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Egan Marine Corp. v. Great American Insurance Co. of New York

February 1, 2010


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge


The plaintiffs, Egan Marine Corp. (EMC) and Service Welding and Shipbuilding, LLC (SWS), have sued their marine insurer, Great American Insurance Company of New York (GAIC), for breach of the insurance contract and for the tort of bad faith claims handling. This case is before the Court pursuant to admiralty jurisdiction. 28 U.S.C. § 1333(1). See Norfolk Southern Ry. Co. v. Kirby, 543 U.S. 14, 23-24 (2004) (action for breach of contract falls within admiralty jurisdiction if contract concerns maritime transactions); St. Paul Fire & Marine Ins. Co. v. Lago Canyon, Inc., 561 F.3d 1181, 1184 (11th Cir. 2009); Continental Cas. Co. v. Anderson Excavating & Wrecking Co., 189 F.3d 512, 517 (7th Cir. 1999).

The Court previously granted partial summary judgment in plaintiffs' favor as to certain liability issues on the breach of contract claim. See Egan Marine Corp. v. Great Am. Ins. Co. of N.Y., No. 05 C 5295, 2009 WL 2515630 (N.D. Ill. Aug. 14, 2009). The Court conducted a bench trial on all remaining issues from January 12 through January 15, 2010. This constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).


EMC is in the business of transporting products on waterways. SWS runs the shipyard where EMC keeps its vessels and repairs and maintains those and other watergoing vessels. Dennis Egan is the principal of both EMC and SWS.

1. The GAIC Insurance Policy

EMC and SWS obtained a marine insurance policy from GAIC for the time period at issue in this case. The policy covered a number of EMC vessels, including the two involved in this case, for "incidents" during the policy's effective period. The term "incident" was defined as "[a]n event that exposes You to liability under OPA90 or CERCLA or FWPCA for which Section B [of the policy] provides coverage." Pl. Ex. 1, Section A (emphasis in original). "OPA90" is a reference to the Oil Pollution Act of 1990, 33 U.S.C. § 2702.

The policy stated that GAIC would indemnify EMC and SWS for the following coverages, among others:

1. OPA90 (Federal) - Removal costs and expenses paid by You under Section 1002 of OPA90 (33 U.S.C. Section 2702), for which liability would have been imposed under the Laws of the United States if You had not voluntarily undertaken the removal of oil.

2. OPA90 (State) - Your liability under State law for those removal costs and expenses referred to in Section 1002 (33 U.S.C. Section 2702) of OPA90 but only to the extent that these could have been recovered under OPA90.

3. OPA90 - Your costs and expenses You have paid either in avoiding or mitigating the liability in 1. OPA90 (Federal) or 2. OPA90 (State) as described above.

4. CERCLA - Costs and expenses You have paid where liability would have been imposed upon You if You had not acted voluntarily under 107(a)(1)(A) and (B) of CERCLA (42 U.S.C. Section 9607(a)(1)(A)) and with specific regard to "removal" "response" or "remedial action" as these terms are defined and applied under Section 101(23) - (25) of CERCLA (42 U.S.C. Section 9601(23) - (25)). This coverage includes claims for contributions [sic] under Section 1013(f)(1) of CERCLA (42 U.S.C. Section 9613(f)(1)).

5. Miscellaneous Spill Liability - Costs and expenses paid by You to mitigate liabilities for incidents where such occurrences are insured by this policy, but subject to our WRITTEN EXPRESSED PRE-APPROVAL.

6. Defense Costs - Costs and expenses paid by You to investigate and pursue a legal defense against claims or liabilities insured by this Policy. This coverage will terminate upon payment of judgments [sic] or settlements which exhaust the amount of insurance as stated in the Declarations Page of this policy.

7. Firefighting and Salvage - Firefighting, salvage, offloading, and disposal of Cargo, but ONLY to the extent that such actions contribute to stopping a discharge or release, OR prevent a substantial threat of a discharge or release under OPA90, CERCLA, or the FWPCA.

