Katrina and Loose Barges — That Couldn’t Possibly Cause a Coverage Dispute, Could It?

On August 29, 2005, New Orleans, Louisiana was devastated by Hurricane Katrina. During the course of the hurricane, hundreds of barges and vessels broke away from their moorings, causing substantial damage. Barge ING 4727 was one such barge which broke away during the storm. Afterwards, some theorized that Barge ING 4727 actually caused the breach in the levee on the Lower Ninth Ward of New Orleans. What followed was an onslaught of litigation for claims against several defendants, including Lafarge, a company which provides construction materials throughout the United States. Lafarge was the operator allegedly responsible for the terminal to which Barge ING 4727 was moored just prior to the storm.

Lafarge had primary insurance coverage through NYMAGIC, and excess coverage through AHAC, NACA, and American Club. Upon learning of the potential casual connection between the barge and the breached levee, Lafarge took proactive steps to begin preparing a defense against any potential litigation. Thus, Lafarge hired two large (and thus very expensive) national law firms (Goodwin Proctor and H&K), as well as a local counsel (Chaffe), to begin assessing their potential mass tort liability. Upon notification that Lafarge had retained the three aforesaid firms, NYMAGIC informed Lafarge that they could not commit to paying for firms which they did not appoint, and instead offered a list of six New Orleans firms to handle the case. Lafarge declined to consent to the representation of any of the named firms, and instead continued to utilize their self-selected attorneys.

Three separate declaratory judgment actions were filed in the United State District Court for the Southern District of New York seeking coverage. The District Court granted the American Club’s Motion for summary judgment in the matter, holding that coverage was not afforded under that excess policy. Furthermore, the court held that the excess carriers were obligated to cover Lafarge. Lastly, the district court held that the primary and excess carriers were obligated to cover the legal fees earned by Goodwin Proctor and H&K. An appeal resulted.

On appeal, NYMAGIC, Lafarge, AHAC, and NACA argued that the American Club Policy covered Barge ING 4727. Lafarge also challenged the District Court’s holding that the primary and excess policies did not cover the legal fees earned by Chaffe; and the court’s refusal to award attorneys fees in connections with the motions for summary judgment. Finally, NYMAGIC, AHAC, and NACA challenged the decision that excess polices were triggered, and that the primary and excess policies covered the legal fees earned by Goodwin Proctor and H&K.

The Second Circuit has now ruled. It first examined the excess policy issued to Lafarge by American Club. Although there was no explicit endorsement naming Barge ING 4727 as a vessel covered under the policy, Lafarge argued that the barge was automatically covered pursuant to the following provision: If Lafarge…acquires an insurable interest in any vessel in addition to or in substitution for those set forth herein, through purchase, charter, lease or otherwise,… . The appellate court declined to confer a broad interpretation of the phrase “or otherwise”, as such a broad interpretation would effectively nullify two entire phrases in the policy. The court also considered extrinsic evidence which revealed that the clause was never intended to cover barges such as Barge ING 4727. Ultimately, the court held that “otherwise” did not include the kind of relationship associated with a ship owner’s bailment to a terminal operator. Thus, the appellate court upheld the district court’s decision to grant summary judgment on behalf of the American Club.

Next, the appellate court held that the primary and excess carriers were liable for the fees payable to Goodwin Proctor and Chaffe which were incurred prior to September 28, 2005. After that date, Lafarge acted in bad faith by failing to consider the list of firms proposed by NYMAGIC; thus, the insurers were not liable for any amounts incurred after that date. The court also held that the fees earned by H&K were recoverable because they were retained on a temporary basis for an investigative mission. Lastly, the appellate court found that the District Court did not abuse its discretion by denying Lafarge’s motion for attorney’s fees, as the denial was not based upon any attempt by the insurers to avoid their duty to defend Lafarge.

Special thanks to Heather Aquino for her contributions to this post. If you have any questions about its contents, please contact Bob Cosgrove at rcosgrove@wcmlaw.com.

http://www.loislaw.com/advsrny/flwhitview.htp?lwhitid=9415075