On a summary trial, a judge should not decide issues of fact based on evidence capable of supporting more than one inference

Appeal by Fidelity Insurer from summary judgment in favor of the Insured was allowed. The motion judge should not have decided issues of fact based on evidence that was capable of supporting more than one inference. Genuine issues remained for trial. However, since the interpretation of the bond was a contentious issue and the trial judge’s interpretation would no doubt end up being appealed, the Court of Appeal interpreted the fidelity bond in order to assist the trial judge with the task of applying the bond to the evidence before him or her.

Iroquais Falls Community Credit Union Ltd. (Liquidator of) v. Co-operators General Insurance Co., [2009] O.J. No. 1783, May 4, 2009, Ontario Court of Appeal, D.H. Doherty, E.A. Cronk and R.G. Juriansz JJ.A.

The Insured, a Credit Union, made a claim under its fidelity bond for the actions of one of its employees. The branch manager had removed $432,000 from a vault and granted herself and others unauthorized lines of credit and overdrafts totalling $1,445,512 and credit extensions of $223,969. The Insurer denied the entire claim, asserting that the requirements under the dishonesty provision of the bond were not met and that the loss was excluded under the unfaithful performance exclusion of the bond because the manager claimed that she had applied the money that she took to loans that were going into default, in order to protect the Insured from attracting the scrutiny of the authorities.

The Insured moved against the Insurer for summary judgment. The motion judge granted the motion, finding that the manager and other employees participated in a single collusive scheme that resulted in losses to the Insured, and ordered the Insurer to indemnify the Insured in the amount of $1.8 million.

On Appeal, the decision was overturned. The judge should not have decided issues of fact based on evidence that was capable of supporting more than one inference. The judge should not have made a factual finding that a single, collusive scheme had been undertaken, as this was a genuine issue for trial. The quantification of damages was also a genuine issue for trial. Lastly, the application of several exclusions and conditions in the fidelity bond, including the “Termination” exclusion and the “Notice of Loss” condition, were not considered by the judge and could form the basis for genuine issues at trial.

The interpretation of the bond was rightly undertaken by the motion judge because it was necessary to apply the bond to determine whether there was a genuine issue for trial. However, the Court of Appeal was not persuaded that the interpretation of the bond should, after deciding that the matter should proceed to trial, be left for the trial judge to interpret on a full record. The bond’s interpretation was hotly contested and the trial judge’s conclusions would likely be appealed to the Court of Appeal. Deciding the contentious issue of the bond’s interpretation would assist the trial judge in applying the bond’s application to the evidence at trial. The “dishonesty” provision, relied on by the Insurer to deny coverage, is a coverage clause and thus should be construed broadly. It requires that, in order for coverage to apply, the loss result directly from dishonest or fraudulent acts of an employee. Furthermore, the dishonest acts must have been committed with “manifest intent” to cause the insured to sustain the loss and with “manifest intent” to obtain a financial benefit for any person or entity or oneself. The Insurer sustains a direct loss when cash is improperly removed from its vault. This is also true when an employee presents false loan applications to the loan committee for approval because the Insured parted with money it otherwise would have kept. It is of no consequence that the Insured could later collect the money. This argument confuses the issue of whether there is a “direct loss”, which is but one requirement to trigger coverage, with whether the loss, once established, can be recovered, which is a question of damages. The meaning of “manifest intent” has been considered by many American courts. It is clear that the text of the bond, by including the modifier “manifest”, requires that the employee’s intent to cause loss be clear or obvious or show itself plainly. It is not necessary that the employee posess knowledge that certain consequences of an act are certain to occur in order to infer “manifest intent”. The employee’s “manifest intent” may be established by the employee’s admission as to his or her intent, or by evidence which establishes that he or she knew or was substantially certain that the loss would be the consequence of the dishonest act. Knowledge may be proved by admissions, circumstantial evidence, or a combination of the two. No matter what evidence is used, the focus of the analysis should be placed on the employee’s intent in performing the very act that caused the loss, and not on some act the employee performs or plans to perform later.

In the result, the summary judgment granted by the motion judge was set aside.

This case was originally summarized by Natasha D. Morley and originally edited by David W. Pilley.

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