Failure to Pay Premium Defeats Claim

No Bad Faith if No Breach of Contract

Posted on April 7, 2022 by Barry Zalma

Chemical Equipment Labs, Inc. (“CEL”) sued Travelers Property Casualty Company of America (“Travelers”) seeking insurance coverage pursuant to two policies: a Custom Cargo Policy (ZOC-51M1777A-14-ND) (“Cargo Policy”) and Charter’s Legal Liability Policy (ZOL-91M17422) (“Liability Policy”). CEL requested declaratory judgment, and damages for breach of contract, as well as bad faith. Travelers’ crossclaimed for declaratory judgment, contending there was no coverage under either policy, and seeking reimbursement for costs incurred while defending Plaintiff in a prior arbitration proceeding regarding the cargo at issue. In Chemical Equipment Labs, Inc. v. Travelers Property Casualty Company Of America, Civil Action No. 19-3441, United States District Court, E.D. Pennsylvania (April 1, 2022) the USDC dealt with the claims of breach of contract and bad faith.

Statement of Undisputed Facts

On April 30, 2014, Plaintiff entered into a Sales Agreement with Servicios Y Suministros Petroleros Y Gasiferos (“SSP&G”) to purchase 300,000 Metric Tons of Venezuelan industrial road salt (the “Sales Agreement”). The Sales Agreement required seller SSP&G to provide all export permits and documentation, and provided that payment was due upon presentation of shipping documents, including bills of lading, within three days after the sailing of the carrying vessel.

On December 4, 2014, Plaintiff entered an agreement with Pioneer Navigation Ltd. (“Pioneer”) to charter the vessel “GENCO OCEAN” to carry a shipment of industrial road salt from Araya, Venezuela to the United States. The GENCO OCEAN tendered her Notice of Readiness to load on December 11, 2014. Loading of Plaintiff’s industrial salt commenced at approximately 2100 hours local time on December 11, 2014. At approximately 1120 hours on December 12, 2014, cargo operations were ordered halted by Venezuelan Customs. At such time, approximately 11,000 tons of salt had already been loaded onto the vessel. On December 22, 2014, Venezuelan customs officials ordered the ship to discharge the industrial road salt back onto the pier. The GENCO OCEAN completed her discharge on December 29, 2014, and subsequently left the port empty. No. bills of lading were issued to Plaintiff.

Travelers had issued two policies to Plaintiff: a Liability Policy and a Cargo Policy. Both policies were issued and countersigned in Pennsylvania.

On December 23, 2015, Pioneer commenced arbitration before the Society of Maritime Arbitrations (“SMA”) to a panel of three New York arbitrators. Pioneer sought to recover $598,681.90 in damages, arising from Plaintiff’s failure to perform under the December 4, 2014 charter agreement of the GENCO OCEAN. Plaintiff timely provided notice of a potential liability claim by Pioneer to its insurance broker, who forwarded the report to Defendant. In documents submitted to Defendant by Plaintiff for the purpose of calculating insurance premiums, the GENCO OCEAN was one of five vessels identified and was designated as “Never Shipped.”?Travelers confirmed that it would provide a defense for Plaintiff if arbitration commenced, while formally reserving its rights to later dispute whether Plaintiff was covered under the Liability Policy.

The SMA panel held Plaintiff breached its contractual obligations and awarded Pioneer a total of $855,918.88: $598,721 for lost profit, $127,000 for attorney’s fees, $96,197 for interest, and $34,000 for arbitral fees.

After the award Travelers notified Plaintiff it was declining coverage under the Liability Policy for all damages set forth in the final award.

Discussion

Both parties agreed that the Liability Policy and Cargo Policy were issued and countersigned in Pennsylvania. The parties did not dispute-that the Liability and Cargo Policies should be interpreted under Pennsylvania law.

The Liability Policy (ZOL-91M17422)

Travelers argued that the Liability Policy is not applicable to Plaintiff’s claim because there was no vessel damage to trigger coverage. Under the Liability Policy, Defendant agreed to indemnify Plaintiff for liabilities incurred in three specific circumstances: (a) “physical loss or damage to the chartered vessel, ” (b) “property damage, loss of life or bodily injury, ” and (c) “legal costs and/or fees or expenses of counsel occasioned by the defense of any claim . . . covered by this policy.” None of the events that would obligate Defendant to indemnify Plaintiff occurred.

