Opinion ID: 594404
Heading Depth: 1
Heading Rank: 4

Heading: implied warranty of seaworthiness at the inception of a

Text: TIME POLICY 43 On appeal--as an independent basis for affirming the district court's summary judgment--Occidental contends that, under the undisputed facts, it did not breach any warranty of seaworthiness implied at the inception of a time hull policy. Occidental argues specifically that the only implied warranty relating to seaworthiness under a time hull policy, is that the insured will not knowingly send the vessel to sea in an unseaworthy condition. Because there was no finding in the first litigation that it knowingly sent the vessel to sea in an unseaworthy condition, Occidental reasons, Wausau's cross-claim is barred. 44 The district court did not expressly grant summary judgment for Occidental on this ground, but it did conclude that a breach of the warranty of seaworthiness at the inception of an insurance policy will void the policy only if the shipowner has prior knowledge of the unseaworthy condition. In reaching this conclusion, the district court recognized that several decisions of this court purported to embrace an absolute warranty of seaworthiness in a time hull policy at the moment of attachment. The district court nonetheless reasoned that such cases were inapplicable. 45 We think that the district court misperceives our prior decisions. As discussed below, federal maritime law 9 implies two warranties of seaworthiness in a time hull insurance policy. The first of these warranties--the implied warranty of seaworthiness at the inception of the policy--is absolute in nature. The second one, which applies only after the policy attaches, is a modified, negative warranty, under which the insured promises not to knowingly send a vessel to sea in an unseaworthy condition. Although the second implied warranty of seaworthiness requires knowledge on the part of the insured, the first does not. The insured breaches this first warranty if the vessel is in fact unseaworthy when the policy becomes effective. Accordingly, Occidental is not entitled to summary judgment on the ground that, because it had no knowledge of the vessel's unseaworthiness, it did not breach the warranty of seaworthiness implied at the inception of the time hull policy. 46
47 The implied warranties of seaworthiness in time hull policies are unique to American maritime law. See generally Russell W. Pritchett, The Implied Warranty of Seaworthiness in Time Policies: The American View, 1983 LLOYD'S MAR. & COM.L. 195. According to one commentator, [t]he present American rule for implied warranties in time policies is a hybrid of the English rules for voyage and time policies. Derek P. Langhauser, Note, Implied Warranties of Seaworthiness: Applying the Knowing Neglect Standard in Time Hull Insurance Policies, 39 ME.L.REV. 443, 449 (1987). Thus, before describing the two warranties of seaworthiness implied in time hull policies under the American rule, we examine the sources of those warranties. 48
49 It is well-settled under maritime law in England and America that there is an implied warranty of seaworthiness in voyage insurance policies. 10 In The Caledonia, 157 U.S. 124, 131, 15 S.Ct. 537, 540, 39 L.Ed. 644 (1895), the Supreme Court stated: 50 Every person who proposes to any insurers to insure his ship against sea perils, during a certain voyage, impliedly warrants that his ship is, in every respect, in a suitable condition to proceed and continue on that voyage, and to encounter all common perils and dangers with safety.    This warranty is strictly a condition precedent to the obligation of insurance; if it be not performed, the policy does not attach; and, if this condition be broken, at the inception of the risk, in any way whatever and from any cause whatever, there is no contract of insurance, the policy being wholly void. 51 Id. at 131, 15 S.Ct. at 140 (quoting PARSONS, 91 MAR. INS. 367). Similarly in England, section 39(1) of the Marine Insurance Act of 1906 provides: In a voyage policy there is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured. 52 The implied warranty of seaworthiness in a voyage policy is absolute in nature. See 1 ALEX L. PARKS, THE LAW AND PRACTICE OF MARINE INSURANCE AND AVERAGE 258 (1987) (The cases are legion establishing that in a voyage policy, the law implies a warranty on the part of the assured which amounts to a positive undertaking--an absolute condition--that the vessel at the commencement of the voyage is seaworthy). The word warranty in this context, according to Professors Gilmore and Black, has its most drastic meaning. GRANT GILMORE & CHARLES L. BLACK, THE LAW OF ADMIRALTY § 2-6, at 63 (2d ed. 1975). If the implied warranty of seaworthiness in a voyage policy is breached--that is, if the vessel is not in fact seaworthy at the beginning of the voyage or at the inception of the risk--then no recovery can be had on the policy. This result does not depend on the knowledge or fault of the assured. Id. (citing Richelieu & Ontario Nav. Co. v. Boston Marine Ins. Co., 136 U.S. 408, 429, 10 S.Ct. 934, 940, 34 L.Ed. 398 (1890), and Bullard v. Roger Williams Ins. Co., 1 Curt. 148, 4 Fed.Cas. 643 (C.C.D.R.I.1852) (No. 2122)). Nor does this result depend on the subsequent loss being directly attributable to the lack of seaworthiness. See Gregoire v. Underwriters at Lloyds, 559 F.Supp. 596, 598 (D.Alaska 1982) (citing GILMORE & BLACK, supra, at § 2-6). 