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Stephen Gabarick v. Laurin Maritime (America), Inc

Court of Appeals for the Fifth Circuit
2011 WL 3480964, 650 F.3d 545 (2011)
ELI5:

Sections

Rule of Law:

Under maritime law and the standard SP-23 Protection and Indemnity (P&I) insurance form, legal defense costs are included within the policy's limit of liability and erode that limit, unless a specific manuscript provision unambiguously states otherwise.


Facts:

  • The M/V TINTOMARA, an ocean-going tanker owned by Laurin Maritime, collided with a barge (DM-932) on the Mississippi River.
  • The barge was being towed by the M/V MEL OLIVER at the time of the collision.
  • D.R.D. Towing provided the crew for the tugboat M/V MEL OLIVER under a bareboat charter, while American Commercial Lines (ACL) owned the tug and the barge.
  • The collision split the barge in half, resulting in a significant oil spill into the river.
  • D.R.D. Towing held a Protection and Indemnity (P&I) insurance policy issued by Indemnity Insurance Company of North America (IINA).
  • The IINA policy used the standard SP-23 Form with some modifications and provided a $1 million limit of liability for any single occurrence with a $15,000 deductible.
  • The policy included a specific 'Collision and Towers Liability' clause that excluded coverage for oil spills and personal injury.
  • Following the collision, numerous parties, including crew members and fishermen, asserted claims for damages.

Procedural Posture:

  • Various plaintiffs filed lawsuits, including personal injury and class actions, against the shipping and towing companies.
  • The insurer (IINA) filed an interpleader action in the United States District Court for the Eastern District of Louisiana, depositing the remaining policy limit ($985,000) into the court registry.
  • The barge owner moved to dismiss the interpleader, which the District Court denied.
  • The District Court ruled that the insurer had a duty to reimburse defense costs but no duty to defend, and that these defense costs eroded the policy limits.
  • The District Court issued an order regarding the release of funds to the towing company but denied immediate release to the barge owner.
  • The barge owner and other defendants appealed the District Court's rulings on policy limit erosion and fund allocation to the United States Court of Appeals for the Fifth Circuit.

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Issue:

Do legal defense costs erode the liability limits of a maritime Protection and Indemnity (P&I) insurance policy based on the SP-23 form, or are they payable in addition to that limit?


Opinions:

Majority - Judge Patrick E. Higginbotham

Yes, defense costs erode the policy limits under the SP-23 Form. The court affirmed the district court's interpretation of the insurance contract. The court reasoned that P&I policies are indemnity policies, not liability policies, and typically do not create a separate duty to defend; therefore, defense costs are part of the indemnification cap. The court examined the text of the SP-23 Form, which stated that liability is limited to the amount insured and that defense costs are subject to the policy's conditions (including the limit). The court rejected the appellant's argument that a separate 'Collision and Towers Liability Clause' created ambiguity because that specific clause excluded the types of damages at issue (oil spills). Furthermore, because the insured was a sophisticated entity using a broker, any potential ambiguity would not be construed against the insurer.



Analysis:

This decision reinforces the distinction between standard general liability insurance and maritime Protection and Indemnity (P&I) insurance. It clarifies that in the maritime context, specifically under the widely used SP-23 Form, the policy limit is a 'wasting' limit—meaning every dollar spent on lawyers reduces the amount available to pay actual claims. The court effectively limited the scope of the Exxon Corp v. St. Paul Fire & Marine precedent by distinguishing between policies where 'also pay' language applies to the relevant coverage versus those where it appears in an inapplicable clause (like the collision clause here, which excluded oil spills). This ruling protects maritime insurers from unlimited defense liability when their policies are structured as indemnity contracts.

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