UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
March 24, 2006
ROYAL INSURANCE COMPANY OF AMERICA, PLAINTIFF,
DEEP SEA INTERNATIONAL, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Frank Maas, United States Magistrate Judge.
REPORT AND RECOMMENDATION TO THE HONORABLE KIMBA M. WOOD
This declaratory judgment action brought by plaintiff Royal Insurance Company of America ("Royal") arises out of the sinking of the R/V ALOHA ("Aloha"), a research vessel owned by defendant Deep Sea International ("Deep Sea") in 2002, while it was en route to Juneau, Alaska, to participate in the attempted salvage of the wreck of another vessel. Royal issued a series of insurance policies to Deep Sea covering the Aloha and certain specialized scientific equipment, such as underwater robots, that it had on board. In its second amended complaint, Royal seeks a declaration that it is released from its obligation to make payment for the losses arising out of the sinking of the Aloha because (a) the policy in effect at the time was void ab initio; (b) Deep Sea cannot prove that the loss resulted from a covered peril; (c) the loss was not fortuitous; (d) the Aloha's unseaworthiness was the proximate cause of its sinking; and (e) Deep Sea breached the warranties of seaworthiness. (Second Am. Compl. at 16-17). Deep Sea, in turn, seeks to recover damages on its counterclaims arising out of Royal's refusal to pay any money for the loss of the Aloha and its equipment.
Following extensive discovery, Royal and Deep Sea each have moved for summary judgment and to exclude the expert testimony and reports of certain opposing experts.*fn1 For the reasons that follow, I recommend that both motions for summary judgment be denied. I further recommend that the motions to preclude expert testimony be denied without prejudice to the filing of more focused motions.
The undisputed facts are as follows:
A. Aloha and its Registry
The Aloha, which was 140 feet long and 32 feet wide, was built in 1960 as a supply boat. (Aff. of John A.V. Nicoletti, Esq., sworn to on Oct. 22, 2004 ("Nicoletti Aff."), Ex. 3 (Dep. of Eric Galerne, taken on Jan. 30, 2003 ("Galerne Dep.")), at 553).*fn2 In 1978, the Aloha was converted to a research vessel. (Decl. of Eric Galerne, dated Oct. 21, 2004 ("10/21 Galerne Decl.") ¶ 40). Deep Sea acquired the Aloha in 1977. (Id. ¶ 6). The vessel took its last ill-fated voyage in connection with a charter pursuant to which it was to salvage the wreck of the S.S. Islander off the coast of Juneau, Alaska. (Id. ¶ 31). At that time, the Aloha had on board underwater research equipment for use in the salvage operation. (Id. ¶ 29).
The Aloha originally was built to meet the standards of the American Bureau of Shipping ("ABS"), a member of the International Association of Classification Societies ("IACS"), an elite group that provides standards for the construction and maintenance of "classed" vehicles. (Royal's R. 56.1 Stmt. ¶¶ 14-15; Deep Sea's R. 56.1 Stmt. ¶ 60; see also Decl. of Cary R. Wiener, Esq., dated Nov. 12, 2004 ("11/12 Wiener Decl."), Ex. BB at 7). When it acquired the Aloha in 1977, Deep Sea opted to sail it under Panamanian registry, which subjected it to the rules and regulations of the Panama Maritime Authority ("PMA") and its enforcement arm, the Panama Bureau of Shipping, rather than the ABS. The PMA is not an IACS member. (10/21 Galerne Decl. ¶ 6; Ex. 8 (Dep. of Mario Breton, taken on Feb. 5, 2003 ("Breton Dep.")), at 11-12).
Under PMA Decree 45, a vessel registered in Panama weighing less than 500 gross tons (such as the Aloha) must be inspected periodically to ensure its seaworthiness. (Ex. 9 (Dep. of Napoleon Smith, taken on Mar. 20, 2003 ("Smith Dep.")), at 69-70). Among the inspections required from time to time are inspections prior to the issuance or reissuance of a vessel's Cargo Ship Safety Certificate -- to certify, inter alia, the soundness of its hull -- and inspections of the area of the vessel above the waterline prior to the issuance of a Load Line Certificate. (Ex. 11 (Dep. of Michael F. Telschow, taken on Jan. 22, 2003 ("Telschow Dep.")), at 94-98). The PBS oversees the process of surveying vessels registered by the PMA, but the surveys are actually accomplished by independent surveyors. (Breton Dep. at 14; Smith Dep. at 11). At all relevant times, the surveys of the Aloha were undertaken on behalf of the PMA by Michael Telschow, a surveyor approved by the PBS, doing business under the name "Acquarian Marine Consultants." (Telschow Dep. at 38).
B. Maintenance History of the Aloha
With the passage of time, the hull plating on vessels with steel hulls, such as the Aloha, obviously is subject to corrosion and wastage. Accordingly, such hulls must be inspected periodically so that any damage threatening the seaworthiness of the vessel can be repaired. (See 11/12 Wiener Decl. Exs. GG, HH).
Between 1996 and 2002, the Aloha was in dry-dock on four occasions when its hull was examined and repairs were undertaken. The first time was in September 1996, when the Aloha was dry-docked at the Calcasieu Shipyard in Louisiana. (Ex. 10 (Dep. of Rick Bastian, taken on Jan. 10, 2003 ("Bastian Dep.")), at 80-81). Prior to its arrival, Eric Galerne, the Vice-President and General Manager of Deep Sea, requested that the shipyard bid on certain items of work, including the cropping (i.e., removal) and renewal (i.e., replacement) of the hull plating under the rudder room. (See Bastian Dep. at 35-39).
