For many readers, this is one of the nicest times of the year. Yes, the days are getting shorter. The sands of local beaches may no longer seem as warm and inviting beneath bare feet. However, such things don’t ruffle those who look forward to the bright, warm colors of fall foliage, in-water boat shows, and fresh breezes that sweep across local waterways in October. For anyone who misses the warmth of sun-soaked beach towels, let’s think of Florida. In fact, let’s go down to the courthouse of the Eleventh Circuit Court of Appeals in the Southern District of Florida. That’s where a federal judge took on something that never ceases to stir problems in marine insurance policies, which is the issue of latent defects.
As the word suggests, a latent defect is a defect which doesn’t present itself to an observer in a readily apparent manner. The concept isn’t only limited to the realm of boats. We see it come up in other areas, such as home inspections. When it comes to boats, owners who submit insurance claims for property damage sometimes encounter provisions declaring that certain losses are not covered, unless they happen to fall under exceptions identified as latent defects.
In the case at hand, the Florida court examined a lawsuit involving a 64-foot catamaran in the British Virgin Islands. The case materialized after a vertical crack was discovered in the aft bulkhead of the port hull. The captain saw that the hull was flexing up and down. It appeared to have separated from the aft transverse support structure. The yacht was brought to Tortola, B.V.I., where a marine survey showed that bulkheads and transverse supports had lost much of their structural integrity.
The catamaran was then taken to Fort Lauderdale, where a naval architect-marine engineer hired by the insurance company performed an inspection. He found cracks and fractures in the bulkheads. He also discovered that the bulkheads had buckled and delaminated. The deck was so limber that a watertight hatch would pop open underway. Although the word “limber” might be something people like to hear in the context of stretching and warming up before a morning walk, it isn’t exactly what one wants to hear in describing the stiffness of a boat deck.
The inspector concluded that the bulkheads had buckled and delaminated because the manufacturer had used foam core that was either too thin or too friable. “Friable” in this sense means easily crumbling upon handling, such as old insulating materials that break into little pieces when stripped off engine room piping and machinery. On this catamaran, the flexing of the deck was also attributed to an absence of deck frames or the very fact that such a material had been used in the first place.
When the vessel interests filed a claim for the loss under the marine policy, the insurance carrier denied the claim because the policy excluded manufacturer’s defects or defects in design. However, if the loss or damage had not resulted from the negligence of the insured, this exclusion would not apply to losses caused by an explosion, bursting of boilers, breakage of shafts or any latent defect in the hull or machinery.
The carrier argued that the damage here was not caused by a latent defect, which as an exception, would have resulted in coverage. Let’s look at what a latent defect means for the purposes of this argument. The policy defined a latent defect as “a flaw in the material of the insured yacht’s hull or machinery existing when the insured yacht or [its] components were built and not discoverable by common means of testing. A latent defect does not include wear and tear, gradual deterioration, corrosion, rust, electrolysis, osmosis, weathering or inherent vice.”
Following the insurance carrier’s denial, the yacht owner sued. In the lower court, the insurance carrier filed a motion to have the court rule in its favor on this latent defect issue. The lower court ruled in favor of the insurance carrier. But on appeal, the higher court reversed the lower court’s decision on the motion, ruling in favor of the boat owner. The insurance carrier argued that there was nothing wrong with the foam. It was simply too thin for the given application. But yacht interests argued that selection of the foam as a material for this purpose, in and of itself, amounted to a latent defect.
This shows that when it comes to latent defects, some very unique arguments could be posed by both sides, where they all seem to have merit. In general, the fine print of marine policies on these issues can often be confusing and difficult, where the outcome sometimes hinges upon the interpretation of a single word.
Ref: French Cuff, Ltd, a British Virgin Islands Company v. Markel American Insurance Company, United States Court of Appeals for the Eleventh Circuit
Author's Note: The author apologizes for mentioning the warmth of Florida in this month's issue in the context of discussing an Eleventh Circuit Court decision from a Florida-based court. At the time of production, Hurricane Irma had not materialized. Given the devastation and suffering inflicted by the hurricane, warm weather is not what comes to mind now in thinking of the hardship faced by the people of Florida. At the time of writing. the reference to warmer weather had been made innocently without a clue as to the hurricane. I am very sorry. Tim