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MERIDIAN TEXTILES INC v. INDEMNITY INSURANCE COMPANY OF NORTH AMERICA et al Complaint

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Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 1 of 10 Page ID #:150
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NEIL S, LERNER, State Bar No, 134031 ARUN DAYALAN, State Bar No. 225255 SANDS LERNER 12400 Wilshire Boulevard, Suite 1300 Los Angeles, California 90025 Telephone (310) 979-9144 ROBERT C. CHILES, State Bar No. 56725 CHILES & PROCHNOW, LLP. 2600 El Camino Real, Suite 506 Palo Alto, California 94306-1718 Telephone (650) 565-8208 Attorneys for Defendant Indemnity Insurance Company of North America
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
11 12 13 MERIDIAN TEXTILES, INC., a California corporation, ) ) ) Plaintiff, ) ) vs. ) ) INDEMNITY INSURANCE COMPANY OF ) NORTH AMERICA, a Pennsylvania corporation,) and Does 1 through 50, inclusive, ) ) Defendants. ) Case No. CV06-4766 CAS (JCx) The Honorable Cluistina A. Snyder DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRETRIAL ORDER.
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TO THE HONORABLE COURT AND TO ALL PARTIES AND TO THEIR COUNSEL OF RECORD: Pursuant to the Supplemental Pretrial Conference Order, Defendant INDEMNITY INSURANCE COMPANY OF NORTH AMERICA (hereinafter "IICNA" or "Defendant"), by and through its undersigned counsel of record, hereby submits its brief regarding the coverage issue between MERIDIAN TEXTILES, INC. (hereinafter "Meridian" or "Plaintiff) and IICNA:
DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 2 of 10 Page ID #:151
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I.
INTRODUCTION.
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II
This case arises from an insurance claim for yarn damaged by a warehouse fire. Plaintiff is the insured and IICNA is the insurer. IICNA issued a "Marine Open Ocean Cargo Policy" with a warehouse endorsement to Meridian (hereinafter referred to as "MOCP" or "Policy"); (a true and correct copy of the Policy is attached hereto as Exhibit "A"). The Policy limits coverage for this incident to $1 million per occurrence with a $5.000 deductible. llCNA has already paid $376.952.00 for this loss. Meridian claims that the loss exceeds the Policy limits and is approximately $1,300,000.00. The complaint alleges causes of action for declaratory relief, breach of contract and breach of the covenant of good faith and fair dealing, This brief concerns the meaning of the insuring agreement of the Policy, which is set forth on page 3, in section 14 (A) (2) of the Policy. entitled AVERAGE TERMS. as follows: "Except while subject to an "ON DECK·· BILL OF LADING shipments of textiles, finished garments and lawful related merchandise properly packed for the intended transit are insured: To cover against all risks of physical loss or damage from any external cause ... " As noted, the Policy, and the coverage set forth above, was endorsed to cover the goods insured while temporarily stored at the locations set forth in the Policy under a WAREHOUSE ENDORSEMENT, which is set forth on page 16 of the Policy. Thus, even though this case involves yarn in a warehouse that was allegedly damaged in a warehouse fire, the policy that was issued to cover this component of the risk was a marine insurance policy, as is common in the marine insurance industry. See, ADMIRALTY LAW INSTITUTE SYMPOSIUM: MARINE INSURANCE: MARINE INSURANCE: VARIETIES, COMBINATIONS, AND COVERAGES., 66 Tul. L. Rev. 311, 320-322 (1991) {"Defining the precise coverage afforded under a typical cargo policy is a three dimensional process ... The second level focuses on the temporal aspect of coverage (i.e., for what duration of transit does coverage apply; is coverage confined to ocean transit or is it expanded to provide coverage on a warehouse -to-warehouse basis?)} (A copy of this law review is attached hereto as Exhibit "B"). Plaintiff claims that all of its yarn was damaged as a result of the fire, even ifnot physically damaged, by reason of it having been in a warehouse that had a fire. This, the argument goes, rendered the yard unusable as "first grade" yarn, and left it-in its degraded state-as "second grade" yarn. In
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA·S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 3 of 10 Page ID #:152
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effect, yarn that has been in a warehouse fire-even ifnot physically damaged-is so tainted by the incident that it is the functional equivalent of physically damaged. Hence, Plaintiff is seeking insurance coverage for the alleged degradation of the reputation of its yarn. Once the legal weakness this argument was pointed out to Plaintiff, it changed its position and started contending that all of its yam was, in fact, physically damaged?