Once the Aloha was out of the water, James Moon, an independent contractor, took ultrasonic measurements of the thickness of the metal plating on the vessel's hull. (Bastian Dep. at 68-69; Ex. 12 (Dep. of William Lance Devillier, taken on July 23, 2002 ("Devillier Dep.")), at 94). After learning the results, Deep Sea opted to have the shipyard crop and renew certain plates on the Aloha's hull which showed more than a 25% diminution in thickness from the Aloha's original "as built" measurements. (Decl. of Eric Galerne, dated Nov. 11, 2004 ("11/11 Galerne Decl.") ¶¶ 4-5). In other instances, repairs were effected using either "doubler" (or "strap") plates welded from the outside onto the existing plates or smaller "pad welds." (Id. at ¶¶ 6-7). The total cost of the work performed at the shipyard during the 1996 dry-docking exceeded $150,000. (Bastian Dep. at 128-31).
While the Aloha was in dry-dock, it was attended at least twice by Telschow. (Telschow Dep. at 134). At the time of his first visit, the Aloha had already been dry-docked and ultrasonically gauged. (Id. at 125-26). Based on his inspection, Telschow made a series of recommendations. (Id. at 126). After the final survey, Telschow issued interim Load Line and Cargo Ship Safety Certificates. (See id. at 138-39). Thereafter, Telschow submitted his survey report and a copy of the shipyard's invoice to the PBS, which was charged with issuing the permanent certificates. (Id. at 139, 151). The invoice reflects the cropping and renewal of certain plates and the use of doublers elsewhere. (Ex. 32).
In February 1999, the Aloha was dry-docked in Encinada, Mexico, for replacement of its bilge piping, a project which was overseen by the captain of the vessel. (Ex. 14 (Dep. of Douglas Bartee, taken on Nov. 18, 2002 ("Bartee Dep.")), at 96). Although Deep Sea inquired about the cost of having Telschow attend the vessel during this period, he did not do so. (Telschow Dep. at 212-13; 11/12 Wiener Decl. Ex. KK).
In September 1999, the Aloha again was dry-docked after it grounded near Morgan City, Louisiana, and sustained rudder and propeller damage. (Ex. 15 (Dep. of Earl Kenneth Maughmer, taken on Dec. 18, 2002 ("Maughmer Dep.")), at 47-54). At this time, the hull was sandblasted and repainted. (Id. at 55-57). As the Aloha was being refloated, water entered the engine room. (Id. at 59-60). The leak was in an area different than the one repaired due to the grounding. (Id. at 60-61). The Aloha then was raised out of the water so that the problem could be evaluated. (Id. at 61-62). At that point, the vessel's captain could see daylight through pinholes in the hull. (Id. at 63, 70). The affected plating was not cropped and renewed; instead, repairs were made using doublers or straps. (Id. at 81; Gelerne Dep. at 492).
There is no indication that Telschow attended the Aloha during this drydocking.
In March 2000, the Aloha was dry-docked at Hudson Drydock in Morgan City, Louisiana. (Ex. 16 (Dep. of John P. Yates, Sr., taken on July 24, 2002 ("Yates Dep.")), at 11, 18). Deep Sea solicited bids before the vessel arrived at the yard for the cropping and renewal of the plating under the engine room and the steering compartment, but, after the hull was inspected and audio gauged, that work was not undertaken. (Id. at 22-27; 11/11 Galerne Decl. ¶¶ 14-15). Once again, however, doublers or straps were installed in several locations. A crack discovered in the engine room shell plating also was repaired and welded from both sides. (11/11 Galerne Decl. ¶¶ 12-13). The amount invoiced by the yard for the work during this dry-docking was approximately $147,000. (Ex. 37).
During this dry-docking, Telschow attended the vessel to conduct a survey. (Telschow Dep. at 439-41). He did not, however, recall whether he saw any doublers or straps on the hull. (Id. at 443).
In addition to this hull work, on February 2, 2002, the Aloha experienced an electrical blackout. (Galerne Dep. at 380-82). To evaluate the problem, Deep Sea retained MC Electric, which concluded that the cause was the failure of an MOV on the portside generator, one of two permanent generators on the Aloha. The MOV is a device designed to protect a generator from over-voltage conditions. (Id. at 380, 384-86; Ex. 17 (Dep. of Byron Wayne Comeaux, taken on Feb. 25, 2003 ("Comeaux Dep.")), at 25). Because a replacement part was unavailable, the MOV was removed and the portside generator was put back on line without one. (Comeaux Dep. at 30-31).
C. Sinking of the Aloha
On February 3, 2002, the Aloha left Morgan City, Louisiana, for Juneau, a voyage which was intended to take it through the Panama Canal. (10/21 Galerne Decl. ¶ 29). On February 4 and 5, 2002, the Aloha encountered beam seas of eight to ten feet.*fn3
(Ex. 4 (Dep. of Michael Murphy, taken on Nov. 20, 2002 ("Murphy Dep.")), at 122). Thereafter, on February 6, 2002, a seawater leak was discovered in the refrigeration room "below deck forward on the starboard side." (10/21 Galerne Decl. ¶ 33). The flooding caused by the leak was contained to the refrigeration room. (Id.).
Early on the morning of February 7, 2002, the oiler found water in the bilge*fn4 below the floor plate in the center passageway forward of the Aloha's engine room. (Id. ¶ 34). The oiler alerted the chief engineer and the two of them engaged the Aloha's bilge pump in an attempt to pump out the water. (Id. ¶ 35). Shortly thereafter, however, there was an electrical blackout on the Aloha. (Id.; Galerne Dep. 379). The members of the Aloha crew were unable to locate the short circuit, and thus to restore electrical power to the Aloha, but they did determine that the short circuit was caused by the entry of water. (Galerne Dep. at 390-92; Ex. 7 (Crew Stmts.)).
The crew of the Aloha also was unable to determine the location from which seawater was entering the hull. (Murphy Dep. at 66-67). Since they were unable to do anything to counteract the incoming water, the Aloha began to list heavily to port within two or three hours after the oiler first noticed the leak. (Ex. 7 (Crew Stmts.)). At approximately 0730 hours, the crew abandoned the vessel. (Murphy Dep. at 73). The Aloha sank some time later. (Ex. 6 (Logbook)). According to records from a nearby rescue vessel, at the time the Aloha sank, the wind force was a "3" on the Beaufort scale, and the seas were at 1.5 meters.*fn5 (Galerne Dep. at 232). Galerne also noted that the wind speed was fourteen knots. (Id.). Thus, in terms of the Beaufort scale, the Aloha was sailing in a gentle to moderate breeze with small waves. (See www.spc.noaa.gov/faq/ tornado/beaufort.html (last visited Mar. 22, 2006).
