Continental Oil Co. v. Bonanza Corp.

• Decision Date: 01 June 1982
• Docket Number: No. 80-2317,80-2317
• Citation: 677 F.2d 455
• Parties: CONTINENTAL OIL COMPANY, Plaintiff-Appellee, v. BONANZA CORPORATION and Republic Insurance Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 455

677 F.2d 455

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 1, 1982.

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 DYER ^*, SAM D. JOHNSON and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

This case calls upon us to descend into the depths of the maritime insurance world to determine when the raising of a sunken wreck is "compulsory by law." Continental Oil Company (Conoco) brought suit against Bonanza Corporation (Bonanza) and Republic Insurance Company (Republic) to recover expenses for removing the wreck of the Aqua Safari, an ill-fated 65 or 70 foot vessel that Bonanza had chartered to Conoco. The district court found that Conoco was entitled to recover its expenses from both the vessel owner and the insurance company, and this appeal followed. We agree with the district court that the wreck was the fault of the vessel owner and that Conoco's removal of the wreck was "compulsory by law" under the insurance policy, and we affirm.

I. Facts

The events which brought about the disappearance beneath the ocean waves of the Aqua Safari, chartered by Conoco from its owner, Bonanza, are not in dispute. The Aqua Safari was chartered as a standby boat in Conoco's offshore drilling operations. The boat's primary function was to ferry "mud log" reports between Conoco's offshore rig and other vessels in the vicinity. Bonanza was to provide the captain and crew for the Aqua Safari's courier missions.

The charter party agreement also required Bonanza to procure insurance on the vessel. Conoco was to be named as an additional insured on each policy. In compliance with the charter party agreement, Bonanza purchased a standard form Protection & Indemnity (P&I) policy from Republic providing one million dollars of coverage. The policy, known in the trade as SP-38, affords insurance coverage for, among other things, wreck removal expenses "when such removal is compulsory by law..." ¹ The policy also provides that when the assured has any interest in the vessel other than as a shipowner, the insurer's liability shall not be greater than "if the assured were the sole owner and entitled to petition for limitation of liability." ² The policy named both Bonanza and Conoco as assureds.

On January 1, 1977, the Aqua Safari reported for duty at the drilling rig, the Transworld 64. The Aqua Safari's task that day was to pick up a drilling report and bring it to another vessel which would then radio the report to Conoco's land-based headquarters. The Transworld 64, a massive three-legged moveable drilling rig, presents a myriad of hazards to unwary small craft; the Aqua Safari fell victim to its captain's unwariness. While awaiting the drilling report, the Aqua Safari drifted underneath the Transworld 64 where the vessel's prop and radio antenna became entangled in the drilling rig's mooring lines. Before the vessel could be freed, it began to take water. The pumps were to no avail and the boat sank below the Transworld 64, where it began to settle into the soft mud of the ocean floor.

Initially, Conoco was concerned about the dangers in moving the Transworld 64 with a sunken craft beneath it. Conoco demanded that Bonanza remove the wreck from under the drilling rig, but Bonanza refused. The Transworld 64 was then moved without incident. The Aqua Safari, Conoco believed, still posed a danger, however, to other wells and to oil pipelines in the vicinity. Because of the potential for damage if the Aqua Safari were thrown by seas against a nearby pipeline, and because Conoco wished to place a fixed structure on its newly-drilled well, Conoco decided to remove the wreck. It was determined that the most prudent means of removal was a derrick barge that was already on the scene to assist in the placing of the fixed structure. In March, 1977, the derrick barge successfully raised the Aqua Safari at a cost to Conoco of $109,000. Conoco then sued Bonanza and Republic to recover these costs. ³

The district court, in a multi-faceted opinion, found both Bonanza and Republic liable on a variety of theories. 511 F.Supp. 62 (S.D.Tex.1980). First, the court found that the Aqua Safari's journey to the depths was solely the fault of its captain and crew, and, therefore, Bonanza was liable for all damages resulting from the wreck. Second, the court found that Republic was liable directly to Conoco on the insurance policy. The court held that two terms of the policy covered wreck removal expenses. The court found the expenses covered, first, by the term of the policy insuring wreck removal expenses when removal is compulsory by law. Second, the court found coverage under the term insuring expenses in connection with movable property. Finally, the court rejected Bonanza's plea to limit its liability. The court reasoned that Bonanza's master was the "managing agent of Bonanza with respect to affairs relating to the vessel." Because the negligence of the master was within the privity or knowledge of Bonanza, limitation was denied. ⁴ From this judgment, both Republic and Bonanza appeal.

