A Law and Economics Analysis of the Duty of Utmost Good Faith (Uberrimae Fidei) in Marine Insurance Law for Protection and Indemnity Clubs

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Title

A Law and Economics Analysis of the Duty of Utmost Good Faith (Uberrimae Fidei) in Marine Insurance Law for Protection and Indemnity Clubs

Subject

Marine Insurance Policies

Creator

Elizabeth Germano

Publisher

St. Mary's Law Journal, St. Mary's University School of Law

Date

2016

Rights

Copyright to author Elizabeth Germano

Relation

St. Mary's Law Journal

Format

RFC3778

Language

English, en-US

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Text

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GermanoFinal

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727
ARTICLE
A LAW AND ECONOMICS ANALYSIS OF THE
DUTY OF UTMOST GOOD FAITH
(UBERRIMAE FIDEI) IN MARINE
INSURANCE LAW FOR PROTECTION AND
INDEMNITY CLUBS
ELIZABETH GERMANO

I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 728
A. Marine Insurance Policies Are Subject to Federal
Admiralty Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 728
B. The Wilburn Boat Choice-of-Law Analysis Highlights the
Importance of Judicially Established Federal Admiralty
Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732
II. Legal Analysis of Uberrimae Fidei as a Judicially Established
Federal Admiralty Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740
A. The Origin and Evolution of Uberrimae Fidei . . . . . . . . . . . . . 740
B. Central Attributes of Uberrimae Fidei . . . . . . . . . . . . . . . . . . . 750
1. Materiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751
2. Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 757
 The author wishes to express her appreciation to University of Connecticut School of Law
Professors Peter Siegelman, Robert Birmingham, and Michael Eisele for their constant intellectual
challenge, without which this Article would still be an unfinished thought. The author also wishes to
thank her parents, Gerald and Joanne Germano, for their endless faith and bottomless love, without
which such an undertaking would be inconceivable.
728 ST. MARY’S LAW JOURNAL [Vol. 47:727
3. Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 760
C. Positions of the United States Circuit Courts on Uberrimae
Fidei. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762
1. Second Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
2. Eleventh Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
3. Fifth Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765
4. Seventh Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766
5. Fourth Circuit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767
6. Ninth Circuit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
7. Third Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769
8. Eighth Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770
9. First Circuit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771
D. Summary of Legal Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 774
III. Economic Analysis of Uberrimae Fidei as a Judicially Established
Federal Admiralty Rule for Protection and Indemnity Clubs. . . . 775
A. Judicial Discussion of the Reasons for Uberrimae Fidei . . . . . 775
B. Legal Commentators’ Approach to the Economic
Efficiency of Uberrimae Fidei. . . . . . . . . . . . . . . . . . . . . . . . . . 777
C. Economists’ Approach to the Efficiency of Uberrimae Fidei . 779
1. Economists’ Approach to Insurance . . . . . . . . . . . . . . . . 779
2. Economists’ Models of the Insurance Market with
Uberrimae Fidei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 787
D. Application to Protection and Indemnity Clubs . . . . . . . . . . 800
1. Special Characteristics of Protection and Indemnity
Clubs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
2. Issues of Information Asymmetry . . . . . . . . . . . . . . . . . . 814
E. Summary of the Economic Efficiencies of Uberrimae Fidei . . 818
IV. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820
I. INTRODUCTION
A. Marine Insurance Policies Are Subject to Federal Admiralty Jurisdiction
Writing for the Supreme Court in The Lottawanna1 in 1875, Justice
Joseph P. Bradley envisioned federal and state regulation of maritime
1. The Lottawanna, 88 U.S. (21 Wall) 558 (1875).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 729
affairs as “a system of law coextensive with, and operating uniformly in,
the whole country.”2 He considered state involvement in maritime law to
defeat the consistency and uniformity the Constitution sought to achieve
for interstate and international commerce.3 Over one hundred years later,
Supreme Court Justice Antonin Scalia described the current relationship
between state and federal regulation in the admiralty arena: “It would be
idle to pretend that the line separating permissible from impermissible
state regulation is readily discernible in our admiralty jurisprudence, or
indeed is even entirely consistent within our admiralty jurisprudence.”4
The chief reason for this state of affairs is admiralty jurisprudence has
evolved from court rulings rather than black letter law.5
Because contracts are conceptual, “[t]he boundaries of admiralty
jurisdiction over contracts” have been challenging to define.6 To be
cognizable in admiralty, “a contract must be wholly maritime.”7 One
United States district court has recently defined a maritime contract as
“one that . . . relates to a ship and its use as such, or to commerce or to
navigation on navigable waters, or to transportation by sea or to maritime
employment.”8 The court continued to clarify “[t]he only general rule is
that to be a maritime contract, the subject matter [i.e., the insurable
interest] of the contract must be directly and intimately related to the
operation of a vessel and navigation; it is not enough that the contract
related in some preliminary (shoreside) manner to maritime affairs.”9 The
characterization of a contract as “maritime” is significant because if “the
dispute is not inherently local, federal law controls” the interpretation of a
maritime contract.10
2. Id. at 575.
3. Id.
4. See Am. Dredging Co. v. Miller, 510 U.S. 443, 452 (1994) (deciding the application of state or
federal forum non conveniens law in a Jones Act suit); see also Bank of San Pedro v. Forbes Westar,
Inc., 53 F.3d 273, 275 (9th Cir. 1995) (quoting Justice Scalia’s opinion to support the determination
of state or federal law in a marine insurance dispute).
5. Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 323–24 (1955) (Frankfurter, J.,
concurring) (“It is appropriate to recall that the preponderant body of maritime law comes from this
Court and not from Congress. . . . Under the distribution of power between national authority and
local law, admiralty has developed for more than a hundred years by rulings of the Court, but not by
absolutes either of abstention or extension.”).
6. Kossick v. United Fruit Co., 365 U.S. 731, 735 (1961).
7. Commercial Union Ins. Co. v. Detyens Shipyard, Inc., 147 F. Supp. 2d 413, 419 (D.S.C.
2001) (quoting Wilkins v. Commercial Inv. Tr. Corp., 153, F.3d 1273, 1276 (11th Cir. 1998)).
8. Id. at 419 (quoting 1 BENEDICT ON ADMIRALTY § 182, at 12-4 (8th ed. 1996)).
9. Id. (quoting 1 THOMAS J. SCHOENBAUM, ADMIRALTY & MARITIME LAW § 3–10, at 111 (2d
ed. 1994)).
10. Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 22–23 (2004) (citing Kossick, 365 U.S. at 735); see
730 ST. MARY’S LAW JOURNAL [Vol. 47:727
Federal common law is not the only source of law governing marine
insurance contracts.11 These contracts straddle the divide between state
law and federal law.12 Maritime jurisdiction over marine insurance
contracts was an issue of first impression in DeLovio v. Boit.13 The 1815
DeLovio court, a United States circuit court sitting in Massachusetts,
considered a libel action resulting from a marine insurance policy on the
basis that the policy was a maritime contract.14 The court ultimately held
marine insurance policies fell within federal admiralty jurisdiction15 after a
rigorous examination of the scope of a maritime contract in English
custom and usage.16 Based on their expansive reading of the Admiralty
Clause of the United States Constitution, the circuit court departed from
the rigid English common law interpretation of admiralty jurisdiction as
being limited to those “things done upon the sea.”17 However, rather
than describe a maritime contract with respect to a list of attributes, the
circuit answered the query “what is a maritime contract?” with a list of
examples.18
Fifty-five years later, the Supreme Court affirmed maritime jurisdiction
also Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 649 (9th Cir. 2008)
(“Marine insurance has always occupied a unique place in the legal universe, straddling federal and
state regulatory jurisdiction.”); Kalmbach, Inc. v. Ins. Co. of Pa., 529 F.2d 552, 554 (9th Cir. 1976)
(“Whether federal or local law applies to a maritime insurance contract can present a troublesome
question.”).
11. Progressive N. Ins. Co. v. Bachmann, 314 F. Supp. 2d 820, 826 (W.D. Wis. 2004)
(“Although it is undisputed that marine contracts, including marine insurance contracts, fall under
federal admiralty jurisdiction in Article 3, Section 2 of the United States Constitution, federal
common law is not the exclusive source of law governing such contracts.” (citations omitted)).
12. AIG Centennial Ins. Co. v. O’Neill, 782 F.3d 1296, 1302 (11th Cir. 2015) (“Marine
insurance is a curious legal creature, bearing the markings of both the state common law of contracts
and the federal common law of admiralty.”).
13. DeLovio v. Boit, 7 F. Cas. 418 (C.C.D. Mass. 1815), superseded by statute, Extension of
Admiralty Jurisdiction Act, 62 Stat. 496 (1948).
14. Id. at 418.
15. Id. at 444.
16. Id. at 432–44.
17. Id. at 442 (“The clause however of the [C]onstitution not only confers admiralty
jurisdiction, but the word ‘maritime’ is superadded, seemingly ex industria, to remove every latent
doubt. ‘Cases of maritime jurisdiction’ must include all maritime contracts, torts and injuries, which
are in the understanding of the common law, as well as of the admiralty, ‘causae civiles et
maritimae.’”).
18. Id. at 444 (“The next inquiry is, what are properly to be deemed ‘maritime contracts.’
Happily in this particular there is little room for controversy. All civilians and jurists agree, that in
this appellation are included, among other things, charter parties, affreightments, marine
hypothecations, contracts for maritime service in the building, repairing, supplying, and navigating
ships; contracts between part owners of ships; contracts and quasi contracts respecting averages,
contributions and jettisons; and, what is more material to our present purpose, policies of
insurance.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 731
over marine insurance contracts in New England Mutual Marine Insurance Co.
v. Dunham.19 The central issue in Dunham was whether a federal court
“sitting in admiralty, ha[s] jurisdiction to entertain” the libel in a case
between a marine insurance company and an insured.20 First, the Court
determined the extent of maritime jurisdiction had been well-established.21
The Court then proceeded to the trickier question of how to define a
maritime contract. It rejected the English “locality” test and determined
“the true criterion [was] the nature and subject-matter of the contract, as
whether it was a maritime contract, having reference to maritime service or
maritime transactions.”22 Having established its baselines, the Court then
proceeded to examine whether a contract of marine insurance was a
maritime contract.23 The Court first discussed marine insurance in terms
of the marine risks insured.24 Next, the Court examined the systems of
law that gave rise to and govern marine insurance.25 The Court
determined insurance contracts were “unknown to the common law”
because they originated in maritime law.26 The Court found this was true
19. New Eng. Mut. Marine Ins. Co. v. Dunham, 78 U.S. (11 Wall.) 1 (1870); see also Certain
Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 649 (9th Cir. 2008) (“It was
not until 1870 that the Supreme Court even recognized marine insurance contracts as within the
federal courts’ maritime jurisdiction.”); Irwin v. Eagle Star Ins. Co., 455 F.2d 827, 828–29 (5th Cir.
1972) (“A hundred years ago, the Supreme Court, in a thoroughly exhaustive opinion authored by
Mr. Justice Bradley, held that a contract of marine insurance is a maritime contract, within the
admiralty and maritime jurisdiction, though not within the exclusive jurisdiction of the United States
Courts . . . .” (citing Dunham, 78 U.S. at 1)).
20. Dunham, 78 U.S. at 22.
21. Id. at 25 (“First, as to the locus or territory of maritime jurisdiction; that is, the place or
territory where the law maritime prevails, where torts must be committed, and where business must be
transacted, in order to be maritime in their character; a long train of decisions has settled that it
extends not only to the main sea, but to all the navigable waters of the United States, or bordering on
the same, whether landlocked or open, salt or fresh, tide or no tide.”).
22. Id. at 26.
23. Id. at 27.
24. Id. at 30 (“But if we carefully analyze the contract of insurance we shall find that, in effect,
it is a contract, or guaranty, on the part of the insurer, that the ship or goods shall pass safely over the
sea, and through its storms and its many casualties, to the port of its destination; and if they do not
pass safely, but meet with disaster from any of the misadventures insured against, the insurer will pay
the loss sustained.”).
25. Id. at 31.
26. Id. at 31–32 (“[I]t is well[-]known that the contract of insurance sprang from the law
maritime[] and derives all its material rules and incidents therefrom. It was unknown to the common
law; and the common law remedies, when applied to it, were so inadequate and clumsy that disputes
arising out of the contract were generally left to arbitration, until the year A. D. 1601, when the
statute of 43 Elizabeth was passed creating a special court, or commission, for hearing and
determining causes arising on policies of insurance . . . . [T]he contract of marine insurance is an
exotic in the common law. And we know the fact, historically, that its first appearance in any code or
system of laws was in the law maritime as promulgated by the various maritime states and cities of
732 ST. MARY’S LAW JOURNAL [Vol. 47:727
not only in the English-speaking world but also globally.27 Therefore, the
Court determined a contract of marine insurance fell within federal
admiralty jurisdiction.28
In the 1961 decision Kossick v. United Fruit Co.,29 the United States
Supreme Court affirmed a contract to insure a ship is maritime and,
therefore, upheld federal courts’ admiralty jurisdiction.30 As recently as
2006, United States federal circuit courts have confirmed federal admiralty
jurisdiction encompasses marine insurance contracts.31
B. The Wilburn Boat Choice-of-Law Analysis Highlights the Importance of
Judicially Established Federal Admiralty Rules
Substantive admiralty rights must be enforced in accordance with
federal admiralty law regardless of the court hearing the admiralty
Europe.”).
27. Id. at 34.
28. Id. at 35 (“The learned and exhaustive opinion of Justice Story, in the case of De Lovio v.
Boit, affirming the admiralty jurisdiction over policies of marine insurance, has never been answered,
and will always stand as a monument of his great erudition. . . . [W]e are of opinion that the
conclusion of Justice Story was correct.” (footnote omitted)).
29. Kossick v. United Fruit Co., 365 U.S. 731 (1961).
30. Id. at 735 (citing Dunham, 78 U.S. at 20); see also Irwin v. Eagle Star Ins. Co., 455 F.2d 827,
829–30 (5th Cir. 1972) (discussing the ramifications of Kossick on choice-of-law analysis for marine
insurance contracts).
31. See Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 37 (1st Cir. 2006) (“This case arises
under our admiralty jurisdiction since it involves a marine insurance policy.”); see also N.Y. Marine &
Gen. Ins. Co. v. Tradeline LLC, 266 F.3d 112, 121 (2d Cir. 2001) (“Federal admiralty jurisdiction
extends to cases involving marine insurance contracts.”); Cent. Int’l Co. v. Kemper Nat’l Ins. Cos.,
202 F.3d 372, 373 (1st Cir. 2000) (“Suits on maritime insurance policies are classic examples of
matters within federal maritime jurisdiction.”); Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57
F.3d 50, 54 (1st Cir. 1995) (“The propriety of maritime jurisdiction over a suit involving a marine
insurance policy is unquestionable.”); St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495
F. Supp. 2d 232, 237 (D. Mass. 2007) (“This case comes before this court under the umbrella of
admiralty jurisdiction, since it involves a marine insurance policy.”); Commercial Union Ins. Co. v.
Detyens Shipyard, Inc. 147 F. Supp. 2d 413, 418–19 (D.S.C. 2001) (“It is well-settled that federal
admiralty jurisdiction over maritime contracts extends to suits involving marine insurance policies.”
(quoting Atl. Mut. Ins. Co. v. Balfour Maclaine Int’l Ltd., 968 F.2d 196, 199 (2d Cir. 1992))); ABB
Power T & D Co. v. Gothaer Versicherungsbank VVAG, 939 F. Supp. 1568, 1575 (S.D. Fla. 1996)
(“[C]ourts consistently held that ‘a contract of marine insurance is a maritime contract, within the
admiralty and maritime jurisdiction . . . of the United States Courts.’” (quoting Irwin, 455 F.2d at 828–
29)); Barber v. Chatham, 939 F. Supp. 782, 786 (D. Haw. 1996) (“Marine insurance policies are
maritime contracts within federal admiralty jurisdiction.”); St. Paul Ins. Co. of Ill. v. Great Lakes
Turnings, Ltd., 829 F. Supp. 982, 984 (N.D. Ill. 1993) (“It is undisputed that marine contracts,
including marine insurance contracts, fall under federal admiralty jurisdiction in Article 3, Section 2
of the United States Constitution.”); Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 656 (N.D. Cal.
1988) (“Admiralty jurisdiction over a suit involving a marine insurance policy is unquestionable.”);
Reliance Ins. v. McGrath, 671 F. Supp. 669, 676 (N.D. Cal. 1987) (“Admiralty jurisdiction over a suit
involving a marine insurance policy is unquestionable.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 733
dispute.32 Although the boundary between procedure and substance is
nebulous, the characterization of a given rule often is determined by
whether the state law “unduly interferes with the federal interest in
maintaining the free flow of maritime commerce.”33 The emphasis is not
only on whether the state provision conflicts with the substantive federal
statutory or common law but also on whether federal maritime rules
occupy the field so as to prevent application of state law.34
According to the United States Supreme Court, “The purpose of a
conflict-of-laws doctrine is to assure that a case will be treated in the same
way under the appropriate law regardless of the fortuitous circumstances
which often determine the forum.”35 Therefore, a United States federal
court exercising admiralty jurisdiction will follow federal conflict of law
principles.36 Until 1955, there was no choice-of-law analysis conducted in
marine insurance law cases.37 United States federal circuit courts
interpreted marine insurance cases based on federal admiralty precedent.38
If there was no clear federal admiralty precedent, then the courts looked to
32. Wilburn Boat Co. v. Fireman’s Fund Ins., 348 U.S. 310, 327 (1955) (Reed, J., dissenting)
(“One rule of law stands unquestioned. That is that all courts, state and federal, which have
jurisdiction to enforce maritime or admiralty substantive rights must do so according to federal
admiralty law.”); Doucette v. Vincent, 194 F.2d 834, 841–42 (1st Cir. 1952) (“[W]e take it now to be
fully established that when a common law action is brought, whether in a state or in a federal court,
to enforce a cause of action cognizable also in admiralty, the substantive law to be applied is the same
as would be applied by an admiralty court—that is, the general maritime law, as developed and
declared, in the last analysis, by the Supreme Court of the United States, or as modified from time to
time by Act of Congress.”).
33. Am. Dredging Co. v. Miller, 510 U.S. 443, 458 (1994) (Souter, J., concurring in part).
34. Id. at 461.
35. Lauritzen v. Larsen, 345 U.S. 571, 591 (1953).
36. See State Trading Corp. of India, Ltd. v. Assuranceforeningen Skuld, 921 F.2d 409, 414 (2d
Cir. 1990) (“A federal court sitting in admiralty must apply federal choice[-]of[-]law rules.”); see also
Advani Enters, Inc. v. Underwriters at Lloyds, 140 F.3d 157, 162 (2d Cir. 1998) (“This policy is a
maritime contract. Therefore, general federal maritime law, including federal choice-of-law rules
apply.”); Aqua-Marine Constructors, Inc. v. Banks, 110 F.3d 663, 670 (9th Cir. 1997) (“This is so
because a federal court sitting in diversity applies the choice-of-law rules of the forum state . . .
whereas a federal court sitting in admiralty must apply federal maritime choice-of-law rules.” (citation
omitted)); Thebes Shipping, Inc. v. Assicurazioni Ausonia SPA, 599 F. Supp. 405, 424 (S.D.N.Y.
1984) (“If this Court must make a choice[-]of[-]law, the rules to be applied in making the choice
should be federal choice[-]of[-]law rules . . . .”).
37. See Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 649 (9th
Cir. 2008) (“In the years between Dunham and the Court’s watershed decision in 1955 in Wilburn Boat,
both states and the federal government, through statutes and judicial decisions, regulated marine
insurance, with state laws yielding to federal laws whenever they were deemed to ‘enter an area of
maritime jurisdiction withdrawn from the States[.]’’’ (alteration in original) (quoting Md. Cas. Co. v.
Cushing, 347 U.S. 409, 413 (1954))).
38. See, e.g., id. at 649 (“Before Wilburn Boat, we would have simply looked to our admiralty
precedent. . . .”).
734 ST. MARY’S LAW JOURNAL [Vol. 47:727
English law.39 According to the United States Supreme Court, because
the admiralty laws came from England, it was advantageous to maintain
“harmony” with English marine insurance laws.40
In Wilburn Boat v. Fireman’s Fund Insurance Co.,41 the United States
“Supreme Court signaled a major shift in the approach to” the
interpretation of marine insurance cases by enunciating a two-step choiceof-
law analysis for marine insurance law cases.42 The two-step choice-oflaw
analysis asked two questions: “(1) Is there a judicially established
federal admiralty rule . . . ? (2) If not, should we fashion one?”43 Because
of this decision, choice-of-law issues have become “pervasive and
characteristic of marine insurance . . . and they can often determine the
result.”44 Approximately thirty years later, one United States district court
summarized the interplay of federal admiralty jurisdiction and the Wilburn
Boat choice-of-law analysis: “Although the propriety of admiralty
jurisdiction over a suit involving a marine insurance policy is
unquestionable . . . the [federal] court must employ the channel markers of
Wilburn Boat to deduce whether federal admiralty law or state insurance law
will control the litigation.”45
The bifurcation of admiralty jurisdiction and choice-of-law analysis for
contract interpretation as a result of the Wilburn Boat decision has been
“troublesome” and has created a “grey area” with respect to marine
insurance contracts.46 Since Wilburn Boat, a myriad of explanations of the
39. Id. As late as 1974, the Second Circuit looked to English law for its precedential effect. See
Nw. Mut. Life Ins. Co. v. Linard, 498 F.2d 556, 561 (2d Cir. 1974) (giving weight to English case law
regarding marine insurance contracts).
40. Queen Ins. Co. of Am. v. Globe & Rutgers Fire Ins. Co., 263 U.S. 487, 493 (1924) (“There
are special reasons for keeping in harmony with the marine insurance laws of England, the great field
of this business . . . .”); see also Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 325 (1955)
(Reed, J., dissenting) (“Our admiralty laws, like our common law, came from England. As a matter
of American judicial policy, we tend to keep our marine insurance laws in harmony with those of
England.”); St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982, 987–88 (N.D. Ill.
1993) (“The custom of marine shippers and American courts to harmonize their interpretation of
marine insurance policies with the laws of Great Britain illustrates that maritime disputes with an
international flavor require a single national voice for resolution.”).
41. Wilburn Boat Co. v. Fireman’s Fund Ins., 348 U.S. 310 (1955).
42. Inlet Fisheries, 518 F.3d at 649.
43. Wilburn Boat, 348 U.S. at 314.
44. Graydon S. Starring, Admiralty and Maritime Law: Selected Topics, 26 TORT & INS. L.J. 538, 559
(1991).
45. Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1013 (D.R.I. 1984) (citations omitted).
46. See Yu v. Albany Ins. Co., 281 F.3d 803, 808 n.5 (9th Cir. 2002) (“[T]he choice[-]of[-]law
determination in wake of [Wilburn Boat] can be ‘troublesome.’” (quoting Bohemia, Inc. v. Home Ins.,
725 F.2d 506, 509 (9th Cir. 1984))); St. Paul Fire & Marine Ins. v. Halifax Trawlers, Inc., 495 F. Supp.
2d 232, 237 (D. Mass. 2007) (“Though the rules of admiralty law supersede local authority, federal
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 735
choice-of-law principles for marine insurance law disputes have
proliferated in the United States federal circuit and district courts.47 The
First Circuit has described the state of affairs as “an abyss of confusion.”48
One legal commentator analyzed the variability in the language used in
United States district court applications of the Wilburn Boat test and
provided nine samples of widely varying interpretations.49
A minority of courts have paraphrased the Wilburn Boat choice-of-law
analysis to emphasize marine insurance contracts are governed first by
federal law and are governed by state law only in the circumstance when
there is no “established” federal law.50 The Ninth Circuit has also allowed
for federal law to control when there was a “need for uniformity in
admiralty practice.”51
courts of all levels, including the Supreme Court, have acknowledged a gray area with respect to
maritime risk policies.”); Crowley Marine Servs., Inc. v. Hunt, 1995 A.M.C. 2562, 2568 (W.D. Wash.
1995) (“The Ninth Circuit has frequently observed that the issue of whether federal or local law
applies to a maritime insurance contract can present a troublesome question.”); see also Wisniewski, 579
F. Supp. at 1013 (“Whether federal or state law should apply [to the interpretation of a marine
insurance policy], however, is a much more enigmatic question. The uncertainty prescinds wholly
from the United States Supreme Court’s decision in Wilburn Boat Co. . . . .”).
47. See, e.g., Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 885 (5th Cir. 1991) (“Oblivious to
the tangled mess it has left the practitioner to decipher, this Court has extended numerous—and
often seemingly inconsistent—explanations of the appropriate choice[-]of[-]law in marine insurance
disputes.”).
48. Cent. Int’l Co. v. Kemper Nat’l Ins. Cos., 202 F.3d 372, 373 (1st Cir. 2000) (“Beneath this
surface agreement on general principles lies an abyss of confusion. One might think that construing
a maritime insurance policy, in relation to damage occurring on the high seas, would be a paradigm
case for a uniform body of federal law . . . but the tensions in Supreme Court precedents are
legendary . . . with regard to the reach of state law in federal maritime law generally . . . .” (citations
omitted)).
49. Christopher W. Nicoll, Uberrimae Fidei: The Doctrine That’s on Everyone’s Lips, 21 U.S.F. MAR.
L.J. 1, 15–17 (2008). In an analysis of 105 United States marine insurance cases, the author found
approximately thirty different formulations of the Wilburn Boat test.
50. See AIG Centennial Ins. v. O’Neill, 782 F.3d 1296, 1302 (11th Cir. 2015) (“In the absence
of a ‘judicially established federal admiralty rule,’ we rely on state law when addressing questions of
marine insurance.” (citing Wilburn Boat Co. v. Fireman’s Fund Ins., 348 U.S. 310, 320–21 (1955)));
Cargill, Inc. v. Commercial Union Ins., 889 F.2d 174, 178 (8th Cir. 1989) (“Federal admiralty law
governs the interpretation of these marine insurance policies, unless no established federal admiralty
law exists, in which case state law applies.”); Great Lakes Reinsurance (UK) PLC v. Kranig, No.
2011-122, 2013 WL 2631861, at *6 (D.V.I. June 12, 2013) (“Marine insurance [policies] are governed
by federal admiralty law when there is an established federal rule, and by state law when there is not.”
(quoting Ingersoll Milling Mach. Co. v. M/V Bodena, 829 F.2d 293, 305 (2d Cir. 1987))).
51. See, e.g., Kiernan v. Zurich Cos., 150 F.3d 1120, 1121 (9th Cir. 1998) (“Disputes arising
under marine insurance contracts are governed by federal admiralty law when an established federal
rule addresses the issues raised. . . . In the absence of an established federal rule, a federal court may,
in certain circumstances, fashion one. . . . State law governs disputes arising under marine insurance
contracts only ‘in the absence of a federal statute, a judicially fashioned admiralty rule, or a need for
uniformity in admiralty practice . . . .’” (quoting Suma Fruit Int’l. v. Albany Ins. Co., 122 F.3d 34, 35
736 ST. MARY’S LAW JOURNAL [Vol. 47:727
A majority of courts have paraphrased the Wilburn Boat choice-of-law
analysis to emphasize the states’ power in the interpretation of marine
insurance policies.52 For example, the First Circuit has recently described
the states’ regulatory powers with respect to marine insurance as “largely
unfettered.”53 One United States district court describes Wilburn Boat as
having decided state law “ordinarily governs” the interpretation of marine
insurance contracts.54 The same district court described the preference
for state law in Wilburn Boat as being “clearly established.”55 Another
district court described there being a “broad presumption” that state law
will control marine insurance contracts.56 Thirty years after Wilburn Boat,
the Fifth Circuit stated it was “now axiomatic” that state law controlled the
interpretation of marine insurance law contracts “in absence of a specific
(9th Cir. 1997))).
52. See Northfield Ins. v. Barlow, 983 F. Supp. 1376, 1379 (N.D. Fla. 1997) (“The Supreme
Court in Wilburn Boat noted the importance of state law in governing maritime disputes; however, it
carved out an exception to the state law application where federal admiralty law was ‘firmly
entrenched.’”); Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1013–14 (D.R.I. 1984) (“In the
absence of a settled federal marine insurance rule, the Wilburn Boat inquiry generally has been
interpreted, in deference to state hegemony over insurance, to discourage the fashioning of new
federal law and to favor the application of state law.”). Before the twenty-first century, United States
circuit court decisions supported a uniform rule of uberrimae fidei. One legal commentator offered the
following harsh opinion:
Wilburn Boat has created a situation in which admiralty courts have largely abrogated their
unique power to fashion maritime rules, at least in the area of marine insurance. From the
perspective of the district courts, the safest approach to the adjudication of marine insurance
contract disputes is to focus on, and adhere to, state law. Generally, admiralty decisions do not
display a tendency to view maritime law as a unique and coherent body of rules. By de facto
delegation of the rule-making power, formerly vested in the federal courts, to the various state
forums, Wilburn Boat has put leadership with regard to the evolution of consistent admiralty
rules into the hands of state judges and legislators. These entities, unlike their federal
counterparts, may have little interest and a lack of experience in maritime law. This makes the
development of consistent admiralty rules theoretically and practically improbable.
Thomas R. Beer, Comment, Established Federal Admiralty Rules in Marine Insurance Contracts and the
Wilburn Boat Case, 1 U.S.F. MAR. L.J. 149, 168 (1989).
53. Catlin at Lloyd’s v. San Juan Towing & Marine Serv., Inc., 778 F.3d 69, 76 (1st Cir. 2015).
54. ABB Power T & D Co. v. Gothaer Versicherungsbank VVAG, 939 F. Supp. 1568, 1575
(S.D. Fla. 1996) (“Based on these important state interests the Court greatly limited the role federal
admiralty law would play in the interpretation of marine insurance contracts. Specifically, the Court
determined that state law, not federal, ordinarily governs the interpretation of such contracts and that
admiralty law would thereafter be confined only to those limited areas in which earlier doctrines were
firmly entrenched.”).
55. Id. (“Although a preference for state law was clearly established by the decision in Wilburn,
federal admiralty law was not completely written out of the equation.”).
56. St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982, 984 (N.D. Ill.
1993).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 737
and controlling federal rule.”57 Such courts paraphrase the Wilburn Boat
analysis in the following terms: “state law governs unless there is a well
settled federal admiralty rule applicable to the particular issues of the
case.”58 Although, as will be later discussed in this Article, there is some
controversy between the federal courts as to exactly what type of admiralty
rule will displace state law.59
The formulation of the Wilburn Boat test in the Ninth Circuit has been
unique among the United States federal circuits since its decision in
Bohemia, Inc. v. Home Insurance Co.60 in 1984. This formulation reads
Wilburn Boat together with the later Supreme Court decision Kossick v.
United Fruit Co.61 to allow federal law to control the interpretation of a
marine insurance contract where there is “a federal statute, a judicially
fashioned admiralty rule, or a need for uniformity in admiralty practice.”62
This standard has been applied by both the Ninth Circuit and by district
courts within the Ninth Circuit.63 One district court within the Ninth
57. INA of Tex. v. Richard, 800 F.2d 1379, 1380 (5th Cir. 1986).
58. Thebes Shipping, Inc. v. Assicurazioni Ausonia SPA, 599 F. Supp. 405, 425 (S.D.N.Y.
1984) (quoting Navegacion Goya S.A. v. Mut. Boiler & Mach. Ins. Co., 411 F. Supp. 929, 934
(S.D.N.Y. 1975)); see also N.Y. Marine & Gen. Ins. Co. v. Cont’l Cement Co., 761 F.3d 830, 836 (8th
Cir. 2014) (“A dispute arising under a marine insurance contract is ‘governed by state law, unless an
established federal admiralty rule addresses the issue raised.’” (quoting Assicurazioni Generali SPA v.
Black & Veatch Corp., 362 F.3d 1108, 1111 (8th Cir. 2004))); Albany Ins. Co. v. Anh Thi Kieu, 927
F.2d 882, 886 (5th Cir. 1991) (“State law, therefore, governs the interpretation of marine insurance
policies unless an available federal maritime rule controls the disputed issue.”); Kilpatrick Marine
Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 948 (11th Cir. 1986) (“In Wilburn Boat, the Supreme
Court applied state law when it found no federal admiralty law on the subject.”).
59. Compare N.Y. Marine, 761 F.3d at 839 (“Striking a balance between the two in Wilburn Boat,
the Court determined that courts should apply state law to maritime insurance disputes unless there
is a judicially established federal admiralty rule governing the issue.”), with McAdam v. State Nat’l
