Opinion
No. 34693.
October 27, 1941. Suggestion of Error Overruled November 24, 1941.
1. INSURANCE.
In determining whether falsity of representations contained in application for fidelity bond defeated right to recovery on the bond, the application for bond, which referred to the bond, and the execution of the bond, under terms of which the surety had right to cancel it if proper application had not come in, constituted a single transaction, notwithstanding fact that the bond was delivered four days before application was delivered.
2. INSURANCE.
Where lumber company did not comply with representations contained in application for fidelity bond covering company's employee, which stated that complete audit of cash securities and accounts would be made two to four times annually, and that statements would be sent to customers by someone other than the employee, and evidence showed that if the representations had been true, embezzlement by employee would not have occurred, and that bond would not have been executed except for reliance on the representations, failure to comply with the representations defeated recovery on bond for loss sustained through employee's embezzlement, regardless of whether representations were made fraudulently.
3. ESTOPPEL.
A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on part of the promisee, and which does induce such action or forbearance, is binding if injustice can be avoided only by enforcement of the promise.
APPEAL from the circuit court of Hinds county, HON. JULIAN P. ALEXANDER, Judge.
Chambers Trenholm, of Jackson, for appellant.
Even appellee admits the answers as promissory representations, and that they were promissory in their nature. There is no reference whatsoever in the bond to the Employer's General Statement, either by making it a part of the contract, making the answers thereto warranties, or conditioning the issuance of the bond thereon. The bond is completely silent thereasto. The statement itself contains nothing of that character except that the information is given to enable "the Surety to decide with full knowledge of the facts" whether or not to make the bond. "Facts," of course, cannot include promises for the future.
The answers of the insured to questions propounded by the insurer, with respect to the facts and circumstances under which the insurer is asked to make the contract of insurance, seem to fall into two classes: (1) Warranties; and (2) Representations. And representations also fall into two classes: (1) Those dealing with existing matters or facts; and (2) Those dealing with future acts of the insured. The latter are commonly called "promissory representations," indicating that they do not deal with existing matters or facts.
One of the most enlightning cases on this subject is that of Grand Lodge v. Massachusetts Bonding Co., 25 S.W.2d 783, decided by the Supreme Court of Missouri in 1930. Suit was by the Grand Lodge on a fidelity bond covering its treasurer. One of the questions in the employer's statement executed by the Grand Lodge was: "How often will the books and accounts be audited, and verified with funds and securities on hand and in bank?" Answer: "Once a year, by the Commissioner of Insurance and Grand Lodge." The defendant claimed that that was a warranty, and had been breached. The bond provided that all representations made by the employer to the surety relative to the employee, in connection with the issuance of the bond, were warranted to be true. The court held that statements of the employer that the Grand Master would counter-sign all checks, and that the Grand Lodge would once each year audit the treasurer's books and accounts, and verify them, were not incorporated in the bond by reference, since such statements were not relating to the employee, but to the future conduct of the employer, and that where the alleged warranty is not set forth in the bond, but appears in a collateral document, it must be referred to in the bond with sufficient clearness to indicate that the parties intended to make it a part of the bond, since statements or alleged agreements not made a part of the bond were not part of the contract, the bond being the agreement between the parties. Therefore, it was further held that when the representations as to countersignature of checks and auditing of books and accounts were not made part of the bond, non-compliance with such representations was not a breach of the bond.
The court then said: "There is a distinction between a representation and a warranty. A `representation' is not strictly speaking a part of the bond or the essence of it, but rather something collateral or preliminary and in the nature of inducement to it, whereas `warranties' enter into and form a part of the bond itself. 1 Life Accident Insurance, Bacon (4 Ed.), pp. 464, 466, Paragraphs 255 and 256."
The court further held that the above mentioned representations as to countersignature of checks and annual audits must be regarded as promissory representations only, which could not be regarded as fraudulent representations inducing the making of the bond, as a false representation, in order to constitute actionable fraud, must relate to past or existing facts; and representations, altho false, which relate to something to be done in the future, cannot be made the basis of charges of fraud. The court even went so far as to say that the employer's statement that the treasurer's books and accounts had been examined, and found correct in every respect, and all monies handled by him accounted for, was not an absolute warranty, but merely that the employer had examined them and found them correct. In other words, had not found anything wrong!
We respectfully invite the court to read that case, as it covers the situation here very completely. And it follows and applies the old doctrine that a charge of false representations cannot be predicated of a promise to perform in the future.
