Insurancefidelity-informationoverdrawing of account.

drawing the same at and before the time when the contract was entered into, was one that should not have been withheld from the surety company. It is not conceivable that the surety, if advised of that habit, would have entered into the contract. In Frost on Guaranty Insurance, § 74, it is said: "The chronic defaulter, for the purpose of becoming a 'risk' under a fidelity insurance policy, is persona non grata to the insurer. The surety companies, as a matter of prudence and business policy, invariably decline a 'risk' who has been guilty of serious arrears in any previous employment. The reasonableness of this position has never been questioned, either by the courts or the public, so far as we are aware."

Where the insured states in its application that nothing is known concerning the employee's habits affecting his title to confidence, when the fact was the employee was engaged in hazardous speculation with the knowledge of the insured, there can be no recovery upon the bond. United States Fidelity & G. Co. v. Blackly, 117 Ky. 127, 77 S. W. 709.

In Belleview Loan & Bldg. Asso. v. Jeckel, 104 Ky. 159, 46 S. W. 482, it was held that if a party taking a guaranty from a surety conceals from him facts which go to increase his risk, and suffers him to enter into the contract under false impressions as to the real state of facts, such concealments will amount to a fraud, because the party is bound to make the disclosure, and the omission to make it, under the circumstances, is equivalent to an affirmation that the facts do not exist. Of similar import is Deposit Bank v. Hearne, 104 Ky. 819, 48 S. W. 160; Hebert v. Lee, 118 Tenn. 133, 12 L.R.A. (N.S.) 247, 121 Am. St. Rep. 989, 101 S. W. 175, 11 Ann. Cas. 1029. "There is no principle of law better settled than that persons proposing to become sureties to a corporation for the good conduct and fidelity of an officer to whose custody its moneys, notes, bills, and other valuables are intrusted, have the right to be treated with perfect good faith. If the directors are aware of secret facts materially affecting and increasing the obligation of the sureties, the latter are entitled to have these facts disclosed to them." 1 Morse, Bkg. p. 226.

Not only was there failure to disclose to the surety company the habitual overdraft of Hayes, but the application for the fidelity bond contained statements warranted to be true, one of which was: That there had never come to the notice or knowledge of the employer any act, fact, or information tending to indicate that the employee was unworthy of confidence, and that his employer knew "no reason why you cannot safely become surety for him." We think that there was a clear breach of the warranty of want of knowledge of facts tending to indicate that Hayes was unworthy of confidence, and of the warranty that his habits were good, and that his employer knew of no reason why the bonding company should not become surety for him.

Petition for rehearing denied May 12, 1919.

General rule.

Where, in an application for a bond insuring the fidelity of an employee or in a certificate of renewal thereof, an employer is called on to answer questions concerning the integrity and habits of an employee and the state of his accounts, said answers being made the basis of the contract, the employer is bound to exercise good faith therein, and the better rule seems to be that the failure of the employer to notify the insurer that the employee had overdrawn his account, where the employer may be charged with knowledge of the overdraft, will avoid the obligation. Carstairs V. American Bonding & T. Co. (1902) 54 C. C. A. 85, 116 Fed. 449, affirming (1901) 112 Fed. 620; Fidelity & C. Co. v. Bank of Timmonsville (1905) 71 C. C. A. 299, 139 Fed. 101; Bank of Hardinsburg & Trust Co. v. American Bonding Co. (1913) 153 Ky. 579, 156 S. W. 394; Willoughby v. Fidelity & D. Co. (1906) 16 Okla. 546, 7 L.R.A. (N.S.) 548, 85 Pac. 713, 8 Ann. Cas. 603, affirmed in (1907) 205 U. S. 537, 51 L. ed. 920, 27 Sup. Ct. Rep. 790. And see the reported case (NATIONAL SURETY Co. v. GLOBE GRAIN & MILL. Co. ante, 552). See also United States Fidelity & G. Co. v. Ridgley (1903) 70 Neb. 622, 97 N. W. 836. Compare Fidelity & D. Co. v. Courtney (1902) 186 U. S. 342, 46 L. ed. 1193, 22 Sup. Ct. Rep. 833, affirming (1900) 43 C. C. A. 331, 103 Fed. 599; United States Fidelity & G. Co. v. Citizens' Nat. Bank (1912) 147 Ky. 285, 143 S. W. 997.

