Hilton Oil Transport v. Jonas

United States Court of Appeals,

Eleventh Circuit.

No. 94-5254.

HILTON OIL TRANSPORT, a foreign entity, Plaintiff-Counter-
Defendant-Appellee,

v.

T.E. JONAS, as lead underwriter, and all of those Lloyd's of
London Underwriters subscribing to Policy number BH 89 3404,
Cornhill Insurance PLC, as lead underwiter, and all those members
of the
institute of London Underwriters subscribing to Policy number
BH 89 3404, Defendants-Counter-Claimants-Appellants,

Feb. 20, 1996.

Appeal from the United States District Court for the Southern
District of Florida. (No. 91-410-CIV-CCA), C. Clyde Atkins, Judge.

Before COX, Circuit Judge, DYER, Senior Circuit Judge, and
GOETTEL*, Senior District Judge.

DYER, Senior Circuit Judge:

Claiming that the barge "Hilton" became a constructive total

loss as the result of a storm, the owner, Hilton Oil Transport,

sued T.E. Jonas, et al. (Underwriters) to recover under its policy

of marine insurance. Underwriters denied liability based upon the

breach of several warranties, including a trading limits warranty.

The district court found against the Underwriters and entered

summary judgment for Hilton Oil Transport. We conclude that there

were genuine issues of material facts concerning the alleged breach

of the trading warranty which precluded the entry of a summary

judgment. We reverse and remand.

*
Honorable Gerard L. Goettel, Senior U.S. District Judge for
the Southern District of New York, sitting by designation.
 Background

Hilton Oil Transport owned the barge "Hilton." In May 1990

Hilton requested hull and machinery insurance on Barge "Hilton"

through its New York insurance broker John Sexton & Associates,

Inc. (Sexton). In turn, Sexton contacted Citicorp Insurance

Brokers (Marine) Limited (Citicorp), a London broker authorized to

place insurance with Underwriters at Lloyd's. Citicorp requested

in its application for a quotation for hull and machinery

insurance, and the Underwriters agreed to a quotation for the

following trade limits: "Limited to East Coast of USA, Gulf of

Mexico and the West Indies or held covered."

In late August 1990 Hilton entered into a charter with Rio

Energy International, Inc. (Rio) for two voyages to Puerto Cortes,

Honduras. Hilton did not advise Sexton, Citicorp or the insurers

of barge "Hilton" of the voyages to Puerto Cortes, Honduras, nor

did it request that barge "Hilton" be "held covered" for the

voyages or agree to pay an additional premium.

Early in September 1990 the tug "OTC Elizabeth" picked up

barge "Hilton" in Puerto Rico. It was towed to Amuay, Venezuela to

load asphalt for the Government of Honduras. Later the tug and

barge voyaged to Puerto Cortes, Honduras. A month after arrival,

barge "Hilton" was towed to Puerto Castilla, Honduras. On November

4, 1990, after completion of the cargo discharge, Hilton ordered

the tug and barge to sail to Puerto Rico. However, the port

officials refused to issue a sailing clearance to depart from

Puerto Castilla because the Honduran government was asserting

claims against the barge "Hilton." On November 11, 1990, the barge
remained moored at a berth which was unsafe in heavy weather. That

night during a storm, the mooring lines broke and the barge was

carried into an area of rock rip-rap and became a constructive

total loss.

On December 13, 1990 Hilton initiated a claim against

Underwriters. They denied coverage on December 19, 1990.

Procedural History

Hilton Oil Transport sued the Underwriters to recover on a

marine insurance policy for the constructive total loss of its

barge "Hilton." Underwriters denied that coverage existed for the

alleged loss because the barge was outside of the trading limits

specified by the hull and machinery insurance. They also relied on

exclusions and other breaches of warranty precluding coverage.

Both Hilton and Underwriters moved for partial summary judgment as

to liability.

The district court concluded that the loss of the barge Hilton

occurred outside of the trading limits warranty but that there was

coverage under the policy by virtue of the "held covered" clause

contained in the cover note, that the Underwriters' other defenses

were unavailing and therefore entered a partial summary judgment as

to liability in favor of Hilton Oil Transport. Subsequently, a

bench trial was held on damages. This appeal ensued.

Issue On Appeal

Was it error for the district court to determine on summary

judgment that coverage under the policy existed by virtue of the
"held covered" clause in the cover note.1

Discussion

The liability vel non of the Underwriters hinges on the

application of the "held covered" clause to the facts of this case.

The crucial question to be resolved is whether Overman, the

managing director of Hilton Oil Transport, intentionally breached

the trading limits warranty without notice to the Underwriters.

