08/14/2013

Latent Defects In Marine Insurance

By J. Dirk Schwenk, Baylaw, LLC

There are lots of potentially hidden issues in a boat.  I have seen engines destroyed by the use of aluminum and iron together.  I have seen stringers with saturated, rotten plywood cores; hulls full of soaked balsa coring and massive delamination caused by improper foam cores or improper installation of foam cores.   These sorts of issues lead to severe losses and sleepless nights.  For new boats under warranty, these losses will first be the responsibility of the builder.  For the rest, the main question will be whether there is any coverage from the marine insurance.

When a boat owner reports a loss that is not obviously due to a collision, the adjuster and surveyor will certainly be looking for evidence of an excluded manufacturer’s defect.  In the case of core problems, the insurer is very likely to deny coverage on that basis unless there is clear evidence of a collision that punctured the outer hull.

In many cases, a hidden defect can be viewed as both a manufacturer’s defect, in the sense that it was due to a mistake of the manufacturer, and a latent defect, in that it was hidden and existed from the time of manufacture.  Insurance adjusters may deny coverage if it is a close call or if the cause is actually unknown, but seems like a manufacturer’s defect.  The courts that have reviewed such cases have reached very different decisions. Since the cases, facts and policy language are all inconsistent, here are some things to keep in mind if the issue arises:

1. Choice of Law: Generally the state’s law that applies to an insurance contract is the state where the policy was issued or the state where the policy was delivered.  These may be different, and state chosen may lead to a completely different result.  Analyze this issue early and choose carefully.
2. Policy Details: The specific language of the policy will be very important.  The surveyor for the insurance company will know how to look for facts that will cause an exclusion of coverage.  A boat owner seeking coverage should be aware of the specific language of the policy and be sure to advocate for a determination that the cause is covered.
3. No Known Cause: One likely scenario is that the actual cause of the loss cannot be determined.  In that instance, the all risks nature of marine insurance should force coverage.  It is not uncommon to have coverage denied in that instance, however, so care should be taken to advocate with the adjuster to ensure coverage.

If you want to review the entire article -- it is at: http://baylawllc.com/latent-defects/

Mr. Schwenk is a member of the Maryland Bar and bar of the Federal Court for the District of Maryland.  He is a Certified Marine Investigator through the International Association of Marine Investigators, a member of the Mid-Atlantic Mariners Club, Marine Trades Association of Maryland and the Severn Sailing Association, where he sails J-24s and Jet-14s with his wife Stefanie. He is a past President of the Jet 14 Class Association, and the 6 time Chesapeake High Point champion in that class. In his remaining free time he is the father of two sons, plays basketball and writes and records acoustic music.