Uberrimae Fidei Revisited

A couple of years ago I brought to our attention the doctrine of uberrimae fidei, utmost good faith, in marine insurance.  In a nutshell the doctrine requires that an applicant for marine insurance is bound to reveal every fact within his knowledge that is material to the risk.  Its origin is grounded both in morality and efficiency; insureds were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder.  This principal was an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, e-mail, digital photography, and air travel.  If an insured breached this duty the insurer may rescind the policy, even if the material misrepresentation was not intentional.  Even in today’s world where information is only a click away, the doctrine of uberrimae fidei lives on.

In October this year a federal judge voided an ocean marine policy when he found that the owner of a dry dock, San Juan Towing (“SJT”), had misrepresented its condition and value.  The insured originally purchased the dry dock for $1.05 million in 2006.  In 2009 it put the dry dock up for sale for $1.35 million.  When there were no takers, the asking price was reduced to $800,000.  It remained on the market until April, 2011 when a shipyard agreed to purchase it for $700,000.

From 2006 to 2011 the dry dock was insured by RLI Insurance Company (“RLI”) for $1.75 million because of modifications made by its owner.  RLI’s underwriter on the account left RLI for another insurer Catlin (Syndicate 2003) at Lloyd’s in January, 2011.  RLI then cancelled the policy in February, 2011.  Thereafter, SJT’s insurance broker called the underwriter in his new role with Catlin and asked if Catlin would be interested in providing insurance for the dry dock since he was already familiar with the account.  Catlin sent a quote to SJT which was accepted and the insurance was bound.  SJT never told Catlin’s underwriter that the value of the dry dock should be less than the $1.75 million at which it had been originally valued.  SJT did not tell the underwriter that it originally advertised it for sale for $1.35 million, and later reduced to $800,000.

In September, 2011 the dry dock sank.  Catlin sent surveyors to the scene who reported that the dry dock was in poor condition with significant deterioration and long standing corrosion.  Catlin refused to pay the claim stating that SJT had the duty to have notified Catlin of the dry dock’s true condition and value.  If SJT was representing to the public that the dry dock was worth only $800,000, it should have made this known to Catlin.  Not unexpectedly, litigation ensued.

After a trial, the judge found in favor of Catlin.  While he questioned the soundness of the underwriter’s decision not to request the updated condition and value information, the doctrine of uberrimae fidei places the burden on the insured to disclose all material information regarding the risk to the insurer.  SJT breached its duty by failing to disclose an accurate description of the dry dock’s condition when seeking insurance from Catlin and overstating its value.  The judge ordered the policy void and dismissed all of SJT’s claims. At the end of the day, SJT was left with no insurance.

Pollution Buyback Notice Provision Was Condition Precedent To Recovery

On June 18, 2013, the United States Fifth Circuit Court of Appeals issued its decision in the case captioned In re Matter of Complaint of Settoon Towing, L.L.C., — F.3d —, 2012 WL 3013868 (5th Cir. 2013).  The case arose out of a vessel’s allision with an oil well which the vessel’s captain failed to report to both his employer and the United States Coast Guard.  The Coast Guard eventually tracked down and confronted the captain who admitted his involvement.  Importantly, this admission was thirty-four days after the incident.  Settoon notified its insurers thirty-seven days after the incident.

One of the many issues the Fifth Circuit addressed on appeal was the district court’s ruling that two of Settoon’s umbrella insurers were not liable under the terms their respective bumbershoot policies.  The two policies at issue both contained pollution exclusions making the insurance inapplicable to claims arising out of pollution-related damages.  Both policies also contained endorsements further explaining the pollution exclusions and providing for buybacks where the insured could establish that “[t]he occurrence became known to the assured within 72 hours after its commencement” and that “[t]he occurrence was reported in writing to those underwriters within 30 days after having become known to the assured.”

Among other things, Settoon appealed the district court’s ruling that these two insurers were not liable on their bumbershoot policies because Settoon failed to comply with the 72-hour knowledge and 30-day notice provisions in the buybacks.  One of the arguments advanced by Settoon was that the insurers were unable to show the required prejudice necessary to escape liability.  The court explained that the Fifth Circuit previously held that where immediate notice was an express condition precedent to coverage in the main body of the policy, failure to comply precluded coverage even in the absence of prejudice.  However, where notice was not a condition precedent, an insurer must show prejudice in addition to failure to give notice in accordance with the policy.

The court concluded that these particular insurers were not liable because the notice provision at issue was a condition precedent.  Here, the pollution exclusions removed coverage for claims arising from pollution.  The buyback provisions withdrew application of the pollution exclusions provided that the insured could establish that it met the necessary conditions.  Because Settoon failed to notify the insurers within thirty days of the incident, the court held that insurers were not liable.  To hold otherwise would alter the terms of the parties’ bargain.

In re Matter of Complaint of Settoon Towing, L.L.C., — F.3d —, 2013 WL 3013868 (5th Cir. June 18, 2013).

Need for Notice

Accidents happen.  To protect ourselves from financial disaster, virtually all of us carry liability insurance on our homes, businesses, and vehicles, as well as health insurance in the event we are injured or ill.  We expect our insurer to respond to our needs and defend and indemnify us from losses.  After all, that is why we pay premiums.  However, an insurer’s contractual obligation to defend or indemnify in the event of a loss is not unconditional.  Often the policy of insurance will contain conditions with which the insured must comply in order for there to be coverage.

