Insurance Law Hawaii

No Coverage for Recovery of Untapped Oil Barrels From Harbor

   The Ninth Circuit found that a pollution endorsement did not cover the cost of retrieving oil barrels that did not discharge pollutants. Guam Industrial Services, Inc. v. Zurich Am. Ins. Co., 2015 U.S. App. LEXIS 9045 (9th Cir. June 1, 2015).

   Guam Industrial's dry dock sank into the harbor. Various containers in which 113,000 gallons of oil were stored fell into the water. None of the containers were breached, however. The Coast Guard forced Guam Industrial to recover the containers, and the cost of the retrieval was $647,000.

   Guam Industrial sought coverage under two policies. A Hull and Machinery Policy was underwritten by Zurich and Star Indemnity and Liability Company. The policy covered damaged to the dry dock resulting from certain specified "perils" that included lightning, earthquake, pirates, and various types of accidents and malfunctions. The policy required a Navy Certification for the dry dock.

   Guam Industrial never acquired the certification, however, instead it obtained "commercial" certification from a private company. In October 2010, the commercial certification expired. The private company would not renew the certification unless significant repairs were made. The dry dock sank while it was undergoing the repairs. Coverage was denied under the Hull and Machinery Policy because of the breach of the requirement to obtain Navy Certification. 

   The second policy was an Ocean Marine Policy with Zurich. Through an endorsement, the policy covered "the discharge, dispersal, release, or escape" of any pollutants into the environment, provided the discharge was accidental. Zurich denied the claim because no actual discharge of pollutants occurred. 

   Guam Industrial filed suit. The district court granted summary judgment to the insurers on both policies. 

   The Ninth Circuit affirmed. Strict compliance with marine policy warranties was required, even when the breach of the warranty did not cause the loss. Even if the insurers waived their right to demand strict compliance with the Navy Certification because they had accepted commercial certification, the dry dock lacked even commercial certification when it sank.

   Regarding coverage under the Ocean Marine Policy, it was undisputed that no oil leaked out of the containers and into the water in the harbor. Although barrels or containers were discharged, dispersed, and released, oil was not. The oil remained sealed inside its containers at all relevant times.

   Judge Kozinski dissented with a relish that policy holder lawyers can appreciate. Judge Kozinski started his dissent as follows:

    If you slap a silk suit on a monkey, you still won't want to take it to the prom. And if you pour crude oil into a barrel, you sill won't want it in your hot tub. 

The dissent concluded by stating,

    No rational dry dock owner would buy a policy that covers government-ordered pollution clean-up if containment vessels filled with toxic waste break apart upon sinking but not if they remain intact. It's absurd. Zurich's denial of coverage is the type of slimy conduct that gives insurance companies a bad name. This opinion should serve as fair warning to those who would throw away good money doing business with Zurich. 

    Special thanks to Damon Key blogging colleague Robert Thomas (www.inversecondemnation.com) for flagging this case.

Insured's Rejection of Counsel Relieves Insurer of Defense Obligations

   Check out today's postover at hawaiioceanlaw.com where my Damon Key colleague, Mark Murakami, discusses a Katrina-related case in which the insured refused to accept the insurer's choice of defense counsel.  The choice was risky because the Second Circuit relieved the insurer of having to pay defense costs.

Policy Covers Insured In Third Party Claim by Longshoreman

   Note today's post [here] by my Damon Key colleague, Mark Murakami, regarding coverage for a claim related to the Longshore Harbor and Workers Compensation Act.  See Bayou Steel Corp. v. Evanston Ins. Co., No. 08-31206 (5th Cir. Nov. 10, 2009).  The policy excluded coverage for injuries imposed on the insured by contract with respect to claims made pursuant to the LHWCA.  Nevertheless, the insured facility owner was covered under the policy when sued by a stevedore who was injured while unloading a barge.  The stevedore's claims against a third party were not "pursuant to" the LHWCA.

Federal Court Without Jurisdiction Where Policy is not a Maritime Contract

    Whether the federal court has jurisdiction over a coverage dispute of a purported maritime policy was the issue in New Hampshire Ins. Co. v. Home Savings and Loan Co. of Youngstown, Ohio, No. 08-3902, 2009 U.S. App. LEXIS 21133 (6th Cir. Sept. 24, 2009). 

