The Hindu Business Line : `Colonel West' and his electronic exploits

Impersonation is a common trick, much like what the big bad wolf did in the Red Riding Hood story. But not only little girls, big companies too can fall for the con game, as the Federal Insurance Co vs Ace Property & Casualty Co case, decided by the US Court of Appeals for the Fifth Circuit on October 21, shows. Read on.

"EDS, a global technology services company that regularly provided computer and electronic services for the North Atlantic Treaty Organization (NATO), commenced doing business with someone who identified himself as `Colonel West'. West told EDS that he was in charge of a covert NATO procurement project that would involve the purchase of sophisticated electronic equipment with expenditures of $80-100 billion, and West engaged EDS to become general contractor of that endeavour."

With $20.7 billion in 2004 revenue, EDS is ranked 95th on the Fortune 500, informs www.eds.com.

Resuming the story, EDS invited Akai Musical Instrument Corporation and Pioneer New Media Technologies Inc to bid on the project.

"EDS represented to Akai and Pioneer that the bidding process required them to ship sample products to NATO representatives, who would have the right to destroy the products as part of their testing procedures. Relying on EDS's representations and hoping that they would be chosen as providers and consequently reap substantial profits, perhaps billions of dollars, from the NATO project, Akai and Pioneer signed Test to Destruction Authorization Agreements and shipped property worth millions of dollars, supposedly to NATO representatives."

Not one-off, these were, because shipments had occurred `over the course of three years'! Then came the realisation that the NATO operation was a fraud perpetrated by `Colonel West' who was neither a military officer nor affiliated with NATO.

"The equipment shipped by Akai and Pioneer was not received or used by NATO personnel, but was used or sold by West for commercial purposes or his private gain. Subsequently, Akai sued EDS for, inter alia, negligent misrepresentations regarding the fraudulent scheme. Pioneer intervened."

Ace was the insurance company that had insured EDS under two commercial general liability policies.

So, EDS called on Ace to bear the liability. But Ace refused, saying that the alleged negligent misrepresentations were not `occurrences' under the commercial general liability policies. Then? "EDS eventually settled the suit, and its excess professional liability insurance carrier, Federal, paid the defence and indemnity costs in excess of EDS's deductible."

Federal asserted subrogation rights and brought this suit against Ace "seeking declaratory relief and damages of more than $5 million because of Ace's refusal to defend or cover the claims against EDS". At the district court level, the ruling went in Ace's favour, saying that property loss resulting from EDS's alleged negligent misrepresentations did not constitute an `accident' and therefore was not an `occurrence' under the policies. Aggrieved, Federal pursued the case to the Circuit Court.

Circuit Judges Jolly, Dennis, and Owen studied the facts. Three precedents that find mention in the court's discussion of the case are of interest. One, Aetna Casualty & Surety Co vs Metropolitan Baptist Church, where "a company negligently misrepresented to an applicant for employment that its health insurance policy would provide the same benefits as his existing employer's policy".

Two, Argonaut Southwest Insurance Co vs Maupin, where Maupin contracted to remove material from a tract of land for use in a highway construction project, but "after removing considerable material from the land, Maupin learned that the person with whom he had contracted was not the owner but instead was merely a tenant."

And three, Mid-Century Insurance Co of Texas vs Lindsey, where a child climbed into the bed of his father's locked pickup truck and entered through the sliding rear window; "he brushed against a loaded shotgun resting in a gunrack mounted over the window, the gun discharged, and a person sitting in a car parked next to the pickup was injured."

Applying all these, the court said that although EDS may have innocently induced Akai and Pioneer to sign the agreements, EDS intended that they relinquish their property without recourse.

The fact that EDS was mistaken about the true use to which the property would be put and was unaware of the scam being perpetrated upon it when it made representations to Akai and Pioneer does not render EDS's conduct an accident, noted the court.

"EDS did intend for Akai and Pioneer to permanently part with their property and that the property might even be destroyed." The allegation that EDS was negligent in failing to research or validate the legitimacy of the NATO project does not alter the analysis, observed the judges, ruling in favour of Ace and thus affirming the district court's judgment.

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