Opinion
CIVIL ACTION NO. 02-2950, SECTION "L" (4).
May 21, 2003.
ORDER REASONS
Before the Court is a motion for summary judgment filed by Plaintiffs LCI Shipholdings, Inc. and LMS Shipmanagement, Inc. For the following reasons, the Plaintiffs' motion is GRANTED.
I. BACKGROUND
Plaintiffs, LCI Shipholdings, Inc. and LMS Shipmanagement, Inc. brought this action against Defendants IF PC Insurance and the Norwegian Hull Club (jointly "Norwegian Underwriters") seeking monetary damages and a declaratory judgment for insurance coverage and payment under a marine insurance policy. Plaintiffs LCI Shipholdings and LMS Shipmanagement are the owner and manager respectively of the M/V ATLANTIC FOREST, a lash barge carrying ship. Plaintiffs and their vessels are insured under a "multi-peril package" of marine insurance evidenced by a cover note, with nine underwriters participating on the cover note. The lead underwriter on the cover note is All American Marine Slip, and the two Defendants are "following underwriters" on the cover note, each of whom has a 10% participation. A "Full Following Clause" was included in the cover note, which provided that a particular claim service would perform all average adjustments for all insurance claims presented to the participating underwriters. Pursuant to the clause, the designated adjustor prepared an average adjustment for Plaintiffs' insurance claims for damages arising out of the ATLANTIC FOREST lash barge crane damage incident. According to the Plaintiffs, the lead underwriter accepted the adjustment and paid Plaintiffs its 21.5% participation interest. Subsequently, seven of the nine "following underwriters" agreed to pay their proportionate share of the insurance claim as set forth in the adjustment, except for the two Defendants.
Marine insurance policies often have several underwriters covering a particular risk, including a lead underwriter and following underwriters. The "lead underwriter" is generally presented with a broker's slip, which contains the details of the risk which the broker is trying to insure. The lead underwriter agrees to cover a certain percentage of the risk and initials the slip, which is then passed on to other "following underwriters" who assume a lesser percentage of the risk until the broker reaches 100% coverage. Generally, a following clause refers to a provision included in the cover note which provides that following underwriters will be bound by the lead underwriter's decisions regarding certain aspects of any claim by the insured. See THOMAS J. SCHOENBAUM, 2 ADMIRALTY AND MARITIME LAW § 19-1 (3d ed. 2001 Supp. 2003).
The cover note's "general insurance terms and conditions" initially contained a following clause, which provided:
This insurance is subject to the same rates, premiums, terms, clauses, conditions, returns, additional premiums and warranties, as the leading underwriters, All American Marine Slip; and it is agreed, with or without previous notice, to follow the decisions of the leading underwriters with regard to alterations, extensions, additions, deletions, endorsements, amendments and cancellations, and also with regard to survey and settlement of claims and returns, whether liable or not liable, even if settlement is made "without prejudice" or on an "ex gratia" basis.
However, Defendant Norwegian Underwriters insisted that a "full following clause (Clause B)" be included as a condition of their participation on the cover note, which provided the following:
1. All underwriters hereon shall follow with or without notice the decisions of the All American Marine Slip (hereinafter referred to as the "Leading Underwriter") with regard to all aspects of coverage, including but not limited to, amendments, additions, deletions, cancellation, extension and warranties.
2. All underwriters hereon shall follow the decisions of the Leading Underwriter with regard to all matters involving claims, including but not limited to, appointment of surveyors, attorneys, and other experts; payments and settlements of claims, including requests for payments on account; and payment of legal fees and other costs.
3. All Underwriters shall make claim payments, as directed in the Loss Payable Clause contained in the policy and/or as directed by duly-signed payment orders, no later than thirty days after receipt of notice that the Leading Underwriter has agreed to pay its proportion of such claims.
Based on this following clause, Plaintiffs seek a declaration that (1) in accordance with the calculations of the average adjustor's statement of particular average and loss of hire, Plaintiffs are entitled to insurance coverage and payment of insurance proceeds for an insured loss from minority subscribers to that marine insurance policy, where the lead underwriter and a majority of underwriters subscribing to that marine insurance policy have already approved the average adjuster's statement of particular average and loss of hire and have already paid their respective proportionate shares of the insured loss in accordance with that adjustment; and (2) that by virtue of the terms and conditions of the marine insurance policy, particularly the "Full Following Clause," Defendant underwriters are bound by the lead underwriter's decision to accept the average adjuster's statement of particular average and loss of hire and are bound by the lead underwriter's decision to pay insurance proceeds in accordance with that average adjustment.
