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Spirit of Excellence, Ltd. v. Intercargo Insurance Company

September 26, 2002


Appeal from the Circuit Court of Cook County. Honorable James Henry, Judge Presiding.

The opinion of the court was delivered by: Justice Hartman


Plaintiff-appellant and cross-appellee, Spirit of Excellence (SOE), through a trustee in bankruptcy, appeals the grant of a motion to reconsider a prior summary judgment favoring SOE, and entry of summary judgment for defendant-appellee and cross-appellant, Intercargo Insurance Company (Intercargo). SOE also appeals the order in favor of defendant-appellee, Abaco International Shippers, Inc. (Abaco), dismissing SOE's third-amended complaint. On cross-appeal, Intercargo challenges the circuit court's finding that SOE had an insurable interest in certain property under its policy.

The issues to be considered on appeal will be limited to those concerned with SOE's standing and damages and, on cross-appeal, to the circuit court's grant of summary judgment for SOE on the insurable interest question.

As recounted by SOE, the final orders entered in this case terminated years of litigation, including motions to dismiss, motions in limine, twenty-seven depositions, motions for summary judgment and other proceedings. Only those facts essential to deciding this appeal, gleaned from the described proceedings, need be set forth.

On December 10, 1994, two Russian companies, Too Objective (Objective) and Too Runo (Runo), contracted to export used American vehicles to Rostov, Russia. Runo and Objective agreed to buy 200 to 300 used automobiles in the United States, remove the engines and transmissions and ship them to Russia, where they would be reassembled (the project). The contract stated that Objective, the "supplier," would provide all necessary documents, including insurance policies. Runo would prepay all project funds, including all costs for the purchase of the automobiles, their disassembly, packing them into ocean containers, transportation and shipping, equipment for reassembly and insurance. After the vehicles were reassembled and sold in Russia, Objective would get 20% of the profits and Alexandre Grigorian, Objective's principal, would receive 10 percent.

Previously, SOE, an exporter of goods from the United States to Russia, contracted in writing with Objective and Grigorian, nonparties to this lawsuit, for the purpose of introducing "goods [consisting of used automobiles] and services provided by [SOE] into the consumer market of Russia as well as export of goods and services from Russia" in furtherance of the project. Objective would act as a "middleman" by facilitating the transactions with Runo in Russia. The contract made SOE responsible for "[a]ppropriately packing the goods," and that "[t]he packing should provide for the safety of the goods and prevention [of] their damages at transport ***." Objective would arrange for prepayments by Runo of the goods by means of non-cash bank transfers to SOE's account. Upon the shipment of goods, SOE was required to provide Objective with a copy of the insurance policy and a statement of the total insurance amount.

Runo prepaid SOE for all the following costs of sale: (1) SOE's purchase cost for the used cars in the United States; (2) SOE's costs in disassembling the automobiles; (3) SOE's costs in paying a shipper selected by SOE to have the cars packed within ocean containers for transportation to Russia; and (4) all the costs associated with transporting by rail and ocean, and insuring the cars. Runo paid SOE in advance for these costs by wiring funds directly to SOE, in the amount of $5,000,000.

In early 1995, Runo began wiring funds from Doninvest Bank in Russia totaling $100,000 to $250,000 in weekly stages over a four-month period directly to SOE's bank account. Grigorian and Oleg Gryzlov, Runo's principal, determined the criteria for purchasing the vehicles, including the year, make, model and mileage. SOE began buying the specified vehicles from dealerships and auctions. Separate commercial invoices reflecting monetary values of the automobile bodies to Runo and the engines and fluids to two other Russian consignees, Too Leks (Leks) and Too Kristall (Kristall), indicated that these goods were sold to Runo and the other parties in order to present proof of possession to Russian customs agents upon their arrival in Rostov.

SOE hired Abaco, an Illinois corporation engaged in the business of stow, design and building of custom containers for the overseas transport of goods to foreign destinations, to design and custom build containers sufficient to withstand the normal rigors of truck, rail and ocean transit. Abaco also arranged the bookings with the steamship lines in a freight forwarding capacity. SOE had no written contract with Abaco, but previously had done business with it for other shipping projects.

SOE directed Abaco to place four cars in each container for a total of 81 containers. Although the titles of the vehicles initially were in SOE's name, SOE issued its commercial invoices evidencing the vehicle sales to Runo prior to transportation of each container. The commercial invoices do not state the precise terms of sale, however, according to the deposition testimony of SOE's president, Michael Vilner, there was an oral agreement that the sale was on a "CIF" basis, including cost, insurance and freight prepaid by the purchaser, Runo. The prepayment of all costs also had the effect of rendering the sale CIF.

Abaco held the Intercargo open marine policy which allowed the privilege of countersigning certificates of insurance as part of a profit sharing agreement, to be issued strictly in accordance with the terms and conditions of the policy. Abaco issued 81 such certificates to SOE, showing their issuance "for the account of Abaco" and loss payable to SOE. Most of the containers each were insured in the amounts of $17,600 or $17,995.

The containers were transported in a series of shipments over a five-month period, between February 7, 1995 and July 7, 1995. The first container departed Abaco's premises by truck and rail transit to Montreal, Canada, where it was received by Cast Lines, which issued bills of lading listing Runo as the consignee. The bills of lading state that "[s]ubject to Section 7 of conditions of applicable bill of lading, if the shipment is to be delivered to the consignee without recourse on the consignor, the consignor shall sign the following statement." The area provided for the consignor's signature was left blank. The bills of lading noted that charges for shipment were to be prepaid. In addition, the bills of lading defined "loss" as "shortage, non-delivery, misdelivery, damage, deterioration, and all physical or consequential loss or damage of any nature whatsoever to or in connection with GOODS or any other thing referred to."

