National Fish & Seafood Inc v. Great American Insurance Company

Brief/Memorandum in Support

N.D. Tex.February 4, 2017

BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION NATIONAL FISH & SEAFOOD, INC., Plaintiff, - v. - GREAT AMERICAN INSURANCE COMPANY, Defendant. § § § § § § § § § § § CIVIL ACTION 3:15-CV-3880 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT CHARLES E. SCHMIDT New York Bar No. 1543461 Admitted Pro Hac Vice Kennedy Lillis Schmidt & English 75 Maiden Lane Suite 402 New York, New York 10038-4816 Telephone: (212) 430-0800 Fax: (212) 430-0810 E-mail: cschmidt@klselaw.com Of Counsel: JOHN T. LILLIS, JR. HAROLD K. WATSON New York Bar No. 1101229 Texas Bar No. 20938500 Kennedy Lillis Schmidt & English Chaffe McCall LLP 75 Maiden Lane 801 Travis Street Suite 402 Suite 1910 New York, New York 10038-4816 Houston, Texas 77002 Telephone: (212) 430-0800 Telephone: (713) 546-9800 Fax: (212) 430-0810 Fax: (713) 546-9806 E-mail: jlillis@klselaw.com E-mail: WATSON@CHAFFE.COM Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 1 of 38 PageID 994 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page i Table of Contents Table of Authorities ........................................................................................................................ ii Summary of Argument ....................................................................................................................1 Background ......................................................................................................................................2 GAIC’s Statement of Material Facts And Response to National’s Statement of Facts ...................6 POINT I: Summary Judgment Standard ....................................................................................14 POINT II: New York Law governs the construction and application of the contract of insurance. ...................................................................................................................15 POINT III: New York Law requires that the court construe the Policy as a whole, in a manner that gives effect to all of its terms .................................................................18 POINT IV: Sue and Labor is a fundamental material obligation on the part of an insured under a marine cargo policy of insurance. .................................................................19 POINT V: The Sue and Labor Clause imposes duties on the insured that are a condition to invocation of the coverage afforded by the Control of Damaged Goods Clause .........................................................................................................................23 POINT VI: Damages .....................................................................................................................29 A. Damages caused by reason of loss of market are excluded from coverage ........29 B. Damages due to inherent vice of the shrimp are excluded from coverage .........30 C. The damages claimed by National were not computed in accordance with Policy terms ................................................................................................31 CONCLUSION ..............................................................................................................................31 Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 2 of 38 PageID 995 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page ii Table of Authorities Cases Advani Enters. v. Underwriters at Lloyds, 140 F.3d 157 (2d Cir. 1998) ............................... 16, 17 Am. Home Assur. Co. v. Merck & Co., 329 F. Supp. 2d 436 (S.D.N.Y. 2004) ............................ 22 Am. Home Assur. Co. v. Merck & Co., 386 F. Supp. 2d 501 (S.D.N.Y., 2005) .................... passim Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986) ......... 14 Blaine Richards & Co. v. Marine Indem. Ins. Co., 635 F. 2d 1051 (2d Cir. 1980) ...................... 29 Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986) ..................... 14 Certain Interested Underwriters at Lloyd’s v. Stolberg, 680 F.3d 61 (1st Cir. 2012) .................. 18 DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 679 (Tex. 1990) ............................................... 17 Gray v. Powers, 673 F.3d 352 (5th Cir. 2012) ............................................................................. 14 Greene v. Cheetham, 293 F. 2d 933 (2d Cir. 1961) ...................................................................... 30 Hester v. Navigators Ins. Co., 917 F. Supp. 2d 290 (S.D.N.Y. 2013) .......................................... 18 In re Horizon, 470 S.W.3d 452 (Tex. 2015) ................................................................................. 19 Sonat Exploration Co. v. Cudd Pressure Control, Inc., 271 S.W.3d 228 (Texas 2008) .............. 17 Statutes 21 U.S.C. 374 .................................................................................................................................. 9 Rules Fed. R. Civ. P. 56(a) ..................................................................................................................... 14 Regulations 11 NYCRR ..................................................................................................................................... 17 Treatises 6f-166f Appleman on Insurance Law & Practice Archive § 3890 (2nd 2011) ............................. 23 Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 3 of 38 PageID 996 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page iii John Dunt, ed., International Cargo Insurance, § 8.111, (2012) ................................................. 22 Other Authorities Restatement 2d of Conflict of Laws § 6 ....................................................................................... 17 Restatement 2d of Conflict of Laws, § 188 ............................................................................ 15, 16 Webster’s New Twentieth Century Dictionary ............................................................................. 31 Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 4 of 38 PageID 997 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 1 Defendant, Great American Insurance Company (“GAIC”), submits this brief in opposition to the motion for partial summary judgment filed by National Fish & Seafood, Inc. (Plaintiff or “National”). Summary of Argument GAIC has paid National over $1,400,000 for the property that was physically damaged by an ammonia leak at the Americold facility (the “Facility”) pursuant to the terms of the marine open cargo policy1 issued to National by GAIC. In its motion, National seeks an additional $12,000,000 for shrimp stored at the Facility – shrimp that recent expert testing confirmed was not physically damaged during the leak. Rather than actively pursue avenues of remediation presented by GAIC based on the information collected from the consultants GAIC had retained, National thwarted efforts to test the shrimp with an ongoing stream of questions and concerns. After National’s New York counsel sent its September 25 demand letter, it became clear that National had no interest in pursuing remediation, and it ultimately allowed the shrimp to be dumped in a landfill. National took the expansive position that the Policy’s Control of Damaged Goods clause gave it the right to destroy the shrimp and demand full payment when it merely “deems” the shrimp property “un- fit,” without showing that the shrimp was in fact physically damaged. There are genuine issues of material fact that preclude summary judgment. In addition to the genuine issues of material fact discussed above regarding whether the impermeable plastic retail bags of shrimp were damaged at all,2 there are additional issues of material fact as to whether National fulfilled the Policy condition that it sue and labor to avoid or minimize the loss by acting 1 References to Plaintiff’s Appendix will be cited here as “Π App.” See Π App. 9–100 (the “Pol- icy”). 2 Except where a distinction is required, the retail plastic bags and their shrimp content will be referred to as “shrimp.” Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 5 of 38 PageID 998 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 2 in the same manner as a prudent uninsured person would have in the same circumstances. There are also genuine issues of material fact concerning the computation of National’s damages. GAIC submits that National’s response to the incident, and its interpretation of it rights, were imprudent and unjustified by the facts, the terms of the Policy and the applicable law. There- fore, National’s motion must be denied in all respects. Background GAIC and National are parties to an open marine cargo insurance policy protecting Na- tional against risks of physical loss and damage. While many of the facts are not in dispute, whether the shrimp suffered any physical damage is in sharp dispute. It is true that National had property in a refrigerated warehouse when there was an ammonia release. Dr. Wouters’ colleague, Marion Armstrong, collected samples of National’s property for testing, but did not smell ammo- nia on the collected bags.3 After transport back to the lab, Armstrong Forensic Laboratories tested the bags for the presence of ammonia, and smelled none, but detected 1 to 24.4 micrograms4 of ammonia ions per square inch on the inside surfaces of 39% of the plastic retail bags tested in July, 2015. National fails to tell the court, in light of Dr. Smith’s testing,5 which demonstrated the retail plastic bags were impermeable, how the ammonia from the leak could have entered the plastic retail bags containing the shrimp. National ignores the fact that Dr. Wouters noted on July 14, 2015 that the minuscule amounts of ammonia ions detected were likely associated with the natural content of the shrimp themselves.6 While National includes Dr. Wouters’ July 18, 2015 report7 in 3 App. 50. 