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HUDSON CITY SAV. INST. v. HARTFORD ACCIDENT & INDE

November 18, 1977

THE HUDSON CITY SAVINGS INSTITUTION, Plaintiff,
v.
HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant


Costantino, D.J.


The opinion of the court was delivered by: COSTANTINO

COSTANTINO, D.J.

This is an action by plaintiff bank to recover from defendant insurance company for a loss covered by the terms of an insurance policy issued by the defendant. The full amount of the loss, which plaintiff claims it is entitled to recover, was $500,882. Defendant claims that under the terms of one of the riders to the insurance policy, its liability is limited to $50,000.

 There is no dispute as to the basic facts of the case. Plaintiff employed several mortgage servicing contractors to collect the monthly payments owed on the mortgages held by the bank. After collecting the payments, the contractors were to forward the principal and interest to the bank and pay the taxes to the appropriate taxing authorities. The loss was suffered when John D. Roake and Son, Inc. ("Roake"), one of the servicing contractors, over a period of time embezzled that portion of the monies collected that was to be used to pay real estate taxes. The embezzlement was discovered when several homeowners contacted the bank to complain that they had received foreclosure notices for failure to pay real estate taxes. In order to avoid foreclosure, the bank paid the taxes, in the amount of $500,882, and filed a claim with the defendant. Defendant, believing that its liability was limited to $50,000, tendered that amount. The bank refused the tender and this lawsuit followed.

 In seeking to limit its liability, defendant claims that the loss suffered by plaintiff falls within the terms of the Service Contractors Rider to the insurance policy. That rider provides, in pertinent part, that:

 
1. The attached bond is hereby amended by adding an additional Insuring Clause as follows:
 
Servicing Contractors
 
A. Any loss through any fraudulent or dishonest act or acts committed by any Servicing Contractor, as hereinafter defined, acting alone or in collusion with others.
 
B. Any loss of money . . . collected or received for the account of the Insured by any such Servicing Contractor through the failure of such Servicing Contractor to pay to the Insured the Money so collected or received as is discovered to be due and payable during the term of this bond, except, however, such Money as may be disbursed by such Servicing Contractor in accordance with instructions from the Insured.
 
* * *
 
5. The total liability of the Underwriter under the foregoing Service Contractors Insuring Clause, with respect to any loss or losses sustained at any time . . . is limited to the sum of Fifty Thousand and No/100 Dollars ($50,000.00), it being understood, however, that such liability shall be a part of and not in addition to the amount of the attached bond. . ..

 Plaintiff, on the other hand, argues that the loss is not covered by the rider since it falls within the exception to clause 1B of the rider. Plaintiff contends, therefore, that it is covered for the full amount of the loss under the "Fraud" Clause (Clause 5) of the main policy, which provides coverage for "[any] loss of Property through any other form of fraud or dishonesty by any person or persons, whether Employees or not."

 The sole issue before the court is the construction to be given to the insurance policy and the rider. In order for the defendant to prevail, it must show that an interpretation favoring it is the only reasonable reading of the rider. Cf. Pan American World Airways, Inc. v. Aetna Casualty & Surety Co., 505 F.2d 989, 1000 (2d Cir. 1974). Conversely, plaintiff will prevail if it can show any reasonable interpretation of the terms of the policy and rider to permit coverage. Id. And any ambiguous or unclear terms in the policy or rider will be given the interpretation which is most beneficial to the insured. Id., at 999.

 Plaintiff, in seeking to hold defendant liable for the full amount of the loss, makes two arguments. First, it claims that the loss falls clearly within the exception to clause 1B of the rider. Second, plaintiff contends that, at best, the exception clause in clause 1B of the rider is ambiguous, and that since any ambiguity must be resolved in favor of the insured, see Pan American World Airways v. Aetna Casualty & Surety Co., supra at 999, plaintiff is entitled to recover the entire amount of the loss. Both of plaintiff's arguments are without merit.

 Clause 1A of the rider provides coverage for any loss through any fraudulent or dishonest act of a servicing contractor, and the defendant's liability for any loss covered by clause 1A is limited by clause 5 of the rider to $50,000. The loss here was caused by the fraudulent act of one of plaintiff's servicing contractors, and is therefore covered by clause 1A. Plaintiff seeks to avoid the clear language of clause 1A, however, by arguing that clause 1B "defines" the loss in clause 1A, Plaintiff's ...


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