Waiver of Further Disclosure- The First Case Under the Insurance Act 2015

The Insurance Act (IA) 2015, which came into force on 12 August 2016, applies in England and Wales, Scotland and Northern Ireland (s. 23 of the IA 2015). It fell to the Court of Session (Outer House) in Scotland to deliver the first judgment under the Act in Young v. Royal and Sun Alliance plc [2019] CSOH 32.

The co-assureds (Mr Young and Kaim Park Investments Ltd, a company of which Mr Young was a director) brought a claim of £ 7.2 million for extensive fire damage to commercial premises insured. The insurer, Royal and Sun Alliance plc, rejected the claim on the basis that the assured failed to disclose material information (a commercial assured is under a duty of fair presentation under the IA 2015).

The policy had been entered through an insurance broker. The assured was requested by the insurance broker to fill in a proposal form which was prepared using the broker’s software. One part of the proposal form required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The drop-down menu that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent. Neither Mr Young nor Kaim Park Investments had been declared bankrupt or insolvent, however, Mr Young had previously been a director of four other companies which had entered into insolvency. The option which was selected on the proposal form was “None”. Accordingly, the proposal forwarded to the insurer showed the option selected, i.e. “None”, and the list of persons to which the declaration related. Once receiving the presentation, the insurer sent an e-mail to the brokers providing a quote for cover and a list of conditions. The conditions, inter alia, included: “Insured has never been declared bankrupt or insolvent.

In the present case, the assured’s argument was that the insurer’s e-mail response amounted to a waiver by the insurer of its right to receive the undisclosed information regarding the four insolvent companies.

The 2015 Act introduces no fundamental change on the law on waiver (a point which both parties agreed). By virtue of s. 3(5) (e) of the Act, the assured is not required to disclose a circumstance “if it is something as to which the insurer waives information.”

The judge, Lady Wolffe, reviewing the case law under the Marine Insurance Act (MIA) 1906 reiterated that waiver in this context can typically arise in one of two ways:

  • Where the insured had submitted information that would prompt a reasonably careful insurer to make further enquiries but the insurer had failed to do so (WISE (Underwriting Agency) Ltd v Grupo Nacional Provincial SA [2004] 2 All ER (Comm) 613); and
  • Where the insurer had asked a “limiting question” such that the insured could reasonably infer that the insurer had no interest in knowing information falling outwith the scope of the question (Doheny v New India Assurance Co [2005] 1 All ER (Comm) 382). The classic example is where the proposal form asks about convictions within the last 5 years and which can instruct waiver of information about convictions more than 5 years ago.

It was decided by Lady Wolffe that only the second of these forms of waiver could be relevant in the present case. Therefore, the key issue was whether it could be inferred from the e-mail of the insurer to the broker stating that the “assured has never been declared bankrupt or insolvent” that the insurer waived information regarding the involvement of Mr Young in other companies which had entered insolvency.

Reviewing the case law on the point, Lady Wolffe stressed that in determining whether the insurer’s email response amounted to waiver, the key consideration was whether a reasonable person in the position of the assured would be justified in thinking that the insurer had restricted its right to receive all material information. It needs to be borne in mind that when presenting the risk to the insurer, the broker utilized its own form rather than the insurer’s proposal form. The relevant part of the proposal form required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The choices that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent, but when assessing the risk, the insurer had only seen the selected option of “None” in the presentation. They had not seen the full list of options which the assured had selected from (which the judge referred to as matters concerning “Moral Hazards”). Therefore, the insurer’s email response intended to clarify that unknown matter. The insurer had done this by listing in the email the various hazards that required to be included. As a result, it was held that the reference in the email response to “the Insured” was not intended to limit the scope of the information being provided but had simply been used as shorthand for the group of persons identified in the presentation. Accordingly, there was no waiver on the part of the insurer with regard to the information not fully disclosed (i.e. the involvement of Mr Young in four insolvent companies).

Even though the case is the first one considered under the Insurance Act 2015, it does not shed any light on any of the novel concepts introduced by the Act. The decision was concerned with the preliminary question of waivers and was decided in light of authorities on the subject which have already existed for some time. Essentially, the fact that the broker’s own proposal form was used meant that the scope of information provided had been controlled by the assured and that it was impossible to be found as a waiver.

The Saga Continues- What Really Happened to the Brillante Virtuoso?

