16‐91‐cv(L)
Am. Commercial Lines LLC v. Water Quality Ins. Syndicate
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY
ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE
OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1. WHEN CITING A
SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE
FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION ʺSUMMARY ORDERʺ). A
PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED
BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in
the City of New York, on the 10th day of February, two thousand seventeen.
PRESENT: REENA RAGGI,
DENNY CHIN,
RAYMOND J. LOHIER, JR.,
Circuit Judges.
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AMERICAN COMMERCIAL LINES LLC,
NATIONAL LIABILITY & FIRE INSURANCE
COMPANY, INDEMNITY INSURANCE
COMPANY OF NORTH AMERICA, LIBERTY
MUTUAL INSURANCE COMPANY, FEDERAL
INSURANCE COMPANY, and THE NORTHERN
ASSURANCE COMPANY OF AMERICA,
Plaintiffs‐Appellants‐Cross‐Appellees,
v. 16‐91‐cv(L)
16‐119‐cv(XAP)
WATER QUALITY INSURANCE SYNDICATE,
Defendant‐Appellee‐Cross‐Appellant.
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FOR PLAINTIFFS‐APPELLANTS‐ JOHN A.V. NICOLETTI (Richard Walter Stone, II,
CROSS‐APPELLEES: on the brief), Nicoletti Hornig & Sweeney, New
York, New York.
FOR DEFENDANT‐APPELLEE‐ JOHN M. WOODS (Corey R. Greenwald, on the
CROSS‐APPELLANT: brief), Clyde & Co US LLP, New York, New
York.
Appeal from the United States District Court for the Southern District of
New York (Kaplan, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED IN
PART AND VACATED IN PART, and the case is REMANDED for further
proceedings consistent with this order.
Plaintiff‐appellant‐cross‐appellee American Commercial Lines LLC
(ʺACLʺ) and its excess insurers National Liability & Fire Insurance Company,
Indemnity Insurance Company of North America, Liberty Mutual Insurance Company,
Federal Insurance Company, and The Northern Assurance Company of America
(together with ACL, ʺplaintiffsʺ) and defendant‐appellee‐cross‐appellant Water Quality
Insurance Syndicate (ʺWQISʺ) cross‐appeal from the district courtʹs judgment entered
December 11, 2015 and its underlying orders. The principal question presented is
whether WQIS was obliged to pay investigation and defense costs (ʺdefense costsʺ)
under a maritime insurance policy (the ʺPolicyʺ) after its $5 million indemnity limit had
been reached. By memorandum and order entered March 29, 2010, the district court
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granted ACLʹs motion for partial judgment on the pleadings, holding that WQIS was
obliged to pay defense costs even after the indemnity limit had been reached. In
addition, by orders entered April 8 and 14, 2014, the district court, adopting the report
and recommendation of the magistrate judge (Francis, M.J.), granted partial summary
judgment to WQIS, concluding that it did not repudiate liability for defense costs under
the Policy. We assume the partiesʹ familiarity with the underlying facts, procedural
history, and issues on appeal.
A. Background
In July 2008, a barge owned by ACL spilled 300,000 gallons of oil into the
Mississippi River. WQIS was ACLʹs primary insurance carrier. The Policy included
Coverage A, which provided $5 million of coverage per vessel for liability associated
with the discharge of oil. The Policy also included Coverage C, which provided
coverage for ʺ[c]osts and expenses incurred by [ACL] with the prior consent of WQIS
for investigation of, or defense against, any liabilities covered under COVERAGE
A . . . .ʺ The Policy provided as follows:
The amounts payable for costs and expenses incurred by [ACL] with the prior
consent of WQIS for investigation of, or defense against, any liabilities covered
under COVERAGE A . . . shall be in addition to the limits of liability stated in
ARTICLE A(1) of PART II.