D. Insurance Coverage
Deep Sea had a long-standing relationship with an insurance underwriter named John Ellis, who initially helped Deep Sea secure coverage for its fleet while he was employed by an insurance wholesaler. (Ex. 18 (Dep. of John E. Ellis, taken on May 2, 2003 ("Ellis Dep.")), at 7-15). In 1996, Ellis joined Royal as an underwriting specialist. (Id. at 5-6). In that capacity, and later as Royal's underwriting manager, Ellis participated in the procurement of insurance coverage for the Aloha from Royal. (Id. at 5-6, 23-24). Royal became the sole underwriter of that coverage in or around 1999 or 2000. (Id. at 50-52).
The policy in effect at the time of the Aloha's sinking was Policy P2OH006873 (the "Policy"), which covered the period from August 5, 2001, until August 5, 2002. (Aff. of John E. Ellis, sworn to on Oct. 21, 2004 ("Ellis Aff."), Ex. A (Policy)).
The Policy provided three categories of coverage: (1) hull and machinery; (2) research scientific equipment; and (3) protection and indemnity. (Id.). Only the first two coverages are at issue here.
The Policy's hull and machinery coverage was written on a "named perils" basis. (Ellis Aff. ¶ 10; Decl. of Cary R. Wiener, Esq., dated Oct. 22, 2004 ("10/22 Wiener Decl."), Ex. C (Dep. of James B. McDonald, taken on May 8, 2003 ("McDonald Dep.")), at 48). In language harking back to days of yore, Royal undertook to insure against certain enumerated risks, including "adventures and perils . . . of the Seas, Menof-War, fire, lightning, earthquakes, Enemies, Pirates, Rovers, [and] Assailing Thieves." (Ellis Aff. Ex. A at C-8). The Policy valued the Aloha's hull and machinery at $1,616,000, an increase of $166,000 over the $1,450,000 agreed value during the prior Policy period. (Id. at C-7; Ellis Dep. at 63-64).
The printed Policy also contained an Inchmaree Clause, (Ellis Aff. Ex. A at C-8-9), intended to extend coverage to latent defects in the machinery or hull not known to the vessel owner, see Employer's Ins. of Wausau v. Avondale Shipyards, Inc., Civ. Nos. 82-4034, 4185 & 4186, 1991 WL 329580, at *4 (E.D. La. Sept. 6, 1991), but this provision, in turn, was superseded by a Policy endorsement (Endorsement No. 2) containing a Liner Negligence Clause ("LNC"). Insofar as relevant, the LNC extended the hull and machinery coverage to:
Loss of or damage to the subject matter insured directly caused by:
(1) Accidents on shipboard or elsewhere . . . ;
(2) Negligence, error of judgment or incompetence of any person; excluding only . . . the cost of repairing, replacing or renewing any part condemned solely as a result of a latent defect, wear and tear, gradual deterioration or fault or error in design or construction; provided such loss or damage . . . has not resulted from want of due diligence by the Assured(s), the Owner(s) or Manager(s) of the Vessel, or any of them. (Ellis Aff. Ex. A at C-23).
The Policy also contained several endorsements relating to research scientific equipment coverage. Endorsement No. 11 contained an insuring agreement providing coverage for certain scheduled equipment "against all risks of direct physical loss of or damage to the property covered from any external cause, except as hereinafter excluded." (Id. at C-33). Endorsement Nos. 12, 16 and 18 to the Policy contained schedules listing each item of the equipment and its "value" or "insured amount." (Id. at C-37, C-960, C-962).
E. Deep Sea Insurance Claim
Deep Sea contends that it notified Royal of its loss on February 7, 2002.
(Deep Sea Mem. in Supp. at 2). Although the ensuing investigation unearthed no evidence of fraud, (McDonald Dep. at 44), Royal's senior claims adjuster recommended that Royal decline coverage because Deep Sea had failed to submit "a peril for the loss." (Id. at 44-47)
A. Summary Judgment Standard
Summary judgment is appropriate only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party has the initial burden of "informing the district court of the basis for its motion" and identifying the matter that "it believes demonstrate[s] the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the court concludes that "the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial,'" and summary judgment must be granted. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289 (1968)).
In deciding a motion for summary judgment, the court must "view the evidence in the light most favorable to the party against whom summary judgment is sought and . . . draw all permissible inferences in favor of that party." Fischl v. Armitage, 128 F.3d 50, 55 (2d Cir. 1997). The Court must accept as true the non-moving party's evidence, if supported by affidavits or other evidentiary material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). "Conclusory allegations, conjecture, and speculation, however, are insufficient to create a genuine issue of fact." Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir. 1998).
In adjudicating a motion for summary judgment, "[t]he court's function is not to resolve disputed issues of fact but only to determine whether there is a genuine issue of material fact to be tried." Fischl, 128 F.3d at 55; see also Anderson, 477 U.S. at 255 ("Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge"). "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. Accordingly, "[i]f the evidence is merely colorable . . . or is not significantly probative . . . summary judgment may be granted." Id. at 249-50 (citing Dombrowski v. Eastland, 387 U.S. 82, 87 (1967), and Cities Serv. Co., 391 U.S. at 290); see also Niagara Mohawk Power Corp. v. Jones Chem., Inc., 315 F.3d 171, 175 (2d Cir. 2003) (the "'mere existence of a scintilla of evidence' . . . is . . . insufficient to defeat summary judgment") (quoting Anderson, 477 U.S. at 252).
The fact that both sides have moved pursuant to Rule 56 does not mean that one side necessarily must be granted summary judgment. See Schwabenbauer v. Bd. of Educ., 667 F.2d 305, 313-14 (2d Cir. 1981). "Rather, the court must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration." Id. at 314.