In the reported case (NATIONAL SURETY Co. v. GLOBE GRAIN & MILL. Co.) the decision is rested on the general rule of insurance law that a policy is avoided by the misstatement or concealment of a material fact.

Some cases, however, are inclined to take a more lenient view of the import of an overdraft, and consequently base their decisions on the good faith of the employers making the representations in question. Thus, in Fidelity

& D. Co. v. Courtney (1902) 186 U. S. 342, 46 L. ed. 1193, 22 Sup. Ct. Rep. 833, affirming (1900) 43 C. C. A. 331, 103 Fed. 599, it was said that the overdrafts in themselves might not have been fraudulent, and that the question of good faith was properly left to the jury.

In United States Fidelity & G. Co. v. Citizens' Nat. Bank (Ky.) supra, it was pointed out that the officers of the bank did not consider that there was any evil intent on the part of the employee in regard to the overdrafts there involved, and their good faith in the matter was submitted to the jury.

Two Missouri cases to the same effect are Commercial Bank v. American Bonding Co. (1916) 194 Mo. App. 224, 187 S. W. 99, and Commercial Bank v. Maryland Casualty Co. (1916) - Mo. App., 187 S. W. 103, both cases involving the same set of facts. In both instances the court disposed of the question of the overdrafts involved by holding the findings of the referee thereon to be binding on it. In each case the referee found that the bank had exercised good faith in making its representations, and that the overdrafts had been properly treated as loans.

Another Missouri case somewhat similar is Long Bros. Grocery Co. v. United States Fidelity & G. Co. (1908) 130 Mo. App. 421, 110 S. W. 29, wherein it appeared that in the renewal certificate of a bond a grocery company stated that the accounts of the employee had been examined and found correct, and that there was no reason known why the bond should not be continued. It was held that there was no obligation on the employee to notify the insurer of an overdraft, since it was in the nature of a debt, and did not affect the integrity of the employee, which the court considered the subject of the policy.

In two cases, Willoughby v. Fidelity & D. Co. (Okla.) and Fidelity &

D. Co. v. Courtney (U. S.) supra, wherein it appeared that the representations of the integrity of the employee had been made by an agent of the employer, it was remarked that a party seeking to recover on a contract must assume its burdens, as well as its benefits, and that the employer could not take advantage of the contract made by the agent and repudiate his authority to make the representations. Illustrations.

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In Carstairs v. American Bonding & T. Co. (1902) 54 C. C. A. 85, 116 Fed. 449, affirming (1901) 112 Fed. 620, it appeared that one Essner was ployed as manager by a restaurant company, that the restaurant company procured from the Bonding & Trust Company a "fidelity bond," protecting them from loss by reason of any dishonesty on the part of said Essner, and that this bond was renewed annually. A certificate given by the restaurant company to the Bonding & Trust Company prior to the last renewal stated that "the books and accounts of Essner had been examined and found correct, and all moneys handled by him accounted for." A clause in the bond stated that any material misstatement or suppression of fact by the employer in "any statement or declaration to the company, etc., shall render this bond void from the beginning." It was shown that Essner drew on a bank account kept in the name of the restaurant company in payment of his salary, and that prior to the last renewal there were overdrafts on this account to the amount of $3,700. It was also shown that the treasurer who signed the foregoing certificate had not examined the books and accounts of Essner, as stated, but had relied entirely on the report handed him by the bookkeeper. The court said: "In this case, the parties to the contract have seen fit to expressly declare that certain statements made by the restaurant company, relative to the duties and accounts of the employed, etc., do and shall constitute an essential part, and form the basis, of their contract. This declaration is clear, un

ambiguous, and manifestly covers the certificate asked for by the [Bonding & Trust Company] as a condition precedent to the renewal of its bond." Since no examination had been made of the books and acounts of Essner, it was said that "there was then a clear and absolute noncompliance with this essential requirement."

