The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | May 2, 2017 • 4 min read

Losses Due to Emails Not Covered

On june 4, 2012, an employee of accounting firm Taylor & Lieberman (T&L) received an email from a client requesting a wire transfer to a bank account in Malaysia in the amount of $94,280.

After complying with those instructions, she received another email the next day, requesting an additional $98,486 be wired to a bank in Singapore. The employee again complied. A third email request, in the amount of $128,101, raised suspicions because of a different email address.

A phone call confirmed that all three emails were fraudulent. T&L was able to recover nearly all of the monies from the first transfer, but none from the second.

The accounting firm used its own funds to reimburse the client and then sought reimbursement under its crime coverage with Federal Insurance Co., which denied the claim on June 13, 2012.

Two years later, the U.S. District Court for the Central District of California ruled the firm was not entitled to coverage. On March 9, the U.S. 9th Circuit Court of Appeals agreed.

The policy, the court ruled, provided coverage for “an insured’s direct loss ‘resulting from forgery or alteration of a financial instrument by a third party.’ ” In this case, there were no financial instruments, just emails instructing the firm to wire money.


The court also dismissed T&L’s argument that the claim was covered by computer fraud coverage because the emails were an unauthorized entry into its system.
“The ‘mere sending’ of emails does not amount to actionable trespass to a computer system,” ruled the 9th Circuit, which dismissed the case.

Scorecard: The accounting firm’s claim for $98,486 was denied.

Takeaway: The “common sense reading of the policy” contradicted the accounting firm’s arguments, the court ruled.

Insurer Must Pay for Appeal

On dec. 13, 2011, a federal grand jury indicted Mitchell Stein on 14 counts of mail, wire and securities fraud, saying he artificially inflated the stock of Heart Tronics (also known as Signalife), a medical device company.

On Dec. 20, 2011, the SEC filed a civil suit against Stein and Heart Tronics for securities fraud and falsification of records.

Stein, a founder of the company who called himself its “chief creative architect,” was found guilty of the criminal charges, sentenced to 17 years in prison and ordered to repay $5 million in “illegally-gained profits” on May 20, 2013. The SEC action resulted in Stein being ordered to pay $5.4 million.

After his criminal conviction (which subsequently was remanded for resentencing earlier this year), Stein sought defense for an appeal from Houston Casualty Co., which had issued a $5 million directors and officers policy in November 2007.

HCC denied the claim, saying the policy provided coverage only until a “final determination,” which it said was the conviction. It also argued that Stein was not an officer or director of the company.

Stein filed suit, and lost in the Superior Court of Los Angeles County. That decision was reversed by the California Court of Appeal, Second Appellate District, on March 8.

Even though Stein denied being an officer of the company in other court proceedings, his statements “do not contradict” the argument that Stein was the functional equivalent of an officer or director during the HCC policy period, the court ruled.

It also said the policy defined a claim as “any civil or criminal proceeding, and expressly included ‘an appeal from any such proceeding.’ ”

Scorecard: The insurance company must pay for the costs to appeal the conviction.

Takeaway: A “thing that is ‘final until reversed’ is not final,” the court ruled.

Maritime vs. State Law

In february 2011, peter savoie and matt delahoussaye used a crane barge to attempt to dislodge solid objects from inside an offshore well in the Atchafalaya Basin in Louisiana.

Savoie was preparing to disconnect the hydraulic gate valve from the crane when the crane came toward him and knocked him off balance. He tried to clutch the crane, but lost his grip and fell about 8 feet, resulting in a “crush-type injury to the right lower extremity.”

Savoie eventually settled his claims against his employer, Specialty Rental Tools & Supply (STS). The master services contract (MSC) had required STS to indemnify Apache Corp., which had hired STS to perform the “flow-back process” on its fixed production platform.

The MSC stated it should be enforced under maritime law unless it was inapplicable.

Even though the injury case was settled, crane owner Larry Doiron Inc. and crane operator Robert Jackson, both of whom are part of Apache, sought a court ruling that would “enforce their contractual right to defense and indemnification” under admiralty law.


Zurich American Insurance Co., which had issued the policy for the MSC, argued the indemnity provision was void under the Louisiana Oilfield Indemnity Act.

The U.S. District Court for the Western District of Louisiana agreed with Doiron and Jackson that it had a right to defense and indemnity, and that state law did not apply. On appeal by STS, Zurich and Oil States Energy Services, the U.S. 5th Circuit Court of Appeals on Feb. 23 agreed.

While flow-back activities have little to do with traditional maritime activity, it ruled, a vessel was necessary to do the work.

Scorecard: The insurer must defend and indemnify the barge owner.

Takeaway: Because the operation could not be completed with the vessel’s crane, the case was decided under maritime law.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Marine

Crewless Ships Raise Questions

Is a remote operator legally a master? New technology confounds old terms.
By: | March 5, 2018 • 6 min read

For many developers, the accelerating development of remote-controlled and autonomous ships represents what could be the dawn of a new era. For underwriters and brokers, however, such vessels could represent the end of thousands of years of maritime law and risk management.

