Cradock International Inc (Cradock) was formed to purchase a coastal transport vessel to transport oil and other liquids along the coast of Peru. Cradock, a Panamanian corporation, had two stockholders: Manuel Cabada Celorrio (Cabada) and Milan Orlic (Orlic). Cradock purchased the M/V Scotia Seahorse from Marinsa Miami Company (Marinsa), a marine equipment supplier. Cabada and Orlic were also shareholders in a Peruvian company called Pesquera Malla SA (PMSA). PMSA operated a fleet of sardine fishing boats. Cabada testified that the plan to purchase a coastal transport vessel solidified when PMSA decided to purchase a fish meal processing plant, which PMSA wanted to transport from Carupano, Venezuela to Pisco, Peru.

In early September 1989, the Scotia Seahorse left Mississippi, USA for Venezuela. The ship encountered a number of technical problems on the way but, nevertheless, arrived safely at Carupano on 15 or 16 September 1980. There, workers began loading PMSA’s fish meal processing plant onto the ship. Many pieces of equipment were so large that a crane was required to load them. The port is an open port without levies or seawalls. At the time of loading, the effects of Hurricane Hugo were being felt in Carupano. Swells created by the hurricane caused the ship to bang against the dock, and steel lines mooring the ship began to break. Eventually the ship was unmoored and put to sea for a day or so to avoid damage to the vessel and the dock.

On 24 September 1989, the ship left Carupano. Some 12 hours later, the main engines of the ship came to a dead stop. Acetylene tanks on the deck had become unsecured and as the crew attempted to secure them, the ship began to list. The crew attempted to pump water from the bilge but the pump only worked intermittently. Around 9.15 am on 25 September 1989, the ship rolled over and sank to the bottom of the sea. Fortunately, all the crew were rescued.

Although this was not normally a service provided by Marinsa, a representative of the company contacted WKP Wilson & Son Inc (Wilson), an insurance broker in Mobile, Alabama. Wilson arranged a USD 350,000 hull and machinery policy with various Lloyd's of London underwriters and a USD 1 million protection and indemnity (P&I) policy with West of England Ship Owners Mutual Insurance Association's fixed premium facility. Wilson arranged to add PMSA as an additional assured on both the hull and machinery and P&I policies.

PMSA did not obtain first party cargo insurance for the fish meal processing plant before the ship sank. When the ship sank, the outstanding unearned premium on Cradock’s P&I policy was approximately USD 39,000. The hull and machinery policy contained a clause under which the full annual premium was deemed due in the event of a total loss. Thus Cradock was required to pay the full annual premium before the underwriters would consider its claim.

As a cost saving measure, Frank Hall (an account executive at Wilson) suggested that the P&I policy could be cancelled retroactively as of the date of the sinking because he had been informed that no crew members had made any claims and they would not have to move the ship because it was in deep waters. Cradock foresaw no claims against the P&I policy. This cancellation was arranged with West on the condition that Cradock stipulate that there would be no claims against the P&I policy. Hall insisted that there was no indication that at the time the P&I policy was cancelled, there might be a third party cargo liability claim by PMSA against Cradock. In January 1990, PMSA made a formal claim on Cradock and on 15 August 1990 filed a lawsuit against Cradock in Peru. Hall suggested that if Cradock paid a reinstatement premium of USD 39,000 there was a good chance that the underwriters would reinstate the cancelled P&I cover. A year later Cradock remitted the premium. By that time, West had abandoned the underwriting function of its fixed premium facility and was unwilling to reinstate the policy when Cradock remitted the premium to Wilson.

The District Court found that Wilson negligently arranged for PMSA to be added as an additional assured on both Cradock’s hull and machinery and P&I policies, although it had only been asked to add PMSA as an assured on the hull and machinery policy. The District Court also found that Wilson had breached its duty by cancelling the P&I policy without adequately consulting the assureds about the terms of the cancellation. However, the District Court concluded that this breach was not the proximate cause of any damage to the plaintiffs.

The District Court awarded PMSA and Cradock USD 1 million, the coverage which the District Court concluded that Cradock would have had under the policy, but for Wilson’s breach of duty. Wilson appealed, challenging the amount of the award, and claiming that Cradock’s coverage under the P&I policy was subject to a limitation of liability clause in the bill of lading which in turn would have limited West’s indemnity obligation.

