Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-14-02234/USCOURTS-ca8-14-02234-1/pdf.json

Parties Involved:
Abhe & Svoboda, Inc.
Appellant
St. Paul Fire & Marine Insurance Company
Appellee

Document Text:

United States Court of Appeals

For the Eighth Circuit

___________________________

No. 14-2234

___________________________

St. Paul Fire & Marine Insurance Company,

lllllllllllllllllllll Plaintiff - Appellee,

v.

Abhe & Svoboda, Inc.,

lllllllllllllllllllll Defendant - Appellant.

____________

Appeal from United States District Court 

for the District of Minnesota - Minneapolis

____________

 Submitted: March 11, 2015

 Filed: August 20, 2015 (Amended October 6, 2015)

____________

Before WOLLMAN, BEAM, and COLLOTON, Circuit Judges.

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COLLOTON, Circuit Judge.

Following the sinking of a leased barge during a storm, industrial painting

contractor, Abhe & Svoboda, Inc. (“Abhe”), filed a claim for insurance coverage. 

Abhe invoked a Protection and Indemnity insurance policy issued by maritime

underwriters, St. Paul Fire and Marine Insurance Company (“St. Paul Fire”), as part

of a package marine insurance policy. St. Paul Fire denied Abhe’s claims and then

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filed suit in the district court seeking a declaration that the policy was void under the

doctrine of uberrimae fidei. That doctrine requires that parties to an insurance

contract must accord each other the highest degree of good faith. Abhe filed several

counterclaims, including a claimfor negligence, and both parties moved for summary

judgment. 

The district court granted St. Paul Fire’s motion for summary judgment,

declaring the package policy void under the principle of uberrimae fidei because

Abhe failed to disclose material facts in its application for insurance coverage. The

court also dismissed Abhe’s counterclaims with prejudice. Abhe appeals, arguing

principally that the district court failed to consider the element ofreliance in assessing

St. Paul Fire’s uberrimae fidei defense. We conclude that reliance is an element of

the defense, and that there are disputed issues of fact as to whether it is satisfied, so

we reverse and remand for further proceedings.

I.

Abhe is a Minnesota company that repairs and paints dams, bridges, and other

infrastructure. In 2010, Abhe contracted with the Rhode Island Bridge and Turnpike

Authority to paint and repair the Pell Bridge, a bridge that hangs over Narragansett

Bay in Rhode Island. To assist in painting the bridge, Abhe leased two barges from

Sterling Equipment, Inc. These barges were “dumb” barges, meaning that they had

no motor or means of propulsion and were intended to serve solely as stationary

equipment platforms. The parties refer to these barges as SEI-34 and SEI-120.

The leasing agreement with Sterling required Abhe to have a professional

surveyor assess the barges “[t]o establish the condition of the Vessel[s] at the time of

delivery and re-delivery.” The survey report for SEI-34 noted that there were

pinholes in the deck, the under-deck tanks were not watertight from one another, and

there was mud, sand, and water in some tanks. The report did not note any holes in

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SEI-34’s hull and did not recommend any repairs. The survey also valued SEI-34 at

$90,000, which reflected the value of the scrap metal, “plus a little bit more because

the barge was still useful.”

In March 2011, Abhe anchored the barges under the Pell Bridge and began

painting. Over the next seven months, Abhe used SEI-34 as a stationary equipment

platform. During thistime, Abhe employees regularly inspected the barge, looked for

holes, and fixed pinholes found in the deck. Abhe also installed a utility pump to

remove any water that accumulated in SEI-34’s bilge.

During the first three months of its work on the Pell Bridge project, Abhe was

covered under its existing Marine Hull and Protection and Indemnity insurance

policy. But instead of renewing its policy with its existing insurer, Abhe purchased

a package marine insurance policy from St. Paul Fire. St. Paul Fire did not request

that Abhe complete an application for insurance, but instead accepted the application

that Abhe provided to its previous insurer in May 2010. The schedule of vessels

attached to that application was outdated and did not include SEI-34 or the other

vessels that Abhe leased for the Pell Bridge project. The 2010 application also

indicated that none of the scheduled vessels was surveyed within the last two years

because the survey of SEI-34 had yet to be performed at the time of the application.

