This Texas diversity case involves the question whether the failure by an insured to furnish proof of loss to its insurer within the time specified by the bond contract precludes recovery on the bond. Appellee, Abilene Savings Association, as successor to Western Commercial Savings and Loan Association, brought this action against appellant, Westchester Fire Insurance Company, seeking indemnity under a savings and loan blanket bond for losses sustained by Western Commercial through the misappropriation of funds by a person covered by the bond. The district court, following a jury trial on special interrogatories, held for Abilene Savings. We reverse.

The salient facts are not disputed. Westchester Fire Insurance Company (Westchester) provided Western Commercial with blanket bond coverage from November, 1967 until April, 1968. Among other things the bond covered losses occasioned by the dishonest, fraudulent, or criminal acts of Western Commercial's employees.

During the years 1966 and 1967 an officer of Western Commercial, in five separate transactions, wrongfully misapplied funds belonging to the company. Shortly thereafter a federal examiner uncovered documentary evidence of such misapplication, and on February 28, 1968 Western Commercial sent notice to Westchester of a possible loss under the bond.1

The bond provided, via rider, that "Within 100 days after discovery of loss under said bond by the Insured . . . the Insured shall furnish to the (Insurer) affirmative proof of loss with full particulars in writing, including dates and items of loss, duly sworn to."2

Abilene Savings, into which Western Commercial was merged in December of 1968, subsequently stipulated that it discovered the loss, as contemplated by the bond, on February 28, 1968 when notice was first sent to Westchester. Except for a letter dated February 29, 1968 indicating that the federal examiner's investigation had turned up evidence of misappropriation, neither Western Commercial nor its successor Abilene Savings communicated with Westchester again until October 24, 1969 when the vicepresident of Abilene Savings informed Westchester that the dishonest employee had been indicted by a Federal Grand Jury, and listed the charges against him. On November 26, 1969 an instrument designated "Affirmative Proof of Loss" was submitted to Westchester, but was returned to Abilene Savings on the grounds that it was deficient in several respects. A fully-documented proof of loss was finally forwarded to Westchester on February 6, 1970, nearly two years after the stipulated discovery date.

Following the failure of Westchester to indemnify it, Abilene Savings commenced this action in the United States District Court for the Northern District of Texas. The jury, responding to written questions submitted by the trial court, found that proof of loss had been furnished within a reasonable time after discovery of loss and that Westchester had not been prejudiced by the delay in filing. Judgment was accordingly entered in favor of Abilene Savings and this appeal was taken.

We start with the proposition that under Texas law, which is binding on us in this diversity litigation, blanket bonds such as the one before us are to be construed in the same manner as insurance contracts generally. Great American Insurance Company v. Langdeau, 379 S.W.2d 62 (Tex.1964). The general rule in Texas is that furnishing timely proof of loss, where such is an express requirement of an insurance contract, is a condition precedent to recovery in the absence of waiver or estoppel. See, e. g., Members Mutual Ins. Co. v. Cutaia, Tex., 476 S.W.2d 278; United States Fidelity and Guaranty Company v. Bimco Iron and Metal Corporation, 464 S.W.2d 353 (Tex.1971); New Amsterdam Casualty Company v. Hamblen, 144 Tex. 306, 190 S.W.2d 56 (1945); Scottish Union and National Insurance Company v. Clancy, 83 Tex. 113, 18 S.W. 439 (1892); Providence Washington Insurance Company v. Whitley, 71 S.W.2d 359 (Tex.Civ.App., Galveston 1934, writ dismissed). In the instant case the bond expressly provided that within 100 days after discovery of loss, proof thereof was to be furnished to Westchester. It is clear, of course, that Abilene Savings did not file its proof of loss within the time required by its contract, for an adequate proof of loss was not submitted to Westchester until nearly two years had elapsed since discovery. Since the proof of loss requirement can be properly characterized as a condition precedent to recovery, Abilene Savings' failure to furnish such proof within 100 days invalidates its claim for indemnity, unless an exception to the general rule applies.

In Texas either waiver or estoppel will excuse non-compliance with a condition, but since Abilene Savings failed to raise either of these defenses, we need not consider them here.3 It is argued instead that Texas courts follow a liberal rule inasmuch as they are reluctant to declare a forfeiture on insurance policies for failure to make formal proof of loss where no provision for forfeiture is contained in the contract. Concededly the bond contract at issue here contained no provision for forfeiture. However, that fact alone does not in this case preclude application of the general rule that failure to comply with a condition precedent negates recovery on the bond.

