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CONTINENTAL INS. CO. v. LONE EAGLE SHIPPING LTD.

January 16, 1997

CONTINENTAL INSURANCE COMPANY, CORVETTE COVER UNDERWRITERS 1993, TUGU INSURANCE COMPANY, CHINA INSURANCE COMPANY, PROTECTOR FORSIKRING AS, OSLO, MITSUI MARINE AND FIRE INSURANCE CO., LTD. TOKYO, FAI GENERAL INSURANCE COMPANY LIMITED (AUSTRALIA), NEW YORK MARINE AND GENERAL INSURANCE CO., HOMESTEAD INSURANCE CO., and CERTAIN UNDERWRITERS AT LLOYDS, Plaintiffs,
v.
LONE EAGLE SHIPPING LTD. (LIBERIA), and THE ROYAL BANK OF SCOTLAND PLC, Defendants.



The opinion of the court was delivered by: COTE

 DENISE COTE, District Judge:

 This is an admiralty action arising out of damage to the M/V ALPHA STAR ("ALPHA STAR"), a 21-year-old Ore/Bulk/Oil ("OBO") carrier, sustained during a voyage from Port Cartier, Quebec to Fos-Sur-Mer, France, in December 1993. Plaintiffs are various insurance companies which issued a time hull insurance policy to the ALPHA STAR. Defendant Lone Eagle Shipping Ltd. (Liberia) ("Lone Eagle") is the owner of the ALPHA STAR, and defendant The Royal Bank of Scotland PLC ("Royal Bank") is the mortgagee of the vessel. Plaintiffs bring this action pursuant to the Federal Declaratory Judgment Act, 28 U.S.C. § 2201, for a declaration of nonliability on the policy for the ALPHA STAR's constructive total loss ("CTL"), and to recover money paid by plaintiffs to a salvor based on a theory of unjust enrichment. Defendants have counterclaimed for the value of the policy.

 Following trial, this Court holds that the defendants have failed to prove that sufficient damage to the ALPHA STAR was caused by heavy weather to trigger the policy's coverage. Rather, plaintiffs have proven that a substantial amount of the damage was caused by advanced corrosion of the structure of the cargo holds of the vessel. Therefore, defendants have failed to show that a constructive total loss resulted from an insured peril. Finally, this Court holds that because the vessel was not endangered due to an insured peril, plaintiffs are entitled to recover the money paid to a salvor under a guarantee.

 I. Background

 A. Procedural History

 Plaintiffs filed this action on May 6, 1994, and subsequently filed an Amended Complaint dated August 31, 1995. In the Amended Complaint, plaintiffs allege (1) that the ALPHA STAR's loss was due to corrosion and wear and tear on the vessel rather than an insured peril such as a peril of the sea; (2) that the weather encountered by the ALPHA STAR during the voyage at issue was normal, expectable, and foreseeable, and therefore did not constitute a peril of the sea under the policy; (3) that defendants cannot prove that the damages to the ALPHA STAR were proximately caused by an insured event; (4) that the defendants cannot prove that the cost of repairing the ALPHA STAR would exceed $ 7,000,000, and thus the cost is insufficient to constitute a CTL; (5) that the defendants breached two separate implied warranties of seaworthiness; and (6) that the defendants were unjustly enriched by plaintiffs' payment to a salvage company of $ 159,000 for salvage expenses because plaintiffs are not liable for such a payment under the policy. Defendants have counterclaimed for the value of the policy, $ 2,650,000.

 At trial, pursuant to this Court's rules and with the consent of counsel, the direct testimony of all witnesses was presented by affidavit. Witnesses appeared at trial only for cross-examination and redirect testimony.

