Insured May Not Hide Material Information From a Marine Insurer
Marine insurance is, because of the risks taken, applies the doctrine of uberrimae fidei (utmost good faith) strictly. In Fireman’s Fund Ins. Co. v. Great American Ins. Co. of New York, United States Court of Appeals, Second Circuit, — F.3d —- 2016 WL 2943139 (May 20, 2016) an insurer sought contribution from a marine insurer who claimed its policy was void because of the insureds failure to fulfill its obligation to treat its insurer with utmost good faith. The Second Circuit was called upon to resolve the dispute.
Fireman’s Fund Insurance Company (“Fireman’s Fund”) and Signal International, LLC (“Signal”) appealed from judgments of the United States District Court for the Southern District of New York granting summary judgment to Great American Insurance Company of New York (“Great American”) and Max Specialty Insurance Company (“MSI”). Fireman’s Fund, Great American, and MSI underwrote insurance policies that included coverage for a dry dock that Signal owned. After the dry dock sank, Signal and Fireman’s Fund sought contribution for losses and cleanup costs from Great American and MSI. Fireman’s Fund initiated this action to resolve disputes regarding coverage.
The district court held that the Great American and MSI policies were void because (1) Great American’s pollution insurance policy was a marine insurance contract subject to the doctrine of uberrimae fidei, and Signal’s failure to disclose that the dry dock had deteriorated and that repairs recommended over several years had not been made violated its duty of utmost good faith under that doctrine, and (2) Signal materially misrepresented the dry dock’s condition when it applied for coverage from MSI.
Signal is a marine construction firm involved principally in building and repairing ocean-going structures such as offshore drilling rigs, platforms, and barges. In 2003, Signal purchased six facilities—two in Mississippi and four in Texas—for use in its business of repairing, upgrading, and converting offshore drilling rigs. One of the Texas facilities was a dockyard in Port Arthur, Texas. In acquiring that facility, Signal assumed an existing lease of a dry dock (“the dry dock”) located along the Sabine–Neches Waterway near the Gulf of Mexico. The dry dock was built in 1944 at the direction of the United States Navy to repair Navy ships. In early 2005, Signal accepted an offer from the lessor to purchase the dry dock, which Signal had been using in its operations since it assumed the lease.
Throughout its lease and ownership of the dry dock, Signal received a number of reports on the dry dock’s deteriorated condition. Signal never replaced the dry dock’s pontoons or pontoon decks. Instead, Signal continued to use inserts and doublers to patch holes in the decks. In 2009, Signal decided to implement the seven-pontoon configuration by removing Pontoon H. On August 20, 2009, it attempted to remove that pontoon, but during that procedure the entire dry dock sank.
Shortly after the sinking, Signal notified the Texas General Land Office (“GLO”), which regulates pollution affecting Texas shoreline waters, about what had occurred. In September 2009, the GLO advised Signal to “initiate immediate action to recover the … dry dock from Texas coastal waters.” Removal and cleanup efforts were not completed until March 2012 and resulted in $12,395,026 in costs.
The Insurance Policies Covering the Dry Dock
Signal had obtained five insurance policies that insured against risks related to the dry dock at the time of its sinking: (1) a marine general liability policy issued by Fireman’s Fund; (2) a marine excess liability policy issued by Fireman’s Fund; (3) a pollution policy issued by Great American (the “Pollution Policy”); (4) a primary property insurance policy (the “PPI Policy”) issued by Westchester Surplus Lines Insurance Company (“Westchester”); and (5) an excess property insurance policy issued by MSI, which provided coverage in excess of the PPI Policy (the “EPI Policy”). Only the Great American Pollution Policy and the MSI EPI Policy are at issue here.
Great American first underwrote the Pollution Policy in 2004 and renewed it annually through 2009. To obtain the renewal of the policy for 2009, Signal completed and submitted Great American’s standard “Vessel Pollution Liability Application” along with a “Schedule of Vessels,” which included the dry dock. To apply for the policy, Signal submitted its “2009–2010 Property Insurance Submission.” This document included a “Statement of Values” that described the dry dock’s value as $13.6 million and the 2009 Heller Report, but it did not include other information from experts suggesting that the dry dock was in need of repair and was valueless.
Admiralty Jurisdiction and the Doctrine of Uberrimae Fidei
Great American argues—and the district court concluded—that the Pollution Policy is void under the maritime doctrine of uberrimae fidei. For the doctrine to apply, Fireman’s Fund’s suit against Great American must be sustainable under the court’s admiralty jurisdiction.
