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It is hard to believe how many cases involve this question or some variation of it, but nevertheless until to date there is no clear-cut precedent.
The basic principle of the standard J.B policies is that non-payment of the consideration for the sale of diamonds is not covered under the policy. This is a commercial loss that is not part of the covered risks. However, in some cases, it later transpires that the buyer of the goods acted with fraudulent intent at the time he received the goods, or in some cases the seller conditioned the sale upon presentation of documents, which were later, ascertained to have been forged.
The common view under Israeli law is that if the insured willingly handed over the diamonds as part of the sale transaction, the non-payment of the consideration or non-return of the goods will not be covered under the policy.
Legal grounds for this view can be found in various Supreme Court judgements:
In C.A 497/85 Asher Eshel v. Philip Gable Wright, PDI 42(1), 89 the court ruled that a covered loss should relate to a physical loss or damage to the insured property itself and not to its proceeds. The insured should prove that he had not willingly given up his rights in the property.
In C.A. 449/89 Abraham Fluke & others v. Philip Gable Wright, PDI 46(2),92 the broker did not pay for the diamonds he had received from the insured for sale nor did he return them.
He was eventually convicted of stealing the diamonds. The question was whether, in view of the fact that the broker had fraudulent intent at the time he had received the diamonds from the insured, the transaction should be regarded as void, namely that the transfer of the diamonds cannot be regarded as entrustment. The court ruled that the proper test is the intention of the insured at the time he handed over the diamonds and not the intention of the party who received the diamonds. Since the insured willingly handed over the diamonds to the broker, as part of the sales transaction, the loss is not covered under the policy.
In C.A 32/82 Griefman v. Lloyds Underwriters, the court emphasized the difference between a loss of the insured property and a commercial loss resulting from the contractual relationship between the insured and the party to whom the diamonds were handed over. The court stated that although the policy is an All Risk policy, nevertheless only loss or damage to the insured property itself is covered and not any consequential loss or commercial one.
However, this position may be somewhat weakened in view of the court ruling in C.A 1569/93 Yosi Maya v. Panford (Israel) Ltd. This case may have significant implications to the coverage under J.B policies, although it does not involve insurance issues but was merely a dispute between diamonteers.
Maya purchased a stock of valuable diamonds from various diamonteers in consideration for post-dated cheques. Soon thereafter, Maya left the country and appointed Mr. Shaul to approach each of the diamonteers and offer a settlement according to which they will receive some of the diamonds - with a value, which was significantly lower than the actual value of the purchased diamonds - and in consideration agree waiver of the full debt owed to them by Maya.
The diamonteers tried to negotiate with Mr. Shaul, but finally agreed to Maya's settlement offer and signed a waiver document. Immediately after receipt of the said diamonds from Maya, the diamonteers sent a letter to Maya notifying him that they had cancelled the original diamond purchase agreements as well as the waiver documents, alleging that both sets of agreements were signed under duress and extortion.
The court ruled that the diamonteers were entitled to revoke the waiver they had signed due to the defence of duress. Moreover, Maya had fraudulently purchased the diamonds and therefore these transactions arevoid. If the sales transaction are regarded as void, there is ground to argue that the loss is not of the consideration of the diamonds but rather a loss of the diamonds themselves as a result of infidelity.
Let us assume that the diamonteers - all or some of them - had Jewelers Block insurance. In such a case, no doubt that they would demand indemnification from their isurers rather than entering into negotiations with Maya. If, indeed, it can be proved that Maya had fraudulently received the diamonds, the diamonteers might be able to allege that the sales transaction had been legally repudiated, that no sales transaction was concluded, and therefore the loss is covered under the J.B. policy.
The legal answer to this important question is therefore still unclear.
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