The ChatGPT (Generative Pretrained Transformer)- an OpenAI platform- was released in November 2022 and has been an instant success. In simple terms, ChatCPT is an artificially intelligent model that has been trained to generate text that imitates human language once it has been prompted with a query or question. The producers of the model expect to release a new version soon!
ChatGTP has been identified as a problem in education sector that could potentially enable some students to engage in unfair practice undermining the integrity of assessment procedures. We have also in the press read about lawyers in different jurisdictions making submissions to courts by using texts obviously prepared by ChatCPT. In insurance sector, especially cyber risk insurers are also concerned of the potential disruptive impact of this OpenAI platform on their business models.
If prompted ChatCPT will refuse to write ransomware or malicious codes and when denying such requests, it will explain that ransomware is both “illegal” and “unethical”. However, there is no guarantee that a person will not find a way to create a malicious code by utilizing ChatCPT. As long as right questions are posed, the current version of the model could give anyone step by step guidance as to how to create a malicious code. This is a genuine concern for cyber risk insurers as it potentially makes it easier to produce such a malicious code (even by amateurs) and then target a business. Small and medium sized (SMEs) businesses, which do not have appropriate cyber security measures in place, are particularly vulnerable to ransomware attacks.
Also, it is possible that if prompted ChatGPT can write convincing phishing emails that can be utilized in social engineering campaigns by threat actors. Again, this increases the possibility that an employee in a company or business could engage with such a convincing phishing email potentially compromising the cyber security of the organization in question.
In recent months, cyber risk insurers have reported that ChatCPT has been utilized by criminals in ransomware negotiations potentially tilting the balance in favour of such criminal elements-one underwriter who discussed the matter with the author believes that ransomware negotiations are getting more difficult by the day thanks to ChatGPT and sums paid by insurers are increasing as a result!
The main problem stems from the fact that OpenAI remains largely an unregulated area and realistically this will not change anytime soon. While there is an expectation on the creators of ChatGPT to ensure that their tool cannot be easily manipulated by threat factors, there is no denying the fact that ChatGPT has broadened the potential attack surface for businesses and this a particular concern for cyber risk insurers. If the new version of ChatGPT is not designed to better detect such threat factors (and block such requests), we should expect an increase in the successful ransomware attacks on businesses which will potentially lead to a further increase in cyber risk insurance premiums. We cannot stop innovation, but we have every right to expect the producers to put in place mechanism to prevent their harmful use. Cyber risk insurers are hoping that the new version of this OpenAI tool will be equipped to deal with those who are panning to use it for criminal purposes. This will be a good illustration of how tech can perform the function of regulation as well as innovation!
Quadra Commodities SA v. XL Insurance and others  EWCA Civ 432
The assured, a trader of agricultural commodities, entered into a series of contracts for the sale and purchase of grain with companies within the Agroinvest Group. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that a fraud was perpetuated by the Agrionvest Group whereby the commodities stored in warehouses in Ukraine were routinely sold and refinanced multiple times, and ultimately misappropriated via the issuance of fraudulent warehouse receipts. As a result, the goods purchased by the assured disappeared from the warehouses in which they were apparently stored. The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts. There was no dispute that the loss was covered under the policy which provided cover for “loss of or damage to goods… through the acceptance by the Assured of… fraudulent shipping documents” and/or under a clause that provided cover for loss “directly caused by misappropriation”. The insurers sought to argue unsuccessfully before the High Court  EWHC 431 (Comm) that the assured had no insurable interest in the goods (this was commented on by the author at this blog last year).
The insurers appealed against the decision essentially arguing:
(a) That the first instance judge’s finding that there were goods corresponding in quantity and quality to the purchased cargoes physically present in storage at the time when the warehouse receipts were issued could not be substantiated based on evidence.
(b) That there could be no insurable interest in the goods in circumstances where they did not form part of a bulk which was sufficiently identified (and this was the case here).
(c) That the first instance judge’s finding that the assured could also rely on insurable interest derived from its immediate right to possession of goods by way of warehouse receipts was wrong as this issue should be determined as a matter of English law not Ukrainian law.
The Court of Appeal upheld the first instance judgment rejecting all the arguments put forward. On (a), the Court of Appeal found that there was “ample evidence” that goods corresponding to the sale contracts and warehouse receipts were physically present. It was appreciated that it was a part of the fraudulent scheme employed here that the same goods were sold to several buyers, but this did not change the fact that the goods corresponding to that amount specified in the sale contract was present as evidenced primarily by the assured’s contemporaneous inspection reports.
On (b), stressing the fact that the law relating to property in goods is distinct from the question whether a person has an insurable interest in them, the assured relied on a US case from the Supreme Judicial Court of Maine, namely Cumberland Bone Co v. Andes Insurance Co (1874) 64 Me 466. The case was based on English authority and supported the proposition that an assured may have insurable interest in unascertained goods irrespective of whether they form part of an identified or unidentified bulk. The Court of Appeal endorsed the principle in Cumberland Bone stating that it should now be recognized as a principle of English law.
On (c), the Court of Appeal held that the insurers had failed to call evidence of Ukrainian law on this issue, and it would be procedurally unfair to allow them to contend on appeal that the issue should be determined by reference to English law.
The outcome of the case did not come as a surprise to the author as it is in line with the recent trend in cases that courts will lean towards finding that an insurable interest exists. It is now clear that the insurable interest in goods will be found not only as a result of legal ownership/title to the goods, or as a result of possession of and a right to possession of the goods (at least when accompanied by an economic interest in the goods) but also when the assured makes payment or part-payment for the unascertained goods irrespective of whether they form part of an identified or unidentified bulk This is a new development and sets a new precedent in that regard in English law highlighting the fact that courts would be nowadays more liberal in finding insurable interest especially if they are convinced that the assured was pursuing a genuine economic interest in obtaining the insurance cover. A contrary outcome in this case would have entitled the insurers to exonerate themselves from liability for a risk they have assumed in the genuine belief that such goods existed even though they have charged the assured a premium for undertaking this potential liability. As Sir Julian Flaux C put it (at ) “it is unremarkable that the law should require [the insurers] to fulfil their contractual obligations”.
