This case is concerned with the meaning of the word "fraud” as used in a surety bond whose terms are prescribed by statute. Three questions are presented:
1. Whether the term "fraud” in the expression "fraud, cheating, or misrepresentation,” as used in a surety bond issued pursuant to MCL 257.248(7); MSA 9.1948(7), 1 means only actual fraud or also means constructive fraud;
2. Whether MCL 257.248(7); MSA 9.1948(7) limits the liability of a surety to a total of $10,000 where a $10,000 surety bond is issued in one year, and renewed the following year, and wrongful acts occur in each year resulting in defalcations exceeding $10,000 in each year; and
3. Whether the trial court erred in assessing prejudgment interest against the defendant surety.
I
Number One Mobile Homes, Inc. (hereafter
"An applicant for a new vehicle dealer or a used or secondhand vehicle dealer or broker license shall accompany the application with a properly executed bond or renewal certificate. If a renewal certifícate is used, the bond shall be considered as renewed for each succeeding year in the same amount and with the same effect as an original bond. The bond shall be in the sum of $10,000.00 with good and sufficient surety to be approved by the secretary of state. The bond shall be conditioned to indemnify or reimburse a purchaser, seller, financing agency, or governmental agency for monetary loss caused through fraud, cheating, or misrepresentation in the conduct of the vehicle business, whether the fraud, cheating, or misrepresentation was made by the dealer or by an employee, agent, or salesperson of the dealer. The surety shall be required to make indemnification or reimbursement for a monetary loss only after judgment based on fraud, cheating, or misrepresentation has been entered in a court of record against the licensee. The bond shall also be conditioned to indemnify or reimburse the state for any sales tax deficiency as provided in Act No. 167 of the Public Acts of 1933, as amended, being sections 205.51 to 205.78 of the Michigan Compiled Laws, or use tax deficiency as provided in Act No. 94 of the Public Acts of 1937, as amended, being sections 205.91 to 205.111 of the Michigan Compiled Laws, for the year in which the bond was in force. The surety shall be required to make indemnification or reimbursement only after final judgment has been entered in a court of record against the licensee. A dealer or applicant who has furnished satisfactory proof that a bond similar to the bond required by this subsection is executed and in force shall be exempt from the bond provisions set forth in this subsection. The aggregate liability of the surety shall not exceed the sum of the bond. The surety on the bond may cancel the bond upon giving 30 days’ notice in writing to the secretary of state and thereafter shall not be liable for a breach of condition occurring after the effective date of the cancellation.” (Emphasis added.)
NOMH procured a conforming surety bond from Wolverine Insurance Company for calendar year 1977. The bond was "renewed” for 1978 and Wolverine issued a renewal certificate. The bond contained the following language:
"Now therefore, the condition of this obligation is such that the principal and surety shall indemnify or reimburse any purchaser, seller, financing agency or governmental agency for any monetary loss only after judgment based on fraud, cheating or misrepresentation has been entered in a court record [sic] against the licensee.
"Provided further, that the aggregate liability of the surety for all such judgments shall, in no event, exceed the sum of this bond.
"Coverage hereunder shall be effective as of 12:01 a.m. on January 1, 1977 and shall remain in effect continuously, provided, however, that the said surety may cancel the bond upon giving thirty days notice in writing to the Secretary of State and thereafter shall be relieved of liability for any breach of condition occurring after the effective date of the cancellation.” (Emphasis added.)
