Thursday July 17, Judge Murphy of the Eighth Circuit concluded that the doctrine of utmost good faith is a judicially established federal admiralty rule, thus preempting the application of state laws.
In February of 2011, The Mark Twain, a cement barge, sank to the bottom of the Mississippi River. Just four months prior, its owner, Continental Cement Co, applied to Starr Indemnity & Liability for a marine insurance policy to cover all of its barges. Continental, however, neglected to submit a 2008 general condition survey with its application. The missing survey indicated several issues with the barge including faulty bulkheads, which seriously called into question its seaworthiness. Starr Indemnity disclaimed for other reasons and stumbled across the survey during discovery.
Continental Concrete brought this appeal, claiming the district court erred in applying the doctrine of utmost good faith as a federal maritime law, instead of applying Missouri state law. Normally, federal law covers maritime issues, and state law covers insurance disputes. The Supreme Court determined back in 1955 that state law is to apply to maritime insurance controversies unless there is a judicially established federal admiralty rule that governs. The district court found that the doctrine of utmost good faith is indeed well established. The Eighth Circuit Court of Appeals affirmed that ruling.
The doctrine of utmost good faith provides the insurer a right of rescission of an insurance contract where the applicant withheld material information affecting the insurance policy, regardless of whether the information was requested. Here, the jury applied the doctrine and found that Starr Indemnity had the right to void the contract as Continental Concrete withheld the 2008 survey.
The Circuit Courts have been split over whether the doctrine is so entrenched in federal law so as to be applied instead of state law. With its ruling, the Eighth Circuit joins the Second, Third, and Eleventh circuits in applying the doctrine in maritime cases. The lone dissenting Fifth Circuit, now outnumbered 4 to 1 in jurisdictions that have considered the issue, may soon find its view sinking, along with The Mark Twain, to the bottom of the Mississippi.