NEW YORK—A New York-based diamond firm is suing Swiss Reinsurance Co. Ltd. for $640 million under the sue and labor clause of insurance policies over the loss of several consignments of Angolan rough diamonds.

Lazare Kaplan International Inc. alleges that a U.K. unit of Swiss Re was slow to follow up its investigations of the lost diamonds and that as a consequence of the insurer’s delay, the diamond manufacturer and trader was delisted from the American Stock Exchange.

According to a suit alleging bad faith filed by Lazare Kaplan in federal court in New York, the firm is seeking $140 million in compensatory damages and $500 million in consequential damages. Other parties named in the suit are certain Lloyd’s of London syndicates and The Marine Insurance Co. Ltd.

The claim stems from a $140 million loss in rough diamonds from Angola, according to court documents.

The diamonds were bought by the Dubai, United Arab Emirates-based corporation Gulfdiam DMCC, an affiliate of Lazare Kaplan, between July and October 2008. Gulfdiam, which purchased the diamonds, according to court documents, then cosigned the diamonds to three companies: Gemport DMCC, in Dubai; A.D. Middle East FZE, in Dubai; and Overseas Diamond Hong Kong Ltd., in Hong Kong.

According to court documents, Gulfdiam did not receive full payment for the diamonds.

When payment was not made, Lazare Kaplan filed a claim with Swiss Re, and according to court documents, the two companies worked on investigations of the loss between April and July 2009. In its complaint, Lazare Kaplan states it tried to “urge” Swiss Re to settle the losses, but the insurer “refused to pay Lazare Kaplan for its insured losses.”

The diamond firm says it took measures, through working on the investigations, that were reasonable and for the purpose of averting and mitigating losses, and that under its global polices can seek damages under the sue and labor clauses in those policies. According to court documents, Lazare Kaplan global policies do not define sue and labor.

Originally included in marine insurance policies to compensate shipowners for the cost of cargo jettisoned to save a foundering ship, sue and labor clauses are now included in various policies. The clause requires the insured to protect damaged property from further loss once a loss has occurred.

Lazare Kaplan contends it incurred costs and expenses to “investigate the circumstances of the losses and mitigate the losses as well as mitigate the consequential and collateral damage to Lazare Kaplan as a result of such losses.”

In the complaint, Lazare Kaplan states that Swiss Re knew the losses were material to its financial stability statements to banks and securities regulators, and that the firm’s financial state would be compromised as a result of Swiss Re’s “breached obligation” to investigate and settle the claim.

Swiss Re made an interim payment of $28 million on Dec. 31, 2009; however the damage had already been done, as Lazare Kaplan was dropped from the American Stock Exchange on that same date, the suit states.

Lazare Kaplan argues that Swiss Re did not make progress on its claims between September and December 2009 after it changed adjusters, which is the crux of the company’s bad faith claim.

Swiss Re declined to comment, as the matter is in litigation.