Puritan Ins. Co. v. Eagle S.S. Co. S.A.

• Decision Date: 18 December 1985
• Docket Number: No. 85-7320,85-7320
• Citation: 779 F.2d 866
• Parties: PURITAN INSURANCE COMPANY, American Druggists Insurance Company, Utah Home Fire Insurance Company and Assurances Generales de France, Plaintiffs-Appellants, v. EAGLE STEAMSHIP COMPANY S.A., Earle Shipping Company, Ltd., Myrapal Freighters Corp., Duchess Shipping Company, Ltd., Lyras Shipping, Ltd. and Thomas E. Leeds Company, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 866

779 F.2d 866

1986 A.M.C. 1240

PURITAN INSURANCE COMPANY, American Druggists Insurance Company, Utah Home Fire Insurance Company and Assurances Generales de France Plaintiffs-Appellants, v. EAGLE STEAMSHIP COMPANY S.A., Earle Shipping Company, Ltd. Myrapal Freighters Corp., Duchess Shipping Company, Ltd., Lyras Shipping, Ltd. and Thomas E. Leeds Company, Inc. Defendants-Appellees.

No. 85-7320.

United States Court of Appeals Second Circuit.

Argued Aug. 26, 1985.

Decided Dec. 18, 1985.

John M. Speyer, New York City (Margaret M. O'Neill, Speyer, Thurm, Perlberg & Heller, New York City, on brief), for plaintiffs-appellants.

Robert P. Lewis, New York City (Allan J. Graf, Irene Savidis, Hill, Betts & Nash, New York City, on brief), for defendants-appellees Eagle Steamship Co. S.A., Earle Shipping Co., Ltd., Duchess Shipping Co., Ltd., and Lyras Shipping, Ltd.

Philip J. Walsh, New York City (Richard P. Byrne, Eric M. Kornblau, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, on brief), for defendant-appellee Thomas E. Leeds Co., Inc.

Before FEINBERG, Chief Judge, and KEARSE and CARDAMONE, Circuit Judges.

KEARSE, Circuit Judge:

The plaintiff insurance underwriters Puritan Insurance Company, et al. (the "insurers"), appeal from a final judgment of the United States District Court for the Southern District of New York, entered after a bench trial before Kevin Thomas Duffy, Judge, dismissing their action for damages and a declaration that certain insurance written by plaintiffs was void on account of defendants' nondisclosures of material facts in their application for insurance coverage. The district court dismissed the complaint on the ground that plaintiffs had failed to prove that they would not have issued the policy had all the material facts been accurately disclosed. The court also awarded attorney's fees to defendants. On appeal, plaintiffs principally challenge the trial court's findings of fact and contend that there was no valid basis for the award of attorney's fees. We affirm the dismissal of the complaint, but we remand the matter of attorney's fees to the district court for further proceedings.

I. BACKGROUND

Defendants Eagle Steamship Company S.A., Earle Shipping Company, Ltd., and Duchess Shipping Company, Ltd. (collectively the "ship owners" or "owners"), were the owners of several ships, including the IRINIO and the MARIAM, upon which they obtained hull and machine insurance from plaintiff insurers for the year beginning July 9, 1980. Defendant Lyras Shipping, Ltd., was the managing agent for the owners from March 1979 through the period in question. Defendant Thomas E. Leeds Company, Inc. ("Leeds"), was an insurance broker used by the owners to obtain insurance. Plaintiff insurers conducted business, at least in part, through a corporation called American National General Agencies of New York, Inc. ("ANGA"), which they authorized to accept risks and write insurance on their behalf. Most of the events leading to the present controversy are not substantially in dispute.

A. The Application

In late April 1980, the ship owners, acting through their operating agent, asked Leeds to seek renewed insurance for the four vessels for the year 1980-1981. The owners provided Leeds with a list of losses suffered by the vessels during the 1979-1980 policy year. These losses were shown in the application submitted by Leeds to ANGA and other insurance underwriters in June 1980; the application stated that in the policy year 1979-1980, premiums paid had exceeded losses claimed to the extent that the owners had a credit balance of 7.5%. The list of losses that was submitted with the application, however, omitted any mention of two casualties that had occurred within that period. The first accident, in the late summer of 1979, had resulted in main engine damage to the MARIAM for which the then-insurers eventually paid $638,115. The second accident involved the IRINIO in March 1980, and the repairs, which had been commenced prior to the owners' April 1980 communications to Leeds with regard to new insurance, resulted in payments by the then-insurers in the amount of $422,487.

