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Maritime Update: Direct Action Under LA Law – Insurers Liable Only to Extent of Policy Language

Bill Schwartz - 

In the case of SCF WAXLER MARINE, LLC, et al. v. M/V ARIS T, et al. decided by Judge Jay Zainey in the Eastern District of Louisiana on September 6, 2017, the court upheld the underwriter’s right to limit exposure under their policy. The insured in this instance had sought to invoke the defense of Limitation of Liability under 46 USC 3106 et seq. Judge Zainey held that despite the fact Louisiana is a direct action state where an underwriter can be sued directly, the insured’s limitation defense is still available to the underwriters if the policy contained such language.

These consolidated cases arose out of an allision incident which occurred on January 31, 2016 when the M/V ARIS T struck various vessels and facilities on the Mississippi River. The resulting physical damage and economic losses were alleged to be substantial. The ARIS T attributed fault to two other south-bound tugs—the M/V LORETTA CENAC and the M/V ELIZABETH M. ROBINSON. Cenac claimed these other two vessels had blocked its safe passage upriver. This, in turn, caused the ARIS T to maneuver into the other vessels and stationary facilities. Cenac Marine Services, LLC was owner and operator of the LORETTA CENAC and it filed a limitation action in defense of the claims asserted against it.

To rebut the limitation defense, Valero Refining, Motiva Enterprises and Shell Chemical filed third-party complaints against Cenac’s insurers under the Louisiana Direct Action Statute, La. R.S. § 22:1269. The answers filed by Cenac’s insurers to these claims included a limitation of liability defense.

The third party refinery plaintiffs filed for summary judgment. They contended Cenac’s policies of insurance did not include the language required by the Fifth Circuit to support a limitation of liability defense in favor of a vessel’s insurers. The motion was opposed by Cenac’s excess insurers. All of the parties agreed that resolution of the motion turned on the language contained in Cenac’s primary policy because the excess policies are “follow-form” policies.

In Crown Zellerbach Corp. v. Ingram Industries, Inc., 783 F.2d 1296 (5th Cir. 1986), the Fifth Circuit, in an en banc decision, overruled Olympic Towing Corp. v. Nebel Towing Co., 419 F.2d 230 (5th Cir. 1969). The Crown Zellerbach decision held a P&I policy’s insurer could limit its liability to that of the vessel owner’s liability when the terms of its policy allowed it to do so. In reaching this holding, the appellate court distinguished the situation where an insurer attempted to invoke the federal Limitation of Liability Act—a statutory defense provided for the benefit of its insured (the ship owner) but not the insurer—from the situation where an insurer’s policy contained language which allowed it to limit its exposure to that of the vessel owner (assuming  the vessel owner prevailed on its limitation defense). Most importantly, the Crown Zellerbach court explained merely enforcing the policy as written would not contravene Louisiana’s Direct Action statute. Instead, it rejected any notion the Direct Action statute served to impose new liabilities or deprive the insurer of its valid policy defenses.

Turning to the case before the court, Cenac’s primary policy of insurance contained the following statement:

“The Assurer hereby undertakes to make good to the Assured or the Assured’s executors, administrators and/or successors, all such loss and/or expense as the Assured shall as owners of the vessel named herein have become liable to pay and shall pay on account of the liabilities, risks, events and/or happenings herein set forth….”

Judge Zainey held that this language made clear that if Cenac were to prevail on its limitation defense, it would be indemnified by its insurers solely for the amounts for which it was actually liable. In other words, the insurer’s exposure to its own insured was limited solely to indemnity. While the Direct Action Statute overrode the “and shall pay” language in the policy by giving parties a right of direct action against the insurer, it did not and could not increase the insurer’s exposure beyond the express terms of the policy. The Court found the Direct Action Statute could not be clearer: recovery via the direct action is within the terms and limits of the policy.  In other words, any action brought via the Direct Action Statute is subject to all of the lawful terms and conditions of the policy, including the defenses.

Judge Zainey went on to hold that the refineries position, which sought to hold the insurer liable for amounts beyond what it agreed to pay when it issued the policy, was inimical to Louisiana law. Crown Zellerbach did not suggest federal maritime law required policy language which referred specifically to the limitation of liability act under federal law. While the policy at issue in Crown Zellerbach did contain more precise language than the primary policy at issue in this case, Judge Zainey concluded there was nothing in the Crown Zellerbach opinion which required such special language. Instead, what Crown Zellerbach recognized was that nothing in maritime law or Louisiana law is contravened when the insurer seeks to limit its liability to that of the vessel owner when that is expressly what is allowed by its policy language.

Accordingly, Judge Zainey denied the motion brought by the third party plaintiff refineries that the excess insurers of Cenac would only be liable to the extent of the indemnity obligation imposed by the primary policy.

The decision is now on appeal to the Fifth Circuit by the refineries.

The full decision can be found here.

If you have any questions regarding this maritime matter, please contact Bill Schwartz at (504) 569-2900 or wschwartz@bhbmlaw.com.


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