Devil Wine not a “Peril Insured Against"


By: Eric P. Benedict

A California Appellate Court recently ruled that a wine dealer’s fraud was not covered under a collector’s “Valuable Possessions” property insurance policy after the collector discovered that millions of dollars in “rare” wine bottles were sold to him under false pretenses.  Over several years, David Doyle purchased nearly $18 million in what he believed to be rare, vintage wine from Rudy Kurniawan. Instead, Kurniawan had been selling Doyle his own blend, disguising it as various rare vintages. In 2013, Kurniawan was convicted of fraud and sentenced to 10 years in prison. Doyle was left with a storage facility filled with nearly-worthless wine. Doyle then filed a claim with his insurance carrier under a “Valuable Possessions” policy with a blanket limit of $19 million. In pertinent part, the policy insured against “direct and accidental loss or damage to covered property caused by an ‘occurrence.’” After the carrier denied coverage because there was no covered “loss” under the policy, the collector filed suit against the carrier for breach of contract. Doyle argued that the policy provided coverage for all insurable risks, “whether anything physical happened to the wine or not.” In response, the carrier argued that no “loss or damage to covered property” occurred because the wine was in the exact same condition that it was when it was first insured.

In Doyle v. Fireman’s Fund Insurance Company, the Court of Appeal of California agreed with the carrier and the trial court concluding that Doyle’s claim was not covered by his “Valuable Possessions” property insurance policy because the wine did not sustain any physical loss or damage. After noting that valuable goods such as rare wine were otherwise covered under the policy, the Court explained that the fraud was not a “peril insured against” under the policy. In the Court’s words, “the wine collector is stuck with the devil wine without recompense. A Shakespearean tragedy, to be sure.”

The Court of Appeal of California explained that because property insurance is, by definition, insurance of property, the “threshold requirement for a recover under a contract of property insurance is that the insured property has sustained physical loss or damage.” The Court reasoned that in the property insurance context, the word “loss” does not include claims where the insured “merely suffers a detrimental economic impact.” According to the Court, under the terms of the policy, the carrier was not insuring Doyle’s financial health or his unrealized expectations about the “vintage” wine he had amassed. The Court went on to explain that when the Doyle purchased the wine, it was already counterfeit and it remained counterfeit from the day he insured it through the day he filed his claim. Thus, no loss had occurred.

The Court then clarified that while diminution in value may be a measure of loss in the property insurance context, it is not a covered peril in and of itself. This case highlights the important distinction between covered property and covered perils in the property insurance context. While Doyle sought to insure his property against some perils, such as theft, abnormal spoilage, or fire, he was not covered by his property insurance for Kurniawan’s fraud or Doyle’s own failed investment. While Doyle claimed that the absence of a fraud exclusion in the policy evidenced coverage, the Court noted that it did not need to analyze the absence of a fraud exclusion, because the collector failed to carry his initial burden of showing that the occurrence was within the basic scope of insurance coverage.

With sympathy for consequences of Kurniawan’s actions, the Court quoted Shakespeare’s Othello and reminded Doyle that “the robbed that smiles steals something from the thief.”

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