Antilles Steamship Co. v. Members of the American Hull Insurance Syndicate

CARDAMONE, Circuit Judge:

An explosion aboard an ocean-going tanker sailing from the United States to Antwerp, Belgium caused extensive damage to the ship, rupturing several of its cargo tanks loaded with liquid chemicals. As a result some of the liquid cargo spilled out and later solidified. We are asked on this appeal to construe the scope and coverage of a marine hull and machinery insurance policy. The specific question is which of the costs incurred by the shipowner to remove chemical debris from the cargo spaces and to clean and repair the damaged tanks are chargeable to the hull insurer. There is no American judicial precedent concerning this kind of coverage.

FACTS

Antilles Steamship Company Ltd. (Antilles), plaintiff-appellee, engaged in the business of ocean transport of chemicals, is the owner of the M/V “Alchemist”. The defendants-appellants, 62 foreign and domestic insurance companies of which 53 are members of the American Hull Insurance Syndicate (Syndicate), are the underwriters that insured the “Alchemist’s” hull.

The “Alchemist” is a steel tanker fitted with 34 tanks (18 of which are stainless steel) designed to carry liquid chemicals. She loaded liquid chemicals in Taft, Louisiana, pursuant to a contract of affreightment between Antilles and Union Carbide Corporation for carriage to Antwerp, Belgium. Among the chemicals taken aboard were over 200 tons of glacial acrylic acid (GAA). Another chemical aboard, loaded at a prior port, was ethylene norbonene (ENB). The only characteristic of ENB relevant to this appeal is its unbelievably penetrating, noxious odor. The two chemicals were placed in adjacent stainless steel tanks sharing a common wall. No. 6 starboard wing tank aft (No. 6 aft) was loaded with GAA, and No. 6 starboard wing tank forward (No. 6 forward) with ENB. On September 14, 1975 two days after taking the chemicals aboard, the parties entered into a one year contract of insurance on the “Alchemist's” hull and machinery. Seventy percent of the risk was insured in the American market with defendants and the remaining 30 percent was underwritten in the London market. The identical British and American policies contained the standard American Hull Institute clauses, including the “Inchmaree” clause involved here.

About an hour before midnight, on September 16 while the “Alchemist” was sailing smoothly at sea, the GAA in No. 6 aft suddenly and explosively polymerized for reasons which still remain unknown. The resulting sudden high pressure caused that aft tank to bulge, the common wall between it and No. 6 tank forward to rupture, and seams to open in No. 6 aft, permitting material to escape into the cofferdam, i.e., the empty space* between the wall of the tanks and the skin of the ship. The skin or shell plating of the ship in the vicinity of No. 6 tank aft also bulged. The thunderous explosion accompanying the polymerization of the GAA caused the ship to vibrate severely and produced intense heat, 250 degrees F. or higher (the readings taken at the time were at the top of the thermometer) near the two No. 6 tanks. The “Alchemist’s” crew reacted quickly during the emergency and successfully reduced the danger of fire by hosing down the deck and pumping seawater into the cofferdam nearest the No. 6 tanks. As a result, a mixture of GAA, ENB and seawater filled these tanks and the cofferdam. The tanker was able to complete the voyage to Antwerp under its own power, and there discharged its sound cargo.

Port officials in Antwerp would not permit the seawater-chemical mixture to be unloaded because of fear that its extremely noxious odor might create an air pollution problem. Later, the “Alchemist” sailed to a tank cleaning facility located near Rotterdam. Upon her departure from Antwerp without even having been permitted to open her cargo tanks, Masefield’s evocative words might have been on the crew’s mind: “I must go down to the seas again, to the lonely sea and the sky.” More likely though — since on the run to Rotterdam the “Alchemist” hoped to avoid the noxious odor by sailing against the wind — this later line from “Sea Fever” was offered as a fervent prayer: “And all I ask is a windy day with the white clouds flying.” ¹

On October 21 the tank cleaning company commenced removal of the putrid cargo still aboard. This operation proved to be infinitely more arduous and costly than anticipated because GAA, a water-like liquid in its monomer state, hardens when polymerized. The mixture at the top of No. 6 aft and No. 6 forward tanks posed little problem and vacuum trucks removed it in short order. Most of the one and a half feet of semi-solid polymer at the bottom of No. 6 forward tank was removed in the same manner. What remained was shoveled out by hand. It only took a few days to clean the No. 6 forward tank. Similar methods were used to clean the cofferdam with high pressure washing equipment, vacuum hoses and, finally, shovels.

