New York Law Review

Tag: fidelity bond

  • 175 East 74th Corp. v. Hartford Accident and Indemnity Co., 51 N.Y.2d 585 (1980): Direct Action Against Insurer Requires Liability Policy

    175 East 74th Corp. v. Hartford Accident and Indemnity Co., 51 N.Y.2d 585 (1980)

    A fidelity bond, which insures against loss of property due to employee dishonesty, is not a “contract or policy insuring against liability” under New York Insurance Law § 167, and therefore does not permit a direct action against the insurer by a third party upon the insolvency of the insured.

    Summary

    A cooperative apartment corporation (plaintiff) sought to recover directly from an insurer (Hartford) under a fidelity bond issued to its managing agent (RBW), after RBW misappropriated the plaintiff’s funds and became insolvent. The plaintiff argued that Insurance Law § 167 allowed a direct action against Hartford. The New York Court of Appeals held that the fidelity bond was not a liability insurance policy within the meaning of § 167, because it insured against the insured’s direct loss of property, not the insured’s liability to a third party. Therefore, the plaintiff could not sue Hartford directly.

    Facts

    Plaintiff hired RBW to manage its building, collect rents, and pay expenses. RBW agreed to obtain a fidelity bond covering employees responsible for plaintiff’s funds. Hartford issued a fidelity bond to RBW, covering losses sustained by RBW due to fraudulent or dishonest acts of its employees. Plaintiff discovered RBW had misappropriated its funds. Plaintiff sued RBW, its officers, and Hartford. The complaint against Hartford was dismissed due to the plaintiff’s default. A judgment was later entered against RBW for $50,000. RBW became insolvent, and the judgment remained unsatisfied.

    Procedural History

    The Supreme Court, Special Term, granted Hartford’s motion to dismiss the second action based on res judicata and the inapplicability of Insurance Law § 167. The Appellate Division reversed, finding the prior dismissal not a bar and § 167 applicable. The Appellate Division certified the question of whether its order was properly made to the Court of Appeals.

    Issue(s)

    Whether a fidelity bond, insuring against loss due to employee dishonesty, constitutes a “contract or policy insuring against liability” within the meaning of Insurance Law § 167, thus permitting a direct action against the insurer upon the insured’s insolvency.

    Holding

    No, because the fidelity bond insures against direct loss of property sustained by the insured, not against the insured’s liability to a third party.

    Court’s Reasoning

    Insurance Law § 167 allows a direct action against an insurer only when the policy insures against liability. The statute’s purpose is to prevent an insurer from escaping liability when the insured becomes insolvent. The court distinguished between liability policies, which cover the insured’s obligations to third parties, and indemnity policies, which cover the insured’s own losses. The fidelity bond issued by Hartford insured RBW against direct loss of property due to employee dishonesty. The court emphasized that “[n]othing applicable to the employee dishonesty coverage indicates that the agreement insures against liability asserted by a third person. Indeed, by its terms, the coverage attaches to a loss of property irrespective of the insured’s liability therefor.” The fact that RBW might be liable to the plaintiff for the misappropriated funds does not transform the fidelity bond into a liability policy. The court rejected the plaintiff’s reliance on Coleman v. New Amsterdam Cas. Co., 247 N.Y. 271, noting that in Coleman, the policy expressly provided coverage against liability imposed by law. The Court stated, “It is only where the insured’s liability for injury to a third party forms the basis of coverage… that section 167… ensures that the benefits of that coverage will run to the injured party. Absent that predicate, however, there is no basis for invoking section 167.”

  • Letendre v. Hartford Accident & Indemnity Co., 21 N.Y.2d 518 (1968): Admissibility of Employee Statements in Fidelity Bond Cases

    21 N.Y.2d 518 (1968)

    In an action by an employer to recover on a fidelity bond, an extrajudicial declaration made by his employee is admissible as affirmative evidence against the surety, provided the declaration is in writing and the declarant is available for cross-examination.

    Summary

    Letendre sued Hartford to recover on a fidelity bond for losses caused by his employee, Tremblay. The key issue was the admissibility of Tremblay’s written confession to embezzling funds, made after the alleged defalcation. The New York Court of Appeals held the statements were admissible, overturning the long-standing rule in Hatch v. Elkins, which had excluded such statements as hearsay. The Court reasoned that the availability of the declarant for cross-examination and the reduced risk of collusion justified admitting the statements as affirmative evidence, thereby furthering the truth-finding function of the courts. The dissent argued for upholding Hatch and excluding the hearsay statements.

    Facts

    Victor Letendre owned a gas station and motel. He secured a fidelity bond on his employee, James Tremblay, before leaving Tremblay in charge while Letendre operated a restaurant in Florida. Upon returning, Letendre discovered discrepancies in business records and bank accounts. Tremblay initially denied any wrongdoing but later confessed to defalcations in a written statement to the insurer’s agent. Subsequently, Tremblay retracted the confession, claiming he only stole a small amount. At trial, Tremblay denied embezzling any funds.

    Procedural History

    Letendre sued Hartford to recover on the fidelity bond. The trial court admitted Tremblay’s inculpatory statements into evidence and returned a verdict for Letendre. The Appellate Division affirmed, finding the statements admissible due to Tremblay’s continued employment at the time they were made. The Court of Appeals granted leave to appeal to determine the admissibility of the statements.

    Issue(s)

    Whether an extrajudicial declaration made by an employee after the acts to which they relate is competent evidence against the surety in an action by an employer to recover on a fidelity bond.

    Holding

    Yes, because the statements were in writing, and the declarant was available for cross-examination, mitigating the dangers of hearsay and furthering the truth-finding function.

    Court’s Reasoning

    The Court of Appeals rejected the rule in Hatch v. Elkins, which had held that extrajudicial statements of a principal made after the fact are inadmissible against the surety. The Court reasoned that the primary justification for the Hatch rule—the fear of collusion between the employer and employee against the surety—did not outweigh the probative value of the evidence, especially where the employee is available for cross-examination. The Court stated, “In an action by an employer to recover on a fidelity bond, an extrajudicial declaration made by his employee should be admissible as affirmative evidence against the surety, where the declaration is in writing and the declarant is available for purposes of cross-examination.” The Court also highlighted that the risk of admitting such statements is no greater than in other types of cases where collusion is possible, and that an employee risks criminal charges by admitting embezzlement, making collusion unlikely. The Court emphasized the injustice of depriving employers of potentially crucial evidence. Judge Breitel’s dissent argued for upholding the Hatch rule, citing its long-standing precedent and alignment with general hearsay principles, as well as the increased risk of collusion when the employee remains employed. He further noted the importance of cautionary instructions to the jury regarding the weight of extrajudicial statements.