Opinion
Civil Action No. 02-7781.
June 15, 2004
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiff Royal Insurance Company of America ("Royal"), an excess insurer, has filed this action seeking a declaration that it is not liable to indemnify its insured, defendant Laurelton Welding Service, Inc. ("Laurelton") in connection with a now consolidated lawsuit involving the death of three crew members of a clam vessel known as the F/V Adriatic ("Adriatic") which sank off the coast of New Jersey. Laurelton is a defendant in the underlying action. Royal alleges that it is entitled to decline coverage for those wrongful death claims because it received late notice of the sinking and was either prejudiced or appreciably prejudiced by the late notice. Royal also seeks a declaration that it is not liable for punitive damages.
Laurelton has counterclaimed against Royal, seeking a declaration not only that Royal has a duty to indemnify it for compensatory damages but that Royal has acted in bad faith in its investigation and handling of the claim for coverage and in the subsequent denial of coverage. Laurelton seeks damages against Royal.
In addition, Laurelton has brought in as third-party defendants: (1) its primary insurer United National Insurance Company ("United National"); (2) the insurance broker, J.F. Murray Co., Inc. ("J.F. Murray") which procured both the United National and Royal policies for Laurelton; and (3) the plaintiffs in the underlying wrongful death action. The court has bifurcated the trial of the third party claims.
The dispute between Royal and Laurelton involves the interpretation of a marine insurance policy. Accordingly, Royal has elected to invoke this court's admiralty jurisdiction under Rule 9(h) of the Federal Rules of Civil Procedure. See Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 313 (1955);Centennial Ins. Co. v. Lithotech Sales, LLC, 2002 WL 312873, at *1 (3d Cir. Feb. 26, 2002); U.S. CONST. art. III, § 2.
The court tried without a jury the claims of Royal against defendant Laurelton and the counterclaim of Laurelton against Royal.
The following are the court's findings of fact and conclusions of law:
1. In December, 1998 and early January, 1999, Laurelton performed extensive repairs and modifications to the engine room clam pump of the Adriatic, a commercial clamming vessel, at Laurelton's shop in Point Pleasant Beach, New Jersey. Laurelton is owned by Thomas Gallagher. The value of the work was approximately $17,000.
2. While Russell Crane, a welder/fitter for Laurelton, performed much of the work, he was assisted by George Evans, the Master of the Adriatic, and by the Adriatic's crew, including Michael Hager.
3. The clam pump on the Adriatic was designed to pump sea water from an intake opening in the vessel into a hose extending from the stern of the vessel to the ocean floor. The water pumped through this hose stirred up the sand and exposed the clams which were then scooped up by a dredging device attached to the vessel behind the hose.
4. After Laurelton completed its work on the Adriatic, Evans and Gallagher ran tests on the vessel, including tests on the clam pump. The results were satisfactory.
5. On January 18, 1999, on its first voyage after these repairs, the Adriatic sank off the New Jersey coast near Barnegat Light during a storm. All four crew members aboard lost their lives. There are no surviving eyewitnesses.
6. Laurelton, through its insurance broker J.F. Murray, had previously procured primary liability insurance policy MIP0050183 from United National with coverage in the amount of $1 million per occurrence and excess insurance policy POH008379 from Royal with coverage in the amount of $2 million. Both the primary and excess policies were effective from July 12, 1998 through July 12, 1999. Laurelton also had a $25,000 self insurance retention layer in the event that the primary policy was exhausted and before the excess insurance coverage became payable.
7. The Royal insurance policy was underwritten and issued from Royal's Philadelphia office. Laurelton paid its premiums for Royal's policy to J.F. Murray, which is located in New Jersey. J.F. Murray then forwarded the premiums to Royal's Philadelphia office.
8. United National, as the primary insurer, does not dispute its duty to defend or its duty to indemnify Laurelton for the underlying occurrence and claims up to the limit of its policy. Royal also concedes, absent late notice and prejudice, that coverage exists under the terms of its policy and that it has a duty to indemnify for compensatory damages once the primary limits and the $25,000 self insurance retention are exhausted.
9. Thomas Gallagher first heard about the sinking of theAdriatic over the marine radio in his office on or about January 19, 1999. On January 20, 1999, Gallagher notified Colleen Smith, president of J.F. Murray, Laurelton's insurance broker, of the sinking.
10. Ms. Smith requested that Gallagher prepare a list of work that Laurelton had performed on the Adriatic. On January 25, 1999, upon receiving Gallagher's reply, Ms. Smith forwarded these documents to MIP, Inc., the agent of United National.
11. On January 29, 1999, J.F. Murray faxed a general liability notice of occurrence/claim to MIP, Inc. On the form, Ms. Smith stated "insured did repairs to the Adriatic and a day later the boat sank." She also noted on the form that "insured does not feel that the work he did had anything to do with the sinking of this vessel but will report for record purposes only."
