Marine Insurance Case Update 1

High Court, Court of Appeal and Supreme Court Cases, January 2012 to June 2012

Welcome to the first of our HFW Marine Insurance Case Updates, which we now intend to produce on a six monthly basis. This first update includes a rare commentary on general average liens exercised by Owners and a case involving attempted avoidance on the grounds of material misrepresentation and non-disclosure. Underwriters will also note the case where an application to re-amend their defence & counterclaim submissions to reflect a breach of warranty in respect of the vessel being laid up was largely rejected. On the procedural side there is useful clarificationof the precise physical version of a claim form which needs to be served overseas and when one can extend the period of time in which to do so.

We hope you find the update useful and should you have any questions, then please do not hesitate to contact us.

Atlasnavios-Navegacao v Navigators Insurance Company Limited [2012] EWHC 802(COM)

High Court of Justice, Queen’s Bench Division: Mr Justice Hamblen

Mr Alistair Schaff Q.C. and Ms Rebecca Sabben-Clare (instructed by Ross & Co) for the Claimant

Miss Philippa Hopkins (instructed by Stephenson Harwood) for the Defendant

This is a trial of preliminary issues whereby the Court was asked to give its views on four questions.

Preliminary issue regarding a claim under a war risks insurance policy for constructive total loss and the exclusion at Clause 4.1.5 of the Institute War Clauses.

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Facts

The Claimant commenced proceedings under its War Risks Insurance Policy for a constructive total loss (“CTL”) of the vessel “B ATLANTIC”. In August 2007, the vessel loaded a cargo of coal in Venezuela for carriage to Italy in the course of routine trading. During a pre-departure inspection by the Venezuelan Authorities, three bags of cocaine were discovered strapped to her hull below the waterline. The vessel has been detained in Venezuela ever since. The Underwriters do not dispute that the vessel is a CTL but deny that the vessel’s loss was caused by a peril insured against.

The Policy incorporated the Institute War Clauses and the Institute Hull Clauses. The Underwriters sought to rely upon the exclusions within Clause 4.1.5 of the Institute War Clauses:

“This insurance excludes…arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations”

The judge held that the effect of the combination of the Institute War Clauses and Institute Hull Clauses was that:

1. An Insured’s hull cover does not respond to the detention of a vessel unless caused by barratry or piracy.
2. With those exceptions, detention is prima facie covered under the War Risk Cover but subject to certain exceptions set out in Clauses 3 and 4.
3. Loss by malicious acts is insured under the War Risk cover but not under the Hull cover.
4. In addition, to the standard form cover, Section A of the slip broadened the cover for the consequences of malicious acts by including words “including … malicious damage and vandalism, piracy and/or sabotage and/or terrorism and/or malicious mischief and/or malicious damage”.

The Claimants contended that they knew nothing about the drugs and were not in the business of any attempted drugs trafficking. Whilst the Master and Second Officer were ultimately convicted of drug trafficking offences, it was the Claimants’ case that there was no basis for such conviction, which was politically motivated. The Claimants therefore contend that the vessel was detained/confiscated in Venezuela pursuant to the orders of the Authorities as a result of the intervention of an unknown third party who decided to affix narcotics to the vessel’s hull for their own purposes. The Claimants’ position was also that, on any analysis under Venezuelan law, the vessel should have been released from arrest by 31 October 2007 after a preliminary hearing took place. The ongoing detention of the vessel was contrary to local law and cannot therefore be the consequence of local Customs Regulations.

The judge considered the general approach in such case:

1. The exclusions contained in Clause 4.1.5 must be given a businesslike interpretation in the context in which they appear.
2. Any questions of construction should be answered in light of the fact that the Clauses are to be used worldwide and must be given a wide meaning.
3. The draftsmen are to be taken to have had in mind decisions of the court on earlier additions to the Clause which have given the wording a settled meaning.
4. The burden is on Underwriters to bring themselves within the exclusion.

