Marine Insurance Considerations

February 5, 2012

Marine Insurance Considerations
By Patrick J. Bonner
Maritime Law Reporter, Volume 11 Number 4, Pages 42-48

MARINE INSURANCE CONSIDERATIONS

A. OVERVIEW OF MARINE INSURANCE: Typical P&I Coverage

Protection and indemnity insurance, in the form of the mutual P&I Clubs, was introduced in England in the second half of the 19^th Century to cover those liabilities not covered or only partially covered by the standard hull and machinery policy of the day. At that time, collision liabilities were only covered by hull policies on payment of an additional premium and there was the case of De Vaux v. Salvador, 111 Eng. Rep. (K. B. 1836) in 1835 which held, in essence, that hull underwriters were not liable for payment of liabilities of the insured owner if these liabilities were due to the owner’s negligence.

The first Club was formed to cover the extra risks not covered by ordinary marine hull policies. Protection and indemnity insurance today is a grab bag covering most of the risks not covered by hull insurance.

The large majority of the world’s shipping tonnage is entered in mutual protection and indemnity associations or clubs. Many of these clubs are based in London although there are clubs based in Scandinavia, Japan and in the United States. The clubs provide the basic layer of insurance and above that layer, which is currently $5,000,000, the clubs entered into the International Group have set up a pool to cover claims in the next layer. This pool covers liability between $5,000,000 and $30,000,000 and for liabilities above $30,000,000, the International Group has one of the world’s largest reinsurance contracts. This contract is placed with Lloyds. The P&I clubs used to provide unlimited insurance but today the limit is $4,250,000,000. This has been a very controversial subject recently and it is thought that this figure could change in the future.

Since the Clubs entered into the International Group participate in a reinsurance pool, the rules of the Clubs are basically similar. However, the rules do vary from association to association. For any questions, check the rules of the Club involved.

The insurance provided by the Clubs is indemnity insurance. I stress this. Protection and indemnity insurance by its very name is indemnity insurance. It is important to remember that the coverage provided is strictly one of indemnity and not direct liability. The assured must first have been legally liable to pay and have paid the loss, damage or expenses before the protection and indemnity underwriter is liable under this policy. Thus, under New York Law, a P&I underwriter of an ocean going vessel is not directly liable to a judgment creditor of a bankrupt assured. Cucurillo v. American S.S. Owners, 1966 A.M.C. 2334 ( N.Y. Sup. 1969). A more recent case upholding the pay to be paid principle is Aasma v. American S.S. Owners, 95 F. 2d 400 (6^th Cir. 1996).

Typically, an assured cannot assign a claim without the express consent of the P&I insurer. Another standard P&I clause is that the insurer can cancel the insurance if the vessel is sold or if the entire management, control and possession of the entered vessel is transferred due to a change in corporate ownership or control.

The rules of most of the P&I Clubs require that any disputes between the assured and the Club be arbitrated in the forum designated in the Club’s rule book. Usually this is the city overseas where the Club is located. These clauses have upheld routinely by courts in the United States. Aasma v. American S.S. Owners,supra.

For the English Clubs, P&I coverage is subject to the Marine Insurance Act of 1906. This Act provides in essence that the Club will not be liable for any loss, damage, liabilities or costs or expenses caused by the willful misconduct of the vessel owner or its managers. Other Clubs and other P&I insurance policies have similar language. This means that it is always questionable whether the P&I insurer will respond for punitive damages. Plaintiff’s lawyers should keep this in mind in seeking punitive damages because these damages may well be uninsured and perhaps uncollectable.

The P&I Clubs have a network of claims handlers and correspondents throughout the United States and the world. Most of the Clubs have a claims handling office in New York or elsewhere and rely on an network of attorneys throughout the country to defend their cases. Often, the same lawyer will be called in to investigate an accident for the vessel owner and insurer. In most cases, this does not present a problem although if there is a coverage issue, the attorney could be in an awkward position.

Although P&I insurance is indemnity insurance, most insureds work very closely with their insurers defending claims. In fact, in many cases, the insurer makes or approves all of the major decisions, including the retention of the lawyer, number of depositions and settlement strategies. If an owner does not follow the recommendations of the Club, the owner may not be insured for the resulting liability or may be partially uninsured if the verdict is greater than the settlement recommended by the insurer.

