F. S. Smithers & Co., Inc., a Corporation v. Federal Insurance Company, a Corporation

This is a diversity action under California law based on an alleged breach of an insurance contract. F. S.- Smithers and Co. (Smithers) appeals from the district court’s order granting summary judgment in favor of Federal Insurance Co. (Federal) and denying Smithers’ motion for summary judgment. We affirm.

FACTS

The Bond

Smithers was a financial service company that operated a retail securities business in the early 1970’s. On February 23, 1973 Federal issued a broker’s blanket bond to Smithers effective December 31, 1972. Coverage under the bond included indemnification for losses resulting from dishonest or fraudulent trading of securities by its employees. The bond specifically excluded any loss “not discovered prior to termination of this bond as a entirety.”

Smithers discontinued its retail brokerage operations in June 1973. In light of this fact, its president, Lester Reeve, executed an amendment to the bond, Endorsement No. 7. This Endorsement was issued and was effective on June 29, 1973. Endorsement No. 7 reduced coverage for dishonest or fraudulent trading by employees from $1,000,000 to $100,000.

Between late 1973 and early 1974, Smith-ers disposed of most of its…