Marine Insurance Principles and Admiralty Jurisdiction Extended by Leading Federal Appellate Court

August 2005 Marine Alert

Court of Appeals Holds that Admiralty Jurisdiction and Marine Insurance Principles Control a Tailored Comprehensive General Liability and Shiprepairer’s Legal Liability Policies where the “Primary Objective” was to Provide Marine Insurance

By Lawrence B. Brennan ([email protected]) and Jean-Claude “JC” Mazzola ([email protected])

In a decision favorable to insurers, the United States Court of Appeals for the Second Circuit in Folksamerica Reinsurance Co. v. Clean Water of N.Y., Inc., ___ F. 3d ___, 2005 UNITED STATES App. LEXIS 13041 (2d Cir. 2005), expanded federal admiralty jurisdiction to insurance coverage cases where the policies’ “primary objective” was to provide marine insurance. Federal admiralty jurisdiction and substantive principles of marine insurance are not restricted to the three traditional forms of marine insurance: Hull and Machinery, Cargo, and Protection and Indemnity. The Court of Appeals read the recent United States Supreme Court decision in Norfolk Southern Railway Co. v. James N. Kirby, Pty Ltd., 543 U.S. ___, 125 S.Ct. 385 (2004) as supporting the expansion of federal admiralty jurisdiction over insurance policies. “The boundaries of admiralty jurisdiction over contracts are conceptual rather than spatial … [and] the purpose of the jurisdictional grant [was] to protect maritime commerce.” The Court of Appeals also noted that “[t]he admiralty question had implications beyond conferring federal jurisdiction. Folksamerica pressed the Court to employ the federal maritime doctrine of uberriemae fide, or utmost good faith, which ‘provides that the parties to a marine insurance contract are held to the highest degree of good faith, whereby the party seeking insurance is required to disclose all circumstances known to it which materially affect the risk.’”

The Court of Appeals ruled that an insurance contract containing a Shiprepairers’ Legal Liability (“SLL”) policy coupled with a modified Comprehensive General Liability (“CGL”) policy was maritime in nature and the District Court had admiralty subject matter jurisdiction. The Second Circuit held that where the “primary objective” of the insurance contract was to establish marine insurance giving rise to admiralty jurisdiction. The Circuit Court also ruled that the maritime character of an insurance policy is determined by examining the entire policy, not just the portion involved in a dispute.

Overview

In this case, a ship tank cleaning business (through its corporate parent) purchased insurance from the defendant insurer’s predecessor in interest. The insurance contract contained an SLL policy coupled with a modified CGL policy (collectively “Policy”). The CGL policy was similar to one normally issued to a shoreside business, but contained a number of maritime modifications. A subcontractor’s employee was injured while cleaning the oil tank of a barge moored in New York Harbor and brought suit against the insured. The insurance company contended that the Policy was maritime in nature and that the doctrine of utmost good faith applied. The insured, however, successfully contended in the District Court that the maritime aspects of the Policy were merely incidental and that state insurance law applied. On appeal, the Court held that an insurance policy’s predominant purpose, as measured by the dimensions of the contingency insured against and the risk assumed, determined the nature of the insurance. Since the primary purpose of the Policy in this case was to insure against risks related to ship tank cleaning, the Court determined that it was maritime insurance.

The Facts

Folksamerica Reinsurance Company (“Folksamerica”) issued the Policy to Clean Water of New York, Inc., (“Clean Water”), which cleaned the tanks of coastal and ocean-going vessels in New York Harbor and prepared vessels for the shipyard and for changes of cargo.

Clean Water contracted to clean the oil tanks of Barge S.T., an ocean-going vessel, moored in the Kill Van Kull, a navigable tidal strait in New York Harbor. Tank cleaners were provided by Union Maintenance Corporation. On August 12, 1994, Mr. Rivera, a Union Maintenance employee, was injured when he lost his grip on a ladder and fell backwards into an oil tank. He brought suit in New York Civil Court against Clean Water primarily alleging negligence. Clean Water sought defense and indemnification under the Policy.