In the absence of a "held covered" clause "[a] breach of

warranty discharges the insurer from liability and deprives the

assured from recourse against the insurer, whether the loss can be

traced to the breach or not and even though such breach was

innocently or inadvertently committed by the assured." Long, "Held

Covered" Clauses in Marine Insurance Policies, 24 Ins.Counsel

Journal 401, 402. The admiralty cases that support this principle

are legion and form a judicially established and entrenched federal

admiralty rule. Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348

U.S. 310, 315, 75 S.Ct. 368, 371, 99 L.Ed. 337 (1955). Thus, in

the absence of a "held covered" clause, federal admiralty law, not

state law, would control. The district court decided, however,

1
Underwriters insist on this appeal that the district court
lacked diversity jurisdiction. This argument has already been
considered and rejected by this Court in Case No. 92-4208 decided
on September 29, 1992 and constitutes the law of the case.
Burger King Corp. v. Pilgrim's Pride Corp., 15 F.3d 166 (11th
Cir.1994).

We have considered Underwriters' claims of
noncompliance with policy conditions (U.S. Coast Guard
certified), policy exclusions for losses caused by arrest
and detainment, war risks and strike clauses, and Hilton
Oil's breach of its duty of good faith and fair dealing. We
find that these claims are meritless and affirm without
opinion. See 11th Cir.R. 36-1.
that the "held covered" clause was applicable in this case and

since there was no firmly established federal admiralty law

governing "held covered" cases, Wilburn Boat dictated that state

law applies.

Because the consequences of a breach of warranty are so

serious, "it was reasonable for Underwriters to find some

appropriate means of protecting the assured against such

consequences, provided Underwriters, by so doing, were not

prejudiced by being intentionally committed by the assured to a

risk different in character from that contemplated at the time the

policy contract was effected." Long at 402 (emphasis in the

original). In Campbell v. Hartford Fire Ins. Co., 533 F.2d 496

(9th Cir.1976) Judge, now Mr. Justice Kennedy iterated this

principle. "By including the clause ["held covered'], the insurer

accepts the greater risk occasioned by a possible failure to comply

with those warranties, on condition that the breach is not wilful,

the assured gives prompt notice in the event a breach occurs and

agrees to pay an additional premium." Id. at 497-98 (footnote

omitted). At oral argument counsel for Hilton agreed that a wilful

breach of the trading limits warranty would vitiate the "held

covered" provision.

The dilemma as to whether the "held covered" clause applies in

this case arises from a factual dispute between the parties.

Overman, the managing director of Hilton, asserts that although he

knew where the barge was located at the time of the loss, he

believed that it was within the trading limits specified in the

cover note. Underwriters take the position that Overman
intentionally breached the trading limits warranty. On oral

argument counsel conceded that the district court did not try this

disputed issue.

We review de novo grants of summary judgment. Summary

judgment is affirmed if, when reviewing the evidence in the light

most favorable to the losing party, the court finds that no genuine

issue of material fact exists and that the moving party was

entitled to judgment as a matter of law. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91

L.Ed.2d 202 (1986); National Association for the Advancement of

Colored People v. Hunt, 891 F.2d 1555, 1559 (11th Cir.1990). It is

apparent that there are genuine issues of material fact in this

case that must be determined by a trial. If it is found that

Hilton did not intentionally breach the trading limits warranty,

"held covered" would apply and Hilton will prevail. If Hilton

intentionally breached the trading limits warranty, Underwriters

will prevail.

One tag end remains under the sue and labor clause of the

policy. Hilton took necessary action to mitigate damage arising

out of a covered peril. See, e.g., Blasser Brothers, Inc. v.

Northern Pan-American Line, 628 F.2d 376, 386 (5th Cir.1980),

Reliance Ins. Co. v. The Escapade, 280 F.2d 482, 489 (5th

Cir.1960). Hilton was successful in its efforts in an arbitration

proceeding in New York and received $583,000 from Rio Energy for

damages to barge Hilton, plus interest and expenses. Rio satisfied

the judgment in favor of Hilton by depositing the recovery in an

interpleader action brought by Oil Transport, S.A. v. Hilton Oil
Transport and Rio Energy International, Inc. in the United States

District Court for the Southern District of Texas, Houston

Division.

Underwriters argue that if they are held liable to Hilton for

damages to the barge Hilton, they are entitled to a credit or set

off from the amount recovered by Hilton from Rio Energy. Hilton

contends that in the event Underwriters are liable to it for the

damage to the barge, Underwriters must file their claim in the

interpleader action in Texas.2 In the event Underwriters are found

liable to Hilton for damages to the barge, Underwriters must pay

the reasonable sue and labor expenses to Hilton. Underwriters are

not required to file a claim in an interpleader action in Texas.

The amount of any recovery that Hilton obtained against Rio Energy

must be set off against the amount otherwise recoverable by Hilton

Oil in this case.

REVERSED and REMANDED for further proceedings consistent with

this opinion.

2
The District Court apparently agrees with Hilton because by
a footnote to an Order entered on October 18, 1994, it "reminded"
Underwriters that the sue and labor claim was now ripe to file in
the Texas interpleader action.