Prepce

Lloyd's Market Association for permission to quote from and reproduce various Institute and International clauses; to Xchanging Group for permission ro reproduce and/or quore from the Ins-sure Companies Marine Policy and associated schedules; and to the Britannia Steam Ship Insurance Association Ltd for
similar permission in respect of the Association)s rules.

CONTENTS-SUMMARY

I am also extremely grateful to Lord Mance, whose judgments have contributed so significantly to the development of insurance contract law in the period since the first edition, for graciously agreeing to contribute a foreword. On a personal note, I should like to thank my wife, Fouzia, who has provided unfailing support and warm encouragement, and has tolerated an author's preoccupation with indulgence and good humour. Special acknowledgements are due also to our daughter, Sonia, who has become accustomed to a laptop computer accompanying her to ballet lessons, and our little son, Adam, who has lived his entire life with the project, blithely unawate of the challenge posed by the doctrine of utmost good faith to the sleep-deprived. I have endeavoured to stare the law as at 31 October 2005. Attention should, howevet, be dtawn to the commercially sensitive judgment ofAikens J in Enterprise Oil Ltd v Strand Insurance Co Ltd [2006] EWHC 58 (Comm) indicating (obiter) a disinclination to follow the reasoning of Colman J in Lumbermens Mutual Casualty Co v Bovis Lend Lease Ltd (discussed at 21.16 below) on global settlement and claims undet liability policies. Needless to say, responsibility for . . .. any errors or omISSIOns remaIns ffime. Howatd Bennett Nottingham Halloween, 2005

Foreword Preface Table ofCases Table ofStatutes Table ofStatutory Instruments Table ofInstitute and International Clauses
1. Introduction to the Law of Marine Insurance 2. Formation of Marine Insurance Contracts 3. Insurable Interest, Illegality, and Public Policy 4. The Doctrine of Utmost Good Faith 5. Marine Insurance Brokers 6. Premiums 7. An Introduction to Modern Marine Cover 8. Inrerpretation and Rectification ofInsurance Contracts 9. Principles of Causarion 10. Marine Risks 11. The Inchmaree Clause 12. Collision and Contact Losses 13. War Risks 14. Srrikes Risks 15. Excluded Losses 16. Cover Provided by Mutual Insurance Associations 17. Duration of Cover 18. Attachmenr and Alreration of Risk 19. Sub-standard Shipping 20. Rights of Third Parties 21. Losses 22. Claims and Claims Handling

Vll
XXXl

!xxvii Ixxxiii

lxxxv
1

29
67

99
183 217 235 261 301 331 365 393 403 437 451 483 493

513
565 597 631 681

Vll1

Contents-Summary

23. Measures ofIndemnity 24. Averting and Minimizing Loss 25. Subrogation
26. Double Insurance and Contribution Appendices

729 747

775
809 841 973 """

CONTENTS
Foreword Preface Table ofCases Table ofStatutes Table afStatutory Instruments Table ofInstitute and International Clauses
1. Introduction to the Law of Marine Insurance A.
V Vll

Index

XXXI

lxxvii lxxxiii

lxxxv

Marine Insurers (1) The Early Evolution of Lloyd's (2) The Rise of Lloyd's to Prominence within the
Marine Market (a) The Vansittart scandal (b) The South Se, Bubble (c) The effect of the Bubble Act on the marine insurance
market

1.03 1.04 1.09 1.10 1.12 1.15 1.17 1.19 1.22 1.27 1.28 1.31 1.34 1.34 1.41 1.44 1.50 1.51 1.58

(d) The marine insurance market and Lloyd's

(3)

The Institute of London Underwriters and the International Underwriting Association of London (4) The Mutual Insurance Associations (5) Government Involvement in Marine War Risks Insurance (a) The origins of government involvement in war risks
insurance

(b) Modern government-backed war risks cover: Queen's

enemy risks

B. Marine Insurance Law

(1)

From Law Merchant to Common Law: Early Development of Marine Insurance Law

(2) Lord Mansfield

(3) Codification

C. The Nature of Marine Insurance

(1)

(2)

Insurance of Losses Incident to Marine Adventure Extension to Mixed Land and Sea Adventures

Xl

Contents

Contents
(2)

2. Formation of Marine Insurance Courracrs A. B. Contract Formation in a Subscription Matket Contract Formation outside the London Market
(I)
(2)

The Concept of Insurable Interest (a) The concept of insurable interest prior to the Marine

3.20 3.21 3.26 3.31 3.37 3.40 3.41 3.52 3.56 3.57 3.58 3.65 3.70 3.78

2.04 2.25 2.28 2.29 2.38 2.43 2.44 2.45 2.47 2.48 2.51 2.55 2.56 2.57 2.61 2.62 2.63 2.66 2.69 2.70 2.77 2.79 2.81 2.86 2.92 B.

C. Obligatory and Facultative Agreements

Floating Policies Facultative/Obligatory Covers

(3) Facultative Covers

D.
(I)

Leading Underwritet Agreements IdentifYing rhe Leader (2) Extent of a Leader's Power to Bind the Following Marker (a) Amendments to cover Impacr of the LMP reforms (h) Declarations under open covers (c) Claims

Insurance Act 1906 (b) The concept of insurable interest in the Marine Insurance Act 1906 (c) The relationship between insurable interest and wagering (d) Defeasible, contingent, and partial interests (3) Insurable Interest in Particular Types of Insurance (a) Property insurance (h) Insurance on freight, hire, and profits (c) Liability insurance (4) Limited Interests
(5)

Pervasive Interests

B.

Embodiment in a Policy

C. Illegality of the Insured Adventure

D. The Impact of War on Contracts of Insurance 4. The Doctrine of Utmost Good Faith A. Evolution and Framework of the Doctrine of Utmost Good Faith (1) Misrepresentation and Non-disclosure in General Contract Law (2) Insurance as a Contract Uberrimae Fidei (3) Utmost Good Faith in the Marine Insurance Acr 1906 (4) Voidable, not Void
(5)

(3) Legal Nature of a Leader's Power

(4) Termination of a Leader's Power E. Delegated Authorities
(1) (2)

Binding Authorities

Line Slips
Definition ofJoint and Composite Insurance Legal Structure of Composite Policies Contractual Status Under Composite Policies

F.

Joint and Composite Policies

(1) (2)

(3)

(a) Authorized agency (h) Ratification (4) Is Classification as Joint or Composite Insurance a Matter
of Law or Contract?

4.02 4.03 4.05 4.08 4.10 4.11 4.22 4.23 4.27 4.35 4.41 4.42 4.44 4.53 4.54 4.60 4.61

Source ofthe Doctrine and the Remedy ofAvoidance: Common

Law or Equity? (6) Avoidance and Rescission The Definition of Materiality (1) Materiality Prior to Pan Atlantic v Pine Top in the House of Lord, (2) Materiality in rhe Honse of Lord, in Pan Atlantic v Pine Top and Beyond (1) Establishing the Requirement for Inducement as a Matter of Legal Principle (2) The Meaning ofInducement (3) Proof of Inducement (a) The so-called 'presumption' of inducement (h) Unknown information (4) Inducement in a Subscription Market
Xlll

3. Insurable Interest, Illegality, and Public Policy A. Insurable Interest (1) The Legal Matrix (a) The evolution of the law on insurable interest prior to the Marine Insurance Act 1906 (h) The insurable interest requirements of the Marine Insurance Act 1906
The contract formation requirement The time of loss requirement

3.02 3.03 3.04 3.08 3.D9 3.12 3.16 3.17

C. Inducement

(c) The Marine Insurance (Gambling Policies) Act 1909 (d) The general law on gaming and wagering contracts
Xli

Contents

Contents

(5) Negating Inducement

D. Circumstances Requiring Disclosure (1) The Physical Hazard (2) The Moral Hazard (3) Other Circumstances Relevant to Assessment of the Risk Information
Misleading or Inaccurate Circumstances

4.64 4.66 4.67 4.69 4.72 4.79 4.82 4.89 4.90 4.91 4.99 4.106 4.108 4.111 4.113 4.117 4.122 4.123 4.124 4.125 4.129 4.130 4.131 4.133 4.147 4.148 4.150 4.151 4.152 4.154 4.155 4.156 4.158 4.163 4.168 4.172 4.173

M. Co-insurance N. Utmost Good Faith after the Formation of the Contract

4.184 4.193 4.205

O. Basis Clauses
5. Marine Insurance Brokers A.
Agency (1) The Broker as Agent of the Assured (2) Liability ro Third Parties Brokers and Sub-Agency (1) Contract (2) Tort

E.
F.
G.

Circumstances not Requiring Disclosure (1) Diminution of the Risk (2) Within the Insurer's Actual or Presumed Knowledge (3) Waiver

5.02 5.03 5.05 5.09 5.10 5.15 5.16 5.20 5.23 5.23 5.30 5.36 5.40 5.42 5.43 5.50 5.51 5.52 5.58 5.62 5.74 5.76

B.

(4) Warranties

(5) Application to Misrepresentation

H. Knowledge of the Assured (1) Who is the Assured? (2) Constructive Knowledge
I.
Brokers and the Doctrine of Utmost Good Faith (1) Independent Duties (2) The Relevant Brokers (3) Scope of Disclosure Duty (4) Relationship Between the Duties of the Assured and the Placing Broker Actionable Misrepresentations (1) Representations of Fact (2) Representations of Expectation or Belief Marine Insurance Act 1906, Section 17: Pre-formation Utmost Good Faith Beyond Sections 18-20 (1) Fraudulent Misrepresentation and Non-disclosure by the Assured (2) Non-material Misrepresentation and Non-disclosure (3) Mistake by the Insurer, Known to the Assured (4) The Insurer's Pre-formation Duties of Dtmost Good Faith Remedies (1) Avoidance (a) Nature of the Remedy (b) Proportionality in General Contract Law (c) Loss of the Right ofAvoidance (d) Post-formation Revelations (e) The Consequences ofAvoidaI1ce (2) Damages
XIV

C. The Scope of the Broker's Duty to the Assured

D. The Standard of the Broker's Duty

E.

Duties of Brokers (1) The Broker's Duty to Obtain Cover (2) The Broker's Duty to Ensure Proper Presentation of the Risk to the Insurer The Broker's Duty in Placing the Cover (3) (4) The Broker's Duty when Assisting in Making Claims Remedies for Breach of Duty (1) Measure of Damages: Basis of Assessment (2) Cost of Alternative Insurance Causation Defences (1) The Risk was Uninsurable on Terms the Assured would have Accepted (2) The 'Two Defence' Problem

F.

].

G.

K.

H. Contributoty Negligence
I.
Brokers' Rights to Remuneration Brokers' Security for Sums Due

J.
A. B.

6. Premiums
Whether and When Premium is Earned Time of Payment

L.

6.02 6.09 6.13 6.14 6.15 6.17 6.18

C. Consequences of Failure to Pay on Time

(1) At Common Law

(a)
(b)

(2)

Renunciation Substantial failure of performance Premium Default Clauses

XV

Contents
D. Brokers and Premiums (I) Liability of the Broker for Premium (2) Consequences of the Broker's Liability for Premium (a) Default (b) Set-off (c) Premium default clauses (d) Payment of premium and issuance of policy
(3)

Contents
6.21 6.21 6.24 6.25 6.27 6.29 6.32 6.33 6.35 6.37 6.38 6.41 B.

(g) Business common sense

(h) Validity rathet than invalidity (i) Taking advantage of one's own wrongdoing

0)

The Position as Between Broker and Assured

Context outside the contract Evolutionof the modern approach to admissibility Restrictions on admissibility of extrinsic evidence The utility of extrinsic evidence Context excluding extrinsic evidence

(4) Displacing the Brokers' Premium Liability Rule (5) Market Recapitalization E. Mutual Insurance War Risks and Additional Premium Areas

(k) Ambiguity
(3)
(I) Estoppel by convention Contractual Interpretation and the Doctrine of Precedent

8.26 8.32 8.33 8.34 8.35 8.39 8.42 8.50 8.51 8.58 8.59 8.63 8.64 8.72 8.73 8.74 8.75

F.

7. An Introduction to Modern Marine Cover

The Slip as an Aid to Interpretation of the Policy (I) General Admissibility but Variable Evidential Value (2) The Rule ofLaw Approach
(a) Inadmissibility of contractual negotiations

A.
B.

The SG Policy The Separation of Marine and War Risks Cover Modern Cover (1) The Policy (2) Cargo Cover (3) Hull Insurance (4) The Eiusdem GenerisClause

7.02 7.03 7.07 7.08 7.10 7.15 7.23 7.24 7.26 7.33 7.38 7.48 7.48 7.54 7.58

(b) The patol evidence rule (c) Marine Insurance Act 1906, section 89

C.

C.

Rectification

8.77

9. Principles of Causation

A.
B.

Remote, Immediate, and Proximate Causes

9.03 9.08 9.12

Leyland Shipping v Norwich Union

D. Valued aud Uuvalued Policies (I) The Significance of an Agreed Value (2) Determining Whether a Policy is Valued: Agreed Value
v Sum Insured

C. The Contextual Nature of Proximity; also of Complex Causes

D. Concurrent Proximate Causes
(1)

One Proximate Cause or More?

9.20 9.21
9.22 9.25 9.30 9.33 9.46 9.55 9.56 9.59 9.60 9.61 9.62 9.65

(3) Re-opening an Agreed Value E. Burden aud Standard of Proof (1) General Principles (2) 'All Risks' Covet (3) Exclusions

(2) Concurrent Causes, One Cause Specifically Included, None Specifically Excluded (3) Concurrent Causes, at Least One Specifically Excluded (4) Exceptions or Exclusions? E. Applying the Effectiveness Test of Proximate Cause Apprehension of a Peril Mistaken Belief ofPetil

F.
8. Interpretation and Rectification ofIusurance Contracts A. Principles ofInterpretation (I) The Intention of the Parties
(2) Factors Taken into Account in Interpreting Contracts

G. 8.02

8.04
8.06 8.07 8.12 8.14 8.15 8.16 8.23

H. Response to Perils
I.
The Language of Causation (1) The Adhesiveness of the Proximate Cause Rule (2) Displacing the Proximate Cause Rule (al Displacement by a Combination of Wording and Other
Circumstances

(a) The natural meaning of the words (b) Specialist meaning 1: technical legal meaning
(c) Specialist meaning 2: custom and usage

(d) Schedule 1 rules of interpretation

(e) (f) Context within the contract Excessive unreasonableness
XV!

(b) Displacement by Simple Change of Language

XVll

Contents
10. Marine Risks A. Hull and Freight Insurance (I) Perils of the Seas, Rivers, Lakes, or Other Navigable Waters
(a) Fortuitous accidents

Contents
B. 10.02 10.03 10.04 10.18 10.26 10.43 10.60 10.69 10.70 10.74 10.77 10.78 10.81 The Due Diligence Proviso Inchmaree Clause and that Provided in Respect of Maritime Perils 12. Collision and Conract Losses 11.66

C. Relationship Between the Cover Provided under the

11.73

(2) (3) (4) (5)

(b) Of the seas (c) Proof (d) Causation Fire and Explosion Violent Theft by Persons from Outside the Vessel Jettison Piracy

A.

Loss of or Damage to the Subject-matter Insured (I) Contact (2) Aircraft, Helicopters, and Satellites (3) Accidents in Cargo Handling (4) Cargo Insurance Third Parry Liability (I) Collision Liability under Hull Policies (a) 'Legally liable by way of damages' (b) 'Any sum Or sums paid' (c) 'Three-fourths' (d) 'Vessel' (e) 'Coming into collision' (f) Basis for the assessment of liability (g) Limitations and exclusions (h) Legal costs cover (2) Collision Liability under Cargo Insurance

B.

Cargo Insurance (I) 'All Risks' Cover Under the Institute Cargo Clauses (A) (2) Named Perils Cover Under the Institute Cargo Clauses (B) and (C)

12.02 12.03 12.04 12.06 12.08 12.09 12.10 12.11 12.13 12.14 12.15 12.18 12.20 12.21 12.22 12.23

B.

11. The Inchmaree Clause

A.

Covered Perils under the Inchmaree Clause (I) Bursting of Boilers, Breakage of Shafts, and Latent Defects in the Machinery or Hull (a) 'Shafts' (b) 'Latent defect' 'Defect'
(c)

11.03 11.03 11.04 11.05 11.06 11.13 11:14 11.16 11.21 11.24 11.25 11.28 11.29 11.30 11.37 11.43 11.44 11.47 11.54 11.57 11.58 11.60 11.64 11.65

'Latent' Requirement of consequential loss or damage

13. War Risks

A.

Damage Timing of the damage Causation (d) Measure of indemnity (e) 'Additional perils' cover (2) Negligence (a) No defence of opetational negligence of the master
or crew

(I)

Perils of War, Uprising, and Hostility Perils ofWar (a) Warlike operations (b) The modern perils of 'war' and 'civil war'
Revolution, Rebellion, and Insurrection

(2)

(3) Civil Strife arising Thereform (4) Any Hostile Act By or Against a Belligerent Power

13.05 13.05 13.06 13.18 13.31 13.37 13.38 13.43 13.45 13.48 13.53 13.55 13.58 13.62 13.64 13.70

B.

Perils of Deprivation and Inhibition on Use

(I) Capture and Seizure (2) Arrest, Restraint, and Detainment

(b) Negligence as a covered peril (3) Barratry of Masters, Officers, or Crew (a) Prejudice (b) Who is the owner?
(c) Fraudulent or criminal conduct

(d) Barratry of mariners (e) Causation (f) Burden of proof (g) Proof of complicity (h) Relationship with war and strikes cover
XVl11

(3) (4) (5) (6)

The Consequences Thereof Any Atrempt Thereat Confiscation or Expropriation Restrictions on Scope of Cover (a) Clause 5.1.2: requisition and pre-emption (b) Clause 5.1.3: order of government Or public or local authority
(c) Clause 5.1.4: arrest restraint detainment confiscation or
XIX

Contents
expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations Clause 5.1.5: ordinary judicial process, failure to provide security or to pay any fine or penalty or any financial cause Characterization and burden of proof

Contents

(b) Causarion
(c) Insuring against inherent vice

13.71

(3)

Rats or Vermin

(d)

15.57 15.59 15.61 15.64 15.70 15.72 15.74 15.78 15.80

D. Inevitable Losses

(e)

13.75 13.80 13.84

E.

War and Strikes Risks

(1) Effecting the Distinction Between Marine and

C. Derelict Weapons 14. Strikes Risks

A.
Perils ofIndustrial Disturbance or Civil Unrest (I) Loss or Damage Caused by Participants (2) Strikers (3) Locked-out Workmen (4) Persons Taking Part in Labour Disturbances (5) Persons Taking Part in Riots (6) Persons Taking Part in Civil Commotions Terrorism and Associated Perils (I) Any Tertorist (2) Persons Acting Maliciously (3) Politically Motivated Persons

Non-Marine Risks (2) The War and Strikes Risks Exclusions

F.
14.03 14.04 14.06 14.10 14.1 I 14.12 14.15 14.18 14.19 14.20 14.28
G.

The Marine Risks Exclusion in War and Strikes Clauses for Hulls or Freight Radioactivity and Non-Conventional Weapons

16. Cover Provided by Mutual Insurance Associations

A.
Protection and Indemnity Cover War Risks
(1) Government Reinsurance

16.03 16.14 16.14 16.15 16.19 16.20

B.

B.

(2) Queen's Enemy Risks (3) Further Cover Available under the British War Risks Rules

C.

Defence Cover

17. Duration of Cover 15. Excluded Losses

A.
Voluntary Conduct of the Assured (I) The General Voluntary Conduct Limitation (2) Wilful Misconduct (a) Wilful (b) Causation (c) Standard of proof (d) Scuttling (e) Pleading (3) Co-Insurance Delay (I) Losses 'Consequent On' Delay (2) Delay and the Proximate Cause Rule (3) Perils of Deprivation and Inhibition on Use Losses that Occur in rhe Natural Course of Events (I) Ordinary Wear and Tear, Ordinary Breakage, and Ordinary Leakage
(2) Inherent Vice or Nature of the Subject-matter InsufG-d

A.

Time and Contracts of Marine Insurance Cargo Insurance

17.02 17.11 17.22 17.28 17.38 17.46 17.49 17.51 17.55

1.5.04 15.05 15.10 15.11 15.14 15.18 15.19 15.25 15.27 15.29 15.30 15.33 15.38 15.42 15.46 15.50 15.51

B.

C. War and Strikes Risks Cargo Insurance

D. Voyage Policies on Hulls E. Voyage Policies on Freight Time Policies on Hulls and Freight

F.

G. War Risks Hull Insurance H. Continuation Clauses

B.

I.

Mutual Insurance

18. Attachment and Alteration of Risk

A.
Failure of Risk to Attach in Voyage Policies (I) Failure to Embark upon the Route of the Designated Voyage (2) Delayed Commencement of the Designated Voyage The General Doctrine ofAlteration of Risk

C.

18.02 18.03 18.20 18.27 18.30

B.

(a)

The meaning of inherent vice xx

C. Alteration of Risk in Voyage Policies

XXI

Contents
(I)
(2)

Contents
18.31 18.34 18.38 18.41 18.54 18.55 18.61 18.66 18.67 18.71 18.75 18.80 18.83 18.87 18.89 18.90 18.92 18.93 18.94 18.97 18.98 18.99 18.101 18.104 18.105 18.110 18.111 18.114 18.115 18.117 18.119 18.123 18.125 (3) Stowage
(4) The Relative Nature of Seaworthiness and Cargoworthiness

Change ofVoyage
Deviation

19.14 19.18 19.20 19.22 19.23 19.30 19.32 19.39 19.40 19.41 19.47 19.49 19.51 19.56 19.60 19.61 19.64 19.65 19.66 19.71 19.78

(3)
(4)

Delay
Excuses for Deviation or Delay

B.

D. Promissory Warranties
(I) The Legal Characterization of Promissory Warranties (2) Identifying Promissory Warranties (3) Interpretation and Breach (a) Interpretation generally

Seaworthiness in Voyage Policies (I) Rationale for the Warranty (2) Time of Compliance and the Doctrine of Stages
(1)

C. Seaworthiness in Time Policies

Privity (2) Who is the Assured? (3) Causation
(a) Unseaworthiness and the doctrine of proximate cause

(b) (c) (d) (e)

Breach

(4)

(5)
(6)

(7)
(8)

(9)

Timing 'Uninsured' warranties The additional insurances warranty under the Institute and International hull clauses (f) Sailing warranties Causation Materiality Cure Breach Excused Waiver Mitigating the Law of Promissory Warranties (a) Contractual drafting Navigation limits Severable cover Held covered clauses Alternative interpretations (b)

(b) The causation test of section 39(5) (4) Multiple Instances of Unseaworthiness D. Proof of Unseaworthiness E. The Relationship Between Unseaworthiness and Cover under the Inchmaree Clause The Relationship Between Unseaworthiness, Inherent Vice, and Ordinary Wear and Tear Cargo Policies

F.
G.

H. Contractual Responses to Sub-standard Shipping (I) The Due Diligence Proviso to the Inchmaree Clause (2) Ownership, Management, and Flag (3) Classification (4) The International Safety Management Code
20. Rights of Third Parties A. B. Contracts (Rights of Third Parties) Act 1999 Assignment (1) Assignment of the Subject-matter Insured . (2) Assignment of the Benefit of the Contract of Insurance (3) Assignment of rhe Policy (4) Protection of the Insurer
(5) Contractual Restrictions on Assignment

E.

Held Covered Clauses (I) Examples of Held Covered Clauses (2) Scope (3) Additional Premium (4) Amendment ofTerms

20.02 20.07 20.08 20.12 20.14 20.21 20.27 20.33 20.36 20.40 20.42 20.44 20.48 20.49

(5) Notice
Option or Obligation? (7) Utmost Good Faith
(6)

19. Sub-standard Shipping A. The Concepts of Seaworthiness and Cargoworthiness (1) Seaworthiness (a) Physical condition (b) Master and crew (c) Documentation (2) Cargoworthiness
XXll

C. Third Parties (Rights against Insurers) Act 1930

19.03 19.03 19.04 19.06 19.10 19.11
(1)

Insurance Policies Covered (2) QualifYing Events for a Transfer of Rights (3) The Timing of a Transfer of Rights

(4) Anti-avoidance Provisions

(5) The Rights that are Transferred (a) An enforceable right to claim under a liability policy

xxiii

Contents

Contents

(b) Defences
Notification and claims co-operation provisions Dispute resolution procedures Restrictions on the scope of cover Pay first clauses Liabilities and set-off Limitation

(6) Distriburion ofInadequate Fund (7) Ptovision ofInformation (a) Section 2(1): disclosure by persons othet than an insurer (b) Section 2(2): disclosure by an insurer (8) Relationship Between Assured and Third Party in rhe Light of a Statutory Transfer of Rights (9) Relationship Between Insurer and Assured in the Light of a Statutoty Transfer of Rights (10) Recovety of the Assured 21. Losses

20.56 20.57 20.60 20.61 20.62 20.65 20.68 20.73 20.74 20.75 20.80 20.81

(2) Relationship Between Loss of Freight and Loss of Vessel

or Cargo

(3) Whether Total Loss of Freight is Actual or Constructive E. Loss of Adventure Finality of Losses and the Doctrine ofAdemption of Loss
(1) Successive Losses: Cumulative Recovery

21.93 21.96 21.97 21.98 21.109 21.110 21.1 12 21.1 15 21.123

F.

G. Successive Losses (2) Successive Unrepaired Losses (3) The Doctrine of Merger of Unrepaired Partial Losses (4) Successive Total Losses 22. Claims and Claims Handling

20.82 20.83

A.
B.

Claims Handling in a Subscription Market Liabilities in a Subscription Market

(1) Notification Provisions in Marine 'Policies Provisions (a) Condition precedent

22.02 22.04 22.05 22.06 22.12 22.13 22.18 22.19 22.20 22.21 22.25 22.30 22.31 22.33 22.35 22.36 22.45 22.46 22.49 22.51 22.52 22.53 22.58 22.61 22.62 22.64

C. Occurrence Notification Obligations

21.02 21.03 21.14 21.18 21.19 21.31 21.36 21.37 21.38 21.39 21.46 21.52 21.53 21.54 21.59 21.60 21.62 21.74 21.77 21.84 21.90 21.91
XXiV

A.

The Concept of a Loss (1) Ptoperty Insurance (2) Liability Insurance Attaching Losses to Periods of Cover (1) Ptoperty Insurance (2) Liability Insurance (1) Actual Total Loss
(a) Destruction

(2) The Consequences of Non-compliance with Notification

B.

(b) Suspensive condition (c) Watranty

(d) (e) Condition or innominate term Severable innominate term

C. The Classification of Losses

(3) Non-compliance Under Marine Wordings D. The Doctrine ofAbandonment and the Notice of Abandonment Procedure (1) The Doctrine ofAbandonment (2) Abandonmenr and Notice ofAbandonment Distinguished (3) When Notice ofAbandonment is Not Required (4) Insurers' Rights upon Acceptance of Abandonment (5) The Impact ofAbandonment on the Assured's Rights (a) Unilateral divesring of rights (b) Does abandonment deny unilateral divesting?
(c) Consequences of improper divesting

(b) Damage so as to cease to be a thing of the kind insured (c) Itretrievable deprivation (d) Applicability of the de minimis principle (2) Constructive Total Loss
(a) Constructive total loss based on reasonable abandonment possessIOn Deprivation of possession

(b) Constructive total loss based on deprivation of

Unlikelihood of recovery
(c) (d) Constructive total loss based on damage to insured

ptoperty
Calculating whether insured property is a constructive total loss

(3) Partial Losses D. Loss ofFreight (1) Whether Freight Lost

(6) Form of Notice ofAbandonment (7) Time for Giving a Notice ofAbandonment (8) Acceptance and Refusal of a Notice ofAbandonmenr (9) Changing an Election E. Limitation (l) Ptoperty Insurance

xxv

Contents
(2) Liability Insurance (3) Conrracr 1erms and Accrual of rhe Cause ofAction

Contents

22.68 22.69 22.73 22.73 22.74 22.75 22.76 22.77 22.78 22.80 22.81 22.90 22.96 22.100 22.101 22.102 22.106 22.109 22.113 22.115 22.115 22.120

24. Averring and Minimizing Loss

A.
Sue and Labour Expenses (I) Conrractual Wordings (2) Required Standard of Conduct (3) Persons Falling within rhe Sue and Labour Docrrine (4) Duty or Liberty? Consequences of Non-compliance with Secrion 78(4) (5) Joinr and Composite Insurance (6) Negligence Cover and tbe Sue and Labour Doctrine (7) Entitlement to Reimbursement of Expenses (8) Supplemenrary Nature of the Sue and Labour Reimbursemenr Undertalting (9) Suing and Labouring in Anricipation of a Peril (10) Relationship Between the Period of Cover and the Sue and Labour Doctrine (11) Expenses Recoverable under a Reimbursement Undertaking General Average (1) General Average Losses and Liabilities (2) Insurance of General Average Losses and Liabilities
(I)

F.

Insurers' Rights in Connection with Claims (I) Claims Co-operation Clauses (2) Appoinrmenr of Surveyor and Average Adjuster (3) Approval Provisions (4) Murual Insurance Fraudulent Claims (1) The Concept ofFraud (2) Fraud of the Assured (3) Types of Fraudulenr Conduct in rhe Malting of a Claim (4) Relevance to the Claim (5) Temporal Limits on the Fraudulenr Claims Jurisdiction (6) Joint and Composite Policies (7) Remedies for Fraud in a Claim (a) Rejection of the claim (b) Contract termination (8) Fraudulenr Claims Clauses

24.02 24.03 24.07 24.09 24.10 24.18 24.19 24.25 24.29 24.30 24.33 24.37 24.41 24.44 24.48 24.56 24.58 24.62 24.63 24.67 24.69 24.70 24.71 24.73 24.75

G.

B.

H. Good Faith in the Malting of Claims

I.

Making Payment of Loss Moneys (I) Method of Payment (2) Time of Payment

C. Salvage
Salvors' Remuneration (2) Insurance of Liability fot Salvage Remuneration (a) Article 13 salvage award (b) Special compensation (c) Life salvage

23. Measures ofIndemnity

A.
Loss of or Damage to Property (1) The Yardstick fot Calculating the Measure ofIndemnity (a) Agreed and insurable values (b) Displacing the insurable value in modern unvalued policies (c) Vessels inrended for scrap (2) Toral Losses (3) Parrial Losses (a) Damage to a vessel (b) Partial loss of goods (c) Partial loss offreight (d) One agreed value covering several species of property Thresholds to Recovery (1) Particular Average Warranties (2) Deducribles (3) Franchise Clauses

23.02 23.03 23.03 23.06 23.11 23.12 23.14 23.15 23.28 23.35 23.37 23.38 23.39 23.40 23.48 23.49

D. Under-insurance (I) Sue and Labour (2) General Avetage and Salvage (3) Insurance Against a Shortfall by Reason of Under-insurance

25. Subrogation
A.
The Doctrine of Subrogation (I): Access to the Assured's Rights Against Third Parties (I) Actual Payment a Pre-requisite to Operative Subrogation Rights (2) Subrogarion Affords the Insuret Access to the Assured's Cause of Action (3) Conrrol and Conduct of Claims Against Third Parties (4) Third Patty Defences to Subrogation Actions (5) Joint Insurance and Co-insurance The Doctrine of Subrogation (2): Insurer's Entitlement to the Benefit of Dimunitions of Loss
XXVll

25.09 25.10 25.12 25.16 25.25 25.27 25.36

B.

B.

C. Under-insurance
XXV!

Contents
Proceeds of Third Party Action by the Assured Benefits Voluntarily Conferred on the Assured (3) Non-monetary Benefits (4) Mixed Purpose Benefits (5) Settlements
(I)
(2)

Contents
25.37 25.38 25.42 25.43 25.44 25.46 25.47 25.49 25.50 25.60 25.61 25.67 25.72 25.73 25.80 (4) Voluntary Payments
(5) Non-satisfaction of a Contribution Claim by Reason of

26.58 26.61 26.62 26.63 26.69 26.73 843 863 865 867 868 869 874 879 884 888

Insolvency

F.

C. The Distribution of Sums Received or Recovered from Third Parties (1) Assured Fully Compensated by tbe Insurance Indemnity (2) Assured Not Fully Compensated in Fact by the Insurance Indemnity (a) General ptinciple (b) Deductibles
(c)
(e)

Quantifying Liability in Contribution (1) Bases for QuantifYing Liability in Contribution (2) Marinelnsurance Act 1906 (3) The Case Law

Under-insurance
Deductibles in the Institute and International

(d) Valued policies hull clauses D. The Nature of the Insurer's Restitution Rights Against the Assured

E.

The Nature of the Assured's Restiturion Rights Against the Insurer

26. Double Insurance and Contribution A. B. The Concept of Double Insurauce Double Insurance and Policy Terms (I) Terms Relating to Cover (2) Rateable Proportion Clauses (a) Time of double insurance
(b) 'Existence' of another insurance

26.02 26.05 26.06 26.07 26.09 26.10 26.15 26.16 26.19 26.28 26.32 26.33 26.40 26.41 26.43 26.57

Appendix 1: Marine Insurance Act 1906 Appendix 2: Marine Insurance (Gambling Policies) Act 1909 Appendix 3: Third Parties (Rigbrsagainst Insurers) Act 1930 Appendix 4: Ins-sure Companies Marine Policy Appendix 5: Ins-sure Mar91 Schedule Appendix 6: Institute Cargo Clauses (A) (1/1182) Appendix 7: Institute Cargo Clauses (B) (111182) Appendix 8: Institute Cargo Clauses (C) (1/1182) Appendix 9: Institure War Clauses (Cargo) (1/1182) Appendix 10: Institute Strikes Clauses (Cargo) (111/82) Appendix 11: Institute Time Clauses Hulls (1110/83) Appendix 12: Institute Voyage Clauses Hulls (1111/95) Appendix 13: International Hull Clauses (01111103) Appendix 14: Institute Voyage Clauses Hulls (1/11195) Appendix 15: Institure War and Strikes Clauses (Hulls-Time) (1110/83) Appendix 16: Institute War and Strikes Clauses (Hulls-Time) (1111/95) Appendix 17: Institute Time Clauses Freight (118/89) Appendix 18: Rules of the Britannia Steam Ship Murual Insurance Association Ltd (extracts)

892
901 911 931 941 943 946

Index

973 -\'

(c) 'Covering the same loss' (3) Clauses Excluding Liability if Loss Covered by
Another Insurance

C. Valued and Unvalued Policies and Double Insurance

D. Return ofPtemium E. The Right to Contribution (1) Sources of Law (2) Time When the Right to Conttibution Arises: Impact on Contribution of Defences to Claim by Assured (a) Marine Insurance Act 1906, section 80 (b) The common law (3) Primacy of Liability
XXV111

xxix

TABLE OF CASES
AfS Ocean v Black Sea & Baltic Genetal Insutance Co Ltd (1935) 51 LlLRep 305 8.54, 8.57 Abel v POttS (1800) 3 Esp 242 22.55 Abtam Steamship Co Ltd v Westville Shipping Co Ltd [1923J AC 773 .4.04 Abt Rasha, The [2000J 2 Lloyd's Rep 575 24.53 AdamSteamship Co Ltd v London Assurance Corp (1914) 20 Com Cas 37 1.59 Adamastos Shipping Co Ltd v Anglo-Saxon Pettoleum Co Ltd [1959) AC 133 8.22 Adamson & Sons v Liverpool &,London & Globe Insurance Co Ltd [1953] 2 Lloyd's Rep 355 22.27 Adelaide Steamship Co Ltd v Attorney-Genetal (No 2) [1926J AC 172 12.09, 15.72 Adelaide Steamship Co Ltd v R (The Watilda) [1923] AC 292 13.12 Admital C, The [1981J I Lloyd's Rep 9 22.116 Admitalty Commissionets v Btynawel Steamship Co (1923) 17 LlLRep 89 13.11 Aegeon, The [2002J EWHC 247, [2003J QB 556 22.78, 22.82, 22.89, 22.91, 22.92, 22.93,22.95,22.98,22.103,22.107,22.108 Aegeon, The (No 2) [2002J EWHC 1558 (Comm), [2003] Lloyd's Rep IR54 .. .4.195, 18.95 Agapitos v Agnew (The Aegean) [2002J EWHC 247, [2003J QB 556 22.78,22.82, 22.89,22.91,22.92,22.93,22.95,22.98,22.103,22.107,22.108 Agapitos Laiki Bank (Hellas) SA v Agnew (The Aegeon) (No 2) [2002J EWHC 1558 (Comm), [2003J Lloyd's Rep IR 54 .4.195, 18.95 Agathon, The (No 2) [1984J 1 Lloyd's Rep 183 2L13 Agip SpA v Navigazione Aha halia SpA (The Nai Genova and Nai Supetba) [1984J 1 Lloyd's Rep 353 8.79,8.80 Agnew v Lansf6tsaktingsbolagens AB [2001J 1 AC 223 .4.01, 4.175 Aiken v Stewart Wtightson Membets Agency Ltd [1995] 2 Lloyd's Rep 618 5.55 Aikshaw, The (1893) 9 TLR 605 8.83,8.87 Aiolos, The [1983J 2 Lloyd's Rep 25 _ 25.14, 25.15 Aitchison v Lohte (1879) 4 App Cas 755 _ 24.12,24.38,24.63 Ajum Golam Hassen & Co v Union Marine Insurance Co [1901] AC 362 _ 10.28,19.04,19.54 Al-jubail IV, The [1982J 2 Lloyd's Rep 637 18.41 Alati v Ktuget (1955) 94 CLR 216 _ _. _ _ .4.03, 4.04 Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 _ _ 26.04 Aldrich v Norwich Union Life Insurance Society [2000] Lloyd's Rep IR 1 .4.74 Aldtidge v Bell (1816) 1 Statk 498 22.56 Alexandet v Cambell (1872) 41 LjCh 478 .4.131 Alexion Hope, The [1988] 1 Lloyd's Rep 311 1065 Alfted McAlpine pic v BAl (Run-Off) Ltd [1998J 2 Lloyd's Rep 694 22.05, 22.13, 22.14,22.16,22.21,22.22,25.21 Algussein Establishment v Eton College [1988J 1 WLR 587 8.33 Aliza Glacial, The [2002J EWCA Civ 577, [2002J 2 Lloyd's Rep 421 9.21,9.60, 13.63,13.72,13.75,13.76,13.78,13.79,13.83,15.41,21.73, 21.82, 21.83 Allen v Robles [1969J 1 WLR 1193 .4.167 Allen v Sugrue (1828) 2 B & S 456 21.77 Allen v Univetsal Automobile Insutance Co Ltd (1933) 45 LlLRep 55 _ 18.91

xxxi

Table ofCases
Allgemeine Versicherungs-Gesellschaft Helvetia v Administrator of German Property [1931] IKB 672 22.32, 22.36 Allianz Marine Aviation (France) v GE Frankona Reinsurance Ltd London [2005] EWHC 101 (Comm), [2005] Lloyd's Rep IR437 8.58 .4.04 Allied Irish Bank pIc v Byrne [1995] 2 FR 325 A1llcins v Jupe (1877) 2 CPD 375 3.1 7 A1lobrogia, The [1979J I Lloyd's Rep 190 20.44 Almojil (M) Establishment v Malayan Motor & Genera! Underwriters (Private) Ltd (The Al-Jubail IV) [1982J 2 Lloyd's Rep 637 18.41 Alps, The [1893] P 109 9.58 Aluminium Wire & Cable Co Ltd v Allstate Insurance Co Ltd [1985] 2 Lloyd's Rep 280 , 8.21,9.27 Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982J QB 84 8.40,8.41,8.58 Amazonia, The [1990] I Lloyd's Rep 236 8.58 2.07,8.51,8.54 American Airlines Inc v Hope [1973] I Lloyd's Rep 233 American International Marine Agency of New York Inc v Dandridge [2005] EWHC 829 (Comm), [2005] I CLC 1102 .. .2.15 26.04, 26.32, 26.51, 26.74 American Surety Co v Wrighrson (1910) 16 Com Cas 37 Amoco International Financial Corp v Iran (1987) 15 Iran-UCCTR 189 13.59 Anderson v Fitzgerald (1853) 4 HLC 484 6.06,6.07,8.53, 18.90 13.46 Anderson v Matten [1907]2 KB 248 Anderson v Morice (1876) I App Cas 713; (1875) LR 10 CP 609; (1874) LR 10 CP 58 3.36, 3.44, 3.45,10.28,19.60 Anderson v Pacific Fire & Marine Insurance Co (1872) LR 7 CP 65 4.10, 4.140 Anderson v Royal Exchange Assurance Co (1805) 7 East 38 5.40,22.56 Anderson v Thornton (1853) 8 Ex 425 6.06,6.07 Andreas Lemos, The [1983] I All ER 590 . .. .10.76, 14.14, 15.76 Andree v Fletcher (1787) 2 TR 161 3.07 Andros Springs (Owners) v World Beauty (Owners) (The World Beauty) [1970] P 144 .. .. .24.26 Aneeo Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2001] UKHL 51, [2002] I Lloyd's Rep 157; [1998J I Lloyd's Rep 565 2.14, 2.38, 4.55, 4.63, 5.29,5.46,5.49 Angel Bell, The [1979J 2 Lloyd's Rep 491 20.01, 20.19 Angel v Merchants' Marine Insurance Co [1903] 1 KB 811 21.74 Anghelatos v Northern Assurance Co Ltd (The Olympia) (1924) 19 LlLRcp 255 15.22, 15.23,15.24 5.03 Anglo-African Merchants Ltd v Bayley [l970J I QB 3ll Anita, The [1971] I WLR 882; [1970] 2 Lloyd's Rep 365 7.04,13.61, 13.71, 13.74, 13.75,13.83,21.47,21,49, 21.103, 22.57 Annefield, The [1971] P 168 8.61 Annen v Woodman (1810) 3 Taunt 299 6.02, 6.04,17.32,18.19,19.24 Anning v Anning (1907) 4 CLR 1049 20.28 Anonima Petroli Italiana SpA v Marlucidez Armadora SA (The FHiatra Legacy) [1991] 2 Lloyd's Rep 337 15.18 Ansoleaga Y Cia v Indemnity Mutual Marine Insurance Co Ltd (The Leonita) (1922) 13 LlLRep 231 15.23, 15.24 Anstey v Ocean Marine Insurance Co Ltd (1913) 19 Com Cas 8 23.29 Antaios, The [1981] 2 Lloyd's Rep 284 6.41 Antaios, The [1985] AC 191 8.26 Antaros Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985]AC 191 8.26 Aqua Design & Play International Ltd v Kier Regional Ltd (2002) EWCKCiv 797, [2003] BLR III , 8.09

Table ofCases
Aquarius Financial Enterprises Inc v Certain Underwriters at Lloyd's (The Delphine) [2001] 2 Lloyd's Rep 542 7.48,7.56,15.23 Arab Bank pic v Zurich Insurance Co [1999] I Lloyd's Rep 262 2.78, 2.95, 4.185, 4.188,22.98 Arawa, The [1980] 2 Lloyd's Rep 135; [1977] 2 Lloyd's Rep 416 14.04, 14.ll Arburhnott v Fagan [1996J Lloyd's Rep IR 135 8.ll, 8.44 Arcangelo v Thompson (1811) 2 Camp 626 9.20 Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] I QB 374 3.71 Ardgantock, The [1921] 2AC 141 13.11 , 15.35 Argentino, The (1889) 14 App Cas 519 Aries Tanker Corp v Total T;ansport Ltd [1977J I WLR 185 20.25 Arkwright v Newbold (188 I) 17 ChD 20 I .4.53 Armar, The [1954] 2 Lloyd's Rep 95 23.23 Arnus, The (1924) 19 LlLRep 186 15.22,15.24 Arrow Shipping Co Ltd v Tyne Improvement Commissioners (The CryStal) [1894) AC 508 22.47 Arthur Average Association for British, Foreign and Colonial Ships, Re (1875) LR 10 Cb App 542 1.23 Arthur Barnett Ltd v National Insurance Co of New Zealand Ltd [1965] NZLR874 25.16,25.51 Asfarv Blundell [1896] I QB 123 .4.101, 21.39, 21,93 Ashville Investments Ltd v Elmer Contractors Ltd [1989] QB 488 8.62 Aspden v Seddon (1874) LR 10 Ch App 394 8.62 Assicurazioni Generali di Trieste v Empress Assurance Corp Ltd [1907J 2 KB 184 25.07, 25.37,25.73 Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642, [2003] Lloyd's Rep IR 131 2.25, 4.45, 4.50, 4.52, 4.55, 4.56, 4.64 Assicurazioni Generali SpA v Ege Sigorta AS [2002] Lloyd's Rep IR 480 8.70 Assievedo v Cambridge (1712) 10 Mod 77 3.06 Associated Japanese Bank International Ltd v Credit du Nord SA [1989] 1 WLR 255 .4.18 Associated Oil Carriers Ltd v Union Insurance Society of Canton Ltd [1917J 2 KB 184 4.24, 21,93,21,96,21,97 Astrovlanis Compania Naviera SA v Lina (The Gold Sky) [1972] 2 Lloyd's Rep 187 .... 15.20, 15.21,15.25,24.14 Athel Line Ltd v Liverpool & London War Risks Insurance Association Ltd (The Atheltemplar) [1946] KB 117 13.11 Atheitemplar, The [1946] KB 117 13.11 Athens Maritime Enterprises Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Andreas Lemos) [1983] I All ER 590 10.76, 14.14, 15.76 Atlantic Lines & Navigation Co Inc v Hallam Ltd (The Lucy) [1983J 1 Lloyd's Rep 188 .4.04,4.51 9.58, 11,59, 15.40, 15.41 Aclantic Maritime Co Inc v Gibbon [1954] I QB 88 Atlantic Mutual Insurance Co v King [1919] I KB 309 13.39 Attorney-General v Ard Coasters Ltd (The Ardgantock) [1921] 2 AC 141 13.11 Atrorney-General v De Keyser's Royal Hotel [1920] AC 508 13.65 13.56 Attorney-General's Reference (No I of 1992) [1993J I WLR 274 Atrwood v Small (1838) 6 Cl & F 232 .4.41, 4.64 Atry v Lindo (1805) I Bos & Pul (NR) 236 17.39 AubertvGray(l862)3B&SI69 3.78 Austin v Drewe (1816) 6 Taunt 436 10.62 Austin v Zurich General Accident & Liability Insurance Co Ltd (1944) 77 LlLRep 409 26.16 Australasian Insurance Co v Jackson (1875) 33 LTNS 286 3.71, 1l.54 Australian Agricultural Co v Saunders (1875) LR 10 CP 668 18.68, 18.85 Avon Insurance pIc v Swire Fraser Ltd [2000] Lloyd's Rep IR 535 .4.49

xxxii

xxxiii

Table ofCases
Avondale Blouse Co Ltd v Williamson (1948) 81 L1LRep 492 """""",,,,,,,,,,,,5.56 Axa General Insurance Ltd v Gottleb [2005] EWCA Civ 112, [2005J Lloyd's Rep IR369 ",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, ,22.102 Axel Johnson Petroleum AB v MG Mineral Group AG [1992] 1 WLR 270 """""",6,27 Ayrey v British Legal & United Provident Assurance Co Ltd [1918] 1 KB 136 .4.165 Bah Lias Tobacco & Rubber Estates v Volga Insurance Co (1920) 3 LlLRep 155 18.26 Bahamas International Trust Co Ltd v Threadgold [1974] I WLR 1514 , , , , , " , , , , , , , , ,8,59 Bain v Cove (1829) 3 Cat & P 496 , , " , , ", , , , , , , , , " , , , , , , " " , , , , , , , , , , , ", , , 18,39 Bainbridge v Neilson (1808) 10 East 329 ' , , , " , , , , " , , , , " " , , , , , , , , , " " , , , , , ,2LlOO Baines v Holland (1855) 10 Exch 802 "",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 18,74 Baker v Adam (1910) 15 Com Cas 227 """"",,,,,,,,,,,,,,,,,,,,,,,, ,20,19,20,26 Balfour v Beaumont [1982J 2 Lloyd's Rep 493"",,,,,,,,,,,,,,,,,,,,,,,,,, ,2,66,17.47 Ballantyne v Mackinnon [1896J 2 QB 457 """",,,,,,,,, .. ,,,,,,,,,,,,,,,,,,,19.48 Bamburi, The [1982J 1 Lloyd's Rep 312 .", ,9.46, 13,50, 21.53, 21.61, 21,64, 21.70, 2Ll02 Bamcell II, The (1984) 150 DLR (3d) 7; (1982) 133 DLR 727 """,,10,14,18,107,18,109 Bank of America National Trust & Savings Association v Christmas (The Kyriaki) [1993] 1 Lloyd's Rep 137 " " " " " " ' ' ' " " . " " " " , , , , ' ' ' ' ' ' ' ' ' ' ,22,66, 22.70, 23,39 Bank of Athens v Royal Exchange Assurance (The Eftychia) (1937) 59 L1LRep 67; (1937) 57 L1LRep 37 """""",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 15,23, 15.24 Bank ofAustralasia v Palmer [1897J AC 540 """"""",,,,,,,,,,,,.,,,,,,,,,,,8,74 Bank of Boston Connecticut v European Grain & Shipping Ltd (The Dominique) [1989] AC 1056 " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " ,4,17 Bank afCredit & Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 ",,,.,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, , , 8,03, 8,37 Bank of England v Vagliano Btos [1891J AC 107 """, .. """"""""",,,,,,, 1,49 Bank Leumi Le Israel BM v British National Insurance Co Ltd [1998] 1 Lloyd's Rep 71 .. .4.63 Bank Line Ltd v Arthur Capel & Co [1919] AC 435 """"",,,,,,,,,,,,,,,,,,,,22.09 Bank of New South Wales v South British Insutance Co (1920) 4 L1LRep 266 ' , ", , , , , , 20,23 Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) [1990J 1 QB 818 """" ,4,203,18,55,18.56,18.57,18,58,18,94,20,12 Banke" Insurance Co Ltd v South [2003] EWHC 380 (QB); [2004] Lloyd's Rep IR 1 ,. ,22,23 Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990J I QB 665" ,4,14,4,152, 4,160,4,174,4,176,4,182,4,196,5,44,20,22 Banque Moneteca & Carystuiaki v Motor Union Insurance Co Ltd [1909J 1 KB 785 .... 10.74 Banque Sabbag SAL v Hope [1972] 1 Lloyd's Rep 253 " , , , , , ", , , , , , , , , , , , , , , , , "" 8,85 Bara Bi, The (1923) 16 LlLRep 45 """,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,15,23,15.24 Barbel' v Fleming (1869) LR 5 QB 59 " , , , , , , , , , " , , , , , , , , , , , , , , , , , , , , , , . ,,3.52, 17.39 BatbervFletcher(I779) 1 Dougl305 """"""".""""""""",,,,,,,,, ,4,62 Barclay Holdings (Australia) Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514 "",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 4,31 Barclay v Stirling (1816) 5 M & S 6 " , , " , , , , , " , " " , , , , , , , , , , , , , , , , " , , , , , , , ,17.45 Bating v Christie (1804) 5 East 398 " " " " " " " " . " " " " " " " " " " " " , , , 18,64 Baring v Claggett (1802) 3 Bos & Pltl201 ,,, " , , ." , , , , " , , , , , , , " , , , , , , , " , , , , , 18,64 Barker v Blakes (1808) 9 East 283 , , , " , , , "", , , " , , , , , , " , , , , , , " " , , , , , " , , , , 22,56 Barker v Janson (1868) LR 3 CP 303 ",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, ,7,28, 7.39 Barlee Marine Corp v Mountain (The Leegas) [1987J 1 Lloyd's Rep 471 , , , , , "., , , 2.50,2,59 Barnett's Trusts, Re [1902] 1 Ch 847 """",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,13.58 Barraclough v Brown [1897] AC 615; (1895) 1 Com Cas 329; (1895) 1 Com Cas 262" .22.48 Barrett Bros (Taxis) Ltd v Davies [1966J 1 WLR 1335 " " " " " " " " " " " " " " ,20.58 Barrlett & Parrne" Ltd v Meller [1961] 1 Lloyd's Rep 487 " " " " " " " " " " " " " ,8,54 Bartlett v Pentland (1830) lOB &Cr760 "",,,,,,,,,,,,,,,,.,,,,,,,,,,, "", , 22,1l7 Batton v Armstrong [1976J AC 104 ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,:,,,,,,,,,,,,, ,4.47 Baston & Firminger Ltd v Nasima Enterprises (Nigeria) Ltd [1996J"CLC 1902 ." .... ".5.13
XXXIV

