BancInsure, Inc. v. Marshall Bank, N.A.
Coverage under your standard financial institution bond can protect you from various types of losses, including forged guarantees, but you have to do your part, too. That's a lesson Marshall Bank learned the hard way.
The litigation between BancInsure and the bank arose out of a $2.56 million loan Marshall Bank made to allow borrowers to purchase one minor league hockey team and refinance another. The bank required personal guarantees from two individuals. The loan documents were executed before the guarantees were obtained, however, and the bank disbursed the proceeds after receiving what appeared to be faxed copies, not originals, of the guaranty documents. Ultimately, the loan went bad and the bank discovered the personal guarantees had been forged.
After the bank suffered a significant loss on the loan, it made a claim for coverage under its bond with BancInsure. BancInsure denied coverage and sought a declaratory judgment that the loss was not covered. The district court granted summary judgment to BancInsure and, on appeal, the 8th Circuit Court of Appeals has affirmed. The courts ruled that the bank should have had the originals of the guarantees before they disbursed proceeds and that protection afforded by the policy is against forgery, but not forgery committed by use of faxed documents, accepted by the bank without perusal of the originals.