Ins., 28 F. Supp. 3d 1110, 1116 (S.D. Cal. 2014) (“A marine insurance contract is interpreted in
accordance with the law of the state in which it was formed unless there is a controlling federal rule
on point, or unless there is a reason to create a federal rule. . . . Following this rule, except where
there is an ‘entrenched federal precedent,’ state substantive insurance law governs marine insurance
disputes.”).
60. Bohemia, Inc. v. Home Ins. Co., 725 F.2d 506 (9th Cir. 1984).
61. Kossick v. United Fruit Co., 365 U.S. 731 (1961).
62. Bohemia, 725 F.2d at 510.
63. See Yu v. Albany Ins. Co., 281 F.3d 803, 806 (9th Cir. 2002) (“Disputes arising under
marine insurance contracts are governed by state law . . . unless an established federal rule addresses
the issues raised, or there is a need for uniformity in admiralty practice.”); Kiernan v. Zurich Cos.,
150 F.3d 1120, 1121 (9th Cir. 1998) (“State law governs disputes arising under marine insurance
contracts only ‘in the absence of a federal statute, a judicially fashioned admiralty rule, or a need for
uniformity in admiralty practice . . . .’” (quoting Suma Fruit Int’l. v. Albany Ins. Co., 122 F.3d 34, 35
(9th Cir. 1997))); Crowley Marine Servs., Inc. v. Hunt, 1995 A.M.C. 2562, 2568 (W.D. Wash. 1995)
(“However, the [Ninth] circuit court has generally held that state law is applicable in the absence of a
federal statute, a judicially fashioned admiralty rule, or a need for uniformity in admiralty practice.”
738 ST. MARY’S LAW JOURNAL [Vol. 47:727
Circuit has also considered the relationship between the federal admiralty
rule and the state rule in its choice-of-law analysis under Wilburn Boat.64
The First Circuit requires the federal admiralty rule be “materially
different from state law” for it to control.65 Materiality is also a factor in
the Fifth Circuit formulation:
This Circuit has identified three factors that a court should consider in
determining if a federal maritime rule controls the disputed issue: (1)
whether the federal maritime rule constitutes “entrenched federal
precedent,” . . . (2) whether the state has a substantial and legitimate interest
in the application of its law, . . . (3) whether the state’s rule is materially
different from the federal maritime rule.66
These widely varying federal court interpretations of the Wilburn Boat
choice-of-law analysis illustrate “the issue of admiralty versus state law in
the interpretation of marine insurance contracts[] is a highly amorphous
and confusing aspect of federal jurisprudence.”67 Writing in his
concurrence to Wilburn Boat, Justice Frankfurter declared, “It cannot be
(citing Bohemia, 725 F.2d at 510)); Port Lynch, Inc. v. New Eng. Int’l Assurety of Am., Inc., 754 F.
Supp. 816, 820 (W.D. Wash. 1991) (“The Court finds that the standard in the Ninth Circuit for
applying federal admiralty law or state law is set forth in Bohemia as follows: state law controls in the
absence of a federal statute, a judicially fashioned admiralty rule, or a need for uniformity in admiralty
practice.” (citing Bohemia, 725 F.2d at 510)); Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 656 (N.D.
Cal. 1988) (“State law will control the interpretation of a marine insurance policy in the absence of a
federal statute, a judicially fashioned admiralty rule, or a need for uniformity in admiralty practice.”
(citing Bohemia, 725 F.2d at 510)).
64. Garvey, 1989 A.M.C. at 656 (“The courts draw from both federal marine insurance
principles and applicable state law when the controlling precedents demonstrate that the federal
admiralty precepts and those of the state having the most significant relationship to the policy, here
California, are harmonious on the disposition of the issues.”).
65. See Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 37 (1st Cir. 2006) (“Generally, in
cases involving a marine insurance contract, we will apply state law unless an established ‘maritime
rule controls the disputed issue, and that rule is materially different from state law.’” (emphasis in
original)); Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50, 54 (1st Cir. 1995) (“State law
may supplement maritime law when maritime law is silent or a local matter is at issue, but state law
may not be applied where it is materially different from maritime law, or where it would defeat the
reasonably settled expectations of maritime actors.”); Catlin at Lloyd’s v. San Juan Towing & Marine
Servs., Inc., 974 F. Supp. 2d 64, 74 (D.P.R. 2013) (“The First Circuit Court of Appeals has held that
in a case involving a marine insurance contract, state law will apply unless an established maritime
rule controls the disputed issue, and that rule is materially different from state law.” (citing Pesante,
459 F.3d at 37)); St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232, 237
(D. Mass. 2007) (“But Wilburn Boat does not reach so far as to render the application of maritime law
obsolete in the context of insurance disputes. In cases involving marine insurance contracts, this
court will apply state law, unless an established maritime rule controls the issue and the rule materially
differs from state law.” (citing Pesante, 459 F.3d at 37)).
66. Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 886 (5th Cir. 1991) (citations omitted).
67. ABB Power T & D Co. v. Gothaer Versicherungsbank VVAG, 939 F. Supp. 1568, 1577
(S.D. Fla. 1996).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 739
that by this decision the Court means suddenly to jettison the whole past
of the admiralty provision of Article III and to renounce requirements for
nationwide maritime uniformity, except insofar as Congress has
specifically enacted them, in the field of marine insurance.”68 Marine
insurance law is certainly an area that cries out for uniformity.69 Because
marine insurance is essential to interstate and international maritime
commerce, uniform laws are needed at the federal level so they can be
synchronized with those of other maritime powers.70
One of the doctrines limited by the application of the Wilburn Boat
choice-of-law analysis is the duty of utmost good faith—uberrimae fidei—in
maritime insurance.71 The concept of uberrimae fidei under federal
admiralty law is broader in application than state consumer insurance
laws.72 The central thesis of this Article is uberrimae fidei should be
recognized as a United States federal admiralty rule for marine protection
and indemnity insurance offered by mutual insurance clubs because such a
duty promotes economic efficiency in the insurance marketplace.
Part II of this Article tackles the first part of the Wilburn Boat choice-oflaw
analysis—is there a judicially established federal admiralty rule?—by
examining uberrimae fidei from a legal perspective. First, United States case
law is reviewed to illustrate the origins of uberrimae fidei and its evolution
through United States jurisprudence. Three central aspects of uberrimae
fidei—materiality, reliance, and disclosure—are discussed at greater length
because these are the most litigated aspects of the duty. Finally, recent
United States federal circuit court cases are surveyed to determine which
federal circuits recognize uberrimae fidei as a judicially established federal
admiralty rule as of October 2015.
Part III of this Article addresses the second part of the Wilburn Boat
choice-of-law analysis—whether a judicially established federal admiralty
should rule be fashioned—by examining uberrimae fidei from an economic
perspective. The federal bench and legal commentators seldom expound
68. Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 323 (1955) (Frankfurter, J.,
concurring).
69. Id. at 333 (Reed, J., dissenting).
70. See id. at 323 (Frankfurter, J., concurring) (“The business of marine insurance often may be
so related to the success of many manifestations of commercial maritime endeavor as to demand
application of a uniform rule of law designed to eliminate the vagaries of state law and to keep
harmony with the marine insurance laws of other great maritime powers.”).
71. Markel Am. Ins. Co. v. Veras, 995 F. Supp. 2d 65, 72 (D.P.R. 2014).
72. See, e.g., Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1383 (N.D. Fla. 1997)
(comparing the concept of materiality under uberrimae fidei to the concept of materiality as applied to a
Florida state statute where a life insurance policy was at issue).
740 ST. MARY’S LAW JOURNAL [Vol. 47:727
on the economic rationale for uberrimae fidei; however, this information,
where available, isdiscussed. A review of four scholarly papers, which
focus on an economic analysis of uberrimae fidei—with respect to insurance
generally—reveals uberrimae fidei’s primary benefit is reducing the negative
impacts of information asymmetries, such as adverse selection and moral
hazard.73 Marine insurance offered by protection and indemnity clubs is
analyzed within that framework. First, the unique characteristics of
protection and indemnity clubs will be outlined. Then, how information
asymmetries can negatively impact the functioning of that market and how
uberrimae fidei can reduce those negative impacts for marine insurance
offered by protection and indemnity clubs are discussed.
Part IV concludes by asserting specifically with respect to protection
and indemnity clubs, economic theory supports the efficiency of uberrimae
fidei as a means to dispel information asymmetry and broaden the
availability of insurance to low-risk individuals.
II. LEGAL ANALYSIS OF UBERRIMAE FIDEI AS A JUDICIALLY
ESTABLISHED FEDERAL ADMIRALTY RULE
A. The Origin and Evolution of Uberrimae Fidei
The doctrine of uberrimae fidei has its origins in the earliest days of
marine insurance, when the insurance underwriters’ only source of
information came from the shipowners and merchants whose cargo sailed
on the ships.74 “Uberrimae fidei” loosely translates from Latin as “of the
utmost good faith.”75 According to the doctrine uberrimae fidei, there is a
mutual duty between the parties to a marine insurance contract to perform
their duties according to the highest standard of good faith.76 The
73. See infra Part III.C.
74. Fed. Ins. Co. v. PGG Realty, LLC, 538 F. Supp. 2d 680, 687 (S.D.N.Y. 2008) (quoting
Stecker v. Am. Home Fire Assurance Co., 84 N.E.2d 797, 799, reh’g denied, 86 N.E.2d 182 (N.Y.
(1949)).
75. Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 37 (1st Cir. 2006) (quoting Grande v.
St. Paul Fire & Marine Ins. Co., 436 F.3d 277, 282 (1st Cir. 2006)); see also Commercial Union Ins.
Co. v. Detyens Shipyard, Inc. 147 F. Supp. 2d 413, 423 (D.S.C. 2001) (“Literally translated the phrase
‘uberrimae fidei’ means of the utmost good faith.” (quoting N. Am. Specialty Ins. Co. v. Savage, 977 F.
Supp. 725, 732 (D. Md. 1997))).
76. See St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., 798 F.3d 715, 719 (8th Cir.
2015) (“Under the doctrine of uberrimae fidei, ‘the parties to a marine insurance policy must accord
each other the highest degree of good faith.’” (quoting Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13
(2d Cir. 1986))); Crowley Marine Servs., Inc. v. Hunt, 1995 A.M.C. 2562, 2568 (W.D. Wash. 1995)
(“The doctrine of uberrimae fidei holds both parties to a contract of insurance to the duty of utmost
good faith.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 741
obligation of utmost good faith arose from the nature of the insurance
relationship and the character of the insurance contract.77 The Ninth
Cir cuit summarized the origin of the doctrine as follows:
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
t elephones, email, digital photography, and air travel.78
Uberrimae fidei was formally addressed by Lord Mansfield as early as 1766
in the English case of Carter v. Boehm,79 which dealt with a policy insuring
against the loss of Fort Marlborough. Lord Mansfield wrote his opinion
based on the notion that insurance is a speculative contract.80 The duty of
good faith prevents either party to the insurance contract from concealing
private knowledge to induce the other party into the agreement.81 The
insured is under an obligation to disclose “special facts, upon which the
contingent chance is to be computed” because such facts are frequently
only known to the insured.82 In the sailing world of the 1700s, the
underwriter had to implicitly trust the representations of the insured.83
Therefore, the remedy for withholding such “special facts” by the insured
was voiding the insurance policy.84 This harsh result was achieved even if
the insured acted without scienter to deceive the underwriter.85 However,
77. See Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 318 (1928) (“The obligation was not one
stipulated for by the parties, but is one imposed by law as a result of the relationship assumed by
them and because of the peculiar character of the insurance contract. The necessity for complying
with it is not dispensed with by the failure of the insurer to stipulate in the policy for such
disclosure.”).
78. Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 646 (9th Cir.
2008).
79. Carter v. Boehm (1766) 97 Eng. Rep. 1162 (Eng.).
80. Id. at 1164.
81. See id. (“Good faith forbids either party by concealing what he privately knows, to draw the
other into a bargain, from his ignorance of that fact, and his believing the contrary.”).
82. Id.
83. See id. (“[T]he under-writer trusts to [the insured’s] representation, and proceeds upon
confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter
into a belief that the circumstance does not exist, and to induce him to estimate the risque, as
if it did not exist.”).
84. See id. (“The keeping back such circumstance is a fraud, and therefore the policy is void.”).
85. See id. (“Although the suppression should happen through mistake, without any fraudulent
intention; yet still the under-writer is deceived, and the policy is void; because the risque run is really
742 ST. MARY’S LAW JOURNAL [Vol. 47:727
avoidance of the policy was limited to circumstances when the concealed
information was material to the risk insured.86 In his conclusion, Lord
Mansfield reasoned the parties should be obligated to disclose “special
facts” to promote good faith and prevent fraud.87 He found similar
reasons for his rule against concealment of “special facts.”88
In 1828, the issue of uberrimae fidei reached the United States Supreme
Court in M’Lanahan v. Universal Insurance Co.,89 which was concerned with
four instances of concealment of “material circumstances” in issuing
insurance on the brig Creole.90 Justice Joseph Story, writing for the
Supreme Court, started from the presumption “[t]he contract of insurance
has been said to be a contract uberrimae fidei, and the principles which
govern it are those of an enlightened moral policy.”91 The opinion then
proceeded to illuminate the specifics of that basic presumption: the
insured must assume the underwriter is going forward on the belief the
insured has disclosed all the facts “material to the risk.”92 Procuring
insurance while in possession of “secret information” is a fraud that voids
the insurance contract.93 Scienter is not a requirement to void an
insurance policy; much like Lord Mansfield, Justice Story held an
unintentional omission of a material fact by the insured permits the insurer
to void the policy.94 The key is whether the insured exercised “due and
different from the risque understood and intended to be run, at the time of the agreement.”).
86. See id. at 1164–65 (“There are many matters, as to which the insured may be innocently
silent—he need not mention what the under-writer knows . . . . The under-writer needs not be told
what lessens the risque agreed and understood to be run by the express terms of the policy.”); see also
Thomas J. Schoenbaum, The Duty of Utmost Good Faith in Marine Insurance Law: A Comparative Analysis
of American and English Law, 29 J. MAR. L. & COMM. 1, 2 (1998) (“In Carter, however, Lord Mansfield
applied the doctrine in a very practical way. The duty of disclosure was limited to material (Lord
Mansfield used the term ‘special’) facts within the exclusive knowledge of the assured.”).
87. See Carter, 97 Eng. Rep. at 1165 (“The reason of the rule which obliges parties to disclose, is
to prevent fraud, and to encourage good faith.”).
88. See id. at 1169 (“The reason of the rule against concealment is, to prevent fraud and
encourage good faith.”).
89. M’Lanahan v. Universal Ins. Co., 26 U.S. (1 Pet.) 170 (1828).
90. Id. at 178.
91. Id. at 185. For recent examples of the enduring nature of this statement, see Fireman’s
Fund Insurance Co. v. Great American Insurance Co., 10 F. Supp. 3d 460, 476 (S.D.N.Y. 2014); and
Thebes Shipping, Inc. v. Assicurazioni Ausonia SPA, 599 F. Supp. 405 (S.D.N.Y. 1984).
92. See M’Lanahan, 26 U.S. at 185 (“The underwriter must be presumed to act upon the belief,
that the party procuring insurance, is not, at the time, in possession of any facts, material to the risk
which he does not disclose; and that no known loss had occurred, which by reasonable diligence
might have been communicated to him.”).
93. Id.
94. See id. (“And even if there be no intentional fraud, still the underwriter has a right to a
disclosure of all material facts, which it was in the power of the party to communicate by ordinary
means; and the omission is fatal to the insurance.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 743
reasonable diligence” in informing the underwriter of the material facts.95
What constitutes “due and reasonable diligence” is determined under the
circumstances of the individual case.96 This position constituted both a
softening of some stricter state court positions of “extreme diligence” and
a clarification of other state court decisions that left the standard open for
discussion.97
The United States Supreme Court again touched upon uberrimae fidei
approximately sixty years later in Sun Mutual Insurance Co. v. Ocean Insurance
Co.,98 which addressed the reinsurance of a marine risk. After establishing
the duty of disclosure in a reinsurance policy did not differ from that of an
original insurance policy, the Supreme Court stated uberrimae fidei was the
basic obligation of both types of policies.99 The Court reiterated scienter
is not an element of uberrimae fidei: “The duty of communication, indeed, is
independent of the intention, and is violated by the fact of concealment
even where there is no design to deceive.”100 More significantly, the
Court clarified its standard for “material” information, which was left
undefined in M’Lanahan. According to the Court, the concealment of any
information “that, if disclosed, would probably have influenced the terms
of insurance” is material enough to avoid the insurance contract.101
As late as the 1920s, the United States Supreme Court held all insurance
policies—maritime and otherwise—had an implied duty of uberrimae
fidei.102 However, the basic definition of uberrimae fidei, with respect to
marine insurance, has been fairly consistent throughout the United States
federal courts since Sun Mutual.103
One twenty-first century case stated “[m]odern maritime cases” describe
95. See id. (“The true principle deducible from the authorities on this subject is, that where a
party orders insurance, and afterwards receives intelligence material to the risk, or has knowledge of a
loss; he ought to communicate it to the agent, as soon as, with due and reasonable diligence, it can be
communicated, for the purpose of countermanding the order, or laying the circumstances before the
underwriter. If he omits so to do, and by due and reasonable diligence the information might have
been communicated, so as to have countermanded the insurance, the policy is void.”).
96. Id. at 185–86.
97. Id.
98. Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485 (1883).
99. Id. at 510.
100. Id.
101. Id. at 510–11; see also State Nat’l Ins. Co. v. Anzhela Explorer, LLC, 812 F. Supp. 2d 1326,
1351 (S.D. Fla. 2011) (quoting Sun Mutual, 107 U.S. at 510–11).
102. Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928) (“Insurance policies are
traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the
risk, of which he is aware, makes the contract voidable at the insurer’s option.”).
103. Schoenbaum, supra note 86, at 9 (“[M]ost United States federal courts have consistently
applied the doctrine of utmost good faith in marine insurance cases.”).
744 ST. MARY’S LAW JOURNAL [Vol. 47:727
uberrimae fidei in terms that originate in Btesh v. Royal Insurance Co. of
Liverpool,104 a short 1931 Second Circuit decision by Judge Learned
Hand.105 Btesh involved an “open” policy of insurance covering marine
shipments.106 A cargo of silk material, which had been labeled as cotton,
was stolen en route, and the cargo owner sued to reclaim the full value of
the silk rather than the declared value of the cotton.107 Judge Learned
Hand expounded on four key points regarding uberrimae fidei. First, under
marine policies, the insured “must disclose to the underwriter all
circumstances known to him which materially affect the risk.”108 This is a
succinct summary of the precedents set in M’Lanahan and Sun Mutual.
Second, materiality is defined as “something which would have controlled
the underwriter’s decision” and is subject to a “reasonable person”
standard.109 Third, intent to deceive on the part of the insured is not
required to void the policy,110 which is aligned with precedent. Finally,
the ultimate purpose of uberrimae fidei is that the insurers “are not exposed
to unassumed risks directly touching the property insured.”111
The Second Circuit briefly revisited uberrimae fidei the following year in
an automobile financing insurance case.112 At the time, the circuit court
viewed the rule as applicable to all types of insurance.113 The key
innovation in this case was the scope of when material changes in risk
needed to be communicated to the insurer because “known changes in
conditions material to the risk which occur between the opening of
negotiations for insurance and the issuance of the policy must be
divulged.”114
Two state courts examined uberrimae fidei before the Second Circuit
104. Btesh v. Royal Ins. Co. of Liverpool, 49 F.2d 720 (2d Cir. 1931).
105. Progressive N. Ins. Co. v. Bachmann, 314 F. Supp. 2d 820, 827 (W.D. Wis. 2004) (citing
Btesh, 49 F.2d at 721).
106. Btesh, 49 F.2d at 720.
107. Id.
108. Id. at 721.
109. Id.
110. Id.
111. Id. at 722.
112. Hare & Chase, Inc. v. Nat’l Sur. Co., 60 F.2d 909, 911 (2d Cir. 1932) (“The question
presented is whether an insured who intentionally fails to disclose material facts because of his belief
that the insurance is not to cover the undisclosed risk and who pays no premium for such risk until
after loss thereunder has been incurred may establish a claim in respect to such a risk. In our opinion
it was properly answered in the negative.”).
113. See id. (“This rule, originating in marine insurance, was extended in England and in a few
early American cases to other types of insurance.”).
114. Id.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 745
revisited the issue.115 In 1979, the Southern District of New York stated,
“It is undeniable that parties to a contract of marine insurance must be
held to a standard of the highest fidelity in their dealings.”116 Distilling
case precedent, the court defined uberrimae fidei as a doctrine that “obligates
the assured to volunteer information which might have a bearing on the
scope of the risk assumed, and the failure to do so will allow the insurer to
avoid the policy.”117 In 1984, the District of Rhode Island proposed its
own similarly lackluster definition: “The marine insurance contract is
uberrima fides: it is conceived in the uttermost good faith and incubated in a
legal environment which transcends the sharper practices of the world of
commerce. Either party’s failure to observe that standard of conduct
renders the contract voidable at the instance of the other party.”118
In 1985, the Second Circuit decided Puritan Insurance Co. v. Eagle
Steamship Co. S.A.,119 in which an insurer sought to void a hull and
machinery policy ab initio due to misrepresentation of pre-policy losses.
The circuit court started its analysis by stating uberrimae fidei was wellestablished
and required “the party seeking insurance . . . to disclose all
circumstances known to him which materially affect the risk.”120 “All
circumstances” includes any material information acquired after having
applied for insurance.121 The opinion focused on three central attributes
of uberrimae fidei: information must be disclosed, the information must be
material, and must be relied upon.122 Materiality was defined by quoting
Btesh as “something which would have controlled the underwriter’s
decision.”123 Furthermore, only substantial compliance with the rule is
115. Contractors Realty Co. v. Ins. Co. of N. Am., 469 F. Supp. 1287, 1294 (S.D.N.Y. 1979);
Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1014 (D.R.I. 1984).
116. Contractors Realty Co., 469 F. Supp. at 1294.
117. Id. (first citing Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974 (5th Cir. 1969);
then citing Fireman’s Fund Ins. Co. v. Wilburn Boat Co., 300 F.2d 631, 646–47 (5th Cir. 1962),
abrogated by Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 888 (5th Cir. 1991); then citing King v.
Aetna Ins. Co., 54 F.2d 253, 254 (2d Cir. 1931); then citing Btesh, 49 F2d at 721; then citing
Navegacion Goya S.A. v. Mut. Boiler & Mach. Ins. Co., 411 F. Supp. 929, 935 (S.D.N.Y. 1975); then
citing Anne Quinn Corp. v. Am. Mfg. Mut. Ins. Co., 369 F. Supp. 1312, 1315 (S.D.N.Y 1973), aff’d
mem., 505 F.2d 727 (2d Cir. 1974); then citing Neubros Corp. v. Nw. Nat’l Ins. Co., 359 F. Supp. 310,
317 (E.D.N.Y. 1972); then citing Rosenthal v. Poland, 337 F. Supp. 1161, 1168 (S.D.N.Y. 1972); and
then citing Stecker v. Am. Home Fire Assurance Co., 84 N.E.2d 797, 798 (N.Y. 1949)).
118. Wisniewski, 579 F. Supp. at 1014.
119. Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866 (2d Cir. 1985).
120. Id. at 870 (citing Btesh, 49 F.2d at 721).
121. Id.
122. Id. at 871 (“The principle of uberrimae fidei does not require the voiding of the contract
unless the undisclosed facts were material and relied upon.”).
123. Id. (quoting Btesh, 49 F.2d at 721).
746 ST. MARY’S LAW JOURNAL [Vol. 47:727
required; if the insured discloses sufficient information to alert the
underwriter of a need to investigate further, then the insured has satisfied
his duty.124 Finally, the alleged misrepresentation must both be relied
upon by the insurer and actually mislead the insurer.125 The following
year, the Second Circuit summarized its position on uberrimae fidei: “The
doctrine of uberrimae fidei requires a party seeking marine insurance to
disclose all circumstances known to it which materially affect the risk. . . .
If a party fails to disclose material information applicable to the risk
involved, the policy is void.”126
Two cases in the Northern District of California also proposed
comprehensive definitions of uberrimae fidei. In discussing an all-risks
policy on a yacht in 1987, the district court described uberrimae fidei as
app licable to all marine insurance policies in the following terms:
The marine insurance contract is conceived in uttermost good faith
(uberrimae fidei), and the assured must disclose every material circumstance
which in the ordinary course of business ought to be known to him. Thus
the assured is obligated to volunteer information which might have a bearing
on the scope of the risk assumed, and the failure to do so will allow the
i nsurer to void the policy.127
The decision the following year used a very similar formulation.128
Twenty-first century jurisprudence affirms precedent rather than makes
new law in the arena of uberrimae fidei. For example, the 2000 Eleventh
Circuit decision in HIH Marine Services v. Fraser129 relied on the 1984
Eleventh Circuit Steelmet130 decision and the 1962 Fifth Circuit Wilburn
Boat131 decision for its definition of uberrimae fidei: “Uberrimae fidei requires
that an insured fully and voluntarily disclose to the insurer all facts material
124. Id. (quoting 2 M. MUSTILL & J. GILMAN, ARNOULD’S LAW OF MARINE INSURANCE AND
AVERAGE § 646, at 493 (16th ed. 1981)).
125. Id. at 870 (quoting Rose & Lucy, Inc. v. Resolute Ins. Co., 249 F. Supp. 991, 992 (D. Mass.
1965)).
126. Ingersoll Milling Mach. Co. v. M/V Bodena, 829 F.2d 293, 308 (2d Cir. 1987) (citations
omitted).
127. Reliance Ins. Co. v. McGrath, 671 F. Supp. 669, 678 (N.D. Cal. 1987) (citations omitted).
128. See Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 659 (N.D. Cal. 1988) (“The marine
insurance contract is conceived in uttermost good faith, uberrimae fidei, and the insured must disclose
every material circumstance which in the ordinary course of business ought to be known (or is fairly
presumed to be known) to him. The doctrine of uberrimae fidei is applicable to all forms of marine
insurance.”).
129. HIH Marine Servs. v. Fraser, 211 F.3d 1359 (11th Cir. 2000).
130. Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689 (11th Cir. 1984).
131. Fireman’s Fund Ins. Co. v. Wilburn Boat Co., 300 F.2d 631 (5th Cir. 1962).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 747
to a calculation of the insurance risk.”132 The case also heavily relied on
Northfield Insurance Co. v. Barlow,133 borrowing its definition of materiality
and its core logic that the insured bears the burden of disclosure.134
The 2001 Second Circuit decision in New York Marine & General
Insurance Co. v. Tradeline LLC135 confirmed uberrimae fidei holdings from the
1980s. With respect to a general definition, the court quoted directly from
Puritan.136 Additionally, the circuit court stated “[u]berrimae fidae, the duty
of utmost good faith, requires an assured to disclose any information that
materially affects the risk being insured, because the assured is more likely
to be aware of such information.”137 Finally, the circuit court defined an
undisclosed fact as “material if it would have affected the insurer’s decision
to insure at all or at a particular premium.”138
When the Second Circuit revisited uberrimae fidei in an unpublished
decision in 2013, it quoted the definition directly from its 1986 decision,
Knight v. U.S. Fire Insurance Co.139 The circuit court then reiterated the
disclosure requirement as formulated in Tradeline.140 To conclude its brief
discussion of uberrimae fidei, the circuit court quoted Knight as the authority
for voiding a policy ab initio if the insured fails to disclose the required
material information.141 The Southern District of New York’s decision
132. HIH Marine Servs., 211 F.3d at 1362.
133. Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376 (N.D. Fla. 1997).
134. See HIH Marine Servs., 211 F.3d at 1362–63 (“A misrepresentation is material if ‘it might
have a bearing on the risk to be assumed by the insurer.’ . . . The central principle of uberrimae fidei,
however, is that the insured bears the burden of full and voluntary disclosure of facts material to the
decision to insure. This duty to disclose is based on the rationale that requiring the marine insurer to
investigate each and every claim made by those applying for coverage ‘would be both time
consuming and expensive.’ . . . Instead, the law has placed the burden of good faith disclosure with
the person in the best position to know all the facts: the insured.” (quoting Barlow, 983 F. Supp. at
1380, 1383)).
135. N.Y. Marine & Gen. Ins. Co. v. Tradeline LLC, 266 F.3d 112 (2d Cir. 2001).
136. Id. at 123 (“[P]arties to a marine insurance contract are held to the highest degree of good
faith. Under this obligation, called uberrimae fidae, the party seeking insurance is required to disclose
all circumstances known to him which materially affect the risk.” (quoting Puritan Ins. Co. v. Eagle
S.S. Co. S.A., 779 F.2d 866, 870 (2d Cir. 1985))).
137. Id. (citing Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d Cir. 1986)).
138. Id. (citing Mut. Benefit Life Ins. Co. v. JMR Elecs. Corp., 848 F.2d 30, 32–33 (2d Cir.
1988)).
139. Knight v. U.S. Fire Ins. Co., 804 F.2d 9 (2d Cir. 1986); see also St. Paul Fire & Marine Ins.
Co. v. Matrix Posh, LLC, 507 F. Appx. 94, 95 (2d Cir. 2013) (“The doctrine of uberrimae fidei demands
‘that the parties to a marine insurance policy must accord each other the highest degree of good
faith.’” (quoting Knight, 804 F.2d at 13)).
140. See Matrix Posh, 507 F. Appx. at 95 (“This duty of utmost good faith ‘requires an assured
to disclose any information that materially affects the risk being insured, because the assured is more
likely to be aware of such information.’” (quoting Tradeline, 266 F.3d at 123)).
141. Id. (quoting Knight, 804 F.2d at 13).
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the following year relied exclusively on this unpublished decision for its
definition of uberrimae fidei.142
The 2006 decision in the First Circuit also reiterates earlier formulations
of uberrimae fidei: “[u]nder this doctrine, the insured is required ‘to disclose
to the insurer all known circumstances that materially affect the insurer’s
risk, the default of which . . . renders the insurance contract voidable by
the insurer.”143 The earlier First Circuit decision, Windsor Mount Joy Mutual
Insurance Co. v. Giragosian,144 relied on the Second Circuit Knight decision.
In Windsor Mount Joy, the circuit court defined uberrimae fidei as “requir[ing]
the parties to a marine insurance policy to accord one another the highest
degree of good faith.”145 According to the circuit court, there is a “strict
duty” imposed upon “the insured to disclose all known circumstances that
materially affect the insurer’s risk” or else the policy is void ab initio.146
The 2006 First Circuit decision picked up that same thread, emphasizing
the strictness of the rule of “full disclosure of all material facts.”147 This
formulation was cited a year later by the District of Massachusetts.148
These First and Second Circuit formulations of uberrimae fidei were
synthesized in a 2013 decision by the District of Puerto Rico.149 The
district court premised its definition of uberrimae fidei on the fact the
doctrine is based on the belief that the insured “is in the best position to
142. See Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 10 F. Supp. 3d 460, 476–77 (S.D.N.Y.
2014) (“Under the doctrine of utmost good faith, ‘parties to a marine insurance policy must accord
each other the highest degree of good faith,’ and the insured is obligated to ‘disclose any information
that materially affects the risk being insured, because [it] is more likely to be aware of such
information.’” (quoting Matrix Posh, 507 F. Appx. at 95)).
143. Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 37 (1st Cir. 2006) (quoting Windsor
Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50, 54–55 (1st Cir. 1995)).
144. Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50 (1st Cir. 1995).
145. Id. at 54 (citing Knight, 804 F.2d at 13).
146. Id. at 54–55 (citing Knight, 804 F.2d at 13).
147. Grande v. St. Paul Fire & Marine Ins. Co., 436 F.3d 277, 283 (1st Cir. 2006)
(“Nevertheless, under the strict maritime rule of uberrimae fidei, an insured must make ‘full disclosure
of all material facts of which the insured has, or ought to have, knowledge . . . even though no
inquiry be made. This doctrine apparently rests on the special circumstances of maritime insurance
in which the insurer may have less than ordinary opportunities to inspect and verify.” (citations
omitted)).
148. See St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232, 237
(D. Mass. 2007) (“The maritime doctrine of uberrimae fidei imposes on the prospective insured a duty
