Free Amended Counterclaim - District Court of California - California

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 1 of 49

BANNING MICKLOW & BULL LLP William L. Banning, State Bar No. 75757 2 Edward M. Bull III, State Bar No. 141996 Jessica L. Voss, State Bar No. 247033 3 501 West Broadway, Suite 2090 San Diego, California 92101 4 Telephone: (619) 230-0030 Facsimile: (619) 230-1350
1 5 6 7 8 9 10 11

Attorneys for Counter-Claimants Mi Barur, Inc., Arsenio Farell and Norma Farell UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA NEW HAMPSHIRE INSURANCE COMPANY, Case No. 08 CV 0443 BEN POR FIRST AMENDED COUNTERCLAIM FOR BREACH OF INSURANCE CONTRACT, BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING, FRAUD, NEGLIGENT MISREPRESENTATION, NEGLIGENT SALVAGE, INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS, NEGLIGENT INFLICTION OF EMOTIONAL DISTRESS, LIBEL AND SLANDER DEMAND FOR JURY TRIAL

) ) ) ) Plaintiff, 12 ) ) 13 vs. ) ) 14 MI BARUR, INC., ) ) Defendant. 15 ___________________________________ ) ) 16 MI BARUR, INC., ARSENIO FARELL and ) ) 17 NORMA FARELL, ) ) Counter-Claimants, 18 ) ) 19 vs. ) ) 20 NEW HAMPSHIRE INSURANCE ) COMPANY, and DOES 1-10 ) 21 ) Counter-Defendants. 22 __________________________________ ) )
23 24 25 26 27 28
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT

I. INTRODUCTORY ALLEGATIONS 1. This is a Counter-Claim for breach of insurance contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, negligent misrepresentation, negligent salvage, intentional infliction of emotional distress,

CASE NO. . 08 CV 0443 BEN POR

-1-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 2 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

negligent infliction of emotional distress, libel and slander brought by the insured owners and operators of a yacht against their insurance company arising from the insurer's wrongful denial of coverage for the yacht fire that totally destroyed the insured vessel M/Y MI BARUR ("MI BARUR") on October 20, 2007, (the "Loss"). The insurance policy at issue ("Policy") is attached as Exhibit A to the Complaint For Declaratory Relief and Reimbursement ("Complaint") of Counter-Defendant NEW HAMPSHIRE INSURANCE COMPANY' ("NHIC")1/ which initiated this action. A timely proof of loss was made by Counter-Claimants to Counter-Defendants. On March 10, 2008, Counter-Defendants, filed the Complaint and, by and through their agents, AI Marine Adjusters, Inc. ("AIMA"), wrote a letter to the President of Mi Barur, Inc., denying Counter-Claimants' insurance claims arising out of the Loss ("Denial Letter"). A copy of the Denial Letter is attached to as exhibit B to the Complaint. In response, a Demand Letter and a Supplemental Proof of Loss , dated May 23, 2008, ("Demand Letter") was sent by Counter-Claimants to CounterDefendants seeking reconsideration of the denial of the claims. A true and correct copy of the Demand Letter is attached hereto, and incorporated herein by reference herein, collectively as Exhibit A. For ease of reference, a true and correct copy of the Denial Letter is attached hereto as Exhibit B and incorporated by reference herein. No response has ever been received to the Demand Letter. 2. 3. Counter-Claimant MI BARUR, INC. ("Mi Barur, Inc.") is a corporation Counter-Claimants ARSENIO FARELL ("Mr. Farell") and NORMA organized and existing under the laws of the State of Delaware. FARELL ("Mrs. Farell") are individuals and are husband and wife ("Farells"). The Farells owned 100% of the stock of Mi Barur, Inc. They are citizens and residents of the Republic of Mexico. 4. Counter-Claimants are insureds under the Policy issued by NHIC that

1/

The Complaint and its exhibits are is incorporated herein by this reference.

FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT

CASE NO. . 08 CV 0443 BEN POR

-2-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 3 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

cover the Loss, as more fully set forth below. Mi Barur, Inc., was at all times relevant the named insured. The Farells at all times relevant were joint insureds as well as express beneficiaries because they were beneficial owners and operators of MI BARUR. From the date of the inception of the Policy through the date of the Loss, the Farells were "operating" MI BARUR with the "prior express permission" of Mi Barur, Inc., "for private pleasure use only." The Farells paid for the fuel, provisions maintenance and repairs of the vessel and determined the vessels itinerary. At all times relevant the Farells were the employers of the crew of MI BARUR including, without limitation, Captain Rello. The Farells as sole shareholders in Mi Barur Inc., are the only individuals or entities who would receive policy proceeds and are thus the intended beneficiaries under the Policy. Counter-Defendants have always acknowledged the Farells' status as insureds and policy beneficiaries. CounterDefendants' agents/employees consistently identified the Farells in their writing as insureds in correspondence concerning the Loss. NHIC's agents/employees use words such as "your insurance company," "your loss" and "your claim" communicating with the Farells concerning the Loss. According to the terms of the Policy and the applicable law, all of the foregoing facts make the Farells insureds under the terms of the Policy. 5. Counter-Claimants are informed and believe and thereon allege that Counter-Defendant NHIC is a corporation organized and existing under the laws of the State of New Jersey with its principal place of business in New York, New York. 6. Counter-Claimants are ignorant of the true names and capacities of the Counter-Defendants sued herein as DOES 1-10, inclusive, and therefore, CounterClaimants sue these Counter-Defendants by such fictitious names. Counter-Claimants are informed and believe and thereon allege that each of these fictitiously named Counter-Defendants is responsible and liable in some manner for the occurrences and Counter-Claimants' damages herein alleged. Counter-Claimants will amend this Counter-Claim to allege their true names and capacities when ascertained.
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-3-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 4 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

7.

