“Uberrimae fidei” is not a legal term commonly used in insurance coverage litigation these days. However, any agent or insured dealing with a policy that may qualify as a maritime policy might wish to know what it means. Karl Anderson, the owner of Karl’s Boat Shop, Inc. in South Dennis, learned this term’s meaning the hard way recently in Boston’s Federal Court. (Mr. Anderson, Karl’s Boat Shop, and KBS Realty are collectively referred to as “Karl’s”).
Karl’s owned and operated a full-service boatyard engaged in storing, repairing, and providing maintenance to pleasure boats. It provided its boat storage at a sizeable three-story barn about two miles from the ocean. Mr. Anderson owned the barn that Karl’s used for storing its customers’ boats under the KBS Realty Trust.
Atlantic Specialty issued to Karl’s beginning in 2015 a marina package policy (Policy) for Karl’s operations and property. After issuing the first Policy, Atlantic Specialty requested and received assurances that Karl’s would have its boat storage customers sign waivers and storage contracts.
In 2018, a fire caused extensive damage to the storage barn and destroyed six boats Karl’s stored there for customers.
Karl’s insurer, Atlantic Specialty, paid for the property loss to the storage barn. However, when the third parties whose boats and gear were lost began making claims against Karl’s, Atlantic Specialty found out that Karl’s could not produce any customer waivers or storage contracts. In response, Atlantic Specialty filed a coverage action against Karl’s.
The coverage action alleged that Karl’s liability coverage was void because of the failure of Karl’s to disclose the fact it did not obtain waivers and storage contracts from its storage customers. This failure, Atlantic Specialty claimed, amounted to (1) a violation of the maritime doctrine of a warranty of truthfulness as to material facts, and (2) a violation of the maritime law doctrine of uberrimae fidei.
On summary judgment, a Federal district court judge found that the failure of Karl’s to obtain the waivers that Atlantic Specialty claimed were conditions precedent to it having issued the Policy amounted to a material misrepresentation. Also, the judge found that Karl’s failure to disclose that it was in material breach of Atlantic Specialty’s Maritime Policy by an ongoing failure to execute storage agreements and waivers with its customers voided the Policy’s liability coverage under the doctrine of uberrimae fidei, “utmost good faith,” applicable to maritime insurance contracts.
The Atlantic Specialty insurance policy
Between January 16, 2018, to January 16, 2019, Karl’s had in force with Atlantic Specialty, a Marina Package Policy. The premium of $16,480 provided coverage for:
- Marina Operators Legal Liability
- Protection & Indemnity
- Commercial General Liability
- Property
- Equipment/Tools, and
- Owned Watercraft Covered
The Marina Operator Legal Liability coverage in the 2018-2019 policy had a $2 million single limit. The insuring agreement provided that Atlantic Specialty covered:
[T]he legal liability of [Karl’s] as a marina operator for loss or damage to boats, engines, trailers, and outboard motors, the property of others, which are in its care, custody or control for purposes of repair, service, maintenance, consignment, storage, mooring, launching, hauling, fueling, docking, or other similar marina operations.”
After issuing its first marina package policy to Karl’s in 2015, Atlantic Specialty renewed the Policy in 2016, 2017, and 2018 for additional one-year terms. After the initial Policy that Atlantic Specialty issued in 2015, Atlantic Specialty did not require Karl’s to complete renewal applications for subsequent policy periods, including the renewal for the Policy in force from January 16, 2018, to January 16, 2019.
However, when Atlantic Specialty issued its first package policy to Karl’s in February 2015, it did so based on a written application, which stated that: “If you [Karl’s] provide any storage, a copy of the storage agreement is required for coverage to apply.”
The Policy’s inspection and survey condition
All the Atlantic Specialty policies issued to Karl’s had in their “General Conditions of Coverage Applicable to All Coverage Sections,” a provision entitled “Inspections and Surveys.” This provision stated:
“This Company has the right but is not obligated to:
6.1 Make inspections and surveys at any time.
6.2 Give you reports on the conditions found; and
6.3 Recommend changes.
Any inspections, surveys, reports, or recommendations relate only to insurability and the premiums to be charged…”
The February 2016 survey of Karl’s operation by Atlantic Specialty
In February 2016, as Karl’s was renewing its Policy with Atlantic Specialty, Atlantic Specialty engaged a loss control consultant to perform a survey of Karl’s operations (“loss control survey”).