12. Neither J.F. Murray nor Gallagher notified Royal of theAdriatic's sinking at this time.
13. On January 19, 1999, the day after the vessel sank, Captain Duane Clause and a team of experienced divers under his supervision conducted a search and rescue dive of the wreck site with the knowledge and authorization of the U.S. Coast Guard. Captain Clause is the lead diver and captain for Budget Boat Towing and Salvage, a boat towing operation.
14. When Captain Clause viewed the Adriatic, it was lying on the ocean bottom on its port side in about 60 feet of water. A videotape of the dive was made but mechanical difficulties caused problems with the video, and it was not produced at the trial.
15. A week later, on January 27, 1999, a team of divers from Divemasters Incorporated ("Divemasters") examined the wreck site, and recorded the dive on videotape at the behest of the owner of the Adriatic. At that time, the dredge hose appeared to be caught in the propeller fluke as seen by Clause on January 19, 1999. However, the Divemasters team video did not capture the full length of the dredge hose from one end to another in the approximately two hours of video recording.
16. Several weeks later, on February 10, 1999, the Divemasters team conducted its second videotaped dive of the Adriatic. The video was approximately one hour in length. It now appeared that the starboard side of the Adriatic wheelhouse had been substantially damaged by a collision from another vessel since the January 27, 1999 video. The aluminum parts of the control panel had also begun to corrode.
17. In the meantime, the United States Coast Guard began hearings on January 28, 1999 in Philadelphia regarding the sinking of the Adriatic. Gallagher and Laurelton's employee Russell Crane were subpoenaed to testify at the hearings concerning the work that Laurelton had performed on the vessel. Gallagher retained experienced admiralty and marine attorney Thomas Stiles, Esquire from New York to represent him and Crane at the hearings.
18. Stiles met with Gallagher beforehand to prepare him for his testimony at the Coast Guard Hearings on February 5, 1999 and also met with and prepared Crane for his testimony prior to his March 5, 1999 testimony at the Coast Guard Hearings.
19. Stiles attended the hearings with his clients in Philadelphia. Stiles and Crane also met with Coast Guard officers before Crane testified on March 5, 1999 in an effort to clarify and rectify the Coast Guard's understanding of the work Laurelton had done on the Adriatic.
20. Stiles did not consider it to be necessary formally to enter his appearance at the hearings on behalf of Laurelton, Gallagher, or Crane or to request that Laurelton be declared an interested party.
21. If Laurelton had been declared an interested party, it would have had an opportunity to examine and cross-examine witnesses and comment on the Coast Guard's draft report before it was finalized.
22. Stiles found no reason to object to any questions asked of Gallagher or Crane and did not see any need to participate in the questioning. Since the proceeding was somewhat informal, he would have sought to participate had the need arisen and believes he would have been afforded an opportunity to do so.
23. The Coast Guard issued its formal investigative report on July 23, 1999. Stiles received a copy of the report in or around December, 1999 or early January, 2000 after making a Freedom of Information Act request. He forwarded a copy of the report to Gallagher in January, 2000.
24. The conclusions of the Coast Guard report stated, among other things, that the proximate cause of the sinking of theAdriatic was the flooding of the engine room and that a contributing cause of the flooding was failure of the clam pump piping system in the engine room. The Coast Guard report goes on to note that "[t]he evidence available limits the ability to ascertain with 100% certainty, the sequence and timing of specific failures in the clam pump piping system." The report then listed two possible scenarios that caused the flooding. The Coast Guard found that "[t]he root cause of this casualty is the lack of a high standard of care in maintenance and operation of the F/V Adriatic." Neither Laurelton nor Gallagher were mentioned by name in the Coast Guard report.
25. The report also listed 13 recommendations, most of which included involving Coast Guard efforts to raise the standard of care in maintenance and operation of fishing vessels.
26. Gallagher did not forward the report to Royal or notify Royal about it at this time.
27. On August 23, 1999, some seven months after the Adriatic sank, an additional videotaped dive of the Adriatic wreck site was conducted. A fourth videotaped dive occurred over a year later, on September 8, 2000. The combined length of these tapes was approximately one hour.
28. The tapes from these dives depicted portions of the vessel including the wheelhouse which had become detached and were lying next to the Adriatic as a pile of debris. Marine growth was covering the wreck site and silt had begun to fill the interior. By the time of the last two videos, the Adriatic was no longer on its port side but was now upside down. It had also been the subject of one or more additional collisions.
29. By the time of the September 8, 2000 dive, the propeller and dredge hose were missing from the wreck site and the wheelhouse had been torn away from the vessel.