In November 1976, NOMH entered into a floor plan financing arrangement with the plaintiff, General Electric Credit Corporation (hereafter GECC). The agreement provided that GECC would loan money to NOMH to buy mobile home units for sale at retail, but would retain a security
On May 29, 1979, GECC filed suit against the defendants. The essential allegations of the plaintiffs claims are pleaded in four counts, but only the third and fourth counts are relevant to our inquiry. In Count III, claiming against all of the defendants except Wolverine, GECC alleges that NOMH and the individual defendants sold four mobile homes "out of trust,” by which is meant that NOMH neither paid GECC for the units sold nor placed an. amount equal to the funds derived from the sale into a trust account. Specifically, GECC claims that in December 1977 NOMH and the individual defendants sold two mobile homes which were subject to the security agreement without remitting to GECC an amount equal to the indebtedness on the units or paying the money into the trust account, that they sold a mobile home in January 1978 which was subject to the security agreement without paying the indebtedness or remitting the funds received to the trust account, and that in March 1978 they sold still another mobile home which was subject to the security agreement without paying the indebtedness or remitting the funds received to the trust account. GECC claimed entitlement to a judgment against the individual defendants for damages of $26,086.01 "for fraudulent and wrongful conver
The trial court granted summary judgment in favor of GECC on Counts III and IV of its complaint.
The summary judgment against NOMH and the individual defendants under Count III of the complaint is stated, in part, to be "on account of fraudulent and wrongful conversion fraud, cheating or misrepresentation; in 1977 in the sum of $15,179.97; and in 1978 in the sum of $10,906.14; for a total of $26,086.81; plus prejudgment interest from May 26, 1978 to September 26, 1980 at 6% per annum.” Under Count IV, the trial court awarded summary judgment for $20,000 plus costs against Wolverine "under its statutory liability and the judgment entered in favor of plaintiff against [NOMH] and [the individual defendants].” It is clear, therefore, and indeed not controverted, that the judgment against Wolverine was based on the judgment against the individual defendants for "fraud, cheating, or misrepresentation” as provided in the statute earlier quoted.
In awarding the summary judgments, the trial court rejected the three claims or defenses that had been asserted by Wolverine:
—That "fraud,” as that term is used in the statute, MCL 257.248(7); MSA 9.1948(7), and the surety bond, required proof of actual or intentional fraud and not merely constructive fraud;
—That the surety’s total aggregate liability for
—That prejudgment interest and costs were not taxable.
On appeal, the Court of Appeals affirmed.
We granted leave to appeal.
I!
Wolverine’s broadest argument is that no liability arose under the surety bond policy because the surety bond and MCL 257.248(7); MSA 9.1948(7) provide for the imposition of liability only upon entry of a judgment for "fraud, cheating, or misrepresentation,” and that "fraud,” as used in the statute and the surety bond, means only actual fraud and does not include constructive fraud.
2
Therefore, Wolverine argues, since the judgment entered against NOMH was based only upon a
"In order to constitute fraud or dishonesty, some courts have held that it is necessary that the employee have the intent to deceive or to cheat the employer or at least to benefit himself or a third party to the detriment of the: employer’s interests. Consequently, mere irregularities committed without such intent do not constitute acts of fraud or dishonesty.” 13 Couch, Insurance, 2d, § 46:55, p 58.
"A bond indemnifying a company against loss from the fraud, dishonesty, forgery, theft, embezzlement, or wrongful abstraction of its treasurer does not cover acts innocently done which are merely constructively or technically a fraud or fraudulent. . . .”13 Couch, Insurance, 2d, § 46:42, p 47.
Finally, Wolverine argues, surety bonds are con
We cannot agree with Wolverine’s analysis or its conclusion.
First, while Wolverine may be correct in saying that, as a general proposition, "the rules * * * of construction [of surety contracts] are not different from those employed in the interpretation and construction of other written agreements,”
Chelsea Savings Bank, supra,
p 699, that general rule does not adequately describe the standard for interpretation of a surety bond whose terms are mandated by statute. The terms of a statutorily required surety bond are interpreted in light of the meaning of the language of the statute and the apparent intent of the Legislature.
