United States: Maritime Update: Violation Of Liner Negligence Clause Results In Finding Of No Coverage Under Hull Policy

Last Updated: February 1 2018
Article by William B. Schwartz

The case of "STARNET INSURANCE COMPANY v. LA MARINE SERVICE LLC AND LEONARD JOURDAN, JR" was decided by Judge Sarah Vance in the Eastern District of Louisiana on December 27, 2017. She concluded the hull insurer did not owe for the sinking of a vessel due to the negligence of the insured. In sum, Judge Vance concluded the insured breached the implied warranty of seaworthiness under the American Rule because, through neglect, the insured knowingly permitted the vessel to break ground in an unseaworthy condition; i.e. the unseaworthy condition of the stuffing boxes proximately caused the vessel's sinking.

StarNet Insurance Company supplied a time-hull insurance policy to defendants to cover the M/V CAPT. LJ. The M/V CAPT. LJ sank on the night of April 7, 2016, or the early morning of April 8, 2016. It is undisputed that, at the time of its sinking, the M/V CAPT. LJ was insured by plaintiff. StarNet filed this suit to argue no insurance benefits were owed because the vessel sank as a result of defendants' negligence.

Choice of Law

As a threshold matter, the Court was required to determine whether state law or federal maritime law governed the dispute. "A marine insurance contract is indisputably a marine contract within federal admiralty jurisdiction." But "the interpretation of a contract of marine insurance is—in the absence of a specific and controlling federal rule—to be determined by reference to appropriate state law."

The Fifth Circuit had identified three factors a court must consider to determine whether to apply state law or federal maritime law:

(1) whether the federal maritime rule constitutes 'entrenched federal precedent';

(2) whether the state has a substantial, legitimate interest in application of its law; and

(3) whether the state's rule is materially different from the federal rule.

The central issue in this case was whether defendants' negligence precluded coverage under the implied warranty of seaworthiness and/or the Liner Negligence Clause of the insurance contract. The parties assumed federal law governed this dispute. "Entrenched federal precedent exists on the implied warranty of seaworthiness and the interpretation of Inchmaree clauses in maritime insurance contracts, which displaces Louisiana law" with regard to the issue of seaworthiness. The Liner Negligence Clause at issue here is closely related to the Inchmaree Clause and is similarly governed by Fifth Circuit precedent. Both clauses expanded maritime insurance to cover additional perils, subject to the assured's due diligence. The Court therefore applied federal maritime law to this dispute.

Implied Warranties of Seaworthiness

The Fifth Circuit explained that "federal maritime law implies two warranties of seaworthiness in a time hull insurance policy": (1) an absolute warranty of seaworthiness at the inception of the policy, and (2) "a modified, negative warranty, under which the insured promises not to knowingly send a vessel to sea in an unseaworthy condition."

If a vessel owner, through bad faith or neglect, knowingly permits the "vessel to break ground in an unseaworthy condition," the insurer may deny coverage for "loss or damage caused proximately by such unseaworthiness." The insurer bore the burden of proving unseaworthiness, and that such unseaworthiness was the cause of the loss.

Liner Negligence Clause

The insurance contract between the parties includes a Liner Negligence Clause, which covers losses caused by:

(1) Breakdown of motor generators or other electrical machinery and electrical connections thereto; bursting of boilers; breakage of shafts; or any latent defect in the machinery or hull;

(2) Loss of or damage to the subject matter insured directly caused by:

(a) Accidents on shipboard or elsewhere...

(b) Negligence, error of judgment or incompetence of any person;

...provided such loss or damage (either as described in said "A" or "B" or both) has not resulted from want of due diligence by the Assured(s), the Owner(s) or Manager (s) of the Vessel, or any of them. Master, mates, engineers, pilots or crew not to be considered as part owners within the meaning of this clause should they hold shares in the vessel.

A Liner Negligence Clause, like the related Inchmaree Clause, broadened coverage available under a marine insurance policy beyond the "classic 'perils' clause" to cover losses caused by certain machinery or hull defects, or by the negligence of certain individuals. The Liner Negligence Clause appeared to form the sole possible basis for defendants' claim for insurance proceeds. Plaintiff's complaint and defendants' counterclaim both stated the M/V CAPT. LJ sank because water entered the engine room through the shafts, stuffing boxes and packing gland assemblies. Defendants asserted the damage to the M/V CAPT. LJ resulted from a premature failure of the stuffing box. Plaintiff represented the sinking was caused by defects in, or breakdown of, the shafts and stuffing boxes not covered by the insurance policy unless defendants satisfied the requirements of the Liner Negligence Clause.

