WCM Wins Complex Coverage Dispute In First Department

Earlier this week, WCM won an Appellate Division First Department affirmance of its previous summary judgment victory on behalf an international trade show insurer in a coverage dispute over the insured value of two diamonds stolen from the Hong Kong Trade Show.  In Certain Underwriters at Lloyds London v Essex Global Trading, a New York jeweler shipped finished jewelry and loose diamonds to Hong Kong for a week-long exhibition.  To cover the risk, the jeweler purchased $50 million in coverage from London market insurers.  Before the goods were shipped, the jeweler prepared and submitted to U.S. Department of Homeland Security and U.S. Customs, via its shipper and customs broker, a series of itemized memoranda specifically identifying each piece of jewelry and assigning a monetary value to each piece.  The sum of the assigned values in the declaration totaled $50 million, the amount of insurance coverage purchased.

At the show, two of the insured’s diamonds, with a declared value of $2.6 million, were stolen in an apparent distraction theft and the insured submitted a claim.  The policy’s Basis of Valuation clause provided that losses were to be valued in accordance with the values from the insured’s private books and records that the insured declared to U.S. Customs through its shipper and insurance broker.  After Underwriters concluded a fortuitous loss took place, they paid the insured the declared value of the two stones.

Despite that payment, the insured claimed it was entitled to an additional $2.6 million because its private inventory records indicated that the two stolen diamonds were actually worth more than the declared values.  To make this argument tenable, the insured cited the policy’s Books and Records clause, which required the insured to keep detailed books and records so that the quantum of a loss could be determined from its private (internal) records.  The insured also claimed that the word “private” in the Basis of Valuation clause could be interpreted to exclude values declared to a public entity like U.S. Customs.  It followed, the jeweler claimed, the policy was ambiguous and ought to be construed against Underwriters.

As Judge Kornreich in the trial court, the First Department rejected these arguments, and ruled that the policy language was unambiguous.  Because the policy was unambiguous, the court concluded that it would be inappropriate to consider the extrinsic evidence offered by the insured in an attempt to create anecdotal evidence of ambiguity (including affidavits from the insured and a supposed expert insurance broker).  The court also held the doctrine of contra proferentum inapplicable to the insured because it was a sophisticated policyholder.

Essex Global is significant.  By recognizing that the doctrine of contra proferentum is inapplicable to sophisticated insureds, Essex Global will provide insurers support against sophisticated insureds claiming their preferred interpretation of policy language should automatically prevail whenever there is claimed ambiguity.  But it is also a reminder that courts frown on attempts to create ambiguity by “reading” policy wording out of context.

Dennis Wade and Michael Gauvin of WCM represented Underwriters.  If you have any questions about this decision or its import, please call or email Dennis.