USCA1 Opinion

United States Court of Appeals

For the First Circuit
___________________

Nos. 96-1556
96-1557

FEDERAL DEPOSIT INSURANCE CORPORATION

as RECEIVER FOR THE BANK FOR SAVINGS,

Plaintiff, Appellant,

v.

INSURANCE COMPANY OF NORTH AMERICA,

Defendant, Appellee/Third-Party Plaintiff, Appellant,

v.

PAUL J. BONAIUTO and DOLORES DiCOLOGERO,

Third-Party Defendants, Appellees.

_________________

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Robert E. Keeton, U.S. District Judge]

___________________
____________________

Before

Selya, Circuit Judge,

_____________
Cyr, Circuit Judge,
_____________
and Lynch, Circuit Judge.
_____________
____________________

Eugene J. Comey, with whom

________________

Robert D. Luskin,
________________

Comey Boyd &

____________

Luskin, Ann S. DuRoss, Assistant General Counsel, Federal Deposit

______ _____________
Insurance Corporation,

Thomas L. Hindes,
_________________

Counsel,

E. Whitney
___________

Drake, Special Counsel, and

_____

Leslie Ann Conover, Senior Attorney,

__________________

were on brief for FDIC.

Gerald W. Motejunas,
____________________

with

whom

Marie Cheung-Truslow
____________________

Lecomte, Emanuelson, Motejunas &

Doyle
___________________________________________
Insurance Company of North America.
__________________
February 3, 1997
___________________

were

on

brief

and

for

LYNCH, Circuit Judge.

LYNCH, Circuit Judge.
_____________

legislature

enacted

112, which

insurance,

rule.

In

a statute,

provided that,

1977 the

Mass.

Massachusetts

Gen.

Laws ch.

for certain types

175,

of liability

the Commonwealth would adopt a "notice prejudice"

This new statutory

rule departed from the traditional

common law rule which had strictly enforced notice provisions

in

insurance policies, allowing forfeiture of coverage where

notice

to

Judicial

an insurer

Court of

of a

Massachusetts

common law, and

then limited

prejudice rule

for liability

here

late.

is whether

If

claim

the notice

so, does

was late.

The Supreme

subsequently extended,

the extension

of, the

insurance policies.

due under

the state

a fidelity

common law

by

notice

At issue

bond was

notice prejudice

rule,

under which an insurer must show prejudice in order to

be excused from coverage by the insured's late notice, extend

to the Financial Institution Bond at issue.

The

import here is

whether a suit

Deposit Insurance Corporation

failed

Bank

for Savings,

by the Federal

("FDIC"), as receiver

may

insurer, the Insurance Company

proceed

for the

against the

Bank's

of North America ("INA"), for

coverage of losses due to certain dishonest acts committed by

a Bank officer

and by a

lawyer retained by

the Bank.

loss to the Bank from these activities is asserted

million.

The

FDIC,

as

receiver

-2-

for

the

The

to be $10

Bank,

seeks

reimbursement for these losses to the

full amount covered by

the Financial Institution Bond issued by INA, $4 million.

I.

The Bank

gave INA

notice of potential

the Bond on January 16, 1990.

and the Bank brought suit.

loss under

The insurer declined to

The district

pay,

court, interpreting

the Bond provisions

on a motion

for summary judgment,

held

that the Bank's notice was late because it had not been filed

within

30 days

policy.

62-63

for

of

discovery of

loss

as required

FDIC v. Insurance Co. of N. Am., 928

____
________________________

(D. Mass. 1996).

the defendant.

district

court's

claiming

that

The court

the

F. Supp. 54,

granted summary judgment

Id.
___

The

analysis

of

the date

of

was

timely.

The

its notice

by

Bank appeals,

disputing the

discovery

Bank

and

further

asserts that, even if its notice was late, the district court

erred

in failing to apply

the notice prejudice

rule to the

Bond.1

Our

novo.
____

review of

a grant

of summary judgment

is de
__

Wood v. Clemons, 89 F.3d 922, 927 (1st Cir. 1996).

____
_______

We

hold that the

district court was plainly correct

that the notice was

late, but we do so

in holding

on different grounds

____________________

1.

The parties have

The FDIC here sues

and

we

statutory

discern no

agreed that Massachusetts law

as the receiver of a
conflict between

provisions

O'Melveny & Myers

__________________

or

v. FDIC,
____

114 S.

Massachusetts bank,

state law

significant

applies.

and federal

federal

Ct. 2048,

policies.

2055 (1994);

Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966).

______
_______________________

-33

than

the district

court.

We

also

hold that

the

notice

prejudice rule does not apply in this instance.2

II.

The facts of the employee misconduct underlying the

Bank's

losses

accepted

are taken

as true for present

Dolores DiCologero,

and

from

the

manager

Bonaiuto,

an

Bank's Bond

purposes.

