Wreck Removal Leaves Insured in the Sludge

In December of 2008, Tom’s Welding Inc. (“TWI”) commenced wreck removal/salvage operations pursuant to its agreement with BEI, the owner of the Tank Barge DIA–IA (the “Barge”), which became grounded earlier that year. At or around this time, and in close proximity to these operations, an oil sludge and sheen was observed in the Port of Orange, requiring a clean-up operation in the Sabine River and its tributaries.

 

TWI contends that they first became aware of the spill on December 15, 2009, when it received notice from the United States Coast Guard, naming TWI as the responsible party. Shortly thereafter, the USGC filed a declaratory action in the Eastern District of Texas to have TWI (along with other defendants not named herein) declared liable for the removal costs associated with the oil spill under the Oil Pollution Act of 1990 (“OPA 90”), as well as civil penalties under the Clean Water Act (“CWA”).

 

Six months after the filing of this lawsuit, TWI sent notice of the claim to its insurer, Great American Insurance Company of New York (“Great American”). In turn, Great American filed this declaratory judgement, disputing that it owed coverage and/or a duty to defend TWI for potential liability in the underlying suit.

 

The policy at issue contained a “Marine Commercial Liability Limited Pollution Coverage Endorsement” (the “Limited Pollution Endorsement”), which covered TWI for property damage it became obligated to pay as a result of “the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ “ resulting from its “Maritime Operations” – identified in the policy as “ship repair.”

 

Ultimately finding in favor of Great American, the Court outlined several reasons why TWI is not owed insurance coverage under its policy with Great American. First, lacking any meaningful legal distinction between wreck removal and ship repair at law, the Court applied the general rule of construction; construing that words in the insurance contract “in accordance with their plain and ordinary meaning,” the Court determined that wreck removal and ship repair are two very distinct functions and call for different policies of insurance. Specifically, the court reasoned that the term “wreck removal” contemplates a vessel that is a total loss that must be removed from navigable channels and, as was the case here, dismantled for scrap while remaining in the water. As such, no aspect of removal of wreckage is contemplated in ship repair, which merely involves moving a vessel from the water to a facility for repair. The function, the risks, and the outcomes are distinct. Accordingly, the Court opined that the Limited Pollution Endorsement does not cover liability arising out of TWI’s wreck removal operations.

 

Second, because TWI did not provide Great American with notice of the Coast Guard’s 2009 letter until six months after the Texas Litigation was filed, the explicit exclusion to coverage under the Limited Pollution Endorsement, for failure to notify Great American of “an actual or potential pollution accident or occurrence within 30 days of [its] knowledge of the event,” was enforceable against TWI.

 

Third, because TWI’s potential liability for the cleanup is based on the OPA 90, and for civil penalties under the CWA, and because the Limited Pollution Endorsement expressly excludes coverage for damages arising solely by statute, as well as coverage for “fines, penalties, exemplary or punitive damages,” the court reasoned that Great American had two additional reasons to deny coverage.

 

Finally, and without much hesitation or discussion, the Court shot down TWI’s contention that Great America breached its duty to defend, stating, “[h]aving already determined that the plain meaning of the terms “wreck removal” and “ship repair” bar coverage, this Court likewise holds that Great American had no duty to defend TWI.

 

Great American Insurance Company v. Tom’s Welding

NASA Issues Final Rule Clarifying A Contractor’s Resonsibility to Obtain and Maintain Longshore and Defense Base Act Insurance

The Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) recently issued a Final Rule discussing a contractor’s responsibility to maintain Longshore and Defense Base Act coverage.  This link will take you to a PDF of the Final Rule, which is reprinted below:

Summary:

DoD, GSA, and NASA are issuing a final rule amending the Federal Acquisition Regulation (FAR) to clarify contractor and subcontractor responsibilities to obtain workers’ compensation insurance or to qualify as a self-insurer, and other requirements, under the terms of the Longshore and Harbor Workers’ Compensation Act (LHWCA) as extended by the Defense Base Act (DBA).

