Awards of Attorneys’ Fees in

American Marine Insurance Law

Steven E. Goldman

I.

Introduction

When any insurance company or underwriter becomes involved in a coverage dispute with an insured, outside counsel is going to be asked to provide an opinion as to the likely outcome of the litigation. The likelihood of success in such a contest must be the first consideration in reaching any determination concerning how to proceed on a questionable claim for coverage.

However, simply winning or losing cannot be the sole determinant in the decision as to whether a claim will be paid, or whether coverage is going to be denied. In addition, counsel will certainly be asked to provide some analysis of the extent of exposure for damages in the event that the judicial decision is against the insurer. In such a case, exposure for damages might well comprehend items such as claims for emotional distress, commercial losses flowing from failure or delay in receiving policy proceeds, prejudgment interest and the potential of punitive damages in the event of a determination of bad faith in the denial of the claim.

In a number of states, legislatures eager to discourage insurance companies from denying claims have enacted statutes that in some cases permit, and in other cases require, that courts make awards of attorneys’ fees in situations in which the insured prevails in a coverage litigation. Those statutory awards of attorneys’ fees can have the effect of dramatically increasing the insurer’s exposure well in excess of the policy limits that were the original subject of the dispute.

Insurance companies offering coverage for non-marine property and liability risks, and for non-marine transportation risks such as aviation and trucking, have for long had to contend with this additional potential exposure in every situation where a denial of coverage and commencement of litigation is being contemplated. At the present time, however, there is a raging controversy concerning whether marine insurance companies and underwriters should be subject to these state law provisions awarding attorneys’ fees to prevailing insureds. That controversy is the subject of this article, which will examine the jurisprudence and the arguments made therein.

Recent decisions by the United States Court of Appeals for the Second Circuit and the United States Court of Appeals for the Eleventh Circuit, respectively, have enunciated two different positions on this subject. The unfortunate fact that these decisions stand in direct conflict with each other, reaching different and irreconcilable positions, in turn casts into stark relief the chaotic predicament confronted by marine insurers seeking guidance from their counsel. How reliable is the answer to the question of whether potential exposure for attorneys’ fees of the insured must also be weighed as a consequence of losing a coverage contest?

II.

Historical Perspective

Like other living things, the law continues to evolve and develop, often along lines that even scholars might have been reluctant to predict. In the American law and practice of marine insurance, the jurisprudence was for quite a long time characterized by a marked and conscious tendency to maintain basic harmony with the laws and practices in the United Kingdom. Justice Oliver Wendell Holmes referenced this basic fact nearly one hundred years ago when he noted that “it is desirable, if there is no injustice that the maritime law of this country and of England should agree.”[1]

A federal judiciary that saw uniformity in this particular field of law as a value to be continually reaffirmed enforced this remarkable harmony and continuity. A common normative regime, existing across the entire United States, familiar and recognizable in other English-speaking jurisdictions, was encouraged by the historic dominance of the great marine insurance market that grew up and developed in London. Underwriters seeking predictability and foreseeability in order to allow for a rational basis for setting premium rates were well served by this state of affairs.

When Great Britain codified into law in 1906 a range of practices and precedents, it must have seemed that a paradigm had been enacted that would provide for a continuation of the harmony in marine insurance that had been fostered by the federal courts in the United States.[2]

Instead, what has taken place in the second half of the Twentieth Century has been an evolution quite different from what might have been expected. Rather than fostering uniformity, the federal courts have presided over a growing diversification, as decisions have been issued that have dethroned previous marine insurance doctrines and practices once considered well entrenched and authoritative. Where previously there existed an established body of federal case law recognized as authoritative in every court, state and federal, recent decades have witnessed a growing willingness on the part of these same courts to refer instead to state statutes as the basis for deciding a marine insurance coverage case.

With fifty state legislatures enacting statutes, the inevitable result has been utterly predictable. Marine insurance companies and the attorneys representing them can no longer look across a vast field of common law and practices, confident of being able to predict the outcome of a coverage dispute regardless of whether a particular case arose in New York, Florida, Texas or California

This departure from uniformity in the law of marine insurance as a primary value in the federal courts traces its beginnings to the case of Wilburn Boat Co. v. Fireman’s Fund Insurance Co.[3] Decided in 1955, this seminal case continues, even after half a century, to roil the waters of marine insurance and to vex underwriters and attorneys alike.

Reversing two centuries of case law from courts in the United States and the United Kingdom, the Supreme Court’s majority decision in Wilburn Boat rejected application of the strict or “literal performance rule” where a marine policy’s Private Pleasure Warranty had been breached by the insured. The insured had been carrying passengers for hire on its vessel. The Hull & Machinery insurer denied the claim when the vessel was destroyed by fire. It no doubt relied upon advice of counsel to the effect that the “literal performance rule” recognized by federal maritime law would void coverage despite the apparent lack of any causal connection between the breach of warranty and the fire.

