Third-Party Losses Not Covered by Fidelity Bond


The plaintiff, New Jersey Title Insurance Company, (NJTIC) is a title insurance company in the business of underwriting title insurance policies in New Jersey, and engages agents to settle and close title for real estate closings. In May 2008, NJTIC entered into an agency agreement (agreement) with Landserv Title, LLC (Landserv). The agreement established Landserv as NJTIC’s representative or agent to solicit applications for title insurance, to examine and issue commitments to insure, to countersign policies of title and to close title.

The agreement provided that Landserv was to collect all fees for commitments to insure and policies from the responsible parties. The language of the agreement specifically limited the authority of Landserv to receive and hold funds on the account of NJTIC. Under its terms, Landserv was prohibited from receiving any funds in the name of the Insurer but was authorized to hold premium and reinsurance fees for NJTIC, which were to become the property of NJTIC immediately upon receipt of a collection. All other monies entrusted to Landserv in the course of their operation were to be kept segregated in a bank account by Landserv. Upon settlement, the agent was directed to disburse funds from said trusts to pay off prior mortgages, taxes, water bills, and other municipal charges on the property for which insurance has been issued.

The agreement also provided that Landserv was to maintain employee fidelity insurance coverage, with a minimum liability of $500,000. The agreement stated that the insurer would be liable for claims arising out of title insurance forms issued and the like.

The defendant, National Union, issued a financial institution bond to provide insurance coverage to NJTIC. The financial institution bond provided coverage for loss resulting directly from dishonest or fraudulent acts committed by an agent but limited coverage to those agents listed in the rider to the bond and only for the amount applicable to that agent. The bond did not cover loss to property owned by the insured, held by the insured in any capacity and for which the insured was legally liable. The bond specifically excluded any loss “resulting directly or indirectly from “contractual or extra contractual liability sustained by the Insured in connection with the issuance of contracts or purported contracts of insurance, indemnity, or suretyship.”

In November of 2009, NJTIC discovered that an employee of Landserv had misappropriated funds from Landserv’s account for her own personal use. As a result of the misappropriation, Landserv was unable to make the requisite payments to clear title for properties for which NJTIC had issued title insurance. NJTIC subsequently filed a claim with National Union for coverage for the loss associated with the misappropriation by Landserv. The plaintiff estimated the total amount of diverted trust funds to be $616,894.79.

National Union denied coverage for NJTIC’s claim asserting that the claim did not fall within the coverage of the bond, that the claimed losses arose from contractual liabilities excluded from coverage, and that the coverage provided by the bond was only excess over any valid and collectible insurance obtained, and NJTIC had not established that any primary insurance coverage had been exhausted.

The plaintiff commenced this lawsuit. On motions for dismissal, the court found that NJTIC did not allege a loss that was within the insurance coverage provided by the defendants. The court held the misappropriated funds were not owned by NJTIC, as the agency agreement specifically provided that Landserv was to receive the funds for its own account, with only the premiums and reinsurance fees to become the property of NJTIC. The court found that the funds were not being held by NJTIC since the agreement noted the nature of property that NJTIC agents could hold on its behalf. Finally, the court found that NJTIC did not provide any reason with respect to the misappropriated funds, why NJTIC would be required to pay. NJTIC did not point to any language in the agreement representing an intent of the parties to indemnify a misappropriation. Further, Landserv was not a designated agent in the bond and therefore the bond was not applicable to Landserv.

Therefore, the court dismissed the complaint for failure to state a claim upon which relief could be granted.

Impact: This decision provides an excellent discussion on the relevance and importance of reading the language of the bond and knowing its intended meaning. The first place to start understanding coverage as it applies to specific facts it the policy language itself.