From

claim

of

the

mortgage

attorney retained

to

of the Bank

department,

represent

with a condominium

and

1987 to 1989,

an Assistant Vice President

mortgage closings, conspired

group,

the

and

the Bank

Paul

in

development

the Rostoff Group, to make hundreds of mortgage loans

using inflated appraisals and purchase prices in violation of

Bank regulations and the law.

The

condominium

projects

developed by the Rostoff Group until February 1989.

Although

internal

Bank

made

loans

regulations forbade the

on

Bank from participating in

more than one-third of the units in a particular development,

the

Bank

exceeded

properties.

these

limits

as

to

Rostoff

Group

In addition, despite regulations prohibiting the

financing

of

more

property,

the Bank

than 80%

made loans

of

the

purchase

to purchasers

price of

for the

full

____________________

2.

INA originally brought a third-party claim in this action

against the
losses.

dishonest Bank employees who

The district

because it held that,

INA appeals

that

court dismissed

caused the claimed

INA's claim

under the Bond, INA had

dismissal.

As we

affirm

as moot

no liability.
the

district

court's

finding that INA

has no liability,

INA's appeal on

this issue is moot.

-44

value of condominiums in

Rostoff Group properties.

Bonaiuto

prepared closing documents overstating the purchase

price of

the condominiums

and falsely indicating

had equity in the property.

that the purchasers

The loan documentation reflected

nonexistent down payments.

the

form of

discounts

In fact, the "down payments" took

on the

purchase price.

DiCologero

expedited approval of the mortgages without any investigation

of the creditworthiness of the applicants, many

not

creditworthy for

value of the

the loans

given.

loans was approximately

The

of whom were

aggregate face

$30 million, and

many

culminated in default.

Other DiCologero family

in the scheme, to their profit.

condominiums

DiCologero's

were

son.

supported

members also

participated

The overstated values of the

by

appraisals

prepared

by

He earned more than $33,000 for his work;

DiCologero's daughter received $4,550 from the

Rostoff Group

for secretarial work.

DiCologero's husband received

$12,000

in referral

directing potential purchasers

to the

fees for

Rostoff

Group and

purchased a

condominium

himself without

paying a deposit, although the Bank records falsely reflected

that he had

done so.

Other aspects of

and corruption need not

insolvent

receiver.

on March

20,

be detailed.

1992, and

The FDIC asserts

this tale of avarice

The Bank

the

FDIC was

that these events

down the Bank.

-55

was declared

appointed

helped bring

In

March 1989,

counsel for Erna

the

Bank received

a letter

Hooton, a former bookkeeper of

from

the Rostoff

Group and a mortgagee on six Rostoff Group units.

Ms. Hooton

had

had

defaulted

on

the

foreclosure proceedings.

loans,

and

the

Bank

The letter said that

begun

the Bank had

misrepresented in the loan documents that Ms. Hooton had made

down payments on the

properties.

The letter also

Ms. Hooton's financial position should

refuse

financing.

The

closing counsel on the

documentation.

The

letter

have led the Bank

claimed

that Bonaiuto,

Hooton loans, was aware of

Bank

said that

investigated

these

to

as

the false

charges;

representatives

of

the

Bank

principal of the Rostoff

said

that the

met with

Steven

Group, on March 21, 1989.

down payment

for some

this.

irregularities.

also

The Bank

denying the allegations.

denied

Ms.

purchase price.

associated with the Bank was

DiCologero

Rostoff

loans, including

Hooton's, had taken the form of a discounted

He denied that anyone

Rostoff,

knowledge

aware of

of

responded to the Hooton letter

Because Ms. Hooton did

any

by

not pursue

the matter, neither did the Bank.

Then, in August 1989, Herbert and Deanna Bello, two

defaulting

borrowers on

Bank for damages and

action brought

Hooton,

six Rostoff

Group units,

sued the

asserted counterclaims in a foreclosure

by the Bank.

The Bellos asserted, as had Ms.

that Bonaiuto was aware

that they had

not made the

-66

down payments reflected in the closing

alleged

that when

previously been

they told

Steven

documents.

They also

Rostoff that

they had

unable to obtain financing,

he replied that

they would "not have to worry about financing" because he had

made

a "deal"

with the

Bank.

The Bank, the

Bellos said,

never asked for financial information from them.

The Bellos

further alleged that, at one closing, they had pointed out to

Bonaiuto

that

purchase

price

referred

them to Rostoff, who

wanted."

In the foreclosure action, the Bellos' counterclaim

specifically

the

closing

and

alleged

an

documents

inflated down

that

stated

payment.

said this was

the

Bank

an

inflated

Bonaiuto

"what the Bank

knowingly

permitted

Rostoff's misrepresentations.

Another

properties,

September

couple

Edward

22,

1989

and

who

had

Dorothy

against

the

purchased

Giamette,

Bank

principals.

