Opinion
09-CV-7957 (RWL)
11-07-2018
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, v. WATER QUALITY INSURANCE SYNDICATE, Defendant.
John Anthony Vincent Nicoletti, Nooshin Namazi, Patrick Colm Nolan, Richard Walter Stone, II, William Matthew Fennell, Nicoletti Hornig & Sweeney, Corey Russell Greenwald, Clyde & Co. US LLP, New York, NY, for Plaintiffs. John Maynard Woods, Corey Russell Greenwald, Mary Helen Mulhearn, Robert Hilton Adams, Clyde & Co. US LLP, John Russell Stevenson, Law Offices of J.R. Stevenson, New York, NY, for Defendant.
John Anthony Vincent Nicoletti, Nooshin Namazi, Patrick Colm Nolan, Richard Walter Stone, II, William Matthew Fennell, Nicoletti Hornig & Sweeney, Corey Russell Greenwald, Clyde & Co. US LLP, New York, NY, for Plaintiffs.
John Maynard Woods, Corey Russell Greenwald, Mary Helen Mulhearn, Robert Hilton Adams, Clyde & Co. US LLP, John Russell Stevenson, Law Offices of J.R. Stevenson, New York, NY, for Defendant.
DECISION AND ORDER
ROBERT W. LEHRBURGER, U.S.M.J.
This case arises out of a fuel oil spill that occurred on July 23, 2008, when a barge owned by Plaintiff, American Commercial Lines ("ACL"), was involved in a collision in the Mississippi River, spilling 300,000 gallons of fuel oil into the water. Plaintiffs 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 (collectively the "excess insurer Plaintiffs") are insurance companies that subscribed to and issued ACL's third layer of excess insurance. Defendant Water Quality Insurance ("WQIS") issued the primary pollution insurance policy for ACL. The issue examined and resolved by this decision is whether Coverage C of the WQIS Policy covers all defense and investigation costs incurred both before and after exhaustion of the Coverage A indemnity cap, or whether WQIS was liable for only the costs incurred prior to when the Coverage A indemnity cap was exhausted.
BACKGROUND
Coverage A of the WQIS Policy covered ACL for various liabilities imposed under the Oil Pollution Act of 1990 ("OPA '90") connected with the discharge or substantial threat of discharge of oil into navigable waters and certain other areas. (Water Quality Insurance Syndicate Policy Form 2007 ("2007 WQIS Policy" or the "Policy"), attached as Ex. P-1 at WQIS000003.) Coverage C required WQIS to reimburse ACL for "[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] ...." (2007 WQIS Policy at WQIS000004.) The $5,000,000 limit of indemnity per vessel under Coverage A was exhausted on August 27, 2008, a little over one month after the spill took place. (S. ¶ 8.)
Exhibits marked as "P" refer to Plaintiffs' trial exhibits; Exhibits marked as "D" refer to Defendant's trial exhibits.
This opinion refers to the period of time from July 23, 2008 (the date of the oil spill) until August 27, 2008 (the date when WQIS fully paid and exhausted its indemnity limit under Coverage A) as the "Phase I" period. The period of time subsequent to August 27, 2008, is referred to as the "Phase II" period. Phase I defense costs have been satisfied and are no longer at issue in this suit.
"S." refers to the Stipulated Facts section of the Joint Pretrial Order dated March 24, 2017. (ECF No. 92.)
In September 2009, ACL filed this action to recover expenditures for the costs of defending and investigating pollution claims (hereinafter, "defense costs") under Coverage C of the WQIS Policy, both for the period before August 27, 2008 (Phase I) and the period after that date (Phase II). ACL later filed an amended complaint that added its excess insurers as plaintiffs and pled an additional cause of action seeking subrogation of defense costs reimbursed by the excess insurers. (Amended Complaint ¶¶ 53-61.) The parties filed cross-motions for partial judgment on the pleadings.
On March 29, 2010, the then presiding District Court Judge granted ACL's motion for partial judgment on the pleadings, finding that the language of the Policy was unambiguous and that under Coverage C, WQIS was obligated to pay defense costs even after the Coverage A indemnity limit had been reached. American Commercial Lines LLC v. Water Quality Insurance Syndicate (ACL I) , No. 09 Civ. 7957, 2010 WL 1379763, at *1-3 (S.D.N.Y. March 29, 2010). The parties cross-appealed from the judgment. (ECF No. 88.) On February 10, 2017, by Summary Order, the Second Circuit held that Coverage C of the WQIS Policy was ambiguous. American Commercial Lines LLC v. Water Quality Insurance Syndicate (ACL II) , 679 F. App'x 11, 14 (2d Cir. 2017). Accordingly, the Second Circuit vacated the district court's judgment to the extent it granted partial judgment on the question of Coverage C's scope of coverage and remanded for further proceedings consistent with that order. Id. at 16.
The parties also filed cross-motions for partial summary judgment. Plaintiffs sought summary judgment on six of the defenses interposed by WQIS, and WQIS argued that coverage was barred for those defense costs for which ACL had not sought prior consent. The Honorable James M. Francis IV, United States Magistrate Judge, denied in part and granted in part those motions, finding that WQIS was not liable for defense costs for which it had not granted consent and dismissing certain defenses brought by WQIS. (Report and Recommendation dated January 16, 2014 (ECF No. 70) at 24-25.) The Report and Recommendation was subsequently adopted in its entirety. (ECF No. 76.) Plaintiffs appealed the district court's award of partial summary judgment in WQIS's favor on the issue of repudiation. The Second Circuit upheld the decision, agreeing that WQIS's conduct had not constituted a repudiation of its contractual obligations. ACL II , 679 F. App'x at 16.
The District Court had previously authorized a Special Master to determine the apportionment of costs reimbursable under Coverage C of the WQIS Policy. (ECF No. 63.) The Special Master issued a Revised Report and Recommendation dated August 19, 2015 (Ex. D-AA), which was subsequently adopted by the court. (ECF Nos. 84, 86.) On December 11, 2015, the Court entered a final stipulated judgment, awarding Plaintiffs $3,552,453.05 for certain defense costs that were incurred by ACL after WQIS's limit of indemnity under Coverage A of the Policy was exhausted and paid as of October 31, 2015, plus prejudgment interest that had accrued as of November 30, 2015, in the amount of $505,031.09 and, thereafter, prejudgment interest in the amount of $267.63 per day until the date of entry of judgment. (ECF No. 86.)
On December 20, 2017, the parties consented to this Court's jurisdiction. (ECF No. 94.) From April 25 to April 27, 2018, the Court presided over a bench trial on the coverage of defense costs under the WQIS Policy. ACL argued that WQIS has an obligation to reimburse all defense costs covered under Coverage A, regardless of whether the policy's limit for pollution cleanup and response costs already had been exhausted when those costs were incurred. By contrast, WQIS argued that its obligation to make payments for defense costs under Coverage C ended on August 27, 2008, when the $5,000,000 limit set out in Part II of the Policy was reached. The parties have both submitted post-trial briefs and proposed findings of fact and conclusions of law. The facts adduced at trial are largely uncontested; instead, the parties' dispute focuses on the inferences to be drawn from those facts.
