Opinion
98 Civ. 5753 (HBP)
March 28, 2002
OPINION AND ORDER
I. Introduction
This action arises out of an alleged loss of approximately $5 million worth of rough gemstones that occurred while the stones were being shipped from Hong Kong to Sri Lanka to be cut and polished. Plaintiffs are the United Kingdom insurance companies that underwrote the policy of marine insurance covering the shipment. Defendant was the bailee of the stones who applied for and to whom the insurance policy was issued. Plaintiffs seek a declaratory judgment that the policy is void as a result of defendant's alleged failure to disclose certain material facts plus attorney's fees and costs. Defendant seeks to recover the value of the stones and other incidental expenses, plus interest, attorney's fees and costs.
The parties consented to my exercising plenary jurisdiction over this matter pursuant to 28 U.S.C. § 636 (c), and the matter was tried before me, without a jury, on several days between October 4 and 13, 2000. The parties completed making their post-trial submissions on November 11, 2000, and I heard oral argument on December 4, 2000. Based on the testimony and other evidence offered at trial and the parties' post-trial submissions, I make the following findings of fact and conclusions of law.
II. Findings of Fact
A. Background
1. This case concerns a marine insurance contract issued by plaintiffs to the defendant, J. Shree Corporation ("Shree"), and a claim under this insurance contract for the alleged loss of two crates of rough gemstones in Colombo, Sri Lanka. As noted above, the plaintiffs are foreign insurance companies that write marine insurance policies in London, England. Shree is a New York corporation that, at all times pertinent, was doing business in New York County as a diamond merchant. Shree's business is managed by Mr. Bharat Shah. At all times relevant, he was assisted in carrying on Shree's business by his wife, Jayshree Shah and an employee, Ms. Sapna Goswami (Stipulated Facts ¶ 1).
References to "Stipulated Facts" refer to the parties joint statement of undisputed facts, set forth in Schedule C of the pretrial Order. References to "Tr." refer to the transcript of the trial of this matter. References to "Dep.," preceded by a name, refer to the transcript of the deposition of the witness identified in the citation. The parties have marked the deposition transcripts as exhibits and the parenthetical reference after "Dep." refers to the exhibit number of the deposition transcript. Finally, references to "JX," "PX" and "DX" refer to the parties' joint exhibits, plaintiffs' exhibits and defendant's exhibits, respectively.
2. Shree commenced operations in or about 1983 or 1984 (Tr. 593).
3. Bharat Shah and his wife Jayshree Shah are the sole officers, directors, and shareholders of Shree (Tr. 593).
4. Shree's principal business is the importation and wholesaling of cut and polished diamonds (Tr. 379). Shree specializes in small diamonds, usually well under a carat (Tr. 593-94). Before the transaction in suit, Shree had never been involved in the shipment of $5 million worth of gemstones; most of its shipments were in the range of $200,000 to $300,000 (Tr. 371).
5. Prior to the transaction in issue, Bharat Shah had no substantial experience in dealing in colored stones and had only dealt in colored stones occasionally, as an accommodation for a customer (Tr. 386, 595;see also Tr. 620-22). There is no evidence that, prior to the transaction in suit, Shree or Bharat
Shah had ever been involved in substantial purchases of colored stones, either finished or unfinished.
B. Shree's 1992 Loss
6. In 1992 Shree submitted a claim under its "jeweler's block" policy for about $1.2 million (Tr. 596).
"Jeweler's block" insurance is insurance on the static and transit risk of the property of jewelry manufacturers, wholesalers, and retailers. "Static" means the jeweler's stock, either his own or others, held on his premises. (Tr. 18-19; see also Levers Dep. (JX 174) at 15; Gibson Dep. (JX 171) at 14).
7. The basis for this claim was Shree's assertion that a briefcase containing the company's entire diamond inventory was stolen in May 1992, while the company was moving its offices (Tr. 282-83). The briefcase had been removed from a vault at the beginning of the day, and at the end of the day it was missing; Shree offered no evidence explaining exactly how the theft occurred (Tr. 283).
8. There was uncontradicted evidence that Bharat Shah was not in Shree's offices when the 1992 loss occurred (Tr. 283; 383).
9. The issuer of Shree's jeweler's block policy that was in effect in 1992 initially denied Shree's claim (PX 12). One of the reasons the insurer gave for denying the claim was a policy exclusion for any loss resulting from a "mysterious disappearance" (PX 12).
10. Another reason the insurer gave for denying the claim was an allegation that Shree had provided false information, both sworn and unsworn, concerning the claim (PX 12).
11. Shree commenced a lawsuit to collect for its 1992 loss under its jeweler's block policy. The matter was settled on the first day of trial for $725,000 (Tr. 596).
C. The Transaction in Suit — Background
12. As noted at the outset, this action arises out of the disappearance of a shipment of uncut emeralds, sapphires and rubies claimed to be worth almost $5 million. However, it was not until after the alleged loss occurred that any of the parties to this action learned the identity of the individual alleged to be the true owner of the stones. Thus, in order to understand the events that allegedly occurred subsequent to the loss, it is first necessary to discuss the ownership of the stones and how they came to be on a freighter en route from Hong Kong to Sri Lanka.
13. Vijen Jhaveri is a diamond trader in Mumbai who specializes in polished diamonds. He has little experience with colored stones. (Jhaveri Dep. (JX 172) at 5-7, 18-19).
Mumbai is a city in India that was formerly known as Bombay (Tr. 357, JX 178).
14. In 1989, Jhaveri met an individual named Girish Shah (no relationship to Bharat Shah) and the two became close friends (Girish Shah Dep. (JX 180) at 8-9).
15. In 1995, Jhaveri informed Girish Shah that he had a source for a substantial quantity of uncut emeralds, rubies and sapphires, and Jhaveri asked Girish Shah to help him find someone who could cut and polish the stones (Girish Shah Dep. (JX 180) at 12-14). Girish Shah contacted a friend named Mr. D.K. Vashidev ("Vashi") who ultimately agreed to find a contractor to cut and polish the stones (Girish Shah Dep. (JX 180) at 18-32). Vashi was not in the gem business; he was in import-export business and usually dealt in goods such as electronics, garments and oil (Tr. 385).
16. At about the same time Girish Shah was attempting to find cutting and polishing services for Jhaveri, Jhaveri provided Girish Shah with samples of the stones (Girish Shah Dep. (JX 180) at 33-35). Although all of Girish Shah's prior business with Jhaveri had involved only diamonds and not colored stones (Girish Shah Dep. (JX 180) at 123-25; Jhaveri Dep. (JX 172) at 93), and although Girish Shah had no particular experience or expertise in colored stones, he became interested in buying the stones based on his visual inspection of the samples (Girish Shah Dep. (JX 180) at 35-38).
17. In October 1996, Jhaveri sent additional samples to Girish Shah, and Shah found the quality of these stones to be consistent with that of the samples he had previously seen (Girish Shah Dep. (JX 180) at 45). However, before committing to purchasing the stones, Girish Shah wanted to see the entire lot of stones (Girish Shah Dep. (JX 180) at 44-45). Accordingly, Jhaveri caused the entire shipment of stones to be delivered to Girish Shah in early November 1996 (Girish Shah Dep. (JX 180) at 45-48).
18. While the stones were in his office, Girish Shah visually examined them, unaided by any equipment, for approximately ten hours (Girish Shah Dep. (JX 180) at 131-39).
19. Girish Shah also had the stones examined by Virendra Dhadda, a merchant in colored stones, whom he had known for approximately six years (Dhadda Dep. (JX 169) at 10, 12-16; Girish Shah Dep. (JX 180) at 54-55). Dhadda examined the stones for sixty to ninety minutes (Girish Shah (JX 180) 56-57, 139-40). Although Dhadda believed that the stones were "top quality" (Dhadda Dep. (JX 169) at 43-44; DX 144), he examined them with only his naked eye and did. not even use a jeweler's loupe (Dhadda Dep. (JX 169) at 82-83; Girish Shah Dep. (JX 180) at 139-40).
20. As a result of Dhadda's evaluation, Girish Shah decided to buy the stones (Girish Shah Dep. (JX 180) at 57-58). The invoice issued by Jhaveri's company to Girish Shah's company for the sale of the stones reflected a sale date of November 11, 1996 and a purchase price of $4,526,250.00 (DX 113; DX 114).
21. Throughout the period in which Girish Shah was considering purchasing the stones, he kept Vashi informed of his activities (Girish Shah Dep. (JX 180) at 42-43).
