Sixth Circuit Court of Appeals, Century Aluminum Company v. Certain Underwriters at Lloyd’s, London, Docket No. 23-5543

Maritime Cargo Insurance Policy

 

Unanticipated Shipping Expenses

 

Extra Expense Clause

 

Physical Loss

 

Purely Economic Loss

 

Consequential Loss

 

Loss of Profitability

 

Trade Disruption Policy

 

Arrests, Detainment and Restraint

 

American Institute Cargo Clauses

 

Duty to Mitigate (Sue and Labour Clause)

 

Insurance Law

 

Transportation Law

 

 

 

Appeal from the United States District Court for the Western District of Kentucky at Owensboro. No. 4:18-cv-00118.

 

 

 

Century Aluminum relies on river barges to obtain alumina ore and other materials that it smelts into aluminum. When the Army Corps of Engineers closed key locks on the Ohio River in 2017 due to low water levels and mechanical breakdowns, Century scrambled to secure other transportation. Century filed a claim with the underwriters of its maritime cargo insurance policy, referred to collectively as Lloyd’s of London, for these unanticipated shipping expenses. Lloyd’s paid the company $1 million under the policy’s Extra Expense Clause but denied coverage for the rest of the claim. The district court granted summary judgment to Lloyd’s. We affirm.

 

 

Century lost some production when it purchased lower-grade alumina as a hedge. And the alternative modes of transportation cost more than shipment by barge. Century estimated that, by the end of 2017, it had incurred over $5 million in excess costs. Century sought to recover the costs under its marine cargo insurance policy, which Lloyd’s of London underwrote. Lloyd’s agreed that the policy’s Extra Expense Clause covered up to $1million of Century’s extra transportation expenses, but it claimed that the policy otherwise excluded losses due to delay. After paying its deductible, Century accepted $975,000 for its extra transportation costs and continued to seek coverage for the other costs.

 

 

The policy says that the “applicable state law” applies to disputes over its meaning, and the parties agree that the relevant law is Kentucky’s. R.100-2 at 29. Kentucky respects the language of insurance contracts, reads their provisions in context, and enforces them as written. Foreman v. Auto Club Prop.-Cas. Ins. Co., 617 S.W. 3d 345, 349–50 (Ky. 2021). The marine cargo insurance policy extends coverage to Century’s goods, merchandise, and cargo, “including but not limited to Coke, Alumina, Alumina products and related materials.” R.100-2 at 3. It also covers “Consequential loss” such as Century’s lost profits. Id. At issue in this appeal is whether the policy, namely the “Conditions” on obtaining coverage, requires Lloyd’s to provide Century with more than the $1 million of the Extra Expense Clause. Id. at 4.

 

 

Out of the forty-odd pages of this policy, the parties have identified four potentially material clauses. We consider each in turn.

 

 

All Risks Clause. 

Start with the policy’s initial “Condition”—that it provides coverage “against all risks of physical loss of or damage to the subject-matter insured from any external cause.” Id. Such clauses commonly appear in maritime insurance to clarify that the policyholder will receive compensation for fortuitous losses, meaning those that do not result from inherent defects, ordinary wear and tear, or intentional misconduct by the insured. See Goodman v. Fireman’s Fund Ins. Co., 600 F.2d 1040, 1042 (4th Cir. 1979). Although the policy does not define “physical loss,” Kentucky law says that the phrase means “that a property owner has been tangibly deprived of the property,” such as by theft, “or that the property has been tangibly destroyed,” such as by fire. Estes v. Cincinnati Ins. Co., 23 F.4th 695, 700 (6th Cir. 2022); see Varanese Fusion, LLC v. Erie Ins. Exch., Member Erie Ins. Grp., No. 2022-CA-0822, 2023 WL 4982587, at *2 (Ky. Ct. App. Aug. 4, 2023) (accepting this definition from federal cases as state law). “Loss” standing by itself may be ambiguous. But a “physical loss” conveys that some property has been “tangibly destroyed, whether in part or in full.” Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398, 401 (6th Cir. 2021). The pairing of “physical loss” with “damage” reinforces the emphasis on destruction of the goods. R.100-2 at 4. Hence, the policy excludes “loss or damage” to aluminum coils that result from “rust, oxidisation, bending or twisting”—material changes to the nature of the goods themselves. Id.