In their defense, Defendants claim that the full following clause does not authorize the lead underwriter to alter the terms of the policy agreed by Defendants and does not obligate the Defendants to follow the decisions of the lead underwriter when he agrees to a loss which falls outside of policy conditions. Additionally, Defendants assert that the full following clause does not obligate them to follow the decisions of the lead underwriter with regard to the adjustment, settlement, and or payment of ex gratia settlements. Defendants claim that the average adjustment provides for payment of losses which fall outside the conditions of that policy of insurance as evidenced by the cover note and, therefore, Defendants are not bound by the adjustment.
The following facts are uncontested. On October 2, 2000, the M/V ATLANTIC FOREST was moored at the Port of New Orleans, utilizing the ship's lash barge crane to load lash barges aboard the ship, when the ship's crane collapsed on account of the sudden failure of the crane's starboard braking system, resulting in substantial damage to the ship's crane and the ship's deck. As a consequence of this casualty, Plaintiffs arranged to remove the lash barge crane from one of Plaintiffs' other lash ships (M/V HICKORY) in Singapore, and transported that crane to New Orleans, where the substitute lash barge crane was installed aboard the ATLANTIC FOREST pending completion of permanent repairs to the ATLANTIC FOREST crane.
The cover note provided that the marine surveyor from The Salvage Association, Ltd. was to conduct all loss surveys on behalf of underwriters. Acting on behalf of all underwriters participating on the cover note, The Salvage Association surveyed the M/V ATLANTIC FOREST and its lash barge loading crane for the purpose of determining the cause of the crane failure and determining the nature and extent of the damage to the ATLANTIC FOREST and to the ship's crane. The Salvage Association also reviewed Plaintiffs' claim for damages and expenses and reviewed the reasonableness of Plaintiffs' actions in responding to the casualty. The Salvage Association reported to the satisfaction of the Lead Underwriter that the collapse of the ship's crane could reasonably have been attributed to the failure of the crane's starboard braking system and therefore was caused by a "covered peril" under the terms of the cover note. The Salvage Association also reported to the satisfaction of the Lead Underwriter that Plaintiffs' damages and expenses were reasonably incurred on account of the casualty, and reported that Plaintiffs' actions in mitigating their losses were "fair and reasonable."
Plaintiffs asserted a claim for insurance coverage under the cover note SMACS 3455-6/99, and submitted a claim for damage and loss to the M/V ATLANTIC FOREST and her barge loading crane, a claim for expenses and damages incurred in connection with actions taken in mitigation of that casualty, and a claim for loss of hire on account of that casualty. Cover note SMACS 3455-6/99 provided that Marsh, Inc. Marine and Energy Claim Services was to perform all average adjustments for all insurance claims presented to underwriters participating on the cover note. Marsh, Inc. prepared an average adjustment dated January 31, 2002 (hereinafter "Marsh Average Adjustment") which presented the insurance claim for the losses, damages and expenses arising out of the ATLANTIC FOREST lash barge crane damage incident. In the Marsh Average Adjustment, the adjuster calculated the claim recoverable by Plaintiffs and covered under the cover note as follows: Particular Average-Hull and Machinery (Less Deductible) $5,293,671.74; Loss of Hire Claim (Less Deductible) $522,014.00; Total Claim on Participating Underwriters $5,815,685.74.
In the Marsh Average Adjustment, the average adjuster allocated and apportioned the respective proportion of insurance proceeds owed by each of the underwriters on the cover note, allocating 10% or $581,568.57 to IF PC Insurance (formerly Vesta Insurance) and 10% or $581,568.57 to Norwegian Hull Club (formerly Bergen Hull Club). The Marsh Average Adjustment was presented to the Lead Underwriter, All American Marine Slip, as proof of the nature and amount of Plaintiffs' insurance claim for the losses, damages and expenses arising out of the M/V ATLANTIC FOREST barge loading crane incident. After reviewing the Marsh Average Adjustment, and after consultation with The Salvage Association and consultation with the Marsh Adjuster, the Lead Underwriter agreed to the claim as presented in the Marsh Average Adjustment and paid Plaintiff its 21.5% participation on the insurance claim. Following the lead, seven of the nine following underwriters paid their respective proportion of the claim. Only Defendants have failed to pay their portion of the claim to this date, which is the basis of Plaintiffs' suit. Plaintiffs filed a motion for summary judgment seeking judgment based on application of the full and following clause in the cover note, which it contends binds the Defendants as underwriters.