22. At the same time Girish Shah was making the decision to purchase the stones, Vashi was attempting to find someone who could have them cut and polished. To that end, Vashi called Bharat Shah in late 1995 or early 1996. Bharat Shah had known Vashi, who resided in Indonesia, for about 10 years. Bharat Shah had never previously done any gem business with Vashi (Tr. 384-85, 439-42, 637).
23. In an effort to assist Girish Shah, Vashi asked Bharat Shah if he would be interested in cutting and polishing colored gemstones (Tr. 384). In view of the fact that they had never previously done any business together, Bharat Shah thought it odd for Vashi to call him with this business proposition (Tr. 637-39).
24. Initially, Bharat Shah was not interested in Vashi's proposal because cutting and polishing stones was not part of Three's business (Tr. 385).
25. Over the course of several subsequent telephone calls, Vashi explained that he was looking for someone to undertake the cutting and polishing of approximately 200 kilograms of uncut rubies, emeralds and sapphires with a value of $4-5 million (Tr. 385, 638; DX 94).
26. Bharat Shah developed an interest in Vashi's proposal and took several steps to assess its feasibility. Bharat Shah made a short trip to Colombo, Sri Lanka to consult with Museem Baba, a Sri Lankan business acquaintance, concerning potential cutting and polishing contractors in Sri Lanka (Tr. 388-92). Upon his return to New York, Bharat Shah also contacted his brother-in-law, Shailesh Shah, and his father-in-law, in Baroda, India, to determine if Shailesh Shah could assist with the project in Sri Lanka. Once Shailesh Shah agreed, Bharat Shah agreed with Vashi to undertake the project (Tr. 392-94).
27. By February 1996, Shah had accepted Vashi's offer. Under the terms of their agreement, Vashi would bear the labor costs, while Shree would bear all shipping and insurance costs. The stones would be delivered to Shree in Hong Kong, and Shree's commission would be eight percent (8%) of the value of the uncut stones, i.e. $320,000 to $400,000 (Tr. 395-98; DX 94).
The agreement between Shree and Vashi is on the letterhead of an entity named "Pt. Trisula Mulia" (DX 94). Bharat Shah testified that this was the name of Vashi's company (Tr. 395).
28. According to Bharat Shah, this project was the "first big business [he had] ever done in [his) life" (Tr. 442, 564).
29. Consistent with the routine practice in the gemstone business, Shree was responsible for any loss occurring while the stones were in its possession (Tr. 397-98).
D. Shree's Preparations for Performance of the Contract
30. After executing Shree's agreement with Vashi, Bharat Shah contacted a Sri Lankan company, Lanka Trade, in March 1996 concerning the cutting and polishing of the stones (Tr. 399-401; DX 95).
Prior to contacting Lanka Trade, Bharat Shah contacted a New York entity — Narrow Stone, Inc. — concerning the possibility of Narrow Stonex's performing the work or overseeing the project. These discussions did not bear fruit (Tr. 404-09, 645-46, 555-59).
31. Bharat Shah testified that he knew one of the principals of Lanka Trade, a Mr. A.A. Mowjood, but that he had never had any prior business dealings with Lanka Trade or Mowjood's partner, Sathasivam Saravanapava. Bharat Shah also testified that he has not: had any dealings with Lanka Trade or Saravanapava since (Tr. 401-02, 404, 560).
32. As the result of a series of written and oral communications between March and August 1996, Shree and Lanka Trade entered into an agreement dated August 14, 1996 under which Lanka Trade was to cut and polish the stones (Tr. 400-03; DX 95-100, 102-108). The written agreement provided that Shree was to deliver to Lanka Trade fifty kilograms of rubies, sixty kilograms of emeralds and fifty kilograms of sapphires, with an aggregate value of $2,526,000, to be cut and polished (DX 108 at 2, 6). The contract set specific prices based on the type of stone being finished and its size (DX 108 at 2-3, 7).
Shree offers no explanation for the discrepancy between the weight of the stones set forth in the Vashi-Shree contract (200 kilograms) and the volume of stones set forth in the Lanka Trade-Shree contract (160 kilograms).
33. Bharat Shah also testified that he had planned to have two representatives at Lanka Trade's facilities to oversee the work. Hamid Beg, from Mumbai, would oversee technical matters. Shailesh Shah, Bharat Shah's brother-in-law, would oversee the general administration (Tr. 424-27). Lanka Trade also agreed with Shah that the packages containing the stones would not be opened until Bharat Shah had arrived in Colombo to witness the delivery (Tr. 423-24).
34. At the same time Shree was making arrangements for the cutting and polishing, it was also making arrangements for the shipping of the stones and for their insurance. Bharat Shah testified that in May 1996 he contacted Yogesh Shah of Tam's Enterprises ("Tam's") to arrange for a place in Hong Kong where Shree could receive the stones (Tr. 411).
35. Bharat Shah was led to Yogesh Shah through Yogesh's brother, Upendra Shah. Upendra Shah was a gem dealer in Mumbai with whom Bharat Shah had previously done business (Tr. 411-12; Leung Dep. (JX 173) at 214; Yogesh Shah Dep. (JX 182) at 38-39).
36. Shree ultimately retained Tam's to perform certain services in connection with the shipment (Stipulated Facts ¶ 6). The specific services Tam's was to provide consisted of (a) arranging for a freight forwarder, (b) arranging for a carpenter to build crates for the shipment to Sri Lanka, (c) handling the customs and other paperwork, and (d) providing a place for the shipment to be stored for four days (Tr. 558; Yogesh Shah Dep. (JX 182) at 64-65). Tam's was to be paid, and was paid, $15,000 for these services (Tr. 557).
E. Shree's Procurement of the Marine Insurance Policy in Issue
1. Background Facts
37. In addition to contracting with Tam's for the incidental services described above, Shree procured the insurance policy in issue in this action during the late summer and fall of 1996.
38. The marine insurance policy in issue in this case was procured by Shree on the London insurance market. In order to place the events that occurred here in perspective, it is helpful to understand in general how the London market for marine insurance operates.
39. The particular policy in issue is a marine cargo insurance policy which, despite its name, covers goods in transit either by sea, land or air (Tr. 18).
40. The policy in issue was procured through the Institute of London Underwriters or "ILU." The ILU is an association of insurance companies operating an insurance marketplace in London (Gibson Dep. (JX 171) at 12; England Dep. (JX 170) at 7-8).
41. The ILU market is largely a face-to-face market. The broker will approach the underwriter with a risk, present the risk, and discuss it with the underwriter. The underwriter will assess the risk and decide whether he or she wishes to participate in the insurance (England Dep. (JX 170) at 8-10).
42. These meetings between broker and underwriter take place in the insurance company's offices in the ILU building. Each company has separate rooms in the building, and the broker goes from room to room to find an underwriter or underwriters who will accept the insurance he is seeking (England Dep. (JX 170) at 10; see also Rose Dep. (JX 179) at 106).
43. It is market practice for a broker to bring his file and have it available when presenting a risk to underwriters (Gibson Dep. (JX 171) at 53-54).
44. For marine cargo insurance (other than insurance for household and personal effects), there is no application form for several reasons. First, there is too much variety in the types of goods and the various risks. Also, there is a time factor in that underwriters have to be able to respond quickly. Finally, underwriters are dealing with a professional intermediary who should be able to provide all the information needed for underwriters to make an assessment of the risk (Tr. 20-21; see also England Dep. (JX 170) at 17, 96; Levers Dep. (JX 174) at 18-19; Rose Dep. (JX 179) at 107).
45. As the foregoing indicates, ILU policies are issued on the basis of discussions between underwriters and brokers. The broker is the professional intermediary between the client, who is seeking to purchase insurance, and the underwriter. The broker's function is to secure for his client the best possible insurance terms for the particular risk, using his or her skill and knowledge of the markets (Tr. 19.14-.23; see also Gibson Dep. (JX 171) at 8-9; Levers Dep. (JX 174) at 10-11). The broker is the agent of the party seeking insurance (Gibson Dep. (JX 171) at 11; Levers Dep. (JX 174) at 10). A "placing broker" is the broker who actually places the insurance with an underwriter; a "producing broker" is the broker who has direct contact with the party seeking insurance and who sends the business to the placing broker (Rose Dep. (JX 179) at 100). In this case, the Wexler Insurance Agency, Inc. ("Wexler") was the producing broker, and an entity named Willis Faber Dumas Ltd. ("Willis Faber") was the placing broker (Rose Dep. (JX 179) at 100).
