Folksamerica Re v. Clean Water of NY
Folksamerica Reinsurance Co. v. Clean Water of New York, Inc.
The Second Circuit has ruled that a policy providing modified commercial general liability (CGL) and shiprepairers legal liability (SLL) coverages to several named insureds engaged in various "maritime support" roles is primarily maritime and within the federal admiralty jurisdiction.
DMC Category: Developed
This case note has been prepared by David Jensen of Healy & Baillie, LLP in New York. Healy & Baillie are the International Contributors to this website for the United States
The lower court, the United States District Court for the Eastern District of New York, had concluded that the CGL policy was not "marine insurance" and did not have a "purely" or "wholly" maritime character. See the report of the case at 281 F. Supp. 2d 531, 532 (E.D.N.Y. 2003). The lower court reasoned that CGL coverage was a type of insurance used by many businesses to cover day-to-day business operations, and that any maritime risks under the policy were "merely incidental," especially when compared with more traditional hull, cargo, and protection and indemnity policies. Because the district court concluded that the policy was not wholly maritime, it dismissed the policyholderís suit against the insurer.
Judgment of the Court of Appeals
However, the Second Circuit felt that the Supreme Courtís recent decision in Norfolk Southern Railway Co. v. James N. Kirby Pty Ltd. "suggested a shift in analysis." Under Kirby, the relevant inquiry is not whether the non-maritime obligations are "incidental," but rather, whether the primary object of the contract is maritime. The Second Circuit then reasoned that the policy before it was "primarily or principally concerned with maritime objectives."
The Second Circuit reasoned that whether a policy was "marine insurance," and thus properly within the maritime jurisdiction of the court, depended on the coverage provided by the policy, which was a function of both the policyís terms and the insuredís business. The "predominant purpose" of the policy should be determined by "the dimensions of the contingency insured against and the risks assumed." The fact that the policy provided CGL coverage, as opposed to a more traditional form of marine insurance, was not dispositive.
Even though the CGL policy excluded some maritime risks, it insured against others. The Second Circuit observed that certain CGL risks - completed operations hazards, products hazards, pollution risks, and premises and operations risks - were "marine." The court analyzed each particular risk in light of the business operations of the insured. The ultimate inquiry was whether the policy "reach[es] maritime risks." In light of the coupling of the CGL and SLL coverage, the court concluded that the policy was (as a whole) "marine in nature." The court further stated: "Combined, the CGL and SLL provisions round out the insuredsí coverage for maritime transport operations and give fairly robust ship repair and maintenance coverage."
A corollary issue that likely made the dispute significant for the parties is the utmost good faith argument advanced by the insurer. While U.S. admiralty law looks to state law to resolve insurance disputes in most instances, certain admiralty doctrines apply even in the face of inconsistent state insurance law. The Second Circuit has ruled that utmost good faith is one such doctrine, and an insurance policy is thus subject to this admiralty doctrine if it is within the federal admiralty jurisdiction. While the court did not discuss the state law that would otherwise have been applicable, it would not be surprising to learn that the state rule on this point would have been quite different.
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