Author: Professor Barış Soyer

Professor Soyer was appointed a lecturer at the School of Law, Swansea University in 2001 and was promoted to readership in 2006 and professorship in 2009. He was appointed Director of the Institute of Shipping and Trade Law at the School of Law, Swansea in October 2010. He was previously a lecturer at the University of Exeter. His postgraduate education was in the University of Southampton from where he obtained his Ph.D degree in 2000. Whilst at Southampton he was also a part-time lecturer and tutor. His principal research interest is in the field of insurance, particularly marine insurance, but his interests extend broadly throughout maritime law and contract law. He is the author of Warranties in Marine Insurance published by Cavendish Publishing (2001), and an impressive list of articles published in elite Journals such as Lloyd’s Maritime and Commercial Law Quarterly, Berkley Journal of International Law, Journal of Contract Law and Journal of Business Law. His first book was the joint winner of the Cavendish Book Prize 2001 and was awarded the British Insurance Law Association Charitable Trust Book Prize in 2002, for the best contribution to insurance literature. A new edition of this book was published in 2006. In 2008, he edited a collection of essays published by Informa evaluating the Law Commissions' Reform Proposals in Insurance Law: Reforming Commercial and Marine Insurance Law. This book has been cited on numerous occasions in the Consultation Reports published by English and Scottish Law Commissions and also by the Irish Law Reform Commission and has been instrumental in shaping the nature of law reform. In recent years, he edited several books in partnership with Professor Tettenborn: Pollution at Sea: Law and Liability, published by Informa in 2012; Carriage of Goods by Sea, Land and Air, published by Informa in 2013 and Offshore Contracts and Liabilities, published by Informa Law from Routledge in 2014. His most recent monograph, Marine Insurance Fraud, was published in 2014 by Informa Law from Routledge. His teaching experience extends to the under- and postgraduate levels, including postgraduate teaching of Carriage of Goods by Sea, Transnational Commercial Law, Marine Insurance, Admiralty Law and Oil and Gas Law. He is one of the editors of the Journal of International Maritime Law and is also on the editorial board of Shipping and Trade Law and Baltic Maritime Law Quarterly. He currently teaches Admiralty Law, Oil and Gas Law and Marine Insurance on the LLM programme and also is the Head of the Department of Postgraduate Legal Studies at Swansea.

Off-Hire Clauses- Burden of Proof, Impact of Covid-19 and Legal Construction

London Arbitration 6/22

The vessel was chartered on trip basis on an amended NYPE form from India to China. The vessel was delivered to charterers’ service on 29 June 2020 and arrived at the first loading port at 04.30 on 30 June. The vessel then commenced drifting until 19.22 on 30 June in order to complete the cleaning of the holds. In fact, it was a requirement under the charterparty that the vessel’s holds to be washed down by fresh water, dried and ready in all respects to receive the charterers’ intended cargo of iron ore pallets/fines/lumps to an independent surveyor’s satisfaction. The charterparty also allowed owners 24 hours for cleaning the holds. The owners acknowledged that the 24 hours permitted expired at 13.44 on 30 June and they had, therefore, exceeded the allowance permitted by 5 hours and 38 minutes by completing cleaning at 19.22 on 30 June. They have, on that premise, accepted that the vessel was off hire during this period. However, charterers argued that hold cleaning was not completed at the end of the drifting period (by 19.22 on 30 June) and submitted that extensive manoeuvring by the vessel after the end of the drifting period has been an attempt by the owners to delay the time of arrival at the first load port with clean holds to ensure that the vessel would not be seen to have used time which would otherwise have fallen outside the agreed cleaning period. In fact, it was alleged by the charterers that hold cleaning continued between the end of the drifting period and was ultimately completed at the arrival of the vessel at the first load port. On that basis, it was the contention of the charterers that the vessel was off hire until 03.36 on 1 July (the time which the notice of readiness was tendered). To substantiate their point, the charterers relied on a message sent to them by owners on 26 June setting out their plan to clean holds taking into account the short ballast leg between previous discharge port and next port of loading.

The arbitration tribunal held that there was no evidence to substantiate the allegations made by the charterers that cleaning of holds continued after 19.22 on 30 June or that the voyage from the end of the drifting period to arrival at the first load port was prolonged by any further cleaning undertaken by the vessel. Therefore, the vessel was off hire until 19.22 on 30 June. Without being aware of all the evidence presented to the tribunal, it is hard to criticise the finding of the tribunal on this point but as a general principle of law the burden of proving something was not the case falls upon the party arguing it and clearly charterers failed to prove their point. There was nothing in the message on 26 June relied on by the charterers to suggest that owners did in fact not complete cleaning of holds at the time they said they did. In the message, the owners simply indicated that completing cleaning might be problematic in the time frame, but they set out a schedule to achieve the required cleaning.

It was also argued by charterers that the vessel was off hire from 14.40 on 26 July until 15.30 on 28 July while awaiting a quarantine officer’s permission to discharge in China. The delay was caused as one of the crew members had a slight fever (37.4 Celsius) and it was as a result requested by the quarantine officer that a nucleic acid test is conducted.

The relevant provisions of the charter party were:

Clause 15   

In the event of loss of time from deficiency of men or stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, drydocking for the purpose of examination or painting of bottom, or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost.                         

Clause 45

Officers and crew to comply with vaccination and sanitary regulations in all ports of call and corresponding certificates to be available on board, enabling the vessel to obtain free pratique by radio.

 The crux of the charterers’ argument was that illness of crew member constituted a deficiency of men within cl 15 or alternatively the events fells within the definition of “any other cause” in cl 15. It was also contended that the owners were in breach of cl 45.

