What Is the Insured’s Duty under a Marine Insurance Policy? It Depends …
The law governing marine insurance in the United States has long been a source of considerable confusion. And if there was once a clear set of principles applicable in such cases, the Supreme Court long ago muddied the waters with their infamous ruling in Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955). That case, involving a fire on a houseboat on an inland man-made lake on the Texas-Oklahoma border, established the “litmus test” for when maritime law should govern and when the courts should instead look to state law in interpreting marine insurance contracts.
Faced with the question whether an insured’s policy should be voided for breach of policy warranties when the insured has made misrepresentations in the application that bear no relationship to the actual risk or claimed loss, the Supreme Court in Wilburn Boat concluded that “[w]hatever the origin of the ‘literal performance’ rule may be, we think it plain that it has not been judicially established as part of the body of federal admiralty law in this country.” Because there was no “established federal admiralty rule” governing such warranties, the Court ruled that it should instead look to state law which, as it happens, contained a provision that protected the insured from such “immaterial” breaches of warranty.
The problem with Wilburn Boat
It has oft been said that Wilburn Boat is the poster child for the adage that hard facts make bad law, and many have wondered why the Supreme Court used a case involving a houseboat on an inland lake to set a broad rule applicable to all policies of marine insurance. Certainly, the rule outlined by the Court is much easier to state than it is to apply: “(1) Is there a judicially established federal admiralty rule governing these warranties? (2) If not, should we fashion one?” Since Wilburn Boat, the lower courts have wrestled over the past 65 years to try to develop a consistent interpretation of what “rules” are entrenched in the federal admiralty law, and which are not.
At the heart of much of this wrangling seems to be the same concern that troubled the Supreme Court in Wilburn Boat: is it really fair to allow an insurer to evade its obligations under an insurance policy where the insured has paid his premiums and suffers an otherwise covered loss but has made misstatements to the insurer that do not actually bear on the risk? (This dilemma does not exist in cases where the misrepresentation is material – here, maritime law and state law would generally agree that the insured should not be entitled to recover).
Certainly, historically, there were good reasons for such a rule: the insurer was being asked to assume a risk in insuring a vessel that could be halfway around the world, with no practical means of inspecting or surveying the vessel before agreeing to assume the risk. Strict enforcement of warranties, coupled with the overriding principle of uberrimae fidei (utmost good faith), which holds that a policy may be voided where the insured has failed to disclose all facts that may be relevant to the insured risk, were the means of inducing the insurer to act quickly in issuing the policy while ensuring that it was taking only the risk it intended to take, and nothing more.
But most states have eschewed these strict rules and have enacted various “anti-technicality” provisions designed to protect “innocent” insureds from the jarring surprise of having an insurer deny coverage for breaches of the policy that seem immaterial to the risk or the loss. And so the courts, when faced with the question whether maritime law’s strict warranty rules should override these state law protections, are often conflicted, with the result that many such cases wind up with contorted or seemingly inconsistent rulings.
This problem is well illustrated in the Eleventh Circuit’s recent ruling in Travelers Property Casualty Company v. Ocean Reef Charters, LLC., 996 F.3d 1161 (11th Cir. 2021). There, the insured, who owned a 92-foot yacht, warranted in the policy that he would employ a professional captain and one crew. A hurricane struck at a time when the yacht was unmanned, and the yacht sank at the dock during the storm after being holed by an exposed dock piling. The insurer sued for declaratory judgment that it was not liable under the policy because the insured had breached the captain and crew warranties. The district court found that there was an established maritime law strictly enforcing such warranties and granted judgment in favor of the insured.
The Eleventh Circuit reversed. In its ruling, the court observed:
One problem with Wilburn Boat, as commentators have pointed out, is that it rests on a flawed premise. At the time the case was decided, all the major admiralty appellate courts in the United States had long accepted the literal performance rule. This rule derived from English common law and applied to all express warranties in marine contracts. [Internal quotation marks and citations omitted.]
The court further noted another problem with Wilburn Boat: it “undermines uniformity in admiralty law.”
