St. Paul Fire and Marine Ins. Co. v. Lago Canyon

• Citation: 561 F.3d 1181
• Decision Date: 06 March 2009
• Docket Number: No. 08-13398.,08-13398.
• Parties: ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Plaintiff-Counter-Defendant-Appellee, v. LAGO CANYON, INC., Defendant-Counter-Claimant-Third-Party-Plaintiff-Appellant, v. H M Y Yacht Sales, Inc., Sunseeker International Limited, Third-Party Defendants, Sunseeker Florida, Inc., Tropical Marine Air Conditioning, Inc., Third-Party Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

561 F.3d 1181

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Plaintiff-Counter-Defendant-Appellee, v. LAGO CANYON, INC., Defendant-Counter-Claimant-Third-Party-Plaintiff-Appellant, v. H M Y Yacht Sales, Inc., Sunseeker International Limited, Third-Party Defendants, Sunseeker Florida, Inc., Tropical Marine Air Conditioning, Inc., Third-Party Defendants-Appellees.

No. 08-13398.

United States Court of Appeals, Eleventh Circuit.

March 6, 2009.

Robert Lyston Jennings, Jennings & Valancy, P.A., Fort Lauderdale, FL, for Lago Canyon, Inc.

Andrew W. Anderson, Michelle Otero Valdes, Ryon Lyndon Little, Houck Anderson, P.A., Miami, FL, for St. Paul Fire and Marine Ins. Co., Sunseeker Florida, Inc., Tropical Marine Air Conditioning, Inc.

Appeal from the United States District Court for the Southern District of Florida.

Before HULL, WILSON and HILL, Circuit Judges.

HULL, Circuit Judge:

Defendant-Appellant Lago Canyon, Inc. ("Lago Canyon") appeals the district court's entry of a final judgment in favor of Plaintiff-Appellee St. Paul Fire & Marine Insurance Company ("St. Paul"). Lago Canyon owns a yacht that partially sank at a dock while undergoing engine repairs, causing over $1.2 million in damages. Lago Canyon filed a damage claim under its marine insurance policy ("the Marine Policy") from St. Paul.

St. Paul filed a complaint for a declaratory judgment that the Marine Policy did not cover the damage because it was caused by a corroding part. Lago Canyon counterclaimed for breach of contract (i.e., the Marine Policy). After a three-day bench trial, the district court found that the "proximate cause of the damage was the failure of a hose barb which resulted from corrosion," that the Marine Policy excluded corrosion, and that "the loss is not covered by the [Marine] Policy unless a provable manufacturer's defect can be shown." The district court also found that the manufacturer's "use of yellow brass [for the hose barb] knowing its exposure to saltwater created a condition likely to cause corrosion" but that this defect was not covered by the term "manufacturer's defect" in the Marine Policy.

Lago Canyon appeals, claiming the district court erred in: (1) applying admiralty law and striking Lago Canyon's demand for a jury trial; (2) concluding that the Marine Policy did not cover the damage to the yacht; and (3) not awarding Lago Canyon prejudgment interest on the towing charges. After review and oral argument, we affirm in part and reverse in part.

I. THE MARINE POLICY AND PROCEDURAL HISTORY

Lago Canyon is the named insured under the "all risks" Marine Policy issued by St. Paul. The Marine Policy states that the Quay Marine Agreement, any endorsements or amendments thereto, and the declarations page constitute the coverage on the yacht. The Marine Policy has a property damage limit of $1.4 million, a property damage deductible of $7,500, and a personal property damage limit of $35,000.

The property damage coverage section of the Marine Policy provides that St. Paul "will pay for accidental direct physical loss of or damage to [the] yacht except as specifically stated or excluded in this policy." The parties agree that "accidental" loss or damage to the yacht covers fortuitous loss unless subject to an exclusion. The coverage paragraph also states that if the loss is caused by a "provable manufacturer's defect," no deductible will apply.¹ The district court concluded that the Marine Policy indicates that a loss must be fortuitous to be covered and that a "manufacturer's defect" is an example of a covered, fortuitous loss where no deductible applies.²

The Marine Policy, however, expressly excludes loss or damage "caused by or resulting from ... corrosion," as follows:

Exclusions: We will not provide Property Damage Coverage for any loss or damage caused by or resulting from wear and tear, electrolysis, lack of maintenance, corrosion, deterioration, mold, or fiberglass blistering.

