WCM Wins Appellate Victory in $25 Million Art Loss

In March 2010, the now infamous art dealer Larry Salander pleaded guilty to a $120 million fraud scheme, admitting to stealing numerous works of art.  Renaissance Art Investors LLC claimed that it was entitled to coverage for Salander’s theft of approximately $25 million in artwork under insurance policies issued by AXA Art Insurance Corporation.  Wade Clark Mulcahy successfully obtained affirmance of the trial court’s decision that RAI is not entitled to coverage under the policies.

RAI consigned its artwork to Salander, a principal of RAI, and the Salander O’Reilly Galleries LLC, a member of RAI.  Ultimately, Salander and the Gallery betrayed RAI, stealing artwork valued at over $42 million.  RAI made a claim to AXA under its commercial inland marine insurance policies, seeking indemnity for the theft.  Litigation followed and the trial court awarded summary judgment in AXA’s favor, finding that there was no coverage for the loss under AXA’s policies.

In a unanimous decision, the Appellate Division, First Department, recently ruled that the AXA policies contained an unambiguous dishonesty exclusion.  The exclusion precludes coverage for losses arising from the dishonesty of an insured, anyone with an interest in the property, or anyone to whom the covered property is entrusted.  The Court held that this policy exclusion applied to both Salander and the Gallery, who were entrusted with the artwork.

In the decision — which is sure to add another arrow to an insurance carrier’s quiver — the First Department held that as a matter of law, insurance coverage only extends to fortuitous losses, even under all-risk policies.  The Court further held that whether there was a fortuitous loss is a legal question to be resolved by a court.  Applying this standard, the Court held that the fraud perpetrated by Salander and the Gallery, which resulted in the loss, was not fortuitous.

In context, the Court suggests that even in the absence of an unambiguous exclusion, where the insured’s principal steals from the insured entity, the loss is not fortuitous and therefore not covered.

Also of note, the Court held that RAI’s claim that AXA breached the implied covenant of good faith and fair dealing was duplicative of its breach of contract claim.