Having concluded in the face of overwhelming case law to the contrary that there was in fact no well established federal law or rule dealing with the consequences of a breach of a Private Pleasure Warranty, the majority opinion in Wilburn Boat went on to state that “[t]herefore, the scope and validity of the policy provisions here involved and the consequences of breaching them can only be determined by State law . . . .”[4] Thus began the introduction of varieties of state law into marine insurance jurisprudence, a field which previously had been noteworthy for the degree of harmony across the entire nation.[5]

In the wake of Wilburn Boat, and despite sometimes-harsh criticism from scholars and commentators,[6] the federal circuit and district courts have struggled to adhere to its stated requirements, and to themselves create predictable rules for decision.[7] However, in compliance with the Supreme Court’s mandate, the case law developed over the past five decades has been marked by increasingly frequent reference to state law. This has occurred in novel areas where previously there had been virtually no dispute but that principles of federal maritime law constituted entrenched, binding and authoritative precedent.[8] In cases dealing with the most common and indeed the most traditional areas of marine insurance disputes, such as those involving breach of policy warranties, or failure to disclose facts during the application process, decisions have been issued from American courts that make a conspicuous salute to Wilburn Boat’s innocuous sounding holding that in the absence of a specific and controlling rule, the interpretation or construction of a marine insurance contract is to be determined by state law.

It is within this context of the intrusion of state statutory enactments into what previously had been an exclusive preserve of an older, common law of federal admiralty rules that the issue of attorneys’ fees in marine insurance coverage litigation should be understood.

III.

State Statutes & Cases Awarding Attorneys’ Fees

The controversy over awards of attorneys’ fees has developed against the background of the enactment by a number of state legislatures of statutes that seek to penalize first party insurers when there is a wrongful denial of coverage.[9] Florida’s provision is typical of many of these statutes, providing:

Upon the rendition of a judgment or decree by any of the courts of this state against an insurer and in favor of any named or omnibus insured or the named beneficiary under a policy or contract executed by the insurer, the trial court or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court shall adjudge or decree against the insurer and in favor of the insured or beneficiary a reasonable sum as fees or compensation for the insured’s or beneficiary’s attorney prosecuting the suit in which the recovery is had.[10]

Federal and state courts in Florida have agreed that the attorneys’ fee statute is punitive in nature, constituting “a penalty against an insurer who wrongfully refuses to pay a legitimate claim.”[11] The manifest aim of the statute is recognized as being to “discourage contesting of valid claims of insureds against insurance companies,”[12] and also to “reimburse successful insureds reasonably for their outlays for attorney’s fees when they are compelled to defend or to sue to enforce their contracts.”[13] There is no requirement in the statute of any demonstration of bad faith or other misconduct on the part of the insurance company. Attorneys’ fees are awarded to an insured or a beneficiary merely upon the rendition of a judgment by a court in Florida.

Florida’s statute may be contrasted with that of the state of Virginia, which states:

Notwithstanding any provision of the law to the contrary, in any civil case in which an insured individual sues his insurer to determine what coverage, if any, exists under his present policy or bond or the extent to which his insurer is liable for compensating a covered loss, the individual insured shall be entitled to recover from the insurer costs and attorneys’ fees as the court may award. However, these costs and attorneys’ fees shall not be awarded unless the court determines that the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment to the insured under the policy.[14]

The Virginia provision would not sanction an award of attorneys’ fees where the insurer commences a declaratory judgment action, casting the insured in the role of the defendant in a coverage action. Nor would the statute permit an award in the absence of a finding by the court that the insurer had acted in bad faith.[15] Whereas statutes like Florida’s threaten an insurer with liability for attorneys’ fees as a punitive sanction that results from an adverse decision, Virginia’s provision requires evidence to support a finding of actual bad faith.[16]

In a number of jurisdictions, the courts have stepped in even in the absence of any direction from the state legislature and have independently crafted rules calling for the same type of awards of attorneys’ fees in the event that an insured prevails in a coverage dispute with its insurer. In Washington State, for example, the state courts have created a regime under which “an award of fees is required in any legal action where the insurer compels the insured to assume the burden of legal action, to obtain the full benefit of his insurance contract.”[17] Whether suit is commenced by the insured, or by the insurer bringing a declaratory judgment action, fees are awarded whenever an insurer unsuccessfully denies coverage.[18]

IV.

Initial Decisions

It is remarkable that the number of reported cases dealing with the applicability of these state provisions, whether statutory or judicially crafted, in the context of marine insurance coverage litigation is as scarce as it in fact turns out to be.[19] More significant, however, is the fact that no particular universally accepted rule emerged to provide a beacon for an industry that thrives upon predictability, and within a legal tradition that had consistently affirmed the strong interest in harmony and uniformity across national and international systems.

One of the earliest cases to address the subject came in 1986 in INA of Texas v. Richard.[20] The marine insurer had rejected coverage for the vessel’s loss and, invoking federal admiralty jurisdiction, had commenced a declaratory judgment action in the federal district court in Houston. The parties had actually agreed to settle their coverage dispute, submitting to the trial judge cross-motions for summary judgment on the question of whether attorneys’ fees could be recovered by the insured. The insured appealed the trial judge’s simple order, without opinion, granting summary judgment to the marine insurer.

The Fifth Circuit asserted that its decision would be guided by the “polestar of Wilburn Boat . . . and its progeny.”[21] Guided by the “axiomatic” principle that state law would control marine insurance issues in the absence of some specific and controlling federal rule, the panel of judges in the Richard case stated:

Having held that state law controls the interpretation of marine insurance policies, it would defy both logic and sound policy were we to hold that the applicability of attorney’s fees vel non must be determined by reference to uniform federal law. As a polyglot of differing state laws respecting the substance of marine insurance policies is permissible, we can think of no reason, nor has one been advanced, why a unitary and uniform federal rule respecting attorney’s fees in marine insurance cases is required.[22]

In the wake of the “polestar” decision from the Supreme Court in the Wilburn Boat case, a panel of judges in the Fifth Circuit could ignore a centuries old tradition and rule not only that “[t]here is no specific and controlling federal rule of law relating to attorney’s fees in marine insurance litigation,” but could justify their holding by asserting that no rationale or justification existed for any such rule![23]

Other courts and other judges were not quick to conform to or to accept the holding in the Richard case that no specific or controlling federal rule of law could be found relating to attorneys’ fees in maritime and admiralty litigation.