B. WHAT IS INSURED IN THE PERSONAL INJURY CONTEXT:

1. Maintenance and cure – the typical P&I policy will reimburse the vessel owner for all liability to pay all hospital, medical, funeral or other similar expenses. The P&I insurer will also reimburse the employer for maintenance payments under normal circumstances. The typical P&I policy will exclude liability for maintenance or compensation under a crewing agreement or employment contract unless the crewing agreement or employment contract is approved by the insurer. In the United States, this is rarely an issue as the maintenance rate is standard and even if an owner decides to make advances against settlement, these are usually covered by the insurer.

An issue may arise if the vessel owner refuses to pay maintenance and cure. Under Vaughn v. Atkinson, 369 U.S. 527 (1962), a seaman may recover attorneys fees from the vessel owner if the vessel owner wrongfully refuses to pay maintenance and cure. This could involve a willful act on the part of the vessel owner and there may be a coverage issue unless the P&I insurer was involved in the decision to cutoff or not pay maintenance and cure.

2. Liability Under the Jones Act. – This is a liability imposed by law and this should be fully covered under the P&I policy. As a general rule, the P&I policy covers liabilities imposed by law but not those assumed by a party under a contract unless the contract was approved by the P&I insurer. Thus, P&I insurance would not cover wages owed to the seaman under a contract with his employer. This is a contractual obligation assumed by the vessel owner. The vessel owner may have a legal liability imposed by law for damages and these damages may include future lost wages and under this scenario, this would be covered by the P&I insurer.

3. Liabilities Under the Longshoremen’s Act – The typical P&I policy will cover liabilities of the vessel owner to third parties arising under the Longshoremen’s Act. In most P&I policies, there is clause that the policy will cover the liabilities arising in connection with the operation of the insured vessel by the vessel owner. P&I insurance would not cover compensation payments due to employees under the Longshoremen’s Act. Liability for these payments may not arise in connection with the operation of the vessel. These would be covered by the compensation insurer.

In cases where an employee sues the employer and claims Jones Act status, a conflict may arise between the compensation insurer and the P&I insurer. Employees may have the option to elect either the Jones Act or the LHWCA in certain circumstances and a conflict could develop between the insurers which would require each interest to have its own attorney.

4. Liability to Passengers – P&I insurance will cover liability for personal injuries and deaths of passengers, including medical bills. It will also cover incidental expenses arising as a result of a casualty including the cost of getting the passengers to their destination or returning to the port of embarkation as well as costs of maintenance of the passenger.

P&I insurance will also cover liability for the loss or damage to any personal effects of the passenger. However, this item is usually is limited in the passage ticket to a set dollar amount. The P&I insurer usually approves any passenger ticket.

As an aside, practitioners should be aware that most passenger tickets contain a one-year statute of limitations for filing suit. This has been routinely upheld by the courts. If you get a passenger case, you should review the passage contract. See e.g., Marchewcha v. Bermuda Star Lines, 937 F.Supp. 328 (S.D.N.Y. 1996)

There is also a line of cases approving forum selections clauses in passenger tickets. The forum selected must have some relation to the transit. For instance, I had a case where a New York resident bought a ticket in New York and then suffered serious injuries while on a cruise in Greece. The Greek ship used a passage contract that called for all litigation in Greece. Since the cruise took place in Greece, the Court dismissed the lawsuit in New York in favor of the litigation in Greece. Hollander v. K Lines Hellenic Cruises, 670 F. Supp. 565 (S.D.N.Y. 1987)

5. Occupational Diseases – The typical P&I policy will also cover liability for occupational diseases such as asbestos and sickness related to exposure to benzene. Although the policy years for the years of exposure may be long since closed, the insurers have not uniformly asserted the time bar defense because the claims were not asserted while the policy years were open. However, it is possible that an insurer will try to apply multiple deductibles for all the years during which the exposure occurred. The Second Circuit Court recently issued an opinion in connection with the Prudential Bankruptcy - In Re Prudential Lines, 1999 A.M.C. 609 ( 2d Cir. 1998) which held that each asbestos claim arose from a separate occurrence and that a single deductible is applicable to each claim. The Court held that a claimant’s later exposure to the product is a continuation of the same occurrence.

