To support their causes of action, Plaintiffs asserted that the March 1996 stability proof test performed by a member of the United States Coast Guard on the Lady D was conducted carelessly and negligently. In evaluating Plaintiffs claims, the appellate court noted that the Coast Guard inspector who was in charge of performing the March 1996 stability proof test on the vessel did not follow the Marine Safety Manual recommendations for conducting a proper test on the double-pontoon vessel. Instead, he mistakenly applied the procedure recommended for a monohull vessel. As a result, the stability proof test inaccurately stated that the Lady D could safely carry up to 25 passengers. After the accident, the proper test was performed, and established that the vessel should not have been certified to carry more than 15 passengers.

In evaluating the plaintiffs' claims, the court noted that despite the Coast Guard's clear departure from recommended instructions, the plaintiffs failed to meet their burden of proof and establish that the discretionary function exception of the United States' waiver of sovereign immunity did not apply to this situation. Although the Government is generally found to have waived its sovereign immunity under the FTCA and SIAA, the court explained, under the discretionary function exception, the Government will not be liable for any claim based upon the performance of a discretionary function of a government employee or agent. The exception will not apply where a federal statute or regulation specifically delineates a course of action, since a government actor in that situation has no choice but to follow the directive.

In affirming the District Court's dismissal, the appellate court noted that because the testing methodology for a stability proof test on a pontoon-type small passenger vessel was a recommendation rather than an instruction, the Coast Guard was permitted to use its discretion in how to perform such a test. The language of the recommendations further supported this proposition. Because the recommendations used an indefinite article "a" to describe one of many stability test options, the court found that the Court Guard's conduct in choosing which test to apply necessarily involved discretionary judgment. Therefore, the plaintiffs could not show that the stability proof test procedure was mandatory. They therefore failed to establish that the Coast Guard inspector was precluded from exercising discretionary judgment. On this basis, the appellate court affirmed the findings of the District Court, found that the discretionary function exception applied, and dismissed the plaintiffs' case for lack of subject matter jurisdiction.

In Indemnity Insurance, the court held that the government's certification process, particularly in the maritime context, may be protected by the discretionary function exception. More broadly, this case stands for the proposition that when a statute guides, rather than directs, a government employee's performance or conduct, the government's choice will be immune from liability in SIAA or FTCA claims.