Article

Insurance; Examination; Cover Letter; Bill of Lading Date.

Notes:

This decade-old case was tried before the U.S. District Court for the Southern District of New York, Pollack, J., who, following a bench trial, rendered judgment for six banks against their insurer in the principal amount of US$ 47.1 million with per diem interest from 1 January 1987 of $10,892 for a total of $2,975,000. The banks were Chemical Bank, Banque Paribas, American Express Bank Ltd., NatWest Bank N.A., Rabobank Nederland, and European American Bank. A Columbian coffee exporter and US importer (Andina) perpetrated a fraud which cost six financing banks $94.5 million in losses over fraudulent truck waybills which were presented against forty-eight LCs.

The banks had maintained a profitable relationship with the importer/applicant which has established an excellent track record. As a condition of financing, the banks had required the importer to obtain a marine open cargo insurance policy issued by insurer which expressly extended coverage to losses caused by fraudulent bills of lading and the Banker's Endorsements expressly provided that the Bank's interest would not be impaired by an act or omission of the importer.

When the fraud was discovered, the banks filed timely notices of loss and provided the insurer with all material information regarding the fraud.

According to the court,

The subsequent chapter of this case concerns the conduct of Affiliated [the insurer] in preparation for trial, specifically its efforts to concoct a defense to the Banks' claims. In 1990, Affiliated retained the firm of Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello ("Podvey, Sachs") as its sole counsel in the instant litigation. As Affiliated readily admitted at trial, at that time, Affiliated had no witnesses to help advance a cognizable defense. Among its numerous attempted theories, Affiliated reasoned that proof of Andina's and the Banks' complicity in the fraud would bar recovery under the Policy's "dishonesty" clause. To that end, between 1990 and 1994, Affiliated engaged in secret, questionable negotiations to induce Ruben Echeverria and his brothers, Luis and Jorge Hernan [principals of the Columbian exporter], to impute to the Banks and Andina knowledge of and participation in the fraud. Affiliated's pretrial strategy, which is summarized below, at a minimum casts doubt on the management's integrity in its attempt to find a cognizable defense.

As to the allegation that the banks had been engaged in fraud, the court found that "Affiliated failed to produce a scintilla of evidence that the Banks knew of or participated in the fraud. The evidence overwhelmingly shows that the Banks had no inkling whatsoever, prior to the discovery of the fraud that [the exporter] created and presented false bills of lading in order to draw down on the letters of credit.

A specific LC issue in the case was that many of the cover letters on the drawing documents were dated before the dates on the bills of lading. The insurer had argued that this fact gave the banks notice of fraud. Since the cover letters were not required by the LCs, the court ruled that "[t]he letter of credit document examiners at each Bank were required to check only the Draw Documents for their compliance with the letters of credit." It concluded that "[t]he dates of the truck bills of lading or the letters transmitting the same did not put any Bank on notice of any misconduct."

The court also concluded that the insurer's "contentions concerning the Bank's compliance with the law or practices governing letters of credit is not relevant in determining whether there is a covered loss under the Affiliated Policy. Even if the Banks had a duty to Affiliated to comply with the law or practices governing documentary letters of credit, the Banks did comply."

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