11th Circuit Holds Contract Partner is Not a Third Party Beneficiary to Insured’s A&E Policy

On Dec. 24, 2014, the Eleventh Circuit, interpreting Florida law, held a marine engineering firm’s professional liability insurer owed no duty to defend a shipbuilder in an underlying wrongful death case. In reversing the Florida District Court’s decision, the Eleventh Circuit held the shipbuilder, though a contract partner of the engineering firm, was not a third-party beneficiary to the engineering firm’s professional liability policy.

In January, 2000, shipbuilder, American Marine Inc. (“AMI”), entered into a contract with engineering firm, Guido Perla & Associates (“GPA”), related to the design and construction of two passenger boats.  Pursuant to the contract, GPA was required to obtain, and be the named insured on, an architect’s and engineer’s professional liability policy (“A&E policy”).  GPA obtained its A&E policy from Evanston Insurance Company (“Evanston”). The A&E policy provided GPA with coverage for personal injuries caused by negligence in performing its professional services.

The underlying case arose from the death of a ship captain operating one of the passenger boats who, after shutting off power to a boat, became trapped in its forward bulkhead door. The door was designed to automatically close upon the loss of power; however, the captain became trapped in such a manner that prevented rescuers from accessing its emergency release mechanism. A wrongful death complaint was filed against GPA and AMI, among others, alleging each was independently at fault – GPA for its design of the bulkhead door and AMI for its installation. AMI requested Evanston provide it with a defense as to the claims against it in the underlying case. Evanston refused, and, ultimately, both AMI and GPA individually settled the claims against them in the underlying case.

After settlement of the underlying case, AMI and its insurer, American Home Assurance Company (“American Home”) filed a declaratory judgment against Evanston.[1] AMI and American Home sought a declaration that Evanston had a duty to defend the claims against it as well as reimbursement for settlement proceeds and attorneys’ fees. The Florida District Court agreed, finding AMI was a third-party beneficiary to A&E policy between GPA and Evanston. As a result, it awarded AMI and American Home the amount paid towards settlement of the underlying case, attorneys’ fees in prosecuting the declaratory judgment, and prejudgment interest and costs – a total of $622,131.32.

On appeal, the Eleventh Circuit reexamined the A&E policy between Evanston and GPA. It was undisputed the underlying case against AMI alleged negligent installation, and not design; therefore, the insuring agreement in the A&E policy did not afford AMI coverage. More importantly, the Court examined two endorsements in the A&E policy that amended policy exclusions. While the District Court had found these endorsements made AMI a third-party beneficiary to the A&E policy, the Eleventh Circuit disagreed. As to the first endorsement, addressing non-insured liability assumed by the named insured through agreement, the Eleventh Circuit found the endorsement did not transform the exclusion into an insuring agreement that would provide AMI with coverage for its own tortuous conduct. As to the second endorsement, the Eleventh Circuit found the endorsement would have applied if AMI were liable based solely on GPA’s negligent design of the bulkhead door. However, since both AMI and GPA settled the underlying case, there was no final adjudication assigning liability to GPA. As a result, The Eleventh Circuit reversed the District Court and found Evanston had no duty to defend AMI in the underlying case.  For these same reasons, the Eleventh Circuit also reversed and held the A&E Policy did not obligate Evanston to pay American Home the cost of settlement.