No Third-Party Beneficiary Coverage Under a Professional Liability Policy

Posted on January 6th, 2015 by sutteroconnell

In Atlantic Marine Florida, LLC v. Evanston Insurance Company, 2014 U.S. App. LEXIS 24415 (11th Cir. Dec. 24, 2014), the Eleventh Circuit addressed the issue of whether a shipbuilder was a third-party beneficiary under the marine engineering firm’s professional liability policy for an underlying wrongful death lawsuit against the shipbuilder and the engineering firm.

Pursuant to their contract, the engineering firm provided design and engineering services to the shipbuilder for a passenger vessel. The parties’ agreement required the engineering firm to obtain professional liability insurance for which the shipbuilder paid the premium.  However, the parties’ agreement did not require the shipbuilder to be named as an additional insured.  The shipbuilder constructed the vessel.

After the vessel was commissioned, the vessel’s captain died of asphyxiation after being trapped behind the bulkhead door. The captain’s estate sued the engineering firm for strict liability and negligent design and the shipbuilder for strict liability and negligent manufacturing and installation.  Asserting that it was a third-party beneficiary, the shipbuilder tendered the lawsuit to the engineering firm’s professional liability carrier, which denied coverage.  Both the shipbuilder and the engineering firm settled with the captain’s estate.

After settling, the shipbuilder and its carrier sued the engineering firm’s professional liability carrier claiming that the shipbuilder was a third-party beneficiary under the policy. The district court agreed and granted the shipbuilder summary judgment.

On appeal, however, the Eleventh Circuit reversed, concluding that because the underlying suit was against the shipbuilder for its own negligence, and not vicariously for the engineering firm’s negligence, the shipbuilder could not recover under the professional liability policy. In addition, the appellate court concluded that designating the shipbuilder as a third-party beneficiary under the policy would have created a conflict of interest in which the engineering firm and its carrier would have had to fund a professional liability claim against the engineering firm that the carrier would have had to defend and indemnify.  That is not what the parties bargained for when they entered into their agreement.  Accordingly, the appellate court reversed and directed a verdict for the professional liability carrier.

The full text of the opinion can be found here.