Geico Marine Insurance Company v. Terry Miller

• Court: Court of Appeals for the Eleventh Circuit
• Decided: October 17, 2024
• Docket: 23-12611
• Status: Unpublished

Opinion

USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 1 of 14

[DO NOT PUBLISH] In the United States Court of Appeals For the Eleventh Circuit

____________________

No. 23-12611 Non-Argument Calendar ____________________

GEICO MARINE INSURANCE COMPANY, Plaintiff-Counter Defendant-Appellee, versus TERRY W. MILLER, ERICKA J. MILLER,

Defendants-Counter Claimants-Appellants.

Appeal from the United States District Court for the Middle District of Florida D.C. Docket No. 5:22-cv-00296-JSM-PRL USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 2 of 14

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Before LUCK, BRASHER, and ABUDU, Circuit Judges. PER CURIAM: This is a maritime insurance contract case. Geico Marine Insurance Company sued Terry and Ericka Miller, seeking a declar- atory judgment that its maritime insurance contract on the Millers’ yacht did not cover damage the yacht suffered when it failed during a sea test. The Millers countersued for breach of contract. Resolv- ing cross motions for summary judgment, the district court found for Geico, determining that (1) the loss was excluded by the con- tract’s exclusion for losses caused by mechanical failure and (2) the record lacked evidence of a latent defect. After careful review, we conclude there is a genuine dispute of material fact as to the exist- ence of a latent defect, so we reverse the district court and remand for further proceedings.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY The Millers owned a 2002 Viking Yacht Cruiser. Geico in- sured the boat. Under the terms of the maritime insurance con- tract, Geico promised to “pay for sudden, direct and accidental property damage, including theft or vandalism, to [the] insured’s boat and its dinghy.” But the policy had a mechanical breakdown exclusion that excluded from coverage “any loss, damage or ex- pense caused directly or indirectly by . . . mechanical breakdown, electrical breakdown, structural breakdown, overheating or gal- vanic action.” That exclusion explained, however, that it “does not USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 3 of 14

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apply to immediate consequential property damage resulting from fire, explosion, sinking, demasting, collision or stranding.” A sepa- rate latent defect exclusion explained that “[c]overage w[ould] not apply to . . . [t]he cost to repair or replace a part that fail[ed] as a result of a design, manufacturing or latent defect.” But that exclu- sion was limited by an exception that explained Geico would “cover immediate consequential property damage that results from such failure.” In November 2021, the Millers’ yacht underwent a sea trial. Leonardo Avila, the Millers’ marine mechanic, was aboard the ship. During the sea trial, the starboard engine made an abnormal noise, and that engine was shut down. The next day, Avila disassembled the failed engine, and he determined that it had suffered a connecting rod bearing failure on either the A5 or B5 bearings, which resulted in other damage to the engine. The bearings appeared to have “spun” and had visible damage. The bearing rod failure resulted in damage to the journal of the crankshaft and the scattering of metal debris throughout the engine. Avila’s inspection of the failed engine revealed its compo- nents had metal contamination. All in all, Avila concluded that the first step in the engine’s failure was when the A5 and B5 connecting rod bearings stopped working properly. To him, this was the “primary cause” of the fail- ure—attributing scattered debris as a “secondary failure.” Avila noted that the connecting rod bearings’ failure was a mechanical failure. Avila was unable to determine the cause of the bearing USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 4 of 14

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failure, but he did not see anything in the starboard engine to indi- cate that the bearing failure was caused by lack of maintenance, lubrication, wear, tear, or corrosion. The Millers filed a claim with Geico, which it denied. About six months later, Geico sued the Millers, seeking a declaratory judg- ment that the damage they claimed was not covered by the policy. The Millers answered and counterclaimed for breach of contract. The case proceeded to discovery where the Millers deposed Geico’s corporate representative, Kerry McCook. McCook testi- fied that Geico doesn’t have a specific latent defect definition, and that it follows the dictionary definition of a term when the policy doesn’t define it. Geico doesn’t follow a specific dictionary, so where there are conflicting definitions of an undefined term, it uses the one most favorable to an insured. He indicated that Geico agreed with Merriam-Webster’s definition of “latent defect” as “a defect as in a product or property that is not discoverable by rea- sonable or customary inspection.” As to the cause of the engine failure, McCook conceded that manufacturing defects can cause a mechanical breakdown. And he also admitted that GEICO was not aware of any “obvious,” non- “onerous,” “reasonable,” or “customary” inspection that could have determined that the bearings would have failed before they did. Based on a report made by Dr. Lee Swanger, an expert for both the Millers and Geico, McCook testified that the “most likely cause” of the rod bearing failure, as outlined by Dr. Swanger, was USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 5 of 14

