Central Internationa v. Kemper Insurance Com

• Court: Court of Appeals for the First Circuit
• Decided: January 25, 2000
• Docket: 99-1642
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 99-1642



                  CENTRAL INTERNATIONAL COMPANY,



                      Plaintiff, Appellant,



                                v.



               KEMPER NATIONAL INSURANCE COMPANIES,

              AMERICAN MOTORISTS INSURANCE COMPANY,



                      Defendants, Appellees.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



           [Hon. Morris E. Lasker, U.S. District Judge]


Before



                    Selya, Boudin and Lynch,

                                

                        Circuit Judges.


Edmund M. Pitts with whom Pitts & Pitts was on brief for

appellant.

     David Y. Loh with whom Marcigliano & Campise was on brief for

appellees.


January 24, 2000


BOUDIN, Circuit Judge.  This marine insurance case, which

turns on the meaning of an exclusion for "discoloration and

corrosion," begins with an ocean shipment made in December 1995. 

At that time, the plaintiff-appellant, Central International

Company ("Central")--a trading company doing business in

Massachusetts--arranged for the transportation of galvanized steel

coils from Aviles, Spain, to a customer in St. Vincent, West

Indies, aboard the M/V Andrealon.  The shipment was insured under

an "all risk" ocean marine open cargo insurance policy previously

issued to Central by the principal defendant-appellee, American

Motorists Insurance Company ("AMICO").  The policy was not limited

either to this shipment or to steel products.

  The vessel in question encountered heavy seas en route to

St. Vincent, resulting in damage to the vessel and its hatches.  It

is apparently undisputed that the steel coils in question were in

good condition when shipped but arrived in damaged condition.  The

laboratory analyses conducted on the damaged cargo showed that the

coils were "severely corroded" and displayed a variety of light and

dark stains.  The initial direct loss, independent of consequential

damages, was estimated by Central at several hundred thousand

dollars.

  Central then brought suit on its insurance policy in a

Massachusetts trial court seeking approximately $221,000 in damages

to the coils plus additional related expenses.  For simplicity, we

treat AMICO as the only defendant.  AMICO removed the case to

federal district court on the ground that it fell within that

court's admiralty or maritime jurisdiction, 28 U.S.C.  1333(1). 

In due course, both sides moved for summary judgment.  In April

1999, the district court filed a decision granting AMICO's motion

for summary judgment and ordering dismissal of the complaint.

  The district court pointed out that the policy covered

all risks of "physical loss or damage [to the cargo] from any

external cause" but was subject to a specific exclusion:

    However, as respects steel products and all

  metals:  excluding rusting, oxidation,

  discoloration and corrosion; also excluding

  bending, twisting, crimping, and end damage.



Since corrosion and discoloration were the admitted damage, the

district court found that the policy exclusion applied.  The court

rejected Central's effort to avoid the exclusion by saying that the

corrosion and discoloration had not occurred naturally but had been

primarily caused by water and by the improper stowage of powder

ash, which had allegedly leaked onto the steel coils during the

storm or otherwise.  Central now appeals.

  Our review of a summary judgment is de novo, EEOC v.

Green, 76 F.3d 19, 23 (1st Cir. 1996), and we begin with the choice

of law.  Suits on maritime insurance policies are classic examples

of matters within federal maritime jurisdiction, see Gilmore &

Black, The Law of Admiralty  1-10, at 22 n.71 (2d ed. 1975)

(citing Insurance Co. v. Dunham, 78 U.S. (11 Wall.) 1 (1871)). 

Accordingly, Central's brief says that such contracts are "subject

to general admiralty law when there is an established federal rule

and by state law when there is not."  AMICO purports to agree but

says that there is enough federal precedent in analogous cases to

make Massachusetts law irrelevant.

  Beneath this surface agreement on general principles lies

an abyss of confusion.  One might think that construing a maritime

insurance policy, in relation to damage occurring on the high seas,

would be a paradigm case for a uniform body of federal law, see

Gilmore & Black, supra,  1-17, at 49.  But the tensions in Supreme

Court precedents are legendary, both with regard to the reach of

state law in federal maritime law generally and its effect on cases

initially brought in state court under the saving to suitors

clause.  Since Massachusetts law in the end is no better for

Central than any federal precedent cited to us, we (like the

district court) need not pursue the matter.