B. Royal Summary Judgment Motion
1. Implied Warranties of Seaworthiness
The time hull portion of the Policy incorporates two warranties of seaworthiness: an "absolute implied warranty of seaworthiness" and a "negative implied warranty." Cont'l Ins. Co. v. Lone Eagle Shipping Ltd., 952 F. Supp. 1046, 1066-67 (S.D.N.Y. 1997), aff'd, 134 F.3d 103 (2d Cir. 1998). The absolute implied warranty of seaworthiness discharges the insurer from liability "if the vessel is in fact not seaworthy at the inception of the policy." Id. (quoting Employers Ins. of Wausau v. Occidental Petroleum, 978 F.2d 1422, 1436 (5th Cir. 1992)). In order to void the policy on this basis, the insurer "need not demonstrate that the insured had knowledge of the unseaworthy condition nor that the insured was somehow at fault in not discovering the unseaworthy condition." Wausau, 978 F.2d at 1436. Rather, the insurer simply must demonstrate that the vessel was unseaworthy at the time the policy attached. Id.
In contrast, under the negative implied warranty of seaworthiness, the "insured promises not to knowingly send a vessel to sea in an unseaworthy condition." Cont'l Ins., 952 F. Supp. at 1070 (quoting Wausau). Accordingly, for there to be a breach of the negative implied warranty of seaworthiness, the insured must have known of the vessel's unseaworthy condition. Id. In addition, a breach of this warranty will exclude coverage only if the loss or damage was proximately caused by that unseaworthiness. Id. (quoting Saskatchewan Gov't Ins. Office v. Spot Pack, 242 F.2d 385, 388 (2d Cir. 1957)).
a. Absolute Implied Warranty
Much of American maritime law is consistent with its British counterpart. In England, however, the absolute implied warranty of seaworthiness is recognized only for voyage insurance policies, which provide coverage for a particular trip. Wausau, 978 F.2d at 1432. Thus, the British courts do not imply an absolute warranty of seaworthiness when a time hull insurance policy incepts. Certain American courts disagree, including the Fifth Circuit. See id. at 1434-35(collecting cases). In the Second Circuit, the Court of Appeals in a single year both endorsed and rejected the notion that an absolute warranty of seaworthiness should be implied when a time hull insurance policy attaches. Compare McAllister Lighterage Line, Inc. v. Ins. Co. of N. Am., 244 F.2d 867, 871 (2d Cir. 1957) (implying warranty), with New York, New Haven & Hartford R. Co. v. Gray, 240 F.2d 460, 466 (2d Cir. 1957) (rejecting warranty and noting that earlier cases suggesting it applied to a time hull insurance policy were dicta). The Second Circuit does not appear to have addressed this conflict in the nearly fifty years since its issuance of these decisions. Nonetheless, after a detailed discussion of the applicability of the absolute implied warranty in the context of a vessel sinking, Judge Cote concluded that, in line with the weight of modern authority, "if the Second Circuit were faced with the issue today, it would hold that the [absolute implied warranty is] applicable to time hull insurance contracts." Lone Eagle, 952 F. Supp. at 1065-67 (S.D.N.Y. 1997). For the reasons cited by Judge Cote in her opinion, this appears to be correct.
Deep Sea contends that even if an absolute implied warranty is part of a time hull insurance policy, it has been superseded in this case by the LNC, which converts the hull and machinery coverage under the policy to "all risks" coverage under which Royal "must prove that the cause of the loss was one which was excluded by the words of the [P]olicy." (Deep Sea Mem. in Supp. at 6; Deep Sea Mem. in Opp'n at 11). This argument appears to conflate two issues because the absolute implied warranty of seaworthiness typically does not require any consideration of the conditions actually resulting in a loss; rather, it looks to the period when the coverage attached -- in this case more than six months before the sinking of the Aloha -- to determine whether the vessel was unseaworthy at that time. McAllister Lighterage, 244 F.2d at 870. As Deep Sea correctly observes, Royal has the burden of proving such unseaworthiness. Wausau, 978 F.2d at 1436 n.14.
Each of the conditions that Royal contends rendered the Aloha unseaworthy other than the failure to replace the MOV was already extant by the time the Policy incepted. Most of these alleged shortcomings in the repair and maintenance of the Aloha relate to the use of straps, doublers, or pad welds to repair certain steel plates on the vessel's hull. Royal also alleges that the use of such temporary fixes to effect permanent repairs voided the Aloha's Cargo Ship Safety and Load Line Certificates, without which the vessel could not have sailed, much less been insured. (Royal Mem. in Supp. at 5, 21). Finally, Royal contends that the 1996 repairs to the bilge piping were improperly performed. (Id. at 5).
The parties appear to agree that a diminution of more than 25 percent in the thickness of hull plating below the waterline necessitates the cropping and replacement of affected areas under the rules applicable to vessels registered in Panama. (See Royal Mem. in Supp. at 14-15; 11/11 Galerne Decl. ¶¶ 4-5). (There is a limited exception to this rule when one side of the replacement plate would be unreachable and thus could not be welded. (11/11 Galerne Decl. ¶ 12)). Where the two sides part company is with respect to the actual extent of the wastage on the hull of the Aloha. Royal and its experts opine that Deep Sea improperly used temporary repair measures, such as doublers or straps, to effect permanent repairs to several severely-eroded areas of the Aloha's hull. (Royal Mem. in Supp. at 17). Deep Sea counters that it cropped and renewed the steel plating whenever its as-built thickness had been thinned by more than 25 percent.*fn6
(See Galerne Decl. ¶¶ 4-5). According to Deep Sea, on other occasions, when gauging or visual inspection detected localized pitting (and in one instance pinholes large enough for light to shine through), but the steel plating was generally sound, Deep Sea resorted to doublers, straps, or pad welding to restore the plating. (Id. ¶¶ 6-10). At times, straps or doublers also were used because the cropping and renewal of the hull shell would have left one side of a weld "unreachable and therefore un-weldable." (Id. ¶¶ 6, 12).