On May 3, 2011, Abhe sent St. Paul Fire an updated schedule of vessels, which

included SEI-34 as a leased barge with a value of $225,000, reflecting its agreed

value on its charter application with Sterling. Abhe did not provide St. Paul Fire with

the November 2010 survey of SEI-34, and St. Paul Fire did not attempt to survey any

of Abhe’s marine equipment, as it was entitled to do under the policy. St. Paul Fire

issued Abhe a Marine Hull and Protection and Indemnity Policy effective July 1,

2011, through July 1, 2012.

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On October 29, 2011, a severe nor’easter struck the Newport area. During that

storm, SEI-34 sank to the bottom of Narragansett Bay and landed upside down,

crushing most of the equipment that was welded to its deck. The Coast Guard

intervened shortly thereafter and ordered Abhe to remove the wreck from the bay. 

If Abhe failed to do so within a specified period of time, the Coast Guard would

federalize the wreck, which would empower the government to clear the wreck and

hold Abhe liable for all associated costs.

Abhe contacted a marine salvage company, Donjon Marine Co., Inc., to

negotiate the wreck removal. At St. Paul Fire’s request, Abhe provided St. Paul Fire

with SEI-34’s survey and lease agreement, salvage plans, and a proposed wreckremoval contract from Donjon. Abhe then turned over negotiation of the Donjon

contract to St. Paul Fire, and St. Paul Fire retained an attorney to negotiate the

contract on Abhe’s behalf.

After the wreck had been submerged for over five weeks, Donjon raised SEI34’s hull and all equipment that was still attached to the deck. Donjon then refused

to recover the remaining barge equipment based on a provision in the wreck-removal

contract that it negotiated with St. Paul Fire. Because the Coast Guard’s deadline for

federalizing the wreck was approaching, Abhe retained new companiesto remove the

remaining barge equipment for an additional cost.

During negotiations of the wreck-removal contract, St. Paul Fire agreed to

guarantee fifty percent of the payments due Donjon and prepaid that amount. Donjon

then pursued Abhe for the other half of the money. Abhe and Donjon proceeded to

arbitration regarding Donjon’s obligations to Abhe under thewreck-removal contract. 

Abhe sought defense and indemnification from St. Paul Fire for the arbitration, but

St. Paul Fire refused, citing Abhe’s non-disclosure of SEI-34’s 2010 survey as a

reason for the coverage denial.

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The arbitrators concluded that Donjon breached its contract with Abhe by

failing to raise all of the equipment, and the panel awarded Abhe $665,351.15 in

compensatory damages, interest, and attorney’s fees. The panel disallowed Abhe’s

claim for loss of the barge and other “overhead” items, including employee salaries,

overtime, and damages not specifically tied to the recovery of the remaining

equipment.

While the arbitration was pending, St. Paul Fire filed this action in the district

court, seeking a declaratory judgment that it had no duty to defend orindemnify Abhe

for several reasons. Abhe filed three counterclaims, including one alleging

negligence by St. Paul Fire.

The district court granted St. Paul Fire’s motion for summary judgment,

concluding that the insurance policy was void ab initio because Abhe breached its

duty of good faith under the doctrine of uberrimae fidei by failing to disclose the

2010 survey of SEI-34 on its application for insurance. The court thus denied Abhe’s

cross-motion for partial summary judgment as moot and dismissed Abhe’s

counterclaims with prejudice.

Abhe appeals, arguing that the district court applied the wrong legal standard

in determining that it breached its duty of good faith. We review the district court’s

grant ofsummary judgment de novo, viewing the evidence in the light most favorable

to Abhe and giving Abhe “the benefit of all reasonable inferences to be drawn from

the evidence.” Country Life Ins. Co. v. Marks, 592 F.3d 896, 898 (8th Cir. 2010).

 

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II.

A.