Article A(1) of Part II referred to the Vessel Schedule, which in turn set forth the limit
on Coverage A of $5 million per vessel. The parties agree that WQISʹs liabilities under
Coverage A reached the $5 million limit on August 27, 2008.
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ACL filed this action in September 2009, alleging that WQIS breached the
Policy when it refused to cover (1) at least $300,000 for defense costs that ACL had
incurred before the Coverage A limit was reached and (2) at least $2 million for defense
costs that ACL had incurred and would continue to incur as a result of the July 2008 oil
spill after the Coverage A limit was reached. On March 29, 2010, the district court
granted ACLʹs motion for partial judgment on the pleadings, holding that WQIS was
required to reimburse ACL for defense costs even after the $5 million indemnity limit
was reached.1 ACL then amended its complaint to add its excess insurers as additional
plaintiffs.
On April 8 and 14, 2014, the district court granted partial summary
judgment to WQIS on the repudiation issue. Final judgment was entered on December
11, 2015, awarding plaintiffs $3,552,453.05 in defense costs plus interest.
B. Extent of WQISʹs Liability Under Coverage C
WQIS appeals the district courtʹs decision to award partial judgment on
the pleadings with respect to the scope of Coverage C liability. ʺWe review de novo a
district courtʹs decision to grant a motion for judgment on the pleadings,ʺ and we apply
ʺthe same standard applicable to dismissals pursuant to Fed. R. Civ. P. 12(b)(6).ʺ
Hayden v. Paterson, 594 F.3d 150, 160 (2d Cir. 2010) (citing Johnson v. Rowley, 569 F.3d 40,
1 In 2011, we dismissed WQISʹs interlocutory appeal of that order for lack of
appellate jurisdiction. Am. Commercial Lines LLC v. Water Quality Ins. Syndicate, 413 F. Appʹx
387, 389 (2d Cir. 2011).
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43 (2d Cir. 2009) (per curiam)). In doing so, we ʺmust accept all allegations in the
complaint as true and draw all inferences in the non‐moving partyʹs favor.ʺ LeFaro v.
N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009) (quoting Miller v. Wolpoff
& Abramson, L.L.P., 321 F.3d 292, 300 (2d Cir. 2003)).
In New York, ʺinsurance policies are interpreted according to general
rules of contract interpretation.ʺ Olin Corp. v. Am. Home Assurance Co., 704 F.3d 89, 98
(2d Cir. 2012).2 The initial interpretation of the contract and whether its terms are
ambiguous are questions of law for the court to decide. Morgan Stanley Grp. Inc. v. New
England Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000). The court is to interpret the contract
ʺto give effect to the intent of the parties as expressed in the clear language of the
contract.ʺ Id. (quoting Village of Sylvan Beach v. Travelers Indem. Co., 55 F.3d 114, 115 (2d
Cir. 1995)); see Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992)
(ʺIn reviewing a written contract, a trial courtʹs primary objective is to give effect to the
intent of the parties as revealed by the language they chose to use.ʺ). Words and
phrases in a contract are to be given their plain meaning and the contract is to be
construed ʺto give full meaning and effect to all of its provisions.ʺ Olin, 704 F.3d at 99
(quoting LaSalle Bank Natʹl Assʹn v. Nomura Asset Capital Corp., 424 F.3d 195, 206 (2d Cir.
2005)).
2 The parties agree that New York law applies.
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If, however, the court determines that a provision in the insurance
contract is ambiguous, it may consider extrinsic evidence to discern the partiesʹ intent at
the formation of the contract. Morgan Stanley, 225 F.3d at 275‐76. A provision is
ambiguous if it ʺcould suggest ʹmore than one meaning when viewed objectively by a
reasonably intelligent person who has examined the context of the entire integrated
agreement and who is cognizant of the customs, practices, usages and terminology as
generally understood in the particular trade or business.ʹʺ Id. at 275 (quoting Lightfoot v.
Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997)).