to render information in the ‘utmost good faith.’ Under this doctrine, the individual seeking
insurance coverage is required to provide the carrier with ‘all known circumstances that materially
affect the insurer’s risk, the default of which . . . renders the insurance contract voidable by the
insurer.’” (citing Pesante, 459 F.3d at 37–38)).
149. See Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 974 F. Supp. 2d 64, 78
(D.P.R. 2013) (mentioning most circuit courts agree the uberrimae fidei doctrine controls in maritime
insurance cases).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 749
know of any circumstances material to the risk [and] must reveal those
facts to the underwriter.”150 Therefore, the insured must fully disclose all
material facts to the underwriter, even if the underwriter does not inquire
about them.151 Because uberrimae fidei involves both nondisclosure and
misrepresentation, there is a dual duty to disclose and to not
misrepresent.152 The District of Virgin Islands decision, also in 2013,
described uberrimae fidei as a “longstanding federal maritime doctrine”153
and relied on a 2000 vintage Eleventh Circuit decision for the core of its
definition.154 The definition proposed emphasized full and voluntary
disclosure by the insured of all material facts, regardless of whether the
insurer made an inquiry.155 A fact was material if it bore on the risk to be
insured.156 The District of Puerto Rico decision the following year
essentially encapsulated the same elements in its definition of uberrimae fidei
by quoting from the 2006 Pesante case.157
In 2008, the Ninth Circuit stated, “The doctrine of uberrimae fidei
imposes a duty of utmost good faith . . . and ‘requires that an insured fully
and voluntarily disclose to the insurer all facts material to a calculation of
the insurance risk.’”158 A few months later, the Third Circuit held, “The
doctrine of uberrimae fidei imposes a duty of the utmost good faith and
requires that parties to an insurance contract disclose all facts material to
the risk. If an insured defaults on this duty, the contract may be avoided
by the insurer.”159 The Third Circuit formulation was a medley of Inlet
Fisheries, HIH Marine Services, and Knight.160
150. Id. (quoting Knight, 804 F.2d at 13).
151. Id. (quoting Grande, 436 F.3d at 283).
152. Id.
153. Great Lakes Reinsurance (UK) PLC v. Kranig, No. 2011-122, 2013 WL 2631861, at *7
(D.V.I. June 12, 2013).
154. Id. (“Meaning ‘utmost good faith,’ the doctrine requires applicants for marine insurance to
‘fully and voluntarily disclose to the insurer all facts material to a calculation of the insurance risk,”
even when this information is not explicitly sought or asked for by the insurer.’” (quoting HIH
Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir. 2000))).
155. Id.
156. Id.
157. Markel Am. Ins. Co. v. Veras, 995 F. Supp. 2d 65, 72 (D.P.R. 2014) (“The doctrine
requires the insured ‘to disclose to the insurer all known circumstances that materially affect the
insurer’s risk, the default of which renders the insurance contract voidable by the insurer.’” (quoting
Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 37 (1st Cir. 2006))).
158. Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 648 (9th Cir.
2008); see also Pringle v. Water Quality Ins. Syndicate, 646 F. Supp. 2d 1161, 1169 (C.D. Cal. 2009)
(quoting Inlet Fisheries, 518 F.3d at 648).
159. AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 262 (3d Cir. 2008).
160. Inlet Fisheries, 518 F.3d 645; HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359 (11th Cir.
2000); Knight v. U.S. Fire Ins. Co., 804 F.2d 9 (2d Cir. 1986).
750 ST. MARY’S LAW JOURNAL [Vol. 47:727
Decisions within the past two years also do not make new law. A 2014
Southern District of California decision both harkened back to M’Lanahan
and reiterated Inlet Fisheries.161 An Eighth Circuit decision in 2014 looked
back to Stipcich v. Metropolitan Life Insurance Co.162 for the essence of
uberrimae fidei.163 In 2015, the Eighth Circuit relied on Knight.164 A 2015
Eleventh Circuit case looked to M’Lanahan165 and Sun Mutual166 for the
spirit of uberrimae fidei. Finally, although a 2015 First Circuit decision
relegates the definition of uberrimae fidei to a footnote,167 the definition
itself is borrowed from the 1995 Windsor Mount Joy case.168
B. Central Attributes of Uberrimae Fidei
In his comparative analysis of the English and American interpretations
of the duty of utmost good faith in marine insurance law, Thomas J.
Schoenbaum notes nine “particular elements of the duty of utmost good
faith.”169 However, the three most litigated aspects of uberrimae fidei are
the materiality of the misrepresentation or omission, whether the
161. See McAdam v. State Nat’l Ins. Co., 28 F. Supp. 3d 1110, 1123 (S.D. Cal. 2014) (“Marine
hull insurance policies are contracts uberrimae fidei—i.e., they are grounded in the utmost good faith.
Under the doctrine, an underwriter is presumed to act on the belief that the insurance applicant
disclosed all facts material to the risk.” (citations omitted)).
162. Stipcich v. Metro. Life Ins. Co., 277 U.S. 311 (1928).
163. See N.Y. Marine & Gen. Ins. Co. v. Cont’l Cement Co., 761 F.3d 830, 837 (8th Cir. 2014)
(“Under the federal common law doctrine of utmost good faith or uberrimae fidei, ‘a failure by the
insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at
the insurer’s option.’” (quoting Stipcich, 277 U.S. at 316)).
164. See St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., 798 F.3d 715, 719 (8th Cir.
2015) (“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.’” (quoting Knight,
804 F.2d at 13)).
165. AIG Centennial Ins. Co. v. O’Neill, 782 F.3d 1296, 1303 (11th Cir. 2015) (“Uberrimae fidei
reflects ‘an enlightened moral policy’ based upon the presumption that ‘the party procuring
insurance, is not . . . in possession of any facts, material to the risk which he does not disclose.’”
(quoting M’Lanahan v. Universal Ins. Co., 26 U.S. (1 Pet.) 170, 176 (1828))).
166. Id. (“Indeed, ‘[i]t is the duty of the [insured] to place the underwriter in the same situation
as himself.’” (quoting Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510–11 (1883))).
167. See Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69, 71 n.2 (1st
Cir. 2015) (“Uberrimae fidei means roughly ‘utmost good faith.’”).
168. Id. (“Under this doctrine, the insured in a maritime insurance contract is required ‘to
disclose to the insurer all known circumstances that materially affect the insurer’s risk, the default of
which . . . renders the insurance contract voidable by the insurer.’” (quoting Windsor Mount Joy Mut.
Ins. Co. v. Giragosian, 57 F.3d 50, 54–55 (1st Cir. 1995))).
169. See Schoenbaum, supra note 86, at 14–38 (listing the nine elements for the duty of good
faith as follows: misrepresentation and non-disclosure, mutuality, scienter and intent, materiality,
inducement (reliance and causation), burden of proof and presumption of inducement, role of
agents, waiver, and legal effect of the breach).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 751
information was adequately disclosed, and whether the information was
relied upon.170
1. Materiality
The materiality of a fact is an often-litigated issue in a marine insurance
coverage dispute. If the fact concealed or misrepresented is material, the
insurer may be able to void the marine insurance policy ab initio.171 An
alte rnate view proposed by one district court has not gained traction:
[W]hen the insurer produces evidence of intentional misrepresentation of
facts or concealment of material facts by the insured which is equal to or
more convincing than the evidence produced by the insured to show that
the policy was in effect and that the loss was fortuitous, then coverage will
b e denied.172
A recent view within the Ninth Circuit balances materiality of the
information with scienter. “An insurer may rescind an insurance contract
170. Based on a personal survey of approximately ninety marine insurance cases dealing with
uberrimae fidei, these three elements are also central to Schoenbaum’s summary of uberrimae fidei: “A
material misrepresentation or omission, whether or not in response to a specific inquiry, renders the
coverage voidable. The truth of material representations is judged under a ‘substantial compliance’
standard.” Id. at 9–10.
171. See Markel Am. Ins. Co. v. Nordarse, 297 F. Appx. 852, 853 (11th Cir. 2008) (“A material
misrepresentation on the marine insurance application is grounds for voiding the policy.”); HIH
Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1363 (11th Cir. 2000) (“A material misrepresentation on
the marine insurance application is grounds for voiding the policy”); Knight v. U.S. Fire Ins. Co., 804
F.2d 9, 13 (2d Cir. 1986) (“The assured’s failure to meet this standard [of good faith] entitles the
underwriter to void the policy ab initio.”); Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 657–58
(N.D. Cal. 1988) (suggesting a “misrepresentation of facts and concealment of material facts as [a
justification for] rescission”); McAdam v. State Nat’l Ins. Co., 28 F. Supp. 3d 1110, 1123 (S.D. Cal.
2014) (“If the insured misrepresents or conceals known material facts, the insurer may rescind the
policy ab initio, even if the misrepresentation was unintentional.”); State Nat’l Ins. Co. v. Anzhela
Explorer, LLC, 812 F. Supp. 2d 1326, 1351–52 (S.D. Fla. 2011) (“Consequently a material
misrepresentation or non-disclosure on an application for marine insurance is grounds for voiding
the policy.”); Reliance Nat’l Ins. Co. (Eur.) Ltd. v. Hanover, 246 F. Supp. 2d 126, 136 (D. Mass.
2003) (“The assured’s failure to meet this standard [of good faith] entitles the underwriter to void the
policy ab initio.” (citing Knight, 804 F.2d at 13)); Commercial Union Ins. Co. v. Detyens Shipyard, Inc.,
147 F. Supp. 2d 413, 423 (D.S.C. 2001) (“If such a [good faith] disclosure is not made by the insured,
the insurance contract will be deemed void.”); Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 10
F. Supp. 3d 460, 477 (S.D.N.Y. 2014) (“If the insured breaches its duty of utmost good faith, the
insurer is entitled to void the policy ab initio . . . .”); Crowley Marine Servs., Inc. v. Hunt, 1995 A.M.C.
2562, 2569 (W.D. Wash. 1995) (“Under the doctrine, a marine insurance policy is void ab initio when
the insured fails to disclose material increases in the risks insured.”); Port Lynch, Inc. v. New Eng.
Int’l Assurety of Am., Inc., 754 F. Supp. 816, 820–21 (W.D. Wash. 1991) (“Accordingly, under
established maritime law, a marine insurance policy is void ab initio where the insured fails to disclose
material increases in the marine risk or makes misrepresentations material to the marine risk.”).
172. Garvey, 1989 A.M.C. at 657–58.
752 ST. MARY’S LAW JOURNAL [Vol. 47:727
if it can show either intentional misrepresentation of a fact, regardless of
materiality, or nondisclosure of a fact material to the risk, regardless of the
risk.”173
A word needs to be said here about scienter. Most courts hold an
“absence of an intent to deceive or conceal will not save the contract from
rescission.”174 According to one district court, “The duty of
communication [of material facts], indeed, is independent of the intention,
and is violated by the fact of concealment even where there is no design to
conceal.”175 According to another district court, “Fraud by intentional
concealment is not necessary if a policy of marine insurance is issued upon
false and material misrepresentations.”176 A third district court stated that
in making the determination of whether the disclosures were in good faith,
“it does not matter whether the insured’s failure to disclose was due to
negligence, mistake, accident, or voluntary ignorance.”177 Therefore, it is
irrelevant whether the party intended to conceal material information.178
173. Pringle v. Water Quality Ins. Syndicate, 646 F. Supp. 2d 1161, 1169 (C.D. Cal. 2009)
(quoting Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 655 (9th Cir.
2008)); Cigna Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 420 (9th Cir. 1998)
(quoting Wash. Int’l Ins. Co. v. Mellone, 773 F. Supp. 189, 191 (C.D. Cal. 1990)).
174. See, e.g., Reliance Ins. Co. v. McGrath, 671 F. Supp. 669, 677 (N.D. Cal. 1987) (discussing
scienter and contract recission).
175. Thebes Shipping, Inc. v. Assicurazioni Ausonia SPA, 599 F. Supp. 405, 426 (S.D.N.Y.
1984) (quoting Sun Mutual Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510 (1883)).
176. McGrath, 671 F. Supp. at 677.
177. Commercial Union Ins. Co. v. Detyens Shipyard, Inc. 147 F. Supp. 2d 413, 423 (D.S.C.
2001); see also Great Lakes Reinsurance (UK) PLC v. Morales, 760 F. Supp. 2d 1315, 1323 (S.D. Fla.
2010) (“Under uberrimae fidei, ‘a material misrepresentation on an application for marine insurance is
grounds for voiding the policy,’ even if the misrepresentation is a result of ‘mistake, accident, or
forgetfulness.’” (quoting Certain Underwriters at Lloyd’s, London v. Giroire, 27 F. Supp. 2d 1306,
1313 (S.D.Fla. 1998))); Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 10 F. Supp. 3d 460, 477
(S.D.N.Y. 2014) (“If the insured breaches its duty of utmost good faith, the insurer is entitled to void
the policy ab initio, ‘regardless of whether the misrepresentation or omission was intentional or was
the result of accident or mistake.’” (quoting Fed. Ins. Co. v. PGG Realty, LLC, 538 F. Supp. 2d 680,
688 (S.D.N.Y. 2008))); Progressive N. Ins. Co. v. Bachmann, 314 F. Supp. 2d 820, 827 (W.D. Wis.
2004) (“A failure by the insured to comply with this duty, ‘although it may arise from mistake,
accident, or forgetfulness, is attended with the rigorous consequences that the policy never attaches
and is void.’” (quoting Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 981 (5th Cir.
1969))).
178. AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 262 (3d Cir. 2008) (“A party’s
intent to conceal, or lack thereof, is irrelevant to the uberrimae fidei analysis.”); Am. Home Assurance
Co. v. Masters’ Ship Mgmt. S.A., 423 F. Supp. 2d 193, 223 (S.D.N.Y. 2006) (“The duty of
communication [of material facts], indeed, is independent of the intention, and is violated by the fact
of concealment even where there is no design to deceive.” (quoting Sun Mutual, 107 U.S. at 510));
Thebes Shipping, 599 F. Supp. at 426 (“It is not necessary that plaintiffs prove that [the insurance
applicant] had an intent to conceal . . . . This intent, in respect of marine insurance, is irrelevant.”);
see also Great Lakes Reinsurance (UK) PLC v. Kranig, No. 2011-122, 2013 WL 2631861, at *6 (D.V.I.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 753
The obligation to disclose material information is “independent of intent”
and is breached even if there is no intent to deceive.179 According to one
district court, “[I]t is of no moment whether the insured breaches its duty
to disclose by virtue of calculated deceit or by innocent mistake; the
insured’s failure to disclose voids the contract and its coverage.”180 The
fact a material misrepresentation or omission had been made is what is
important to the uberrimae fidei analysis.181
In 1887, the Supreme Court of the United States addressed the question
of materiality of answers to insurance policy application interrogatories in
the life insurance context.182 The Supreme Court held, “The
misrepresentation or concealment by the assured of any material fact
entitles the insurers to avoid the policy.”183 Although materiality was not
defined in the case, the Supreme Court characterized the grounds on
which the insurer could avoid the policy.184 If the insured made what
looked like a complete answer to a direct question and that answer
contained “any substantial misstatement or omission,” that policy could be
avoided.185 However, if the answer space is blank or incomplete, then it
is on the insurer to follow up for more details before issuing the policy.186
“Materiality is a broad concept” under federal admiralty law.187
Perhaps the most comprehensive and most often cited discussion of
materiality in marine insurance law is the 1986 Second Circuit Knight
decision, in which a cargo policy was void ab initio because of a
misrepresentation of the cargo value and a failure to disclose a previously
June 12, 2013) (“‘A party’s intent to conceal, or lack thereof, is irrelevant to the uberrimae fidei
analysis’—the insured’s failure to disclose voids the contract and its coverage.” (quoting AGF Marine,
544 F.3d at 262)).
179. See St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232, 237 (D.
Mass. 2007) (stating the “duty to disclose material facts applies even where no inquiry has been made.
And the obligation to disclose is independent of intent and is violated even where no intent to
deceive is present”).
180. N.H. Ins. Co. v. Diller, 678 F. Supp. 2d 288, 297 (D.N.J. 2009).
181. See AGF Marine, 544 F.3d at 262 (“The only thing that matters is the existence of a
material misrepresentation.”).
182. See generally Phx. Mut. Life Ins. Co. v. Raddin, 120 U.S. 183 (1887) (discussing the
materiality of answers to interrogatories concerning a life insurance policy application).
183. Id. at 189.
184. See id. at 189–90 (stating when a policy may be avoided).
185. Id.
186. Id. at 190.
187. See Great Lakes Reinsurance (UK) PLC v. Yellow Fin 36 LLC, 736 F. Supp. 2d 1302, 1307
(M.D. Fla. 2010) (“Under federal maritime law, materiality is a broad concept.”); see also Northfield
Ins. Co. v. Barlow, 983 F. Supp. 1376, 1380 (N.D. Fla. 1997) (“The standard for what information
qualifies as material is very broad . . . .”).
754 ST. MARY’S LAW JOURNAL [Vol. 47:727
cancelled insurance policy.188 As previously discussed, the definition of
uberrimae fidei in Knight was derived from Puritan: “[T]he parties to a marine
insurance policy must accord each other the highest degree of good faith.
This stringent doctrine requires the assured to disclose to the insurer all
known circumstances that materially affect the risk being insured.”189
This definition of materiality was derived from the 1931 Btesh case: “To be
material, the fact must be ‘something which would have controlled the
underwriter’s decision’ to accept the risk.”190 Therefore, “the materiality
of the nondisclosure does not depend on what an investigation would
have revealed.”191
The Btesh definition of materiality, as quoted in Knight, has been often
quoted by district courts.192 Other circuit and district courts have
adopted very similar formulations.193 For example, also in 1986, the
Eleventh Circuit defined materiality as that “which could possibly
influence the mind of a prudent and intelligent insurer in determining
whether he would accept the risk, and . . . that concealment of such facts
188. Knight v. U.S. Fire Ins. Co., 804 F.2d 9 (2d Cir. 1986).
189. Id. at 13 (citing Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 870 (2d Cir. 1985)).
190. Id. (quoting Btesh v. Royal Ins. Co., 49 F.2d 720, 721 (2d Cir. 1931)).
191. Id.
192. For districts courts that cite Knight, see Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 659
(N.D. Cal. 1988); Reliance Nat’l Ins. Co. (Europe) Ltd. v. Hanover, 246 F. Supp. 2d 126, 136 (D.
Mass. 2003); Fed. Ins. Co. v. PGG Realty, LLC, 538 F. Supp. 2d 680, 687 (S.D.N.Y. 2008); Port
Lynch, Inc. v. New Eng. Int’l Assurety of Am., Inc., 754 F. Supp. 816, 822 (W.D. Wash. 1991); and
Progressive North Ins. Co. v. Bachmann, 314 F. Supp. 2d 820 (W.D. Wis. 2004).
193. HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1363 (11th Cir. 2000) (“A
misrepresentation ‘is material if it might have a bearing on the risk to be assumed by the insurer.’”
(citation omitted)); State Nat’l Ins. Co. v. Anzhela Explorer, LLC, 812 F. Supp. 2d 1326, 1353 (S.D.
Fla. 2011) (“[A] misrepresentation or non-disclosure is material if it might have a bearing on the risk
to be assumed by the insurer.” (citing HIH Marine Servs., 211 F.3d at 1363)); Great Lakes Reinsurance
PLC v. Arbos, No. 08-20439-CIV, 2009 WL 8642003, at *4 (S.D. Fla. Jan. 6, 2009) (“A
misrepresentation is material if it might have a bearing on the risk to be assumed by the insurer.”
(citing HIH Marine Servs., 211 F.3d at 1363)); Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1380
(N.D. Fla. 1997) (“[I]n the case of marine insurance a fact is material if it might have a bearing on the
risk to be assumed by the insurer.”); PGG Realty, 538 F. Supp. 2d at 687 (“To be material, a fact must
be something . . . which ‘would influence the judgment of a prudent insurer in fixing the premium, or
determining whether he will take the risk.’” (citation omitted)); Am. Home Assurance Co. v. Masters’
Ship Mgmt. S.A., 423 F. Supp. 2d 193, 221 (S.D.N.Y. 2006) (“A fact is material if it is something
‘likely to influence [the underwriter’s] judgment in accepting the risk.’” (quoting Sun Mut. Ins. Co. v.
Ocean Ins. Co., 107 U.S. 485, 509 (1883))); Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1015
(D.R.I. 1984) (“[T]he misrepresentation must be material, that is, ‘it must be something which would
have controlled the underwriter’s decision . . . . [A] circumstance which ‘would influence the
judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.’”
(citations omitted)); Crowley Marine Servs., Inc. v. Hunt, 1995 A.M.C. 2562, 2569 (W.D. Wash.
1995) (“A fact is material if it would influence the judgment of a reasonable insurer in fixing the
premium or in determining if it will take the risk.” (citations omitted)).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 755
voids the policy, whether the concealment be due to fraud, negligence,
accident, or mistake.”194 Similarly, in one 2006 case, the First Circuit
defined a material misrepresentation as “one that affects the insurer’s
decision to accept the risk and insure the applicant”195 and a material fact
as “that which can possibly influence the mind of a prudent and intelligent
insurer in determining whether it will accept the risk.”196 In another case
in 2 006, the First Circuit stated:
Absent a different regime imposed by statute, an insurance contract is
ordinarily voidable if a false statement in the application was “material”—
materiality meaning something that affects the risk and might lead either to a
higher premium or a refusal of insurance. There are various formulations:
one treatise says that in the marine insurance context a material fact is “that
which can possibly influence the mind of a prudent and intelligent insurer in
d etermining whether it will accept the risk.”197
In 2008, the Third Circuit took a critical look at the Second Circuit’s
definition of materiality in Knight and found it to be too narrow.198
Examining the question of materiality “from the perspective of a
reasonable person in the insured’s position,”199 the circuit court
determined a fact does not necessarily need to “control an underwriter’s
decision in order to be material.”200 Although the Third Circuit never
arrived at a definition of materiality, it was persuaded by the analysis of the
Ninth Circuit in New Hampshire Insurance Co. v. C’Est Moi, Inc.,201 wherein
the court determined the purchase price of a vessel was a material fact in
an application for marine insurance.202
The materiality standards proffered in recent cases have sounded very
similar to the Btesh standard offered in Knight. In 2010, the Middle District
194. Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 942–43, 943 n.2 (11th
Cir. 1986) (concurring with the lower court’s statement of law); see also Barlow, 983 F. Supp. at 1383
(N.D. Fla. 1997) (rejecting defendant’s reliance on case law that narrowly interprets materiality in
context of state insurance law, and instead favoring a widely accepted definition in context of federal
admiralty law).
195. Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 38 (1st Cir. 2006).
196. Id.; see also St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232,
240 (D. Mass. 2007) (“Though the notion of materiality is subjective by nature, it has been defined in
these circumstances as ‘that which can possibly influence the mind of a prudent and intelligent
insurer in determining whether it will accept the risk.’” (quoting Pesante, 459 F.3d at 38)).
197. Grande v. St. Paul Fire & Marine Ins. Co., 436 F.3d 277, 282–83 (1st Cir. 2006) (quoting
4A APPLEMAN & APPLEMAN, INSURANCE LAW AND PRACTICE § 2651 (rev. ed. Supp. 2005)).
198. AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 265 (3d Cir. 2008).
199. Id. at 264.
200. Id. at 265.
201. N.H. Ins. Co. v. C’Est Moi, Inc., 519 F.3d 937 (9th Cir. 2008).
202. AGF Marine, 544 F.3d at 265.
756 ST. MARY’S LAW JOURNAL [Vol. 47:727
of Florida defined materiality as “that which could possibly influence the
mind of a prudent and intelligent insurer in determining whether he would
accept the risk.”203 That same year the Southern District of Florida
defined a material misrepresentation as one that “might have a bearing on
the risk to be assumed by the insurer.”204 In 2013, the District of the
Virgin Islands defined a material fact “for purposes of the uberrimae fidei
doctrine if it would have either prevented an insurer from issuing a policy
or prompted an insurer to issue the policy at a higher premium had it been
disclosed before the policy was executed.”205 The Southern District of
California adopted a strikingly similar definition.206
The Southern District of New York’s discussion of materiality in 2014
both summarized and affirmed existing Second Circuit precedent.
According to the district court, “A non-disclosed fact is material if it
would have affected the insurer’s decision to insure at all or at a particular
premium.”207 The district court adopted an objective standard for
materiality that focused on “whether a reasonable person in the assured’s
position would know that the particular fact is material.”208 However, the
district court also envisioned a subjective element to materiality, making
the materiality inquiry bipartite: “(i) would a reasonable insured believe
that the disclosure would be material to the insurer’s decision; and (ii) was
the non-disclosure in fact material to the insurer’s decision?”209
The Eleventh Circuit in 2015 affirmed prior circuit precedent, relying
heavily on M’Lanahan. The circuit court first emphasized that materiality is
a broadly defined concept, which must be evaluated from “the perspective
of a reasonable insurer.”210 The test for materiality was whether the fact
could “possibly influence the mind of a prudent and intelligent insurer in
determining whether he would accept the risk.”211 According to the
203. Great Lakes Reinsurance (UK) PLC v. Yellow Fin 36 LLC, 736 F. Supp. 2d 1302, 1307
(M.D. Fla. 2010) (quoting Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1379 (N.D.Fla. 1997)).
204. Great Lakes Reinsurance (UK) PLC v. Morales, 760 F. Supp. 2d 1315, 1325 (S.D. Fla.
2010) (quoting HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1363 (11th Cir. 2000)).
205. Great Lakes Reinsurance (UK) PLC v. Kranig, No. 2011-122, 2013 WL 2631861, at *7
(D.V.I. June 12, 2013) (citations omitted).
206. McAdam v. State Nat’l Ins. Co., Inc., 28 F. Supp. 3d 1110, 1123 (S.D. Cal. 2014)
(“Material facts are those that tend to bear upon an insurer’s decision to accept the risk, the
premium, or the terms under which the risk is insured.” (citations omitted)).
207. Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 10 F. Supp. 3d 460, 477 (S.D.N.Y. 2014)
(quoting N.Y. Marine & Gen. Ins. Co. v. Tradeline LLC, 266 F.3d 112, 123 (2d Cir. 2001)).
208. Id. (quoting Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d Cir. 1986)).
209. Id. (quoting Fed. Ins. Co. v. PGG Realty, LLC, 538 F. Supp. 2d 680, 688 (S.D.N.Y. 2008)).
210. AIG Centennial Ins. Co. v. O’Neill, 782 F.3d 1296, 1303–04 (11th Cir. 2015).
211. Id. (quoting Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 942–43
(11th Cir. 1986)).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 757
Eleventh Circuit, because the insured is in the best position to know all the
material facts, if he conceals or misrepresents a material fact, he commits
“manifest fraud” and “avoids the policy.”212 Accident, mistake,
negligence, and voluntary ignorance do not excuse the result.213
2. Disclosure
“The doctrine of uberrima fidei requires the parties to a marine
[insurance] contract exercise the highest degree of good faith and fully
disclose all facts material to the risk.”214 As the District Court of
Massachusetts stated in 2007, “If the information is material, it must be
disclosed.”215 However, the insured is not required to make “a minute
disclosure of every material circumstance.”216 The general rule is the
insured has to supply sufficient information to call the underwriter’s
attention to the matter in such a way so he can ask for additional
information.217 However, once information is determined to be material,
the insured must disclose it regardless of a specific request by the
insurer.218
212. See id. at 1303 (citations omitted) (requiring the insured to disclose fully all material facts to
the insurance provider so the insurance provider can make an informed decision).
213. Id.; see also Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 943 (11th
Cir. 1986) (stating a policy is void even if the non-disclosure is due to negligence, mistake, accident,
or fraud).
214. Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1380 (N.D. Fla. 1997); see also Fed. Ins.
Co. v. PGG Realty, LLC, 538 F. Supp. 2d 680, 687 (S.D.N.Y. 2008) (“Under the doctrine of utmost
good faith, the party applying for marine insurance must ‘disclose all circumstances known to him
which materially affect the risk.’” (quoting Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 870
(2d Cir. 1985))).
215. St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232, 240 (D.
Mass. 2007).
216. Am. Home Assurance Co. v. Masters’ Ship Mgmt. S.A., 423 F. Supp. 2d 193, 221–22
(S.D.N.Y. 2006).
217. Id.
218. HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir. 2000) (“The duty to
disclose extends to those material facts not directly inquired into by the insurer.” (citations omitted));
Pringle v. Water Quality Ins. Syndicate, 646 F. Supp. 2d 1161, 1169 (C.D. Cal. 2009) (“Further, an
insured is ‘obligated to disclose all material information, regardless of a request by’ the insurer.”
(quoting Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 648 (9th Cir.
2008))); see also St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., 798 F.3d 715, 719 (8th Cir.
2015) (“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.”); Cigna Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 420
(9th Cir. 1998) (“Whether or not asked, an applicant for a marine insurance policy is bound to reveal
every fact within his knowledge that is material to the risk.” (citations omitted)); Barlow, 983 F. Supp.
at 1380 (“The doctrine of uberrima fidei places a strict burden on the insured to disclose all material
facts.”); State Nat’l Ins. Co. v. Anzhela Explorer, LLC, 812 F. Supp. 2d 1326, 1351 (S.D. Fla. 2011)
(“The duty of good faith by necessity extends to those facts not directly inquired into by the insurer.”
758 ST. MARY’S LAW JOURNAL [Vol. 47:727
It is the insured who bears the burden of disclosure.219 The
prospective insured must “voluntarily and accurately disclose to the
insurance company all facts which might have bearing on the insurer’s
decision to accept or reject the risk.”220 From as early as 1949, it has been
held in the marine insurance context that “an applicant for marine
insurance must state all material facts which are known to him and
unknown to the insurer.”221 Not only must the prospective insured
disclose every material fact actually known to him but he also “is deemed
to know every circumstance which in the ordinary course of business
ought to be known to him.”222 This is “because the insured is in the best
position to know of any facts that may be material to the risk.”223 When
(citations omitted)); Great Lakes Reinsurance PLC v. Arbos, No. 08-20439-CIV, 2009 WL 8642003,
at *4 (S.D. Fla. Jan. 6, 2009) (“The duty to disclose extends to those material facts not directly
inquired into by the insurer.”); Halifax Trawlers, 495 F. Supp. 2d at 237 (“This duty to disclose
material facts applies even where no inquiry has been made.”); Albany Ins. Co. v. Wisniewski, 579
F. Supp. 1004, 1014 (D.R.I. 1984) (“The insured is bound, even absent inquiry, to reveal every fact
within his knowledge which is material to the risk”); Progressive N. Ins. Co. v. Bachmann, 314
F. Supp. 2d 820, 827 (W.D. Wis. 2004) (“The insured is bound to communicate all material
information voluntarily regardless whether the insurer made any inquiry concerning it.”); Stecker v.
Am. Home Fire Assurance Co., 84 N.E. 2d 797, 798–99 (N.Y. 1949) (“In marine insurance, the
insured is bound, although no inquiry be made, to disclose every fact material to the risk, within his
knowledge.” (quoting Gates v. Madison Cty. Mut. Ins. Co., 5 N.Y. 469, 474 (1851))).
219. HIH Marine Servs., 211 F.3d at 1363 (“The central principle of uberrimae fidei, however, is
that the insured bears the burden of full and voluntary disclosure of facts material to the decision to
insure.”); see also PGG Realty, 538 F. Supp. 2d at 687–88 (“It is important to bear in mind that the
insurer is not placed on a duty of inquiry; rather, ‘the insured is bound to communicate every material
fact within his knowledge not known or presumed to be known to the underwriter, whether inquired
for or not.’” (quoting Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 980–81 (5th Cir.
1969))).
220. Great Lakes Reinsurance (UK) PLC v. Morales, 760 F. Supp. 2d 1315, 1323 (S.D. Fla.
2010) (quoting Certain Underwriters at Lloyd’s, London v. Giroire, 27 F. Supp. 2d 1306, 1311
(S.D.Fla. 1998)); see also N.H. Ins. Co. v. C’Est Moi, Inc., 519 F.3d 937, 938 (9th Cir. 2008) (stating
uberrimae fidei “‘imposes a duty of utmost good faith’” such that an applicant for a marine insurance
policy must reveal that which is within his knowledge and is material to the risk (quoting Inlet
Fisheries, 518 F.3d at 648)); AIG Centennial Ins. Co. v. O’Neill, 782 F.3d 1296, 1303 (11th Cir. 2015)
(“And from duty springs obligation: an insured must ‘fully and voluntarily disclose to the insurer all
facts material to a calculation of the insurance risk.’” (quoting HIH Marine Servs., 211 F.3d at 1362));
Anzhela Explorer, 812 F. Supp. 2d at 1351 (“The doctrine requires that an insured fully and voluntarily
disclose to insurer facts material to a calculation of the insurance risk.”); Wisniewski, 579 F. Supp. at
1016 (“[T]he law of marine insurance imposes a duty upon the insured to disclose voluntarily to the
insurer, even though no inquiry is made, every material fact and circumstance within his knowledge
and unknown (or fairly presumed to be unknown) to the insurer; and failure to do so—intentionally
or otherwise—allows the insurer to have the contract declared void ab initio.”).
221. Stecker, 84 N.E. 2d at 799.
222. Reliance Ins. Co. v. McGrath, 671 F. Supp. 669, 677 (N.D. Cal. 1987).
223. Abhe & Svoboda, 798 F.3d at 719; see also HIH Marine Servs., 211 F.3d at 1363 (“[T]he law
has placed the burden of good faith disclosure with the person in the best position to know all the
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 759
the insured fails in his duty of disclosure, the marine insurance policy is
voidable at the option of the insurer.224
The reasons for the strict marine insurance law doctrine regarding
disclosures originated in the age of sail.225 For example, a Maryland ship
insurance case decided in 1840 laid the groundwork for the modern
