The New Warranty Regime Tested in A Common Law Court   

PT Adidaya Energy Mandiri v. MS First Capital Insurance Ltd [2022] SGHC(I) 14; [2022] 2 Lloyd’s Rep 381

Factual and Contractual Matrix

The assured operated an unmanned single point mooring buoy (SPM) at a gas field which was moored to seabed by nine set of chains at three locations on its skirt area. The insurance policy provided cover for physical damage to the SPM on total loss basis only with an insured value of US$ 4, 700,0000. The policy, inter alia, contained two warranties:

Clause 1- “The Insured Equipment is only to be operated by and under the supervision of suitably trained and authorised personnel…”

Clause 8- “Suitable precautions and preservation/maintenance measures to be adopted when storing, handling, transporting and operating Insured Equipment.

The policy was subject to English law as amended by the Insurance Act (IA) 2015. It also contained a clause to the effect that the assured should notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy.   

Between 1 and 13 July 2018, several collisions between the SPM and a crude oil tanker (The Bratasena) occurred during loading operations leading to the flooding of the SPM’s compartments. Emergency repairs were carried out in August/September 2018 and further repairs were made in situ in December 2018. The SPM received further repairs in May/June and November 2019. The assured claimed that the SPM was a constructive total loss (CTL) by tendering a Notice of Abandonment (NoA) on 22 May 2019. The assured also claimed expenses incurred to prevent the SPM from becoming a total loss as sue and labouring expenses. The assured’s indemnity claim was rejected by the insurer on various grounds mainly due to breach of marine warranties and procedural issues. The assured’s claim for sue and labouring expenses was also rejected by the insurer. The assured brought the current proceedings against the insurer before the Singapore International Commercial Court as per jurisdiction agreement in the contract.

Breach of Warranty

Sir Jeremy Cooke IJ, was of the opinion that both of the warranties in the contract were breached. The assured was in breach of Clause 1 as no evidence was presented showing that the crew was adequately trained to operate the insured equipment. It was also held that there was a breach of cl. 8 as there was no static tow in place to ensure that The Bratasena did not surge into the SPM. Moreover, it was found that there was no 24/7 watchkeeping during loading operations which meant another failure in the provision of suitable precautions and preservation measures. It was also found that the crew’s failure to notify the assured of every contact with the SPM constituted a further breach as that prevented any corrective measure taken.

Having established that both cl 1 and 8 were breached, the trial judge held that the cover was suspended at the time of the loss by virtue of s. 10(2) of the IA 2015. It was also held that s. 11(3) of the IA 2015 could not assist the assured here as there was no prospect of the assured showing that non-compliance with the warranties did not increase the risk of the loss which actually occurred in the circumstances which it did occur.

Other Defences Raised by the Insurer

The clause requiring the assured to notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy was held to be a condition precedent to the liability of the insurer. It was held that this clause was breached (which barred recovery) as the assured even though by 17 July 2018 was aware that there had been several collisions between the SPM and The Bratasena, gave no notification to the insurer until 5 September 2018.    

Agreeing with the contention of the insurer, the Court also found that the SPM was not a constructive total loss as the repair costs (estimated to be around US$ 2 million by the insurer’s expert and US$ 3.2 million by the assured’s expert) did not exceed the insured value under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906. It was also held that (even if the repair costs had exceeded the insured value of the SPM), the assured could not treat the loss as constructive total loss as it failed to tender NoA within a reasonable time (as required by s. 62(1)(3) of the MIA 1906). The trial judge stressed that NoA was not tendered until 22 May 2019 even though the temporary and permanent repairs required to preserve the vessel from being a total loss had been completed by mid-December 2018.  Sir Jeremy Cooke IJ was convinced that the assured had waived its right to abandon the SPM to the insurers as it sold the equipment in June 2019 for US$ 400,000 at an undervalued price on the premise that it was a liability, but it kept operating it following the collision and kept earning a revenue. All these inconsistent actions pointed to the Court that the assured was dealing with SPM for its own account throughout so its offer to cede its interest in the SMP to the insurer was taken to have been withdrawn.   


The assured’s claim for sue and labouring costs were mostly rejected. By virtue of s. 78(3) of the MIA 1906, to qualify as a sue and labour expense, it is necessary to show the assured that the expenses were incurred for the purpose of averting or minimising a loss to the insured property. This puts a serious limit on a policy like this one which provides cover on “total loss basis” only allowing the assured to claim costs that had been spent to prevent the insured property from an immediate risk of total loss as sue and labouring expenses. On that basis, the Court held that most of the expenses were not recoverable as sue and labouring expenses. More precisely:

  1. Replacement of the mooring hawser was not incurred to preserve the property from total loss;
  2. Inspection costs of the mooring chain, SPM riser and the pipeline end manifold, had no influence on the loss;
  3. Effecting permanent repairs (especially in 2019) did not qualify as there was no longer a risk of sinking.

The only expense recoverable as sue and labouring expense was the inspection costs and repairs to prevent further flooding immediately after the collisions in July 2018 (US$ 20,875 on the estimate of the insurer’s expert).

Comment

The Court’s findings on the CTL issue and sue and labour clause do not break any new ground. What we see here is a very good application of established legal principles to the facts of the case with the assistance of insurance experts.

However, given that this is the first case (known to the author) that gives judicial airing to the changes introduced on the traditional warranty regime by the IA 2015 (in addition to academic scrutiny carried out- see, for example, observations of the author in 3rd edition of Warranties in Marine Insurance (2017, Routledge), his contribution to Cambridge Law Journal [2016] “Risk Control Clauses in Insurance Law” pp, 109- 127, Professor Clarke’s observations published in The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (Informa Law, 2017), pp. 54-59 comments of R. Merkin and Ö. Gűrses, “The Insurance Act 2015: Rebalancing the Interests of the Insurer and the Assured” (2015) 78 MLR 1004), it is worth commenting on that aspect of the case.