53 The absolute nature of this implied warranty of seaworthiness is grounded in a public policy choice. The warranty is intended to take away all temptation to expose life and property to the dangers of the seas in vessels not fitted to encounter or avoid them. The Caledonia, 157 U.S. at 134, 15 S.Ct. at 541 (quoting the jury charge given in Bullard v. Insurance Co.). It is premised on the notion that, because the insured is best able to foresee the nature, extent, and necessities of a specific voyage, the insured is also best able to have the vessel adequately prepared for that voyage. See Langhauser, supra, at 449 (citing Hoxie v. Pacific Mut. Ins. Co., 89 Mass. (7 Allen) 211, 225 (1863), and Capen v. Washington Ins. Co., 66 Mass. (12 Cush.) 517, 536 (1853)). In short, the absolute warranty implied in every voyage insurance policies represents an early attempt by the law to place the risk of loss on the cheapest cost avoider. See also GILMORE & BLACK, supra, § 2-6, at 65 (absolute nature of the implied warranty of seaworthiness in a voyage policy doubtless had a wholesome effect on the discipline of the shipping industry in early, less well-policed days); cf. GUIDO CALABRESI, THE COSTS OF ACCIDENTS (1970). 54
55 Under English law, there is no implied warranty of seaworthiness in a time policy; however, the insurer can escape liability in certain limited circumstances. Section 39(5) of the Marine Insurance Act of 1906 provides: 56 In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness. 57 The English rule regarding time policies can thus be separated into two parts. Under the first part of the rule, there is no absolute warranty that tracks the warranty of seaworthiness in voyage insurance policies. A vessel's condition of unseaworthiness cannot void a time insurance policy. Under the second part of the English rule, however, an insurer may be able to disclaim liability for a particular loss if it can demonstrate that (1) the vessel was unseaworthy, (2) the insured was privy to vessel's condition when it was sent to sea, and (3) the unseaworthy condition proximately caused the particular loss. See WILLIAM GOW, MARINE INSURANCE 272 (4th ed. 1909). 58 The rationale behind the English rule regarding time policies, as embodied in section 39(5) of the Marine Insurance Act of 1906, is somewhat unclear. One commentator views the act as merely declaring the common law and expressing the gist of a great many decisions. 1 PARKS, supra, at 264. Others view the English rule as somehow representing equitable considerations. See GOW, supra, at 272 (reasoning that, because a time policy could commence when a vessel is at sea--beyond the knowledge and control of her owner--insistence on the warranty in such a case might become inequitable); see also Pritchett, supra, at 197 (tracing English refusal to imply warranty of seaworthiness in time policies to Gibson v. Small, 4 H.L.Cas. 352 (1853), a case in which the shipowner obtained a time policy while the vessel was on a voyage). Finally, still another commentator considers section 39(5) of the Marine Insurance Act of 1906 to represent a legislative compromise between the arguments advanced by shipowners against implying an absolute warranty in time policies and the arguments advanced by insurers in favor of such a warranty. See Langhauser, supra, at 449-50. 59
60 The American rule regarding the implied warranties of seaworthiness in time insurance policies is set forth in our decision in Saskatchewan Government Insurance Office v. Spot Pack, Inc., 242 F.2d 385 (5th Cir.1957). After describing the English rule regarding the implied warranty of seaworthiness in time hull policies, we stated: 61 But the American Rule, in a rare departure from a determined course of parallel uniformity, ... implies for a time policy, as does the English Rule as of the commencement of the voyage for voyage policies, ... a warranty of seaworthiness as of the very moment of attachment of the insurance. And unlike the English Rule which limits the warranty to the commencement of the voyage, the American Rule takes it somewhat further to extend, in point of time, a sort of negative, modified warranty. It is not that the vessel shall continue absolutely to be kept in a seaworthy condition, or even that she be so at the inception of each voyage, or before departure from each port during the policy term. It is, rather, stated in the negative that the Owner, from bad faith or neglect, will not knowingly permit the vessel to break ground in an unseaworthy condition. And, unlike a breach of a warranty of continuing seaworthiness, express or implied, which voids the policy altogether, the consequence of a violation of this 'negative' burden is merely a denial of liability for loss or damage caused proximately by such unseaworthiness. 