It is also worth pointing out that the assured’s success in the present case was based on its ability to convince the Court that the corresponding goods existed by providing contemporaneous reports. There is a lesson here for buyers that they should consider commissioning contemporaneous inspections of warehouses (especially when purchasing cargo in bulk from overseas) and also ensure that reports of such inspections are provided and recorded.
Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd  EWHC 3287 (Comm) involved the effect of an anti-assignment clause in a contract on statutory rights of subrogation under an insurance policy subject to Japanese law taken out by one of the parties. Mitsui Bussan Aerospace Co Ltd (“MBA”) and Dassault entered into a sale contract governed by English law under which Dassault would manufacture and deliver to MBA two aircraft and certain related supplies and services for supply to the Japanese Coast Guard. Article 15 of the Sale Contract, titled “Assignment-Transfer”, provided:
“Except for the Warranties defined in Exhibit 4 that shall be transferable to Customer, this Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null and void without the prior written consent of the other Party.
Notwithstanding the above and subject to a Seller’s prior notice to Buyer, Seller shall have the right to enter into subcontracting arrangements with any third party, for the purpose of the performance of this Contract”
The Sale Contract contained an arbitration agreement providing for arbitration under the ICC rules and for the seat of arbitration to be London.
MBA entered into a contract of insurance with MSI, governed by Japanese law, without seeking Dassault’s consent. The Policy covered the risk of MBA being held liable to the Japanese Coast Guard for late delivery under the Sale Contract. In fact, delivery was delayed and the Japanese Coast Guard claimed liquidated damages for late delivery. MBA claimed that sum from MSI (less a deductible) under the Policy, and MSI accepted that claim and paid MBA in turn.
Article 25 of the Japanese Insurance Law provides:
“An insurer, when the insurer has made an insurance proceeds payment, shall, by operation of law, be subrogated with regard to any claim acquired by the insured due to the occurrence of any damages arising from an insured event (under a non-life insurance policy which covers claims arising due to default or any other reason, such claims shall be included; hereinafter referred to as the ‘insured’s claim’ in this Article), up to the smaller of the amounts listed below:
(i) the amount of the insurance proceeds payment made by the insurer; or
(ii) the amount of the insured’s claim (if the amount set forth in the preceding item falls short of the amount of damages to be compensated, the amount that remains after deducting the amount of the shortfall from the amount of the insured’s claim).”
Article 26 of the Japanese Insurance Law provides: “A contractual provision that is incompatible with the provisions of […] [Article 25] that is unfavourable to an insured shall be void.” However it permits of agreement that an insurer would not be subrogated, as not being “unfavourable to the insured”.
The mechanism of subrogation under Japanese Law is the transfer of rights: the insurer acquires the right to sue in its own name, including the right to initiate proceedings. This was reinforced by Article 35 (1) of the Policy which essentially reproduced Article 25 of the Japanese Insurance Law and provide:
“In the event that the Insured acquires a right to claim for damages or other claim […] as a result of the occurrence of Losses, such claims shall be transferred to [MSI] when [MSI] pays the insurance benefits for said Losses..”
30 April 2021, MSI submitted a request for arbitration under the arbitration agreement in the Sale Contract against Dassault. The Tribunal considered the jurisdictional issue as a preliminary issue. In its Partial Award on jurisdiction by a majority decision, the Tribunal dismissed Dassault’s jurisdictional objection. The Tribunal held that: (i) Article 15 of the Sale Contract did not apply to involuntary assignments and/or assignments by operation of law; (ii) as a matter of Japanese law, the transfer of rights from MBA to MSI occurred by operation to law pursuant to Article 25 of the Japanese Insurance Act. The majority found that, since the transfer occurred by operation of law, Article 15 did not apply to it
On appeal under s.67 of the Arbitration Act 1996 Cockerill J that the effect of Article 15 was that the subrogation to MSI was of no effect and the Tribunal had no jurisdiction to hear its claim against Dassault. So far as the authorities went, there was a presumption that the court should not be prevented from giving effect to such a clause when the transfer is one which is voluntary (in the sense of consented to). The authorities did not justify a conclusion that prohibitions on assignment should not be taken to carve out transfers which occur “by operation of law” in a broad sense. The relevant test was whether the transfer was voluntary in that it was in the power of MBA to prevent the transfer. The answer was that it was. MBA might have chosen not to insure or might have chosen a policy governed by another system of law. It might have excluded the operation of Article 25 instead positively reinforcing it with Article 35 of the Policy. It might have chosen not to make a claim. It was therefore in the power of MBA to comply with the provision. It acted voluntarily or consented to take a step which on a certain contingency would put it in breach of that provision.
MSI pointed out that it was difficult to say that subrogation under English law was acceptable, whereas the subrogation equivalent of another legal system was not. Dassault replied that an English law subrogation does not involve a transfer and there simply is a relevant difference for the purposes of a clause such as this. Secondly, the assumption that there is no problem with English law subrogation might not be a safe one.
This required a consideration of the nature of subrogation in English law. Would the third rule of English law subrogation, that an insurer can pursue a claim in the name of the insured, but not pursuant to a transfer of right, be affected by Article 15 or a clause like it? Cockerill J was not prepared to decide that Dassault’s argument would probably gain traction based on a fairly slight and somewhat abstract argument and its case must therefore (for present purposes) stand or fall on the basis that English law subrogation would not fall foul of Article 15.
MSI argued that “a question of public policy arises… because the general view of English contractual law is that it’s sensible for parties to obtain insurance and they should not be penalised for doing so“. Cockerill J rejected this because one could not imply into the clause a blanket exception for insurance: it would be contrary to the express words of the contract and it would fail the business efficacy test.