uberrimae fidei disclosure requirements. The state judge determined if a
party obtains “a material fact” while his agent is negotiating for insurance,
he must promptly communicate such fact to the insurer.226 Both
promptness and diligence were required lest the insured “bear the
consequences of his neglect.”227 Such a strict rule was made necessary
because it was impossible to define the line between “prompt attention”
and “unreasonable delay,” and it was difficult to ascertain the motives
behind the insured’s actions.228
In Knight, the Second Circuit stated “the assured is required to
communicate the information to the insurer before the policy is issued, so
that the insurer can decide for itself at that time whether to accept the
risk.”229 The insured bears the obligation of communication because it is
less burdensome to him and “it comports with the open disclosure
required by the doctrine of uberrimae fidei.”230 The duty to disclose is also
“based on the rationale that requiring the marine insurer to investigate
each and every claim made by those applying for coverage ‘would be both
time consuming and expensive.’”231
The obligation of disclosure includes both misrepresentation and
concealment of material facts.232 According to the Eleventh Circuit,
facts: the insured.”).
224. Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 974 F. Supp. 2d 64, 78 (D.P.R.
2013) (“When the insured fails to disclose to the insurer all circumstances known to it and unknown
to the insurer, which materially affect the risk, the policy is voidable at the option of the innocent
party.”); see also McGrath, 671 F. Supp. at 678 (“A marine insurance policy is void ab initio where the
assured fails to disclose material increases in the risk insured.”).
225. Stecker, 84 N.E. 2d at 799 (“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.”).
226. Neptune Ins. Co. v. Robinson, 11 Gill & J. 256, 260 (Md. 1840) (“Thus, if a party with
knowledge, that his agent is in treaty for insurance, obtains information of a material fact, he is
bound promptly to use the means of communicating it.”).
227. Id.
228. Id.
229. Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 14 (2d Cir. 1986).
230. Id.
231. HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1363 (11th Cir. 2000) (quoting
Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1383 (N.D. Fla. 1997)).
232. Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1014–15 (D.R.I. 1984) (“Distortion of
760 ST. MARY’S LAW JOURNAL [Vol. 47:727
In the context of marine insurance, “concealment” is the failure to disclose
any material fact or circumstance in relation to the subject matter of the
contract which may increase the liability to loss, or affect the risk assumed,
and which is, in fact or law, within or ought to be within, the knowledge of
one party, and of which the other party has no actual or presumptive
knowledge.233
In general, an objective standard for disclosure applies “whether a
reasonable person in the insured’s position would know that a particular
fact is material.”234 However, the rule going back to an 1830
Massachusetts case states, if the underwriter already knows the material
facts, the policy is not voided.235 Nevertheless, the insurer generally bears
the burden of proving the insured failed to disclose material
information.236
3. Reliance
In 1965, the District of Massachusetts held a marine insurance policy
“cannot be voided for misrepresentation where the alleged
misrepresentation was not relied upon and did not in any way mislead the
insurer.”237 This statement was incorporated into one of the core
holdings of the well-known Second Circuit Puritan case.238 As recently as
2014, the Southern District of New York acknowledged this Second
the factual underpinnings upon which the contract of marine insurance rests, fairly attributable to the
insured, cedes to the insurer a right to rescind, irrespective of whether the warp is brought about by
knowing concealment of relevant facts or by outright misrepresentation.”).
233. Great Lakes Reinsurance (UK) PLC v. Yellow Fin 36 LLC, 736 F. Supp. 2d 1302, 1307–
08 (M.D. Fla. 2010) (quoting Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir.
1984)).
234. Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 659 (N.D. Cal. 1988); see Am. Home
Assurance Co. v. Masters’ Ship Mgmt S.A., 423 F. Supp. 2d 193, 221 (S.D.N.Y. 2006) (quoting Knight,
804 F.2d at 13); see also Great Lakes Reinsurance (UK) PLC v. Kranig, No. 2011-122, 2013 WL
2631861, at *8 (D.V.I. June 12, 2013) (“An objective standard for disclosure applies—that is, whether
a reasonable insured would believe that a particular fact is material to the insurer’s decision regarding
whether to accept the risk and on what terms.”).
235. Green v. Merchants’ Ins. Co., 27 Mass. 402, 413 (1830) (“It is a well[-]known rule of law,
that the concealment, or rather silence of the assured in regard to facts already known to the
underwriter, if no inquiry is made on the subject, although the facts are material to the risk, will not
vacate the policy.”).
236. Kranig, 2013 WL 2631861, at *8 (“The burden of proof of a material nondisclosure or
misrepresentation lies with the insurer.”).
237. Rose & Lucy, Inc. v. Resolute Ins. Co., 249 F. Supp. 991, 992 (D. Mass. 1965).
238. Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 871 (2d Cir. 1985) (reiterating “a
marine insurance policy ‘cannot be voided for misrepresentation where the alleged misrepresentation
was not relied upon and did not in any way mislead the insurer’” (quoting Rose & Lucy, 249 F. Supp.
at 992)).
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Circuit holding.239
The element of reliance in uberrimae fidei figured into a 1987 opinion
from the Northern District of California. There, the district court wrote,
“A material concealment in reliance upon which a policy is issued is
grounds for avoidance of the policy whether the concealment is made with
knowledge of its falsity or instead is made through a good faith
mistake.”240 In 2011, the Southern District of Florida echoed this
approach when it sought to make avoidance of a marine insurance policy
under uberrimae fidei a two-step process: (1) The insurer must demonstrate
materiality; and (2) the insurer must demonstrate reliance.241
A 2015 Eighth Circuit case, St. Paul Fire & Marine Insurance Co. v. Abhe
& Svoboda, Inc.,242 focused almost exclusively on the issue of reliance via
the doctrine of uberrimae fidei in marine insurance law. The circuit court
first distinguished materiality from reliance: “While materiality examines
whether a fact would have influenced the judgment of a reasonable and
prudent underwriter, reliance examines whether there was a causal
connection between the misrepresentation or concealment of that material
fact and the actual underwriter’s decision to issue the policy.”243 Finding
“surprisingly little authority” on the issue of “whether a showing of
reliance is required to void a[] [marine] insurance policy under the doctrine
of uberrimae fidei,” the Eighth Circuit noted the Second Circuit’s Puritan
decision was “[t]he principle case to address the question directly.”244 In
Puritan, the Second Circuit held, “The principle of uberrimae fidei does not
require the voiding of the contract unless the undisclosed facts were
material and relied upon.”245
The Eighth Circuit interpreted this holding as requiring an insurer to
“show reliance on an insured’s nondisclosure, regardless of whether the
insurer had knowledge” of the omission when “it decided to issue the
239. Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 10 F. Supp. 3d 460, 477 (S.D.N.Y. 2014)
(“Even if a non-disclosed fact is material, however, the policy ‘cannot be voided for
misrepresentation where the alleged misrepresentation was not relied upon and did not in any way
mislead the insurer.’” (quoting Puritan, 779 F.2d at 871)).
240. Reliance Ins. Co. v. McGrath, 671 F. Supp. 669, 677 (N.D. Cal. 1987).
241. State Nat’l Ins. Co. v. Anzhela Explorer, LLC, 812 F. Supp. 2d 1326, 1352 (S.D. Fla. 2011)
(“To void a policy, the insurer must show, first, that a misrepresentation or non-disclosure was
indeed made by the insured prior to coverage attaching and, second, that this deficient disclosure was
material to or relied upon by the insurer.”).
242. St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., 798 F.3d 715 (8th Cir. 2015).
243. Id. at 722 (citation omitted).
244. Id. at 719–20.
245. Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 871 (2d Cir. 1985).
762 ST. MARY’S LAW JOURNAL [Vol. 47:727
policy.”246 Because the Eighth Circuit found the Second Circuit’s
reasoning to be analogous to general contract law, it was persuaded by the
Second Circuit’s holding and adopted the requirement of causation “in the
context of marine insurance contracts.”247 The Eighth Circuit then
surveyed the status of the reliance requirement in the other federal circuit
courts.248 The Ninth and the Eleventh Circuits apply “a subjective test
for materiality that asks whether the insurer in fact would have found the
omitted information to be material.”249 Therefore, “[t]o satisfy the
materiality element of the uberrimae fidei defense in these jurisdictions,
insurers must show that,” had they known about the undisclosed fact, they
either “would not have issued the policy[] or would have issued it at a
different premium.”250 Other decisions in the Fifth and Ninth Circuits
“applying the uberrimae fidei defense rely on evidence of actual reliance or
inducement on the part of the insurer, even where they have not
articulated reliance as a requirement distinct from materiality.”251
C. Positions of the United States Circuit Courts on Uberrimae Fidei
Although apparently abstract, the determination of whether a particular
doctrine is a judicially established federal admiralty rule can be dispositive
in admiralty cases because the Wilburn Boat choice-of-law analysis hinges
on that determination.252 According to the clear dictate of Wilburn Boat,
the question is whether there is a “judicially established federal admiralty
rule governing” the marine insurance issue.253 Unfortunately, the Court
provided little guidance on how to determine what “a judicially established
federal admiralty rule” looks like.254 One United States district court
246. Abhe & Svoboda, 798 F.3d at 720.
247. See id. (“We find the Second Circuit’s reasoning persuasive. In general contract law, a
misrepresentation by omission has no legal effect ‘unless it induces action by the recipient, that is,
unless [the recipient] manifests his assent to the contract in reliance on it.’ . . . In other words, a party
is required to show a causal connection between the other party’s omission and the issuing of the
contract. . . . We discern no reason why the requirement of causation should be removed in the
context of marine insurance contracts.” (alteration in original) (citations omitted)).
248. Id. at 721.
249. Id.
250. Id.
251. Id.
252. See Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69, 80 (1st Cir.
2015) (“The question of whether a doctrine is an established rule of maritime law, though seemingly
abstruse, is of vital importance in admiralty cases as it can prove to be dispositive in controversies
such as the dispute at hand.”).
253. Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 314 (1955).
254. Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 650 (9th Cir.
2008) (“Wilburn Boat itself provides limited direction on how we are to determine whether a rule is
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posited the fact a state law was newer than or conflicted with the federal
admiralty law was not enough for the state law to trump the federal
admiralty law.255 However, across the United States circuits, the
requirements and terminology used are different. For example, the Fifth
Circuit requires the federal admiralty rule to be “entrenched federal
precedent”256 to gain precedence over state law, which is not surprising
given the three-part test favoring the application of state law in that circuit.
The Ninth Circuit requires a federal admiralty rule be “sufficiently
longstanding and accepted within admiralty law that it can be said to be
‘established.’”257 The Eighth Circuit mimics the Ninth Circuit approach
of “an established rule of federal maritime law.”258 The Second Circuit
avoided the Wilburn Boat analysis entirely in Puritan by finding uberrimae fidei
was a well-established rule.259 The First Circuit mixes the Second and
Ninth Circuit requirements and “only appl[ies] federal maritime rules that
are established and settled.”260 Finally, the Eleventh Circuit puts its own
gloss on the Second Circuit requirement and requires federal admiralty
rules to be both “well settled” and a “clear rule of maritime law.”261
Prior to Wilburn Boat in 1955, “it was generally accepted that uberrimae
fidei applied to” marine insurance contracts.262 However, the choice-oflaw
analysis propounded by the decision limited the possible scenarios
‘judicially established.’” (quoting Wilburn Boat, 348 U.S. at 314)).
255. See ABB Power T & D Co. v. Gothaer Versicherungsbank VVAG, 939 F. Supp. 1568,
1580 (S.D. Fla. 1996) (“According to the clear dictate of Wilburn, federal maritime law, where
entrenched, preempts state law[] and controls the interpretation of a marine insurance contract. The
fact that a state law exists, in direct conflict with a federal maritime rule is a factor to be taken into
account when determining what law to apply, but that is a far cry from stating the proposition that,
since the state law is newer[,] it must reign supreme.”).
256. Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 888 (5th Cir. 1991).
257. Inlet Fisheries, 518 F.3d at 650.
258. N.Y. Marine & Gen. Ins. Co. v. Cont’l Cement Co., 761 F.3d 830, 840 (8th Cir. 2014)
(quoting Inlet Fisheries, 518 F.3d at 654).
259. See Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 870 (2d Cir. 1985) (agreeing with
the maxim “parties to a marine insurance contract are held to the highest degree of good faith”).
260. Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69, 80 (1st Cir. 2015).
261. Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir. 1984) (“The general
rule of marine insurance, requiring full disclosure, is well settled in this circuit, and as a clear rule of
maritime law it is the controlling federal rule even in the face of contrary state authority.”); see also
Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 942 (11th Cir. 1986) (citing
Steelmet, 747 F.2d at 695) (underscoring the Eleventh Circuit’s requirement for full disclosure for
marine insurance).
262. St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982, 985 (N.D. Ill.
1993) (“Prior to 1955, it was generally accepted that uberrimae fidei applied to all of the conduct which
assureds and insurers accorded each other regarding marine insurance.”).
764 ST. MARY’S LAW JOURNAL [Vol. 47:727
when the doctrine applied.263 Over the past sixty years, United States
circuit courts have decided one by one whether uberrimae fidei is a judicially
established federal admiralty rule that supersedes state law.
1. Second Circuit
Within the Second Circuit, the Southern District of New York was an
early proponent of uberrimae fidei as universally applicable to marine
insurance contracts.264 In 2006, after citing extensive definitions from
M’Lanahan and Sun Mutual, the Southern District of New York affirmed
“[t]he duty of utmost good faith is an established federal admiralty
rule.”265
2. Eleventh Circuit
Writing in 2015, the Eleventh Circuit refers to “[t]he age-old federal
marine-insurance doctrine of uberrimae fidei . . . [that] provides ‘the
controlling federal rule even in the face of contrary state authority.’”266
However, this circuit recognized uberrimae fidei as a judicially established
federal admiralty rule almost since its inception.267 In 1997, one district
court within the Eleventh Circuit noted uberrimae fidei had been accepted
since the Steelmet decision in 1984.268 This assertion is supported by an
unpublished Southern District of Florida opinion from 2009269 and a
published Southern District of Florida opinion from 2011.270 The latter
263. See id. at 985–86 (“Some confusion sprung up that year when Wilburn Boat Co. v. Fireman’s
Fund Ins. Co. constricted the range of scenarios to which uberrimae fidei applied.”).
264. Contractors Realty Co. v. Ins. Co. of N. Am., 469 F. Supp. 1287, 1294 (S.D.N.Y. 1979)
(“It is undeniable that parties to a contract of marine insurance must be held to a standard of the
highest fidelity in their dealings.”); see also Thebes Shipping, Inc. v. Assicurazioni Ausonia SPA., 599
F. Supp. 405, 426 (S.D.N.Y. 1984) (“There can be no dispute about the principles of law applicable
to marine insurance contracts.”). For a discussion of Thebes Shipping as exemplifying the “established”
nature of uberrimae fidei, see generally Beer, supra note 52, at 149.
265. Am. Home Assurance Co. v. Masters’ Ship Mgmt. S.A., 423 F. Supp. 2d 193, 221
(S.D.N.Y. 2006) (citing Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 870 (2d Cir. 1985)).
266. AIG Centennial Ins. Co. v. O’Neill, 782 F.3d 1296, 1302–03 (11th Cir. 2015) (quoting
Steelmet, 747 F.2d at 695).
267. See id. at 1303 (acknowledging uberrimae fidei is the controlling law within the Eleventh
Circuit’s jurisdiction).
268. See Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1379 (N.D. Fla. 1997) (“Uberrima
fidei, requiring parties to a maritime contract to deal in utmost good faith and full disclosure, has been
accepted in the Eleventh Circuit as firmly entrenched precedent, controlling even in the face of
contrary state authority.”).
269. Great Lakes Reinsurance PLC v. Arbos, No. 08-20439-CIV, 2009 WL 8642003, at *4
(S.D. Fla. Jan. 6, 2009).
270. State Nat’l Ins. Co. v. Anzhela Explorer, LLC, 812 F. Supp. 2d 1326, 1351 (S.D. Fla.
2011).
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opinion grounded its findings in the Gulfstream Cargo, Ltd. v. Reliance
Insurance Co.271 decision before the circuit split: “As our predecessor
circuit explained, ‘[n]othing is better established in the law of marine
insurance than that a mistake or commission material to a marine risk,
whether it be wil[l]ful or accidental, or result from mistake, negligence or
voluntary ignorance, avoids the policy.’”272 In 2000, the Eleventh Circuit
declared uberrimae fidei was “well-settled” and the “controlling law” of the
circuit.273 An unpublished circuit opinion in 2008 cited HIH Marine
Services as establishing the doctrine of uberrimae fidei as controlling law of
the Eleventh Circuit.274
3. Fifth Circuit
In 1991, the Fifth Circuit authored Albany Insurance Co. v. Anh Thi
Kieu,275 which discussed the doctrine of uberrimae fidei at length. The
circuit court noted “repeated references” to uberrimae fidei appear in early
United States Supreme Court insurance cases;276 however, the “sole
remaining substantial vestige of the doctrine” today is in marine insurance
law.277 The circuit court found only three cases examining the availability
of uberrimae fidei within the Fifth Circuit, and none of them applied the
doctrine to void a marine insurance contract.278 The Fifth Circuit
recognized the doctrine of uberrimae fidei but never applied it because the
court determined the doctrine was not an “entrenched federal
precedent.”279
Other United States federal circuits have criticized the Anh Thi Kieu
decision. The Ninth Circuit characterized the Fifth Circuit’s analysis as
“not persuasive” and an abrupt change of course.280 The court explained,
271. Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974 (5th Cir. 1969).
272. Anzhela Explorer, 812 F. Supp. 2d at 1351 (first alteration in original) (quoting Gulfstream
Cargo, 409 F.2d at 980).
273. See HIH Marine Servs. Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir. 2000) (citing cases
from 1984 to 1996).
274. Markel Am. Ins. Co. v. Nordarse, 297 F. App’x 852, 853 (11th Cir. 2008) (citing HIH
Marine Servs., 211 F.3d at 1362).
275. Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882 (5th Cir. 1991).
276. Id. at 888 (first citing Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928); and then
citing Phx. Mut. Life Ins. Co. v. Raddin, 120 U.S. 183, 189 (1887)).
277. See id. (citing marine insurance treatises from 1934, 1950 and 1952).
278. Id. at 889 (“None of the opinions of this Court which have cited the uberrimae fidei doctrine
authoritatively conclude, however, that the doctrine applies to the exclusion of state law. For that
matter, no opinion of this Court has ever explicitly authorized the application of the uberrimae fidei
doctrine to invalidate a marine insurance policy.”).
279. Id.
280. Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 652, 653
766 ST. MARY’S LAW JOURNAL [Vol. 47:727
“It does violence to the meaning of the term ‘entrenched’ to reason that
because few cases have disputed the application of uberrimae fidei, it has
somehow become unmoored or ‘unentrenched.’”281 At the conclusion of
its analysis, the Ninth Circuit found it “[n]ot surprising[]” that “no other
circuit has followed Anh Thi Kieu . . . [because] in the face of 200 years of
precedent, it takes more than a single circuit case and spotty citation in
recent years to uproot an entrenched doctrine.”282 In 2008, the Third
Circuit accepted uberrimae fidei as a judicially established federal admiral
rule, but not before highlighting that the Fifth Circuit’s rejection of the
doctrine was heavily criticized by courts and scholars283 and that it was
the only federal circuit to “disavow” the precedential effect of uberrimae
fidei.284 Likewise, in a February 2015 opinion acknowledging uberrimae fidei
as a judicially established federal admiralty rule, the First Circuit
characterized the Fifth Circuit opinion as “heavily criticized”285 and
recognized the Fifth Circuit stood alone in its rejection of the doctrine.286
4. Seventh Circuit
The Northern District of Illinois wrote in 1993 regarding the Seventh
Circuit position on uberrimae fidei.287 At the time, the Seventh Circuit had
addressed neither the problem of the Wilburn Boat choice-of-law analysis
nor the question of uberrimae fidei as a judicially established federal
admiralty law.288 In deciding whether uberrimae fidei was an established
federal precedent, the district court considered three factors: judicial
precedent, the history of the insurance industry, and “the need for
uniformity and coherence of a vital international industry.”289 Although
the district court limited its decision to certain matters, it determined that
uberrimae fidei was an established federal admiralty law that superseded state
(9th Cir. 2008).
281. Id. at 653.
282. Id.
283. See AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 263 (3d Cir. 2008) (“The
Fifth Circuit’s position has been criticized quite heavily, most recently by the Ninth Circuit in Inlet
Fisheries. It also contradicts the general sentiment in scholarly literature.” (citations omitted)).
284. Id.
285. Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69, 80 n.13 (1st Cir.
2015) (citing Inlet Fisheries, 518 F.3d at 650–54).
286. Id.; see also Cassin, 554 F.3d at 263 (“The Fifth Circuit is alone in holding that uberrimae fidei
is ‘not entrenched federal precedent.’” (quoting Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 889
(5th Cir. 1991))).
287. St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982, 986 (N.D. Ill.
1993).
288. Id.
289. Id. at 988.
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law.290 The limitation of the decision was to “ongoing contractual
obligations between parties engaged in international and commercial
matters.”291 In a footnote, the district court reserved its opinion on
whether uberrimae fidei would apply to marine insurance contracts that were
of “a less commercial or international scope.”292
In 2004, the Western District of Wisconsin refused to apply uberrimae
fidei in a declaratory action by an insurer to cover damage to a thirty-fourfoot
powerboat that was operated on internal navigable waters of the
United States.293 However, rather than subvert the doctrine of uberrimae
fidei, the district court distinguished the case from St. Paul Insurance Co. of
Illinois v. Great Lakes Turnings294 based on specific facts that did not
warrant the application of federal admiralty law.295
5. Fourth Circuit
The District of South Carolina wrote in 2001 regarding the Fourth
Circuit position on uberrimae fidei.296 The district court began its
discussion by acknowledging most courts faced with the issue have applied
utmost good faith to marine insurance contracts.297 The court also
acknowledged the recent Anh Thi Kieu decision that disavowed the
entrenchment of uberrimae fidei as federal precedent.298 However, the
290. See id. (“Indeed, to decide that uberrimae fidei is not established federal precedent in this
dispute would require this court to ignore four hundred years of judicial decisions, the entire history
of insurance, and the need for uniformity and coherence of a vital international industry.
Accordingly, the federal admiralty doctrine of uberrimae fidei applies to marine insurance disputes over
ongoing contractual obligations between parties engaged in international and commercial matters.”);
see also Progressive N. Ins. Co. v. Bachmann, 314 F. Supp. 2d 820, 829 (W.D. Wis. 2004) (“In a
thoroughly researched and well-reasoned opinion, the [Northern District of Illinois] court concluded
that uberrimae fidei is established federal precedent that should supersede state law ‘in marine insurance
disputes over ongoing contractual obligations between parties engaged in international and
commercial matters.’” (quoting Great Lakes Turnings, 829 F. Supp. at 988)).
291. Great Lakes Turnings, 829 F. Supp. at 988.
292. Id. at 988 n.6.
293. Bachmann, 314 F. Supp. 2d at 823–25, 829.
294. St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982 (N.D. Ill. 1993).
295. See Bachmann, 314 F. Supp. 2d at 829 (“Unlike Great Lakes Turnings and like Wilburn Boat,
this case does not involve facts of any commercial or international scope but a policy of insurance for
a recreational boat that was damaged while in operation on an inland lake and that was available for
plaintiff to inspect before it issued its policy. The Supreme Court has indicated that such localized
maritime matters are better subject to state regulation than to federal admiralty law, which is
concerned primarily with national and international commercial shipping.”).
296. Commercial Union Ins. Co. v. Detyens Shipyard, Inc., 147 F. Supp. 2d 413, 423–24
(D.S.C. 2001).
297. Id. at 423 (first citing Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir.
1984); and then citing Knight v. U.S. Fire Ins., 804 F.2d 9, 13 (2d Cir. 1986)).
298. Id.
768 ST. MARY’S LAW JOURNAL [Vol. 47:727
court determined “[e]ven if this court were to adopt the analysis discussed
in Anh Thi Kieu, the doctrine of uberrimae fidei would still govern the
insurance policies”299 because South Carolina law did not compel a
“contrary conclusion” and Fourth Circuit jurisprudence did not require
abandoning uberrimae fidei.300 Therefore, the district court held the
doctrine of uberrimae fidei was “a firmly entrenched federal maritime
doctrine.”301
6. Ninth Circuit
Within the Ninth Circuit, the Western District of Washington was an
early proponent of uberrimae fidei as “a well established principle of general
marine law.”302 In a footnote to a 1998 marine insurance dispute, the
Ninth Circuit recognized uberrimae fidei existed under federal admiralty
law.303 Ten years later, the circuit court authored the landmark decision
that unambiguously recognized uberrimae fidei as a judicially established
federal admiralty law.304 In Certain Underwriters at Lloyds, London v. Inlet
Fisheries, Inc.,305 the Ninth Circuit addressed whether the doctrine of
uberrimae fidei applied to “vessel pollution insurance policies covering
statutory environmental liabilities.”306 The first task before the circuit
court was to determine what a “judicially established” federal admiralty
rule looked like. In the Ninth Circuit, the requirement was the rule be
“sufficiently longstanding and accepted within admiralty law,” while in the
Fifth Circuit the requirement was the rule be an “entrenched federal
precedent.”307 However, the Ninth Circuit determined “[u]nder either
gloss,” uberrimae fidei was such a doctrine.308 The Ninth Circuit considered
299. Id. at 424.
300. Id. (“There is no South Carolina state law mandating a contrary conclusion and no Fourth
Circuit case law mandating that district courts abandon the doctrine.”).
301. Id.
302. Port Lynch, Inc. v. New Eng. Int’l Assurety of Am., Inc., 754 F. Supp. 816, 820 (W.D.
Wash. 1991).
303. See Cigna Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 420 n.3 (9th Cir.
1998) (“This principle, known as uberrimae fidei exists under both California insurance law and federal
admiralty law.” (citation omitted)).
304. Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 647 (9th Cir.
2008); see also Nicoll, supra note 49, at 5 (“Inlet Fisheries is the Ninth Circuit’s firm statement that
uberrimae fidei is judicially established and displaces contrary state law in matters concerning marine
insurance.”).
305. Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645 (9th Cir.
2008).
306. Id. at 647.
307. Id. at 650.
308. Id.
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the history of the doctrine, beginning with Lord Mansfield in 1766 and
incorporated into United States jurisprudence by the Supreme Court in
1828.309 Because of its almost 200-year history in American law, the
Ninth Circuit determined there were few marine insurance doctrines
“more uniformly accepted in admiralty law” than uberrimae fidei “at the time
Wilburn Boat was decided.”310 Because the circuit court believed “Wilburn
Boat did nothing to change the standing of this doctrine,” it launched into
a critique of the Fifth Circuit Anh Thi Kieu decision.311 According to the
Ninth Circuit, the Anh Thi Kieu decision was the only reason why uberrimae
fidei was being doubted as a firmly entrenched doctrine of admiralty
law.312 Because the Ninth Circuit found the Anh Thi Kieu analysis was
“not persuasive,” it elected to follow the framework of Wilburn Boat.313
Under that rubric, the court held “the longstanding federal maritime
doctrine of uberrimae fidei, rather than state law, applies to marine insurance
contracts.”314
Later in 2008, the Ninth Circuit reaffirmed its position that “[u]berrimae
fidei is a ‘longstanding federal maritime doctrine’ that ‘applies to marine
insurance contracts.’”315 The following year, the Central District of
California cited Inlet Fisheries as the basis for describing “uberrimae fidei [a]s
an ‘established federal maritime law rule’ that applies to [marine]
insurance.”316
7. Third Circuit
In 1985, the Third Circuit authored a footnote to a marine insurance
case agreeing “that in the maritime context a boat owner must meet its
duty of uberrimae fidae.”317 In 2008, after a brief discussion of the Anh Thi
Kieu decision, the Third Circuit stated, “We reaffirm our prior precedent,
309. Id. at 650, 652.
310. Id. at 650.
311. Id.
312. See id. at 652 (“Ironically, were it not for the Anh Thi Kieu decision itself, there would be
little cause at all to doubt that uberrimae fidei is indeed firmly entrenched maritime law.”).
313. Id. at 653–54.
314. Id. at 654.
315. N.H. Ins. Co. v. C’Est Moi, Inc., 519 F.3d 937, 938 (9th Cir. 2008) (quoting Inlet Fisheries,
518 F.3d at 650); see also Nicoll, supra note 49, at 5–6 (“C’Est Moi re-emphasizes the Ninth Circuit’s
stand on the entrenchment of uberrimae fidei, while also notifying parties that, at least in this circuit,
contractual avoidance of the requirement of utmost good faith in marine insurance will require clear
and unmistakable language.”).
316. Pringle v. Water Quality Ins. Syndicate, 646 F. Supp. 2d 1161, 1169 (C.D. Cal. 2009)
(quoting Inlet Fisheries, 518 F.3d at 649–55).
317. E. Coast Tender Serv., Inc. v. Winzinger, Inc., 759 F.2d 280, 284 n.3 (3d Cir. 1985).
770 ST. MARY’S LAW JOURNAL [Vol. 47:727
and conclude that the doctrine of uberrimae fidei is well entrenched and
therefore controls this dispute.”318
8. Eighth Circuit
In 2013, the Eastern District of Missouri considered whether uberrimae
fidei was a judicially established federal admiralty rule and found “the duty
of uberrimae fidelis remains entrenched federal precedent.”319 Although the
district court acknowledged the Fifth Circuit found the duty was “no
longer [an] entrenched federal precedent,” it also determined that “most
other circuits” recognized the duty.320 Most importantly, the district
found that the Eighth Circuit implicitly recognized uberrimae fidei.321
The Eighth Circuit explicitly recognized uberrimae fidei as a judicially
established federal admiralty rule in 2014.322 The circuit court’s logic was
very straightforward. First, the court determined the doctrine had been
long recognized by the Supreme Court323 and then noted other federal
circuit courts also recognized the doctrine.324 Therefore, the Eighth
Circuit concluded that “[b]ased on its lengthy history . . . ‘no rule of
marine insurance is better established tha[n] the utmost good faith
rule.’”325 The circuit court then proceeded to consider the Anh Thi Kieu
decision and ultimately declined to follow that approach because a number
of circuit courts had subsequently addressed the issue and concluded
uberrimae fidei remains a judicially established federal admiralty rule.326 The
Eighth Circuit gave specific weight to the Ninth Circuit’s critique of Anh
Thi Kieu in Inlet Fisheries and found the Second, Third and Eleventh
Circuits reached similar conclusions to the Ninth Circuit in a marine
context. 327 The Eight Circuit administered proper application of
318. AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 263 (3d Cir. 2008). For an
extensive discussion of this case, see generally Stephen C. Richman, Note, Uberrimae Fidei-Once
Entrenched, Always Entrenched: The Third Circuit Joins the Majority in AGF Marine Aviation & Transport
v. Cassin, but Is That Enough?, 33 TUL. MAR. L.J. 553 (2009).
319. Starr Indem. & Liab. Co. v. Cont’l Cement Co., No. 4:11CV809 JAR, 2013 WL 1442456,
at *14 (E.D. Mo. 2013).
320. Id.
321. Id. (citing Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 903 (8th Cir. 2003)).
322. N.Y. Marine & Gen. Ins. Co. v. Cont’l Cement Co., 761 F.3d 830, 839 (8th Cir. 2014)
(“We conclude that the doctrine of utmost good faith is such a judicially established federal admiralty
rule.”).
323. Id. (citing United States Supreme Court cases from 1828, 1887, and 1928).
324. Id. at 839–40 (citing Second Circuit, Third Circuit, and Eleventh Circuit decisions).
325. Id. at 840 (quoting Certain Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518
F.3d 645, 653–54 (9th Cir. 2008)).
326. Id. at 839–40.
327. Id. at 840.
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uberrimae fidei to marine insurance policies by 2015.328
9. First Circuit
In 1995, the First Circuit heard a marine insurance case that raised the
issue of uberrimae fidei but did not decide whether the doctrine was a
judicially established federal admiralty law.329 In a footnote, the court
cited Anh Thi Kieu and raised the specter it might follow suit.330 Eleven
years later, uberrimae fidei again came before the First Circuit. The court
stated, “While we have never actually decided the issue, it is true that we
have questioned whether uberrimae fidei is an established rule of maritime
law.”331 However, at the time, the court did not decide the issue because