Here, the parties dispute the scope of WQISʹs liability under Coverage C,
which requires WQIS to pay defense costs incurred with respect to ʺliabilities coveredʺ
under Coverage A. Coverage Cʹs limiting clause provides that the amounts payable for
defense costs are ʺin additionʺ to the $5 million limit on Coverage A liability. App. at
103, 106. WQIS asserts that ʺliabilities coveredʺ refers to claims that it must actually pay
out under Coverage A, such that its liability under Coverage C ends after it pays $5
million in liability under Coverage A. ACL, however, argues that ʺliabilities coveredʺ
are claims that WQIS could potentially pay out under Coverage A, without reference to
the $5 million limit, because the application of the limit would not change ʺwhether an
incident is the type of liability covered under Coverage A.ʺ Resp. & Reply Br. for Pls.‐
Appellants‐Cross‐Appellees at 18.
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We conclude that the language of the Policy is ambiguous. While
Coverage A and Coverage C could be read, as the district court concluded, as operating
independently of each other, a reasonably intelligent person who has considered the
context of the Policy as a whole and who is cognizant of the customs and practices of
the trade could conclude that WIQSʹs liability under Coverage C ceased once the
Coverage A limit was reached. See Morgan Stanley, 225 F.3d at 275 (describing when a
contract provision is ambiguous).
First, the phrase ʺliabilities coveredʺ in the Coverage C insuring provision
could reasonably be read to refer only to liabilities that WQIS was required to cover
under Coverage A, that is, up to $5 million per vessel. Under this interpretation, any
liability above $5 million was not ʺcovered,ʺ and therefore defense costs incurred with
respect to liabilities above $5 million did not arise from ʺliabilities covered.ʺ See
Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1219 (2d Cir. 1995),
modified on other grounds by 85 F.3d 49, 51 (2d Cir. 1996) (holding, where an insurance
policy indemnifies defense costs paid as a result of ʺoccurrence[s] covered,ʺ that the
insurer need only ʺreimburse defense costs for claims that are established to be covered
through judgment and settlement, and not for claims only potentially falling within the
policyʹs coverageʺ). A reasonable person could conclude that once the $5 million cap
was reached, ACL no longer had any ʺliabilities covered,ʺ and therefore WQIS was no
longer obliged to cover defense costs under Coverage C.
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Moreover, the phrase ʺin additionʺ could be read consistently with that
construction as merely clarifying that WQIS accrues Coverage C costs, arising from
Coverage A liabilities for which it must actually pay, on top of the limit on Coverage A
indemnity. Under this interpretation, even though there was no explicit dollar
limitation on the amount of Coverage C liability, the parties intended for WQIS to cease
paying defense costs under Coverage C once it no longer had to indemnify under
Coverage A.
Second, WQISʹs interpretation of the Policy is supported by the overall
structure and purpose of the Policy. WQIS argues that the parties could not have
intended its obligation to indemnify defense costs under Coverage C to continue after
the Coverage A limit was exhausted. Such an interpretation of the partiesʹ intent could
result in WQISʹs paying for defense costs far in excess of the $5 million limit on liability,
and it would require WQIS to have responsibility for reimbursing defense costs even
when it no longer had an interest in defending or minimizing liability for the incident.
A reasonable person could conclude that this could not have been what the parties
intended. Mastrovincenzo v. City of New York, 435 F.3d 78, 104 (2d Cir. 2006) (holding
that contracts should be interpreted to avoid absurd results).
