Court Rejects “Pay to be Paid”

Posted on Wednesday, September 18th, 2019 | Posted in Site Blog

Decision of concern to P&I clubs and insurers

In Bodden v. Travelers Property Casualty Company of America, U.S. District Court for the Southern District of Florida held that despite the “pay to be paid” language in the P&I policy at issue, the policy was a liability policy. Accordingly, the court held that the plaintiffs had a direct cause of action under §627.4136 of the Florida statutes, which allows a party who obtains a settlement or verdict to bring a direct action against a “liability insurer.”

Background

In Bodden, crew members of a tug were abandoned by the vessel owner off the coast of Cuba. The Cuban Coast Guard towed the vessel to Cuba, where the crew members remained stranded for nearly a year.   They obtained a default judgment against the shipowner, and then sought to enforce the judgment against Travelers, the vessel’s P&I insurer. The policy provided that Travelers would “make good to [Suncoast] . . . all such loss and/or damage and/or expense as [Suncoast] shall as owners of the vessel named herein have become liable to pay and shall pay on account of liabilities, risks, events, and/or happenings” as set forth in the policy.  The policy then identified 14 categories of loss, etc. covered by the policy.  The court reasoned that 11 of these items are introduced as “Liability for” various matters and that this “necessarily gives the policy reader the overall impression that protection is in the nature of liability indemnity rather than loss paid indemnity.”  The court relied on an earlier Florida Supreme Court decision that had reached a similar conclusion, DaCosta v. Gen. Guar. Ins. Co. of Florida, 226 So.2d 104, 106-7 (Fla. 1969).

Main takeaways from the court’s opinion

The decision in Bodden is concerning on several levels. 

  • First, as noted above, the policy provided that the underwriters will pay “all loss and/or damage and or expense as [the assured] shall . . . have become liable to pay and shall pay on account of liabilities,” and then lists the “liabilities” that are covered.  This unambiguous language only provides coverage for amounts that the assured has paid on account of liabilities, and it is difficult to see how listing the liabilities that would trigger coverage once the assured has made payment could abrogate the words “shall . . . have become liable and shall pay.”
  • Second, the question of whether the “pay to be paid” clause in a P&I policy means what it says has been answered affirmatively any number of times by the federal courts.  See, e.g., Conoco, Inc. v. Republic Ins. Co., 819 F.2d 120 (5th Cir. 1987); Continental Oil Company v. Bonanza Corp.,677 F.2d 455 (5th Cir. 1982).  The decision in Bodden would appear to be in direct conflict with these decisions.

The plaintiffs  in Bodden had been abandoned by their employer in Cuba without money, food, supplies, or medical treatment for a year, allegedly surviving on a diet of rats and insects in order to survive, and the decision may be a prime example of the old adage that hard cases make bad law.  Given the potential effect of the holding eviscerating the “pay to be paid” principle of P&I insurance, however, this is a case that should be monitored for further developments. We intend to monitor the case as it proceeds in the district court and through any appeal, and will provide further updates on this important issue as warranted.

Chaffe McCall’s Role

The lead counsel in the Fifth Circuit cases upholding the “pay to be paid” principle is a partner at Chaffe McCall LLP. 

Please contact us if you would like more information about these cases, or if we can be of service in matters raising similar issues.