8. Limited Administrative Penalties - Your liability under the section of the Federal Water Pollution Control Act ("FWPCA") that was amended by OPA90 to allow for administrative penalties against You under Section (b)(6)(A)(I) of the FWPCA. The maximum amount of insurance payable by this Policy for this coverage is two hundred and fifty thousand dollars ($250,000) per incident, per Vessel, and shall be a separate limit from the amount of insurance shown elsewhere in the Policy. Penalties imposed under any other section of FWPCA, any other Federal Statute, or the laws of any State or subdivision thereof are specifically EXCLUDED. . . .

Id., Section B (emphasis in original). The policy provided $5,000,000 in coverage for each listed vessel.

The GAIC policy required EMC and SWS to provide "IMMEDIATE NOTICE of the occurrence of any incident which is potentially covered by POLICY and/or to which You may have liability or as to which You may be required to enter a defense." Id., Section E ¶ 11 (emphasis in original). The policy also provided that the "cooperation" of EMC and SWS "is required as a condition of this insurance" and that their "failure to provide such assistance and cooperation . . . entitles US to withhold, cancel, deny, or refuse any payments that might otherwise be due under this Policy." Id., Section E ¶¶ 2 & 4. The policy states that its terms "shall be construed pursuant to, and the rights of the parties hereto shall be governed and controlled by, the general maritime law of the United States; and in the absence thereof, the laws of the State of New York." Id., Section E ¶ 18.

2. The Barge Explosion

In January 2005, EMC was hired to transport several loads of clarified slurry oil (CSO) from the Exxon / Mobil refinery in Joliet, Illinois to Ameropan Oil Company via the Chicago Sanitary and Ship Canal. The CSO was loaded onto an EMC tank barge called the EMC 423, which was connected to and pushed by another EMC vessel, a tugboat called the Lisa E. Both the Lisa E and the EMC 423 were listed vessels under the GAIC insurance policy. The EMC 423 had no means of self-propulsion and no crew of its own. The crew of the Lisa E made the navigation decisions concerning the barge and also served as the barge's crew.

On January 19, 2005, while transporting one of the loads of CSO, an explosion occurred aboard the EMC 423 just as it passed under the Cicero Avenue bridge on the canal. One crew member was killed. The rest of the crew was able to reconnect the barge to the Lisa E, and the Lisa E's captain was able to move the barge to the side of the canal near a dock before it sank there. Some of the CSO was discharged into the canal as a result of the explosion, but most of it remained on board the EMC 423.

3. The Immediate Aftermath of the Explosion

An emergency coordinator from the United States Coast Guard summoned a company called Heritage Environmental to remediate the scene. Heritage set up a "containment boom" around the barge (though the barge had sunk, part of it was still above water due to the canal's shallow depth). The Coast Guard emergency coordinator first ordered that the Lisa E be moored to a dock and later ordered that it be moved within the containment boom. Heritage performed a cleanup of the Lisa E.

EMC immediately notified GAIC and Gulf Coast Marine, EMC's "protection and indemnity" insurer. Pursuant to a provision of the GAIC policy stating that the insurer would provide "spill management" services, GAIC contacted its retained emergency response consultant, Meredith Management Group, Inc., to support EMC in its response to the incident. Meredith dispatched Thomas Neumann to the site. Neumann arrived on January 20. It is undisputed that Neumann acted on behalf of GAIC in dealing with Dennis Egan and his companies.

On January 21, the Coast Guard sent EMC a letter designating the EMC 423 as the source of the discharge of oil into the canal. On January 26, the Coast Guard issued a "notice of federal interest" advising EMC that it may be financially responsible for the incident and that, as responsible party, it may be liable for removal costs and damages and was required to cooperate with the federal "on-scene coordinator," a Coast Guard officer. The Coast Guard also directed EMC to remove the discharge. That same date, Dennis Egan sent the Coast Guard on-scene coordinator a letter advising that he had established a response team and designating Neumann as the "incident commander." As such, Neumann was responsible for coordinating the response to the incident.

4. GAIC's Arrangement with EMC and SWS

Upon arriving in Chicago, Neumann had discussions with Egan regarding the response to the incident. Following these discussions, Neumann agreed on behalf of the insurers to have Egan act as the salvage master to attempt to raise the EMC 423 from the canal. This operation had the dual purpose of salvaging the vessel and remediating actual and potential pollution. With Neumann's approval (on the insurers' behalf), EMC engaged its related entity SWS to conduct the salvage operation. The Coast Guard also approved the involvement of EMC and SWS.

