In St. Paul Fire & Marine Ins. v. Abhe & Svoboda, Inc., No. 14-2234 (8th Cir. Aug. 20, 2015), the Eighth Circuit Court of Appeals held that reliance is an element of the defense of uberrimae fidei. Prior to Abhe, only the Second Circuit had so held. This case is extremely important to insurers and should be required reading for marine insurers and their coverage counsel.
Abhe, an industrial painting contractor, used stationary leased barges as platforms while painting Pell Bridge over Narragansett Bay. Abhe changed insurance carriers three months into the project. St. Paul Fire did not request that Abhe complete an application, but accepted the application provided to its previous insurer in 2010. The attached schedule of vessels was outdated and did not include vessels leased for the Pell Bridge project. Abhe sent St. Paul an updated schedule in 2011, listing those vessels, but did not provide a 2010 survey that showed that one barge had non-watertight bulkheads. St. Paul did not attempt to survey any of the equipment, as it was entitled to do under the policy. After the barge sunk in a storm, St. Paul denied Abhe’s claims and sought a declaration that the policy was void under the doctrine of uberrimae fidei, which requires that parties to an insurance contract accord each other the highest degree of good faith. Abhe counterclaimed, alleging negligence. The district court granted St. Paul summary judgment, finding the package policy void because Abhe failed to disclose the survey. The Eighth Circuit remanded, stating that reliance is an element of the defense, and that there are disputed issues of fact as to whether it is satisfied.
As pointed out by the Court of Appeals, there is scant authority discussing whether a showing of reliance is required to void an insurance policy under the doctrine of uberrimae fidei. Abhe relied, not on an Eighth Circuit case in finding that reliance is an element of the defense of uberrimae fidei, but rather, the case of Puritan Ins. Co v. Eagle S.S. Co., 779 F.2d 866, 871 (2d Cir. 1985), which held that the principles of utmost good faith and full disclosure do not require voiding the policy unless the undisclosed or misrepresented facts were both material and were relied on by the insurer.
However logically speaking, to show materiality, the insurer must show that the fact would influence the underwriter in accepting the risk or setting the premium. See, e.g., Royal Ins. Co. v. Flemming, 1986 AMC 2077 (M.D. Fla. 1985). Surely, when proving the fact that the insurer would have not accepted the risk or would have set the premium had it known that the barge did not have watertight bulkheads and thus not seaworthy, the insurer would have submitted an affidavit or other testimony that it relied on the basic assumption that a vessel it was insuring would be seaworthy. Furthermore, there is an implied warranty of seaworthiness at the inception of the risk and if the barge was not seaworthy, it will void the policy. See, e.g., The Connecticut Indem. Co. v. Palivoda, 2005 AMC 2047 (M.D. Fla. 2005).
It is expected that St. Paul will ultimately be able to show reliance. However, this case is an example of how the insurer's proffer of the evidence should squarely address reliance to avoid the needless expense of what occurred to St. Paul in Abhe.
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