Insurance Policies Must Be Read as They are Written

“Arise out of ” or “Relate in Any Way”

People who write contracts with conditions requiring that one party provides insurance protection for another must be able to read and understand all of the terms, conditions and limitations of a policy of insurance. Failure to do so will usually result in litigation that is, more often than not, unsuccessful.

In International Marine, L.L.C.; Et Al., Tesla Offshore, L.L.C. V. Atlantic Specialty Insurance Company; New York Marine & General Insurance Company, Tesla Offshore, L.L.C. v. Atlantic Specialty Insurance Company; One Beacon Insurance Company; New York Marine And General Insurance Company, No. 18-30392, United States Court of Appeals for the Fifth Circuit (February 12, 2019) the Fifth Circuit resolved an insurance coverage dispute stemming from an allision (the running of one ship upon another ship that is stationary) during a sonar survey by Tesla Offshore, L.L.C. (“Tesla”). Tesla seeks insurance coverage for its liability from the allision under two policies taken out on a vessel it chartered. The district court granted the insurers’ motions for summary judgment and dismissed Tesla’s claims with prejudice. Tesla appealed.

Previously, in International Marine, L.L.C. v. Integrity Fisheries, Inc., 860 F.3d 754 (5th Cir. 2017) the Fifth Circuit noted that Tesla was conducting an archaeological sonar survey using two chartered vessels. The first—the “tow vessel”—was the M/V International Thunder (“Thunder”) owned by International Marine, L.L.C., and International Offshore Services, L.L.C. (jointly, “International”). The second—the “chase vessel”—was the F/V Lady Joanna (“Joanna”) owned by Sea Eagle, Inc. (“Sea Eagle”).

FACTS

To perform the survey, the Thunder traveled along a grid pulling a “towfish” attached to a lengthy cable. The Joanna followed to track the towfish and receive sonar signals it emitted. At one point, the Thunder reeled in the towfish to make some repairs. After the towfish was redeployed, its cable allided with the mooring line of a mobile offshore drilling unit (“MODU”) used by Shell Offshore, Inc. (“Shell”). The allision severely damaged the MODU, and Shell sued Tesla and International for negligence. A jury awarded Shell over $9 million in damages and determined that Tesla was 75% at fault, International 25%.

Following that verdict, Tesla and International sought indemnity from Sea Eagle, owner of the Joanna. Tesla and International also sued two of Sea Eagle’s insurers, claiming that they had been “added as additional insureds” on two policies taken out on the Joanna. The first policy, a marine comprehensive liability (“MCL”) policy, was issued by Atlantic Specialty Insurance Company/OneBeacon Insurance Company (“OneBeacon”). The second, a bumbershoot policy, was issued by New York Marine and General Insurance Company (“NYMAGIC”).

The district court held that Tesla and International were not entitled to indemnity because the allision did not “aris[e] out of or relate[] in any way” to the operation of the Joanna, as the indemnity portions of the Master Service Agreement (“MSA”) between Tesla and Sea Eagle required. The court also denied Tesla’s insurance claims against Sea Eagle’s insurers, holding that those claims fell with the indemnity claim.

The Fifth Circuit affirmed the denial of indemnity but vacated the denial of the insurance claims. Noting that the scope of insurance coverage should be based on the language of the policies and not the availability of indemnity, the court vacated and remanded for further proceedings on the insurance claims. Importantly, the panel affirmed the district court’s finding that “the Joanna’s operation made no contribution to the negligent act causing the [Shell MODU’s] damages.” The court repeatedly emphasized that Tesla’s “negligence, as well as the resulting damage to [Shell’s MODU], was independent of the operation of the Joanna.”

AFTER REMAND

On remand, after presenting the relevant policy language, the insurers moved for summary judgment on whether Tesla and International were insureds on the MCL and bumbershoot policies and, if so, whether they were entitled to coverage for their negligence liability. The district court granted the insurers’ motions, denied Tesla’s, and dismissed Tesla’s and International’s claims with prejudice. Tesla—but not International—appeals.

