Johnson & Higgins of Texas, Inc. v. Kenneco Energy, Inc.

• Decision Date: 07 December 1997
• Docket Number: No. 96-0244,96-0244
• Citation: 962 S.W.2d 507
• Parties: 41 Tex. Sup. Ct. J. 268 JOHNSON & HIGGINS OF TEXAS, INC., Petitioner, v. KENNECO ENERGY, INC., f/k/a Armada Supply Inc., Respondent.
• Court: Texas Supreme Court

Page 507

962 S.W.2d 507

41 Tex. Sup. Ct. J. 268

JOHNSON & HIGGINS OF TEXAS, INC., Petitioner, v. KENNECO ENERGY, INC., f/k/a Armada Supply Inc., Respondent.

No. 96-0244.

Supreme Court of Texas.

Argued Oct. 22, 1996.

Decided Jan. 16, 1998.

Dissenting Opinion Dec. 7, 1997.

Joe R. Greenhill, Bob E. Shannon, Austin, Stephen G. Tipps, Jane A. Bland, Robert Harrison Pemberton, Amy Eikel, Houston, for Petitioner.

John L. Russell, David J. Mullican, Jr., Robert Eikel, George E. Pletcher, Kimberly Ann Warren Brown, Nina Cortell, Houston, for Respondent.

ABBOTT, Justice delivered the opinion of the Court, in which PHILLIPS, Chief Justice, ENOCH, BAKER and HANKINSON, Justices, join. SPECTOR, Justice, joined Parts I, II, III, and IV of the Court's opinion.

We withdraw our opinion of December 11, 1997, and substitute the following in its place. The parties' motions for rehearing are overruled.

This insurance case involves statute of limitations and collateral estoppel issues, and reevaluates the common-law method of calculating prejudgment interest under Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549 (Tex.1985). The court of appeals reversed the trial court's judgment in favor of Johnson & Higgins, and rendered judgment for Kenneco Energy. We modify the court of appeals' judgment and remand the cause to the trial court to render judgment in accordance with this opinion.

I. BACKGROUND

In 1982, Kenneco Energy, an oil trading company then known as Armada Supply, purchased a tanker cargo of fuel oil from Petrobas, a Brazilian oil company, to be shipped from Rio de Janeiro to New York. Under their contract, the purchase price of the oil was to be measured by the market price on the day the tanker arrived in New York. The contract was on a "C.I.F." basis, meaning that Petrobas bore the cost of shipment, insurance, and freight.

Petrobas purchased insurance for the cargo from Banorte, a Brazilian underwriter, for the amount of the purchase price, plus ten percent. This amount was the "primary coverage." In addition to the insurance provided by Petrobas, Kenneco already had its own insurance from a group of London underwriters, which it obtained through an insurance broker, Johnson & Higgins of Texas, Inc. (J & H).

The oil tanker sailed November 16, 1982. While the tanker was en route, Kenneco contracted to sell the oil, upon delivery in New York Harbor, to Sun Oil Trading Company (Sun) for $30.55 per barrel. This contract was on a "delivered" basis (rather than a C.I.F. basis), meaning that Kenneco retained title to the oil and assumed the risk of loss until Sun accepted the cargo in New York. Kenneco's profit on the oil was to be the difference between the sale price of $30.55 per barrel and the purchase price to be determined by the market price upon delivery.

After the tanker set sail, the market price of the oil began to decline. Because Kenneco's purchase price was determined by the market price, as the market price decreased, Kenneco's potential profit on the sale increased. At the same time, the primary coverage amount under the Brazilian insurance policy, which was tied to the market price Kenneco would pay to Petrobas (plus ten percent), declined. Concerned about the adequacy of insurance coverage for its increasing potential profit, anticipated to be $1.5 million, Kenneco arranged a meeting with J & H to discuss coverage under the London policy. On November 30, 1982, while the tanker of fuel sailed to New York, Kenneco sent Carolyn Brown to meet with Jim Anderson of J & H to discuss coverage.

According to Kenneco, Brown met with J & H to address two primary concerns. First, Kenneco was worried that it would be unable to collect on a claim under the Banorte policy because Kenneco had heard that the Brazilian insurers had a dubious reputation. To avoid that potential problem, Kenneco wanted to claim the primary coverage amount directly from the London underwriters. In essence, Kenneco wanted assurance from the London underwriters that it would be able to recover the amount insured by Banorte.

In response, Anderson prepared a certificate of insurance under the contingency coverage Kenneco already had with the London underwriters. Anderson did not, however, offer the possibility of a "guarantee of collectibility," which would insure Kenneco against the risk that Banorte would not pay. This later proved problematic because the policy's cover sheet stated that contingency coverage required a back-to-back C.I.F. sale, meaning that both the sale from Petrobas to Kenneco and the sale from Kenneco to Sun needed to be C.I.F.