The tribunal was of the view that a body temperature of 37.4 Celsius was within the normal range of temperatures for human body and there was no reasonable ground to assume that the crew member was ill. Therefore, there was no good reason for the actions of the quarantine officer which were clearly excessive and arbitrary. On that basis, the delay was not an off hiring event within cl. 15- there was simply no “deficiency” of crew or the full working of vessel was not affected adversely as a result of a similar incident. It was also held that cl 45 was not relevant as there was no evidence that the owners and/or master failed to comply with the vaccination and sanitary regulations at the discharge port or there was evidence of any absence of certificates required be on board.

The events at the discharge port took place when China was implementing very strict measures to deal with the outbreak of the pandemic. That said, terms of a commercial agreement still need to be construed in line with the established principles of law and construction. The finding of the tribunal emphasises once again the fact that off hire clauses (just like any exception clause) will be construed narrowly (as illustrated recently in The Global Santosh [2014] EWCA Civ 403 by the Court of Appeal).

It is also clear from the finding of the tribunal that burden to prove that the off hiring event took place is on the charterers and mere speculation will not be adequate to convince the arbitral panel or judge that the event might have occurred in a particular way.            

Performance Claims in Trip Time Charters- Log Book Entries and Weather Routing Company Reports

London Arbitration 23/21

The charterted vessel was on a trip charter of about 55 days without guarantee from Recalada (Argentina) to Cuba. The charterparty form used was NYPE 1946 with additional clauses, and contained a performance warranty (cl 74) which stipulated:         

SPD/CONS ARE ABOUT, UNDER GOOD WEATHER CONDITION’ I.E. THE WINDS NOT EXCEEDING BF4, EVEN KEEL, NO DECK CARGO, NO SWELL, NO ADVERSE CURRENTS, THE SEA STATE UP TO DOUGLAS SEA SCALE 3 (MAX 1.25M). THE WORD ABOUT IN SPEED/CONSUMPTION REFERS TO AN ALLOWANCE OF +/- 0.5 KNOTS ON SPEED AND +/- 5% ON BUNKER CONSUMPTION RESPECTIVELY BOTH ALWAYS IN VESSEL’S FAVOUR. ANY GAIN ON TIME AND/OR CONSUMPTION TO BE SET OFF AGAINST LOSS OF TIME AND/OR CONSUMPTION – IF ANY.

ABT 13 KNOTS ON ABT 20 TONS VLSIFO + 0,1 MT LSMGO ECO SP/CONS:

ABT 12 KNOTS ON ABT 18 TONS VLSFO + 0,1 MT LSMGO

Clause 67 of the charterparty also provided:

The Charterers may supply an independent weather bureau advice to the Master, during voyages specified by the Charterers and the Master shall comply with the reporting procedure of the weather bureau. However, the Master remains responsible for the safe navigation and choice of route. Alternatively Charterers have the option to instruct the Master to report daily to a weather bureau during the execution of sea voyages. The weather bureau will subsequently produce a performance analysis report.

Evidence of weather conditions shall be taken from Vessel’s logs. Consideration of minimum 24 hours continuous good weather periods from noon to noon. No hire deductions for alleged underperformance claims. Vessel to be monitored by Charterers’ appointed weather routing company strictly in accordance with the performance warranty. The independent weather reporting bureau appointed by Charterers will be for their account. This does not preclude Owners from appointing their own independent weather reporting bureau for their account which evidence along with Vessel’s evidence shall be taken into consideration by all parties.

The charterers instructed a weather routing company (WRC) which prepared a report on the performance of the chartered vessel during the trip concluding that the chartered vessel achieved a good weather performance speed of 10.63 knots on the voyage compared to the minimum 12.5 knots warranted. As part of its assessment, the WCR employed a “good weather parameter” which utilised significant wave height (which naturally included swell) and ignored the effect of the adverse currents. Accordingly, the charterers claimed that the trip took an additional 87.78 hours (so was off hire during that period)- a sum of US$ 49,383 and they also claimed excessive bunker consumption in the sum of US$ 31,423.20. The charters also contended that the hull was fouled on entry into charterparty, which was a breach of line 22 of the Charter form providing that “On delivery the vessel to be… tight, staunch and in every way fitted for the service.” The charterers also challenged the veracity of the logbooks as “not true and correct logs of the voyage.”            

The arbitrator found that:

1) In the light of the evidence presented by the charterers, the vessel’s hull was fouled on entry into the charter (especially the constantly high slip figures on the laden voyage were inconvertible indication of hull fouling). This was a defect of the hull in breach of line 22 of the charterparty. Moreover, as the vessel was not in every way fit for the service to be undertaken, the owners were in breach of the charterparty, which resulted in a loss of time. The loss of time was an off-hire event under cl. 15 of the charterparty.

2) The arbitrator was convinced that the master exaggerated the wind and sea conditions recorded in the log book from sailing from Recalada until 16 February so he failed to maintain a true and correct log in breach of cl. 11.

3) The arbitrator found that the role of cl 67 was to evaluate the performance strictly in accordance with the parameters set in this clause. However, WRC essentially devised its own methodology of assessing the vessel’s true performance by construing the parameters set in cl. 67. Therefore, WCR’s findings were based on non-contractual criteria and not binding. However, based on the finding that the log entries were not accurate, the arbitrator was satisfied that the vessel underperformed in speed due to a hull deficiency.    