The Brillante Virtuoso was sailing from Ukraine to China with a cargo of fuel oil when she was boarded by pirates off Gulf of Aden on 5 July 2011. The pirates directed the vessel to Somalia but when the engine stopped and could not be re-started, they allegedly placed a detonator in the engine room causing a huge damage to the vessel. The vessel was insured for $US 55 million with an additional $US 22 million increased cover with ten Lloyd’s underwriters. The underwriters refused to indemnify the assured (Suez Fortune Investments Ltd). The assured and its bank (Pireus Bank AE) brought a claim against the insurers. In the first stage of the trial, the claimants were successful and Flaux, J, (as he then was) held that the vessel was a constructive total loss under s. 60(2)(i) of the Marine Insurance Act 1906 as she was damaged by an insured peril and the cost of repairs would exceed the insured value of the ship when repaired [2015] EWHC 42 (Comm). The insurers argued unsuccessfully that in taking into account the repair value of the damage, the cost of repairs at China should be taken into account. The claimants, on the other hand, argued that the repairs were completed in Dubai and the cost incurred at Dubai should be taken into account even though the cost of repairs in Dubai was 17.5 % more than the cost of repairs in China. Flaux, J, held that that the appropriate location for repairs will depend on the individual circumstances of the case. In this case, he was of the view that Dubai was the most appropriate place for repairs taking into account i) risks that will be associated with further towage to China; ii) cost of insurance for the tow; iii) loss of income for additional period of time; and iv) reputation of yards (not only with regard to the quality of workmanship but also accuracy of cost estimates and the risk of delay).                        

The Brillante Virtuoso after the incident!

The second stage of the trial which will determine the issues of liability of the insurers commenced on 18 February 2019. Parties have different views of what happened to the Brillante Virtuoso in July 2011. The owners argue that the attack was carried out by the pirates who were or used to be members of the Yemeni navy or coast guard. The insurers, on the other hand, put forward the view that the attack was staged by the owners of the ship so this is a case of “wilful misconduct” of the assured. The insurers also rely on other defences, such as breach of various warranties in the policy. It is expected that this will be a lengthy trial but hopefully we shall finally find out what really happened to The Brillante Virtuoso.

Condition Precedents/Warranties in Insurance Contracts

Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC)

Constructing the meaning of words used in insurance contracts is a regular function of courts. In this case, the meaning of various terms, which appeared in the policy that Wheeldon (the assured) had with Millennium Insurance Co Ltd (the insurer), received judicial airing. The assured owned a waste processing plant which was destroyed in a major fire in June 2014. The assured’s claim for indemnity was turned down by the insurer who argued that the assured was in breach of several terms of the policy. The assured brought this action seeking declaratory relief that the insurer is liable under the policy for the loss.

The Deputy Judge, Mr Jonathan Acton Davis QC, first of all sought to identify the cause of fire at the plant. The plant produced solid recovered fuel by removing non-combustible components from inputted waste material transported on conveyor belts. It was discovered that a failed bearing caused a misalignment of one of the conveyor belts which created a gap between it and a trommel (a rotating industrial sieve). Combustible materials which would have been otherwise caught by the sieve, dropped through the gap at the bottom of the conveyor and began to accumulate there. The friction caused by the failed bearing led to hot metal fragments dropping into the accumulated combustible material thus starting a fire.

The insurer, inter alia, argued that the assured was in breach of:

  1. A condition precedent to liability which provided that “combustible waste must be stored at least 6m away from any fixed plant” (storage condition)
  2. A warranty that required “all combustible stocks and/or wastes to be removed from picking station base and/or trommels and/or hopper feeds and balers etc when business is closed.” (combustible materials warranty)
  3. A condition precedent which required the assured “to maintain all machinery in efficient working order in accordance with the manufacturer’s specifications and guidelines and keep records of all such maintenance” (maintenance condition)

At the plant, there were potentially combustible materials, such as a combination of glass, stones and soils which passed through the sieve, and were kept 6 meters of the fixed plants. Also, combustible materials had accumulated in the gap created by the conveyor belt misalignment. The Deputy Judge held that the presence of such materials did not amount to breach of the “storage condition” in the policy. It was stressed that the word “combustible” should be given the meaning, which would be understood by an ordinary person and not its scientific meaning, which is anything which burns when ignited. On that basis, a layman would not regard a combination of “glass, stones and soils” as combustible. The judge also indicated that the word “store” implied a degree of permanence and a conscious decision by the assured to designate an area to keep a particular material. On that basis, materials accumulated in the gap created by malfunctioning cannot said to be “stored” within the meaning of the condition in the policy.

With regard to (ii), the combustible materials warranty, the assured provided evidence that there was a system requiring employees to undertake a visual inspection and carry out the necessary cleaning each day. The judge held that even though the system, without more, was insufficient, the fact that it was in place and had been adhered to were adequate to comply with the warranty.

On third point, the judge found that the failure of the bearing, without more, did not conclusively mean that there was a breach of this condition. In any event, there was no evidence of any breach. As to the requirement to keep formal records, the judge agreed with the assured that their system of daily and weekly checklist was adequate. Furthermore, the judge stressed that if the insurer required records to be kept in a particular format, this should have been prescribed clearly in the maintenance condition.

Although the focus of the case is construction of certain terms in an insurance contract, it is a reminder to insurers that they need to be clear and specify the particulars carefully in the clause if they want to attribute a specific or scientific meaning to a word or requirement on the part of the assured. Otherwise, any word or requirement in a condition precedent or warranty is likely to be construed by courts as an ordinary person would read them.

