How Latent Are Your Defects
Generally defined, a latent defect is one which could not be discovered using ordinary and reasonable care in inspection. It is a hidden or dormant defect in a product that cannot be discovered by observation or a reasonably careful inspection. Typically a new vessel purchase agreement includes some form of manufacturer’s warranty which otherwise might cover repair or replacement of defective conditions, equipment or latent defects. In the unfortunate case that a latent defect manifests its presence after the expiration of a manufacturer’s warranty and claims against the manufacturer for repair are unsuccessful, we turn our attention as to what role an “All Risk Marine Insurance Policy” may play for coverage and remedy to cure a latent defect.
The most shallow of All Risk Marine Insurance Policies are silent or typically exclude any coverage whatsoever for latent defects. More common, however, we see the disingenuous conventional language in an insurance policy which addresses latent defects:
- ALL RISK INSURANCE
This policy covers the insured against all accidental risks of physical loss or damage to the insured property.
Latent Defects: Latent defects and physical damage or loss caused by latent defects are covered under this insurance policy. “Latent defect” as used in this policy means a hidden physical defect (but not a defect in design) in the material or construction existing at the time of the original build of the insured vessel(s) or manufacture or installation of any additional or replacement parts, components or systems of the insured vessel(s) which are not discoverable by ordinary observation by an experienced marine surveyor or known methods of testing, provided such loss or damage was not caused, in whole or in part, by a lack of due diligence by the insured. Latent defects and any physical damage or loss arising out of or caused by latent defects are covered only if there are no warranties, guarantees or other insurance covering the latent defect or such damages or losses. The coverage provided for latent defects and physical damage or loss caused by such latent defects is subject to an obligation on the part of the insured to identify and enforce any and all rights and claims under warranties, guarantees or other insurance.
There is no coverage for defects in design, manufacture, construction, workmanship or installation of insured property, other than coverage for latent defects as set forth and limited in this policy. There is no coverage for the cost of re-designing, correcting, or modifying any defect in design, manufacture, construction, workmanship or installation of insured property. However, physical damage or loss to other parts of the yacht resulting from such defects will be covered.
So…after you discover that your vessel is falling apart due to faulty design and construction, and the yacht manufacturer is now out of business, and after reading the above paragraph five times, you ask yourself, “Am I covered by my insurance?”
We learn in the first paragraph of this policy language that there is an absolute duty by the insured or vessel owner to exhaust its claims for any damages caused by latent defects against responsible parties such as the manufacturer, but in this case such recourse is not available.
The second paragraph excludes coverage for defects “in design, manufacture, construction, workmanship or installation of insured property…However, physical damage or loss to other parts of the yacht resulting from such defects will be covered.”
My estimation is that the physical damage or loss to other parts of the yacht from the latent defects might be a very difficult claim to prove even with the most understanding adjuster representing the underwriter.
Attention should be paid to the fine print of both the Manufacturer’s Warranty and your Marine Insurance Policy before you conclude the second happiest day in your life, the purchase of your dream vessel. Be sure to read, review, and understand the terms and conditions of the written language in an effort to avoid the possibility a “latent defect” exists in the terms and conditions of your All Risk Marine Insurance Policy. We have recently experienced an increase in the number of disputes from boat owners originating under Manufacturer’s Warranty claims and denials of insurance benefits, and we seek to educate and caution the uninformed accordingly.
Bohonnaon Law Firm,LLC
David M. Bohonnon is a partner in the Bohonnon Law Firm, LLC, which practices extensively in Marine and Aviation Law as well as tax matters. Member: American Bar Association; Connecticut Bar Association, Tax Section Executive Committee; Maritime Law Association (Proctor), (Chairman Subcommittee on Yacht Financing 2007-2015); American Bar Association (Chair for Recreational Marine Finance 2011-2015); Member Recreational Boating and Marine Lending Network, National Marine Banker Association, Yacht Brokers Association of America (YBAA), Florida Yacht Brokers Association (FYBA) Affiliate Member; Advisor Connecticut Law Revision Commission (2011-2012)