Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y.

Decision Date31 March 2014
Docket NumberNo. 10 Civ. 1653 JPO.,10 Civ. 1653 JPO.
Citation10 F.Supp.3d 460
PartiesFIREMAN'S FUND INSURANCE CO., One Beacon Insurance Co., National Liability and Fire Insurance Co., and QBE Marine & Energy Syndicate 1036, Plaintiffs, v. GREAT AMERICAN INSURANCE CO. of New York, Max Specialty Insurance Co., and Signal International, LLC, Defendants.
CourtU.S. District Court — Southern District of New York

John Anthony Vincent Nicoletti, Nicoletti Hornig & Sweeney, New York, NY, for Plaintiffs.

George Richard Zacharkow, Stephen J. Galati, Mattioni, Ltd., Philadelphia, PA, Meryl R. Lieberman, Stephen D. Straus, Traub Lieberman Straus & Shrewsberry LLP, Hawthorne, NY, for Defendants.

OPINION AND ORDER

J. PAUL OETKEN, District Judge:

On August 20, 2009, one of the world's largest drydocks, the AFDB–5 (the “Drydock”), sank at its berth in calm waters in Port Arthur, Texas. Fireman's Fund Insurance Company (FFIC), One Beacon Insurance Company (One Beacon), National Liability and Fire Insurance Company (National Liability), and QBE Marine & Energy Syndicate 1036 (QBE) (collectively, Plaintiffs) brought this action against Great American Insurance Company of New York (Great American), Max Specialty Insurance Company (“MSI”), and the insured, Signal International, LLC (Signal), seeking a declaration as to the rights and obligations of the parties under various insurance policies. After several years of discovery and the unearthing of documents reflecting the Drydock's dilapidated condition, disagreement over the extent of coverage has given way to accusations of fraud and concealment. MSI and Great American have moved for declarations that their respective policies are void on such grounds. Plaintiffs and Signal have cross-moved on the same, and seek declarations requiring payment under the policies. For the reasons that follow, the Court holds that both policies are void ab initio. MSI and Great American's motions for summary judgment on these issues are therefore granted; all remaining motions are denied.

I. Background
A. Factual Background

The following facts are drawn from the parties' Local Civil Rule 56.1 Statements and other submissions made in connection with the instant motions. They are undisputed unless otherwise indicated.

1. Signal

Signal is a marine repair and fabrication company that came into existence in 2003 when it purchased the offshore repair division of Friede Goldman Halter in bankruptcy. The division consisted of six facilities in Mississippi and Texas, including a dockyard in Port Arthur, Texas (“dockyard”). Initially, Signal was predominantly involved in the repair, upgrade, and conversion of offshore drilling rigs. In 2006, it expanded its business model to include marine fabrication—performing new construction from engineering plans. By 2009, more than sixty percent of its revenue was derived from new construction projects. In 2010, Signal entered the ship repair business by purchasing the assets of Bender Shipbuilding in Alabama.

2. The Life and Death of a Drydock

In connection with its 2003 asset purchase, Signal assumed a lease with the Port Arthur Navigation District Industrial Development Corporation (“PANDIDC”) to operate the AFDB–5 drydock at the Port Arthur dockyard. The Drydock was built by the United States Navy during World War II for the purpose of repairing naval vessels, and acquired by the Port of Port Arthur (“Port”) in 1984. Later that year, the Port entered into a Lease Agreement to lease the dockyard from the City of Port Arthur (“City”) and assigned its leasehold interest to PANDIDC, which contemporaneously entered into a Project Agreement with Bethlehem Steel Corporation (“Bethlehem”) for the latter to operate the Drydock at the dockyard. Under the Project Agreement, the Drydock operator—first Bethlehem, and ultimately Signal—assumed all of the Port's obligations under the Lease Agreement. The Lease Agreement was for a term of twenty-five years, with an option for the operator to renew for another twenty-five years provided it gave two years' notice to PANDIDC, the Port, and the City.

The Drydock consisted of eight pontoons designated “A” through “H.” Each pontoon was 240 feet long, 101 feet wide, and twenty-three and a half feet deep, with a fixed wing wall at one end and a removable wing wall at the other. The wing walls rose 48 feet above a pontoon deck, and each had a watertight level called the safety deck. The center of each pontoon had a compartment called the machinery space, which housed the main ballast pumps as well as old engines, generators, and a boiler room no longer in use. The safety deck, which once functioned as a machine shop, also contained old machinery and parts. Asbestos and transite (an asbestos-containing material) were present in the safety deck and in the crew deck and machinery spaces of the pontoons. The Drydock was located in navigable waters along the Sabine–Neches Waterway in an area that had been carved out of the land by Bethlehem for the purpose of its installation. In addition to the AFDB–5, Signal owned and operated a second drydock—the “Dual Carrier” in Pascagoula, Mississippi.