The policy against forfeitures has, of course, long provided a judicial perspective for viewing insurance contract disputes involving noncompliance with conditions precedent. However, the doctrine is limited and requires some affirmative action by the parties which the courts can seize upon as justification for overriding explicit contractual provisions. As the Texas Supreme Court said, "While it is a maxim that forfeitures are odious, the law is not eager to relieve against them; it takes no initiative; and in itself presents no remedy against the contract the parties have themselves made." Equitable Life Assurance Society v. Ellis, 105 Tex. 526, 147 S.W. 1152, 1156 (1912). We are of the opinion that the case before us presents a situation in which the specific terms of the contract are controlling.

We note that neither Western Commercial nor its successor Abilene Savings made an independent effort to determine how much it had lost, but instead relied on the federal government to furnish the details. Following the correspondences of February 28 and 29, 1968, the insured did not again communicate with Westchester for nearly 20 months, even though its officers knew that proof of loss had to be furnished within a specified time. No attempt was made to secure from Westchester an extension of the time within which to furnish proof. Moreover, the insured's officers understood the requisites of a formal proof of loss, which normally include an audit of company records, yet no audit was undertaken. The facts thus indicate that Abilene Savings made little or no effort to comply with the terms of its contract even though it was fully aware of the nature and purport of the proof of loss requirement. The burden was on the insured here to effect substantial compliance with its end of the deal, but in that respect it has been deficient. We do not find in the Texas case law any indication that studied inaction of this sort is sufficient to invoke the policy against forfeiture. That doctrine is applied only where equity and good conscience dictate that recovery be had and this is not such a situation.4

Appellee relies chiefly on Aetna Life Insurance Company v. Tipps, 98 S.W.2d 375 (Tex.Civ.App.1936, affd. 132 Tex. 213, 121 S.W.2d 324 (1938) which involved an insurance policy requiring only "due proof", not as here proof within a specified time. In affirming the Court of Appeals decision upon which appellee relied, the Texas Supreme Court recognized the clear distinction between specific time requirements in an insurance contract and those which are general. It said,

"The policy contains no requirement to furnish the company the usual notice and proof of loss within a specifed time. In fact no element of time enters into the requirement other than that 'due proof' of disability be furnished after it had existed for a period of six months 'during the continuance of this policy'. . . . How long after, or what shall be considered 'due proof' is not specified in the policy. Cases cited by the company in support of its contention that the clause in question was not complied with . . . are not in point. The requirements to be met in those cases as conditions precedent to recovery are specific. In the present case the requirement is wholly general." 121 S.W.2d 327.

Moreover, the court concluded that the due proof requirement had in fact been complied with and thus, while the Tipps case is distinguishable from the instant one, it nonetheless supports the principle which we find is controlling in this case. Cf. Connecticut General Life Insurance Company v. Kornegay, 93 S.W.2d 164 (Tex.Civ.App. Beaumont 1936, writ dismissed).

Where the parties have bargained freely and on equal terms their contract ought not be extended by implication or enlarged by construction beyond the actual terms of the agreement entered into by the parties. Great American Insurance Company v. Langdeau, supra. They have made their own contract and it is not for the court "to vary their terms in order to protect them from the consequences of their . . . failures in nonobservance of obligations assumed." Dorroh-Kelly Mercantile Company v. Orient Insurance Company, 104 Tex. 199, 135 S.W. 1165, 1167 (1911). The obligation assumed in this instance by Western Commercial was to furnish Westchester with proof of loss within 100 days after discovery, and, absent circumstances which would require a different result, that obligation is binding.

Notwithstanding the above appellee urges that it is entitled to recovery on the basis of Article 5546, Vernon's Tex.Civ. Statutes which provides:

"No stipulation in a contract requiring notice to be given of a claim for damages as a condition precedent to the right to sue thereon shall ever be valid unless such stipulation is reasonable. Any such stipulation fixing the time within which such notice shall be given at a less period than ninety days shall be void. . . ." (Emphasis added.)

The statute on its face applies only to requirements for giving notice and thus we are faced with the threshold question as to its applicability to proof of loss stipulations. On this issue there would appear to be a split of Texas authority5 which we do not here attempt to resolve. Even if we assume that the statute does apply to proof of loss provisions, the 100 days requirement in the bond here at issue is not thereby rendered automatically void. Inasmuch as the bond provision exceeds 90 days it is void only if the provision itself is unreasonable, and that is a question of fact for the jury to determine. See, e. g., Missouri, K & T Ry of Texas v. Newton, 60 Tex. Civ. App. 110, 127 S.W. 873 (1910, writ refused). That question was not before the jury in the trial below, and since appellee neither submitted a requested instruction on the issue nor objected when none was given, it must be deemed to have waived the point.6

For the foregoing reasons we are of the opinion that Abilene Savings cannot recover on this bond. The contract is unambiguous and the parties thereto, being on equal terms, should be held to the obligations they assumed.

