On November 9, 2016, the Sixth Circuit Court of Appeals released its decision in Hantz Financial Services, Inc. v. American International Specialty Lines Insurance Co., affirming the U.S. District Court for the Eastern District of Michigan’s grant of summary judgment in favour of National Union in a claim advanced on a Financial Institution Bond.
As we discussed in our September 29, 2015 post, the District Court held that no coverage was available to the insured, Hantz Financial Services, Inc. (“Hantz”), for losses resulting from its employee’s perpetrating a fraud on its clients, as such losses were indirect. The District Court also suggested that the employee could not, in defrauding the clients, have had the manifest intent to cause a loss to Hantz.
The Sixth Circuit’s decision affirmed the result, but did so on the basis of the expiration of the suit limitation provision contained in General Agreement F of the Bond. The Sixth Circuit’s decision provides a useful reminder of the enforceability of suit limitation provisions in fidelity and crime policies, even where the insurer undertakes significant investigatory steps in the course of assessing the first-party claim.
Hantz is a licensed securities broker-dealer that offers clients investment advice. Hantz does not provide its own investment products to clients; instead, it introduces clients to investment products offered by other financial services companies.
Hantz employee Michael Laursen stole more than $2.6 million that Hantz’s clients had provided to him to invest, or to purchase insurance, on their behalves. Initially, Laursen deposited cheques written by clients directly into his personal bank account. Some cheques were written to Laursen directly, while others were made payable to “Hantz Financial Services”, “HFS”, “Hantz” or “Hantz Consulting”. At one point during the course of the fraud, Laursen opened a bank account in the name of “Henary Firearms Service” and directed his clients to write cheques payable to “HFS”, which he then deposited into that account. The fraud came to light in March 2008.
As a result of the fraud, Hantz ended up in litigation with two sets of clients:
- Bolton Claimants: the Bolton claimants initiated a Financial Industry Regulatory Authority (FINRA) arbitration action against Hantz, which was settled for $600,000 on July 24, 2009.
- Monroe Claimants: the Monroe claimants initiated a FINRA arbitration action against Hantz and recovered $587,063. A Michigan state court entered judgment confirming the FINRA arbitration award on December 17, 2010; this judgment was affirmed by the Michigan Court of Appeals on January 24, 2012.
Hantz commenced its coverage action against National Union on March 18, 2013.
The National Union Coverage and the Suit Limitation Period
General Agreement F of Hantz’s Financial Institution Bond with National Union provided that, with respect to losses arising from legal proceedings against Hantz:
the Insured may not bring legal proceedings for the recovery of such loss after the expiration of 24 months from the date of such final judgment or settlement.
It will be noted that the trigger for the suit limitation period in General Agreement F of the Bond, drafted specifically to apply to losses resulting from legal proceedings against the insured, is “the date of … final judgment or settlement” in such litigation. Almost invariably, fidelity coverages contain a “general” suit limitation period, which is triggered by the insured’s discovery of the loss. For example, in the 1999 decision of the Supreme Court of Canada in Guarantee Co. of North America v. Gordon Capital Corp., the Court enforced a 24-month suit limitation period which was triggered by the insured’s discovery of “facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred”.
Before the Sixth Circuit, Hantz contended that the suit limitation period in General Agreement F did not apply in respect of the Bolton and Monroe claims. With respect to the Monroe claim, Hantz asserted that the Bond did not define “final judgment” and was therefore ambiguous as to whether it meant the December 17, 2010 judgment from the Michigan state court, or the January 24, 2012 appeal judgment. After reviewing extensive authority, the Court held that:
Accordingly, as a legal term of art, “final judgment” virtually always designates the judgment by a court that determines all the rights and obligations of the parties in a case so that it can be appealed—not a judgment that has been resolved after appeal. Mindful that we must not read ambiguity into contracts where none exists, we do not find Hantz’s proposed construction of the term to be a reasonable alternative interpretation. And no other language that could support its reading of “final judgment” — i.e., words like “appeal,” “exhaust,” “affirm,” or “deny” — appears anywhere in this section of the Bond.
The March 18, 2013 action was initiated subsequent to the expiration of the 24-month suit limitation period following the December 17, 2010 judgment. Accordingly, no coverage was available to Hantz in respect of the Monroe claim.
With respect to the Bolton claim, Hantz took a different approach. Hantz asserted that, as a result of National Union’s thorough investigation of the first-party claim over a period of almost three years, National Union was equitably estopped from relying on the suit limitation period. The Court held that National Union’s investigative steps did not equitably estop it from relying on the suit limitation period:
National Union’s contractual limitations defense survives despite its investigative efforts. No evidence supports Hantz’s argument that National Union “induced” Hantz to believe it would not enforce the limitations clause. Although National Union spent nearly three years investigating Hantz’s claims and requested Hantz’s cooperation throughout the process, it never implied it would waive the contractual limitations provision, nor did it suggest that it would cover the losses. Quite the contrary: National Union’s letters conveyed that the insurer planned to contest coverage, albeit on grounds other than the Bond’s limitations period. …
Even assuming that National Union was responsible for unnecessary delays in the claims investigation process, as Hantz contends, delay alone won’t support a reliance finding. [emphasis added]
As a result, the 24-month suit limitation period was enforceable in respect of the Bolton claim, and had expired prior to the commencement of Hantz’s action.
Hantz Financial Services is notable insofar as it affirms the enforceability of a suit limitation provision on its plain terms. Although the Sixth Circuit was considering General Agreement F of the Financial Institution Bond, there is no reason why the same interpretive approach should not apply to discovery-triggered suit limitation periods; indeed, this was the result in the Supreme Court of Canada’s decision in Gordon Capital.
Hantz Financial Services is also significant in its rejection of the insured’s contention that National Union’s investigative actions gave rise to equitable estoppel precluding reliance on the suit limitation provision. While prudence suggests that an insurer may wish to expressly advert to a suit limitation period in the course of investigating a first-party loss, the Sixth Circuit has rejected the contention that the mere fact of investigating and gathering information, without specifically broaching the suit limitation period, necessarily gives rise to equitable estoppel.
Hantz Financial Services, Inc. v. American International Specialty Lines Insurance Co., 2016 WL 6609544 (6th Cir.)