
USCA1 Opinion

	




                            United States Court of Appeals                                                            For the First Circuit                                 ___________________          Nos. 96-1556               96-1557                         FEDERAL DEPOSIT INSURANCE CORPORATION                         as RECEIVER FOR THE BANK FOR SAVINGS,                                Plaintiff, Appellant,                                          v.                         INSURANCE COMPANY OF NORTH AMERICA,                Defendant, Appellee/Third-Party Plaintiff, Appellant,                                          v.                       PAUL J. BONAIUTO and DOLORES DiCOLOGERO,                          Third-Party Defendants, Appellees.                                  _________________                    APPEALS FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                     [Hon. Robert E. Keeton, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                                Selya, Circuit Judge,                                       _____________                                 Cyr, Circuit Judge,                                      _____________                              and Lynch, Circuit Judge.                                         _____________                                 ____________________               Eugene  J. Comey, with whom  Robert D. Luskin,  Comey Boyd &               ________________             ________________   ____________          Luskin, Ann S. DuRoss, Assistant General Counsel, Federal Deposit          ______  _____________          Insurance Corporation,  Thomas  L. Hindes,  Counsel,  E.  Whitney                                  _________________             ___________          Drake, Special Counsel, and  Leslie Ann Conover, Senior Attorney,          _____                        __________________          were on brief for FDIC.               Gerald  W. Motejunas,  with  whom  Marie Cheung-Truslow  and               ____________________               ____________________          Lecomte,  Emanuelson,  Motejunas  &   Doyle  were  on  brief  for          ___________________________________________          Insurance Company of North America.                                  __________________                                   February 3, 1997                                 ___________________                      LYNCH, Circuit Judge.   In  1977 the  Massachusetts                      LYNCH, Circuit Judge.                             _____________            legislature  enacted  a statute,  Mass.  Gen.  Laws ch.  175,              112, which  provided that,  for certain types  of liability            insurance,  the Commonwealth would adopt a "notice prejudice"            rule.  This new statutory  rule departed from the traditional            common law rule which had strictly enforced notice provisions            in  insurance policies, allowing forfeiture of coverage where            notice  to  an insurer  of a  claim  was late.    The Supreme            Judicial  Court of  Massachusetts  subsequently extended,  by            common law, and  then limited  the extension  of, the  notice            prejudice rule  for liability  insurance policies.   At issue            here  is whether  the notice  due under  a fidelity  bond was            late.   If  so, does  the state  common law  notice prejudice            rule,  under which an insurer must show prejudice in order to            be excused from coverage by the insured's late notice, extend            to the Financial Institution Bond at issue.                       The  import here is  whether a suit  by the Federal            Deposit Insurance Corporation  ("FDIC"), as receiver  for the            failed  Bank  for Savings,  may  proceed  against the  Bank's            insurer, the Insurance Company  of North America ("INA"), for            coverage of losses due to certain dishonest acts committed by            a Bank officer  and by a  lawyer retained by  the Bank.   The            loss to the Bank from these activities is asserted  to be $10            million.    The  FDIC,  as  receiver  for  the   Bank,  seeks                                         -2-                                          2            reimbursement for these losses to the  full amount covered by            the Financial Institution Bond issued by INA, $4 million.                                            I.                      The Bank  gave INA  notice of potential  loss under            the Bond on January 16, 1990.   The insurer declined to  pay,            and the Bank brought suit.  The district  court, interpreting            the Bond provisions  on a motion  for summary judgment,  held            that the Bank's notice was late because it had not been filed            within  30 days  of  discovery of  loss  as required  by  the            policy.   FDIC v. Insurance Co.  of N. Am., 928  F. Supp. 54,                      ____    ________________________            62-63  (D. Mass. 1996).   The court  granted summary judgment            for  the defendant.   Id.   The  Bank appeals,  disputing the                                  ___            district  court's  analysis  of  the date  of  discovery  and            claiming  that  its notice  was  timely.   The  Bank  further            asserts that, even if its notice was late, the district court            erred  in failing to apply  the notice prejudice  rule to the            Bond.1                      Our  review of  a grant  of summary judgment  is de                                                                       __            novo.  Wood v. Clemons, 89 F.3d 922, 927 (1st Cir. 1996).  We            ____   ____    _______            hold that the  district court was plainly correct  in holding            that the notice was  late, but we do so  on different grounds                                            ____________________            1.  The parties have  agreed that Massachusetts law  applies.            The FDIC here sues  as the receiver of a  Massachusetts bank,            and  we  discern no  conflict between  state law  and federal            statutory   provisions   or  significant   federal  policies.            O'Melveny  & Myers  v. FDIC,  114 S.  Ct. 2048,  2055 (1994);            __________________     ____            Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966).            ______    _______________________                                         -3-                                          3            than  the district  court.   We  also  hold that  the  notice            prejudice rule does not apply in this instance.2                                         II.                      The facts of the employee misconduct underlying the            Bank's  losses  are taken  from  the  Bank's Bond  claim  and            accepted  as true for present  purposes.  