The opinion of the court was delivered by: POLLACK
MILTON POLLACK, Senior United States District Judge,
This is a declaratory judgment action brought by Great Northern Insurance Co. ("Great Northern") seeking a decree that it is not liable, under an all risk property insurance policy, to indemnify its insured, Dayco Corporation ("Dayco"), for a claimed loss of its goods. Dayco counterclaimed for the loss of its goods in the amount of $6,188,343, plus interest and attorneys' fees.
Jurisdiction is based on diversity of citizenship and requisite amount in controversy. Great Northern is a Minnesota corporation, with its principal place of business in Minnesota. Dayco is a Michigan corporation, with its principal place of business in Ohio.
Dayco's claim under the insurance policy is based on the loss of its goods which were taken from it by false pretenses. Dayco's sales agent, Edith Reich, represented to Dayco that she had secured orders from the Russians for Dayco's products. In reliance on Reich's representations as to the existence of the contracts with the Russians and the terms of sale therein, Dayco manufactured goods and sent them to Bremen, West Germany to await pickup by the Russians. Goods, with an invoice price of over $15 million, were then delivered in 13 shipments to Russian ocean and truck carriers and consigned to a Soviet purchasing agency known as Tractoroexport.
Because the Russians denied having made the contracts on which Dayco had released the goods, Dayco never received payment for the goods -- except for, as discussed below, a sum which Dayco was unable to attribute to any of the 13 shipments. Upon investigation, Dayco learned that the contracts on which it had relied in surrendering the goods were fictitious; no such contracts had been entered into by the consignee, Tractoroexport.
Proof of this state of facts -- that Dayco was deprived of its goods by use of fictitious contracts -- was sufficient to establish Dayco's prima facie case of a loss under the all risks policy. Great Northern then presented a series of alleged defenses to liability, none of which, however, offset the abstraction of the goods from Dayco under false pretenses, through the use of the fictitious contracts.
Post trial analysis of the documentary record placed before the Court revealed further the extent of Reich's fraudulent scheme -- an analysis which Great Northern apparently did not perceive, or if it did, was not argued.
It appears from the records and the testimony developed by Dayco's investigation that there were a double set of contracts -- one set made by Reich with the Soviets and the fictitious set which Reich represented to Dayco and on which Dayco relied in surrendering its goods. Without Dayco's knowledge or consent, Reich sold Dayco's goods to the Russians for several millions of dollars less than called for by the fictitious contracts. This fact is disclosed in the record by comparison of the description of the goods shipped to Russia pursuant to the fictitious contracts and the like description of goods contained in the genuine contracts,
under which the Russians received the goods. Payment for the goods under the genuine contracts was sent directly to Reich and FTC.
The course of events established by the evidence is discussed in more detail below.
Effective November 1, 1976, Great Northern issued an insurance policy to Dayco, known as a foreign property excess and difference in conditions ("D.I.C.") "All Risks" insurance policy, no. 2060-90-93. The All Risks Policy, including its annual renewals, insured Dayco for the period from November 1, 1976 through November 1, 1982. The parties have stipulated that Dayco has paid all premiums due Great Northern and that at all times relevant to this action, the All Risks Policy remained in full force and effect.
The policy insured against "All Risks of Direct Physical loss or damage to property insured ... except as hereinafter excluded." The policy covered an amount not exceeding $1,000,000 for "any loss at any location" and had a $10,000 deductible for property damage.
On July 27, 1982, Dayco filed 6 proofs of loss with Great Northern seeking recovery for goods shipped to Russia by ocean-going vessels from Bremen, West Germany. The proofs sought recovery under the All Risks policy for $5,757,014. On October 21, 1983, Dayco filed 6 additional proofs of loss with Great Northern seeking recovery under the All Risks policy for $431,329, for goods shipped to Russia by truck from Bremen, West Germany.
On October 23, 1983, Great Northern notified Dayco that its claims had been rejected, that the All Risk policy did not cover the losses, and that they were specifically excluded from coverage by the provisions of the policy. This declaratory judgment action was filed by Great Northern on November 7, 1983. The complaint asserted seven contentions for the denial of coverage:
1. that there was no "Direct Physical loss or damage" to the property insured;
2. that the losses were not a "fortuitous event" because they were caused by the illegal and fraudulent actions of Dayco's employees;
3. that the policy specifically excludes coverage for loss "caused by or resulting from.... theft, conversion, or infidelity by any employee of the insured.";
4. that the policy provides that "Accounts, bills, currency, deeds, evidence of debts" is not property covered by the policy;
5. that the policy excludes coverage for damage caused by or resulting from "confiscation by order of any government or public authority."
6. that Dayco failed to comply with the provision in the policy which requires the insured to "employ every reasonable means to protect the property from further damage..."
7. that to the extent that coverage is provided the policy limits the amount of coverage to $1 million.
On a motion for summary judgment, Judge Duffy dismissed Great Northern's seventh contention; the Judge held that proof of loss of each of the thirteen shipments would constitute proof of a separate loss in each instance under the policy and that each shipment was covered to the limit of $1 million. Great Northern Insurance Co. v. Dayco Corp., 620 F. Supp. 346, 353-55 (1985).
