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June 1, 1995


The opinion of the court was delivered by: DENNY CHIN

 Chin, D.J.

 On May 12, 1993, workers aboard the vessel SAMICK NORDIC off the coast of Saudi Arabia were welding a hatch on deck. Sparks fell below onto a cargo of plywood. First the plywood and then the ship caught fire. The ship burned for over a week, and the entire cargo was destroyed.

 The plywood was insured by defendants, Certain Member Companies of the Institute of London Underwriters (the "London Underwriters") , who in turn had entered into a "binder" of reinsurance with plaintiffs Reliance Insurance Company ("Reliance") and New York Marine & General Insurance Company ("NYMGIC").

 Plaintiffs commenced this action seeking a declaratory judgment that the reinsurance binder is void ab initio. The London Underwriters have asserted a counterclaim for a declaratory judgment that the reinsurance agreement is valid and binding; they also seek recovery of $ 2,043,740.24, the amount that would be due if the reinsurance agreement is valid.

 The case was tried to the Court from May 15 to 18, 1995. For the reasons set forth below, judgment will be entered in favor of plaintiffs. Pursuant to Fed. R. Civ. P. 52(a), the following are my findings of fact and conclusions of law.

 The London Underwriters are direct cargo insurers of Apkindo, a consortium of Indonesian plywood and lumber products producers. Apkindo is also sometimes insured directly by an Indonesian insurance company, Tugu Pratama Indonesia, or its affiliate, Tugu Hong Kong (collectively "Tugu"). Apkindo's direct insurance is written on an "all risks" basis, i.e., losses are covered no matter what the cause (with certain limited exceptions) and whether total or partial. (JPTO PP 3, 4). *fn1"

 The London Underwriters are the direct insurers of all of Apkindo's shipments going to the United Kingdom/Europe, including the shipment lost on the SAMICK NORDIC. (Klima Dep. 145-46). Tugu is involved on these shipments as an original reinsurer of 40% of the London Underwriters' interest. (Klima Dep. 146).

 Apkindo's direct insurance has been placed for a number of years by the London insurance broker, Energex International Insurance Brokers, Ltd. ("Energex"). (Tr. 501). David Klima is the deputy managing director of Energex who has been responsible for the Apkindo account. (Tr. 498, 501).

 In the marine insurance industry, "Free of Particular Average" -- or "FPA" -- coverage is limited coverage for total loss of cargo (regardless of cause) and partial loss of cargo caused by certain specified casualties, such as collision, fire, stranding or sinking. (JPTO P 7; see Tr. 288-89).

 In the insurance year from April 1, 1992 to March 31, 1993, the London Underwriters paid in excess of $ 2.4 million for two losses sustained by Apkindo of the type that would have been covered under an FPA policy. (TX 1; Tr. 502-03, 507). As a result of these losses, at the conclusion of the negotiations for the renewal contract, Klima of Energex and Ken Hopwood, who was the lead underwriter, decided to explore the possibility of reinsuring the FPA exposure. (Tr. 503). *fn2" Although Hopwood made no commitment, he indicated to Klima that the London Underwriters would "move forward" with reinsuring the FPA exposure if "it was obtainable at the appropriate cost." (Tr. 504; see Hopwood Dep. 90, 93 (Hopwood expressed "an interest" in purchasing the proposed reinsurance)).

 In March 1993, Energex also discussed the FPA reinsurance proposal with Tugu's London representative, who passed the proposal on to Tugu's offices in Indonesia and Hong Kong. (Tr. 515-16). Although there were positive indications from Tugu's London representative, the decision was to be made in Indonesia and Hong Kong. (Tr. 516). As of March 31, 1993, Energex had not received a "definitive answer either way" from Tugu. (Klima Dep. 96-97; see also Tr. 523). In mid to late April, Klima was advised that Tugu was declining the FPA reinsurance. (Tr. 519).

 In early March, Energex prepared a written proposal for the FPA reinsurance. (Tr. 508; TX 34). Klima made no effort to market the FPA reinsurance in London, even though London underwriters often reinsure themselves. (Tr. 556-57; see also Tr. 610). He did, however, send the proposal to Nausch, Hogan & Murray ("NH&M"), insurance brokers in the United States, inviting them to market the proposal in the United States. (Tr. 509). It was Energex's intent that 100% of the FPA risk be reinsured. (See Hopwood Dep. 98 ("We would only have reinsured FPA 100%.")).

 Scott Darragh, a broker with NH&M, received the proposal from Energex by facsimile in March 1993. (Tr. 432; TX 26H). He had a follow-up telephone conversation with Klima, during which he wrote on his copy of Energex's proposal "100% or TBA [to be advised]"; this note reflected Darragh's understanding that the proposal "was looking for one hundred percent FPA reinsurance of the reassureds that were listed on the top." (Tr. 433, 457; TX 26H). Darragh made the note because it "assisted" him in "understanding" the proposal, by "clarifying the hereto" clause contained in the written proposal. (Tr. 457, 459; TX 26H).

 Darragh took the Energex proposal, made a few changes, and had it retyped onto NH&M letterhead. (Tr. 434-36; TX 1). He made no revisions to the "reassured" or "hereto" clauses. (Compare TX 26H with TX 1). The "reassured" clause at the top of the proposal, which was dated March 16, 1993, listed the "reassured" as follows:


 (TX 1). The "hereto" clause read as follows:

"Order to be advised, but provisionally - U.K. (60%) Europe (60%) China (51%) Japan (25%)"

 (TX 1).

 On or about March 16, 1993, Darragh brought the retyped proposal to Michael Hyland at Reliance. (Tr. 434, 437; TX 1). Hyland had known Darragh for some twelve years at the time (Tr. 46), and Darragh testified that he and Hyland were friends. (Tr. 486). Hyland and Darragh met for approximately ten minutes discussing the proposal, ...

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