The Ninth Circuit Court of Appeals has held that even if an insured only “unintentionally” makes “material” misrepresentations in an application for a marine insurance policy, the insurer is entitled to rescind the policy. ( New Hampshire Ins. Co. v. C’Est Moi, Inc . (2008) WL 732487)
Facts
In 1986, Lawrence O’Rourke (O’Rourke) purchased all the stock of C’Est Moi, Inc. (C’Est Moi). As part of the purchase, O’Rourke paid $300,000 for a yacht owned by C’Est Moi. O’Rourke subsequently insured the yacht through Washington International Insurance Company (Washington International).
In 1992, a fire destroyed the yacht and Washington International paid O’Rourke $450,000 for the loss. O’Rourke reacquired the yacht from Washington International at salvage, paid off a loan and began restoring it. Washington International stopped insuring the yacht after the fire, and it remained uninsured until 2001 (a period of nine years).
In 2001 C’Est Moi applied for a yacht policy through New Hampshire Insurance Company (NHIC). In the application, C’Est Moi listed the purchase price as “$450,000” even though O’Rourke had only paid $300,000 for the yacht in 1986. C’Est Moi also listed the “present marine insurer” as “Wash Int.,” even though the yacht was not insured when the application was filled out in 2001. After reviewing the application, NHIC issued a policy to C’Est Moi covering the yacht.
In 2004, the yacht sank in calm waters while docked at Newport Beach, California. O’Rourke, on behalf of C’Est Moi, filed an insurance claim. NHIC investigated and determined that the likely cause was a malfunctioning bilge pump.
NHIC then sued C’Est Moi in federal district court to rescind the insurance policy. The district court granted summary judgment in favor of NHIC, holding that the doctrine of uberrimae fidei applied and that C’Est Moi misrepresented material facts on its insurance application. C’Est Moi appealed.
Holding
The Ninth Circuit Court of Appeals affirmed the judgment in favor of NHIC.
The appellate court first noted that under the federal maritime doctrine of uberrimae fidei , an applicant for marine insurance owes the insurer a “duty of utmost good faith,” and is “bound to reveal every fact within his knowledge that is material to the risk.” Under this doctrine, if an insured misrepresents a material fact in the application, the insurer may rescind the policy, even if the misrepresentation was “unintentional.” The court acknowledged that the NHIC policy contained a provision stating that the policy would be void if the insured “intentionally” concealed or misrepresented any material fact or circumstance relating to the insurance application. However, according to the court, this provision was not sufficient to modify or eliminate the insured’s uberrimae fide obligation. Thus, NHIC was entitled to rescind even if C’Est Moi’s misrepresentations were merely “unintentional.”
The court next held that C’Est Moi’s misrepresentations in the application were “material.” The court reiterated the rule that if insurer demands answers to specific questions in an application for insurance, that fact is in itself usually sufficient to establish “materiality” as a matter of law.” Here, NHIC’s insurance application asked for the yacht’s purchase price and present insurer, and C’Est Moi misrepresented both facts. Both facts were facts which NHIC would naturally want to know in determining whether to issue a policy to C’Est Moi and, if so, on what terms. Thus, as a matter of law, C’Est Moi’s misrepresentations were “material” and NHIC was entitled to rescind.
Comment
Note that the Court of Appeals did not hold that the parties to a marine insurance policy can never contract around the doctrine of uberrimae fidei . Rather, the court held that if it is possible at all to contract around the doctrine, it must be done by “very clear policy language, unequivocally disclosing a mutual intent to supersede the insured’s common law obligation.” Here, according to the court, the language in NHIC’s policy did not disclose a clear intent to supersede the insured’s common law duty of disclosure. Because the common law duty remained in place, the insurer could rescind based on either the insured’s intentional or unintentional misrepresentation.