Second Circuit Court of Appeals Considers Issues of Insurance Policy Coverage in Hurricane Katrina Related Litigation

In New York Marine and General Insurance Company v. Lafarge North America, Inc., No. 08-5504-cv (2d Cir. March 15, 2010), the Second Circuit Court of Appeals considered primary, excess and protection and indemnity ("P & I") insurance policies maintained by Lafarge North America, Inc. ("Lafarge"), a supplier of construction materials and operator of a terminal in New Orleans to which a barge, Barge ING 4727, was moored. In this multi-party appeal, the Court specifically considered the coverage provided by each of the policies with respect to legal defense costs incurred in the aftermath of Hurricane Katrina, as well as whether Lafarge's P & I policy automatically covered the barge in question under the "Chartered Barges Clause" contained in the policy.

Following reports that Barge ING 4727 had possibly smashed through a levee during Hurricane Katrina and caused the flooding of the Lower Ninth Ward in New Orleans, Lafarge promptly retained two (2) national law firms, as well as a local New Orleans law firm, for various legal defense and investigation costs associated with potential claims against it. Lafarge also notified its primary insurer of the possibility of claims against it. Shortly thereafter, Lafarge notified its primary insurer of its appointment of all three (3) law firms. The primary insurer advised that it wished to assign one (1) of six (6) New Orleans law firms identified on its "Panel Counsel" list the defense of the case, and advised that it would not agree to pay for the three (3) previously appointed law firms which had not been approved. Lafarge did not respond to this message, and the three (3) law firms continued their work on the matter.

In 2006, Lafarge's various insurers commenced three (3) separate actions in the Southern District of New York, seeking declaratory judgments with respect to issues of coverage under the primary, excess and P & I policies. The District Court concluded that (1) the P & I club had no obligation to provide coverage for claims asserted against Lafarge in connection with the barge litigation; and (2) the primary and excess insurers were obligated to cover the legal fees and expenses of two of the three law firms retained by Lafarge without the knowledge or consent of its primary insurer. The District Court also denied Lafarge's motion for attorneys' fees associated with the insurers' summary judgment motions, and denied Lafarge's motion to transfer venue. 

On appeal, the Second Circuit first held that the transfer motion was properly denied. The Court concluded that a balancing of the conveniences weighed in favor of the Southern District of New York, despite Lafarge's argument that the "first-filed rule" (providing that the first filed suit should have priority in determining proper venue) should govern. 

The Court next considered whether the District Court had properly dismissed all claims against the P & I club. The Court conducted extensive review of the Transportation Agreement between Lafarge and the owner of Barge ING 4727, as well as the "Chartered Barges Clause" contained in the P & I Club's policy, which provided for automatic coverage for vessels not specifically identified in the policy that were acquired by Lafarge "through purchase, charter, lease or otherwise."  After careful consideration of the relevant clause in the policy, the Court concluded that the word "otherwise" did not include the relationship Lafarge had with the owner of Barge ING 4727 (i.e. - a shipowner's bailment to a terminal operator). In addition, the Court found that Lafarge's conduct indicated an understanding that third-party barges like Barge ING 4727 was not covered under the policy. Accordingly, the Court affirmed the District Court's grant of summary judgment in favor of the P & I Club.

Finally, the Court considered whether the primary or excess policies covered the legal expenses earned by the three (3) law firms not authorized by the primary insurer. The Court looked to two (2) provisions contained in the primary policy: first, the "Naming Clause", which allowed the primary insurer the option to name mutually acceptable attorneys to represent Lafarge in prosecution or defense of any litigation covered by the primary policy; as well as the "Protection Clause", obligated Lafarge to take steps to protect its own and the primary insurer's interests with respect to any occurrence likely to give rise to a claim under the primary policy. While the Court agreed that it was reasonable for Lafarge to promptly retain all three (3) law firms under the exceptional circumstances presented by Hurricane Katrina, it founded that Lafarge had violated its obligations under the Naming Clause to act in good faith to consider agreeing to retain a firm from the list provided by the primary insurer. Accordingly, the Court concluded that the primary insurance policy only covered expenses incurred by the temporary retention of one (1) of the law firms, as well as those legal fees incurred by the remaining two (2) law firms prior to the date on which the primary insurer advised Lafarge that it would not agree to pay for non-approved attorneys. 

The Court also found that the excess policy - a "bumbershoot" policy intended to fill any gap of insurance coverage - covered "reasonable" legal expenses not covered by the primary insurance policy. Notwithstanding, the Court concluded that the continued retention of two (2) of the three (3) law firms in defiance of the terms of the primary policy was "unreasonable". Accordingly, the Court concluded that the excess policy did not cover fees and expenses claimed by these two (2) law firms on or after the date Lafarge was advised that the primary insurer would not approve their retention. 

Read a copy of the Second Circuit's Opinion

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