National Liability & Fire Insurance Company, et al v. Nathan Carman

Filing 177

FINDINGS OF FACT AND CONCLUSIONS OF LAW - So Ordered by District Judge John J. McConnell, Jr. on 11/4/2019(Barletta, Barbara)

Case 1:17-cv-00038-JJM-PAS Document 177 Filed 11/04/19 Page 1 of 16 PageID #: 3584

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

NATIONAL LIABILITY & FIRE
INSURANCE COMPANY and BOAT
OWNERS ASSOCIATION OF THE
UNITED STATES,
Plaintiffs,

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v.

NATHAN CARMAN,
Defendant.

C.A. No. 17·038·JJM·PAS

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FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiff National Liability & Fire Insurance Company and Boat Owners
Association of the United States (collectively "National") issued a yacht insurance
policy ("the Policy") to Defendant Nathan Carman, insuring a thirty·one·foot
recreational sport fishing boat he purchased in December 2015. Nine months later,
Mr. Carman's boat sank while he and his mother were out on a fishing trip off the
coast of Long Island, New York; the boat was never recovered. He made a claim for
the boat's insured value under the Policy. National investigated and denied his claim,
filing this lawsuit for declaratory judgment and asking the Court to determine that
the Policy does not cover Mr. Carman's loss. Mr. Carman filed Counterclaims against
National about the Policy and its claims handling.
The parties presented their claims and defenses to the Court in a bench trial.
Considering all the documentary evidence and witnesses' testimony, the Court finds
that the Policy does not cover Mr. Carman's loss. Because the facts show that Mr.

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Carman made improper and faulty repairs to his boat that contributed to its sinking,
Exclusion D in the Policy excludes the claimed loss.

FINDINGS OF FACT
This litigation brought to light certain facts about Mr. Carman, his family, his
boat, and the events leading up to and after the boat sank. To focus on the claims at
issue during this bench trial, however, the Court recites only the relevant facts
underlying its inquiry into whether Mr. Carman's boat insurance covered his
property loss and whether Mr. Carman has proven any of his Counterclaims asserting
breach of contract and bad faith.l
The Boat
1.

Brian Woods, a lifelong boat builder and refurbisher, purchased a used

lobster boat in 2007, which was originally a JC 31' plug. A plug is a mold that a boat
manufacturer uses to manufacturer hulls. Mr. \Voods named the boat "Chicken Pox."
2.

Mr. Woods installed forward bulkheads of marine plywood to each side

of the boat. He affixed the curved bottom of the plywood by fiberglass to the hull in
the bilge, the top of the plywood butted to the deck above it, and the inboard

To efficiently manage this lawsuit, the Court issued an Order bifurcating the
trial, cueing up for trial only the four Counts that did not involve intentional actsCounts I (Vermont Endorsement), II (Uberninae Fidei), IV (Exclusion D), and VI
(Breach of the Negative Implied Warranty of Seaworthiness)-and Mr. Carman's six
Counterclaims. ECF No. 157. The remaining Counts III and V involved Policy
exclusions for intentional conduct.
At the beginning of trial, National moved, and the Court granted its oral
motion to dismiss Count I. Because the Court concludes after the trial that National
properly denied coverage under Count IV (Exclusion D), there is no need to address
in this order Counts II or VI, or to conduct another trial on the remaining intentional
counts-Counts III and V.
1

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perpendicular was tight and sealed with "3M Marine Adhesive Sealant 5200" against
the fish box.
3.

Mr. Woods testified that bulkheads on the boat provided structural

strength and integrity to the boat and added some buoyancy because they formed air
pockets in the event of flooding in the boat.
4.

Mr. Woods installed two bilge pumps, one at the stern and one at the

port cockpit hatch.
5.

Mr. Woods also installed Bennett Marine trim tabs on the transom of

the boat, to help trim the vessel by the bow. He installed them by following the
manufacturer's directions.

He drilled four Y, inch diameter holes through the

transom, about 3·4 inches above the waterline, for thru-hull hydraulic connections to
the four actuators that controlled the pitch of the trim tabs. The four Y, inch diameter
holes were below the aft cockpit deck level and opened into the bilge, a few inches
below the scuppers that are even with the aft cockpit deck.
G.

In December 2015, Mr. Woods sold the boat to Nathan Carman for

$48,000.
7.

The Court found Mr. Woods' testimony to be credible.

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Insurance Policy
8.