In Fidelity & C. Co. v. Bank of Timmonsville (1905) 71 C. C. A. 299, 139 Fed. 101, it appeared that the casualty company had renewed their bond protecting the bank from loss by reason of the fraud or dishonesty of a cashier. At the time of the renewal the company had submitted to the bank questions concerning the cashier. An answer thereto stated that he was not indebted to the bank, whereas he was in fact indebted by note and on small overdrafts. The bond contained the following: "Any wilful misstatement or suppression of fact by the employer in any statement or declaration to the company concerning the employed, or in any claim made under this bond or renewal thereof, renders this bond void from the beginning." The court held that the false answers were in some instances material and that they came within the meaning of the phrase "wilful misstatement," which was interpreted as meaning any "material false statement, made with knowledge of its falsity, made voluntarily," regardless of the intent to de.. ceive.

In Bank of Hardinsburg & Trust Co v. American Bonding Co. (1913) 153 Ky. 579, 156 S. W. 394, it appeared that the cashier of a bank applied to a bonding company for fidelity insurance. The company obtained from the bank's president a statement, noted as the basis of the bond, in which the said president averred that the cashier's accounts had been correctly kept, and that he was not at the time indebted to the bank or its officers. The fidelity bond and several renewals thereon were issued, and suit was later brought to recover funds wrongfully converted by the cashier. It was shown that the president and directors had not examined the books, as stated in the application for the bond,

but had taken the word of the cashier on the matter, and that prior thereto and at that time the cashier was indebted to the bank on overdrafts of his account, and had also forged several notes which were treated as assets of the bank. It was held that an examination of the books of the bank by the president could not have failed to show these overdrafts, and that the material statements concerning the dealings of the cashier with the bank, examinations of his books, etc., were false.

In Willoughby v. Fidelity & D. Co. (1906) 16 Okla. 546, 7 L.R.A. (N.S.) 548, 85 Pac. 713, 8 Ann. Cas. 603, it appeared that a fidelity company had given a bond of $1,000, insuring to the bank of which the plaintiff was the receiver the fidelity and honesty of its president. The bond stipulated that it was made on the faith of certain warranties made by the employer, and that statements of an officer or director should be considered the statements of the employer. The warranty was made in this instance by the assistant cashier, who stated that the president was not at the time, and had not been, indebted to the bank. At the time, however, the president was indebted to the bank on his own overdraft of $35,693.24, and the assistant cashier was aware of the falsity of the answer. The court pointed out that, as in life and fire insurance policies, so too in the case of fidelity insurance, a false or fraudulent material misrepresentation would avoid the policy; and that the misrepresentation was particularly glaring in showing bad faith. It was also held that since "it is the well-settled law that a party seeking to recover upon a contract cannot claim the benefits arising therefrom and at the same time repudiate its burdens," the receiver, who was suing on the bond, could not question the authority of the assistant cashier to make the statements and warranties which induced the company to make the contract.

In Fidelity & D. Co. v. Courtney (1902) 186 U. S. 342, 46 L. ed. 1193, 22 Sup. Ct. Rep. 833, affirming (1900) 43 C. C. A. 331, 103 Fed. 599, it appeared

