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Catlin (Syndicate 2003) at Lloyd's v. Towing

United States Court of Appeals, First Circuit

February 6, 2015

CATLIN (SYNDICATE 2003) AT LLOYD'S, Plaintiff, Appellee,

As Amended February 12, 2015.

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Manuel Sosa-Báez, with whom Ian P. Carvajal and Saldaña, Carvajal & Vélez-Rivé, P.S.C., were on brief, for appellant.

James W. Carbin, with whom P. Ryan McElduff and Duane Morris LLP, were on brief, for appellee.

Before Torruella, Thompson, and Kayatta, Circuit Judges.


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TORRUELLA, Circuit Judge.

This is an appeal from a decision of the United States District Court for the District of Puerto Rico sitting in admiralty. The trial involved a maritime insurance policy issued by Appellee Catlin (Syndicate 2003) at Lloyd's (" Catlin" ), to cover the floating drydock[1] PERSEVERANCE owned by Appellant San Juan Towing and Marine Services (" SJT" ), a ship repair company based in San Juan, Puerto Rico. At trial, the district court concluded that the insurance policy was void ab initio by reason of SJT's violation of the doctrine of uberrimae fidei in its application for the policy.[2] See Catlin (Syndicate 2003) at Lloyd's v. San Juan Towing & Marine Servs., Inc., 979 F.Supp.2d 181, 186 (D.P.R. 2013) (" Catlin IV" ). The district court erred in deeming the contract void ab initio; rather, we find that it was voidable. We therefore affirm, albeit with a

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minor modification of the lower court's holding to reflect this correction.

I. Background

A. Factual History

In 2006, SJT retained the services of Marine Consultants, Inc. (" Marine Consultants" ) to perform a condition and valuation survey of the floating drydock PERSEVERANCE. In that survey, which was dated April 17, 2006, the PERSEVERANCE was valued at $1,500,000. Thereafter, on August 27, 2006, SJT purchased the PERSEVERANCE for $1,050,000. Subsequently, SJT made improvements to the floating drydock, modifying it so that it could be towed from Louisiana to Puerto Rico. Marine Consultants then issued another condition and valuation report on November 21, 2006, in which it valued the floating drydock at $1,750,000. This $250,000 increase in value from the first report to the second was the result of the value added to the floating drydock due to the improvements and modifications that allowed the PERSEVERANCE to be towed to Puerto Rico.

By 2009, and as late as 2011, due to declining business and increasing financial distress, SJT was actively trying to sell the PERSEVERANCE. SJT had initially advertised the sale price in 2009 as $1,350,000. In February 2010, SJT advertised the floating drydock for sale in Boats & Harbors -- a marine industry publication -- for $1,350,000. During January 2011, SJT continued to advertise the PERSEVERANCE for sale at $1,350,000. On January 3, 2011, a potential buyer offered to purchase the floating drydock for $700,000. As negotiations progressed throughout the month, SJT lowered the PERSEVERANCE's purchase price to $850,000, and eventually, on January 29, 2011, to $800,000. That potential buyer ultimately did not consummate the purchase.

In April 2011, SJT again advertised the PERSEVERANCE for sale in Boats & Harbors. This time the asking price was $800,000. Five months later, on September 4, 2011, SJT agreed to sell the PERSEVERANCE to Leevac Shipyards (" Leevac" ), a Louisiana-based company, and on September 19, 2011, SJT signed a purchase-and-sale agreement in which it accepted Leevac's offer to purchase the floating drydock for $700,000. The deal later fell through.

Between August 2006 and February 2011, SJT insured the PERSEVERANCE with the RLI Insurance Company (" RLI" ), with a declared hull value of the PERSEVERANCE under this policy of $1,750,000, presumably based on the second Marine Consultants condition and valuation report dated on November 21, 2006. In February 2011, RLI cancelled the drydock's insurance policy, cryptically stating " Loss History" [3] as the reason for said action.

Thereafter, at SJT's request, SJT's insurance broker, John Toscani (" Toscani" ), who was located in New York, approached Catlin seeking, through Lloyd's, a marine insurance policy " consisting of hull, [protection and indemnity], ship repairs, general liability and contractor's equipment" (emphasis added). SJT's broker represented that the PERSEVERANCE's prior insurance coverage was for $1,750,000, but did not provide Catlin with a copy of RLI's notice of cancellation. The parties agree that SJT did not provide additional representations

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suggesting that this was the actual value of the PERSEVERANCE, and Catlin's representative, Mr. Kirchhofer, testified that he did not ask for more information on the floating drydock's value or condition, but rather assumed that the value was in line with that number. Most importantly, SJT also did not disclose information regarding substantial, preexisting damage to the PERSEVERANCE's hull, which had been evident since at least April 2010.