 Plaintiffs presented affidavits from Robert A. Raguso, a weather expert; James L. Dolan, an expert in classification societies; Emanuel Silkiss, a metallurgical corrosion expert; George Petrie, a naval architecture expert; Paul Bartolo, an underwriter for the All American Marine Slip ("AAMS"); and Brian Sales, a claims manager for AAMS. Plaintiffs presented deposition excerpts from Bruno Storms, a surveyor from Comite d'Etudes et de Services des Assureurs Maritimes ("CESAM") who performed a survey of the ALPHA STAR in October 1993; Vassilios Roussopoulos, the Chief Mate of the ALPHA STAR; Petros Tsacaleris, Master of the ALPHA STAR; Stylianos Bithizis, Bosun of the ALPHA STAR; Mihail Karanikos, Chief Engineer of the ALPHA STAR; Alexandros Moshos, Second Engineer of the ALPHA STAR; Panagiatis Tzanetatos, Managing Director of the companies managing the ALPHA STAR; Paul Labrinakos, technical consultant and engineer for the companies managing the ALPHA STAR; Andre Fabiao, a court appointed hull surveyor for the Port Authority of Marseilles; Jacques Mordelle, CESAM surveyor; Johan Van Grieken, the surveyor hired by the ALPHA STAR's owner; Bernd Ustorf, the owner's claims adjuster; Thomas Dushas, chairman of one of the companies managing the ALPHA STAR; David Burbridge, an expert marine surveyor; and John Waite, an expert naval architect.

 Defendants presented affidavits from Van Grieken, Ustorf, Dushas, and Anthony Amanatides, chief financial officer for Le Timon. Defendants presented deposition excerpts from Storms, Roussopoulos, Tsacaleris, Bithizis, Karanikos, Moshos, Tzanetatos, Labrinakos, Burbridge, Waite, Fabiao, Mordelle, Bartolo, and Sales.

 B. Factual Background

 The Vessel

 The ALPHA STAR was an 841 foot long, 101,700 dead weight ton, 9-hold OBO carrier, built in 1972. *fn1" The vessel was constructed with double bottom tanks extending to side hopper tanks. The ship had 300 internal side shell structural frames which supported the external side shell plating between top side tanks and the lower hopper tanks. The frames are in effect the ribs of the vessel, while the plating is the skin of the ship. The frames are referred to as the web of the vessel. *fn2" Each cargo hold extended the entire width of the ship.

 From the time of its construction until its purchase by Lone Eagle, the ALPHA STAR was classed with one of the thirteen of the world's thirty-nine classification societies who are members of the International Association of Classification Societies ("IACS"). Classification societies provide minimum standards addressed to the technical requirements for vessels during construction and throughout their service life. As of 1991, the ALPHA STAR was classed with the Det Norske Veritas Classification Society ("DNV"). DNV was and is a member of IACS.

 In February 1991, Lone Eagle purchased the ship for $ 6,995,000, renamed her ALPHA STAR, and registered her in Greece. Following the purchase, the owners reclassed the vessel with the Hellenic Register of Shipping Classification Society ("HRS"). HRS has applied to IACS for membership but has been rejected. It is acknowledged by the parties in this matter that HRS has adopted standards for vessels that are very similar if not identical to those adopted by the members of IACS, but that HRS is criticized within the industry for employing inspectors who do not apply those standards with the rigor presumed to govern their enforcement by IACS member societies. At the time ALPHA STAR was reclassed with HRS, HRS did not have a worldwide network of competent surveyors working exclusively for HRS, a requirement for IACS membership. Nor did it have sufficient technical expertise on hand both to develop and apply classification standards. Following their purchase of the vessel, the owners immediately put a riding crew on board to conduct repairs and maintenance since the vessel was already over 18 years old.

 The mortgagee of the ALPHA STAR was the Royal Bank. Olympic Shipping and Brokerage Agency ("Olympic") and Le Timon Transport Co. (Le Timon"), which manage three other similar bulk carriers, were hired to manage the ALPHA STAR. Le Timon's U.S. agent is Dover Agency and Brokerage, Inc. ("Dover").