National Liability & Fire Insurance Company sold insurance through a

marine insurance program with its general agent Boat Owners Association of the
United States (d/b/a BoatU.S.).2
9.

Mr. Cannan received an insurance quotation for a $66,200 agreed hull

value policy ("the Quote"). The Quote indicated that it was an "all risk" Policy "subject
to policy limits, warranties and exclusions." A few clays later, Mr. Carman received
a Marine Insurance Binder ("the Binder"), containing the terms from the Quote. The
Binder showed that it was "A TEMPORARY INSURANCE CONTRACT" that would
be "cancelled when replaced by a policy."
10.

Before issuing the insurance, National hired marine surveyor Bemard

J. Feeney to review the boat's condition to determine if it was seaworthy. lVIr. Feeney

inspected the boat and found the boat to be in good shape and seaworthy. The Court
found Mr. Feeney's testimony to be credible.
11.

The Yacht Policy (Policy No. 3985989·15) (Exhibit 25.3) 3 was mailed to

Mr. Carman's home. The Policy echoed the language in the Quote and the Binder,
covering property damage to his boat from any accidental cause up to the agreed

Because Mr. Carman raises an issue as to which Policy terms were in effect
at the time of his loss, the Court will briefly review the evidence of how Mr. Carman
obtained the Policy from National. The Court will discuss the legal framework
underlying its factual findings later in this Order when it discusses the issue of Count
II of the Counterclaims. See page 13.
3 Mr. Cannan's lVIotion to Strike this exhibit is DENIED. ECF No. 166.
2

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amount subject to the limitations and exclusions in the Policy. It was in effect for
one·year beginning December 22, 2015.
12.

Mr. Carman asserts that he did not accept the terms of the Policy,

including its exclusions, because he never received the Policy Gust the Binder). This
assertion, however, is belied by the facts of the case.

Mr. Carman effectively

corresponded with National in March 2016, three months after the Policy went into
effect, to increase the insured value to $85,000 following some upgrades, including
his purchase of an autopilot, chart plotter, VHF radio, automatic identification
system, and a lifo raft. Mr. Carman also made a claim with National in April 2016
against the Policy for engine damage and National paid him $33,489.33.
13.

The Court finds from the record that this Policy (Exhibit 25.3) was the

policy in effect at the time of the loss. National made all information about the Policy,
including its terms and exclusions, available to Mr. Carman. In its communications
with Mr. Carman about the Policy, National never misrepresented any material fact.
14.

The Policy contained much of the standard property insurance policy

language and exclusions. Relevant to this case, Exclusion D excluded coverage for
"any loss, damage, expense or cost of repair caused directly or indirectly by
incomplete, improper or faulty repair."
Repairs Mr. Carman made to the Boat

Bulkheads
15.

Mr. Carman removed the forward bulkheads.

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Tnin Tab Removal and Repair
16.

On Saturday September 17, 2016, the day he left Ram Point Marina to

go fishing with his mother, Mr. Carman removed the trim tabs using an electric power
drill. He took off the actuator from the transom leaving four half· dollar-size holes in
the transom. At one point upon removing the three screws at the top of each trim
tab, he had also to remove a fitting behind for the piston to come out to finish the job
of removing the tabs. Mr. Carman ch·illed larger holes at each of those spots to enable
him to remove that fitting through the hull.
17.

Left with these larger holes in the hull and with a plan to fish that clay,

Mr. Carman bought a package of Epoxy Putty Stick and a Fiberglass Boat Repair Kit.
He did not follow the package instructions on how to make the repairs to the holes.
Instead, he filled the holes in the boat with the epoxy putty, using abotlt% of the stick
from the package. Tho holes had no backing on them. He did not place the fiberglass
mat fabric on the outside of the hull to seal the holes. Simply putting epoxy into tho
holes without a backing meant that the epoxy could get pushed through the holes.

B1ke Pumps
18.

Mr. Carman replaced the port bilge pump after it froze in early 2016.

19.

After finding oil in the bilge in early September 2016, Mr. Carman

brought the boat to Point Judith Marina. Mechanics there diagnosed a continuing
electrical problem with the port bilge pump. The bilge pumps were not functioning
properly.

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20.

The day before he left to fish, Mr. Carman found water in the bilge again.

He replaced the port bilge the next day.
The Insurance Claim
21.

lVIr. Carman's boat sank on September 18, 201G. He reported a claim for

property insurance coverage on October 7, 201G.
22.