After receiving the loss control survey from the consultant, Atlantic Specialty sent its loss control recommendations to Karl’s by a letter, dated February 11, 2016.
Based on the loss control survey’s recommendations, Atlantic Specialty designated six operational changes as “Recommendation Grade: Necessary.” The compliance with these ‘Necessary’ recommendations, Atlantic Specialty considered a condition precedent for continuing Karl’s insurance program on a going-forward basis.
One of the necessary recommendations was for Karl’s to use a boat storage agreement that had hold harmless, indemnity, and insurance provisions protecting Karl’s from liability as a bailee of the boats it stored. The recommendation stated:
A boat storage agreement should be instituted. The agreement should require that boat owners provide proof of insurance and the agreement should have hold harmless and indemnification language. Legal counsel should be consulted for proper wording to ensure that it complies with state and local statutes.”
On June 13, 2016, Karl’s responded to this recommendation by fax, forwarding a waiver and short-term storage contract that Karl’s purported to have boat storage customers sign. The waiver stated in pertinent part:
In contracting with Karl’s Boat Shop, Inc., I recognize and accept that there are certain elements of risk that exist…I will in no way hold Karl’s Boat Shop, Inc. responsible for any such damage that may occur during the handling of my boat.”
The storage contract Karl’s faxed to Atlantic Specialty similarly stated:
Karl’s Boat Shop, Inc. assumes no responsibility for loss or damage to vessels, engines, or articles left onboard in case of fire, theft, rodents, damage, exposure to the elements, acts of God, or any other cause however arising.”
Based on Karl’s response and other communications with Karl’s owner Atlantic Specialty understood that:
- “Karl’s would require its customers to execute the Karl’s Boat Shop, Inc.’s Short Term Storage Contract contained in the Fax; and,
- Karl’s would require its customers to execute the Karl’s Boat Shop, Inc. Waiver document contained in the Fax.”
Karl’s delegation of the responsibility for obtaining and maintaining the storage contracts
Karl’s delegated to its employee the responsibility for obtaining the boat storage customers’ signatures on the short-term storage contracts and the waiver documents during 2016 and 2017. Karl’s did not verify this employee’s compliance with its instruction to obtain and maintain these agreements as part of the company’s business records.
Karl’s fired the employee charged with overseeing the execution of the storage paperwork with customers in 2017, “based in part on ‘fishy’ accounting irregularities and inconsistencies in payroll.”
After the termination of this employee in 2017, no one at Karl’s assumed the responsibility to ensure the consistent execution of the short-term storage contracts and the waiver agreements by all of Karl’s boat storage customers.
The fire at Karl’s barn and the stored boat losses
On June 2, 2018, a two-alarm fire occurred at Karl’s boat storage barn. Atlantic Specialty eventually paid Karl’s $221,347 for the barn’s fire damage.
Besides the extensive damage to the barn, however, six boats, sails, and masts stored for third parties were damaged or destroyed in the fire. Several customers advised Karl’s that they intended to file damage claims against Karl’s as the bailee of their lost boats. After paying a claim to a storage customer of Karl’s, one insurance company filed a subrogation suit against Karl’s to recover the $153,195.61 it had paid.
Atlantic Specialty’s request for the storage contracts and waivers
Upon receipt of the subrogation suit papers, Karl’s requested that Atlantic Specialty provide it with a defense for the subrogation suit and the other potential third-party claims under its liability coverage.
As part of its investigation of the loss, Atlantic Specialty requested copies of the waivers and storage contracts signed by the customers claiming damage to their boats or marine gear. However, Karl’s could not produce records indicating the parties who brought third-party claims for fire damage to their boats or gear had executed the waiver document or the short-term storage agreements.
When Karl’s could not produce any originals or copies, Atlantic Specialty advised Karl’s that it would defend the subrogation suit under a reservation of rights. However, Atlantic Specialty also advised Karl’s that it intended to bring a declaratory judgment action to determine whether Karl’s lack of the required waivers and short-term rental agreements voided Karl’s insurance coverage.