 

 

Kentucky also understands physical loss to exclude purely economic losses. If someone suffers only “‘detrimental economic impact’ without a tangible destruction or deprivation of property,” the Commonwealth would not say that a “physical” loss has occurred. Estes, 23 F.4th at 700 (quoting 10A Steve Plitt, et al., Couch on Insurance §148:46 (3d ed.)). Profits or income streams recorded in ledger books and electronic bank accounts lack the physical existence that could suffer loss or damage. Veneman v. Travelers Cas. Ins. Co. of Am., 2022-CA-0021, 2023 WL 3261555, at *6 (Ky. Ct. App. May 5, 2023). Reinforcing this understanding, the insurance policy distinguishes Century’s financial harms from physical loss. The Extra Expense Clause covers up to $1 million for “each and every loss” due to delays in obtaining physical possession of the alumina, as distinct from physical loss or damage. R.100-2 at 10, 14. And the Interests Clause guards against “Consequential loss,” which a subsequent clause defines as certain lost profits or increased debts resulting from “loss of or damage to or delay in the delivery of the property.” Id. at 3, 14.

 

 

Under the All Risks provision, Century’s alumina did not suffer any physical loss or damage. The temporary delay never threatened to deprive Century of its ownership or control of the alumina. The company, on the contrary, retained sufficient control over the alumina to deliver it by other transportation means. Nor has Century alleged any damage. All of the alumina arrived at Century’s facilities no worse for the wear. Century, it is true, suffered a loss of profitability. But the insurance policy addressed this intangible claim under the Extra ExpenseClause, not the All Risks provision. A “Trade Disruption policy,” for what it is worth, could have provided additional “coverage for any event which disrupts service and causes aproduction loss,” but Century declined to purchase that insurance from a different underwriter. R.100-17 at 1.

 

 

Risks Covered Clause:

In addition to the All Risks Clause, the policy contains a second statement of general coverage in a section entitled “Risks Covered.” R.100-2 at 25; see also Opera Boats, Inc. v. La Reunion Francaise, 893 F.2d 103, 104 (5th Cir. 1990) (observing that this clause is also known as the “named perils” provision). The clause has been a staple of maritime insurance contracts for centuries. See McCall v. Marine Ins. Co., 12 U.S. 59, 66 (1814). Its language, as the reader will soon see, reflects that heritage, (…): Touching the adventures and perils which the Underwriters are contented to bear and do take upon themselves in this voyage, they are of the seas and inland waters, men-of-war, fire, enemies, pirates, rovers, thieves, jettison, letters of mart and countermart, surprisals, takings at sea, arrests, restraints and detainments of all Kings, Princes and People of what nation, condition or quality soever, barratry of master and mariners, and of all other like perils, losses or misfortunes that have or shall have come to the hurt, detriment or damage of the said goods and merchandises and ship, or any part thereof. R.100-2 at 25. In the aftermath of British blockades of Atlanti ports during the War of 1812, the Supreme Court explained that arrests and detainment occur when a government authority takes possession of the vessel or its cargo. Olivera v. Union Ins. Co., 16 U.S. 183, 189 (1818); see also 9A Couch on Insurance §137:53 (defining an arrest as a “temporary detention”). It distinguished those contingencies from a restraint, which arises from “the forcible confinement of a vessel in port, and the forcible prevention of her proceeding on her voyage,” such as when a blockade prevents a ship from leaving port. Olivera, 16 U.S. at 194; see also Calmar S.S. Corp. v. Scott, 345 U.S. 427, 441, 442 n.11 (1953) (describing “Allied restraints” and “restraint of princes” under analogous conditions during World War II). The Court also considered the situation of a vessel that changes course after learning that its intended destination faces a blockade. It explained that the vessel has not suffered a restraint because the government has not “directly” forced the vessel to halt its journey. Olivera, 16 U.S. at 192–93; see Smith v. Universal Ins. Co., 19 U.S. 176, 186–87 (1821). The Risks Covered Clause does not cover Century’s situation. The government never took control of the barges or impounded the alumina, ruling out arrest and detainment. Olivera, 16 U.S. at 189. Nor did Century suffer a restraint. Once it learned of the Corps’s closures, it diverted its barges down the Ohio River for unloading on the Mississippi River. The barges never found themselves trapped within the locks, unable to escape. Cf. id. at 193–94. Century also did not suffer any “other like perils, losses or misfortunes” under the general clause found at the end of the Risks Covered provision. R.100-2 at 25. Not only does that clause go on to require “the hurt, detriment or damage of the said goods and merchandises and ship,” id., but its limitation to perils, like those already listed, limits its scope to risks akin to piracy, fire, and similarly destructive harms, 9A Couch on Insurance §137.9. The cargo and its barges did not face any such threats.

