Insurance Law Hawaii

Third Circuit Applies Doctrine of Uberrimae Fidei to Void Marine Policy

      In today's post, we return to the federal maritime doctrine of uberrimae fidei, previously reviewed here. Should the doctrine, which requires an insured to exercise the utmost good faith and disclose to the insurer all facts material to an insurance risk, apply when considering coverage under a marine policy?  The Third Circuit applied the doctrine in AGF Marine Aviation & Transport v. Cassin, Nos. 07-1640, 07-1641(3rd Cir. Sept. 29, 2008), and voided coverage under a marine policy.

     Cassin purchased a yacht for $400,000.  Nevertheless, in an application to insure the Yacht, he represented the purchase price was $600,000.  He then insured the yacht under successive policies for $600,000.  The policy provided any dispute would be "adjudicated according to well established, entrenched principles and precedents of substantive United States Federal Admiralty law and practice."   

     In 2000, the yacht sank of the coast of Grenada.  Cassin filed a claim.  After investigating, the insurer sued, alleging the policy was void because Cassin misstated the purchase price in his application.  Cassin argued there was no misrepresentation because the purchase price included a $200,000 equity stake in the Yacht. The district court applied the doctrine of uberrimae fidei and determined Cassin had materially misrepresented the purchase price of the yacht.  Therefore, the insurer was permitted to void the policy.

     Cassin appealed, arguing uberrimae fidei was not firmly entrenched in federal admiralty law.  The Third Circuit noted that most circuits agreed uberrimae fidei controlled in maritime insurance disputes.  The Third Circuit agreed the doctrine was well entrenched and applied in this dispute.  The Court determined the $200,000 equity was never transferred to Cassin.  Consequently, the purchase price was $400,000 and Cassin had misrepresented this amount in his application.

     Finally, the misrepresentation was material.  When a marine insurer asks the purchase price, it was a fact material to the risk, the misrepresentation of which violated uberrimae fidei.  Because Cassin misrepresented the purchase price, the policy was voidable ab initio.

Duty to Cooperate - How Far Does it Extend?

     A liability policy typically requires the insured to cooperate with the insurer.  Under the provision, the insured must, among other things, cooperate with the insurer in investigating or settling of the claim.  Breach of the cooperation clause by the insured relieves the insurer of liability under the policy.  But the insurer must show the breach caused "substantial prejudice."  22 E. Holmes, Holmes' Appleman on Insurance 2d (2003) sec. 138.6 [A].  Further, prejudice to the insurer is not presumed as a matter of law from the insured's breach.  Instead, the insurer "shoulders a heavy burden" to establish that the insured acted willfully to obstruct the insurer.  Id.

    In Deguchi v. Allstate Ins. Co., Civil No. 07-00144, 2008 U.S. Dist LEXIS 34368 (D. Haw. April 9, 2008), the federal district court interpreted Hawaii's law on the duty to cooperate.  The insureds held a marine insurance policy issued by Allstate for their boat.  The policy required the insureds to cooperate in any investigation, including submitting to an Examination Under Oath (EUO) if requested by Allstate. The boat sank under suspicious circumstances while in route from Hilo to Honolulu.  The insureds made a claim and Allstate hired an investigator.

     Allstate eventually requested an EUO of the two insureds.  One insured submitted to an EUO, but refused to attend a second EUO.  On instructions from his attorney, the second insured refused to answer basic questions, such as "When did you start looking for a boat? or Why did you pick this boat to buy?"  Allstate refused to go forward with the EUO and eventually denied coverage.

     The insureds sued Allstate based on breach of insurance contract, bad faith and other claims.  Allstate moved for summary judgment because the insureds failed to cooperate with the investigation.  The federal district court noted that under Hawaii law, the requirement that the insured submit to an EUO was part of the duty to cooperate and a condition precedent to the insurer's obligation to pay benefits.  The court predicted the Hawaii Supreme Court would hold that an insured breaches a policy's requirement to cooperate by failing to answer material questions during an EUO or to attend a second EUO.  Therefore, the insureds breached their duty under the policy to submit to examinations under oath as reasonably required by Allstate, relieving Allstate of its duty to pay the insureds under the policy.

     One further note on the duty to cooperate.  If the insurer denies coverage, all bets are off.  Once coverage is denied, the insured is no longer under an obligation to comply with the cooperation clause.  By denying coverage, the insurer waives as a matter of law its rights under the policy, including the right of cooperation.  22 Appleman sec. 128 [A].

Vessel Owner’s Failure to Volunteer Pertinent Information Voids Vessel Pollution Policy

     The Ninth Circuit recently issued a decision regarding a vessel pollution insurance policy that could have implications for Hawaii.  In Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., No. 06-35383 (9th Cir., Feb. 11, 2008), the Court determined Lloyds was justified in voiding a policy because the insured did not volunteer important information.

     Prior to seeking a vessel pollution policy from Lloyd’s, the insured, Inlet, experienced two large oil spills in Bethel, Alaska, one at the city pier and the other in Steamboat Slough.  (As a former resident of Bethel, I passed through Steamboat Slough many times on boat, dog sled and skis.  The Slough acquired its name from steamboats abandoned there after traveling up the Kuskokwim River).  When applying for the policy, Inlet responded to the request for “pollution loss history” by writing “None.”  Inlet did not supply, and the application did not request, information about the condition of Inlet’s vessels or Inlet’s financial status.

     After acquiring a policy from Lloyds, an Inlet vessel again spilled oil and pollutants when it sank in Steamboat Slough (thereafter undoubtedly making passage through the Slough by boat, dog sled or skis problematic).  Inlet made a claim under its vessel pollution policy, prompting Lloyds to investigate both the incident and Inlet generally.  Upon learning of Inlet’s failure to disclose the prior incidents, the poor condition of its vessels, and its pending bankruptcy, and after Inlet refused to cooperate with the investigation, Lloyds filed suit seeking a declaratory judgment that it had a right to void the policy ab ignitio under the doctrine of uberrimae fidei.  The District Court granted summary judgment in favor of Lloyds.

     The doctrine of uberrimae fidei imposes a duty of utmost good faith and requires that an insured fully and voluntarily disclose to the insurer all facts material to a calculation of the insurance risk.  The doctrine was first recognized in 1766 and was codified in English law in 1906.  In 1828, the U.S. Supreme Court incorporated the doctrine into American maritime insurance law.  More recently, stand-alone coverage of maritime insurance referred to as vessel pollution insurance has emerged as a separate coverage of marine insurance in response to the 1990 Oil Pollution Act.

     The issue in this case was whether the vessel pollution insurance issued to Inlet was appropriately characterized as marine insurance and, therefore, whether the doctrine of uberrimae fidei was applicable.  The doctrine of uberrimae fidei requires a marine insurance applicant, even if not asked, to reveal every fact within its knowledge that is material to the risk.  An insurer can rescind a policy if it can show either intentional misrepresentation of a fact, regardless of materiality, or nondisclosure of a fact material to the risk, regardless of intent.

     Affirming the District Court, the Ninth Circuit held the federal maritime doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts. Further, for purposes of applying uberrimae fidei¸ the vessel pollution insurance issued to Inlet was appropriately characterized as marine insurance.  The facts undisclosed by Inlet were material to the insurance risk undertaken by Lloyds and voiding the policy was justified.

     Because the Ninth Circuit held that the doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts, this decision would presumably apply in a Hawaii case involving vessel pollution insurance.