Uberrimae Fidei Alive and Well in the 11th Circuit
Uberrimae Fidei Alive and Well in the 11th Circuit
Error in Purchase Price Voids Policy
Bank not Protected Under Standard Mortgage Clause
By: Mark Tufts
AIG Centennial Insurance Company v. O’Neill et al., 2015 U.S. App. LEXIS 5853, 2015 WL 1607788 (11th Cir., No. 13-13243, Apr. 10, 2015).
This declaratory judgment action sought to void the policy of insurance purchased on the 66 foot sport fishing vessel which initially sold for $1.575 Million along with the transfer of another vessel valued at $700,000. The vessel was surveyed and valued at $1.875 Million; which was later increased at the request of the purchaser to $2.35 Million. The vessel also was in need of repairs resulting in a reduction of the price to $2.125 Million.The Bank, also a defendant in the suit, obtained a preferred ship mortgage and required insurance with a mortgage clause to protect the bank’s interest should the policy be declared void. Naturally, a series of missteps lead to the avoidance of the policy.First, the purchaser of the boat had his executive assistant handle the insurance application which mistakenly named O’Neill as the owner; he had placed the vessel in the name of another entity which was the record owner, Caroline Acquisition, of which he was the sole owner. Next, in response to the information about losses, only one loss was listed. Finally, the purchase price was inflated and did not reflect the actual purchase price of$2.125 Million; rather, it listed the purchase price as $2.35 Million.O’Neill had the repairs performed at the cost of $225,000. On her first voyage, the crew noticed considerable flexing in the hull. On arrival in Rhode Island, the vessel was surveyed and found un-seaworthy and unfit for any use. O’Neill then filed a claim with the insurer.O’Neill maintained that the term “purchase price” on the application is ambiguous. The unanimous panel did not agree stating: “It simply means the value given in return for an item. But even assuming the term is ambiguous, it matters not. The federal maritime doctrine of uberrimae fidei—not state contract law—governs this dispute, and it provides no refuge in claiming ambiguity.” The purchase price is material to the contract; thus, the misrepresentation voids the contract ab initio.Regarding the claim of the mortgage holder the court turned to Pennsylvania law and determined that the contract was a standard mortgage clause which protects the mortgage holder even if the policy is “impaired or invalidated by any act or omission, or neglect of the mortgagor.” But, that alone is insufficient to determine if the bank is covered under the policy.The court stated that this situation was sui generis as it was “confronted with a scenario in which the named insured is neither the owner of the property insured by the policy nor the mortgagor on the loan for which the property serves as collateral.” Finding that O’Neill personally is the named insured and that the mortgagor is the same as the named insured, the court determined that the bank was not covered under the insurance policy. The limited liability company is the registered owner of the vessel and not O’Neill and was not named as an insured. This is not a mere technicality as corporate form matters.The insurer and the corporate owner of the vessel did not enter into a contract. The bank’s loan was to the corporate entity and not the individual. While the loan was signed by O’Neill in his capacity as managing member of the corporate entity, he acted on his own behalf in procuring the insurance. Thus, the bank is not covered under the policy.