The moral of this tale is that if your contract contains a ban on assignment, you need to take care with taking out insurance under a policy subject to a foreign law. If subrogation under that system of law operates by a direct transfer of rights to the insurer, it will be caught by the ban on assignment in your contract.
PT Adidaya Energy Mandiri v. MS First Capital Insurance Ltd  SGHC(I) 14;  2 Lloyd’s Rep 381
Factual and Contractual Matrix
The assured operated an unmanned single point mooring buoy (SPM) at a gas field which was moored to seabed by nine set of chains at three locations on its skirt area. The insurance policy provided cover for physical damage to the SPM on total loss basis only with an insured value of US$ 4, 700,0000. The policy, inter alia, contained two warranties:
Clause 1- “The Insured Equipment is only to be operated by and under the supervision of suitably trained and authorised personnel…”
Clause 8- “Suitable precautions and preservation/maintenance measures to be adopted when storing, handling, transporting and operating Insured Equipment.”
The policy was subject to English law as amended by the Insurance Act (IA) 2015. It also contained a clause to the effect that the assured should notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy.
Between 1 and 13 July 2018, several collisions between the SPM and a crude oil tanker (The Bratasena) occurred during loading operations leading to the flooding of the SPM’s compartments. Emergency repairs were carried out in August/September 2018 and further repairs were made in situ in December 2018. The SPM received further repairs in May/June and November 2019. The assured claimed that the SPM was a constructive total loss (CTL) by tendering a Notice of Abandonment (NoA) on 22 May 2019. The assured also claimed expenses incurred to prevent the SPM from becoming a total loss as sue and labouring expenses. The assured’s indemnity claim was rejected by the insurer on various grounds mainly due to breach of marine warranties and procedural issues. The assured’s claim for sue and labouring expenses was also rejected by the insurer. The assured brought the current proceedings against the insurer before the Singapore International Commercial Court as per jurisdiction agreement in the contract.
Breach of Warranty
Sir Jeremy Cooke IJ, was of the opinion that both of the warranties in the contract were breached. The assured was in breach of Clause 1 as no evidence was presented showing that the crew was adequately trained to operate the insured equipment. It was also held that there was a breach of cl. 8 as there was no static tow in place to ensure that The Bratasena did not surge into the SPM. Moreover, it was found that there was no 24/7 watchkeeping during loading operations which meant another failure in the provision of suitable precautions and preservation measures. It was also found that the crew’s failure to notify the assured of every contact with the SPM constituted a further breach as that prevented any corrective measure taken.
Having established that both cl 1 and 8 were breached, the trial judge held that the cover was suspended at the time of the loss by virtue of s. 10(2) of the IA 2015. It was also held that s. 11(3) of the IA 2015 could not assist the assured here as there was no prospect of the assured showing that non-compliance with the warranties did not increase the risk of the loss which actually occurred in the circumstances which it did occur.
Other Defences Raised by the Insurer
The clause requiring the assured to notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy was held to be a condition precedent to the liability of the insurer. It was held that this clause was breached (which barred recovery) as the assured even though by 17 July 2018 was aware that there had been several collisions between the SPM and The Bratasena, gave no notification to the insurer until 5 September 2018.
Agreeing with the contention of the insurer, the Court also found that the SPM was not a constructive total loss as the repair costs (estimated to be around US$ 2 million by the insurer’s expert and US$ 3.2 million by the assured’s expert) did not exceed the insured value under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906. It was also held that (even if the repair costs had exceeded the insured value of the SPM), the assured could not treat the loss as constructive total loss as it failed to tender NoA within a reasonable time (as required by s. 62(1)(3) of the MIA 1906). The trial judge stressed that NoA was not tendered until 22 May 2019 even though the temporary and permanent repairs required to preserve the vessel from being a total loss had been completed by mid-December 2018. Sir Jeremy Cooke IJ was convinced that the assured had waived its right to abandon the SPM to the insurers as it sold the equipment in June 2019 for US$ 400,000 at an undervalued price on the premise that it was a liability, but it kept operating it following the collision and kept earning a revenue. All these inconsistent actions pointed to the Court that the assured was dealing with SPM for its own account throughout so its offer to cede its interest in the SMP to the insurer was taken to have been withdrawn.
The assured’s claim for sue and labouring costs were mostly rejected. By virtue of s. 78(3) of the MIA 1906, to qualify as a sue and labour expense, it is necessary to show the assured that the expenses were incurred for the purpose of averting or minimising a loss to the insured property. This puts a serious limit on a policy like this one which provides cover on “total loss basis” only allowing the assured to claim costs that had been spent to prevent the insured property from an immediate risk of total loss as sue and labouring expenses. On that basis, the Court held that most of the expenses were not recoverable as sue and labouring expenses. More precisely:
Replacement of the mooring hawser was not incurred to preserve the property from total loss;
Inspection costs of the mooring chain, SPM riser and the pipeline end manifold, had no influence on the loss;
Effecting permanent repairs (especially in 2019) did not qualify as there was no longer a risk of sinking.
The only expense recoverable as sue and labouring expense was the inspection costs and repairs to prevent further flooding immediately after the collisions in July 2018 (US$ 20,875 on the estimate of the insurer’s expert).
The Court’s findings on the CTL issue and sue and labour clause do not break any new ground. What we see here is a very good application of established legal principles to the facts of the case with the assistance of insurance experts.
However, given that this is the first case (known to the author) that gives judicial airing to the changes introduced on the traditional warranty regime by the IA 2015 (in addition to academic scrutiny carried out- see, for example, observations of the author in 3rd edition of Warranties in Marine Insurance (2017, Routledge), his contribution to Cambridge Law Journal  “Risk Control Clauses in Insurance Law” pp, 109- 127, Professor Clarke’s observations published in The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (Informa Law, 2017), pp. 54-59 comments of R. Merkin and Ö. Gűrses, “The Insurance Act 2015: Rebalancing the Interests of the Insurer and the Assured” (2015) 78 MLR 1004), it is worth commenting on that aspect of the case.