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having debris on the bearing surface or the bearing back, and that Geico “would agree that that issue would be latent.” He “disa- gree[d]” that the bearing failure itself was latent, but he admitted that Dr. Swanger’s report revealed “there was a latent . . . defect or issue with the bearings.” McCook stated that, “[b]ased on Dr. Swanger’s report, Geico agree[d] that there was a latent issue with the bearings that caused the mechanical breakdown.” “Based on [his] knowledge of the dictionary definition of defect,” McCook “agree[d]” that “latent issue is just another word for latent defect.” And McCook admitted that Dr. Swanger’s reports indicated “there could have been debris on the bearing surface or bearing back or a slight out-of-position location of one or more of the bearing shells” and that “[b]ased on our agreed definition of latent, those condi- tions would be latent, as no reasonable inspection would have been able to uncover that.” The parties filed cross motions for summary judgment. The district court granted Geico’s motion and denied the Millers’ mo- tion, concluding that “the record lacks evidence of a latent defect,” so the exception to the latent defect exclusion wouldn’t apply, and that the “loss is excluded by the policy’s mechanical breakdown ex- clusion.” The district court determined McCook’s testimony didn’t provide evidence of a latent defect because it was “entirely speculative” and he “wasn’t qualified to testify about any alleged defect,” so there was “no competent evidence of a latent defect.” The Millers appeal the summary judgment for Geico. USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 6 of 14

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STANDARD OF REVIEW We review de novo the district court’s grant of summary judgment. Mata Chorwadi, Inc. v. City of Boynton Beach, 66 F.4th 1259, 1263 (11th Cir. 2023). We also review de novo the interpre- tation of marine insurance contracts. Geico Marine Ins. Co. v. Shack- leford, 945 F.3d 1135, 1139 (11th Cir. 2019).

DISCUSSION The Millers’ appeal raises two issues for us to decide: (1) Was there a genuine dispute of material fact as to the existence of a latent defect? (2) And if so, does the exclusion for losses from 1 mechanical breakdowns preclude recovery? As to the first issue—whether there was a genuine dispute of material fact as to the existence of a latent defect—the Millers argue that McCook’s testimony created a genuine issue. McCook testified that the “most likely cause” of the rod bearings’ failure, as outlined by Dr. Swanger, was having debris on the bearing surface or the bearing back, which Geico agreed “would be latent.” He also testified that “[b]ased on Dr. Swanger’s report, Geico agrees

1 “Marine insurance contracts”—like the one at issue here—“qualify as mari- time contracts, which fall within the admiralty jurisdiction of the federal courts and are governed by maritime law.” Id. (citations omitted). “In the absence of a ‘judicially established federal admiralty rule,’ we rely on state law when addressing questions of marine insurance.” Id. (quoting Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 314 (1955)). Here, both parties acknowledge that Florida law supplements the applicable federal admiralty law. USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 7 of 14

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that there was a latent issue with the bearings that caused the me- chanical breakdown.” And “[b]ased on [his] knowledge of the dic- tionary definition of defect,” McCook said “I would agree,” when asked if “latent defect” meant “latent issue.” We agree with the Millers that the district court erred in con- cluding there was no genuine dispute as to a latent defect based on McCook’s testimony. The district court determined that this testi- mony was “entirely speculative,” and now Geico argues that this would have been an improper opinion by a lay witness in violation of Federal Rule of Evidence 702’s expert requirements. Of course, “[s]peculation does not create a genuine issue of fact; instead, it cre- ates a false issue, the demolition of which is a primary goal of sum- mary judgment.” Cordoba v. Dillard’s, Inc., 419 F.3d 1169, 1181 (11th Cir. 2005) (cleaned up). But McCook, Geico’s corporate rep- resentative, was not speculating about the cause of the mechanical failure and he was not giving a lay opinion. McCook, as Geico’s rule 30(b)(6) designee, gave Geico’s position on the cause of the rod bearing failure based on the expert report Geico and the Millers commissioned from Dr. Swanger. Based on the expert report, “Geico agree[d] that there was a latent issue with the bearings that caused the mechanical breakdown.” As to the second issue, we must determine whether cover- age for a latent defect exists despite the mechanical breakdown ex- clusion. Geico says no, claiming that the mechanical breakdown was the efficient cause such that there is no coverage. We disagree. USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 8 of 14