In his deposition testimony, Telschow stated that cropping and renewal of the steel plating below the waterline on the Aloha was not required unless the wastage exceeded 25 percent. (Telschow Dep. at 444). In that connection, Deep Sea admits that during the 1999 dry-docking at the Hudson Drydock pits and pinholes were detected in certain areas of the hull plating, but contends that the plates themselves were not significantly reduced in thickness. (See Galerne Decl. ¶ 9). Deep Sea further maintains that a similar localized condition was encountered during the 2000 dry-docking. (Id. ¶¶ 14-15).
The ABS rules regarding hull thickness provide that individual plates "which are wasted in excess of allowable limits are to be cropped and renewed," but that "[h]ighly localized pitting, usually found in cargo oil tanks," may be cropped and renewed, cleaned and coated with a special coating, cleaned and filled with a special filler, or repaired by welding." (11/12 Wiener Decl. Ex. GG at 2) (emphasis added). The ABS rules also indicate that doublers are "not acceptable as a permanent repair or wastage compensation," but that "straps" can be used "for area loss compensation of deck or bottom plating area."*fn7 (Id. at 6).
Whether the conditions detected through visual inspection and gauging during the various dry-dockings of the Aloha constituted generalized wastage (which required cropping and renewal) or a localized problem fairly described as "pitting" (which could be dealt with in another fashion) under the PMA or ABS rules presents a fact question that cannot be resolved at this stage of this case. Moreover, while Telschow and his superior at the PBS both testified, in substance, that the use of doublers or straps to deal with excessive thinning of the Aloha's hull plating would have rendered the Aloha's Cargo Ship Safety and Load Line Certificates void if made known to the PBS, it appears that this would only be true if they were employed as a stop-gap solution to general wastage of the hull. Whether the use of doublers under the circumstances presented here actually would have voided the Aloha's certificates therefore also presents a question of fact.
Royal also alleges that the bilge piping was replaced during one of the drydockings in 1999 under the supervision of the captain of the Aloha, who was not qualified to perform that work. (Royal Mem. in Supp. at 5). There nevertheless has been no showing that the work performed was inadequate or rendered the vessel unseaworthy.
For these reasons, Royal has not shown that, as a matter of law, Deep Sea breached its absolute implied warranty of seaworthiness. There consequently is no need to address at this stage Deep Sea's claim that the LNC totally superseded that warranty.
b. Negative Implied Warranty
To avoid making payment under the Policy on the basis of the negative implied warranty of seaworthiness, Royal must prove that the Aloha was unseaworthy when it set out on its last voyage, that Deep Sea knew of that fact, and that the conditions rendering it unseaworthy were the proximate cause of the vessel's sinking. See Spot Pack, 242 F.2d at 388; Lone Eagle, 952 F. Supp. at 1070. Royal alleges that the Aloha was unseaworthy when it left port because of (i) the deteriorated condition of its hull and (ii) its failure to replace the defective MOV. (Royal Mem. in Supp. at 22). As noted above, the seaworthiness of the Aloha's hull presents a question of fact which cannot be resolved through summary judgment. Accordingly, Royal cannot prevail on this basis.
Furthermore, even if the failure to replace the MOV prior to the departure from port rendered the Aloha unseaworthy, Royal has not shown, as it must, that this condition was a proximate cause of the loss. Indeed, B. Michael Aucoin, an expert in electrical engineering whose credentials and report are not challenged by Royal, has explained that because an MOV has a finite service life, the fact that one has failed does not indicate that an electrical system has an underlying problem. (11/12 Wiener Decl. Ex. EE at 4). Moreover, the risk that arose by virtue of the failure to replace the MOV was that the portside generator might be damaged through an "overvoltage condition." (Id. at 5). Here, however, both the port and starboard generators were working on February 7, 2002, although the crew's attempts to connect them to the distribution circuit failed -- most likely, in Dr. Aucoin's view, due to seawater intrusion elsewhere in the electrical system. (Id. at 5). In short, according to Dr. Aucoin, the lack of an MOV had nothing to do with the inability of the Aloha's crew to activate the pumps aboard the vessel.
Dr. Aucoin's detailed explanation of the electrical problems on the day of the sinking stands in marked contrast to the report of Royal's own causation expert, James L. Dolan, whose sole thesis with respect to the cause of the electrical system failure is that "it would logically appear that the failure [of the electrical system] on February 7, 2002, following just five days after the problem encountered in Morgan City was related." (See Ex. 21 at 10).
Although the causation theory espoused by Royal's expert appears to be wholly conclusory, there is no need to resolve the dispute between the two sides' experts. Rather, the role of the Court at this juncture is merely to identify factual disputes. Here, the Aucoin report is sufficient to create a factual issue regarding the extent to which the failure to replace the MOV played a role in the crew's inability to activate the Aloha's pumps and the ensuing loss of the vessel. Accordingly, Royal is not entitled to summary judgment on the basis of the implied negative warranty of seaworthiness.