In the case of Pace v. Insurance Co. of North America,[24] the First Circuit Court of Appeals addressed the issue of whether a Rhode Island statute, quite similar to the Virginia statute previously discussed, conflicted with a controlling federal admiralty rule against such provisions.[25] The state statute provided for punitive damages as well as attorneys’ fees, and the appellate court very hesitantly held that such a state law could be given effect. Characterizing its holding as “tentative,”[26] the court stated that jurisdiction in the case was based upon diversity rather than upon admiralty jurisdiction, and noted that Wilburn Boat encouraged use of state law to supplement federal principles. Since there was no established federal principle in conflict with state bad faith law doctrines, the First Circuit saw no absolute bar to permitting an award of damages against a marine insurer for violation of a state law aimed at such specific practices.

Several years later, in the case of Southworth Machinery Co. v. F/V Corey Pride,[27] the First Circuit addressed the issue of whether a Massachusetts statute could be the basis for an award of attorneys’ fees in an action for damages caused by a defective engine on a fishing trawler.[28] The district court rejected the claim for attorneys’ fees because “such an award would conflict with federal maritime law under which the parties pay their own fees absent bad faith or oppressive litigation tactics.”[29] The appellate court noted that state law may be relied upon to “supplement federal maritime law but may not directly contradict it.”[30]

In reaching its decision affirming the district court’s denial of any award of attorneys’ fees, the appellate court reasoned that cases permitting such awards, such as Pace, could be distinguished because these dealt with matters not the subjects of traditional maritime law.

State statutes providing for attorney’s fees may sometimes be given effect in admiralty cases, notably, where the attorney’s fees are awarded incident to a dispute that is not normally a subject of maritime law. For example, in Pace . . . we held that maritime law did not preempt a Rhode Island cause of action allowing recovery of damages and attorney’s fees for an insurer’s bad faith refusal to pay or settle claims; the refusal to settle claims is normally left untouched by maritime law.[31]

Clearly, the stated position of the First Circuit seems to be that unless there is a demonstration of bad faith, a marine insurer need not be concerned that an award of attorneys’ fees under a state provision will be made against it after an adverse judgement in a coverage dispute. Otherwise, established principles of federal admiralty law would apply and at least in the First Circuit, these are recognized as prohibiting awards of attorneys’ fees even in the face of state statutes.

Based upon the holding in Southworth, district courts within the First Circuit have continued to rule that attorneys’ fees will not be awarded in admiralty actions, because to do so would contradict established and uniform principles of federal admiralty law.[32]

In the case of Sosebee v. Rath,[33] the Third Circuit determined that there was now a federal maritime law rule holding that attorneys’ fees could be awarded only where a defendant was shown to have acted in bad faith. In a case involving a provision from the civil code of the United States Virgin Islands awarding attorneys’ fees to successful litigants,[34] the appellate court ruled that any such statute conflicted with an admiralty law rule against such awards absent bad faith. More critically, the Third Circuit panel stated quite explicitly that its aim was to encourage the old tradition of a uniform maritime law and practice:

There is a strong interest in maintaining uniformity in maritime law. This interest would be undermined if the availability of attorneys’ fees depended upon where the plaintiff filed suit. Therefore, when a case arises under the federal maritime law, as this case does, a local statute awarding attorneys’ fees should not be applied.[35]

Despite the fact that it admittedly did not deal with a marine insurance policy or a coverage dispute, there is no reason whatever to believe that the Third Circuit’s holding would not extend there. Conceptually, there is no distinction between such cases and any other variety of maritime litigation, and the strongly stated rationale of uniformity in cases arising under the federal admiralty law remains vital.

V.

Affirming Harmony -- The Second Circuit Decision

By the time the Court of Appeals for the Second Circuit took up American National Fire Insurance Co. v. Kenealy,[36] the only decision from a federal appellate court that favored application of a state attorneys’ fees statutes in marine insurance coverage litigation was INA of Texas v. Richard.[37] Both the First and the Third Circuits had issued decisions prohibiting the application of state attorneys’ fees statutes, and there was a strong argument to be made to the effect that the federal courts should encourage nationwide uniformity by explicitly recognizing a federal admiralty rule for the subject.

Kenealy was initiated by the marine insurer filing a declaratory judgment action in the Southern District of New York, seeking a ruling that it could not be liable for the loss of an insured vessel that took place beyond the policy’s navigational limits. Both parties appealed the decision of the district court, the insurer asking for a reversal of the judgment determining that there was in fact coverage for the loss, and the insured seeking a reversal of the district court’s denial of any award of attorneys’ fees.

