Eleventh Circuit Holds Engineering Firm’s Insurer Not Obligated to Defend Shipbuilder

In Atlantic Marine Florida, LLC v. Evanston Ins. Co., No. 13-11342 (Dec. 24, 2014), the issue was whether insurance covering Guido Perla & Associates (GPA) as the named insured, also covered Atlantic Marine Inc. (AMI) by reason of agreement between the two companies.  Specifically, whether Evanston Insurance should have provided a defense for AMI and whether Evanston should reimburse American Home for their payment to the plaintiff in settlement.  The Eleventh Circuit held that AMI was not covered.

An engineering firm, GPA, procured liability insurance to protect itself against accusations of negligently creating blueprints that go into building a seagoing vessel.  The prints were used by a shipbuilder, AMI, which built a bulkhead door in its forward engine room that malfunctioned.  The malfunction resulted in the death of the captain of the ship, Beverly.  The captain’s representative sued both the shipbuilder, AMI, and the engineering firm, GPA.  GPA’s insurance provider provided a defense for the engineering firm but refused to defend AMI, who built the door.  AMI thus procured a defense from its own insurance company.  Both insurance firms settled with the captain’s representative separately.  After, AMI’s insurance firm, American Home Insurance, then brought a declaratory judgment action against GPA’s insurers, Evanston Insurance Company and Hartford Casualty,[1] stating that GPA’s insurance providers should have provided a defense for AMI as a third-party beneficiary of the engineering firm’s insurance policy.  American Home insurance also wanted GPA’s insurance providers to pay American Home Insurance for the money it paid to Beverly in settlement, amounting to $325,000.  The district court agreed that the engineering insurance firm should have provided the shipbuilder with a defense and should have paid American Home Insurance for their settlement with Beverly.  The Eleventh Circuit Court of Appeals disagreed and reversed.

AMI wanted a determination that both of GPA’s insurance companies had to defend them.  American Home wanted reimbursement from Evanston for the money paid to Beverly.  Evanston countered that since AMI was neither a named nor an additional insured in the policy, it was not contract-bound to provide AMI with a defense; AMI was being sued for its own negligence, not GPA’s, and the policy did not provide coverage for AMI’s negligence; and AMI could not recover under the policy unless and until it obtained a judgment against GPA establishing GPA’s negligent performance of professional services caused Captain Beverly’s death.  The Eleventh Circuit found these arguments persuasive and reversed because it found that AMI was not a third party insured so it was not entitled to a defense, and its insurer was not entitled to be made whole by GPA’s insurers.

The Evanston insurance policy covered GPA for its liability to third parties for personal injuries caused by its negligence in rendering its professional services.  The Eleventh Circuit found that Evanston was obligated to provide AMI a defense if the allegations underpinning Beverly’s claims came within the coverage the policy provided.  See Jones v. Fla. Ins. Guar. Ass’n, 908 So. 2d 435, 442-43 (Fla. 2005) (“It is well settled that an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within the policy coverage.”).  First, AMI conceded that it was not the named insured under the Evanston policy.  Because the insurance policy only covered the named insured, only GPA could claim coverage, not AMI.

AMI then pointed to two endorsements (10 and 11)[2] in the AMI-GPA contract that it claimed made it a third party beneficiary of the insurance policy.  The tenth endorsement was dismissed by the Eleventh Circuit because it only covered GPA for a breach of contract caused by GPA’s negligence; it did not cover AMI for its own tortious conduct.  Next, the Eleventh Circuit held that the eleventh endorsement would have extended coverage to AMI if Beverly had obtained a judgment against AMI based on a finding that GPA’s negligence in designing the door caused the decedent’s death.   But this never came to pass because all parties settled.  Therefore, the endorsement did not extend coverage to AMI.  The Eleventh Circuit also noted that Evanston could not have intended to cover AMI because that would create an obvious conflict of interest between Evanston and the two companies.  Finally the Eleventh Circuit held that the District Court erred in holding Evanston liable for the $325,000 paid by American Home to Beverly in settlement.  This was because of the fact that AMI was never covered by Evanston, thus Evanston had no responsibility for paying that judgment.  It was proper for American Home to pay the settlement for their client, AMI.  Therefore, the Eleventh Circuit reversed the District Court’s rulings.

[1] Because Hartford’s policy expressly excluded liability for bodily injury that resulted from GPA’s engineering services, the District Court found that it had no duty to defend or indemnify AMI.  AMI did not appeal this ruling, and so the only insurance company at issue is Evanston.

[2] Ten stated that “The insuring agreements and all other provisions of this policy shall not apply to: Liability assumed by the Named Insured by agreement, whether written or oral, including, but not limited to, hold harmless and indemnity clauses, warranties, guarantees, certification or penalty clauses, unless such liability arises form an error, omissions or negligent act of the Insured and would have attached in the absence of such agreement.  However, this exclusion shall not apply to liability of the Named Insured for a breach of the express contract described below [the AMI-GPA Agreement], but only to the extent that the liability is the result of an act, error, or omission of the Named Insured arising out of the professional services described in the Declarations.  Doc. 26-2, at 37 (emphasis added).

Eleven stated that “In consideration of the premium charged, such insrance as is afforded by this policy applies to the liability of other imposed by law, which is assumed by the Named Insured under the contract described below [the AMI-GPA Agreement], but only to the extent that the liability of others is the result of an act, error, or omission of the Insured arising out of the professional services described in the Declarations.  Doc. 1-2, par. 1, at 24.

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