  Turning to the merits, Central must accept in light of

its own affidavits that the harm to the steel coils manifested

itself as corrosion and discoloration.  Conversely, at least for

purposes of this appeal, we must assume the truth of Central's

claim that the anterior cause of the corrosion and discoloration

was the exposure of the steel to improperly stowed powder ash as

well as to sea water and that unexpected storm conditions at sea

contributed to that exposure.  See Green, 76 F.3d at 21.  The case

thus involves a generally covered risk (actually, two risks:  sea

peril and negligent stowage) resulting in excluded consequences

(corrosion and discoloration).

  This is a recurring issue and, under ordinary principles

of contract interpretation, there is little doubt that the

exclusion is presumptively a qualification on the risk coverage. 

Normally, specific language is treated as a limitation on general

language; and in this case fixing the relationship of the two

clauses is made even easier because the all-risk language in

Central's policy is followed by the term "[h]owever," which

introduces the exclusion.  In other words, facially read, there is

liability for damage to cargo from all risks including storm or

accident unless the damage is corrosion or discoloration.  

  Curiously, this straightforward approach is not always

reflected in the cases.  There is language, in Massachusetts

decisions as elsewhere, that purports to treat a covered risk and

an excluded consequence as legitimate rivals whose priorities are

to be tested by asking questions about "causation"; these

discussions, often in opinions with defensible results, tend not to

be very illuminating.  See Keeton & Widiss, Insurance Law  5.5(c),

(d) (Practitioner's ed. 1988).  The better explanation, where the

insurer is held liable, appears to be that the court has chosen to

read the exclusion in context more narrowly than its literal

language might suggest.

  A good example in Massachusetts is Standard Elec. Supply

Co. v. Norfolk & Dedham Mut. Fire Ins. Co., 307 N.E.2d 11 (1973),

where water from a burst pipe leaked into and damaged the basement

of an adjoining building; the policy on the latter building

generally covered physical damage but specifically excluded water

damage in various specified forms (e.g., flood, underground

seepage).  Yet recovery was allowed, seemingly because the court

thought the exclusion in context was directed at natural flooding

or seepage and not that resulting from an accidentally burst pipe. 

307 N.E.2d at 12-13.  What is confusing is the court's reliance,

later in the opinion, on an alleged "well established principle"

that recovery is allowed "where the insured risk [caused] . . . an

excepted risk."  Id. at 13.

  The smattering of authority for this "well-established"

principle is not very impressive, see, e.g., 5 Appleman & Appleman,

Insurance Law and Practice  3083, at 311 (1970) (discussing fire

insurance), and the cases usually--but perhaps not always, see

Jussim v. Massachusetts Bay Ins. Co., 610 N.E.2d 954, 955-58 (Mass.

1993)--can be better explained as a limiting construction of the

exclusion.  The attempt to give priority to the initial covered

cause in the "train of events" over the excluded consequence is

doubtful in principle even where the covered risk is narrowly

defined (e.g., fire), but it becomes absurd where the initial

coverage is all risk, since every excluded harm has some cause.

  Still, there is nothing wrong with reading policy

language more narrowly (or broadly) than its literal wording might

at first suggest where this better captures the reasonable

expectation of the parties--the central object of all contract

interpretation.  See 1 Corbin, Contracts, supra,  1.1, at 2; see

also Commercial Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047,

1052 (1st Cir. 1993).  Courts have made such adjustments on a range

of bases, including not only surrounding language or other specific

evidence of the parties' intent but also--to a surprising extent--

the common-sense intuition of judges as to what the parties likely

had in mind.  Although the readings often favor the insured,

implied exceptions to coverage are not unknown.  See Keeton &

Widiss, supra,  5.3(a), (c).

