Engine of Luxury Yacht Burns Out

Owner incompetent – but what about the insurance?

Sheehan v Lloyds Names Munich Re Syndicate Ltd. [2017] FCA 1340

Mr Sheehan bought a Sunseeker Manhattan motor yacht fitted with two diesel engines equipped with a monitoring and diagnostic system, which included liquid LCD panels with a display for each engine.

When an alarm was triggered, a visual and an audible alarm was activated; the audible alarm was very loud. The alarms could not be overridden, although they could be ignored.

Once the alarm was activated, there was a high likelihood of the engine seizing if the engine was not shut down.

The vessel was also equipped with a “limp mode” whereby the engines defaulted automatically from the usual speed of c.2,250 RPM to 1,500 RPM. This was activated in various circumstances – one of which was the activation of a “critical alarm” for low lube oil pressure or high coolant temperature.

At the time of purchasing the vessel Mr Sheehan was provided with a manual which included instructions for the alarms and warnings relating to loss of engine oil pressure. Mr Sheehan said that he had not read the manual and did not know it existed.

Mr Sheehan took the vessel out from Hillarys Yacht Club at Hillarys in Western Australia.

Within only about five minutes, the alarm activated and the speed of both engines automatically slowed when “limp mode” was automatically engaged.

He then navigated the vessel back to the marina. Part way, the starboard engine shut down. He continued to operate the port engine at low RPM back to the pen.

Mr Sheehan did not check the alarm screen or gauges to determine why the alarm had activated.

The Judge accepted Mr Sheehan’s account of events as truthful, noting that he had acknowledged that he would have turned off the engine had he known the oil pressure was low. Observing that Mr Sheehan’s conduct was undoubtedly an example of poor seamanship bordering on negligence, and noting a reasonable operator of the vessel would have read the manual, checked the analogue gauges and scrolled through the list of alarms, he found that Mr Sheehan did not observe any warning that engine oil pressure was low and thought he would be able to “limp” home without damaging the engine.

The services of a referee were utilised to resolve many of the technical and factual issues arising.

The referee’s findings were, in summary:

“The damage to the engine occurred as a result of its continued operation after the loss of lube oil pressure which led to overheating and seizure. If the engine had been turned off immediately when the alarm sounded the damage would not have occurred. Damage began to occur 10 to 15 seconds after the alarm sounded when the lube oil pressure reached 2.8 bar. The loss of lube oil pressure was due to the oil cooler gasket’s faulty design and thus the damage could be considered to be as a result of the faulty design.”

These findings foreshadowed the ultimate question for determination, being – what was the legal cause (or causes) of the damage to the starboard engine: i.e. was it the conduct of Mr Sheehan or the defective design of the gasket or both?

The vessel was covered by a Nautilus Marine Insurance Policy which provided cover for accidental loss or damage.

“Accident/Accidental” were defined synonymously as “an event that you did not expect or intend to happen. It also includes a series of accidents arising out of the one event”.

The insurer denied indemnity and relied on various general exclusions including one expressed in these terms:

“You are not covered for any loss or damage caused by or resulting from, or the costs incurred from or of:

  • inherent defects, structural faults, faulty workmanship or faulty design;

  • any illegal or deliberate action by you, or someone acting with your express or implied consent;

  • mechanical, structural, electrical or electronic breakdown unless directly caused by one of the insured events listed …

  • a motor caused by or resulting from seizure and/or overheating unless caused by an accident which is otherwise an accepted claim under the policy …”

Noting the wording of the last exclusion relating to seizure and overheating did not sit well with the wording of the rest of this clause, the Judge concluded that the better construction of the exclusion was that the insured was not covered for loss and damage to a motor resulting from seizure and/or overheating unless caused by an accident otherwise covered under the policy.

The first issue was whether the damage to the engine came within the policy cover for accidental loss or damage.

An “accident” has been variously described as an “unlooked for mishap or an untoward event which is not expected or described” or “any unintended and unexpected occurrence which produces hurt or loss”: It must involve something “fortuitous and unexpected”: This accorded with the definition contained in the Policy wording of “accident/accidental”.

The test is an objective test but incorporates the specific knowledge and experience of the person involved. Accordingly, the appropriate enquiry was whether a reasonable operator of the vessel with the knowledge of Mr Sheehan would have expected the damage to the starboard engine to have occurred.

Mr Sheehan submitted that the damage was unexpected, drawing attention to the fact the engine had been serviced that day or the previous day, had been operated for only twenty minutes and had entered “limp mode” – which Mr Sheehan had believed was a mechanism that operated to protect the engine from damage. He mistakenly assumed that no damage would occur if the vessel was in “limp mode” and that the engine would shut down automatically if there was a possibility of serious damage.

The insurer contended that damage could not be considered as unexpected from the perspective of a reasonable person in the circumstances, who would have read the manual, known about the operation of the alarms, recognised their significance and acted reasonably when an alarm activated. In ignoring the alarm and continuing to operate the engine, Mr Sheehan’s conduct was not reasonable. His failure to act upon the alarm meant that the damage was not objectively unexpected as a reasonable operator of the vessel would have been aware of the alarm system and turned off the engine.

Alternatively, the insurer argued that the damage was not accidental within the meaning of the Policy as Mr Sheehan knew of the risk of damage and deliberately chose to court that risk by failing to read the manual, ignoring the visual and audible alarms and then failing to turn off the starboard engine.

The Judge found, however, that if he did not know of the risk, Mr Sheehan could not have chosen to court it. Mr Sheehan’s evidence was accepted in this regard and it was acknowledged that while his conduct demonstrated poor seamanship, that did not necessarily mean the events could not be characterised as being within the definition of “accident/accidental”. The fact Mr Sheehan’s assumptions were incorrect did not mean the damage was not unexpected.

On this basis, it was found that the damage to the starboard engine was accidental loss or damage within the meaning of the policy.

The cause of the damage was then considered, it being noted that the causal inquiry in insurance law is directed to the proximate cause of the relevant loss or damage – which means proximate in efficiency rather than the last in time.

A proximate cause is determined based upon a judgment as to the “real”, “effective”, “dominant” or “most efficient” cause, by applying the commonsense knowledge of a business person or seafarer. There does not need to be a single dominant, proximate or effective cause of loss or damage.

In the present case, the referee made a factual finding that the loss of lube oil pressure was due to the faulty design of the gasket; however, he also found that the damage would have been avoided if Mr Sheehan had turned off the engine immediately.

Both sides submitted there was a single proximate cause of damage. Mr Sheehan submitted it was his failure to turn off the starboard engine once the alarm activated. The insurer submitted the sole proximate cause was the defective gasket owing to its faulty design which meant Mr Sheehan’s claim would fail as damage caused by faulty design was excluded under the Policy.

Mr Sheehan then submitted that his actions were significantly more dominant than the design fault in bringing about the actual damage.

His Honour noted that the referee found that the faulty design of the gasket had led to the significant and rapid drop in oil pressure and continued until the engine ultimately seized and ceased operation only six minutes later and that the rapidity of the gasket failure was illustrated by the fact the damage began to occur to the engine only 10 to 15 seconds after the alarm sounded.

This rapid and significant failure of the gasket indicated that it was the dominant and, indeed, most efficient cause of the damage to the engine.

The claim was accordingly dismissed on the basis of the policy exclusion relating to faulty design.

This is an abridged version of the case report first published in Australian Insurance Law Bulletin 2018 Vol 34 No 1.

For more information, please contact:
Debra Lane

Debra Lane
Director
p.  +61 8 8124 1806
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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