GRAYDON S. STARING

SAN FRANCISCO

Chapter 19

UBERRIMA FIDES AND CONCEALMENT IN

THE MARINE INSURANCE POLICY APPLICATION

I. DEFINITION AND HISTORY

Uberrima fides, which is translated as "utmost good faith", is defined as "[tlhe most abundant good faith; absolute and perfect candor or openness and honesty; the absence of any concealment or deception, however slight." Black's Law Dictionary, 1520 (6th ed., 1990). Although its applications are now somewhat limited, uberrimafides once applied to all policies of insurance. Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316, 48 S. Ct. 512, 72 L.Ed. 895 (1928) ("Insurance contracts are traditionally contracts uberrimae fidei.")

It probably originated in the Civil Law expounded by early continental writers. See 2 John Duer, The Law & Practice of Marine Insurance 381 n. (a) (N.Y. 1845). The first statement of its incidents as to disclosure in English law was by Lord Mansfield, who said in a war risk case that insurance is a contract based on speculation, where the facts are securely in the knowledge of the insured, and underwriters should therefore be entitled to trust and rely upon the full disclosure of all relevant circumstances concerning the risk insured. Carter v. Boehm, 97 Eng. Rep. 1162, 1164 (K.B. 1766). He laid down the rule that any misrepresentation or failure to disclose a material fact, regardless of intent on the part of the insured (applicant), means that the actual risks do not match the risks contemplated, causing a failure of the meeting of the minds. Id

The doctrine was firmly established in the American law of marine insurance by at least two Supreme Court decisions, M'Lanahan v. The Universal Ins. Co., 26 U.S. (1 Pet.) 170, 18 5, 1998 AMC 285, 296, 7 L.Ed. 98 (1828) and Sun Mutual Insurance Co. v. Ocean Insurance Co., 107 U.S. 485, 510, 27 L.Ed. 337, 1 S. Ct. 582 (1883). See Leslie J. Buglass, Marine Insurance & General Average in the United States 10 (2d ed. 1981) ("a contract of marine insurance is a contract based on the utmost good faith"); Alex L. Parks, 1 The Law & Practice of Marine Insurance & Average 216 (1987). California's statutory treatment of marine insurance, taken from the Field Code, a Nineteenth Century codification of Anglo-American law, is greater than that of most states, and since it is generally the same as the admiralty law on this subject, see CIGNA Property and Casualty Ins. Co. v. Polaris Pictures Corp., 159 F. 3 d 412, 420, 1999 AMC 1, 11 n. 3 (91h Cir. 1998), it is sometimes cited here.

II. SCOPE AND DURATION

An underwriter may presume to rely on his belief that a potential insured has disclosed all facts material to the risk insured. M'Lanahan, at 185. The Supreme Court has held that the insured's disclosure must be so complete as to put the insurer in the exact same position as the insured. Sun Mutual, at 510 (citing 2 Duer, supra, 398-99); Cf Washington Int'l Ins. v. Mellone, 773 F. Supp. 189, 191, 1991 A.M.C. 996, 997-98 (C..D. Cal. 1990) (Cal. law); Cal. Ins. Code § 1900 (West 1993).

In order to put the insurer in such a position, the insured must disclose all "facts, material to the risk," known or discoverable "by reasonable diligence", and may not hide behind an agent for the purpose of misleading an underwriter. M'Lanahan, at 185 (knowledge of the insured "infects the act of his agent."). An insured may be required to divulge third party opinions regarding risks and can be held to know facts he reasonably ought to know. Sun Mutual, at 5 10. But the insured has "no duty of diligence to collect knowledge about risks" and need not give his own opinion about risks. Id. The duty is "independent of the intention and is violated by the fact of concealment even where there is no design to deceive." Id. The duty of good faith, and therefore to disclose, is mutual (although rarely invoked by insureds in respect of disclosures). 2 Duer, supra, 380-81; Cal. Ins. Code § 332.

