Certain Underwriters at Lloyds v. Inlet Fisheries

• Decision Date: 11 February 2008
• Docket Number: No. 06-35383.,06-35383.
• Citation: 518 F.3d 645
• Parties: CERTAIN UNDERWRITERS AT LLOYDS, LONDON, Plaintiff-Appellee, v. INLET FISHERIES INCORPORATED; Inlet Fish Producers Incorporated, Defendants-Appellants, v. Totem Agencies Incorporated; American E & S Insurance Brokers California Incorporated, Third-party-defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

518 F.3d 645

CERTAIN UNDERWRITERS AT LLOYDS, LONDON, Plaintiff-Appellee, v. INLET FISHERIES INCORPORATED; Inlet Fish Producers Incorporated, Defendants-Appellants, v. Totem Agencies Incorporated; American E & S Insurance Brokers California Incorporated, Third-party-defendants-Appellees.

No. 06-35383.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 5, 2007.

Filed February 11, 2008.

John A. Treptow, Dorsey & Whitney LLP, Anchorage, AK, for the defendant-appellants.

Christopher W. Nicoll and Larry E. Altenbrun, Nicoll Black & Feig PLLC, Seattle, WA, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Alaska; John W. Sedwick, District Judge, Presiding. D.C. No. CV-04-00058-JWS.

Before: M. MARGARET McKEOWN and RICHARD R. CLIFTON, Circuit Judges, and WILLIAM W SCHWARZER,^* District Judge.

McKEOWN, Circuit Judge:

This case involves the interplay between an ancient legal doctrine and contemporary vessel pollution insurance. Historically, all insurance policies were contracts uberrimae fidei, meaning that both parties were held to the highest standard of good faith in the transaction. The doctrine of uberrimae fidei was grounded both in morality and efficiency; insureds were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder, but such a principle was also an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, email, digital photography, and air travel. See, e.g., Stecker v. Am. Home Fire Assurance Co., 299 N.Y. 1, 84 N.E.2d 797, 799 (1949) ("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."); McLanahan v. Universal Ins. Co., 26 U.S. 170, 176, 1 Pet. 170, 7 L.Ed. 98 (1828) ("The contract of insurance, is one of mutual good faith; and the principles which govern it, are those of an enlightened moral policy."). Today, uberrimae fidei has been displaced in most insurance contexts. Nevertheless, the doctrine enjoys continuing vitality in the world of marine insurance.

Although maritime insurance has its roots in pre-Roman times, its modern incarnation can be traced to a sixteenth-century coffee shop. The mariners who gathered there became tired of individually shouldering the plethora of risks inherent in their trade, and decided to band together to share those risks. The coffee shop was owned by the eponymous Edward Lloyd. Out of the coffee shop conversation grew the development of the modern marine insurance market, with Lloyd's of London at its helm. THOMAS J. SCHOENBAUM, ADMIRALTY AND MARITIME LAW § 17-1 (4th ed. 2004) (Hornbook Series) ("SCHOENBAUM").

Lloyd's of London became a force not only in the traditional maritime insurance industry but also in emerging and specialized marine insurance markets. With the advent of significant environmental legislation in the 1970s, coupled with a number of high profile disasters involving oil tankers, liability of shipowners for environmental damages was expanded, culminating, at the federal level, with the Oil Pollution Act of 1990 ("the OPA"). SCHOENBAUM § 16-2. The "OPA increase[d] substantially both the regulation and pollution liabilities of entities engaged in the transportation and production of oil within the . . . United States." Id. "[I]n part because of the enactment of the [OPA]," "[p]ollution insurance, which traditionally had been part of P & I coverage, has emerged as a separate coverage in the United States." ADMIRALTY & MARITIME LAW 185, 187, Federal Judicial Center (2004). This stand-alone pollution coverage is often referred to as `vessel pollution insurance,' and Lloyd's of London is currently the second-largest provider of such policies. The question we consider is whether the doctrine of uberrimae fidei applies to vessel pollution insurance policies covering statutory environmental liabilities. We answer that query in the affirmative, and affirm the district court's grant of summary judgment in favor of the Lloyds' underwriters.

BACKGROUND

Inlet Fisheries, Inc. and Inlet Fish Producers, Inc. (together "Inlet") are Alaska-based fish buying and processing businesses, both owned by Vincent Goddard. Inlet owns a number of vessels, including the YUKON II, FORT YUKON, MAREN I, HARVESTER BARGE ("HB"), and the QANIRTUUQ PRINCESS ("QP").

