ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 86-04212)
Before: Becker and Alito, Circuit Judges and Huyett,*fn* District Judge
Assureds under a marine insurance policy sought to recover the cost of removing a sunken vessel. The marine insurance policy covered removal costs if the removal was "compulsory by law." Two insurance companies denied the claim. After a bench trial, the district court entered judgment for the insurance companies, holding that the removal was not "compulsory by law" and that the assureds had not acted as prudent uninsureds when proceeding with the removal of the wreck. Because we hold that the district court's judgment rests on incorrect Conclusions of law, we will reverse and remand for further proceedings.
In December 1985, the Huichol II, a diving support vessel, sank during a violent storm in the Bay of Campeche, approximately 50 miles off the coast of Mexico. More than 27 Mexican seamen were killed. The wreck of the Huichol II came to rest 1.5 miles within the eastern border of the Petroleos Mexicanos ("PEMEX") oil exploratory zone.*fn1
The Huichol II was owned by Condux S.A. de C.V. ("Condux"), a wholly owned subsidiary of Grupo Protexa S.A. ("Protexa"). Both companies are organized under the laws of Mexico. Protexa is in the business of constructing and servicing the pipelines, platforms, and related structures needed by PEMEX. Protexa develops and manages maritime construction projects through Condux. For convenience, we will refer to the companies collectively as "Protexa."
The Huichol II was insured under a marine insurance policy placed by Protexa's broker, Energy Insurance International ("EII") of Houston, Texas. Keith Mollman ("Mollman") was the manager assigned to Protexa's account. Under the policy, five percent of the risk was placed with a Mexican company. In addition, the policy had two separate layers of coverage. The four primary-layer underwriters were liable for the first $2,500,000 of covered loss. If any single loss exceeded $2,500,000, the excess-layer underwriters would be liable. There were three excess-layer underwriters: All American Marine Slip ("AAMS"), which carried 30% of the excess layer; various Lloyds/London underwriters, which carried 65% of the excess risk; and SIGNA/AFIA, which had 5% of the excess layer. The insurance policy contained a standard wreck removal provision covering expenses the assureds became liable to pay on account of "removal of the wreck of the vessel . . . when such removal is compulsory by law." App. at 1671 (emphasis added).
The day after the vessel sank, EII was notified of the incident. Acting as liaison between the underwriters and the claimants, EII called in Rush Johnson Associates ("RJA"), a worldwide firm of marine surveyors and adjustors, to survey the damage, adjust the loss, and prepare a written report for the underwriters.*fn2 RJA appointed Theo Tyssen ("Tyssen"), the vice-president in charge of its marine department, to handle the claim. Tyssen arrived at the scene of the wreck on December 16, 1985. On the same day, EII notified the underwriters on the policy, including AAMS and CIGNA/AFIA, that the Huichol II had sunk and that RJA's representative, Tyssen, had been sent to the wreck location.
When Tyssen reached the wreck location, he met with various parties concerning the situation. Because the wreck lay in a PEMEX zone of heavy drilling activity and because he believed that the Mexican government would want to remove the bodies of the deceased seamen and conduct an investigation, he concluded that the vessel would definitely have to be removed. Mollman sent a telex to Protexa dated December 17, 1985, suggesting that if the wreck were to be raised and moved, an immediate investigation should commence to determine if the removal was compulsory by law. The telex advised that a valid order of removal would have to be in writing and issued by an authorized governmental authority.
Immediately after the sinking, the Mexican Procuraduria General de la Republic ("PGR"), ordered an investigation due to the great loss of life involved. On December 17, 1985, the Mexican Port Captain for Ciudad del Carmen and the offshore port of Cayo Arcas issued a written order that, according to the English translation, required Protexa to post a bond "to guarantee the cleaning up of the area and the salvaging of [the] Vessel." App. at 1407. All underwriters, including AAMS and CIGNA/AFIA, were notified of the order by EII.
Protexa interpreted the Port Captain's order as requiring immediate removal of the wreck. The Port Captain's order was referred to Protexa's legal counsel, Jorge Uriarte, for review. After a 45-minute review, Uriarte concluded that "it was clear beyond a doubt that the order had to be complied with." App. at 1166. Uriarte visited the office of the Port Captain in an effort to obtain suspension or rescission of the order but was informed that any such relief would have to be sought from officials in Mexico City. He was also informed that the Port Captain expected removal to begin without delay or the navy would take over the removal and Protexa would be punished to the full extent of the law. In addition to providing Protexa with an opinion as to the validity of the removal order, Uriarte listed five potential consequences that could result from noncompliance: 1) if Protexa did not begin removal of the vessel immediately, the Mexican government could arrange to have the wreck removed and could present Protexa with the bill; 2) Protexa faced the potential for catastrophic liability to third parties for any damage resulting from movement of the wreck within the oil field; 3) Protexa would face potential sanctions or fines, which could be imposed on a sliding scale, for failure to comply with the removal order and cooperate with the investigation; 4) Protexa risked forfeiture of the vessel and the bond; and 5) Protexa risked the destruction of its goodwill with the government and with PEMEX if it failed to comply with the order. After concluding that the removal order was valid and after weighing the potential consequences of non-compliance, Protexa did not challenge the order.
On the same day that the order was issued, Pablo Cruz ("Cruz"), Protexa's representative, notified Mollman and requested an immediate meeting so that EII could present the removal order to the underwriters. Cruz also wanted to present Protexa's proposal to perform the removal without resort to a third-party salvor.
Mollman, Tyssen, and Cruz met in Houston on December 18, 1985. They all agreed that it appeared that the removal was required and that Protexa's proposed plan was sound. In Mollman's opinion, it made sense for Protexa to remove the wreck, since the project primarily involved diving and lifting and he considered Protexa to have an abundance of expertise and equipment for this type of operation. Mollman also was aware that preliminary reports indicated that the Huichol II was quickly sinking into the mud. Mollman attempted to telephone the underwriters but was able to contact only three of them. He was not able to reach AAMS or the Lloyds/London underwriters. To those underwriters that were reached, Mollman explained the circumstances of the removal order and the need for beginning wreck removal without delay in order to minimize expenses. These underwriters agreed to waive any requirement that Protexa obtain a second or third salvage bid and advised that Protexa should begin work immediately to avoid further complications and costs.*fn3
Protexa presented the underwriters with two alternatives regarding the costs of removal: 1) a fixed-sum bid to remove the wreck for $3,785,000 or 2) a daily rate of $224,608 for an estimated period of 24 days, resulting in a cost of approximately $5.4 million. Tyssen sent these orders to the underwriters by telex on December 19, 1985.
By December 20, 1985, all of the underwriters except AAMS and CIGNA/AFIA had agreed to the lump-sum bid assuming that there was a consensus in favor of this option. AFIA took no position and AAMS, instead of accepting either of the alternatives posed by Protexa, responded by advising that all necessary steps should be taken to minimize the loss and expressed its desire to have a third-party salvor involved, as much as possible, in the removal of the wreck. Since AAMS and CIGNA/AFIA had not approved the lump-sum basis, Mollman and Tyssen told Protexa that it should consider the job to be on a day-rate basis.
The wreck removal operation began on December 19, 1985, and Tyssen initially estimated that it would take about three weeks to remove the vessel and transport it to an approved location. Protexa's original plan involved passing slings under the wreck using cranes, but problems developed. According to Cruz, a ship passing through the area during a storm snagged the Huichol II with its anchor, the wreck shifted, and debris lodged under the wreck, making passage of the slings ...