Table ofCases
Batard v Hawes (1853) 2 El & Bl 287 ",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,,,,,,,,26,61 Bates v Hewitt (1867) LR 2 QB 595 , , " , , " , " , " , , ", , " , , " , , ", . " , ", , ,4,95, 4,97 Battley v Faulkner(1820) 3 B & AId 288 , , , " , " , , , , , , " , , " , , , , , , , , , ." , , " , " , 22,62 Baxendale v Fane (The Lapwing) [1940J P 112 ' " ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' 10.14,10,25,11.39 Baxendale v Harvey (1859) 4 H & N 445 """""""".""",.".""""",18,29 Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd (2002J EWCA Civ 1605, [2003J 1 Lloyd's Rep 131; [2002J EWHC 21 (Comm), [2002J 1 Lloyd's Rep 652""""""",."",,13.47,13.58,17,14,17,16, 17.19,21.25,21.65,24,08 Bean v Stuparr (1778) 1 Douglll ",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,18.54 Beatson v Haworth (1796) 6 TR 531 """"",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,18,36 Beattie v Lord Ebuty (1872) LR 7 ChApp 777""""",,,,,,,,,,,,,,,,,,,,,,,, ,4,133 Becker, Gray & Co v London Insmance COtp [1918J AC 101 ,,,,,,,,,,,,,9.04,9,53, 13.50 Beckett v West of England Insurance Co Ltd (1872) 25 LTNS 739 """.""", 1.54, 17,45 Bedouin, The [1894J PI"""""""",,,,,,,,,,,,,,,,,,,,,,,,, ,4,148, 4,150, 9,58 Beley v Pennsylvania Mutual Life Insurance Co 95 A 2d 202 (1953) ..... , . , ,. , " .... . 13.23 Bell v Bell (1810) 2 Camp 475 """"""",,,,,,,,,,,,,,,.,,,,,,,,,,,,,.,,,,17,34 Bell v Ca"tairs (1810) 2 Camp 543 ""',.",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 4,62 Bell v Nixon (1816) Holt 423 '''''''''',,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, ,21.38 Bell v Tinmoutb (1988) 53 DLR (4th) 731 " " " " " " " " " " " " " " " " " " " ,5.31 Belle ofPorrugal, The [1970J 2 Lloyd's Rep 386 " " " " " " " " , .. """",10,65,11.40 Bennett Steamship Co v Hull Mutual Steamship Protecting Society [1914J 3 KB 57 ... , . 12.16 Bennett v Axa Insurance pic [2003J EWHC 86 (Comm), [2004J Lloyd's Rep IR 615 ",,18,72 Bensaude v Thames & Metsey Marine Lloyd's Rep [1897) AC 609 "",,,,,,,. 15.31, 15.39, 15.40, 18,65 Benson v Chapman (1849) 2 HLC 696 """"""."".""",." ,21.84, 22,61, 23,14 Beresford v Royal Insurance Co Ltd [1938J AC 586 """'" ,3,73, 3,74,15,05,15,07,15,09 Berger & Light Diffuse" Pty Ltd v Pollock [1973J 2 Lloyd's Rep 442 """,2.43,4.42,21.39 Berk (FW) & Co Ltd v Style [1956] 1 QB 180 "'"""""""",,,,, 7.54, 15.55,24,27 Bermon v Woodbridge (1781) 2 Dougl781 " " ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ,5,04, 19,23 Berns & Koppstein Inc v Orion Insurance Co Lrd [1960] 1 Uoyd's Rep 276 ... " ... ,.,18.76 Berridge v Man on Insurance Co Ltd (1887) 18 QBD 346 , , , , , , , , , , , , , , , , , , , , , , , , , , ,3,17 Beutsgracht, The [2001] EWCA Civ 2051, [2002J 1 Lloyd's Rep 574 """,2,31,2,32,2.33, 2.35,2,36,2.39,6,17,22,22 Beu"gracht, The (No 2) [2001] 2 Lloyd's Rep 608 """", .. """""."", ,2,31, 2.35 BICC pic v Burndy Corp [1985J Ch 232 , , , , , , ", , , , , , " " , , " , , " , " , , " , , " , ,,20,25 Biccard v Shepherd (1861) 14 Moo PC 471 """""",,,,,,,,,,,,,,,,,,,,,,,,,,19,61 Bigl Estate v Alberta (1989) 60 DLR (4tb) 438 "'''""""""""""",,,,,,, ,25.52 Bird v Appleton (1800) 8 TR 562 ", , " , , , " , , " , , , , , , , " , , " , , , " , " , " , , , " ",3,77 Bitd's Cigatette Manufacturing v Rouse (1924) 19 LlLRep 301 ,,,,,,,,,,,,,,,, ,7,53, 15.58 Birmingham & District Land Co v London & North-Western Railway Co (1886) 34 ChD 261 " , " , " , , " " , , " , " , , , " , , " " , " " " , , , " , , " , " , , , " , ,,22,64 Birrell v Dyer (1884) 9 App Cas 345 " , , , , , , , " , , , " " " , , , " , , , , , , .8.56, 18.30, 18,109 Bishop v Pentland (1827) 7 B & Cr 219 ",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,11.31 Bissett v Wilkinson [1927J AC 177 ' , " , , , , , , , , " , , , , , , , , , , , , " , , , " , , , , , ,4,133, 4,134 Blaauwpotv Da Costa (1758) 1 Ed 130 """'''"""""".""",,,,, ,,25.75, 25.76 Black King Shipping Corp v Massie (The Lirsion Pride) [1985] 1 Lloyd's Rep 437 ., , , , ,4,123, 4,200,4,203,6.41,18,120,20.22,22,35,22.52,22,88,22,1l3 Blackburn, Low & Co v Haslam (1888) 21 QBD 144 """"""""""" ,4,121, 4,125 Blackburn, Low & Co v Vigo" (1887) LR 12 App Cas 531 , " , , . " , , , , ,4,116, 4,1l9, 4,121, 4,122,4,175 Blackburn Rove" Football & Athletic Club pic v Avon Insurance pic [2004] EWHC 2625 (Comm), [2005] Lloyd's Rep IR 239 """"",,,,,,,,,,,,,,,,,,,,,,,,,8,26 Blackburn v Liverpool, Brazil & River Plate Steam Navigation Co (1902] 1 KB 290 ' .. , .10.14 Blackett v Royal Exchange Arsurance Co (1832) 2 Cr & J 244 , , ", , , , " , , , , " , , . " , ,,8.53

xxxv

Table ofCases
Blackhurst v Cockell (1789) 3 TR 360 18.76,18.90 Blackpool & Fylde AetO Club Ltd v Blackpool Botough Council [1990J 1 WLR 1195 2.43 Blane Steamships Ltd v Minister of Transport [1951] 2 KB 965 22.48 Blascheck v Bussell (1916) 33 TLR 74 7.34 Boag v Economic1nsutance Co Ltd [1954] 2 Lloyd's Rep 581 26.06 Boaed ofTtade v Hain Steamship Co [1929] AC 534 9.29, 13.11, 13.42 BOC GtOUP pIc v Cemeon IIc [1999] 1 All ER (Comm) 970 8.03 Boggan v MOtOt Union Insutance Co Ltd (1923) 16 LlLRep 64 14.17 Boiler Inspection & Insurance Co of Canada v Sherwin-Williams Co of Canada [1951] AC 319 '" '" " 10.68 Bolam v Priem Barnet Hospital Management Committee [1957] 1 WLR 582 5.20 Bolitho v City & Hackney Health Authority [1998] AC 232 5.21 Bombay & Persia Steam Navigation Co v Shipping Comroller(1921) 7 LlLRep 226 " 13.64 Bond Air Services Ltd v Hill [1955J 2 QB 417 7.58 Bondrerr v Hemigg (1816) 1 Holt 149 _ 9.37,21.49 Bonner v Cox Dedicated Corporate Member Ltd [2005J EWCA Civ 1512; [2004] EWHC 2963 (Comm); [2005] Lloyd's Rep lR 569 2.07, 2.21, 2.67, 4.201,15.69 Boon & Cheah Steel Pipes Sdn Bhd v Asia Insurance Co Ltd [1975] 1 Lloyd's Rep 452 21.52 Booth v Gair (1863) 15 CB(NS) 291 24.27 Bosma v Larsen [1966J 1 Lloyd's Rep 22 22.71 Boston Fruit Co v British & Foreign Marine Insurance Co [1906] AC 336 2.83 Bosworth (No 3), The [1962) 1 Lloyd's Rep 483 24.69 BottOmley v Bovill (1826) 5 B & C 210 , 11.54, 18.31 Bouillon v Lupton (1863) 15 CB(NS) 113, (1863) 33 LJCP 37 18.43,19.25,19.26,19.27 BoultOn v Houlder Bros & Co [1904] 1 KB 784 1.59, 1.60,4.200 Bousfield v Bames (1815) 4 Camp 228 26.20, 26.22, 26.24, 26.27 Bavis Construction Ltd v Commercial Union Assurance Co pIc [2001] Lloyd's Rep lR 321 26.04, 26.38, 26.58 Bovis Lend Lease Ltd v Saillatd Fuller & Parmers [2001] 77 Con LR 134 26.38 Bowden v Vaughan (1809) 10 East 415 4.134 Bowring (CT) & Co Ltd v Amsterdam London Insurance Co (1930) 36 LlLRep 309 15.57 Boyd v Dnbois (1811) 3 Camp 133 '10.80 BP Exploration Operating Co Ltd v Kvaemer Oilfield Producrs Ltd [2004] EWHC 999 (Comm), [2005] 1 Lloyd's Rep 307 8.07 BP pIc v GE Frankona Reinsurance Ltd [2003] EWHC 344 (Comm), [2003] 1 Lioyd's Rep 537 2.32, 2.39, 2.40, 2.41, 2.42 Braconbush, The (1945) 78 LlLRep 70 , 7.52 Bradbourn v Great Western Railway (1874) LR 10 Ex 1 25.01 Bradford v Levy (1825) Ry & Mood 331 11.54 Bradford v Symondson (1881) 7 QBD 456 6.05 Bradley (FC) & Sons Ltd v Federal Steam Navigation Co (1926) 24 LlLRep 446 19.18 Bradley, Re [1912] 1 KB 415 22.15 Bradley v Eagle StarInsurance Co Ltd [1989] AC 957 20.33,20.50,20.53,21.14 Bragg v Anderson (1812) 4 Taunt 229 17.08 Brandeis, Goldschmidt & Co v Economic Insurance Co Ltd (1922) 11 LlLRep 42 24.48 Brandon v Curling (1803) 4 East 410 3.80 Brentwood, The [1975] 2 SCR 477 11.68, 11.71 Brine v Featherstone (1813) 4 Taunt 869 , 4.62 Bristol & West Building Sociery v May, May & Merrimans (No 2) [1998] 1 WLR 336 25.02 Btitain Steamship Co Ltd v R (The Petersham) [1921] 1 AC 99; [1919] 2 KB 670 '" 13.06, 13.08, 13.40 British & Foreigh Steamship Co Ltd v R (The St Oswald) [1918] 2 KB 879 13.10 British & Foreign Insurance Co Ltd v Wilson Shipping Co Ltd [1921] 1 AC 188 21.116, 21.118
XXXVI

Table ofCases
C650 . British & Foreign Marine Insu~~~~~

Britis~': Foreign Marine Insurance Co Ltd v Sanday & Co [1916]

C.. 'G'
ov

aunt

'['19'.. ']" .. " 21 lAC41

1.49, 21.54, 21.97 4.92,7.54,7.59,

British Sugarplc v NEI Power Projects Ltd (1997) 87 BLR 42' 10.78, 10.79, 15.06,24.20 Bnnsh-Amencan Tobacco Ltd v HG Poland (1921) 7 LiLRe i 8.60 . P 08 18.39 Broad & Montague Lrd v South E. 6.06 Broadmayne, The [1916] P 64 . ast Lancashtre Insurance Co Ltd (1931) 40 LILRep 328 Brocklebank v Sugrue (1831) 1 'R,;b 13.64 :: :: '" 21.91 Brooking v Maudsley (1888) 38 ChD 636 Brooks v MacDonnell (1835) 1 Y&CEx .. .. .. .. 4.10 Broom v Batchelor (1856) 1 H & N 255 .500 2 1.111 8.32 Brothersron v Barber(1816) 5 M & S 418

!vi &

'l'oi

Brotherton v Aseguradora Cols~~;o~SA(N~ 3)[i(;O;iEwti~'lir(~85, 4.86, 4.156, 4.169 Lloyd's Rep IR 762 1 omm), [2003] 4.63,4.81,4.89,4.92 Brough v Whitmore (1791) 4 TR 206 Brown Bros v Fleming (1902) 7 Com C~~ '2;' .. : " .. '" ." " .. 7.02 21.07 Brown v Howard (1820) 2 Brod & B 73 5 Brown v Raphael [1958] Ch 636 . . 22.62 Brown v Tayleur (1835) 4 A & E 24'1'" '" . '" " .. " 4.134, 4.138 Brown v Vigne (1810) 12 East 283 17.08 Brownlie v Campbell (1880) 5 A 17.35 pp .. .. .. .. .. . 4182 0 . BrownSVI'11 e Hid'mgs Lt d v Adam' I 925.. C Rep 458 " Jee nsurance 0 Ltd (The Milasan) [2000] 2 Lloyd's Bruce v Jones (1863) 1 H & C 769 .. .. .. .. .. .. .7.55,15.18,15.22 Brutus v Cozens [1973] AC 854. 26.24,26.25,26.26,26.27

Brotherton v Aseguradora COlseguros SA (No 2) [2003]' EWCAC: ;21.101 Rep 1R 746 .. .. .. ... . . IV 705, [2003] Lloyd s

C;;

Bryant & May Ltd v London Assu;a~c~'C~;. (i886)i 8.59 Buckeye State, The (1941) 39 F Su 344 P 10.81 '(994) .; 9' 10.60 Bucks Priming Press Ltd v Prudent!J Assur~~;~ Bldchow Vaughan & Co v Compania Minera (1916) 32 TLR 40 22.79 Bunge Seroja, The [1998] HCA 65, [1999] 1 Llo d's Re 12 4 13.52 Burges v Wickham (1863) 3 B & S 669 Y P5 10.07 Burke v LFOT Pry Ltd [2002] HCA 17 19.18,19.19 Burmah Oil Co Ltd v Lord Advocate [196'5'] 'AC 26.33 Burnand v Rodocanachi Sons & Co (1882) 7 A C .. .. .. .. .13.65,13.66 Burston Finance v Speirway Lrd [1974] 1 WLlf64;s 333 25.38,25.40 Burron v English (1883) 12 QBD 218 6.34 Business Computers Ltd v Anglo Af' .. 1.01, 24.45 20.25 Busk v Royal Exchange Assuranc: C~(~~ 1;)s~,,: ~O~~77] 1 WLR 578 Burler v Wildman (1820) 3 B & Ald 398 '" 73 10.63, 10.65, 11.31 Burlin's Sertlement, Re [1976) Ch 251 7.23,10.70,10.72,13.57 ........................................... 8.77

TLR59i

"..

'6;

Re' LR2 i

75'

L:

.. .. ..

1890 Y s ep 553 . Calico Printers As~o~iation v Bardays 'B~k i.'td(1'930)' 'c~~ 25.02,25,03 Callaghan v Domlmon Insurance Co Ltd [1997] 2 LIo d's Re 54~ 71 . 5.11 Y P ." 22.66,22.70 Callaghan v Thompson [2000] Lloyd's Re IR 474 Callender v Oelrichs (1838) 5 Bin (NG) p 4.164 Cambridge v Anderron (1824) & C 6~~ 5.29

Cale~o~;~ ~?r~ Sea Ltd v British Telecommunications ~l~ i200i) UKHL 4:

Cadogianis v Guardian Assurance CO [1921J 2 AC 125

36

c' .,,., .".. '..

[2ooij.....

211

Canada Rice Mills Ltd v Union Marine & Ge~~~~'I~~~~~~~~ C~ L~d '['194'1']' . , , .. , '. , .. 21.38 AC 55............ 956 ............................... ,10.10,10.14,10.44,10.45

xxxvii

Table ofCases
Canada Steamship Lines Ltd v The King [1952J AC 192 Canadian Imperial Bank of Commerce v Insurance Corp of Ireland Ltd (1991) 75 DLR (4th) 482 Canadian Transport Co Ltd v Court Line Ltd [1940J AC 934 Candler v London & Lancashire Guarantee & Accident Co of Canada (1963) 40 DLR (2d) 408 Cane v Moye (1658) 2 Sid 121 Canterbury GolfInternational Ltd v Yoshimoto [2002] UKPC 40 , Cantiere Meccanico Brindisino v Janson [1912] 3 KB 452 Caparo Industries pic v Dickman [1990] 2 AC 605 Cape plc v Iron Trades Employers Insurance Association Ltd (1999) [2004] Lloyd's Rep
m~...........

Table ofCases
4.110 20.01 25.25 15.12 1.37 8.40 4.107 5.45

8n

Capital Coastal Shipping Corp v Hartford Fire Insurance Co (The Cristie) [1975] 2 Lloyd's Rep 100 10.06, !l.40, 19.46, 19.54 Capital Finance Co Ltd v Stokes [1969] I Ch 261 6.34 Capricorn, The [1995] I Lloyd's Rep 622 3.35, 355 Captain Panagos DP, The [1985J 1 Lloyd's Rep 625 1.57, 7.33, 7.34, 23.07, 23.08, 23.09 Captain Panagos Dp, The (No 2) [1989] 1 Lloyd's Rep 33; [1986] 2 Lloyd's Rep 470 ... 10.65, 11.62,11.64,11.73,15.18,15.19 Car & Universal Finance Co Ltd v Caldwell [1965] I QB 525 4.04 Carihhean Sea, The [1980] 1 Lloyd's Rep 338 11.08, 11.13, 11.24 Carius v New York Life Insurance Co 124 F Supp 388 (1954) 13.23 Carras v London & Scottish Assurance Corp Ltd [1936J I KB 291 21.91, 21.93 Cattery Boehm (1766) 3 Burr 1905 .4.05, 4.10, 4.13, 4.89, 4.92, 4.153, 4.178 Cartwright v MacCotmack [1962] 2 Lloyd's Rep 328 , 17.47 Carvill America Inc v Camperdown UK Ltd [2005] EWCA Ciy 645, [2005J 2 Lloyd's
~m................5~6~

Century Insurance Co of Canada v Case Existological Laboratories Ltd (The BamcelllI) (1984) 150 DLR (3d) 7; (1982) 133 DLR 727 10.14,18.107,18.109 Cepheus Shipping Corp v Guardian Royal Exchange Assurance plc (The Capricorn) [1995] 1 Lloyd's Rep 622 3.35, 3.55 Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65 22.65 Chandris v Isbrandtsen-Moller Co Inc [1951J 1 KB 240 '" 8.Q3, 8.17 Chapman GA) & Co Ltd v Kadirga DenizciIik ve Ticare' [1998] Lloyd's Rep IR 377 6.02, 6.04,6.22,6.30,6.33,6.35,6.36 Chapman v Walton (1833) 10 Bing 57 '" 5.20 Charente Steamship v Director of Transports (1921) 9 LlLRep 355 , .. , .. ", .. ,.,,13.10 Charles Brown & Co Ltd v Nitrate Producers' Steamship Co Ltd (1937) 58 LlLRep 188 .. 11.13 Charlton v Fisher [2001] EWCA Civ 112, [2002] QB 578 15.05, 15.09 Charman v New Cap Reinsurance Corporation Ltd [2003J EWCA Civ 1372, (2004J Lloyd's Rep IR373 6.30 Charter Reinsurance Co Ltd v Fagan [1997] AC 313 8.05,8.07,8.10,8.16,8.24,20.62 Chatenay v Brazilian Submarine Telegraph Co [1891] 1 QB 79 859 Cheng v Governor of Pentonville Prison [1973] AC 931 . '" 14.28 Cheshire(Thomas) & Co v Vaughan Bros [1920] 3 KB 240 3.11 China Traders' Insurance Co Ltd v Royal Exchange Assurance Corp (1898J 2 QB 187 ,.,,1.59,
1.60,4.200 China Transpacific Steamship Co v Commercial Union Assurance Co (1881) 8 QBD 142 1.59 Chitty v Selwyn (1742) 2 Ark 359 18.20 Christensen v Sterling Insurance Co 284 P 2d 287, 22 ILR 893 ' , .. , , 13,23 Christie v Secretan (1799) 8 TR 192 . 19.22 Christin v Ditchell (1797) Peake Add Cas 141 18.89 Ciampa v British India Steam Navigation Co Ltd (1915J 2 KB 774", .. , .. , "., .. 19.13 Citadel Insurance Co v Adantic Union Insllrance Co SA [1982] 2 Lloyd's Rep 543 "', .. 2.21, 2.41,2.42 Clan Line Steamers Ltd v Board of Trade (The Clan Matheson) [1929] AC 514 .... 9.05, 13.15 Clan Line Steamers Ltd v Liverpool & London War Risks Insurance Association Ltd [1943] KB 209 13.10 Clan Matheson, The [1929J AC 514.............................. . 9.05,13.15 Clapham v Cologan (1813) 3 Camp 382 .. 18.64 Clapham v Langton (1864) 34 LJQB 46 19.19 Clarke v Dumaven (Earl of) (The Satanita) [1897] AC 59 2.67 Clay v Harrison (1829) 10B&C99 3.12 Clilford v Hunter (1827) Moo & M 103 19.09 Clough v London & North Western Railway Co (1871) LR 7 Ex 26 4.04,4.20,4.167 Clyde Marine Insurance Co, Re (1924) 17 LlLRep 287 3.68 Co~operative Retail Services Ltd v Taylor Young Partnership Ltd [2001J Lloyd's Rep IR 122 25.33,25.34,25.35, 26,54 Coast Ferries Ltd v Century Insurance Co of Canada (The Brentwood) [1975] 2 SCR 477 11.68, 11.71 Coates v Modern Methods & Materials [1982] ICR 763 14.09 Cobb & Jenkins v Volga Insurance Co Ltd of Petrograd (1920) 4 LlLRep 130 751 Cobequid Marine Insurance Co v Baneaux (1875) LR 6 PC 319 .. , ' , .. , , .. " .21.42 Coca~Cola Financial Corp v Finsat International Ltd [1998J QB 43 , " .. ,., .. 6.40 Cock, Russell & Co v Bray, Gibb & Co Ltd (1920) 3 LlLRep 71 5.36 Cockey v Atkinson (1819) 2 B & AId 460 17.08, 17.48 Cockrane v Fisher (1835) I Cr M & R 809; (1834) 2 Cr & M 581 , 18.87 Cohen (George), Sons & Co v Standard Marine Insurance Co Ltd (1925) 21 LlLRep 30 , 21.69 Cohen, Sons & Co v National Benefit Assurance Co Ltd (1924) 40 TLR 347 '" .10.14, 1950

Case v Davidson (1820) 2 Brod & B 379; (1816) 5 M & S 79 , 22.38 Cassel v Lancashire & Yorkshire Accident Insurance Co Ltd (1885) 1 TLR 495 , ' ,22.14 Casson v Osrley Ltd [2001J EWCA Civ 1013, [2003J BLR 147 8.05 Castellain v Preston (1883) 11 QBD 380 357,25.05,25.06,25.07,25.10,25.39, 25.40,25.65 Castelli v Boddington (1852) 1 El & Bl66 6.27 Castle Insurance Co Ltd v Hong Kong Islands Shipping Co Ltd (The Potoi Chau) [1983] 2 Lloyd's Rep 376 22.66,24.45 Catariba, The [1997] 2 Lloyd's Rep 749 21.111,21.1 14,23.21,23.23 Cates (Captain JA) Tug & Wharfage Co Ltd v Franklin Insurance Co [1927] AC 698 21.48,21.69,21.106,22:59 Catherine Chalmers, The (1874) 32 LT 847 , 10.44 Cator v Western Insurance Co of New York (1873) LR 8 CP 552 21.05 Cawley v National Employers' Accident & General Assurance Association Ltd (1885) 1 TLR255 22.14, 22.15 CazaletvStBarbe(1786) 1 TR187 21.107 CCR Fishing v Tomenson (The La Pointe) [1986] 2 Lloyd's Rep 513 2.42, 9.23, 10.14 Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR 1 553,8.21,8.47,9.27 Central Bank of India Ltd v Guardian Assurance Co Ltd (1936) 54 LlLRep 247 22.86 Central Insurance Co Ltd v SeacaifShipping Corp (The Alolos) [1983] 2 Lloyd's Rep 25 " 25.14,25.15 Central Railway of Venezuela v Kirsch (1867) LR 2 HL 99 , 4.64 Centre Reinsurance International Co v Curzon Insurance Ltd [2004] EWHC 200 (Ch), [2004] Lloyd's Rep IR 622 " 20.41, 20.43,20.45,20.46,20.81 Centre Reinsurance International Co v Frea1tley [2005] EWCA Civ 115, [2005] Lloyd's Rep IR 303 20.43, 20.44

XXXV111

XXXIX

Table ofCases
Coker v Bolton [1912] 3 KB 315 Colby v Hunter(1827) M &M 81 Colby v Machell (1827) 3 Car & I' 7 Coleman's Deposiraries Lrd, Re [1907] 2 KB 798 Coles v Sir Frederick Young (Insurers) Ltd (1929) 33 LlLRep 104 Colledge v Harty (1851) 6 Ex 205 Collinge v Heywood (1839) 9 A & E 633 Collingridge v Royal Exchange Assurance (1877) 3 QBD 173 Cologan v London Assurance Co (1816) 5 M & S 447 Cas 128 Colonia VersicherungAG v Amoco Oil Co [1997] I Lloyd's Rep 261 Comber v Anderson (1808) 1 Camp 523 Commercial & Estates Co of Egypt v Ball (1920) 36 TLR 526 Commercial & Estates Co ofEgypt v Board of Trade [1925] 1 KB 271 Commercial Union Assurance Co v Lister (1874) LR 9 Ch ApI' 483 Commercial Union Assurance Co v Niger (1921) 7 LlLRep 239 Commercial Union Assurance Co Ltd v Hayden [1977] QB 804 22.44 .. .18.68 6.05 22.15 5.22 18.109 22.68 25.01 21.101 3.45 24.45,25.06 5.24, 5.40 13.66 l3.66 25.16, 25.18 .4.194 26.49,26.71,26.77, 26.78,26.80,26.81 Constance v Noble (1810) 2 Taunt 403

Table ofCases
17.09

Constitution Insurance Co of Canada v Kosmopoulos (1987) 34 DLR (4th) 208 Container Transport International Inc v Oceanus Mutual Underwriting Association

3.33

Colonial Insurance Co of New Zealand v Adelaide Marine Insurance Co (1886) 12 App

Commercial Trading Co v Hartford Fire Insurance Co [1974] 1 Lloyd's Rep 179 .. 11.44,11.54

Commercial Uoion Assurance Co pIc v Sun Alliance Insurance Group pIc [1992] 1 Lloyd's
~m......................8.W

Commercial Uoion Assurance Co v NRG Victory Reinsurance [1998] 2 Lloyd's

Rep 600 21.14

(Bermuda) Ltd [1984] I Lloyd's Rep 476; [1982) 2 Lloyd's Rep 178 .4.09,4.25, 4.27,4.28,4.31,4.32,4.33,4.34,4.35,4.37,4.38,4.39,4.42, 455, 4.69, 4.101,4.127,4.150,4.176,4.177 Conrinenral Grain Co Ltd v Twitchell (1945) 78 LlLRep 251 958 Continental Illinois National Bank & Trust Co of Chicago v Alliance Assurance Co Ltd (The Captain Panagos Dp) (No 2) [1989) I Lloyd's Rep 33 [1986) 2 Lloyd's Rep470 10.65, 11.62, 11.64, 11.73, 15.18, 15.19 Continental Illinois National Bank & Trust Co of Chicago v Bathurst (The Captain Panagos) [1985) 1 Lloyd's Rep 625 1.57,7.33,7.34, 23.Q7, 23.08, 23.09 12.16 Cook v Dtedging & Construction Co Ltd [1958] 1 Lloyd's Rep 334 5.35 Coolee Ltd v Wing, Heath & Co (1930) 47 TLR 78 Cooper v General Accident Fire & Life Assurance Corp (1923) 128 LT 481 . " 14.17 Copernicus, The [1896J I' 237 17.15 Corcoran v Gurney (1853) 20 LTOS 221 10.81 17.36 Cornfoot v Royal Exchange Assurance Corp [1904] I KB 40 Cornhillinsurance Co Ltd v L & B Assenheim (1937) 58 LlLRep 27 .4.156 Cory & Sons v Butr (1883) 8 ApI' Cas 393 9.29,11.58,11.59,13.45,13.47, 15.Q3 Cotyv Patron (1872) LR 7 QB 304 2.21 Cory v Patron (No 2) (1874) LR 9 QB 577 2.21 Cossman v West (1887) 13 ApI' Cas 160 21.49, 21.93

Costain-Blankevoort (UK) Dredging Co Ltd v The Davenport (The Nassau Bay) [1979]
1 Lloyd's Rep 395 12.03, 1353, 13.84 15.23 22.68 22.33 2.43 25.24

Commission for the New Towns and Cooper (Great Britain) Ltd [1995] Ch 259 Commonwealth Construction Co Ltd v Imperial Oil Ltd (1977) 69 DLR
(3d) 558

8.79
358,25.27 5.31 13.10, 13.11

Coulouras v British General Insurance Co Ltd (The Katina) (No 2) (1922)

LlLRep 220 County & District Properties Ltd v Jenner (C) & Son Ltd [1976) 2 Lloyd's Rep 729 COUrt Line Ltd v R (The Lavington Court) [1945] 2 All ER 357 21.54, Courrney & Fairbairn Ltd v Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297 Cousins (H) & Co Ltd v D & C Catriers Ltd [1971) 2 QB 230

Commonwealth Insurance Co of Vancouver v Groupe Spinks SA (1983] 1 Lloyd's

Rep67

Commonwealth Shipping Representatives v Peninsular & Oriental Branch Service (The

Geelong) [1923J Ac 191 Rep 121 Commonwealth, The [1907] I' 216

Commonwealth Smelting Ltd v Guardian Royal Exchange Assurance Ltd [1986] 2 Lloyd's
8.59, 10.67 25.61, 25.63, 25.64, 25.66, 25.72

Cousins v Nantes (1811) 3 Taunt 513

Coven SpA v Hong Kong Chinese Insurance Co [1999] Lloyd's Rep lR 565

3.07

Compania Columbiana de Seguros v Pacific Navigation Co [1965] 1 QB 101 ,25.15, 25.48 Compania Maritima of Barcelona v Wishart (1918) 23 Com Cas 264 ., 7.52 Compania Maritima San Basilio SA v Oceanus Mutual Underwriting As~ociation
17.03,17.04,19.34, 19.38,19.49 Compania Maritime Astra SA v Archdale (The Armar) [1954] 2 Lloyd's Rep 95 23.23 (Bermuda) Ltd (The Eurysthenes) [1976J 2 Lloyd's Rep 171

Compania Naviera Martiartu v Royal Exchange Assurance Corp [1923] 1 KB 650 Campania Naviera Martiartu v Royal Exchange Assurance Corp (The Arnus) (1924) 19
LlLRep 186 [1960] 2 Lloyd's Rep 469

7.50,

10.30, 11.47, 11.60 .15.22, 15.24 15.20 15.18,15.21, 15.24, 19.33

21.08, 21.09, 2UO, 21.20 Covington v Roberts (1806) 2 B & pNR 378 1057 Cox v Bankside Members Agency Ltd [1995) 2 Lloyd's Rep 437 4.201,20.42,20.66,20.67, 20.73,22.14,22.76 Coxe v Employers' Liability Assurance Corp Ltd [1916] 2 KB 629 9.60,9.65 Coxwold, The [1942] AC 691 8.09,9.04,9.06,9.34,9.45, 13.11, 13.12, 13.16, 13.17 12.16 Craighall, The [1910] I' 187 Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd's Rep 275 5.24 Crew, Widgety & Co v Great Western SS Co Ltd [1887J WN 161 13.75 Crippen, Re [1911) I' 108 3.74 Cristie, The [1975] 2 Lloyd's Rep 100 10.06, 11.10, 19.46, 19.54

Compania Naviera Santi SA v Indemnity Mutual Assurance Co Ltd (The Tropaioforos) Compania Naviera Vascongada v British & Foreign Marine Insurance Co Ltd (The Gloria)
(1936) 54 LlLRep 35

Crocker v General Insurance Co Ltd of Trieste (1897) 3 Com Cas 22

Crocker v Srurge [1897) 1 QB 330 Crooks v Allan (1879) 5 QBD 38 Crowley v Cohen (1832) 3 B & Ad 478 Crown of Leon (Owners) v Admiralty Commissioners [1921] 1 KB 595

17.37
17.37 24.45 3.69 13.64

Company of African Merchants Ltd v British & Foreign Marine Insurance Co Ltd (1873) LR 8 Ex 154 18.27, 18.39 Comunidad Naviera Baracaldo v Norwich Union Fire Insurance Society (The Bara Bi)
(1923) 16 LlLRep 45 15.23,15.24

Crows Transport Ltd v Phoenix Assurance Co Ltd [1965) 1 WLR 383

17.11
17.10 22.47 1857

Confederation Life Insurance Co v Causton (1989) 60 DLR (4th) 372

Conohan v Coopetators 2002 FCA 60,2004 AMC 1661

':'
,

25.52
12.13

Cruikshank v Janson (1810) 2 Taunr 301 Ctystal, The [1894] AC 508 CTN Cash & Carry Ltd v General Accident Fire & Life Assurance Corp pte [1989] 1 Lloyd's Rep 299

x)

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Table ofCases
Cullen v Butler (1816) 5 M & S 461 10.15, 25.01 Cunard v Hyde (No 1) (1859) 29 LJKB 6 3.76 Cunard Steamship Co Lrd v Marten [1902J 2 KB 624 23.51, 24.02, 24.37, 24.71 Cunliffe-Owen v Teather & Greenwood [1967J 1 WLR 1421 8.14 Currie (MR) & Co v Bombay Native Insurance Co (1869) LR 3 PC 72 22.54,24.12,24.13 Curtis & Sons v Mathews [1918J 2 KB 825 13.26,13.29,13.30,13.34 CVG Siderurgicia del Orinoco SA v London Steamship Owners' Mutual Insurance Associarion (The Vainqueur Jose) [1979J 1 Lloyd's Rep 557 20.57,20.61 Da Costa v Scandrer(1723) 2 P Wms 170 6.07 Daewoo Heavy Industries Ltd v Klipriver Shipping Ltd (The Kapitan Petko Voivoda) [2003] EWCA Civ 451, [2003J 2 Lloyd's Rep I; [2002J EWHC 1306 (Comm), [2002J 2 All ER (Comm) 560 8.21 Dairy Contractors Ltd v Tasman Orient Line CV (The Tasman Discoverer) [2004] UKPC 22, [2005J 1 WLR 215 8.50 Dalzell v Mair (1808) 1 Camp 532 6.05, 6.33 Daneau v Luarent Gendron, Ltee [l964J I Lloyd's Rep 220 .4.165 19.17,19.20,19.61 Daniels v Harris (1874) LR 10 CP I DarbishirevWarran [1963J 1 WLR 1067 24.11 Darrell v Tibbitts (1880) 5 QBD 560 25.42, 25.73 Davidson v Bumand (1868) LR4 CP 117 10.14, 10.23, 19.51 Davidson v Gwynne (I810) 12 East 381 11.48 Davidson v Willasey (I 813) I M & S 313 17.39 Davies v London Provincial Marine Insurance Co (1878) 8 ChD 469 _ 4.03 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 8.05 Davis v Garrett (I 830) 6 Bing 716 18.34 Dawson v Mercantile Mutual Insurance Co Ltd [1932] VLR 380 18.107,18.109 Dawsons Ltd v Bonnin [1922J 2 AC 413 .4.205,18.62,18.91 De BusschevAlr (1878) 8 ChD 286 5.13 De Costa v Scandtet (I723) 2 P Wms 170 1.42, 4.13 De Hahn v Hartley (I 786) I TR343 18.71, 18.92 3.17;9.38 De Mattos v Gibson (1868) LR 3 Ex 185 De Maurier Oewels) Ltd v Bastion Insurance Co Ltd [l967J 2 Lloyd's Rep 550 .4.107, 4.108,4.165,8.54,18.109 De Monchy v Phoenix Insurance Co of Hartford (I929) 34 L1LRep 201 15.42,15.46,15.47 De Vaux v Salvador (I836) 4 A & E 420 12.09 De Wolf v Archangel Maritime Bank & Insurance Co Ltd (I874) LR 9 Qll451 .. 18.24, 18.25 Deatle v Hall (1823) 3 Russ I 20.13 Debtor (No 627 of!936), Re a [l937J Ch 156 26.61 .4.79 Decorum Investments Ltd v Atkin (The Elena G) [2001J 2 Lloyd's Rep 378 Deepak Fertilisers & Petrochemicals Corp v leI Chemicals & Polymers Ltd [1999] I Lloyd's Rep 387 3.36,3.63,25.30 Deering v Earl of Winchelsea (I787) 2 Bos & P 270 26.32 Delany v Stoddart (I785) 1 TR22 18.41, 18.44 1.37 Delbye v Proudfoot (I692) 1 Show KB 396 Delphine, The [2001J 2 Lloyd's Rep 542 7.48,7.56,15.23 Demetra K, The [2002J EWCA Civ 1070, [2002J 2 Lloyd's Rep 581 8.78, 8.81, 8.90,10.65 Denby v English & Scottish Maritime Insurance Co Ltd [1998J Lloyd's Rep IR 343 ..... 2.66, 2.67,8.54 Denison v Modigliani (I794) 5TR 580 18.27 Dennistown v Lillie (I821) 3 Bl202 .4.133, 4.134 Denoon v Home & Colonial Assurance Co (1872) LR 7 CP 341 21.87, 21.88 Denoyr v Oyle (I649) Style 166 :: 1.37 DenrvSmith(I869)LR4QB414 18.64

Table ofCases
Depaba v Ludlow (172!) 1 Comyns 360; (I720) I Com Rep 360 1.39, 3.06 Deposit & General Life Assurance Co v Ayscough (1856) 6 El & BI 761 .4.20 Derry v Peek (1889) 14 App Cas 337 .4.03, 5.07, 22.78 Deutsche Ritckversicherung AG v Wa!brook Insurance Co Ltd [1995] 1 WLR 1017 4,123 Deutsche-Australische DampfSchiffsgesellschaft v Sturge (1913) 30 TLR 137 17.17 Devaux v rAnson (1839) 5 Bing NC 519 1.54,3.52, 17.41, 17.44 DG Finance Ltd v Stott [1999J Lloyd's Rep IR 387 3.57 Diamond, The [1906J P 282 10.60 10.36, 15.21, 15.26 Dias, The [1972J 2 QB 625 Dibbens, Re [1990] BCLC 577 3.57 Dick Bentley Producrions Lrd v Harold Smith (Motors) Ltd [1965J 1 WLR 623 4.179 Dickinson v Jardine (1868) LR 3 CP 639 25.01 Dickson v Devitr (1916) 86 LJKB 315 5.64, 5.65, 5.66, 5.70 Dina Services v Prudential Assurance [1989] 1 Uoyd's Rep 379 , 10.69 Direct Line Insurance v Khan [2002] Lloyd's Rep IR 364 22.100,22.102 Direct Travel Insurance v McGeown [2003] EWCA Civ 1606, [2003J Lloyd's Rep
m5~.......,.............8.~

Ditbrie v Hilton (1868) LR4 CP 138 21.39 Dixon v Hovill (1828) 4 Bing 665 5.37 11.36,19.20 Dixon v Sadler (1839) 5 M & W 405 Dixon v Whitwortb (1879) 4 CPD 371 24.37 Dodwell & Co Ltd v British Dominions & General Insurance Co Ltd (1918) [1955] 2 Lloyd's Rep 391n '" " .. 15.47 Doheny v New India Assurance Co Ltd [2005J EWCA Civ 1705, [2005J Lloyd's Rep IR251 .4.104 Dome Mining Corp Ltd v Drysdale (1931) 41 LlLRep 109 22.88 Domingo Mumbra SA v Laurie (I924) 20 L1LRep 122 15.23 Dominique, The [1989J AC 1056 .4.17 Don King Productions Inc v Warren [2000J Ch 291 20.27 Dora Forster [1900J P 241 21.115 .4.70,4.71,4.127,7.45,7.47 Dora, The [1989J 1 Lloyd's Rep 69 Doriga Y Sanudo v Royal Exchange Assurance Corp (The Marianela) (1922) 13 L1LRep 126 15.24 Douglas v Scougall (1816) 4 Dow 269 19.22 Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 .4.183 Doyle v Powell (1832) 4 B & Ad 267 18.39 DPP v Stonehouse [1970] AC 55 13.56 Drake Insurance pic, Re [2001] Lloyd's Rep IR 643 6.03 Drake Insurance pic v Provident Insurance pic [2003J EWCA Civ 1834, [2004J QB 601; .4.53, 4.156, 4.171, [2003J EWHC 109 (Comm), [2003J Lloyd's Rep IR 781 26.07, 26.59, 26.60 Driefonrein Consolidated Mines Ltd v Janson [1900J 2 QB 339 3.80,13.18 Drinkwater v London Assurance Corp (1767) 2 Wils KB 363 13.32 Driscol v Bovill (1798) 1 B & P 313 18.44 Driscoll, Re [1918J 11R 152 25.51 DSG Retail Lrd v QBE Inrernational Insurance Ltd [1999J Lloyd's Rep IR 283 " 2.76 8.20,9.23,9.33, 10.06, 19.30, 19.45, 19.60 Dudgeon v Pembroke (1877) 2 App Cas 284 Duff v Mackenzie (1857) 3 CB(NS) 16 23.39 Dufourcet & Co v Bishop (1886) 18 QBD 373 25.18, 25.37 Dunbar v AB Painters Lrd [1986J 2 Lloyd's Rep 38; [1985J 2 Lloyd's Rep 616 5.59 18.36 Dunbeth, The [1897J P 133 Duncan v Worrall (1822) 10 Price 31 4.15 Dunlop Bros & Co v Townend [1919] 2 KB 127 2.34 Dunlop Tyres Ltd v Blows [2001J EWCA Civ 1032, [2001] IRLR 629 8.41

xlii

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Table ofCases
Dunthorne v Bentley (1996) [1999] Lloyd's Rep IR 560 Dutham Bros v Robertson [1898J 1 QB 765 Durrell v Bederley (1816) Holt NP 283 Duus Btown & Co v Binning (1906) 11 Com Cas 190 Dyson v Rowcroft (1803) 3 Bos & Pul473 9.62 20.13 4.80 25.23 21.43

Table ofCases
Esso Petroleum Co Lrd v Hall Russell & Co Ltd (The Esso Bernicia) [1989] AC 643 .... 25.14 Esso Petroleum Co Ltd v Mardon [1976J QB 801 .4.138, 5.07 Etablissemems Georges et Paul Levy v Adderley Navigation Co Panama SA (The Olympic Pride) [1980J 2 Lloyd's Rep 67 8.77 Etherington and The Lancashire & Yorkshire Accident Insurance Co [1909] 1 KB 591 9.36,9.44 Eurasian Dream, The [2002] EWHC 118 (Comm), [2002J 1 Lloyd's Rep 155 19.07, 19.10 Eurodale Manufacturing Ltd v Ecclesiastical Insurance Office pic [2003] EWCA Civ 203, [2003J Lloyd's Rep IR444 14.19 European Asian Bank v Punjab & Sind Bank (No 2) [1983J 1 WLR 642 5.24 Eurysthenes, The [1976J 2 Lloyd's Rep 171 17.03, 17.04, 19.34, 19.38, 19.49 Evelpidis Era, The [1981] 1 Lloyd's Rep 54 20.18 Everett v Hogg, Robinson & Gardner Mountain (Insurance) Co [1973] 2 Lloyd's Rep 217 558, 5.60 Everth v Hannam (1815) 6 Taunr375 11.54 Everth v Smith (1814) 2 M & S 278 21.91 Ewer v National Employers' Mutual Insurance Association (1937] 2 All ER 193 22.86 Express & Star Ltd v Bunday [1988J ICR 379 14.06, 14.10 Eyre v Glover (1812) 16East218 3.55 Fairbanks v Snow (1887) 13 NE 596 4.47 Falkner v Ritchie (1814) 2 M & S 290 21.99 Fanhaven Pty Ltd v Bain Davies Northern Pty Ltd [1982] 2 NSWLR 57 5.30,556 Fanti, The [1991] 1 AC 1 16.03, 20.41, 20.63, 22.65, 22.72 Farnworth v Hyde (1865) 34 LJCP 207 " 21.42,21.75 Farrell v Federated Employers' Insurance Association Ltd [1970] 1 WLR 1400 26.44 Fawcus v Sarsfield (1856) 6 El & BII92 10.06, 19.30, 19.46 Feaseyv Sun Life Assurance Corp of Canada [2003J EWCA Civ 885, [2003J Lloyd's Rep IR637 , 3.27, 3.34, 3.36, 3.40, 3.51, 3.62 Federal Commerce & Navigation Co Ltd v Tradax Export SA [1978J AC 1 8.61 Feise v Parkinson (1812) 4 Taunt 640 .4.62, 6.06, 6.07 Felicie, The [1990J 2 Lloyd's Rep 21n 20.70,20.72 Fenton Insurance Co Ltd v Gothaer Versicherungsbank WAG [1991] 1 Lloyd's Rep 172 .. 6.16 Ferrcom Pty Ltd v Inbush (NSW) Pty Ltd (1996) 9 ANZ Insurance Cases 76, 728 557 Field Steamship Co Ltd v Burr [1899J 1 QB 579 15.35, 21.06 Fielding & Plarr Ltd v Najjar [1969J 1 WLR357 ." " " 3.71 Figre Ltd v Mander [1999J Lloyd's Rep IR 193 " 6.16,6.17 Piliarra Legacy, The [1991] 2 Lloyd's Rep 337 15.18 Fine's Flowers Ltd v General Accident Assurance Co of Canada (1977) 81 DLR (3d) 139 5.16, 5.29 Finlay v Liverpool & Grear Western SS Co Ltd (1873) 23 LTNS 251 13.75 Fiona, The [1993J 1 Lloyd's Rep 257 19.13 Fireman's Fund Insurance Co v Western Australian Insurance Co Ltd (1927) 33 Com Cas 36 '" 19.16 Firestone v Chubb Insurance Co of Canada (1995) 21 OR (3d) 370 25.51 Firma C~Trade SA v Newcastle Protection & Indemnity Association (The Fanti) [1991] 1 AC 1; [1989J 1 Lloyd's Rep 239 16.03, 20.41, 20.63, 22.65, 22.72 First National Bank of Chicago v West of England Shipowners Mutual Protection and Indemnity Association (Luxembourg) (The Evelpidis Era) [1981] 1 Lloyd's Rep 54 20.18 Fisher v Liverpool Marine Insurance Co (1874) LR 9 QB 418 3.68 Fisher v Smith (1878) 4 App Cas 1 5.77 Fisk v Masrerman (1841) 8 M & W 165 , ,., .. , .. 26.29 Fitzherbert v Mather (1795) 1 TR 12 "" 4.127 Fleming v Smith (1848) 1 HLC 513 22.34,2256,22.61

Eagle Oil Transport Co Ltd v Board of Trade (1925) 23 LlLRep 301 13.12 Eagle Star & British Dominion Insurance Co Ltd v AV Reiner (1927) 27 LlLRep 173 8.89 Eagle Star Insurance Co Lrd v Cresswell [2003] EWHC 2224 (Comm), [2004J 1 All ER (Comm) 508 8.02 Eagle Star Insurance Co Ltd v Games Video Co (GVC) SA (The Game Boy) [2004] EWHC 15 (Comm), [2004J 1 Lloyd's Rep 238 7.39,7.47,22.89,22.93 Eagle Star Insurance Co Ltd v National Westminster Finance Australia Ltd (1985) 58 ALR 165 (PC) 5.29,550 Eagle Star Insurance Co Ltd v Provincial Insurance pIc (1994) 1 AC 130 26.47, 26.50, 2651,26.55 Eagle StarInsurance Co Ltd v Spratt [1971J 2 Lloyd's Rep 116 2.14 Earle v Rowcroft (1806) 8 East 126 " 11.48, 11.55, 11.56 EasrIndia Co v Oditchurn Paul (1849) 7 Moo 85 22.62 Ebsworth v Alliance Marine Insurance Co (1873) LR 8 CP 596 3.39 Economides v Commercial Assurance Co pic [1998J QB 587 4.134,4.136,4.137,4.139,4.145, 4.146,7.47 Eden v Parkison (1781) 2 Dougl732 18.77 Edgar v Bumstead (1808) 1 Camp411 " 22.119 Edgington v Fitzmaurice (1885) 29 ChD 459 , .4.45, 4.137 Edington v Jackson (1832), unreported 21.79 Edwards Oohn) & Co v Motor Union Insurance Co Ltd [1922J 2 KB 249 3.11, 25.07, 25.10, 25.22 Edwards v Foorner (1808) 1 Camp 530 " .4.134 Efrychia, The (1937) 59 LlLRep 67; (1937) 57 LILRep 37 , 15.24 Egan v Static Control Components (Europe) Ltd [2004] EWCA Civ 392, [2004J 2 Lloyd's Rep 429 , 8.44 Eglantine, Credo & Inez, The [1990) 2 Lloyd's Rep 390 ., 12.18 Eide UK Ltd v Lowndes Lambert Group Ltd (The Sun Tender) [1999J QB 199 5.76, 5.79 El Ajou v Dollar Land Holdings pic [1994J 2 All ER 685 .4.123 Elcock v Thomson [1949J 2 KB 755 7.34,7.39,23.23,23.24,23.27 Elder, Dempster & Co Ltd v Patetson, Zochonis & Co Ltd [1924J AC 522 19.11,19.15 Elena D'Amico, The [1980]1 Lloyd's Rep 75 " " 24.11 Elena G, The [2001] 2 Lloyd's Rep 378 4.79 Eleyv Bradford [1972J 1 QB 155 25.01 Elliott v Wilson (1776) 4 Bro PC 470 18.34, 18.36 Elton v Brogden (1747) 2 Str 1264 , " 18.44 Emperor Goldmining Co Ltd v Switzerland General Insurance Co Ltd [1964] 1 Lloyd's Rep 348 24.26 Empresa Cubana de Fleres v Kissavos Shipping Co SA (The Agathon) (No 2) [1984] 1 Lloyd's Rep 183 " 21.13 Engineer, The [1898J AC 382 '" , 12.21 England v Guardian Insurance Ltd [2000J Lloyd's Rep IR 404 22,121,25.79 Enlayde Ltd v Roberts [1917J 1 Ch 109 5.25 Equitable Fire & Accidenr Office Ltd v Ching Wo Hong [1907] AC 96 18.84 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 , , .4.03, 4.04 Esperanza, The (1822) 1 Hagg 85 13.46 Esposito v Bowden (1857) 7 El & Bl763 " 3.78 Esso Bernicia, The [1989] AC 643 25.14

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Table ofCases
Fletcher v Ingliss (1819) 2 B & Ald 3 I 5 10.25 FlindtvWaters (1812) 15 EaSt 260 3.81 Flinn v Headlam (1829) 9 B & Cr 693 .4.42 Flint v Flemyng (1830) I B & Ad 45 1.53, 1.54, 17.43 FNCB Lrd v Barnet Devaney (Harrow) Ltd [1999] Lloyd's Rep IR 43 2.78 FoleyvTabor(l861)2F&F663 19.16, 19.22 Foley v United Fire & Marine Insurance Co of Sydney (1870) LR 5 CP 155 3.52, 17.39 Fomin v Oswell (1813) 3 Camp 357 5.24 Fooks v Smith [1924] 2 KB 508 21.26 Forbes v Aspinall (1811) 13 EaSt 323 17.42,17.43,21.86,21.87 Forder v Great Western Railway Co [1905] 2 KB 532 15.11 ForreSter v Pigou (1813) I M & S 9 .4.62 Forshaw v Chabert (1821) 3 Brod & B 158 18.75, 19.09 Forsiktingsaktielskapet VeSta v Burcher [1989] AC 852 5.42,5.67, 18.89 ForSter v ChriStie (1809) 11 EaSt 205 ........................................... 9.48 FoSter v Wilmer (1746) 2 Str 1249 18.37 France Fenwick & Co Ltd v The King [1927] I KB 458 13.64 Francis v Boulton (1895) 65 LJQB 153 21.40,23.32 Frangos v Sun Insurance Office Ltd (1934) 49 LlLRep 354 19.46, 19.60 Fraser Shipping Ltd v Cotton (The Shakir III) [1997] I Lloyd's Rep 586 .4.197, 18.122, 18.127,21.41,21.48,24.27 Fraser v BN Furman (Productions) Ltd [1967] I WLR 898 5.59,8.21,9.27 Freeth v Burr(1878) LR 9 CP 208 6.15 Friends Provident Life & Pensions Ltd v Sirius International Insurance [2005] EWCA Civ 601, [2005]2 All ER (Comm) 145 22.24, 22.27, 25.21 21.08 Fuerst Day Lawson Ltd v Orion Insurance Co Ltd [1980) 1 Lloyd's Rep 656 Furness, Withy & Co Ltd v Duder [1936] 2 KB 461 12.11 Furness Withy (Australia) Ltd v Metal Distriburors (UK) Ltd (The Amazonia) [1990] 1 Lloyd's Rep 236 8.58 3.80 Furtado v Rogers (1802) 2 Bos & Pul191 8.14, 10044 13.22 6.04 22.85,22.102, 22.107 Gambles v Ocean Marine Insurance Co of Bombay (1876) 1 ExD 141 17.03 Game Boy, The [2004] EWHC 15 (Comm), [2004] I Lloyd's Rep 238 7.39,7.47, 22.89, 22.93 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (Nos 2 & 3) [2001] EWCA Civ 1047, [2001] Lloyd's Rep IR 667 4.201, 8.29, 8.52, 8.57 Gardenet v Salvador (1831) I M & Rob 116 21.42, 21.107 1.59 Gatra v Eagle Star Insurance Co (1923) 16 LlLRep 339 Gare v Sun Alliance Insurance Ltd [1995] LRLR 385 4.70,4.85 Gedge v Royal Excbange Assurance Corp [1900] 2 QB 214 3.17 Gee & Garnham Ltd v Whittall [1955] 2 Lloyd's Rep 562 15.55 Geelong, The [1923] AC 191 13.10,13.11 General Accident Fire & Life Assurance Corp Ltd v JH Minet & Co Ltd (1942) 74 LlLRep I 5.23 General Accident Fire & Life Assurance Corp Ltd v Midland Bank Ltd [1940] 2 KB 388 2.71, 2.72, 2.93 General Accident Fire & Life Assurance Corp v Tamer (The Zephyr) (1985] 2 Lloyd's Rep 529; [1984] I Lloyd's Rep 58 2.08, 2.14, 2.16, 2.19,2.20,2.21,2.27, 4.62,5.04,5.07,5.08,5.30,5.229 GabayvLloyd(l825)3B&C793 Gagliormella v Metropolitan Life Insurance Co 122 F Supp 246 (1954) Gale v Machell (1781) 2 DougI790n Galloway v Guardian Royal Exchange (UK) Ltd [1999] Lloyd's Rep IR 209

Table ofCases
General Insurance Co of TrieSte Ltd v Cory [1897] 1 QB 335 18.81 General Reinsurance Corp v ForsakringsaktiebolagetFennia Patria [1983J QB 856; [1982] QB 1022 2.13, 2.14, 2.15 General Shipping & Forwarding Co v British General Insurance Co Ltd (I923) 15 LlLRep 175 7.25 Genforsikrings Aktieselskabet (Skandinavia Reinsurance Company of Copenhagen) v Da Costa [1911] I KB 137 3.68 George Hunt Cranes Ltd v Scottish Boiler & General Insurane Co Ltd [2001] EWCA eiv 1964, [2002) Lloyd's Rep IR 178 8.19, 22.14, 22.15 George Wimpey UK Ltd v VI Components [2005] EWCA Civ 77, [2005] BLR 135 8.79,26.02 Gernon v Royal Exchange Assurance (1815) 6 Taunt 383 22.55 Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39, (2003) ALR 497 1.55 Gibson v Small (1853) 4 HLC 353 17.05, 19.30, 19.61 GIO Personal Investment Services Ltd v Liverpool & London Steamship Protection & Indemnity Association Ltd unrep, Comm Ct, 27 November 1997 4.65 Girl Pat, The [1937) I All ER 158 21.65, 21.66, 21.102 Glafki Shipping Co SA v Pinios Shipping Co (The Maita) (No 2) [1986]2 Lloyd's
~12.......................~,7~

Glasgow Assurance Corp Ltd v Symondson (191 I) 27 TLR 245 2.42, 4.78 Gledsranes v Royal Exchange Assurance (1864) 5 B & S 797 2.34 Glen Line Ltd v Attorney-General (1930) 36 Com Cas I 22.36, 22.41 Glencore International AG v Alpina Insurance Co Ltd [2003] EWHC 2792 (Comm), [2004] Lloyd's Rep 11 I 2.39,2.40,4.64, 4.77, 4.93 Glencore International AG v Ryan (The Beursgracht) [2001] EWCA Civ 2051, [2002] I Lloyd's Rep 574 2.31, 2.32, 2.33, 2.35, 2.36, 2.39, 6.17 Glencore International AG v Ryan (The Beursgracbt) (No 2) [2001] 2 Lloyd's Rep 608 ... 2.31, 2.35,22.22 Glengate-KG Properties v Norwich Union Fire Insurance Society Ltd [1996] 1 Lloyd's Rep 614 3.39,3.50,3.55, 18.72 Glennie v London Assurance Co (1814) 2 M & S 371 21.52 Glicksman v Lancashire & General Assurance Co [1927] AC 139 .4.78 Globe & Rurgers Fire Insurance Co v Truedell [1927] 2 DLR 659 25.16 Gloria, The (1936) 54 LlLRep 35 15.21, 15.24, 19.33 Glowrange Ltd v CGU Insurance pIc, unrep, Comm Ct, 29 June 2001 15.49 GlynnvMargetson&Co [1893]AC351 8.21 Goddarr v Garrett (1692) 2 Vern 269 1.39, 3.04 Godin v London Assurance Co (1758) I Burr 489 26.QI, 26.03 Gold Sky, Tbe [1972] 2 Lloyd's Rep 187 15.20,15.21,15.25,24.14 Goldcorp Exchange Ltd, Re [1995] lAC 74 25.79 Goldschmidt v Marryat (1809) I Camp 559 1.59 Goldschmidt v Wbitmore (1811) 3 Taunt 508 11.59 Good Luck, The [1990] I QB 818 .4.203, 18.55, 18.56, 18.57, 18.58, 18.94,20.12 Gooding v Wbite (1913) 29 TLR 312 7.43 Goole & Hull Steam Towing Co Ltd v Ocean Marine Insurance Co Ltd [1928] 1 KB 589 23.21, 25.11, 25.69, 25.71 Gordon v Rimmington (1807) I Camp 123 10.66 Gordon v Street [1899] 2 QB 641 .4.148 Go" v Withers (1758) 2 Burr 683 13.46, 21.99 Goulsrone v Royal Insurance Co (1855) I F & F 276 3.50 Grace v Leslie & Godwin Financial Services Lrd [1995] CLC 801 5.41,5.60 Graham Joint Stock Shipping Co Ltd v Motor Insurance Co Ltd [1922] I KB 563 .. 1.59, 20.22 Graham v Belfast & Northern Counties Railway Co [1901] 2 IR 13 15.1 I Gtainget v Marrin (1862) 2 B & S 456 21.77