It should be noted that request for permission to appeal against this judgment has recently been turned down by the Court of Appeal.

Insurable Interest in Insurance- Adopting A Commercial Solution

Broadgrain Commodities Inc v. Continental Casualty Company [2017] ONSC 4721

Does a CIF seller still have an insurable interest in a cargo policy after the goods are delivered to the carrier (i.e. risk of loss or damage to the goods is transferred to the buyer under the CIF contract)? This was the main debate in the case before the Ontario Superior Court of Justice (Canadian Marine Insurance Act 1993 is similar to the unamended version of the UK Marine Insurance Act 1906).

Here,a cargo of 26 containers of sesame seeds were sold by the claimant (Broadgrain) on CIF basis and insured by the insurers under an open policy which intended to insure the claimant and its property as well as the property of others in respect of which the claimant had an obligation to insure under various contracts entered into during the insurance period. The cargo was loaded on board the carrying vessel in Nigeria in October. It was common ground that the risk had passed to the buyer at that stage. The full contract amount was paid by 12 December by the buyers. Under the sale contract, the title in the good was to pass upon payment and the buyer granted the seller a security interest in the cargo until all amounts had been paid. When the vessel arrived at its destination, Xingang, on 17 December, it was discovered the goods had been damaged during transit and the claimant sought indemnity under the insurance policy from the underwriters.                    

The insurers moved for a summary judgment to dismiss the action on two grounds: i)the claimant did not have “insurable interest” in the goods at the time of the loss; and ii) the claimant did not sustain any loss as, despite the damage to the goods, it was paid in  full by the buyer for the shipment in question.

On the first point, the insurers sought to rely on two Federal Court decisions(Green Forest Lumber Ltd v. General Security Insurance Co of Canada [1977] 2F.C. 351 (F.C.T.); aff’d [1978] 2 F.C. 773 (F.C.A), aff’d [1980] 1 S.C.R. 176 and Union Carbide Corp v. Fednav Ltd [1997] F.C.J.No. 665 (F.C.T)) which contained statements made in obiter to the effect that, where goods are shipped on CIF terms and the goods are loaded on board the ship, the seller no longer has an insurable interest and cannot claim under a policy of insurance. 

The court, rightly so, indicated that the Supreme Court of Canada in Kosmopoulosv. Constitution Insurance [1987] 1 SCR 2 has adopted a non-technical definition of “insurable interest” pointing out that any real interest of any kind in a marine adventure should qualify as an insurable interest. It was stressed that a contrary solution would act to the detriment of international trade. On that basis, it was held that in the present case even though the risk passed upon loading in October, and the title passed upon payment, the seller’s retention of security interest would qualify as an equitable relation to the adventure such as to give the seller an insurable interest that subsisted throughout the voyage.

However, judge’s finding on the insurable interest point was not adequate to secure victory for the claimant.  The summary judgment for insurers was granted on the second ground. Accordingly, it was held that the claimant had suffered no loss as payment had been made by the buyer in full and the assertion that the buyer had reduced payments on subsequent cargoes was dismissed for lack of evidence.

The case is a yet another illustration of the fact that when defining insurable interest, courts are taking a more liberal stance as advocated in various English judgments (e.g. The Moonacre [1992] 2 Lloyd’s rep 501; National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 380 and The Martin P [2003] EWHC 3470 (Comm)) and not likely to follow the lead of Macaura v. Northern Assurance Co Ltd (1925) 21 LIL Rep 333 to insist that a legal or equitable relation must exist between the policy and the subject matter insured. It is safe, therefore, to say that courts are likely to find insurable interest in cases where they are convinced that the assured has not entered into the policy as an act of wager or is not attempting to make an illegitimate gain from the insurance transaction and as long as some kind of connection (even merely economic) between the insured property and the assured exists.             

Autonomous Ships- Regulatory Work Begins

The idea of developing smart ships that have ability to navigate without human input has been around for some time and as a result of technological developments in recent years, it is believed that this could be a reality in near future.

The Maritime Safety Committee (MSC) of the International Maritime Organisation (IMO) at its most recent meeting (MSC 99) in May 2018 agreed to establish a Working Group (WC) (named as Maritime Autonomous Surface Ships (MASS) WC) to undertake a scoping exercise with a view to identifying which of the existing international instruments dealing with maritime safety should be amended and what new instruments should be developed to facilitate the operation of such vessels in international waters.

For the purposes of this exercise, a number of provisional definitions have been prescribed. Most significantly, MASS is defined as “a ship which, to varying degree, can operate independent of human interaction”. This is a very broad definition and encompasses all of the ships that are currently under consideration. The WG has prescribed four degrees of autonomy: (MSC 99/WP.9 Annex 1, para 4)

  1. Ship with automated processes and decision support. Such ships have on board seafarers to operate and control shipboard systems and functions.
  2. Remotely controlled ships with seafarers on board. The ship is controlled and operated from a distant location.
  3. Remotely controlled ships without seafarers on board. The ship is controlled and operated from a distant location.
  4. Fully autonomous ships. Here, the operating system of the ship is able to make decisions and determine actions by itself.