The insurance company promptly investigated the claim. Because of the

unusual nature of the claim, i.e. Mr. Carman was alone out at sea on a raft for many
clays after the boat sank and the boat was never recovered, National issued a
reservation of rights. It assigned a marine surveyor to review the claim. It examined
lVIr. Cannan under oath. Ultimately, National denied Mr. Carman's claim about four
months after Mr. Carman made his claim.
23.

Martha Charlesworth, BoatU.S.'s marme msurance legal counsel,

described the claim review process. National kept Mr. Carman fully informed as the
investigation progressed and invited him to submit any material for its consideration
of the claim. Ms. Charlesworth's testimony was credible.
24.

The Court found the claim review process to be fair and transparent and

that National processed the claim efficiently and in good faith.

CONCLUSIONS OF LAW
Court's Juris diction
21.

The Court has subject·matter jurisdiction over this dispute because it

involves a contract of marine insurance on a vessel under admiralty and maritime
jurisdiction, 28 U.S.C. § 1333, and under the Federal Declaratory Judgment Act, 28

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U.S.C. § 2201. "Suits on maritime insurance policies are classic examples of matters
within federal maritime jurisdiction." Central Int'l Co. v. KempterNat'l Ins. Cos., 202
F.3d 372, 373 (1st Cir. 2000); Windsor ll!fount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d
50, 54 (1st Cir. 1995) ("The propriety of maritime jurisdiction over a suit involving a
maritime insurance policy is unquestionable.")
Applicable Law
22.

Federal maritime law applies to marine insurance contracts. Lloyd's of

London v. Pagan-Sanclwz, 539 F.3d19, 25 (1st Cir. 2008). If there is an absence of a
federal maritime rule on point, however, the appropriate state law will apply to
interpreting the marine insurance contract. See Norfolk S. Ry. Co. v. I(irby, 543 U.S.
14, 27 (2004) ("A maritime contract's interpretation may so implicate local interests
as to beckon interpretation by state law.").
23.

The basic policy underlying contract law is to protect the expectations of

the parties. The language of the policy governs the interpretation of the parties'
expectations.

"In construing an insurance policy, disputed terms should be read

according to their plain, ordinary and popular meaning. Because a policy is prepared
by the insurer, all ambiguities must be resolved in favor of the insured." State v.

CNA Ins. Cos., 779 A.2d 662, 667 (Vt. 2001) (citations omitted):'

4

In accordance with choice of law rules, the Court looks to the "center of
gravity" of the policies' formation to decide which state's law applies. SeeAlban_y Ins.
Co. v. Wisniewski, 579 F. Supp. 1004, 1013 (D.R.I. 1984). Because the Policy was
formed and mailed to Mr. Carman's home in Vermont, that state's law applies where
appropriate.
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National's Claims
The Court will now turn to National's causes of action.

Conscious of its

mandate to decide only issues it needs to in order to provide a final judgment, the
Court focuses first on Count IV rooted in Exclusion D because, in hearing the evidence
and reflecting on the applicable law, that claim resolves the entire case.
24.

Mr. Carman's Policy contained an Exclusion D. The Exclusion provides

that there is no coverage for "any loss, damage, expense or cost of repair caused
directly or indirectly by incomplete, improper, or faulty repair." There is no dispute
that the language of this Exclusion is clear and unambiguous.
25.

When a

policy exclusion is being invoked,

"[t]hc insurer bears

the bmden of showing that an insured's claim is excluded by the policy." Slninel' v.

Amica Mut. Ins. Co., 204 Vt. 321, 324 (2017).
26.

National met its burden of proving that Exclusion D applies to Mr.

Carman's claim. The credible evidence that leads the Court to conclude that the
repairs lVIr. Carman made to the boat were incomplete, improper, and faulty include
the following:
a. The evidence shows that Mr. Carman's transom hole repmrs wore
incomplete, improper, and faulty because he filled the holes with epoxy
and did not use fiberglass as an exterior seal. The removal of the trim
tabs and the faulty repairs rendered the boat unseaworthy and in poor
condition. Having four holes in the back of a boat lends itself to taking

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water on. It is more likely than not that this improper repair at least
indirectly caused water to fill up the bilge, causing the boat to sink.
b. The removal of the bulkheads diminished the integrity and strength of
the boat, rendered the boat in poor condition under the marine grading
system, and made the boat less seaworthy. The removal increased the
risk that that boat would come into safety troubles by eliminating
reserve buoyancy forward in the boat. If the boat flooded, that area of
the boat no longer had an air pocket, so it would flood the entire bilge
area. If the forward bulkhead had been in place, the boat would have
flooded at a slower rate.
27.

