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July 7, 1993

ERWIN PERZY, Plaintiff,

The opinion of the court was delivered by: MILTON I. SHADUR

 Erwin Perzy ("Perzy") brought suit under the federal admiralty jurisdiction against Intercargo Corporation ("Intercargo," formerly doing business as International Cargo & Surety Insurance Company), charging it with breach of its obligations under a marine insurance contract and advancing a supplemental jurisdiction claim (see 28 U.S.C. § 1367) for attorneys' fees for vexatious and bad faith denial of his insurance claim pursuant to a section of the Illinois Insurance Code, 215 ILCS 5/155 ("Section 155"). Both sides now move for summary judgment. For the reasons stated in this memorandum opinion and order, Intercargo's motion is denied, while Perzy's motion is granted in principal part but denied as to the remainder.

 Rule 56 Standards

 Rule 56 principles impose on each movant the burden of establishing the lack of a genuine issue of material fact ( Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)). For that purpose this Court is "not required to draw every conceivable inference from the record--only those inferences that are reasonable"--in the light most favorable to the nonmovant ( Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991) (citations omitted)). Where as here cross-motions are involved, that principle thus demands a dual perspective--one that this Court has often described as Janus-like--that sometimes involves the denial of both motions.

 Under the Illinois case law allocating the burden of proof in insurance cases such as this, "existence of coverage is an essential element of the insured's case, and the insured has the burden of proving that his loss falls within the terms of the policy" ( St. Michael's Orthodox Catholic Church v. Preferred Risk Mut. Ins. Co., 146 Ill. App. 3d 107, 109, 496 N.E.2d 1176, 1178, 100 Ill. Dec. 111 (1st Dist. 1986)). On the other hand, the burden then rests with the insurer to show that it is free from doubt that the insured's claim falls within an exclusion from policy coverage (id.; Dungey v. Haines & Britton, Ltd., 224 Ill. App. 3d 1091, 1094, 587 N.E.2d 86, 88, 167 Ill. Dec. 204 (5th Dist. 1992)).

 Citations to the Parties' Submissions

 This District Court's General Rule ("GR") 12(m) and 12(n) require factual statements in support of and in opposition to Rule 56 motions, and both sides have tendered such statements. Intercargo's statement in support of its motion is cited "D. 12(m) P --," while Perzy's responsive statement is cited "P. 12(n) P --." Perzy's statement of other facts in support of his cross-motion is cited "P. 12(m) P --," and Intercargo's responsive statement is cited "D. 12(n) P --." To minimize confusion, the numbering of the statements in support of and in opposition to Perzy's cross-motion begins at the point where the statements in support of and in opposition to Intercargo's motion left off. *fn1" At the end of its GR 12(n) statement Intercargo also filed a two-paragraph statement of additional assertedly uncontested material facts, cited here as "D. 12(n) Add. P --."

 Finally, this Court has followed its regular procedure in dealing with cross-motions under Rule 56: Each party filed a memorandum in support of his or its motion, then a response to the other party's opening memorandum. Accordingly this opinion will cite those memoranda by following "P. Mem." or "D. Mem." with a roman numeral "I" or "II," followed by the page number.


 Austrian citizen Perzy is in the business of manufacturing and selling Schneekugeln--"snowball" paperweights consisting of a clear globe containing a miniature scene, filled with water and a particulate that, when shaken, looks like falling snow (D. 12(m) P 1, Perzy Aff. P 1). In October 1990 Perzy shipped 20 pallets of Schneekugeln to Marijan Wregg ("Wregg") of Wregg Imports in Tustin, California (D. 12(m) P 19). Because many of the Schneekugeln had plastic bases rather than the wooden bases Wregg had ordered, Perzy agreed to Wregg's request to be allowed to return them if he could not sell them during the Christmas season (D. 12(m) P 21, Perzy Aff. P 2). Wregg sold fewer than half of the Schneekugeln, and in February 1991 he asked Kathleen Tansey-Riggs ("Tansey-Riggs"), who does business as a customs broker freight forwarder under the name "Tansey & Riggs," to arrange for shipment and insurance of the Schneekugeln (D. 12(m) P 5, Wregg Aff. P 2).

 When the Schneekugeln arrived in Vienna they were in a "frozen and damaged condition" (D. 12(m) P 31). *fn2" Perzy communicated with Tansey-Riggs and Intercargo's European representative Gellatly Hankey Marine Services GmbH ("Gellatly Hankey") to advise them of the loss (P. 12(m) P 6). Arrangements were made for a Lloyd's representative to act for Intercargo as an insurance surveyor to examine the shipment. After examination the surveyor characterized the shipment as "a total loss" (D. Ex. 12, Spear Aff. Ex. 1 at 4). *fn3" On August 5, 1991 Intercargo formally responded to Perzy's claim by denying it (P. Mem. I-6 and its Ex. 2).

 Perzy now seeks summary judgment on both his claims: breach of insurance agreement and vexatious refusal to pay. Intercargo's cross-motion attacks the latter claim both on the merits and in terms of the reasonableness of Intercargo's denial of Perzy's claim of loss, while its attack on the breach of contract claim asserts (D. Mem. I-1):

(a) Coverage is excluded for inherent vice, as provided in the insurance policy and certificate;
(b) Coverage is excluded for improper packaging as provided in the insurance policy and certificate; and
(c) Coverage is excluded because Perzy is making an exaggerated claim in violation of policy terms and has breached his duty that he owes to his insurer under the admiralty doctrine in uberrimae fidei.

