Summary
finding a policy void ab initio because the insured's misrepresentation of a vessel's value as $32,000 when it had been purchased five years earlier for $16,000 and estimated at $100 a year earlier in a bankruptcy petition was material, and because the insured's failure to disclose those earlier prices was also material
Summary of this case from CatlinOpinion
Civil Action No. L-00-526 (Magistrate Judge, Bredar)
April 23, 2001
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This marine insurance coverage case requires the Court to consider whether a boat owner violated his duty under the doctrine of uberrimae fidei to disclose all material information to his insurer so as to render the insurance contract voidable at the option of the insurer. Brought under this Court's admirality jurisdiction, the case was tried to the Court, and upon the evidence presented and the applicable law, the Court now finds in favor of the Defendant insurer.
The Court's findings of fact are based upon the stipulations of the parties, the exhibits entered into evidence, and the testimony given at trial. The following is a brief summary of the witnesses called by the parties and the general subject matter of their testimony: Ronnie Smith, the Plaintiff and owner of the boat, Hillbilly Mansion, testified about the condition of the boat, his estimates of the boat's value, his contract and dealings with the insurance companies, Continental Insurance Company and Hagerty Classic Marine Insurance Agency, Inc., his decision to have
Philip Schnering survey his boat, and the sinking of the Hillbilly Mansion. David B. DuVall, the owner and president of the towing and salvage company that towed the sunken vessel to shore, testified about how his company relocated the boat. He also testified about the cost of this service and that the charges for the service were fair and reasonable.
Kenneth Blackstone Chapman, the lead mechanic at the marina to which Hillbilly Mansion was towed, testified regarding the services provided by the marina, the cost of these services, and that the cost was fair and reasonable.
Courtney Amanda Hardy, a friend of Mr. Smith's, testified about her role in encouraging Mr. Smith to obtain insurance and dealing with the insurance company, the repairs she and Mr. Smith made to Hillbilly Mansion, her acquaintance with Mr. Schnering, and the sinking of the boat.
Philip Schnering, the man who performed the survey that Mr. Smith sent to the insurance company, testified about his training and experience as a marine surveyor and his survey of Hillbilly Mansion. He testified as an expert about the condition and value of the boat.
Clifford Bruce Sannino, a marine surveyor and the director of the Virginia Marine Institute where Mr. Schnering took a five-day marine surveying course, testified about his survey of Hillbilly Mansion in December 1999. He testified as an expert about the field of marine surveying, the pre-loss condition and value of Hillbilly Mansion, and the damage done to the boat during and after the sinking.
Carla Gernhofer, a vice-president with Hagerty Classic Marine Insurance Agency, Inc., which assessed the risk for the policy at issue, testified regarding Hagerty's reliance on surveys obtained by boat owners and the company's underwriting guidelines.
Catherine McLaughlin, a marine surveyor who inspected Hillbilly Mansion on September 29, 1999, testified as an expert about the pre-loss and post-loss condition of the boat. John Horan, a marine surveyor who inspected Hillbilly Mansion on October 14, 1999, and in June 2000, testified as an expert about the pre-loss and post-loss condition of the boat.
In 1994, Plaintiff Ronnie Smith purchased a boat for $16,000 and named it "Hillbilly Mansion." This vessel, a Pacemaker Sport Fisher, was built in 1967 of wooden construction. In 1999, Mr. Smith sought insurance for Hillbilly Mansion from Continental Insurance Company (Continental). Hagerty Classic Marine Insurance Agency, Inc. (Hagerty), which reviews and approves risks for Continental, required plaintiff to submit a marine survey of the vessel as part of the insurance application. A marine survey of a boat is an investigation and report of its condition and seaworthiness.