46. At all times relevant, Willis Faber had a special insurance "facility," or agreement, called "Cover 50" to facilitate the placement of marine transportation policies. The plaintiffs in this matter are the fifteen (15) insurance companies that participated in Cover 50 at the time of the events in issue and that agreed to cover specified percentages of risks underwritten by Cover 50. The three companies with the largest percentage interests were called the "leaders" of Cover 50. These companies are Sphere Drake Insurance PLC ("Sphere Drake"), Royal Sun Alliance PLC ("Royal Sun") and Insurance Company of North America (UK) Ltd. ("CIGNA"). The agreement of these three leaders on any particular insurance risk was sufficient to bind all the members of Cover 50 to that risk. At Sphere Drake, the individual underwriter principally involved with the policy in issue was Ms. Johanne Levers, at Royal Sun it was Mr. John Gibson and at CIGNA it was Mr. Joseph England (Stipulated Facts ¶ 4; PTO Schedule O; England Dep. (JX 170) at 12; Gibson Dep. (JX 171) at 14-15; Levers Dep. (JX 174) at 15-17).
2. Shree's Procurement of the Policy in Issue
47. In September 1996, Shree, acting through Ms. Goswami, contacted Wexler, an insurance broker in Coral Gables, Florida, that specialized in insurance for jewelry merchants. Shree contacted Wexler to obtain insurance for the rough gemstones that Shree had undertaken to have cut and polished. The person at Wexler principally involved with Shree's request for insurance was Michael Wexler, the President of Wexler (Stipulated Facts ¶ 2). Shree had never previously done business with Wexler and has not done business with it since the transaction in issue (Tr. 346, 549-50). Ms. Goswami got Wexler's name from a list of companies she had that specialized in insurance for the jewelry industry (Tr. 346).
48. Although Shree had a jeweler's block policy in 1996, that policy had a liability limit for goods on consignment of $500,000 and, thus, was insufficient to cover the shipment of the rough gemstones that were the subject of Shree's contract with Vashi (Tr. 550-51).
49. Ms. Goswami met with Wexler at Shree's New York office (Tr. 287-88). She followed up this meeting on September 30, 1996 with the following written request for a quote:
Dear Mr. Wexler:
As per our discussion, we wish to purchase per shipment coverage as follows:
— Shipment will originate in Hong Kong, with transshipment in New York for relabeling and to continue to [its] final destination in Colombo, Sri Lanka.
— Contents of the shipment will be rough semiprecious stones and precious stones, to a value of US $3 million to US $5 million.
— Material is to be declared as "Mineral" on the the [sic] airway bill for security purposes.
— No value to be declared on the airway bill.
— Shipment will be sent as air cargo, by Pakistan International Airlines.
— All risk coverage, including war and strike i.e. Export bill plus 10% i.e. 110% coverage.
— Door to door coverage.
— Policy to be under New York jurisdiction.
We expect 3 to 4 such shipments within a 12 month period.
As discussed, please try to obtain a rate better than the one of .225 quoted by you.
This appears to be a reference to a premium quote of 0.225% that Wexier had previously received and transmitted to Shree (see PX 11 at Willis 0044). At this rate, the premium on a $5 million shipment would have been $11,250.
Please call me if you have any questions.
(DX 32).
50. To obtain the insurance requested by Shree, Wexler contacted Gary Dakes, an insurance broker with Willis Faber. In response to Wexler's request, Colin Rose, a colleague of Qakes who was also employed by Willis Faber, went into the London insurance market to obtain the insurance sought by Shree (Stipulated Facts ¶ 3).
51. On October 4, 1996, Rose approached the three leaders of Cover 50 concerning Shree's request for insurance; Rose had discussions with the leaders over the next several weeks concerning the risk (Stipulated Facts ¶ 5).
52. On or about October 4, 1996, Levers initially quoted a rate of 0.215% based on air shipment and a twenty percent (20%) value declared to the airline. Some substantial declared value was required because Levers believed that a substantial declared value would result in the cargo being handled in a more secure manner. Finally, Levers' quote was expressly qualified as being "subj clean record," i.e., subject to the insured's having a clean record or loss history (PX 11 at Willis 0043; DX 35; Levers Dep. (JX 174) at 15, 22-23, 73).
53. The two other leaders of Cover 50 concurred with Levers' quote (Levers Dep. (JX 174) at 28-29).
54. Wexler transmitted this quote to Shree, and Bharat Shah then decided to ship the stones by sea rather than air (Tr. 346-48, 553). At the time he made this decision, Bharat Shah was aware that airlines would charge a higher rate for a cargo with a substantial declared value (Tr. 553).
55. Shree, through Bharat Shah, decided to ship the stones by sea despite the fact that Shree had never previously transported gemstones by sea and despite the fact that the shipment of colored stones was the largest transaction in which Shree had participated. All of Shree's prior shipments of diamonds had been made through courier services — Brinks and Malca-Amit — that specialize in high value shipments; Shree never had a problem with shipments made through these two companies (Tr. 553-55). Thus, in connection with the largest single transaction in Shree's experience, Shree decided to use a previously untried method of shipment.
Shah testified that he obtained quotes from both Brinks and Malca-Amit but felt that they were too high (Tr. 555-56).
56. On October 17, 1996, Wexier sent Willis Faber a fax stating that Shree wanted to know what reduced premium would apply if the goods were shipped by sea directly from Hong Kong to Sri Lanka. On October 18, 1996, Levers, on behalf of Cover 50, quoted a rate of 0.25% which was an increase over the premium quoted on October 4 (DX 41; Levers Dep. (JX 174) at 35).
During early October, 1996, there was additional correspondence concerning the possible shipment of the stones from Hong Kong to New York and from New York to Sri Lanka. Since Shree decided not to ship the stones in this manner, the correspondence is irrelevant.
57. On or about October 22, 1996, Wexler faxed Willis Faber arid advised that Shree accepted the October 18 quote of 0.25%. The fax from Wexler was, in turn, initialed by the three leaders of Cover 50, confirming their undertaking (DX 45; Levers Dep. (JX 174) at 38-41).
58. On or about November 4, 1996, the "slip policy" of insurance was initialed by Cover 50's leaders, re-confirming their undertaking (Stipulated Facts ¶ 5; JX 2; Levers Dep. (JX 174) at 42-44).
59. Throughout the discussions concerning the insurance policy at issue in this action, the leaders of Cover 50 never made further inquiry concerning Shree's loss history, despite their ability to do so (England Dep. (JX 170) at 99-100; Levers Dep. (TX 174) at 134-35;).
60. Rose never informed the underwriters of Shree's 1992 loss on its jeweler's block policy (Oakes Dep. (JX 177) at 98-99, 114, 125; Rose Dep. (JX 179) at 98-99, 114, 125).
61. Levers testified that had she believed Shree had a clean loss history and that if she had known of Shree's prior loss, she would have consulted with her superiors. She also testified that she believed Shree was the true owner of the stones and that if she had known that Shree did not own the stones, she would have consulted with her superiors (Levers Dep. (JX 174) at 53-56).
62. England testified that he also believed Shree had a clean loss history and that if he had known about Shree's prior loss, he would have wanted to know all of the specifics. He further testified that he believed Shree was the owner of the stones, and that, if he had known that Shree did not own the stone, he would have wanted to know why Shree, and not the true owner, was procuring the insurance (England Dep. (JX 170) at 38-42).
63. Finally, Gibson also testified that he believed that Shree had a clean loss history and that if he had known about Shree's prior loss he would have evaluated the risk differently. Gibson further testified that he believed Shree was the true owner of the stones, that if he had known that Shree was not the true owner of the stones, his evaluation of the risk would have been different and that if Shree did not know who the true owner was, he would never have insured the risk (Gibson Dep. (JX 171) at 39-46).
F. Delivery of the Stones to Shree in Hong Kong and Their Shipment to Sri Lanka
64. Bharat Shah arrived in Hong Kong on November 16, 1996 to accept delivery of the stones and to oversee their packing for shipment to Sri Lanka (Tr. 444-45). Bharat Shah called Vashi on November 17 and arranged for the delivery of the stones to him on November 18 (Tr. 445-48). The stones were delivered to Bharat Shah at Tam's office on the afternoon of November 18; at the time of delivery, they were packed in two cardboard boxes and delivered by two men. No receipt for the delivery was requested by or provided to the delivery men (Stipulated Facts ¶ 6; Tr. 448-49; Yogesh Shah Dep. (JX 182) at 46). Bharat Shah testified that he called Vashi to confirm to him that the stones had been delivered (Tr. 450).