The categorisation seems to be rather basic but perhaps simplicity is necessary at this early stage. We suppose in case of (ii), it is envisaged that seafarers on board will have technical knowledge and knowhow to intervene and take control in case of an emergency. It is also worth noting that ever increasing cyber risks should be taken into account and especially in case of (iii), it is curious to know what steps can be taken to ensure that the safety is not compromised in a case where contact between the ship and offshore operator is lost. This could be also a significant issue with regard to vessels which have full autonomy (e.g. iv).

It is worth reminding ourselves that the scope of this exercise is restricted to instruments concerning maritime safety (i.e. COLREG 1972, SOLAS 1974, STCW 1974, SAR 1979 and International Convention on Loadlines 1966). Once smart ships become operational other problems, i.e. the liability of manufacturers/software producers, impact of cyber risks on traditional division of liability, salvage law, are also likely to arise. These issues do not form at this stage part of the IMO’s work on the subject.

It is expected that the work of the MASS WC will be completed by the end of 2020. Even then, this is only beginning of a long journey. It will possibly take another decade or so to formulate new legal rules and amend existing ones to enable autonomous ships to engage in cross-border commercial operations. However, as Lao Tzu once famously said:

“The journey of a thousand miles begins with one step”.

Please note that smart ships will form part of the discussion in our 14th Annual Colloquium to be held on 10-11 September 2018:

https://www.eventbrite.co.uk/e/new-technologies-and-shippingtrade-law-tickets-46148370017

 

New Package Holiday Regulations in Force in the UK as of 1 July 2018

On 1st July 2018, the Package Travel and Linked Travel Arrangements Regulations 2018 (hereinafter referred to as the Package Regulations 2018) (SI 2018/634) entered into force to give effect to the Directive (EU) of the European Parliament and of the Council EU 2015/2302. This replaces the Package Travel, Package Holidays and Package Tours Regulations 1992.

The Package Regulations 2018 introduce several changes taking into account the transformation that the travel industry has gone through especially in the last decade. The main changes are:

  1. Redefining “package holiday” and extending the scope of the Regulations

Today, people do not usually purchase their holidays from travel shops but instead utilise internet (i.e. their mobile phones, laptop etc). It is also common to use an online travel agent where elements of holiday (i.e. flight, hotel) are bought separately although the consumer might get the impression that he/she is purchasing a package. Therefore, to offer extended protection for today’s consumers, a new definition of “package holiday” has been introduced. The new definition will capture thousands of more arrangements sold on a daily basis especially on the internet increasing consumer protection. For example, if elements of a holiday are offered or sold separately this will still be treated as a package holiday for the purposes of 2018 Regulation if a total price is charged to the consumer (Article 2, (5)(b)(ii)). Similarly, if a consumer purchases a product commonly known as “holiday gift box”, this will be treated as a package holiday even if the precise hotel, for example, or precise combination, is yet to be ascertained(Article 2, (5)(b)(iv)).

Also, consumers purchasing package holidays are increasingly interesting in renting cars for sightseeing purposes. Under 1992 Regulations, there was a package holiday if at least two travel services were included in the package- i.e. transport, accommodation and other tourist services. With 2018 Regulations, “car rental” is added to the list meaning that a contract that provides the consumer holiday accommodation and a rental car will be viewed as a package holiday within the scope of the Regulations.

2. Price Alterations

Article 10 indicates in which instances the price of the package holiday can be increased after the booking is made.

This is only possible if:

  • The contract expressly stipulates that such an increase may be made;
  • The prize increase is a direct consequence of changes in a) the price of the carriage of passengers resulting from the cost of fuel or other power sources; and b) the level of taxes or fees on the travel services included in the contract imposed by third parties not directly involved in the performance of the package.

The procedure as to how the price increase may be made is stipulated in the Regulation.

3. Cancellation of the Contract

Article 12(4) for the first time allows organisers to stipulate “reasonable standardised termination fees” when a booking is cancelled by the consumer. On the other hand, consumers have been afforded a new right to cancel without paying cancellation charges “… in the event of unavoidable and extraordinary circumstances occurring at the place of performance of the package, or which significantly affect the carriage of passengers to the destination.” (Article 12(7)). It is envisaged that this provision might prove problematic in practice especially if extraordinary events occur in the vicinity of the place of performance but there is no evidence that such events have caused disturbance at the location which the holiday maker was planning to go. For example, if a hurricane hits a nearby state (Alabama), would that justify the consumer to cancel a package holiday to Florida?