30. On October 5, 1999, the Estate of Michael Hager, one of the crew members who lost his life on the Adriatic, filed a wrongful death action in the United States District Court for the District of New Jersey entitled Hager v. Cape Cod Packing Co., et al., 1999 CV 4714. On February 28, 2000, the complaint was amended to add Laurelton as an additional defendant. This lawsuit was never served on Laurelton. This suit was dismissed without prejudice in August, 2000.
31. On January 22, 2001, the Estate of Michael Hager commenced a second suit against Laurelton in the New Jersey Superior Court in Ocean County, entitled Hager v. Laurelton Welding Service, Inc., et al., Docket No. OCNL-122-01. Hager's Estate seeks both compensatory and punitive damages.
32. On February 8, 2001, the Estates of Douglas Michael Oland and Frank Janicelli III, two other crew members who died on theAdriatic, filed a single wrongful death action against Laurelton in the New Jersey Superior Court in Ocean County entitled Oland Janicelli v. Givens Ocean Survival Sys. Co., Inc., et al., Docket No. OCNL-164-01. The Estates of Oland and Janicelli likewise seek both compensatory and punitive damages.
33. Gallagher, the owner of Laurelton, was served in early February, 2001 with the complaints against Laurelton in the two pending actions filed in the state court. Shortly thereafter, he sent copies to J.F. Murray, Laurelton's insurance broker. Colleen Smith of J.F. Murray then forwarded the complaints to MIP, Inc., the agent of United National.
34. Neither Gallagher nor J.F. Murray notified Royal of the underlying suits at this point.
35. MIP, Inc. forwarded the Hager complaint to United National on February 12, 2001 and the Oland and Janicelli complaint on February 21, 2001.
36. On November 20, 2001, the two New Jersey state court actions were removed to federal court pursuant to diversity jurisdiction and consolidated into one proceeding entitledHager, et al. v. Laurelton Welding, et al, Docket No. 2001-CV-00859. It is currently pending before U.S. District Judge Mary L. Cooper. No trial has yet occurred.
37. On or about February 26, 2001, Steven Dana, the United National senior claims adjuster assigned to the claims against Laurelton, appointed attorney Joseph Cooney, Esquire to represent Laurelton in the two yet unconsolidated underlying lawsuits. Cooney is an experienced lawyer who has been certified as a civil trial attorney by the New Jersey Supreme Court.
38. On February 27, 2001, Dana wrote to Gallagher, informing him that United National had received the complaints in the two underlying suits. In his letter, Dana advised Gallagher that the actions contained claims for punitive damages and that Laurelton's policy with United National specifically excluded coverage for such damages. Dana also explained, "the damages associated with these claims are potentially in excess of the policy limits provided to you by [United National]."
39. In his February 27, 2001 letter, Dana also instructed Gallagher to "immediately notify your excess liability carrier of these losses and request that they contact [United National] as soon as practicable."
40. At the request of an expert witness obtained by Cooney, Captain Louis Wary of B K Marine Engineer, Inc., Cooney hired Dan Crowell to perform another dive to examine the Adriatic wreck site. Crowell, who had previously been on the August 23, 1999 and September 8, 2000 dives, performed this latest dive on October 8, 2001. He was in the water for approximately an hour and half but was unable to capture video images inside theAdriatic because the conditions he encountered were not conducive to doing so. Crowell noted that the vessel interior contained a great deal of silt and marine growth.
41. On October 4, 2001, Cooney wrote to Dana at United National, enclosing a report from one of the plaintiff's liability experts in the underlying wrongful death case. After reviewing this expert report, Cooney noted that "the allegations against the other defendants in [the underlying wrongful death cases] are extremely tenuous, and "it is very likely that [Laurelton] will be the sole remaining defendant in the [underlying wrongful death cases] against whom a viable theory of liability is presented."
42. On August 1, 2001 Cooney wrote to Gallagher inquiring as to whether Laurelton carries any excess insurance coverage. After Gallagher did not respond to this inquiry, Cooney sent follow-up letters on September 6, 2001 and October 3, 2001 requesting the same information.
43. On October 26, 2001, Cooney obtained a copy of Laurelton's Royal excess insurance policy from J.F. Murray.
44. On October 30, 2001, Cooney wrote to J.F. Murray, advising it to notify Royal of the sinking of the Adriatic and the underlying lawsuits.
45. In a letter dated November 2, 2001, Colleen Smith of J.F. Murray notified Royal of the claims against Laurelton. Royal received the notice on November 6, 2001.
46. On November 12, 2001, Deborah Scott, a senior claims adjuster at Royal, sent a reservation of rights letter addressed to Gallagher, J.F. Murray, and Cooney. She asked that Royal be placed on Cooney's mailing list. Scott also requested information from Cooney related to the underlying suits.
47. On November 27, 2001, Cooney sent Scott some 225 pages of documents related to the Adriatic's sinking.
48. On February 27, 2002, Thomas Rittweger, an attorney with the law firm of Nicoletti, Hornig, Campisi, Sweeney Paige, acting on behalf of Royal, faxed a letter to Cooney requesting copies of the papers from the underlying wrongful death proceedings.
49. On March 11, 2002, Cooney sent Thomas Rittweger over 1500 pages of pleadings and deposition transcripts in the underlying actions.
50. In a letter dated April 23, 2002, attorney Rittweger asked Cooney to send him copies of transcripts from the Coast Guard hearings. Cooney did so on April 30, 2004.
51. After Scott of Royal issued the reservation of rights letter, she gathered and reviewed information Cooney had provided, including the Coast Guard report, and expert reports that Cooney had commissioned. She does not remember seeing any mention of the videotaped dives and did not view any of the existing videos.
52. Royal did not hire an attorney to represent Laurelton in the underlying suit. Nor did Scott ever communicate with Dana at United National about the limits of United National's policy or United National's efforts to defend the underlying suit. She did not communicate with Gallagher about whether he had retained counsel to represent Laurelton at the Coast Guard hearings. Finally, she did not talk to Cooney while reviewing the file.
53. Paragraph "E" under the "conditions" provisions in Royal's policy provides:
Whenever the Assured has information from which the Assured may reasonably conclude that an occurrence covered hereunder involved injuries or damages which, in the event that the Assured should be held liable, it is likely to involve this policy, notice shall be sent to this Company as soon as practicable, provided, however, that failure to notify this Company of any occurrence which at the time of its happening did not appear to involve this policy, but which at a later date would appear to give rise to claims hereunder, shall not prejudice such claims.
54. On October 8, 2002, some eleven months after Royal sent its reservation of rights letter, Scott sent a letter to Gallagher in which she advised that Royal was declining coverage for the now consolidated underlying lawsuits on the grounds of late notice and prejudice. The letter also stated that the Royal policy does not cover punitive damages, which are demanded in the underlying suits.
55. Scott obtained approval from her boss at Royal to send the declination letter. Royal is not relying on the advice of counsel in declining coverage for Laurelton.
56. In its declination letter, Royal specified three grounds for prejudice as a result of late notice.
57. First, Royal asserted that if Laurelton had provided notice to it upon receipt of the U.S. Coast Guard subpoenas shortly after the sinking of the Adriatic, Royal would have appointed defense counsel to defend Laurelton, Gallagher and Crane at the hearings. Royal contended that said defense counsel would have placed Laurelton on the "interested parties" list at the hearings and as a result would have had an opportunity to comment on the proposed findings and conclusions of the Coast Guard before it issued its report.
58. Royal also maintained that if it had received timely notice, it would have conducted a comprehensive underwater investigation to preserve evidence before it was irretrievably lost because of ocean conditions.
59. Finally, Royal asserted that it was prejudiced by Cooney's failure to assert 46 U.S.C. § 6308, which provides that "no part of a report of a marine casualty investigation . . ., including findings of fact, opinions, recommendations, deliberations, or conclusions, shall be admissible as evidence or subject to discovery in any civil or administrative proceedings." Royal claimed that if Laurelton had provided timely notice, it would have appointed defense counsel for the underlying lawsuits. According to Royal, counsel would have objected to the use of Coast Guard report and testimony in the underlying wrongful death lawsuits.
60. Royal presented no evidence that when acting as an excess insurer, it had ever engaged in an investigation or retained counsel to defend a claim against an insured before a claim had been made against the insured.
61. Dana of United National has placed a total indemnity reserve on the underlying lawsuits at $600,000. The reserve is the amount of money that might be necessary to resolve all three pending wrongful death suits.
62. Joseph Cooney agrees with United National's assessment. Thus, he has concluded that the underlying claims against Laurelton are not likely to exceed the primary limits of $1,000,000.
63. There was no credible testimony from any witness that the underlying wrongful death claims by themselves net of the property value of the Adriatic are likely to involve compensatory damages against Laurelton in excess of $1,000,000.
64. In a letter dated April 27, 2001, Cooney informed Dana at United National of the Jones Act Limitation Action that was previously settled by the Estates of the crew members against the owner of the Adriatic for the full amount of his available insurance proceeds totaling $911,000. See 46 App. U.S.C.A. §§ 181 et seq. (West Supp. 2004). As part of the limitation action, the release specified that the defendants in the pending federal court actions, including Laurelton, will be given a credit to the extent of the proportionate percentage of fault which is ultimately attributed to the vessel owner and captain.
65. On November 5, 2003, U.S. District Judge Mary L. Cooper made findings in the underlying lawsuit that the death of the crew members occurred outside the three nautical mile limit and therefore that the Death on the High Seas Act ("DOHSA"), 46 U.S.C. § 761 et seq., applies to the wrongful death claims against Laurelton. When DOHSA is applicable, recovery for wrongful death is limited to economic loss, and no recovery is allowed for pain and suffering.
