A jeweler was insured against the “physical loss” of its property, except when the property was sold under a “deferred payment” agreement, or when the loss was caused by a “dishonest act.”  The jeweler regularly delivered some pieces to a refiner, which usually bought the items after melting them down.  On two occasions, though, the refiner neither paid for nor returned the property, which then disappeared, along with the refiner’s owner.  The jeweler’s insurer denied coverage, reasoning that the refiner had either purchased or misappropriated the jewelry.  But inTapper’s Fine Jewelry v. Chubb National Ins. Co., No. 14-13280 (E.D. Mich. Dec. 21, 2015), a federal court found it could not state, as a matter of law, that coverage had been excluded.  The jeweler’s coverage action may now proceed to trial.

Fire Golden Rings

Tapper’s Fine Jewelry is “Michigan’s most trusted jeweler.” Tapper’s has been a retailer since 1977, but it also began buying used jewelry in 2009, to take advantage of a rising market in precious metals.  The company’s owner would deliver bags of items made of gold, silver, platinum and palladium to a refiner known as PMG Refiners, which would melt these items into bars.

When the bars cooled, the parties would agree on their composition.  PMG performed a preliminary assay, but it also sent the bars to an independent refiner for a final determination.  PMG paid the jeweler 85% of each bar’s anticipated value on the day after the jeweler’s delivery.  It paid the balance after the parties reached final agreement about each bar’s value, based on the results of the final assay.  The refiner kept all the bars for which it paid.

According to Tapper’s, there were times when the jeweler chose to keep the bars, based on the results of the final assay.  But this was not the rule: over the course of a few years, Tappers’ sold about $51 million worth of metal bars to PMG.

The Search for Tapper’s Gold

In July 2013, Tapper’s delivered three bags of jewelry, with an estimated value of $129,000.  The following day, PMG asked for more time to make its initial payment of 85% of the estimated value.  In September, PMG received another delivery, for which it paid about 80% of the estimated value, leaving a $35,000 balance.

The parties completed other transactions in August, but PMG never paid the money it owed for the July and September deliveries, nor did it return the ingots to which those deliveries had been reduced.

During a phone call in October, PMG’s owner said “he would get [Tapper’s] the money],” but he failed to do so, and he has not been heard from since.  That month, Tapper’s filed a police report, which referred to a possible “theft.”   According to the police, PMG had separately notified them that two of its employees had been stealing from the refiner.

A Chip Off the Jeweler’s Block

Tapper’s had “Jeweler’s Block Coverage” under two policies issued by Chubb.  The policies promised to “pay for direct physical loss of or damage to Covered Property.”  But this coverage was subject to two exclusions.

First, the definition of “Covered Property” exempted “Property sold under a deferred payment sales agreementafter it leaves your premises.”

Second, the policies excluded coverage for

loss or damage caused by or resulting from any … [d]ishonest or criminal actcommitted by … [a]nyone … to whom the property is entrusted.

After some indecision, Chubb denied coverage for the missing jewelry, based on both provisions.  Tapper’s brought an action, asserting claims under Michigan’s Uniform Trade Practices Act and for breach of contract.  After the case was removed to federal court, both sides moved for summary judgment.  It was the position of both sides, in other words, that no issues of material fact were in dispute.

Parsing the Exclusions

The district court analyzed the coverage question as two separate issues.

First, it considered the “deferred payment” provision, and it acknowledged that “[t]his is a close call.”  Although the policies did not define the term “deferred payment sales agreement,” Tapper’s had received approximately $51 million under a course of dealing in which PMG paid for jewelry in two steps, both of which occurred at least one day after the jewelry had been delivered.  When it conducted its initial assay in July 2013, PMG had prepared a report that was labeled,

INITIAL ASSAY FOR ADVANCE; PAYMENT BASED ON FINAL SETTLEMENT.

Furthermore, although Tapper’s denied that any sale had taken place, it admitted that the company’s owner called PMG in October 2013 to demand payment, without requesting the return of the metal bars.

As noted, however, Tapper’s alleged that there had been times when it decided not to complete a sale to PMG, based on the result of the final assay.  Since there was no evidence that Tapper’s had received the final assay results for the deliveries of July and September 2013, the court held that a reasonable jury could find that no sale had occurred on those occasions.

The court next considered the “dishonest or criminal act” exclusion, which presented “another close call.”  While acknowledging several indicia of foul play, such as the disappearance of PMG’s owner, the court focused on evidence that the local prosecutor had not approved a request for an arrest warrant, out of concern that this might be “more of a civil matter.”  The court reasoned:

There may have been good reason for the prosecutor to consider this a civil matter.  Recall that evidence suggests that PMG and [Tapper’s’] overall arrangement was a sales agreement.  If true, [PMG] may have simply breached that agreement. … That Tapper’s chose to continue to do business with PMG after it failed to pay in July 2013 strengthens the inference that this was all a contractual arrangement … .  And the Court is hard pressed to say that every breach of contract due to a party’s inability to pay amounts to a dishonest act.

Summing up these deliberations, the court concluded:

The bottom line is that no one knows exactly what happened to the metals once in PMG’s possession, why they disappeared, and why they failed to pay Tapper’s in full.

The motions for summary judgment were denied.

The Common Welfare Was My Business

While the court examined each of the policies’ exclusions with some care, it neglected to consider how the analysis of one exclusion might affect the application of the other.  It declined to apply the “dishonest or criminal act” exclusion, on the ground that it had not been established, as a matter of law, that either PMG or its employees had absconded with the missing bars.  But the court accepted only one alternative explanation for the bars’ disappearance—the possibility that PMG had breached a contract to pay for them.  The court posited, in other words, that Tapper’s had sold the bars under an agreement by which payment was deferred.

Similarly, while the court allowed for the possibility that Tapper’s did not complete a sale of the bars to PMG, it did not explain how, in that case, PMG could have failed to return them without committing a “dishonest or criminal act.”

In short, although the court recognized scenarios that might constitute exceptions to each of the exclusions separately, it did not explain what facts Tapper’s might prove that would render both exclusions inapplicable at the same time.

It’s probably not a coincidence that Michigan is home to a town called “Christmas.” In fact, the Tapper’s case might teach insurers nothing more profound than to avoid having courts resolve coverage disputes after Thanksgiving.  It’s tempting to question a judicial tendency to deck the halls with insurers’ reserves, but, in the spirit of the season, we should at least acknowledge the possibility that, “[o]f all who give and receive gifts, such as they are wisest.”