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Seaboard Shipping Corp. v. Jocharanne Tugboat Corp.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT


decided: May 25, 1972.

SEABOARD SHIPPING CORPORATION, PLAINTIFF,
v.
JOCHARANNE TUGBOAT CORPORATION ET AL., DEFENDANTS, AND OCEANUS MUTUAL UNDERWRITING ASSOCIATION, LTD., DEFENDANT-APPELLANT, V. G. I. SIBRING AND ALL OTHER UNDERWRITERS AT LLOYD'S SUBSCRIBING POLICY OF INSURANCE 64/60630 AND EDINBURGH ASSURANCE CO. LIMITED AND ALL OTHER INSTITUTES OF LONDON UNDERWRITERS COMPANIES SUBSCRIBING POLICY OF INSURANCE NO. 60630, DEFENDANTS AND CROSS-CLAIMANTS-APPELLEES

Friendly, Chief Judge, and Smith and Oakes, Circuit Judges.

Author: Smith

J. JOSEPH SMITH, Circuit Judge:

Interpretation of the hoary and often poetic provisions of two marine insurance policies is necessitated by this appeal by Oceanus Mutual Underwriting Association, Ltd. (Oceanus) from a judgment of the United States District Court for the Southern District of New York (Dudley B. Bonsal, Judge) requiring the company to contribute a portion of a sum expended by Lloyd's of London to remove from its grounding a stranded and damaged barge insured by both parties. The court found that the salving operation redounded to the benefit of all three of the vessel's insurers and ordered each to reimburse Lloyd's for one-third of the costs. Oceanus appeals, and we reverse that portion of the lower court's order which held it liable to Lloyd's.

On June 16, 1964, the VAL 51, a barge owned by the Jocharanne Tugboat Corporation (Jocharanne), carrying 50,000 barrels of gasoline, went aground in Lake Ontario, immediately offshore Oswego, New York, and began leaking gasoline into the water and onto the adjacent shoreline. Notified of the grounding and of the possibility of explosion of the vessel, the Salvage Association of London appointed an independent surveyor, Mr. Paul J. Ranahan, to survey the casualty and proceed with salvage operations. Though Mr. Ranahan testified that he was acting on behalf of "all concerned underwriters," Lloyd's was the insurer actively involved in the project, and Oceanus was not notified of the incident until completion of the salvage work. Seaboard Shipping Corporation (Seaboard) was hired to offload the usable gasoline cargo remaining on the barge; Sequin Salvage Company was employed to refloat and work on the hull, which continued to present an explosion hazard. The ship was made ready for towing by June 29, and arrived in New York City, where it was declared a constructive loss, on July 4, 1964.*fn1

In November, 1965, Seaboard instituted this action against Jocharanne to collect the $7,800 owed for Seaboard's services in off-loading the gasoline from the VAL 51. Seaboard obtained a default judgment against the insolvent Jocharanne and, after Jocharanne had tendered the policies on the vessel to the court, Seaboard was permitted to amend its complaint to name the insurers as defendants. At the time of the accident, Jocharanne had three policies covering the barge: a $200,000 Hull and Machinery policy issued by Lloyd's of London, an $80,000 Open Cargo Legal Liability policy issued by Phoenix Assurance Company of New York (Phoenix), and a $200,000 Protection and Indemnity (P & I) policy issued by appellant Oceanus. The coverage of the three policies was not redundant, as Lloyd's insured for damage to the hull and machinery of the vessel; Phoenix was liable for loss or damage to the cargo; and Oceanus was responsible for personal injury, loss of life, damage to docks, piers, etc., and certain other extraordinary expenses.*fn2

In its answer to the amended complaint, Lloyd's cross-claimed against Oceanus and Phoenix to recover part of the $83,000 Lloyd's had paid in settlement of state court actions brought by Sequin and other local salvors for labor and materials used to remove the VAL 51 and its cargo. The Seaboard claim was settled before trial; the only remaining issue was the liability as between the insurers for the state court settlement costs.*fn3

These expenses, for removal of cargo and barge, are known in maritime insurance circles as "sue and labor" expenses; they are sums spent by the insured or its representative in an effort to mitigate damage and loss once an accident has occurred; and the insurance company pays them even where, as in this case, the ship is ultimately declared a total loss, in order to encourage diligence in the prevention of excessive liability or loss. See Gilmore and Black, The Law of Admiralty (1957), pp. 64- 69; Home Ins. Co. v. Ciconett, 179 F.2d 892 (6th Cir. 1950); White Star SS Co. v. North British and Mercantile Ins. Co., 48 F. Supp. 808, 812 (E.D.Mich.1943). The Lloyd's and Phoenix policies contained a "sue and labor" clause; that of Oceanus did not.

