Continental Oil Co. v. Bonanza Corp.

• Decision Date: 16 June 1983
• Docket Number: No. 80-2317,80-2317
• Citation: 706 F.2d 1365
• Parties: CONTINENTAL OIL COMPANY, Plaintiff-Appellee, v. BONANZA CORPORATION, and Republic Insurance Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1365

706 F.2d 1365

CONTINENTAL OIL COMPANY, Plaintiff-Appellee, v. BONANZA CORPORATION, and Republic Insurance Company,

Defendants-Appellants.

No. 80-2317.

United States Court of Appeals, Fifth Circuit.

June 16, 1983.

Vinson & Elkins, Harold K. Watson, Houston, Tex., for defendants-appellants.

Eastham, Watson, Dale & Forney, Marion E. McDaniel, Jr., Houston, Tex., for Bonanza Corp.

Baker & Botts, Randy McClanahan, Houston, Tex., S. Gene Fendler, Liskow & Lewis, New Orleans, La., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before CLARK, Chief Judge, BROWN, RUBIN, REAVLEY, POLITZ, TATE, JOHNSON, WILLIAMS, GARWOOD, JOLLY, and HIGGINBOTHAM, Circuit Judges.^*

ALVIN B. RUBIN, Circuit Judge:

Conoco, the operator of an offshore drilling rig, chartered a vessel that, due to negligence of its master, sank beneath the rig. Conoco removed the wreck and seeks to recover the cost of removal under a marine protection and indemnity (P & I) insurance policy that covers amounts the vessel owner has become legally liable to pay and has paid either for removal when it is "compulsory by law" or "in connection with any fixed or movable object." Finding that Conoco's unilateral decision to remove the wreck was neither compulsory nor to avert legal liability, we reverse the district court decision ordering Conoco's indemnification.

Conoco also sought a declaration that Bonanza Corporation (Bonanza), the owner of the chartered vessel, was liable to it for the cost of removal because the vessel's sinking was caused by the negligence of the vessel's captain and deckhand, who were employees of Bonanza under Bonanza's exclusive control. The district court, 511 F.Supp. 62, held Bonanza liable and denied limitation of liability on the theory that the vessel's captain was Bonanza's managing agent with respect to the vessel's operations. Finding that the district court's findings of fact are adequately supported by the record and that the legal conclusions reached in those findings are correct, we affirm the denial of limitation.

I. FACTS

Conoco time-chartered the Aqua Safari, a 65-foot vessel, fully manned, from Bonanza, to remain near a Conoco drill tender in the Gulf of Mexico, do standby duty, and carry messages, including daily drilling reports, between the drill tender and the drilling rig it served. Bonanza retained exclusive control of the vessel.

Both Conoco and Bonanza were named as assureds in a standard P & I policy issued by Republic Insurance Company (Republic) to cover the Aqua Safari's operations. The policy provided one million dollars in coverage for:

such sums as the assured, as owner[,] ... shall have become legally liable to pay and shall have paid on account of:

Loss of, or damage to, or expense in connection with any fixed or movable object or property of whatever nature;

Costs or expenses of, or incidental to, the removal of the wreck of the vessel ... when such removal is compulsory by law ....

While maneuvering alongside the drilling rig one morning, preparing to pick up a drilling report, the Aqua Safari became entangled in a steel cable hanging from the rig. The vessel drifted into one of the rig's legs, began taking on water in her after-compartment, and sank directly beneath the rig. The Aqua Safari's captain and deckhand swam to safety.

Initially concerned that the sunken vessel might hamper the scheduled removal of the drilling rig fourteen days later, Conoco demanded that Bonanza remove the wreck. Bonanza refused, and announced that it abandoned all interest in the vessel. In spite of the wreck, the rig was moved without difficulty.

Conoco, however, continued to demand that Bonanza remove the wreck, which lay in 34 feet of water and was by then half-covered with mud. Conoco asserted that the sunken Aqua Safari interfered with installation of a permanent offshore platform on the site. Republic, as Bonanza's insurer, instructed Bonanza to turn a deaf ear to Conoco's request. Two and a half months after the sinking, when construction of the offshore platform began, Conoco raised the Aqua Safari with a derrick barge brought to the site for the platform's installation. It then moved the Aqua Safari to a Louisiana shipyard, incurring a total cost of $109,000.

After raising the Aqua Safari, Conoco sued Bonanza and Republic for the cost of removal. Bonanza denied liability, but argued that, if it were held liable, it should be allowed the protection of the Limitation of Liability Act, 46 U.S.C. Sec. 183 et seq. (1976). Republic denied that the policy covered Conoco's removal of the wreck because Conoco was not the vessel's owner.