The judgment is reversed and the case is remanded to the trial court with directions to enter a judgment for the defendant on its motion N.O.V.

Erie cases produce eerie results, as this case so well demonstrates. For despite the fact that the assured acted as any reasonable person would have under the circumstances and that the insurer suffered no prejudice from his actions, the Court here allows an insurer to escape its obligation to indemnify an undisputed loss simply because the assured did not do something which nobody suggests it could reasonably have been expected to do at an earlier time.

The place where the Court goes wrong, it seems to me, is in failing to appreciate precisely what the provision in controversy called for. It sought proof-detailed, affirmative, written, particularized, verified, sworn-to proof-that a loss had occurred under the policy, how it had occurred, when it had occurred, by whom it had been caused and how much monetary value it involved. Anything less would not-did not-satisfy either the insurer or the policy provision in question. What Westchester thought the policy requirement meant can be no better demonstrated than by its own rejection of Abilene Savings' letter of October 24, 1969, which undertook to be a proof of loss in which the dates, amounts and defalcating employee were set forth with as much particularity as then possible:

"Among other things, you have offered no proof as to the loans or of the fact of your assertion that Mr. McAden received any of the funds which were the subject of the loans. You have given no details of the discovery of the alleged infidelity, including the dates and by whom discovered. You have given no affirmative proof regarding the alleged relationship between Mr. McAden and any of the recipients of the loans, nor have you explained the relationship of Mr. McAden to Western Commercial Savings & Loan Association except to mention that he held a position as Chairman of the Board of Directors. No information as to his stock ownership or other details of his relationship are given. In addition, there is not offered any proof of the relationship between Abilene Savings Association and Western Commercial Savings & Loan Association and with respect to your assertion that Western Commercial Savings & Loan Association of Abilene was merged into Abilene Savings Association on December 31, 1968.

"In general, the 'affirmative proof of loss' is not the proof of loss contemplated by the bond in question and until it does comply, the claim cannot be given any consideration. We assume you will want to resubmit it." (Emphasis added.)

It is therefore apparent that the proof of loss provision-as interpreted by the insurer-demanded details-"full particulars * * * duly sworn to." But it is inescapable on this record that such information was not available to Abilene Savings until the time of McAden's trial (February 1970). Immediately thereafter Abilene Savings forwarded all the proof to the insurer.

It must be remembered here that the defalcation involved was not a run-of-the-mill, or perhaps more accurately, a run-of-the-till case of merely some teller absconding with a cash drawer full of loot. Rather it encompassed a very complex scheme whereby the Chairman of the Board of Directors (McAden) channeled funds into his personal coffers through fraudulent loans to dummy or cooperating corporations. Though examiners were early able to tell that this individual was dipping into the till, the detailed affirmative proof demanded by the insurer required complete audit of the bank and also of the two corporations through which the money was passed and a thorough investigation by the Federal Home Loan Bank and the Federal Bureau of Investigation, neither of which made their reports available until McAden's trial, in February, 1970. All of the evidence so indicated.

Robert Jordan, Vice-President of Abilene Savings testified that the first time Abilene Savings had access to detailed information with which to file a detailed, sworn proof of loss was during the trial of McAden, and that without the records of the two manipulated corporations, the precise manner of the defalcation could not be proved.1

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Bill Churchill, the supervisory analyst for the Federal Home Loan Bank who first discovered that a criminal investigation was appropriate, testified that his report could not be divulged to Abilene Savings, but only to government investigating authorities, and that exposure of the defalcation required examination of the records of the other corporations.2

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James Hayes, an Examiner for the Texas Savings and Loan Department who had managed Western Commercial Savings and Loans3 throughout 1968, testified that through December 31, 1968, he never had sufficient information to compile a detailed report of the loss, setting forth full particulars required by the bonding company, under oath, and outlining precisely McAden's misdealings.4

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* * *Indeed, all the evidence points to one conclusion-until McAden's trial, Abilene Savings simply did not have and could not reasonably have been expected to obtain sufficient detailed information of the nature demanded by the insurance company to fulfill its obligation to provide verified proof of loss with full particulars. And the jury, guided by appropriate instructions, so found. The Trial Court had instructed them what they had to find before they could conclude that Abilene Savings had acted reasonably.