66. The trial of the underlying action is currently stayed pending the appeal of Judge Cooper's DOHSA ruling.
Because this case falls within the court's admiralty jurisdiction, federal maritime law applies. See Windsor Mt. Joy Mut. Ins. Co. v. Pozzi, 832 F. Supp. 138, 140 (E.D. Pa. 1993). A federal court sitting in admiralty must apply federal choice of law rules. Id. (citations omitted). However, where there is "absence of a controlling federal statute or an established rule of general maritime law, state law governs the scope and validity of contracts of marine insurance." Id. In this case no federal statute or established rule of maritime law governs the interpretation and construction of contracts for marine insurance. Accordingly, state law controls.
Here, the parties disagree about whether New Jersey or Pennsylvania law applies to this action. See Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310 (1955). Royal contends that Pennsylvania law applies, and Laurelton argues for New Jersey law. Under Pennsylvania law, "where an insurance company seeks to be relieved of its obligations under a liability insurance policy on the ground of late notice, the insurance company will be required to prove that the notice provision was in fact breached and that the breach resulted in prejudice to its position." Brakeman v. Potomac Ins. Co., 371 A.2d 193, 198 (Pa. 1977).
Under New Jersey law, Royal must prove a breach of the notice provision and a likelihood of appreciable prejudice. See Cooper v. Gov't Employees Ins. Co., 237 A.2d 870, 874 (N.J. 1968) (emphasis added). To establish appreciable prejudice, the insurer must prove (1) that substantial rights have been irretrievably lost by virtue of the late notice, and (2) that the insurer had a likelihood of success in defending against the claim. Morales v. Nat'l Grange Mut. Ins. Co., 423 A.2d 325, 329-30 (N.J.Super. 1980).
We first consider the issue of late notice. We need not decide whether Pennsylvania law or New Jersey law governs this question because the law is the same in both jurisdictions.
As noted above, under the Royal policy, Laurelton was required to give Royal notice "as soon as practicable" after it had "information from which [it] may reasonably conclude that an occurrence covered hereunder involved injuries or damages which, in the event that the assured should be held liable it is likely to involve this policy." The policy continued, "provided however that failure to notify this company of any occurrence which at the time of its happening did not appear to involve this policy, but which at a later date would appear to give rise to claims hereunder, shall not prejudice such claims." The provision of the policy requiring timely notice of an occurrence or a claim is designed to protect the insurance company from being placed in a substantially less favorable position than it would be without timely notice. See Trustees of the Univ. of Pennsylvania v. Lexington, 815 F.2d 890, 897 (3d Cir. 1987).
The duty to notify cannot be postponed until the insured has information from which it may believe itself liable. Nonetheless, the duty does not come into being until the insured reasonably has some grounds for believing its liability to be at issue and that it is likely that the Royal policy's layer of coverage would be involved. See id. at 895.
Four crew members of the Adriatic died in the occurrence at issue. At first glance, it may seem that Laurelton potentially faced more than $1 million in damages if held liable. The Royal policy, however, does not require notification simply because the policy may potentially be involved. One can also argue persuasively that Laurelton should have given Royal notice at an early date simply out of an abundance of caution. Nonetheless, the Royal policy does not contain an "out of an abundance of caution" clause either. The question on which we must focus is if and/or when the Royal policy was likely to be involved if the insured is held liable for the occurrence. In making this determination, we must apply an objective standard.Id. at 896.
First, Laurelton did not have a reasonable basis to believe it had any liability until at least after the Coast Guard report was issued on July 23, 1999. Even then, the picture was unclear. There were no eyewitnesses to the sinking of the Adriatic and the bodies of two crew members were never found. There were indications that some of the crew members may have been at fault. While the Coast Guard report mentioned the failure of the clam pump system, it never accused Laurelton of wrongdoing and stated that the root cause of the casualty was "the lack of a high standard of care in maintenance and operation of the F/VAdriatic." There were also other possible defendants besides Laurelton. In short, there were real questions as to whether Laurelton's repairs played any part in the loss of life.
Most significantly, United National's experienced claims adjuster, Steven Dana, placed a $600,000 reserve on the three claims in February, 2001, shortly after the claims were filed. The reserve has remained the same. The professional opinion of Joseph Cooney, an experienced lawyer certified by the New Jersey Supreme Court as a civil trial attorney, agreed with the assessment of United National with respect to the value of the three claims. Both opined that the total value is below the $1 million coverage provided by United National's policy. In contrast, Royal, which has the burden of proof, has produced no credible evidence by either an attorney, experienced claims adjuster or other claims or legal expert to the contrary. Using the required reasonable person standard as we must, we cannot impose on Laurelton or its owner Thomas Gallagher a conclusion that the occurrence in issue was likely to involve more than $1 million in wrongful death damages against Laurelton when professionals like Steven Dana of United National and Joseph Cooney, Esquire hold a contrary view.