Following Leeds's dissemination of the application, a syndicate at Lloyd's of London agreed to act as lead underwriter ("Lloyd's" or "leaders"), and it set certain premium rates. ANGA's senior vice president Derek Jones and its employee William J. Hatzel reviewed the application on behalf of plaintiffs and noted the low 7.5% credit ratio. Jones concluded that notwithstanding the fact that the proposition appeared to be marginal, plaintiffs would underwrite 5% of the risk. On July 1, 1980, ANGA orally bound this amount with Leeds on behalf of the plaintiff insurers, effective July 9, 1980, and accepted the rates set by Lloyd's.

B. The Disclosure of the IRINIO Loss

By letter dated July 2, 1980, and received by Leeds on July 7, the owners informed Leeds for the first time of the March 1980 loss to the IRINIO, which they then estimated would total more than $300,000. Leeds employee Mary Mase immediately gave this information to the British insurance brokers, who relayed it to Lloyd's. Lloyd's agreed not to take the March 1980 loss to the IRINIO into account in the renewal. Mase testified that she then telephoned ANGA and spoke either to Hatzel or to ANGA senior marine underwriter Paul Gagliardi. Mase testified that she informed the person to whom she spoke of the fact of the IRINIO loss, although probably not of its amount, and of the fact that Lloyd's had decided not to take the IRINIO loss into account for the renewal. Gagliardi and Hatzel denied having received such a call from Mase.

On July 22, Leeds sent a written binder ("Binder") to ANGA and the other underwriters who had agreed orally to underwrite the risk. The July 22 Binder was to supersede the application of June 6. Under a section entitled "Information to Underwriters," the Binder stated: "As per leaders agreement 'IRINIO' Machinery Damage Claim March 1980 not taken into account this renewal." The "Statistics" section of the July 22 Binder continued to list a 7.5% credit balance. Because of the new information on the IRINIO loss, ANGA had the option of not signing the Binder and could have declined the risk had it been aware of the situation. Both Gagliardi and Hatzel testified that they had read this Binder but that they did not recall seeing its reference to the IRINIO loss. Jones testified that ANGA would not have accepted the risk if it had known of the additional losses to the IRINIO and the MARIAM. On July 30, Gagliardi signed the Binder on behalf of the plaintiff insurers without asking anyone at Leeds about the IRINIO loss.

C. The Disclosure of the MARIAM Loss

Leeds first learned of the 1979 loss of $638,000 to the MARIAM on January 5, 1981, and it listed this loss and the $422,000 loss to the IRINIO in the renewal application it sent ANGA on June 10, 1981. The application also listed losses totaling nearly $3 million for the 1980-1981 policy year to these two ships and to one other insured by plaintiffs and owned by the ship owners. Gagliardi testified that, in reviewing the renewal application, he noticed the losses to the IRINIO and the MARIAM that had not been included in the previous year's application. These losses brought the supposed 7.5% credit balance for that year to a deficit of more than 300%.

D. The Decision Below

Plaintiffs refused to pay claims under the 1980-1981 policy and filed this lawsuit in August 1981, seeking damages and a declaratory judgment that the policy was void ab initio, on the ground that they had undertaken the risk in reliance on materially inaccurate representations contained in the June 6, 1980 application. The ship owners counterclaimed for plaintiffs' unpaid share of the losses covered under the policy, plus prejudgment interest, and sought an award of attorney's fees.

Following a four-day bench trial, the district court issued an opinion and order dismissing plaintiffs' complaint, granting the owners' counterclaim, and awarding attorney's fees to all defendants. It found as established the sequence of events described above. The court noted the differing statements of Mase, Hatzel, and Gagliardi with respect to telephonic notification of ANGA by Leeds of the IRINIO loss in July 1980. The court explicitly found credible Mase's testimony that she had called ANGA and informed one of those two employees of the fact of the IRINIO loss, and it accepted that testimony as true. The court found incredible the testimony of Gagliardi and Hatzel that in reading the July 22 Binder they had overlooked the information as to the IRINIO loss.

The court noted the principle that the parties to a maritime insurance contract are held to the highest degree of good faith and that the failure of the assured to disclose a material fact or circumstance known to him makes the policy voidable at the instance of the insurer. The court found that the fact of the IRINIO loss was disclosed to ANGA prior to its signing of the Binder, and it concluded that the insurers had not established that the facts not disclosed to them prior to ANGA's signing of the Binder were material. Thus, the court stated that although the initial application should have disclosed the losses to the IRINIO and the MARIAM, defendants had satisfied their obligation with respect to the IRINIO by amending the application in July 1980; it ruled that, while the ship owners should also have disclosed the loss to the MARIAM, the plaintiffs had failed to prove that they would not have undertaken the risk had they been fully informed of this loss. The court found that, in deciding to accept 5% of the risk on the ship owners' application, plaintiffs had apparently relied on the judgment of the lead underwriters rather than on the information presented in defendants' application.

Having found that the plaintiffs failed to prove that the nondisclosures were material,...