Upon consideration of the evidence submitted at trial, the post-trial briefs and all other prior papers and proceedings herein, the Court finds that the phrase "liabilities covered" contained in Coverage C of the WQIS Policy does not include liabilities incurred after the Coverage A limit was exhausted. Because WQIS already has fully paid defense costs incurred by ACL prior to exhaustion of the Policy's liability limit, ACL is not entitled to recover any additional costs from WQIS, and judgment shall be granted in favor of WQIS.
FACTUAL FINDINGS
A. The 2007 WQIS Policy
At the time of the oil spill leading to this lawsuit, WQIS insured ACL under Policy No. 40-27083, a primary marine pollution liability insurance policy with effective dates of July 30, 2007 to July 30, 2008. (S. ¶ 6.) The barge involved in the oil spill, Tank Barge DM-932, was a scheduled, insured vessel under the Policy. (S. ¶ 6.) The Policy provided coverage to ACL under Coverage A for liabilities under OPA '90 in the amount of $5,000,000 per scheduled vessel. (S. ¶ 7.) The initial premium that ACL paid for the Policy was $302,499.88, although after WQIS incurred a loss, ACL also had to pay a so-called "swing premium" which brought the total to $624,000. (Tr. (Landry) 186-87.) The Policy had a $750,000 deductible, leaving WQIS with actual out-of-pocket exposure under Coverage A in the amount of $4,250,000. (Declaration of Dawn R. Landry dated March 21, 2017 ("Landry Decl."), attached as Ex. P-15 ¶ 20.)
"Tr." refers to the Trial Transcript dated April 25-27, 2018. (ECF Nos. 100, 102, 104.)
Direct testimony at trial came in by way of witness declarations and affirmations. References to "Decl." or "Aff." are to those declarations and affirmations.
Coverage C of the WQIS Policy obligates WQIS to pay "costs and expenses incurred by the assured with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under" another coverage section of the Policy, including Coverage A. (2007 WQIS Policy at WQIS000004.) The limitation applicable to Coverage C, as set forth in Part II of the Policy, provides that "[t]he amounts payable for costs and expenses incurred by the Assured with the prior consent of WQIS for investigation, of, or defense against, any liabilities covered under Coverage A ... shall be in addition to the [Coverage A] limits of liability." (2007 WQIS Policy at WQIS000007.) WQIS's defense costs coverage was structured this way to prevent the policy's limit of indemnity for pollution cleanup and response costs from being eroded by the assured's defense costs. (Affirmation of Richard H. Hobbie III dated April 10, 2018 ("Hobbie Aff."), attached as Ex. D-DD ¶ 11.) The $5,000,000 liability limit under Coverage A was fully paid and exhausted on August 27, 2008. (S. ¶ 8.) The critical issue is whether the phrase "liabilities covered" in Coverage C refers to all pollution defense costs incurred by ACL even after exhaustion of the Coverage A indemnity limit for pollution cleanup and response costs, or, instead, only those costs incurred before the limit was reached.
B. The History of ACL's Purchase of Insurance From WQIS
In or around 2000, ACL purchased its first marine insurance policy from WQIS. (Deposition of Douglas Charles Ruschman dated August 7, 2013 ("Ruschman Dep."), attached as Ex. P-19 at 16, 18-19.) At that time, Douglas Ruschman was the individual at ACL responsible for purchasing the company's insurance for operational liabilities, which included marine insurance. (Ruschman Dep. at 16-17.) Mr. Ruschman received guidance and advice on these purchases from ACL's insurance broker, AON Insurance. (Ruschman Dep. at 19-21.)
Mr. Ruschman did not testify at trial, but portions of his deposition transcript were entered into evidence.
The WQIS Policy at issue was a renewal effective from July 30, 2007 to July 30, 2008. (2007 WQIS Policy at WQIS000002.) WQIS uses its own form policy. Since its inception, WQIS's form policy has evolved and expanded to address changes in pollution legislation. (Tr. (Hobbie) 356-57.) However, with regard to coverage for pollution defense costs, the form policy contained "essentially the same relevant language and structure" from 2000 through 2008. (Hobbie Aff. ¶ 8.) When the 2007 Policy was placed, AON was still ACL's marine insurance broker. (Landry Decl. ¶ 15.) The ACL employee responsible for procuring insurance at that time was Barry Meeks. (Tr. (Landry) 140; Ruschman Dep. at 13-16.)
In 2011, WQIS made substantial changes to the substance and format of its standard form policy. (Tr. (Diamond) 301.) The 2011 changes included eliminating Coverage C's separate coverage for defense and investigation costs. (Ex. P-20.) The 2011 policy form continued to provide coverage for these costs but under a single policy cap, meaning that the limit would be comprised of both liability and defense costs. (Ex. P-20 at 7; Tr. (Diamond) 304-05.) The switch to a single policy limit was made, at least partially, in response to the instant lawsuit. (Tr. (Diamond) 305-07; (Hobbie) 364.)
C. ACL's Excess Insurance Coverage
At the time of the fuel spill, ACL had a complex marine insurance program in place to protect it against pollution and non-pollution liabilities, consisting of primary insurance and excess insurance in the amount of $300,000,000. (Landry Decl. ¶ 12.) Generally, "primary insurance provides the first layer of coverage of an insured's liability or loss," and excess insurance provides one or more additional layers "of coverage for an insured's losses exceeding the primary insurance policy's limits." See Utica Mutual Insurance Co. v. Clearwater Insurance Co. , 906 F.3d 12, 15 (2d Cir. 2018).
In addition to the primary pollution policy issued by WQIS, ACL had a first layer non-pollution policy issued by National Liability with a $4,000,000 limit. (Ex. P-3.) This primary policy provided certain hull and machinery coverage, certain protection and indemnity coverage, and comprehensive marine liability coverage, but it did not cover pollution liabilities. (Ex. P-3; S. ¶ 10.) Above these pollution and non-pollution primary layers, ACL had three additional layers of excess insurance. The first was an excess liability policy subscribed to and issued by Indemnity Insurance Company of North America, National Liability and Liberty Mutual Insurance Company, with a policy limit of $20,000,000 excess of $5,000,000 titled the "Second Layer Bumbershoot Liability" policy. (S. ¶ 14.) ACL also had an excess liability policy subscribed to and issued by National Liability & Fire Insurance Company, Indemnity Insurance Company of North America, Liberty Mutual Insurance Company, International Marine Underwriters, Federal Insurance Company, and the Indemnity Insurance Company of North America with a policy limit of $75,000,000 excess of $25,000,000, titled the "Third Layer Bumbershoot Liability" policy. (S. ¶ 17; Ex. P-5.) Finally, ACL had a "Fourth Layer Bumbershoot Liability" policy with a limit of $200,000,000 excess of $100,000,000, thus amounting to a total limit of $300,000,000. (S. ¶ 21.)
"A ‘bumbershoot’ is ‘[a] marine insurance policy covering multiple liability coverages in excess of one or more different underlying policies (comparable to the Commercial Liability Umbrella covering liabilities on land). ‘Bumbershoot’ is the English word for ‘Umbrella’; i.e., ‘all encompassing.’ " St. Paul Travelers Companies, Inc. v. Corn Island Shipyard, Inc. , 495 F.3d 376, 379 (7th Cir. 2007) (alterations in original) (quoting Glossary of Marine Insurance and Shipping Terms , 14 U.S.F. Mar. L.J. 308, 325).
