Diminution in Value of Stock of Jeweler is a Direct Physical Loss

Before the court was a Motion for Partial Summary Judgment  filed by defendant Great American Insurance Company of New York (“Great American”) seeking dismissal of plaintiff’s claims of insurance coverage for consequential loss. In Nederland Jewelers LLC v. Great American Insurance Co Of New York, No. 2:21-CV-01431, United States District Court, W.D. Louisiana, Lake Charles Division (January 11, 2022) the question was whether Rolex watches recovered from thieves lost value because they could not be sold as new Rolex watches.

FACTUAL BACKGROUND

Nederland claimed against a property and inland marine insurance policy issued by defendant Great American. Nederland owns and operates a jewelry store in Lake Charles, Louisiana. An armed robbery occurred at the store on June 3, 2020, in which the four suspects smashed display cases and took several Rolex watches, among other items.

Law enforcement arrested the suspects soon after the robbery, recovering all but two of the watches. Nederland then filed a claim under its policy with Great American, seeking to recover for the missing watches and for the loss of value to the Rolex watches that had been returned as well as those that had remained in the display case. Great American made partial payment but claimed insufficient information to determine coverage for some of the amounts.

Nederland then filed suit in Louisiana raising claims for breach of insurance contract and bad faith under Louisiana law. Relevant to this motion, Nederland alleges that “[a]s a result of this robbery, the damaged watches can no longer be sold as Rolex products and have lost their original value due to damages sustained.”

It sought damage for “loss of use” and “depreciation.” Great American moved for partial summary judgment on Nederland’s entitlement to coverage for consequential damages, asserting that such losses are not covered under the policy

APPLICATION OF LAW

Louisiana law provides that an insurance policy is a contract and that its provisions are construed using the general rules of contract interpretation in the Louisiana Civil Code. The words of the policy must be given their generally prevailing meaning and interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole.

While the insured must show that a claim falls within a policy’s terms, the insurer bears the burden of showing that an exclusion applies. Ambiguities in the policy, including within an exclusionary clause, must be construed against the insurer and in favor of coverage.

Under its “Jewelers Block Coverage Form,” Great American’s policy provides that it will pay for “direct physical loss of or damage to Covered Property from Covered Causes of Loss.” The parties do not dispute that the Rolex watches stocked by Nederland are covered property. “Covered Causes of Loss,” meanwhile, is defined as “Direct Physical Loss or Damage to the Covered Property except those causes of loss listed in the exclusions.” Among the exclusions, Great American states that it will not pay for “loss or damage caused by or resulting from . . . [d]elay, loss of use, loss of market or any other consequential loss.”

Great American relied on the exclusion for the position that, while it is liable for repair costs for the watches that were damaged during the robbery, it is not liable for any diminution in their value.

Insurance companies in Louisiana are permitted to exclude coverage for consequential damages as a result of damage to property. Reviewing such a provision, the Fifth Circuit delineated between actual losses and consequential damages as follows: “According to Black’s [Law Dictionary], ‘actual loss’ is ‘[a] loss resulting from the real and substantial destruction of insured property.’ Black’s makes reference to “actual loss” when it defines “actual damages” as “[a]n amount awarded to a complainant to compensate for a proven injury or loss; damages that repay actual losses.” In contrast, Black’s separately defines “consequential loss” as “[a] loss arising from the results of damage rather than from the damage itself, ” and notes that it is “[a]lso termed indirect loss; consequential injury.” According to Black’s, “consequential damages” entail “[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act.” A plain reading of “actual loss or damage” does not include “consequential loss” or “consequential damage.”

The concept appears more frequently in the case law under loss of use cases. A few courts have distinguished between repair/replacement costs and damages based on the diminished value of the repaired item. Where the insured property is the merchant’s stock in trade, the court finds a much closer question in whether a diminution in market value following covered direct physical damage is properly excluded as a consequential loss.

Nederland purchased coverage as a jeweler, with the obvious intent of selling its insured property rather than keeping it as an heirloom. Great American asserts that any diminution in value-not merely those resulting from changes in market conditions or loss of use-is a consequential damage excluded by the terms of the policy. But if the watches cannot be resold for close to their original value after these repairs, then it calls into question whether the repairs themselves offered the coverage contemplated by the policy.

Accordingly, the court found that the exclusion cannot be read as barring all coverage for the watches’ decrease in value following repair.

ZALMA OPINION

The damage caused to the jewelry, whether left in the showcase smashed by thieves, changed the value and the ability of Nederland to sell the jewelry at the same price had they not been stolen and had not been damaged by the broken glass. Therefore, the court concluded, that there was direct physical loss and damage to the jewelry. The insurer could have paid the full value as required by the policy and taken the “damaged” watches and other jewelry as salvage or paid the diminished value. This case teaches that the insurer needed the assistance of an intelligent, well trained and experienced claims adjuster not a lawyer.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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