USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 97-1678
THE STOP & SHOP COMPANIES, INC.,
Plaintiff, Appellee,
v.
FEDERAL INSURANCE COMPANY,
Defendant, Appellant.
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No. 97-1784
THE STOP & SHOP COMPANIES, INC.,
Plaintiff, Appellant,
v.
FEDERAL INSURANCE COMPANY,
Defendant, Appellee.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
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Before
Selya, Circuit Judge,
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Coffin, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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Leonard F. Clarkin with whom Harry C. Beach was on brief for
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Federal Insurance Company.
Joseph L. Kociubes with whom Victor H. Polk, Jr., and Denise
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Jefferson Casper were on brief for The Stop & Shop Companies,
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Inc.
Michael Roster, Michael H. Hudnall, Robert A. Lewis, and
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William Carpenter on brief for Stanford University Hospital,
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amicus curiae.
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February 12, 1998
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COFFIN, Senior Circuit Judge. This is an insurance coverage
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dispute involving a crime insurance policy issued by Federal
Insurance Company ("Federal") to Stop & Shop Companies, Inc.
("Stop & Shop"). Federal appeals the district court's finding
that it must indemnify Stop & Shop for loss arising out of theft
by officers of Hamilton Taft & Company ("Hamilton Taft"), a
company employed by Stop & Shop to process and pay taxes.
Federal also challenges the district court's calculation of
damages, and Stop & Shop cross-appeals denial of its attorney's
fees. We conclude that the authorized representative exclusion
in the crime insurance policy bars recovery by Stop & Shop. We
therefore reverse the district court's holding that Federal must
indemnify Stop & Shop, and leave the attorney's fees decision
intact.
FACTUAL AND PROCEDURAL BACKGROUND
The material facts are essentially undisputed. In February
1990, Stop & Shop purchased a crime insurance policy from Federal
which provided coverage for "direct losses caused by the . . .
disappearance, wrongful abstraction or Computer Theft of Money
and Securities . . . ."1 The policy excluded coverage for loss
due to the "[t]heft or any other fraudulent, dishonest or
criminal act . . . by any [e]mployee, director, trustee or
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1Insuring Clause 2 provides coverage for such loss within or
from the premises or banking premises; insuring clause 3 provides
for coverage from such loss "outside the premises, while being
conveyed by the Insured, . . . or any other person duly
authorized by the Insured to have custody thereof. . . ."
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authorized representative of the Insured whether acting alone or
in collusion with others." Because we find that the issue in
this case turns on the exclusion clause, we detail only briefly
the somewhat unusual circumstances surrounding the losses
suffered by Stop & Shop.
Stop & Shop entered into a tax service agreement in 1987
with Hamilton Taft, by which Stop & Shop would deposit funds with
Hamilton Taft and Hamilton Taft would then use these funds to
remit timely payments to taxing authorities on behalf of Stop &
Shop. The agreement allowed Hamilton Taft to commingle Stop &
Shop funds with deposits from other customers and to use the
money for its own investments and expenses so long as tax
payments owed by Stop & Shop were made when due. In 1989, Connie
Armstrong assumed control of the company, becoming Hamilton
Taft's sole shareholder, director and chief executive officer.
In 1990, Stop & Shop renewed its contract with Hamilton
Taft, after making certain revisions. These included changing
the language, "This agreement may not be assigned to persons who
are not employees of Hamilton Taft" to "This agreement may not be
assigned by Hamilton Taft."
In the relevant period for this case, Stop & Shop had tax
payments due on October 18, 1990, October 25, 1990, January 17,
1991, and January 24, 1991, totalling $5,257,474 for October, and
$7,632,269 for January. On these dates, Hamilton Taft employees
prepared the checks and recorded them as payments made in their
accounting logs. As was standard practice with amounts in excess
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of $100,000, the checks were then sent to the front office for an
officer's counter-signature. The checks were not, however,
mailed in the required period of time.