C. THE INSURANCE MARKETS: P&I CLUB/ LLOYDS/DOMESTIC MARKET

There are differences between the providers of P&I insurance that will affect the way a claim is handled and eventually litigated or settled. The P&I Clubs are just that. They are clubs. They are non-profit mutual organizations. Conversely, Lloyds and domestic underwriters are profit making companies. This could affect the handling of a claim.

A second distinction is that the P&I Clubs provide a great deal of service to their members. Each of the Clubs has a large professional staff and as mentioned above, a network of correspondents throughout the world. The commercial insurers provide much less service or support to their insured. Basically, with the commercial insurers, the assured is often on his own in handling the case.

The Boards of Directors of the P&I Clubs are composed of shipowners. These boards may make the ultimate decision on coverage and they naturally will have a great deal of empathy for the insured/shipowner. The Clubs also may have more flexibility and discretion in handling claims. Most of the Clubs have an omnibus rule which allows claims to be covered under certain circumstances.

The commercial insurers may be more rigid. Many of the marine insurers are departments of much larger insurance companies and there may be more of an emphasis on the profit and loss statement rather than on service or flexibility.

Another distinction is the way the insurers calculate premiums. The Clubs use a call system where policy years usually stay open for three years or so and the premium is based on the assured’s loss record. Thus, a claim may seem very minor at first but could deteriorate over the next few years. The call system allows the P&I Club to charge an increased premium for this deterioration.

The commercial insurers may operate on a fixed premium basis. There is a tremendous amount of pressure to get the premium right the first time. The insurer cannot go back and get additional premium for the prior years. If a vessel owner has a particularly bad year, with many injuries, he will have cost the commercial insurer additional money that the insurer cannot recoup from the owner. This may contribute to more volatility in the commercial market with owners switching insurers more than in other sectors.

Due to the services offered by the P& I Clubs, their flexibility and discretion, there is a substantial amount of loyalty between the shipowners and their clubs.

Traditionally, the commercial insurer did not provide the same limits of liability as provided by the Clubs. However, the Lloyds Syndicate of Jonathan Jones has raised its limits substantially this year and I understand that about 280 ships obtained their P&I insurance through the syndicate this year.

A final difference is the level of competition. Due to the International Group Agreement, there is not too much competition among the clubs. However, the opposite is true among commercial insurers. It is thought that with the emergence of the additional fixed premium providers, such as Jonathan Jones, that there will be more competition in P&I renewals next year.

Two other marine insurance concepts that I should touch on are Wilburn Boat and Uberrimae Fidei.

The case of Wilburn Boat Co. v Fireman’s Fund Insurance Co., 348 U.S.310 (1955) involved an insurance policy on a small houseboat used for carriage of passengers on Lake Texoma, Texas. The boat burned and the insurance company defended the suit under the policy on breach of warranty grounds. The Court of Appeals for the Fifth Circuit took the orthodox view regarding maritime insurance law and allowed the defense. The Court found the Federal Maritime Law to be supreme in the field and would not apply certain Texas statutes. The Supreme Court reversed and held that no Federal rule had been established to deal with the consequences of breach of warranties in marine insurance policies. The Court would not fashion a federal rule and remanded the case with directions to give effect to the Texas statutes. This led to the general principle that absent controlling Federal maritime law, the interpretation of a contract of marine insurance in admiralty cases will apply State Law.

This decision has been roundly condemned by many of the commentators for the past 45 years. It defeats any ideas of uniformity and encourages a great deal of confusion in the marine insurance field.

There have been a great number of efforts over the past 40 years or so to change Wilburn Boat by legislation. For the most part, Congress has not been interested in this issue. Members of the Maritime Law Association recently completed a compendium of the law of marine insurance and it is hoped that this will be put into a Restatement of the Law of Marine Insurance. Thus, this Restatement may stand alongside the Restatements for the Law of Torts and Contracts and provide some uniformity and predictability in this area.