The finding of the arbitrator was in favour of the charterer but it clearly demonstrates that if the charterparty specifies the source of data from which good weather assessment should be derived, that data needs to be used and an assessment that employs other methods (or data) will be regarded as non-contractual regardless of how sound those methods are.  The arbitral finding also shows that increasingly reports from weather routing companies play a significant role in performance claims and the days of relying solely on the log book entries of the master are long gone! Performance claims usually require complicated assessment methods and there is plenty technical analysis in this arbitral finding that might be useful to parties and arbitrators in the future especially when depicting “good weather” qualification.          

Athens Convention- Elaboration on key terms “defect in ship” and “fault”

Warner v. Scapa Flow Charters (No 2) [2021] CSOH 92

The pursuer was the widow of Mr Warner who tragically died in a technical exploratory diving trip on a wreck off Cape Wrath on 14 August 2012. The defenders facilitated the trip and skippered the boat (MV Jean Elaine). While walking in his cumbersome gear, including diving fins, preparing for a dive, Mr Warner fell off the deck of the vessel. This fall caused him, unknowingly, to suffer internal injuries. Stating that he was fit, he started his dive but during the dive he got into difficulties and made a rapid surface ascent due to the pain of his internal injuries. By the time he surfaced, his breathing apparatus was no longer in situ and he drowned.       

Mrs Warner brought an action for damages on behalf of her son. The action was within the scope of the Athens Convention 1974 (by virtue of the Carriage of Passengers and their Luggage by Sea (Domestic Carriage) Order 1987). It was argued that:

  1. Mr Warner’s injury arose from or in connection with a “defect in ship”. This meant under Article 3(3) of the Athens Convention that the carrier’s fault could be presumed.
  2. Even if not, the carrier was at fault as it failed to make adequate risk assessment.

The Outer House of the Court of Session held that the injury was not connected with or arose from a “defect in ship”. There was no evidence that the configuration of the deck defective. Also, it was pointed out that there were handrails that could have been put to sensible use, but at the time of the incident Mr Warner was not using them. The Court, however, held that the carrier was at fault in that he failed to recognise that the system of dive preparation he had set up or allowed to develop permitted or even encouraged divers to walk on deck in fins, and that was an inherently risky activity to the extent that consideration should have been given to putting in place mechanisms apt to eliminate it or at least bring it under control. Given the known risk of falls while walking in fins, particularly given the equipment worn by technical divers, and the unavailability of swift medical assistance on board, there should have been put in place proper precautions to mitigate the risk. Such precautions would have eradicating or minimising the risk of falling and Mr Warner would not have fallen at all, or it he did, he would not have  sustained a serious injury as he in fact sustained, because the force of any fall would probably have been broken by him holding on to a handrail or being supported by the onboard deckhand.  Accordingly, the defenders were liable to make reparation to the pursuer in terms of Art 3(1) of the Athens Convention 1974.               

What do we learn from the case?

The Athens Convention 1974 does not provide a definition for the term “defect in ship”. This means that determining whether an injury has occasioned from a “defect in ship” needs to be addressed by the national court. It is hard to suggest that the court’s handling of the matter in the present case is not satisfactory. That said, it should be noted that 2002 version of the Athens Convention provides a more rounded definition for this term. There, a defect in the ship has been described as “any malfunction, failure or non-compliance with applicable safety regulations in respect of any part of the ship or its equipment when used for the escape, evacuation, embarkation and disembarkation of passengers, or when used for the propulsion, steering, safe navigation, mooring, anchoring, arriving at or leaving berth or anchorage, or damage control after flooding; or when used for the launching of life saving appliances” (Article 4 of the Athens Convention 2002). Given that the main finding of the Court here was that the carrier failed in their risk assessment and there was no evidence that the deck’s configuration was defective, it is unlikely that a different outcome would have been reached even if Athens Convention 2002 had applied in this case.       

It is also left to the national law to determine what amounts to “fault” for the purposes of Article 3 of the Athens Convention 1974. This enabled the Court to adopt a flexible approach in determining whether the carrier was at fault for failing to make appropriate assessment of the risk. The Court initially focussed on a statutory duty to carry out a risk assessment of those on board under Regulation 7 of the Merchant Shipping and Fishing Vessels (Health and Safety at Work) Regulations 1997 but then moved its focus to general duty to exercise reasonable care for the health and safety of others onboard and a positive obligation to assess risk. This approach is in line with the general principles of tort law and a similar approach has been employed by British courts in the context of deliberating what amounts to “fault” under the Athens Convention- see Janet Dawkins v. Carnival PlC (t/a) P & O Cruises [2011] EWCA Civ 1237.

One positive development coming out of the case, especially for small maritime operators and their insurers, is that the Court found that a risk assessment was carried out by the skipper here although it was not written down or recognised as such (and of course although it was not adequate). This indicates that risk assessments need not to be formal affairs and a dynamic risk assessment carried out by the skipper or operator might be deemed to be adequate in some instances.            

For a comprehensive analysis of these issues see:

Carriage of Passengers by Sea: A Critical Analysis of the International Regime– by B. Soyer and G. Leloudas published

[2018] Michigan State University International Law Review, Volume: 26, Issue: 3, Pages: 483 – 535

This article has been cited with approval by the District Court of Columbia in Erwin-Simpson v. Berhard (DC DC, 2019).

Proposal Questions and Implied Waiver in Insurance Contracts

It is common for underwriters to utilise automated computer underwriting systems through which applications for insurance are evaluated and processed without the need for individual underwriter involvement. Reliance on such emerging technologies inevitable brings attention to the questions posed to potential assureds in the proposal forms used by such systems. Any ambiguity in the wording of questions put forward to the assureds is likely to have an adverse impact on the insurer’s ability to claim non-disclosure or misrepresentation. This was the central issue in Ristorante Ltd T/A Bar Massimo v. Zurich Insurance Plc [2021] EWHC 2538 (Ch).

