Before Judges Petrella, Conley and Coburn.
The opinion of the court was delivered by: Coburn, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from the Superior Court of New Jersey, Law Division, Salem County.
This is an action on a fidelity bond by the assignee of the insured. The Law Division judge found in favor of the assignee, plaintiff Conestoga Title Insurance Company ("Conestoga"), and entered judgment in the amount of $385,470.59. The bond issuer, defendant Old Republic Insurance Company ("Old Republic"), appeals. We reverse because the thefts resulting in the claim under the bond were committed not by an employee of the insured but by its alter ego, an individual who was the insured's sole director, officer, and stockholder.
Although a bench trial occurred, the relevant facts are undisputed. Conestoga, a title insurance company, authorized defendant Premier Title Agency, Inc. ("Premier") to issue title insurance policy commitments on its behalf and required that Premier obtain fidelity insurance. Premier obtained that insurance from Old Republic based on a written application that included the following information: "Number of employees by position[:] Officials [-] 1 President[;] Accounting [-] 1 Accountants[;] Other [-] 1 Secretary/Reception." It also recited "TOTAL NUMBER OF EMPLOYEES [-] 2 1 owner." The application is used to calculate premiums, which are based on the number of employees; however, Old Republic charges the same premium for up to five employees and does not include persons listed as owners in setting the premium.
Defendant Robert M. Wurster was the sole director, president, and shareholder of Premier, which had two other employees. In that capacity, he supervised numerous title closings during which he issued Conestoga title commitments and received checks payable to Premier from home purchasers, the funds to be held in trust and used to satisfy existing mortgages on the purchased properties. Instead of paying off the previous mortgages on the properties, Wurster stole the money. Conestoga reimbursed Premier's clients, and obtained a judgment against Premier and an assignment of any rights it might have against Old Republic under the fidelity bond. The fidelity bond insured Premier against dishonest acts of its employees; and, in relevant part, it defined the term "employee" as "Any natural person . . . in your service . . . [w]hom you compensate directly by salary . . .; and [w]hom you have the right to direct and control while performing services for you[.]" (Emphasis added). The bond also provided that "this insurance is for your benefit only. It provides no rights or benefits to any other person or organization."
The trial judge found as a fact that Wurster, the thief, was the alter ego of Premier. No one disputes that determination. He reasoned that under the case law "coverage should not be afforded in 'alter ego' situations unless such coverage was part of the bargain." Based on the application for the fidelity bond and the testimony that applications were used to set premiums, he concluded that Old Republic had agreed to provide coverage for embezzlements committed by Wurster with respect to funds held in trust by Premier. He properly concluded that Conestoga was not a third-party beneficiary under the bond (and Conestoga does not disagree), but he sustained its right to proceed against the bond as assignee of Premier's alleged rights.
An assignee's rights are limited to the rights of the assignor and are subject to all the equities and defenses that could have been asserted against the assignor before assignment. James Talcott, Inc. v. H. Corenzwit & Co., 76 N.J. 305, 309-10 (1978). Therefore, we turn our attention to Premier's alleged rights under the fidelity bond.
As a general matter, "fidelity bonds indemnifying employers against dishonest acts of their employees are to be broadly construed." Mortgage Corp. v. Aetna Cas. & Sur. Co., 19 N.J. 30, 36 (1955). But that principle is customarily limited to cases where the question is whether the particular acts of a true employee are covered by the bond, id. at 36-38, a point not presently at issue.
The fundamental question to be resolved is whether Wurster was an employee of Premier as defined in the fidelity bond. Conestoga does not appear to be contending that the policy definition is ambiguous, and the trial judge did not so find. Rather, he based his judgment on the information contained in the application, which he believed established an agreement to cover Wurster, a point that we will consider after discussing the policy itself.
The courts of this 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. Bird v. Centennial Ins. Co., 11 F.3d 228, 233-34 (1st Cir. 1993).
The general rule that corporations are separate and distinct from their shareholders and officers, Stopford v. Boonton Molding Co., 56 N.J. 169, 187 (1970), has no place in this analysis. Nor is there any significance to the corporation's theoretical right to govern an entirely dominant "employee." As the court said in Bird, supra:
[W]e join those courts that . . . reject the claim that the theoretical right to govern and direct a dominant corporate actor is sufficient to render that actor an employee under the definition of employee set forth in the Policies. We think it apparent that the "right" to govern and direct referred to in the Policies must be more than an ephemeral ...