Comm’r of Ins v Central West Casualty Co,
The fact that actions for actual fraud and constructive fraud have separate elements and may require different proofs does not mean that both concepts are not included within the term "fraud.” Use of the noun "fraud,” unadorned by attachment of the descriptive modifiers "actual” or "con
Wolverine argues that the phrase "fraud, cheating, or misrepresentation,” as used in the statute and the bond in question, means only intentional misconduct. We do not agree. A review of the law of misrepresentation indicates that a misrepresentation is "an assertion which is not in accord with the facts.” Restatement Contracts, 2d, § 159, p 426. The definition does not distinguish between incorrect statements that are intentional, or negligent, or even innocent. Additionally, 3 Restatement Torts, 2d, §§ 525 and 552, indicates that there are "fraudulent misrepresentations,” "negligent misrepresentations,” and "innocent misrepresentations.” Wolverine’s argument that the expression "fraud, cheating, and misrepresentation” involves only intentional misconduct and that "fraud” is
Finally, as with Wolverine’s strict interpretation argument, its "analogous” fidelity-and-bankers-blanket-bonds argument fails to consider the fact that the statutory word "fraud” must be interpreted in the light of the legislative intent, and is not simply defined by a general rule of interpretation applicable to surety bonds where issuance and operative language are not mandated by statute.
We think the Legislature meant to include both actual and constructive fraud within the scope of the word "fraud” when it required surety bonds for "fraud, cheating, or misrepresentation” in MCL 257.248(7); MSA 9.1948(7). We reach this conclusion upon the basis of the following analysis:
First, the word "fraud” must be interpreted in the light of the legislative intent behind MCL 257.248(7); MSA 9.1948(7).
Brockway, supra; Lawrence, supra.
From the terms of the statute it is plain that the Legislature, in enacting MCL 257.248(7); MSA 9.1948(7), intended to protect the general public by requiring a license and a bond for persons dealing in motor vehicles. As MCL 257.248(7); MSA 9.1948(7) states, protection is to extend to a "purchaser, seller, financing agency, or governmental agency.” Essentially, anyone who might suffer financial loss in the course of a transaction with a motor vehicle dealer is protected. Since the Legislature intended the statute to afford protection to the public, the language of surety bonds issued in compliance with the statute must be interpreted in the light of that “purpose. As this Court said in
Detroit v Blue Ribbon Auto Drivers’ Ass’n,
"This bond was obviously required for the protectionof the public. If its purpose had been to protect rights of the municipality issuing the license, there would be force and logic in limiting the life of the bond to the license period. * * * But when, as here, the bond is given to afford protection to the general public, if its terms permit, it should be so construed as to accomplish that purpose.”
If statutory terms included in a surety bond are interpreted to afford protection to the general public and not narrowly construed to limit the insurer’s liability at the expense of the general public, an interpretation consistent with such a purpose necessarily contemplates protection against both actual and constructive fraud.
Even without such a rule of construction, however, the word "fraud” in MCL 257.248(7); MSA 9.1948(7) must be given its natural, common, ordinary, and primarily understood meaning, and not unjustifiably restricted and narrowly or technically limited. The natural, common, and ordinarily understood definition of the word "fraud” embraces both actual and constructive fraud. This is clear even from a reading of the general dictionary definitions of the word. Webster’s, for example, defines "fraud” to include both the "intentional perversion of truth in order to induce another to part with something of value” and "an act of deceiving or misrepresenting.” Webster’s New Collegiate Dictionary, 1975 ed, p 457. "Intentional perversion of the truth” is actual fraud based upon an intent to defraud while "an act of deceiving or misrepresenting” may be constructive fraud which only requires a misrepresentation which need not amount to a purposeful design to defraud.
Black’s Law 'Dictionary also indicates that the term "fraud” includes both actual and constructive fraud when it states that "fraud is either
actual
or
constructive.”
(Emphasis in original.) Black’s Law
"its general or generic sense, it comprises all acts, omissions, and concealments involving a breach of legal or equitable duty and resulting in damage to another, or the taking of undue or unconscientious advantage of another . . . .” 37 CJS, Fraud, § 1, p 204. See also 37 Am Jur 2d, Fraud and Deceit, § 1, p 17.