The case is a very good reminder that when dealing with a warranty that requires the assured to adopt safety standards and practices (such as cl 8 here), when such standards are not maintained by the assured, it will be very difficult (if not impossible) to convince the Court that non-compliance with such warranty could not have increased the risk of loss which actually occurred in the circumstances in which it occurred (s. 11(3) of the IA 2015). From the way the arguments were presented to the judge, it is also evident that (as predicted by academics) the effect of s. 11(3) is to introduce a test of causation from the backdoor! Inevitably, the courts will be drawn into an enquiry as to whether the loss would have happened in the manner it did, had the safety standards been appropriately adopted.
One should also bear in mind that the effect of s. 11(3) could be negated altogether (i.e., the assured could be prevented from arguing that the breach of warranty did not contribute to the occurrence of the loss so that it should not have any detrimental impact on coverage) if it is drafted in a way that serves the purpose of describing the limits of the cover as a whole. A warranty of that nature is excluded from the application of s. 11(3) on the premise that such a term will have a general limiting effect not linked to a specific risk (s. 11(1) stipulates: “This section applies to a term (express or implied) other than a term defining the risk as a whole,…”). Unfortunately, this matter was not deliberated by the trial judge in depth, but it could be plausibly argued that cl. 1 is such a term as it requires the insured equipment to be operated only by and under the supervision of suitably trained and authorised personnel. On that basis, it can be viewed as going to the definition of the insured risk rather than simply being a term designed to reduce the risk of a particular type of loss. If so, regardless of whether breach of cl. 1 has contributed to the loss, the risk is suspended the moment the insured equipment is operated by personnel who are not adequately trained until that situation is rectified (as long as, of course, the breach does have a lasting impact on the risk (s. 10(2) of the IA 2015). Lack of discussion on the nature of cl. 1 did not here have any impact on the outcome as the judge was convinced that non-compliance with the warranty did, in fact, increase the risk of loss which actually occurred in the manner in which it occurred but such an analysis would have helped us to see how judges actually deal with the issue of identifying whether a warranty is one that “describes the risk” (which is excluded from the application of s. 11(3) of the IA 2015) or is one which is designed to reduce the risk of “loss of a particular kind” or “loss at a particular location” or “loss at a particular time”.
By 31 July 2023, all retailers in the UK must comply with a new “Consumer Duty” when selling new and existing products and services to their customers (the date of implementation is 31 July 2024 for firms offering closed products and services). This Duty has been introduced by the Financial Conduct Authority (FCA) with an amendment to existing Principles for Business (PRIN) and intends to impose a higher standard of behaviour for firms interacting directly or indirectly with retail customers. The scope of the duty has been extended to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), and on that basis applies not only to insurers but also to insurance intermediaries (e.g., insurance brokers).
What Does the New “Consumer Duty” Entail?
In a nutshell, the new “Consumer Duty” requires retailers to take a more proactive approach and put their customers’ needs first. It should, however, be noted that the duty is neither a “duty of care” nor a “fiduciary” one. It also does not require retailers to provide advice to customers. Although the Duty does not give customers a private right of action, it enables the FCA to investigate any allegation of breach and the FCA could accordingly issue fines against firms and secure redress for customers who have suffered harm through a firm’s breach of the Duty.
More specifically, the Duty introduces:
An overarching customer principle that firms must act to deliver good outcomes for retail customers.
This overarching principle requires firms: i) to act in good faith; ii) to avoid causing foreseeable harm; and iii) to enable and support customers to pursue their financial objectives. No firm definition of the term “good faith” in this context has been provided but the FCA put forward some examples where a firm would be judged not be acting in good faith. Accordingly, an insurance firm will not be acting in good faith if it sells insurance to a customer by taking advantage of his/her vulnerability. Similarly, an insurance company will not be acting in good faith if it exploits its customers’ behavioural bias- i.e. renewing a policy automatically without reviewing the details of any revised terms or endorsements as well as any changes to excess or premiums introduced by the policy.
The Duty focuses on four outcomes (products and services, price and value, consumer understanding and consumer support) and requires firms to ensure consumers receive communications so that they can understand products and services that meet their needs, offer fair value and the support needed to consumers.
The Duty, therefore, will require insurers to reflect on how they assemble, sell, market insurance products to their customers and what kind of support they provide to customers who make inquiries. The insurers are now under a statutory duty to act in good faith, avoid causing foreseeable harm and support their customers in the process of delivering these outcomes.
Specific Implications for Insurance Companies- Especially Those Using AI and Algorithms
The insurers are already reflecting on how they present their policies and various terms in their policies. They will be expected to inform customers fully of the limits of cover (especially policy excesses). Similarly, any proposed changes to cover at renewal stage should be made clear to customers so that they are aware of the changes to their policy and scope of cover. Many insurers would tell you that these are the good practices that they have been implementing for some time anyway.
One area that insurers need to pay careful attention is the standard questions they expect potential customers to answer in cases where they utilise automated computer underwriting systems through which applications for insurance are evaluated and processed without the need for individual underwriter involvement. In some recent cases, the vagueness of such questions has raised legal issues (see, for example, Ristorante Ltd T/A Bar Massimo v. Zurich Insurance Plc  EWHC 2538 (Ch)). For example, if a consumer had a “declined to quote” decision from a pervious insurer, how would s/he be expected to respond to a standard question on such an automated system asking him/her to specify whether s/he has been refused insurance previously? Would a standard customer expected to appreciate that “decline to quote” might not necessarily mean refusal of insurance? The insurers need to think how they phrase such questions, and it would be advisable in the light of the new Duty to provide additional explanation on such a question posed on an automated underwriting platform.
