Archive for the ‘Admiralty & Energy’ Category

Ahoy! – “Wear and Tear” and “Manufacturing Defect” Exclusions in Yacht Insurance Policies Upheld in Recent Decisions From the First and Eleventh Circuits

Friday, May 16th, 2014

Both the First and Eleventh Circuit Courts of Appeals have recently rejected arguments seeking to limit the application of “wear and tear” and “manufacturing defect” exclusions in yacht insurance policies. In Miele v. Certain Underwriters at Lloyd’s of London, — Fed. Appx. —, 2014 WL 998184 (11th Cir. March 17, 2014), the insured’s 32-foot vessel sank while docked because water entered through what a surveyor concluded was a “degraded and rotten” air conditioning hose, which cause was not disputed.  Underwriters denied coverage under the insured’s yacht insurance policy based upon an exclusion for “losses or damages arising (whether incurred directly or indirectly) from … the costs of repairs or replacing any part of Your Boat by reason of wear and tear, gradual deterioration ….”  In the insured’s suit against Underwriters, the United States District Court for the Southern District of Florida granted summary judgment to Underwriters.

On appeal, the insured argued that the exclusion was ambiguous and should be limited to excluding only the cost of replacing the air conditioning hose and not the cost of replacing the entire boat if a part failed and caused a sinking.  The Eleventh Circuit disagreed, concluding that the exclusion was unambiguous and broader than the insured argued.  In its view, the exclusion applied to all damages arising from the need to replace a single part due to wear and tear.   The Eleventh Circuit agreed with the district court’s reasoning that a vessel is nothing but a sum of all its parts and that the exclusion bars coverage for any single part or collection of parts where the damages are caused by wear and tear of any part.  In the case at hand, “the need to replace one part due to wear and tear indirectly gave rise to a need to replace all parts.”  Unfortunately for the insured, the fact that the entire vessel was damaged made no difference in the application of the exclusion.

The issue before the First Circuit in Ardente v. Standard Fire Ins. Co., 744 F.3d 815 (March 12, 2014) was whether balsa wood – incorporated in installation holes in a yacht – were a “hidden flaw inherent in the material” within the meaning of the latent defect exception to a yacht insurance policy’s manufacturing defect exclusion.  The exclusion barred coverage for “loss or damage caused by or resulting from defects in manufacture, including defects in construction, workmanship and design other than latent defects.”  The term “latent defect” was defined as “a hidden flaw inherent in the material existing at the time of the original building of the yacht, which is not discoverable by ordinary observation or methods of testing.”

The insured’s yacht sustained water damage to the hull, which was traced to water seeping into balsa wood surrounding installation holes and then spreading throughout the hull.  Normally, the material surrounding installation holes is solid laminate, which is water proof.  But here, the installation holes were surrounded by balsa wood, which is not water proof.  The insurer denied coverage for the damage on the ground that it fell within the manufacturing defect exclusion.  In the insured’s suit against the insurer, the United States District Court for the District of Rhode Island granted summary judgment to the insured on its breach of contract claim.  Because, in the district court’s view, “inherent” meant something that was characteristic of the material and a “flaw” was the opposite, there could be no such thing as an inherent flaw.  Finding that the phrase “flaw inherent in the material” was ambiguous, the district court therefore interpreted “latent defect” to include the flawed use of unflawed material.  According to the district court, “The use of balsa wood in these areas was a flaw in the construction of the yacht, even if it was not a flaw in the underlying material itself.”  Thus, the use of balsa wood – which normally absorbs water – was such a flawed use and therefore within the exception to the exclusion.

While recognizing that the policy’s definition of “latent defect” was “not a model of precision” and redundant (in that it simultaneously used the terms hidden, not discoverable, and inherent), the First Circuit disagreed that the term was self-contradictory.  The First Circuit found that the district court failed to give the term its plain, everyday meaning: flaws in the material used to build the boat that were not noticeable.  It found further that the district court’s remedy of the purported ambiguity was improper.  Although a canon of policy interpretation is to avoid surplusage, or redundant terms, that rule should not be applied, the First Circuit cautioned, if it renders the policy ambiguous.  In this case, the district court effectively changed the language of the exception to require a “hidden flaw in the yacht,” rather than in the material. Yet this interpretation did not address the perceived redundancy, which the First Circuit suggested could have been more appropriately remedied by striking the word inherent.  Ultimately, applying the plain meaning of the exclusion, the First Circuit directed that summary judgment be entered in favor of the insurer.

