Court Opinion

ID: 53045
Source: CourtListenerOpinion
Date Created: 2010-04-26 01:22:15+00
Date Added: 2024-06-11T14:58:21.135409
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT United States Court of Appeals
                                                   Fifth Circuit

                                                                            FILED
                                                                         October 25, 2007

                                       No. 06-30955                   Charles R. Fulbruge III
                                                                              Clerk

NORTH AMERICAN SPECIALTY INSURANCE COMPANY,
formerly known as Underwriters Insurance Company

                                                  Plaintiff-Appellant
v.

DEBIS FINANCIAL SERVICES INC

                                                  Defendant-Appellee

                   Appeals from the United States District Court
                       for the Eastern District of Louisiana
                                  (2:04-CV-140)

Before DAVIS, WIENER, and PRADO, Circuit Judges.
WIENER, Circuit Judge.*
       North American Specialty Insurance Company, formerly known as
Underwriters Insurance Company (“Underwriters”), appeals the district court’s
dismissal of its action to recover monies paid to Debis Financial Services Inc.
(“Debis”) as an additional payee under a Hull Insurance Policy issued by
Underwriters to Offshore Marine Contractors Inc. (“Offshore Marine”). We
affirm.

       *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
                                  No. 06-30955

                         I. FACTS & PROCEEDINGS
      In 1994, Offshore Marine purchased a jack-up barge named the L/B
ATLAS. Following the purchase, Debis loaned funds to Offshore Marine secured
by a mortgage on the ATLAS. At all relevant times, the ATLAS was insured by
Underwriters under a policy that contained both Hull & Machinery coverage
(“Hull Policy”) and Protection & Indemnity coverage (“P&I”).           Debis, as
mortgagee, was listed as a loss payee under the Hull Policy. In addition, Debis
was named as an insured under a “Single Interest Mortgagee Form,” which
separately insured Debis for up to $2 million in the event that Offshore Marine
should breach its warranty of the ATLAS’s seaworthiness, an event that would
prevent Offshore Marine (and thus Debis as its mortgagee) from recovering
under the Hull Policy.
      In August 2000, the ATLAS departed from Cameron, Louisiana, headed
for the Matrix Oil & Gas production platform. The next day, the ATLAS sank
in the Gulf of Mexico while attempting to jack-up at a Matrix facility. The vessel
was a total constructive loss.
      Offshore Marine reported the incident to Underwriters, which retained
Andrew Wilson, esq., of Burke & Mayer, Attorneys, to represent itself and
Offshore Marine in connection with property damage claims arising from the
sinking of the ATLAS. Underwriters also retained the consulting firm of Steege
Kingston & Associates to investigate the cause of the sinking. During its
investigation, Steege Kingston became aware of allegations that Offshore Marine
had ordered the captain of the ATLAS to commence the voyage in the face of
knowledge that the vessel’s jacking system was known to be malfunctioning. A
known pre-voyage problem with the jacking system would breach the warranty
of seaworthiness that was implied in the Hull Policy, which breach would void
coverage. Although Offshore Marine denied any prior knowledge of a problem
with the jacking system, it turned out that both Steege Kingston and Attorney

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                                 No. 06-30955