Coverage under the Second Layer Bumbershoot Liability policy was exhausted shortly after the spill. (S. ¶ 16.) As of trial, the Third Layer Bumbershoot Liability policy had paid out almost its entire limit, and the Fourth Layer Bumbershoot Liability policy had not been pierced. (S. ¶¶ 20, 22.) Plaintiffs' employees testified to ACL's desire to forestall moving into the Fourth Layer Bumbershoot Liability policy because doing so would affect future pricing for insurance and potentially even impact ACL's ability to obtain insurance at that level. (Tr. (Ferguson) 76-80; (Landry) 184-86, 211-12.) In its own words, ACL's "goal has been to try to avoid ACL having to use its Fourth Layer Bumbershoot Liabilities policy." (Plaintiffs' Proposed Findings of Fact and Conclusions of Law ("Pl. FF & CL") ¶ 44.)
D. The Oil Spill and Its Aftermath
As a result of the July 2008 collision, approximately 300,000 gallons of oil spilled into the Mississippi River, making it one of the largest inland waterway spills in United States history. (S. ¶¶ 2-4.) The spill impacted a large area along the Mississippi River from within the city limits of New Orleans and down river for more than 100 miles. (Landry Decl. ¶ 6.) As the owner of the DM-932 tug barge, ACL was designated a "Responsible Party" under OPA '90 and was therefore responsible for all costs associated with the clean-up of the oil as well as governmental and third-party claims for property damage, natural resource damage, and remediation. (S. ¶ 3.) The total amount in claims for clean-up and third-party liabilities paid by ACL's insurers to-date is in excess of $90,000,000. (Tr. (Ferguson) 35.)
Upon receiving notice of the spill, WQIS accepted coverage and issued no reservation of rights. (Affirmation of Harry J. Diamond dated April 6, 2018 (Diamond Aff."), attached as Ex. D-CC ¶¶ 7, 12.) WQIS quickly dispatched two of its employees to the site to act as representatives and to assist ACL in managing the casualty. (Diamond Aff. ¶¶ 8, 13.) Additionally, WQIS contacted two third-party contractors to assist in managing the response and clean-up: the Maritime Alliance Group Inc. and Environmental Sciences Services, both of which were members of the Marine Pollution Response Group. (Diamond Aff. ¶ 14.) At WQIS's recommendation, ACL hired Cardno Entrix to assist with defending against natural resource claims, and Worley Catastrophe to serve as ACL's third-party claims administrator. (Tr. (Diamond) 225-26, (Landry) 151.)
The Marine Pollution Response Group consists of independent contractors hired by WQIS on a retainer basis to oversee pollution clean-up and responses for WQIS and their assureds. (Diamond Aff. ¶ 14.)
Within a week after the spill, ACL had already incurred costs reaching the $5,000,000 limit for pollution cleanup and response under the WQIS Policy. (Diamond Aff. ¶ 18.) By early August 2008, the parties were beginning to transition responsibility for claims payment and management from WQIS to the excess insurers. (Diamond Aff. ¶¶ 19-20.) The onsite WQIS employees left the scene of the incident. (Tr. (Diamond) 228-29; Diamond Aff. ¶ 13.) And on August 4, 2008, Mr. Diamond wrote a letter to Paul Ferguson, the lead claims representative for the Second and Third Layer Bumbershoot Liabilities policies, confirming that the WQIS spill response team (i.e., third-party consultants hired by WQIS) would, at the excess insurers' request, be permitted to work for the excess insurers. (Ex. D-F. at ACL0001905.) Mr. Diamond confirmed to the excess insurers that the charges from the third-party consultants would be "for your account" but reserved WQIS's right "to use these resources as fact and/or expert witnesses and to continue to consult with these resources." (Ex. D-F. at ACL0001905.) Mr. Ferguson agreed to transition claims handling from WQIS to himself, which included approving payments from the excess policies for all costs, including defense costs. (Tr. (Ferguson) 28-29.) Due to delays in invoicing and payments, however, the WQIS primary layer was not actually exhausted by payments until August 27, 2008. (S. ¶ 8; Diamond Aff. ¶ 19.)
Integro Insurance Brokers USA ("Integro") was ACL's maritime insurance broker on the day of the oil spill. (Tr. (Hendrick) 84-85.) The Integro employee with primary responsibility for the ACL account was Brad Hendrick. (Hendrick Decl. ¶ 4.) Shortly after the spill, ACL's employee, Mr. Ruschman instructed Mr. Hendrick to contact the excess insurers to request that they all participate in an escrow account to pay for the costs that were being incurred at a rapid pace. (Ex. D-A.) This required the excess insurers to waive the "pay to be paid" requirement of their respective policies and, instead, pool their funds into an account from which all expenses would be paid. (Landry Decl. ¶ 8; Tr. (Ferguson) 76-79.) Neither Mr. Ferguson nor Mr. Hendrick had any prior experience with using an escrow account as a payment mechanism for claims. (Tr. (Ferguson) 76; (Hendrick) 90-91.)
The escrow account was created, in part, to demonstrate to the United States Coast Guard that ACL was able to meet the financial demands of the clean-up effort and that a federal take-over was not warranted – a development which ACL believed would have "ultimately imposed a greater financial burden" on ACL and the excess insurers. (Landry Decl. ¶ 8.) The escrow account also streamlined the typical claims processing process, which, in light of the size of the spill and the complexity of the clean-up, would have otherwise been a "nightmare." (Tr. (Ferguson) 78-79.) More specifically, use of the escrow account eliminated the typical practice of using a broker to present each of the insured's individual claims to the insurer. (Tr. (Hendrick) 123-25.) Instead, the account was administered by ACL's third-party claims administrator, Worley Catastrophe. (Landry Decl. ¶ 9.) Payments coming from the account were reviewed by Mr. Ruschman until he left ACL, at which point the invoices were reviewed by Ms. Landry, and by the excess insurers' representatives, Dan Picou and Mr. Ferguson, and excess insurers' counsel, John Nicoletti. (Tr. (Ferguson) 61-62; (Nicoletti) 407-08.) In other words, representatives from ACL and the excess insurers reviewed each of the invoices. To the extent that defense costs were not covered by the excess insurance policies, ACL paid those defense costs. (Tr. (Landry) 171-72.) Initially, the excess insurers and ACL also reviewed the costs to determine whether they qualified as pollution-related or whether they were covered by ACL's non-pollution primary insurance because excess insurance would not cover non-pollution costs until the non-pollution primary insurance policy from National Liability was exhausted. (See Tr. (Nicoletti) 412-13; Exs. D-J; D-l ("Claims, to the extent they are partly marine and partly OPA '90 will be examined by Floyd and an attempt made to segregate the charges so as to be apportioned to the proper policies. The breakdowns will be ... submitted also to Mr. Nicoletti for review to be sure that he can also approve of the breakdown between the policies.") Once both primary layers of insurance were exhausted, however, the parties reviewing the escrow payments did not distinguish between the types of costs because the understanding was that all costs relating to ACL would be paid by excess insurance. (Tr. (Ferguson) 66.)