Rod Johnson, director of marine risk management, RSA Global Risk

While crewless vessels have yet to breach commercial service, there are active testing programs. Most brokers and underwriters expect small-scale commercial operations to be feasible in a few years, but that outlook only considers technical feasibility. How such operations will be insured remains unclear.

“I have been giving this a great deal of thought, this sits on my desk every day,” said Rod Johnson, director of marine risk management, RSA Global Risk, a major UK underwriter. Johnson sits on the loss-prevention committee of the International Union of Maritime Insurers.

“The agreed uncertainty that underpins marine insurance is falling away, but we are pretending that it isn’t. The contractual framework is being made less relevant all the time.”

Defining Autonomous Vessels

Two types of crewless vessels are being contemplated. First up is a drone with no one on board but actively controlled by a human at a remote command post on land or even on another vessel.

While some debate whether the controllers of drone aircrafts are pilots or operators, the very real question yet to be addressed is if a vessel controller is legally a “master” under maritime law.


The other type of crewless vessel would be completely autonomous, with the onboard systems making decisions about navigation, weather and operations.

Advocates tout the benefits of larger cargo capacity without crew spaces, including radically different hull designs without decks people can walk on. Doubters note a crew can fix things at sea while a ship cannot.

Rolls-Royce is one of the major proponents and designers. The company tested a remote-controlled tug in Copenhagen in June 2017.

“We think the initial early adopters will be vessels operating on fixed routes within coastal waters under the jurisdiction of flag states,” the company said.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.”

Once autonomous ships are a reality, “the entire current legal framework for maritime law and insurance is done,” said Johnson. “The master has not been replaced; he is just gone. Commodity ships (bulk carriers) would be most amenable to that technology. I’m not overly bothered by fully automated ships, but I am extremely bothered by heavily automated ones.”

He cited two risks specifically: hacking and fire.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.” — Rolls-Royce Holdings study

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty, asked an even more existential question: “From an insurance standpoint, are we even still talking about a vessel as it is under law? Starting with the legal framework, the duty of a flag state is ‘manning of ships.’ What about the duty to render assistance? There cannot be insurance coverage of an illegal contract.”

Several sources noted that the technological development of crewless ships, while impressive, seems to be a solution in search of a problem. There is no known need in the market; no shippers, operators, owners or mariners advocate that crewless ships will solve their problems.

Kinsey takes umbrage at the suggestion that promotional material on crewless vessels cherry picks his company’s data, which found 75 percent to 90 percent of marine losses are caused by human error.


“Removing the humans from the vessels does not eliminate the human error. It just moves the human error from the helm to the coder. The reports on development by the companies with a vested interest [in crewless vessels] tend to read a lot like advertisements. The pressure for this is not coming from the end users.”

To be sure, Kinsey is a proponent of automation and technology when applied prudently, believing automation can make strides in areas of the supply chains. Much of the talk about automation is trying to bury the serious shortage of qualified crews. It also overshadows the very real potential for blockchain technology to overhaul the backend of marine insurance.

As a marine surveyor, Kinsey said he can go down to the wharf, inspect cranes, vessels and securements, and supervise loading and unloading — but he can’t inspect computer code or cyber security.

New Times, New Risks

In all fairness, insurance language has changed since the 17th century, especially as technology races ahead in the 21st.

“If you read any hull form, it’s practically Shakespearean,” said Stephen J. Harris, senior vice president of marine protection UK, Marsh. “The language is no longer fit for purpose. Our concern specifically to this topic is that the antiquated language talks about crew being on board. If they are not on board, do they still legally count as crew?”

Harris further questioned, “Under hull insurance, and provided that the ship owner has acted diligently, cover is extended to negligence of the master or crew. Does that still apply if the captain is not on board but sitting at a desk in an office?”

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty

Several sources noted that a few international organizations, notably the Comite Maritime International and the International Maritime Organization, “have been very active in asking the legal profession around the world about their thoughts. The interpretations vary greatly. The legal complications of crewless vessels are actually more complicated than the technology.”

For example, if the operational, insurance and regulatory entities in two countries agree on the voyage of a crewless vessel across the ocean, a mishap or storm could drive the vessel into port or on shore of a third country that does not recognize those agreements.

“What worries insurers is legal uncertainty,” said Harris.

“If an operator did everything fine but a system went down, then most likely the designer would be responsible. But even if a designer explicitly accepted responsibility, what matters would be the flag state’s law in international waters and the local state’s law in territorial waters.


“We see the way ahead for this technology as local and short-sea operations. The law has to catch up with the technology, and it is showing no signs of doing so.”

Thomas M. Boudreau, head of specialty insurance, The Hartford, suggested that remote ferry operations could be the most appropriate use: “They travel fixed routes, all within one country’s waters.”

There could also be environmental and operational benefits from using battery power rather than conventional fuels.

“In terms of underwriting, the burden would shift to the manufacturer and designer of the operating systems,” Boudreau added.

It may just be, he suggested, that crewless ships are merely replacing old risks with new ones. Crews can deal with small repairs, fires or leaks at sea, but small conditions such as those can go unchecked and endanger the whole ship and cargo.

“The cyber risk is also concerning. The vessel may be safe from physical piracy, but what about hacking?” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]