In Doyle v. Fireman’s Fund Insurance Co. (No. G054197, filed 3/7/18), a California appeals court held that financial loss from purchasing counterfeit vintage wine was not direct and accidental loss or damage to covered property within the coverage of a valuable possessions property policy.
In Doyle, the insured was a collector of rare, vintage wine that was housed in a wine storage facility. He had purchased nearly $18 million of purportedly rare, vintage wine from a dealer, and insured the collection under a valuable possessions policy. But a law enforcement investigation revealed that the dealer had been filling empty wine bottles with his own wine blend and affixing counterfeit labels. The dealer was convicted of fraud and was sent to prison for 10 years.
The policy’s “perils insured against” provision provided that: “We insure for direct and accidental loss or damage to covered property….” The policyholder argued that the policy provided “broad protection against all insurable risks, which include crime-related losses to [his] investment whether anything physical happened to the wine or not.” However, the insurer argued that no “loss or damage to covered property” had occurred, because “the wine is in the exact same condition now that it was in when [the policyholder] first insured it.”
The trial court sustained the insurer’s demurrer without leave to amend and the appeals court affirmed. Citing Simon Marketing, Inc. v. Gulf Ins. Co. (2007) 149 Cal.App.4th 616, the Doyle court stated that “the threshold requirement for recovery under a contract of property insurance is that the insured property has sustained physical loss or damage.” Further, “[t]he requirement that the loss be ‘physical,’ given the ordinary definition of that term is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer where the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.”
The court pointed out that in the phrase “direct and accidental loss … to covered property,” the word “loss” modifies the subject phrase “covered property” by way of the preposition “to.” Thus, the policy was insuring against any losses to the wine, not insuring against any losses to the policyholder’s finances or to his unrealized expectations as to the value of the wine he had purchased:
“When Doyle purchased the wine from Kurniawan it was counterfeit. The wine remained counterfeit (and essentially worthless) throughout the entire coverage period of the policy. Perhaps Doyle has a valid claim against Kurniawan for fraud. However, Doyle cannot reasonably expect his … ‘Valuable Possessions’ property insurance policy to reimburse him for his multiple purchases of wine from Kurniawan, which was essentially valueless at the time of purchase.”
The Doyle court went on stating: “Indeed, when it comes to property insurance, diminution in value is not a covered peril, it is a measure of a loss.” (Citing State Farm Fire and Casualty Co. v. Superior Court (1989) 215 Cal.App.3d 1435, 1444.) And the Doyle court explained: “Here, similar to State Farm, Doyle suffered a diminution in value—he lost the money he had invested in his wine collection—because of the fraud committed by Kurniawan. But Doyle’s financial loss was not a covered peril, it is simply a measure of his damages.”
The Doyle court also rejected an argument that the absence of any express requirement in the policy for “physical damage” necessarily meant that economic loss was covered: “[G]iven the fundamental nature of property insurance, the policy Doyle purchased only insured him against potential harms to the wine itself, such as fire, theft, or abnormal spoilage; Doyle did not insure himself against any potential financial losses. Doyle did not buy a provenance insurance policy; Doyle bought a property insurance policy.”
Finally, the Doyle court found the absence of a fraud exclusion irrelevant: “The problem with this argument is that the burden is on the insured to establish that the occurrence forming the basis of its claim is within the basic scope of insurance coverage. And, once an insured has made this showing, the burden is on the insurer to prove the claim is specifically excluded.  Here, Doyle has failed to establish that any type of financial loss, including fraud, comes within the scope of the property insurance policy he purchased. That the policy does not specifically list fraud as an exclusion is irrelevant.”
The Doyle opinion confirms long-standing insurance law in California that property policies do not cover economic losses of policyholders.
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