The escrow account was initially funded by ACL's Second Layer Bumbershoot Liability excess insurers in the full amount of the second layer policy limit. (Landry Decl. ¶ 9.) WQIS's only contribution to the escrow account was a deposit of $8,400, made to exhaust the $5,000,000 policy liability limit. (Tr. (Ferguson) 41.) Outside of that small amount, none of the excess insurers or ACL ever asked WQIS to contribute to the escrow account. (Tr. (Hendrick) 126-27.) The escrow account was later funded by ACL's Third Layer Bumbershoot Liabilities insurers in the amount of the policy limit and other recoveries made by ACL.
At the time of spill, the barge owned by ACL was in the tow of the Tug Mel Oliver, which was under bareboat charter to D.R.D. Towing Company LLC ("D.R.D."). (S. ¶ 2.) In a separate lawsuit, ACL eventually recovered funds from D.R.D.'s insurers. See Gabarick v. Laurin Maritime (America), Inc. , 900 F. Supp. 2d 669 (E.D. La. 2012), affirmed , 551 F. App'x 228 (5th Cir. 2014) ; see also (Tr. (Landry) 173-76.)
E. WQIS's Payment of Defense Costs
Prior to the casualty, ACL had only limited interactions with WQIS. Until the spill, ACL had never experienced a major pollution event where the clean-up costs exceeded ACL's deductible, and therefore WQIS had never had to pay a claim. (Landry Decl. ¶ 17-18; Ruschman Dep. at 25.) On July 22, 2008, the day before the oil spill, representatives from ACL's insurance broker, Integro, had a meeting at ACL's offices with Mr. Ruschman and Ms. Landry to discuss the renewal of certain ACL policies, including the WQIS policy. (Tr. (Hendrick) 107). Shortly after the spill, Mr. Diamond again met with Integro employees, including Mr. Hendrick, as well as the excess insurers' claim handler, Paul Ferguson, to discuss ACL's response to the casualty and ACL's coverage. (Diamond Aff. ¶ 15-17; Tr. (Hendrick) 114-15.) Then in the spring of 2009, Ms. Landry came to New York and met with Mr. Hendrick and ACL's insurers, including WQIS, to discuss ACL's insurance coverage renewals. (Tr. (Landry) 161-63.) In addition to these meetings, Ms. Landry also had dinner with Mr. Hendrick and Mr. Hobbie. (Tr. (Landry) 166-67.) The question of whether WQIS had ongoing obligations to cover ACL's pollution defense costs was not raised during any of these meetings. (Tr. (Hendrick) 108-09, 115, (Landry) 163-69; Declaration of Brad G. Hendrick dated March 22, 2017 ("Hendrick Decl."), attached as Ex. P-17 ¶ 7.)
Indeed, ACL concedes that the issue did not come up internally at ACL until the summer of 2009 when it was raised by legal counsel. (Pl. FF & CL ¶ 48.) Specifically, the issue was raised by ACL's outside counsel, Glenn Goodier, following a conversation he had with counsel for D.R.D. in connection with ACL's lawsuit against D.R.D. (Landry Decl. ¶ 17; see also Tr. (Ferguson) 67; (Landry) 156; Ex. P-8 at ACL(NHS)0478914.) This conversation was then relayed to ACL's general counsel, Ms. Landry, who in turn, communicated the information to excess insurers' counsel, Mr. Nicoletti. (Tr. (Ferguson) 67; (Landry) 176-77.) On August 6, 2009, Mr. Nicoletti reached out to WQIS's counsel, John Woods, and inquired whether defense costs could be recovered from WQIS. (Ex. P-8 at ACL(NHS)0478914-15.) The following day, WQIS's outside counsel informed Mr. Nicoletti that WQIS believed its obligation under Coverage C to reimburse pollution defense costs ended when WQIS exhausted its liability limit under Coverage A. (Ex. P-8 at ACL(NHS)0478913.) On September 16, 2009, ACL filed the present lawsuit. (Ex. P-11.)
On October 11, 2009, Mr. Hendrick submitted ACL's first request for reimbursement of defense costs under Coverage C of the WQIS Policy. (Ex. P-10.) On September 4, 2010, ACL submitted a supplemental request for additional defense costs. (Hendrick Decl. ¶ 10.) Upon Mr. Nicoletti's recommendation, both requests were limited to defense costs incurred during Phase I. (Hendrick Decl. ¶¶ 11-12.) Between November 2, 2010, and February 24, 2011, WQIS reimbursed ACL a total of $551,359.64, and in or about November 2015, WQIS reimbursed ACL an additional $87,095.54 for pollution defense costs incurred during the Phase I period. (Landry Decl. ¶ 25.) ACL deposited these payments into the escrow account established by ACL and the excess insurers. (Landry Decl. ¶ 25.)
Initially, all Phase I and Phase II defense costs were paid for by the escrow account, with the exception of certain defense costs that were not covered by the excess insurance policies, which were paid directly by ACL. (Tr. (Landry) 171-72.) WQIS subsequently reimbursed the escrow account for all Phase I pollution defense costs. Accordingly, there are no remaining disputed Phase I costs in this action. ACL's claim for defense costs incurred during Phase II exceeds several million dollars and continue to mount. (Ex. D-AA at 5-15; Tr. 327.)
CONCLUSIONS OF LAW
The question before the Court is whether WQIS's obligation to pay defense costs under Coverage C was extinguished when the Coverage A indemnity limit was reached. Following careful consideration of the evidence presented at trial and all prior proceedings, the Court finds that the extrinsic evidence convincingly demonstrates that the parties never intended for WQIS to continue paying pollution defense costs under Coverage C once WQIS no longer had to indemnify claims under Coverage A. A. Legal Standard
Under New York law, which the parties agree is controlling, "an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract." Morgan Stanley Group Inc. v. New England Insurance Co. , 225 F.3d 270, 275 (2d Cir. 2000) (quoting Village of Sylvan Beach v. Travelers Indemnity Co. , 55 F.3d 114, 115 (2d Cir. 1995) ). When an insurance contract's provisions "are unambiguous and understandable, courts are to enforce them as written." Parks Real Estate Purchasing Group v. St. Paul Fire and Marine Insurance Co. , 472 F.3d 33, 42 (2d Cir. 2006). If an insurance contract is ambiguous, the court "may consider extrinsic evidence to discern the parties' intent at the formation of the contract." ACL II , 679 F. App'x at 14 (citing Morgan Stanley Group Inc. , 225 F.3d at 275-76 ). "If the court concludes that an insurance policy is ambiguous, then the burden shifts to the insurer to prove that its interpretation is correct." Parks Real Estate , 472 F.3d at 43 (quoting Morgan Stanley Group Inc. , 225 F.3d at 276 ).
Here, the Second Circuit has already held that the language of the Policy is ambiguous, stating that:
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 WQIS's liability under Coverage C ceased once the Coverage A limit was reached.
ACL II , 679 F. App'x at 14. Accordingly, the Second Circuit tasked this court with assessing the extrinsic evidence to resolve the contractual ambiguity. Id. at 15-16.
