10 F. Supp. 3d 460
S.D.N.Y.2014Background
- Signal International operated the AFDB-5 floating drydock in Port Arthur, Texas; extensive contemporaneous surveys (2002–2009) documented severe deterioration and recommended major repairs or replacement.
- Signal purchased the drydock in 2005 for $10, retaining disposal obligations; it proceeded to reconfigure/remove a pontoon in August 2009 and the drydock sank the same day, triggering removal and cleanup costs.
- Signal had several insurance policies potentially covering the loss, including a pollution (Great American) policy and a primary (Westchester) and excess property policy (MSI). Westchester paid its primary $10 million; MSI later paid part of the drydock cash value but disputed cleanup liability.
- Plaintiffs (insurers/Signal) sued for declaratory relief about coverage and contribution; Great American and MSI counterclaimed to void their respective policies for nondisclosure/fraud.
- After discovery, the court concluded the pollution policy and the EPI excess property policy were maritime in nature for purposes of the doctrine of utmost good faith/material misrepresentation and granted summary judgment voiding both policies ab initio for material nondisclosure.
Issues
| Issue | Plaintiffs' Argument | Defendants' Argument | Held |
|---|---|---|---|
| Whether the Pollution Policy is a maritime contract governed by admiralty law/uberrimae fidei | Policy is not maritime because the drydock is a non-vessel fixed structure and the dispute is local; therefore state law or non-maritime rules apply | Policy covers pollution liability arising from maritime repair operations (and many vessels) and thus its primary objective is maritime; admiralty law (utmost good faith) governs | Pollution Policy is marine insurance; admiralty law applies and uberrimae fidei governs interpretation |
| Whether Signal’s nondisclosure of surveys/reports was material such that Great American can void the Pollution Policy | Withheld reports were not material; underwriters relied on package submitted and did not request those surveys; any nondisclosure was not outcome-determinative | Omitted surveys repeatedly warned of imminent failure, would have affected underwriting decision (decline, exclude, or demand repairs); underwriters so testified | Nondisclosure was material as a matter of law; Great American entitled to void the policy ab initio |
| Choice of law for rescission claim on EPI excess property policy | Texas (location of drydock) or no conflict; any ambiguity favors insured | Mississippi law (insured’s domicile) governs under New York choice-of-law approach because risks are multi-state and insured domiciled in Mississippi | Mississippi law governs the rescission/ concealment/misrepresentation claims |
| Whether MSI can rescind the EPI Policy for material misrepresentation/concealment | Submission (2009 Property Submission / Statement of Values) was not false or misleading; MSI had enough information and would not have changed terms | The Statement of Values and Heller report painted an overly favorable picture; withheld adverse surveys/reports were clear, convincing, and material and would have led MSI to decline or exclude the drydock or charge different terms | MSI entitled to rescind the EPI Policy for material misrepresentation as a matter of law; policy void ab initio |
Key Cases Cited
- Norfolk S. Ry. Co. v. James N. Kirby, Pty. Ltd., 543 U.S. 14 (conceptual test: a contract’s primary purpose determines maritime character)
- Folksamerica Reinsurance Co. v. Clean Water of N.Y., Inc., 413 F.3d 307 (2d Cir. 2005) (pollution and ship-repair related CGL/SLL coverage held primarily marine)
- Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955) (when federal admiralty rule exists, federal maritime law governs marine insurance; otherwise state law may apply)
- Kossick v. United Fruit Co., 365 U.S. 731 (1961) (definition and scope of maritime contracts)
- Puritan Ins. Co. v. Eagle S.S. Co., 779 F.2d 866 (2d Cir. 1985) (uberrimae fidei: reliance/inducement requirement — policy voiding only if insurer was in fact misled)
- Certain Underwriters at Lloyd’s v. Inlet Fisheries, Inc., 518 F.3d 645 (9th Cir. 2008) (vessel pollution insurance is maritime; material nondisclosure can support summary judgment for insurer)