Again the complaint alleged

were falsely

represented

on

the

closing

Rostoff Group

filed

and

the

suit

on

Rostoff

that down payments

documents,

that

Steven Rostoff told

the plaintiffs

that the

Bank knew

figures were false,

that the appraisals, which were

the

done by

DiCologero's son, were for more than the fair market value of

the properties,

at least eight

and that this scheme had

other purchasers

forty-five condominiums.

Giamette had

made similar

been repeated with

who had bought

a total

of

Earlier, on September 11, 1989, Mr.

allegations in a

-77

counterclaim in

the Bank's foreclosure action against him.

claims,

lead

the Bank

conversation in

President of

her

of

these

however, prompted the Bank to notify INA of possible

losses due to alleged employee

did

None

submit

October 1989

purchased

making

a down

notice

What eventually

of

claim was

between DiCologero and

the Bank during which

husband had

Group without

to

misconduct.

a Vice

DiCologero remarked that

a condominium

payment.

from the

The Vice

Rostoff

President

reported DiCologero's remark to the Bank's President, who met

with the Bank's Audit Committee on November 6, 1989.

Outside

legal counsel from Gaston & Snow were present at the meeting.

The Committee

discussed "the possibility of

100% loans, the

unknown extent of these loans, employee involvement and legal

ramifications."

preliminary

1989.

Gaston

analysis

Gaston &

&

Snow was

which was

submitted

to

on

prepare

measures, that

November 15,

Snow then investigated and reported

the Bank on December 18, 1989.

other

asked

back to

The report recommended, among

the Bank

refer the matter

authorities, notify INA, and dismiss DiCologero.

27, 1989, the Bank filed a Report of

to federal

On December

Apparent Crime with the

FDIC, advising that it had learned of suspected violations of

federal law on December 18, 1989.

FBI and

and

the U.S.

The Bank also notified the

Attorney's Office.

the development

group were

DiCologero, Bonaiuto,

later convicted

on federal

-88

bank fraud and conspiracy charges.

United States v. Rostoff,

_____________
_______

53 F.3d 398 (1st Cir. 1995).

On

potential loss

January 16, 1990, the Bank gave INA notice of a

arising from

employee misconduct.

The Bank

enclosed copies of the complaints in the Giamettes' state and

federal lawsuits with its letter of notice.

III.

As is

customary in the banking

had obtained a Financial

24, from INA.

industry, the Bank

Institution Bond, Standard Form No.

The Bond period originally ran from January 1,

1988 to April 1, 1989, and was later extended by agreement to

April 1, 1990.

employee

Insured losses include

dishonesty and

fraud.3

those resulting from

For present

purposes, we

assume that the actions of DiCologero and Bonaiuto caused the

Bank to sustain losses

of the type covered by

AGREEMENTS FIDELITY" section of the Bond.4

____________________

the "INSURING

3.

Other types of losses covered under other portions of the

Bond are not pertinent here.

4.

That provision reads:

INSURING AGREEMENTS
FIDELITY

Loss resulting directly from dishonest or

fraudulent acts committed by

an Employee

acting alone or in collusion with others.

Such dishonest or fraudulent acts must be
committed

by

the

Employee

with

manifest intent:

(a)

to cause the Insured to sustain

such loss, and

-99

the

The

obligation

of the

insurer

to

indemnify the

insured for covered losses is explicitly made:

subject

to

the

Agreements,
Conditions

Declarations,
General

and

Insuring

Agreements,

Limitations

and

other

terms [of the Bond].

The

Bond contains,

Under that

"CONDITIONS

AND LIMITATIONS"

among other clauses,

clause, the Bond

discovered by

The clause then defines

"Discovery" in two ways:

Discovery occurs when

the Insured

becomes aware of facts which

of the

the "DISCOVERY" clause.

applies to "loss

the Insured during the Bond Period."

section

first

would cause

a reasonable person to assume that a loss

of the type covered by this bond has been
or

will be incurred,

the act or
to

regardless of when

acts causing or

such loss

exact amount

contributing

occurred, even

though the

or details of the

loss may

not then be known.

____________________

(b)

to obtain financial benefit

Employee

or

another

for the

person

or

entity.

However, if some or all of the

loss results directly or
Loans,

that portion

covered

unless

Insured's

indirectly from

of the loss

the

Employee

is not
was

in

collusion with one or more parties to the

transactions

and

has

received,

in

connection therewith, a financial benefit

with a value of at least $2,500.

As

used

Agreement,

throughout
financial

include any employee

this
benefit

Insuring
does

benefits earned

not
in

the

normal

including:
bonuses,

course

of

employment,

salaries, commissions, fees,

promotions,

awards,

profit

sharing or pensions.

-1010

Discovery

also

occurs when

the Insured

receives notice of an actual or potential

claim in

which

it is

Insured is liable to
circumstances

which,

alleged that

the

a third party under

if

true,

constitute a loss under this bond.

would

The

"CONDITIONS AND

LIMITATIONS"

section of

the

Bond also contains pertinent notice provisions which state in

relevant part:

NOTICE/PROOF - LEGAL PROCEEDINGS

AGAINST UNDERWRITER

a)

At

the earliest

practicable moment,

not to exceed 30 days, after discovery of

loss,

the

Insured

shall

give

the

Underwriter notice thereof.