B. Analysis of the Extrinsic Evidence
"Extrinsic evidence includes ‘the acts and circumstances surrounding execution of the ambiguous term’ of the contract." Invista B. V. v. E.I. Du Pont De Nemours & Co. , No. 07 Civ. 713, 2008 WL 4865044, at *4 (S.D.N.Y. Nov. 5, 2008) (quoting Roberts v. Consolidated Rail Corp. , 893 F.2d 21, 24 (2d Cir. 1989) ); see also Antilles Steamship Co. v. Members of American Hull Insurance Syndicate , 733 F.2d 195, 199 (2d Cir. 1984) (In evaluating a marine insurance policy, "the language of the policy, [ ] the circumstances surrounding its execution, custom and usage, as well as the established law," all bear on the inquiry into the parties' understanding of the policy.). In reaching its decision, and in addition to the language of the Policy, the Court has considered evidence regarding (1) the intent of the parties at the formation of the Policy, (2) the parties' behavior post-execution and pre-litigation; and (3) custom and practice in the marine industry. Each of these subjects is discussed below.
1. Formation and Execution of the WQIS Policy
"The cardinal principle for the construction and interpretation of insurance contracts – as with all contracts – is that the intentions of the parties should control." SR International Business Insurance Co. v. World Trade Center Properties, LLC , 467 F.3d 107, 124 (2d Cir. 2006) (quoting Newmont Mines Ltd. v. Hanover Insurance Co. , 784 F.2d 127, 135 (2d Cir. 1986) ). Under New York law, this requires the Court to consider "the objective manifestations of the intent of the parties as gathered by their expressed words and deeds." Id. (quoting Brown Brothers Electrical Contractors, Inc. v. Beam Construction Corp. , 41 N.Y.2d 397, 399, 393 N.Y.S.2d 350, 352, 361 N.E.2d 999 (1977) ).
ACL purchased its first WQIS policy in 2000. (Ruschman Dep. at 16-17.) While the Policy at issue here was a 2007 renewal, it contained "essentially the same relevant language and structure" as the earlier policies. (Hobbie Aff. ¶ 8.) Therefore, evidence of the parties' intentions and understanding of both the 2000 initial purchase and the 2007 renewal may be relevant to this inquiry. ACL claims that prior to the summer of 2009, ACL had not "considered or formed an opinion" regarding the scope of WQIS's obligation under Coverage C to reimburse defense costs. (Pl. FF & CL ¶ 62.) By comparison, WQIS argues that neither it nor ACL ever intended WQIS to pay defense costs after WQIS exhausted its $5,000,000 policy limit under Coverage A. (Defendant Water Quality Insurance Syndicate's Post Trial Brief ("Def. Mem.") at 14.) At trial, evidence of the parties' intentions at the time of formation was scant. Neither party presented contemporaneous evidence relating to the negotiation and execution of either policy, and testimony on this subject was limited.
As President of WQIS, Richard Hobbie was responsible for reviewing and approving all changes to the WQIS policy forms, including the Policy at issue here, and in many cases he drafted the revisions himself. (Hobbie Aff. ¶¶ 8-10.) Mr. Hobbie testified that WQIS did not intend to continue to pay its assured's defense costs once the primary policy liability limit was exhausted and WQIS no longer had any interest in the defense of the underlying claims. (Tr. (Hobbie) 372-73, 381-82; see also Hobbie Aff. ¶ 12.) Mr. Hobbie also confirmed that the 2000 and 2007 policies were essentially the same, and that WQIS's position on the scope of its defense coverage was consistent from 2000 to 2008. (Tr. (Hobbie) 357, 382.) Mr. Hobbie testified that the limitation was clearly stated in the policy, and if the assured had any doubts, they should have discussed the issue with their insurance broker. (Tr. (Hobbie) 378-81.) Based upon his demeanor, consistency, and many decades of experience in the industry, the Court found Mr. Hobbie's testimony quite credible.
Mr. Ruschman was the individual at ACL responsible for purchasing the first WQIS policy in approximately 2000. (Ruschman Dep. at 35-36.) As Mr. Ruschman had no prior experience purchasing marine insurance, he relied heavily upon the advice of ACL's insurance broker, AON Insurance. (Ruschman Dep. at 18-20.) Shortly after ACL purchased its first marine insurance policies, including the 2000 WQIS policy, Mr. Ruschman met with AON representatives, who he described as "expert in each coverage area" in order to "go over the policies, and to discuss them and get comfortable with them, and to spend more time with the underwriters." (Ruschman Dep. at 21-22, 35-36.) Peter Wiswell and Mr. Hobbie were the only WQIS employees with whom Mr. Ruschman could specifically remember working. (Ruschman Dep. at 23-24.)
Mr. Ruschman recalled that he reviewed the WQIS policy after ACL's initial 2000 purchase. (Ruschman Dep. at 35.) When asked about his understanding of the scope of coverage under the WQIS Policy for defense costs, Mr. Ruschman responded: "I just know that there was – there was a primary policy, and that [ACL] had defense coverage under that policy. And that all, the – the remaining policies were to be – followed form policies, and so I felt like [ACL] had adequate coverage there." (Ruschman Dep. at 24.) "Following form" coverage is insurance that follows the same terms and conditions as the primary policy. See National Union Fire Insurance Co. of Pittsburgh, PA. v. L.E. Myers Co. Group , No. 84 Civ. 7481, 1995 WL 581692, at *1 n.2 (S.D.N.Y. Oct. 4, 1995). Although not a model of precision, Mr. Ruschman's testimony that the "remaining policies [i.e., excess policies]" were "followed form policies" and provided "adequate coverage there" in answering the question about the extent of defense costs covered by WQIS suggests that he believed WQIS would not be responsible for all defense costs. Furthermore, Mr. Ruschman stated that, at the time, in 2008 he had been satisfied with WQIS's response to the oil spill and that WQIS provided the coverage he had expected of them. (Ruschman Dep. at 68.)
Barry Meeks was the individual at ACL responsible for procuring insurance when the WQIS policy was renewed in 2007. (Tr. (Landry) 140; Ruschman Dep. at 13-16.) Mr. Meeks did not provide any testimony, and neither party presented any evidence related to his understanding of the Policy's coverage. There was also no evidence presented as to the understanding or representations from ACL's insurance broker, AON, which could have informed the inquiry. See Columbia Casualty Co. v. Neighborhood Risk Management Corp. , No. 14 Civ. 48, 2016 WL 4467548, at *5 (S.D.N.Y. Aug. 22, 2016) ("[A]n insurance broker's understanding and representations in the course of procuring an insurance policy are imputed to the insured by operation of law.").
Only two individuals – Russell Brown and Brad Hendrick – testified that it was ever their belief, prior to the summer of 2009, that WQIS was obligated to continue paying defense costs after the Coverage A limit was exhausted. (Tr. (Hendrick) 129-30; Declaration of Russell Brown dated March 30, 2017 ("Brown Decl."), attached as Ex. P-18 ¶¶ 5-7.) Neither Mr. Hendrick nor Mr. Brown were involved with negotiating or executing the WQIS policies in either 2000 or 2007. Moreover, the Court found neither witness believable on this issue.
