Carlos Morales-Vázquez (Morales) bought an insurance policy without revealing, among other things, a previous grounding. His insurer, QBE Seguros, when it found out the real facts was sued to confirm revocation due to concealment of material facts. In QBE Seguros v Carlos A. Morales-Vázquez, No. 19-1503, United States Court of Appeal for the First Circuit (January 19, 2021), the First Circuit was asked to resolve the application of the doctrine of uberrimae fidei – an enshrined principle in maritime law that imposes on the parties to marine insurance contracts a maximum fiduciary duty.
2011 Defendant-Complainant Carlos Morales-Vázquez (Morales) purchased insurance for his forty-foot Riviera Yacht (Riviera Policy) from Optima Insurance Company, a unit later acquired by another insurance company, plaintiff-appellant QBE Seguros (QBE). As part of his application for this insurance, Morales left blank spaces for answers to questions asking him to describe his previous boat history and any accidents related to any ship he had previously owned, inspected and / or operated.
In March 2014, Morales applied for separate insurance for his forty-eight-foot Cavileer boat (the Cavileer policy). Section seven of the application required Morales to disclose any accidents or losses in connection with vessels which he had owned, inspected and / or operated. This time, Morales indicated that he had been involved in an accident about eleven years earlier, declaring that the accident was a "propeller strike" and that "[p] rifles were replaced [and] axle and rudder corrected." But Morales did not see fit to mention that in January 2010 he had founded a forty-foot Riviera Offshore boat in Fajardo, Puerto Rico.
The omission of the previous grounding was not Morale's sole oversight. Section six of the Cavileer policy application required Morales to disclose his boat ownership and boat history. When Morales responded, he listed only two of the seven boats he had previously owned and / or operated (a forty-foot Riviera Offshore boat and a forty-foot Riviera Sport Fisherman). He omitted the remaining information required in section six even though the application form clearly stated that “[i] if incorrect answers are provided (either by mistake, omission or omission), I will violate this warranty and the policy, if will be invalid from the beginning.
In pricing the quote, the insurer relied, among other things, on the information in the applications for both the Riviera policy and the Cavileer policy, as well as Morales' more than 15 years of nautical "ownership experience." Eventually, within minutes of the request, Morales' Cavileer yacht was insured by QBE for the following year in the amount of $ 550,000.
On October 24, 2014, the Cavileer boat sustained significant damage from a fire. Morales reported the loss to QBE and QBE retained an independent adjuster to work with its own employees to resolve Morales' claims. Following a series of investigations, QBE made a settlement offer in December 2014: it offered to pay Morales $ 63,774.10 in favor of the loss. Morales declined the offer. Negotiations between the parties continued over the next few months and Morales rejected several other settlement offers from QBE. The settlement offers were withdrawn when QBE learned of the true history of Morales and his ships.
QBE sued in the federal district court invoking the court's admiralty jurisdiction where QBE requested an explanatory judgment annulling the policy because Morales had failed to honor his duty of good faith (known as " uberrimae fidei " in the law of the sea) to acquire the Cavileer policy and, in the finding, had violated the guarantee of truthfulness in the Cavileer policy.
Six-day bench trial followed. The court concluded that QBE was entitled to annul the policy for two independent sufficient reasons:
- Morales had not only violated the obligation of uberrimae fidei but also
- policy guarantee of truthfulness.
The Latin phrase " uberrimae fidei " is loosely translated as "ultimate good faith." As relevant here, the doctrine requires that parties to a marine insurance contract must disclose all known facts or circumstances that are material to an insurer's risk. According to the doctrine, an insurance company can annul a marine insurance policy if its insured does not disclose all circumstances that are known to the insured and unknown to the insurer that significantly affect the insurer's risk calculation.