From  1987 to 1989,            Dolores DiCologero,  an Assistant Vice President  of the Bank            and  the  manager  of   the  mortgage  department,  and  Paul            Bonaiuto,  an  attorney retained  to  represent  the Bank  in            mortgage closings, conspired  with a condominium  development            group,  the Rostoff Group, to make hundreds of mortgage loans            using inflated appraisals and purchase prices in violation of            Bank regulations and the law.                        The   Bank  made  loans   on  condominium  projects            developed by the Rostoff Group until February 1989.  Although            internal  regulations forbade the  Bank from participating in            more than one-third of the units in a particular development,            the  Bank   exceeded  these   limits  as  to   Rostoff  Group            properties.  In addition, despite regulations prohibiting the            financing  of  more  than 80%  of  the  purchase  price of  a            property,  the Bank  made loans  to purchasers  for the  full                                            ____________________            2.  INA originally brought a third-party claim in this action            against the  dishonest Bank employees who  caused the claimed            losses.   The district  court dismissed  INA's claim  as moot            because it held that,  under the Bond, INA had  no liability.            INA appeals  that  dismissal.    As we  affirm  the  district            court's  finding that INA  has no liability,  INA's appeal on            this issue is moot.                                         -4-                                          4            value of condominiums in  Rostoff Group properties.  Bonaiuto            prepared closing documents overstating the purchase  price of            the condominiums  and falsely indicating  that the purchasers            had equity in the property.  The loan documentation reflected            nonexistent down payments.  In fact, the "down payments" took            the  form of  discounts  on the  purchase price.   DiCologero            expedited approval of the mortgages without any investigation            of the creditworthiness of the applicants, many  of whom were            not  creditworthy for  the loans  given.  The  aggregate face            value of the  loans was approximately  $30 million, and  many            culminated in default.                       Other DiCologero family  members also  participated            in the scheme, to their profit.  The overstated values of the            condominiums   were  supported  by   appraisals  prepared  by            DiCologero's  son.  He earned more than $33,000 for his work;            DiCologero's daughter received $4,550 from the  Rostoff Group            for secretarial work.  DiCologero's husband received  $12,000            in referral  fees for  directing potential purchasers  to the            Rostoff  Group and  purchased a  condominium  himself without            paying a deposit, although the Bank records falsely reflected            that he had  done so.  Other aspects of  this tale of avarice            and corruption need not  be detailed.  The Bank  was declared            insolvent  on March  20,  1992, and  the  FDIC was  appointed            receiver.   The FDIC asserts  that these events  helped bring            down the Bank.                                         -5-                                          5                      In  March 1989,  the  Bank received  a letter  from            counsel for Erna  Hooton, a former bookkeeper of  the Rostoff            Group and a mortgagee on six Rostoff Group units.  Ms. Hooton            had  defaulted   on  the  loans,  and  the   Bank  had  begun            foreclosure proceedings.   The letter said that  the Bank had            misrepresented in the loan documents that Ms. Hooton had made            down payments on the  properties.  The letter also  said that            Ms. Hooton's financial position should  have led the Bank  to            refuse  financing.   The  letter  claimed  that Bonaiuto,  as            closing counsel on the  Hooton loans, was aware of  the false            documentation.     The   Bank  investigated   these  charges;            representatives  of  the  Bank  met with  Steven  Rostoff,  a            principal of the Rostoff  Group, on March 21, 1989.   Rostoff            said  that the  down payment  for some  loans, including  Ms.            Hooton's, had taken the form of a discounted  purchase price.            He denied that anyone  associated with the Bank was  aware of            this.      DiCologero   also   denied   knowledge   of    any            irregularities.  The Bank  responded to the Hooton letter  by            denying the allegations.   Because Ms. Hooton did  not pursue            the matter, neither did the Bank.                      Then, in August 1989, Herbert and Deanna Bello, two            defaulting  borrowers on  six Rostoff  Group units,  sued the            Bank for damages and  asserted counterclaims in a foreclosure            action brought  by the Bank.  The Bellos asserted, as had Ms.            Hooton,  that Bonaiuto was aware  that they had  not made the                                         -6-                                          6            down payments reflected in the closing  documents.  They also            alleged  that when  they told  Steven  Rostoff that  they had            previously been  unable to obtain financing,  he replied that            they would "not have to worry about financing" because he had            made  a "deal"  with the  Bank.   The Bank, the  Bellos said,            never asked for financial information from them.   The Bellos            further alleged that, at one closing, they had pointed out to            Bonaiuto  that  the  closing  documents  stated  an  inflated            purchase  price  and  an  inflated down  payment.    Bonaiuto            referred  them to Rostoff, who  said this was  "what the Bank            wanted."  In the foreclosure action, the Bellos' counterclaim            specifically  alleged  that   the  Bank  knowingly  permitted            Rostoff's misrepresentations.                      Another  couple  who  had  purchased  Rostoff Group            properties,  Edward  and  Dorothy  Giamette,  filed  suit  on            September  22,   1989  against  the  Bank   and  the  Rostoff            principals.   Again the complaint alleged  that down payments            were falsely  represented  on  the  closing  documents,  that            Steven Rostoff told  the plaintiffs  that the  Bank knew  the            figures were false,  that the appraisals, which were  done by            DiCologero's son, were for more than the fair market value of            the properties,  and that this scheme had  been repeated with            at least eight  other purchasers  who had bought  a total  of            forty-five condominiums.  Earlier, on September 11, 1989, Mr.            