it found the policy voidable under Rhode Island state law due to a
misrepresentation.332
In 2007, the District of Massachusetts read the Anh Thi Kieu decision
both as questioning “the universal application of uberrimae fidei” and as
validating “the continued relevance of the doctrine.”333 In the
Massachusetts district court’s opinion, the Fifth Circuit’s stance on
uberrimae fidei was a minority view within the circuit courts.334 For
example, the Second Circuit acknowledged the doctrine’s
entrenchment,335 and the Eleventh Circuit cited uberrimae fidei as a “clear
rule of maritime law.”336 On this basis, the district court recognized
uberrimae fidei as an established federal admiralty rule.337
328. See, e.g. St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., 798 F.3d 715, 719 (8th
Cir. 2015) (“This dispute concerns a marine insurance contract and therefore is governed by the
principle of uberrimae fidei, or utmost good faith.” (citing N.Y. Marine, 761 F.3d at 839)).
329. Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50, 55 (1st Cir. 1995) (“Whatever
the exact extent of the applicability of the strict uberrimae fidei standard, we cannot believe that in
these times it requires a pleasure boat owner to notify the insurer every time the craft takes on a small
amount of water, or has engine trouble, at pain of losing coverage.”).
330. Id. at 54 n.3 (“[H]owever, it is debatable whether the doctrine can still be deemed an
‘entrenched’ rule of law.” (quoting Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 889–90 (5th Cir.
1991))).
331. Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 38 (1st Cir. 2006).
332. Id.
333. St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232, 238–39 (D.
Mass. 2007) (“While it is true that some federal decisions, including that of the Fifth Circuit in Albany
Ins. Co. v. Anh Thi Kieu, question the universal application of uberrimae fidei, it is equally important to
note that the Fifth Circuit qualified its decision, acknowledging the continued relevance of the
doctrine.”).
334. Id. at 239.
335. Id. (citing Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d Cir. 1986)).
336. Id. (quoting Steelmet Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir. 1984)).
337. Id. (“Considering the predominant acceptance of this doctrine by federal courts across the
country, this court concludes that the doctrine of uberrimae fidei is an established maritime rule.”).
772 ST. MARY’S LAW JOURNAL [Vol. 47:727
On the third iteration of Catlin at Lloyd’s v. San Juan Towing & Marine
Services, Inc.,338 the District of Puerto Rico acknowledged the First Circuit
was presented with the issue of uberrimae fidei twice but did not take “an
authoritative stance” on the issue of whether the doctrine was a judicially
established federal admiralty rule.339 The district court held uberrimae fidei
was “a well-entrenched federal precedent.”340 The decision relied on the
analysis done by the District of Massachusetts in St. Paul Fire & Marine
Insurance Co. v. Halifax Trawlers, Inc.,341 which illustrated the weight of
authority was in favor of concluding uberrimae fidei was well-entrenched.342
According to the District of Puerto Rico, “The majority of circuits are in
agreement that uberrimae fidei controls in maritime insurance disputes.”343
Although the district court recognized the position of the Fifth Circuit,344
Puerto Rico ultimately agreed with the Ninth Circuit’s evaluation of that
position.345
In 2014, like a broken record, the District of Puerto Rico again criticized
the First Circuit for failing to rule on whether the doctrine of uberrimae fidei
was a judicially established federal admiralty rule.346 The district court
338. Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 974 F. Supp. 2d 64 (D.P.R.
2013).
339. Id. at 74–75 (first citing Commercial Union Ins. Co. v. Pesante, 459 F.3d 34, 38 (1st Cir.
2006); and then citing Windsor Mount Joy Mut. Ins. Co. v. Giragosian, 57 F.3d 50, 54 n.3 (1st Cir.
1995)).
340. Id. at 76 (“Having weighed the Fifth Circuit Court of Appeals’ opinion against opposing
authority from other circuits and legal scholars, the Court holds that the uberrimae fidei doctrine
constitutes a well-entrenched federal precedent, even in the face of the First Circuit Court of Appeals
apparent hesitation to hold it does not.”).
341. St. Paul Fire & Marine Ins. Co. v. Halifax Trawlers, Inc., 495 F. Supp. 2d 232 (D. Mass.
2007).
342. San Juan Towing, 974 F. Supp. 2d at 75 (“Even despite the lack of a clear stance on the
issue by the First Circuit Court of Appeals, however, ‘the number and ratio of courts endorsing the
doctrine weigh in favor of [the] conclusion [that uberrimae fidei is an established rule of maritime
law].’” (alterations in original) (quoting Halifax Trawlers, 495 F. Supp. 2d at 238)).
343. Id.
344. Id. (“The only circuit to disavow the doctrine of uberrimae fidei as ‘not entrenched federal
precedent’ is the Fifth Circuit Court of Appeals.” (quoting Albany Ins. Co. v. Anh Thi Kieu, 927
F.2d 882, 889 (5th Cir. 1991))).
345. Id. (“The Court thus subscribes to the Ninth Circuit Court of Appeals’ conclusion that
‘[i]ronically, were it not for the Anh Thi Kieu decision itself, there would be little cause at all to doubt
that uberrimae fidei is indeed firmly entrenched maritime law.’” (alteration in original) (quoting Certain
Underwriters at Lloyds, London v. Inlet Fisheries, Inc., 518 F.3d 645, 652 (9th Cir. 2008))).
346. See Markel Am. Ins. Co. v. Veras, 995 F. Supp. 2d 65, 73 (D.P.R. 2014) (“[T]he First
Circuit has had numerous opportunities to rule on whether the doctrine of uberrimae fidei is a wellestablished
rule of maritime law, it has nonetheless declined to do so.” (first citing Lloyd’s of London
v. Pagan-Sanchez, 539 F.3d 19 (1st Cir. 2008); and then citing Commercial Union Ins. Co. v. Pesante,
459 F.3d 34 (1st Cir. 2006); and then quoting Grande v. St. Paul Fire & Marine Ins. Co., 436 F.3d
277 (1st Cir. 2006))).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 773
noted none of the First Circuit cases expressly rejected uberrimae fidei as
being established in federal admiralty law.347 Although there was a split in
the circuit courts on the issue,348 the magistrate judge was unable to find
cases within the district holding uberrimae fidei was not a well-established
admiralty doctrine.349 Based on precedent reaching back to 1828, the
district court agreed with the magistrate judge and held the doctrine of
uberrimae fidei was a judicially established federal admiralty rule.350
On the fifth iteration of the San Juan Towing case in 2015, the First
Circuit acknowledged, while it was presented with the issue of uberrimae
fidei twice previously, the circuit had yet to take “an authoritative stance”
on whether the doctrine was a judicially established federal admiralty
law.351 The circuit court affirmed that it was doing so.352 In
summarizing its decision, the First Circuit cited three reasons: the policy
rationale, the long history, and the consistent application of the
doctrine.353 Characterizing its ruling as “hardly . . . surprising,” the circuit
court discussed the precedential effect of M’Lanahan and Stipcich.354 It
then noted that even after Wilburn Boat, the circuit courts “routinely
applied” uberrimae fidei to marine insurance contracts as an established
federal admiralty rule.355 Additionally, the circuit court found it
“instructive” that three circuit courts formally recognized uberrimae fidei as
an established federal admiralty rule after the First Circuit expressed doubts
about the doctrine’s entrenchment.356 Finally, the First Circuit noted the
Second and Eleventh Circuits reaffirmed the relevance of uberrimae fidei
within their jurisdictions.357
347. Id. (“[N]one of the aforementioned cases reject the notion that uberrimae fidei is entrenched
in federal admiralty law.”).
348. See id. (“The U.S. Courts of Appeals are split on the issue, with the Second, Third, Ninth,
and Eleventh Circuits holding that uberrimae fidei is a well-established maritime rule, and the Fifth
Circuit disavowing said doctrine as ‘not entrenched federal precedent.’”).
349. See id. (“In fact, most of the courts in this district have concluded that uberrimae fidei is a
well-established rule of maritime law . . . .”).
350. Id. at 73–74.
351. Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69, 80 (1st Cir. 2015).
352. Id. at 80–81 (“Although this court had not yet held definitively that uberrimae fidei is an
established rule of maritime law, we do so now, thus joining the near-unanimous consensus of our
sister circuits, ruling without further equivocation that the doctrine of uberrimae fidei is an
established rule of maritime law in this Circuit.” (footnote omitted)).
353. Id. at 82.
354. Id. at 81.
355. Id.
356. Id.
357. Id. at 81–82.
774 ST. MARY’S LAW JOURNAL [Vol. 47:727
D. Summary of Legal Analysis
Understanding uberrimae fidei is vitally important because violation of the
duty results in the voiding of the marine insurance policy ab initio and the
return of premiums paid. The doctrine of uberrimae fidei is rooted in the
earliest days of marine insurance when insurance underwriters relied on
shipowners and merchants for information about the risks that they were
insuring.358 The typical formulation of uberrimae fidei is “[t]he assured
under a marine policy must disclose to the underwriter all circumstances
known to him which materially affect the risk.”359 Therefore, the central
attributes of uberrimae fidei are materiality, disclosure, and reliance. As far
back as 1931, materiality in marine insurance has been defined as
“something which would have controlled the underwriter’s decision” to
insure the risk.360 A modern formulation of materiality from the Eleventh
Circuit is “that which could possibly influence the mind of a prudent and
intelligent insurer in determining whether he would accept the risk, and . . .
that concealment of such facts voids the policy, whether the concealment
be due to fraud, negligence, accident, or mistake.”361 The later
formulation reinforces that scienter is not necessary to violate uberrimae
fidei. Once information is determined to be material, the insured must
disclose it regardless of a specific request by the insurer.362 Reliance on
the material information is an evolving field; however, some circuit courts
consider it to be akin to a subjective element of material.363 As of
October 2015, the Fifth Circuit was the only United Stated Circuit Court
of Appeal to expressly deny uberrimae fidei is a judicially established federal
admiralty rule.364
358. Fed. Ins. Co. v. PGG Realty, LLC, 538 F. Supp. 2d 680, 687 (S.D.N.Y. 2008) (citing
Stecker v. Am. Home Fire Assurance Co., 84 N.E.2d 797 (N.Y. 1949), aff’d, 340 F. App’x 5 (2d Cir.
2009)).
359. Btesh v. Royal Ins. Co., 49 F.2d 720, 721 (2d Cir. 1931).
360. Id.
361. Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 942–43 (11th Cir.
1986) (concurring with the lower court’s statement of law).
362. See HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir. 2000) (“The duty to
disclose extends to those material facts not directly inquired into by the insurer.”); Pringle v. Water
Quality Ins. Syndicate, 646 F. Supp. 2d 1161, 1169 (C.D. Cal. 2009) (“Further, an insured is
‘obligated to disclose all material information, regardless of a request by’ the insurer.” (quoting
Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 648 (9th Cir. 2008))).
363. See St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., 798 F.3d 715, 721 (8th Cir.
2015) (“[S]ome courts have applied a subjective test for materiality that asks whether the insurer in
fact would have found the omitted information to be material.”).
364. See Catlin at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69, 81 (1st Cir.
2015) (pointing to the Fifth Circuit’s decision in Anh Thi Kieu as the sole circuit court decision
refusing to recognize uberrimae fidei as an established and entrenched doctrine in maritime law).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 775
III. ECONOMIC ANALYSIS OF UBERRIMAE FIDEI AS A JUDICIALLY
ESTABLISHED FEDERAL ADMIRALTY RULE FOR PROTECTION AND
INDEMNITY CLUBS
A. Judicial Discussion of the Reasons for Uberrimae Fidei
According to Lord Mansfield in 1766, there were two basic reasons to
enforce the duty of uberrimae fidei in insurance: “to prevent fraud and to
encourage good faith.”365 In the late nineteenth century and early
twentieth century, the United States Supreme Court considered uberrimae
fidei to be an aspect of all insurance law.366 However, as insurance
regulation shifted to the states, standards became more favorable to the
insured.367 Uberrimae fidei was displaced in most insurance contexts,
except for marine insurance.368 The First Circuit explained why uberrimae
fide i still exists in marine insurance in its 2015 Catlin decision:
Marine insurance is vital to the adequate flow of commerce. The
nature of the risks that are covered by maritime insurance is such that, given
the urgent necessity for the placement of this type of insurance coverage that
is often present in the business of maritime commerce, as well as the
extreme distances that often separate the insurance seeker and the insurer, it
is imperative that the insurer be provided with truthful and valid information
about the risk the insurer is asked to undertake by the party most able to
p rovide such data: the insured.369
This reasoning echoes the rationale of the 1932 Hare & Chase court.370
According to Judge Swan, insurance is a speculative contract and the
underwriter proceeds upon the belief the insured does not withhold any
known fact affecting the risk, since such facts often lie within the special
knowledge of the insured alone.371 The principle of uberrimae fidei had
365. Carter v. Boehm (1766) 97 Eng. Rep. 1162, 1165; 3 Burr, 1905, 1911 (KB).
366. See Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928) (explaining the vital presence
of uberrimae fidei in every insurance contract); accord Phoenix Mut. Life Ins. Co. v. Raddin, 120 U.S.
183 (1887) (upholding a requirement of good faith by both parties to an insurance contract).
367. See Progressive N. Ins. Co. v. Bachmann, 314 F. Supp. 2d 820, 827 (W.D. Wis. 2004)
(remarking the state began to implement standards more favorable to the insured when they took
over insurance regulatory duties).
368. Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 646 (9th Cir.
2008); see also Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 888 (5th Cir. 1991) (“Today, the sole
remaining substantial vestige of the [uberrimae fidei] doctrine is in maritime insurance law.”).
369. Catlin, 778 F.3d at 80.
370. See Hare & Chase, Inc. v. Nat’l Sur. Co., 60 F.2d 909, 911–13 (2d Cir. 1932) (reasoning
that since only the insured has access to all material facts, the insurer must rely on the insured’s full
disclosure to properly assess risk).
371. Id. at 911.
776 ST. MARY’S LAW JOURNAL [Vol. 47:727
been relaxed in other areas of insurance in the United States, such as fire
and life insurance, because the insurers make inspections or ask questions
to produce the information that the insurers need.372 Because this is not
the case in marine insurance, “the rule of uberrimae fidei should still be
enforced.”373
Likewise, the Northern District of Florida envisioned the purpose of
uberrimae fidei as protecting the underwriter, who lacked the means to verify
the accuracy or sufficiency of the information supplied by the prospective
insured.374 Material misrepresentations in marine insurance are often
impractical to investigate at policy inception.375 The district court
reasoned that “placing the burden of good faith on the insured” saves the
time and cost of an investigation, which is normally passed on to the
consumer through higher insurance rates.376 Therefore, “the good faith
requirement saves money for both the insured and insurer at very little
cost—simply the truthfulness of the insurance applicant.”377
Other courts have been less verbose about their reasons for enforcing
the rule of uberrimae fidei. According to the Ninth Circuit, the purpose of
the doctrine is to both protect the insurer and “the integrity of the risk
pool.”378 The Northern District of Illinois enumerated a list of purposes:
“protecting insurance company assets and the assets of policy holders;
deterring the submission of misleading information; promoting personal
integrity by imposing harsh penalties on dishonesty; preventing the
imposition of frauds and perjuries on the court; and injecting certainty,
predictability and uniformity into the law.”379
In summary, the courts that have expressed an opinion about the reason
for the existence of uberrimae fidei in marine insurance law have primarily
cited that it protects underwriters from taking unnecessary risks and that it
372. Id.
373. Id.
374. See Northfield Ins. Co. v. Barlow, 983 F. Supp. 1376, 1380 (N.D. Fla. 1997) (“It has been
said that the insured is bound to communicate every material fact within his knowledge not known
or presumed to be known to the underwriter, whether inquired for or not; and that a failure in either
particular, although it may arise from mistake, accident, or forgetfulness, is attended with the rigorous
consequences that the policy never attaches and is void, for the reason that the risk assumed is not
the one intended to be assumed by the parties.” (quoting Gulfstream Cargo, Ltd. v. Reliance Ins. Co.,
409 F.2d 974, 980–81 (5th Cir. 1969))).
375. Id. at 1383.
376. See id. (noting the good faith requirement has a positive impact for both insured and
insurer, at a low cost to the insured).
377. Id.
378. N.H. Ins. Co. v. C’Est Moi, Inc., 519 F.3d 937, 939 (9th Cir. 2008).
379. St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982, 987 (N.D. Ill.
1993).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 777
saves the time and cost of preliminary investigations.
B. Legal Commentators’ Approach to the Economic Efficiency of Uberrimae Fidei
Thomas Schoenbaum, a noted admiralty law scholar, briefly discussed
the economic efficiency of uberrimae fidei in an article comparing the
American and English laws on the duty of utmost good faith. According
to Schoenbaum, “[T]he doctrine of utmost good faith still has utility in
marine insurance because it fosters a high standard of care, economic
efficiency, and lower premiums for assureds.”380 Economic efficiency is
the basis for the doctrine because it minimizes costs to the insurer and
insured.381 Lower and more precise premiums are available to the insured
because the doctrine places the burden to disclose on the insured, who is
the party with exclusive knowledge of the circumstances affecting the risk,
which allows the risks to be evaluated more precisely and cheaply.382
Because marine insurance is an industry where risk calculation and
negotiation are done on an individual basis, “the doctrine of uberrimae fidei
is of continuing importance.”383
John Kavanagh, a Fifth Circuit clerk in the 1990s, also briefly discussed
the economic efficiency of uberrimae fidei in his article on the topic. He
concludes adherence to uberrimae fidei would “foster economic efficiency
and honest dealings in marine insurance transactions.”384 He looks at the
economic efficiency of the doctrine from the perspective of “‘transactional
cost[s]’ associated with contractual dealings.”385 According to Kavanagh,
high transactional costs will increase the overall costs for the parties to the
contract.386 One such transactional cost is the “cost of collecting
information concerning the insured risk.”387 It is “both logical and
economically efficient” to burden the insured with the responsibility of full
disclosure because that is the party with all the material facts.388
Monitoring and enforcement also act to increase transaction costs.389
Because uberrimae fidei incentivizes the insured “to engage in full, good faith
380. Schoenbaum, supra note 86, at 39.
381. Id. at 3.
382. Id.
383. Id. at 3–4.
384. John P. Kavanagh, Jr., “Ask Me No Questions and I’ll Tell You No Lies”: The Doctrine of
Uberrimae Fidei in Marine Insurance Transactions, 17 TUL. MAR. L.J. 37, 50 (1992).
385. Id. at 48.
386. Id.
387. Id.
388. Id.
389. Id.
778 ST. MARY’S LAW JOURNAL [Vol. 47:727
disclosure with their underwriters,” it “minimizes monitoring expenses for
these underwriters.”390 Without the doctrine, the higher costs of
monitoring and enforcement would be passed on indiscriminately to all
insured, regardless of whether they were honest or dishonest.391
Mitchell Popham and Chau Vo synthesized the comments of Kavanagh
and Schoenbaum about the economic efficiency of uberrimae fidei in their
article about the doctrine in the Ninth Circuit.392 They agree that the
doctrine promotes economic efficiency393 and that “it is designed to
minimize costs to both the insurers and the insured.”394 They echo
Kavanagh’s analysis that information collection and risk investigation
comprise a portion of the premium associated with transactional costs
incurred by the underwriter and that “any significant increase in the
transactional cost of a contract increases the overall costs for the parties
involved in the contract.”395 The insured “can more efficiently carry the
burden of full disclosure” because the insured is in full possession of “the
material facts concerning the risks.”396 Therefore, “a rule placing the
burden of disclosure on the insured leads to lower costs for insurers and a
corresponding reduction in premiums [for the insured].”397
In summary, the legal commentators who have written about the
economic efficiency of uberrimae fidei398 have principally considered its role
in the reduction of costs, whether they are specifically investigation costs
or more generally transactional costs in contracting. This is a slight
departure from the judicial interpretation of economic efficiency, which
also considered the broader perspective of the prevention of fraud, the
390. Id.
391. Id. at 48–49.
392. Mitchell J. Popham & Chau Vo, Misrepresentation and Concealment in Marine Insurance
Contracts: An Analysis of Federal and State Law Within the Ninth Circuit, 11 U.S.F. MAR. L.J. 99, 104–05
(1999).
393. See id. at 104 (citing Kavanagh, supra note 384, at 48).
394. See id. (citing Schoenbaum, supra note 86, at 3).
395. Id. at 104–05 (citing Kavanagh, supra note 384, at 48).
396. Id. at 105 (citing Schoenbaum, supra note 86, at 3).
397. Id.
398. Two other legal papers have mentioned the economic impact of uberrimae fidei in one
passing sentence each. See Jeffery B. Struckhoff, The Irony of Uberrimae Fidei: Bad Faith Practices in
Marine Insurance, 29 TUL. MAR. L.J. 287, 308 (2005) (“Among legal scholars and commentators (and
insurers), there appears to be near-universal agreement that uniformity between English and
American law regarding the duty of utmost good faith is not only desirable, it is economically
indispensable.”); Paula Hamilton Lee, Comment, Untying the Gordian Knot and Opening Pandora’s Box:
The Need for a Uniform Federal Maritime Rule of Uberrimae Fidei with Respect to Marine Insurance, 19 TUL.
MAR. L.J. 411, 427 (1995) (“Many insurers agree that uberrimae fidei is the bedrock upon which
insurance is founded; if it is removed, the market could collapse.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 779
protection of assets, and the protection of the integrity of the risk pool,
among other economically related reasons.
C. Economists’ Approach to the Efficiency of Uberrimae Fidei
Four academic papers have been written about the impact of uberrimae
fidei on the economic model of the insurance market with asymmetric
information developed by Michael Rothschild and Joseph Stiglitz in
1976.399 Before delving into the details of the four papers specifically
addressing uberrimae fidei, it is important to understand how economists
generally see the insurance market and how the Rothschild–Stiglitz model
impacts that vision.
1. Economists’ Approach to Insurance
Economics focuses on “the allocation of resources in the presence of
scarcity.”400 Today’s insurance market reflects a need to manage and
allocate risks because insurance is nothing more than “a legal mechanism
by which the insured pays a premium to purchase from an insurer some
financial protection against a future potential loss.”401 Therefore, to
economists, insurance is important “because it allows individuals and
entities to engage in” risky activities that they might limit or refrain from
all together in the absence of insurance.402
However, sometimes “there is no economic advantage to insurance.”403
Sometimes the insured can more effectively reduce or protect against the
399. Avinash Dixit, Adverse Selection and Insurance with Uberrima Fides, in INCENTIVES,
ORGANIZATION AND PUBLIC ECONOMICS: PAPERS IN HONOR OF SIR JAMES MIRRLEES 41 (Peter
J. Hammond & Gareth D. Myles eds., Oxford Univ. Press 2000); Avinash Dixit & Pierre Picard, On
the Role of Good Faith in Insurance Contracting 1 (Princeton Univ., Econ. Theory Working Paper No.
02S2, 2002), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=303841; Pierre Picard, Costly Risk
Verification Without Commitment in Competitive Insurance Markets, 66 GAMES & ECON. BEHAV. 893
(2009); Jason David Strauss, Uberrimae Fidei and Adverse Selection: The Equitable Legal Judgment of
Insurance Contracts 1 (MPRA Paper No. 10874, 2008), http://mpra.ub.uni-muenchen.de/10874;
Michael Rothschild & Joseph Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the
Economics of Imperfect Information, 90 Q.J. ECON. 629, 630–38 (1976).
400. George L. Priest, Economic Problems of Accidents and Compensation, 15 U. HAW. L. REV. 544,
549 (1993).
401. Ronen Avraham, The Economics of Insurance Law—A Primer, 19 CONN. INS. L.J. 29, 32, 111
(2012).
402. George L. Priest, A Principled Approach to Insurance Law: The Economics of Insurance and the
Current Restatement Project 5 (Yale Law, Econ. & Pub. Pol’y Research Paper No. 527, 2015),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2631123; see also Avraham, supra note 401, at
32 (“The goal of [the insurance] transaction is to provide the insured protection from financial risks
to her assets, health, and life, or from third party claims, while incentivizing her to guard against
those risks.”).
403. Priest, supra note 402, at 6.
780 ST. MARY’S LAW JOURNAL [Vol. 47:727
risk than the insurer, and sometimes the insured does not want to pay the
premium required to support the risk.404 According to George Priest,
“From an economic standpoint, an insurance contract represents a joint
allocation as between the policyholder and insurer as to how best to
minimize the risks that the policyholder faces in the context of the risks
that the insurer can effectively reduce.”405 Therefore, when designing
rules governing insurance contracts, those rules should “maximize the
availability of insurance coverage to the society.”406 It follows that, when
an insured “is in a position to reduce loss (by prevention) at a lower cost
than what the insurer would charge for coverage of the loss,” it would be
advantageous for both parties for the insured to take that action because it
will reduce insurance premiums and expand the overall availability of
insurance.407 However, insurance products also have many hidden
characteristics such that there is ample opportunity for insurers to behave
strategically at the expense of the individuals insured.408
According to Priest, an insurance regime effectively reduces its risk level
through three principle features: “the aggregation of risks, the separation
of risks into separate risk pools[,] and the control of moral hazard.”409
According to Ronen Avraham, the design of an insurance regime should
focus on alleviating informational impediments, including moral hazard
and other impediments to efficiency.410 Priest’s approach serves as the
better foundation for the four economic papers discussing the efficiency
of uberrimae fidei.411 Issues of information asymmetry, specifically adverse
selection, will be addressed separately later in this Article.
Aggregation of risks assumes insurance operates when losses are
stochastic or probabilistic, because it would be uneconomic for an insured
to pay an insurer to estimate the risk, maintain reserves, and perform other
404. Id. at 3.
405. Id.
406. Id. at 5.
407. Id. at 7.
408. Avraham, supra note 401, at 33 (“The problem is that the product sold, insurance
coverage, is not usually well defined in the minds of insureds. What exactly is covered under the
policy? What type of ‘protection’ will be delivered? What constitutes an ‘occurrence’ which triggers
coverage? Not only are all of these left undefined in the minds of insureds, but they are all widely
litigated questions.”).
409. Priest, supra note 402, at 9.
410. Avraham, supra note 401, at 29. The main informational impediments are adverse
selection, reverse adverse selection, moral hazard, and reverse moral hazard. Other impediments to
efficiency include administrative costs, negative externalities, correlated risks, non-competitive pricing
and irrational behavior. Id. at 34.
411. Priest, supra note 402, at 9.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 781
functions for a loss that is certain to occur during a given period.412 It
would be more economic for the insured to accumulate savings to restore
its previous position.413 For insurance to reduce the risk level, losses
must be described by a probability distribution, either with respect to
whether the losses will occur or with respect to when the losses will
occur.414 By aggregating uncorrelated losses, insurance can reduce the
risk of loss due to the operation of the law of large numbers.415 This
happens in two ways: first, the accuracy and prediction of the risk
generated by each individual holding an independent and identically-valued
risk will improve as the number of those individuals increases.416 Second,
the ability to predict the risk level and to reduce the effective risk level will
also improve as the number of statistically independent risks is
increased.417 Therefore, aggregation of risks is critical to risk reduction
efforts in the insurance market.
Separation of risks into separate risk pools “refers to insurer efforts to
distinguish relatively high-risk from low-risk policyholders and then to
assign them to narrowly defined risk pools.”418 Risk pool definition is
also called insurance underwriting.419 Like the aggregation function of
insurance, the segregation function of insurance seeks to “increase
predictive accuracy in order to reduce the risk level and the total effective
412. Id. at 9–10.
413. Id. at 9; see also Avraham, supra note 401, at 37–38 (“The idea was that the sample mean for
a probabilistic set nears the expected mean for an occurrence or process in the population as the
sample size increases . . . . This is known as the law of large numbers. The obvious extrapolation to
be made is that pooling of risks reduces the risk per insured, as long as these risks are not perfectly
correlated.”).
414. Priest, supra note 402, at 10 (“The mean of the distribution represents the most likely
probability of occurrence of the loss; the distribution or error term surrounding the mean represents
the greater or lesser likelihood that the loss or set of losses will occur. The expected cost of the loss
is determined by summing the amount of the loss weighted by these probabilities.”); see also Avraham,
supra note 401, at 38 (“Insurance policies utilize the law of large numbers to reduce uncertainty for
risk-averse individuals. The first step in that process is risk transfer, by which the risk of a certain
event is shifted from one party to another. The law of large numbers, discussed above, allows an
insurer to predict with reasonable certainty the aggregate losses it will pay in a given year . . . .”
(footnote omitted)).
415. Priest, supra note 402, at 11 (noting the “law of large numbers” is “the empirical
phenomenon according to which the probability density function of a loss tends to become
concentrated around the mean as the sample number increases” (footnote omitted)). That basically
means the more numbers there are in a sample, the more likely the number pulled will be around the
mean value.
416. Id.
417. Id. at 12.
418. Id. at 13.
419. Id.
782 ST. MARY’S LAW JOURNAL [Vol. 47:727
costs of losses.”420 There are two separate dimensions to risk segregation:
a reduction in the “statistical variance below that of a more broadly
aggregated pool” and an influence on the level of risky activity by setting
the insurance premium to more precisely align with the risk that the
activity adds to the risk pool.421 Segregation can reduce statistical risk
variance below that of a more broadly aggregated pool if the high-risk
insured are segregated from the low-risk insured.422 This reduction in
statistical variance reduces the overall pool risk level, improves predictive
accuracy by virtue of the law of large numbers, and, as a result, reduces
aggregate insurance premiums.423 By setting an insurance premium that
most accurately reflects the insured’s risk, risk segregation can reduce the
underlying level of losses.424 This helps the insured internalize the cost of
their risky behavior because the insured can decide how much of the risky
behavior to engage in based on the cost of the insurance.425 The low-risk
insured will be charged lower premiums than the high-risk insured.426
Although at least one economist asserts that more accurate risk
segregation maximizes insurance coverage,427 and risk segregation can
also create problems of both efficiency and distributive justice, as
insurance companies can reallocate resources between the segregated risk
classes.428
The control of moral hazard also maximizes the gains from
insurance.429 Moral hazard describes the condition when the underlying
level of activity and the underlying loss rate will increase because the
expected loss costs to the insured have fallen, owing to the presence of
insurance.430 “A necessary . . . condition to the characterization of moral
hazard is that the suboptimal behavior of the insured is the result of the
420. Id. at 19 (footnote omitted).
421. Id. at 13.
422. Id.
423. Id. at 14.
424. Id. at 16.
425. Priest, supra note 402, at 16.
426. Id.
427. Id. at 17–18 (“[I]t is well-established that the more precisely insurers can accurately
segregate risks by insurance discrimination, the more broadly insurance can be offered in the
society.” (footnote omitted)).
428. Avraham, supra note 401, at 47–48 (“Insurers—private or public—have the ability to
redistribute resources between the classes they have separated by overcharging, intentionally or
otherwise, the less risky and undercharging the more risky. In health insurance, for example, the
healthy subsidize the chronically sick.” (footnote omitted)).
429. Priest, supra note 402, at 19.
430. Id.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 783
insurance coverage.”431 Therefore, “the insured’s behavior must be
examined in relation to” his conduct in a world where he had no insurance
coverage.432 Ex ante moral hazards are the reduced precautions to
prevent the loss taken by an insured because of the existence of insurance
that increase the frequency of loss.433 Ex post moral hazards are the
increased claims against the insurance beyond what the insured would
have consumed in absence of insurance that “increases the costs of losses
that have actually occurred.”434 Another type of ex post moral hazard,
which may be considered fraud depending on its magnitude, is the
exaggeration of a loss by the insured to increase his reimbursement.435
Because the insurance company cannot separate those who behave