Meanwhile attention focused on the site of the bulk of the GAA in No. 6 aft tank. For the next 30 days this tank had to be cleaned by hand on an around-the-clock basis. The mixture was about 20 feet deep in the tank. At first near the top it was shovelable. As the work progressed deeper into the tank the polymer became less rubbery and much harder. Near the bottom it became necessary to use heavy-duty compressed air jackhammers to break up the granite-like mass which extended across the bottom of the tank from bulkhead to bulkhead, and adhered to them.

In the course of the work substantial damage was done to the stainless steel skin of the tank. After the “Alchemist” was repaired at a nearby ship yard, Antilles claimed the cost of removal of all of the GAA-ENB-seawater mixture and the cost of repairs from both the British insurers and from defendants by submitting a statement of adjustment in particular average for over a million dollars.² The London market underwriters responsible for 30 percent of the risk paid their portion of the claim without protest. Defendants, the American market underwriters, at first paid only for the actual damage to the walls of both tanks and the skin or shell of the ship; later, defendants agreed to pay in addition those costs associated with removal of the mixture from the cofferdam and removal of the last residue of the mixture adhering to the bulkheads of the No. 6 aft and forward tanks, a sum stipulated to be $51,858.76. Defendants refused to pay for the cost of removing the bulk of the hardened mass from the cargo tanks which, it was stipulated, cost Antilles $365,339.72.

Antilles filed this action in the United States District Court for the Southern District of New York seeking recovery for the removal of the hardened polymer from the ruptured No. 6 aft. The parties tried the case before District Judge Conner on March 16, 1982. In the brief bench trial where most of the facts were stipulated, plaintiff called only two witnesses. The first, James W. Kingston, was Marine Superintendent for Steuber Company, the manager and operator of the “Alchemist” at the time when the explosion occurred. Kingston testified to the accident and its aftermath. Plaintiffs second witness was Raymond M. Hicks, Jr., claims manager for the defendant American Hull Insurance Syndicate. He testified as an expert regarding the custom and practice of average adjusters and marine insurers in cases of solidified, difficult to remove cargo. Defendants called no witnesses. As part of the case both parties submitted post-trial briefs.

The district court issued two opinions and orders. In its opinion dated May 24, 1982, 539 F.Supp. 572, the court found that the defendants were obligated to indemnify plaintiff for removal of all the hardened polymer. In a supplemental opinion and order dated August 5, 1982 the court clarified its earlier opinion. After analyzing and distinguishing the somewhat arcane authority in what he recognized as a case of first impression, Judge Conner fashioned a result that permitted plaintiff to recover for the cost of removing the rock-hard polymer, but not for the costs of removing from the two No. 6 tanks the “shovelable” material, i.e., the liquid and rubbery substances. Defendants appeal the resulting judgment awarding plaintiff $271,179.01 plus costs and interest. Antilles cross-appeals claiming it was entitled to the entire cost of removal of all substances.

DISCUSSION

I. Choice of Law

Before beginning an analysis of the law we explore briefly the choice of applicable law. After some dispute below, the parties have now agreed that New York law applies in the first instance. See also Wilburn Boat Co. v. Fireman’s Fund Insurance Co., 348 U.S. 310, 321, 75 S.Ct. 368, 374, 99 L.Ed. 337 (1955) (state law controlling on marine insurance issues). Such issues as burden of proof and general rules of insurance policy interpretation are substantive rules governed by settled New York law.

