Charles M. Davis 2 March 1, 2006, Revised July 14, 2008

Transcription

1 YACHT & BOATOWNER S INSURANCE SOME INSURERS MAY DENY COVERAGE FOR BIG LOSSES: INSURERS INTERPRET POLICIES TO EXCLUDE COVERAGE FOR RESULTING DAMAGE THAT IS IN ANY WAY CONTRIBUTED TO BY WEAR, GRADUAL DETERIORATION, CORROSION, REPAIRS OR OTHER COMMON CONTRIBUTING CAUSES TO MAJOR MARINE CASUALTIES, INCLUDING FIRES AND SINKINGS 1 Charles M. Davis 2 March 1, 2006, Revise July 14, 2008 Damage cause or in any way contribute to by animals or marine life is not covere. The Traition that Marine Insurers Offer Coverages Require by Vessel Owners Has Been Abrogate in Recent Yacht Policies Historically, marine insurers have respone to evelopments in vessel construction an technology to expan coverage to provie insurance that vessel owners have require. Three primary examples are the concepts of proviing coverage (1) against machinery breakown, (2) Inchmaree 3 1 This paper is poste at It may be circulate an quote with attribution to the author. Copyright 2007, The backgroun of the Inchmaree clause is important to a iscussion of how marine insurers historically have voluntarily broaene coverage to respon to the practical nees of the marine insurance marketplace. In Thames & Mersey Marine Ins. Co. v. Hamilton Fraser & Co., 12 App. Cas. 484 (H.L. 1887), the House of Lors hel that the non-fire bursting of a boiler was not a peril of the sea or a like peril, so amage to the ship Inchmaree that resulte from the bursting of a boiler was not covere uner the traitional hull policy. In The Inchmaree, a boiler burst either because a latent efect or Law Office of Charles M. Davis, 4767 Wharf Roa, Bow WA Telephone , fax , cavis@avismarine.com. -1-

2 coverage for a number of risks that ha not been covere uner traitional perils policies, incluing explosions, repairers negligence, negligence of crew, an resulting amage from latent efects, an (3) liner negligence clauses in commercial hull policies that broaen coverage for amage which results from negligence of any person. For an appropriate premium, the worl s unerwriters have been contente to bear an take upon themselves the broa risks of perils of the sea an normal vessel operations, meeting the purpose of insurance of spreaing the risk of substantial economic losses among the vessel owners purchasing insurance. Exclusions from coverage have been clear, narrow an specific, usually shifting insurance of exclue perils such as war risks, capture an seizure an breaches of warranty to other insurers who are able to evaluate an unerwrite those risks uner specific applicable circumstances. Although marine insurers generally have offere expane coverage to meet the nees of insures, they may contractually limit coverage by the language of their insurance contracts. Courts an insurers long have recognize that insurers may limit their contractual liabilities. 4 Until recently, yacht an boatowners policy forms generally have followe the principle that the economics of the marketplace result in coverage being offere by unerwriters that meets the practical nees of prospective insures, incluing insurance either uner enumerate perils with Inchmaree coverage forms or against all risk of physical loss or amage to the insure vessels an their machinery from any external cause, plus certain internal causes such as resulting amage from latent efects, repairers negligence, negligence of master an crew, an other acciental causes involving some element of fortuity. Exclusions from coverage generally have been specific an unerstanable by the average insure. Unerwriters generally have ajuste claims within the broa concept of honoring claims which are within the reasonable expectations of coverage by consumers purchasing insurance. With respect to yacht an boatowners policies, in recent years I have note a isturbing reversal of the historical principle of broa coverage an goo faith ajusting of claims to meet the insurance nees of vessel insures. Some current yacht policy forms an many boat owners policy forms inclue broa exclusions from coverage which are contrary to traitional marine insurance principles. Some yacht an boatowners policy insurers now are using policy forms with broaly wore exclusions which, without careful analysis, appear innocuous but potentially exclue risks which are not only fortuitous but orinary insurance consumers woul expect woul be covere. The exclusions themselves generally are targete at protecting insurers from claims for ecreases in value of vessels ue to inevitable eterioration an losses preventable by proper maintenance. But in combination with anticoncurrent-causation clauses ae to many yacht an boatowners policies in recent years, have corrosion jamme a pressure relief valve. The House of Lors hel that neither latent efect nor corrosion was an insure peril uner the traitional perils of the sea policy forms. Instea of clapping their hans in satisfaction for winning a coverage ecision, unerwriters promptly intentionally an voluntarily offere the coverage the House of Lors hel i not exist. th Tropical Marine Proucts v. Birmingham Fire Ins. Co., 247 F.2 116, 1957 AMC 1946, 1950 (5 Cir. 1957), acknowlege that the purpose of the Inchmaree clause is a substantial insurance unertaking which history shows, was ae voluntarily by unerwriters, (with successive amenments to meet like conitions) to expan protection to shipowners an thereby overcome court ecisions favorable to an unerwriter but which, the unerwriting fraternity thought unrealistic an a enial th of coverage reasonable neee. Saskatchewan Government Ins. Office v. Spot Pack, Inc., 242 F.2 385, 1957 AMC 655 (5 Cir. 1957), refers to the Inchmaree Clause s rich history which reveals it an its several expansive amenments as the unerwriters response to the practical business nees of the shipping worl in the face of averse court ecisions. As such its purpose is to broaen, not restrict, to expan, not withraw, coverage. 4 See, e.g., Sea Trek, Inc. v. Sunerlan Marine Mutual Ins. Co., Lt., 757 So (La. App. 2000): It is equally well settle, however, that subject to the rules of interpretation, insurance companies have the right to limit coverage in any manner they esire, so long as the limitations o not conflict with statutory provisions or public policy. -2-

