Fair Presentation of the Risk and Waiver- Latest from Scotland on the Insurance Act 2015

Last year we commented on Young v. Royal and Sun Alliance plc [2019] CSOH 32 which was the first case to be decided under the Insurance Act (IA) 2015. The Scottish appeal court (Inner House, Court of Session) has recently upheld the first instance decision [2020] CSIH 25.

Let us remind our readers the facts of the case briefly. The co-assureds (Mr Young and Kaim Park Investments Ltd, a company of which Mr Young was a director) brought a claim of £ 7.2 million for extensive fire damage to commercial premises insured. The insurer, Royal and Sun Alliance plc, rejected the claim on the basis that the assured failed to disclose material information in breach of the duty of fair presentation under the Insurance Act (IA) 2015. The policy had been entered through an insurance broker. The assured was requested by the insurance broker to fill in a proposal form which was prepared using the broker’s software. One part of the proposal form required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The drop-down menu that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent. Neither Mr Young nor Kaim Park Investments had been declared bankrupt or insolvent, however, Mr Young had previously been a director of four other companies which had entered into insolvency. The option which was selected on the proposal form was “None”. Accordingly, the proposal forwarded to the insurer showed the option selected, i.e. “None”, and the list of persons to which the declaration related. Once receiving the presentation, the insurer sent an e-mail to the brokers providing a quote for cover and a list of conditions. The conditions, inter alia, included: “Insured has never been declared bankrupt or insolvent.

Before the commercial judge, Lady Wolffe, the assured’s argument was that the insurer’s e-mail response amounted to a waiver by the insurer of its right to receive the undisclosed information regarding the four insolvent companies. Section 3(5)(e) of the IA stipulates that the assured is not required to disclose a circumstance “if it is something as to which the insurer waives information.”

It needs to be stressed that the introduction of the IA 2015 does not alter the legal position with regard to waiver established by case law pre-dating the 2015 Act. On that basis, with reference to Doheny v. New India Assurance Co [2005] 1 All ER (Comm) 382, the commercial judge indicated that waiver could be established in a case where the insurer had asked a “limiting question” such that the assured could reasonably infer that the insurer had no interest in knowing information falling outwith the scope of the question. The classic example is where the proposal form asks about convictions within the last 5 years and which can instruct waiver of information about convictions more than 5 years ago. This was not held to be the case here and accordingly it was held that there was no waiver on the part of the insurer with regard to the information not fully disclosed (i.e. the involvement of Mr Young in four insolvent companies).

_109147621_courtofsession_frame_92130

The assured appealed. The main argument brought forward by the assured was that by showing that it was interested in one aspect of Mr Young’s experience of insolvency, the insurer had impliedly demonstrated that it was not interested in others, and, therefore restricted Mr Young’s duty of disclosure. The Court of Session indicated that the commercial judge successfully identified relevant legal principles in that to found implied waiver of the insurer of this nature it is necessary to show that it made an inquiry directing the assured to provide certain information but no other information. This means that the appeal turned on the construction of a single email sent by the insurer to the brokers when providing a quote (during the pre-contractual stage). The Inner Court found that there was nothing in the email that amounted to an inquiry. Essentially, the insurers were responding to the broker’s request to provide a quotation based on the information provided. The response of the insurers in the relevant email was, therefore, an offer to insure on a variety of terms and conditions. It was not an inquiry and did not amount to limited concern of Mr Young’s past experience of insolvency that excluded the undisclosed information from which he was required to disclose for fair presentation of the risk. The insurer was accordingly entitled to avoid the policy.

It is hard to suggest that the case establishes any novel point with regard to “implied waiver” of the duty of disclosure on the part of the assured by the insurer. Although, this is a Scottish case, it is very much in line with the pre-Act English law authorities and essentially turns on the impression an insurer’s response to a disclosure might create on the mind of a reasonable assured. If it can be said that insurer’s answer amounts to an inquiry (judged from the perspective of a reasonable assured) there could be a possibility of arguing that the relevant assured could infer that the insurer had no interest in knowing information falling outside the scope of that inquiry. Otherwise, there will be no issue of waiver by asking “limiting questions”. The judgment is obviously not binding on English courts but one suspects that it is one that will be referred to not only because it is the first case under the IA 2015 but also as it relies on principles developed by English courts pre-dating the IA 2015 which obviously remain relevant at least in the context of establishing “waiver of disclosure” by the insurer.

