Starnet Ins. Co. v. La Marine Serv. LLC

Citation: 298 F. Supp. 3d 869Docket: CIVIL ACTION NO. 16–13511

Court: District Court, E.D. Louisiana; December 26, 2017; Federal District Court

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The case involves the sinking of the M/V CAPT. LJ, owned by LA Marine Service LLC, with Leonard Jourdan, Jr. as its operator. StarNet Insurance Company provided a time-hull insurance policy covering the vessel from September 24, 2015, to September 24, 2016. Following the sinking on April 7-8, 2016, StarNet filed a suit on August 2, 2016, seeking a declaratory judgment to deny coverage for the incident, arguing that the sinking was due to the defendants' negligence. The defendants responded with an answer, affirmative defenses, and a counterclaim for damages. The court struck the defendants' jury demand due to the admiralty nature of the claim and later granted partial summary judgment to the plaintiff, dismissing certain counterclaims. The remaining issues concern the cross-claims for declaratory judgment regarding insurance coverage. 

The court must first determine whether state law or federal maritime law applies, acknowledging that marine insurance contracts fall under federal admiralty jurisdiction. However, absent a specific federal rule, state law is referenced for contract interpretation. The Fifth Circuit outlines three factors for deciding the applicable law: the existence of entrenched federal precedent, the state's legitimate interest in its law's application, and whether the state's rule differs materially from federal law. The primary question is whether defendants' negligence negates coverage under the implied warranty of seaworthiness and the Liner Negligence Clause of the insurance policy, with parties assuming federal law governs the dispute.

Entrenched federal precedent governs the implied warranty of seaworthiness and Inchmaree clauses in maritime insurance, superseding Louisiana law on seaworthiness issues, as established in Thanh Long Partnership v. Highlands Ins. Co. The Liner Negligence Clause, closely related to the Inchmaree Clause, is also governed by Fifth Circuit law, which extends maritime insurance coverage to include additional risks, contingent upon the assured's due diligence.

Federal maritime law implies two warranties of seaworthiness in time hull insurance: an absolute warranty at the policy's inception and a modified warranty where the insured must not knowingly send an unseaworthy vessel to sea. If a vessel owner knowingly allows an unseaworthy vessel to set sail, the insurer can deny coverage for losses arising from that unseaworthiness, with the insurer responsible for proving both the unseaworthiness and its causal link to the loss.

The Liner Negligence Clause in the insurance contract covers losses due to machinery breakdowns, latent defects, and negligence, provided such losses did not result from the assured's lack of due diligence. It broadens coverage beyond standard perils to include specific machinery or hull defects and negligence by certain crew members. The clause is pivotal to the defendants' claim for insurance proceeds, as both the plaintiff's complaint and defendants' counterclaim indicate that the M/V CAPT. LJ sank due to water entering the engine room through various components, with defendants attributing the damage to a premature failure of the stuffing box.

A stuffing box or packing gland assembly creates a seal around a propulsion shaft, allowing rotation while minimizing leaks into the engine room. The plaintiff asserts that a sinking caused by defects in the shafts and stuffing boxes is not covered by the insurance policy unless the defendants meet the Liner Negligence Clause requirements. Defendants, as the insured, must initially demonstrate their loss is covered by the policy. The insurer then must prove any exclusions apply. Defendants have not identified any specific insurance clause that addresses the sinking of the M/V CAPT. LJ, but a claims representative stated it was due to an unforeseen failure, which he claims is covered under the Liner Negligence Clause. The court determines the defendants' claim for benefits is governed by this clause. 

Defendants contend that the exclusion for losses resulting from lack of due diligence by the vessel's assured, owner, or manager should not apply, arguing that the clause broadens coverage. While the Liner Negligence Clause allows recovery for certain losses not covered by traditional maritime insurance, its expansion is limited. To qualify for coverage, the loss must not stem from a lack of due diligence by the assured or vessel owner. The plaintiff maintains that if it can prove the sinking resulted from Leonard Jourdan's lack of due diligence, it is not liable for insurance benefits. The plaintiff also argues that both the American Rule and the Liner Negligence Clause serve as independent defenses to coverage, with violations resulting in denial of benefits. However, the Fifth Circuit has ruled that the Liner Negligence Clause can supersede the American Rule's implied warranties of seaworthiness. The court will assess whether the plaintiff appropriately denied coverage under the Liner Negligence Clause.

The M/V CAPT. LJ sank while moored to a spud barge in Empire, Louisiana, during the night of April 7-8, 2016. Marine surveyors Austin Glass and Nicholas Paternostro provided reports and testimonies regarding the vessel's condition and the maintenance of its stuffing boxes. 

Austin Glass, a marine surveyor since 2011 and former U.S. Coast Guard member, conducted a preliminary inspection and reported on April 10, 2016, that the vessel's stuffing boxes were suspected to be leaking. He indicated that an automatic bilge pump had been used to manage water ingress, powered by a generator that was meant to run continuously. Glass surmised that the generator likely stopped during the night, leading to water filling the engine room and causing the sinking. He clarified that he did not personally inspect the stuffing boxes and based his conclusions on discussions with Jourdan. Glass noted that while stuffing boxes typically leak for cooling, he could not ascertain the extent of the leaks or whether the generator was operational at the time of the incident. Importantly, he stated he was not tasked with determining the cause of the sinking.