An underwriter can be expected, however, to know certain facts, which therefore need not be disclosed by the insured. Benjamin Buck & Thomas Hendrick v. The Chesapeake Ins. Co., 26 U.S. (1 Pet.) 151, 160, 7 L.Ed. 90 (1829) ("A knowledge of the state of the world, of the allegiance of particular countries, of the risks and embarrassments affecting their commerce, of the course and incidents of the trade on which they ensure, and the established import of the terms used in the contract, must necessarily be imputed to underwriters.") (citing Lord Mansfield in Pelly v. The Royal Exchange, 1 Bur. 341); Contractors Realty v. Insurance Co. of North America, 469 F. Supp. 1287, 1295, 1979 A.M.C. 1864, 1876 (S.D.N.Y. 1979) ("knowledge of both the design features of the insured yacht and the normal pattern of expectable maintenance and upkeep of such a yacht, which are part of 'the course and incidents of the trade [and] must necessarily be imputed to the underwriters."' (addition in original); see also Anne Quinn Corp. v. American Mfrs. Mutual Ins. Co., 369 F. Supp. 1312, 1315, 1974 A.M.C. 655, 660 (S.D.N.Y. 1973), aff'd without op., 505 F.2d 727 (2d Cir. 1984); Cal. Ins. Code §§ 333, 335, 336, 1900; 2 Duer, supra, 552, 559-60; 9 Couch § 38:106.

The duty of disclosure and representation exists beyond the placement of an insurance order and up to the inception of the policy. M'Lanahan, at 185; see 1 Parks, supra, 230-31. It also encompasses corrections of representations and applies to renewals and modifications. See Cal. Ins. Code § 3 6 1; Navegacion Goya S.A. & American Bulk Carriers Inc. v. Mutual Boiler & Machinery Ins. Co., 411 F. Supp. 929,1972 A.M.C. 650, 658 (S.D.N.Y. 1972) (continuing duty to disclose all material facts) The duty can be modified by express agreement. See King v. Allstate Ins. Co., 906 F.2d 1537, 1991 AMC 204 (11th Cir. 1990). While the doctrine is discussed mainly in relation to disclosures, its principal statements have been that the contract is one of utmost good faith or uberrimae fidei, without appearing to limit the doctrine to contract formation. See M'Lanahan, at 185 ("a contract uberrimae fidei"); Stipcich, at 316; 2 Duer, supra, 380 ("a contract ... uberrimae fidei, of the most abounding good faith"). The doctrine may therefore be applicable to all the incidents of the contract throughout its life; this view has been taken in England and the doctrine applied to the presentation of claims. The Litsion Pride, [1985] 1 Lloyd's Rep. 437, 511 (Q.B.).

III. MATERIALITY

What must be disclosed are facts material to the risks undertaken. M'Lanahan, at 185. Materiality has to do with the effect of the non-disclosure or misrepresentation and involves two important questions by which it is to be tested: 1) the identity of the underwriter to be considered, that is, the actual underwriter (subjective test) or a hypothetical prudent underwriter (objective test); and 2) the degree of the probable influence of the undisclosed facts on that underwriter.

Sun Mutual refers to the effect of information on a 'prudent underwriter'. 107 U.S. at 509-10; see also Parks, supra, at 222;. Most federal courts follow Sun Mutual in testing by the effect on a prudent underwriter and not on the actual underwriter. But see Puritan Ins. Co. v. Eagle Steamship Co. S.A., 779 F.2d 866, 871, 1986 A.M.C. 1240, 1247 (2d Cir. 1986) (judgment against insurer because the underwriter would not have relied on certain undisclosed prior losses, based on evidence that suggests waiver). Contrary to Federal precedent, California, by statute, judges materiality by the subjective test of effect on the actual underwriter. Cal. Ins. Code § 334; see Merced Mutual Fire Ins. Co. v. State of California, 233 Cal. App. 3d 765, 772 (1991).

Sun Mutual states the test of materiality as the importance of a particular fact "to the underwriter as likely to influence his judgment in accepting the risk," and cites with approval Duer's statement of the test as whether a fact "would probably have influenced the terms of the insurance." 107 U.S. at 509-10. But see Btesh v. Royal Ins. Co., Ltd., of Liverpool, 49 F.2d 720, 721, 1931 AMC 1044, 1046 (2d Cir. 193 1) ("something which would have controlled the underwriter's decision"). California asks whether a fact would have a probable and reasonable effect on the acceptance of an application, the setting of its premiums, and the establishment of the disadvantages of the proposed risk. Cal. Ins. Code § 334; Merced, at 772.

