Chemical Equipment Labs, Inc. (“CEL”) sued Travelers Property Casualty Company of America (“Traveler”) to seek insurance coverage under two insurances: a Custom Cargo Policy (ZOC-51M1777A-14-ND) (“Cargo Policy”) and the Charter’s Legal Liability Policy (ZOL-91M17422) (“Liability Policy”). CEL requested a declaratory judgment and damages for breach of contract and bad faith. Travelers sought a declaratory judgment claiming that there was no cover under any of the insurances and claiming compensation for costs incurred when defending the plaintiff in an earlier arbitration proceeding concerning the cargo in question.. IN Chemical Equipment Labs, Inc. v. Travelers Property Casualty Company Of America, Civil Action No. 19-3441, United States District Court, ED Pennsylvania (April 1, 2022) USDC dealt with claims of breach of contract and bad faith.
Statement of undisputed facts
On 30 April 2014, the plaintiff entered into a sales agreement with Servicios Y Suministros Petroleros Y Gasiferos (“SSP & G”) to purchase 300,000 tonnes of Venezuelan industrial road salt (the “sales agreement”). The sales agreement required the seller SSP & G to provide all export permits and documentation, and provided that payment was made upon presentation of shipping documents, including bill of lading, within three days of the transporting vessel’s voyage.
On 4 December 2014, the plaintiff entered into an agreement with Pioneer Navigation Ltd. (“Pioneer”) to charter the ship “GENCO OCEAN” to transport a consignment of industrial road salt from Araya, Venezuela to the United States. GENCO OCEAN submitted its notification of readiness to load on 11 December 2014. The loading of the plaintiff’s industrial salt began at approx. 21.00 local time on 11 December 2014. At approx. At 11.20 on 12 December 2014, the cargo operations were ordered to be stopped. Venezuela tull. By then, about 11,000 tons of salt had already been loaded on the ship. On December 22, 2014, Venezuelan customs officials ordered the ship to release the industrial road salt back onto the pier. GENCO OCEAN ended its emissions on December 29, 2014 and then left the port empty. Number of bills of lading were issued to the plaintiff.
Travelers had issued two policies to the plaintiff: a liability policy and a freight policy. Both policies were issued and countersigned in Pennsylvania.
On December 23, 2015, Pioneer initiated arbitration before the Society of Maritime Arbitrations (“SMA”) to a panel of three arbitrators in New York. Pioneer sought to recover $ 598,681.90 in damages arising from the plaintiff’s failure to perform under the GENCO OCEAN Charter Agreement on December 4, 2014. The plaintiff notified in a timely manner a potential claim for damages from Pioneer to its insurance broker, who forwarded the report to the defendant. In documents submitted to the defendant by the plaintiff for the purpose of calculating insurance premiums, GENCO OCEAN was one of five vessels identified and designated as “Never Sent”. Travelers confirmed that it would provide a defense for the plaintiff if arbitration was initiated, while formally reserving the right to later dispute whether the plaintiff was covered by the liability policy.
The SMA Panel considered that the Plaintiff had breached its contractual obligations and awarded Pioneer a total of $ 855,918.88: $ 598,721 for lost profits, $ 127,000 for legal fees, $ 96,197 for interest and $ 34,000 for arbitration fees.
Following the award, the travelers informed the plaintiff that they declined coverage under the liability policy for all damages specified in the final judgment.
Both parties agreed that the liability policy and the cargo policy were issued and countersigned in Pennsylvania. The parties did not dispute – that the liability and liability policy should be interpreted in accordance with Pennsylvania law.
Liability policy (ZOL-91M17422)
Travelers argued that the liability policy does not apply to the plaintiff’s claim because there was no ship damage to trigger coverage. According to the liability policy, the defendant agreed to indemnify the plaintiff for liability incurred under three specific circumstances: (a) “physical loss or damage to the chartered vessel”, (b) “damage to property, loss of life or bodily injury”, and ( c) “legal costs and / or fees or expenses of agents caused by the defense of a claim… are covered by this policy.” None of the events which would compel the defendant to indemnify the plaintiff occurred.
