When A Cruise Goes Off Course

February 27, 2013 by

The world press has been abuzz with stories about the recent engine room fire aboard the Carnival Triumph in the Gulf of Mexico. The Triumph sailed from Galveston, Texas on February 7th, destined for sunny Mexico. An engine room fire interrupted those plans and left the vessel adrift without power or basic sanitary services for a period of days.

Even before the vessel was successfully rescued by tugboats and brought to port, plaintiff’s lawyers were busy at work preparing a class action lawsuit against Carnival. The class action was filed just one day after the vessel returned port in the United States District Court for the Southern District of Florida. The complaint alleged that the conditions aboard the vessel, created by the engine room fire, resulted in a severe “risk of injury or illness” and that Carnival “should have known” that the vessel was likely to experience the total loss of power due to prior problems aboard the ship.

This article will highlight the somewhat unique liability scheme and novel insurance coverage issues that may arise from the filing of the class action lawsuit, as well as the property and business interruption claims that may arise from the loss.

The starting point for determining an insurer’s exposure with respect to class action claims is no different than a standard liability coverage analysis. Insurance coverage for such claims, just like any lawsuit, is governed by the allegations contained in the applicable complaint.

Moreover, maritime causes of action for personal injury to passengers are fairly consistent with principles of common law negligence: In order to impose liability on the vessel owner, the plaintiffs must establish that there was a duty of due care owed by the vessel owner to the passenger, that the defendant was negligent and that there was a direct causal link between the negligence and the injury suffered.

In the commercial cruise line context, however, the liability analysis may entail additional complex considerations. Practitioners must take into account contractual statutes of limitation, forum and venue clauses, and also the potential applicability of international conventions and even the law of foreign nations. These issues typically arise from the language contained in the contract of carriage purchased by the passenger for the cruise. The enforceability of these contractual limitations to liability are governed by federal law, 46 U.S.C. § 30509, which ensures that such provisions are not unconscionable. As a practical matter, the statute limits a cruise line’s ability to avoid a jury trial on technical grounds. It should not, however, be considered an all-encompassing bar to liability. Where the limiting provisions are reasonable in nature and have been fairly disclosed to the passenger, such provisions will be enforced by the courts to the benefit of the vessel owner and its insurers.

The unique aspects of analyzing cruse line claims do not stop there. The coverage available to, and utilized by, cruse lines is generally quite different than a standard liability insurance policy purchased from a domestic U.S.-based insurance carrier.

A major cruise ship like the Carnival Triumph, for example, is typically insured by a protection and indemnity (P&I) policy issued by a P&I club. These clubs are mutual organizations that are typically located in the UK or other overseas locales. The P&I structure is part historical and may also bring benefits with respect to tax and regulatory issues. The owners and members of the club are typically the owners of the vessels who are covered by the club rules. The club members are sophisticated parties who may also be represented by international insurance brokers with their own high level of experience and expertise.

Practitioners should also be aware of the significant role that self-insured retentions (SIR) play in the cruise line context. By contrast, SIRs generally have limited impact when it comes to insurance defense of standard U.S. tort claims. Such non-marine defendants served with a summons and complaint will typically notify the applicable insurance company, after which the company is obligated to conduct a prompt investigation to determine whether the claim is covered by the applicable insurance policy. If the claim potentially implicates the coverage provided by the policy, the insurer will appoint a defense lawyer to defend the insured and will take control of the defense of the case.

A different dynamic may exist in connection with the Carnival situation. Large commercial ship owners like Carnival will typically ask their brokers to negotiate insurance coverage with a high level of SIR. The SIR obligates the vessel owner – as opposed to the insurance company – to hire defense counsel and to control the defense up to the limits of the SIR. The SIR is typically in the multi-million dollar range. Often, the vessel owner will agree with the P&I club to use certain attorneys in a given geographical area who have expertise in the defense of maritime claims. The case will then be overseen by the local correspondents for the club, particularly where it is a large claim that may exceed the SIR, implicating the financial exposure of the club.