The case is a very good reminder that when dealing with a warranty that requires the assured to adopt safety standards and practices (such as cl 8 here),  when such standards are not maintained by the assured, it will be very difficult (if not impossible) to convince the Court that non-compliance with such warranty could not have increased the risk of loss which actually occurred in the circumstances in which it occurred (s. 11(3) of the IA 2015). From the way the arguments were presented to the judge, it is also evident that (as predicted by academics) the effect of s. 11(3) is to introduce a test of causation from the backdoor! Inevitably, the courts will be drawn into an enquiry as to whether the loss would have happened in the manner it did, had the safety standards been appropriately adopted.    

One should also bear in mind that the effect of s. 11(3) could be negated altogether (i.e., the assured could be prevented from arguing that the breach of warranty did not contribute to the occurrence of the loss so that it should not have any detrimental impact on coverage) if it is drafted in a way that serves the purpose of describing the limits of the cover as a whole. A warranty of that nature is excluded from the application of s. 11(3) on the premise that such a term will have a general limiting effect not linked to a specific risk (s. 11(1) stipulates: “This section applies to a term (express or implied) other than a term defining the risk as a whole,…”). Unfortunately, this matter was not deliberated by the trial judge in depth, but it could be plausibly argued that cl. 1 is such a term as it requires the insured equipment to be operated only by and under the supervision of suitably trained and authorised personnel. On that basis, it can be viewed as going to the definition of the insured risk rather than simply being a term designed to reduce the risk of a particular type of loss. If so, regardless of whether breach of cl. 1 has contributed to the loss, the risk is suspended the moment the insured equipment is operated by personnel who are not adequately trained until that situation is rectified (as long as, of course, the breach does have a lasting impact on the risk (s. 10(2) of the IA 2015). Lack of discussion on the nature of cl. 1 did not here have any impact on the outcome as the judge was convinced that non-compliance with the warranty did, in fact, increase the risk of loss which actually occurred in the manner in which it occurred but such an analysis would have helped us to see how judges actually deal with the issue of identifying whether a warranty is one that “describes the risk” (which is excluded from the application of s. 11(3) of the IA 2015) or is one which is designed to reduce the risk of “loss of a particular kind” or “loss at a particular location” or “loss at a particular time”.     

The ILO adopts a Resolution on Financial Security in cases of the Abandonment of Seafarers 

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.  

Financial Security in Cases of Abandonment: A Four-Month Limit for Unpaid Seafarers’ Wages?

Introduction

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.

Issues

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 law

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.

Conclusion

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.

Insurable Interest in Cargo Insurance Context and First Late Payment of Claim Assertion in English Law


Quadra Commodities SA v. XL Insurance and others [2022] EWHC 431 (Comm)

The assured was a commodities trader who entered into various contracts with Agroinvest Group for the purchase of grain. 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 Agrionvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. The fraud unravelled when buyers sought to execute physical deliveries against the warehouse receipts and it became clear that there was not enough grain to go around.


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. The relevant clauses in the policy stipulated as follows:

Misappropriation
This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

Fraudulent Documents

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

Insurable Interest Issue

The insurers denied cover on the basis that the assured did not have insurable interest in any of the goods which were lost and/or there was no physical loss of the property, only pure financial loss, which was not insured. The basis of the insurers’ case on insurable interest was that this was not an insurance on property but instead an insurance of an adventure, including the success of storage operations. The judge (Butcher, J) was quick to dismiss this submission by referring to various terms in the contract pointing strongly to the direction that this was indeed an insurance on the property (grain) which the assured was purchasing from the buyers. The alternative argument of the insurers was interesting and raised issues whether the assured had insurable interest in the goods. It was essentially argued that even if the insurance was on the cargo purchased, the assured had no insurable interest in the present case as the cargo in question never existed. With this argument the insurers were primarily encouraging the court to adopt a strict approach to insurable interest following the spirit of the reasoning of Lord Eldon in Lucena v. Craufurd (1806) 2 & P.N.R. 269 which suggested that only those who stand in a “legal and equitable relationship to the property” have insurable interest in the context of property insurance.
The judge was able to dismiss insurers’ argument by holding that the assured was successful, on a balance of probabilities, in showing that goods corresponding in quantity and description to the cargoes were physically present at the time the Warehouse Receipts were issued. This meant that this was not an insurance policy on goods that never existed and accordingly the assured had insurable interest on the grounds that:

• The assured had made payment for goods under purchase contracts, and such payment for unascertained goods of the relevant description was valid ground for establishing an insurable interest irrespective of whether there were competing interests in the grain. The assured, therefore, stood in a “legal or equitable relation” to the property by virtue of the payment.

• The assured was able to show on the balance of probabilities that it had an immediate right to possession of the grain and this coupled with its economic interest in the grain can give rise to an insurable interest.

This outcome in the case is in line with authorities on the subject and is not too controversial. However, the curious point is whether the court would have reached the same conclusion on insurable interest, had it decided that on balance of probability the assured failed to show that goods corresponding in quantity and description to the cargoes were physically present. There is authority to the effect that an assured has no insurable interest in insuring property that it does not own although it might have a factual expectation of loss related to that property (Macaura v. Northern Assurance Co Ltd [1925] AC 619). However, a different stance has taken on the matter in other common law jurisdictions (in particular by the Supreme Court of Canada in Constitution Insurance Company of Canada v Ksmopoulos [1987] 1 SCR 2). Also, there is a marked shift in attitude of English courts towards a more flexible approach to insurable interest (especially in cases like National Oilwell Ltd v Davy Offshore (UI) Ltd [1993] 2 Lloyd’s Rep 582 and The Moonacre [1992] 2 Lloyd’s Rep 501). It should be at least arguable that a person who is led to believe by a fraudster to purchase goods (that never existed) and paid for them under a sale contract, should have an insurable interest if s/he enters into a contract of insurance to protect his/her interest against the risk of not getting what s/he paid for.

