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Lyman Morse Boatbuilding, Inc. v. Northern Assur. Co. of America

United States Court of Appeals, First Circuit

December 2, 2014

LYMAN MORSE BOATBUILDING, INC. and CABOT LYMAN, Plaintiffs, Appellees, Cross-Appellants,
v.
NORTHERN ASSURANCE COMPANY OF AMERICA, Defendant, Appellant, Cross-Appellee

Page 961

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MAINE. Hon. D. Brock Hornby, U.S. District Judge.

James D. Poliquin, with whom Norman, Hanson & DeTroy, LLC was on brief, for appellant/cross-appellee Northern Assurance Company of America.

Robert C. Hatch, with whom Leonard W. Langer, Hillary J. Bouchard, and Thompson & Bowie, LLP were on brief, for appellees/cross-appellants Lyman Morse Boatbuilding, Inc. and Cabot Lyman.

Before Lynch, Chief Judge, Stahl and Kayatta, Circuit Judges.

OPINION

Page 962

LYNCH, Chief Judge.

Lyman Morse Boatbuilding, Inc. (LMB) of Maine contracted to build a luxury yacht for Russ Irwin. Unhappy with the completed yacht, in 2011 Irwin brought an arbitration proceeding against LMB and Cabot Lyman, the controlling owner of LMB, alleging that the vessel had numerous defects. LMB and Cabot Lyman tendered defense of the arbitration complaint to their insurer, Northern Assurance Company of America, but Northern Assurance refused to defend the insureds. So the insureds filed this federal suit in 2012 seeking to recover the costs and attorneys' fees that they incurred in the arbitration proceeding.

The district court held that Northern Assurance had a duty to defend Cabot Lyman, the individual, but not LMB, the corporation; it then awarded to Cabot Lyman 50 percent of the attorneys' fees incurred during the arbitration by the two insureds together. Each side was unhappy and we are faced with appeals and cross-appeals. We conclude that on the pertinent facts Northern Assurance owed neither insured a defense under Maine law. Thus, we affirm in part, reverse in part, and remand for entry of judgment in favor of Northern Assurance.

I.

A. The Arbitration Demand

On July 22, 2011, Irwin filed an arbitration complaint against LMB and Cabot Lyman, claiming damages related to the allegedly defective construction of a 52-foot custom sailing vessel.[1] Irwin alleged that LMB and Cabot Lyman had agreed to build the vessel " with the 'best practices for quality yacht construction' using the 'highest quality materials'" for a price of $2,155,000. However, there were cost overruns, and Irwin eventually ended up paying over $3,400,000 for the completed vessel. Moreover, upon LMB's delivery of the vessel to Irwin, Irwin allegedly discovered multiple defects, which necessitated a series of rejections and repairs. As of the date of filing of the arbitration complaint, the quality of the vessel was still unsatisfactory to Irwin.

That complaint alleged eight causes of action: intentional fraud, negligent misrepresentation, constructive fraud, breach of contract, rejection and revocation of acceptance under the Uniform Commercial

Page 963

Code, breach of the implied warranty of fitness for a particular purpose, breach of the implied warranty of merchantability, and violations of Maine's unfair trade practices laws. Irwin requested rescission of the agreement and a refund and damages for the time he spent and the expenses he incurred during the period when he repeatedly rejected the yacht because of its defects, as well as " the return . . . of the amounts overpaid to [LMB and Cabot Lyman] and the difference between the value of the 'highest quality' version of the Vessel that [LMB and Cabot Lyman] represented that [Irwin] would receive and the actual version [Irwin] received." He also requested punitive damages, attorneys' fees and costs, interest, and " such other and further relief as the Court deems just and proper."

The arbitration complaint contained two paragraphs naming Cabot Lyman. First, Irwin alleged that Cabot Lyman, the controlling owner of LMB, was the alter ego of the corporation, and alleged that " [a] unity of interest exists between [Cabot] Lyman and [LMB] and injustice and fraud can only be avoided by piercing the corporate veil" and holding Cabot Lyman jointly and severally liable for the wrongs alleged.

Second, in the course of alleging violations of Maine's unfair trade practices laws, the complaint stated that LMB and Cabot Lyman

made further repeated representations and promises to [Irwin] about " best practices" and " highest quality" construction that they guaranteed for the completion of the Vessel . . .; for example, [Cabot] Lyman expressly represented to [Irwin] that he had extensive experience sailing worldwide including in the Caribbean and he was aware of the most common problems [Irwin] would encounter during his travels in tropical and other varying conditions . . .; as such he assured the Vessel would be completed to withstand these issues.

After the insurer refused their request for defense, LMB hired a law firm, Thompson & Bowie, LLP, to represent both it and Cabot Lyman in the arbitration. That firm then filed this lawsuit on behalf of the insureds, seeking to recover from Northern Assurance the costs and attorneys' fees incurred in the arbitration.[2] LMB and Cabot Lyman also brought a claim for unfair claims settlement practices, contending that Northern Assurance had not made a coverage decision in a timely manner.

B. The CGL Insurance Policy

On January 4, 2008, Northern Assurance had issued a package insurance policy to LMB and Cabot Lyman. The named insureds listed in the Declarations of the policy are " Lyman Morse Boatbuilding Co., Inc." and " Cabot & Heidi Lyman ATIMA." " ATIMA" stands for " as their interests may appear." Section III of the package policy provides the insureds with Commercial General Liability (CGL) insurance. It states in relevant part as follows:

Throughout this policy the words " you" and " your" refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured ...

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