II. LAW ANALYSIS
Plaintiffs argue that they are entitled to judgment as a matter of law on the grounds that (1) the lead underwriter on the cover note agreed to Plaintiffs' insurance claim as presented in the Marsh Average Adjustment, and paid its proportionate share of the claim and, (2) the cover note contains a full following clause in which Defendants agreed to follow the lead underwriters' decisions regarding coverage, payment and settlement of claims and agreed to pay their respective proportionate share of the insurance claim once notified of the lead underwriter's decision to pay.
Summary judgment will be granted only if the pleadings, depositions, answers to interrogatories, and admissions, together with affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56. If the party moving for summary judgment demonstrates the absence of a genuine issue of material fact "the nonmovant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial." Willis v. Roche Biomedical Laboratories, Inc., 61 F.3d 313, 315 (5th Cir. 1995). "[A] dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. To oppose a motion for summary judgment, the non-movant cannot rest on mere allegations or denials but must set forth specific facts showing that there is a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 321-22 (1986).
The burden of demonstrating the existence of a genuine issue is not met by "metaphysical doubt" or "unsubstantiated assertions." Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 586 (1986)). The Court must "resolve factual controversies in favor of the nonmoving party, but only when there is an actual controversy, that is, when both parties have submitted evidence of contrary facts." Id. The Court does not, "in the absence of proof, assume that the nonmoving party could or would prove the necessary facts." Id. If the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, no genuine issue exists for trial. See Matsushita, 475 U.S. at 588. Finally, "the mere existence of some factual dispute will not defeat a motion for summary judgment; Rule 56 requires that the fact dispute be genuine and material." Willis, 61 F.3d at 315. If the evidence leads to only one reasonable conclusion, summary judgment is proper. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).
In cases involving marine insurance policies, state law is applied if there is no specific and controlling federal rule. Truehart v. Blandon, 884 F.2d 223, 226 (5th Cir. 1989). The law of the state where the marine insurance contract was issued and delivered is the governing law. Elevating Boats, Inc. v. Gulf Coast Marine, Inc., 766 F.2d 195, 198 (5th Cir. 1985). In this case, the parties do not dispute that New York law applies because the cover note was issued in New York.
Under New York law, insurance policies, like other contracts are to be construed so as to give effect to the intent of the parties as expressed by their words and purposes. Nat'l Union Fire Ins. Co. of Pittsburgh v. The Stroh Cos., 265 F.3d 97, 103 (2d Cir. 2001). The words of a contract must be given their plain meaning and clear and unambiguous terms must be enforced as written. Goldberger v. Paul Revere Life Ins. Co., 165 F.3d 180, 182 (2d Cir. 1999). An insurance policy cannot be construed so as to render its terms meaningless or of no effect, and extrinsic evidence is not admissible if the language of the policy is unambiguous. Seiden Assoc. Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992); Mossa v. Provident Life Cas. Ins. Co., 36 F. Supp.2d 524, 526 (E.D.N.Y. 1999). The interpretation of an insurance policy is a question of law and it is for the Court to decide whether a clause in an insurance policy is ambiguous or unambiguous. In re Prudential Lines, Inc., 158 F.3d 65, 77 (2d Cir. 1998).
According to the Plaintiffs, the language of the full following clause is clear and unambiguous; it requires all following underwriters to follow the decisions of the Lead underwriter "with regard to all aspects of coverage" and "with regard to all matters involving claims, including . . . payments and settlements of claims." The Plaintiffs contend that the full following clause provides the lead underwriter the sole discretion to determine coverage under the policy, and the sole discretion to pay and settle claims made against the policy. It is Plaintiffs' position that the only construction of the clause possible is that once the lead underwriter exercises its discretion and decides to pay a claim, then the full following clause requires following underwriters to pay their share of the claim in accordance with the lead underwriter's decision.