"A 'reasonable period of time' means that period in which an ordinarily prudent person, acting under the same or similar circumstances, would have filed a proof of loss. You must consider that the ordinary prudent person would use reasonable diligence, and you must examine the conduct of the directors, officers and managing agent of the Western Commercial Savings and Loan Association to determine whether or not, if an ordinarily prudent person had been in their shoes, he would have taken as much time as was taken for the filing of the proof of loss after the discovery of the loss. In arriving at your answer to that question you should take into consideration all of the circumstances relevant thereto that have been proved to your satisfaction."

Answering Interrogatory No. 1 that proof of loss had been filed within a reasonable period of time after discovery of loss, the jury made clear their finding that Albilene Savings could not reasonably have been expected to acquire sufficient knowledge of "full particulars" any sooner than it did, and therefore could not have earlier filed the requisitely explicit proof of loss.

At this juncture it bears emphasis that this is not-as the Court laboriously structures it-a question of the (i) validity or (ii) strict compliance with a notice clause. I accept (i) validity and as to (ii) the stringent and recent approach which leads the Texas Supreme Court, which has not only the latest but also the last word, to a self-acknowledged injustice5 would impel me to acquiesce in a conclusion that the letter of the bond must prevail to demand the filing within 100 days of the required verified proof of loss. The problem is not when it must be filed. It is what must be filed.

This involves what the parties intended. At this point our own cases6 clearly establish that in the quest for intent the Court must put itself in the position of the parties. This is not a rule simply to dispel ambiguities. It is a rule for all seasons.

Considering that an insurance company from sheer self-interest knows that to attract and hold business it must supply what its market customers reasonably need to protect them against identifiable risks under limits and restrictions which are mutually bearable and, on the other hand, the customers must acknowledge an operational justification for these limitations and conditions, the problem is one of determining what reasonably was meant by the 100 day provision.

On this approach, surely the parties to the bond did not contemplate that at the awful expense of forfeiture of protection paid for, the assured was required to file a completely meaningless, virtually blank piece of paper "duly sworn to" within 100 days of discovery of the loss.

What-and all-the provision in question sought to accomplish was that before the insurer should be required to pay a claim or defend a lawsuit it be shown some reliable factual, detailed evidence-other than the unverified, selfserving assertions of its assured-that a bona fide loss had actually occurred within the coverage afforded and that the amount claimed was legitimate and accurate. This would enable the insurer to determine in fact just what, if anything, was owing, so that it could promptly be paid.

Contrary to the assumptions of some, an underwriter wants-wants, no less-to pay a loss. He knows that without paying losses he has no reason to exist,7 and unless he willingly-yea, enthusiastically-pays a loss no one will seek his wares, and without sales there is no business, and without business there is no profit. So for the coveted Madison Avenue image, cf. Travelers Indemnity Co. v. Holman, 5 Cir., 1964, 330 F.2d 142, 145, this requirement serves to assure the assured that, as the TV commercial puts it, he is indeed in good hands and, at the same time assure the insurer that it can honor a genuine loss in amounts which, if not altogether undisputed, are at least demonstrably fair on their face.

Likewise, having prescribed what is demanded in writing under oath it would be completely reasonable to prescribe (within the limits of pertinent regulatory state statutes) a fixed time in which to file what is required. This makes certain that before the assured could pressure the insurer with threats of costly litigation, the insurer be given an opportunity to examine the claim and determine that it is neither fraudulent, inflated nor unfounded. The time limit is designed to minimize the chance of prejudice to the insurer in accomplishing this objective caused by delay of the assured.8

But here the Court, never examining into what insurer-assured reasonably could have intended, and proceeding under the erroneous notion that the Texas question is one of when, not what, has transformed the provision into something altogether different-a requirement that the assured, on risk of forfeiture for non-compliance, either file a paper swearing to facts it could not reasonably be expected to know, or file a paper ostensibly under oath which because of its lack of particularity, could be of no benefit or value to anyone.

I do not think an insurer ought to be allowed to so easily avoid its obligations simply because the assured, acting reasonably, did not do something which was not required by the policy-file a meaningless piece of paper-or something which it could not reasonably have been expected to do-verify facts which it could not possibly have accumulated, particularly where the loss is uncontradicted both as to coverage and amount.

I am the first to acknowledge that the Court decides the case the way it does because it conscientiously feels compelled to do so by the Erie Texas law, but I believe that the Court has misperceived the pivotal inquiry to be one of when, instead of what.

I therefore respectfully dissent.