4. Liability of the Organiser

Under 1992 Regulations, the organiser is liable to compensate the consumers if something goes wrong during the holiday (i.e. problems arising during transportation or sub-standard accommodation is offered to the consumer) or if the consumer suffers illness or injury. This position is not altered under the 2018 Regulations but the liability of the organiser has been defined slightly differently. Under Article 15, the organiser is liable if there is “lack of conformity” with the package travel contract. It is submitted despite the use of new terminology, this will not create a significant change in the liability regime. This is because “lack of conformity” has been defined in Article 2(b) as “a failure to perform or improper performance of the travel services included in a package” which is precisely the wording used in 1992 Regulations.

From the perspective of transport law rules, 2018 Regulations offers the organisers the same protection that the previous Regulations provided.

Article 16(5) of 2018 Regulations provides that:

“In so far as the international conventions limit the extent of, or the conditions under which compensation is to be paid by a provider carrying out a travel service which is part of a package, the same limitations are to apply to the organiser.”

This means that if a passenger is injured whilst on board a ship involved in an international voyage, if the organiser is treated as a “contractual carrier” from the perspective of the relevant international regime, the Athens Convention on the Carriage of Passengers and their Luggage by Sea, the organiser will be able to rely on the limits afforded to carriers by that Convention. (It was stressed by HHJ Hallgarten QC in Lee v. Airtours Holidays Ltd & Another [2004] 1 Lloyd’s Rep 683, at [32] that a tour operator could be treated as “contracting carrier” under the Athens Convention as long as it assumes responsibility for the performance of the contract including the sea leg.) The position will be the same if the passenger is injured on a plane in an international voyage or on a train engaged in an international voyage.

5. Insolvency protection

The Regulation requires the organiser of a package holiday, who is established in the United Kingdom, to provide effective security in the event of organiser’s insolvency to cover the cost of refunding all payments made by or on behalf of travellers for any travel service not performed as a consequence of the insolvency (Article 19).

The Regulation 2018 also introduces a mutual recognition requirement. Accordingly, the UK must accept the insolvency protection arrangements entered into by organisers established in another EU Member State. Likewise, other Member States are required to accept the insolvency protection put in place by UK-based organisers.

One word of caution! Given that the Regulation is intended to implement an EU Directive, it is hard to predict what the position will be after BREXIT in March 2019 especially with regard to insolvency protection requirements. There is a serious risk that UK companies might be cut out of the European market unless they start a business in an EU county and offer insolvency protection as required by the Directive.

Marine Cargo Policies Do Not Normally Provide Cover for Economical Losses

Engelhart CTP (US) LLC v. Lloyd’s Syndicate 1221 for the 2014 year of account [2018] EWHC 900 (Comm)

Having purchased 1,967.898 metric tonnes of cooper ingots, said to be shipped in 102 containers from New York, the buyer (assured) obtained “Marine Cargo and Storage Insurance Policy” from various insurers at Lloyd’s. The insurance policy, inter alia, stated:

“… noted and agreed that unless otherwise declared the contrary, the broadest coverage shall apply.”

“Container Clause

It is agreed that this Insurance contract is also to pay for shortage of contents (meaning thereby the difference between the number of packages as per shippers and/or suppliers invoice and/or packing list loaded or alleged to have been laden in the container and/or trailer and/or vehicle load and the count of packages removed therefrom by the Assured and / or their agent at time of container emptying) notwithstanding that seals may appear intact, and/or any other loss and/or damage including but not limited to cargo and/or container sweat howsoever arising.”

 

“Fraudulent Documents

This insurance contract covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or Shippers of fraudulent documents of title, including but not limited to Bill(s) of Lading and/or Shipping Receipt(s) and/or Messenger Receipt(s) and/or shipping documents and/or Warehouse Receipts and/or other document(s) of title.

This insurance contract is also to cover physical loss of or damage to goods insured caused by utilisation of legitimate Bill(s) of lading and/or other documents of title without the authorisation and/or consent of the Assured or their Agents and/or Shippers.”

On arrival at Hong Kong for transhipment, it was discovered that no cooper ingots were, in fact, shipped in the containers. Indeed, no such cargo existed and the containers only contained slag of nominal commercial value.

The assured’s claim for indemnity was turned down on various grounds but it was specifically stipulated by Sir Ross Cranston, sitting as a judge of the High Court, that all risk marine cargo insurance was generally construed as covering only losses following from physical loss or damage to goods and this policy as a whole did not displace the presumption against cover for pure economic loss.

The trial judge  dismissed the assured’s contention that the alleged loss fell under the container clause stressing that the term “shortage” in the clause should be given its ordinary meaning and could not cover a situation where there was no goods in the first place. He also emphasised that the “fraudulent documents” clause expressly and exclusively responded to “physical loss of or damage to” goods through the acceptance of dishonest documents so this clause rather than displacing the presumption against cover for pure economic loss in cargo policies endorsed it in the sense that it did expressly indicate that no cover was available for physical losses.