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Table ofCases
Grand Union (Shipping) Ltd v London Steamship Owners Mutual Insurance Association Ltd (The Bosworth (No 3)) [1962]1 Lloyd's Rep 483 24.69 Grant, Smith & Co & McDowell Ltd v Seattle Construction & Dry Dock Co [1920] AC 162 10.06 Gr.ntvKing (1802) 4 Esp 175 18.21 Grauds v Dearsley (1935) 51 LlLRep 203 11.45 Grayv Barr [197l] 2 QB 554 3.74,15.09 Great China Metal Industries Co Ltd v Malaysian International Shipping Corp Berhad (The Bunge Seroja) [1998] HCA65, [1999]1 Lloyd's Rep 512 10.07 Great Indian Peninsular Co v Saunders (1861) 2 B & S 266 24.27 Grear North Eastern Railway Ltd v Avon Insurance pic [2001] EWCA Civ 780, [2001J 2 Lloyd's Rep 649 8.22 6.22 Great Western Insurance Co v Cunliffe (1874) LR 9 Ch ApI' 525 4.85, Greci. Express, The [2002] EWHC 203 (Comm), [2002] Lloyd's Rep IR 669 4.169,7.40,7.41,7.46,14.27,15.18,15.79,24.02, 24.14, 24.16 10.06, 11.12, 11.13 Green Lion, The [1974] 1 Lloyd's Rep 593 Green v British India Stearn Navigation Co Ltd (The Matiana) [1921]1 AC 99; [1919J 2 KB 670 13.06 7.58,10.29 Green v Brown (1744) 2 Str 1199 Green v Elmslie (1794) Peake 278 , 9.37 Green v Pacific Mutual Life Insurance Co (1864) 91 Mass (9 Allen) 217 13.47 Green v Young (1702) 2 Salk 444 18.34 .4.07, 4.68, 4.101 Greenhill v Federal Insurance Co Ltd [1927J 1 KB 65 Greenock Steamship Co v Maritime Insurance Co Ltd [1903J 1 KB 367 18.115, 18.116,18.119 Griffen, Re [1899]1 Ch 408 20.28 Grill v General Iron Screw Collier Co (1866) LR 1 CP 600 9.22 22.76 Groom v Crocker [1939J 1 KB 194 Gronp Josi Re v Walbrook Insurance Co Lrd [1996]1 WLR 1152 " .. .4.09, 4.116, 4.124 Groupama Insurance Co Ltd v Overseas Panners Re Ltd [2003] EWHC 34 (Camm) '" .4.197 Grover & Grover Ltd v Mathews (1910) 15 Com Cas 249 2.14, 2.86 Gunns v Par Insurance Brokers [1997] 1 Lloyd's Rep 173 .455
H, Re [1996] AC 563 : 15.18 Hadenfayre Ltd v British National Insurance Society Ltd [1984] 2 Lloyd's Rep 393 18.28 Hadkinson v Robinson (1803) 3 Bos & Pul388 9.47 Hahn v Corbert (1824) 2 Bing 205 21.124 11.53, 13.47 Hai Hsuan, The [1958]1 Lloyd's Rep 351 Haigh v de Ia Cour (1812) 3 Camp 319 " 7.39 Hair v Prudential Assurance [1983] 2 Lloyd's Rep 7 4.104 Halhead v Young (1856) 6 E & B 312 3.12, 3.55 Hall Bros SS Co Ltd v Young [1939]1 KB 748 12.11 Hall v Hyman [1912]2 KB 5 1.49, 21.66, 21.74 Halvanon Insurance Co Ltd v Compania de Seguros do Estado de Sao Paulo (1995] LRLR 303 21.14 Ham v Somak Travel Ltd [1998] EWCA Civ 153 8.42 Hamilton, Fraser & Co v Pandorf & Co (1887) 12 App Cas 518; (1886) 17 QBD 670; (1885) LR 16 QB 629 10.06, 10.24, 10.52, 10.55, 10.56, 15.62, 15.63 Hamilton v Mendes (1761) 2 Burr 1198 21.99, 21.101 Hammond v National Life & Accident Insurance Co 243 So 2d 902 (1971), 54 ILR 522 13.23 Hammond v Reid (1820) 4 B & Aid 72 18.36 Hampshire Land Co, Re[1896]1 Ch 743 ,c 4.118 Hanak v Green [1958] 2 QB 9 , 6.27,20.25

Handelsbanken Norwegian Branch of Svenska Handelsbanken AB (PUBL) v Dandridge (The A1iza Glacial) [2002] EWCA Civ 577, [2002] 2 Lloyd's Rep 421 9.21,9.60, 13.62,13.72,13.75,13.76,13.78,13.79,13.83,15.41, 21.73,21.83 Hansson v Hamel & Horley Ltd [1922]2 AC 36 8.50 Harbutt's 'Plasticine' Ltd v Wayne Tank & Pump Co Ltd [1970] 1 QB 447 9.29 Harding Maughan Hambly Ltd v Compagnie Europeene de Courtage d'Assurances & de Reassurances SA [2000]1 Lloyd's Rep 316 5.75 Harding v Bussell [1905]2 KB 83 .. " . " . " 1.60,4.200 Hardy v Motot Insurers' Bureau [1964] 2 QB 745 3.73, 15.09 18.37 Hare v Travis (1827) 7 B & Cr 14 Hargreaves (B) Ltd v Action 2000 Lrd [1993] BCLC 1111 6.27 Harlow, The [1922] l' 175 12.16 Harman v Kingston (1811) 3 Camp 150 3.81 HarmanvVaux(1831)3Carnp429 10.81 Harmonides, The [1903] l' 1 21.77 20.33 Harrington Moror Co Ltd, ex I' Chaplin [1928] Ch 105 Harris v Polana [1941] 1 KB 462 10.64 Harris v Scaramanga (1872) LR 7 CP 481 24.52 Harrison v Douglas (1835) 3 A & E 396 4.165 Harrisons Ltd v Shipping Controller (The Inkonka) [1921]1 KB 122 9.05,13.10 Hart v Standard Marine Insurance Co Ltd (1889) 22 QBD 499 8.09 14.16 Hartford Fire Insurance Co v War Eagle Co 295 F 663 (1924) Harrleyv Buggin (1781) 3 Dougl39 18.27,18.40 Harvest Trucking Co Lrd v pB Davis [1991] 2 Lloyd's Rep 638 5.38,5.53 Hatch, Mansfield & Co Ltd v Weingort (1906) 22 TLR 366 25.37 17.32,17.35 Haughten v Empire Marine Insurance Co Ltd (1866) LR 1 Ex 206 Haywood v Rodgers (1804) 4 East 590 .4.150 Hearne v Edmunds (1819) 1 Brod & Bing 388 10.81 Heath Lambert Ltd v Sociedad de Corretaje de Seguros [2004] EWCA Civ 792, [2005] 6.10, 1 Lloyd's Rep 598; [2003J EWHC 2269 (Comm), [2004]1 Lloyd's Rep 495 6.30, 6.33, 6.35, 6.37 Hedburg v Pearson (1816) 7 Taunt 154 21.52 4. I79 Hedley Byrne & Co Ltd v Heller & Partners Lrd [1964J AC 465 Hedley v Pinkney & Sons Steamship Co Ltd [1894] AC 222 19.03 Heilbut, Symons & Co v Buckleton [1913J AC 30 ., 4.179 Heintich Hirdes GmbH v Edmund [1991]2 Lloyd's Rep 546 17.47 Helicopter Resources Pty Ltd v Sun Alliance Australia Ltd (The kebird) (1991) 312 LMLN 5.33,15.55,17.13 Hellenic Dolphin, The [1978J 2 Lloyd's Rep 336 19.41 Helmsville Ltd v Yorkshire Insurance Co Ltd (The Medina Pdncess) (1965] 1 Lloyd's Rep 361 23.21 Helstan Securities Ltd v Hertfordshire County Council (1978] 3 All ER 262 20.27, 20.28 Henderson v Merrert Syndicates Ltd [1995]2 AC 145 1.18, 5.15, 5.42 Henderson v Underwriting & Agency Association Ltd [1891J 1 QB 557 1.60 Henkle v Royal Exchange Assurance Co (1749) 1 Yes Sen 317 6.04, 8.81, 8.91 9.55, 10.16, 13.41 Henry & MacGregor v Marten (1918) 34 TLR 504 8.48 Heritage Insurance Services Lrd v Rotch Properry Group Ltd [2003J NpC 100 (Ch) 21.79 Herne v Bay (1842), umep Herting v Janson (1895) 1 Com Cas 177 7.28 Heselron v Allmm (1813) 1 M & S 46 18.37 4.100 Hewitt Bros v Wilson [1915] 2 KB 739 Hewitt v London General Insurance Co Ltd (1925) 23 LlLRep 23 18.115, 18.116, 18.121 Heyman v Darwins Ltd [1942] AC 356 18.57

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Table ofCases
Hibernia Foods plc v McAuslin General Accident Fire & Life Assurance Corp pic (The Joint
Frost) [1998J 2L1oyd's Rep 310 Higgins v Dawson [1902J AC 1 ,. 17.18 8.51

Table ofCases
Hunt v Royal Exchange Assurance (1816) 5 M & S 47 , 22.56

Hunter v Northern Marine Insurance Co Ltd (1888) 13 App Cas 717

Hunter v Potts (1815) 4 Camp 203 Hurtell v Bullard (1863) 3 F & F 445 Hurry v Royal Exchange Assurance Co (1801) 2 Bos & Pul430 Hussain v Btown [1996J 1 Lloyd's Rep 627 Hutchins Btos v Royal Exchange Corp [1911J 2 KB 398

17.09
15.63 5.37 17.13 18.29, 18.79 11.19

Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyd s Rep 109 4.144, 4.161 HIH Casualty & General Insurance Ltd v AXA Corporate Solutions (2002) EWCA
Civ 1253, [2003J Lloyd's Rep IR 1 18.94,18.95 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003J UKHL 6, [2003J 2 Lloyd's Rep 61; [2001] EWCA Civ 1250, [2001] 2 Lloyd's Rep 483; [2001J 1 Lloyd's Rep 30 2.42, 2.65, 2.68, 4.01, 4.22, 4.100, 4.110, 4.129, 4.182, 5.63 BIB Casualty & General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ735, [200IJ 2 Lloyd's Rep 161 .8.21, 8.64, 8.69, 8.73, 8.76,18.62 HIH Casualty & General Insurance Ltd v Waterwall Shipping Inc (1998) 146 9.30, 15.43 FLR 76 8.32 Hillas & Co Ltd v Arcos Ltd (1932) 43 LlLRep 359 Hindustan Steam Shipping Co v Admiralty (1921) 8 LlLRep 230 13.08

Hydarnes SS Co v Indemnity Mutual Marine Assurance Co [1895] 1 QB 500

Hyde v Bruce (1782) 3 Doug1213 Hyderabad (Deccan) Co v Willoughby [1899J 2 QB 530

17.45

18.70,18.71 18.45, 18.115, 18.119

Hine Bros v Steamship Insurance Syndicate Ltd (1895) 72 LT 79

22.116

Hiscox Underwriting Ltd v Dickson Manchester & Co Ltd [2004J EWHC 479 (Comm), [2004J 2 Lloyd's Rep 438 2.64 Hitchman v Stewett (1855) 3 Drew 271 26.61 Hobbs v Hannam (1811) 3 Camp 93 11.44 Hobbs v Marlowe [1978J AC 16 25.01, 25.14, 25.75 Hoffman (C) & Co v British General Insurance Co (1922) 10 LlLRep 434 19.04, 19.51 11.69 Holm v Rice (1981) 124 DLR (3d) 463 Holmes & Sons Ltd v Merchants' Marine Insurance Co Ltd (The Nefeli) [1919] 1 KB 383 24.75 Homburg Houtimport BV v Agtosin Ptivate Ltd (The Starsin) [2003J UKHL 12, [2004J 1 AC 715 8.20, 8.50 Home Insutance Co of New Yotk v Gavel (1928) 30 LlLRep 139 18.84 Hood v West End Motot Cat Packing CO [1917J 2 KB 38 5.20, 18.120

Icebird, Tbe (1991) 312 LMLN 5.33 IF P&C Insutance Ltd (Publ) v Silversea Cruises Ltd [2004J EWCA Civ769, [2004J Lloyd's 3.53, 8.90, 9.28, 9.43,13.42,14.18 Rep IR696 Ikarian Reefet, The [1993J 2 Lloyd's Rep 68 10.65, 11.63, 15.18, 15.22 Iketigi Compania Navieta SA v Palmer (The Wondrous) [199212 Lloyd's Rep 566; [1991J 1 Lloyd's Rep 400 3.11, 3.54, 7.59, 8.57,13.49,13.50,13.73,13.76, 13.82, 13.83, 15.Q7, 24.27

Imperial Marine Insurance Co v Fire Insurance Corp (1879) 4 CPD 166

Inchmaree, Tbe (1887) 12 App Cas 484 .. , [19981 AC 878 , Indian Endutance, The & Indian Grace, The (No 2) [1998J AC 878

2.34
10.18, 10.24, 11.01 ' 8.58,24.45 8.58,24.45

India v India Stcamship Co Ltd (The Indian Endurance & The Indian Grace) (No 2)

Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries [1977J QB 580 ... 4.51
Inglis v Stock (1885) 10 App Cas 263 2.39, 3.43 9.05,13.10 Inkonka, The [1921] 1 KB 122 Insurance COtp of tbe Channel Islands v McHugh [1997J LRLR 94 .4.156, 22.70 Insurance Corp of the Channel Islands v Royal Hotel Ltd [1998J Lloyd's Rep IR 151 .4.56, 4.164

Hood's Trustees v Southern Union General Insurance Co of Australia Ltd [1928] Ch 793 20.33
Hooley Hill Rubbet & Chemical Co Ltd, Re [1920J 1 KB 257 10.60 Hopewell Ptoject Management Ltd v Ewbank Pteece Ltd [1998J 1 Lloyd's Rep 448 5.63 Hore v Wbitmore (1778) 2 Cowp 784 ., 18.93 15. I 8 Homal v Neubetget Ptoducts Ltd [1957J 1 QB 247 Homcastle v Stuart (1806) 7 East 400 17.39 Horne v Prudential Assurance Co Ltd 1997 SLT (Sh Ct) 75 , 20.59 Hotty v Tate & Lyle Refineries Ltd [1982J 2 Lloyd's Rep 416 .4.51 Horsc, Carriage & General Insurance Co Ltd v Petch (1917) 33 TLR 131 25.43 HorsIer v ZortO [1975J Ch 302 , ' 4.04 HoughvHead(1885)55LJQB43 21.11 Houghton (RA) & Mancon Ltd v Sunderland Marine Mutual Insurance Co Ltd (The Ny-Eeasteyr) [1988J 1 Lloyd's Rep 60 . .11.12, 11.13, 11.63, 15.18 Houghton v TrafalgarInsurance [1954J 1 QB 247 8.51 Household Global Funding Inc v Btitish Gas Trading Ltd [20011 EWHC 400 (Ch) 8.29 Houstman v Thornton (1816) Holt 242 22.36

Integrated Containers Service Inc v British Traders Insurance CO [1984J 1 Lloyd's

Rep 154 21.13, 24.23, 24.26, 24.31, 24.32, 24.35 International Lottety Management v Dumas [2002J Lloyd's Rep IR 237 .. .4.112,4.136, 4.137

International Management Group (UK) Ltd v Simmonds [2003] EWHC 177 (Comm),
[2004j 1 Lloyd's Rep 476 IR 690 .4.23, 4.57, 4.63, 4.79, 4.205 22.93 .4.70, 4.71, 4.85, 4.90, 4.127, 7.38, 7.45, 7.47

Interpart Comerciao e Gestao SA v Lexington Insurance Co [2004] Lloyd's Rep Inversiones Manria SA v Sphere Drake Insurance Co pIc (The Dora) [19891 1 Lloyd's
Rep 69

Investors Compensation System Scheme Ltd v West Bromwich Building Society [1998]
I WLR 896 ' 8.03,8.04, 8.Q7, 8.09, 8.37, 8.39, 8.40, 8.45, 8.48, 8.49, 9.04 Ionides v Pacific Fite & Marine Insurance Co (1871) LR 6 QB 674 2.08, 2.21, 2.39, 2.42,4.135,4.141, 8.75, 8.76, 8.82 Ionides v PendetCI874) LR 9 QB 531 .4.66, 7.38, 7.42 5.53,9.37,9.40, Ionides v Universal Marine Insurance Co (1863) 14 CB(NS) 259 13.08, 13.Q9, 13.57 Itaqi Ministty of Defence v Arcepey Shipping Co SA (The Angel Bell) [I979J 2 Lloyd's Rep 491 20.01,20.19 Ireland v Livingston (1872) LR 5 HL 395 5.24

Howard Marine & Dredging Co Ltd v Ogden & Sons (Excavations) Ltd [1978)
QB 574 Howard v Pickfotd Tool Co Ltd [1951] 1 KB 417 Hucks v Thornton (1815) Holt 30 Hudson v Hattison (1821) 3 Biod & B 97 Hughes v Asset Managets pIc [199513 All ER 669 Hughes v Pump House Hotel [1902J 2 KB 190 Hull v Coopet (1811) 14 East 479 Hummingbird Motors Ltd v Hobbs [1986J KfR 276 .4.182 , .26.53 11.57,17.06 22.60 3.71 .. .20.13 ; 18.22, 18.23 .4.136

Iron Trades Mutual Insurance Co Ltd v Companhia de Deguros Imperio [1991] 1 Re

LR 213 Irvin v Hine [1950J 1 KB 555 Irving v Manning (1847) 1 HLC 287 Irving v Richatdson (1831) 2 B &Ad 193 Isaacs v Royal Insutance Co (1870) LR 5 Ex 296 .4.165,4.195 21.53, 23.15, 23.23, 24.37 6.27,7.27,21.79 3.46, 26.22 17.47

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Issaias (Elfie A) v Marinelnsurance Co Lrd (1923) 15 LlLRep 186 10.16, 11.61, 11.62, 11.63, 15.18, 15.22, 15.24 Iralia Express, The (No 2) [1992J Lloyd's Rep 281 , 6.27,22.67,22.121 6.27, 22.62 JabboudF & K) v Cusrodian of Israeli Absentee Properry [1954] 1 WLR 139 Jackson (John C) Ltd v Sun Insurance Office Ltd (1962) 38 WWR 294 10.81 Jackson v Greenfield [1998] BpIR 699 , , 20.41 JacksonvMumford(1902)8ComCas61 11.04, 11.07, 11.08, 11.10, 11.13 Jackson v North American Assurance Society of Virginia Inc 183 SE 2d 160 (1971), 54 ILR 525 , , , 13.23 Jackson v Union Marine Insurance Co (1874) LR 10 CP 125 9.58, 15.35,21.92,21.93 Jaglom v Excess Insurance Co Ltd [1972] 2 QB 250 2.14,2.15,8.54 James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC572 8.41 James v CGU Insurance pic [2002] Lloyd's Rep IR 206 , .455, 4.101, 15.18 James Yachts Ltd v Thames & Mersey Marine Insurance Co Ltd [1977] 1 Lloyd's Rep 206 1.61 Jamieson & Newcastle Steamship Freight Insurance Association, Re [18951 2 QB 90 9.58, 21.95
Janson v Driefomein Consolidated Mines Ltd [1902] AC 484 3.78 Jardine v Learhley (1863) 32 LJQB 132 22.34 JEB Fasreners v Marks, Bloom & Co [1983] I All ER 583 .4.41, 4.48 Jenkins v Deane(1934) 47 LlLRep 342 18.84, 26.16 Jenkins v Power (1817) 6 M & S 282 6.22,6.32 JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1987] 1 Lloyd's Rep 32; [1985] 1 Lloyd's Rep 264 9.23,10.06,10.08,15.49, 19.45,19.46,19.48,19.60 .17.1 1,17.16 John Martin ofLondon Ltd v Russell [1960J 1 Lloyd's Rep 554 1852 John Potter & Co v Burrell & Son [1897] 1 QB 97 John v Price Waterhouse [2002] EWCA Civ 899 8.02, 8.34 Johnson & Co v Hogg (1883) 10 QBD 432 13.47 Johnson v Marshall, Sons & Co Ltd [1906] AC 409 15.11 Johnson v Sheddon (1802) 2 Easr 581 23.32 17.18 Joinr Frost, The[1998] 2 Lloyd's Rep 310 Jones v Bangor Mutual Shipping Insurance Sociery Ltd (1889) 61 LT 727 .4.165, 4.167 Jones v Neptune Marine Insurance Co (1872) LR 7 QB 702 17.45 Jones v Nicholson (1854) 10 Exch 28 , 11.48 Jones v Randall (1774) 1 Cowp 37 : 3.04 Joseph Watson & Son Ltd v Firemen's Fund Insurance Co of San FranClsco [1922] 2 KB 355 9.55 Joyce v Kennard (1870 LR 7 QB 78 23.51 Jumbo King Ltd v Faithful Properties Ltd [1999J 4 HKC 707 8.45

Table ofCases
Kastor Too, The [2004] EWCA Civ 277, [2004]2 Lloyd's Rep 277 21.36,21.106, 21.120,21.121,21.124,21.125,22.32,22.33,22.34,22.35,22.55 Kausar v Eagle StarInsurance Co Ltd (1996) [2000] Lloyd's Rep IR 154 .4.157, 18.28,18.29 Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Co Ltd [1939] 2 KB 544 8.09, 13.19, 13.22 Keevil & Keevil Ltd v Boag [1940] 3 All ER 346 1.59 Keighley, Maxred & Co v Durant [1901] AC 240 2.87 Keir v Andrade (1816) 6 Taunt 498 3.77 Kelly v Norwich Union Fire Insurance Society Ltd [1989] 2 Lloyd's Rep 333 7.53, 11.22,2Ll9 Kelner v Baxted1866) LR 2 CP 174 2.89 Kennedy v Panama, New Zealand & Australian Royal Mail Co Ltd (I 867) LR 2 QB 580 , .4.03 Kent v Bird (1777) 2 Cowl' 583 3.06 Kenyon v Berthon (1778) 1 DougI12n 18.90 Kerr v Ayr Steam Shipping Co Ltd [1915] AC 217 .7.52 Kewley v Ryan (1794) 2 HBI 343 18.37 Khan v Ahbey Life Assurance Co [2002] NpC 5 22.93 Khedine, The (1882) 7 ApI' Cas 795 12 Kldston v Empire Marine Insurance Co (1866) LR 1 CP 535 24.29 King (or Fiehl) v Chambers & Newman (Insurance Brokers) Ltd [1963] 2 Lloyd's Rep 130 5.26,5.56 King v Brandywine Reinsurance Co (UK) Lrd [2005] EWCA Civ 235, [2005]1 Lloyd', Rep 655; [2004] EWHC 1033 (Comm), [2004] 2 Lloyd's Rep 670 8.1 1,9.62,24.26 King v Vicroria Insurance Co Ltd [1896] AC 250 25.15, 25.26, 25.76 Kingscroft Insurance Co Ltd v Nissan Fire & Marine Insurance Co Ltd (No 2) [1999J . Lloyd's Rep IR 603 .4.94, 4.118, 4.119 Kingsford v Marshall (1832) 8 Bing 458 10.81 Kingston v Phelps, cited (1795) 7 TR 165 18.37 Kiriacoulis Lines SA v Compagnie d'Assurances Maritimes Ariennes et Terrestres (CAMAT) (The Demetra K) [2002] EWCA elv 1070, [2002] 2 Lloyd's Rep 581 8.78,8.80, 8.90, 10.65 Kirkaldy (J) & Sons Ltd v Walker[1999] Lloyd's Rep IR 410 8.52,8.53, 18.62, 18.63, 18.94, 18.96 KJS Merc~Scandia XXXXII v Certain Lloyd's Underwriters (The Mercandian Continent) [2001] EWCA elv 1275, [2001] 2 Lloyd's Rep 563 .4.195, 4.197, 4.198, 22.22, 22.89, 22.94, 22.97, 22.114 Kish v Taylor Sons & Co [1912] AC 604 18.53 Kleinwort v Shepard (1859) lEI & E1447 13.47 Kleovoulos of Rhodes, The [2003] EWCA Civ 12, [2003J 1 Lloyd's Rep 138 8.12, 8.60, 13.71, 13.75, 13.83 Kler Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd's Rep IR47 18.79, 18.109 Knight ofSt Michael, The [1898] I' 30 9.52,10.60 Knight v Cambridge (1724), cited (1743) 2 Str 1173 11.56 21.27, 21.30, 21.117, 23.19 Knight v Fairh (1850) 15 QB 649 Knox v Wood (1808) 1 Camp 543 3.10 Koch Marine Inc v D'Amica Societa Di Navigazione ARL (The Elena D'Amico) [1980] 1 Lloyd's Rep 75 24.11 Koebel v Saunders (1864) 17 CB(NS) 71 , 19.61 Kopitoffv Wilson (1876) 1 QBD 377 19.16 Kulukkundis v Norwich Union Fire Insurance Society [1937] 1 KB 1 21.93 Kumar v AGF Insurance Ltd [1999] Lloyd's Rep IR 147 8.28

Kacianoffv China Traders Insurance Co Ltd [1914] 3 KB 1121 951,9.52,9.53 Kallis (George) Manufacmrers Ltd v Success Insurance Ltd [1985] 2 Lloyd's Rep 8 (PC) ., .18.11 Kaltenbach v Mackenzie (1878) 3 CpD 467 . .22.32, 22.33, 22.34 Kammins Ballrooms Co Ltd v Zenirh Investments (Torquay) Ltd [1971] AC 850 .4.164 4.164 Kanchenjunga, The [1990J 1 Lloyd's Rep 391 Kapitan Petko Voivoda, The [2003] EWCA Civ 451, [2003] 2 Lloyd's Rep 1; [2002J EWCA 1306 (Comm), [2002] 2 All ER (Comm) 560 8.21 Karen Oltmann, The [1976J 2 Lloyd's Rep 708 , 858 Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) p004J EWCA Civ 277, [2004]2 Lloyd's Rep 277 21.36,21.106,21.120,21.121, 21.124,21.125,22.32,22.33,22.34,22.35,22.55

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Table ofCases
Kusel v Atkin (The Catatiba) [1997] 2 Lloyd's Rep 749 21.111,21.114, 23.21,23.23

Table ofCases
Lek v Mathews (1927) 29 LlLRep 141 22.78, 22.85, 22.88 Lemos v British & Foreign Marine Insurance Co Ltd (1931) 39 LlLRep 275 15.22,15.24 Lennard's Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705 .. , " , .. , .. ,.4.113 Leon v Casey [1932J 2 KB 576 1.59,1.60,4.200 Leonita, The (1922) 13 LlLRep 231 15.23, 15.24 10.81 Letchford v Oldham (1880) 5 QBD 538 10.15 Letts v Excess Insurance Co (1916) 32 TLR 361 Levin v Allnutt (1812) 15 East 267 13.60 , , .. " 14.15 Levy v Assicurazioni Generali [1940] AC 791 .. , Lewis v Gteat Western Railway Co (1877) 3 QB 195 15.11 7.26,23.29,23.32 Lewis v Rucker (1761) 2 Burr 1167 Lewis v Tressider [1985J 2 QdR 533 5.20,5.21,5.37,5.50 Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350; [1917J 1 KB 873 9.08, 9.12, 9.14, 9.21, 9.35, 9.44, 9.56,10.15,10.60, 15.16,15.35,15.57,15.63,15.72, 19.41, 19.42 Liberian Insurance Agency Inc v Mosse [l977J 2 Lloyd's Rep 560 .4.68, 4.167, 18.115,18.117,18.121,18.122,18.126 Lidgett v Secretan (1870) LR 5 CP 190 17.33 7.25,7.27,7.39,21.120,23.21 Lidgett v Secretan (No 2) (1871) LR 6 CP 616 Lind v Mitchell (1928) 45 TLR 54 11.39, 24.21, 24.24 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 ." ... , .. , .. 20,14, 20.27,20.28 Lindsay Blec Depots v Motor Union Insurance Co (1930) 46 TLR 572 " , 17.11 Lindsay v Klein (The Tatjan.) [1911J AC 194 19.54 22.121 Lips, The [1988] AC 395 4.123,4.200,4.203,6.41, 18.120,20.22, Litsion Pride, The [1985J 1 Lloyd's Rep 437 22.35,22.52,22.88,22.113 Liverpool & Londo,n War Risks Association Ltd v Ocean Steamship Co Ltd (The Priam) [l948J AC 243 13.14, 13.16, 13.53 Liverpool & London War Risks Insurance Association Ltd v Marine Underwriters of SS Richard de Larringa [1921] 2AC 141 13.10,13.11 Livie v Janson (1810) 12 East 648 9.40, 21.116, 21.117, 21.119 Lloyd v Fleming (1872) LR 7 QB 299 20.1 0 Lloyd's & Scottish Finance Ltd v Modern Cars & Caravans (Kingston) Ltd [1966] 1 QB 764 24.26 Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd [2001] EWCA Civ 1643, [2002J Lloyd's Rep IR 113 9.04, 9.60 .4.20 Load v Green (1846) 15 M & W 216 LockyervOfHey(l786) 1 TR252 19.20,21.27 Loders & Nicoline Ltd v Bank of New Zealand (1929) 33 LlLRep 70 21.89 Lohre v Aitchison (1878) 3 QBD 558 21.38, 21.107, 23.18 London & Lancashire Fire Insurance Co Ltd v Bolands Ltd [1924] AC 836 , , 8.12, 14.13,14.14 London & Manchester Plate Glass Co v Heath [1913] 3 KB 411 14.16 , .. 21.25, 21.28 London & Provincial Leather Processes Ltd v Hudson [1939] 2 KB 724 London & Provincial Marine & General Insurance Co Ltd v Chambers (1900) 5 Com Cas241 1.59 London Assurance Co v Sainsbury (1783) 3 Doug 245 ' , , .. , , , 25.14 London Assutance v Mansel (1879) 11 ChD 363 .4.112 London Borough of Bromley v Ellis [1971] 1 Lloyd's Rep 97 5.39 London, Chatham & Dover Railway Co v South Eastern Railway Co [1893] AC 429 6.14 London County Commercial Reinsurance Office Ltd [1922J 2 Ch 67 1.56, 3.11, 3.16 London General Insurance Co v General Marine Underwriters Association [1921 J I KB 104 4.96,4.117

Kuwait Airways Corpv Kuwait Insurance Co SAK (No 1) [1997] 2 Lloyd's Rep 687; [l997J 2 Lloyd's Rep 687; [1996J 1 Lloyd's Rep 664 8.02, 8.18, 8.30, 8.43, 9.20,9.23,9.29, 13.47, 21.12, 21.47, 21.65, 24.27, 24.29, 24.71, 25.58,25.63 Kytiaki, The [1993J 1 Lloyd's Rep 137 22.66, 22.70, 23.39 Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Association (Europe) [2000] Lloyd's Rep IR 513 7.31,7.35,7.36,7.37 La Fabrique de Produits Chimiques SA v Large [1923J 1 KB 379 10.69 2.42, 9.23,10.14 La Poinre, The [1986J 2 Lloyd's Rep 513 Lady Gwendolen, The [1965J P 294 . .4.114 Lag>, The [1966J 1 Lloyd's Rep 582 14.06 Lagden v O'Conllor[2003J UKHL 64, [2004J 1 AC 1067 123 Laing v Glover (1813) 5 Taunr 49 18.71 L'Alsacienne Premiere Societe Alsacienne et Lorraine d'Assurances Contre l'Incendie Ies Accidents et les Risques Divers v Unistorebrand International Insurance SA [1995] Lloyd's Rep IR 333 2.65 Lamb Head Sbipping Co Ltd v Jennings (The Marel) [1994J 1 Lloyd's Rep 624; [1992J 1 Lloyd's Rep 402 7.51, 10.06, 10.30, 10.37, 10.41, 10.42 Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd's Rep 485 4.07 Lambert v Liddard (1814) 5 Taunt 480 17.08 Lanasa Fruit Steamship & Importing Co Inc v Universal Insurance Co 302 US 556

(1~...................15~
Lancasbire County Council v Municipal Insurance Ltd [1997] QB 897 8.32,8.53, 12.12 18.89, 19.28, 19.63 Lane v Nixon (1866) LR 1 CP 412 8.21, 9.27, 24.22 Lane (W &j) vSptatt [1970J 2QB480 Lang v Andetdell (1824) 3 B & Cr 495 17.09, 18.88 Langdale v Mason (1780) 1 Bennett's Fire Insurance cases 16, (1780) 2 Park on Imurance965 13.33, 14.15 Langhom v Cologan (1812) 4 Taunt 330 6:02 13.23 Langlas v Iowa Life Insurance Co 63 NW 2d 885 (1954), 21 ILR 416 Lapwing, The [1940] P 112 .10.14,10.25,11.39 Laroche v Oswin (1810) 12 East 133 18.29 Laurie v West Hardepool Steamship Thirds Indemnity Association (1899) 15 TLR486 20.12, 20.28 Laveroni v Drury (1852) 22 LJ Ex 2 10.24 21.54, 22.33 Lavington Court, The [1945] 2 All ER 357 Law Guarantee Trust & Accident Society Ltd v Munich Reinsurance Co (1915) 31 TLR 572 2.42 Lawrence v Aberdein (1821) 5 B & Ald 107 8.51 , " ,9.06,9.60 Lawrence v Accidental Insurance Co Ltd (1881) 7 QBD 216 Le Cheminant v Pearson (1812) 4 Taunt 367 ., "" " "., 21.111 Le Crasv Hughes (1782) 3 Doug 81 3:21 Ledingham v Ontario Hospital Services Commission (1979) 46 DLR (3d) 699 25.51, 25.52 Leduc & Co v Ward (1888) 20 QBD 475 18.01 ,, ", , , ' , .. 24.39 Lee v Southern Insurance Co (1870) LR CP 397 ,. " . , Leegas, The [1987J 1 Lloyd's Rep 471 2.50, 2.59 Lefevre v White [1990J 1 Lloyd's Rep 569 20.69, 20.71, 20.72 Legal & General Assurance Society Ltd v Drake Insurance Co Ltd [1992] QB 887 26.10, 26.42,26.45,26.48,26.50,26.51,26.52,26.53,26.60 Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 .: 8.21,9.27 Legge v Byas, Mosley & Co (190 I) 7 Com Cas 16 22.116

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Table ofCases
London Guarantee Co v Fearnley (1880) 5 App Cas 911 22.14,22.15 London Steamship Owners Mutual Insurance Association Ltd v Bombay Trading Co Ltd (rhe Felicie) [1990J 2 Lloyd's Rep 21n 20.70,20.72 Long v Allan (1785) 4 Dougl276 " 6.04 Lonhro Exports Ltd v Export Credits Guarantee Department [1999] Ch 158 25.80 Lonsdale & Thompson Ltd v Black Artow Group pic [1993) 3 All ER 648 3.31 Loraine v Thomlinson (1781) 2 Dougl585 6.04 Lordsgate Properties v Balcombe [1985) 1 EGLR 20 5.75 .18.64 Lothian v Henderson (1803) 3 Bos & PuI499 Lowe & Sons v Dixon & Sons (1885) 16 QBD 455 26.61 Lozano v Janson (1859) 2 EI & BI160 13.47, 21.50, 21.101 Luhbock v Rowcroft (1803) 5 Esp 50 9.48 Lucena v Craufurd (1803) 2 Bos & Pul (NR) 269 3.04,3.07,3.21,3.22,3.23,3.24, 3.30,3.40,3.41,3.47,3.55 Luckie v Bushby (1853) 13 CB 864 , 6.27 Lucy, The [1983] 1 Lloyd's Rep 188 .4.04, 4.51 Luke v Lyde (1759) 2 Burr 882 1.41 Lumbermens Murual Casualty Co v Bovis Lend Lease Ltd [2004] EWCA 2197 (Comm), [2005] 1 Lloyd's Rep 494 21.15, 21.16 Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 8.62 Lydia Flag, The [1998] 2 Lloyd's Rep 652 : 9.25, 19.57 Lynch v Dunsford (1811) 14 East 494; sub nom Lynch v Hamilton (1810) 3 Taunt 37 .4.84 Lynch v Narional Life & Accidentlnsurance Co 278 SW 2d 32 (1955) 13.23 Lyons v JW Bendey Ltd (1944) 77 L1LRep 335 5.31 Lysaght (J) Ltd v Coleman [1895] 1 QB 49 21.05

Table ofCases
Manchester Liners Ltd y British & Foreign Marine Insurance Co Ltd (1901) 7 Com ~U...........353 Mancomunidad del Vapor Frumiz v Royal Exchange Assurance [1927] 1 KB 567 12.08 Mandarin Star, The [1969] 2QB 449 10.69, 14.20, 14.25 Man~ervCommercia1 Union Assurance Co [1998] Lloyd's Rep IR93 2.58, 2.59 Mamfest Shipping Co Ltd v Uni~Polaris Insurance Co Ltd (The Star Sea) [2001J UKHL 1, [2003] 1 AC 469; [1997] 1 Lloyd's Rep 360; [1995] 1 Lloyd's Rep 651 1.59, 1.60,4.14,4.195,4.199,4.202,4.204,10.65,10.80, 19.04, 19.06, 19.08, 19.34,19.35,19.36,19.37,19.39,19.40,19.46,19.47, 19.48,22.80,22.89, 22.102,22.106,22.107,22.108,22.113 Mann Macneal & Steeves Ltd v Capital & Counties Insurance [1921] 2 KB 300 4.103 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] Ac 749 8.09, 8.26,8.48 Maori King, The [1895] 2 QB 550 19.13 .4.53, 4.57, 4.65, 4.77, 22.107 Marc Rich & CoAG v Portman [1996) 1 Lloyd's Rep 430 March Cabaret Club & Casino Ltd v London Assurance [1975] 1 Lloyd's Rep 169 4.85, 4.86,4.87 Mate v Charles (1856) 5 E & B 978 8.32 Marel, The [1994J 1 Lloyd's Rep 624; [1992] 1 Lloyd's Rep 402 7.51, 10.06, 10.30, 10.37,10.41,1Q.42 Margetts & Ocean Accident Guarantee Corp, Re [1901] 2 KB 792 '" .12.16 Madanela, The (1922) 13 L1LRep 126 15.24 Marine Craft Constructors Ltd v Erland Blomqvist (Engineers) Ltd [1953] 1 Lloyd's Rep 514 12.16 Maritime Insurance Co v Allianza Insurance Co of Santander (1907) 13 Com Cas 46 17.10 Maritime Insurance Co v Stearns [1901] 2 KB 912 18.07,18.114 Maritime Transport Overseas GmbH v Unitramp (The Antaios) [1981] 2 Lloyd's Rep 284 6.41 Mark Rowlands Ltd v Berni 1nns Ltd [1986] 1 QB 211 , .. 3.30,25.25,25.32 Markel International Insurance Co Ltd v La Republica Campania Argentina de Seguros [2004] EWHC 1826 (Comm), [2005] Lloyd's Rep 1R 90 4.69 Marsden v Reid (1803) 3 East 572 4.62, 18.36 Marsttand Fishing Co Ltd v Beer (The Girl Pat) [1937] 1 All ER 158 21.65, 21.66, 21.102,21.106 17.37 Marten v Vestey [1920) AC 307 Martin Maritime Ltd v Provident Capital Indemnity Fund Ltd (The Lydia Flag) [1998] 2 Lloyd's Rep 652 9.25,19.57 Martin P, The [2003] EWHC 2158 (Comm), [2004] 1 Lloyd's Rep 389 2.82, 3.27, 3.36,3.49,4.74,4.76,4.88,4.104,4.107,4.197,6.37, 26.31, 26.34, 26.38, 26.39,26.41,26.50,26.53,26.55,26.69,26.72,26.80,26.82 Martin v Sitwell (1691) 1 Show KB 156 1.39, 6.05 Mason v Sainsbury (1782) 3 Dougl61 25.02,25.75 5.77 Maspons y Hermano v Mildred, Goyeneche & Co (1883) 8 App Cas 874 Mata Hari, The [1983] 2 Lloyd's Rep 449 8.91 Matiana, The [1921] 1 AC 99; [1919] 2 KB 670 13.06 17.13 Marthie v Potts (1802) 3 Bos & Pul 23 Matvieff v Crosfield (1903) 8 Com Cas 120 22.117 Mayban General Assurance Bhd v Alstom Power Plants Ltd [2004] EWHC 1038 (Comm), [2004] 2 Lloyd's Rep 609 10.79,15.53,15.54 Mayor, &c, of Boston v France Fenwick & Co Ltd (1923) 28 Com Cas 367 22.48 Mazarakis Bros v Furness, Withy & Co (1923) 17 LlLRep 113 13.12 M'Carthy v Abel (1804) 5 East 388 21.91 MDIS v Swinbank [1999] Lloyd's Rep 1R 516 21.15 M'Dougle v Royal Exchange Assurance Co (1815) 4 Camp 283 10.81

MIS Aswan Engineering Establishment Co Ltd v Iron Trades Mutual Assurance Co Ltd [1989] 1 Lloyd's Rep 289 8.07,8.54,8.57 Mac, The (1882) 7 PD 126 .. " , , 12.16 3.32, 3.33, 3.36, 3.46, Macaura v Northern Assurance Co Lrd [1925] AC 619 3.47,3.50,3.60 Macbeth & Co Ltd v Maritime Insurance Co Ltd [1908) AC 144 , 21c74 McCormick v National Motor & Accident Insurance Union Ltd (1934) 49 LlLRep 361 " .4.164, 4.167, 20.56 McCowin Lumber & Export Co Inc v Pacific Marine Insurance Co Ltd (1922) 38TLR901 22.117 MacDowell v Fraser (1779) 1 Dougl 260 , .4.06, 4.131 19.23, 19.29 McFadden v Blue Star Line [1905J 1 KB 697 Mackay v London General1nsurance Co Ltd (1935) 51 L1LRep 201 18.91 Mackender v Feldia AG (1967) 2 QB 590 4.156, 18.84 " " .8.77, 8.81 Mackenzie v Coulson (1869) LR 8 Eq 369 Mackenzie v Shedden (1810) 2 Camp 431 17.39 Mackenzie v Whitworrh (1875) 1 Ex D 36 3.69 MacMillan v AW Knorr Becker Scott Ltd [1990] 1 Lloyd's Rep 98 5.06 McNealy v Pennine Insurance Co Lrd [1978] 2 Lloyd's Rep 18 5.03,5.25 McNeil v Law Union & Rock 1nsurance Co Lrd (1925) 23 LlLRep 314 5.75 Magnus v Burremer (1852) 11 CB 876 .. .10.12, 10.25 " 7.28,21.86,23.36 Main, The (1894) P 320 Mains v London Assurance (1935) 52 LlLRep 211 15.23 Maira, The (No 2) [1986) 2 Lloyd's Rep 12 7.25,7.29 Malbi v Ahhey Life Assurance Co Ltd [1996] LRLR 237 .4.64 Mallett v McMonagle [1970] AC 166 " 5.53 Mallough v Barber (1815) 4 Camp 150 : 5.25,5.50 Mammorh Pine, The [1986] 3 All ER 767 24.26

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Table afCases
Mead v Davison (1835) 3 A & E 303 3.13,3.65 Medina Princess, The [1965] 1 Lloyd's Rep 361 23.21 Mediterranean Freight Services Ltd v BP Oil International Ltd (The Fiona) [1993] 1 Lloyd's Rep 257 19.13,19.43 Melanesian Mission Trust Board v Australian Mutual Provident Society [1996] UKPC 53, (1997) 74 p & CR297 8.08, 8.52 Mellish v Andrews (1812) 15 East 13 21.24 Mentz, Decker & Co v Marlrimelnsurance Co [1910] 1 KB 132 18.!!6, 18.119, 18.123 Mercandlan Continent, The [2001] EWCA Civ 1275, [2001] 2 Lloyd's Rep 563 4.195, 4.197,4.198,22.22,22.89,22.94,22.97,22.114 Mercantile Marine Insurance Co v Titherington (1864) 5 B & S 765 . , .. , .. 8.20, 17.30, 17.36 Mercantile Steamship Co Ltd v Tyset (1881) 7 QBD 73 9.58 Merchants & Manufacturers Insurance Co Ltd v Hunt [1941] 1 KB 295 4.14, 4.175 Merchants Marine Insurance v North of England Protecting & Indemnity Association (1926) 26 LlLRep 201 12.16 Merchants Trading Co v Universal Marine Co (1870) (1874) 2 Asp MC 431n 10.06 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 .4.113, 4.!!4 Merrett v Capltollndemnlry COtp [1991] 1 Lloyd's Rep 169 25.41 Metropolitan Police Commissioner v Caldwell [1982] AC 341 14.24 Meunier, Re [1894] 2 QB 415 14.29 Meyer v Gtegson (1784) 3 Dougl 402 6.04 Meyer v Ralll (1876) 1 CPD 358 9.57 Miceli v Union Marine & General Insurance Co Ltd (1938) 60 LlLRep 275 7.51 Michael, The [1979] 1 Lloyd's Rep 55 11.62, 11.64,22.88 Michael v Gillespy (1857) 2 CB(NS) 627 . 17.06 Michael v Tredwln (1856) 17 CB 551 19.30 Michael v Valentine (1923) 16 LlLRep 244 5.38 Michalos (N) & Sons Maritime SA v Prudential Assurance Co Ltd (The Zinovia) (1984) 2 Lloyd's Rep 264 10.16, 11.62, 11.63,15.18 Micklefield v Hepgln (1793) 1 Anst 133 3.04 Micklefield v SAC Technology Ltd [1990] 1 WLR 1002 8;33 Middleton v Pollock (1875) LR 20 Eq 29 6.27 Midland Mainline Ltd v Eagle Star Insurance Co Ltd [2004] EWCA Civ 1042, [2004] 2 Lloyd's Rep 604; [2003J EWHC (Comm) 1771, [2004J Lloyd's Rep IR 22 9.41, 9.43, 15.49 Mllasan, The [2000] 2 Lloyd's Rep 458 , .. 7.57,10.30,15.22 Millet, Glbb & Co Ltd, Re [1957] 1 WLR 703 25.15, 25.76 Miller v Law Accidentlnsurance Co [1903] 1 KB 712 '" 9.50, 13.49, 13.50 Miller v Woodfall (1857) 8 El & Bl493 22.37, 22.40 MilIesvFletcher(1779) I Dougl231 21.101 Minden, The [1942] AC 50 7.03,9.53, 10.66, 11.44, 11.45, 13.46, 13.50, 13.51, 18.31,18.46,18.47,21.63,21.67,21.68,21.97, 21.106, 22.35 Minett v Anderson (1794) Peake 277 17.34 Mint Securiry Lrd v Blair [1982] 2 Lloyd's Rep 188 .4.165, 5.38 Miss lay Jay, The [1987] 1 Lloyd's Rep 32; [1985J 1 Lloyd's Rep 264 9.23, 10.06, 10.08,19.45,19.48,19.60 Mitchell v Edle (1787) 1 TR 608 22.56 Mitor Investments Pry Ltd v General Accident Fire & Life Assurance Corp Ltd [1984] WAR365 5.18, 5.29 Mitrovich Bros & Co v Merchants Marine Insurance Co Ltd (1923) 14 LlLRep 25; (1922) 12 LlLRep451 7.51 Mitsui Construction Co Ltd v Attorney-General of Hong Kong (1986) 33 Build LR 1 8.26 Molr v Royal Exchange Assurance Co (1815) 3 M & S 461; (1814)4 Camp 84 18.88

Table
9.03, 19.42 20.25 26.44, 26.45, 26.49 17.41,17.42 Monrgomery v Egglngton (1789) 3 TR 362 Monroya v London Assurance Co (1851) 6 Exch 451 10.44 Moonacre, The [1992] 2 Lloyd's Rep 501 3.17, 3.30, 3.31, 3.50, 3.62, 5.22, 5.26, 5.70,5.73 Moor Line Lrd v Isaac King (1920) 4 LlLRep 286 9.40, 13.12 Moore Large & Co Ltd v Hermes Credit & Guarantee pic (2003) EWHC 26 (Comm), [2003] 1 Lloyd's Rep 163 4.53, 4.60, 4.76, 4.104 Moore v Evans [1918JAC 185 21.36,21.47 Moore v Lunn (1923) 15 LlLRep 155 19.07 Moore v Mourgue (1776) 2 Camp 479 5.27,5.28 Moran, Galloway & Co v Uzielll [1905] 2 KB 555 3.31,3.46,3.48 Mordy v Jones (1825) 4 B & Cr 394 9.57 Morgan v Price (1850) 4 Exch 615 ., 26.23 Morgan v Provincial Insurance Co Ltd [1932) 2 KB 70 18.105, 18.109 Morley v Moore [1936] 2 KB 359 25.Ql Morley v United Friendly Insurance pic [1993J 1 WLR 996 15.12 MornlngSrar, The 1984 (4) SA 269 3.74,13.78 Morris v Ford Motor Co Ltd [1973] 1 QB 792 25.22 Morrison v Universal Marine Insurance Co (1873) LR 8 Ex 197 2.08, 4.10, 4.19, 4.20,4.96,4.167 Moses v Prarr (1815) 4 Camp 297 6.02 Moss v Byrom (1795) 6 TR 379 !!.55, 18.27 Motor & General Insurance Co Ltd v Pavy [1994] 1 WLR 462 22.13 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990]1 Lloyd's Rep 391 .4.164, 18.95 Motteux v London Assurance (1739) 1 Atk 545 8.81, 8.87, 18.47 Mount v Larkins (1831) 8 Bing 108 18.23 MounrainvWhltrle[1921] lAC615 10.13,19.46 Moxon v Atkins (1812) 3 Camp 200 17.09 M'Queen v Great Western Railway Co (1875) LR 10 QB 569 .4.59 MSC Mediterrananean Shipping Co SA v Polish Ocean Lines (The Tychy) (No 2) [2001] EWCA Civ 1198, [200!) 2 Lloyd's Rep 403 8.37,8.40,8.41 Mudlark, The [1911] P 116 12.16 Muirhead v Forth & NonhSea Steamboat Mutual Insurance Association (1894) ~n..................18.~ Mullet v Thompson (1811) 2 Camp 610 '" '" 18.70 Mullett v Sheddon (18!!) 13 East 304 '" 21.49 Muncaster Castle, The [1961J AC 807 11.n Munro, Brice & Co v FW Marren (1920) 2 LlLRep 2, (1920) 36 TLR 241; sub nom Munro Brice & Co v War Risks Association [1918] 2 KB 78 7.52,7.58 Murphy v Bell (1828) 4 Bing 567 3.06 Murray v Legal & General Assurance Sociery Ltd [1970] 2 QB 495 " 20.66, 20.67 Murray v Mann (1848) 2 Ex 538 .4.20 Nal Genova and Nal Superba, The [1984] 1 Lloyd's Rep 353 8.79,8.80 Nam Kwong Medicines & Health Products Co Ltd v China Insurance Co Ltd [2002] 2 Lloyd's Rep 591 18.12 Napier & Emick (Lord) v Hunter [1993] AC 713 25.16,25.54,25.55,25.58,25.60,25.63, 25.65, 25.n, 25.73, 25.77, 25.78, 25.79 Nassau Bay, The [1979] 1 Lloyd's Rep 395 12.03,13.53,13.84 Monarch Sreamshlp Co Ltd v Karlshamms Olje&briker [1949] AC 196 Mandel v Steel (1841) 8 M &W858 Monksfield v Vehicle & General Insurance Co Ltd [1971] 1 Lloyd's Rep 139

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Table ofCases
National Employers Mutual General Insurance Association Ltd v Haydon [1980] 2 Lloyd's Rep 149 26.06, 26.16 National Fite1nsurance Co v Mclaren (1886) 12 OR 682 25.52 National Insurance & Guarantee Corp v Imperio Reinsurance Co (UK) Ltd [1999] Lloyd's Rep lR 249 5.65,5.69 National Justice Campania Naviera SA v Prudential Assurance Co Ltd (The Ibrian Reefer) [1993] 2 Lloyd's Rep 68 , 10.65, 11.63, 15.18, 15.22 National Oil Co of Zimbabwe (Private) Ltd v Srurge [1991] 2 Lloyd's Rep 281 13.36 National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 1 Lloyd's Rep 582 2.82, 2.85, 2.86,2.87,2.90,3.62,3.63,15.11,22.82,24.14, 25.29, 25.30 12.13, 20.62 Nautilus Steam Sbipping Co Ltd, Re [1936J Ch 17 Naviera de Canarius SA v Nacional Hispanica Aseguradora SA (The Playa de las Nieves) [1978] AC 853 15.32, 15.35, 15.37 Navone v Haddon (1850) 9 CB 30 21.108 Naylot v Palmer (1853) 8 Ex 739 10.75 Naylor v Taylor (1829) 9 B & C 718 21.100 , , .. 5.77 Near East Relief v King, Chasseur & Co Ltd [1930] 2 KB 40 Nefell, The [1919] 1 KB 383 24.75 Nelson v Salvador (1829) M & M 309 18.87 Nema, The[1982] AC 724 , 8.59 Nesbitt v Lushington (1792) 4 TR 783 10.76 Neter (NE) & Co Ltd v Licences & General Insurance Co Ltd (1944) 77 LlLRep 202 7.51, 10.Q7 Netherlands Insurance Co Est 1845 Ltd v Karl Lijunberg & Co AB (The Mammoth Pine) [1986J 3 All ER 767 24.26, 25.22 Neue Fischmehl Vertriebsgesellschaft Haselhorst mbH v Yorkshire Insllrance Co Ltd (934) 50 LlLRep 151 19.04 New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24 2.74, 2.93, 2.96, 4.40, 4.64,4.102,4.185,4.187,4.192,4.194,8.40,8.69 New South Wales Leather Co Pty Ltd v Vanguard Insurance Co Ltd [1991] NSWLR699 3.14 13.22, 13.23 New York Life1nsurance Co v Bennion 158 F 2d 260 (1946), 13 ILR 224 Newby v Reed (1763) 1 Black W 416 26.01 Newcastle Fire Insurance Co v Macmorran & Co (1815) 3 Dow 255 18,54,18.90 Newton's ofWembley Ltd v Williams [1965] 1 QB 560 '" .4.156, 18.84 Nickels & Co v London & Provincial Marine & General Insurance Co Ltd (1900) 6 Com Cas 15 9.48, 13.57 Nicol's Case (1859) 3 De G &J 387 .4.20,4.47 Nigel Upchurch Associates v Aldridge Estates Investment Co Ltd [1993] 1 Lloyd's Rep 535 20.42,20.76 Niger Co Ltd v Guardian Assurance Co (1922) 13 LlLRep 75 18.39 Nima SARL v Deves Insurance pic (The Prestrioka) [2002] EWCA Civ 1132, [2002J Lloyd's Rep IR 752 17.12,18.12,18.13,18.15,18.18 Nishina Trading Co Ltd v Chiyoda Fire & Marine Insurance Co Ltd (The Mandarin Star) [1969] 2 QB 449 10.69, 14.20, 14.25 Nissan v Attorney-General [1970] AC 179 13.64, 13.65 Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), [2004] 1 Lloyd's Rep 38 5.12,20.03 Nittan (UK) Ltd v Solent Steel Fabrication Ltd [1981] 2 Lloyd's Rep 633 8.47 18.48,18.49 Nohel's Explosives Co v Jenkins;& CO [1896J 2 QB 326 Noble Resources Ltd v Greenwood (The Vasso) [1993] 2 Lloyd's Rep 309 24.14,24.16 Nohle v Kennoway (1780) 2 Doug KB 510 4.92 Nocton v Kruger [1914] AC 932 ~ .4.03, 4.64 Normhurst Ltd v Dornoch Ltd [2004] EWHC (Comm), [2005J Lloyd's Rep IR 27 .... 22.121

