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Jeffcott v. Aetna Ins. Co.

July 15, 1942


Appeal from the District Court of the United States for the Southern District of New York.

Author: Clark

Before SWAN, CLARK, and FRANK, Circuit Judges.

CLARK, Circuit Judge.

This case arises out of damage sustained by the yacht "Dauntless" during the hurricane of September, 1938. Libelant, Robert C. Jeffcott, owner of the yacht, has recovered on two marine insurance policies covering the yacht. On appeal, respondent, Aetna Insurance Company, raises several questions, the most important of which are whether there is admiralty jurisdiction, whether the owner can recover for a "constructive total loss," and whether the damage and subsequent cost of repair were properly ascertained.

The "Dauntless" was an auxiliary three-masted schooner of some 500 tons used as a pleasure craft. In June, 1938, two policies of insurance - one a hull policy for $240,000 and one a disbursements and shipowners liability policy for $80,000 - were issued by respondent covering a one-year period. Both policies provided that the insured warranted that the yacht would be "laid up and out of commission at the Thames Shipyard, New London, Conn.," during the currency of the policies. Accordingly, the yacht was towed to New London and laid up. During the hurricane on September 21, 1938, the yacht broke loose from the moorings and drifted about 500 feet inshore, where she settled on some submerged hulks. Water entered the hull and flooded the engines, salons, cabins, and other portions of the interior. The owner immediately had the vessel examined by advisers, and on the basis of their report and his own inspection was convinced that the cost of repair would exceed $150,000. On advice of counsel that a constructive total loss could be claimed under the policies, abandonment was tendered. This was declined.

The boat was eventually salvaged by respondent, and various surveys were made as to damage and cost of repair. Libelant filed a claim for the full amount of both policies, plus sue and labor expenses, and when this was not accepted, filed his libel. Respondent first admitted admiralty jurisdiction, but later amended its answer to deny it. After a hearing, Judge Bondy in the district court upheld the jurisdiction and trial was had. On the merits, libelant was successful; and respondent was held for the full value of both the hull policy and the disbursements policy, with interest, and for sue and labor expenses, for a determination of which reference to a commissioner was made. D.C.S.D.N.Y., 40 F.Supp. 404. Respondent appeals from the determination of full liability, but does not contest liability for sue and labor expenses. Fuller statements of relevant facts will be made in connection with the various points to be discussed.

I. Jurisdiction.

The jurisdictional question arises because of the provision in the policies that the owner warranted that the yacht would be laid up and out of commission. Both parties agree that admiralty jurisdiction over contracts exists when the subject matter of the contract is maritime. It is also agreed that the subject matter of marine insurance is maritime. De Lovio v. Boit, C.C.Mass., 7 Fed.Cas. page 418, No. 3,776; New England Marine Ins.Co. v. Dunham, 11 Wall. 1, 20 L. Ed. 90. Accepting these labels as counters for decision, the question then is whether this insurance policy is a policy of marine insurance. That, in turn, becomes a question whether the insurer assumes risks which are marine risks.

By its terms the policy covers marine risks. The insurer assumes the risks of the perils of the seas to the vessel insured. The policy contains the traditional language of the admiralty, and provides for settlement in the traditional way, including the insured's privilege of abandonment if the ship is a "constructive total loss." Respondent now asserts that the maritime nature of this policy was destroyed by its having required the vessel to be laid up. What the insurer really did was decrease the quantum of risk, i.e., decrease the likelihood of loss. It did not change the type of risk, which remained marine in nature. This can be demonstrated by examples of what could have befallen this ship without breach of warranty by the owner. The yacht could have been set adrift by vandals and run aground; it could have been hit by another ship; it could have been stolen and injured by poor navigation; and it could have been, as it actually was, damaged by a hurricane. These are all risks which a marine insurer anticipates and on which he calculates his premiums. They are risks peculiar to ship and sea. A non-marine insurance company might be familiar with damage from fire, theft, storm; it would not be prepared to assume such risks where the insured article was a ship. It would recognize that the risk took on a different character when a ship became the object insured.

