The law governing marine insurance in the United States has long been a source of considerable confusion. And while there once existed a set of clear principles applicable in such cases, the Supreme Court has long since muddyed the waters with its infamous decision in Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 US 310 (1955). This case, involving a fire on a houseboat on an inland man-made lake on the Texas-Oklahoma border, set the “litmus test” for when maritime law should govern and when courts should instead turn to the state law to interpret marine insurance contracts. .
Faced with the question of whether an insured’s policy should be voided for breach of policy warranties where the insured has made misrepresentations in the application that bear no relation to the actual risk or loss claimed, the Supreme Court in Wilburn boat concluded that “[w]Whatever the origin of the “literal execution” rule, we think it is clear that it has not been judicially established as part of the body of Federal Admiralty Law in this country. . Because there was no “established federal admiralty rule” governing these safeguards, the Supreme Court ruled that it should look instead to state law, which in this case contained a provision that protected the insured against such “immaterial” breaches of warranty.
The problem with Wilburn Boat
It has often been said that Wilburn boat is the poster child of the adage that hard facts make bad law, and many have wondered why the Supreme Court used a case involving a houseboat on an inland lake to establish a general rule applicable to all marine insurance policies. Certainly, the rule enunciated by the Supreme Court is much easier to state than to apply: “(1) Is there a judicially established federal admiralty rule governing these warranties? (2) If not, should we create one? ” Since Wilburn Boat, the lower courts have struggled over the past 65 years to try to develop a consistent interpretation of which “rules” are enshrined in federal Admiralty law and which are not.
At the heart of much of these squabbles appears to be the same concern that troubled the Supreme Court in Wilburn boat: Is it really fair to allow an insurer to avoid its obligations under an insurance policy when the insured has paid its premiums and suffers an otherwise covered loss, but has made inaccuracies to the insurer that do not really relate to risk? (This dilemma does not exist in cases where the misrepresentation is material – here maritime law and state law would generally agree that the insured should not be entitled to recover.)
Certainly, historically, there were good reasons for such a rule: the insurer was being asked to assume a risk by insuring a ship which might be on the other side of the world, with no practical means of inspecting or to survey the ship before agreeing to assume the risk. The strict application of guarantees, coupled with the overriding principle of uberrimae fidei (the utmost good faith), that a policy may be canceled where the insured has failed to disclose all facts which may be relevant to the risk insured, were the way to induce the insurer to act quickly in issuing police while making sure she only took the risk he intended to take, and nothing more.
But most states have avoided these strict rules and adopted various “anti-technical” provisions designed to protect “innocent” policyholders from the shocking surprise of having an insurer deny coverage for policy violations that seem insignificant to risk or loss. Thus, courts, when faced with the question of whether the strict warranty rules of maritime law should override these state law protections, are often in conflict, with the result that many cases of this type result in twisted or seemingly inconsistent decisions.
This problem is well illustrated in the recent Eleventh Circuit decision in Travelers Property Casualty Company v Ocean Reef Charters, LLC., 996 F.3d 1161 (11th Cir. 2021). There the insured, who owned a 92ft yacht, guaranteed in the policy that he would employ a professional captain and crew. A hurricane struck at a time when the yacht was unmanned, and the yacht sank at the dock during the storm after being breached by an exposed dock piling. The insurer sued for a declaratory judgment that it was not liable under the policy because the insured breached the warranties of the master and crew. The District Court found that there was established maritime law strictly enforcing these warranties and entered judgment in favor of the insured.
The eleventh reverse circuit. In its decision, the court observed:
A problem with Wilburn Boat, as commentators have pointed out, is that it rests on a faulty premise. By the time the case went to trial, all of the major admiralty appeals courts in the United States had long accepted the literal execution rule. This rule derived from English common law and applied to all express warranties in maritime contracts. [Internal quotation marks and citations omitted.]
The court further noted another problem with Wilburn boat: it “undermines the uniformity of admiralty law”.