3 provie grouns for insurers to eny coverage for resulting amage an ensuing loss, which not only o consumer insures reasonably believe woul be covere but often are isastrous losses of the magnitue that vessel owners cannot bear as operating expenses an are the reason they purchase insurance. If the combination of broa exclusions an anti-concurrent-causation clauses are enforce with respect to claims for amage to components of vessels amage as a result of flooing, fire, sinking, straning an collision, the purposes of the owners in purchasing insurance is subverte an coverage can be illusory, available at the iscretion of the insurer. The problem is aggravate by two major factors. First, as yacht an boatowners insurances are consiere marine insurance, they generally are not reviewe or approve by state offices of insurance commissioners. Secon, many of these policies are sol by agencies, rather than by inepenent brokers, so many vessel owners are not fully avise of the potential effects of the broaly-wore exclusions an that coverage they may have ha uner the policy forms of past years may be enie uner toay s policies. In other cases, agents an brokers may not be fully aware of the potential application of the exclusions or that policies offering substantially broaer coverage may be available. Problems with Many Current Yacht Policies Forms In recent years, many insurers have issue yacht an boatowners insurance in plain language policy forms that have incorporate language from homeowners policy forms with respect to both lists 5 of exclusions from coverage an anti-concurrent-causation clauses. The problem is that many yacht/boatowners insurers have omitte from their boat insurance forms the ensuing loss clauses that 6 are inclue in homeowners policies. Using the analogy of a nursery rhyme: For want of a nail the shoe was lost. For want of a shoe the horse was lost. For want of a horse the rier was lost. For want of a rier the battle was lost. For want of a battle the kingom was lost. An all for the want of a horseshoe nail. there woul be no coverage uner policy of insurance on the kingom if a contributing cause of the loss of the horseshoe nail was wear, graual eterioration, or corrosion of any type or efinition. My specific complaints with some current yacht policy forms are: (1) the longstaning principle of proviing coverage for resulting amage that result from fortuitous events such as fire, sinkings an flooing, an collision that inirectly are contribute to be causes such as wear an tear, latent efects, marine life, unusual chemical or electrolytic action that 5 See, e.g., Insurance Services Office homeowner s form HO-3, a stanar form approve by insurance commissioners of most if not all states. 6 The ISO HO-3 form states: We o not insure, however, for loss... cause by... wear an tear, latent efect, inherent vice, or any quality in property that causes it to amage or estroy itself... smog, rust or other corrosion...vermin, roents, or insects... [but] any ensuing loss... not preclue by any other provision in this policy is covere. Section I, Coverage A. -3-

4 technically can be calle corrosion, repairers negligence, an negligence of the master or crew have been abrogate by policy forms of many insurers; (2) the exclusion of coverage by anti-concurrent-causation clause language such as any loss or amage cause or contribute to by any exclue clause may result in enial of coverage for resulting amage which virtually every boat owner woul expect to be covere; (3) efects in esign or manufacture or by efective repairs or maintenance often result in major or total loss not only of value to the vessel, but, ue to fire, sinking, collisions an straning to other components of the vessel, but many policies exclue coverage for these risks; 7 (4) the concept of proviing insurance for losses cause by the insure s own negligence has been abrogate by some insurers, with some policies incluing warranties that the insure vessels shall be maintaine at all times in seaworthy conition (with no allowance for ue iligence); (5) the fact that many yacht policies an most boatowners policies are not place through inepenent brokers may result in insures being eprive of inepenent avice on what coverages they nee an comparisons of what coverages may be available uner competing policy forms (this last complaint assumes that inepenent brokers universally are competent an knowlegeable about the relative coverages offere uner the policies of various insurers); an (6) irrespective that the policy forms are not clear that they exclue coverage for resulting 8 amage or ensuing loss, some insurers are enying claims for resulting amage to otherwise unamage components of the vessels. Examples of Elimination of Traitional Coverage Traitional yacht policies have provie very broa coverage, as construe by courts an as ajuste by unerwriters. As mentione above, traitional yacht policies have been either enumerate risks policies which provie hull an machinery coverage either against perils of the sea an other specific risks, or all risks policies which provie coverage against all risks of physical loss or amage from any external cause. Both types of traitional policies also have inclue some form of Inchmaree coverage for resulting amage from latent efects, repairers negligence, crew negligence (provie that such loss or amage has not resulte from want of ue iligence of the Assure, but masters an crew are not to be consiere owners). Subject to specific express warranties such as navigation limits, layups, specific masters, number of crew an other operating criteria to control exposure to loss, most fortuitous losses to hull an machinery have been covere (in cases of latent efects, excluing the cost of repairing the efective component part). The traition of yacht insurers proviing broa coverage clearly has change. Some current policies inclue language efining a latent efect much narrower than the efinitions evelope by courts in the context of Inchmaree clauses: If it was not iscoverable prior to eparture for sea by all known an customary tests, it was latent an covere uner the policy.... The Court conclues that a person of competent skill shoul not mean that an owner is 7 One of the earliest marine insurance cases in Unite States Jurispruence, Citizen s Ins. Co. v. Marsh, 41 Pa. 386 (1862), hel that one of the purposes of insurance is to protect the insure against losses by mere negligence an carelessness, short of misconuct by the insure. 8 The term resulting amage comes from construction of coverage uner the Inchmaree clauses that, until recently, were use not only in enumerate perils policy forms for commercial vessels an larger yachts, but in all-risks insurances for yachts an smaller pleasure boats. The term ensuing loss has been use in homeowners policies. -4-