65. Bharat Shah testified that he spent the next two days — November 19 and 20, 1996 — examining the stones in Tam's Hong Kong office (Tr. 461-68). The stones were packed in cloth bags; inside at least some of the bags was a slip of paper reflecting the weight of the stones in the bag (Tr. 451-52; Yogesh Shah Dep. (JX 182) at 49). Bharat and Yogesh Shah testified that they weighed the contents of the bags and compared the actual weight of the contents of each bag with the weight noted on the slip of paper (Tr. 451-54; Yogesh Shah Dep. (JX 182) at 49-50). To accomplish this, they used a scale calibrated in kilograms (Tr. 453-54).
66. Yogesh Shah testified that during his inspection, Bharat Shah showed some of the stones to Yogesh Shah and his wife Priti Shah. Yogesh Shah testified that, apart from handling a few samples that Bharat had shown him, only Bharat Shah actually handled the bags and their contents (Yogesh Shah Dep. (JX 182) at 48, 51-52). However, Bharat Shah testified that he and Yogesh both examined the stones (Tr. 461-64). Bharat Shah checked the stones for color, clarity and inclusions, but used no equipment to check the stones other than a jeweler's loupe (Tr. 462).
67. Sharat Shah believed that the stones were of good quality (Tr. 466). However, prior to November 1996, Bharat Shah had seen uncut rubies and sapphires on only two or three occasions and had never before seen rough, uncut emeralds (Tr. 467).
68. Priti Shah believed the stones were of good quality (Priti Shah Dep. (JX 181) at 11-12) as did Yogesh Shah (Yogesh Shah Dep. (TX 182) at 7-8). However, as of November, 1996, neither had knowledge, training or experience concerning colored gemstones (Priti Shah Dep. (JX 181) at 29; Yogesh Shah Dep. (TX 182) at 43-44).
69. No one with training or experience in colored stones examined the stones while they were in Tam's office (Tr. 533).
70. According to Bharat Shah, the only people who actually examined the stones in Hong Kong were himself, Yogesh Shah, Priti Shah, and another Tam's employee named Sayed (Tr. 542, 589). Neither side offered testimony from Sayed at trial.
71. At Bharat Shah's request, Yogesh Shah had hired a local carpenter to construct crates for the shipment, and the carpenter built the crates in Tam's office on November 21, 1996 (Tr. 471-72).
72. In addition, on November 21, 1996, an independent surveyor, Mr. Eric Ng, of Central Alliance Survey Services Ltd., weighed a total of thirty-one (31) cloth bags in Tam's office and witnessed their being packed into two wooden crates (Stipulated Facts ¶ 6). Ng issued a report certifying that he had weighed and measured two crates which weighed 108 and 110 kilograms and which had been described to him as containing "Minerals" (JX 4). Ng did not look in any of the bags because he had been retained only to determine the gross weight of the shipment (Ng Dep. (TX 176) at 16-17).
73. After Ng's survey, the crates were nailed shut in the presence of both Bharat Shah and Ng and banded with metal strips. (Tr. 477-78; Ng. Dep. (JX 176) at 17-20). The sides of the crates were marked "LT-1" and "LT-2" (for Lanka Trade) (Tr. 478-79; Ng Dep. (JX 176) at 13-14).
74. On the evening of November 21, the boxes were locked in Tam's office (Tr. 479; Yogesh Shah Dep. (JX 182) at 32).
75. That evening, Bharat Shah spoke by telephone with Ms. Goswami who was at Shree's office in New York. According to Bharat Shah, Goswami suggested that Bharat Shah take photographs of the crates to provide to the insurance broker; it is not at all clear from the evidence what purpose was to be served by photographing the outside of the crates (Tr. 307-08, 481). In any event, photographs of the outsides of the crates were taken the following morning (Tr. 482; JX 5).
76. On November 22, 1996, the two wooden crates were delivered to MR Forwarding for shipment to Colombo, Sri Lanka; the total weight of the shipment was approximately 177.5 kilograms or 390 pounds (Stipulated Facts ¶ 6).
77. At the Port of Hong Kong, the two crates were stowed in an ocean shipping container. On November 26, 1996, that container was loaded onto the M/V Med Taipei. On that same day, the vessel's operator, MCL Container Line ("MCL"), issued an ocean bill of lading for the shipment of the crates to Lanka Trade in Sri Lanka (Stipulated Facts ¶ 7).
78. Despite the fact that Bharat Shah did not want the crates opened in Sri Lanka unless he was present, he had the shipping documents, including the bill of lading, forwarded to Lanka Trade (Tr. 488).
79. Bharat Shah left Hong Kong on Friday evening, November 22, 1996, for Mumbai; he intended to stay in Mumbai until Saravanapava notified him that the crates were in Colombo ready for delivery to Lanka Trade (Tr. 489-91). Due to the serious illness of a close nephew, Viral Shah, Bharat Shah returned unexpectedly to New York on December 1, 1996, intending to go directly to Colombo once notified by Saravanapava that the gemstones had arrived (Tr. 491).
G. Events in Sri Lanka
80. On December 5, 1996, the Med Taipei arrived in Colombo, Sri Lanka. On December 6, the two crates that Shree had shipped to Lanka Trade were unloaded from the ocean shipping container and stored in a warehouse operated by the Sri Lanka Port Authority, designated Container Freight Station No. 1 ("CFS-1"), pending delivery to Lanka Trade. The unloading of the crates was recorded on Tally Sheet No. 211034, a copy of which was displayed outside the CFS warehouse for public examination (Stipulated Facts ¶ 7; Leung Dep. (JX 173) at 98-101; DX 27 at 7).
81. According to Saravanapava and Mowjood, on December 7, 1996, a Lanka Trade representative, Sadiq Mohammed, endorsed the original bill of lading at the offices of MR Forwarding (Lanka) Pvt in order to allow MR Forwarding to receive the goods. He then reportedly could not locate the two crates on the copy of the Tally Sheet posted outside CFS-1 (Leung Dep. (JX 173) at 101-02; DX 27 at 7). As the Port Authority later discovered, the Tally Sheet had been altered, with the marks "LT" changed to "DIEO" (DX 27 at 9-10). The circumstances surrounding the alteration of the Tally Sheet have never been explained.
82. On December 11, 1996, warehouse personnel found a large quantity of red, blue and green stones on the warehouse floor. The stones were swept up and put into gunny sacks. The workers also found pieces of wood on which the marks "LT-1" and "LT-2" had been altered to "ETO." The warehouse personnel also found cloth bags containing a few stones. The next day, the Port Authority reported the matter to the police (Leung Dep. (JX 173) at 103-05, 109, 111, 119-21, 147, 170-71).
83. The pieces of wood found in the warehouse were parts of the crates Shree had shipped from Hong Kong. The cloth bags were also either the same bags, or similar to the bags,. that Shree had shipped from Hong Kong (Tr. 498-501, 569; DX 186-88).
84. There is no dispute that the stones found on the floor of the warehouse are not of gem quality and are substantially worthless (Tr. 267-68, 676-77, 719-22; JX 8; DX 184, DX 185). Bharat Shah testified that the stones recovered from the warehouse floor were not the stones that he shipped from Hong Kong (Tr. 469-70).
85. Saravanapava told Bharat Shah that the stones were missing in mid-December 1996 (Tr. 493). In the first half of January 1997, Bharat Shah made unsuccessful inquiries to the freight forwarder in an effort to determine what had happened to the stones (DX 124-27; see Tr. 495-97).
86. On January 20, 1997, Shree, through Wexler and Willis Faber, informed the plaintiffs that the shipment was missing. Later that month, plaintiffs retained the Hong Kong firm of Crawford-THG (Hong Kong) Limited ("Crawford") to investigate the matter. Ms. Helena Leung, an investigator for Crawford, made two trips to Colombo, in February and March 1997, to investigate the missing shipments. The physical evidence that Ms. Leung inspected during these trips is described in paragraphs 82-83, above. The plaintiffs also retained a London law firm, Clyde Co., to provide legal advice. On February 20, 1997, Shree retained the firm that was the successor to its present counsel. In March 1997, Shree also retained Sri Lanka Shipping Company to provide local assistance in Colombo (Stipulated Facts ¶ 8).
87. Bharat Shah did not go to Colombo during December 1996 or January 1997, despite the fact that he believed he would be liable to Vashi for any loss (Tr. 564-67).
H. Shree's Alleged Payment for the Loss
88. In February 1997, Bharat Shah informed Vashi that the stones could not be located (Tr. 496-97). In March 1997, Bharat Shah gave Vashi written notice of the loss of the gemstones (Tr. 502-03; DX 128). He then learned from Vashi that Girish Shah was the owner of the stones (Tr. 503-04; DX 129). Although Bharat Shah had previously either suspected or had known that Vashi was not the owner of the stones (Tr. 503), this was the first time that he learned that Girish Shah was, in fact, the true owner (Tr. 504). Bharat Shah had had no prior contact with Girish Shah (Tr. 504).
89. After learning of the loss of the stones from Bharat Shah, Vashi, in turn, informed Girish Shah that there was a problem with the shipment. This was the first time that Girish Shah learned that Shree was the entity that Vashi had found to cut arid polish the stones (Tr. 503-04; Girish Shah Dep. (JX 180) at 74-78; DX 129). Girish Shah told Vashi that he wanted to speak with Shree directly; as a result, Bharat Shah called Girish Shah (Girish Shah Dep. (TX 180) at 79-80, 82). Bharat Shah's call to Girish Shah was the first communication between them (Tr. 331; Girish Shah Dep. (TX 180) at 82).
90. There followed an increasingly heated series of telephone conversations between Bharat Shah and Yogesh Shah in which Girish Shah demanded that he be reimbursed for the lost stones. Bharat Shah offered to assign his insurance claim to Girish Shah, but Girish Shah refused (Tr. 506). Thereafter, Girish Shah used what Bharat Shah described as "very hard word[s]" in his demand for payment (Tr. 507). Girish Shah ultimately threatened to advise Bharat Shah's diamond suppliers in Mumbai about his problems with Bharat Shah and threatened to urge them to engage in a concerted refusal to deal with Shree and Bharat Sriah (Tr. 507).
91. Girish Shah never made a written demand on Shree or Bharat Shah for repayment; all of their communication was oral (Tr. 574). Bharat Shah testified that there were more than twelve telephone conversations (Tr. 574-75). Girish Shah testified that he had "maybe" four or five telephone conversations with Bharat Shah (Girish Shah Dep. (JX 180) at 88-89, 178). Bharat Shah never referred Girish Shah to his attorneys (Tr. 577-79).
92. Girish Shah subsequently agreed to accept payment for the lost rubies, emeralds and sapphires in cut and polished diamonds (Tr. 508). According to Bharat Shah, he satisfied his debt to Girish Shah by delivering a quantity of cut and polished diamonds to an agent of Girish Shah, Mr. Sameer Shah, in Mumbai on April 16, 1997 (Tr. 331-32, 507-08, 514, 522).
93. Like the gemstones that are at the heart of this action, the manner in which the diamonds allegedly came to satisfy the debt is circuitous and Byzantine. The diamonds used to pay for the loss did not belong to Bharat Shah. According to Bharat Shah, in order to secure the diamonds with which to pay Girish Shah, he first spoke with Sanjay Parekh, a Mumbai gem dealer who Bharat Shah had known for about seven years (Tr. 508). Bharat Shah had previously purchased diamonds from Parekh and his company, Diamart (Tr. 509). Bharat Shah told Parekh that he needed about $5 million dollars worth of diamonds; he did not explain to Parekh what he needed them for (Tr. 510). Parekh subsequently informed Bharat Shah that he could supply the diamonds (Tr. 511).
94. In early April 1997, Bharat Shah traveled to Mumbai to obtain the diamonds from Parekh. It was at that time that Bharat Shah explained to Parekh why he needed the diamonds. He also told Parekh that he would pay him back once he received the insurance proceeds (Tr. 511-12). Parekh informed Bharat Shah that although he had the diamonds, he was not the owner of the diamonds (Tr. 512).
95. Parekh then provided the diamonds to Bharat Shah for his inspection (Tr. 513). Bharat Shah inspected the diamonds and concluded that they were of sufficient value to satisfy Girish Shah's claim (Tr. 513-14; see also DX 130). The diamonds were delivered to Sameer Shah on April 16, 1997 (Tr. 521).
96. Parekh subsequently told Bharat Shah that the diamonds had come from an individual named Surash Lodha, who had consigned the diamonds to Parekh (Tr. 522-23; DX 133). Lodha's consignment to Parekh was subsequently converted into a direct sale from Lodha to Shree (Tr. 523-24; DX 135). Bharat Shah testified he is still indebted to Lodha for the diamonds (Tr. 524, 583).
III. Conclusions of Law and Findings of Fact that are Dependent Upon the Applicable Principles of Law
A. Jurisdiction
97. This action arises out of a contract of marine insurance. Consequently, this Court has jurisdiction over the subject matter of this action by reason of its admiralty jurisdiction. 28 U.S.C. § 1333; New England Mut. Ins. Co. v. Dunham, 78 U.S. (11 Wall.) 1, 4 (1870); New York Marine Gen. Ins. Co. v. Tradeline (L.L.C.), 266 F.3d 112, 121 (2d Cir. 2001) ("Federal admiralty jurisdiction extends to cases involving marine insurance contracts."); Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50, 54 (1st Cir. 1995) ("The propriety of maritime jurisdiction over a suit involving a marine insurance policy is unquestionable.").
98. The plaintiffs are citizens of various foreign states, and the defendant is a citizen of New York State. The amount in controversy exceeds the sum of $75,000, exclusive of interest, and costs. Thus, the Court also has subject-matter jurisdiction pursuant to 28 U.S.C. § 1332.
99. No party has raised any issue as to the propriety of venue in this district.
B. Choice of Law
100. The marine insurance contract in issue in this matter provides for the application of English law (JX 3, ¶ 19). Since the contract of insurance was negotiated and issued in London, this choice of law provision is reasonable and should be enforced. See, e.g., M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 1916 (1972); Advani Enter, v. Underwriters at Lloyds, 140 F.3d 157, 162-63 (2d Cir. 1998);Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1363 (2d Cir. 1993).
101. The Honorable Richard M. Berman, United States District Judge, to whom the matter was previously assigned, concluded that "English law properly governs the instant insurance dispute," finding that "there are numerous critical contacts with London which weigh in favor of applying English law." (Order of February 15, 2000, at pp. 4-6).
102. Accordingly, I conclude that English law, including the Marine Insurance Act, 1906, 6 Edw. 7, c. 41 ("Marine Insurance Act"), should be applied to both plaintiffs' claim and defendant's counterclaim.
C. Burden of Proof
103. Plaintiffs are seeking a declaratory judgment that the insurance policy they issued is void as a result of Shree's alleged failure to disclose certain material facts, namely (1) Shree's 1992 loss under its jeweler's block policy and (2) the fact that Shree was not the owner of the stones that are subject matter of the insurance policy. Plaintiffs bear the burden of proving this claim. Thomas J. Schoenbaum, The Duty of Utmost Good Faith in Marine Insurance Law: A Comparative Analysis of American English Law, 29 J. Mar. L. Com. 1, 29 (1998) ("Schoenbaum"), citing Joel v. Law Union Crown Ins. Co., 2 K.B. 863 (C.A.).
104. In order to prevail on its claim to recover under the policy, Shree bears the burden of proving that the shipment contained rough semi-precious stones worth $4.9 million. Fuerst Day Lawson Ltd. v. Orion Ins. Co., Lloyd's Rep. 656, 664 (Q.B.).
105. With respect to issues on which it bears the burden of proof, a party sustains the burden by showing that the "balance of probabilities" tips in favor of the proposition. Malcolm A. Clarke, The Law of Insurance Contracts (3d ed. 1997), § 16-3A at 388 (insured's burden to show loss) and § 23-1C at 587 (insurer's burden to show non-disclosure of material fact). The United Kingdom standard of "balance of probabilities" appears to be identical with the familiar civil standard of a preponderance of the evidence. See Cooper v. Oklahoma, 517 U.S. 348, 358 (1996).
106. To the extent that Shree argues that in order to defeat Shree's claim, plaintiffs must prove fraud by some higher standard, I reject its contention. Although plaintiffs could defeat Shree's claim by showing fraud, they can also defeat the claim by showing that Shree's evidence lacks sufficient probative force to tip the balance of probabilities in Shree's favor and satisfy Shree's burden of proof.
