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May 1997
Vol. 8, No. 2
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Contents
The Reinsured's Duty of Good Faith to its Reinsurer: New Developments
by Robert E. Wilder
Until recently it was generally understood
that the reinsurance relationship involves uberrima fides, which means
"[t]he most abundant good faith; absolute and perfect candor or openness
and honesty; the absence of any concealment or deception, however slight."
Black's Law Dictionary 1363 (5th ed. 1979). This is a higher standard than
the duty of good faith and fair dealing implied in ordinary arm's length
contracts. The commercial underpinnings of this heightened duty have been
described as follows:
Historically, the reinsurance market has relied on a practice of the exercise of utmost good faith to decrease monitoring costs and ex ante contracting costs. Reinsurance works only if the sums of reinsurance premiums are less than the original insurance premium. Otherwise, the ceding insurers will not reinsure. For the reinsurance premiums to be less, reinsurers cannot duplicate the costly but necessary efforts of the primary insurer in evaluating risks and handling claims. Reinsurers may thus not have actuarial expertise . . . or actively participate in defending ordinary claims. They are protected, however, by a large area of common interest with ceding insurers and by the tradition of utmost good faith, particularly in the sharing of information.
Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049, 1054 (2d Cir. 1993).
The issue typically comes before a court or arbitration panel when a reinsurer seeks to avoid paying a claim because of the nondisclosure of a material fact by the reinsured. The nondisclosure may occur during the underwriting process when the reinsurer is assessing the risk or in the course of claim administration.
A century ago, in Sun Mutual Insurance Co. v. Ocean Insurance Co., 107 U.S. 485, 509-10 (1883), a marine reinsurance dispute, the United States Supreme Court held that the reinsured owed a duty of utmost good faith and, as such, even an innocent failure to disclose a material fact to the reinsurer when it was underwriting the risk would be grounds for avoiding the contract. In Christiania General Insurance Corp. of N.Y. v. Great American Insurance Co., 979 F.2d 268 (2d Cir. 1992), a rescission action involving products liability reinsurance, the Court of Appeals for the Second Circuit cited Sun Mutual for the proposition that "[t]he relationship between a reinsurer and a reinsured is one of utmost good faith . . . ." and stated in dicta that a failure to disclose "need not be fraudulent or even intentional" to warrant rescission. Id. at 278, 279.
However, as discussed below, subsequent decisions in the First, Second and Third Circuits suggest that, at least in the context of non-marine reinsurance, there is a trend to limit the duty of good faith or to make it more difficult to obtain redress for a breach of the duty. Either approach threatens effectively to place reinsurance contracts on the same footing with ordinary commercial agreements. On the other hand, a recent decision by the highest court of the State of New York suggests that New York will continue to apply the traditional Sun Mutual standard.
In the Unigard case decided one year after Christiania General, a different panel of the Second Circuit adopted a restrictive view of the duty of good faith. Unlike Christiania General, which concerned nondisclosure in the context of underwriting, Unigard involved a reinsured's failure to disclose information about potential claims. The reinsurer alleged that the reinsured breached its duty of good faith by failing to disclose that it had assumed certain obligations by joining an Asbestos Claim Facility. The court noted that certain commentators have questioned whether recent practices in the reinsurance business were consistent with the traditional duty of utmost good faith:
However, in recent years, the reinsurance market has witnessed an increase in participants and a decline in profitability due to huge environmental losses. This has led some commentators to question the continued vitality of utmost good faith as a description of the current practices in the reinsurance market . . . and argue that the market is now one of caveat emptor. Unigard, 4 F.3d at 1054 (citations omitted).
Turning to the merits of the case, the Court found that notice of the reinsured's joinder in the Asbestos Claim Facility was required by "[t]he good faith and fair dealing implied in all contracts." The court stated that "a high level of good faith" should be required "to ensure prompt and full disclosure." However, the court concluded that, at least in the context of claim notification, to avoid payment of the disputed claims, the reinsurer must prove bad faith and "the proper minimum standard for bad faith should be gross negligence or recklessness."
Unigard implicitly leaves open the possibility that a different standard would apply in a case involving nondisclosure at the underwriting stage of the relationship. Indeed, in a subsequent decision, Reliance Ins. Co. v. Certain Member Companies, Institute of London Underwriters, 886 F. Supp. 1147, 1152-54 (S.D.N.Y. 1995), aff'd on the opinion below, 1995 U.S. App. LEXIS 39924 (Dec. 28, 1995), the Second Circuit affirmed a trial court decision which voided a marine reinsurance binder for such nondisclosure without requiring proof of intent to deceive.
