Insurance considerations in the M/V DALI and Francis Scott Key Bridge Incident

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(www.MaritimeCyprus.com) In the wake of the early morning collision on March 26, 2024, between the DALI container ship and the Francis Scott Key Bridge, resulting in the bridge’s collapse, the complexity of insurance coverage in maritime incidents has been brought to the forefront.

The incident resulted in extensive property damage, loss of life, and a significant disruption of shipping and vehicular traffic in and around the Port of Baltimore. With many losses yet to be quantified, a crucial question emerges: which losses are recoverable and from whom?

Below is a summary of the marine insurance coverages potentially triggered by this tragic event, along with the implications of relevant U.S. maritime law principles for claimants, insurers, and reinsurers.

Insurance Coverage Analysis

Below is a summary of the key insurance coverages potentially involved in this incident.

HULL & MACHINERY (H&M)

(purchased by Owner of DALI; claim paid to same)

  • Physical Damage: Covers structural damage to the ship’s hull, with current repair estimates in the region of $28 million.
  • Salvage Costs: Covers expenses incurred in salvaging the vessel, currently estimated to be in the region of $19 million.
  • General Average: May cover the ship’s proportion of general average, depending on the insurance policy terms.

LOSS OF HIRE (LOH)

(purchased by Owner of DALI; claim paid to same)

  • Compensates for loss of income due to the vessel being out of service.
  • Reimbursement of pre-agreed daily lost revenue until the vessel returns to normal service, subject to a time element deductible.

FREIGHT, DEMURRAGE, AND DEFENSE (FD&D)

(purchased by owner of any vessel impacted by the port/bridge closure; claim paid to same)

  • Covers legal expenses incurred in defending or pursuing legal action relating to the port or bridge closure. Cover typically discretionary in nature.

TRADE DISRUPTION (TDI)

(purchased by owner of any vessel impacted by the port/bridge closure; claim paid to same)

  • Compensation for losses due to trade disruption, subject to time element deductible.
  • Reimburses for additional costs incurred to complete voyage(s) via alternative means.

STRIKE & DELAY

(purchased by owner of any vessel impacted by port/bridge closure; claim paid to same)

  • Coverage available for first-party losses from delay, such as loss of income if ship is delayed, supplementary to standard Loss of Hire and/or Trade Disruption.

BUSINESS INTERRUPTION (BI)

(purchased by marine and non-marine businesses impacted by the incident; claim paid to same)

  • Compensation for lost revenues resulting from port/bridge closure.
  • Reimbursement of additional costs incurred to maintain operations.

CARGO

(purchased by cargo owners impacted by incident; claim paid to same)

  • Cover for loss, damage or spoilage of goods awaiting shipment or in transit which are delayed due to the port closure.
  • Supplemental coverage for additional expenses incurred, such as transshipment costs.

PROTECTION & INDEMNITY (P&I) (THIRD PARTY LIABILITY CLAIMS)

(purchased by owner of DALI; claims paid to third parties)

  • Personal injury and death related medical expenses, lost wages and other damages resulting from the incident.
  • Pollution clean-up costs as well as mitigation / prevention expenses.
  • Discretionary cover for fines and penalties levied by government authorities.
  • Unrecoverable General Average contributions (Cargo, H&M etc.).
  • Liabilities from damage or delayed delivery / non-delivery of cargo onboard the vessel.
  • Damaged cargo onboard other vessels.
  • Delay claims from impacted third party vessels (stationary vessels awaiting transit) where there is a breach of duty of care and legal liability to indemnify for those losses.
  • Lost revenue resulting from port closure (potential claimants include port authority and other government agencies, private port and terminal operators, vessel operators doing business in and around the port and local businesses whose revenue has been impacted as a result of the port closure). Under US law, however, a claimant must typically prove physical damage to property in order to recover lost revenue.
  • Lost revenue resulting from closure of the Francis Scott Key Bridge, to potentially include bridge owner’s loss of use of the bridge and others whose business has been impacted by closure of the bridge, if the vessel owner is ultimately determined legally liable for lost revenue (i.e. claimants can demonstrate physical damage to property).
  • Cost of demolition and repair/rebuilding of the Francis Scott Key bridge via cover for Fixed & Floating Objects (FFO), where not recoverable under H&M.

Limitation of Liability and US Maritime Law Principles

The primary challenge in this incident is the potential third-party liability claims (covered by the DALI’s P&I insurer, Britannia P&I, a member of the International Group). Considering the whole universe of claims, including those brought by uninsured / underinsured parties and insurer subrogation, the current estimated value of damages is thought to be between $2 billion and $4 billion which, if this were to materialize, would result in the largest P&I claim in history.

