Full opinion text
OPINION GRIESA, District Judge. This is an action to recover insurance on a cargo of fuel oil shipped from Rio de Janeiro to New York. The action has been tried to the court without a jury. This opinion constitutes the court’s finding of fact and conclusions of law. Armada purchased the oil from Petrobras, a Brazilian company. This being a C.I.F. sale, Armada took title in Rio and Petrobras obtained marine insurance for the benefit of Armada from defendant Banorte and other Brazilian underwriters. Prior to the time of the voyage, Armada contracted to sell the cargo of oil to Sun Oil Trading Corp. Sun was to take delivery (and title) in New York. Thus, Armada was at risk during the voyage from Rio to New York. Armada obtained certain marine insurance coverage of its own from London underwriters, the precise extent and nature of which is in dispute. The principal problem giving rise to the insurance claims results from the fact that the crew of the vessel (named the AGIOS NIKOLAS) used part of the cargo for fuel and then pumped sea-water into the cargo tanks. This resulted in the contamination of the cargo and a shortage of actual oil. Because of this situation Armada lost the contract with Sun, except for a portion of the cargo which was sold to Sun at a discount. As to the rest of the contaminated cargo, it was put through reconditioning processes and sold to various purchasers at prices less than the original contract price to Sun. Aside from the misappropriation of oil and the resulting contamination with seawater, there was a shortage in the oil arising at the time of the loading in Brazil. Armada makes claims against both Brazilian and the London underwriters for the shortages and the contamination. In addition, Armada seeks to recover from both groups of underwriters expenses related to its efforts to recondition and sell the contaminated cargo. Armada has named defendants in this action as certain representatives of the London underwriters. It is conceded that a judgment against these representatives will bind all the London underwriters. As to the Brazilian underwriters, Armada has named all of them as defendants. The lead underwriter, Banorte, has been served. Some, but not all, of the participating Brazilian underwriters have been served. I ISSUES PRESENTED As to Armada’s claims against the London underwriters, Armada first contends that it obtained “contingency coverage,” which makes London underwriters liable for the amount of the primary Brazilian insurance in the event the Brazilian underwriters fail to pay. London underwriters argue that Armada did not comply with the requirement in the London insurance document (the “cover note”) for obtaining contingent coverage. Armada contends that even if this is so, nevertheless London underwriters, or their agents, accepted and retained a premium for this coverage, and thus waived the requirement of the cover note. London underwriters deny such a waiver. Armada makes a claim against London underwriters for an amount over and above any amount payable on the primary insurance. This claim is made under the “increased value” coverage in the London insurance. Armada contends that the proper interpretation of the increased value coverage has the effect of making London underwriters liable for the entire amount of the contract price with Sun, less what is recovered on the primary Brazilian insurance. Thus Armada contends that this was insurance against the risk of loss of profits on the contract with Sun. Armada claims that it is entitled to recover $1,416,000 or, alternatively, $794,842 under the increased value coverage. The basis for these proposed figures will be described hereafter. London underwriters deny Armada’s contentions and urge that they are liable, at most, for only about $100,000. They contend that the increased value coverage did not insure against loss of profits, but, like the underlying Brazilian insurance, only covered against the risk of physical loss or damage to cargo. The London underwriters argue that the function of the increased value insurance was to increase the insured value over and above what it was under the Brazilian insurance. As to the contamination loss component of Armada’s claim, London underwriters contend that the particular average method of adjustment should be used, under which a percentage of about 10-12% would be applied to the insured value stated in the Brazilian insurance and the increased value in the London insurance. Armada contends that even if the normal interpretation of the cover note would not allow recovery for loss of profits, nevertheless there was a separate agreement to provide such coverage for this cargo. Armada argues that it obtained such an agreement from a broker, Johnson & Higgins. London underwriters deny that Johnson & Higgins had either actual or apparent authority to bind them to terms of coverage, and in any event denies that Johnson & Higgins purported to make such an agreement. With regard to the Brazilian insurance, it appears that a shortage arose in the pipeline between the Petrobras tanks and the vessel. There is an issue as to whether the Brazilian insurance covered the transit in the pipeline. There is also an issue as to when the Brazilian insurance terminated. When the vessel arrived in New York, not all of the cargo tanks were contaminated. However, the vessel pulled out of New York harbor temporarily. This involved a scheme by the vessel owners to avoid legal process.' By the time the vessel returned, the contamination affected all the cargo tanks, and there was an additional shortage. Brazilian underwriters contend that their coverage terminated when the vessel first arrived in New York. Armada argues that the coverage continued while the vessel was temporarily away from New York. Armada contends (although not with great force) that, as to the shortage and contamination problem arising from the derelictions of the crew, there is no need to assess precise losses from the actual shortage and the actual contamination because the cargo should be deemed a constructive total loss. Assuming that the constructive total loss theory is rejected, Armada must prove the quantum of its contamination loss under the particular average method of adjustment. The principal issue here relates to whether the oil still had some residual contamination following reconditioning, and if so what was the damaged value. Armada contends that the oil did have residual contamination, and that the damaged value should be measured by the sale prices of the various lots of oil following the reconditioning. Underwriters contend that, although this is true for some portions of the cargo, as to other portions, they were rendered sound or close to sound by the reconditioning and Armada improvidently accepted prices which did not reflect the actual condition of the oil. Underwriters contend that, as to these portions of the cargo, Armada cannot recover because it has failed to prove that the oil was contaminated, or at least has failed to prove the damaged value. Armada seeks to recover substantial sue and labor expenses from both the Brazilian and London underwriters. The Brazilian underwriters deny liability for certain items. The London underwriters assert that they have no liability whatever for sue and labor expenses. Before proceeding further, a word should be said about the matter of choice of law. In this case, as so often happens, choice