The Jones Act settlement and the decision by Judge Mary L. Cooper under the Death on the High Seas Act have all benefitted Laurelton by reducing its potential liability and thus the chance that the Royal policy will be implicated. While these events occurred in 2001 and 2003, we cannot ignore the ramifications of these statutes and their effect on a evaluation of the three death claims even before the issues they present had been decided. The reasonable person would have considered the effect of a Jones Act proceeding against the owner of the vessel as well as of the bar of pain and suffering damages under the Death on the High Seas Act in determining whether the Royal policy was likely to be implicated. From the beginning, the reasonable insured would have discounted the value of these death claims because of the Jones Act and the Death on the High Seas Act.
In sum, Royal has not proven that Laurelton, acting as a reasonable insured, should have come to the conclusion that the occurrence involving the sinking of the Adriatic and the deaths of the crew members was likely to involve the Royal policy even if Laurelton had grounds to believe its liability was at issue after the Coast Guard report emerged in late July, 1999.
Assuming for the moment, however, that notice of the occurrence to Royal on November 6, 2001 was untimely and that notice should have been provided as early as August, 1999, a short time after the Coast Guard report was issued, we turn to the issue of whether Royal has established prejudice under Pennsylvania law.
Preliminarily, we note that the role of an excess insurer such as Royal is quite different from that of a primary insurer such as United National. The primary insurer has the duty to defend the insured while the excess insurer has no such duty.Trustees, 815 F.2d at 898. Under the terms of the Royal policy,
This Company shall not be called upon to assume charge of the settlement or defense of any claim made or suit brought or proceeding instituted against the Assured, but this Company shall have the right and shall be given the opportunity to associate with the Assured or the Assured's Underlying Insurers, or both, in the defense and control of any claim, suit or proceeding relative to an occurrence where the claim or suit involves or appears reasonably likely to involve this Company, in which event the Assured, underlying insurers, and this Company shall cooperate in all things in the defense of such claim, suit or proceeding, but this Company shall have the right to make such investigations, negotiations and settlement of any claim or suit as may be deemed expedient by this Company.
Excess Marine Insurance Policy at Conditions, ¶ F.
Because the primary carrier will usually provide an experienced defense, the likelihood of prejudice from late notice to an excess insurer is more remote. Trustees, 815 F.2d at 898.
Royal outlined three grounds for prejudice in its October 8, 2002 declination letter.
First, we disagree that Royal has been prejudiced by the failure of counsel for Laurelton to object to the use of the Coast Guard hearing testimony or the July 23, 1999 Coast Guard report in any subsequent proceeding pursuant to 46 U.S.C. § 6308. The statute provides in relevant part:
(a) Notwithstanding any other provision of law, no part of a report of a marine casualty investigation conducted under section 6301 of this title, including findings of fact, opinions, recommendations, deliberations, or conclusions, shall be admissible as evidence or subject to discovery in any civil or administrative proceedings, other than an administrative proceeding initiated by the United States.
The underlying actions in the U.S. District Court for the District of New Jersey have not yet been tried. Thus, no party has even attempted to move the report into evidence at trial. In addition to the statutory prohibition, the report is hearsay and thus objectionable on that ground. Royal also maintains the testimony adduced at the hearing must be excluded. The statute, of course, contains no such specific prohibition to the admission of the testimony, and whether its use is prohibited for all purposes including impeachment is an open question. See In re American Milling Co., 270 F. Supp. 2d 1068 (E.D. Mo. 2003); In re Complaint of Danos Curole Marine, 278 F. Supp. 2d 783 (E.D. La. 2003). In any event, since no trial has yet occurred, the opportunity to object still exists as to both the report and the testimony.
It is true that the expert reports for both sides in the underlying action reference the Coast Guard report and the testimony given at the hearing. These reports are likewise hearsay, and the experts have not yet testified. Thus, no harm has yet been done as a result of these reports.
It is also true that the testimony from the Coast Guard hearing has been referenced in a decision by Judge Mary L. Cooper in the underlying action in which she dismissed a defendant which was then purported to be the manufacturer of the clam pump. This was in November, 2001. This defendant was simply not the actual manufacturer, and no one is now contending otherwise. This hardly constitutes prejudice to Royal.
Evidence from the Coast Guard hearing was also introduced at a hearing before Judge Cooper in 2003 on the question whether the Death on the High Seas Act, 46 U.S.C. § 761 et seq., applied to the underlying action. The court relied in part on testimony at the Coast Guard hearing in finding that the deaths of the crew members of the Adriatic occurred beyond the three nautical mile limit. As a result, Laurelton can only be held liable for economic loss and not pain and suffering. Contrary to Royal's position that it had been prejudiced by counsel's failure to object to the evidence under 46 U.S.C. § 6308, the use of the testimony from the Coast Guard hearing was extremely helpful to Laurelton in significantly limiting what it might otherwise have to pay in damages.
