The Ninth Circuit was asked to reverse the decision of the district court that damage to the dock was covered by the policy because it sank as a result of a typhoon not the lack of a Navy certification.

Guam Industrial Services, Inc. (“Guam Industrial”) owned the dry dock. At the time of the sinking, one of its insurance policies covered damage to the dock. After the dock sank, Guam Industrial filed a claim under each policy. The insurers denied the claims and Guam Industrial brought suit. The district court granted summary judgment for the insurers, finding that the first policy was voidable because Guam Industrial had failed to maintain the warranty on the dock.

Guam Industrial owned and operated a dry dock called the Machinist located in Apra Harbor, Guam. The dry dock sank on January 2, 2011. Guam Industrial had insured the dry dock under two policies: a Hull and Machinery Policy, which was underwritten collectively by Zurich American Insurance Company (“Zurich”) and Starr Indemnity and Liability Company (“Starr”), and an Ocean Marine Policy, which was underwritten by Zurich alone.

The Hull and Machinery Policy covered damage to the dry dock resulting from certain specified “perils” that included lightning, earthquake, pirates, assailing thieves, and various types of accidents and malfunctions. As a condition of coverage, the policy required Guam Industrial to obtain and maintain Navy Certification for the dry dock (“the Navy Certification warranty”). Such certification ensures that the dock has satisfied a certain level of structural integrity. It is the highest standard in the industry.

Guam Industrial never obtained Navy Certification. Instead, Guam Industrial obtained “commercial” certification from a company called Heger Dry Dock, Inc. In October 2010, that commercial certification expired. Heger Dry Dock informed Guam Industrial that it would not renew the certification unless Guam Industrial undertook significant repairs. Guam Industrial then took the dry dock out of commission to conduct these repairs. The dock sank while it was undergoing the repairs.

Guam Industrial then filed a claim under the Hull and Machinery Policy with Zurich and Starr. The insurers denied the claim on the basis of the breach of the requirement to obtain Navy Certification.

The district court granted summary judgment in favor of Zurich and Starr. It concluded that the Hull and Machinery Policy did not provide coverage because Guam Industrial had breached the Navy Certification warranty. The court rejected Guam Industrial's position that Zurich and Starr had to demonstrate that the breach caused the sinking of the dry dock, because applicable law required strict compliance with certification requirements.

Hull and Machinery Policy and the lack of certification

The Hull and Machinery Policy covering damage to the dry dock was underwritten by both Zurich and Starr, and required, as a condition of coverage, that Guam Industrial obtain and maintain Navy Certification for the dry dock. Guam Industrial breached the warranty because the dry dock was never Navy Certified.

Ultimately, whether derived from federal admiralty law or state law, the Ninth Circuit concluded that the law requires strict compliance with marine insurance policy warranties, even when the breach of the warranty did not cause the loss. Applying that law to these facts, there is no question that Guam Industrial failed to comply with the Navy Certification warranty.

Guam Industrial contends that the insurers waived their right to demand strict compliance with the Navy Certification warranty because they had accepted commercial certification. The Ninth Circuit concluded that summary judgment in favor of the insurers was proper because even if they had waived the insistence on Navy Certification, the dry dock lacked even commercial certification when it sank.

Breach of warranty

A “breach or violation by the insured of any warranty, condition, or provision” only excuses the insurer from paying — essentially, it only constitutes a material breach — if “such breach or violation increased the hazard by any means within the control of the insured.” For example, if the insured violated the insurance policy by keeping too many crew members, that might increase the likelihood of mutiny. Fireman's Fund Ins. Co. v. Cox, 742 F.Supp. 609, 611 (M.D.Fla.1989), aff'd, 892 F.2d 87 (11th Cir.1989).

But an insured's failure to update a plane's airworthiness certificate does not void coverage for a plane crash caused by pilot error. Pickett v. Woods, 404 So.2d 1152 (Fla. 5th DCA 1981).

An insurer had to be excused from payment on any losses under a marine insurance policy where statements provided by an insured in his application were warranted to be true and accurate. The insured breached his warranty of truthfulness when he misrepresented the purchase price of the boat, neglected to inform the insurer of other vessels which he had previously owned, concealed that he had lost a prior boat as a result of fire, and did not inform the insurer that his boat was for sale. The insured's breach of his warranty of truthfulness placed the insurer in a peculiarly difficult position to assess risks involved in insuring the vessel. [Markel American Ins. Co. v. Veras, 995 F.Supp.2d 65, 2014 A.M.C. 1452 (2014)]

A passenger limitation warranty and compliance warranty of a sunken boat owner's marine insurance policy were “promissory warranties,” such that breach of either warranty would void the policy's coverage. The owner breached the passenger limitation warranty by carrying more than six passengers on the boat at the time it sunk, so policy coverage for the incident was void. [Nieto-Vicenty v. Valledor, 984 F.Supp.2d 17 (2013)]

Warranties in Marine Insurance are the essence of this type of insurance and are considered the foundation upon which the policy of insurance was built. In the first case, the insurers required a Navy Certification of the dry dock as a condition of writing the insurance. The insured never obtained a Navy Certification and at the time of the loss did not hold any certification at all. As a result, the policy was void at the time of the loss and the insured had no right to indemnity under the policy. Warranties in other types of insurance are also strictly construed but not as strictly as in marine insurance.

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years and now serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. He also serves as an arbitrator or mediator for insurance related disputes. Books in the Zalma Insurance Claims Library, can be found at www.nationalunderwriter.com/ZalmaLibrary.