Dayco is engaged in the manufacture and sale of rubber and plastic belts and hoses used in automobiles, trucks and tractors. Although the majority of Dayco's sales are domestic, Dayco has an International Division. Dayco secures business in foreign countries through sales agents, distributors, or through direct contacts with customers. The foreign sales agents are compensated by commissions on the amount of the sales. The amount of the commissions vary depending on the type of sale; commissions range from 3% to 15% of the amount of the sales. Dayco frequently pays commissions to its sales agents in advance of payment from the customer.
In 1976 Dayco began sales of its products to the Soviet Union. The Soviet Union purchases goods manufactured outside Russia through purchasing agents called Foreign Trade Organizations ("FTOs"). Different FTOs specialize in purchasing particular products to be distributed to various Soviet industries. Between 1976 and 1979, Dayco sold between $1 to $1.5 million worth of 4000 mm V-belts per year to Tractoroexport, a Soviet FTO. These sales were secured by Dayco's sales agent, Jeffrey Nutter, who received a commission based on a percentage of the selling price; the commission was usually around 3%.
Relationship with Edith Reich
In May 1979, Edith Reich approached Dayco; she identified herself as a sales agent who did a great deal of business in the Soviet Union and said that she wanted to do business with Dayco. During the spring and summer of 1979, Dayco began talking to Edith Reich about the possibility of having her company, Foreign Transactions Corporation ("FTC"), represent Dayco in the sale of its products to the FTOs. Mrs. Reich claimed that there were enormous business opportunities in Russia and that through her extensive contacts in the Soviet Union, she could sell substantial quantities of Dayco's products.
Reich also told Dayco officials that she had represented numerous United States firms, such as Miles Laboratories and Uniroyal, in their business in the Soviet Union. Dayco made inquiries about Reich, with Uniroyal and Miles Labs, and received favorable reports.
Throughout the meetings between Dayco and Reich, Dayco personnel were impressed with the professional manner in which Reich handled herself, and the extensive knowledge of Russia and familiarity with technical information which she displayed. They were convinced that she had numerous connections in the Soviet Union and that she could generate substantial business for Dayco.
On July 1, 1979, a Commercial Representative Agreement was entered into between Dayco and Reich's company, FTC. The agreement appointed FTC as the exclusive representative of Dayco in the Soviet Union for the sale of industrial and automotive V-belts and provided that FTC would be entitled to the difference between the price at which FTC sold Dayco's products and the price quoted by Dayco to FTC, as compensation.
In the fall of 1979, Reich made several trips to the Soviet Union. In November 1979, Reich informed Dayco that Raznoimport, a Soviet FTO, had placed an order for Dayco's "Super Blue Ribbon V-Belts" totalling $1,656,680.
On November 15, 1979, a new Commercial Representative Agreement was entered into. This agreement contained terms similar to the July agreement in that Reich was still compensated through the differential between the price Dayco quoted and the price which Reich obtained in the sale. The only difference was that the new agreement provided that Dayco would advance up to 10% of the amounts due. Prior to November 15, 1979, there was no formal agreement which provided for advances of commissions; however, Dayco previously had authorized advances to be made to Reich. Dayco believed that such advances were necessary to help cover the high expenses which Reich would incur in developing market opportunities in the Soviet Union.
Under the arrangement between Dayco and FTC, FTC would enter into agreements with the FTOs for Dayco's products. Dayco would receive a letter from FTC stating that a particular contract had been procured and the terms of sale therein. Dayco would then manufacture the goods described in the letter. After the goods were produced in Dayco's factory in Springfield, Missouri, they were transported to Charleston, South Carolina for shipment abroad. They were then sent to a warehouse in Bremen, West Germany, where the goods were to be stored until they were picked up by the Soviets.
The goods were not shipped by Dayco directly to the Soviet Union because, during this period, due to the Soviet Union's actions in Afghanistan, longshoremen refused to load cargo onto vessels bound for the Soviet Union.
Payment for the goods was not to be made until the goods were loaded on transports bound for Russia. Once ocean or truck bills of lading were obtained for the goods, all documents relating to the sale and shipment of the goods were sent to the First National Bank of Chicago and then forwarded to the Bank for Foreign Trade of the USSR. Upon the receipt of these documents, payment was to be forwarded from the Bank of Foreign Trade to the First National Bank of Chicago and then to Dayco.
Reich kept her relationship with the Russians closely guarded. She insisted that Dayco maintain secrecy concerning its business dealings with the Russians and that Dayco not contact the Soviets directly. Dayco management complied with her requests believing that Reich was merely trying to protect her valuable contacts, as would any sales agent. Although Dayco did not have direct contact with the Russians, Reich forwarded telexes to Dayco purporting to come from the Soviet FTOs confirming the orders, delivery requirements, and receipt of the goods.
Reich kept all contracts which she had secured on Dayco's behalf in her possession. Throughout their dealings, Reich took the position that she was not obligated to provide Dayco with copies of the contracts. However, from time to time, Reich permitted certain Dayco employees to review copies of contracts at FTC's ...