Truth or Consequences in Marine Insurance
November, 2008
By
Marilyn Raia
Pacific Maritime MagazineTwo very important rules must be followed in connection with a marine insurance policy:
Rule No. 1: Before a loss occurs, tell the truth.
Rule No. 2: After a loss occurs, tell the truth.
The importance of following these rules cannot be overstated. Failure to follow either rule can lead to a financially devastating result, i.e. no insurance coverage for a major loss.
The Doctrine of Uberrimae Fidei
Unlike homeowners or auto insurance, marine insurance is subject to the doctrine of uberrimae fidei or "utmost good faith." Under that doctrine, the insured is bound, even if not asked, to reveal every fact material to the risk within his/her knowledge. In California, the duty is codified. See Cal. Ins. Code §1900.
The doctrine has its roots in mid-18th century England and the development of overseas trade. It comes from the belief that in the relationship between an insured and an insurer, the insured is in a better position than the insurer to know the risks involved. This is particularly true for marine insurance because insured vessels are often at sea and cannot easily be inspected. The doctrine was first recognized by the US Supreme Court in 1828 and since then, has been universally recognized by US courts.
A breach of the duty to disclose all information material to the risk most often results in the voiding of the marine insurance policy, leaving the insured without coverage for a loss. Under federal law, it is not necessary for a marine insurer to prove that an insured intended to deceive by misrepresenting or withholding material information, in order to void the policy. Moreover, a marine insurer does not have an obligation to investigate information provided by the insured in the insurance application. A marine insurer has the right to rely on that information when deciding to issue a marine insurance policy.
Before the Loss, Tell the Truth
The doctrine of uberrimae fidei can aptly be summarized in three words: "tell the truth." When applying for insurance, a prospective insured has a duty to provide truthful answers to questions on the application. When the insured is not truthful about information considered "material," the policy is at risk for voidance or rescission.
"Material" information has been defined as "that which can possibly influence the mind of a prudent and intelligent insurer in determining whether it will accept the risk." Whether information is considered material is somewhat subjective. Information sought by questions on the application is considered material to the risk as a matter of law, merely because the insurer asked about it. Information not specifically asked about can also be material to the risk. Certainly, an intentional misrepresentation will void the policy. However, many insureds are unaware that an unintentional misrepresentation can also result in a void policy. Over the years, the courts have not hesitated to void a marine insurance policy when the insured failed to tell the truth in the application, regardless of motive.
In St. Paul Fire and Marine Ins. Co. v. Halifax Travelers, Inc., 495 F. Supp. 2d 232, (D. Mass. 2007), the insured applied for insurance on a 54-foot wooden-hulled fishing vessel. The application asked the insured to disclose details of prior losses. The insured believed the question sought information specific to that insured. Because the insured had not previously lost a vessel or crewmember, it responded that there had been no prior losses. In fact, while in the possession of her prior owner, the vessel had taken on sufficient water to lose buoyancy and sat on the bottom, submerged up to the wheelhouse, for several days. The insured was aware of the incident but failed to disclose it on the application. Shortly after the policy attached, the vessel sank. During investigation of the claim, the insurer learned of the prior incident. The court held the insured's failure to disclose the prior incident was a violation of the doctrine of uberrimae fidei and, as a consequence, held the policy void.
A similar mistaken belief as to the scope of a question in the application resulted in a void policy in Atkin v. Smith, 1996 AMC 2876 (N.D. Cal. 1996). In that case, the insured delegated completion of the insurance application to the captain of the insured vessel. The application asked whether the insured, or anyone it allowed to use the vessel, was charged with or convicted of an offense involving dishonesty. The captain assumed the question applied to the insured and responded "no." Further, according to the captain, the insurance broker told him the insurer was interested only in the insured's background.
During an around-the-world voyage, the vessel called in American Samoa where the captain was arrested for violation of probation on felony charges. His criminal record included three separate criminal proceedings. Ten days after the vessel left American Samoa, it sank.
The court ultimately held the insurance policy void on the ground that the captain should have disclosed his criminal record in the application. It also held such information was material to the risk even though it was not related to the loss because the insurer's decision to issue the policy was based on information in the application.
Failure to provide truthful information about the insured vessel's particulars has also served as a basis for voiding a marine insurance policy. In Certain Underwriters at Lloyd's v. Montford, 52 F.3d 219 (9th Cir. 1995), the insured represented that the purchase price of his vessel was $925,000, that the vessel was built in 1983, and that he had no insurance losses within the past five years. In fact, the insured paid less than $500,000 for the vessel, which was actually built in 1980. Further, the insured had a loss on another vessel he owned. The representations resulted in a void policy.
In New Hampshire Ins. Co. v. C'est Moi, Inc., 519 F.3d 937 (9th Cir. 2008), the policy was held void because the insured misrepresented the purchase price of the vessel ($450,000 v. $300,000) and the current insurer (the vessel was uninsured). The court rejected the insured's argument that $450,000 was an accurate figure because it reflected the amount he paid to restore the vessel in addition to the purchase price. Similarly, in Commercial Union v. Lord, 2007 AMC 1518 (2d Cir. 2007), the court voided the policy when the insured failed to tell the truth about the vessel's purchase date, purchase price, and builder.
Failure to tell the truth about the insured vessel's condition can also lead to a void policy. In Reliance Nat'l Ins. Co. (Europe) Ltd. v. Hanover, 246 F. Supp. 2d 126 (D. Mass. 2003), the insured was not truthful about the vessel's unseaworthy condition and failed to disclose defects in the mast as well as engine problems. The policy was held void because of a breach of the seaworthiness warranty. The court also commented that the policy would not have been issued had the truth about the vessel's condition been disclosed.
Even a misrepresentation about the insured's own driving record can be a basis for dismissal of a negligence action against an insurer. In Continental Ins. Co. v. Muradyan, 2003 AMC 1536 (C.D. Cal. 2003), the insured responded "no" to a question on the application as to whether he had any violations on his motor vehicle record within the last five years. After the insured vessel was damaged during towing by the insured's auto, the insurer investigated and learned the insured actually had five violations on his driving record. The untruthful information on the application served as a basis for dismissal of the in