However, more interesting questions might arise in cases where insurance companies utilise AI and algorithms for pricing, risk assessment and consumer support purposes.
Naturally, there is an expectation on any insurance firm that utilise AI in risk assessment process to ensure that the system in use does not inadvertently lead to discriminating outcomes and the new Consumer Duty amplifies this. That is easy to say but difficult to achieve in practice. It is well-known that it is rather difficult, if not impossible, when algorithms are used for risk assessment purposes to know what data has been used by the algorithm and what difference any factor made in such risk assessment (commonly known as the ‘black-box problem’). Insurers rely on programmers, designers and tech experts when they employ AI for risk assessment purposes and as much as they expect such experts to assist them in fulfilling their “Consumer Duty”, it is ultimately something they have very little control over. More significantly, it is rather doubtful that the FCA will have that degree of expertise and technical knowledge to assess whether an algorithm used could deliver good outcomes for the customers. To put differently, it is not clear at this stage whether the new Consumer Duty will in practice enhance the position of consumers when underwriting decisions are taken by AI and algorithms.
Another advantage that algorithms could provide to insurers is to differentiate in price not simply based on risk related factors but other factors (such as the tendency of an individual to pay more for the same product). If allowed or left unchecked, an algorithm by taking into account factors (i.e. number of luxury items ordered by an individual online), might quote a higher premium to an individual than it would have quoted for another individual with a similar risk portfolio. We have a similar problem here- could the algorithm be trained not to do this and more significantly how can a regulator check whether this is complied with or not?
Also, today many insurance companies use chatbots when interacting with customers. Given that the Customer Duty requires insurance companies to provide adequate support to consumers, it is likely that an insurer might fall short of this duty by employing a chatbot that could not deal with unexpected situations or non-standard issues. Checking whether a chatbot is fit for purpose should be easier than trying to understand what factors an algorithm has utilised in making an insurance decision. I suppose the new Consumer Duty would mean that insurers must invest in more advanced chatbots or should put in place alternative support mechanisms for those customers who do not get adequate or satisfactory answers from chatbots.
There is no doubt that the objective of the new Consumer Duty is to create a culture change and encourage retailers, and insurers, to monitor their products and make changes to ensure that their practices and products are “appropriate” and deliver good outcomes for customers. This will also be the motivating factor when insurers utilise AI and algorithms for product development, underwriting and customer support. However, it is also evident that the technical expertise and knowledge within the insurance sector is at an elementary level, and it will probably take some time until the insurers and regulators have the knowledge and expertise to assess and adapt AI and algorithms in line with the consumers’ needs.
Charles Darwin had a point. It was not, he said, the strongest of the species that survived, nor the most intelligent, but that most adaptable to change. So too with law and digital transformation. The government recognises this well. As G7 President, the UK has been actively leading the process to achieve the legal environment for the full digitisation of trade documents. It has now put its money where its mouth is, with its swift introduction in the Lords (on 12 October, only five months after it appeared) of the Law Commission’s draft Electronic Trade Documents Bill.
The Bill is theoutcome of consultations and a later report on how to achieve the digitisation of trade documents and thereby enhance paperless commerce. It aims to cement the legal recognition of electronic trade documents, including most importantly bills of lading, mate’s receipts, ship’s delivery orders, warehouse receipts, marine insurance policies and cargo insurance certificates. (It also includes provisions dealing with commercial paper such as bills of exchange and promissory notes, though these today are a good deal less important.)
Quite right too. Digitisation is an inevitable part of today’s global economy, with big data and cloud-based computing the driving force of industry and its supply chains and the smooth running of trade dependent not only on commercial operations but also to a great extent on the instantaneous turnaround and exchange of the relevant documents. Yet a huge number of the underlying processes and operations still rely “on practices developed by merchants hundreds of years ago.” This matters for us: under the latest statistics from the Department of Trade, international trade is worth around £1.266 trillion annually to the UK.
The problem arises in particular with the paper documentation traditionally used for proving shipment of the goods and their quality, and for their handover while in transit. Pre-eminent among these are bills of lading which not only act as receipts and furnish parties with significant data about the goods, but also serve as documents of title. The problem is a big one: the Digital Container Shipping Association has estimated that ocean carriers issued 16 million original bills of lading in 2020, more than 99% in paper form, quite apart from the myriad other documents that accompany goods in transit. The exercise in paper-shuffling that this involves is mind-blowing; its threat to the smooth operation of commerce was thrown into stark relief by COVID-19 lockdowns that forced the paper-shufflers to be sent home. No wonder this accelerated digitisation across the world. As the Law Commission observed, it was partly in response to the complexities brought by the pandemic that the International Chamber of Commerce asked governments to take immediate steps remove legal requirements for hard-copy trade documentation, and to consider longer-term plans for establishing legal frameworks applicable to electronic documents.
The Bill is commendably brief, consisting of only seven clauses. It starts (cl.1) with definitions of “paper trade document” and “qualifying electronic document” before presenting a non-exhaustive list of trade documents affected by it (excluding some more exotic instruments subject to the Uncertificated Securities Regulations 2001, and curiosities such as bearer bonds). Further provisions relate to what is to be regarded as possession, transfer and indorsement of electronic documents (cl.3), and deal with the change of a paper form to an electronic one or vice versa (cl.4).
The nub of the problem is, of course, possession: in English law you cannot in any real sense “possess” a mere stream of electrons. Therefore, in order for an electronic trade document to have similar effects and functionality as its paper equivalent, the Bill in cl.2 lays down gateway criteria. These consist of content requirements, and stipulations about the reliability of the underlying digital system, the “integrity” of an electronic trade document as regards originality and authenticity, the possibility of exclusive control, divestibility of that control, and the reliable identification of the persons in control of a document at any time.
