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Origins and Characteristics of Navigation and Trading Warranties

Trading Warranties (also called Navigation limits) can be found in almost every marine insurance policy. A typical yacht policy navigation warranty states: “This policy provides coverage when the ‘insured yacht’ is being used or navigated within navigation limits specified on the Declarations page. There is no coverage under this policy if the ‘insured yacht’ is being used or navigated outside the navigation limits specified on the Declarations page.” The Declarations page may then provide certain route restrictions (e.g., remain in inland waterways), may specify areas to be avoided during hurricane season, or may limit how far offshore the vessel may go before “sailing out of coverage.”
 
Navigation/trading warranties date back to the early days of sailing. Then, as now, insurers carefully examined the risk and set the premium, based upon whether the vessel would remain in known waters between safe ports, during calm weather, or would be facing dangers such as hurricanes or pirates. Coverage would be immediately terminated once the insured deviated from the warranty. English law has always provided for strict interpretation and application of navigational warranties (known as the “literal compliance rule”). A breach of warranty would void the policy and coverage of a loss would be denied – even if there was no connection between the violation of the warranty and the cause of the loss. 

 

Until 1955, courts in the United States also followed the “literal compliance rule” in maritime cases. However, that year the U.S. Supreme Court decided the case of Wilburn Boat v. Fireman’s Fund Ins. Co. InWilburn Boat the Supreme Court held that the breach of a warranty in a policy of marine insurance should be interpreted in accordance with applicable state law, unless it was found that there was already an “entrenched” precedent under federal maritime law. Admiralty law scholar Alex Parks put it another way: “Under Wilburn, where a state statute requires that the breach of warranty must contribute to the loss, the state statute governs; where the state statute does not so provide, a mere violation of the warranty is sufficient to void the policy even though the loss may not be attributable to the breach.”  

In deciding Wilburn, the Supreme Court apparently attempted to avoid the harsh effect of the literal compliance rule by permitting courts to apply certain “anti-technical statutes” that had been adopted by a minority of states. These statutes required insurers to prove that a breach of warranty caused or contributed to the loss, before they could deny coverage based upon a breach of warranty. However, despite the Supreme Court’s good intentions, since 1955, the lower courts have either ignored Wilburn, or found ways to circumvent it, thereby effectively reinstating the literal compliance rule. Today, an insured’s breach of a navigational warranty, provides the marine insurer with one its most potent grounds upon which to void the insurance policy and to deny coverage of losses occurring after the navigational limits have been violated - regardless of whether the violation has any causal connection with the claimed loss. 

Some courts have achieved this end by simply following the Wilburn rule. After looking to state law, they find that the state would enforce the literal compliance rule. Other courts have simply ignored Wilburn, and held that there is an entrenched federal maritime law precedent that requires strict compliance with navigational warranties, regardless of causal connection with the loss. Other courts have held that strict compliance is required by both state and federal law. The only courts following Wilburn and applying state laws that require there to be a causal connection between the breach of warranty and the claimed loss, appear to be in Texas and Oregon.  

On the East Coast of the United States, the following quotation from the Eleventh Circuit’s 1988 decision of Lexington Ins. Co. v. Cooke’s Seafood, appears to summarize the general rule in this geographic region: “Admiralty law requires the strict construction of express warranties in marine insurance contracts; breach of the express warranty by the insured releases that insurance company from liability even if compliance with the warranty would not have avoided the loss.”  

Due to the harsh results of a breach of warranty, insurance agents and brokers must be particularly careful when responding to requests from insureds for a modification of their navigation/trading limits. In several cases, courts have held that agents have spoken with apparent authority for the insurer, when they notified insureds that their navigation limits had been modified, when in fact, the insurer had not approved the change. In such cases, the agents face potential liability to the carrier for conveying unapproved modifications of navigational limits to the insured. In one case the court even held that there was an issue of fact as to whether a broker (usually acting on behalf of the insured) could act for the insurer. On the other hand, courts have held that notice of navigation limits, given by the insurer to the broker, is considered notice to the insured, even though the broker never conveyed the limits to the insured. One insurer attempted to negate the apparent authority of its agent to modify navigation limits without its consent, by relying on the policy language that allows changes to the policy only when made by “us.” However, the court held that without express language stating that agents could not bind the insurer to changes, the “us” clause did not relieve the insurer of complying with an extended navigation limit, granted by the agent without the insurer’s consent.  

In several cases, insurance claims for vessels lost beyond their navigational limits have been denied and policies voided by insurers, only to have coverage reinstated by the courts after holding that the real cause of the loss was barratry. In those cases, the Captains of the vessels fraudulently used the vessel for their own purposes (such as a drug run) without the knowledge or consent of the owners. Since the barratry was initiated before the vessels crossed the navigational limit, such claims were held covered. 

Other courts have refused to enforce navigational limits that were not sufficiently described in the policy. Such clauses are still strictly construed against the insurer. Navigational limits must be drafted with great specificity in order to avoid being found ambiguous and unenforceable. In one case, the navigational limit included northern and southern boundaries of latitude, but failed to specify the distance that could be traveled out to sea. Therefore, the court held that the insured vessel could sail around the world without violating the navigational limits. Of course, as with all warranty clauses, the insurer may waive its right to enforce the navigational limit in the event it does not raise the violation as grounds for the initial declination of coverage. 

Navigational limits are fundamentally the result of risk analysis in the formation of the insurance contract. If the insurer is not willing to accept the risk of insuring the vessel beyond a certain point, or after a certain date, it will set navigational limits that it is not required to alter or amend unless it agrees to do so. Any insured that violates navigational limits (except in an emergency) does so at its own peril, with the likely result that its policy will be voided and coverage of any claim made following the breach will be denied, regardless of whether the violation of the navigational limit caused or contributed to the loss.  

Stephen F. White is a maritime attorney with the law firm of Wright, Constable & Skeen, LLP in Baltimore, Maryland. You can contact Mr. White at 100 North Charles Street, 16th Floor, Baltimore, MD 21201‑3812. Ph:   (410) 659‑1304 Fax: (410) 659‑1350. 

© Stephen F. White 2007

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