Prestige 3.0 — the saga continues

The Spanish government and SS Mutual are clearly digging in for the long haul over the Prestige pollution debacle eighteen years ago. To recap, the vessel at the time of the casualty was entered with the club under a contract containing a pay to be paid provision and a London arbitration clause. Spain prosecuted the master and owners and, ignoring the arbitration provision, came in as partie civile and recovered a cool $1 bn directly from the club in the Spanish courts. The club meanwhile obtained an arbitration award in London saying that the claim against it had to be arbitrated not litigated, which it enforced under s.66 of the AA 1996 and then used in an attempt to stymie Spain’s bid to register and enforce its court judgment here under Brussels I (a bid now the subject of proceedings timed for this coming December).

In the present proceedings, London Steam-Ship Owners’ Mutual Insurance Association Ltd v Spain (M/T PRESTIGE) [2020] EWHC 1582 (Comm) the club sought essentially to reconvene the arbitration to obtain from the tribunal an ASI against Spain and/or damages for breach of the duty to arbitrate and/or abide by the previous award, covering such things as its costs in the previous s.66 proceedings. By way of machinery it sought to serve out under s 18 of the 1996 Act. Spain claimed sovereign immunity and said these further claims were not arbitrable.

The immunity claim nearly succeeded, but fell at the last fence. There was, Henshaw J said, no agreement to arbitrate under s.9 of the State Immunity Act 1978, which would have sidelined immunity: Spain might be bound not to raise the claim except in arbitration under the principle in The Yusuf Cepnioglu [2016] EWCA Civ 386, but this did not amount to an agreement to arbitrate. Nor was there, on the facts, any submission within s.2. However, he then decided that s.3, the provision about taking part in commercial activities, was applicable and allowed Spain to be proceeded against.

Having disposed of the sovereign immunity point, it remained to see whether the orders sought against Spain — an ASI or damages — were available in the arbitration. Henshaw J thought it well arguable that they were. Although Spain could not be sued for breach of contract, since it had never in so many words promised not to sue the club, it was arguable that neither Brussels I nor s.13 of the 1978 Act barred the ASI claim in the arbitration, and that if an ASI might be able to be had, then there must be at least a possibility of damages in equity under Lord Cairns’s Act.

No doubt there will be an appeal. But this decision gives new hope to P&I and other interests faced with opponents who choose, even within the EU, to treat London arbitration agreements as inconsequential pieces of paper to be ignored with comparative immunity.

Covid-19 and Business Interruption Policies- Courts Are Expected to Be Called into Action Soon

More than 300 small and medium sized businesses have formed an action group (Hiscox Action Group) with a view to bringing a class action against Hiscox’s decision to refuse payment under its commercial business interruption policies. It now looks like the Financial Conduct Authority (FCA) will also be involved in the ongoing debate by seeking clarity from the courts about whether the wording of some business interruption insurance policies should provide cover as a result of the pandemic. Although this particular class action might involve Hiscox, there is no doubt that other insurers, such as AXA, Allianz, RSA, QBE and Zurich, might face potential multi-million pound lawsuits from businesses such as hotels, pubs, restaurants and leisure groups that allege legitimate business interruption claims have been rejected by their insurers.

covid19-business-interruptions

The legal issue at stake here is a matter of construing the scope of such policies. Several assureds claim that their policies specifically provide cover for the “inability to use the insured premises due to restrictions imposed by a public authority following an occurrence of any human infectious or human contagious disease.” However, Hiscox and other insurers are arguing that cover is only available under such policies if “there is an incident within a mile radius of the insured building” and therefore unless the businesses are closed by authorities due to outbreak of the disease at the premises, the relevant business interruption policy will not respond.

On several occasions, courts have adopted purposive interpretation techniques when construing terms in commercial contracts. Lord Clarke, famously, in Rainy Sky S.A. and others v. Kookmin Bank [2011] UKSC 50 stipulated [at 14]: “The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant”.

On that basis, taking into account the wording in question, it will be hard to say that a reasonable person would not have understood the parties to have meant that cover would not be available if the commercial activities of a business are restricted due to restrictions imposed by authorities following an occurrence of any human infectious or human contagious disease. That said, more recently the Supreme Court seemed to be trending back towards the literal approach moving away from the contextual approach. See, for example, Arnold v. Britton [2015] UKSC 36 where Lord Neuberger [at 17] stated that “the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed.”