 

 

Shipping Expenses Clause.

Century turns to the policy’s Shipping Expenses Clause. This provision covers “reasonable direct charges incidental to shipping” when “the subject matter insured is not delivered to the destination contemplated due to circumstances beyond the control of the Insured.” R.100-2 at 25–26. But it covers the risk of a failed delivery, not an untimely delivery. Cf. Glennborough Homeowners Ass’n. v. U.S. Postal Serv., 21 F.4th 410, 412 (6th Cir. 2021) (contrasting mail that “was not delivered” with the successful delivery of mail). Century does not dispute that its alumina eventually arrived at its facilities.

 

 

Sue and Labour Clause. 

Last of all comes the Sue and Labour Clause. This provision imposes an obligation on the insured to exercise a duty of care to prevent losses to the insurer and, if need be, to minimize them. See Ope Shipping v. Allstate Ins. Co., 687 F.2d 639, 643 (2d Cir. 1982). The clause promises that, “in case of actual or imminent, loss, damage, cost or expense,” Lloyd’s will reimburse Century for its expenditures in protecting the “interests insured” and in “reducing... any potential loss or liability under this Contract.” R.100-2 at 26. This provision, as Century reads it, requires Lloyd’s to pay for the additional shipping expenses that prevented the physical loss of its aluminum and reduced the possibility of an imminent pot-line freeze and any consequential losses. The Sue and Labour Clause does not assist Century. The Sue and Labor Clause promises to reimburse Century for fulfilling its duty to mitigate Lloyd’s exposure under the policy, but it does not obligate Lloyd’s to pay anything for reducing losses that fall outside the policy. See Continental Food Prods., Inc. v. Ins. Co. of N. Am., 544 F.2d 834, 837 (5th Cir. 1977). While the interests insured under this contract include both the alumina and certain profits, the contract conditions that coverage on “risks of physical loss of or damage to the subject-matter insured.” R.100-2 at 4. Had Century faced a risk of physical loss or destruction, such as if the delay resulted in the cargo rotting or the barges capsizing, the Sue and Labour Clause would have obligated Lloyd’s to compensate Century for reasonable efforts to secure delivery by other means. See St. Paul Fire & Marine Ins. Co. v. Pac. Cold Storage Co., 157 F. 625, 629–31 (9th Cir. 1907); see also Homes Ins. Co. v. Ciconett, 179 F.2d 892, 895–96 (6th Cir. 1950) (observing that a Sue and Labour Clause may operate as a separate contract requiring payment beyond the limits stated elsewhere in the insurance policy). But because Century did not face an actual or imminent risk of physical loss or destruction to its alumina, the Sue and Labour Clause did not require Lloyd’s to compensate Century for these expenses. Cf. GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598, 618 (3d Cir. 2004).

 

 

Before concluding, it is worth noting that the policy also incorporates by reference the “American Institute Cargo Clauses.” R.100-2 at 4. The thirteenth and final clause excludes the risks of “arrest, restraint, [and] detainment” and “loss, damage or deterioration arising from delay” except where the policy affirmatively includes them. Am. Inst. Marine Underwriters, American Institute Cargo Clauses 32B-10 §13(A), (C) (Apr. 1, 1966), https://www.aimu.org/forms/32B-10.pdf. 

These exclusions may have denied Century coverage beyond the Extra Expense Clause even had it been able to identify a covered risk. Cf. Blaine Richards & Co., Inc. v. Marine Indem. Ins. Co. of Am., 635 F.2d 1051, 1056 (2d Cir. 1980).

 

 

 

 

(Sixth Circuit Court of Appeals, April 4, 2024, Century Aluminum Company v. Certain Underwriters at Lloyd’s, London, Docket No. 23-5543, Recommended for Publication)