One well entrenched rule of Federal Maritime Law is Uberrimai Fidei. This requires that parties to an insurance contract must deal with each other in the utmost good faith. Uberrimai Fidei has been, been translated in Black’s Law Dictionary as: the most abundant good faith; absolute and perfect candor or openness and honesty, the absence of any concealment or deception, however slight. Though the doctrine applies to an insurer with respect to its investigating claims and resolving coverage issues, it most frequently is applied to the insured relative to its actions in applying for insurance. The recognized rule has been that if utmost good faith and full disclosure in the application, negotiation and renewal of insurance policies are not observed by either party, the other party may avoid the policy, retroactive to its inception.

D. THE IN REM CLAIM; VESSEL ARRESTS/LETTERS OF UNDERTAKING/LIENS

In order to arrest a vessel or libel a ship in rem, the claim must give rise to a maritime lien. Non-lien claimants are limited to actions in personam. Not all maritime claims give rise to liens. A personal injury claim under the Jones Act does not give rise to a maritime lien. These claims may be brought in personam only. Personal injury claims brought on unseaworthiness grounds do give rise to liens. Since one usually joins a Jones Act with an unseaworthiness claim this distinction usually is not of great importance.

There is no requirement that one take possession of the ship to assert a maritime lien. Similarly, there is no filing requirement and these liens may remain secret. The possessor of a maritime lien is able to use the vessel as security for his claim. The lien holder can arrest the vessel at anytime unless the lien is extinguished by laches or the applicable statute of limitations. It is often very unpleasant for a mortgagee bank which tries to foreclose on a vessel to learn that there may be 50 or 100 personal injury liens held by seaman that take priority over the bank.

The in rem claim is limited to the admiralty jurisdiction of the Federal Court. You cannot assert an in rem claim in State Court. It might be possible under some states statutes to attach the vessel but arrests are limited to proceedings under Rule C and must be done in Federal Court.

Since Rule C is part of the admiralty jurisdiction, Rule C cases are non-jury. Thus, if a personal injury claimant arrests a vessel pursuant to Rule C, lawyers for the vessel owner will argue that this case should be heard non-jury.

An additional reason why personal injury claimants do not arrest vessels is the cost of the arrest. Though the Courts may waive the filing fee of seamen in Jones Act cases, there is usually no waiver for the costs of arrest. Currently, it costs about $8,000 to arrest a vessel in New York. The party arresting the ship must pay for a custodian, insurance and other costs which continue to accumulate each day the vessel is under arrest. This, coupled with the possibility of a non-jury trial, makes this an unpopular option for personal injury lawyers.

There is no notice requirement to arrest. One does not have to notify the ship or give any advanced warning that a lien holder intends to arrest the ship. For most ship owners, the first notice they have is when the marshal boards the ship.

Following an arrest, the vessel owner is entitled to adversary hearing within three court days. This requirement is set forth in Rule E.1 of the Local Admiralty rules. At that time, the Court should set the amount of the stipulation, bond or other security that will be posted to secure the claim. Under Supplemental Rule E, the amount of the bond or stipulation should be sufficient to cover the amount of the plaintiff’s claim with interest and costs but should not exceed twice the amount of the claim or the value of the property.

Under the Local Rules, a bond must be posted from a company on the approved list. The companies on the approved list are primarily U.S. bonding companies. In practice, most vessels are released on the posting of a P&I Club of Undertaking.

A Letter of Undertaking is simply a letter signed by an attorney for a P&I Club in which the P&I Club agrees to pay a claim up to a certain amount or to post a bond upon demand. The letters reserve all the rights and defenses of the vessel owner and the usual language is that one cannot draw down on a Letter of Undertaking until the judgment is final, after all appeals. These letters can be posted quickly, can be tailored to fit most claims and are widely accepted by most people in the maritime field.

E. DUTY TO DEFEND/BAD FAITH/ ASSIGNMENT OF CLAIMS

Although P&I policies are indemnity policies and the terms of the policies require the insurer to reimburse the assured or vessel owner for the costs of defense, in practice, the opposite is often true. Usually, P&I insurers appoint and control defense counsel. Usually, the insured does not automatically appoint a second lawyer to represent its interests. If the lawyer appointed by the insurer investigates the accident and uncovers grounds to avoid the risk, the insurer may be estopped to deny coverage for the liability. This is true even when the insured was notified that the defense was being provided under a reservation of rights.