The Supreme Court in Wood v. Capita Insurance Services Ltd [2017] UKSC 24 attempted to reconcile these authorities by confirming the validity of both literal and contextual approaches to contract construction. Lord Hodge [at 13] explained the appropriate approach in the following fashion:

“The extent to which [textualism or contextualism] will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. …”

This approach indicates that a more contextual approach can be adopted in construing some commercial contracts. The key question will be whether standard business interruption policies sold to small and medium sized businesses can be viewed as sophisticated contracts negotiated and prepared with the assistance of skilled professionals? That is highly doubtful! So, there might be room for the courts to adopt a more contextual approach when it comes to construing such contracts bearing in mind the factual matrix. Defining the factual matrix in this context will not be an easy task but the approach taken by courts when construing the scope of professional indemnity policies in actions brought by those who suffered from mesothelioma or their families (Employers’ Liability Policy Trigger Litigation Durham v. BAI [2012] UKSC 14) might give clues as to the likely direction of travel in this context as well.

On the other hand, one appreciates the genuine concerns of insurers- providing indemnity for losses they did not intend to cover- will have implications on their businesses and also their re-insurance arrangements. They can plausibly argue that higher rate of premium would have been charged if they were expected to cover the financial losses emerging from a global pandemic.

One feels that a lengthy and tough legal battle lies ahead!

A Further Clarification on Cyber Risk Cover by the Lloyd’s Market Association

cyber-risk

Although cyber risks insurance in the London market is fast growing, more clarity is needed as various types of clauses drafted by different insurers are in use creating an enormous degree of confusion for assureds as to the scope of the cover on offer. With the objective of providing added clarity, from 1 January 2020, Lloyd’s underwriters will be required to clarify whether first-party property damage policies affirm or exclude cyber cover.

This is certainly a positive development and with the aim to assisting in this process, the Lloyd’s Market Association (LMA) has recently published a number of new clauses for the property and marine markets that can be used with traditional lines of business, e.g. hull & machinery policies, war risks insurance policies for vessels and other offshore structure. It should be noted that clauses published by LMA are designed to act as “models” and are distributed for the guidance of its members, who are free to agree to different conditions or amend as they see fit.

The new clauses published by the LMA comprise a cyber endorsement (LMA5400) and exclusion clause for Property D&F (LMA5401) and a cyber endorsement (LMA5403) and exclusion clause for Marine (LMA5402). All clauses explicitly supersede or replace conflicting policy wording related to cyber loss and data.

Both the property endorsement and exclusion clauses exclude coverage for any cyber loss, as well as any costs related to the use or replacement of data. The endorsement does, however, affirm coverage for physical loss or damage to property caused by fire or explosion that results directly from a cyber incident, as well as coverage for physical damage related to data processing media owned by a policyholder.

The marine clauses, meanwhile, rule out coverage for any loss or expense related to the “failure, error or malfunction of any computer, computer system, computer software programme, code, or process or any other electronic system.” Similarly, they exclude coverage for “the use or operation, as a means for inflicting harm, of any computer, computer system, computer software programme, malicious code, computer virus or process or any other electronic system.” However, marine cyber endorsement clause makes it clear that if the clause is used with policies covering risks of war, civil war, revolution, rebellion, insurrection, or civil strife arising  therefrom, or any hostile act by or against a belligerent power, or terrorism or any person acting from a political motive, the cover will be available for losses arising from the use of any computer, computer system or computer software programme or any other electronic system in the launch and/or guidance system and/or firing mechanism of any weapon or missile.

It should be noted that liability and treaty reinsurance policies will also be required to clarify whether they affirm or exclude cyber cover and these requirements will come into effect in two phases during 2020 and 2021.

“The Brillante Virtuoso Was Scuttled by Those Operating under the Instructions of the Owner” is the View of the Commercial Court

On 21 February 2019, a piece was published on this blog posing the question: “What really happened to the Brillante Virtuoso”? A meticulously drafted judgment of Teare, J ([2019] EWHC 2599 (Comm)) provides an answer to that burning question.