To the extent that no New York precedent exists, the maritime nature of this insurance contract dictates that we anticipate that New York courts would look to English law in view of the “special reasons for keeping in harmony with the marine insurance laws of England, the great field of this business.” Queen Insurance Co. v. Globe & Rutgers Fire Insurance Co., 263 U.S. 487, 493, 44 S.Ct. 175, 177, 68 L.Ed. 402 (1924) (Holmes, J.); see Lenfest v. Coldwell, 525 F.2d 717, 724 n. 15 (2d Cir.1975). These sophisticated contracting parties should be presumed familiar with basic English law principles that have shaped custom and practice in the hull insurance field.

The claim made was under the “Inchmaree” clause of the hull and machinery policy issued by defendants. The term “Inchmaree Clause” derives from an 1887 case involving the steamer “Inchmaree”. It arose in the ease of Thames and Mersey Marine Insurance Co. v. Hamilton, Fraser & Co., 12 App.Cas. 484 (1887), when a pump valve closed accidentally and caused water, intended for a boiler, to go instead into an air chamber where it split the pump. The House of Lords held that this was not a loss caused by a “peril of the sea”, nor a loss within the words “all other perils, losses” contained in a hull insurance policy. To counter this restrictive judicial view, a clause covering additional perils or negligence came into being and has evolved and broadened the scope of coverage afforded insureds. That clause in marine policies is now called the “Inchmaree” clause. See Templeman at 444-452. The relevant portion of the “Inchmaree” clause in the policy before us is: “[T]his insurance also covers loss of or damage to the vessel directly caused by the following: ... Explosions on shipboard or elsewhere.”

II. Intent of the Parties

The district court’s task in this case was to ascertain whether the statement of particular average filed by Antilles came within the scope and coverage of the “Inchmaree” clause of the defendants’ policy. This is a matter of intent. Blain Richards & Co. v. Marine Indemnity Insurance Co. of America, 635 F.2d 1051, 1054 (2d Cir. 1980). The sophisticated and knowledgeable parties here engaged in a classic maritime transaction — insuring a vessel’s hull and machinery. The issue was their “reasonable understanding ... as to the meaning of their insurance agreements.” Id. In marine insurance law there is interplay and tension between a hull underwriter's duty to pay the reasonable cost of repairing “damage to the hull” and a shipowner’s duty to pay for discharge of his ship’s cargo. In fixing these respective obligations, a line must be found where the shipowner’s responsibility for discharge of its cargo ends and the hull underwriter’s duty to pay for damage to the hull begins.

The district court apparently did not view the policy coverage issue as one of fact and did not explicitly make a finding as to the parties’ intent. We believe the central question here is at least a mixed question of law and fact. See 3 Corbin on Contracts § 554 (1951 and 1980 Supp.). Because the contracting parties here were free to agree on coverage for this type of loss, the emphasis of plaintiff’s proof, as well as the district court’s analysis, should have been on the parties’ mutual understanding. In addition to the language of the policy and the circumstances surrounding its execution, custom and usage, as well as the established law, all bear on the ultimate “fact” of the parties’ “reasonable understanding.” While the basis for the trial court’s holding is not free from doubt, we note that his opinion refers to certain facts which influenced his interpretation of the clause (e.g., the English underwriters’ settlement of the claims). Such suggests that Judge Conner implicitly found, as a matter of fact, that plaintiff had proved the parties contemplated this sort of coverage.

III. Antilles’Proof at Trial

Antilles concedes that it was required to prove by a preponderance of the evidence three elements: (1) it was insured on a marine insurance policy underwritten by defendants; (2) a loss occurred; and (3) the loss was an event within the terms of the policy. The first two presented Antilles with no difficulty. Defendants conceded the first element in their answer and stipulated the second by agreeing that an explosion had occurred. Antilles’ final hurdle was to prove that there was a loss within the terms of the policy, i.e., that the shipboard explosion, which concededly damaged the vessel, required the underwriters to pay for the cost of removing cargo or cargo debris from the ship’s cargo spaces after the “Alchemist” had reached harbor safely in Antwerp. It was this last hurdle that plaintiff failed to clear.