Under federal law, a marine insurance contract is subject to the federal maritime doctrine of uberrimae fide, or utmost good faith. Under the doctrine, the party seeking insurance is required to disclose all circumstances known to it which materially affect the risk. Thus, the insured is bound, although no inquiry be made, to disclose every fact within his knowledge that is material to the risk. The standard for disclosure is an objective one, that is, whether a reasonable person in the insured’s position would know that the particular fact is material.
In respect to the duty of disclosing all material facts, the obligation is one uberrimae fidei. The duty of communication, indeed, is independent of the intention, and is violated by the fact of concealment even where there is no design to deceive.
Therefore, the primary object of the Pollution Policy’s coverage of the dry dock was to insure against the risk of liability for pollutants emitted during Signal’s ship repair and maintenance operations there. Insurance policies protecting against such risks have long been considered marine in nature.
Signal Violated Its Duty of Utmost Good Faith by Failing To Disclose the Dry Dock’s Condition
Signal breached its duty to Great American and no genuine disputes of fact exist as to either the materiality of Signal’s non-disclosures or Great American’s reliance. Signal’s insurance broker submitted only Great American’s standard “Vessel Pollution Liability Application” along with a “Schedule of Vessels,” which listed the dry dock. It appears that the only information in those materials related to the dry dock’s condition was that it was built in 1945, that it was constructed from steel, and that its gross tonnage was less than 27,000 tons; neither Signal nor Fireman’s Fund has argued otherwise. Signal did not provide any surveys to Great American when it applied for coverage for the dry dock.
Notwithstanding the paucity of relevant information furnished by Signal to Great American, it is undisputed that by 2009 Signal had in its possession numerous surveys and reports concluding that the dry dock had substantially deteriorated and that necessary long-term repairs were not being made. At least one survey estimated that the dry dock’s value was “below zero.” Nevertheless, Signal did not disclose this information to Great American.
This undisclosed information was clearly material—that is, it “would have influenced the judgment of a reasonable and prudent underwriter.” If disclosed, this information would have raised significant concerns about the likelihood of pollutant emissions from the dry dock.
The underwriter testimony established that, in agreeing to underwrite the policy, she was acting on the understanding that Signal was complying with its duty of utmost good faith. She testified as follows: “If the insured had information that could materially affect our policy, it would be their obligation to furnish us with that information…. [F]or example, if you were to read a survey that said that you had a vessel that was about ready to collapse or something like that, that would be something that you should bring to the attention of your broker, who would then bring it to our attention.”
The appellate court concluded that Signal breached its duty of utmost good faith by failing to disclose information about the dry dock’s condition to Great American. Because this information was both material and relied upon, Great American is entitled to void the Pollution Policy.
Material Misrepresentation under Mississippi Common Law
If the applicant for insurance undertakes to make a positive statement of a fact, if it be material to the risk, such fact must be true. It is not sufficient that he believes it true, but it must be so in fact, or the policy will be avoided, provided, always, that the misstatement be about a material matter.
Because there is no genuine dispute that Signal induced MSI to underwrite the EPI Policy by materially misrepresenting the dry dock’s condition when it applied for coverage, the district court correctly held that MSI was entitled to void the EPI Policy under Mississippi law. Consequently, Fireman’s Fund may not succeed on its claim for equitable contribution against MSI that it was granted on summary judgment below, as the validity of the EPI policy is a prerequisite to such a claim.
Great American’s Pollution Policy is a marine insurance contract and that Great American was entitled to void the policy under the doctrine of uberrimae fidei due to Signal’s failure to disclose material information indicating that the dry dock was in a deteriorated condition and that recommended long-term repairs were not being made. MSI was entitled to void the EPI Policy under Mississippi law because Signal materially misrepresented the dry dock’s condition when it disclosed to MSI only reports reflecting positively on the dry dock, while failing to disclose numerous other reports indicating that the dry dock was in a dilapidated state and nearing the end of its useful life.
Although people applying for insurance believe they are only obligated to answer questions posed to them on an application, if they are applying for a marine insurance policy subject to the Admiralty jurisdiction of a federal court, the potential insured is obligated to advise the insurer of material facts even if not asked. Signal knew the dry dock was valueless and at a risk of sinking and did not disclose material facts to the insurer that deceived the insurer and allowed it to cause the policy to be void.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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