(Emphasis added). The commercial towing section of the Marine Policy covers reasonable costs, up to $7,500, to tow the yacht if it is "disabled from a cause other than a covered loss."³

St. Paul issued a Reservation of Rights advising Lago that its loss might not be covered. St. Paul then filed a declaratory judgment action based on admiralty jurisdiction under 28 U.S.C. § 1333(1).⁴ St. Paul's complaint alleged, "[T]his action concerns a policy of marine insurance on a vessel, which is deemed a maritime contract, giving rise to admiralty and maritime jurisdiction." It is well settled that cases involving marine contracts give rise to admiralty jurisdiction. See, e.g., Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 23, 125 S.Ct. 385, 392-93, 160 L.Ed.2d 283 (2004). St. Paul's complaint also invoked Rule 9(h) of the Federal Rules of Civil Procedure, which allows plaintiffs to elect admiralty jurisdiction over "some other ground" of federal jurisdiction.⁵ In other words, if there are two grounds for jurisdiction in the same case—such as admiralty and diversity jurisdiction—Rule 9(h) provides that the plaintiff may elect to proceed in admiralty.

Lago Canyon counterclaimed that St. Paul had breached its contract (i.e., the Marine Policy) by refusing to pay the damages to the yacht and demanded prejudgment interest. Lago Canyon's counterclaim is the flip side of St. Paul's own claim. Lago Canyon asserts its loss is covered by the Marine Policy, and St. Paul asserts no coverage. Thus, both parties make claims under the same maritime insurance contract. Lago Canyon's counterclaim also alleged that the action was between citizens of different states and the amount in controversy exceeded $75,000. Lago Canyon separately demanded a jury trial.

St. Paul then moved to strike Lago Canyon's demand for a jury trial. Based on our precedent in Harrison v. Flota Mercante Grancolombiana, S.A., 577 F.2d 968 (5th Cir.1978),⁶ the district court granted St. Paul's motion and struck Lago Canyon's jury demand. The district court noted that "[t]he issue before the Court is whether St. Paul's election to bring this case in admiralty precludes Lago [Canyon] from demanding a jury trial on its related state common law counterclaim." The district court concluded that St. Paul's Rule 9(h) designation of its marine insurance claim as an admiralty claim trumped Lago Canyon's jury-trial right on its breach-of-contract counterclaim where Lago Canyon's counterclaim arose out of the same operative facts and same Marine Policy as St. Paul's claim. The district court recognized that there was a split of authority on this issue but concluded the binding precedent in Harrison required that both claims be tried by the court.⁷

After a three-day bench trial, the district court declared that St. Paul's Marine Policy did not cover Lago Canyon's damage and granted final judgment in favor of St. Paul. First, the district court found that: (1) the hose barb failed and caused the water intrusion, sinking, and damage; (2) there was "[c]lear and convincing evidence that the proximate cause of the loss was the failure of the hose barb which resulted from corrosion"; (3) "both experts determined that the hose barb failed because of corrosion, albeit they each found a different type of corrosive process was present"⁸; and (4) "[t]he use of yellow brass knowing its exposure to saltwater created a condition likely to cause corrosion."

The district court acknowledged that the Marine Policy covered loss caused by a "manufacturer's defect." Because the Marine Policy explicitly excludes damage "caused by or resulting from corrosion," the district court determined that "the loss is not covered by the [Marine] Policy unless a provable manufacturer's defect can be shown."

The district court treated the term "manufacturer's defect" in the Marine Policy as meaning a "manufacturing defect" and then distinguished between a "manufacturing" defect, a problem in the manufacturing process, and a design defect, a problem with the design of the product. The district court concluded that only manufacturing defects, not design defects, were covered by the Marine Policy. As to manufacturing defects, the district court found that Lago Canyon "failed to submit any evidence to establish that the hose barb deviated from the manufacturer's own design, standards or specifications, or establish that something went wrong during the manufacturing process."

The district court ordered St. Paul to pay a $7,500 towing fee to Lago Canyon because the Marine Policy covered towing fees if the yacht was disabled from a cause other than a covered loss. Lago Canyon incurred a towing fee of $18,500.⁹ The district court's order did not mention prejudgment interest.

II. BENCH VS. JURY TRIAL

On appeal, Lago Canyon claims that the district court erred in striking its jury demand. We first review our Harrison precedent, which the district court applied as controlling on the admiralty and jury trial issue.¹⁰

A. Our Harrison Precedent

In Harrison, the plaintiff was a longshoreman who came into contact with liquid chemical isobutyl acrylate (IBA) while cleaning up a spill on a ship. 577 F.2d at 972. The plaintiff's condition steadily deteriorated until he was left totally disabled. Id. The plaintiff sued the vessel's owner, alleging negligence and unseaworthiness. Id. at 973. The plaintiff designated his claim as one "within the admiralty jurisdiction of this Honorable Court as that term is defined by Section 9(h)."¹¹ Id.

The defendant vessel-owner then impleaded the plaintiff's employer, alleging that any unseaworthiness of the vessel was due to the employer's negligence. Id. The employer, in turn, filed a fourth-party complaint against the shipper of the IBA, seeking indemnification based upon products liability and negligent failure to warn of the dangerous propensities of IBA. Id. The defendant vessel-owner then asserted a claim against the shipper. Id. The plaintiff amended his complaint to state a claim against the fourth-p...