Judge Calabresi’s opinion on the attorneys’ fee issue was brief and direct, reciting a line of earlier cases in which he discerned an emerging consensus on the existence of “a settled federal admiralty rule.”[38] With the holding in the case of Ingersoll Milling Machine Co. v. M/V Bodena,[39] the Second Circuit had reached a “general rule . . . that the award of fees and expenses in admiralty actions is discretionary with the district judge upon a finding of bad faith. And this would seem to settle the matter.”[40]

The ruling rejected any suggestion that attorneys’ fees should be awarded where the marine insurance company had been the one to initiate the unsuccessful coverage litigation by commencing a declaratory judgment action:

While Ingersoll did not specifically examine cases brought by insurance companies, it stated the federal prohibition against attorneys’ fees in admiralty suits in the broadest of terms. It did not temper its holding by suggesting that a different rule would apply if the insurance company brought the action. We believe that our holding in Ingersoll suffices to “establish” a federal admiralty rule, which now must be followed instead of state law.[41]

Unless there was a demonstration of bad faith, federal admiralty law would not permit marine insurers to be subjected to the various and widely differing regimes set up by the states for awarding attorneys’ fees in coverage litigation. Judge Calabresi cited the earlier rulings of the First Circuit in Southworth and from the Third Circuit in Sosebee in support of the consensus for the existence of an established federal admiralty rule on this subject. He stated, “the First and Third Circuits . . . have reached the same results as Ingersoll . . . . We agree with Southworth and Sosebee, and see no reason . . . to limit Ingersoll.”[42]

VI.

Affirming Disharmony -- The Eleventh Circuit Decision

Courts in the Eleventh Circuit seemed to be in firm agreement with the emerging federal admiralty rule on attorneys’ fees right up until the very surprising decision during the summer of 2000 rejecting the existence of any such rule in All Underwriters v. Weisberg.[43] Indeed, it is unavoidable to describe the latter decision as shocking in light of the existing case law from the district courts within the circuit. There the Florida statute providing for attorneys’ fees had been described as violative of the treasured value of uniformity in federal admiralty law, and its application to marine insurance expressly rejected.

In Underwriters v. On The Loose Travel,[44] and then again in La Reunion Francaise, S.A. v. Florida Yacht Charters,[45] the federal district court in Miami had issued decisions consistent with the consensus that had emerged among the First, Second and Third Circuits. The district court judges were manifestly prepared to recognize the existence of “a well-settled federal maritime rule that attorneys’ fees are not recoverable absent federal statutory authorization or a showing of bad faith in the conduct of litigation.”[46]

Somewhat earlier, the same federal district court in Miami had confronted the issue from a somewhat different perspective. However, it had still reached the same conclusion that a federal admiralty law rule existed which would prohibit application of state law awards of attorneys’ fees to a prevailing insured in a marine insurance litigation. In Garan, Inc. v. M/V Aivik,[47] the marine insurer moved to strike an offer of judgment[48] that was filed under Florida’s state statute, arguing that such an award was in conflict with the established federal maritime rule. Deciding in favor of the existence of the federal maritime law rule, the district court was influenced by the fact that the case was before it on the basis of section 1333 of title 28 of the United States Code, admiralty jurisdiction. It distinguished other cases in which the state provision had been permitted to apply where jurisdiction was founded on diversity. However, separate and apart from jurisdiction, the district court was clearly convinced that the case law over the previous decade had resulted in the creation or the recognition of a federal maritime law rule requiring its deference:

The Florida statute conflicts with the American rule set forth in federal common law, as the Florida substantive rule impermissibly imposes an additional obligation on the parties in direct conflict with longstanding federal maritime common law.

While Defendant argues that courts have increasingly applied state law as a supplement to the federal maritime law, such applications are only valid when federal statutory or common law is silent on the issue. The federal law regarding the award of attorneys’ fees in the maritime context is clear and directs each side to pay its own fees.[49]

In view of the district court case law which adhered to and which commented approvingly on the authorities from the First, Second and Third Circuits, the ruling of the Eleventh Circuit in the Weisberg case seemed to come as a bolt from the blue to marine insurers and underwriters. The decision reversed the existing consensus among the district court judges regarding the existence of an established federal rule. In addition, it also rejected the goal of achieving any degree of uniformity on the issue.

This case that has now roiled the waters of maritime law had the most quotidian of beginnings, arising out of Lloyd’s Underwriters’ rejection of a claim for the sinking of a thirty-two foot motor vessel insured under a Hull & Machinery policy for an agreed value of $50,000. Asserting material misrepresentation in the application, Underwriters’ counsel commenced a declaratory judgment action in the federal district court in Miami, invoking admiralty jurisdiction. Counsel for the assureds responded with an answer and a counterclaim, including in the latter a demand for an award of attorneys’ fees under the Florida statutes.[50] At a preliminary stage in the litigation, the demand for attorneys’ fees was the subject of a motion to strike, which was granted by the district court. After a denial of Underwriters’ summary judgment motion, the parties agreed to a settlement of the coverage dispute by which the full agreed value of the policy was paid to the assureds, reserving the assureds’ right to appeal the district court’s denial of attorneys’ fees.

Giving a very strong indication of precisely where it intended to go, the Eleventh Circuit panel first reached the preliminary conclusion that the Florida attorneys’ fee statute was substantive law, rather than merely procedural law. Therefore, it would be binding upon a federal court in Florida in any case brought on the basis of diversity jurisdiction. Having thereby cleared the decks, the panel addressed the heart of the case: whether there was an existing and applicable federal admiralty law rule on the subject, or any reason to require or justify one.

