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In re May

September 13, 2007

IN RE: CHARLES A. MAY;
EDWARDA. BECK, III, APPELLANT,
v.
CONTINENTAL CASUALTY COMPANY (CNA SURETY), APPELLEE.



Appeal from the Superior Court of the District of Columbia (INTVP. No. 95-91) (Hon. José M. López, Trial Judge).

The opinion of the court was delivered by: Glickman, Associate Judge

Argued November 8, 2005

Before GLICKMAN, Associate Judge, and STEADMAN and SCHWELB, Senior Judges.*fn1

This appeal requires us to construe the standard form of conservator's bond prescribed by the Register of Wills. The term of the bond is indefinite, as it continues in effect for the duration of the conservatorship, though the surety charges an annual premium. The issue is whether the surety's potential liability is limited to the penalty amount stated in the bond, regardless of the number of years the bond remains in force, or is cumulative for each year of coverage. We hold that the bond is not cumulative, and that the face amount of the bond establishes the surety's maximum liability.

I.

On June 30, 1993, the Probate Division of Superior Court appointed Flora Snead to serve as guardian and conservator for her son, Charles A. May. The order of appointment required Ms. Snead to obtain from an approved surety a bond for the faithful discharge of her duties as conservator in the amount of $10,000. See D.C. Code § 21-2058 (2001); Super. Ct. Prob. R. 332. Ms. Snead acquired the necessary bond from appellee's predecessor in interest, Continental Insurance Company. Two years later, the estate of Mr. May under conservatorship was augmented with the proceeds from a settled personal injury claim, and the court directed Ms. Snead to obtain an additional surety bond in the amount of $113,500. Continental Insurance Company also issued this second bond. Ms. Snead paid an annual premium for the two bonds of $554.

In 2001, the probate court removed Ms. Snead as conservator of May's estate because she had failed to file required annual accounts with the court. See D.C. Code § 21-2065 (a) (2001); Super. Ct. Prob. R. 330. Appellant Edward A. Beck III was named successor conservator. A court-appointed special master eventually found that Ms. Snead had failed to account for $193,444.63 in annuity and Social Security income payments between October 1994 and August 2001. Based on the special master's report, the court in January 2004 entered judgment against both Ms. Snead*fn2 and appellee CNA Surety, "individually and severally," for $193,444.63, plus $5,686.69 in fees and costs.

CNA Surety tendered $123,500, the total face amount of the two conservator's bonds, in full satisfaction of its obligations, but Mr. Beck demanded that it pay the entire judgment. Mr. Beck asserted that the surety bonds were renewed each year with the payment of the annual premium, and that the full penalty amount of each bond therefore was available for each year the bond was in effect to cover Ms. Snead's defalcations in that year. (It appears that no losses in any single year exceeded the sum of the face amounts of the two bonds.) In other words, according to Mr. Beck, the surety's liability under each bond was cumulative from year to year while the bond was in force, exactly as if Ms. Snead had purchased a separate bond covering each year of her tenure as conservator. Because the first bond was purchased in 1993 and the second bond was purchased in 1995, the surety's total potential liability through 2001 under Mr. Beck's interpretation was $761,000 ($10,000 per year for eight years plus $113,500 per year for six years) -- well above the amount of the court's judgment.

CNA Surety disputed Mr. Beck's view of its obligations. It claimed that the two bonds were of continuous and indefinite duration, and that its exposure was not cumulative from year to year, but was capped at the face amounts of the bonds for the whole multi-year period. Having tendered the face amounts, CNA Surety petitioned the probate court to discharge it from its liability as surety. The court treated this petition as a motion for relief from judgment under Super. Ct. Civ. R. 60 (b) (having found, inter alia, that CNA Surety had not had an opportunity to address the issue of the extent of its liability before the judgment was rendered). Over Mr. Beck's opposition, the court agreed with CNA Surety and granted the discharge petition. This appeal followed.

II.

Is CNA Surety's liability limited to the maximum penalties stated on the face of the bonds purchased by Ms. Snead, or is the surety subject to liability (up to those maxima) for each year of coverage in which Ms. Snead misappropriated funds belonging to her ward's estate? In the shorthand terminology employed by the parties (and in a vast number of judicial decisions treating fidelity bonds of all kinds), the sole issue before us is whether the conservator's bonds were "continuous" or "cumulative."*fn3 The question of whether a fidelity bond is continuous or cumulative has arisen in many different contexts and has vexed many courts for a century. As might be expected, the decisions in this area are not uniform in their reasoning or their outcomes. See generally H. D. Warren, Annotation, Extent of Liability on Fidelity Bond Renewed from Year to Year, 7 A.L.R.2d 946 (1949).

It is generally said that "the liability of a surety cannot be extended beyond the terms of the surety contract." In re Estate of Spinner, 717 A.2d 362, 366 (D.C. 1998). In this case, those terms are set forth in the conservator's bonds, which are a species of fidelity insurance.*fn4 The proper interpretation of the bonds, as of any contract, including whether they are ambiguous, "is a legal question, which this court reviews de novo." Tillery v. District of Columbia Contract Appeals Bd., 912 A.2d 1169, 1176 (D.C. 2006). In answering that question, we apply established rules of contract interpretation. See generally id. at 1176-77; Cameron v. USAA Prop. & Cas. Ins. Co., 733 A.2d 965, 968 (D.C. 1999) (contracts of insurance); United States v. Ins. Co. of N. Am., 327 U.S. App. D.C. 383, 387-88, 131 F.3d 1037, 1041-42 (1997) (surety bonds). In brief: we adhere to an "objective" law of contracts, meaning that "the written language embodying the terms of an agreement will govern the rights and liabilities of the parties regardless of the intent of the parties at the time they entered into the contract, unless the written language is not susceptible of a clear and definite undertaking, or unless there is fraud, duress, or mutual mistake." Tillery, supra (internal brackets, citations and footnote omitted). Thus, "[w]here insurance contract language is not ambiguous . . . a written contract duly signed and executed speaks for itself and binds the parties without the necessity of extrinsic evidence." Cameron, supra (internal quotation marks, brackets and citation omitted). "In determining whether a contract is ambiguous, we examine the document on its face, giving the language used its plain meaning," Tillery, supra, unless, in context, it is evident that the terms used have a technical or specialized meaning. A contract is not ambiguous merely because the parties disagree over its meaning. See Cameron, supra. Rather, a contract is ambiguous if, on its face, it has more than one reasonable interpretation. In that event, "the court -- after admitting probative extrinsic evidence -- must determine what a reasonable person in the position of the parties would have thought the disputed language meant." Tillery, supra (internal quotation marks and citations omitted). (Of course, if there remains a genuine dispute over the meaning of the facially ambiguous contract language after the marshaling of extrinsic evidence, the issue will not be susceptible to resolution as a matter of law.)*fn5

There is a pertinent caveat to the rule that a surety's liability is governed by the terms of the bond. Fidelity bonds mandated by statute (often referred to as "statutory bonds") must be interpreted "in harmony" with the statutory scheme. 11 COUCH ON INSURANCE 3D § 166:28, at 166-28 (footnote omitted). The terms of the law prescribing the bond "are to be read into the bond," and the bond "must be construed in light of the purpose of the statute." Cooper v. The Hartford Fin. Serv's. Group, Inc., No. 04-383, 2005 U.S. Dist. LEXIS 11434, at *6 (D.D.C. June 9, 2005) (citations omitted).

As the conservator of May's estate, Ms. Snead was a court-supervised fiduciary. The probate court directed her to furnish the bonds at issue in this case ...


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