Prevailing Party Fees are Not Recoverable in Cases Arising Under Admiralty Jurisdiction

Friday, March 22nd, 2013

Insurers with marine risks in Florida should be wary of an evolving conflict among Florida’s lower appellate courts regarding the applicability of Florida’s Offer of Judgment Statute (ch. 768.79) to claims governed by admiralty law. Compare Nicoll v. Magical Cruise Co., Ltd., No. 5D11-1039, 38 Fla. L. Weekly D624b, 2013 WL 1007679 (Fla. 5th DCA Mar. 15, 2013) with Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992).

In Nicoll, plaintiff Fay Nicoll slipped and fell aboard a cruise ship owned by Magical Cruise Company. During the course of litigation, Magical served an Offer of Judgment in accordance with Florida Statute 768.79. The statute allows a party in a civil action to serve an offer of judgment for a specific dollar amount. If rejected or not accepted within 30 days, the serving party is entitled to recover costs and attorney’s fees from the date of service if the serving party beats their offer of judgment by more than 25 percent. For defendants, this means obtaining a judgment of no liability or one that is 25 percent less than its offer; for plaintiffs, this means recovering a judgment for more than 25 percent of its offer.

Nicoll rejected Magical’s offer. Magical subsequently prevailed on a motion for summary judgment and moved for fees according to the statute. The trial court denied Magical’s motion for attorney’s fees and Florida’s Fifth District Court of Appeal affirmed. In so holding, the Court found that entitlement to attorney’s fees under Florida’s statute is a substantive right; thus, the Court must apply federal maritime law to substantive issues arising under admiralty jurisdiction. Under federal admiralty law, a prevailing party is generally not entitled to attorney’s fees, even when a state statute establishes entitlement to such fees. Thus, the Court rejected Magical’s claim for fees.

The opinion recognized a conflict with the Third District Court of Appeal’s decision in Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992). The Modesto Court found no conflict between Florida’s rules of law regarding offers of judgment and federal maritime law, stating the rules relating to offers of judgment are an integral part of the state’s management of its courts’ proceedings. The continued validity of Modesto was recently questioned by the Third District Court in Royal Caribbean Corp. v. Cox, No. 3D09-2712, 29 Fla. L. Weekly D2029, 2012 WL 3587008 (Fla. 3d DCA Aug. 22, 2012). However, Modesto remains good law in the Third District Court of Appeal and its conflict with the Fifth District’s decision in Nicoll remains.


If it Floats, it May Not be a Boat – the U.S. Supreme Court Clarifies the Definition of a Vessel

Wednesday, January 16th, 2013

Our readers in the marine insurance industry are sure to be paying attention to Lozman v. City of Riviera Beach, Florida, an opinion issued by the U.S. Supreme Court on Tuesday.   Charles Davant, an associate in our Fort Lauderdale office who advises marine insurers and litigates cases involving various maritime and admiralty issues, has provided an analysis of the case below.

The U.S. Supreme Court settled an important conflict between the Fifth and Eleventh Circuits this week, holding a floating home, incapable of propelling itself, was not a “vessel” within the meaning of the Rules of Construction Act, 1 U.S.C. § 3.  Lozman v. City of Riviera Beach, Florida, Case No. 11-626, 23 Fla. L. Weekly Fed. S556a.  We expect this decision will have an impact, not only on individuals and their floating homes, but also on businesses that use special purpose structures in construction and other industries.  We will keep you updated as lower courts begin to digest and interpret this important decision.