5 hel to a stanar that if a shipbuiler, naval architect, composites expert, engineer, or other expert coul have iscovere the efect then the efect is patent. The Court conclues that a person of competent skill shoul be efine an interprete to mean the competency of the Owners, crew, master, etc, an then place in the context of activities surrouning the maintenance, safety proceures, an sailing of the [vessel]. Gray v. Certain Unerwriters at Lloy s, 1999 AMC 939 (E.D. La. 1999). Washington courts efine 9 a latent efect as one which coul not have been iscovere by inspection. In comparison, some current policy forms narrowly reefine latent efects as limite to a flaw in the material of the Insure Yacht s hull or machinery existing when the Insure Yacht or its components were built an not iscoverable by common means of testing. Latent Defect oes not inclue wear an tear, graual eterioration, corrosion rust, electrolysis, osmosis, weathering or inherent vice. [For purposes of this paper, I o not ientify specific policy forms]. Uner this efinition, resulting amage from many efects which classically woul an coul be consiere latent efects, incluing esign efects plus hien an unetectable efects which result from errors in construction, repairs, prior amage, or other efects which i not exist as flaws in the material at the time of original manufacturer woul be exclue from coverage. It is not har to imagine a hien efect causing a fire or a sinking, which, uner this restrictive efinition, woul not be a covere casualty. Although traitional policies specifically provie coverage for loss or amage cause by repairers negligence which occur without want of ue iligence of the insures, some current policies specifically exclue loss to the property... resulting in any manner from... repairing, renovating, servicing or maintenance. Wow! NO COVERAGE FOR DIRECT OR RESULTING DAMAGE CAUSED BY REPAIRERS! What if a repairer negligently allows the vessel to be stolen? What if a repairer negligently rops the vessel from a crane? What if a repairer negligently causes a fire or the vessel to sink? What if negligent repairs cause a mechanical failure an the vessel allies with a ock or collies with another vessel or strans? The exclusion applies wether the amage is irect or resulting! So if a yacht burns or sinks or is stolen or is involve in a collision as a result of the negligence of a repairer, uner these policies potentially there is no coverage. My concern is not theoretical. Many current policies exclue from coverage losses cause or contribute to by marine life. I have litigate coverage where relatively large yachts have sunk as a result of muskrats entering their exhaust systems an chewing through the rubber fittings. Virtually all 10 current policy forms exclue amage cause or contribute to be rust or corrosion. I have litigate coverage for a sinking where the owner allegely faile to properly maintain a vessel although it was professionally maintaine an the owner ha no knowlege that there was any problem with rust builup in the engine exhaust system that the insurer contene was a contributing cause to flooing/near sinking when the vessel was unerway. One insurer of a yacht uner an all risks policy enie coverage for a sinking on the grouns the insure faile to maintain the vessel in a seaworthy conition at all times when afloat, irrespective that the owner ha the yacht professionally maintaine an ha no knowlege 11 that a through hull fitting might have been efective. Similarly, I am aware of several fires being 9 10 Rottinghouse v. Howell, 35 Wn. App. 99, 108 (1983). A claim I presently am litigating involves the breaking of a stainless steel bolt that secure a clamp on an engine exhaust system. The resulting loose clamp allowe a large leak of very hot exhaust gasses into the engineroom, which woul have starte a fire but the heat triggere the boat s halon fire suppression system. The soot from the exhaust an the release halon ruine the boat s engines. Coverage was enie on the grouns of microscopic analysis of the bolt inicate that there was a type of corrosion between the molecules of the stainless steel alloy of the bolt that reuce its tensile strength. 11 Allstate Ins. Co. v. Heil, 2007 U.S. Dist. Lexis (D. Hi. 2007) (settle pening appeal), hel that a express warranty of that a yacht woul be kept in a safe an navigable conition whenever afloat was a warranty that a vessel be maintaine in a seaworthy conition at all times, an breach of that warranty terminate coverage irrespective of a causal -5-

6 cause by corrosion or chaffing of electrical wires or latent efects in the esign or construction of 12 electrical wiring, fittings an appliances. Some policies exclue coverage for any loss cause by any illegal activity by the insure. Consiering that orinary negligence in the operation of a vessel not 13 only is illegal but is criminal uner feeral law, the results of virtually any collision or allision can be (an have been) eeme exclue from coverage. 14 Anti-Concurrent-Causation Clauses Most current boatowners an yacht policies not only inclue broa exclusions from coverage, but, without clear warning or explanation, exten the effect of the exclusions to resulting amage cause or contribute to by any exclue cause. Most of the exclusionary provisions o not highlight or warn insures of the potential application of what may appear to consumers (who unerstanably usually o not have a very high egree of insurance sophistication) to be boiler-plate language not inconsistent with their expectations of what woul be covere. For example, the exclusions clause of one current policy provies: We will not pay for loss or amage cause by or resulting from any of the following, regarless of whether any other cause or event contribute concurrently or in any sequence or in any way to the loss: 1. wear an tear, graual eterioration, rust, corrosion, electrolytic or galvanic action...; 2. mechanical breakown;. 6. insects, vermin, animals or marine life;... Virtually all consumer insures woul be very shocke if their insurer enie their claims for major amage to their yachts from a fire which resulte from unexpecte an unpreventable by normal maintenance an inspections of the following examples, which are just of few of the ozens of foreseeable causes of fires, sinkings, flooings, collisions an allisions: 1. unobservable chaffing through the insulation of electrical wiring; relationship between the breach an the cause of loss. In that case, a plastic through hull fitting faile an the vessel sank. The vessel ha been professionally inspecte without notice of any problem with the fitting installe by the builer, an ha been professionally maintaine. 12 An example is a recent fire in the engineroom of a passenger ferry that was foun to be the result of a vibration-inuce fatigue fracture of a fuel oil gauge pipe, allowing pressurize fuel to spray onto the hot engine exhaust manifol. This was covere uner a stanar enumerate perils hull policy, but the cause an resulting amage coul be eeme exclue uner most current yacht policies U.S.C. 1115, the seaman s manslaughter statute, has been interprete as criminalizing orinary negligence. th Unite States v. O Keefe, 426 F.3 274, 2005 AMC 2805 (5 Cir. 2005); Unite States v. Ryan, 364 F. Supp , 2005 AMC 1281 (S.D. N.Y. 2005). 46 USC 2302(b), makes operation of a vessel in a negligent manner than enangers the life limb or property of a person unlawful. 14 st See, e.g., Littlefiel v. Acaia Ins. Co., 392 F.3 1, 2005 AMC 1779 (1 Cir. 2004). In Foremost Ins. Co. v. Thorson, W.D. Wa. Cause No. C , the insurer enie coverage not only for hull amage but for liability coverage in a simple case of a pleasure boat alliing with another vessel while entering a marina where the operator plea guilty to a noncriminal infraction of negligent operation of the vessel, where the policy exclue coverage for boily injury or property amage arising out of the illegal acts of the insure. In Foremost, the insurer contene there was no coverage for illegal activity, whether or not the activity resulte in an arrest or a conviction. In Northern Ins. Co. of New York v. Lamm, 2007 th AMC 901 (11 Cir. 2005), applying Illinois law, the court etermine that the term illegal acts is ambiguous as to whether it exclues coverage for loss while the vessel is engage in illegal activity or loss cause by illegal activity, an, further, whether the vessel was engage in illegal activity at the time of the loss. -6-