Table
Normid Housing Association Ltd v Ralphs [1989J 1 Lloyd's Rep 265 20.47 Normid Housing Association Ltd v Ralphs (No 2) [1989J 1 Lloyd's Rep 274 .. '" 20.47 North & $curh Trust Ce v Berkeley [1971] 1 WLR 470 5.03 North Atlantic Insurance Co Ltd v Bishopsgate Insurance Ltd [1-.998] 1 Lloyd's Rep459 2Ll7 North Atlantic Insurance Co Ltd v Nationwide General Insurance Co Ltd [2004] EWCA Civ 423, [2004J Lloyd's Rep lR 466; [2003J EWHC 449 (Comm), 2.67 [2003J 2 CLC731 12.21 North Btitain, Tbe[1894] p 77 North British & Mercantile Insurance Co v London, Liverpool & Globe Insurance Co (1877) 5 ChD 569 26.Q2 North British Fishing Boat Insurance Co Ltd v Starr (1922) 13 LlLRep 206 4.78, 4.92 North Eastern 1aDA Steamship Insurance Association v Red Sea Steamship Co Ltd (1906) 12 Com Cas 26 6.05 North of England Iron Steamship Insurance Association v Armstrong (1870) LR 5 QB 244 25.68,25.69,25.71,26.27 North of England Pure Oil~Cake Co v Archangel Maritime Insurance Co (1875) LR 10 QB 249 '" '" 20.09, 20.10 North Star Shipping Ltd v Sphere Dtake Insurance pIc (No 2) [2005] EWHC 665 (Comm) .4.40, 4.69, 4.76, 4.85, 11.65, '15.79 [2005] 2 Lloyd's Rep 76 North Star Shipping Ltd v Sphere Dtake Insurance pic (The North Star) [2004] EWCA 2457 (Comm), [2005] Lloyd's Rep IR 404 24.29 24.29 North Star, The [2004] EWCA 2457 (Cemm), [2005] Lloyd's Rep lR 404 Northumbrian Shipping Co Ltd v Timm (E) & Son Ltd [1939J AC 397 19.27 22.86 Norton v Royal Fire & Life Assurance Co (1886) 1 TLR 460 Norwegian American Cruises AlS v Mundy (The Vistafjotd) [1988J 2 Lloyd's Rep 343 8.58 Norwest Refrigeration Services Pry Ltd v Bain Dawes Pty Ltd (1984) 157 CLR 149 5.26 Norwich Union Fire Insurance $cciery Ltd v Price (WH) Lrd [1934] AC 455 22.52,22.58 18.48 Notaro v Henderson (1872) LR 7 QB 225 '" Noten BV v Harding [1990] 2 Lloyd's Rep 283 8.09, 15.56, 15.57 NottS Patent Brick & Tile Co v Buder (1886) 16 QBD 778 .4.03 Nourse v Liverpool Sailing Ship Owners' Mutual Protection & Indemnity Association [1896] 2 QB 16 24.69 lLl5, 11.16, lLl7, lLl9, 11.20, 11.21, Nukila, The [1997] 2 Lloyd's Rep 146 11.23,11.26,15.68, 2Ll9, 21.20, 24.39 Nurt v Bourdieu (1786) 1 TR 323 11.44 Ny-Eeasteyr, The [1988J 1 Lloyd's Rep 60 ILl2, lLl3, 11.63, 15.18 0& RJewellers Ltd v Terry [1999] Lloyd's Rep lR436 5.30, 5.61 O'Btien v Hughes-Gibb & Co Ltd [1995] LRLR 90 5.17, 5.28 Oceanic Steam Navigation Co Ltd v Evans (1934) 40 Com Cas 108 22.48 Oceanic Steamship Co v Faber (1907) 13 Com Cas 28; (1906) 11 Com Cas 179 11.23 O'Cennor v BDB Kirby & Ce [1972] 1 QB 90 5.72 O'Connor v Hart [1983] NZLR280 4.04 Oei v Foster [1982] 2 Lloyd's Rep 170 9.65 Office Appliance Trades Association of Great Britain & Ireland v Roylance (1940) 67 LlLRep 86 9.48 Ogden & Ce Pry Ltd v Reliance Fire Sptinkler Ce Pry Ltd [1975] 1 Lloyd's Rep 52; [1973] 2 NSWLR 7 " 5.32 O'Kane v Jones (The Martin P) [2003] EWHC 2158 (Comm), [2004] 1 Lloyd's Rep 389 2.81, 3.27, 3.36, 3.49, 4.76, 4.88, 4.104, 4.107, 4.197, 6.37, 26.31, 26.34,26.38,26.39,26.41,26.50,26.53,26.55,26.69, 26.72, 26.80, 26.82 5.11, 22.117 Okeanis, The [1986] 1 Lloyd's Rep 195 Oliverson v Brightman (1846) 8 QB 781 17.35

Jx

!xi

Table ofCases
Olympia, The (1924) 19 LlLRep 255 15-22, 15.23, 15-24 Olympic Pride, The [1980] 2 Lloyd's Rep 67 8.77 Orakpo v Barclays Insurance Services [1995] LRLR 433 _.. 22.86,22-102,22.107,25.75 O'Reilly v Gonne(1815) 4 Camp 249 _ 18.50 O'Reilly v Royal Exchange Assurance (1815) 4 Camp 246 18.50 _. - -. _.. 20.15 Orient Co Ltd v Brekke & Howlid [1913] 1 KB 531 Osman v J Ralph Moss Ltd [1970] 1 Lloyd's Rep 313 _ - . - .. 5.37 O'Sullivan v Management Agency & Music Ltd [1985] 1 QB 428 _ .4.04 Oswell v Vigne (1812) 15 East 70 18.27, 1830 OT Compute", Re [2004] EWCA Civ 653, [2004] Lloyd's Rep lR 669 _ 20.38, 20.39,20.42,20.77 Outhwaite v Commercial Bank of Greece SA (The Sea Breeze) [1987]1 Lloyd's Rep 372 ... 18.86 Ove"eas Commodities v Style [1958J 1 Lloyd's Rep 546 15.59,17.15,18.64, 18.68,18.72,18.119,18.126,21.05 Overseas Marine Insurance Co, Re (1930) 36 LlLRep 183 3.11 Owners of Cargo on Ship 'Maori King' (The Maori King) [1895] 2 QB 550 19.13 Owners of the Steamship Gracie v Owners of the Steamship Argentino (The Argentino) (1889) 14 App Cas 519 15.35 Owne" of Steamship 'Larchgrove' v R (1919) 1 LlLRep 408 _ 13.12 P&S Platt v Crouch [2003] EWCA Civ 1110, [2004J 1 p & CR 18 _ , 839,8.40 Pacific & Generallnsutance Co Ltd v Hazell [1997] LRLR 65 6.16 Padrelsland, The [1984] 1 Lloyd's Rep 408 _ 20.60 20.41,20.63,22.73 Padre Island, The (No 2) [1989J 1 Lloyd's Rep 239 Page v Scottish Insurance Corp (1929) 140 LT 571 _.. 25.11 Pagnan SA v Tradax Ocean Transportation SA [1987] 2 Lloyd's Rep 342 8.21 Palamisto General Enterprises SA v Ocean Marine Co Ltd (The Dias) [1972] 2 QB 625 10.36,15.21, 15.26 15.23 Palitana, The (1924) 20 LlLRep 74,140 _ Palmer v Fenning (1833) 9 Bing 460 _ _ 18.21 Palmet v Ma"hall (1832) 8 Bing 317 _ 18.22 Pan American World Airways Inc v Aetna Casualty & Surety Co [1975] 1 Lloyd's Rep 77 .. .. .. .13.30,13.35,14.19 Pan Atlantic Insurance Co Ltd v Pine Top Insutance Co Ltd [1995] lAC 501; [1993] 1 1,47,1.49,4.16,4.25,4.26,4.33, Lloyd's Rep 496; [1992]1 Lloyd's Rep 101 4.35,4.39,4.40,4.42,4.44,4.51, 4.54, 4.55, 4.58, 4.83, 4.89, 4.105, 4_108,4.142, 4.148, 4.157. 4.161,4.177, 4.178 Panamanian Oriental Steamship Corp v Wtight (The Anita) [1971] 1 WLR 882, [1970] 2 Lloyd's Rep 365 7.05,9.60,13.61, 13.71, 13.74, 13.75, 13.83,21.47,21.49, 21.103,22.52,22.57 Pangood Ltd v Barclay Brown & Co Ltd [1999J Lloyd's Rep IR 405 5.11,5.14,5.15 Papademittiou v Hende"on (1939) 64 LlLRep 345 15.13 Papera Traders Co Ltd v Hyundai Merchant Marine Co Ltd (The Eurasian Dream) [2002] EWHC 118 (Comm), [2002] 1 Lloyd's Rep 719 19.07,19.10 Parente v Bayville Marine Insurance [1975] 1 Lloyd's Rep 333 11.13 Park v Hammond (1816) 6 Taunt 495 5.23 Parkin v Dick (1809) 2 Camp 221 3.76 Parmeter v Cousins (1809) 2 Camp 235 _ 1731 Parry v Cleaver [1970] AC 1 25.01 Parry v Great Ship Co Ltd (1864) 4 B &S 556 _ 8.81, 21.101 Pasquali & Co v Traders & General Insurance Association (1921) 9 LlLRep 514 7.54 Pateras v Royal Exchange Assurance (The Sappho) (1934) 49 LlLRep 400 15.21 Paterson Steamships Ltd v Canadian Co~operative Wheat Producers Ltd (1934] AC 538 _ 19.16, 19.43

Table _'r. 15.65 21.101 .4.06, 18.90 . 4.09,4.118,4.119, 4.123, 4.124, 4.126 Pearson & Son Ltd v Dublin Corp [1907] AC 351 .4.110 Pedley v Avon Insurance [2003] EWHC 2007 (QB) 4.60, 4.69 Pellas (E) & Co v Neptune Marine Insurance Co (1879) 5 CPD 34 _ _6.27, 20.26 Pelly v Royal Exchange Assurance(1757) I Burr341 _1.42, 17.13 Pelton SS Co Ltd v North of England Protecting & Indemnity Association (1925) 22 LlLRep 510 12.16 _ 26.32 Pendlebury v Walker(184 I) 4 Y & C Ex 424 Pesquerias y Secaderos de Bacalao de Espana SA v Beer (1949) 82 LlLRep 501 _ 13.26, 21.125,22.32 13.06, 13.08, 13.40 Petersham, The [1921J 1 AC 99; [1919J 2 KB 670 Petrofina (UK) Ltd v Magnaload Ltd [1984] QB 127 2.75,3.58,3.60,25.28,26.02 Petro~ec Inc v Petroleo Brasileiro SA Petrobas [2004] EWCA Civ 156, [2004] 1 Lloyd's ep 629 _ _. _ 8.02, 8.05 Petromec Inc v Petroleo Brasileiro SA Petrobas (No 2) [2004] EWHC 127 (Comm) .. , 8.40 Peyman v Lanjani [1985] Ch 457 4.164 Phelps,James&CovHill [1891] 1 QB605 18.48 Phelps v Auldjo (1809) 2 Camp 350 18.47 Phillips v Barber(182I) 5 B &Ald 161 _ _ 10.26 Phillips v Irving (1844) 7 Man & G 325 _ 18.39 _.956 Philpott v Swann (1861) 11 CB(NS) 271 Phoenix Assurance Co v Spooner [1905] 2 KB 753 25.18 Phoenix General Insurance Co of Greece v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599 _ " . '" .4.201, 22.22 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 , 18.57 Phynn v Royal Exchange Assurance Co (1798) 7 TR 505 _ _.. _ 11.55, 18.44 Pickersgill & Sons Ltd v London & Provincial Marine & General Insurance Co [1912] 3 KB 614 22.64 19.52 Pickup v Thames & Mersey Marine Insurance Co Ltd (1878) 3 QBD 594 Piermay Shipping Co SA v Chester (The Michael) [1979] 2 Lloyd's Rep 1 11.62, 11.64, 22.88 Pieschell v Allnutt (1813) 4 Taunt 792 _ _ 3.77 Pilkington United Kingdom Ltd v CGU Insurance pic [2004J EWCA Civ 23, [2004] Lloyd's Rep IR 891 _ 11.15 Pim v Reid (1843) 6 Man & G 1 18.28 8.91 Pindos Shipping Corp v Raven (The Mata Hari) [1983] 2 Lloyd's Rep 449 Pink v Fleming (1890) 25 QBD 396 9.06,15.34,15.35,15.36,15.37 Pintada, La [1985] AC 104 6.14, 22.121 Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd's Rep 274 20.57, 22.13, 22.15 Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 8.59, 8.61, 8.62 Piper v Royal Exchange Assurance (1932) 44 LlLRep 103 .7.43 Pipon v Cope (1808) 1 Camp 434 11.46 Pitman v Universal Marine Insurance Co (1882) 9 QBD 192 23.19, 23.21, 23.22, 23.23 Pirtegrew v Ptingle (1832) 3 B &Ad 514 18.69,19.26 Platform Home Loans Ltd v Oysron Shipways Ltd [2002] 1 AC 190 5.45 Playa de las Nieves, The [1978] AC 853 15.32,15.35,15.37 Polpen Shipping Co Ltd v Commercial Union Assurance Co Ltd [1943] 1 All ER 162 ... 12.15 21.06, 21.62, 21.65, Polurrian Steamship Co Ltd v Young (1913) 19 Com Cas 143 21.66,21.102,21.106,21.107 _.. _ Patterson v Harris (1861) 1 B & S 336 Patterson v Ritchie (1815) 4 M & S 392 Pawson v Watson (1778) 2 Cowp 785 PCW Syndicates v PCW Reinsurers [1996] 1 WLR 1136

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Table ofCases
Polzeath, The [1916] I' 117 16.15 Popham & Willett v St Petersburg Insurance Co (1904) 10 Com Cas 31 10.11 Popi M, The [1985] I WLR 948; [1984] 2 Lloyd's Rep 555; [1983] 2 Lloyd's Rep 235 7,49,7.56,7.57,10.28,10.31, 10.33, 10.38, 10,41, lQ.42, 19.55 Post Office v Norwich Union Fire Insurance Co [1967] 2 QB 363 ' 20.50,20.51, 20.56 Potoi Chau, The [1983) 2 Lloyd's Rep 376 22.66,24,45 Powell v General Electric Co [2005] EWCA 644 (QBD) 8.22 Powell v Hyde (1855) El & Bl607 13,46, 13,47 Power Packing Casemakers Ltd v Emst [1983] ICR 292 14.11 6.21, 6.22 Power v Burcher (1829) 10 B &Cr 329 20.09, 20.10 Powles v Innes (1843) 11 M & W 10 2.07 Praet Gulian) et Cie SA v HG Poland [1960] 1 Lloyd's Rep 416 8.35,8.40 Prenn v Simmonds [1971] 1 WLR 1381 Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc [1998] 2 Lloyd's Rep 326 5.11, 5.13,5.14,6.22,6.29 President ofIndia v La Pintada Campania Navigacion SA (La Pintada) [1985] AC 104 6.14, 22.121 Presidem of India v Lips Maritime COtp (The Lips) [1988] AC 395 22.121 17.12, 18.12, Prestrioka, The [2002] EWCA Civ 1132, [2002] Lloyd's Rep IR 752 18.13,18.15,18.18 Priam, The [1948] AC243 13.14,13.16,13.53 Ptide of DonegaL The [2002] EWHC 24 (Comm), [2002] I Lloyd's Rep 659 11,41, 19.04,19.05,19.10,19.23 Prinrpak v AGF Insurance Ltd [1999] Lloyd's Rep IR 542 18.103 1.59 Prohatina Shipping Co Ltd v Sun Insurance Office Ltd [1974] QB 635 Ptoject Asia Line Inc v Shone (The Pride of Donegal) [2002] EWHC 24 (Comm); [2002] 1 Lloyd's Rep 659 11,41,19.04,19.05,19.10,19.23 Ptomet Engineering (Singapore) Pte Lrd v Sturge (The Nukila) [1997] 2 Lloyd's 11.15,11.16,11.17,11.19,11.20, lUI, 11.23, 11.26, 15.68, Rep 146 21.19,21.20,24.39 Property Insurance Co Ltd v National Protector Insurance Co Ltd (1913) 18 Com ./ Cas 119 4.100 .4,1 19,4.120 P1Oudfoot v Monrefiore (1867) LR 2 QB 511 Provincial Insurance Co of Canada v Leduc (1874) LR 6 PC 224 22.59,22.60 Provincial Insurance Co v Morgan [1933] AC 240 18.70 Prudent Tankers Ltd SA v Dominion Insurance Co Ltd (The Caribbean Sea) [1980] 1 Lloyd's Rep 338 11.08, 1LI3, 11.24 Pryke v Gibbs Hartley Cooper [1991] 1 Lloyd's Rep 602 2,42,2.65 Punjah National Bank v de Bainville [1992] 1 WLR 1138 5.05

Table ofCases
R v Gullefer [1990] 1 WLR 1063n '" R v jones [1990J 1 WLR 1057 R v Oshorn (1919) 84jp63 R v Savage [1992] lAC 699 Rafsanjan Pistachio Producers Co~operative v Bank Leumi (UK) pIe [1992] 2 Lloyd's Rep 512 Raiffeisen Zentralbank Osterrieh AG v Five Star Trading lie [2001] QB 825 Raine v Bell (1808) 9 East 195 Ralli v johnson (1856) 6 El & BI422 Randal v Cockran (1748) 1 Yes Sen 98 Rankin v Porter (1873) LR 6 HL 83 13.56 13.56 13.56 14.24 .4.148 12.13,

20.12,20.14,20.16 18.29 23.39 25.38, 25,40, 25.75, 25.76 17.39, 21.91, 21.93, 21.96, 22.33, 22.34, 22.35,22.36,22.61 6.27, 20.25 10.81 20.09 1.59, 4.200 22.55 8.04,8.36,

Rawson v Samuel (1841) Cr & Ph 161 Rayner v Godmond (1821) 5 B & AJd 225 Rayner v Preston (1881) 18 ChD I Raynor v Ritson (1865) 6 B & S 888 Read v Bonham (1821) 3 Brad & B 147 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] I WLR 989

Quebec Marine Insurance Co v Commercial Bank of Canada (1870) LR 3 PC 234 ..... 18.65, 18.75,19.23,19.26,19.29 Queensland National Bank Ltd v Peninsar & Oriental Steam Navigation Co [1898] I QB 567 19.13 Quinta Communications SA v Warrington [2000] Lloyd's Rep IR 81 8.67 Quorum v Schramm [2002] Lloyd's Rep IR 292 7.34,8.27,21.04

R v Bottrill, ex p Kuechenmeister [1947] KB 41

R v Cunningham (1957) 41 Cr ApI' Rep 155 R v Dagnall [2003] EWCA Civ 2441, (2003) 147 SjLB 995 R v G [2004] I AC 1034 R v Governor of Winson Green Prison, Birmingham, ex p Littlejohn [1975]'1 WLR 893

13.19 14.24 13.56 14.24

14.28

8.39, 18.35 Red Sea, The [1896] I' 20 22,40 .4.03, 4.64 Redgrave v Hurd (1881) 20 ChD I Redman vWihon (1845) 14M &W 476 ~ 11.31,19,44 Redmond v Smith (1844) 7 Man & G 457 3.70, 3.71 Reed (AE) & Co v Page, Son & East Ltd [1927J 1 KB 743 19.11,19.24 Reese Silver Mining Co v Smith (1869) LR 4 HL 64 .4.04 Regina Fair Co Ltd v Blossom [1958] 2 Lloyd's Rep 425; [1957] 2 Lloyd's Rep 466 10.35 Reid v Standard Marine Assurance Co Ltd (1886) 2 TLR 807 21.21 Reimer v Ringrose (1851) 6 Exch 263 21.75 Reinhart Co v joshua Hoyle & Sons Ltd [1961] I Lloyd's Rep 346 21.19 Reischer v Barwick [1894] 2 QB 548 9.05,9.24,9.36,9,44 Reliable Distributors Ltd v Royal Insurance Co of Canada [1984] 6 WWR 83 14.26 Reliance Marine Insurance Co v Duder [1913] I KB 265 8.03 Rendall v Combined Insurance Co of America [2005J EWHC 678 (Comm), [2005] 1 CLC 565 .4.134, 4.146 Remon (GH) & Co Ltd v Black Sea & Baltic General Insurance Co Ltd [1941] I KB 206 17.15 Republic of Bolivia v Indemnity Mutual Marine Insurance Co Ltd [1909] 1 KB 785 10.74,10.76 Republic of China v National Union Fire Insurance Co of Pittsburgh (The Hai Hsuan) [1958] I Lloyd's Rep 351 .. .. .. 11.53, 13,47 Reynolds v Phoenix Assurance Co Ltd [1978J 2 Lloyd's Rep 440 .4.85,4.86,7.33 Rhesa Shipping Co Ltd v Edmunds (The Popi M) [1985] I WLR 948; [1984] 2 Lloyd's Rep 555; [l983J 2 Lloyd's Rep 235 7.49,7.56,7.57,10.28,10.31, 10.33,10.38,10,41,10,42,19.55 Rhodes, Re (1887) 36 ChD 586 21.21 Richardson, ex I' Governors ofStThomas's Hospital, Re [1911] 2 KB 705 22.65, 22.68 Rickards v Porestal Land, Timher & Railways Co (Tbe Minden) [1942J AC 50 7.03, 9.53,10.66, 11.44,11.45,13,46,13.50,13.51,18.31,18,46,18,47, 21.53,21.63,21.67,21.68,21.97, 2LI06, 22.35 Rickman v Carmirs (1833) 5 B &Ad 651 17.20, 21.87 19.26 Ridsdale v Newnham (1815) 4 Camp III Rivaz v Gerussi Bros & Co (1880) 6 QBD 222 2.37,4.25,4.66 Rivetlate Properties Ltd v Paul [1975] Ch 133 8.79

lxiv

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Table ofCases

Table ofCases
St Paul Fire & Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd [1995] 2 Lloyd's Rep 116 4.40, 4.51, 4.56, 4.58, 4.89 Salem, The [1982] QB 946 7.55,9.60, 10.78, 11.44, 11.52, 13.46, 13.47, 14.26,14.27,15.16 SalrvCooper(1880) 16ChD544 4.17 Salvador v Hopkins (1765) 3 Burr 1707 1.42 Samuel (P) & Co Ltd v Dumas [1924] AC 431 1048, 3.72, 4.184, 4.185, 9.15, 9.16, 9.18,9.29,10.14,10.15,10.16,10.17,10.58,10.59, 10.78, 11.34, 11.44,12.02,15.28,18.83,22.100,25.30 Samuel v Royal Exchange Assurance Co (1828) 8 B & Cr 119 17.35 San Roman, The (1873) LR 5 PC 301 18.49 Sanday v British & Foreign Marine Insurance CO [1915J 2 KB 781 13.50, 13.52,21.37 Sappho, The (1934) 49 LlLRep 400 15.21 Sarginson Bros v Keith Moulron & Co (1942) 73 L1LRep 104 5.22 Sarpen, The [1916] P 306 13.65 Sassoon (ED) & Co v Western Assurance Co [1912] AC 561; (1923) 16 LlLRep 129; 10.06,10.19,15.51,15.59,15.67,15.68 (1923) 14 LlLRep 135 Satanira, The [1897] AC 59 , 2.67 Saunders v Baring (1876) 34 LTNS 419 21.42, 25.18, 25.37 18.51 Scaramanga & Co v Sramp (1880) 5 CPD 295 Scarf v Jardine (1882) 7 App Cas 345 .4.164 Scheiderman v Merropoliran Casualty Co of New York 220 NYS 2d 947 (1961) 13.23 Schiffshypothekenbankzu LuebeckAG v Compton (The Alexion Hope) [1988J 1 Lloyd's Rep 311 10.65 1.60, 4.92, 5.54 Schloss Bros v Stevens (1905) 10 Com Cas 224 .4.104 Schoolman v Hall [1951] 1 Lioyd's Rep 139 Schroder v Thompson (1817) 7 Taunt 462 18.39 Schtraks v Government of Israel [1964] AC 556 14.28 8.09,8.12,8.13, Schuler (L) AG v Wickman Machine Tools Ltd [1974] AC 235 '" 8.23,8.24,8.29,8.40 Scindia Steamships (London) Ltd v London Assurance [1937] 1 KB 639 11.19, 11.25 Scott Lithgow Ltd v Secretary of State for Defence (1989) 45 BLR 1 22.17 SCOtr v Copenhagen Reinsurance Co (UK) Ltd [2003] EWCA Civ 688, [2003] Lloyd's Rep IR 696 9.04,21.12,21.22,21.30,21.102,21.105 Scott v Irving (1830) 1 B & Ald 605 22.117 18.44, 18.46 Scott v Thompson (1805) 1 B & P (NR) 181 Scottish Marine Insurance v Turner (1855) 4 HLC 312 22.39 Scottish Metropolitan Assurance Co Ltd v Stewert (1923) 39 TLR 407 17.47 Scottish Shire Line Ltd v London & Provincial Marine & General Insurance Co Ltd [1912] 3 KB 51 17.39, 21.91 Sea Insurance Co v Blogg [1898] 2 QB 398 18.87 Sea Insurance Co v Hadden (1884) 13 QBD 706 22.42,25.37 Sea Voyager Maritime Incv Bielecki [1999) Lloyd's Rep IR356 20.54 Seaman v Fonereau (1743) 2 Str 1183 .4.13,4.80,4.84 Searle v A R Hales & Co Lrd [1996J LRLR 68 .4.180, 5.03 Seashore Marine SA v Phoenix Assurance pIc (The Vergina) (No 2) [2001] 2 Lloyd's Rep 698 24.66 Seaspeed Dora, The [1988] 1 WLR 221 25.13 Seavision Investment SA v Evenett (The Tiburon) [1990] 2 Lloyd's Rep 418 2.55, 18.64 Seeburg v Russian Wood Agency Ltd (1934) 50 LlLRep 146 14.07 3.78,3.80 Seligman v Eagle StarInsurance CO [1917J 1 Ch 519 Sellar v M'Vicar(1804) 1 Bos & Pul (NR) 23 18.04 Seymour v London & Provincial Marine Insurance Co (1872) 41 LJep 193 18.68 Shalrir III, The [1997] 1 Lloyd's Rep 586 4.197,18.122,18.127,21.41,21.48,24.27

River~Z;o~~a.t .~~.~:. ~~~ ~.~~~~s~.i~e. ~~~~~i~.g. ~~. :~~~ .~.U.~c~~~e.r.~~t~~). ~1.~~~] ... . 11.72
Roadworks (1952) Lrd v JR Charman [1994] 2 Lloyd's Rep 99 2.49, 2.57 Roar Marine Lrd v Bimeh Iran Insurance Co [1998] 1 Lloyd's Rep 423 2.45,2.59 Roberts v Anglo-Saxon Insurance Association Lrd (1926) 26 LlLRep 154 18.105, 18.109 Roberrs v Plaisred [1989] 2 Lloyd's Rep 341 5.34 Roberrson v Ewer (1786) 1 TR 127 11.56, 21.06 Roberrson v French (1803) 4 Easr 130 8.07,8.14,8.20 Roberrson v Hamilton (1811) 14 East 522 .3.39 Roberrson v Pettos M Nomikos [1939] AC 371 3.54, 15.41,21.53,21.94,22.33 Roberrso n v Royal Exchange Assurance Corp (1924) 17 LlLRep 17 22.59 ,' 13.47, 13.50 Robinson Gold Mining Co v Alliance Assurance Co [1902] 2 KB 489 Rodan International Ltd v Commercial Union Assurance Co plc (1999] Lloyd s Rep IR495 11.14 Roddick v Indemnity Mutual Marine Insurance Co Ltd [1895] 2 QB 380; [1895] 1 QB 536 18.82 9.53,21.97,21.102 Rodocanachi v Elliott (1873) LR 8 CP 649 Rogers v Whittaker [1917] 1 KB 942 13.34, 13.35 Roper v Johnson (1873) LR 8 CP 167 24.15 Rosa v Insurance Co of the State of Pennsylvania (The Belle of Portugal) (1970] 2 Lloyd's Rep 386 10.65,11.40 RoscowvCorson(1819) 8 Taunr 684 11.55 10.35 Roselodge Lrd v Castle [1966] 2 Lloyd's Rep 113 Roserto v Gurney (1851) 11 CB 176 21.75 Ross v Humer (1790) 4 TR 33 11.48, 11.51, 11.55, 18.43 RotchvEdie(1795)6TR413 13.52 Rothschild OJ Assurance pic v Collyear [1999] Lloyd's Rep IR 6 22.09 21.67,21.93,21.102,22.33 Roura & Forgas v Townend [1919] 1 KB 189 Roux v Saivador (1836) 3 Bing NC 266 21.42, 21.44, 21.50, 22.31, 22.61, 25.18,25.37 Rowcroft v Dunmore (1801), cited 3 Taunt 228 , 10.25 Royal & Sun Alliance Insurance pic v Dornoch Ltd [2005] EWCA Civ 238, [2005] 1 All /' ER (Comm) 590; [2004] EWHC 803 (Comm), [2004] Lloyd's Rep IR 826 8.31, 8.55,8.57 Royal Bank of Scotland pic v Ettidge (No 2) [2001] UKHL 44, [2002] 2 AC 773 10.31 Royal Boskalis Wesrminsrer NYv Mountain [1999] QB 674; [1997] LRLR 523 21.61, 21.65,21.66,21.71,21.102,21.104,22.32,22.61,22.91, 24.27, 24.31, 24.32,24.38,24.71 Royal Brompton NHS Trusr v Hammond (No 3) [2002J UKHL 14, [2002] 1 WLR 1397 26.36 Royal Exchange Assurance Corp v M'Swiney (1849) 14 QB 646 3.55 Royscor Trusr Lrd v Rogerson [1991J 2 QB 297 4.183 Rozanes v Bowen (1928) 32 LlLRep 98 .4.07, 5.03 Russian Bank for Foreign Trade v Excess Insurance Co Ltd [1918] 2 KB 123 13.50, 13.52,13.67,15.39,15.40,22.52 Ruys v Royal Exchange Assurance Corp [1897] 2 QB 135 21.102 Sadler v Dixon (1841) 8 M & W 895 Sadlers' Co v Badcock (1743) 2 Atk 554 Safadi v Wesrern Assurance Co (1933) 46 LlLRep140 Sailing Ship 'Blairmore' Co Ltd v Macredie [1898] AC 593 Sailing Ship Garston Co v Hickie & Co (1885) 15 QBD 580 St Machar, The (1939) 65 LlLRep 119 Sr Oswald, The [1918] 2 KB 879 19.23 3.04 20.19 21.48,21.77,21.107 17.08, 17.09 : 12.16 13.10

lxvi

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Table ofCases
Sharp v Sphere Drakelnsurance pic (The Moonacre) [1992J 2 Lloyd's Rep 501 3.17, 3.30,3.50,3.62,5.22,5.26,5.70,5.73 Shaw v Moss Emoires & Bastow (1908) 25 TLR 190 20.28 Shaw v Robberds (1837) 6 A & E 75 18.27, 18.70 17.32 Shawe v Felton (1801) 2 East 109 12.02, 14.04 Shelbourne & Co v Law Investment & Insurance COtp [I 898J 2 QB 626 9.60,7.55, Shell International Pettoleum Co Ltd v Gibbs (The Salem) [1982J QB 946 10.78,11.44,11.52,13.46,13.47,14.26,14.27,15.16 Sbell UK Ltd v CLM Engineering Ltd [2000J 1 Lloyd's Rep 612 15.42 21.66,21.101,22.59 Shepberd v Henderson (1874) 7 App Cas 49 Shogun Finance Ltd v Hudson [2003J UKHL 62, [2004J 1 AC 919 8.74 Shooter v Incorporated General Insurances Ltd (The Morning Star) 1984 (4) SA 269 3.74, 13.78 Shore v Benrnall (1828) 7 B & C 798(b) 11.36 Shore v Wilson (1842) 9 Cl & Fin 355 8.34 Short v McCarthy (1820) 3 B & Ald 626 22.62 18.78 Sillem v Thornton (1854) 3 El & Bl868 Simmonds v Cockell [l920J 1 KB 843 18.67 Simmons v Gale [1957J 2 Lloyd's Rep 485 7.58 Simner v New India Assurance Co Ltd [l995J LRLR 240 4.119, 4.164 .4.167 Simon, Haynes, Barlas & Iteland v Beet (1945) 78 LlLRep 337 Simon, Israel & Co v Sedgwick [l893J 1 QB 303; (1892) 67 LTNS 352 17.12, 18.07, 18.11,18.13,18.14,18.17,18.114 Simpson & Co v Tbomson (1877) 3 App Cas 279 22.32, 25.10, 25.14, 25.25 Simpson 55 Co v Premier Underwriting Association Ltd (1905) 10 Com Cas 198 18.73 Sinner v New India Assurance Co Ltd [1995J LRLR 240 4.111 10.06, 11.12, 11.13 Sipowicz v Wimble(The Green Lion) [1974J 1 Lloyd's Rep 593 Sir William Garthwaite (Insurance) Ltd v Port of Manchester Insurance Co Ltd (1930) 37 LlLRep 194 1.59, 1.60 Sirius International Insurance Co (PUBL) v FAI General Insurance Ltd [2004] UKHL 54, [2004J 1 WLR 3251 8.09, 8.11, 8.38 Sirius International Insurance Corp v Oriental Assurance Corp [1999] Lloyd's Rep
m~................................

Table ofCases
SnOwville UK Ltd v Holidaybreak pIc [2004J EWHC 1336 (Ch) 8.48 Soares v Thornton (1817)7 Taunt 627 11.44, 11.51 Societe Anonyme d'Intel'mediaries Luxembourgeois v Farex Gie [1995] Lloyd's Rep IR 116 2.43, 2.67, 4.09, 4.75, 4.98, 4.123, 4.128,5.04 Societe d'Avances Commerciales (SA Egyptienne) v Merchants' Marine Insurance Co (The Palirana) (1924) 20 LlLRep 74, 140 15.23 Socony Mobil Oil Co Inc v West of England Ship Owners Mutual Insurance Association (London) Lrd (The PadreIsland) [1984J 1 Lloyd's Rep 408 20.60 Socony Mobil Oil Co Inc v West of England Ship Owners Mutual Insurance Association (London) Ltd (The PadreIsland) (No 2) [1991J 2 AC 1; [1989J 1 Lloyd's Rep 239 20.41, 20.63, 22.72 24.10 Solholt, The [1981) 2 Lloyd's Rep 574 Sotiros Shipping Inc v Sameiet Solholt (The Solholt) [1981 J 2 Lloyd's Rep 574 24.10 South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 5.44, 5.46,5.47,5.48 South Staffordshire Tramways Co Ltd v Sickness & Accident Assurance Association Ltd [1891J I QB 402 17.47 Soya GmbH Mainz KG v White [1983J 1 Lloyd's Rep 122; [1982J 1 Lloyd's Rep 136; [1980J 1 Lloyd's Rep 491 15.01,15.44,15.51,15.55,15.60,15.65,15.67,15.68 Spalding v Crocker (1897) 2 Com Cas 189 8.88 Spectrum Plus Ltd, Re [2004J EWCA Civ 670, [2004J Ch 337 26.51 23.30 Spence v Union Marinelnsutance Co Ltd (1868) LR 3 CP 427 Sphere Drake Insurance Ltd v Euro International Underwriting Ltd [2003] EWHC 1636 (Comm), [2003) Lloyd's Rep IR 525 15.67,26.32 Spinney's (1948) Ltd v Royal Insurance Co Ltd [1980J 1 Lloyd's Rep 406 7.59,8.09,9.66, 13.26,13.28,13.30,13.33,13.34,13.35,14.15 Spriggs v Wessington Court School [2004J EWHC 1432 (QB), [2005J Lloyd's Rep 1R474 4.164 22.75, 22.121, 22.123 Sprung v Royal Insurance (UK) Ltd [1999J Lloyd's Rep IR 111 18.48 Stag Line Ltd v Foscolo, Mango & Co Ltd [1932J AC 328 Stamma v Brown (1743) 2 Srt 1173 11.55, 11.56 Stanley v Western Insurance Co (1868) LR 3 Ex 71 7.53,9.29,9.56, 10.60 Star Sea, The [2001] UKHL 1, [2003J 1 AC 469; [1997J 1 Lloyd's Rep 360; [1995J 1 Lloyd's Rep 651 1.59, 1.60,4.114,4.199,4.202,4.204,19.04,19.06,
19~19~1~3~19~1~~19~19~1~~1~~19~ 22.80,22.89,22.102,22.106,22.107,22.108,22.113 Srarfire Diamond Rings Lrd v Angel [1962J 2 Lloyd's Rep 217 8.07 Starrett Housing Corp v Iran (1984) 4 Iran-USCTR 122 13.59 8.20, 8.50 Starsin, The [2003J UKHL 12, [2004J 1 AC 715

.. 4~

Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 1 AC 199 2.81 Slattery v Mance [l962J 1 QB 676 15.21 Slazengers Ltd v Seaspeed Ferries International Ltd (The Seaspeed Dora) [1988] 1 WLR221 25.13 18.65,19.13 Sleigh v Tyser [1900J 2 QB 333 Small v United Kingdom Marine Mutual Insurance Association [1897] 2QB311 10.16, 11.49 Smit Tak Offshore Services v Youell [1992J 1 Lloyd's Rep 154 21.14 Smith, Hogg & Co Ltd v Black Sea & Baltic General Insurance Co Ltd [1940] AC 997 19.16,19.43 Smirh (MH) (Plant Hire) Ltd v DL Mainwaring [1986J 2 Lloyd's Rep 244 25.14,25.15 Smith New COUrt Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 .4.183 Smith v Chadwick (1884) 9 App Cas 187 4.56, 4.59 5.29 Smirh vCologan (1788) 2 TR 188n Smirh v Land & House Properry Corp (1884) 28 ChD 7 .4.14 Smith v Lascelles (1788) 2 TR 187 5.29 Smith v Reynolds (1856) 1 H & N 221 3.17, 3.55 21.100 Smith v Robertson (1814) 2 Dow 474 Smith v Surridge (1801) 4 Esp 25 " .. 18.48 8.14 Smirh v Wilson (1832) 3 B &Ad 728

State Government Insurance Office (Qld) v Brisbane Stevedoring Pry Ltd (1969) 123 CLR 228 25.55 3.58, State of rhe Netherlands v Youell [1998J 1 Lloyd's Rep 236; [1997J 2 Lloyd's Rep 440 3.64,4.191,10.78,11.41,24.09,24.15,24.23,24.24 Stare Trading Corp oflndia Lrd v M Golodetz Ltd [1989J 2 Lloyd's Rep 277 18.57 Sraric Control Componenrs (Europe) Lrd v Egan [2004J 2 Lloyd's Rep 429 .. '" 8.10 7.32,23.23,24.73 Sreamship Balmotal Co Ltd v Marten [1902J AC 511 Steamship Calcutta Co Ltd v Andrew Weir & Co (1910) 15 Corn Cas 172 19.15 25.40, 25.73 Stearns v Village Main Reef Gold Mining Co (1905) 10 Com Cas 89 13.64 Steaus Romana, The 158 F 2d 260 (1946), 13 ILR 224 Steel v State Line Steamship Co (1877) 3 App Cas 72 '" 19.03 Stephen v Scottish Boatowners Mutual Insurance Association (The Talisman) [1989J 1 Lloyd's Rep 535 24.07,24.22,24.23 Stephens v Australasian Insurance Co (1872) LR 8 CP 18 2.29,2.32,2.34 Stephens v Cannon [2005J EWCA Civ 222, [2005J CP Rep 31 7.50

lxviii

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Table ofCases
Stewart v Bell (1821) 5 B &Ald238 " ' " ' ' ' ' ' ' ' ' ' ' ' ' ' ' """,."".""",17,13 Stewart v Greenock Marine Insurance Co (1848) 2 HLC 159 , 22.38 Stewett v Aberdein (1838) 4 M & W 211 """",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,22,117 Stock v 1ngliss (1884) 12 QBD 565 " " " ' " ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ,,3.35 Stockdale v Dunlop (1840) 6 M & W 224 , , , " , , , ," , ' " , , , ' " , , , ' , , , , " ' , , ,3,12,3.55 Sto10s Compania SA v Ajax Insurance Co Ltd (The Admiral C) [1981J 1 Lloyd's Rep 9 ,,,.',,,,,,,,,,,,,,,,,,,,,,,,' .... ,,,,,,, .. ,,,,,,,,,,,,,.',,,, ,22,116 Stone v Marine Insurance Co, Ocean Ltd of Gothenburg (1876) 1 ExD 81 6.02, 17.30 Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd [1992] 2 Lloyd's Rep 578 .",,2.84, 3,61,25,29 Stoneham v Ocean, Railway & General Accident Insurance Co (1887) 19 QBD 237 .... 22.14, 22,15,22.16 StoOlUvaart Maacschappy Nederland v Peninsular & Oriental Steam Navigation Co (The Khedine) (1882) 7 App Cas 795 ' ... , , .. ' , , .. , , .. , , , , , , , , , , . ' .... , , , , , .... ,12,20 Stott (Baltic) Steamers Ltd v Matten [1916J 1 AC 304 " .. """"""",,,,,,,,,,,10,21 Stowers v GA Bonus pIc [2003J Lloyd's Rep IR 402 , .. " " " " . " " " " , .. """",5.56 Sttang v Scott (1889) 14 App Cas 601 , .. " .. ",,,,,, .. ,,.,,,,,,,,, .. ,,,,,, .. ,,,24,45 Stranna, The [1938J P 69 " .. ", .. ", .. ", .. ",,,,, .. ,.,,, .. ,,,,,,,,,,,,,,,,,10,21 Stringer v English & Scottish Marine Insurance Co (1870) LR 5 QB 599 21.21, 22.34,22,60,22,61 Strive Shipping Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2002J EWHC 203 (Comm), [2002J Lloyd's Rep IR 669 ' ' , , A,85, 4,88, 4.169,7,40,7,41, 7,46,14,27,15,18,15.79,24,02,24,14,24,16 Srtong & Pearl v S Allinson & Co Ltd (1926) 25 LlLRep 504 ",.""".""",."",5.23 Stroude v Beazer Homes Ltd [2005J EWCA Civ 265, [2005J NPC 45 """""""",8,40 Strover v Harrington [1988J Ch 390 , , ' , , .. , , , , , .. , . , , , , , , " ' , , .. , , , , , , , . ,4,64 Structural Polymer Systems Ltd v Brown [2000J Lloyd's Rep IR 64 , , , , , , , , , , .. , , , , , , ,2L15 Stuart v British & African Steam Navigation Co (l875) 32 LT 257 , ' , .. '" , , ,18.52 Sumitomo Bank Ltd v Banque Btuxelles Lamberr SA [1997J 1 Lloyd's Rep 487""",. A,138 Sun Fire Office v Hart (1889) 14 App Cas 98 "", .. " .. ", .. """."""""",,6,03 Sun Tender, The [1999J QB 199" .. " .. " .. "" .. """" ... """" .. ", ,5.76, 5,79 Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The Kleovoulos of Rhodes) -[2003] EWCACiv 12, [2003J I Lloyd's Rep 138, ,8,12, 8,60,13.71,13.75,13.83, 2L71 Suplhite Pulp Co Lrd v FaberCl895) 1 Com Cas 146 ''''''''''''''''''''''''''~'' A,165 Surrey Heath Botough Council v Lovell Construction Lrd (1990) 48 BLR 108 ",25,32,25.33 Surherland v Pratt (1843) 11 M & W 296 ' , , .. , , , , , , , .. , ' , , , .. , , ' , , , .. , , ' , , , , , . , ,3,13 Svenssons 1hvaruaktiebolag v Cliffe Steamship CO [1932J 1 KB 490 , .. """,19.28, 19,29 Swain v Wall (1649) 1 Rep Ch 149"" .. , .. "", .. " " " " " " " , . " " " " " " ,26.32 Swan v Maritime Insurance Co [1907] 1 KB 116 " ,.", "" '""" .20.13 Sweeting v Pearce (1861) 30 LJCP 109 ", .. ",,,,,, .. ,,,,, .. ,.,,,,,,,,,,,,,,.,22,117 Swiss Reinsurance Co v United Insutance Co Ltd [2005J EWEC 237 (Comm), [2005] Lloyd's Rep IR341""" .. ", .. ".""" .. , .. "",,,,,,,,, .. ,,,,,,, ,6,02, 6,07 Sykes v Forster, umep, QB, 30 March 2001 ,,,,,,, .. ,,,,,,,,,, .. ,,,,,,,,,,,,,8,34,8,40 Symington & Co v Union Insurance Society of Canton Ltd (1928) 31 LlLRep 179 ... ,. 10.60, 10.73, 13,57 Symington & Co v Union Insurance Society of Canton Ltd (No 2) (1928) 32 LILRep 287 , .. ' , , , , , ., ' , , , " ' , " , , , , , , , "., , " , , , , , . , , , , , , , , , ,8,86,9,49,9,60 Syndicate 1242 at Lloyd's v Morgan Read [2003J Lloyd's Rep IR412 " " ' " " " ' , , , , ' ,2,64 Sze Hai Tong Bank Ltd v Rambler Cycle Co Lrd [1959J AC 576 ' , , " , , , , , , ,,' , ' , , , , , ,8,21 T&N Ltd v Royal & Sun Alliance pic [2003J EWEC 1016 (Ch), [2004J Lloyd's Rep IR 106 " " " " ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ,8.D?, 8.78, 8,80, 20,37 , 14.28 T v Secretary of State for the Home Department [1996] AC 742 Tait v Levi (1811) 14 East 481 , , , , , , , , " ' .. , .. , , ... ' , .. , , , , , , , .. , , , , , , .. , 1L36, 18.34

Table ofCases
Talbot Underwtiting Ltd v Nausch Hogan & Murray [2005J EWEC 2359 (Comm) "" ,2,81 Talisman, The [1989J 1 Lloyd's Rep 535 " " " " " " " " " " " " ' " ,24,07, 24,22, 24.23 Tamphn (FA) SS Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916J 2 Tannenbaum & Co v Heath (1908) 13 Com Cas 264 , , , , " , , , , , , . , , , .. , , , , , , , , , .. , . L60 Tanner v Bennett (1825) Ry & Mood 182 , .. , " " " ' , ... "", ... , .. " .. ", ,9,57,11,40 Tarbuckv Avon Insurance pic [2002J QB 571 " " " " " " " " " " " " " " , ,20,37, 20.39 TaskervCunninghame(1819) 1 Bligh 87 "', .. ,.,", .. , .. ", .. " " " " " , , , ",18,33 Tasman Discovetet, The [2004J UKPC 22, [2005J 1 WLR 215 ' " , , , .. , .. , , " , , . : , " ,8,50 Tate & Sons v Hyslop (1885) 15 QBD 368 " " " " " " " " " " " " ' " A.73, 4.75, 25,19 Tatham, Bromage & Co v Burr (The Engineer) [1898J AC 382 " , , , , , , " , , ... , , " , ,,12.21 Tatjana, The [1911] AC 194 " ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' " " .. """ .. " .. "", .. ,19.54 1imersall v National Steamship Co Ltd (1884) 12 QBD 297 """"",.""""",,19,13 Taylor v Dunbar(1869) LR4 CP 206 " " " ' ' ' ' ' ' ' ' ' .. , .. " " " , .. ,,,,,,,15,36,15,37 Taylor v Wilson (1812) 15 East 324 " " " " " ' , .. """ .. ,."", .. """",,,,,17,06 Tekuol Ltd ~ International Insurance Co of Hanover Ltd [2005J EWCA Civ 845, [2005J 2 Lloyd s Rep 701; [2004J EWEC 2473 (Comm), [2005J Lloyd's Rep IR 358 , " , .. 8.17, 8.51,9.29,9,65 Telfait Shipping Corp v Inersea Carriers SA [1985] 1 WLR 553 ' , , , " , ,., , " , , ,22,68, 22,71 Tempus Shipping Co Ltd v Louis Dreyfus & Co Ltd [1930J 1 KB 699 "",9.53, 10,60, 10,65 Tersons Ltd v Stevenage Development Corp [1963] 2 Lloyd's Rep 333 """""""",8,57 Tesco Stotes Ltd v Pook [2003J EWEC (Ch), [2004J IRLR 618 """"".""."",,8.33 Teuronia, The (1872) LR4 PC 171 " " " " " " ' " " , , , , .. ,,,,,,, .. ,.,,,, .. , .. ,18,49 TFL Prospetity, The [1984J 1 WLR 48 " " ' ' ' ' ' ' ' ' ' ' ' ' , .. """,,, .. ,,,,,,, .. ,,,8,22 Thames & Mersey Marine Insurance Co Ltd v British & Chilean Steamship CO [1915J 2 KB 214 ", .. , " " " .. ,"', .. "" .. """"" .. ",,,,, .. ,,,,, ,,25,68, 25,71 Thames & Mersey Marine Insurance Co Ltd v Gunford Ship Co Ltd [1911] AC 529 .... 3.11, Thames & Mersey Marine Insurance Co Ltd v Hamilton, Fraser & Co (The Inchmaree) (1887) 12 App Cas 484 , ... " .. ,", .. , .. " " " " , .. ",' .. "" 10,18, 10,24, 1LOI Thames & Mersey Marine Insurance Co Ltd v HT Van Laun & Co (l905) (l917) 23 Com Cas 104 " " " " " " ' ' ' ' ' ' ' ' ' ' " , . " " .. " .. ", .. , .. "",18,34,18.37 Thellusson v Ferguson (1780) 1 Dougl231 " " " " " " " ' , , , , , , .. , .. ,.,,,,, .... ,18.37 Thellusson v Fletcher (1780) 1 Doug 315 "', .. ,""'"",,,,,, .. ,,,, .. ,, ,3,07, 2L107 Theodorou v Chestet [1954J 1 Lloyd's Rep 204 ' ' ' ' ' ' ' ' , .. " .. " " " .. ", .. """ .1.57 Thin v Richards & CO [1892J 2 QB 141 """""",." .. " " " , .. , .. , .. "",,, 19,28 Thomas & Co v Brown (1899)4 Com Cas 186 ' ' ' ' ' ' ' ' , .. " " " , .. , .. , .. ", .. " ,25.25 Thomas Bares & Sons Ltd v Wyndam's (Lingerie) Ltd [1981J 1 WLR 505 """,.,8,79,8,80 Thomas Chesire & Co v Vaughan Bros & CO [1920J 3 KB 240 , , , , , , , , , , , , , ... , , , , , , ,5.58 Thomas (M) & Son Shipping Co Ltd v London & Provincial Marine & General Insurance Co Ltd (1930) 30 TLR 595""'''''''''''"""" .. """,,,,,,,,,,19,38,19.50 Thomas v Metropolitan Life Insu[~nce Co 131 A 2d 600 (1957) """""""""",13.23 Thomas v Richatd Evans & Co Ltd [1927J 1 KB 33 , , , .. , , , .. , , ", , , , , , , , , , . " .. , .. 6.39 Thomas v Tyne & Wear Steamship Freight Insurance Association [1917J 1 KB 938 ..... 19.49 Thomas Wilson, Sons & Co v Owners of the Cargo per the Xantho (The Xantho) (1887) 12App Cas 503; (1886) 11 PD 170""""""",,10,03,10,13,10,14,10,15,10,20, 1051, 10.55, 10.56, 10.59, lL32, l2.02, 19,45 Thomas Witter Ltd v TBP Industries Ltd [1996J 2 All ER 573 " " " " " " " ' " A.03, 5,07 Thomas Young & Sons Ltd v Hobson & Partners (1949) 65 TLR 365 """, .. """,,5,28 Thompson v Adams (1889) 23 QBD 361 " " " " " " " " " " " " " . " " " " " " ,2,14 Thompson v Hopper (1856) 6 El & B1172 """",."""",,10,16,18.29,19.22,19.30 Thompson v Taylor (1795) 6 TR 478 , , , , " , , , .. , , , , , , , , , , " , , , .. , .. , " , , , .3.52, 17.39 Thompson v Whitmore (1810) 3 Taunt 227 """"""'"."""""""""",10.25 Thomson v Weems (1884) 9 App Cas 671 " " " " " " " " " ' " ,6,05, 1858, 18,89, 18,90

~m""""'",,13m

3,49,7,25,7,39,7,44,18,82, 26m, 26,56

Ixx

lxxi

Table ofCases
Thor Navigarion Inc v Ingosstrakh Insurance Co Lrd [2005] EWHC 19 (Comm), [2005J I Lloyd's Rep IR 547 7.33,7.36,7.37,8.79,23.03,23.08,23.10 Thorsa The [1916J P 257 19.15 Thrun;coe, The[1897J P 301 9.56, 10,44 2.55,18.64 Tiburon, The [1990J 2 Lloyd's Rep 418 Tierney v Etherington (1743), cited 1 Burr 348 , 17.13 TL Creda Ltd v Hay Fielding Ltd, unrep, CA, 30 October 1984 5.20 21.87, 21.88 Tobin v Harford (1864) 34 LJCP 37; (1863) 13 CB(NS) 791 Todd v Ritchie (1816) 1 Stark 240 11.56 3.57, 3.58 Tomlinson (Hauliers) Ltd v Heppburn [1966J AC 451 Toomey v Banco Vitalicio de Espana SA de Seguros y Reasseguros (20041 EWCA Civ 622, [2005] Lloyd's Rep IR 423 18.62 8.22 Tor Line AB v Alltrans Group of Canada (The TFL Prosperity) [1984] 1 WLR 48 Toronto Railway Co v National British Irish Millers Insurance Co Ltd (1914) 111 LT 555 4.165 8.1l Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd'sRep 209 Touche Ross & Co v Baker[1992J 2 Lloyd's Rep 207; [1991J 2 Lloyd's Rep 230 2.15, 2.66 Toulmin v Inglis (1808) 1 Camp 421 11.57 7.02 Ttade Indemnity Co Ltd v Workingron Harbour & Dock Board [1937J AC 1 Traders & General Insurance Association v Bankers & General Insurance Co (1912) 9 LlLRep 223 15,47 Trading & General Investment Corp v Gault Armstrong & Keble Ltd (The Okeanis) [1986J I Lloyd's Rep 195 5.11, 22.117 14.06, 14.07, 14.08 Tramp Shipping Corp v Greenwich Maritime Inc [1975J ICR 261 15.18, Transrhene Packaging Co Lrd v Royal Insurance (UK) Ltd [1996] LRLR 32 22.66,22.70 Tridenr General Insurance Co Ltd v McNiece Bros Pty Lrd (1987) 8 NSWLR 270 2.86, 2.90 Trim Joint District School Board of Management v Kelly [1914] AC 667 10.15 Trinder, Anderson & Co v Thames & Mersey Marine Insurance Co [1898] 2 QB 114 10.16, 11.32,15.11, 15.16,21.96 Tropaioforos, The [1960] 2 Lloyd's Rep 469 15.20 Truscott v ChriStie (1820) 2 Brod & B 320 .3.52,17,41,17,43 TSB Bank pIc v Camfield [1995J 1 WLR 430 , .4.04 Tudor]ones 1I v Crowley Colosso Lrd [1996] 2 Lloyd's Rep 619 5.23,5.69,5.70 Turcan, Re (1888) 40 ChD 5 20.27 , 19.19 Turnbull v Janson (1877) 36 LT 635 .4.01 Turner v Green [1895] 2 Ch 205 20.02 Tweddle v Atkinson (1861) 1 B & S 393 Tychy, The (No 2) [2001J EWCA Civ 1198, [2001] 2 Lloyd's Rep 403 8.37,8,40,8,41 Tyrie v Fletcher (1777) 2 Cowp 666 6.02, 8.61 Uhde v Walters (181l) 3 Camp 16 Union Insurance Society of Canton Ltd v George Wills & Co [1916] 1 AC 281 17.09 2.34,

