Royal Ins. Co. of America v. Ksi Trading Corp.

• Decision Date: 16 April 2009
• Docket Number: No. 07-3824.,No. 06-3447.,06-3447.,07-3824.
• Citation: 563 F.3d 68
• Parties: ROYAL INSURANCE COMPANY OF AMERICA v. KSI TRADING CORPORATION; Astro Automotive, Inc. James Barrett; Jeffrey Joiner; The LIG Insurance Agencies, Third-Party Defendants. KSI Trading Corporation; Astro Automotive, Inc., James Barrett, Jeffrey Joiner, The LIG Insurance Agencies, Appellants. KSI Trading Corporation; Astro Automotive, Inc., The LIG Insurance Agencies, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

563 F.3d 68

ROYAL INSURANCE COMPANY OF AMERICA v. KSI TRADING CORPORATION; Astro Automotive, Inc James Barrett; Jeffrey Joiner; The LIG Insurance Agencies, Third-Party Defendants KSI Trading Corporation; Astro Automotive, Inc., James Barrett, Jeffrey Joiner, The LIG Insurance Agencies, Appellants.

KSI Trading Corporation; Astro Automotive, Inc., The LIG Insurance Agencies, Appellants.

No. 06-3447.

No. 07-3824.

United States Court of Appeals, Third Circuit.

Argued January 6, 2009.

Filed: April 16, 2009.

Kenneth R. Rothschild (Argued), Golden, Rothschild, Spagnola, Lundell, Levitt & Boylan, Bridgewater, NJ, for Appellants.

James F. Campise, David Y. Loh (Argued), Cozen & O'Connor, New York, NY, for Appellee.

Before: FUENTES and FISHER, Circuit Judges, and PADOVA,^* District Judge.

OPINION OF THE COURT

FISHER, Circuit Judge.

This appeal calls for the interpretation of a Marine Open Cargo insurance policy (the Policy) entered into by KSI Trading Corporation (KSI) and Royal Insurance Company of America (Royal). A fire occurred at one of KSI's warehouses, and KSI filed a reimbursement claim with Royal for the full extent of its loss pursuant to a Warehouse Storage Insurance section of the Policy. Royal disclaimed coverage for a significant portion of the loss, asserting that the Warehouse Storage Insurance section did not cover KSI's domestically acquired merchandise. Thereafter, Royal sought a declaratory judgment in the District Court that it was not obligated to indemnify KSI for all of its loss. The District Court determined that the Warehouse Storage Insurance section of the Policy only provided coverage for KSI's internationally acquired merchandise and granted summary judgment in favor of Royal. We conclude that the Policy is ambiguous with respect to the property that was insured while stored in KSI's warehouse, and because New Jersey law, which governs the interpretation of the Policy, requires ambiguities to be resolved in favor of the insured, we will reverse the District Court and enter judgment in favor of KSI.

I.

KSI, a New Jersey corporation, is a wholesale distributor of after-market auto body parts that purchases inventory from both domestic and international suppliers, and stores its inventory in warehouses located throughout the United States. Royal, an Illinois corporation, is a marine cargo underwriter which provides insurance for the hazards encountered in maritime transportation. On May 19, 1999, Royal provided quotations for insurance coverage to KSI's broker, Jeffrey Joiner of the LIG Insurance Agencies (LIG), and on July 1, 1999, Royal and KSI entered into an insurance contract, with coverage commencing at this time. Certain subsidiaries of KSI, including Astro Automotive, Inc. (Astro), were also covered by the Policy. Sometime after July 1, 1999, KSI received the actual Marine Open Cargo Policy No. POC102991.

The Policy contained three sections, which are titled as follows: (I) Ocean Cargo; (II) Domestic Transportation Insurance; and (III) Warehouse Storage Insurance. The Ocean Cargo section of the Policy is comprised of fifty-one paragraphs, but in one particularly relevant paragraph, entitled "Property Insured & Insurable Interest," states:

"This Policy covers, for account of whom it may concern, shipments of lawful goods and merchandise consisting principally of:

MERCHANDISE INCIDENTAL TO THE ASSURED'S BUSINESS, CONSISTING PRINCIPALLY OF AUTOMOBILE PARTS

Under or on deck, consigned to or shipped by others for account or control of the Assured or in which the Assured has the risk of loss, but excluding shipments either sold or purchased by the Assured subject to the terms of sale (or purchase) whereby the Assured is not obligated to furnish Ocean Marine insurance. Notwithstanding the foregoing, this Policy also covers all shipments of lawful goods and merchandise for the account of others from whom the Assured has received written instructions to insure provided such instructions are received prior to any known or reported loss, damage, or accident and prior to sailing of the vessel."