62 Id. at 388 (citations omitted). In this passage, Judge Brown recognized two implied warranties of seaworthiness in a time policy. The first one--a warranty of seaworthiness as of the very moment of attachment of the insurance--is akin to the absolute warranty of seaworthiness implied in voyage policies under the English Rule. The second one, which has been labelled a modified, negative warranty, 11 looks very much like the second part of the English rule regarding the implied warranty of seaworthiness in a time policy. That is, under the second warranty, the insured does not absolutely warrant that the vessel shall continue to be seaworthy for the duration of the policy, but only that he or she, from bad faith or neglect, will not knowingly permit the vessel to break ground in an unseaworthy condition. 63 Although we described the American rule in Spot Pack as being settled, we recognized that [h]ow this came to be the rule of general acceptance for all Time policies is obscure. 242 F.2d at 388. Commentators were also perplexed by the source of the so-called American rule regarding time policies, and our decision in Spot Pack was criticized as resting on quite slender authority. See GILMORE & BLACK, supra, § 2-6, at 63; see also Pritchett, supra, at 196 (the 'American Rule' is not so well established as its name implies). More recently, a federal district court in Alaska opined that the great majority of the decided cases in this country are consistent with the English Rule, and accordingly rejected the Spot Pack formulation of the American rule. Gregoire v. Underwriters at Lloyds, 559 F.Supp. at 600-01. 64 We are aware of the criticism that has been levelled against our Spot Pack decision; however, we decline to revise our interpretation of history. Since our decision in Spot Pack we have on several occasions reaffirmed our description of the American rule regarding the implied warranties of seaworthiness in time policies. See, e.g., Insurance Co. of North Am. v. Board of Comm'rs. of the Port of New Orleans, 733 F.2d 1161, 1165 (5th Cir.1984); D.J. McDuffie, Inc. v. Old Reliable Fire Ins. Co., 608 F.2d 145, 147 (5th Cir.1979), cert. denied, 449 U.S. 830, 101 S.Ct. 97, 66 L.Ed.2d 35 (1980); Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 983 (5th Cir.1979); Tropical Marine Prods., Inc. v. Birmingham Fire Ins. Co. of Pa., 247 F.2d 116, 119 (5th Cir.1957), cert. denied, 355 U.S. 903, 78 S.Ct. 331, 2 L.Ed.2d 260 (1957). In addition, several other circuits have adopted the Spot Pack description of the American rule. See L & L Marine Serv., Inc. v. Insurance Co. of North Am., 796 F.2d 1032, 1035 (8th Cir.1986), cert. denied, 479 U.S. 1065, 107 S.Ct. 952, 93 L.Ed.2d 1000 (1987); Kilpatrick Marine Piling v. Fireman's Fund Ins. Co., 795 F.2d 940, 945 (11th Cir.1986); see also McAllister Lighterage Line, Inc. v. Insurance Co. of North Am., 244 F.2d 867, 870 (2d Cir.1957) (recognizing, under Supreme Court's decision in Union Ins. Co. of Philadelphia v. Smith, 124 U.S. 405, 8 S.Ct. 534, 31 L.Ed. 497 (1888), that in a term policy of insurance a warranty of seaworthiness arises at the time when the insurance becomes effective), cert. denied, 355 U.S. 872, 78 S.Ct. 123, 2 L.Ed.2d 77 (1957). 12 Finally, we remain convinced that the general principles described in Spot Pack are sufficiently grounded in precedent. See Pritchett, supra, at 198-208. 65 B. Nature of the Implied Warranty of Seaworthiness at the Inception of a Time Policy Under the American Rule 66 This case concerns the precise contours of the first warranty described in our Spot Pack decision. There are at least three unresolved questions about the contours of this warranty. First, does the existence of an implied warranty of seaworthiness at the inception of a time hull policy depend on whether the vessel is at port or at sea when the policy attaches? Second, do principles of causation have any role in determining whether a condition of unseaworthiness at the inception of a time policy precludes recovery under the policy? And third, is the implied warranty of seaworthiness at the inception of a time hull policy absolute in nature--such that it is breached if the vessel is in fact unseaworthy at the time the policy attaches? 67 We need only resolve the last question in this case, because the first two questions are not raised. It is undisputed that, when the policy at issue became effective, the Oxy Producer ITB was at a port of repair and not at sea. Moreover, the first lawsuit established that the unseaworthy condition of OXY Producer ITB at the time the policy attached was the sole cause of the loss of the Oxy Producer. Thus, we need only decide whether a breach of the implied warranty of seaworthiness at the inception of a time hull policy requires knowledge or fault on the part of the insured. 68 We first look to the few cases in which the implied warranty of seaworthiness at the inception of a time policy was at issue. 13 In Gulfstream Cargo, Ltd. v. Reliance Insurance Co., we held that the existing, spectacular unseaworthiness of the vessel--at the moment the time policy was to attach--kept the policy from becoming effective. 