7 2. unobservable corrosion of fuel piping; 3. estruction of a vessel which rifts onto a reef after a mechanical breakown; 4. sinking of a boat from unexpecte corrosion of a through-hull fitting or water piping; 5. collision with a whale; 6. a colony of sea lions ecies to sun themselves on the eck; 7. expensive mechanical amage which results from sucking kelp into the cooling system; as a result of corrosion of a steering or engine control cable, a vessel collies with another vessel or allies with a ock; 9. hien esign efect or manufacturing efect causes fire or sinking. Traitional policies either provie coverage for such resulting losses irectly, or provie coverage for resulting amage if their masters an crews in their vessel-operating capacity negligently fail to iscover 16 efects an minimize amage. In looking over some oler policy forms, I see one policy which has an exclusion for amage cause by graual eterioration incluing marine life. This seems fair an appropriate, as the exclusion is for loss or amage ue an confine to wear an tear, graual eterioration, etc., an the policy form oes provie coverage for resulting amage. But to not provie coverage for resulting amage incluing total loss of the yacht from an acciental cause beyon the control of the insure clearly oes not meet the insurance nees of most yacht owners. One company s policy form, at page 2, states that the physical amage coverage provies you with coverage against all risk of physical loss to your watercraft unless state otherwise or an exclusion applies. If an insure rea this far, it woul appear to provie comprehensive coverage. But at page 13, the policy form efines cause by as meaning any loss that is contribute to, mae worse by, or in any way results from that peril. That form, until recently, also at page 13, exclue coverage for... any loss cause by wear an tear, marine life, eterioration, electrolysis, lack of maintenance, or fiberglass osmosis or blistering.... But we o insure ensuing covere loss unless another exclusion applies. My emphasis. The policy form now has been revise: it now omits the ensuing covere loss coverage. For comparison, two policy forms which I think illustrate how some competitive policies offer much broaer coverage make it clear that the exclusions for latent efect an wear an tear, etc., o not apply to resulting amage: The first form states: This insurance oes not cover:... The cost of repairing or replacing any part of the boat efective or repairing mechanical breakown. However we o cover loss resulting from such mechanical breakown or latent efect in the hull or machinery. The cost of repairs or replacing any part of the boat efective by reason of wear an tear, graual eterioration, osmosis, mechanical breakown, wet or ry rot, corrosion, weathering, marring, scratching, enting, vermin, pets, or marine life, or electrolytic or galvanic action. The secon provies: You are insure against All Risks of acciental an irect physical tangible loss of or amage to the Insure Property from any external cause... excluing the following loss or amage cause or resulting from: A) Wear an tear, graual eterioration, faulty repair or faulty workmanship,... corrosion,... electrolysis, galvanic action, or any inherent vice, insects, vermin or marine life: however we will not kelp) See, e.g., Jefferson Ins. v. Roberts, 349 F Supp (D. Ma. 2004) (engine amage cause by a plastic bag, See, e.g., Ferrante v. Detroit Fire & Marine Ins. Co., 125 F. Supp. 621, 1954 AMC 2026 (S.D. Ca. 1954); Carter Tug Service, Inc. v. Home Ins. Co., 345 F. Supp. 1193, 1972 AMC 498 (S.D. Il. 1971). -7-

8 cover consequential property amage resulting from any fire, sinking, submersion, emasting, collision or straning;... C) Defect in manufacture or construction, nor will we pay for the cost of repairing or replacing any part which fails as a result of a efect in manufacture or construction, however, we will cover consequential physical amage that results from such failure if not otherwise exclue. Bol emphasis ae. Some contemporary policies exclue any loss or amage resulting in any manner from criminal 17 acts of an insure person. Some policies exclue coverage for any willful act of the insure. In view of ecisions which hol that willful misconuct inclues the intentional performance of an act in such a manner as to imply reckless isregar of the probable consequences, even if the amage involve was not intene, coverage may be illusory uner such policies. 18 Some policies also exclue any loss cause by any person who uses your watercraft without permission from you. I can unerstan not proviing liability coverage to a non-permissive user, but to exclue first party property amage coverage which occurs uring a theft or other non-permissive use contravenes principles of first party property insurance: if insures nee hull insurance or liability insurance at all, they nee insurance against loss or liability if someone steals their yachts or amages their yacht while operating it without their permission. Also of concern is some current yacht an boatowners policies inclue express warranties of seaworthiness. This is counter to principles of marine insurance an goo sense. English law an usage 19 oes not impose any specific uty on an insure to maintain his vessel in a seaworthy conition. In contrast, some current yacht an boatowners policies expressly impose an absolute uty on insures to maintain their vessels in seaworthy conitions at all times. For example, one policy form states Seaworthiness Warranty. You warrant that your watercraft will be kept in a safe an navigable conition whenever afloat an/or being operate. An unerwriter imposing a ue iligence requirement on its insure may be appropriate, but an absolute express warranty that the vessel shall in no way ever be efective makes insurance illusory In a case uner a pollution insurance policy that exclue coverage for willful acts of the insure, Unite States v. Water Quality Ins. Synicate, 2005 U.S. Dist. Lexis 7128 (D. Me. 2005), uphel enial of coverage for a spill that was cause by intoxication of a crewmember, holing that intoxication is a willful act. 18 st Littlefiel v. Acaia Ins. Co., 392 F.3 1 (1 Cir. 2004), etermine that criminal liability base on orinary negligence coul justify enial of coverage uner a policy which exclue coverage for any loss, amage or expense arising out of or uring any illegal activity on your part or on the part of anyone using the insure s property with your permission, where the insure ha been foun guilty of negligent homicie as a result of negligent operation of the vessel. The policy also exclue coverage for any loss, amage, or liability willfully, intentionally, or criminally cause or incurre by insure. A recent case has hel that orinary negligence of a vessel operator is sufficient for a conviction of manslaughter th uner the seaman s manslaughter statute, 18 USC 1115, Unite States v. O Keefe, 426 F (5 Cir. 2005), so an insure whose orinary negligence causes the eath of any person may not only be charge with manslaughter, but may not have insurance coverage uner some yacht policies. 19 English law oes not imply a warranty that the vessel shall be seaworthy, but provies that if the vessel is sent to sea in an unseaworthy state with the privity of the insure, the insurer is not liable for any loss attributable to the unseaworthiness. Marine Insurance Act 39(5). American law implies a warranty of seaworthiness at the inception of a time insurance policy, plus recognizes a warranty that the insure shall not, from ba faith or neglect, knowingly permit the vessel to epart a safe port in an unseaworthy conition. 20 I have mentione that some of the exclusions in many yacht policies, without coverage for resulting amage, make coverage illusory in that a reasonable insure may have believe he ha purchase insurance against such risks of loss. This may not be sufficient to raise the octrine of illusory coverage which woul result in voiing of exclusionary -8-