according to moral hazard from those who do not, the insurance company
charges all insured the same premium, leading to cross subsidization of the
“immoral” insured.436 Because moral hazard increases the loss costs, it
results in an increased risk level for the insured pool.437
“[C]ontrolling both ex ante and ex post moral hazard [reduces risk].”438
“Moral hazard is often a problem . . . in the third-party liability insurance
context.”439 Theoretically, addressing the ex ante moral hazard issue
requires “disincentivizing the deviations from the optimal level of care,”
which can either be a “carrot” or a “stick” approach.440 Because at the
heart of moral hazard is a principal–agent problem, one way to alleviate
moral hazard is to have the parties “contract on care,” which would
require certain precautions be taken by the insured in exchange for lower
premiums.441 Also, the more closely aligned the insured’s incentives are
with those of the insurance company, the less frequent moral hazard will
be.442 However, the insurance company will still incur the cost of
431. Avraham, supra note 401, at 67.
432. Id.
433. Priest, supra note 402, at 19; see also Avraham, supra note 401, at 66 (“[W]hen insureds take
less than optimal care in protecting themselves against the insured risk . . . is considered ex-ante moral
hazard.”).
434. Priest, supra note 402, at 19; see also Avraham, supra note 401, at 66 (“[W]hen insureds make
less of an effort to minimize their loss should the risk occur . . . [it] is considered ex-post moral
hazard.”).
435. Avraham, supra note 401, at 66.
436. Id.
437. Priest, supra note 402, at 19; see also Avraham, supra note 401, at 66 (“Moral hazard consists
of the risk of three distinct kinds of behavior by insureds, all of which are hidden from the insurer.”).
438. Priest, supra note 402, at 20.
439. Avraham, supra note 401, at 67.
440. Id. at 70.
441. Id.
442. See id. (describing how utilizing the “stick” and “carrot” approach can solve moral hazard
784 ST. MARY’S LAW JOURNAL [Vol. 47:727
deciding the appropriate loss prevention measures and monitoring the
insured’s compliance with the agreement.443
Careful design of the insurance policy can also control moral hazard.444
Defining insurance coverage to constrain or exclude certain losses and
designing insurance benefits to introduce deductibles and coinsurance that
shift part of the loss back to the insured are both two key ways to control
for moral hazard.445 Deductibles are most appropriate in the case of
small losses; co-insurance in the case of moderate losses; and policy limits
in the case of large losses.446 The cost savings resulting from these
measures necessarily make insurance available to insureds who may not
otherwise be able to pay the full actuarial cost of their insurance.447
Experience ratings, especially in third-party insurance, are another way that
an insurer can protect against moral hazard.448 An experience rating
classifies the insured according to their experiences with the loss to be
insured, and then associates higher premiums with higher experience
ratings.449 Policy exclusions are a final way to mitigate ex ante moral
hazard, as it “pressure[s] the insured party to avoid the proscribed
behavior.”450
Ex post moral hazard can also be addressed in several different ways.
First and foremost, insurance companies refuse to insure non-pecuniary
losses because the scope of such losses may be impossible to prove.451
Second, insurance companies audit claims that are suspected to involve ex
post moral hazard due to specific characteristics.452 Finally, the insurance
companies design their policies as indemnity policies rather than stated
because the incentives of both the insured and insurer become more aligned).
443. Id.
444. Id. at 71.
445. Priest, supra note 402, at 20–21; see also Avraham, supra note 401, at 71 (“Deductibles and
co-insurance clauses in the policy force insureds to bear some specified amount or percentage of
harm (respectively), thereby forcing the insured to internalize some of the cost of an occurrence and
incentivizing careful behavior. Policy limits, or caps on the total amount payable under the policy,
similarly provide a strong incentive to avoid risky behavior and to minimize total harm.”).
446. Avraham, supra note 401, at 72.
447. Priest, supra note 402, at 22.
448. Avraham, supra note 401, at 73.
449. See id. (“In other words, insurers threaten higher premiums for those insureds with the
highest losses, incentivizing the insureds to invest in minimizing their losses (as well as reducing cross
subsidization of high-risk insureds by low-risk insureds). Some insurers offer policies that are
experience rated retrospectively, meaning that the premium is set after the loss experience is known.
Insureds with lower losses receive refunds for part of their premiums, while a surcharge is levied on
those with higher losses.”).
450. Id. at 74.
451. Id. at 75.
452. Id.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 785
value policies to minimize the incentive of the insured to exaggerate a
claim.453
According to economist Ronen Avraham, reverse moral hazard is also a
risk that should be controlled because insurance companies behave
strategically once the insured are under contract.454 Problems of reverse
moral hazard arise because the insurance company is the insured’s agent
but can act to “maximize its own interests rather than the insured’s
interests.”455 Theoretically, there are multiple ways to combat reverse
moral hazard, such as requiring a full and detailed disclosure of the
coverage decisions made by insurance companies so that such disclosure
could be used to punish opportunistic behavior by insurance
companies.456 Additionally, individual insureds could have a legal claim
for damages that result from insurance companies’ bad faith denials or
have access to an alternate dispute resolution mechanism to challenge
insurance companies’ decisions.457 Designing a liability insurance policy
to require the insurance company “to defend a suit unless the insured
consents” to a settlement in writing will also reduce reverse moral
hazard.458
Against this general background of insurance economics, Priest
provides the briefest analysis of uberrimae fidei.459 In his view, insurance
contracts do not differ from other contracts in that they generally allocate
the duties and responsibilities between the insured and the insurers.460
This allocation is based upon “the relative comparative advantages of each
party in contributing towards the objective of the contract.”461 According
453. Id.
454. See id. at 87 (“Just like there is reverse adverse selection, there is arguably also reverse
moral hazard. It is not insured parties alone that behave strategically once the insurance contract is in
place—insurers are similarly the perpetrators of opportunistic behavior, finding it easy and
advantageous to mistreat their insureds once they are locked in a contract. This is especially true
because barriers to litigation can prevent insureds from challenging insurer abuse.” (footnote
omitted)).
455. Id. at 90.
456. Id. at 88.
457. Id. See, for example, the Connecticut Unfair Insurance Practices Act (CUPA), CONN.
GEN. STAT. ANN. §§ 38a-815 to 819 (West, Westlaw through 2015). For the laundry list of “unfair
methods of competition and unfair and deceptive acts or practices in the business of insurance,” see
CONN. GEN. STAT. ANN. § 38a-816. The Connecticut Unfair Trade Practices Act permits a private
individual to bring an action in court if he suffers “any ascertainable loss of money or property, real
or personal” as a result of any “unfair methods of competition and unfair or deceptive acts or
practices in the conduct of any trade or commerce. Id. §§ 42-110a, -110b, -110g.
458. Avraham, supra note 401, at 90.
459. Priest, supra note 402, at 1.
460. Id. at 23.
461. Id.
786 ST. MARY’S LAW JOURNAL [Vol. 47:727
to Priest, the “current law” is that “a misrepresentation of a material fact
by an applicant for insurance voids the insurance contract.”462 There are
good economic reasons for supporting this rule. “Parties to contracts
need to know the risks they are facing to create a contract that maximizes
mutual value to them.”463 It is essential to know the material facts in
order to place the insured into the appropriate risk pool.464
Misrepresentation defeats the insurer’s efforts to segregate risks and
increase insurance, availability.465 Finally, this rule is “cost effective in
terms of maximizing the possibilities of insurance” because “the potential
policyholder is in the best position to know” the relevant material facts.466
The marine insurance contract is a specific type of insurance contract in
which an insurer “assumes some of the maritime risks on a vessel or cargo,
or both, in exchange for a premium.”467 Covered risks may include risks
in port or at sea, for a particular voyage, or for a specific period of
time.468 By the beginning of the eighteenth century, when marine
insurance had developed into a familiar practice, insurers faced three main
categories of “uncertainty and complex information asymmetries that
created agency problems for both the insurer and the insured”
shipowner.469 First, the shipowners and merchants often had better
information than the insurers about the various aspects of the risk to be
insured, such as the route, the seaworthiness of the ship, the quality of the
crew and its armament, and the risk of seizure at sea or in port.470
Second, there was a high potential “for moral hazard on the part of the
insured.”471 Opportunities ranged from extreme risk taking to blatant
fraud, and the insurers were seriously concerned about the possibility of
fraudulent overinsurance and deliberate shipwreck.472 Finally, shipowners
and merchants preferred to insure with insurers who they perceived to be
462. Id. at 28.
463. Id.
464. Id.
465. Id. at 29.
466. Id. at 28.
467. Christopher Kingston, Marine Insurance in Britain and America, 1720–1844: A Comparative
Institutional Analysis, 67 J. ECON. HIST. 379, 380 (2007).
468. Id.
469. Id. at 380–81.
470. Id. at 381.
471. Id.
472. See id. (“[T]here were many opportunities for moral hazard on the part of the insured.
These ranged from excessive risk-taking, such as sending unseaworthy ships to sea or attempting to
carry goods into a blockaded port; to outright frauds, such as deliberately sinking an insured ship,
misrepresenting the value of the goods, insuring the same goods multiple times, or seeking to insure
a ship already known to have been lost.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 787
non-litigious and financially secure.473 Insurers had the opportunity to
protest claims or delay payment because of the unpredictable nature of
sailing ship voyages and the slow, costly process of assembling proof to
support a claim in court.474 Because the English marine insurance market
was predominantly composed of private individuals, shipowners and
merchants were seriously concerned about the financial stability of the
insurers.475
Information itself was critical to combat these three categories of
information asymmetries and agency problems.476 Despite the fact
information traveled slowly in the eighteenth century, marine insurance
was able to support the expansion of trade throughout the next two
centuries.477 Although there are alternate explanations for this
phenomenon,478 the judicial endorsement of the mercantile practice of
uberrimae fidei by Lord Mansfield in 1766 was a significant step toward
alleviating the problems resulting from the rampant information
asymmetries because the doctrine voided the marine insurance policies of
any insured who misrepresented or concealed facts or of any vessel that
deviated from the planned voyage without reasonable cause.479 This
extreme “punishment” for dishonesty encouraged information sharing
between shipowners, merchants and insurers.
2. Economists’ Models of the Insurance Market with Uberrimae Fidei
Economists are “quite willing to accept that people will take full private
advantage of opportunities to conceal information (or take unobservable
actions).”480 Michael Rothschild and Joseph Stiglitz developed the
“economist’s standard model of insurance with asymmetric
information”481 in their article written in 1976.482 Because that article is
473. Id. at 382.
474. Id.
475. Id.
476. See id. (“In the context of these information asymmetries and agency problems,
information was critical.”).
477. See Kingston, supra note 467, at 382–83 (recognizing that despite the problems created by
information asymmetries during the eighteenth century, “marine insurance provided crucial support
for the expansion of trade throughout the eighteenth and nineteenth centuries”).
478. For example, Professor Kingston posits that development of insurance institutions to
mitigate information asymmetries and agency problems are responsible for the expansion of
maritime trade in this era. Id.
479. See id. at 389 (discussing the steps taken by Lord Mansfield to void an insurance policy if
any concealment or misrepresentation of facts was found in addition to a change in a planned trip
without reasonable cause).
480. Dixit, supra note 399, at 42.
481. Id. at 41.
788 ST. MARY’S LAW JOURNAL [Vol. 47:727
“widely considered as one of the most important contributions to the
insurance economics literature,”483 it is necessary to understand the basics
of their model to understand the impact of the incorporation of uberrimae
fidei by later economists. The models with uberrimae fidei illustrate the
economic efficiency of that doctrine to the general insurance market,
which can be extended to the mutual marine insurance market of
protection and indemnity clubs.
In general, Rothschild and Stiglitz analyzed the insurance market as an
example of a competitive market in which the characteristics of the
commodities exchanged are not fully known to at least one of the parties,
and they concluded imperfect information is a factor that needs to be
considered in economic modeling.484 When there is imperfect
information competitive equilibria may not exist, and the equilibria that
may exist can have strange properties.485 They had three specific findings
relevant to the insurance market. First, in the insurance market, sales
offers consist of a price and a quantity, rather than just a quantity.486
Second, everyone in the market would be better off if individuals were
willing or able to reveal their private information.487 Third, the mere
existence of high-risk individuals in the market causes an externality: the
low-risk individuals are worse off.488 However, the opposite is not true:
high-risk individuals are not better off when low-risk individuals are
absent.489 In the summary to their article, Rothschild and Stiglitz phrased
their three principle findings somewhat differently. First, competition in
markets with imperfect information is more complex than in standard
models because perfect competitors may limit the quantities their
customers can buy (i.e. price-quantity competition) in order to improve
their information about their customers.490 Secondly, equilibrium may
not exist.491 “Finally, competitive equilibria are not Pareto optimal.”492
482. Rothschild & Stiglitz, supra note 399, at 629.
483. Pierre Picard, Participating Insurance Contracts and the Rothschild–Stiglitz Equilibrium Puzzle, 39
GENEVA RISK & INS. REV. 153, 153 (2014).
484. See Rothschild & Stiglitz, supra note 399, at 629 (analyzing flawed information as a factor
to consider in insurance markets).
485. Id.
486. See id. (“In the insurance market . . . sales offers . . . do not specify a price at which
customers can buy all the insurance they want, but instead consist of both a price and a
quantity . . . .”).
487. Id.
488. Id.
489. Id.
490. Id.
491. Id.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 789
The basic model is an individual has one income if he is lucky enough
to avoid an accident and a lesser income if an accident occurs. The
individual can insure himself against the accident by paying an insurance
company a premium, in return for which he will receive a payment if an
accident occurs. This results in four possible states: “accident,” “no
accident” without insurance, and “accident,” “no accident” with
insurance.493 In a competitive insurance market with free entry among
competitors, insurance contracts are traded by the individuals who buy
insurance and the companies who sell insurance.494 “An individual
purchases an insurance contract so as to alter his pattern of income across
states of nature.”495 All individuals are risk averse and are identical in all
respects except for their probability of having an accident.496 “Risk
aversion” has a precise meaning for economists: “in simplest terms, it
implies an unwillingness to take actuarially fair bets.”497 In fact, “[t[he
return from an insurance contract is a random variable.”498 Insurance
companies are risk neutral and are only concerned with expected
profits.499 “Insurance companies have financial resources such that they
are willing and able to sell any number of contracts that they think will
make an expected profit.”500 Taken as a whole, “these assumptions
guarantee that any contract” that is expected to be profitable will be
supplied when demanded.501
The Rothschild–Stiglitz model assumes “individuals know their accident
probabilities, while [the insurance] companies do not,” setting up a classic
situation of asymmetric information.502 However, an insurance company
may infer accident probabilities from its customers’ market behavior
because, for example, those individuals with higher accident probabilities
will demand more insurance than those with lower accident
492. Id.
493. Rothschild & Stiglitz, supra note 399, at 630. For this concept represented mathematically,
see id.
494. Id.
495. Id. For a mathematical representation of the value of an insurance contract to an
individual, see id.
496. Id. at 631.
497. David Hemenway, Propitious Selection, 105 Q.J. ECON. 1063, 1067–68 (1990).
498. Rothschild & Stiglitz, supra note 399, at 631.
499. Id. For a mathematical representation of how firms are likely to behave as if they
maximize the profitability equation, see id.
500. Id
501. Id.
502. Id. at 632.
790 ST. MARY’S LAW JOURNAL [Vol. 47:727
probabilities.503 When the market consists of low-risk individuals and
high-risk individuals as two distinct customer groups, there cannot be a
pooling equilibrium in which both groups buy the same contract.504 If
there is equilibrium, it must be a separating equilibrium in which the
different types purchase different contracts.505 “[E]ach contract in the
equilibrium set makes zero profits.”506 However, a competitive insurance
market may not have equilibrium.507 Equilibrium will not exist if the lowrisk
individual has low costs of pooling or high costs of separating.508
“One of the interesting properties of the equilibrium is the presence of the
high-risk individuals” yields a negative externality on the low-risk
individuals.509 However, the high-risk individuals are no better off than
they are in isolation.510 Therefore, if only the high-risk individuals would
admit their riskiness, all individuals in the marketplace would be made
better off without anyone being made worse off.511
As already discussed at length, the core of the doctrine of uberrimae fidei
is full disclosure of all material facts relevant to the risk to be insured by
the individual to be insured. In 2000, Princeton economics professor
Avinash Dixit placed the concept of uberrimae fidei into the Rothschild–
Stiglitz model and recognized uberrimae fidei achieves a Pareto improvement
by allowing insurers to better separate low-risk individuals from high-risk
individuals.512 According to Dixit, “[T]his social attempt to enforce
morally superior behavior by placing the onus of disclosure on the insured
leads to an outcome that is in the rational personal interest of all.”513
When the Rothschild–Stiglitz model was modified to discover how the
contracts and equilibrium changed with the imposition of uberrimae fidei, it
was shown the inclusion of the doctrine deters high-risk individuals from
claiming to be low-risk individuals.514 Dixit endeavored to keep his
503. See id. (recognizing an insurance firm’s ability to “use its customers’ market behavior to
make inferences about their accident probabilities” because generally, those with higher accident
probabilities tend to demand more insurance).
504. Id. at 634.
505. Id. at 635.
506. Id.
507. Rothschild & Stiglitz, supra note 399, at 637.
508. See id. (stating “because there are relatively few of the high-risk individuals who have to be
subsidized, or because the subsidy per individual is low” an equilibrium will not exist).
509. Id. at 638.
510. Id.
511. Id.
512. Dixit, supra note 399, at 41, 42; Picard, supra note 399, at 893–94.
513. Dixit, supra note 399, at 41, 42.
514. See id. at 41 (explaining how high-risk individuals can be deterred from claiming to be lowrisk).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 791
model as similar as possible to the standard Rothschild–Stiglitz model.
While he maintained the probability of loss was private information, he
assumed the size of the loss was common knowledge.515 However, the
“insurance company offering a contract can” make it available to a certain
risk type, provided the individual must certify that he is that risk type in his
application for the insurance contract.516 At any time, the company can
investigate the truth of the individual’s certification; if the certification is
found to be false, “the company can void the contract” but must return
the premium paid to the individual.517 An investigation will reveal the
truth accurately and unambiguously; therefore, a rational company will
only investigate, if at all, after a claim is made.518
In summary, the standard of uberrimae fidei makes an extra set of
economic tools available to an insurance company, including the prospect
of an investigation, penalties for lying, and rewards for truthfulness.519
Combined in the economic model, these tools make it more difficult for
high-risk individuals to claim to be low-risk individuals.520 That, in turn,
reduces the information asymmetries that block mutually beneficial trades
of risk.521
The changes to the model basically operate as follows: when an
insurance company introduces a contract specified for low-risk individuals,
the individual must certify himself as a low risk and pay the low-risk level
premium.522 If an accident occurs, the insurance company will investigate
the truth of the insured’s risk certification.523 If the individual is actually a
low-risk individual, the insurance company will pay him such that his final
wealth is restored to his pre-accident state; however, if the individual is
actually a high-risk individual, the company will only refund his insurance
premium.524 In this situation, the high-risk individual would be better off
not buying the insurance intended for the low-risk individual and would
have been best off buying the insurance intended for high-risk individuals
515. Id. at 42.
516. Id. at 43.
517. Id.
518. Id.
519. Id. at 49.
520. Id.
521. See generally George A. Akerlof, The Market for ‘Lemons’: Quality Uncertainty and the Market
Mechanism, 84 Q.J. ECON. 488 (1970) (summarizing the classic discussion of how information
asymmetry blocks mutually beneficial trades of risk).
522. Dixit, supra note 399, at 44.
523. Id.
524. Id.
792 ST. MARY’S LAW JOURNAL [Vol. 47:727
in a separating equilibrium.525 Therefore, implementation of uberrimae fidei
in the Rothschild–Stiglitz model substantially improves the insurance
company’s ability to separate risk types.526 Because separation can be
more easily achieved, the low-risk individuals can get better coverage in a
Rothschild–Stiglitz equilibrium with uberrimae fidei than one without.527
The high-risk individuals “continue to get the same fair, full insurance as in
the Rothschild–Stiglitz equilibrium.”528
However, Dixit noted moral hazard may arise in three ways in his
modified model. First, the insurance company experiences moral hazard
in that it may not completely randomize its investigations, as is generally
realized with probabilistic auditing.529 Therefore, its randomization
technique must be publicly verifiable.530 Second, the insurance customer
may pretend to suffer a loss when no actual loss has occurred.531 This
would require an audit, which is different than the investigation into
private information about risk type.532 Finally, the insurance customer
may be better off with a loss and therefore create a genuine accident.533
The assumption in Dixit’s model that investigations always accurately
and unambiguously reveal the truth is troublesome. Combating fraudulent
insurance claims is a major concern of most insurance companies.534
Because it is costly to monitor suspicious claims, strong action against
fraud is often difficult for insurance companies to follow through with.535
Still, to deter fraud, insurance companies need to convince their
policyholders that a stringent monitoring policy will be enforced, despite
the fact it is difficult for an insurer to obtain a reputation for being tough
on fraud.536 Insurance companies engage in an “audit game” with
525. Id.
526. Id. at 45.
527. Id. at 44.
528. Id. at 49.
529. Id.
530. Id.
531. Id. at 50.
532. Dixit, supra note 399, at 50.
533. Id.
534. Pierre Picard, Auditing Claims in the Insurance Market with Fraud: The Credibility Issue, 63 J.
PUB. ECON. 27, 28 (1996).
535. Id.
536. Id. at 29 (“First, optimal claim handling usually involves random auditing, which makes it
difficult for policyholders to monitor devaluations of the company from its pre-announced strategy.
Second, the probability of suffering a loss may be too low for a policyholder to experiment with the
credibility of the insurer’s auditing strategy. Third, policyholders may have only aggregate
information on the average probability among insurers for a claim to be audited. Such global
information could be volunteered by insurance regulators, but then we are faced with the problem of
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 793
policyholders as follows: “the insurer has incomplete information”
regarding the policyholder’s risk type, the policyholder may or may not
experience a loss, and opportunistic policyholders may decide to file
fraudulent claims.537 The insurance company determines whether to audit
the claims that have been filed.538 If it is discovered a policyholder
submitted a fraudulent claim, he can be prosecuted and fined.539 The
equilibrium of the audit game between an insurance company and a
policyholder “depends on whether the insurance company can commit . . .
to its auditing strategy.”540 Commitment gives an advantage to the
insurance company; however, in “absence of commitment, the auditing
strategy of the insurance company should be a best response to” the
opportunistic policyholder’s fraud strategy.541 Most helpful for insurance
companies would be a common agency to resolve the commitment
problem.542 As will be discussed later, although the major marine
protection and indemnity clubs belong to the International Group of P&I
Clubs, that organization plays no role in settling claims outside the pooling
agreement.543
One important critique of the assumptions used in Dixit’s extension of
the Rothschild–Stiglitz model is the uberrimae fidei doctrine itself may be
fundamentally flawed in assessing the relative strength of the parties with
respect to the information they hold.544 Because the individual does not
know what information he holds that is relevant to the insurance
company, he may actually be in a weaker position relative to the insurance
company.545 The strength of the insurance company’s position lies in the
fact that it is aware of what information it needs to determine individual
risk type.546 Even under a limited formulation of uberrimae fidei that
the credibility of this public announcement, since any insurer has an incentive to deviate.”).
537. Id.
538. Id.
539. Id.
540. Id.
541. Id.
542. Id. at 30; see also id. at 41–45 (providing an extensive economic explanation and proof of
this proposition).
543. See The Role of the Group, INT’L GROUP P&I CLUBS, http://www.igpandi.org/article/therole-
of-the-group (last visited May 18, 2016) (“One of the main roles of the Group is coordinating
the operation and regulation of the clubs’ claim-sharing agreement (the Pooling Agreement).”).
544. See R. A. Hasson, The Doctrine of Uberrima Fides in Insurance Law—A Critical Evaluation, 32
MOD. L. REV. 615, 633 (1969) (“[T]he doctrine is in error in assessing the strength of the parties with
regard to knowledge. The doctrine assumes that the insured is in a stronger position than the insurer
because he (the insured) has more knowledge than the insurer.”).
545. Id.
546. Id. at 633–34.
794 ST. MARY’S LAW JOURNAL [Vol. 47:727
requires an individual to only disclose facts within his knowledge, the
individual still may be at a disadvantage vis-à-vis the insurance company
because he is either unaware or uncertain of the materiality of a given
fact.547
However, in marine insurance law, the foregoing critique is not
necessarily valid. As discussed earlier in this Article, the materiality of
information in an application for marine insurance has been heavily
litigated and the contours of what constitutes “something which would
have controlled the underwriter’s decision”548 have been fairly well
fleshed out.
Dixit’s Rothschild–Stiglitz model with uberrimae fidei assumed any
misrepresentation of risk type was intentional because the individuals were
“perfectly privately informed about their risk types.”549 This model was
extended by Dixit and Picard to a setting in which the individuals only
perceive a signal of their risk level, rather than know their risk level for
certain, and distinguished between unknowing and intentional
misrepresentations.550 The economists intended to reflect the reality that
individuals may not be aware of their actual risk type and believe
themselves in good faith to be low risk.551 To illustrate this difference,
the economic model incorporated not only the cost of the investigation of
the insured’s actual risk type but also the cost of investigating whether the
insured was aware of his risk type (signal receipt).552 The model also
assumed if a post-accident investigation revealed a low-risk individual
knew himself to be a high-risk individual, the law allowed the insurance
company to both rescind the contract and levy a fine on the insured.553
Therefore, the optimal contract design will be subject to both these legal
provisions as well as the usual economic profit and incentive
constraints.554
This economic model is essentially the same as Dixit’s version of the
Rothschild–Stiglitz model with uberrimae fidei, except each individual also
receives a signal about his risk type.555 Low-risk individuals always get a
547. Id. at 634.
548. Btesh v. Royal Ins. Co., Ltd., of Liverpool, 49 F.2d 720, 721 (2d Cir. 1931).
549. Dixit & Picard, supra note 399, at 1, 2.
550. Id. at 3.
551. Id. at 2.
552. Id. at 3.
553. Id.
554. Id.
555. Id. at 4.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 795
true signal, but high-risk individuals sometimes get a false signal.556 That
is, sometimes high-risk individuals believe in good faith they are low-risk
individuals and will act in the market as if they are low-risk individuals.
The model then operates as a multistage game to reach equilibrium. First,
a potential insurance company decides whether to offer insurance; if so, it
decides what type of contract and the price–quantity specifications of the
contract.557 Second, the insurance consumer decides whether to accept
an insurance contract; if so, he decides which one based on the expected
utility of the risk signal he has received.558 In the following stages, each
individual’s outcome is realized. Those individuals who have suffered
losses file claims, and “the insurance companies follow through with their”
investigation strategies, reveal the true risk type of the individuals, and pay
the appropriate indemnities.559 Like Dixit’s model with uberrimae fidei,
when there is equilibrium, it is Pareto superior to the equilibrium in the
basic Rothschild-Stiglitz model.560
In this economic model, the insurance companies elicit information
about customer risk type and information signal through post-accident
investigations.561 The insurance company may either verify risk type as
the first step in a sequential claims handling procedure or directly
investigate the individual’s signal type.562 If the insurance company
engages in a sequential claims handling procedure and the type verification
reveals high risk, then the insurer may decide to investigate the individual
further by performing a signal investigation to establish whether the
misrepresentation was intentional.563 If a direct signal investigation is
done, a later investigation of risk type should not be done.564 This is
because “if [a direct] signal investigation reveals bad faith,” then the
individual risk type is made known to the insurance company and the type
verification is unnecessary.565 However, “if [a direct] signal investigation
reveals good faith,” then the risk type is still unknown to both the
company and the individual and, therefore, compels the same payout
556. Id.
557. Id. at 7.
558. Id. at 6.
559. Dixit & Picard, supra note 399, at 6.
560. Id. at 8.
561. Id. at 7.
562. Id. at 3.
563. Id.
564. Id. at 11.
565. Id.
796 ST. MARY’S LAW JOURNAL [Vol. 47:727
regardless of risk type.566 The model shows the optimal signal
investigation is always random because the investigation “is [being] used as
an incentive . . . to deter” the recipients of bad signals from being
dishonest.567 However, insurance companies will use only the less
expensive of the two procedures for signal verification.568
Insurance companies in this model reward good faith disclosures and
punish bad faith disclosures; the gap between each is important to elicit
the truth.569 To incentivize honesty, enforcement of the highest possible
penalty for dishonest high-risk types is required, which is “canceling [the]
insurance contract and returning the premium.”570 On the other hand, an
excessive payout is the reward for honest low-risk types.571 This
paradigm allows for more robust contract forms because there is zero
indemnity when bad faith is established, partial coverage when neither
good faith nor bad faith is established (no investigation conducted), and
over-coverage when good faith is established.572
The law of contracts places the burden of proving bad faith on the
insurer, and the Dixit–Picard economic model suggests this is usually the
most efficient solution.573 When the cost to the insurer of proving bad
faith is not greater than the cost to the individual insured of proving good
faith, the burden of proof should rest with the insurer.574 This is
consistent with the law of marine insurance.575
A third variation on the Rothschild–Stiglitz model with uberrimae fidei
was developed by Picard to account for the conditions in which insurers
are unable to pre-commit to their risk investigation strategies.576 The two
566. Id.
567. Id.
568. Id. at 3.
569. Dixit & Picard, supra note 399, at 2 (indicating “[a] larger insurance indemnity should be
paid to a (truthful) low[-]risk individual” while “[n]o insurance indemnity should be paid to a
policyholder caught lying”).
570. See id. at 2, 9 (providing mathematical proof for the principle that “it is optimal to enforce
the highest possible penalty” when a policy holder has acted in bad faith).