 Insurance

 Lone Eagle's marine insurance broker in the United States was Rollins Hudig Hall ("RHH"). RHH applied to All American Marine Slip ("AAMS"), a slip of insurance underwriters led by Continental Insurance Co., for coverage for the four vessels managed by Olympic and Le Timon. On November 10, 1993, AAMS issued a Hull and Machinery Marine Insurance Policy for the ALPHA STAR, which provided insurance coverage from November 20, 1993 to November 20, 1994. The insurance rate for the ALPHA STAR was 4.2%; the premium $ 294,000. Older ships such as the ALPHA STAR pay higher insurance premiums because, among other reasons, insurance companies expect that they will have a certain amount of rust and corrosion. The policy required that the classification society for all four vessels be changed from HRS to another classification society approved by AAMS no later than February 1994. *fn3"

 For the heavy weather damage claim asserted here, the policy only provides coverage for a total loss or a CTL. The insurer did not provide coverage for partial loss due to heavy weather or a peril of the sea because it considered older vessels like the ALPHA STAR to be more susceptible to such damage. A CTL claim requires that Lone Eagle prove that the cost of recovering and repairing the ALPHA STAR would be at least $ 7,000,000. If a CTL is proven, the policy provides coverage of $ 5,000,000, with 53% being insured by the U.S. market with AAMS as lead underwriter, 20.4% insured through a line of French underwriters, and 26.6% being self insured. The underwriters' payment is minus the net scrap amount collected by the vessel interests, including the mortgagee, from the sale of the vessel to the ship breakers.

 Payment in an amount below the valuation is known as a dual valuation clause. Again, this is customary for coverage of older vessels because of the difficulties in accurately valuing them.

 The policy provides recovery for sue and labor expenses. Sue and labor expenses are those costs which the owner expends in order to take such reasonable measures as may be necessary to protect the vessel from loss or from a CTL due to an insured peril. This would include the costs associated with safeguarding and recovery of the vessel in order to prevent a total loss or a CTL.

 Structural Surveys

 The ALPHA STAR was on a "four" year survey cycle. Such a cycle includes a special survey at the beginning of the cycle, customarily has a "year of grace" survey at year four for older ships, and has the next special survey at year five. A special survey is a complete, in-depth review of the vessel. Within this cycle there are also annual surveys and, at either year two or three, an intermediate survey.

 The intermediate survey of an OBO, before enhanced survey requirements were adopted in 1993, required a close-up inspection of one or two cargo holds, with examination of additional holds and ultrasonic gauging at the discretion of the surveyor. A close-up inspection requires the surveyor to come close enough to the portion of the structure the surveyor is examining to be able to touch it. Ultrasonic gauging permits precise measurement of any diminution in the thickness of steel due to corrosion.

 The year of grace survey requires the surveyor to enter every space on the vessel except the oil tanks, and to do the close-up survey and take the ultrasonic gaugings required for a special survey. As a consequence, this survey permits the repairs which will be required by the special survey to be done during the year of grace. When an OBO is twenty years old, gaugings must be taken of the interior and exterior of the vessel within three complete wide transverse bands of the vessel, as well as within two strakes or horizontal bands at the splash zone, certain other specified areas, and any suspicious areas.

 On July 1, 1993, IACS issued enhanced survey requirements for vessels like the ALPHA STAR as a result of the extraordinary casualty record of recent years. Between 1989 and 1992, thirty-four OBO/bulk carrier casualties occurred and, when several vessels sank without a trace, cost more than 250 lives. Within the last ten years, more than 700 crewmen have died as a result of bulk carrier casualties. Many of the casualties occurred among older vessels, which are most prone to structural failure in their top side tanks, double bottom ballast tanks, and cargo holds. The IACS has recognized various factors as contributing to those casualties, the single most significant of which is wastage of the frames in the cargo holds from corrosion.

 A DNV survey in October 1990 found more buckled side shell frames in some of the cargo holds and ordered a close-up survey to be done. A close-up survey in January 1991 included a close-up inspection of the top ends of the frames in certain cargo holds, but not cargo holds 2, 5 or 8. Where it was done, spot gauging indicated wastage of less than 10%.

