McAllister Bros., Inc. v. Ocean Marine Indem. Co.

• Decision Date: 22 December 1989
• Docket Number: No. 87 Civ. 3840 (RJW).,87 Civ. 3840 (RJW).
• Citation: 742 F. Supp. 70
• Parties: McALLISTER BROTHERS, INC., et al., Plaintiffs, v. OCEAN MARINE INDEMNITY CO., and Gulf Coast Marine, Inc., Defendants & Third-Party Plaintiffs, v. SEAHAWK INTERNATIONAL, INC., Third-Party Defendant.
• Court: U.S. District Court — Southern District of New York

742 F. Supp. 70

McALLISTER BROTHERS, INC., et al., Plaintiffs, v. OCEAN MARINE INDEMNITY CO., and Gulf Coast Marine, Inc., Defendants & Third-Party Plaintiffs, v. SEAHAWK INTERNATIONAL, INC., Third-Party Defendant.

No. 87 Civ. 3840 (RJW).

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

December 22, 1989.

George W. Sullivan, Lilly Sullivan Purcell Barkan & Junge PC, New York City, for plaintiffs.

Douglas R. Burnett, Hill Rivkins Loesberg O'Brien Mulroy & Hayden, New York City, for defendants and third-party plaintiffs.

Leonard H. Rubin, New York City, for third-party defendant Seahawk.

MEMORANDUM DECISION

ROBERT J. WARD, District Judge.

This action concerns a contract of marine insurance which was obtained by McAllister Brothers, Inc. on its own behalf and on behalf of various insured interests (collectively "McAllister"), and which was brokered by third-party defendant Seahawk International, Inc. ("Seahawk"). Defendants and third-party plaintiffs Ocean Marine Indemnity Co. ("Ocean Marine") and Gulf Coast Marine, Inc. ("Gulf Coast") are, respectively, a five percent participant in the underwriting of the insurance policy and its parent company and managing general agent.

Originally, this action was filed in the Supreme Court of the State of New York, County of New York. On June 11, 1987, Ocean Marine and Gulf Coast removed the action to this Court pursuant to 28 U.S.C. § 1441. Plaintiffs did not oppose removal. In a decision filed on January 4, 1988, the Court granted defendants' motion to implead Seahawk into this action pursuant to Rule 14, Fed.R.Civ.P.

Pursuant to Fed.R.Civ.P. 56(b), all parties have moved for summary judgment on the issue of liability under the insurance policy. Ocean Marine and Gulf Coast contend that coverage under the policy lapsed due to nonpayment of premiums, and effective notice of cancellation was given to plaintiffs. McAllister and Seahawk allege that the cancellation was ineffective, or if effective, was rescinded. Alternatively, they argue that the cancellation was a breach of the terms of the insurance policy. Ocean Marine and Gulf Coast have also moved, pursuant to Rule 12(b)(6), Fed.R. Civ.P., for dismissal of plaintiffs' claim for punitive damages.

Additionally, Seahawk has moved for (1) remand of this action to state court pursuant to 28 U.S.C. § 1447(c), (2) dismissal of the third-party claims against it due to a number of alleged jurisdictional and procedural defects, pursuant to Rules 9(b), 12(b) and 14, Fed.R.Civ.P., and (3) sanctions against third-party plaintiffs and their counsel pursuant to Rule 11, Fed.R.Civ.P. In response, Ocean Marine and Gulf Coast cross-moved to amend the third-party complaint pursuant to Rule 15, Fed.R.Civ.P. and for the imposition of Rule 11 sanctions against Seahawk and its counsel.

By order filed on June 14, 1989, this action was referred to the Honorable James C. Francis IV, United States Magistrate, to report pursuant to 28 U.S.C. § 636(b)(1) and Rule 4 of the Local Rules for Proceedings Before Magistrates. On August 30, 1989, Magistrate Francis filed his Report and Recommendation (the "Report") in which he recommended that the motions for summary judgment, the motion for remand to state court and the motion to dismiss the third-party complaint be denied, that the motion to dismiss the claim for punitive damages be granted, and that leave be granted to amend the original and third-party complaints. Report at 2.

All of the parties have made timely written objections to a portion or portions of the magistrate's Report. The Court has reviewed the Report and has considered de novo those portions to which there were objections. For the following reasons, the Court accepts, with certain modifications, the magistrate's proposed findings and recommendations.

BACKGROUND

McAllister Brothers, Inc., a shipping company with headquarters in New York, obtained insurance protection for vessels in its ownership or control through Seahawk, a New York-based broker of marine insurance. The contract of marine insurance in dispute, Marine Hull and Machinery Policy No. SI-001-86 H & M (the "Policy" or the "Contract"), was to have been in effect from March 1, 1986 to March 1, 1987, and required the payment of a $2,700,000.00 premium by McAllister. At its inception, the Contract covered 107 vessels, barges, and various other pieces of marine equipment against damage to hull and machinery. The Contract provided that each vessel was to be deemed a separate interest, individually insured in all respects, as if a separate policy had been issued for it.