Mr. Brown is a former employee of WQIS, who left the company to found Safe Harbor, a direct competitor to WQIS. (Tr. (Brown) 330-31, 340-44.) Mr. Brown's departure from WQIS resulted in a lawsuit and a countersuit against WQIS. (Tr. (Brown 338-42.) Safe Harbor's business plan included taking WQIS's clients, such as ACL, which switched to Safe Harbor approximately two years ago. (Tr. (Brown) 334-36.) Mr. Brown has also worked closely with Mr. Nicoletti, who at various points served as counsel for the excess insurers. (Tr. (Brown 337-38.) In light of these conflicts of interest, and having observed his demeanor, the Court found Mr. Brown's testimony self-serving and not credible. See, e.g. , MWH International, Inc. v. Inversora Murten, S.A. , No. 11 Civ. 2444, 2015 WL 728097, at *3 (S.D.N.Y. Feb. 11, 2015) (finding witness not credible based on his demeanor and self-interest); Pignoloni v. Gallagher , No. 12 CV 3305, 2012 WL 5904440, at *30 (E.D.N.Y. Nov. 25, 2012) (disregarding testimony that was self-serving, unreliable, and internally inconsistent).
Among other claims, WQIS alleged that Mr. Brown violated his fiduciary duty and committed fraud. Tr. (Brown) 339-340; Exs. D-MM, D-NN. The case ultimately settled for $100,000 – which was paid by Safe Harbor. Tr. (Brown) 343-44.
ACL's broker, Mr. Hendrick, testified on direct that Mr. Brown informed him prior to 2009 that WQIS provided unlimited coverage for defense costs and used this coverage as a "selling point" for its product. (Brown Decl. ¶ 5; Hendrick Decl. ¶¶ 15-16.) On cross-examination, however, Mr. Hendrick testified unequivocally that he never discussed the scope of WQIS's defense costs with his client, ACL; neither in connection with ACL's renewal of their policy in 2008 nor at any other point following the spill. (Tr. (Hendrick) 86-87, 107-08.) It strains credulity to believe that Mr. Hendrick knew that WQIS provided unlimited coverage for defense costs, even after the primary policy was exhausted, but never raised it with his client in renewing the WQIS policy or determining payment of defense costs for the spill. The more plausible explanation is that Mr. Brown never told Mr. Hendrick that the WQIS policy covered defense costs incurred after the liability cap had been reached and that is why Mr. Hendrick never discussed it with ACL.
The extent to which the testimony of both Mr. Brown and Mr. Hendrick skirted around the relevant issue further diminishes their credibility. For instance, Mr. Hendrick initially represented that he understood that "WQIS's policy obligation to reimburse defense and investigation costs incurred by its assured was both unlimited in amount and in addition to and separate and distinct from other indemnity limits in the Policy." (Hendrick Decl. ¶ 15.) Mr. Brown's direct testimony contained nearly identical language. (See Brown Decl. ¶¶ 5, 7.)
Those descriptions, however, are consistent with WQIS's interpretation of the Policy. Some marine insurance policies are single limit policies where liability and defense costs are jointly subject to a single cap. The WQIS policy form was not a single limit policy. (Tr. (Hobbie) 358-59.) The WQIS Policy capped its liability limit for the costs of pollution cleanup and response but provided that covered defense costs were in addition to that cap. The Policy also did not cap the amount of those defense costs. But the dispute here is not whether the Policy covered defense costs in addition to the $5,000,000 limit. It clearly did. Rather, the issue is whether the Policy covered defense costs that were incurred after the $5,000,000 liability limit was exhausted. Technically, Mr. Hendrick's carefully phrased statement is, therefore, not at odds with WQIS's position. Even assuming that Mr. Brown did communicate to Mr. Hendrick that coverage for defense costs was "unlimited" and "in addition to" and "separate and distinct from" the $5,000,000 limit, that does not mean that WQIS had an obligation to pay defense costs after the policy limit was reached. And although Mr. Hendrick did clarify his statement to embrace the latter interpretation in response to a pointed question from the Court, his response was not credible in light of his earlier testimony and that of Mr. Brown. (See Tr. (Hendrick) 128-29.)
In sum, the Court finds the evidence of the parties' intent and understanding of the Policy terms persuasively supports WQIS's interpretation. Mr. Hobbie was a credible witness with four decades of experience in the industry, and his testimony was consistent with Mr. Diamond's. By contrast, Mr. Brown was not credible; Mr. Hendrick's avowed interpretation of the Policy was at odds with his own conduct (i.e., he never informed ACL that WQIS had an ongoing obligation to pay defense costs); and Mr. Ruschman's testimony, though far from clear, suggested his having an understanding consistent with that of WQIS.
2. The Parties' Post-Execution Conduct
The parties' post-execution course of conduct constitutes relevant, probative evidence. GE Funding Capital Market Services, Inc. v. Nebraska Investment Financial Authority , No. 15 Civ. 1069, 2017 WL 2880555, at *4 (S.D.N.Y. July 6, 2017) ; see also Hoyt v. Andreucci , 433 F.3d 320, 332 (2d Cir. 2006) (explaining that, under New York law, the factfinder may consider "extrinsic evidence such as the parties' course of conduct throughout the life of the contract"); AIU Insurance Co. v. TIG Insurance Co. , 934 F. Supp. 2d 594, 601-02 (S.D.N.Y. 2013) (considering the expectations and actual performance of the parties as extrinsic evidence). "The parties' interpretation of the contract in practice, prior to litigation, is compelling evidence of the parties' intent." Invista B.V. , 2008 WL 4865044, at *4 (quoting Ocean Transport Line. Inc. v. Am. Philippine Fiber Industries, Inc. , 743 F.2d 85, 91 (2d Cir. 1984) ); see also Aircraft Services Resales LLC v. Oceanic Capital Co. , No. 09 Civ. 8129, 2013 WL 4400453, at *4 (S.D.N.Y. Aug. 14, 2013) ("A party's "post-execution interpretation of a contract before a motive arose (ante litem motam ) has some probative value, especially here when the party later contradicts itself in litigation.") In this case, the behavior of all the parties after the Policy's $5,000,000 liability limit was reached clearly shows they were operating under the belief that once the limit of Coverage A was reached, WQIS's obligation to reimburse defense costs ended.
ACL has conceded that the question of whether WQIS was obliged to pay for Phase II defense costs was raised for the first time in the summer of 2009, when it was suggested by counsel. (Declaration of Paul J. Ferguson dated April 5, 2017, attached as Ex. P-16 ¶ 9.) ACL's General Counsel, Ms. Landry, testified that until that point, even though the Policy liability limit had been exhausted a year earlier, she had never discussed WQIS's coverage of defense costs with Mr. Hendrick or with any other individuals at ACL, WQIS, or ACL's insurance brokers. (Tr. (Landry) 147-48, 151.) ACL also has repeatedly emphasized the company's strong desire to avoid piercing the fourth excess insurance layer. (See, e.g. , Tr. (Ferguson) 78-80; (Landry) 184-86, 211-12.) In other words, in the summer of 2009, when ACL's counsel theorized that WQIS could be liable for the excess insurers' pollution defense costs, ACL was incentivized to find additional sources of funds to forestall exposing the fourth excess layer. Prior to that time, however, neither the parties' behavior nor their communications evinced a belief that WQIS had an obligation to pay Phase II defense costs.
To the contrary, as pollution liability for the spill approached the $5,000,000 limit, the parties started to end WQIS's involvement. For instance, on July 26, 2008, Maritime Alliance Group Inc., one of the third-party contractors hired by WQIS, wrote to ACL that "[a]s the WQIS policy coverage limits have, or will shortly be reached, our services provided by WQIS will be ending." (Ex. D-B.) On August 26, 2008, a claims manager wrote to representatives at ACL and the excess insurers and confirmed that a payment of $8,408.02 to a third-party administrator would "constitute full payment by WQIS of its policy limit." (Ex. D-O at WQIS000628.)
