Armada Supply Inc. v. Wright

• Decision Date: 18 August 1987
• Docket Number: No. 83 Civ. 3182.,83 Civ. 3182.
• Parties: ARMADA SUPPLY INCORPORATED, Plaintiff, v. Philip Gaybell WRIGHT, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

665 F. Supp. 1047

ARMADA SUPPLY INCORPORATED, Plaintiff, v. Philip Gaybell WRIGHT, et al., Defendants.

No. 83 Civ. 3182.

United States District Court, S.D. New York.

July 10, 1987.

As Amended August 18, 1987.

COPYRIGHT MATERIAL OMITTED

George Graff, Milgrim Thomajan Jacobs & Lee, New York City, for plaintiff.

Richard A. Hagen, Crowell, Rouse, Varian, Hagen & Matera, New York City, for defendants.

OPINION

GRIESA, District Judge.

This is an action to recover insurance on a cargo of fuel oil shipped from Rio de Janeiro to New York. The action has been tried to the court without a jury. This opinion constitutes the court's finding of fact and conclusions of law.

Armada purchased the oil from Petrobras, a Brazilian company. This being a C.I.F. sale, Armada took title in Rio and Petrobras obtained marine insurance for the benefit of Armada from defendant Banorte and other Brazilian underwriters. Prior to the time of the voyage, Armada contracted to sell the cargo of oil to Sun Oil Trading Corp. Sun was to take delivery (and title) in New York. Thus, Armada was at risk during the voyage from Rio to New York.

Armada obtained certain marine insurance coverage of its own from London underwriters, the precise extent and nature of which is in dispute.

The principal problem giving rise to the insurance claims results from the fact that the crew of the vessel (named the AGIOS NIKOLAS) used part of the cargo for fuel and then pumped sea-water into the cargo tanks. This resulted in the contamination of the cargo and a shortage of actual oil. Because of this situation Armada lost the contract with Sun, except for a portion of the cargo which was sold to Sun at a discount. As to the rest of the contaminated cargo, it was put through reconditioning processes and sold to various purchasers at prices less than the original contract price to Sun.

Aside from the misappropriation of oil and the resulting contamination with seawater, there was a shortage in the oil arising at the time of the loading in Brazil.

Armada makes claims against both Brazilian and the London underwriters for the shortages and the contamination. In addition, Armada seeks to recover from both groups of underwriters expenses related to its efforts to recondition and sell the contaminated cargo.

Armada has named defendants in this action as certain representatives of the London underwriters. It is conceded that a judgment against these representatives will bind all the London underwriters. As to the Brazilian underwriters, Armada has named all of them as defendants. The lead underwriter, Banorte, has been served. Some, but not all, of the participating Brazilian underwriters have been served.

I ISSUES PRESENTED

As to Armada's claims against the London underwriters, Armada first contends that it obtained "contingency coverage," which makes London underwriters liable for the amount of the primary Brazilian insurance in the event the Brazilian underwriters fail to pay. London underwriters argue that Armada did not comply with the requirement in the London insurance document (the "cover note") for obtaining contingent coverage. Armada contends that even if this is so, nevertheless London underwriters, or their agents, accepted and retained a premium for this coverage, and thus waived the requirement of the cover note. London underwriters deny such a waiver.

Armada makes a claim against London underwriters for an amount over and above any amount payable on the primary insurance. This claim is made under the "increased value" coverage in the London insurance. Armada contends that the proper interpretation of the increased value coverage has the effect of making London underwriters liable for the entire amount of the contract price with Sun, less what is recovered on the primary Brazilian insurance. Thus Armada contends that this was insurance against the risk of loss of profits on the contract with Sun. Armada claims that it is entitled to recover $1,416,000 or, alternatively, $794,842 under the increased value coverage. The basis for these proposed figures will be described hereafter. London underwriters deny Armada's contentions and urge that they are liable, at most, for only about $100,000. They contend that the increased value coverage did not insure against loss of profits, but, like the underlying Brazilian insurance, only covered against the risk of physical loss or damage to cargo. The London underwriters argue that the function of the increased value insurance was to increase the insured value over and above what it was under the Brazilian insurance. As to the contamination loss component of Armada's claim, London underwriters contend that the particular average method of adjustment should be used, under which a percentage of about 10-12% would be applied to the insured value stated in the Brazilian insurance and the increased value in the London insurance.