The first containers began arriving in Rostov in April 1995, and were accepted by Runo. There was minor damage to the automobiles in the first two containers opened, but significant damage to the vehicles was observed in the next 79 containers. There is no evidence in the record, however, that Runo ever rejected any shipped vehicle.

Konstantin Kaymakov, president of Tamga-Ug Insurance Company in Rostov, agent for the insurance company listed on Intercargo's insurance certificates, testified by deposition that he is familiar with methods of packing and securing automobiles for shipment. Kaymakov testified that Runo contacted him in April 1995 about the damaged vehicles. He surveyed all the containers and prepared reports of damages, including rubbed off paint, scratches, dents, broken windows and mirrors and dented bumpers. From his observations, Kaymakov concluded that the packaging of the vehicles was improper, as evidenced by broken wooden planks supporting vehicles on the upper tiers and torn nylon straps securing the automobiles. In further support of his opinion was the fact that the automobiles were shipped at different times over various routes, but the damages were similar. Kaymakov limited his communication to Runo officials, who paid him for the surveys. He did not analyze the cost of repairing the vehicles.

Alexander Bondarev, a representative of Runo, testified by deposition that Runo hired various companies in Russia to repair the damages to the cars, which had been noted in the survey reports upon arrival, and Runo paid for all the repairs. All the invoices for these repairs are addressed to Runo as the party which ordered and paid for the repairs. After the repairs were completed, the vehicles were sold by Runo to purchasers in Russia. Thereafter, Runo communicated directly to Intercargo its position that "all losses according to the Contract was incured [sic] by company 'Runo,'" on April 12, 1996.

Grigorian testified by deposition that Runo and SOE conducted their business through Objective. Runo decided how much insurance to purchase. Runo paid a total of $1.9 million for all the repairs made and wanted Objective to reimburse it in that amount. An assignment of claims from Runo to Objective, dated March 20, 2000, assigned all legal and equitable rights, claims, demands, actions, causes of action, suits, judgments and orders against Abaco and Intercargo arising out of the damages to the automobiles shipped in the 81 containers. SOE paid Grigorian $150,000 for his project services.

Michael Vilner, president of SOE, testified by deposition that SOE conducts its business on a consignment basis. He met with Grigorian, Gryzlov and Mark Von Ebers, general manager of Abaco, where insurance coverage was discussed. Von Ebers explained the concept of partial insurance, which provides for the recovery of loss of only that percentage covered. According to Vilner, Abaco issued the insurance certificates after the vehicles were packed into the containers. Vilner testified that he instructed Von Ebers to provide 50% insurance coverage for the shipments, as requested by the consignee, Runo.

Vilner claimed he did not know if money wired to SOE came from Objective or Runo. SOE had no contact with Intercargo during the packing process. Grigorian and Gryzlov called Vilner immediately upon discovering damage to the vehicles. SOE was to have filed the insurance claim, but Runo possessed the insurance certificates. After Vilner received the initial telephone call regarding damages, he contacted Von Ebers, who gave Vilner the telephone number of Tamga-Ug, the local insurance representative in Rostov. Vilner telephoned Grigorian and gave him the information. Vilner did not know how many containers were shipped after the initial report of damages. He was told by Von Ebers that the vehicles were packaged correctly.

According to Vilner, SOE profited from the project in the amount of $365,000. SOE and Abaco both filed for bankruptcy in 1997. Objective, Runo's assignee, filed a bankruptcy claim against SOE in the amount of $1.9 million.

Von Ebers, a 20-year Abaco employee, testified by deposition that when the containers left Abaco's warehouse, he was given bills of sale for the cars to satisfy U.S. customs requirements for proof of ownership, which listed SOE as the owner. Regarding procurement of insurance for SOE, Von Ebers did not deal directly with Intercargo; rather, all insurance issues were handled by Trade Insurance Services, Abaco's insurance broker.

Alan Spear, of Intercargo, testified by deposition that he is a marine claims adjuster and loss prevention analyst for Intercargo. He performed a "failure analysis" for this project. A February 7, 1996 letter from Spear to Runo and SOE representatives acknowledged the receipt of 90 claims. Spear stated that the insured knew that a pattern of loss was occurring from April 28, 1995, and did nothing to change the circumstances. Ten shipments may have left after April 29, 1995. Spear testified that he was told by Von Ebers that the damage was minor, so the method of packaging was not changed. If he had known about the damage, he would have stopped the last ten shipments.

An April 9, 1996 report prepared by Spear noted that as the damaged vehicles were unloaded from their containers, they were taken to an automotive plant where the engines were re-installed. During this time, the cars were inspected by a repair company, Transtourservice, which developed estimates for the repairs. The Transtourservice estimates were between 30% and 50% over the amount of average prices. Transtourservice made the repairs. Runo sold the repaired cars at random prices, but did not profit because the community had heard about the damages.

A letter from Spear to SOE, dated May 8, 1996, denied coverage by Intercargo for all claims due to the following: (1) late notice of the claims; (2) the named insured, SOE, had no insurable interest in the goods at the time of loss; (3) an exclusion for improper packing applied; (4) coverage for damages of goods shipped to Russia ceased 30 days after arrival of the goods in port; (5) an exclusion for used merchandise applied; (6) SOE failed to make immediate claims against the carriers; (7) SOE's claims were time-barred; (8) the certificates were void because SOE breached its obligation of utmost good faith and fair dealing with Intercargo; and (9) SOE vastly underinsured the shipments.

On May 20, 1996, SOE filed its initial complaint against Intercargo for breach of contract, and later added Abaco as a defendant in an amended complaint, alleging negligence. In its third-amended complaint, SOE sought damages for repair ...

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