Opinion ID: 1774526
Heading Depth: 2
Heading Rank: 1

Heading: Federal Court Findings

Text: We must first ascertain exactly what issues were decided in the federal action to determine whether those findings might preclude Kenneco's claims in its state court action. Although Kenneco's federal action was brought against both the London and the Brazilian underwriters, for our purposes we need address only the claims against the London underwriters. J & H was not a party in the federal action; but, several of its employees were called to testify in that case. The federal district court concluded that the London underwriters were not liable for contingency coverage. Kenneco argued that the back-to-back C.I.F. requirement was waived by the London underwriters' retention of Kenneco's premium. The district court rejected this argument, finding that the London underwriters did not waive their reservation of coverage, despite the fact that they received and retained the premium from Kenneco. As to J & H's conduct, the court stated, [I]t appears that Johnson & Higgins did not clearly understand the situation and mistakenly billed Armada for a premium for contingency coverage. Armada Supply, 665 F.Supp. at 1062. The court further noted that Johnson & Higgins billed Armada for the contingency coverage premium before the question of coverage was resolved. Id. at 1067. The court did not, however, determine whether J & H was or was not liable to Kenneco. The federal district court also considered whether the London underwriters were liable for Kenneco's lost profits on the Sun contract under the increased value provision. The court reasoned that the increased value coverage included physical loss or damage to the cargo, but not the loss of a contract or its profits. Id. at 1051. The court squarely addressed Kenneco's argument that even if the normal interpretation of [the coverage provision] would not allow recovery for loss of profits [on a contract], nevertheless there was a separate agreement to provide such coverage for this cargo. Id. at 1050. The district court held that no such separate agreement was made, explicitly finding that J & H did not make an agreement binding the London underwriters ... to coverage of the lost profits on the Sun contract, that [J & H] did not purport to make such an agreement, and that [J & H] had neither actual nor apparent authority to do so. Id. at 1051. It is significant to note that these findings relate to the loss of profits coverage under the increased value provision and not to contingency coverage. In its conclusions of law regarding increased value coverage, the federal district court phrased the issue as follows: [Kenneco] contends that Johnson & Higgins agreed that the London insurance would cover lost profits on the Sun contract. Id. at 1058. The court found as a fact that Johnson & Higgins did not purport to make any agreement to insure the Sun contract or the profits on that contract, and found that J & H had no actual or apparent authority to do so. Id. at 1066-67. Finally, the court concluded that, as a matter of fact and law, no agreement was made at the November 30 meeting binding the London underwriters to insurance against loss of the Sun contract or the profits thereon. Id. at 1067. The district court also made other specific findings about what occurred at the November 30 meeting. The court drew the distinction between the concept of increasing the insured value based on the amount of a contract and the concept of insuring against the loss of a contract as such, finding that only the former was discussed at the November 30 meeting. Id. at 1059. The court also found that Brown said nothing which apprised Anderson that [Kenneco] wished to have coverage that would depart from the normal marine insurance and would cover possible loss of a contract. Brown did not testify in words or substance that Anderson ever agreed to such a thing. Id. at 1059-60. The court continued, There is nothing in Anderson's testimony to indicate that he was agreeing to insure against the loss of the Sun contract or the profits on that contract. Certainly Anderson did not agree to something other than the normal particular average method of adjustment in the case of a contamination loss. Id. at 1061. Again, these conclusions by the court relate to lost profits under the increased value provisions rather than contingency coverage. Kenneco appealed the district court's ruling to the Second Circuit. The Second Circuit generally affirmed the district court's findings regarding increased value coverage that: (1) Brown and Anderson did not discuss insurance against loss of profits for the Sun contract at the November 30 meeting; (2) Brown did not ask for, nor did Anderson agree to, coverage on lost profits; (3) Anderson's testimony was consistent with the London underwriters' position that the increased value coverage insured against cargo loss or damage rather than lost profits; (4) what was actually discussed was Kenneco's desire to protect its profits by utilizing the increased value coverage; and (5) Brown and Anderson did not discuss the difference between increasing the insured value based on the amount of the contract and insuring against the loss of a contract as such. Armada Supply, 858 F.2d at 851. The Second Circuit found that these findings were not clearly erroneous. Id. The court also reviewed and affirmed the finding that J & H lacked authority to bind the London underwriters. Id. Finally, the court explicitly upheld the district court's conclusion that as a matter of fact and law, no agreement was made at the November 30 meeting binding the London underwriters to insurance against loss of the Sun contract or the profits thereon. Id. The Second Circuit also upheld the district court's finding that the London underwriters were not liable for contingency coverage. Id. at 852. The court addressed Kenneco's claim that the London underwriters' acceptance and retention of a premium for contingency coverage waived any objection they may have had to such coverage. Id. at 851. The court noted that the evidence indicates that J & H mistakenly billed Armada for [contingency] coverage before any question of coverage had been resolved and that the London underwriters denied coverage as soon as the facts of the transaction became fully known. Id. The court held that the payment of a premium alone does not justify the rewriting of an insurance contract, reasoning that waiver cannot change coverage. Id. at 851-52. Thus, the court concluded that coverage could not be created where none clearly existed. Id. at 852.