 Applicable Law

 As stated at the outset of this opinion, this action has invoked the court's admiralty jurisdiction. Under that jurisdiction the marine insurance policy is normally construed--absent any rule of established federal admiralty law--in accordance with state insurance law ( Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 316-21, 99 L. Ed. 337, 75 S. Ct. 368 (1955)). In this instance the open cargo policy under which Tansey-Riggs issued the insurance Certificate (the "Policy") included a clause providing that "all terms and conditions of this insurance shall be governed by Illinois law" (D. Ex. 3 at 3b). And Perzy's Certificate stated (D. Ex. 4 at 1):

This certificate is issued subject to the standard International Cargo & Surety Insurance Company open cargo policy, which is incorporated herein by reference. To the extent that any terms or conditions in this certificate are inconsistent with the standard policy, the standard policy shall govern the rights and duties of all parties subject to the contract of insurance.

 Although the parties' memoranda did not specifically address the choice of law issue, *fn4" they did address the question whether the terms of the Policy applied to Perzy's insurance coverage. Perzy argues that the Policy terms are not applicable because it was never sent to him (P. Mem. I-9, citing Western Casualty & Surety Co. v. Harris Petroleum Co., 220 F. Supp. 952, 956 (S. D. Cal. 1963) and Hartford Accident & Indem. Co. v. Shaw, 273 F.2d 133, 138 (8th Cir. 1959)). Those cases, however, involve endorsements missing from what is otherwise a self-contained policy of insurance (see Georgetown Assoc. v. Cherokee Ins. Co., 535 F. Supp. 912, 913-14 (N.D. Ill. 1982)). By contrast a certificate of insurance is by definition not self-contained. Instead the certificate and the master policy upon which it is issued together constitute the contract of insurance ( J.M. Corbett Co. v. Insurance Co. of N. Am., 43 Ill. App. 3d 624, 626, 357 N.E.2d 125, 127, 2 Ill. Dec. 148 (1st Dist. 1976)). Thus an insured who receives a certificate of insurance should expect that terms affecting the scope of coverage are contained in a separate master policy (13A John Appleman and Jean Appleman, Insurance Law & Practice ["Appleman"] § 7530 (1976 and 1992 pocket part)).

 Where as here the parties have included a choice of law clause in a maritime contract, the law of the chosen jurisdiction will be applied unless (1) that jurisdiction has no substantial relationship to the parties or the transaction or (2) that jurisdiction's law conflicts with the fundamental purposes of maritime law ( Stoot v. Fluor Drilling Serv. Inc., 851 F.2d 1514, 1517 (5th Cir. 1988); King v. Allstate Ins. Co., 906 F.2d 1537, 1540 (11th Cir. 1990)). Hence Illinois law will provide the rules of decision as to the interpretation of coverage under the Policy in this case.

 Inherent Vice

 Intercargo argues that coverage for damage to the Schneekugeln due to freezing is excluded under the "inherent vice" exception included in both the Certificate and the Policy (D. Mem. I-5, D. Ex. 3 at 2, D. Ex. P 11.VI and page 3b)). Intercargo insists that the freezing was a result of the "inherent nature" of the Schneekugeln and that the freezing was "inevitable" (D. Mem. I-6).

 Inherent vice is "a quality of the goods that causes damage to the goods during transport even in the absence of negligence" (Mulay Plastics, Inc. v. Grand Trunk W. R.R., 822 F.2d 676, 683 (7th Cir. 1987)). Properties with an inherent vice "carry within themselves the seeds of their own destruction" (Essex House v. St. Paul Fire & Marine Ins. Co., 404 F. Supp. 978, 991 (S.D. Ohio 1975)). "Foods rot; iron rusts; some wines simply do not travel well" ( Mulay Plastics, 822 F.2d at 683); see also Employers Casualty Co. v. Holm, 393 S.W.2d 363, 367 (Tex. Civ. App. 1965) ("The term 'inherent vice' as a cause of loss not covered by the policy, does not relate to an extraneous cause but to a loss entirely from internal decomposition or some quality which brings about its own injury or destruction"). Loss from inherent vice must be "inevitable, certain and nonfortuitous," even if the timing of the loss may not be calculable (Andrew Hecker, Jr. and M. Jane Goode, Wear and Tear, Inherent Vice, Deterioration, Etc.: The Multi-Faceted All-Risk Exclusions, 21 Tort & Ins. L.J. 634, 640 (1986)). As Mellon v. Federal Ins. Co. 14 F.2d 997, 1002 (S.D. N.Y. 1926) explained:

It must always be borne in mind that the policies are of insurance and not of warranty of soundness. . . . The words "other causes of whatsoever nature" cover, in my opinion, "all risks"; but the perils insured against are risks.

 Quoting Lord Sumner in British & Foreign Marine Co. v. Gaunt, 2 App. D.C. 41, 57 (1921), Mellon, id. continued:

The expression ["all risks"] does not cover inherent vice or mere wear and tear. . . . It covers a risk, not a certainty; it is something which happens to the subject-matter from without, not the natural behavior of that subject-matter, being what it is, in the circumstances under which it is carried.

 Intercargo's argument really blurs the distinction between true inevitability--something that is bound to occur even in the absence of external forces ("food rots")--or something that is bound to occur because the external forces are always present ("iron rusts") and, by contrast, a quality that makes property vulnerable to damage only if a non-inevitable external force is in fact encountered. Freezing and destruction of the Schneekugeln scarcely seem to be a matter of uninsurable certainty. Left to themselves on a shelf or on someone's desktop, Schneekugeln will not freeze and break. In ...

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