time of the inspections. See Tr. 919-61; Ex. N; Ex. 207; Zamora Dep. 48-56; Delgado Dep. 10-12, 14-19; Orozco Gutierrez Dep. 33, 50-59, 62. The insureds assert that in demonstrating the foregoing they have sustained their burden of presenting a prima facie case. We agree.
The insureds alternatively assert that, as a matter of Mexican law, controlling as to this issue, the warehouse receipts, without more, constitute a prima facie case as to all parties, including the third party insurers, that the coffee existed and that they had ownership rights to the coffee. To this effect, they have introduced the opinion of a Mexican law expert, Dr. Miguel Acosta Romero. Acosta Opinion at 3-4, 11. The insurers disagree and have introduced the opinion of another Mexican law expert, Mr. Luis Mauricio Ibarrola Serrano, to the effect that, whatever probative value Mexican warehouse certificates may have as to the signatories to such certificates, they do not constitute prima facie evidence as to the third party insurers. Ibarrola Opinion at 8-12.
On balance, we find more persuasive the opinion expressed by Dr. Acosta Romero that the certificates do establish a prima facie case that the coffee existed and was owned by the insureds. But we emphasize that we are not called upon to determine what weight should attach to the certificates standing alone. Nor is this a case where the significance of the certificates arises in a controversy involving competing ownership claims. Rather, here, the question is whether the insureds, having established purchases in the ordinary course of business pursuant to an established industry pattern of trading, and holding certificates regular on their face, have established a prima facie case that the coffee in fact existed and was owned by them. The existence of confirmatory inventory reports we believe makes this an even stronger case. In other words, we find that, apart from the intricacies of Mexican law or any special status accorded the certificates, as a matter of New York law or any other arguably relevant law,
each insured has established a prima facie case.
2. The Insurers' Rebuttal
Plaintiff-insurers have introduced no direct evidence as to the cause of the coffee shortage but have relied principally on two main contentions to support their theory that the coffee never existed. First, they assert that Cafetalera Zardain and its principals were corrupt and engaged in fraudulent activities and that the various inspectors who signed the Somex inspection reports were also corrupt. Therefore, they argue, the Court should conclude that the warehouse receipts tendered by Zardain to VES and Armenia were fraudulent and should also reject any reliance on the Somex inspection reports.
In response to this first assertion, however, we find that the insurers have failed to meet their burden of demonstrating that such corruption existed and that it was the cause of defendants' losses. The insurers note that Carlos Zardain operated the Somex habilitated warehouses where his own company's coffee was allegedly deposited and maintain that it would therefore have been easy for Zardain to influence the Somex inspectors or to issue fraudulent warehouse receipts. However, plaintiffs provide no evidence of actual wrongdoing. Although plaintiffs assert without contradiction that Carlos Zardain and Ricardo Zardain were convicted of "generic fraud" in Mexico and that all appeals on these convictions have been exhausted and/or denied, see PTO at 28; C. Zardain Dep. at 130; R. Zardain Dep. at 57, plaintiffs do not demonstrate any nexus between these convictions and the subject matter of this controversy.
Moreover, the insurers cannot argue that they have had no access to persons who would have knowledge of such wrongdoing. We know that Atlantic's investigators interviewed and procured the cooperation of Cafetalera Zardain's warehouse managers, Teodoro Hoppenstedt and Juan Carlos Rivera Silva, who signed the inspection reports at the warehouses where most of the missing coffee was stored. Tr. 1314-17; Hoppenstedt Dep. 220-22, 301-03; Silva Dep. 7, 95, 122-23. In their depositions, Hoppenstedt and Rivera did not indicate that Somex and Creditzam warehouse inspectors were defrauded or that the coffee that the inspectors documented in their reports did not actually exist in the warehouses. If Hoppenstedt and Rivera conspired with Zardain to create fictitious inventories to mislead the Somex inspectors, then the insurers, who had the cooperation of these employees as well as the burden of proof on this issue, should have elicited such testimony from them.
In addition, the evidence shows that in August and September, 1990, Cafetalera Zardain was entitled to a $ 2.5 million pre-financing payment that VES had agreed to pay under the new 1990-91 crop year contract. Ex. 22.
When VES proffered this payment to Carlos Zardain, he advised that they hold off because he was having difficulty buying new crop coffee. Tr. 1194-98, 1224-25, 1232-35. We think it unlikely, if Zardain were conspiring to defraud VES, that he would have declined a payment from VES of such a large sum of money to which he was entitled.
