"On Premises" Insuring Agreement of Financial Institution Bond Does Not Cover Loss Resulting From Theft Perpetrated by Telephone
April, 2005
The Seventh Circuit has recently held that the “on premises” insuring agreement of a financial institution bond does not cover losses resulting from theft perpetrated by telephone, despite the fact that certain predicate acts occurred on the premises of the insured bank. Private Bank & Trust Co. v. Progressive Casualty Ins. Co., 409 F.3d 814 (7th Cir. 2005).
Facts
On April 14, 2003, a man purporting to be “Lawrence Goodman” entered the insured bank's Wilmette, Illinois branch and opened a corporate bank account in the name of BBI Enterprises. In order to open the account in BBI's name, Goodman presented the bank with an Illinois driver's license, an employee identification card purportedly issued by BBI, BBI's articles of incorporation, and an Internal Revenue Service employee identification card. Goodman then deposited two checks totaling $461,057.18, made payable to BBI Enterprises, into the newly opened account.
After the checks had cleared and the funds were made available, Goodman telephoned the bank and instructed it to transfer $400,200.00 from the BBI account to one of the bank's other customers from whom Goodman had purchased a number of gold coins. The bank honored the request and the funds were transferred. The bank later discovered that “Goodman” was actually Robert Manola, and that all of the documents he presented to open the BBI account were fake. After the bank discovered his true identity, Goodman/Manola returned to the bank to withdraw the remainder of the cash, and was promptly arrested.
Unable to recover its loss, the bank sought coverage under the “on premises” insuring agreement of its financial institution bond. That provision provides coverage for “Loss of Property resulting directly from… theft, false pretenses, common-law or statutory larceny, committed by a person in an office or on the premises of the insured while the Property is lodged or deposited within the offices or premises located anywhere.” The insured argued that Goodman's presence at the bank when he opened the account and deposited the checks was sufficient to trigger coverage under the bond. The insurer rejected the claim, explaining that because Goodman was not on the bank's premises when the withdrawal was made, the loss was not covered. The district court granted summary judgment in favor of the insurer, and the bank appealed.
Analysis
Relying on the plain language of the insuring agreement, the Seventh Circuit affirmed the trial court's decision, reasoning that nothing in the language of the “on premises” insuring agreement indicates an intent to extend coverage to losses caused by telephone transactions. Rather, the court explained, the purpose of the insuring agreement is to exclude such losses from coverage. In addition, the Seventh Circuit also relied upon Alpine State Bank v. Ohio Casualty Ins. Co., 941 F.2d 554 (7th Cir. 1991) (a factually analogous decision in which Clausen Miller successfully defended the insurer). In that case, the insured argued that its loss occurred when the customer deposited the funds with the insured. The court rejected the argument, reasoning that unless a bank irrevocably commits itself to allow withdrawals at the moment of deposit, a loss does not occur unless the thief is physically present on the bank's premises at the time of the withdrawal. Finally, the bank argued that coverage should be found if “most of” or the “principal” fraudulent acts occurred on its premises. The Seventh Circuit disagreed, finding no reason to expand coverage “on a case-by-case basis in light of the totality of circumstances preceding the loss.”
Learning Point:
In this decision, the Seventh Circuit properly applied the financial institution bond's “on premises” insuring agreement, concluding that a loss perpetrated by telephone did not fall within the scope of the bond's coverage. Despite the insured bank's argument that the thief committed several acts necessary to perpetrate the fraud while on its premises, the court declined to expand the scope of coverage, holding that the thief must be present on the insured's premises at the time the loss occurs.•
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