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Town of Ira v. Vermont League of Cities and Towns-Property

Supreme Court of Vermont

October 31, 2014

Town of Ira
Vermont League of Cities and Towns-Property and Casualty Intermunicipal Fund, Inc.

On Appeal from Superior Court, Rutland Unit, Civil Division William D. Cohen, J.

Patrick J. Bernal of Witten, Woolmington, Campbell & Bernal, P.C., Manchester Center, for Plaintiff-Appellee/Cross-Appellant.

Kaveh S. Shahi of Clearly Shahi & Aicher, P.C., Rutland, for Defendant-Appellant/ Cross-Appellee.

PRESENT: Reiber, C.J., Dooley, Skoglund, Robinson and Crawford, JJ. [1]


¶ 1 Plaintiff Town of Ira brought this action to recover from its insurer, Vermont League of Cities and Towns–Property and Casualty Intermunicipal Fund, Inc. (PACIF), certain losses related to the embezzlement of town funds by the Town’s former treasurer. On summary judgment, the trial court found that the Town was entitled to interest on the embezzled amount up to the policy limit and that this amount mooted the Town’s claim for audit and attorney’s fees, as well as insurer’s counterclaims to recoup certain sums already paid. It also granted judgment to insurer on the Town’s claim that insurer acted in bad faith by not paying for all of the items it claimed. We affirm.

¶ 2. The Town purchased a policy from insurer that included coverage of losses due to employee embezzlement. The coverage limit was $500, 000. In November 2009, an audit revealed to the Town that its long-time elected treasurer had embezzled over $300, 000 in funds from town accounts. The audit also reported that the lost interest on the embezzled funds totaled $346, 427. For these amounts and others, the Town obtained a judgment against the former treasurer for $1, 157, 883. The Town sought the coverage limit of $500, 000 from insurer. Insurer paid only a part of that amount, essentially reflecting funds actually taken and not including interest on that amount. The Town sued in this action for the difference. On cross-motions for summary judgment, the trial court ruled for the Town, holding specifically that the Town could recover lost interest in addition to the amount embezzled.

¶ 3. The insurance policy involved is a fidelity policy, which indemnifies for certain criminal conduct. Agreement H, paragraph a, of Section IV of the policy, labeled as a “commercial blanket bond, ” [2] provides in pertinent part:

The Fund agrees, subject to limitations, terms and conditions of this Coverage, to indemnify the Named Member against any loss of money or “other property, ” which the Named Member shall during the term of this Coverage sustain or discover it has sustained through... embezzlement... committed by any one of its officials or Employees, acting alone or in collusion with others.

The Town argues that the “loss of money” [3] that it “sustained through embezzlement” includes not only the amount embezzled but also the “time value of money, ” that is, the interest lost because the money was not available to invest or hold to earn interest. The insurer argues that the language covers only the amount actually embezzled, at least for an insured that is not in the business of investing or lending money.

¶ 4. The trial court sided with the Town, noting generally that the policy language “is at least broad enough to create an ambiguity as to whether interest... [is] covered” and that the ambiguity “must be construed in favor of coverage.” The court amplified:

PACIF’s interpretation of contract so as to exclude interest the embezzled funds could have earned from the definition of “loss of money... sustained through... embezzlement” is overly restrictive. It ignores that prejudgment interest is designed to make a plaintiff whole.... Interest does that by adequately compensating the plaintiff for the time value of money, a fundamental economic concept.... As such, interest [4] qualifies as a “loss of money... sustained through... embezzlement” under the policy.

¶ 5. In evaluating the trial court decision, we start with the principles under which we evaluate coverage claims. [5] Interpretation of an insurance policy, [6] like other contracts, involves the resolution of a question of law and, therefore, our review is plenary and nondeferential. Coop. Ins. Cos. v. Woodward, 2012 VT 22, ¶ 8, 191 Vt. 348, 45 A.3d 89. We give effect to the plain meaning of the terms of the policy if the meaning is unambiguous. Id. ¶ 9. We give policy language a “practical, reasonable, and fair interpretation consonant with the apparent object and intent of the parties.” Bradford Oil Co. v. Stonington Ins. Co., 2011 VT 108, ¶ 10, 190 Vt. 330, 54 A.3d 983 (quotation omitted). We do, however, construe policy language in favor of the insured where there is ambiguity. Id.; Trinder v. Conn. Attorneys Title Ins. Co., 2011 VT 46, ¶ 11, 189 Vt. 492, 22 A.3d 493. Although here we are dealing with a fidelity policy, rather than a liability policy, we see no reason why these principles should not apply in this instance. See 11 S. Plitt et al., Couch on Insurance § 160:19 (3d ed. 2014) (“[B]onds and contracts which guarantee the fidelity of employees, ... if written for profit and in the course of a business undertaken therefor, are essentially insurance contracts rather than contracts of strict or pure suretyship, and are to be construed as insurance contracts[.]”); Southside Motor Co. v. Transamerica Ins. Co., 380 So.2d 470, 471 (Fla. Dist. Ct. App. 1980) (applying liberal construction in favor of insured to fidelity bond). [7]

¶ 6. We also start with an understanding of what is at issue. As discussed in the early leading case of Bank of Brighton v. Smith, 94 Mass. (12 Allen) 243 (Mass. 1866), there are two types of prejudgment interest involved in this situation. The first is interest “from the time of misappropriation of the funds intrusted to [the employee]... as constituting a part of the damages occasioned by his misconduct.” Id. at 251. In ...

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