Late Payment Issue

The Insurance Act (IA) 2015 implies a term into insurance contracts to the effect that the insurer must pay any sums due in respect of a claim within a “reasonable time” (s. 13A of the IA 2015). However, by virtue of s. 13A(4) the insurer is not in breach of this implied term if it shows that there were reasonable grounds for disputing the claim merely by failing to pay while the dispute is continuing. The assured in the present case contended that the insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted the assured suffering losses by reference to the return on shareholders’ equity. Conversely, the insurers argued that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, the insurers argued that by virtue of s. 13A(4) there was no breach of this implied term as they had reasonable grounds to dispute the claim.

Given that this was the first case on the matter, in considering whether there was any breach of the implied term, the judge apart from the guidance provided by s. 13A(2) of the Insurance Act, also turned to the Law Commissions’ Report and the Explanatory Notes to the legislation before ultimately deciding that there was no breach of the implied term. In reaching this conclusion, the judge made reference to a number of factors:


i) That although the case was relating to a dispute that arose in relation to a property insurance cover (which according to the Explanatory Notes such claims usually take less time to value than, for example, business interruption claims), the cover in question applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation);
ii) The size of the claim was substantial;
iii) The fraud, uncertainty as to what happened, the destruction of documents, existence of legal proceedings in Ukraine and the fact that the assured elected to swap from French law to English law during the investigation were all significant complicating factors; and
iv) Relevant factors outside insurers’ control, included the destruction and unavailability of evidence and the legal proceedings in Ukraine.

On the point raised by the insurer, s. 13A(4) of the IA 2015, it was held that the insurer bears the burden of proof but here they had reasonable grounds for disputing the claim stressing that although the grounds for rejecting the claim were wrong, this did not mean that they were unreasonable. Although the judge considered elements of the insurers’ investigations were delayed, the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout.

This is the first judgment on s. 13A of the IA 2015. When first introduced, there was some concern especially among insurers that this section might fuel US type of bad-faith litigation against insures. However, the parameters for such a claim are well-defined in s. 13(A) and guidance is provided to courts as to how they should judge whether a claim is paid/assessed within a reasonable time. The manner in which the trial judge made use of such guidance in this case is a clear indication that late payment claims will not go down the path that has been taken by some US courts and in England & Wales an assertion of late payment of an insurance claim will only be successful in some extreme cases. There is no doubt that insurers will take some comfort from the judgment given that it is clear now that an insurer’s decision to refuse payment for a claim will not automatically amount to breach of this implied term even if it is found that the grounds for disputing the claim are wrong.

Cyber warfare: Are you protected?

Beware of the war exclusions!

Following the Lloyds Performance Management Supplemental Requirements & Guidance, published July 2020, all insurance and reinsurance policies written at Lloyd’s must exclude all losses caused by war and nuclear, chemical, biological or radioactive risks (NCBR), except in limited circumstances.[1] This reinforces the exclusion of war and NCBR in hull and cargo and most cyber policies. Both cyber  security data and privacy breach (CY) and cyber security property damage (CZ)[2] polices are among the exempted class of business which would be allowed to write war risks. However, when writing these cyber policies, the terms and scope of the cover must be unambiguously stated. If there is an extension of the policy to include war, that extension must not override any NCBR exclusions contained within the cyber policy. It is customary to follow local law or regulation on how coverage should be provided for in policy documentation and for the exempted classes of business, it is recommended to follow local market practice. In light of these guidelines several war exclusions in varying degree of liability were developed to be endorsed on or attached to commercial cyber policies. It is not yet clear if the same clauses are or will become applicable to non cyber policies but the discussion is relevant considering current geopolitical conflicts and imminent threats to businesses and states.

The exclusions (LMA5564, LMA5565, LMA5566, LMA5567)[3] are very similar in terms of the language used and excludes loss of any kind directly or indirectly occasioned by, happening through or in consequence of war or a cyber operation.  The burden is on the insurer to prove that the exclusion applies. An obvious difference is the causal language used in each clause. ‘Happening through’ is not language commonly used in the marine sector, as such its meaning and what needs to be established to fulfil this causal effect requires clarification. Clauses 3-5 of each exclusion refer to the attribution of a cyber operation to a state and the definition of war and cyber operation are both related to the acts of a state against another state. War is defined as the ‘use of physical force by a state against another state’ thus excluding cyber incidents / attacks which may have the same effect but without physical use of force and not by a state against another state. Cyber operations means ‘the use of computer system by or on behalf of a state to disrupt, deny, degrade, manipulate or destroy information in a computer systems of another state’.[4] The emphasis on ‘states’ means that the exclusion would not be applicable to private acts of civilians who are not acting on behalf of their government or another state. Furthermore it is doubtful whether cyber operation would extend to the damage loss of cargo, vessel or financial losses since the subject of a cyber operation is the ‘information in a computer system’.

In attributing cyber operation to a state, the primary but not exclusive determinant is whether the government of the state in which the computer system affected is physically located has attributed the cyber operations to another state or those acting on its behalf. Pending a decision, the insurer may rely on an inference which is objectively reasonable as to attribution of the  cyber operation  but no loss shall be paid during this time. If the  government of the state in which the affected computer system is located takes too long to decide, or is unable to declare or does not determine attribution, the responsibility shifts to the insurer to determine attribution by using other evidence available to it. There are several problems with the terms of LMA5564, there is no explanation of the type and source of information the insurers should rely on to develop an inference and what will qualify as objectively reasonable and importantly who will sit as ‘objective person’. Furthermore,  the reference to the insurer using ‘such other evidence as is available’ suggest that the insurer is permitted to rely on any source, type / quality of evidence available that will support his position that the exclusion does apply. In other words, the acceptable standard of evidence to support the insurer’s ‘inference’ and to discharge his burden that the exclusion does apply is low and therefore prejudicial to the assured.

