Opinion ID: 203449
Heading Depth: 2
Heading Rank: 2

Heading: Consequences of the Breach of Warranty

Text: In light of the insured's breach, the question, then, is the effect of this breach. The district court reasoned that Puerto Rico law would apply. It acknowledged that Chapter 11 of Puerto Rico's Insurance Code, which covers contract interpretation and construction, expressly excludes maritime insurance contracts from its coverage. [3] See P.R. Laws Ann. tit. 26, § 1101(1) (The applicable provisions of this chapter shall apply to insurances other than ocean marine . . . insurances. . . .). The court reasoned it should turn by default to the Puerto Rico Civil Code. In the absence of any statute or case law on point, the court predicted that under the Puerto Rico Civil Code the breach of a warranty clause in a contract of maritime insurance would not excuse payment by an insurer unless the breach was related to the cause of the loss. The insurers agree with the district court that Puerto Rico law is silent on the issue and that the majority rule with respect to warranty breaches is similar to the federal admiralty rule inasmuch as[ ] both treat any breach as having the effect of voiding coverage in its entirety. Op. and Order Den. Mot. for Recons., at 6. That being so, the insurers argue, even if Puerto Rico law would apply, it would apply as substantive law the majority rule that a breach of a promissory warranty excuses the insurer from coverage. We turn to the relevant principles of choice of law analysis as most recently set forth by the Supreme Court in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004). [4] Norfolk Southern clarified the Supreme Court's earlier choice of law analysis for maritime insurance contracts set forth in Wilburn Boat Co. v. Fireman's Fund Insurance Co., 348 U.S. 310, 314, 75 S.Ct. 368, 99 L.Ed. 337 (1955). [5] Norfolk Southern stated the general rule that [w]hen a contract is a maritime one, and the dispute is not inherently local, federal law controls the contract interpretation. Id. at 22-23, 125 S.Ct. 385. This lawmaking power in the federal courts stems from the Constitution's grant of admiralty jurisdiction to federal courts. See id. at 23, 125 S.Ct. 385; Wilburn Boat, 348 U.S. at 314, 75 S.Ct. 368; see also U.S. Const. art. III, § 2, cl. 1. This choice of law principle applies regardless of whether the basis for federal jurisdiction is admiralty jurisdiction, under 28 U.S.C. § 1333(1), or diversity, under id. § 1332. See Norfolk S. Ry., 543 U.S. at 23, 125 S.Ct. 385; Pope & Talbot, Inc. v. Hawn, 346 U.S. 406, 411, 74 S.Ct. 202, 98 L.Ed. 143 (1953) ([S]ubstantial rights . . . are not to be determined differently whether [a] case is labelled `law side' or `admiralty side' on a district court's docket.). There is no dispute this is a maritime insurance contract. We also agree that the prevailing view, under federal law and the law of most states, is that a breach of a promissory warranty in a maritime insurance contract excuses the insurer from coverage. See Commercial Union, 190 F.3d at 31 (Under the federal rule and the law of most states, warranties in maritime insurance contracts must be strictly complied with, even if they are collateral to the primary risk that is the subject of the contract, if the insured is to recover.); see also Yu v. Albany Ins. Co., 281 F.3d 803, 809 (9th Cir.2002) (noting that rule that a marine insurer can avoid liability for breach of a . . . warranty, regardless of whether that breach caused the loss[,] . . . is in place in most states); 6 Couch on Insurance, supra, § 83:20 (In marine insurance, there is historically no requirement that the breach of warranty relate to the loss, so that any breach bars recovery even though a loss would have happened had the warranty been carried out to the letter.); 2 T.J. Schoenbaum, Admiralty and Maritime Law § 19-15 (4th ed.2008) (noting that while courts tend to differ on whether the rule is a function of state law or federal law, most courts agree that in a maritime insurance contract, [i]f the warranty is breached, the insurer is discharged). Given this well-established general rule, in our view, the question becomes whether Puerto Rico has either clearly stated a contrary rule or demonstrated a strong interest in having a different rule. Only if so, would we address the question of whether this is inherently a local dispute to Puerto Rico. [6] Puerto Rico has done neither. Here, the Puerto Rico legislature has expressed its intent to exclude maritime insurance contracts from its statutory provisions governing the interpretation and construction of insurance contracts. P.R. Laws Ann. tit. 26, § 1101(1). In addition, in twelve other provisions of its Insurance Code, the Puerto Rico legislature has excluded maritime insurance contracts from its insurance regulation. See P.R. Laws Ann. tit. 26, §§ 329(4)(c), 406, 412(4), 414(6), 905(1), 1001(1)(c), 1007a, 1007b, 1101(1), 1119(1)(c), 1202(1)(e), 3701(1), 3803(6). There is no Puerto Rico statute which expressly sets forth an interpretive rule for maritime contracts, much less an interpretive rule which expressly states that in such maritime contracts, a breach of an express promised warranty by the insured does not excuse the insurer from its payment obligations. [7] Moreover, there is no case law from the Puerto Rico Supreme Court supporting such a rule. Nor is it clear as a matter of policy that Puerto Rico law would craft such a rule. It is true that Puerto Rico has some interest in protecting insureds who are residents and that it has adopted an insurance code to do so. But the Puerto Rico legislature has chosen rather emphatically to exclude maritime insurance contracts from the special protections it offers its insureds under its Insurance Code. That choice may well reflect Puerto Rico's desire not to impose special burdens on maritime insurers, who are crucial to the island's commerce, and, in turn, to encourage them to do business in Puerto Rico. See Commercial Union, 190 F.3d at 31-32 (The rule of strict compliance with warranties in marine insurance contracts stems from the recognition that it is peculiarly difficult for marine insurers to assess their risk, such that insurers must rely on the representations and warranties made by insureds regarding their vessels' condition and usage.); 7 Couch on Insurance, supra, § 99:1 (The added strictness [of the rule for maritime insurance contracts] is, in many ways, a consequence of the fact that marine insurers historically have been in a poorer position to ascertain for themselves the true state of affairs.). This interest is served by not imposing more burdensome rules on maritime insurers than are imposed in the majority of jurisdictions. Because Puerto Rico has not stated a contrary rule, we see no reason to apply anything other than the majority rule here: that the insured's breach of a promissory warranty excuses the insurers from payment. We add a final note. This analysis has proceeded by reference to Puerto Rico law, despite an express choice of law clause in the insurance contract which states that if federal law does not apply, then New York law would apply. For reasons we do not understand, counsel for the insurers argued that New York law and Puerto Rico law were essentially equivalent and so consented to the court analyzing the case under Puerto Rico law. The district court suggested that the two laws are very different and that New York law follows the majority rule and would strictly enforce the warranty but Puerto Rico law would not. In light of the concession by counsel for the insurers, the court analyzed the matter under Puerto Rico law. We are not certain that counsel, as a matter of litigation strategy, may vary the express terms of a choice of law clause. The issue has not been briefed to us. The concession greatly complicated this litigation. We agree with the district court that under New York law, the insured's breach excuses the insurer from performance. See Commercial Union, 190 F.3d at 32 (noting that New York law requires strict compliance with warranties in marine insurance contracts). This fact demonstrates that there is no unfairness to the insured here from the result. The insured were on notice that they would face strict compliance with the warranty. We reverse and remand to the district court for entry of summary judgment for the insurers. No costs are awarded.