"Mid Size Power Boats": A Guide for Discreminating Buyers - by David Pascoe


Latent Defects


A Little Understood Term Results in
Boat Owners Not Taking Advantage of Insurance Coverage

Most yacht policies have a latent defect clause which provides specific coverage for latent defects, while others specifically exclude latent defects from coverage. The term latent defect in maritime use is widely misunderstood, for it is not the same thing as with common law usage. A latent defect is an unknown defect not discoverable by such inspection or test as the law reasonably requires under the circumstances, i.e. reasonable and prudent inspection.

It is a principle of insurance that insurance does not cover property that is in any way defective because, to do so, would be providing a warranty for the defective product. That, of course, is the responsibility of the manufacturer and would be providing free insurance for the manufacturer. However, marine insurance policies have long provided coverage for loss and damage caused to the vessel as a result of a latent defect. Say, for example, an error in the lamination of a vessel hull results in the hull breaking open, causing it to sink. In this case, if the policy had a latent defect clause, under that clause the insurance would cover the resultant damage, but not the defect itself. Typical coverage wordings are:

Latent defects, excluding the cost of repairing or replacing the defective part.

The real problem with latent defect is in defining this term that is remarkably broad in scope: Latent means not discoverable by such inspection or test as the law reasonably requires under the circumstances. It can also mean a defect that has not become manifest yet; that is, a fault may exist within a material or component which, short of destructive testing, cannot be discovered, but which as time goes on will eventually become apparent as the part begins to fail or fails. The latent defect thus becomes a patent defect.

The kind of inspection necessary would be the one that any reasonable and prudent person or entity would be expected to carry out in order to ensure that the thing in question would not harm the vessel's seaworthiness. What the courts have determined does not constitute a latent defect is any kind of wear, normal stress or deterioration. In other words, the natural tendency of nearly every material to age, deteriorate and wear out.

Latent defect includes faulty material and faulty workmanship, but does it include faulty design? The answer is yes, but . . . . but only if damage results from faulty design; it does not cover correction of the faulty design.

Historical Perspectives

At this point is it necessary that we should back up a moment and consider where this "latent defect" business comes from. The term first appeared in 1888 in the English Institute Hull Clauses, which refers to ocean marine hull insurance for ships. Heretofore, there was no reference to the term in common law; it was exclusively maritime. The concept quickly crossed the Atlantic to be incorporated into the American Institute hull clauses and thence into yacht policies and finally into common law.

Today, civil lawyers throw the term latent defect around like snowballs after a heavy wet snow, and has little to do with the maritime definitions. Latent defects have a substantial legal background and precedent upon which to draw, not only in the U.S. but particularly Europe where it originated. Even so, there remains today a great deal of controversy within the U.S. courts about the myriad ramifications of what constitutes an insurable latent defect. What with the tremendous advancements in materials these days, there are apparently no limits to the meaning of the word "defective." Because the term has a strictly maritime ancestry, the maritime context of the term should apply, along with all Admiralty case law, both English and domestic.

Error in Design

Design errors or faulty design means that the specifications concerning how the vessel is to be built – or repaired. These specifications concern the form and functioning of the vessel, the choice of material and the process of manufacture. Say, for example, your boat has a balsa cored bottom that subsequently became saturated with water. Is that an error in design? Most likely, because one of two things had to happen: either the lamination design was faulty or balsa was an improper choice of material for the application. By definition, error in design is something that happens before construction or manufacture even begins. We’ll consider this subject in more detail in a moment.

Faulty Material

In the above case of the balsa core, was the balsa itself a faulty material? No, balsa may have been an improper selection of material for that application, or possibly the design of the laminate was faulty. There was nothing wrong with the balsa material itself, for balsa has been used for decking and other structural cores successfully for at least 50 years. Faulty material means that the material itself was faulty before it was incorporated into construction or manufacture. Examples of faulty materials are hard to find, but flawed castings, extrusions or forgings are rare examples.

