The U.S. Court of Appeals for the Sixth Circuit, affirming a district court decision, has found that a businessowners special insurance policy did not provide coverage for the defense of a fraud counterclaim asserted against the shipper of a missing 5.56-carat pink diamond.

The Case
John Stafford and U.S. Diamond & Gold, doing business as Stafford's Jewelers (together, “Stafford”), shipped a 5.56-carat pink diamond to Julius Klein Diamonds (“JKD”). Stafford packaged the diamond and arranged for The Brinks Company to provide secured transportation from Dayton, Ohio, to New York City. JKD received the package the same day Stafford shipped it. JKD claimed that upon opening the package, however, the diamond was missing.

Stafford sued JKD for damages related to the loss of the diamond. JKD counterclaimed, alleging that Stafford had made false representations concerning the shipment (in particular, JKD contended that Stafford never had shipped the pink diamond at all).

The case went to trial, and a jury found in Stafford's favor, awarding over $1.7 million in damages. Stafford estimated the cost of successfully defending against JKD's counterclaim amounted to more than $1 million.

Stafford contended that its insurance policy required that its insurer, Jewelers Mutual Insurance Company, defend against JKD's counterclaim, but Jewelers Mutual disclaimed coverage. Stafford filed suit, alleging that Jewelers Mutual had breached the parties' insurance agreement and had acted in bad faith when it refused to defend against JKD's counterclaim.

Jewelers Mutual moved for judgment on the pleadings, the motion was granted, and Stafford's complaint was dismissed. Stafford appealed.

The Policy
The policy provided:

COVERAGE P—PERSONAL INJURY LIABILITY/ADVERTISING INJURY LIABILITY
“We” pay all sums which an “insured” becomes legally obligated to pay as “damages” due to “personal injury” or “advertising injury” to which this insurance applies.
1. “We” cover:
a. “personal injury” arising out of an offense committed in the course of “your” business, excluding advertising, publishing, broadcasting, or telecasting done by “you” or on “your” behalf; and
b. “advertising injury” arising out of an offense committed in the course of advertising “your” goods, products, or services.
2. The “personal injury” or “advertising injury” offense must be committed:
a. within the “coverage territory”; and
b. during the policy period.

The policy defined “personal injury” as:

“Personal injury” means injury (other than “bodily injury”, “property damage”, or “advertising injury”) arising out of one or more of the following offenses:
a. oral or written publication of material:
1) that slanders or libels a person or organization;
2) that disparages a person's or an organization's goods, products, or services; or
3)that violates a person's right of privacy;
b. false arrest, detention, or imprisonment;
c. malicious prosecution; or
d. wrongful entry into, wrongful eviction from, or invasion of the right of private occupancy of a room, dwelling, or premises that a person occupies. This offense must be committed by or on behalf of the owner, landlord, or lessor of the room, dwelling, or premises.

The policy defined “advertising injury” as:

“Advertising injury” means injury (other than “bodily injury”, “property damage”, or “personal injury”) arising out of one or more of the following offenses:
a. oral or written publication of material:
1) that slanders or libels a person or organization;
2) that disparages a person's or organization's goods, products, or services; or
3) that violates a person's right of privacy.
b. misappropriation of advertising ideas or style of doing business.
c. infringement of copyright, title, slogan, trademark, or trade name.

JKD's Counterclaim
JKD's counterclaim alleged:

27. Repeats and realleges the allegations of paragraphs 1–21 above, as if fully set forth hereat.

28. Plaintiffs John Stafford (“Stafford”) and U.S. Diamond & Gold d/b/a Stafford's Jewelers (“Stafford's Jewelers”) made false representations to JKD concerning the pink diamond which is the subject of this action (the “Pink Diamond”), which plaintiffs allegedly shipped to JKD, unsolicited and on approval, from their jewelry store in Ohio to JKD's offices in New York City.

