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Broker Liability

A $24 Million Yacht Burns: Its Owner Ignores Key Policy Terms and Conditions

An expensive loss and court battle hinge on the boundaries of a broker's obligations to insureds.
By: | June 1, 2018 • 4 min read

Photo: Kurt Roll via YouTube

Whether a broker is in constant contact with an insured or merely checking in before renewals, it can’t change the fact that the onus for understanding and meeting a policy’s terms and conditions rests first and foremost on the insured.

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That’s the painfully expensive lesson learned by millionaire Larry Jodsaas, the owner of the pleasure craft Polar Bear, a yacht that took five years and $24 million to build.

Smoke rose in San Diego Bay on the morning of June 19, 2014, above the Chula Vista shipyard where the Polar Bear was in drydock for repairs. A local ship captain sent up his drone to get a closer look. What he saw was any boat lover’s worst nightmare: The Polar Bear engulfed in flames.

The craft was a total loss.

Of Damages and Fires

The Polar Bear was en route to the shipyard for routine maintenance when it ran aground on the Zuniga Jetty at the entrance of the San Diego Bay.

The impact damaged the bottom of the hull, port and starboard sides of the keel and the aft port stabilizer shaft.

The yacht was covered under a Lloyd’s marine policy placed through Marsh, and the policy remained in effect while the vessel was undergoing routine maintenance in the shipyard.

When it arrived at the shipyard in May after hitting the Zuniga Jetty, the Polar Bear needed major repairs instead of the planned routine maintenance. Neither Jodsaas nor Roger Trafton, the ship’s captain, notified Marsh or Lloyd’s of the situation.

They reasoned the cost of repairs would be below the deductible.

Unfortunately, welding performed during repairs led to the demise of the Polar Bear.

Claims Denied

The broker on the marine policy, Katherine Johnson, provided Lloyd’s with a notice of loss the day after the fire. Lloyd’s, however, denied coverage.

The Polar Bear’s policy contained a repair clause stating that for major repairs or alterations involving hot work (welding), prior agreement must be obtained from the insurer. Failure to notify the insurer of the needed repairs voided the coverage in full.

Lloyd’s sought declaratory relief that it had justifiably denied coverage for the claim. Jodsaas, filing as Bear LLC (“Bear”), filed counterclaims against Lloyd’s and a third-party complaint against Marsh, asserting breach of oral contract, breach of fiduciary duty and negligence.

“As long as the insured, even with more advice from the broker, remains in the driver’s seat, [the special relationship] doctrine does not apply.” — Christopher St. Jeanos, attorney, Willkie Farr & Gallagher

In addition, Bear claimed a “special relationship” with Marsh, establishing a heightened duty to advise. Had Johnson dissuaded Bear from electing the Lloyd’s policy, it argued, it could have recovered the policy limit of $17.3 million.

A local ship captain spotted the plume of smoke and sent his drone in for a closer look at the fire consuming the Polar Bear.

The Court granted Lloyd’s summary judgment, holding that Bear had breached the terms of the repair clause. Marsh’s motion for summary judgment was granted in part and denied in part.

Claims for breach of contract, breach of general fiduciary duty and negligence were denied. But the claim for breach of a heightened duty to advise could proceed to trial. Contacted for this story, Marsh declined comment.

The Court’s Verdict

In the U.S. District Court in the Southern District of California, the court applied the “special relationship” doctrine narrowly. As other courts have in similar disputes, it examined the depth of the relationship between Bear and Marsh and the broker’s role in decision-making, among other elements.

Christopher St. Jeanos, attorney, Willkie Farr & Gallagher

It concluded that the services Marsh provided for Bear were the same as the services being provided for all of Marsh’s clients.

Also, the fact that the broker had not been notified of the jetty incident — and the fact that Johnson and Jodsaas had never met in person during their 10-year acquaintance — contradicted claims of a “deep relationship.”

“The court reconfirmed that [the ‘special relationship’ doctrine] is a narrow exception to the general rule that only applies in exceptional circumstances and found that the facts in this case did not trigger it,” said the lead attorney on the case, Christopher St. Jeanos of Willkie Farr & Gallagher.

A Broker’s Role

The question of who retains decision-making authority is a key factor in this case or any case where a “special relationship” with a broker is in question.

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“As long as the insured, even with more advice from the broker, remains in the driver’s seat,” said St. Jeanos, “this doctrine does not apply.”

The court further noted there was no evidence the loss would have been paid if Johnson had advised Bear to select an alternate carrier. Under a Chubb policy that had been under consideration, conditions applied that would have required the insured to notify it of the jetty strike and subsequent major repairs.

“The entire case turns on Jodsaas’ and Trafton’s failure to provide notice,” said the court, also noting Bear had received notice of the repair clause conditions more than a dozen times.

While the yacht claim was a loss, Bear did settle a claim with the shipyard for $9.2 million. A judgment was also granted against the company performing the welding. However, that company folded after the incident, and its owners are thought to have fled the country. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]