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FOURTH DIVISION
JUNE 30, 2004

JUSTICE HARTMAN delivered the opinion of the court:

Plaintiffs, RBC Mortgage Company (RBC) (formerly Prism Mortgage Company) and FirstCity Financial Corporation (First City) appeal from the circuit court's section 2-615 dismissal of theiraction for indemnity under a financial institution bond issued by defendant, National Union FireInsurance Company of Pittsburgh (National Union). On review, RBC and First City (sometimescollectively RBC) contend that the court erred in finding that the bond does not afford coverage toRBC for payments made to a third party under a settlement agreement.

First City is a wholly owned subsidiary of RBC, a mortgage banking company. From March1, 1999 to December 3, 1999, First City employed Brandon Earl as a loan officer in its Utah branch. There, Earl prepared loan packages for potential home mortgage borrowers, which consisted ofvarious financial documents used to evaluate creditworthiness. Earl originated a fraudulent loanpackage for himself in the amount of $450,000 and put in the name of his wife, Andrea Earl. In aneffort to conceal his own loan, Earl compiled fraudulent packages for other borrowers. The packagescontained fabricated documents necessary to close the loan, including counterfeit credit reports,falsified appraisals and forged income verifications. To facilitate the scheme, Earl paid off thevarious providers of the tainted documents. Earl collectively submitted the packages for sale fromFirst City, as a broker, to Evergreen Moneysource Mortgage Company (EMMC), which funded theloans and ultimately sold them to third party investors.

Under the brokerage agreement between EMMC and First City, EMMC retained solediscretion to approve and fund the loans, relying on the packages submitted by First City. Once theloans were funded and closed they became the property of EMMC, which paid First City a brokeragefee in return. EMMC assumed the risk of any losses associated with interest rate fluctuations, loanservicing, and change in the market value of the property. A warranty provision in the brokerageagreement guranteed that the loan packages submitted by First City would not contain any untruestatements and, if breached, First City was obligated to indemnify EMMC for any resultant losses.

In early December of 1999, First City's Utah branch manager, Sue Bitterman, uncoveredEarl's self-funded loan. Bitterman then initiated an audit of all loan packages originated by Earl. By the end of January of 2000, First City confirmed the fraud, however, Earl's loan for $450,000already had been funded and sold to third party investors. First City immediately notified EMMCof the fraud and, on January 13, 2000, EMMC requested that First City confirm its obligation to bearthe risk of the warranted, but fraudulent loans. Days later, First City informed National Union thatit would seek coverage under the bond, should it incur losses as a result of the fraud.

The insuring agreement between First City and National Union was in the form of a financialinstitution bond or fidelity bond, in effect from March 1, 1999 to March 1, 2002.⁽¹⁾ Under "InsuringAgreement A" entitled "Fidelity," National Union promised to indemnify RBC for:

"(A) Loss resulting directly from dishonest or fraudulent actscommitted by an [e]mployee acting alone or in collusion withothers.

Such dishonest conduct or fraudulent acts must be committedby the [e]mployee with the manifest intent:

(a) to cause the Insured to sustain such loss; and

(b) to obtain financial benefit for the [e]mployee or anotherperson or entity."⁽²⁾

The policy does not provide a definition for "loss resulting directly from," and excludes fromcoverage generally "indirect or consequential loss of any nature." The agreement permitted NationalUnion to "elect" whether to provide a defense for RBC in the event of a claim against it.

On March 17, 2000, EMMC commenced an action against First City,⁽³⁾ requesting (1) damagesfor losses incurred in reliance on the fraudulent loan packages, and (2) that First City buy back thedefective loan packages. On April 14, 2000, First City notified National Union of the suit; however,National Union declined to provide a defense or commit to coverage.

Over 14 months later, on June 20, 2001, RBC sent a proof of loss to National Union onbehalf of First City and RBC, as First City's guarantor. The parties reached an "agreement inprinciple" to settle the suit. On October 10, 2001, EMMC and First City finalized a settlementagreement, wherein RBC agreed to pay to EMMC $175,000 for losses already incurred, and toindemnify EMMC for any future losses traceable to the fraud. RBC also promised to compensatedirectly one of EMMC's investors, Conseco Finance Corporation, for related losses not yet incurred. RBC provided National Union with drafts of the settlement agreement, supplementing its proof ofloss previously tendered. In a letter to RBC dated November 28, 2001, National Union denied theclaim, asserting that RBC's losses did not result "directly" from the fraud.

