Marine Insurance Case Update 2

High Court, Court of Appeal and Supreme Court Cases, July 2012-December 2012

Welcome to the second of our HFW Marine Insurance Case Updates which are now produced on a six monthly basis. This second update includes issues of coverage, nondisclosure, the importance of carefully worded arbitration agreements and binding settlement agreements.

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

Valiant Insurance Company v (1) Sealion Shipping Ltd & (2) Toisa Horizon Inc (“The Toisa Pisces”) [2012] EWCA Civ 1625

Court of Appeal: Lord Justice Pill, Lord Justice Tomlinson and Lord Justice Gross

Mr Robert Bright QC and Mr Richard Sarll (instructed by Swinnerton Moore LLP) for the Appellant

Mr Steven Berry QC and Mr Nathan Pillow (instructed by Law & Co LLP) for the Respondents

Court of Appeal decision on issues of aggregation and whether three separate breakdowns were one occurrence and whether the subsequent breakdowns broke the chain of causation.

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This case at first instance was reported in our Case Update No. 1. At first instance the Owners of the specialist well-drilling vessel “TOISA PISCES” (the “Vessel”) were successful before the Commercial Court in their claim against their loss of hire insurers. The case centred on issues of non-disclosure and misrepresentation. The unsuccessful Underwriters appealed to the Court of Appeal.

Facts

The loss of hire insurance was on ABS 1/10/83 wording which provided:

“If in consequence of […] breakdown of machinery […] occurring during the period of this insurance the Vessel is prevented from earning hire for a period in excess of [21] days in respect of any accident, then this insurance shall pay [US$70,000] for each 24 hours after the expiration of the said days […] not exceeding a further [30] days in respect of any one accident or occurrence and not exceeding [30] days in all during the currency of this Insurance…”

Owners were claiming the maximum $2,100,000 indemnity under the policy, which represented 30 days loss of hire at the insured amount of US$70,000 per day.

The Vessel was propelled by two azimuth thrusters, each of which was driven by an electrical motor. These two motors were referred to in the judgment as the PAM (the port azimuth motor) and the SAM (the starboard azimuth motor). The first and primary incident was the breakdown of the PAM, which occurred on 25 February 2009. The Vessel was put off-hire as a result of the breakdown. The PAM did not return to service until 19 May 2009, and it was this period of off-hire which formed the basis of the Owners’ claim.

The Owners attempted to mitigate their losses by installing the SAM in place of the PAM and using a Louis Allis motor where the SAM would ordinarily have been. This work enabled easier access for maintenance in areas that were usually difficult to reach. During this maintenance, a hydraulics failure occurred (the second occurrence), with the result that the vessel had to go to drydock for repair. The vessel was in drydock for just over a month.

Held

If the second occurrence broke the chain of causation then the Owners’ claim would be reduced from US$2,000,000 to just over US$1,940,000. However, the Court of Appeal held that the chain of causation had not been broken. Both the reasonableness of the Owners’ decision to undertake the maintenance work which was underway at the time of the second occurrence and the close relationship between that maintenance work and Owners’ attempts to mitigate their loss pointed against a break in the causal chain. Agreeing with Gross LJ’s judgment on the point, Tomlinson LJ noted that the decision to carry out the repairs which gave rise to the second occurrence could be regarded as itself caused by the first occurrence.

However, less than a week after departure from drydock following the second occurrence, the SAM failed (the third occurrence). The Vessel proceeded to port for further repairs, during which time the now repaired PAM was reinstalled and the Louis Allis motor installed on the starboard side in place of the SAM. The Vessel then went back into charterers’ service.

The third occurrence was relevant to the question of whether one, two or three deductibles should be applied. The Court looked on this as a question of construction of the loss of hire policy, and held that after the application of the 21 day deductible, the first occurrence gave rise to a claim to the policy maximum. There was no need to consider whether further deductibles would have been applied if the Owners’ claim had hinged on the second and/or third occurrences. It was irrelevant that H&M cover, which was closely linked to the loss of hire cover, had treated the three occurrences as three separate events. Tomlinson LJ concluded his judgment by describing the Underwriters’ attempt to suggest that a claim based upon the occurrence of a single insured peril should attract the application of multiple excess periods as “to say the least unorthodox”.

This judgment has re-emphasised that, where multiple insured perils occur, it will be necessary to examine the factual circumstances of the claim carefully to determine whether the chain of causation has been broken by one or more of the perils which followed the first. The parties will also need to take a careful look at the policy wording to determine how many deductibles should apply. In this case, as the Owners’ claim was successfully established on the basis of the first occurrence, the fact that two insured perils occurred after the first was ultimately irrelevant to the claim. In such cases, and subject always to the policy wording, it would seem unlikely that multiple deductibles and/ or excess periods could be applied.

Amlin Corporate Member and Others v Oriental Assurance Corporation (“Princess of the Stars”) [2012] EWCA Civ 1341

Court of Appeal: Lord Justice Longmore, Lord Justice Rimer and Lord Justice Tomlinson

Mr Roger ter Haar QC (instructed by Brown Jacobson LLP) for the Appellant

Mr Peter MacDonald Eggers QC (instructed by Norton Rose LLP) for the Respondent

Court of Appeal decision not to grant a stay of reinsurance proceedings in the English High Court pending the outcome of the underlying insurance claim in the Philippines.