Giamette had  made similar  allegations in a  counterclaim in                                         -7-                                          7            the Bank's foreclosure action against him.  None   of   these            claims,  however, prompted the Bank to notify INA of possible            losses due to alleged employee  misconduct.   What eventually            did  lead  the Bank  to  submit  a   notice  of  claim was  a            conversation in  October 1989  between DiCologero and  a Vice            President of  the Bank during which  DiCologero remarked that            her  husband had  purchased  a condominium  from the  Rostoff            Group without  making  a down  payment.   The Vice  President            reported DiCologero's remark to the Bank's President, who met            with the Bank's Audit Committee on November 6, 1989.  Outside            legal counsel from Gaston & Snow were present at the meeting.            The Committee  discussed "the possibility of  100% loans, the            unknown extent of these loans, employee involvement and legal            ramifications."    Gaston  &  Snow was  asked  to  prepare  a            preliminary  analysis  which was  submitted  on  November 15,            1989.  Gaston &  Snow then investigated and reported  back to            the Bank on December 18, 1989.  The report recommended, among            other  measures, that  the Bank  refer the matter  to federal            authorities, notify INA, and dismiss DiCologero.  On December            27, 1989, the Bank filed a Report of  Apparent Crime with the            FDIC, advising that it had learned of suspected violations of            federal law on December 18, 1989.  The Bank also notified the            FBI and  the U.S.  Attorney's Office.   DiCologero, Bonaiuto,            and  the development  group were  later convicted  on federal                                         -8-                                          8            bank fraud and conspiracy charges.  United States v. Rostoff,                                                _____________    _______            53 F.3d 398 (1st Cir. 1995).                      On  January 16, 1990, the Bank gave INA notice of a            potential loss  arising from  employee misconduct.   The Bank            enclosed copies of the complaints in the Giamettes' state and            federal lawsuits with its letter of notice.                                         III.                      As is  customary in the banking  industry, the Bank            had obtained a Financial  Institution Bond, Standard Form No.            24, from INA.  The Bond period originally ran from January 1,            1988 to April 1, 1989, and was later extended by agreement to            April 1, 1990.   Insured losses include  those resulting from            employee  dishonesty and  fraud.3   For present  purposes, we            assume that the actions of DiCologero and Bonaiuto caused the            Bank to sustain losses  of the type covered by  the "INSURING            AGREEMENTS FIDELITY" section of the Bond.4                                              ____________________            3.  Other types of losses covered under other portions of the            Bond are not pertinent here.            4.  That provision reads:                                 INSURING AGREEMENTS                                       FIDELITY                      Loss resulting directly from dishonest or                      fraudulent acts committed by  an Employee                      acting alone or in collusion with others.                      Such dishonest or fraudulent acts must be                      committed  by  the   Employee  with   the                      manifest intent:                      (a)  to cause the Insured to sustain                           such loss, and                                         -9-                                          9                      The  obligation  of the  insurer  to  indemnify the            insured for covered losses is explicitly made:                      subject  to  the  Declarations,  Insuring                      Agreements,      General      Agreements,                      Conditions  and   Limitations  and  other                      terms [of the Bond].                      The  "CONDITIONS  AND LIMITATIONS"  section  of the            Bond contains,  among other clauses,  the "DISCOVERY" clause.            Under that  clause, the Bond  applies to "loss  discovered by            the Insured during the Bond Period."  The clause then defines            "Discovery" in two ways:                      Discovery occurs when  the Insured  first                      becomes aware of facts which  would cause                      a reasonable person to assume that a loss                      of the type covered by this bond has been                      or  will be incurred,  regardless of when                      the act or  acts causing or  contributing                      to  such loss  occurred, even  though the                      exact amount  or details of the  loss may                      not then be known.                                            ____________________                      (b)  to obtain financial benefit  for the                           Employee   or   another  person   or                           entity.                      However, if some or all of the  Insured's                      loss results directly or  indirectly from                      Loans,  that portion  of the loss  is not                      covered  unless  the   Employee  was   in                      collusion with one or more parties to the                      transactions   and   has   received,   in                      connection therewith, a financial benefit                      with a value of at least $2,500.                      As   used    throughout   this   Insuring                      Agreement,  financial  benefit  does  not                      include any employee  benefits earned  in                      the   normal    course   of   employment,                      including:   salaries, commissions, fees,                      bonuses,   promotions,   awards,   profit                      sharing or pensions.                                           -10-                                          10                      Discovery  also  occurs when  the Insured                      receives notice of an actual or potential                      claim in  which  it is  alleged that  the                      Insured is liable to  a third party under                      circumstances   which,  if   true,  would                      constitute a loss under this bond.                      The  "CONDITIONS AND  LIMITATIONS"  section of  the            Bond also contains pertinent notice provisions which state in            relevant part:                           NOTICE/PROOF - LEGAL PROCEEDINGS                                 AGAINST UNDERWRITER                      a)  At  the earliest  practicable moment,                      not to exceed 30 days, after discovery of                      loss,   the   Insured   shall  give   the                      Underwriter notice thereof.                      