Held: The judgment of the District Court is affirmed as modified, the damage award is vacated, and the cause is remanded for the District Court to make comparative negligence findings and to render a judgment not inconsistent with the Court of Appeals opinion.

A reasonable and consistent reading of the P&I policy as a whole is that it insures Cradock for Cradock’s third-party liability for the loss of another person’s cargo, including PMSA's. As the marginal note indicates, the exclusion applies to the 'Assured’s own cargo'. Even if PMSA’s cargo had been covered by first-party cargo insurance, that would not have insulated Cradock from its liability for the loss; PMSA's first-party cargo insurer would have had subrogation rights against Cradock.

The term 'assured' in the Assured’s Own Cargo clause should be construed to mean the party asserting coverage under the policy. Accordingly, each assured would have liability coverage for the loss of another’s cargo, including another assured, but would not have coverage for the loss of its own cargo.

The cancellation of the policy was a cause of PMSA's and Cradock's damages. However, adding PMSA as an additional assured was not prejudicial. Therefore, it is not necessary to examine the issues raised by Wilson challenging the District Court's determination that Wilson was negligent in adding PMSA as an additional assured on the P&I policy.

The District Court also noted that Cradock 'did not exercise due diligence to ensure that the vessel was seaworthy prior to departure'. Wilson argued that the District Court should have reduced Cradock's recovery because of Cradock’s failure to exercise due diligence. However, there is no indication that the P&I policy would not have provided coverage if the loss resulted from the assured’s failure to exercise due diligence.

An insurance broker who negligently cancels liability coverage cannot claim a reduction of damages if the underlying loss was caused by an insured event, even if that event was caused by the assured's lack of due diligence. Thus, the District Court properly declined to reduce Cradock's and PMSA's damages to reflect any negligence that contributed to the sinking of the ship.

Cradock’s P&I policy contained a limitation-of-coverage clause that purported to limit the insurer’s indemnification obligation to USD 250 per customary freight unit. The District Court implicitly held that the 'customary freight unit' in this case was the entire shipment. Thus, the clause, if applicable, would limit Cradock’s liability to USD 250. The District Court, however, concluded that Wilson was prevented from invoking this limitation-of-coverage clause because PMSA had not been given a 'fair opportunity' to avoid the limitation under the Carriage of Goods by Sea Act (COGSA), 46 USC § 1300 ff. On appeal, Wilson reasserted the policy’s limitation of coverage and also attempted to rely on a limitation of liability clause in the bills of lading between PMSA and Cradock.

The bills of lading issued by Cradock to PMSA provided that any terms not stated explicitly in the bills of lading were governed by the Brussels Convention of 25 August 1924, commonly referred to as the Hague Rules. See Associated Metals & Minerals Corp v Alexander’s Unity MV (CMI1602). The bills of lading do not state a limit for the carrier’s (here, Cradock’s) liability. Under art 4.5 of the Hague Rules, however, the carrier’s liability is limited to GBP 100 per unit or package.

Wilson asserted for the first time on appeal that Cradock’s liability to PMSA was limited to GBP 100 under the Hague Rules, that West of England’s indemnification obligation in turn would have been so limited, and accordingly that Wilson’s liability should be limited as well.

Wilson forfeited this argument by failing to raise it in the Court below. Wilson also argued that it had no burden to raise this issue in the District Court because the limitation of liability clause was a matter that Cradock and PMSA were obligated to negate in the course of proving damages. However, a limitation of liability is, in general, a defensive matter that must be raised in the trial court by the party seeking to benefit from the limitation. Therefore, Wilson forfeited the argument that its liability is limited by the Hague Rules because it failed to raise this argument in the Court below.

Wilson also contended that the District Court should have given effect to cl 8(bb) of Cradock’s P&I policy, which represented an attempt to limit West’s indemnification obligation. The relevant paragraphs of the clause provided:

When cargo is carried by the vessel named herein under a bill of lading ... subject or made subject to the Carriage of Goods by Sea Act, April 16, 1936, liability hereunder shall be limited to such as is imposed by said Act, and if the Assured or the vessel named herein assumes any greater liability or obligation than the minimum liabilities and obligations imposed by said Act, such greater liability or obligation shall not be covered hereunder.