Plaintiff has the burden of showing that both the loss and the peril which caused it fall within the meaning of the policy terms. See Northwestern Mutual Life Insurance Co. v. Linard, 498 F.2d 556, 561 (2d Cir.1974); S. Felicione & Sons Fish Co. v. Citizens Casualty Co., 430 F.2d 136, 138 (5th Cir.1970), cert. denied, 401 U.S. 939, 91 S.Ct. 936, 28 L.Ed.2d 219 (1971).

Antilles points to the testimony at trial of the expert witness Hicks who testified concerning customs and practices of the marine insurance industry. We examine this proof as it bears on the intent of the parties, construing it in a light most favorable to plaintiff. The testimony at trial demonstrated: the English Marine Insurance Act of 1906 provides, and all parties to hull policies apparently contemplate, that the underwriter is to bear the “reasonable cost of repair” of a vessel and machinery damaged by a covered peril, and underwriters generally assume responsibility under the “Inchmaree” clause for removal of cargo in two cases, i.e., removal of cargo from the cofferdam area and gasfreeing the vessel’s cargo tanks to permit repairs. Hicks noted his familiarity with these principles of law and custom and also recognized the competing legal principle that a shipowner bears the cost of removing cargo at the port of destination. On cross-examination, when asked whether in his opinion there was coverage in this case, he answered “no.” No other evidence is found in the record to refute that opinion.

In essence, Hicks was of the view that the general practice of hull underwriters is to pay for the cost of removing only that portion of solidified or adhering cargo which remains in the cargo areas beginning with the layer where the process of removal begins to cause damage to the bulkhead. The witness acknowledged that he had stated publicly that the “ ‘reasonable cost of repair’ refers solely to the costs necessary to restore the vessel’s ‘physical being.’ ” And, in response to a leading question, he affirmed that removal of the hardened polymer was necessary to restore the vessel’s “physical being.” Antilles repeatedly cites this testimony as proof supporting its argument that the loss falls within the “Inchmaree” clause. Quite the contrary, even when viewed most favorably to plaintiff, Hicks’ testimony related solely to the limits of the hull policy’s coverage, not to whether the cost of cargo removal, the loss here claimed, is covered. Moreover, Hicks elsewhere noted that even sound cargo would affect the “physical being” of the vessel for purposes of effecting repairs. Thus, we conclude that Antilles failed in its burden of producing sufficient evidence to prove a prima facie case that removal of the bulk of the hardened cargo fell within the intended scope of the “Inchmaree” clause.

Antilles presented various letters and memoranda prepared over the years by experts in the marine insurance area. None of these documents supports plaintiff’s argument that coverage here was contemplated. At most, these exhibits proved that hull underwriters customarily pay for removal of cargo or its derivatives from void spaces, e.g., a cofferdam, and for removing the last layer of residue from cargo spaces. Because these documents uniformly recognize the general rules established by Field v. Burr, infra, and the other authorities, Antilles’ documents were at best equivocal and at worst detrimental to its claim of coverage.³

We entertain some doubt as to whether the evidence taken as a whole was sufficient to make out plaintiff’s prima facie case. Even if plaintiff produced enough proof to survive a motion for a directed verdict, a review of all the evidence in the case, including particularly the customs and practice in the field of marine insurance, convinces us that Antilles failed to sustain its burden of proof by a preponderance of the evidence. The trial court’s findings to the contrary were therefore clearly erroneous.