Anderson testified that he believed the sale was back-to-back C.I.F. In a back-to-back C.I.F. sale, Kenneco would not hold title to the cargo during the voyage; instead, Kenneco's buyer would take title and accordingly bear the risk of loss of the cargo during transport. In a back-to-back C.I.F. sale, Kenneco would prepare a certificate of insurance under its contingency coverage and deliver it to the purchaser of the cargo, who would then replace Kenneco as the party asserting a claim.

As it turned out, the sale from Kenneco to Sun was contracted on a delivered basis, not C.I.F.; therefore, Kenneco retained both the title and the risk. As a consequence, the contingency coverage procured by J & H did not protect Kenneco against the possibility that the Brazilian underwriters would not fulfill their insurance obligations.

The second concern Brown expressed to J & H was that the primary coverage through Banorte was insufficient to cover its profits on the deal because Banorte insured only the purchase price (i.e., the market price) plus ten percent. Kenneco wanted to insure against the loss of the sizable profit it would make on the Sun contract. Anderson responded by preparing a certificate under Kenneco's preexisting increased value coverage, increasing the insured value of the cargo from the market price plus ten percent (the primary coverage amount) to the contract amount of $30.55 per barrel (thereby including the profit).

In preparing both certificates, Anderson apparently did not realize that Kenneco could not recover under both the increased value provision, under which Kenneco retained title and bore the risk of loss, and the contingency coverage provision, under which Kenneco's buyer held the title and the risk. Nevertheless, Brown discerned from her meeting with Anderson that Kenneco was protected by "contingency coverage" in the event the Brazilian underwriters failed to pay, and that the profits on the Sun contract were covered by the increased value provision. Kenneco paid premiums for both the contingency coverage and the increased value coverage.

When the tanker arrived in New York Harbor, Sun rejected the cargo and canceled the contract because the oil arrived both short and contaminated. Before leaving Brazil, the cargo was apparently deficient by 8,000 barrels. In addition, the tanker crew used some of the cargo as fuel during the voyage, pumping in seawater to replace the depleted amount.

Sun rescinded the contract. Had it not, Kenneco's profits would have been about $1,690,780.00. Kenneco was able to partially renegotiate the contract with Sun; however, the renegotiated contract was also lost when the tanker fled the harbor to avoid being sanctioned for its conduct. Eventually, Kenneco convinced the tanker captain to return, took control of the cargo, and began to recondition the oil. As the reconditioned oil became saleable, Kenneco sold it in several parcels at various prices below the $30.55 per barrel contract price.

Kenneco asserted insurance claims under both the Brazilian and London policies claiming the full amount of its lost profit under the canceled Sun contract. The London underwriters refused Kenneco's contingency coverage because the sale was not back-to-back C.I.F. as required under the insurance policy. The London underwriters did recognize coverage under the increased value provision; however, their position was that the increased value coverage insured only against physical loss or damage to the cargo up to the amount insured, not the loss of profits due to cancellation of a contract, as Kenneco urged. The London underwriters took a formal position on the claim in March 1983, denying contingency coverage and rejecting Kenneco's interpretation of the increased value provision.

Kenneco filed suit against Banorte and the London underwriters in April 1983 in New York federal district court. Armada Supply, Inc. v. Wright, 665 F.Supp. 1047 (S.D.N.Y.1987), aff'd in part, rev'd in part, 858 F.2d 842 (2d Cir.1988). With the contingency coverage in dispute, Kenneco could not look solely to the London underwriters for coverage, but had to bring suit against Banorte, which disputed Kenneco's primary coverage. Kenneco did not name J & H as a defendant, but did offer evidence about the events at the November 30, 1982 meeting between Brown and Anderson, and Kenneco's contention that Anderson's and J & H's representations resulted in lost profits coverage.

After a non-jury trial, the federal district court held that the contingency coverage was inapplicable because the sale was not back-to-back C.I.F. The court also concluded that the increased value provision covered physical loss and damage, but not the loss of the Sun contract. In determining the scope of the lost profits and lost contract coverage, the court considered J & H's conduct during and after the November 30 meeting to decide what agreements had been made regarding coverage. On appeal, the Second Circuit affirmed most of the district court's judgment, but reversed in part on the issue of sue and labor expenses. ¹ Armada Supply, Inc. v. Wright, 858 F.2d 842, 851 (2d Cir.1988). The Second Circuit rendered its decision on September 22, 1988.

While the federal action was pending in New York, Kenneco indicated that it might file a separate suit against J & H for mishandling its insurance...