Summary: Mark Twain, a cement barge owned by Continental Cement, sank on February 7, 2011. After the insurance companies investigated, they denied coverage for the loss of the hull and the expense of removing the barge from the river. The insurance companies filed a declaratory judgment action seeking a declaration of no coverage which drew a counterclaim for breach of contract and vexatious refusal to pay. The district court agreed with the insurers that Continental Cement had a maritime insurance law duty of utmost good faith. After a jury trial which returned a verdict in favor of the insurance companies, Continental Cement appealed to the 8th Circuit which affirmed the district court judgment.
Slip Op. No. 13-2313 (8th Cir., July 17, 2014)
Usually when we are dealing with issues of good faith and bad faith, we are dealing with the requirement that an insurance company act in good faith when handling a claim of its insured. However, under maritime insurance law dating back into the early 1800s, there is a common law requirement that the maritime insured act in utmost good faith toward its insurance company. Under that doctrine, “a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.” Stipcich v. Metro Life Ins. Co., 27 U.S. 311, 316 (1928).
The insurers in the Mark Twain case contended that Continental Cement had not acted in utmost good faith because it had failed to disclose a 2008 study which had revealed flaws in its barge before the issuance of the policy to Continental Cement. The 2008 survey had “indicated that the barge had not been watertight at the time Continental Cement obtained its policies.” Continental Cement had applied for its insurance coverage in November 2010, nearly two years after Continental Cement had obtained the undisclosed 2008 survey results.
During the course of discovery in the declaratory judgment action, the insurance companies learned of the 2008 survey. Thereafter, the insurance companies argued that Continental Cement had breached its duty of utmost good faith by withholding the 2008 survey from its insurance application. The survey showed the Mark Twain was “unseaworthy at the time Continental Cement applied for insurance and the company thus breached its absolute warranty of seaworthiness.” In this case, the duty of utmost good faith required Continental Cement to disclose the 2008 survey results. Its failure to disclose those results showing that the barge had not been watertight when Continental Cement obtained the policies supported the jury’s verdict in favor of the insurance companies. In light of the judgment in favor of the insurance companies, the court did not need to explore any issue regarding the insurance companies’ alleged vexatious refusal to pay under Missouri law.
Insureds, insurance carriers, and attorneys representing policyholders and insurance companies where the maritime industry is strong and marine insurance coverage is prevalent need to know that in most federal circuits which have considered the issue have adopted the “doctrine of utmost good faith” as “a judicially established federal admiralty rule governing the issue” recognized by the Supreme Court of the United States dating back to 1828 and referred to by that Court 100 years later as “a ‘traditional’ aspect of insurance law.” Although the law in the Fifth Circuit is contrary, courts in the Second, Third, Ninth, Eighth, and Eleventh Circuits have adopted the same rule. In fact, the Eighth Circuit quoted Ninth Circuit’s opinion in Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 653-54 that “no rule on marine insurance is better established than [in] the utmost good faith rule.” (Quoting Thomas J. Schoenbaum, The Duty of Utmost Good Faith in Marine Insurance Law: A Comparative Analysis of American and English Law, 29 J.Mar.L. & Com. 1, 11 (1998)).