In 2002, Fane Lozman bought a floating home, which “contained a sitting room, bedroom, closet bathroom and kitchen, along with a stairway leading to a second level with office space.”  Id.  “An empty bilge space underneath the main floor kept it afloat.”  Id.  Mr. Lozman moved his vessel four times in seven years, ending up at a marina owned by the City of Riviera Beach, Fla.  Id.  After failing to pay dockage fees and damages for trespass, the city invoked admiralty jurisdiction and sought a maritime lien on the vessel pursuant to the Federal Maritime Lien Act, 46 U.S.C. § 31342.  The lower courts allowed the city to maintain the maritime lien finding the home was “capable” of movement over water and the owner’s intent was to remain moored at the city’s marina indefinitely.  Id.  The U.S. Supreme Court reversed.

In reaching its decision the Court considered the definition of a vessel within the Rules of Construction Act, to wit, that a vessel is “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.”  Id.  The Court focused on the phrase “capable of being used…as a means of transportation on water.”  Id.  It found it must apply the definition in a practical, as opposed to theoretical, way.  Id.  Disagreeing with the Eleventh Circuit’s broad interpretation of the definition, the Court found that not every floating structure is a vessel.  Id.

In the Court’s view, a structure such as Mr. Lozman’s does not fall within the statutory definition of a vessel (thereby invoking admiralty jurisdiction) “unless a reasonable observer, looking into the home’s physical characteristics and activities, would consider it designed to a practical degree for carrying people or things over water.”  Id.  The Court’s observations of the particulars of Mr. Lozman’s floating home illustrate its general criterion: it has no rudder or other steering mechanism, it’s hull was unraked, it had a rectangular bottom just 10 inches below the water, had no capacity to generate or store electricity, its rooms looked like nonmaritime living quarters, it was equipped with French doors and ordinary windows, and was not self-propelled.  Id.  Thus, in the Court’s opinion, the characteristics of the home could not “lead a reasonable observer to consider it designed to a practical degree for transportation on water.”

Mr. Lozman may now seek a return of the $25,000 bond the city posted when it arrested the vessel.

The opinion, authored by Justice Breyer, can be found here.

By Charles S. Davant

11th Circuit: Total Pollution Exclusion Bars Coverage for Carbon Monoxide Poisoning

Tuesday, September 11th, 2012

In Scottsdale Insurance Co. v. Pursley, Slip Copy, 2012 WL 3553405 (11th Cir. Aug. 20, 2012), the U.S. Court of Appeals for the 11th Circuit rejected an attempt to limit the application of a commercial general liability policy’s total pollution exclusion to traditional, environmental pollution.

In Scottsdale, Sheryl Simpson-Jones (Simpson-Jones) and her husband, Christopher Jones (Jones), hired Richard Pursley to repair their boat.  Pursley completed the repair, but neglected to cover the exhausts for the starboard engine after he was done.  After the Joneses retook possession of their boat, Jones turned on its generator to operate the boat’s air conditioner.  The generator and starboard engine shared a common exhaust vent, and carbon monoxide filled the boat’s cabin, kitchen, and sleeping quarters, where Jones had fallen asleep.  Jones died of carbon monoxide poisoning, and Simpson-Jones filed a wrongful death claim against Pursley.

Scottsdale had issued a commercial general liability policy to Pursley covering liabilities arising out of his mobile marine engine repair business.  The policy, however, contained a total pollution exclusion that precluded coverage for “‘bodily injury’ … which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.”  The policy defined “pollutants” to mean “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”  Scottsdale filed a declaratory judgment action against Simpson-Jones in Georgia federal district court.  The court, in granting Scottsdale’s motion for judgment on the pleadings, determined that the total pollution exclusion in Scottsdale’s policy precluded coverage for Jones’ death.  Simpson-Jones appealed, arguing that the district court’s application of the exclusion disregarded the historical purpose of the pollution exclusion to preclude coverage for traditional environmental pollution.  Rejecting Simpson-Jones’ argument, the 11th Circuit noted that the Georgia Supreme Court held in Reed v. Auto-Owners Insurance Co., 667 S.E.2d 90, 91 (Ga. 2008), that there was “no language in the policy supporting restricting application of the exclusion to traditional environmental pollution.”  Therefore, the 11th Circuit affirmed the district court’s grant of Scottsdale’s motion for judgment on the pleadings.

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