We have been contacted by numerous New Jersey property owners who have suffered significant damages to their properties as a result of the wind, rain and flooding of Hurricane Sandy. As an example, some of these owners obtained insurance policies to insure their marinas which contain buildings, piers, wharves, and docks which were damaged. When a policyholder commences a lawsuit against the insurance company in the state court to recover their damages, some insurance companies, likely in an effort to secure what they believe to be a more favorable jury pool, may attempt to have the case removed to the federal district court. The insurance company typically proceeds in this manner by alleging that the federal court has jurisdiction (i.e., the power to hear and decide the case), and specifically that admiralty or maritime jurisdiction exists pursuant to Federal Statute 28 U.S.C. §1333.1 This blog will focus on a dispute between a policyholder and an insurance company as to coverage for property damage to a dock, pier or wharf at a marina and how to analyze whether a federal court has admiralty jurisdiction such that is it proper for the court to hear and decide the case.
A contract is within admiralty jurisdiction if its subject matter is maritime.2 To invoke admiralty jurisdiction, a contract must be “wholly maritime in nature.”3 If a contract contains both maritime and non-maritime obligations, admiralty jurisdiction generally is absent. There are two exceptions to this rule: (1) if the maritime portion can be separately enforced or (2) if the non-maritime elements are merely incidental.4
What constitutes a “maritime contract”? In Norfolk Southern Railway Co. v. Kirby, the U.S. Supreme Court stated that “[t]o ascertain a contract’s ‘maritime nature’, the Court looks not to whether a ship or vessel was involved in the dispute, or to the place of the contract’s formation or performance, but to the ‘nature and character of the contract.”5 Similarly, the U.S. Supreme Court in Exxon Corp. v. Central Gulf Lines, Inc.,6 stated that “the ‘nature and subject-matter’ of the contract at issue should be the crucial consideration in assessing admiralty jurisdiction.”
Typically, contracts of insurance on marine objects that are not in navigation are considered by courts to be outside the jurisdiction. For example, in Pier 39 Ltd. Partnership,7 where insurance on a floating dry dock and breakwater was held to be non-maritime, the Ninth Circuit reasoned that “wharfage contracts are maritime if wharfage is provided to a specific vessel . . . If there is no connection to a specific vessel, however, contracts relating to wharves generally are not within admiralty jurisdiction.”
Similarly, in New Hampshire Ins. Co. v. Home Sav. And Loan Co. of Youngstown Ohio,8 the Sixth Circuit held that a liability insurance policy which covered a yacht dealers operations and marina operations fell outside the scope of federal maritime jurisdiction.9 The Court reasoned that whether a “maritime contract” falls within federal admiralty jurisdiction “depends upon the nature and character of the contract, and the true criterion is whether the contract has reference to maritime service or maritime transactions.”10 The Sixth Circuit further noted that the inquiry depended “on whether the principal objective of the contract is maritime commerce.”11 In this case, the Court found that the policy’s “yacht dealer operations” was outside federal admiralty jurisdiction because “[b]y its very terms, the yacht-dealer provisions relate to boats as objects of commerce — i.e., ‘stock for sale’ — not as agents of maritime commerce.”12 Also, turning to the policy language regarding “marina operations,” the Court noted the distinction “between a contract relating to a particular vessel involved in a commercial operation as opposed to the overarching operation of a fixed structure that happens to involve boats”.13 The Court held that the insurance policy covering the yacht dealership and marina fell outside the scope of admiralty jurisdiction, reasoning as follows:
Simply because a contract involves a marina does not mean it necessarily is a maritime contract. We must look at the nature of the contract and, in the case of an insurance policy, consider the specific interests insured. Applying that distinction in this case, we conclude that this insurance policy covering a yacht dealership and a marina falls outside the scope of our maritime jurisdiction, despite the fact that some of the services provided by the marina may relate incidentally to or facilitate maritime commerce.14
To summarize, when the principal objective of the insurance policy is to insure against property damage to a dock and therefore does not involve maritime commerce, a federal court would not have admiralty jurisdiction such that it could hear and decide the insurance coverage dispute. In analyzing whether admiralty jurisdiction may be invoked in a coverage dispute, both policyholders and insurance companies should be mindful of the most fundamental rule of property insurance litigation: Read the policy language!
1 28 USC § 1333(1), titled “Admiralty, maritime and prize cases” provides:
The district courts shall have original jurisdiction, exclusive of the courts of the States, of:
(1) Any civil case of admiralty or maritime jurisdiction, saving to suitors in all cases all other remedies to which they are otherwise entitled.
2 Royal Ins. Co. of Am. v. Pier 39 Ltd. Partnership, 738 F.2d 1035 (9th Cir. 1984), citing Insurance Co. v. Dunham, 78 U.S. (11 Wall.) 1, 26, 20 L.Ed. 90 (1871).
3 Atlantic Mut. Ins. Co. v. Balfour Maclaine Int’l Ltd., 968 F.2d 196, 199 (2d Cir. 1992).
4 See Sirius Ins. Co. v. Collins, 16 F.3d 34 (2d Cir. 1994).
5 543 U.S. 14 (2004).
6 500 U.S. 603, 611, 111 S. Ct. 2071 (1991).
7 738 F.2d 1035, 1037 (9th Cir.1984).
8 581 F.3d 420 (6th Cir. 2009).
9 Id. at 421.
10 Id. at 423 (citation and punctuation omitted).
11 Id. at 424 (citation omitted, emphasis in original).
12 Id. at 431.
13 Id. at 431.
14 Id. at 431.