Another issue singular to cruise line coverage involves the mechanics for recouping defense costs. As referenced above, the typical liability policy gives the insurer both the right and duty to defend its insured. Under most P&I coverage, the club typically has no duty to defend its members, though many club rules do allow the club to appoint counsel and to control the defense at their option. However, even where the club chooses not to assert control over the defense, the vessel owner can still recover the reasonable costs of the defense as “loss, damage or expense” incurred by the member in the indemnity provisions contained in the coverage provisions of the club rules. As noted, the duty to reimburse defense costs would be subject to the SIR provisions discussed above.

With these concepts as a backdrop, the liability exposure for Carnival under the facts alleged in this particular class action do not seem extensive, particularly when compared to other recent cruise line accidents involving serious personal injuries and loss of life. The Carnival class action seeks to impose liability on the vessel owner for the five days that the passengers were adrift at sea. While certainly a major inconvenience and a loss of enjoyable vacation time, the class action is not likely to involve a major payout from Carnival’s P&I club. To the contrary, Carnival has already swung into action by putting up the passengers in free hotel rooms and offering to pay compensation on top of full refunds for the lost cruise experience. This is to be expected from a major hospitality company simply from a public relations standpoint.

In fact, the largest potential insurance claim that Carnival will likely make does not relate to the passengers, but rather business interruption loss which it has experienced. This could be significant. Not only did Carnival lose revenue for the cruise at issue, but the damaged vessel will likely be out of service for the foreseeable future, resulting in lost revenue that the ship would have otherwise generated. The U.S. Coast Guard, and perhaps other agencies as well, can be expected to conduct potentially lengthy investigations into the cause of the engine room fire. The engines will have to be repaired and the vessel thoroughly cleaned and scrubbed prior to the next voyage, which may be a long time down the road.

Another claim that Carnival may pursue is a first party property insurance claim known as “hull coverage.” Hull insurance, like P&I coverage, has many unique facets. Under the typical hull policy, the vessel is insured against so-called “enumerated perils.” One of the most common enumerated perils is the “peril of the sea.” There is a dearth of case law defining exactly what constitutes such a peril. One early U.S. Supreme Court decision refers to losses caused by extraordinary circumstances such as the stress of the weather, wind and waves. This is distinguishable from losses caused by ordinary wear and tear, which generally do not implicate maritime insurance policies. Seaworthy vessels are presumed to be fit to endure and survive the expected rigors of sea travel. Thus, if the vessel is found to be “unseaworthy” for its intended operation, and that unseaworthy condition was the proximate cause of the loss, those findings could be used to void insurance coverage.

With respect to the Carnival, the main reported incident appears to have been caused by a fire either in or near one of the engines to the vessel. In most hull policies fire is one of the enumerated perils that is insured against. Where fire is involved, there would typically be insurance unless the carrier can establish that the loss was proximately caused by a loss specifically excluded by the policy. It is a virtual certainty that an army of marine surveyors and investigators descended upon the vessel at the time it docked to commence an investigation into the cause or causes of the loss. The availability of insurance coverage may well hinge on the findings of those investigations.

A fire on a large commercial passenger vessel can give rise to major business, public relations, liability and insurance issues. We are sure we have not heard the last of the interesting news and developments relating to the Carnival Triumph saga.

Jack Pierce is the senior litigation partner in Barger & Wolen’s San Francisco office. He has more than 30 years of litigation and trial experience for insurance and non-insurance clients. He has been a Proctor in the Maritime Law Society for over 25 years and involved in a wide range of insurance matters. He also defends corporations and their officers and directors in cases involving complex litigation and financial claims.

David McMahon is the managing partner of the firm’s San Francisco office. He has extensive marine related litigation experience having worked on disputes relating to the construction of the worlds largest sailing catamaran and the largest pleasure yacht ever constructed in the United States. He has been involved in the Gulf Oil Spill Litigation as well as numerous complex personal injury and death claims governed by federal maritime law and related federal statutes and international conventions.