On June 19, 2002, Folksamerica filed a declaratory judgment action in the United States District Court for the Eastern District of New York. The insurer alleged admiralty jurisdiction and sought avoidance of the Policy, rescission and a declaration that it was not obligated to defend or indemnify Clean Water. Clean Water raised various defenses and a challenge to the District Court’s subject matter (admiralty) jurisdiction.

Both sides moved for summary judgment. In support of its allegation of the District Court's admiralty jurisdiction, Folksamerica contended, "Since the Policy was issued to maritime companies, clearly covers their marine interests, and the underlying accident was on board a vessel in navigable waters, it is a policy of 'marine insurance.'" Folksamerica also pressed the Court to employ the federal maritime doctrine (uberrimae fide), or utmost good faith because Clean Water failed to disclose that it performed tank cleaning on others' vessels and that the Policy was therefore void. Clean Water argued that Folksamerica could not invoke admiralty jurisdiction because the CGL section of the Policy was a standard "all risk policy" and contended that the maritime risks covered by the Policy were "merely incidental." The District Court agreed.

Second Circuit’s Decision

In sum, the Court of Appeals held that of the “various protections provided in the CGL section of the Policy – completed operations, products, pollution, premises and operations and contractual liability – the first three are ‘decidedly marine’ in nature and the fourth covers both shore side and maritime risks.” In examining the SLL section of the Policy, the Court concluded that this too was “decidedly marine.”

The Second Circuit concluded that because the primary objective of the Policy was to establish marine insurance, the District Court had admiralty jurisdiction over the dispute. As a result, the Second Circuit reversed, vacated its dismissal and remanded the matter for further proceedings.

Threshold Inquiry

In reaching its conclusion that the Clean Water Policy provided marine coverage, the Court of Appeals conducted a “threshold inquiry” to determine whether the dispute had issues that related to maritime interests. While noting that, in light of the United States Supreme Court’s recent decision in Kirby, there exists some degree of uncertainty as regards to the necessity of such a threshold inquiry, the Court noted that this dispute arises out of an insurance claim based on a ship-maintenance-injury sustained by a ship oil tank cleaner aboard an ocean-going vessel in navigable waters. It concluded therefore, that the threshold inquiry was met and that this matter “has more than a ‘speculative and attenuated’ connection with maritime commerce.”

Subject Matter of the Insurance Contact

In determining that the parties’ insurance contract was a marine contract and subject to admiralty jurisdiction, the Court viewed the substance of the contract over its form and instructed that the coverage afforded by the Policy would determine whether the Policy was marine insurance.

The Court concluded that in the context of ship repair and maintenance (Clean Water’s business in this case) completed operations coverage and the product hazard coverage fall within the “various formulations of marine insurance.” The Court also concluded that coverage provided for pollution through the pollution “buy-back” was marine in nature. The Court further noted that the premises and operations coverage was also marine in nature as there could be circumstances where losses, as in those giving rise to the instant contract dispute, arose out of marine activities.

The Court observed that the basic format of the Policy's CGL section mirrored that of typical CGL policies, "containing provisions affording coverage for 'premises/operations,' 'completed operations,' and 'products' hazards." In addition to these three aspects of coverage, the Policy also provided pollution and limited contractual liability coverage. Through tailored endorsements, the Policy extended coverage to exposures particular to marine operations.

Although the Court noted that the Policy excluded certain traditional marine risks, it held that these exclusions did not dispose of all of the insureds' maritime risks. Typical CGL policies exclude "liability for damages arising out of the ownership, maintenance, use, loading, or unloading of a watercraft." The Policy voided that exclusion with a "Watercraft Liability Coverage" endorsement. A "Gulf of Mexico Extension" endorsement extended coverage to "operations of the Named Insured in the Gulf of Mexico." The Policy also contained an "In Rem" endorsement extending coverage to "any loss, otherwise covered ... even though asserted by an action 'in rem' instead of [an] action 'in personam.'" Another endorsement involved pollution coverage. The CGL section of the Policy included a "buy back" provision, permitting pollution coverage under certain circumstances.

The Court of Appeals concluded that since the Policy was marine in nature the District Court had admiralty jurisdiction; the lower court’s decision was vacated and the matter remanded for further proceedings.

To obtain an electronic copy of the opinion, go to: http://www.wilsonelser.com/fcwsite/uploadimages/Folksamerica.pdf.