Mr. Smith asked an acquaintance, Philip S. Schnering, to survey Hillbilly Mansion. Mr. Schnering had met Mr. Smith through the latter's girlfriend, Ms. Amanda Hardy. Mr. Schnering, himself a boat owner, had invited Mr. Smith to join the Caddyshack Cruising Club, an informal group of boat owners. Although Mr. Schnering's professional background was in the area of risk management for insurance companies, he was interested in becoming a marine surveyor. He had recently completed a five-day course on marine surveying at the Virginia Marine Institute. Because he had never performed a survey, he told the members of the Caddyshack Cruising Club that he would perform surveys for them for one dollar. Needing a survey to complete his insurance application, Mr. Smith accepted Mr. Schnering's offer. Mr. Schnering first inspected the boat for four hours while it was in the water on or about July 18, 1999. He described his findings in a survey. At the further request of Hagerty, Mr. Schnering conducted an out-of-water inspection shortly thereafter and recorded his findings in an addendum to the survey. Relying on this survey, Continental agreed to insure Hillbilly Mansion. The effective date of the policy was September 22, 1999.
Although the document was titled "Pre-Purchase Survey," the contents of the document indicate that Mr. Schnering knew that Mr. Smith would use the survey for the purpose of obtaining insurance.
On September 25, 1999, Mr. Smith and Ms. Hardy piloted Hillbilly Mansion to a rendezvous point where they met Mr. Schnering and other members of the Caddyshack Cruising Club. They dropped anchor, tied their boats together, and spent the night on the water. The next day, while returning to the marina where Mr. Smith kept his boat, the Hillbilly Mansion hit something underwater that resulted in a hole being punched in the hull by the vessel's prop. The boat sank in shallow water. It was later recovered by a towing and salvage company and towed to a nearby marina where it has remained in dry-dock ever since.
Mr. Smith filed a claim with the insurance company, alleging a total loss and claiming the $32,000 limit under the policy. On November 30, 1999, the insurance company notified Mr. Smith that it was voiding the policy on the ground that the survey misrepresented the condition of the boat.
Mr. Smith brought the present action against Continental for breach of the insurance contract. Because the insurance policy is a maritime contract, this Court has jurisdiction by virtue of the Admiralty Clause of the United States Constitution. See Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310 (1955). The Court completed a three-day bench trial on March 22, 2001. The parties stipulated that they had entered into an insurance contract and that the premium was paid. During the trial, Defendant's experts, Catherine McLaughlin and John Horan, testified that Mr. Schnering's survey failed to mention numerous problems with the boat, that these problems existed prior to the sinking of the boat, and that an experienced marine surveyor would have detected these problems and noted them on an insurance risk survey. Although Plaintiff's expert, Clifford Bruce Sannino, generally concurred with Mr. Schnering's conclusion, he testified that he did notice three problems noted by Mr. Horan that Mr. Schnering should have included in his survey. Defendant argued at trial that Mr. Smith's failure to notify the insurance company of the numerous defects, Mr. Schnering's inexperience, and/or Mr. Smith's less-than-arm's-length relationship with Mr. Schnering rendered the contract voidable under the doctrine of uberrimae fidei.
These problems were (1) "[l]oose unorganized wiring, non-recommended twisted, taped and capped wiring connections," (2) "[a]bandoned hull intake below waterline plumbing, starboard side, adjacent engine unplugged," and (3) "[b]ilge hose torn and severed, starboard side, for emergency take-off on engine intake system" (Def.'s Ex. 8, at 4).
Continental argued that Mr. Schnering's failure to note certain problems with the boat in his survey constituted a failure by Mr. Smith to disclose material facts that rendered the contract voidable at the insurer's option under the doctrine of uberrimae fidei. Because of its ultimate resolution of this case, the Court does not need to decide whether a boat owner can be held accountable under the doctrine for a surveyor's failure to disclose a condition that would not be known by a reasonably diligent boat owner. I note, however, that Continental's view would essentially require a boat owner to know and disclose any material information that a reasonable surveyor could ascertain. The problem with this standard is that the unregulated nature of the marine surveyor field and the lack of guidance given by Continental as to the qualifications required could cause a boat owner's coverage to turn on his luck in picking a surveyor rather than his good faith.
Analysis
"Uberrimae fidei," literally translated, means "of the utmost good faith." North Am. Specialty Ins. Co. v. Savage, 977 F. Supp. 725, 732 (D.Md. 1997) (Blake, J.). In 1828, the Supreme Court explained:
The contract of insurance has been said to be a contract uberrimae fidei, and the principles which govern it, are those of an enlightened moral policy. The underwriter must be presumed to act upon the belief, that the party procuring insurance, is not, at the time, in possession of any facts, material to the risk which he does not disclose; and that no known loss had occurred, which by reasonable diligence might have been communicated to him. If a party, having secret information of a loss, procures insurance, without disclosing it, it is a manifest fraud, which avoids the policy. . . . And even 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 countermanding 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.