Table ofCases
Upcerne, The [1912] P 160 Upjohn v Hitchens [1918] 2 KB 48 Usher v Noble (1810) 12 East 639 UzielH & Co v Boston Marine Insurance Co (1884) 1 Lloyd's Rep 437 , 12.16 10.64 23.05 , .. 22.35

Vacuum Oil Co v Union Insurance Society oECanron Lrd (1926) 25 LlLRep 546; (1925) 24 LlLRep 188 21.07, 22.35 20.57, 20.61 Vainqueur Jose, The [1979] 1 Lloyd's Rep 557 Vale & Co v Van Oppen & Co Ltd (1921) 37 TLR 367 5.25 .4.92,18.05 Vallance v Dewar (1808) 1 Camp 503 VallejovWheeler(1774) 1 Cowp 143 11.51 6.07 Vandyck v Hitt (1800) 1 EaSt 96 Vasso, Tbe [1993J 2 Lloyd's Rep 309 24.14, 24.16 Velos Group Ltd v Harbour Insurance Services Ltd [1997J 2 Lloyd's Rep 461 5.14,5.74, 6.02,6.35 Ventouris v Mountain (The Iralia Express) (No 2) [1992J Lloyd's Rep 281 6.27, 22.67,22.121,22.676 Verderame v Commercial Union Assurance Co plc [1992] BCLC 793 , ,." 5.06 Vergina, The (No 2) [2001J 2 Lloyd's Rep 698 24.66 Vermaas' ScheepvaartbedrijfNV v Association Technique de l'Importation Charbonniere (The Laga) [1966J I Lloyd's Rep 582 14.06, 14.07 Versicherungs und Transport AG Daugava v Henderson (1934) 39 Com Cas 312 ., 21.14 Village Main Reef Gold Mining Co v Stearns (1900) 5 Com Cas 246 1.60 22.66, 22.71 Virk v Gan Life Holdings pIc [2000J Lloyd's Rep IR 159 Visger v Prescott (1804) 5 Esp 184 3.78 Visscherij Maatschappij Nieuw Onderneming v Scottish Metropolitan Assurance Co (1922) 10 LlLRep 579 15.24 8.58 ViStaf)ord, The[1988J 2 Lloyd's Rep 343 Vorrigern, The [1899] P 140 19.27, 19.28

2.35, 18.b3
Union Marine Insurance Co v Borwick [1895J 2 QB 279 12.08, 26.06 5.24,5.64 United Mills Agencies Ltd v Harvey, Bray & Co [1952] 1 All ER 225n United Scottish Insurance Co Ltd v British Fishing Vessels Mutual War Risks Association Ld (The Braconbush) (1945) 78 LlLRep 70 7.52 University oEKeele v Price Waterhouse [2004] EWCA Civ 583, [2004J PNLR 43 8.21 Universo Insurance Co of Milan v Merchants Insurance Co Ltd [1897] 2 QB 93; [1897] 1 QB 205 6.21, 6.22, 6.26, 6.35,10.30 Unum Life Insurance Co of America v Israel Phoenix Assurance Co Ltd [2002] Lloyd's Rep IR 374 : 2,45, 2.57, 2.61

19.54 Waddle v Wallsend Shipping Co Lrd [1952] 2 Lloyd's Rep 105 Wade v Cockedine (1905) 10 Com Cas 115 19.15 Wadsworth Lighterage & Coaling Co Ltd v Sea Insurance Co Ltd (1929) 34 LlLRep 285 10.06, 10.13 22.121 Wadsworth v Lydall [1981] 1 WLR 598 3,43 Wait, Re [1927J 1 Ch 606 Walker v Maitland (1821) 5 B & AId 171 11.31, 11.36 20.12 Walter & Sullivan Ltd v Murphy [1955) 2 QB 584 Waples v Eames (1746) 2 Str 1243 17.35 13.12 Warilda, The [1923] AC 292 15.10, 17,41 Warte v Miller (1825) 4 B & Cr 538 5.30,5.35 Warren v Henry Sutton & CO [1976J 2 Lloyd's Rep 276 Waterkeyn v Eagle Star & British Dominions Insurance Co Ltd (1920) 5 LlLRep 42; (1920) 4 LlLRep 178 3,48, 5.25, 5.26 3.57 Waters v Monarch Fire & Life Assurance Co (1856) 5 El & Bl870 Warson v Clark (1813) 1 Dow 336 19.23, 19.52 Watson v Swann (1862) 11 CB(NS) 756 2.90 18,49 Watts, Warrs & Co v Mitsui & Co Ltd [1917] AC 227 3.71 Waugh v Morris (1873) LR8 QB202 18.05 Way v Modigliani (1787) 2 TR30 Wayne Tank & Pump Co Ltd v Employers' Liability Assurance Corp Ltd [1974J QB 57 9.21, 9.29,15,49 WebSter v General Accident Fire & Life Assurance Corp Ltd [1953J 1 QB 520 21,47 26.14 Weddell v Road Transport & General Insurance Co Ltd [1932] 2 KB 563

]xxii

lxxiii

Table ofCases
Wedde,burn v Bell (1807) 1 Camp 1 18.08 Wei," Aberdeen (1819) 2 B & Aid 320 19.23 Weir v Northern Counties of England Insurance Co 4 LR Ir 689 22.18 Weissbe'g v Lamb (1950) 84 LlLRep 509 24.27 22.14 Welch v Royal Exchange Assurance [1939] 1 KB 294 10.81 Wells v Hopwood (1832) 3 B &Ad 20 Wells v Owners ofG" Hoat Whhton No 2 [1897] AC 337 12.16 West ofEngland & South Wales District Bank v Canton Insurance Co (1877) 2 ExD 472 1.60 West of England Bank v Ba'chelo' (1882) 51 LjCh 199 26.03 25.18 West of England Fi,e Insurance Co v Isaacs [1897] 1 QB 226; [1896] 2 QB 377 West India & Panama Telegraph Co Ltd v Home & Colonial Marine Insurance Co Ltd (1880) 6 QBD 51 10.18,10.24 West Wake Price & Co v Ching [1957] 1 WLR 45 20.50 Western Assurance Co v Poole (1903) 8 Com Cas 108 8.89 Western Australian Bank v Royal Insurance Co (l908) 5 CLR 533 22.18 Western Canada Steamship Co Ltd v Canadian Commercial Corp [1960] 2 Lloyd's Rep 313 19.18 Westerton, Re [1919] 2 Ch 104 20.28 Westminster City Council v National Asylum Support Service [2002] 1 WLR 2956 8.34 Westminster Fire Office v Reliance Marine Insurance Co (1903) 19 TLR 668 17.11 Westwood v Bell (1815) 4 Camp 349 5.77 Wharton OJ (Shipping) Ltd v Mortleman [1941] 2 KB 283 13.10 3.73 White v Bdtish Empi'e Mural Life Assutance Co (1868) LR 7 Eq 394 25.76 White v Dobinson (1844) 14 Sim 273,116 LTOS 233 Whittingham v Thomborough (1690) 2 Vem 206 6.06 Whitwell v Hattison (1848) 2 Ex 127 17.35 18.49 Wilhelm Schmidt, The(1871) 25 LT 34 19.04, 19.22 Wilkie v Geddes (1815) 3 Dow 57 Wilkinson v Hyde (1858) 3 CB(NS) 30 23.39 William Bros (Hull) Ltd v Naamlooze Vennootschap WH Berghuys Kolenhaandel (1916) 21 Com C" 253 14.06, 14.07 William France Fenwick & Co Ltd v Merchants' Marine Insurance Co Ltd [1915] 3 KB 290 12.19, 13.25 William France Fenwick & Co Ltd v North ofEngland Protecting & Indemnity Association [1917] 2 KB 522 10.20 William Pickersgill & Sons Ltd & Provincial Marine & General Insurance Co Ltd [1912] 3 KB 614 20.22 22.14 Williams, Re (1902) 19 TLR 82 20.17,23.05 Williams v Atlantic Assurance Co Ltd [1933] 1 KB81 Williams v British Marine Mutual Insurance Association Ltd (1886) 57 LT 27 6.38, 6AO Williams v Notth China Insurance Co (1876) 1 CPD 757 2.86,21.86 Willis Steamship Co Ltd v United Kingdom Mutual War Risks Association Ltd (1947) 80 L1LRep 398 13.15 Wills & Sons v Wotld Marine Insurance Ltd (1911) [1980] I Lloyd's Rep 350n 11.25 Wilson v Boag [1956] 2 Lloyd's Rep 564 17.48 22.118 Wilson v Cteigton (1782) 3 Dougl 132 , 1.42,4.12,6.07 Wilson v Ducker (1762) 3 Burt 1361 Wilson v Forster (1815) 6 Taunt 25 , 21.49 Wilson v jones (1867) LR 2 Ex 139 3.28,3.29,3.30,3.39,3.46,3.55,21.47 Wilson v Maynard Shipping Consultants AB [1978] QB 665 8.41 7.34,26.27 Wilson v Nelson (1864) 33 LjQB 220 Wilson v Raffalovich (1881) 7 QBD 553 : 25.13 9.56 Wilson v United Counties Bank [1920] AC 102

Table ofCases
Wilson Bros Bobbin Co Ltd v G,een [1917] 1 KB 860 24.39 Wilson Holgate & Co Ltd v Lancashire & Chesire Insurance Corp Ltd (1922) 13 L1LRep 486 8.86 Wing v Harvey (1854) 5 De G M & G 265 , .4.165 Wise (Underwriting Agency) Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962, [2004J 2 Lloyd's Rep 483 .4.53, 4.101, 4.103, 4.165 22.88, 22.93 Wisemhal v World Auxiliary 1nsutance Co,p Ltd (1930) 38 LlLRep 54 4.59 Wisniewski v Cent,al Manchesm Health Authntity [1998J PIQR 324 Wi,h v O'Flanagan [1936] Ch 575 4.03 1.42 Wittingham v Thornborough (1690) hec Cit 20 Wolenbutg v Royal Co-opettive Collecting Society (1915) 84 LjKB 1316 6.09 3.11,3.54, Wondrous, The [1992] 2 Lloyd's Rep 566, [1991J I Lloyd's Rep 400 7.59, 13.50, 13.73, 13.76, 13.82, 13.83, 15.07,24.27 Wood v Associated National Insurance Co Ltd [1985] 1 QdR 297; [1984] I QdR 507 .................................................... 15.11,15.13,15.15,19.06 Wood v Perfection Travel Ltd [1996] LRLR 293 20.51 Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC741 5.24 10.20,10.51 Woodley v Michell (1883) LR 11 QBD 47 21.121 Woodside v Globe Marine Insutance Co Ltd [1896] 1 QB 105 Woolf v Claggett (1800) 3 Esp 257 18.53 Woolfall & Rimmer Ltd v Moyle [1942] 1 KB 66 9.27 18.06,18.114 Woolridge v Boydell (1778) I Dougl17 Woolwich Building Society v Taylor [1995] 1 BCLC 132 20.76,20.80 Workvale Ltd (No 2), Re [1992] I WLR 416 20.53 Wunsche HandelsgeseHschaft International MBH v Tai Ping Insurance Co Ltd [1998] 2 Lloyd's Rep 8 17.06,17.07 Wynnstay Steamship Co v Board of Trade (1925) 23 L1LRep 278 13.10 Xamho, The (1887) 12App Cas 503; (1886) II PD 170 10.Q3, 10.13, 10.14, 10.15,10.20,10.51,10.55,10.56,10.59,11.32,12.02,19.45 Xenos v Fox (1868) LR 3 CP 630 12.09, 21.06, 24.37 6.22, 8.81 Xenos v Wickham (1867) LR 2 HL 296; (1863) 14 CB(NS) 435 Yarm Road Ltd v Hewden Tower Ctanes Ltd [2002] EWCA 2265 (TCC), (2002) 85 Con LR 142 25.35 Yasin, The [1979] 2 Lloyd's Rep 45 25.01,25.28 Yasuda Fire & Marine Insurance Co of Europe v Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174 5.41 Yates v Whyte (1838) 4 Bing (NC) 272 25.02, 25.75 Yorkshire Dale Steamship Co Ltd v Minister of War Transport (The Coxwold) [1942] AC691 8.09, 9.04, 9.06, 9.34, 9.45, 13.11, 13.12 18.63, 18.90 Yorkshire Insurance Co Ltd v Campbell [1917] AC 218 Yo,kshite Insmance Co v Nisber Shipping Co Ltd [1962] 2 QB 330 25.22, 25.48, 25.73,25.75,25.76 Yorkshire Water Services Ltd v Sun Alliance & London Insurance pIc [1997] 2 Uoyd's
~21............................UU

Youell v Bland Welch & Co Ltd (No 1) [1992] 2 Lloyd's Rep 127; [1990] 2 Lloyd's Rep 423 8.02,8.39,8.53,8.74,8.75,8.76 Youell v Bland Welch & Co Ltd (The Superhulls Cover case) (No 2) [1990] 2 Lloyd's Rep 431 2.21, 5.29, 5.42, 5.48, 5.49, 5.66, 5.68, 5.69, 8.02 Young v Sun Alliance and London Insurance Ltd (1977] 1 WLR 104 , 8.17 Young v Turing (1841) 2 M & Gt 593 21.79 Young v Waterloo Mutual Fire Insurance Co [1955] 5 DLR 35 10.62

Ixxiv

lxxv

Table ofCases
Zamora, The [1916] 2 AC 75 11.69, 13.66 Zemco Ltd v Jerrom-Pugh [1993] BCC 275 6.27 2.08,2.14,2.16, Zephyr, The [1985] 2 Lloyd's Rep 529; [1984] 1 Lloyd's Rep 58 2.18,2.20,2.21,2.27,4.62,5.04,5.07,5.08,5.29,5.30 Zeus, The [20001 2 Lloyd's Rep 587 " .. 18.63 Zeus Tradition Marine Ltd v Bell (The Zeus) [2000] 2 Lloyd's Rep 587 18.63 Zinovia, The [1984] 2 Lloyd's Rep 264 10.16, 11.62, 11.63, 15.18 Zurich General Accident & Liability Insurance Co Ltd v Morrison [1942] 2 KB 53 4.42 Zurich Insurance Co v Shield Insurance Co [1988] IR 174 26.04, 26.57

TABLE OF STATUTES
Paragraph numbers in bold refir to material actually reproduced in either the text or the appendices

Zyxel Communications Corp v Fairbridge Communications Ltd [2004] EWCA

1388 (QBD) 8.45

Act concerning Matters of Assurances used among Merchants 1601 1.36

(1)

s1 An additional Act concerning

Matters of Assurance used amongst Merchants 1662

1.37

(14 Car II, c 23)

1.37

(a) (b) (2) (3) (5) s2

(1)

5.12,20.03 20.03 20.03 5.12, 20.03 5.12, 20.04 20.05 20.05 20.05 20.05 20.05 20.06
~ln ~ln

Bills of Exchange Act 1882 1.45 Bubble Act 1720 (6GeoI,c 18) 1.14, 1.15, 1.16, 1.17, 1.22, 5.27 s1 5.27 s 12 1.15, 5.27 s 18 1.14
Civil Liability (Contribution) Act

(3)(a) (4) (5) s3

~) (~

(5) Convoy Act 1803 (43 G3, c 57)

Criminal Attempts Act 1981

20.06 , .. 18.71 13.56 2.09, 8.82 8.75 8.75

1978 s1 (1) (3) s 2(1) s6

(1)

26.36, 26.37, 26.39, 26.54 26.35, 26.36, 26.54 26.54 26.37,26.38 26.37 26.36 26.35, 26.39 26.39 26.39

s1
Customs and Inland Revenue Act

1867 (30 Vict, c 23) s7 s9

Employment Protection (Consolidation)

s 7(3) s 9(2) Sch 2

Companies Act 1985

Act 1978 Sch 13, para 24(1)

Extradition Act 1989

14.06 14.28 14.28

20.53

s425 s 651
(1)

(2) (4) (5) (6) s 141 (3) (4)

20.41 20.53, 25.14 ........................ 20.53 20.53 20.53 20.53 20.53 20.53 20.53 20.53 2.79, 5.12, 20.01, 20.02, 20.04, 20.06 20.06

s 6(1)(a) Sch 1
Fatal Accidems Act 1976

Finance Act 1959

Finance Act 1970

3.67, 21.13
3.67

Companies Act 1989

Gambling Act 2005 s3 s9 s334(1) s335

Contracts (Rights of Third Parties)

Act 1999 s1

3.19 3.19 3.18 3.18 (1) ....................... 3.18 (2) 3.18 Gaming Act 1845 3.17 3.17, 3.18 s 18

!xxvi

Ixxvii

Table ofStatutes
Harbours, Docks and Piers Clauses Act 1847 556 22.47 Insolvency Act 1986 Ptl Pt VIII 51A 52(1A) 5 5(2)(a) 56 5126(1) 5 130(2) 5260(2)(a) 5262 $ 323 5423 $651 $653 Sch Al pata 12(1)(h) Interpretation Act 1978 59 $23(3)

Table ofStatutes
Marine Insurance Act 1906 (com.) 4.118,4.119,4.126,4.127,4.147, 4.149,4.178,4.197,4.1294.128 (1) .4.08,4.43,4.111,4.117, 4.119,4.155,4.176 (2) 4.23, 4.25, 4.36, 4.75 (3) .4.89, 4.108, 4.151, 4.197 (a) 4.90 (b) .4.75,4.91,4.94 (c) .4.99, 4.101, 4.104 (d) .4.76, 4.106 (5) .4.79 $ 19 4.09, 4.122, 4.123, 4.124,4.125,4.126,4.127, 4.128,4.129,4.189,4.197

20.40, 20.80 20.40, 20.80 20.55 20.79 20.40 20.54 20.52 20.52 20.40 20.54 22.118 20.47 20.41 20.41 20.55 20.55 17.46 17.46

Marine Insurance Act 1906 .... , ..... 1.47, 1.48,1.49,1.61,2.12,2.23, 2.31,3.01. 3.04, 3.21, 3.30, 3.37,3.65,4.16,4.22,4.23, 4.25,4.32,4.41,4.42,4.54, 4.154, 4.175, 4.177, 4.180, 6.07,6.32,8.84,17.04,17.30, 18.11,18.31. 18.34,21.75, 21.106,23.33,23.37,26.40, 26.72, App.1 s1 1.51,17.01,18.11
~ ~16

(c) (d) 33
(I)

., 26.27 .. .. 26.27
.. 18.61 .. 18.65 18.55, 18.57, 18.70, 18.94

(2) (3) 534 (2)

(3)

18.92 3.71,18.94 18.62 18.65 18.77 18M

s 35
(I)

52
(I)

(2) 53
(I)

(2)
(a)
~

(c) 54
(I)

18.11 1.58, 4.182,18.12 1.61 17.01,18.11 3.70,3.75 1.52, 1.55, 1.56, 1.57 1.52 1.52 1.55, 3.56 3.12, 3.16, 3.18, 3.22, 20.10, 26.56 3.09,3.11,3.75 3.09, 3.11 3.11 3.26 3.26 3.26, 3.27, 3.29, 3.56 38, 3.20, 3.22 3.12, 3.13, 3.14, 3.15" 3.13 3.45 3.37, 3.38 3.37 3.39

(3) 536(1)
s~
$

39

~IM

(b)

$20

(I) (2)
(~

.4.128 1.47, 4.08, 4.09, 4.10, 4.11, 4.21,4.128,4.142,4.147,4.149, 4.150,4.161,4.186,4.190,4.197 4.08, 4.43, 4.155 .4.23,4.25
~I~

Joint Stock Companies Act 1844 ... , . . 1.14

Law of Property Act 1925 $ 136 20.12, 20.18, 25.15 Law Reform (Contributory Negligence) Act 1945 5.66,5.67 54 5.67 Law Reform (Married Women and Tortfeasors) Act 1935 56(I)(c) 26.37 Limitation Act 1980 , 20.69 55 22.62 514A 5.42
Malicious Damage Act 1861 $ 58 14.24 Marine and Aviation Insurance (War Ri5ks) Act 1952 1.31,1.32, 1.33, 1.48 16.15 51 (I) 1.31 $2(1) 1.32 $ 10 (I) 1.32,16.18 (2) 1.32 Marine InsuranceAct 1745 (19GeoII,. c 37) 3, 1.40,3.06,3.07,3.08, 3.09,3.17,3.55 Marine Insurance Act 1788 1.48 Marine Insurance Act 1824 1.16

(2) (a) (b)

(4) (5)

.4.130, 4.131, 4.144 .4.130, 4.139, 4.140, 4.143,4.144,7.47

~IU

$5
(1)

0)
s 21

(2) $6
(I)

(2) 57
(I)

(2) 58 5 14
(I)

(2) (3) 515 516 (1) (2) (3) (4) 517

$ 18

3.46 3.57 3.42 20.09, 26.03 7.26,23.04,23.05,23.10 23.04, 23.08, 23.10 23.04 7.27,23.04,23.29 23.04 .4.08,4.09,4.10,4.11,4.21, 4.30,4.147,4.149,4.150,4.151, 4.152,4.155,4.161,4.176,4.178, 4.186,4.196,4.197,4.200,4.202, 4.203,4.204,22.113,22.114 1.47,4.08,4.09,4.10,4.11, 4.21,4.114,4.115,4.116,4.117,

$ 22 523 (1) (2)-(5) 524(2) 525 (1) (2) 526 (I) (2) (3)

2.10 2.11, 3.65, 3.68 3.66 3.66,3.68 3.66, 3.67 2.14 17.02, 17.03, 17.04 3.67,21.13 3.68 3.69 3.36, 3.69 7.24 7.24 6.09, 7.24, 7.38, 21.119, 23.50,25.10,25.67,25.69 21.78 21.80 2.29,2.31 2.29, 2.31, 2.34 26.41 26.27 26.01 26.27

527
(I) (2) (3) (4) (7) (1) (3) 532 5 32(2) (a) (b)

5~...........2.31

(I) 19.23 (1)-(4) 19.20 (2) 19.24 (3) 19.23, 19.29 (4) 19.Q3 (5) 9.64,15.69,19.4,19.30, 19.39,19.40,19.48,19.49,19.59 540 (I) 19.61 (2) 19.13, 19.61 $41 3.70, 19.82 $ 42 (I) 18.25, 18.26 (2) 18.25 $C I&~ 544 18.Q3, 18.12, 18.14, 18.19 545 (I) 18.30 (2) 18.32 546 18.48 (I) 11.55, 18.34, 18.92 (2) 18.35 (3) 18.37 547 (I) 18.36 (2) 18.36 s 48 18.38, 18.48 s 49 18.39, 18.41, 18.42, 18.43 (I) 18.24, 18.48 (b) 18.44, 18.50 (c) 18.43 (d) 18.44, 18.48, 18.50 (e) 18.51 (f) 18.53 (g) 11.55, 18.43 $ 50 ., .20.14, 20.18, 20.24, 20.26, 20.28 (I) 20.14, 20.28, 20.31 (2) 20.14, 20.20, 20.21, 20.22, 20.23 (3) 20.18, 20.19

!xxviii

!xxix

Table ofStatutes
Marine Insurance Act 1906 (cant.) s 51 20.10 s 52 3.68 s 53 (1) 6.21, 6.22, 6.23, 6.24, 6.27, 6.29, 6.32, 6.35, 6.37, 6.40, 22.116,22.118 (2) 5.76, 5.77, 5.79 ,54 6.32 s 55 15.29 (1) 9.02,9.30,9.59,9.64, 10.66,15.01 (2) 9.30, 15.01, 15.02, 15.10 (a) 9.32,9.64, 11.29, 11.33, 11.35, 11.39, 11.40, 11.44, 15.10,15.14,15.16,19.47, 24.19,24.20,24.21,24.24 (b) 9.30, 9.31, 9.64,15.29, 15.33,15.35,15.37 (c) 9.30, 9.31, 9.64,10.24, 15.43,15.47,15.49, 15.50, 15.61 s 56 (I) 21.36, 21.84 (2) 21.36 (4) 21.84, 23.14 (5) 23.30 ,57 (1) 21.37 (2) 22.35 s 58 . .21.21, 22.37

Table ofStatutes
24.63 24.43 24.45 24.44 24.45 24.49, 24.53 24.50 24.52 22.121 22.04, 23.49 22.121, 23.12 25.67 21.20, 23.15 23.15, 23.16, 23.18, 23.19, 25.69 21.112, 23.15, 23.19 21.30, 21.112, 23.15, 23.19 23.35 23.29 23.29 23.31, 23.32 23.35 23.37 23.14, 23.19 7.26,21.85 23.39 23.39 23.39 23.39 21.110,21.113,21.114 21.115 24.02,24.16 24.25, 24.29 24.64 24.27 24.Q2, 24.Q7, 24,09, 24.10, 24.12,24.13,24.14,24.15, 24.16,24.20,24.21,24.24, 24.25, 24.26, 24.29 25.10, 25.69 22.32, 25.38, 25.69 25.69 26.01,26.34,26.35,26.39,26.42 26.34, 26.41, 26.42, 26.69, 26.71,26.72 26.34, 26.60, 26.61 23.49, 25.61, 25.66 5.50 1.42, 6.04, 6;07,15.49,18.08 : 6.04
Marine Insurance Act 1906 (cont.)
(3)

(2) s 66 (1) (2)

(3)

(4) (5) (6) ,67 (2) s 68 (1) s 69 (1) (2)

(3)

(a) (c) (e) (I) ,85(2) s 86 s 88 s 89

s~

1.42, 6.02, 6.06, 6.07 3.16, 6.05 6.09 6.09,26.28 6.40 2.86 18.39,18.115,21.65,22.54 8.72,8.75,8.76
1.~

Public Order Act 1986 s 1. (I) (2)

(3)

(4) (5) s 10(2)

14.12 14.12 14.12 14.12 14.12 14.12 8.12, 14.14

s59 s 60 (I) (2)

(i)

(a) (ii) (iii) s 61 ,62 (I) (2) (i) (3) (4) (5) (6) (7) (8) (9) s 63(1) s 65 (1)

.. .. .. 18 . 111 21.53, 21.53, 21.56 21.53, 21.58, 21.77, 21.96 21.53, 21.77, 21.96 21.59, 21.69 21.62, 21.67, 21.71 21.74 21.76 22.33, 22.50
22.33, 22.50 22.52 21.60 22.33, 22.53 22.58 22.59 21.102,22.58,22.61 21.71,21.96,22.35,22.58 22.35, 22.58 22.35 22.32 24.63

s 70 s 71 (I) (2) (3) (4) s 72 ,75 (1) (2) s 76 (1) (2) (3) (4) s77 (I) (2) s78 (I) (2)
(3)

(4)

s79 (1) (2) s 80 (1)

(2) s 81 s 84 (1) (2)

1.47, 4.43, 4.148, 4.176, 4.178,21.106 ,92 3.08 Sch 1 7.02, 8.15, 14.14, 17.28, 17.45 rl 3.13 r2 17.29 r3 17.29 r 3(c) 17.38,17.39 r 3(d) 17.40,17.41,17.42 r6 18.36 r7 10.03 r8 10.74 r9 10.69 rIO 13.48 r 11 7.59, 11.50 rI2 7.23 r 15 1.52 r16 1~ rI7 1.52 Sch 2 3.08 Marine Insurance (Gambling Policies) Act 1909 1.48, App.2 s1 " 3.16 (5) 3.16 ,2 1.49 Maritime Conventions Act 1911 12.09, 26.39 Merchant Shipping Act 1894 ,742 12.15 Merchant Shipping Act 1995 s 187 12.09, 26.39 Sch 11, Pt II, para 2 24.56 MisrepresenrationAct 1967 .4.162 s2 (I) .4.179, 4.182, 4.183 (2) 4.04, 4.158, 4.159, 4.160, 4.162,4.182
Offences Against the Person Act 1861. .. 14.24 Policies of Marine Insurance 1868 (31 & 32 Vict, c 86) 1.44 sl 20.14

,91(2)

Rehabilitation ofOffendersAcr 1974 . .4.69 s 7(3) .4.69 Road Traffic Act 1988 9.62
Sale of Goods Act 1893 1.45 s 16 3.43 Sale of Goods Act 1979 s16 3.43 s20A 3.43 s 31(2) 6.04 s 32(2) 5.28 s 53(1) 20.25 SrampAct 1795 3.65, 8.81, 8.82 Stamp Act 1891 3.66, 3.67, 8.83 Summer Time Act 1972 , 17.46 Supply of Goods and Services Act 1982 s13 5.2 Supreme COUrt Act 1981 ,35A 6.14 Supreme Court ofAdjudicature Acts 1873 and 1875 4.03, 4.17
Terrorism Act 2000 ,1 14.19 Third Panies (Rights against Insurers) Act 1930 1.48, 2.95, 5.06, 8.54,12.13,16.04,20.01, 20.33,20.35,20.36,20.39, 20.40,20.41, 20.48, 20.49, 20.50,20.51,20.52,20.53, 20.54,20.55,20.57,20.58, 20.62,20.66,20.68,20.69, 20.72,20.73, 20.74, 20.81, 20.83,22.97,25.79, App.3 s1 20.40, 20.50 (I) 20.46, 20.47, 20.48, 20.63, 20.83 (3) 20.44,20.45, 20.46, 20.63

(4)
(a) (b) (5) (6)(.) s2 (1) 20.82 20.81 20.36 20.40 20.74 20.75,20.79,20.80

lxxx

!xxxi

Table ofStatutes
(2)
(3)

s3 s3A (1)

20.80 20.67,20.78 20.44, 20.47

.. .. 20.40

(2)

Treason Act 1351

............ 20.40 ....... 13.32

War Risks Insurance Act 1939 1.31 Workmens' Compensation Act 1906 .. 10.15

TABLE OF STATUTORY INSTRUMENTS

Civil Procedure Rules r 31.12 r 58.14 r 58.14(2)

25.13 1.59 1.59 1.59

Lloyd's Delegated Underwriting Byelaw (No 1 of 2004) 2.64 Merchant Shipping (International Safety Managemenr (ISM) Code) Regulations 1998, SI1998/1561

Insolvency Rules 1986

r 4.90 Insolvent Partnerships Order 1994 Insurance Brokers Registration Council (Code of Conduct) Approval Order 1978 example 14 22.118 20041

19.78

5.73

Ixxxii

\xxxiii

TABLE OF INSTITUTE AND INTERNATIONAL CLAUSES

Paragraph numbers in bold refer to material actually reproduced in either the text or the appendices Institute Additional Expenses Clauses

(Cargo-War Risks) 21.97 Institute Additional Perils Clause-Hulls (lil0/83) 11.28, 11.37 11.37 d 1.2 (I/Il!95) 11.28 d 1.2 11.37
Institute Cargo Clauses (1912) 1.20

d 9.2 d 10 d12 d 13 d 14 d 16 d 16.1 d 16.2

(B)

d 11.1 d 11.2 (111/82) (A)

3.12, 3.15 3.15

7.10, 7.11, 7.12, 7.59,10.77, 10.79,11.44,12.08,13.61, 14.04,14.22,15.03,15.06, 15.63,15.76,17.23,18.12, 21.76,24.52, App 6 d 1.1 9.63 17.13 d 1.3 d2 24.49,24.51,24.52, 24.65,24.74 d 3 , 12.23 d4.1 15.10 d 4.2 7.59, 15.46 cl4.3 7.59, 15.55 d 4.4 , 15.50 d 4.5 9.59, 15.33 d 4.7 14.22 d 5.1 19.61 19.63 d 5.2 19.61 19.62 d 6.2 13.61 d 7 9.63 d8 17.18 d8.1 17.11, 17.20, 18.111 d 8.1.1 17.11 17.14, 17.15, 17.16 d 8.1.2 17.11 17.14, 17.15, 17.16,17.17 d 8.1.3 17.11 17.14,17.18, 17.19 d 8.3 17.13,18.30,18.111 18.112 d9 18.11118.112,18.117, 18.124 d9.1 18.111

d 4.2 d 1.1 d1.1.4 d 1.2.2 d 1.2.3 d1.3 d 3 d4.1 d 4.3 d4.4 d 4.5 d 4.7 d 5.1 d 5.2 d 7 d 8 d8.1 cI8.1.1 d 8.1.2 d 8.1.3 d 8.3 d9 d9.1 d 9.2 d 10 dI2 cl13 cl14 d 16

18.111 18.11118.112,18.117 21.51 21.75,21.76 26.08 24.05 24.16, 25.22, 26.55 24.05 24.Q5 25.20 7.10,9.18,9.59,10.44, 10.60,10.77,10.81,10.82, 10.83,12.08,14.04,14.22, 15.76,17.23, 24.52,App 7 18.111 9.63 12.08 10.82 9.13,10.82 10.82,17.13 ' .. 12.23 15.10 15.55 15.50 9.59,15.33 10.83, 14.22 19.61 19.63 19.61 19.62 9.63 17.11,17.12 18.lll 17.11 17.11 17.11 18.30, 18.111 18.112 18.11118.112, 18.117, 18.124 18.111 18.111 18.11118.112,18.117 21.51 21.75, 21.76 26.08 24.05 26.55

1xxxv

Table ofInstitute and International Clauses

Institute Cargo Clauses (cont.)
Institute Mortgagees' Interest

Table ofInstitute and International Clauses

11.44 10.17 10.17
Institute Time Clauses Freight (1/8/89) (cont.)

24.05 , .24.0525.20 (C) 7.10, 7.11, 7.12, 9.18,10.60, Institute Notice of Cancellation, 10.77,10.81,10.82,10.83, Automatic Termination of 12.08,14.04,14.22,15.76, Cover and War and Nuclear 17.23,21.97,24.52, App 8 Exclusions Clause-Hulls el1.1. 7.11,9.63 (1/11/95) 17.49, 17.560 dU.1. .. 7 .11 Institute Strikes Clauses (Cargo) d1.L2 7.11,9.13 (11l/82) 7.14,14.02, d1.1.3 7 .11 14.11, App 10 d1.1.4 .7.11, 12.08 ell 14.01 d1.1.5 .. .. 7 .11 el2 24.52 dL2 .. .. 7.11 .. 15 . 10 el3.1 d 1.2.1. 7.11 el3.2 15.46 eI 1.2.2 7.11 elB 1555 el3 12.23 el3.4 15.50 el4.1 15.10 el3.5 15.33 dO 15.46 el3.7 14.04 15.55 el4.3 el3.8 21.97 cl4,4 .759, 15.50 el3.9 15.80 el4.5 959 ,15.33 el4 , .19.61 el4.7 10.83, 14.22 el5.3 18.112 el5.1. 19.61,19.63 el7 .. 18 .112 el5.2 19.61, 19.62 el9 26.08 el7 9.63 elll 24.05, 26.55 el8 17.11, 17.12 el1L2 25.20 .. 18 .111 el8.1 Institute Time Clauses-Hulls eI 8.1.1. 17.11 Disbursements and Increased .. 17.11 el8.L2 Value (Total Loss only, el8.1.3 17.11 including Excess Liabilities) el8.3 18.30, 18.111, 18.112 (11l0/83) 24.75 el9 18.111, 18.112, 18.117, (1/11/95) ,' .24,75 18.124 Institute Time Clauses-Hulls .. 18.111 el9.1 Excess Liabilities el9.2 18.111 (1110/83), ,' ,", .. '" .24,75 el10 18.111,18.112,18.117 (1/11/95) , ,' ' , .. ' .12,21, 24,75 el12 21.51 Institute Time Clauses Freight el13 21.75, 21.76 (1/8/89) , , . , .. ' , , 7.25, App 17 el14 26.08 el4.,., .. " " .. ",." .. 18.113 el 16 24.05,26.55 el7,l ", , , .. 10,02 el16.1 24.05 eI 7.2 .. , .. " " " .. , .11.02 el16.2 24.05,25.20 eI 11 ,' ', ' , , ,24,65 Institute Commodity Trades Clauses ellU , , .. "", ', .. 24.74 (A) 21.08, 21.09 d 11.3 " ", .. ,,24.52, 24,66 d5.3 19.62 el12 .. , ' , , , .. , , , ' , .. ' ,23.48 (B) ', .. " 23,36 el13.1 .. " eI 5.3 19.62 el14" , ", , .. ,21.95 (C) d15 , .. " " 21.94 el5.3 19.62 elI5.1" ", .. " .. ,.,3.54,21.94 Institute General Average-Pollution cl15.2 .. " ', .. ,., 21.94 Expenditure Clauses-Hulls el15.3, .. ",.,.":.,,."'" .21.94 (1/ll/95) 24.54 el16 , ' , ... , ' ... ' , , ..... 6,03,21.94
Institute Malicious Damage Clause 14.22

elI6.1 el16.2

Clauses (1/3/97) elU el2.1.4

(11l1/95) , ., ' , , ., , 7.25 d4 , , ", 18.113 d7,1 , .. , , , 10.02 eI 7,2 .. , .. , " .. " , .11.01 ellU " , .. " ,,24,74 ellL2 , , .. , ".2451 d 11.3 , .. , , .. ,24.52 d 12 , .. , ,', 23.48 eI 14 , 15.29, 21.95 el14.1 " ", .. , .. 23,36 el14,2 .. , , .. " ....... 26.08 el16,1 , .. ", ,3.54, 7,21, 21.94 d16.3 , .. , ',., ,21.94 el 17 , ,,.,' ,,., 6.03 dI3.2 , "", 26.07
Institute Time Clauses Hulls

(1/10/83) "",7,15,7,16,7,17, 8,90, 9,25, 12,06, 16.04, App 11 elU " " .. ,.18.100 eI 1.2 '.',' " .12.07, 12.21 el1.3 .. , " ,23.11 el2, ,., 1752, 17.53 el3 ", .. " " .18.113 el4 ", 19.69, 20.11, 23.26 el4.2 .. , "",13.68,19,67 el5 ' .. , ,' 19,69, 20,19 eI 6,1 , .. , .. , ,.10,02 ", .. , .. 12.04 el6.1.7 .. , .. ,' el6.2 .. , .. " , .. " 11.01 el6.2,l , ,., ,12.06 ,. 12,05 d 6,25 , .. , .. , ell0,2 ,'., " .. , .. 23.17 ell0.3 ." .. , , " .. ,23.17 el10.4 ,' , " .. , 22.25 eI 11 . , ' , .. , 24,65 ellU ".' .. , 24.49, 24.74 el 11.2 .. "."" " .. ,24.51 el 11.4 .,.", 24.52, 24.66 el 12.1 ,., 23.40, 23.47, 24,40 d12,2 " '", " 23.44 el 12.3 , ,.,,,, ,.,,.,25.72 el 12.4 "" "", ,25,72 el 13.1 ,."." ", ...... 24,04 d13,2 " "." .. 24.37, 24,40 el 13.3 , ,,,'., ,,, ,22.60 el 13.4 "., ,,'., ,24,72 el 13.5"" """, .24.28 el 13,6., ", 24,29 elI4,,, , .. ,.,, ,,. ,23,18 elI5 ".,,,, ,,, ... ,23.18 el 16., .. ",,,.,, ,,,,,,, .23.18 el 18"".", "", ...... 23,25

el 18,1 .. ", """,., ... 23.25 el 18.2 , ", ,21.122, 23,25 , 21.122, 23.25 el18.3 .. ,' el19 " " .. , .. ,21.80 el 19,1 ."" """"" .21.74 el21,l.,,, ,,,,,.,,,.,.18.83 d2L2 ,,,, ,,,, 18.83 el22 .. ,' ',.,' 6.03,6.20 (1/11/95) , 7.21,7,36, 11.65, 12,06, 23.08, App 12 elU ... , .. " "." .. ,,, 18.100 el1.5 .. "., " ... ,." .. 23.11 el 3 , , ,,,,.,,, .. 18.113 el 4 , . , . , , " , , " , . '" ... 23.26 el 5,2 ", .. ".,,, 13,68,19,67,20.11 el 6.1 " ", 10,02 el 6.1.8 , 12,06 el 6.2 .. ",' , .. ,., 11.01 el 10 .... " , .. " .. , .. ,24,65 d10.1 " ,,,,, ,24.49, 24.74 dl0.2, " , 2451 el 10.4 "" ,2452, 24,66, 25.72 el 10.5.1 ."."." .... ,'.". ,24.67 el 10.5.2 "." ,.",,,, 24.54 diU",., ", 24,04 ell1.2 " ,.,,, 24.37, 24.40 el 11.3 , ,,, ,, 22.60 ellI.4 ,." " .. ",24.72 el 1I.5 .. "", "",,,,,, .24.28 el 11.6 ."" .. , .. ,,,, ........ 24,29 eI 12.1 " ",23.40, 23.47, 24.40 23.44 el12.2 ' , .. ,,, , .. "",25.72 el12.3 , .. , elI3,l " """".22.28 el13.2 " .. , ,.""" .... 23,17 el 13.3 ,,,, ,,,,,,,,, .. ,, .. 23.17 el 14." , .. ,,,,,,, 23.18 elI5, ,." ,23,18 el 16, , ,." ,,, ,23,18 el 18.2 .. ,.", ,'.', ,,2U22 el 19 .. , .. , , .. "." .. 21.80 el 19.1 ", , .. "." 21.74 el 21 .. " ,'.'." 20,19 el 23 , .. "",., 6.03, 6.20
Institute Voyage Clauses Freight (1/8/89)

d3 "" " ... 18.30,18.113 ,,,, .. , .. ,, 10.02 el5.1 el5.2 ., , .. , ,11.01 el 10., .. "."." ,,, ,23.48 diU,,,,, ,,,,, .23.36 dl1.2 , ",' .. ,24.51, 26.08 elI2, .. , "",,,, 21.95 el 13,1 ", 3.54,21.94 el 13,2 ,,,, ' , .26,08

!xxxvi

Ixxxvii

Table ofInstitute and International Clauses

Institute Voyage Clauses Freight (1/8/89) (cont.) cl13.3 21.94 (1111/95) cl3 18.30,18.113 cl5.1 10.02 cl5.2 11.01 clIO , .. 23.48 cll0.1 23.36 cl10.2 26.08 cl12 15.29, 21.95 cl12.1 3.54,21.94 cl12.3 21.94 Institute Voyage Clauses Hulls (1/10/83) 7.16,7.17,11.67 el2 18.30, 18.113 cl4.1 10.02 cl4.2 11.01 cl14 23.18 cl16 , 23.25 cl16.2 21.122 cl17.1 21.74 cl17.2 21.18 (1/11/95) App 14 cl1.1 18.52 el2 , 18.30, 18.113 cl4.1 10.02 cl4.2 11.01 cl14 23.19 cl16 23.25 cl16.2 21.122 el17.1 21.74 21.81 cl17.2 Institute War Clauses (Cargo) (1/1/82) 7.14,13.61,13.63, 13.67,17.22, App 9 c 11.2 " 25.20 cl1 13.02 cll.l 13.02 13.47 cl1.2 " ., 13.02 13.44 d 1.3 13.0217.27 cl2 , 24.52 cl3 " 13.63 cl3.1 15.10 cl3.2 15.46 cl3.3 15.55 d 3.4 15.50 el3.5 15.33 cl 3.6 13.63 el3.7 " 13.63 21.97 el3.8 15.80 el4 19.62 cl5 17.23,17.25 el5.1.1 17.24

Table ofInstitute and International Clauses

Institute War and Strikes Clauses (Hulls-Time) (1/10/83) (COnt.) cl5.1.3 13.6213.70 cl5.1.4 7.59, 13.62, 13.71-74 13.82 cl5.1.5 7.59, 13.62, 13.75-79 13.82,15.41 el 5.1.6 15.75 cl5.2 17.50 cl 5.3 11.65 cl5.5 24.48 el6.1 17.50 cl6.2 17.50 cl6.2.2 13.68 Institute War and Strikes Clauses (HullS-Voyage) (1110/83) cl3 21.70 (1/11/95) cl3 21.70 Institute Yacht Clauses (1111/85) 7.35 International Hull Clauses (1/11/02) 7.19,11.27,11.67,12.05 cl2.1.9 12.05 el 2.2.1 11.27 cl 2.2.2 11.27 d 2.3 11.27 el 2.4 , 11.27 d41 11.28 el43.1 22.07 el46.1 22.07 (01/11103) 21, 6.03, 7.19, 7.22, 7.26, 11.27, 11.28, 11.65, 12.05, 22.33,22.83,24.72, App 13 el2 21.81, 23.41 el2.1 10.02 d 2.1.1 10.02 cl2.1.2 10.02 cl 2.1.3 10.02 cl2.1.4 10.02 cl 2.1.5 10.02 cl2.1.6 " 10.02 12.02 cl2.1.7 10.02 cl2.1.8 10.0210.22, 12.06 el2.1.9 10.02 12.02 cl2.2 " . 11.01 cl2.2.1. 11.01 el2.2.2 11.01 el2.2.3 11.01 el2.2.4 11.01 cl2.2.5 11.01 cl2.5 11.70 cl6 " 12.21, 23.41 cl6.1 12.14,12.19,12.21 cl6.1.1. 12.10 cl6.1.2 12.10

cl 5.1.2 17.24 el 5.1.3 17.24 cl 5.1.4 17.24 el 5.2 17.26 cl5.3 17.26 el 5.4 17.27 el5.5 18.112 el6 18.112 el9 , 26.08 el11 24.05,26.55 Institute War and Strikes Clauses (Freight-Time) (1/10/83) cl3 '" " 21.95 cl4.5 21.95,21.97 (1/11/95) cl3 21.95 cl4.5 21.95 cl4.6 21.97 Institute War and Strikes Clauses (Freight-Voyage) (1/10/83) ..... 21.95 cl4.5 21.95, 21.97 (1/11/95) d3 21.95 cl4.5 21.95 cl4.6 21.97 Institute War and Strikes Clauses (Hulls-Time) (1/10/83) 7.22, 15.Q7, 16.19, App 15 cl1 7.05, 14.01 cl1.4 14.01 cl1.5 " " 14.01 cl1.6 14.01 cl2 17.51 cl3 , .. 21.70 cl4.1.3 13.62 cl4.1.4 13.62 cl4.1.5 13.62 cl4.1.6 13.62 cl4.1.7 15.75 cl4.2 15.78 cl4.4 15.41, 24.48 cl5.2.3 13.68 cl12 15.78 (1/11/95) '" .App 16 cl1 14.Ql cl 1.4 14.Ql cl 1.5 11.65, 14.01 cl 1.6 14.Ql cl2 17.51 cl3 21.70 cl 5 '" 13.62 cl5.1 " 13.62 cl5.1.1 ~ 17.50 cl5.1.2 13.62, 13.64-69 17.50

cl6.1.3 el6.2 cl6.2.2 cl6.3 el6.4 cl6.4.1. cl6.4.2 el6.4.3 cl6.4.4 cl6.4.5 cl8 cl8.1 cl 8.2 cl 8.4 el 8.5.1 el8.5.2 cl 8.6.2 cl9 el9.1. el9.2 el9.3 el9.4 cl9.5 cll0.1 cl10.2 el10.4 elll el12 el13 cl13.1 cl13.1.1. cl13.1.2 el13.1.3 el13.1.4 el13.1.5 el13.2 el14 el14.1 cl14.2 el14.3 cl14.4 cl14.4.1. el14.4.2 eI 15 el15.1 el15.2 el15.3 cl15.4 cl15.5 cl16 el17 el18

12.10 12.21 12.21 12.22 12.21, 15.Q3 12.21 " 12.21 12.21 12.21 12.21 23.41,24.65 24.49, 24.74 24.51 24.52, 24.66 24.67 24.54 24.54 23.41,23.47 24.04 24.37,24.40 22.60 24.28 24.29 18.99, 22.07 18.100 12.07, 12.21 12.07, 12.21, 18.99, 18.100 17.54 19.73, 19.75, 19.76, 19.81,19.82 19.73,19.74,22.07 19.73 19.7319.74 " 19.73 19.77 19.81 19.81 19.74,19.75,19.81 23.26 13.68,19.67,20.11 19.68, 23.11 19.69 19.70, 19.76, 19.77 19.76 19.70 23.40-23.47 23.40 23.47 23.40, 23.42, 23.43, 23.47 23.47, 24.40 23.44,23.45 23.46 23.18 23.18 23.18

!xxxviii

Ixxxix

Table ofInstitute and International Clauses

International Hull Clauses (1111102) (cont.) el20 23.25 el20.2 21.122 el21.1 21.74 el22 6.03, 22.43 el23 20.19 el24.1 18.83 el24.2 18.83 el25 6.20 el26 18.102 el27 22.04 el30 14.20 el30.3 11.65,14.20 el31 15.80 c131.1 15.80 17.50 c131.2 15.80 17.50 el 31.3 15.80 17.50 el31.4 15.80 el31.5 15.80 el32 18.99 el35 6.11, 6.19 el35.1 6.11 el35.2 6.19 6.31 el35.3 6.19 el35.4 6.19 6.20 el35.5 6.196.20 el35.6 6.11 6.12,6.31 el36.1 20.03 el36.2 20.05 el37 12.05,12.17,12.18 el38 12.14,12.22 el 39 6.03, 6.20 el40 23.41, 24.55 el40.10 24.55 el41.1.3 11.37

el 42.1 .. .. .. .. .. . .. 22.03 el42.1.1. 22.03 el42.1.2 22.03 el42.1.3 22.03 25.17 el42.1.4 22.03 el43.1 22.26, 22.27 el43.2 22.26,22.27,22.83 el44.1 23.17 el44.2 23.17 el44.3 23.17 el44.4 23.17 el45 22.73 el45.1 22.73 el45.2 22.73 el45.2.1. 22.73 el45.2.2 22.73 el45.2.3 22.73 el45.2.4 22.73 el45.3 22.110,22.111,22.112 el45.3.1 22.11022.111 el 45.3.2 22.110 22.111, 22.112 el45.4 22.112 el46 22.74 el46.1 22.74, 23.17 el46.3 22.74 el46.7 22.122 el48 20.01, 22.115, 22.117 el49.1 25.20 el49.1.1. 25.20 el49.1.2 25.20 el49.1.3 25.20 el49.1.4 25.20 el49.2 .. 25.22,25.23 el49.3 25.22 el49.4 25.72

1
INTRODUCTION TO THE LAW OF MARINE INSURANCE

A. Marine Insurers (1) The eady evolution of Lloyd's (2) The rise of Lloyd's to prominence within the marine market (3) The Institute of London Underwriters and the International Underwriting Association of London (4) The Mutual Insurance Associations
(5) Government involvement in

1.03 1.04 1.09

B. Marine Insurance Law

(1) From law merchant to common law: early development of
marine insurance law

1.34

(2) Lord Mansfield (3) Codification

1.19 1.22
1.27

C. The Nature of Marine Insurance

(1) Insurance oflosses incident to

1.34 1.41 1.44 1.50 1.51 1.58

marine war risks insurance

marine adventure (2) Extension to mixed land and sea adventures

The need to protect investment in maritime adventure was recognized in early 1.01 civilizations.' Contractual transfer of risk was pioneered through loans on the security of a vessel or cargo, repayahle at a high rate of interest should the secured property arrive safely but otherwise not tepayable. Such maritime loans exisred in ancient Babylon, were used by the Phoenicians, ancient Greeks, and Romans, 2 and were revived in medieval Italy. They became known as 'bottomty' where the secured property was a vessel and 'respondentia' where the secured property was cargo. In addition, from at least the time of commercial prominence of ancient Rhodes, risk has been shared through the system of general average, by which a loss incurred for the benefit of a common maritime adventure is shared among all interests benefited by the

1 G Clayton, British Insurance (1971) Ch 1; V Dover, A Handbook to Marine Insurance (8th edn, 1975) Ch 1; H Raynes, A History ofBritish InsuranceC2nd edn, 1964) Ch 1. 2 Although the Romans also used and may have preferred a system of loss sharing by partnership.

xc

Introduction to the Law ofMarine Insurance

loss. 3 In general average, however, the interesr thar sustains rhe loss must srill carry its share and recovery is conringenr upon orher interesrs deriving benefit from the loss.'
1.02 It was in rhe fourteenth century in the ciry states of, mainly northern, Italy that there developed transactions recognizable as contracts of insurance, wirh the risk of mischance befalling a ship or cargo being transferred from that properry's owner to another person in rerurn for the payment of a non-rerurnable sum of money. Insurance spread ro northern Europe, with leading cenrres initially in Bruges and later in Anrwerp. Meanwhile, the practice of insurance was imporred into England by merchants from the region of Lombardy, especially the ciry of Florence. Restrictive legislation caused the Lombards to leave England towards the end of the fifteenth cenrury, bur London continued to develop as a centre for commerce generally and marine insurance in particulat. When Anrwerp was sacked by the Spanish in 1576, London, with strong political backing, 5 inherited much of its commercial significance, including in the

Marine Insurers

learning and amused his colleagues by brewing a black drink from roasred coffee berries'.' Conopius was subsequenrly expelled from Oxford by parliamenrary visirors and rerurned to the Levanr where he became Bishop of Smyrna,' but his legacy of coffee drinking flourished. So popular did it become among the undergraduate studenrs of borh Oxford and Cambridge that in 1677 one Cambridge don was moved to complain: 'Why doth solid and serious learning decline and few or none now follow it in the Universiry? Answer: because of coffee-houses where rhey spend all their time." The passion for coffee was not confined to the universiries. Puriran rule during 1.05 rhe Commonwealth saw the suppression ofmany forms ofenrertainment and the new coffee houses flourished upon a pleasurable blend of caffeine and conversation. The first London coffee house was opened in 1652 in Sr Michael's Alley, Cornhill, by one Pasqua Rosee." Coffee houses proliferated, and we know that by 1688 one Edward Lloyd had opened Lloyd's Coffee House in Tower Street, not far from Tower Wharf and rhe Custom House. From the beginning, Edward Lloyd seems to have targeted the shipping communiry as his clientele. In 1691 , Lloyd's moved to new premises at 16 Lombard Srreer where it remained for some 80 years. By rhe rime Edward Lloyd died in 1713, leaving a subsranrial esrate, Lloyd's was well established as a cenrre for businessmen ro meer and as a location for rhe holding of auction sales, increasingly of vessels. The connecrion with marine underwriring seems not to have developed until 1.06 the 1720s, bur in the next rwo decades Lloyd's reputation grew, during which rime it came ro enjoy a de ficto monopoly in rhe London marine insurance marker, a developmenr discussed below. The I750s and 1760s, however, saw Lloyd's fall into disrepure. In 1763, rhe business passed inro rhe somewhat ineffecrual hands of Thomas Lawrence." Substantial profirs during the Seven Years War gave way ro less spectacular peacerime business, and vulrurine specularors exploired and abused rhe insurance market as a means of indulging in

field of marine insurance.

