Less than zero
A federal appeals court found the costs of removing a liftboat sunk during Hurricane Katrina was covered by a protection and indemnity insurance (P&I) policy, but disagreed with the way a lower court valued the wreck and denied the owners the ability to recover funds from the wreck. (Danos Marine et al. v. Certain Primary Protection and Indemnity Underwriters, 5th Circuit. No. 09-30378. July 28.)
The liftboats Andre Danos and Sarah David were owned by Danos Marine, a company owned by Allen Danos. He chartered the Andre Danos to a company called Danos & Curole that was owned by Allen and his brother Hank.
The charter required Danos & Curole to obtain insurance on the boat and return it at the end of the charter in the same condition as when the charter began. Danos & Curole purchased a P&I policy that included coverage for wreck removal expenses. The hull of the Andre Danos was insured by a different company for nearly $3.29 million, with a deductible of $1 million (or $2.29 million).
Danos & Curole also owned six liftboats, which it operated in addition to the Andre Danos and Sarah David. In 2004, Allen and Hank Danos decided to sell all eight liftboats and related assets.
On Aug. 24, 2005, liftboat operator Hercules submitted the highest bid, $42 million. The Danos companies made a counter offer of $45 million and Hercules conditionally accepted, agreeing to pay the appraised value of $4 million that an investment banker placed on the Andre Danos and $4.7 million it placed on the Sarah David. The combined $8.7 million was to be paid to Danos Marine and the remainder of the purchase price to Danos & Curole.
The next day Hurricane Katrina hit the Louisiana coastline. The Andre Danos capsized and sank.
Shortly after the storm, Hercules and the Danos companies resumed negotiations. At that point the parties knew the Andre Danos had suffered damage and lost value. But on the other hand, because of widespread damage to oilfield equipment, Danos said the value of its other liftboats had increased. It eventually struck a deal to sell all eight boats to Hercules for $44 million.
In the amended purchase agreement (APA), Hercules agreed it would give Danos $1.5 million ' $500,000 toward the cost of raising the capsized boat and $1 million to offset the deductible in the hull policy on the Andre Danos.
Although the Andre Danos was still submerged, the APA contained a schedule that allocated the purchase price among the eight vessels, listing the purchase price of the Andre Danos as $500,000.
On Oct. 17, 2005, Danos & Curole obtained a survey report that said the sunken boat 'has no value as it lies, capsized and partially sunk in the Gulf of Mexico and is most likely a liability.' However, 'assuming that the vessel is salvaged under the current 'No Cure, No Pay' contract, it is the opinion of the undersigned that the hull and salvaged appurtenances would have an estimated value in the range of $450,000 depending upon the extent of salvage-related damage.'
It took three attempts by three different firms to recover the Andre Danos.
The initial try was interrupted by Hurricane Rita, which caused the vessel to shift so that the first firm's equipment was no longer capable of recovering the boat.
During the second try, as the boat was brought to the surface, slings broke and the boat sank to the ocean floor.
When the third company recovered the ship and brought it to shore, Danos & Curole was unable to sell it for scrap because the cleaning costs were prohibitive. Instead it ended up paying $150,000 to dispose of the wreck. The total cost of removal, including the marking, raising and disposing of the wreck, was $2.05 million.
Pursuant to the APA, because the Andre Danos was a total loss, Danos & Curole refunded $785,000 to Hercules. This amount represented the $2.29 million in hull insurance proceeds, minus the $1.5 million ' $1 million for the deductable and $500,000 to help raise the Andre Danos ' that Hercules had agreed to give Danos in the APA.
The Danos companies filed a claim with underwriters for the costs of removing the wreck, and when coverage was denied, filed a suit for the $2.04 million in removal costs.
Danos sought a ruling that removal costs of the wreck were covered under the policy, and the district court agreed, rejecting the underwriters argument that removal was not compulsory. The district court held the plaintiffs had a nondelegable duty to remove the vessel because it was an obstruction and therefore the policy covered costs of wreck removal.
When question was brought up on appeal, the 5th Circuit agreed that a reasonable, fully informed owner, Danos Marine, would conclude that failure to remove the Andre Danos would likely expose it to liability pursuant to the Wreck Act and justify the expense of removal.
But on the other issue, the 5th Circuit overturned the district court and sent the case back to the lower court.
The district court had sided with the underwriter in concluding that the wrecked vessel had a value of $4 million ' the amount laid out in the pre-Katrina appraisal. Because this exceeded the cost of removing the wreck, it found Danos was not entitled to any recovery.
The 5th Circuit said that since it was uncontested that the ship had negative value when it was finally raised (Danos had to pay to have it scrapped), the court said the question became, 'in determining the amount of the credit the underwriters are entitled to deduct from costs of wreck removal, do we look to the actual amount recovered for the recovered wreck or do we look to the amount of the purchase price allocated by the Danos' companies for the purchase price of the Andre Danos?'
The district court concluded the boat had a value of $4 million ' its pre-Katrina appraised value ' and relied on this fact to establish the value of the 'salvage recovered from the wreck,' and said there was 'nothing in the APA to reflect otherwise.'
But the 5th Circuit said that statement was incorrect, pointing to the APA, which listed the purchase price of Andre Danos as $500,000.
The P&I insurance policy allowed a credit against the costs of removal equal to the value of any salvage recovered from the wreck, but the 5th Circuit said the salvage value here was zero. Furthermore, it said the way the brothers allocated the price for the eight ships was an internal decision and irrelevant to the 'value of salvage.'
It sent the case back to district court for further proceedings consistent with its opinion.