The Eleventh Circuit, in attempting to craft a solution to this problem, made clear what they would do if they could: “If we were writing on a blank slate, we would consider holding that there should be a uniform maritime rule regarding the effect of a breach of an express warranty in a marine insurance policy—and from there determine what that uniform rule should be.” But of course, there is not a blank slate, and so ultimately the Eleventh Circuit resolved the “dilemma” by identifying only narrow categories of warranties, pertaining to trading limits and seaworthiness of the vessel, which have been explicitly recognized as part of the entrenched federal maritime law. With respect to the captain and crew warranties at issue, on the other hand, the court found that no such entrenched maritime rule existed; consequently, state law, with its anti-technicality provision, should govern. It seems inescapable that this ruling, much like Wilburn Boat, was written more to accomplish a particular outcome than to enunciate any kind of clear guidance for future courts.
Issues of uniformity
The maritime law rule of strict construction is originally derived from English law, which historically required literal performance of maritime warranties. Uniformity with English law, where possible, has always been an aim of the American courts in maritime cases. This is why it is particularly notable that England enacted the United Kingdom Insurance Act of 2015, which abandons recission as the automatic remedy for breach of warranty. Instead, an insured who breaches a warranty and fails to cure can still recover if it “shows that the noncompliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.” Id. at § 11(3). As the Eleventh Circuit observed:
If there are still “special reasons for keeping in harmony with the marine insurance laws of England, the great field of this business,” Queen Ins. Co. of America v. Globe & Rutgers Fire Ins. Co., 263 U.S. 487, 493, 44 S.Ct. 175, 68 L.Ed. 402 (1924), it will be interesting to see what effect the Act has on American maritime law (and on how Wilburn Boat is viewed).
One way this problem could be solved once and for all would be by federal statute; Congress clearly could enact some form of federal marine insurance law to codify the manner in which marine insurance contracts should be interpreted. No one should hold their breath waiting for this to happen, however; the chances of Congress addressing this issue in legislation anytime in the foreseeable future are virtually nil.
Another way would be for the Supreme Court to revisit Wilburn Boat. The Eleventh Circuit in Travelers practically begged the Supreme Court to take up their case: “Maybe, just maybe, this case will prove tempting enough for the Supreme Court to wade in and let us know what it thinks of Wilburn Boat today. As they say, ‘hope springs eternal ....’” This outcome is perhaps somewhat more likely, if not in Travelers then in some other case down the road. But what would we want the Supreme Court to actually do?
One possible option would be for the Court to definitively hold that the strict enforcement of maritime warranties is, after all, an entrenched federal maritime rule such that federal maritime law should always preempt state law on this issue. While that would have the laudable effect of returning uniformity and clarity to the federal maritime law, however, it would also constitute a complete reversal of Wilburn Boat. It would also put the U.S. maritime law even further out of step with both state law and, now, English law.
Alternatively, the Court could find that, after all, the broad rule of “strict enforcement” of warranties has never been an entrenched federal maritime rule, such that state law should always control on this issue. But the Court would have to engage in some pretty fancy revisionism to plausibly reach this conclusion.
A third possible option might be for the Court to find that the federal maritime law has evolved and that, while strict enforcement of warranties was once an entrenched federal maritime rule, both the courts and legislators – in the U.S. and in England – have come to recognize the weaknesses of this strict rule, such that it should no longer be treated as an established maritime rule. This might be a plausible “out” for the Court and, in some respects, may be the most accurate explanation for the recurring reluctance of the courts (including the Supreme Court itself) to strictly apply maritime warranties in some cases. Still, it leaves the problem that insurance law varies from state to state, such that uniformity would remain elusive.
Whatever the solution may be, the Supreme Court first must decide to take a case – which might yet take a while. In the meantime, insurers and insureds are left to guess what rules of construction will apply to their policies, which is never a good thing for maritime commerce.
“What Is the Insured’s Duty under a Marine Insurance Policy? It Depends …” by Thomas H. Belknap, Jr. was published in Marine Link on March 11, 2022.