9 against many risks of loss or amage that may result from simple negligence not only of the insure, but of esigners, builers an repairers, an from latent efects uner any efinition. Some collisions an grounings that are cause by operational negligence of the operators may result in losses to seaworthy vessels, but most fires, sinkings an flooings result from unseaworthy conitions, many of which will not be etecte an prevente by reasonably iligent Sunay sailors. Inherent or Implie Coverage for Resulting Damage/Ensuing Loss Unless Specifically Disclaime The history of anti-concurrent-causation clauses is they were introuce in homeowners policies in the 1980s. As state above, anti-concurrent-causation clauses in stanar homeowners policies o not apply to the wear, tear, eterioration, latent efect, rust or corrosion exclusions: those policy forms specifically provie coverage for ensuing loss resulting from those causes. Anti-concurrent-causation clauses in ISO HO-2 an HO-3 policies forms are inclue only in the Section I exclusions, which exclue coverage for loss ue to orinance or law, earth movement, water amage from floo or subsurface water, war, intentional loss, an earthquake. Entirely ifferent from the pleasure boat policies that are the subject of this paper, losses from these risks are very specifically exclue, homeowners purchasing insurance are aware that they are exclue, an supplemental or separate coverage for these 21 risks is available in the marketplace. In some cases, supplemental insurance, such as for flooing, is require by leners. A few years after the introuction of anti-concurrent-causation clauses in homeowners policies, some of the same language began appearing in proprietary pleasure vessel policies, but specific language recognizing coverage for ensuing loss often was not inclue. Never-theless, custom an practice has been that coverage for ensuing losses has been accepte an claims for resulting amage routinely have been pai. There have been very few exceptions, some of which have resulte in litigation, apparently all of which have been resolve by settlement or unreporte ecisions. I am not aware of any jurispruence that enies coverage uner a pleasure vessel policy for resulting loss that may have as a contributing cause an exclue cause such as wear an tear, rust or corrosion. This custom an practice is an important consieration (1) in interpreting whether coverage for resulting amage is implie in such policies, (2) that such policies are ambiguous whether they exclue coverage for resulting amage, an (3) that such coverage is within the reasonable expectations of consumer insures. Other Issues with Current Forms of Yacht Policies Some policies also make it practically ifficult an/or expensive for an insure to enforce a claim. Many policies have arbitration clauses which require that the insure bear 50% of the costs of litigating coverage (sometimes requiring three arbitrators). Other insurers have policy forms that are even more language on a public policy basis where policy limitations an exclusions efeat the precise purpose for which the insurance is purchase. The octrine of illusory coverage usually applies when there is no real coverage against any risk of loss or if there is actual coverage it is extremely minimal an affors no realistic protection to any group or class or insures. If the insurance in issue oes provie realistic protection of some group or class of insures, the octrine usually oesn t apply. See, e.g., National Union Fire Ins. Co. v. Dixon, 141 I. 537, 112 P (2005). 21 These factors are not the case with pleasure vessel insurance: buy back coverage or separate insurances are not generally available; insures are not aware an are not informe that coverage for potentially calamitous losses that they reasonably expect will be covere are not in fact covere; an the basis for the exclusion is so vague, ambiguous an obtuse that even most marine claims ajusters believe there is coverage for resulting amage. -9-

10 potentially abusive: some contractually esignate that any litigation or arbitration be brought subject to foreign law an in a foreign forum. 22 The basic principle of consumer insurance is to provie coverage against fortuitous losses, incluing negligence of the insures, which the insures are willing to pay a premium to an insurer to bear the risk of financial loss. For the most part, yacht owners are not experts on marine insurance coverage or on the esign an maintenance of their yachts. They reasonably expect broa coverage against fortuitous losses, at least to the extent that they o not expressly, after full explanation of any exclusions, elect to forgo specific coverages. The forms of some yacht an boatowners insurers provie illusory coverage an o not meet the insurance nees of insurance consumers an their leners. This problem is aggravate by the present system of marketing yacht an boatowners insurance: with most yacht owners placing insurance through agents rather than inepenent brokers, they might not receive professional avice on alternatives, so competitive market forces are not effective to force some of the insurers to narrow contractual exclusions. LEGAL ISSUE I: CONSTRUCTION OF EXCLUSIONS: AMBIGUITIES AND REASONABLE EXPECTATIONS OF INSURED In aition to the general rule that ambiguities in contracts, incluing insurance policies, will be 23 construe against the raftor, the courts of many states recognize a rule that coverage will be construe in accorance with the reasonable expectations of a layman insure as to what risks will be covere. Policy language will be given the same fair, reasonable an sensible construction as will be given to the 24 contract by the average person purchasing insurance. Courts will not blinly apply esoteric commercial 22 See, e.g., Intermetals Corp. v. Hanover Int l, 188 F. Supp , 2001 AMC 2417 (D. N.J. 2001). McAlleer v. John Does 1-10, 1996 AMC 2868 (Mass. Sup. Court 1996), interprete a Massachusetts statutory invaliating of choice of law an choice of forum clauses on Massachusetts interests as not extening to policies entere into in other jurisictions, holing that the state rule oes not rise to the level of an expression of substantial public policy. Avani Enterprises, Inc. v. n Unerwriters at Lloy s, 140 F.3 157, 1998 AMC 2045 (2 Cir. 1998), enforce a clause in a policy requiring application of English law an practice. 23 The rule that insurance policies are to be construe in favor of the insure is most rigorously applie in construing the meaning of exclusions incorporate into a policy of insurance or provisions seeking to narrow the insurer s liability. See, n e.g., The Ingersoll Milling Machine Co. v. M/V Boena, 829 F.2 293, 1988 AMC 223, at (2 Cir. 1987); Royal Ins. r Co. v. Delaware Operating Co., 904 F.2 696, 1990 AMC 2792 (3 Cir. 1990); Kalmbach, Inc. v. Insurance Co. of the State th of Pennsylvania, 529 F (9 Cir. 1976). 24 Although a number of states have recognize the reasonable expectations octrine, there are not many cases construing the octrine in the context of yacht policies. Lewis v. Aetna Ins. Co., 505 P (Or. 1972), hel that, at least with respect to a policy issue to a lay insure, an insurance policy is to be construe to provie the coverage which a layman may reasonably expect, given his interpretation of the policy s terms. In Lewis, a yacht sank at its covere moorage because of leaks in the hull, but the cause of the leaks coul not be etermine: there was no rotten woo an the caulking i not seem to be eficient. The insure contene that the leaks were cause by a latent efect within the coverage of the Inchmaree clause in a peril of the seas yacht policy. The concurring opinion of Juge Bryson states at 505 P : Toay, when the typical owner of a pleasure craft seeks marine... insurance, his objective is financial protection form all or most of the risks which reasonably flow from ownership an operation of his craft.... He bargains with the salesman about little concerning his coverage, pays his premium, an receives a printe policy. The policy itself is selom rea, an almost never unerstoo, because the content is complicate an fille with confusing legal terminology. Nevertheless, the boat owner believes that when the contract is execute an the premiums an pai he is covere. He may be wholly unaware of the exact type or extent of coverage, or any qualifications or exceptions to the policy coverage about -10-

