PAGO PAGO, American Samoa-Just because local custom allows businesses to flout rules and regulations does not mean insurers must also overlook licentious practices that give rise to a claim, a trial court in American Samoa ruled.

In a March 27 decision, the court upheld a property insurer's refusal to pay a $5.9 million claim filed by a small-businessowner in American Samoa for computer chips destroyed in a fire. The insurer alleged that the chips were smuggled into the country, making them "contraband subject to seizure" and therefore ineligible for coverage.

It would have been against public policy to cover the claim, because the chips were brought into the country as undeclared personal possessions in checked baggage to avoid paying customs duties, explained Dean Hansell, a partner at LeBoeuf, Lamb, Greene & MacRae L.L.P. in Los Angeles. Mr. Hansell, along with local counsel William H. Reardon & Associates, successfully defended Progressive Insurance Co. (Pago Pago) in the coverage suit.

But Paul Miller, the attorney representing YHT Inc. and its principal officer, South Korean businessman Yu Chun Yung, vehemently denied this assertion, saying this is the way business is conducted in American Samoa. U.S. Customs laws are unenforceable in this unincorporated U.S. territory in the South Pacific because the country has "no valid excise tax statute," he said.

Therefore, "they can't be `smuggled,"' even though the chips admittedly were brought into the country in duffel bags checked on a commercial airliner and not declared to customs officers, Mr. Miller said.

Furthermore, no excise tax would have been due on the chips even if there were such a statute, he said, because they were imported for subsequent export. The South Korean-made chips were to be installed in computer motherboards, older-generation cellular telephones and in microwave ovens, Mr. Miller said.

Despite these and other arguments, Associate Justice Lyle L. Richmond of the American Samoa High Court's trial division granted partial summary judgment to the insurer. "Mere possession of property is in and of itself insufficient to constitute an insurable interest," the court wrote, citing a 1983 Georgia appellate court decision in Splish Splash Waterslides vs. Cherokee Insurance Co., which stated that the "insured must have a lawful interest in property before he can insure the interest."

"As the allegedly insured goods were, by YHT's own admitted facts, illegally smuggled goods, YHT had no insurable interest in the goods," the court found.

Now the policyholder is litigating a secondary claim for $60,000 in other business contents lost in the February 2000 fire. If YHT loses that round, it will appeal its case, Mr. Miller said.

But Mr. Hansell doesn't think the appeal stands any better chance than the initial coverage suit because two judges from the 9th U.S. Circuit Court of Appeals in San Francisco sit on the American Samoan appellate court, and they will likely adhere to U.S. law, not to local customs.

YHT Inc., an American Samoa corporation, vs. Progressive Insurance Co. (Pago Pago) et al., Civil Action No. 92-00, the High Court of American Samoa, Trial Division, March 27, 2002.