The second war, cyber war and cyber operation exclusion (LMA5565) differs from LMA5564  in that LMA5565 clause 1.1 to 1.3 list the conditions under which war and cyber operations are excluded. These are war or cyber operation carried out in the course of war and or retaliatory cyber operations between any specified state (China, France, Germany, Japan, UK or USA) and or a cyber operation that has a detrimental impact on the functioning of the state due to the direct or indirect effect of the cyber operation on  the availability, integrity or delivery of an essential service in that state and or the security or defence of a state. Clause 3 introduces the agreed limits recoverable in relation to loss arising out of one cyber operation and a second limit for the aggregate for the period of insurance. If the limits are not specified, there will be no coverage for any loss arising from a cyber operation. Noteworthy is the fact that similar limits have not been introduced for loss arising from a war or cyber war, so the limit would be based on the insured value of the subject matter insured. The definition of essential service creates uncertainty because what is categorised as ‘essential for the maintenance of vital functions of a state’ may vary across states. While examples are provided which includes financial, health or utility services, unless the parties stipulate and restrict this category to only the services named in the policy, there is potential contention between the parties over what will qualify as an essential service and what is a vital function to a state. It is expected that the marine sector will be among the list of essential services, however it is unlikely that an attack on a commercial private vessel or onshore facilities would qualify as harm to an essential service, vital for function of the state.

A third form of the war, cyber war and cyber operations exclusion LMA5566 is identical to LMA5565 except that there is no equivalent to the clause on limits of liability for each cyber operation or aggregate loss in LMA5566. The fourth form of exclusion LMA5567 expounds on the conditions mentioned in LMA5565 and LMA55666, particularly the exclusion or loss from retaliatory cyber operations between any of the specified states leading to two or more of those states becoming impacted states. The exclusion of cyber operation that has a major impact an essential service or the security of defence of a state shall not apply to the direct or indirect effect of a cyber operation on a bystanding cyber asset. LMA5567 introduces the concepts of impacted states and bystanding asset, thus expanding the effect of the exclusion clause. Impacted states means any state where the cyber operation has had a detrimental impact on the functioning of that state due to its effect on essential services  and or the security or defence of that state. The bystanding cyber assets are computer systems used by the insured or its third party provider that is not located in the impacted state but is affected by the cyber operation. As an exemption to the exclusion, the consequence is that the insurer will be exposed to liability for loss to assets that are not owned by the insured or its third party providers. The only requirement being that these bystanding cyber assets / computer systems are used by the insured or its third party providers which could be an extensive list of unidentified assets and liabilities. Another problem with the definition of bystanding cyber asset is it does not declare for what purpose the said asset should be used by the insured or by the third party provider. The presumption is the use should be related to the subject matter / business of the insured but without clarification, there are doubts about the scope and limits of the term.  Interestingly and of concern is the use of the words ‘cyber war’ in the title of each exclusion but is not repeated in any of the four clauses nor is there a description of the meaning of a cyber war and how it differs from a cyber operation and war as defined in the clauses.

A guidance on the correct interpretation of the exclusion clauses was not published and given their deficiencies, the effectiveness of each exclusion clause is reduced. In terms of their application to marine activities, the insurer will find that he is liable to indemnify the assured for his loss from cyber-attack unless there is evidence to attribute the cyber act to a state. The exclusions will be more effective in scenarios where terrorist or political groups are involved. War is limited to acts between states and significant emphasis is placed on damage to essential services of a state. Despite the deficiencies discussed above, the importance and take up of any variation of the exclusion clause will increase as the political security of nation states and businesses continue to be of concern to insurers. The constant threats and warning  in the news of cyber-attacks being used as weapons of war will affect market response and which will sometimes be reflected in strictness of language / variations of the war exclusions used in insurance policies. Other stakeholders must be proactive and ensure that they have adequate insurance protection against cyber war risks and war risks generally and mitigate their risks of loss by implementing and maintaining good cyber hygiene based on industry specific best practices.  


[1] Lloyd’s, ‘Performance Management – Supplemental Requirements & Guidance’ (July 2020) 41 <https://assets.lloyds.com/assets/performance-management-supplemental-requirements-and-guidance-july-2020highlighted/1/Performance%20Management%20Supplemental%20Requirements%20and%20Guidance%20July%202020Highlighted.pdf> accessed 22 March 2022. War and NCBR policies can only be provided where: the exclusion of war is prohibited by local legal or regulatory requirements but this is not inclusive of the writing non-compulsory war risks; where the type of business is within the exempted class and where the syndicates have the express agreement from Lloyds through business planning process.

[2] Lloyd’s, ‘Cyber Risks & Exposures : Market Bulletin Ref : Y4842’ (25 November 2014)

<https://assets.lloyds.com/assets/y4842/1/Y4842.pdf > accessed 22 March 2022.

[3] LMA, ‘Cyber War and Cyber Operation Exclusion Clauses’ (LMA21-042-PD, 25 November 2021)  

<https://www.lmalloyds.com/LMA/News/LMA_bulletins/LMA_Bulletins/LMA21-042-PD.aspx> accessed 22 March 2022.

[4] Michael N Schmitt,  ‘The Use of Force’ in Tallin Manual 2.0 on the International Law Applicable to Cyber Operations ( 2nd edition Cambridge University Press 2017)The Tallin Manual is nonbinding legal source which explains how international law applies to cyber operations. It is in the process of a five (5) year review for the launch of Tallinn Manual 3.0.

Limitation — not everyone who operates a vessel is an operator

At least one P&I Club will, one suspects, be feeling rather rueful after this morning’s Court of Appeal decision in Splitt Chartering APS v Saga Shipholding Norway [2021] EWCA Civ 1880.