There is one other salient point in connection with the Coast Guard report, the testimony at the Coast Guard hearings, and § 6308. Royal argues that it was prejudiced because the report and testimony provided a road map to the plaintiffs in the underlying action in determining which defendants or defendant to sue. This argument is without merit. The availability of the Coast Guard report and testimony has nothing whatsoever to do with whether or not Laurelton's counsel would object to the use of § 6308 material at a trial. The Coast Guard report and the transcripts are available as public documents for use by plaintiffs' counsel in investigating and preparing their cases, regardless of any prohibition under § 6308.
Second, Royal claims it was prejudiced because it would have arranged for a comprehensive underwater investigation of the sunken vessel had it not been given late notice of the occurrence. As noted above, the sinking of the Adriatic occurred on January 18, 1999. Nature began to take a toll on the sea wreck almost immediately. Corrosion set in, the currents moved what remained of the vessel, marine growth covered the vessel in abundance, and silt piled up. In addition, collisions from other vessels affected this wreck as well as human scavengers. Royal's counsel conceded that by the time of the August 23, 1999 dive, the wreck site had been so altered that a further investigatory dive would have been futile. By Royal's own admission, even if Laurelton had provided notice to Royal shortly after the July 23, 1999 Coast Guard report issued, an investigative dive would still have been too late. Thus, Royal was not prejudiced by not being able to arrange a comprehensive dive at the wreck site of theAdriatic in August, 1999 or thereafter.
We also find and conclude that Royal would not have undertaken a comprehensive investigatory dive even had it known about the sinking immediately after it took place on January 18, 1999. Royal produced no evidence that in its role as an excess insurer it has ever undertaken an investigation of an occurrence before an actual claim was made. In this case, the claims (as opposed to the occurrence) were not known to Laurelton until it was served in February, 2001 with the complaints in the underlying state court lawsuits.
While Royal had the right but not the obligation to conduct its own investigation, the court is not persuaded that it would have conducted its own investigatory dive even if it had learned of the occurrence in January, 1999. Instead, Royal would have relied on United National and its judgment whether or not to conduct another early dive (beyond those already undertaken) before any claims were made.
Finally, for the same reason, the court finds and concludes that Royal would not have appointed counsel to represent defendants Laurelton, Gallagher, or Crane at the Coast Guard hearings in February and March, 1999 or taken steps to have Laurelton named as an interested party. Laurelton had hired its own attorney Thomas Stiles to represent it, Thomas Gallagher, and Russell Crane at the hearing. Again, Royal, as an excess insurer, would have relied on United National, the primary insurer, to carry the laboring oar and would have remained in the background until the actual claims surfaced in February, 2001.
Under Pennsylvania law, to establish prejudice an excess insurer must show not only a substantial loss of defense opportunities, but also a likelihood of success in defending liability or damages if those opportunities had been available.See Trustees, 815 F.2d at 898. We find and conclude that Royal has not demonstrated by a preponderance of the evidence that it has been prejudiced by the failure of Laurelton to provide it with notice of the occurrence or of the wrongful death claims earlier than it did. Thus, Royal is not entitled to declaratory relief against Laurelton except for its claim that it is not liable for punitive damages. The Royal policy excludes "liability or expense arising . . . from claims for fines, penalties, or exemplary, or punitive damages." Royal Insurance Policy at Absolute Exclusions, ¶ l.
Since Royal has not been prejudiced under Pennsylvania law, it cannot prevail under New Jersey's higher standard which requires proof of appreciable prejudice. See Cooper v. Gov't Employees Ins. Co., 237 A.2d 870 (N.J. 1968); Morales v. Nat'l Grange Mut. Ins. Co., 423 A.2d 325 (N.J.Super. 1980).
We find and conclude that Laurelton is entitled to declaratory relief on its counterclaim that Royal is obligated under its excess policy to indemnify Laurelton up to its policy limits for any compensatory judgment or settlement in the underlying wrongful death action which exceeds the primary limits of the United National Policy and Laurelton's $25,000 selfretained limit.
As a result of our findings of fact and conclusions of law, we will dismiss the third party claims of Laurelton against United National, against J.F. Murray Co., and against the plaintiffs in the underlying action pending against Laurelton in the United States District Court for the District of New Jersey. Since we have found against Royal, Laurelton's claims against these parties are now moot.
Finally, we turn to Laurelton's bad faith counterclaim against Royal. Royal contends that Pennsylvania law should apply in determining Laurelton's bad faith claim. Laurelton asserts that New Jersey law applies to its bad faith claim. We need not decide which law controls because the result would be the same under either standard.
