American Surety Company v. Pauly

In American Surety Company v. Pauly, 170 U.S. 133 (1898), in the context of an insurance policy that required the insured to notify the insurance company of a claim upon "discovery of the loss," the United States Supreme Court approved the following jury instruction: "It is not sufficient to defeat the plaintiff's right of action upon the policy that it be shown that the plaintiff may have had suspicions of dishonest conduct. He may have had suspicions of irregularities; he may have had suspicions of fraud, but he was not bound to act until he had acquired knowledge of some specific fraudulent or dishonest act." Id. at 145. The Supreme Court's statement in American Surety reflects the ordinary understanding of the term "discovery," which connotes "gaining knowledge" or "ascertaining the existence of something previously unknown or unrecognized." Webster's Third New Int'l Dictionary, 647 (unabridged ed 1993). Courts generally have followed American Surety, and its statement has become the "well-established rule." See Federal Deposit Ins. Corp. v. Aetna Casualty & Surety Co., 426 F.2d 729, 739 (5th Cir 1970) (citing authorities relying on American Surety).