The Norwegian Mibau group undertook an operation for Costain, involving the transport and deposit of vast amounts of rock in the sea under Shakespeare Cliff near Folkestone. Getting the rock to the correct place involved towing a loaded dumb barge from Norway and anchoring it where the rock was to be placed. The barge was owned by one Mibau company, Splitt; for internal accounting reasons it was chartered to another such company, Stema AS, which also owned the rock. On arrival the barge was anchored, with a crew put on board employed by a third Mibau company, Stema UK. That crew took orders from, and acted on the instructions of, Stema AS.

Despite ominous weather forecasts, Stema UK’s crew assumed the barge could be safely left unmanned at anchor. They were seriously wrong. She dragged her anchor in a storm and sliced an underwater cable which proved costly to repair. The question arose whether, in a suit by the cable owners, Stema UK could limit its liability. Although clearly not an owner or charterer of the barge under Art.1(2) of the LLMC 1976, it argued that because of its de facto control at the relevant time it had been either a manager or an operator. The cable owners argued that it was neither.

Teare J held Stema UK entitled to limit. (See [2020] EWHC 1294 (Admty), noted in this blog here.) True, because it had lacked executive authority, being under the orders of Stema AS, it could not have been a manager. But it, or rather its employees, had undoubtedly been in physical control of, and had operated the machinery aboard, the vessel; and this meant that it counted as her operator within Art.1(2).

This was a commercially sensible result. It meant that the ability to limit stood to be fairly generously granted to any entity in physical control of a vessel; it also had the extra advantage that corporate groups would not be unduly prejudiced merely because for organisational reasons they chose to parcel out the functions of ownership and physical manipulation to different group entities.

Unfortunately it did not find favour with the Court of Appeal. Phillips LJ, giving the only judgment, took the view that just as an employee would not be an operator in his own right since he acted only on someone else’s orders, an entity physically operating a vessel as the catspaw of another entity was in the same position. It followed that because of its lack of authority to act on its own initiative without contacting Stema AS, Stema UK was liable in full since it was outside the charmed circle of those entitled to limit.

For what it is worth, with the greatest of respect this blog is inclined to prefer the reasoning in the judgment below. We see it as not only commercially rational but also more certain, in that making the status of operator dependent on an estimation of the amount of discretion allowed to an entity seems to encourage some hair-splitting arguments.

But no matter. As Phillips LJ pointed out, the effect of the Court of Appeal’s decision can easily be avoided by making sure that the people physically in charge of a vessel are seconded to, or otherwise technically employed by, the company with the serious decision-making power. No doubt, indeed, as this is being written P&I club lawyers will be sharpening their pencils with a view to drafting the necessary advice to members, and possibly even changes to the rules so as to back up that advice. As ever, a little discreet bureaucratic tinkering can pay big dividends.

Insurance Implications of “Phishing”!

Phishing Emails - How to Protect Your Customers When Using E-Signature |  OneSpan

The 2Cs, COVID-19 and cyber risks, 2 plagues of our generation, both of which command global interest and competes in both print and online media for daily headlines. They also have one thing in common, they are highly misunderstood and mutates ever so often. For these and other reasons, governments and business stakeholders have invested heavily in developing safety guidelines to mitigate the loss and damages arising directly or indirectly from cyber risks and COVID19. While governments have made some progress in the fight against COVID-19 through the vaccine administration, cyber risks on the other hand is mutating at such a rate where it almost impossible to keep up and the shipping and insurance industries are just as vulnerable to cyber risks as any other industry.  Here we will briefly discuss phishing, often described as the most widespread and pernicious cyber-attack technique, but the discussion will be centered around the decision of the U.S. District Court for the Northern District of Texas  in RealPage v National Union Fire Insurance Company of Pittsburgh and Beazley Insurance Company[1].

BIMCO in its guidelines on cybersecurity risks onboard ships describes phishing as encompassing the sending of emails to many potential targets asking for pieces of sensitive or confidential information. The email may also contain a malicious attachment or request that a person visits a fake website using a hyperlink included in the mail. A distinguishing feature of phishing is that attackers pretend to be a real and trusted person or company that the victim usually or have had business relations. It is reported in the Cyber Security Breaches Survey 2020, that phishing attacks are the most common attack vector used by cyber criminals and that between 2017 and 2020 there has been a rise in the number of businesses experiencing a phishing attacks from 72% to 86% whereas there has been a fall in viruses and other malware from 33% to 16%.[2] Since phishing is such a constant threat to businesses, it is understandable why insurers see the need to cater for this risk in their cyber insurance policies and or other commercial crime policies.

Facts of RealPage case:

RealPage provides several services for their clients who are property owners and managers of real estate. The clients entered contracts with RealPage authorizing it to act as agents on their behalf, and to manage and collect monies debited from their customers’ accounts, and to credit the client’s identified bank account. The tenants authorized the transactions processed by RealPage and this was communicated to RealPage by their clients. RealPage then contracted with Stripe to provide software services that enable payment processing and related functions.

The payment process involved the following:

  1. A tenant would log in to an interface called “Resident Passport” to make a payment to one of RealPage’s clients.
  2. Upon initiation of a payment by a tenant, RealPage would send application programming interface (API) calls[3] to Stripe’s server either through Stripe Dashboard or the On-Site application.
  3. Upon receipt of an API call, for an automated clearing house (ACH) transaction, Stripe would send instructions to its bank, Wells Fargo to process the ACH transfer that would pull money from the tenant’s bank account and place these funds in Stripe’s Wells Fargo bank account.
  4. Thereafter, Stripe would direct Wells Fargo to complete another ACH transfer to pay these funds to the clients in accordance with RealPage’s instructions.

The funds held in Stripe’s accounts were for the benefit of its users and merchants such as RealPage. If there was a balance owed to a client of RealPage, the funds for that client in Stripes account would be for the benefit of the said client. RealPage had no rights to the funds held in Stripes account. RealPage was not entitled to draw funds and did not receive interest from funds maintained in the account. RealPage contracts describes the relationship with Stripes as independent contractors. One exception where Stripe operates as an agent is holding funds that are owed to RealPage

The hackers used targeted phishing to obtain and alter the account credential of a RealPage employee. They then used those credentials to access the Stripe Dashboard and alter RealPage’s fund disbursement instructions to Stripe. The hackers diverted over $10 million that was not yet disbursed to clients. RealPage discovered the fraud, contacted Stripe and directed them to reverse the payments and freeze outgoing payments. RealPage was unable to recover over $6 million of the funds. RealPage refunded clients for lost funds.