 An HRS structural survey in February 1991 related to the change of class noted no new structural deficiencies. The only structural deficiencies in the cargo holds that were commented on were those identified in the DNV October 1990 survey. The HRS surveyor described the buckled frames identified by DNV as "minor" damage and opined that repairs could be deferred. There is no indication that cargo holds 2, 5, or 8 were subject to any inspection. At the annual survey in March 1992, HRS conducted an internal survey of three holds (again, not holds 2, 5 or 8), and pronounced their condition good. During the 1993 annual survey, conducted in February, HRS entered holds 1, 2, and 5, and declared their condition good. No repairs were carried out as a result of the survey and no recommendations for repairs or testing were made.

 On October 6 and 8, 1993, CESAM performed a condition survey at Amsterdam in order to decide whether to renew insurance coverage of the vessel. This was not a structural survey and no thickness gauge readings were taken of the frames in the cargo holds. An HRS surveyor who was also in attendance indicated, however, that he had made some ultrasonic thickness measurements of some portions of the vessel and that they were within allowed limits.

 The CESAM surveyor only inspected four cargo holds, and since the cargo (soy beans) was on board at the time of the survey, he limited his survey to a brief inspection of the upper parts of those holds nearest the ladders. With respect to the exterior of the hull, only approximately 25% of the hull surface of a fully laden vessel can be observed. As a consequence, this survey was of little assistance in assessing the allegation of damage from heavy weather later asserted by the vessel's owners. Nonetheless, the survey noted a generally rusted condition of the side walls and frames. Ultimately, the French underwriters agreed to continue coverage of the vessel but only for $ 1,000,000. The remainder of the coverage was, as described above, placed in the American market.

 In October 1993, while the vessel was in Amsterdam, HRS conducted the year of grace survey. The survey was not as rigorous, however, as it should have been. For instance, no close-up inspection was conducted and no ultrasonic gaugings were taken of the framing in the cargo holds. Nonetheless, HRS granted the vessel a year of grace until its next special survey.

 That same month, October of 1993, the vessel developed a crack in the No. 1 double bottom starboard side tank. The crack was repaired by an on-board riding crew of four welders. Although classification societies are supposed to be consulted regarding all structural repairs, the owners never advised HRS of this crack or the repair.

 A crack in the No. 1 double bottom port side tank was noticed to be leaking at a rate of 5,000 gallons per day prior to the vessel's arrival at Dunkirk, France on November 17, 1993. Again, HRS was not notified. The crack was repaired by the riding crew in early December, after the Canadian Coast Guard independently discovered the crack.

 In sum, as of the ALPHA STAR's fateful voyage in December 1993, no close-up inspection of the framing in all of the cargo holds had been done since 1989 and no ultrasonic gaugings of the framing in cargo holds 2, 5 and 8 had been taken since before 1989, if ever. In this and many other respects, the surveys undertaken since 1989 were not sufficiently rigorous to provide a reliable assessment of the structural soundness of the vessel. Had HRS carefully surveyed cargo hold No. 2 in February 1993 or each of the cargo holds during the year of grace survey in October 1993, it would have found that the frames were so seriously diminished through corrosion that the vessel was no longer "in class."

 The Voyage

 The voyage at issue here began at Port Cartier, Canada, where the ALPHA STAR loaded iron ore to be delivered to Fos-Sur-Mer, on France's Mediterranean coast. On November 26, 1993, as the vessel was en route to Canada to pick up its cargo, Dover sent the Master of the ALPHA STAR a telex describing the Canadian Port Authorities as "very strict" and "prejudiced".

 On November 29, 1993, Dover underscored its warning with the following telex to the Master:

 
Nobody has the right to inspect areas of the ship to his discretion and without Masters [sic] approval. Master should not permit entrance of anybody in areas which he don't [sic] approve. Master should also have to arrange [sic] prohibit entrance in the areas he feels necessary by making random access impossible (e.g. by ballasting, or other technical undertakings). If any inspection is to be conducted by authorities then, the inspector must be continuously followed by ship's officer who if [sic] fully aware of all above.