Construing

the

Bond's

first

definition

of

discovery, the district court found that, at the latest,

the

Bank had discovered the loss by November 15, 1989.

thus

The court

determined that the Bank was required to give notice to

INA no later

than December 15, 1989 and that the January 16,

1990

was therefore

notice

untimely.

The district

court

concluded that, "[i]f notice to INA was untimely, the Bank is

precluded from recovery, regardless

of whether INA can prove

any actual prejudice as a result of the delay.

Federal Ins. Co.,

__________________

(interpreting

(Mass. 1980))."

The

920

F.2d

Johnson Controls
_________________

118,

v.

120

(1st

Bowes, 409
_____

J.I. Corp. v.
__________

Cir.

1990)

N.E.2d

185

Insurance Co. of N. Am., 928 F. Supp. at 59.

_______________________

district court

then

granted INA's

judgment.

-1111

motion for

summary

We agree

posits.

that discovery was earlier

Although the

district court relied

than the Bank

on the

Bond's

first definition of discovery to reach this conclusion, it is

most clearly

reached under the second definition.

v. FDIC, 7 F.3d 1054, 1056 (1st Cir. 1993).

____

definition,

discovery

occurs

"when

the

See Levy
___ ____

Under the second

Insured

receives

notice of an actual or potential claim in which it is alleged

that

the

Insured

circumstances which,

is

liable

to

third

if true, would constitute

party

under

a loss under

this bond."

The lawsuits and

Bellos and the

counterclaims brought by

Giamettes plainly constituted

the

actual claims.

The complaints alleged knowing acts of dishonesty or fraud by

Bank employees.5

Any harm caused by these alleged acts would

qualify as loss under the Bond.6

____________________

5.

We reject

alleged

that

Giamettes and

the Bank's
the

argument that the

Bank

itself

thus could

defrauded

complaints only
the

Bellos

not constitute discovery

and

of loss.

The complaints and counterclaims all specifically allege that

DiCologero

and/or

fraudulent manner

Bonaiuto

acted

in

under circumstances which,

have created a loss under the Bond.

finally provided

INA with

contained in the

Giamette complaints

dishonest

and

if true, would

Moreover, when the Bank

notice, it cited
as the

the allegations
source of

its

discovery of loss.

6.

Though it is largely irrelevant for our purposes, we will

assume

that the

other

elements of

"loss"

are present

--

namely that, with regard to the portion of the loss resulting

from loans, the employee(s), DiCologero and/or Bonaiuto, were

in collusion with one or more parties to the transactions and
received
from

a financial benefit with a value of at least $2,500

principals

involved in

the

transactions.

The

Bank

conceded in its notice letter to INA that, with regard to the

loans alleged

in the

Giamette complaints, it

appeared that

DiCologero's family members received financial benefits of at

-1212

The Bank weakly

not

rise

to

the

level

argues that these complaints

of

allegations

of

deceit

"did

and

misrepresentation on

obtain

the part

improper financial

more than the litigation

were

upon

benefits but rather

the point.

The

insured

proceedings."

the Bond independently

provide INA -- within

argument

to the insurer

dishonesty and does

to wait until the claim is proved.

Agreement F of

were nothing

That

Bond requires notice

a claim of employee

seeking to

tactics of defaulting borrowers who

confronting foreclosure

misses

of Bank employees

not allow the

Further, General

required the Bank

thirty days -- with all

to

pleadings and

pertinent papers in any legal proceeding brought to determine

the insured's liability for any loss.

The Bank

not

trigger

also asserts

discovery

under

that third-party

the

second

claims do

definition

of

discovery unless those claims are reasonable.

Massachusetts adopts

such

a reasonableness

Whether or not

standard,7

the

claims here met any such requirement and triggered the notice

____________________

least $2,500.

7.

But cf. Clore & Keeley, "Discovery of Loss," in Financial

___ ___
__ _________

Institution Bonds
_________________

89, 113 (Duncan

L. Clore ed.,

1995) ("As

long as a third party's claim would constitute a covered loss

under the bond if proven
the

allegations

allegations

are

to be true, it matters

perceived

as

can be completely false.

true.

not whether
Instead,

the

The point is, once the

allegations are made, the insurer has the right to know about
them

and

to

conduct

whatever investigation

appropriate.").

-1313

it

may

deem

requirement by, at the

time,

the Bank had been

claimed to

the

latest, mid-September 1989.

informed that at

have purchased more than

Rostoff Group without any

down payment

than the

The Bank was

charged with

loan

documentation

alleged to be complicit

least ten persons

fifty condominiums from

down payment or

Bank's loan documentation

knowing that the

were false.

By that

The

with a lower

reflected.

figures in

the

Bank's attorney

was

in the falsehoods.

