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Payroll Express Corp. v. Aetna Casualty and Surety Co.

decided: September 9, 1981.

PAYROLL EXPRESS CORPORATION, PLAINTIFF-APPELLANT, CROSS-APPELLEE,
v.
THE AETNA CASUALTY AND SURETY COMPANY, DEFENDANT-APPELLEE, CROSS-APPELLANT.



Appeal from a judgment of the District Court for the Southern District of New York, Pierre N. Leval, Judge, holding that a crime insurance policy issued by the defendant may not be cancelled until February 7, 1983, after which it may be cancelled upon four months' written notice, and enjoining the defendant from cancelling before August 7, 1981. Affirmed in part and reversed in part .

Before Feinberg, Chief Judge, and Lumbard and Mansfield, Circuit Judges.

Author: Mansfield

In this diversity action for breach of an insurance contract Payroll Express Corporation (Payroll), a company which makes payroll deliveries for employers, appeals from a judgment of the Southern District of New York, Pierre N. Leval, Judge, entered after a non-jury trial, holding that a policy issued to it by the defendant, The Aetna Casualty and Surety Company (Aetna), insuring it against dishonesty, destruction and disappearance of payrolls (known as "crime" insurance) is not cancellable except for non-payment of premiums until February 7, 1983, and enjoining Aetna from cancelling before August 7, 1981. The defendant cross appeals, claiming that the policy was at all times cancellable. We reverse that part of the decision holding the policy cancellable after February 7, 1983, and direct that the judgment be modified to enjoin Aetna permanently from terminating except for non-payment of premiums due. In all other aspects the decision is affirmed.

Since the facts are fully and thoroughly set forth by Judge Leval in his decision, 504 F. Supp. 383, and his findings are supported by the record, we will limit ourselves to a summary of the highlights. Payroll is in the business of cashing on location payroll checks or vouchers of employees of companies that hire it. Those companies wire the necessary funds to Payroll's account and Payroll then pays the employees cash. As part of its contracts with these businesses Payroll must have insurance against the loss of their payrolls due to crime. Since February, 1972, that insurance has been provided by Aetna. The first paragraph of § 16 of Aetna's printed policy provides in pertinent part that "This Policy or any Insuring Agreement may be cancelled by the Company by mailing to the Insured at the address shown in this Policy written notice stating when not less than fifteen days thereafter such cancellation shall be effective."

From the beginning of its relationship with Aetna Payroll has sought to obtain non-cancellable insurance, because its ability to market its services would be enhanced if it could point to such insurance and because it feared that the consequence of an untimely cancellation of its insurance could be the failure of the company. In response to Payroll's requests Aetna in 1972 issued an ambiguous letter which agreed to provide coverage for one year from the effective date of the policy but also permitted Aetna on 30 days' notice to elect not to continue coverage and provided that if Payroll failed to pay premiums Aetna could cancel under § 16.

Payroll continued to seek non-cancellable insurance. Robert Felzenberg, its President, pressed Aetna for permanent non-cancellable insurance under which Aetna would periodically adjust the amount of the premiums to be paid. Aetna eventually responded by issuing a letter endorsement to its renewal of the policy, effective February 7, 1983, that provided coverage for three years, i. e., until February 7, 1976, and permitted Aetna to cancel under § 16 for non-payment of premiums. In 1974, on the anniversary of this policy, a new special endorsement was issued, similarly guaranteeing coverage for three years, until February 7, 1977. Aetna also set fixed guidelines for changing premiums over the three years. A similar three-year guarantee was issued in 1975, extending coverage to February 7, 1978. Again, fixed limits for the premium charges were set.

Felzenberg was still unsatisfied with the limited-duration guarantee of Payroll's coverage. At the end of 1975 he renewed his request for a permanently non-cancellable policy, with Aetna setting the premium for each year three years in advance. He and Richard LaHue, the Aetna officer in charge of the Payroll contract, held a meeting on the subject, attended by other Aetna personnel, at which they agreed to change the terms of the policy. Felzenberg testified that LaHue agreed to make the policy non-cancellable. LaHue testified that he refused to do so, but was unclear as to exactly what the agreed-upon change was. Shortly after the meeting Aetna issued a letter stating the terms of the agreement, and LaHue approved it before it was sent to Payroll. The letter was prepared by LaHue's staff in response to his instruction to "design for approval" a "Letter to Insured re non/can (non-cancellation) and premium level." It provided:

"February 7, 1976

Robert M. Felzenberg, President

Payroll Express Corp.

295 Lyons Avenue

Newark, New Jersey 07112

Dear Mr. Felzenberg:

Payroll Express ...


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