Thereafter, the Catlin policy -- the Ocean Marine Insurance Policy (the " Policy" ) -- became effective in April 2011, with a total insurable value of $1,840,000. The Policy, however, contained an endorsement that modified its terms to list the insured value at $1,750,000, the same stated amount in the previous RLI policy. Additionally, the total limit of liability for each loss occurrence was set at $1,000,000.

On September 28, 2011, the PERSEVERANCE was berthed at Pier 15, in San Juan, Puerto Rico. At the direction of Mark Payne (" Payne" ), one of SJT's principals, the floating drydock was ballasted[4] for the purpose of performing maintenance on parts of the hull. Payne instructed the repairmen to add ballast water to the floating drydock's stern compartments to allow access to the forward sections to be repaired. Thereafter, Payne left the PERSEVERANCE'S berthing area on personal business. At approximately 3:30 p.m., before he left for the day, SJT foreman JoséMonge gave instructions to the repairmen to pick up and shut off the water hose that was still filling at least one of the floating drydock's ballast tanks.

Late that evening, SJT tug Captain Padilla (" Padilla" ) returned to Pier 15 after a towing assignment and found the PERSEVERANCE with its aft section completely underwater and its forward part awash. Padilla proceeded to call Payne on his cell phone to inform him of the dire situation the PERSEVERANCE was in, but ten minutes later, at about midnight, called him again to inform him of the total sinking of the PERSEVERANCE. Payne arrived shortly thereafter and, together with Padilla, observed that a fire hose connected to a water main on the dock was still pumping water into the sunken drydock, with the valve on shore still in an open position. Payne proceeded to shut the valve, which was easily seen and accessible to anyone who wished to turn off the flow of water.

Refloating the PERSEVERANCE turned out to be a challenging process, taking nearly one month to complete. After being refloated, the PERSEVERANCE was inspected and the damage assessed by expert marine surveyors. The surveyors found the underside of the floating drydock to be substantially rusted and decayed, the existence of which SJT had known about but failed to disclose to Catlin when it sought coverage under the Policy. This damage explained why refloating the PERSEVERANCE -- a drydock that was designed specifically to be able to submerge and refloat using its ballast tanks -- had been so difficult. During the month of December 2012, the drydock was sold for scrap for $40,000.00.

SJT proceeded to file a claim with Catlin, alleging the total loss of the PERSEVERANCE, in the amount of $1,750,000. Catlin denied this claim, relying on the discrepancy between the amount the PERSEVERANCE was insured for according

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to the Endorsement ($1,750,000) and its actual market value (approximately $700,000 to $800,000), as evidenced by the sale price advertised to potential buyers around the time when SJT sought the quote for the Policy.

B. Procedural History

To afford a better understanding of the final resolution of this appeal, we deem it appropriate to include a résuméof the procedural history of this case before the district court. On November 8, 2011, Catlin filed a declaratory judgement complaint against SJT, invoking both admiralty (28 U.S.C. § 1333) and diversity (28 U.S.C. § 1332) jurisdiction. Catlin alleged eight admiralty or maritime claims and sought to void the Policy pursuant to the doctrine of uberrimae fidei. In turn, SJT filed a separate diversity suit against Catlin, demanding recovery for the full insured value of $1,750,000 under the Policy for the loss of the PERSEVERANCE. Catlin counterclaimed and the cases were consolidated.

1. Catlin I

On April 8, 2013, the district court granted SJT's motion for partial summary judgment and dismissed without prejudice the claim brought by Catlin, concluding that under the recently decided case of Lozman v. City of Riviera Beach, 133 S.Ct. 735, 184 L.Ed.2d 604 (2013), the court lacked admiralty jurisdiction over this controversy because the PERSEVERANCE was not a " vessel." [5] See Catlin (Syndicate 2003) at Lloyd's v. San Juan Towing & Marine Servs, Inc., Civil Nos. 11-2093 (FAB); 11-2116 (FAB), at *37-38 (D.P.R. Apr. 8, 2013) (" Catlin I" ). This ruling was based on the court's determination that the PERSEVERANCE did not meet the Lozman test for determining whether a floating structure was a " vessel" for admiralty jurisdiction purposes because " a reasonable observer, looking to ...

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