Nicholas Paternostro, a marine surveyor since 2006 and former U.S. Coast Guard machinery technician, conducted a survey on June 23, 2016. His report concluded that uncontrolled seawater ingress through the packing gland assemblies (stuffing boxes) was the most probable cause of the sinking. He explained that the packing rings in the stuffing boxes should form a compression seal to maintain watertight integrity while allowing for cooling of the propulsion shafts. Paternostro noted significant wear on the vessel's port and starboard propulsion shafts, which had an hourglass appearance, potentially contributing to the failure of the packing assemblies.

The port propulsion shaft of the M/V CAPT. LJ was worn down from an original diameter of 3 inches to 1.75 inches, while the starboard shaft decreased to 2.25 inches. Photographs in Paternostro's report illustrate significant wear, resembling an hourglass shape, attributed to insufficient maintenance. Paternostro noted that old packing rings can harden and lead to compression failure when new packing is added without removing the old material. This practice caused frictional heat and abrasive contamination, resulting in shaft wear and poor sealing conditions between the shafts and packing chambers, allowing excessive seawater to infiltrate the engine room. Paternostro stated that such conditions render a vessel non-seaworthy.

Defendant Jourdan explained his maintenance practices, admitting he added packing rings as needed without removing old packing unless it was easily accessible. He expressed uncertainty about the fate of the old packing. The defendants claim the vessel sank due to water entering through the shafts and stuffing boxes but do not provide physical evidence supporting a sudden failure of the stuffing boxes.

The plaintiff argues that improper maintenance by Jourdan caused the sinking, while the defendants do not propose an alternative cause. They challenge the reliability of Paternostro's report, alleging bias, yet fail to dispute his findings on the deteriorated conditions of the vessel. The Court finds Paternostro's report credible, concluding that the M/V CAPT. LJ sank due to leaks from the stuffing boxes, caused by overstuffing packing material, which led to the deterioration of the shafts and failure of the seals.

The critical issue is whether Jourdan, as the vessel owner, exercised due diligence regarding the maintenance of the stuffing boxes, which resulted in leaks. Due diligence requires objective inspection and maintenance to prevent deficiencies from becoming critical. It is determined by what a reasonable person would do, rather than the owner's personal views on acceptable practices. Inadequate maintenance can indicate a lack of due diligence.

Evidence shows Jourdan did not properly maintain the stuffing boxes or propulsion shafts. Defendants admitted maintenance involved merely adding packing rings without documented procedures or policies. Jourdan’s approach of adding new packing without removing the old was criticized as poor practice, leading to potential overheating and damage to the shaft. Testimony from marine surveyor Andrew Minster acknowledged some maintenance was conducted but warned that improper packing could exacerbate wear and leaking.

Defendants argued that there were inconsistencies in Paternostro's testimony regarding the removal of packing rings and claimed it would be reckless to replace them while the vessel was afloat. However, Paternostro clarified that safely removing and replacing a few rings at a time was feasible while moored, and defendants did not provide reasons for Jourdan's failure to follow this method.

Jourdan was aware of excessive leaks from the stuffing boxes, which should have necessitated inspections or repairs. Paternostro noted that both packing gland assemblies were likely leaking seawater beyond acceptable industry standards, defined as not exceeding a pencil lead-sized stream. Jourdan's own testimony indicated a significantly larger stream when the vessel was in operation. Paternostro clarified that the assessment of leaks is based on established industry standards rather than subjective opinion, emphasizing that any unmanageable leak should trigger an inspection. Glass corroborated that a vessel like the M/V CAPT. LJ should exhibit only light to moderate dripping, not a steady stream. The Court determined that Jourdan did not exercise due diligence in maintaining the stuffing boxes, as he improperly added packing rings without removing old material, which caused damage and allowed seawater to infiltrate the vessel. Defendants' claims of adhering to maintenance standards lacked factual support, and they acknowledged their negligence in ensuring the vessel's seaworthiness. Consequently, the Court concluded that the loss of the M/V CAPT. LJ was due to Jourdan's lack of due diligence, leading to the vessel's sinking being excluded from coverage under the Liner Negligence Clause.

The Court has ruled that StarNet Insurance Company is not liable for insurance coverage related to the sinking of the M/V CAPT. LJ on April 7, 2016. The defendants' counterclaim for a declaratory judgment has been dismissed. The Court found that the vessel's external propeller, connected to the motor by a shaft through a stuffing box, was critical for safety, as a failure in this system could lead to catastrophic water ingress. Although federal maritime law was applied, the burden of proof for both parties aligned with Louisiana insurance law. The Court previously granted partial summary judgment based on the American Rule and the Liner Negligence Clause, indicating the plaintiff had reasonable grounds to counter the defendants' claim. However, the Court did not resolve whether these standards employ the same negligence criteria. Additionally, it was determined that Jourdan breached the implied warranty of seaworthiness under the American Rule by allowing the vessel to operate in an unseaworthy condition, specifically citing issues with the stuffing boxes that led to the sinking.