When cargo is carried by the vessel named herein under a ... bill of lading ... not subject or made subject to the Carriage of Goods by Sea Act, April 16, 1936, liability hereunder shall be limited to such as would exist if said ... bill of lading ... contained the following clauses: a clause limiting the Assured’s liability for total loss or damage to goods shipped to Two Hundred and Fifty Dollars per package, or in case of goods not shipped in packages, per customary freight unit.

The District Court declined to limit Wilson’s indemnification obligation under either of these paragraphs. Instead, it held that cl 8(bb) 'activated' COGSA, and that COGSA's judicially created fair opportunity doctrine barred Wilson’s reliance on the limitation, because Wilson failed to show that PMSA had been given a 'fair opportunity' to avoid the limitation. Wilson maintained that the District Court erroneously applied the fair opportunity doctrine to prevent Wilson from invoking the P&I policy’s limitation-of-coverage clause.

COGSA is the United States' 'statutory codification of the Hague Rules'. See Associated Metals & Minerals Corp v MV Alexander’s Unity (CMI1602). Under COGSA, a carrier’s liability is limited to USD 500 per package or, if the goods are not shipped in packages, per customary freight unit. US courts have given a common law gloss to COGSA, however, and required that before a carrier can benefit from COGSA’s limitation of liability or a contractual one, the cargo owner must be given a 'fair opportunity' to avoid the limitation

COGSA's fair opportunity doctrine does not overcome the P&I policy's limitation of coverage for two simple reasons: COGSA does not govern the contract between PMSA and Cradock by its own force or by agreement, and the insurance policy does not 'activate' COGSA.

The first para of cl 8(bb) applies only to contracts that are 'subject or made subject to' COGSA. COGSA governs 'contracts for carriage of goods by sea to or from ports of the United States in foreign trade'. The contracts between Cradock and PMSA did not involve or contemplate shipments to or from the United States; the bills of lading governed the transport of cargo from Venezuela to Peru. Accordingly, COGSA did not govern the underlying bills of lading by operation of law.

The bills of lading in this case specify that the Hague Rules should fill in any gaps in the contract. Paragraph 2 of the bills of lading states: 'Regarding whatever terms are not here stated explicitly[,] the Brussels Convention of August 25, 1924 shall apply in regard to certain clauses concerning the Bills of Lading.' Because the bills of lading are not 'subject or made subject to' COGSA, the first para of cl 8(bb) of the P&I policy does not apply.

The stated limitation of coverage, USD 250 per package or customary freight unit, provides yet another indication that the parties did not intend to import COGSA wholesale. As previously mentioned, USD 500 is the minimum limitation of liability per customary freight unit under COGSA.

Because COGSA does not apply to the underlying bills of lading, either by its own force or by contract, and because the P&I policy does not activate COGSA, COGSA's fair opportunity doctrine would not have prevented West from invoking the policy’s limitation of coverage provision. Accordingly, the District Court erred in awarding Cradock and PMSA the limits of the P&I policy.

The District Court’s finding that the plant was shipped on a lump-sum basis was not clearly erroneous when one looks to the bills of lading under which the plant was shipped. Each bill lists certain components of the plant, and then states a lump-sum freight charge at the bottom. The bills of lading in this case do not reflect the value of the goods shipped, nor do they give any other indication that the freight charge was based on the value of the goods.

Accordingly, the District Court’s finding that the cargo was shipped on a lump-sum basis and its implied finding that the entire shipment was the customary freight unit is affirmed.

Cradock would have been indemnified under the policy for only USD 250, when its lack of due diligence caused the loss of a USD 1.7 million fish meal processing plant. Cradock’s liability to PMSA may be limited as drastically, as Cradock’s coverage is limited. Although Wilson forfeited the right to rely on the Hague Rules limitation of liability provision in this suit, Cradock may yet be able to invoke that limitation as a defence in the lawsuit filed against it by PMSA in Peru. The unfortunate fact that PMSA may not be made whole is a result of its own failure to obtain first-party cargo insurance; under the unappealed findings of the District Court, PMSA’s lack of first-party insurance is not attributable to Wilson.