571. See id. at 3, 9 (“Overinsurance is a reward for truthtelling.”).
572. See id. at 4 (“[I]f investigation shows that the policyholder was in good faith . . . , then the
handling of the claim usually leads to the payment of a positive indemnity . . . .”).
573. Id.
574. Id. at 12–13.
575. See Great Lakes Reinsurance (UK) PLC v. Kranig, No. 2011-122, 2013 WL 2631861, at *5
(V.I. June 12, 2013) (“The burden of proof of a material nondisclosure or misrepresentation lies with
the insurer.”).
576. See Picard, supra note 399, at 893 (discussing the potential for individuals not being aware
of their risk type at the time of application); see also Strauss, supra note 399, at 2 (proposing the notion
that individuals must know their risk type).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 797
previous Rothschild–Stiglitz models with uberrimae fidei assumed all
individuals revealed their risk types truthfully at equilibrium and, therefore,
derived a random investigation strategy was the best for insurers.577 As a
result, when investigation is expensive, insurance companies may decide
not to verify individual risk type “or perceived signals with the
preannounced frequency, which implies the insur[ance companies’
investigation] strategies” are “weakened by credibility problems.”578
The economic model is similar to the Rothschild–Stiglitz model: both
low-risk and high-risk individuals “seek . . . insurance on a competitive
market,” and a high-risk individual “may announce that he is . . . low-risk
in order to benefit from cheaper insurance.”579 Insurers conduct a “costly
[investigation] of the risk type of alleged low[-]risk individuals who file a
claim.”580 Uberrimae fidei allows the insurance company to cancel any
insurance contract and return any premium paid by any dishonest low-risk
individual.581 Nature plays a role, as she chooses each individual risk type
and whether the individual has an accident.582 The insurance companies,
the individuals, and nature play a seemingly unpredictable game where, at
equilibrium, the insurance company’s investigation “probability is the best
response to the [individual’s] contract choice strategy.”583
The principal finding of this economic model is that uberrimae fidei “is
still Pareto-improving in [a] noncommittal setting.”584 In general, because
uberrimae fidei “allows insurers to rescind contracts” once an “intentional
misrepresentation of risk is established,” the doctrine allows for “more
efficient risk sharing in insurance markets [with] asymmetric
information.”585 However, when there is a credibility constraint on the
577. See Picard, supra note 399, at 894 (“[I]n their model, all policyholders reveal their
information truthfully at equilibrium . . . they are all in good faith.”); see also Dixit, supra note 399, at
41 (“Common law attempts to [make] insurance contracts subject to an understanding that the
insured should make a full disclosure in utmost good faith.”); Dixit & Picard, supra note 399, at 1
(explaining the bifurcation of low-risk and high-risk applicants and the insurance companies’ desire
to only be responsible for the least possible amount of liability in cases pertaining to the latter
grouping).
578. See Picard, supra note 399, at 894 (discussing the assertion that verification of accident
probability is beneficial through random investigation, if it is not too costly).
579. See id. (working under the assumption where individuals know their own risk type at the
time of application, a high-risk applicant can benefit by receiving a lower premium through bad
faith).
580. Id.
581. Id. at 895.
582. Id. at 894.
583. Id.
584. Id.
585. Id. at 909.
798 ST. MARY’S LAW JOURNAL [Vol. 47:727
insurance companies’ investigation strategies, the effects of uberrimae fidei
can “be weakened or even cancelled” out completely.586 The equilibrium
in this model can “be separating or semi-separating.”587 A semiseparating
equilibrium is characterized by “some degree of bad faith from
[the] high-risk individuals,” who randomize between low-risk and high-risk
contracts, and by overinsurance of the low-risk individuals.588 However,
low-risk individuals will still have partial coverage in a separating
equilibrium.589 The validity of the prevailing regime is determined by “the
fraction of high-risk individuals in the population and the cost of risk type
[investigation].”590 “[E]quilibrium will always exist if the [investigation]
cost is low enough” because the possibility of rescinding the contract for
bad faith extends the set of parameters for which a competitive
equilibrium exists.591
In his variation of the Rothschild–Stiglitz model with uberrimae fidei,
Jason Strauss purports to contribute a new theory of underwriting.592 He
develops four propositions from the basic framework of the Rothschild–
Stiglitz model with uberrimae fidei. First, “if the individual consumer knows
his risk type and understands the concept of uberrimae fidei, he will
truthfully reveal” the information about his risk type and probability of
loss to the insurance company.593 As a result, “there will be no
asymmetric information in the [insurance] market.”594 Telling the
insurance company the truth is the only option that is consistent with
utility maximization because reporting a lower-than-actual probability of
loss will leave the individual with a level of utility equivalent to not having
any insurance and reporting a higher-than-actual probability of loss will
cause the individual to obtain insurance at a higher-than-actuarially-fair
price.595 With “no asymmetric information in the market,” Dixit’s Paretooptimal
outcome is repeated.596 If the courts strictly enforce insurance
contracts, then insurance companies do not have to do any underwriting
586. Id.
587. Id. at 910.
588. Picard, supra note 399, at 910.
589. Id.
590. Id.
591. Id. at 910.
592. See Strauss, supra note 399, at 1 (asserting that consumers must know their risk type and
their potential liability for bad faith).
593. Id. at 3.
594. Id.
595. Id.
596. Id.; see Dixit, supra note 399, at 41 (comparing a new model for risk against the Rothschild–
Stiglitz model).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 799
because they know the information provided to them by the individuals
seeking insurance is truthful.597 An insurance company’s investment into
underwriting is the same if one or both of the original assumptions about
individual rationality does not hold.598 Actually, it is even preferable for
insurance companies not to underwrite—even when underwriting is
costless—when individuals do not know their risk type or do not
understand uberrimae fidei.599
The second proposition provides insurance companies will not
underwrite, even if underwriting is costless, “if courts . . . strictly enforce
insurance contracts, and [if individuals] do not know their risk type” or do
not understand uberrimae fidei.600 “[T]he insurer will earn [an] economic
profit on every [individual] who underestimates his risk [type] and does not
have a loss.”601 However, if the individual underestimates his risk type
and does have a loss, the insurer will discover the true risk type, rescind
the contract, and refund the premiums paid.602 Related to this is the third
proposition, which holds “for any normally behaved social welfare
function,” this situation will decrease social welfare.603
Profit-maximizing insurance companies will be incentivized to
underwrite when there is “[a]n ex ante expectation that courts” will
equitably, rather than strictly, enforce insurance contracts when the
customer has withheld material information, such as probability of loss.604
Th e intuition behind this is as follows:
If the probability of accurately discovering a consumer’s risk type increases
with the amount of money spent on underwriting, then the level of
underwriting will be a positively related function of the ex-ante probability
that a court of law will rule equitably in favor of the consumer if the
consumer under-estimates his probability of loss. If a court is nearly always
equitable towards the consumer if the consumer’s stated risk type is lower
than his actual risk type and there is a loss, then insurers will spend a
sufficiently high level of money to reveal consumer’s risk types. If the court
is only equitable towards consumers some of the time, then insurers will
spend a less, yet still positive, amount of money on underwriting, such that
597. Strauss, supra note 399, at 4.
598. See id. at 3–4 (arguing consumers’ knowledge of good faith doesn’t influence an insurer’s
decision to underwrite when courts are strict).
599. See id. at 4 (“In this way, insurers will be able to earn economic profit on the consumers
who have invalid insurance for which their coverage is actually void and whom have no loss.”).
600. Id.
601. Id.
602. Id.
603. Id.
604. Id. at 5.
800 ST. MARY’S LAW JOURNAL [Vol. 47:727
they maximize their expected profits.605
Therefore, when individuals are unaware of their risk type or do not
understand uberrimae fidei, an equitable rather than strict legal standard can
increase social welfare by maximizing insurance coverage, albeit “at the
expense of decreasing social welfare through the additional expense of
underwriting.”606 In this situation, the insurance companies’ ex ante
expectation that courts will rule in favor of the individuals who have
misrepresented their risk type can incentivize the insurance companies to
underwrite to maximize profits.607
In summary, the four extensions of the Rothschild–Stiglitz model
illustrate the primary benefit of incorporating uberrimae fidei into the basic
economic model of asymmetric information in the insurance market is the
expansion of insurance coverage for the low-risk individuals; although, a
credibility constraint on insurance companies’ investigation strategies can
weaken or cancel out the improving effects of uberrimae fidei. Based on
insurance companies’ ability to enforce segregation of the risk pools, lowrisk
individuals expand from partial coverage at equilibrium in the original
Rothschild–Stiglitz model to full coverage in the separating equilibria of
the extended models incorporating uberrimae fidei. This is true whether the
individuals are aware of their actual risk type. In a situation where
individuals are unaware of their risk type, optimal signal investigation is
always random. Finally, the underwriting investment required by
insurance companies will depend on how strictly or equitably courts
enforce the doctrine of uberrimae fidei.
D. Application to Protection and Indemnity Clubs
1. Special Characteristics of Protection and Indemnity Clubs
Because marine insurance underwriters have traditionally sought to
address the needs of marine interests, “the history and development of
protection and indemnity insurance in the United States has [paralleled]
the history and development of . . . laws affecting vessels’ liability.”608 As
increasing shipowners’ third party liabilities began to present serious
problems to the shipowners in the mid-nineteenth century, protection and
indemnity clubs grew out of the declining hull clubs in English port
605. Id.
606. Id.
607. Strauss, supra note 399, at 5.
608. John P. Kipp, The History and Development of P&I Insurance: The American Scene, 43 TUL.
L. REV. 475, 475 (1969).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 801
cities.609 In 1855, the Shipowners’ Mutual Protection Society was
founded to cover “extra risks not covered by ordinary marine policies on
ships with a collision or running down clause therein.”610 The
shipowners established the associations based on the principle of
mutuality, “the joint, shared or reciprocal protection against losses.”611
The thought was by pooling the risks of inevitable maritime losses among
themselves, each individual shipowner could reduce his personal risk of a
catastrophe.612 Since the structure for the organization of the new clubs
already existed in the declining hull clubs, there was a smooth transition
between mutually insuring hulls to mutually insuring against these new
risks.613
Initially, the associations insured only against “protection” risks: liability
for death, personal injury, collision, structural damage and wreck
removal.614 Shipowners’ liability for death and personal injury to
passengers and crew was the main reason for the formation of the newer
protection associations.615 Originally, liability to passengers was of greater
importance than liability to crew because of the potential for vicarious
liability due to the negligent acts of the crew.616 Liability to crew was also
limited, to a certain extent, by legal precedent. For example, in 1903, the
U.S. Supreme Court held in The Osceola,617 in the event of injuries arising
from unseaworthiness, a seaman had a right to an indemnity, as well as
609. See William R. A. Birch Reynardson, The History and Development of P&I Insurance: The British
Scene, 43 TUL. L. REV. 457, 464 (1969) (“It was the gradual recognition of these liabilities and the
refusal of the underwriters to cover them that brought the Protection and Indemnity Clubs into
being.”); Norman J. Ronneberg, Jr., An Introduction to the Protection & Indemnity Clubs and the Marine
Insurance They Provide, 3 U.S.F. MAR. L.J. 1, 3 (1990) (“Responding to the needs of the market, the first
English Protection Associations were founded in the mid-19th Century to cover maritime risks
which were otherwise uninsurable.”).
610. Reynardson, supra note 609, at 467; Javier A. Franco, P&I Clubs and Their Treatment Under
Columbian Law (Los Clubes de Protección e Indemnización (P&I Clubs) y Su Operación a la Luz del Derecho
Colombiano), REVIST@E-MERCATORIA, July–Dec., http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1490991; History, BRITANNIA, http://www.britanniapandi.com/about/
history (last visited May 18, 2016).
611. Ronneberg, supra note 609, at 4.
612. Id.
613. Reynardson, supra note 609, at 464.
614. Id. at 464–65; see Ronneberg, supra note 609, at 3 (citing Reynardson, supra note 610, at
464–69); see also History, supra note 610 (“On 20 February 1886 Britannia became a Protection &
Indemnity (P&I) Club with the introduction of indemnity risk cover i.e. cargo claims and cargo’s
proportion of general average, in addition to other ‘protection’ risks.”).
615. Reynardson, supra note 609, at 465.
616. See id. at 465–66 (citing Boson v. Sandford, 91 Eng. Rep. 382 (KB 1689)).
617. The Osceola, 189 U.S. 158 (1903).
802 ST. MARY’S LAW JOURNAL [Vol. 47:727
maintenance, cure and wages.618 However, “the seaman [was] not
allowed to recover an indemnity for the negligence of the master, or any
member of the crew, but is entitled to maintenance and cure, whether the
injuries were received by negligence or accident.”619 At this time, there
was also no wrongful death action available in admiralty.620 However, the
shipowners’ insurance policy available at the time, through Lloyd’s, made
no provision for any such third party liabilities because the underwriters
were unwilling to cover them.621 Therefore, the protection risks were of
greatest concern to the shipowners.
Indemnity risks, including liability for loss or damage to cargo and for
fines, were added later because cargo claims were not a serious burden for
shipowners until the second half of the nineteenth century.622 Therefore,
the first protection and indemnity association was founded in 1874.623 As
insurance underwriters became more assertive of their subrogation rights,
the need for indemnity cover became more important.624 In response,
the members of protection associations formed indemnity classes.625 As a
result, by the end of the nineteenth century, mutual protection and
indemnity clubs covering limited classes of risk were entrenched both in
London and in other U.K. port cities.626 In April 1899, six mutual
protection and indemnity clubs had established a pooling agreement,
which shared among them any covered claim in excess of $10,000.627 The
first $10,000 was retained by the protection and indemnity club that
suffered the loss.628 Individual shares of the remaining loss were
calculated according to each club’s share of the total tonnage entered into
the group, up to a maximum of 3,000 tons per ship.629
A robust demand for protection and indemnity insurance did not
originate in the United States until the dawn of World War I because the
618. Id. at 175; see also Kipp, supra note 608, at 478 (citing 1903 legislation providing seamen
with the right to indemnity for injuries caused by unseaworthiness but not for the negligence of other
crew members).
619. The Osceola, 189 U.S. at 175.
620. Kipp, supra note 608, at 478.
621. Reynardson, supra note 609, at 466.
622. Id. at 464–65; Ronneberg, supra note 609, at 3–4.
623. Reynardson, supra note 609, at 468.
624. Id.
625. Id.
626. Id.
627. History, supra note 610.
628. Id.
629. Id.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 803
need for such insurance was being satisfied by the English clubs.630 The
first protection and indemnity club was established in the United States in
1917 because the British government’s control over the English protection
and indemnity clubs seriously compromised their ability to insure the fleets
of neutral countries.631 The new American club was a mutual association
patterned after the English clubs and soon had all the members of the
United States Shipping Board enrolled as members.632 Four thousand
ocean going vessels were enrolled by the end of World War I.633
Both the holding of The Osceola and the lack of a right of recovery for
wrongful death in admiralty were reversed by United States congressional
action in 1920.634 The passage of the Jones Act provided American crew
members a right of recovery for injury or death caused by negligence, and
the Death on the High Seas Act provided a general right of recovery for
wrongful death on the high seas.635 Congress continued to expand
shipowners’ potential liabilities with the 1927 passage of the
Longshoremen’s and Harbor Workers’ Compensation Act, which
provided potential compensation benefits to an additional class of
workers.636
Once Congress finished expanding shipowners’ liabilities, the U.S.
Supreme Court picked up the baton. The Court decided eight cases
between 1944 and 1967 alone that resulted in the expansion of
shipowners’ liability.637 In 1944, Mahnich v. Southern Steamship Co.638
630. Kipp, supra note 608, at 477. See History of the Club, AM. CLUB, http://www.americanclub.
com/page/history (last visited May 18, 2016) (“At that time [in 1916], the majority of
internationally-trading US flag vessels were insured by British P&I clubs.”).
631. Kipp, supra note 608, at 477; see also Ronneberg, supra note 609, at 4 (“The ‘American
Club,’ the only P&I association in the Western Hemisphere, was created during World War I for
foreign policy reasons. American shipowners feared that the established English Clubs were too
closely tied to the British government, and thus threatened the United States’ pre-1917 status as a
neutral. In addition, as the size of the American merchant fleet increased, there were ‘patriotic’
reasons for having a home-grown protection and indemnity insurer.” (citing Kipp, supra note 604, at
477)); History of the Club, supra note 630 (“The American Club was originally formed as a consequence
of legislation passed in the United Kingdom at the height of World War I.”).
632. Kipp, supra note 608, at 477; see also History of the Club, supra note 630 (“The early Rules and
general terms of entry in the American Club were framed much in line with those of the London
Club in which a significant volume of [U.S.] tonnage had traditionally been entered during the early
part of the twentieth century.”).
633. Kipp, supra note 608, at 477; see also History of the Club, supra note 630 (“However, by the
end of the war, there were more than 4,000 ocean-going ships entered, the United States Shipping
Board having committed its vessels to the Club in the interim.”).
634. Kipp, supra note 608, at 478.
635. Id.
636. Id. at 478–79.
637. See id. at 480 (detailing U.S. Supreme Court decisions during 1944 and 1967, which
804 ST. MARY’S LAW JOURNAL [Vol. 47:727
reinforced the holding of The Osceola by refusing to apply the fellow
servant rule to limit the liability of the vessel and her owner for
unseaworthiness.639 Any negligence on the part of a fellow crewmember
in preparing an appliance appurtenant to the ship did not relieve the vessel
owner of his duty to furnish a seaworthy appliance.640
Two years later, the Court took up the question of whether a
shipowner’s obligation of seaworthiness extended to stevedores who were
injured while working aboard the ship in Seas Shipping Co. v. Sieracki.641
The provisions of the Longshoremen’s and Harbor Workers’ Act
notwithstanding, the Supreme Court expanded shipowners’ third party
liabilities by holding “[t]he brunt of loss cast upon the worker and his
dependents is the same, and is as inevitable, whether his pay comes directly
from the ship owner or only indirectly through another with whom he
arranges to have it done.”642 The holding in Sieracki was expanded even
further to encompass shipowners’ liability for injuries resulting from the
unseaworthiness of equipment that “belongs to the stevedore’s
independent employer, is part of that employer’s loading equipment, and is
brought on board by such employer.”643 During this period, the U.S.
Supreme Court also expanded the definition of unseaworthiness to include
incompetence by crew members644 and amplified the duty to provide a
seaworthy ship to include both the cargo containers and to the work of
longshoremen.645
Relying in part on Sieracki, the U.S. Supreme Court also decided a
stevedore employed by a charterer could rely on the charterer’s liability as
shipowner for the vessel’s unseaworthiness to support his libel in rem
against the vessel itself, despite the provisions of the Longshoremen’s and
resulted in an “expansion of shipowners’ liability”).
638. Mahnich v. S. S.S. Co., 321 U.S. 96 (1944).
639. See id. at 102–03 (refusing to apply the fellow servant rule because the staging, which
caused petitioner’s injury, was “unseaworthy in the sense that it was inadequate for the purpose for
which it was ordinarily used, because of the defective rope with which it was rigged”).
640. Id. at 103.
641. Seas Shipping Co. v. Sieracki, 328 U.S. 85, 87 (1946), superseded by statute as stated in Yamaha
Motor Corp., U.S.A. v. Calhoun, 516 U.S. 199 (1996).
642. Id. at 95.
643. Alaska S.S. Co. v. Petterson, 347 U.S. 396, 397 (1954) (Burton, J., dissenting).
644. See Boudoin v. Lykes Bros. S.S. Co., 348 U.S. 336, 339–40 (1955) (“We see no reason to
draw a line between the ship and the gear on the one hand and the ship’s personnel on the other. A
seaman with a proclivity for assaulting people may, indeed, be a more deadly risk than a rope with a
weak strand or a hull with a latent defect.”).
645. See Gutierrez v. Waterman S.S. Corp., 373 U.S. 206, 215 (1963) (“[We] hold that the duty
to provide a seaworthy ship and gear, including cargo containers, applies to longshoremen unloading
the ship whether they are standing aboard ship or on the pier.”).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 805
Harbor Workers’ Compensation Act.646 The Supreme Court affirmed
this result four years later under a similar set of facts.647 Finally, the U.S.
Supreme Court decided the U.S. government may recover the costs of
removing vessels negligently sunk in navigable waters under the Rivers and
Harbors Act of 1899.648
The 1972 Amendments to the Longshoremen’s and Harbor Workers’
Compensation Act reversed the Supreme Court’s expansion of shipowner
liability to non-seamen;649 however, significant third-party liabilities still
remained. The increasing legal liabilities of shipowners and the improved
coverage of risks by the protection and indemnity clubs have led to the
growth of mutual protection and indemnity clubs in the twentieth and
twenty-first centuries.650
Beginning in the 1920s, U.S. courts began to rough out some of the
contours of how they considered protection and indemnity insurance to be
different from other forms of insurance. In Hanover Fire Insurance Co. v.
Merchants’ Transportation Co.,651 the Ninth Circuit stated:
The object of this form of insurance is to afford protection to ship[]owners,
in addition to that afforded by the ordinary marine policy, and the contract
should be construed with that object in view. When so construed, we are
clearly of opinion that it covered damages paid for loss of life arising from
the negligence of the ship or ship-owner; for, in the absence of negligence
on the part of either, there would be no loss or liability to be indemnified
against. And, if the policy covered loss arising from negligence, the courts
will not attempt to distinguish between the different kinds or degrees of
646. See Reed v. S.S. Yaka, 373 U.S. 410, 415–16 (1963) (“We conclude that petitioner was not
barred by the Longshoremen’s Act from relying on [the charterer’s] liability as a shipowner for the
Yaka’s unseaworthiness in order to support his libel in rem against the vessel.”).
647. See Jackson v. Lykes Bros. S.S. Co., 386 U.S. 731, 735 (1967) (“In this case as in Yaka, the
fact that the longshoreman was hired directly by the owner instead of by the independent stevedore
company makes no difference as to the liability of the ship or its owner.”).
648. See Wyandotte Transp. Co. v. U.S., 389 U.S. 191, 210 (1967) (Harlan, J., concurring) (“I
concur in the Court’s holding that under § 15 of the Rivers and Harbors Act of 1899, 33 U.S.C.
§ 409, the United States may recover the costs of removing a vessel negligently sunk in navigable
waters from those responsible for the sinking.”).
649. See Edward M. Bull III, Seaman Status Revisited: A Practical Guide to Status Determination, 6
U.S.F. MAR. L.J. 547, 559 (1994) (“In 1972, after more than a decade of spiraling expansion of the
availability of seamen’s remedies, Congress hit the brakes by amending the LHWCA. It withdrew
from all but seamen the unseaworthiness remedy, taking away from the longshore and harbor
workers what had been given by the courts.” (footnotes omitted)).
650. See Reynardson, supra note 609, at 468 (documenting association growth in Britain from
236 ships in 1876 to more than 4000 ships in 1968); see generally Kevin X. Li & Jia Yan, Valuation of
Information-Sharing in Marine Mutual Insurance, 2 J. RISK & DECISION ANALYSIS 65 (2010) (citing an
average growth rate of 9.11% for fourteen major marine mutual marine insurers as of 2010).
651. Hanover Fire Ins. Co. v. Merchants’ Transp. Co., 15 F.2d 946, 948 (9th Cir. 1926).
806 ST. MARY’S LAW JOURNAL [Vol. 47:727
negligence, unless, as agreed by counsel, the negligence was so gross as to
amount to a willful, deliberate, and intentional wrong.652
U.S. courts have repeatedly recognized the limited nature of protection
and indemnity policies.653 The American Institute of Marine
Underwriters SP-23 standard forms used by some protection and
indemnity clubs to write these policies specifically enumerate either ten or
fourteen “specific types of loss or damage as perils or risks insured against;
these enumerated perils by no means would cover the entire range of a
ship owner’s liability.”654 Modern protection and indemnity insurance
covers the gamut of maritime risks, ranging from Jones Act cases to
pollution catastrophes.655 Types of loss or damage include: loss of life,
injury and illness; hospital, medical or other expenses; “crew member
burial expense not to exceed $1,000 per person”; repatriation expenses;
“damage to any fixed or movable object or property” regardless of cause,
except damage to another vessel or property aboard it caused by collision
with the vessel; removal of wreck; customs, immigration or other fines or
penalties; “extraordinary expense arising from an outbreak of contagious
disease”; deviation for the purpose of landing injured seaman; and costs
and charges “reasonably incurred” for investigation and defense of
claims.656
Both settled case law and the forms “leave no room for doubt or
ambiguity as to who is the insured, in what capacity he is insured, and for
652. Id.
653. See St. Paul Fire & Marine Ins. Co. v. Vest Transp. Co., 666 F.2d 932, 941 (5th Cir. 1982)
(“It must be stressed initially that protection and indemnity policies do not purport to cover all types
of an insured’s liability but extend only to the liabilities specifically enumerated in the insuring
agreement.”); Williams v. Treasure Chest Casino, LCC, 1998 A.M.C. 1300, 1303 (E.D. La. 1998)
(“The Court recognizes that a protection and indemnity policy is of a limited nature.”).
654. St. Paul Fire & Marine Ins. Co., 666 F.2d at 941. See AM. INST. OF MARINE
UNDERWRITERS, PROTECTION AND INDEMNITY FORM SP-23 (1956), http://www.aimu.org/
forms/SP-23%20%28Revised%201-56%29.pdf [hereinafter P&I FORM SP-23] (providing an older
protection and indemnity form with fourteen covered perils); see also AM. INST. OF MARINE
UNDERWRITERS, PROTECTION AND INDEMNITY FORM 23 (1983), http://www.aimu.org/forms/
23.pdf [P&I FORM 23] (providing a newer protection and indemnity form with ten covered perils).
See Rules, AM. CLUB, http://www.american-club.com/page/rules (last visited May 18, 2016) for how
mutual insurers of the International P&I Group define the covered risks and losses under Rule 2
“Risks and Losses Covered.”
655. Ronneberg, supra note 609, at 35; see also About the Group, INT’L GROUP P&I CLUBS,
http://www.igpandi.org/about (last visited May 18, 2016) (“Clubs cover a wide range of liabilities
including personal injury to crew, passengers and others on board, cargo loss and damage, oil
pollution, wreck removal and dock damage.”).
656. P&I FORM 23, supra note 654; see P&I FORM SP-23, supra note 654 (stating the fourteen
covered perils under the old version of the form).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 807
which losses he will be indemnified.”657 An important feature of the
protection and indemnity policy it only covers liability incurred by a
vessel’s owner, and if the liability is unrelated to the operation of the
vessel, then it will not be covered under the protection and indemnity
policy.658 However, the protection and indemnity policy will cover any
liability for claims brought against the vessel owner if “a seaman is injured
in the course and scope of employment and the injury bears a ‘causal
operational relation’ to the ship.”659
U.S. courts have viewed protection and indemnity clubs as “peculiar to
the maritime setting.”660 U.S. courts have not viewed protection and
indemnity clubs to be “traditional insurance” companies because of the
following distinguishing characteristics: mutuality of insurance,
membership in the club, indemnity rather than liability coverage, and lack
of a duty to defend.661 Therefore, conflicts between seamen and
protection and indemnity clubs are held to be uniquely maritime in nature
and require application of federal maritime law.662
The “essence” of mutuality is “[t]he ship owners are not only coinsureds,
but co-managers of the Club’s funds.”663 Each protection and
indemnity association is a non-profit association formed by shipowners
banding together because “the unusual risks of the world-wide shipping
657. St. Paul Fire & Marine Ins. Co. 666 F.2d at 941.
658. Williams, 1998 A.M.C. at 1304 (“Fifth Circuit precedent clearly shows that even though a
party may be an insured under a P&I policy, if its liability arises out of an employment relationship
with the plaintiff and conduct unrelated to the operation of the insured vessel, there is no coverage
under the policy.”).
659. Id. at 1305.
660. Aasma v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n, Inc., 95 F.3d 400, 404 (6th Cir.
1996).
661. Psarianos v. Standard Marine, Ltd., 728 F. Supp. 438, 451 (E.D. Tex. 1989) (distinguishing
b etween traditional insurance companies and P&I clubs). The Psarianos court explained:
First, a protection and indemnity association is not a traditional insurance company; it is a group
of ship owners who have agreed to insure one another’s vessels for the mutual benefit of all.
[The defendant] is a member of the Club, not simply an insured; and the coverage provided is
indemnity, rather than liability. There is no duty to defend, although coverage does include
reimbursement for defense costs.
Id.; see also Ronneberg, supra note 609, at 4 (defining a P&I club as a mutuality and an indemnity).
662. See TCW Special Credits v. F/V Chloe Z, 1998 A.M.C. 750, 761 (D. Guam 1997) (stating
“conflicts between seamen and P&I Associations are uniquely maritime in nature, and therefore,
demand a uniform admiralty rule” (citing Aasma, 95 F.3d at 404)); see also Heikkila v. Sphere Drake
Ins. Underwriting Mgmt., Ltd., No. Civ. 96-00047, 1997 WL 995625, at *7 (D. Guam Aug. 29, 1997)
(stressing standard insurance policies, when compared to P&I policies, require a specific admiralty
rule).
663. Ronneberg, supra note 609, at 29.
808 ST. MARY’S LAW JOURNAL [Vol. 47:727
industry render private insurance largely unavailable.”664 For a shipowner
to obtain coverage from a protection and indemnity club, he must become
and remain a member of the club.665 Therefore, the shipowners are both
the insured and the insurers.666 Shipowners can collectively change or
amend the protection and indemnity association rules.667
The members elect the board of directors, which manages the club’s
business, from among themselves.668 A smaller group of directors
administers the daily club’s business and makes such decisions as setting
the calls and amending the insuring agreement.669 Each club also has “a
staff of underwriters, lawyers,” and other specialists “who are responsible
for underwriting, handling claims and administering funds in accordance
with the policies” established by its board of directors.670 However, the
directors must vote to approve a large settlement; therefore, one director
cannot represent the club at a settlement conference in a United States
court in advance of a board of directors’ decision.671
Instead of fixed annual premiums, membership in a protection and
indemnity club requires payment of an “advance call,” which is estimated
to cover the association’s claims and operating expenses for the year.672
The advance call, which is usually invested to create additional income for
the fund, is based on each shipowner’s claims history, his fleet size, the
664. Aasma, 95 F.3d at 404; see also About the Group, supra note 655 (explaining each “group club
is an independent, non-profit making mutual insurance association, providing cover for its shipowner
and charterer members against third party liabilities relating to the use and operation of ships”).
665. See Ronneberg, supra note 609, at 5 (announcing the shipowners must become and remain
members of the P&I club to obtain coverage).
666. Id. at 21; see Franco, supra note 610 (implying the dual capacity of the insurance policy in
the club allows for the insured to also be the insurers).
667. Ronneberg, supra note 609, at 21–22 (explaining why the contra proferentum rule of
construction should not apply to protection and indemnity insurance issued by clubs).
668. Id. at 24; see About the Group, supra note 655 (noting each club “is controlled by its members
through a board of directors or committee elected from the membership”).
669. See Ronneberg, supra note 609, at 24–25 (illustrating the daily activities and expectations of
the executive committee).
670. See id. at 25 (echoing the presence of a manager or group of managers has an important
role “as a trustee on behalf of the whole [shipowning] membership”).