Plaintiffs rely on a Southern District of New York decision for support that following clauses can be enforced against delinquent following underwriters, Navegacion Goya S.A. v. Mutual Boiler Machinery Inc. Co., 411 F. Supp. 929 (S.D.N.Y. 1975). In Navegacion, the plaintiff sought to compel following underwriters to pay after the lead underwriter had made payment; the defendant asserted that the underlying insurance claim was not covered under the policy because of alleged misconduct including breach of implied warranty and material misrepresentations on the part of the plaintiff/assured, which nullified defendants' agreement under the following clause. In the court's first opinion in Navegacion, it denied plaintiffs' motion for summary judgment based on a following clause because it found that the clause was ambiguous and both plaintiffs' and defendants' interpretation was reasonable, therefore, raising a question of fact as to the parties' intentions. 1972 A.M.C. 650 (S.D.N.Y. 1972).
Plaintiffs argue that this aspect of the Court's decision in Navigacion is distinguishable from this case because the language of the following clause is clear and unambiguous. Furthermore, Plaintiffs in this case rely on language in the Navegacion opinion explaining that if none of the defenses asserted are viable as a matter of law, then the plaintiff would be entitled to summary judgment. In a subsequent opinion, after a trial on the merits, the court in Navegacion rejected the defenses asserted regarding implied warranty and misrepresentation, and concluded that the defendant had no defense to the following clause.
This Court is also aware of a decision by the English Commercial Court, which provides guidance on the issue absent any controlling law. In Roar Marine, Ltd. v. Bimeh Iran Ins. Co., 1 Lloyds Rep. 423 (QBC 1997), a hull policy included a follower clause which provided that the underwriters agreed to follow the lead underwriter "in regard to agreements, alterations, extensions, additions, endorsements, and cancellations and attaching and expiring dates, and also in regard to all decisions, surveys, the providing of bail and settlements in respect of all claims and returns, but excluding ex gratia and without prejudice settlements." Plaintiffs in the case moved for summary judgment, arguing because the lead underwriter paid the claim, the defendant follower underwriter was required to pay under the following clause. Defendants in the case argued that the London underwriter was not the lead, the underlying claim was not covered under their "proper construction" of the policy, and by virtue of "custom and practice," they were not required to follow the leader where the claim that was settled fell outside of the "covered perils" in the policy.
The Roar Marine court rejected the defendants' arguments and granted plaintiffs' motion for summary judgment. The court explained with respect to defendants' contention that the claim was not covered under the policy, "the defendants wish in reality to be treated as if they were the leader or as if there was no leader at all responsible for factual investigations and claims settlement," and that this was exactly what the follow the leader clause precludes. Further, in rejecting the argument that the following clause must be interpreted in light of custom, that is, not requiring the follow underwriter to follow the lead when the claim was outside covered perils of policy, the court explained that "the only matrix of any real relevance . . . is to be found in the obvious commercial purpose of the clause in simplifying administration and claims settlement." The court criticized defendants' argument that custom must be considered in interpreting the following clause as undermining the purpose of the following clause to a very fundamental extent. The court concluded that the defendants failed to show that they had any possibility of having a real or bona fide defense.
Plaintiffs in this case rely on the analysis of the court in Roar Marine for support that the full following clause in this case must be enforced despite Defendants' arguments concerning its meaning-Plaintiffs insist the clause is unambiguous and clear, in which case the clause should be enforced and summary judgment is proper.
In opposition to the summary judgment, Defendants contend that (1) the Norwegian underwriters, as co-insurers, retained the right to challenge whether a particular claim is within the ambit of coverage; (2) the Norwegian underwriters, as co-insurers, may challenge the claim on the basis of misrepresentation by the Plaintiffs' broker; and (3) the claim is so clearly beyond the terms of the policy that even the broadest interpretation of the follow clause does not require the co-insurers to follow the lead.
