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Social Security Administration v. Employers Mutual Liability Insurance Co.

Decided: May 1, 1964.


Appeal from the Superior Court of Baltimore City; Prendergast, J.

Brune, C. J., and Hammond, Horney, Marbury and Sybert, JJ. Hammond, J., delivered the opinion of the Court.


This appeal must determine whether a corporate insurer under a fidelity or indemnity bond is liable to a defrauded employer for interest on the principal sum embezzled by an employee.

The appellant is a federal credit union. An assistant treasurer, a Miss Mand, perpetrated a series of embezzlements of money belonging to her employer by purportedly making loans to fictitious persons and pocketing the proceeds. From June 1957 to February 1962 she entered on the credit union's records some one hundred twenty such loans, totalling $50,890. According to the stipulation of facts:

"The repayment of all these loans was kept current by Mand by payments as required under the terms prescribed by the Plaintiff at the time that the loans were granted, and one of the loans was completely repaid with interest. Of the total amount of the repayments, $6,885.36 was credited [by Mand] to interest on the books of the Plaintiff."

On May 11, 1962, Mand voluntarily disclosed her peculations. At all times here pertinent the credit union was insured by the appellee, a Wisconsin insurance company duly qualified to do business in Maryland, under a "credit union blanket bond," which stated that the insurer's liability was a sum equal to the "total assets of the insured" at the time a loss was incurred up to a then applicable limit of $1,000,000 as to any loss. By the bond the insurer, among other things, agreed "to indemnify the insured for direct loss of, or damage to, any property, as defined herein, caused by the fraud or dishonesty of any of the insured's employees * * *." Under the policy definition, "property" included "money."

The bond conditions required the giving of written notice of any loss, and then provided:

"and within 90 days after giving such notice the insured shall file with the company an itemized proof of claim duly sworn to. The company shall have 30 days after proof of claim is filed in which to investigate the claim. No action shall be brought against the company under this bond unless begun within twelve months after the insured shall learn of the loss * * *."

The insured complied with the conditions as to notice and proof of loss, claiming some $41,000. After making its own

audit, the insurer on September 17, 1962, tendered a check for $34,138.86, which was $6,885.36 less than the insured sought. The tendered check was accepted on the agreement of the insurer that it was without prejudice to the insured's right to claim and sue for the additional $6,885.36 in dispute.

The theory of the insured is that its dishonest employee was liable to it for interest on the money she stole, from the date of its misappropriation, and, under the bond, the insurer stands in the shoes of the employee. (It contends primarily that the sum of $6,885.36 represents interest on the money stolen and, alternatively, that it should not have been applied to reduce the total of the amount stolen but rather treated as the employee purported to treat it -- as interest on the "loans" she made to herself under fictitious names.) The insurer contends that since the bond in terms affords it a period of thirty days after proof of loss has been filed, "in which to investigate the claim," its liability to pay a loss did not arise until the expiration of the thirty days, and only then would interest begin to run. (In its computation of the loss suffered, the insurer treats the sum of $6,885.36 as repayment of stolen principal.)

In deciding whether interest is payable by the guarantor of the honest conduct of another who has defaulted, the Courts have usually stated the crucial question to be whether interest is due from the time of defalcation or from the time demand is made on the guarantor, and have divided in their answers. See annotation in 57 A. L. R. 2d 1317, 1324-1325, and 11 Appleman, Insurance Law and Practice, Sec. 6426, p. 195.

The true distillate of the authorities, as we read them, is that interest is due from the time of defalcation if it is a part of the loss or damage guaranteed against, up to but not above the penalty of the bond or insurance policy, and the guarantor also must pay interest on the sum for which he is ...

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