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,

(2d Cir. 2010) (citing Johnson v. Rowley,

,

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,

(2d Cir. 2009) (quoting Miller v. Wolpoff

& Abramson, L.L.P.,

(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.,

(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.,

, 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.,

(2d

Cir. 1995)); see Seiden Assocs., Inc. v. ANC Holdings, Inc.,

(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,

(quoting LaSalle Bank Natʹl Assʹn v. Nomura Asset Capital Corp.,

(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

at 275 (quoting Lightfoot v.

Union Carbide Corp.,

(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.,

(2d Cir. 1995),

modified on other grounds by

(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,

(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,

(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.,

(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.,

(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.,

, 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.,

(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.,

(1st

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Depʹt 2007) (quoting Wurm v. Commercial Ins. Co. of Newark,

(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.

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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