The son of

the

Bank's mortgage department manager purportedly had

been paid

for false appraisals.

Group had

confirmed

A principal of the Rostoff

that this had happened.

The similarity of all the

allegations is telling.

If a "smell test" was

smell

Accordingly, the notice given by the

was rank indeed.

in order, the

Bank on January 16, 1990 was untimely.

IV.

More

Massachusetts

difficult

courts

is

would

the

apply

question

the

of whether

common

the

law "notice

prejudice" rule to Financial

Institution Bonds of this sort.

This is

See J.I. Corp.

___ __________

a question of law.

Co., 920 F.2d 118, 119 (1st Cir. 1990).

___

A.

v. Federal Ins.
____________

The

two

primary cases

from the

Supreme Judicial

Court on the notice prejudice rule are Johnson Controls, Inc.

______________________

v. Bowes, 409 N.E.2d

_____

notice prejudice

185 (1980), which creates a

rule for

liability policies, and

-1414

common law

Chas. T.
________

Main, Inc. v.
__________

Fireman's Fund Insurance Co.,

_____________________________

(Mass. 1990),

which

limits

liability

policies.

The

prejudice

has been

this

court

in

the

rule

Massachusetts

previously visited

J.I.
Corp.,
____________

Insurance Co. v. Talcott,

_____________
_______

supra;
_____

the

law

by the

context

of

28

of

notice

decisions of

National Union Fire

_____________________

931 F.2d 166 (1st Cir.

Liberty Mutual Insurance Company v.

_________________________________

Cir. 1985).

in

551 N.E.2d

1991); and

Gibbs, 773 F.2d 15 (1st

_____

For various reasons, in all three of these cases

this court declined to apply the notice prejudice rule.

The

whether the

Financial

Bank urges us to analyze the issue in terms of

admittedly

different

Institution Bond

is

policy

closer

to

language

an

in

the

"occurrence"

liability policy

insurance

question

obligation

or a

policy.

and

"claims made and

There

one

is,

which it

to apply

here of any conflict

is

reported" liability

however,

a logically

prudent

state substantive

to

ask under

law (in

with or a threat to

prior

our

the absence

federal policies).

See Atherton v. FDIC, No. 95-928, 1997 WL 9781 (U.S. Jan. 14,
___ ________
____

1997); Erie R.R. Co. v.

______________

also
____

given

infra n.1.
_____

by its

Tompkins, 304 U.S.

________

We must apply the

state legislature

64 (1938);

see
___

law of Massachusetts as

and state

court decisions.

And in that lies the difficulty of the Bank's position.

The

Supreme Judicial Court

has never

applied the

notice prejudice rule to a Financial Institution Bond.

fidelity

bonds, as

discussed later,

are different

Such

in kind

-1515

from liability insurance policies.

notice prejudice rule,

the context of liability

In

creating a common law

the Johnson Controls court did

________________

policies.

so in

The statutory progenitor

to Johnson Controls concerned automobile liability policies.8

________________

The refinement and limitation of the notice prejudice rule in

Chas. T. Main was also in the context of liability policies.

______________

And the usual posture in which the court has applied the rule

has been in liability policies.

Ins. Co.,
________

554

N.E.2d 28

See, e.g., Darcy v. Hartford

___ ____ _____
________

(Mass. 1990).

No

court has

extended the Massachusetts notice prejudice rule to

policies such as this Bond.

yet

fidelity

See, e.g., J.I. Corp., 920 F.2d

___ ____ __________

at 118; Boston Mut. Life Ins. Co. v. Fireman's Fund Ins. Co.,
_________________________
_______________________

613 F. Supp. 1090 (D. Mass. 1985).

When guidance is sought from

concerning

fidelity

policies, that

recent

vintage,

does not

notice

prejudice

rule

require

here.

Massachusetts caselaw

law, admittedly

our

The

not of

application of

background

law

the

of

Massachusetts, which

Controls,
________

was

that

we believe is not

conditions

and

overruled by Johnson
_______

limitations

in

such

____________________

8.

In Goodman
_______

(Mass. 1994),

v. American Casualty Co., 643 N.E.2d 432, 434

_____________________
the court

applied the usual

rule for automobile liability coverage to

coverage, finding no meaningful

notice prejudice
uninsured motorist

distinction between the two.

Accord MacInnis v. Aetna Life and Cas. Co., 526

______ ________
________________________
(Mass. 1988).

-1616

N.E.2d 1255

policies are construed as

written.9

In Gilmour
_______

v. Standard
________

Surety and Casualty Co., 197 N.E. 673 (Mass. 1935), the court
_______________________

was

concerned

contract

of

with a

bond for

suretyship

made

indemnity to the plaintiffs in

acts

by

the

of dishonesty.

defendant

"That

The

loss

bond had the

be

following condition and

discovered

provided

the event they sustained loss

through dishonest conduct on the part of the agency."

673.