  In this case, Central does make a pair of colorable

arguments for a narrowing interpretation of the exclusion.  The

first is that the exclusion should apply only to naturally

occurring corrosion or discoloration, say, as a result of exposure

to salt air, and not to that produced by a fortuitous event like

storm exposure or negligent stowage of adjacent cargo.  This is not

an impossible interpretation, cf. Standard, 307 N.E.2d at 12-13--an

insurer might specially wish to prevent such liability for natural

corrosion--but, of course, there is nothing in the policy to

suggest such a limitation, and at least two further arguments exist

against it.

   One is that some authority exists for excluding natural

deterioration of shipped goods from coverage without a specific

exclusion, see Keeton & Widiss, supra,  5.3(c), which would make

the express exclusion from corrosion redundant if it were read so

narrowly.  The other is that the full exclusion in this policy

includes some excluded harms (e.g., bending of the steel) that

could rarely occur "naturally" in a voyage, so Central's argument

implies that one part of the exclusion is subject to an implicit

limitation that could not be applied to the other part--hardly a

natural reading.

  Central's other argument for coverage is that unless the

exclusion were read narrowly, the protection offered for steel

shipments would be empty; its premise is that the only foreseeable

damage to steel on a sea voyage would be discoloration, corrosion

or some form of physical distortion covered by the above-quoted

"bending" clause of the exclusion.  We agree that a reading of a

policy that entirely nullified meaningful protection would raise

doubts that the parties intended that reading.  E.g., Titan Indem.

Co. v. Newton, 39 F. Supp. 2d 1336, 1344-45 (N.D. Ala. 1999);

Employers Mut. Cas. Co. v. Pires, 723 A.2d 295, 298 (R.I. 1999).

  Yet it is not true that all maritime loss as to steel

would trigger the literal language of the exclusion; if the ship

sank in deep water, the inability to recover the cargo would create

a covered loss without regard to any corrosion or discoloration

that might ensue.  Further, this policy was "open," embracing

various kinds of cargo that Central might ship on different

voyages; the failure to provide much protection for steel did not

render the policy generally useless.  And it appears from the

policy that the exclusion could have been modified, although

perhaps not to provide unlimited coverage for steel, by payment of

a higher premium.

  As for case law, neither side has cited us to maritime

law cases that are closely in point, but there is no reason to

believe that on this issue maritime law would differ from the

ordinary application of contract rules customarily applied by state

courts in insurance cases.  However, Massachusetts case law does

offer a number of examples, including the burst pipe case described

above, which are somewhat helpful to Central--even beyond their

support for the view (with which we agree) that the presumptive

literal reading is not always the one that prevails.

  But the precedent most closely in point from

Massachusetts--whose law Central wants to govern this case--cuts

the opposite way.  In Bettigole v. American Employers Insurance

Co., 567 N.E.2d 1259 (Mass. App. Ct. 1991) (Kaplan, J.), the Court

held that an insurance policy exclusion for "corrosion" negated

coverage where the supporting steel in a parking facility

deteriorated after exposure to ice, water and de-icing salts

carried in by cars, id. at 272-73; the court rejected the insured's

claim that the true "cause" was the "release of chloride ions,

which was not named as an excluded risk, with the corrosion

following as a consequence," id. at 275.

  We cite Bettigole primarily because its facts are apt and

not because we attach conclusive weight to Massachusetts case law

construing a particular policy.  The Supreme Court's intermittent

resort to state law to resolve maritime law issues usually involves

not random state-law precedents but something closer to an

affirmative state policy, typically in cases involving local

maritime matters (e.g., coastal or inland waterways).  Gilmore &

Black, supra,  1-17.  Thus, there may be no compulsion here to

treat state precedent as binding rather than merely instructive,

cf. Southworth Mach. v. F/V Corey Pride, 994 F.2d 37, 41 (1st Cir.

1993), but Bettigole is certainly instructive.

  Central has also sought review of the district court's

refusal to allow Central leave to amend in order to add a very

large claim for consequential damages over and above the value of

the coils.  Since we affirm the district court's reading of the

exclusion, such an amendment would be futile; whether or not

consequential damages are consistent with maritime law, they can

hardly be awarded under this policy to offset the further

consequences of an expressly excluded loss.

  The judgment is affirmed.  AMICO's motion for damages and

double costs is denied.