671. Id. at 29 (prohibiting one director from representing the club in a U.S. Court without first
receiving a decision from the board).
672. See Aasma v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n, Inc., 95 F.3d 400, 404 (6th Cir.
1996) (delineating the differences from premiums of insurance carriers from the “advance calls” of
the associations); see also Ronneberg, supra note 609, at 29 (“Shipowners (or ‘members’) do not pay
‘premiums’ for vessel P&I coverage. Instead, they pay ‘advance calls’ which are used to create a fund
from which personal injury and other claims are paid, and from which the Club’s day-to-day
expenses are met.”); Franco, supra note 610 (paraphrasing the description of “advanced call” as a
premium paid by the members to cover expenses).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 809
anticipated needs of the association, as well as the overall character of the
insurance market.673 If there is a shortfall because the claims paid exceed
the funds available that year, the members must pay a “supplemental
call.”674 Supplemental calls also ensure policy years are closed with
neither profit nor loss.675
Indemnity coverage provided by protection and indemnity clubs differs
from standard liability insurance because the associations “are not
ordinarily obligated to indemnify their members for covered losses unless
and until the member has actually paid out a claim, judgment or
settlement.”676 For example, the SP-23 form’s indemnification agreement
has a clear “pay to be paid” provision.677 Therefore, the insured
shipowner has no right of recovery against the protection and indemnity
club “unless and until” it has fulfilled its obligation to the claimant.678
For the insurer to be liable under an indemnity policy, unlike a standard
liability policy, the insured “must have suffered an actual [monetary] loss
before the insurer is liable.”679
The modern maritime protection and indemnity market consists of a
673. See Ronneberg, supra note 609, at 29–30 (summarizing the amounts and uses of advanced
calls). Other factors that may be used in calculating calls are the tonnage of the ships, the age and
characteristics of the ships, the nature of the shipping traffic, the nationality of the ship, and the
extension of the coverage. Franco, supra note 610.
674. See Aasma, 95 F.3d at 404 (“[W]hen claims exceed funds available, members must pay
‘supplementary calls’ to make up the shortfall.”); see also Ronneberg, supra note 609, at 30 (expanding
on the instances when “supplementary calls” are required); Franco, supra note 610 (indicating the
additional amount, called “Supplementary Call,” is determined by the director of the club and is a
fixed relation to cover the largest amount to be paid).
675. See Ronneberg, supra note 609, at 30 (restating the year will close with no profit or loss).
676. Id. at 5.
677. See P&I FORM SP-23, supra note 654 (“The Assurer hereby undertakes to make good to
the Assured or the Assured’s executors, administrators and/or successors, all such loss and/or
damage and/or expense as the Assured shall as owners of the vessel named herein have become
liable to pay and shall pay on account of the liabilities, risks, events and/or happenings herein set
forth . . . .”); see also P&I FORM 23, supra note 654 (“Subject to all exclusions and other terms of this
Policy the Underwriters agree to indemnify the Assured for any sums which the Assured, as owner of
the Vessel, shall have become liable to pay, and shall have paid, in respect of any casualty or
occurrence during the currency of the Policy but only in consequence of any of the matters set forth
hereunder. . . .”). The American Club has a rule that states, “It is a condition precedent of a
Member’s right to recover from the funds of the Association in respect of any liabilities, costs or
expenses that he shall first have discharged and paid the same out of funds belonging to him
unconditionally and not by way of loan or otherwise.” Rules, supra note 654.
678. See Ronneberg, supra note 609, at 14 (refuting the chief indemnity policy); see also Franco,
supra note 610 (limiting the coverage to civil liability for the owner or carrier that may arise from any
kind of damage caused to third parties).
679. Ronneberg, supra note 609, at 14.
810 ST. MARY’S LAW JOURNAL [Vol. 47:727
service component and several insurance tiers.680 As of October 2015,
there were thirteen principal underwriting member clubs of the
International Group of Protection and Indemnity Clubs that provide
protection and indemnity insurance for approximately ninety percent of
the world’s ocean-going ship tonnage.681 The member clubs operate
under the International Group Agreement, which “specifies how member
clubs may quote rates,” clarifies what information the clubs should gather
from each other before providing premium rate quotes, regulates how
clubs can accept applications from shipowners desiring to move from one
club to another, and specifies the factors to be accounted for in setting
“release calls” for vessels switching from one club to another.682 The
International Group Agreement ensures mutual cooperation between the
member clubs in the operation of the Pooling Agreement, which is “an
annually renewed agreement between the clubs to mutually reinsure each
other by sharing claims between themselves.”683 As of February 2015,
each member club had an individual retention of $9 million per vessel for
owned entities; above that, the International Group’s pool provides
approximately $3 billion commercial reinsurance coverage.684
According to organizational economic theory, two broad conditions
680. Knut K. Aase, Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs, 74
J. RISK & INS. 239, 266 (2007).
681. The thirteen clubs are as follows: American Steamship Owners Mutual Protection and
Indemnity Association, Inc.; Assuranceforeningen Skuld; Gard P&I (Bermuda) Ltd.; The Britannia
Steam Ship Insurance Association Ltd.; The Japan Ship Owners’ Mutual Protection & Indemnity
Association; The London Steam-Ship Owners’ Mutual Insurance Association Ltd.; The North of
England Protecting & Indemnity Association Ltd.; The Shipowners’ Mutual Protection & Indemnity
Association (Luxembourg); The Standard Club Ltd.; The Steamship Mutual Underwriting
Association (Bermuda) Ltd.; The Swedish Club; United Kingdom Mutual Steam Ship Assurance
Association (Bermuda) Ltd.; and The West of England Ship Owners Mutual Insurance Association
(Luxembourg). Group Clubs, INT’L GROUP P&I CLUBS, http://www.igpandi.org/article/listprincipal-
clubs (last visited May 18, 2016).
682. See INT’L GRP. P&I CLUBS, INTERNATIONAL GROUP AGREEMENT (2013),
http://static.coracleapps.com/igpi_website/media/article_attachments/IGA2013.pdf [hereinafter
INTERNATIONAL GROUP AGREEMENT] (outlining the terms of the International Group
Agreement).
683. Id.
684. See Pooling Agreement, INT’L GROUP P&I CLUBS, http://www.igpandi.org/groupagreements
(last visited May 18, 2016) (providing the agreement, “which defines the risks that can be
pooled and how losses are to be shared” among associated clubs); Pool Reinsurance Programme 2016-17,
INT’L GROUP P&I CLUBS, http://www.igpandi.org/reinsurance (last visited May 18, 2016)
(describing the reinsurance program and the Collective Overspill layer, “which combine to provide
up to just over US $3 billion of commercial reinsurance” coverage). For a chart of the general excess
of loss reinsurance contract structure for the 2016–2017 policy year, see Reinsurance Diagram, INT’L
GROUP P&I CLUBS, http://static.igpandi.org/igpi_website/media/adminfiles/pandi-RIa.pdf (last
visited May 18, 2016).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 811
need to be satisfied for firms to be organized as consumer cooperatives.
First, there needs to be a “relatively severe market failure in the firm’s
product market.”685 In the face of a market failure, mutual companies do
better than stock companies because they only insure the better risks in the
industry and “typically have a regular program of inspecting the firms they
insured, both to assess the risk and to recommend loss prevention
measures.”686 When the firm has a natural monopoly or otherwise faces
very limited competition, consumer cooperatives most typically occur.687
A consumer cooperative has an advantage in a natural monopoly because
it substitutes an ownership relationship for a market mechanism, there is
no conflict of interest between the firm’s owners and consumers, and
there is some assurance the firm will not charge monopoly prices.688
For the historical reasons previously discussed, mutual insurers have
almost a natural monopoly in the marine protection and indemnity market.
In August 2010, the European Commission opened formal proceedings to
investigate whether the insurance and reinsurance agreements between the
members of the International Group violated European Union antitrust
rules by lessening competition between protection and indemnity clubs
and by restricting access of commercial insurers and other mutual insurers
to the relevant market.689 Two years later, the Commission concluded its
proceedings without sufficient findings conclusive enough to confirm their
initial concerns.690
The second condition for firms to be organized as consumer
cooperatives is the consumers need to be “able to assume effective control
without incurring excessive costs.”691 In general, consumer cooperatives
arise when the consumers repeatedly purchase a relatively large value of
goods or services from the same firm over a significant period of time.692
If this were not the case, “the transaction costs of registering, keeping
track of, and communicating with members will be disproportionate to the
value of goods consumed.”693 Also important to the success of the
685. Henry Hansmann, The Organization of Insurance Companies: Mutual Versus Stock, 1 J. L. ECON
& ORG. 125, 126 (1985) (footnote omitted).
686. Id. at 145.
687. Id. at 126.
688. Id.
689. Antitrust: Commission Opens Formal Probe into Marine Insurance Agreements, EUROPEAN
COMMISSION (Aug. 26, 2010), http://europa.eu/rapid/press-release_IP-10-1072_en.htm?locale=en.
690. Antitrust: Commission Closes Investigation in P&I Clubs Case, EUROPEAN COMMISSION (Aug.
1, 2012), http://europa.eu/rapid/press-release_IP-12-873_en.htm.
691. Hansmann, supra note 685, at 126.
692. Id. at 127.
693. Id.
812 ST. MARY’S LAW JOURNAL [Vol. 47:727
cooperative form are relatively small requirements for organizationspecific
capital.694 Finally, all consumers in the cooperative must
purchase goods or services that are similar in type and quantity.695 If this
were not the case, the consumers’ objectives would not be aligned and
either one group of members could exploit another or strategic behavior
could considerably increase the firm’s decision-making costs.696
This second condition also holds true for marine mutual insurance.
Shipowners typically purchase vessel or fleet coverage for one year at a
time.697 Homogeneity in services is guaranteed through the use of either
the SP-23 form or rule book to define the standard protection and
indemnity cover offered by the mutual marine insurer.698
“The mutual form mitigates conflicts of interest between the insurer
and the insured.”699 According to one organizational theorist,
Like the patrons of a typical nonprofit, the policyholders in a mutual
company derive protection not from the exercise of control over the firm,
but rather from the fact that the management of the mutual, unlike the
management of a stock company, does not have a strong pecuniary incentive
t o exploit its policyholders.700
Because the members of protection and indemnity clubs elect their board
of directors from among themselves,701 there is little question of interest
alignment.
Asymmetric information is also one of the root causes for the rise of
mutual companies, which evidently form in part because traditional stock
insurance companies cannot easily distinguish between the different risks
the prospective insureds present.702 “[T]he customers themselves are
often likely to have better information than the insurance companies”
abo ut the risks they pose.703
The firms that joined to form the mutuals, on the other hand, were
694. Id.
695. Id. at 128.
696. Id.
697. Under Rule 1, the American Club defines “policy year” as “[a] year from noon GMT on
any February 20 to noon GMT on the next following February 20.” Rules, supra note 654.
698. See supra note 654.
699. Hansmann, supra note 685, at 148.
700. Id. at 143.
701. Ronneberg, supra note 609, at 24; see also About the Group, supra note 655 (“Each club is
controlled by its members through a board of directors, or committee, elected from the
membership.”).
702. Hansmann, supra note 685, at 145.
703. Id.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 813
commonly owned and operated by individual entrepreneurs, who necessarily
were already quite familiar with the available technology in the industry and
the risks that it presented. This situation then provided an incentive for
those firms within an industry that knew themselves to be unusually good
risks to join together to form a mutual insurance company to insure
themselves: the firms could recognize each other as good risks but would
have difficulty convincing an insurance company from outside the industry
that they deserve especially low premiums. Or, put differently, the cost of
information about the riskiness of individual insureds was lower to firms
within the industry than to those outside of it.704
Revisiting the history of the formation and expansion of the early
protection associations, this statement most certainly rings true about
modern protection and indemnity clubs.
Pierre Picard wrote an article in 2014 extending the Rothschild–Stiglitz
model to account for the difference between participating and nonparticipating
insurance contracts.705 In his analysis, there were two types
of insurance contracts: (1) participating contracts with dividends and
supplementary calls, depending on the profitability of the risk
underwriting; and (2) non-participating contracts with fixed premiums and
an indemnity to be paid in the event of a loss.706 The insurance market is
composed of insurers who are allowed to offer one type of contract and
individuals who are risk averse.707 The key finding from this model was,
when there was cross-subsidization between risk types by the insurer,
“participating policies act as an implicit threat against deviant insurers who
would like to attract low-risk individuals only.”708 This means no insurer
who offers non-participating contracts will be able to exclusively target the
low-risk segment of the market, to the exclusion of the high-risk segment,
because the low-risk individuals will always be able to opt for an attractive
participating contract.
Picard’s theory explains why there still exists a market for fixed
premium marine protection and indemnity insurance, despite the
overwhelming dominance of the mutuals in the protection and indemnity
insurance market.709
704. Id. at 146.
705. Picard, supra note 483, at 153.
706. Id. at 153–54.
707. Id. at 154.
708. Id.
709. Under Rule 1.1.7, the American Club allows members to be insured on a fixed premium
basis. Rules, supra note 654.
814 ST. MARY’S LAW JOURNAL [Vol. 47:727
2. Issues of Information Asymmetry
Adverse selection in insurance markets is the process by which
individuals use private knowledge of their risk type in their decision to
acquire insurance coverage.710 There are four general assumptions to the
model of adverse selection: first, the purchase of insurance is voluntary;
second, risks are heterogeneous; third, heterogeneous risks are pooled and
charged the same premium; and finally, the individuals purchasing
insurance have private information about their own risks.711 The
heterogeneous risk pool of insureds is “personally better able to determine
their own risk than the [insurance companies], which only know the
average risk for a pool of observationally similar, but in fact
heterogeneous, insureds.”712 Therefore, “high-risk parties . . . obtain
insurance at a lower premium than what they would actually be otherwise
willing to pay,” and low-risk individuals face a higher premium than what
they would otherwise be willing to pay because they are cross-subsidizing
the high-risk parties.713
When insurance is voluntary, individuals who perceive themselves to be
low risk may decide not to participate in the insurance program, which
decreases the premium payments flowing into the program and increases
the benefit payments flowing out of the program.714 As the cost of
insurance increases, the number of low-risk individuals who opt into the
program decreases.715 Similarly, those individuals who buy more
insurance tend to pose higher costs for their insurers.716 However, if the
insurance companies had access to the individual’s private information,
they would use this to charge high-risk individuals higher premiums.717
This positive relationship between an individual’s risk type and insurance
710. Peter Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 YALE L.J.
1223, 1223 (2004); see also Avraham, supra note 401, at 44 (“[A]dverse selection describes the
phenomenon of high-risk parties who, knowing their ‘type’, seek more insurance coverage than lowrisk
parties.”).
711. Hemenway, supra note 497, at 1063.
712. Avraham, supra note 401, at 44.
713. Id.
714. Currie v. Group Ins. Comm’n, 290 F.3d 1, 4 (1st Cir. 2002).
715. Id. see Avraham, supra note 401, at 44 (“Low-risk parties might object to cross subsidizing the
high-risk parties-with insurers using the excess premiums of the low-risk parties to defray the costs of
offering cheaper insurance to high-risk parties-and might therefore drop their coverage and leave the
insurance pool. Consequently, the average risk faced by the insurer increases, the premium must
increase, and this cycle of adverse selection repeats itself and theoretically might lead to the risk pool
unraveling completely-a classic death spiral.”).
716. Siegelman, supra note 710, at 1247; see also Hemenway, supra note 497, at 1063 (inferring a
causal correlation between individuals with higher risks and those who purchase more insurance).
717. Siegelman, supra note 710, at 1247.
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consumption lies at the heart of adverse selection.718 As a result, all
adverse selection models involve a constraint on the insurance companies
who are unable to obtain the beneficial private information from the
individuals they desire.719 For example, when an individual knows he is a
high-risk type, there is an informational asymmetry with the insurance
company who may, out of ignorance, categorize the individual in the
wrong risk pool.720 If this misrepresentation is on an insurance
application, the “informational asymmetry may substantially affect the
insurer’s underwriting.”721
As discussed earlier, theoretically if equilibrium exists, the low-risk
individuals will have partial coverage.722 As long as the information
asymmetry between the insurance company and the individual exists, it will
be impossible to do better than this “second-best optimal” equilibrium.723
The four basic general assumptions of the adverse selection model are
suspect when considering protection and indemnity insurance offered by
clubs.724 First, such insurance may not be voluntary.725 As of January 1,
2012, European Union Directive 2009/20/EC requires each member
states’ ships of 300 gross tons or larger flying the member state’s flag to
carry “insurance with or without deductibles, and comprise, for example,
indemnity insurance of the type currently provided by members of the
International Group of P&I Clubs, and other effective forms of insurance
(including proved self-insurance) and financial security offering similar
conditions of cover.”726 Additionally, each member state shall require
ships of other nationalities to have insurance when they enter a port under
718. Id.
719. Id. at 1261.
720. Priest, supra note 402, at 17.
721. Id.
722. Siegelman, supra note 710, at 1239–40; see generally Rothschild & Stiglitz, supra note 399, at
637 (“An equilibrium will not exist if the costs. . . of separating are high. The costs of separating
arise from the individual’s inability to obtain complete insurance. Thus, the costs of separating are
related to the individuals’ attitudes toward risk.”).
723. Siegelman, supra note 710, at 1240; see generally Rothschild & Stiglitz, supra note 399, at 638
(recognizing without the risk information, low-risk individuals are worse of at equilibrium while highrisk
individuals are no better off, thus no one benefits).
724. See Hemenway, supra note 497, at 1063 (listing the four assumptions of the adverse
selection model).
725. See id. (“The model of adverse selection seems to contain four general assumptions: (1)
insurance purchase is voluntary. . . .”).
726. Directive 2009/20/EC, of the European Parliament and of the Council on the Insurance
of Shipowners for Maritime Claims, arts. 2(1), 3(b), 4(1), 2009 O.J. L. 131/128, at 128–29 [hereinafter
Directive 2009/20/EC].
816 ST. MARY’S LAW JOURNAL [Vol. 47:727
a member state’s jurisdiction.727 The compulsory aspect of protection
and indemnity insurance means low-risk shipowners can opt in only if they
are willing to self-insure or otherwise post financial security. Therefore, a
higher number of low-risk shipowners will be retained in the insurance
pool.
Although the risks in the pool of ships enrolled in protection and
indemnity clubs are heterogeneous, the risks are not charged the same
premium.728 As previously discussed, each shipowner’s advance call is
based on his claims history, his fleet size, the anticipated needs of the club,
as well as the overall character of the insurance market.729 Such riskbased
pricing better aligns the call with insurance consumption and will
further encourage low-risk shipowners to remain in the risk pool.
The marine insurance doctrine of uberrimae fidei730 is the most basic
solution to adverse selection because it requires full disclosure of all
material facts in the application by the insured.731 In general, with more
accurate information about the characteristics of the insured, the insurance
companies can better assess and price the overall insurance pool.732 An
insurance company may then mitigate the problem of adverse selection to
some extent by dividing individuals according to their level of risk and
assigning similar risks the same premium.733 Uberrimae fidei is incorporated
into the rule books of protection and indemnity clubs, as “[i]t shall be a
condition precedent of such insurance that all the said particulars and
information were true so far as the applicant [m]ember knew or could with
reasonable diligence have ascertained.”734
According to one economist, the added benefit of risk classification is
that it may result in increasing the average costs of rival insurance
companies, as high-risk individuals leave one insurance company for
another that has a higher degree of cross subsidization.735 For the
727. Id.
728. See Ronneberg, supra note 609, at 29 (explaining the members pay “advance calls” rather
than “premiums” and personal injury claims are paid out of the resulting fund from these advance
calls).
729. Id. at 29–30.
730. See Struckhoff, supra note 398, at 292 (describing the doctrine as a duty of the insured to
disclose any and all material circumstances which speak to the individual’s risk level to the insurer).
731. See Avraham, supra note 401, at 45 (“There are several possible solutions [to the adverse
selection problem] on the theoretical level. The first and most basic is requiring disclosure by the
insureds.”).
732. Id.
733. Avraham, supra note 401, at 45.
734. See Rules, supra note 654 (including uberrimae fidei under Rule 1.4.2).
735. Avraham, supra note 401, at 45.
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 817
protection and indemnity clubs that are members of the International
Group of P&I Clubs, such a transfer may not be beneficial because it is
heavily regulated.736 However, “because classification is never perfect, the
certain insured (the less risky) essentially cross subsidize the others (the
more risky) when they pay a higher premium than the risk they actually
present.”737 This creates problems of both efficiency and distributive
justice, as insurance companies can reallocate resources between the
segregated risk classes.738 In a protection and indemnity club, which is a
mutual insurer, the concern over distributive justice is less prevalent
because the insured are the insurers, and it takes a vote of the Board of
Directors to approve a large settlement.739
Propitious selection “may sometimes serve to ameliorate the danger of
adverse selection in the real world”740 and act as the “force promoting
favorable selection in . . . insurance.”741 The model has six general
assumptions: first, the purchase of insurance is voluntary; second, risks are
heterogeneous; third, such risks are pooled and charged the same
premium; fourth, individuals can act knowingly to influence their risk level;
fifth, individuals have different appetites for risk; and, finally, individuals
are consistent in their appetite for physical and financial risk.742 The
primary outcome of the model “is that individuals who are highly “risk
avoiding” are more likely both to act to reduce hazards and to purchase
insurance.”743 “Risk avoidance” is not to be confused with the narrower,
more economically precise term, “risk aversion.”744 The “ex ante moral
736. See INTERNATIONAL GROUP AGREEMENT, supra note 682 (announcing regulations exist
for the International Group of P&I clubs). The International Group Agreement specifies how
member clubs may quote rates, clarifies what information the clubs “should obtain from each other
before quoting premium rates,” regulates how clubs can accept applications from shipowners
desiring to move from one club to another, and specifies the factors to be accounted for in setting
“release calls” for vessels moving from one club to another. Id.
737. Avraham, supra note 401, at 47.
738. Id. at 47–48 (“Insurers—private or public—have the ability to redistribute resources
between the classes they have separated by overcharging, intentionally or otherwise, the less risky and
undercharging the more risky. In health insurance, for example, the healthy subsidize the chronically
sick.” (footnote omitted)).
739. See Ronneberg, supra note 609, at 29 (asserting protection and indemnity clubs require a
vote by the directors or board members to approve big settlements; therefore, complete authority to
bind the club is not vested in one person).
740. Hemenway, supra note 497, at 1063.
741. Id. at 1068.
742. Id. at 1063–64.
743. Id. at 1064 (“[P]eople who buy insurance tend to be more safety conscious and thus are
more inclined to take physical precautions.”).
744. Id. at 1067–68 (“‘Risk aversion’ has a precise meaning for economists; in simplest terms, it
implies an unwillingness to take actuarially fair bets. This note uses the broader and more
818 ST. MARY’S LAW JOURNAL [Vol. 47:727
hazard problem”745 and the “adverse selection problem”746 both assume
“[f]or any particular individual insurance coverage and safety precautions
are typically substitutes.”747 However, because the propitious selection
model “compares people with different levels of risk avoidance[, t]hose
with higher levels are more likely to both buy insurance and to exercise
care.”748 “The theory of propitious selection suggests that risk-averse
individuals will tend to be more generalized risk avoiders[.]”749
The history of protection and indemnity clubs illustrates the theory of
propitious selection may be a better fit to explain their continued existence
and growth. The clubs’ organization on principles of mutuality
demonstrates the shipowners’ interest in risk avoidance.750 For example,
in the modern protection and indemnity club rule books, there are
minimum standards for ship safety that need to be upheld to maintain
membership in the club.751 Therefore, the ships that are the highest risks
(because they do not satisfy those minimum standards) are not eligible for
membership in the clubs.
E. Summary of the Economic Efficiencies of Uberrimae Fidei
At its broadest, the judicial discussion of the economic efficiency of
uberrimae fidei covered “protecting insurance company assets and the assets
of policy holders; deterring the submission of misleading information;
promoting personal integrity by imposing harsh penalties on dishonesty;
preventing the imposition of frauds and perjuries on the court; and
injecting certainty, predictability and uniformity into the law”;752 however,
the majority of judicial discussion limited itself to focusing on time and
cost savings realized from not having to undertake preliminary
investigations or underwrite unnecessary risks. Legal commentators
amorphous terminology of ‘risk avoidance.’”).
745. See id. at 1064 (explaining the theory when a person buys insurance, the person takes less
safety precautions).
746. See id. (introducing an alternate theory where a person who takes precautions may not be
able to afford high premiums for insurance and will be less likely to buy insurance).
747. Id. at 1064.
748. Id.
749. Id. at 1068.
750. See Ronneberg, supra note 609, at 4 (implying maritime losses are inevitable, but the losses
can be minimized by participation in a P&I association, which is based upon the principle of
mutuality).
751. See Rules, supra note 654 (outlining the classification and statutory requirements for
membership in the American P&I Club under Rule 1.4.14).
752. St. Paul Ins. Co. of Ill. v. Great Lakes Turnings, Ltd., 829 F. Supp. 982, 987 (N.D. Ill.
1993).
2016] (UBERRIMAE FIDEI) IN MARINE INSURANCE LAW 819
likewise have principally considered the role of uberrimae fidei in reducing
the costs of insurance contracting. Economists’ extensive modeling of
insurance markets with asymmetric information show the incorporation of
uberrimae fidei broadens the availability of insurance for low-risk individuals
because the greater availability of information allows better segregation of
risk pools.753
Protection and indemnity clubs are unique forms of marine insurance
that insure only third party protection and indemnity risks, such as Jones
Act cases, collision, fines or penalties, and wreck removal.754 They are
non-profit associations of shipowners who band together to provide each
other with insurance because such insurance is otherwise unavailable.755
United States courts have not considered such clubs to be traditional
insurance companies because they are mutuals, they require membership
in the club, they offer indemnity rather than liability coverage, and they do
not have a duty to defend.756 As of October 2015, the thirteen principle
underwriting member clubs of the International Group of Protection and
Indemnity Clubs provided protection and indemnity insurance for
approximately ninety percent of the world’s ocean-going ship tonnage.757
The history and nature of the protection and indemnity clubs align with
organizational theorist’s conditions for the rise of mutual insurance firms
in certain markets.
The good faith disclosure required by the doctrine of uberrimae fidei, as
well as the nature of the protection and indemnity market, defeat two of
the four basic assumptions of the adverse selection model. First,
protection and indemnity insurance is not voluntary in the European
Union for ships over 300 gross tons, and the voluntary nature of insurance
is a major assumption of the model.758 Second, protection and indemnity
753. See Hemenway, supra note 497, at 1063–64 (suggesting incorporation of risk avoidance
propensities can help separate risks pools, thus benefitting lower risk individuals).
754. See Ronneberg, supra note 609, at 3–4 (listing the risks insured against, including personal
injury, collision, removal of wrecks, and fines).
755. See id. at 1–2 (“The Clubs, which are actually groups of vessel owners banded together to
provide mutual insurance coverage, seem to exist in a backwater of their own making—gentlemanly,
noncompetitive, and unchanging.”).
756. Psarianos v. Standard Marine, Ltd., 728 F. Supp. 438, 451 (E.D. Tex. 1989) (“[A]
protection and indemnity association is not a traditional insurance company. . . . Eagle is a member
of the Club, not simply an insured; and the coverage provided is indemnity, rather than liability.
There is no duty to defend . . . .”).
757. See Ronneberg, supra note 609, at 1 (recognizing P&I Clubs insure ninety percent of the
merchant vessels in the world, generating a combined premium income of over one billion dollars for
the largest sixteen clubs).
758. See Directive 2009/20/EC, supra note 726, art 2(1) (“This Directive shall apply to ships of
300 gross tonnage or more.”).
820 ST. MARY’S LAW JOURNAL [Vol. 47:727
clubs do not charge heterogeneous risks homogenous premiums.759
Advance calls, as they are known, are based on claims history, fleet size,
and other risk related characteristics.760 Third, with uberrimae fidei
enforced by United States courts in admiralty, the insured will have to
truthfully complete his application for insurance and otherwise disclose all
facts material to the risk. The requirement for a truthful application is also
a condition precedent to insurance coverage in the protection and
indemnity club.761 Finally, the theory of propitious selection may explain
the health of protection and indemnity clubs, as there are minimum
requirements for ship safety that need to be satisfied for membership.
Risk avoidance may coincide with willingness to purchase insurance
coverage.762
IV. CONCLUSION
Because the choice-of-law may be outcome determinative in admiralty
cases, it is important to understand the Wilburn Boat analysis, which asks
“(1) Is there a judicially established federal admiralty rule . . . ? (2) If not,
should we fashion one?”763 Except for the Fifth Circuit, all the federal
circuits have examined the question of whether uberrimae fidei is a judicially
established federal admiralty rule have determined that it is. Should the
Fifth Circuit decide to revisit its decision, there is ample judicial reasoning,
legal commentary, and economic theory that supports the economic
efficiency of uberrimae fidei.
Specifically with respect to protection and indemnity clubs, economic
theory supports the efficiency of uberrimae fidei as a means to dispel
information asymmetry and broaden the availability of insurance to lowrisk
individuals.
759. See Hemenway, supra note 497, at 1063 (reflecting on an adverse selection model where
heterogeneous risks are charged same price as other categories).
760. Ronneberg, supra note 609, at 29.
761. See Rules, supra note 654 (“It shall be a condition precedent of such insurance that all the
said particulars and information were true so far as the applicant Member knew or could with
reasonable diligence have ascertained.”).
762. See Hemenway, supra note 497, at 1063–64 (noting the assumptions of the propitious
selection model imply those who are high-risk avoiders are more cautions and thus are more likely to
purchase insurance).
763. Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 314 (1955).

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Elizabeth Germano, “A Law and Economics Analysis of the Duty of Utmost Good Faith (Uberrimae Fidei) in Marine Insurance Law for Protection and Indemnity Clubs,” St. Mary's Law Digital Repository, accessed August 16, 2017, http://lawspace.stmarytx.edu/item/GermanoFinal.

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