4 One microgram (1 µg) is one-billionth of a kilogram, less 0.000000000138 ounce. 5 App. 53, 55. These were provided to National when or shortly after they were received. 6 Π App. 308. 7 Π App. 322-324. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 6 of 38 PageID 999 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 3 its Appendix, neither its brief, nor the declaration of Dr. Sanchez, addresses Dr. Wouters’ state- ment that there was “no significant impact on the products tested” – which at that time included the packaging of National’s shrimp. National does not even mention Dr. Acheson, a former Chief Medical Officer and Director Office of Food Safety of the Food and Drug Administration’s Center for Food Safety and Applied Nutrition, who opined:8 . . . [I]t is highly probable that the seafood product had minimal to no exposure to the exogenous ammonia. Further, based on the levels of ammonia found on the inner packaging for the seafood product (maximum 24.4μg/sq inch) the levels are well below any that would constitute a concern for public health. As noted above ammonia and ammonium ions are recognized to be integral components of normal metabolic processes and the levels of ammonia detected on the inner packaging could likely be a result of those natural events and not related to any uptake of ammonia from the leak. This is further supported by the fact that there was no odor of ammonia on the product or the packaging at the time of sampling. And, indeed, National cannot prove any damage to the shrimp, because there was none.9 This was ultimately demonstrated by expert testing of the kind approved by the FDA for use in connection with the testing of other Americold customers’ food products.10 Carried to an illogical extreme, National asks this Court to hold that if a carton of retail bagged shrimp fell off a pallet and into a puddle of standing water during handling across a loading dock, it could “deem” the entire contents of the warehouse “unfit” and dispose of the product. This defies logic, common sense, the terms of the Policy, and the law. * * * 8 App. at 66 9 App. at 69. 10 App. at 2. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 7 of 38 PageID 1000 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 4 During the period of coverage,11 while property of National was stored in an Americold warehouse (“the Facility”), the Facility experienced a failure of its refrigeration system that re- leased a quantity of the anhydrous ammonia refrigerant. The ammonia gas spread in the Americold Facility and the National’s property was exposed to it. National’s property consisted of packaged seafood, principally shrimp of various origins, sizes, and methods of preparation.12 Americold, the Facility’s operator, notified federal authorities, including the Food and Drug Administration (“FDA”) and the FDA notified the Texas Department of State Health Services (“TXSDHS”). Both Agencies sent representative to the Americold Facility. The TXDSHS issued a notice of inspection with a detention directive. Various Americold customers arranged for their property to be tested. Much of this testing was performed by Armstrong Forensic Laboratory, which reported to the TXDSHS that by June 18, 2015 it had tested and analyzed numerous samples of products in the Facility at the time of the Ammonia Release, concluding “In the opinion of Armstrong, the preliminary data obtained has demonstrated no significant impact on the products tested.”13 During the period up to July 13, the Texas DSHS was allowing merchandise that had been present in the Facility at the time of the Ammonia Release to be released on a case-by-case basis. On July 13, the Texas DSHS released all product under detention, in the expectation that the “firm [Americold] will continue communi- cation and compliance with FDA’s direction.” As part of its investigation of National’s claimed loss, GAIC engaged a marine cargo sur- veyor, Louis Marino, to examine the goods; Armstrong Laboratory to perform certain chemical 11 The marine open cargo policy had its inception on January 1, 2015, and the incident that gives rise to the claims in this action occurred on June 9, 2015. Π App. at 10. 12 Π App. at 3. 13 App. 143. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 8 of 38 PageID 1001 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 5 testing on the plastic bags that had been emptied of their contents; J. Scott Smith, Ph.D., to test the plastic retail bags that had contained the shrimp, for their permeability; David Acheson M.D., a former Chief Medical Officer and Director Office of Food Safety of the Food and Drug Admin- istration’s Center for Food Safety and Applied Nutrition (CFSAN), to evaluate the alleged health risks posed by the shrimp; and Richard Pecora, a chemist and former FDA Consumer Safety Of- ficer, to advise and assist in dealing with the FDA and complying with its requirements. Their reports all demonstrate that the ammonia released had no effect on the shrimp or their plastic retail packaging. Their reports were all furnished to National as received.14 Over the course of the ensuing months, the FDA received and assented to reconditioning plans for food products from a number of Americold’s customers, and upon completion of recon- ditioning and submission of results, assented to distribution of the products in commerce.15 Eventually, in September 2016, when Americold threatened National with unilateral de- struction of the shrimp, GAIC was permitted to arrange for sampling of the shrimp themselves by an independent laboratory to determine if they met the criteria of interest to the FDA. Certified Laboratories concluded that National’s shrimp presented “as ‘normal’ seafood and is commercially acceptable. In no way was the merchantability compromised by exposure to ammonia.”16 National never submitted a reconditioning plan to the FDA, forbade GAIC from doing so on its behalf, delayed any testing of the type FDA required of other products, and ultimately de- cided to allow the shrimp to be disposed of by Americold in a landfill. GAIC submits that the 14 App. 147, 155, 160. 15 App. 164, 167, 173. 16 App. 69. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 9 of 38 PageID 1002 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 6 evidence shows that the shrimp were sound and merchantable, and that National’s acts were abso- lutely antithetical to its duty to act as a prudent uninsured and a breach of a material condition of the Policy. The principal disputes in this case as framed by GAIC are whether and to what extent National’s property was damaged, and whether National fulfilled its obligations to sue and labor under the terms of the Policy and the extent to which it is entitled to be compensated. GAIC submits that the shrimp were sound, and could economically have been transferred into new card- board cartons free of any ammonia taint. GAIC paid National the estimated cost to do so – over $1,300,000. In addition, GAIC agreed to pay the full value of other merchandise because its unique packaging was considered unlikely to have protected the food effectively. In short GAIC has paid National in full what it was obligated to pay under the terms of the Policy. GAIC’s Statement of Material Facts And Response to National’s Statement of Facts The Policy became effective as to shipments made, and insured property at risk at storage locations, on and after January 1, 2015.17 The terms of the policy were negotiated by GAIC’s New York-based marine underwriting department with National’s White Plains, New York-based bro- ker, Arthur J. Gallagher, Inc. (“Gallagher”), and executed and delivered in New York.18 The cov- erage relevant to this case was provided against “. . . All Risks of physical loss or damage from any external cause, Including loss due to deterioration as a result of lack of refrigeration or loss to fresh seafood resulting from freezing, irrespective of percentage, but excluding nevertheless, the risks of 17 Π App. 10, 16. 18 App. 38. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 10 of 38 PageID 1003 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 7 war, strikes, riots, seizure, detention and other risks excluded by the F.C. & S. warranty and the S.R. & C. C. warranty in the Policy, excepting to the extent that such risks are specifically covered by endorsement.”19 Endorsement No. 17 extends the Policy, subject to all terms and conditions, to cover all risks of physical loss or damage from any external cause to goods while in controlled temperature storage facilities.20 Coverage is conditioned by the Sue and Labor Clause, Clause 63 of the Policy, as follows:21 In case of any loss or misfortune, it shall be lawful and necessary for the Assured, his or their factors, servants and assignee, to sue, labor and travel for, in and about the defense, safeguard and recovery of the goods and merchandise, or any part thereof, without prejudice to this insurance; nor shall the acts of the Assured or this Company, in recovering, saving and preserving the property insured, in case of dis- aster, be considered a waiver or an acceptance of abandonment; to the charges whereof, this Company will contribute in proportion to the sum herein insured. The duty is restated in plain English in the Policy’s clause 49, emphasizing the duty of National to exert itself to minimize loss.22 Premiums for coverage under the Policy were invoiced by GIAC to Gallagher and pay- ments were remitted by the Gallagher.23 Endorsements were negotiated between Gallagher’s New York office, on behalf of National, and GAIC’s New York marine underwriting staff and then issued and delivered in New York. Claims that arose, including the one that is the subject of this action, were presented by Gallagher’s New York office, on behalf of National, and adjusted by GAIC’s marine claims department in New York. There was little direct contact between GAIC and National.24 19 Π App. 11. 20 Π App. 68–72. 21 Π App. 31. 22 Π App. 26. 23 App. 38. 24 App. 31. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 11 of 38 PageID 1004 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 8 Following the inception of the Policy and until the ammonia release, National imported shrimp that were transported by sea from their origins in India, Thailand and Vietnam. After their arrival in the U.S. the shrimp were transported to the Facility, a refrigerated warehouse operated by Americold, in Dallas. The Facility is a building 800 – 900 feet long, running north/south on the east side of Catron Drive. It contains 6 refrigerated chambers, numbered 1 – 6, with no. 1 on the south end of the building and no. 6 on the north end. Five are used as freezers and maintained near 0° F., and one is used as a cooler, maintained at about 38° – 40° F. The refrigerated chambers are about 200 feet deep. A refrigerated “dock” area, some 30 – 50 feet wide runs the length of the west side of building. Goods are received from and delivered to trucks through the “dock.” There are two engine rooms that project from the dock westward towards Catron Drive that contain the facil- ity’s refrigeration equipment.25 On June 9, 2015, the Facility suffered a malfunction of its refrig- eration machinery, and about 5,000 lbs.26 (approximately 880 – 970 gallons27) of anhydrous am- monia was released in the engine room on the south side of the building.28 On June 11, Gallagher’s claim representative Minette Rivera reported the matter to GAIC “as incident only at this time. There insured is not aware of any problems with their cargo.”29 Americold, the Facility’s operator, notified federal authorities, including the Food and Drug Administration (“FDA”) and the FDA notified the Texas Department of State Health Ser- vices (“TXSDHS”).30 Representative of both agencies attended the Facility on June 18.31 The 25 App. 175, 177, 180, 182, 185. 26 App. 187. 27 https://www.osha.gov/SLTC/etools/ammonia_refrigeration/ammonia/ visited Jan. 19, 2017. 28 App. 177, 180. 29 App. 189. 30 App. 192. 31 App. 196. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 12 of 38 PageID 1005 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 9 TXDSHS issued a notice of inspection with a detention directive.32 The FDA issued a Notice of Inspection, form FDA-482,33 but did not issue a form FDA-48334 citing any adverse findings. The FDA did not detain the food in the Facility,35 although Americold told GAIC’s surveyor36 that it had. As part of its investigation of the loss, GAIC engaged consultants to advise on the question of the nature and extent of damage. They included Louis Marino, a certified marine cargo sur- veyor; Armstrong Forensic Laboratory’s Dr. Kelly Wouters; Dr. J. Scott Smith, an expert in food packaging; Dr. David Acheson, a former Chief Medical Officer at the FDA Center for Food Safety and Applied Nutrition and Mr. Richard Pecora, a former FDA Consumer Safety Officer. Armstrong Forensic Laboratory reported to TXDSHS on June 18, 2015 that the ammonia leak had had no significant impact on products in the Facility.37 TXDSHS accepted the validity of Armstrong’s sampling method and its testing protocol.38 At an early stage, the Texas DSHS 32 App. 200. 33 App. 204. 34 This is significant because such a report is required under 21 U.S.C. 374: Upon completion of any such inspection [for which an FDA-482 is issued] of a factory, warehouse, consulting laboratory, or other establishment, and prior to leaving the prem- ises, the officer or employee making the inspection shall give to the owner, operator, or agent in charge a report in writing setting forth any conditions or practices observed by him which, in his judgment, indicate that any food, drug, device, tobacco product, or cosmetic in such establishment (1) consists in whole or in part of any filthy, putrid, or decomposed substance, or (2) has been prepared, packed, or held under insanitary condi- tions whereby it may have become contaminated with filth, or whereby it may have been rendered injurious to health. A copy of such report shall be sent promptly to the Secretary. 35 Π App. 129. (“No order has been issued by the FDA under [21 U.S.C. §] 334(h) . . .”) 36 Π App. 232. 37 TXDSHS001701-3. 38 App. 208. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 13 of 38 PageID 1006 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 10 established critera for release from detention, inter alia, that the interior surfaces of food packaging contain no trace of ammonia.39 Marino attended at the Facility on June 18, 2015. He noted that National had an office and staff in the Facility. He introduced himself to National’s Keith Bradsher, but Bradsher had little time for Marino or for action in response to the condition of the shrimp at the facility: "I really don't have much to do with this. I'm dealing with sales and so forth. Please talk to Americold. They're on the other side of the building."40 Marino viewed National’s boxed, retail-packaged shrimp that day and subsequently, and communicated with Americold and Armstrong Forensic Laboratory, assisting in organizing testing of the interior surfaces of the plastic retail bags for the presence of ammonia. Armstrong sampled National’s property in accordance with the TXDSHS-approved hypergeometric plan. There was no smell of ammonia on the bags collected. The testing, limited to the interior surfaces of plastic retail bags that had been emptied of their shrimp content at Americold, took place on July 9 and 10, 2015. The process is amply described in National’s moving brief. Dr. Wouters issued a report on July 13, 2015. He also issued a narrative report on July 14, 2015.41 Also on July 13, TXDSHS began releasing product from the Facility back to its owners, and, also on July 13, withdrew its detention order in the expectation that the “firm [Americold] will continue communication and compliance with FDA’s direction.”42 On July 15, FDA released a statement that “FDA considers food product that has been exposed to ammonia as a result of an 39 TXSDHS000923-4 40 App. 211. 41 Π App. 307–08. 42 App. 213. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 14 of 38 PageID 1007 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 11 ammonia leak to be adulterated under section 402(a)(3) of the Food Drug and Cosmetic Act [21 U.S. Code § 342(a)(3)].”43 On July 15, Dr. Wouters explained to Marino’s colleague, Clive Hubbard, that the extent to which TXDSHS was still involved was unclear to him.44 Therefore, he had included a statement in his July 14 narrative to the effect that National’s product did not meet TXDSHS standards for release from detention based on the July 2 TXDSHS guidance. Marino asked it that statement could be removed in contemplation of a conference that Marino and Pecora planned to have with FDA’s case officer, Jeffrey Wooley, to clear the field and allow the FDA to make its own deter- mination about the possibility of reconditioning National’s shrimp based on the actual laboratory results.45 Such an amended narrative report, clearly labeled as such, was issued.46 Dr. Acheson reviewed Dr. Wouters’ test results and issued a opinion47 on July 29 stating that: . . . There is nothing in the analysis undertaken to indicate that consumption of the exposed seafood would present any type of health risk or any organoleptic concerns with the public and the distribution and sale of this product to consumers would not raise any health concerns whatsoever. Dr. Wouters offered a further opinion on August 5:48 Based on the available data, observations, and information, it is the opinion of Arm- strong that there are no indications of a health hazard associated with the National Fish product line. The presence of low levels of ammonia would be expected from the natural content of seafood products, and there is no evidence that the ammonia detected is actually associated with the ammonia leak at the Americold facility. In the opinion of Armstrong, the National Fish product line has not been negatively affected by the ammonia leak, and the product should be considered for a return to commerce. 