In North River Insurance Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995), North River, the reinsured, sought indemnification for certain defense costs from CIGNA Re under four facultative reinsurance certificates. North River had become obligated to pay certain defense costs as a result of its joinder in the same Asbestos Claims Facility that was the subject of Unigard. The Third Circuit expressly adopted the Second Circuit's approach in Unigard, requiring proof of bad faith to establish a breach of the duty of good faith. However, the North River Court seemingly placed an even greater burden on the reinsurer than the Second Circuit, since it stated that "bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract." North River, 52 F.3d at 1216.
In Compagnie de Reassurance d'Ile de France v. New England Reinsurance Corp., 57 F.3d 56 (1st Cir.), modified on rehearing, 1995 U.S. App. LEXIS 17272 (1st Cir.), cert. denied, 116 S. Ct. 564 (1995), the First Circuit considered the good faith issue in the context of nondisclosure during the underwriting process. The court stated that the reinsured was required to exercise the "utmost good faith." However, it held, without any analysis, that because non-marine reinsurance was involved, to obtain rescission, the reinsurer was required to prove fraudulent misrepresentation. The effect of this holding was that the reinsurer was in no better position than a party to an ordinary contract asserting fraud in the inducement. Whatever justification there may be for distinguishing between marine and non-marine risks in the context of direct insurance (a topic that is beyond the scope of this article), the traditional rationale for the duty of utmost good faith in the reinsurance relationship would seem to apply equally to both non-marine and marine reinsurance.
In a recent opinion, the New York Court of Appeals, the highest court in New York, suggested, in dicta, that it would apply the traditional Sun Mutual standard in any reinsurance dispute. In Matter of the Liquidation of Union Indemnity Ins. Co. of New York, 651 N.Y.S.2d 383 (N.Y. Ct. App. 1996), reinsurers sought to rescind a reinsurance treaty on the ground that the reinsured failed to disclose its insolvency at the time the contract was written. The central issue on appeal was whether the reinsured's financial condition was a material fact that should have been disclosed. The court concluded that it was indeed material. The reinsured's state of mind at the time of the nondisclosure was apparently not at issue. However, in discussing the nature of the duty of good faith, the Court of Appeals cited Sun Mutual with approval. The court also specifically stated that it is not necessary to prove intent to conceal and even an innocent failure to disclose a material fact is sufficient to render a contract voidable.
The law with regard to the scope of the duty of good faith in the reinsurance relationship and the remedies for breach of the duty is obviously in a period of transition. Reinsureds will continue to argue that the traditional notion of utmost good faith is inconsistent with modern business practices and is subject to abuse by reinsurers who wish to avoid their just obligations. Conversely, reinsurers will argue that the duty of utmost good faith is a fundamental aspect of the relationship which is essential to the continuing viability of the reinsurance business. Undoubtedly, the question of whether the same standard should apply in marine and non-marine reinsurance will be revisited. It will be interesting to see if the important interests at stake in this debate can be satisfactorily accommodated by the courts.
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Charterparty Developments
by LeRoy Lambert
A. STEVEDORE DAMAGE CLAIMS
Stevedore damage claims are a fact of shipping life. Both time and voyage charters often contain special clauses attempting to allocate this risk. Various issues arise relating to when notice of the claim is to be given, to whom it must be given, and liability for unrepaired damages. The applicable clause must of course be examined in order to determine the rights of the parties to any particular charter.
New York arbitrators view unrepaired damage claims with caution, but awards have been made in favor of shipowners in some cases based on diminished value and/or repair estimates when the arbitrators are persuaded that "damage" has truly occurred.
Under an NYPE 1993 time charter, the starting point is now Clause 10 (Clause 4 under the 1946 form) which obliges the charterer to redeliver the vessel "in like good order and condition, ordinary wear and tear excepted." New York arbitrators have recognized, however, that "ordinary wear and tear" will vary depending on the trade. Relatively more damage is expected in the carriage of scrap metal than in the carriage of wheat in bulk. New York arbitrators will also take into account special clauses calling for an off-hire survey.