Omitting any reference whatsoever to the district court holdings in cases such as Underwriters v. On The Loose Travel,[51] La Reunion Francaise, S.A. v. Florida Yacht Charters,[52] or Garan, Inc. v. M/V Aivik,[53] the panel stated that “[t]his circuit has awarded attorneys’ fees pursuant to [the Florida statute] in a number of marine insurance contract disputes.”[54] The opinion cited to several rather venerable decisions, the most recent of which was from 1988, as support for this very suspect statement, and while noting that in none of these had the court dealt with the issue of whether an established federal maritime rule existed, the ruling stated:

Nonetheless, because these cases consistently applied state law to decide whether or not attorneys’ fees lie in the context of a marine insurance dispute, they strongly support, if not implicitly hold, that there exists no specific and controlling federal law relating to attorneys’ fees in marine insurance litigation.[55]

In one of the cases cited by the panel, Windward Traders, Ltd. v. Fred S. James & Co.,[56] neither the court nor any of the parties had ever even raised the issue of whether application of the Florida statute was barred by an existing federal admiralty rule. Both the court and the parties had stipulated to the use of Florida state substantive law to decide the issues in the litigation.

In two other cases cited by the panel, Steelmet, Inc. v. Caribe Towing Corp.[57] and Blasser Bothers, Inc. v. Northern Pan American Line,[58] awards of attorneys’ fees had indeed been permitted. However, in Garan, Inc. v. M/V Aivik,[59] a mere five years earlier, the court had explicitly rejected these same two cases as authority for a departure from the existence of an established federal admiralty rule, noting:

Defendants’ reliance on Steelmet . . . and Blasser Brothers . . . is misplaced. In both of those cases, attorneys’ fees were awarded only in third party actions on insurance contracts between insured shippers and their insurers. There, the Courts had previously recognized the ability of states to regulate rights under insurance policies issued within their domain.[60]

Recognizing that a conflict existed on the question of attorneys’ fees in marine insurance litigation, and having decided to reject the case law from its lower courts, the Eleventh Circuit panel defined its task as a choice between following the decision reached by the Fifth Circuit in the Richard case,[61] or following that reached by the Second Circuit in Kenealy.[62] Manifestly having already determined what course they wished to pursue, the Eleventh Circuit panel sought to justify and defend their refusal to follow the Second Circuit in finding an emerging federal admiralty rule of law, and instead criticized Kenealy as having been wrongly decided.[63]

To do so, the Eleventh Circuit panel had to conclude that the Second Circuit decision in Ingersoll Milling Machinery Co. v. M/V Bodena[64] had not in fact provided for a “general rule . . . that the award of fees and expenses in admiralty actions is discretionary with the district judge upon a finding of bad faith” as Judge Calabresi had stated in Kenealy.[65] This dismissal of the Kenealy court’s interpretation of Ingersoll as having settled the matter of a federal admiralty rule on the issue of attorneys’ fees was accomplished virtually without argument.

The Eleventh Circuit panel also had to take exception with the Kenealy decision’s understanding of the holding by the First Circuit in Southworth Machinery Co. v. F/V Corey Pride,[66] and the holding by the Third Circuit in Sosebee v. Rath.[67] This was accomplished by noting simply that neither Southworth nor Sosebee involved denials of coverage under marine insurance policies. The Eleventh Circuit panel was thereby able to ignore the very strong language in both of these cases that would otherwise very clearly support the existence of an established and universally applied federal admiralty rule prohibiting reference to state law provisions requiring attorneys’ fees. To do so, the Eleventh Circuit panel stated, “the cases relied upon by Kenealy do not support the Kenealy court’s proposition that they reached the same conclusion as Ingersoll.”[68]

However, as we have seen, lower courts in the First Circuit have very recently expressed their strong disagreement with the Eleventh Circuit’s reading of Southworth and Sosebee. Those courts have granted motions seeking to strike demands for attorneys’ fees in marine insurance actions as being contrary to established and uniform principles of federal admiralty law.[69]

The Eleventh Circuit decision in the Weisberg case is certainly subject, therefore, to criticism on the basis of its having strained to reach a preordained result. The ruling ignored lower court precedents from the district court in Miami and elsewhere, and it exaggerated the extent to which its own precedents from over a decade earlier provided any authority for permitting the state attorneys’ fee statute to operate in the context of marine insurance litigation.

Most critically, however, the decision is utterly astounding for its glib and facile dismissal of the chance to avail itself of an opportunity to encourage uniformity by agreeing with the Kenealy decision. Previous decisions rejecting state law attorneys’ fee provisions have recognized that “a strong interest exists in maintaining uniformity in maritime law,”[70] and have noted that this strong interest “would be undermined if the availability of attorneys’ fees depended upon where the plaintiff filed suit.”[71]

Where the goals of international harmony, and national uniformity, had once been explicitly announced in marine insurance decisions from the federal bench across the United States, the Eleventh Circuit’s decision in Weisberg seems to announce a completely different policy: “Underwriters does not provide any reason, nor have we found one to require a unitary and uniform federal rule respecting attorney’s fees in marine insurance litigation.”[72]

VII.

Prognosticating the Future

The Eleventh Circuit has recently reaffirmed its Weisberg holding in the case of Fireman’s Fund Insurance Co. v. Tropical Shipping.[73] Therefore, it must now be considered as settled law that state and federal courts in Florida resolving marine insurance coverage disputes “may award attorneys’ fees pursuant to [the Florida statute] against an insurer in a marine insurance contract case.”[74]

Presumably, courts in the Fifth Circuit will continue to be bound by the holding in INA of Texas v. Richard[75] that the Eleventh Circuit evidently deemed to be so persuasive in Weisberg. No decisions on this subject have been forthcoming in quite some time, and it might perhaps be safest for the astute and cautious underwriter to simply presume that attorneys’ fees will almost certainly continue to be awarded in Texas and Louisiana. The Fifth Circuit has not been reluctant to confound and amaze by abruptly reversing centuries of decisions supporting a uniform and established federal admiralty rule that a policy of marine insurance is subject to the doctrine of “utmost good faith,” or uberimmae fidei.[76] If state law can be permitted to intrude into a field of marine insurance law and practice previously understood as being so manifestly federal, then it can only be reasonably expected that attorneys’ fee awards will continue to be determined by reference to state provisions.