   National Marine, a yacht dealer and marina operator, purchased a "Yacht Dealer/Mariana Operator's" general liability policy from New Hampshire Insurance Company ("NHIC").  The policy insured National Marine against loss or damage to its inventory, loss or damage to third-party property while in its custody, personal injury or property damage occurring on its boats or at its marina, and loss or damage to its tools and equipment.  The policy also had "Truth in Lending Errors and Omissions Liability Coverage," to insure against "damage due to the unintentional violation of any Federal or State Consumer Credit Act."

   National Marine was sued in state court for fraudulent misrepresentations and failure to deliver boats with clean title.  National Marine sought coverage under the "Truth in Lending" provision of the policy.  NHIC provided coverage under a reservation of rights, but then sued in federal court to resolve the coverage issues.  NHIC asserted jurisdiction under 28 U.S.C. 1333(1), federal maritime jurisdiction.  The complaint requested the policy be rescinded for misrepresentation or a declaration that there was no coverage.  The district court assumed jurisdiction under 1333(1), but dismissed NHIC's action, concluding it had discretion to accept or deny jurisdiction under the Declaratory Judgment Act. 

   The Sixth Circuit questioned whether federal jurisdiction existed under 28 U.S.C. 1333(1) and whether the underlying claims arose under a "maritime contract."  Ultimately, the court determined the policy was not a maritime contract because its primary object did not relate to maritime commerce.  Instead, the policy related to boats as objects of commerce, i.e., "stock for sale", and not as agents of maritime commerce.  Further, the marina operations portion of the policy related to fixed structures such as wharves instead of particular vessels.  Consequently, although the district court properly dismissed the case, dismissal was appropriate due to lack of subject matter jurisdiction. 

Third Circuit Applies Doctrine of Uberrimae Fidei to Void Marine Policy

      In today's post, we return to the federal maritime doctrine of uberrimae fidei, previously reviewed here. Should the doctrine, which requires an insured to exercise the utmost good faith and disclose to the insurer all facts material to an insurance risk, apply when considering coverage under a marine policy?  The Third Circuit applied the doctrine in AGF Marine Aviation & Transport v. Cassin, Nos. 07-1640, 07-1641(3rd Cir. Sept. 29, 2008), and voided coverage under a marine policy.

     Cassin purchased a yacht for $400,000.  Nevertheless, in an application to insure the Yacht, he represented the purchase price was $600,000.  He then insured the yacht under successive policies for $600,000.  The policy provided any dispute would be "adjudicated according to well established, entrenched principles and precedents of substantive United States Federal Admiralty law and practice."   

     In 2000, the yacht sank of the coast of Grenada.  Cassin filed a claim.  After investigating, the insurer sued, alleging the policy was void because Cassin misstated the purchase price in his application.  Cassin argued there was no misrepresentation because the purchase price included a $200,000 equity stake in the Yacht. The district court applied the doctrine of uberrimae fidei and determined Cassin had materially misrepresented the purchase price of the yacht.  Therefore, the insurer was permitted to void the policy.

     Cassin appealed, arguing uberrimae fidei was not firmly entrenched in federal admiralty law.  The Third Circuit noted that most circuits agreed uberrimae fidei controlled in maritime insurance disputes.  The Third Circuit agreed the doctrine was well entrenched and applied in this dispute.  The Court determined the $200,000 equity was never transferred to Cassin.  Consequently, the purchase price was $400,000 and Cassin had misrepresented this amount in his application.

     Finally, the misrepresentation was material.  When a marine insurer asks the purchase price, it was a fact material to the risk, the misrepresentation of which violated uberrimae fidei.  Because Cassin misrepresented the purchase price, the policy was voidable ab initio.

Duty to Cooperate - How Far Does it Extend?

     A liability policy typically requires the insured to cooperate with the insurer.  Under the provision, the insured must, among other things, cooperate with the insurer in investigating or settling of the claim.  Breach of the cooperation clause by the insured relieves the insurer of liability under the policy.  But the insurer must show the breach caused "substantial prejudice."  22 E. Holmes, Holmes' Appleman on Insurance 2d (2003) sec. 138.6 [A].  Further, prejudice to the insurer is not presumed as a matter of law from the insured's breach.  Instead, the insurer "shoulders a heavy burden" to establish that the insured acted willfully to obstruct the insurer.  Id.

    In Deguchi v. Allstate Ins. Co., Civil No. 07-00144, 2008 U.S. Dist LEXIS 34368 (D. Haw. April 9, 2008), the federal district court interpreted Hawaii's law on the duty to cooperate.  The insureds held a marine insurance policy issued by Allstate for their boat.  The policy required the insureds to cooperate in any investigation, including submitting to an Examination Under Oath (EUO) if requested by Allstate. The boat sank under suspicious circumstances while in route from Hilo to Honolulu.  The insureds made a claim and Allstate hired an investigator.

