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Summary Judgment Reversed in Bond Case
Published in the June 2009 issue of Litigation Notes - View Article
The Ontario Superior Court of Justice granted summary judgment in a claim for losses caused by the dishonesty of an employee under a fidelity bond issued by Co-operator’s General Insurance Company and Cumis General Insurance Company. The decision was reversed by the Ontario Court of Appeal on the basis that there were issues that required a full hearing
Iroquois Falls is a town in Northern Ontario where the main employer is Abitibi Consolidated, a pulp and paper company. The Iroquois Falls Community Credit Union was established in the 1970’s and 80 - 90% of it’s members were current or former employees of Abitibi.
In the mid 1980’s Abitibi began to scale back its operations and the economy of Iroquois Falls suffered correspondingly. Loans and mortgages extended by the Credit Union to its members began to go into default. Donna Simmons was the Credit Union’s general manager. Many of its members were her friends and family and she wanted to help them. She removed cash in the approximate amount of $253,000.00 from the Credit Union’s treasury over time. She would keep cash in her bottom drawer and deposit to members accounts to cover impaired loans and overdrafts. She also wrote off various loans and overdrafts improperly and granted overdrafts and lines of credit in excess of her authority.
An audit of the Credit Union eventually revealed these irregularities and led to the Credit Union being placed under the supervision of the Deposit Insurance Corporation of Ontario (“DICO”). DICO made a claim for losses caused by the dishonesty of an employee under a fidelity bond issued by Co-operator’s General Insurance Company and Cumis General Insurance Company. The insurers denied the claim on various grounds, including the fact that the requirements for coverage under the employee “Dishonesty” provision of the bond were not met and that a number of exclusions in the bond were applicable.
The Credit Union brought a motion for summary judgment which was granted by the motions judge. The insurers appealed. The Ontario Court of Appeal agreed with the insurers that summary judgment should not have been granted in this case.
The “Dishonesty” provision of the bonds Insuring Agreement set out four requirements for coverage: (i) the insured must sustain a direct loss of property; (ii) the direct loss of property must result from the dishonest or fraudulent acts of an employee; (iii) the employee must have committed those dishonest acts with the “manifest intent” to cause the Insured to sustain the loss; and (iv) the employee must have committed those dishonest acts with the “manifest intent” to obtain a financial benefit for any person or entity or for oneself.
The Insurers argued that the Credit Union did not suffer a direct loss of property because the money taken from treasury had been deposited in customers’ accounts. Consequently, there had been “no money out the door”. The Court considered that as soon as the cash had been removed from the Credit Union’s vault, there had been a direct loss of property. “The Credit Union suffered a direct loss to its cash position from that transaction in much the same way that the king sustains a direct loss when robbed by Robin Hood, even though Robin Hood later gives the money to peasants to pay their taxes to the king”.
The situation with respect to the extension of unauthorized credit was not so clear. Simmons had made dishonest fictitious entries for two purposes, to advance new loans and to prevent existing loans from going into default. The Insurers argued that the dishonest act of concealing the default of a legitimate loan should be distinguished from the dishonest act of extending credit that the Credit Union would not have authorized otherwise.They argued that the act of merely concealing indebtedness, even if dishonest, could not be said to have caused the loss.
The motion judge had taken the view that all of Simmons’ dishonest acts were part of a single collusive scheme and that the Credit Union’s claim, in the aggregate, resulted from dishonesty. Insurers argued that Simmons had not admitted to a collusive scheme, but rather to individual acts and decisions made over the years in relation to different members and their accounts.The motion judge, they submitted, should not, on a motion for summary judgment, have made the finding of fact that there was a single collusive scheme.
The Court of Appeal agreed: “…Given its potential bearing on the analysis of both liability and damages, the finding of fact that all the dishonest acts were part of one scheme should not have been made on a summary judgment motion.On a summary judgment motion, where significant evidence, albeit uncontested, is reasonably capable of supporting more than one inference, the motion judge should refrain from deciding the issue of fact.The competing inferences should be resolved at trial…”
In addition the Court of Appeal considered that the interpretation of certain Conditions and Exclusions in the bond raised genuine issues for trial. These included the condition for “Termination”. This condition would prevent coverage from attaching in circumstances where the Credit Union had learned of Simmons’ dishonesty before some or all the losses claimed were sustained. Outside inspection reports to the Credit Union had identified unauthorized overdrafts as well as other lending activity irregularities and raised the question of whether the Credit Union learned that Simmons had committed dishonest acts prior to some of the losses.
The condition for “Notice of Loss” required a written notice of loss within 20 days after discovery of the loss. Discovery of the loss is defined in the bond as including “..when the insured becomes aware of facts which would cause a reasonable person to conclude that a loss covered by this Bond has been or will be incurred.” What a reasonable person would gather from the repeated findings of irregularities in the outside inspection reports was a matter to be decided at trial.Similarly, several of the bond’s exclusions raised issues best decided by a trial judge.
The Court of Appeal allowed the appeal, set aside the summary judgment granted by the motion judge, and dismissed the summary judgment motion brought by the Credit Union.
Iroquois Falls Community Credit Union
Limited v. Co-Operators General Insurance Company, 2009 ONCA 364 (CanLII)