Afederal judge found an insurer was justified in rescinding an ocean marine insurance policy because the insured misrepresented the value and condition of a dry dock it insured. (Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing & Marine Services Inc. Nos. 11-2093, 11-2116. D. Puerto Rico. Oct. 8.)
San Juan Towing (SJT) purchased a floating dry dock called the Perseverence (that’s the spelling in the court decision) for $1.05 million in 2006. SJT obtained a line of credit from Banco Popular to pay for the dry dock.
SJT put the dry dock up for sale in 2009 for $1.35 million because of a lack of business, and advertised it at that price in Boats & Harbors magazine in February 2010 and January 2011.
Hendry Corp. of Tampa, Fla., sought to purchase the dry dock for $700,000 on Jan. 3, 2011 and, after bargaining for several months, SJT offered to sell it for $800,000. Hendry offered $775,000, but the two parties could not make a deal. Banco Popular would have to approve the sale because it constituted a “short sale.”
In April 2011, with Banco Popular’s approval, the dry dock was advertised for sale at $800,000. Richard Ortego, vice president and general manager of repair at Leevac Shipyards, traveled to Puerto Rico to inspect the dry dock and in September. Mark Payne, head of SJT, signed an agreement to sell the dry dock to Leevac Shipyards for $700,000.
From 2006 to 2011, SJT insured the dry dock with RLI Insurance Co. The value was determined by a survey to be $1.75 million above the original $1.05 million because of modifications made by SJT.
John Kirchhofer was the RLI underwriter who handled the SJT account up until January 2011, when he left to join Catlin.
A month after Kirchhofer left RLI, the firm advised SJT that it was canceling the insurance policy mid-term. RLI cited “loss history” as the reason for cancellation.
In February or March, SJT’s insurance broker called Kirchhofer at his new job and asked if Catlin would be interested in creating a quote as he was familiar with the account. Catlin sent a quote to SJT, which was accepted.
Kirchhofer said Catlin never received any request from SJT to change the value of coverage from the $1.75 million at which it was originally valued and said he did not become aware of the lower original asking price of $1.35 million, Hendry’s offer for $775,000, SJT’s counter offer of $800,000, or the advertised price of $800,000 until this litigation began.
Catlin said as a marine underwriter “Kirchhofer relied upon the duty of Utmost Good Faith and expected that SJT, through its marine insurance broker, Frenkel, would disclose all information material to the risk that he was being asked to underwrite.”
Kirchhofer said the advertising price of “over half the difference in insured value” would have been important to Catlin, because “the purpose of the insurance is to insure at fair market value, to prevent the insured from profiting from his insurance.” It was his opinion that because SJT had made representations to the public market place and its bank that the dry dock was much less than $1.75 million, it should have also notified its broker and insurance underwriter.
In September the dry dock sank and the SJT insurance broker notified Catlin. Catlin contracted with the surveying company, GL Noble Denton, to examine the claim.
After an investigation, Noble Denton advised Catlin that the dry dock was in poor condition, that significant deterioration to the structure had occurred and the corrosion had existed for a significant period of time.
Kirchhofer concluded SJT should have disclosed the level of corrosion “at the time of the binding or at some point during the policy period,” and Catlin chose to rescind the policy and return the premiums.
The court previously held the maritime doctrine of uberrimae fidei, or utmost good faith, applied in this case.
The 2nd Circuit, in the 1986 decision Knight v. U.S. Fire Insurance Co. (804 F2d 9, 13), explained the uberrimae fidei doctrine provides “an 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.”
If it fails to disclose all circumstances known to it and unknown to the insurer, which materially affect the risk, the policy is voidable at the option of the innocent party.
The court cited the 5th edition of Thomas Schoenbaum’s book, Admiralty and Maritime Law, as saying “it is of no consequence whether an insured’s misrepresentation or nondisclosure is due to fraud, negligence, accident or mistake.”
The court found “SJT (1) overstated the value of the Perseverence, and (2) failed to disclose an accurate description of the dry dock’s condition where applying for insurance from Caitlin,” and therefore a violation of uberrimae fidei occurred and the marine insurance policy is void ab initio, from the beginning.
The court said:
- “SJT unquestionably overstated the drydock’s value when it sought insurance coverage from Catlin in April 2011.”
- It was “also persuaded that SJT violated uberrimae fidei by failing to disclose an accurate description of the drydock’s condition when seeking insurance from Catlin.”
But as to Catlin’s contention that a third ground for voiding the policy existed because SJT failed to disclose that its previous policy with RLI was cancelled due to loss history, the court said it declined to adopt that conclusion.
The court said the ocean marine policy between Catlin and SJT was void ab initio.
It found SJT violated the doctrine of uberrimae fidei and dismissed all of SJT’s claims, both as originally filed in case No. 11-2116 and amended in No. 11-2093.
