PT Adidaya Energy Mandiri v. MS First Capital Insurance Ltd [2022] SGHC(I) 14; [2022] 2 Lloyd’s Rep 381
Factual and Contractual Matrix
The assured operated an unmanned single point mooring buoy (SPM) at a gas field which was moored to seabed by nine set of chains at three locations on its skirt area. The insurance policy provided cover for physical damage to the SPM on total loss basis only with an insured value of US$ 4, 700,0000. The policy, inter alia, contained two warranties:
Clause 1- “The Insured Equipment is only to be operated by and under the supervision of suitably trained and authorised personnel…”
Clause 8- “Suitable precautions and preservation/maintenance measures to be adopted when storing, handling, transporting and operating Insured Equipment.”
The policy was subject to English law as amended by the Insurance Act (IA) 2015. It also contained a clause to the effect that the assured should notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy.
Between 1 and 13 July 2018, several collisions between the SPM and a crude oil tanker (The Bratasena) occurred during loading operations leading to the flooding of the SPM’s compartments. Emergency repairs were carried out in August/September 2018 and further repairs were made in situ in December 2018. The SPM received further repairs in May/June and November 2019. The assured claimed that the SPM was a constructive total loss (CTL) by tendering a Notice of Abandonment (NoA) on 22 May 2019. The assured also claimed expenses incurred to prevent the SPM from becoming a total loss as sue and labouring expenses. The assured’s indemnity claim was rejected by the insurer on various grounds mainly due to breach of marine warranties and procedural issues. The assured’s claim for sue and labouring expenses was also rejected by the insurer. The assured brought the current proceedings against the insurer before the Singapore International Commercial Court as per jurisdiction agreement in the contract.
Breach of Warranty
Sir Jeremy Cooke IJ, was of the opinion that both of the warranties in the contract were breached. The assured was in breach of Clause 1 as no evidence was presented showing that the crew was adequately trained to operate the insured equipment. It was also held that there was a breach of cl. 8 as there was no static tow in place to ensure that The Bratasena did not surge into the SPM. Moreover, it was found that there was no 24/7 watchkeeping during loading operations which meant another failure in the provision of suitable precautions and preservation measures. It was also found that the crew’s failure to notify the assured of every contact with the SPM constituted a further breach as that prevented any corrective measure taken.
Having established that both cl 1 and 8 were breached, the trial judge held that the cover was suspended at the time of the loss by virtue of s. 10(2) of the IA 2015. It was also held that s. 11(3) of the IA 2015 could not assist the assured here as there was no prospect of the assured showing that non-compliance with the warranties did not increase the risk of the loss which actually occurred in the circumstances which it did occur.
Other Defences Raised by the Insurer
The clause requiring the assured to notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy was held to be a condition precedent to the liability of the insurer. It was held that this clause was breached (which barred recovery) as the assured even though by 17 July 2018 was aware that there had been several collisions between the SPM and The Bratasena, gave no notification to the insurer until 5 September 2018.
Agreeing with the contention of the insurer, the Court also found that the SPM was not a constructive total loss as the repair costs (estimated to be around US$ 2 million by the insurer’s expert and US$ 3.2 million by the assured’s expert) did not exceed the insured value under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906. It was also held that (even if the repair costs had exceeded the insured value of the SPM), the assured could not treat the loss as constructive total loss as it failed to tender NoA within a reasonable time (as required by s. 62(1)(3) of the MIA 1906). The trial judge stressed that NoA was not tendered until 22 May 2019 even though the temporary and permanent repairs required to preserve the vessel from being a total loss had been completed by mid-December 2018. Sir Jeremy Cooke IJ was convinced that the assured had waived its right to abandon the SPM to the insurers as it sold the equipment in June 2019 for US$ 400,000 at an undervalued price on the premise that it was a liability, but it kept operating it following the collision and kept earning a revenue. All these inconsistent actions pointed to the Court that the assured was dealing with SPM for its own account throughout so its offer to cede its interest in the SMP to the insurer was taken to have been withdrawn.