43 Π App.144. 44 App. 215 45 Id. 46 Π App. 337–38. 47 App. 66. 48 App 217. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 15 of 38 PageID 1008 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 12 Pecora and Marino conducted a conference call with FDA’s Wooley on August 6, during which Wooley admitted that the 402(a)(3) reference in his July 15 e-mail related to test results for other clients’ product, not National’s shrimp, and requested that a reconditioning plan be submit- ted.49 He was not hostile to the idea that, in light of the imperviousness of the plastic retail pack- aging, testing of the re-boxed shrimp might not be required. Dr. Smith examined and tested a selection of the bags that Armstrong had sampled. He determined and reported on August 24 that the bags were impermeable to ammonia at freezing temperatures.50 He issued a detailed laboratory report on September 27 explaining the technique used to conduct the tests.51 On August 17, GAIC forward to Gallagher copies of Dr. Wouters’ August 5 opinion, Pec- ora’s report of the August 6 conference with FDA’s Wooley, and Dr. Acheson’s report.52 Dr. Smith’s report of August 24 was forwarded on August 25.53 Adopting a view that was consistent with the opinions of Dr. Wouters, Dr. Smith, Dr. Acheson, and Mr. Pecora, the FDA ultimately arrived at the position memorialized in an internal e-mail message sent by Jeffery Wooley on August 24, 2015:54 We contacted Millie Benjamin and she stated CFSAN [FDA’s Center for Food Safety and Applied Nutrition] would not support action if the organoleptic testing of the product was negative. . . . During a phone call with Millie, she expressed organoleptic testing is the only testing FDA would really be concerned about since ammonia is not harmful if its levels are not high enough to smell. [em- phasis added.] 49 App. 220. 50 App. 53. 51 App. 55. 52 App. 222. 53 App. 226. 54 App. 229. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 16 of 38 PageID 1009 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 13 At this point, sufficient information had been received to understand that National’s clam merchandise, packaged quite differently in Styrofoam tray wrapped with a flimsy plastic, could not reasonably be expected to have been impermeable as was the shrimp packaging. Nor did the value of the clam merchandise justify the expense of testing, and, potentially, repackaging the clams themselves. Accordingly, GAIC accepted this portion of the claim on the realistic appraisal that the clams were in fact unfit and could not be made merchantable by any economically sensible means.55 In late November, 2015, GAIC paid over $1,400,000 to cover the full insured value of the clam merchandise as well as the estimated cost of transferring the bagged shrimp into new cardboard boxes. In doing so, GAIC advised that it was prepared to arrange for the preparation of a full reconditioning plan for the shrimp that would meet the requirements of the FDA.56 In re- sponse, National revoked its permission for GAIC’s consultants to communicate with the FDA, and denied permission for GAIC’s consultants to present any reconditioning plan to the FDA.57 Reconditioning plans were developed and refined by Mr. Pecora in the fall of 2015.58 In early January 2016, a fully configured sampling, testing and reconditioning plan was presented to National, with the request that it confirm that Americold was authorized and instructed to comply with the sampling needs of the contractors concerned.59 When National replied, 60 it recommended that the samples to targeted be modified to include those pallets that had been sampled by Arm- strong Forensic Laboratories in July, 2015. GAIC acceded61 to this recommendation and other 55 App. 31 56 App. 235. 57 App. 239. 58 See, e.g., App. 243. 59 App. 249. 60 App. 256. 61 App. 259. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 17 of 38 PageID 1010 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 14 conditions imposed by National, including an agreement to a tandem sampling process with sam- plers engaged by National. GAIC again requested confirmation that Americold had been author- ized and instructed to assist in process of securing samples. In the absence of any affirmative response that Americold had been authorized and instructed to allow and assist in sampling, GAIC followed up again on March 14 to determine if National was ready to proceed.62 Although Na- tional replied that it was, months passed before, under threat of destruction of the shrimp by Amer- icold, the sampling actually began, in September, 2016. As noted by National, these months of delay had a potentially adverse effect on the value of the shrimp because of their age.63 POINT I: Summary Judgment Standard Summary judgment must be denied unless the movant shows, based on admissible evi- dence in the record placed before the court, “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The moving party bears the burden of demonstrating “the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317 (1986). “The evidence should be viewed in the light most favorable to the non-moving party, and this court should ‘refrain from making credibility determinations or from weighing the evidence.’ Deville v. Marcantel, 567 F.3d 156, 163-64 (5th Cir. 2009) (quoting Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007)).” Gray v. Powers, 673 F.3d 352, 354 (5th Cir. 2012). Disputes of material facts – those “facts that might affect the out- come of the suit under the governing law” – will properly preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). 62 App. 293. 63 App. 302. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 18 of 38 PageID 1011 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 15 POINT II: New York Law governs the construction and appli- cation of the contract of insurance. Despite the fact that there is no explicit Policy provision calling for the application of New York law, considerations found in the Restatement 2d of Conflict of Laws § 188 compel that result. This section enumerates the significant contacts to be considered in determining the state with the most significant interest in the controversy. They are (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of busi- ness of the parties. National, through Gallagher, its New York-based broker, came into the New York insur- ance market to solicit coverage from GAIC’s New York-based marine underwriters. It is notable that the New York market has a history of expertise in the field of insurance on seafood risks.64 This Policy is made subject to a contractual limitation period as provided by New York statute (clause 64),65 evidencing an expectation that in the event of any alleged breach, New York law would control a significant aspect of the parties’ relationship. The Policy, and subsequent endorse- ments, were negotiated, signed and issued by GAIC’s marine underwriter in New York (clause 69) and delivered to Gallagher in New York. Premium was billed to, and remitted by, Gallagher. Other National claims were submitted on its behalf by Gallagher to GAIC’s ocean marine claims department in New York. The GAIC marine claims group adjusted these claims with Gallagher in New York, and payments in their satisfaction were directed by GAIC’s New York-based team. The subject matter of the insurance – principally goods in transit – was worldwide in na- ture, and the coverage for goods in warehouses named locations from coast to coast, and from 64 App. 22. 65 Π App. 031 at clause 64. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 19 of 38 PageID 1012 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 16 Texas to Canada. The location of any particular property that might become the subject of a claim on the Policy thus of little significance. National’s demand for payment of the alleged losses it seeks to recover in this action was sent by a New York attorney, from New York, to Gallagher in New York, with a request that it be forwarded to GAIC’s ocean marine claims department in New York. It is therefore clear that New York was the place where the contract was made; the place where its terms, conditions, rates of premium and periodic changes by endorsement were all negotiated; where Gallagher, on behalf of National, called on GAIC to perform its Policy obligation to receive, investigate, adjust and pay claims recoverable under the Policy generally,66 and this claim specifically. As the Restatement further notes in subsection (3), “If the place of negotiating the contract and the place of perfor- mance are in the same state, the local law of this state will usually be applied, except as otherwise provided.” The case of Advani Enters. v. Underwriters at Lloyds, involving a marine cargo insurance policy, is also instructive. In Advani, the court noted that the insurance was placed with London underwriters by a Lloyd’s broker in London. Applying factors analogous to Restatement § 188, the court then noted: More concretely, this choice-of-law analysis should include an assessment of the following contacts: (1) any choice-of-law provision contained in the contract; (2) the place where the contract was negotiated, issued, and signed; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the dom- icile, residence, nationality, place of incorporation, and place of business of the parties. See e.g., Sundance Cruises, 7 F.3d at 1082; State Trading, 921 F.2d at 417; Siegelman v. Cunard White Star Ltd., 221 F.2d 189, 193-95 (2d Cir. 1955). See also Aqua-Marine Constrs., Inc. v. Banks, 110 F.3d 663, 674 (9th Cir.) cert. denied, 139 L. Ed. 2d 263, 118 S. Ct. 339 (1997); Milanovich v. Costa Crociere, S.p.A., 293 U.S. App. D.C. 332, 954 F.2d 763, 767 (D.C. Cir. 1992). 