Friday, May 9, 2008

Yacht Sinks, Insurance company sues: The Princess Gigi decision.

If you attended the 2007 C-PORT conference, you probably remember my somewhat abbreviated seminar on salvage and insurance. Once the session was aborted, there were some heated debates about why insurance companies fight salvage bills. Indeed, some of the participants singled out one company as primarily responsible for the industry's billing problems with the insurance industry in general. I believe the term (supposedly used in the derogatory) was "[They] always swing for the fences." In baseball, that would be a good thing, but somehow when salvage invoice negotiations are the topic, there is an assumption that the salvors and the insurance companies are on the same team. If you believe that, I have some news for you; insurance companies are always on their own team, and do not invite other to sit in their dugout.
In fact, I have argued that insurance companies are financially obligated to negotiate whenever they can. They have a fiduciary responsibility to their shareholders, after all, to maximize their profits, not to recruit teammates. So they put up a good fight, and that fact isn’t evidence that one company has been charging too much.

Another reason marine salvage cases seem to be so vehemently contested is that most insurance companies have very little admiralty experience; they treat a marine loss like it was an automobile or a house, and hence their arguments are colored by landlubber laws, rather than admiralty.

Probably the best reason to fight an insurance claim is to avoid paying out over $7.2 million. In a recent case, Federal Insurance Company (connected with Chubb Ins) didn’t want to pay a total loss claim on a Mega-yacht that sank in the Bahamas. They didn’t have a single reason to deny the claim, but that didn’t stop them from seeking a declaratory judgment in federal court, denying any liability for the loss. You can read the judges decision here.

The decision is 40 pages long, but it is very interesting reading. A variety of surveyors, at least two yacht builders, banks, brokers, insurance agents are all called on to offer their opinions as to whether the yacht Princess Gigi was actually covered at the time of the sinking.

Point by point, judge Rakoff finds that the insurance company's evidence is immaterial, and in almost every example, he further states that even if you consider that the evidence was material, it doesn't constitute a legal reason to deny coverage. On more than one occasion, the judge questions the veracity of Federal employee's sworn testimony:

"....the court does not credit their self-serving and largely conclusory testimony." (bottom of page 13)

I urge you to read the entire decision. In this case, an insurance company wrote a $7.2m yacht policy without requiring a survey, and when provided the survey, didn't even read it. Once the yacht sank, all of a sudden everything in the survey is important. By their own admission, waiting for surveys is bad for business.

Lest you think this is just an isolated incident, driven by recent hurricane losses or the huge dollar amount involved, here is a $60,000 case from 1971 where the same Federal Insurance Co. attempted to weasel out of paying a total loss claim:

Back to my original point: how is it that one salvage company that started "swingin' for the fences" in 1984 somehow accounts for the actions of the insurance industry in 1971? Of course it doesn't, and the idea is completely bankrupt. The billing practices of one or two small salvage companies, attempting to maximize their profits, have zero bearing on how insurance industry acts, or reacts, when faced with paying out claims. They hate to pay claims, they are not in the business of paying claims, and they will employ a variety of strategies to avoid paying claims.