Upon discovering that its October and January tax payments
had not been made, Stop & Shop contacted Hamilton Taft, which
ultimately responded by paying the October liability on January
31, 1991, and the January liability on March 8, 1991. Around the
same time, a former Hamilton Taft comptroller reported to about
thirty Hamilton Taft clients that the company's executives, most
notably Armstrong, were diverting client funds intended for tax
payments and using these funds for their personal use or for
investment in other Armstrong-owned companies. In late March,
three Hamilton Taft clients petitioned the company into
involuntary bankruptcy, and a Trustee was appointed. The Trustee
calculated the loss from improper diversion of client funds at
over $55 million. In January 1992, the Trustee demanded that
Stop & Shop repay the bankrupt estate for the January and March
1991 tax payments made by Hamilton Taft, arguing that these
payments were voidable preferences.2
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2The Bankruptcy Code allows a bankruptcy trustee to:
. . . avoid any transfer of an interest of the debtor
in property --
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the
debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made --
(A) on or within 90 days before the date of the
filing of the petition . . .
11 U.S.C. 547(b).
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Litigation proceeded in federal court in California, where
the Ninth Circuit ultimately agreed that the January and March
payments were voidable preferences subject to repayment. Shortly
thereafter, Stop & Shop settled with the Trustee for a portion of
its tax liability. It then filed a claim in district court for
indemnification by Federal for its remaining loss; upon Federal's
motion for a transfer of venue, the case was moved to
Massachusetts. Federal argued that it had no obligation to
indemnify because Stop & Shop's loss was not direct and the
policy's authorized representative exclusion barred recovery for
theft perpetrated by Hamilton Taft executives. The district
court found direct loss and held the exclusion inapplicable.
The court then awarded damages to Stop & Shop but denied its
request for attorney's fees. Each side appeals.
DISCUSSION
Although the parties raise multiple issues on appeal, our
conclusion on the exclusion clause issue makes it unnecessary to
discuss the remaining ones. We therefore begin with Federal's
claim that the clause bars coverage, and Stop & Stop's response
that the clause is inapplicable because the responsible Hamilton
Taft executives diverted funds for their personal gain and not
for the benefit of the company.
Construction of insurance contracts and application of their
terms to facts are matters of law, which we review de novo.
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Preferred Mut. Ins. Co. v. Travelers Co., 127 F.3d 136, 137 (1st
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Cir. 1997). Exclusionary clauses must "state clearly what items
are to be excluded and any ambiguity is to be interpreted
strictly in the insured's favor." American Home Assur. Co. v.
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Libbey-Owens-Ford Co., 786 F.2d 22, 28 (1st Cir. 1986) (applying,
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as we do here, Massachusetts law). Ambiguity exists where the
language is susceptible to more than one rational interpretation.
Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st. Cir. 1997).
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But where the policy's language is plain, we interpret and
enforce it according to the ordinary meaning of the words
contained in the policy's provisions. Bird v. Centennial Ins.
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Co., 11 F.3d 228, 232 (1st Cir. 1993); Cody v. Connecticut
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General Life Ins. Co., 387 Mass. 142, 146, 439 N.E.2d 234, 237
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(1982). "[L]ack of ambiguity is a relative status, not an
absolute one. . . . [I]t is sufficient if the language employed
is such that a reasonable person, reading the document as a whole
and in a realistic context, clearly points toward a readily
ascertainable meaning." Fashion House, Inc. v. K Mart Corp., 892
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F.2d 1076, 1085 (1st Cir. 1989).
The question for us is whether the actions of Hamilton Taft
executives in diverting funds for their own gain fall under
Federal's authorized representative exclusion. The district
court found that the term "authorized representative" was
ambiguous based on several factors: it was not defined in either
the policy or case law, other crime insurance contracts included
express terms excluding coverage, the parties' course of conduct
in amending the Agreement suggested their specific intention that
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Hamilton Taft and not Armstrong be Stop & Shop's authorized
representative, and no public policy reasons precluded coverage.