In another particularly relevant paragraph, with the caption "Geographical Limits," the Ocean Cargo section also states:

"Always excepting adventures which are illegal under the laws of the United States this Policy covers Property Insured at and from ports and/or places in the world to ports and/or places in the world excluding shipments originating in the United States (meaning the forty-eight (48) contiguous states and the District of Columbia) or Canada for shipment to destination[s] in the Continental United States or Canada."

Turning to Sections II and III of the Policy, the Domestic Transportation Insurance section states, in pertinent part:

"Effective as to all shipments made on or after July 1, 1999 this Policy is hereby extended, subject to its terms and conditions, to cover shipments of the Property Insured while in due course of transit only at the risk of the assured WORLDWIDE excluding the former Soviet Union and Russian Federation from the time the property leaves the store, warehouse, or factory at initial point of shipment and continuously thereafter, including while on docks, wharves, piers, bulkheads, depots, stations or platforms; until delivered at store, warehouse or factory at destination."

Lastly, the Warehouse Storage Insurance section states, in relevant part:

"It is understood and agreed that, subject to all terms and conditions which do not conflict with the provisions set forth herein, this Policy is extended to cover property insured under Section I which is the property of the Assured or the property of others from whom the Assured has written instructions to insure while temporarily stored in warehouses at locations listed in the attached Schedule."¹

Additionally, Sections II and III both provide that "[n]othing herein contained shall be held to vary, waive, alter or extend any of the terms, conditions, declarations or agreements of the Policy other than as expressly stated in this Coverage Section." The Policy renewed automatically on an annual basis.

On April 1, 2003, a fire occurred at KSI's warehouse in Franklin, Massachusetts resulting in a significant loss of KSI's inventory.² At that time, Astro was a leasehold tenant of the Franklin warehouse and was using it to store inventory. KSI submitted a claim to Royal for its loss of inventory pursuant to the Warehouse Storage Insurance section of the Policy. KSI claimed that the inventory destroyed or ruined by the fire was in excess of the $2.5 million limit scheduled for the Franklin warehouse. On March 9, 2004, in a written notice, Royal disclaimed coverage for the portion of the loss attributable to KSI's domestically acquired merchandise. Instead, Royal agreed to reimburse KSI in the amount of $768,766.10 — which was Royal's estimate of the net value of the internationally acquired merchandise that was lost in the fire — minus salvage and a $5,000 deductible. KSI maintained that it was entitled to reimbursement from Royal for the full extent of its loss, up to the Policy's $2.5 million limit.

On February 24, 2004, Royal filed a Complaint in the District Court seeking a declaratory judgment against KSI and Astro (collectively KSI) with respect to its indemnification obligations. KSI filed an Answer in which it asserted counterclaims against Royal for breach of contract, fraud, unjust enrichment, and bad faith. KSI also filed a Third Party Complaint against LIG, Joiner, and one other named individual (collectively LIG). Subsequently, KSI filed an Amended Answer and Amended Counterclaims, which included counterclaims for breach of the implied covenant of good faith and fair dealing, reformation based on fraud, and reformation based upon mutual mistake.

On June 13, 2005, Royal filed a motion for summary judgment against KSI seeking a declaration that the Warehouse Storage Insurance section of the Policy only covered goods that originated overseas and did not cover goods that originated domestically. KSI cross-moved against Royal for summary judgment on its counterclaim for breach of contract on the ground that no genuine issue of material fact existed with respect to Royal's obligation to reimburse KSI for all of the loss it incurred as a result of the warehouse fire (up to the Policy limits).

On February 17, 2006, the District Court granted summary judgment in favor of Royal and denied it as to KSI, finding that the Policy only provided warehouse coverage for internationally acquired merchandise. Consequently, the District Court found that, under the plain language of the Policy, Royal had no obligation to indemnify KSI for the loss of its domestically acquired merchandise that resulted from the warehouse fire. The District Court also dismissed KSI's claims for breach of contract.

As a result of clerical error, the case was listed as "terminated" on the District Court's docket; however, because KSI's counterclaims for reformation were not the subject of any party's motion for summary judgment, KSI and LIG filed a motion to reinstate the counterclaims. On June 19, 2006, the District Court amended its Decision and Order to clarify that the reformation counterclaims remained viable. Subsequently, Royal moved for summary judgment on these two remaining counterclaims, and KSI filed an opposition to the motion. On August 22, 2007, the District Court granted Royal's motion for summary judgment and entered its order the next day, thus rendering a final judgment.

KSI timely appealed from the District Court's Decision and Order of February 17, 2006, as amended by the Decision and Order of June 19, 2006, and from the District Court's Decision and Order entered August 23, 2007.³

II.

The District Court had diversity jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1). We have jurisdiction over the appeal pursuant to 28 U.S.C. § 1291. Our review of a district court's grant of summary...