Less than ten days after the accident, Peter Curzio wrote that "[a]lthough legals are outside the limit on the WQIS policy, since their limit is effectively exhausted, we do not see WQIS expending much in this area." (Ex. D-L at NACA000424.) Mr. Curzio was a claims managers for International Marine Underwriters, one of the excess insurers that issued the Third Bumbershoot Layer, with many decades of experience in the marine insurance industry. (Tr. (Curzio) 384-85.) Mr. Curzio testified that he was not familiar with the WQIS Policy language and that therefore, his description of the Policy was a faulty assumption based on familiarity with other industry policies. (Tr. (Curzio) 389-90). He explained that:
In retrospect, I probably did something a claims person should never do, which was to assume that the coverage in the WQIS policy was similar to those policies with which I had the majority of my experience or was in effect a single limit policy and had limiting language that would have made that statement accurate.
(Tr. (Curzio) 390.) This characterization of his email, however, is the exact opposite of what the email actually states. Mr. Curzio's email did not describe a single limit policy. Instead, it explicitly acknowledged that defense costs were not counted as part of WQIS's $5,000,000 liability cap and that because the liability limit "effectively had been exhausted," minimal additional defense costs would be covered (i.e., "we do not see WQIS expending much" in "legals"). (Ex. D-L at NACA000424.) During trial, Mr. Curzio could not coherently explain the discrepancy between the content of his email and his testimony and ultimately concluded that "the document has to speak for itself." (Tr. (Curzio) 393-94.) The Court agrees.
Mr. Curzio's understanding of the WQIS policy was based either on his own familiarity with the WQIS form policy or on information he received from others, such as the excess insurer's CFO or President, Robert Gallagher. Mr. Gallagher, who also served as Chairman of the WQIS board for several years, was copied on the Curzio e-mail. (Tr. (Curzio) 394-96.) Had Mr. Gallagher believed Mr. Curzio's understanding of the policy to be incorrect, he would have had good reason to raise the matter with Mr. Curzio. But he did not. (See Ex. D-L.)
Furthermore, when ACL moved to set up the escrow account to which the excess insurers contributed, ACL never asked WQIS to contribute to the account, beyond the small remaining balance of its policy limit. (Tr. (Hendrick) 126-27.) And unlike the excess insurers, who were all represented in the chain of authority to approve payments from the escrow account, WQIS had no say in that process. (Tr. (Ferguson) 61-62; (Nicoletti) 407-08.)
ACL argues that, at that time, it simply was not "focused on defense costs or on which pollution insurer had the obligation to reimburse pollution defense costs." (Pl. FF & CL ¶ 45.) ACL further elaborates that during the initial year after the spill, it was concentrated on other priorities, such as completing the clean-up, meeting its obligations under OPA '90, and participating in congressional hearings. (Landry Decl. ¶ 7; Tr. (Ferguson) 64; (Hendrick) 94-96; (Landry) 149.) And it is true that ACL did not present a claim to WQIS for reimbursement of defense costs prior to the initiation of this lawsuit for either Phase I or Phase II claims. (Tr. (Diamond) 275-77.)
This argument, however, is belied by ACL's own testimony and the contemporaneous documents showing that, from early on, ACL and the excess insurers were concerned that the oil spill would give rise to a large number of third-party claims and corresponding defense costs. (See, e.g. , Tr. (Hendrick) at 92-94; Ex. D-I (noting that D.R.D. owed ACL "defense in this matter"); Ex. D-J at ACL0000332 ("As for the splitting of defense cost on a fifty/fifty split, I have no objection but it is something that needs to be addressed by the subscribing investors."); Ex. D-D at WQIS000240 ("Another issue we need to address is the expected large volume of 3rd party claims and how we are going to handle them.").) The documents also demonstrate that ACL and the excess insurers were working diligently to determine their exposure and identify other potential sources of funding. (See, e.g. , Exs. D-L, D-Q, D-FF.) Within that context, the Court finds it difficult to believe that millions of dollars in Phase II defense costs owed by WQIS would go overlooked. Yet, at no point in any of the discussions between ACL or the excess insurers, did any of the claims managers, underwriters, or legal counsel raise the issue of WQIS's obligation to pay Phase II defense costs.
In short, "prior to a transparently tactical assertion of coverage authored by counsel," Plaintiffs never acted as if they believed the WQIS Policy covered defense costs after the Coverage A limit was exhausted American Steamship Owners Mutual Protection & Indemnity Association, Inc. v. Lafarge North America, Inc. , No. 06 Civ. 3123, 2008 WL 4449353, at *10 (S.D.N.Y. Sept. 29, 2008). To the contrary, Plaintiffs' conduct demonstrated the opposite; they did not involve WQIS in allocating funds from the escrow fund or even consider the possibility that WQIS had an ongoing obligation to pay defense costs, until the theory was posited by their attorneys.
As with evidence of the parties' intent and understanding at the time of execution of the Policy, the evidence of the parties' post-execution behavior persuasively demonstrates that the parties intended that WQIS's obligation to cover defense costs would not continue after the limit for costs of pollution cleanup and response was reached.
3. Industry Custom
Industry custom and practice also may be considered to resolve ambiguous contract language. See Stolt–Nielsen SA v. AnimalFeeds International Corp. , 548 F.3d 85, 99 (2d Cir. 2008), reversed and remanded on other grounds , 559 U.S. 662, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010). Custom and usage evidence must establish that the trade usage is " ‘fixed and invariable’ in the industry in question." British International Insurance Co. Ltd. v. Seguros La Republica, S.A. , 342 F.3d 78, 84 (2d Cir. 2003) (quoting Belasco Theatre Corp. v. Jelin Productions , 270 A.D. 202, 205, 59 N.Y.S.2d 42, 45 (1st Dep't 1945) (internal citation omitted)). "Moreover, the advocate of the trade usage must establish either that the party sought to be bound was aware of the custom, or that the custom's existence was ‘so notorious’ that it should have been aware of it." Id. (quoting Reuters Ltd. v. Dow Jones Telerate, Inc. , 231 A.D.2d 337, 343, 662 N.Y.S.2d 450, 454 (1st Dep't 1997) ).
WQIS argues that it is the custom and practice within the marine insurance industry that excess insurers always assume the costs of defense once the primary insurer's limit of indemnity is exhausted. Plaintiffs counter that WQIS failed to demonstrate that this custom was sufficiently fixed and invariable.
