AIG Centennial Insurance Company v. J. Brian O'Neill, 782 F.3d 1296

Background

Brian O’Neill arranged purchase of the 66-ft vessel Bryemere through his wholly owned LLC, Carolina Acquisition, LLC (Carolina), which held title and was the mortgagor under a preferred ship mortgage with Bank of America (BOA).
O’Neill applied for marine insurance through broker Willis; his executive secretary completed the application and listed O’Neill (not Carolina) as the named insured, misstated the vessel purchase price ($2.35M instead of $2.125M), and omitted certain prior losses.
AIG issued a policy in O’Neill’s name with a standard mortgage clause for BOA; BOA had requested the named insured be Carolina but AIG’s final policy named O’Neill.
After purchase and repairs, structural defects rendered the vessel unseaworthy; O’Neill submitted a claim and AIG sued for declaratory judgment seeking that the policy be void ab initio for misrepresentations under the maritime uberrimae fidei doctrine.
The district court found the purchase-price misrepresentation material and voided the policy as to O’Neill; it also held BOA was not covered under the mortgage clause because the mortgagor (Carolina) was not the named insured.
On appeal the Eleventh Circuit affirmed: it held the purchase-price misrepresentation was material under uberrimae fidei and that Pennsylvania law plus the policy’s plain language meant the standard mortgage clause did not protect BOA where the mortgagor was not the named insured.

Issues

Issue	Plaintiff's Argument (O’Neill / BOA)	Defendant's Argument (AIG)	Held
Whether O’Neill’s misrepresentation of purchase price voided the policy under uberrimae fidei	Misstated price was ambiguous or immaterial; any ambiguity resolves for insured	Misrepresentation of purchase price was material to underwriting and voids policy	Court: Misrepresentation of $225,000 was material; policy void ab initio as to O’Neill
Whether omission/misstatement of prior loss history was outside scope or immaterial	Argues loss-history issue was beyond pleadings/pretrial and immaterial	AIG relied on misstatements; materiality and duty of utmost good faith apply	Court: Did not need to decide on loss-history because purchase-price misrepresentation alone voided policy
Whether BOA could recover under the policy’s standard mortgage clause despite the policy being void as to the named insured	BOA: mortgage clause is a separate, independent contract and protects mortgagee regardless of mortgagor’s misrepresentation	AIG: clause cannot protect BOA because the mortgagor (Carolina) was not the named insured and AIG never contracted with Carolina	Court: Under Pennsylvania law and the clause’s plain language, mortgagee protection presumes mortgagor is the named insured; BOA not covered
Whether district court erred by deciding mortgage-clause issue outside pleadings	BOA: trial-by-ambush; issue was not in pretrial scope	AIG: pretrial stipulation framed mortgagee-coverage issue; BOA had notice	Court: Pretrial stipulation adequately framed the mortgage-clause issue; no abuse of discretion

Key Cases Cited

Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955) (federal maritime rules do not automatically displace state law on marine insurance terms)
McLanahan v. Universal Ins. Co., 26 U.S. (1 Pet.) 170 (1828) (insurable party must disclose material facts; concealment avoids policy)
Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485 (1883) (insured must place underwriter in same position; duty of disclosure)
Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940 (11th Cir. 1986) (materiality under uberrimae fidei is generally for the factfinder)
Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689 (11th Cir. 1984) (uberrimae fidei is controlling federal rule in this circuit)
HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359 (11th Cir. 2000) (insured must disclose facts material to risk under maritime doctrine)
N.H. Ins. Co. v. C’Est Moi Inc., 519 F.3d 937 (9th Cir. 2008) (when insurer specifically asks for purchase price, misstatement is material as a matter of law)
AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255 (3d Cir. 2008) (misstatement of purchase price in marine insurance application is material)