A muddle in marine insurance

THE laws governing marine insurance in the United States have been in a muddle since 1955, in which year the Supreme Court handed down its decision in Wilburn Boat Company v Fireman's Fund (348 US 310). The facts of the case were simple.

Fireman's Fund insured Wilburn's houseboat, which was being used on Lake Texoma, an artificial lake between Texas and Oklahoma. The marine policy contained an express warranty that the boat would be used only for private pleasure purposes. In fact, Wilburn used the boat for the commercial carriage of passengers. While moored on the lake, the boat was destroyed by fire. Fireman's Fund denied liability because of the breach of warranty, and this position was sustained by the federal district court and the appeal court, upholding the well-recognised principal of marine insurance law that a breach of warranty avoids the contract.

Under the laws of Texas, however, breach of warranty is not a defence unless the breach contributed to the loss. The Supreme Court granted certiorari. After reviewing the precedents, the court, in a split decision, concluded that there was no established federal admiralty rule dealing with breach of warranty and, although the court recognised that it was empowered under the constitution to fashion such a rule, it declined to do so, saying, "The whole judicial and legislative history of insurance regulation in the United States warns us against the judicial creation of admiralty rules to govern marine policy terms and warranties."

The court therefore reversed the lower court and held that Texas law must be applied. In very broad language, the court said that it is for the states to regulate marine insurance, absent established federal admiralty rules on the subject.

The strong dissent castigated the majority for ignoring the long and ancient history of the laws of marine insurance as developed in England, and for destroying uniformity. The dissent said, "If uniformity is needed anywhere, it is needed in marine insurance," and, "Insurers must know the risks they are assuming when they fix their premiums."

The refusal of the court to acknowledge and accept such a basic, long-established principal of marine insurance law as the breach of warranty, or the "literal performance" rule as it is sometimes known, and the refusal even to fashion such a rule on its own (as the court acknowledged it had power to do) has led the lower federal courts to interpret Wilburn Boat as standing for the general proposition that state law governs. Consequently, it is possible to have as many as fifty different results to identical factual disputes arising out of a marine insurance policy, depending on where suit is brought.

"If uniformity is needed anywhere, it is needed in marine insurance."

The admiralty jurisdiction we are addressing here is not dependent upon the location of the accident, as it is in tort litigation, because such jurisdiction is based entirely on the nature of the contract. If it is a marine insurance policy, there is admiralty jurisdiction regardless of the place of the loss.

It is apparent that, with so many possible outcomes, each state being guided by its own rules, the situation has been confusing, if not chaotic. And, to make matters worse, historically the states have generally declined to regulate marine insurance, in recognition of the unique national and international aspects of this form of insurance, concluding that this area is better left to the federal courts and US congress.

Wilburn Boat has therefore left a sort of vacuum, with the result that it is practically impossible to predict the outcome in any particular case.

A very recent example of the kind of problems created is found in the case of Acadia Insurance Company v McNeil (116 Fed 3d 599, 1st Cir 1997). Again, the facts are simple. Acadia insured McNeil's thirteen-foot recreational boat, which was being used on Lake Winnipesaukee, New Hampshire, on August 3, 1995, when McNeil's father, a passenger in the boat, allegedly sustained serious injury. The father sued and Acadia denied liability on the basis of a clause in the policy which excluded coverage for intra-family liability. New Hampshire law, however, provides that, "No liability policy issued or delivered in this state shall contain any exclusion which would preclude coverage for intra-family or intra-spousal claims."

The Court of Appeals found that the policy was a marine insurance contract governed by admiralty law, but then it came up against Wilburn Boat, quoting an oft-repeated authority: "Wilburn Boat has generally been interpreted, in deference to state hegemony over insurance, to discourage the fashioning of new federal law and to favour the application of state law.'" Since the court could find no established admiralty rule on the subject, and since it felt it could not, on its own, develop an appropriate rule, it certified the question to the Supreme Court of New Hampshire to determine whether or not the statute in question applied to marine insurance policies.

Wilburn Boat has been criticised by the maritime community since the day it was decided. One leading authority calls the decision "nightmarish" and says, "The implication of Wilburn would appear to be that marine insurance law as a whole is to be excised from the general maritime law inferentially adopted by the constitution." But Wilburn Boat still stands as the controlling authority on marine insurance in the US. The Maritime Law Association of the United States has been actively attempting to find a solution to the problem. It has participated in several petitions to the Supreme Court involving marine insurance cases which offered the court the opportunity to remedy, or at least ameliorate, the havoc it created in 1955. But the court has declined every invitation.

"Insurers must know the risks they are assuming when they fix their premiums."

The MLA has also drafted a proposed federal statute designed to nullify the effects of Wilburn Boat. It is a simple, single sentence stating, "The interpretation and effect of policies of marine insurance and other insurances of marine risks shall be governed by the general maritime law and statutes of the United States." Yet this proposal has been unsuccessful because, despite every effort, no congressman or senator could be found to sponsor the legislation. And, even if it were to be enacted, a problem would remain because there is very little federal statutory law on the subject and, thanks to Wilburn Boat, there is no body of general maritime law, or at least none has been developed for the last forty-two years.

Recognising the problem, the MLA then prepared a comprehensive study of marine insurance law as it exists in the US, based largely on the British Marine Insurance Act of 1906. Prior to Wilburn Boat, it had been the practice for US courts to look to British law for meaning and definition in the field of marine insurance.

The purpose of the study was to enable the MLA, working closely with industry, to draft statutory language for a United States Maritime Insurance Act. The Marine Insurance Committee of the MLA completed this analysis in 1995 and it has since been published in MLA Document No. 719. To date, however, congress has expressed little or no interest in such legislation. This is primarily because there have been indications of disagreement within the marine insurance industry itself, and experience shows that congress will not act until all conflicting interests have approved draft legislation. Only then will the bill be open to debate in congress with any chance of success.

Finally, there is always the danger that congress could amend any proposed draft, reflecting the parochial interest of the members. In recent years there has been a strong tendency to include in federal legislation dealing with regulation of various interstate activities such as environmental protection and pollution, a clause expressly reserving to each state the right to impose its own remedies should it choose to do so. The MLA Marine Insurance Study Group is now exploring the possibility of a non-legislative solution through the development of a so-called Restatement of Marine Insurance in conjunction with the American Law Institute. The ALI is a non-governmental organisation of about 3,500 lawyers, law professors and judges dedicated to the reform and improvement of the law. It has completed numerous restatements on various aspects of the law, including contracts, torts, property and others.

The MLA is currently engaged in discussions with the ALI about the feasibility of a programme in maritime law. This project, if it can be accomplished, will be a welcome source of reference to both the federal and state courts in dealing with problems arising out of marine insurance. US courts readily quote and rely on the authority of ALI restatements in other fields, and it is assumed that the same deference will be shown to a restatement on marine insurance. This could effectively fill the vacuum left by Wilburn Boat, resulting in uniform and predictable interpretations of marine insurance policies.