Materials may be said to exist in three states, raw, processed and finished. The meaning of the word "material" implies that it is to be used to fabricate something else. A log from a cut tree is a raw material; after it is cut into planks it becomes a processed material. Made into pre finished plywood panels it becomes a finish material. This point is relevant because we may confront the question of what is a fiberglass laminate. Plastic resin is a processed material because it is made from a number of raw materials that are processed into the resin. In the building of a boat, plastic resin is further combined with fiberglass fabrics and other materials into a hull or other components. At each step of the manufacturing process, errors may occur. Added to our laminated hull is a finish called gel coat. Thus, the question arises, for the purpose of dealing with insurance issues, of how we define what is the excluded "part" that contains the latent defect because recovery cannot be made for the defective part.

In the case of plank or plate on frame construction, if a frame is faulty and fails, resulting in damage to the hull skin, we have little difficulty discerning the independent parts of a hull; the frame is clearly a part distinct from the plating. But in the case of a molded hull, this is a bit more difficult.

With a wood hull, the distinct parts are joined together with screws or bolts; with aluminum, the parts are welded together; with FRP, distinctly separate materials are joined together by means of chemical bonding. The common point amongst all three is that once distinct elements have been joined in some manner and where they were once separate, now appear as a single whole, yet those elements remain distinguishable.

Therefore, it would appear to be a reasonable and correct argument that a composite hull consists of separate parts and that a fault in one could cause damage to the others. The significance of this as it relates to latent defects will surely not be missed.

Premature Failure

A material may be said to fail prematurely when it fails to achieve the normally expected service life as a result of unexpected conditions. An error in design or materials could possibly result in advanced wear or corrosion that occurs at a rate far faster than normal. In a case where a yacht had sunk because a sea strainer, which was held together by a single bronze rod, came apart due to what appeared to be corrosion or electrolysis. But metallurgical analysis revealed that the rod was worn completely through as the result of bits of oyster shell swirling around within the strainer (the shell was not present because the strainer had been cleaned earlier but the captain failed to notice the damage to the rod). In this instance, we were dealing with erosion, not corrosion, which is a matter of wear. Furthermore, the strainer had failed within three years, which was shown to be far less than a normal service life. However, the vessel owner claimed that the cause of the failure was faulty strainer design because there was no material that could reasonably be expected to resist erosion by oyster shell. Indeed, other brands of strainers have the securing rods on the outside where they are not subject to erosion.

As to the discovery issue, it was shown that the yacht captain routinely inspected and cleaned the strainer on a monthly basis, but never observed the eroded shaft because of the awkward position of the unit that would require the thing to be completely removed and dismantled to see it. Thus, the owner prevailed by virtue of claiming a latent defect in design.

What is Damage?

If insurance covers the resultant damage caused by a defect, then we need to ask what is damage? Here the issue gets a bit murky because we can inquire whether damage to a hull caused by a defect in design falls within the context of "damage"? While it is doubtful that this is what underwriters intended, a bad design that results in a hull splitting open, or a core becoming filled with water could certainly be construed as damage. It has often been asserted that the design error is the selection of balsa as a core material for hull bottoms, the damage is that a core full of water renders a vessel at risk of hull failure due to hydraulic erosion of the core.

To carry it a step further, what about blistered hulls? If a policy does not specifically exclude blistering (many do) could the blisters be construed as damage? Blistering is caused by an improper selection of materials, namely general purpose polyester resin, because we know that better quality resins do not blister; therefore, a hull that is blistered is by definition built of inferior materials, a design fault. If a policy does not specifically exclude blistering – or some words to that effect – then blistering itself is not a latent defect because blistering is the result of improper selection of materials, i.e., blistering is the resultant damage, the casualty.

But yacht policies are worded differently than ship hull policies for the former usually contain the phrase excluding the cost of repairing or replacing the defective part. That would appear to mean that if the part itself is damaged by the defect, it still is not covered. So where does our soggy balsa cored bottom leave us?