Held

The four preliminary issues were as follows:

(1) Whether, in order for Underwriters to be able to rely on the exclusion in Clause 4.1.5, they must show that there was privity or complicity on the part of the insured in any infringement of customs regulations.

The Claimant did not pursue this contention and thus the judge answered in the negative.

(2) If not, whether Underwriters must show that there was privity or complicity on the part of the servants or agents of the insured in any infringement of customs regulations.

The judge noted that Clause 4.1.5 did not say that the infringement of Customs Regulations is one to which Owners, their servants or agents must be privy or in which they must be complicit. Had the draftsmen intended such an effect, they could easily have said so. In seeking to construe the Clauses imposing such requirements, the Claimant is, in effect, seeking to read or write in words that are not there. This question was also answered in the negative.

(3) Whether the exclusion in clause 4.1.5 is only capable of applying to exclude claims for loss or damage to a vessel, which would otherwise fall within insuring clause 1.2 or 1.6, and not the other perils insured against under clause 1 and/or Section A of the Conditions.

The judge agreed with the Underwriters’ case. They argued that the exclusion in Clause 4.1.5 is capable of applying to exclude claims under insurance clauses other than Clause 1.2 or 1.6, even if, in practice, it is not wholly easy to identify the circumstances in which this would be the case. Even if for most practical purposes it will be the perils in Clauses 1.2 and 1.6 to which Clause 4.1.5 applies, the words of Clause 4.1.5 are general and apply to any loss, damage, liability or expense arising from the stated cause. If, for example, there is a loss as a result of detainment which is alleged to be politically motivated, the assured cannot prevent Underwriters relying on Clause 4.1.5 by advancing its claim under Clause 1.5 rather than 1.2. Therefore, the third question was also answered in the negative.

(4) Whether the exclusion in clause 4.1.5 is capable of applying if an infringement of customs regulations is found not to be, or not reasonably arguably to be, a ground for the arrest, restraint, detainment, confiscation or expropriation of the vessel in question as a matter of the relevant local law.

It was a common ground that the exclusion in Clause 4.1.5 does not apply if an infringement of Customs Regulations is not reasonably arguably a ground for the arrest, restraint, detainment, confiscation or expropriation of the vessel in question. That being the case, the judge did not answer issue 4.

(1) Sealion Shipping Limited and (2) Toisa Horizon Inc vs Valliant Insurance Company (Defendant) v Valiant Insurance Company [2012] EWHC 50 (Comm)

High Court of Justice, Queen’s Bench Division: Mr Justice Blair

Steven Berry QC and Nathan Pillow (instructed by Lax & Co LLP) for the Claimant

Robert Bright QC and Richard Sarll (instructed by Swinerton Moore LLP) for the Defendant

Claim under marine loss of hire policy arising out of the breakdown of a propulsion motor. Whether Underwriters entitled to avoid the policy on the grounds of material non-disclosure and or misrepresentation.

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Facts

This case concerns a claim under a marine loss of hire policy issued by the Defendant in respect of the N.V. “TOISA PISCES”. The claim arose from a propulsion motor breakdown in February 2009 which resulted in the Charterers, Mexican Oil Company Pemex, placing the vessel off-hire.

The Defendant argued that it was entitled to avoid the policy on the grounds of material non-disclosure and/or misrepresentation. They relied on a number of policy defences, including whether or not there was a failure on the Claimants’ part to exercise due diligence.

The “TOISA PISCES” was capable of dynamic positioning allowing her to automatically maintain her position above a wellhead. The case focuses on a number of instances involving the motors of the vessel which had not been disclosed to the Defendants. As a result of which the Defendants contended they were entitled to avoid the policy. The first undisclosed incident occurred in 2004 when a starboard motor failed due to the stator breaking loose from the frame. When the vessel arrived in Mexico for repairs later in 2004 the Claimants chose to replace the starboard motor with a new motor by a different manufacturer to avoid the possibility that repairs would take some considerable time. The motor was a different type manufactured by Louis Allis. This resulted in the vessel being off-hire for over 7 days before resuming service.