The facts can be briefly summarised as follows: The assured obtained an insurance policy that provided cover for inter alia business interruption, money, employer’s liability and legal expenses. The insured property was damaged by fire in 2018 and when the assured sought to claim under the policy, the underwriters rejected the claim and purported to avoid it for misrepresentation and non-disclosure of a material risk. At inception and each renewal the assured was asked to answer the following question as part of procuring insurance through the insurer’s electronic automated underwriting system:

“No owner, director, business partner or family member involved with the business … has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation”.

On each occasion, the assured selected “Agreed” in response to the question. At claims stage, when it transpired that three of the directors of the assured had been directors of other companies that had entered voluntary liquidation, and had subsequently been dissolved, insurers argued that there had been a material misrepresentation by the assured in responding to the question above and/or non-disclosure of material facts and sought to avoid the policy.

The assured disputed that insurers were entitled to avoid the policy and started this litigation requesting the court to order the insurers to indemnify the assure with respect to the loss.

Two issues required legal analysis in this case:

  1. Was there any misrepresentation on the part of the assured by responding wrongly to the question? and
  2. Was there a non-disclosure as the assured failed to disclose insolvency of other persons or companies?

On (i) the assured submitted that the “Insolvency Question” was clear and unambiguous in that it simply asked about insolvency events relating to individuals (i.e. any owner, director, business partner or family member involved with the insured business) and did not ask about insolvency events of any other person or company with which any of them have been connected or involved in some way. The judge agreed with the assured noting especially in the question lack of express reference to any corporate body with which any of the persons expressly identified has been or is involved or connected with in some way.

The insurer’s attempt to rely on the Court of Appeal’s reasoning in Doheny v. New India Assurance Co [2004] EWCA 1705  was not successful given that the question put to the assured in that case was fundamentally different:

“No director/partner in the business, or any Company in which any director/partner have had an interest has been declared bankrupt, been the subject of bankruptcy proceedings or made any arrangement with creditors.”

The Court of Appeal in that case held that this question required disclosure of insolvency events in relation to other companies of which the policyholder’s director had previously served as a director. However, that question in the proposal form was worded rather differently than the present “Insolvency Question”, because it clearly referred to “any Company in which any director/partner have had an interest”. Conversely, the wording of the present “Insolvency Question” is different and on literal construction more restricted. The insurer’s attempt to draw support from another judgment (R & R Developments v. Axa Insurance UK plc [2009] EWHC 2429 (Ch)) that deliberated a differently worded “Insolvency” question was also not successful.

On (ii) the court held that the insurer by asking a well-defined question essentially waived its right to information on the same matters outside the question asked. Several legal authorities pre-dating the Insurance Act 2015, which still represent the legal position on this matter, dictate that the test here is an objective one and requires the judge to question whether a reasonable person reading the relevant question would be justified in thinking that the insurer had restricted its right to receive all material information, and had consented to the omission of specific information (here the other matters relating to insolvency). In holding that this was the case in the present case, Snowden, J, said at [91-92]:

[91] To my mind, having identified previous liquidations as a subject on which the [insurer] required disclosure, and having specified the persons in respect of whom a previous liquidation would be disclosable, the [insurer] thereby limited its right of disclosure in respect of other (unspecified) persons or companies which had been placed into liquidation. The Other Insolvency Events were all liquidations. They were therefore precisely the same type of insolvency matters which were the subject of the Insolvency Question: the difference is that they related to a different set of persons than those identified in the question.

[92] I therefore conclude that it was a reasonable inference for the [assured] to draw that the [insurer] did not wish to know about any other liquidations (or, indeed, administrations, administrative receiverships, company voluntary arrangements, and so on), other than those specified in the Insolvency Question.

Lessons from the Judgment

Given the increased use of electronic platforms for provision of information to insurers at pre-contractual stage, the case is another timely reminder to insurers that they need to check the wording of questions they rely on in proposal forms which appear as part of such platforms. In commercial setting we often advocate the use of clear wording but when it comes to legal matters concerning fair presentation of the risk, a very well-defined and clear question might serve the purpose of limiting the scope of disclosure for the assured- as was the case here (careful readers would remember that a similar point was raised by the assured (unsuccessfully) in Young v. Royal and Sun plc [2020] CSIH 25 (discussed again on this blog)). Also, it is worth keeping in mind that drawing support from previous authorities especially when construing such questions might often be problematic as wordings of questions in proposal forms deliberated in those judgments will inevitably differ- a matter that the insurer found out to its detriment in this case!            

Avoidance of Insurance Policy under the New Law 

The new proportionate approach to remedies for breach of “the duty of fair presentation” introduced by the Insurance Act (IA) 2015 has recently been to put test in Berkshire Assets (West London) Ltd v. AXA Insurance UK Plc [2021] EWHC 2789 (Comm).   

The facts are relatively straightforward. The assured, a joint venture vehicle used to purchase and develop an existing office block into residential apartments, bought from the insurer a Construction All Risks and Business Interruption Policy. On 1 January 2020, the insured development suffered damage as a result of flooding and the assured sought to claim for the property damage under the policy. During the investigation stage of the claim it transpired that when the policy was procured in November 2019, the assured failed to disclose the fact that criminal charges were filed against one of its directors in Malaysia in August 2019 by the Malaysian public prosecutor in relation to an alleged scheme to defraud the Malaysian government and other purchasers of bonds. The insurer avoided the policy on the premise that the relevant non-disclosure was material and if it had been adequately disclosed, the insurer would not have agreed to insure the assured at all. The judgment was given in favour of the insurer on both grounds. 