A case involving the conflict between the insured and insurer under the duty to defend is Cay Divers, Inc. v Raven, 1987 A.M.C. 1342 (3d. Cir. 1987). In this case the Third Circuit Court held that an insurer can preserve its right to deny coverage when it appoints counsel to defend the insured provided that the insurer renounces its right to control the litigation. If the insurer reimburses the insured for the cost of defense, this ordinarily fulfills the insurer’s duty to defend.

In most P& I policies and liability policies, an insurer has the duty to defend which is much broader than its duty to indemnify. The insurer must provide a defense if any aspect of the claim against the insured can be fairly interpreted as giving rise to an insured claim. The New York State Court of Appeals has held that "a declaration that there is no duty to defend can be made only if the Court can conclude as a matter of law that there is no factual or legal basis on which the insurer might eventually be held obligated to indemnify under any provision of the policy." Spoor-Lasher Co. v Aetna Cas. & Sur. Co., 39 N.Y. 2d 875. When an insurer provides a defense under a reservation of rights to deny or limit coverage, it may have a conflict of interest with the insured. It would be possible that the insurer would conduct only a token defense if it appeared likely that there would be no coverage, conduct a defense to steer the recovery so it would be uninsured or the insurer might gain access to confidential or privileged information in providing the defense that it could later use in any litigation on coverage. In New York, where the insurer and insured have a potential conflict of interest, the insurer must provide independent defense to the insured whose reasonable fee is to be paid by the insurer but who is to be appointed by the insured. Golotrade Shipping & Chartering v Travelers Indem. Co., 706 F.Supp.214 (S.D.N.Y. 1989); Public Service Mutual Insurance Co. v. Goldfarb, 53 N.Y. 2^d 392 (1981).

There is no specific Federal maritime policy or law whereby admiralty courts have established rules for proving bad faith by the insurer. Thus, this is an area determined by State law. Pace v. Insurance Co. of North America, 838 F.2d 572 (1^st Cir. 1988); Bohemia, Inc. v. Home Ins. Co., 725 F.2d 506 (9^th Cir. 1984).

A leading New York State case setting forth the standards for a bad faith claim against an insurer is Rocanova v. Equitable Life Assurance, 612 N.Y. S. 2d 339 (N.Y. 1994). The New York Court of Appeals held that punitive damages were not recoverable for ordinary breaches of contract. The purpose of punitive damages is not to remedy private wrongs but to vindicate public rights. If the breach of contract also involves a fraud with a high degree of moral turpitude and demonstrates such wanton dishonesty as to imply a criminal indifference to civil obligations, punitive damages will be recoverable if the conduct was aimed "at the public generally." A private party seeking to recover punitive damages must demonstrate the egregious tortious conduct by which he or she was aggrieved but also must show that the conduct was part of pattern of similar conduct directed at the public generally. Clearly, the standard for awarding punitive damages in first party insurance actions is a strict one in New York and this extraordinary remedy will be available only in limited number of instances.

The applicable rules in other jurisdictions are much more liberal and pro insured. This is especially true on the West Coast.

The general rule is that a P&I policy cannot be assigned without the consent of the insurer. The rationale or reason for this rule is that the identity of the insured will affect the risk that is being underwritten. It is also generally accepted that the assignment of rights after a loss is valid. This type of assignment may be nothing more than a direction of where to pay the proceeds of the insurance policy.

F. THE INSOLVENT INSURER OR INSURED

Most P&I policies have a double insurance clause which provides that the P&I insurer shall not be liable for any loss or liability which is recoverable under any other insurance which also provides insurance to the insured relative to the loss in question. Usually, the other policy also has some form of double insurance clause and the question becomes which policy is primary or whether the insurers prorate the loss. There appears to be no applicable Federal rule governing the interpretation of such double insurance clauses and therefore, courts will look to the applicable law of the states where the policies were issued.

A related problem is when there is true double insurance, not excess and one of the of the insurers becomes insolvent. If both coverages were written to be "first dollar" primary insurance, the solvent insurer will have to respond for the liability of the insolvent insurer. However, if one of the insurers is a true excess insurer and issued a policy excess of prior limits, rather than excess of primary amount collectable, the excess policy will not drop down when the other insurer is insolent. Insurance Company of North American v West of England Shipowners Mutual Insurance Association, 890 F.Supp. 1292 (E.D.La. 1995). There are many cases involving this issue and there can be no general rule to cover every case because there is no standard language for the excess pollicies.

