First Circuit Upholds Doctrine of Uberrimae Fidei Requiring a Marine Insurance Policyholder to Act in “Utmost Good Faith”

In a recent case, QBE Seguros v. Carlos A. Morales-Vázquez, No. 19-1503, United States Court of Appeals for the First Circuit (January 19, 2021), Judge Bruce M. Selya strictly applied the doctrine of uberrimae fidei that requires a marine insurance policyholder to act in “utmost good faith.” An insurer may void a marine insurance policy if its insured fails to disclose all facts within its knowledge and outside the insurer’s knowledge that might materially impact the insurer’s risk calculus.

A Departure from the Fifth Circuit and History of American and English Maritime Jurisprudence

When it comes to marine insurance policies, the U.S. Fifth Circuit has sailed under a different flag than the other federal circuit courts of appeals. The Fifth Circuit is the only circuit that does not require a policyholder to act in the “utmost good faith” when taking out a marine insurance policy, and it is by far the most forgiving circuit when a policyholder withholds information or fails to disclose a material fact. This recent decision in Morales from the First Circuit may yet force the Fifth to strike its colors and fall in line with the rest.

The case at issue stems from the historical connection between American and English maritime jurisprudence. They are, axiomatically, tied to each other in their history, development, and doctrines. However, the U.S. First Circuit Court of Appeals’ case clarified that while American courts will often look to their transatlantic counterparts for guidance on maritime issues, they can and will break from their British colleagues when American policy interests so require.

In this case, England’s Parliament legislatively repealed a centuries-old doctrine regarding marine insurance law. The First Circuit made it clear that despite this change in English jurisprudence, American courts would continue to apply the law’s traditional interpretation.

QBE Seguros v. Carlos A. Morales-Vázquez – Background

Carlos Morales-Vázquez purchased an insurance policy for his forty-eight-foot Cavalier yacht from marine insurer QBE Seguros. When prompted to disclose any prior accidents or incidents on the policy application, he stated only that he had been involved in a “propeller strike” in approximately 2003. But he did not mention that he grounded a yacht off Puerto Rico in 2010. Further, when asked, he only listed two of the seven boats that he had previously owned and operated.

He made these omissions even though the application form plainly stated that “[i]f incorrect answers are provided (either by error, omission or neglect), I will be in breach of this warranty and the policy, if issued, will be void from inception.”

QBE reviewed this application and an application that Morales had submitted in 2011 for a separate vessel. This earlier application similarly made no mention of any prior accidents, even though the 2010 grounding had occurred a year earlier. QBE agreed to underwrite Morales’ policy.

In 2014, Morales’ Cavalier yacht was damaged in a fire. QBE, after learning of the 2010 grounding, took the position that Morales’ policy was invalid under the doctrine of uberrimae fidei—“utmost good faith.” The District Court agreed, and Morales appealed to the U.S. First Circuit Court of Appeals.

Uberrimae fidei – A Marine Policyholder Must Act in “utmost good faith”

Uberrimae fidei requires a marine policyholder to act in “utmost good faith” when providing information to a potential insurer during the application process. The applicant must disclose all known facts or circumstances material to an insurer’s risk. An insurer may void a marine insurance policy if its insured fails to disclose all facts within its knowledge and outside the insurer’s knowledge that might materially impact the insurer’s risk calculus.

Uberrimae fidei is an ancient doctrine of maritime law, dating back to the eighteenth-century insurance markets in London. It originated to protect insurers who often underwrite policies without ever being able to inspect an insured vessel. American and English courts continued to adopt and follow this policy as their maritime laws developed in tandem through the 1800s. In 1906, England’s Parliament codified uberrimae fidei; the United States Congress, however, never addressed the issue.

In 2015, Parliament—citing modernization and the reduced need for such a strict rule in today’s interconnected world—reversed course and abolished uberrimae fidei under English law. But again, Congress remained silent.

U.S. First Circuit Ruling

In the First Circuit case, Morales’ argument was two-pronged: first, he argued that American maritime common law had always retained significant flexibility to evolve over time. Given that Congress was silent on the issue of utmost good faith, federal courts should modernize themselves to comport with the new English law on the subject. Second, and in the alternative, he took the position that a modern reading of uberrimae fidei necessitates that a mere misstatement or omission alone is not grounds to void a policy; rather, the insurer must actually rely on the insured’s false statement—a fact not proven in this case.

Judge Bruce M. Selya of the First Circuit was convinced by neither argument.

First, he noted that while English maritime law is highly persuasive on the American judiciary, U.S. Courts are not bound to follow acts of Parliament. Moreover, he observed that the policy interest of requiring full and complete disclosure from a marine insured is still relevant to marine insurers today, even as such a requirement is unlikely to apply to any other field of modern insurance. The Judge noted that it is routine for marine insurers to underwrite policies for vessels berthed on the other side of the world on a moment’s notice, and thus they rely heavily on their insured’s representations. Thus, the First Circuit held that “utmost good faith” was still the law of the land.

Second, the First Circuit refused to update “utmost good faith” to what Morales argued to be a more modern interpretation. Judge Selya maintained that American courts would and should continue to apply the traditional interpretation of uberrimae fidei. While some federal circuit courts had previously toyed with the notion that a material misrepresentation would not void a policy unless the insurer had actually relied on it, the Supreme Court had made no such concession. Accordingly, uberrimae fidei is alive and well in federal courts.

Will the U.S. Fifth Circuit Fall in Line with Other Circuits?

Morales gives some guidance in the U.S. Fifth Circuit—currently the only federal circuit that has refused to apply uberrimae fidei as an entrenched doctrine of federal law (see the heavily-criticized opinion in Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 889 (5th Cir. 1991)). The Fifth Circuit instead defers to the applicable state law, which does not require a policyholder to act in “utmost good faith.” However, following Judge Selya’s deep analysis of the doctrine’s principles, history, and policy implications, it is possible that the Fifth Circuit may feel some pressure to strike its dissenting colors and fall in line with all other circuits: strictly applying uberrimae fidei, voiding a marine insurance policy whenever the insured makes any material misrepresentation, regardless of whether the insurer actually relies on it.