The finding on materiality is not surprising at all. The IA 2015, introduces no change in the materiality test, which originates from s. 18(2) of the Marine Insurance Act (MIA) 1906 and, accordingly, stipulates that a circumstance’s materiality will need to be judged with reference to the influence it would have on “the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.”  The fact that the test remains unaltered means that the case law as it stood prior to the introduction of the IA 2015 is still relevant. And on numerous occasions, the courts repeatedly acknowledged that the charge of a criminal offence would often constitute a material circumstance (see, for example, March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep 169). And it did not matter that the Malaysian criminal charges had been subsequently dismissed. There is authority indicating that materiality must be judged at the date of placement and not with the benefit of hindsight. This was put very cogently by Phillips J (as he then was) in The Dora [1989] 1 Lloyd’s Rep 69, at 93: “when accepting a risk underwriters were properly influenced not merely by the facts which, with hindsight, can be shown to have actually affected the risk but with the facts that raised doubts about the risk.” (a point endorsed by Mance, LJ (as he then was) in Brotherton & Ors v. Aseguradora Colseguros (No 2) [2003] EWCA Civ 705). Further, Colman, J, held (which was approved by the Court of Appeal) in North Star Shipping Ltd v. Sphere Drake Insurance Plc [2005] EWHC 665; [2005] 2 Lloyd’s Rep 76 that a failure to disclose pending criminal charges were material facts, even though the assured was acquitted and the charges set aside.            

Proving materiality and inducement would have been adequate to avoid the policy under the old regime but the changes introduced by the IA 2015 on the remedies available now requires the insurer to prove either that the assured acted fraudulently or recklessly in failing to present the risk fairly or the insurer would not have taken the risk at all had (s)he been aware of the criminal charges brought against one of its directors in Malaysia (s. 8 of the IA 2015). In this case, the insurer was able to prove the latter by relying on an internal practice note on “disclosure of previous insurance, financial or criminal matters” which provided that if an assured client disclosed maters that fell within a particular “negative criteria”, the risk was not acceptable to the insurer and should be declined. The Court was satisfied that the insurer had no authority to write the risk under the practice note and if the criminal charges had been appropriately disclosed the insurer would have declined the risk.  

The case is a timely reminder that failing to disclose criminal charges or convictions could trigger moral hazard concerns in relation to the assured and in most instances would be held to be material even if they are not directly related to the assured’s involvement with the insured property. But more significantly, one should not disregard the role the insurer’s internal practice note played in achieving the desired result from the insurer’s perspective. Given that under the IA 2015, it is vital for the insurer to demonstrate what s(he) would have done had the risk been fairly presented to him/her, one perhaps would expect insurance companies to produce more detailed internal underwriting guidance going forward ready to be deployed in litigation.  

The changes introduced by the IA 2015 have been systematically analysed in a book edited by Professors Clarke and Soyer, The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law, published by Informa Law in 2016.

              

Several excellent contributors (Sir Bernard Rix, Professor Tettenborn, Associate Professor Leloudas, Simon Rainey QC and Peter Macdonald-Eggers QC, also commented on various parts of the law reform in this book.

Extent of The Right of Subrogation in Insurance Law  

Sompo Insurance Singapore Pte Ltd v. Royal & Sun Alliance Insurance Plc [2021] SGGC 152

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Singapore Marine Insurance Act 1994 (which is based on English Marine Insurance Act 1906) s. 79(1) stipulates (emphasis added):

Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.

The question in this case was: “does an insurer’s right of subrogation extend to the right to call upon a performance bond issued to the assured?”  

The facts can be summarised as follows: In December 2013, the Government of Singapore entered into a contract with Geometra for the transport of military cargo. It was a condition under the contract that Geometra would provide an unconditional performance bond for 5 % of the contract price. This was satisfied by Sompo issuing a bond in favour of the Government.

The Singapore Government also purchased an insurance policy from RSA with regard to this shipment against the risk of loss or damage to cargo. When the cargo was damaged during transport the Government sought and obtained indemnity for the loss from RSA, which then commenced a subrogated recovery action under s. 79(1) of the Act and called on the performance bond issued by Sompo. To this end, RSA’s lawyers wrote to Sampo and made a demand on the bond “on behalf of the Government of Singapore”. Sampo refused the call and the matter was then litigated. In the District Court, RSA secured a judgment in its favour. Sampo appealed the decision to the High Court.

One of the arguments put forward by Sompo was that the bond had ultimately expired as it was not called upon by the Singapore Government. This point was easily disposed by the High Court on the ground that the letter of the RSA’s lawyers was in effect written “on behalf of Singapore Government” as they acquired the right to wear the shoes of the assured, in this case the Government, pursuant to their right of subrogation.

The main discussion was whether the insurer’s right of subrogation extended to the right to call on the performance bond.  The High Court had no doubt that it did. Philip Jeyaretnam JC confirmed that the common law principle of subrogation grants an insurer the entitlement to every right the assured has to recover in respect of a loss including the right to call on a performance bond.    

The judgment is not only in line with the wording and ethos behind s. 79(1), but is in accord with the case law on the subject especially Castellian v. Preston (1883) 11 QBD 380; London Assurance Corp. v. Williams (1892) 9 TLR 96 and more recently England v. Guardian Insurance Ltd [2000] Lloyd’s Rep IR 409. Moreover, it would have been incongruous to hold that insurers are entitled to pursue subrogated recoveries against the person responsible for the loss but not use all rights and remedies that the assured would be able to pursue for recovery including calling on performance bonds. It is very likely that a similar judgment would have been delivered, had the case been litigated in England & Wales.

