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Sunken barge insurance dispute tests good-faith dealing legal principle

Sunken barge insurance dispute tests good-faith dealing legal principle

A nor'easter that sank a barge being used by a bridge repair company has resulted in a maritime insurance dispute that the U.S. Supreme Court recently refused to resolve, returning the case to Minneapolis federal court.

In St. Paul Fire & Marine Insurance Co. v. Abhe & Svoboda Inc., the dispute is over information the Minnesota company did not provide the marine insurer, a unit of Travelers Cos. Inc., for coverage of two barges that Abhe rented to paint and repair a bridge over Narragansett Bay near Newport, Rhode Island.

Four months after the bridge repair company changed its protection and indemnity insurance to St. Paul Fire & Marine in 2011, a nor'easter struck and sunk one of the barges, which overturned with all the equipment still welded to the deck.

While St. Paul Fire & Marine initially agreed to pay half of the salvage costs, it refused to provide a defense to Abhe when the bridge repair firm got into a dispute with the salvage company the insurer had hired.

St. Paul Fire & Marine in 2014 went to federal court in Minneapolis and won summary judgment voiding the coverage it had provided, arguing that Abhe violated the legal principle of uberrimae fidei, or dealings that are conducted in the “utmost good faith.”

However, St. Paul Fire & Marine did not request Abhe & Svoboda to complete an application for insurance and accepted an application that the bridge repair firm had provided its previous insurer, which did not include the barges since they had not yet been rented, according to court papers. Subsequent documentation included one of the barges. The insurer also did not seek to inspect the barges.

On appeal, however, a three-judge panel of the 8th U.S. Circuit Court of Appeals sided with the bridge repair firm, ruling unanimously in March 2015 the insurer failed to show it relied on that lack of information in issuing the coverage.

St. Paul Fire & Marine then appealed to the U.S. Supreme Court, which on March 30 rejected taking the case.

Reacting to the ruling, Thomas C. Mielenhausen, a Minneapolis-based partner at Barnes & Thornburg L.L.P. who represents the bridge repair firm, said insurers and policyholders have a mutual obligation.

“An insurance company doesn't get to be careless in their underwriting and then rely on the utmost good faith doctrine to retroactively void coverage,” he said.

Uberrimae fidei is usually used to deny coverage to the policy holder,” Mr. Mielenhausen said. “But this is a unique case where the 8th Circuit talked about the moral hazard that would be created if insurance companies are allowed to do sloppy underwriting and then wait until a claim is made and then do post-claim underwriting.”

St. Paul Fire & Marine declined comment, with James W. Carbin, the insurer's Newark, New Jersey-based legal counsel and a partner at Duane Morris L.L.P., saying in an email that is because the case is still active.

Now the case heads back to District Court, on which the 8th Circuit panel had a recommendation should the case go to trial.

“We also believe that the question of materiality should be considered by the trier of fact to resolve disputed issues of fact,” the appeals court panel ruled. “The District Court concluded succinctly that Abhe's nondiscloser of the 2010 survey was material because a 'prudent insurer would want to know that bulkheads … would not operate as intended.' ”

Citing Abhe evidence that surveys found the barge suitable for the bridge work and that a lack of watertight bulkheads and the need to pump bilge water is common, “there is a genuine dispute for trial on materiality as well,” the 8th Circuit panel ruled.

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