Armada contends that even if the normal interpretation of the cover note would not allow recovery for loss of profits, nevertheless there was a separate agreement to provide such coverage for this cargo. Armada argues that it obtained such an agreement from a broker, Johnson & Higgins. London underwriters deny that Johnson & Higgins had either actual or apparent authority to bind them to terms of coverage, and in any event denies that Johnson & Higgins purported to make such an agreement.

With regard to the Brazilian insurance, it appears that a shortage arose in the pipeline between the Petrobras tanks and the vessel. There is an issue as to whether the Brazilian insurance covered the transit in the pipeline.

There is also an issue as to when the Brazilian insurance terminated. When the vessel arrived in New York, not all of the cargo tanks were contaminated. However, the vessel pulled out of New York harbor temporarily. This involved a scheme by the vessel owners to avoid legal process. By the time the vessel returned, the contamination affected all the cargo tanks, and there was an additional shortage. Brazilian underwriters contend that their coverage terminated when the vessel first arrived in New York. Armada argues that the coverage continued while the vessel was temporarily away from New York.

Armada contends (although not with great force) that, as to the shortage and contamination problem arising from the derelictions of the crew, there is no need to assess precise losses from the actual shortage and the actual contamination because the cargo should be deemed a constructive total loss.

Assuming that the constructive total loss theory is rejected, Armada must prove the quantum of its contamination loss under the particular average method of adjustment. The principal issue here relates to whether the oil still had some residual contamination following reconditioning, and if so what was the damaged value.

Armada contends that the oil did have residual contamination, and that the damaged value should be measured by the sale prices of the various lots of oil following the reconditioning. Underwriters contend that, although this is true for some portions of the cargo, as to other portions, they were rendered sound or close to sound by the reconditioning and Armada improvidently accepted prices which did not reflect the actual condition of the oil. Underwriters contend that, as to these portions of the cargo, Armada cannot recover because it has failed to prove that the oil was contaminated, or at least has failed to prove the damaged value.

Armada seeks to recover substantial sue and labor expenses from both the Brazilian and London underwriters. The Brazilian underwriters deny liability for certain items. The London underwriters assert that they have no liability whatever for sue and labor expenses.

Before proceeding further, a word should be said about the matter of choice of law. In this case, as so often happens, choice of law makes little or no difference.

Questions about the interpretation of marine insurance policies are generally to be decided under local law, rather than as a matter of admiralty law. Wilburn Boat Co. v. Fireman's Fund Insurance Co., 348 U.S. 310, 75 S.Ct. 368, 99 L.Ed. 337 (1955). The same is obviously true of certain other questions, such as issues about the authority of a broker. The present case has substantial contacts with Texas (the location of Armada and its broker), England (the location of the London underwriters), Brazil (the starting point of the voyage and the location of the Brazilian underwriters), and New York (the termination point of the voyage).

The fact is that on the issues relevant to this case, there is no showing that there would be any material difference in the law of any of these jurisdictions. The parties have cited authorities from whatever sources are available. These will be discussed in due course.

II SUMMARY OF RULINGS

The London underwriters are not liable for contingency coverage. Armada did not comply with the requirement of the cover note. Underwriters did not waive this requirement.

Armada did obtain increased value coverage from the London underwriters. But this coverage did not insure the lost profits on the Sun contract. The increased value insurance covered physical loss or damage, not the loss of a contract or the profits thereon. It served to increase the amount of the insured value over and above the amount provided in the primary Brazilian insurance. The particular average method of adjustment applies to the contamination loss claim.

Johnson & Higgins did not make an agreement binding the London underwriters to a different interpretation — i.e., to coverage of the lost profits on the Sun contract. Johnson & Higgins had neither actual nor apparent authority to do so. Moreover, Johnson & Higgins did not purport to make such an agreement.

As to the Brazilian insurance, there was coverage for the loss occurring in the pipeline in Rio. In New York the coverage did not terminate until the vessel...