On May 31, 2002, RBC filed a four-count complaint against National Union, alleging claimsfor declaratory judgment, breach of contract, attorney's fees and costs, and prejudgment interest. OnAugust 23, 2001, National Union moved to dismiss RBC's claims pursuant to 735 ILCS 5/2-615(West 2000) (section 2-615). On October 21, 2002, following oral argument, the circuit courtgranted the motion with prejudice, finding that (1) "[t]he language of the bond is not ambiguous,"(2) "[n]either Insuring Agreement A nor E affords coverage because the loss was not a loss resultingdirectly from the covered risk," and (3) "'[d]irect loss,' as used in the bond, is not properly construedby analogy to proximate cause." The court commented that "courts throughout the land takesurprisingly, a very, very narrow approach to fidelity bonds with regard to this issue of direct loss.*** [T]o suffer a direct loss[,] it's got to be a situation where the employee puts his hand in theemployer's pocket. And if it turns out that the loss occurred as a consequence of the involvementof a third party[,] that's not what fidelity bonds insure against."

On November 27, 2002, RBC moved the circuit court to reconsider and vacate its ruling,which the court denied on February 4, 2003. RBC timely appeals.

On appeal, RBC maintains that National Union denied coverage for the very risk itcontemplated in purchasing the bond. RBC contends: (A) the circuit court erred in finding "directloss" to be unambiguous, and the language must be construed strictly against National Union asdrafter of the policy; and (B) the question of whether the loss is direct or not should be examinedunder the "proximate cause" standard, which would give rise necessarily to unresolved questions offact. RBC requests that the matter be remanded for further proceedings.

The question presented by a section 2-615 motion to dismiss is whether sufficient facts havebeen pled in the complaint which, if proved, would entitle plaintiff to relief. Thornton v. Shah, 333Ill. App. 3d 1011, 1020, 777 N.E.2d 396 (2002). All well-pleaded facts in the complaint are takenas true and are construed in the light most favorable to plaintiff. Indeck North American Power Fundv. Norweb, PLC, 316 Ill. App. 3d 416, 430, 735 N.E.2d 649 (2000). A complaint is susceptible todismissal under section 2-615 only when it clearly appears that no set of facts could be proved underthe pleadings that would entitle plaintiff to relief (Casualty Insurance Co. v. Hill Mechanical Group,323 Ill. App. 3d 1028, 1033, 753 N.E.2d 370 (2001)), and where the circuit court can determine therelative rights of the parties solely from the pleadings. Thornton, 333 Ill. App. 3d at 1020. To statea cause of action adequately, the claim must be both legally and factually sufficient, setting forth alegally recognized claim as its basis, as well as pleading facts which are cognizable legally. CasualtyInsurance Co., 323 Ill. App. 3d at 1033. A complaint dismissed under section 2-615 requires thereviewing court to apply a de novo standard of review. Indeck, 316 Ill. App. 3d at 431.

RBC argues that it incurred "direct" losses from the dishonest and fraudulent conduct of itsemployee, Earl. These losses, it urges, emanate from the settlement agreement with EMMC, andmanifest themselves in the form of a reduced market value of the fraudulent loans it re-purchasedfrom EMMC, and the compensatory payments made to EMMC for losses already incurred. RBCconstrues these losses as "flow[ing] 'directly' from the dishonesty of [its] employee." RBC insiststhat as the insured, the bond's language should be construed broadly in its favor, and strictly againstNational Union.

National Union counters that RBC is "attempting to manipulate a first party fidelity bond todeflect third party liability to their insurer." It argues RBC suffered no losses where EMMC, notFirst City, actually funded the loans, and that RBC could not have lost the loans' market value sinceEMMC never paid market value to RBC; instead, it paid only a brokerage fee. Even if Earl's fraudcaused RBC to lose money, National Union maintains, the "losses are entirely derivative, basedsolely on [RBC's] contractual liability to a third party," EMMC. For losses to be "direct," they mustbe immediate, definite, and ascertainable, such as in cases of theft or embezzlement. NationalUnion points out that RBC did not file its proof of loss upon discovery of the fraud in December of1999, or when it was sued by EMMC in March of 2000, but waited instead until June of 2001, oncethe settlement was reached.

Fidelity insurance is a form of insurance in which the insurer undertakes to guaranty thefidelity of an officer, agent, or employee of the insured, or to indemnify the latter for losses causedby dishonesty or a want of fidelity on the part of such a person. State Street Bank & Trust Co. v.United States Fidelity & Guaranty Co., 181 Ill. App. 3d 1081, 1087, 539 N.E.2d 779 (1989) (Lund,J., specially concurring); Continental Corp. v. Aetna Casualty & Surety Co., 892 F. 2d 540, 543 (7thCir. 1989); 11 Couch on Insurance