Often, however, there will be a specific clause governing claims for stevedore damage providing, among others, special notice provisions. If so, New York arbitrators will attempt to read the "wear and tear clause," "off-hire survey clause," and the special clause together, but, in case of conflict, will give effect to the more specific clause, although the results reached under similar clauses and facts are not always consistent.
Such special clauses often bar an owner from making a claim if the master fails to give notice within a specific time (e.g., within 24 hours of occurrence for visible damage) and to specific persons. Generally, New York arbitrators will give effect to such notice provisions. Parties should therefore pay attention to these clauses, often buried in a pro forma, when fixing, and, after fixing. Shipowners, in particular, should make sure the master is aware of the clause and knows how to contact and give timely notice to the relevant persons.
B. CAUTION URGED WITH RESPECT TO CHARTERS TO CARRY USED CARS AND TRUCKS TO HAITI
We have recently become aware of difficulties arising out of at least two shipments of cars and used trucks to Haiti from the United States. A ship is chartered in to carry such cargo. The cargo is loaded for numerous shippers. Charterers do not pay the shipowners and do not issue bills of lading. Import formalities in Haiti are not complied with, and the vessel is subject to being detained in Haiti. Charterers, having collected freight from the various shippers, are no longer heard from.
Extreme diligence and caution should be exercised before
entering into charters for the transportation of cargo under such arrangements.
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Federal Maritime Law Applies to Product Liability Action Brought by Swimmer
Injured While Disembarking a Pleasure Craft
by John G. Ingram
On March 25, 1997 New York's highest state court,
the Court of Appeals decided O'Hara v. Bayliner, et. al., a case in which
a 16-year old plaintiff was allegedly injured by a cleat affixed to a pleasure
boat while disembarking the anchored boat fifteen feet from shore in Huntington
Bay on Long Island Sound. In determining whether federal maritime law or
state law governed the case, the Court applied the two-prong admiralty
jurisdiction test first set forth in the United States Supreme Court decision
of Executive Jet Aviation v. City of Cleveland, 409 U.S. 249(1972) and
refined by its progeny.
The first prong of the jurisdictional test, which prior to Executive Jet was the sole criterion for admiralty jurisdiction, requires that the incident occur on navigable waters. The Court determined that the situs test was met in this action because the incident occurred in Huntington Bay, a navigable water of the United States, even though the incident occurred in three feet of water, fifteen feet from shore.
The second prong of the analysis, the nexus test or maritime connection test, consists of two subparts. The incident must have the "potential to disrupt maritime commerce" and the "general character of the activity giving rise to the incident shows a substantial relationship to traditional maritime activity." (citations omitted)
The Court held that this incident met the first subpart of the second prong since "placing a vessel into navigable water with a defect sufficiently carries the potential to disrupt maritime commerce by creating a hazardous situation to nearby vessels and all those engaged in maritime activity. Additionally, the existence of a dangerous and, possibly injurious situation ‘could lead to restrictions on the navigational use of the waterway.'" The Court went on to hold that the "operation of boats in navigable waters plainly fits within the substantial relationship test" thereby meeting the second subpart of the nexus test.
Therefore, since admiralty jurisdiction governed the matter, the court applied the Federal Maritime Statute of Limitations, 46 U.S.C. App. §763a which does not provide for any tolling provisions for infancy. The Court determined that applying the New York State infancy tolling provisions would frustrate federal uniformity. Therefore, the Court held that this action commenced more than three years after the date of incident was time barred even though plaintiff was a minor on the date of the accident. The court declined to apply the extraordinary doctrine of equitable tolling, where plaintiff's delay in filing suit was due to its own lack of diligence. The court reversed the order of the Appellate Division, First Department which had affirmed the Trial Court, with costs and dismissed the plaintiff's complaint as against the Bayliner.
The appeal was argued to the Court of Appeals on behalf of Bayliner by John G. Ingram. Associate Julie Pateman Ward was on the brief for Bayliner.
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Developments in Electronic Commerce
by Glen T. Oxton
FDA RULE
The Food and Drug Administration (the "FDA") recently issued
a final rule, developed over the last six years in a cooperative effort
between industry and government, amending 21 C.F.R. Part 11 to provide
for submission of reports electronically with electronic signatures. The
final rule and related materials can be found at http://www.fda.gov/cder/esig.
The final rule provides general criteria under which the FDA will consider electronic records to be equivalent to paper records and electronic signatures equivalent to traditional handwritten signatures. For those of us who do not deal daily with the FDA, the significance of the rule is that it is the first time a major government agency has permitted direct electronic submissions with electronic signatures. (For several years the IRS has accepted tax returns electronically, but they may be submitted only through designated service companies and they must be accompanied by a manually signed paper document.)