The evidence presented on this issue was too little to establish a "fixed and invariable" custom or practice. What evidence there was, however, predominantly supports WQIS's interpretation of the Policy. Generally, expert testimony is relied upon for the introduction of custom and practice evidence. See Didzbalis v. Sheridan Transportation Co. , No. 00 Civ. 4329, 2002 WL 31619071, at *1 (S.D.N.Y. Nov. 19, 2002) (collecting cases). However, "practical experience in the industry may be sufficient to qualify a witness as an expert on ‘trade usage.’ " U.S. Underwriters Insurance Co. v. Zismopoulos , No. 07 CV 4684, 2009 WL 6316251, at *5 (E.D.N.Y. July 20, 2009), report and recommendation adopted by 2010 WL 1286221 (E.D.N.Y. March 31, 2010) (internal citations omitted) (quoting SR International Business Insurance Co. , 467 F.3d at 132-33 ). Here, neither party submitted expert testimony. WQIS relied on its witnesses, Mr. Hobbie and Mr. Diamond, who testified that this practice was universally accepted within the industry. For instance, Mr. Hobbie testified that:
Mr. Diamond also identified five previous instances where WQIS had exhausted the limit of its primary policy and thereafter ceased paying for defense costs. (Tr. (Diamond) 258-62.) In theory, evidence of WQIS's prior practices could be relevant to the Court's inquiry. Mr. Diamond's testimony, however, was based on conjecture and second-hand knowledge rather than personal knowledge. (See Tr. (Diamond) 288, 290-92, 294, 296.) Accordingly, the Court does not rely on this portion of his testimony. See, e.g. , Mateo v. City of New York , No. 14 Civ. 9020, 2018 WL 1115761, at *5 (S.D.N.Y. Feb. 26, 2018) (declining to consider witness testimony that was not based on personal knowledge); Tapia v. Blch 3rd Ave. LLC , No. 14 Civ. 8529, 2016 WL 4581341, at *3 (S.D.N.Y. Sept. 1, 2016) (same).
I have never, ever, ever seen or know of a case where a liability primary, once exhausted, paid for defense of an excess. I have sat for twenty years on the liability committee of the American Institute of Marine Underwriters, reviewing all of the policies that come under the institute, and there I have never seen a policy which, when primary was exhausted, allowed for defense to be paid [ ] by primary for excess.
(Tr. (Hobbie) 370.) Both Mr. Diamond and Mr. Hobbie have decades of experience in the marine insurance industry. (See Diamond Aff. ¶¶ 1-3; Hobbie Aff. ¶¶ 2-3.)
Further, and as detailed above, all of the individuals involved, many of whom had extensive experience in the marine insurance industry, behaved throughout as if once WQIS's policy limit for pollution cleanup and response costs was exhausted, WQIS no longer had any responsibility for defense costs. While a few of Plaintiffs' witnesses were able to identify exceptions to the practices cited by WQIS, they also affirmed WQIS's position. For instance, Mr. Ferguson testified that he could only recall one exception from his thirty-eight years in the industry, in which an insurer continued to have an obligation to pay defense costs after the primary policy limit was exhausted. (Tr. (Ferguson) 72.) Furthermore, Mr. Ferguson admitted that the policy that covers the liability for the claims will typically be responsible for defending those claims. (Tr. (Ferguson) 73.)
ACL also argues that WQIS's inconsistencies in its own practices undermines the evidence of industry custom and practice. (Pl. FF & CL ¶¶ 69-70.) For instance, prior to the 2008 oil spill, WQIS stopped paying defense costs when the incurred amount of pollution cleanup costs reached the limit of indemnity under Coverage A. In the present case, however, WQIS altered this practice and, instead, decided to pay pollution defense costs through the date when the cleanup costs were actually paid. (Tr. (Diamond) 313-14.) But this change in practice does not bear on the inquiry before the Court. The date that the Policy was properly considered to be exhausted has no impact on whether WQIS has an obligation to pay defense costs after that date.
Nor is the Court convinced that the recent changes to the WQIS form policy have probative value. In 2011, WQIS altered the structure of its form policy, so that liability and defense costs were collectively covered under a single policy limit. (Ex. P-20; see also Tr. (Hobbie) 360-62.) ACL argues that these changes are evidence that WQIS's and the industry's practices were not as well-established as WQIS claims. While this shift in the policy form was a substantial change in WQIS's coverage, it says nothing about WQIS's obligation to pay defense costs after exhaustion of the policy limit.
Based on the parties' testimony and conduct, the Court accepts that the practice of excess insurers assuming defense costs was common in the marine industry. However, the standard for proving the existence of a custom requires a higher bar. See, e.g. , Bernard National Loan Investors, Ltd. v. Traditions Management, LLC , 688 F. Supp. 2d 347, 365 (S.D.N.Y. 2010) (although defendants "introduced convincing evidence" that the industry practice was often used, they failed to prove that the custom was sufficiently fixed, invariable, and recognized); Mitsubishi International Corp. v. Interstate Chemical Corp. , No. 08 Civ. 194, 2008 WL 4387392, at *3 (S.D.N.Y. Sept. 24, 2008) (evidence that a practice occurs most of the time or on a regular basis was insufficient).
WQIS has not put forth sufficient evidence to demonstrate that the alleged practice was "fixed and invariable" or that the "party sought to be bound was aware of the custom, or that the custom's existence was ‘so notorious’ that [ACL] should have been aware of it." Bernard National Loan Investors, Ltd. , 688 F. Supp. 2d at 365. Accordingly, based on custom alone, the Court would not find in WQIS's favor. For the reasons detailed above, however, the Court finds for WQIS based on the evidence of the parties' intentions and their course of conduct.
4. Contra Proferentem
The rule of contra proferentem provides that where an insurer drafts a policy, any ambiguity in that policy "should be resolved in favor of the insured." Morgan Stanley Group Inc. , 225 F.3d at 276. But this doctrine only applies if the extrinsic evidence "fails to resolve the ambiguity." Bahar v. Allstate Insurance Co. , 159 F. App'x 311, 312 (2d Cir. 2005) ; see also 1070 Park Avenue Corp. v. Fireman's Fund Insurance Co. , 313 F. Supp. 3d 528, 536 (S.D.N.Y. 2018) ("If the extrinsic evidence does not yield a conclusive answer as to the parties' intent" then "[a]s a last resort, the court will fall back on the rule of contra proferentem. "). Here, it is not necessary to resort to the rule, because the extrinsic evidence resolves the ambiguity. See Parks Real Estate , 472 F.3d at 46 ("If the extrinsic evidence does not yield a conclusive answer as to the parties' intent, a court may apply other rules of contract construction, including the rule of contra proferentem. ") (quoting Morgan Stanley Group Inc. , 225 F.3d at 276 ).
The parties also dispute whether this rule of construction even applies, since, arguably, the true parties at interest are all insurance companies. See Great American Insurance Co. v. Fireman's Fund Insurance Co. , 481 F.2d 948, 954 (2d Cir. 1973) ("Although ordinarily we would be disposed to interpret the language of an ambiguous notice in favor of the insured and against the insurer, we consider that this general rule should not apply when both insured and insurer are large insurance companies long engaged in far flung activities in that field of economic activity.") (internal quotation omitted). Because the Court finds that extrinsic evidence resolves the ambiguity, it is not necessary to address this additional issue.
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Conclusion
The Court finds that the phrase "liabilities covered" in Coverage C refers only to liabilities that WQIS was required to cover under Coverage A. Coverage A only requires WQIS to cover OPA '90 liabilities up to $5,000,000 million per vessel. Once the coverage limit under coverage A was reached by final payment on August 27, 2008, ACL no longer had any "liabilities covered," and therefore WQIS was no longer obligated to cover defense costs under Coverage C. Accordingly, for the reasons set forth above, judgment shall be entered in favor of WQIS.
SO ORDERED.