Page 19: of Marine News Magazine (May 2011)

18 20

insurer can have grave consequences. If the marine insurer takes on the risk of insuring the vessel based on the infor- mation the insured provided, a loss incurs, and the marine insurer’s investi- gation reveals the insured has con- cealed or misrepresented material facts (facts which were material to the insur- er’s decision whether, and for what amount of premium dollar, to under- write the risk), then under the wording of most marine insurance policies and the law of most states, the insurer is entitled to void the policy “ab initio,” or from its inception, as though the policy never existed.

The public policy rationale is obvi- ous: in the marine insurance market- place, where candor and full disclosure of risk is essential for the marketplace to function efficiently, where an insured conceals or misrepresents the risk to the insurer, it should have to pay a high price — voiding of the policy and thus forfeiture of insurance cover- age — if the insured has breached its duty of candor to the insurer.

Here are some excerpts from court decisions on this issue to give you a feel for the law in this realm: • “Generally, insurance policies may be voided ab initio when an insurer issued a policy in reliance on a materi- al misrepresentation in the application …. Materiality is determined by consid- ering whether, given the circumstances of the case, the information omitted could reasonably have affected the determination of the acceptability of the risk …. The misrepresentation must actually have been relied on in issuing the policy or setting the premium in order for it to be material.” • “Insurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the