Finally, this Court has long implicitly recognized that the word "fraud” includes both actual and constructive fraud. In
Goodrich v Waller,
"The important question in the present case is whether or not plaintiffs established actual fraud or constructive fraud entitling them to cancellation of their respective assignments to defendant. Fraud will not be presumed, cannot be lightly inferred, but must be established by a preponderance of evidence.” (Emphasis added.)
The Goodrich Court, therefore, used the word fraud as embracing both actual fraud and constructive fraud, even though it defined them separately.
The Legislature is presumed to know the primary, ordinary, and generally understood meaning of the words it uses and uses them consistent with that meaning unless a contrary intention is manifested.
People ex rel Hughes v May,
In summary, since the commonly understood meaning of the word fraud is consistent with the legislative intent behind MCL 257.248(7); MSA 9.1948(7) to protect the general public and third parties, the term fraud as used in MCL 257.248(7); MSA 9.1948(7) includes both actual and constructive fraud.
Ill
Wolverine also contends that, even if liability under the surety bond is triggered by a constructive fraud judgment against NOMH and the individual defendants, that liability is limited to a total of $10,000, notwithstanding the fact that the bond was renewed for a second year and was required by MCL 257.248(7); MSA 9.1948(7) to be "in the same amount and with the same effect as an original bond.” In support of its claim, Wolverine argues that the surety bond was a "continuous” bond since the bond states that coverage "shall remain in effect continuously.”
The original surety bond issued by Wolverine stated that "the aggregate liability of the surety for all such judgments shall, in no event, exceed the sum of this bond.” This language is taken from MCL 257.248(7); MSA 9.1948(7) which states that the "aggregate liability of the surety shall not exceed the sum of the bond.” Therefore, Wolverine argues; since the bond language and MCL
We do not agree.
We are satisfied that the correct interpretation of the language of the bond and of the statute which requires it is that the surety bond provided $10,000 coverage for its first year, covering events occurring in that year, and that the subsequent "renewal” of the surety bond provided another $10,000 coverage for the second year for events occurring in that year.
As we have said, the bond in this case is required by statute, and its terms are interpreted in the light of the statute which requires it. In
Central West Casualty Co, supra,
quoting
Lawrence v American Surety Co of New York, supra,
" 'It is the general rule that existing law becomes part of a statutory bond, i.e., one commanded or provided by statute, so that omitted conditions required by the law are read into the bond, and conditions not so required, which limit or restrict liability, are read out of it as surplusage. The rule governs not only the bonds of public officials but others.’ ”
Therefore, the scope of the surety bond’s coverage is determined according to the statutory requirements. In this case, MCL 257.248(7); MSA 9.1948(7) specifically states that the renewal bond shall be "in the same amount and with the same effect as an
original
bond” (emphasis added). Plainly implicit is the notion that multiple bonds are required — an original bond and another bond having the "same effect,” for the following year. The
Moreover, we find no indication that the Legislature or Wolverine intended the statutory surety bonds to be merely "continuous” as the surety construes that term. Wolverine argues that the bond originally issued is "continuous” and affords only $10,000 coverage regardless of the number of years covered, the number of renewals issued, the number of annual premiums paid, and the number and amount of covered defalcations. The first basis for this argument is that the policy states that the coverage was to "remain in effect continuously.” But that language does not create a "continuous” bond. Instead, that phrase is related to the duration of coverage, its commencement and the termination, and not to the scope or terms of coverage. The relevant language of the surety bond, in context, states: "Coverage hereunder shall be effective as of 12:01 a.m. on January 1, 1977 and shall remain in effect continuously, provided, however, that the said surety may cancel the bond.” Therefore, the word "continuously” in the surety bond policy does not indicate a limitation on renewed coverage.
