Third party not bound by agreement between carrier andits insured
A company that arranged to have wood chips hauled for an affiliatein the lumber and pulpwood business contracted with a marine towingfirm to tow seven hopper barges to Williamston, N.C., from Mobile,Ala. At the time, the company was negotiating to buy the barges,which were 20 to 25 years old, from a third party. As part of thenegotiations, the company arranged for insurance on the barges.

In connection with the insurance transaction, the company had amarine surveyor look at the barges. The surveyor reported that thebarges leaked and needed repairs. The report indicated that certainrepairs were “considered compulsory for insurance underwritingpurposes.” After reviewing a draft of the report, a principal ofthe company asked the surveyor if certain repairs could be deferreduntil the barges' next scheduled maintenance. The surveyor saidthey could but advised certain other repairs should be madeimmediately. The surveyor then amended the report to state thatcertain of the repairs discussed “should be completed at the nextregular servicing/maintenance period.” In the report's conclusion,the surveyor stated that “in the opinion of this undersigned,subject vessel is considered suitable for its intended purpose anda satisfactory risk for interested underwriters…. In accepting thisreport it is understood that this survey was performed forcondition and valuation purposes only and that no warranty as tothe condition, seaworthiness or marketability of subject vessel isexpressed or implied.”

The company subsequently asked its insurance broker to arrangecoverage for the barges. The broker had several conversations withan underwriter regarding coverage for the barges for their tripfrom Alabama to their final destination. The broker gave theunderwriter a copy of a letter from his client indicating “allrepairs necessary to make the vessels seaworthy have beenperformed.”

The underwriter quoted hull and protection & indemnitycoverage for the barges. After receiving the quote, the brokerissued a binder to his client. The binder specifically indicatedthat the barges were covered for the trip from Alabama to NorthCarolina. This binder was then faxed to the marine towing companyto inform it that the barges were insured and could now betowed.
That same day, the broker sent the underwriter copies of the marinesurveyor's amended reports on the barges. The underwriter receivedthem the next day. He reviewed the reports and took no furtheraction.

Ten days later, two tugboats operated by the marine towingcompany left Mobile with the seven barges bound into a single tow.Approximately four miles from the mouth of Mobile Bay, in the Gulfof Mexico, the tow of barges broke apart after taking on water. Asa result of the breakup and efforts by the tugboats' crews togather up the barges, the marine towing company suffered variousdamages.

The towing company sought recovery for its damages from theowner of the barges, and the claim was reported to the carrier,which at the time of the incident had not yet issued the policy. Itdid not do so until about a month later, after which it hadconcluded its investigation of the loss. When it did issue thepolicy, it contained the standard forms referenced on the quotesheet and the binder; however, it also included a “trip riskendorsement” which stated, “It is a condition of this extensionthat the barges are confined to the Intercoastal Waterway of theU.S. (where present) and the Okeechobee Barge Canal, otherwise notto exceed 3 miles off shore.”
A few weeks later, the carrier notified the insured that itintended to deny the claim. Then it sought a declaratory-judgmentaction affirming its position in a U.S. District Court in Florida.In this action, the carrier contended the barges were unseaworthy.It also claimed the provisions of the policy's trip-riskendorsement were violated when the barges went more than threemiles offshore. While the carrier named the insured as a party tothe declaratory-judgment action, it did not name the marine towingcompany. The insured filed a counterclaim.

A few months later, the insured sued the marine towing companyin a Mobile, Ala., circuit court, claiming damages as a result ofthe barge incident. The towing company counterclaimed, assertingbreach of contract and also seeking damages from the incident.

Two years later, back at the U.S. District Court, the carrierthat had insured the barges entered into a settlement in thedeclaratory-judgment action. In it, the carrier agreed to pay theinsured $25,000 in return for a release of all claims for coverageunder its policy. In the consent judgment, the insured acknowledgedthat at the time of the loss its barges were outside the three-milenavigational limitation stated in the trip-risk endorsement.Therefore, the parties stipulated, the insured's policy was “nulland void at all times relevant, including but not limited to thetime of the occurrence (of the loss).”

As a result of this consent judgment, the U.S. District Courtdismissed with prejudice the insured's counterclaim. The courtpreserved the carrier's right to assert any of the defenses itraised in any subsequent litigation brought by the insured or anythird parties.
More than four years later, a jury in the insured's lawsuit againstthe marine towing company returned a verdict against the insuredand in favor of the towing company on its counterclaim, awarding it$457,415.79. The jury indicated that the towing company had notbeen negligent. It also upheld the towing company's assertion thatthe barges had been unseaworthy, and that their condition was theproximate cause of the towing company's loss.

Thirty days after the final judgment was entered, it remainedunsatisfied. The towing company then sued the insured and itscarrier in circuit court, contending that under Alabama law it wasentitled to tap the policy the carrier had issued to the insured tosatisfy the judgment.
The court held that the insurer was estopped from relying on theunseaworthiness of the barges as a defense to coverage because ithad actual and constructive knowledge of the barges' conditionbefore the loss occurred.

The carrier admitted that it had issued the binder for thebarges, that the binder made no mention of a trip-risk endorsement,and that the formal policy was not issued until after the lossoccurred. The insurer asserted, however, that its policy was voidab initio (from the beginning) because the barges were unseaworthyat the policy's inception. It also said the towing company wasbound by the consent judgment issued by the U.S. District Court inFlorida. It pointed out that in that litigation, the insured hadadmitted that it had violated the policy's navigational limits andthat in its settlement agreement the insured had released thecarrier from any and all liability under the policy. It also saidthat because the marine towing company's loss occurred beyond thepolicy's navigational limits, there was no coverage for it underthe insured's policy.

After a bench trial (no jury), the court ruled that the insurerwas obligated to provide coverage to the towing company for some ofits damage. The trial court said that because the insurer hadactual and constructive knowledge of the condition of the bargesbefore the loss occurred, it was estopped from relying on theircondition to deny coverage. The trial court also concluded that theterms of the policy as negotiated by the carrier and the insured'sbroker did not include a trip-risk endorsement or a navigationallimit. The court further determined that the marine towing companywas not bound by the consent judgment entered by the U.S. DistrictCourt because the company was not a party to that action.Therefore, the trial court said, the judgment could not bind thetowing company or prejudice its rights.

The trial court also concluded that the insured had not withheldmaterial information from the carrier by failing to provide theinitial version of the marine surveyor's report and therefore thatthe insured had not violated any duty uberrimae fidei (of utmostgood faith) to the carrier. The trial court also heard testimonyfrom the insurer's director of global marine claims, whoacknowledged that if the policy was not void, it would cover someof the damage the marine towing company suffered. Based on thattestimony and on its own reading of the policy, the trial courtawarded the marine towing company $293,151.53 in damages andpostjudgment interest.

An appellate court reduced the damages by $2,500 but otherwiseupheld the ruling.
St. Paul Fire & Marine Insurance Co. vs. Christiansen MarineInc., No. 1030014 (Ala. 06/11/2004) 2004.AL. 0000382 (www.versuslaw.com).

Readers may contact Don Renau via e-mail at [email protected].