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May 18, 1993



The opinion of the court was delivered by: CHARLES H. TENNEY

TENNEY, District Judge:

 Plaintiff Bernadette Castro ("Ms. Castro") brought this action pursuant to 28 U.S.C. § 2201 (1982) and Rule 57 of the Federal Rules of Civil Procedure. She seeks a declaratory judgment that the defendant, Federal Insurance Company ("Federal"), has a duty to defend and to indemnify her in a legal action pending in the United States Virgin Islands. Ms. Castro is a third party defendant in Whitmer v. Castro Convertible Corp., et al., Civ. No. 1990/27 (D.V.I.) ("the Whitmer action"). She claims that she is entitled to reimbursement from Federal for expenses she has already incurred in defending that action, as well as recovery of her share of the $ 75,000 paid to settle the Whitmer action. Moreover, she seeks to recover legal fees and costs incurred in pursuing this declaratory judgment action, alleging that Federal acted in bad faith when it refused to defend her in the Whitmer action.

 This court has diversity jurisdiction pursuant to 28 U.S.C. § 1331 (1966 & Supp. 1993): Ms. Castro is a citizen of New York, and Federal is a corporation doing business in New Jersey, with no principal offices in New York.

 Following a bench trial in December of 1992, this court heard further argument from both parties. For the reasons stated below, the plaintiff's request for a declaratory judgment is granted.


 At the end of 1987, Ms. Castro arranged to charter a sailing vessel for her children's use during their spring recess. She asked Rob Shelnut ("Captain Shelnut") to help her make the arrangements. Captain Shelnut was captain on the AVANTE, a yacht owned by the Castro Convertible Corporation ("Castro Corp."). He contacted a yacht charterer broker, Tom Collins ("Mr. Collins"). Mr. Collins, in turn, contacted La Vida Charterers, Inc. (La Vida"), which offered a boat called the "JUST PERFECT." La Vida issued a charter reservation form and charter contract form *fn1" to Mr. Collins. He forwarded the documents to Captain Shelnut, who filled them out and signed them. He did not indicate on the contract or the reservation form that he was signing pursuant to Ms. Castro's authorization. Exhs. 2, 3. The JUST PERFECT was insured under a La Vida policy issued by Federal. The term "insured" was defined in the policy as including:

Any person, charterer, firm, corporation, partnership, or other legal entity who may be operating the yachts with the prior permission of the named insured.

 Exh. 1, Endorsement at 1. The policy provided coverage "for damages a covered person is legally obligated to pay for bodily injury . . . ." Exh. 1, Yacht Policy at 5. The policy also provided that Federal would "defend a covered person against any suit seeking covered damages for bodily injuries or property damages . . . even if the suit is groundless, false or fraudulent." Id.

 When Ms. Castro's children went to the Virgin Islands, Captain Shelnut accompanied them at her request; he also brought James Whitmer ("Mr. Whitmer"), who was the chief engineer of the AVANTE, to assist him. The two men stayed with the children on the JUST PERFECT, which was chartered for a one week period beginning on February 13, 1988.

 On February 19, the JUST PERFECT was anchored in Cruz Bay on the island of St. John. That night Mr. Whitmer set out from the JUST PERFECT in a dinghy, accompanied by one of Ms. Castro's children. After the engine lost power, the dinghy drifted toward the mouth of the Cruz Bay Harbor, where it was struck by a ferry, the NIKKI V. Mr. Whitmer was seriously injured and was taken by Medivac helicopter to a hospital in Gainesville, Florida.

 Seven months later, Ms. Castro received a letter from a law firm representing Mr. Whitmer; the firm demanded payment for medical bills and for the injuries that Mr. Whitmer had sustained in the collision. Exh. 35. When Ms. Castro's insurance company told Federal about the letter, Federal responded that it would not provide her with a defense. Exh. 4. She brought this declaratory judgment action on August 17, 1989.

 The action in the Virgin Islands involves a number of parties. Mr. Whitmer brought suit against Castro Corp. and Varlack Ventures *fn2" on September 3, 1990 in the Virgin Islands district court. Castro Corp. brought a third party claim against La Vida Charterers, Inc., La Vida Management Co., Inc., Caribbean Ventures, Inc., and Captain Shelnut (the "La Vida defendants").

 Federal provided the La Vida defendants with a defense and a promise of indemnification. On September 30, 1991, Varlack Ventures brought a third party action against the La Vida defendants and Ms. Castro. This third party action caused Ms. Castro again to ...

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