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Conestoga Title Insurance Co. v. Premier Title Agency, Inc.

2000 WL 1819534 (N.J. Supr. Ct. 2000)

CORPORATIONS; SHAREHOLDERS; ALTER EGOS—When one person owns a controlling interest in a corporation and dominates the corporation’s actions, his acts are the corporation’s acts such that a fidelity bond does not cover his dishonest acts.

A title insurance company authorized a title agency to issue policy commitments on its behalf, but required that the agency obtain fidelity insurance. The agency’s owner was its sole director, president, and shareholder. The agency had two other employees. The owner stole money that was intended to be used to satisfy existing mortgages. The title insurance company reimbursed the agency’s clients and obtained a judgment against the agency as well as an assignment of any rights it might have had under a fidelity bond. The fidelity bond insured the agency (not the title insurance company) against “dishonest acts of its employees; and it defined the term ‘employee’ as ‘[a]ny natural person…in your service…[w]hom you compensate directly by salary…; and in relevant part [w]hom you have the right to direct and control while performing services for you.” The lower court found as a fact that the owner, the thief, was the alter ego of the agency. Therefore, coverage under the bond should not be afforded in “alter ego” situations unless such coverage was part of the insuring bargain. Based upon the application for the fidelity bond and the testimony that applications were used to set premiums, the lower court concluded that the bonding company had agreed to provide coverage for embezzlements committed by the owner with respect to funds held in trust by the agency. The Appellate Division disagreed. In doing so, it distinguished between “employees” and “true employees,” saying “the courts of the state have not yet addressed the basic issue, but numerous cases have held that this common definition of employee in corporate fidelity bonds - persons whom you have the right to direct and control while performing services for you - is unambiguous and means that thefts by corporate alter egos are not covered.” Under these circumstances, the “general rule that corporations are separate and distinct from their shareholders and officers, ..., has no place in this analysis.” The Appellate Division rejected the claim that the theoretical right to govern or direct a dominant corporate actor is sufficient to render that actor an employee under the applicable definition of employee. The Court pointed out that a corporation can only act through its officers and directors. When one person owns a controlling interest in the corporation and dominates the corporation’s actions, “his acts are the corporation’s acts.” Consequently, to allow the corporation to recover for the owner’s fraudulent conduct would allow the corporation to recover for its own fraudulent dishonest acts. According to the Court, fidelity bonds were clearly designed to insure the corporation against all employee’s dishonest acts and not its own dishonest acts. Further, the policy of not permitting insurance for intentional wrongdoing applies in these circumstances. Since the title insurance company was only an assignee, its rights were no greater than that of the agency. Therefore, because the agency could not collect under the fidelity bond for its owner’s fraudulent acts, the title insurance company was not entitled to collect. The New Jersey Supreme Court agreed.


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