Wilson had reported allegations of the ATLAS’s unseaworthiness to
Underwriters.
     Section 5.2 of Steege Kingston’s second report stated:
            We have had no access to the crew since the casualty.
     Investigating officers from the USCG Marine Safety Office at Port
     Arthur, Texas have interviewed the crew as of August 30, 2000. We
     have queried the [United States Coast Guard] as to their
     preliminary findings, and while they are generally unwilling to
     divulge such findings, they have indicated that the crew reported
     they experienced a problem with the jacking gear of the port aft leg
     prior to departure to WC192A. Again, while we have not had access
     to the crew, we have queried [Offshore Marine which] indicates [it]
     was unaware of any problem with the port aft leg jacking system.
            [Offshore Marine] further states that when the crew
     experienced the initial problems at WC192A and called into the
     office, they were advised to cease any and all jacking evolutions,
     evacuate al personnel to the platform and await arrival of a relief
     liftboat to offload the deck cargo. [Offshore Marine] state that he
     thinks the resultant failure at the port aft leg occurred because the
     Master attempted to level the vessel prior to arrival of the relief
     vessel. Our investigation continues.
     Mr. Wilson reported:
     we have recently received information from counsel for Matrix
     indicating that the master of the L/B ATLAS at the time of this
     incident has allegedly admitted to the “company man” onboard the
     liftboat that the jacking mechanism for the port stern leg was
     malfunctioning at the dock or at some prior location before the
     voyage which led to this loss. It is unclear when the admission was
     allegedly made. This is the same jacking mechanism which
     purportedly failed at the time of the incident and purportedly
     caused the loss, according to the information we have received to
     date.
            Counsel for Matrix also recently advised that his
     representatives have told him that the master of the L/B ATLAS
     had previously reported the problems with the jacking mechanism
     to [Offshore Marine’s] representatives by cell phone repeatedly on
     several occasions some of which were just prior to the loss, but was
     told to proceed and to not report this information to Matrix. Finally,
     counsel for Matrix advised that, according to his information, this

                                       3
                                      No. 06-30955

       account of the incident has been reported by the crewmembers to
       the United States Coast Guard’s Marine Safety Office in Port
       Arthur.

       Ultimately, Underwriters decided to pay the full amount of the Hull
Policy, plus expenses for the salvage and removal of the wrecked liftboat. In so
doing, Underwriters carved out $3,763,840.97 and paid it directly to Debis as
vessel mortgagee and named loss payee under the Hull Policy.1 Underwriters
did not issue a reservation-of-rights letter in connection with payments to either
Offshore Marine or Debis.
       Thereafter, Offshore Marine initiated limitation of liability proceedings in
the district court.      Mr. Wilson again represented the interests of both
Underwriters and Offshore Marine. Offshore Marine continued to deny any
liability to third parties for losses or injuries arising out of the ATLAS’s sinking.
       Following the completion of discovery, Mr. Wilson informed Underwriters
that the depositions and other discovery materials confirmed that Offshore
Marine had indeed known about the faulty jacking system prior to ordering the
captain of the ATLAS to sail from Cameron on the vessel’s fateful voyage.
Specifically, telephone records confirmed that several calls had been made to
Offshore Marine or its principals from a payphone at the dock from which the
vessel departed. In October 2002, Underwriters settled third-party personal
injury and property damage claims arising out of the sinking of the ATLAS.
       In January 2004, Underwriters filed the instant action against Offshore
Marine and Debis, seeking a declaration that Underwriters was not liable for
any payments made under the Hull Policy and is thus entitled to reimbursement
of the payments made to those defendants, including costs and attorneys fees.

       1
         Underwriters is seeking to recover only $1,763,840.97 of the $3,763,840.97 that it
previously paid to Debis, in essence acknowledging that Debis would be entitled to the $2
million difference by virtue of the above mentioned Single Interest Mortgagee Form that would
provide coverage to Debis in the event of a breach of warranty by Offshore Marine.

                                             4
                                         No. 06-30955

After completion of discovery, both Offshore Marine and Debis filed motions for
summary judgment. Offshore Marine asserted that it was entitled to summary
judgment because (1) Underwriters waived its policy defense by failing to
reserve its rights or obtain a nonwaiver agreement while continuing to defend
Offshore Marine in the limitation proceeding, (2) Underwriters was barred from
bringing its claim because of the preclusive effect of the limitation proceeding,
and (3) Underwriters’s claim was barred by the doctrine of judicial estoppel. In
its motion for summary judgment, Debis expressly adopted Offshore Marine’s
arguments regarding preclusion and judicial estoppel,2 and additionally insisted
that (1) Underwriters’s claim was barred by the doctrine of laches, and (2)
Underwriters had no cause of action under Louisiana’s law governing recovery
of a thing not owed.3
      Following oral argument, the district court granted summary judgment in
favor of both Offshore Marine and Debis, dismissing Underwriters’s lawsuit. As
to Offshore Marine, the court held that Underwriters had waived all coverage
and policy defenses by failing to investigate allegations of unseaworthiness
further or to issue a reservation-of-rights letter prior to making payment under
the policy. As to Debis, the court addressed only its defenses of laches and no
cause of action under the Louisiana Civil Code. Relying in part on Pilgrim Life
Insurance Co. of America v. American Bank & Trust Co. of Opelousas,4 the court
held that Louisiana Civil Code article 2302 [current article 2299], which provides
the quasi-contractual basis for a recovery claim like the one advanced by
Underwriters against Debis, does not apply, so Debis is not required to

