A “Small Technical Failure”

The captain of the 114,137 gross ton, 952-foot long, 4,000+ person, six-year-old Costa Concordia cruise ship who ran it aground last month reportedly initially characterized the vessel as having suffered a “small technical failure.”

That “small technical failure,” however, turned out to be a large gash in the vessel’s hull sustained after it struck a rock, and resulted in the vessel’s grounding, emergency passenger evacuation, and the loss of at least 16 lives.

The types and amounts of liability and insurance coverage issues that will arise as a result of this incident will be significant, including claims for personal injury and death; property damage; environmental damage; employee claims; and criminal liabilities—to name but a few.

As of late January, the Costa Concordia remained perched on a rocky outcropping near the coast of Giglio, an island in Italy. Initial reports suggest that the tragic loss of the cruise ship could involve potential losses of up to $1 billion or more. Carnival Corporation and plc., corporate parent of Costa Crociere S.p.A. (“Costa”), the Italian registered owner of the Italian-flagged Costa Concordia, estimates that the disaster will cost Carnival $85 to $95 million this year alone for loss of use of the vessel (for which Carnival self-insures), along with combined deductibles of $40 million for damage to the vessel and personal injury liability.

The vessel’s captain, Francisco Schettino, remains under house arrest after having been arrested for abandoning ship (a crime under Italian law) and manslaughter.

Schettino’s conduct before, during, and after the grounding is astonishing. According to various reports, Schettino is alleged to have deliberately deviated from the vessel’s route to approach the coast of Giglio (with varying accounts of the reason(s) for the approach, such as to honor a former colleague on the island and to bring his maitre d’ close to shore where his family resides). He is also accused of wining and dining beautiful women while doing so; lying about the condition of the vessel by characterizing it as having a “small technical failure”; abandoning ship and leaving passengers behind amid chaos; ending up in a lifeboat because he “tripped” into one; battling with the Italian Coast Guard by radio and refusing orders to get back aboard the vessel to take care of the passengers; and hopping into a cab, asking to be taken far away.

So what’s next? Beyond the search for missing passengers, there also are immediate environmental, fuel containment, and wreck removal/salvage issues to be addressed. The Costa Concordia reportedly has approximately 2,400 tons of heavy fuel oil and 200 tons of diesel fuel on board. It remains to be seen whether the ongoing fuel removal efforts will succeed. The wreck poses a grave danger to the Giglio marine habitat. According to Reuters, the Italian government has assessed the environmental risk to the Island of Giglio as “very, very high,” and has erected anti-spill booms as a precaution. A fuel spill potentially could imperil the Tuscan Archipelago National Park, and the “Santuario dei Cetacei,” an area declared jointly by the governments of France, Italy, and Monaco as a sanctuary for dolphins, whales, and other marine mammals. Clean-up and remediation costs could be exorbitant.

The Costa Concordia cannot stay where it is. Ironically, Costa may be hoping that the vessel is a constructive total loss. If the Costa Concordia qualifies as a “wreck,” and removal is “compulsory by law,” Costa potentially may turn to its protection and indemnity policy or policies for the costs of removal. Other coverages potentially implicated with regard to removal costs and incidental expenses include hull policy “sue and labor” provisions as well as pollution insurance should there be a spill. Meanwhile, salvage efforts reportedly remain ongoing.

Costa Concordia passengers reportedly are planning a class-action lawsuit in collaboration with an Italian consumer group Codacons, which is soliciting class members through its website. There may be issues, however, with regard to whether these passengers’ claims are appropriate for a class action. For example, they may not have sufficient commonality to provide a basis for a class action. Moreover, the terms and conditions of the passengers’ cruise contracts may present an obstacle for litigation. The Costa contract terms contain restrictions on the kinds of lawsuits that can be brought, where and when they must be brought, and how much the company will pay.

For the doomed cruise that involved no U.S. ports, the contract terms appear to require all litigation to be brought in Genoa, Italy and governed by Italian law. Claims for personal injury and death are stated to be capped at approximately $71,000, and individual passengers’ property damages may further be capped at $5,000. The contract terms further indicate that in the event of any conflict in the various applicable limitation laws or treaties, Costa “shall be entitled to invoke whichever provisions provide the greatest limitations and immunities.” Class-action lawsuits are barred by the contract terms, as are claims for mental anguish.

According to various reports, only about 120 of the Costa Concordia passengers were U.S. citizens. Absent unusual circumstances, in accordance with U.S. Supreme Court precedent, Carnival Cruise Lines v. Shute, 499 U.S. 585, 593-594 (1991), U.S. courts today commonly enforce forum selection clauses, so those passengers may be forced to file any lawsuits in Genoa. Such provisions have been held to be unenforceable in some circumstances, however. That would include instances in which a passenger received a ticket shortly before departure and objection to any terms would have meant forfeiture of the entire purchase price under the contract. See Coma v. American Hawaii Cruises, 794 F. Supp. 1005 (D. Haw. 1992).