Construing   the   Bond's   first   definition   of            discovery, the district court found that, at the latest,  the            Bank had discovered the loss by November 15, 1989.  The court            thus  determined that the Bank was required to give notice to            INA no later  than December 15, 1989 and that the January 16,            1990  notice  was therefore  untimely.    The district  court            concluded that, "[i]f notice to INA was untimely, the Bank is            precluded from recovery, regardless  of whether INA can prove            any actual prejudice as a result of the delay.  J.I. Corp. v.                                                            __________            Federal  Ins.  Co.,  920  F.2d   118,  120  (1st  Cir.  1990)            __________________            (interpreting  Johnson  Controls  v.  Bowes, 409  N.E.2d  185                           _________________      _____            (Mass. 1980))."  Insurance Co. of N. Am., 928 F. Supp. at 59.                             _______________________            The  district court  then  granted INA's  motion for  summary            judgment.                                         -11-                                          11                      We agree  that discovery was earlier  than the Bank            posits.   Although the  district court relied  on the  Bond's            first definition of discovery to reach this conclusion, it is            most clearly  reached under the second definition.   See Levy                                                                 ___ ____            v. FDIC, 7 F.3d 1054, 1056 (1st Cir. 1993).  Under the second               ____            definition,  discovery  occurs  "when  the  Insured  receives            notice of an actual or potential claim in which it is alleged            that   the  Insured  is   liable  to  a   third  party  under            circumstances which,  if true, would constitute  a loss under            this bond."   The lawsuits and  counterclaims brought by  the            Bellos and the  Giamettes plainly constituted  actual claims.            The complaints alleged knowing acts of dishonesty or fraud by            Bank employees.5  Any harm caused by these alleged acts would            qualify as loss under the Bond.6                                            ____________________            5.  We reject  the Bank's  argument that the  complaints only            alleged  that  the  Bank  itself  defrauded  the  Bellos  and            Giamettes and  thus could  not constitute discovery  of loss.            The complaints and counterclaims all specifically allege that            DiCologero  and/or   Bonaiuto  acted   in  a   dishonest  and            fraudulent manner  under circumstances which,  if true, would            have created a loss under the Bond.   Moreover, when the Bank            finally provided  INA with  notice, it cited  the allegations            contained in the  Giamette complaints  as the  source of  its            discovery of loss.            6.  Though it is largely irrelevant for our purposes, we will            assume  that the  other  elements of  "loss"  are present  --            namely that, with regard to the portion of the loss resulting            from loans, the employee(s), DiCologero and/or Bonaiuto, were            in collusion with one or more parties to the transactions and            received  a financial benefit with a value of at least $2,500            from  principals  involved in  the  transactions.   The  Bank            conceded in its notice letter to INA that, with regard to the            loans alleged  in the  Giamette complaints, it  appeared that            DiCologero's family members received financial benefits of at                                         -12-                                          12                      The Bank weakly  argues that these complaints  "did            not  rise  to   the  level  of  allegations  of   deceit  and            misrepresentation on  the part  of Bank employees  seeking to            obtain  improper financial  benefits but rather  were nothing            more than the litigation  tactics of defaulting borrowers who            were  confronting foreclosure  proceedings."   That  argument            misses  the point.  The  Bond requires notice  to the insurer            upon  a claim of employee  dishonesty and does  not allow the            insured  to wait until the claim is proved.  Further, General            Agreement F of  the Bond independently  required the Bank  to            provide INA -- within  thirty days -- with all  pleadings and            pertinent papers in any legal proceeding brought to determine            the insured's liability for any loss.                       The Bank  also asserts  that third-party  claims do            not  trigger  discovery   under  the  second  definition   of            discovery unless those claims are reasonable.  Whether or not            Massachusetts adopts  such  a reasonableness  standard,7  the            claims here met any such requirement and triggered the notice                                            ____________________            least $2,500.             7.  But cf. Clore & Keeley, "Discovery of Loss," in Financial                ___ ___                                      __ _________            Institution Bonds  89, 113 (Duncan  L. Clore ed.,  1995) ("As            _________________            long as a third party's claim would constitute a covered loss            under the bond if proven  to be true, it matters  not whether            the  allegations  are  perceived   as  true.    Instead,  the            allegations  can be completely false.  The point is, once the            allegations are made, the insurer has the right to know about            them  and  to  conduct  whatever investigation  it  may  deem            appropriate.").                                         -13-                                          13            requirement by, at the  latest, mid-September 1989.   By that            time,  the Bank had been  informed that at  least ten persons            claimed to  have purchased more than  fifty condominiums from            the  Rostoff Group without any  down payment or  with a lower            down payment  than the  Bank's loan documentation  reflected.            The Bank was  charged with  knowing that the  figures in  the            loan  documentation  were false.    The  Bank's attorney  was            alleged to be complicit  in the falsehoods.   The son of  the            Bank's mortgage department manager purportedly had  been paid            for false appraisals.   A principal of the Rostoff  Group had            confirmed  that this had happened.  The similarity of all the            allegations is telling.  If a "smell test" was  in order, the            smell  was rank indeed.  