Defendants argue that following clauses do not bind the co-insurers to follow the leader if the leader allows recovery of claims outside the applicable coverage conditions, as expressed in the affidavit of Thomas Distefano, a U.S. adjuster. Defendants explain that because LSI's brokers were taken over by Marsh, and the fact that Marsh was the insured's broker and adjustor, the Defendants were concerned about the particular language in the following clause and attempts to broaden the scope of the clause to include ex gratia payments and language "whether liable or not liable." The Defendants agree that the cover note following clause read as originally stated above; however, Defendants contend that a series of letter were exchanged among the parties, which clarified the language to be used and were made a part of the contract itself. According to Defendants, they suggested in a letter to the sub-broker working on behalf of LCI and Marsh dated September 29, 1999, that the follow clause should read ". . . without prejudice, but excluding ex gratia settlements absolutely." After this and other correspondence, LCI proposed a following clause deleting the phrase "whether liable or not," meaning that the Defendants would not be required to pay if the claim was outside the scope of coverage. The parties also negotiated and agreed to exclude the language "Ex gratia" settlements. Defendants contend that all of this negotiation was incorporated into the insurance contract because in the binder containing the original, proposed following clause, a handwritten note provided that the following clause was replaced as agreed to in the correspondence. Based on these negotiations, the Defendants contend that they believed the role of the lead would be limited to administrative and ministerial functions regarding claims administration and the co-insurers retained the right to have coverage disputes settled in the courts.
This Court rejects Defendants' argument that the following clause was meant only to bind the following underwriters to follow the lead on administrative matters and not coverage issues. No other cases appear to address the interpretation and enforcement of following clauses in marine insurance other than the Navigacion and Roar Marine cases detailed above, which this Court finds helpful. Unlike the Navigacion case, where the court denied summary judgment because of issues of intent of the parties after finding that both parties had asserted reasonable interpretations of the following clause, the Defendants in this case have not put forth a reasonable interpretation of the following clause such that the clause is ambiguous. The language of the following clause is clear that the underwriters agreed "to follow with or without notice the decisions of the [leading underwriter] with regard to all aspects of coverage, including but not limited to, amendments, additions, deletions, cancellation, extension and warranties." Additionally, it clearly provided that the underwriters would follow the lead's decisions on "payments and settlements of claims." No language in the contract limits the lead underwriter's authority to administrative matters and the Court does not find that assertion to be a reasonable interpretation of the following clause. In fact, the plain language of the contract suggests otherwise by providing that the underwriters agreed to follow the lead with respect to all aspects of coverage. This view is also consistent with the traditional purpose of following clauses, as expressed by the Roar Marine court. The decisions of settlement and coverage were left to the lead, with the underwriters' being obliged to follow such decision. Summary judgment is proper because the language of the clause is clear and unambiguous.
Furthermore, Defendants' position appears to be inconsistent to this Court. On one hand Defendants argue that they cannot be bound by the following clause with respect to ex gratia payments; however, the Defendants do not argue that there is no coverage for the claim, but rather Defendants take issue with what coverage is applicable. According to the Defendants, the adjuster, Marsh, Inc. misrepresented the nature of the claim as involving a temporary repair, which would be covered under Hull and Machinery, instead of what Defendants' believe the claim did involve, a permanent repair, which would be covered under Loss of Hire with substantially less coverage. Defendants explain that the cover note included a multi peril package covering Hull and Machinery and loss of hire, among other losses. Defendants allege that originally, the adjuster classified the crane repair as permanent and thereby covered under Loss of Hire. However, Defendants claim that the adjusters decided to seek greater recovery by improperly allocating the HICKORY crane rental and reinstallation charges as temporary repairs under the Hull and Machinery clause when it became clear that the loss of hire coverage would be insufficient to cover the total costs. Defendants claim that the confirmation endorsement dated March 27, 2002 was a misrepresentation because no later than 2001, the adjusters knew that a final decision had been made to leave the HICKORY crane on the ATLANTIC FOREST, thereby making the repair permanent. According to Defendants, if the lead underwriter knew of the final decision to leave the crane, it would not have approved allowance of expenses related to the HICKORY crane as temporary repairs. The ultimate difference in coverage is as follows: instead of collecting $851.35 under the loss of hire coverage, the adjuster allegedly improperly sought $3,575,539 under the hull and machinery coverage. In addition to alleging the misrepresentation, the Defendants allege that the lead did not read applicable provisions of the plan which govern the coverage of the policy.
The Court is not persuaded by this argument because the language of the following clause clearly leaves coverage decisions to the lead underwriter. The crux of Defendants' argument is that the lead's decision was based on an improper application of the policy coverage; however, the following clause gives the authority to make such decision to the lead underwriter. In conclusion, Defendants have failed to show that an issue of fact exists as to the meaning of the following clause and, therefore, summary judgment is proper.
II. CONCLUSION
For the foregoing reasons, the motion for summary judgment filed by Plaintiffs is GRANTED and a judgment will be entered in favor of Plaintiffs against Defendants.