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In reaching that conclusion, we are mindful that “[w]e must interpret the policy’s terms ‘in accordance with the plain language of the policies as bargained for by the parties.’” Travelers Indem. Co. of Conn. v. Richard Mckenzie & Sons, Inc., 10 F.4th 1255, 1264 (11th Cir. 2021) (quoting Prudential Prop. & Cas. Ins. Co. v. Swindal, 622 So. 2d 467, 470 (Fla. 1993)). In addition, “we are required to abide by the Florida rule that ‘exceptions to coverage in an insurance pol- icy are strictly construed against the insurer and any doubt or am- biguity is resolved in favor of the insured.’” Arawak Aviation, Inc. v. Indem. Ins. Co. of N. Am., 285 F.3d 954, 956 (11th Cir. 2002) (cleaned up) (quoting Hartford Accident & Indem. Co. v. Phelps, 294 So. 2d 362, 364 (Fla. Dist. Ct. App. 1974)). But we do so “only when a genuine inconsistency, uncertainty, or ambiguity in meaning remains after resort to the ordinary rules of construction.” Id. (cleaned up) (quot- ing State Farm Mut. Auto. Ins. Co. v. Pridgen, 498 So. 2d 1245, 1248 (Fla.1986)). With those background interpretative principles in mind, we consider Geico’s argument that the exclusion for consequential property damage based on mechanical breakdown trumps the cov- erage permitted under the exception to the latent defect exclusion for immediate consequential property damage. True, as Geico points out in its brief, the Florida Supreme Court has long said that “an exclusion does not provide coverage but limits coverage.” La- 2 Marche v. Shelby Mut. Ins. Co., 390 So. 2d 325, 326 (Fla. 1980). But

2 The Millers argue that this latent defect exclusion provision is really an Inch- maree clause, which has a “rich history” and “purpose . . . to broaden, not USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 9 of 14

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the Florida Supreme Court has also explained that “[a]lthough ex- clusionary clauses cannot be relied upon to create coverage, prin- ciples governing the construction of insurance contracts dictate that when construing an insurance policy to determine coverage the pertinent provisions should be read in pari materia.” U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 877 (Fla. 2007) (quoting State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1074–75 (Fla. 1998)). When looking at the relevant coverage and exclusion provi- sions of the contract, as the parties both correctly point out, the question is whether the mechanical breakdown or the latent defect was the proximate cause of the damage. “[T]he proximate cause is the efficient cause and not a merely incidental cause which may be nearer in time to the result.” Lanasa Fruit S.S. & Importing Co. v. Universal Ins. Co., 302 U.S. 556, 562 (1938). Put another way, courts must determine the “predominate and determining cause.” Stand- ard Oil Co. of N.J. v. United States, 340 U.S. 54, 57–59 (1950) (cleaned up). This means “[c]ourts analyzing problems of marine insurance causation have, as a rule, applied strictly the doctrine of causa

restrict, to expand, not withdraw, coverage” in maritime cases. Saskatchewan Gov’t Ins. Off. v. Spot Pack, Inc., 242 F.2d 385, 391 (5th Cir. 1957). But this pro- vision is clearly within the “exclusions” provisions within the “coverages” sec- tion of the contract, and that part in the contract here saying there is coverage is an exception to the exclusion. Cf. id. at 391 n.5 (featuring an Inchmaree clause that provided, “[t]his insurance also specially to cover . . . loss of or damage to the subject matter insured directly caused by the following: . . . any latent de- fect in the machinery or hull[] (excluding the cost and expense of replacing or repairing the defective part)”). USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 10 of 14

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proxima non remota spectatur (‘the immediate not the remote cause is considered’).” Tillery v. Hull & Co., 876 F.2d 1517, 1519 (11th Cir. 1989). In other words, “courts seeking to determine the cause of a vessel’s damage assign greater weight to the ultimate, efficient causes than to the temporally remote causes.” Id. Florida’s precedent is instructive on this point. Under Flor- ida’s efficient proximate cause doctrine, “where there is a concur- rence of different perils, the efficient cause—the one that set the other in motion—is the cause to which the loss is attributable.” Sebo v. Am. Home Assurance Co., 208 So. 3d 694, 697 (Fla. 2016) (cit- ing Fire Ass’n of Phila. v. Evansville Brewing Ass’n, 75 So. 196 (Fla. 1917); additional citation omitted)). For instance, “[i]n Evansville Brewing, [the Florida Supreme Court] contemplated a chain of events where one peril directly led to a subsequent peril,” and “[i]n finding that coverage existed under the policy, [it] drew the distinc- tion between a covered peril setting into motion an uncovered peril and an uncovered peril setting into motion a covered peril,” holding that “[c]overage exists for the former but not the latter.” Id. (citing Evansville Brewing, 75 So. at 198). Here, there’s evidence from which a reasonable jury could conclude that the latent defect was the efficient cause of the engine failure. McCook testified that the “most likely cause” of the bear- ing rod failure was “having debris on the bearing surface or the bearing back among other things,” and he admitted Geico “would agree that that issue would be latent, yes.” Sure, he “disagree[d]” that the bearing failure itself was latent, but he admitted that USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 11 of 14