2. Uberrimae Fidei
Royal also contends that the Policy is void ab initio because Deep Sea misrepresented or failed to disclose material facts at the time that it applied for coverage. (Royal Mem. in Supp. at 16-20). The maritime doctrine of uberrimae fidei (or utmost good faith) upon which Royal relies is "well-established" and "dates back at least as far as 1883." Am. Home Assurance Co. v. Master's Ships Mgmt., No. 03 Civ. 0618 (JFK), 2004 WL 1161223, at *5 (S.D.N.Y. May 24, 2004) (citing Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485 (1883)). Pursuant to that doctrine, the parties to a marine insurance contract are held to a standard of the "highest fidelity in their dealings." Contractors Realty Co. Inc., v. Ins. Co. of N. Am., 469 F. Supp. 1287, 1294 (S.D.N.Y. 1979). This requires that the assured voluntarily disclose to the insurer any information material to the risk being assumed. See Puritan Ins. Co. v. Eagle Steamship Co., 779 F.2d 866, 870 (2d Cir. 1985); Am. Home Assurance Co., 2004 WL 1161223, at *5; Ekco Int'l Trade Corp. v. Zihni Holding A.S., No. 92 Civ. 6075 (KMW), 1995 WL 406124, at *6 (S.D.N.Y. July 7, 1995); Contractors Realty Co., 469 F. Supp. at 1294. A fact is material if it is something which "would have controlled the underwriter's decision with respect to accepting the risk." Puritan Ins. Co., 779 F.2d at 871 (citing Btesh v. Royal Ins. Co., 49 F.2d 720, 721 (2d Cir. 1931)). If so, the insurance contract is void even if the misrepresentations or omissions were innocently made. Commercial Union Ins. Co. v. Spanish Am. Stainless Corp., No. 83 Civ. 317 (CSH), 1985 WL 1978, at *5 (S.D.N.Y. June 27, 1985) (citing Piccininni v. Aetna Life Ins. Co., 94 N.Y.S. 880 (2d Dep't 1937)). Nevertheless, an insured does not have an obligation to disclose the minute details of every material circumstance to its carrier. Puritan Ins. Co., 779 F.2d at 871. Consequently, an insured "complies with the rule if he discloses sufficient to call the attention of the underwriter in such a way that, if the latter desires further information, he can ask for it." Id. (internal quotes and citations omitted). The doctrine applies to both sides. Therefore, an insurer has an equivalent duty to deal fairly with its insured, which includes apprising him of his obligations and "openhandedly" furnishing the benefits of the policy purchased by the insured. Contractors Realty Co., 469 F. Supp. at 1294.
Royal alleges that Deep Sea failed to meet the required standard of conduct because it failed to disclose the unseaworthiness of the Aloha, and particularly its hull; falsely represented that it had Cargo Ship Safety and Load Line Certificates, when they in fact were invalid; and misrepresented the value of the Aloha. (Royal Mem. in Supp. at 17-18). To establish the materiality of these alleged omissions and misrepresentations, Royal has submitted the affidavit of Ellis, who states, in substance, that Royal would not have underwritten the risk had he known the true facts.
Since there is a factual issue as to the seaworthiness of the hull, Royal plainly cannot show as a matter of law that the condition of the hull rendered the Aloha unseaworthy. Similarly, because there is a factual issue as to whether doubler plates were installed on the Aloha's hull as part of an attempt to effect a permanent repair "on the cheap" or were a permissible remedy for localized problems, Royal cannot show as a matter of law that the Aloha's various certificates were void when issued.
There similarly is a factual issue as to the value of the Aloha's machinery and hull. In 1999, Perry H. Beebe, a marine surveyor retained by Deep Sea, conducted a survey of the Aloha while the vessel was afloat. He concluded at that time that the fair market value of the vessel was $1,175,000. (Ex. 19 (Dep. of Perry H. Beebe, taken on Feb. 26, 2003 ("Beebe Dep.")), at 72). Thereafter, pursuant to a survey conducted on November 19, 2001, Beebe concluded that the fair market value had increased to $1,650,000, based on the sales prices of comparable vessels. (Id. at 84-85, 98-99). The second survey evidently was conducted after the inception of the Policy period during which the loss occurred, but certainly is close enough in time to create a factual issue as to Royal's claim that the value of the vessel was inflated.
Royal also contends that Deep Sea made material misrepresentations in 1999 by claiming that the value of the vessel had increased from $1,450,000 to $1,616,000 at the same time that its own survey showed a value of only $1.175 million. (Royal Mem. in Supp. at 18). Assuming, arguendo, that this earlier Policy period is relevant and that the value of the vessel was misrepresented, Royal still must show that knowledge of the true facts would have caused it to decline coverage or rewrite the Policy to reduce coverage or increase the premium. See Commercial Union, 1985 WL 1978, at *4. As noted earlier, Royal attempts to meet this burden here through the affidavit of its underwriter, Ellis, who states: "Had I known that the true value of the [Aloha] was much less than Deep Sea represent[ed] to Royal, I would have declined Deep Sea's request to insure the vessel for $1.6 million." (Ellis Aff. ¶ 23).
As Royal previously has argued and this Court has recognized, although this is a maritime case, the legal issues presented must be decided pursuant to New York law. (Docket No. 109 (order holding that New York law controls this action)). In New York, conclusory statements by an insurance company's employee do not suffice to establish that, but for an insured's misrepresentation or omission, the policy actually written would not have been issued. See Carpinone v. Mut. of Omaha Ins. Co., 697 N.Y.S.2d 381, 384 (3d Dep't 1999); Feldman v. Friedman, 661 N.Y.S.2d 9, 10 (1st Dep't 1997). An insurer therefore is "required to present documentation concerning its underwriting practices such as its underwriting manuals, rules, or bulletins which pertain to insuring similar risks" to establish its reliance. Carpinone, 697 N.Y.S.2d at 383 (collecting cases and citing N.Y. Ins. Law § 3105(c)). Having failed to do so, Royal plainly cannot prevail on its theory that the Policy is void because Deep Sea breached its duty of utmost good faith by misrepresenting the value of the Aloha in 1999.*fn8 This same shortcoming in Royal's proof also bars summary judgment on the basis of the other alleged inadequacies in Deep Sea's disclosure cited by Royal in an effort to show that Deep Sea breached its duty of utmost good faith.
3. Research Scientific Equipment Coverage
The last argument advanced by Royal in connection with its summary judgment motion relates to the research scientific equipment endorsement to the Policy. Royal concedes, as it must, that this coverage was written on an "all risks" basis. (See Royal Mem. in Supp. at 23). Accordingly, to recover under this portion of the Policy, Deep Sea need only show that there was a loss of its covered property during the Policy period and that the loss was fortuitous. Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002); In re Balfour MacClaine Int'l Ltd., 85 F.3d 68, 77 (2d Cir. 1996); Ingersoll Milling Mach. Co. v. M/V Bodena, 829 F.2d 293, 307 (2d Cir. 1987). There clearly is no dispute that the scientific equipment lost was covered by the Policy. Royal nevertheless contends that the loss was not fortuitous.
