As reported in lawyers weekly in a case that came down this week, , judge William Smith in the Federal Court in Rhode Island ruled that an insurance company that issued a policy to a boat owner could not deny coverage for damage caused by water intrusion. Although the judge ruled in favor of vthe boat owner the lesson learned is that caution must be exercised when buying a boat.
The policyholder argued that the damage was caused by a latent defect and thus was covered by the policy.
“[T]he ‘latent defect’ is the use of balsa wood in areas surrounding hull installations,” Smith found. “A reasonable insured would expect the term ‘latent defect’ to include the use of an otherwise appropriate boat building material in a flawed manner where such improper use is not discoverable by ordinary observation.”
The judge went on, however, to rule in the insurer’s favor on the policyholder’s claim under G.L. §9-1-33 alleging a failure to perform an adequate investigation.
“A difference of opinion as to policy language interpretation does not a bad faith investigation make,” Smith stated.
The 16-page decision is Ardente v. The Standard Fire Insurance Company, Lawyers Weekly No. 52-086-12.
Plaintiff Evan Ardente purchased a 1997 580 Super Sun Sport Sea Ray yacht from its original owner.
When he began to experience problems with the yacht, the plaintiff retained Stafford Marine Services to perform a marine survey. Stafford concluded that water intrusion had caused damage to the vessel’s hull and deck.
The defendant, Standard Fire Insurance Co., retained Stephen J. Burke, a naval architect with Burke Design, LLC, to inspect the yacht. Based on his own inspection of the boat and review of a thermal infrared survey, Burke reported to Standard that the damage was caused by “poor composite manufacturing techniques employed during the original construction of the vessel.”
More specifically, Burke concluded that the failure of the builder to terminate the balsa core material and substitute solid composite laminate in the area of hardware, equipment, fasteners and related installations allowed moisture to enter the hull and deck laminates at many locations on the vessel.
“In a properly built boat, port lights and other hardware installed into the hull should be surrounded by solid laminate … because solid laminate is a dense material that does not transmit moisture,” the judge explained, noting that balsa wood is not water-proof. “In Ardente’s Yacht, balsa wood is present in the areas surrounding installations in the hull. This poor manufacturing technique caused the damage to the Yacht.”
The plaintiff presented a claim to Standard for the damage. The policy issued to the plaintiff excluded loss caused by “[d]efects in manufacture, including defects in construction, workmanship and design other than latent defects as defined in the policy.”
The policy contained an exception to that exclusion, however, providing that “any resulting direct physical loss or damage to your yacht resulting from [a] latent defect will be covered.”
The policy defined “latent defect” as “a hidden flaw inherent in the material existing at the time of the original building of the yacht, which is not discoverable by ordinary observation or methods of testing.”
‘Inherent flaw’ interpreted
“In the instant case, there is no factual dispute concerning the cause of the damage to the Yacht: the damage occurred because the hull was constructed in such a way that the holes where the fixtures attached to the boat passed through both laminate and balsa wood; because of this, water intruded and saturated the balsa wood over time,” Smith said, noting that the only dispute concerned whether the loss sustained was covered by the insurance policy.
“[W]hether the policy covers the damage to the Yacht depends upon whether that damage resulted from a latent defect,” he said. “Thus, the only disputed issue is whether the damage to Ardente’s Yacht resulted from a ‘flaw inherent in the material’ within the meaning of the policy.”
The judge found that susceptibility to rot is a characteristic of balsa wood, but it is not a flaw, and that the balsa wood used in the plaintiff’s yacht was perfectly good, notwithstanding its susceptibility to rot.
“There is a fundamental contradiction in the policy’s definition of latent defect as a ‘flaw inherent in the material,’” Smith said.
The word “inherent” requires that a latent defect be characteristic of or intrinsic to the material. The word “flaw” imposes the exact opposite requirement and includes problems with a specific piece of material, but not problems characteristic of the material itself.
“In short, giving the terms their plain and reasonable meaning, there can be no such thing as an inherent flaw,” Smith said.
While there is no such thing as a “flaw inherent in the material,” Smith said, the case before him involved a flaw in the construction of the hull resulting from an inherent characteristic of balsa wood.
“For this reason, the Court interprets the policy language to cover the loss to Ardente’s Yacht,” he concluded.
“It would be inconsistent with the insured’s reasonable expectations to hold that, because there is no such thing as an ‘inherent flaw,’ the exception to the manufacturing defects exclusion is entirely meaningless,” Smith said. “If Standard intended to exclude all manufacturing defects from coverage without exception, it ‘should have so stated in plain and simple language.’”
Read more: http://rilawyersweekly.com/blog/2012/12/06/water-damage-to-boat-covered/#ixzz2EOLUe9gr