The opinion of the court was delivered by: BONSAL
This suit in admiralty for a declaratory judgment seeking to recover on Ocean Marine Policy No. DE 3540 ("the Policy") issued by defendant American Manufacturers Mutual Insurance Company
on August 18, 1964 to plaintiffs Anne Quinn Corporation ("Quinn") and Earl J. Smith & Company ("Smith")
was tried without a jury.
Quinn was the bareboat charterer of the S.S. SMITH VOYAGER ("VOYAGER"), which foundered and sank in the Atlantic Ocean in December of 1964, while the Policy was in effect. Smith was the general agent of Quinn. Thirty-six claims were filed by or on behalf of members of the crew of the VOYAGER as a result of the sinking, including four death claims and thirty-two personal injury claims ("the individual claimants"). In addition, the India Supply Mission ("the cargo claimant") filed a claim for the loss of the cargo, consisting of 10,204 tons of grain. Together, these claims total $16,000,000. Two of the individual claimants have settled their claims, for $5,000 and $30,000 respectively.
The remaining claimants have intervened in this action.
Ocean Marine Policy No. DE 3540 is an excess insurance or "Bumbershoot" policy
whereby defendant agreed to indemnify plaintiffs for all protection and indemnity risks of whatsoever nature including, but not limited to, those covered by the primary insurance policy with respect to all claims for personal injury and property damage in excess of $2,000,000 and up to $5,000,000 for each vessel covered, each accident. The term of the Policy ran from noon E.S.T. August 13, 1964 to noon E.S.T. August 13, 1965, and the annual premium was $7,500. The Policy's terms and the premium were the same as those in the previous year's policy (No. DE 1751) issued by defendant to plaintiffs.
Clause I(a) and I(b) of the Policy's exclusions provide:
"THIS POLICY SHALL NOT APPLY: --
I (a) to indemnify an Assured whose dishonesty or fraud, committed individually or in collusion with others, caused the loss for which that Assured seeks indemnity; nor
(b) to indemnify any Assured against claims based upon any intentional non-compliance with any statute or regulation unless such (claims) be for damages occasioned by actual or alleged bodily injury (fatal or otherwise) or physical loss of, damage to, and/or loss of use of tangible property."
On October 29, 1968, this court denied the petition of Smith, Quinn, and Sumner A. Long ("Long") (the owner of the VOYAGER) for exoneration from or limitation of liability. Petition of Long, 293 F. Supp. 172 (S.D.N.Y. 1968). The court found that the VOYAGER was overloaded when she broke ground at Houston, Texas on December 12, 1964; when she departed Freeport, Grand Bahama Island on December 15; and when she sank on December 27; and that the overloading was a substantial cause of the VOYAGER's sinking. The court also found that the overloading of the VOYAGER had occurred with the privity and knowledge of Smith, Quinn, and Long.
Shortly before argument on the appeal from this court's decision, Long agreed to pay the claimants $1,821,000 in settlement of their claims against it, and Long's appeal was withdrawn subject to the approval by this court of the stipulation of settlement. On March 3, 1971, the Court of Appeals affirmed with respect to the liability of Smith and Quinn and remanded for disposition of the claims for damages. Petition of Long, 439 F.2d 109 (2d Cir. 1971). On May 21, 1971, the court approved the stipulation of settlement between Long and the 34 claimants.
The policy of the primary insurer, the London Steam-Ship Owners' Mutual Insurance Association, Ltd., was limited to $2,000,000 for each vessel, each accident. Under its policy, the primary insurer has made payments totalling $1,987,501.58, including $1,821,000 paid with respect to personal injury, death, and cargo claims, and $166,501.58 representing payments for the repatriation of the crew, maintenance, attorneys' fees, and expenses in the limitation proceedings. The balance of $12,498.42 is being held by the primary insurer pending a final determination of all the claims, when it will be paid out to exhaust the limits of the primary policy. The individual and cargo claimants have received payments under the settlement and contend that they are entitled to additional damages to be paid out of the Policy.
The complaint alleges that under the Policy, defendant is liable to the plaintiffs to take over the defense of the pending claims at its risk and expense, and, in the event that plaintiffs should be held liable, to indemnify plaintiffs up to the $5,000,000 limitation of the Policy. There is no dispute that defendant received timely notice from the plaintiffs' broker of the sinking of the VOYAGER and of the presentation of the personal injury, death, and property damage claims. The defendant associated with the plaintiffs and the primary insurer in the defense and control of the claims until November 25, 1968 (after the court's determination that overloading had caused the sinking of the VOYAGER), when defendant notified Smith and Quinn that it considered the Policy to be void and tendered return of the $7,500 premium, which tender was not accepted, and the check was returned to defendant by plaintiffs on December 4, 1968.
Defendant denies liability under the Policy on the following grounds: 1) that the Policy was void from its inception because the plaintiffs did not disclose at the time it was issued their alleged practice of overloading their vessels; 2) that under clause I(a) of the Policy's exclusions, the Policy does not cover plaintiffs' losses because they were caused by the plaintiffs' alleged dishonesty or fraud in overloading their vessels.
Plaintiffs contend that there was no fraud with respect to the issuance of the Policy because it was a matter of common knowledge in the marine industry that "tramp" vessels, such as the VOYAGER, engaged in the grain trade from United States gulf ports to India, would leave the gulf ports loaded to their marks with fuel to reach Caribbean bunkering ports, would then take on bunkers for the voyage across the Atlantic Ocean, and would leave the bunkering ports overloaded; plaintiffs contend that defendant knew or should have known of this practice at the time the Policy was issued. Plaintiffs also contend that the overloading of the VOYAGER, which the court found violated the United States Load Line Act, 46 U.S.C. § 85 et seq., Petition of Long, 293 F. Supp. at 177, would be, at most, an ...