There was no evidence to rebut these facts or conclusions. 5

28.

The credible evidence that leads the Court to conclude that the improper

and faulty repairs that Mr. Carman made to the boat contributed to the sinking
include the following:
a. Mr. Feeney, the marine surveyor, opined that Mr. Carman's boat sank
because water intruded through inadequately sealed holes below the
scuppers with exterior covers. That water accumulated inside the hull
because of the failing bilge pumps and the water flowed forward.

Christopher Roth, Sr. testified in support of Mr. Carman. However, he
conceded that the repairs Mr. Carman made to the holes were incomplete because he
did not seal the exterior of the holes with fiberglass. His testimony was inconsistent
with all the other credible testimonial and documentary evidence, and thus the Court
found his testimony was not credible.
5

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Because Mr. Carman removed the bulkheads, eliminating what would
have boon air pockets, the boat sank.
b. Jonathan Klopman, an expert marino surveyor, testified that if he had
been asked by an insurance company to inspect the boat after lVIr.
Carman puttied the holes he made by removing the trim tabs, he would
have reported that the insured performed amateurish and inadequate
repmrs.

Considering Mr. Carman's intent to uso his boat to fish

offshore, Mr. Klopman would have recommended that the underwriter
place tho boat on port risk ashore so that the holes could be plugged,
feathered, and properly patched with fiberglass.
c. Mr. Klopman also opined there was no sound or practical reason for Mr.
Carman to cut away the bulkheads and their removal increased the risk
that that boat would come into safety troubles. For example, if the boat
flooded, that area of the boat no longer had an air pocket, so it would
flood the entire bilge area. Mr. Klopman determined that the boat sank
faster because Mr. Carman removed the bulkheads.
d. The Court found :Mr. Klopman's testimony credible.
o. Naval architect Eric Greene opined that Mr. Carman's repairs made the
boat unseaworthy. He used improper materials to repair holes close to
the waterline, especially when he intended to troll for five hours at slow
speed with a following sea on the same day he made the repairs. Mr.
Greene opined that there was a high likelihood that water entering from

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the inadequately filled holes would gradually fill the bilge. The Court
found Mr. Greene's testimony credible.
29.

Based on the unrebutted expert opinions, and all the credible evidence,

the Court finds that Exclusion D applies here because lVIr. Carman's property loss
was caused directly or indirectly by incomplete, improper, and faulty repairs. Thus,
the Court holds that National has no obligation under the Policy to pay Mr. Carman's
Claim No. 1607671 for loss, damage, or expenses.G
The Court's findings of fact, when applied to applicable law resolves the case
National brought against Mr. Carman. While the remaining claims presented other
ways to decline coverage or void the Policy, there is no need to fish in an empty
barreJ.7 National appropriately denied coverage and judgment will enter in its favor
on Count IV.
Nathan Carman's Counterclaims
Mr. Carman filed six Counterclaims in response to National's Complaint. The
Court's decision in favor of National on Count IV obviates a lengthy discussion of
these Counterclaims, but it will now address those briefly.

6

To be clear, the Court is making no determination of whether Mr. Carman
intended to sink his boat or to harm his mother. Those allegations are not a part of
the counts the Court heard during the trial of this civil case.
7 Count II asserts that the Policy is void under the maritime law principle of
ubenimae lide1; which allows an insurer to void a policy of insurance when an insured
fails to disclose to the insurer all circumstances known to him and unknown to the
insurance company that "materially affect the insurer's risk." Catlin at Lloyd's v.
San Juan Towing & }}[mine Servs., Inc., 778 F.3d 69, 83 (1st Cir. 2015). Count VI
urges no coverage under the Policy's negative implied warranty of seaworthiness.
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Count !-Breach oflnsurance Contract
30.

Count I alleges that National breached the Policy by denying Mr.

Carman's claim. As the Court found in accordance with the facts and law cited above,
National properly denied coverage for the loss under Exclusion D so did not breach
the insurance contract.

Therefore, Mr. Carman has failed to establish by a

preponderance of the evidence that he is entitled to relief under Count I of his
Counterclaim. The Court DISMISSES Count I of Defendant's Counterclaim.
Count II-Breach of Sales and Insurance Contract
31.

Mr. Carman claims that the Quote and Binder that he received

represented "a legally enforceable contract."

He claims National breached the

agreement by not providing him with the insurance set forth in the Quote and/or in
the Binder.
32.