The Commission were rightly aware of the possible impact of the latest innovations and emergent technologies brought by the fourth industrial revolution. In Appendix 6 to its report, it assessed the use of distributed ledger technology (“DLT”) to support trade documents in electronic form. Indeed, it points out that DLT, involving distribution of data among nodes accessible only by secured keys in order to render it effectively tamper-proof, offers very significant possibilities for the acceptance, validity, and functionality of electronic documents in international trade equivalent to that accorded to their paper counterparts.
These reforms can only be welcomed. If passed, the Bill will undoubtedly facilitate cross-border commerce by cutting unnecessary costs and reducing processing times and delays. Digitising documentation also contributes to sustainability, eco-efficiency, and environmental values by mitigating harmful carbon emissions, quite apart from boost the UK’s reputation as a global centre for international commerce and trade.
If there is a criticism of the Bill, it is its lack of detail. It does not contain any provisions on the procedural aspects of digitisation of documents, the use and exploitation of digitised documentation, or the mechanics of changing its form. In addition, the effectiveness of the gateway criteria might be achieved only upon the adoption of the specific protocols regarding the digital systems, their control mechanisms, and accreditation standards. One suspects in practice that if the bill becomes law, a detailed commentary will become essential for its practical application. This matters: unless such matters are satisfactorily sorted out, an electronic trade document that is effective in one jurisdiction might not be treated in the same way in another.
Moreover, while trade documents are being transferred across borders, cross-border disputes are at least to some extent inevitable. This means that we will need to give attention to the private international law rules specific to such documents: even if they contain an English choice-of-law clause, this will not necessarily ensure the application of English law to all their aspects. The Law Commission, to its credit, has recognised this. It has already launched a follow-up project on the Conflict of laws and emerging technology to ensure the rules of applicable law and jurisdiction in an increasingly digitised world. This issue is still at the pre-consultation stage – this might mean that unless private international law rules applicable to the related matters are achieved, the current Bill might not be operable or practically effective.
Some other tidying up may also be necessary. There may be a need, for example, to clarify matters by a few further amendments to the Carriage of Goods by Sea Act 1992 and the Bills of Exchange Act 1882 over and above those in cl.6 of the Bill. which are not in line with the latest technological and legal developments and in particular, the new Bill. But even if there is some way to go the Bill is a very important development. We, for one, welcome it.
In one of our previous posts ( https://iistl.blog/2022/04/13/financial-security-in-cases-of-abandonment-a-four-month-limit-for-unpaid-seafarers-wages%ef%bf%bc/ ), we considered some of the issues that emerge from the operation of Standard A2.5.2 of the Maritime Labour Convention (MLC), 2006, as amended, on financial security in cases of the abandonment of seafarers. In particular, we looked at paragraph 9 of this Standard which requires that the coverage provided by the financial security system when seafarers are abandoned by shipowners shall be limited to four months of any such outstanding wages and four months of any such outstanding entitlements. In this regard, we highlighted, inter alia, the inadequacy of the fourth month limit to accommodate the needs of seafarers when a case of abandonment is not resolved in time.
Only a few months ago, during the second part of the fourth meeting of the Special Tripartite Committee, the possibility of extending the minimum coverage afforded by the current financial security system from four months to eight months was considered following a proposal from the seafarers’ group of representatives. While the proposal was not supported by the representatives of the shipowners’ group and the representatives of the Governments’ group, mainly because of the risks faced by the insurers, a joint resolution was adopted. The latter called for the establishment of a working group under the auspice of the Special Tripartite Committee to discuss the financial security system required under Standard A2.5.2 of the MLC, 2006, as amended, with a view to making recommendations on potential improvements that would make the system more effective and sustainable, as well as ensure a greater degree of protection and assistance for abandoned seafarers.
The facts will be entirely familiar to any P&I claims handler. The Angara, a small superyacht insured against P&I risks by QBE UK under a policy later transferred to QBE Europe, allegedly damaged an underwater cable linking Mallorca and Menorca to the tune of nearly $8 million. The cable owners’ underwriters Generali brought a subrogated claim in the Spanish courts against QBE, relying on a Spanish direct action statute (Arts. 465-467 of the 2014 Ley de Navegación Marítima). QBE pointed to a London arbitration clause requiring disputes between insurer and assured to be arbitrated in London, said that if Generali wanted to enforce the policy they had to take the rough with the smooth. This being a post-Brexit suit, they sought an ASI.
Generali resisted. They argued that they were enforcing a direct delictual liability under Spanish law, and that in any case since the arbitration clause merely referred to assured and insurer (and indeed the whole policy excluded any third party rights under the Third Parties (Rights against Insurers) Act 1999) they were unaffected by it.
But in this, one of the first post-Brexit P&I cases to come to the English courts, QBE won hands down. Solid first instance authority had extended the rule in The Angelic Grace  1 Lloyd’s Rep 87 (i.e. that very good reasons had to be shown for not granting an ASI to halt foreign proceedings brought in blatant breach of contract) to cases where the person suing was enforcing transferred rights, as where a subrogated insurer sought to take advantage of contractual provisions between its insured and the defendant. That line of decisions applied here: and Foxton J duly followed it, confirmed it and lengthened it by one.
He then asked whether, properly characterised, Generali’s suit was a tort claim or in substance a claim to piggy-back on the policy QBE had issued. His Lordship had no doubt that it was the latter. True, the Spanish direct action provisions disapplied certain limitations in the policy, such as pay to be paid provisions and a number of defences based on misconduct by the assured; but the matter had to be viewed in the round, and overall the cause of action arising under the 2014 Spanish law, being based on the existence of a policy and limited to sums assured under it, was clearly contract-based. It remained to deal with Generali’s further point based on the limited wording of the arbitration clause. Here his Lordship accepted that parties could provide that an arbitration clause in a contract did not apply to those suing under some derivative title, but said that much more would be required to demonstrate such an intent: the mere fact of reference to the original parties to the contract was not nearly enough.
And that was it: having failed to show any substantial reason why the ASI should not go, Generali were ordered to discontinue the Spanish proceedings.
