Settling Before Trial Costs Shipbuilder In Insurance Coverage Dispute In Eleventh Circuit
In 2002, the crew of a passenger vessel was preparing for an extended lay-up period when the Captain cut the ship’s power to disconnect from its battery terminals and became trapped in the forward bulkhead door in a position that prevented rescuers from accessing the door’s emergency release mechanism. The Captain died in the incident and his estate brought a wrongful death action against the shipbuilder (Shipbuilder) and the marine engineering firm (Architect) alleging that the bulkhead door was unreasonably dangerous because it was designed and installed so that a person caught or trapped in the door could not reach or activate a release mechanism to disengage it.
Pursuant to an architect’s and engineer’s professional liability insurance policy, the Architect‘s insurer provided Architect a defense. Shipbuilder also demanded that Architect‘s insurer provide it with a defense under the policy but the insurance company refused on the ground that Shipbuilder was not an insured under that policy. Shipbuilder turned to its own insurer that had issued a comprehensive marine liability policy to insure Shipbuilder against liability in tort based on Shipbuilder‘s negligence. Both insurance companies then settled separately with the Captain’s estate, and Shipbuilder and its insurer then brought suit against Architect‘s insurer seeking reimbursement of its defense expenses and the settlement amounts paid to the Captain’s estate. The U.S. District Court for the Middle District of Florida agreed with Shipbuilder and concluded that it had the same rights under Architect‘s insurance policy as did Architect. The Eleventh Circuit, however, recently reversed that decision.
The Eleventh Circuit concluded that under the terms of Architect‘s policy, including its endorsements, that the insurer was not obligated to provide Shipbuilder a defense of the Captain’s estate’s lawsuit. The claims against Shipbuilder alleged that Shipbuilder installed the unreasonably dangerous bulkhead door (under a strict liability theory) and that Shipbuilder was negligent in installing the door. The terms of Architect‘s policy coverage obligated the insurer to satisfy any judgment obtained against Architect for negligently designing the door, but not a judgment recovered against Shipbuilder for negligently installing the door. The court explained that the coverage would extend to Shipbuilder if Shipbuilder were held liable to the Captain’s estate for an “act, error, or omission” of Architect in its performance of professional services in connection with Shipbuilder‘s construction, but that because Shipbuilder settled before trial, that no such finding had been made. In other words, if Shipbuilder wanted to recoup its defense costs and the cost of its settlement, it should not have settled and proceeded to trial on the merits (that, however, would have to be weighed against the trial risk).