DATES:

Effective: July 1, 2014.

FOR FURTHER INFORMATION CONTACT:

Mr. Edward N. Chambers, Procurement Analyst, at 202-501-3221 for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat at 202-501-4755. Please cite FAC 2005-74, FAR Case 2012-016.

SUPPLEMENTARY INFORMATION:

I. Background

DoD, GSA, and NASA published a proposed rule in the Federal Register at 78 FR 17176 on March 20, 2013, to make the necessary regulatory revisions to revise the FAR to clarify contractor and subcontractor responsibilities to obtain workers’ compensation insurance or to qualify as a self-insurer, and other requirements, under the terms of the LHWCA, 33 U.S.C. 901, et seq., as extended by the DBA, 42 U.S.C. 1651, et seq. Three respondents submitted comments on the proposed rule.

II. Discussion and Analysis

The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) reviewed the comments in the development of the final rule. A discussion of the comments and the changes made to the rule as a result of those comments are provided as follows:

A. Summary of Significant Changes

This final rule includes one change to align the FAR with Department of Labor’s (DOL) regulations and implementation of section 30(a) of the LHWCA. This change involves deleting proposed paragraph (b) of FAR clause 52.228-3, which stated that the actions set forth under paragraphs (a)(2) through (a)(8) may be performed by the contractor’s agent or insurance carrier. The DOL’s regulations place the responsibility for reporting injuries on the employer, see 20 CFR 703.115. The removal of proposed FAR 52.228-3 paragraph (b) also promotes consistency with the statutory requirements.

B. Analysis of Public Comments

1. Support of the Proposed Rule

Comment: Two respondents expressed support for the rule.

Response: The public’s support for this rule is acknowledged.

2. Clarify Term “Days”

Comment: One respondent recommends that the ten-day reporting period within the report of injury requirements set forth in proposed FAR 52.228-3 paragraph (a)(2) should be revised to read “ten business days.” The respondent asserts this modification will clarify the reporting period.

Response: The intent of this rule is to alert contractors to their obligations under the LHWCA, rather than to alter those obligations. The respondent’s suggested revisions could result in altering a contractor’s obligations and therefore are beyond the scope of the FAR rule. The DOL’s regulation interprets the ten-day injury reporting period set forth in LHWCA section 30(a), 33 U.S.C. 930(a), as ten calendar days. See 20 CFR 702.201(a) (using unqualified term “days” to describe reporting period). Thus, adding “business” days would alter the intent of the law.

3. Inclusion of “Work-Related” Terminology

Comment: The respondent states that the terms injury and death should be modified by adding the phrase “work-related” before both. The respondent asserts that this modification will serve to clarify a contractor’s obligation.

Response: The Councils do not recommend adding the phrase “work-related” to the terms “injury” and “death.” The added phrase is not necessary as the LHWCA defines an injury in 33 U.S.C. 902(2) and the concept of work-relatedness is subsumed in the term “injury.” Moreover, the question whether a particular injury is work-related is often a difficult issue to resolve, and a contractor may not be able to decide whether a particular injury arose out of and in the course of employment within the meaning of the statute. By leaving the terms “injury” and “death” unqualified, contractors will be encouraged to err on the side of reporting any incident that may be work-related.

4. Inclusion of “Actual” Terminology

Comment: One respondent suggests that the provision should specify that the contractor’s “actual/constructive” knowledge of the injury triggers the reporting period. The respondent recommends this revision to further clarify a contractor’s obligation.

Response: DOL’s governing rules use the unqualified term “knowledge of an employee’s injury or death” when describing the event that triggers the reporting period. This FAR rule simply tracks that language.

5. Conflicts With Current Practice

Comment: One respondent states that FAR 52.228-3 paragraph (b), which allows the contractor’s agent or insurance carrier to submit the first report of injury referenced in paragraph (a)(2), is inconsistent with section 30(a) of the LHWCA, 33 U.S.C. 930(a), as extended by the DBA, and the DOL’s current practice. The respondent argues that it is inappropriate to redefine this statutory provision through a FAR clause. The respondent recommends the proposed paragraph (b) should be amended to conform to current practice both under the DBA and LHWCA.