 As the Coast Guard officers stationed at Port Cartier approached the vessel in early December, they saw water leaking from one of the double bottom ballast tanks. They thereafter carried out a Port State Control Safety Inspection. Various deck cracks were discovered by the Canadian authorities and repaired by the on-board welders. The repairs were approved by an HRS inspector, who classified at least one of the repairs as permanent when he should not have done so. There is no indication that a close-up survey of the side shell framing was done by anyone.

 On December 11, 1993, 99,046.28 metric tons of bulk iron ore concentrate were loaded into holds 1, 3, 5, 6, 7 and 9. The sailing draft of the loaded vessel was 48 feet, 7 inches. Holds 2, 4 and 8, as was customary, were left empty. When the vessel left Quebec on December 11, 1993, she carried a riding crew of four deck welders.

 Between approximately December 16 and 18, while crossing the North Atlantic, the Chief Mate discovered four cracks in the port side shell plating in hold No. 2 and approximately ten to twelve structural frames in the hold were found buckled. At that point of the voyage, the port side of the vessel was also the leeward side, which meant that the wind was on the starboard side. Two of the ten frames were also detached from the side shell plating in way of the hold. Approximately 10 centimeters of water, which had entered through the cracks, was lying over three-quarters of the hold's tank top.

 The Master of the vessel was immediately informed. The Master, who had joined the vessel in July 1993, had received no instructions from the owners about repairs or maintenance, but had instead been given a free hand with the vessel. The owners, who were also immediately informed of the situation, did not contact the classification society as they were required to do. Indeed, HRS was never contacted about this problem or those that were discovered over the succeeding days. Nor was it advised to arrange for an inspection at Gibraltar or Fos. The owners were well aware of their obligation to report any breach of hull integrity to the classification society but chose not to do so.

 By December 20, an emergency inspection of the remaining eight holds had been completed and revealed buckled structural frames in seven of the other eight holds. There were detached frames in at least hold No. 5 as well. Only hold No. 4 appeared to be without a problem. The owners made arrangements for four additional welders as well as welding equipment and a superintendent engineer to board at Gibraltar.

 Defendants contend that the additional riding crew, superintendent, and supplies were put on board in Gibraltar because it cost less to do it there, there was concern that it would be impossible to obtain supplies in France during the holidays, and the welders could erect scaffolding in holds 2 and 8 so that inspection and repair work could proceed more quickly when the vessel was in port. It would have been imprudent and dangerous to make riding repairs to the structure of a loaded vessel at sea and there is no evidence that such repairs were made by the crew of the ALPHA STAR. *fn4"

 The vessel stopped in the roads of the port of Gibraltar to take on the additional crew and supplies. If it had stopped in the port, it would have been subject to inspection by the Port Authority and if inspected the Port Authority would in all probability not have permitted the vessel, with a breach in its hull, to continue sailing. To enter the port and to repair the breach, the ALPHA STAR would have had to discharge a significant portion if not all of its cargo, which would have been a difficult, costly, and time consuming process. As the vessel left Gibraltar, however, the weather forecast warned of winds at Beaufort Force 6 to 7. The owners and Master were well aware of the risks they ran in continuing the voyage, but gambled that they could safely reach Fos, discharge the cargo, and then make the necessary repairs.

 On December 23, 1993, the Chief Mate observed that the cracks in the side shell of the No. 2 hold had grown to approximately 12-13 centimeters. On December 26, 1993, at about 0130 hours, the vessel began to move off its course to Fos. At that time it was experiencing winds no greater than Beaufort Force 8 and a combined sea and swell no greater than 5 meters. At approximately noon, the Master ordered an inspection of holds 2, 5 and 8. Water continued to pour in from the port side shell plating cracks in hold No. 2 and three meters of water were on the tank top. Breaking and cracking noises were heard in holds 5 and 8 and water was found in hold No. 8. At approximately 1510 hours, the vessel sent an SOS message. The French Navy dispatched two helicopters from Corsica and the crew was safely evacuated. Among those removed from the vessel was the wife of the Chief Officer.