II. Bonanza's Liability

The district court held Bonanza liable because of the negligence of the Aqua Safari's master in allowing the vessel to drift under the Transworld 64, starting the irreversible process that led to the sinking. Neither Bonanza nor Republic contests the finding of negligence. Having negligently caused the Aqua Safari to sink below the drilling rig, Bonanza is liable for Conoco's costs in removing the vessel. See Tennessee Valley Sand & Gravel Co. v. M/V Delta, 598 F.2d 930, 934 (5th Cir. 1979), modified per curiam on other grounds, 604 F.2d 13 (5th Cir. 1979). We affirm the district court's judgment holding Bonanza liable.

III. Direct Action?

Although Bonanza is liable to Conoco for wreck removal expenses, Conoco may not recover directly against Republic as Bonanza's insurer. The contract between Bonanza and Republic is written as an indemnity contract, not as a liability contract. In a liability contract, the insurer agrees to cover liability for damages. If the insured is liable, the insurance company must pay the damages. In an indemnity contract, by contrast, the insurer agrees to reimburse expenses to the insured that the insured is liable to pay and has paid. An indemnity policy covers only the insured's actual expenses.

We have held that the insured on an indemnity contract may not bring an action against the insurance company until the insured has actually paid money on his liability. Stuyvesant Insurance Company v. Nardelli, 286 F.2d 600 (5th Cir. 1961). If the insured cannot enforce his own indemnity policy until having paid out money, it follows that the insurance company has no greater obligation to the person to whom the insured is liable. See Ahmed v. American S.S. Mutual Protection & Indemnity Ass'n, 640 F.2d 993 (9th Cir. 1981) (New York law); cf. Liman v. American Steamship Owners, 299 F.Supp. 106 (S.D.N.Y.) aff'd, 417 F.2d 627 (2d Cir. 1969) cert. denied, 397 U.S. 936, 90 S.Ct. 946, 25 L.Ed.2d 116 (1970) (the court allowed an action by an insolvent insured against the insurance company under an indemnity policy when the insured had contracted to satisfy a judgment although the insured had not actually performed the contract).

Conoco has also failed to bring our attention to any principle of law, federal or state, that overrides the indemnity provision and authorizes a direct action against the insurer. Cf. Olympic Towing Corp. v. Nebel Towing Co., 419 F.2d 230, 237 (5th Cir. 1969) (Louisiana direct action statute overrides indemnity restriction in a maritime protection and indemnity policy), cert. denied, 397 U.S. 989, 90 S.Ct. 1120, 25 L.Ed.2d 396 (1970). Federal admiralty law provides no general right to sue an insurance company directly, Stuyvesant, supra, and, looking landwards, Texas law refuses to permit a direct action against an insurance company. Tex.R.Civ.P. 51(b); Russell v. Hartford Casualty Insurance Co., 548 S.W.2d 737 (Tex.Civ.App.1977-writ ref'd n. r. e.).

IV. Was the removal of the Aqua Safari "compulsory by law"?

While Conoco may not bring a direct action against Republic based on Bonanza's status as an assured, Conoco itself is also an assured under the policy and has paid wreck removal expenses. Thus, Conoco may assert rights against Republic in this action based on Conoco's independent status as an assured under the policy.

The Protection and Indemnity policy issued by Republic provides that Republic will indemnify an assured as owner of the Aqua Safari for "costs and expenses of, or incidental to, the removal of a wreck of the vessel named herein when such removal is compulsory by law." Republic argues that the removal of the Aqua Safari was not compulsory by law. ⁵ Rather, according to Republic, Conoco was under no legal obligation to raise the Aqua Safari and did so solely in aid of its operations in managing the well. Conoco protests that it faced potential liability should the wreck of the Aqua Safari have been tossed by a storm upon a neighboring pipeline. Moreover, Conoco insists it was required by federal regulations to remove all equipment from its leasehold. Without the guidance of Fifth Circuit authority at that time, the district court held that Conoco's removal of the Aqua Safari was compulsory by law.

Many would sooner walk the plank than engage in the risky business of interpreting maritime insurance policies. Unlike the district court had, however, we have the benefit of progress in...