Resolving the ambiguity in favor of the insured, the court
therefore determined that Stop & Shop was covered under the
policy for the losses sustained.
We find each of these reasons lacking in force and conclude
that the language in context is susceptible to only one
definition, exclusion of coverage. In the absence of a statutory
definition, or any relevant state law construction of the term,
we begin by turning to the lexical meaning, as Massachusetts
courts frequently do, see, e.g., Gordon v. Safety Ins. Co., 417
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Mass. 687, 690, 632 N.E.2d 1187, 1189 (1994), and to a thoughtful
federal case, Colson Services Corp. v. Ins. Co. of North America,
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874 F. Supp. 65 (S.D.N.Y. 1994), which provide us with thorough
and specific explanations of the term. Black's Law Dictionary
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133-34 (6th ed. 1990) defines "authorized" as possessed of
control or power delegated by a principal to his agent, and
"representative" as "a person or thing that . . . in some way
corresponds to, stands for, replaces, or is equivalent to,
another person or thing. . . . includ[ing] an agent, an officer
of a corporation or association . . . or any other person
empowered to act for another," id. at 1302. Webster's Third New
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International Dictionary (Unabridged) 146 (1966) defines
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"authorized," inter alia, as "endorse[d], empower[ed]," and
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"representative" as "standing for or in the place of another:
action for another or others: constituting the agent for another
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especially through delegated authority," id. at 1926-27. The
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court in Colson relied on the Webster's meaning, concluding that
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a company given authority by another company to act as its agent
in choosing investments was an "authorized representative" under
the relevant crime insurance policy. 874 F. Supp. at 68.
These definitions persuade us that an "authorized
representative" can be either a person or company empowered to
act on an entity's behalf. Stop & Shop accepts this definition,
but insists that in this case only Hamilton Taft was its
authorized representative and that individuals who behave
inconsistently with the interests of Hamilton Taft, such as the
executives who committed the theft here, cannot fall under the
exclusion.
We repeat at the threshold the fundamental premise that,
while a corporation does have a noncorporeal and independent
existence, it can conduct its affairs only through its officers
and employees. See Holmes v. Bateson, 583 F.2d 542, 560 (1st
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Cir. 1978). Thus, where Hamilton Taft is conceded to be Stop &
Shop's authorized representative, it must also be conceded that
Hamilton Taft may carry out its obligations to Stop & Shop only
through the acts of its officers and employees. Given this, we
must consider whether the term omits acts by individuals acting
for their own benefit.
Stop & Shop argues that the authorized representative
exclusion is at minimum ambiguous on this point because the
policy does not delineate its scope, as other policies have done
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in the context of employee exclusion clauses. Before addressing
the specifics of this argument, we emphasize that it stretches
the notion of ambiguity to conclude that language is ambiguous
because of something that is not said. Definitions of ambiguity
require examination of the language employed, see, e.g., Fashion
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House, 892 F.2d at 1085, not the language omitted. With some
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hesitancy therefore we address Stop & Shop's argument that
ambiguity exists because the exclusion does not, after
"authorized representative," contain the language, "while working
or otherwise."
A careful review of the cases cited for this proposition
reveals their constant thrust, and the inappropriateness of their
use in the instant case. For they all actually turn on the
temporal scope of the action -- specifically, whether the theft
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was committed outside of working hours -- rather than the nature
of authority given or the type of behavior involved. See, e.g.,
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Citizens Ins. Co. of New Jersey v. Kansas City Commercial
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Cartage, Inc., 611 S.W.2d 302, 309-11 (Mo. Ct. App. 1980); Del
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Vecchio v. Old Reliable Fire Ins. Co., 132 N.J. Super 589, 594-
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96, 334 A.2d 394, 397-98 (1975); Sehon, Stevenson & Co. v.
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Buckeye Union Ins. Co., 298 F. Supp. 1168, 1169-70 (S.D.W. Va.