Wolverine’s second basis for asserting that the
The statutory provision that the "aggregate liability of the surety shall not exceed the sum of the bond” refers to the separate years of coverage and means that the surety is not liable for multiple judgments for "fraud, cheating, or misrepresentation” occurring
in a single year
that result in a total or aggregate liability
for that year
of more than $10,000, the annual limit on liability. This interpretation is further supported by the position of the "aggregate liability” clause within MCL 257.248(7); MSA 9.1948(7) quoted above. The clause does not follow the statement concerning the amount of bond required, or the statement of the persons covered, or even the actions to be indemnified against. Instead, it follows upon a statement concerning the fact that a motor vehicle dealer may acquire substitute protection similar to the protection required. In other words, the language of the statute makes it clear that, whether a statutory bond or similar bond is used, the liability
Interpreting a surety bond to be "continuous,” in the way Wolverine would have us do in this case, would be to hold that the insured was paying an additional premium while receiving no additional protection.
As Justice Fellows observed in his dissenting opinion in
Michigan Mortgage-Investment Corp v American Employers’ Ins Co of
Boston,
"[I]f there are two contracts each agreeing to indemnify for loss during the period covered by it up to a certain sum, and a loss occurs during both periods, I see no impediment in a recovery on both contracts up to the limit fixed in each. If this is not the rule, then plaintiff received no consideration for the premiums paid on the second or renewal policy, and the only way employers may be protected by this character of insurance will be to take a new policy in a different company each year. If there had been two original policies issued by defendant to plaintiff covering different periods, each containing the language limiting recovery quoted by my Brother, I do not think we would hesitate in holding that such limitation was a limitation on the amount recoverable under each of the policies for loss during the period covered. I do not believe we would extend the limiting languages to losses arising under the other policy.” 3
The Legislature sought, by the statute here in question, to protect third parties, not to penalize motor vehicle dealers by requiring the purchase of near valueless bonds.
The legislative purpose in requiring a yearly
We hold that the original surety bond in this case provided $10,000 protection for the year for which it was issued and that the renewed bond provided $10,000 protection for the year for which the renewal certificate was issued. Consequently, we reject Wolverine’s claim that it was liable for only $10,000, since the defalcations, adjudicated in the circuit court to have been based on "fraud, cheating or misrepresentation,” occurred in successive years, and separate bond coverage had been obtained for each year.
IV
Wolverine’s final contention, stated in a single paragraph in its brief, is that the trial court improperly assessed prejudgment interest "on an amount exceeding its portion of the judgment” and that, if prejudgment interest is appropriate, "it should not be paid on more than the statutory amount of the bond.” The Court of Appeals did not discuss this issue.
In support of its argument, Wolverine cites
Denham v Bedford,
"If the legislative purpose was to compensate theprevailing party for the delay in payment of money damages and to cover the costs of litigation, then this legislative purpose can only be effectuated by the allowance of prejudgment interest, even if this ^interest exceeds the policy limits of an insurance contract.” Den-ham, pp 534-535.
Wolverine is not entitled to any relief on this point.
V
The word "fraud,” as used in MCL 257.248(7); MSA 9.1948(7), encompasses both actual fraud and constructive fraud. Since there was a judgment in this case for constructive fraud, liability under the surety bond attaches. The amount of that liability is $10,000 for the year covered by the original bond and $10,000 for the year covered by the renewal certificate because MCL 257.248(7); MSA 9.1948(7) requires a bond "in the same amount and with the same effect as an original bond” for each year in which a license is held. The trial court properly granted prejudgment interest in this case.
The judgment of the Court of Appeals is affirmed.
Notes
Formerly MCL 257.248(g); MSA 9.1948(g).
It is clear from an examination of the pleadings that the plaintiff alleged and proceeded to judgment on a theory of constructive fraud and that that fact is not contested by the parties.
Since Michigan Mortgage-Investment Corp did not involve a statutorily mandated bond, we need not evaluate the soundness of its reasoning. In the light of the legislative intent underlying MCL 257.248(7); MSA 9.1948(7), however, it is clear that the observations of dissenting Justice Fellows are accurately applicable to this case.