McLanahan v. Universal Ins. Co., 26 U.S. (1 Pet.) 170, 185 (1828). Under the doctrine of uberrimae fidei, the insured is required, though no inquiry be made, to disclose every fact he knows that is material to the risk to be incurred by the insurer. See id.; 2 THOMAS J. SCHOENBAUM, ADMIRALTY AND MARITIME LAW 457 (3d ed. 2001) (citations omitted). The insured's failure to do so renders the policy voidable at the option of the insurer. See Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316 (1928); Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. (17 Otto) 485, 511 (1882); SCHOENBAUM, supra, at 458 (citations omitted).
Although they have disagreed about its requirements, the parties have agreed that the doctrine of uberrimae fidei applies to the insurance contract in the present case. Under this doctrine, Mr. Smith had a duty to disclose to the insurer any information within his knowledge that could influence the insurer's decision to rely on Mr. Schnering's survey when he forwarded the survey to the insurer. The Supreme Court has held that "[i]t is the duty of the assured to place the underwriter in the same situation as himself; to give to him the same means and opportunity of judging of the value of the risks; and when any circumstance is withheld, however slight and immaterial it may have seemed to himself, that, if disclosed, would probably have influenced the terms of the insurance, the concealment vitiates the policy." Sun Mut. Ins. Co., 107 U.S. at 510-11 (quotation omitted). Neither Continental nor Hagerty had "the same means and opportunity of judging of the value of the risks" as Mr. Smith because the latter did not disclose information he knew about Mr. Schnering's experience that foreseeably could affect the weight that the insurer gave to the survey. Mr. Smith knew that Mr. Schnering had never performed a survey. Yet the first page of Mr. Schnering's survey indicated that it was "Survey No. 10100" (Pl.'s Ex. 14), suggesting that Mr. Schnering was an experienced surveyor or that, at the very least, he was a member of a seasoned marine surveying firm. Mr. Smith was aware that his arrangement with Mr. Schnering was not an arm's-length transaction, as demonstrated by the fact that Mr. Schnering invited him to join the informal and social Caddyshack Cruising Club, the fact that Ms. Hardy previously worked as Mr. Schnering's assistant at an insurance company, and the fact that Mr. Schnering performed the survey for only $1.00. Yet he did not disclose his social relationship with Mr. Schnering to the insurance company. Mr. Smith testified that he was surprised at Mr. Schnering's conclusion that Hillbilly Mansion was valued at $32,000, twice the $16,000 purchase price of the boat in 1994 or 320 times the $100 he estimated the boat was worth in a petition for bankruptcy relief that he filed in May 1998 (Def.'s Ex. 9). This should have led Mr. Smith to question Mr. Schnering's conclusions, especially in light of his lack of experience. Yet Mr. Smith decided to stick with Mr. Schnering's survey, and he forwarded it to the insurance company without supplying the information that caused him to question Mr. Schnering's valuation, i.e., the 1994 purchase price or his estimate of the boat's value in 1998.
There is authority for the proposition that state law may displace the doctrine of uberrimae fidei. In Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310 (1955), the Supreme Court observed that in the absence of a controlling federal admiralty rule, it is usually appropriate to leave the regulation of marine insurance to the states. The Fifth Circuit identified three factors that courts should consider in determining whether a federal admiralty rule controls a disputed issue: "(1) whether the federal maritime rule constitutes `entrenched federal precedent,' . . . (2) whether the state has a substantial and legitimate interest in the application of its law, . . . [and] (3) whether the state's rule is materially different from the federal maritime rule." Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 886 (5th Cir. 1991). In Anh Thi Kieu, the Fifth Circuit held that Texas insurance law, not the federal maritime doctrine of uberrimae fidei, governed the marine insurance contract at issue. See id. at 895. Because the parties to the present case have agreed that the doctrine of uberrimae fidei applies to the instant insurance contract and because their position is supported by authority that disagrees with the Fifth Circuit's conclusion that the doctrine is not "entrenched federal precedent," see Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir. 1984), I will apply the doctrine in this case.