Accordingly, the notice given by the            Bank on January 16, 1990 was untimely.                                         IV.                      More  difficult  is  the  question  of whether  the            Massachusetts  courts  would  apply  the  common  law "notice            prejudice" rule to Financial  Institution Bonds of this sort.            This is  a question of law.   See J.I. Corp.  v. Federal Ins.                                          ___ __________     ____________            Co., 920 F.2d 118, 119 (1st Cir. 1990).            ___                                          A.                      The  two  primary cases  from the  Supreme Judicial            Court on the notice prejudice rule are Johnson Controls, Inc.                                                   ______________________            v. Bowes, 409 N.E.2d  185 (1980), which creates a  common law               _____            notice prejudice  rule for  liability policies, and  Chas. T.                                                                 ________                                         -14-                                          14            Main, Inc. v.  Fireman's Fund  Insurance Co.,  551 N.E.2d  28            __________     _____________________________            (Mass. 1990),  which  limits  the  rule  in  the  context  of            liability  policies.     The  Massachusetts   law  of  notice            prejudice  has been  previously visited  by the  decisions of            this  court  in  J.I.   Corp.,  supra;  National  Union  Fire                             ____________   _____   _____________________            Insurance Co. v. Talcott,  931 F.2d 166 (1st Cir.  1991); and            _____________    _______            Liberty  Mutual Insurance Company v.  Gibbs, 773 F.2d 15 (1st            _________________________________     _____            Cir. 1985).  For various reasons, in all three of these cases            this court declined to apply the notice prejudice rule.                      The  Bank urges us to analyze the issue in terms of            whether the  admittedly  different  policy  language  in  the            Financial  Institution Bond  is  closer  to  an  "occurrence"            liability policy  or a  "claims made and  reported" liability            insurance  policy.   There  is,  however,  a logically  prior            question  and  one  which it  is  prudent  to  ask under  our            obligation  to apply  state substantive  law (in  the absence            here of any conflict  with or a threat to  federal policies).            See Atherton v. FDIC, No. 95-928, 1997 WL 9781 (U.S. Jan. 14,            ___ ________    ____            1997); Erie R.R.  Co. v.  Tompkins, 304 U.S.  64 (1938);  see                   ______________     ________                        ___            also  infra n.1.   We must apply the  law of Massachusetts as            ____  _____            given  by its  state legislature  and state  court decisions.            And in that lies the difficulty of the Bank's position.                      The  Supreme Judicial Court  has never  applied the            notice prejudice rule to a Financial Institution Bond.   Such            fidelity  bonds, as  discussed later,  are different  in kind                                         -15-                                          15            from liability insurance policies.  In  creating a common law            notice prejudice rule,  the Johnson Controls court did  so in                                        ________________            the context of liability  policies.  The statutory progenitor            to Johnson Controls concerned automobile liability policies.8               ________________            The refinement and limitation of the notice prejudice rule in            Chas.  T. Main was also in the context of liability policies.            ______________            And the usual posture in which the court has applied the rule            has been in liability policies.  See, e.g., Darcy v. Hartford                                             ___  ____  _____    ________            Ins. Co.,  554  N.E.2d 28  (Mass. 1990).   No  court has  yet            ________            extended the Massachusetts notice prejudice rule to  fidelity            policies such as this Bond.   See, e.g., J.I. Corp., 920 F.2d                                          ___  ____  __________            at 118; Boston Mut. Life Ins. Co. v. Fireman's Fund Ins. Co.,                    _________________________    _______________________            613 F. Supp. 1090 (D. Mass. 1985).                      When guidance is sought from  Massachusetts caselaw            concerning  fidelity  policies, that  law, admittedly  not of            recent  vintage,  does not  require  our  application of  the            notice  prejudice   rule  here.     The  background   law  of            Massachusetts, which  we believe is not  overruled by Johnson                                                                  _______            Controls,  was   that  conditions  and  limitations  in  such            ________                                            ____________________            8.  In Goodman  v. American Casualty Co., 643 N.E.2d 432, 434                   _______     _____________________            (Mass. 1994),  the court  applied the usual  notice prejudice            rule for automobile liability coverage to  uninsured motorist            coverage, finding no meaningful  distinction between the two.            Accord MacInnis v. Aetna  Life and Cas. Co., 526  N.E.2d 1255            ______ ________    ________________________            (Mass. 1988).                                         -16-                                          16            policies are construed as  written.9  In Gilmour  v. Standard                                                     _______     ________            Surety and Casualty Co., 197 N.E. 673 (Mass. 1935), the court            _______________________            was  concerned  with a  bond for  acts  of dishonesty.   "The            contract   of  suretyship  made  by  the  defendant  provided            indemnity to the plaintiffs in  the event they sustained loss            through dishonest conduct on the part of the agency."  Id. at                                                                   ___            673.  The  bond had the  following condition and  limitation:            "That  loss  be  discovered  during the  continuance  of  the            suretyship or  within six  (6) months after  its termination,            and  notice delivered to the Surety at its Home Office within            ten (10)  days after such discovery."  Id. at 673.  The court                                                   ___            held that "[t]he giving  of such notice was made  a condition            precedent  to recovery on the bond."   Id. at 675.  