Latent Defects v. Manufacturer’s Defects in Marine Insurance

There are lots of potentially hidden issues in a boat.  I have seen engines destroyed by the use of aluminium and iron together.  I have seen stringers with saturated, rotten plywood cores; hulls full of soaked balsa coring and massive delamination caused by improper foam cores or improper installation of foam cores.   These sorts of issues lead to severe losses and sleepless nights.  For new boats under warranty, these losses will first be the responsibility of the builder.  For the rest, the main question will be whether there is any coverage from the marine insurance.

When a boat owner reports a loss that is not obviously due to a collision, the adjuster and surveyor will certainly be looking for evidence of an uncovered manufacturer’s defect.  In the case of core problems, the insurer is very likely to deny coverage on that basis unless there is clear evidence of a collision that punctured the outer hull.

Most marine insurance covers all losses unless there is a specific exclusion that applies (this is known as an “all risks” policy), so losses are considered covered absent an exclusion.  Most policies exclude all losses that are caused by manufacturer’s defects by excluding coverage for damages caused by “manufacturer’s defect(s) or manufacturer’s defect(s) in design. “  At the same time, most policies exclude latent defects, but cover damage that result from a latent defect with language that excludes “the cost of replacing or repairing any item having a latent defect that causes damage to your insured property, however, resulting damage would be covered.”  A latent defect is usually defined to mean a hidden defect that existed from the time of manufacture.

In many cases, a hidden defect can be viewed as both a manufacturer’s defect, in the sense that it was due to a mistake of the manufacturer, and a latent defect, in that it was hidden and existed from the time of manufacture.  Insurance adjusters may deny coverage if it is a close call or if the cause is actually unknown, but seems like a manufacturer’s defect.  The courts that have reviewed such cases have reached very different decisions.

For example, in French Cuff v. Markel, a case out of Florida, the court considered 64 foot catamaran in which the bulkheads failed because the coring was “too thin or friable.”  The court concluded that this was both a manufacturer’s defect and a latent defect.  Under Florida law, an insurance policy is read to favor the insured, and therefore coverage existed for the loss.  However, the case Carrier v. RLI (applying New York law) considered the loss of a large catamaran due to a bad safety hatch.  In that instance, the Court again considered the problem to be both a manufacturer’s defect and a latent defect.  Under New York law, however, exclusions are applied in the order that they are listed in the policy.  The manufacturer’s defect exclusion was listed first, and therefore there was no coverage.

Since the cases, facts and policy language are all inconsistent, here are some things to keep in mind if the issue arises:

1. Choice of Law: Generally the state’s law that applies to an insurance contract is the state where the policy was issued or the state where the policy was delivered.  These may be different, and state chosen may lead to a completely different result.  Analyze this issue early and choose carefully.

2. Policy Details: The specific language of the policy will be very important.  The surveyor for the insurance company will know how to look for facts that will cause an exclusion of coverage.  A boat owner seeking coverage should be aware of the specific language of the policy and be sure to advocate for a determination that the cause is covered.

3. No Known Cause:  Sometimes when there is no readily ascertainable cause, it will be termed a manufacturer’s defect in order to exclude coverage.  In that instance, the all risks nature of marine insurance should force coverage, but it may take additional advocacy to make sure that it happens.

Good luck and let me know if I can be of assistance.

Dirk Schwenk