Insurance Policies with National Union and Beazley

At the time of the attack, RealPage had a commercial crime policy with National Union and an Excess Fidelity and Crime Policy from Beazley. The Excess Policy provides a $5,000,000 limit of liability “for any loss which triggers coverage under the Commercial Crime Policy.  Therefore, any recovery under the Excess policy was dependent on RealPage successfully making a claim under the Commercial Crime Policy. The following provisions of the Commercial Crime Policy are the most relevant

Ownership of Property; Interests Covered:

The property covered under this policy is limited to property:

(1) That you own or lease; or

(2) That you hold for others whether or not you are legally liable for the

loss of such property.

Computer Fraud:

We will pay for loss of or damage to “money”, “securities” and “other property” resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the “premises” or “banking premises”:

a. To a person (other than a “messenger”) outside those “premises”; or

b. To a place outside those “premises”.

Funds Transfer Fraud:

We will pay for loss of “funds” resulting directly from a “fraudulent instruction” directing a financial institution to transfer, pay or deliver “funds” from your “transfer account”.

Insurance Claims and Responses

RealPage claim for the funds lost under the policy but National Union was only willing to reimburse the transactional fees owed to Real Page. With respect to the diverted funds that were owed to RealPage clients, National Union concluded that based on their preliminary analysis, RealPage did not own or hold the funds and thus was not entitled to coverage. As a result of National Union’s denial of coverage, RealPage filed a claim seeking a declaration of judgment for the funds fraudulently diverted and lost as a result of the phishing attack.

Court Proceedings

The main issue for the court was ‘whether RealPage is entitled to coverage under commercial crime insurance policies for the loss of its clients’ funds which were diverted through a phishing scheme’? In answering this question, the central issue is whether RealPage held these funds despite its use of a third-party processor, Stripe Inc? After an extensive discussion of the meaning given to the word ‘hold’, it was accepted that there must be possession and not necessarily ownership of an item. Accordingly, the court held that RealPage did not suffer a direct loss as required under the policy as they did not hold the funds at the time of the phishing attack  and in so doing the court decided in National Union and Beazley’s favour granting them summary judgment.

RealPage argued that the policy was expansive enough to cover property they held. They also reasoned that since they had the authority to direct Stripe as to where the funds should go, they ‘held’ the funds. The court rejected this line of reasoning by stating ‘hold’ cannot be reduced to simply the ability to direct but required some sort of possession of property. By applying the ordinary meaning of ‘hold’, Real page was not in possession of the funds. The funds were in Stripes account at Well Fargo and not RealPage up to the time it was diverted to the hackers account. RealPage ability to direct the transfer of the funds does not amount to holding the funds. Furthermore, RealPage had no rights to the funds in the account, could not withdraw the funds and held in the same account as those of other Stripe users.

RealPage had to also establish that they had suffered loss resulting directly from computer fraud or funds transfer fraud. Since RealPage did not hold the funds, its loss resulted from its decision to reimburse its clients. Accordingly, RealPage did not suffer a direct loss as required under the Policy.

Insurance implications

While we acknowledge that this decision is not binding on the courts in the UK, it cannot be denied that many of the practices within the UK cyber insurance market are influenced by what happens in the more mature US market. Furthermore, many of the insurance companies including Beazley who are leading the way in the UK as cyber insurance providers also have parent companies, branch offices or subsidiaries operating in the USA. So, while the decision is not binding, it will certainly be persuasive or at the very least leave an indelible lesson for both assureds and insurers to seek clarity and modify policy clauses relating to loss or damage from phishing or other social engineering attacks.

If a higher court was to approve this judgement and a similar practice is adopted in the UK by insurers, it will be very difficult for assureds who use third party providers to assist them with payment transfers and other transactions to successfully claim an indemnity from their insurers relying on similar policy wording. This would mean even though the assured’s system was breached when the employee inadvertently shared their confidential account details and though the phishing diverted funds belonging to clients of the assured, a policy bearing similar clauses as those provided above, would not respond since the outcome of the claim would be totally dependent on the definition of ‘hold’ and what was considered to be in the possession of the assured as per the requirement of the policy at the time the funds were fraudulently diverted.

To prevent such a harsh outcome for assureds, it is recommended that assures negotiate with their brokers for their cyber insurance policies or commercial crime policies to include words which would cover situations where funds are being held in the account of an agent or third-party contractor.  In so doing, the policy wording could be modified to include not just funds the assured ‘hold or owns’ but to also cover ‘loss of funds for which they have authority to direct’.

Variations in policy wording – UK

  1. Cyber Crime[4]
  2. We will indemnify you in respect of the following for loss by theft committed on or after the Retroactive Date stated in the schedule which is first discovered during the period of insurance and notified to us in accordance with Claims conditions applicable to Section B:

i)   assets due to any fraudulent or dishonest misuse or manipulation by a third party of the computer system operated by you

ii)  your funds or those for which you are responsible at law from an account maintained by you at a financial institution following fraudulent electronic, telegraphic, cable, telephone or email instructions todebit such account and to transfer, pay or deliver funds from such account and which instructions purportto have come from you but which are fraudulently altered, transmitted or issued by a third party or are

a forgery.

  • In the event that any party other than an insured person enters into an agreement with a third party  entity pretending to be you we will pay reasonable fees and costs to establish that such fraud has occurred should the third party seek to enforce such agreements against you provided that such loss is first discovered and is notified to us during the period of insurance.