A. Marine Insurers
1.03 Marine insurance is roday underwtitten in England by insurers that operate through the Lloyd's market, insurance companies that operate outside Lloyd's, and by murual insurance associations. In time of armed conflict, the government may support the market. To trace the developmenr of the marine market and explain this strucrure, one may start with the origins of Lloyd's, which lie iii
seventeenth-century COnee consumption.
cc .
6

(I) The Early Evolution of Lloyd's

1.04 William Laud, Archbishop of Canrerbury, whose teligious policy was a major cause of the English civil war, was elected Chancellor of Oxfotd Universiry in 1630. In that capaciry, he was an influenrial patron of Orienral studies, in particular endowing a lectureship in Arabic. He befriended a Cretan scholar named Nathaniel Conopius, who was fleeing from Mohammedan rule, and brought him to Oxford, 'where, from Baliol College, he disseminated his grave

7
8
9
10

C Wedgwood, The Kings Peace (J955) 79. H 1i:evor-Roper, Archbishop Laud (2nd edn, 1962) Ch 8. D Gibb, LloydsofLondon (1957) 1. Encyclopaedia Britannica, Vol 6, 'Coffee'. Rosee had been the servant of a merchant named

Daniel Edwards who brought back the drink from his travels abroad. His house was rapidly

-------"--"
3

General average was recognized by the maritime law of ancient Rhodes: Digest XlY.2. 1;

Barton v English (1883) 12 QBD 2)8, 22L

4 For outline discussion of general average and exploration of insurance of losses and liabilities admissible in general average, see 24.41 5 See 1.36 below. 6 See also W Reynardson, 'The History and Development of P&I Insurance: The British Scene' (1969) 43 Tul LR 457.

inundated by coffee-seeking 'friends' and, in the interests of domestic tranquility, the merchant encouraged Rosee to set up in business (D Gibb, Lloyd's o/London (l957) 1-2). He duly opened 'The Sign of Pasqua Rosee's Head', now the site of the Jamaica Wine House. 11 Lloyd's had a curious succession, not infrequently operating as a dowry. After the death of Edward Lloyd in 1713, it passed to his son-in-law William Newton, one of his waiters who had married his daughter in January of that year. William Newton, however, died shortly afterwards and his widow married one Sheppard. Next in line was Sheppard's brother-in-law, Jemson, who was followed in 1738 by Baker, the nephew of another of Sheppard's sisters. Samuel Saunders, son-in-law of Baker, succeeded in 1754. Thomas Lawrence waS Saunders' brother-in-law.

Introduction to the Law ofMarine Insurance

unadulterated wagering upon the safery of property and the lives of persons in which they had nO interest. The combination of such disteputable behaviour and the ambition of one of Lawtence's waiters, Thomas Fielding, led to the establishment in 1769 undet Fielding's management of the rival New Lloyd's Coffee House at 5 Pope's Head Alley.12 1.07 The new premises, however, were cramped, old, and insanitary. Only rwO yeats latet, the underwtiters wete again looking fot somewhere new. This prompted the election in 1771 fot the first time of a Committee to represent the underwriters and the payment of a subsctiption, a step that matks the fitst significant moVe by the underwritets themselves towards assumption of tesponsibility fot the otganization of the market. Nevertheless, two years later the nine-member Committee had failed to find alternative premises. Ultimately, an immigrant from the Baltic and an ordinary subsctibet, one John Julius Angustein,13 artanged for the lease of twO rooms in the Royal Exchange,14 to which the underwritets moved in Match 1774. Lloyd's 15 had metamorphosed from coffee house to otganization of underwritets, although it was not until the first Lloyd's Act in 1871 that thete could be said to be a structured organization regulated by a constitution. 1.08 The Wat of American Independence subjected Lloyd's to a sevete otdeal. The official entry of France into the wat in 1778 saw its hostile maritime action escalate from privateering, and 656 ships were lost in 1779. At the time, thete was no legal prohibition on the insurance of enemy vessels, and Lloyd's sustained heavy losses as a result of British successes as well as British revetses." The greatest disaster came in August 1780. Two convoys rotalling together somi: sixty-thtee merchant vessels, and protected only by one ship of the line and a couple of ftigates, encounteted the combined fleets of France and Spailt. Only eight metchantmen escaped, resulting in losses of 1.5 million. A considetable number of Lloyd's underwriters failed to meet their obligations. Nevertheless,

Marine Insurers

Lloyd's survived (as ;ViII be seen, it had no genuine competition) and soon found, itself basking m a penod of financial prosperity. 'Seldom, if ever, has Lloy~,~ been mote prospetous or more prominent than it was in the Napoleonic war~. Sharply nsmg commodity prices led to an inctease in the demand for manne msuran~e) creating an underwriters' market where coverage commanded whatever premiUms the underwriters deemed necessary. In addition, the Royal Navy, which at one stage during the eighteenth century had been reduced to a shambohc state, was m a better position to fulfil its convoy protection duties.
(2) The Rise of Lloyd's to Prominence within the Marine Market

The a~ove outline of the early histOry of Lloyd's does not, howevet, reveal why 1.09 Lloyd s came to assume such a dominant position in the marine insurance matk~t. The ~nswer lies in a combination of corruption, chance, and commerCial expediency.

(a) The Vansittart scandal

At the heginning of the eighteenth centuty, thete was no centte of matine 1.10 msurance.. Undeiwtiting was vety much a patt-time activity pursued by petsons of all callmgs. The 'fixed point in a floating matket''' was provided by the brokets, then known as 'office-keepets' since the term 'broker' had fallen into dlsrep~te as synonymous with a handlet of stOlen goods. The brokers knew whete m the City of London to find individuals prepared to assume, on their personal account, a proportion of the risk in the course of their secondary intetest of undetwriting. The pivotal role of the broker emerges against the backgtound of a matket devoid of regulation:
When [th~ i~surers].un~erwrote ... they usually were not acting as partners in a firm, but rIskmg thelf pnvate fortunes in such a way that there was no partnership control, no common liability, no check on what was written or who wrote it It was ~ free-~or-aIl trade and, so long as the office-keeper was willing to accep't a

12 The choice of name for the new coffee house suggests the existence of a strong connection between underwriting and the name 'Lloyd's'. 13 Elected Chairman of Lloyd's in 1795 and known to subsequent generations as the Father of

Lloyd's. 14 The Exchange was built by Sir Thomas Gresham in the 1560s as a meeting place for merchants. It opened in 1570 and became known as the Royal Exchange after a visit by Elizabeth I in 1571. 15 The 'New' was dropped in 1794. The original Lloyd's went out of business by about 1785: C Golding and D King-Page, Lloyds (1952) 12-13. Lloyd's, however, is not rhe only modem commercial institution to have its_.roots in a London coffee house. The Stock Exchange is the descendant of Jonathon's Coffee House and the Shipping Exchange started life as the Baltic

man s secunty, there ,:as no bar to the most unsuitable person committing himself to any extent on any fisk The one binding controlling element must have been the office-keeper's judgement; and his duty to his client was not only to get a risk completed at the best rate, but to mal<e sure that it was placed with reliable men whose ~eans would satisfY the claims when they arose, If his integrity and good sense faIled,h' 19the assured must suffer and the good name ofthe London market then cc . h SUner WIt 1m. Ne;7ett7helessb' the 0ficcasional broker was no patagon of virtue. Scandal erupted 1.11 ill ,1. A rol<or nding himself short of 200 of cover on a vessel called the Vanstttart added two fictitious insurers. Had the vessel completed its voyage

Coffee House. 16 Much Dutch shipping and goods was insured at Lloyd's, which sustained considerable losses after Holland declared war on Britain. For the impact of war on insurance contracts today,

17

D Gibb, Lwyds ofLondon (1957) 50.

18

ibid 19.

19

ibid 21.

sed.78ff below.

Introduction to the Law ofMarine Insurance

safely, the fraud would have passed undiscovered, bur the Vansittart was lost and the truth emerged. The ensuing widespread recrimination and the levying of accusations against brokers generally were fuelled in part by a campaign ro introduce chartered insurance companies to replace or compete with the individual underwriters. Questioning of the system appears legitimate since merchants' livelihoods would depend upon individuals not known personally to them assembled by the broker. However, the clamour for the introduction of chartered companies was raised in no small measure by company speculators seeking access ro the insurance marker in the era of the South Sea Bubble.

Marine Imurers The bubble of deceit was pricked in 1720. The incorporared company was 1.14 the key to having stock amenable ro specularion and, at that time, incorporarion was by Royal Charter or by Act of Parliament alone. 22 As the success of a petition for a charter was dependent primarily upon extensive tactical bribery, a number of companies resorted instead ro purchasing obsolete charters from firms rhat had ceased trading. Although charters granted the right to pursue a particular trade, such resrrictions were then cavalierly ignored. However, in March 1720, a House of Commons committee met to investigate fraudulent schemes for the subscription of capital, including the acquisition of obsolete charters. The result of its report was the preparation and passing in June 1720 of the Bubble Act," which, inter alia, rendered illegal the raising of public subscriptions either in the absence of authority of charter or Act of Parliament, or under an obsolete charter. 24 The institution of proceedings against companies with a view ro forfeiture of their obsolete charters,25 combined with the adverse publicity engendered by the passing of the Bubble Act, triggered a srock market crash of unprecedented devastation in September 1720. In the course of that month, shares in the South Sea Company itself fell from 780 to 180 per cent. Although the company was roo entwined with the nation's finances to be permirred to fail totally, it never regained public confidence. 26

(b) The South Sea Bubble 1.12 In 1711, faced with serious national debt problems, the government established a company, the Sourh Sea Company, to exploit a trading monopoly conferred by charter in return for taking over 9 million of the debt. Holders of government securities could exchange them for shares in the company, which would receive reduced interest from the Treasury. In return, the shareholders were to benefit from an assurerlly and increasingly profitable investment in the South Sea Company. The flaw was that, in reality, the company's trading monopolies were of little if any value, consisting of dealings in unwrought iron with Spanish subjects, some vague fishing rights, and trade with Spanish South America, which never blossomed. By way of comparison, one commentator has postulated a company floated in London in 1943 'ro develop British trade with Japan, ro buy and sell base metals with Germany, and ro run a fleet of trawlers ro Iceland'.'o
1.13

(c) The effict ofthe Bubble Act on the marine insurance market
Throughout the eighteenth century and beyond, the bursting of the Sourh Sea 1.15 Bubble retarded the development of incorporated companies. New charters and authorizing Acts of Parliament for any type of company were few and far between. Bur the Bubble Act itself had a more direct impact upon the evolution of the marine insurance market. At the time of preparation of the Act, charters were being sought for a new marine insurance corporation and for an underwriting company operating under the purchased obsolete Elizabethan charters of the combined Mines Royal and Mineral and Battery Works. The petitions to Parliament for charters proving unavailing, the promoters appealed unto Caesar, 'or rather (to be more accurate) they offered Caesar a bribe and Caesar accepted

Between 1711 and 1720, when the company took over another 31 million of the National Debt, every speculator's trick was employed to maintain the apparent buoyancy of Sourh Sea Company stock, its 100 srock rising ro a height of 1,000. But the government-sponsored gambling on Sourh Sea srock spread:
A perfect rage for speculation seized the entire country: fraudulent companies of every conceivable description were floated, and however absurd their ostensible

purpose, they found people willing to invest in them" .. The crowning imposition
of all

... was a scheme 'for carrying on an undertaking of great advantage, but

nobody to know what it is.' The ingenious deviser of this idea asked for a capital of half a million, and provided that every investor paying down two guineas per cent
was to have 100 per annum for every 100 so subscribed. Extravagant as this sounds, the projector received 1000 subscriptions in a single morning, and
Incorporation by registration was introduced by the Joint Stock Companies Act 1844. 6 Geo I, c 18. 24 ibid s 18. 25 It is generally believed that these proceedings were instituted by directors of the South Sea Company as other public companies were rivals for potential investors and the success of the South Sea Company itself depended upon continued confidence and investment in its stock. If this view is accurate, the move backfired disastrously. 26 Sir William Holdsworth records that the company 'dragged out a struggling existence till 1807; and the faded splendours of its South Sea House survived long enough to secure
22
23

decamped with his 2000 guineas in the afternoon. The nominal value of all these 'Bubbles,' as they were called, was 500,000,000-about rwice the value of all the land in England. 21

20

ibid 26.

21

B Drew, The London Assurance: A Second ChroniCle (1949) 24.

immortality in the Essays ofElia', A History ofEnglish Law (2nd edn, 1937) Vol VIII. 210.

Introduction to the Law ofMarine Insurance

it'.27 An impecunious government had fallen into arrears of 600,000 on the Civil List. The Prime Minister, Robert Walpole, engineered a scheme whereby the promoters of each of the two petitions would pay the government 300,000 for the award of chartets granting exclusive rights to cotpotate marine undetwriting. The ensuing support of the King, George 1,28 led to the grant of exclusive charters to the Royal Exchange Assurance and the London Assurance, the relevant provisions being included in the Bubble Act. Permission for two charters was gtanted by section 1 of the Act, each of the beneficiaries being required by section 2 to pay 300,000 'into the Receipt of the Exchequer ... for the Use of the King's Majesty, in order to discharge the Debts and Expences of his Civil Government'. The crucial provision, however, was section 12, which prohibited 'all other Corporations or Bodies Politick, before this time erected or established, or hereafter to be erected or established, whethet such Corporations or Bodies Politick, or any of them, be sale or aggregate, and all such Societies and Partnerships as now are, or hereafter shall or may be entered into by any Person or Persons, for assuring Ships or Metchandizes at Sea' from entering into any contract of marine insurance. Nevertheless, section 12 also declared that 'any private Petson or Persons shall be at Liberty to write or underwrite any Policies, or engage himself or herself in any Assurances of [marine insurance] as fully and beneficially as if this Act had not been made, so as the same be not upon the Account or Risque of a Corporation or Body Politick, or upon the Account or Risque of Persons acting in a Society or Partnership for that Purpose),
1.16 At face value, therefore, the impact of the Bubble Act was threefold. First,

Marine Insurers

restrictive terms and conditions. 29 Individual underwriters helped themselves to over 90 per cent of the marine market. 30

(d) The marine insurance market and Lloyd's

What, then, led to the marine marker adopting Lloyd's as its centre? Edward 1.17 Lloyd esrablished a maritime connection but nor an underwriting tradition. As already seen, however, the Bubble Act creared a de ftcto monopoly of individual underwrirers with respect to marine insurance. The 1730s and 1740s saw an export boom together wirh a correlative growth in rhe demand for marine insurance. A leading criticism of the marine marker prior to 1720 had been irs scattered narure. Commercial expedience dictated concentration and Lloyd's became the centre, probably because of the development of the coffee house by its proprietors as a centre for shipping intelligence, exemplified by the establishment in 1734 of the shipping-oriented newspaper Lloyd's List, which has been published continuously ever since. 31 The repeal of the corporare duopoly in 1824 saw the introduction of corporate 1.18 competition, but the ever-developing insurance market proved large enough to accommodate both Lloyd's and the companies. The modern Lloyd's remains an insurance (and reinsurance) market of global importance, although the latter part of the twentieth century saw rhe market experiencing severe troubles and undergoing something of a metamorphosis. Until rhen, the capital basis of the market was srill provided by individuals, called 'names', who staked their entire fortunes for the right to join one or more insurance syndicates managed by professional underwriters. Catastrophic losses falling upon the names caused by a combination of bad luck and incomperence of market professionals" led, however, to rhe introduction of corporate capital to the market in order to compensate for the reduction in individual capital as names were bankrupted or voluntarily left the market. 33

individual underwriting via brokers remained unfettered. Secondly, competition was introduced in the form of the Royal Exchange Assurance and the ~ondon Assurance. Thirdly, the marine insurance market was closed absolutely except to individual underwriters and the two corporations. The reality, however, was that for more than one hundred years, from the passing of the Bubble Act in 1720 until the repeal of the corporate duopoly by the Marine Insurance Act 1824, individual underwriting enjoyed an almost total monopoly. The stock market collapse of 1720 led the two corporations to default on their 300,000 sratutory debrs. Fifty per cent remissions enabled rhem to survive, but they made lirtle impact on the marine market. They were nor competitive; rhey imposed a limir of 1 0,000 on the sum assured; they were reluctant to accepr risks attached to voyages between two overseas ports (known as 'cross risks') or to cover neutral ships againsr the war risk of captute in enemy ports; and they rended to impose

D Gibb, Lloyds afLondon (1957) 30. For the text of a letter from George I to the House of Commons, see B Drew, The London Assurance: A Second Chronicle (1949) IS.
27

28

29 Report of the Select Committee on Marine Insurance (1810) PP, IV; B Supple, The Royal Exchange Assurance (1970) 189-90. 30 In 1809, the Royal Exchange Assurance and London Assurance underwrote respectively only 3.91m and 2.25m of marine risks from a total of 162.5m: Report of the Select Committee on Marine Insurance (1810) PP, IV; 4-5. 31 Edward Lloyd himself had earlier published the short-lived Lloyd's News from 1696 umi11697. 32 A name is advised as to appropriate syndicates, placed thereon, and given general advice by a 'member's agent'. The underwriting of a syndicate is entrusted to a 'managing agent'. An agent who combines both functions is called a 'combined agent'. For the legal duties owed by agents to names, see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145. 33 For an account of the recent disastrous history of Lloyd's, see A Raphael, Ultimate Risk (1994).

Introduction to the Law ojMarine Insurance

(3) The I\lstitute of London Underwriters and the International Underwriting Association of London 1.19 The lifting in 1824 of the restrictions on corporate participation in marine insurance heralded a number of corporate ventures into the market. For over thirty years, however, nearly all proved abortive and it was not until the 1860s, when the American civil war prompted a significant upturn in marine insurance business, that a number of new corporations successfully entered the market. On 5 June 1884, the Institute of London Underwriters was incorporated as a forum for co-operation between these corporate participants in the market. 34 Originally, it had been intended that the Institute should embrace Lloyd's underwriters as well, but it proved impossible ro accommodate them within the memorandum and articles of association of the Institute. 1.20 From its inception, a particular feature of the work of the Institute was its involvement in the drafting of standard clauses for adoption in marine policies. An amended form of the Running Down Clause (governing third party collision liability)35 was promulgated only six months after the Institute's incotpotation. Four years later the first set of 'Institute clauses' was promulgated: the 1888 Time Clauses 'recommended by the Institute of London Underwriters for adoption in the year's policies on hulls'. They wete widely taken up, with about 80 per cent of hull policies that year incorporating the recommended clauses. In 1893, separate Institute hull clauses for time and for voyage were introduced, and the first 'Institute Cargo Clauses' followed in 1912. To ensure maximum market acceptability of the clauses, joint committees including representatives from the Lloyd's Underwriters' Association were established to oversee the drafting ofsuccessive generations of clauses. The Joint Hull Committee came into existence in 1910 and the Joint Cargo Committee followed in 1942. 1.21 The focus of the Institute of London Underwriters was marine, aviation, and transport insurance. In 1998, the desire to give the London insurance marker one voice saw the merger of the Institute with the London International Insurance and Reinsurance Market Associarion" to form the International Underwriting Association of London (IUA)." It is under the auspices of this organization that new market forms and clauses are now promulgated, with the
34 See generally C Hewer, A Problem Shared: A History 0/ the Institute a/London Underwriters 1884-1984 (1984). 35 For discussion of the modern equivalent, see 12.1 Off below. 36 Itself the product of a merger"'in 1991 of organizations that focused on non~marine and reinsurance business. 37 The IUA formally came into existence on 31 December 1998.

Marine Insurers
detailed work still being done by the joint committees of representatives from the IVA and Lloyd's.38 (4) The Mutual Insurance Associations" The post-Bubble Act de ftcto monopoly on marine insurance enjoyed by indi- 1.22 vidual underwriters centred on Lloyd's was not to the liking of all shipowners. Dissatisfaction developed, fuelled by a variety of concerns. First, shipowners based not in London but in provincial ports, such as Bristol, Liverpool, and Manchester, found the London underwriters remote and unsympathetic. Secondly, premium rates at Lloyd's were unrestrained by any effective competition. Thirdly, the solvency of any given individual underwriter could not be assumed, as graphically illustrated in the wake of the disastrous loss of most of a large convoy in 1780.40 In consequence, shipowners came together to constitute unincorporated associations to provide mutual hull insurance. Despite doubts as to whether they were illegal insurance companies in disguise,41 1.23 the hull clubs initially proved populat but declined in the face of improved competition from Lloyd's and the new corporate insurers entering the market after 1824, combined with pOOt quality conttol on membetship.42 The mechanism, however, was established, and the advent of a variety ofthird party liabilities to which shipowners were subject, and which the London market of Lloyd's and the insurance companies did not cover, saw rhe birth of a new generation of mutual insurance associations. These developed into the modern protecrion and indemnity associations (or P&I clubs).43 Today, mutual insurance provides cover against principally three categories of risk, namely P&I, war, and defence risks. These are outlined in Chapter 16 below. As a general rule, the London market offers marine property insurance together with some collision liability cover, while other marine liability insutance is the province of the P&I clubs. In the context ofwar risks, rhe associations offer both property and liability insurance. The association members are shipowners and other operators of ships, such as 1.24 charterers. Control of the association is vested in a committee or board of

The modern forms and clauses are introduced in 7.07ffbe1ow. See generally.S Hazelwood, P&l Clubs: Law & Practice (3rd edn, 2000). 40 See 1.08 above. 41 An issue not resolved until Re Arthur Average Association for British, Foreign and Colonial Ships (1875) LR lOCh App 542, when it was held that associations with more than 20 members were in law companies requiring registration under me companies legislation. 42 Unscrupulous owners entered poor quality tonnage, thereby trading at the expense of the more reputable owners. Once better competition was established, the latter reverted to fixed premium insurance leaving me hull clubs full of rUSt buckets. 43 The first such club, the Shipowners Mutual Protection Society, was founded in 1854. In 1876 it amalgamated with a number of other associations to form the Britannia club.
38
39

10

11

Introduction to the Law ofMarine Insurance

directors, elected by the members from among themselves. However, considerable management responsibility is delegated to the club managers, who may be employees of the club or an independent management company.44 The relationship between the club and its members is governed by the club rules, which detail membership rights and obligations, the operation of the club, and the cover provided. 1.25 Market insurance and mutual insurance do not share the same ethos. Market insurance consists of a purely financial bargain whereby cover is purchased for a fixed premium from a profit-making entity. Mutual insurance associations are non-profit making organizations that permit the pooling of losses over a given period at the cost of a contribution thereto, the amount payable depending therefore on the magnitude of the losses that actually occur." The associations, moreover, provide a valuable claims-handling service and advice on a wide range of matters concerned with or incidental to the operation of ships. 1.26 An application to enter a ship in a dub is made to the managers, who are given the discrerion to accept or reject. If the application is successful, the managers issue a certificate of entry attesting, inter alia, to the terms and conditions on which the ship has been accepted for insurance and the date of commencement of cover. (5) Government Involvement In Marine War Risks Insurance 1.27 While the London market and the mutual insurance associations offer cover against war risks that might be incurred in the ordinary course of trading, war risks cover in the context of a significant armed conflict involving the United Kingdom is a different commercial proposition. Government involvement [s then required to sustain the maritime activity of an island nation at war.

Marine Insurers

reinsurance cover, controlling by tegulation both premium rates and settlement of claims. As regards catgoes, the government opened a State Insurance Office offering ptimary insurance directly to metchants fot cargoes in British hulls at a unifotm rate for all voyages. The government, howevet, did not appropriate to itselfany monopoly and permitted the private sector to compete for cargo covet. The effect of the scheme was that the government ended up covering poor cargo 1.29 risks, while Lloyd's and the companies undercut it with tespect to the better tisks and made considetable ptofits. Since the purpose of the scheme was not to enable the government to patticipate in the insurance market but to ensure the continuance of certain voyages, the result was not without justification. But it led to abandonment of the unifotm rate for cargoes. Overall, the government made a ptofit of 32 million on hulls insurance against a 7.5 million loss on cargo cover. The State Insurance Office covered approximately 27 per cent of the total value of wartime catgoes, while the temaindet, with a value of about 6,000 million, went to the private sectot. The Second World Wat saw a different scheme. The government entered into a 1.30 gentlemen's agreement (which was duly observed) with Lloyd's and the companies. This agreement divided war risks into two groups. With respect to voyages to or from a United Kingdom port, the private sector underwrirers agreed to quote only rates higher than the government's. As regards voyages between two overseas pons, the underwriters were left unfettered. To a certain extent, the government was protected against competition while foteign nationals were not compelled to subscribe to United Kingdom government insurance. 'It was a sensible arrangement which at once protected the British tax-payers, preserved an invisible export, and brought us during the war millions of pounds worth of foreign currency. It also guatanteed the survival of our marine insurance market after the war was over. '47

(a) The origins ofgovernment involvement in war risks insurance46

1.28 In 1903, the government appointed a committee, under the chairmanship of Austen Chamberlain, to consider whether private enterprise could accommodate marine insurance in time ofwar involving the United Kingdom. The committee concluded that it could, but losses from the Russo-Japanese War, which confirmed the efficacy of the torpedo, together with the growing power of the German navy prompted a considerable retreat from war risks cover by both the London market and the associations. Consequently, in 1913 a second committee, chaired by Huth Jackson, drew up the scheme adopted by the government on 5 August 1914. With respect to hulls, the government offered 80 per cent

(b) Modern government-backed war risks cover: Queen senemy risks

The current statutory framework for government wat risks insurance is provided 1.31 by the Marine and Aviation Insurance (War Risks) Act 1952. 48 By virtue of this Act, the Board of Trade is empowered to reinsure ships and catgoes against wat risks. If, however, the ship is not a British ship, the wat tisks must arise either during the continuance of a wat or other hostilities in which rhe United Kingdom is engaged or after any such war or hostilities in consequence of things done Ot omitted during such events.49 The Board is also empowered by section 2(1) to carty on business:

44 The Britannia club is managed by Tindall, Riley (Marine) Ltd while the United Kingdom P&I club is managed by Thomas Miller P&I. 45 See 6.38-6.39 below. " See generally D Gibb, Lloyds ofLondon (1957) Ch 12.

47 48 49

ibid 229. Repealing and replacing the relevant provisions of the War Risks Insurance Act 1939. Marine and Aviation Insurance (War Risks) Act 1952, S 1(1).

12

13

Introduction to the Law ofMarine Insurance

(a) at any time when it appears to the Board that reasonable and adequate facilities for the insurance of British ships or British aircraft against war risks, or any description of such risks, are not available, for the insurance by the Board of such ships ... against such risks Of, as the case may be, that description thereof; (b) during the continuance of any war or other hostilities in which Her Majesty is

Marine Insurance Law

engaged, for the insurance by the Board of ships and aircraft (wherher British
or not); (c) at any time when it appears to the Board that reasonable and adequate facilities for the insurance ofcargoes carried in ships or aircraft against war risks, or any description of such risks, are not available, for the insurance by the Board of such cargoes against such risks or, as the case may be, that description thereof; (d) during the continuance of any war or other hostilities in which Her Majesty is engaged, for the insurance by the Board of cargoes carried in ships or aircraft; (e) during the continuance of any such war or hostilities, for the insurance by the Board of goods consigned for carriage by sea or by air, while the goods are in transit between the premises from which they are consigned and the ship or aircraft or between the ship or aircraft and their destination ...

mercantile community and administered by specialist tribunals. 54 These tribunals consisted mainly of merchants' COUtts at fairs and seaports. The expeditious nature of their proceedings was both part of their attraction to the commercial community and the reason why so few records of their proceedings survive. The fourteenth century saw the birth of the Court ofAdmiralty, a court that gradually came into competition with the seaport courts for jurisdiction in maritime matters. The Court of Admiralty, however, seems to have made little contribution to the evolution of insurance law. Marsden observes that: 'Insurance law alone owes little to Admiralty judges. The court ofAdmiralty does not seem to have given satisfaction to underwriters Or merchants. With the exception of a few cases which found their way into the court during the latter half of the sixteenth century ... there is little to be found on the records relating to insurance.'55 Insurance litigation was affected by the politicization of commerce during 1.35 the reign of Elizabeth I. The national importance of international trade saw the active intervention of the Privy Council. 'Of marine insurance, during the period from 1571 to 1577, there are no less than twenty-one recorded minutes. The Privy Council took a very strong line in fostering the health of marine insurance in the City of London.''' On occasion, the Privy Council would be petitioned to intervene in insurance disputes, and a practice appears to have evolved of referring these disputes for arbitration by the Lord Mayor of London and knowledgeable merchants. In 1576, this ad hoc system of arbitration was formalized by a resolution of the Court of Aldermen of the City of London. Seven merchants, termed Commissioners, were appointed on an annual basis to adjudicate on insurance disputes. They sat to hear dispures evety Monday and Thursday in the newly created Chamber of Assurance within the Royal Exchange. One consequence of the establishment of this specialist court was to draw insurance litigation away from the Court ofAdmiralty. Before long, however, it appears that a number of insurers refused to submit to 1.36 the speedy jurisdiction of the Court of Commissioners. Insurers unwilling to meet claims were doubtless attracted by the protracted and more costly procedures of formal litigation, which might induce a settlement on terms more favourable to the insurer or even dissuade an assured from pursuing a claim altogether. Assured merchants, in conttast, regarded this atrenuation of dispute

1.32 However, no insurance may be provided under paras (b), (d), or (e) unless, in the interests of the defence of the realm or the efficient prosecution of any such war or hostilities as described above, it is necessary or expedient so to do. 50 The key term 'British ship' is not defined but also encompasses ships ofIndia and of the Republic of Ireland. 51 The statutoty definition of 'war risks' reflects the insurance terminology of the time. For the purposes of the 1952 Act, it means" 'risks arising from any of the following events, that is to say, hostilities, tebellion, revolution and civil war, from civil strife consequent on the happening of any of those events, or from action taken (whether before or after the outbreak of any hostilities, rebellion, revolution or civil war) for repelling an imagined attack or preventing or hindering the carrying out of any attack, and includes pitacy'. 1.33 Pursuant to the 1952 Act, the government has standing agreements with ten Btitish mutual war risks associations. This is outlined in Chapter 16 below. 53

B. Marine Insurance Law

(1) From Law Merchant to Common Law: Early Development of Marine

Insurance Law 1.34 Marine insurance law originally formed part of the law merchant, that body of transnational commercial law generated by the latgely autonomous medieval

54

On the law merchant, its institutions, and its absorption into the common law, see generally

Sir William Holdsworth, A History ofEnglish Law (7th cdn, 1956), Vol I, Ch VII: T Scrutton,
50 53

'General Survey of the History of the Law Merchant' in E Freund, W Mikell, and J Wigmore

ibid proviso to s 2(1). See 16.15 below.

" ibid s 10(2).

52

ibid s 10(1).

(cds) Select Essays in Anglo-American Legal History Vol III (1909) Ch 47. 5S Introduction to Select Pleas in the Court ofAdmiralty (Selden Society) Vol II, lxxx. 56 H Raynes, A History ofBritish Insurance (2nd edn, 1964) 41.

14

15

Introduction to the Law ofMarine Insurance

resolution as unacceptable and petitioned the Privy Council. This led, in 1601, to 'An Act concerning Matters of Assurances used among Merchants', 57 which sought to reinvigorate the arbitration system by establishing a new Court of Commissioners to adjudicate on disputes arising out of insurance contracts by reference to the law merchant. 1.37 The Commissioners were the Admiralty judge, the Recorder of London, two doctors of civil law, two common lawyers, and eight 'grave and discreet merchants'." They were required to sit at least once a week 'without Formalities of Pleadings or Proceedings' in panels of five. Originally, it had been intended to confer jurisdiction on the High Court of Chancery, but the length of Chancery litigation and the absence of specialist knowledge on the part of Chancery judges led to the retention of a specialist commercial tribunal, 59 ,Jbeit coupled with a right of appeal to the High Court of Chancery. In 1662, the powers of the new Court of Commissioners were extended and the quorum reduced to three,'O considerably enhancing the ability of the court to meet the requirements of the commercial community. Despite these reforms, however, the court did not survive into the eighteenth century as an effective tribunal. Along with the other tribunals of the law merchant, including the Court of Admiralty, it fell victim to the aggressively expanding jurisdiction ofthe common law courts. 61 The Court of King's Bench held that the jurisdiction of the Court of Commissioners was confined to 'things merchantable'," thereby excluding policies of life insurance, and to actions by the assured against the insurer. 63 Most significantly, it held that an unsuccessful action in the Court of Commissioners did not bar a fresh action at common law. 54

Marine Insurance Law

Unfortunately, the common law courts," to which litigation in mercantile mat- 1.38 ters gradually moved, lacked expertise in the law merchant. Initially, indeed, the law metchant was administeted as custom tather than law, retarding the evolution of commercial law doctrine. 66 A major contributory factor was a division in the legal profession between membets of the Inns of Court, who practised in the courts of common law and equity, and the civil lawyers, who wete members of Doctors Commons and specialized in the law merchant. Samuel Pepys recorded his amusement at the difficulty encountered by bench and bar in grappling with a matine insurance case heard in King's Bench on 1 December 1663. 67 For many merchants, the incompetence of the common law courts in mercantile mattets elicited disgust tather than amusement, resulting in the courts being fotsaken in favour of ptivate arbittation." This combination oflack of expertise and resultant scarcity of disputes being btought before the courts retarded the development of the common law in mercantile matters, and insurance law in particular was poorly served. Writing originally in 1786, Park stated:"
But though the Court of Policies of Assurances70 has been long disllsed; though it

is near a century since ,questions of this nature became chiefly the subject of
common law jurisdiction; yet I am sure I rather go beyond bounds ifI assert that in

all our reporters from the reign of Queen Elizabeth ro the year 1756 ... there are
sixty cases upon matters of insurance. Even those cases which are repofted, are such

loose notes, mostly of trials at Nisi Prius, containing a short opinion of a single
Judge, and, very often, no opinion at all, but merely a general verdict, that little information can be collected upon the subject.

Not only was there a paucity of authority and exposition of principle, there was 1.39 also a diversity of jurisdiction. The primary common law aggressor against the tribunals of the law merchant was the Court of King's Bench, but the occasional insurance case can also be found in Common Pleas. Moreover, as was clear from

57 The preamble to the Act describes the reason for this legislative intervention in the following terms; 'And whereas heretofore such Assurers have used to stand so justly and precisely upon their credits, as fewor no Controversies have arisen thereupon, and if any have grown, the same have from Time to Time been ended and ordered by certain grave and discreet Merchants appointed by the Lord Mayor of the City of London, as Men by reason of their Experience fittest to understand, and speedily to decide those Causes; until of late years that divers persons have withdrawn themselves, from that arbitrary Course, and have sought to draw the parties assured to seek their Monies of every several Assurer, by Suits commenced in Her Majesty's Courts, to their great Charges and Delays ...' 58 ibid s L 59 See the extract from the speech of Francis Bacon, introducing the Bill in Parliament, cited by H Raynes, A History ofBritish [mutance (2nd edn, 1964) 52. 60 By 'An additional Act concerning Matters of Assurance used amongst merchants' 1662 (14 Car II, c 23). 61 On the expansion of the jurisdiction of the common law courtS, see generally G Hand and D Bendey (eds). Radeliffi & Cross, The English Legal System (6rh edn, 1977) 241ff. On the demise of the Court of Commissioners, see F Hildyard (ed), Park, A System of the Law of Marine Insurances (8th edn, 1842) lxxxvi-lxxxviii. 62 Denoyt v Oyle (1649) Sryle 166, 172. 63 Delbye v Proudftot(1692) J Show KB 396. 64 Cane v Moye (1658) 2 Sid 121.

65 In the following discussion, a distinction is drawn between the COUrtS of common law and tribunals that administered the law merchant. For these purposes, courts of equity qualify as common law courts in that they did not administer the law merchant. 66 T Scrutton, 'General Survey of the History of the Law Merchant', in E Freund, W Mikell, and J Wigmore (eds) Select Essays in Anglo-American Legal History (1909) Ch 47, 13. 67 R Latham and W Marthews (cds), The DiaryofSomuelPepys (1971) Vol IV, 403: 'There was all the great counsel in the kingdom in the case ... But it was pleasant to see what mad sort of testimonys the seamen did give, and could not be made to speak in order; and then their terms such as the Judge could not understand; and to hear how sillily the Counsel and Judge would speak as to the terms necessary in the matter would make one laugh.' 68 See C Fifoot, Lord Mansfield (1936) 7-8. cf also the response to the inadequacies of the Queen's Bench that led to the establishment of the Commercial Court in 1895: V Veeder, 'Mr Justice Lawrance: The "True Begetter" of the English Commercial Court' (1994) 110 LQR 292,298-9. 69 F Hildyard (ed), Park, A System o/the Law o/Marine Insurances (8th edn, 1842) lxxxix-Ixc. On the difficulty of deriving principle from earlier proceedings, see also Vallejo v Wheeler (1778) 1 Cowp 143, 153. 70 A reference to the Court of Commissioners established by the 1601 Act.

16

17

Introduction to the Law ofMarine Insurance

the 1601 statute, the COUrt of Chancery, notwithstanding its lack of expertise, was considered an appropriate forum for insurance litigation and reports survive of a number of late seventeenth- and early eighteenth-cenrury Chancery insurance cases. 71 Thus, cases on insurable interest, for example, can be found in King's Bench in 1691,72 in Chancery in 1692,73 and in Common Pleas in 1721.74
1.40 By the middle of the eighteenth century, therefore, the position appears to

Marine Insurance Law reforming civil procedure in the interest of efficient resolurion of disputes and, .informed and assisted by the advice ofspecial jurors drawn from the ranks ofleading merchants, established principles of law that attracted the approval of both lawyers and merchants. Only six decisions were ever reversed by the House of Lords. For its part, the commercial communiry never felt compelled to petition Parliament for legislation to overtide judicial antipathy to mercantile practice," and was happy to bring its dispures before courts that inspired its confidence. The result was a transformation of English commercial law in general and 1.42 marine insurance law in particular. Lord Mansfield was a firm believer in the need for the law to promote commercial certainty, especially with respect to commercial transactions where the law consisted of default principles from which the commercial communiry was free to derogate by appropriately worded agreemenr. 80 Subject to that constraint, he was prolific in expounding principle and, within the constraints of precedent, quite prepared to depart from earlier aurhoriry in favour of what he considered a more appropriate principle. In Wilson v Ducket,81 following underwriters were induced to subscribe to a risk by fraud in the form of a decoy duck leading underwriter. 82 The question was whether on avoidance of the policy premium paid to following underwriters was forfeit by reason of the fraud or rerurnable to the assured. Counsel for the assured submitted that there was no common law aurhoriry on the point, bur that the courts of common law and equiry had concurrent jurisdiction, that in equiry authoriry established that the premium should be repaid," and that the two jurisdictions should resolve the same question in the same way. Lord Mansfield accepted that the premium was repayable in equiry but enquired whether there was any corresponding common law authoriry. No such authoriry being produced, he departed from the equitable approach and held the premium forfeit to the insurers. 84

be as follows. There was no clear, coherent, and comprehensive corpus of insurance contract law. A number of rules had been developed by the law merchant. However, the abiliry ofthe common law courts that had appropriated jurisdiction in insurance matters to absorb and develop their law merchant inheritance was limited. Moreover, jurisdiction was claimed by several common law courts, engendering possible confusion through different views emerging on the same issue. Legislation was confined to invalidating certain waget policies" and prohibiting the insurance of enemy properry.76 What was needed was a person possessed of a legal mind of the first calibre; who undersrood, was sympathetic towards, and supportive of commercial practice; and who had the time and power to articulate and imbue with authoriry principles of law that were intellectually rational and reflected business practice. (2) Lord Mansfield
1.41

On 25 May 1756, Sir Dudley Ryder, Chief Justice of the King's Bench, died unexpectedly. By custom, the vacant position could be claimed by the AttorneyGeneral. The then Attorney-General, William Murray, duly demanded the position and the peerage that traditionally accompanied it. Despite every attempt by the leading minister, the Duke of Newcasrle, to keep him in the government, Murray remained adamant until the Duke of Newcastle finally relented. On 8 November rhat year, Murray was sworn in and immediately afterwards was created Baron Mansfield in rhe County of Nottingham." Three days later, on 11 November, Lord Mansfield took his place as ChiefJustice of the King's Bench. He remained in office for rhirty-two years, resigning on 4 June 1788. In rhe field of commercial law, he devored a formidable intellecr and profound learning" to

71

See the authorities collected ar 1 Eq Cas Abr 371; 2 Eq Cas Abr 635.

"MartinvSitwell(1691) 1 ShowKB 156. 73 Goddart v Garrett (1692) 2 Vern 269 (from the comment of Park, at 1.38 above, this is
unlikely to have been an appeal from the Court of Commissioners). . " DepabavLudlow(I721) 1 Comyns360. 75 Marine Insurance Act 1745 (19 Geo II, c 37), discussed at 3.06-3.07 below. 76 21 Geo II c 4. 77 In 1776 he was created Earl of Mansfield. 78 See C Fifoot, LordMansfield(1936) 27-30. Fot an example of Lord Mansfield's pteparedness to draw on a wide range of SOurces in seeking the most appropriate legal principle, see Luke v Lyde (1759) 2 Burr 882.

79 As it had when faced with the resolute opposition of Lord Holt to recognizing promissory notes as negotiable instruments: C Fifoor, Lord Mansfield (1936) 18-19. 80 C Fifoot, LordManifield (1936) 99-100, referring to 1'e11:y v Royal Exchange Assurance(1757) 1 Burr 341; Salvador v Hopkins (1765) 3 Burr 1707. 81 (1762) 3 Burr 1361. 82 In a subscription market, following underwriters subscribe, at least inter alia, on the strength of the expertise and size of line taken by the leading undelwriter. A leader acting as a decoy duck fraudulently agrees with the assured that, in return for lending his name to the insurance, the leader will not accept any risk but will instead share in loss moneys paid by the following underwriters. The operation of the London subscription market and the role of leading underwriters is discussed in Ch 2 below. 83 Wittingham v Thornborough (1690) Prec Ch 20. Reliance was placed also on De Costa v Scandret (1723) 2 P Wms 170, although it is unclear whether the non-disclosure in that case (of a report of the capture of a ship described in terms that matched the insured vessel) was fraudulent in the modern common law sense of the term fraud. 84 The forfeiture rule Is now codified in MIA 1906, s 84(1), (3)(a), see 6.06-6.07 below.

18

19

Introduction to the Law ofMarine Insurance

1.43 So comprehensive was Lord Mansfield's propounding of principle in the area of

Marine Insurance Law

and consisted of representatives of shipowners, average adjusters, and insurers, as well as Mackenzie Chalmers. After Lord Herschell's death in March 1899, Lord Halsbury reintroduced the Bill into the House of Lords but did not proceed with it. After further comments had been obtained," the Bill was again reintroduced in 1900. A further representative committee of shipowners, average adjusters, and insurers, chaired by Lord Halsbury, then considered the Bill clause by clause, after which it was finally passed by the House of Lords. It was, however, repeatedly blocked in the House of Commons, apparently 'by one obsrinate member', 92 until 1906 when, with various amendments introduced in committee, it was finally passed by the Commons. The House of Lords accepted the amendments, and the Bill received Royal Assent on 21 December 1906. It entered into force on 1 January 1907.

marine insurance rhat, by 1786, Sir James Park was able ro offer to rhe public a treatise entitled A System ofthe Law Relating to Marine Insurance, dedicated to Lord Mansfield with the statement: 'Any treatise upon the subject must be admitted ro be rhe exclusive property of your Lordship.' The first edition of Joseph Arnould's authoritative text, Law ofMarine Insurance and Average, followed in 1848. (3) Codification
1.44 Throughout the nineteenth century, marine insurance remained predominantly

the subject of principles developed by the common law courts. Further legislative intervention remained piecemeal, concerned with facilitating assignment of marine policies" and formalities, largely in connection with the imposition of stamp duty on marine policies." The second half of the nineteenth century saw a movement for the codification of areas of commercial law, motivated by a belief that a clear statement of legal principle would benefit the commercial commnnity by reducing rhe need for litigation or confining the scope of litigation to the application of legal principle to a particular set of facts without the need first to elucidate the relevant principle. 'It is cheaper to legislate than to litigate.'87 Codification of an area of commercial law required, therefore, that the case law had achieved a settled and comprehensive set of principles. 88
1.45 The first area of commercial law selected for codification was the law of negoti-

able instruments, resulting in the Bills of Exchange Act 1882. Sale of goods was the second, with the Sale of Goods Act following in 1893. Marine insurance was the third, and (as it proved) final, area selected. All three statutes were the work of the same draftsman, Mackenzie Chalmers. The Marine Insurance Bill, a distillation of over 2,000 cases, was first introduced into the Honse of Lords in 1894 by the Lord Chancellor, Lord Herschell, whose chambers Chalmers had joined in 1875 and who had encouraged Chalmers in his work of codification. 89 The Bill, however, underwent a tortuous passage through Parliament. 9O
1.46 Af1er its inirial introduction, it failed to gain the support of the House of Lords

The Marine Insurance Act 1906, although wide-ranging, is confined to issues 1.47 addressed by previous case law relating to marine insurance contracts. However, section 91(2) also provides for the applicability to marine insurance contracts of the 'rules of the common law, including the law merchant, save in so far as they are inconsistent with the express provisions of the 1906 Act. The reference to 'common law' in this context includes rules of equity. For example, the availability of the equitable remedy of rectification in marine insurance law is not in doubt despite the fact that it receives no mention in the Act." Conversely, many of the principles codified in the Act are not confined to contracts of marine insurance, but rather constitute principles of general insurance contract law applicable to all forms of insurance contract, whether direct cover or reinsurance, marine or non-marine. In post-1906 non-marine insurance litigation, the provisions of the 1906 Act are often accepted and analysed as accurate formulations of the relevant law. Indeed, many of the leading post-1906 authorities on the principles codified in the Act, and thereby the interpretation of the Act, do not themselves concern marine insurance contracts. 94 The 1906 Act repealed all prior legislation. 95 Three years later, the Marine 1.48 Insurance (Gambling Policies) Act 1909 was passed to render criminal certain contraventions of the requirements of the 1906 Act with respect to insurable interest. The two Acts may be cited together as the Marine Insurance Acts 1906

and was referred by Lord Herschell for consideration by a committee. This was chaired initially by the Attorney-General and later by Lord Herschell himself

Policies of Marine Insurance Act 1868. 86 See 3.65ffbelow. 87 M Chalmers, Digest of the Law of Marine Insurance (lst edn, 1901), Introduction, reproduced in E Ivamy, Chalmers 'Marine Insurance Act 1906 (10th edn, 1993) ix. 88 M Chalmers, 'Codification of Metcantile Law' (1903) 19 LQR 10, 11. 89 Lord Herschel! had been instrumental in the passage through Parliament of both the Bills of Exchange and Sale of Goods Bills. 90 M Chalmers, Digestofthe Law ofMtlrine Insurance (lSt edn, 1901), Introduction.
85

91 From Lord Justice Mathew (who had been the first judge of the Commercial Court, when it was established in 1895) and Sir Arthur Cohen KC. 92 M Chalmers, 'Codification of Mercantile Law' (1903) 19 LQR 10,140. 93 For discussion of rectification, see 8.77ffbelow. 94 eg the non~marine reinsurance case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 is a leading authority on the interpretation ofMLA 1906, ss 18 and 20. 95 In the case of the Marine Insurance Act 1788, only in so far as it related to marine insurance. Despite its title, it applied also, and continues to apply, to non-marine policies on goods.

20

21

Introduction to the Law ofMarine Insurance

and 1909. 96 Subsequent legislative intervention has addressed the position of third parties to liability policies" and government intervention in war risks
insurance. 98

The Nature ofMarine Imurance

insurance law strives to avoid the assured bei l1g unjustly enriched rhtough any recovery in excess of the measure of indemnity provided by law. '04
The subject-matter of any contract of marine insurance is a marine adventure, 1.52

1.49 The passing of rhe 1906 Act inevitably changed the nature of the legal enquiry

in any case where the relevant legal principles wete codified in the Act. The primary focus of any enquiry falls inevirably upon the statutory wording. 99 However, where the statutory language gives rise to doubt as to the correct interpretation of a codifYing provision, the pre-existing common law affords the best evidence of Parliament's intention.'oo There is, indeed, no sign of forbearance by reason of any preclusionary principle from recourse to pre-Act case law whenever it is felt that such recourse mighr be useful.'o'

three instances of which are detailed by section 3(2) of the Act. First, a marine adventure exists whete: 'Any ship'05 goods'06 or other moveables ate exposed to maritime perils."o, Such propetty is tetmed 'insurable property'. Secondly, there is a marine adventure where: 'The earning or acquisirion of any freight, passage money, commission, profit, or other pecuniary benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of insurable property to maritime perils. '108

As observed by Lord Tenterden in Flint v Flemyng, the term 'freight' in insur- 1.53 ance law comprehends three separate financial interests: '09 'It is the same thing
to the shipowner whether he receives that benefit of the use of his ship by a money payment from one person who charters the whole ship, or from various persons who put specific quantities ofgoods on board, or from persons who pay him the value ofhis own goods at the port of delivery, increased by their carriage in his own ship.' Charrered freight is 'a fixed sum stipulated to be paid to the shipowner by the 1.54 terms of a charterparty for the use of his ship (or parr of it) on an entire voyage therein described'" In its classic sense, fteight is the money paid by an owner of cargo for the carriage of his goods on a ship owned or hired by another. However, freight also 'includes the profit derivable by a shipowner from the employment of his ship to carry his own goods or moveables': '"
Whether the ship~owner carry his own goods or the goods of another person is immaterial to him. In either case he has to pay the whole expense of the ship, of

C. The Nature of Marine Insurance

1.50 A contract of marine insurance provides cover against losses incident to marine

adventure. In addition, the concept of marine insurance may be extended to

certain other risks.

(1) Insurance of Losses Incident to Marine Adventure

1.51

According to section 1 of the Marine Insurance Act 1906: 'A contract of marine insurance is a contract whereby the insurer undertakes to indemnifY the assured,
in a manner and to the extent agreed, against marine losses, that is to say, the

losses incident to marine adventure.' Fundamental to the nature of a contract of

marine insurance is its characteristic as a contract of indemnity. As discussed

elsewhere,'02 no claim can be made under a contract of insurance by a person with no connection to the insured property recognized in law as an insurable
interest. Insurance is not permitted to function as pure financial speculation on

provisions, and ofwages; he may fairly expect to reimburse himselfout of the profit he may derive from carrying goods being his own property, or that of others, and

the continued safety of the insured property. Moreover, the instirer's liability to the assured is confined to indemnification of the loss sustained, '03 and marine
104 See the discussion in later chapters of abandonment (22.31 below), subrogation (Ch 25), and double insurance (Ch 26). 105 By virtue of MIA 1906, Sch 1, r 15, subject to contrary intention, the term 'ship' has the following non-exhaustive definition: 'the hull, materials and outfit, stores and provisions for the officers and crew, and, in the case of the vessels engaged in a special trade, the ordinary fittings requisite for the trade, and also, in the case of a steamship, the machinery, boilers, and coals and engine stores, if owned by the assured', 106 By virtue of MIA 1906, Sch 1, r 17, subject to contrary intention, the term 'goods' is defined as 'goods in the nature of merchandise, and does not include personal effects or provisions and stores for use on board'.

96

Marine Insurance (Gambling Policies) Act 1909, s 2. The 1909 Act is discussed at 3.16 Third Parties (Rights against Insurers) Act 1930, discussed at 20.33 below. Marine and Aviation Insurance (War Risks) Act 1952, discussed at 1.31-1.33 above.

below.
97
98

" Bank ofEngland v v"gliano Bros [l8911 AC 107, 145; Hall v Hayman [1912J 2 KB 5, 12. British & Foreign Marine Insurance Co Ltd v Sanday 6oCo [1916J 1 AC 650, 672-3. 101 See, eg, the extensive discussion of pre~Act case law and secondary sources in Pan Atlantic Insurance Co Ltd v Pine 70p Insurance ,Co Ltd[1995] 1 AC 501.
'00

See 3.02ffbelow. 103 The practice of concluding valued policies, discussed at 7.24ff below, whereby the measure of indemnity is quantified by reference to a conclusive agreement on, the value of the subject-matter insured,incroduces a significant element of conventionaHndemnity.
102

'" MIA 1906, S 3(2)(a). '" ibid s 3(2)(b). '09 (1830) I B & Ad 45. 48. Arnauld, Law o/Marine Insurance & AverageSir Michael Mustill and J Gilman (eds) (16th edn, 1981) para 572. 111 MIA 1906, s 90, Sch 1, r 16. It does not include passage money. See also Devaux v j'Anson (1839) 5 Bing (NC) 519; Beckett v West ofEngland Insurance Co Ltd (I 872) 25 LfNS 739, 742.
110

22

23

Introduction to the Law ofMarine Insurance

h
y insure that profit under the name of freight, whether it accrue from the e. ~apaid for the carriage of the goods of others, or from the additional value pnc . . 112 conferred on his own goods by thelf carnage.

The Nature ofMarine Insurance

1.55 The third instance of marine adventure contemplated by section 3(2) occurs

where: 'Any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of

.. ' mantime pen1s. '113

1.56 Inte ral, therefore, to the concept of a marine adventure is the risk of maritime

peri~.

According to section 3(2): ":Maritime perils" means the perils .consequent on, or incidental to, the navlgat~on of the sea, that IS to say, penIs of the seas, fire, war perils, pirates, rovers, thIeves, captures, seIzures, restraints, a~d detainments of princes and peoples, jettisons, barratty, and any other penIs, either of the like kind or which may be designated by the policy.' The final hrase of this definition, part of which is now obsolete, '14 has occasioned ;ome difficulty since, read literally, it permits any peril to be designated as a matitime peril despite a complete absence of any maritime connection. However, although the concept of maritime perils serves to define a manne adventure the courts restrict the definition of the former by reference to the latter. , In Re London County Commercial Reinsurance O'ih Ltd,115' ~J,ce remsurance ,peace olicies' drafted in marine insurance form provided for indemnification against ~otal losses 'in the event of peace not being declated between Great Britain and Germany on or before 31 March, 1918'. Since the trigger to indemnification was obviously not a loss incident to a marine adventure, the failure to declare peace could not be a maritime peril and the contract could not be 0ge
of marine insurance.

determine the measure of the insurer's liability on a bank's mortgagee's interest policy, Mustill J had to decide whether the policy was one of marine insurance. Observing that a literal reading of the closing words of section 3(2) would be 'absurd', he held that only exposure of property to periJs consequent on or incidental to the navigation of the sea could lend an adventure a marine ch aracter. 118 Th e po1" m question presented considerable difficulties of characICy terization, but its 'general tenor and shape' were held to be more consistent with insurance against damage to the vessel rather than financial loss to the mortgagee through default of the insurer on the principal policy. Accordingly, the policy was held to be one of marine insurance. (2) Extension to Mixed Land and Sea Adventures
Although a contract of marine insurance must insure a marine adventure, 1.58 section 2(1) of the Marine Insurance Act 1906 permits its extension by express term or usage to cover 'losses on inland waters or on any land risk which may be incidental to any sea voyage'. Standard modern cargo insurance, for example, offers cover from the time the goods leave their place of storage at the named place of commencement of transit. '19 Any casualty in the course of transit bur prior to shipment on board a vessel for carriage by sea will still be treated as a marine loss and the measure of indemnity will be calculated according to principJes of marine insurance law.