Atlantic Specialty files declaratory judgment under Federal admiralty law
On May 31, 2019, Atlantic Specialty filed its declaratory judgment against Karl’s in the United States District Court in Boston, seeking to void Karl’s insurance policy. In its complaint, Atlantic Specialty asserted that its suit involved claims subject to the admiralty jurisdiction of the Federal Court.
Admiralty law includes special rules concerning marine commerce, salvage, maritime pollution, sailors’ rights, and the transportation on navigable waters of passengers and goods. However, admiralty law also covers land-based commercial activities maritime in character, such as marine insurance policies.
Atlantic Specialty claimed that since Karl’s Policy involved marine insurance, two rules of admiralty law allowed Atlantic Specialty to void Karl’s Policy. The first was the warranty of truthfulness, and the second was the doctrine of uberrimae fidei.
Each of these doctrines, if applicable to Karl’s Policy as marine insurance, gave Atlantic Specialty legal rights that imposed strict disclosure duties on Karl’s concerning the information in Karl’s possession that affected the risk undertaken by Atlantic Specialty.
Judge rules Federal maritime law applicable to Atlantic Specialty’s Marina Package Policy
After discovery by productions of documents, interrogatories, and depositions ended, both Atlantic Specialty and Karl’s cross-moved for summary judgment.
Karl’s argued that its Policy did not come under Federal maritime law and its strict rules.
Notwithstanding the Policy’s designation as a “Marina Package Policy,” Karl’s position was that the substance of the Policy was the insurance on the barn property and the storage of boats, not the operation of a marina. There was no dispute that the barn and Karl’s storage functions were two miles away from any navigable water.
The judge, however, broke down the premiums and the coverages. Most of the premium paid purchased the “Marina Operators Legal Liability” coverage. This coverage also extended to “property away from your premises in you or your employees’ custody for covered marina operations . . .” The Policy also covered pollution caused by vessels and equipment, a tell-tale marker to Federal courts of marine insurance.
Based on these terms in the Policy, along with other similar terms, the judge ruled that “Each component of the Legal Liability coverage, as applied to [Karl’s], is marine in nature because it insures against maritime peril.”
Based on this analysis, the judge ruled that “Because the object of the contract was maritime, as were the risks insured against, the contract falls under maritime jurisdiction.”
The judge rules Karl’s breached the warranty of truthfulness applicable to maritime insurance policies
Atlantic Specialty argued in its summary judgment motion that it could void Karl’s insurance policy because Karl’s had breached the maritime law’s “warranty of truthfulness.” Federal maritime law, the judge noted, states, “a breach of a promissory warranty in a maritime insurance contract excuses the insurer from coverage.”
The applicable warranty that Atlantic Specialty claimed to apply appeared in the final section of the Policy: “General Conditions of Coverage Applicable to all Coverage Sections.” In that section entitled “Concealment, Misrepresentation or Fraud,” the Policy stated:
This insurance Program shall be void as to all interests insured if, whether before or after a loss, any insured hereunder has concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interests of the insured therein, or in the case of any fraud or false swearing by any insured hereunder relating thereto. (“Concealment, Misrepresentation or Fraud clause”).
The alleged misrepresentation that breached the warranty of truthfulness, Atlantic Specialty claimed, was Karl’s statement that it would require its boat storage customers to execute the waiver and short term storage agreement Karl’s had provided to Atlantic Specialty.
Atlantic Specialty also argued that the Policy was voidable under Massachusetts law, without resort to Federal maritime law, because Karl’s violated a “condition precedent” contained in the Concealment, Misrepresentation or Fraud clause.
Atlantic Specialty argued the language “shall be void” in the Concealment, Misrepresentation or Fraud clause was the legal equivalent of a specific statement identifying a “condition precedent.”
The judge agreed with Atlantic Specialty’s argument holding that “the ‘natural meaning’ of the phrase ‘shall be void’ in the [Concealment, Misrepresentation or Fraud clause] is to make insurance coverage contingent on truthfulness, and this clause is, therefore, a condition precedent.”
