Handling claims for the removal of a vessel can depend on important distinctions between two different types of coverage.
By Casey Matthews, USCG Master (50 GRT), CPCU, AMIM, SCLA, Manager, MPL Marine Claims, Victoria Allen, Coverage Counsel, and Nicholas Butovich, Director, Associate General Counsel, Coverage Counsel
When an insured submits a claim for costs associated with removing a damaged vessel from the water, the determination of whether those costs are covered under the Sue & Labor (“S&L”)1 provision of a Hull or Cargo policy or under the Wreck Removal provision of a Protection and Indemnity (“P&I”) policy can create some murky issues. The Second Circuit, in Seaboard Shipping Corp. v. Jocharanne Tugboat Corp., 461 F.2d 500 (2d Cir. 1972), navigates these issues and illustrates the importance of identifying the differences between coverage provided under S&L and Wreck Removal.
In Seaboard, a barge loaded with a cargo of gasoline ran aground on Lake Ontario and began leaking fuel into surrounding waters. The barge owners arranged to have the vessel refloated and taken to New York City with the intention of repairing it. However, the vessel was later deemed economically unrepairable and declared a constructive total loss (“CTL”). The insured had three policies: (1) Hull and Machinery; (2) Open Cargo Legal Liability; and (3) Protection and Indemnity (“P&I”).
A dispute arose concerning which of these three policies was responsible for costs incurred in removing the vessel. The trial court ruled that because all three insurers benefited from removing the vessel, the costs should be divided equally under the three policies. However, the appellate court reversed the decision and held that the costs were not covered under the P&I policy. See Seaboard, 461 F.2d at 504. In other words, the costs were not recoverable as Wreck Removal.
The activities involved in raising a vessel, whether for repair or disposal, are often the same. Determining whether an action falls under the S&L or Wreck Removal provisions is necessary in order to allocate costs to the correct insurer or coverage part. Even in cases where the Hull/Cargo and P&I are underwritten by the same insurer, this distinction is important, as applicable limits may differ. In other situations, an owner might only have a Hull/Cargo or a P&I policy in place, but not both. The absence of one coverage should not automatically result in these costs falling to the other. For example, if an insured does not have a Hull/Cargo policy in place, that insured is not automatically entitled to receive coverage under the P&I policy for Wreck Removal, if the insured’s actions would have been considered S&L.
To understand the reasoning behind Seaboard, it is crucial to understand the differences between S&L and Wreck Removal. Determining whether costs are attributable to S&L or Wreck Removal involves consideration of the specific policy language at issue, the insured’s actions in removing the vessel, and the objective result of the insured’s actions.
Sue and Labor Provision
The S&L provision obligates a vessel owner insured to undertake efforts to mitigate or prevent further damage to a vessel once a covered loss has occurred. S&L provisions are incorporated into Hull/Cargo policies in order to incentivize the insured to “protect and to preserve the [vessel] after an occurrence in order to minimize the [insurer’s] liability.” American Home Assurance Co. v. Fore River Dock & Dredge, Inc., 321 F.Supp.2d 209, 226, fn. 7 (D. Mass. 2004); Seaboard, 461 F.2d at 503 (“[S]ue and labor costs are sums spent by the insured or its representative in an effort to mitigate damage and loss once an accident has occurred”).
"It is important to note that P&I policies are not intended to provide coverage for costs that would otherwise fall within the scope of Hull/Cargo policies."
If an insured attempts to protect the vessel following a covered loss, the insurer is required to reimburse the insured for the “sue and labor costs,” even if the vessel is later declared a CTL. See American Home, 321 F.Supp.2d at 220; see also Zurich Ins. Co. v. Pateman, 692 F.Supp. 371, 376 (D.N.J. 1987) (noting that if the removal of the vessel was undertaken in order to preserve the ship’s hull or gear, then the removal would be covered by the sue and labor provision of the hull policy).
In Seaboard, the vessel grounded and leaked gasoline into Lake Ontario. The vessel was refloated and taken to New York City “in the vain hope of salvaging the hull.” Seaboard, 461 F.2d at 504. Even though the vessel was later declared a CTL, the court found that the costs for refloating and towing the vessel to New York City were S&L costs payable only under the S&L provision of the insured’s Hull and Machinery and Open Cargo Legal Liability policies. Id. The court further held that “no governmental order was necessary to spur the removal and the costs of the operation were therefore not chargeable to [the P&I insurer] as removal costs under its policy.” Id.
