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March 4, 1969

Arthur L. LIMAN, as Trustee in Bankruptcy of A. H. Bull Steamship Co., Plaintiff,

Mansfield, District Judge.

The opinion of the court was delivered by: MANSFIELD

MANSFIELD, District Judge.

In this declaratory judgment action plaintiff, as Trustee in Bankruptcy of A. H. Bull Steamship Company ("Bull"), moves pursuant to Rule 56, F.R.Civ.P., for summary judgment declaring the Trustee's rights to reimbursement under certain insurance policies issued by defendant. For the reasons indicated below, the motion is granted. The undisputed facts are as follows:

 Bull, which was engaged in the business of operating merchant vessels before it went into bankruptcy, is the assured in certain indemnity insurance policies issued by defendant, for which Bull paid premiums in excess of $300,000 annually. Under the terms of the policies defendant, as insurer, agreed to indemnify Bull against loss, damages and expenses sustained by it as the owner, charterer or operator of certain vessels, including losses sustained as the result of personal injury claims, subject to a deductible of $1,000. Following a Chapter X Reorganization proceeding Bull was adjudicated a bankrupt and plaintiff was appointed its Trustee in Bankruptcy. In the meantime various actions have been instituted against Bull or its Chapter X Trustee by seamen and longshoremen for personal injuries, of which approximately 120 suits involving 114 accidents or occurrences fall within the coverage of the policies. Defendant has the right to assume the defense of the actions but is not obligated to do so. Following its refusal to do so, the Chapter X Trustee sought authority to retain special counsel to defend certain of the lawsuits. Thereupon the Government, a large priority creditor, opposed on the grounds that the estate would be diminished to the extent of the $1,000 deductible which would be attributed to each of the claims to be defended and that the expenditure of such sums by the Trustee would violate the Government's priority in the distribution of the assets of the estate. This position was upheld by the Hon. Edward J. Ryan, Referee in Bankruptcy, acting as Special Master.

 Following defendant's refusal to take over the defense of the actions or to reimburse plaintiff unless it first satisfied the judgments or settlements in full, including payment of the $1,000 deductible (for which the debtor would not be entitled to reimbursement from defendant), the Chapter X Trustee brought the present action for a declaratory judgment to the effect that the $1,000 deductible requirement might be satisfied in one of several different ways, but pointed out that the Trustee could not implement any of its proposals without court approval and assurance of reimbursement from defendant because the $1,000 payments, as pointed out by the Government and Special Master, would deplete the estate and amount to a preference over other general creditors in violation of the Bankruptcy Act.

 The stumbling block giving rise to the present controversy is found in the following provision of the insurance policies issued by defendant to Bull:

"The Association agrees to indemnify the Assured against any loss, damage or expense which the Assured shall become liable to pay and shall pay by reason of the fact that the Assured is the owner * * * of the insured vessel and which shall result from * * *:
"(1) Liability for life salvage, loss of life of or personal injury to, or illness of, any person * * *.
"(e) Claims hereunder, * * * are subject to a deduction of $1,000 with respect to each accident or occurrence."

 Plaintiff acknowledges that under the above-quoted clause the estate's right to indemnity for any loss sustained by it on account of an accident or occurrence covered by the policies, after deduction of $1,000, depends upon a showing that the estate has made payment to the third party claimant of the amount for which reimbursement is sought from defendant. For example, upon satisfaction of a $10,000 judgment against the estate, plaintiff would be entitled to $9,000 from defendant, i.e., the $10,000 paid out by the estate, less the $1,000 deductible. The Trustee, however, cannot permit the claimant to retain the $1,000 not covered by the indemnity policy, since the $1,000 would then, because of the estate's insolvency, amount to an illegal preference. The Trustee therefore proposes to finance the $1,000 deductible in each case by defending each lawsuit pursuant to an agreement with the claimant to the effect that in the event of recovery or settlement in an amount in excess of $1,000, the estate will pay the full amount of the recovery to the claimant and the claimant will thereupon repay $1,000 to the estate, in exchange for which the claimant will become a general creditor of the estate in the sum of $1,000. The United States has by affidavit stated that it has no objection to the proposed plan, since there would be no invasion of the priority rights of the United States, as a creditor, in the bankrupt estate.

 It is plaintiff's position that the source of the funds used to finance the $1,000 deductible is of no concern to defendant and should not affect defendant's obligation to reimburse the estate for any bona fide payments made to claimants on account of their personal injury claims covered by the policies. Defendant, on the other hand, contends that in order to be indemnified under the policies the estate must show that it actually "absorbed" the $1,000 deductible. The effect of defendant's position, it seems to be conceded, would be to enable it to escape payment of judgments possibly running into many thousands of dollars solely because the estate, due to its insolvency, is unable to pay out of its own funds the relatively few thousand dollars required to satisfy defendant's concept that the assured must "absorb" the deductible. It is in this context that the Trustee seeks summary judgment pursuant to Rule 56, F.R.Civ.P., declaring that the procedure proposed by it, if carried out by the estate, will obligate defendant to reimburse the estate in the amount of the claims paid, less $1,000.

 Since the undisputed facts reveal a substantial controversy with respect to adverse legal interests necessitating a determination as to the rights of the parties, the subject matter is appropriate for resolution by way of declaratory judgment. See Maryland Casualty Co. v. Pacific Co., 312 U.S. 270, 61 S. Ct. 510, 85 L. Ed. 826 (1941). It is equally clear that in the absence of any specific provision of maritime law governing the issue here presented, see Kossick v. United Fruit Co., 365 U.S. 731, 742, 81 S. Ct. 886, 6 L. Ed. 2d 56 (1960) - and we know of none - regulation of such marine insurance contracts is controlled by state rather than federal law. Wilburn Boat Co. v. Fireman's Ins. Co., 348 U.S. 310, 75 S. Ct. 368, 99 L. Ed. 337 (1954). As defendant is a New York corporation, Bull had its principal place of business in New York and the only proof submitted indicates that the policies were delivered to Bull in New York, New York law should serve as the principal guide to the construction of this contract.

 New York's policy in construing provisions of insurance contracts dealing with the insurer's obligation to indemnify against loss was summed up in a recent decision, Henegan v. Merchants Mutual Insurance Co., 31 A.D.2d 12, 294 N.Y.S.2d 547 (1st Dept., Nov. 7, 1968), where the court, rejecting an insurer's contention that it was not required to make payments to the insured for the reason that the latter had failed to pay excess judgments over the policy limits, stated:

"To hold that prior payment must be shown before action by the insured, would permit the insurer to take advantage of the financial status of its insured and deprive the ultimate beneficiary claimant of its judgment. Such a holding would be contrary to the purpose and spirit of our law." Cf. Meridan Trading Corp. v. Nat. Auto Ins., 45 Misc.2d 847, 850-851, 258 N.Y.S.2d 16 (Sup.Ct. 1964).

 Guided by this fundamental standard of fairness and equity, the courts of New York have repeatedly held that an insured fulfills his obligations under an indemnity policy and is entitled to reimbursement when a judgment against him has been satisfied, and the insurer may not escape its obligation to indemnify by showing that the payment made by the assured was advanced to it by a third party or financed in some other fashion. Employers' Liability Assurance Corporation, Ltd. v. International Milk Products Co., 192 ...

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