In its commentary on the new rule, the FDA recognized the benefits of electronic records in increasing the speed of information exchange, reducing the cost of storage, reducing the number of errors, permitting the use of automated databases for analysis, avoiding initial and subsequent document misfiling, and fast and reliable document retrieval. The benefits of electronic filing could be obtained by converting incoming paper documents to electronic form through a scanning process. That process, however, is cumbersome, time-consuming and expensive. Thus, the key to electronic filing is to arrange to have all incoming documents arrive in electronic form.
There are many problems to be resolved before electronic commerce becomes widely adopted. One of the main issues is whether electronically signed documents meet state law requirements for a signed writing. About eight states have passed digital signature legislation that sets standards for electronic documents and signatures, states that they are equivalent to paper documents with manual signatures, and regulates the participants in the new roles that will be required in electronic commerce, such as certification authorities and digital notaries.
Other problems have been created by the government's insistence on escrowing the private keys to the kinds of encryption systems that are essential to electronic signatures, and its prohibition of the exportation of strong American encryption software.
Within an individual company, the obstacles to receiving documents electronically involve mainly additional software and new processes. A company must have robust electronic filing provided by an electronic document management system. It must also have a very secure method of controlling digital signatures. A person who is president of a company, for example, would typically have a personal signature for his own use and a separate digital signature as president of the company reflecting his authority to bind the company. Other representatives of the company would have company digital signatures reflecting their respective levels of authority. The issuance and administration of these signatures present serious security issues. Finally, the company would need sending and receiving equipment, and work flow software to provide for appropriate processing and handling of incoming electronic documents.
If the FDA rule is adopted by other agencies, electronic submissions to federal government agencies will be permissible, regardless of whether the states adopt enabling laws. This could accelerate the development of electronic commerce.
The FDA rule does not certify any particular technology or brand of electronic signature system. The FDA commented that this approach is consistent with its practice in other areas. The agency, for example, does not certify manufacturing equipment used to make drugs, medical devices or food. The difference with electronic signatures, however, is that the recipient must have essentially the same version of the technology used by the sender in order to validate the signature and the document. While it may have been wise not to endorse one or more particular products, the FDA's approach will require it to gear up to use all the products available that will meet its general standards for authenticity and security. Whether this is practicable remains to be seen.
CD-ROM BRIEF
In a different arena, a multimedia brief filed on a CD-ROM in HTML format
was stricken recently by the U.S. Court of Appeals for the Federal Circuit
(the party's paper brief was accepted) on the ground that the court had
no rules governing the submission of a brief in electronic format, and
neither consent of court nor opposing counsel had been obtained. The court,
however, encouraged the parties to propose rules to govern the filing of
electronic briefs in the future.
The development of rules for filing
pleadings and briefs electronically and for producing discovery documents
on CD-ROM would benefit courts, parties and their counsel.
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Howard M. McCormack, First Vice President of the Maritime Law Association
Howard M. McCormack, First Vice President of The Maritime Law Association of the United States, was recently elected a member of the Permanent Advisory Board of the Tulane Admiralty Law Institute. He joins fellow partners Nicholas J. Healy and Gordon W. Paulsen as members of that Board. While attending the recent Tulane Admiralty Institute program in New Orleans, Howard had the pleasure of introducing Healy & Baillie partner LeRoy Lambert as one of the speakers.
Howard has also recently been elected to the Board of Governors of India House in New York. He will also be one of the principal speakers (on Maritime arbitration in New York) at the International Bar Association Seminar in Hamburg in late May on the topic of "Arbitration in Maritime and Transport Disputes." Fellow panelists will be discussing arbitration in London, Hamburg, Madrid, Paris, Beijing, Oslo, Stockholm, Hong Kong and Singapore. Howard will be a member of the U.S. delegation to the Comité Maritime International Centennial meeting that will be held in Antwerp during the week of June 9.
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Associates/Paralegals Monthly Luncheon Goes on a Field Trip
by Betty M. Waterman*
Among the many attractions for visitors to New York City is the Seamen's Church Institute. Recently relocated to the South Street Seaport Historic District, the Institute, which was founded in 1834, serves to improve the treatment of merchant seafarers at the Port of New York and elsewhere.
