A.M.I. Diamonds Co v. Hanover Insur Co

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-3152
A.M.I. DIAMONDS COMPANY,
Plaintiff-Appellant,
v.
HANOVER INSURANCE COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 7959—Samuel Der-Yeghiayan, Judge.
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ARGUED JANUARY 18, 2005—DECIDED FEBRUARY 8, 2005
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Before POSNER, EASTERBROOK, and ROVNER, Circuit Judges.
POSNER, Circuit Judge. Wholesale jewelry salesman Maged
Soliman, after a sales visit to a retail jewelry store in a
Chicago suburb, stopped at a gas station to phone his office.
He was careful to park his car just steps away from the
station’s pay phone because in a briefcase wedged between
the driver’s and front passenger’s seats were more than
$100,000 worth of finished diamonds. After finishing his
phone call Soliman opened the door of the car on the
driver’s side to get back in when he was distracted by a
young woman in a minivan a few feet away who asked him
for help with directions. He walked over to her, keeping his
car with its precious cargo in sight. But when he reached
2 No. 04-3152
her, she dropped the map she was holding in her hand and
he stooped to pick it up. At that moment he lost sight of the
car and an accomplice of the woman stole the diamonds,
which were never recovered. The thieves had probably kept
watch on the retail jewelry store, identified Soliman as a
wholesale jewelry salesman, and followed him from the
store to the gas station.
Hanover Insurance Company had issued to Soliman’s
employer, A.M.I. Diamonds, what is called a “Jewelers’
Block Policy,” a standard insurance policy that protects
jewelers against a broad range of risks of loss or damage.
E.M.M.I. Inc. v. Zurich American Ins. Co., 84 P.3d 385, 388-
89 (Cal. 2004); Woods Patchogue Corp. v. Franklin National Ins.
Co., 158 N.E.2d 710, 712-13 (N.Y. 1959); 1 Lee R. Russ &
Thomas F. Segalla, Couch on Insurance § 1:57 (3d ed. 1997
and supp. 2004). If, however, the diamonds are lost “while
in or upon any vehicle,” coverage is forfeited unless “at
the time the loss occurs, there is actually in or upon
such vehicle . . . a permanent employee of the Insured” and
“the property insured is in the close personal custody and
under the direct control of [the employee].” Hanover
refused to pay A.M.I.’s claim and A.M.I. brought this
diversity suit, governed by Illinois law. The district judge
granted summary judgment for the insurer.
Neither party has bothered to consider the purpose of
the exclusions on which the judge based his decision, and as
a result have treated us to a parade of absurdities. A.M.I.
argues that Soliman, even when he was bending over to
pick up the map, was “in or upon” his car because he had
not abandoned it, and Hanover ripostes that yes, he had
temporarily abandoned it. See Revesz v. Excess Ins. Co., 106
Cal. Rptr. 166, 168 (App. 1973). Hanover contends that the
terms “in or upon” must be interpreted literally, but
inconsistently it concedes that had Soliman merely been
No. 04-3152 3
filling his gas tank when the diamonds were stolen
he would have been “in or upon” his car—“actually in
or upon” his car. Star Diamond, Inc. v. Underwriters at Lloyd’s,
965 F. Supp. 763, 767-68 (E.D. Va. 1997); cf. JMP Associates,
Inc. v. St. Paul Fire & Marine Ins. Co., 693 A.2d 832, 839-40
(Md. 1997). Hanover further represents to us that if, while
driving, Soliman had left the diamonds in full view on the
passenger seat beside him and had picked up a hitchhiker
who proceeded to steal the diamonds, the loss would be
covered by the policy, but if they were stolen from his
locked trunk or even from the kind of secret compartment
in which drug couriers conceal illegal drugs, the loss would
not be covered because the diamonds would then not have
been in his “direct custody.”
The purpose of the exclusions is twofold: to curb what
is called “moral hazard” and to limit coverage in high-
risk settings even when there is no moral hazard. Moral
hazard refers to the effect of insurance in causing the
insured to relax the care he takes to safeguard his property
because the loss will be borne in whole or part by the
insurance company. May Department Stores Co. v. Federal Ins.
Co., 305 F.3d 597, 601 (7th Cir. 2002); Alma Cohen & Rajeev
Dehejia, “The Effect of Automobile Insurance and Accident
Liability Laws on Traffic Fatalities,” 47 J.L. & Econ. 357(2004); Steven Shavell, “On Moral Hazard and Insurance,”
93 Q. J. Econ. 541 (1979). (The policy in this case had a
$100,000 limit.) It is the reason insurance companies will not
insure property for more than the property is worth.
Soliman was careless in failing to lock his door when he left
his car, instead relying on his ability to keep it in sight and
rush to the rescue of the diamonds if he saw someone trying
to purloin them. Saritejdiam, Inc. v. Excess Ins. Co., 971 F.2d
910, 912 (2d Cir. 1992); Tivoli Corp. v. Jewelers Mutual Ins. Co.,
932 S.W.2d 704, 707, 710-11 (Tex. App. 1996); Revesz v. Excess
4 No. 04-3152
Ins. Co., supra, 106 Cal. Rptr. at 168; see Transnational Ins.
Co., 785 N.E.2d 816, 817 (Ohio App. 2003); Starfire Diamond
Rings, Ltd. v. Angel [1962] 2 Lloyd’s Rep. 217, 218. His
employer’s failure to equip him with a cellphone was also
careless, but probably did not contribute to the theft, which
did not occur while he was at the pay phone—though if
he’d been calling on a cellphone from within the car he
might not have left the car to help the damsel in apparent
distress, as distinct from walking over to her when he was
already outside the car, having left it to use the pay phone.