Counter-Claimants are informed and believe and thereon allege that at all

times herein mentioned each of the Counter-Defendants was and is the agent, alter ego, partner, joint venturer, co-conspirator, principal, shareholder, servant, employer, employee and the like of each of the other Counter-Defendants, and in doing the things hereinafter mentioned, was acting within the course and scope of that CounterDefendant's authority as such agent, alter ego, partner, joint venturer, co-conspirator, principal, shareholder, servant, employer, and employee and the like of the other Counter-Defendants with the permission, ratification or consent of the other CounterDefendants, and each of them, and thus, each Counter-Defendant is legally liable for all damages, including punitive damages, if any, resulting from the acts and/or omissions of each of the other Counter-Defendants. 8. 9. Jurisdiction exists pursuant to 28 U.S.C. §1332. Venue is proper in this district because one or more of the insurance

contracts at issue in this action were issued in the Southern District of California, Defendant and Counter-Claimant Mi Barur, Inc. has its principal place of business in this district, a substantial part of the events and omissions giving rise to this claim occurred within the Southern District of California and NHIC has already filed a complaint against Defendant and Counter-Claimant Mi Barur, Inc. in this district. 10. Mr. Farell comes from a family of four children. He and each of his siblings are highly educated and graduated summa cum laude from prestigious schools. Mr. Farell is an attorney; his brother is a cardiologist; one of his sisters is a mathematician and another is a dentist. For many generations, Mr. Farell's family has been widely recognized as one of the most successful in Mexico, and Mr. Farell's father (who passed away in 2006) was one of the top trial attorneys in the country for over twenty years. Mr. Farell followed in his father's footsteps and chose to be a trial attorney. A year after Mr. Farell finished law school in 1971, his father went into government service. Mr. Farell joined his father's law firm and ultimately came to lead the firm (which was founded in the late nineteen forties). During his thirty years
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-4-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 5 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

of government service, Mr. Farell's father led various important government departments (for a long period, one level below the President) for five Mexican Presidents (with different ideologies, but requiring an administrator and politician of his skills and knowledge). 11. Mr. Farell has been, and still is, a legal counsel and trial attorney for many of the most successful and influential business people in Mexico and of many large Mexican and foreign corporations, including several major insurance companies. He has also been counsel to Presidents and heads of government departments. At the time of this loss, Mr. Farell was comfortably leading his law firm through some of its most prosperous and successful years. 12. Mr. Farell has been married to Mrs. Farell since 1977. In addition to a large and beautiful house that they have owned for over twenty-five years in Mexico City, a remarkable collection of automobiles and a stable full of pure blood horses, Mr. Farell is also the owner of a valuable beach front weekend house in Acapulco and an exceptional collection of paintings and sculptures from renowned Mexican artists. Mr. Farell has enjoyed leisure boats and yachts for many years. Mr. Farell also owns a third home as well as his office building in Mexico City (along with a law partner). All his properties and vessels are virtually debt free. 13. Mr. and Mrs. Farell's daughters have recently married (the last one last year). Their elder daughter is both a biologist and psychologist and holds dual Master's Degrees (one in mathematics) from Boston University and the University of Massachusetts. She is married to a Professor and both will begin working at Yale University in August of this year. Mr. Farell's younger daughter is also married and living with her husband at Stanford University. At this time, Mr. Farell has greater personal wealth than at any prior time in his life. Mr. Farell has virtually no debts, outstanding obligations or financial problems of any kind. 14. Mr. Farell has owned numerous high-end boats and yachts over the last twenty-five years. In the larger yacht category, Mr. Farell owned a 42-foot Grand
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-5-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 6 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Banks, a 55-foot Grand Banks and a 75-foot DeFever before he purchased the 92' Hatteras MI BARUR. Mr. Farell purchased each of these vessels for cash, never carried any loans on any of his yachts, and always fully insured such vessels. In addition to owning MI BARUR on the date of loss, Mr. Farell also owned a 29-foot yacht which he docks at his beachfront home in Acapulco. Mr. Farell maintains a berth at the Acapulco Yacht Club (for which he paid $120,000). Mr. Farell has never made an insurance claim. 15. MI BARUR, a 1990, 92-foot Hatteras motor yacht, was in pristine condition at the time of her loss; impeccably maintained and the product of one of the most sought after, distinguished and respected yacht builders. At the time of her last survey, completed by marine surveyor Cecil Lange in September of 2007, MI BARUR was found to have a market value of $2,300,000 ("in its present condition") and a replacement cost of $5,500,000. At that time, the hull of the yacht, "including the decks, superstructure flying bridge and boat deck were found to be in excellent condition . . . ." The interior of MI BARUR was described as "excellent and like new condition throughout" and overall Lange commented that she was "a vessel that has been well maintained and a credit to her owner." See a true and correct copy of the Survey and Evaluation report for the motor vessel "MI BARUR" attached as Exhibit A-1 hereto and incorporated herein by reference. 16. When initially offered for sale by her prior owner, the asking price was $2,400,000. See the Hallmark Central Listing Agreement dated 6/16/03 and the cover sheet of the resultant listing, Exhibits A-2 and A-3 attached hereto and incorporated herein by reference. In a prior listing, under the name ARRIVEDERCI III, the asking price for MI BARUR was $3,250,000. See the Merle Wood and Associates listing, Exhibit A-4 attached hereto and incorporated herein by reference. In 1997, one Marion Knight purchased the MI BARUR for $2,850,000. He insured MI BARUR for $2,825,000. See Exhibit A-5 attached hereto and incorporated herein by reference. Finally, when the boat was surveyed immediately prior to her purchase by
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-6-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 7 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Mr. Farell, she was surveyed by marine surveyor Marvin Henderson and found to have an estimated market value of $2,200,000. See the cover sheet to the Marvin Henderson survey dated September 7, 2003, Exhibit A-6 attached hereto and incorporated herein by reference. 17. In the fall of 2003, seeking to purchase a larger boat to replace his 75foot DeFever, Mr. Farell decided to purchase the 92-foot Hatteras, later to be named MI BARUR. Mr. Farell's yacht broker of many years, Michael Hallmark, had advised him that the current owner of the Hatteras was experiencing financial troubles and that an opportunity existed to get an exceptional deal on this high-end motor yacht. After a period of negotiations, Mr. Farell indeed purchased the Hatteras for a payment of $900,000 cash and the trade-in of his existing yacht, the DeFever. 18. Prior to the transfer in question, the prospective owner arranged for a survey of the DeFever by Marvin Henderson, who placed the fair market value of MI BARUR at that time at $1,400,000. See the cover sheet of the Marvin Henderson survey of September 17, 2003, Exhibit A-7 attached hereto and incorporated herein by reference. Counter-Claimants are informed and believe that at the time, Calcote was under financial duress, and as a result thereof, he later reduced the price to $1.1 million and then to $950,000 (see the Hallmark listings for said vessel, Exhibit A-8 attached hereto and incorporated herein by reference. ). He ultimately sold the boat for $620,000. However, there is nothing to suggest that the fair market value of this vessel was less than $1,000,000 (had Calcote had the financial wherewithal to sell MI BARUR in the normal course). After the trade in, Zurich Insurance Company insured the DeFever's hull and machinery for $1.4 million. When the subsequent owner, Mr. Augustin Rodriguez, later listed the DeFever for sale (in February of 2006), he also valued the boat at in excess of one million dollars ($1.1 million). See Cover Note 5170 and the Hallmark Central Listing Agreement dated February 8, 2006, collectively Exhibit A-9 attached hereto and incorporated herein by reference. 19. In addition to the above-referenced cash payment and yacht trade,
CASE NO. . 08 CV 0443 BEN POR

FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT

-7-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 8 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

following the purchase of the MI BARUR, Mr. Farell invested well in excess of $300,000 in additional upgrades and equipment for his new yacht. Prior to the denial of this claim, NHIC's agent and attorney obtained a full copy of Hallmark's file on this vessel. In said file were detailed documents evidencing the nature and extent of such work. Also in the file was a complete ledger report prepared by Hallmark showing that Mr. Farell spent in excess of $300,000 on vessel up-grades in the fall of 2003 alone. See Mr. Hallmark's Register Reports, Exhibit A-10 attached hereto and incorporated herein by reference. Using these figures, the amount spent by Mr. Farell for the cost of the 92-foot Hatteras MI BARUR, including equipment, can be conservatively estimated at over $2.3 million (even valuing the DeFever at only $1.1 million and the upgrades at only $300,000). 20. When purchased by Mr. Farell, the Hatteras was a Coast Guard documented U.S. flagged vessel. It is common and perfectly legal for Mexican owners to fly a U.S. flag on such a vessel. As Mr. Farell explained in his Examination Under Oath, there were numerous legal benefits for him to continue to fly the U.S. flag on his yacht. Not only would maintaining the U.S. flag make it easier to resell MI BARUR (in the U.S. market or to another non U.S. citizen), but Mr. Farell had experienced firsthand that flying the American flag improved the treatment he received when calling in various ports in Mexico and elsewhere. 21. NHIC knew at the inception of the Policy that the Farells chose to hold title to MI BARUR in a single vessel holding corporation, a legal and very common practice for pleasure yacht owners. See the Declaration of Michael Hallmark, paragraph 9, and Paul Trusso, paragraph 4, Exhibits A-11 and A-12 attached hereto and incorporated herein by reference. Furthermore, as NHIC knew at the inception of the Policy, the holding by Mexican nationals of 100% of the stock in such a U.S. single vessel corporation is completely legal and is specifically approved by 46 C.F.R. §67.39. See the Declaration of Paul Trusso, paragraph 5. NHIC commonly insures such single vessel corporations, including companies where the stock is entirely held
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-8-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 9 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

by Mexican citizens. See the Declaration of Henry Medina, paragraph 8, Exhibit A13 attached hereto and incorporated herein by reference. Indeed, when NHIC and similar marine insurance hull underwriters insure such recreational vessels, none of their standard application forms or questionnaires even inquire as to the nationality of the ownership of such single vessel corporations. See the Medina declaration, paragraph 8 and Exhibit A-14 attached hereto and incorporated herein by reference. 22. Upon purchasing MI BARUR, Mr. Farell arranged for hull and P & I insurance for MI BARUR through Henry Medina of Mariners General Marine of San Diego ("Mariners General"). Although Mariners General received various quotes on MI BARUR (see, e.g., the Chubb quote of 9/18/03 with hull limits of $2,200,000, a $44,000 deductible, and an annual premium of $12,645, Exhibit A-15 attached hereto and incorporated herein by reference), at the advice of Medina, the yacht was ultimately insured by Zurich. A copy of the Mariners General Cover Note #5171 indicates coverage effective September 23, 2003, with hull and machinery coverage in the amount of $2,200,000 (per the Henderson survey), a $44,000 deductible, and an annual premium of $20,990. See Exhibit A-16 attached hereto and incorporated herein by reference. Zurich also offered to renew their policy the following year for the same policy limits and at a similar premium rate. See the Zurich quote dated August 16, 2004, Exhibit A-17 attached hereto and incorporated herein by reference. 23. As the 2004 renewal deadline for the policy approached, Medina contacted other insurers, including the NHIC's general agent, Maritime General Agency ("MGA"). Medina advised MGA that he was currently insuring MI BARUR with Zurich, but was "looking for better coverage and premium." See the fax cover sheet from Medina to Chris Clark of August 17, 2004, Exhibit A-18 attached hereto and incorporated herein by reference. This inquiry led to the issuance of the first NHIC policy on MI BARUR, that was to be renewed the following three years. The original NHIC policy in effect at the time of the Loss was on its third renewal. 24. The application process was conducted entirely by Medina based upon
CASE NO. . 08 CV 0443 BEN POR

FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT

-9-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 10 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

NHIC's underwriting guidelines (as he understood them and based upon his conversations and experience with MGA). The application information was placed on a standard form utilized by Mariners General on prior placements with NHIC. A true and correct copy of the Yacht Insurance Application is attached as Exhibit A-19 attached hereto and incorporated herein by reference. As alleged below, the initial submission to MGA included not only the cover sheet and the Mariners General standard application form, but also an updated yacht quote questionnaire prepared by Medina (Exhibit A-20 attached hereto and incorporated herein by reference), a copy of the September 7, 2003 survey prepared by Henderson, and the resume for MI BARUR's Captain, Luis Manuel Rello (as well as other certificates and other documents attached thereto). 25. The following day, MGA's Clark e-mailed Medina attaching a quotation and requesting certain additional information including a signed compliance letter regarding the outstanding recommendation items on the Henderson survey and a severe weather plan ("Weather Plan"). See a copy of Clark's August 18, 2004 email, Exhibit A-21 attached hereto and incorporated herein by reference. Furthermore, when Medina responded and asked whether the original 2003 application would work to bind coverage, Clark responded that indeed it would. See the further e-mail exchange of August 18, 2004, Exhibit A-22 attached hereto and incorporated herein by reference. Medina also promised to forward the compliance letter under separate cover. 26. Thereafter on September 14, 2004, Medina faxed the signed compliance letter to MGA as requested. See Medina's e-mail of September 14, 2004, the requested Weather Plan and the sign off compliance, Exhibits A-23, A-24 and A-25 attached hereto and incorporated herein by reference. Thereafter, on September 23, 2004, NHIC did in fact issue policy EY 341-92-25 with an agreed hull value of $2,200,000, a hull deductible of $44,000, and a hull premium of $16,060. See the 2004-2005 Declarations Page, Exhibit A-26 attached hereto and incorporated herein
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-10-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 11 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