What messages can P&I clubs and other insurers taker away? Three are worth referring to. One is that the enforcement of jurisdiction and arbitration clauses in a European context is now fairly straightforward. Another refers to the specific case of Spain, which altered its direct action statute in 2014: the QBE case has confirmed that under the new dispensation, as much as under the old, an attempt to use direct action as a means of getting at insurers abroad will continue to be be regarded as essentially an attempt to enforce the insurance contract. And third, judges in the UK are unlikely to be very receptive to attempts by claimants desperate to litigate at home to give arbitration or jurisdiction clauses an unnaturally narrow meaning.
Life, in short, has got a good deal easier for P&I interests. Now, where’s that bottle of cava?
Piraeus Bank A.E. v. Antares Underwriting Ltd (The ZouZou)  EWHC 1169 (Comm)
In practice mortgagee’s interest policies (MIPs) provide financiers (e.g. banks) a supplementary cover to the shipowner’s policies (marine and war risks) to ensure that the mortgagee will still have cover in the event of the cover is declined under owners’ policies for an insured risk by reason of: a) misrepresentation or non-disclosure; b) breach of a promissory warranty, c) the failure to exercise due diligence insofar as it is required under the owners’ policies d) the expiry of a time limitation period; and, even in case of a total loss where there is a judgment or award holding that the shipowner’s claim is not recoverable under the owner’s hull or war risk policies on the grounds that the loss has not been proved to have been proximately caused by a peril insured against, but is not otherwise excluded by any exclusion or provision. However, on the last point it needs to be stressed that there will be no cover under MIPs, if the loss is proximately caused by a peril excluded from cover under owners’ policies.
In the present case, the mortgaged ship was detained in Venezuela in late August 2015 on the suspicion that the crew had attempted to smuggle part of a cargo of high sulfur diesel oil by diverting it from the cargo tanks nominated for loading to other tanks through the cargo lines. Four members of the crew allegedly involved in this smuggling attempt were tried and acquitted. The ship was detained for about 14 months and two weeks before its release, the owners tendered a notice of abandonment (NOA) and sought indemnity under its war risk policy for constructive total loss. The vessel’s war risk insurer (Hellenic Club) declined indemnity on the basis that an excluded peril (cl. 3.5 which excluded cover for losses arising out of steps taken “under the criminal law of any state”).
The mortgagee bank turned to mortgagees’ interest insurer, which insured the risk under a standard MIP, and claimed their net loss (indemnity quantified by reference to the outstanding indebtedness). The mortgagee’s interest insurer declined the claim on various grounds which will be briefly discussed below.
The cause of loss is an excluded peril under the war risk policy
Whilst providing cover for seizure, arrest and detention and the consequences thereof, there was an exclusion in the policy stipulating that loss arising out of action taken “under the criminal law of any state” would not be covered under the policy. The mortgagee bank claimed that this exclusion did not apply as detention was unlawful. Relying on the expert advice, the Court was able to find that the detention was carried out in line with Venezuelan criminal law by the order of the Venezuelan Criminal Court and was accordingly lawful. Therefore, the exclusion certainly was relevant in this context.
The alternative argument of the bank was that the exclusion did not apply as the owners themselves were not guilty (or alleged to be guilty) of the offence. The Court, rightly, in the opinion of the author, rejected this alternative argument stating that the exclusion in question did not draw such a distinction (i.e. excluding losses arising out of steps taken under the criminal law of any state only when the assured themselves are involved in the criminal activity and not so when this is not the case). This is in line not only with literal wording of the clause but also the decision of Hamblen J in Atlasnavios-Navegação v. Navigators (The B Atlantic)  EWHC 4133 (Comm) in connection with the equivalent exclusion in the Institute War and Strikes Clauses.
Additional coverage provided by the MIP in question?
When setting out the coverage terms, clause 1 of the policy provided for an indemnity in the event of loss, damage to, or liability, arising in connection with the vessel:
Which prima facie would have been covered by the Owners’ policies but for any act or omission by the Owners (amongst others and/or their servants and/or their agents- referred to as the “Relevant Parties”; or
Which occurred because of “any alleged deliberate, negligent or accidental act or omission … of any of the Relevant Parties”.
The Bank’s alternative argument was that it was entitled indemnity under cl 1(ii) as the wording of this clause did not expressly cross-refer to the owners’ insurance policies thus providing wide coverage for any loss or damage to the ship as a consequence of any act of omission by any of the crew or any other servant or agents of the owners or charterers or by any allegation of such and act or mission. The Court rejected this argument as well stressing that cl 1(ii) could not be construed in isolation and was dependent on the war risk policy. Put differently, it was held that the words “relevant party” in this clause referred to the owners’ or their employees/agents acting in the context of the relevant insurance contract (war risk insurance) and claim only. This means that this clause only applies in a case where the loss of the ship is prima facie covered by the owners’ insurances and the owners’ insurers refuse to pay by alleging involvement of the owners or agents in the loss.
As highlighted by the Court, a contrary interpretation would have led to outcomes which would have been wholly uncommercial, such as:
The bank recovering losses which would have never recovered under the owners’ policies as they would have been excluded;
The bank recovering sums far in excess of anything recoverable under the owner’s policies, even if covered; and
The bank recovering from mortagees’ interest insurers even where the loss had already been paid under the owners’ policies.
Was there a loss under the war risk policy in any event?
Most war policies contain a detainment clause, and the owner’s war policy here was no exception, which provided that the vessel will be deemed to be a constructive total loss (CTL) when the owner is deprived of possession of the insured vessel for a period of 12 months. Although, the vessel in question was detained by Venezuelan authorities more than 12 months in the present case, given that the detention was lawful and this was an excluded peril under the relevant war risk policy, there can be no prospect of claiming CLT unless it was found that the detention was in fact unlawful. The Court’s finding that the vessel had not been detained unlawfully at any point meant that there was no CLT under the detainment clause.
