While most insurance applicants satisfy their disclosure obligations by accurately answering insurers' questions, disclosure requirements are more complex when it comes to marine insurance, say Michael S. Gehrt and Shaun H. Crosner of law firm Dickstein Shapiro L.L.P. A little-known doctrine requires those who are seeking marine insurance to disclose all risk-related facts related to the coverage to step around insurers trying to void the policy after a loss occurs, they say.

Most applicants for insurance believe they can satisfy their disclosure obligations to their insurer simply by truthfully and accurately answering the questions posed to them on insurance applications.

When it comes to marine insurance, however, disclosure requirements are a bit more complex. The little-known doctrine of uberrimae fidei obligates an applicant for marine insurance to disclose all known facts material to the insurer's calculation of the insured risk — even if such information is not requested on the application for coverage. Because a marine insurer can rely on this doctrine to contest coverage or attempt to void a policy after a loss, it is important for insureds to understand the doctrine and its impact on their disclosure requirements.

Uberrimae fidei, which translates to “utmost good faith,” is a vestigial doctrine of insurance law created centuries ago. Historically, all insurance policies were subject to the doctrine of uberrimae fidei, meaning that both parties were held to the highest standard of good faith in the transaction. At the time, this strict doctrine was an economic necessity in insurance transactions because insurers often had no reasonable means of obtaining information about the risks they were insuring. For example, when underwriters in London were insuring ships sailing in faraway seas, they had no choice but to rely on their insureds for information regarding the potential risks those ships might face. In other words, the doctrine's heightened disclosure requirements existed to ensure that the insurer was able to fairly evaluate the risks being insured.

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Although the doctrine of uberrimae fidei has been displaced in most insurance contracts, it enjoys continuing vitality in the world of marine insurance. Traditionally, the phrase “marine insurance” referred to coverage for loss or damage to a ship and its cargo between the point of origin and its final destination. Today, however, such policies also insure against a variety of nonmarine risks — including, for example, risks associated with civil commotions, labor unrest and the land transportation.

Applying the uberrimae fidei doctrine to this wide array of risks is contrary to the original purpose of the doctrine and ignores the realities of the modern insurance landscape. After all, the doctrine developed in an age without the ubiquity of telephones, email, digital photography, air travel, and — perhaps most importantly — the Internet. Today's marine insurers are much better equipped than their predecessors (and, for that matter, their insureds) to stay informed and obtain information regarding the risks they insure. And, of course, nothing is stopping today's marine insurers from posing targeted questions on an application to elicit the information they seek. The notion that marine insurers must rely on their insureds to tell them what is happening on the far side of the world has been outdated for years.

Although many may legitimately view the doctrine as an antiquated notion for these reasons, uberrimae fidei is still the law in several jurisdictions. Consequently, when applying for or renewing coverage on a marine risk, companies must keep the doctrine in mind and take reasonable steps to ensure compliance with the doctrine's disclosure requirements.

In the months and weeks before a new marine insurance policy is issued, a company should take stock of information within its knowledge that could potentially merit disclosure. Although a company cannot fairly be said to possess knowledge of all information known to its employees, they should take reasonable and appropriate measures to gather all such information germane to the risk being insured. For instance, depending on the size of the company, it may be appropriate for risk managers and others responsible for purchasing coverage to identify and communicate directly with those employees most likely to have knowledge of material information.

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Because it is not always easy to say whether a particular fact is “material” to the risk being insured, companies can and should rely on their brokers to assist them in determining whether to disclose information during the application process. But, if there is any doubt, it is generally best to err on the side of disclosing all potentially material facts to an insurer. Although a company might be concerned that disclosing too much information during the application process will result in increased premiums or a coverage refusal, failure to disclose material facts may give an insurer a basis to contest coverage in the event of a subsequent loss. Therefore, companies should strive to comply with the doctrine of uberrimae fidei and must act with utmost good faith and fair dealing when purchasing coverage for a marine risk.

After a loss, a marine insurer may attempt to rely on perceived nondisclosures during the application process to contest coverage and have the policy declared void. When faced with such a scenario, the insured should take several steps to protect its rights and improve its chances of defeating the marine insurer's attempt to void coverage.

First and foremost, an insured must evaluate whether it should even be held to the heightened standard of uberrimae fidei. Although many modern marine insurance policies cover marine and nonmarine risks, the history and purpose of the doctrine of uberrimae fidei make clear that it should only apply to the marine elements of an insurance policy. For this reason, a number of courts have refused to apply the doctrine's disclosure requirements to facts bearing on nonmarine risks. Consequently, if a particular fact is material only to an insurer's decision to cover a nonmarine risk, the scope of the insured's disclosure obligations are arguably framed solely by the questions posed on the application for coverage.

However, even if uberrimae fidei does apply, it is important for insureds to understand relevant limitations on the doctrine. Setting aside the insured's ordinary obligation to provide truthful and thorough responses to questions posed on a policy application, the doctrine of uberrimae fidei only requires disclosure of material facts within the insured's knowledge prior to the policy's issuance. Although certain facts may seem material with the benefit of hindsight, an insurer attempting to void a policy bears the burden of establishing materiality as of the time of the insured's disclosure obligation. Along those same lines, because an insured can be charged with disclosing material facts only within its knowledge prior to the policy's issuance, facts learned after the policy is issued are of no relevance to the analysis.

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Furthermore, insureds should examine the insurer's course of conduct after learning the fact or facts purportedly giving rise to the right to rescind. Generally, after an insurer discovers a legitimate basis to void a policy, it must promptly notify its insured of its intent to void the policy. If an insurer fails to do so and continues to act as if the policy is still in force, it may have effectively ratified coverage and waived any right to rescind the policy. For this reason, several courts have found the right to rescind has been waived when an insurer accepts additional premiums after learning of a purported nondisclosure or takes other actions inconsistent with an alleged desire to treat the policy as void.

By the same token, an insured must be careful not to take any actions that could be misconstrued as a tacit acknowledgement of the insurer's right to rescind a policy. For instance, because an insurer must return premiums paid for the policy in order to formally void or rescind the policy, an insurer may offer a return of premiums at some point after learning of a purported nondisclosure. Insureds are under no obligation to accept an insurer's offer to return premiums and should not do so. Indeed, in some jurisdictions, accepting a return of policy premiums — even under protest — can significantly jeopardize an insured's ability to pursue coverage.

Finally, throughout the course of a dispute with its insurer, an insured should be mindful of timing-related limitations on the right to initiate litigation or arbitration. Some policies will include contractual limitations provisions that dictate the timeframe in which an insured must initiate litigation against its insurer. In other cases, this timeframe will be set by statute or regulation. Because jurisdictions have different rules regarding how contractual and statutory limitations periods are to be applied, insureds must make sure to navigate these rules with care so that they preserve their right to pursue coverage.

Michael S. Gehrt and Shaun H. Crosner are Los Angeles-based attorneys in Dickstein Shapiro L.L.P.'s insurance coverage practice, focusing their practices on the representation of insureds in disputes with their insurers. Mr. Gehrt can be reached at gehrtm@dicksteinshapiro.com. Mr. Crosner can be reached at crosners@dicksteinshapiro.com.