Although 10,100 surveys is a lot of surveys for one person to have performed, the insurer could have inferred from the heading on the survey that more than one marine surveyor worked for Schnering Marine Services, L.L.C. The heading describes the company as "marine surveyors appraisers" and as "specialists in yacht and commercial vessel inspections for all purposes."
This information was material because it could have affected the weight that Defendant gave to the survey or caused it to ask for another survey. It is foreseeable to the average boat owner that an insurance company would consider the background and experience of a surveyor before it relies on a survey. Moreover, a reasonable insurer would vary the weight it gives such a survey depending on the background and experience of the surveyor, and Ms. Gernhofer testified that Hagerty did in fact rely on the representations of the insured and the survey in evaluating the risk. The information known to Mr. Smith regarding Mr. Schnering's inexperience, the absence of an arm's-length agreement, and earlier valuations that were inconsistent with Mr. Schnering's conclusion that the boat was worth $32,000, all were material to the insurer's evaluation of the risk.
The standard for determining whether information is material is an objective one, i.e., information is material if it would affect a reasonable insurance company's evaluation of the risk. See SCHOENBAUM, supra, at 458 ("A fact is material if, to a prudent insurer, its existence would affect decisions on the risk assumed."). Ms. Gernhofer testified that Hagerty's "underwriting guidelines" would not have permitted her to approve the contract if Mr. Smith had disclosed certain facts. It was later revealed that many of these "guidelines" were not in writing and were instead the custom and practice of the company. A subjective standard of materiality based on unwritten "guidelines" that vary from company to company would be intolerable because it would be even more difficult for a boat owner to determine what information must be disclosed and because this malleable standard would invite self-serving testimony from agents of insurance companies.
I do not hold that a prior acquaintance with the surveyor is per se material. In this case, however, that acquaintance should have been disclosed because, when considered together with the fact that Mr. Schnering charged only $1.00, it demonstrates the absence of an arm's-length relationship. The absence of an arm's-length relationship between the boat owner and the surveyor usually will be material to an insurer's evaluation of the risk. A disclosure by Mr. Smith of the absence of an arm's-length transaction would likely have influenced the insurer's evaluation of the risk if he had also disclosed Mr. Schnering's lack of experience and the information about the prior valuations of the boat. In short, I hold that the facts Mr. Smith had regarding Mr. Schnering's inexperience, the absence of an arm's-length agreement, and the earlier valuations, considered together, were material to the insurer's evaluation of the risk., (Md. 2001) Because Mr. Smith did not disclose to the insurer information that was material to the insurer's evaluation of the risk, I hold that under the doctrine of uberrimae fidei the insurance contract was voidable at Continental's option.
This conclusion is not altered by Ms. Gernhofer's testimony that she ordinarily does not review a surveyor's background for a conflict of interest. Although evidence that a particular insurer does not ordinarily consider conflicts of interest in evaluating applications may prevent that insurer from claiming that the failure to disclose in the absence of an arm's-length transaction by itself is material to the insurer's evaluation of the risk, such a failure considered together with other omissions may constitute an omission of material information.
Mr. Smith's failure to disclose this information to the insurer was not merely a technical violation of the doctrine. Evidence was presented by Mr. Horan and Ms. McLaughlin that critical members of the boat's wooden hull were in a deteriorated condition and that a more experienced surveyor would have found and reported this deterioration. I find that Mr. Horan and Ms. McLaughlin were competent marine suveyors and I credit their testimony about the deteriorated condition of the boat. Although this deteriorated condition was not a cause of the sinking of the boat, it did bear on the seaworthiness of the boat. The insurance company may very well have declined to insure the boat if it had been aware of the boat's condition. Had Mr. Smith told the insurance company about Mr. Schnering's inexperience, their acquaintance, and the earlier valuations, the insurance company may very well have required Mr. Smith to have retained a more experienced surveyor who would have then informed it of the deterioration.