of law makes little or no difference. Questions about the interpretation of marine insurance policies are generally to be decided under local law, rather than as a matter of admiralty law. Wilburn Boat Co. v. Fireman’s Fund Insurance Co., 348 U.S. 310, 75 S.Ct. 368, 99 L.Ed. 337 (1955). The same is obviously true of certain other questions, such as issues about the authority of a broker. The present case has substantial contacts with Texas (the location of Armada and its broker), England (the location of the London underwriters), Brazil (the starting point of the voyage and the location of the Brazilian underwriters), and New York (the termination point of the voyage). The fact is that on the issues relevant to this case, there is no showing that there would be any material difference in the law of any of these jurisdictions. The parties have cited authorities from whatever sources are available. These will be discussed in due course. II SUMMARY OF RULINGS The London underwriters are not liable for contingency coverage. Armada did not comply with the requirement of the cover note. Underwriters did not waive this requirement. Armada did obtain increased value coverage from the London underwriters. But this coverage did not insure the lost profits on the Sun contract. The increased value insurance covered physical loss or damage, not the loss of a contract or the profits thereon. It served to increase the amount of the insured value over and above the amount provided in the primary Brazilian insurance. The particular average method of adjustment applies to the contamination loss claim. Johnson & Higgins did not make an agreement binding the London underwriters to a different interpretation — i.e., to coverage of the lost profits on the Sun contract. Johnson & Higgins had neither actual nor apparent authority to do so. Moreover, Johnson & Higgins did not purport to make such an agreement. As to the Brazilian insurance, there was coverage for the loss occurring in the pipeline in Rio. In New York the coverage did not terminate until the vessel returned to New York from its temporary flight. Armada is not entitled to treat the cargo as a constructive total loss. It is required to prove its actual shortage losses and actual contamination loss. The details of these calculations will be set forth later in this opinion. It is sufficient to say at this point that there is no substantial dispute as to the method of calculating the shortage losses. As to the contamination loss, Armada’s recovery is limited to some extent because the court agrees with underwriters that certain portions of the oil had no residual contamination and, as to certain portions which had residual contamination, Armada has not proved the damaged value. Regarding sue and labor expenses, the London underwriters are not liable. The Brazilian underwriters are liable for proper sue and labor expenses. Some of the items claimed by Armada are allowed. Some are denied. The details are set forth later in this opinion. Ill FACTS RELEVANT TO LONDON INSURANCE A. Armada-Petrobras Contract Plaintiff Armada Supply Incorporated, a Texas corporation, was formerly in the oil trading business and had its principal place of business in Houston. On April 29, 1982 Armada contracted with a subsidiary of Petróleo Brasileiro S.A. (“Petrobras”) to purchase up to 330,000 metric tons of fuel oil. The sales were to be C.I.F. port of delivery. This meant that Armada would take. title at the port of origin, Rio de Janeiro, but Petrobras would pay the freight to the destinations and would purchase marine insurance covering the voyages. The oil was to be shipped in cargoes of about 55,000 metric tons each. Armada had the option to have cargoes shipped to Rotterdam or New York. The prices were not fixed in the contract, but were to be established pursuant to an index of spot oil prices at the time and place of delivery. The cargo in question in the present case was the last shipment under the April 1982 contract. It was loaded on November 16, 1982 at Rio de Janeiro on the AGIOS NI-KOLAS destined for New York. The amount supposed to be loaded was 52,066 metric tons or about 348,000 barrels. The bill of lading specified this amount. It appears that a shortage of about 8,000 barrels occurred in the pipeline between the shore tanks and the vessel. About 340.000 barrels were loaded on the AGIOS NIKOLAS. The vessel entered New York harbor on December 9, 1982. At that time a problem of contamination was discovered. This was followed by a temporary departure of the vessel from New York harbor in order to avoid legal process, which in turn led to a complex series of transactions to be described later in this opinion. B. Armada-Sun Contract On October 29, 1982, prior to the time the cargo in question left Rio de Janeiro, Armada entered into a contract to sell the cargo of oil to Sun Oil Trading Corp. The contract specified that Armada was to sell 49.000 metric tons, plus or minus 10% at Armada’s option, on a delivered basis in New York. This meant that Sun would take title in New York, and the oil was Armada’s risk until then. The price was fixed at $30.55 per barrel. It soon became apparent that the Sun contract would be highly profitable to Armada. The market price of oil was steadily declining. The flexible price under the Armada-Petrobras contract would allow Armada to acquire for substantially less than the $30.55 fixed price in the Sun contract. As it turned out, the spot oil price in New York at the time of the arrival of the AGIOS NIKOLAS was $25.70 per barrel. Had Armada been able to consummate the transaction with Sun it would have earned a profit of $4.85 per barrel or a total profit of about $1.6 million. Due to the contamination of the oil discovered upon arrival at New York on December 9, Sun would not accept the cargo at the $30.55 price. Armada and Sun renegotiated the price and on December 16 agreed upon $27.40 per barrel. However, for reasons to be described, only about 49,000 barrels were delivered at this reduced price. Since the rest of the oil was not delivered to Sun by December 20, Sun rejected the remainder of the cargo on that date. Except for the sale of the 49,000 barrels at the reduced price, the Sun contract was lost. C. Brazilian Insurance Petrobras had an open marine insurance policy with Banorte and other Brazilian underwriters covering shipments of oil. The Brazilian insurance policy was subject to the London Institute Cargo Clauses (All-Risks). It covered the type of losses from shortage and contamination involved in the present case. On December 14, 1982 the Brazilian underwriters issued an Insurance Certificate covering the cargo in question. It recited that the quantity of oil insured was 52,066 metric tons. The certificate recited the sale price of the oil to Armada, $8,959,394, and added 10% to arrive at the insured value of $9,855,333. The insured value under the Brazilian insurance was $28.27 per barrel. This is equal to the $25.70 spot price in New York plus 10%. D- London Insurance 1. Language of Cover Note Armada had an open policy of marine insurance with London underwriters. This coverage was renewed for the period April 20, 1982 to April 19, 1983. In connection with its London insurance, Armada dealt with its Houston broker, Johnson & Higgins, which in turn dealt with a London broker, Willis Faber & Dumas, Ltd. The London insurance coverage for April 1982 —April 1983 was reflected in a cover note