 The abandoned vessel continued to steam on auto-pilot toward Sardinia due to the fact that the vessel's propulsion engines and power plant were not effectively shut down. *fn5" On December 27, the French Navy helicoptered some of the officers and crew back to the ship in order to bring the vessel to a stop. The vessel was completely and safely evacuated again that same day.

 While a vessel's logs are ordinarily a reliable source of significant information about a voyage, including the weather experienced, the ALPHA STAR's logs are not reliable. Entries made by the Master in the rough log for certain portions of the voyage before December 26 exaggerated the wind conditions slightly. On December 26, the Master recorded Beaufort Force winds of 11-12 (73-82mph) after 10:30 a.m. These were excessively high and not substantiated by any other vessel in that part of the Mediterranean, government weather data, or any expert calculation. Indeed, I find that all of the entries in the vessel's log for December 26 contain exaggerated descriptions of the conditions encountered by the vessel. The ALPHA STAR's logs are particularly unreliable since the Master believed that the rough log was not an official record and that he was therefore free to omit entering its data into the smooth log and could add data to the smooth log that was not in the rough log. In addition, he added material to the rough log to conform it to entries that he decided to make in the smooth log. *fn6" Finally, as described below, the Master was determined to exaggerate the severity of the weather faced by the vessel as part of his scheme to conceal the deteriorated condition of the ALPHA STAR.

 I find that the weather experienced by the vessel from its departure from Canada to have been the following:

 From December 11 to 23, while the vessel was travelling between Port Cartier and Gibraltar, it experienced wind forces no greater than Beaufort Force 7 (32 to 38 mph), and combined significant sea and swell heights no greater than five meters. Until December 19, the winds were coming from the southeast, south, or southwest, striking the starboard side of the vessel. On December 21 at approximately noon, the wind began for the first time to strike the port side of the vessel.

 From December 23 to 25, that is, from the time the vessel left Gibraltar to the day before being abandoned, the vessel experienced wind forces no greater than Beaufort Force 7 and a combined significant sea and swell height no greater than 3.9 meters. On December 26, the day the vessel was abandoned, it experienced wind forces no greater than Beaufort Force 9 and combined significant sea and swell heights no greater than 7.4 meters.

 The world meteorological organization classifies Beaufort Force winds of 7 as near gale conditions and describes the sea associated with such winds as one in which the sea heaps up, with foam from breaking waves beginning to be blown in streaks. Force 9 winds are characterized as strong gale winds and are associated with high waves, a sea that begins to roll, and dense streaks of foam. All of these conditions were expectable weather at that time of year in the waters in which they were experienced by the ALPHA STAR and vessels like the ALPHA STAR which are "in class" are expected to weather even more severe conditions without any structural failures. Indeed, the vessel is built to run in just such weather and conditions. Even with web corrosion of 25% there should have been no structural damage to the ALPHA STAR from the weather she experienced during this passage.

 The Veracity of the Crew

 During the latter portion of his deposition the Chief Mate revealed that the Master had gathered the officers together after they had been rescued and instructed them not to tell the whole truth concerning what had transpired during the voyage from Port Cartier, in particular not to reveal that there had been any damage to the vessel before December 26 and that water had entered hold No. 2 during the voyage across the Atlantic. The Chief Mate admitted that he had, as a consequence, initially given false deposition testimony and had not told the truth when various authorities interviewed him about the voyage.

 December 31, 1993

 Feronia International Shipping ("FISH"), a salvor under contract with the French Navy, managed to tow the abandoned vessel to an anchorage just outside the port of Fos-Sur-Mer. The vessel arrived at the anchorage of the port of Fos the evening of December 31. That evening Andre Fabiao, the Court Appointed Hull Surveyor for the Port Authority of Marseilles, boarded the vessel. ...


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