Courts in New York and throughout the Second Circuit will continue to rule that attorneys’ fees may be awarded in marine insurance coverage litigation only where there is some demonstration of bad faith, or perhaps a breach of the obligation of utmost good faith in handling the claim.[77]

At least two courts in the First Circuit have demonstrated quite recently that they understand there to exist a federal admiralty rule prohibiting awards of attorneys’ fees under state law or practice in marine insurance coverage litigation, other than in situations involving bad faith.[78]

No decision has been reported out of the Third Circuit since Sosebee v. Rath.[79] However, it appears reasonable to expect courts in that jurisdiction to continue to feel bound by the strong language of the appellate court’s ruling emphasizing the powerful and continuing interest in application nationwide of a uniform federal rule. That rule seeks to avoid the pitfall of having a significant element of a damage award be contingent upon the plaintiff’s selection of a particular forum in which to commence a suit.

An intermediate state appellate court in Washington State has recently embraced the reasoning of the Eleventh Circuit in Weisberg, rejecting the Kenealy case and its “notion” that a uniform federal admiralty rule exists prohibiting awards of attorneys’ fees unless there is a finding of bad faith.[80] The court even suggests that in the event it were to engage in some test involving balancing of the competing federal interest in uniformity of maritime law versus the state interest in protecting its citizen-insureds who are compelled to resort to litigation in order to establish coverage, the “harmony and uniformity of maritime law does not mandate preemption of the attorney fees determination.”[81]

The United States Court of Appeals for the Ninth Circuit, overseeing the entire West Coast of the country and the great and growing ports located there, has yet to rule on this subject.

VIII.

Conclusion

By following the holding in the Wilburn Boat case to its logical conclusion, certain courts have been instrumental in creating a chaotic situation where just a short time ago national uniformity and international legal harmony had been the rule. Now, in a case in which a policy warranty has been breached by the insured, the outcome of litigation might well be dependent upon whether the policy was delivered in New York or in Florida. In a case in which the evidence supports the conclusion that an unintentional but material misrepresentation was made by the insured during the application process, the outcome of litigation might well be dependent upon whether the policy was delivered in California or in Texas. With the Eleventh Circuit’s decision in Weisberg, the uncertainty that has been imported into these areas of substantive marine insurance law has now been introduced into the question of whether a punitive award of attorneys’ fees can also be visited upon a marine insurer unlucky enough to have guessed wrong on which law would apply and on how a coverage litigation would likely turn out. As the Third Circuit noted with concern in the Sosebee case, marine insurers and underwriters now confront a situation in which the availability of attorneys’ fees as an element of damages can depend upon where a plaintiff files its lawsuit. Even without evidence of bad faith or improper handling of a claim, courts in the Fifth Circuit, Eleventh Circuit and Washington State will now impose attorneys’ fees. Whereas, courts in the First Circuit, Second Circuit, Third Circuit, and Fourth Circuit will make such an award to a prevailing insured pursuant to a state statute only where the marine insurer can be shown to have acted in bad faith. There is no definitive decision as yet from the Ninth Circuit, or from the remaining federal appellate courts which, situated for the most part far from major seaports, should not be expected to take up cases involving significant marine insurance issues.

Short of willingness by the Supreme Court to take up the issue and resolve this conflict between the circuits, this sad and unfortunate situation will continue to prevail. In light of the fact that the last marine insurance case taken up for review by the Supreme Court was almost fifty years ago in Wilburn Boat, it must be considered highly unlikely that the Court will view the need for resolution of this dispute with any degree of urgency. It is instead rather likely that the situation involving awards of attorneys’ fees in marine insurance coverage litigation will be allowed to continue as it has, unsettled and with every case before every court presenting the issue anew as ever hopeful attorneys press their cases asking for damages.

The results in the future will be various, as they have been in the past. For some courts, motivated by the historic value placed upon international harmony and nationwide uniformity, the ruling of the Second Circuit in the Kenealy case will continue to be persuasive and awards of attorneys’ fees will not be permitted. In other courts, unconvinced of the need for, or even the desirability of a common law and practice in marine insurance, and unwilling to concede that marine insurers might be influenced to alter their business practices in locales that permit attorneys’ fees,[82] the ruling of the Eleventh Circuit in Weisberg will continue to constitute a polestar. Difficult and unpleasant as it might be to continue to navigate in such treacherous waters, marine insurers and underwriters wishing to do business in the domestic United States market will find that there is no other choice.

ENDNOTES

---

[1] Eliza Lines, 199 U.S. 119, 128 (1905).

[2] British Marine Insurance Act, 6 Edw. 7, C. 41, sec. 33.

[3] 348 U.S. 310 (1955).

[4] Id. at 316.

[5] The dissenting opinion filed by Justice Reed strongly protested the majority’s departure from what certainly seemed to have been an established and well entrenched federal rule of maritime law shared with the UK on this subject of the effect of a breach of a warranty in a policy of marine insurance, stating:

Our admiralty laws, like our common law, come from England. As a matter of American judicial policy, we tend to keep our marine insurance laws in harmony with those of England. Before our Revolution, the rule of strict compliance with marine insurance warranties had been established as the law of England. That rule persists. While no case of this court has been cited or found that says specifically that the rule of strict compliance is to be applied in admiralty and maritime cases, that presumption has been consistently adopted as the basis of reasoning from our earliest days. Other courts have been more specific. No case holds to the contrary.

