Uberrimae Fidei – Utmost Good Faith – Is Alive and Well in US Courts

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­­­­­The Marine Rule Requires Rescission of a Marine Policy Because of Concealment of Material Fact

Carlos Morales-Vázquez (Morales) purchased a policy of marine insurance without disclosing, among other things, a prior grounding. His insurer, QBE Seguros, when it learned the true facts sued to confirm rescission because of the concealment of material facts. In QBE Seguros v. Carlos A. Morales-Vázquez, No. 19-1503, United States Court of Appeals For the First Circuit (January 19, 2021) the First Circuit was asked to resolve the applicability of the doctrine of uberrimae fidei — an entrenched principle of maritime law that imposes a duty of utmost good faith on the parties to marine insurance contracts.

BACKGROUND

In 2011, defendant-appellant Carlos Morales-Vázquez (Morales) purchased an insurance policy for his forty-foot Riviera yacht (the Riviera Policy) from Optima Insurance Company, an entity later acquired by another insurance company, plaintiff-appellee QBE Seguros (QBE). As part of his application for this insurance policy, Morales left blank the spaces provided for answers to questions asking him to describe his prior boating history and all accidents related to any vessel he had previously owned, controlled, and/or operated.

In March of 2014, Morales applied for a separate insurance policy for his forty-eight-foot Cavileer yacht (the Cavileer Policy). Section seven of the application required Morales to disclose any accidents or losses sustained in connection with any vessel he had owned, controlled, and/or operated. This time, Morales indicated that he had been involved in an accident some eleven years earlier, explaining that the accident was a “propeller strike” and that “[p]ropellers were replaced [and] shaft and rudders rectified.” But Morales did not see fit to mention that in January of 2010 he had grounded a forty-foot Riviera Offshore yacht in Fajardo, Puerto Rico.

The omission of the earlier grounding was not Morales’s only oversight. Section six of the application for the Cavileer Policy required Morales to recount his boat-ownership and boat-operating history. When responding, Morales listed only two of the seven boats that he previously had owned and/or operated (a forty-foot Riviera Offshore yacht and a forty-foot Riviera Sport Fisherman). He omitted the remaining information called for by section six even though the application form plainly stated that “[i]f incorrect answers are provided (either by error, omission or neglect), I will be in breach of this warranty and the policy, if issued, will be void from inception.”

In pricing the quotation, the underwriter relied, among other things, on the information contained in the applications for both the Riviera Policy and the Cavileer Policy, as well as Morales’s “more than 15 years” of nautical “owner experience.”  Eventually, within minutes of the request, Morales’s Cavileer yacht was insured by QBE for the ensuing year in the face amount of $550,000.

On October 24, 2014, the Cavileer yacht sustained appreciable damage from a fire. Morales reported the loss to QBE, and QBE retained an independent adjustor to work with its own employees toward resolving Morales’s claim. Following a number of surveys, QBE made a settlement offer in December of 2014: it offered to pay Morales $63,774.10 in satisfaction of the loss. Morales rejected the offer. Negotiations between the parties continued over the next few months, and Morales rejected several other settlement offers from QBE.  The settlement offers were withdrawn when QBE learned the true history of Morales and his vessels.

QBE sued in federal district court invoking the court’s admiralty jurisdiction where QBE sought a declaratory judgment voiding the policy on the grounds that Morales had failed to honor his duty of utmost good faith (known as “uberrimae fidei” in maritime law) in acquiring the Cavileer Policy and, in the bargain, had breached the warranty of truthfulness contained in the Cavileer Policy.

A six-day bench trial ensued. The court concluded that QBE was entitled to void the policy for two independently sufficient reasons:

  1. Morales had breached not only the duty of uberrimae fidei but also
  2. the policy’s warranty of truthfulness.

ANALYSIS

The Latin phrase “uberrimae fidei” loosely translates as “utmost good faith.” As relevant here, the doctrine requires parties to a marine insurance contract to disclose all known facts or circumstances material to an insurer’s risk. Under the doctrine, an insurer may void a marine insurance policy if its insured fails to disclose all circumstances known to the insured and unknown to the insurer that materially impact the insurer’s risk calculus.

The origins of the doctrine can be traced back to eighteenth-century London, which was — and remains — a global insurance hub. In its nascent form, the doctrine applied to a myriad of insurance contracts across a wide swath of industries. As early as 1766, Lord Mansfield recognized that insurance contracts impose a heightened duty of good faith to prevent a party from omitting or concealing facts that would induce the counterparty “into a bargain, from his ignorance.” Carter v. Boehm (1766) 97 Eng. Rep. 1162, 1164 (K.B.). Such a requirement was rooted in practical wisdom, recognizing that an insurer often lacked the ability to verify the insured’s representations before issuing a policy. This practical wisdom still rings true when applied to marine insurance — an industry in which, for example, a policy may have to be issued in London, on a time-sensitive basis, for a vessel berthed halfway across the globe.

For some time, American and English law concerning marine insurance continued to develop in parallel through a parade of judicial decisions. Parliament lately adopted a number of insurance reforms. As relevant here, Parliament passed the Insurance Act of 2015, which (among other things) effectively amended the 1906 MIA to preclude an insurer from voiding a marine insurance policy by recourse to the doctrine of uberrimae fidei. Congress did not follow Parliament’s lead.

Morales does not dispute that uberrimae fidei is firmly entrenched in the jurisprudence of this circuit. Nonetheless Morales urged the court to disregard its own precedent.  At any rate, abandoning the doctrine of uberrimae fidei in marine insurance cases would have “rebarbative consequences” [causing annoyance, irritation, or aversion], both upending settled law and disrupting an industry that has long been premised on insureds telling the whole truth to insurers. Given this grim prospect, the court declined Morales’s invitation to remove the doctrine U.S. jurisprudence.

Although the availability of information has improved dramatically in recent times, a marine insurer and its insured do not have equal access to the information needed to make underwriting decisions and to set premiums. Long ago, Lord Mansfield famously wrote that “[i]nsurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only.” Carter 97 Eng. Rep. at 1164. This remains true in the sphere of marine insurance.

Marine insurance is often needed at a moment’s notice, and insurers are frequently located far away from the vessel that they are asked to insure. Requiring an insurer to ascertain difficult-to-find information about a risk will impose substantial costs on the industry — costs that are likely to be passed along to policyholders in the form of higher premiums. Placing the burden of disclosure on the insured (the party who knows or can most easily obtain the necessary information) will reduce processing costs and will help to keep premiums low.

The First Circuit concluded that “[t]his case is a poster child for the continuing relevance of the doctrine. Morales admits that QBE’s underwriter was ‘pressed for time because Morales needed the insurance for that same day.’ Contrary to the arguments made by Morales, the First Circuit has never held that actual reliance is a necessary prerequisite for an insurer to void a marine insurance policy under the doctrine of uberrimae fidei. Rather, we have held that the materiality of a false statement or an omission, without more, provides a sufficient ground for voiding such a policy.

In addition the policy represented that: “If the named insured has, before or after a loss made a false statement or representation with respect to this insurance or has concealed or misrepresented any material fact or circumstance relating to this insurance, this policy shall be void and without effect. The false statement or representation or concealment need not be related to the damages or loss claimed in order to void the entire policy.”

This language embodies the core of the uberrimae fidei doctrine: that omission or misrepresentation of a material fact is a sufficient ground, in and of itself, to allow an insurer to void a policy of marine insurance.

The district court found that the incomplete accident history (most notably, the earlier grounding) crossed the threshold for materiality. The trial court was correct and its judgment was affirmed, the policy is void from its inception.

ZALMA OPINION

Since at least 1766 insurance, and most notably marine insurance, has been a business of the utmost good faith where neither party will do anything to deprive the other of the benefits of the contract. When Morales failed to advise QBE of his loss history – a fact obviously material because, at the least, the application asked the question which he failed to answer, and as a result QBE properly rescinded the policy after learning the truth. Clearly Mr. Morales is kicking himself for not accepting the offers of settlement made before his refusals and QBE’s investigation led to an examination under oath and QBE learned of the grounds that resulted in the rescission of the policy and a total loss.


© 2021 – 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 zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 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.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/

 

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