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Recreational Boating Committee of The Maritime Law Association of the United States Frank P. DeGiulio, Chairman Spring/Summer 2010 Volume 19 Number 1 This journal will summarize the latest Yacht retains vessel status during cases and other developments which impact the recreational boating industry. overhaul We welcome any articles of interest or suggestions for upcoming issues. Crimson Yachts v. The Betty Lyn II, 2010 U.S. App. LEXIS 7447 - The Editorial Staff (11th Cir. April 12, 2010) Also in this Issue he U.S. Court of Appeals for the Eleventh Circuit has held Tthat a yacht undergoing extensive overhaul remained a ves- Insurance .............................................. 2 sel susceptible to a maritime lien for necessaries, because the yacht retained the ability to be towed through the water and the overhaul did not amount to new construction. Salvage ................................................... 4 The vessel was a 132-foot yacht built in 1974. Its owner con- tracted with an Alabama shipyard to perform a refit, including Jurisdiction and Procedure ............... 6 extension of its decks and replacement of the engines, genera- tors, electronics, plumbing, and wiring. The old equipment was removed and the yacht was towed to the shipyard, where it was Torts ....................................................... 7 hauled ashore and placed in a covered shed. Work continued for the next eighteen months, and although there were some pay- Financing .............................................. 9 ments made by the owner, the unpaid invoices allegedly exceed- ed $1.2 million. The shipyard filed an action in rem against the vessel and in Products Liability personam against the owner. An arrest warrant was issued, but and Warranties ................................. 9 later the district court held a hearing and determined that, given the extent of the work, the yacht was out of navigation and was no longer a vessel susceptible to a maritime lien. (We reported on the district court’s decision in Boating Briefs Vol. 18:1.) On interlocutory appeal, the Eleventh Circuit reversed. After a thorough discussion of the history and purpose of maritime liens and the Federal Maritime Lien Act, the court determined that the yacht remained a vessel throughout the overhaul period. The yacht “need merely be capable of transportation on water to be a vessel,” and it was sufficient that the yacht could have been put in the water and placed under tow on 24 hours’ notice at any point during the overhaul. The fact that the work was done on land did not deprive the yacht of vessel status. And, since the hull remained intact, the work did not qualify as new construction. The yacht was simply being rebuilt, not constructed anew. The district court’s dismissal for lack of in rem jurisdiction Boating Briefs 1 was therefore erroneous, and the case was remanded to properly procure insurance. The broker sought dis- for consideration of the shipyard’s in rem claim on the missal of these claims because the insured had not filed merits. an “affidavit of merit” as required in New Jersey profes- sional malpractice cases. The court determined that the Insurance claims against the broker did need to be supported by an affidavit of merit and therefore had to be dismissed. However, being as the broker waited until the later In New Jersey, uberrimae fidei stages of the case before raising the insured’s failure to displaced by policy provision supply an affidavit, the claims were dismissed without prejudice to the insured’s right to re-file them with the New Hampshire Ins. Co. v. Diller, 2009 U.S. Dist. LEXIS necessary affidavit. 120836 (D.N.J. Dec. 23, 2009) No coverage where insured he U.S. District Court for the District of New TJersey held that an insured has no uberrimae fidei concealed chartering activities disclosure duty when the policy contains a provision that reads: “Any relevant coverage(s) shall be voided if Axis Reinsurance Co. v. Henley, 2009 U.S. Dist. LEXIS you intentionally conceal or misrepresent any material 98718 (N.D. Fla. Oct. 22, 2009) fact or circumstance relating to this insurance, or your insurance application, before or after a loss.” his was a declaratory-judgment action against an Two federal appellate courts have reached differ- Tinsured whose vessel, a 34-foot Fountain T-top, ent conclusion when interpreting similar provisions: sank dockside following an offshore fishing trip. At the Eleventh Circuit in King v. Allstate Ins. Co., 906 trial the court found that the insured had intention- F.2d 1537 (11th Cir. 1990), held that such a provision ally concealed the fact that he advertised and used the relieves the insured of the duty-to-disclose under uber- vessel for charter fishing trips. There was uncontested rimae fidei, and the Ninth Circuit in New Hampshire evidence that charter use presents a greater risk than Ins. Co. v. C’est Moi, Inc., 519 