Id. at 325 (citations omitted).

[6] The Supreme Court’s decision has been characterized as “persistently problematic,” see, Alex L. Parks & Edward V. Cattel, Jr., The Law of Tug, Tow and Pilotage, (2d ed. 1982); “an anomaly,” see, Nicholas J. Healy, The Hull Policy: Warranties, Representations, Disclosures and Conditions 41 Tul. L. Rev. 245 (1967); “chaos,” see, Grant Gilmore & Charles L. Black, Jr., The Law of Admiralty (2d ed. 1957).

[7] The decision in Steelmet, Inc. v. Caribe Towing Corp., 779 F.2d 1485 (11th Cir. 1986), states quite succinctly the type of analytical exercise that the courts see themselves as bound to pursue whenever an issue arises in a marine insurance case:

One must identify the state law involved and determine whether there is an admiralty principle with which the state law conflicts, and, if there is no such admiralty principle, consideration must be given to whether such an admiralty rule should be fashioned. If none is to be fashioned, the state rule should be followed.

Id. at 1488.

[8] Perhaps the most familiar and well established principle in all of marine insurance law is that such policies are uberimmae fidie, i.e., that they are contracts of “utmost good faith,” requiring that the insured make full disclosure of all material facts and permitting rescission of the policy in the event of even an innocent failure to comply with this admittedly harsh but historic and essential protection. In the case of Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882 (5th Cir. 1991), a panel of the 5th Circuit Court of Appeals relied upon Wilburn Boat to retreat from this doctrine of uberimmae fidei, permitting federal and state courts in Texas and Louisiana to refer to state law in both of those jurisdictions in order to resolve cases of alleged failure to disclose material facts. Under both Texas and Louisiana statutes, only evidence of fraudulent misrepresentation by the insured will support rescission of the policy.

[9] For a review of the statutory enactments see, Note, State Attorney Fee Shifting Statutes: Are We Quietly Repealing the American Rule?, 47 Law & Contemp. Probs. 321 (1984).

[10] Fla. Stat. ch. 627.428(1) (2002).

[11] Great Southwest Fire Ins. Co. v. DeWitt, 458 So. 2d 398, 400 (Fla. Dist. Ct. App. 1984).

[12] Ins. Co. of N. Am. v. Lexow, 937 F.2d 569, 573 (11th Cir. 1991).

[13] Id.

[14] Va. Code Ann. § 38.2-209 (Michie 2002).

[15] See Joseph P. Bornstein, Ltd. v. Nat’l Union Fire Ins. Co., 828 F.2d 242 (4th Cir. 1987).

[16] See Rush v. Hartford Mut. Ins. Co., 652 F. Supp. 1432 (W.D. Va. 1987).

[17] Olympic Steamship Co. v. Centennial Ins. Co., 811 P.2d 673, 681 (Wash. 1991).

[18] See Fluke Corp. v. Hartford Accid. & Indem. Co., 7 P.3d 825 (Wash. Ct. App. 2000), rev. granted, 22 P.3d 802 (Wash. 2001).

[19] Professor David W. Robertson also notes this “relative scarcity” of marine cases in the section of his broad article dealing with the general issue of attorneys’ fees in all varieties of admiralty and maritime litigation in the United States. See David W. Robertson, Court-Awarded Attorneys’ Fees in Maritime Cases: The “American Rule” in Admiralty, 27 J. Mar. Law & Comm. 507, 561 (1996).

[20] 800 F.2d 1379 (5th Cir. 1986).

[21] Id. at 1380.

[22] Id. at 1381.

[23] The panel does cite to a number of earlier decisions supporting reliance upon state law to answer the questions of whether attorneys’ fees lie in the context of a marine insurance dispute. See Am. E. Dev. Corp. v. Everglades Marine, Inc., 608 F.2d 123 (5th Cir. 1979); Offshore Logistics Servs., Inc. v. Arkwright-Boston Mfrs. Mut. Ins. Co., 639 F.2d 1142 (5th Cir. 1981); Eagle Leasing Co. v. Hartford Fire Ins. Co., 540 F.2d 1257 (5th Cir. 1976), cert. denied, 431 U.S. 967 (1977); Solomon v. Warren, 540 F.2d 777 (5th Cir. 1976); Stuyvesant Ins. Co. v. Nardelli, 286 F.2d 600 (5th Cir. 1961); Gulf Oil Corp. v. Mobile Drilling Barge or Vessel, 442 F. Supp. 1 (E.D. La. 1975), aff’d per curium, 565 F.2d 958 (5th Cir. 1978).

[24] 838 F.2d 572 (1st Cir. 1988).

[25] R.I. Gen. Laws § 9-1-33 (2002).

[26] Pace, 838 F.2d at 579.

[27] 994 F.2d 37 (1st Cir. 1993).

[28] Mass. Gen. Laws ch. 93A, § 11 (2002).

[29] Southworth Machinery, 994 F.2d at 41.

[30] Id.

[31] Id. (citation omitted).

[32] See Clarendon Am. Ins. Co. v. Fernandez, 1999 A.M.C. 2885 (D. P.R.); Jefferson Ins. Co. v. Maine Offshore Boats, Inc., 2001 A.M.C. 2171 (D. Me.).