A second incident occurred in 2005 when unusual vibrations were detected in the port motor. At the time it was thought that the source of the vibration was not the stator core. The port rotor was replaced with the repaired rotor that had been taken from the starboard motor in 2005. During these two incidents the vessel was insured by Transmarine for three policy years between 2003 to 2006. The cover was limited to 60 days with 34 days excess period, as a result of which the Claimants did not make a claim under the policy.

There were further incidents in February 2009 when the port motor could not be restarted. This was replaced with the old starboard motor. However, on 10 March 2009 during testing of the starboard motor a further failure occurred with the hydraulic system. Another, further incident occurred to the starboard motor on 25 April 2009. As a result of these incidents, the vessel was placed off-hire until 19 May 2009.

The Claimants did not have any loss of hire insurance between the policy of 2006 and that of 2008. In 2008 the Claimants decided to resume the loss of hire cover. The risk was broked as a good risk to the Defendant in terms that the vessel had an “excellent hull record” with only one hull claim and “no major business interruption”. The loss of hire policy was subject to a limit of 30 days each accident or occurrence or series of accidents or occurrences arising out of one event. There was an excess of 14 days any one occurrence, and 21 days in respect of machinery claims.

The Defendant argued that the events of 2009 constituted three separate incidents with each one constituting less than 21 days loss of hire and therefore no claim payable, or in the alternative much less than the 30 days claimed by the Claimants.

Material non-disclosure and misrepresentation

The Defendants relied on the following sections from the Marine Insurance Act 1906:

S.18(1) “the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract”.

S.20(1), ” Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract”.

S.20(4), “A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer”.

Held

The policy stated that there had only been “one hull claim on the vessel”, when there had been two in 2004 and 2005. In terms of the undisclosed second hull claim, the Commercial Court found that although disclosure of this might have been “good broking practice”, the issue was whether the hull claims were material to the loss of hire policy. It was found that they could only be material insofar as they caused the undisclosed periods of offhire.

In terms of the undisclosed periods of offhire in 2004, the Court held that these were not material as it was for a short period of time, over four years prior to the placing of the policy and had not resulted in any claims under the previous policy with Transmarine.

In terms of inducement, the Court was not satisfied on the evidence that the Defendant would have proceeded differently had they been told of the two hull claims or the 10 days offhire in 2004.
The Defendants’ alternative case to avoid the policy was failure on the Claimants’ part to exercise due diligence. The Defendants argued that the breakdown resulted from want of due diligence within the meaning of the Inchmaree clause of the ITCH whereby the “the underwriters expressly agree to undertake such risks- provided that such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers”. The Court followed the authority in Secunda Marine Services Ltd v Libery Mutual Insurance Company 2006 NSCA 82, that want of due diligence is negligence, and that it is “a lack of reasonable care”, rather than recklessness as the Defendants alleged. The Court held that the failures alleged by the Defendants did not amount to negligence as there was no reason to doubt the adequacy of the inspection in 2006 and, accordingly, the Claimants’ technical managers’ reliance on the inspection.

With regard to the question of aggregation, the experts agreed that there was no technical causal link between the three incidents which occurred on 25 February, 11 March and 25 April 2009. There were therefore three separate occurrences. However, the Court held that the Claimants were entitled to claim for the full 82 days off hire resulting from the original breakdown on 25 February 2009. The Claimants could not have reasonably done anything to shorten the period of time it took the vessel to get back on-hire as a result of the first incident. The Claimants dealt with the initial problem by replacing the starboard motor, which if successful would have resulted in no loss of hire claim. Unfortunately the hydraulics failure obstructed this effort and then, finally, the starboard motor failed after only a few days at sea. The Court held that the whole period of off-hire counted and consequently the Defendants failed in their arguments that the period was split into three separate “occurrences”.