F.3d 937 (9th Cir. 2008) purely personal use and that the insurer did not write (reported in Boating Briefs Vol. 17:1), held that it does insurance for vessels in the charter business. not. Notably, the court declined to apply uberrimae fidei In view of the disagreement between these courts because the policy contained a clause prohibiting in- and the absence of a case directly on point from the tentional concealment or misrepresentation, and in the Third Circuit, the court decided that there was no- en Eleventh Circuit such a clause means that the policy trenched federal law on the subject and that the provi- cannot be rescinded unless the insured’s concealment sion should be evaluated under New Jersey’s rules of or misrepresentation was intentional. Even applying insurance-policy construction. Construed in that light, this heightened scienter requirement, however, the the clause would allow rescission only if there was court determined that the insured had intentionally intentional concealment or misrepresentation (i.e., the concealed his chartering activities from the insurer. word “only” would effectively be read into the provi- The court provided several alternative reasons why sion). coverage was unavailable. First, the loss was not for- In view of this holding, the insurer was unable to tuitous inasmuch as it was caused by improper main- obtain summary judgment because there were ques- tenance, namely, a missing starboard-side bilge pump, tions of fact as to whether the insured had intention- the absence of an anti-siphon loop, and an apparently ally concealed or misrepresented material facts relating inoperable port-side bilge pump. to prior losses and engine horsepower, among other Second, the policy excluded coverage for losses things. caused by wear and tear or mechanical breakdown, The insured also sued his insurance broker on -a va and the court determined that the exclusion applied riety of claims premised on the broker’s alleged failure here because the sinking was a result of wear and tear 2 Boating Briefs on the bilge pumps and a breakdown of the port-side last in a chain of similar partnership or “conditional pump. purchase agreements” by which the right to use the Third, the insured breached the negative implied vessel had been successively conveyed to different peo- warranty of seaworthiness inasmuch as he had left the ple. In this manner, the titled owner was several layers vessel in the water following the charter trip, know- removed from operational control of the vessel. ing that there was a significant amount of water in the In reviewing New York insurance cases, the court bilge and that the bilge pump was not working cor- stated that an answer to a question on an insurance rectly. Although rain subsequently compounded the application cannot be the basis for rescission under vessel’s problems, the court noted that rain would not New York law if a reasonable person in the applicant’s have resulted in a capsizing had the vessel been looked position could have interpreted the question as the ap- after properly. plicant did. And, the court stated, the insurer’s position Finally, the court determined that, contrary to the on materiality should be corroborated by the insurer’s insurer’s argument, the insured did have an insur- own underwriting practices “such as underwriting able interest in the vessel even though he was not the manuals, bulletins or rules pertaining to similar risks, titled owner. The insured was acting in the capacity of to establish that it would not have issued the same a bailee and agent for the titled owners, and had the policy if the correct information had been disclosed in benefit of using the vessel. This was sufficient to vest the application.” him with an insurable interest. In this case, the application did not expressly require the applicant to identify the “owner” but simply asked Insurer denied summary judgment for the name of the “insured.” Further, the insurer’s only factual support for the motion was an affidavit where materiality of misrepresen- from an in-house senior underwriter, who stated that tation was in dispute the policy would not have been issued had the appli- cant’s “partnership” arrangement been disclosed. But the insurer did not offer any written guidelines to cor- Joseph v. Great Lakes Reinsurance (UK) PLC, 2010 U.S. roborate the underwriter’s position or other evidence Dist. LEXIS 24454 (N.D. Ohio March 16, 2010) that applicants in a similar situation would not have obtained a policy from this insurer. high performance Baja Outlaw was allegedly Secondly, the court determined that, at least for stolen, and the marine insurer sought summary A purposes of summary judgment, the insurer had not judgment on the basis that the person who applied for shown that the misrepresentation of the purchase price the insurance had, in filling out the insurance applica- was material.

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