Opinion ID: 765983
Heading Depth: 3
Heading Rank: 1

Heading: Whether the Tow Endorsement Is a Warranty

Text: 15 We agree with Commercial Union that the Tow Endorsement constitutes a warranty by Flagship Marine, rather than an exclusion from coverage, the significance of which we address in a moment. The district court did not address whether the Tow Endorsement constituted a warranty or an exclusion. 16 Although, at first glance, the Tow Endorsement does not appear to be a warranty, a closer inspection of its contents, read in the context of the contract in its entirety, leads to the conclusion that it is a warranty whereby Flagship Marine promised to limit its towing activities to the towing of yachts less than 50 feet in length. For example, the Tow Endorsement appears in a section of the policy that begins with the header [t]he following Warranties are added to and made part of [the policy]. Although the sub-section we are concerned with does not itself begin with the signal [w]arranted that, it directly follows five sub-sections that do begin with these words, and like the five previous sub-sections, it is indented under the above-quoted header. Moreover, the policy elsewhere provides that the Trading Warranty supporting the policy, which we infer reflects Flagship Marine's representation of its business activities to the insurer, is as per Tow Endorsement. These textual phrases and cues, in our view, signify that the Tow Endorsement is a warranty. 17 This conclusion is significant because of the special status that warranties hold under the law of insurance contracts, and especially the law of maritime insurance contracts. A warranty is a promise by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. Leslie J. Buglass, Marine Insurance & General Average in the United States 27 (2d ed. 1981) (quoting Sect. 33(1) of the English Marine Insurance Act of 1906, a traditional source of shared Anglo-American maritime law). A warranty, whether express or implied, stands in contrast to an exclusion, which does not represent a promise on the part of the insured, but merely define[s] the coverage limits . . . [by] clarify[ing] and defin[ing] the types of events an insurer does not intend to cover. David D. Hallock, Jr., Recent Developments in Marine Hull Insurance: Charting a Course Through the Coastal States of the Fourth, Fifth, Ninth, and Eleventh Circuits, 10 U.S.F. Mar. L.J. 277, 301 (1998). 18 New York's Insurance Law defines a warranty as 19 any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer's liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract. 20 N.Y. Ins. L. § 3106(a). As a general matter, warranties represent a promise by the insured to do or not to do some thing that the insurer considers significant to its risk of liability under an insurance contract. 21 In all areas of insurance other than maritime insurance, an insured's breach of warranty does not avoid an insurance contract or defeat recovery thereunder unless such breach materially increases the risk of loss, damage, or injury within the coverage of the contract. Id. § 3106(b). In other words, if an insured breaches a warranty that is collateral to the risk that is the primary concern of the contract, the insured will not be precluded from recovery. This is generally not the rule in maritime insurance contracts. 22 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 Buglass at 27-28, 34; Patrick J.S. Griggs, Coverage, Warranties, Concealment, Disclosures, Exclusions, Misrepresentations, and Bad Faith, 66 Tul. L. Rev. 423, 431-32 (1991). 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. See O'Connor Transp. Co. v. Glens Falls Ins. Co., 189 N.Y.S. 612, 614 (2d Dep't 1921), aff'd, 233 N.Y. 659 (1922); see also In re Balfour MacLaine Int'l Ltd., 85 F.3d 68, 80-81 (2d Cir. 1996) (discussing maritime doctrine of uberrimae fidei, or utmost good faith, which requires party seeking insurance to disclose all circumstances known to it which materially affect the risk); Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d Cir. 1986) (same). 23 New York's Insurance Law, for example, specifically carves out a maritime exception from its general rule regarding breach of warranty. See N.Y. Ins. L. § 3106(c) (This section [stating that breach of collateral warranties shall not preclude recovery] shall not affect the express or implied warranties under a contract of marine insurance.); Levine v. Aetna Ins. Co., 139 F.2d 217, 218 (2d Cir. 1943) (per curiam) (interpreting predecessor statute to N.Y. Ins. L. § 3106(c) and holding that [c]ompliance with the warranty was a condition precedent to liability [under the contract of marine insurance] and afforded a complete defense irrespective of any question of causation); Advani Enters., Inc. v. Underwriters at Lloyds, 962 F. Supp. 415, 419-20 (S.D.N.Y. 1997), vacated on other grounds, 140 F.3d 157 (2d Cir. 1998) (New York Ins. L. § 3106, like federal rule, requires strict compliance with warranties in marine insurance contracts). 24 Florida also treats maritime insurance contracts differently than it does other insurance contracts. See FL ST § 627.409(2) (setting forth distinct approach to marine insurance contracts). However, unlike New York and the majority of states, Florida does not require strict compliance with all warranties, but it does preclude recovery where the breach or violation increased the hazard by any means within the control of the insured. Id.; see Hallock, 10 U.S.F. Mar. L.J. at 303 (noting that Florida, Texas, Hawaii, and Washington, unlike the majority of states, require that the insurer demonstrate a causal connection between a breach of warranty and the loss in order to avoid coverage). This rule was designed to prevent the insurer from avoiding coverage on a technical omission playing no part in the loss. Windward Traders, Ltd. v. Fred S. James & Co. of New York, Inc., 855 F.2d 814, 818 (11th Cir. 1988) (quoting Pickett v. Woods, 404 So.2d 1152, 1153 (Fla. App. 1981)). 25 Under the Florida rule, recovery is barred if the breach increased the potential hazard or risk of loss over and above that which [the insurer] had agreed to insure . . . [and] is not a mere technical violation of the policy but significantly alters the risk of loss [the insurer] would be called on to bear. Fireman's Fund Ins. Co. v. Cox, 742 F. Supp. 609, 611 (M.D. Fla.), aff'd, 892 F.2d 87 (11th Cir. 1989). Florida thus treats warranties made pursuant to a maritime insurance contract the way New York treats warranties outside of the marine context - i.e., the insurer is relieved of liability only if the breach results in an increase in the risk assumed by the insurer. See N.Y. Ins. L. § 3106(b).