Opinion ID: 579835
Heading Depth: 2
Heading Rank: 2

Heading: Duty to Disclose Material Facts

Text: 14 In a marine insurance contract, the parties are bound to exercise the utmost good faith, or uberrimae fidei. Pacific Queen Fisheries v. Symes, 307 F.2d 700, 708 (9th Cir.1962) (quoting the Marine Insurance Act of 1906), cert. denied, 372 U.S. 907 (1963); see also Alex L. Parks, 1 The Law and Practice of Marine Insurance and Average 216 (1987). 15 California law recognizes that the duty of an insured under a marine insurance contract is different from what it is under other types of insurance. Washington Int'l Ins. Co. v. Mellone, 773 F.Supp. 189, 191 (C.D.Cal.1990). According to section 1900 of the California Insurance Code: 16 In marine insurance each party is bound to communicate, in addition to what is required in the case of other insurance: 17 (a) All the information he possesses and which is material to the risk, except such as is exempt from such communication in the case of other insurance. 18 (b) The exact and whole truth in relation to all matters that he represents or, upon inquiry assumes to disclose. 19 The insured is bound, even if not asked, to reveal every fact within his/her knowledge that is material to the risk. Hartford Ins. Co. v. Garvey, 1989 A.M.C. 652, 658 (N.D.Cal.1988). A marine insurance policy is void ab initio when the insured fails to disclose material increases in the risks insured. Pacific Fisheries, 307 F.2d at 706, 711; Reliance Ins. Co. v. McGrath, 671 F.Supp. 669, 678 (N.D.Cal.1987). The insurer is entitled to rescission if it can show nondisclosure of a fact material to the risk, regardless of intent. Cal.Ins.Code § 1904; Washington Int'l Ins. Co., 773 F.Supp. at 191. An insurer also is entitled to rescission if the insured made an intentional misrepresentation, regardless of materiality. Id. 4 20 To be material, the fact must influence the judgment of a reasonable insurer in fixing the premium, or in determining if it will take the risk. Marine Insurance Act of 1906, § 18(2); see also Cal.Ins.Code § 334 (materiality determined solely by the probable and reasonable influence of the facts upon the party). Materiality is a factual finding reviewed for clear error. Port Lynch, 754 F.Supp. at 822-23. 21
22 Preliminarily, we note that the underwriters argue that the district court applied an incorrect legal standard to determine materiality. 5 We disagree. The district court's Determination discusses the immateriality of Cole's nondisclosures, and nothing there reveals that the court applied an incorrect legal standard. We therefore turn to the specific findings regarding materiality. 23 The court found that the Johnson-Cole agreement was not a typical arms-length transaction, and therefore the purchase price did not adequately reflect the Kingfisher's market value. This finding is not clearly erroneous. The court based the finding on the testimony of Cole, Johnson, and Johnson's son. Johnson, who wanted to retire, was desperate to sell the corporation owning the Kingfisher. Cole, who did not initiate the transaction, believed he was receiving a remarkable deal. Determination at 3. 24 Nor did the court clearly err in finding that Cole's failure to reveal the purchase price was not a material omission. Although a purchase price reflecting fair market value generally is material to an insurer, here the district court found that because the purchase price did not reflect market value it was not material. 25 The underwriters argue the district court clearly erred in finding Cole had no duty to reveal that he unsuccessfully attempted to sell the Kingfisher for $140,000. Again, we disagree. The lead underwriter in the sport fishing department testified that even if Cole had provided such information, it merely would have been noted on the record and it would not have affected either the premium or the decision to insure the vessel. Further, the listed sale price was not necessarily probative of the fair market value of the vessel; Cole testified that he wanted to sell it cheaply and quickly. 26 Hartford Insurance Co. v. Garvey, 1989 A.M.C. 652, cited by the underwriters, is inapposite. In Hartford, the defendant had listed his boat with a brokerage firm with an asking price of $112,500. Id. at 653. It had been surveyed at $125,000. Id. He thereafter sought to insure the boat for $150,000, and then falsely told the insurer the boat had never been surveyed. The court found that the market value of the vessel was no more than $112,500. Id. at 659. The court concluded that Garvey intentionally concealed a material fact regarding the market value of the vessel. 27 Here, the district court could have believed Cole's testimony that he offered the Kingfisher for sale for less than market value. Cole obtained insurance before he put the vessel up for sale. Further, a survey in Cole's possession which was approximately two years old listed the market value at $225,000, exactly the agreed value insured by the underwriters. 28 Finally, the underwriters argue that the lack of proper Coast Guard documentation and the names of all the licensed operators of the ship were material and that Cole failed to reveal this information. The district court, after finding that Cole did not intentionally misrepresent this information, implicitly found that these facts were immaterial to a reasonable insurer in bearing the risk or in setting the premium rate. Closing Argument, at 18 (Reprinted in Excerpts of Record, Tab 134) (I assume that [the lead underwriter] would have said, he should have sent me a report every time the toilet was flushed on the vessel). 29 The district court's findings here are not clearly erroneous. An insurer cannot expect the insured to report to it these relatively minor matters which do not affect the risk assumed.