Misrepresentation in Procuring Insurance- Avoidance or Not?  

Jones v. Zurich Insurance [2021] EWHC 1320 (Comm)

When obtaining insurance cover for his Rolex watch in May 2018, Mr Jones made a representation to the insurer (Zurich), through his insurance broker, that he had not made any other insurance claim in the previous five years. This was not accurate as Mr Jones had previously claimed for a lost diamond in 2016.

Mr Jones put forward an insurance claim for loss of his beloved Rolex watch (valued at £ 190,000), said to have come off his wrist while skiing. The insurer turned down the claim on the basis that Mr Jones made a misrepresentation on his claim history and it would not have written the policy, or would have written it on materially different terms, had the true state of affairs been disclosed (s. 2(2) of the Consumer Insurance (Disclosure and Representation) Act (CIDRA) 2012). In the alternative, the insurer argued that if it had known the true state of affairs, it would have charged a substantially higher premium and the claim should be reduced proportionately. The insurer did not plead that the misrepresentation was “deliberate or reckless”.

His Honour Judge Peeling QC had no hesitation in holding that the assured failed to take reasonable care not to make a misrepresentation to the insurer when questioned about his claim history and he was also satisfied that the insurer could avoid the policy as it managed to demonstrate that it would not have entered into the insurance contract at all had it been aware of the previous claim made in 2016 for a lost diamond. In reaching this decision, the judge considered expert evidence from underwriters. Both experts agreed that some underwriters might accept this particular risk at higher premium and others would refuse to underwrite altogether, but different in emphasis as to how usual a refusal to underwrite would be. However, what ultimately swayed the judge was the fact that the underwriter (Mr Green) had expressed concern in his written notes about the jewellery element of the cover. He also stated in his evidence that “the answer to whether or not there had been ant previous claim was extremely significant to my assessment of the risk… it was already a case which was borderline declinature… it’s just not one which would fit our underwriting strategy.”. The judge accepted his evidence.

The judgment makes clear that the burden of proof on the insurer to establish that it would not have entered into an insurance contract is a high one but can certainly be satisfied especially in cases where underwriters could present to judge written notes confirming their hesitancy to take the risk in the first instance supported by reliable expert evidence. The relevant underwriter’s contemporaneous notes and records giving clues about his thought process at underwriting stage as well as copes of e-mails and documents provided by the assured and his broker were very helpful to advance the insurer’s case.       

The case was considered under the CIDRA 2012 (as this was personal insurance) but it is certainly a good illustration as to how the judges might interpret certain parts of the Insurance Act (IA) 2015 since CIDRA 2012 and IA 2015 share similar provisions (i.e. both of these legal instruments allow an insurer to avoid the policy for misrepresentation if the insurer can demonstrate that the misrepresentation was “deliberate or reckless” or “the insurer would not have underwritten the policy on any terms had there been no misrepresentation”).    

“Inducement” Requirement for Non-Disclosure and/or Misrepresentation Further Clarified

What if the insurer ends up charging less premium and non-disclosure of material facts is a contributory factor? Could it be said in that case that inducement is established as a matter of law? This was essentially the thrust of the insurer’s appeal in Zurich Insurance plc v. Niramax Group Ltd [2021] EWCA Civ 590 against the judgment of Mrs Justice Cockerill, J (which also was reported on this blog last year). Reminding readers the facts briefly: the assured ran a waste collection and waste recycling centre and obtained an insurance policy from the insurer in December 2014. In September 2015 a fixed shredding machine, known as Eggersmann plant, was added to the policy with an endorsement. On 4 December 2015, a fire broke out at the assured’s premises and the Eggersmann plant along with the other plant was destroyed. The assured made a claim, which, at trial was valued at around £ 4.5 million, under the Policy. The majority of the claim related to the loss of the Eggersmann plant, which was valued around £ 4.3 million. The insurer refused to pay stating that the assured’s non-compliance with risk requirements under the buildings policy with another insurer and the fact that special terms under that policy were imposed on the assured were materials facts which needed to be disclosed under s. 18(1) of the MIA 1906. Mrs Justice Cockerill agreed that these were material facts and needed to be disclosed. However, it was held that the insurer failed to demonstrate that, if the facts had been fully disclosed, the original Policy for the plant (effected in December 2014) would not have been renewed. On the other hand, the insurer was able to demonstrate that, if the facts had been fully disclosed (especially imposition of special circumstances for the assured company by another insurer), the extension of cover for the Eggersmann plant would have been refused. Accordingly, it was held that the insurer was entitled to avoid the cover for the endorsement under the Policy and no indemnity was due for the loss of the Eggermanns plant.  Otherwise, the original Policy stood and the insurer was bound to indemnify the assured for the items of mobile plant which were covered by the original Policy (as renewed in December 2014) and damaged in the fire.

On appeal, the assured was essentially arguing that they should have been allowed to avoid the original policy as well as the Eggersmann endorsement as they ended up charging less premium as a result of the assured’s non-disclosure with regard to special conditions imposed on them by another insurer due to non- compliance with risk requirements. Before evaluating the legal position on “inducement”, it is worth highlighting facts that led the insurer to charge premium less than it would have normally done. When rating risks, the particular insurer normally apply a “commoditised and streamlined” process that take into account three aspects, namely the amount of the cover, the nature of the trade, and the claims experience. A junior employee of the insurer when entering these variables, instead of categorising the risk as waste, with an automatic premium of 6 %, categorised it as contractor’s portable plant, with a premium of 2.25, to which a loading of 40 % was applied. The argument of the insurer is that if full disclosure had been made, the risk would have been referred to the head underwriter who would have noticed the mistake and accordingly priced the premium correctly. The non-disclosure therefore fulfills a “but for” test of causation in that it provided the opportunity for a mistake to be made in the calculation of premium that would not otherwise have been made.

