiums, which are based on the number of employees; however, Old
Republic charges the same premium for up to five employees and does
not include persons listed as owners in setting the premium.
Defendant Robert M. Wurster was the sole director, president,
and shareholder of Premier, which had two other employees. In that
capacity, he supervised numerous title closings during which he
issued Conestoga title commitments and received checks payable to
Premier from home purchasers, the funds to be held in trust and
used to satisfy existing mortgages on the purchased properties.
Instead of paying off the previous mortgages on the properties,
Wurster stole the money. Conestoga reimbursed Premier's clients,
and obtained a judgment against Premier and an assignment of any
rights it might have against Old Republic under the fidelity bond.
The fidelity bond insured Premier against dishonest acts of
its employees; and, in relevant part, it defined the term
"employee" as "Any natural person . . . in your service . . .
[w]hom you compensate directly by salary . . .; and [w]hom you have
the right to direct and control while performing services for
you[.]" (Emphasis added). The bond also provided that "this
insurance is for your benefit only. It provides no rights or
benefits to any other person or organization."
The trial judge found as a fact that Wurster, the thief, was
the alter ego of Premier. No one disputes that determination. He
reasoned that under the case law "coverage should not be afforded
in 'alter ego' situations unless such coverage was part of the
bargain." Based on the application for the fidelity bond and the
testimony that applications were used to set premiums, he concluded
that Old Republic had agreed to provide coverage for embezzlements
committed by Wurster with respect to funds held in trust by
Premier. He properly concluded that Conestoga was not a third
party beneficiary under the bond (and Conestoga does not disagree),
but he sustained its right to proceed against the bond as assignee
of Premier's alleged rights.
An assignee's rights are limited to the rights of the assignor
and are subject to all the equities and defenses that could have
been asserted against the assignor before assignment. James
Talcott, Inc. v. H. Corenzwit & Co.,
76 N.J. 305, 309-10 (1978).
Therefore, we turn our attention to Premier's alleged rights under
the fidelity bond.
As a general matter, "fidelity bonds indemnifying employers
against dishonest acts of their employees are to be broadly
construed." Mortgage Corp. v. Aetna Cas. & Sur. Co.,
19 N.J. 30,
36 (1955). But that principle is customarily limited to cases
where the question is whether the particular acts of a true
employee are covered by the bond, id. at 36-38, a point not
presently at issue.
The fundamental question to be resolved is whether Wurster was
an employee of Premier as defined in the fidelity bond. Conestoga
does not appear to be contending that the policy definition is
ambiguous, and the trial judge did not so find. Rather, he based
his judgment on the information contained in the application, which
he believed established an agreement to cover Wurster, a point that
we will consider after discussing the policy itself.
The courts of this state have not yet addressed the basic
issue, but numerous cases have held that this common definition of
employee in corporate fidelity bonds__persons whom you have the
right to direct and control while performing services for you__is
unambiguous and means that thefts by corporate alter egos are not
covered. Bird v. Centennial Ins. Co.,
11 F.3d 228, 233-34 (1st
Cir. 1993).
The general rule that corporations are separate and distinct
from their shareholders and officers, Stopford v. Boonton Molding
Co.,
56 N.J. 169, 187 (1970), has no place in this analysis. Nor
is there any significance to the corporation's theoretical right to
govern an entirely dominant "employee." As the court said in Bird,
supra:
[W]e join those courts that . . . reject the
claim that the theoretical right to govern and
direct a dominant corporate actor is
sufficient to render that actor an employee
under the definition of employee set forth in
the Policies. We think it apparent that the
"right" to govern and direct referred to in
the Policies must be more than an ephemeral
right inhering generally in the corporate
form; rather, it must have some grounding in
reality.
Although Conestoga continues to rely, in part, on Premier's theoretical right to control Wurster, the trial judge properly rejected that argument, as do we. Our conclusion finds strong support in considerations of policy:
A corporation can only act through its officers and directors. When one person owns a controlling interest in the corporation and dominates the corporation's actions, his acts are the corporation's acts. Allowing the corporation to recover for the owner's fraudulent or dishonest conduct would essentially allow the corporation to recover for its own fraudulent or dishonest acts. The [fidelity] bonds, however, were clearly designed to insure the corporations against their employee's dishonest acts and not their own dishonest acts.
And the policy of not permitting insurance for intentional
wrongdoing has been expressed as our own in other settings
involving insurance claims. See, e.g., Ambassador Ins. Co. v.
Montes,
76 N.J. 477, 483 (1978). Consequently, we are satisfied
that this fidelity bond provides no coverage to Premier for the
acts of Wurster. Since Conestoga's only rights were as assignee,
it was not entitled to judgment on the bond.
The application for the policy does nothing to fortify
Conestoga's position for a number of reasons.
First, the portions of the application on which Conestoga
relies make no reference whatsoever to coverage; they merely
request information with respect to the numbers and titles of
employees. Although the form might be interpreted as indicating
that the corporation had only one officer, by implication Wurster,
there is nothing to indicate that he was the sole director and
owner of all the corporate stock, and that the corporation was
nonetheless desirous of coverage for his thefts even though it had
no control over him. Although the number of employees listed
generally dictated the amount of the premium, since there were less
than five listed, the mention of the president as an employee had
no effect on the premium. Moreover, he might have been a covered
employee if the corporation had other stockholders and directors
through whom the corporation could have exercised the necessary
control. See, e.g., General Finance Corp. v. Fidelity & Cas. Co.,
439 F.2d 981 (8th Cir. 1971).
Second, when an application for an insurance policy is neither
attached to the policy nor incorporated by reference, the general
rule is that the application may not be considered to ascertain the
intent of the parties. Wright v. Newman,
598 F. Supp. 1178, 1203
(W.D. Mo. 1984), aff'd,
767 F.2d 460 (8th Cir. 1985).
Third, even if the application were considered as part of the
policy and even if there were a conflict between the application
and the policy, which we do not perceive, the terms of the policy,
being the later expression of intent, would generally control.
Ibid.
Therefore, we reverse and remand for entry of judgment in
favor of Old Dominion dismissing the complaint with prejudice.
Reversed.