Under the direction of the Rev. Peter Larom, the Institute serves more than 150,000 seafarers from 75 different nations around the world through three main program divisions: the Center for Maritime Education, the Center for Seafarers' Rights and the Center for Seafarers' Services.
Associates and Paralegals of Healy & Baillie were recently given an opportunity to tour the Institute, enjoy lunch on the Top Deck, and also experience an aspect of the Institute's programs, the Center for Maritime Education. Healy & Baillie personnel were invited to attend at the simulator center of a ship's bridge and observe as a drycargo vessel was maneuvered out of the harbor. This simulator system is used for the advance training of experienced mariners to enhance the individual seafarer's professional competency and to promote safety of life at sea.
* Paralegal at Healy & Baillie, LLP.
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Firm Inaugurates Home Page
http://www.healy.com
The Firm has inaugurated its home page on the Worldwide Web located at http://www.healy.com. An introduction to the site is available in several foreign languages including Norwegian, German and Spanish. In development are versions in Greek, Chinese, Russian and Persian. One or more lawyers in the firm is fluent in each of these languages.
As a service to its clients and the maritime and business community, the home page contains various resource centers including a Marine Oil Pollution Center, which contains a guide "What to Do if You Have a Spill," a list of oil spill emergency telephone numbers, and an oil spill preparedness checklist. Under development are a Time and Voyage Charter Center and a resource center for arbitration issues.
The home page contains an extensive list of links to other law and maritime-related web sites and search engines. These links are often used by lawyers in the Firm as their starting point in searches for information on the web.
In addition, this issue of Mainbrace is posted on the site, together with all back issues. The Mainbrace full text is searchable using a full text search program contained within the site. Receipt of Mainbrace can be arranged by e-mail, and e-mail delivery of Mainbrace will also be available through the home page.
The home page also contains information about the firm's practice areas and the location and contact information for its offices in New York, Hong Kong, Connecticut and New Jersey. Biographies of the firm's attorneys are included, as well as a bibliography of materials published by members of the firm.
Teaching positions and seminar presentations are also listed. E-mail can be sent directly to any member of the firm through the home page.
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Firm Sponsors WISTA USA Breakfast
On Thursday, May 1, 1997, Healy & Baillie sponsored a Breakfast and Panel Discussion presented by the U.S. Chapter of the Women's International Shipping and Trading Association, "WISTA," at The Yale Club in New York City. The title of the program was "‘Who's on Deck?' Seafarers in the New Millennium." The distinguished panel included Captain Deborah Dempsey, the first women to graduate from any military or service academy and the first female master on international waters, and the Reverend Jean E. Smith, director of The Seaman's Church Institute's International Seafarer's Center in Port Newark, New Jersey. Healy & Baillie associate Ellen FitzGerald, Secretary of WISTA USA, moderated the event.
WISTA was founded in 1974 as an informal gathering of brokers in the U.K. The Association includes women from around the globe involved in all aspects of the shipping industry. The U.S. chapter, WISTA USA, Inc., founded only this year, is growing rapidly and now boasts over 100 members in 17 states. New York City has been chosen as the site of the 1998 WISTA conference. If you would like additional information about the May 1 breakfast or WISTA USA membership, please contact Julie Pateman Ward, Ellen FitzGerald or Evanthia Coffee at Healy & Baillie.
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Richard S. Ciacci started in April 1997. He received a J.D. from The George Washington University National Law Center in May 1994 and a B.A. from New York University. He most recently was a litigation associate with a NY law firm. Richard is admitted in NY, CT, and NJ and is fluent in Italian and Spanish.
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NOTE: "Mainbrace," our Firm's cable address, in nautical terminology means the brace or rope sustaining the main yard on a ship. The Staff of "Mainbrace" consists of Nicholas J. Healy, Gordon W. Paulsen, John C. Koster, Matthew A. Marion, Betty M. Waterman and Renee Kintzer.
New York Office: 29 Broadway New York, NY 10006-3293 Telephone: (212) 943-3980 Telecopier: (212) 425-0131 |
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Connecticut Office: Stamford HarborPark 333 Ludlow Street Stamford, CT Telephone: (203) 961-7250 Telecopier: (203) 357-7909 |
New Jersey Office: 374 Millburn Avenue P.O. Box 599 06902-6987 Millburn, NJ 07041-0599 Telephone:(201) 384-2556 Telecopier:(201) 384-1081 |
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