11 marine stanars to a yacht policy: if there are ambiguities, the courts will resolve them consistent with reasonable expectations of the average insure. 25 LEGAL ISSUE II: FIDUCIARY DUTIES OF AGENTS AND BROKERS TO RECOMMEND BEST TERMS TO INSUREDS Obviously, yacht insurance policies are not fungible commoities, to be selecte on price only. But most yacht-owning customers are not aware that some policies exclue important coverages or even that there are substantial ifferences between policies. Does a captive agent of an insurance company owe any uty to a prospective customer to explain to the customer that the only yacht policy the agent can offer oes not provie the coverage the customer shoul have? How about an inepenent agent who may place policies with several companies oes an inepenent agent owe a uty to assist an insure in selecting coverage that best meets the customer s nees? What about a broker who may be which he has not been warne The ifficulty is with the term latent efect. In this case, the term is stretche to embrace an unknown, unexplaine something that cause the Manatee to sink at its mooring. This interpretation oes violence to the language but justice to the case. The phrase may have serve a proper function in 1889 but toay it only confuses courts an policyholers an frustrates the reasonable expectations of the insure, a result which courts have historically isfavore.... We woul reach an unreasonable result if we enie the plaintiff policy-holers the coverage which they reasonably assume they ha purchase because they cannot explain an inexplainable sinking. When members of the public purchase policies of insurance they are entitle to the broa measure of protection necessary to fulfill their reasonable expectations.... Where particular provisions, if rea literally, woul largely nullify the insurance, they will be severely restricte so as to enable fair fulfillment of the state policy objective.... Kievit v. Loyal Protect. Life Ins. Co., 34 N.J. 475, , 170 A.2 22, 26 (1961). In Barber v. Chatham, 939 F. Supp. 782 (D. Hi. 1996), the court applie Hawaii law, uner which it is the court s uty to enforce the objectively reasonable expectations of parties claiming coverage uner insurance contracts, which are construe in accor with the reasonable expectations of a layperson. The only feeral appellate ecision of which I am aware on this issue is Ferrara & DiMercurio, Inc. v. St. Paul st Mercury Ins. Co., 169 F.3 43, 2001 AMC 1320, 1327 (1 Cir. 1999), which in a ictum, state: In examining the language of the policy, we consier what an objectively reasonable insure, reaing the relevant policy language, woul expect to be covere [citations to non-marine cases omitte]. That sai, the court hel that an exclusion for losses cause by malicious acts or vanalism was not ambiguous an woul provie a efense to a claim for fire amage if the fire was cause by malicious acts of a thir party, remaning for trial on that issue. Also, see Parks, THE LAW & PRACTICE OF MARINE INSURANCE & AVERAGE, 1987, pp , for a iscussion of the reasonable expectations octrine. Washington case law recognizes the octrine in etermining whether ambiguities exist in exclusions from coverage: An insurance policy must have meaning to the average iniviual. As such, the policy language must be interprete the way it woul be unerstoo by the average person.... In interpreting exclusions, we have hel exclusions from coverage of insurance are contrary to the funamental protective purpose of insurance an will not be extene beyon their clear an unequivocal meaning. Exclusions shoul also be strictly construe against the insurer. Stuart v. American States Ins. Co., 134 Wn , (1998)(internal citations omitte). (1978). 25 Farmers Home Mutual Ins. Co. v. Ins. Co. of North America, 20 Wn. App. 815, 583 P.2 644, 1979 AMC

12 able to place coverage with a number of insurers, but may be influence by the reality that some insurers offer higher commissions than others, an/or that it may be necessary to share commissions with a specialty broker or Lonon broker in orer to access some markets? The law as to the obligations to insures of captive agents of insurers varies from state to state. Most states o not impose the same uty to obtain aequate insurance on agents of the insurers 26 as is impose on brokers. Brokers owe contractual an, in a majority of states, fiuciary uties to their clients. The contractual uties of agents run to their insurers, not the insures. 27 The courts have evelope three lines of ecisions on the issue whether insurance brokers owe a fiuciary uty to their clients to compare policy terms an recommen policies that best meet the nees of their insures. Some states essentially hol that brokers are mere orer takers responsible only for accepting premiums an completing forms. Others impose uties of professional experts to take all reasonable steps to further the client s goals, incluing avising the client of insurances necessary to provie aequate coverage for the client s nees. For example, New York courts hol that a broker owes 28 no uties to its clients except to obtain agree-upon coverage, but New Jersey courts impose on brokers stanars of professional specialists, similar to accountants an lawyers, to etermine what the client 29 requires an to recommen alternatives, not just to perform what the client requests. The thir line of cases is that brokers an agents who hol themselves out as proviing expertise or offering special services may have liability for properly recommening necessary insurance coverage to the extent insures rely on the representations of the brokers. AGA Fishing Croup Limite v. Brown & Brown, 30 Inc. hel that a broker has no obligation to recommen that a vessel owner increase its P & I coverage limit after 15 years. Applying Massachusetts law, the First Circuit state: There is no general uty of an insurance agent to ensure that the insurance policies procure by 26 See, e.g., D. Sakall, Can the Public Really Count on Insurance Agents to Avise Them? A Critique of the Special Circumstances Test. 42 ARIZ. L. REV. 991 (2000). 27 Agents of an insurer may be liable to the insures for the agents torts. Agents for a isclose principal normally are not liable for contractual breaches by the principal. Grane v. St. Paul Fire & Marine Ins. Co., 2006 U.S. App. Lexis st 2567 (1 Cir. 2006) 28 New York courts hol that brokers are not consiere professionals. Highlans Ins. Co. v. PRG Brokerage, Inc., 2002 U.S. Dist. Lexis 83 (E.D. N.Y. 2004). 29 Aen v. Fortsh, 169 N.J. 64 (2001), rejecte the efense by a broker that the client ha faile to rea a policy an faile to etect the broker s negligence: it hel that the broker is the expert, not the client, an the client is entitle to rely on the broker s professional expertise in properly performing the job the broker was engage to perform. See also Rier v. Lynch, 42 N.J. 465, 476 (1964): One who hols himself out to the public as an insurance broker is require to have the egree of skill an knowlege requisite to the calling. When engage by a member of the public to obtain insurance, the law hols him to the exercise of goo faith an reasonable skill, care an iligence in the execution of the commission. He is expecte to possess reasonable knowlege of the types of policies, their ifferent terms, an the coverage available in the area in which his principal seeks to be protecte. If he neglects to procure the insurance or if the policy is voi or materially eficient or oes not provie the coverage he unertook to supply, because of his failure to exercise the requisite skill or iligence, he becomes liable to his principle for the loss sustaine thereby. Carter Lincoln-Mercury, Inc. Leasign Division v Emar Group, Inc., 135 N.J. 182 (1994), impose on a broker the uties to avise a client of insurance options an to obtain insurance that met the insure s nees, extening the uties beyon contractual uties specifically requeste by the client. 30 st F.3 (1 Cir. 2008). -12-

