Settlement Amount:
$2 Million

Case Name:
VALLEY TITLE COMPANY v. HANOVER INSURANCE COMPANY AND INSURANCE
COMPANY OF NORTH AMERICA (INA)

Case Number:
Santa Clara Superior Court, No. 337 093

Plaintiff:
Valley Title Company

Defendant:
Hanover Insurance Company and Insurance Company of North America

Facts and Background:
Valley Title Company is an affiliate of Safeco Company and
engaged in the escrow business in San Jose, California. Valley
Title Company purchased various fidelity bonds from Hanover
Insurance Company and Insurance Company of North America. These
bonds provided indemnification for attorneys’ fees and costs and
a penal sum in the event an employee of the company engaged in a
fraudulent or dishonest act.

Two bonds were issued by Hanover, a "primary" with an effective
date of April 24, 1970 and a face amount of $15,000, and an
"excess" bond with an effective date of April 24, 1970 and a face
amount of $185,000. Insurance Company of North America issued a
fidelity bond with an effective date of July 18, 1973, and a face
amount of $1,000,000.

In September of 1972, an audit conducted by the California
Insurance Commissioner indicated irregularities in the handling
of Valley Title’s escrow accounts. Valley Title notified Hanover
Insurance Company of the Insurance Commissioner’s report.

On February 23, 1973, Valley Title Company was sued by Bellevue
and Drovers banks and the lawsuit alleged fraud and dishonesty.

In October of 1973, Hanover Insurance Company denied any
responsibility under the fidelity bonds and stated that in any
event, $200,000 would be the maximum amount recoverable under the
bonds which were issued, and in November of 1973, INA disclaimed
any obligation under their fidelity bonds.

In December 1973, various sports figures such as Cedrick Hardman
of the San Francisco 49’ers, Jerry Lucas and other professional
athletes filed suit against Hanover Insurance Company. These
lawsuits also alleged acts of fraud and dishonesty and sought
recovery against Donald Avila, an employee of Valley Title
Company and also sought recovery from Valley Title Company.

In December of 1976, Valley Title submitted a formal proof of
loss to Hanover and INA detailing loss in the amount of
$215,449.87. Neither of the insurance companies responded to the
proofs of loss which were submitted. Once again, in September of
1977, Valley Title Company submitted a full status report of all
the pending litigation to Hanover and INA and requested that the
carrier participate in settlement negotiations in the underlying
actions.

Plaintiff’s Contentions:
As to Hanover: Attorneys for Valley Title contended that the
attorneys’ fees and costs incurred in defending each of the
actions would require payment under the bond even though the face
limits on the policy amounted to only $200,000. Furthermore, it
would not be necessary to set forth a specific date in which
fraud or dishonesty was alleged in order to recover the attorneys’
fees and costs recoverable under the terms of the bond because
the date of the occurrence would not necessarily be defined by
reference to the alleged fraudulent act or the dishonesty of the
employee, but rather determined by reference to the allegations
of the complaints filed against Valley Title Company and any
proof offered in the underlying actions. Furthermore, attorneys
for Valley Title Company alleged that requiring an insured to
provide statements under oath that an employee committed a
fraudulent or dishonest act would subject the Valley Title
Company to liability under theories of respondeat superior and to
request said information would constitute oppression.
Furthermore, the insured contended that by refusing to
participate in any of the actions which were settled precluded
the necessity of having to offer proof of fraud or dishonesty in
regard to the claim of the fidelity bonds.

As to INA: During the trial of the action, Valley Title’s
attorneys contended that the alleged acts of fraud and dishonesty
were committed during concurrent periods in which the bonds were
in effect and that under the law of Continental Insurance Company
v. Morgan, Holmstead, 83 Cal.App.3d 583, 148 Cal.Rptr.57 (1978),
neither insurer would be permitted to deny a claim based on the
fact the surety bonds were concurrently in force, but rather each
of the insurance companies would be required to seek a proportion
of liability for the claim by resolving the matter in litigation
between themselves.

The Valley Title Company further contended that the action for
rescission was barred by the statute of limitations and that no
factual misrepresentations were made in regard to the application
for the fidelity bond.

Defendant’s Contentions:
Hanover Insurance Company gave various bases for the denial of
the claim. A few of these were:

• The insured was only entitled to a maximum of $200,000 under
...the subject fidelity bond;

• Valley Title’s right to recover attorneys’ fees and court costs
...would be limited to those legal expenses referable to defending
...against a claim for $15,000 in damages (the face amount of the
...primary Hanover bond);

• Valley Title approved and ratified the alleged fraudulent and
...dishonest acts of their employee; and,

• Hanover’s obligations to Valley Title were limited to the
...extent of INA’s contractual responsibility to indemnify Valley
...Title (Hanover would not pay any portion of the claim which might
...come under the time period in which INA’s bond was in effect).

INA gave various bases for the denial of the claim. A few of
these were:

• The acts alleged to have been committed by Valley Title’s
...employees were committed before the effective date of the INA
...bond;

• Specific misrepresentations in the application for the bond and
...a failure to set forth specific facts concerning the pending
...litigation and the application for the INA bonds constituted a
...ground for rescission of the INA bonds.