European Group Ltd and others v Chartis Insurance UK Ltd (formerly known as AIG (UK) Ltd and AIG Europe (UK) Ltd) [2012] EWHC 1245 (Comm)

High Court of Justice, Queen’s Bench Division: Mr Justice Popplewell

R Ansell and S Goldstone (instructed by DAC Beachcroft LLP) for the Claimants

G Blackwood and G Morgan (instructed by Waltons & Morse LLP) for the Defendants

Determination of whether the Erection All Risks, Public Liability and Delay in Start Up Insurance Policy or the Primary Marine Cargo/Delay in Start Up Insurance Policy were to cover losses arising from fatigue stress cracking to tubes in an economiser block.

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Facts

This case required the court to determine which of two insurers was liable for losses caused by fatigue stress cracking to tubes in economiser blocks which were installed in a new waste recycling plant facility (Facility) in respect of a project near Slough. Fourteen blocks made their way by road from Bucharest to Constanta and then by ship from Constanta to Southampton. Two blocks were transported solely by road.

Lakeside Energy from Waste Limited (Lakeside) was the developer of the Facility. Itochu Corporation (Itochu) and Takuma Corporation (Takuma) were the engineering, procurement and construction contractors for the Facility, together referred to as EPC Contractors. The manufacture of the economiser blocks was subcontracted to Vulcan SA (Vulcan) by EPC Contractors.

The Claimants and Defendant were the insurers for the Erection All Risks, Public Liability and Delay in Start Up Insurance Policy (EAR Policy). This policy provided cover against physical loss, destruction and damage to all items needed for the incorporation of the project. The policy commenced upon the attachment of lifting gears and similar equipment at the Facility. The policy named Lakeside and EPC Contractors as the assureds.

The Defendant was also the insurer for the Primary Marine Project Cargo/Delay in Start Up Insurance Policy (Marine Policy). This policy provided cover during transit against all risks of loss or damage (in respect of the economisers’ cover started from the time the goods left the factory in Bucharest and terminated on delivery at the Facility). The Marine Policy incorporated the Institute Cargo Clauses A which excluded liability for “loss, damage or expense caused by inherent vice or nature of the subject matter insured”. The policy named Lakeside and all Lakeside’s engineers including the EPC Contractors as the assureds.

Moreover, both policies provided cover in the event that damage led to delay in the start up of the project and contained a clause which meant that if it was not possible to determine whether the cause of the damage to the insured’s property occurred before or after the arrival at the Facility, both policies would contribute 50% to the claim.

Fatigue crack damage to the tubes was discovered in February 2008. Upon investigation it became clear that the fatigue cracking was caused by resonant vibration, which occurred between Bucharest and arrival at the Facility. The costs of repairing the tubes and associated costs were claimed under both policies by Takuma. As such, a dispute arose between the EAR Policy insurers and the Marine Policy insurers as to whether the damage had arisen prior to arrival at the Facility.

The Defendant argued that the vibrations could not have occurred during road and sea transport. They argued that it was likely that these occurred due to turbulent winds at the Facility. Alternatively, the Defendant put forward a case based on the inherent vice exception in the Marine Policy. This argument is based on the principle that if a loss could have two proximate causes, one being within the ambit of the insurance policy and one being expressly excluded, the exclusion comes into effect. Thus, in any event, if the resonant vibration was the cause there was an additional cause comprising one or more of the following: (a) stress imparted on the economisers; (b) quality of the welds; and (c) the set on design of the cracked tubes. These were referred to as inherent vice and it was argued that these excused the Defendant from liability.

The Claimants contended that the vibrations occurred during transport, most likely during road transport due to missing packing between rows of tubes (which meant they could recover 100% of the claim). If it was not possible to determine the cause, they could recover 50% of the claim in line with the clause in the policies.