that a bank had requested and obtained the renewal of a "fidelity bond" covering the acts of its president, one McKnight, for one year. A certificate had been filed with the company stating that the accounts of the president had been examined and found correct, and that no reason existed, to the knowledge of the bank, why the bond should not be continued. As a matter of fact, several overdrafts had been made by the president on the account of a firm of which he was a partner. The original bond, of which the one in question was a renewal, stated that it and any renewals thereof were issued in reliance on the statements and representations which constituted an essential part of the contract. The court held that the overdrafts in themselves might not have been fraudulent, and that the bank might have been satisfied with the president's explanation thereof, and that furthermore the jury had been left to determine whether or not there were such "surrounding circumstances as to authorize them (the jury) to infer that the bank must have known of the fraud, and therefore to find that the bank could not possibly have been satisfied with the conduct of the president." It was pointed out that any knowledge possessed or acquired by an officer or director of the bank concerning the fraudulent purposes or conduct of McKnight should be considered as the knowledge of the bank. The court also said that "the information solicited was such as was proper to be asked of and communicated by the bank, and as the renewal was presumably made upon the faith of the statements contained in the certificate, the bank ought not to be heard, while seeking to obtain the benefits of the stipulations agreed to be performed by the surety, to deny the authority of its officer to make the representations which induced the surety to again bind itself to be answerable for the faithful performance by McKnight of the duties of his employment."

In United States Fidelity & G. Co. v. Citizens' Nat. Bank (1912) 147 Ky. 285, 143 S. W. 997, it appeared that a guaranty company had insured the

bank against the dishonesty of its cashier, and had granted several annual renewals thereon, always requiring statements from the bank certifying that the accounts and books of the cashier had been examined and found correct, and that he was not then in default, etc. Prior to the last two renewals the cashier had been in the habit of making overdrafts, which were not concealed, but which were often settled by notes forged by him. The guaranty company insisted that the continuation certificates contained misrepresentations by the bank, which avoided their obligation, but the court pointed out that the president and directors of the bank were not expert accountants and had testified that no discrepancies were found, and that the question had been decided by the jury in favor of the bank.

In the case of Long Bros. Grocery Co. v. United States Fidelity & G. Co. (1908) 130 Mo. App. 421, 110 S. W. 29, it appeared that a salesman employed by a grocery company obtained a bond insuring his fidelity to his employer. Later, the guaranty company issued a renewal certificate on the bond on the faith of a statement by the grocery company that the salesman's accounts had been examined and found correct, and that they knew of no reason why the bond should not be continued. The salesman had been permitted to draw on account of his commissions, and prior to the issuing of the renewal certificate his account had been overdrawn $315.03. The guaranty company insisted that they were relieved of obligation by reason of the false representation in the above-mentioned renewal certificate, when to the knowledge of the grocery company the salesman's accounts were largely overdrawn. It was held that by the terms of the bond the guaranty company was to be notified only of acts affecting the integrity of the salesman, and there was no duty to state that he had been paid more than he had earned by way of commission. The court continued: "Nor can it be said that in voluntarily permitting Knauber to overdraw his account, the integrity of Knauber in anywise was affected. 4 A.L.R.-36.

If defendant thought it material to be advised of such facts, it should have stipulated in the contract for notice of them."

In Commercial Bank v. American Bonding Co. (1916) 194 Mo. App. 224, 187 S. W. 99, one Meier, a bookkeeper of the bank, gave a bond of the bonding company to cover any defalcations. In the application for the bond it was stated by the president of the bank that Meier was not indebted to the bank, was engaged in no other business, that his accounts were correct, etc. A clause stated that these answers should be considered warranties, and should form part of the bond and any renewal thereof. On a renewal the cashier of the bank certified that Meier's accounts had been examined and found correct, and that he was not in default. It was also provided in the bond that it should continue in force by virtue of a renewal, but that the liability should not be cumulative. Meier had overdrawn his account at the bank without its consent at the time of the renewal of the bond, which, on discovery, he was required to reduce and pay off. On Meier's default it was asserted that the bank had not exercised good faith in its failure to notify the bonding company of these overdrafts. The court held that the referee had decided the question of good faith when he declared: "I do not find that the bank was prohibited from making loans to Meier or to his auto company, or to his picture show company, nor was Meier deprived of the right to engage in other business under his contract with the bond or with the bank." It was pointed out that a renewal of a policy was a separate and distinct contract; that the warranties made in the original application, while running through a renewal, were warranties only that the original statements were true, and not such as would render void the bond if there occurred a change of condition between the employer and employee. There being nothing to show that the statements in the renewals were to be held as warranties, it was held that they were merely representations, and