A similar problem involves the liability of a subscribing underwriter for the share of the insolvent co-underwriter. In American Marine Underwriters, Inc. v. Holloway, 836 F.2^d1454 (5^th Cir. 1987) two separate insurers insured the same risk, one for 60% and the other for 40% of $500,000. The insured settled with the claimant for $107,000 but before the settlement was distributed, the 40% insurer became insolvent. The issue was whether the remaining solvent insurer should pay 100% or 60% of the settlement. The Court held that since the language in the policy was unambiguous in limiting liability to 60% of any claim, the solvent insurer did not have to pay 100% of the claim. The result might have been different if the two underwriters had written one policy rather issued separate policies.

If the insolvent insurer is a New York company, the insured might have access to the New York State Insurance Fund.

INSOLVENT INSURED

The general rule in New York under §3420(a) (2) of the Insurance Law is that an action may be made against an insurer for the judgment which is unsatisfied at the expiration of 30 days from the serving of Notice of Entry upon the insurer. The general rule is limited by § 3420(i), 2117(b) and 113(a)(21) which exclude marine protection and indemnity insurance in connection with ocean going vessels from this general rule. The latest case interpreting these sections is Royal Insurance Company of America v A&C Ship Fueling Corp., 1992 A.M.C. 1686 (S.D.N.Y. 1992). In this case, the Court found that a judgment creditor would not have a direct action against a tug’s P&I insurer if it was determined that the tug was an ocean going vessel. This becomes the key point in many cases- is the insured vessel an ocean going vessel?

The paid to paid rule creates both interesting problems and creative solutions in cases involving bankruptcies of shipowners. The case that the Court allowed the trustee to use a creative solution is Liman v American Steamship Owners, 1969 A.M.C. 1669 (S.D.N.Y.1969), aff’d. 417 F.2d 627 (2d Cir. 1969). In this case, shipowner A.H. Bull went into bankruptcy and approximately 120 claims were presented by seamen and longshoremen. Although the shipping company had sufficient funds to pay the claims, the chief creditor opposed payment of the claims as illegal preferences. Each claim had a deductible of $1,000 applicable to the P&I insurance and the chief creditor argued that the estate would be diminished by all these $1,000 deductibles. The trustee came up with a creative solution whereby each claimant agreed that in the event of a recovery or settlement in an amount in excess of $1,000, the estate would pay the full amount of the recovery or settlement to the claimant and the claimant would thereupon repay $1,000 to the estate and thus become a general creditor of the estate for the sum of $1,000. This allowed the trustee to setup a recycling arrangement whereby the estate paid each claim and then was reimbursed by the P&I insurer for the full amount less the $1,000 deductible. The claimant would pay back the $1,000 deductible so the bankrupt shipowner would be whole and could continue the process..

In a recent case which is in the A.M.C. advanced sheets, the Second Circuit Court disapproved a similar plan in the Prudential Lines bankruptcy. In re Prudential Lines, 1999 A.M.C. 609 (2d Cir. 1998). In this case, the reorganization plan set aside $300,000 to be used by the trustee to try to settle personal injury cases. Under the plan, the trustee would pay claimant A in cash from the $300,000 fund and claimant A would immediately loan the funds back to bankrupt estate via a non-recourse loan. The replenished fund then be used to compensate claimant B who would also loan the funds back to the bankrupt estate via a non-recourse loan. The bankrupt would then claim the P&I Club for the amounts used to settle the claims of claimant A and claimant B.

The Court held that the recycling plan did not satisfy the P&I insurers paid to paid requirement. The Court found that due to the non-recourse notes, Prudential could not state in good faith that it had incurred an actual loss. The Court found that an indemnifible payment entails satisfaction of a claim and the absorption of some loss by the insured, both in good faith.

The Court differentiated Liman because in that case there was no loss on the deductible but there was a loss by the bankrupt in settling the remainder of the claim. Personally, I think Liman was wrong but I think the Second Circuit Court has now limited it to its facts.