"The

during the

Id. at
___

limitation:

continuance

of

the

suretyship or

and

within six

(6) months after

its termination,

notice delivered to the Surety at its Home Office within

ten (10)

days after such discovery."

held that "[t]he giving

precedent

of such notice was made

to recovery on the bond."

noted that it

was concerned

circumstances

under which

imposed on the

notice,"

at

The court

a condition

Id. at 675.
___

The court

not with "the

question of

the

common law

an obligation

is

obligee in a fidelity bond to give the surety

but rather with the

notice given.

Id. at 673.
___

Id.
___

at 674.

question of the

The question

timing of the

was whether

the

____________________

9.

The

requirement of timely notice is

a condition of this

Bond and so
agreement.

is a
In

condition of coverage

a bond of

this type,

under the

parties'

the Insured agrees

to

comply with the bond's "CONDITIONS AND LIMITATIONS" governing

the procedure for presenting
in exchange

for the

and proving the Insured's claim

indemnity promised by

the Underwriter.

Woods, "Conditions Precedent to Recovery: Presentation of the

Insured's
(Duncan
agreement

Claim," in
__
L.

Clore
or

Financial Institution Bonds

____________________________

ed.,

1995).

covenant,

"A

makes

condition,
the

Bond's

285, 285
unlike

an

indemnity

contingent upon the Insured's performance of the condition."

____________________________________________________________
Id. (emphasis added).
___

-1717

plaintiffs had complied

order to

be able to

apparently given

with the

recover on

ten day

notice period

in

the bond.

The notice

was

during the bond

year, but the

considered the dispositive question

to be whether the notice

was given within the ten day period.

concluded that it

had).

No case

court still

Id. at 674.
___

(The court

has said that Gilmour

_______

has

been overruled.

In Liberty Mutual Insurance Co. v. Gibbs, 773 F.2d

_____________________________
_____

15 (1st

Cir. 1985), this

notwithstanding,

court held that,

the contract

of

Johnson Controls
________________

insurance there

must

be

enforced according to its terms and that the notice prejudice

rule did not apply.

At issue was a

contract of reinsurance.

The contract's notice clause required notice to be given

soon as possible."

three

things.

Id. at 18.
___

First,

Our

the parties

court thought important

involved

policyholders who required protection.

involved

that

two

insurance

had bargained

at

Massachusetts

insurance

distinguished

between the

and liability policies.

Id.
___

were not

length.

statute,

as

contracts at

Id.
___

is

businesses,

Third,

true

App. Ct.

the

here,10

issue (reinsurance)

Id.
___

In Cheschi v. Boston Edison Co., 654 N.E.2d 48,

_______
_________________

(Mass.

lay

Second, the case

companies, experienced

arm's

"as

1995), Chief

Judge Warner

of the

53

Appeals

____________________

10.

See
___

Mass.

Gen. Laws

ch.

175,

107

(distinguishing

between surety bonds and insurance contracts).

-1818

Court

of

prejudice

Massachusetts rejected

rule

Johnson Controls.
________________

to

an

indemnity

application of

contract,

The court adopted and

the notice

distinguishing

expanded upon this

court's reasoning in Liberty Mutual, doubting that the notice

______________

prejudice rule would

apply to types of

insurance other than

liability insurance when the insureds were not laypersons and

when

the

parties to

business concerns.

would

of

the

contract

654 N.E.2d at 53.

apply traditional contract

the

indemnity clause,

special

circumstances of

not

applied in

be

were two

The court held that it

principles to the language

saying:

"Rules addressing

certain insurance

these

sophisticated

circumstances."

the

policies should

at

53-54.

Because it found language in the policy equivalent to

making

prompt

notice a condition, the

prompt

notice

relieved the

reimburse the insured.

Id.
___

court held that

insurer

Id. at 54.
___

of

the lack of

its obligation

to

Guided

Massachusetts

application of

by

law.

these

Cheschi
_______

principles,

cautions

we

against

notice prejudice rules designed

of insurance to other insuring arrangements.11

53-54.

The Bond

here

is

a Financial

analyze

automatic

for one type

654 N.E.2d at

Institution

Bond,

____________________

11.

In

J.I. Corp., this court, based on the analysis of the

__________

language in a

fidelity policy, declined to

prejudice rule to
suggests that

that policy.

While dicta
_____

the operative distinction

apply the notice

in J.I. Corp.
___________

is not the

type of

insuring arrangement involved, 920 F.2d at 120, the panel did

not have the benefit of Cheschi.
_______

-1919

Standard Form No.

recent

form in

forms

utilized

America.

24, as revised

a long

by

line

members

of Financial

of the

It is the

most

Institution Bond

Surety

Association

of

See generally Knoll & Bolduan, "A Brief History of

___ _________

the Financial

Institution

Bonds (1995), supra, at 1.