A loss is fortuitous unless it results from an inherent defect in the property, ordinary wear and tear, or intentional misconduct on the part of the insured. Goodman v. Fireman's Fund Ins. Co., 600 F.2d 1040, 1042 (4th Cir. 1979). Thus, a "loss due to the negligence of the insured or his agents has generally been held to be fortuitous and, absent express exclusion, is covered by an all risks policy." CPH Int'l, Inc. v. Phoenix Assur. Co. of N.Y., No. 92 Civ. 2729 (SS)(NRB), 1994 WL 259810, at *8 (S.D.N.Y. June 9, 1994) (quoting Goodman). Here, there has been no showing that any inherent defect in or wear and tear on the scientific equipment aboard the Aloha was the cause of its loss. However, there is a factual issue as to whether Deep Sea performed all of the maintenance work necessary to keep the Aloha seaworthy and, if not, as to whether this was adequately disclosed to the PBS and Royal. Although Deep Sea contends that it was, at worst, negligent in the maintenance of the Aloha, if a finder of fact were to determine that Deep Sea intentionally used a stop gap measure to effect an inadequate permanent repair of the Aloha's severely deteriorated hull and then took steps to hide its actions, it could conceivably conclude that this went beyond mere negligence and rose to the level of wilful misconduct.
Accordingly, because there are factual issues with respect to the fortuitousness of the loss of the scientific equipment, Royal is not entitled to summary judgment with respect to its research scientific equipment coverage under the Policy.
C. Deep Sea Summary Judgment Motion
1. Liner Negligence Clause
In its cross-motion for summary judgment, Deep Sea contends that the inclusion of the LNC in the hull and machinery portion of the Policy abrogates the absolute implied warranty of seaworthiness and converts the coverage to "all risks" coverage. (Deep Sea Mem. at 3-7). An all risk policy is one in which "all risks are included in the coverage unless specifically excluded in the terms of the contract." Couch on Insurance, § 101:7 (3d ed. 2005). In contrast, a "named perils" policy excludes from coverage those risks not specifically included in the contract. Id.
The only case cited by Deep Sea in support of its contention that the hull and machinery coverage was written on an all risks basis is the Fifth Circuit's decision in Wausau. (See Deep Sea Mem. in Supp. at 5-9). There, as in this case, the LNC extended the hull and machinery coverage to include, inter alia, losses arising out of latent defects or the "[n]egligence, error of judgment or incompetence of any person," unless the loss was attributable to "want of due diligence on the part of the insureds, the owners, or the managers of the vessel." Wausau, 978 F.2d at 1437-38. As the Fifth Circuit recognized, this language "effect[s] at least a partial waiver of the absolute [implied] warranty of seaworthiness." Id. at 1439. It does not, however, completely oust the absolute warranty as Deep Sea contends.
In Wausau, the court noted that the breadth of the additional coverage afforded under the LNC, combined with the narrowness of the exclusion, converted a policy with such coverage into a "species of an 'all risk' policy." Id. at 1438 (citing 1 Alex L. Parks, The Law and Practice of Marine Insurance and Average 404 (1987)). This language, however, is simply a recognition that the LNC greatly expands an insured's coverage, leaving only a narrow avenue for an insurer to escape its increased exposure. Neither the Parks treatise nor Wausau supports the notion that an LNC completely eviscerates the absolute warranty of seaworthiness implied at the inception of a time hull and machinery policy.
Accordingly, if an insurer can show that a loss is attributable to an insured's lack of due diligence, it may rely on the absolute implied warranty as a basis for denying coverage even if the policy incorporates an LNC. Deep Sea consequently is not entitled to summary judgment on the theory that the absolutely implied warranty of seaworthiness has been written out of the Policy.
2. Hull and Machinery Coverage
The second argument advanced in Deep Sea's summary judgment motion is that the hull and machinery coverage in the Policy stipulated that the vessel had a value of $1,616,000, which must be paid. As Deep Sea necessarily concedes, this is only true if the stipulated amount was arrived at without fraud or concealment by Deep Sea. (See Deep Sea Mem. in Supp. at 10 (citing Occidental Petroleum Corp. v. N.H. Ins. Co., 506 F. Supp. 606 (S.D.N.Y. 1981); G. Gilmore & C. Black, The Law of Admiralty § 216, at 86-87 (2d ed. 1975)). As noted above, there plainly is a factual issue as to whether the agreed value of the hull was based on material misrepresentations by Deep Sea. Additionally, although Royal has failed to prove the materiality of Deep Sea's alleged misrepresentations through suitable documentation, it may be able to supplement the testimony of its underwriter, Ellis, at trial with writings establishing that it would not have issued the Policy (or would have lowered its coverage or raised its premium) had it known that the hull was worth substantially less than the amount for which Deep Sea sought coverage.
For these reasons, Deep Sea is not entitled to summary judgment with respect to the agreed value of the hull.
3. Research Scientific Equipment Coverage
Deep Sea also contends that it is entitled to recover damages under the Policy for the scientific equipment set forth on the schedules because the loss of that equipment was fortuitous. (Deep Sea Mem. in Supp. at 17). As noted above, there is an issue as to whether the loss of the equipment was in fact fortuitous. Accordingly, Deep Sea is not entitled to summary judgment on the issue of liability with respect to the research scientific equipment endorsements to the Policy.
