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Industrial Valley Bank and Trust Co. v. Dilks Agency and First State Insurance Co.

decided: January 7, 1985.

INDUSTRIAL VALLEY BANK AND TRUST COMPANY
v.
THE DILKS AGENCY AND FIRST STATE INSURANCE COMPANY THE DILKS AGENCY, APPELLANT



Appeal From the United States District Court For the Eastern District of Pennsylvania.

Hunter, Weis, Circuit Judges, and Thompson,*fn* District Judge.

Author: Hunter

Opinion OF THE COURT

HUNTER, Circuit Judge:

This appeal is from an order of the United States District Court for the Eastern District of Pennsylvania entering judgment in the amount of $387,200.51 for plaintiff-appellee Industrial Valley Bank and Trust Company ("IVB") and against defendant-appellant, The Dilks Agency ("Dilks"), and from an order denying Dilks' motion for additional findings of fact and conclusions of law. Subject matter jurisdiction is based on the complete diversity of the parties, 28 U.S.C. § 1332 (1982), and appellate jurisdiction is under 28 U.S.C. § 1291 (1982). For the reasons stated below, we reverse.

I.

The underlying facts in this case are largely undisputed, although the parties vigorously contest the conclusions that may be drawn from the facts. In defending and eventually settling a civil action brought against it, IVB incurred approximately $440,000 in losses. C. Mack Moore v. Industrial Valley Bank and Trust Company, C.A. No. 80-4909 (E.D. Pa.). The Moore litigation arose from a default by Capital First Corporation ("CFC") on a series of debentures for which IVB was indenture trustee. The debenture obligations were secured by CFC lease receivables, in which IVB held a first priority security interest equal to the principal amount of the outstanding debentures. As the aggregate rental receivables due on the leases declined below the principal amount of the outstanding debentures, IVB, as trustee, was obligated to obtain new collateral from CFC. IVB did not obtain new collateral over the period of the debentures, and thus, when CFC defaulted, the debentures, not being backed by sufficient collateral, were virtually worthless. (App. at 1410). The complaint in the Moore action alleged that IVB breached its fiduciary duty to the debenture holders by negligently failing to maintain sufficient collateral. (App. at 1410).

The CFC default occurred in November, 1976, and IVB discovered that the collateral protecting the debenture holders was worthless in December, 1976. Three IVB representatives, Frank Martin, Lyman Sener, and Roger Williams, testified either at trial or in depositions that they were aware that the worthlessness of the CFC collateral could lead to litigation against IVB. (App. at 609-616, 683, 1121-23, 1125-27). Both Martin and Sener were employed by IVB's Trust Department, and Williams was IVB's corporate general counsel. Significantly, Sener was also the IVB representative most intimately involved with the maintenance of errors and omissions policies for the trust department.

Dilks was IVB's long-term insurance agent and broker. Prior to May 1, 1979, Dilks provided IVB with an errors and omissions policy for IVB's trust department through Underwriters at Lloyd's ("Lloyd's"). This policy had a liability limit of $100,000, and a $5,000 deductible. (App. at 1458). Although known as a "claims-made" policy, the Lloyd's policy did provide that if during the term of the policy IVB gave Lloyd's written notice of "any occurrence which may subsequently give rise to a claim against [IVB] . . . by reason of any negligent act, error or omission . . .," claims made against IVB after the policy expired and arising from such occurrences would be treated as arising during the term of the policy. (App. at 1456).

Each year prior to the renewal date of the Lloyd's policy, a representative of Dilks contacted IVB Personnel Officer Harry L. Morris and requested certification as to any "known outstanding claims or anything that might cause a claim." (App. at 810). It is undisputed that prior to the institution of this action, no representative of IVB ever informed Dilks or Lloyd's of the circumstances surrounding the CFC default and IVB's possible liability for breach of its fiduciary duty as indenture trustee.

In 1978, because the bank desired to become a self-insurer of smaller losses while continuing to purchase insurance against major losses, IVB requested that Dilks obtain errors and omissions coverage with a higher deductible and a higher liability limit. In response, Dilks submitted estimates for increased coverage from Lloyd's, and an application for a new carrier, First State Insurance Company ("First State"). Dilks informed IVB that the First State policy provided the "same coverage" as Lloyd's, but at lower premiums. (App. at 1557). IVB authorized Dilks to contract with First State, and the policy became effective May 1, 1979.

In fact, however, the First State policy did not technically provide the "same coverage," for by switching carriers, IVB lost continuous coverage for claims made during the term of the First State policy but based on circumstances occurring during the term of the Lloyd's policy.

Based on these facts, IVB alleged in its complaint that Dilks was negligent for not informing IVB of this coverage gap, that the Moore claim arising from the CFC default fell into that coverage gap, and thus that Dilks caused the losses incurred by IVB in defending and settling the Moore claim.*fn1 In contrast, Dilks primarily argues that IVB was negligent in not informing Dilks or Lloyd's of the CFC default prior to the switch in insurance coverage, that if IVB had so informed Dilks the Lloyd's policy would have covered the Moore claim, and thus that IVB's own negligence bars recovery against Dilks.*fn2

The district court held that Dilks breached its duty to IVB by not fully informing IVB of the differences in coverage between the Lloyd's and First State errors and omissions policies, and that this breach caused the losses incurred by IVB in the Moore litigation. The court also concluded, without discussion, that IVB was not contributorily negligent in failing to inform Dilks, prior to obtaining the First State policy, of the circumstances surrounding the CFC ...


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