This dispute concerns a marine insurance contract and therefore is governed

by the principle of uberrimae fidei, or utmost good faith. See N.Y. Marine & Gen.

Ins. Co. v. Cont’l Cement Co., 761 F.3d 830, 839 (8th Cir. 2014). Under the doctrine

of uberrimae fidei, “the parties to a marine insurance policy must accord each other

the highest degree of good faith.” Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d

Cir. 1986). This duty of good faith requires the insured to “disclose to the insurer all

known circumstances that materially affect the risk being insured.” Id.; see also

Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 942 (11th Cir.

1986). Because the insured is in the best position to know of any facts that may be

material to the risk, the insured is obligated to disclose those facts to the insurer,

regardless of whether the insurer makes a specific inquiry. See Knight, 804 F.2d at

13.

The parties agree that Abhe was required to disclose all material facts to St.

Paul Fire, but they dispute whether there is another element to an insurer’s claim that

a policy is void for non-disclosure. Abhe argues that an insurer cannot void a policy

under the doctrine of uberrimae fidei without showing both that the insured failed to

disclose a material fact and that the non-disclosure induced the insurer to issue the

policy. The district court reasoned that St. Paul Fire was entitled to void the policy

solely because a survey of a vessel’s condition could “possibly influence the mind of

a prudent and intelligent insurer”—i.e., that the non-disclosure was material. Abhe

asserts that the district court applied the wrong standard and that it failed to examine

whether St. Paul Fire actually relied on the non-existence of SEI-34’s survey when

deciding whether to issue the policy to Abhe.

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There is surprisingly little authority on whether a showing of reliance is

required to void an insurance policy under the doctrine of uberrimae fidei. The

principal case to address the question directly is Puritan Insurance Co. v. Eagle

Steamship Co. S.A., 779 F.2d 866 (2d Cir. 1985), which held that reliance is a

necessary element of the uberrimae fidei defense:

The principle of uberrimae fidei does not require the voiding of the

contract unless the undisclosed facts were material and relied upon. A

fact is not material unless it is something which would have controlled

the underwriter’s decision, and a marine insurance policy cannot be

voided for misrepresentation where the alleged misrepresentation was

not relied upon and did not in any way mislead the insurer. 

Id. at 871 (emphasis added) (internal citation and quotation marks omitted). 

St. Paul Fire argues that Puritan does not stand for the proposition that an

insurer must always show reliance before invoking the uberrimae fidei defense. 

Instead, St. Paul Fire suggests that an insurer is required to show actual reliance only

where the insurer had actual knowledge of the claimed non-disclosure and bound the

risk anyway. According to St. Paul Fire, reliance should factor into a court’s decision

only where the underwriter bound the insurance with knowledge of the material

information but did not rely upon it.

St. Paul Fire’s contention isinconsistent with Puritan. The insured in that case

failed to disclose two losses suffered by two of its vessels on its application for

insurance. Id. at 868. The insurer was made aware of the first loss, but the second

loss was not disclosed to the insurer until the next insurance renewal period. Id. at

869. Even though the insurer had no knowledge of the second loss, the Second

Circuit upheld the district court’s finding that while the insured should have disclosed

the second loss to the insurers, the insurers “failed to prove that they would not have

undertaken the risk had they been fully informed of this loss.” Id. at 870. Puritan

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thus requires that an insurer seeking to void a policy show reliance on an insured’s

non-disclosure, regardless of whether the insurer had knowledge of the undisclosed

material fact at the time that it decided to issue the policy. 

We find the Second Circuit’s reasoning persuasive. In general contract law,

a misrepresentation by omission has no legal effect “unless it induces action by the

recipient, that is, unless [the recipient] manifests his assent to the contract in reliance

on it.” Restatement (Second) of Contracts § 164 cmt. c (1981). Before a party can

rescind a contract due to the other party’s non-disclosure or misrepresentation, he

must show that the misrepresentation induced him to enter the contract. Id. In other

words, a party is required to show a causal connection between the other party’s

omission and the issuing of the contract. See R. Lord, 27 Williston on Contracts

§ 69:32 (4th ed. 2014). We discern no reason why the requirement of causation

should be removed in the context of marine insurance contracts. 

