No Coverage For Fraudulent Wine Purchases Under “Private Collections” Policy
Earlier this year, we wrote about a California Appellate Court case holding 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). See CM Report 2018 Vol. 1, “No Coverage For Counterfeit Wine Under ‘Valuable Possessions’ Policy” (https://www.clausen.com/wp-content/uploads/2018/04/CMRpt2018vol1Final.pdf).
More recently, in Hasan v. AIG Property Casualty Co., 1:16-cv-02963-RM-MLC (D. Colo. Aug. 2, 2018), the insureds did not even receive “the devil wine”—they were victims of a Ponzi scheme who paid over $1.7 million for 2400-plus bottles of wine “purchased” from a fraudster but never delivered. Serving as coverage counsel, Clausen Miller partners Dennis Fitzpatrick and Erin Pellegrino correctly advised AIG that there was no coverage for the insureds’ claimed economic loss under these circumstances. The federal district court agreed, granting summary judgment to AIG on all claims and denying plaintiffs’ motion for leave to file an amended complaint.
Since 2000, Malik and Seeme Hasan placed online orders for bottles of wine and “wine futures” from Fox Ortega Enterprises, Inc. d/b/a Premier Cru (“Premier Cru”). The wines purchased were of two types: (1) wine that was physically located in Premier Cru’s Berkeley, California warehouse; and (2) wine futures or “pre-arrival” wine that customers paid Premier Cru for and which Premier Cru promised to deliver at some later time. Premier Cru’s principal, John Fox, admitted in a plea agreement that the “pre-arrival” wine sales were a fraudulent Ponzi scheme to induce customers to pay for wine that Fox knew would not be delivered.
The Hasans were insured under a “Private Collections” Policy issued by AIG. In February 2016, the Hasans submitted a claim for benefits under the Policy seeking $1,707,985 based on 2,448 bottles of wine that had been purchased but not delivered. AIG denied coverage for the Hasans’ claim on two grounds: (1) the Hasans did not own or possess the wine; and (2) the Hasans did not suffer direct physical loss or damage to the wine. The Hasans filed suit and the case was removed to federal district court in Colorado.
Applying Colorado law, the federal district court granted AIG’s motion for summary judgment on all claims finding that there was no physical loss or damage as required for coverage under the Policy.
The Private Collections Policy insures against “direct physical loss or damage to valuable articles anywhere in the world unless stated otherwise in this policy or an exclusion applies.” Valuable articles are defined as “personal property you own or possess[.]” Neither party argued that the Policy was ambiguous and the court did not find it to be. The Policy must accordingly be enforced as written.
The court first addressed AIG’s contention that plaintiffs cannot establish that a “direct physical loss” of property covered by the Policy occurred. Plaintiffs argued that all of the cases relied upon by AIG finding no direct physical loss or damage—and thus no insurance coverage—for purely economic losses were distinguishable because those cases did not involve the purchase of a physical object like the bottles of wine at issue here. The court agreed with AIG. Although the issue has not been directly addressed by Colorado state courts, the Tenth Circuit has concluded that economic loses are not “direct physical loss or damage to property.” The district court also cited Couch on Insurance in its decision:
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 when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.
10 Couch on Insurance § 148:46 (3d ed. 2018).
The court further explained that cases from other jurisdictions consistently hold that losing money in a fraudulent transaction is not physical loss or damage.
The court rejected plaintiffs’ argument that their claim involved a covered direct physical loss because they sought to purchase physical bottles of wine that were never received. As the court noted:
Plaintiffs completely fail to present any evidence that the wine they sought to purchase suffered a distinct, demonstrable, or physical alteration. And Plaintiffs cite no authority for the proposition that the failure to receive a physical item, purchased online, constitutes a direct physical loss under the terms of an insurance policy. To the contrary, all that has been lost is money which does not trigger coverage.
In short, the Policy does not cover failed investments or failed purchases. Because there was no evidence of direct physical loss or damage to property as required under the Policy, the court declined to reach the issue of whether plaintiffs owned, possessed, or obtained title to any of the wine.
Learning Point: Under property insurance policy language affording coverage for “direct physical loss or damage to covered property,” no coverage is provided for the loss of value to the insured for property that is purchased but never delivered in a fraudulent scheme, absent proof of any physical loss or damage to that covered property. For more information about this case or other first-party property matter, please contact Dennis (email@example.com) or Erin (firstname.lastname@example.org).