sent by Willis Faber to Johnson & Higgins dated July 15, 1982. The cover note is the document relied on in the present case to express the relevant terms of the London insurance. It was applicable to the cargo on the AGIOS NIKOLAS. The cover note named certain Armada entities other than plaintiff Armada Supply Incorporated, but it has been stipulated that plaintiff is the assured or beneficiary in regard to this insurance. The cover note provided “continuous cover” for shipments occurring between the dates specified. It was obviously understood by Armada and the London underwriters that Armada might have different degrees of interest in different cargoes. For instance, Armada might purchase F.O.B. a foreign port, thus taking title in the foreign port and being required to purchase its own marine insurance for the voyage. On the other hand, as in the present case, Armada might make a C.I.F. purchase, taking title in the foreign port but having insurance purchased for it by the seller. In such a case, if Armada was satisfied with the marine insurance provided by the seller, it would not obtain insurance of its own. However, Armada might resell the oil on a C.I.F. basis and be required to provide marine insurance to its purchaser. Armada might resell the oil on a non-C.I.F. basis, but wish to increase the insured value to take into account the resale price. The cover note of July 1982 made provision for these different possibilities. There was provision for ordinary marine insurance, for which the premium was .105% of the insured value. This was apparently intended to apply only where Armada purchased F.O.B. a foreign port, although the cover note did not expressly state this. There was a provision covering the situation where Armada purchased on C.I.F. terms and resold on C.I.F. terms, and was therefore required to provide insurance coverage to its purchaser. It was provided that, upon a payment of one-quarter of the regular marine rate (.02625%), the London insurance would cover the full value of the original supplier’s insurance. The London underwriters would become subrogated to Armada’s rights on the original insurance. This was referred to as “contingency” coverage. As part of the contingency coverage, it was provided that any increased value represented by Armada’s resale of the oil would be added to the insured value. Armada was to pay the marine premium rate of .105% on the increased value. The relevant provision of the cover note was as follows: C.I.F. PURCHASES: It is agreed that where the Assured purchase goods on C.I.F. terms and sell on C.I.F. terms, but wish to give their buyer a certificate for their Sales Price that they may issue certificates for the full value hereunder. Underwriters hereunder to have the benefit of the original suppliers certificates held by Wills Faber & Dumas Ltd. Surveys in the event of loss and/or damage to be conducted by the Agent specified on the original suppliers certificate in order to preserve Underwriters rights of recourse thereunder. This insurance not to be deemed a double insurance. Premium payable as follows: (1) Where the original suppliers certificate is in force for the entire period of risk:— (a) Marine: Rate(s) as per cover payable on the Increased Value, if any, which see (3) below. (b) Contingency: 0.02625% payable on the full value of the original suppliers certificate(s) but at rates to be agreed where the conditions on the original suppliers certificate(s) are narrower than those on the certificate^) issued hereunder. The next clause in the cover note dealt with the situation in which Armada purchased on C.I.F. terms and resold on non-C. I.F. terms, with the result that Armada was not providing insurance for its buyer but was itself the beneficiary of the insurance during the voyage. This clause provided insurance for Armada for the increased value arising from the non-C.I.F. resale. The clause also provided insurance for increased value arising from rising market value without a resale. This insurance was mandatory on all cargoes purchased C.I.F. by Armada. The premium on this increased value coverage was .01%, payable on all cargoes purchased C.I.F. by Armada. The percentage was levied on the contract price of the C.I.F. purchase. The relevant provision was: INCREASED VALUE IN RESPECT OF C.I.F. PURCHASES: It is also agreed that, in respect of interest bought on C.I.F. terms, this insurance is extended to cover, on concurrent conditions, increased value which may occur during the period of this insurance, it being understood and agreed that, in the event of the vessel or interest being lost, the period of cover for ascertainment of increased value shall be the period between commencement of risk and the estimated timé of arrival at port of destination. The sum insured shall be:— (a) If bought against sales: The difference between the sum insured by seller(s) and the sum stipulated in the sales contract or, if required by the buyer(s) the highest market value reached during the period defined above. Additional Premium: 0.01% payable on the contract purchase price of all shipments attaching hereunder. The amount of the increased value on the AGIOS NIKOLAS cargo was the difference between the amount of the Sun contract ($10,650,175) and the sum insured by Petrobras ($9,855,333), or $794,842. This is $2.28 per barrel. The increased value coverage involved in the second of the quoted provisions should not be confused with the increased value feature of the contingency coverage. Regarding the terminology in this opinion, “increased value coverage” will refer to the coverage under the second provision. It is important to understand the relationship between the contingency coverage and the increased value coverage. Some recapitulation and elaboration is in order. The increased value coverage was automatic for all shipments, and the .01% premium was to be paid on all shipments. The provision contemplated that Armada would have primary insurance supplied by its C.I.F. seller. Armada would benefit from the increased value coverage on a particular cargo if it retained ownership of the cargo, and was itself at risk, during the voyage, and if the value of the cargo increased by virtue of rising market-value or a resale of the cargo. The type of resale contemplated here was one in which Armada had a contract to deliver at the destination, and retained title during the voyage. The contingency coverage related to a different situation. If Armada bought C.I.F. and resold C.I.F. before the voyage, it would not have title, and would not be at risk, during the voyage. It would need to provide its purchaser with insurance covering the total value of the cargo. Armada might do this by giving its purchaser two certificates of insurance, one involving an assignment of the primary insurance and the second for the increased value, bringing the insured value up to the amount of the resale price. However, this might have certain disadvantages, particularly the disclosure of the profit on the resale contract. Therefore Armada might wish to give its seller a single certificate of insurance covering the full value. This is the situation provided for by the contingency coverage in the July 1982 cover note. This coverage was not automatic, but came into effect only in the event of back-to-back C.I.F. sales and an appropriate exercise of Armada’s option to obtain this coverage. Armada would then issue a certificate to its seller. It