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The Argument for Utmost Good Faith in Property Insurance

Texas Law360
December 10, 2015

By Jennifer L. Gibbs
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The term “bad faith” is commonly understood as a breach of the implied duty of good faith and fair dealing recognized in insurance contracts due to the “special relationship” between an insured and an insurer. Breach of this common law duty, although based in contract, is recognized as a tort under Texas law. Unfortunately, the implied duty of good faith and fair dealing is not reciprocal.

However, there is another “good faith” doctrine to be aware of. The doctrine of uberrimae fidei, or “utmost good faith.” As set forth below, this heightened duty — which goes beyond the duty of disclosure — may be necessary given the difficulty in proving the insured had an “intent to deceive” when providing false statements on an insurance application. Uberrimae fidei’s harsh penalty of voiding the policy should also deter insureds from withholding information from an insurance carrier or carelessly completing an insurance application.

Uberrimae Fidei Defined

Uberrimae fidei means roughly "utmost good faith." See Black's Law Dictionary 1754 (10th ed. 2014). Under this doctrine, the insured is required "to disclose to the insurer all known circumstances that materially affect the insurer’s risk, the default of which ... renders the insurance contract voidable by the insurer." Windsor Mount Joy Mutual Insurance Co. v. Giragosian, 57 F.3d 50, 54-55 (1st Cir. 1995). Notably, the insured “must make ‘full disclosure of all material facts of which the insured has, or ought to have, knowledge ... even though no inquiry be made.’” Grande v. St. Paul Fire & Marine Insurance Co., 436 F.3d 277, 283 (1st Cir. 2006) (citing 7 Russ & Segalla, Couch on Insurance § 99:2 (3d ed.1997)).

Uberrimae fidei was first recognized by the United States Supreme Court in 1828 in McLanahan v. Universal Insurance Co., 26 U.S. 170 (1828). In adopting the English rule of uberrimae fidei, the court found that even absent intentional fraud, “the underwriter has a right to disclosure of all material facts, which it was in the power of the party to communicate by ordinary means; and the omission is fatal to the insurance.” Id. at 185-86.

Similarly, in Sun Mutual Insurance Co. v. Ocean Insurance Co., 78 U.S. 1 (1870), the Supreme Court held that the duty of utmost good faith imposed a strict burden on the insured, stating:

It is the duty of the assured to place the underwriter in the same position as himself; given the same means and opportunity of judging the value of the risk; and when any circumstances withheld, however slight and immaterial it may have seemed to himself, that, if disclosed, would probably influence the terms of the insurance, that concealment vitiates the policy. Id. at 10-11.

The rationale behind this doctrine ostensibly rests on the unique circumstances of maritime insurance in which the insurer may have less than ordinary opportunities to inspect and verify the risk insured. Grande, 436 F.3d at 283.

Currently, most states recognize the doctrine of utmost good faith in only very limited circumstances such as marine insurance and in reinsurance relationships. A small minority of states have recognized that the principle of utmost good faith may apply in insurance relationships other than marine insurance, in the context of a policyholder’s responsibility to disclose material facts to an insurer when applying for insurance. See., e.g., First American Title Insurance Co. v. Lawson, 798 A.2d 661, 669 (App.Div.2002)(finding that in New Jersey, “ [c]ontracts of insurance are contracts of utmost good faith and the applicant therefor is bound to deal fairly with the insurer in the disclosure of facts material to the risk.”)(internal citations omitted).

Does Texas Recognize the Duty of Utmost Good Faith?

Texas does not recognize the doctrine of uberrimae fidei, but does permit an insurer to deny a claim or cancel a policy on the basis of the insured's misrepresentation (including an insured's failure to advise the insurer of the changes in his prior answers to an insurance application) if the insurer pleads and proves, among other things, the insured's intent to deceive in making the representation at the time it was made. Mayes v. Massachusetts Mutual Life Insurance Co., 608 S.W.2d 612, 616 (Tex. 1980). An insured's false statements which are made because of negligence, mistake and/or carelessness are not sufficient to invalidate an insurance policy on the basis of an insured's misrepresentation of a material fact. Adams v. John Hancock Mutual Life Insurance Co., 797 F.Supp. 563, 566 (W.D. Tex. 1992).

As set forth below, the key difference between uberrimae fidei and Texas law is the “intent to deceive” requirement — a difference which is likely outcome determinative in most instances.

For example, in Albany Insurance Co. v. Anh Thi Kieu, 927 F.2d 882, 885 (5th Cir. 1991), Anh Thi Kieu, a Vietnamese immigrant residing in Texas, seeking insurance coverage for her shrimping vessel, submitted an application to Albany Insurance Co. However, the application contained a number of inaccuracies, including representations (1) that Anh Thi Kieu regularly operated the shrimping vessel as captain, (2) that the vessel had sustained no damages in the last five years and (3) that the purchase price of the vessel was $110,000. In truth, Anh Thi Kieu purchased the shrimping vessel for $30,000 and assembled an independent crew to guide the vessel in fishing and shrimping operations off the coast of Port Arthur, Texas. In November, 1988, the shrimping vessel sustained damage and Ahn Thi Kieu submitted a claim to Albany Insurance. After Albany investigated and learned of the misrepresentations, Albany filed a declaratory judgment action. In concluding that Texas law, rather than the federal maritime law applied, the court held that the insurer failed to prove that the insured intended to deceive or defraud Albany and found that the negligence or carelessness of the insured in completing the application of insurance would not support the invalidation of an insurance policy. Id. at 892.

Conversely, in Marine Insurance Co. v. Cron, (S.D. Tex. Oct. 6, 2014), the insured purchased a yacht at auction for $65,000 and purportedly began a complete overhaul of the vessel. The insured then sought to refinance the vessel, but the lender required insurance covering the yacht. The insurance application at issue included spaces for “market value” and “purchase price” — both of which the insured completed with “$300,000.” Just over a year after the marine insurance policy became effective, the yacht caught fire while in drydock in Dickenson, Texas, — resulting in a total loss. The insurance carrier filed a declaratory judgment action, seeking to void the policy due to the misrepresentation on the application concerning the purchase price. In applying New York’s uberrimae fidei doctrine, the court concluded that the purchase price was a fact material to the risk and the insurer was entitled to void the policy based on the insured’s material misrepresentation. Id. at *4.

Conclusion

Despite the fact that the insured property owner is in the best position to know of the risks and exposures of its own property, Texas law regarding misrepresentations is significantly less stringent than the duty of utmost good faith. And although the common law implied duty of good faith and fair dealing is premised on the purported “unequal bargaining power” between the parties — the ability of the insured to either incompletely or untruthfully answer an insurance application with no recourse unless the carrier proves an intent to deceive is inequitable from the carrier’s perspective. It should be worth considering whether the pendulum of good faith should swing in the other direction and insureds should be held to the high standard of utmost good faith, or uberrimae fidei.

—By Jennifer Gibbs, Zelle Hofmann Voelbel & Mason LLP

Jennifer Gibbs is a senior associate in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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