Signal International owned a dry dock in Port Arthur, Texas. When the dry dock sank, Signal tendered it to its pollution underwriter, Great American, and to its GL underwriters and excess underwriters. The Great American pollution policy called for the application of New York law. Contending Signal had not told Great American about the condition of the dry dock and in so failing, Signal had made material misrepresentations, failing to report that the dry dock had been surveyed and found to have a negative value. Though the Second Circuit makes much of Signal’s failure to disclose problems with the dry dock, the surveys are more equivocal. Some surveys contended the dry dock was in ‘fair to good’ condition; others indicated it had deeper problems. Signal used doublers where there were wastage holes and ABS does not approve of the use of doublers. The ABS survey of the dry dock, nine years before the loss, was therefore harshest. In 2007 and 2009, two surveys of the dry dock called it essentially fair to good.
When the dry dock sank, removal costs exceeded $12,000,000.
Signal maintained a pollution policy through Great American between 2004 and the loss in 2009. Signal did not disclose the surveys of the barge to Great American, and at depositions Great American representatives testified - understandably - they would want to know about the surveys.
The Second Circuit first addressed whether the pollution policy was maritime in nature and therefore subject to uberrimae fidei, the duty of ‘utmost good faith’ on the insured to disclose risks. The Second Circuit said “yes.” This is a little surprising because a dry dock is not a vessel and ordinarily not subject to maritime jurisdiction. But the Second Circuit held that the purpose of a pollution policy is to prevent the actual or imminent threat of discharge onto a navigable waterway, which implicates marine commerce under Norfolk Southern Railway v. Kirby, the Supreme Court’s famous 2004 maritime case involving a railroad.
Having determined maritime law applies, the Second Circuit found Signal had failed to disclose material facts the underwriter would have wanted to know. Even though Signal filled out the application fully and accurately, it failed to take the extra step of disclosing more than the underwriter had requested. Therefore the policy was voided.
Uberrimae Fidei is undergoing a renaissance everywhere but the Fifth Circuit, it seems. In the Fifth Circuit, it is probable this claim would have come out the other way. The Fifth Circuit has held uberrimae fidei is not entrenched federal law, so it can be supplemented by state law. In that case, the burden is typically on the insurer to learn more about the risks it is undertaking; it is not on the insured to disclose risks.