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Maritime Update: Failed Rescue Results in Insurance Battle

On December 24, 2014, the U.S. Eleventh Circuit Court of Appeals resolved an insurance coverage dispute between a shipbuilder and its comprehensive marine liability carrier and the professional liability insurer of a marine engineering firm in the case Atlantic Marine Florida, LLC v. Evanston Insurance Company.  This ruling offers guidance to marine engineering firms and their professional liability insurers who face demands for defense and indemnity.

A.   Parties and Coverages

In 1998, the engineering firm Guido Peria & Associates ("GPA") contracted with Delta Queen Steamboat Company ("Delta Queen") to prepare specifications and drawings for two passenger vessels, the CAPE MAY LIGHT and the CAPE COD LIGHT.  The vessel owner contracted with shipbuilder American Marine, Inc. ("AMI") to construct the vessels in accordance with GPA's drawings. 

AMI contracted with GPA to complete the design and engineering services called for by GPA's contract with Delta Queen.  The GPA/AMI contract required GPA to obtain insurance, including comprehensive general liability ("CGL") insurance and architect's and engineer's professional liability ("A&E") insurance.  GPA was the "named insured" in both policies, whereas AMI was designated as an "additional insured" only on the CGL policy.  GPA obtained an A&E policy from Evanston Insurance Company ("Evanston").

B.   Incident

The CAPE MAY LIGHT was christened in Alexandria, Virginia and six months later was berthed in Florida before an extended lay-up.  The ship's captain, Charles Beverly, and the port engineer were in the forward engine room.  At one end of the room was a watertight forward bulkhead door designed to shut automatically upon the loss of power.  The port engineer left the room to secure the port fueling station, leaving Captain Beverly to cut the ship's power and disconnect its battery terminals.  Captain Beverly became trapped in the forward bulkhead door in a position that prevented rescuers from accessing its emergency release mechanism, resulting in his death.

C.   State Court Suit

Beverly's personal representative filed wrongful death actions against the manufacturer of the watertight door, GPA and AMI in Florida state court alleging that the bulkhead door was designed and manufactured by Project and Construction Welding, Inc. and installed by AMI, and that GPA designed the CAPE MAY LIGHT and the bulkhead door system.

AMI demanded that GPA and Evanston defend it.  Evanston rejected AMI's demand and settled the claims against GPA for $300,000.  American Home, the CGL insurer of AMI, settled the claims against AMI for $325,000. 

D.   Subsequent Insurance Battle

Following the settlements, AMI and American Home filed suit in federal court against GPA's insurers for a declaration that the GPA's insurers had a duty to defend AMI and sought reimbursement of all defense costs and the $325,000 settlement.  Evanston sought contrary declarations that there was no coverage for AMI under the A&E policy and American Home couldn't recover under the A&E policy because AMI hadn't obtained a judgment against GPA based on GPA's negligence in designing the bulkhead door.

The district court found that AMI was a third-party beneficiary under the Evanston contract with GPA and therefore provided coverage in favor of AMI.  The trial court awarded American Home the amount it paid to settle the Beverly claim ($325,000); attorneys' fees of $164,305.26; $132,014.56 in pre-judgment interest; and $811.50 in court costs.  Evanston appealed.

E.   Discussion

Evanston raised two issues on appeal:  1) whether under the A&E policy it was obligated to defend AMI, and 2) whether the A&E policy obligated Evanston to pay American Home the price of its settlement with plaintiff.

The Eleventh Circuit rejected the district court's third-party beneficiary finding and set aside its ruling that Evanston was obligated to defend AMI.  The Court also found that American Home failed to establish, as required by the A&E policy, that AMI's liability to plaintiff was the result of an act of GPA arising out of its professional services.  The Court noted that American Home couldn't recover from Evanston because the claims against AMI were settled prior to trial and plaintiff did not obtain a judgment against AMI based on a finding that GPA was negligent in designing the bulkhead door.

F.   Why is this Important?   

  1. Claims handlers and/or coverage attorneys who can recognize a good opportunity to reject a demand for defense and indemnity are worth their weight in gold.

  2. Insurers should be mindful that settling a claim without a factual finding regarding the cause of the loss could preclude recovery of defense costs and indemnity from other insurers.

  3. Unfortunate incidents like this illustrate why marine engineering firms should have quality professional liability insurers in their corners.

Attorneys

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