29. Specifically, on February 14, 2006, after a Brink's shipping bag was delivered to JKD's offices in New York City, and the UPS box inside it proved to be empty when JKD opened it, plaintiff Stafford (acting individually and on behalf of plaintiff Stafford's Jewelers) falsely represented to JKD, in a telephone conversation with JKD's employee Chaim Eichenstain, that plaintiffs had placed the Pink Diamond inside the UPS box, and had placed the UPS box containing the Pink Diamond inside the Brink's shipping bag, prior to shipment, and falsely suggested to JKD that the Brink's shipping bag had been tampered with during the shipment process.

30. Upon information and belief, plaintiffs knew the falsity of these representations when they were made.

31. Upon information and belief, plaintiffs made these false representations to JKD pursuant to an insurance fraud scheme, and made them with the intent of deceiving and defrauding JKD, and/or plaintiffs' insurer, and/or Brink's.

32. JKD justifiably and rightly relied upon plaintiffs' false representations to their detriment, but undertaking various actions and incurring various expenses that they would not have undertaken or incurred absent plaintiffs' false representations.

33. Plaintiffs' false representations have caused JKD to suffer actual damages in an amount to be determined at trial, but believed to be in excess of $25,000.00.

34. Plaintiffs' false representations to JKD were intentional, knowing, malicious, reckless, and in conscious disregard of JKD's rights. Accordingly, JKD is entitled to recover punitive damages against plaintiffs in an amount to be determined at trial, but in excess of $25,000.00, as well as attorneys' fees and costs and pre- and post-judgment interest.

The Circuit Court's Decision
The circuit court affirmed.

In its decision, it ruled that the district court had concluded correctly that the policy did not provide coverage, even arguably, for JKD's counterclaim.

The circuit court found that JKD's counterclaim alleged that Stafford had committed fraud – and, in fact, that it “precisely track[ed] the elements for a fraud claim under Ohio law.” Indeed, the circuit court observed, “Stafford consistently referred to the claim as one for fraud” during the case. “Clearly JKD intended to plead a fraud claim, and Stafford considered it as such.”

Because Stafford took the position that JKD's counterclaim involved nothing but fraud throughout the case, and because Stafford then prevailed on that claim when it was presented to a jury, the Sixth Circuit ruled that it could not assert that the counterclaim instead alleged disparagement, defamation, or negligent misrepresentation. The circuit court stated that Stafford could not “play[ ] fast and loose with the courts, blow[ ] hot and cold as the occasion demands, [or] hav[e][its] cake and eat it too.”

The Sixth Circuit next decided that the counterclaim did not fall within the policy's provisions covering personal injury or advertising injury.

It did not constitute a “personal injury” under the policy because JKD's allegations did “not align with the requirements for personal-injury coverage under section P.” To begin with, the circuit court stated, the counterclaim did not allege (and Stafford did not argue otherwise) a claim for “false arrest, detention, or imprisonment; malicious prosecution; or wrongful entry into, eviction from, or invasion of the right to private occupancy of a room, dwelling, or premises.” It also made no allegations that oral or written publication of material had slandered JKD, had disparaged JKD's services, or had violated JKD's right of privacy.

Instead, the circuit court emphasized, the counterclaim alleged only that Stafford had “made false representations to JKD concerning the pink diamond….” (Emphasis added). Importantly, the circuit court concluded, the counterclaim did not allege that Stafford had made false representations about anything but the pink diamond, and did not include allegations that Stafford had said anything about JKD or its services.

The case is Stafford v. Jewelers Mutual Ins. Co., No. 13–3385 (6th Cir. Jan. 21, 2014).

Editor's note: Steven A. Meyerowitz, Esq., is a director of FC&S Legal. FC&S and PC360 are both owned by Summit Professional Networks.

Originally published on FC&S Legal: The Insurance Coverage Law Information Center. FC&S Legal is the industry's ONLY single-source, comprehensive portal developed specifically for insurance coverage law professionals. To find out more, visit www.fcandslegal.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent professional person should be sought.

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