In a recent decision, the First Circuit Court of Appeals formally recognized the doctrine of uberrimae fidei (i.e. – “utmost good faith”) as an established principle of federal admiralty law and, finding that the appellant had violated this doctrine, affirmed the District Court of Puerto Rico’s findings that the appellant’s insurance policy had properly been voided by its marine insurer.  Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing and Marine Services, Inc., No. 13-2491 (1st Cir. 2015).

Catlin arose from 2011 sinking of the PERSEVERANCE; a floating drydock purchased by San Juan Towing and Marine Services, Inc. (“SJT”) in 2006.  At the time of SJT’s purchase of the PERSEVERANCE for USD 1,050,000 in 2006, the drydock was valued at USD 1,500,000.  SJT subsequently made improvements to the floating drydock which increased its value to USD 1,750,000.  The PERSEVERANCE was insured for this value with RLI Insurance Company (“RLI”) until RLI canceled the policy in February 2011; despite the drydock’s depreciation and SJT’s efforts to sell the PERSEVERANCE for more than USD 1 million less than its insured value.  Following RLI’s cancellation of the floating drydock’s insurance policy, SJT, through its broker, procured a marine insurance policy with Catlin.  SJT’s broker represented that the PERSEVERANCE’s prior insurance coverage was for USD 1,750,000, but did not provide any further information on the floating drydock’s value or condition.  The Catlin policy, which became effective in April 2011, insured the PERSEVERANCE for USD 1,750,000.  The floating drydock subsequently sank.  Refloating took nearly one (1) month to complete due to substantial rust and decay to the underside of the PERSEVERANCE, which SJT was aware of but had failed to disclose to Catlin at the time it sought coverage.  The drydock was ultimately sold for scrap, and SJT filed a claim with Catlin in the sum of USD 1,750,000; alleging the total loss of the vessel.

Catlin subsequently filed a declaratory judgment action against SJT, seeking to void the Policy under the doctrine of uberrimae fidei.  Under this doctrine, an insured must act with “utmost good faith” in applying for an insurance policy and disclose all known circumstances that would materially affect the insurer’s risk.  The District Court ultimately conducted a bench trial and concluded that SJT had failed to comply with the doctrine of uberrimae fidei in its application for the Policy and was therefore barred from recovery under the Policy.  SJT appealed.

On appeal, the First Circuit first considered whether federal admiralty law or local Puerto Rican law applied.  The Court recognized that the Jones Act grants Puerto Rico more power to legislate in the admiralty and maritime field than if it were a state and allows for Puerto Rican legislation that is inconsistent with federal admiralty law.  However, the Court rejected SJT’s argument that the Puerto Rican Code controlled as to whether representations made during negotiations to obtain coverage affected SJT’s ability to collect on the Policy, noting that the provision of the Puerto Rican Code relied upon by SJT expressly excluded ocean marine insurance.  Concluding that the Catlin Policy was an “ocean marine insurance policy” based on the Policy’s inclusion of “hull” coverage and the description of the PERSEVERENCE falling within this definition, the Court determined that the Policy was excluded from the Puerto Rican Code’s more lenient provisions regarding representations made during Policy negotiations.  Having concluded that federal admiralty law was to apply, the Court next considered whether the doctrine of uberrimae fidei was an established rule of admiralty law.  Citing policy reason and its own prior decisions in which it has applied uberrimae fidei, as well as the longstanding history and consistent application of the doctrine by the majority of the Circuit Courts, the Court held that uberrimae fidei is an established admiralty rule within the First Circuit.

Finally, the Court considered whether SJT had violated the doctrine of uberrimae fidei under the facts and circumstances of the case.  The Court determined that despite advertising that sale of the PERSEVERANCE at USD 800,000 in April 2011 – the same month the Catlin Policy took effect – SJT failed to disclose this fact; the true value of the floating drydock; what SJT paid for the floating drydock; or the level of deterioration of the drydock at the time that the Policy was sought.  The Court determined that these were material facts required to be disclosed to Catlin in applying for the policy, and that nondisclosure violated uberrimae fidei.  As such, the First Circuit affirmed the District Court’s ruling (but modified the decision to reflect that the insurance contract was deemed valid until voided at Catlin’s election, as opposed to voided ab initio as the District Court had held).

To read a copy of the First Circuit’s decision, click here.

For more information about the Court’s decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.