Black’s Law Dictionary defines marine insurance as “a contract whereby one party (the insurer), for a stipulated premium, undertakes to indemnify the other (the insured) against certain perils (risks) to which his ship . . . may be exposed . . . .” The marine insurer makes an assessment of the risk and sets the premium accordingly.
Occasionally disputes arise with regard to what risks are covered under a marine insurance policy. Generally the law holds that the written policy should be construed in favor of the policyholder whenever possible, and strictly construed against the insurer in order to afford the protection that the insured sought to secure.
This general rule is based upon the premise that the insurer is in a better position to limit its liability exposure in the written policy. If, from the policy language, it is possible to adopt either of two interpretations, the interpretation that permits recovery will be used.
In the recent Bender Shipbuilding case (1991 AMC 220), the Court of Appeals for the 11th Circuit held that the above general rule does have limitations. “A court should never lose sight of the risks which the insurer and insured reasonably contemplated to be covered under the policy, nor should a court automatically extend a policy’s coverage to all risks . . . for which the insured may face liability.”
The Bender case arose out of a marine casualty to a dry dock being constructed under a shipbuilding contract. The floating dry dock blew away from its moorings during a thunderstorm and was damaged in a collision.
The shipbuilding contract called for liquidated damages to be paid to the dry dock purchaser as the penalty for late delivery. The purchaser made a claim upon the shipyard for liquidated damages and collected $350.000. The shipyard then brought an action under its separate insurance policy against its insurer to recover the liquidated damages it had paid.
The marine policy that was subject of the litigation was the American Institute Builders Risk Clauses (Feb. 8, 1979. Form 13-L), which is commonly used in this country and abroad.
The policy included three sections: hull, liability (both collision and P&I) and general provisions. The general provision excluded from coverage delays of any type, except to the extent, if any, covered by the collision liability clause. The collision liability clause provided that if the vessel collided with another vessel, and the insured became liable to pay damages to any other person with respect to such collision, the insurer would indemnify the insured.
The district court found that a straightforward reading of the clause supported a finding that the policy covered the liquidated damage claim. The court held for the insured and concluded that no clear language in the policy demonstrated an intent to exclude from coverage liquidated damages resulting from a collision.
The Court of Appeals reversed the decision and found that the policy did not indicate an intent to cover the liquidated damages paid by the insured to the dry dock purchaser. The appeals court noted that the district court had totally ignored the historical development and scope of the collision clause when rendering its opinion.
The appeals court then traced the entire history of the collision clause, beginning with a 1836 English admiralty decision. The historical development of the clause clearly showed that it is intended to indemnify a shipowner for damages to vessels that the insured’s vessel causes. The cases and authorities that have construed the collision clause over the past two centuries demonstrate that the clause does not cover damages that relate to the insured vessel itself.
The Bender case illustrates that risks covered by a marine insurance policy must be consistent with a reasonable interpretation of the historical coverage associated with the policy. Judicial expansion of the intended coverage will likely result in higher premiums to cover addional risks.
As noted by the appeals court in the Bender case: “Such a result is unintended by the underwriters and undesireable to the maritime industry in general.”