Response: The Councils concur with the respondent. The intent of this FAR rule is to clarify and inform contractors of their obligations under the DBA and the DOL’s regulations, not to alter those requirements. Section 30(a) of the LHWCA, as implemented by the DOL’s regulations, places the responsibility for reporting injuries on the employer. See 20 CFR 703.115. Accordingly, the Councils are removing the proposed FAR 52.228-3 paragraph (b) to promote consistency with the statutes referenced above.

6. Contractors Should Provide Insurance

Comment: One respondent states that the contractors should have sufficient insurance to be able to pay compensation if an employee is injured.

Response: The Councils concur that the views of this respondent are in accord with the intent of the law, this FAR rule, and the existing FAR clause 52.228-3.

III. Executive Orders 12866 and 13563

Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under Section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

DoD, GSA, and NASA have prepared a Final Regulatory Flexibility Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. The FRFA is summarized as follows:

DoD, GSA, and NASA do not expect this rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because this rule merely clarifies the existing prescriptions and clauses relating to contractor and subcontractor responsibilities to obtain workers’ compensation insurance or to qualify as a self-insurer, and other requirements, under the terms of the LHWCA as extended by the DBA, and implemented in DOL Regulations. No comments from small entities were submitted in reference to the Regulatory Flexibility Act request under the proposed rule.

The rule imposes no reporting, recordkeeping, or other information collection requirements. The rule does not duplicate, overlap, or conflict with any other Federal rules, and there are no known significant alternatives to the rule.

Interested parties may obtain a copy of the FRFA from the Regulatory Secretariat. The FAR Secretariat has submitted a copy of the FRFA to the Chief Counsel for Advocacy of the Small Business Administration.

Fifth Circuit Addresses Bailment and Eroding Policy Limits After Vessel Sank

 National Liability & Fire Ins. Co. v. R&R Marine, Inc., — F.3d —- (5th Cir. 2014):

This case arises after the sinking, and subsequent salvage, of a vessel owned by Hornbeck Offshore Services. Hornbeck Offshore owned the M/V Erie Service, which was in need of repairs.  Hornbeck entered into a Shipyard Repair and Drydock Agreement with R&R Marine for the repair and refit of two of Hornbeck’s vessels, one being the M/V Erie Service, at R&R Marine’s shipyard.  Per this Agreement, Hornbeck retained access to its vessel and reserved its authority over the vessel with the use of two on-site managers.  Despite Hornbeck’s oversight, it was undisputed that the Erie Service was in the custody of R&R Marine upon delivery.

On September 12, 2007, the National Weather Hurricane Center issued a tropical storm warning which included an area in which R&R Marine’s shipyard was located.  R&R Marine ensured Hornbeck pumps were available should water entry become an issue.  R&R Marine also ensured Hornbeck the shipyard docks were monitored “around the clock.”  However, in anticipation of the weather advisory, R&R personnel evacuated the shipyard and failed to take any precautions, apparently underestimating the severity of the storm.  The following morning, the M/V Erie Service sank.

Hornbeck entered into a time-and-materials salvage bid which totaled $627,324.64.  Hornbeck and R&R Marine demanded National, R&R Marine’s insurer, pay the salvage costs directly.

National sought a declaratory judgment that it was not required to pay the salvage cost.  Hornbeck counterclaimed asserting National’s policy required them to pay for damage to the M/V Erie Service since it was in the custody of R&R Marine, its insured, at the time of loss.  Hornbeck filed a cross-claim asserting R&R Marine’s negligence proximately caused the sinking of the M/V Erie Service.

The district court held R&R Marine was negligent in failing to secure the M/V Erie and that National was required to pay Hornbeck salvage costs, and interest and attorney’s fees associated with said costs.  Both National and R&R appealed.