D. Plaintiffs' Non-Disclosure Claim
1. Legal Principles Applicable to Plaintiffs' Non-Disclosure Claim
107. The Marine Insurance Act provides, in pertinent part:
Insurance is uberrimae fidei
Disclosure by assured
17. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.
18. — (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.
(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
(3) In the absence of inquiry the following circumstances need not be disclosed, namely: —
(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which is superfluous to disclose by reason of any express or implied warranty.
(4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.
(5) The term "circumstance" includes any communication made to, or information received by, the assured.See also Manifest Shipping Co. v. Uni Polaris Ins. Co., 1 Lloyd's Rep. 389, 392-94, 398-402 (H.L.); 2 M. Mustill and J. Gilman, Arnould's Law of Marine Insurance and Average, §§ 579-80, 627 (16th ed. 1981) ("Mustill Gilman"); Schoenbaum at 1.
108. The Marine Insurance Act places the obligation on the prospective insured to disclose material information. "It is reasonable to expect a very high degree of openness at the stage of the formation of the contract [of marine insurance]." Manifest Shipping Co. v. Uni-Polaris Ins. Co., supra, 1 Lloyd's Rep. at 392 (H.L.). The burden is not on an underwriter to ask for it, and the underwriter is entitled to assume the fairness of the broker's presentation. Marc Rich Co. AG v. Portman, 1 Lloyd's Rep. 225, 234 (C.A.).
109. It is not necessary for an insurer to prove an intent to defraud in order to rescind an insurance contract on the ground of non-disclosure; an innocent failure to disclose a material fact is sufficient. Schoenbaum at 16. As stated by a leading treatise on English insurance law:
Whether such suppression of the truth arises from fraud (that is, from a wilful intention to deceive for the party's own benefit), or merely from mistake, negligence or accident, the consequences will be the same. Nor is it any excuse that the assured, knowing the fact, failed to recognise its materiality, and for this reason refrained from disclosing it.
Mustill Gilman at § 627.
110. In order to rescind an insurance contract on the ground of non-disclosure of material facts, the insurer must prove two elements: (1) a material fact was not disclosed, and (2) it was induced to issue the policy as a result of the non-disclosure.
111. An undisclosed fact is material if it "would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk." Marine Insurance Act, § 18(2). See J. Gilman, Arnould's Law of Marine Insurance and Average § 610 (16th ed. 1997) ("Gilman 1997 Ed.").
112. In order to be material, a non-disclosed or misrepresented fact need not have a decisive influence and need not be of such magnitude that an underwriter would have declined the risk had it known the truth or would have only underwritten the risk for an increased premium. Instead, the duty of disclosure extends to all matters that would have been taken into account by a hypothetical "prudent underwriter" when assessing the risk. Any doubt in this regard was eliminated by the House of Lords' decision in Pan Atl. Ins. Co. v. Pine Top Ins. Co., 2 Lloyd's Rep. 427, 440 (H.L.) which expressly rejected an insured's argument that a fact is material only if it has a decisive influence on the underwriter's decision to insure the risk or on the setting of the premium:
The main thrust of the argument for [the insured] is that [the definition of materiality set forth in Section 18(2) of the Marine Insurance Act] calls for the disclosure only of such circumstances as would, if disclosed to the hypothetical prudent underwriter, have caused him to decline the risk or charge an increased premium. I am unable to accept this argument.
In the first place[,] I cannot find the suggested meaning in the words of the Act. This is a short point of interpretation, and does not yield to long discussion. For my part I entirely accept that part of the argument for [the insured] which fastens on the word "would" and contrasts it with the words such as "might". I agree that this word looks to a consequence which, within the area of uncertainty created by the civil standard of proof, is definite rather than speculative. But this is only part of the enquiry. The next step is to decide what kind of effect the disclosure would have. This is defined by the expression ". . . influence the mind of the prudent underwriter The legislature might here have said decisively influence"; or "conclusively influence"; or "determine the decision"; or all sorts of similar expressions, in which case [the insured's] argument would be right. But the legislature has not done this, and has instead left the word "influence" unadorned. It therefore bears its ordinary meaning, which is not, as it seems to me, the one for which [the insured] contends. "Influence the mind" is not the same as "change the mind". Furthermore, if the argument is pursued via a purely verbal analysis, it should be observed that the expression used is:
. . . influence the judgment of a prudent insurer in . . . determining whether he will take the risk.
To my mind, this expression clearly denotes an effect on the thought processes of the insurer in weighing up the risk, quite different from words which might have been used but were not, such as "influencing the insurer to take the risk."
(Emphasis in original). See also St. Paul Fire Marine Ins. Co. (UK) v. McConnell Dowell Constructors Ltd., 2 Lloyd's Rep. 116, 123 (C.A.); Aneco Reins. Underwriting Ltd. (In Liquidation) v. Johnson Higgins Ltd., 1 Lloyd's Rep. 563, 589 (Q.B.). A leading commentator has referred to this standard for materiality as the "mere influence" test. Schoenbaum at 19-20, 21-22.
113. The insured's obligation to disclose material facts is limited to the facts necessary to provide the underwriter with a fair presentation of the risk. "[I]f the disclosed facts give a fair presentation of the risk, then the underwriter must enquire if he wishes to have more information." Aneco Reins. Underwriting Ltd. v. Johnson Higgins Ltd., supra, 1 Lloyd's Rep. at 590. The threshold question to be decided is:
Having regard to all the circumstances known or deemed to be known to the insured and to his broker, and ignoring those which are expressly excepted from the duty of disclosure, was the presentation in summary form to the underwriter a fair and substantially accurate presentation of the risk proposed for insurance, so that a prudent insurer could form a proper judgment — either on the presentation alone or by asking questions if he was sufficiently put on enquiry and wanted to know further details — whether or not to accept the proposal, and, if so, on what terms?Container Transport Intel Inc. v. The Oceanus Mut. Underwriting Ass'n (Bermuda), [1984] 1 Lloyd's Rep. 476, 496-97 (C.A.).
114. An insurer's lack of inquiry may constitute a waiver of the non-disclosure of a material fact where the insured's presentation puts the insurer on notice of the facts and prompts further inquiry.
The test appears to be as follows: The assured must perform his duty of disclosure properly by making a fair presentation of the risk proposed for insurance. If the insurers thereby receive information from the assured or his agent which, taken on its own or in conjunction with other facts known to them or which they are presumed to know, would naturally prompt a reasonably careful insurer to make further inquiries, then, if they omit to make the appropriate check or inquiry, assuming it can be made simply, they will be held to have waived disclosure of the material fact which that inquiry would have revealed. Waiver is not established by showing merely that the insurers were aware of the possibility of the existence of other material facts; they must be put fairly on inquiry about them. A presentation which makes no reference to an existing loss experience is not fair unless the losses are modest or insignificant. so that the underwriter does not waive disclosure of a history of substantial losses by failing to ask for the claims experience.MacGillivray on Insurance Law § 17-78 at 422-23 (9th ed.) (emphasis added).
115. Although the Marine Insurance Act does not expressly limit rescission to those situations where the non-disclosed or misrepresented fact actually induced the issuance of the insurance policy, the courts of the United Kingdom have implied such a requirement. As stated by Lord Mustill in Pan Atl. Ins. Co. v. Pine Top Ins. Co., supra, 2 Lloyd's Rep. at 452, "there is to be implied in the 1906 [Marine Insurance] Act a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using 'induced' in the sense in which it is used in the general law of contract." Thus, in addition to the objective standard of materiality, an insurer seeking to rescind a marine insurance policy must also prove the subjective element of inducement. Gilman 1997 Ed. § 611; Schoenbaum at 26.
116. Inducement requires proof that the omitted or misrepresented fact was actually a cause of the decision to underwrite the risk.
Inducement, then, is a question of fact: whether the particular insurer was induced by the non-disclosure or misrepresentation to enter into the contract on terms it would not have accepted had it known of the material information. Under the general law of contract it is necessary to establish that then falsity was a cause, not necessarily the sole cause, of the bargain that was made.
Schoenbaum at 26, citing St. Paul Fire Marine Ins. Co. v. McConnell Dowell Constructors Ltd., supra, 2 Lloyd's Rep. p. 124-25.