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1969); Century Indem. Co. v. Schmick, 351 Mich. 622, 627-28, 88
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N.W.2d 622, 624-25 (1958).3 These cases have found that theft by
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3In Colson, 874 F. Supp. 65 (S.D.N.Y. 1994), also cited for
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this proposition, the applicable policy excluded acts by an
authorized representative "while working or otherwise," but the
case never discussed and in no way turned on the meaning of this
clause. Rather, the Colson court explored only the definition of
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employees after their shift is over -- in other words, after the
period of time during which they are actively working for their
employer -- falls under an employee theft exclusion only where
the "while working or otherwise" language is included in the
policy. Other cases have taken the contrary position, but we do
not discuss them, as we find this entire line of cases
inapposite. We are not involved here with when the diversion of
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funds occurred; certainly no argument has been made that the
fraud was perpetrated at any time other than during working
hours. Nor would it make sense to think of a corporate
authorized representative as having working hours.
Indeed, to the extent they are relevant, the employee
exclusion cases support Federal's contention that, for the
purposes of determining coverage, it is irrelevant whether the
wrong is perpetrated for the benefit of Hamilton Taft or the
individual.4 Even the cases applying a temporal restriction
assume that if the temporal scope is satisfied, all inappropriate
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use of funds is included under the exclusion, irrespective of who
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the term "authorized representative" in an effort to determine
whether an investment company that made bad investments for the
insured fell under the applicable crime insurance policy's
authorized representative exclusion. Id. at 67. As the case
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neither relied on the "while working or otherwise" language nor
concerned acts by individuals, it does not support Stop & Shop's
arguments.
4While Federal and Stop & Shop's dispute concerns
application of the term "authorized representative" rather than
"employee," we agree with Stop & Shop that the way "employee"
exclusions have been interpreted is instructive as we consider
how to construe the scope of the authorized representative
exclusion.
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benefits from the improper use. None of these cases so much as
queries whether an employee who steals for himself, rather than
to add to the company's coffers, does not therefore fall under
the exclusion.
As evidence in support of its construction, Stop & Shop
makes much of its 1990 modification to the Tax Service Agreement.
Instead of adopting the standard language of Hamilton Taft's pre-
printed form, stating that the agreement "may not be assigned to
persons who are not employees of Hamilton Taft," Stop & Shop
revised the clause to provide that the agreement "may not be
assigned by Hamilton Taft." The district court agreed that this
change indicated that Stop & Shop intended that no entity other
than Hamilton Taft could be the authorized representative. This
conclusion requires reading too much between the lines. The
record contains no evidence of the context in which the contract
revision was made, nor gives any clue as to why it was
implemented. We see no relationship between the revision and an
understanding of the term "authorized representative."
Hamilton Taft can act only through its officers and
employees, and the reality is that the grant of authority to the
executives of Hamilton Taft enabled their diversion of funds.
When we consider, too, that employee exclusion clauses have been
construed to encompass theft for personal benefit, and that the
policy excludes illegal acts by employees, directors or
authorized representatives without distinguishing between these
groups, the intent of the exclusion is most readily understood as
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an effort to bar coverage of wrong committed by persons who have
been granted access to the corporate funds.
Nor do public policy concerns play an obvious role here.
The district court, while conceding that the dispute in this case
turns wholly on an interpretation of a contract clause and not on
an equitable allocation of risk between innocent parties,5 felt
vicarious liability-agency law provided useful guidance. Some
Massachusetts cases have found companies liable for the illegal
actions of their employees only where the employees act for the
companies' benefit rather than for their own. See Kansallis
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Finance Ltd. v. Fern, 421 Mass. 659, 665-69, 659 N.E.2d 731, 734-
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37 (1996) (reviewing existing case law). We do not pursue here
the conflict in the case law on this issue, as we disagree with
the district court's assessment that these cases provide a useful
context for understanding the present situation. These cases
turn on equitable allocation of the financial burden resulting
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5Federal seeks to apply the alter ego doctrine in
furtherance of its argument; agreeing with Stop & Shop, the
district court found the doctrine inapplicable to this case. We
see no need to ground refusal of coverage in this complex
doctrine, which is based on the equitable allocation of
liability. Indeed, to apply it would turn equitable allocation
on its head, for it was Stop & Shop, not Federal, whose choice of
Hamilton Taft gave Armstrong access to the diverted funds.