Third, to the extent extrinsic evidence is relevant ‐‐ and we think it is ‐‐ the
record contains extrinsic evidence to support WQISʹs assertion that the parties could not
have intended that its obligation to pay for defense costs under Coverage C continued
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after it exhausted the limits under Coverage A. For example, WQIS submitted two
affidavits by its Vice President of Claims declaring that, after WQIS exhausted its
$5 million of liability under the Policy, (1) its employees withdrew from the oil spill
response and cleanup efforts; (2) plaintiffs separately hired WQISʹs spill response team,
with WQISʹs permission, to continue managing the oil spill response and cleanup
efforts; (3) the excess insurers fully reimbursed ACL for all incurred defense costs;
(4) ACL did not request or receive WQISʹs consent prior to incurring the defense costs;
and (5) ACL did not submit a claim for defense costs to WQIS until after filing this
action. The record also includes an affidavit from the representative of an excess
insurer stating that WQIS ceased its active participation in ACLʹs claims after reaching
$5 million of liability under the Policy. The partiesʹ actions after the $5 million limit was
reached provide some evidence of their intent and the customs and practices of the
industry. See Hoyt v. Andreucci, 433 F.3d 320, 332 (2d Cir. 2006) (holding that extrinsic
evidence of the partiesʹ course of conduct may be considered where the contract
language is ambiguous); Mellon Bank, N.A. v. United Bank Corp. of N.Y., 31 F.3d 113, 116
(2d Cir. 1994) (concluding that, because the contract language was ambiguous, the
district court should have considered extrinsic evidence of the partiesʹ conduct after the
alleged breach of contract).
Accordingly, we vacate the award of partial judgment on the pleadings
and remand the matter for the district court to assess the extrinsic evidence as well as
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any further evidence adduced through discovery and give effect to the intent of the
parties.
C. Repudiation
Plaintiffs appeal the district courtʹs award of partial summary judgment in
WQISʹs favor on the issue of repudiation. Although it is not clear that repudiation will
remain an issue after the district court resolves the question of interpretation of the
Policy on remand, we consider plaintiffsʹ arguments given that the issue is clear and
fully briefed.
We review an award of summary judgment de novo and will affirm only if
the record, viewed in the light most favorable to the party against whom judgment was
entered, shows there are no genuine issues of material fact and the moving party is
entitled to judgment as a matter of law. Barfield v. N.Y.C. Health & Hosps. Corp., 537 F.3d
132, 140 (2d Cir. 2008). In New York, ʺa repudiation of liability by an insurer on the
ground that the loss is not covered by the policy operates as a waiver of the notice
requirements contained in the policy.ʺ Burt Rigid Box, Inc. v. Travelers Prop. Cas. Corp.,
302 F.3d 83, 96 (2d Cir. 2002). The party claiming repudiation must show that the other
party ʺdistinctly, unequivocally, and absolutely refused to perform its obligations under
the policy,ʺ Varda, Inc. v. Ins. Co. of N. Am., 45 F.3d 634, 638 (2d Cir. 1995), by denying its
ʺintention or [] duty to shape its conduct in accordance with the provisions of the
contract,ʺ Seward Park Hous. Corp. v. Greater N.Y. Mut. Ins. Co., 836 N.Y.S.2d 99, 105 (1st
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Depʹt 2007) (quoting Wurm v. Commercial Ins. Co. of Newark, 766 N.Y.S.2d 8, 12 (1st Depʹt
2003)). There is no repudiation if the insurer, in denying liability under the insurance
contract, appeals to the authority of the provisions and endeavors to apply them. Id.
Here, upon de novo review of the record and under the above principles,
we conclude the district court properly held that WQISʹs conduct constituted a
disclaimer of coverage under the contract, not a repudiation of its contractual
obligations. We therefore affirm the district courtʹs grant of partial summary judgment
on the issue for substantially the reasons given by the magistrate judge in his report and
recommendation, which the district court accepted and adopted in its April 8, 2014
order.
* * *
Accordingly, we AFFIRM the judgment of the district court to the extent it
granted partial summary judgment on the issue of repudiation, and we VACATE the
judgment to the extent it granted partial judgment on the pleadings on the issue of
contract interpretation. We REMAND for further proceedings consistent with this
order.
FOR THE COURT:
Catherine OʹHagan Wolfe, Clerk
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