sion, justly prevents the alteration of rules of evidence by the act of the parties, and protects the debtor who is frequently considered to be at the mercy of the creditor. It is necessary to distinguish between an agreement that the receipt of payment by the surety to the creditor shall be conclusive against the principal, and the conclusive effect of a judgment obtained against the surety when the principal is sued for indemnity.22 § 232. Differences between contracts by compensated surety and insurance contracts. Naturally, an application of different principles is required when the surety is one who, for compensation and as a regular business, contracts to become responsible for the obligations of others, than where a gratuitous surety is concerned. The forms and language used are those of the surety, which in case of ambiguity are always construed strongly against the one using them. In effect, undertakings of surety companies have been treated as insurance contracts, "whereby one party agrees to wholly or partially indemnify another for loss or damage which he may suffer from a specified peril." 23 The rules of law applicable to insurance have been recognized by the courts as governing the contracts of surety companies. In one of the earlier federal opinions interpreting the contract of a corporate surety, this language was used: The cases cited by defendant in error holding that a surety is 'a favorite of the law,' and that a claim against him is strictissimi juris, have no application. Corporations entering into contracts like the one at bar may call themselves 'guarantee' or 'surety' companies, but their business is in all essential particulars that of insurers, who, upon careful calculation of the risks of such buisness, and with such restrictions of their liability as may seem to them V. Co. of North America V. Pitts 22 Hare v. Grant, Adm'r (1877) 77 N. C. 203; Sec. 164, supra. 23 Shakman Credit System Co. 366, 66 N. W. 528, 53 A. S. R. 920. See Claflin et al. v. United States Credit System Co. (1896) 165 Mass. 501, 43 N. E. 293, 52 A. S. R. 528. V. United States (1896) 92 Wis. 32 L. R. A. 383, sufficient to make it safe, undertake to assure persons against loss, in return for premiums sufficiently high to make such business commercially profitable. Their contracts are, in fact, policies of insurance, and should be treated as such." 24 While judicial opinions abound with expressions that contracts of corporate sureties on fidelity, commercial and judicial bonds are contracts of insurance,25 it must be noted that two Mercantile 24 Tebbets et al. v. Credit Guarantee Co. of N. Y. (1896) 73 Fed. 95, 97, 19 C. C. A. 281. Accord: American Credit Indemnity Co. v. Athens Woolen Mills (1899) 92 Fed. 581, 584, 34 C. C. A. 161; City of Topeka v. Federal Union Surety Co. et al. (1914) 213 Fed. 958, 130 C. C. A. 364; City of Cheyenne v. Maryland Casualty Co. (1926) 13 Fed. (2nd Ser.) 401, 404; Chicago Lumber Co. v. Douglas et al. (1913) 89 Kan. 308, 131 Pac. 563; Hormel and Co. v. American Bonding Co. (1910) 112 Minn. 288, 128 N. W. 12, 33 L. R. A. (N. S.) 513. In Knight and Jillson Co. V. Castle et al. (1909) 172 Ind. 97, 87 N. E. 976, 27 L. R. A. (N. S.) 573, the court professes to have adopted a "middle ground." It is said in that opinion (p. 109): "In some cases the strict construction in favor of private sureties is not applied, but the more liberal rule of interpretation, as applied with respect to insurance contracts, is adopted. We think there is a middle ground which may be occupied with justice to all persons. In construing the contract it is not unreasonable to construe it in the light of its preparation by the obligor, with the safeguards in its favor, and to construe ambiguous language against it, following the rules applied as to insurance contracts, having in view also the rights, duties, responsibilities and functions which belong to the relation of suretyship, and stipulations which are fairly entered into, either by the compensated or gratuitous surety, should be as much for the benefit of one as the other." The Court of Civil Appeals in Texas, however, said with reference to corporate sureties on building contracts: "Surety bonds on building contracts are not to be construed as contracts of insurance, but as the obligation of a surety, and to General be strictly construed."' Bonding and Casualty Co. v. Waples Lumber Co. et al. (1915) (Tex.) 176 S. W. 651, 654. 25The bond (fidelity) is to be interpreted in the light of the nature as a contract of insurance, in view of its purpose as such, and with a considerable degree of liberality in favor of the insured, and against the insurer by reason of its having framed the contract." Mitchell Grain, etc., Supply Co. v. Maryland Casualty Co. (1921) 108 Kan. 379, 195 Pac. 978, 980, 16 A. L. R. 1488. "The peril of loss by the insolvency of customers is just as definite and real a peril to a merchant or manufacturer as the peril of loss by accident, fire, lightning, or tornado, and is, in fact, much more frequent. No reason is perceived why a contract of indemnification against this differences exist between them and those of marine, fire or life insurance. First, an insurance contract is entered into without reference to any other collateral contract. There are but two parties to it. The contract of a corporate surety on a bond, like that of the private surety, is coextensive with that of the principal. Usually, there are three parties to it, the obligee, the principal obligor and the surety. The surety is a co-obligor with the principal.26 If the principal's contract is found not to exist, the surety will not be liable.27 Frequently courts do not discriminate between the terms surety and guarantor, between which it is contended there is a substantial difference. A guarantor more nearly resembles an insurer than a surety, yet a guarantor assumes the responsibility for the performance of an obligation by another. His promise ever-present peril is not just as legitimately a contract of insurance as a contract which indemnifie against the more familiar, but less frequent, peril by fire." Shakman v. United States Credit System Co. (1896) 92 Wis. 366, 66 N. W. 528, 531, 32 L. R. A. 383, 53 A. S. R. 920. A note in (1911) 24 Harvard Law Review 568, 569, says by way of criticism of the view: "It is submitted that contracts of guaranty entered into by a corporation for the purpose of gain are as much contracts of suretyship as insurance. It is common ground. But the public demand that these contracts be enforced has rendered inevitable a line of cases which, in effect, decide that this portion of suretyship law is not applicable to the contracts of surety companies." 