Here’s where it gets interesting. The latent defect must develop in a way that results in a casualty. If the fault is in what we call the bottom (a part) and that fault causes the plies to separate, the balsa to turn to mush due to hydraulic erosion, then clearly a casualty has occurred to the bottom; the essential structure has sustained severe damage as a result of improper design. In other words, the part (bottom) is not defective, but some aspect of the design of it. The casualty is damage not to all aspects of the entire bottom, but to the core, which constitutes another "part" as was discussed in an earlier section. Therefore, if water migration into a balsa core results in ply separation, or degradation of the core by means of hydraulic erosion, then that is the resultant damage, the casualty and should be covered.

Look at it this way: the balsa itself is not defective, the fiberglass laminates are not defective, but the defect that caused water to somehow get into the core has resulted in damage to both. The latent defect is therefore the means by which water got into the core.

In the case of the balsa cored bottom, at issue will be the question of what constitutes the defective part that will not be covered. The bottom consists of balsa wood sandwiched between two skins of fiberglass laminate. The core is either full of water or has already begun to separate from the skins and possibly degrade. It would appear, then, that neither the core nor the laminates are defective materials so we have to look elsewhere for the latent defect.

The casualty is the damage that occurred as a result of water intrusion whatever the outcome of that may be. In the case of Sea Ray Boats, that company built several hundred boats with balsa cored bottoms, yet we know that not all of them have failed. My extensive searches have produced only 43 verified cases , though surely the number is far greater. And of those 43 cases there were at least four differing means of water intrusion, so there are at least four different perils that produced the same casualty or type of damage.

The phrase excluding the cost of repairing or replacing the defective part is intended not to provide coverage for the manufacturer’s error, yet it is intended to cover the insured for his fortuitous loss that was not his fault for want of due diligence to maintain his vessel. The reality is that many of the Sea Ray core saturations were caused by faulty design wherein the core was extended completely around the keel, thereby creating a weak spot on the apex of the bottom or keel. When the vessels were blocked after hauling, the laminate fractured in way of the keel blocks. Thus, there was indeed a major design error that resulted in water intrusion into the core, but the use of balsa as a core was not the de facto error; the error was in the manner in which balsa was used, i.e. on the point of the keel.

Fractured laminate on hull bottom
Fractured laminate on hull bottom

In several instances, holes had been inadvertently drilled through the inner hull skin that allowed water into the core. No one knew why, but there they were. And in other cases the builder failed to seal the core in way of port holes, the deck joint, and other hull penetrations. Again, none of this was the fault of the balsa but the failure to employ proper construction practices, be it workmanship or design.

We can look at the issue from one final angle, that of the question of whether it is possible to build a hull using balsa core that will not inevitably fail. My answer to that is yes and the fact that not all balsa cored hulls fail proves the point.

Were the above cited instances involved in insurance claims – which some were – the "defective part(s)" that would not be covered range from repair of the drill holes to redesigning the keel laminating schedule, but in every case, repairing the damage, the saturated or separated core, should have been covered.

In the case of the cracked keel area mentioned above, the defect not covered would be the correction of the use of balsa in the keel area; the rest of the wet core damage would be covered. This illustrates my assertion that the ferreting out the correct interpretation of latent defect issues is often not easy, and frequently leads to wrong conclusions.

Similarly, if an undersized I beam used to construct a building collapses because it is under dimensioned, you don’t say that the I beam is defective by being undersized. No, there was nothing wrong with that particular I beam; what was wrong was the architect’s specified use of that size I beam. Seemingly nitpicking distinctions of semantics can produce very different results so far as insurance coverage is concerned.

As to hull blistering, the blisters are the damage resulting from a defect not discoverable by reasonable inspection and therefore latent. Many all risks policies specifically exclude blistering, a clause that will override the latent defect clause. Named peril policies typically do not contain blistering exclusions and so blistering will fall under the latent defect cover. However, there may be some difficulties. The latent defect is the selection of improper material, polyester resin. If the cover excludes repairing or replacing the defective part, what is the defective part and what is the damage?