66 The course of dealing between National and GAIC from January 1, 2013, beginning with the joint policy with policy issued jointly with Aspen, was the same. App. 38. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 20 of 38 PageID 1013 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 17 * * * Moreover, Advani obtained the policy by participating in the underwriting market at Lloyd’s of London in England. Advani addressed a letter requesting payment under the policy to Lloyd’s Underwriters c/o Houlder Insurance Services (Marine) Limited in England, Letter from Lilly Sullivan Barkan & Junge P.C. to Lloyds Un- derwriters c/o Houlder Ins. Servs. (Marine) Ltd of Mar. 21, 1995 at 1, and the re- sponse came from English solicitors. Advani Enters. v. Underwriters at Lloyds, 140 F.3d 157, 162-63 (2d Cir. 1998) As in this case, the place of the contract’s formation, and the place where the insured sought the insurer’s perfor- mance, were both highly valued contacts. Furthermore, to suggest as National does that New York has no interest in the behavior of licensed insurers providing underwriting and claims service within that State defies credulity. New York’s Department of Financial Services enforces a robust body of regulation in the field of insur- ance. See generally, 11 NYCRR. Sonat Exploration Co. v. Cudd Pressure Control, Inc., 271 S.W.3d 228 (Texas 2008), cited by National, does not impel a contrary result. Notably, the court observed that the parties there negotiated and contract from two different states. Id. at 233. That is not the case here. The negotiations and execution were all performed in New York. Moreover, in Sonat the services that gave rise to the claim performed were performed in Louisiana, whose law the court determined applicable. The gist of the agreement, and the performance of the parties, in this case was centered in New York. “As a rule, that factor alone is conclusive in determining what state’s law is to apply.” DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 679 (Tex. 1990). No precept of Restatement 2d of Conflict of Laws § 6 is offended by such an outcome. Application of New York law in the case of a contract made and performed in New York is cer- tainly a justifiable expectation; it can scarcely come as a surprise to a party who enters its insurance market in order to avail itself of that market’s expertise in underwriting seafood risks. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 21 of 38 PageID 1014 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 18 POINT III: New York Law requires that the court construe the Policy as a whole, in a manner that gives effect to all of its terms Under New York law, the Policy, like any contract, must be interpreted according to the parties’ intent. Crane Co. v. Coltec Indus., Inc., 171 F.3d 733, 737 (2d Cir. 1999) (citing American Express Bank, Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 277, 562 N.Y.S.2d 613 (1st Dep’t 1990)). That intent is derived “from the plain meaning of the language employed in the agreements,” id. (quotation marks omitted), when the agreements are “read as a whole.” W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 566 N.E.2d 639, 642, 565 N.Y.S.2d 440 (N.Y. 1990). Divining the parties’ intent requires a court to “give full meaning and effect to all of [the contract’s] provisions.” Katel Ltd. Liab. Co. v. AT&T Corp., 607 F.3d 60, 64 (2d Cir. 2010) (quotation marks omitted). Courts must avoid “interpretations that render contract provisions meaning- less or superfluous.” Manley v. AmBase Corp., 337 F.3d 237, 250 (2d Cir. 2003). When the parties’ intent is clear – i.e., unambiguous – the contract “must be en- forced according to the plain meaning of its terms.” Lockheed Martin Corp. v. Retail Holdings. N.V., 639 F.3d 63, 69 (2d Cir. 2011) (citing South Rd. Assocs., LLC v. IBM, 4 N.Y.3d 272, 826 N.E.2d 806, 809, 793 N.Y.S.2d 835 (N.Y. 2005)). (emphasis added.) Hester v. Navigators Ins. Co., 917 F. Supp. 2d 290, 296 (S.D.N.Y. 2013) (applying New York law) Nor does this conflict with Massachusetts law. The case law is plain that courts should “presume[]” that contractual terms have meaning and effect “whenever practicable.” Id. (quoting Jacobs v. U.S. Fid. & Guar. Co., 417 Mass. 75, 627 N.E.2d 463, 464 (Mass. 1994)) (internal quotation marks omitted); see King Features Syndicate, Inc. v. Cape Cod Broad. Co., 317 Mass. 652, 59 N.E.2d 481, 483 (Mass. 1945) (“If possible, reasonable effect must be given to all [of a contract’s] provisions.”). Where, as here, the effect of a narrow provision is starkly limited in light of a broader provision, this canon of construction does not require us to invent wholly separate purposes for overlapping provisions such that only one provision will govern in each case. Instead, Massa- chusetts law dictates that we follow the plain language of the policy, even though some terms may be rendered redundant or superfluous in particular instances. See Hanover, 624 N.E.2d at 617. Although our reading may make the Employees Ex- clusion supererogatory when the Contractors Exclusion has already operated to eliminate certain events from coverage, this reading – which leaves all of the con- tractual provisions intact – is preferable to the appellant’s reading, which guts the Contractors Exclusion and which, by logical extension, would also eviscerate the Workers’ Compensation Exclusion. (emphasis added.) Certain Interested Underwriters at Lloyd’s v. Stolberg, 680 F.3d 61, 69 (1st Cir. 2012) Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 22 of 38 PageID 1015 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 19 Texas law is to the same effect: [W]e construe the policies as we would any other contract. Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010). Our primary objective in doing so is to ascertain and give effect to the parties’ intent as expressed by the words they chose to effectuate their agreement. Id. To that end, we give the words in the policy their ordinary and generally accepted meaning un- less the policy indicates that the parties intended the language to impart a technical or different meaning. Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 158 (Tex. 2003). We must examine the policy as a whole, seeking to harmonize all provisions and render none meaningless. Gilbert, 327 S.W.3d at 126. In re Horizon, 470 S.W.3d 452, 464 (Tex. 2015) National’s argument here ignores this precept, exalting the Control of Damaged Goods clause beyond reasonable meaning, and essentially eviscerating the Policy of its other terms. POINT IV: Sue and Labor is a fundamental material obligation on the part of an insured under a marine cargo pol- icy of insurance. The duty of an insured to sue and labor as a condition of coverage is well-established. This extensively discussed in the case of Am. Home Assur. Co. v. Merck & Co., Am. Home Assur. Co. v. Merck & Co., 386 F. Supp. 2d 501, 517-518 (S.D.N.Y., 2005)(Merck II), and the superior rela- tionship of the sue and labor clause over a control of damaged goods clause analyzed. Merck II is particularly apt because it involved alleged damage to FDA-regulated products: The Assured [i.e., Merck] shall have full right to the possession of all goods in- volved in any loss under this policy and shall retain control of all damaged goods. The Assured, exercising a reasonable discretion, shall be the sole judge as to whether the goods involved in any loss under this policy are fit for use as originally intended or in any other capacity, and no goods so deemed by unfit for use shall be sold or otherwise disposed of except by the Assured or with the Assured’s consent, but the Assured shall allow this Company [i.e., American Home] any salvage ob- tained by the Assured on any sale or other disposition of such goods. In addition, property insured by this policy shall be deemed to have suffered an insured loss if, as a result of a fortuitous event: Said property is deemed unfit for use by any government regulatory body and/or agency, anywhere in the world, or as a result of reasonable interpretation of regu- lations promulgated by said bodies and/or agencies; Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 23 of 38 PageID 1016 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 20 or the only means of determining the existence or extent of damage is through “de- structive testing.” Id., at 506. In Merck II, a number of prototypical claims were considered. In one instance, the plain- tiff-insured claimed for a total loss of vaccines alleged to have been exposed to freezing tempera- tures. The defendant-insurer argued that the vaccines were not exposed to freezing temperatures, and that in any event the insured should have conducted salvage operations in order to return un- damaged vaccines to the marketplace. Id. at 509 In another, damage to exterior packing of four fiberboard drums of pharmaceutical ingredients was noted. On examination, the insured found that the interior liners of two of the drums had been breached, with spillage of their contents within the drums. There was no evidence of such a breach or spillage in the other two drums. Neverthe- less, the insured condemned all four drums without performing any testing. The insurer resisted this type of claim on the basis of the insured’s failure to take any steps to salvage the material from the drums whose liners were punctured, and the failure to demonstrate that there was any damage at all to the goods in the drums whose liners were sound. A third type of prototype claim involved condemnation of pharmaceuticals that were shipped in a truck that subsequently loaded cylinders of chlorine gas en route to the insured’s customer. The insured recalled the pharmaceuticals, in- spected them and the truck, finding: the truck exuded no smell of chlorine, and all of the drugs shipment “was in good order.” Moreover, Merck never tested the chlorine gas canisters to determine if they still contained any chlorine or were emitting chlorine gas. Nor did Merck examine or test the pallets of pharmaceuticals to determine whether even the outer packaging of the drugs had been exposed to chlorine. Id., at 511. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 24 of 38 PageID 1017 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 21 The circumstances attendant to the ultimate destruction of National’s shrimp are analogous. The shrimp and the bags containing them had no smell of ammonia. Despite the fact that it col- lected samples for testing, National identifies no testing of any kind performed on its behalf of the shrimp.67 Its representatives had a half dozen telephone conversations with TXDSHS or FDA representatives.68 National states that it had “communications . . . regarding the feasibility and cost of removing the shrimp from National Fish’s shrimp merchandise and placing it into new bags and boxes,”69 and even presented its own bid to Great American for repacking the shrimp,70 but having received over $1,300,000 from GAIC to effect repackaging, did nothing. Finally, while it asserts in answers to interrogatories that it “communicated or attempted to communicate with nu- merous companies” about salvage, this was never communicated to Great American until long after the inception of this action, and was limited to exploration of sale of the shrimp for non- human consumption.71 In point of fact, the first mention of salvage was in communication between counsel in early August 2016, after Americold terminated its contract with National and threatened unilaterally to dispose of the shrimp.72 The sue and labor clause in the Merck II policy was “. . . in substance indistinguishable from those adopted in countless other insurance contracts and interpreted in other jurisdictions,” and is substantially identical to the clause contained in the Policy. Compare, Π App. 031 at clause 63 with the text appearing in Merck II at 506. As described by the Fifth Circuit in Reliance Insurance Co. v. Escapade, 280 F.2d 482, 488 n.11 (5th Cir. 1960), “the purpose of the clause is at least twofold. It is to 67 App. 306, no. 11 68 Id. no. 5. 69 Id. no. 14. 70 National Seafood Quotation of Aug. 26, 2015 – App. 299 - 300 71 App. 306, no. 15. 72 App. 328. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 25 of 38 PageID 1018 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 22 (a) encourage and (b) bind the assured to take steps to prevent a threatened loss for which the underwriter would be liable if it occurred, and when a loss does occur to take steps to diminish the amount of the loss.” Id. (internal citations and quotation marks omitted). An insured is obligated by the clause “to exercise the care of a prudent uninsured owner to protect insured property in order to minimize or prevent the loss from the occurrence for which the underwriter would be liable under the policy.” Id. at 488. That duty “is one of reasonable care under all the circumstances and in the light of pertinent commercial and maritime practices. It does not require the insured to use all possible care or to follow the wisest course.” Ope Shipping v. Allstate Ins. Co., 687 F.2d 639 at 643 (internal citations omitted). . . . Moreover, the Sue and Labor Clause represents a specific, material provi- sion of the insurance policy that imposes its distinct obligations upon the in- sured, separate and apart from any other express or implied duty that may arise by operation of law. If Merck failed to comply with its obligations under that clause, it would be in breach of its obligations under the Policy. Merck II at 518. While Merck II was decided under Pennsylvania law,73 the Court went on to note: [T]here are cases in this District indicating that an insured’s violation of its obliga- tions under a sue and labor clause defeats its right to recover under the policy. See American Nat. Fire Ins. Co. v. Mirasco, Inc., 249 F. Supp. 2d 303, 327 (S.D.N.Y. 2003) [applying New York law] (“If [the insured’s] losses occurred as a result of breach of the sue and labor clause, recovery is not available.”), supplemented and reconsideration denied, 2003 U.S. Dist. LEXIS 17370, No. 99 Civ. 12405 (RWS), 2003 WL 22271226 (S.D.N.Y. Sept. 30, 2003); International Commodities Export Corp. v. American Home Assur. Co., 701 F. Supp. 448, 452 (S.D.N.Y. 1988) (“When a policy contains a sue and labor clause, an insurer may be able to argue that the insured has forfeited its coverage if it does not sue and labor to minimize the covered loss.”); Intermondale Trading Co. v. North River Ins. Co. of N.Y., 100 F. Supp. 128, 132 (S.D.N.Y. 1951). Merck II, at 518-519; accord: John Dunt, ed., International Cargo Insurance, § 8.111, (2012), commenting on American law: 73 The court considered the factors enumerated in Restatement § 188, and found that “(1) the loca- tion of the risk covered is essentially worldwide . . . , (2) the Policy’s only state-specific term is a Pennsylvania Statute of Limitations in its “Suits” clause, and (3) the document’s signature block expressly states that the Policy was issued in Pennsylvania. Given . . . the absence of a specific geographical focus for the coverage itself, these details are determinative. Accordingly, . . . a declaratory judgment identifying Pennsylvania law as the controlling standard is granted in re- sponse.” Am. Home Assur. Co. v. Merck & Co., 329 F. Supp. 2d 436, 444-45 (S.D.N.Y. 2004)(“Merck I”) Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 26 of 38 PageID 1019 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 23 This clause is founded on the premise that an insured has a legal duty to prevent a loss and must use due diligence to save and preserve insured property. The ultimate aim of the clause is twofold: (1) prevention of a loss or (2) mitigation of a loss once it occurs. An assured is obligated to exercise the care of a prudent uninsured cargo owner to protect insured property in order to minimize or prevent the loss for which the underwriter would be liable under the policy. It is not essential for there to have been an actual loss or damage to the property, as long as the charges were properly incurred to prevent a loss when the cargo was immediately threatened. Compliance is mandatory or the assured may be denied recovery under the policy. In exchange, the insurer must reimburse the assured for reasonably incurred expenses. [footnotes omitted.] Thus, after a loss has occurred, it is the duty of the insured, usually required by specific policy provision, to exercise reasonable care for the preservation and protection of the damaged property, unless there is a total loss. This duty is absolute, and is a condition precedent to recovery. 6f-166f Appleman on Insurance Law & Practice Archive § 3890 (2nd 2011). POINT V: The Sue and Labor Clause imposes duties on the in- sured that are a condition to invocation of the cov- erage afforded by the Control of Damaged Goods Clause The obligations imposed on National by the Sue and Labor clause are not contrary to the provisions of the Policy’s Control of Damaged Goods clause. Reading the Policy as a whole, rather than the Sue and Labor clause being subordinated to the Control of Damaged Goods clause, the opposite is the case. If construed as proposed by National, almost all of the Policy becomes surplussage. While National concedes that there must be damage to insured goods, all the temporal limitations and exclusions fall away. For example, the all-risk provision (clause 12(A) of the Pol- icy)74 requires that damage arise from a fortuitous external cause. Inherent vice is explicitly ex- cluded.75 Does National seriously propose that “notwithstanding” the all-risk wording, if it 74 Π App. 11 75 Id. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 27 of 38 PageID 1020 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 24 “deems” goods unfit, losses arising from seafood that was damaged due to an indwelling fault are nonetheless recoverable? The same “classic subordination phrasing,” “Notwithstanding anything to the contrary in or endorsed on this Policy,” also appears in the Marine Extension Clauses of the Policy.76 These define the point in time when the coverage attaches to National’s property. If read as National would propose, the Control of Damaged Goods clause would subordinate the Marine Extension Clauses. Any damage to insured goods, whenever occurring, would be recoverable if National “deemed” the goods “unfit.” Moreover, are there any limits on the extent to which National can “deem” goods “unfit”? If bird droppings fell on a single carton of shrimp while transferring its pallet from a truck to the Americold warehouse, under National’s approach could it “deem” all of its property at the ware- house “unfit”? The whole truckload? The whole pallet? Any of these results is farcical. Reading the Policy as a whole, it is clear that these subordinations must be read narrowly. The subordination phrasing “Notwithstanding anything to the contrary” appears in the Policy no less than eight times by our count. And the subordination phrasing in the Control of Damaged Goods clause does not say “Notwithstanding any other provision”; it is only those provisions that are “contrary” to the Control of Damaged Good clause that are subordinated. There is nothing in the Policy to indicate that that the Control of Damaged Goods clause supersede the condition imposed on coverage by the Sue and Labor Clause. Merck is particularly instructive on this point: 76 Π App. 22 Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 28 of 38 PageID 1021 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 25 Genuine issues have been raised concerning whether Merck’s application of Sec- tion 211.208 or, in the alternative, Section 211.204 to Prototype Claim 1 was rea- sonable; whether – and if so, for how long – temperatures inside the truck that was carrying the Vaccines dipped below the freezing point; whether any of the Vac- cines, which were housed in insulated packaging, could have frozen even if the temperature readings proffered by Merck are to be believed; and whether, even if Merck would otherwise be entitled to coverage under the Policy, Merck failed to discharge its duties under the Sue and Labor Clause by testing the Vaccines to de- termine whether they might be salvaged. While Merck appears to have made a substantial case for coverage based on the current record, it has left itself exposed to American Home’s affirmative defenses by its failure to examine the Vaccines to determine whether they might have been salvaged. Merck, at 520. Even if Merck has demonstrated that the Prototype Claim would otherwise be fully or partially covered under the Policy, has American Home proven that Merck failed to satisfy its obligations under the terms of the Sue and Labor Clause of the Policy or its duty to mitigate damages? If so, Merck’s coverage would be excluded or limited based on one of these affirmative defenses. Merck, at 522. National suggests that it discharged its Sue and Labor duty merely by preserving the shrimp in a frozen condition.77 Preserving the shrimp by keeping them frozen served no purpose to min- imize the loss. The question of what was feasible and reasonable to minimize the loss, as required by the Sue and Labor clause, presents a triable issue of fact. The Policy provides a number of graduated solutions to damage that might be sustained by insured property. Among these are the Recoopering/Repacking clause (no. 34), the Partial Loss clause (no. 51), the Labels clause (no. 36) and the Brands and Trademarks clause (no. 39). These provide clear guidance on the question of whether National acted as a reasonable and prudent uninsured. These clauses refer to damage, and comprehend potential distinctions between pack- aging, goods, merchandise, property and labels. Their very presence in the Policy, read as a whole 77 National’s Brief at p. 30 Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 29 of 38 PageID 1022 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 26 and against the framework of standard imposed by the Sue and Labor clause of a reasonable pru- dent uninsured owner of goods, demonstrates that alternatives that will minimize a loss must be considered and applied. Clause 34 of the Policy, “Recoopering/Repacking,” establishes the right of the insured, in its sole judgment, to repackage merchandise and require GAIC to pay the cost of new packaging. National obtained and provided GAIC bids both to transfer the retail bags of shrimp to new cartons only, and to re-bag the shrimp in new bags and re-box those shrimp in new cartons. GAIC recog- nized this and paid the cost of such repackaging. As it turns out, this was all the FDA would have required to assent to distribution of the shrimp in commerce.78 There can be no doubt that the circumstances here present a partial loss within the meaning of clause 51, the Partial Loss clause. The shrimp and their retail packaging were sound. It is clear that the damaged cardboard box element of the insured property was capable of being separated from the sound retail bags of shrimp.79 In a variation of the concept of repackaging embodied in the Labels clause, no. 34, the Policy specifically covers the cost of replacing wrappers and labels. There is no evidence that this was ever explored by National. Clause 39, Brands and Trademarks, permits removal of goods from branded packaging to plain packaging. As the shrimp themselves carried no brand or trademark, it would have been possible to transfer the shrimp contents of the original bags into new bags without the Walmart name. 78 App. 2 79 Id. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 30 of 38 PageID 1023 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 27 The Control of Damaged Goods clause provides an ultimate “fail safe” if no means to reasonably avoid or minimize loss is viable. Clause 32, in its first paragraph, acknowledges Na- tional’s ultimate discretion in the disposition of its property, if the other conditions in the clause are met, including physical damage to the shrimp. Discretion signifies more than whim. The first paragraph of the clause does not provide any coverage in its own right. It is only in the second paragraph of the clause that two potential bases for coverage are stated. One is if the insured deems the property unfit for sale. The other is if the insured cannot sell the property under its agreement with a trade association or other entity. In both cases the framework of standard imposed by the Sue and Labor clause of a reasonable prudent uninsured owner of goods still applies. The agreement to dispose of the clam merchandise is instructive and illustrative of how the Control of Damaged Goods clause operates. There was never a factual determination that the food product was damaged, or even that its immediate packaging was damaged. Rather, consideration of the totality of circumstances reasonably impelled the conclusion that the goods were unfit. The clams were packaged on Styrofoam trays sealed with flimsy plastic. The best judgment available was that these packaging materials were unlikely to have protected the food within against the incursion of ammonia gas. These factors alone satisfied GAIC and prompted agreement to pay the cost of the clam merchandise. Also considered, but not a determining aspect, was the fact that the clam merchandise, at cost, had value of about $1 per pound. Given the cost of sample collec- tion, the cost of testing each sample, and the potential cost of repackaging the clams, it simply made no sense to consider any of the alternatives to destruction. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 31 of 38 PageID 1024 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 28 While National purports to have made its determination based on a number of facts,80 many of the factors were of fleeting duration as noted above. This was, or should have been, known to National, as it had an office in the Facility. The Texas DSHS released its hold on the goods on July 13, 2015. The FDA never had a “hold” on the goods. Pecora’s description of his August 6, 2015 conversation with FDA’s Jeffrey Wooley, reporting that the adulteration charge was not lev- ied on National’s shrimp and that FDA would entertain a plan to transfer the bags of shrimp to new cartons was ignored. As it turns out, such a plan would have been acceptable to the FDA and resulted in the FDA expressing its non-opposition to distribution of the shrimp. Dr. Wouters’ reports that the exposure was so minimal as to be of no consequence were ignored. Dr. Acheson’s opinion that there were no risks to health was ignored by National. Walmart did not reject the goods because of any damage – it never had the chance to because there is no evidence that Na- tional even tendered, or proposed to tender, them to Walmart. Since the shrimp were not damaged or adulterated, delivery of the original shrimp in their original bags but in new cartons would not have constituted delivery of remanufactured, reconditioned, refurbished or adulterated merchan- dise. GAIC submits that when all the facts were taken into account, it is clear that there was no rational basis for National, acting in the same manner as a reasonably prudent owner of uninsured goods, simply to “deem” the shrimp unfit for sale. 80 National’s Brief at p. 26. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 32 of 38 PageID 1025 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 29 POINT VI: Damages A. Damages caused by reason of loss of market are excluded from coverage To the extent that it can be shown that National was motivated to allow destruction of sound shrimp because Walmart simply might not accept them, the damages would be unrecover- able under the terms of the Policy by virtue of the warranty against claims for loss of market contained in the Policy’s Delay clause.81 Such a loss is discussed in Blaine Richards & Co. v. Marine Indem. Ins. Co., 635 F. 2d 1051 (2d Cir. 1980). Blaine Richards involved an alleged contamination of a food product and detention by the FDA. During the detention, buyers cancelled their contracts. When Blaine Richards submitted a reconditioning proposal to the FDA, which was accepted, a substantial quantity of the goods was released as clean. The court stated: “it seems clear that no damages may be recovered in relation to the 9,387 bags of beans regarded as ‘clean’ by the FDA unless it can be shown that the original purchasers rejected these beans due to their physical condition.” Id. at 1055-1056. Here, as the retail bags of shrimp were demonstrated to be sound and merchantable, if Walmart had rejected them because of their “reputation”82 without the existence of any physical damage, the Policy would not respond for the resulting market loss. 81 Π App. 019 82 And National has never said that the shrimp were ever rejected by Walmart. The Bruno Decla- ration does not so state. Π App. 001 et seq. All it states is that the shrimp were intended for sale and delivery to Walmart, and that National’s contract forbids delivery of “adulterated, remanufac- tured, reconditioned or refurbished merchandise.” The Bruno Declaration presumes adulteration of the shrimp, which is factually contradicted. While the process of rehabilitating the goods in the Facility at the time of the incident is often referred to as reconditioning, it would have involved removing the sound retail bags of shrimp from their original cardboard cartons and transferring them to new cardboard cartons. The cardboard cartons would be “new,” and the shrimp in their plastic retail bags would be as original and “new.” No part of what could have and should have been tendered to Walmart would have been adulterated, remanufactured, reconditioned or refur- bished merchandise. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 33 of 38 PageID 1026 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 30 B. Damages due to inherent vice of the shrimp are excluded from coverage Three lots of shrimp were still in import status subject to FDA jurisdiction as they had not been approved for distribution in commerce by the FDA prior to the ammonia release. At least one of these was detained because it allegedly contained an unlawful food coloring, having nothing to do with the ammonia release.83 Such an in-dwelling flaw in the shrimp arising from application of an additive before the shrimp were packaged and shipped – before the coverage attached – would represent an inherent vice of the shrimp, not recoverable under the Policy. At this time, National has not yet produced all the FDA notices relating to the three lots in question, and without them GAIC cannot further address this issue. Such a cause of loss was addressed by Greene v. Cheetham, 293 F. 2d 933 (2d Cir. 1961). The court held that “Fish designed for human consump- tion, if unfit for consumption when shipped, would inevitably be condemned. Hence there would be no insurable risk of loss but a certainty of loss.” Furthermore, National has taken the position that the trace amounts of ammonia found by Armstrong’s test on the inside of a portion of the bags of shrimp proves that the shrimp was “unfit for sale” under the Control of Damaged Goods clause. National has not, however, provided any evidence that the ammonia was present as a result of the leak. In fact, GAIC’s expert explained that shrimp generates ammonia itself, and that is why the trace amounts were detected on the inside of the bags. GAIC’s expert has also stated that the plastic bags in which the shrimp were packaged were impermeable. If the ammonia was generated by the shrimp, and did not seep through the bags from the leak, and if the trace amounts of ammonia rendered the shrimp “unfit” as National 83 App. 331. Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 34 of 38 PageID 1027 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 31 argues, then the shrimp would be excluded from coverage under the inherent vice exclusion of the Policy. C. The damages claimed by National were not computed in accordance with Policy terms National’s summary of damages sustained does not conform to the Policy’s agreed terms of valuation. The Policy provides, in material part, that the goods shall be valued at “Cost, as appearing in the Assured’s books and records, including import duty, if any, plus 10%.” National’s summary adds further components for financing expenses, handling expenses. These expenses are not a “cost” of the goods. The plain dictionary meaning of the word “cost” comprehends the “price” – the amount of money paid for a thing. Webster’s New Twentieth Century Dictionary. This is consistent with the customary approach taken to defining the agreed insurance value of property in a marine cargo policy. The term “cost” as applied to property that has reached its destination contemplates the landed cost of the goods: the price paid to the seller, ocean freight if not included in the seller’s invoice, insurance premium if insurance were not provided by the seller, and import duty. The purpose of the 10% addition to this cost of the goods is precisely to provide a measure of protection for extra expenses like storage and handling, and for potential profit. CONCLUSION Great American respectfully submits that there is a substantial doubt that there was physi- cal damage to the impermeable retail plastic bags of shrimp or their contents. Furthermore, Na- tional Fish did not conduct itself as a “reasonably prudent uninsured” and failed to fulfill the con- dition of coverage imposed by the Policy’s Sue and Labor Clause. It did not take steps to determine whether the retail bags of shrimp were damaged – which subsequent testing proves was not the case – nor did it take any meaningful steps to avoid or minimize the loss, other than simply keep Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 35 of 38 PageID 1028 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 32 the shrimp frozen. Even allowing for the proposition that the cardboard boxes containing the retail bags required replacement, the apparent utter failure to make any timely effort to avoid the loss of the retail bags of shrimp as required by the sue and labor provision of the Policy defeats coverage. The genuine issue of material fact concerning the question of whether National’s actions met the standard of the reasonably prudent uninsured under all the circumstances is equally sufficient to defeat this motion. Finally, there are genuine issues of material fact concerning the quantum of damages sought. National’s claim includes shrimp that were detained for reasons other than exposure to ammonia, evidently from inherent vice, and this element of loss is unrecoverable under the terms of the Policy. Equally, its computation of its valuation relies on a clearly inappropriate calculation of “cost” that includes expense paid to finance and store the shrimp rather than the price paid for them. WHEREFORE, Great American requests that the motion be denied in all respects. February 3, 2017 Respectfully submitted, Kennedy Lillis Schmidt & English /s/ Charles E. Schmidt CHARLES E. SCHMIDT New York Bar No. 1543461 Admitted Pro Hac Vice Kennedy Lillis Schmidt & English 75 Maiden Lane Suite 402 New York, New York 10038-4816 Telephone: (212) 430-0800 Fax: (212) 430-0810 E-mail: cschmidt@klselaw.com Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 36 of 38 PageID 1029 BRIEF OF DEFENDANT GREAT AMERICAN INSURANCE COMPANY IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT Page 33 Of Counsel: JOHN T. LILLIS, JR. HAROLD K. WATSON New York Bar No. 1101229 Texas Bar No. 20938500 Kennedy Lillis Schmidt & English Chaffe McCall LLP 75 Maiden Lane 801 Travis Street Suite 402 Suite 1910 New York, New York 10038-4816 Houston, Texas 77002 Telephone: (212) 430-0800 Telephone: (713) 546-9800 Fax: (212) 430-0810 Fax: (713) 546-9806 E-mail: jlillis@klselaw.com E-mail: WATSON@CHAFFE.COM Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 37 of 38 PageID 1030 CERTIFICATE OF SERVICE I hereby certify that on the 3rd day of February, 2017, I filed this document using the Court’s Electronic Case Filing (“ECF”) system, which will automatically deliver a notice of electronic filing to all counsel of record listed below, who are all registered ECF users. Delivery of the notice of electronic filing constitutes service of this document as contemplated by Rule 5 of the Federal Rules of Civil Procedure: Amy Elizabeth Stewart Marisa Lynne Jeffrey AMY STEWART PC 5307 E. Mockingbird Lane, Suite 425 Dallas, Texas 75206 Email: amy@anystewartlaw.com marisa@amystewartlaw.com Martin C. Pentz Euripides D. Dalmanieras Kevin J. Conroy FOLEY HOAG LLP 155 Seaport Blvd. Boston, MA 02210 Email: mpentz@foleyhoag.com edalmanieras@foleyhoag.com kjconroy@foleyhoag.com Case 3:15-cv-03880-N Document 61 Filed 02/04/17 Page 38 of 38 PageID 1031