Seattle Court Rules Failure to Disclose Pollution Incidents Voids Vessel Policy

February 21, 2008

The U.S. Ninth Circuit Court of Appeals in Seattle has upheld an Alaskan district court ruling that a primary insurance carrier can cancel a marine vessel’s pollution insurance policy on the basis that the insured failed to disclose the vessel’s prior incident together with the poor condition of the vessel.

The case involved the interplay of a contemporary vessel pollution insurance with an ancient legal doctrine, uberrimae fidei, that considers insureds morally obligated to disclose all information material to the risk that the insurer is asked to shoulder. The doctrine’s roots go back to the early days of maritime insurance, when London underwriters could get no information other than from ship owners on sailing ships in faraway seas.

In the case under dispute, an earlier carrier writing standalone vessel pollution coverage informed Inlet Fisheries Inc. and Inlet Fish Producers, Inc., in August 2000 that it was canceling Inlet’s policy because Inlet failed to conduct a survey of its vessels as requested and had not paid its premiums. The carrier’s request for a survey had arisen after an Inlet vessel that the carrier insured, the Maren I, hit a sandbar in Steamboat Slough and sank, with 3,000 gallons of diesel oil on board. The same vessel had been involved in a “pollution incident” the week before, and the QP, another Inlet-owned vessel, was at the time reportedly listing at the city dock “with the potential of turning turtle.”

The day after the carrier sent notice of cancellation, another Inlet vessel, the HB, spilled approximately 55 gallons of oil at the city pier in Bethel, Alaska.

Inlet then sought insurance coverage from Lloyds for the QP, the HB and two other vessels through its broker. On the application form, Inlet allegedly did not divulge the vessels’ pollution loss history nor the fact that the earlier carrier had cancelled coverage, or the reason for the cancellation.

In August 2002, the QP spilled oil and pollutants when it sank in Steamboat Slough. Salvage attempts were unsuccessful, and 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. Lloyds sued to invoke the doctrine of uberrimae fidei after discovering the prior Maren I and HB incidents, the poor condition of Inlet’s vessels, the company’s unwillingness to cooperate with the investigation and the firm’s pending bankruptcy. The district court ruling, which was upheld on appeal, validated Lloyd’s right to void the policy.

Source: U.S. Ninth Circuit Court of Appeals

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