Popplewell, LJ stressed in his judgment, at [30], that

“in order for non-disclosure to induce an underwriter to write the insurance on less onerous terms than would have been imposed if disclosure had been made, the non-disclosure must have been an efficient cause of the difference in terms. If that test of causation is not fulfilled, it is not sufficient merely to establish that the less onerous terms would have not been imposed but for the non-disclosure.”                            


To support this finding, he made reference to several legal authorities, including the judgment of the House of Lords in Pan Atlantic Insurance Ltd v. Pine Top Ltd [1995] 1 AC 501, but perhaps the words of Clarke, LJ, in Assicurazioni Generali SpA v. Arab Insurance Group [2002] EWCA 1642, at [62] emphasised in the clearest fashion the accurate legal position:

“In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of doing so.”

 The Court of Appeal’s judgment in the present case, and the line of authority on the subject of inducement, is a good reminder that in most cases if an insurer cannot satisfy the effective cause test he will also be unable to satisfy the “but for test”. But the opposite is not always true. There could be cases, like the present one, where it is possible to satisfy the “but for test” but the non-disclosure or misrepresentation could still not be the effective cause leading the insurer to enter into the contract on the terms it did. Here, the reason for the insurer charging less premium for the risk underwritten in December 2014 was the error of the junior employee mistakenly categorising the risk. The insurer has, therefore, failed to prove that non-disclosure of the condition imposed by another insurer had any impact on the premium charged or the decision to insure the assured. Accordingly, the judgment of the trial judge on this point (lack of inducement to enable the insurer to avoid the original policy) was upheld.

The case was considered under the Marine Insurance Act 1906 (s. 18). The law in this area was reformed by the Insurance Act 2015 especially with regard to remedies available in case of breach of the duty to make a fair representation. There is no indication, however, that the law reform intended to alter the “inducement” requirement (and in fact the Law Commissions stated clearly in the relevant reports published that this was not the case). It can, therefore, be safely said that the decision would have been the same has the case been litigated under the Insurance Act 2015.       

EU Proposes a Uniform Approach to the Regulation of Artificial Intelligence

Artificial intelligence (AI) is used in many domains ranging from public sector to health, finance, insurance, home affairs and agriculture. There is no doubt that AI can potentially bring a wide array of economic and societal benefits for nations and humanity as a whole. However, it has been subject of intense deliberation as to how AI can be best regulated given that its applications could potentially have adverse consequences on privacy, dignity and other fundamental human rights of individuals. There is no easy answer to this question and various options have been deliberated over the years. Academics have come up with theories as to which manner of regulation would suit the interest of the society best, whilst various stakeholders (developers and/or users of the technology) have supported different types of regulation alternatives suiting their interests.

On 21 April, the European Commission unveiled its proposal for the regulation of AI in EU (2021/0106 (COD)). This is an important development which will, no doubt, generate significant interest (and debate) and play a role in shaping the regulatory framework not only in the EU but perhaps globally. In a nutshell, the proposed new regulatory regime for AI will be as follows:

  • The regulation lists AI systems whose use is considered unacceptable and accordingly prohibited (Article 5). Such AI practices are: i) those that deploy subliminal techniques beyond a person’s consciousness in order to materially distort a person’s behaviour in a manner that causes or is likely to cause that person or another person physical or psychological harm; ii) those that exploit any of the vulnerabilities of a specific group of persons due to their age, physical or mental disability, in order to materially distort the behaviour of a person pertaining to that group in a manner that causes or is likely to cause that person or another person physical or psychological harm; iii) those that are used by public authorities or on their behalf for the evaluation or classification of the trustworthiness of natural persons over a certain period of time based on their social behaviour or known or predicted personal or personality characteristics, with the social score leading to either or both of the following: a) detrimental or unfavourable treatment of certain natural persons or whole groups thereof in social contexts which are unrelated to the contexts in which the data was originally generated or collected; b) detrimental or unfavourable treatment of certain natural persons or whole groups thereof that is unjustified or disproportionate to their social behaviour or its gravity; and iv) those that use “real-time” remote biometric identification systems in publicly accessible spaces for the purpose of law enforcement (certain exclusions also listed for this).
  • The new regime contains specific rules for AI systems that create a high risk to the health and safety of fundamental rights of natural persons (Title III, Arts 6 and 7). Annex III, lists a limited number of AI systems whose risks have already materialised or likely to materialise in the near future (e.g. biometric identification and categorisation of natural persons; AI systems intended to be used for recruitment or selection of natural persons for employment; AI systems intended to be used by public authorities to evaluate the eligibility of natural persons for public assistance benefits and services and AI systems intended to be used by law enforcement authorities as polygraphs and similar tools to detect the emotional state of a natural person) Article 7 authorises the Commission to expand the list of high-risk AI systems in the future by applying a set of criteria and risk assessment methodology.
  • The proposed regulation sets out the legal requirements for high-risk AI systems in relation to data and data governance, documentation and record keeping, transparency and provision of information to users, human oversight, robustness, accuracy and security (Chapter 2).              
  • Chapter 4 sets the framework for notified bodies to be involved as independent third parties in conformity assessment procedures and Chapter 5 explains in detail the conformity assessment procedures to be followed for each type of high-risk AI system.
  • Certain transparency obligations have been set for certain AI systems (e.g. those that i) interact with humans; ii) are used to detect emotions or determine association with (social) categories based on biometric data and iii) generate or manipulate content (deep fakes)) by virtue of Title IV.
  • Title V encourages national competent authorities to set up regulatory sandboxes and sets a basic framework in terms of governance, supervison and liability.   
  • The draft regulation proposes to establish a European Artificial Intelligence Board which will facilitate a smooth, effective and harmonised implementation of the requirements under this regulation by contributing to the effective corporation of the national supervisory authorities and the Commission and providing advice and expertise to the Commission. At national level, Member States will have to designate one or more national competent authorities and, among them, the national supervisory authority, for the purpose of supervising the application and implementation of the regulation (Title VI).           