It should be noted that a small portion of Plaintiffs yarn was actually exposed to fire, water or
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smoke and thus physically damaged. For this portion that did actually suffer such exposure - roughly 10% of the total inventory in the warehouse - IICNA paid Plaintiff approximately $376,952.00. However, there is no relevant case law to support Meridian's claim that the "Marine Open Ocean Cargo Policy" issued by IICNA provides coverage for anything other than actual physical loss or damage and, as will be demonstrated, that phrase has a well-established meaning in maritime law, which must be applied.
II.
FACTUAL BACKGROUND.
On the morning of December 31, 2004, a sprinkler at the Novelty Knits warehouse, located in
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Carson, California, was activated. The fire department responded to the alann and found a smoldering fire that was isolated to a stack of yarn. The activated water sprinklers were localized only to the area where the fire occurred. In other words, the majority of the sprinklers in the warehouse were not activated. The cause of the fire has not been detennined, although the fire investigators speculate that the cause may have been spontaneous ignition. Novelty Knits, which owned and operated the warehouse, provided storage for various textile companies including Meridian. Meridian's allegedly damaged yarn that is the subject of Plaintiffs complaint was located inside the Novelty Knits warehouse at the time of the fire.
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III.
SINCE THE MARINE OPEN OCEAN CARGO POLICY IS A MARINE INSURANCE
POLICY, THE WILBURN BOAT ANALYSIS MUST BE FOLLOWED AND MARITIME LAW, TO THE EXTENT IT EXISTS, MUST BE APPLIED.
The "Marine Open Ocean Cargo Policy" (MOCP) issued by IICNA was unquestionably a
Indeed, loss of market is specifically excluded in Paragraph \8(d) of the MOCP.
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE·TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 4 of 10 Page ID #:153
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marine insurance policy. See, Certain Underwriters at Lloyds v. Inlet Fisheries Inc., 2008 U.S. App. LEXIS 2951 (9 Cir. 2008). (A true and correct copy of the opinion is attached hereto as Exhibit C). As noted in the recent Inlet Fisheries decision: Marine insurance is, simply, insurance against the losses incident to the marine adventure ... Marine insurance generally has three central conceptual elements: (1) it is a contract of indemnity against loss; (2) the indemnity ... is only triggered by an accident or fortuity; and (3) the 'adventure' or peril insured against must be specifically maritime in character. [d. at 2008 U.S. App. LEXIS 2951 [*25-26]. Here, even though the alleged loss occurred on land, and the cause was a warehouse fire, the MOCP was a marine insurance policy; albeit with a warehouse endorsement. When the MOCP is read as a whole, this conclusion is inescapable. For example, the policy is called a Marine Open Ocean Cargo Policy. It attaches upon all shipments of lawful goods 4). It reaches all ports in the world. in reference to vessels.
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3). It covers all lawful shipments.
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It covers vessel transit of the goods.
It limits liability
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The perils clause is traditional marine terminology, "touching the In fact, almost every provision touches a maritime peril and is
adventures ... ofthe seas. maritime in nature.