As the insured party, defendants bore the initial burden of proving that their loss fell within the policy's coverage. The insurer then bore the burden of proving the applicability of any policy exclusions. A Liner Negligence Clause does permit recovery for some losses that would not be available under traditional maritime insurance contracts, such as losses caused by the negligence of the vessel's builder and construction supervisor. But the clause's expansion of coverage is not unlimited and per the explicit terms of the policy, "to come within the protection of the Liner Negligence Clause, the loss in this case must not have resulted from a want of due diligence" by the assured, owner, or manager of the vessel."

In short, under the terms of the insurance policy, the plaintiff insurer would not owe insurance benefits if it could establish the sinking of the M/V CAPT. LJ resulted from the lack of due diligence of the assured party and vessel owner. The Court then examined the facts whether plaintiff properly denied coverage under the Liner Negligence Clause.

Cause of Sinking

The M/V CAPT. LJ was moored to a spud barge in the Quality Pipeline yard in Empire, Louisiana when it sank during the night of April 7, 2016, or the early morning of April 8, 2016. Two marine surveyors, Austin Glass and Nicholas Paternostro, issued reports related to the sinking. Glass, Paternostro and Jourdan also testified as to the condition of the M/V CAPT. LJ and the maintenance of its stuffing boxes.

Glass Report

Austin Glass of Rivers & Gulf Marine Surveyors conducted a preliminary inspection and survey of the vessel, and issued a preliminary advice report on April 10, 2016. Glass's report stated that the vessel's "stuffing boxes were believed to be leaking, but an automatic bilge pump was used to keep the water pumped out of the vessel. To do this the generator was left running at all times." The report further noted that "[i]t is believed that at some point during the night the generator engine stopped running and the engine room started to fill with water as the bilge pump did not have any power to it," causing the vessel to sink.

Glass testified he did not inspect the stuffing boxes himself, and instead based his report on his conversation with Jourdan and their discussion of what might have caused the sinking. Glass further testified that he discussed with Jourdan a slight leak of the stuffing boxes, but "that is the industry standard for those types of stuffing boxes." Glass noted that stuffing boxes are designed to leak for cooling purposes. Further, Glass testified that he did not know whether and to what extent the stuffing boxes were leaking. Nor did he know whether the generator was running at the time of the sinking. Glass explained that he was not asked to determine the cause of the sinking of the M/V CAPT. LJ, and he did not determine the cause.

Paternostro Report

Nicholas Paternostro conducted a survey of the M/V CAPT. LJ at plaintiff's request. Paternostro's survey of the M/V CAPT. LJ concluded that "the most probable cause of the vessel's sinking was the result of uncontrolled seawater ingress into the vessel's engine room through the packing gland assemblies." Paternostro found that the M/V CAPT. LJ's port and starboard propulsion shafts were heavily worn, resulting in an hourglass appearance. Paternostro concluded that the shafts were worn down because of a lack of maintenance. Based on these observations, Paternostro's report concluded that the condition of the packing gland assemblies provided an opportunity for an uncontrollable volume of seawater to enter the engine room. Paternostro testified that "if you have an improper seal or excessive amount of water entering an engine room, that is a non-seaworthy condition."

Court's Factual Conclusions

The Court found Paternostro was credible and plaintiff had proven the M/V CAPT. LJ sank because of a leak through the vessel's stuffing boxes. Further, the Court found by a preponderance of the evidence this leak was caused by overstuffing of packing material against the propulsion shafts, which wore down the shafts and led to a failure of the compression seal around the shafts.

Due Diligence

The sole question which remained was whether the leak from the stuffing boxes resulted from want of due diligence by the assured party and vessel owner. With regard to a vessel's seaworthiness, "[w]here the standard of due diligence is applicable, it comprehends inspection and investigation, where prudent, to determine the existence of deficiencies before they become critical." Due diligence is judged by an objective standard rather than the vessel owner's subjective beliefs regarding acceptable practices. Objectively inadequate maintenance constitutes a lack of due diligence.

It was essentially uncontested that the vessel owner failed to maintain the vessel's stuffing boxes and propulsion shafts properly. Although the vessel owner argued they "employed maintenance activities that were within acceptable tolerances of generally accepted industry standards," they provided no factual support for this assertion. On the contrary, in arguing that plaintiff lacked evidence of bad faith under the American Rule, defendants themselves stated "the proof shows nothing more than negligence on the part of defendants to use simple means to make the vessel seaworthy."

The Court therefore found the insurer had demonstrated the loss of the M/V CAPT. LJ resulted from the want of due diligence of the assured and vessel owner. The vessel's sinking was therefore excluded from coverage under the Liner Negligence Clause.

The case can be found here.

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