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Facts

The “PRINCESS OF THE STARS” (the “Vessel”) was a roll-on roll-off passenger cargo vessel operating in the Philippine Islands. On 21 June 2008, she sank with the tragic loss of more than 500 passengers and crew having headed into the pathway of typhoon “Frank”. The incident was all the more tragic because the Philippine government had issued a typhoon warning on the evening the Vessel left her port of departure. The warning encompassed the port of departure, the port of destination and the Vessel’s planned route.

Over 40 cargo claims have been brought in the Philippines against the owners of the Vessel (“Owners”). Further claims in respect of the lost cargo have been brought directly against Owners’ cargo liability insurer, Oriental. By the underlying cargo liability policy (the “Original Policy”), Oriental would indemnify Owners “for all sums which the insured [Owners] shall become legally obligated to pay as damages for loss or damage of merchandise or goods under his custody.”

Oriental reinsured their potential liability in the London market with reinsurers led by Amlin (the “Reinsurance Policy”). The Reinsurance Policy contained an English law and jurisdiction clause, and a “follow the settlements” clause. Importantly, both the Original Policy and the Reinsurance Policy contained a typhoon warranty which stated:

“[…] it is expressly warranted that the carrying vessel shall not sail or put out of Sheltered Port when there is a typhoon or storm warning at that port nor when her destination or intended route may be within the possible path of the typhoon or storm announced at the port of sailing, port of destination or any intervening point. Violation of this warranty shall render this policy void”.

Reinsurers commenced proceedings in the High Court in England for a declaration of non-liability under the Reinsurance Policy on the grounds that there had been a breach of the typhoon warranty. Reinsurers further sought a declaration that Oriental were not liable under the Original Policy by reason of the breach of the typhoon warranty as it appeared in the Original Policy.

Held at First Instance

It was against this background that Oriental applied for the English High Court proceedings to be stayed pending the outcome of the various cargo claims commenced in the Philippine Courts. In the Commercial Court, Andrew Smith J had refused to grant a stay. Oriental therefore appealed to the Court of Appeal.

The legal starting point was that English law had established that a stay of proceedings would only be granted in a “rare and compelling case”. Oriental argued that, in order to protect their claim in England under the Reinsurance Policy, they had to argue in the Philippines that there had been a breach of the typhoon warranty in the Original Policy. However, at the same time, in order to make good their reinsurance claim, they had to argue the opposite case under the Reinsurance Policy in the English courts (i.e. that there had been no breach of warranty).

Oriental further argued that the circumstances of this case were sufficiently rare and compelling because, without a stay, the Philippine court and the English court might reach inconsistent verdicts.

Held in the Court of Appeal

In his leading judgment rejecting Oriental’s application, Longmore LJ held that the Commercial Court had given sufficient weight to the risk of inconsistent verdicts. It was within the Commercial Court judge’s discretion to hold that the risk of different evidence and inconsistent decisions in the two sets of proceedings was “a relatively modest one”, particularly because evidence relevant to the reinsurance proceedings would come out in the Philippine proceedings well in advance of the English trial. It had been legitimate to take into account as a factor mitigating against a stay that the Philippine proceedings might not be concluded for 10 years.

The other members of the Court of Appeal agreed with Longmore LJ’s judgment, but not without expressing some sympathy for Oriental. Rimer LJ noted that it was legally correct to refuse the stay but commented on the “apparent unfairness” of Oriental’s position. Tomlinson LJ went even further, commenting that, by commencing declaratory proceedings in London “[t]hese giants of the London insurance market have placed their reinsured Philippine minnow in a hopeless and invidious position.”

In summary, each application for a stay will be considered on its own merits to determine whether the “rare and compelling” case test has been satisfied. The Court of Appeal’s decision makes clear that there can be no argument that reinsurance claims automatically satisfy that test. However, the Court of Appeal also indicated in their judgment that long delay in foreign underlying proceedings (such as the potential 10 year delay in this case) can be one of the factors that would mitigate against a stay. The threshold to satisfy the test therefore remains high, and is one which the Philippine insurer was unable to meet in this case, despite the considerable difficulties they face in arguing contradictory cases in England and the Philippines at the same time. Nevertheless, as Tomlinson LJ noted in reaching his verdict “[a] conclusion does not have to be reached with enthusiasm in order to be right”.

Barbara Parker & Michael Parker v The National Farmers Union Mutual Insurance Society Limited [2012] EWHC 2156 (Comm)

Commercial Court: Mr. Justice Teare

Clive Blackwood (instructed by Shoosmiths) for the Claimants

David Turner QC (instructed by Clyde and Co.) for the Defendant

Commercial Court decision on whether insurers liable to pay fire damage in circumstances where a joint or composite policy had been avoided because of Insureds’ failure to disclose fraudulent claims and whether there had been a breach of condition precedent.