What is the key message coming out of the case?
From the perspective of the application of principles of legal construction, the outcome of the case makes sense and does not break any new ground. However, the judgment reiterates the point that MIPs are secondary in nature and issues a stark warning to financiers that there might be several instances where they might fail to recover under their MIPs. Where, for example, drugs placed by criminal carters on board of a ship which eventually lead to detention of the vessel in question, even if the owners are not involved in this criminal activity, the resulting loss will be excluded from most war risk policies given that there is often an exclusion for loss resulting from “detainment… by reason of infringement of any customs or trading regulations in standard war policies (see The Kleovoulos of Rhodes  1 Lloyd’s Rep 138) and The B Atlantic  UKSC 26). This would mean that any claim of a bank under a MIP will also fail. Similarly, claims airing out of any detention for alleged breach of government sanctions are likely to be excluded from war risk policies as there is an exclusion for loss, damage, cost or expense arising out of “ordinary judicial process” (see cl 4.1.6 of the Institute War and Strikes Clauses- Hulls- Time (1/10/1983). The banks, therefore, need to appreciate the limitations of standard MIPs and consider negotiating tailor-made coverage clauses in their policies.
The International Labour Conference (ILC) at its 103rd session approved the first group of amendments to the Maritime Labour Convention (MLC), 2006. The amendments were agreed by the Special Tripartite Committee at its first meeting at the International Labour Organisation (ILO) in Geneva in April 2014 and entered into force in January 2017. The amendments concerned Regulations 2.5 and 4.2 which deal with the right to repatriation and the shipowners’ liability for sickness, injury or death of seafarers occurring in connection with their employment. In brief, the amendments inter alia set out requirements for shipowners to provide financial security to provide support for abandoned seafarers and to assure compensation in the event of death or long-term disability of seafarers due to occupational injury, illness or hazard. While an exhaustive overview of such amendments is beyond the scope of this blogpost, this blogpost aims to shed light into the operation of Standard A 2.5.2. of the MLC, 2006, as amended, paragraph 9 of which stipulates that the coverage provided by the financial security system when seafarers are abandoned by shipowners shall be limited to four months outstanding wages and four months of outstanding entitlements.
Let’s take a hypothetical case of seafarers being abandoned for 10 months. Seafarers contact the P&I Club for assistance, providing all the necessary documentation to substantiate their claim. The P&I Club’s claims handlers acknowledge receipt of the claim, check the validity of the financial security system, and investigate whether the shipowners have in fact failed to pay wages to seafarers. If the P&I is satisfied that the financial security system is valid and that the seafarers’ wages are outstanding, the P&I Club will pay four months of outstanding wages and take immediate action to repatriate the affected seafarers. Now, assuming that all the outstanding wages are of the same rate, no further questions arise. But what if the outstanding wages are not all of the same rate? If, for example, after the first four months, there has been a pay rise under the seafarers’ employment agreement.
In such cases, a further question can potentially arise as to how the limit of four months outstanding wages will be calculated. Should it be calculated based on the first four outstanding wages? Or is there a right to pick and choose which of such outstanding wages to form the basis for the calculation of such limit? If the latter is true, seafarers will be keen on calculating such limit based on the higher rate of such outstanding wages. On the other hand, the P&I Club will attempt to calculate such limit based on the lower rate of such outstanding wages. In the next section, this blogpost will explain what the relevant provisions of the MLC, 2006, as amended, provide.
The relevant provision is Standard A 2.5.2 of the MLC, 2006, as amended. Paragraph 9 of this Standard states that:
‘Having regard to Regulations 2.2 and 2.5, assistance provided by the financial security system shall be sufficient to cover the following: (a) outstanding wages and other entitlements due from the shipowner to the seafarer under their employment agreement, the relevant collective bargaining agreement or the national law of the flag State, limited to four months of any such outstanding wages and four months of any such outstanding entitlements; […].’
If one looks at the wording of this provision, it can easily be ascertained that the actual text of the Convention does not give an answer to this question. Certainly, the use of the words ‘limited to four months of any such outstanding wages and four months of any such outstanding entitlements’ gives ample of space for arguments suggesting that the four months limit can be calculated by reference to any such outstanding wages, and not necessarily the first four outstanding wages.
However, it is not clear whether the specific wording was used with such flexibility in mind. The draft text of the amendments of Standard A 2.5.2. of the MLC, 2006, was based on the principles agreed at the Ninth Session (2-6 May 2009) of the Joint IMO/ILO Working Group on Liability and Compensation regarding Claims for Death, Personal Injury and Abandonment of Seafarers. During the negotiations, it was considered whether links should be drawn between paragraphs 2 and 9 of this Standard. Although this discussion took place in respect of the duration of the limitation period (it may be worth noting here that, initially, a limit of three months wages was suggested), it can still be instructive. In this respect, it was explained that the purpose of paragraph 2 is to identify when abandonment takes place, whereas paragraph 9 defines the scope of financial security to be provided in case of abandonment. Thus, it was concluded, it is necessary to allow for a time lapse between the recognition of the abandonment situation and the limitation of financial security.
Against this backdrop, it can be argued that the purpose of the said limit is to ensure that seafarers’ wages are fully paid up for the first four months since their abandonment. Bearing in mind that it is the seafarers who have to initiate the process with the P&I Clubs, it may also be worth noting here that such interpretation can assist with avoiding cases, although rare, where seafarers intentionally allow wages to continue to accrue.
In practice, it is highly unlikely that seafarers are owed only four months’ wages when they are abandoned by their shipowners. Thus, the possibility of different rates for wages or other entitlements cannot be precluded. Given the uncertainty of the wording of Standard A 2.5.2. paragraph 9 (a) of the MLC, 2006, amended, any conflicting arguments can easily be avoided if the purpose of this provision is clarified in future amendments.