The court below found that the leaking and damaged condition of the ship threatened the separate and distinct interest of each insurer and that Jocharanne, in incurring towing and removal charges, was seeking to protect the hull, save the cargo, and prevent explosion and resultant disaster.*fn4 The terms of the Lloyd's and Phoenix policies which authorize sue and labor efforts to protect the hull and cargo in case of accident were held the source of those underwriters' responsibility. The basis for Oceanus' obligation to reimburse Lloyd's was found in a term of the Oceanus policy which insures against "costs or charges of raising or removing the wreck of the ship named herein when such removal is compulsory." It is not clear whether the court considered the salvors' charges "costs of raising the wreck" under the policy or preventive medicine which by forestalling explosion and sinking would relieve Oceanus of the future obligation to raise or remove the wreck.

If the court meant the former, Oceanus argues persuasively that the clause was not applicable to this situation. Lloyd's argues that the pressure from the Coast Guard and other governmental authorities in the Oswego area made the removal of the barge compulsory. But "compulsory removal" is a term of art in admiralty law and refers to a situation in which a hull has been abandoned by the owner and the hull underwriter but, pursuant to government order, must be removed from navigable waters. Under those circumstances, the P & I underwriter, absorbing costs which no one else remains liable to pay, must remove the wreck or reimburse the government for removal. See the Wreck Removal Act, 33 U.S.C. §§ 409-414; Dover, A Handbook to Marine Insurance (6th ed. 1964) at 439. Cf. Wyandotte Transportation Co. v. United States, 389 U.S. 191, 88 S. Ct. 379, 19 L. Ed. 2d 407 (1967). There was no "compulsory removal" of the VAL 51. Lloyd's and Jocharanne, far from abandoning their interest in the vessel, had it towed to New York in the vain hope of salvaging the hull. No governmental order was necessary to spur the removal and the costs of the operation were therefore not chargeable to Oceanus as removal costs under its policy.*fn5

The other possibility is that the benefit the lower court found Oceanus had received from the sue and labor efforts was the avoidance of explosion and potential liability for injury to persons and damage to docks or piers as well as for wreck removal. Oceanus admits that had such a disaster occurred, it might have been liable for substantial amounts, but it claims that any calculation based on that possibility is extremely hypothetical and insists that the terms of its policy preclude holding it for any part of the expenses even if they tended to lessen the chance of explosion. Although we appreciate the motives of the district court in apportioning the costs, we are constrained to conclude that Oceanus is correct.

First we note that despite Lloyd's rhetoric, none of the expenses was incurred solely to avert those occurrences or protect those interests for which Oceanus alone was liable. All the costs were essential to any attempt to save the hull and cargo, so any benefit to Oceanus was in a sense incidental. More important, clause 2 of the Oceanus policy excepts from coverage "claims for any loss, damage, liability, or expense which would be payable under the present standard form of policy of the American Marine Insurance Syndicate on hull and machinery [identical in all essential respects to the Lloyd's policy] . . . and sufficient in amount to pay such loss, damage, liability or expense in full." As sue and labor expenses are covered by hull policies, they normally would not be recovered from the P & I policy underwriter. United States v. American Ins. Co. of Newark, N.J., 89 F.2d 8 (2d Cir. 1937); Landry v. Steamship Mutual, supra.

Despite the lack of coverage under the Oceanus policy, one might under these circumstances consider applying equitable principles and hold those who benefited from the services rendered for a portion of their cost, under a theory of equitable contribution or restitution. See Restatement of Restitution § 115. Within certain limits, courts sitting in admiralty are free to apply these equitable rules. See Gilmore and Black, pp. 37-39; Swift & Co. Packers v. Compania Colombiana Del Caribe, S.A., 339 U.S. 684, 70 S. Ct. 861, 94 L. Ed. 1206 (1950). Whether such principles could and ought to be applied here, however, is rendered academic by the presence of a contractual provision on this very point, which states that "where the Assured is, irrespective of this Association, insured or deemed to be insured against any loss or claim which would otherwise have been paid by the Association, there shall be no contribution by the Association on the basis of double insurance or otherwise." Clause 5, Oceanus policy. It is clear that in the absence of Oceanus Lloyd's would have been liable for the whole of the salvage expense, at least until the hull was abandoned in New York. Therefore, as these "escape" or "no-contribution" clauses have repeatedly been held valid and legal,*fn6 Oceanus has successfully contracted out of liability for contribution, under any theory, to a sum paid by another insurer, even though Oceanus might have otherwise been liable for that sum. Although this term, permitting Oceanus to reap benefits at no expense, seems somewhat odd, the intent that P & I insurance apply mainly or exclusively in situations to which no other coverage extends and the fact that Lloyd's has spent no more than it would have had there been no Oceanus policy mitigate the seeming harshness of the clause.

Concluding as we do that the cross-claim against Oceanus must be dismissed, we need not reach the question of the district court's use of the pretrial settlement with Seaboard, except to note that the use of such settlements to establish liability is forbidden as a matter of sound judicial policy. McCormack on Evidence, § 251; Hawthorne v. Eckerson Co., 77 F.2d 844 (2d Cir. 1935); Winkler-Koch Engineering Co. v. Universal Oil Products Co., 79 F. Supp. 1013 (S.D.N.Y.1947).

Judgment against Oceanus reversed and cross-claim ordered dismissed.

Disposition

Reversed and cross-claim ordered dismissed.


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