Signal became aware soon after acquiring the Drydock that it was nearing the end of its useful life and in need of serious renovation.1 A December 2002 appraisal report prepared by surveyor Robert Heger stated that [t]he dry dock would require extensive repairs to the pontoon deck to make it operational,” which would require some 3.5 million pounds of steel, and the cost of doing so in the United States rendered its value “below zero.” (Dkt. No. 246 (“Zacharow Decl.”), Ex. 11 (“2002 Heger Report”) at 7–8.)2 Neither the Drydock's owners nor its operators seemed interested in making such costly repairs. A March 2003 condition and valuation (“C & V”) survey issued by ABS Consulting, Inc. (“ABS”), which had been retained by PANDIDC to periodically inspect the condition of the Drydock, found that “the shipyard is only marginally keeping up with the rapidly increasing rate of overall deterioration” and “within the last year more than a hundred doubler plates have been welded over severely wasted/holed original main deck platings.” (Zacharow Decl., Ex. 7 (“Mar.2003 ABS Survey”) at 3–4.)3 The survey also stated that although ABS had notified the Drydock's owners and operators in January 2000 of the “advanced state of pontoon shell and deck plating deterioration” and recommended “drydocking or outright renewal of the pontoons” to prevent the Drydock from “conceivably becom[ing] unserviceable well within the next 5 years,” “the drydock operators are attempting to effect essential maintenance/repair work (that can be accomplished without removing pontoons) in order to keep the facility operational in the short term.” (Id. at 5.)

Consistent with this observation is an April 2003 staff study conducted by Signal to determine whether it would be economically justifiable to purchase the Drydock from the Port. On the one hand, if Signal purchased the Drydock it would have discretion over “operation, maintenance, and disposal costs,” and could prevent the Port from offering to sell it to Signal's largest competitor. (Zacharow Decl., Ex. 8 (“Staff Study”) at 2–3.) On the other hand, the pontoon deck plate, which was being kept watertight with doublers and insert plates, was expected to last only another three to five years absent major renewal efforts which could cost $22 million and render the Drydock inoperable for two years. (Id. ) Moreover, even if Signal owned the Drydock, it would remain responsible under the Lease Agreement for disposal costs that “could run into the millions or even tens of millions of dollars due to age, condition and the presence of asbestos.” (Id. at 4–5.) In light of “the relatively short remaining useful life and extreme costs of renewals/life extensions and subsequent/eventual dry-dock disposal,” the study concluded that, [i]n the Port's own words, [the Drydock] is too much potential liability,” and recommended that Signal decline the Port's offer and attempt to renegotiate the Lease Agreement to place the burden of disposal upon the Port. (Id. )

In a subsequent C & V survey dated September 2003, ABS observed that Pontoon H was “the most deteriorated pontoon” and had “very serious hull leakage,” such that pumps were used constantly to maintain ballast levels. (Zacharow Decl., Ex. 6 (“Sept.2003 ABS Survey”) at 5.) The survey went on to state that since ABS's January 2000 recommendation, “no major, permanent, hull plating repairs have been accomplished,” and “even with the repairs and maintenance that have been done, the overall rate of drydock deterioration appears to be progressing at an ever increasing rate,” such that “the drydock is now well past the point where a major restoration effort would be economically practical.” (Id. at 7.) “At the time of inspection, repair personnel were actively looking for deck fractures over pontoon machinery areas and were affixing doublers as necessary,” and “due largely to excessive leakage in ‘H’ pontoon, it appeared that unsafe drydock operations were being conducted and ... that it [was] the Operator's intention to continue the same.” (Id. at 5–6 (emphasis in original).) The survey concluded by “highly recommend[ing] that drydock Owners advise Operators not to conduct additional drydockings until substantial repairs are made to the ‘H’ pontoon and the repairs are verified.” (Id. at 6 (emphasis removed).) In light of the survey's conclusions, PANDIDC held an emergency meeting on September 30, 2003 to address the Drydock's condition. As a result of that meeting, Signal and PANDIDC entered into an agreement whereby Signal made various commitments, including that it would remove the Drydock from service no later than October 2003 to perform the repairs mentioned in the survey. (Zacharow Decl., Ex. 9.)4

In March 2005, Signal purchased the Drydock from the Port for $10 pursuant to a Conditional Bill of Sale. (Zacharow Decl., Ex. 19 (“CBOS”).)...

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