by reference. That policy was renewed twice by NHIC (with the same limits, deductible and hull premium), once on September 23, 2005, and again on September 23, 2006, each time with only a single page questionnaire and no further inquiry. See the NHIC Insurance Company declaration pages for policy periods 9/23/2005 to 9/23/2006, and 9/23/2006 to 9/23/2007, Exhibits A-27 and A-28 attached hereto and incorporated herein by reference. 27. During the application process, and in related correspondence and conversations, Medina worked as an intermediary between NHIC and the Insureds and was thus particularly familiar with their underwriting guidelines. Medina gave all information which he considered to be material to NHIC, based on his many years of experience in the marine insurance business in general, and with NHIC in particular, in addition to any and all materials requested by the representatives of NHIC. Medina had absolutely no incentive to misrepresent or conceal any facts, had experienced no trouble whatsoever insuring this yacht in the past, and had received quotes with lower premiums from other insurers. Medina had insured many vessels held by single vessel owning corporations and/or Mexican citizens, and had never had any problem or any indication from any underwriter, including Clark or any others at NHIC, that either of these considerations were considered negative risk factors by the underwriters. Clark and other representatives of NHIC were never shy about requesting information they felt was important to them. Mr. Farell was always completely forthcoming in his dealings with Medina and fully advised him of all facts regarding his yacht. See the declaration of Henry Medina, paragraphs 5, 6, and 7, Exhibit A-13 attached hereto and incorporated herein by reference. 28. In addition to the fact that Mr. Farell disclosed all material information to Medina, Medina also disclosed all material information regarding the identity of the insured to NHIC as part of the initial application process. First, on both the standard yacht insurance application form and the yacht quote questionnaire (Exhibits A-19 and A-20 attached hereto and incorporated herein by reference), the owner of MI
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-11-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 12 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

BARUR was properly identified as Mi Barur, Inc. Given that the name of MI BARUR was also disclosed, it was abundantly clear to anyone with any experience in the maritime industry, that Mi Barur, Inc. was a single vessel holding corporation (a very common and legal arrangement). Second, the fact that Mr. Farell was the beneficial owner of MI BARUR and a Mexican citizen were also clearly disclosed. On both the yacht quote questionnaire and the yacht insurance application, the occupation of the owner is identified as "Attorney." Not only did the insurance application indicate that Mr. Farell employs a "Licensed Mexican Captain," but the cover page of the Marvin Henderson marine insurance survey dated September 7, 2003 (Exhibit A-6 attached hereto and incorporated herein by reference) indicated that the survey was done at the request of Mr. Farell, with an address of "Gutenberg 147 Col. Anzures, Mexico City, MX D.F. 11590". Furthermore, when Medina was asked why the Captain's resume was in Spanish, he told Clark that the owners, crew etc., of the MI BARUR were "Mexicans." See the declaration of Henry Medina, paragraph 11, Exhibit A-13 attached hereto and incorporated herein by reference. 29. In support of the application for coverage submitted to NHIC, Medina also disclosed to NHIC the market value of the MI BARUR as $2,200,000 based on the September 7, 2003 survey by Marvin Henderson. See the yacht quote questionnaire, Exhibit A-20 attached hereto and incorporated herein by reference. Additionally, on the standard application form under the heading "costs, including equipment" the figure of $2,200,000 was again entered. This, again, is a conservative figure given that Mr. Farell paid $900,000 in cash for MI BARUR, traded in a vessel with a survey value of $1.4 million (the DeFever) and invested in excess of $300,000 in upgrades immediately after purchasing MI BARUR. Notwithstanding the fact that Medina later suggested that Mr. Farell obtain an updated survey (in the fall of 2007), no representative of NHIC ever requested any further information regarding the value of MI BARUR, a further survey, or further details regarding the cost of MI BARUR. See the Medina Declaration, paragraph 12, Exhibit A-13 attached hereto and
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-12-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 13 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

incorporated herein by reference. 30. Medina also accurately disclosed the anticipated trading patterns of MI BARUR. Indeed, he not only disclosed these patterns, but additional premiums were charged and the deductible was increased to allow MI BARUR to travel as far south as Acapulco, Mexico. First, both the application and the yacht questionnaire described the location of where MI BARUR was moored as "San Diego/Acapulco." Second, the Weather Plan showed MI BARUR would travel in the La Paz area as well. During the years NHIC insured MI BARUR, she actually traveled within the areas identified in the application and the Weather Plan. See Exhibit A-24 attached hereto and incorporated herein by reference. At the time that MI BARUR was purchased, and her extensive outfitting was completed (i.e. when the application was prepared), MI BARUR was in San Diego. It would, in fact, have been an omission, if not a misrepresentation, not to list San Diego on the document. Third, because Mr. Farell had always used a San Diego based yacht broker to buy and sell his yachts and had always had major repairs performed on his vessels by top boat yards in San Diego, this was a necessary disclosure given the probable future use and mooring of MI BARUR in these waters. 31. Medina was well aware, at the time of making these submissions, that it was very common for yachts to remain in Mexico for the entire year and that this was not an issue that was of any concern to any insurer he worked with, including NHIC. See the Medina Declaration, Paragraph 9, Exhibit A-13 to Supplemental Proof of Loss. Indeed, for the initial policy year, and each year thereafter, MI BARUR trading warranty was adopted pursuant to the navigation endorsement (Endorsement No. 1) specifically to allow the MI BARUR to travel to as far south as Acapulco, in exchange for an additional premium and an increase deductible. See Exhibit A-29 attached hereto and incorporated herein by reference. If NHIC believed that its risk would be materially increased if the yacht operated out of the United States for an extended period of time, the Policy obviously could have included a limit on the time the MI
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-13-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 14 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

BARUR could remain in Mexico. Nowhere in the Policy is MI BARUR required to return to U.S. waters for any period of time. Indeed, it is not uncommon for insurers that do want a vessel to return to a specific location to so mandate in the trading warranty or elsewhere in the Policy. See the Medina Declaration, Paragraph 10, Exhibit A-13 to Supplemental Proof of Loss. 32. Approximately a year before the loss in question, Mr. Farell decided that he was going to sell the MI BARUR and purchase a smaller yacht. The MI BARUR had always been used as a center of family life and relaxation, and given that both of Mr. and Mrs. Farell's daughters were leaving Mexico to study in the United States, the Farells felt that the 92-foot Hatteras was simply too large for the couple at this stage in their lives. 33. Mr. Farell was willing to take the time needed to get a reasonable price and was never an anxious seller. However, he was flexible in price when the market suggested a reduced asking price and he had the financial ability to reduce his price with ease. For example, while the boat was originally offered for $2.7 million, the price was later lowered to $2.2 million at the suggestion of Mr. Farell. See the Hallmark Declaration, paragraph 1, Exhibit A-11 attached hereto and incorporated herein by reference. Mr. Farell was not in anyway desperate for money. Mr. Farell rejected multiple offers on the MI BARUR; two that Mr. Hallmark was aware of, one for $1.6 million cash and one for $1.85 million (including a home trade), and a third made directly to Mr. Farell for $1,000,000 and a 75' Italian yacht. See the Hallmark Declaration, Paragraph 11, Exhibit A-11 attached hereto and incorporated herein by reference. 34. In July 2007, Mr. Farell strongly considered moving MI BARUR to Florida to experience a different cruising ground and a better yacht market. According to one of Hallmark's competitors (Merrill-Stevens Yachts), Florida was a better market for a yacht the size of MI BARUR. All of this information was conveyed to NHIC and the 2007-2008 renewal was set to have revised trading
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-14-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 15 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