Therefore, the judge found that “In other words, the equivalent of the maritime warranty of truthfulness is embedded in the contract and enforceable under Massachusetts law.”
The judge rules a breach of the warranty of truthfulness does not require any intent to deceive
Atlantic Specialty characterized Karl’s documentation, and statements to Atlantic Specialty in 2016, that it would require its storage customers to execute the waiver and short term storage agreement, and its failure follow through on having customers sign them, a ‘misrepresentation’ in violation of the warranty of truthfulness contained in the Policy’s Concealment, Misrepresentation or Fraud clause.
Karl’s argued that the meaning of “misrepresentation” used in the Policy required intent, as in an intentional misstatement or lie.
However, the judge ruled that the term “misrepresentation” did not involve intent as a necessary element. The judge, quoting prior legal precedent, found that “under both maritime and Massachusetts law, misrepresentation can be due to “fraud, negligence, accident, or mistake’.”
Instead, under Massachusetts law, which the judge said was consistent with Federal maritime law, Atlantic Specialty had the burden of showing a lack of substantial compliance by Karl’s with its material promises.
As to substantial compliance, the judge found that Karl’s failure to comply might not have risen to the level of intentional neglect. However, Karl’s inability to produce its required business records of the signed waivers and short term storage contracts meant that there was no evidence it substantially complied with its promises. Accordingly, the judge ruled that Karl’s had committed a “misrepresentation” in violation of the Policy’s Concealment, Misrepresentation, or Fraud clause.
On the issue of whether Karl’s misrepresentation was material, Karl’s argued that Atlantic Specialty had not shown that it had relied on the waivers and storage agreements in issuing the Policy.
Atlantic Specialty, continuing its argument that Karl’s compliance with having its storage customers sign the waivers and short term storage agreement was a condition precedent to the policy issuing, submitted an underwriter’s affidavit that it would not have issued Karl’s Policy had it known Karl’s did not intend to comply.
Likewise, the Policies that Atlantic Specialty issued all indicated it had the right to conduct inspections, give reports, and make recommendations. Under the Policy, the inspections “relate[d] only to insurability and premiums to be charged.” Finally, the application Karl’s submitted in 2015 includes language stating: “If you provide any storage, a copy of the storage agreement is required for coverage to apply.”
The judge focused on the facts that:
- The inspection provision of the Policy put Karl’s on notice that any forthcoming inspections could affect its insurability and premiums.
- Storage agreements were an area of particular interest based on Karl’s 2015 application’s statement concerning storage and the requirement of storage agreements.
- Atlantic Specialty’s 2016 post-survey recommendations identified the storage agreements as “Necessary;” and
- The cover document included a statement about the recommendations that: “Failure to respond may jeopardize your insurance coverage.”
To the judge, these statements evidenced the materiality of the storage agreements.
In conclusion, the judge ruled that “Atlantic Specialty has met its burden to show that Karl’s breached a condition precedent to the contract by committing material misrepresentations and concealments, which means the contract is voidable.”
Uberrimae Fidei doctrine required Karl’s to disclose storage contract issues to Atlantic Specialty
The judge’s ruling on the first count of Atlantic Specialty’s complaint found Karl’s failure to have its customers sign waivers or short term storage agreements constituted a misrepresentation. That misrepresentation violated the warranty of truthfulness and allowed Atlantic Specialty to void coverage. However, Atlantic Specialty’s complaint had a second count that alleged a different violation of a doctrine of maritime insurance that could allow Atlantic Specialty to void Karl’s coverage even if the first ground did not stand up on appeal: The doctrine of uberrimae fidei.
Under maritime law, “uberrimae fidei’ is the doctrine of utmost good faith. “Under this doctrine, the insured is required ‘to disclose to the insurer all known circumstances that materially affect the insurer’s risk, the default of which . . . renders the insurance contract voidable by the insurer.’” To show a breach of the duty of utmost good faith, the insurer must show that the insured misrepresented or concealed a material fact.
Karl’s repeats its arguments about intent and materiality without any better result
In its opposition to Atlantic Specialty’s summary judgment arguments for Karl’s losing coverage under the uberrimae fidei doctrine, Karl’s presented two main arguments.