[33] 893 F.2d 54 (3d Cir. 1990).

[34] V.I. Code. Ann. § 541 (1967).

[35] Sosebee, 893 F.2d at 56 (citation omitted).

[36] 72 F.3d 264 (2d Cir. 1995).

[37] 800 F.2d 1379 (5th Cir. 1986).

[38] Kenealy, 72 F.3d at 270 (citing Purilan Ins. Co. v. Eagle Steamship Co., 779 F.2d 866 (2d Cir. 1985)).

[39] 829 F.2d 293 (2d Cir. 1987), cert. denied sub nom. J.E. Bernard & Co. v. Ingersoll Milling Mach. Co., 484 U.S. 1042 (1988).

[40] Kenealy, 72 F.3d at 270 (citations omitted).

[41] Id.

[42] Id. at 271.

[43] 222 F.3d 1309 (11th Cir. 2000).

[44]. 1999 A.M.C. 1742 (S.D. Fla.).

[45]. 2000 A.M.C. 1953 (S.D. Fla.).

[46] On The Loose Travel, 1999 A.M.C. at 1744.

[47] 1995 A.M.C. 2657 (S.D. Fla.).

[48] Fla. Stat. ch. 768.79 (2002) states, in pertinent part:

In any civil action for damages filed in the courts of this state, if a defendant files an offer of judgment which is not accepted by the plaintiff within 30 days, the defendant shall be entitled to recover reasonable costs and attorney’s fees incurred by her or him or on defendant’s behalf . . . from the date of filing of the offer if the judgment is one of no liability or the judgment obtained by the plaintiff is at least 25 percent less than such offer.

[49] Garan, 1995 A.M.C. at 2661.

[50] See Fla. Stat. ch. 627.428(1) (2002).

[51] See 1999 A.M.C. 1742 (S.D. Fla.).

[52] See 2000 A.M.C. 1953 (S.D. Fla.).

[53] See 1995 A.M.C. 2657 (S.D. Fla.).

[54] All Underwriters v. Weisberg, 222 F.3d 1309, 1313 (11th Cir. 2000).

[55] Id.

[56] 855 F.2d 814 (11th Cir. 1988).

[57] 842 F.2d 1237 (11th Cir. 1988).

[58] 628 F.2d 376 (5th Cir. 1980).

[59] See 1995 A.M.C. 2657 (S.D. Fla.).

[60] Id. at 2661.

[61] 800 F.2d 1379 (5th Cir. 1986).

[62] 72 F.3d 264 (2d Cir. 1995).

[63] The Eleventh Circuit panel derived intellectual support for this position from the Robertson article, supra note 19, in which the author had opined that the federal admiralty rule approved by the Second Circuit in the Kenealy decision was in fact nothing more than the so-called “American Rule” which generally provides that each side in any litigation should pay its own fees and costs in the absence of some statutory rule to the contrary. The “American Rule” being merely procedural, the author had argued that Kenealy therefore “rests on a conceptual error,” and was to that extent “wrongly decided.” Id. at 563-66.

[64] 829 F.2d 293 (2d Cir. 1987), cert. denied sub nom. J.E. Bernard & Co. v. Ingersoll Milling Mach. Co., 484 U.S. 1042 (1988).

[65] Id. at 309.

[66] 994 F.2d 37 (1st Cir. 1993).

[67] 893 F.2d 54 (3d Cir. 1990).

[68] All Underwriters v. Weisberg, 222 F.3d 1309, 1314 (11th Cir. 2000).

[69] See Clarendon Am. Ins. Co. v. Fernandez, 1999 A.M.C. 2885 (D. P.R.); Jefferson Ins. Co. v. Maine Offshore Boats, Inc., 2001 A.M.C. 2171 (D. Me.).

[70] Garan, Inc. v. M/V Aivik, 1995 A.M.C. 2657, 2661 (S.D. Fla.).

[71] Sosebee v. Rath, 893 F.2d 54, 56 (3d Cir. 1990).

[72] All Underwriters v. Weisberg, 222 F.3d 1309, 1314-15 (11th Cir. 2000).

[73] 254 F.3d 987 (11th Cir. 2001).

[74] Id. at 1009 (citing Weisberg).

[75] 800 F.2d 1379 (5th Cir. 1986).

[76] See, e.g., Albany Insurance Co. v. Anh Thi Kieu, 927 F.2d 882 (5th Cir 1991).

[77] See, e.g., New York Marine & Gen. Ins. Co. v. Tradeline, 2000 A.M.C. 2139 (S.D.N.Y.).

[78] See Clarendon Am. Ins. Co. v. Fernandez, 1999 A.M.C. 2885 (D. P.R.); Jefferson Ins. Co. v. Maine Offshore Boats, Inc., 2001 A.M.C. 2171 (D. Me.).

[79] 893 F.2d 54 (3d Cir. 1990).

[80] Axess Int’l, Ltd. v. Intercargo Ins. Co., 30 P.3d 1 (Wash. Ct. App. 2001).

[81] Id. at 8.

[82] See, e.g., the comment of the Washington State Court of Appeals in Axess, in which it stated its belief that “[i]t is highly unlikely a fee award in Washington would alter the business practices of insurers . . . .” Id.

(Author’s bio)

Steven E. Goldman is a partner in the law firm of Goldman & Hellman, and is a member of the New York and Florida bars. His practice concentrates upon the representation of marine insurers in coverage disputes with insureds.