At the time Neumann engaged EMC and SWS, Egan provided Neumann with rate sheets for both entities, listing their regular rates. See Pl. Ex. 15. The SWS rate sheet identified the regular per-hour rates for various categories of SWS employees (supervisors, welders, and laborers), as well as the per-hour or per-day rates for various types of equipment or services. The rate sheet for EMC that Egan provided to Neuman listed per-hour and per-day rates for boats and barges. The boat and barge rates, Egan explained to Neumann, included charges for the employee time involved in operating the vessels.

As noted earlier, the GAIC insurance policy covered "[r]emoval costs and expenses" under OPA90 (among other things). Both Egan and Neumann understood and agreed that under the terms of the policy, EMC and SWS would have to do the work at cost. Egan understood that this meant that they could not make a profit.

Egan proposed to bill at rates of twenty percent less than the companies' listed rates. Egan proposed that SWS would bill only for employee time and that charges for the use of certain types of machinery and equipment, such as pumps and forklifts, would be included in the employee rate. Egan agreed to do this even though SWS's rate sheet contemplated separate charges for the use of such equipment. In addition, Egan said he would not charge for his own time as salvage master, work for which Egan testified one ordinarily would charge $1,500 per day. Neumann testified that he understood that general overhead expenses associated with the project were incorporated into the hourly per-employee / per-boat charges. Egan told Neumann that the reduced rates represented EMC and SWS's cost of operations.

Egan and Robin Chanda, EMC's secretary / treasurer and SWS's controller, both believed, honestly in the Court's view, that the discounted rates represented the two entities' costs and eliminated any profit. Chanda testified that in August 2004, she and Egan looked at the companies' finances and determined that they were not making a profit. After consulting with the companies' outside accountant, Kenneth Iwanicki, they raised the companies' rates by twenty-five percent to try to get them back into the black. When Egan quoted rates to Neumann for the salvage and recovery work, he and Chanda figured that a twenty percent reduction from the new rates would eliminate the companies' profit and result in bills being at or approximately at the companies' cost, including overhead. The effect of the twenty percent reduction was to reduce the rates to what the companies had been charging before the August 2004 rate increase (100 25% = 125, less 20% = 100). This, Egan and Chanda believed, approximated a break-even rate. Plaintiffs did not, however, introduce in evidence any accounting analysis performed either at that time or since to support Egan and Chanda's beliefs.

Egan contended at trial that Neumann agreed up front to pay the rates Egan quoted for EMC and SWS. The Court rejects this contention. Among other things, it is directly contradicted by the contemporaneous and near-contemporaneous documentary evidence. The contemporaneous evidence includes the purchase order that Neumann issued on January 24, 2005. See Def. Ex. 3. The purchase order lists the following as the "description of material or service" to be provided: "Time and material charges on a cost reimbursable basis to salvage the vessel and remove cargo from vessel as appropriate. . . ." Id. (emphasis added). It lists the "estimated or agreed price" as "Cost basis and subject to review." Id. (emphasis added). The near-contemporaneous evidence includes payment authorization forms that Neuman submitted to Meredith to obtain partial payment of EMC and SWS invoices, at least some of which were shown to EMC / SWS personnel. See Def. Exs. 39-49. Each of these forms included a hold-back amount described, consistent with the original purchase order, as "pending audit of invoice and review of cost basis." See, e.g., Def. Ex. 39. Some of the invoices also included the notation "The rates used on this invoice are list minus 20% and this position as a cost basis is subject to review." See Def. Exs. 39 & 40 (emphasis added). This evidence makes it clear that Neumann did not agree up front to pay the rates Egan had quoted. Rather, both Egan and Neumann understood that the rates were subject to later review to determine whether they actually represented EMC and SWS's cost.

Neumann did agree, however, that EMC and SWS could bill using the method that Egan proposed. In other words, he did not express any problems or concerns with Egan's proposal to bill for SWS on a per-employee basis with certain machinery and equipment costs included and for EMC on a per-vessel basis with employee costs included (including Egan's own time as salvage master). Neumann did not contend during his testimony, nor did GAIC offer any other evidence, that Egan or anyone else with EMC or SWS was told at or near the outset ...

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