PETER L. HILBERT

NEW ORLEANS ⁽¹⁾

Chapter 6

FINES, PENALTIES, MUTINY,

QUARANTINE, DEVIATION AND

GENERAL AVERAGE EXPENSES

(9) Liability for fines and penalties, including expenses necessarily and reasonably incurred in avoiding or mitigating same, for the violation of any of the laws of the United States, or of any State thereof, or of any foreign country; provided, however, that the Assurer shall not be liable to indemnify the Assured against any such fines or penalties resulting directly or indirectly from the failure, neglect, or default of the Assured or his managing officers or managing agents to exercise the highest degree of diligence to prevent a violation of such laws.

Under this clause, an Assured may claim against the Insurer for all fines and penalties assessed by a federal, state or foreign government. This may include fines imposed by any court, tribunal or authority of competent jurisdiction for failure to maintain safe working conditions, failure to comply with the regulations for declaration of goods or documentation of cargo, smuggling or violation of any customs regulation, breach of immigration regulations, any act of neglect of a seamen or any other servant or agent of the master. Christopher Hill et al., Introduction to P & I Insurance,75 (2d ed. 1996), The member may also recover fines imposed an any agent or seaman, but only if it is me the member may be liable to reimburse. E.R. Hardy Ivamy, Marine Insurance, 219 (4th ed, 1985). A fine resulting from the deliberate misconduct of a seaman will only be reimbursed if the member is compelled by law to pay the fine or had reasonably paid the fine to obtain the release of an arrested vessel. Hill, supra, at 7l.

While this clause has previously allowed recovery for fines incurred for oil pollution, P & I Clubs have begun offering distinct pollution control liability insurance up to a maximum of $500 million and up to an excess of $200 million for tanker-owner members. Hill, supra, at 75. Oil pollution insurance from P & I Clubs covers the losses, damages, costs and expenses caused by the discharge or escape of oil or any hazardous substance from an insured vessel, or incurred due to the threat of such discharge or escape. Id. at 71. This includes measures taken to avoid or minimize pollution or prevent an impending discharge or escape of oil or my hazardous substance from the insured vessel. Id. Because pollution coverage is generally quite broad, it may include recovery for defense costs, fines and penalties, and possibly punitive damages, James P. Walsh, Environmental Coverage Issues Under Marine Insurance Policies, 7 U.S.F., Mar. L.J. 1, 18 (Fall 1994). Although the, P&I Clubs have continued to provide oil pollution coverage for ships operating in U.S. waters, they have refused to issue evidence of financial responsibility for ships to receive the Certificates of Financial Responsibility (COFRs) from the US Coast Guard, as required by the Oil Pollution Act of 1990. Id. at 5. The Clubs have refused to back the OPA 90 certificates because of higher limits of liability under the Act, the ability to lose their right to limit liability, broad recoverable damages and the allowance for similar state legislation. John Trew and Robert Seward, The Britannia Guide to Oil Pollution Legislation, 85 (1999). Further, they would submit to direct action which would change their traditional role of indemnity underwriters. Id.

In some states, insurance coverage of punitive damages claims is contrary to public policy. Id. at 20. For example, the Insurance. Code of California forbids payment of insurance for a willful act. Id., Cal. Ins. Code § 533 (West 1993). On its face, Clause 9 has been held not to exclude coverage for punitive damages, even when the punitive damages arise out of personal injury or loss of life covered by Clause 1 of the SP-23. Punitive damages are within the nature of fines and penalties covered by Clause 9. Taylor v. Lloyd's Underwriters of London,1994 WL 118303 at *6 (E.D. La 1994).

If a ship is confiscated in lieu of the assessment of fines, some P & I Clubs will pay an innocent ship owner market value of the confiscated ship. L. Buglass, Marine Insurance and General Average in the United States 411 (3d ed. 1991). However, at the discretion of the Club, it may provide a letter of undertaking to assist in securing the release of a vessel which has been arrested for reasons such as customs penalties mid other state-imposed fines. The letter stipulates that in consideration for the release of the vessel, the Club will pay such sums as may be awarded against the member in proceedings before a court of competent jurisdiction up to a maximum amount, although in some countries, clearance is refused until a fine is paid. Hill, supra, 120-121.

P & I Clubs ordinarily reimburse their members for the expenses incurred in keeping stowaways on board until they can be released on share, and the costs of repatriating them to their country of origin, even though Clause 9 does not expressly cover such costs. Hill, supra, at 84. Recently, stowaway coverage bas also reimbursed the costs of a ship that picked up "boat people, in South East Asia and maintained them on board until they were allowed on shore. Id.

