The American Mills Company v. American Surety Company of New York case in 1922 revolved around a dispute over the interpretation and application of a fidelity bond. The plaintiff, American Mills Company, sought to recover losses from the defendant, American Surety Company of New York, under the terms of their agreement which covered any fraudulent or dishonest acts by employees that resulted in financial loss for the company. A former employee had committed fraud causing significant monetary damage to the company; however, this was discovered only after his employment ended and he died. The court ruled in favor of the surety company stating that since there was no discovery clause within their contract specifying coverage beyond termination or death and because it wasn't proven that an inventory check would have revealed these losses during his employment period - as required by conditions set forth in their bond - they were not liable for covering these damages.

In the dissenting opinion for American Mills Company v. American Surety Company of New York, Justice Holmes disagreed with the majority's interpretation of the contract between both parties. He argued that a more reasonable reading would be to consider it as an insurance policy against loss rather than a guarantee of payment by any particular party. According to him, if there was no loss suffered by American Mills due to non-payment from its customers, then there should be no obligation on part of American Surety to pay anything under their agreement. Therefore, he believed that since some payments were made directly by customers and not through bankruptcy proceedings or liquidation sales (which is what caused losses), these should not have been counted towards reducing liability of the surety company. His view was that only actual losses incurred should determine how much needs to be paid out under such contracts.