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While the warehouse endorsement is undeniably land-based, it would be error to sever that endorsement out from the rest of the MOCP in order to transform it from a marine insurance policy to something else particularly since the warehouse endorsement provides coverage for the same risks as those enumerated in the insuring clause of the marine policy. Mur-Joe Distributors. Inc. v. Reliance Ins. Co., 1989 A.M.C. 2015, *4 (N. Y. Sup. Ct. 1989). See alsa, Commercial Union Ins. Co. v. Sponho1z, 866 F.2d 1162, 1164 (9 ili Cir. 1989) holding that defective title is not physical loss or damage to a vesseL ("The marine insurance policy issued by Commercial Union was a casualty policy .. .It cannot, however, be converted into a title insurance policy merely because the Sponholzes encountered a difficulty for which they were not insured.") Because this case involves marine insurance, the court is bound to follow Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 75 S. Ct. 368, 99 L. Ed. 337, (1955). Under Wilburn Boat, state law controls disputes involving marine insurance only in the absence of a federal statute, the
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 5 of 10 Page ID #:154
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absence of a Gudicially fashioned) well-settled admiralty rule on point or ifthere is not a need to create one in order to preserve uniformity in admiralty practice. Bohemia. Inc. v. Home Ins. Co., 725 F.2d 506, 510 (9 Cir. 1984). It is well-settled, for example, that parties to a marine insurance contract may freely negotiate (as did the parties here) for specific coverage in a given insurance policy. Suma Fruit In!'l v. Albany Ins. Co., 122 F.3d 34, 36 (9ili Cir. 1997). In sum, in analyzing the issue before the court, the court must first look to see whether a wellsettled maritime rule exists and if so apply it. If not, the court may then resort to state law. The insurance policy here is an all-risk open cargo policy, and federal maritime law does have some well-settled rules that apply. First, the tenn all-risk does not provide coverage for all losses. "The term is a misnomer in that it does not provide coverage for every conceivable cause of loss. It does, however, give considerable protection to the insured in addition to that provided by the usual perils coverage. An all risk policy should cover physical loss or damage resulting from any external cause. It is necessary that the loss in question be physical so that. for instance. the cover would not apply to a claim for loss of market where goods have been delayed in transit. or for losses attributable to the inherent vices of the goods in question." See, ADMIRALTY LAW INSTITUTE SYMPOSIUM: MARlNE INSURANCE: MARlNE INSURANCE: VARIETIES, COMBINATrONS, AND COVERAGES., 66 Tul. L. Rev. 311, 321-322 (1991). (Emphasis added). (This Law Review is attached as Exhibit B). Another Law Review describes this type of insurance, and the coverage afforded under it, similarly. SYMPOSIUM: 21st BIENNIAL ADMIRALTY LAW INSTITUTE: Allocation of Marine Risks: An Overview of the Marine Insurance Package, 81 Tul. L. Rev. 1467, 1478-1480 (2007). (A true and correct copy of this opinion is attached hereto as Exhibit "D"). Marine open cargo policies generally are written to provide all risks coverage. All risks policies provide a very wide range of cover, but all risks cargo policies do not provide coverage against every conceivable type of loss. Cargo Wlderwriters require some fortuitous accident or casualty resulting in damage to the cargo, and coverage under all risks policies require that the physical loss or damage to the cargo result from some external cause ... All risks cargo policies generally exclude from coverage the following types ofloss: (1) loss of market or loss, damage, or deterioration arising from delay ... Under all risks cargo coverage ... , the assured (must) prove only that at the time the insurance policy
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 6 of 10 Page ID #:155
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attached, the cargo was in good order and condition, and on outtum it was found damaged. Consequently, there are well-settled maritime rules on point and thus they must be applied. The cargo must actually sustain physical damage, not intangible or incorporeal damage or damage to its reputation or grade quality. Actual physical damage must be established under maritime law. See, Morrison Grain Co. v. Utica Mut. Ins. Co., 632 F.2d 424, 432-433 (5" Cir. 1980) ("No one seriously questions that much of the (cargo) area was seriously damaged at the time it was unloaded from the vessel.")
IV.
CASE LAW SUPPORTS IICNA'S POSITION REGARDING ALL-RISK FIRST PARn
PROPERTY COVERAGE INSURANCE POLICIES IN THE CONTEXT OF TEXTILES.