EAR Policy insurers settled their claim for £4,600,000. The Claimants now claim the respective proportion of £3,680,000 (£4,600,000 minus Defendant’s 20% share in its capacity as an EAR Policy insurer). It was noted that only £4,300,000 was established as a proved loss.

Moreover, there were issues as to the Claimants’ title to sue, measure of loss recoverable and effect of deductibles.

Following the hearing, three issues remained:

1. Was the cause of damage resonant vibrations during transit or wind after arrival at the Facility?
2. If resonant vibrations during transit were an additional cause in addition to the inherent vice, could this exclude the Defendant’s liability?
3. Did the assured suffer the insured losses of at least £4,600,000? If so, how much?

Held

1. Was the cause of the damage resonant vibration during transit or wind after arrival at the Facility? The court accepted the evidence of the Claimants’ expert that resonant vibration by wind could be ruled out. It was not a realistic enough mechanism to explain the damage. This was largely based on the amount and duration of wind to which the tubes were exposed as well as the pattern of damage to the blocks which was inconsistent with the cracking resulting from wind.
   However, in relation to the issue of causation, Popplewell J adopted a cautious approach. Referring to the 50/50 contribution clause in both policies, he stated that the clause would be applicable if: “(a) there was such certainty that it is not possible to reach any conclusion as to when the damage occurred; or (b) one theory is so improbable that even if the other theory is ruled out, it cannot as a matter of common sense be described as more likely than not to have occurred”.
   In line with the above, since Popplewell J had eliminated wind as a cause, he had a duty to look into the theory of vibration during transport to see whether it was possible to conclude more likely than not to have occurred. Popplewell J further stated that if it were not possible to reach such a conclusion, (due to unsatisfactory evidence or improbability of the conclusion based on common sense), then he would not be able to treat it as a proximate cause of damages.
   On reviewing the expert evidence, Popplewell J concluded that the road between Bucharest and Constanta may have presented sufficient roughness to have caused the vibration. Moreover, the packing between the tubes was missing and/or ineffective and could also have accounted for the damage. As such, the transport by road in Romania, which possibly may have been exacerbated by damage caused during the journey in England, was a credible and realistic theory for the vibrations. In any event, the transport theory was much more likely than the wind explanation and so on the balance of probabilities Popplewell J concluded that the damage occurred prior to arrival at the Facility, the damage being caused by vibrations during transport.
2. If resonant vibrations during transit were an additional cause inherent vice, could this exclude the Defendant’s liability?
   The Defendant’s inherent vice argument was rejected. The economiser blocks on leaving the factory were designed to and reasonably expected to survive transportation. It was the missing/ insufficient packing which was the proximate cause of loss rather than the inherent condition and/or design of the economiser blocks. The missing/insufficient packing was a fortuity and so there was no room for an inherent vice to be treated as another proximate cause of the loss.
3. Did the assured suffer the insured losses of at least £4,600,000? If so, how much?
   Popplewell J concluded that the assured had suffered an insured loss of at least £4,600,000 and were entitled to judgment for their respective proportion.

Clothing Management Technology Limited and Beazley Solutions Limited trading at Beazley Marine UK [2012] EWHC 727

Queen’s Bench Division (Mercantile Court): His Honour Judge Mackie QC

Mr Richard Sarll (instructed by Browne Jacobsen) for the Claimant

Mr Tim Marshall (instructed by Waltons & Morse) for the Defendant

Claim under a marine policy incorporating Institute Cargo Clauses A 1982 and the Institute Strike Clauses 1982. Whether the Claimants had suffered an ATL or CTL.

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Facts

The Claimant is a clothing manufacturer and supplier based in the United Kingdom who used suppliers in Romania and Morocco to manufacture garments in mass production for re-sale in the United Kingdom.

