Tuesday, February 12, 2008

Certain Underwriters at Lloyds London v. Inlet Fisheries Inc.

Feb 11: In the U.S. Court of appeals, Ninth Circuit, Case No. 06-35383. According to the Ninth Circuit, the case involves the interplay between an ancient legal doctrine and contemporary vessel pollution insurance. Historically, all insurance policies were contracts uberrimae fidei, meaning that both parties were held to the highest standard of good faith in the transaction. The doctrine of uberrimae fidei was grounded both in morality and efficiency; insureds were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder, but such a principle was also an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, email, digital photography, and air travel.

The reasons which brought into being the strict marine insurance law doctrine as to disclosures, go far back into the early days of marine insurance, when sailing ships in faraway seas were insured in London by underwriters who could get no information except from the shipowners. Today, uberrimae fidei has been displaced in most insurance contexts. Nevertheless, the Appeals Court says, the doctrine enjoys continuing vitality in the world of marine insurance.

With the advent of significant environmental legislation in the 1970s, coupled with a number of high profile disasters involving oil tankers, liability of shipowners for environmental damages was expanded, culminating, at the federal level, with the Oil Pollution Act of 1990 (the OPA). The OPA increased substantially both the regulation and pollution liabilities of entities engaged in the transportation and production of oil within the United States. Pollution insurance, which traditionally had been part of P&I coverage, has emerged as a separate coverage in the United States. This stand-alone pollution coverage is often referred to as "vessel pollution insurance," and Lloyd’s of London is currently the second-largest provider of such policies.

The Appeals Court said, "The question we consider is whether the doctrine of uberrimae fidei applies to vessel pollution insurance policies covering statutory environmental liabilities. We answer that query in the affirmative, and affirm the district court’s grant of summary judgment in favor of the Lloyds’ underwriters."

The case arose when Water Quality Insurance Syndicate (WQIS), Inlet’s then-provider of stand-alone vessel pollution insurance, sent notice that it was cancelling Inlet’s (an Alaska-based fish buying and processing businesses) policy. The stated and most immediate reasons for the cancellation were Inlet’s failures to conduct a survey of its vessels as requested by WQIS and to pay its premiums. After receiving WQIS’s notice of cancellation, but before its effective date, Inlet, through its broker, sought vessel pollution insurance from Lloyds for several ships. The information Inlet provided on its application forms the basis of the current dispute.

Lloyds conditioned its renewal on Inlet providing accurate information on a newly requested application. In addition, Lloyds immediately commenced an investigation into Inlet’s history and the condition of its vessels. Finally, once Lloyds obtained sufficiently sound information, despite considerable stonewalling by Inlet, it filed this suit. The district court granted Lloyds’ motion, and ruled that uberrimae fidei applied and that Lloyds was entitled to void the policy. The Ninth Circuit agreed.

Access the complete opinion (
click here).