Simply because the contract provisions require suit in a foreign jurisdiction does not mean that U.S. passengers will forego U.S. courts, particularly when they have booked their tickets through a U.S.-based tour company or have some other arguable basis for circumventing the forum selection clause. For example, similar litigation ensued in New York federal courts after the grounding of the cruise ship Sea Diamond off the coast of the Greek island of Santorini in 2007.

Negligence claims could involve passenger complaints that chaos ensued after the vessel’s grounding; that the crew and staff were confused and improperly trained; and passengers and crew had not been appropriately instructed on evacuation procedures and safety protocols. The International Maritime Organization regulations, however, only require a passenger safety drill within 24 hours of the vessel’s departure. The incident took place only a couple of hours after commencement of the cruise.

Costa’s recent conduct suggests that it may be trying to cut off its nose to spite its face.  According to numerous reports, Costa is blaming Schettino for the incident. The more vehemently Costa blames its own vessel captain for the grounding and subsequent turmoil and tragedy, however, the more Costa may simultaneously be establishing a foundation for potential liability claims and implicating insurance coverage defenses. For example, Costa blames Schettino for deviating from Costa Concordia’s course, but this was not the first time a Costa vessel undertook a public relations “fly-by” near the coast of Giglio—reportedly to the previous commendation by the mayor of Giglio and apparent knowledge of Costa.

If Schettino intentionally altered the vessel’s course to approach too close to land and disabled navigation alarms as one report suggests, this could be raised as a basis for negligence or unseaworthiness claims. Incompetence of the captain or crew also could render the vessel unseaworthy and thus negate coverage.

Costa’s responsibility for Schettino’s conduct also likely will be at issue in future litigation. See, e.g., Massachusetts Lobstermen’s Ass’n, Inc. v. U.S., 554 F. Supp. 740, 742-43 (D. Mass. 1982) (“The master of a vessel is the agent and representative of the owner…. He is the representative of the owner; thus, his actions are those of the owner.”). Further, because marine insurance generally only responds to losses “triggered by an accident or fortuity,” Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 654 (9th Cir. 2008), and because “[a] loss is not considered fortuitous if it results from…the intentional misconduct of the insured,” Axis Reinsurance Co. v. Henley, No. 4:08cv168, 2009 WL 3416248, at *15 (N.D. Fla. Oct. 22, 2009), the limiting concept of fortuity (sometimes implied into marine insurance policies, if not already expressly stated) may be implicated in coverage issues.

Moreover, even “consciously criminal or tortious” conduct of a vessel’s captain may be imputed to the vessel owner in certain circumstances. See, e.g., Jackson Marine Corp. v. Blue Fox, 845 F.2d 1307, 1310 (5th Cir. 1988). Schettino also reportedly informed Italian prosecutors following the casualty that Costa supposedly insisted that he operate the vessel close to the coast.

Costa also could seek to limit its liability under applicable law for claims arising as a result of the casualty pursuant to a limitation proceeding. It appears that although Italy is not a signatory to the Convention on Limitation of Liability for Maritime Claims, Italian law nonetheless grants the benefit of limitation to operators of vessels, according to the Italian Maritime Law Association’s website.

Likewise in the U.S., pursuant to the Shipowner’s Limitation of Liability Act of 1851, a vessel owner may seek to limit its liability to the value of the vessel plus pending freight. Limitation of liability, however, is not always available under all circumstances. For example, under U.S. law, if an unseaworthy condition of a vessel is determined to have been the cause of a casualty (such as, for example, malfunctioning navigation or safety equipment), and such unseaworthy condition was within the owner’s “privity or knowledge,” the right to limitation may be denied. See generally, e.g., Trico Marine Assets, Inc. v. Diamond B Marine Servs., Inc., 332 F.3d 779, 790 (5th Cir. 2003). (Limitation denied, in part, on the basis that the vessel owner knew or should have known that the vessel “was unseaworthy and that its captain was improperly trained.”)

Moreover, in certain circumstances, related corporate entities might not be permitted to limit liability. For example, in the event that Costa’s parent Carnival becomes embroiled in litigation as well, that may become an issue. See, e.g., In re AMOCO CADIZ, 954 F.2d 1279 (7th Cir. 1992). (In litigation involving a tanker oil spill off the coast of France, related corporate entities were held not entitled to limit as a result of failure to prove “owner” status.) Conversely, the AMOCO CADIZ court found that liability of those related corporate entities was established.

The peculiar circumstances involved in the Costa Concordia incident also likely will give rise to various potential bases for denial of coverage and/or liability shifting. For example, did Captain Schettino have a history of inappropriate behavior of which Costa was aware, which made him unfit to captain the Costa Concordia? Did his conduct amount to intentional misconduct, gross negligence, and/or negligence? Was the crew properly trained? Did the vessel have up-to-date charts aboard and functional navigation equipment? Did Costa authorize the vessel’s approach to Giglio so close to the coast? Did the Mayor of Giglio encourage, or even request, these showy salutes to Giglio, despite having been aware (or having the obligation to have been aware) of the danger to these vessels just off the coast? These questions and many others are likely to influence the course that liability and insurance coverage disputes take.

The world already knows that the wreck of the Costa Concordia is no “small technical failure.” Only time will tell the scope of this disaster from an insurance perspective.