_____
_____

bonds,

in 1986.

written

Bond," in
__

Financial Institution
______________________

Such bonds are basically fidelity

specifically

for

financial

institutions,

including

commercial

and savings

banks,

savings

and loan

associations, credit unions, stockbrokers, finance companies,

and insurance companies.

I Fitzgerald et al., Principles of

_____________

Suretyship 67 (1st ed. 1991).

__________

Fidelity bonds are a

sort of "honesty

insuring against employee dishonesty.

the Bankers

with

Blanket Bond and the

Comments

on

the

Drafting

Institution Bonds 1, 1 (1989);

_________________

The

capacity of one

employee has

with liability

insurance,"

See Weldy, "History of

___

Financial Institution Bond

Process,"

in
__

Financial
_________

Knoll & Bolduan, supra, at 1.

_____

who ensures

the fidelity

of another's

been described as part insurer and part surety,

in either capacity being

primary and direct.

1 Russ & Segalla, Couch on Insurance 3d

_____________________

1:16 (1995).

Massachusetts

Bankers

predecessor

cases

to the

about

the Blanket

Financial Insurance

Bond, use

language of surety and the language of insurance.

Bond,

Early

the

both the

See, e.g.,
___ ____

Fitchburg Sav. Bank v. Massachusetts Bonding & Ins. Co., 174

___________________
_________________________________

N.E. 324, 328 (Mass. 1931).

-2020

It

purposes, .

of

is

said that

supra,
_____

scholars

most cases

and

for most

. . [fidelity bonds] are recognized to be a form

insurance that

insurance

"[i]n

are subject

to the

contracts generally."

rules applicable

Couch on Insurance 3d,

______________________

1:16 (citing law from various states).

have noted

that, while

to

Nonetheless,

fidelity bonds

have, over

time, become more like insurance contracts,12 a fidelity bond

is still not liability insurance:

Although often referred to

as insurance,

it is not liability insurance, but rather

a

two-party indemnity

agreement through

which the insurer reimburses

for

losses

actually

the insured
suffered

in

accordance with the contract provisions.

Weldy, supra, at 2; see also Knoll & Bolduan, supra, at 5.

_____
___ ____
_____

It

is significant

that

the Bond

possesses

some

characteristics of surety arrangements which distinguish them

from

liability policies.

the party in

between

the role

insurance

"The nature of the risk assumed by

of 'insurer' is

and

the

a major

arrangements

of

distinction

guaranty

and

surety. . . . [T]he risk can be characterized in terms of the

____________________

12.

The transformation

treatment
broadening

as
in

an

from treatment

insurance

the

"[F]idelity coverage

scope

contract
of coverage

as a surety
was
of

came to encompass not

bond to

prompted
fidelity

by

bonds.

only traditional

employee dishonesty, but other related risks, and became more

like a

contract of insurance, using

and 'insured'
Bolduan,

instead of 'surety'

supra, at
_____

5.

Here, the

the terms 'underwriter'

and 'obligee.'"
only insuring

Knoll &
clause at

issue is the one

But it is also

covering "traditional employee dishonesty."

true that INA is described in

the Bond as an

"underwriter" providing insurance.

-2121

degree

of

to which the contingency is within the control of one

the parties.

In

the classic instance

risk is controlled only by chance or nature.

of insurance, the

In guaranty and

surety arrangements, the risk tends to be wholly or partially

in

the

control

of

one of

creditor, or debtor]."

1:18.

There

is also

classic insurer

upon

the

ultimate loss, while

three

parties

the liability

of surety/guarantor.

of

[promisor,

Couch on Insurance 3d, supra,

______________________ _____

difference in

and that

occurrence

the

the

a surety

contingency,

is entitled

of a

An insurer,

must

bear

to indemnity

the

in

case the surety is compelled to perform.

It

Mutual, 773
______

has

made

is also

F.2d at

significant,

18, that the

distinctions

legislature has decided

surety bonds

are not

in

as was

true in

Liberty
_______

Massachusetts legislature

this area.

The

Massachusetts

that, for most regulatory

insurance contracts.

purposes,

See Mass.
___

Gen.

Laws ch. 175,

45 F.3d

107.

588, 592

In Williams v. Ashland Engineering Co.,

________
_______________________

(1st Cir.), cert.

_____

denied, 116
______

S. Ct.

51

(1995), this court found that "surety bonds are not insurance

contracts,

and are

insurance laws."

thus not

See
___

Contracting Corp., 292

_________________

expression

of

public

subject to

the Commonwealth's

also General Elec. Co.

____ __________________

N.E.2d 874, 876

policy

application of the insurance

v. Lexington
_________

(Mass. 1973).

undercuts

any

That

automatic

notice prejudice rule to surety

-2222

bonds, and thus to Financial Institution

Bonds to the extent

that they partake of the characteristics of surety bonds.

These distinctions confirm our reluctance to extend

the state

notice prejudice

Financial

Institution

rule for liability

Bonds.

substantive differences between

The

material

insurance to

technical and

a Financial Institution Bond

and liability insurance make it difficult to apply easily the

common

law notice prejudice rule, developed as it was in the

liability

insurance

context,

to the

insuring

arrangement

here.

