The First Circuit Court of Appeals recently held that, under Puerto Rico law, a breach of warranty excuses a maritime insurer from paying a claim regardless of whether the breach has any causal connection to the loss at issue. Lloyd’s of London, et al. v. Pagan-Sanchez, et al., No. 07-1709 (August 21, 2008). The court reached this decision, and reversed the district court, despite acknowledging that Puerto Rico law requires a showing of a causal connection between the breach of warranty and the loss in order for an insurer to properly refuse payment of a claim under other types of insurance policies.

As an initial matter, the court found erroneous the district court’s decision that the warranty clause at issue was ambiguous. The court noted that “[t]he contract interpretation question of whether there is an ambiguity in [a] warranty clause” is a question of law for the court to decide. It then found that the clause was clearly a warranty and was clear and unambiguous. The court therefore interpreted the clause “as written under usual insurance law” and found that the insured was in breach of the warranty.

As to the ramifications of the breach, the appeals court rejected the trial court’s holding that a breach of warranty in a maritime insurance context must be causally connected to the loss in order for an insurer to refuse payment of a claim. The court noted that Puerto Rico has expressly excluded maritime insurance from its insurance statute (including the causal connection requirement provision) and that the federal and majority state views have rejected a causal connection requirement under maritime insurance. The court further discussed general and Puerto Rico-specific policy reasons for the distinction between maritime and other insurance. Based upon its analysis, the court reversed the lower court, predicted that Puerto Rican courts would find no causal connection requirement in the maritime insurance context and remanded for entry of summary judgment for the insurers.

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