By Coastal Tile he means a water tile next to land (which will have the terrain type "Coast" listed in the tile information that you can see by holding the mouse cursor over the tile).
The tile must also not have a water resource (Fish, Clams, Crabs, Pearls) in it (much to my chagrin).
What version of FfH2 are you playing? There was an earlier version in which Work Boats were bugged and could not build Coves...so if you're not using the latest version (0.41m) then you might want to try patching to version M.
That's version 0.41d. I believe that Pirate Cove construction works just fine in that version.
If you patch to version M your saved games will be broken (unable to load or continue them). Unless you are prepared to abandon your current games, you should wait to patch until you finish the ones you are currently playing.
@Emptiness, I had this same problem with 0.41d. I upgraded to version j and it worked after that. To the OP, I'm sorry, but it sounds like you're going to have to either play this game without pirate coves or start another game.
I just started playing my first game ever as Lanun, and holy crap are Pirate Coves good (well, once, they upgrade to Pirate Ports in 30 turns). I would definitely install the patch and restart the game rather than play without them.
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