The Fifth Circuit concluded the district court did not clearly err in finding R&R Marine to be negligent.  Hornbeck had established a prima facie case of negligence, as the M/V Erie Service was delivered to R&R Marine afloat and R&R Marine had full custody of the vessel.  The Court did not agree with R&R Marine that only a limited bailment was created due to the presence of Hornbeck’s on-site managers; to the contrary, the Court determined the district court was not clearly erroneous in finding that neither the presence nor authority of Hornbeck’s personnel affected R&R Marine’s exclusive control and full custody.

R&R Marine next argued Hornbeck was unreasonable in choosing a time-and-materials salvage contract, as opposed to a less expensive, “no cure, no pay” agreement.  Again, the Court determined the district court’s determination of Hornbeck’s reasonableness was not clearly erroneous and therefore upheld its determination.

The district court determined National was liable for the salvage costs associated with the sinking of the M/V Erie Service, as provided by its policy with R&R Marine.  National argued Hornbeck lacked standing as a third-party claimant to bring its counterclaim.  The Court of Appeals, reviewing the district court’s decision de novo, looked to Texas law to determine the parties’ substantive rights.  The Court engaged in an analysis of procedural law application and determined Hornbeck had standing to assert its counterclaim but agreed with National that the district court erred in the total amount of damages awarded in excess of National’s policy limits.  Accordingly, the award to Hornbeck was reduced to $1,000,000.00 plus reasonable attorney’s fees.

Uberrimae Fidei Revisited

A couple of years ago I brought to our attention the doctrine of uberrimae fidei, utmost good faith, in marine insurance.  In a nutshell the doctrine requires that an applicant for marine insurance is bound to reveal every fact within his knowledge that is material to the risk.  Its origin is grounded both in morality and efficiency; insureds were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder.  This principal was an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, e-mail, digital photography, and air travel.  If an insured breached this duty the insurer may rescind the policy, even if the material misrepresentation was not intentional.  Even in today’s world where information is only a click away, the doctrine of uberrimae fidei lives on.

In October this year a federal judge voided an ocean marine policy when he found that the owner of a dry dock, San Juan Towing (“SJT”), had misrepresented its condition and value.  The insured originally purchased the dry dock for $1.05 million in 2006.  In 2009 it put the dry dock up for sale for $1.35 million.  When there were no takers, the asking price was reduced to $800,000.  It remained on the market until April, 2011 when a shipyard agreed to purchase it for $700,000.

From 2006 to 2011 the dry dock was insured by RLI Insurance Company (“RLI”) for $1.75 million because of modifications made by its owner.  RLI’s underwriter on the account left RLI for another insurer Catlin (Syndicate 2003) at Lloyd’s in January, 2011.  RLI then cancelled the policy in February, 2011.  Thereafter, SJT’s insurance broker called the underwriter in his new role with Catlin and asked if Catlin would be interested in providing insurance for the dry dock since he was already familiar with the account.  Catlin sent a quote to SJT which was accepted and the insurance was bound.  SJT never told Catlin’s underwriter that the value of the dry dock should be less than the $1.75 million at which it had been originally valued.  SJT did not tell the underwriter that it originally advertised it for sale for $1.35 million, and later reduced to $800,000.

In September, 2011 the dry dock sank.  Catlin sent surveyors to the scene who reported that the dry dock was in poor condition with significant deterioration and long standing corrosion.  Catlin refused to pay the claim stating that SJT had the duty to have notified Catlin of the dry dock’s true condition and value.  If SJT was representing to the public that the dry dock was worth only $800,000, it should have made this known to Catlin.  Not unexpectedly, litigation ensued.

After a trial, the judge found in favor of Catlin.  While he questioned the soundness of the underwriter’s decision not to request the updated condition and value information, the doctrine of uberrimae fidei places the burden on the insured to disclose all material information regarding the risk to the insurer.  SJT breached its duty by failing to disclose an accurate description of the dry dock’s condition when seeking insurance from Catlin and overstating its value.  The judge ordered the policy void and dismissed all of SJT’s claims. At the end of the day, SJT was left with no insurance.