The policy does not define "highest degree of diligence," but presumably this standard requires more care than mere "due diligence" or reasonable fitness," the standards for seaworthiness. Further, under this c1ause, "the Assured or his managing officers or managing agents" as well as the master and his crew would be charged with the knowledge of all laws and government regulations if they could be ascertained by using the "highest degree of diligence."

(10) Expenses incurred in resisting any unfounded claim by the master or crew or other persons employed on the vessel named herein, or prosecuting such persons in case of mutiny or other misconduct.

Mutiny requires the commission of in overt act by one or more crew members, including the Mate and any other officer subordinate to the master, While on a US vessel either on the high seas or on any "waters within the admiralty and maritime jurisdiction of the United States." Benedict on Admiralty, § 117 at 9-37 (7th ed. Rev. 1996). A mutiny does not require intent to usurp the master's command. Concerted disobedience or encouraging disobedience in other members of the crew is sufficient. Id. Currently, mutiny is frequently associated with labor disputes as some settlement methods attempted by crewmembers have been deemed mutiny. Benedict, supra, §117 at 9-38; Southern S.S. Co. v. National Labor Relations Board, 316 U.S. 31, 62 S. Ct. 886, 86 L. Ed 1246, 1942 A.M.C. 515 (1942); Algic 1938 A.M.C. 531 (4th Cir. 1938).

Other misconduct of the master or crew would include charges of barratry. Barratry is an act committed by the master or mariners of a ship involving "deliberate and willful disobeyance by the master or mariners of an owner's oral or written instructions." Albany Ins. Co. v. Jones, 1996 WL 904756 (D. Alaska) at *4 quoting U.S. Fire Ins. Co. v. Cavanaugh, 732 F.2d 832, 835 (11th Cir.). cert. denied, 469 U.S. 1036 (1984). Barratry "comprehends all wrong done by master or mariners against interests of the owner of the ship, but it does not include errors in judgment or ordinary cases of negligence." E.R. Hardy Ivamy, Maine Insurance, 161 (4th ed. 1985). In order for conduct to constitute batrratry, there must be intentional fraud, breach of trust or a willful violation of the law. Compania de Navigacion, La Flecha v. Brauer, 168 U.S. 104, 124, 18 S.Ct. 12, 17 (1897). Under this clause, the costs of prosecuting the master or crew on charges of barratry would be covered Barratry has been held to include smuggling off-eases, other breaches of municipal or international law which results in a loss to the Assured, breach of an embargo, trading with the enemy, deviation for the purposes of the master, changing sides during a civil war and deliberately sinking the ship. Id. at 161-68.

As an aside, the applicable standard which the Assured may be required to meet in order to recover such expenses may be provided by Federal Rule of Civil Procedure 11. In other words, it may be necessary for the Assured to establish that the claim was without merit. Under U.S. law, this requirement is tantamount to a judicial determination that the attorney representing the master and/or crew did not comply with Federal Rule of Civil Procedure 11. Rule 11 imposes three affirmative duties on an attorney. (1) to conduct a reasonable inquiry into the fads which support any pleading, motion or other document signed by the attorney, (2) to conduct a reasonable inquiry into the law such that the document embodies existing legal principals or a good faith argument for the extension, modification, or reversal of existing law; and (3) that the document is not submitted to delay, or harass, or increase the costs of litigation. Childs v. State Farm Mutual Auto. Ins. Co., 29 F.3d 1018, 1023 (5th Cir. 1994). If the claim is unfounded and the Insurer settles the claim with the Assured, the Insurer may, through subrogation, seek recovery from the master and/or crew's attorney under Federal Rule of Civil Procedure 11. There are similar provisions under the laws of various states and foreign countries.

(11) Liability for extraordinary expenses resulting from outbreak of plague or other contagious disease, including such expenses incurred for disinfection of the vessel named herein or persons on board, or for quarantine, but excluding the ordinary expenses of loading and/or discharging, and the wages and provisions of crew and passengers; each claim under this provision is subject to a deduction of Two Hundred ($200) Dollars. It is provided further, however, that if the vessel named herein be ordered to proceed to a port when it is or should be known that calling there will subject the vessel to the extraordinary expenses above mentioned, or to quarantine or disinfection there or elsewhere, the Assurer shall be under no obligation to indemnify the Assured for any such expenses.

