The only other things you will need to do between reading this thread and fall semester final exams are (1) look at a couple of old - or commercial - outlines to see how this stuff is condensed into outline format for exam prep purposes; and (2) possibly read GTM (or get some Siegel's books) to help you figure out how to answer a LS exam.
NOTE: The issues in this case aren't easy, so don't be concerned if you don't understand the topic. You just need to get the gist of what has been done and how I came up with the brief.
Facts: Company failed and was taken over by the federal government. The government brought a claim on an insurance policy taken out by the old company that had terminated upon the takeover. The district court held that no claim could be made because the policy terminated upon takeover. The government appealed arguing, among other things, that the termination should be equitably tolled.California Union Ins. Co. v. American Diversified Sav. Bank
948 F.2d 556
[American Diversified Savings Bank (“ADSB”), as required by federal law, took out insurance policies that insured against the wrongdoing of its officers and employees. The policies provided that coverage was limited to wrongdoing discovered while the policy was in force. The policy has a specific term but also provided that it would be terminated upon the "taking over" by a regulator, liquidator, or other entity. Several months after obtaining the policy, ADSB failed and was taken over by the the Federal Savings and Loan Insurance Corporation (“FSLIC”), thereby terminating the insurance policy by its terms. After taking over ADSB, the FSLIC discovered that certain employees of ADSB committed wrongdoing which contributed to the bank's failure. The FSLIC then brought a claim under the insurance policy.]
. . .
It is undisputed that FSLIC is eligible to recover for the claimed covered losses provided that there was “discovery” under the bond prior to the date of termination. . . . FSLIC contends the district court erred when it determined that equitable tolling did not properly apply to extend the period for discovery of losses under the bond.
. . .
2. Equitable Tolling
 Alternatively, FSLIC contends that the discovery period under the National Union and Lloyd's bonds should be equitably tolled because Sahni and Day so completely dominated and controlled ADSB and its subsidiaries that the entities lacked the legal capacity to discover losses under the bond. FSLIC maintains that, as the bonds specify that only the Insureds can discover losses under the bonds, the entities must have the legal capacity “to discover” in order for that condition to be met. See Admiralty Fund, 143 Cal.App.3d at 386-89, 191 Cal.Rptr. at 758-59; accord Kehoe v. Peerless Ins. Co., No. 74-1905-MC (1980 WL 1425), Fed.Sec.L.Rep. (CCH) ¶ 97,583 (D.Mass.1980). Consequently, FSLIC seeks to rely on principles of equitable tolling in order to extend the period for discovery of losses under the Form 22 bonds.
In Admiralty Fund, the insured maintained that the discovery period, for losses claimed against a fidelity bond, should be equitably tolled “due to the adverse domination and control [of the insured] by the very defalcating ‘employees' who caused the losses.” 143 Cal.App.3d at 383, 191 Cal.Rptr. at 755. The court held that if “the dishonest president and other high ranking officers controlled the [company's] operations to such an extent as to preclude discovery, the tolling of a discovery of loss provision should be considered.” Id. at 389, 191 Cal.Rptr. at 759. The court noted that otherwise, the shareholders would receive no protection under the fidelity policy during the time the wrongdoers controlled the company. Id.
FSLIC argues that the evidence presented in this case supports the conclusion that ADSB was adversely dominated and controlled by the wrongdoers, Sahni and Day. Sahni and Day owned all the stock and held key positions. Further, FSLIC argues that the public policy considerations in this instance are even more compelling than those in Admiralty Fund. Thus, the discovery period on the Form 22 bonds should be equitably tolled.
We reiterate that in Admiralty Fund, the court began its analysis with the general rule; namely, that “[g]enerally, the courts have strictly enforced such [discovery of loss] provisions so that neither difficulty in discovering insured losses nor employee concealment excuse the insured's performance.” Id. at 384, 191 Cal.Rptr. at 756. Only under certain circumstances may this general rule may be set aside and the tolling of the discovery of loss provision considered. See id. at 389, 191 Cal.Rptr. at 759. While this may be appropriate in situations where there is such domination and control as to preclude non-wrongdoing employees from “discovery,” it is not warranted under the facts of this case.
Here, it is not controverted that there were non-wrongdoing employees who could have discovered the losses prior to takeover. Moreover, FHLB examiners were investigating ADSB for two years prior to the takeover. The regulators were closely overseeing the thrift and had the ability, either independently or through FSLIC, to uncover the facts and notify ADSB of the discovery. We simply do not have an Admiralty Fund situation in which all involved but the wrongdoers were powerless to act in order to prevent the loss of coverage under the fidelity bonds. FSLIC must be charged with knowledge of the requirement that “discovery” occur prior to the termination of the bond period. By failing either to reform the bond or take steps to charge the Insured with knowledge of facts that would constitute “discovery” under the bonds, FSLIC missed its opportunity to claim coverage under the National Union or Lloyd's Form 22 bond in this case. It cannot now look to the equitable tolling *566 doctrine to reallocate the bargained for risks. Accordingly, we reject FSLIC's argument that the “discovery” period should be equitably tolled to extend the period for discovery of losses under National Union's and Lloyd's fidelity bonds.
Issue: Did the district court err when it determined that equitable tolling did not properly apply to extend the period for discovery of losses under the bond?
Rule: The termination of an insurance policy can be equitably tolled “due to the adverse domination and control [of the insured] by the very defalcating ‘employees' who caused the losses.”
Holding: The district court property held that the principal of equitable tolling is not warranted under the facts of this case.
Reasoning: Generally, where an insurance policy requires "discovery" of wrongdoing before bringing a claim, the termination of that policy will be strictly enforced even if it precludes coverage by the insured. Only under certain circumstances may this general rule may be set aside and the tolling of the discovery of loss provision considered. In Admirality Fund, the court found it equitable to toll the termination of the policy because the wrongdoing was done by those who completely controlled the insured. It would be inequitable to prevent the entity from recovering in a situation where there was no possibility that the entity, because of the control by the wrongdoer, could have discovered the alleged wrongdoing. Here, the facts do not present such a case. In this situation, any wrongdoing was not done by those in control of the entity. Furthermore, before FSLIC takeover, regulators were independently investigating the bank and could have discovered the employee's wrongdoing and filed claim before the termination of the policy.
If anyone has questions relating to this topic, feel free to post them and I, or someone else, will be sure to answer them.