Certain Interested Underwriters at Lloyd's, London v. Bear, LLC
Docket: Case No.: 15-cv-630-BTM-BLM
Court: District Court, S.D. California; April 21, 2017; Federal District Court
The court has granted the plaintiff, Certain Interested Underwriters at Lloyd’s, London, a motion for summary judgment while denying the defendant Bear, LLC's motion to strike. This case involves a marine insurance dispute regarding the destruction of the 102-foot motor vessel, Polar Bear.
In 2010 and 2011, Larry Jodsaas and Roger Trafton sought assistance from Marsh USA, through agent Kathy Johnson, to obtain an insurance policy for the Polar Bear. Marsh submitted requests for quotes to various insurers, including the Underwriters, and Bear ultimately chose the policy offered by them. This policy was renewed in 2012 and 2013.
The critical provisions of the 2013 policy included:
1. **Conditions Precedent**: The policy remained valid during maintenance and repair, but required prior agreement from insurers for major refits, alterations, or hot work. The owner had to provide the shipyard's liability insurance documentation and obtain written agreement from Underwriters.
2. **Notice of Loss and Filing of Proof**: The Assured was obligated to report any occurrences that might lead to a claim immediately and submit a detailed sworn proof of loss within 90 days of the incident.
3. **Legal Representation and Co-operation Clause**: The Assured had to cooperate with the Assurers and could not assume obligations or incur expenses without prior written approval, except for necessary actions to safeguard the yacht.
4. **Sue and Labor Clause**: The Assured was allowed to take necessary actions to defend and recover the yacht without jeopardizing the insurance, with the Assurers covering associated costs.
These provisions highlight the responsibilities of the Assured and the rights of the Underwriters in the context of the insurance agreement.
On August 22, 2013, Trafton, acting as Jodsaas' agent, signed an 'Acknowledgment Form' acknowledging key policy terms of an insurance policy. Subsequently, on August 28, Marsh provided Bear with a 'Cover Note' confirming insurance coverage, which was officially documented in a letter sent to Jodsaas on October 9, 2013, detailing coverage from August 26, 2013, to August 25, 2014.
On May 4 or 5, 2014, the Polar Bear experienced a failure of its forward stabilizer and actuator during a voyage, leading to it running aground near San Diego on May 6, causing significant hull damage. The vessel was then towed to Marine Group Boat Works (MGBW) for repairs, a facility capable of handling the Polar Bear. Prior to hauling the vessel out on May 7, Trafton signed a contract with MGBW for $3,500, which included various liability provisions on its backside that Trafton did not sign. Bear did not seek Underwriters' consent before entering into this contract or executing subsequent work change orders for repairs.
On June 17, 2014, Jodsaas informed Marsh of the incident causing $250,000 in damages but had not yet filed a claim. Following this, on June 19, 2014, the Polar Bear caught fire during repairs at MGBW, resulting in a total loss. Bear communicated the loss to Marsh the same day.
Underwriters acknowledged the notice of loss on June 30, 2014, with a reservation of rights, and sent a formal reservation letter on August 6, 2014. On March 20, 2015, Underwriters denied coverage, citing Bear's failure to meet conditions in the Maintenance and Repair Clause, and subsequently filed an action seeking a declaration of non-coverage for Bear's claim. Bear counterclaimed for declaratory relief, breach of contract, and implied covenant of good faith and fair dealing, along with a third-party complaint against Marsh.
Summary judgment under Rule 56 of the Federal Rules of Civil Procedure requires the moving party to prove that there is no genuine issue of material fact and that they are entitled to judgment as a matter of law. A material fact is one that could influence the case outcome based on the applicable law. A genuine dispute exists if sufficient evidence could lead a reasonable jury to favor the nonmoving party. The burden of proof initially lies with the moving party, who can either negate an essential element of the nonmoving party’s claim or demonstrate its failure to establish such an element. Irrelevant disputes do not affect the summary judgment process. Once the moving party meets its burden, the nonmoving party must present specific facts showing a genuine issue for trial, rather than relying on mere allegations. The court must view evidence in the light most favorable to the nonmoving party, and credibility assessments and evidence weighing are jury responsibilities, not the judge's.
Underwriters’ declaratory relief claim against Bear falls under admiralty jurisdiction due to its connection to a disputed marine insurance policy. Federal admiralty law governs such disputes when applicable; otherwise, state law is consulted. In the absence of a choice-of-law provision, federal maritime choice-of-law principles determine the relevant state law. If a contractual choice exists, it is generally honored unless the chosen state lacks a substantial relationship to the parties or the transaction, or its application would violate significant policies of a more relevant state.
