Down To Cases

Third party not bound by agreement between carrier and its insured
A company that arranged to have wood chips hauled for an affiliate in the lumber and pulpwood business contracted with a marine towing firm 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 the negotiations, the company arranged for insurance on the barges.

In connection with the insurance transaction, the company had a marine surveyor look at the barges. The surveyor reported that the barges leaked and needed repairs. The report indicated that certain repairs were “considered compulsory for insurance underwriting purposes.” After reviewing a draft of the report, a principal of the company asked the surveyor if certain repairs could be deferred until the barges' next scheduled maintenance. The surveyor said they could but advised certain other repairs should be made immediately. The surveyor then amended the report to state that certain of the repairs discussed “should be completed at the next regular 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 and a satisfactory risk for interested underwriters…. In accepting this report it is understood that this survey was performed for condition and valuation purposes only and that no warranty as to the condition, seaworthiness or marketability of subject vessel is expressed or implied.”

The company subsequently asked its insurance broker to arrange coverage for the barges. The broker had several conversations with an underwriter regarding coverage for the barges for their trip from Alabama to their final destination. The broker gave the underwriter a copy of a letter from his client indicating “all repairs necessary to make the vessels seaworthy have been performed.”

The underwriter quoted hull and protection & indemnity coverage for the barges. After receiving the quote, the broker issued a binder to his client. The binder specifically indicated that the barges were covered for the trip from Alabama to North Carolina. This binder was then faxed to the marine towing company to inform it that the barges were insured and could now be towed.
That same day, the broker sent the underwriter copies of the marine surveyor's amended reports on the barges. The underwriter received them the next day. He reviewed the reports and took no further action.

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

The towing company sought recovery for its damages from the owner of the barges, and the claim was reported to the carrier, which at the time of the incident had not yet issued the policy. It did not do so until about a month later, after which it had concluded its investigation of the loss. When it did issue the policy, it contained the standard forms referenced on the quote sheet and the binder; however, it also included a “trip risk endorsement” which stated, “It is a condition of this extension that the barges are confined to the Intercoastal Waterway of the U.S. (where present) and the Okeechobee Barge Canal, otherwise not to exceed 3 miles off shore.”
A few weeks later, the carrier notified the insured that it intended to deny the claim. Then it sought a declaratory-judgment action 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-risk endorsement were violated when the barges went more than three miles offshore. While the carrier named the insured as a party to the declaratory-judgment action, it did not name the marine towing company. The insured filed a counterclaim.

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

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

As a result of this consent judgment, the U.S. District Court dismissed with prejudice the insured's counterclaim. The court preserved the carrier's right to assert any of the defenses it raised in any subsequent litigation brought by the insured or any third parties.
More than four years later, a jury in the insured's lawsuit against the marine towing company returned a verdict against the insured and in favor of the towing company on its counterclaim, awarding it $457,415.79. The jury indicated that the towing company had not been negligent. It also upheld the towing company's assertion that the barges had been unseaworthy, and that their condition was the proximate cause of the towing company's loss.

Thirty days after the final judgment was entered, it remained unsatisfied. The towing company then sued the insured and its carrier in circuit court, contending that under Alabama law it was entitled to tap the policy the carrier had issued to the insured to satisfy the judgment.
The court held that the insurer was estopped from relying on the unseaworthiness of the barges as a defense to coverage because it had actual and constructive knowledge of the barges' condition before the loss occurred.

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

After a bench trial (no jury), the court ruled that the insurer was obligated to provide coverage to the towing company for some of its damage. The trial court said that because the insurer had actual and constructive knowledge of the condition of the barges before the loss occurred, it was estopped from relying on their condition to deny coverage. The trial court also concluded that the terms of the policy as negotiated by the carrier and the insured's broker did not include a trip-risk endorsement or a navigational limit. The court further determined that the marine towing company was not bound by the consent judgment entered by the U.S. District Court because the company was not a party to that action. Therefore, the trial court said, the judgment could not bind the towing company or prejudice its rights.

The trial court also concluded that the insured had not withheld material information from the carrier by failing to provide the initial version of the marine surveyor's report and therefore that the insured had not violated any duty uberrimae fidei (of utmost good faith) to the carrier. The trial court also heard testimony from the insurer's director of global marine claims, who acknowledged that if the policy was not void, it would cover some of the damage the marine towing company suffered. Based on that testimony and on its own reading of the policy, the trial court awarded the marine towing company $293,151.53 in damages and postjudgment interest.

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

Readers may contact Don Renau via e-mail at drenau@thepoint.net.