restrictions accordingly. Merrill-Sevens also produced a $200,000 deposit and an offer for the yacht at $1,750,000. Ultimately before the renewal date, it was decided not to take the boat to Florida and to keep the boat in waters from San Diego to Acapulco. Consequently, the Policy renewed with the original trading warranty. Also, during the time prior to the 2007 renewal, Mr. Farell was considering bringing the boat back to San Diego and Hallmark had even made inquiries on arranging for a slip for the boat on Shelter Island in San Diego. See the Hallmark Declaration, Paragraph 12. 35. The Agreed Value for the 2007-2008 policy of $1.9 million was not based on any request or representation by the Insureds, but was based on independent research by MGA's underwriter, Michael Terrier. See the Declaration of Henry Medina, Paragraph 13 and the e-mail from Terrier to Medina of August 28, 2007, Exhibit A-30 attached hereto and incorporated herein by reference. 36. Ultimately, with the boat remaining in LaPaz (and possibly being brought back to San Diego for sale), Medina requested the Policy be renewed with the same trading warranty; "a San Diego, La Paz, Acapulco vessel." See Medina's e-mail to Michael Terrier of September 20, 2007, Exhibit A-31 attached hereto and incorporated herein by reference. All of the previously disclosed facts remained true and accurate and no additional information was requested by NHIC. The only material change in the coverage was as a result of Mr. Terrier's unilateral new valuation and the need to write the boat under the Yacht, rather than the Executive Yacht form. See the September 23, 2007 Declaration Page referencing new policy form BJP 2191-A (8/06), Exhibit A-32 attached hereto and incorporated herein by reference. According to NHIC, these changes in policy language, as distinct from the changes in policy limits, were reversed and the Executive Yacht Policy form used again pursuant to Endorsement 9 of the September 2007 renewal. At the time of the issuance of the Policy, Mr. Farell had been an insured with NHIC for three loss free years and had paid premiums of over $70,000.
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-15-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 16 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

37.

As of the date of the loss (October 20, 2007), Captain Rello had worked

for the Farells for over ten years as the full-time Captain of MI BARUR and prior yachts owned by the Farells. Captain Rello is a graduate of the Mexican Naval Academy, has excellent credentials and has no criminal record. Captain Rello was, at all times, well compensated and well liked by the Farells, and happily employed with no complaints about his employer. Captain Rello was an admitted smoker, but did not smoke in the lower enclosed cabins on the MI BARUR. No evidence exists that would demonstrate any reason why Captain Rello would intentionally set fire to MI BARUR. Moreover, he has passed a polygraph test demonstrating he was telling the truth when he told Murphy he did not commit arson. 38. On October 20, 2007, the vessel lay at her normal dock at the Marina Palmira in LaPaz, Baja Sur, Mexico. The marina is located in a major metropolitan area and is well served by police and fire services. The fire was first reported at approximately 9:30 a.m. The MI BARUR was moored on the starboard side, facing north at slips 201 and 203 located at the east end of dock No. 2. No one was on board the motor yacht at the time the fire was reported. Captain Rello had left MI BARUR approximately one hour before the fire was reported. 39. Multiple calls were received by witnesses within the marina, who observed white or light grey smoke emanating from the forward, starboard side, of MI BARUR. Two of the witnesses, Francisco Robles and Alfredo Amador, were working on adjacent vessels towards the middle of dock No. 2 and observed the early stages of the fire. Both men ran to the yacht, disconnected the shore-power, and boarded MI BARUR. They entered through the galley passageway door located amid-ships, main deck level, at the starboard (right) side of MI BARUR, and observed a smoke layer banking down from the overhead to about three-to-four feet off the galley deck. All smoke was observed light grey in color and emanating from the companion way stairs leading down to the forward crew's quarters and VIP stateroom. Robles was able to get some three steps down the stairs before he was driven back by the smoke. There
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-16-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 17 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

was very little heat and he felt that he could have gone down further if it was not for the smoke. 40. When he returned to the marina, Captain Rello got some help and moved MI BARUR from its original moored position at the west end dock No. 2 to north side of dock No. 7, on the interior east side of the marina breakwater. MI BARUR was moved so that other vessels would not be harmed by the fire and to provide better access for fire suppression equipment. Local firefighters arrived on the scene and observed heavy flames emanating from the galley door and salon. Firefighters began suppression operations, but were driven off MI BARUR by the intensity of the fire that had developed by that time. Firefighters then re-directed their efforts to the exterior of MI BARUR. Suppression effort and pumping of large quantities of water aboard the yacht continued until approximately 2:00 p.m., when the fire was thought to be completely extinguished. The MI BARUR and all contents sustained a total fire loss. The following morning a "re-kindle" occurred on MI BARUR and MI BARUR was taken outside the breakwater, where she burned to the water line and sank in shallow water. MI BARUR was submerged for days prior to being raised and taken to a local marine facility at Abaroa's shipyard, where she was placed in the ways for inspection. 41. Counter-Claimants fully cooperated with the NHIC investigation following the Loss. At the express direction of NHIC and their marine surveyor Todd Schwede, the Farells turned over to NHIC the task of raising and salvaging MI BARUR from the marina floor. The Farells spent in excess of $60,000 of their own money for sue and labor expenses for materials, equipment and labor used by NHIC in its salvage and on-scene survey of the loss but NHIC controlled the operation. See the Letter of November 5, 2007 from Schwede to Mr. Farell, Exhibit A-33 attached hereto and incorporated herein by reference. Furthermore, Mr. Farell not only submitted a detailed Statement of Loss and provided releases for all of the files maintained by his insurance broker and both of his yacht brokers, he, his Captain, and
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-17-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 18 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Hallmark all submitted to lengthy videotaped examinations under oath by counsel for NHIC. The Policy required that the Insureds provide NHIC with only a sworn statement not a videotaped examination under oath by counsel for NHIC. 42. Although the fire should have been investigated, at least initially, while MI BARUR remained undisturbed and in the water, NHIC decided to take upon itself the task of salvaging the wreck and removing it to dry land to conduct their investigation. NHIC had a duty to carry out the raising of the vessel and salvage in a reasonably prudent fashion, NHIC's agents carelessly and negligently carried out said rasing of the vessel and salvage. As a result, much evidence of how the fire was started was lost or destroyed before the fire investigator for NHIC even began his investigation. For example, NHIC's agents' haphazard use of grappling hooks and other devices to pull wreckage from the hull of the MI BARUR, destroyed critical cause and origin evidence. Mr. Farell indeed wrote to Mr. Schwede about this very issue following the loss. See Mr. Farell's letter of October 24, 2007, Exhibit A-34 attached hereto and incorporated herein by reference. In addition to this negligent salvage operation, NHIC's fire investigators failed to follow proper fire investigation procedure. Competent and skilled fire investigators are supposed to comply with the requirements of the National Fire Protection Association ("NFPA") publication entitled NFPA 921: Guide for Fire and Explosion Investigations. NHIC repeatedly failed to follow proper fire investigation procedure throughout their investigation. A true and correct copy of Mr. Lyson's peer review report is attached as Exhibit A-42 attached hereto and incorporated herein by reference. Further, after NHIC's raised the hull, it was left un-supervised and exposed to theft and tampering for over a week before NHIC's fire investigator Murphy returned to complete his cause and origin inspection and investigation. See letter to Todd Schwede from Mr. Farell dated November 5, 2007, Exhibit A-35 attached hereto and incorporated herein by reference. Finally, when Murphy did begin his inspection, his de-layering of the fire debris and removal of equipment was sloppy and haphazard; Items being removed, for
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-18-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 19 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