Quarantine expenses are recoverable if incurred because of an outbreak of a contagious disease on board and an attendant order that the ship be disinfected. In order to recover under this clause, the disease requiring quarantine or disinfection must be contagious, not merely infectious. Thus. any expenses incurred because of Acquired Immune Deficiency Syndrome (AIDS) or other sexually transmitted diseases would not be covered. In contrast, the rules governing most P&I Clubs in Scandinavia and the United Kingdom use the term "Infectious" instead of "contagious" and may be interpreted more broadly. See Britannia P&I Club Rule 19(16), Skuld P&I Club Rule 21. 1. The SP-23 does not address the risks the AIDS epidemic poses to seamen and passengers. See generally, Mindy James, Article, The Availability of Maintenance and Cure to Seamen with AIDS, 11 U.S.F. Mar. L.J. 333 (1998-1999)(discussing the legal ramifications of AIDS in the maritime community). The owner may recover costs for disinfection of the ship or of persons on board under quarantine or public health requirements. E.R. Hardy Ivamy Marine Insurance 218-219 (4th ed. 1985). The: Clubs will reimburse the net expense of the quarantine; their liability is reduced by the wages and cost of provisions for the crew and passengers and expense of loading or unloading. The costs included are bunkers, insurance and port charges. Christopher Hill et al., Introduction to P & I Insurance, 84 (2d ed. 1996).

(12) Net loss due to deviation incurred solely for the purpose of landing an injured or sick seaman in respect of port charges, incurred, insurance, bunkers, stores, and provisions consumed as a result of the deviation.

A deviation is an intentional departure from the stated or customary route not contemplated by the parties at the formation of the contract. ADA, 1926 A.M.C. 1 (Ct. App. NY 1925). In the case of an inexcusable deviation from the anticipated route, the insurer is discharged from liability as from the time of the deviation. However, because a master is obligated "to bear away to some port of distress as soon as possible" to obtain medical assistance for a seriously injured or dangerously ill seaman, a deviation for that purpose is considered reasonable. The Iroquois, 118 F. 1003, (9th Cir, 1902); 70 Am. Jur. 2d Shipping § 366 (1987). The Marine Insurance Act of 1906 excuses reasonable deviation "for the purpose of saving human life, or aiding a ship in distress where human life may be in danger; or where reasonably necessary for the purposes of obtaining medical or surgical aid for any person on board the ship."

If the ship must deviate to seek medical care for someone who is injured or ill, "the owner can recover port and other charges solely incurred for the purpose of landing or securing the necessary treatment for an injured or sick person being carried in the ship including the net loss to the owner in respect of fuel, insurance, wages, stores and provisions incurred for such purpose or while awaiting a substitute for such person." Ivamy, supra at 217. Deviation expenses can also be recovered by a ship with an on-board hospital facility which comes to the aid of an ill seaman aboard another ship. Peninsular and Oriental Steam Navigation Co. v. Overseas Oil Carriers, 553 F.2d 830 (2nd Cir. 1977).

(13) Liability for, or loss of, cargo's portion of general average, including special charges, in so far as the Assured cannot recover same from any other source; subject however, to the exclusions of Section (8) and provided, that if the Charter Party, Bill of Lading, or Contract of Affreightment does not contain the quoted clause under Section 8 (bb) the Assured's liability hereunder shall be limited to such as would exist if such clause were contained therein.

Under this clause, the Assured is protected from the inability to recover cargo's proportion of general average even if the Assured failed to exercise due diligence to make the vessel seaworthy or if the Assured breached another provision of the contract of affreightment not specifically delineated in the exclusions clauses. This protection is limited to the Assured's liability as determined by the inclusion of Clause 8(bb) in all contracts of affreightment entered into by the Assured. See, L. Buglass, Marine Insurance and General Average in the United States, 413-414 (3d ed. 1991); J. Moore, Liability for Damage to Property Carried, to be Carried or which Has Been Carried; Both-to-Blame Cases -and Liability for Recovery over by Non-Carrier, Liability for Cargo's Proportion of General Average Not Otherwis Collectible Policy Exclusions and Protective Clauses, 43 Tul. L. Rev. 581, 590 (1969). Because P&I Insurance is not intended to overlap in anyway with any other type of insurance carried by the Assured, ordinarily, the Clubs' underwriters will not reimburse the assured for the ship's sacrifices, which should be reimbursed by a ship's hull underwriters. Christopher Hill et al., Introduction to P & I Insurance, 93 (2d ed. 1996).

The insolvency of the cargo owner does not prevent the Assured from recovering, but the Insurer is not liable for any sacrifices. Therefore, if the uncollectible general average contained any sacrifices, the amount recoverable will be reduced accordingly, Buglass, supra, at 413-414.

There is no coverage "which will indemnify the assured against a loss which he may purposely and willfully create or which may arise from his immoral, fraudulent or felonious conduct." Rose Murphy, 1933 AMC 444 (Ala. 1933).

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