The district court held that Bonanza's negligence was the sole cause of the sinking of the Aqua Safari. It found that the vessel's captain was Bonanza's managing agent with respect to the Aqua Safari's operations. Although Bonanza could have limited its liability to Conoco for the cost of the Aqua Safari's removal if the vessel's sinking had occurred without Bonanza's privity and knowledge, ¹ limitation was foreclosed here because the captain's negligence in navigating the vessel was attributable to the corporation as occurring with its privity and knowledge.

The district court found that Conoco could also proceed directly against Republic to recover the cost of removal. Because Conoco was an assured under the P & I policy covering the Aqua Safari, Conoco could claim the same rights as any other assured under that policy. Conoco was compelled by law to remove the Aqua Safari because its lease and federal regulations required removal of all equipment from its leasehold within one year after the lease terminated. Earlier removal had been a prudent gesture that in no way jeopardized Conoco's right to recover its expenses. In addition, Conoco could reasonably believe that it was exposed to potential liability, as owner of the wreck, for damages that the wreck might cause to other property. Alternatively, because Conoco was a third-party beneficiary of the insurance contract between Republic and Bonanza, Conoco had standing to proceed against Republic for enforcement of the policy provisions. ²

Republic and Bonanza appeal the district court's judgment. They argue that the district court erred in holding that (1) Conoco's removal of the sunken Aqua Safari was compulsory by law; (2) Conoco could recover the cost of removal under the policy provision covering expenses Conoco became legally liable to pay "in connection with any fixed or movable object"; (3) Conoco was liable for removal of the Aqua Safari as owner of the vessel; and (4) neither Republic nor Bonanza was entitled to limit liability for the cost of removal to the value of the Aqua Safari. We examine each of these contentions in turn.

We consider first whether Conoco may recover the cost of removing the sunken Aqua Safari under either clause of the P & I policy. The first directs reimbursement of the assured for sums that, as owner, it has become legally liable to pay and has paid in connection with a fixed or movable object. The second indemnifies the assured for wreck removal expenses paid by it as owner when removal is compulsory by law. We consider these, in Parts II and III, in the reverse of the order in which they appear in the policy.

Apart from recovery under the P & I policy, the district court's judgment allows Conoco to recover the cost of removal from Bonanza, the owner of the vessel negligently sunk. Because we decide that Conoco may not recover removal costs under the policy, we address finally in Part IV Bonanza's assertion that the district court incorrectly denied limitation of its liability to Conoco.

II. COMPULSORY BY LAW

A. Policy Coverage for Wreck Removal

The P & I policy requires Republic to pay only when its assured "shall have become legally liable to pay and shall have paid ...." Thus the assured must prove a legal liability in order to recover. Bonanza did not pay for the removal of the wreck and has never made a claim under the policy. Conoco cannot, therefore, recover on the basis that removal was compulsory as to Bonanza. We turn to the claim that Conoco can recover because it was compelled to remove the wreck. ³

The policy extends coverage only when removal is compulsory by law. Unlike the Second Circuit, we do not find this phrase to be a term of art. See Seaboard Shipping Corp. v. Jocharanne Tugboat Corp., 461 F.2d 500, 504 (2d Cir.1972). ⁴ Instead its words are to be construed in their "plain, ordinary, and popular sense." Boudreaux v. Fireman's Fund Ins. Co., 654 F.2d 447, 449 (5th Cir.1981); Calcasieu Marine Nat'l Bank v. American Employers' Ins. Co., 533 F.2d 290, 295 (5th Cir.), cert. denied, 429 U.S. 922, 97 S.Ct. 319, 50 L.Ed.2d 289 (1976).

The Random House Dictionary (8th ed. 1981) defines "compulsory" in two different senses. One is "using compulsion; compelling; constraining." The other is "required without exception; mandatory; obligatory." The first sense betokens that compliance is impelled, perhaps by sanctions. The second more closely suggests an unavoidable mandate. ⁵ The policy does not unambiguously adopt either definition. We must consider not only what is "compulsory," but also what is meant by compulsion effected by "law." Jocharanne decided that, as a term of art, the phrase had the second meaning: removal is compulsory by law only when a governmental, or, perhaps, judicial body directs it. Restricting "compulsion" to the mandate of a governmental agency rather than according it the usual significance of the generalized command of a statute or judicial decision narrows the meaning of the term considerably and, we think, unjustifiably. A statute requiring a warning on cigarettes that smoking may be harmful to the smoker's health would appear to make the warning "compulsory by law" without the intervention of an administrative official. Compulsion is not exerted only by direct command....