Court gives pause for thought on issues of damage and s11 Insurance Act in marine cargo claim

In the matter of MOK v Argo (judgment handed down by the Commercial Court on 26 July 2024)the Court has considered a number of key issues in relation to a marine cargo claim, including in particular the meaning of damage in the context of mixtures, and certain issues under the Insurance Act 2015 (“IA 2015”). In our view the judgment leaves open some questions of concern for insureds which we discuss below.  

Background

The claimant insured oil trading company sought to claim an indemnity under an all-risks marine cargo open cover for petrochemical cargo shipments, against the defendant reinsurers (who reinsured the insurer on a back-to-back basis with a cut through clause).

It was common ground that the insured’s cargo was off-specification by the time it came to be discharged. The insured’s primary case was that it had been on-specification prior to loading, as certified at the load port, but it was fortuitously contaminated during loading (likely from tank washing residue in the vessel’s pipes and tanks). As a result, it became off-specification, as its phase separation temperature was raised (meaning it could not be used in engines) and so was rejected by the insured’s purchasers. The insured sought to recover its loss in relation to the lost value of the cargo from its insurers. 

The cargo was a blend of gasoline and methanol, and it was loaded at the terminal by drawing the individual components from shore tanks that were blended on the vessel.  Reinsurers accepted that if the insured could rely on the load port inspection certificate as a reflection of the cargo on loading, then subject to the breach of warranty defence discussed below, the insured could recover its loss. 

Judgment

Dias J found on the facts that the inspection certificate relating to the shore tank samples did not represent accurately the quality of the cargo on loading. The Court instead relied upon testing conducted on samples taken from the shore tanks around two weeks before loading and carried out 15 months later to conclude the cargo would always have been off-specification and unmarketable regardless of any water contamination. It is noteworthy that a feature of the case was that it was the reinsurers who pleaded that the cargo would have been off-specification in any event (initially in order to bring the loss within an exclusion for inherent vice), but nonetheless the judge held that it was for the insured to disprove this counterfactual.

As an alternative case, the claimant argued that the seller’s decision to blend in the actual blend proportions from those shore tanks was a fortuity which caused damage to the blended cargo. The judge was prepared to assume that there was a fortuity from the point of view of the claimant. The judge found that the difficulty with this argument was the question of damage – the blend had an actual phase separation temperature that was too high. Phase separation, the judge found, could not be regarded as damage, as it was no more than the natural behaviour of a particular product. The claimant also argued that the propensity to separate could itself be regarded as damage, but the judge held that this could not be so as a propensity involves no change in physical state.

The judge further held that no insured cargo had ever existed without the propensity.  Firstly, she held it was impossible to say that there was any insured cargo when the blend stocks were in the shore tanks. Although there was an insured interest in the undivided bulk in the shore tanks (following Quadra v XL¹) in this case the cover was for a specific shipment on a specific vessel and no shipment existed until the constituent parts of the cargo were appropriated to the voyage. Further, the judge found that when the two stocks were blended together the individual stocks were not damaged, but instead they happened to form an inherently defective product – so in other words the cargo had never existed in an undamaged state. The judge referred to the Court of Appeal decision Bacardi-Martini v Thomas Hardy² indicating that the same issue was considered in that case.   

Although, in light of the findings above, it was not necessary to deal with these further points, the judge went on to consider the issues in relation to breach of warranty and the application of s10 and s11 of the IA 2015.

Section 10

The defendants said that the claimant was in breach of a warranty requiring a survey to be carried out by an internationally recognised marine surveyor at the loading port that included inspection/certification of the cleanliness of the vessel tanks and shore tanks and the connecting pipelines. The judge found on the evidence that there had in fact been such an inspection and the inspection part of the warranty was complied with. However, no certificate was produced until March 2023.

The judge considered that, although it was unlikely the parties intended the insured to lose all cover due to lack of certification of a satisfactory inspection, nonetheless the certification part of the warranty was an independent and discrete part of it, which the defendants were entitled to rely on.

Although there was no express temporal limit, the judge’s view was that the certificate was required to be provided within a reasonable time for the industry (this was despite evidence it was a bespoke term and there being no evidence of such a practice in the industry). Therefore, it was held that the March 2023 certificate did not assist the claimant. The judge did not explore further if there was any rule of law that would preclude the provision of a certificate to cure ex post facto a breach of warranty.

The next question was whether the wording in the policy that “Failure to comply with a warranty will, in normal circumstances, void this insurance policy” constituted an agreement to contract out of the IA 2015 (meaning that the transparency provisions of the IA 2015 must be complied with to be effective). The judge considered  that the wording was a warning, not a statement with contractual effect. There was ambiguity as to what would be normal circumstances.

Section 11

Finally, the judge considered the effect of s11 IA 2015. This applies to terms (other than those which define the risk as a whole) which tend to reduce the risk of: loss of a particular kind; loss at a particular location; or loss at a particular time. If the insured shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred, then insurers cannot rely on the breach to deny cover.

The claimants argued that the lack of certification alone (given inspection took place) did not tend to reduce the risk of loss. However, the judge accepted the insurer’s submissions that s11 is directed at the effect of compliance with the entire term including the inspection – and compliance with the warranty as a whole was capable of minimising the risk of water contamination. 

Comment

Although an application for permission to appeal was made in relation to the judgment, it was refused. 

The case contains a number of unsatisfactory conclusions for insureds. This includes the question of the apparent lack of cover until products are blended on the vessel despite purchasing shore tank to shore tank coverage and secondly what constitutes damage in a marine cargo policy in the case of mixtures. 

The reference by the judge to the Bacardi-Martini case to support a finding that there was no damage to a blended product because it had never existed in an undamaged stage is the first within an insurance context. That case relates to very different circumstances: the application of a clause in a supply contract limiting liability in respect of direct physical damage to property and excluding pure financial loss between parties.  One party supplied contaminated carbon dioxide to a manufacturer of drinks who mixed it with water and mixture. It was necessary for the resulting drinks to be subsequently recalled and a claim was made against the gas supplier. The Court of Appeal, in holding that it was not that the mixture/water was damaged by the gas, but that a defective product came into existence, was considering the nature of what loss the parties intended to exclude from their contract, not what in law constitutes damage in the context of mixtures.

This is also the first judgment to consider section 11, which was intended to mitigate what was (under the previous law) insurers’ ability to deny cover for breaches of policy terms which were irrelevant to the loss which had actually occurred. The obiter comments in this judgment indicate that the relevant consideration in applying section 11 is not whether the particular breach of the term which took place could have increased the risk of loss, but whether compliance with the term as a whole could have decreased the risk of loss. The outcome is that if a term is substantially complied with but breached in a minor way that is irrelevant to the circumstances of the particular loss, then s11 still may not assist the insured. It also suggests from an insured’s point of view that it is better to have warranties or conditions precedent broken down into as many separate clauses as possible, rather than combined as one.    

It is hoped that the Courts will address these points further in the future.

HFW (team led by Jonathan Bruce) acted in this matter for the insured.

Footnotes

1. [2023] EWCA Civ 432
2. [2002] EWCA Civ 549