Turning to the issue of damages for the loss of the equipment, Deep Sea contends that the scientific research equipment coverage was written on an agreed value basis. (Deep Sea Mem. in Supp. at 15-16, 19-20). In at least one instance, where the parties wished to stipulate to an agreed value, they were able to do so in language which is not susceptible to varying interpretations. Thus, the hull and machinery portion of the Policy states that "by agreement between [Deep Sea] and [Royal]" the Aloha "shall be valued at One Million Six Hundred Sixteen Thousand Dollars." (Ellis Aff. Ex. A at C-7). Unfortunately, the research scientific equipment endorsements contain no comparably clear language.*fn9
In its motion, Deep Sea also contends that "[t]he mere statement of agreed values in Endorsements 12, 16 and 18 binds Royal to pay those amounts upon a total loss." (Deep Sea Mem. in Supp. at 19). Deep Sea further contends that Royal attempted to "obfuscate" the parties' "otherwise clear agreement" concerning the amounts to be paid under the research scientific equipment coverage by inserting a valuation clause into Endorsement No. 11. (Id. at 20). However, Endorsement Nos. 12, 16 and 18 to the Policy contain no language of indemnity. For example, Endorsement Nos. 16 and 18 merely state that in "consideration of [a] pro rata additional premium . . . , it is hereby understood and agreed the following items are added to the Schedule of Equipment." (Ellis Aff. Ex. A at C-960, C-962). Similarly, Endorsement No. 12 states that "[i]t is hereby understood and agreed that as respects the Schedule of Equipment shown below, coverage provided herein shall be applied to the scheduled equipment while used on third party vessels, including while overside." (Id. at C-37). Apart from this sentence, there is no language providing insurance coverage in Endorsement No. 12.
Inevitably, therefore, one must turn to Endorsement No. 11 to determine the scope of the coverage provided to Deep Sea under the Policy for the equipment appearing on the schedules. That endorsement provides that, except as specifically excluded, the "Policy insures against all risks of direct physical loss of or damage to the property covered from any external cause." (Id. at C-33).
With respect to valuation, another clause of Endorsement No. 11 (which Deep Sea contends constitutes an attempt to muddy the waters) provides that Royal shall not be liable for more than the actual retail replacement cost of the property at the time any loss or damage occurs and the loss or damage shall be ascertained or estimated on the basis of the actual cash retail replacement cost of property in kind to that insured . . . , but in no event to exceed the stipulated amount of insurance stated in the schedule. (Deep Sea Mem. in Supp. at 20 (quoting Ellis Aff. Ex. A at C-35)). While the precise meaning of this provision is admittedly murky, the phrase stating that the amount to be paid shall not exceed the stipulated amount of insurance set forth on the schedules makes clear that this value is not the amount that must be paid by Royal in every instance.
What then is the measure of Deep Sea's recovery, assuming that Deep Sea is able to persuade the finder of fact that the loss of the scientific equipment was fortuitous? Paragraph 11(a) of Endorsement No. 11 states that Royal is liable only for the "actual retail replacement cost" of the scheduled property at the time of the loss and that this must be determined (or estimated) based on the "actual cash retail replacement value of property in kind" at the place of and time immediately preceding the loss. (Ellis Aff. Ex. A at C-35). Additionally, in an obsolete equipment clause of Endorsement No. 11, Deep Sea warranted that in the event of a loss, its "rights to recovery [would] be limited to the normal and customary cost of replacement as though such items were readily available on the local market." (Id.). Deep Sea further agreed that Royal would not "be held liable for increased cost of repair and / or replacement due to the unavailability and / or obsolescence of integral parts or the whole of equipment." (Id.).
The term "actual (or actual cash) retail replacement cost" is not defined in the Policy. It also appears that there is no case law construing this language. Nevertheless, when this language is read in conjunction with the obsolete equipment clause of the Policy, it seems clear that the phrase actual (or actual cash) retail replacement value refers to the market price of comparable goods, even if that price is necessarily theoretical due to obsolescence or the unavailability of similar equipment. Accordingly, the Court should hold, without resort to any extrinsic evidence, that the measure of Deep Sea's recovery shall be the fair market value of comparable equipment -- even if theoretical -- but in no event more than the scheduled amounts.
D. Motions in Limine
In connection with its summary judgment motion, Royal has also filed a motion to preclude the testimony of two of Deep Sea's proposed experts: John A. Hickey, its underwriting expert, and Peter W. Schermerhorn, its valuation expert. Additionally, while Deep Sea has not filed a separate motion to preclude, it argues in its summary judgment papers that the opinions of Royal's three causation experts (James Dolan, George Randall, and Lucius Pitkin) are based on speculation and unreliable. (Deep Sea Mem. in Opp'n at 18-22).
As shown above, the resolution of the parties' cross-motions for summary judgment does not require this Court to consider the opinions of any experts whose reports are challenged. Moreover, if Your Honor adopts this Report and Recommendation, many of the issues raised by the motions to preclude will become moot. (For example, Hickey presumably will not be permitted to testify at trial, contrary to this Court's interpretation, that the term "actual cash retail replacement value" is the equivalent of "the common term in a 'hull' policy calling for 'new for old.'"). (See Weiner Decl. Ex. NN at 2). For this reason, I recommend that Royal's motion to preclude and Deep Sea's objections to Royal's experts each be denied without prejudice to the filing of more focused evidentiary motions once Your Honor has had an opportunity to rule with respect to this Report and Recommendation.
For the foregoing reasons, the parties' cross-motions for summary judgment should be denied. Additionally, any motions to preclude experts should also be denied without prejudice to their renewal closer to trial.
V. Notice of Procedure for Filing of Objections to this Report and Recommendation
The parties are hereby directed that if they have any objections to this Report and Recommendation, they must, within ten (10) days from today, make them in writing, file them with the Clerk of the Court, and send copies to the chambers of the Honorable Kimba M. Wood, United States District Judge, at the United States Courthouse, 500 Pearl Street, New York, New York 10007, to the chambers of the undersigned, at the United States Courthouse, 500 Pearl Street, New York, NY 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 6(e), 72(b). Any requests for an extension of time for filing objections must be directed to Judge Wood. Any failure to file timely objections will result in a waiver of those objections for purposes of appeal. See Thomas v. Arn, 474 U.S. 140 (1985); 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 6(e), 72(b).
FRANK MAAS United States Magistrate Judge