The assured’s claim for sue and labouring costs were mostly rejected. By virtue of s. 78(3) of the MIA 1906, to qualify as a sue and labour expense, it is necessary to show the assured that the expenses were incurred for the purpose of averting or minimising a loss to the insured property. This puts a serious limit on a policy like this one which provides cover on “total loss basis” only allowing the assured to claim costs that had been spent to prevent the insured property from an immediate risk of total loss as sue and labouring expenses. On that basis, the Court held that most of the expenses were not recoverable as sue and labouring expenses. More precisely:
- Replacement of the mooring hawser was not incurred to preserve the property from total loss;
- Inspection costs of the mooring chain, SPM riser and the pipeline end manifold, had no influence on the loss;
- Effecting permanent repairs (especially in 2019) did not qualify as there was no longer a risk of sinking.
The only expense recoverable as sue and labouring expense was the inspection costs and repairs to prevent further flooding immediately after the collisions in July 2018 (US$ 20,875 on the estimate of the insurer’s expert).
Comment
The Court’s findings on the CTL issue and sue and labour clause do not break any new ground. What we see here is a very good application of established legal principles to the facts of the case with the assistance of insurance experts.
However, given that this is the first case (known to the author) that gives judicial airing to the changes introduced on the traditional warranty regime by the IA 2015 (in addition to academic scrutiny carried out- see, for example, observations of the author in 3rd edition of Warranties in Marine Insurance (2017, Routledge), his contribution to Cambridge Law Journal [2016] “Risk Control Clauses in Insurance Law” pp, 109- 127, Professor Clarke’s observations published in The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (Informa Law, 2017), pp. 54-59 comments of R. Merkin and Ö. Gűrses, “The Insurance Act 2015: Rebalancing the Interests of the Insurer and the Assured” (2015) 78 MLR 1004), it is worth commenting on that aspect of the case.
The case is a very good reminder that when dealing with a warranty that requires the assured to adopt safety standards and practices (such as cl 8 here), when such standards are not maintained by the assured, it will be very difficult (if not impossible) to convince the Court that non-compliance with such warranty could not have increased the risk of loss which actually occurred in the circumstances in which it occurred (s. 11(3) of the IA 2015). From the way the arguments were presented to the judge, it is also evident that (as predicted by academics) the effect of s. 11(3) is to introduce a test of causation from the backdoor! Inevitably, the courts will be drawn into an enquiry as to whether the loss would have happened in the manner it did, had the safety standards been appropriately adopted.
One should also bear in mind that the effect of s. 11(3) could be negated altogether (i.e., the assured could be prevented from arguing that the breach of warranty did not contribute to the occurrence of the loss so that it should not have any detrimental impact on coverage) if it is drafted in a way that serves the purpose of describing the limits of the cover as a whole. A warranty of that nature is excluded from the application of s. 11(3) on the premise that such a term will have a general limiting effect not linked to a specific risk (s. 11(1) stipulates: “This section applies to a term (express or implied) other than a term defining the risk as a whole,…”). Unfortunately, this matter was not deliberated by the trial judge in depth, but it could be plausibly argued that cl. 1 is such a term as it requires the insured equipment to be operated only by and under the supervision of suitably trained and authorised personnel. On that basis, it can be viewed as going to the definition of the insured risk rather than simply being a term designed to reduce the risk of a particular type of loss. If so, regardless of whether breach of cl. 1 has contributed to the loss, the risk is suspended the moment the insured equipment is operated by personnel who are not adequately trained until that situation is rectified (as long as, of course, the breach does have a lasting impact on the risk (s. 10(2) of the IA 2015). Lack of discussion on the nature of cl. 1 did not here have any impact on the outcome as the judge was convinced that non-compliance with the warranty did, in fact, increase the risk of loss which actually occurred in the manner in which it occurred but such an analysis would have helped us to see how judges actually deal with the issue of identifying whether a warranty is one that “describes the risk” (which is excluded from the application of s. 11(3) of the IA 2015) or is one which is designed to reduce the risk of “loss of a particular kind” or “loss at a particular location” or “loss at a particular time”.
