Chubb’s Federal Insurance Co. must pay fabric company over $ 2 million that lost 22 shipments of goods when the Mississippi warehouse company that stored it, filed for bankruptcy, sold the goods and pocketed the product.
A panel of the 2nd Circuit Court of Appeals rejected the insurer’s arguments that the coverage was prohibited by an exclusion of dishonest acts in the ocean freight policy it issued, and also that the coverage applied. only for shipments from one location owned by the insured to another. The panel upheld a decision by the United States District Court in New York which found that coverage was due under a marine freight policy issued to Fabrique Innovations Inc.
Fabrique, which does business as Sykel Enterprises, sells fabrics with licensed designs, such as sports logos or popular art images. The company shipped 22 trucks of approximately $ 1.2 million worth of “plush fabrics and products” from a warehouse in Chino, Calif., To a warehouse in Mississippi owned by Hancock Fabrics.
Hancock filed for bankruptcy in February 2016 and received authorization from the bankruptcy court to liquidate its assets. Fabrique objected, but the court approved the “closing sale” plan. Hancock sold Fabrique’s merchandise and kept the money for himself, Fabrique says.
Fabrique filed a theft complaint, which Federal denied. The Chubb unit said the policy only covered “intra-company” shipments, not business-to-business shipments – that is, the transfer of goods from premises owned by Fabrique to premises owed by another company. .
Further, Federal argued that if Hancock had indeed sold the merchandise and retained the money, this constitutes a fraudulent or dishonest act for which coverage is prohibited under the Ocean Freight Policy.
The district court rejected these arguments and granted summary judgment in favor of Fabrique, awarding $ 2,006,814.09 in damages.
On appeal, Federal argued that Fabrique admitted that Hancock had committed a dishonest act in filing a claim for “theft” of its merchandise.
“Although Hancock may have had permission from the bankruptcy court to sell Fabrique’s products, Hancock did not have permission from this court to keep the proceeds from the sale of those products,” Federal argued.
The 2nd Circuit panel said the exclusion of dishonest acts requires “tort”, which goes far beyond willful breach of contract.
“We have a hard time finding tort misconduct or dishonesty where one party has openly sought and obtained court clearance before engaging in the conduct in question, and the opposing party has had an opportunity to ‘oppose,’ the panel said in its opinion.
The appeals court also rejected Federal’s argument that coverage was not due because only “intra-company” transfers were covered by the policy.
“Given the common meaning of ‘intra-company shipments’ in everyday discourse, a businessman would reasonably expect the endorsement to cover Fabrique’s products, which remained labeled Fabrique when shipped and stored in the warehouse in Hancock ”, indicates the opinion.
Photo courtesy of Fabrique Innovations.
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