The words provided in clause 1a (ii) will cause a different outcome when compared to how property was defined and what was decided by the court in RealPage. In RealPage the National Union insurance policy defined ‘property’ as that i) owned or leased by the assured or ii) that you hold for others whether or not you are legally liable for the loss of such property’. Whereas, under Section B- Crime, clause 1a (ii) of Zurich Cyber Policy, the assured will be indemnified for ‘your funds or those for which you are responsible at law from account maintained by you at a financial institution following fraudulent electronic … or email instructions to debit such account and to transfer’. The difference with the Zurich policy is that unlike the National Union policy in RealPage, there is no requirement for the assured to ‘hold’ the funds in the literal sense of the word. Furthermore, under the Zurich policy the insurer will only indemnify the assured if funds are either his or those for which he is responsible at law. This is different in RealPage as the National Union policy will cover property that the assured hold for others whether or not he is legally liable for the loss. Another distinguishing feature between the two policies is that in the Zurich policy the insurer will cover funds from an account maintained by the assured at a financial institution.

This latter feature has similar meaning to ‘hold’ as interpreted by the court in RealPage. If we consider for example, maintenance of a bank account, this includes holding and transferring funds within the account and the execution of other control mechanisms to ensure that the account remains active and in good financial standing. However, others may argue that ‘an account maintained by the assured at a financial institution’ should be given a wider meaning in that even accounts owned or held by a third party at a financial institution may be maintained by the assured. In other words, maintenance of an account does not necessarily mean that the funds must be held or are being held by the assured as was decided in RealPage. If this interpretation should be applied to the facts in RealPage, it is reasonable to conclude that the insurers would have been held liable to indemnify the assured since the monies in the account held by Stripe Inc was the legal responsibility of RealPage. Moreover, if the account was used solely to hold funds related to RealPage business there should be no logical explanation as to why it cannot be accepted that RealPage is maintaining the account in accordance with Zurich policy wording. Either way, the ambiguity and possibility of a trial will be removed if the parties clearly defined and explained what it meant by ‘maintenance of account’.

For those businesses without a cyber insurance policy, coverage may be acquired under their commercial crime policy. Below is an example of a clause covering this type of loss that can be found in most crime policies:

Computer Fraud and Funds Transfer Fraud[5]

The Insurer shall indemnify the Insured for:

1. loss of or damage to Money, Securities or Property resulting directly from

Computer Fraud committed solely by a Third Party; or

2. loss of Money or Securities contained in a Transfer Account at a Financial Institution resulting directly from Funds Transfer Fraud committed solely by a

Third Party.

Funds Transfer Fraud” means fraudulent written, electronic, telegraphic, cable, teletype

or telephone instructions by a Third Party issued to a Financial Institution directing such

institution to transfer, pay or deliver Money or Securities from any account maintained by

an Insured at such institution, without the Insured’s knowledge or consent.[6]

Some crime policies in their definition section provide that a “Transfer Account” means an account maintained by the Insured at a Financial Institution from which the Insured can initiate the transfer, payment or delivery of Money or Securities.”[7] Like the Zurich policy, the implications of the clause will turn on the meaning assigned to ‘maintenance of an account’ as discussed above.

Funds transfer fraud is also covered in Beazley Commercial Crime Insurance Module[8]:

Fund transfer fraud means the transfer of money, securities or other property due to electronic data, computer programs or electronic or telephonic transfer communications within a computer system operated by the insured having been dishonestly, fraudulently, maliciously or criminally modified, replicated, corrupted, altered, deleted, input, created, or prepared.

Fund transfer fraud does not include loss due to social engineering fraud.

Based on this definition and the exclusion of social engineering from Fund transfer fraud, an assured in RealPage’s position could not rely on the Funds transfer clause under their commercial crime policy. Instead, the assured would need to rely on the social engineering fraud clause (where not excluded), variations of which are found in most cyber insurance policies.

Social Engineering Fraud[9] means the insured having authorised, directed or acknowledged the transfer, payment, delivery or receipt of funds or property based on:

  • an electronic or telephonic transfer communication which dishonestly, fraudulently, maliciously or criminally purports to be, but is not, from a customer of the insured, another office or department of the insured, a financial organisation or vendor; or
  •  a written or printed payment instruction obtained by fraudulent impersonation.

In some policies for example Zurich Cyber Policy, an obligation is placed on the assured to confirm the validity of the transfer instructions before actions are taken to send the funds to the account mentioned in the purported instructions. The confirmation must include ‘either verification of the authenticity or accuracy of the transfer instruction by means of a call back to a predetermined number or the use of some other verification procedure and the assured must keep a written record of the verifications along with all elements of the fraudulent transfer instruction’.[10]  It is imperative for assureds to check their cyber insurance and or commercial crime policies to ensure they have adequate protection against phishing and other types of social engineering attacks as cyber criminals will continue to use these attack vectors to steal from companies.


[1] Civil Action No. 3:19-cv-1350-b (ND Tex Feb 24, 2021)

[2] Department for Digital, Culture, Media & Sport, ‘Cybersecurity breaches survey 2020’ (March 2020) <https://www.gov.uk/government/statistics/cyber-security-breaches-survey-2020/cyber-security-breaches-survey-2020 > accessed 31 March 2021.

[3] The API calls sent from RealPage to Stripe provided information about the tenant’s account, the client’s destination account and the amount due to the client.

[4] Zurich Insurance plc, ‘Cyber Policy: Section B – Crime’ (2020) 29 < https://www.zurich.co.uk/business/business-insurance/specialty-lines/financial-lines/cyber  > accessed 8 April 2021.

[5] Beazley Inc, ‘Crime Insurance Policy: Insuring Clause 1F’ (BICCR00020411)<https://www.beazley.com/documents/Management%20Liability/Crime/Crime%20Policy.pdf> accessed 9 April 2021.

[6] Beazley Inc, ‘Crime Insurance Policy: Clause II Definition EE’ (BICCR00020411)<https://www.beazley.com/documents/Management%20Liability/Crime/Crime%20Policy.pdf> accessed 9 April 2021.