2 points emerge from the judgment:

  1. Considered from the perspective of the construction of contracts, the decision is not at all surprising. It is in line with the spirit of several high profile judgments of the Supreme Court, such as Rainy Sky SA Kookmin Bank [2011] UKSC 50; Arnold v. Britton [2015] UKSC 36 and Impact Funding Solutions Ltd v. Barrington Support Services Ltd [2016] UKSC 57, which emphasise that construing a written document is “first and foremost” a textual exercise. On that premise, a clear and express wording is required to extend the cover of a marine cargo policy to losses which are economic in nature. General statements in the policy purporting to describe the nature of coverage provided in broad terms are not on their own capable of extending the nature of cover beyond physical loss or damage to goods.
  2. It is somehow surprising that the insurers did not develop an alternative defence to the claim by arguing that the policy in this case was void (or did not attach) as the subject matter of insurance has never existed in the first place (see AF Watkinson & Co. Ltd. v. Hullett (1938) 61 L1L Rep 145) In fact, it was argued forcefully in Marine Insurance Fraud, (2014, Informa Law) at 2-117-2-118) that where insurance is obtained for an imaginary cargo, the non-disclosure and misrepresentation is of such magnitude that there is no cover at all.             

Warranty or Not?

Bluebon Ltd (in liquidation) v Ageas (UK) Limited, Aviva Insurance Ltd and another [2017] EWHC 3301 (Comm)

The assured, owners of the Star Garter Hotel at West Lothian, having purchased the property in December 2007, obtained an insurance policy from insurers, Ageas and Aviva, which incepted on 3 December 2009 for a period of 12 months. The insured property suffered loss by fire on 15 October 2010 and a claim was made. The insurers denied liability on the premise that the Electrical Installation Inspection Warranty was breached. The relevant term in the policy was worded as follows:

“It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”

On the premise that the last electrical inspection at the Hotel had taken place in September 2003, the insurers argued that the policy was either void or suspended from the outset. In the case, the trial judge, Bryan, J, was required to determine:

  1. The proper construction of the Warranty – was the five-year period to be calculated from the date of the last electrical inspection, or from Policy inception?
  2. Was the Warranty a True Warranty, a Suspensive Warranty, or a Risk Specific Condition Precedent, and what was the consequence of a breach?

The proper construction of the warranty

The assured argued that the five year period should be calculated from the date the policy has been incepted. Taking into account the commercial purpose of the warranty, i.e. ensuring that the risk of fire is minimised (whilst also protecting the health and safety of the insured and the occupiers of the hotel), the judge rejected this contention. This objective can only be achieved if the electrical installation is inspected at regular intervals, e.g. every five years, and any defects identified are remedied. The judge also suggested that the contention of the assured, i.e. the installation inspected every 5 years from the inception of the policy, would make no commercial sense and not work in the context of a one year policy, like this one.

This outcome makes sense and the judgment is in line with recent authorities on the matter such as AC Ward & Son Ltd v. Catlin (Five) Ltd [2009] EWHC 3122 (Comm) and GE Frankona Reinsurance Ltd v. CMM Trust No 1400 (The Newfoundland Explorer) [2006] EWHC 429 (Admlty), analysed by the author in his contribution to the 4th Volume of The Modern Law of Marine Insurance (2016, Informa Law) “New Parameters in Construing Insurance Contracts”

Legal classification of the clause            

The insurers argued that the clause in question was a true warranty and accordingly in this case breach had the effect of rendering the policy void from inception as the warranty related to a period before the attachment of the risk. Alternatively, they argued that the clause was a “suspensive provision” and as the inspection had not been carried out in 2008, the cover was suspended from the outset, i.e. the insurer never came on the risk. Conversely, the assured argued that the clause was a “Risk-Specific Condition Precedent”- i.e. a term which required compliance in respect of risks relating to the electrical installation. Therefore, in case of breach the assured could not recover for liabilities that emerge from risks associated with the electrical installation but cover should be available for liabilities that emerge from other risks.

The assured’s contention was a novel one and essentially based on the premise that a clause could make compliance with a specific aspect of the risk condition precedent to liability. That is certainly possible but clear and apposite language is required to achieve such an outcome. That does not seem to be the case here and the trial judge finding in favour of the insurers expressed the view that the clause was a “suspensory provision”. In reaching this conclusion, he worked on the assumption that the clause was designed to ensure that the assured undertakes such an inspection immediately if there had been no such inspection in the last five years. In other words, he assumed that the intention of the clause was to encourage the assured to get the inspection done as soon as possible by suspending the cover until it is completed. The author is not certain that this was the original intention of the insurers. The insurers in all probability desired to assess the risk accurately at the outset by ensuring that they were insuring a property that had gone through electrical surveys at regular intervals. To the author, it was clear that the clause went to the root of the contract and bore materially on the risk of fire and damages would not have been an adequate remedy (these are all the attributes of a true warranty as highlighted by Rix, LJ in HIH Casualty & General Insurance v New Hampshire Insurance Co [2001] EWCA Civ 735, at [101]). In fact the judge himself appreciated that the term carried all these attributes! It is, therefore, arguable that this was a true warranty.

