In admiralty law there is an ancient doctrine called “uberimae fidae.” Under this doctrine, the applicant for marine hull insurance has the obligation of “uttermost good faith” to disclose to the insurer any matter that may possibly affect the risk of loss. This obligation extends to all material information, whether asked for or not. The requirement arose from the recognition that ships were usually well over the horizon when applications for insurance would be made and information about the ship’s current condition was usually sparse and unevenly distributed. Often, neither the shipowner nor the potential insurer could know whether the ship was above or below the water at the time the application was made. It was not unheard of, in the days of sailing ships, for unscrupulous owners, upon learning by messenger pigeon of their vessel’s sinking, to obtain marine insurance “after the fact” before the loss was officially reported. Lesser misdeeds included obtaining insurance just before the arrival of typhoons or even pirates at a far off location where the ship happened to be. The doctrine of uberrimae fidae arose to prevent these greater and lesser attempts to obtain marine insurance by taking advantage of an owner’s greater knowledge of potential risks. In California, the uberriame fidae doctrine is codified at California Insurance Code §1900:
1900. In marine insurance each party is bound to communicate, in addition to what is required in the case of other insurance:
(a) All the information which he possesses and which is material to the risk, except such as is exempt from such communication in the case of other insurance.
(b) The exact and whole truth in relation to all matters that he represents or, upon inquiry assumes to disclose.
In light of the things that can actually go wrong with a ship at sea, the nature of relevant information that must be disclosed to the insurer could be very broad. The traditional marine insurance perils clause is a delight to read:
"Touching the adventures and perils we the assurers are contended to bear and to take upon us in this voyage: they are of the seas, men-of-war, fire, enemies, pirates, rovers, thieves, jettisons, letters of marque and countermarque, reprisals, takings at sea, arrests, restraints, and detainments of all kings, princes and people, of what nation, condition or quality soever, barratry of the master and mariners, and of all other perils, losses, and misfortunes, that have or shall come to the hurt, detriment or damage of the said goods and merchandises, and ship, &c., or any part thereof. "
Just compare that to the language in your standard CGL policy!
A recent California case makes the point that, even for landlubbers, the obligation to disclose all relevant information is very high indeed, if not to the level of “uberrimae fidae.” In Mitchell v United National Insurance Co., (2005) 127 Cal.App4th 457, 25 Cal.Rptr.3d 627, the court held that material misrepresentations of fact on the application for insurance permit the insurance company to cancel the policy even after a loss and even if the misrepresentations were not intentional. The insurer has no obligation to independently verify the accuracy of the representations.
On April 11, 2000, Mitchell applied for fire insurance on a recently purchased building. On the application he told the insurer that the building was a 3420 square feet commercial building used as a video production studio and he had a $20,000 payroll with $300,000 in receipts. He also represented that the building met city code requirements and there was no other insurance. In fact, the building was only 2000 square feet, was used only to film a single music video for two days and was then leased to a tenant who operated a garment manufacturing business and the building was subject tot a city abatement order and could not be occupied until certain repairs were undertaken. In November of 2000 a prospective buyer set fire to the building and died in the blaze. When Mitchell made a claim under the policy, the carrier, then examined the inaccurate application, noticed the discrepancies and rescinded the policy.
Predictably, Mitchell sued the carrier, but the court held that the insurer was entitled to rescind the policy. The application contained several inaccuracies. The insurer pointed out that owner-occupied business of a certain size and location were important factors in setting premiums. Mitchell claimed that at the time he submitted the application, he intended to use the building for music video productions but this never came to pass, essentially arguing that the inaccuracies either were minor or unintentional.
The court of appeals properly relied on Insurance code sections 331 and 359 in holding that the insurer can rescind for any material misrepresentation. A material representation in one that would cause to the insurer to either decline the application, amend the terms or change the premiums. If the insurer asks for information on the policy it’s pretty safe to conclude that the information is “material” to the insurer. The insurer's questions regarding the building's size use and codition were all "material" and inaccurate answers were given in reponse. Therefore, the insurer did not have to pay for the fire loss.
It is essential to be fully truthful in filling out applications for insurance. There are specific statutes governing most types of insurance in California that may limit the insurer’s right to rescind, but generally the insurer can rescind the policy even after a loss if an unintentional material misrepresentation was made in the application for the policy. Even if you don’t intend to run afoul of pirates, practice uberrimae fidae in all insurance applications, to be safe.