[7] Beazley Inc, ‘Crime Insurance Policy: Clause II Definition P’ (BICCR00020411)<https://www.beazley.com/documents/Management%20Liability/Crime/Crime%20Policy.pdf> accessed 9 April 2021.

[8] Beazley Inc, ‘Commercial Crime Insurance Module (Lloyds Syndicate) Clause F: Definitions’

<https://www.beazley.com/documents/Wordings/Commercial%20Crime%20Module%20%28Lloyd%27s%20syndicate%29.pdf > accessed 9 April 2021.

[9] Ibid.

[10] Zurich Insurance plc, ‘Cyber Policy: Conditons application to Section B – 7 Social Engineering Cover’ (2020) 31

< https://www.zurich.co.uk/business/business-insurance/specialty-lines/financial-lines/cyber  > accessed 8 April 2021.

P&I Fixed Premium Renewals. Coronavirus exclusion clause to apply.

So far, P&I Insurance has operated continued to afford liability cover without any specific exclusions for incidents arising out of COVID-19. However, fixed premium and Charterers’ P&I covers are reinsured outside the International Group’s Pooling Agreement and with effect from 20.2.2021 and will be subject to the Coronavirus Exclusion Clause (LMA 5395) and The Cyber Endorsement (LMA 5403) in the Rules for Mobile Offshore Units (MOUs).

The coronavirus exclusion for marine and energy provides:

“This clause shall be paramount and shall override anything contained in this insurance inconsistent therewith.

This insurance excludes coverage for:

1) any loss, damage, liability, cost, or expense directly arising from the transmission or alleged transmission of:

a) Coronavirus disease (COVID-19);

b) Severe Acute Respiratory Syndrome Coronavirus 2 (SARS-CoV-2); or

c) any mutation or variation of SARS-CoV-2;

or from any fear or threat of a), b) or c) above;

2) any liability, cost or expense to identify, clean up, detoxify, remove, monitor, or test for

a), b) or c) above;

3) any liability for or loss, cost or expense arising out of any loss of revenue, loss of hire,

business interruption, loss of market, delay or any indirect financial loss, howsoever

described, as a result of any of a), b) or c) above or the fear or the threat thereof.

All other terms, conditions and limitations of the insurance remain the same.”

Gard have recently announced that they will offer Members and clients in respect of the categories of covers listed below a special extension of cover. The extension of cover (hereinafter referred to as the ‘Special Covid-19 Extension’) shall comprise liabilities, losses, costs and expenses falling within the scope of terms of entry agreed but for the Coronavirus Exclusion Clause (LMA 5395) and subject to a sub-limit of USD 10 million per ship or vessel per event. This extension does not apply to the Cyber Endorsement.

Hague Convention 2005. After the transition period.

As expected the UK government has made a fresh declaration agreeing to be bound by the Hague Convention on Choice of Law 2005 in its own right from the end of the transition period at 11pm, UK time, on 31 December  2020. It states “With the intention of ensuring continuity of application of the 2005 Hague Convention, the United Kingdom has submitted the Instrument of Accession in accordance with Article 27(4) of the 2005 Hague Convention. Whilst acknowledging that the Instrument of Accession takes effect at 00:00 CET on 1 January 2021, the United Kingdom considers that the 2005 Hague Convention entered into force for the United Kingdom on 1 October 2015 and that the United Kingdom is a Contracting State without interruption from that date.”

It has also made a reservation under art 21 of the Convention that it will not apply the Convention to insurance contracts except as stated below.

(a) where the contract is a reinsurance contract;

(b) where the choice of court agreement is entered into after the dispute has arisen;

(c) where, without prejudice to Article 1 (2) of the Convention, the choice of court agreement is concluded between a policyholder and an insurer, both of whom are, at the time of the conclusion of the contract of insurance, domiciled or habitually resident in the same Contracting State, and that agreement has the effect of conferring jurisdiction on the courts of that State, even if the harmful event were to occur abroad, provided that such an agreement is not contrary to the law of that State;

(d) where the choice of court agreement relates to a contract of insurance which covers one or more of the following risks considered to be large risks:

(i) any loss or damage arising from perils which relate to their use for commercial purposes, of, or to:

          (a) seagoing ships, installations situated offshore or on the high seas or river, canal and lake vessels;

          (b) aircraft;

          (c) railway rolling stock;

(ii) any loss of or damage to goods in transit or baggage other than passengers’ baggage, irrespective of the form of transport;

(iii) any liability, other than for bodily injury to passengers or loss of or damage to their baggage, arising out of the use or operation of:

         (a) ships, installations or vessels as referred to in point (i)(a);

         (b) aircraft, in so far as the law of the Contracting State in which such aircraft are registered does not prohibit choice of court agreements regarding the insurance of such risks;

         (c) railway rolling stock;

(iv) any liability, other than for bodily injury to passengers or loss of or damage to their baggage, for loss or damage caused by goods in transit or baggage as referred to in point (ii);

(v) any financial loss connected with the use or operation of ships, installations, vessels, aircraft or railway rolling stock as referred to in point (i), in particular loss of freight or charter-hire;

(vi) any risk or interest connected with any of the risks referred to in points (i) to (v);

(vii) any credit risk or suretyship risk where the policy holder is engaged professionally in an industrial or commercial activity or in one of the liberal professions and the risk relates to such activity;

(viii) any other risks where the policy holder carries on a business of a size which exceeds the limits of at least two of the following criteria:

          (a) a balance-sheet total of EUR 6,2 million;

          (b) a net turnover of EUR 12,8 million;

          (c) an average number of 250 employees during the financial year.

2. The United Kingdom of Great Britain and Northern Ireland declares that it may, at a later stage in the light of the experience acquired in the application of the Convention, reassess the need to maintain its declaration under Article 21 of the Convention.”

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.