The insurers' second basis in support of their theory that the coffee at issue never in fact existed is their contention that a net book inventory undertaken by Norman Reitman & Company, as well as independent inspections conducted by the Mexican Coffee Institute (Inmecafe), demonstrate that Cafetalera Zardain did not purchase enough coffee during the relevant time periods to satisfy the certificates of deposit issued by Somex and held by the insured parties. It therefore follows that certificates must have been issued as to Cafetalera Zardain for non-existent coffee.
However, we are persuaded by the testimony of Ira Zecher, defendants' witness and an expert auditor at Ernst & Young, that sufficient coffee did exist in the Mexican warehouses to match the certificates of deposit held by the insureds. In a report prepared for VES on April 19, 1991, Ernst & Young concluded that "the books and records of Cafetalera Zardain . . . and other available documentation support Zardain's representation that during the period October 1, 1989 to September 30, 1990, it purchased approximately [$ 31.4 million] of coffee and that the purchases were delivered to and entered into its warehouses." Ex. AI at 1; Tr. 911-12. Zecher testified at trial that Ernst & Young representatives traveled to Mexico City on numerous occasions and examined a sample of 3,224 individual receiving reports ("romaneajes"), as well as related check vouchers ("polizas de cheque"), supplier ledger cards ("tarjetas"), bank statements, and supplier confirmations, in reaching this conclusion. Tr. 912-16; Ex. AI at 2.
In addition, Ernst & Young reviewed and analyzed 215 periodic physical inventory reports prepared by Somex and two reports prepared by Creditzam. It found that these reports were reliable and that they supported defendants' conclusion that there was sufficient coffee in the Mexican warehouses during the relevant periods to satisfy the certificates of deposit held by both VES and Armenia. Ex. AI at 3; Tr. 919-97. Ernst & Young also compared VES's records as to the certificates of deposit with Zardain's records and found that these records coincided, lending further support to the insureds' claims. Ex. AI at 5; Tr. 987-88.
Plaintiffs argue, in part, that we should disregard Ernst & Young's findings because they rely on inspections carried out by Somex and Creditzam, which plaintiffs contend were faulty or fraudulent. Examining all of the evidence presented, however, we find that plaintiffs have failed to meet their burden of proving that such error or fraud ever took place.
In the absence of such proof, we believe Ernst & Young's analysis, incorporating the first-hand observations of trained inspectors, to be more persuasive than the theoretical net book inventory of Norman Reitman & Co, which ignored these observations. Tr. 136-37.
In sum, the problem with the insurers' rebuttal case is that it presumes, without proper support, that much of the evidence relied upon by insureds in making out their prima facie case is fraudulent. As defendants argue, plaintiffs' theory that the missing coffee never existed relies on the unproven assumption of "either a vast collusion between the warehouse inspectors and the Zardain warehouse managers, or a systematic, inexplicable ineptitude on the part of the twenty or so trained Somex inspectors who inventoried the coffee in the warehouses." VES's Post-Trial Memorandum at 7. For the reasons stated above, we find that the insurers have not adequately established that the coffee never existed and therefore have not met their burden of rebutting the insureds' prima facie case. Consequently, we reject the insurers' primary argument for declaratory relief.
C. INA's Additional Bases for Declaratory Relief
Plaintiff-insurer INA maintains that there are several additional bases for denying Armenia's insurance claims. We address each of these arguments in turn.
1. Armenia's Policy is Not Void Ab Initio
INA argues that, under the doctrine of uberrimae fidei, we should declare Armenia's policy void ab initio, because Armenia misrepresented material facts to INA at the time of its application for coverage. We disagree.
The doctrine of uberrimae fidei requires that parties to a marine insurance contract accord each other the utmost degree of good faith. Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987). Under this doctrine, the assured is under an obligation, without inquiry, to disclose every fact within his knowledge that is material to the risk. See Puritan Ins. Co. v. Eagle S.S. Co., S.A., 779 F.2d 866 (2d. Cir. 1985). The insured's failure to meet this stringent standard entitles the underwriter to void the policy ab initio. Knight, 804 F.2d at 13.
However, the doctrine of uberrimae fidei does not apply in this case, because the warehouse storage risks at issue are not marine risks. The Court of Appeals for the Second Circuit has already held, with respect to the Atlantic-VES dispute, that warehouse storage risks such as these fall outside the scope of federal admiralty and maritime jurisdiction:
Even construing the facts in Atlantic's favor, the coffee never became marine cargo and never entered the maritime stream of commerce. . . . The goods' connection with maritime commerce was simply too speculative and attenuated to justify admiralty and maritime jurisdiction in this case.
