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Hartford Fire Insurance Co. v. Conestoga Title Insurance Co.

328 N.J. Super. 456, 746 A.2d 460 (App. Div. 2000)

CORPORATIONS; OFFICERS; ALTER EGOS—Although theoretically only an employee, the president of a corporation was found not to be under the direction and control of the company when he acted as if he, not his wife, was the sole shareholder and therefore a fidelity bond did not cover his dishonest acts.

A title insurance company authorized an agency to issue title insurance policy commitments on its behalf. The president of the agency was not its owner, but his wife was the sole director and stockholder. Nonetheless, she had absolutely nothing to do with the corporation or its business. All corporate affairs were solely under the control of the president, who supervised the work of the company’s four employees. The title insurance company required the agency to obtain and maintain a fidelity bond. In applying for the fidelity bond, the president of the agency falsely stated in writing that the officers and employees of the agency had “always performed their respective duties honestly.” The bond defined an “employee” as “[a]ny natural person: (1) [w]hile in your service…; and (2) [w]hom you compensate by salary…; and (3) [w]hom you have the right to direct and control while performing services for you.” The question here was whether the president was an employee as that term was defined in the bond. The Court pointed out that the term “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.” Here, the president had installed his wife as director and had designated her as owner of all of the corporate stock. The Court stated that, had her position or stock ownership been grounded in reality, the agency, and therefore the title insurance company, its assignee of the fidelity bond, might have had a case worth pursuing. But, because she, in fact, knew nothing of the corporation’s business and was completely uninvolved, the question as to whether the president was “under the direction and control” of the corporation required investigation. “Although a corporation and its stockholders are usually treated as separate entities, ‘a court of equity is always concerned with substance and not merely form, and thus, it will go behind the corporate form where necessary to do justice.’” The best that the Court could say was that the president’s wife had a theoretical right to govern the agency and thereby control her husband. Nonetheless, the “right” to govern and direct must be more than ephemeral. It must have some grounding in reality. Consequently, the Court would not permit recovery on the bond because, under the circumstances, the reality was that a thief who utterly dominated a corporation could wrongly obtain the benefits of a fidelity bond by placing formal ownership of the company in a spouse or confederate. That is patently inconsistent with the settled policy of not permitting insurance for intentional wrongdoing. Because the agency could not have collected under the fidelity bond under these circumstances, the title insurance company, as assignee of the policy, also could not collect.


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