example, from the Captain's Cabin area and piled on other important areas, such as the Crew Lounge. Other debris was piled ashore, again unprotected. 43. In addition to this negligent salvage and the negligent fire investigation, both Schwede and Murphy had preconceived agenda to prove that the fire had been intentionally set, rather than conducting an objective investigation (Schwede actually asked various people, before any investigation had been carried out, if Captain Rello had set fire to the MI BARUR). An oral statement made by Schwede to broker Medina sums up best the approach taken by the NHIC team, "NEW POLICY, LESS THAN 30 DAYS OLD, TOTAL LOSS, MEXICAN, HE DID IT." See the March 7, 2008, pre-denial e-mail from Mr. Medina to Mr. Robb, Exhibit A-36 attached hereto and incorporated herein by reference and the Medina Declaration, Paragraph 14. 44. Murphy's conclusion that the fire started in the Captain's Cabin was patently wrong. His conclusion that the fire was started by an arsonist was also patently wrong. Counter-Claimants do not currently know the full relationship between Murphy and NHIC/AIG. Counter-Claimants understand he has been hired on several occasions by NHIC to investigate fires and has received significant fees from NHIC. Counter-Claimants understand that Murphy's wife is an insurance claims adjuster. Counter-Claimants also understand he was attending a marine surveyor's conference in San Diego at the time of the fire and was asked by Todd Schwede and NHIC to participate in the investigation of this fire. While on the scene Murphy let slip to Captain Rello that the evidence demonstrated that the fire was started by an electrical short in a refrigeration motor. However, in his report he concluded that the fire began in the "Captain's Cabin" (a cabin that Captain Rello did not use), and that "the Form of Ignition was (caused) by incendiary (intentional arson) human action." 45. Murphy's report has overtones of racial prejudice throughout. For example, Murphy states that Captain Rello was the last person aboard MI BARUR. He also states that the boat was unlocked (i.e. accessible to anyone within the marina
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-19-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 20 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

complex, which houses hundreds of boats and is accessible not only by their owners, but their crews, guests, repair personnel, marine workers etc). He then implies that the Counter-Claimants and the marina management were involved in a conspiracy to hide the identity of the arsonist stating that the "identification of the arsonist could be proven by the introduction and/or release of the marina surveillance video recordings." The truth is that the video camera on that dock does not come close to visualizing the area where MI BARUR was docked at the time of the fire. All it visualizes is a small area around the gate. Ironically, Murphy made an appointment to see the video room at the marina and meet with the security personnel, including the technician in charge of the video surveillance system, but he never showed up. Further, if Murphy had requested the video earlier, he would have been given a copy of whatever film there was prior to the fire. Unfortunately, Murphy waited until the video had automatically recycled. 46. Despite coming to the conclusion that the fire was caused by arson, Murphy found: (1) no specific evidence of incendiary origin; (2) no evidence of any timing device that would explain how Captain Rello could set the fire over an hour before any smoke was noted by persons on the crowded dock; and (3) no evidence of motive or any of the arson indicators that would implicate Captain Rello or Mr. Farell. See also the email from attorney Robb to Mr. Medina dated March 7, 2008, wherein even he notes in relation to the Murphy report that "I . . . did not see where he has concluded that Captain Rello started the fire." Exhibit A-37 attached hereto and incorporated herein by reference. 47. Donald Perkins of Fire Cause Analysis, Berkeley, California, has conducted an investigation of the Loss at the request of the Counter-Claimants. Perkins is a retired Captain from the San Jose, California Fire Department. He has extensive fire and arson investigation experience and was the Arson Unit Supervisor/Investigator for that Department for four years. See a copy of Perkins resume, Exhibit A-38 attached hereto and incorporated herein by reference.
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-20-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 21 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Accompanying Perkins to La Paz was Ron Kilgore of Kilgore Engineering, Inc., and Bill Engstrom, a marine surveyor. Following his investigation, Perkins prepared a Fire Investigation Report in conformance with NFPA 921, Exhibit A-39 attached hereto and incorporated herein by reference. To insure that the Perkins Report met the highest standards of NFPA 921, the Insureds had the Perkins Report peer reviewed by Dr. John Dehaan. Dr. Dehaan is one of the foremost authorities on fire science in the nation. 48. Although Perkins is continuing his investigation at the time this CounterA. Based on an objective analysis of the fire patterns, the fire originated in the Crews Lounge located on the lower level on the port side amidship. The fire then spread down the companion way and up the stairs and out the starboard side galley door. Murphy never even inspected this area, but rather buried it under the debris he had removed from the Captain's Cabin. B. The fire was probably caused by an undetermined electrical ignition source high within the forward bulkhead/overhead in the Crews Lounge compartment. Given the manner in which NHIC's agents destroyed the evidence at the fire scene; the severe burning of the electrical conductors and components and their degradation from salt water submergence, it is now impossible to identify the specific ignition source. C. The fire did not reach the Captain's Cabin on the starboard side of MI BARUR until MI BARUR was well engulfed in fire, many minutes after ignition. Proof of this point can be found in the fact that the carpet and lower areas of the doors, bunk etc., suffered no fire damage at all due to the fact that they were submerged in water from on-going fire suppression efforts before the fire reached this
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