Atlantic Mutual, 968 F.2d at 200 (citing Paul Marsh, Inc. v. Edward A. Goodman Co., 612 F. Supp. 635 (S.D.N.Y. 1985)). Although the INA policy also included coverage for ocean transit risks, Armenia declared separately for its warehouse storage risks and paid separate premiums. Ex. 92. We therefore believe that the warehouse storage risks in this case should be treated as ordinary insurance risks and that, instead of the stringent "marine rule," we should apply the "ordinary" New York rule regarding concealments by applicants for insurance. See Stecker v. American Home Fire Assur. Co., 299 N.Y. 1, 84 N.E.2d 797, 798-99 (NY 1949) (contrasting the two rules); see also Thebes Shipping, Inc. v. Assicurazioni Ausonia SPA, 599 F. Supp. 405, 427 (S.D.N.Y. 1984).
Under this "ordinary" New York standard, the mere nondisclosure of a fact, concerning which the insured has not been asked, is not a ground for avoidance of the insurance contract. Sun Ins. Co. v. Hercules Secs. Unlimited, Inc., 195 A.D.2d 24, 605 N.Y.S.2d 767, 771 (N.Y. App. Div. 1993) (citing Sebring v. Fidelity-Phenix Fire Ins. Co., 255 N.Y. 382, 174 N.E. 761 (N.Y. 1931)). In other words, "if fraud be absent, the assured may remain silent in respect to many matters concerning which the underwriter fails to question him." Sebring, 174 N.E. at 762. In order to constitute fraud, "there must be a willful intent to defraud and not a mere mistake or oversight." Sun Ins., 605 N.Y.S.2d at 771.
Applying this "ordinary" standard, we find that INA has not introduced evidence that, at the time of Armenia's application for insurance coverage, INA requested information from Armenia that it did not receive. In addition, INA has not demonstrated that Armenia fraudulently withheld information from INA that it should have divulged. INA alleges that at the time of Armenia's application for insurance in September 1989, it failed to disclose to INA two pending losses involving the mysterious disappearance of coffee from Mexican warehouses. However, we are persuaded by the trial testimony of Joseph Apuzzo, Armenia's former president, that he was unaware of these losses at the time INA bound the Armenia policy, see Tr. 1472, 1474-75, 1494-96, and indeed would have been unlikely to change underwriters had he been so aware. Tr. 1494-96, 1504.
We therefore reject INA's request that we void Armenia's insurance policy ab initio.11
2. Untimely Notice
INA next argues that we should not allow Armenia to collect under its insurance policy because Armenia neglected to give prompt notice to INA of its loss. The policy at issue contains a "Notice of Loss" provision that states:
The Assured shall report to Johnson & Higgins . . . (for transmission to the Assurers) or to the agents of the Assurer if there be one at or near the place where the loss occurs . . . every loss or damage which may become a claim under this insurance as soon as may be practicable after it becomes known to them.
Ex. 92 (Clause 31). INA contends that Armenia was aware of its losses under the policy "at least ten months prior" to its submission of its formal claim to INA on October 23, 1990, and that Armenia therefore violated the "notice of loss" provision.
We reject this contention. The "notice of loss" provision clearly required Armenia to notify either its insurance broker, Johnson & Higgins ("J&H"),
or INA of potential losses. INA admits in its post trial briefs that Armenia advised J&H on January 3, 1990 and March 21, 1990 of potential losses in Mexico that might possibly be subject to an insurance claim. See Plaintiffs' Post Trial Findings of Fact & Conclusions of Law PP 313-15, 318 (citing Ex. 135, Ex. 132). We find that these actions by Armenia were adequate to satisfy its obligations under the insurance policy.
Alternatively, even if INA's late-notice defense has merit, we find that INA waived this defense by failing to include it in its original declaratory judgment complaint on December 20, 1990. Under New York law, "when an insurer refuses to pay a claim based on one ground that it specifically states, the insurer waives all other grounds for denying liability." Middle East Eng'g & Dev. Co. v. Arkwright-Boston Mfrs. Mut. Ins. Co., No. 86 Civ. 834, 1987 WL 17419, at *2 (S.D.N.Y. Sept. 16, 1987). See New York v. Amro Realty Corp., 936 F.2d 1420, 1433 (2d Cir. 1991) (liability insurer's waiver of late-notice defense was "conclusively established" by its assertion of several grounds for disclaiming coverage, without asserting late-notice ground until later); Luria Bros. & Co. v. Alliance Assurance Co., 780 F.2d 1082, 1090 (2d Cir. 1986).