The marine nature of the risk can be further demonstrated.As libelant points out, many policies require pleasure yachts to be laid up during certain seasons. Clearly, this is related to such factors as the seaworthiness of a yacht during rougher seasons and the quantum of risk in terms of the portion of the policy's life in which loss is likely. This practice is hardly an attempt to divide the year into maritime periods and nonmaritime periods. To reduce this example further, if the yacht were endangered by a nearby fire while laid up, or if governmental authorities ordered the boat yard cleared, and the yacht were towed out to sea and there damaged, the risk would certainly be maritime. This being the case, it becomes a little absurd to declare that admiralty jurisdiction depends on fortuitous circumstances such as these.If there were a change in the nature of risk involved, respondent might be justified in asserting that maritime character disappeared. But when it seeks only to diminish the likelihood of damage from perils of the seas it seems gratuitous to tell it that unwittingly it ceased being a marine insurer.

That this is the correct approach is shown by the leading cases on admiralty jurisdiction over marine insurance. Mr. Justice Story on circuit wrote an exhaustive opinion on maritime contracts in general when deciding that marine insurance was within admiralty jurisdiction. De Lovio v. Boit, supra. He was faced with the English rule - apparently built up by Lord Coke as part of his opposition to the admiralty, as well as chancery - that jurisdiction over contracts was dependent on locality, just as was admiralty tort jurisdiction. In breaking away from this rule, he covered in all contracts that "relate to the navigation, business or commerce of the sea." In New England Marine Ins.Co. v. Dunham, supra, Justice Story's rule was adopted in general and as to marine insurance in particular. Mr. Justice Bradley's language in this case clearly adopts a broad rule of covering in insurance protecting ships against the perils of the sea. He notes all the peculiarities of maritime law in determining losses. He observes that insurance as a loss distribution device originated in maritime law. And he points out that marine insurance law forms a part of the maritime law of all countries. True, he does not define marine insurance, but his use of the words indicates that he meant it in a general sense, and not in the particular sense of certain types of marine insurance related to the sea in a special way.

Respondent argues, however, that some of Justice Bradley's language indicates a restriction of admiralty jurisdiction over marine insurance. It points out that he said of the contract of insurance, "in effect, it is a contract, or guaranty, on the part of the insurer, that the ship or goods shall pass safely over the sea, and through its storms and its many casualties, to the port of its destination." 11 Wall. at page 30, 20 L. Ed. at page 99. These are not words of limitation. Justice Bradley was faced with overturning the English rule as to jurisdiction based on locality. His words are pointed to that problem, and not to the question of delimiting the scope of marine insurance. This same answer is relevant to Mr. Justice Story's quotation about contracts which relate "to the navigation, business or commerce of the sea." Here again, the opinion was pointed to establishing a new rule, not to limiting jurisdiction to certain types of marine insurance. Moreover, common sense would indicate that insurance against the perils of the sea is "business" or "commerce" of the sea, whether the insured ship be loaded or unloaded, moving, or laid up. And certainly, such insurance would have been included within those two words as they were used in those days.See Hamilton and Adair, The Power to Govern, 1937, 73, 94, 107-8, 160-1; Timberg, Insurance and Interstate Commerce, 50 Yale L.J. 959, 970. We conclude that the nature of the insurance policy here involved is such that it comes within admiralty jurisdiction.

It may not be amiss to observe that, though this precise question appears not to have arisen, other marine insurance issues have come up, and in them the courts have generally accepted admiralty jurisdiction simply on the ground that the Supreme Court in the Dunham case had settled the issue. See The Dolphin, D.C.E.D.Mich., 7 Fed.Cas. page 862, No. 3,973; The Guiding Star, D.C.S.D. Ohio, 9 F. 521; The Paola R., C.C.E.D.La., 32 F. 174; Kerr v. Union Marine Ins.Co., D.C.S.D.N.Y., 124 F. 835, reversed on other grounds, 2 Cir., 130 F. 415, certiorari denied 194 U.S. 635, 24 S. Ct. 858, 48 L. Ed. 1160; The Daisy Day, D.C.W.D.Mich., 40 F. 538; North German Fire Ins.Co. v. Adams, 7 Cir., 142 F. 439; St. Paul Fire & Marine Ins.Co. v. Pacific Cold Storage Co., 9 Cir., 157 F. 625, 14 L.R.A., N.S., 1161; Robinson, Admiralty, 1939, 163. We may also note that great reliance has been placed on analogies of other types of contracts where distinctions have been made between ships engaged in active service and ships laid up. The difficulty is that these distinctions in their own field are generally unreal,*fn1 and their continued life rests on their ...

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