Here, again, we have to consider the issue carefully: the defective part is the selection of plastic that is used to construct the entire hull. Obviously, that can’t be undone. But the damage is not primarily to the plastic that binds the glass fibers together – though certainly some plastic damage does occur -- but a blister that has formed between the gel coat and the laminate. The damage is an accumulation of fluid and a distortion of the gel coat which is not the defective part and thus repair of the gel coat should be covered even though that will not resolve the problem. However, those looking to their insurance for relief of blistering problems will be faced with the tough issue of proving that the blistering originated within the insurance policy period.

Machinery

Latent defects in machinery were the original basis for creation of the latent defect clause. In the Institute named peril policy (ships) the coverage is:

This insurance covers loss of or damage to the subject matter insured caused by:

Bursting of boilers or breakage of shafts but does not cover any of the costs of repairing or replacing the boiler which bursts or shaft which breaks

Any latent defect in the machinery or hull but does not cover the cost of correcting the latent defect

Yachts, of course, don’t have boilers, but the essential purpose of the 1888 English clause concerning latent defects remains. To wit, damage resulting from latent defects is covered.

Wear, tear and gradual deterioration cannot give rise to a latent defect which is confined to manufacturing defect in materials, design and workmanship.

The latent defects clause of yacht policies is one of the most under utilized areas of yacht insurance because it is so poorly understood, and because latent defects are difficult and costly to prove. In most cases when machinery fails, the exact cause is never determined but ascribed to a generic cause such as piston failure without ever determining why the piston failed.

Instances of latent defects in basic engine components (crankshaft, rods, pistons, bearings, etc., are very rare, yet design errors in fuel and induction and cooling systems are quite common. Latent defects occur in exhaust system designs, engine mounting systems and generator installations. A builder who installs a generator under a non watertight hatch commits a design error.

Limitations on Claims

The only limitation for making a latent defect damage claim is that the claimant must be able to demonstrate that the damage – not the latent defect – occurred during the period that the policy was in force. It does not matter whether one is the first owner or the fifth owner of the boat.

Marine Investigations: Chapter 4 - Marine Insurance and Issues of Law

Marine Investigations: Chapter 9 - Machinery Failure Analysis

Uploaded March 21, 2004

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David Pascoe - Biography

David Pascoe is a second generation marine surveyor in his family who began his surveying career at age 16 as an apprentice in 1965 as the era of wooden boats was drawing to a close.

Certified by the National Association of Marine Surveyors in 1972, he has conducted over 5,000 pre purchase surveys in addition to having conducted hundreds of boating accident investigations, including fires, sinkings, hull failures and machinery failure analysis.

Over forty years of knowledge and experience are brought to bear in following books. David Pascoe is the author of:

In addition to readers in the United States, boaters and boat industry professionals worldwide from over 70 countries have purchased David Pascoe's books, since introduction of his first book in 2001.

In 2012, David Pascoe has retired from marine surveying business at age 65.

Biography - Long version

 

David Pascoe's
Power Boat Books

Mid Size Power Boats Mid Size Power Boats
A Guide for Discriminating Buyers
Focuses exclusively cruiser class generally 30-55 feet
With discussions on the pros and cons of each type: Expresses, trawlers, motor yachts, multi purpose types, sportfishermen and sedan cruisers.
Buyers' Guide to Outboard Boats
Selecting and Evaluating New and Used Boats
Dedicated for offshore outboard boats
A hard and realistic look at the marine market place and delves into issues of boat quality and durability that most other marine writers are unwilling to touch.
Surveying Fiberglass Powewr Boats
Surveying Fiberglass Power Boats
2nd Edition
The Art of Pre-Purchase Survey The very first of its kind, this book provides the essentials that every novice needs to know, as well as a wealth of esoteric details.
Marine Investigations
Pleasure crafts investigations to court testimony The first and only book of its kind on the subject of investigating pleasure craft casualties and other issues.
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Over 70 countries
Countries List
Links to Each Chapter Contents with Excerpt at:
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