INA argues that it could not have waived its late-notice defense in December 1990 because it had no knowledge at that time that Armenia had violated the notice of loss provision. We reject this argument. INA is correct that "an insurer cannot waive a defense by asserting another defense as grounds for declination if it had no knowledge of the facts giving rise to the unasserted defense." Luria Bros., 780 F.2d at 1090. However, even if an insurer does not have actual knowledge of all the pertinent facts about a defense when it declines liability on other grounds, if it has sufficient information to put it on notice of the defense, the insurer has constructive knowledge, which is sufficient for waiver. Id. at 1091; Middle East Eng'g, 1987 WL 17419, at *2.
We conclude that INA had sufficient information to give it either actual or constructive knowledge of the critical facts when it denied liability in December 1990. The record demonstrates that INA was aware of problems in Mexican warehouses in general even before the INA-Armenia policy was bound in September 1989. Tr. 842-43, 861, 863, 878. In addition, INA learned by January 8, 1990 that Armenia had suffered losses under its prior policy. Tr. 789, 856; Brosnan Dep. 69-71; Ex. 129. Reports commissioned in response to this January information cautioned INA about purported illegal activities in Mexican warehouses. Tr. 857-58, 861; Exs. 50, 51. Between October 23, 1990, when Armenia submitted its insurance claims, and December 20, 1990, when INA filed its declaratory judgment action, INA had a further opportunity to investigate Armenia's losses. Indeed, INA's attorney, James Sweeney, was part of a team that travelled to Mexico in mid-October and met with Somex and Creditzam officials. PTO at 4; Tr. 1252-57. INA has not demonstrated that documents were withheld by Armenia or that INA was denied access to records sufficient to examine Armenia's claim. In short, if Armenia truly was aware of its losses "at least ten months prior" to its submission of its formal claim, then INA should have had enough information by December 1990 to alert INA to this fact.
D. VES's Claim for Non-Contractual Damages
In addition to the contractual damages claimed by both of the insured plaintiffs and awarded by the Court in this decision, VES asserts a further claim for the damages it allegedly sustained as a consequence of Atlantic's "bad faith" in denying VES's insurance claims on November 2, 1990. Under New York law, an insurer owes a duty of good faith to its insured, see Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 285 N.E.2d 849, 854, 334 N.Y.S.2d 601 (N.Y. 1972), cert. denied, 410 U.S. 931, 35 L. Ed. 2d 593, 93 S. Ct. 1374 (1973), and the insured can collect damages for "harm that naturally and foreseeably flows" from a violation of this duty, see Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 635 N.E.2d 1222, 1224, 613 N.Y.S.2d 352 (N.Y. 1994). VES argues that Atlantic violated its duty of good faith by precipitately denying VES's insurance claims without conducting the necessary prior investigations. This bad faith act, VES alleges, resulted in a foreseeable and massive withdrawal of capital by VES's lending banks and eventually in the loss of VES's entire going-concern value, amounting to $ 42 million.
We find, however, no evidence of bad faith on the part of Atlantic. We are persuaded by the trial testimony of one of Atlantic's managers, Allan Saunders, that Atlantic feared that VES was on the verge of bankruptcy yet was making representations to the public that its Mexican coffee losses were fully insured. Tr. 1294, 1318; Ex. 252. Atlantic believed that VES would not prevail on its claim and that if Atlantic did not promptly make this position clear, it could later be alleged that Atlantic had lulled entities with a financial interest in VES's viability into a false sense that the claim was valid and would be paid. Thus, in order to avoid multiple lawsuits by American and European banks, Atlantic denied VES's claim by bringing its own declaratory judgment action on November 2. Tr. 1294-95. Moreover, VES itself contributed to Atlantic's expeditious denial of VES's claim by invoking, in its claim submission letter, clause 32(b) of the insurance policy, see Tr. 1287; Ex. A., which would have required payment of the loss within 30 days. See Ex. 71.
Further, this is not a case in which the insurer took one stance prematurely and then changed its position after the publicity had already caused harm to the insured. Atlantic took a reasonable, although ultimately unsuccessful, legal position that it continued to maintain throughout the course of litigation. Under these circumstances, the defendant banks and other creditors of VES and Balfour were arguably benefited by knowing as soon as possible that Atlantic would oppose VES's insurance claim. In short, we find no bad faith on the part of Atlantic and therefore deny VES's claim for consequential damages.
For the reasons stated above, this Court dismisses plaintiffs' claims for declaratory judgment and grants judgment in defendants' favor on their insurance claims. Defendant VES's request for non-contractual damages is denied.
Submit order within 30 days from the date of this Opinion.
Dated: January 23, 1995
New York, New York
Leonard B. Sand