The plaintiff seeks redress for an arbitration award granted to Pioneer as a result of the failed transport of industrial salt at GENCO OCEAN. Since the arbitration arose from the plaintiff’s obligations regarding loss of cargo, clause 4 (d) makes it clear that the defendant is not obliged to provide coverage under the liability policy.
Cargo policy (ZOC-51M1777A-14-ND)
The plaintiff claims that the freight insurance is an “all-risk policy”, which means that the insured faces a lower burden to prove coverage than the high burden that the insurer faces to disprove coverage. The defendant agrees with the plaintiff’s assessment of the burden of proof, but argues that the plaintiff cannot establish even a prima facie cases for coverage according to the freight policy. Specifically, the defendant claimed that there is no coverage because:
- The plaintiff failed to pay the premiums;
- The plaintiff had no insurable interest;
- there was no “physical loss or damage” required by the policy; and,
- coverage was excluded under the FC & S. clause.
Since the court found that the plaintiff had failed to pay the premium on the cargo, the defendant’s remaining three arguments are disputed.
The parties disagree on the effect of the plaintiff’s listing of the GENCO OCEAN trip without a declared value and without a corresponding premium payment. The defendant claims that the plaintiff’s non-payment prevents coverage for losses in connection with the GENCO OCEAN trip.
According to the clear meaning of the freight policy, the plaintiff’s failure to declare a value for the salt cargo loaded on GENCO OCEAN, and failure to pay a corresponding premium, excludes coverage for resulting losses. The plaintiff provided no evidence that it paid a premium for the GENCO cargo or that the defendant agreed to any changes to the premium agreed within the four corners of the shipping policy. The plaintiff presents no evidence that this defendant’s specific conduct could be interpreted as agreeing to extend the coverage, despite non-payment of the full required premium.
Violation of insurance contract
In the light of the court’s position on the declaratory judgment, the plaintiff’s claim for breach of contract must also fail. Since the defendant had no obligation to perform under either the liability or liability policy, the defendant can not be held liable for breach of any of the insurance contracts.
Bad faith under 42 Pa.CS § 8371
Prosecution III in the plaintiff’s complaint alleges that the defendant showed bad faith in his handling of the plaintiff’s claims. In order to recover in bad faith, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the insurance and (2) that the insurer knew or carelessly disregarded its deficiency. on reasonable grounds Since the court ruled that the Plaintiff is not entitled to insurance coverage under the law, the Plaintiff’s claim of bad faith necessarily fails.
Compensation for the defendant’s costs of defending the plaintiff in arbitration
Under Pennsylvania law, an insurer is required to defend its insured if the actual allegations about the complaint on its face include damage that is actually or potentially within the scope of the insurance. As long as the complaint “may or may not” fall within the insurance’s coverage, the insurance company is obliged to defend. Consequently, it is the possibility, rather than the security, of a claim that falls within the insurance that triggers the insurer’s defense obligation. This obligation is not limited to meritorious acts. Reimbursement of defense costs requires an explicit provision in the written insurance contract. The USDC concluded that an insurer may not be reimbursed for defense costs for a claim for which a court later held that there was no obligation to defend, even if the insurer tried to claim a right to compensation in a series of rights reservation letters.
Although the court later found that the defendant had no liability under the liability policy, the lack of an express reimbursement provision prevents the defendant from receiving compensation for these costs.
The plaintiff’s claim was rejected in its entirety and the defendant’s claim was upheld in part and rejected in the part which claimed compensation for defense costs.
In order for there to be an agreement, it is required that there is an offer, acceptance of the offer and payment of consideration. It should be obvious that when an insured does not pay a premium, there is no right to the benefits of an insurance contact because the contract was never entered into. The case should have ended with the decision that the premium was not paid, but since the insured brought an action for bad faith, the court found it necessary to note that failure to fulfill the contract claim destroys the bad faith claim. The lack of a condition in the insurance that if there is no coverage for advanced defense costs to be reimbursed the claim for reimbursement of defense costs failed. Travelers should change their contract wordings in the future to include the right to reimburse defense costs that have been advanced and which were later found not to be liable.
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Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and firstname.lastname@example.org.
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