A non-marine case articulates the marine rule well, and is factually on point. 2 In ColwnbiaKnit Inc. v. Affiliated FM Insurance, 1999 U.S. Dist. LEXIS 11873 (D. Oregon) (a true and correct copy of this opinion is attached hereto as Exhibit E) the insured made a claim under a first-party insurance policy which insured against "all risk of physical loss of or damage to the property insured ... " Id. at 1. The property insured included fabric and gannents. Rainwater entered the building in which the goods were stored and saturated some of the fabric and gannents. The remaining contents of the building were exposed to high humidity for long periods while salvage crews, hired by the insurer, worked to dry out the building. Similar to Meridian in the instant case, the insured in ColumbiaKnit sought coverage for damage to reputation to the goods and declined to sell the goods as first-quality. The Court concluded that "the decision not to sell the goods as new, in the absence of distinct and demonstrable physical change to the gannents necessitating some remedial action that would preclude honestly marketing as first quality goods, is not a covered loss" (emphasis added). ColumbiaKnit, at 17-18. Significantly, the "all risk" coverage afforded to the plaintiff in ColumbiaKnit is almost identical in language to the all risk coverage afforded to Meridian here. As the ColumbiaKnit Court recognized, the term "all risk of physical loss or damage" has a specific legal meaning:
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2 Thus, even if the court were to conclude that there was no well-settled maritime rule on point, the ColumbiaKnit case could be relied upon since California law is seemingly lacking a case that is factually on point. 6
DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTII AMERICA'S BRIEF RE, COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 7 of 10 Page ID #:156
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11 ... the requirement that the loss be physical, given the ordinary definition of that tenn, is widely held to exclude alleged losses that are intangible or incorporeal and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property. ColumbiaKnit at 9. Thus, maritime and nOllwmaritime courts have consistently held that there must be a "demonstrable, physical alteration of the property" in order for the physical loss or damage coverage to apply. Further, the Court went into further analysis as to the meaning of "risk" in an "all risk" policy: "The term "all-risk" is essentially a misnomer as the questions of loss and risk are separate and distinct." ColumbiaKnit, at 8 (internal citations omitted). "All-risk" is not synonymous with "all-loss."
Id at 8 (internal citations omitted).
To counter the holding in ColumbiaKnit, IICNA anticipates that Meridian will offer Customized Distribution Services v. Zurich Insurance Company, 373 N.J. Super. 480 (2004), as they have previously. However, this case is completely inapplicable because it involves a policy that contains significantly different language. Furthermore, it was not decided under maritime law, it did not undertake a Wilburn Boae analysis and it has not been cited by any subsequent case as authority for articulating a well-settled maritime rule. In fact, it is contrary to the well-settled maritime rules set forth herein. Customized Distribution was a third party New Jersey case decided under New Jersey and South Carolina law. In a first party maritime case such as this one, Customized Distribution has nc precedential value and, following the Wilburn Boat analysis, it cannot be deemed to articulate a wellsettled maritime rule. Furthermore, Customized Distribution Services involves a liability policy, not a first-party policy as in ColumbiaKnit and the present case. Hence, the risks assumed by the respective insurance companies are vastly different. The California Supreme Court in Garvey v. State Farm Fire and Casualty Co., 48 Cal.3 rd 395 (1989), stated that the scope of coverage and the operation of exclusion clauses are to be handled differently in a third party setting than when addressing coverage under a first
J It should be noted that the claims manager's name in Customized Distribution Services was coincidentally Wilburn, but the Court nevertheless did not undertake a Wilburn Boat Analysis.
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE, COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 8 of 10 Page ID #:157
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party property contract. Id at 406. The Garvey decision cites Bragg. Concurrent Causation and the Art of Policy Drafting: New Perils for Property Insurers (1985) 24 Forum 385, 386 as follows: Property insurance ... is an agreement, a contract in which the insurer agrees to indemnify the insured in the event that the insured property suffers a covered loss. Coverage, in turn, is commonly provided by reference to causation, e.g. "lost caused by ... " certain enumerated perils. The term "perils" in traditional property insurance parlance refers to fortuitous, active, physical forces such as lightening, wind and explosion, which bring about the loss. Thus, the "cause" of loss in the context of a property insurance contract is totally different from that in a liability
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policy.
The _ Garvey Court further noted that by comparison: 10 11 12 ... the right to coverage in a third party liability context draws on traditional tort concepts of fault, proximate cause and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance by insuring for personal liability and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks. Garvey, at 407. In other words, the California Supreme Court cautions to not confuse the two types of policies.
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V.
PJ-,AINTIFF VIOLATED THE DOCTRINE OF UBERRIMAE FIDEI.
