Litigation & Dispute Resolution

Imagine that your boat is sitting at dock and you get a call from the marina: your vessel has sunk. This is one of the nightmare scenarios that all boat owners’ hope will never happen. Well, at least you have insurance… or so you thought. Maritime insurance policies are very complicated legal documents and are not like your homeowners policy.

As the owner of a 60 foot yacht found out, their claim was denied when their vessel sunk due to a leak in an air conditioning coil. The insurance company, National Union, denied coverage because the sinking was caused by corrosion in the cooling coil, and corrosion was an uncovered item. However, the district court ¹ held that the loss of the vessel was not due to corrosion, but due to the failure of the bilge pumps which failed due to a loss of power – and that the loss should be covered. You would think that this would be the end of the story, but it was not.

National Union appealed this judgment ², arguing that, under maritime law, coverage is determined by a “proximate cause” test, not a “but-for” test. Thus, using the “proximate cause” test, one could assume that the cause of the boat sinking was water penetration due to the corrosion. Using the “but-for” test would support the position that the vessel sank, not from water penetration, but the failure of the bilge pumps, i.e., but for the failure of the pumps, the vessel would not have sunk regardless of the water penetration from the corrosion leak. 

Here is where we get into the legal weeds. The policy did not cover corrosion but did cover erosion / impingement. Have you read your policy to this level? Luckily, the appellate court did and decided that the correct standard would be the “but-for” test. This resulted in the boat being covered by the policy.

From personal experience, I know that very few boat owners even read the cover page on their insurance policy other than the price and coverage amount. When you are insuring assets under a maritime policy, it is advisable to seek professional advice from both an insurance broker and an attorney on potential holes in the policy. Many of these can be addressed in advance by tailoring the policy and exclusions in advance of instituting the policy. It is ill advised to wait for an incident to determine if the policy will cover such an event.

This alert was written by Ajay A. Jagtiani, a lawyer in the Intellectual Property & Technology practice group at Miles & Stockbridge.

¹ IAG LLC v. Nat'l Union Fire Ins. Co. of Pittsburgh Pennsylvania, No. 8:13-CV-1675-T-36TBM, 2015 WL 5173055 (M.D. Fla. Sept. 3, 2015), reconsideration denied sub nom. IAG LLC v. Nat'l Union Fire Ins. Co., No. 8:13-CV-1675-T-36TBM, 2015 WL 12696190 (M.D. Fla. Nov. 19, 2015)
² IAG LLC v. Nation Union Fire Insurance Co. of Pittsburg PA, Case Number 15-4406

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