IV. Parties ’ Knowledge of Marine Custom and Practice

In eliciting proof of custom and usage from its expert witness, plaintiff specifically developed the general practice of particular average adjusters regarding solidified cargo. In the course of testifying, Hicks clearly evidenced his familiarity with the authorities in this field and described a practice, the existence of which those authorities confirm. The language used in the subject marine policy consists of certain words of art and phrases that over generations have acquired content and meaning, revealed through an examination of customs and practices in the field of marine insurance. When knowledgeable parties enter into a contract of marine insurance containing such specific terminology, they should therefore be presumed to have intended that its terms be applied in accordance with such general understanding, absent an indication of contrary intent. In that connection underwriters introduced into evidence the deposition of an insurance adjustor representing Antilles that indicated complete familiarity with the history and customs of marine insurance law. Thus, charging both of these parties with knowledge of the English custom and practice of marine hull insurance, we turn to examine it.

V. Analysis of Law

The seminal — and perhaps only — judicial decision on the scope of a hull policy in a damaged cargo situation is Field v. Burr, [1899] 1 Q.B. 579. In that case an appeal panel of the Queen’s Bench affirmed a trial court’s conclusion that a hull underwriter was not liable for expenses incurred in removing cottonseed cargo which, having mixed with seawater after an accident where the vessel was holed, had become a “putrid mass.” The appellate court held for the underwriters, finding only “damage to the shipowner in his business as carrier,” not damage to the hull. Id. at 579. The Field court also discussed the hypothetical case of solidified cargo such as cement. Even as to this, the appellate court stated that only the last layer adhering to the fabric of the ship properly would be recoverable in particular average. Removal of the bulk of the cement would remain the shipowner’s responsibility. Shipowners, underwriters and adjusters are all familiar with the Field case. Marine insurance commentators discuss it at length and view its holding as stating the basic contemporary practice in the field. See 2 Arnould on Marine Insurance § 1125 (16th ed. 1981); L. Buglass, Marine Insurance & General Average in the United States, 156 (2d ed. 1981).

Leslie Buglass, a leading American commentator, describes the American adjusters’ practice as follows:

In practice if, for example, the damaged cargo has solidified and has adhered to the structure of the vessel so that in effect the vessel has sustained damage, the cost of removing that part which has adhered to the vessel is recoverable from hull underwriters as part of the reasonable cost of repairs. This is necessarily an arbitrary division, but usually a percentage is allowed, depending on the width of the solidified mass. Similarly, if the cargo debris has entered places where cargo would not normally be (such as the engine room, pump room or double-bottom tanks) the cost of cleaning and removing such cargo is considered “damage” and therefore part of the reasonable cost of repairs. In all other circumstances, the cost of removing cargo debris from a vessel (whether or not such removal is necessary to effect repairs) is not considered to be part of the cost of repairs but rather a consequential loss or enhanced voyage expense. Such extra expenses may be recoverable from freight underwriters or Protection and Indemnity underwriters, depending on the circumstances in each individual case.

Apparently no court has confronted the problem of removal of solidified or adhering cargo since Field v. Burr. In 1968 the question whether solidified cargo can be “damage to the vessel” arose in an arbitration in San Francisco before Martin P. Detels, former chairman of the Association of Average Adjusters, as arbitrator. Barge J. Whitney, [1968] A.M.C. 995. In that case the owners of a barge contracted to carry asphalt from California to Alaska. The barge was equipped with special heating coils through which hot oil or steam could be forced to liquify the cargo at the port of discharge. During the process of loading, the heating coils fractured because of condensate which had remained in them; as the hot asphalt flowed into the coils it solidified and rendered the coil system inoperative. Not surprisingly, removal of the solidified asphalt was difficult and expensive, and the shipowner claimed that expense from the hull underwriter in particular average. The arbitrator resolved the “difficult question” (id. at 1003) in favor of the underwriters, and found Field v. Burr “nearly indistinguishable.” He ruled therefore that the underwriters were responsible only for damage done to the vessel during loading, for repairing the deck which had to be penetrated for the installation of new heating coils during discharge and for the last layer of asphalt adhering to the tanks after removal of the bulk of the cargo.

