Blaine Richards & Co., Inc. v. Marine Indem. Ins. Co. of America, 149

• Decision Date: 17 December 1980
• Docket Number: D,No. 149,149
• Citation: 635 F.2d 1051
• Parties: BLAINE RICHARDS & CO., INC., Plaintiff-Appellant, v. MARINE INDEMNITY INSURANCE COMPANY OF AMERICA and William H. McGee & Co., Inc., Defendants-Appellees. ocket 80-7366.
• Court: U.S. Court of Appeals — Second Circuit

Page 1051

635 F.2d 1051

BLAINE RICHARDS & CO., INC., Plaintiff-Appellant, v. MARINE INDEMNITY INSURANCE COMPANY OF AMERICA and William H.

McGee & Co., Inc., Defendants-Appellees.

No. 149, Docket 80-7366.

United States Court of Appeals, Second Circuit.

Argued Oct. 3, 1980.

Decided Dec. 17, 1980.

Stephen H. McReavy, San Francisco, Cal. (Hall, Henry, Oliver & McReavy, P. C., San Francisco, Cal., Bernard Goldstein, Goetz & Goldstein, P. C., Mineola, N. Y., of counsel), for plaintiff-appellant.

Seymour Simon, New York City (Graham & Simon, P. C., New York City, of counsel), for defendants-appellees.

Before LUMBARD, OAKES and NEWMAN, Circuit Judges.

LUMBARD, Circuit Judge:

Plaintiff Blaine Richards & Co., Inc. ("Blaine Richards") ¹ appeals from an order of summary judgment entered against it by Judge Nickerson in the Eastern District of New York. Blaine Richards brought suit upon marine insurance policies issued by the defendant for losses sustained in regard to a shipment of beans from Europe which had been detained upon arrival in this country by order of the United States Food and Drug Administration ("FDA"). Judge Nickerson held that FDA detention was excluded from the coverage of the insurance policies, and therefore no damages could be recovered. While we agree that the detention itself fell within the exclusion of the policies, and therefore agree with the district court regarding losses resulting from detention, we believe that the case must be remanded to determine whether losses were sustained as a result of physical damage to the insured goods.

I.

Blaine Richards purchased 10,400 bags of pea-beans from a supplier in France. The beans were packed in shipping containers in Dunkirk and sent overland to Antwerp from where they were shipped to Baltimore. Because the beans had originally been harvested sometime earlier in Ethiopia and Chile, the terms of sale provided that the supplier would arrange to have the beans fumigated prior to the ocean voyage. Contrary to Blaine Richards' instructions, however, the fumigation company hired by the supplier applied the fumigant Phostoxin, a pesticide widely used in Europe, but not approved by the FDA.

The beans arrived at Baltimore in two shipments and were inspected upon arrival by an FDA official. He discovered an empty can of Phostoxin in one of the shipping containers as well as some powder on some of the bags of beans. On February 24, 1976, the FDA, after confirming the presence of Phostoxin, issued a Notice of Detention stating that the shipment was "adulterated" within the meaning of Section 801(a)(3) of the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 381(a)(3), since no regulation existed for the use of the discovered pesticide.

The detention notice gave Blaine Richards 10 days to respond. Six weeks later, it made an application for permission to segregate, clean and rebag the beans which were found with Phostoxin residue. The FDA approved the plan. It immediately released the 9,387 "clean" bags, and agreed to the reconditioning and release of the remaining 1,013 bags. Aside from the money spent upon reconditioning, plaintiff lost money when the original sales contracts for the beans were cancelled, and the beans had to be sold at lower prices.

Blaine Richards held two marine insurance policies relating to the shipments. The first insured the cargo against "all risks of physical loss or damage from any external cause." This "all risks" policy, however, included a standard Free from Capture and Seizure ("F.C.&S.") Clause which excluded from coverage all losses due to "capture, seizure, arrest, restraint, detainment, confiscation, pre-emption, requisition or nationalization, and the consequences thereof or any attempt thereat, whether in time of peace or war and whether lawful or otherwise." It also included a Delay Clause excluding coverage of claims "for loss of market or for loss, damage or deterioration arising from delay, whether caused by a peril insured against or otherwise." The second policy was a War Risk policy which generally insured against those risks excluded by the F.C.&S. Clause. This policy, however, excluded damages caused by either "(s)eizure or destruction under quarantine or customs regulations" or "(d)elay, deterioration and/or loss of market."