The origins of the doctrine can be traced back to 18th century London, which was – and remains – a global insurance center. In its emerging form, the doctrine applied to a variety of insurance contracts across a wide range of industries. As early as 1766, Lord Mansfield recognized that insurance contracts face a higher obligation in good faith to prevent a party from omitting or concealing facts that would cause the other party "to a finding, from his ignorance." Carter v. Boehm (1766) 97 Eng. Rope. 1162, 1164 (K.B.). Such a requirement was rooted in practical wisdom and recognized that an insurance company often lacked the ability to verify the insured's representations before issuing an insurance policy. This practical wisdom is still true when applied to marine insurance – an industry where, for example, insurance may need to be issued in London, on a time-sensitive basis, for a ship that is halfway around the world.
For some time, US and English law on marine insurance continued to develop in parallel through a parade of legal decisions. Parliament recently adopted a number of insurance reforms. As relevant here, Parliament adopted the Insurance Act of 2015, which (among other things) effectively amended the MIA of 1906 to prevent an insurance company from canceling a marine insurance policy by using the doctrine of uberrimae fidei. Congress did not follow the leadership of Parliament.
Morales does not deny that uberrimae fidei is firmly rooted in the jurisprudence of the district. Nevertheless, Morales urged the court to disregard its own precedent. In any case, abandoning the doctrine of uberrimae fidei in marine insurance cases would have "rebarbative consequences" [causing annoyance, irritation, or aversion] both upward law and disrupt an industry that has long been based on insureds telling the whole truth to insurers. In view of this gloomy outlook, the court rejected Morale's call to remove the doctrine of American case law.
Although the availability of information has improved dramatically in recent times, a marine insurance company and its insured do not have equal access to the information needed to make a guarantee. decisions and to set premiums. Long ago, Lord Mansfield famously wrote that "[i] insurance is a contract after speculation. The special facts on which the conditional chance is to be calculated are usually only in the insured's knowledge. ” Carter 97 Eng. Rope. At 1164. This is still true in marine insurance.
Marine insurance is often required at a moment's notice, and insurers are often far from the ship they are asked to insure. Requiring an insurance company to determine whether it is difficult to find information about a risk will entail significant costs for the industry – costs that are likely to be passed on to policyholders in the form of higher premiums. If the insured (the one who knows or can most easily get the necessary information) is added to the information burden, handling costs are reduced and help keep premiums low.
First Circuit concluded that “
In addition, the policy represented that: "If the said insured has previously or after a loss made a false statement or statement with respect to this insurance or has concealed or misrepresented any material fact or circumstance relating to this insurance, this insurance shall The false claim or representation or concealment need not be related to the damages or losses claimed to invalidate the entire policy. ”
This language embodies the essence of the uberrimae fidei doctrine: the The omission or misrepresentation of a material fact is a sufficient basis, in itself, to allow an insurance company to invalidate an insurance policy.
The district court found that the incomplete accident history (especially the previous grounding) crossed the threshold for materiality. correctly and its judgment was upheld , the policy is invalid from the start.
Since at least 1766, insurance, and in particular marine insurance, has been a company of utmost good faith where neither party will do anything to deprive the other of the benefits of the contract. When Morales failed to inform QBE of his loss history – a fact apparently essential because the application at least asked the question he failed to answer, and as a result, QBE properly repealed the policy after learning the truth. It is clear that Mr Morales is kicking himself for not accepting the conciliation offers made before his refusal and QBE's investigation led to an investigation under oath and QBE became aware of the reasons that led to the policy being repealed and a total loss.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims handling, cheating and insurance fraud almost equally for insurers and policyholders. He also acts as an arbitrator or mediator for insurance-related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims lawyer and more than 52 years in the insurance industry. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine / ACE Legend Award.
For the past 53 years, Barry Zalma has devoted his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to enable insurers and their claims staff to become professional in insurance claims. Follow Zalma on Twitter at https://twitter.com/bzalma ; Go to Barry Zalma videos on Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the library for insurance claims – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma on https://parler.com/profile/Zalma/ posts ; Go to the insurance claims library – https://zalma.com/blog/insurance-claims-library/