Jason P. Minkin and Katherine A. Martin (BatesCarey LLP, Chicago)
Depending on the cover you purchased, your marine insurance policy may provide broad (or even worldwide) navigation limits or a navigation limit requiring that the vessel be confined to a specified geographic area. For those marine insurance policies with navigation limits, U.S. courts have found that that an insured’s breach of the policy’s navigation limit warranty releases the insurer of liability for a loss that occurs during the breach. This principle was recently followed in Atlantic Specialty Insurance Co. v. AC Chicago, LLC, et al., No. 15-cv-10972, 2017 WL 3531490 (N.D. Ill. Aug. 17, 2017), in which the U.S. District Court for the Northern District of Illinois determined that a marine insurance policy did not cover any damage or loss after a vessel’s grounding because the vessel was intentionally navigated outside of the policy’s navigation limits. The court’s holding is a reminder that navigation limits are strictly enforced and should be drafted with specificity to avoid any confusion over the boundaries.
AC Chicago, LLC (“ACC”) applied for Hull & Machinery and P&I coverage through Atlantic Specialty Insurance Company for two America’s Cup Class sailboats to be operated in Lake Michigan. In the policy application, ACC requested navigation limits of ten miles north and five miles east of 31st Street Harbor in Chicago. The underwriter reviewed a nautical chart for Lake Michigan’s Chicago shoreline area to identify any potential marine hazards within these navigation limits and the surrounding areas. The underwriter noted that there were shoals—submerged ridges, banks, or bays that rise from the bed of a body of water near the surface that often contains a danger to navigation—one mile south of 31st Street Harbor, which was outside of the requested navigation limits. Based on the underwriter’s investigation, a policy was issued which contained a Navigation Condition requiring as a condition of coverage that the vessel be confined to ACC’s requested navigation limits “when vessels are operated from May 1 to October 21 each year.”
During summer 2015, one of ACC’s vessels was docked at Chicago’s 31st Street Harbor. On August 1, 2015, the vessel went on a paid excursion in Lake Michigan and sailed north to Chicago’s Navy Pier and Shedd Aquarium before heading south to return to the harbor. The captain sailed the vessel approximately one mile south of the harbor so that it could be turned into the wind. The vessel then headed northwest towards the harbor, and was grounded on a shoal one mile southeast of the harbor.
ACC submitted a claim to its insurer, Atlantic. Atlantic disclaimed coverage after it learned the vessel was grounded one mile southeast of the 31st Street Harbor, which in Atlantic’s view, was outside the policy’s specified navigation limits.
ACC contended the navigation limits should not have ended at the southern-most rock of the harbor wall because the only entrance to 31st Street Harbor that allows ingress and egress from the harbor opens to the south. ACC argued that “31st Street Harbor” was ambiguous and that a fair reading of the policy would include in its navigation limits the area needed to safely maneuver the vessels in and out of the harbor. The court rejected the argument that “31st Street Harbor” was ambiguous, finding it unreasonable to interpret “31st Street Harbor” to include an unspecified distance south of the harbor. The court reasoned that such an interpretation would essentially render the southern border of the navigation limits meaningless because there was no specified distance south of 31st Street Harbor that would be covered. Moreover, the court rejected ACC’s argument that, because 31st Street Harbor only opens to the south, by necessity, vessels would require room to maneuver when entering or exiting the harbor. The policy clearly provided coverage to the vessel within the exact navigation limits that ACC requested; if ACC had wanted the southern border to extend beyond the harbor, it could have requested as much. The court found the underwriter reasonably relied on ACC’s requested navigation limits in investigating the hazards that could increase the risk that it would be insuring and in providing a quote of insurance. Because the vessel was outside of the navigation limits when it grounded, the court determined ACC had breached the Navigation Condition.
Next, ACC argued that the Held Covered Clause in the policy provided coverage, even if there was a technical breach of the Navigation Condition. The Held Covered Clause provided:
The vessel is held covered in case of any breach of conditions as to . . . locality . . . provided (a) notice is given to the Underwriters immediately following receipt or knowledge thereof by the Assured and (b) any amended terms of cover and any additional premiums required by the Underwriters are agreed to by the Assured.
Typically, held covered clauses are used to protect the owner of a vessel when there is an inadvertent failure to comply with specifications in the policy. Here, according to the court, ACC was aware of the navigation limits specified in the policy and intentionally operated the vessel outside of those limits. ACC argued that the breach of the Navigation Condition was unintentional and should be excused because the crew was trying to move the vessel back to 31st Street Harbor. The court disagreed. According to the court, ACC’s logic would create an exception to the specified navigation limits “each and every time” the vessel sailed south of 31st Street Harbor as long as the vessel was in the process of returning to its home port. The court distinguished State National Insurance Co. v. Anzhela Explorer, LLC, 812 F. Supp. 2d 1326 (S.D. Fla. 2011), where, unlike here, the breach was an inadvertent violation because it occurred during the owner’s attempt to transport the vessel from its place of purchase to the intended coverage area. The court also determined that ACC had not complied with the unambiguous notice requirement of the Held Covered Clause.
In Atlantic Specialty, the court interpreted and enforced the navigation limits requested by the vessel owner during the marine insurance application process. The decision is a reminder that during the underwriting process, vessel owners who purchase marine insurance with navigation limits should request limits that correspond precisely to where the vessel is expected to operate. It is also a reminder that the vessel owner understands the nature and scope of the navigation limit and ensures that the vessel is operated within the limit.