We conclude that cargo debris in a cargo tank at the port of destination does not constitute “damage to the vessel” within the parties’ intended meaning of the “Inchmaree” Clause, and that the lower court’s finding on this issue was clearly erroneous. Every merchant vessel requires repair work at some time or other and cargo often must be discharged to do that work. Once a voyage is completed, hull underwriters are not concerned with the cost of cargo discharge, no matter what its form. This view on the coverage of blue water hull policies has been prevalent in marine insurance law for 85 years. We think it must be well understood by now. The hardship to a shipowner arising from the extra expense for cargo removal may be protected against by insurance with Protection and Indemnity underwriters, but the parties to this hull and machinery policy obviously did not contemplate such added expense.

CONCLUSION

Accordingly we reverse the $271,179.01 judgment in favor of Antilles. The insurers were required under the “Inchmaree” clause to pay only for those expenses incurred in removal of the mixture from the cofferdam and in removing the last residue of material clinging to the bulkhead of No. 6 tanks aft and forward. Hull insurers customarily pay the cost of cleaning cargo bulkheads of cargo residue where it is a prerequisite to repair work, e.g., an oil tanker must be “gas freed” to permit welding and the like. Of course, what is a “residue” will vary and should be a matter for the trier of fact to determine in each case recognizing that the word means remnant, vestige or trace. This definition accords with the view that only that portion of the cargo which adheres to a bulkhead is chargeable to the hull insurer. Fortunately, here, that amount has been stipulated by the parties to be $51,858.76, and that amount has apparently been paid since the trial. The bulk of the hardened polymer in the tanks was cargo, and the expense of its removal must be borne by the shipowner, not the hull insurers.

Since the defendants have paid the sums for which they are liable, and plaintiff is entitled to neither the additional sum awarded by the district court nor the further sum it seeks on its cross-appeal, the judgment is reversed and the complaint is dismissed.

1 . J. Masefield, “Sea Fever,” reprinted in Twelve Centuries of English Poetry and Prose 838 (rev. ed. 1928).

2 . In this case, after the completion of all cleanup and repairs of the "Alchemist,” plaintiff had a statement of particular average prepared by its insurance broker, Alexander & Alexander, Inc., in order to make a claim under the "Inchmaree” clause of the policy. In English law under section 56(1) of the Marine Insurance Law "a loss may be either total or partial. Any loss other than a total loss ... is a partial loss.” Section 64(1) of the same law provides that "a particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against, and which is not a general average [ — ] loss.” The loss must be accidentally caused by a peril insured against and under section 69(1) the assured is entitled to “reasonable cost of repairs, less customary deductions," but not exceeding the sum insured. See RJ. Lambeth, Templeman on Marine Insurance, 256-57 (5th ed. 1981) (Templeman). Thus, the particular average in this case was a statement or claim for a partial loss. The statement was a detailed compendium of the casualty, various surveys, repairs at the shipyard, clean-up at Rotterdam and itemization of all expenses connected with these activities.

3 . The district court also noted that "the fact that the London market paid the claim undercuts defendants’ argument that the law, especially English law, requires rejection of Antilles’ claim.” The settlement achieved between Antilles and the London market has little or no probative value regarding the American underwriters’ liability, and arguably contravenes the spirit, if not the literal terms, of Fed.R.Evid. 408. Cf. Reichenbach v. Smith, 528 F.2d 1072, 1074 (5th Cir.1976); Sun Oil Co. v. Govostes, 474 F.2d 1048, 1049 (2d Cir.1973) (per curiam); Hawthorne v. Eckerson Co., 77 F.2d 844, 847 (2d Cir.1935). Although the English underwriters’ decision to pay cannot be viewed as a "settlement” within Rule 408 because there was apparently no real dispute, the probative weight of its payment on the question of the American insurers' liability is conjectural. A desire to avoid substantial litigation expenses, the need to maintain good client relations or even a mistaken view of the facts (underwriters suggest that plaintiff’s brokers successfully passed off the disputed expense as "cleaning required solely in connection with damage repairs”) or law might have motivated the London market to pay. It sheds little light on the present parties’ intentions in entering into the hull policy.