would be Armada’s buyer who would be the beneficiary of the insurance, and not Armada. The buyer would be covered, not by the original supplier’s insurance (such as that obtained in Brazil by Petrobras), but by the London insurance. In the event of a loss, the London underwriters would be subrogated to Armada’s rights under the original insurance. A comparison of the features of the contingency coverage and the increased value coverage is contained in the following table. Contingency Increased Value C.I.F. sales Back-to-back C.I.F. sales: original supplier to Armada, then Armada to its buyer Only one C.I.F. sale — i.e., to Armada Risk during voyage Armada’s buyer Armada London insurance coverage Entire value Increased value only Beneficiary London insurance Armada’s buyer Armada Beneficiary original supplier’s insurance London underwriters Armada 2. Amounts Claimed by Armada on Increased Value As described earlier, Armada contends that the increased value provision insured it against loss of profits on the Sun contract. The amount of the profit (the Sun contract price less the Petrobras contract price) would have been $1,690,780 if the Sun contract had been consummated. However, this is not the amount of the increased value under the formula set forth in the cover note. As already stated, that amount is $794,842. Under the cover note, the increased value is not to be based upon the amount of the Petrobras contract, but upon the sum insured by Petrobras. This was the contract price plus 10% (this 10% being about $800,000). Armada does not even argue that it should recover the actual lost profit, $1,690,780, from the London underwriters. It makes two other alternative arguments. The first of these was articulated in its opening statement at the trial. There Armada argued that it should recover from the London underwriters the difference between the amount of the Sun contract and the net amount realized from the damaged cargo (both from resales of contaminated oil and from the Brazilian insurance). The following figures were presented: Net amount of resale after expenses $6,557,000 From Brazilian insurance 2,676,000 $9,233,000 Subtracting the latter figure from the amount of the Sun contract ($10,650,175), and rounding off, gives $1,416,000. In the opening statement Armada argued that this was the amount of the sum insured under the increased value provision of the cover note, and this is the amount which should be recovered against London underwriters. This argument can be readily disposed of. The proper calculation of the sum insured under the increased value insurance is what was set forth earlier in this opinion resulting in the figure of $794,842. The method of calculation proposed in Armada’s opening statement is contrary to the plain language of the provision in the cover note. An alternative argument has been made in recent presentations to the court. Armada contends that it is entitled to recover the $794,842 from the London underwriters. The problem with this argument is that, although this is the correct ■ figure under the cover note formula, it does not represent a loss of profit; and it is the theory about insurance against loss of profits that is the sole rationale used by Armada to justify an amount of this magnitude rather than the $100,000 or so argued for by the London underwriters. Armada’s response to this problem is that the increased value provision insures all its profit on the Sun contract over and above the 10% portion of those profits included in the insured value under the Brazilian insurance. This is a most untenable position. There is nothing in the language of the cover note which approaches a definition of this kind of insurance — ie., insurance against a portion of lost profits. A strong argument can be made for rejecting this position out of hand. However, the parties in this case have gone to great effort to present evidence and argument about what they consider a somewhat basic issue — i.e., the general question of whether the insured value provision did or did not provide insurance against loss of profits. They have also presented arguments on the related question of whether the particular average method of adjustment applies. The various contentions of the parties in this regard will now be dealt with. 3. Evidence About Interpretation of Increased Value Coverage The London underwriters called two witnesses, Christopher Parker and John M. Blackwell, to testify about the customary method of adjustment of claims where there is increased value coverage. Parker is with the London insurance broker Willis Faber, and has long experience in both the placement and claims aspects of the marine insurance business. Blackwell is employed at Lloyd’s in the adjustment of insurance claims. The following is a summary of their testimony, together with certain inferences drawn by the court on the basis of that testimony. They testified that the basic concept of marine insurance is that it insures against the risk of physical loss of the cargo or physical damage to the cargo. In the event of such loss or damage, the insured’s claim will be adjusted and paid on the basis of the extent of that loss or damage. For instance, if 10% of a cargo is lost by being jettisoned, then the adjustment and payment will be on the basis of this 10%. Parker and Blackwell also testified about the concept of a “valued policy.” This is a policy in which the “insured value” is agreed upon, rather than being subject to estimation after the loss has occurred. In the event of loss or damage to the extent of 10%, the amount to be paid to the insured would be 10% of the insured value. This is quite different from insuring against the failure to complete a contract or the failure to earn profits on a contract. This difference is illustrated by the following examples. First, assume insurance on a cargo of 100.000 barrels of oil. The owner of the cargo has a contract to sell it for $20 per barrel, or a total of $2 million, and the contract provides that if all 100,000 barrels are not delivered, the contract is void. The policy states that the insured value is $20 per barrel, or a total of $2 million. Due to a casualty at sea, 10,000 barrels are lost. Under standard marine insurance concepts, involving the theory that the insurance is against the loss of physical property, the amount to be paid on the claim is the insured value of the 10,000 barrels lost, or $200,000. If, on the other hand, the insurance were to be construed as protecting against the loss of the contract, the amount to be paid would be $2 million, since the entire contract was lost as a result of the 10.000 barrel shortage. In the second example, again assume an insured cargo of 100,000 barrels of oil, which is subject to contract of sale for $20 per barrel or a total of $2 million. The contract provides that if there is salt water contamination of more than 2%, the contract is void. The insured value is agreed to be the $20 per barrel or a total of $2 million. A casualty occurs at sea and the cargo is contaminated with s.alt water to the extent of 12%, which reduces the value of the oil by 10%. Under standard concepts, a claim would be paid representing the amount of physical loss or deterioration of the cargo. This would be 10% of $2 million, or $200,000. On the other hand, if the insurance were construed to cover the risk of the loss of the contract, the amount to be paid would be $2 million, because the