117. Although there is some authority in United Kingdom law that proof of materiality gives rise to a presumption of inducement, the law is far from clear on this point. For example, in Pan Atl. Ins. Co. v. Pine Top Ins. Co., supra, 2 Lloyd's Rep. at 452 4S3, Lord Mustill referred to a "presumption of inducement" from the non-disclosure of material facts. However, this comment appears to be dicta, because he went on to state that "on the facts of this particular case the position as regards causation is so clear that the appeal can be decided in favour of the indemnitors without the need for remittal to the trial Judge." (Emphasis added). The other Law Lords did not join Lord Mustill in this aspect of his opinion; to the contrary, Lord Lloyd referred to the notion of a presumption of inducement as a "heresy." [1994] 2 Lloyd's Rep. at 452, 453, 465). A subsequent decision from the Queens Bench Division suggests that inducement should be presumed from materiality only where the underwriter "cannot (for good reason) be called to give evidence and there is no reason to suppose that the actual underwriter acted other than prudently in writing the risk." Marc Rich Co. v. Portman, 1 Lloyd's Rep. 430, 442 (Q.B.). See also 31 Halsbury's Laws of England ¶ 1066 (4th ed. 1980) ("Actual inducement must be shown, irrespective of materiality.").
118. I conclude that I need not determine whether a finding of materiality gives rise to a presumption of inducement since there is sufficient evidence in the record to decide this issue as a matter of fact.
2. Findings of Fact Relevant to Plaintiffs' Non-Disclosure Claim
119. Plaintiffs claim that defendant failed to disclose two material facts: (1) defendant's 1992 loss under its jeweler's block policy and (2) defendant's lack of an ownership interest in the goods. As to the former, I find that plaintiffs have sustained their burden of proof. As to the latter, I find that they have not.
120. I find that a reasonable insurer would have considered Shree's 1992 loss for several reasons. First, it was a loss that occurred under mysterious circumstances while defendant was in possession of the goods. It was not a loss that resulted from any readily identifiable cause, nor was the cause of the loss ever actually identified. The significance of the loss would be more attenuated if it was the result of a theft in which the perpetrator was subsequently caught and convicted or some ocher cause which could not have implicated Shree. Thus, the nature of the loss suggests the possibility that it was the result of employee dishonesty.
121. The magnitude of the loss also weighs in favor of it being material. The loss consisted of Shree's entire inventory. The fact that Shree's employees would leave any quantity of diamonds unattended in a briefcase, conveniently packaged for anyone to take, suggests, at the very least, reckless behavior on Shree's part. When the fact is added that the briefcase contained the company's entire inventory, with a value in excess of $1 million, the recklessness is so gross that it gives rise to questions concerning Shree's honesty.
122. Third, the fact that Shree's jeweler's block insurer denied the claim, asserting dishonesty by Shree, and that Shree ultimately settled for approximately $500,000 less than the amount of the claimed loss — a 42% discount — also raise questions concerning the legitimacy of the claim (See Tr. 157-58). If Shree had strong defenses to any claim of dishonesty, there is no reason why it should have taken such a substantial discount.
I appreciate that a settlement is not proof of liability nor is it proof of the validity of the defenses. Fed.R.Evid. 408. Nevertheless, the issue here is materiality under the Marine Insurance Act, viewed from the point of view of a reasonably prudent underwriter in the United Kingdom. Thus, the legal consequences of a settlement under United States law are irrelevant.
123. The practice in the industry is that loss history for at least five years prior to the application for insurance is material (Tr. 23-24; see also Gibson Dep. (JX 171) at 40; England Dep. (JX 170) at 96-97; Levers Dep. (JX 174) at 129-30; but see Rose Dep. (TX 179) at 117-18 (3 years)).
124. Numerous United Kingdom cases have concluded that loss history is material. E.g., Marc Rich Co. AG v. Portman, supra, 1 Lloyd's Rep. at 234; Pan Atl. Ins. Co. v. Pine Top Ins. Co., supra, 2 Lloyd's Rep. at 427-28; Container Transp. Intel Inc. v. Oceanus Mut. Underwriting Ass'n. (Bermuda) Ltd., supra, Lloyd's Rep. at 499-501. Neither party has cited any authority in which an insured's loss history was found not to be material. Although Section 18(4) of the Marine Insurance Act expressly makes materiality a question of fact, the decisions of the United Kingdom Courts are relevant to what a reasonable underwriter would expect to be disclosed and would consider.
To avoid any misapprehension as to the nature of my decision, I note that I am aware that there is a substantial body of authority holding that unsubstantiated charges of misconduct on the part of the insured are not material and do not have to be disclosed to a prospective insurer. See MacGillivray on Insurance Law § 17-55 (9th ed.). My conclusion is that Shree's 1992 loss history under its jeweler's block policy is a material fact that should have been disclosed. Although I believe that the insurer's response to the claim for that loss is relevant to determining whether that loss was material, plaintiffs do not argue, and I do not find, that the insurer's response to the claim for the 1992 loss was an independent material fact that should have been disclosed.
125. Plaintiffs have offered credible expert testimony from Nicholas Gooding that Shree's 1992 loss would have been considered by a reasonably prudent underwriter in assessing Shree's application for insurance (Tr. 31-32).
126. Shree attempts to minimize the significance of its 1992 loss, claiming that the loss arose under a jeweler's block policy and had no relevance to the risks against which the policy in issue — a transportation policy — insured. Shree's argument is unconvincing. Shree's prior loss raises issues that are relevant to Shree's integrity and the possibility that Shree's prior claim may have been fraudulent — issues referred to by plaintiffs' expert as the "moral hazard" (Tr. 25, 61-62). This risk exists regardless of the type of policy in issue.
127. I also find that the non-disclosure of the loss was a factor in causing plaintiffs to issue the policy in suit.
128. The best evidence that Shree's loss history was important to the plaintiffs is PX 11, the underwriters' initial response to the request for a quote made on defendant's behalf. This quote was "subj clean record,"i.e., subject to the insured's having a clean record or loss history, and constitutes clear evidence, prior to the existence of any claim and any motive to falsify, that loss history was a fact that the underwriters were actually considering in making their quote (PX 11 at Willis 0043).
129. I have reviewed the videotapes of the depositions given by the three lead underwriters, Levers, England and Gibson, and conclude that each testified credibly that the absence of any disclosed loss history was considered by them in deciding to underwrite the risk (England Dep. (JX 170) at 19-20, 38-40, 95, 97-98, 132; Gibson Dep. (JX 171) at 28, 39, 40-42; Levers Dep. (JX 174) at 25-26, 53-56, 9S, 128-30, 134).
130. Shree contends that inducement has not been established here because the underwriters never expressly asked any questions concerning loss history and failed to act diligently. Plaintiffs do not dispute that their conduct in writing the policy was, in some respects, less than diligent; plaintiffs' own underwriting expert characterized their conduct as "extremely sloppy" (Tr. 160). They asked virtually no questions concerning the details of the shipment, whether the stones would be surveyed before they were shipped, or what steps, if any, were being taken to protect the stones after they were landed in Sri Lanka but before they were delivered to the consignee. Nevertheless, in the absence of some disclosure that prompts inquiry concerning an insured's loss history, the insured's failure to make inquiry is immaterial. See paragraph 114, above. In this case, there was no disclosure by Shree that prompted inquiry concerning its loss history, and thus, the burden of inquiring about the subject never came to rest on plaintiffs. In addition, the notation on plaintiffs' initial quote, "subj clean record," although not expressly phrased as a question, clearly put Shree on notice that the absence of prior claims was important to plaintiffs and effectively invited defendant to disclose any issues in that regard. Plaintiffs' failure to make inquiry concerning other aspects of the transaction cannot diminish the fact that they unmistakably communicated their concern regarding Shree's loss history and received no disclosure. Given plaintiffs' expression of the importance of loss history to them, their lackadaisical attitude towards other issues does not defeat inducement.
131. Finally, Shree argues that plaintiffs waived the non-disclosure of the loss history by failing to make inquiry about it.
132. Plaintiffs' arguments with respect to the materiality of Shree's lack of ownership are less convincing. Although Shree did not own the stones, it had accepted the stones on memorandum and was obligated to reimburse the true owner in the event of any loss (Tr. 333-34, 336-39, 339-40). This trade practice of the gemstone business was also known to specie underwriters, such as plaintiffs, in the London market for Marine Insurance (Tr. 105-07).
133. As a practical matter, Shree's interest in the stones, and in protecting them against loss, was no different from that of the owner (Tr. 99; see Tr. 107-08). Plaintiffs' own expert conceded that the insuring clauses of the policy would remain the same regardless of whether plaintiffs were insuring against loss or against liability (Tr. 121-22).