Although I apply the doctrine in the present case, I recognize that one could legitimately question whether the doctrine should continue to govern marine insurance contracts in light of the changes in society and the law that have occurred since its inception. Cf. In re Bay Runner Rentals, Inc., 113 F. Supp. 2 d 795, 798 (D.Md. 2000) (Bredar, J.) (noting that the extension to personal watercraft of a maritime statute limiting the liability of an owner of a vessel to the value of the owner's interest in the vessel appeared to be inconsistent with the historical purposes of the statute). "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." Stecker v. American Home Fire Assurance Co., 84 N.E.2d 797, 799 (N.Y. 1949). Because these early underwriters were prevented by distance from sending agents to inspect the ships, they had no choice but to rely upon the shipowner to inspect the boat and report any defects. The rule that "any misrepresentation or omission to communicate a material fact will vitiate the policy whether such omission is intentional or results from mistake, accident, forgetfulness, or inadvertence," SCHOENBAUM, supra, at 458 (emphasis added), which placed an extraordinarily high duty on the shipowner, almost certainly arose because the insurer was unable to inspect the boats itself. The world is much smaller today. Telephones, facsimile machines, and e-mail have revolutionized communication. Insurance companies often operate on a national and even a multi-national scale with the ability to retain local marine surveyors for inspections. In this case, Continental was able to arrange for Ms. McLaughlin to inspect Hillbilly Mansion three days after it was notified that the boat had sunk. It is no longer infeasible for an insurance company to find and hire a local surveyor to inspect a boat or to specify that it will only insure if a vessel has been surveyed by someone possessing certain qualifications. Because insurance companies can now obtain their own inspection of vessels with greater ease, the rationale that gave rise to the doctrine as it applies to marine insurance contracts has lost some of its persuasive force. Changes in insurance law during the last two centuries have made it less likely that a boat owner like Plaintiff would know his disclosure obligations. In the nineteenth and the early twentieth centuries, the Supreme Court applied the doctrine of uberrimae fidei "as a `traditional' aspect of insurance law in general." Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 888 (5th Cir. 1991) (citing Stipcich, 277 U.S. at 316 (observing that "[i]nsurance policies are traditionally contracts uberrimae fidei")). Over the ensuing years, however, most states abandoned the doctrine of uberrimae fidei. See id. "Today, the sole remaining substantial vestige of the doctrine is in maritime insurance law." Id. (citations). Laypersons are not as familiar with the disclosure obligations of the doctrine as they once were because it applies to far fewer contracts.
Large- and medium-size corporations may have lawyers to research the law and approve their marine insurance contracts, but average private owners of small pleasure boats, like Plaintiff, rely on common sense, their general experience in the insurance industry, and the contract itself to ascertain the extent of their legal duties. People are presumed, of course, to know their legal duties; and they are held liable when they violate them, whether or not they actually knew what they were. This legal fiction is necessary if we are to have an orderly society governed by law. The fiction is more palatable, however, when, as is often the case, a person's legal duties can be ascertained by common sense, one's life experiences, and the terms of any applicable agreement. The duty imposed by the doctrine of uberrimae fidei, however, cannot be so ascertained. Common sense and life experience suggest that if one performs his or her duties as spelled out in a contract, the other side is obligated to perform its obligations as set forth in the contract. The doctrine, however, imposes a strict duty over and above the obligations set forth in the contract. A boat owner's experience with other forms of insurance (e.g., car, home, or life insurance) will not help him or her because the uberrimae fidei doctrine has been abandoned with respect to all forms of insurance except marine insurance. See Anh Thi Kieu, 927 F.2d at 888. The contract will not help because the duty to disclose imposed by the doctrine applies regardless of whether it is set forth in the contract. It is no surprise that, as counsel for Defendant acknowledged at trial, most boat owners do not know of their duty under the doctrine.
In the present case, the insurance contract contained a provision that stated that "[c]overage will be void if you intentionally conceal or misrepresent any material fact relating to this insurance before or after a loss." (Classic Boat Agreement, Pl.'s Ex. 1, at 1). Language like this could give insureds the impression that coverage will be void only if nondisclosure is affirmative and intentional and obscure the fact that the doctrine of uberrimae fidei permits the insurer to void the contract if nondisclosure is an unintentional omission.
It is only with reluctance that I conclude that the uberrimae fidei doctrine controls the outcome of this case.
Conclusion
It is: ORDERED that JUDGMENT in the above-captioned case is GRANTED in favor of DEFENDANT.