Universal Mortgage Corp. v. Württembergische Versicherung AG
651 F.3d 759
| 7th Cir. | 2011Background
- Württ is an underwriter in a mortgage bankers blanket bond issued to Universal Mortgage Corporation; the bond covers losses directly caused by employee dishonesty.
- A Universal employee, Hightower, conspired with an outside broker to fund mortgages not meeting FNMC down-payment requirements for a kickback.
- Universal, unaware of the noncompliance, sold these loans to investors, warranting they met FNMC standards, creating contractual repurchase obligations when defaults occurred.
- Investors forced Universal to repurchase the noncompliant loans, leading to substantial repurchase obligations and an estimated $4.5 million potential loss.
- Universal filed a claim under the bond; the Underwriters denied coverage, and the district court dismissed the suit, ruling the loss was not directly caused by employee dishonesty and/or excluded by exclusion 18.
- On appeal, the Seventh Circuit affirmed, holding the loss was not directly caused by the employee's dishonesty and was barred by Exclusion 18 for repurchase losses arising from real estate loans.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss from third-party contract liability is 'directly caused' by employee dishonesty under the bond. | Universal: loss directly caused by Hightower’s fraud. | Württ: loss arises from contractual repurchase obligations, not direct loss from dishonesty. | Not directly caused; excluded. |
| Whether Exclusion 18 bars coverage for losses from repurchase obligations. | Exclusion 18 does not apply because the loss source is Hightower’s misconduct. | Exclusion 18 applies to any loss resulting from repurchasing a Real Estate Loan from an Investor. | Exclusion 18 bars coverage. |
| Whether the loss could be characterized as an actual depletion of bank funds due to employee dishonesty. | Loss occurred when Universal funded the noncompliant loans with depleted funds. | Any depletion was recouped upon sale of loans; later loss arises from repurchase liability. | Even if covered, loss tied to repurchase obligation—not depletion liability. |
| Whether Wisconsin/Direct-means-direct causation principles apply to bank bonds here. | Direct-causation standard supports coverage for direct losses from dishonesty. | Wisconsin law aligns with direct-means-direct; third-party liability is not a direct loss. | Wisconsin direct-loss interpretation forecloses coverage for third-party contract liability losses. |
| Do allegations and evidence in the complaint establish a covered loss independent of Exclusion 18? | There may be a covered 'direct loss' from the initial funding. | Complaint and proof of loss show repurchase costs; exclusion applies. | Even if some theory could fit, Exclusion 18 and the contract-based loss prevail. |
Key Cases Cited
- Tri City Nat'l Bank v. Fed. Ins. Co., 268 Wis. 2d 785 (Wis. Ct. App. 2003) (direct-loss language excludes third-party liability under fidelity bonds)
- RBC Mortgage Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 812 N.E.2d 728 (Ill. App. 2004) (third-party contract liability not covered by direct-loss fidelity bonds)
- First State Bank of Monticello v. Ohio Cas. Ins. Co., 555 F.3d 564 (7th Cir. 2009) (advocates direct-means-direct interpretation of 'directly' language)
- Continental Corp. v. Aetna Casualty & Surety Co., 892 F.2d 540 (7th Cir. 1990) (exclusion bars loss where underlying cause is contract-based, despite employee dishonesty)
- First Nat'l Bank of Manitowoc v. Cincinnati Ins. Co., 485 F.3d 971 (7th Cir. 2007) (bond language and scope require close reading of 'directly caused' )