The underwriters that are parties to this case are those syndicates at Lloyd's of London that agreed to underwrite a stand-alone pollution insurance policy issued to Inlet in August 2000.¹ For convenience, we refer to both these underwriters and Lloyd's of London as simply "Lloyds."

In August of 2000, Water Quality Insurance Syndicate ("WQIS"), Inlet's then-provider of stand-alone vessel pollution insurance, sent notice that it was cancelling Inlet's policy. The stated and most immediate reasons for the cancellation were Inlet's failures to conduct a survey of its vessels as requested by WQIS and to pay its premiums. WQIS's request for a survey arose after the MAREN I, a vessel owned by Inlet and insured by WQIS, hit a sandbar in Steamboat Slough in Alaska and sank, with 3000 gallons of diesel oil on board. The same vessel had been involved in a "pollution incident" the week before, and the QP, another vessel owned by Inlet, was at the time reportedly listing at the city dock "with the potential of turning turtle."

The day after WQIS sent notice of the cancellation, another of Inlet's vessels, the HB, spilled approximately 55 gallons of oil at the city pier in Bethel, Alaska. Because that oil came originally from the MAREN I, Inlet included the cost of cleaning up this spill in its claim to WQIS for the sinking of the MAREN I.

After receiving WQIS's notice of cancellation, but before its effective date, Inlet, through its broker, sought vessel pollution insurance from Lloyds for the FORT YUKON, YUKON II, HB, and QP. The information Inlet provided on this application forms the basis of the current dispute. In the space calling for Inlet's current pollution insurance carrier, Inlet put "Water Quality Ins. Syndicate." In response to a request for "pollution loss history," Inlet wrote "None." Inlet did not supply, and the application did not request, information about the condition of Inlet's vessels, Inlet's financial status, or the fact of, or reason for, WQIS's cancellation of Inlet's previous policy.

In August 2002, one of Inlet's vessels, the QP, spilled oil and pollutants when it sank in Steamboat Slough, near Bethel, Alaska. After salvage attempts were unsuccessful, the vessel was eventually towed out to sea and scuttled. Inlet made a claim to Lloyds under its vessel pollution policy, at which point Lloyds commenced an investigation into both that incident and Inlet generally.

Upon learning additional information about Inlet, including its failure to disclose the MAREN I and HB incidents, the poor condition of its vessels, and its pending bankruptcy, and after Inlet refused to cooperate with Lloyds' investigation, Lloyds filed suit seeking a declaratory judgment that it had the right to void the policy ab initio under the doctrine of uberrimae fidei. Inlet counterclaimed and argued that Alaska state law, rather than federal maritime law, applied, and that Lloyds never asked for the allegedly material information. On cross-motions for summary judgment, the district court granted Lloyds' motion, and ruled that uberrimae fidei applied and that Lloyds was entitled to void the policy.

ANALYSIS

The doctrine of uberrimae fidei imposes a duty of utmost good faith, SCHOENBAUM § 17-14, and "requires that an insured fully and voluntarily disclose to the insurer all facts material to a calculation of the insurance risk." HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir.2000). Whether the doctrine applies here is particularly important, because Lloyds claims that Inlet failed to disclose material information, and Inlet argues that Lloyds never asked for the information it now regards as material. Under uberrimae fidei, however, Inlet would have been obligated to disclose all material information, regardless of a request by Lloyds. SCHOENBAUM § 17-14.

The application of the doctrine can have dramatic consequences. For example, in Cohen, Friedlander & Martin Co. v. Massachusetts Mutual Life Insurance Co., 166 F.2d 63 (6th Cir.1948), the court held a life insurance policy void under the doctrine of uberrimae fidei because the insured failed to disclose two heart attacks that occurred between the date of his application and the effective date of the policy. Id. at 66. The court reasoned that even though the representations in the application were correct when it was submitted, uberrimae fidei required the insured to disclose any material facts of which he became aware before the policy became effective. Id.

Similarly, in the maritime context, the Fifth Circuit invalidated an insurance policy under uberrimae fidei for the insured's failure to disclose the poor condition of his boat. Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 983 (5th Cir.1969). There, the insured notified the insurance company that his boat was undergoing repairs, but failed to disclose the full extent of the problems with the vessel. Id. at 978. In fact, the boat was literally falling apart. Id. The shipowner argued he had given the company sufficient notice of the repairs and that it could have inquired about their extent, had it found that fact material. Id. at 981-82. The court disagreed, reasoning that while the insurance company was aware that repairs were taking place, it had no reason to expect the vessel was unseaworthy. Id. at 982. Under uberrimae fidei, the court held the...