See, also, Farmers Union Grain Co. v. U.S.F. G. Co., 109 Neb. 142, 190 N.W. 221; 3 Joyce, Insurance (2 Ed.), Par. 1891; Title Guaranty Surety Co. v. Bank of Fulton, 89 Ark. 471, 117 S.W. 537, 33 L.R.A. (N.S.) 676; Fidelity Deposit Co. v. Colorado Ice Storage Co., 103 P. 383; Isaac Upham Co. v. U.S.F. G. Co., 59 Cal.App. 606, 211 P. 869 (1922, hearing denied by Supreme Court, 1923); Hunter v. U.S.F. G. Co., 129 Tenn. 572, 167 S.W. 692; Title Guaranty Co. v. Nichols, 274 U.S. 346, 32 S.Ct. 475; M.K. T. Trust Co. v. German National Bank, 77 Fed. 117; Slidell S. H. Assn. v. Fidelity Deposit Co., 178 La. 548, 152 So. 121; 32 C.J. 1283, 1284; 14 R.C.L. 1026, Par. 206; Handleman v. Maryland Casualty Co. (La.), 184 So. 827; Main v. Benjamin Foster Co. (Fla. 1939), 192 So. 602.
The United States Circuit Court of Appeals for the Fifth Circuit, which Circuit includes Mississippi, had before it in 1933 the case of U.S.F. G. Co. v. Howard, 67 F.2d 382, which was an action on a fidelity bond. It held that a breach of a promissory representation made by a bank that an auditing committee would examine the employee's books and accounts semi-annually, and that a committee would pass on the security of its loans, would not defeat recovery on the bond unless the bond so provided.
See, also, Maryland Casualty Co. v. Ind. Loan Inv. Co., 83 F.2d 14; Underwriters Finance Corp. v. Union Indemnity Co., 61 F.2d 865.
This court does not seem to have passed upon this point as to a fidelity bond, but, as shown above, stated that such bonds are to be governed by the general rules applicable to insurance. But see Planters Ins. Co. v. Myers, 55 Miss. 479; Citizens Ins. Co. v. Swords, 109 Miss. 635, 68 So. 920.
Lotterhos Travis and Vardaman S. Dunn, all of Jackson, for appellee.
The failure of appellant to comply with its express undertaking in the employer's statement to make at least two complete audits of cash, securities and accounts and to verify accounts by sending statements to customers prevented recovery on the bond.
The undertaking in the employer's statement was material to the risk and was relied on as a basis for the bond.
United States Fidelity Guaranty Company v. Downey, 38 Col. 414, 88 P. 451, 10 L.R.A. (N.S.) 323; Stipcich v. Met. Life Ins. Co., 277 U.S. 311, 72 L.Ed. 895.
There was no substantial compliance with the undertaking to make two complete audits. The undertaking in question was such as to require a substantial compliance and it is immaterial that the employer's statement was not referred to in the bond.
American Bonding Trust Co. v. Burke (Colo., 1906), 85 P. 692; Springfield Fire Marine Ins. Co. v. Nix, 162 Miss. 669, 138 So. 598; Citizens Nat. Life Ins. Co. v. Swords, 109 Miss. 635, 68 So. 920; Nonantum Inv. Co. v. Md. Cas. Co. (C.C.A. 5th, 1932), 56 F.2d 329; U.S.F. G. Co. v. Howard, 67 F.2d 382; Clark v. Till, 177 Miss. 891, 172 So. 133; Ganony v. Brown, 88 Miss. 53, 40 So. 556; N.O. N.E.R.R. Co. v. Poplarville Sawmill Co., 132 Miss. 757, 96 So. 467; Floyd v. Arky, 89 Miss. 700, 42 So. 569; A.L.I. Restatement Contracts, Sec. 279; Williams v. Batson, 186 Miss. 248, 187 So. 236; U.S.F. G. Co. v. Wilson, 184 Miss. 823, 185 So. 802; A.L.I. Restatement Contracts, Sec. 90; Annotation, 115 A.L.R. 152; Hinds County Water Co. v. Scanlon, 159 Miss. 767, 132 So. 567; Lusk-Harbinson-Jones v. Universal Credit Co., 164 Miss. 693, 145 So. 623; Brewer v. Universal Credit Co., 192 So. 902; Dayhood v. Neely, 135 Miss. 14, 99 So. 440.
The doctrine of promissory estoppel has been generally applied to insurance contracts and to circumstances analogous to those in the case at bar. Although the doctrine has not always been termed a promissory estoppel, the doctrine has been recognized and applied in a great many decisions.
U.S.F. G. Co. v. Downey, 38 Colo. 414, 88 P. 451, 10 L.R.A. (N.S.) 323; Fidelity Deposit Company v. Kane (Kentucky), 206 S.W. 888; Nonantum Inv. Co. v. Md. Cas. Co. (C.C.A. 5th), 56 Fed. 2d 329; Mendenhall v. Farmers Ins. Co. (Ind., 1915), 110 N.E. 50; Clark v. Mass. Ins. Co., 8 How. 236, 12 L.Ed. 1061; U.S.F. G. Co. v. Foster Deposit Bank (Ky., 1912), 147 S.W. 406.