entire contract was lost. According to the testimony of Parker and Blackwell, the July 1982 cover note provided standard marine insurance against loss of cargo or damage to cargo, and did not cover loss of a contract. Parker and Blackwell testified that “increased value” coverage, of the kind provided in the cover note, has no other function than to increase the insured value beyond what is insured under the primary insurance. If the increased value is based upon a resale contract, the amount of that contract will be used as a basis for establishing the increased value. However, this does not mean that the contract as such, or the profit under the contract, is insured. Where there is a primary policy and an increased value policy, there are two insured values. In the event of loss or damage, liability would be shared by the two insurers. Let us return to the two hypothetical cases, and suppose that there are two policies — a primary policy with an insured value of $1.50 per barrel or a total of $1,500,-000, and an increased value policy for $.50 per barrel or a total of $500,000. In respect to the casualty involving the loss of 10,000 barrels, the primary insurer would pay $1.50 per barrel or $150,000, and the increased value insurer would pay $.50 per barrel or $50,000. In the second example, the primary insurer would pay 10% of $1,500,000, or $150,000, and the increased value insurer would pay 10% of $500,000 or $50,000. It should be noted that a shortage loss— 1. e., a total loss of part of the cargo — would be adjusted by payment of the full insured value of the amount of cargo lost. In the present case the shortage losses are adjusted for the full insured value of the cargo— $30.55 per barrel, $28.27 for Brazilian underwriters and $2.28 for London underwriters. Parker and Blackwell testified that a method exists for establishing the extent of a loss in the event of contamination. That is called the particular average method of adjustment. This method is designed to provide a recovery based upon the amount of physical damage or physical deterioration to the cargo. The usual method of doing this is to ascertain the sound market value (“SMV”) as of a certain location and time, and subtract from it the damaged value (“DV”) as of that place and time. This gives a monetary figure for the deterioration. This figure is divided by the SMV to arrive at the percentage of deterioration (“P”). This calculation is represented by the following equation: p _ SMV-DV ~ SMV This percentage is applied to the insured value to determine the amount of the recovery on the particular policy. As already noted, Armada concedes that the particular average method of adjustment is applicable to the Brazilian insurance. It is only with respect to the London insurance that there is a claim that this method does not apply. Armada called an expert witness, Thomas L. Riley, an employee of Johnson & Higgins in Houston. As it turned out, Riley did not disagree with the basic explanation of Parker and Blackwell about the meaning of increased value and the normal application of the particular average method of adjustment. The effect of Riley’s testimony was to urge that the particular average method should not be applied in the present case because the cargo should be considered to be a constructive total loss. This point will be dealt with later in the opinion. E. The November 30, 1982 Meeting Armada contends that, even if the increased value provision of the cover note would normally be interpreted to provide for insurance against physical loss or damage rather than against the loss of profits on a contract, nevertheless the parties specifically agreed to the latter coverage in the present case. Armada alleges that such an agreement was entered into at a meeting held in Houston on November 30, 1982 between a representative of Armada and a representative of Johnson & Higgins. Armada contends that Johnson & Higgins agreed that the London insurance would cover lost profits on the Sun contract, and that Johnson & Higgins had either actual or apparent authority to make this agreement on behalf of the London underwriters. Armada contends that, in addition to its bearing on the increased value provision, the November 30 meeting started a chain of events which resulted in the alleged waiver on the part of the underwriters regarding contingency coverage. 1. Johnson & Higgins’ Authority In connection with the original London insurance obtained in 1981, and the cover note obtained in July 1982, Johnson & Higgins was concededly the agent of Armada not of the London underwriters. The cover note expressly described Johnson & Higgins as “Brokers for the Assured.” The London underwriters consisted of both Lloyd’s underwriters and certain companies who were members of the Institute of London Underwriters. The Lloyd’s underwriters bore 42.5% of the risk and the companies bore the rest. Considerable evidence was introduced at the trial on the question of whether the relationships of Johnson & Higgins, Willis Faber and the Lloyd’s underwriters was such as to permit a finding that Johnson & Higgins had the actual or apparent authority to bind these underwriters. No such evidence was introduced about the company underwriters. It is appropriate to describe the evidence relating Lloyd’s. There are well-defined practices at Lloyd’s about the placement of insurance. There are individual underwriters, and there are also underwriting syndicates in which several parties invest. Someone is designated to accept or decline risks offered to a syndicate. That person is called an “underwriter.” The role of a broker in the placement of insurance varies depending upon the circumstances. There are times when certain underwriters give “binding authority” to a broker to write specific kinds of insurance. This authority is strictly limited to the particular underwriters and types of insurance. In the absence of such authority, the risks are accepted by the underwriters themselves (either individuals or representatives of syndicates). In this situation the broker represents the insured. He presents a “slip” to the underwriters describing the risk, and a subscribing underwriter will sign the slip and state the percentage of the risk he is willing to take. The July 15, 1982 cover note was signed by the underwriters themselves. Neither Willis Faber nor Johnson & Higgins had binding authority to enter into this insurance on behalf of the Lloyd’s underwriters, much less the company underwriters. During the time involved in this case, Willis Faber had an agreement with certain Lloyd’s underwriters that it could bind them on certain kinds of insurance business emanating from Johnson & Higgins. However, ocean marine insurance was specifically excluded from the authority granted to Willis Faber, and none of the underwriters involved in the present case was a signatory to the Willis Faber authority. Aside from whatever role the broker plays in the placement of insurance, he is usually involved at other points in the insurance process. He may well participate in the handling of a claim. It was certainly true in the present case that Johnson & Higgins performed certain services in the processing of Armada’s claims regarding the AGIOS NIKOLAS. In this connection, Johnson & Higgins was acting for the benefit of Armada, except in one particular respect. This related to the handling of the premium. In accordance with custom, Johnson & Higgins calculated