In Aftermath of Likely Record Maritime Loss, Next Piece of Insurance Puzzle Will be Liability Claims

The massive wreck of the Carnival Corp. cruise ship Costa Concordia off the Italian coast on Jan. 13 is estimated at a likely record-setting $1 billion in insured losses.

Whether the ship can be salvaged or whether it will have to be removed piece-by-piece from the Tuscan coastline impacts how much the wreck will cost the insurers who issued the Costa Concoria's hull and machinery policy.

But it is the other side of the equation that could takes years to calculate—the liability cost. Carnival said the incident could cost it up to $95 million in initial out-of-pocket expenses, including a $30 million deductible on its hull and machinery policy and a $10 million deductible for third-party personal injury liability coverage. The company self-insures for loss of use of the vessel.

With 11 people dead and 20 more missing as of Jan. 19, losses for the insurers involved could increase with the inevitable lawsuits will be filed against Carnival and its insurance carriers. The lead insurers for the ship are XL Group, Assicurazioni Generali and RSA Insurance Group plc. But because most marine policies are written by syndicates of different companies and protection & indemnity clubs (a type of mutual formed by the operators themselves), the losses are expected to be fragmented and relatively easy for the industry to absorb, said Joy Ferneyhough, an analyst for Espirito Santo.

London-based Standard Club confirmed it is the lead protection & indemnity insurer for the stricken ship. A Standard Club spokesman said on Jan. 16 the club "has very limited information available at the moment" (Best's News Service, Jan. 16, 2011).

The arithmetic for calculating the total liability costs will be complex and it will all come down to how the polices are written.

Thomas Denniston, an executive vice president of Lockton Cos., whose practice focuses on marine, aviation and transportation insurance, said cruise ships typically buy coverage in pieces.

Denniston, who was not involved in the Costa Concordia insurance transaction, said a hull and machinery policy usually covers up to 80% of the ship's value. Ship operators usually purchase increased value policies to cover the rest of the ship's value, and those policies have a different premium rate than the underlying hull and machinery policy, he said. P&I clubs offer the liability coverage for the ship and its operators.

Then there is the looming threat the ship's fuel vessels could leak, setting off an environmental disaster that would add to the liability costs of the disaster, Denniston said.

"Right now, Carnival and the insurers want to secure the site of the crash," he said. "The search and rescue efforts are ongoing, and we all hope that doesn't result in a higher death toll. But they also want to ensure that the ship doesn't leak fuel or shift off its perch and fall into deep water."

Should the ship fully submerge, it would only exacerbate the problems associated with the cleanup efforts. "It's also possible that the Italian government could declare the ship a navigational obstruction and order it to be removed immediately, which would somewhat limit their options," Denniston said.

Once the site is secured or cleaned up, the attention of those handling the disaster will shift to the next stage—litigation.

Barry Buchman, a Washington-based lawyer with Gilbert LLP who represents policyholders in marine insurance disputes, said lawsuits involving sea-going vessels can include unique legal questions that cause litigation to drag on for years.

The first question lawyers will have to answer is where the lawsuits should take place.

Buchman said it could take months for courts in the United States, Italy or some other country to decide the venue for disputes, given that cruise ships, their owners and their passengers are internationally diverse by nature and design. That is, unless the insurance policies include option of law or jurisdictional clauses. Buchman said it is also possible the policies include mandatory arbitration clauses, which could further complicate the issue.

Jurisdictional questions played a part in the spate of litigation set off in 2010 after hundreds of passengers aboard a Celebrity Cruise ocean liner suffered food poisoning, Buchman said.

Buchman said the lawsuits will also have to address the question of what role the Costa Concordia's captain, Francesco Schettino, played in the disaster. Schettino is under house arrest and facing charges of manslaughter and abandoning ship.

"Insurance companies like to argue that incidents like this one were nonfortuitous losses, that is, expected or intentional losses, which may not be covered," Buchman said. "But if the case is tried in the U.S., that would be a high hurdle to jump because the courts have largely agreed that negligence, even gross negligence, is exactly what companies buy policies to cover."

The question of the captain's reputation could also become an issue as litigation proceeds, Buchman said, because many marine insurance lawsuits hinge upon what representations were made to the company. Common issues include the ship's seaworthiness, where it will be traveling and who will be piloting it, Buchman said.

"It's going to take several months for everyone to get their arms around exactly what they're dealing with," Buchman said. "This is a case we're going to continue seeing well into the future."

(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)