Circumstances can be of such obvious importance to a prudent underwriter that no special evidence of their materiality is needed. In Sun Mutual, the Court held that the materiality of undisclosed concurrent charters and consequent overinsurance was "so manifest to common reason as to need no proof of usage or opinions of those engaged in the business [of insurance]."107 U.S. at 509; see also Knight v. United States Fire Ins. Co., 804 F.2d 9, 1987 AMC 1 (2d Cir. 1986). A particular question asked by an underwriter will ordinarily be regarded as material in any case, Bella Steamship Co. v. Insurance Co. of North America, 5 F.2d 570, 1925 AMC 751 (4th Cir. 1925); Kerr v. Union Marine Ins. Co., 130 F. 415 (2d Cir. 1904), especially if the question is written and calls for a written response. See Cal. Ins. Code § 1900(b); Merced, at 772.

Materiality may differ according to the type and subject of the policy; the application to P & I policies of cases dealing with hull or cargo policies may depend on circumstances. The following are examples from the Supreme Court and more recent decisions of the lower courts of circumstances found material or immaterial, with indications of the types of policy involved (e.g., hull, yacht, etc.):

Materiality has been found or implied as to the following:

-Age of vessel:

Certain Underwriters at Lloyd's v. Montford, 52 F. 3d 219, 1995 A.M.C. 1201 (9th

Cir, 1995) (yacht)

Royal Ins. Co. v. Fleming, 1986 AMC 2077 (M.D. Fla. 1985) (yacht)

-Cargo perishable:

St. Paul Fire & Marine Ins. Co. v. Merchants & Shippers Ins. Co., 219 App. Div. 636, 1927 AMC 577 (1927) (cargo)

-Condition:

Certain Underwriters at Lloyd's v. Johnston, 1999 AMC 1452 (D.P.R. 1999 (yacht)

John Jovino Co. v. Fireman's Fund Ins. Co., 1993 AMC 53 (S.D.N.Y 1992) (cargo)

Washington Int'l Ins. Co. v. Mellone, 773 F. Supp. 189,1991 AMC 996 (C.D. Cal. 1990) (yacht)

Neubros Corp. v. Northwestern National Ins. Co., 3 5 9 F. Supp. 310, 1972 AMC 2443 (E.D.N.Y. 1972) (hull)

Tremaine v. Phoenix Assurance Co., 6 Cal. App.2d 552,1935 AMC 753 (1935) (hull)

Cf Drake Fishing, Inc. v. Clarendon American Ins. Co., 136 F.3d 851, 1998 AMC 1341 (l" Cir. 1998) (hull; requirements stated as condition precedent represented as met)

-Hazardous equipment or modifications:

The Pacific Queen, 307 F.2d 700,1962 AMC 1845 (9th Cir. 1962) (hull)

Hauser v. American Central Ins. Co., 216 F. Supp. 318, 1964 AMC 526 (E.D. La. 1963) (hull)

-Intended uses:

La Reunion v. Thompson, 1999 AMC 2579 (S.D. Fla. 1999) (yacht; non-commercial)

Certain Underwriters at Lloyd's v. Giroire, 27 F. Supp.2d 1306, 1998 AMC 2153 (S.D. Fla. 1998) (yacht; non-racing)

Hartford Ins. Co. v. Garvey, 1989 AMC 652 (N.D. Cal. 1989) (yacht; non- commercial)

-Offenses:

Atkin v. Smith, 137 F.3d 1169, 1998 AMC 1239 (9" Cir. 1998) (yacht; conviction of fraud)

North American Specialty Ins. Co. v. Savage, 977 F. Supp. 725, 1998 AMC 769 (D. Md. 1997) (yacht; denial of driver's license suspensions)

-Overinsurance:

Sun Mutual Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 1998 AMC 1191 (1883) (cargo)

-Ownership:

CIGNA Property and Casualty Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 1999 AMC 1 (9" Cir. 1998)

Griffith v.American National Fire Ins. Co., 1997 AMC 2745 (D. Del. 1996) (yacht)

Washington Int'l Ins. Co. v. Mellone, 773 F. Supp. 189, 1991 AMC 996 (C.D. Cal. 1990) (yacht)

-Prior damage or injury:

Crowley Marine Services v. Hunt, 1995 AMC 2562 (W.D. Wash. 1995) (P&I)

Reliance Ins. Co. v. McGrath, 671 F. Supp. 669,1987 AMC 1916 (N.D. Cal. 1987) (yacht)

-Prior insurances, cancellations, non-renewals:

Knight v. United States Fire Ins. Co., 804 F.2d 9, 1987 AMC 1 (2d Cir. 1986) (cargo)

Griffith v. American National Fire Ins. Co., 1997 AMC 2745 (D. Del. 1996) (yacht)

Hartford Ins. Co. v. Garvey, 1989 AMC 652 (N.D. Cal. 1989) (yacht)

-Prior losses:

CIGNA Property and Casualty Ins. Co. v. Polaris Pictures Corp., 159 F.3d. 412, 1999 AMC I (91h Cir. 1998)

Underwriters at Lloyd's v. Kenney, 1997 AMC 2372 (S.D. Fla. 1997) (yacht)

Certain Underwriters at Lloyd's v. Montford, 52 F. 3 d 219, 1995 A.M.C. 1201 (9th Cir. 1995) (yacht)

Albany Ins. Co. v. Horak, 1994 A.M.C. 273 (E.D.N.Y. 1993) (yacht)

John Jovino Co. v. Fireman's Fund Ins. Co., 1993 AMC 53 (S.D.N.Y 1992) (cargo)

Travelers Indemnity Co. v. 30'h Street Associates, 1993 AMC 1149 (N.Y. Sup. N.Y. Co. 1992) (cargo)

AIS Ivarans Rederei v. Puerto Rico Ports Authority, 617 F.2d 903, 1982 AMC 2493 (1 st Cir. 1980) (wharfinger's liability)

-Purchase price:

Certain Underwriters at Lloyd's v. Montford, 52 F. 3 )d 219, 1995 A.M.C. 1201 (9th Cir. 1995) (yacht)

Royal Insurance Co. of America v. Harbor Shuttle, 1999 AMC 929 (E.D.N.Y. 1999) (hull and P&l)

Albany Ins. Co. v. Horak, 1994 A.M.C. 273 (E.D.N.Y. 1993) (yacht)

Washington Int'l Ins. Co. v. Mellone, 773 F. Supp. 189, 1991 AMC 996 (C.D. Cal. 1990) (yacht)

-Sailing date:

M'Lanahan v. Universal Ins. Co., 26 U.S. (I Pet.) 170,1998 AMC 285 (1828) (hull)

Kerr v. Union Marine Ins. Co., 130 F. 415 (2d Cir. 1904) (hull)

-Surveys:

Gulfstream Cargo, Ltd v. Reliance Ins. Co., 409 F.2d 974,1969 AMC 781 (5th Cir. 1969) (hull)

Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1985 AMC 689 (D.R.I. 1984) (hull)

-Value:

Bella Steamship Co. v. Insurance Co. offorth America, 5 F.2d 5 70, 1925 AMC 751 (4th Cir. 1925) (hull)

Certain Underwriters at Lloyd's v. Johnston, 1999 AMC 1452 (D.P.R. 1999) (yacht)

Washington Int'l Ins. Co. v. Mellone, 773 F. Supp. 189,1991 AMC 996 (C.D. Cal. 1990) (yacht)

Hartford Ins. Co. v. Garvey, 1989 AMC 652 (N.D. Cal. 1989) (yacht)

Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004,1985 AMC 689 (D.R.I. 1984) (hull)

Materiality has been denied as to the following:

-Cargo details non involving risk:

Btesh v. Royal Ins. Co., 49 F. 2d 720, 1931 AMC 1044 (2d Cir. 193 1) (cargo)

Granger v. Providence- Washington Ins. Co., 200 F. 730 (2d Cir. 1912) (cargo)

-Offenses:

La Reunion v. Christy, 1999 AMC 2499 (M.D. Fla. 1999) (yacht)

-Flag change:

Alavegacion Goya, S.A. v. Mutual Boiler & Machinery Ins. Co., 411 F. Supp. 929,1972 A.M.C. 650 (S.D.N.Y. 1972) (hull)

-Premiums to others:

China Union Lines, Ltd. v. American Marine Underwriters, Inc., 755 F.2d 26, 1985 AMC 1643 (2d Cir. 1985) (hull)

-Survey criticisms:

Contractor's Realty v. Insurance Co. of North America, 469 F. Supp. 1287, 1979 AMC 1864 (S.D.N.Y. 1979) (yacht)

-Owner's warranty suit:

Contractor's Realty v. Insurance Co. of North America, 469 F. Supp. 1287, 1979 AMC 1864 (S.D.N.Y. 1979) (yacht)