The court                                                   ___            noted that it  was concerned  not with "the  question of  the            circumstances  under which  at  common law  an obligation  is            imposed on the  obligee in a fidelity bond to give the surety            notice,"  but rather with the  question of the  timing of the            notice given.   Id.  at 674.   The question  was whether  the                            ___                                            ____________________            9.  The  requirement of timely notice is  a condition of this            Bond and so  is a  condition of coverage  under the  parties'            agreement.  In  a bond of  this type,  the Insured agrees  to            comply with the bond's "CONDITIONS AND LIMITATIONS" governing            the procedure for presenting  and proving the Insured's claim            in exchange  for the  indemnity promised by  the Underwriter.            Woods, "Conditions Precedent to Recovery: Presentation of the            Insured's  Claim," in  Financial Institution  Bonds  285, 285                               __  ____________________________            (Duncan  L.  Clore  ed.,  1995).   "A  condition,  unlike  an            agreement  or   a  covenant,   makes  the   Bond's  indemnity            contingent upon the Insured's performance of the  condition."            ____________________________________________________________            Id. (emphasis added).            ___                                         -17-                                          17            plaintiffs had complied  with the  ten day  notice period  in            order to  be able to  recover on  the bond.   The notice  was            apparently given  during the bond  year, but the  court still            considered the dispositive question  to be whether the notice            was given within the ten day period.  Id. at 674.  (The court                                                  ___            concluded that it  had).  No case  has said that Gilmour  has                                                             _______            been overruled.                       In Liberty Mutual Insurance  Co. v. Gibbs, 773 F.2d                         _____________________________    _____            15 (1st  Cir. 1985), this  court held that,  Johnson Controls                                                         ________________            notwithstanding,  the contract  of  insurance there  must  be            enforced according to its terms and that the notice prejudice            rule did not apply.  At issue was a  contract of reinsurance.            The contract's notice clause required notice to be given  "as            soon as possible."   Id. at 18.  Our  court thought important                                 ___            three  things.   First,  the parties  involved  were not  lay            policyholders who required protection.  Id.  Second, the case                                                    ___            involved  two  insurance  companies, experienced  businesses,            that  had bargained  at  arm's  length.    Id.    Third,  the                                                       ___            Massachusetts   insurance   statute,  as   is   true  here,10            distinguished  between the  contracts at  issue (reinsurance)            and liability policies.  Id.                                      ___                      In Cheschi v. Boston Edison Co., 654 N.E.2d 48,  53                         _______    _________________            (Mass.  App. Ct.  1995), Chief  Judge Warner  of the  Appeals                                            ____________________            10.  See  Mass.  Gen. Laws  ch.  175,    107  (distinguishing                 ___            between surety bonds and insurance contracts).                                         -18-                                          18            Court  of  Massachusetts rejected  application of  the notice            prejudice  rule  to  an  indemnity  contract,  distinguishing            Johnson Controls.   The court adopted and  expanded upon this            ________________            court's reasoning in Liberty Mutual, doubting that the notice                                 ______________            prejudice rule would  apply to types of  insurance other than            liability insurance when the insureds were not laypersons and            when  the  parties to  the  contract  were two  sophisticated            business concerns.  654 N.E.2d at 53.  The court held that it            would  apply traditional contract  principles to the language            of  the  indemnity clause,  saying:    "Rules addressing  the            special  circumstances of  certain insurance  policies should            not  be  applied in  these  circumstances."   Id.  at  53-54.                                                          ___            Because it found language in the policy equivalent to  making            prompt  notice a condition, the  court held that  the lack of            prompt  notice  relieved the  insurer  of  its obligation  to            reimburse the insured.  Id. at 54.                                    ___                      Guided    by    these   principles,    we   analyze            Massachusetts  law.     Cheschi  cautions  against  automatic                                    _______            application of  notice prejudice rules designed  for one type            of insurance to other insuring arrangements.11  654 N.E.2d at            53-54.    The Bond  here  is  a Financial  Institution  Bond,                                            ____________________            11.  In  J.I. Corp., this court, based on the analysis of the                     __________            language in a  fidelity policy, declined to  apply the notice            prejudice rule to  that policy.   While dicta  in J.I.  Corp.                                                    _____     ___________            suggests that  the operative distinction  is not the  type of            insuring arrangement involved, 920 F.2d at 120, the panel did            not have the benefit of Cheschi.                                     _______                                         -19-                                          19            Standard Form No.  24, as revised  in 1986.   It is the  most            recent  form in  a long  line  of Financial  Institution Bond            forms  utilized  by  members  of the  Surety  Association  of            America.   See generally Knoll & Bolduan, "A Brief History of                       ___ _________            the Financial  Institution  Bond," in  Financial  Institution                                               __  ______________________            Bonds (1995), supra, at 1.  Such bonds are basically fidelity            _____         _____            bonds,  written  specifically  for   financial  institutions,            including  commercial  and savings  banks,  savings  and loan            associations, credit unions, stockbrokers, finance companies,            and insurance companies.   