Plaintiff is seeking indemnity for an arbitration award granted to Pioneer arising from the failed shipment of industrial salt on the GENCO OCEAN. Because the arbitration proceedings arose from Plaintiff’s obligations relating to a loss of cargo, Clause 4(d) makes it clear that Defendant is not obligated to provide coverage under the Liability Policy.

The Cargo Policy (ZOC-51M1777A-14-ND)

Plaintiff asserts that the Cargo Policy is an “all-risk policy, ” meaning the insured faces a lower burden to prove coverage than the high burden faced by insurer to disprove coverage. Defendant agrees with Plaintiff’s assessment of the burdens of proof, but argues Plaintiff fails to establish even a prima facie case for coverage under the Cargo Policy. Specifically, Defendant asserted there is no coverage because:

1. Plaintiff failed to pay the premiums;
2. Plaintiff did not have an insurable interest;
3. there was no “physical loss or damage,” as required under the policy; and,
4. coverage was excluded under the F. C. & S. Clause.

Since the Court found Plaintiff failed to pay the premium on the cargo, Defendant’s remaining three arguments are rendered moot.

The parties disagree about the effect of Plaintiff’s listing of the GENCO OCEAN voyage without a declared value, and without a corresponding premium payment. Defendant asserts that Plaintiff’s nonpayment bars coverage for losses associated with the GENCO OCEAN voyage.

Under the plain meaning of the Cargo Policy, Plaintiff’s failure to declare a value for the cargo of salt loaded onto the GENCO OCEAN, and failure to pay a corresponding premium, precludes coverage for resulting losses. Plaintiff offered no evidence that it paid a premium for the GENCO cargo or that Defendant assented to any modifications to the premium agreed to within the four corners of the Cargo Policy. Plaintiff presents no evidence that this Defendant’s specific conduct could be interpreted as having agreed to extend coverage, despite nonpayment of the full required premium.

Breach of Insurance Contracts

In light of the court’s holding regarding declaratory judgment Plaintiff’s breach of contract claim must also fail. Because Defendant had no duty to perform under either the Liability or Cargo Policies, Defendant cannot be found liable for breaching either insurance contract.

Bad Faith Under 42 Pa.C.S. § 8371

Count III of Plaintiff’s Complaint alleges Defendant exhibited bad faith in its handling of Plaintiff’s claim. In order to recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis Because the Court determined Plaintiff is not entitled to insurance coverage as a matter of law, Plaintiff’s claim for bad faith necessarily fails.

Reimbursement of Defendant’s Costs Defending Plaintiff in Arbitration

Under Pennsylvania law, an insurer is obligated to defend its insured if the factual allegations of the complaint on its face encompass an injury that is actually or potentially within the scope of the policy. As long as the complaint “might or might not” fall within the policy’s coverage, the insurance company is obliged to defend. Accordingly, it is the potential, rather than the certainty, of a claim falling within the insurance policy that triggers the insurer’s duty to defend. This duty is not limited to meritorious actions. Reimbursement of defense costs requires an express provision in the written insurance contract. The USDC concluded that an insurer may not obtain reimbursement of defense costs for a claim for which a court later determines there was no duty to defend, even where the insurer attempted to claim a right to reimbursement in a series of reservation of rights letters.

While the Court subsequently found that Defendant had no duty to defend under the Liability Policy, the absence of an express reimbursement provision precludes Defendant from recovering those costs.

Plaintiff’s Motion was denied in full, and Defendant’s Motion was granted in part and denied in the part seeking reimbursement of defense costs.

ZALMA OPINION

For there to exist a contract it is necessary that there be an offer, acceptance of the offer and payment of consideration. It should be obvious that when an insured that fails to pay a premium there is no right to the benefits of a contact of insurance since the contract was never made. The case should have ended with the decision that premium was not paid but since the insured sued for bad faith the court found it necessary to note that failure of the contract claim destroys the bad faith claim. The lack of a condition in the policy that if there is no coverage defense costs advanced must be reimbursed the claim for return of defense costs failed. Travelers should amend its contract wordings in the future to include the right to return of defense costs advanced and found, later, to not be owed.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at https://www.zalma.com and [email protected] .

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