IV. CONSEQUENCES OF BREACH

A material misrepresentation or non-disclosure, intentional or unintentional, makes the insurance voidable by either party ab initio. Stipcich, at 3 16; Sun Mutual, at 5 10; Certain Underwriters at Lloyd's v. Montford, 52 F.3d, at 222,1995 A.M.C., at 1203-04; Washington Int'l Ins. Co., 773 F. Supp., at 191, 1991 A.M.C.; at 998; Cal. Ins. Code §§ 331, 359. As the cases cited above illustrate, the insurer may either declare the entire policy void and then defend any actions brought by an insured or seek a judgment of rescission. The insurer may take the less drastic course of keeping the policy in force and disputing coverage of a particular loss based on the concealment. A canceling underwriter must return his premiums. Carter v. Boehm, 97 Eng. Rep. at 1164.

V. JURISDICTION AND CHOICE OF LAW

The United States Constitution places maritime law under federal admiralty jurisdiction. New England Insurance Co. v. Dunham, 78 U.S. (11 Wall.) 1, 1997 AMC 2394 (1871) confirmed admiralty jurisdiction of marine insurance. The case central to the dispute between the applicability of federal maritime law and state law, which is sometimes contrary, is Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 1955 A.M.C. 467 (1955), in which the Court appeared to hold that, where there is an "established federal admiralty rule on an issue in a marine insurance case, federal law will apply and, absent such controlling federal law, marine insurance contracts may be interpreted under state law. 348 U.S. at 314, 1955 A.M.C. at 471.

The Second, Third, Ninth and Eleventh Circuits affirm with varying degrees of clarity the entrenchment of uberrima fides as federal law. Second Circuit: Knight v. United States Fire Ins. Co., 804 F.2d 9, 13, 1987 AMC 1, 5 (2d Cir. 1986); Puritan Ins. Co. v. Eagle Steamship Co., 779 F-2d 866, 870, 1986 AMC 1240, 1245 (2d Cir. 1986); Anne Quinn Corp. v. American Manufacturers Mutual Ins. Co., 369 F. Supp. 1312, 1315, 1974 AMC 655, 659 (S.D.N.Y. 1973). aff'd without op. 505 F.2d 727 (2d Cir. 1984); see Btesh v. Royal Ins. Co., 49 F. 2d 720, 19 1 AMC 1044 (2d Cir. 193 1). Third Circuit: See East Coast Tender Service, Inc. v. Robert T Winzinger, Inc., 759 F.2d 280, 284, 1986 AMC 114, 117-18 n.3 (3d Cir. 1985) ; West Aftica Trading & Shipping Co. Inc. v. London Int'l Group Inc., 1996 AMC 1905, 1918 (D.N.J. 1996) (citing Steelmet). Ninth Circuit: Certain Underwriters at Lloyd's v. Montford, 52 F.3d 219, 222, 1995 AMC 1201, 1203 n. 1 (9th Cir. 1995) (admiralty and California law "materially the same"); Crowley Marine Services Inc. v. Paul Hunt, 1995 AMC 2562, 2568 (W.D. Wash. 1995) ("Here, there is an entrenched doctrine of admiralty law that no court has held gives way to state laws."), aff'd without opinion, 99 F.3d 1145 (9th Cir. 1996). Eleventh Circuit: Steelmet Inc. v. Caribe Towing Corp., 747 F.2d 689, 695, 1985 AMC 956, 964 (1 Ith Cir. 1984) (uberrima fides is the clear rule of law "even in the face of contrary state authority.")

The Fifth Circuit has wavered. In Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 889, 1991 A.M.C . 2211, 2214 (5th Cir. 1991), the court set up a new, three-factor test for determining when to apply federal versus state law: 1) whether the federal maritime rule constitutes entrenched federal precedent; 2) whether the state has a substantial and legitimate interest in application of its laws; 3) whether the state's rule is materially different from the federal maritime rule. Id. Contrary prior 5th Circuit authority can been found in Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 980, 1969 AMC 781, 790 (5th Cir. 1969), holding that there is nothing better established in the law of marine insurance than uberrima fides.

On the authority of the Supreme Court and a plurality view in the courts of appeals, it appears that the doctrine of uberrima fides in the context of marine insurance policy applications has remained intact, except for a question as to its continued application in the Fifth Circuit.