      2
          Debis, in its reply memorandum to Underwriters’s memorandum in opposition to
summary judgment, also adopted Offshore Marine’s waiver argument to the extent that the
district court should determine Debis to be an additional insured under the Hull Policy.
      3
          See La. Civ. Code. arts. 2299 et seq.
      4
          542 So.2d 804 (La. App. 3d Cir. 1989).

                                                  5
                                          No. 06-30955

reimburse Underwriters. This, the court explained, is because Debis, as loss
payee under the Hull Policy, was an innocent mortgagee which accepted the
payment in good faith and was thus immune from a claim for recovery under the
otherwise applicable provisions of the Civil Code.
         Underwriters timely filed a notice of appeal. Shortly thereafter, however,
Underwriters entered into a settlement agreement with Offshore Marine and
dismissed it as a party to this appeal. Underwriters now seeks to recover solely
from Debis, with which it has not settled.
         Debis urges on appeal that collateral estoppel applies to that court’s
holding on the issue of waiver, precluding Underwriters’s recovery from Debis.
Underwriters counters that, because it settled with Offshore Marine before the
judgment appealed from became final, the district court’s ruling cannot support
collateral estoppel vis a vis Debis. We have assumed arguendo, however, that
(1) collateral estoppel does not apply, and (2) Underwriters would not be
precluded from recovering from Debis under Louisiana Civil Code article 2299,
and have proceeded to examine Underwriters’s purported waiver of the Hull
Policy defense of unseaworthiness. As we explain below, that examination has
convinced us to adopt the district court’s waiver analysis and hold that it was
correct as to Offshore Marine and that it applies equally to Debis.5
                                         II. ANALYSIS
A. Standard of Review
         We review de novo a district court’s grant of summary judgment.6 Absent
a specific and controlling federal rule, cases involving marine insurance

         5
      Although the district court did not explicitly address the issue of waiver as between
Underwriters and Debis, we may affirm the district court’s decision on alternative grounds.
McGruder v. Will, 204 F.3d 220, 222 (5th Cir. 2000).
         6
             Am. Int’l Specialty Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254, 260 (5th Cir.
2003).

                                                 6
                                         No. 06-30955

contracts are governed by state law.7 As there are no specific and controlling
federal admiralty rules involving breach of warranty in contracts of marine
insurance, state law governs.8 And, as Underwriters issued and delivered the
insurance policy to Offshore Marine in Louisiana, we apply Louisiana law.9
B. Merits
       Underwriters contends that it did not waive its right to assert the defense
of unseaworthiness, because (1) it was unable to investigate the allegations of
the ATLAS’s unseaworthiness further, and (2) it did not have “actual facts”
indicating noncoverage at the time it paid Offshore Marine. We find neither of
these arguments persuasive.
       “Waiver is generally understood to be the intentional relinquishment of a
known existing legal right.”10 For waiver to occur, there must be an existing
right, knowledge of its existence, and either an actual intention to relinquish
that right or conduct so inconsistent with the intent to enforce the right as to
induce a reasonable belief that it has been relinquished.11 Under Louisiana law,
“when an insurer, with knowledge of facts indicating noncoverage under the
insurance policy, assumes or continues the insured’s defense without obtaining
a nonwaiver agreement to reserve its coverage defense, the insurer waives such

       7
           Elevating Boats, Inc. v. Gulf Coast Marine, Inc., 766 F.2d 195, 198 (5th Cir. 1985).
       8
        Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 320 (1955); Ins. Co. of N.
Am. v. W. of England Shipowners Mut. Ins. Ass’n, 890 F. Supp. 1302, 1305-06 (E.D. La. 1995).
       9
           Elevating Boats, Inc., 766 F.2d at 198.
       10
            Peavey Co. v. M/V ANPA, 971 F.2d 1168, 1175 (5th Cir. 1992).
       11
            Steptore v. Masco Constr. Co., 643 So.2d 1213, 1216 (La. 1994).