the amount of the premium due from Armada and billed Armada. Armada paid Johnson & Higgins. Either Johnson & Higgins or Willis Faber then held the premium for a time for the benefit of the underwriters and then remitted the premium to the underwriters. In this discrete respect, Johnson & Higgins, along with Willis Faber, was performing a service for the London underwriters and acting for them. Viewing the evidence as a whole, it is clear beyond question that at the time of the November 30, 1982 meeting, Johnson & Higgins had no actual authority to bind the London underwriters to any terms of insurance coverage. Moreover, nothing has been shown to give substance to the theory of apparent authority. The cover note specified that Johnson & Higgins was Armada’s broker. There is no evidence that the Lloyd’s underwriters or the British company underwriters, or any of them, represented or indicated in any way to Armada that Johnson & Higgins had power to bind them. Anderson did not say anything to this effect on November 30. The mere fact that Johnson & Higgins accepted and held premiums on behalf of underwriters would not amount to an indication that Johnson & Higgins had authority to bind underwriters to insurance coverage. Furthermore, the fact that Willis Faber could bind certain London underwriters to cover a limited number of specific risks for business emanating from Johnson & Higgins did not invest Johnson & Higgins with apparent authority to bind London underwriters to coverage in all situations. Armada did not learn about the existence of this relationship until after the commencement of trial. It is thus impossible for Brown to have relied upon this fact when she visited Johnson & Higgins’ offices on November 30, 1982. 2. Events At Meeting As to the November 30, 1982 meeting, Carolyn Brown of Armada testified at the trial, and the deposition of James Anderson of Johnson & Higgins was read into evidence. Brown was an employee of Armada with responsibility for administering various details regarding oil shipments. She testified that she and others at Armada had certain questions about the London insurance. Specifically, Armada was concerned with the protection of the Sun contract’s profits, and also had concerns over collecting under the Brazilian policy. Brown went to Johnson & Higgins on November 30 to discuss these points. The person at Johnson & Higgins who had handled the placement of the London insurance was on vacation. Brown met with other persons at the firm. Brown first talked with Doug Richmond, who could not answer her questions. She then talked with Anderson, a cargo claims adjuster. It is the meeting of Brown with Anderson that Armada relies on. Brown stated that of “utmost importance” to her was instilling Anderson with the knowledge that she wanted to protect the profit on that voyage. However, there is no testimony by Brown that she did in fact request, or even discuss with Anderson, insurance against loss of the Sun contract profits. Brown stated that she told Anderson about the Petrobras and Sun contracts. With respect to the purchase from Petrobras, Brown told Anderson that it was the last in a series of purchases, that it was on C.I.F. terms, and that Armada was uncertain as to the Brazilian coverage. Brown stated that the cargo was going to be particularly profitable to Armada. Brown testified that she gave Anderson “all the details” about the Armada-Sun contract. Aside from the price, Brown did not specify what details she gave Anderson. She did not state what she told Anderson about whether the Sun contract was or was not C.I.F. Under the London cover note, contingency coverage was available only for back-to-back C.I.F. sales. Brown testified that at the conclusion of the meeting she believed that Anderson had confirmed that Armada had “coverage under the two clauses in the policy, the contingency coverage and the increased value insurance, and when I left that office I had no doubt whatsoever that we were covered under that policy.” Brown did not testify that she had any understanding of the distinction between the concept of increasing the insured value based on the amount of a contract and the concept of insuring against the loss of a contract as such. She did not indicate in her testimony that there was any discussion of this matter. Brown said nothing which apprised Anderson that Armada wished to have coverage that would depart from the normal marine insurance and would cover possible loss of a contract. Brown did not testify in words or substance that Anderson ever agreed to such a thing. Anderson’s deposition and a letter he wrote to Willis Faber on January 3, 1983 provide a more definitive account of the meeting than does Brown's testimony. He testified: Carolyn had come in to ask, one, that we name Armada Supply as an additional assured under the policy, specifically named; and two, wanted to discuss a vessel that she had currently which was on the water, the AGIOS NIKOLAS. She wanted to make a declaration under the increased value and contingency sections of the policy. It should be noted that Armada was required to make a declaration to Johnson & Higgins with regard to each shipment coming within the terms of the cover note. Anderson stated that he discussed with Brown the problem of making declarations in view of the fact that Armada’s purchase price for the oil was not going to be established until the vessel arrived in New York. The letter of January 3, 1983 recited that Armada usually issued declarations in the form of certificates and sent them to Johnson & Higgins. However, the shipment on the AGIOS NIKOLAS was regarded as a “special situation,” and Johnson & Higgins issued the certificates — one for contingency and one for increased value. According to the letter, the intention was to have Johnson & Higgins hold these two certificates until Armada knew its purchase price for the oil, at which time “a more complete and detailed set of certificates could be issued.” However, due to the numerous problems which arose upon the vessel’s arrival in New York, Johnson & Higgins did not issue the further certificates, and sent the two original certificates to Willis Faber with the letter of January 3. The two certificates, filled out as a result of the meeting, were signed by Anderson. It is unclear from the evidence if the certificates were filled out in the presence of Brown. The increased value certificate stated: Shipment is insured under provisions of Increased Value Clause of Cover No. No CS5577 dared July 15, 1982. This certificate to cover increased value of shipment of 348,614.572 barrels as described, above. Increased value amount to be the difference between amount insured under Certificate of Insurance issued by Petrobas Insurer to cover this shipment and sales price of 30.55 per barrel. Exact purchase price is unknown at time of issuance of this certificate. The contingency certificate stated: Shipment is insured under provisions of Contingency Clause of cover Note No. CS5577 dated July 15, 1982. Value based on loaded quantity at sales price of 30.55 per barrel. The contingency certificate does not state what type of sale was made by Armada to Sun. Aside from the mechanics of declaration, Anderson stated in his deposition that the subject of the coverage was discussed. Anderson testified: A. We discussed the contingency clause, what it would do from the standpoint that it would respond — it would allow them to