The Policy includes a choice-of-law provision designating Delaware law as governing and stipulates that both parties submit to the exclusive jurisdiction of U.S. courts. In the absence of a federal rule, Delaware law will apply to issues arising under the insurance policy. Bear is incorporated in Delaware and has its principal place of business there, reinforcing the court's obligation to respect the contractual agreement.
Underwriters assert that Bear failed to meet certain conditions precedent outlined in the Policy, arguing that the Repair Clause constitutes a warranty that must be strictly adhered to. Bear did not notify Underwriters or obtain their prior agreement concerning significant repairs, hot work, or a waiver of subrogation requested by the shipyard, nor did Bear provide necessary documents from MGBW.
The court concurs with Underwriters, affirming that the Repair Clause is indeed a warranty rather than an exclusion from coverage. While marine insurance policies may suggest broad coverage, exclusions and warranties often limit that coverage. An exclusion clarifies what is not covered, while a warranty demands certain conditions be fulfilled. The strict compliance rule dictates that warranties must be strictly performed, with no excuses for breaches. Breaches of warranty in marine insurance are governed by state law, confirming that state law applies to determine the implications of such breaches.
Under Delaware law, a warranty or a condition precedent becomes part of a contract once completed, as established in Baltimore Life Ins. Co. v. Floyd. Warranties must be strictly complied with and their intention must be clearly indicated in the contract. Courts in Delaware do not favor constructing warranties; they rely on clear interpretations of the parties' words. The Repair Clause in the Policy indicates that the parties intended it to serve as a warranty because it conditions coverage on Bear notifying Underwriters and obtaining their prior agreement for certain repairs. The clause is not a negative exclusion but outlines conditions for coverage, emphasizing the necessity of Underwriters' consent for major repairs and waivers. The clause is placed under the 'CONDITIONS PRECEDENT' header in the Policy, following subsections labeled as 'EXPRESS WARRANTIES,' suggesting its nature as a warranty.
Bear contends that the clause does not create a warranty since noncompliance 'may result in denial of coverage,' arguing this implies coverage could still exist with Underwriters' consent. However, under American law, non-fulfillment of a warranty merely allows the insurer to void coverage rather than nullifying the contract itself. Therefore, the phrase 'may result' accurately reflects this legal principle. The Court concludes that the Repair Clause constitutes a warranty based on its language and placement.
Additionally, Bear's alternative argument that the Repair Clause serves as a forfeiture provision fails. Under Delaware law, an insurer must demonstrate prejudice before coverage can be forfeited due to failure to notify. The Repair Clause conditions coverage not just on notification but also on Underwriters' agreement and receipt of documentation. Furthermore, a breach of the Repair Clause does not lead to forfeiture as it does not pertain to a risk within the policy's coverage, contrasting with prior case law that required proof of prejudice for the insurer to deny liability due to delayed notification.
Forfeiture provisions in insurance policies involve denying the insured coverage due to a breach of conditions, differentiating them from cases regarding the existence of coverage for specific losses. The central issue at hand is whether the Repair Clause in the policy provides coverage for a particular type of loss, rendering Bear's cited cases irrelevant. Under Delaware law, insurance contract interpretation is a legal question, with any ambiguous language construed against the insurer. Clear and unequivocal language binds parties to its plain meaning, as insured parties are expected to read their policies.
The Repair Clause stipulates that coverage remains in effect during annual maintenance and repairs but requires Bear to notify Underwriters and obtain prior agreement for major repairs, hot work, or if a waiver of subrogation is requested by the shipyard. Bear must also provide Underwriters with necessary insurance documents and updates on the work schedule. The clause is deemed unambiguous, clearly outlining conditions for coverage during significant repairs.
Bear contends that the requirement for Underwriters’ consent is ambiguous, especially since the Cooperation Clause relieves Bear from such obligations regarding sue and labor activities. However, Underwriters argue, and the Court agrees, that the Repair Clause and Sue and Labor Clause are distinct and can be harmonized. The Sue and Labor Clause is intended to encourage the insured to mitigate losses, thereby serving a different purpose within the marine insurance contract framework.