Recovery for Economic Damages

CASE LAW: ROBBINS DRY DOCK

At present there are two unknowns that will determine whether the DALI makes P&I history or not: first will be whether parties who have sustained purely economic losses (and their subrogated insurers), will be able to successfully recover those claims. Under existing US maritime law the answer is likely no because of the Robbins Dry Dock rule established by the US Supreme Court in 1923. This case, and countless cases that have followed, have established a fundamental restraint on the recovery of economic losses in maritime law, emphasizing the need for a proprietary interest in the damaged property. This pivotal and long-established legal principle has shaped how economic damages are approached and recovered in US maritime law and would likely act as a bar to recovery for pure economic loss. As such, many of the business interruption claims arising out of this incident would not give rise to a legal liability for which the DALI (and their P&I insurer) would be called upon to pay.

Limitation of Liability

The second unknown that will shape the ultimate outcome of this matter as it winds its way through the US courts is whether the DALI’s owner can successfully limit their liability. On April 1, 2024 the DALI’s owners (and her manager) filed a petition in federal court in Maryland seeking to limit their liability by availing themselves of the protections afforded them by the Limitation of Liability Act of 1851 - a long-established US federal law permitting the owner of a vessel involved in a marine casualty to cap their maximum liability for damages in cases of maritime accidents. This law was enacted primarily to encourage investment in the maritime industry by limiting the financial risks associated with ship ownership and allows a shipowners to limit their liability to the value of the vessel immediately following a casualty plus pending freight (i.e. compensation paid to the vessel owner for the carriage of cargo or other service performed for the respective voyage). This limitation applies regardless of the extent of the actual damages caused by the incident.

In the case of the DALI, the cap sought is approximately $44 million and if the DALI interests are successful, claimants to whom the shipowner is found liable would be paid their proportional share of that amount. Many of the claims outlined above –particularly the high value claims involving personal injury/death, general average/ salvage costs, damage to the bridge and other recoverable economic losses - would be subject to such limitation.

In addition to potentially capping a vessel owner’s liability, the filing of a Limitation of Liability petition consolidates all claims in a single federal forum (i.e. a single multi-party lawsuit). Once all parties have appeared, the court will then move the case forward to determine whether the shipowner is entitled to limit their liability or whether the ship owner is responsible for the full value of all claims arising out of the incident. As noted above, the delta in the DALI matter is astonishing given the limitation amount resting at $44 million and potential liabilities topping out at approximately $4 billion.

The key question will be whether the Dali owners will be successful in their efforts to limit their liability. The primary hurdle they will need to clear is proving the owner lacked “privity or knowledge” or the negligence or fault that caused the incident. In the context of US admiralty law, "privity” refers to a legal relationship or connection between parties – meaning the relationship between a shipowner and the person or entity responsible for the act or omission that caused the maritime incident. ”Knowledge” in this context refers to the shipowner's awareness or understanding of the circumstances that led to the incident. This can include knowledge of any unseaworthy conditions of the vessel, negligence of the crew, or other factors contributing to the incident. For corporate shipowners, courts generally impute the privity or knowledge of high-ranking corporate officials onto a corporate shipowner, such as land based executives, as well as the privity or knowledge of the master or the owner’s superintendent or managing agent, at or before the beginning of each voyage.

Despite our simple summary of privity or knowledge, this area of law is far from straightforward. US courts have struggled for literally centuries to apply the privity or knowledge standard, calling it “somewhat elusive” and “difficult to apply” in a consistent manner. As such, US courts will typically look at the specific facts of the case, including such factors as crew competency and efforts made by the owner and crew to remedy defects in the vessel that are discoverable through reasonable diligence. Navigational mistakes or other errors caused by an otherwise competent crew, or latent defects in the ship, typically are not deemed to be within the shipowner’s privity or knowledge. Even so, legal decisions in this area are far from consistent or predicable, with the trend in US courts toward holding shipowners seeking to limit liability to an extremely high standard.

At present, all reports indicate that the immediate cause of the incident was a power failure aboard the DALI moments before the allision. If that power failure were the only causal link in the chain, the limitation petition of the owner of the DALI would undoubtedly be successful. However, previous power failures noted by the NTSB in their Preliminary Report could complicate the owner's limitation petition, potentially unraveling their defense and leaving them and their insurer (Britannia P&I) liable for the full value of recoverable claims.

Conclusion

The outcome of the limitation petition and subsequent litigation will significantly impact all parties involved, including insurers, reinsurers, and claimants, potentially reshaping the landscape of maritime insurance and US admiralty law. Regardless of the ultimate determination, the legal process will undoubtedly drag on and thus the payout of third-party claims could take years. The incident also underscores the importance of P&I insurance and the P&I Club group pooling and reinsurance system, which will be the focus of an upcoming Lockton PL Ferrari publication. The incident also highlights the importance of proactive risk management and comprehensive insurance planning to mitigate risks from unforeseen maritime incidents.

Should you have any questions regarding the above, please do not hesitate to get in touch with Jana Byron (jbyron@lockton.com) or Kyle Lochridge (klochridge@lockton.com).

 

Source: Jana Byron, Senior Vice President, Lockton

 

 

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