Karl’s claimed, that even accepting that Federal maritime law applied to the Policy, (1) Karl’s and Atlantic Specialty had made an insurance contract to which the doctrine of uberrimae fidei did not apply, and (2) even if the doctrine did apply, the omitted facts about the failure to maintain storage and indemnity agreement with its boat storage customers were not material facts that the insurer relied upon in issuing its policy renewals.
On its first argument about the uberrimae fidei doctrine not applying because of the Policy’s terms. Karl’s pointed to the Policy’s Concealment, Misrepresentation or Fraud clause’s terms as only applying where Karl’s “has concealed or misrepresented any material fact or circumstance concerning this insurance or the subject matter thereof.”
To Karl’s, the use of the terms “concealment” or “misrepresentation” required a knowing violation where “concealment” required evidence of Karl’s hiding a fact from the insurance company and “misrepresentation” as Karl’s stating as true a fact it knew was false. Thus, since there was no evidence of any intentional concealment or misrepresentation by Karl’s of its failure to have the waivers and boat storage contracts signed by its customers, the Policy’s Concealment, Misrepresentation or Fraud clause did not apply.
The judge found the language contained in the “Concealment, Misrepresentation or Fraud clause “essentially reflects the doctrine of uberrimae fidei.” As such, the Court found that the “intent” requirement that Karl’s read into the words “conceal” and “misrepresent” had no basis in the law.
Instead, the judge cited an admiralty law decision applicable to insurance policies holding that the uberrimae fidei doctrine placed a ‘high burden’ on insureds because, under that doctrine, it does not matter “whether the insured’s misrepresentation or nondisclosure occurred due to fraud, negligence, accident, or mistake.”
Also, the Court ruled that the uberrimae fidei doctrine barred coverage whether the negligent, accidental, or mistaken misrepresentations were made in a request for renewal, or if the nondisclosures occurred after the insurance policy went into effect. Under this “strict maritime rule [uberrimae fidei],” the “insured must make full disclosure of all material facts of which the insured has, or ought to have knowledge . . . even though no inquiry be made [by the insurer].”
The judge also ruled against Karl’ on whether uberrimae fidei allows an insurer to void a policy “only if it actually relied on a misstatement of fact.” (Emphasis in original). The judge noted that while some Federal appellate courts had stated that reliance is an element of the uberrimae fidei doctrine, the rulings of the appellate Court that the Federal district court in Massachusetts must follow has not included ‘reliance’ as a condition. This appellate Court, the First Circuit Court of Appeals, the judge noted, has stated that the doctrine applies if the insurer “could have reasonably made assumptions and evaluations based on the insured’s misrepresentations.” (Emphasis in original). Under this objective test of materiality, the Court found, reliance is not a necessary condition for the uberrimae fidei doctrine to apply.
Accordingly, based on the undisputed material fact that Karl’s had never informed Atlantic Specialty during the renewals or policies’ terms about its lack of the required storage contracts and indemnities, the judge ruled that under the uberrimae fidei doctrine, Karl’s had no coverage for the claims brought by its boat storage customers.
The Court’s final order
The judge entered a final decision granting Atlantic Specialty’s summary judgment motions and entering “a declaratory judgment that the 2018 Insurance Policy is voidable due to violation of uberrimae fidei and condition precedent within the contract, and that Atlantic Specialty has no duty to provide coverage, defend, or indemnify Karl’s with respect to third-party claims.”
Karl’s has thirty days to appeal the final judgment after the Court rules on its motion to alter or amend the judgment
Under the Federal Rules of Civil Procedure, Karl’s had thirty days to appeal the summary judgment decision to the First Circuit Court of Appeals. However, Karl’s filed a motion to alter or amend the judgment before the appeal period expired, asserting errors in the judge’s decision or, in the alternative, seeking an order for Atlantic Specialty to repay the policy premium for the voided Policy.
Karl’s motion stays the thirty-day appeal period until the judge rules on the motion to amend or alter the judgment in favor of Atlantic Specialty.
Agency Checklists will keep its readers posted.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklist
Over the course of his legal career, Owen has argued a number of cases in the Massachusetts Supreme Judicial Court and has helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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