A second well-settled maritime rule on point in this case is the applicability of the doctrine of
utmost good faith, or uberrimae fidei. See, Certain Underwriters at Lloyds v. Inlet Fisheries Inc., 2008 U.S. App. LEXIS 2951 [*24·*25J (9 Cir. 2008), ("Following the framework of Wilburn Boat, we hold that the longstanding federal maritime doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts.") This duty exists, however, under both California and federal law. See Cigna Property and Casualty Insurance Company et al. v. Polaris Pictures Corporation. et al., 159 F.3 Td 412, 420 (9 th Cir. 1998). Pursuant to it, an insured is obligated to fully and voluntarily disclose all facts material to the risk, even ifnot asked. See, Markel American Insurance Company v. Fitt, 528 F.Supp.2d 1010 (S.D. Ca. 2007), (Under the doctrine of uberrimae fidei a marine insurance applicant is bound, even if not
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE: COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 9 of 10 Page ID #:158
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asked, to reveal every fact within hislher knowledge that is material to the risk. The insurer may rescind or void the contract if it can show either intentional misrepresentation of a fact, regardless of materiality, or nondisclosure of a fact material to the risk, regardless of intent.) Clearly, under the doctrine of uberrimae fidei, Meridian had a duty to disclose to IICNA that the Policy would be covering the risk of damage to the reputation of Meridian' s yam, or non-physical damage to it, but it did not. Nor did Meridian disclose that the policy was to cover a possible degradation "first grade" goods to something less. VI. INTERPRETATION OF AMBIGUITIES IN MARINE INSURANCE POLICIES. Finally. as noted above, coverage was afforded to Meridian under a marine open cargo policy. In ~ 3, of the MOCP, there is the following provision:
Goods Insured
3. To attach upon all shipments of lawful goods and merchandise consisting principally of:
Textiles, Finished Garments and Lawful related Merchandise.
This provision is incorporated by reference in the warehouse endorsement, Endorsement No.2 to the policy. There does not appear to be any dispute that yarn is "lawful related merchandise" and/or falls under the category of "textiles." While the Policy covers Meridian's yarn, it does not insure any risk to the yam beyond actual physical loss or damage. Damage to the reputation of Meridian's yarn is not covered by the Policy, nor was such a risk contemplated at the time of policy inception. Meridian may argue that the policy is ambiguous with regard to the "Goods Insured" clause as well as the "all·risk" language in Paragraph 14(A)(2) and thus must be construed against IICNA, the insurer. IICNA maintains that there is no ambiguity in the policy, but if there is one it is not appropriate to construe it against the issuer. First, it should be recognized that an insurance policy under California law and maritime law is to be treated like any other contract. Interpretation of an insurance contract is a question of law governed by ordinary rules of contract interpretation. See, Fidelity and Deposit Company of Maryland v. Charter Oak Fire Insurance Company, 66 Ca1.AppA th
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More specifically, the rule that interprets a policy against the draftsman (who is typically the insurer) is not applicable here. This was a negotiated contract. Meridian's insurance broker
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE, COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.
Case 2:06-cv-04766-CAS-JC Document 36
Filed 03/14/08 Page 10 of 10 Page ID #:159
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participated in and called for changes in the policy and specifically in the language used in the Goods Insured clause. If there is ambiguity in the this clause, it was created by Meridian's agent and as a result the policy must be construed against Meridian under traditional rules of contract interpretation. Furthermore, as the Law Reviews cited herein state, any argument by Plaintiff that the "all-risk of physical loss or damage" language is ambiguous would necessarily mean that Plaintiff is also asking the Court to hold that over one hundred years of well-settled maritime law should be ignored. Plaintiff would essentially be arguing that every marine insurance policy is ambiguous with respect to this "allrisk" language since it is present in every marine insurance policy. VII. CONCLUSION. This is a marine insurance case and the court is bound to follow maritime law to the extend it provides a well-settled rule. In marine open cargo policies the rule is clear and well-settled. Actual physical loss or damage to the cargo, as defined in the authorities cited herein, must be established before the policy provides coverage for a loss. The court is asked to apply the reasoning of the ColumbiaKnit case and rule that Meridian's burden is the same as the burden of the insured in that case. Absent physical damage, meaning a distinct, demonstrable, physical alteration of the property, there is no coverage for the remaining yam. Failing that, the policy has been voided by Meridian's failure to disclose material facts regarding the risk insured.
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DATED: March 14. 2008
SANDS LERNER
BY:~~~~~#====:=:=" Neil S. LenrtJ'
Arun Dayalan Attorneys for Defendant INDEMNITY INSURANCE COMPANY OF NORTH AMERICA
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DEFENDANT INDEMNITY INSURANCE COMPANY OF NORTH AMERICA'S BRIEF RE, COVERAGE ISSUE REFERENCED IN SUPPLEMENTAL PRE-TRIAL ORDER.

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