P&I Coverage and the 5th Circuit

On October 13th, the Fifth Circuit came out with an interesting maritime P&I coverage case, Certain Underwriters at Lloyds, London, v. Cox Operating, 2023 WL 6779999, Case No. 22-30371 (5th Cir., Oct. 13, 2023).  Late last week Lloyd’s filed a “Petition for Panel Rehearing.”  

The Fifth Circuit decision appears sound; it is essentially limited to the language of the policy at issue and reads that language to deny Lloyd’s the right to seek subrogation for an additional insured.  It does not appear to present any dramatic new law, but it does underscore the truism that coverage is determined by a close and holistic reading of the policies and exclusions. 

The Petition does not appear to raise any relevant new arguments, so Lloyd’s somewhat extraordinary request panel rehearing is surprising, and seems unlikely to be granted.  

Background

A shipowner, Select, entered into a Master Service Agreement to provide services, including the charter of a vessel and use of its captain and crew, to a rig owner, Cox. The MSA included a clause under which Select agreed to indemnify Cox against any losses, personal injuries, etc. incurred by Select or its personnel.  

To cover those risks, Select agreed to procure insurance policies that included Cox as an additional assured with a waiver of subrogation in Cox's favor – meaning that the insurance policy provider would not be able to recoup costs incurred under the policy, from Cox.  Specifically, Select obtained a general liability policy from US Specialty Insurance Company, and a P&I policy from Lloyds. 

Lloyds’ P&I coverage clause provided coverage for:

“all such loss and/or damage and/or expense as the [a]ssured shall as owners of the vessel named herein have become liable to pay,” including “hospital, medical, or other expenses necessarily and reasonably incurred in respect of loss of life of, personal injury to, or illness of any member of the crew of the vessel.”

Select added Cox as an additional assured under the policy, and Lloyds in turn agreed to “waive all rights of subrogation against any parties so released.”

However, the waiver of subrogation had an exclusion the read: 

“no party shall be deemed an [a]dditional [a]ssured or favoured with a waiver of subrogation on any vessel insured hereunder which is not actually engaged or involved in the intended operations at the time of loss[.]”

During the course of the contract, Select’s vessel Master was injured while on Cox’s platform.

After the Master’s accident, Lloyds paid the maintenance and cure, but then sought to recoup those payments from from Cox.  The district court granted summary judgment to Cox, finding that Lloyds had no right to recover from Cox. 

Lloyds appealed, arguing that because the injury did not occur on the covered vessel, the captain was not covered by the policy; or in the alternative, that the injury fell within Lloyds’ waiver of subrogation exclusion. 

Legal analysis

Issue 1 – Does the P&I policy cover the captain’s maintenance and cure?

The Fifth Circuit quickly dispatched Cox’s first argument that because the injury did not occur on Select’s vessel, the captain’s maintenance and cure were not covered under the P&I policy. 

Lloyds pointed to the policy’s statement that it provides coverage for “all such loss and/or damage and/or expense as the [a]ssured shall as owners of the vessel named herein have become liable to pay.” However, the court found that the indemnity provision in the MSA explicitly applied to losses beyond the mere operation of the vessel to cover “all [l]osses of every kind and character arising out of bodily injury, illness, death, property damage” in connection with Select's services. 

Accordingly, Select incurred the costs of maintenance and cure for injuries sustained while the captain was “in service of the vessel”, even if the captain was aboard Cox’s oil platform and those costs were covered by the P&I policy.

Issue 2 – Does the limitation on Lloyds’ waiver of subrogation apply?

With regard to the second issue, the court held that the waiver of subrogation blocked Lloyd’s from recouping the payments from the co-assured, Cox. 

The key point relied upon by the court was the precise wording of the exclusion – Lloyds was arguing that the coverage and waiver of subrogation applied only to “vessel operations.”  However, the exclusion only limits the waiver of subrogation where a vessel is “not actually engaged or involved in the intended operations at the time of loss” meaning that the P&I policy limits the waiver of subrogation only where the vessel is not engaged in operations intended by the parties to the MSA at the time of the loss.

Since the vessel was engaged in the intended operations – servicing of Cox’s platform – at the time the Master was injured, the policy applied, the waiver of subrogation applied, and the exclusion to the waiver did not.

Petition for Rehearing

Lloyds’ Petition complains that the decision will expand the scope of P&I coverage generally, exposing insurers to greatly increased liability exposure; and that it would further undercut a specific insurance policy, Marine Employer Liability (MEL) – cover expressly intended for maintenance and cure obligations incurred by a person off the vessel. 

While Lloyd’s interest in clarifying the distinction between specific policy coverages seems reasonable, the Fifth Circuit, like most courts, enforces insurance policies strictly by their express terms, based on specific language at issue, with any ambiguity being read against the drafter.  Accordingly, it seems to us that the Fifth Circuit is unlikely to be swayed; leaving aside whether Lloyd’s Petition would even get a substantive review by the court, or be rejected as a merely seeking a “second bite at the apple.”

Conclusion

The take-away from the case is the same as in most insurance cases – the courts always look at the precise language of the contract of insurance, and apply that language strictly.  When a policy includes an additional insured clause based on the application of indemnification provisions in a service contract, the vessel owner needs to read both closely and together, to be certain that all risks are properly covered.