On May 20, 2016, the United States Court of Appeals for the Second Circuit affirmed a decision of the Southern District of New York in Fireman’s Insurance v. Great American Insurance, No. 14-cv-1346, holding that under the doctrine of uberrimae fidei, as well as Mississippi Common law, an insurance contract is void ab initio if the insured is found guilty of misrepresenting material facts which a prudent and reasonable insurance underwriter would have otherwise taken into consideration when determining whether to issue a policy.
Fireman’s Fund Insurance Company (“Fireman’s Fund”) and a marine construction firm Signal International, LLC (“Signal”) appealed a decision from the Southern District of New York which had granted summary judgment to Great American Insurance Company of New York (“Great America”) and Max Specialty Insurance Company (“MSI”). Fireman’s Fund, Great American and MIS underwrote insurance policies that included coverage for a dry dock that Signal owned in Port Arthur, Texas. Signal had failed to disclose material information regarding the poor condition of the dock and the repairs needed when contracting with Great American and MSI for insurance coverage. In addition, Signal was aware of the negative reports on the state of the dry dock and had ignored several repair recommendations from various sources. After obtaining pollution and excess property insurance coverage for the dry dock from Great American and MSI, Signal’s dock sank. Great American and MSI argued that their policies did not cover the costs of removing the dry dock from the Sabine-Neches Waterway and cleaning up the site. Instead, Firemen’s Fund paid for the costs of the dry dock clean-up and removal and subsequently filed an action against Great American and MSI seeking reimbursement of those fees.
The Second Circuit affirmed the District Court’s decision to void the marine insurance contracts between Signal and Great American. The Second Circuit stated that the primary objective of the pollution policy coverage for the dry dock was to insure against the risk of liability for pollutants emitted during Signal’s ship repair and maintenance operations, which would affect marine commerce. When marine commerce is affected, an insurance contract can be considered a marine contract, and thus subject to the uberrimae fidei doctrine. In applying the doctrine to the specific facts at issue, the Second Circuit Court stated that Signal should have disclosed all facts within its knowledge that were material to the risk being insured. Because Signal did not reveal to Great American the numerous reports detailing the poor condition of the dock, the contract was declared void ab initio. The Court reiterated that the uberrimae fidei doctrine imposes a duty of utmost good faith on the insured, and that all material information subject to consideration by a prudent and reasonable insurance underwriter should be revealed, without need of an inquiry.
Furthermore, the Second Circuit also reached a similar conclusion under Mississippi Common law, affirming the District Court’s opinion that insurer MSI could also void ab initio its insurance contract with Signal. Here, the excess property insurance policy held by MSI was not categorized as a marine insurance contract by the District Court. However, under Mississippi law the insured may not mislead nor misrepresent material facts to an otherwise prudent underwriter who relied on them in making an insurance decision. Signal provided MSI with its own submission report when applying for coverage and presented a favorable report on the condition of the dry dock. The Second Circuit stated that MSI should have been provided with any negative reports prepared by engineers and the like, as a prudent and reasonable insurance underwriter would have reviewed same before taking a decision on whether or not to write the policy. The Court finally stated that providing the positive report to MSI amounted to an affirmative representation by Signal of the dock’s condition.
Accordingly, the Second Circuit presently stands clear on the issue that, under admiralty law, insurance contract must be entered into with the utmost good faith as required by uberrimae fidei.
To read a copy of the Second Circuit’s Opinion, click here.
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