ANALYSIS

The interpretation of a contract of marine insurance is — in the absence of a specific and controlling federal rule — to be determined by reference to appropriate state law. When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. Under Louisiana law, the party seeking coverage has the burden of proving that the incident falls within the policy’s terms. The insurer has the burden of proving an exclusory clause applies. Ambiguities in a policy are construed in favor of coverage.

Sea Eagle was not obligated by an “insured contract to include” Tesla as an additional insured. The parties agree that the relevant “insured contract” is the MSA. Section 11(a) of the MSA obligated Sea Eagle to acquire insurance to “protect [Tesla] from third party claims arising out of or connected with the performance of Service hereunder.” The MSA defines

Under that definition, the only “Service” Sea Eagle performed was providing Tesla with the Joanna and its crew. Sea Eagle was thus obligated to obtain insurance to cover Tesla’s liability only for third-party property damage that arose from or was connected with the provision of the Joanna and its crew. But the third-party claim for which Tesla seeks coverage did not “aris[e] out of” nor was “connected with” that Service. Consequently, Sea Eagle was not obligated by a “written contract” to obtain insurance coverage to cover Tesla’s liability for third-party property damage based on the allision.

Sea Eagle was not obligated to obtain coverage for Tesla’s liability for the allision. Tesla is not entitled to coverage because the contract required Sea Eagle to obtain insurance to protect Tesla only “from third party claims arising out of or connected with the performance of Service.”

Notwithstanding the conclusion that Sea Eagle was not obligated to name Tesla as an additional insured, the liability for which Tesla seeks coverage did not arise out of Sea Eagle’s “work.” Thus, it is not covered by the MCL policy.

Tesla’s negligence liability is not covered by the MCL policy because its liability did not arise out of Sea Eagle’s work.

The NYMAGIC bumbershoot policy provides no coverage for Tesla. Although Tesla is not listed as a Named Assured or Additional Assured, the policy’s blanket “assured” provision covers any organization to whom the Named Assured is obligated by virtue of a written contract or agreement to provide insurance such as is afforded by this policy, but only in respect of operations by or on behalf of the Named Assured. There are thus two criteria for Tesla to qualify as an additional assured under the bumbershoot policy. First, Integrity (Sea Eagle’s sister company that obtained the bumbershoot policy) must have been obligated by the MSA (the “written contract”) to provide Tesla with the type of coverage the bumbershoot policy affords. Second, if that obligation existed, Tesla is covered only in respect of operations by or on behalf of the Named Assured [Integrity].

To reiterate, the MSA obligated Sea Eagle to obtain insurance protecting Tesla from third-party claims stemming from the “Service” Integrity provided — the use and operation of the Joanna. The claim for which Tesla seeks coverage did not stem from that “Service.”

Even if the MSA obligated Integrity to cover that claim, the second criterion for Tesla to qualify as an additional assured is not satisfied. Tesla maintains — without citing any controlling precedent — that whether the relevant operation was by or on behalf of Integrity depends on whether there was a causal connection or relation between the entire operation in which the Lady Joanna was essential and the underlying incident. The correct understanding of “by or on behalf of,” Tesla claimed, is that “Tesla would have been unable to perform the survey work and towage ongoing at the time of the incident” without the use of the Joanna as “the ‘eyes’ of the tow.”

That language of the policy covers only incidents that arose “in respect of operations by or on behalf” of Integrity. The entire operation was not on behalf of Sea Eagle; to the contrary, Integrity (via its sister company) was working on behalf of Tesla. Tesla is not entitled to coverage under the OneBeacon MCL policy or the NYMAGIC bumbershoot policy. The judgment was, therefore, affirmed.

ZALMA OPINION

Had the insurance contracts and the Master Service Agreement been read and understood along with the insurance policies these lawsuits would never have been filed because the proper insurance would have been obtained to pay for any liability due to the allision. The key to this case is that contracting parties dealing with insurance should use insurance professionals and not steal language from someone else’s standard contract language.