134. In addition, Shree's interest in the stones — 100% liability in the event of loss — was legally sufficient within the terms of the Marine Insurance Act. Section 5(2) of the Marine Insurance Act provides that
a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto or by the detention thereof, or may incur liability in respect thereof.See also MacGillivray on Insurance Law § 17-65 at 417 (9th ed.) ("Apart from specific questions or special conditions, the assured is not bound to disclose either the nature or extent of his interest in the subject-matter of the insurance.")
135. Given the fact that the financial impact on Shree resulting from the loss of the stones would have been the same whether it owned the stones or accepted them on memorandum, I find that the fact that Shree did not own the stones was not a material fact.
E. Shree's Claim for the Loss of the Stones
1. Applicable Legal Principles
136. The applicable legal principles are set forth in paragraphs 104-05, above.
2. Resolution of Factual Issues Relevant to Shree's Claim for the Loss of the Stones
137. Based on all the evidence offered at trial, I find that Shree has not offered sufficient evidence to sustain its burden that it shipped uncut gemstones to Hong Kong that were worth approximately $5 million.
138. First, there is no evidence that the stones were ever competently appraised by a competent appraiser.
139. The stones in issue are reported to have ranged in size from five to fifty carats (DX 114) and, in the aggregate, weighed 177.5 kilograms (Stipulated Facts ¶ 6). Since there are 5000 carats to the kilogram, the total weight of the shipment in issue was 887,500 carats and the number of individual stones ranged from 17,750 (assuming that each stone weighed fifty carats) to 177,500 (assuming that each stone weighed five carats). The only individual with any experience in the colored stone business who looked at the stones was Dhadda, who examined the stones for sixty to ninety minutes. Assuming that he examined the stones for the full ninety minutes and that he was able to analyze four stones per minute, he would have looked at a total of 360 stones. 360 stones equals approximately two percent (2%) of 17,750 stones and approximately 0.2 percent of 177,500 stones. Since not all the stones weighed fifty carats and not all of them weighed five carats, the sample that Dhadda examined must have been less than 2 percent, but not less than two-tenths of one percent (0.2%). Such a small sample has little probative weight.
140. In addition, the methodology of Dhadda's examination — visual examination unaided by even a jeweler's loupe — gives me almost no confidence in his ultimate conclusion. Plaintiffs offered the expert testimony of Antoinette Matlins. Ms. Matlins has been a certified professional gemologist for twenty years (Tr. 166-67). She has authored five books and several articles on gems (Tr. 170-71). Ms. Matlins also lectures on gems, teaches at the Gemological Institute of America, serves as a consultant to at least two companies with gem mining operations (Tr. 168-69) and served as an expert in at least two other cases (Tr. 171-72). Defendant's expert, Berj Zavian, recognized Ms. Matlins' book on gem identification as a reliable authority (Tr. 728).
141. Ms. Matlins testified credibly and convincingly that it. is not possible to perform a competent analysis of 900,000 carats of gemstones without any equipment (Tr. 191-94) and that, if she were to undertake such a project, it would take her up to one month (Tr. 273-74). Shree's expert, Berj Zavian, concurred in part, with Matlins and testified that he would not do a "fairly important or significant" appraisal without using at least a jeweler's loupe (Tr. 748).
142. Matlins also testified convincingly that stones of the quality and in the quantity claimed by Shree simply do not exist in today's market (Tr. 194-99, 239-42).
143. Although I do not doubt that jewelers have varying degrees of ability and that some can work with greater speed than others and that some can perceive qualities with their naked eye that others need elaborate equipment to discern, there is nothing in the record that remotely suggests that Dhadda has the extraordinary ability necessary to perform a valid appraisal of almost 400 pounds of uncut gemstones in a mere hour and a half.
144. Finally, the evidence in the record concerning the examinations of the stones performed by Girish Shah, Bharat Shah, Yogesh Shah and Priti Shah are entitled to virtually no probative weight. None of these individuals had any training or experience in uncut colored stones. Bharat Shah, who appears to have spent the most time examining the colored stones, has no experience with uncut stones, either diamonds or colored, and candidly admitted that, prior to November 1996, he had only seen uncut rubies and sapphires on only two or three occasions and had never before seen rough, uncut emeralds (Tr. 467). Given Bharat Shah's profoundly limited knowledge base with respect to uncut colored stones and his interest in the outcome of this matter, his testimony is entitled to no weight.
145. In addition, the conclusion is all but inescapable that the worthless stones found in the warehouse in Colombo were part of the material that was shipped. Given the fact that pieces of the crates and cloth bags were found in the warehouse in Colombo, it appears that the material shipped to Sri Lanka was stolen from the warehouse. Unless the worthless stones found on the warehouse floor were the stones that were shipped, a thief would have had to have broken into the warehouse, bringing the worthless stones with him or her, taken the putatively valuable stones, and then scattered the worthless stones on the floor of the warehouse. Such a scenario simply makes no sense.
At oral argument, in response to my questioning, Shree's counsel suggested the possibility that individuals at Lanka Trade stole the stones and left the worthless stones on the warehouse floor to create the appearance that worthless stones had been shipped and thereby divert attention from themselves. This theory is so unlikely that it can be entirely disregarded.
First, there is no evidence of unexplained recent wealth on the part of the principals of Lanka Trade or of their flight from Sri Lanka. If they had successfully perpetrated a $5 million theft, one would expect that they would have taken an extended sojourn in a temperate venue that has no extradition treaty with Sri Lanka.
Second, the amount of material recovered from the warehouse floor had a gross weight of approximately 125 kilograms (DX 27 at 12), while the weight of the stones shipped by Shree was 177.5 kilograms. The weight of Shree's shipment was known to Lanka Trade as of October 3, 1996 (DX 110). If individuals at Lanka Trade were substituting worthless stones for the valuable stones, with the intent of making it appear that worthless stones were shipped, one expects that they would have left 177.5 kilograms of worthless stones on the warehouse floor.
146. Finally, certain details of the manner in which the transaction was structured suggest that the entire transaction may have been a fabrication to defraud the insurers.
Item: Despite the fact that this was the largest transaction in which Bharat Shah had ever engaged and a transaction in which he faced a multi-million dollar liability, he departed from shipment practices that were literally tried and true and chose
to ship the $5 million worth of stones in a manner he had never previously used.
Item: Although he has no experience in grading or assaying uncut colored stones, Bharat Shah was the only individual who examined the stones for any substantial period of time in Hong Kong.
Item: The surveyor never examined the contents of the crates.
Item: Although Bharat Shah took the effort to photograph the exteriors of the crates, ostensibly for the insurance companies' benefit, he never photographed their contents, when it is their contents that are the only material part of the shipment.
Item: Bharat Shah testified that he did not want the crates opened in Sri Lanka until he was present, yet he sent the bill of lading to Lanka Trade; had he retained the bill of lading, Lanka Trade would not have even been able to pick up the crates.
Item: Finally, in order to pay Girish Shah, Bharat Shah had to borrow $5 million worth of diamonds from Lodha through Parekh. It is difficult to understand why Parekh or Lodha would volunteer to substitute themselves for Girish Shah as unsecured creditors of Shree to the extent of $5 million.
Whatever their belief was in Bharat Shah's good faith, a $5 million debt is a debt of staggering magnitude for a business the size of Shree, and it is impossible to fathom why rational business people such a Parekh and Lodha, would assume the risk of such a debt.
Although I need not make a determination as to whether the entire transaction was a sham, the foregoing factors raise serious questions concerning the true nature of the alleged undertaking and further diminish the weight of the evidence offered by Shree concerning the value of the stones.
147. Accordingly, for all the foregoing reasons, I find that Shree has not offered evidence of sufficient probative force and weight to prove that uncut gemstones worth approximately $5 million were shipped from Hong Kong to Sri Lanka.
IV. Conclusion
Accordingly, for all the foregoing reasons, I find that plaintiffs are entitled to a declaratory judgment that the marine insurance policy they issued to Shree in 1996 is void and is rescinded as a result of Shree's failure to disclose the 1992 loss on its jeweler's block policy. I further find that plaintiffs are entitled to judgment dismissing Shree's counterclaim.
Counsel for plaintiffs shall advise me within ten (10) days from the date of this Opinion and Order whether plaintiffs wish to pursue their claim for attorney's fees.
I also express my gratitude to counsel for both sides for the excellence of their presentations of a factually complex case and for their consistently professional conduct. The care and attention to detail that went into both sides' oral presentations and written submissions was obvious and was deeply appreciated.
SO ORDERED