The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | November 1, 2017 • 5 min read

Batteries Included: Insurer Must Pay for Pollution Damages

Between 1982 and 2009, exide technologies inc. rented property from The Wattles Co. to operate its battery manufacturing facility. After the tenants left, Wattles sued Exide for roofing and floor damages caused by sulfuric acid fumes and acid leaks released during the manufacturing process.

As of June 2016, Wattles was awarded $1.4 million in damages and more than $860,000 in attorneys’ fees.

Exide turned to its insurer, Ace American Insurance Co., for coverage. Ace, however, claimed it had no duty to pay the claim. According to the insurer, Exide had proposed a pollution exclusion for the policy, but it was omitted from the final policy by mistake.

Both parties agreed the exclusion was intended, argued Ace. In addition, the damages done to Wattles’ roof and floor fell under exclusions for general wear-and-tear — a by product of Exide’s battery operations.

The Georgia federal court was unconvinced.

“The problem with Ace’s reformation claim is that, at best, Ace has produced evidence that the parties to the Ace policy may have intended for it to include a pollution exclusion, but no evidence that they actually did so intend,” the judge said.

“The fact that Exide’s contamination of the premises — i.e., its pollution of the building — was an insured risk is dispositive.”

He found Ace was not only liable for the entire loss exceeding a $2 million deductible up to Exide’s $60 million policy limit, but Ace was also liable for losses stemming from Exide’s defense of Wattles’ underlying suit.


That amount, the judge determined, was still unclear, and he directed the parties to submit supplementary evidence concerning Exide’s defense costs moving forward.

Scorecard: Ace American Insurance Co. can’t rely on an alleged policy error to deny coverage of pollution damages.

Takeaway: The adage “It’s the thought that counts” will not hold in court. A policy and its exclusions require explicit and detailed language.

Secondary Damages Not Excluded

Superstorm sandy hit the atlantic coast in 2012, bringing with it wind, storm surge and flood damage claims. In New York, property owner 7001 East 71st St. LLC returned after the storm to a single-story shopping center, where the owner found flooding and damages to the building’s roof, ceiling and walls.

7001 East held a $3 million policy with Chubb Custom Insurance Co. and a $5 million policy with Continental Casualty Co. Repair estimates reached more than $14 million.

The property owner filed claims with both insurers for property damage and lost profits. The damages, 7001 East claimed, allowed for rainwater to enter the building through holes in the roof created by Sandy’s severe winds. Chubb and Continental both denied coverage, pointing to flood exclusions in each policy.

In two separate hearings, 7001 East took the insurers to court.

The court looked at the damages done, finding flood and rainwater intrusion through the roof as the main two causes.

In Chubb’s case: “These are separate and distinct losses caused by separate and distinct physical forces,” said the court judge.

“Because a jury could find that rainwater and flooding caused damage to distinct parts of the shopping center, the policies’ exclusions for flooding do not bar coverage for the parts of the shopping center damaged by rainwater.”

The judge ruled that the water damages only extended from the holes in the roof, which were caused by wind. Therefore, Chubb was responsible for coverage, because its policy did not exclude wind damage.

Continental, however, had a wind exclusion in its policy and was not liable for the damages.

Scorecard: Chubb’s policy contained a covered hazard — wind — which left the insurer responsible for flood damages. Continental’s policy excluded both flood and wind, allowing the insurer to walk away.

Takeaway: Courts will take into account whether or not excluded damages are a direct result of a covered hazard. In such cases, the court looks to the primary cause of damages to determine coverage.

Insurer Not Responsible for Intentional Fraud

The owner of a hair salon in a Florida strip mall felt cheated. The tenant believed the mall owner, JG Gulf Coast Town Center, LLC, and the real estate manager, CBL & Associates Properties, fraudulently inflated the tenant’s utility rates. Its energy bills went from $500 per month to almost $700.

A class action suit was brought against the owner and manager.

CBL and Gulf sought insurance coverage for the underlying action from its insurer, Catlin Specialty Insurance Co.

The insurer argued that, in its policy, it did not cover claims where a client intentionally and knowingly committed wrongful acts. Catlin had no legal obligation to pay any defense costs or damages incurred, according to the insurer.

CBL and Gulf argued they were entitled to insurance coverage because the underlying action involved alleged “negligent acts, errors or omissions in the rendering of professional services” — something explicitly covered by Catlin’s policy. Each asked for declaratory judgment.


This policy clause came in to question. The court determined an action, error or omission must be negligent in conduct in order for the policy to apply, and because CBL and Gulf were not negligent in their actions but instead intentional, Catlin did not have to pay for the underlying suit.

“Because the only reasonable interpretation of the allegations in the underlying action sound in intentional conduct, and the policy does not cover such acts, Catlin’s motion for judgment on the pleadings is granted and CBL defendants’ motion for judgment on the pleadings is denied,” said the court judge.

Scorecard: Catlin Specialty Insurance Co. does not have to cover the mall owner for a fraud suit.

Takeaway: Businesses must have a plan in place to minimize the risk of employees engaging in fraudulent activities. Insurers typically exclude coverage for such illegal actions.

Autumn Heisler is a staff writer at 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]