Suit was brought upon these policies in the Eastern District. Blaine Richards claimed that the damages sustained were the result of improper fumigation, a fortuitous external event which resulted in the physical loss of the beans during the period of detention and in the cancellation of its sales contracts. The insurers defended on a number of grounds that the damages did not arise during the period of coverage of the policies, that the damages related to "inherent" or "internal" defects in the shipped goods, that there was a failure of notice, that the suit was untimely, that the suit was solely for damages due to delay, that there was a failure to mitigate damages, and that the damages fell into the exemptions noted above. On motion for summary judgment, Judge Nickerson held that recovery was barred by the F.C.&S. Clause of the "all risks" policy and the "customs regulation" exemption of the War Risks policy. He held that the F.C.&S. Clause was not limited to exclusion of perils of a "warlike nature" but applied as well to risks of detention by civil authorities. Therefore, summary judgment for the insurers was deemed appropriate.

II.

Blaine Richards seeks reversal of the judgment for two reasons. First, it argues that the F.C.&S. Clause was not intended to exclude the risk of detention by civil authorities in peaceful circumstances. We disagree. As Judge Nickerson pointed out, prior cases have consistently applied the F.C.&S. Clause to detention by civil authorities. In Intermondale Trading Co. v. North River Insurance Co., 100 F.Supp. 128 (S.D.N.Y.1951), a vessel transporting insured tires was detained by British officials at Gibraltar because it was suspected that the ship was also illegally carrying refugees bound for Palestine. The detention, held to be the principal cause of whatever losses were sustained, was found to fall within the F.C.&S. exemption. Similarly, in Nakasheff v. Continental Insurance Co., 89 F.Supp. 87, 1954 A.M.C. 986 (S.D.N.Y.1953), recovery was not allowed for damages sustained during a period of detention by United States customs authorities. Admittedly, the language in Nakasheff stating that the F.C.&S. Clause there defeated any claim for damages arising during detention was, strictly speaking, unnecessary to the result since the district court had also held that the damages claimed were caused by the "inherent characteristics" of the transported goods. Nevertheless, the language of Nakasheff as to the applicability of the F.C.&S. Clause has been followed recently in Resin Coatings Corp. v. Fidelity & Casualty Co. of New York, 489 F.Supp. 73 (S.D.Fla.1980), in which the F.C.&S. Clause was held to bar recovery for losses due to a seizure by Saudi Arabian customs officials.

We think the consistent line of authority on this point should be followed here. Although the F.C.&S. Clause may have originally been inserted in marine policies to protect against risks of war, see generally G. Gilmore & C. Black, The Law of Admiralty § 2-9, at 71-73 (2d ed. 1975), its interpretation in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the Clause, which is to exclude from coverage losses arising from unforeseeable actions of sovereign states against the insured vessel or, in the case of a policy such as this one, the insured cargo. Moreover, the language of the Clause itself declares that such seizures or detentions in time of peace as well as in time of war are to come within the exemption.

Relying upon language in Flota Mercante Dominicana v. American Manufacturers Mutual Insurance Co., 272 F.Supp. 540 (S.D.N.Y.1967), Blaine Richards, however, argues that even if detention by civil authorities falls within the F.C.&S. exemption, the FDA "hold" does not qualify as a "seizure" or "detention" because there was no adverse possession of the insured goods asserted by the United States. This reading of the terms "seizure" and "detention" is unduly restrictive. In Flota Mercante the court held that the sinking of a ship by United States forces did not constitute a "seizure" or "detention." In so holding, the court quite properly relied upon the common sense understanding of those terms. 272 F.Supp. at 543. The common sense understanding of those terms here compels the result that an FDA "hold" constitutes a "seizure" or "detention" of the vessel and its cargo.

Blaine Richards further argues that even if the detention falls within the F.C.&S. Clause, coverage should still be found under the War Risks policy. We agree with the district court, however, that the losses resulting from detention fall within the exemptions of that policy. Although FDA regulations are not technically United States Customs Regulations, which are issued by the United States Customs Service pursuant to the Customs statutes set out in Title 19 of the United States Code, we believe that the phrase "customs regulations" in the War Risks policy should be construed in a reasonable manner which would give proper effect to the intentions and expectations of the parties. Therefore, detention due to regulations concerning imported food should be regarded as "customs regulations." Also, the specific exemption of "customs regulations" from the War Risks policy suggests that such detention falls within the general provisions of the War Risk policy and hence within the F.C.& S. Clause of the "all risks" policy.

III.

Having held that detention by the FDA falls within the exemptions of the two policies, we must reach Blaine Richards' second and more troublesome objection to the decision below. Blaine Richards argues that even if detention...