Marine Insurers Invented The Warranty In An Insurance Policy
Marine insurers invented the warranty in an insurance policy. So, it is fitting that a boat was involved in Lloyd’s of London v. Pagan-Sanchez, 539 F.3d 19 (1st Cir. 2008), in which the First Circuit Court of Appeal enforced a warranty and deprived the insured of all rights to indemnity because of the breach of warranty.
The case arose in 2003. A vessel called the Gabriella was at sea when an exhaust hose came loose and the Gabriella began taking on water through its exhaust system. Attempts to pump out the water were unsuccessful, and the Gabriella flooded and sank. The insured later submitted a claim to the plaintiffs for $175,000 for the loss of the boat and $100,000 for the costs incurred during salvage operations.
The insurers found by investigation that the loss of the Gabriella was caused by wear and tear, gradual deterioration, and lack of maintenance, and they also found that the vessel’s fire extinguishing equipment had not been inspected or certified within the preceding year and that the automatic engine room fire extinguisher system had been disconnected prior to the loss. Both were warranted by the insured to be in effect.
Even though there was no relationship between the terms of the warranty and the actual cause of the loss, the First Circuit concluded that “under the federal rule and the law of most states, warranties in maritime insurance contracts must be strictly complied with, even if they are collateral to the primary risk that is the subject of the contract, if the insured is to recover.”
In addition, “in marine insurance, there is historically no requirement that the breach of warranty relate to the loss, so that any breach bars recovery even though a loss would have happened had the warranty been carried out to the letter.” The treatise noted that most courts agree that in a maritime insurance contract, “[i]f the warranty is breached, the insurer is discharged.”
New York law has long provided that “the breach of an express warranty [in a marine insurance policy], whether material to the risk or not, whether a loss happens through the breach or not, absolutely determines the policy and the assured forfeits his rights under it.” Cogswell v. Chubb, 1 A.D. 93, 36 N.Y.S. 1076, 1077 (1st Dept.1896) (navigation limit warranty), aff’d, 157 N.Y. 709, 53 N.E. 1124 (1899).
As New York’s Court of Appeals has explained, an express warranty in a marine insurance policy “must be literally complied with, and that noncompliance forbids recovery, regardless of whether the omission had a causal relation to the loss.” [Jarvis Towing & Transp. Corp. v. Aetna Ins. Co., 298 N.Y. 280, 82 N.E.2d 577, 577 (1948) and Levine v. Aetna Ins. Co., 139 F.2d 217, 218 (2d Cir.1943); Kron v. Hanover Fire Ins. Co., 15 N.Y.2d 521, 254 N.Y.S.2d 119, 202 N.E.2d 563-64 (1964) all of which required literal compliance rule to bar coverage where insured breached a warranty. [Great Lakes Ins. SE v. Aarvik (S.D. Fla., 2019)]
In admiralty, a vessel owner impliedly warrants the seaworthiness of a vessel at the inception of an insurance policy. [State Nat’l Ins. Co. v. Anzhela Explorer, L.L.C. , 812 F.Supp.2d 1326, 1365 (S.D. Fla. 2011)]
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts