Misrepresent Material Fact – Lose Coverage
Uberrimae Fidei Allows Voidance of Marine Insurance Policy
Insurance has, from its inception, been an agreement requiring utmost good faith by both parties to the contract of insurance. As used in maritime insurance failure of an insured to deal in the utmost good faith with its insurer allows the insurer to void the insurance.
A marine insurer sued its insured seeing a declaration that a maritime insurance policy for the insured’s floating drydock was void. The trial involved a maritime insurance policy issued by Appellee Catlin (Syndicate 2003) at Lloyd’s (“Catlin”), to cover the floating drydock Perseverance owned by San Juan Towing and Marine Services (“SJT”), a ship repair company based in San Juan, Puerto Rico. At trial, the district court concluded that the insurance policy was void ab initio by reason of SJT’s violation of the doctrine of uberrimae fidei in its application for the policy. SJT appealed in Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing and Marine Services, Inc., — F.3d —-, 2015 WL 500744 (C.A.1 (Puerto Rico) 2/6/2015) requiring the First Circuit to determine whether the doctrine of Uberrimae Fidei, utmost good faith, applied to the sinking of the floating dry dock.
BACKGROUND
In 2006 SJT purchased the Perseverance for $1,050,000. Subsequently, SJT made improvements to the floating dry- dock, modifying it so that it could be towed from Louisiana to Puerto Rico. Marine Consultants then issued a valuation report on November 21, 2006, in which it valued the floating drydock at $1,750,000. By 2009, and as late as 2011, due to declining business and increasing financial dis- tress, SJT was actively trying to sell the Perseverance. After failing to sell the dry dock by reducing prices in September 4, 2011, SJT agreed to sell the Perseverance to Leevac Shipyards (“Leevac”), a Louisiana- based company, for $700,000. However, the deal later fell through.
Between August 2006 and February 2011, SJT insured the Perseverance with the RLI Insurance Company (“RLI”), with a declared hull value of the Perseverance under this policy of $1,750,000, presumably based on the Marine Consultants condition and valuation report dated on November 21, 2006. In February 2011, RLI cancelled the drydock’s insurance policy, cryptically stating “Loss History” as the reason.
Thereafter, at SJT’s request, SJT’s insurance broker, John Toscani (“Toscani”), who was located in New York, approached Catlin seeking, through Lloyd’s, a marine insurance policy “consisting of hull, [protection and indemnity], ship repairs, general liability and contractor’s equipment” (emphasis added). SJT’s broker represented that the Perseverance’s prior insurance coverage was for $1,750,000, but did not pro- vide Catlin with a copy of RLI’s notice of cancellation. Most importantly, SJT also did not disclose information regarding substantial, preexisting damage to the Perseverance’s hull, which had been evident since at least April 2010.
SJT tug Captain Padilla (“Padilla”) returning from a towing assignment called SJT manage to inform him of the total sinking of the Perseverance. They observed that a fire hose connected to a water main on the dock was still pumping water into the sunken drydock, with the valve on shore still in an open position. Payne proceeded to shut the valve, which was easily seen and accessible to anyone who wished to turn off the flow of water.
SJT proceeded to file a claim with Catlin, alleging the total loss of the Perseverance, in the amount of $1,750,000. Catlin denied this claim, relying on the discrepancy between the amount the Perseverance was insured for according to the Endorsement ($1,750,000) and its actual market value (approximately $700,000 to $800,000), as evidenced by the sale price advertised to potential buyers around the time when SJT sought the quote for the Policy.
On October 8, 2013, after a bench trial, the district court resolved the merits of this controversy. See Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 979 F.Supp.2d 181, 191 (D.P.R.2013) ( “Catlin IV ”).
DISCUSSION
The application of the doctrine of uberrimae fidei to this controversy, which the First Circuit concluded only existed in modern American jurisprudence in the context of maritime insurance, depends on the outcome of the central issue raised by SJT both here and below: whether Puerto Rico’s Insurance Code, P.R. Laws Ann. tit. 26, §§ 1101 et seq. (“the Code”), is the con- trolling substantive law in this controversy rather than general federal maritime law.
