While parties to an insurance contract owe each other the highest degree of good faith, an insurer must show actual reliance on an insured’s misrepresentation to void a policy. In St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., — F.3d —, No. 14-2234 (8th Cir. Aug. 20, 2015), a panel of the Eighth Circuit Court of Appeals held that to void an insurance policy under the uberrimae fidei defense, which requires that parties to an insurance contract must accord each other the highest degree of good faith, the insurer must prove it actually relied on the insured’s representation before underwriting the policy.
The case arose from the sinking of a leased barge. Abhe & Svoboda, Inc. (“Abhe”), an industrial painting contractor, leased a barge to complete work on a bridge in Rhode Island. The leasing company required Abhe to have a professional surveyor assess the condition of the barges before and after delivery. The surveyor reported the barge had pinholes in the deck and the under-deck tanks were not watertight from one another. Thereafter, Abhe anchored the barge, loaded equipment, and began the several month project.
Midway through the project, Abhe obtained a marine policy from St. Paul Fire. St. Paul Fire did not request that Abhe complete an application for insurance, but instead accepted the application that Abhe provided to its previous insurer in May 2010. Abhe sent St. Paul Fire an updated schedule of vessels, which included the leased barge with a value of $225,000. Abhe did not send St. Paul Fire a copy of the barge’s survey, and St. Paul Fire did not survey any of Abhe’s marine equipment, as it was entitled to do under the policy.
After issuing the policy, a severe “nor’easter” struck and caused the barge to sink. Abhe retained a salvage company to remove the wreck, and notified St. Paul Fire, who in turn retained an attorney to represent Abhe in the contract negotiations. Midway through the cleanup operation, a contract dispute arose between Abhe and the salvage company, which stopped work. To avoid the Coast Guard federalizing the wreck, Abhe retained another company to finish the job.
St. Paul Fire, after receiving the barge’s survey, agreed to pay only 50-percent of the salvage company’s costs. The salvage company initiated an arbitration claim for the remaining 50-percent of the contract. St. Paul Fire refused to defend or indemnify based on Abhe’s failure to disclose the barge’s survey.
The arbitrators found the salvage company breached the contract with Abhe and awarded Abhe over $665,000 in compensatory damages, interest, and attorney’s fees. The panel disallowed Abhe’s claim for loss of the barge and other “overhead” items, including employee salaries, overtime, and damages not specifically tied to the recovery of the remaining equipment.
St. Paul Fire then initiated a declaratory judgment action that it had no duty to defend or indemnify Abhe. The district court granted St. Paul Fire’s motion for summary judgment, concluding that the insurance policy was void ab initio because Abhe breached its duty of good faith under the doctrine of uberrimae fidei by failing to disclose the survey of the barge on its application for insurance. Abhe appealed, arguing the district court failed to consider whether St. Paul Fire actually relied on the nondisclosure of the survey before issuing the policy.
The Eighth Circuit agreed with Abhe and reversed the district court. The decision turned on the standard to void a policy under the doctrine of uberrimae fidei, or “utmost good faith.” Under the doctrine of uberrimae fidei, the parties to a marine insurance policy must accord each other the highest degree of good faith. This duty of good faith requires the insured to disclose to the insurer all known circumstances that materially affect the risk being insured. Because the insured is in the best position to know of any facts that may be material to the risk, the insured is obligated to disclose those facts to the insurer, regardless of whether the insurer makes a specific inquiry.
The Eighth Circuit held that while Abhe was required to disclose all material facts to St. Paul Fire, application of uberrimae fidei requires the insurer to show both that the insured failed to disclose a material fact and that the non-disclosure induced the insurer to issue the policy. In other words, there must be a causal connection between the omission and the issuing of the contract. Thus, the insurer had the burden to show that the insured’s misrepresentation induced the insurer to underwrite the risk. If that were not the case, the panel reasoned, it would have the perverse effect of encouraging insurers to assume unreasonable risks and to issue insurance policies that they otherwise would not have issued.
This case is significant for its holding that materiality is an essential and distinct element of the uberrimae fidei defense. Thus, where an insurer attempts to void a policy for failure to disclose material facts, the insurer must also prove that those facts induced it to underwrite the risk at issue. Otherwise, the policy is not void.