Even if there were no moral hazard, an insurer might
want to exclude coverage in especially risky situations;
more precisely, the insured might agree to accept less
coverage in exchange for a reduced premium. Suppose
Soliman had an unforeseen heart attack while driving his
diamond-laden car, was removed unconscious from the
car by paramedics, and the diamonds disappeared. He
would not be at fault, but the policy would not cover the
loss, for when the theft occurred he would neither have
been “actually in or upon” the car nor have had the dia-
monds in his personal custody. See Phil G. Ruvelson, Inc. v.
St. Paul Fire & Marine Ins. Co., 50 N.W.2d 629 (Minn. 1951);
cf. Starfire Diamond Rings, Ltd. v. Angel, supra.
We have identified the purposes of the exclusions; but
as is often the case with contracts and statutes, the text is not
written in terms of its purposes, and in such a case the task
for the court is to interpret the text in light of its purposes.
We can begin by setting aside “or upon,” an archaic refer-
ence to open vehicles (the Jeweler’s Block Policy dates from
the beginning of the twentieth century, E.M.M.I. Inc. v.
Zurich American Ins. Co., supra, 84 P.3d at 388-89; Woods
Patchogue Corp. v. Franklin National Ins. Co., supra, 158 N.E.2d
at 712-13; 1 Russ & Segalla, supra, § 1:57), such as the early
automobile (“horseless carriage”), which had no roof.
No. 04-3152 5
William Kinscherf Co. v. St. Paul Fire & Marine Ins. Co., 254
N.Y.S. 382, 383 (App. Div. 1931) (per curiam); E.M.M.I. Inc.
v. Zurich American Ins. Co., supra, 84 P.3d at 402 (dissenting
opinion); but see Star Diamond, Inc. v. Underwriters at Lloyd’s,
supra, 965 F. Supp. at 767. Hanover was correct to concede,
though it does violence to the policy language, that Soliman
would have been “actually in” his car if he had locked it and
then refueled and gotten back in. There would be no moral
hazard—a driver needs gas whether or not the property
he is carrying in the car is insured, and most gas pumps
nowadays are self-service—and the risk of robbery or
other theft would be little if any greater than if he had
been stopped at a traffic light. A salesman who makes
his rounds in a car, as most salesmen do, cannot avoid
stopping from time to time to refuel, so the insurance policy
would have a gaping hole in it if coverage were suspended
whenever the salesman was refueling. It is different if he
stops for lunch. For he is leaving the car unattended, and
should either take the briefcase containing the diamonds
with him or, better perhaps—now that there are highly
effective auto alarm systems and some cars come equipped
with cryptographic keys that block thieves from starting the
engine even if it could be hotwired—lock it in the trunk. But
it would be absurd to insist that when he leaves his car
merely to refuel he take the briefcase with him, holding it in
one hand while he fills the gas tank with the other.
But Soliman left the car unattended for an optional reason,
without clutching the briefcase or locking it in the
trunk—without even locking the car. By leaving the car as
he did, he no longer was “actually in” the vehicle even in an
extended sense and he no longer had personal custody of
the diamonds. His effort to keep his eye on the car was a
pathetic effort at precaution, when he could have locked the
car with a twist of his wrist. His carelessness, and the risky
6 No. 04-3152
situation that it created, are just the reasons why the policy
contains the exclusions that it does, although, presumably
for the sake of precision, the policy does not contain a
general exclusion for “carelessness” by the insured or the
insured’s agents.
The approach that we’ve sketched, which relates the
meaning of “actually in or upon” to its purpose, is con-
sistent with the cases, e.g., Phil G. Ruvelson, Inc. v. St. Paul
Fire & Marine Ins. Co., supra, 50 N.W.2d at 633-34; Princess
Ring Co. v. Home Ins. Co., 161 A. 292 (R.I. 1932); Williams
v. Fallaize Ins. Agency, Inc., 469 S.E.2d 752, 755 (Ga. App.
1996); Royce Furs, Inc. v. Home Ins. Co., 291 N.Y.S.2d 529(App. Div. 1968); Star Diamond, Inc. v. Underwriters at
Lloyd’s, supra, 965 F. Supp. at 767, with the exception of
E.M.M.I. Inc. v Zurich American Ins. Co., supra. The sales-
man in that case was driving with the jewelry in the trunk
when he heard a clanking sound in the rear of the car. He
stopped without locking the car or turning off the engine,
got out, walked to the rear, crouched down to inspect
the exhaust pipe—and as he did so someone got in and
drove the car away. The court thought the policy ambiguous
because of “or upon,” missing the point that the phrase is a
vestige of an era of open vehicles. The court may also have
been influenced by the fact that it was an unusual case, in
which both the element of moral hazard and the risk of theft
were minimal. In this case they were not.
E.M.M.I. is an outlier. To read “upon” to mean “near”
would open a large loophole of uncertain limits, something
the cases we’ve cited, and others as well, such as Thomas
Noe, Inc. v. Homestead Ins. Co., 173 F.3d 581, 583 (6th Cir.
1999); Equity Diamond Brokers, Inc. v. Transnational Ins. Co.,
785 N.E.2d 816, 819-20 (Ohio App. 2003), and Nissel v.
Certain Underwriters at Lloyd’s of London, 73 Cal. Rptr. 2d 174,
181 (App. 1998), have refused to do. Remember, too, that “in
No. 04-3152 7
or upon” is used twice in the policy exclusion: once with the
diamonds as a subject (the diamonds must be “in or upon”
the vehicle) and once with the salesman as the subject. If “in
or upon” is given the same meaning in both places, and
“upon” means “near,” then the exclusion is inapplicable if
the diamonds are merely near the vehicle, and not in
it—which would be preposterous.
AFFIRMED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-8-05