In the end, the judge’s classification of the clause as a “suspensory provision” had no impact on the outcome. In the present case, the cover was suspended from the outset as the electrical survey had not been concluded 5 years after the previous one by the time the policy had been incepted.

The outcome is in line with the recent trend in the judiciary, i.e. to avoid classifying terms as warranties due to the harshness of the remedy they attract in case of their breach. (see, for example, Sugar Hut Group v. Great Lakes Reinsurance (UK) Plc [2010] EWHC 2636 (Comm)) Of course, had the case been considered under the Insurance Act 2015 a different outcome could have been possible. Under s. 11 of the 2015 Act, the assured could possibly argue that this was a term designed to reduce the risk of a particular type (i.e. fire that is caused by electrical default) and the assured should be able to recover for the loss if he can show that its breach did not increase the risk of the loss which occurred in the circumstances in which it occurred.

It is worth noting that s. 11 is not available in cases where the term in question is designed to define the risk in a general way. The author does not think that the clause in question is of that nature but nevertheless one should be alert to the fact that this kind of disputes could arise under the new Act as s. 11 introduces a type of causation test from the backdoor (even though the Law Commissions were desperate to avoid such an outcome!). (for a more analytical evaluation on s. 11 and the effect of changes on law see- B. Soyer, “Risk Control Clauses in Insurance Law: Law Reform and the Future” (2016) Cambridge Law Journal 109)

CTL Assessment in Marine Insurance

The Swedish Club v Connect Shipping (The MV Renos) [2018] EWCA Civ 230

The insured vessel, the Renos, was on a laden voyage in the Red Sea in August 2012 when a fire broke out. The owners sought assistance and on 23 August a salvage agreement (in LOF form) was signed to deliver the vessel to a place of safety. The salvors invoked the SCOPIC clause immediately and brought the vessel to anchorage off the Suez Canal on 31 August. The owner’s surveyor inspected the vessel and estimated that the repair cost would be in the region of US$ 8 million. The insurer’s surveyor, on the other hand, valued the repair costs around US$ 5.527 million. It was a common ground between the assured and insurer that to be declared as a constructive total loss (CTL) under s. 60 of the Marine Insurance Act (MIA) 1906, the repair costs needed to be in excess of US$ 8 million.

The vessel was towed to a place of safety, the port of Adabiya (Egypt), by the end of September 2012.  There, the owners in conjunction with the insurer’s surveyors drew up a repair specification which was completed by the end of November. In December, the owners received several repair quotations ranging from US$ 2.8 million to US$ 9 million. Discussions over the repairs continued between the assured and insurer throughout January 2013 and ultimately the owners issued a notice of abandonment on 1 February 2013.

The insurers refused to accept the notice of abandonment on the premise that it was not given within a reasonable time after receipt of reliable information of the loss and a reasonable time for inquiry, as stipulated by s. 62(3) of the MIA 1906. The trial judge, Knowles, J, delivered the judgment on this point [2016] EWHC 1580 (Comm) in favour of the assured indicating that due to the complexity of the repairs required and contradictory information received from different surveyors as to the cost of repairs, it was understandable why it took until 1 February 2013 for the assured to give notice of abandonment. Therefore, it was held that the assured did not lose its right to abandon the vessel to underwriters under s. 62(3) of the MIA 1906.  The insurers appealed to the Court of Appeal on this point.

Another point of dispute was the type of costs that can be taken into account for the purposes of the CTL calculation. Relying on the wording of s. 60(2)(ii) of the MIA 1906, which stipulates that “in estimating the costs of repairs…. account is to be taken of the expense of the future salvage operations” the insurers argued, unsuccessfully before the trial judge, that the costs incurred prior to the date of date of the notice of abandonment should not be included. It was also argued that the payment due under the SCOPIC clause should not be taken into account in estimating the costs of repairs. This argument was also rejected. The insurers also appealed against these findings to the Court of Appeal.

The Court of Appeal’s decision is momentous especially on the issue of calculation of cost of repairs for identifying whether CTL can be declared on the premise that “the cost of repairing the damage would exceed the value of the ship when repaired”.  Hamblen, LJ, who delivered the judgment of the Court of Appeal, was of the opinion that the relevant date for calculating the costs of repair for this purpose was the date of the casualty. The reference to “future” in s. 60 (2)(ii) was justified on the premise that this was a word of inclusion rather than exclusion making it clear that future costs should be taken into account alongside those already incurred. This certainly makes sense considering how matters progress in practice. Once a casualty arises, the first consideration of any owner is to appoint a salvor to assist his ship rather than sending a notice of abandonment to their hull insurers just in case the casualty is serious and the cost of repair (including salvage cost) is high enough to justify abandoning the insured vessel to underwriters. At that stage, the assured simply does not possess adequate information to be able to make a decision as to whether to send a notice of abandonment or not.