In

considered

liability

Cheschi,
_______

the fact

as

that

policies) did

in

Liberty Mutual,
_______________

the

not

insuring

involve

was little

holding

the

reason to

layperson

Supreme Judicial Court

applying

depart from

the parties to their

bargain.

had stated

court

arrangements

Rather, they involved sophisticated businesses.

there

the

(not

consumers.

Accordingly,

the usual

rule of

In Johnson Controls,
________________

that one

reason for

the notice prejudice rule in that case was that the

insurance policy was:

not

negotiated agreement;

conditions are by
the

insurance

The

only

which

and large dictated

company

aspect

the insured

rather its

of

to the
the

by

insured.

contract over

can 'bargain'

is the

monetary amount of the coverage.

409

N.E.2d at 187 (quoting Brakeman v. Potomac Ins. Co., 371

________
________________

A.2d 193, 196 (Pa. 1977)).

-2323

Here, in

contrast, the Bond is

an agreement whose

basic

terms are negotiated between two industries.

years, the

banking industry and the

have negotiated

Institution

various

Bonds.

standard

Weldy, supra.
_____

As one

bond

arms-length,

is

an

fidelity bond companies

forms

See generally
___ _________

Over the

of

Knoll &

the

Bolduan, supra;
_____

commentator has noted,

negotiated

Financial

"the fidelity

contract

sophisticated business entities, the standard

between

form for which

was drafted by the joint efforts of the Surety Association of

America and the American

Bankers Association."

at vii.

the request of the American Bankers

For example, at

Association, the

Securities,

and

Koch, supra,
_____

1986 Bond added coverage for Uncertificated

adopted

financial instruments.

the

Knoll &

UCC

definitions

Bolduan, supra, at
_____

of

these

25; see
___

also Calcasieu-Marine Nat'l Bank v.

____ ___________________________

Co., 533 F.2d

___

290, 295

construed was

drafted

Bankers

n.6 (5th Cir.)

as a

Association and

American Employers' Ins.

________________________

the

joint

(bankers bond

effort by

American Surety

the

being

American

Association),

cert. denied, 429 U.S. 922 (1976).

_____ ______

The

Bank

brings

proferentum arguing that

___________

the

insurer, who

insured."

the

doctrine

policy, and

GRE Ins. Group v.

________________

provides

the

of

contra
______

"[a]mbiguities are resolved against

drafted the

Partnership, Inc., 61
__________________

doctrine

up

F.3d 79,

Bank

in favor

of the

Metropolitan Boston Hous.

___________________________

81 (1st

no refuge.

Cir. 1995).

The

This

presumption

-2424

against the insurer is not applied

where the policy language

results from the bargaining between

sophisticated commercial

parties of similar bargaining power.

Ticor Title Ins. Co.,

_______________________

920

F.2d

1990)(applying Massachusetts law).13

Falmouth Nat'l Bank v.

___________________

1058,

1062

(1st

Cir.

Thus, to

supported

by

effectively

the

have

policy provides

the extent

policy

little

the notice prejudice

of

or

protecting

no bargaining

rule is

consumers

leverage,

who

that

no basis here to extend the notice prejudice

rule.

B.

Finally, the

Bank draws

from

a Tenth

1529

(10th Cir. 1994), cert.

_____

and district

support for its

Circuit decision, FDIC

____

v. Oldenburg,
_________

denied, 116 S.
______

court decisions from other

court in Oldenburg
_________

predicted that Utah

position

34 F.3d

Ct. 171 (1995)

jurisdictions.

law would require

The

Financial Institution Bond company to show prejudice in order

to avoid coverage where

1546.

the bank gave

late notice.

Id.
___

at

The court held that the notice prejudice rule applied

in light of: (1) the failure of the

policy to expressly make

notice

condition

within

recovery;

(2)

specific

the

Utah

time a

rule

that

precedent

provisions

to

excluding

____________________

13.

The Fifth

the doctrine
Bonds.

Circuit has also rejected

of contra proferentum to
______ ___________

the application of

Financial Institution

Sharp v. FSLIC, 858 F.2d 1042, 1046 (5th Cir. 1988);

_____
_____

Calcasieu-Marine Natl Bank, 533 F.2d at 295 n.6.

__________________________

-2525

coverage are strictly construed

Utah

statute,

enacted

expressed a public

against the insurer; and (3)

after

requirements of

Utah

governs this issue, and

Judicial Court

Bond

policy that the notice

applied to all insurance policies.

the

the

or the

or other

period,

which

prejudice rule be

Id. at 1545-46.
___

Whatever

law, Massachusetts

law

Massachusetts has, until the Supreme

state legislature

decides otherwise,

framed its public policy choices differently.

We

hold that

the notice

prejudice rule

does not

apply.

Affirmed.
_________

-2626