The Eleventh Circuit, in trying to find a solution to this problem, made it clear what it would do if it could: “If we were writing on a blank slate, we would consider that there should be a uniform maritime rule regarding the effect of a breach of an express warranty in a marine insurance policy – and from there to determine what that uniform rule should be. But of course there is no clean slate, and so ultimately the Eleventh Circuit resolved the “dilemma” by identifying only narrow categories of warranties, relating to commercial limits and seaworthiness of the vessel, which were explicitly recognized as part of entrenched federal maritime law. With respect to the captain’s and crew’s warranties at issue, on the other hand, the court found that no entrenched maritime rule existed; therefore, state law, with its anti-technicality provision, should apply. It seems inevitable that this decision, like Wilburn Boat, was drafted more to achieve a particular result than to set out any clear direction for future courts.
The rule of maritime law of strict construction is originally derived from English law, which historically required literal enforcement of maritime warranties. Uniformity with English law, as far as possible, has always been a goal of American courts in maritime cases. That’s why it’s particularly notable that England enacted the United Kingdom Insurance Act 2015, which drops termination as an automatic remedy for breach of warranty. Instead, an insured who breaches a warranty and fails to make good can still recover if he “shows that breach of the clause could not have increased the risk of loss which actually occurred in the circumstances in which it occurred”. Identifier. in § 11(3). As the Eleventh Circuit observed:
If there are still “special reasons to keep in harmony with the marine insurance laws of England, the great domain of this business”, Queen Ins. Co. of America vs. Globe & Rutgers Fire Ins. Co., 263 US 487, 493, 44 S.Ct. 175, 68 L.Ed. 402 (1924), it will be interesting to see what effect the Act has on American maritime law (and how Wilburn boat is viewed).
One of the ways to solve this problem once and for all would be to pass a federal law; Congress could clearly enact some form of federal marine insurance law to codify how marine insurance contracts should be interpreted. However, no one should hold their breath waiting for this to happen; the chances of Congress addressing this issue in legislation at any time in the foreseeable future are virtually nil.
Another way would be for the Supreme Court to reconsider Wilburn boat. The eleventh circuit of Travelers practically begged the Supreme Court to take up their case: “Maybe, just maybe, this case will be tempting enough for the Supreme Court to step in and tell us what they think about it. Wilburn Boat today. As they say, “hope is eternal….” This result is perhaps a little more probable, if not in Travelers then in another case on the road. But what would we want the Supreme Court to actually do?
One possible option would be for the Supreme Court to rule definitively that strict enforcement of maritime safeguards is, after all, an entrenched federal maritime rule, so that federal maritime law should always prevail over state law on this issue. While this would have the laudable effect of restoring uniformity and clarity to federal maritime law, it would also constitute a complete reversal of Wilburn boat. It would also put US maritime law even further out of step with state law and, now, with English law.
Alternatively, the Supreme Court could conclude that after all, the general rule of “strict enforcement” of warranties was never an entrenched federal maritime rule, so state law should still control this issue. But the Supreme Court would have to engage in a fairly fanciful revisionism to plausibly reach that conclusion.
A third possible option could be for the Supreme Court to conclude that federal maritime law has evolved and that, while strict enforcement of safeguards was once entrenched federal maritime rule, courts and legislators – in the United States and England – have come to recognize the weaknesses of this strict rule, so that it should no longer be treated as an established maritime rule. This could be a plausible “exit” for the Supreme Court and, in some respects, may be the most accurate explanation for the recurring reluctance of courts (including the Supreme Court itself) to strictly enforce maritime safeguards in some case. Yet that leaves the problem that insurance law varies from state to state, so uniformity would remain elusive.
Whatever the solution, the Supreme Court must first decide to take up a case, which can still take some time. In the meantime, insurers and insureds must guess which construction rules will apply to their policies, which is never a good thing for the maritime trade.