St. Paul Fire’s proposed rule also would create a moral hazard on the part of

marine insurers. It would have the perverse effect of encouraging insurers to assume

unreasonable risks and to issue insurance polices that they otherwise would not have

issued. Under the rule proposed by St. Paul Fire, if an insurer knowsthat an applicant

for insurance failed to disclose or misrepresented a fact that other prudent insurers

may deem to be material, that insurer would have an incentive to issue the policy

anyway, collect premiums from the insured, and then use the doctrine of uberrimae

fidei to void the policy if an accident occurs and the insured seeks to invoke the

policy’s protection. Allowing an insurer to void a policy based on the uberrimae fidei

defense in that situation would not further the purpose of the doctrine to protect the

insurer against liability caused by an insured’s failure to act in good faith.

We have required that insurers demonstrate actual reliance before voiding a

policy based on the principle of uberrimae fidei in other circumstances. In Shipley

v. Arkansas Blue Cross & Blue Shield, 333 F.3d 898 (8th Cir. 2003), we addressed

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an insurer’s effort to void an insurance policy, governed by ERISA, because of

alleged material omissions in the insurance application. The court recognized that

“[i]nsurance polices are traditionally contracts uberrimae fidei,” and “[i]f a party’s

manifestation of assent is induced by either a fraudulent or a material

misrepresentation by the other party upon which the recipient is justified in relying,

the contract is voidable by the recipient.” Id. at 903 (emphasis added) (internal

quotation marks omitted). We upheld the district court’s grant ofsummary judgment

in favor of the insurer, but only after determining that the insurer showed actual

reliance on the insured’s misrepresentations. Id. at 905-06. 

Similarly, in Countryside Casualty Co. v. Orr, 523 F.2d 870 (8th Cir. 1975),

we addressed an insurer’s claimto have an automobile insurance policy declared void

ab initio on the ground that the insured misrepresented his history of traffic

violations, arrests, and convictions for public drunkenness on his application for

insurance. Id. at 871-72. The district court granted summary judgment in favor of

the insurer, reasoning that “the insurance company relied upon the misrepresentations

and would not have issued the policy had it known the true facts that existed at the

time.” Id. at 875 (internal quotation marks omitted). In affirming the district court,

we applied the common law rule that “a material misrepresentation made on an

application for an insurance policy and relied upon by the insurance company will

void the policy.” Id. at 872 (emphasis added).

Whilemost circuits have not explicitly recognized reliance as a distinct element

of the uberrimae fidei defense, some courts have applied a subjective test for

materiality that asks whether the insurer in fact would have found the omitted

information to be material. The standard applied by these circuits effectively requires

a showing of actual reliance by the insurer, because it defines a material fact as one

that the insurer relied upon. See, e.g., I.T.N. Consolidators, Inc. v. N. Marine

Underwriters Ltd., 464 F. App’x 788, 794 (11th Cir. 2012) (“Because all parties knew

of the loss here, a misrepresentation that no known loss had occurred could not have

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led [the insurer] to rely on that statement, and would in no way constitute a material

misrepresentation in breach of uberrimae fidei.”); Certain Underwriters at Lloyd’s,

London v. Inlet Fisheries, Inc., 518 F.3d 645, 655 (9th Cir. 2008) (“[The insurer]

produced overwhelming and unrefuted evidence that any of these undisclosed facts

would have affected its decision to offer the policy were it known.”). To satisfy the

materiality element ofthe uberrimae fidei defense in these jurisdictions, insurersmust

show that they would not have issued the policy, or would have issued it at a different

premium, if they had known about the omitted fact. Other decisions applying

uberrimae fidei rely on evidence of actual reliance or inducement on the part of the

insurer, even where they have not articulated reliance as a requirement distinct from

materiality. See, e.g., Certain Underwriters at Lloyd’s v. Montford, 52 F.3d 219, 222

(9th Cir. 1995); Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 980 (5th

Cir. 1969). 