issue a certificate for their entire amount and would, in the event the original supplier of certificate did not respond, it would respond as long as all obligations in the original supplier certificate were taken care of. On the increased value, Carolyn was concerned that it appeared that the— again, she was approximating at this point, that her barrel price on purchase would be roughly somewhere in the neighborhood, I think at that point, of 26 to 25 dollars a barrel and that she wanted to make sure that in the event there as loss or damage to the cargo that her profit was protected. Q. What did you understand to be meant by her profit? A. Well, that she would be able to declare that under the increased value clause, the dollar amount that she expected to realize from the shipment from the standpoint that, if she was selling the cargo at — well, $30 a barrel and was buying it at $25, that you would declare that additional $5 per barrel. Q. To increase the sum assured? A. Exactly. And that in the event — a specific analogy we would have had was in the event she had a shortage loss, because obviously that is what we had more of, actually all with Armada, say, of a hundred barrels and the deductible would be fulfilled, say, with fifty barrels — I remember the hundred barrel analogy — that on the other fifty she would collect on the basis of the $30 per barrel price that she declared, the first 25 from the primary and the rest from the other. Q. Did Ms. Brown tell you anything about the terms of the Armada sale to its customer? A. I understood her to say that it was a CIF/CIF back-to-back contract. Thus, according to Anderson, the result of the discussion was the preparation of certificates for the cargo — one for increased value and the other for contingency coverage. With regard to the increased value insurance, it was understood, according to Anderson’s testimony, that the difference between the price Armada was to pay Petrobras and the price which Armada was to receive from Sun on the resale would “increase the sum assured.” Focusing on the matter of increased value, Anderson’s testimony is totally consistent with the position of the London underwriters in this case, as supported by the expert testimony, to the effect that the increased value coverage related to nothing more than the amount of the insured value for standard marine insurance coverage of loss or damage to property. There is nothing in Anderson’s testimony to indicate that he was agreeing to insure against the loss of the Sun contract or the profits on that contract. Certainly Anderson did not agree to something other than the normal particular average method of adjustment in the case of a contamination loss. Neither Anderson’s letter of January 3, 1983 nor the certificates he prepared at the time of the November 30, 1982 meeting indicate any agreement to insure against the loss of the Sun contract profits. The letter stated that “Armada wished to utilize the Increased Value and Contingency provisions of the Armada policy,” and then went on to discuss the matter of the certificates. The increased value certificate, as quoted above, defined the increased value amount as the difference between the sale price to Sun of $30.55 per barrel and the amount insured under the Brazilian insurance. The certificate was consistent with the standard concept of a valued policy of marine insurance. It said nothing about insuring against the risk of the loss of the Sun contract. As to the question of coverage under the contingency clause, Anderson understood Brown to say that both the Petrobras-Armada sale and the Armada-Sun sale were C.I.F. sales. As already stated, this was contrary to the fact. The sale to Sun was on a delivered basis, not C.I.F. Thus, under the terms of the cover note there could be no contingency coverage. However, Armada claims that during the course of later events the London underwriters waived the requirement of the cover note. It is necessary now to turn to these events. F. Further Events Regarding London Coverage On December 14, 1982, after having learned of the problem with the AGIOS NIKOLAS cargo, Johnson & Higgins notified Willis Faber by telex that a claim under the London policy would be made. The telex noted that “Armada Houston contacted our office to provide for increased value and contingency coverage on this shipment.” It stated that Armada was a C.I.F. purchaser but was silent as to the terms of the sale by Armada to Sun. On December 16 Willis Faber responded with a telex referring to the London underwriters only as “increased value insurers.” In a telex of December 17 to Johnson & Higgins and New York counsel for Armada, Willis Faber stated that London insurers are only covering increased value and primary insurance was arranged by seller to Armada. On December 21 Willis Faber telexed Johnson & Higgins that it did not understand how increased value insurers can be involved in the event original insurers fail to respond. You have already advised us that an increased value certificate was issued and the original certificate] remains. Willis Faber’s comments were understandable. As described earlier, under the terms of the cover note two essential features were involved in contingency coverage. The first is that Armada make a C.I.F. sale to its purchaser. The second is that Armada issue a certificate of insurance to its purchaser, who would be the beneficiary of the insurance. The purchaser, not Armada, would have the right to make a claim under the contingency coverage. However, to recover under the increased value provision, Armada would need to retain title and be the beneficiary of the insurance. Thus, under the terms of the cover note Armada could not recover under both contingency coverage and increased value coverage. Willis Faber telexed Johnson & Higgins on January 4 stating that London underwriters were “still proceeding with the line of thinking that they were only involved for increased value.” However, the telex requested that Johnson & Higgins supply certain documents, and expressed the hope that then Willis Faber “will get a more positive response from insurers.” On January 3 Anderson of Johnson & Higgins had written the letter to Willis Faber describing the meeting of November 30 with Carolyn Brown of Armada. Anderson enclosed the two certificates he made out on November 30, the operative language of which was quoted earlier in this opinion. One of these certificates related to contingency coverage and one related to increased value coverage. Also enclosed was a third certificate dated December 22 signed by Brown. This was, of course, after the problems with the cargo had been discovered in New York, and after Sun had rejected its contract with Armada. Brown’s certificate of December 22 contained the following description: 348,614.572 loaded barrels of No. 6 High Sulpher Fuel Oil purchased CIF New York and sold delivered outturn New York with a bill of lading dated November 16, 1982. Purchase price unknown upon loading. Cargo to be covered under Armada's ‘increased value’ and ‘contingency’ clauses. The certificate listed the value of the oil as $10,650,175.17 with the following explanation: This value based on loaded quantity at sales price: 348,614.572 BBLS @ 30.55/BBL It is important to note that this is the first time, according to evidence in this case, that Armada had affirmatively stated that the sale to Sun was on a delivered, rather than a C.I.F. basis. It