Wreck Removal Provision
So, what, then, is Wreck Removal? The Wreck Removal language in P&I policies requires (1) compulsory removal (2) of a wreck.
The vessel must be a wreck.
Not all policies define the term “wreck.” One court has defined the term “wreck” as “a sunken vessel damaged so extremely that it is unnavigable.” See M.J. Rudolph Corp. v. Lumber Mut. Fire Ins. Co., 371 F.Supp. 1325 (E.D.N.Y. 1974); accord Pateman, 692 F.Supp. at 379 (finding a vessel that lost its entire superstructure was unnavigable and, therefore, a “wreck” under the Wreck Removal provision of the P&I coverage). While specific policy language may differ, the definition of “wreck” generally includes the vessel being unnavigable and a CTL.
The removal of the wreck must be compulsory.
For example, the removal of the wreck may be required by a court or governmental order, federal regulation, or a directive from a governmental agency such as the Coast Guard. Additionally, some courts have held that removal is considered compulsory by law not only in situations involving a specific order or directive, but also when the reasonable expectations of the parties suggest that the failure to remove the wreck would reasonably expose an insured to “liability imposed by law sufficiently great to justify the cost of removal.” See e.g., Pateman, 692 F.Supp. at 377-80 citing East Coast Tender Serv. v. Winzinger, 759 F.2d 280 (3d Cir. 1985); Continental Oil Co. V. Bonanza Corp., 706 F.2d 1365 (5th Cir. 1983); Progress Marine, Inc. v. Foremost Ins. Co., 642 F.2d 816, 820 (5th Cir. 1981). Courts have also found that the P&I insurer may be required to cover the Wreck Removal in instances where there is a governmental order and abandonment of the vessel by the insured and the hull insurer. See e.g., Seaboard, 461 F.2d at 504.
"Insurance professionals must be aware of the subtleties involved in distinguishing S&L and Wreck Removal."
It is important to note that P&I policies are not intended to provide coverage for costs that would otherwise fall within the scope of Hull/Cargo policies. See Seaboard, 461 F.2d at 505, fn. 2 (“claims for any loss, damage, or liability which could be covered or would be payable under the standard form of hull policy are excepted from the P&I policy”); Quigg Brothers-Schermer Inc., v. Comm. Union Ins. Co., 223 F.3d 997, 1000 (9th Cir. 2000); cf. American Home, 321 F.Supp.2d 209 at 220-21 (finding debris removal was part of the compulsory wreck removal ordered by the town, as such actions were undertaken to mitigate and prevent damage to potential third-party claimants and were not undertaken to mitigate or prevent damage to the vessels themselves).
The Seaboard Holding
So, what was the basis for the Seaboard court’s holding with respect to the P&I policy? The fact that these costs could or would have been considered payable under the Hull/Cargo policies meant they could not be considered Wreck Removal costs under the P&I policy. As discussed, the shipowner wished, although “in vain,” to repair and preserve the vessel after it ran aground. The objective result of these actions was to preserve and protect the vessel’s condition so that repair could be considered, notwithstanding the ultimate conclusion that the vessel was a CTL. The court stated that while the P&I insurer may have benefited from the efforts undertaken, the costs were not “incurred solely to avert those occurrences or protect those interests for which the [P&I carrier] alone was liable” (emphasis added). The court also noted that “no governmental order was necessary to spur the removal” of the vessel. These facts led to the court’s conclusion that the costs incurred were payable under the Hull/Cargo policies’ S&L provisions, not the P&I policy’s Wreck Removal provision.
The distinction between S&L and Wreck Removal is critical to making a coverage determination. Insurance professionals must be aware of the subtleties involved in distinguishing S&L and Wreck Removal. These subtleties include, but are not limited to, the policy language at issue, the specific actions undertaken by the insured, and the objective result of those actions. It is important to pay careful attention to the facts of each claim and the pertinent case law in order to avoid calling upon the wrong insurer to pay, providing coverage where there is none, or worse, disclaiming coverage where it otherwise exists.
1 The S&L provision is also referred to as the Preserve and Protect provision.