13 him provie coverage that is aequate for the nees of the insure. Such a uty only arises uner special circumstances of assertion, representation an reliance.... Courts have consiere length of relationship a significant factor when etermining the existence of special circumstances. An insurer s public representations of expertise or public promises to provie specialize counseling, like those foun on Flagship s website, coul also support, base on other facts as well, a fining of special circumstances. An expane agency agreement, arrangement or relationship, sufficient to require a greater uty from the agent than the general uty, generally exists when the agent hols himself out as an insurance specialist, consultant or counselor.... Internal citations an quotations omitte. Although the broker in AGA i avertise on its website that it ha the expertise necessary to offer the appropriate insurance services for the maritime inustry an claime to systematically an comprehensively examine maritime exposures, summary jugment ismissing the claims was affirme on the facts that, although the insures were escribe as naive an unsophisticate, they never aske the broker if insurance was sufficient or that they be tol if insurance became insufficient, an there was no other evience of the insure relying on the broker base on an assertion or representation, an the insures never consulte the website an thus i not rely on the avertise representations. The Washington Supreme Court, without broaly holing that all brokers are hel to a level of professionalism an expertise, has hel that both brokers an agents who hol themselves out as having expertise have fiuciary responsibilities to the clients to have knowlege of the types of policies, their ifferent terms, an the coverage available, an are liable to their insures for failure to procure 31 insurances that meet the nees as isclose by their insures. Uner a Washington preceent which oes not seem to make a istinction between an agent an a broker, agents an brokers owe their insures an enhance fiuciary uty of care, in two situations: (1) when the agent or broker hols itself out as an insurance specialist an receives compensation for consultation an avice apart from the premiums 32 pai by the insure; or (2) there is some form of interaction on the question of coverage, couple with 33 the insure s reliance on the expertise of the insurance agent, to the insure s etriment. I think it woul be very unusual for a yacht owner, other than a large business who retains risk management consultants, to pay aitional compensation for avice on which yacht policy to choose. Thus, the first situation escribe in AAS-DMP selom woul apply. But I can see few situations where the secon test woul not apply: most requests for yacht insurance woul involve some form of interaction on the question of coverage an the insure s reliance on the expertise of the insurance agent. In such situations, the fiuciary obligation inclues the uty to provie avice on selecting a policy that meets the insure s specific an general nees. In this respect, one of the few reporte marine insurance ecisions on the issue illustrates the scope of a broker s fiuciary uties to the insure: 34 [A]n insurance agent is more than a mere orer taker for the insure. His fiuciary uties inclue avising the client with regar to recommene coverage, investigating an ascertaining the financial conition of prospective companies, an notifying the insure of policy cancellations or terminations. Where an agent is The primary Washington ecision on this issue is iscusse below. I see no situations where a captive agent of an insurer woul hol itself out as proviing such avise, for an aitional fee. There are situations where brokers o provie risk management avise an also act as agents for the insurers. 33 AAS -DMP Mgmt., LP. v. Acoria Northwest, 115 Wn (2003). AAS-DMP involve assistance with respect to a claim, rather than with respect to selection of an appropriate policy. 34 th Offishore Prouction Contractors, Inc. v. Republic Unerwriters Ins. Co., 910 F (5 Cir. 1990), applying Louisiana law, citations omitte. -13-

14 familiar with the insure s business, has reason to know the risks against which an insure wants protection, an has experience with the types of coverage available in a particular market, we must construe an unertaking to procure insurance as an agreement by the agent to provie coverage for the client s specific concerns. 35 Montgomery, Duties an Liabilities of Marine Insurance Brokers an Agents, states: Often the broker will be aske by the assure to give his professional opinion an avice regaring the assure's insurance nees. The broker must exercise the egree of skill an care that is expecte of a pruent an experience marine insurance broker. If the broker hols himself out as a highly skille insurance aviser an expert, he may be hel to a higher level of expertise an stanar of care. Hart v. Brink recognize that when an insurance broker hols himself out as an expert in the fiel of insurance, an the insurer hires him in reliance on that fact, then the broker an his insure become boun in a special relationship in which with the broker owes a special uty to the insure. California law recognizes the same rule: an agent assumes special uties by holing himself out as having specific expertise in a fiel of insurance. Kurtz, Richars, Wilson & Co. v. Insurance 36 Communicators Marketing Corp. hel that because the broker hel himself out as an expert in a particular fiel of insurance, he owe a special uty to the insure to properly unerstan both the law an the policy, an that the broker ha breache this uty by failing to properly explain the policy to the 37 insure. In Ey v. Sharp the court hel an insurance broker to have a special uty towar the insure because he unertook responsibility for fining an insurance policy specifically suite to the insure's nees: In this case Sharp's uty to the Eys arose because Sharp unertook to prepare an insurance proposal for the Eys to review prior to purchasing a policy of insurance. Sharp thus came uner a uty of ue care to accurately inform the Eys of the policy's provisions. 38 Westrick v. State Farm Insurance involve a claim against an agent for failing to obtain coverage an for failing to explain the terms of the policy. The Court state: 39 A long line of California cases has recognize that a isparity of knowlege may impose an affirmative uty of isclosure. In the insurance fiel, the quasi-public nature of the insurer s obligation imposes upon him a uty of goo faith an fair ealing, which requires the insurer to give at least as much consieration to the [insure's] interests as it oes to its own. Since [i]t is a matter almost of common knowlege that a very small percentage of policy-holers are actually cognizant of the provisions of their policies... [an t]he insure usually confies implicitly in the agent securing the insurance..., the insurer's uty inclues the uty reasonably to inform an insure of the insure's rights an obligations uner the insurance policy. Thir Eye Blin, Inc. v. Near North Entertainment Ins. Services hel a claim is state on allegations 40 that a broker faile to explain the effect of an exclusion that substantially reuce coverage TUL. MAR. L. J. 33, 40 (1982), citing a non-maritime Washington ecision, Hart v. Brink, 192 F. Supp. 879 (W.D. Wash. 1961) Cal. Rptr (1993) Cal. App , (1988) Cal. Rptr. 214 (1982). 39 Westrick, internal citations an quotations omitte. 40 th 127 Cal. App , 26 Cal. Rptr (Cal. App. 2005): The point is that [the broker] faile to alert [the insure] that the [exclusion] woul give [the carrier] a viable basis for refusing coverage uner some circumstances an, consequently, faile to recommen that [the insure] purchase errors an omissions insurance to ensure complete, incontestible coverage. -14-