There is no doubt in the coming weeks the suitability of the proposed regulation will be rigorously deliberated. For example, civil rights campaigners might possibly argue that the proposed regulation does not go far enough as the it allows several exceptions to the use of “real time” biometric identification systems. Fundamentally, Article 5 of the proposed regulation states that the use of real-time biometric identification systems can be allowed for the “prevention of a specific, substantial and imminent threat to the life or physical safety of natural persons or of a terrorist attack”, the interpretation of which leaves wide discretionary power to the authorities. On the other hand, developers of AI applications might find it troubling that the Commission would have a discretion going forward to treat new applications developed as high-risk making them subject to a demanding compliance regime set out in the proposed regulation.

Obviously, the proposed regulation will not apply in the UK. However, it is important for the relevant regulators in the UK to see what is brewing on the other side of the Channel. We should follow the debates emerging, reactions to it from various interest groups and academics with interest. There might be considerable benefit for the UK to make its move once the path the EU is taken on this issue is settled. This might bring economic advantages and even perhaps a competitive edge (assuming that more efficient regulatory measures are preferred in the UK)!   

Non-Disclosure, Materiality and Inducement in Commercial Insurance Context (Again)!

What happens if an assured fails to disclose to the insurer the fact that special conditions were imposed by another insurer as part of another insurance contract? Could that amount to an actionable non-disclosure under s. 18 of the Marine Insurance Act (MIA) 1906? This was the main issue in Niramax Group Ltd v. Zurich Insurance plc [2020] EWHC 535 (Comm). The assured, Niramax, is a company carrying out the business of waste collection and waste cycling from various sites in north-east England. Niramax held a suite of insurance policies with the insurer, Zurich, which provided cover for a variety of risks relating to its plant and machinery. One of these policies was a contractor’s plant policy which provided all risks cover for a mobile plant owned by the assured (the Policy). Niramax also held buildings cover separately with a variety of other insurers. One of these insurers was Millennium Insurance. In the process of providing insurance cover for a building owned by Niramax in 2014, a risk survey report was prepared by Millennium which laid out seven risk requirements. One of these requirements was the installation of a fire suppression system at the main recycling facility of Niramax located at Hartlepool. Even though the assured was reminded by Millennium of the need to install the fire suppression system on several occasions, the system was never installed and as a result special conditions stipulated by the policy came into force on 22 October 2014 increasing the deductible to £ 250,000 and requiring Niramax to self-insure for thirty five percent of the balance of any loss.

In December 2014, Niramax renewed its policy with Zurich on the mobile plant. In 2015, Niramax acquired another mobile plant (Eggersmann plant) and in September 2015, Zurich was persuaded to amend the Policy to extend cover to the newly acquired plant until the renewal date of mid-December 2015. On 4 December 2015, a fire broke out at Niramax’s premises and the Eggersmann plant along with the other plant was destroyed.
Niramax made a claim, which, at trial was valued at around £ 4.5 million, under the Policy. The majority of the claim related to the loss of the Eggersmann plant, which was valued around £ 4.3 million. Zurich refused to pay stating that it was entitled to avoid the Policy for material non-disclosure and/or misrepresentation. Niramax brought the current proceedings against Zurich.

It was held that the assured’s non-compliance with risk requirements under the buildings policy with Millennium and the imposition of special terms under that policy were materials facts which needed to be disclosed under s. 18(1) of the MIA 1906. However, the insurer (Zurich) failed to demonstrate that, if the facts had been fully disclosed, the Policy for the plant (effected in December 2014) would have been renewed. On the other hand, Zurich was able to demonstrate that, if the facts had been fully disclosed (especially imposition of special circumstances for the assured company (Niramax) by another insurer), the extension of cover for the Eggersmann plant would have been refused. Accordingly, it was held that the insurer, Zurich, was entitled to avoid the cover for the endorsement under the Policy and no indemnity was due for the loss of the Eggermanns plant. The insurer was required to return the premium received for the endorsement. Otherwise, the original Policy stood and the insurer was bound to indemnify Niramax for the items of mobile plant which were covered by the original Policy (as renewed in December 2014) and damaged in the fire.

Two comments are in order. First, it is interesting to see that the trial judge (Mrs Justice Cockerril) found that the original policy stood (i.e. there was no inducement) even though it would have not been written on the same terms (i.e. with higher premium to reflect the correct multiplier) if full disclosure had been made by the assured. This certainly raises an interesting question going forward on the application of the test of inducement and seems to be at odds with the sentiments expressed by Clarke, LJ, in Assicurazioni Generali SpA v. Arab Insurance Group [2002] EWCA Civ 1642; [2003] Lloyd’s Rep IR 131, at [62] (emphasis added):
In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.

Second, the contract was obviously concluded before the Insurance Act 2015 (IA) came into force but is highly unlikely that the application of the AA 2015 would have led to a different outcome. The materiality test applicable under the IA 2015 (under s. 7(3) of the IA 2015) is practically the same and there is still a need to prove inducement for actionable non-disclosure under the 2015 Act.