Bear is obligated to take measures to protect and recover the Polar Bear in case of loss or misfortune. Under the Cooperation Clause, Bear does not need prior written approval from Underwriters for expenses related to saving the Polar Bear, such as towing. However, the Repair Clause stipulates that once the Polar Bear is safe, any coverage for major repairs or those requiring hot work must be preceded by notice and approval from Underwriters. The court finds no conflict between the clauses, rejecting Bear's argument that the Repair Clause contradicts its duties under the implied warranty of seaworthiness. The court states that the Repair Clause is unambiguous, thus the reasonable expectation doctrine does not apply, as that doctrine only comes into play with ambiguous terms.
Bear must strictly comply with the Repair Clause to receive coverage. The court evaluates whether Bear's June 17, 2014 conversation with Grossinger met the notice requirements under the Repair Clause. However, the court clarifies that the Repair Clause not only requires notice but also Underwriters' prior approval and receipt of relevant documentation. Underwriters assert that Bear did not fulfill all conditions of the Repair Clause, and even if the conversation was adequate notice, Bear failed to meet the remaining conditions. Consequently, the court concludes that Bear breached the Repair Clause. The court also references a Second Circuit case, Commercial Union Ins. v. Flagship Marine Servs., which underscores that clear policy language constitutes an unambiguous warranty that, if breached, negates coverage.
The provision mandates that in exchange for the insurer's promise of coverage at an agreed rate, the insured warranted not to tow vessels exceeding 50 feet. The insured breached this warranty materially, as the breach directly relates to the risk assumed. Consequently, under New York or Florida law, this breach prevents recovery under the insurance contract. The Second Circuit's ruling, while not binding, is relevant as it involves a similar coverage provision that is conditioned on the insurer's agreement. Thus, Underwriters appropriately denied coverage for damages associated with the Polar Bear's loss.
Bear contends that Underwriters admitted coverage and waived defenses based on their response to a request for admission regarding the effectiveness of the Cover Note on the date of the incident. Underwriters admitted this request, which under Federal Rule of Civil Procedure 36(b) is considered conclusively established unless amended. However, this admission does not confirm that the policy covered the specific incident, affirming Underwriters' denial of coverage.
Underwriters also sought summary judgment against Bear's counterclaims for breach of contract and implied covenant of good faith, asserting that Bear is not entitled to coverage for the Polar Bear's loss, and therefore cannot claim damages for alleged breaches by Underwriters. Additionally, Underwriters moved for summary judgment on Bear's claim for expenses under the Sue and Labor Clause, which includes costs for tugs, divers, and surveys following the vessel's grounding. While Underwriters acknowledge some recoverable expenses under this Clause, they argue that Bear's claim is barred by the Notice of Loss Clause, which requires immediate reporting of incidents and submission of a detailed proof of loss within ninety days.
Bear argues that sue and labor expenses, being exempt from the Policy’s deductibles or limitations, should also be exempt from the proof of loss requirements. This argument lacks legal support, as Delaware courts emphasize that proof of loss is a condition precedent to coverage, necessary for the insurer to investigate and assess its liabilities. Notice of loss and formal proof of loss are distinct requirements; mere notice does not fulfill the formal proof requirement. Bear acknowledges non-compliance with proof of loss but contends that Underwriters' late request for evidence should estop or waive their defense. However, estoppel requires that one party’s conduct induced another to alter their position detrimentally, which does not apply here since Underwriters’ actions occurred after the 90-day deadline. Waiver, on the other hand, cannot be inferred from Underwriters’ request for documentation. A prior case illustrates that an insurer can investigate a loss without forfeiting its right to enforce proof of loss requirements. Consequently, Bear’s arguments are rejected, and Underwriters’ denial of coverage for sue and labor expenses is upheld. Additionally, Bear’s objections to certain exhibits submitted by Underwriters are overruled, as the Court did not rely on those materials in its decision, rendering the objections moot.
On September 30, 2016, Bear submitted a sur-reply addressing evidentiary issues raised in Underwriters’ reply brief, which was filed under court rules that limit sur-replies to five pages, strictly for responding to objections. On October 13, 2016, Underwriters moved to strike parts of Bear’s sur-reply, asserting that it exceeded permissible content. The court reviewed Bear’s sur-reply and determined that certain sections exceeded the allowed scope but noted that this did not prejudice Underwriters. Consequently, Underwriters’ motion to strike was denied. The court granted Underwriters’ motion for summary judgment and denied the motion to strike, directing the Clerk to enter judgment for Underwriters on their claim for declaratory relief and against Bear’s counterclaims for declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing.