Claim is filed, he has reached the following conclusions:

-21-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 22 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

compartment. Had the fire originated in this area, or even reached this area before the fire suppression water, the carpet would necessarily been burned (just as it was in the crew's lounge and cabin on the starboard side of the boat). D. The cause of the fire was not arson. Pursuant to NFPA investigative criteria, and specifically NFPA 921, the cause of this fire must be ruled "undetermined." As discussed below in relation to his critique of Murphy's report, Perkins found no information or data that would support a conclusion of arson. See a complete copy of Perkins May 9, 2008 report, Exhibit A-39 attached hereto and incorporated herein by reference. E. Mr. Perkins has determined that there is a "vehicle history" of electrical fires on similar Hatteras yachts, including an electrical fire in the crew's quarters on a Hatteras 105 built just several years after the MI BARUR. 49. In addition to the Perkins team, Counter-Claimants contacted and retained a highly renowned Mexican fire investigator, Mario Saldana Nolasco. Mr. Nolasco examined the remains of MI BARUR in the presence of Perkins. Mr. Nolasco reached the following conclusions: A. B. C. D. E. The point of origin was not the Captain's Cabin. The point of origin was not the Crew's Cabin. The point of origin was the crew's "dinning area" (i.e. Crew's Lounge). The fire was not intentionally set. While the probable cause was electrical in nature, the fire must be deemed of an "unknown" cause. See the report of Mr. Nolasco, Exhibit A-40 attached hereto and incorporated herein by reference. 50. In addition to retaining Mr. Perkins to complete his independent fire
CASE NO. . 08 CV 0443 BEN POR

FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT

-22-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 23 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

cause and origin investigation, Counter-Claimants asked Mr. Hal Lyson, another nationally renowned fire investigator, to complete, in his words, an "evaluation of the Maze fire investigation report." In response to this request, Counter-Claimants received, and submit herewith as Exhibit A-42 attached hereto and incorporated herein by reference, Mr. Lyson's report of May 20, 2008. As indicated by way of introduction, Mr. Lyson is highly critical of the methodology of the Maze investigation and its conclusions. The report concludes that: A. Mr. Murphy violated NFPA 921, section 28.3.5.11, when he "failed to examine MI BARUR while it was partially submerged" and failed to use "qualified people" to complete the "recovery and documentation," and as a consequence, "allowed for the likely destruction of evidence." B. Mr. Murphy ignored industry standards and NFPA 921 and did not thoroughly identify and interview witnesses. As such, he missed valuable information, such as the fact that the smoke and heat of the early stages of this fire simply do not match his conclusions. C. Mr. Murphy relied on "empirical data" that the electrical system was in proper working order, and ignored NFPA 921 sections 24.2.1-2 when he concluded that there had been no previous problems with the electrical system. Mr. Lyson notes that "NFPA 921 states that a vehicle and appliance history needs to be obtained" and notes that Mr. Murphy failed to do so. Ironically, Mr. Lyson was not even aware of the history of Hatteras electrical fires when he reached these conclusions. D. Mr. Murphy has identified the cause as "incendiary" with open flame, but ignores the fact that while it took over an hour for this fire to be noticed, a fire of the type identified in his report would "flash over" to "full room involvement" very rapidly, "within
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-23-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 24 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

minutes." E. Mr. Murphy concluded that the fire started in a mattress that would "flow like an ignitable liquid and burn on the floor," and yet failed to notice that the carpet in the captain's cabin was not burned. F. Mr. Murphy violated NFPA 921, section 22.3, when he improperly considered evidence "not directly related to the fire or explosion cause," such as the removal of personal items from the boat. G. Mr. Murphy ignored the recommendations of NFPA chapters 11 and 16 when he failed to label and identify the evidence and MI BARUR contents as he removed material from MI BARUR. H. Mr. Murphy violated NFPA 921 chapter 17 when he failed to complete "arc mapping" and wiring and circuit tracing (and probably could not even do so with the destruction of this critical evidence). I. Mr. Murphy incorrectly and indiscriminately relied on NFPA 921 section 18.2, "Process of Elimination," in a fire where NFPA specifically states that it could not be used. J. Mr. Murphy violated NFPA 921 section 4.3.7 when he formed the arson hypothesis at least eight days before he even conducted his examination of MI BARUR. K. Mr. Murphy ignored the clear requirements of NFPA 921, Chapter 4, when he failed to identify the cause of this fire as "undetermined." NHIC has been advised of these findings. Given the major faults in the Maze investigation and conclusions, it is a violation of the implied of covenant of good faith and fair dealing for it to have relied on Mr. Murphy's report as a basis of the denial of this claim. 51. NHIC's entire claim of arson is implicitly based upon the assumption that
CASE NO. . 08 CV 0443 BEN POR

FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT

-24-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 25 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Captain Rello intentionally set MI BARUR on fire (an assumption that does not even appear to be shared by NHIC's counsel, Mr. Geoffrey Robb; "I . . . did not see where he [Mr. Murphy] has concluded that Captain Rello started the fire." Exhibit A-37 attached hereto and incorporated herein by reference). None of the Insureds were present in La Paz on the day of the fire and the only crewmember in La Paz was Captain Rello. Murphy implicitly claims in his report that Captain Rello was lying when he said he did not set fire to the yacht. According to Perkins, while he served as Chief of Arson Investigation for the City of San Jose, it was customary to give polygraph tests to arson suspects if the suspect was willing to take the test. Further, Perkins routinely would rely upon the results of the polygraph tests in forming his opinions concerning the cause of a fire. Consequently, the Insureds arranged to have Captain Rello undergo a polygraph exam on the issues of arson and smoking in the lower level of the yacht (Captain's Cabin and Lounge). During the exam Captain Rello was found to be telling the truth when he said he did not commit arson and did not smoke in the lower level of the yacht on the day of the fire. A true and correct copy of an English translation of the report of the May 7, 2008 polygraph exam is attached as Exhibit A-41 attached hereto and incorporated herein by reference. 52. NHIC Policy No. YM 868-56-66, effective date from 09/23/2007 to 09/23/2008, lists as the named insured Mi Barur, Inc. The Policy provides hull (Agreed Value) coverage of $ 1,900,000 subject to a 2% deductible of $38,000 and a premium of $14,060. The insured vessel, "Mi Barur," is described as a 92 foot Hatteras, built in 1990. Although the Declaration Page of the Policy references NHIC Yacht Policy standard form [Form BJB 2191-A (8/06)], Endorsement # 9, entitled "POLICY JACKET REFERENCE" states that the reference to Form BJB 2191-A (8/06) "is deleted in its entirety and replaced by form 95613 (9/07)", the Executive Yacht Policy form. That form in conjunction with the declaration Page and other endorsements (the "Policy") provides hull, protection and indemnity, medical and other incidental coverage per standard conditions.
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-25-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 26 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

53.