Now briefly the facts!  On 5 July 2011, on route to China with a cargo of fuel oil, the Brillante Virtuoso was boarded by pirates off Gulf of Aden. The pirates directed the vessel to Somalia but when the engine stopped and could not be re-started, they allegedly placed a detonator in the engine room causing huge damage to the vessel. The vessel was insured for $US 55 million with an additional $US 22 million increased cover with ten Lloyd’s underwriters. The underwriters refused to indemnify the assured (Suez Fortune Investments Ltd). The assured and its bank (Pireus Bank AE) as a co-assured under a composite policy brought a claim against the insurers.

Image result for the brillante virtuoso

In the first stage of the trial, the claimants were successful and Flaux, J, (as he then was) held that the vessel was a constructive total loss under s. 60(2)(i) of the Marine Insurance Act 1906 as she was damaged by an insured peril and the cost of repairs would exceed the insured value of the ship when repaired [2015] EWHC 42 (Comm).  In 2015, war risk underwriters alleged wilful misconduct. As the case proceeded the owner of the vessel, Mr Marios Iliopoulos, declined to provide electronic documents related to the case to his own counsel or to the counsel of underwriters, raising questions for the court. In 2016, the owner’s claim was struck out for a failure to comply with disclosure obligations and Flaux, J, was adamant that Mr Iliopoulos had invented a false story in an attempt to explain his failure to make disclosure. The claim was then pursued by the bank alone. The underwriters resisted the claim put forward by the bank alleging that the loss was caused deliberately by the assured and hence was not covered by the policy.  

The case does not alter established legal principles in any significant manner. The burden of proving wilful misconduct or scuttling, on balance of probabilities, lies upon the insurers and as stressed by Neill, LJ, in The Captain Panagos DP [1989] 1 Lloyd’s Reports 33 at p. 43, “an inference of the owner’s guilt can properly be drawn if the probabilities point clearly and irresistibly towards his complicity.” On that premise, Teare, J, was convinced that the cause of loss was on balance of probability was “wilful miscounduct” of the assured. He pointed out to several inconsistencies in the owners’ account of the attack. For example, the incident occurred within Yemeni waters off Aden, a location where Somali pirates had never attempted a boarding before (and have not since). In VDR recordings, the attackers identified themselves as “security,” suggesting that if they were pirates, they would have had to have known that the vessel was awaiting a security detail. They brought with them an incendiary device. The master allowed them to come aboard, even though they were masked and armed and the ship was awaiting an unarmed security team. When directed to steer towards Somalia, the master selected a very different course, but the attackers did not detect this or correct it!

Accordingly, it was held that the supposed attack by pirates was a “fake attack”, and that in reality it was a charade orchestrated by the owner of the vessel, Mr Iliopoulos. It was also held that the vessel’s master and chief engineer were complicit in the scheme, alongside local Aden-based salvors, Poseidon Salvage, and current or former members of the Yemeni coast guard or navy.

An interesting point was raised by the bank in its submissions. On the assumption that the bank is insured under the policy as a composite co-assured, was it possible to argue that in the popular or business sense the owner of the vessel was a pirate, since they carried out the attack on a vessel (or instructed that the attack was to be carried out) with a motive of personal gain/to satisfy personal senses of vengeance/hatred? Teare, J was quick to dismiss this argument indicating that the violence to the vessel and the threat of violence to the crew would not qualify as piracy if carried out by the owners (or the conspirators) with the intention to defraud the insurers. This might seem an obvious point to some but is another clarification on the meaning of “piracy” for the purposes of marine insurance law. The bank’s attempt to argue that the loss was caused by “persons acting maliciously” also failed. Teare, J, quoting from the Supreme Court judgment in The B Atlantic [2018] UKSC 26 stressed that this peril involves an element of “spite or ill-will or the like in relation to the property insured or at least to other property or perhaps even a person” but he rightly indicated that those who were permitted to board the vessel did not act out of “spite or ill-will or the like” in relation to the vessel but did so on the request of the owner in order to assist him in his fraudulent plan to deceive the underwriters. Put differently, here the owner sought to damage his own property and the armed men sought to assist the owner, not to harm him.

The finding of the trial judge on the “wilful misconduct” point was adequate to decide the case in favour of the war risk underwriters insurers but it was briefly stated in the judgment that underwriters were also successful on a number of subsidiary and alternative defences such as the insured vessel being outside the geographical limits of policy (the so called “Aden agreement” point) at the time of the alleged loss and breach of a warranty that required compliance with advice and recommendations of an IMO Circular concerning planning and operational practices for ship operators and masters of ships transiting the Gulf of Aden and the Arabian Sea.