To begin coverage, insurance companies, as here, issue a "Binder," or

"preliminary insurance contract, that covers the applicant until the insurance
company either issues a policy or refuses the risk." In Te Waste Sys., h1t'1, hJC., 317
B.R. 650, 655 (D. Del. 2004) (citing Lee R. Russ & Thomas F. Segalla, 1 Couch on

Insurance 3d § 13.1). "A binder is not an insurance policy, but it is considered a
contract providing interim insurance from the date of the application until either
completion or rejection of the principal policy." Id at 655 (citing 1 Couch, supra at §
13.2). "Generally a contract of temporary insurance-the binder-is terminated by the
issuance of a policy, or by a rejection of the application. If no policy is issued, and the
binder is not otherwise terminated, it continues until the time fixed for its

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termination or a reasonable time has expired." Id. at 656 (citing 1 Couch, supra at §
13.9). A policy is considered issued and delivered when executed by the insurance
company and mailed to the insured. 1A Couch on Insurance, § 14:15 (3d eel. June
2019).
33.

National executed Policy No. 3985989·15 and mailed it to Mr. Cannan

with Michael Pellerin's December 23, 2015 cover letter. The Court finds that the
Quote and Binder merged into the subsequently issued Policy. Mr. Carman initiated
a supplement to that Policy when he requested an increase in coverage for the boat's
agreed hull value to $85,000 through the Endorsement.

The Court found Mr.

Pellerin's testimony to be credible.
34.

The Policy was the operative contract, not the Binder or the Quote, and

because the Court found that National did not breach the Policy and dismissed Count
I of the Counterclaim, it DISMISSES Count II of the Counterclaim on the same
grounds.
Counts III. IV. V, and VI-Duty of Utmost Good Faith and Fair Dealing
35.

In each of these four Counterclaims, Mr. Carman alleges under

maritime and various state laws that National breached its duty of utmost good faith
and fair dealing by engaging in unfair and deceptive practices based on BoatU.S.'s
status as a membership organization, its relationship with National, its "bait and
switch" sales practices (Counts III, V), and in connection with National's claims
handling and payments (Counts IV, VI).

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36.

To establish a claim for bad faith under Vermont law, "a plaintiff must

show that (1) the insurance company had no reasonable basis to deny benefits of the
policy, and (2) the company knew or recklessly disregarded the fact that no
reasonable basis existed for denying the claim." Bushey v. Allstate h1s. Co., 670 A.2d
807, 809 (Vt. 1995).
37.

The Court found that the repairs and alterations Mr. Carman made to

his boat were faulty, causing the boat to become unseaworthy, and directly or
indirectly causing the loss. National had a reasonable basis for denying Mr. Carman's
insurance claim under Exclusion D of the Policy. The Court further finds that the
evidence shows that National executed its investigation and claims review
professionally, fairly, and in good faith. The Court DISMISSES Counts III, IV, V,
and VI of the Counterclaims.
Conclusion
Based on all the evidence presented at trial, the Court finds that Mr. Carman's
boat was unseaworthy when it left Rams Point Marina on September 17, 2016
because he improperly repaired the holes he created by removing the trim tabs, and
he compromised the boat's stability by removing the bulkheads. The unseaworthy
state of the boat brought about by the faulty repairs, at least indirectly caused it to
sink. National appropriately denied coverage for the resulting property loss after a
good faith investigation.

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a. Judgment shall enter for National as to Count IV of its Complaint and
as to each of the Counts in the Counterclaims. 8
b. The Court DISMISSES AS MOOT the remaining two Counts presented
during the bench trial, Counts II and VI.
c. The Court DISMISSES Nathan Carman's Counterclaims Counts I
through VI.
d. It is not necessary to consider National's remaining claims in Counts III
and V9 severed by the Court, because the Court has determined that
National appropriately denied coverage under Exclusion D granting
judgment in its favor on Count IV. The Court thus DISMISSES AS
MOOT Counts III and V.
(

!

IT IS

John J. McConnell, Jr.
United States District Judge
November 4, 2019

8

National's oral motions for declaratory judgment made on August 23, 2019
and September 4, 2019 are DENIED AS MOOT.
9 Count III invokes an exclusion of coverage for a non·fortuitous loss for faulty
repairs, like Exclusion D. Count V involves Exclusion F, which excludes coverage
when the loss was "caused intentionally by, with the knowledge of, or resulting from
criminal wrongdoing" of the insured.

16