The decision of the Court of Appeal on the SCOPIC expenses could prove to be more controversial. In the present case, the cost of the salvage operation was around US$ 1.2 million for the notional Art. 13 salvage award and US$ 1.428 million in respect of SCOPIC paid over and above the Art. 13 award. It was the contention of the insurers that the SCOPIC costs should not be taken into account as costs within s. 60(2)(ii) of the MIA 1906 as the SCOPIC remuneration was conceptually different from Art. 13 award payable and not payable under the hull and machinery policy. Affirming the first instance judgment, Hamblen, LJ, rejected this contention. He was of the opinion that the benefit that was conferred on the insured property by the SCOPIC services could not be easily divorced from the benefit under Art. 13 award. Put differently, had there been no SCOPIC element, the insured vessel would presumably have been declared economically unsalvageable and, therefore, a wreck. Therefore, in determining whether the vessel had become a CTL it should be disregarded which insurer (hull and machinery insurer or P & I Club) pays which part of the salvage award. The author understands the reasoning behind this decision. But it ultimately means that in determining whether CTL under a hull and machinery policy has arisen, costs which do not fall for indemnity under that policy (i.e. SCOPIC award) should be taken into account. One might regard this outcome counter-intuitive and even slightly peculiar and it is possible that insurers might wish to reverse this position by adding clauses to the contracts in future to the effect that SCOPIC reward should not be taken into account in calculating costs under s. 60(2)(ii) of the MIA 1906.

The decision of the Court of Appeal on the point whether the assured had lost their right to abandon the vessel to them under s. 62(3) of the MIA 1906 does not set a precedent but is a good illustration of the difficulties that can emerge after a casualty in determining whether notice of abandonment was given in a reasonable amount of time. On this point too, the Court of Appeal affirmed the judgment of the first instance judge. Hamblen, LJ, stressed that in determining whether notice of abandonment was given in a reasonable time the factual context needed to be examined carefully. The nature of the casualty in this case meant that obtaining reliable information about the loss would inevitably be complex and take time. Also, given that the repairs required were likely to be substantial and complex, it would have been very difficult to have reliable information as to loss until quotations from various shipyards had been received. Such quotations were not received until early December. Furthermore, insurers on several occasions challenged the findings of the assured’s surveyor making it rather difficult for the assured to have reliable information to make a decision as to whether they would abandon their interest to the insurer or not. Hamblen, LJ, concluded on this point at [58] by stating “…the Insurers chose at the time to carry out their own detailed surveys so as to produce their own repair specification and quotations for repair costs, which they relied upon to demonstrate that the Vessel was not a CTL. They shared that information with the Owners, insisted on its correctness, and can hardly complain if it is taken into account in considering whether there was reliable information of the loss.”

Independent Contractors Facing Unlimited Liability!

JD Irving Ltd v. Siemens Canada Ltd (The SPM 125) 2016 FC 287 (Federal Court of Canada)

 The shipowners, JDI, engaged a firm of marine consultants to prepare stability calculations in respect of the loading of a cargo of large industrial equipment on and off the barge SPM125. During the loading process, the cargo was damaged and the owner of the cargo brought an action against the carrier claiming damages (CAD$45,000,000). The cargo owner also brought an action against the firm of marine consultants and the naval architect (who was the principal of that firm and had carried out the calculations) for the same amount.

The question that arose in this case was whether the firm of consultants had a right to limit their liability under the Convention on Limitation of Liability for Maritime Claims 1976, as amended by the Protocol of 1996, which has been incorporated into Canadian law by Part 3 of the Marine Liability Act.

Article 1(4) of the Convention stipulates:

If any claims set out in Article 2 are made against any person for whose act, neglect or default the shipowner or salvor is responsible, such person shall be entitled to avail himself of the limitation of liability provided for in this Convention.

There is no firm judicial reasoning on this point and differing opinions have been expressed in text books. The Court has subscribed to the view that Article 1(4) would afford limitation to a person if the shipowner or salvor has vicarious liability for the actions of that person. This would be the case when the negligence of a master or crew member gives rise to a claim by a third party against the owner or salvor. The crew or master in that case would accordingly have a right to limit their liability under the Convention. However, the relationship between an employer and an independent contractor would not usually give rise to a claim for vicarious liability and on that basis, such contractors are not afforded a right to limit their liability under Article 1(4) of the Convention. Applying this reasoning, it was held that the marine consultants in the present case could not enjoy the right of limitation.

The decision is a significant one as it adopts a new yardstick in determining whose actions a shipowner and/or salvor is responsible for in the context of the application of Article 1(4) of the Limitation Convention 1976 as amended by 1996 Protocol. The relevant party is able to limit its liability if the shipowner and/or salvor has vicarious liability for the actions of that party. Apart from marine consultants, classification societies, freight forwarders and logistics experts are likely to fall under this category. The judgment is not binding on English courts but obviously its reasoning needs to be considered carefully when the issue does arise, in addition, it sends a strong warning to the liability insurers of independent contractors as lack of the prospect of limitation would mean a huge increase in the exposure that they might face!