Although federal courts retain exclusive jurisdiction over maritime claims and, consequently, interpret maritime contracts using principles of federal admiralty law, state law applies to the interpretation of marine insurance contracts. Identifying the applicable law and implications to the interpretation of obligations in a particular contract is crucial to accurately assess and mitigate risks and avoid unintended consequences. These principles were recently reaffirmed by the U.S. Fifth Circuit in Barrios v. Centaur, L.L.C.

Barrios v. Centaur, L.L.C. – Background

The owner of a dock facility hired Centaur, a construction employer, for work on its facility pursuant to a Master Services Contract (“MSC”). The MSC imposed insurance procurement obligations on Centaur, including (1) a Protection & Indemnity (“P&I”) insurance policy with coverage “not less than the P&I SP-23 (Revised 1/56) form of policy;” and (2) an excess/bumbershoot insurance policy without a sole fault exclusion.

River Ventures provided vessel transportation for Centaur’s employees who worked on the dock project. A River Ventures employee alleged injuries while transferring a generator onto a barge leased by Centaur. He thereafter sued for damages in the U.S. District Court for the Eastern District of Louisiana. After a bench trial, the district court found River Ventures 100% at fault and imposed a $3.3 million judgment.

River Ventures then sued Centaur, asserting that River Ventures was a third-party beneficiary under the MSC, and that Centaur breached the MSC by failing to procure appropriate insurance. The district court found the MSC’s insurance procurement obligation provisions were ambiguous and accordingly dismissed the breach of contract claims. The U.S. Court of Appeals for the Fifth Circuit reversed and remanded.

Holdings and Analysis

The Fifth Circuit reaffirmed that the interpretation of a maritime contract such as the MSC is governed by general principles of contract law under federal admiralty law, not state law. Accordingly, neither disagreement as to the meaning of a contract, nor uncertainty or lack of clarity in the language chosen by the parties, renders a contract provision ambiguous. Both parties’ experts testified that the ordinary meaning of “P&I SP-23 (Revised 1/56) form is a P&I policy that includes coverage for personal injuries to crew/employees.” The MSC therefore unambiguously required at least that level of coverage. Centaur breached this unambiguous requirement of the MSC when it procured a P&I policy that excluded coverage for personal injuries to any employees.

The Fifth Circuit further determined that the MSC was not ambiguous and would not lead to absurd consequences, even though it could be interpreted to require duplicative coverage. Specifically, the MSC required Centaur to procure both a P&I insurance policy including crew/employee coverage, and a Worker’s Compensation policy with a Maritime Employers Liability endorsement providing for liabilities resulting from vessel-related injuries to Centaur’s employees. The district court found that interpreting the contract to require such duplicative coverage could trigger escape clauses under each respective policy, leading to the absurd consequence of Centaur lacking any coverage.

In contrast to a general maritime contract such as the MSC, the interpretation of a marine policy of insurance is governed by state law. Under Louisiana law, two independent escape clauses that threaten coverage are deemed “mutually repugnant”, and liability for a claim that would otherwise be covered by each policy is imposed on a pro rata basis. Therefore, the potential for duplicative coverage under the MSC would not lead to absurd consequences under Louisiana law.

The MSC also obligated Centaur to procure excess liability insurance that did not exclude additional insureds. Centaur’s excess/bumbershoot policy indeed excluded “any claims for liability arising out of the sole fault or sole negligence of the Additional Insured.” The Fifth Circuit thus reversed the district court’s dismissal of this breach of contract claim as well.

Takeaways

Parties to marine insurance policies should gain an understanding of the applicable state law that will apply to interpretation of their coverage obligations and the potential consequences of duplicative insurance with respect to escape clauses in their jurisdiction. It is just as important to know the relevant federal maritime law regarding the interpretation of contracts, to the extent that any other general maritime contracts are or may be at issue.

Parties to maritime contracts in the Fifth Circuit should review and consider the Fifth Circuit’s test for maritime contracts, which was clarified in a prior decision in this same matter, see Barrios v. Centaur, L.L.C., No. 18-31203 (5th Cir. 2019) (holding that to be analyzed as a maritime contract, such contract must: (1) be for services to facilitate  activity on navigable waters; and (2) provide, or the parties must expect, that a vessel will play a substantial role in the completion of the contract).

All parties should be aware of the distinction in choice of law regarding maritime and marine insurance contracts. Inclusion of a choice of law provision to ensure clarity may also be appropriate for marine insurance contracts.

Barrios v. Centaur, L.L.C., No. 23-30892 (5th Cir. 2024) (per curiam)