The case does not necessarily establish novel legal points but a 52 day trial and a very lengthy judgment is a good illustration of the work that needs to be carried out by lawyers and judges in cases where insurers raise “fraud” as a defence to a claim under the policy.     

Much Ado About Nothing! A Marine Insurance Case That Promised A Lot But Delivered Very Little

McKeever v. Northernreef Insurance CO SA (22 May 2019)(LM-2018-000044) 

The owner of a sailing yacht named CREOLA, Mrs McKeever, brought an action against Northernreef Insurance CO SA, a Uruguayan insurance company, under a yacht policy providing against the usual range of marine risks, including perils of the seas, piracy, malicious acts and theft.

On 19 March 2014, the insured yacht grounded on a reef in the Sulu Sea. The assured and her friend’s attempts to re-float her were unsuccessful and they had to abandon the yacht as the waves were becoming stronger. Having secured and padlocked the hatches, they were picked up by a fishing vessel which responded to their mayday signal. The next day, they returned to the yacht with the coastguard to find out that the windows had been broken and she had been looted. Various valuable items including electronic navigation aids had been stolen. The assured engaged a firm to guard the yacht and also a salvage company to move the yacht to a place of safety. The salvage company found flooding to a depth of six inches in the portside midsection. On 7 April 2014, the salvage company managed to re-float the yacht and tow her to the Penuwasa boatyard.

The assured’s numerous attempts to claim from the insurer failed. The current proceedings were issued against the insurer in the UK and served on its UK agent. The insurer failed to engage with any of the litigation process save for filing a defence and did not attend trial.

The assured’s claim included:

  1. Damage to the yacht;
  2. Indemnity for the items stolen;
  3. Recovery of the sums paid for guarding the yacht and sums paid for re-floating and towing the yacht (as sue and labour expenses)

Miss Julia Dias QC sitting as the Deputy High Court Judge awarded the assured the diminution in the market value of the yacht owing to the totality of the damage suffered, the value of the stolen items, and her sue and labour expenses.

Grounding Damage

The trial judge was convinced that the initial damage of the hull was caused by “perils of the seas” as the grounding itself was fortuitous. The defendant insurer’s counter arguments that i) the maintenance warranty was breached; ii) the yacht was unseaworthy owing to out-dated charts; and iii) the grounding was caused by the assured’s negligence, had no prospect of success as no evidence was presented by the insurer to maintain these points. There was also no doubt that damage caused by the ingress of water was also recoverable as a loss caused by perils of the seas. In this context, discussion was carried out whether damage caused by ingress of water could be attributable to “piracy” or “theft” or “malicious acts” of third parties given that the looters broke the windows and left hatches open enabling the entry of seawater. The observations of the judge on these points are interesting. On the point of piracy, she indicated that piracy in English law can be defined as “forcible robbery at sea” (The Andreas Lemos [1983] 1 QB 647, at 796-7). She then, relying on s. 8(1) of the Theft Act 1968 reached the conclusion that robbery requires there to be a threat of violence or use of force directed at some person and it was, accordingly, not adequate that violence was directed at the property. This conclusion is not free from criticism. Most would find it strange that assistance is sought from a national legislation, e.g. the Theft Act 1968, in ascertaining the meaning of a marine peril which invariably occurs at high seas, i.e. outside the jurisdiction of any national state. More fundamentally, however, in relevant authorities (especially Republic of Bolivia v. Indemnity Mutual Marine Assurance Co [1909] 1 KB 785, at 796-7) emphasis has been made to the fact that piracy was in essence indiscriminate plunder for personal benefit carried out at sea and with force. There is nothing in that case stressing that violence must be directed to people and violence directed at property would not suffice for the purposes of defining the boundaries of piracy. 

The judge acknowledged that violence directed at property was adequate to bring an action under the peril of the “theft”, she held that while the water ingress can be regarded as having resulted in a general sense from the theft, its proximate cause was the forcible entry rather than the theft of the machinery and it is only the latter which is insured under the policy. This is a curious reasoning, to say the least, considering that the efficient cause of the loss here seems to be breaking of the windows to facilitate theft of various items on board the yacht.

It was relatively easy to rule out “malicious acts” as a cause of the loss on the premise that the looters here were motivated by self-interest (i.e. their actions were motivated for the purpose of facilitating theft).