I Fitzgerald et al., Principles of                                                            _____________            Suretyship 67 (1st ed. 1991).             __________                      Fidelity bonds are a  sort of "honesty  insurance,"            insuring against employee dishonesty.  See Weldy, "History of                                                   ___            the Bankers  Blanket Bond and the  Financial Institution Bond            with  Comments  on   the  Drafting  Process,"  in   Financial                                                           __   _________            Institution Bonds 1, 1 (1989);  Knoll & Bolduan, supra, at 1.            _________________                                _____            The  capacity of one  who ensures  the fidelity  of another's            employee has  been described as part insurer and part surety,            with liability  in either capacity being  primary and direct.            1 Russ & Segalla, Couch on Insurance 3d   1:16 (1995).  Early                              _____________________            Massachusetts  cases  about  the Blanket  Bankers  Bond,  the            predecessor  to the  Financial Insurance  Bond, use  both the            language of surety and the language of insurance.  See, e.g.,                                                               ___  ____            Fitchburg Sav. Bank v. Massachusetts Bonding & Ins.  Co., 174            ___________________    _________________________________            N.E. 324, 328 (Mass. 1931).                                         -20-                                          20                      It  is  said that  "[i]n  most cases  and  for most            purposes, .  . . [fidelity bonds] are recognized to be a form            of  insurance that  are subject  to the  rules applicable  to            insurance  contracts generally."   1  Couch on  Insurance 3d,                                                  ______________________            supra,   1:16 (citing law from various states).  Nonetheless,            _____            scholars  have noted  that, while  fidelity bonds  have, over            time, become more like insurance contracts,12 a fidelity bond            is still not liability insurance:                      Although often referred to  as insurance,                      it is not liability insurance, but rather                      a  two-party indemnity  agreement through                      which the insurer reimburses  the insured                      for    losses   actually    suffered   in                      accordance with the contract provisions.             Weldy, supra, at 2; see also Knoll & Bolduan, supra, at 5.                   _____        ___ ____                  _____                      It  is significant  that  the Bond  possesses  some            characteristics of surety arrangements which distinguish them            from  liability policies.  "The nature of the risk assumed by            the party in  the role  of 'insurer' is  a major  distinction            between  insurance  and  the  arrangements  of  guaranty  and            surety. . . . [T]he risk can be characterized in terms of the                                            ____________________            12.  The transformation  from treatment  as a surety  bond to            treatment  as  an  insurance   contract  was  prompted  by  a            broadening  in  the  scope  of coverage  of  fidelity  bonds.            "[F]idelity coverage  came to encompass not  only traditional            employee dishonesty, but other related risks, and became more            like a  contract of insurance, using  the terms 'underwriter'            and 'insured'  instead of 'surety'  and 'obligee.'"   Knoll &            Bolduan,  supra, at  5.   Here, the  only insuring  clause at                      _____            issue is the one  covering "traditional employee dishonesty."            But it is also  true that INA is described in  the Bond as an            "underwriter" providing insurance.                                         -21-                                          21            degree  to which the contingency is within the control of one            of  the parties.  In  the classic instance  of insurance, the            risk is controlled only by chance or nature.  In guaranty and            surety arrangements, the risk tends to be wholly or partially            in  the  control  of  one of  the  three  parties  [promisor,            creditor, or debtor]."   1  Couch on Insurance  3d, supra,                                           ______________________  _____            1:18.   There  is also  a  difference in  the liability  of a            classic insurer  and that  of surety/guarantor.   An insurer,            upon  the  occurrence  of  the  contingency,  must  bear  the            ultimate loss, while  a surety  is entitled  to indemnity  in            case the surety is compelled to perform.                        It  is also  significant,  as was  true in  Liberty                                                                  _______            Mutual, 773  F.2d at  18, that the  Massachusetts legislature            ______            has  made  distinctions  in  this area.    The  Massachusetts            legislature has decided  that, for most regulatory  purposes,            surety bonds  are not  insurance contracts.   See Mass.  Gen.                                                          ___            Laws ch. 175,   107.  In Williams v. Ashland Engineering Co.,                                     ________    _______________________            45 F.3d  588, 592  (1st Cir.), cert.  denied, 116  S. Ct.  51                                           _____  ______            (1995), this court found that "surety bonds are not insurance            contracts,  and are  thus not  subject to  the Commonwealth's            insurance laws."   See  also General  Elec. Co.  v. Lexington                               ___  ____ __________________     _________            Contracting Corp., 292  N.E.2d 874, 876  (Mass. 1973).   That            _________________            expression  of   public   policy  undercuts   any   automatic            application of the insurance  notice prejudice rule to surety                                         -22-                                          22            bonds, and thus to Financial Institution  Bonds to the extent            that they partake of the characteristics of surety bonds.                       These distinctions confirm our reluctance to extend            the state  notice prejudice  rule for liability  insurance to            Financial  Institution  Bonds.   The  material  technical and            substantive differences between  a Financial Institution Bond            and liability insurance make it difficult to apply easily the            common  law notice prejudice rule, developed as it was in the            liability  insurance  context,  to the  insuring  arrangement            here.                      