Terra Resources, Inc. v. Lake Charles Dredging & Towing Inc.

Court of Appeals for the Fifth Circuit
695 F.2d 828 (1983)

ELI5:

Sections

Rule of Law:

Under Louisiana law, if an insured's liability arises from two separate and independent sources, an insurance policy exclusion applicable to only one of those sources does not preclude coverage based on the other, non-excluded source.

Facts:

Lake Charles Dredging and Parker Brothers owned three unmanned barges used in dredging operations.
Lake Charles Dredging also owned a specific mooring device, consisting of a concrete block sunk into the bay floor connected to a buoy.
On January 25, 1978, employees moored the three barges to this single anchoring device in East Cote Blanche Bay, Louisiana.
A severe storm with gale-force winds developed over the bay that night.
The mooring device was inadequate for the weather conditions; the barges dragged the anchor across the bay floor.
The drifting barges collided with an oil production facility and pipeline owned by Terra Resources and others, causing significant damage.
Lake Charles Dredging held a P&I policy with Fidelity & Casualty and a general comprehensive liability policy with Aetna.
Aetna's policy contained a 'watercraft exclusion,' stating the insurance did not apply to property damage arising out of the use or operation of watercraft.

Procedural Posture:

Terra Resources filed suit against Lake Charles Dredging, Parker Brothers, and Fidelity & Casualty in the U.S. District Court.
Aetna was joined as a third-party defendant.
The underlying claim with Terra Resources was settled for $140,000, with Fidelity & Casualty paying the majority.
The settlement agreement subrogated the defendants to Terra's rights and reserved rights against Aetna.
The U.S. District Court held a trial on the indemnity issue.
The U.S. District Court ruled that Aetna was liable to indemnify Lake Charles Dredging and Fidelity & Casualty despite the watercraft exclusion.
Aetna appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit.

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Issue:

Does a 'watercraft exclusion' in a general liability insurance policy bar coverage when the damage was proximately caused by the combined negligence of operating barges (an excluded risk) and the independent failure of a defective mooring device (a covered risk)?

Opinions:

Majority - John R. Brown

No, a watercraft exclusion does not defeat coverage where an independent, non-excluded cause contributes to the loss. The court reasoned that while the barges (watercraft) were involved, the ownership and maintenance of the mooring device constituted a separate and independent source of liability. The court found that the damage would have occurred due to the failure of the mooring device regardless of who owned the barges attached to it. Under Louisiana law (citing LeJeune v. Allstate Insurance Co.), because the inadequate anchoring device was a distinct basis of liability not encompassed by the watercraft exclusion, Aetna remained liable. Furthermore, the court held that Fidelity & Casualty was entitled to indemnity from Aetna because Fidelity, as a subrogee, only needed to demonstrate potential liability rather than actual liability to recover, given their claim was based on a written insurance contract. Finally, the court affirmed that the entire settlement amount was recoverable because Lake Charles Dredging was the primary tortfeasor in control of the operation, while Parker Brothers was only constructively at fault.

Analysis:

This decision reinforces the 'dual cause' or 'independent concurrent cause' doctrine in insurance law, particularly within the Fifth Circuit and Louisiana jurisdiction. It prevents insurers from using specific exclusions to avoid liability when a covered risk independently contributes to the harm, even if an excluded risk is also present. The ruling incentivizes insurers to draft exclusions more comprehensively if they intend to avoid all liability related to a specific type of operation. Additionally, the case clarifies the standard for indemnity among insurers, establishing that a settling insurer (subrogee) need only prove 'potential liability' to seek reimbursement from a primary insurer, provided the claim is based on a written contract. This facilitates settlements by reassuring insurers that they can pay out claims to third parties and subsequently litigate coverage disputes without satisfying a heightened burden of proving actual liability.

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