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Facts

Mrs Parker owned a house which suffered substantial damage by fire. The house was insured by NFU pursuant to a policy dated 6 July 2006 which named Mrs Parker as an insured and insured the property against damage by fire. From 22 September 2009 Mr Parker was added as an insured. At the time of the fire they were living together and married in April 2010.

After the fire Mr and Mrs Parker claimed on the policy for damage by fire, loss of contents and loss of rent. It was common ground that the house was damaged by an insured peril (i.e. fire) however the NFU denied liability on the following grounds:

1. Avoidance of the policy on account of the failure by Mr and Mrs Parker to disclose two earlier fraudulent insurance claims:
   1. one by Mr Parker in 2002 in respect of the alleged theft of an expensive watch; and
   2. another by both Mr Parker and the future Mrs Parker in 2007 in respect of the alleged theft of two expensive watches.
2. Mr Parker was responsible for the arson which destroyed the house.
3. Mr and Mrs Parker relied on fraudulent means in support of their claim, namely false documents relating to the alleged lease of the house and in response to the investigation of the claim.
4. Mr and Mrs Parker had failed, in breach of terms of the policy, to provide documents requested by NFU and were therefore not entitled to payment.

After a careful review of the evidence the judge held that one of the earlier claims was not fraudulent (2002) but the other was (2007). The judge also held that the fire was set by one or more people acting on the direction of Mr Parker. The judge was not persuaded that an agreement leasing the property at £3,500 per month was a sham.

A schedule to the policy of insurance described Mr Parker as “joint policyholder”. However, the judge held that there can be no joint insurance where the different interests of several persons are insured under the same policy. Such a policy is a composite policy. On the facts of this case Mrs Parker owned the house and although Mr Parker had had an ownership interest in it, he had sold this back to Mrs Parker in 2007. Although Mr Parker may have had an equitable interest in the house, or an interest in some of its contents, or an insurable interest in the rent legally payable, the interests of Mr and Mrs Parker were different and the policy was therefore a composite policy.

Against this background, the judge held that the NFU was entitled to avoid its obligation to indemnify Mr Parker. Furthermore, since the destruction of the house was caused by his wilful misconduct he could not in any event make any recovery in respect of the loss. However, since Mrs Parker had not been aware that Mr Parker had made a dishonest claim in 2007, the NFU was not entitled to avoid its obligation to indemnify Mrs Parker. The NFU did not allege that Mrs Parker was part of any conspiracy to the arson and since the policy was a composite policy her right to claim was not affected by the wilful misconduct of Mr Parker.

It followed that unless the NFU could take advantage of another defence, Mrs Parker was entitled to indemnity. The General Conditions of the Policy provided that:

“Your rights to policy benefit

To qualify for benefit YOU and any other person seeking benefit under this POLICY must keep to the terms and conditions of the POLICY

How to claim

If anything happens which might result in a claim, YOU must do the following:-

… provide all written details and documents WE ask for”.

It was common ground that this clause was a condition precedent to recovery under the policy. NFU requested that Mr and Mrs Parker provide copies of their bank statements for the period October 2009 to March 2010 to evidence the availability of funds for the rebuild. Mr and Mrs Parker’s solicitors responded saying that “Our clients see no reason to supply you with complete bank statements” and attached a letter from their bank providing some assurance that Mr Parker could generate the money. During the course of disclosure, the Parkers disclosed certain bank and credit card statements, respectively for October and November 2009 for the period October 2009 to February 2010.

Mrs Parker sought to avoid the consequences of the breach of condition by saying that:

1. The provision was not fair and not binding pursuant to the Unfair Terms in Consumer Contract Regulations 1999 (UTCCR 1999); and
2. The NFU unreasonably rejected the claim in breach of Insurance Conduct of Business Sourcebook (ICOBS).

The judge held that the general condition was not unfair as it did not cause a “significant imbalance” in the parties’ rights and obligations as required by the UTCCR.

Rule 8.1.2 of ICOBS (applicable only to consumer insurance) provides that, except where there is evidence of fraud, a rejection of a consumer policyholder’s claims is unreasonable, unless it is for breach of warranty or condition unless the circumstances of the claim are connected to the breach. The judge held that this was a case where the breach of condition was connected with the breach since the NFU considered that Mr Parker was involved in the arson and the bank statements were relevant to the question of motive.

It followed that Mrs Parker’s failure to comply with the terms and conditions under the policy meant that she was not able to “qualify for benefit” under the policy.

Starlight Shipping Company v Allianz Marine & Aviation Versicherungs AG and Others (“Alexandros T”) [2012] EWCA Civ 1714

Court of Appeal: The Right Honourable Lord Justice Longmore the Right Honourable Lord Justice Toulson and the Right Honourable Lord Justice Rimer

Mr Iain Milligan QC, Mr Michael Ashcroft QC & Mr Luke Pearce (instructed by Thomas Cooper) for the Appellants

Mr Michael Swainston QC & Mr Tony Singla (instructed by Clyde & Co LLP) for the 1st – 4th Respondents

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