The insuring language for the hull coverage provides standard "all risk"

coverage and states in relevant part: GENERAL CONDITIONS AND EXCLUSIONS 1. GENERAL CONDITIONS ... SECTION "A" - HULL INSURANCE 1. WHAT WE INSURE: A. Physical Loss to Your Yacht: We shall pay for direct physical loss to your yacht arising out of all perils unless otherwise excluded herein. Those items "otherwise excluded," as set forth on page seven of the Policy, include the following (the only exclusions even allegedly applicable to this loss): 10. CAUSES OF LOSS THAT ARE NOT COVERED: ... B. (1) We shall not cover any loss or damage arising out of: Intentional Acts: Any intentional misuse or misconduct, criminal, willful or malicious act or lack of reasonable care or due diligence, in the operation or maintenance of your yacht, tender or trailer; ... (5) Any willful misconduct, criminal, or dishonest act by an insured, your employees, or any person to whom you entrust your yacht; 54. Part J of the GENERAL CONDITIONS, entitled CONCEALMENT Any relevant coverage(s) shall be voided if you intentionally conceal or
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

OR MISREPRESENTATION, also provides:

-26-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 27 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

misrepresent any material fact or circumstance relating to this insurance, or your insurance application, whether before or after a loss. 55. The GENERAL CONDITIONS, Part D, Entitled WHAT YOU MUST DO IN THE EVENT OF A LOSS, also imposes certain affirmative duties on the insured to give notice of any loss and provides, in relevant part, that: If you have a loss or claim that you think might be covered under this policy, you must do the following: ... (4) If your yacht or other property covered by this policy is damaged, you must take all lawful and reasonable steps to protect your yacht or other property from further damage. We will reimburse you for the reasonable expenses of protecting the property, not including your personal labor. These payments for protecting the damaged property shall be made in addition to any other payments we make for losses covered by this policy. 56. 57. Nowhere does the Policy impose a similar duty on NHIC to take such Thereafter, in GENERAL CONDITION Part E, entitled WHEN WE We shall pay for losses covered under this policy within thirty (30) days after we receive proof of loss or other requested documentation that is satisfactory to us. 58. As set forth above, the policy is an "Agreed Value" policy and pursuant "(2) Agreed Hull Value means the value agreed to by you and by us on your insured yacht as shown on the declarations." 59. Finally: (29) You and your means: (A) The person or organization named as the insured on the
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

steps to protect the yacht. SHALL PAY FOR LOSSES, the policy provides that:

to the policy definitions:

-27-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 28 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

enclosed Declarations; ... (C) Anyone else operating the insured vessel with the prior express permission of the named insured, as long as the actual use is within the scope of such permission and for private pleasure use only; or (D) A captain or crew member who works on your yacht .... 60. In addition to these standard policy terms, The Policy was also subject to certain endorsements that are relevant to this loss. Endorsement No. 1, entitled NAVIGATION ENDORSEMENT, for example, provides as follows: In consideration for premiums charged $1050. The navigation warranty of this policy is amended to include Navigation of Coastal Waters and waters tributary thereto, of the Pacific Ocean and Acapulco as far south as 16 Degrees 30 Minutes North Latitude. It is agreed and understood a 2% deductible shall apply while the named vessel is outside US waters. Endorsement No. 2, entitled GENERAL ENDORSEMENT, provides in relevant part that: The following changes shall apply to this policy. It is agreed and understood that MI BARUR named in this policy shall be subject to a 3% Named Windstorm deductible. This deductible shall apply any time MI BARUR is south of Rio Santo Tomas, MX, during the period of 6/3011/1. 61. Putting aside the NHIC's allegations of non-disclosure, misrepresentation and out-right fraud (or arson), this fire loss would otherwise be covered by the Policy. The Policy under Section A ("HULL INSURANCE"), sub-section 1, provides that NHIC will pay for the "direct physical loss" of MI BARUR "arising out of all perils unless otherwise excluded . . . ." The Policy also covers Mr. Farell's personal effects
FIRST AMENDED COUNTER-CLAIM FOR BREACH OF INSURANCE CONTRACT CASE NO. . 08 CV 0443 BEN POR

-28-

Case 3:08-cv-00443-BEN-POR

Document 21

Filed 08/04/2008

Page 29 of 49

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

lost as a result of these same "perils" and his Sue & Labor expenses. 62. Unless Mr. Farell failed to disclose or misrepresented material facts, or the loss is "otherwise excluded," NHIC should have paid Mr. Farell the Agreed Value of the MI BARUR, $1.9 million, within thirty (30) days of his submission of his proof of loss, and should have paid his timely claims for lost personal effects and other covered losses. 63. Paragraphs 13 though 17 of NHIC's Complaint set forth the alleged failures to disclose and/or misrepresentations underlying its basis for the denial of this otherwise covered claim. The first such allegation, set forth in paragraph 13, states in relevant part, that: (1) the Mi Barur was represented to be "a U.S. Company seeking to insure ... a U.S. documented vessel." Paragraph 13 continues with the allegation that: "the undisclosed risk ... was that Mi Barur, Inc, was a `shell' company set up by a Mexican resident to circumvent U.S. law regarding vessel documentation." 64. Both of these allegations fail in the face of the above outlined evidence. First, the truth was and is that Mi Barur, Inc. was "a U.S. Company" (actually a Delaware Corporation) "seeking to insure ... a U.S. documented vessel." Second, the fact that Mi Barur, Inc. was a "shell" company, presumably a reference to a single vessel holding company, was openly disclosed and fully known to NHIC when it chose to insure this risk. As set forth in the Declarations of Henry Medina and Paul Trusso (and will be easily shown at trial), the use of single vessel corporations (typically, as here, sharing the name of MI BARUR) is extremely common in the maritime industry and something that NHIC deals with all the time. What else could NHIC's experienced underwriters Chris Clark and Michael Terrier think a company named after the yacht that was warranted for private pleasure use only could have been formed for? Third, federal statutes expressly allow U.S. flag pleasure yachts (as compared to commercial vessels) to be owned entirely by non-U.S. citizens, including,