
    REPRESENTATIONS AS TO FIDELITY OF AN EMPLOYE.
    Common Pleas Court of Montgomery County.
    Legler, Barlow & Company v. The United States Fidelity & Guaranty Company.
    Decided, January 13, 1911.
    
      Fiduciary Bonds — Statements by Employers in Their Applications in the Nature of Warranties — Good Faith in Declaring Pr vious Fidelity not Available — Insurance Vitiated by Breach of Warranty.
    
    Representations by an employer applying for a bond securing him against loss though larceny or embezzlement of a bookkeeper, that the said bookkeeper’s accounts were audited on a certain day and were found correct in every particular, amount to a warranty as to the correctness of said accounts, and in a subsequent action upon the bond a plea of good faith in making such representations, with the explanation that prior embezzlements were concealed by said bookkeeper by means of fraudulent entries and were not known at the time the representations as to his fidelity were made, is demurrable where the bond provides that “if there is any statement made by the employer that is false the bond shall he void.”
    
      D. B. Van Pelt, for plaintiff.
    
      Rowe, Matthews & James, contra.
   Brown, J.

Decision sustaining demurrer to the reply to the first defense.

This matter has been pending in court for several years and was recently brought to the attention of the court by oral argument, on December 24 last, upon demurrers to the reply to the first defense, to the reply to the amended second defense, ,to the reply to the third defense, and to the reply to the fourth defense. The original action was brought to recover upon a guarantee bond issued by the defendant to the plaintiffs to indemnify them against any loss which should accrue by any act of a certain bookkeeper amounting to larceny or embezzlement.

The answer sets up five defenses and the second defense was amended by the filing of what is termed in pleading an amended second defense. To these separate defenses a reply is filed to each one specifically, and a demurrer is now interposed for the consideration of the court to each of the first four of these replies, no demurrer being filed to the reply to the fifth defense.

The first defense in the answer admits the formal parts of thé petition and alleges that plaintiffs in their written declaration of July 26, 1904, for the purpose of inducing the defendant to bond the said bookkeeper, stated among other things that the bookkeeper’s accounts were audited on July 1, 1904, and were correct in every particular; and also that his authority in reference to funds was to pay any bills such as freight and other little local bills, and that the means employed to ascertain the correctness of his accounts was by daily balances, his accounts to be examined daily, and that there was not at that time any shortage due from him to the plaintiffs; that it was further provided in said bond that if the plaintiffs’ statements shall be found in any respect untrue the bond shall be void. The defendant then avers that the accounts of the bookkeeper were not correct on the first day of July, 1904, and that they showed at that time a large shortage and that he was in fact a defaulter at that time; that the bookkeeper was in the habit of paying out large amounts of money for other than freight or little local bills; that the dealings and handling of cash by the bookkeeper were not examined and balanced daily, and it was not true that the bookkeeper was not .short in his accounts July 27, 1904; and by reason of these facts the bond issued upon him was null and void, and therefore denies any liability.

To this first defense the plaintiffs file a reply, to which the demurrer is filed, admitting the signing of the declaration as alleged and setting forth the employers’ declaration in full; it admits also that the plaintiffs signed what is termed an “employers’ statement,” and of the eighteen questions and answers eight are not set forth in full together with the conclusion of such statement wherein it is stated that the answers are to be taken as conditions precedent and as the basis of the bond applied for. Among othér questions and answers was the 13th— “When were his accounts last examined? Answer: July 1st. ’04;’’ and the 14th — -“Were they at that time in every respect correct and proper securities on hand to balance! Answer: Yes.” It then admits that the bond contained the following, provisions: “If the employers’ written statement hereinbefore referred to shall be found in any respect untrue this bond shall be void.”

The plaintiffs then further admit that prior to July .26, 1904, the said bookkeeper without their knowledge had embezzled certain sums of money as shown by the exhibit attached' to the petition; that on and prior to July 1st, 1904, he had so embezzled the said sums, but the plaintiffs aver that the bookkeeper had concealed these facts by false entries, so that the accounts kept by him appeared on the books to be correct in every particular; and they aver that in making the statements above referred to Mr. Barlow, who signed the same, acted in good faith and in the honest belief that they were in all respects true and without any knowledge that the bookkeeper had embezzled as aforesaid, and that the plaintiffs were reasonably vigilant in the examination and supervision of his accounts.