In September 2008, the owner of the factory in Beltram, Morocco, disappeared and left the workers unpaid. The Claimants entered into negotiations with the workers to ensure the garments were finished. The Claimants paid the workers directly for the finished garments that left the factory. Work resumed at the factory for a few months. However, on 5 November 2008 the workers demanded an immediate payment of £80,000 in return for the resumed work. This was refused. As a result the workers refused to resume working and prevented the release of the finished garments.

The Claimants therefore looked to make a claim under the marine policy which covered “clothing, fabric, finished and semi-finished garments …” … “whilst in store at named locations …”. The marine cargo policy also included a marine insurance clause which stated as follows:

“Notwithstanding the fact that some or all of the movements covered by this policy of insurance are not subject to the Marine Insurance Act 1906, it is expressly agreed and declared that the terms, conditions, warranties and other matters contained with the Marine Insurance Act 1906 shall be applicable hereto.”

Decision

a) Actual Total Loss or Constructive Total Loss

The first issue concerned whether or not the Claimants had suffered an actual total loss (“ATL”) or constructive total loss (“CTL”).The Claimants’ primary case was that they had suffered an ATL within the meaning of Section 57 of the Marine Insurance Act 1906; “… where the assured is irretrievably deprived thereof … there is an actual total loss”. The Court rejected this and referred to the Bunga Malati Dua [2011] Lloyds Rep 338, at 350 where the test for an ATL had been applied with “utmost rigour”. The court concluded that in the present case the assured had not been irretrievably deprived of the property, as the goods had not been destroyed and may well exist, and further that had legal action been pursued, the goods may well have been recoverable.

The Claimants argued in the alternative that there was a CTL and referred to Section 60(1) of the Marine Insurance Act 1906 which provides “… there is a constructive total loss (i) where the assured is deprived of the possession … goods and (a) it is unlikely that he can recover … goods”. The Claimants argued that there was a CTL as it was unlikely that the Claimants could recover the goods. The court held that there was a CTL despite no notice of abandonment being given, in accordance with Section 62 of the Marine Insurance Act 1906. There was a CTL from about 5 November 2008 at which point it was unlikely that the Claimants would be able to recover the goods within a reasonable time.

The Claimants relied on Section 62(7) of the Marine Insurance Act 1906 which provides “Notice of abandonment is unnecessary where, at the time when the assured received information of the loss, there would have been no possibility of benefit to the insurer as notice were given to him.” The Claimants’ case was that there was no realistic possibility of the Claimants being able to exercise effective control over the salvage. In any event, by this point the insurers, who were aware of the situation, could have intervened.

b) Failure to give notice

The Defendants relied on the clause that stated “immediate notice be given in writing” and “that Underwriters are informed about the event as soon as possible but in any event within seven (7) working days”. These were expressed as conditions precedent as to liability. The Court held that although the Claimants had sought details of the relevant insurance on the 25 September 2008, this was not a point in time at which the Claimants were aware of any claim under the policy, as up to this point the Claimants were of the view that the problems had been contained. It was held that the written notice given on the 8 October 2008 was effective as the Claimants did not know of and/or were not aware of any event that could give rise to a claim before 29 September 2008. Further, as late as 19 and 20 October 2008 the workers were still sending out finished goods.

c) Theft

The policy contained an exclusion which stated “loss or damage due to attempted theft or attempted threat unless following forcible and/or violent entry and/or exit.”. The Court held that it was for the Defendants to prove that there was theft. There was no proof of who took what or when, or that the workers had acted dishonestly. The exclusion did not apply.

d) Whether the loss arose from “the absence, shortage or withholding of labour of any description whatsoever resulting from any strike, lock-out, labour disturbance, riot or civil commotion”

The Defendants contended that the cause of loss was within clause 3.7 of the Institute’s Strike Clauses. The Court held that the actions of the workers did not resemble anything close to a riot or civil commotion. The Court held that the exclusion related to consequential loss and not loss of possession which the Claimants had insured against.

e) Was there a “capture, seizure, arrest restraint or detainment…and the consequences thereof

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