These decisions are consistent in substance with our conclusion, but we think

clarity is enhanced by preserving actual reliance and objective materiality as distinct

elements. In one of its earliest cases concerning a marine insurer’s uberrimae fidei

defense, the Supreme Court applied an objective test for materiality, concluding that

“[h]ad [the undisclosed fact] been known, it is reasonable to believe that a prudent

underwriter would not have accepted the proposal as made.” Sun Mut. Ins. Co. v.

Ocean Ins. Co., 107 U.S. 485, 509-10 (1883); see also AGF Marine Aviation &

Transp. v. Cassin, 544 F.3d 255, 264-65 (3d Cir. 2008); Grande v. St. Paul Fire &

Marine Ins. Co., 436 F.3d 277, 282-83 (1st Cir. 2006); Kilpatrick, 795 F.2d at 942-

43. While materiality examines whether a fact would have influenced the judgment

of a reasonable and prudent underwriter, e.g., Cont’l Cement Co., 761 F.3d at 841,

reliance examines whether there was a causal connection between the

misrepresentation or concealment of that material fact and the actual underwriter’s

decision to issue the policy. See 2 Thomas J. Schoenbaum, Admiralty and Maritime

Law § 19-14 (5th ed. 2011).

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B.

St. Paul Fire argues that even if reliance is an element of the defense, there is

no genuine issue of fact for trial on whether it relied on Abhe’s failure to disclose the

2010 survey. The insurer argues that its underwriter, Ed King, received, reviewed,

and relied upon Abhe’s insurance application before deciding to insure SEI-34. King

also testified that the 2010 survey of SEI-34, which indicated a lack of watertight

bulkheads and pinholesin the hull, would have been “very important in underwriting

[the] risk.” Abhe countered, however, with evidence that in June 2012, King renewed

coverage for SEI-120, despite receiving an on-hire survey for that vessel thatshowed

the vessel lacked watertight bulkheads. We conclude that this evidentiary dispute is

sufficient to create a genuine issue of material fact as to whether St. Paul Fire relied

on Abhe’s failure to disclose SEI-34’s lack of watertight bulkheads in issuing the

insurance policy for that barge.

Alternatively, St. Paul Fire asserts that Abhe’s over-valuation of SEI-34 in its

insurance application was an additional breach of uberrimae fidei that independently

entitles it to summary judgment. King testified that if Abhe had disclosed the fact

that SEI-34 had a scrap value of $90,000, he would have questioned whether the

barge “might be an unacceptable risk.” Abhe, however, produced evidence that SEI34’s stated value of $225,000 accurately reflected the barge’s value as expressed in

Abhe’s charter agreement with Sterling. Abhe’s marine insurance expert also

testified that, for insurance purposes, the appropriate value of a leased vessel is the

value specified in the charter agreement. We therefore conclude that a genuine issue

ofmaterial fact exists asto whether undisclosed information regarding SEI-34’s value

was material and actually induced St. Paul Fire to issue coverage to Abhe.

If the case proceeds to trial on the defense of uberrimae fidei, we also believe

that the question of materiality should be considered by the trier of fact to resolve

disputed issues of fact. The district court concluded succinctly that Abhe’s non-

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disclosure of the 2010 survey was material because “a prudent insurer would want to

know that bulkheads designed to protect a vessel from sinking would not operate as

intended.” Abhe presented evidence, however, that other recent surveys of SEI-34

stated that the barge was suitable for use as an equipment barge despite having nonwatertight bulkheads. Abhe also presented testimony from its expert surveyor that

a lack of watertight bulkheads and a need to pump water from the bilge is common

and is not a concern on barges that are used as construction platforms. As we do not

think it can be “universally affirmed” on this record that the existence of nonwatertight bulkheads “must always be material to the risk,” McLanahan v. Universal

Ins. Co., 26 U.S. 170, 189 (1828), there is a genuine dispute for trial on materiality

as well.

* * *

For the foregoing reasons, we reverse the judgment of the district court and

remand the case for further proceedings consistent with this opinion.

______________________________

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