Appellant, Planters Lumber Company, brought this action against appellee, Trinity Universal Insurance Company, to recover the sum of $2,415.21 on a fidelity bond executed by Elizabeth Young, Secretary-Treasurer of the Lumber Co. as principal, and the Insurance Co. as surety. The basis for recovery is that Miss Young embezzled the amount sued for while occupying that position with appellant, the liability for which was covered by the fidelity bond. The evidence showed without dispute that she was guilty of the embezzlement. The trial resulted in a verdict for the Insurance Co. and judgment accordingly, from which judgment the Lumber Co. prosecutes this appeal.
The Lumber Co. made a written application to the Insurance Co. for the execution of the bond. In the application certain representations of existing facts were made, and in addition certain promissory representations as to how the Lumber Co. would conduct its business in the future. Those representations along with the premiums to be paid were the consideration for the execution of the bond. The defense of the Insurance Co. is that they were breached by the Lumber Co.
The first paragraph of the application for the bond is in this language: "The following information is given to the Surety by the Employer for the purpose of enabling the Surety to decide with full knowledge of the facts whether or not to furnish the desired suretyship."
Among the representations in the application are the following: "24. How often will complete audit be made of the cash, securities and accounts? Two to four times annually. By whom? T. Albert Ross, Certified Public Accountant, Deposit Guaranty Bank Building, Jackson, Mississippi.
"25. When was the last audit made? December 31, 1937. By whom? T. Albert Ross, Certified Public Accountant, Jackson, Mississippi.
"26. Are statements prepared and sent to customers by someone other than the employee? Yes. If so, how often and by whom? T. Albert Ross, Certified Public Accountant.
"28. Has any examination or inventory ever revealed a shortage in this or a similar position? No. If so, give particulars on separate sheet."
The evidence without conflict showed the falsity of the answer to Question 28. The facts were that two previous secretaries-treasurers, employed by the Lumber Co., had embezzled the aggregate of approximately $10,000. Those facts, however, were known to the Insurance Company's State Agent, Reid, at the time the application was made and the bond issued. Both the application and the bond passed through his hands for delivery. The lower court held under Section 5196, of the Code of 1930, that his knowledge was that of the Insurance Co. and therefore the falsity of that representation would not defeat a recovery. That action of the court is the basis of a cross-assignment of error by the Insurance Co. We do not pass on that question because we have reached the conclusion that there should be an affirmance of the judgment based on the breach by the Lumber Co. of the promissory representations.
The evidence showed with little, if any, conflict that the habit of the Lumber Co. was to have only one audit made annually and that that course was pursued during the life of the bond. In other words, instead of from two to four audits annually, as stated in the answer to Question 24, there was only one; and furthermore, that the customers of the Lumber Co. were not circularized at all in order to ascertain the status of their accounts. The answer to Question 26 was that that was being done and by "someone other than the employee."
The application for the bond and the execution of the bond constituted one transaction. They were inter-dependent. Although the application is not referred to in the bond, the latter is referred to in the application. In the first paragraph of the application it will be observed that the statements of fact therein made as well as the promissory representations are information given to "the surety by the employer for the purpose of enabling the surety to decide with full knowledge of the facts whether or not to furnish the desired suretyship." The evidence tended to show that they were material representations; that if they had been true the embezzlement probably would not have occurred, and furthermore, that the bond would not have been executed except for the reliance thereon by the Insurance Co.
It is immaterial whether the representations were made fraudulently or in good faith. Their falsity defeats a recovery by the Lumber Co. The controlling principle is stated in American Law Institute, Contracts, Section 90: "A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." Id. Sec. 279; United States F. G. Co. v. Downey, 38 Colo. 414, 88 P. 451, 10 L.R.A. (N.S.) 323, 120 Am. St. Rep. 128; Stipcich v. Life Ins. Co., 277 U.S. 311, 48 S.Ct. 512, 72 L.Ed. 895. There is no Mississippi case directly in point. If the Missouri Court decided to the contrary in Grand Lodge v. Massachusetts Bonding Co., 324 Mo. 938, 25 S.W.2d 783, we decline to follow that decision; we think it unsound.
The proposition that the application and bond constitute one contract, not two, is held in the affirmative by the following authorities: Nonantum Inv. Co. v. Maryland Cas. Co., 1 Cir. 1932, 56 F.2d 329; Floyd v. Arky, 89 Miss. 162, 42 So. 569; Clark v. Till, 177 Miss. 891, 172 So. 133.
The fact that the bond was delivered four days before the application was delivered is immaterial. The whole transaction went through the office of Reid, State Agent. When the bond was delivered the parties knew that the application was forthcoming and what is contained. Furthermore, under the terms of the bond the Ins. Co. had the right to cancel it if the proper application had not come in. American Bonding Company v. Burke, 1906, 36 Colo. 49, 85 P. 692.
Affirmed.
Alexander, J., not participating.