No coverage for engine failure under all-risk marine policy

Milad Emam and Jason P Minkin of US legal firm Bates Carey have reported on the case of Great Lakes Ins. SE v. Wave Cruiser LLC, No. 20-14517, 2022 WL 2136681 (11th Cir. June 15, 2022), in which it was ruled that, applying New York law, the US Court of Appeals for the Eleventh Circuit held that an all-risk marine insurer owed no coverage for engine failure.

The policy barred coverage for engine damage “unless caused by an accident external event.” According to the court, the policyholder had the burden to show that the “external event” exception to the engine-damage exclusion applied. Finding that the policyholder did not meet this burden, the court held that the insurer was entitled to summary judgment. In so holding, the court also enforced the policy’s choice-of-law provision.

After suffering catastrophic engine failure, the policyholder tendered a claim to its “all risks” marine insurer, which covered specified loss and damages to the insured vessel that was “accidental, fortuitous in nature and . . . incidental” to the vessel’s use. The policy barred coverage for “[d]amage to the [v]essel’s engines . . . unless caused by an accidental external event such as collision, impact with a fixed or floating object, grounding, stranding, ingestion of foreign object, lightning strike or fire.” In investigating the vessel’s engine failure, the inspector found no evidence of an “external cause” but said “fatigue failure of one or more parts” was the most likely cause of engine failure. The insurer denied coverage on the grounds that the policyholder had not shown that an external event caused the engine failure. In the ensuing coverage litigation, the district court granted summary judgment for the insurer because the policyholder had not presented evidence of an external event causing engine failure.

On appeal, an Eleventh Circuit panel affirmed the district court’s holding, rejecting the policyholder’s argument that the district court improperly placed the burden on the insured. As a threshold issue, the panel considered choice of law.  The policy provided that disputes should be “adjudicated according to well established, entrenched principles and precedents of substantive US Federal Admiralty law and practice” but selected New York law “where no such well-established, entrenched precedent exists[.]” The Eleventh Circuit enforced this choice-of-law provision, finding there was no “well established, entrenched precedent” on point.

Applying New York’s “burden shifting framework,” the panel ruled for the insurer.  According to the panel, the policyholder satisfied its initial burden of showing that its loss was fortuitous, shifting the burden to the insurer to establish that there was engine damage. The panel held that, because the insurer met that burden, the burden shifted back to the policyholder to prove that the “external event” exception to the engine-damage exclusion applied. Finding that the “policyholder failed to come forward with evidence to create a genuine issue of material fact on the ultimate issue . . . of whether an external event caused the engine failure,” the Eleventh Circuit affirmed the district court’s decision granting the insurer’s summary-judgment motion.

https://www.batescarey.com/blog/no-coverage-for-engine-failure-under-all-risk-marine-policy/