409 F.2d at 983. As Occidental points out, however, this holding does not aid our inquiry, because in Gulfstream the insured was charged with knowledge of the vessel's unseaworthy condition. See id. at 976. Similar facts surrounded the condition of unseaworthiness in D.J. McDuffie, Inc. v. Old Reliable Fire Insurance Co., a case in which we affirmed the district court's finding that the insured had breached its implied warranty of seaworthiness at the inception of the time policy. 608 F.2d at 147. In McDuffie, as in Gulfstream, there was evidence that the insured had knowledge of the unseaworthy condition at the inception of the policy. See McDuffie, 608 F.2d at 147 (The [insured's] expert witness testified that one month before the policy was to take effect, he had recommended that [the vessel] be drydocked for critical repairs.); see also McAllister Lighterage Line v. Insurance Co. of North Am., 244 F.2d at 870-71 (holding that unseaworthiness of vessel breached an express as well as the implied warranty of seaworthiness at the inception of time policy). We conclude, therefore, that the cases addressing this warranty do not decide the issue of whether knowledge of the vessel's unseaworthiness or fault on the part of the insured is a prerequisite for finding a breach. 69 We thus turn to our decision in Spot Pack for guidance. There we equated the warranty of seaworthiness implied at the inception of a time hull policy with the warranty of seaworthiness implied in a voyage policy. See 242 F.2d at 388. This latter warranty, according to well-settled precedent, is absolute in nature. As stated in Douglas v. Scougall, 4 Dow. 269, 270: 70 [T]here is nothing in matters of insurance of more importance than the implied warranty that a ship is seaworthy when she sails on the voyage insured.... It is not necessary to inquire whether the owners acted honestly and fairly in the transaction; for it is clear law that, however just and honest the intentions and conduct of the owner may be, if he is mistaken in fact, and the vessel is in fact not seaworthy, the underwriter is not liable. 71 (emphasis added), quoted in The Caledonia, 157 U.S. 124, 133-34, 15 S.Ct. 537, 541, 39 L.Ed. 644 (1895). Accordingly, by tracing the implied warranty of seaworthiness at the inception of a time insurance policy to its root--the implied warranty in voyage policies--we conclude that the warranty is absolute in nature, requiring neither knowledge nor fault on the part of the insured. 72 The sound reasons supporting an absolute, implied warranty of seaworthiness at the inception of a voyage policy also support such a warranty in the context of a time policy--at least where the ship is in a port of repair at the time the policy attaches. It is the insured, not the insurer, who is best able to foresee the intended use of the vessel during the term of a time policy. Consequently, it is the insured, not the insurer, who is in the best position to see that the vessel is adequately prepared for its intended use. Where, as in this case, a time policy attaches while the vessel is in a port of repair, we can discern no reason for relaxing the strict standard embodied in the absolute warranty of seaworthiness implied in a voyage policy. To require knowledge or fault on the part of the insured, in addition to a finding that the vessel was unseaworthy at the inception of the policy, 14 we think, would discourage the owners of vessels from taking steps to assure that the vessel is adequately prepared for its intended use. 73 In sum, we hold that the warranty of seaworthiness implied at the inception of a time hull policy is absolute in nature. The insurer need not demonstrate that the insured had knowledge of the unseaworthy condition nor that the insured was somehow at fault in not discovering the unseaworthy condition. It is enough to discharge the insurer, as noted in Scougall, if the vessel is in fact not seaworthy at the inception of the policy. We need not and do not decide, however, whether (a) the absolute warranty arises if the vessel is at sea at the inception of the time policy, or (b) an insurer may claim benefit of the absolute warranty of seaworthiness implied at the inception of the risk if the condition of unseaworthiness does not cause the particular loss. 74 C. Appropriateness of Summary Judgment on the Basis of Occidental's Compliance with the Implied Warranty of Seaworthiness at the Inception of a Time Policy 75 The undisputed facts of the case demonstrate that Occidental was not entitled to summary judgment on the ground that it complied with the warranty of seaworthiness at the inception of the policy. In the first lawsuit, the district court found that the Oxy Producer ITB was improperly mated and unseaworthy on delivery to Occidental. The district court also found that this unseaworthy condition was the sole cause of the sinking of the Oxy Producer. Absent some waiver of the implied warranty of seaworthiness at the inception of the policy, these findings, which were affirmed on appeal, demonstrate as a matter of law that Occidental did not comply with this absolute warranty. Summary judgment in favor of Occidental on this ground would be wholly inappropriate. 76