is clear that by early January London underwriters had not assented to the contingency coverage, and were in effect denying such coverage until and unless Armada could show the basis for it. Since Armada’s sale to Sun had not been on a C.I.F. basis and Armada had delivered no certificate of insurance to Sun, there was in fact no basis for contingency coverage. However, it appears that Johnson & Higgins did not clearly understand the situation and mistakenly billed Armada for a premium for contingency coverage. Willis Faber requested on January 11, 1983 that Johnson & Higgins advise “what the billed premium was for this shipment and how calculated.” Willis Faber also asked whether the premium had been paid. Johnson & Higgins telexed Willis Faber on January 12 with a description of the proposed premium. The total amounted to $5,023.10, the bulk of which was for contingency coverage and was expressly designated as such. There was also a charge for increased value coverage under the separate provision (at the .01% rate). The telex asked that Willis Faber “confirm up agreement to above calculations” and stated that then Johnson & Higgins would and “press for immediate collection.” On January 14 this premium calculation was circulated to the underwriters and initialled “SFAC Seen.” by the leading Lloyd’s and company underwriters. “SFAC” is an abbreviation for “So Far As Concerned.” The undisputed testimony is that this meant that the London underwriters’ position was still reserved with respect to their position on the coverage. Willis Faber made no reply to the Johnson & Higgins telex of January 12. In spite of the fact that no such reply had been received, Johnson & Higgins proceeded to bill Armada for the premium of $5,023.10. The bill was sent on January 20, and Armada made payment on February 28. It will be recalled that on January 4 Willis Faber telexed Johnson & Higgins requesting documents regarding the claim for contingency coverage. There is no evidence of a specific communication in response. However, John M. Blackwell of the Lloyd’s claims office testified: Q. Did there come a time when you determined what was, in fact, the involvement of London underwriters in this matter? A. Well, finally, it is our practice to reserve our position until we get the actual documents which establish the position, i.e., the actual terms of sale between the various parties so we can then see, make a determination. He stated that prior to receiving the “actual documents,” the concerned parties in London were relying on various telexes. The documents which permitted a resolution of the coverage question arrived in February. The documents showed conclusively that Armada had purchased on C.I.F. terms from Petrobras but had not sold on C.I.F. terms to Sun. Therefore, there could be no contingency coverage. There was, however, increased value coverage. On March 4, 1983 Clyde and Co., solicitors for London underwriters, wrote Willis Faber stating that, due to the absence of back-to-back C.I.F. sales, the contingency coverage “does not come into operation.” The letter went on to state You will appreciate that Underwriters are not able to agree the basis of your premium calculations contained in your telex to us of January 14th, and in any event they do not accept that in the present case they are on risk for what you have called ‘Contingency Coverage’ or that any premium is payable in respect thereof, whatever the final rate adopted. In the meantime, Willis Faber’s accounting department had prepared a “premium closing endorsement” on February 3, 1983 for submission to London underwriters. The information contained on this form did not contain any identification of an amount being collected for contingency coverage. However, it did have the amount of the premium listed as $5,023.10, stating that it was on an “insured value” of “U.S. $10,-650,175.17.” On March 15, 1983 representatives of the London underwriters initialled this form. In June 1983 the premium was forwarded to London underwriters by either Johnson & Higgins or Willis Faber. The amount paid for the contingency coverage has not been returned. IV CONCLUSIONS OF LAW REGARDING LONDON INSURANCE A. Interpretation of Increased Value Provision As alreády described, the London underwriters claim that the insured value provision in the cover note related solely to augmentation of insured value, and that it in no way provided for a departure from the normal concept of marine cargo insurance as covering property loss or damage. They contend that the normal methods of adjustment apply — including particular average adjustment in case of a contamination loss. Armada contends that the increased value coverage insured its loss of profits on the Sun contract. As an initial proposition, it is clearly possible to have insurance against loss of profits. 1 M. Mustill & J. Gilman, Arnould's Law of Marine Insurance and Average 11318, at 206 (16th ed. 1981); see Barclay v. Cousins (1802) 2 East 544. However, Armada concedes that ordinary marine cargo insurance is against loss of cargo, not against loss of profits. See Royal Exchange Assurance Co. v. McSwiney, 14 Q.B. 646 (1849). Marine underwriters are not responsible for loss of profits unless there is “a policy specially providing for such an event.” Id. at 663. Cases involving such express provisions are Canada Sugar Refining Co. v. Insurance Co. of North America, 175 U.S. 609, 20 S.Ct. 239, 44 L.Ed. 292 (1900); Patapsco Insurance Co. v. Coulter, 28 U.S. (3 Pet.) 222, 7 L.Ed. 659 (1830). Armada cites Standard Marine Insurance Co. v. Scottish Metropolitan Assurance Co., 283 U.S. 284, 51 S.Ct. 371, 75 L.Ed. 1037 (1931), for the proposition that increased value insurance, such as that provided in the July 1983 cover note, should be construed as insurance against loss of profits. This case involved a purchase of wheat by Dreyfus at a price of $1.38 lh per bushel C.I.F. Montreal. The wheat was to be shipped from Port Arthur. The seller purchased insurance for Dreyfus’ account at a valuation of $1.42 per bushel. Contemporaneously Dreyfus also obtained an insurance policy providing that it was To cover “Increased Value” on grain owned by the Assured or in which the Assured may have an interest, ... Id. at 285 n. 1, 51 S.Ct. at 371 n. 1. The policy did not specifically refer to profits, as did the policies in Canada Sugar and Patapsco, supra, cited by the Court in the Standard Marine decision. The policy in Standard Marine defined increased value to be the difference between Dreyfus’ C.I.F. cost and the highest market value per bushel between the day of sailing and the day on which the cargo would have arrived at the destination but for the loss, plus $0.05. The vessel carrying the wheat collided with another vessel, and the cargo was lost. The primary insurer paid Dreyfus $1.42 per bushel or $284,000. The increased value insurer paid $62,500, which was the difference between the increased market value during the voyage ($1.69 %) and the C.I.F. price ($1.38 Vi), or $.31 Vi, plus $.05. The owner of one of the vessels brought a limitation of liability proceeding. Both vessels were held to be at fault. The amount held to be due Dreyfus for maritime tort was $309,500. This was the value of the grain at the time of shipment ($1.54 % per bushel). Both insurers intervened in the limitation proceeding claiming to be subrogated to Dreyfus’ right of recovery. The increased value insurer argued that it wa