The meaning of 'incidental' has arisen in the context of the order for ship's 1.59 papers, a form of, traditionally pre-defence, disclosure developed at common law'20 and embracing all documents relating to a ship that had suffered a

1.57 Where a vessel is mortgaged, the mortgagee will normally take an assignment

of the benefit of the mortgagor's hull insurance. However, as a safeguard against failure of the principal insurance, the mortgagee may also take out a separate mortgagee's interest policy.'" In The Captain Panagos DP, '17 in order to

incurred in connection with a business offering paragliding over the estuanne wate~s of the Swan River in Perth is marine insurance: Gibbs v Mercantile Mutual Insurance (Austrafta) Ltd [2003] HCA 39, (2003) ALR 497. , , ' .,. 114 Modern marine policies do not refer to rovers or to restramts and detamments of pnnces and peoples'. ," [1922J 2 Ch 67. . . 116 Assignment is discussed at 20.12ff below. The insurance may fad b~cause the msurer becomes insolvent, or the insurer has an equity or right of set~offopposable agamst the mortgagee: see 20.21-20.26. ... . 117 Continental Illinois National Bank 6' Trust Co ofChicago v Batkurst (The Captam Panagos DP) [1985J 1 Lloyd's Rep 625.

'" Flint v Flemyng(l830) 1 B & Ad 45. 48-9 per Bayley J. . ... 113 MIA 1906, s 3(2)(c). The High Court of Australia has held that ins~rance agamst lIabIlIty

ibid 631-2. See also Theodorou v Chester [1954J 1 Lloyd's Rep 204, 218. See 17.llffbelow. 120 The order for ship's papers originated in the eighteenth cemury, at which time discovery orders were available only in courts of equity. Since actions on a policy of marine insurance are brought at common law, to obtain discovery an insurer would have to accept the delay and expense attendant upon the additional litigation involved in seeking an order in equity: Goldschmidt v Marryat (1809) 1 Camp 559; Leon v Casey [1932J 2 KB 576, 579. The rationale for granting discl?sur.e at the p~e-~efence stage appears to lie in the extreme difficulty historically faced by .manne lllsur~rs wIshmg to defend a claim arising from a casualty that might have occurred m a geographIcally remote location, involved property under the control of the assured, a?d generated a severe !nformation imbalance between assured and insurer with respect to the CIrcumstances surroundlllg the casualty. In consequence, before committing itself to a potentially spurious defence, the insurer was held entitled to the fullest possible disclosure from the assured in order to evaluate the claim: Rdynor v Ritson (1865) 6 B & S 888; China Iranspacific Steamship Co v Commercial Union Assurance Co (1881) 8 QBD 142; Boulton v Houlder Bros 6' CO [1904J 1 KB 784, 792; Harding v Bussell [1905J 2 KB 83; Sir William Garthwaite (fnsurance) Ltd v Port of Manchester Insurance Co Ltd (1930) 37 LlLRep 194; Probatina Shipping Co Ltd v Sun Insurance Office Ltd [1974J QB 635. The order may today be granted at any stage of the proceedings: CPR. r 58.14(2).
118
119

24

25

Introduction to the Law ofMarine Insurance

12 casualty of any possible relevance to the resulting claim. ' Once granted to marine insurers as a matter of course,'" since 1936 its availability has been a matter of judicial discretion.'" Theoretically available in any action, in practice the order is largely bur not exclusively confined to cases where the underwriter wishes to raise a wilful misconduct defence.'24 The court'S discretion extends to an accompanying stay of ptoceedings pending compliance with the order.'25
.... _ - - '" Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001) UKHL 1, [2003}1 AC 469, para. The order is potentially extremely wide rangmg. It m,ayextend,beyond
documents relating to the subject-matter insured to documents concerned with other m,tcrests in the adventure, such as the cargo, and material to show perhaps that the voyage was Illegal: China Transpacific Steamship Co v Commercial Union Assurance Co (1881) 8 QBD 142. It ~as been held, however, that the order may not be used to obtain disclosure of documents revealmg the general financial position of an assured shipowner, ,even whe.re th~ insurer wis~es to defend a claim for loss of a vessel by perils of the sea by allegmg scuttlmg WIth the ~o~mvance of t~e owner and desires disclosure of the documents for the purpose of establishmg a finanaal motive: GatTa v Eagle Star Insurance Co (1923) 16 ~ILRep 33~. It is good pra~dce for t~e parties to agree, if possible, a form of order appropnate to the Issues and reflectmg any dl~~ closure already made: Probatina Shipping Co Ltd v Sun Insurance Office Ltd (1973] 2 Lloyd s Rep 520, 528. 12.2 Sir William Garthwaite (Insurance) Ltd v Port ofManchester Insurance Co Ltd (1930) 37 LlLRep 194. Contrast China Traders'Insurance Co Ltd v Royal Exchange Assurance C"orp [1898] 2 QB 187, 193 (order available when 'wise and right'). . 1.23 The order provided potential for abuse as a device for delayi~g payment. In 1932: It wa~ forcefully criticized by Greer L] as an 'unfair and unjust weapon m the hands of the mS~l'er and an 'instrument of oppression': Leon v Casey [1932J 2 KB 576, 588, 589. See also Keevtl & Keevil Ltd v Boag [1940] 3 All ER 346. In 1936, rules of cou~t.restricted the availability of t3 e order to cases of necessity or expedience and rendered the deClSlOn whether to grant an ord~r a matter of judicial discretion. Today, the order is governed by CPR, r 58.14. Upon an application for specific disclosure under CPR, r 31.12, the court may or~er a pa~ty to produce aU ship's papers and require that party to use best endeavours to obtam and dlsclose documents that are not or have not been in that party's possession. In the latter case, merely a formal request of and refusal by a third party in possession of a relevant docuqtent will not suffice: Graham Joint Stock Shipping Co Ltd v Motor Union Insurance Co Ltd [19221 1 KB 563. In London & Provincial Marine & General Insurance Co Ltd v Chambers (l900) 5 Com Cas 241, 244-5, in response to a reinsurer's order for ship's pape~s, the da~mant underwriter wro~e to h~s fellow underwriters informing them of the order, statmg that It covered documents m thelr possession, and continuing:. 'If there is no objection to such documents being produced we s.hall be much obliged by your letting us have them for the purpose.' When the feHow underwrlt~rs declined to give disclosure, it was held that the claimant's acts were insufficient to comply wlth the ship's papers order. Being a form of disclosure, the ship's papers jurisdiction, does not, however, override the rules of privilege: Adam Steamship Co Ltd v London Assurance Corp (1914) 20 Com Cas 37. 124 Probatina Shipping Co Ltd v Sun Insurance Office Ltd [19741 QB 635, 649. 1.25 CPR, r 58.14(2). A stay of proceedings clearly permits the insurer to benefit fully from discovery of ship's papers ..pefore entering a defence, and to fulfil the requirement of giving particulars of any alleged scuttling (see 15.25-15.26 below). However, the co~se quent delay may outweigh the marine insurer's convenience, which is no r.n0re deservmg of protection than that of the non-marine insurer for whom pre~defen~~ dlscovery would be unusual although not impossible: Probatina Shipping Co Ltd v Sun f.nsurance Office Ltd [1974] QB 635.

The Nature ofMarine Insurance

Since the order for ship's papers is unique ro marine insurance,126 applications 1.60 for the order have on occasion been resisted on the basis that the contract in question is not one of marine insurance. The decisive question is whether the subject-matter insured is substantially a marine adventure. Insurance of cargo, warehouse to warehouse, by land from Cairo to Alexandria and thence by sea to Jaffa was held to be a marine policy.'" In contrast, an order for ship's papers was refused in respect of a policy substantially on land carriage although includ. . . C mg a sea flS k'28 an d a poI'ICy on t he carnage 0 f goo ds Irom the ocean pOtt of importation inland by rail, river steamer, and mule into the interior of Columbia. 12 ' Section 2(2) of the Marine Insurance Act 1906 also contemplates a marine 1.61 policy being used to insure 'a ship in course of building, or the launch of a ship, or any adventure analogous to a marine adventure'. In such a case, the contract is governed by the provisions of the 1906 Act 'in so far as applicable'. A shipbuilder's risk policy covering a hull together with its machinely and fittings under construction qualifies, therefore, as a marine policy. EO

. _ - - - - - - - _..

__

1.26 Wi-stofEngland & South \,%!es District Bank v Canton Insurance Co (1877) 2 fuD 472, 474; China 7raders'Insurance Co Ltd v Royal Exchange Assurance Corp [1898] 2 QB 187, 190; 'Emnenbaum & Co v Heath (1908) 13 Com Cas 264; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001} UKHL 1, [2003) 1 AC 469, para 58; CPR, r 58.14. On rhe ground

that the availability of the primary insurer's defences should be matched by equal discovely rights, the order is available also to a reinsurer of a marine risk (China 7raders' Insurance v Roya! Exchange Assurance) and to a marine rerrocessionaire: Sir William Garthwaite (Insurance) Ltd v Port of Manchester Insurance Co Ltd (1930) 37 LlLRep 194, Moreover, an insurer may seek an order for ship's papers where claiming resritution of money paid in setdement of a claim on the ground of misrepresentation by the assured as to the extent of the loss. The action in substance is a claim on the policy and the underwriter should not be prejudiced by having failed to defend the original claim in the light of being misled by the assured: Boulton v Houlder Bros & CO [1904J I KB 784 (fraudulent misrepresentation of the cost of repairs of the insured ship). m Leon v Casry [1932} 2 KB 576; (1932) 48 TLR 452. See also Harding v Bussell [19051 2 KB 83; 10 Com Cas 184; Schloss Bros v Stevens (1905) 10 Com Cas 224. It is clear from these authorities mat, to the extent of any departure from the test of substantial marine character, reliance should not be placed upon Henderson v Underwriting & Agency Association Ltd [1891 J 1 QB 557, followed in Village Main ReefGoidMining Co v Stearns (1900) 5 Com Cas 246. 1.28 Tannenbaum & Co v Heath (1908) 13 Com Cas 264. 129 Schloss Bros v Stevens (1905) 10 Com Cas 224. 130 James Yachts Ltd v Thames & Mersey Marine Insurance Co Ltd [1977] 1 Lloyd's Rep 206 (Supreme Court of British Columbia).

26

27

2
FORMATION OF MARINE INSURANCE CONTRACTS

A. Contract Formation in a
Subscription Market B. Contract Formation Outside the London Market 2.04 2.25 2.28
2.29 2.38 2.43

(3) Legal nature of a leader's power (4) Termination of a leader's power

2,57 2.61

E. Delegated Authorities (1) Binding authorities

(2) Line slips

2.62
2.63 2.66

C. Obligatory and Facultative

Agreements
(1) Floating policies

(2) Facultative/obligatory covers (3) Facultative covers

R Joint and Composite Policies (1) Definition of joint and composite insurance

2.69

D. Leading Underwriter Agreements (1) Identifying the leader (2) Exrem of a leader's power to bind
the following market

2.44 2.45
2.47

2.70 (2) Legal structure of composite policies 2.77 (3) Contractual status under composite

policics 2.79 (4) Is classification as joint or composite insurance a matter oflaw or contract? 2.92

In general, the formation of a contract of marine insurance is governed by 2.01 the ordinary principles of contract law. Their application must be considered, however, in the context of certain practices of the insurance markets. For these purposes, a distinction needs to be drawn between the 'London market' and the 'United Kingdom market'. The London market operates generally on a subscriprion basis, with insurers 2.02 each accepting a percentage of rhe risk, and is characterized by the processing of documentation and money through centralized facilities. Participants in the London market are the Lloyd's syndicates and those insurance companies outside Lloyd's that choose to write business in rhat way to the extent that they so choose. The practices of the London market are undergoing extensive reform with the introduction of new recommended documentation, market agreements, and market processes under the auspices of a reform programme known

29

Formation ofMarine Insurance Contracts

as LMP (standing for London Marker Principles),' designed to enhance contractual cerrainty and market efficiency and, hence, the appeal of the London market to potential assureds. Insurance companies ontside Lloyd's may participate both in the London market and also in the genetal United Kingdom insurance market with documentation and money being processed in respect of each risk through the relevant broker at even directly with the assured and with risks often being underwritten in rheit entirety by one insurer. Subscription risks may be spread across the London market and insurance markets in other
countries.

Contract Formation in a Subscription Market

identified standard wordings or attached non-standard clauses. The second section is headed 'Subscription Agreement'. This addresses principally how Contract amendments and claims will be handled in the context of the subscription 7 market. The third section, headed 'Infotmation', details information provided to underwriters in support of the placement of the risk. 8 The final section addresses fiscal and regulatory matters. Standatd headings are prescribed within each section. For risk details, these are minimum headings the order of which is not currently regulated, but for the othet three sections the headings 'must not be changed, deleted, teordered or added to in any way'.' An underwriter who wishes to parricipate in the insurance will initial (or 2.07 'sctatch') the slip, stating, almost invatiably in the form of a percentage, the propottion of the risk that the underwriter is prepared to accept." This is termed the underwriter's 'line'. In American Airlines v Hope," Lord Diplock descnbed the process at Lloyd's whereby brokers seek to obtain underwriters' subscriptions to the risk:
[The broker} takes the slip in the first instance to an underwriter whom he has selected to deal with as leading underwriter, ie, one who has a reputation in the market as an exper.t in the ~nd of cover required and whose lead is likely to be followed by other Insurers 1ll the market. If it is the first contract of insurance co,:,eri~g. that risk in whi~h. a p.articular underwriter has acted as leading underwnter It IS treated as an ongmal lllsurance. The broker and the leading underwriter

2.03 In practice, hull insurance is underwritten by the London market while catgo may be insured in either the London or the United Kingdom market.

A. Contract Formation in a Subscription Market

2.04 The practice of a number of underwtiters subscribing to the same risk is centuries old and offers a number of benefits. First, it permits the placing of risks toO large for one insurer to accept. Secondly, it enables underwriters participating in the subscription market to share desirable business with other underwriters and benefit from teciprocity. By contrast, an underwriter who did not supporr the subscription market would run the risk of being severely limited in the business that underwtiter was able prudently to do. Thirdly, the subsctiption matket offers a valuable form of peer review of underwriting judgment. 2.05 The broker, an intermediary who acts as the agent of the assured,' prepares a memorandum of agreement, called a 'slip', in the shorrhand of the market and then approaches underwtiters seeking subscriptions to the cover.' A centtal plank of the LMP reforms was the inttoduction of a standard form of slip, known as the LMP slip, designed to promote clarity in the tenns of the contract. The LMP slip was released to the market in 20024 and rapidly gained widespread acceptance. 5 An enhanced variant, known as the LMP BRAT slip,' was subsequently agreed and, with some limited exceptions, made compulsory within Lloyd's as of2 January 2004. 2.06 An LMP or LMP BRAT slip is divided into four sections. The first section contains the details of the risk, including contract terms either in the form of

:~d. fix the pr.emium..When agreement has been reached the leading underwriter 1ll1tials the slIp for hIS proportion of the cover and the broker then takes the initialled slip round the market to other insurers who initial it for such proportion of the cover as each is willing to accept. For practical purposes all the negotiations about the terms of the insurance and the rate of premium are carried on between the broker and the leading underwriter alone. 12
This shaping of the risk and subscription thereto by one Ot more 'leading' 2.08 underwriters (or 'slip leaders') renders the tisk marketable to othet 'following'

go through the slip rogether. They agree on any amendments ro the broker's draft

It was originally known as iMP 2001. The broker's agency is discussed at 5.03 below. 3 See generally H Bennett, 'The Role of the Slip in Marine Insurance Law' (1994J LMCLQ94. 4 The first iMP slip was regiStered on 25 Februaly2002. " . s Although there is some dispute as to the proportion of slips that. a~e truly LMP compliant. 6 BRAT stands for Broker Reform Action Team.
1

7 For contract amendments, see discussion ofleading underwriter agreements at 2.48ffbe1ow. For claims, see 22.02-22.03 below. S This may assist in disputes concerning the pre-formation doctrine of utmost good faith discussed in Ch 4 below. ' 9 As stated on the iMP BRAT Slip. 10 The slip may be scratched on a conditional ('subject to') basis: Bonner v Cox Dedicated Corporate Member Ltd [2004j EWHC 2963 (Comm), [20051 Lloyd's Rep IR 569, para 25. " [1974j 2 Lloyd's Rep 301, 304. See also Praet (julian) et Cit SA v HG Poland [1960j Lloyd's Rep 416, 428. 12 Where the risk is placed either with insurance companies outSide Lloyd's or with a combin~tion of Lloyd's ~nderwriters and outside companies, the process is essentially the same, although III the latter case lt may be necessary to negotiate the detail of the risk with both a Lloyd's leading underwriter and a leader from the companies.

30

31

Formation ofMarine Insurance Contracts

Contract Formation in a Subscription Market

at the time when the Contract is concluded, or afterwards'. According to the
Act, therefore, formation of a marine insurance contract does not require

underwriters whose confidence in the expertise of the leader will induce them to accept a proportion of the risk. 13 Once the broker has obtained the desired level of subscriptions, the slip is closed. A formal policy is frequently not prepared until some months later. Market practice, however, has always understood that the initialling of a slip by an underwriter creates a binding contract. In Ionides v Pacific Fire & Marine Insurance CO,'4 the underwriter sought ro resist a claim on the basis of a failure to disclose a material fact after initialling of the slip and before execution of a policy. However, the non-disclosure would furnish a defence only if it preceded a binding decision to insure on decided terms and, according to Blackburn]: 'The slip is, in practice, and according ro the understanding of those engaged in marine insurance, the complete and final contract between the parties, fixing the terms of the insurance and the premium, and neither party can, without the assent of the other, deviate from the tetms thus agreed on without a breach of faith, for which he would suffer severely in his
credit and future business.'15 2.09

embodiment of the contract in a policy but occurs upon the acceptance by the underwriter of the assured's offer. Where the underwriter initials the slip without amendment, the slip both conveys the terms of the assured's offer and
evidences the underwriter's acceptance. Where the underwriter requires a

change of terms, this response will constitute a counter-offer that may lead to further negotiation, but the underwriter's ultimate initialling of the slip concludes a contract of insurance for the percentage indicated. A number of issues remained unresolved by the 1906 Act. Is the risk placed 2.12 through subscriptions ro a slip ultimately covered by one conrract of insurance or does each subscription give rise ro a separate contracr? A relared question is the status of subscriptions to the slip while rhe broker continues ro offer the risk to the market and whether rhe assured and underwriters remain free to resile from the agreement until closure of the slip.

By virtue of the then stamp duty legislation an unstamped slip could not give rise to a legally valid and enforceable contract of marine insurance,16 but it was nevertheless held to be admissible as evidence of the parties' intentions regarding the relevance of the policy. In the light of market understanding that the slip constituted a contract, albeit not one enforceable in the courts, it followed that the policy merely recorded an earlier Contract and that the alleged non-disclosure occurred after the formation of that contract.
The distinction between the existence of the marine insurance contract and its

2.10

enforceability was perfected by the Marine Insurance Act 1906. Section 21 provides as follows: 'A contract of marine insutance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not: and for the purpose of showing when the proposal was accepted, reference may be made ro the slip or covering note or other cusromary memorandum of the contract, although it be unstamped.'17
2.11

Moreover, although the contract remains unenforceable unless embodied in a policy, section 22 provides that the policy 'may be executed and issued either

General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria18 concerned 2.13 layered reinsurance. Fennia, the insurer, reinsured the primary cover for 12 million Finnish marks excess of three million anyone occurrence. Further reinsurance was then placed in respect ofspecific risks for 15 million in excess of 15 million, thus producing two complementary layers of reinsurance cover. Fennia subsequently increased the first layer to 20 million in excess of five million, producing an overlap with the second layer from 15 to 25 million. On 11 and 12 February, a casualry occurred, resulting in a loss of approximately 27 million Finnish marks, which Fennia paid in full. On 14 February, in order to restore complementary layers of reinsurance, Fennia's brokers prepared an amendment slip altering the second layer to 15 million excess 25 million which the claimants (one of twenry-eight reinsurers participating in the second layer) initialled that same day. The issue was whether that amendment was binding, the relevance being whether the claimants were liable for a share of 2 or 12 million marks of the loss.
In Jaglom v Excess Insurance Co Ltd,19 Donaldson] expressed the view, obiter, 2.14 that an underwritet's subscription constitutes an offer on the terms of the slip as initialled, but that remains susceptible to modification to accord with any variation of terms introduced by underwriters taking subsequent lines. However, contrary expressions of judicial opinion" and heavy academic criticism, based largely on the market understanding that initialling of the slip produces an
" 19 [19721 2 QB 250 257-8. w [19821 QB 1022, rvsd [1983] QB 856. , T"ompson v Adams (1889) 23 QBD 361; Grover & Grover Ltd v Mathews (1910) 15 Com Cas 249 (both non~marine cases); Eagle Star Insurance Co Ltd v Spratt [1971J 2 Lloyd's Rep 116, 127.
~

13 British & Foreign Marine Insurance Co Ltd v Sturge (1897) 2 Com Cas 244, 247; General Accident Fire & Life Assurance Corp v ranter (The Zephyr) [1984]1 Lloyd's Rep 58, 66. In practice, indeed, a broker that has obtained the subscription of a respected London market leader will often place much of the remainder of the risk in international markets that will follow the London lead

but offer cover at discounted rates,

(l87l) LR 6 QB 674, .ffd (1872) LR 7 QB 517. (1871) LR 6 QB 674, 684-5. See also Morrison v Universal Marine Imurance Co (1873) LR8 Ex 197, 199. 16 Customs and Inland Revenue Act 1867, 30 Viet, c 23. 17 Marine insurance contracts are no longer subject to stamp duty.
14
lS

32

33

Formation ofMarine Insurance Contracts

immediately binding contract, led Staughton J at fitst instance in Fennia Patria to reject the view articulated by Donaldson J in favour of holding that the act of initialling a slip constitutes an immediate acceptance of the assured's offet." Nevertheless, on the basis of a cusromary right of the assured to cancel rhe contract until closure of the slip, Staughron J held that Fennia could hold the plaintiffs ro the unamended reinsurance contract, but was overruled by the Court of Appeal on the ground of insufficient evidence ro establish the alleged cusrom." Alrhough there was no appeal against the conclusion of Staughton J with tespect ro the status of the underwriter's initialling of the slip, Kerr LJ expressly affirmed that 'the presentation of the slip by the broker constitutes the offer, and the writing of each line constitutes an acceptance of thiS offer by the
underwriter pro tanto',23 each subscription thus giving rise to a separate, distinct
9

Contract Formation in a Subscription Market Fennia Patritl Staughron J expressed no doubt that underwriters generally would agree ro cancellation, particularly if the assured had a good reason so to request, although they might require time on risk premium if risk had attached. Fourthly, the insurer will be bound by the terms of the slip as it stands when initialled by that insurer and is neither bound by nor entitled to the benefit of
any s~bsequent variation in its terms introduced at the instigation of a later subscnber. In the event of such variations, the slip will embody contracts on different terms. Although such a prospect has been judicially denigrated as 'daft', productive of 'considerable administrative difficulty',3D and 'absurd',31 differences in terms do arise. For example, in American International Marine Agency ofNew York Inc v Dandridge,32 the terms of subscription among the following market differed with respect to the scope of the leading underwriter clause.

contract between the assured and the initialling underwriter.

24

2.15 This analysis of the slip method of contract formation has several consequences. 25 First, where the resulting contracts contain options open ei~her to the underwriters or the assured, there is, unless the contracts upon theIr true construction provide ro the contrary, no obligation on the underwriters ro act in harmony in either exercising or declining the option, and, correspondingly, the assured is free to exercise any option selectively against the underwriters participating in the overall cover." Secondly, in the event of ~ claim, the unde":,,riters are entitled ro diversiry of response. They may pay m full, compromise, or contest in whole or in part independently of one another." Thirdly, neither party can unilaterally cancel the cover once the slip has been initialled, even if the broker fails ro obtain full subscription." A fOrtiori, the assured has no rig!:t unilaterally ro resile from the contract once full subscription has been obtained, regardless of whether the underwriters have come on risk. Neverth$,less, in

The custom in the London market is not necessarily to close the slip on obtain- 2.16 mg 100 per cent subscription. The broker is entitled to continue collecting subscriptions with the end result that the cover reflected by the slip exceeds that which the broker has been authorized to obtain. By virtue of market cusrom, however, on the closure of the slip, each subscription is automatically subject to a pro rata reduction so that the aggregate of all the subscriptions rotals exactly 100 per cent. This process is called 'signing down'. The proportion of risk for which the insurer is liable and the proportion of premium to which the insurer is entitled is the signed down percentage. Consequently, an underwriter who wishes to secure a certain percentage of the risk and the premium needs to know at what point the broker will close the slip in order ro allow for signing down of the percentage for which he actually initials the slip. A slip leader will, therefore, invariably ask the broker for a 'signing indication', a statement of the percentage ro which rhe subscribed lines are expected ro be signed down. 33 A following underwriter may do the same or may determine the size of line merely by reference to the lines subscribed by leading underwriters. 34 In principle, a signing indication is merely a statement of opinion by the broker 2.17 of the extent ro which the risk may attract subscriptions. It will generate a collateral contract between broker and underwriter, whereby the broker

" [1982] QB 1022, 1038. 22 The expert testimony yielded only one instance of cancellation of a subscription and that was at the request of the broker who had failed to obtain 100% subscription, not demanded as of right: [1983] QB 856, 875. 23 At 866 (Slade and Oliver L]] concurring). " MIA 1906, s 24(2); Genera/Accident Fire & Lift Assurance Corp 0 Tanter (The Zephyr) [1984] 1 Lloyd's Rep 58, 66, [1985] 2 Lloyd's Rep 529, 531; Aneto Reinsurance Underwriting Ltd v Johnson [1998] 1 Lloyd's Rep 565, 5 9 0 . . .. 25 In addition to those considered m the followlOg text, see also the Issue of lOducemem by pre~formation, non~disdosure, or misrepresentation: 4.61ffbelow. 26 Touche Ross & Co v Saker [1991] 2 Lloyd's Rep 230, affd [1992] 2 Lloyd's Rep 207 where the argument focused upon whet~~r the wording of the policies prohibited selectivity. 27 General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria {l983] QB 856, 864. 28 The analysis adopted by Donaldson Jin]aglom v Excess Insurance Co Ltd[1972] 2 QB 250, at 2.14 above, was designed to avoid two 'absurd consequences'. A binding contract in the absence of 100% subscription was one, while the other was the prospect of the slip enibodying a series of contracts on different terms, as to which see below.

" [1982J QB 1022, 1039.

32
33

30

ibid.

" Jag/om v Excess Insurance Co Lcd [1972] 2 QB 250, 257.

[2005] EWHC 829 (Comm), [20051 Lloyd's Rep IR 643 paras 12,44. -A broker who believes the risk will sign down to give subscribing insurers 80% of the line for which they initial will normally say the risk is 'signing eighty'. 34 However, a foll0W:in~ u~derv:riter who does nOt ask for a signing indication cannot subsequently rely on the mdlcatlon given to the leader: GeneralAccident Fire & Life Assurance Corp v Tanter (The Zephyr) [1985J 2 Lloyd's Rep 529, discussed at 5.08 below.

34

35

Formation ofMarine Insurance Contracts undertakes to use best endeavours to obtain the indicated level of subscriptions. It may also import implied statements that the broker has reasonable grounds to support the opinion exptessed and that the broker does in truth hold the opinion represented, giving rise iffalse to tortious liability in negligence as to the first tepresentation and deceit as to the second. It does not, however, qualify the size ofline assumed and the contract concluded between underwriter and assured." Suppose, therefore, that an underwriter signs for 40 per cent in response to an indication that the slip will sign down to 50 per cent. Pending signing down, the subscription constitutes a legally binding commitment to the full extent of the line taken. Consequently, should the broker fail to achieve subscriptions totalling at least 100 per cent, the underwriter will be liable fot the full petcentage for which the slip is initialled. Where the broket obtains more than 100 but less than 200 per cent, the underwriter's line will be signed down, bur not to the extent anticipated. In either case, the insurer may seek redtess against the broker." Under no circumstances, however, can the amount of the final line exceed the percentage for which the underwritet initials the slip. Signing up does not exist.
2.18 Clearly, a broker may not achieve precisely the level of subscription to produce

Contract Formation in a Subscription Market

slip of 'signing no more than' a specified amount." Conversely, an underwriter concerned ~o guarant~e a minimum level of participation in what is perceived to be a good nsk may stipulate that he is to receive 'NLT' (not less than) a certain percentage. Thus, the line '10% signs NLT 50%' means that the underwtiter is securing at least five per cent of the risk. The practice of procuring by brokers of oversubscription of slips has been stated 2.20 to have the following advantages. 40 It enables brokets to show their business to more underwriters, .al:ho~gh the extent of this benefit is reduced by the writing of larger hnes m antICIpatiOn of signing down. These larger lines, however, make the risk appear more attractive to following underwriters and, in addition, enable the broker to reach 100 per cent subscription, and therefore full cover for the assured, more quickly. Moreover, should the assured subsequently wish to mcrease the value msured, the initial commitment of underwriters to a larger percentage than ultimately obtained provides an indication ofwhere some spare capacity may be found. Certain risks are of such a magnitude or nature that underwriters will subscribe 2.21 only if simultaneously offered reinsurance. 41 In such a case, the broker will first prepare a slip fot. the reinsurance cover and approach reinsurers seeking subscnptlOns. A remsurer who initials such a slip thereby makes an offer of reinsurance on the terms stated therein to such insurers as subscribe to the direct cover, even though they may at that stage be unidentifiable. 42 The legal consequences of such an offer have yet to be authoritatively considered. 43 Since the reinsurance is being arranged in advance, the broker has no insurer as its principal when dealing with the reinsurer. Consequently, any contract concluded on the reinsurer's initialling of the slip cannot be a contract of reinsurance; at most rhere may be a contract between the reinsurer and the broker, or the assured through the agency of the broker, for the future provision of reinsurance to a third party on the terms of the slip.44 A separate contract of reinsurance4s will

exactly the indicated amount of signing down. A market custom allows a tolerance of 10 per cent on the level of signing down. For example, if an underwriter subscribes for 20 per cent on a signing indication of 80 per cent, the underwriter is accepting a final line of anything between 14.4 per cent and 17.6 per cent.37 Should the signed down percentages fall outside such tolerance, in law the undetwriters are bound. However, in practice there will be further negoti, ations between rhe broker and rhe slip leader and potentially relevant followi~g underwriters. While rhe matter has not been tested in the courts, there would appear to be no reason why the btoker should not be tegarded as having the assured's implied actual authority to vaty the amount of risk accepted by the various underwriters on their concluded contracts, provided ihat the assured's overall cover is not prejudiced.
2.19 Occasionally, the extent of signing down will be affected by a statement on the

slip. If the signing indication is noted on the slip, it takes effect as a contractual term, so that signing down to thar extent is then ensured. 38 An underwriter concerned to limit the maximum size of the line might insert a limitation on the

Subject to the possibility of annotation on the slip, discussed at 2.19 below. The liability of the broker for misleading signing indications is discussed at 5.07-5.08 below. 37 80% ofa line 020% of the risk gives a signed down line of 16%. A margin of plus or minus 10% of 16 yields a range of 14.4% to 17.6%. 38 General Accident Fire 6- Life Assurance Corp v Ttmter (The ZephyrY'(1984J 1 Lloyd's Rep 58, 81. '
35

36

ie the line to be no more than the specified amount after signing down. General Accident Fire & Life Assurance Corp v 7tmter (The Zephyr) [1984] 1 Lloyd's Rep 58, 68. " See, eg, Youell v Bland Welch & Co Ltd (The Superhulls Cover case) (No 2) [19901 2 Lloyd's Rep 431. 42 GeneralAccident Fire, & Life Assurance Corp v 7tmter (The Zephyr) (1984] 1 Lloyd's Rep 58, 71-2; Bonner v Cox DedIcated Corporate Member Ltd [2004J EWHC 2963 (Comm) [2005] Lloyd's Rep IR 569, para 96. ' 43 For some d" lSCUSSlOn, see Bonner v Cox Dedicated Corporate Member Ltd [2004] EWHC 2963 (Comm), [2005] Lloyd's Rep IR 569, para 41. 44 ibid para 74. ' o. ' ,45Th'l!y, a s~rles f rems~rance contracts between the insurer and each subscribing ec mea remsurer: GeneralAcCldent Fzre & Life Assurance Corp v ranter (The Zephyr) [1984] 1 Lloyd's Re 58,71~ , P
39
40

36

37

Formation ofMarine lmurance Contracts

then be concluded each time the broker conveys the reinsurer's offer of cover ro an eligible insurer and the insurer acceprs rhat offer.46 On thar basis, a revocation of its offer by the reinsurer ar any time will be effective to prevent the formation of any further contract of reinsurance, albeit that the revocation may constitute a breach of contract as against the broker. 47 2.22 Once placement of the risk is complete, the broker will prepare a signing slip. This document contains the agreed terms, a list of rhe subscribing insurers, and their signed-down percentages. The form taken by the signing slip will depend on the working practice of the broking house concerned. A new document may be produced with the agreed terms, identities of the subscribing underwriters, and signed-down percentages. This will be submitted ro the slip leader ro check that it accords with the original slip. Alternatively, the signing slip may consist simply of a phorocopy of the placing slip with the signed-down percentages entered against the lines of the subscribing underwriters. Since there is no possibility of a transcription error, there is no need for checking by the slip leader. 2.23 The broker will also draw up the poliey, the document that sets our the full contractual wording that the Marine Insurance Act 1906 traditionally regards as the key ro enforceability of the contract in a court." Should it be desired ro alter cover at this late stage, the new wording would have ro be circulated for approval by subscribing underwriters or by the duly authorized slip leader. Otherwise, the poliey will be submitred directly to the centralized London market policy signing office (known as 'Ins-sure'),49 rogether with details of the subscribing

Contract Formation Outside the London Market

underwriters and the lines they have subscribed, as well as a London premium advice note. 50 The function of Ins-sure is to check the contract, sign and issue the policy on behalf of the insurers, and process premiums and loss moneys. Ins-sure also issues a signing advice for each individual underwriter, which is the document that informs each underwriter of precisely what proportion of the risk and, therefore, premium that underwriter has secured after any signing down. The advent of electronic communication has not (as yet) altered the essential 2.24 operation of the London subscription market. Instead, technology is increasingly employed in a supportive way. Information regarding a risk may be fOlwarded electronically to an underwriter so that the latter can consider the risk in advance of meeting personally with the broker. Alternatively, an electronic system may be established covering less complex risks, which permits the broker ro enter relevant information and receive an electronically generated quotation slip. The quotation will be supported by a number of underwriters subscribing ro a line slip. 51 Depending on its correct interpretation, the quotation could in law be regarded as either an invitation to treat or an offer. The likely interpretation is as an invitation to treat, so that a broker that received instructions from the client to take up the quotation would need ro take the slip ro the line slip leader for acceptance ih the cusromary way.

B. Contract Formation Outside the London Market

Outside the London market, as characterized by the subscription system and the 2.25 centralized processing of documents and money, the legal rules governing contract formation are those of general contract law. A slip is ofren used, with the contract being concluded on initialling of the slip by the underwriter, accepting in this case all of the risk. 52 Alternatively, brokers may approach more than one insurer in order to obtain competing quotations. Provided the terms of a quotation constitute an expression of willingness ro contract on terms sufficiently complete and certain to amount to a contract if accepted, the quotation will

46 At 71. See also Citadel Insurance Co v Atlantic Union Insurance Co SA (1982] 2 Lloyd's Rep 543, 546; Bonner v Cox Dedicated Corporate Member Ltd [2004J EWHC 2963 (Comm), [2005J Lloyd's Rep IR 569, paras 53, 74. If the reinsurer should, nevertheless, b~ held to undenake a commitment binding in the eyes of the market to accept the risk at an agreed level of premium, the doctrine of utmost good faith should be exhausted upon the reinsurer's initialling of the slip regardless of whether a legally binding contract is then concluded: Ionides v Pacific Fire & Marine Insurance Co (1871) LR6 QB 674, affd (1872) LR 7 QB 517; Cory v Patton (1872) LR 7 QB 304; Cory v Patton (No 2) (1874) LR 9 QB 577. It appears, however, that the market may not view the reinsurer's offer as irrevocable. In which case, the doctrine of utmost good faith contintles to apply with respect to the subsequent conclusion of reinsurance contracts with insurers: Bonner v Cox Dedicated Corporate Member Ltd [2004J EWHC 2963 (Comm), [2005J Lloyd's Rep IR 569, para 52; [2005J EWCA Civ 1512, paras 15-17. 47 To the extent that the offer of reinsurance binds the reinsurer either through being irrevoc~ able or through generating a contract with the broker, this is subject to no further material facts arising that would induce a.change of mind on the part of the reinsurer: Bonner v Cox Dedicated Corporate Member Ltd [2004J EWHC 2963 (Camm), [2005J Lloyd's Rep lR 569, paras 58, 70, 80-81, 103. 48 On the status of the policy, see 3.65ffbelow. 49 The first market signing office was the Lloyd's Underwriters' Signing Bu~eau, established in 1915. This was replaced in 1927 by the Lloyd's Policy Signing Office.: In 1942, the Institute of London Underwriters created its own policy signing office, the London Processing Centre. 1998

saw the merger of the Institute with the London International Insurance and Reinsurance Market Association to form the International Underwriting Association of London. In 2002, the two policy signing offices were merged and replaced by Ins-sure Services Ltd, a joint venture between Lloyd's (which owns 25%), the International Underwriting Association of London (25%) and Xchanging BV (50%). so ~ften known as a PAN. This sets out information such as the gross amount of the premium, deductions such as brokerage, and instalment basis if applicable. 51 Line slips are discussed at 2.66ffbelow. 52 Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002J EWCA Civ 1642, [2003J Lloyd's Rep lR 131, paras 51, 209.

38

39

Formation

ofMarine Insurance Contracts

(1) Floating Policies

Obligatory and Facultative Agreements

rank in law as an offer, leaving the assured, through the broker, to accept whichever offer it prefers.
2.26 Outside the subscription market, electronic communication is increasingly common in a number of different forms. First, there is extensive presentation of electronic slips to insurers, instead of brokers visiting insurers in person. Sec-

ondly, brokers may operate an electronic panel system, whereby risks of a certain nature are offered to all members of a limited panel of insurers. The broker will place a risk on the system. The panel members then have a specified period of time within which, possibly after some negotiation, to make an offer if they are interested in the risk. This is widespread in the United Kingdom cargo market. Thirdly, a number of insurers have established electronic platforms permitting potential assureds to input details of risks and receive quotations. Whether such quotations constitute offers or invitations to treat depends entirely on the ttue interpretation of the terms of the quotation.
2.27 Insurers that do not use the centralized processing systems may still participate in a subscription risk. In such a case, once the signing slip is approved, the broker prepares a closing advice, which states the precise share of the risk, and therefore premium, allocated to each underwriter in the light of signing down. This is circulated to all subscribing underwriters, 53 often electronically.

The first type of umbrella arrangement to be developed was the 'floating policy', 2.29 defined by section 29(1) of the Marine Insurance ACt 1906 as 'a policy which describes the insurance in general terms, and leaves the name of the ship or ships and other particulars to be defined by subsequent declaration'. By virtue of a usage established at common law'S and codified in section 29(3):
Unless the policy otherwise provides, the declarations must be made in the order of despatch or shipment. They must, in the case of goods, comprise all consignments

within the tetms ofthe policy, and the value ofthe goods Ot other property must be
honestly stated, but an omission or erroneous declaration may be rectified even after loss or arrival, provided the omission or declaration was made in good faith.

The assured, therefore, is obliged to declare all eligible risks and the insurer has no option to decline a declaration. It follows from this obligatory character of a floating policy that it constitutes an immediate contract of insurance and that there is no duty to disclose material circumstances that come to light after conclusion of the floating policy but before any individual declaration. A floating policy traditionally provides cover up to a specified maximum aggre- 2.30 gate value. The policy is exhausted once the cumulative value of risks declared by the assured reaches that aggregate limit, while the amount of premium depends on the risks in fact declared. The existence of an obligation on the assured to declare all cargoes within the terms of the cover prevents the selective declaration of only those cargoes in peril or already the subject of a casualty. Floating policies as traditionally drafted presented the difficulty that the assured 2.31 would have to be continually alert to the cumulative value of declared risks for fear of exhausting cover and running uninsured risks. Consequently, the market developed a form of umbrella cover with no maximum aggregate but that covered all risks within the terms of the cover within a specified period of time subject to a maximum limit for each risk. This was termed an 'open cover'. That
expression is not, however, a term of art of marine insurance law and is found

C. Obligatory and Facultative Agreements

2.28 Where a series of similar subjects are to be exposed to the same adventure, the!e is evident administrative advantage in being able to negotiate one agreement to cover the series. A number of such arrangements have evolved. They are similar in that they all involve an initial 'umbrella' agreement defining the terms on which insurance is offered, with cover subsequently attaching automatically to particular risks falling within its terms or being attached to particular risks through a declaration procedure. In each case, however, a key question is whether the initial agreement is a contract of insurance and therefore subject to the doctrine of utmost good faith, which requires the assured voluntarily to disclose and not to misrepresent circumstances material to the insurer's decision on whether to grant cover and at what premium. 54 While general contract law grants relief against misrepresentation, it recognizes no duty of disclosure.

nowhere in the Marine Insurance Act 1906. The question that arises, therefore, is whether an open cover can be a floating policy, attracting the provisions of section 29. Certainly, an open cover responds to the basic definition of floating policy in section 29(1). The particular method by which the insurer's maximum exposure is limited forms no part of the statutory concept. The key to that concept, however, is the obligatory nature of the cover. Although section 29(3) reads prima ficie as articulating a rule that applies to contracts within section 29( 1), in truth it reveals an essential and defining characteristic of the section 29

53

General Accident Fire & Lift Assurance Corp v Tanter (The Zephyr) [1984] 1 Lloyd's The doctrine is discussed in Ch 4 below.
SS

Rep 58, 68.

54

See Stephens v Australasian Insurance Co (l872) LR 8 CP 18, 19-20.

40

41

Formation ofMarine Insurance Contracts

floating policy, namely its obligatory nature. If the assured were free to elect whether to declare a risk, the rules in section 29(3) would make no sense. Consequently, it is suggested that any obligatory umbrella agreement constitutes a floating policy within section 29, regardless of the label attached to the agreement. In Glencore International AG v Ryan (The Beursgracht) (No 2),56 it was common ground that section 29 did not in terms apply to an obligatory agreement that was labelled an 'open cover'. However, HH] Hallgarten confessed to 'a degree of unease' as to this view and, indeed, counsel for the insurers was prepared to invoke section 29 by analogy. In the Court of Appeal, in rejecting the insureis argument that the cover was facultative/obligatory,57 Tuckey L] stated that it was 'more like a floating policy'.58It was not necessary to determine whether the policy was in ttuth a floating policy within section 29, bur it is suggested that it was.
2.32 Under a floating policy, subject to conttary intention, the policy attaches to risks falling within its terms as soon as they embark upon the insured adventure. Declarations serve not to attach the policy to the risks but rather the essential contractual process of informing the insurer of the risks covered in order to enable insurers to calculate and collect premiums and determine remaining capaciry or the extent of exposure under the cover. 59 2.33 Unless the policy otherwise provides, declarations must be made within a reasonable time. 60 A provision for declarations to be made by monthly bordereaux constitutes, of itself, a requirement only that a declaration be made each month and not that each risk be declared the month it attaches under rhe policy." 2.34 Since it is obligatory under a floating policy to declare all qualifying risks, where the assured omits to declare a risk or makes an erroneous declaratjon, the insurer is always entitled to have the declarations rectified, with the result that 62 certain risks declared by the assured under the policy may not be covered. Moreover, ptovided the error or omission was made in good faith, meaning not

Obligatory and Facultative Agreements

fraudulently," section 29(3) of the Marine Insurance Act 1906 provides that the assured may rectify the failure even after loss or the expiry of the insured adventure. 64 In principle, therefore, rectification will afford the assured the benefit of full cover for the true risks as they should have been declared. This, however, is subjecr to contrary intention, so that the assured's contractual obligation to make declarations must be considered in order to determine whether the error or omission constirutes a basis for rejecting liabiliry in accordance with insurance contract law. Thus, in Union Insurance Society ofCanton Ltd v George Wills & Co," a requirement to make declarations 'as soon as possible after sailing of vessel' was construed as a promissory warranty'" in the light of evidence rhat insurers might make particular reinsurance arrangements for particular declarations. Consequently, breach of rhe declaration ohligation automatically prospectively discharged the insurer from liabiliry under the policy. It was not possible to construe section 29(3) as implicitly denying the insurer the benefit of an expressly agreed promissory warranry. In Union, the court considered that the only possible interpretations were as 2.35 either a promissory warranry or as a warranty in the sense in which that term is employed in general contract law, with breach sounding only in damages. 67 Modern contract law, however, has explored the possibility of greater flexibility in the classification of tetms, causing doubt to be expressed whethet the conclusion on interpretation reached in Union would be likely to be reached today." In The Beursgracht,69 the Court of Appeal analysed a declatation obligation, in the absence of contrary intention, as severable, so that remedies are confined to the risk that is the subject of the relevant declatation, and innominate, so that the insurer can avoid liability for the risk in question only where the consequences of failure to make a timely declaration are sufficiently serious to justify that temedy. Conversely, whete the failure amounts to an insufficiently serious breach of an innominate term, the insurer will merely be entitled to damages compensating fot such loss as it can establish has been caused by the late declaration. In The Beursgracht itself, as a result of an honest mistal<e, the assureds' declaration was over five years late, but the obligation to make a timely declaration was innominate and the commercial consequences of the delay wete negligible. The risk would have yielded a premium of only US$250 and would

[200l] 2 Lloyd's Rep 608, 613. Facultative/obligatory agreements are discussed at 2.38ffbelow. " Glencore International AG v Ryan (The Beursl'acht) [20011 EWCA Civ 2051, [2002] 1 Lloyd's Rep 574, para 34. 59 Stephens v Australasian Insurance Co (1872) LR 8 CP 18, 19; Glencore International AG v Ryan (The Beursl'acht) [200l] EWCA Civ 2051, [2002] 1 Lloyd's Rep 574 paras 29-34; BPpie v GE Frankona Reinsurance Ltd [2003] EWHC 344 (Comm), [2003] 1 Lloyd's Rep 537, paras 86, 125, 135 (facultative/obligatory cover). 60 Glencore International AG Ryan (The Beursl'acht) [2001] EWCA Civ 2051, [2002] 1 Lloyd's Rep 574. 61 ibid para 41. 62 Stephens v Australasian Insurance Co (1872) LR 8 CP 18,20; Dunlop Bros 6- Co v Thwnend [1919] 2 KB 127.
56
57

Gledstanes v Royal ExchangeAssurance (1864) 5 B & S 797. MIA 1906, s 29(3); Stephens v Australasian Insurance Co (1872) LR 8 CP 18; Imperial Marine Insurance Co v Fire Insurance Corp (1879) 4 CPD 166. 65 [1916] 1 AC 281. 66 Promissory warranties are discussed at 18.54ffbelow. 67 [1916] 1 AC 281, 286. 68 Glen,ore International AG v Ryan (The Beursl'acht) (No 2) [20011 2 Lloyd's Rep 608, para 22. 69 Glencore International AG v Rytln (The Beursl'acht) [2001] EWCA Civ 2051, [2002] Lloyd's Rep 574.
63
64

42

43

Formation ofMarine Insurance Contracts

not have affected the insurers' reinsurance cover. In consequence, the delay was no basis for avoiding liability. In such a case, where no special loss can be proved, the insurer is entitled to nothing more rhan interest on rhe amount of premium that the insurer should have received earlier. 70

Obligatory and racultative Agreements

As with floating policies, declarations under facultative/obligatory covers serve 2.39 to permit insurers to calculate and collect premiums, to monitor their financial position, and to provide information to reinsurers. 74 In addition, however, under facultative/obligatory covers, declarations constitute the mechanism whereby the assured exercises its right to attach selected individual risks to the cover by accepting the insurer's standing offer. 75 This function was described by Blackburn 1 in Ionides v Pacific Fire & Marine Insurance Co" in the context of facultative/obligatory insurance of goods as might be declared on ship or ships:
The object of the declaration is to earmark and identify the particular adventure to which the assured elects to apply the policy. The assent of the assurer is not required to this, for he has no option to reject any vessel which the assured may select; nor is it necessary that the declaration should do more than identify the adventure, and so prevent the possible dishonesty of a party insured, who might

2.36 Since there was no serious prejudice on the facts of The Beursgracht, the recognition of a severable innominate term analysis of a declaration obligation is obiter. Such an analysis has been rejected in a different context because the relevant obligation was nor truly severable." A declaration obligation under a floating policy, by contrast, is genuinely severable with the premium payable in any given accounting period being merely the aggregate of rhe premiums attracted by the individual declarations made on the policy in that period. 2.37 Where the error or omission is not made in good faith, the sequence of declarations must still be amended. This may result in later declarations exceeding the contractual limit and falling out of the scope of the cover, bur the assured should not receive the benefit of the correction. The insurer should not be liable for losses incurred by a fraudulently omitted risk. Moreover, improper selective declaration may also jeopardize cover under other insurance contracts. In Rivaz v Gerussi Bros & CO,72 two existing floating policies were supplemented by two additional floating policies providing successive tiers of cover. The assured acted fraudulently under the first two policies in respect of safely arrived shipments, concealing some and undervaluing others. In consequence, the premiums paid under the initial policies were made to covet an undue volume of cargo and the undetwriters under the additional policies were misled into believing that considerable spare capacity still existed under the first two policies that would have to be exhausted before they would come on risk. This constituted non-disclosure of a material circumstance that vitiated the later policies.
(2) Facultative/Obligatory Covers

intend to apply the policy to particular goods, so that they should be at the risk of
the insurers, and he should come on them if there was a loss; and then, when those

goods had arrived safely, to pretend that he intended to apply the policy to another set of goods still subject to risks. The ptoposition that a declaration must be made before an insurer can come on 2.40 risk has been described as 'certainly a good starting point'." It is, however, ultimately a matter of contractual interpretation: there is no reason in legal principle why declarations should not be made retrospectively, even after a loss has occurred." However, it follows from the concern, identified by Blackburn l, to avoid declarations only of risks thar incur losses that an assured who wishes to invoke the cover in respect of any given risk should, subject to contrary intention, make a declaration before the assured gains knowledge of a 10ss.79 Where the cover has been issued in the subscription market, each declaration to 2.41 each subscribing insurer generates a separate contract between the assured and that insurer and, subject to contrary intention, it is necessary to make a declaration to each and every subscribing insurer for it to be bound. In particular, a

2.38 Should the insurer be obliged to accept any declaration made by the assured, bur the assured retain the option whether or not to mal<e declarations, the cover may be termed 'facultative/obligatory'. The insurer is committed on issuing the cover to insuring tisks of the specified type on the specified terms. Consequently, in considering whether to offer such cover, the insurer has to consider the possibility that the assured will elect to declare only those qualifYing risks that appear likely to incur a 10ss.73

74

BP pic v GE Frankona Reinsurance Ltd [2003J EWHC 344 (Comm), [2003J 1 Lloyd's Rep

537, paras 86,125,135.

75 To be effective, therefore, a declaration must adequately identifY the subject-matter to be insured: Gfencore International AG v Alpina Insurance Co Ltd [2003] EWHC 2792 (Carom),

[2004J 1 Lloyd's Rep Ill, para 273. 76 (1871) LR 6 QB 674. 682-3. See also Inglis v Stock (1885) 10 App Cas 263, 269; Glencore IncemationalAG v Ryan (The Beursgracht) [2001] EWCA Civ 2051, [2002J 1 Lloyd's Rep 574.
para 32.
77

Glencore Intemational AG v Alpina Insurance Co Ltd [2003J EWHC 2792 (Comm), [2004)

Liability to interest as damages for late payment of premium was conceded by the assured in The Beursgracht, to the evident approval ofTuckey LJ: at para 50.
70
71
73

1 Lloyd's Rep Ill, para 264. 78 ibid paras 264-266.

79 BP pic v GE Frankona Reinsurance Ltd [20031 EWHC 344 (Comm), [2003J 1 Lloyd's Rep 537, para 113; Glencore International AG v Alpina Insurance Co Ltd [2003] EWHC 2792

See 22.24 below.

72

(1880) 6 QBD 222.

Aneea Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2001J UKHL 51, [2002J 1

Lloyd's Rep 157, paras 26, 71.

(Comm), [20041 1 Lloyd's Rep Ill, paras 267-271.

44

45

Formation ofMarine Insurance Contracts

declaration to leading underwriters will bind the following market only if the leading underwriter clause on its true interpretation covers the receipt of declarations. 80
2.42 Since the assured owes rhe insurer no counter-obligation, a facultative/obligatory cover must be regarded as a unilateral offer, albeit one that is regarded by market custom as irrevocable, accepted each time the assured mal,es a declaration within the terms ofthe cover and giving rise to a separate contract on each occasion." In consequence, since rhe dOCtrine of utmost good faith is designed to ensure that the insurer makes an informed decision on the acceptability of the risk and the terms ofcover, the doctrine attaches to the cover itself,82 but ir has no function to perform in respecr of and does not attach to individual declarations."

Leading Underwriter Agreements

provide merely 'a framework for such individual contracrs as the parties might choose to make by the declaration and acceptance of individual risks'."

D. Leading Underwriter Agreements

The efficiency of a subscription market is promoted through leading under- 2.44 writer agreements, by virtue of which one or more underwriters with particular expertise in the type of business being underwritten are given the power to act on behalf of all the underwriters subscribing to the risk. Under the LMP scheme, reference is made to a 'slip leader' rather than a leading underwriter.
(1) Identifying the Leader

(3) Facultative Covers

2.43 Where, under the terms of rhe cover, the insurer has the right to decline a declaration, the agreement may be termed 'facultative'. In such a case, each declaration the insurer accepts constitutes a separate contract ofinsurance that is concluded at the time of the insurer's acceptance. In consequence, the doctrine of utmost good faith attaches to each declaration. 84 The initial agreement pursuant to which the assured makes a declaration is at most a contract whereby the insurer undertakes to consider properly any declararion within the parameters of the cover should the assured make such a declaration." Indeed, if the initial arrangement also confers a discretion upon the assured as to whether to declare eligible risks, the arrangement will not in itself constitute a contract at all, but

The identity of the leader is usually clearly indicated. In the pre-LMP case 2.45 of Roar Marine Ltd v Bimeh Iran Insurance Co," however, there was no such clear statement and the following market disputed their obligation to follow a settlement agreed by the alleged leader, Lloyd's Syndicate 724. Nevertheless, Mance J had no hesitation in holding that Syndicate 724 was the leader. Lloyd's underwriters appeared first in a cover note and Syndicate 724 headed that list. Moreover, Syndicate 724 had scratched both an endorsement adding the vessel the subject of the claim to the cover and the claims endorsement in the box reserved for the leading underwriter. That Syndicate 724 had not subscribed the largest line did not prevent leader status." Under the LMP scheme, the identity of the 'slip leader' is the first item under 2.46 the heading 'Subscription Agreemenr'. If the identiry of the leader is not known when the slip is produced, the details of the leader must be entered when that party subscribes to the slip. As a matter of common law, however, there is norhing to prevent a leader from subsequently being appointed from underwriters who have already subscribed to the slip." (2) Extent of a Leader's Power to Bind the Following Market The extent of the power of a leader to bind the following market depends 2.47 entirely on the terms of the leading underwriter agreement. Power may be given

80

BP pic v GE Frankona Reinsurance Ltd [20031 EWHC 344 (Comm), [2003].1 Lloyd's

Rep 537, paras 87, 128.