     Allstate eventually requested an EUO of the two insureds.  One insured submitted to an EUO, but refused to attend a second EUO.  On instructions from his attorney, the second insured refused to answer basic questions, such as "When did you start looking for a boat? or Why did you pick this boat to buy?"  Allstate refused to go forward with the EUO and eventually denied coverage.

     The insureds sued Allstate based on breach of insurance contract, bad faith and other claims.  Allstate moved for summary judgment because the insureds failed to cooperate with the investigation.  The federal district court noted that under Hawaii law, the requirement that the insured submit to an EUO was part of the duty to cooperate and a condition precedent to the insurer's obligation to pay benefits.  The court predicted the Hawaii Supreme Court would hold that an insured breaches a policy's requirement to cooperate by failing to answer material questions during an EUO or to attend a second EUO.  Therefore, the insureds breached their duty under the policy to submit to examinations under oath as reasonably required by Allstate, relieving Allstate of its duty to pay the insureds under the policy.

     One further note on the duty to cooperate.  If the insurer denies coverage, all bets are off.  Once coverage is denied, the insured is no longer under an obligation to comply with the cooperation clause.  By denying coverage, the insurer waives as a matter of law its rights under the policy, including the right of cooperation.  22 Appleman sec. 128 [A].

Vessel Owner’s Failure to Volunteer Pertinent Information Voids Vessel Pollution Policy

     The Ninth Circuit recently issued a decision regarding a vessel pollution insurance policy that could have implications for Hawaii.  In Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., No. 06-35383 (9th Cir., Feb. 11, 2008), the Court determined Lloyds was justified in voiding a policy because the insured did not volunteer important information.

     Prior to seeking a vessel pollution policy from Lloyd’s, the insured, Inlet, experienced two large oil spills in Bethel, Alaska, one at the city pier and the other in Steamboat Slough.  (As a former resident of Bethel, I passed through Steamboat Slough many times on boat, dog sled and skis.  The Slough acquired its name from steamboats abandoned there after traveling up the Kuskokwim River).  When applying for the policy, Inlet responded to the request for “pollution loss history” by writing “None.”  Inlet did not supply, and the application did not request, information about the condition of Inlet’s vessels or Inlet’s financial status.

     After acquiring a policy from Lloyds, an Inlet vessel again spilled oil and pollutants when it sank in Steamboat Slough (thereafter undoubtedly making passage through the Slough by boat, dog sled or skis problematic).  Inlet made a claim under its vessel pollution policy, prompting Lloyds to investigate both the incident and Inlet generally.  Upon learning of Inlet’s failure to disclose the prior incidents, the poor condition of its vessels, and its pending bankruptcy, and after Inlet refused to cooperate with the investigation, Lloyds filed suit seeking a declaratory judgment that it had a right to void the policy ab ignitio under the doctrine of uberrimae fidei.  The District Court granted summary judgment in favor of Lloyds.

     The doctrine of uberrimae fidei imposes a duty of utmost good faith and requires that an insured fully and voluntarily disclose to the insurer all facts material to a calculation of the insurance risk.  The doctrine was first recognized in 1766 and was codified in English law in 1906.  In 1828, the U.S. Supreme Court incorporated the doctrine into American maritime insurance law.  More recently, stand-alone coverage of maritime insurance referred to as vessel pollution insurance has emerged as a separate coverage of marine insurance in response to the 1990 Oil Pollution Act.

     The issue in this case was whether the vessel pollution insurance issued to Inlet was appropriately characterized as marine insurance and, therefore, whether the doctrine of uberrimae fidei was applicable.  The doctrine of uberrimae fidei requires a marine insurance applicant, even if not asked, to reveal every fact within its knowledge that is material to the risk.  An insurer can rescind a policy if it can show either intentional misrepresentation of a fact, regardless of materiality, or nondisclosure of a fact material to the risk, regardless of intent.

     Affirming the District Court, the Ninth Circuit held the federal maritime doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts. Further, for purposes of applying uberrimae fidei¸ the vessel pollution insurance issued to Inlet was appropriately characterized as marine insurance.  The facts undisclosed by Inlet were material to the insurance risk undertaken by Lloyds and voiding the policy was justified.

     Because the Ninth Circuit held that the doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts, this decision would presumably apply in a Hawaii case involving vessel pollution insurance.