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Dr. Swanger’s report revealed “there was a latent . . . defect or is- sue with the bearings.” McCook made perfectly clear that, “[b]ased on Dr. Swanger’s report, Geico agrees that there was a latent issue with the bearings that caused the mechanical breakdown.” That’s evidence that a latent defect caused the mechanical breakdown. And although Avila was unable to determine what the cause of the bearing failure was, he did not see anything in the starboard engine to indicate that the bearing failure was caused by lack of mainte- nance, lubrication, wear, tear, or corrosion—which means his tes- timony is consistent with the possibility of a latent defect too. In other words, the record testimony provides evidence of a genuine dispute of material fact that a latent defect was the “predominate and determining” or “efficient cause” of the failure. See Standard Oil, 340 U.S. at 57–59. Geico invokes two cases involving engine failure that it ar- gues undermine this conclusion. Neither help it. The first case is Little Judy Industries, Inc. v. Federal Insurance Co., 280 So. 2d 14 (Fla. Dist. Ct. App. 1973). In Little Judy, the trial court concluded that an exclusion for mechanical breakdown applied—despite exception language saying the exclusion applied “unless such damage re- sulted from other damage covered by this [all-risk] policy”—even though the mechanical failure was “traceable to negligence in its repair or to improper repair or assembly of the engine.” Id. at 14– 15. The state appellate court affirmed, holding that “[t]he fact that the failure . . . was traceable to negligence in its repair or to im- proper repair or assembly of the engine did not make it other than a mechanical failure. In a great many, if not most instances the USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 12 of 14

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mechanical failure of an engine could be attributed to some . . . im- proper or negligent work.” Id. at 15. The second case Geico cites is our decision in Arawak Avia- tion. Relying on Little Judy, we concluded that a “wear and tear” exclusion that excluded “damage caused by heat that results from the operation . . . of the engine” should not be read to include an efficient cause doctrine such that coverage would apply based on the “damage to the aircraft [being] ultimately ‘caused by’ the neg- ligence of the pilot.” Arawak Aviation, 285 F.3d at 956–59 (citing Little Judy, 280 So. 2d at 15). We explained that “[i]f we read the efficient cause doctrine into the phrase, ‘caused by,’ in the exclu- sionary clauses of the [insurance] policy, we would make those very same clauses pointless, because . . . negligence (a covered cause of damage) is almost always the efficient cause of ‘wear and tear’ (an excluded cause of damage).” Id. at 958. We noted efficient cause cases under Florida law “involved situations in which the efficient cause of the damage was not a nec- essary antecedent of the damage’s direct cause.” Id. We cited Ev- ansville Brewing as an example of where the efficient cause doctrine applied. Id. (citing 75 So. at 198). In Evansville Brewing, we ex- plained, “the Florida Supreme Court considered whether a policy, which insured against fire damage but not against explosion dam- age, would cover a building that was destroyed by an explosion caused by fire.” Id. “Because fire is not the essential cause of every explosion, the court was able to look at these two factors separately and determine which one was the efficient cause of the damage— USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 13 of 14

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without eviscerating the policy’s provisions excluding coverage for explosion damage.” Id. But because we concluded that applying the efficient cause doctrine to negligence as the earlier cause in Ar- awak Aviation would eviscerate a wear and tear exclusion, we con- cluded an efficiency cause reading did not apply to the contract at issue there. Id. at 958–59. Unlike in Little Judy and in Arawak Aviation, we are not faced with negligence as the asserted efficient cause here. Our case is much more like the example from Evansville Brewing we outlined in Arawak Aviation: a latent, manufacturing, or design defect is not “almost always the efficient cause” of mechanical breakdown like we held negligence to be for wear and tear in Arawak Aviation. See 285 F.3d at 958. Nor is it “[i]n a great many, if not most instances” that mechanical breakdown is caused by a latent, manufacturing, or design defect—like the court in Little Judy found negligence to be. See 280 So. 2d at 15. So those negligence-based cases don’t alter the proximate cause inquiry here. And they certainly don’t change the genuine dispute of material fact as to the latent defect being the efficient cause of the engine failure.

CONCLUSION In short, we conclude that the district court erred in granting summary judgment because there is a genuine dispute of material fact as to latent defect and as to that latent defect being the efficient cause of mechanical breakdown. We therefore vacate the sum- mary judgment for Geico and remand for further proceedings con- sistent with this opinion. USCA11 Case: 23-12611 Document: 32-1 Date Filed: 10/17/2024 Page: 14 of 14

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VACATED AND REMANDED.