For example, on May 1, 2013, the Fifth Circuit Court of Appeals decided the matter of Insurance Company of North America v. Board of Commissioners of the Port of New Orleans, 2013 WL 1811892.  This dispute arose in connection with a $2.6 million judgment against the Port for injuries sustained by John Morella in 2001.  The Port had in place a primary policy with a limit of $1 million.  Above this, the Port had purchased an excess marine insurance policy to which three underwriters subscribed by percentages, forty (40%) percent, forty (40%) percent, and twenty (20%) percent.

The case went  to trial in 2007.  The Port’s representatives had timely notified the insurance company, which provided the primary layer of insurance.  However, the excess insurers were not notified until late March 2007, approximately a month after the state court judgment was entered.  In May, 2007 the underwriters filed suit seeking declaratory judgment that they were not required to pay under the policy because the Port did not provide timely notice of Morella’s claim.  In May 2009, the excess insurers filed for summary judgment.  Applying New York law, the district judge found that the notice was untimely and that the Port should have notified the underwriters of the claim when its defense counsel indicated that Morella’s economic loss exceeded $1.8 million.  The district judge also found, however, that “loss summaries” provided to two of the insurers could have constituted timely “notice” under the policies.  Accordingly, the district court rendered summary judgment in favor of the third insurer because it did not receive loss summaries detailing the incident as its co-excess insurers had and notice to its co-excess insurers did not constitute notice to St. Paul.

The policy contained the following policy provisions:

Whenever any Assured has information from which the Assured may reasonably conclude that an occurrence covered hereunder involves an event likely to involve this Policy, notice shall be sent to Underwriters as soon as practicable, provided, however, that the failure to notify Underwriters of any occurrence which at the time of its happening did not appear to involve this Policy, but which, at a later time, would appear to give rise to claims hereunder, shall not prejudice such claims.

It its decision in favor of the insurer that did not receive notice via the “loss summaries,” the court rejected the Port’s argument that notice to one or more co-excess insurers triggered a duty of coverage by all the excess insurers, regardless of whether some underwriters did not receive notice like the others.  The court stated that “the policy language requires that all of the subscribing insurers must receive notice,” and affirmed the district court’s summary judgment in favor of the insurer because it did not receive notice under the policy as its co-excess insurers may have received.

On receipt of this ruling, the remaining two insurers filed another summary judgment and argued that the ruling required notice to all insurers before any were required to provide coverage.  That is to say that because one of the three did not receive notice, all were relieved of any duty to provide coverage under the policy.  The district court agreed and ruled that the notice provision required that each and every insurer needed notice and found that no excess coverage was available.

On appeal from the Fifth Circuit, the district judge was reversed.  The Fifth Circuit found that any insurer who receives notice is liable for providing coverage, regardless of whether its co-insurers received notice.  Because these two insurers had received “loss summaries” earlier in the litigation, this constituted sufficient notice and they provided coverage.

The moral of the story is clear.  Better to be safe than sorry.  Read your policies and when a loss occurs, make sure that all insurers, primary and excess, are timely placed on notice in writing.  Failure to promptly place your insurers on notice of a claim may leave you uninsured.

Keep Your Vessels in Ship Shape to Protect Insurability

Any prudent vessel owner knows the importance of a comprehensive hull insurance policy.  After all, you rely on your insurance to mitigate the losses that arise from those typically unforeseeable and often unavoidable marine perils unique to the workboat industry.  But beware, your policy many not be worth the paper it’s written on if you, as the insured, have not maintained your vessel in a staunch and sound condition.

The typical hull policy is rife with conditions, warranties, endorsements and waivers which impose express obligations on the insurer and the assured, alike.  However, one fundamental prerequisite for binding hull coverage may not be expressly stated within the four corners of the policy.  Under the federal admiralty law, a vessel owner must provide a vessel that is “seaworthy” in order to obtain binding coverage.  In this context, a vessel is legally seaworthy if it is in a condition sufficient to encounter whatever perils the it may be fairly expected to encounter while at sea.

There are subtle, but important differences in the vessel owner’s duty of seaworthiness under a time hull policy, which insures the vessel for a specified duration, as compared with a voyage policy, which provides coverage for a particular trip.  For a voyage policy, the law imposes a duty on the vessel owner to warrant that the vessel is seaworthy at the commencement of the voyage.   If this warranty of seaworthiness is breached, then no recovery can be had under the policy.  The obligation on the part of the owner is  absolute, and an insurer need not prove that the owner had actual knowledge of the unseaworthy condition to deny coverage.

For coverage to attach under a time hull policy, the vessel must be seaworthy at the commencement of the policy.  This is likewise an absolute duty, and an owner’s lack of knowledge of an unseaworthy condition will not prevent coverage from being nullified.  Furthermore, although the owner need not warrant the seaworthiness of its vessel for the duration of the policy, it must not knowingly permit the vessel to set sail in an unseaworthy condition.  A breach of this duty can likewise void coverage.

Whether a vessel is actually seaworthy is generally a fact-specific inquiry.  The advice of legal counsel or assistance from your broker may guide you in obtaining the coverage necessary to protect your marine equipment. However, the most comprehensive policy available will be of little benefit if the owner is not diligent in maintaining its vessel in such a condition that complies with those obligations mandated by law.

Note: This article first appeared in WorkBoat Magazine.  The internet version of the article can be found here.