The demurrer to this reply to the first defense reaches the vital point in the determination of the litigation, and the matter has been very ably and fully argued by counsel in their oral argument.

The cousel for the fidelity company insist that these statements made by Mr. Barlow as to the conditions past amount to warranties of fact, and that the statements as to what will be the future condition amount to promises which must be fulfilled strictly to the letter; while counsel for the plaintiffs contend that these statements were made in good faith, and that the absence of any fraudulent intent to deceive would excuse them in event the statements were found not to be true.

The defendant relies upon the case of Trustees v. Deposit Company, 78 O. S., 253, the first syllabus of which reads:

“Written statements made by a corporation accompanying an application to a bonding company for a bond guaranteeing the honesty of employes, which statements relate to the past conduct of such employes in their service as such, and are intended to and do enter into the contract and become the inducement in part for the issuing of the bond, are iji the' nature of warranties, and their falsity in any material particular defeat recovery on the bond for the delinquency of such employes.”

It is contended by counsel for the plaintiffs that this ease does not apply to the ease in hearing, on account of the gross negligence and carelessness and violations of the statutory law on the part of the officers of the building association of which Blodt, the embezzler, was then secretary; that it is not a parallel case because the bond given to indemnify private citizens like the plaintiffs against their employes would find a different application of the rule. I have given the case cited very careful consideration, but it is certainly evident from the opinion of the court given on page 267, that there was no intention of the court to modify the law as to warranties. The opinion was . rendered by Judge Spear, a.11 the other judges concurring. ITe says:

“Lest the foregoing comment respecting the negligence of the loan company be misconstrued as indicating that negligence is the basis of our judgment, we add that negligence is but an incident. It is not intended to hold that mere negligence on the part of the guarantee may afford a defense but to hold that a warranty binds the warrantor, and that the breach on his part constitutes a defense to an action on the bond.”

I have taken the opportunity to look up the question from other authorities not cited by counsel. Richards on Insurance Law, page 656:

‘ ‘ The written statements accompanying application for a guaranty bond usually amount to warranties and' the doctrine of • warranty then applies.”

A warranty in insurance is a stipulation or agreement on the part of the insured in the nature of a condition. An expressed warranty is a particular stipulation introduced into the written contract by the agreement of the parties. An expressed warranty must be strictly complied with and the assured is not permitted to allege any excuse for non-compliance that the risk was not thereby affected, since the parties have agreed 'that the stipulated fact or act shall be the basis of the contract.

A breach of warranty vitiates an insurance though the insured made the warranty without the knowledge of its falsity. Bouvier’s Law Dictionary, Vol. 2, page 1213.

The answers in applications for insurance are warranties. It is not important that the party making the warrant really believed in its entire truth; if it be false it voids the contract. Clemans v. Supreme Assembly, etc., 131 N. Y., 485-488.

It is claimed hy counsel for the plaintiff that the law of warranty is that if a party makes a positive representation knowing it is not true, or has no reasonable ground to believe it is true, or makes it recklessly, it is a warranty no matter whether the party intended it so or not, and that the statements of Mr. Barlow fall under this head.

This is not the correct definition of warranty. A warranty is a statement of the fact that is made by one party to a contract to another which is to induce him to enter into the contract, and the party making the statement, no matter how honest he may be, no matter how thoroughly he may believe in the truth of that statement, takes the risk of it being false. If he knows it to be false, then there enters into it fraud upon which the contract may be attacked, but when one makes a warranty, when he asserts a fact in a positive way, he knowing that it is going to be a warranty, .and as the bond in this case states “if there is any statement made by the employer that is false the bond shall be void,” that brings it home to the person making such statement that he takes the risk and chance of its being false, and his honesty and diligence are no excuse for making a statement which is proven subsequently to be false.

The rule of construction by the courts is always to strictly construe the contract of insurance in favor of the insured, and the natural sympathy of judges is with the parties indemnifiled by the insurance companies; but when the law-makers of the state permit such contracts to be made and such statements and applications to be signed and do not provide that statements made in good faith and with honest intention shall not be considered warranties, the courts have no discretion and must decide the matter according to the law and the facts as found.

Therefore, in this case, it will be necessary to sustain the demurrer to the reply to the first defense, which is accordingly done. This being determined and going to the essential part of the entire ease, it is not necessary to consider the demurrers to the replies to the other defenses.  