Company Seeks $640 Million From Swiss Re, Lloyd’s to Cover Lost Diamonds

A New York-based diamond company is suing Swiss Re and several other insurers for $640 million for losses related to diamonds lost while on consignment with third parties, plus "sue-and-labor" expenses and breach of contract.

Lazare Kaplan International Inc. said $140 million in missing diamonds should be covered by two "all risk" property insurance policies, plus the company is seeking $500 million for consequential damages, the suit said. Swiss Re is the lead underwriter on the policies. The lawsuit, which is filed in U.S. District Court for the Southern District of New York, names Swiss Re International, U.K. branch; SR International Business Insurance Co.; Lloyd's Syndicates 1414, 2488, 3210, 457, 2001 and 1084, plus Marine Insurance Co. Ltd. as defendants.

Lazare Kaplan, one of the largest manufacturers and traders of diamonds in the United States, is involved in cutting and polishing diamonds that it sells to retail jewelers in the United States and abroad, according to the lawsuit.

In the lawsuit, which involves several of Lazare Kaplan's subsidiaries, the company said it had delivered diamonds to several third-party, unrelated entities on consignment, on the condition that Lazare Kaplan retained ownership of the diamonds until it received full payment for the diamonds. The third-party companies, based in Dubai, United Arab Emirates; Antwerp, Belgium; and Hong Kong, failed to fully pay Lazare Kaplan for the diamonds, plus failed to return the diamonds, leaving Lazare Kaplan on the hook for $140 million, which the company claims should be covered by its property insurers.

The lawsuit also seeks damages for breach of contract and coverage for sue-and-labor submissions.

The suit alleges the insurers breached two "all risk" New York property insurance policies, and an agreement for interim payment under which the insurers made a nonrefundable interim payment of $28 million to Lazare Kaplan in January.

After making the $28 million payment, the insurers "abruptly reversed course and refused to acknowledge coverage or to pay any covered losses under the policies," Lazare Kaplan said in a statement.

"For the first time in its over 100-year existence, LKI was facing economic hardship by reason of these large losses and insurers' refusal to investigate and pay LKI," the company said in the complaint.

Swiss Re told BestWire it "pays all valid claims but our general policy is not to comment on individual clients, nor on ongoing legal proceedings. Therefore we are unable to comment on this particular case."

The complaint alleges, among other things, that the insurers, which also issued separate policies to Lazare Kaplan under English law, created a virtual coverage "whipsaw" by denying coverage under the English policies on the ground that Lazare Kaplan does not have an insurable interest in the lost diamonds, while at the same time, asserting under the New York policies that there is no coverage because Lazare Kaplan insured the same property under the English policies.

Also, insurers filed a lawsuit in February 2010 in London against Lazare Kaplan, seeking a declaratory judgment for policies related to Lazare Kaplan's "Angola policies." The insurers allege Lazare Kaplan did not have an insurable interest in the diamonds that had been physically lost, according to court papers.

Sue-and-labor clauses are rooted in maritime law, and are intended to cover the insured's costs related to mitigating a larger loss, said Chris Kende, an attorney with Cozen O'Connor.

For instance, if a ship's hull is damaged, and the shipowner takes action to save the ship from sinking -- such as repairing the damage or towing the ship to safely -- the ship's hull policy will cover the expense that stopped a larger loss from occurring.

The clause is not just for maritime insurance. "It's very common in large commercial property policies," said Kende, who's not involved with the Lazare Kaplan v. Swiss Re case.

Sue-and-labor clauses were cited unsuccessfully in several Y2K lawsuits, when insureds sought insurance coverage to pay for computer programming upgrades necessary to switch from two-digit data fields to four-digit data fields that became necessary in the year 2000, said Joshua Gold, an attorney with Anderson Kill & Olick.

Generally, the coverage only applies if the insured is trying to avoid an accident, Gold said. "You don't get sue-and-labor coverage if the event you are trying to avoid is not accidental in nature," said Gold, who is also not involved in the Lazare Kaplan v. Swiss Re case, but is an expert in sue-and-labor clauses.

Swiss Re and Lloyd's currently have Best's Financial Strength Ratings of A (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])