Just add water—why relating back does not put the insurer on notice of bad faith

In D&B Marine, LLC v AIG Prop. Cas. Co. [March 21, 2023] the North Carolina Court of Appeals held that the owner of what the court deemed “the Unluckiest Yacht” could not relate back claims for bad faith to its original complaint for coverage, filed several years prior.

Background – a series of damage and disputes

The series of unfortunate events and disputes that precipitated the ruling in D&B Marine were tried in separate jurisdictions and spanned over the course of nearly a decade.

Beginning in January 2013, the plaintiff renewed an insurance policy with defendant AIG to provide coverage for the yacht M/V FEARLESS, which had been designed by a renowned naval architect, Eric Goetz. The policy covered damages “caused by an occurrence which happens within the policy period.”.

Only two days after the renewal, the FEARLESS struck a submerged rock while sailing off the coast of the US Virgin Islands. The incident caused significant damage to the hull, and she was towed to a shipyard in St. Thomas for repairs. AIG accepted coverage for the claim.

Following partial repairs performed at a shipyard in St. Thomas, the parties agreed that the vessel should be moved to Rybovich, in West Palm Beach, Florida, to complete the remainder of the repairs. Prior to departing for Rybovich, the vessel’s captain noted a large crack in the vessel’s hull, which had been previously repaired. Despite this discovery, the vessel departed for Rybovich in March 2013.

During the voyage, the FEARLESS’ rudder, which had been repaired after the vessel struck the rock, fell off. The insured informed AIG of the additional damage, and AIG again agreed to cover the claim. 

Once the vessel arrived at Rybovich, AIG arranged to have it inspected. Moisture intrusion was detected, and removal of a large section of the hull was recommended. But this work was never performed, as a dispute arose between the owner and AIG about which party had the responsibility to contract for and oversee repairs.

This dispute led to AIG cancelling the insurance policy in September 2013. However, AIG acknowledged that it would remain responsible for the cost of the repairs associated with the rock encounter and subsequent rudder incident. These repairs were eventually completed at the end of 2013.

In October 2014, shortly after the owner purchased a new policy from Great Lakes Reinsurance (Great Lakes), the FEARLESS was struck by lightning. Great Lakes paid for most of the damage associated with the lightning strike, which work was completed in early 2016.

Shortly after the lightning strike repairs were completed, in March 2016, FEARLESS embarked on her final fateful voyage. A few hours after departing, FEARLESS began taking water on, so the captain dropped anchor and called the Coast Guard. The Coast Guard worked diligently into the night attempting to stop the ingress of water, but after the electronics failed and the vessel’s interior was knee deep in water, the Coast Guard ordered the captain and his mate off the vessel, and it sank.

Court actions

This unfortunate sequence of events led to protracted coverage litigation.

While the FEARLESS was undergoing repairs for the lightning strike, the owner filed suit against AIG in state court in North Carolina, alleging breach of contract for AIG’s failure to pay for the full value of the insured loss related to the rock encounter in 2013 (the AIG Action).

Soon after the FEARLESS sank, in June 2016, Great Lakes filed a declaratory judgment action against the owner in federal court for the loss of FEARLESS. Great Lakes claimed that the owner made a material misrepresentation when applying for the policy it issued, being a failure to disclose the lack of repairs to the vessel’s hull from the 2013 rock encounter. Great Lakes also claimed that the lack of repairs to the vessel in 2013 rendered it unseaworthy and led to the sinking of the FEARLESS. Thus, Great Lakes took the position that there was no coverage.

In response, the owner counterclaimed for breach of contract, bad faith, and Unfair or Deceptive Trade Practices (UDTP) claims (under North Carolina law) against Great Lakes. The owner argued that the vessel sank due to water ingress in March 2016 from a separate grounding incident, rather than from the damage suffered in 2013.

In August 2017, the owner amended its complaint in the pending AIG Action to add a cause of action for negligence against AIG, alleging that it had breached its duty to ensure that all repairs were properly performed in 2013 and the vessel was seaworthy. The North Carolina state court stayed the proceedings, pending the resolution of the claims involving Great Lakes in federal court. The federal court case settled in January in 2019.

In September 2019, after the federal court action was settled, the owner again moved to amend its complaint in the AIG Action, this time to add claims for bad faith and UDTP against AIG. The court permitted this amendment.

Over a year later, in February and March 2021, both parties moved for summary judgment. AIG argued that the claims for common law bad faith and UDTP were time barred and even if found timely, they were invalid under maritime law. In response, the owner argued that its original complaint associated with the 2013 rock allision gave sufficient notice of the events or transactions which produced the bad faith and UDTP claims, and therefore the amended claims should relate back to the date of the original complaint, making them timely.

In March 2021, the court found for AIG, and ruled that the original pleadings associated with the rock allision did not give notice of the transactions or occurrences, and thus the bad faith and UDTP claims did not relate back under North Carolina law and were untimely. 

The owner filed a motion for reconsideration, which was denied. 

The case proceeded to a jury trial in February 2022 on the coverage issues. At the end of the trial, the jury was asked to consider whether the 2016 sinking of the FEARLESS was an “occurrence” applicable under the AIG policy from 2013. The trial court entered a judgment in favor of AIG, after the jury declined to find the sinking fell under the definition of “occurrence” in AIG’s 2013 policy.

The appeal

On April 22, 2022, the owner appealed the judgment. The owner argued that, because the trial court previously granted its motion to amend the pleadings in 2019, it “automatically” caused the amendment to relate back to the original complaint.

The appellate panel disregarded owner’s argument that the amended claims automatically related back, instead focusing on whether the original pleading gave AIG sufficient notice of the proposed amended claim for bad faith and UDTP.

Ultimately, the appellate panel held that the amended complaint did not relate back to the original pleading and AIG was not on sufficient notice of the amended claims for bad faith and UDTP, as the owner had failed to include the facts for the specialized pleading requirements for those types of claims. This barred the owner from relating back the bad faith and UDTP claims to its original complaint filed in 2017. 

Comment

The findings here are important to insurers dealing with similar situations. The North Carolina appellate court held that claims brought later for bad faith or deceptive business practices do not automatically relate back to the initial lawsuit for coverage, unless there are specialized facts pled in the underlying complaint. Unless those specialized facts are pled, an insurer will be deemed not to be on notice of amended claims for bad faith or deceptive business practices.

Furthermore, the appellate court determined that the doctrine of equitable estoppel does not apply to analysis of risks covered under an insurance policy, nor to the policy’s exclusions.

This case presents a refreshing outcome in the area of marine insurance coverage – confirmation that the precise and clear terms of the policy will apply. But the owner has petitioned the Supreme Court of North Carolina to take its appeal, so stay tuned!