15 CONCLUSION The past few years there have been a number of reporte cases in which insurers have enie coverage uner their policies because of some breach by the insures of the octrine of uberrimae fiei 41 (both parties to an insurance contract owe the other the uty of utmost goo faith). When uberrimae fiei works to the insurers avantage, unerwriters are entitle to assert eman retroactive utmost goo faith on the part of their insure, an are entitle to eny coverage if an insure is in breach of his obligations to isclose all facts material to the insurer s evaluation of the risk in etermining whether to accept coverage an set premiums. In rafting exclusions to coverage uner their policies, an in interpreting vaguely wore exclusions that o not put the average lay insure on aequate notice that resulting amage, incluing fires an sinkings, may not be covere if some contributing cause in the chain of causation is one of the exclue risks, unerwriters may not be so emaning of themselves. 42 Yacht owners an their leners require reasonably comprehensive coverage against fortuitous major financial losses. Although it is certainly appropriate to exclue coverage for some specificallyefine causes of loss which are clearly explaine to potential insures, the fact remains that the market requires coverage for resulting amage from such causes as latent efects, repairers negligence, crew negligence, an other fortuitous losses that cannot always be avoie by goo faith efforts to properly maintain the vessels. I cannot comprehen why most marine insurers are not offering coverage their market wants an requires. If loss ratios an competition with other companies are the issues, an insurer coul offer two policies at ifferent policy rates: one with traitional coverages an one with clearly expresse exclusions an allow insure to make elections with informe consent. There is surprisingly little legal preceent on the liability of brokers an agents who are willing to place policies that o not fully meet the nees of their insures to fully an explicitly explain to their clients an customers the potential extent an effect of all exclusions, an that policies of other carriers may provie coverage that better meet the nees of the insures. Relative to yacht an boatowners insurance policies in the moern insurance marketplace, many brokers an agents essentially are selling 43 a prouct, rather than services. The law long has impose implie warranties in contracts for the sale of goos by merchants in goos of that kin that goos they sell shall be fit for the orinary purpose for 44 which such goos are use an, when they assist their customers in selecting goos that the goos 41 The octrine requires that an insure make full isclosure in connection with the negotiations for insurance of all facts which may materially affect the unerwriting of the risk, whether a misrepresentation or non-isclosure in innocent or otherwise. Sun Mutual Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, [retro] 1998 AMC 1191 (1883). Recently, Certain r th Unerwriters at Lloy s v. Inlet Fisheries, Inc., F.3 (9 Cir. 2008), affirme that the octrine is a well-entrenche rule of feeral maritime law an justifies enial of coverage. 42 Contractors Realty Co. v. Insurance Co. Of North America, 469 F. Supp (S.D. N.Y. 1979), states that reciprocal to an insure s uties of uberrimae fiei to make full isclosure of all facts material to the insurer s evaluation of the risk, the insure has the uty to eal fairly, to give the assure fair notice of his obligations, an to furnish openhanely the benefits of a policy of all risk insurance. Insurance obligations must not be construe so as to rener the coverage mere gossamer. 43 If brokers are selling their services, they shoul provie the services of proviing comparisons of the terms of coverage uner various insurers policies an recommenations as to which policies best meet the nees of their clients. If the law oes not impose obligations on company agents to provie services to their clients, that fact shoul be isclose to the insurance-purchasing community. 44 Uniform Commercial Coe 2-314(c). -15-

16 45 shall be reasonably suitable for their intene purpose. Within the extremely high stanar of uberrimae fiei, the sellers of yacht insurance, whether unerwriters, brokers or agents shoul be hel to at least that stanar of the marketplace with respect to the sale of nuts, bolts an other goos: that the insurance will be fit for the purpose of the insurance an meet the reasonable expectations an nees of the insures. A final concern is my information that some insurers offer brokers higher commissions than other insurers. It seems obvious that because a broker is the agent of the insure with respect to selecting insurance, there is a conflict of interest in not recommening a policy that has better terms for the insure but may result in a lower commission to the broker. As we all know, even New York State, which imposes very low uties on brokers, now hols brokers responsible for the consequences of steering clients towars insurers who offer higher commissions. In most situations, agents an brokers have a responsibility to avise insures on policy terms an conitions, incluing whether coverage an exclusions meet the nees of the insures. They may have an obligation to comparatively analyze competing policies not only price but terms of coverage. My belief is that best terms oes not mean best price to the insure, or best commission for the broker or agent. In the case of agents who have limite or exclusive markets, they may have uties to avise customers that the policies they can write may not meet the insurance nees of owners of larger yachts to whom an uninsure total loss woul be a financial isaster. 45 Uniform Commercial Coe provies: Where the seller at the time of contracting has reason to know any particular purpose for which the goos are require an that the buyer is relying on the seller s skill or jugment to select or furnish suitable goos, there is... an implie warranty that the goos shall be fit for such purpose. -16-