Indemnity for items stolen

The insurers themselves had conceded that indemnity for the items stolen was recoverable under the peril of the “theft” as there was clear evidence of violence against the property.

Sue and Labour Expenses

The trial judge had no doubt that expenses incurred, i.e. engaging a firm to protect the insured yacht and engaging the salvage company to remove her from the reef and tow to Penuwasa boat yard were properly and reasonably incurred for the purpose of taking reasonable measures to avert or minimise a loss

Conclusion

The case leaves so many points unanswered. The conclusion about the essential elements of “piracy” in the context of a marine insurance policy is debatable. Also, the judge’s findings on issue of identifying “proximate cause” of the loss are questionable. The case also presented an opportunity to deliberate to what extent a clause excluding claims from negligence of an assured is valid in the context of a policy that is taken by an individual. No doubt, these issues would have been evaluated further had the insurer appeared before the Court. As it stands, the judgment does not add much to the development of marine insurance law. 

Supreme Court Clarifies the Law on CTL Calculation in Marine Insurance

The Swedish Club v Connect Shipping (The MV Renos) [2019] UKSC 29

Under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906, there is constructive total loss (CTL) when the insured ship is damaged by a peril it’s insured against and the cost of repairing said damage would exceed the insured value of the ship when repaired. In estimating the cost of repairs for the purposes of this provision, it has been held by Knowles, J, [2016] EWHC 1580 (Comm) that i) the costs incurred prior to the date of notice of abandonment and ii) the costs of salvage operations performed before the notice of abandonment, including sums payable under the SCOPIC clause, should be taken into account.

The underwriters’ appeal to the Court of Appeal on these points was rejected unanimously [2018] EWCA Civ 230 (per Hamblen, LJ, with whom Simon, LJ and Sir Geoffrey Vos C agreed). In a previous case note, the author was critical of the Court of Appeal’s reasoning, especially with regard to the second point, i.e. taking into account SCOPIC expenses incurred before the notice of abandonment in estimating the cost of repairs.

The Supreme Court (composed of Lords Sumption, Reed, Hodge, Kitchin and Lloyd Jones) allowed the appeal on this ground holding that SCOPIC charges cannot be considered as part of the “cost of repairing the damage” under s. 60(2)(ii) of the MIA 1906 (or the “cost of recovery and/or repair” under clause 19.2 of the Institute Hull Clauses). The Supreme Court stressed that the primary purpose of SCOPIC expenditure is to protect owners’ potential liability for environmental pollution not to enable the ship to be repaired. Hence, such expenditure is not connected with the damage to the hull or its hypothetical reinstatement and the mere fact that a prudent uninsured owner would have contracted with the same contractors for both prevention of environmental pollution and protection of the property does not make them indivisible. The author believes that the Supreme Court’s decision on this issue is intuitive and makes sense.   

On the issue of whether expenses incurred prior to the notice of abandonment should count towards the calculation of a CTL under s. 60(2)(ii) of the MIA 1906, the Supreme Court rejecting the submission of the underwriters, affirmed the findings of the lower courts. The Supreme Court approached the matter with reference to basic principles of insurance law indicating that several older judgements on the matter (in particular Hall v. Hayman (1912) 17 Comm Cases 81 and The Medina Princess [1965] 1 Lloyd’s Rep 361) lacked reasoning and legal argument. Taking into account the objective character of the factual enquiry of whether a vessel is a CTL and the fact that in marine insurance context the loss is suffered at the time of the casualty, the Supreme Court was adamant that the reference to “damage” in s. 60(2)(ii) was in fact reference to the entire damage arising from the casualty from the moment that it happened. Therefore, it cannot make any difference when costs are incurred, i.e. pre or post notice of abandonment. On that premise, the Supreme Court evaluated whether this principle might be affected by the legal requirement for a notice of abandonment but reached the conclusion that it is not.                   

At the commencement of litigation, it was agreed by the parties that, to be declared a CTL under s. 60 of the MIA 1906, the repair costs needed to be in excess of US$ 8 million. The matter in the light of the Supreme Court judgment will be remitted to the trial judge to determine whether the vessel had been a CTL and what financial consequences would follow from that. 

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

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

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

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

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

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

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

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

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

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

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

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

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

The Brillante Virtuoso after the incident!

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

Condition Precedents/Warranties in Insurance Contracts

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

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

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

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

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

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

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

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

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

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