                                                7
                                  No. 06-30955

policy defense.”12 Additionally, “notice of facts which would cause a reasonable
person to inquire further imposes a duty of investigation upon the insurer.”13
      Underwriters was aware that the ATLAS’s crewmembers and counsel for
Matrix had reported that the ATLAS was unseaworthy at the time it left the
port. Despite having knowledge of these allegations, Underwriters paid Offshore
Marine and Debis, and continued its joint representation without obtaining a
nonwaiver agreement or issuing a reservation-of-rights letter. Underwriters
nevertheless persists in contending that waiver should not apply, urging that it
could not fully investigate the allegations of unseaworthiness without
prejudicing Offshore Marine in the personal injury litigation. We cannot agree.
Underwriters could have preserved its rights by issuing a reservation-of-rights
letter. By failing to do so, Underwriters waived its right to assert the defense of
unseaworthiness.
      Underwriters also contends that waiver does not apply because it was not
aware of “actual facts” indicating noncoverage.             We again disagree.
Underwriters cannot dispute that it received at least two separate reports
indicating that Offshore Marine knew there was a problem with the vessel prior
to its sailing for the Matrix facility. Specifically, counsel for Matrix reported
that “the master of the L/B ATLAS had previously reported problems to
[Offshore Marine’s] representatives by cell phone,” and that, despite these calls,
the ATLAS departed for the Matrix Oil Facility. Had Underwriters reasonably
investigated these allegations, it would surely have unearthed additional
evidence indicating that Offshore Marine breached its warranty of
seaworthiness. To his credit, counsel for Underwriters acknowledged at oral
argument that Underwriters was aware of the possibility that the loss might not

      12
           Id.
      13
           Id.

                                        8
                                      No. 06-30955

be covered, but weighed the economics of the competing positions and elected to
disregard the allegations of unseaworthiness and pay the full amount due under
the Hull Policy, hoping to avoid liability to potential third party claimants.
Underwriters cannot seriously contend that it was “unaware of facts that
indicate non-coverage.”
       We agree with the district court’s waiver analysis and its conclusion that
Underwriters waived its right to assert unseaworthiness as a defense to its
liability under the Hull Policy. Even though the district court explicitly
addressed the application of waiver as between Underwriters and Offshore
Marine, we are convinced that waiver applies equally to Debis. As Offshore
Marine’s mortgagee, Debis recovered from Underwriters as loss payee under the
Hull Policy by virtue of standing in the shoes of Offshore Marine; Underwriters
did not pay Debis as an additional named insured under the Hull Policy or as a
named insured under the Single Interest Mortgagee Form. As Debis recovered
derivatively through Offshore Marine, it is entitled to no less rights and defenses
against Underwriters’s quasi-contractual claims to recovery than those to which
Offshore Marine was entitled to assert. Underwriters’s waiver of the defense of
unseaworthiness bars its recovery claim against Debis to no less extent than
that defense barred its recovery claim against Offshore Marine.14
                                  III. CONCLUSION
       We adopt the district court’s waiver analysis and hold that
Underwriters waived the defense of unseaworthiness. Debis recovered under
the loss payee provision of the Hull Policy as Offshore Marine’s mortgagee, so
Underwriters’s waiver of the defense of unseaworthiness bars recoupment of
the monies paid to Debis. Accordingly, the district court did not err in

       14
         Given our holding that Underwriters cannot recover from Debis because it waived the
defense of unseaworthiness, we need not and therefore do not reach the issues of collateral
estoppel or recovery under Louisiana Civil Code article 2299.

                                             9
                                   No. 06-30955

granting Debis’s motion for summary judgment, dismissing Underwriters’s
claim of recovery against Debis.
AFFIRMED.

                                       10