No Coverage For Counterfeit Wine Under “Valuable Possessions” Policy
“O thou invisible spirit of wine, if thou hast no name to be known by, let us call thee devil!” (Shakespeare, Othello, act II, scene 3.)
With some amusing nods to Shakespeare, a California Appellate Court holds that an unsuspecting wine collector who purchased millions of dollars’ worth of counterfeit wine from a “villainous wine dealer” sustained a financial loss, but no loss to property that was covered by his “Valuable Possessions” property insurance policy. “In other words, the wine collector is stuck with the devil wine without recompense. A Shakespearean tragedy, to be sure.” Doyle v. Fireman’s Fund Ins. Co., 21 Cal. App. 5th 33 (Cal. App. 4 Dist. 2018).
David Doyle collects rare, vintage wine. His “world-class” wine collection is housed in a wine storage facility in Laguna Beach. Starting in 2007, Doyle insured his wine collection against loss or damage by purchasing a “Valuable Possessions” policy from Fireman’s Fund with a blanket policy limit of $19 million. Doyle purchased eight annual renewal policies.
During the eight years the policies were in effect, Doyle purchased close to $18 million of purportedly rare, vintage wine from Rudy Kurniawan. But a law enforcement investigation revealed that for many years Kurniawan had apparently been filling empty wine bottles with his own wine blend and affixing counterfeit labels to the bottles. In 2013, Kurniawan was convicted of fraud and was sent to prison for 10 years.
In 2014, Doyle filed a claim seeking reimbursement from Fireman’s Fund “for the losses he sustained” due to Kurniawan’s fraud. After conducting an investigation, Fireman’s Fund denied all coverage stating there was no covered “loss” under the policy. In 2015, Doyle filed a first amended complaint alleging breach of contract, among other causes of action. Fireman’s Fund filed a demurrer, which the trial court sustained without leave to amend. Doyle appealed.
The Fireman’s Fund insurance policy at issue is a preprinted “Scheduled Valuable Possessions Policy,” which covers various items of valuable personal property such as jewelry, furs, and fine art. The policy also covers: “ ‘Collectibles’, meaning wine, sports cards, dolls, model trains, and other private collections of rare, unique or novel items of personal interest including memorabilia.” The “PERILS INSURED AGAINST” provision states: “We insure for direct and accidental loss or damage to covered property caused by an ‘occurrence.’ ” The policy defines an “occurrence” as “a loss to covered property which occurs during the policy period and is caused by one or more perils we insure against.” The policy does not define the term “loss.”
The “EXCLUSIONS—LOSS NOT INSURED,” portion of the policy lists various exclusions such as, “Wear and tear, gradual deterioration, latent defect or inherent vice[.]” The policy also provides that: “If wine is covered ․, the following exclusions also apply: [¶] a. Failure to use reasonable care to maintain all heating, cooling or humidity control equipment in proper operating condition․; [¶] b. Improper handling or storage; [¶] c. Consumption; or [¶] d. Normal shortage, leakage, spillage, evaporation, dissipation, spoilage or deterioration, all usual and customary to wine.”
On appeal, Doyle argued that the policy provides “broad protection against all insurable risks, which include crime-related losses to [his] investment whether anything physical happened to the wine or not.” Conversely, Firearm’s Fund argued that no “loss or damage to covered property” occurred; that is, “the wine is in the exact same condition now that it was in when [Doyle] first insured it.” Based on the nature of property insurance and the plain language of the policy, the Appellate Court agreed with Fireman’s Fund; Doyle indeed suffered a financial loss, but there was no loss to his covered property.
The Court explained that the threshold requirement for recovery under a contract of property insurance is that the insured property has sustained physical loss or damage. The requirement that the loss be “physical,” given the ordinary definition of that term is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer where the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.
Here, Doyle has not plead a breach of contract claim that can be proven at trial because nothing happened to the covered property (i.e., the wine that Doyle purchased and insured). That is, the plain language of the “PERILS INSURED AGAINST” provision makes it clear that Fireman’s Fund was insuring against “direct and accidental loss ․ to covered property”—with the preposition “to” linked to “covered property.” Fireman’s Fund was accordingly insuring against any losses to the wine; Fireman’s Fund was not insuring against any losses to Doyle’s finances or to his unrealized expectations as to the value of the wine he had purchased. The wine remained counterfeit (and essentially worthless) from the time of purchase throughout the entire coverage period of the policy. Thus, Doyle cannot reasonably expect reimbursement from Fireman’s Fund for the millions of dollars he spent buying wine which was essentially valueless at the time of purchase.
“Indeed, when it comes to property insurance, diminution in value is not a covered peril, it is a measure of a loss.” Given the fundamental nature of property insurance, the policy Doyle purchased only insured him against potential harms to the wine itself, such as fire, theft, or abnormal spoilage; Doyle did not insure himself against any potential financial losses. Doyle did not buy a provenance insurance policy; Doyle bought a property insurance policy.
The Appellate Court expressly rejected Doyle’s argument that because the subject policy does not list fraud as an exclusion, fraud is covered under the policy. The problem with Doyle’s argument is that: “The burden is on the insured to establish that the occurrence forming the basis of its claim is within the basic scope of insurance coverage. And, once an insured has made this showing, the burden is on the insurer to prove the claim is specifically excluded.” Here, Doyle has failed to establish that any type of financial loss, including fraud, comes within the scope of the property insurance policy he purchased. That the policy does not specifically list fraud as an exclusion is irrelevant. The Court further noted that its decision is based on the clear and explicit language in the covered perils provision. The Court did not find the contract terms to be ambiguous and thus did not consider Doyle’s expectations at the time of contracting based on extrinsic parol evidence.
The Court concluded by offering Doyle a “small piece of wisdom from the Bard of Avon”: “The robbed that smiles steals something from the thief.” (Shakespeare, Othello, act I, scene 3.)
Learning Point: Under standard property insurance policy language affording coverage for “direct and accidental loss or damage to covered property caused by an ‘occurrence’” no coverage is provided for mere diminution in value of covered property unaccompanied by any physical loss or damage to the covered property.