The parties dispute who prepared the terms and conditions of the Policy. Magistrate Francis found that the terms of the Policy were prepared by Seahawk, and, as is customary in the marine insurance business, Seahawk then sought underwriters to cover the risks insured under the policy. Report at 3. McAllister maintains that the Policy was prepared by Atlantic Mutual Insurance Company ("Atlantic"), which subscribed to twenty-five percent of the coverage to be provided and assumed the role of lead underwriter for the Policy. According to McAllister, Seahawk only carried out the mechanical preparation of the Policy, not its substantive drafting, and then submitted the terms and conditions set forth by Atlantic to the various subscribing underwriters for acceptance. Ocean Marine and Gulf Coast subscribed to a 5% participation in the coverage provided under the Policy. Neither Ocean Marine nor Gulf Coast had any role in drafting or issuing the Contract.

The terms of the Policy do not specify conditions for payment of premiums.¹ The binder for the Policy, however, provides that the total premium of $2,700,000.00 was to be "payable quarterly (premium financed)." The various underwriters did not bill McAllister directly for premiums. Instead, McAllister made payments to Seahawk which, in turn, made payments to the underwriters. On March 25, 1986, Seahawk sent McAllister four quarterly premium invoices that reflected quarterly payments due on March 1, June 1, September 1, and December 1, of that year.

During the term of the Policy, coverage for additional vessels was agreed upon and previous coverage for vessels was deleted. These changes were reflected in periodic endorsements issued by Seahawk and submitted to the underwriters. The endorsements set forth schedules which included quarterly dates for the payment of additional premiums for new coverage or for the return of premiums for deleted coverage, beginning from the date of the change in coverage. Periodically, Seahawk would send invoices to plaintiffs reflecting debits or credits for these changes. These invoices generally reflected payments due or returnable quarterly, but some reflected lump sums due or returnable within a particular quarter.

McAllister asserts that the frequent addition and deletion of insured vessels through the endorsement process required it continually to reassess and recalculate payments due to Seahawk. According to McAllister, as a matter of convenience, a net balance for endorsements, whether a debit or a credit, was to be determined as the expiration date for the Policy approached, not on a quarterly basis. Ocean Marine and Gulf Coast argue that there was no such practice in effect, and that the adjustments for the endorsements were payable or returnable quarterly.

McAllister did not make the premium payments required by the Contract on the quarterly due dates. The first two premium installments paid to Seahawk by McAllister were received on or about April 10 and July 22, 1986, respectively. Payment of the third installment to Seahawk was apparently made on October 20, 1986.²

Magistrate Francis found that Seahawk, after receiving McAllister's check for the third-quarter premium installment, forwarded payment to Gulf Coast for its share of the third quarter premium. Report at 5-6. Prior to receipt of this check, however, Gulf Coast sent a letter to Seahawk dated October 22, 1986, stating that "in accordance with the non-payment of premium provisions of this policy, we hereby give thirty (30) days notice of cancellation."

The Seahawk check was received by Gulf Coast on October 23, 1986, and was acknowledged in a handwritten postscript to a second letter from Gulf Coast to Seahawk dated October 23, 1986, which stated:

The list of open items attached to my letter of October 22, 1986 was incorrect as it reflected open items as of August 19, 1986.

Enclosed is a corrected list showing open items as of October 21, 1986. The items shown in the attached statement for McAllister are those that need to be paid in order that we can reinstate coverage....

P.S. I acknowledge your payment of the third quarter but still need to have the endorsements paid.

The attached statement included McAllister's third-quarter premium, crossed out by hand, and a number of debit and credit listings under the heading "McAllister Brothers," dated March, April and May 1986.

The October letters from Gulf Coast were not sent directly to McAllister. As the magistrate found, it is unclear from the submissions just when McAllister received actual notice of Gulf Coast's attempt at cancellation. Testimony by the president of Seahawk indicates that Seahawk immediately delivered a copy of the Gulf Coast letters to McAllister, but believed that payment of the third-quarter premium settled the issue. McAllister contends that it believed that coverage under the Policy remained intact, that the first notice it had of the alleged cancellation was received from Windward International, its claims adjuster, and that it was not until February 20, 1987 that an actual copy of the October 22, 1986 Gulf Coast letter was received from Seahawk. Gulf Coast and Ocean Marine dispute these assertions, and claim that, in addition to the notice McAllister received from Seahawk in October, McAllister received notice of the cancellation in January 1987.

The Policy contains a...