We are not faced here with equitable, public policy concerns
about placing responsibility on the guilty, or more culpable,
party, nor are we presented with a need to find an extraordinary
way to impose liability on a generally untouched party. This
case does not involve a creditor seeking to hold an individual
liable for misuse or theft of funds, nor does it seek to
guarantee that a wrongdoer company does not recover under an
insurance policy for abuse perpetrated by its own officer,
director or shareholder. Hamilton Taft is not a party to this
action, and its liability for the misappropriation of funds is
not at issue here.
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from bad acts by officers or employees. Where a creditor or
third party suffers at the hands of such a person, and the
company somehow ratified the improper act or gave its express
authority to perpetrate fraud, it makes equitable sense for the
company to pay. It is equally true that where a maverick officer
or employee perpetrates fraud against the company's interest and
without the company's express or implied knowledge, it may be
unfair to hold the company liable. We are not concerned here
with a determination of whether the corporation Hamilton Taft
should be liable to a creditor for the wrongful acts of its
employees. It may be that Stop & Shop suffered a loss at the
hands of Hamilton Taft employees for which it deserves
compensation. But Stop & Shop's insurer, Federal, who was not
party to the fraud, has no responsibility to reimburse for losses
suffered unless those losses are contractually covered.
If we were to hold, as Stop & Shop's argument would have us
do, that an insurance company must bear the full cost of theft
only when it was committed by an individual working for the
insured company's authorized representative but acting contrary
to the representative's interest, the exclusionary clause,
insofar as it deals with the authorized representative, wouldn't
accomplish much. The policy underlying the exclusion clause,
which includes, without distinction, employees, directors,
trustees and authorized representatives, is most readily
understood as an effort to place on the insured the risk of
picking a faithless agent. It makes little sense for the
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exclusion clause to encompass self-interested acts on the part of
employees, but not on the part of those working for the
authorized representative.6
We come full circle, then, to the contract. The exclusion
clause specifically states that the crime insurance policy does
not cover theft by an authorized representative. The policy does
not restrict the scope of "authorized representative" to acts
benefitting Hamilton Taft, the record contains no evidence that
such a restriction was contemplated, and no case law applies such
a restriction. In sum, although exclusion clauses are to be
narrowly construed, we find no basis for imposing the proposed
limit. In the absence of legally cognizable ambiguity, we
enforce the ordinary meaning of the words. Bird, 11 F.3d at 232.
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It is most sensible to consider "authorized representative" as
one of a series of capacities in which an individual who commits
theft may have been given access to funds by the insured. We see
use of the term as a straightforward effort to embrace all
statuses that are "authorized," and thus are the insured's
responsibility to supervise. Because Hamilton Taft can act only
through its officers, we must construe this exclusion to
encompass generally acts by the officers of Hamilton Taft. As
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6Theft and misappropriation of funds -- acts covered by
crime insurance policies -- are by their very nature most likely
to be committed for individual rather than corporate benefit.
Certainly, an authorized representative company may, for its own
benefit, steal an insured company's funds, but we think by far
the more likely scenario is that a person with access to funds
through their employment position will risk illegally acquiring
these funds for personal profit.
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officers of the corporate representative, Armstrong and others
were given access and power to divert funds.7
Finding that the diversion of funds by officers of Hamilton
Taft falls under Federal's authorized representative exclusion
policy, we reverse the district court decision, and need not
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reach the direct loss and damages questions raised on appeal. As
we find Stop & Shop is not covered under Federal's policy, we
deny its cross-appeal for attorney's fees.
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It is so ordered.
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7This is particularly true where, as here, the officers were
the only persons who could have perpetrated the fraud, because
they alone were endowed with the authority to co-sign checks over
$100,000.
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