Violation of Uberrimae Fidei: Void Ab Initio or Voidable? That is the question By: Alberto J. Castañer, Esq. © Castañer Law Offices P.S.C. Tel

Federally Entrenched Principle State insurance law generally should not govern marine insurance disputes if an existing federal maritime rule constitutes “entrenched federal precedent.” Is the Uberrimae Fidei doctrine “federally entrenched”? 10/15/14© Castañer Law Offices PSC. All rights reserved. 2

Uberrimae Fidei: Entrenched v. Not Entrenched Entrenched –1 st, 2 nd, 3 rd, 8 th, 9 th, 11 th Not Entrenched –5 th 10/15/14© Castañer Law Offices PSC. All rights reserved. 3

Void Ab Initio v. Voidable Voidable –1 st and 8 th –G. Gilmore & C. Black, The Law of Admiralty § 2- 6, at 62 (2d ed. 1975) Void Ab Initio –2 nd, 3 rd, 9 th, 11 th –2 Schoenbaum, Admiralty and Maritime Law (4 th Ed., 2004) 410/15/14© Castañer Law Offices PSC. All rights reserved.

Lloyd’s v. San Juan Towing 2015 AMC 694 First Circuit formerly adopts uberrimae fidei as an entrenched GML doctrine. Misrepresentation regarding true value and loss history. District court applied doctrine and held that policy was void ab initio 510/15/14© Castañer Law Offices PSC. All rights reserved.

Lloyd’s v. San Juan Towing 1 st Cir affirms in part and reverses in part First Circuit affirms that the doctrine of uberrimae fidei is entrenched in federal maritime law. However, it reverses the District Court decision regarding the effect of the violation of uberrimae fidei. The policy is voidable, not void ab initio. 10/15/14© Castañer Law Offices PSC. All rights reserved. 6

Lloyd’s v. San Juan Towing “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.” quoting Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50, 55 (1 st Cirt 1995) * based on Stipcich 710/15/14© Castañer Law Offices PSC. All rights reserved.

AIG Centennial Ins. Co. v. O’neill, 2015 AMC 1217 Misrepresentations regarding yacht’s value, owner, and loss history. Eleventh Circuit affirmed District Court declaratory judgment finding a violation of uberrimae fidei and declaring the policy void ab initio. Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689 (11 th Cir. 1984). 10/15/14© Castañer Law Offices PSC. All rights reserved. 8

AIG Centennial Ins. Co. v. O’neill, 2015 AMC 1217 Steelment relied on the Fifth Circuits decision in Gulfstream Cargo v. Reliance Ins., 409 F.2d 974, 980 (5 th Cir. 1969): “It has been said that the insured is bound to communicate every material fact within his knowledge …and that a failure in either particular, … is attended with the rigorous consequences that the policy never attaches and is void, for the reason that the risk assumed is not the one intended to be assumed by the parties." 10/15/14© Castañer Law Offices PSC. All rights reserved. 9

St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, (8 th Cir. August 20, 2015) Before a party can rescind a contract due to the other party's non-disclosure or misrepresentation, he must show that the misrepresentation induced him to enter the contract. In other words, a party is required to show a causal connection between the other party's omission and the issuing of the contract. There is no reason why the requirement of causation should be removed in the context of marine insurance contracts. 10/15/14© Castañer Law Offices PSC. All rights reserved. 10

St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, (8 th Cir. August 20, 2015) In the context of uberrimae fidei, while materiality examines whether a fact would have influenced the judgment of a reasonable and prudent underwriter, reliance examines whether there was a causal connection between the misrepresentation or concealment of that material fact and the actual underwriter's decision to issue the policy. 10/15/14© Castañer Law Offices PSC. All rights reserved. 11

Early US Supreme Court Cases M'Lanahan v. Universal Insurance Co., 26 U.S. 170 (1828). “The contract of insurance has been said to be a contract uberrimae fidei…” “[E]ven if there be no intentional fraud, still the underwriter has a right to a disclosure of all material facts, which it was in the power of the party to communicate by ordinary means; and the omission is fatal to the insurance. The true principle deducible from the authorities on this subject is, that where a party orders insurance, and afterwards receives intelligence material to the risk, or has knowledge of a loss; he ought to communicate it to the agent, as soon as, with due and reasonable diligence, it can be communicated, for the purpose of counter-manding the order, or laying the circumstances before the underwriter. If he omits so to do, and by due and reasonable diligence the information might have been communicated, so as to have countermanded the insurance, the policy is void.” 10/15/14© Castañer Law Offices PSC. All rights reserved. 12

Early US Supreme Court Cases Hazard’s Adm’r v. New England Marine Ins., 33 U.S. 557 (1834). “if any fact material to the risk be misrepresented, either through fraud, mistake or negligence, the policy is avoided..” Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485 (1882). “The concealment, whether intentional or inadvertent, we have no hesitation in saying, avoids the policy, if actually intended to cover the risk for which the claim is made.” © Castañer Law Offices PSC. All rights reserved. 13

Early Non Maritime US Supreme Court Cases Phoenix Life Ins. V. Raddin, 120 U.S. 183 (1887). “Where an answer of the applicant to a direct question of the insurers purports to be a complete answer to the question, any substantial misstatement or omission in the answer avoids a policy issued on the faith of the application.” Stipcich v. Metropolitan Life Ins, 277 U.S. 311 (1928). “Insurance policies are traditionally contracts of uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.” 10/15/14© Castañer Law Offices PSC. All rights reserved. 14

U.S. and English Maritime Law The Supreme Court has stated that efforts should be made in the area of marine insurance to preserve the uniformity between English and American law. Standard Oil Company of New Jersey v. United States, 340 U.S. 54, 59, 1951 AMC 1, 5 (1950); Queen Insurance Company of America v. Globe & Rutgers Fire Insurance Company, 263 U.S. 487, 493, 1924 AMC 107, (1924). 1510/15/14© Castañer Law Offices PSC. All rights reserved.

The Marine Insurance Act Under the Marine Insurance Act 1906, an insured applying for insurance has been under theduty of utmost good faith to fully disclose and accurately represent all facts material to the risk. In what amounts to a momentous change in the law, the duty of utmost good faith is replaced in the 2015 Act by the requirement in Clause 3 that an insured must make a “fair presentation of the risk.” 10/15/14© Castañer Law Offices PSC. All rights reserved. 16

The Marine Insurance Act An insurer no longer has an absolute right to avoid an insurance policy on the basis of an insured’s breach of the duty of uberrimae fidei. Clause 8 of the 2015 Act provides a range of remedies intended to be proportionate to the particular circumstances of the insured’s failure to fairly present the risk at the time coverage is requested. Schedule 1 to the Act specifies that the insurer will only have the right to avoid the policy if the insured’s breach was deliberate or reckless. In all other circumstances, the burden shifts to the insurer to demonstrate what it would have done had it received a fair presentation. 10/15/14© Castañer Law Offices PSC. All rights reserved. 17