As a general rule, in the absence of established and governing federal admiralty law, the states have largely unfettered power to regulate matters related to marine insurance. The rules of admiralty and maritime law of the United States are presently in force in the navigable waters of the United States in and around the island of Puerto Rico to the extent that they are not locally inapplicable either because they were not designed to apply to Puerto Rican waters or because they have been rendered inapplicable to these waters by inconsistent Puerto Rican legislation.
There can be no doubt that the Policy is an ocean marine insurance policy. The Policy was procured for SJT by Toscani, who “placed a package policy consisting of hull, P & I, ship repairs, legal, general liability and contractors equipment” (emphasis added), with Catlin. Indeed, Toscani admitted that he considered the Policy to be a marine insurance policy. Based on the evidence presented, the dis- trict court found as follows: “The Perseverance was designed, constructed, and used to provide marine maintenance and repair services to vessels,” and “[i]ts intended use [was] to lift floating equipment for inspection and repair.”
Marine insurance is vital to the adequate flow of commerce. The nature of the risks that are covered by maritime insurance is such that, given the urgent necessity for the placement of this type of insurance coverage that is often present in the business of maritime commerce, as well as the extreme distances that often separate the insurance seeker and the insurer, it is imperative that the insurer be provided with truthful and valid information about the risk the insurer is asked to undertake by the party most able to provide such data: the insured. Uberrimae fidei is an established rule of maritime law. This ruling should hardly be surprising. As early as 1828, the Supreme Court characterized an insurance contract as “a contract uberrimae fidei.” McLanahan v. Universal Ins. Co., 26 U.S. 170, 185, 1 Pet. 170, 7 L.Ed. 98 (1828).
At the bench trial, Richard Thompson (“Thompson”), a hull inspector who surveyed the Perseverance, testified that he found “heavy wastage” in the drydock’s hull during an April 2010 inspection. After Thompson notified SJT of the rust and deterioration problems, SJT admitted that “those damages were pre-existing.” Because the Perseverance was not in prime condition and business was slow, SJT offered to sell the floating drydock to potential buyers at a price between $700,000 to $800,000, which presumably approximated its actual value at the time. Indeed, in April 2011—the same month that the Catlin Policy took effect—SJT advertised the Perseverance for sale at a price of $800,000. Yet, SJT, in its request for marine insurance coverage from Catlin, represented to Catlin that the Perseverance had been previously insured by RLI for $1,750,000—$700,000 more than what SJT paid for the drydock originally. Catlin could have reasonably assumed the value presented to it in the previous insurance policy from RLI as the actual value and evaluated its risks based on the conditions it would have reasonably expected from a drydock of that value. SJT’s failure to disclose the true value of the Perseverance, what SJT paid for the Perseverence, and the Perseverance’s level of deterioration, therefore, are all material facts, the nondisclosure of which violates uberrimae fidei.
Under uberrimae fidei, when the marine insured fails to disclose to the marine insurer all circumstances known to it and unknown to the insurer which “materially affect the insurer’s risk,” the insurer may void the marine insurance policy at its option. In other words, the policy becomes voidable. As discussed above, the evidence conclusively shows that SJT failed to disclose material information about the Perseverence’s actual value and preexisting deteriorated condition prior to Catlin determining whether it would accept the risk. Catlin was free, therefore, to void the policy.
SJT violated the doctrine of uberrimae fidei in its procurement of the Policy. Thus, Catlin was entitled to void the Policy. The decision of the district court is affirmed, however, its holding is modified to reflect that the contract was voidable, not void ab initio.
ZALMA OPINION
Uberrimae fidei Latin, for utmost good faith. It, contrary to the First Circuit’s com- ments, applies in every jurisdiction as a concept of how the business of insurance should be conducted. For example, in New York or California, even an innocent misrepresentation of the value of a property over half its true value, would allow the insurer to rescind the policy from its inception (ab ini- tio). In cases of marine insurance, rather
than allow rescission, the First Circuit concludes that the insurer can declare the policy void in the event of a material misrepresentation. A difference without meaning since, in either case, the insured is without cover- age and the policy void.[IA]