26 Edward C. Lunt, in his practical book on Surety Bonds (1922), Sec. 3, says: "In the case of ordinary insurance the underwriter as a matter of course takes all the risk, while in the case of suretyship, pure and simple, the bonding "When, therefore, it is said of certain bonds that they are 'written on an insurance basis,' the reference is to this aspect of the matter-to the fact that underwriters expect to pay their losses from a fund saved for the purpose from the premiums collected, rather than from cash secured upon the occurrence of loss from responsible principals or indemnitors." See Frost on Guaranty Insurance (1909, 2d Ed.) Sec. 3; Sec. 4, supra. 27 American Surety Co. of N. Y. v. United States (1900) 127 Ala. 349, 28 So. 664; Whittaker United States Fidelity and Guaranty Co. (1924) 300 Fad. 129. 81 is distinct from that of the principal, yet dependent upon and collateral to that of the principal.28 An insurance contract is one of indemnity,29 original, and not within the statute of frauds,30 while a contract of guaranty is within the statute. The second difference between the corporate surety bond and the ordinary contract of insurance is that in the latter the insured must disclose all facts concerning which inquiry is made, and in certain cases it is implied that the insured has made a warranty. The facts being within the knowledge of the insured must be accurately given. The insurer has no other means of obtaining information. The falsity of the statements by the insured in applying for insurance many times will avoid such contracts.82 But in the case of fidelity bonds especially, while the courts recognize them as insurance contracts, they point out that the insurer has equal opportunity with the obligee to ascertain the facts concerning the conduct of the employee. Therefore, implied contracts are not presumed in such bonds as in oldfashioned insurance contracts. One of the earlier opinions of the federal court, dealing with fidelity bonds, emphasized this 28 See "Primary and Secondary Obligations" (1925) 74 University of Pennsylvania Law Review, p. 36; note, (1912) Columbia Law Review, Vol. 12, p. 448; Secs. 4 and 52, supra. 29 Dane v. The Mortgage Insurance Corporation Ltd. (1894) 1 Q. B. 54. Brandt on Suretyship (1905, 2d Ed.), Sec. 5, says: "Within this class (indemnity) fall most of the fidelity and like bonds executed by surety companies hereinafter referred to."' 30 Quinn-Shepherdson Co. v. United States Fidelity and Guaranty Co. et al. (1919) 142 Minn. 428, 172 N. W. 693. Apparently contra is Commonwealth v. Hinson (1911) 143 Ky. 428, 136 S. W. 912, L. R. A. 1917-B, 139, Ann. Cases 1912-D, 291. Contracts for fire insurance are held to be original, and no written evidence is necessary. See Phoenix Insurance Co. v. Spiers et al. (1888) 87 Ky. 285, 8 S. W. 453, 456; Emery v. Boston Marine Insurance Co. (1885) 138 Mass. 398, 409; Sanford v. Orient Insurance Co. (1899) 174 Mass. 416, 54 N. E. 883, 75 A. S. R. 358; Wiebeler v. Milwaukee Mechanics' Mutual Insurance Co. (1883) 30 Minn. 464, 16 N. W. 363; Bank of Tarboro v. Fidelity and Deposit Co. of Maryland (1901) 128 N. C. 366, 38 S. E. 908. 31 Watkins v. Perkins (1697) 1 Lord Raymond 224; Jones v. Cooper (1774) Cowper 227, 98 Eng. Rep. Reprint 1058; Chapter III, supra. 32 Joyce on Insurance (1897) Sec. 1970. difference between the two kinds of so-called insurance contracts in this language: "And if these new contracts, whatever their form, are to be turned into contracts of insurance, the courts will be careful not to again perplex themselves with regrettable technicalities of law such as have sometimes crept into the older contracts of insurance, and have required statutes for their removal. In marine, fire and life insurance, it is not an unreasonable assumption that the owner knows more intimately than others can know the conditions which are material to the risk assumed, and it is therefore not unreasonable to require him to disclose those conditions to the insurer, and to hold him strictly to that duty. But in insurance like this the insurer and the insured deal at arms' length with each other, and upon a plane of equal opportunity for information. Indeed, the risk does not depend so much on conditions of fact as upon a mere judgment about human character in the subject of insurance, his individuality of moral qualities. About this the insurer can inform himself, and the assured is not presumed to know anything, as in the case of the owner of a property or a life which has been insured. Hence it is not unreasonable to hold the insurer to his risk in the broadest sense that is required to indemnify the assured for any loss by dishonesty which falls fairly within the employment of the person whose honesty is guaranteed, and to permit no escape except by lines of retreat or avenues of deliverance clearly defined, well marked, and mutually understood as part of the contract, evidenced by the use of unambiguous language for that purpose. 133 § 233. Defenses of gratuitous surety. Among the available defenses the gratuitous surety may set up against the obligee, after he has entered into a valid contract on behalf of his principal, are (a) the failure of the obligee to disclose facts within his knowledge concerning the principal's previous misconduct; 83 Guarantee Co. of North America v. Merchants' Savings Bank and Trust Co. (1896) 80 Fed. 766, 773, 26 C. C. A. 146. 34 Smith et al. v. Governor and Company of the Bank of Scotland (1813) 1 Dow 272, 3 Eng. Rep. Reprint 697; Railton v. Mathews et al. (1844) 10 Clark and Finnelly 934. 84 The creditor, however, is not required to volunteer information to the proposed gratuitous surety on a note of the insolvency of the prin cipal, since both have equal opportunity to ascertain the facts. Ham v. Greve et al. (1870) 34 Ind. 18 See Sec. 34, supra. |