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E. Udolf, Inc. v. Aetna Cas. and Sur. Co.

Supreme Court of Connecticut

May 1, 1990


Argued March 1, 1990.

William F. Gallagher, with whom, on the brief, was Gwen B. Weltman, New Haven, for appellant (plaintiff).

John T. Harris, with whom, on the brief, were Gregory T. D'Auria and Peter R. Reynolds, Hartford, for appellees (named defendant, et al.).

Henry C. Ide, Hartford, for appellee (defendant, Fire and Cas. Ins. Co. of Connecticut).


[214 Conn. 742] HULL, Associate Justice.

The sole issue in this appeal is whether the plaintiff, E. Udolf, Inc., was entitled to coverage under certain employee dishonesty insurance policies issued by the defendants, Aetna Casualty and Surety Company (Aetna) and Fire and Casualty Insurance Company of Connecticut (Fire and Casualty), for the [214 Conn. 743] misappropriation of monies by an employee of the plaintiff. The plaintiff notified the defendants of

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losses it had incurred as a result of an employee's dishonesty and sought from the defendants indemnification, plus interest, for those losses. Upon the defendants' refusals to pay its claim, the plaintiff instituted the present action. The matter was thereafter tried to the court and judgment was rendered in favor of the defendants. From this judgment the plaintiff appeals. We find no error.

The underlying facts as found by the trial court are as follows. The plaintiff is a small corporation that operates a retail men's clothing store in the city of Hartford. During the relevant period, 1980 through 1983, the plaintiff employed between eight and ten employees. The only officer, director and shareholder of the plaintiff was Leonard Udolf, who was present in the store approximately 10 to 20 percent of the time. In his absence the store was run by Kenneth Auer, the store manager. Auer was the overseer of the store and was principally in charge of its operations in the absence of Leonard Udolf. He was expected, however, to report all relevant activities to Leonard Udolf.

During the years 1980 and 1981, Lynn Bjork, an employee of the plaintiff, misappropriated $6000 from the plaintiff. To effect the misappropriations, she substituted her personal checks for money generated by the plaintiff's sales, and then simply put these checks in her desk rather than depositing them into the plaintiff's account. In the spring of 1981, during one of Leonard Udolf's frequent absences from the store, Anna Shukis, the plaintiff's bookkeeper, discovered the misappropriations and immediately informed Auer of them. Auer and Shukis were expected to inform Leonard Udolf of activities such as Bjork's misappropriations. They, however, did not consult with Leonard [214 Conn. 744] Udolf, but rather agreed with one another to allow Bjork to repay the $6000 and remain employed by the plaintiff. Thereafter, Bjork repaid the $6000.

Beginning in late 1981, and continuing until February, 1983, Bjork again misappropriated monies from the plaintiff, totaling $48,715.08. These misappropriations were discovered in February, 1983, and Bjork was immediately fired by Auer on the direct order of Leonard Udolf.

Pursuant to employee dishonesty insurance policies that the plaintiff had purchased from Aetna and from Fire and Casualty, [1] the plaintiff notified the two companies of the losses incurred as a result of Bjork's misappropriations. Both Aetna and Fire and Casualty refused to indemnify the plaintiff for those losses, claiming that the language of the policies excluded coverage for Bjork's actions. Aetna's refusal to pay was based on the following provision contained in section 7 of its policy: "The coverage of Insuring Agreement I shall not apply to any Employee from and after the time that the Insured or any partner or officer thereof not in collusion with such Employee shall have knowledge or information that such Employee has committed any fraudulent or dishonest act in the service of the Insured or otherwise, whether such act be committed Before or after the date of employment by the Insured." Fire and Casualty's refusal was based on similar language contained in section 1(3) of its policy: "Insurance hereunder shall be deemed cancelled as to any Employee immediately upon discovery by the Insured, or any partner or officer, of any fraudulent or dishonest act of such Employee."

[214 Conn. 745] The trial court concluded that, under the terms of the policies, the plaintiff was not entitled to recovery of the losses it had incurred as a result of Bjork's actions. The basis of the court's conclusion was its determination that the knowledge of Auer and Shukis concerning misappropriations committed by the plaintiff's employees was imputed to the plaintiff. The court thus reasoned that because the 1980-81 misappropriations by Bjork constituted "fraudulent or dishonest act[s]" within the scope of section 7 of Aetna's policy, and section 1(3) of Fire and Casualty's policy, and because the plaintiff, by imputation of Auer's and Shukis' knowledge, became aware of those

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misappropriations no later than the summer of 1981, any subsequent losses caused by a "fraudulent or dishonest act" on the part of Bjork were excluded from coverage under the policies. In so concluding, the court rejected the plaintiff's claim that, because Auer and Shukis did not inform Leonard Udolf of Bjork's 1980-81 misappropriations, they were in collusion with Bjork. The court stated that while the failure of Auer and Shukis to notify Leonard Udolf may have been an act of poor judgment, it was not a fraudulent act and therefore was not collusive.

On appeal, the plaintiff claims that the trial court erred in: (1) imputing to the plaintiff the knowledge of Auer and Shukis concerning Bjork's prior misappropriations of the plaintiff's monies; (2) finding that Bjork's prior misappropriations were "fraudulent or dishonest" under the terms of the ...

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