In   Cheschi,  as  in  Liberty  Mutual,  the  court                           _______           _______________            considered  the fact  that  the  insuring  arrangements  (not            liability  policies) did  not  involve  layperson  consumers.            Rather, they involved sophisticated businesses.  Accordingly,            there  was little  reason to  depart from  the usual  rule of            holding  the parties to their  bargain.  In Johnson Controls,                                                        ________________            the  Supreme Judicial Court  had stated  that one  reason for            applying  the notice prejudice rule in that case was that the            insurance policy was:                      not  a  negotiated agreement;  rather its                      conditions are by  and large dictated  by                      the  insurance  company  to the  insured.                      The  only  aspect  of  the  contract over                      which  the insured  can 'bargain'  is the                      monetary amount of the coverage.            409  N.E.2d at 187 (quoting Brakeman v. Potomac Ins. Co., 371                                        ________    ________________            A.2d 193, 196 (Pa. 1977)).                                         -23-                                          23                      Here, in  contrast, the Bond is  an agreement whose            basic  terms are negotiated between two industries.  Over the            years, the  banking industry and the  fidelity bond companies            have negotiated  various  standard  forms  of  the  Financial            Institution  Bonds.   See generally  Knoll &  Bolduan, supra;                                  ___ _________                    _____            Weldy, supra.   As one  commentator has noted,  "the fidelity                   _____            bond   is   an  arms-length,   negotiated   contract  between            sophisticated business entities, the standard  form for which            was drafted by the joint efforts of the Surety Association of            America and the American  Bankers Association."  Koch, supra,                                                                   _____            at vii.  For example, at  the request of the American Bankers            Association, the  1986 Bond added coverage for Uncertificated            Securities,  and   adopted  the  UCC  definitions   of  these            financial instruments.   Knoll &  Bolduan, supra, at  25; see                                                       _____          ___            also Calcasieu-Marine Nat'l Bank v.  American Employers' Ins.            ____ ___________________________     ________________________            Co., 533 F.2d  290, 295  n.6 (5th Cir.)  (bankers bond  being            ___            construed was  drafted  as a  joint  effort by  the  American            Bankers  Association and  the  American Surety  Association),            cert. denied, 429 U.S. 922 (1976).            _____ ______                      The  Bank   brings  up   the  doctrine   of  contra                                                                   ______            proferentum arguing that  "[a]mbiguities are resolved against            ___________            the  insurer, who  drafted the  policy, and  in favor  of the            insured."    GRE  Ins.  Group v.  Metropolitan  Boston  Hous.                         ________________     ___________________________            Partnership,  Inc., 61  F.3d 79,  81 (1st  Cir. 1995).   This            __________________            doctrine  provides  the  Bank  no refuge.    The  presumption                                         -24-                                          24            against the insurer is not applied  where the policy language            results from the bargaining between  sophisticated commercial            parties of similar bargaining power.   Falmouth Nat'l Bank v.                                                   ___________________            Ticor  Title  Ins.  Co.,  920  F.2d  1058,  1062  (1st   Cir.            _______________________            1990)(applying Massachusetts law).13                        Thus, to  the extent  the notice prejudice  rule is            supported  by   the  policy   of  protecting   consumers  who            effectively  have  little  or  no bargaining  leverage,  that            policy provides  no basis here to extend the notice prejudice            rule.                                          B.                      Finally, the  Bank draws  support for its  position            from  a Tenth  Circuit decision, FDIC  v. Oldenburg,  34 F.3d                                             ____     _________            1529  (10th Cir. 1994), cert.  denied, 116 S.  Ct. 171 (1995)                                    _____  ______            and district  court decisions from other  jurisdictions.  The            court in Oldenburg  predicted that Utah  law would require  a                     _________            Financial Institution Bond company to show prejudice in order            to avoid coverage where  the bank gave  late notice.  Id.  at                                                                  ___            1546.   The court held that the notice prejudice rule applied            in light of: (1) the failure of the  policy to expressly make            notice  within  a  specific  time a  condition  precedent  to            recovery;  (2)  the  Utah  rule   that  provisions  excluding                                            ____________________            13.  The Fifth  Circuit has also rejected  the application of            the doctrine  of contra proferentum to  Financial Institution                             ______ ___________            Bonds.   Sharp v. FSLIC, 858 F.2d 1042, 1046 (5th Cir. 1988);                     _____    _____            Calcasieu-Marine Natl Bank, 533 F.2d at 295 n.6.             __________________________                                         -25-                                          25            coverage are strictly construed  against the insurer; and (3)            a  Utah  statute,  enacted   after  the  Bond  period,  which            expressed a public  policy that the notice  prejudice rule be            applied to all insurance policies.  Id. at 1545-46.  Whatever                                                ___            the  requirements of  Utah  or other  law, Massachusetts  law            governs this issue, and  Massachusetts has, until the Supreme            Judicial Court  or the  state legislature  decides otherwise,            framed its public policy choices differently.                      We  hold that  the notice  prejudice rule  does not            apply.                       Affirmed.                      _________                                         -26-                                          26