The Pennsylvania statute governing bad faith claims against insurers is found at 42 P.S. § 8371 and provides:
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:
(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
Under Pennsylvania law, to prove bad faith, Laurelton must demonstrate "by clear and convincing evidence that the insurer (1) did not have a reasonable basis for denying benefits under the policy, and (2) knew or recklessly disregarded its lack of reasonable basis in denying the claim." W.V. Realty, Inc. v. Northern Ins. Co., 334 F.3d 306, 311 (3d Cir. 2003) (citations omitted).
The policy provision that Royal relies upon in denying Laurelton's claim provides:
Whenever the Assured has information from which the Assured may reasonably conclude that an occurrence covered hereunder involved injuries or damages which, in the event that the Assured should be held liable, it is likely to involve this policy, notice shall be sent to this Company as soon as practicable . . .
Excess Marine Insurance Policy at Conditions, ¶ E.
We have already found that Laurelton, the insured, did not fail to notify Royal of the occurrence in a timely manner and that even if Laurelton had acted in an untimely manner, Royal did not suffer prejudice. Thus, Laurelton did not breach the provisions of the Royal insurance policy.
We now must focus on Royal's conduct in denying coverage. Even assuming that Royal had no reasonable basis to deny coverage, Laurelton has not met the high standard of proof required under Pennsylvania law, that is, it has not proven by clear and convincing evidence that Royal knew or recklessly disregarded its lack of reasonable basis for denying coverage. To be sure, Deborah Scott, the senior claims adjuster at Royal who reviewed the file and made decisions about Laurelton's coverage under the policy, did not do as thorough a job as she could have done. Nonetheless, there was no clear and convincing evidence that she knew or recklessly disregarded any lack of a reasonable basis for denying coverage.
Under New Jersey law, to establish its bad faith claim, Laurelton must prove, apparently by a preponderance of the evidence, that Royal's denial of coverage occurred without any "fairly debatable" basis in law or fact. Pickett v. Lloyd's, 621 A.2d 445, 453-54 (N.J. 1993). "Under the `fairly debatable' standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer's bad-faith refusal to pay the claim." Id. at 454.
While Royal breached its contract in disclaiming coverage based on Laurelton's alleged late notice, Laurelton has not proven there was no "fairly debatable" basis in law or fact to support Royal's denial of coverage for late notice or prejudice.Pickett, 621 A.2d at 453-54. The issues were not as simple as Laurelton contends. Moreover, because there were genuine factual disputes before trial as to whether Laurelton's Royal policy would likely be implicated, Laurelton's bad faith claim fails to satisfy the "not fairly debatable" standard under New Jersey law. Pickett, 621 A.2d at 454.
Laurelton has not established Royal's bad faith in denying coverage under either Pennsylvania's "no reasonable basis" standard or New Jersey's "not fairly debatable" standard. W.V. Realty, Inc., 334 F.3d at 311; Pickett, 621 A.2d at 453-54. Accordingly, we will deny Laurelton's bad faith claim.
ORDER
AND NOW, this day of June, 2004, based on the foregoing findings of fact and conclusions of law, it is hereby ORDERED that:(1) judgment is entered in favor of defendant Laurelton Welding Service, Inc. ("Laurelton") and against plaintiff Royal Insurance Company of America ("Royal") on Royal's complaint for a declaratory judgment, except that judgment is entered in favor of Royal and against Laurelton declaring that Royal does not have a duty to indemnify Laurelton for any punitive damage award under policy #POH008379 in connection with the consolidated action entitled Hager, et al. v. Laurelton Welding, et al., 2001-CV-00859 (D.N.J.);
(2) judgment is entered in favor of counterclaimant Laurelton and against counterclaim defendant Royal declaring that Royal has a duty to indemnify Laurelton up to the limits of policy #POH008379 to the extent that there is any judgment for compensatory damages or settlement in the case of Hager, et al. v. Laurelton Welding, et al., 2001-CV-00859 (D.N.J.) which exceeds the limits of the United National Insurance Company policy MIP0050183 and the self-retention layer of $25,000;
(3) the third party complaints filed by Laurelton against United National Insurance Company, J.F. Murray Co., Inc., the Estate of Michael Scott Hager, and Susan Cornell and Judith Ann Hager as co-administratrices ad prosequendum for the Estate of Michael Scott Hager, Sr., Frank Janicelli, Jr., as administrator of the Estate of Frank Janicelli, III, and the Estate of Frank Janicelli, III, Robert H. Oland, Administrator for the Estate of Douglas Michael Oland, and the Estate of Douglas Michael Oland, the plaintiffs in Hager, et al. v. Laurelton Welding, et al., 2001-CV-00859 (D.N.J.), are DISMISSED as moot; and
(4) judgment is entered in favor of Royal and against Laurelton on the counterclaim of Laurelton for bad faith.