81 Citadel Insurance Co vAtlantic Union Insurance Co SA [1982] 2 Lloyd's Rep 543, 545-8; BP pic v GE Frankona Reinsurance Ltd [20031 EWHC 344 (Comm), [200311 Lloyd's Rep 537, paras

~K
82

GlasgowAssurance Corp Ltd v Symondson (1911) 27 TLR 245. The logic of this decision by

Scrutton J is, it is submitted, impeccable. It is, however, placed in question by unhelpful terminology. In seeking to identify the scope of the doctrine of utmost good faith, a distinction is sometimes drawn between COntracts ofinsurance, to which the doctrine applies, and Contracts fOr insurance, to which it is said not to apply: Pryke v Gibbs Hartley Cooper [1991] 1 Lloyd's Rep 602, 616; BIB Casualty & General Insurance Ltd v Chase Manhattan Bank [200n 1 Lloyd's Rep 30, para 49. The distinction may have some validity as a generalization, but a facultative/obligatory contract is a contract for, rather than of, insurance. Unless the doctrine applies at the stage of presentation of the cover to the insurer, the result will be an anachronistic route to insurance cover that completely avoids the doctrine, for which it is hard to see any justification. 83 Ionities v Pacific Fire & Marine Insurance Co (1871) LR 6 QB 674; Law Guarantee Trust & Accident Society Ltd v Munich Reirt!Urance Co (1915) 31 TLR 572; Citadel Insurance Co v Atlantic Union Insurance Co SA [19821 2 Lloyd's Rep 543, 548; CCR Fishing v Tomenson (The La Pointe) [198612 Lloyd's Rep 513 (Supreme Court of British Columbia). 84 Berger & Light DiffUsers Pty Ltd v Pollock [19731 2 Lloyd's Rep 442. 85 cf Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council [l 990j 1 WLR 1195, butsee also Walford v Miles [1992] 2 AC 128 and quaere the measure of damages for breach.

86 Societi Anonyme dlntermediaries Luxembourgeois v Farex Gie [1995] Lloyd's Rep IR 116, 148 per Hoffmann LJ. Also at 153. A contract to conclude a contract in the future is not recognized in law: Courtney & Fairbairn Ltd v Thlaini Bros (Hotels) Ltd [1975J 1 WLR 297. See further the discussion of line slips, 2.67 below. 87 [199811 Lloyd's Rep 423. 88 At 426. See also Unum Life Insurance Co ofAmerica v Israel Phoenix Assurance Co Ltd [2002] Lloyd's Rep lR 374,377. 89 ibid 377.

46

47

Formation ofMarine Insurance Contracts

Leading Underwriter Agreements

fot differenr classes of business, listing possible amendmenrs to covet, which are in turn divided into three categoties. In the marine field, thete are three schedules, one each for hull, catgo, and liability. For the GUA to be incorporated, both it and the televant schedule must be 2.52 specified in the Subscription Agreement section of the LMP slip under the heading 'Basis of Agreement to Conrtact Changes'." If the risk is written by
way of a declaration to a contract for insurance or framework agreement, such

to agree wording, to amend agreed rerms of cover, to accept declarations under floating policies and open covers, and to make decisions in respect of claims, including settlemenr. However, under LMP, wording should be agreed as part of the LMP slip and phrases such as 'wording tba LlU'90 ate to be avoided.

(a) Amendments to cover

2.48 Leading underwriter agreements have often conferted wide-ranging powers to

agree amendmenrs to the agreed terms of cover. However, despite the clear breadth of wording, the scope of the power thereby confetred has occasionally come as an unpleasanr sutprise to the following matket.
2.49 In Roadworks (J952) Ltd v]R Charman,91 the leading underwriter clause was

as a line slip" or open cover, the GUA must be incorporated in both the
declaration and the contract for insurance or agreement. 97

drafted in rhe following broad terms: 'All alterations, additions, deletions, extensions, agreements, rates and changes in conditions to be agreed by the Leading Lloyd's Underwriter and Leading Company Underwriter only. Such agreement to be binding on all Underwrirers subscribing hereon.' It was held that this clause authorized the leading Lloyd's underwriter to waive even a
contingent condition of the contract. 92

2.50 Similarly, in The Leegas,93 the leading undetwriter clause was worded as follows:

'Any amendments additions deletions including new and or managed and or chartered notice of assignmenr ratings and alterations of any descriprion ro be agreed by Leading underwriter and to be binding on all orhers hereon.' The clause was held to empowet the leader to transform a policy originally on one vessel for a limited number of voyages over four months by successive amendmenrs to one covering an additional vessel over a considerably extended period and for many extra voyages. A suggested distinction between a power to agree major and minor alterations was rejected as unworkable.
2.51

Under the GUA, amendmenrs in the first categOlY as listed in the relevant 2.53 schedule can be authorized by the slip leader alone. The slip leader is the party so identified in the LMP slip. Amendmenrs falling inro the second category require approval by both the slip leader and also by other underwriters specified in the LMP slip, known as 'agreemenr parties'. In default of specification by the slip, the enrire following market qualifies as agreement parties. Amendmenrs falling into this second category do not bind any underwriter unril the final agreement party has signed. Amendments that fall inro the third category can be approved only by each subscribing underwriter for its own line and are binding for each as each signs. 98 In case of amendmenrs falling within eirher of the first two categories, provision 2.54 is also made for all underwriters to be notified of certain amendmenrs. Notification is required if either the schedule so indicates or any authorizing underwriter
so requires.

Impact of the LMP reforms As part of the LMP market reforms, a new leading undetwriter agreement, called the General Underwriters Agreemenr (GUA), was inrroduced to govern amendmenrs to cover. The GUA is designed to work together with the LMP slip" and is inrended to replace all previous agreemenrs used in the market by a single, uniform, and clearer regime. It is not obligatory to use the GUA, but it is the preferred agreemenr and in practice is currently adopted in at least half of all policies. The GUA contains six schedules

(b) Declarations under open covers A leader may be given power to accept declarations under an open cover. Should 2.55 an accepted declaration prove to fall outside the rerms of the cover, however, neither the leader nor the following market is liable. In The Tiburon," an accepted declaration of a vessel fell outside the terms of the open cover because of the nationality of the owners. Steyn J held that the declararion was invalid and the underwriters consequently nor liable:
The open cover was an irrevocable open cover on the part of underwriters subscribing to it to accept liability for any risks declared to the leading underwriter within the terms of the cover ... The acceptance by a leading underwriter of a declaration is, of course, by market practice merely an acceptance that the risk is prima facie

'Wording to be agreed by leading underwriter'. 91 [1994]2 Lloyd's Rep 99. 92 It was common ground that double approval was unnecessary simply because no company underwriters had subscribed to the risk. Moreover, the intention of the leader to scratch the waiver endorsement for his own syndicate alone was irrelevant as that intention had not been made manifest: ibid 106-7. 93 Barlee Marine Corp v Mountain (The Lecgos) [1987] 1 Lloyd's Rep 47l. 94 In the event ofany conflict between the slip and the GUA, the slipprevails: GUA, d 10.
90

declarable. Given rhat rhe declaration did not comply with the terms ofrhe offer, it

9S

97
99

GUA, d 1.1. 96 Line slips are discussed at 2.66ffbelow. GUA, cll.2. 98 GUA, cl 5. Seavision Investment SA v Evenett (The Tiburon) [1990J 2 Lloyd's Rep 418.

48

49

Formation ofMarine Insurance Contracts

follows inexorably that no contract of insurance ever came into existence between [the owners] and the underwriters. lOo

Leading Underwriter Agreements

the Cover and agreed by the leading underwriter: ie the agreement of the leading underwriter acts as a 'trigger' rather than as an act of agency.

(c) Claims
2.56 The powet of a leadet to bind the following matket in the context of claims is discussed in Chapter 22 below.'o,
(3) Legal Nature of a Leader's Power

In othet wotds, a leading underwtiter has no true power vested in it to bind the following matket. Instead, the following market uses the leadet in a purely ministerial capacity to bind itself. The merit of this analysis, and the reason fot its being propounded, is that it 2.59 avoids any ptospect ofa leadet incutting liability through agency status, whether to the following market Ot the assuted. Moteovet, it has been said that the telationship between a leadet and the following market is underpinned by a duty of care owed by the fotmer to the lattet.'os Such tortious language sits ill with the strict liability of an agent for exceeding authority. Ultimately, however, the status of a leader as agent Ot trigger will depend on the 2.60 wording of the leading underwritet agreement. Even if the law settles on the trigger analysis as the natutal default analysis of leading underwtiter agreements, following markets will remain ftee to adopt wording that confets agency status on theit leaders. Indeed, the GUA exptessly refers to the slip leadet and agreement parties as 'agents', and to their 'authority' and 'powers and duties',lo5 clearly embtacing an agency analysis together with potential agency liability fOt the slip leader to the following market. The GUA is not, howevet, mandatory. Consequently, a leading undetwritet that wishes to conttact out of all liability to the following matket is free to use a different leading underwriter agteement. (4) Terminarion of a Leader's Power A leading underwriter agreement terminates on a valid avoidance of the insur- 2.61 ance conttact of which it fotms a severable part since there is no longer any insurance covet in respect of which the leader can act.'07 Otherwise, a leadet's power under a leading underwriter agreement will terminate in accordance with genetal contract law and, if the agteement renders the leader an agent, in accotdance with agency ptinciples. In parriculat, the leadet's power will tetminate in accotdance with the exptess tetms of the leading underwtitet agteement. Thus, the GUA contains provisions fot termination of authotity of the slip leadet immediately upon insolvency or cessation of business of the slip

2.57 A leadet's power to bind the following market has ttaditionally been analysed in terms of agency. Subscription to a slip containing a leading underwriter clause by a following underwtiter both cteates a contract of insurance with the assured and confets authotity upon the leadet fot the purposes and to the extent specified in the leading underwtiter clause.,02 The leadet's power to bind the following market would, thetefore, take the form of an agent's authority. Two consequences could flow from such an analysis. First, a leader who exceeded the actual authotity conferred would still bind, and incur liability to, the following matket if acring within the scope of any apparent authority. Given, howevet, that in ptactice a leader's actual and appatent authority both rest solely on the terms of the leading underwtiter agteement, it is unlikely that such liability could arise.'03 Secondly, a leader who occasioned loss to an assured by acting ourside the scope of its actual or apparent authority would incur liability for breach of warranty of authority. Again, however, given that the terms of the leader's authotity are known to the assured through the broker, it is only where those terms were misinterpteted by the leadet, and the assured through the broker telied on that intetptetation, that liability could arise. 2.58 An alternative analysis was, however, propounded by Rix J in Mander v Commercial Union Assurance Co.'o, Refuring an allegation of breach of warranty of authotity, namely alleged unauthotized acceptance of declarations, made against the leading underwriter on an open cover of retrocession, Rix J, obiter, stated as follows:
I would tentatively suggest1that a leading underwriter at any rate under an open cover is not constituted the agent of the following market by reason merely of a leading underwriter clause ... Rather the following market agrees, by subscribing

to the Covet, that they will be bound by a declaration falling within the scope of

ibid 422. tOt See 22.02-22.03 below. '" Roadworks (1952) Ltd v JRCharman [19941 2 Lloyd's Rep 99, 105; Unum Lifi Insurance Co ofAmerica v Israel Phoenix Assurance Co Ltd [2002] Lloyd's Rep IR 374,378. t03 There would not in practice be a secret restriction on the scope of the leader's authority. Liability could, conceivably, arise ifafoHowing underwriter terminated the leader's actual authority without notifying the assured. ~
100

'04

[1998] Lloyd's Rep IR 93, 143.

t05 Barlee Marine Corp v Mountain (The Leegas) [1987] 1 Lloyd's Rep 471, 475. See also Roar Marine Ltd v Bimeh Iran Insurance Co [1998] 1 Lloyd's Rep 423, 430, but cf Mander v Commercial Union Assurance Co [1998] Lloyd's Rep IR 93, 144-5 (duty of care owed if to anyone to the following market). t06 GUA, introductory para and ell?, 8. 10] Unum Life Insurance Co of America v Israel Phoenix Assurance Co Ltd (2002] Lloyd's Rep IR374.

50

51

Formation ofMarine Insurance Contracts leader, or by notice following insolvency or cessation of business of a following underwriter, or by withdrawal ofthe leader's authority by notice from a following underwriter to the broker."8

Delegated Authorities
LMP reforms have seen the introduction of five new model LMP slip templates for Binding Authority Agreements, including one for marine business. '12 A binding authority is not itself a contract of insurance, and it has been held 2.65 that the doctrine of utmost good faith does not attach to a broker's presentation of even a full binding authority to an underwriter for subscription. 113 A full binder is merely a grant of authority to conclude insurance contractS. No assured is a party to that relationship. The doctrine will, of course, apply to presentations of risk to the coverholder. Moreover, the practical import of the refusal to apply the doctrine of utmost good faith should not be exaggerated, since the view has also been expressed that a broker who presents a full binding authority to an underwriter impliedly represents that the authority contains no unusual features that would not naturally be expected in such a transaction. '14 Failure to disclose such an unusual feature is, therefore, actionable, albeit as a pattial misrepresentation rather than a non-disclosure. Its (2) Line Slips In BalfOur v Beaumont,"6 Webster J described a line slip as follows: 'A line slip is 2.66 an authority (known in the London market as a facility) given in writing by a number of underwrirers which enables the leading underwriter (or writers) to agree to proposals for insurance of risks within a prescribed class on behalf of all underwriters subscribing to the line slip provided that the ptoposed insurance is within the scope of the terms of the authority.' The delegation of authority in a line slip facilitates the marshalling of capital within the London market behind a single underwriter 117 and also provides a mechanism whereby capital outside the London market can participate in that market through a London leader. 2005 saw the introduction of a standard form of line slip, known as the LMP line slip, under the LMP reforms. Provided the line slip is facultative, in that the leader has the right to decline 2.67 individual risks proposed for cover under the facility, an underwriter who subscribes to such a facility does not by virtue of such subscription enter into any
contract of insurance. Instead, contracts of insurance are concluded each time

E. Delegated Authorities
2.62

Cover may also be offered under the auspices of authority delegated by underwriters. Two types of delegation agreement will be considered: binding authorities and line slips. The incidence of the doctrine of utmost good faith is again a significant question.
(l) Binding Authorities

2.63 A binding authority, or 'binder', is an instrument whereby underwriters delegate

to a named entity, termed the 'coverholder', authority to conclude contracts of insurance on risks that fall within specified terms. Binding authorities are employed where the relevant market can be accessed better by the coverholder than the underwriters.
2.64 The coverholder is the agent of the underwriters that subscribe to the authority,

and the business writren under the cover belongs to the underwriters. Accordingly, the underwriters are entitled to all documents relating to that business, including documents revealing the identity of the assureds or placing brokers with whom the coverholder has dealt in order to build up the business under the cover. IO' Under a 'limited', or 'prior submit', binding authority, the coverholdeJ" must obtain the underwriters' acceptance of each risk before agreeing cove~. Under a 'full binding authority', the coverholder has authority to agree cover wirhout prior referral to underwriters. An underwriter who subscribes to a full binding authority passes full decision-malcing power to the coverholder. Such an authority should be granted only afier careful consideration and on carefully circumscribed terms, and should be properly monitored throughout its operation. t10 Within the Lloyd's market, binding authorities are subject to a strict regulatory scheme. I 11 Moreover, from 1 Januaty 1992, a standard market form was mandatory for all marine binding authorities in Lloyd's. More recenrly, the

._-_._-"-112

113
115

LMA3005 (replacing LSW1476). Pryke v Gibbs Hartley Coop" [1991] 1 Lloyd's Rep 602, 616. '" ibid. ibid. See also L 'Alsacienne Premiere Socihe Alsacienne et Lorraine d'.Assurances Contre

I1ncendie les Accidents et les Risques Divers v Unistorebrand International Insurance SA [1995]
108

GUA, ell 7-9. The clauses also address the authority of agreement parties in identical

fashion.
109 Hiscox Underwriting Ltd v Dickson Manchester & Co Ltd [2004] EWHC 479 (Corom), [2004] 2 Lloyd's Rep 438 (but not to documents relating to dealings after termination of the coverholder's authority). 110 See Syndicate 1242 at Lloyd; v Morgan Read [2003] Lloyd's Rep 1R 412,para 8. 111 Lloyd's Delegated Underwriring Byelaw (No 1 02004).

Lloyd's Rep 1R 333, 349; HIH Casualty & Generallnsurance Ltd v Chase Manhattan Bank [2001) 1 Lloyd's Rep 30, paras 52-53. 116 [1982) 2 Lloyd's Rep 493, 494. See also Touche Ross 6- Co v Baker [1992] 2 Lloyd's Rep 207,210; Denby v English &Scouish Maritime Insurance Co Ltd[1998] Lloyd's Rep 1R 343,357. 117 This is particularly convenient for brokers who thereby avoid the need to place each and every qualifYing risk on an individual, subscription basis. A broker may also be able to offer a participant in a line slip a certain volume of business and in return seek an additional commission.

52

53

Formation ofMarine Insurance Contracts

Joint and Composite Policies

policy, for example, misconduct by one assured giving rise to a defence to a daim is inopposable against other assureds, whereas under a joint policy it provides a defence against all assureds. This section. considers the definition of
joint and composite insurance, the structure of composite policies, and the

an individual proposal, or declaration, is made under the facility in the form of what is tetmed an 'off-slip' and that ptOposal is accepted by the leader.'18 It follows that the facility is not itself a conttact of insutance. Indeed, in the absence of any obligation on the part of any prospective assured ro make declarations and any obligation on the part of the leader to accept declatations made, there is clearly no contract at all between subscribing insurers and prospective assured.' 19 Whether the line slip is devoid of any legal force, even as between the subscribing insurers, is less clear. On one view, subject to any contrary market custom to which the law is prepared to give effect, a participant in a line slip is free at any time to revoke prospectively the authority conferred on the leader'20 Alternatively, it may be argued that a line slip constitutes a multilateral contract between all the subscribers'" and that the authotity conferred can be tevoked only in breach of contract.
2.68 It follows from the fact that a facultative line slip is merely a grant of authority

question of the contractual status of co-assureds under composite policies.

(1) Definition of}oint and Composite Insurance
'Joint insurance' arises where
twO

or more assureds share in the one and same 2.70

interest that they insure for their collective benefit. Joint owners of property can take out joint insurance on their shared interest. The assureds enjoy a unity of
interest and the policy covers that unified interest. 'Composite insurance', in

that, as with a full binding authority, the doctrine of utmost good faith does not attach to the presentation of such a facility to an underwritet when subscriptions ate sought.'" It will attach to the subsequent making of facultative declarations to the leader under the line slip by means of off-slips. On the other hand, a line slip is analogous to a binding authority and should attract the same ability to derive misrepresentation from non-disclosure.'" Thus, failure to disclose any unusual features of the proposed line slip to underwriters invited to subscribe should be actionable as a partial mistepresentation.'"

contrast, arises where diffetent interests are brought together and, for teasons of convenience, insured under the same policy but on a several basis. Common examples of a composite policy are those that embrace the interests of the ownet and managers of a ship, different companies within a group, and a head contractor and sub-contractors. The term 'co-insurance' may be employed as an

umbrella term for all insurance contracts where the interests of more than one assured are covered, whatever the relationship between those interests. Sometimes it is employed interchangeably with composite insurance. Indeed, it is customaty to refer to co-assureds under a composite policy. Probably the most cited discussion of the difference between joint and compos- 2.71 ite insurance is found in the judgment of Sir Wilfred Greene MR in General Accident Fire <& Life Assurance Corp Ltd v Midland Bank Ltd.'25 In this case, the insurer paid a claim under a policy that embraced the interests of rhree assureds. Having discovered the claim to have been fraudulently exaggerated, the insurer sought restitution from two of the assureds who were innocent of the fraud. The claim failed, principally because the defendants had never received the money in such a way as to render them potentially liable to repay money as paid under a mistake of fact. One of the arguments raised by the insurer, however, was that the policy was a joint policy. The policy covered a company's buildings, plam, and stock. The three assureds 2.72 were the company, which made the fraudulent claim and subsequently became insolvent, and rhe two defendants, namely Midland Bank Ltd, a secured creditor of the company with a floating charge over its assets, and Seoffin and Willmott Ltd, freeholders of part of the premises occupied by the company, holders of a controlling shateholding in the company, and guarantors of the bank loan under terms that they succeeded to the bank's security in the event of

F. Joint and Composite Policies

2.69 It is essential to distinguish between joint and composite policies. Radically

different legal consequences attach to the two types ofpolicy. Under a composite

'" Denby v English 6- Scottish Maritime Insurance Co Ltd [1998] Lloyd's Rep IR 343, 354, 357-8. 119 At 354-5. See also Socihi Anonyme d'lntermediaries Luxembourgeois v Farex Gie [1995] Lloyd's Rep IR 116, 148, 153; Bonner v Cox Dedicated Corporate Member Ltd [20041 EWHC 2963 (Comm), [2005] Lloyd's Rep IR 569, para 4 per Morisonj, 'a sranding offer by subscribing underwriters to be bound to risks accepted by the leader'. 1.20 ibid, although it was common ground in Denby that the authority was in law irrevocable. 121 See Clarke v Dunraven (Earl oj) (The Satanitll) [1897] AC 59; North Atlantic Insurance Co Ltd v Nationwide General Insurance Co Ltd [2003] EWHC 449 (Comm), [2003] 2 CLC 731, paras 41-42, [2004] EWCA Civ 423, [2004] Lloyd's Rep IR 466, para 19. 122 HIH Casualty 6- Generaiinsarance Ltd v Chase Manhattan Bank [2001] 1 Lloyd's Rep 30, para 49. 123 See 2.65 above. 124 As was argued in HIH Casualty 6- General Insurance Ltd v Chase Manhattan Bank [2001J 1 Lloyd's Rep 30, paras 52-53.

12S

[1940] 2 KB 388.

54

55

Formation ofMarine Insurance Contracts

a calion the guarantee. In rejecring the insurer's argument of a joint policy, Sir Wilfred Greene MRdelivered the following exposirion ofjoint and composite insurance: 126
That there can be a joint insurance by persons having a joint interest is, of course, manifest. If A and B are joint owners of property-and I use that phrase in the strict sense-an undertaking to indemnify them jointly is a true contract of indemnity in respect of a joint loss which they have jointly suffered. Again, there can be no objection to combining in one insurance a number of persons having different interests in the subject-matter of the insurance, but I find myself unable to see how an insurance of that character can be called a joint insurance. In such a case the interest of each of the insured is different. The amount of his loss, if the subject-matter of the insurance is destroyed or damaged, depends on the nature of his interest, and the covenant of indemnity which the policy gives must, in such a case, necessarily operate as a covenant to indemnifY in respect of each individual loss which the various persons named may suffer. In such a case there is no joint

Joint and Composite Policies

number of legal issues. These relate notably to (a) the status of co-assureds as parties to the insurance; (b) the doctrine of insurable interest; (c) the availability of a broker's lien over the policy and extent of rights over collected claims moneys; (d) the extent to which defences arising out of the conduct of one coassured are opposable against other co-assureds; and (e) the operation of the doctrine of subrogation. These are discussed elsewhere. 127 However, it is worth emphasizing that the existence and structure of composite policies are products of commercial convenience. This convenience features in several judgments and is stated to provide a justification for finding and developing legal rules and concepts that enable composite policies to achieve their intended commercial role. It is, therefore, worth quoting judicial expositions of the commercial justification for composite insurance. At first instance in New Hampshire Insurance Co v MGN Ltd, 128 Potter J stated 2.74 as follows of a composite fidelity policy taken out by the Maxwell group of compames:
From the point of view of the insured, group insurance has the advantage that it is cheaper to purchase because most underwriters will operate a 'banded' approach to

element at all.
Applying those considerations to the facts of the present case, there is no joint loss

to the bank and to Scoffin and Willmott, Ld, in respect of the damage by fire to the
premises. The bank, in truth, having only a floating charge, suffered no loss at all, and even if its floating charge had crystallized, its interest in the premises would

have been quite different from the interest of Scoffin and Willmott, Ld, who were
freeholders. How, then, can there be a joint insurance, in any true sense of that phrase, of the interest of a freeholder in freehold premises and the interest of a

rating (usually based on the overall number of employees), each band attracting a
lower rate as the insurance progresses upwards. It also avoids the usual requirement of underwriters for a ,minimum premium per policy. It assists better corporate management, with better control over COStS and the amount and nature of cover purchased, as well as giving better access to world-wide insurance markets through a specialist department which carries more 'clom' and expertise than is at the command of individual company secretaries or finance directors. Overall, it reduces the mass of paper and the difficulty of administering a variety of numerous separate policies with numerous insurers. Finally, the effect of a 'Group' approach avoids the tendency of underwriters writing separate policies to insert exclusion clauses designed to prevent policy limits being added together when two companies within the same group are involved in the same loss event, or to exclude a loss originating in one company but in reality sustained by another. The advantages to the undelwriter, on the other hand, include economy in paperwork and premium collection; receipt of a presentation which gives an overview of the general operation of the group so that the insurance required may be approached in a 'top down' fashion; ability to concentrate on exposures to cash and securities held at anyone location for amounts in excess of the deductible; and the opportunity to provide for a single deductible applicable to each constituent of the group irrespective of its size or financial ability to absorb such a sum. Finally,

debenture holder holding a floating charge on that mass of ptoperty, including,

among other things, those premises? There is no joint risk; there is no joint interest; the measure of loss suffered by those two parties will be different, calling for a different measure of indemnity, and, accordingly, it seems to me that there is no joint element about the thing at all. Such a policy, in my judgment, may be more accurately described as a composite policy, because it comprises for reasons of obvious convenience, in one pie'ce of paper the interests of a number of persons whose connection with the subjectmatter of the insurance mal<es it natural and reasonable that the whole matter

should be dealt with in one policy. 2.73 A composite policy, therefore, amounts to insurance of a range of interests vested in different assureds. Technically, there is no reason why all the assureds whose interests are covered under a composite policy may not participate in the formation of that contract and why the cover provided in respect of each assured should not be confined to the precise interest of that assured. However, it is frequently commercially convenient for one party to conclude a property policy on behalf of or for the benefit of a number of interesred parties and for the contraCt ro be drafted in such a way as to insure the entirety of rhe insured property for the benefit of each and every assured. Such policies give rise to a

the underwriter is enabled to write a policy which specifically deals with the
question of aggregation of limits which could not be achieved in the case of cover granted to related but separately insured entities.

126

At 404-5. The passage is technically obiter but has often been dtedand never doubted.

1;(7 See 2.79ff (participation in contracts), 358ff (insurable interest), 5.79 (lien), 4.184ff, 15.27-15.28,18.102,22.100 (defences), 25.27-25.35 (subrogation) below. 128 [19971 LRLR24, 37-8.

56

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Formation ofMarine Insurance Contracts

2.75 In Petrofina (UK) Ltd v Magnaload Ltd,'29 Lloyd J described the convenience of co-insurance in the context of a building contract as follows:
In the case of a building or engineering contract, where numerous different sub~ contractors may be engaged, there can be no doubt about the convenience from everybody's point of view, including, I would think, the insurers, of allowing the head contractor to take out a single policy covering the whole risk, that is to say covering all contractors and sub-contractors in respect of all loss of or damage to the entire contract works. Otherwise each sub-contractor would be compelled to take out his own separate policy. This would mean, at the very least, extra paperwork; at worst it could lead to overlapping claims and cross-claims in the event of an accident. Furthermore, ... the cost of insuring his liability might> in the case of a small sub-contractor, be uneconomic. The premium might be out of all proportion to the value of the sub-contract. If the sub-contractor had to insure his liability in respect of the entire works, he might well have to decline the contract.

Joint and Composite Policies

express provision in the policy to that effect and regardless of whether premium is apportionable between the separate interests. A slightly different approach would be to regard a composite policy as giving rise to one contract, but a severable contract, with each interest contained within one severable slice. Severance language may be found in the judgment of Gage J in FNCB Ltd v Barnet Devaney (Harrow) Ltd,'" albeit in the context of rejecting an argument that a composite policy that covers interests on the same subject-matter is not severable so that a defence arising out of the conduct of one assured will be good against all other assureds unless the contract contains a saving or severing provision. In other words, the language of severance was dictated by the argument advanced, rather than flowing from a dear decision of the judge as to how composite contracts should in principle be analysed. (3) Contractual Status Under Composite Policies That marine insurance law does not require that the assured's identiry or inter- 2.79 est be specified in the policy'34 facilitates the co-insurance under one policy of the varying interests of any number of parties. However, nothing in the accommodating attitude of insurance law to formalities alleviates the need for an alleged co-assured under a composite policy to establish its status as a true parry to the contract in order to benefit from original, non-derivative rights under the contract. Such status can be claimed only thtough principles of agency: the parry claiming co-assured status must either establish rhat rhe insurance was obtained in the exercise of authoriry duly conferred or be able to invoke the doctrine of ratification. If unable to establish agency, the daimant will be confined to derivative rights, the most likely sources of which will be the Contracts (Righrs ofThird Parties) Act 1999 and the doctrine of assignment. In either case, the daimant's rights will be more precarious since they will be subjecr to defences arising out of the principal assured's conducr that would nor be opposable against the daimant if it had original rights as a co-assured. 13 ' In the following discussion, the party effecting insurance will be termed the 2.80 'principal assured', while the party daiming status as a co-assured will be rermed the 'claimant'.

2.76 To be distinguished from joint and composite policies is the contingent policy. Under a contingent policy, one interest is insured generating one set of contractual rights. In specified circumstances, however, the assured initially entitled to enforce those rights loses that entitlement and is replaced by a different assured. In contrast to co-insurance, this second assured's rights under the policy are contingent upon the specified circumstances arising. Moreovet, the second assured inherits only such rights as the first assured enjoyed. The fact of the second assured's succession to those rights does not defeat any defence to a daim arising by reason of the conduct of the first assured. 130 (2) Legal Structure Of Composite Policies 2.77 Although the customary expression 'a composite policy' appears to denote a unitary contractual artangement, it has long been dear that the different interests of co-assureds are treated as effectively separately insured. The practical result is that, for example, a defence arising in relation to one interest does not, without more, affect the other co-insured interests. 13 ' Quite how this is achieved in all areas in terms of analysis and principle, however, has yet to be authoritatively decided. An important question is whether a composite policy comprises in truth one contract covering all the various interests insured or a series of contracts, so that each interest is insured under its own contract. 2.78 In Arab Bank pic v Zurich Insurance CO,132 Rix J conceived of a composite policy as typically embracing 'a bundle of separate contracts'. Each separate inreresr is, consequently, separately insured under a distinct contract, even if there is no

(a) Authorized agency

To claim co-assured status as principal of an authorized agent does not require 2.81 rhat the agent effecting the insurance reveal the existence of the principal, since

129

[19841 QB 127. 136. m [19991 Lloyd's Rep lR 43, rvsd in parr on different grounds [19991 L1oyd's Rep IR 459. '" See 3.65ffbelow. 135 See 20.06, 20.21-20.26 below.

12' DSG RetaitLtd v QBE Internationallnsurance Ltd [1999J Lloyd's Rep lR 283. '" See, ego 4.184ffbelow. 12' [199911 L1oyd's Rep 262, 277.

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Formation ofMarine Insurance Contracts

Joint and Composite Policies

the doctrine of the undisclosed principal applies to insurance contracts. 136 Moreover, there is no requirement that the policy describe its intended beneficiaries and that any party claiming to be a co-assured falls within such description. Of course, if the policy does identify intended co-assureds, the claimant must fall within the contractual designation.'"
2.82 The claimant must, however, be able to prove that it conferred authority on the

intended to be covered by the policy or persons for whose benefit the policy was proposed. They were strangers to the contract altogether.' In Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd, 143 the contract 2.84 between the main contractor in the consttuction of a vessel and the supplier of a propeller made no reference to the main contracror procuring any insurance on behalf of the supplier. On the contrary, the contract provided for each party to be liable to the othet in respect of various losses. Such an exptess statement of liability was inconsi~tent with an intention to procure composite insurance that would have coveted such losses. A similar decision was reached in National Oilwell (UK) Ltd v Davy Offihore 2.85 Ltd, 144 which arose our of the construction of a floating oil production facility. The alleged co-as'sured undertook to supply a part. The principal assured, the
main contractor, -contracted to procure insurance confined to cover up until the

principal assured to procure insurance to cover the loss that has ensued, and that the principal assured, when effecting cover, intended to act in the exercise of that aurhority. Whete there is no evidence that the principal assured contemplated the claimant as a principal on whose behalf it was placing the insurance, the claimant has no status as co-assured. '38 Evidence of the requisite contemplation may be furnished by 'the terms of the policy itself, by the terms of any contract between the principal assured or other contracting party and the alleged co-assured or by any other admissible material showing what was subjectively intended by the principal assured' .139
2.83 The traditional Lloyd's SG 140 policy provided that the policy was taken out for

time of delivety. Colman J held that, in the absence of any other source of aurhority, the scope of the authority conferred on the main contractor had to be
'co-extensive with the scope of its obligation to procure cover' .145

the benefit not only of the party effecting it but also 'fot and in the name and names of all and evety other person or persons ro whom the same doth, may, or shall appertain, in part or in all'. This broad wotding, not tetained in the modern policy forms, was, however, interpreted as meaning merely that the insurer undertook liability to any person the principal assured intended to be covered and not as dispensing with the need to establish agency. In Boston Fruit Co v British & Foreign Marine Insurance CO,'41 charterers were held unable to claim on a policy in traditional form effected by brokers on behalf of ship" owners. The charterers fell within the policy wording, but there was no evidence that the owners intended the policy to benefit them. According to Lord Macnaghten: 142 'When the owners proposed to insure, acting as they did withour any communication with the chartetets, the charteters cannot be regarded as the persons within the contemplation of the proposal. They were not persons

(b) Ratification

In the absence of authority ro procure insutance conferred by the claimant and 2.86 duly exercised by the principal assured, the claimant must tely on the doctrine
of ratification to secure co-assured status. Ratification retrospectively confers authority on the principal assured and is effective, in marine insurance at least,

even afrer rhe claimant has knowledge of an insured 10ss.'46 There are, however, a number of difficulties. The intention of rhe principal assured to insure on behalf of the claimant in 2.87 quesrion must again be established. Thus, if the principal assuted obtains insurance fot the benefir of a class of assureds within which the claimant prima ficie falls, evidence arising our of the relationship between the principal assured and the claimant inconsistent with rhe principal assured acting for that claimant will deny ratification in the same way as it serves to deny actual authotity.'4'
Moreover, the unauthorized principal assured must not only intend to insure on

Siu Yin Kwan v Eastern Insurance Co Ltd [1994J 2 AC 199. The undisclosed principal doctrine does not, however, displace the doctrine of utmost good faith (discussed in Ch 4 below),
136

which will require disclosure of the principal's identity if material to the risk. On general agency principles, moreover, the terms of the policy may exclude undisclosed principals from assured

status: Talbot Underwriting Ltd v Nausch Hogan & Murray [20051 EWHC 2359 (Comm).120051 2 CLC868. '" eg O'Kane v Jones (lbe Martin P) [2003J EWHC 2158 (Comm), [20041 1 Lloyd's Rep 389, paras 124-128. 138 National Oilwell (UK) Ltd v Davy Offihore Ltd [19931 2 Lloyd's Rep 582, 596. See also O'Kane v Jones (The Martin P) 120031 EWHC 2158 (Comm), [20041 1 Lloyd's Rep 389, paras 84-103. B9 National Oilwell (UK) (n 138 above) 597 perColmanJ. '''' See 7.02 below. 141 [19061 AC 336. 142 ibid 341.

143 [199212 Lloyd's Rep 578. 144 [199312 Lloyd's Rep 582. 145 ibid 598. 146 MIA 1906, s 86; Williams v North China Insurance Co (1876) 1 CPD 757. Ir has been held

that post-loss rati6cation is not possible in non-marine insurance: Grover 6- Grover Ltd v Mathews [1910] 2 KB 401. The distinction has, however, been criticized with the marine rule being

regarded as preferable: National Oilwell (UK) Ltd v Davy Offihore Ltd[19931 2 Lloyd's Rep 582, 607-8. See also Trident Generallnsurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270. '47 National Oilwell (UK) Ltd v Davy Offihore Ltd [l993J 2 Lloyd's Rep 582, 596-7.

60

61

Formation ofMarine Insurance Contracts

behalf of the claimant bur also purport to do so, since the doctrine of ratification is not available to an undisclosed principal.'4'
2.88 Further difficulties arise where co-insurance is sought for rhe benefir of a class of

Joint and Composite Policies

insurer and each co-assured would involve a separate contract being triggered as ,any individual, and by that time identified, claimant became a member of the insured class. Thirdly, it might be objected that a future member of an insured class had 2.91 neither an insurablelnterest nor an expectation of acquiring any interest at the time the insurance was concluded, so that the contract would be void as a wager. 152 Again) however, on the 'bundle of separate contracts' analysis of a composite policy, at the time any individual claimant becomes a member of the insured class triggering a separate contract, that claimant will have an insurable interest or at least the expectation of acquiring such an interest.
(4) Is Classification as Joint or Composite Insurance a Matter of Law or Contract?

co-assureds of which the membership may be determined in whole or in part only at a later date. For example, a builders' risks policy may be designed ro cover not only the hull owner bur also rhe main contractor and all subcontractors involved in the ptoject, many of whom may be inttoduced to the project only afrer the insurance has been effected. Likewise, rhe owner of cargo to be sold on CIF terms may desire a policy under which all subsequent purchasers of all or part of the cargo can claim as assureds. In each case, rhe identity of all intended beneficiaries will often be unknown, and indeed unascertainable, when the insurance is effected. It is entirely conceivable that some such parties will not even exist at the time the insurance contract is concluded.
2.89 The absence of any relationship between principal assured and claimant at

that time excludes any actual authority. If it likewise denies the possibility of ratification, there will be no possibility of direct rights under the policy, bur co-insurance of a class of unascertained composition raises a number of difficulries. First, the retrospectivity of ratification requires the claimant to exist and be competent to conclude the unauthorized insurance at the time it is effected by the principal assured. Where the claimant is a company that did not exist at the time of conclusion of the insurance contract, ratification is therefore unavailable.'4'
2.90 Secondly, dicta suggest that ratification is confined to parties who are ascertail;-

There are significant legal differences between joint and composite insurance. 2.92 For example, a breach of contract under a composite policy affects only the interest of the co-assured that commits the breach. Under a joint policy, however, there is only one interest insured and the insurer's remedy lies against all joint assureds. Discussions of joint and composite policies in the existing case law often contain language that may convey the impression thar classification follows ftom the nature ofthe interests insured. The better view, however, is that appropriate contractual drafting can transform insurance that by nature falls into one category into insurance that falls into the other. The dicta of Sir Wilfred Greene MR in General Accident v Midland Bank, 153 2.93 quoted above,154 can be read as regarding the existence ofa genuine joint interest 'in the strict sense' as essential for a joint policy. However, he was not dealing with a situation where a clear attempt had been made to bring together two different interests and insure them under a joint policy. In New Hampshire Insurance Co v MGN Ltd,155 it was accordingly argued that there was no reason in principle and no authority that prohibited separate interests being jointly insured. At first instance, Potter J accepred that General Accident v Midland Bank was not authority against the possibility of combining separate interest under a joint policy,156 but had little difficulty in holding that the policy in question, a fidelity policy covering the Maxwell gtoup of companies, was composite in nature. The Court ofAppeal appears also to have been content to view the matter as one of construction. Even if the matter is viewed as one of construction, however, it seems clear that 2.94

able by the third party (here rhe insurer) as at the time of conclusion of the contract as intended to be parties to the contract. 150 The policy beh.ind this requirement is elusive. If the concern is that rhe insurer should not be faced with uncertainty as to whether a particular claimant is entitled to ratifY, that is answered by the description of an insured class and the onus of proof borne by the claimant of its membership of that class. 15 ' If the objection is that a contract requires two identifiable parries as at the rime of its formation, rhe answer is rhat the analysis of a composite policy as a bundle of separate contracts between the

'48 Keighley, Maxted & Co v Durant [1901] AC 240.

Kelner v Baxter (l866) LR 2 CP 174. watson v Swann (1862) 11 CB (NS) 756, 771 per Willes j. The dictum goes further than was necessary in the case: see 770 per Erie C], although the formulation of Willes] has been preferred in Australia: Trident General Insurance Co Ltd v MeNiece Bros Pty Ltd (1987) 8 NSWLR 270,276. See also National Oilwell (UK) Ltd v Davy Offihore Ltd[199312 Lloyd's Rep 582. 596.
150
151 In general, the concern might be that the agent would have the power to confer the benefit of the unauthorized act on whomever the agent subsequently chose to declare had been the intended principaL However, this risk is inherent to agency, whether authorized or unauthorized, given appropriate circumstances and does not justify a restriction on the scope of ratification.

'48

The doctrine of insurable interest is discussed in Ch 3 below. '" [19401 2 KB 388, 404--5. 154 See 2.72 above. '" [19971 LRLR 24. 156 ibid 41.
152

62

63

Formation ofMarine Insurance Contracts it will take the cleatest possible wording befote a court will accept that different interests have been insured under a joint policy. Indeed, many terms that a sensibly drafted policy on different interests will contain will lead almost inevitably to construction as a composite policy.
2.95 Suppose that a professional indemnity policy is taken out to cover both a company and its directors. None of the assureds would want their cover to be jeopardized by the misconduct of one of the others. Yet under a joint policy, the indivisibility of interest results in a defence being good against any assured who shares in that interest. A company stands ro be sued in respect of miscouduct by its directors. If that misconduct jeopardized its insurance cover, the very purpose of rhe cover would be frusrrared. The obvious commercial intent is rhat the misconduct of one assured should not prejudice the rights of the others, although that individual mighr be denied cover in the event of serious personal misconduct. Thus, in Arab Bank pic v Zurich Insurance CO,157 rhe managing director of a company made a number of fraudulent statements in the company's name and rhe vicrim obtained judgmenr against the company. It then sought to claim via the Third Party (Rights againsr Insurers) Acr 1930 '58 under a policy of professional indemnity insurance that covered both the company and its directors. Regardless oflegal principle, Rix J held that as a matter ofconstruction the dishonesty of the managing director did not prejudice the rights of the company, given that the company itself was not complicit in the dishonesty. A number of clauses, perfectly consistent with the commercial purpose of the policy, were inconsistent with the idea (inherent in a joint policy) that the director's dishonesty should give rise to a defence against the company. Thus; the policy covered 'any Civil Liability whatsoever', a phrase wide enough to cover liability for dishonesty, but then excluded cover for anyone 'kn C1wingly committing, making or condoning' fraud. Clearly, the policy covered liability arising out of dishonesty provided the dishonesty was not that of the claimant. In addition, a subrogation clause stated that the insurer would not exercise rights against any partner, director, or employee of the assured company 'unless the claim has been brought about or contributed to by the dishonesty, fraud, criminal or malicious act or omission of such persons'. Unless, however, such misconduct could give rise to a valid claim by another assured, there could be no subrogation claim againsr the wrongdoer. 2.96 In New Hampshire Insurance Co v MGN Ltd,'59 rhe policy contained a 'Joint Insured' clause. The policy as a whole, however, was clearly a composite policy,

Joint and Composite Policies

embracing the quire different interests of the members of a group of companies, both public and private. The 'Joint Insured' clause as drafted changed norhing. It merely addressed cerrain specific poinrs, providing that wirh regard ro those issues rhe assureds were to be treared as joint assureds. 'Bur rhe content of the clause does nor go so far as to say that all those insured have joint inrerests or are
joint contractors. '160

The cases discussed concern policies that by nature were composire but were 2.97 argued ro be joint. From an insurer's perspecrive, a joint policy is preferable as defences are stronger, alrhough subrogarion is excluded. There does not, however, appear to be any reason of principle why two genuine joint owners of property should nor insure under a policy thar expressly provides for several rather rhan joinr cover and consequently takes effect as a composite policy and not as a joint policy.

160

ibid 57 per Staughton L].

157
158

[199911 Lloyd's Rep 262. For discussion of the 1930 Act, see Ch 20 below.

15'

[19971 LRLR 24.

64

65

3
INSURABLE INTEREST, ILLEGALITY, AND PUBLIC POLICY

A. Insurable Interest (1) The legal matrix (2) The concept of insurable interest (3) Insurable interest in particular types of insurance (4) Limited interests (5) Pervasive interests

3.02 3.03 3.20

B. Embodiment in a Policy C. Illegality of thelnsured Adventure

D. The Impact ofWar on Contracts of Insurance

3.65 3.70 3.78

3.40
3.57 3.58

A contract of insurance may be inherently invalid or unenforceable on the 3.01 grounds of illegality or public policy. In particular, the doctrine of insurable interest, which originated in and continues to reflect the fi.llldamental nature of a contract of insurance as a contract of indemnity, also implements public policy
that a marine insurance contract is not employed as an instrument of wager.

Public policy, in the form of fiscal legislation, is also the origin of the inadmissibility in evidence of a marine insurance contract not embodied in a policy. Alternatively, the insurance may be unenforceable by reason of the insured adventure being illegal or contrary to public policy.

A. Insurable Interest
The law on insurable interest is almost unique in marine insurance law in its 3.02 mandatory nature. It was also the first aspect of marine insurance law to be placed on a statutory footing. However, despite its long development and
attendant extensive consideration, whether an assured possesses an insurable interest remains, on occasion, a difficult and controversial question.

67

Insurable Interest, Illegality, and Public Policy

(1) The Legal Matrix
3.03 The law relating to insurable interest developed at common law before statutory intervention in 1745. Gaming and wagering contracts are also the subject of restrictions in the general law of contract.

Insurable Interest
and any policy containing a dispensation from the requirement of an insurable interest. Any such policy was declared to be null and void. This invalidity was triggered either by the substance of the policy as a wager, as where the assured lacked any insurable interest or had only a token interest,' or by the presence of a dispensing phrase regardless of whether the policy was in truth a wager. Proof of an insurable interest could not save such a policy from staturolY nullity.' Wager policies were, however, expressly permitted for British-financed privateers thar would prey solely~on enemy vessels and for cargo from any European or American porr or place under Spanish or Porruguese control. The 1745 Act did not, therefore, invalidate wager policies completely. Private 3.07 sector capital was encouraged to finance patriotic privateering' and to pursue trade in desired contraband goods from territory controlled by Spain and Porrugual. lO Moreover, wager policies continued ro be enforceable in respect of non-British shipping by reason of the difficulty of bringing witnesses from abroad to prove an insurable interest in foreign vessels and their cargoes before English courrs." However, policies continued to be construed as indemnity contracts and requiring an insurable interest unless they provided to the contrary. Consequently, policies on non-Brirish vessels were unenforceable in the absence of an insurable interest unless they contained wording dispensing with that requirement. 12

(aJ The evolution ofthe law on insurable interestprior to the Marine Insurance Act 1906
3.04 The requirement of an insurable interest is a manifestation of rhe fundamental characteristic of an insurance contract as a contract of indemnity.' Historically, however, the common law enforced contracts of wager provided they were not contrary to public policy, 2 and, after some initial reluctance, the courts came to the view that it was open to the parties to conclude an enforceable wager policy by expressly dispensing with the insurable interest requirement.' 3.05 A variety of wordings developed to indicate that the parties intended an enforceable wager policy. A policy might be issued 'interest or not interest', signifYing that it was to be enforceable regardless of whether the assured had an insurable interest. The letters 'ppi', meaning 'policy proof of interest', indicated that possession of the policy was to act as proof of the existence of an insurable interest. The phrase 'without benefit of salvage' constituted a waiver by the insurer of its right under the indemnity principle to whatever was left of the assured's interest in the insured property on payment for a totalloss. 4 A wager policy was clearly incompatible with such a right. 3.06 Wager policies containing such phrases were legally enforceable until the mideighteenth century. 5 By the mid-eighteenth century, however, they were perceived as encouraging various evils and their use was restricted by the )vIarine Insurance Act 1745.6 The Preamble to the Act identified three evils encouraged by wager policies: the potential for unlimited insurance on the same adventure facilitated insurance frauds; wager policies were employed to disguise insurance of prohibited adventures; more generally, an insrrument designed for the financial protecrion of genuine merchants had been brought into disrepute through perversion into a gambling device. Section I of the Act then prohibited any policy on British ships or property on such ships by way of gaming or wagering

(bJ The insurable interest requirements ofthe Marine Insurance Act 1906
The 1745 Act was repealed by rhe Marine Insurance Act 1906,13 which enacts 3.08 two separate insurable interest requirements. The first operates by reference ro the time of formation of the contract, the second by reference to the rime of loss. The contract formation requirement Section 4(1) of the Marine Insurance 3.09 Act 1906 provides that: 'Every contract of marine insurance by way of gaming or wagering is void.' This mandatory rule looks to the contract as originally concluded. Unlike the 1745 Act, this statutory invalidity is without exception. Section 4(2)(a) then deems to be a wager any contract of marine insurance concluded by the assured with neither an insurable interest nor an expectation of acquiring such an interest. Thus, where a contract is entered into without even an expectation of an insurable interest, the contract is irredeemably void, notwithstanding a subsequent acquisition of an insurable interest.

Lucena v Crauftrd(1803) 2 Bas & Pul (NR) 269, 302. Jones v Randall (1774) 1 Cowp 37; Micklejield v Hepgin (1793) 1 Anst 133. , Sadlers' Co v Badcock (1743) 2 Atk 554; Lutena v Crauftrd(1802) 3 Bos & Pu175, 101. For an early refusal in Chancery to enJorce a wager policy despite saving wording, see Goddart v Garrett (1692) 2 Vern 269.
1 2

4
S

See 22.31-22.32,22.36-22.44 below.

Assievedo v Cambridge (1712) 10 Mod 77; Depaba v Ludlow (1720) 1 Corn Rep 360.
19 Geo 2, 037.

Kent v Bird (1777) 2 Cowp 583. 8 Murphy v Be/I(1828) 4 Bing 567. See N Legh-]ones, 'The Elements of Insurance Interest in Marine Insurance Law', in D Thomas (ed) The Modern Law ofMarine Insurance, Volume 2 (2002) para 4.6. " Andree v Fletcher (1787) 2 TR 161, 164-5 (specifically, the smuggling of bullion). " lbellusson v Fletcher (1780) 1 Doug 315; Lucena v Crauftrd (1803) 2 Bas & Pol (NR) 269,322. 12 Cousins v N,tntes (l81!) 3 Taunt 513. 13 See MIA 1906, s 92 and Sch 2.
7 9

68

69

Insurable Interest, Illegality, and Public Policy

3.10

Insurable Interest
court will not enforce a policy it knows to be void by virtue of section 4 even if the parties both wish the conttact to be treated as binding. 21 The time of loss requirement In addition to the insurable interest require- 3.12 ments of section 4, section 6(1) of the Marine Insurance Act 1906 requires the assured to have an insurable interest in the subject-mattet insured at the time of the loss. This requirement is reiterated by clause 11.1 of the Institute Cargo Clauses (A), (B), and (C). Consequently, an assured that had an interest or expectation of acquiring an interest at the time of formation of the contract bur which has since, but before the time of loss, voluntatily divested itself of its intetet" or ot h ' 1 . . s erwlse ost ItS mterest23 or aIternativeIy whose expectation temained unfulfilled24 cannot tecover an indemnity undet the policy. Section 6(1) of the 1906 Act, however, contains a proviso to the insurable 3.13
interest requirement. Insurance may be taken out on a {lost or not lost' basis, in

The limits of an expectation were illustrated in Knox v WOod.'4 The claimant took out a policy on commission to be earned on the sale of cargo to be provided for the return voyage of his ship. Delay caused by rhe capture and ransoming of the ship resulted in the loss of the rerum voyage. The claim for the lost commission failed for want of insurable interest. The crucial facr was that no cargo was ever procured. The alleged interesr lay in commission expected to be earned on cargo expecred to be obrained. An expectarion upon an expectation was toO remote and conjecrural to be an insurable interest. According to Lord Ellenbotough: 'This case carries us into rhe land of dreams; and, if supported, would inrroduce the practice of insuring a 20,000 prize in the lottety wirhour purchasing a ticked'15 Section 4(2)(a) of the 1906 Act addresses the reality of whether the assured has an insurable interest or expectation of acquiring one. In addition, like the 1745 Act, section 4(2)(b) renders conclusive evidence of the wagering narure of the contract any phrase that dispenses with the requirement of an insurable interest or assumes its absence. Any policy containing such a phrase is deemed a wager and is, therefore, void under section 4(1), regatdless of whethet the assured in fact has an insurable interest." Any insurance containing such a phrase is 'destirute of all legal effect between the parties' and 'stricken with sterility'." Where, however, the policy contains severable insurances only one ofwhich contains an offending phrase, the invalidity is confined to that section of the covet." Although the practice evolved of inserting the ppi clause into a slip pinned ro or otherwise detachable from the policy, a policy void at issue by reason of the incorporation of such a clause cannot subsequently be rendered valid by its physical detachment." Of course, any insurer that failed to honour such technically void contracts would destroy its commercial repuration, for which reason ppi policies have generally been treated in practice as if legally binding. Nevertheless, a ppi defence, if taken, is paramount and will be invoked by liquidators of insolvent insurers. 20 Moreover, the view has been expressed that a

3.11

which case the assured may recover even though no interest was acquited until after the loss occurred, unless the assured knew of the loss and the insurer did not as at the time of conclusion of the contract. 25 This is in turn subject to the qualification that the assured must not have known of rhe loss at the time of acquiring the insurable interest." Consequently, 'lost or not lost' wotding permits the assured to recover in respect of loss sustained before the acquisition of any insurable interest if either the assured is unaware of the loss at the time of acquisition of interest and that of concluding the contract," or the assured is unaware of the loss at the time of acquisition of the interest but subsequently learns of the loss and discloses that fact to the insurer before the conclusion of
the contract. 28

'Lost or not lost' wording provides the solution to a problem that may confront 3.14

" Cheshire (Thomas) & Co v Vaughan Bros [1920J 3 KB 240, 252-3: Re London County Commercial Reinsurance Office Ltd [1922J 2 Cb 67, 85.
" (1808) 1 Camp 543. " ibid 546.
16 Cheshire (Inomas) & Co v Vaughan Bros (19201 3 KB 240, 248: Edwards Uohn) & Co v Motor Union Insurance Co Ltd [1922J 2 KB 249, 252. " Edwards Uohn) &Co v Motor Union Imuranee Co Ltd [1922J 2 KB 249, 256 perMcCardieJ. C:0nsequend~, it was held that an insurer who honours a ppi policy is not entitled to subrogation nghts. The view has even been expressed by Lord Shaw that a ppi policy <infect[s] and invalidate[s] the entire insurances which the same assured have made upon vessel, freight or cargo' on the basis that gambling on one pan of an adventure jeopardizes the whole: Thames & Mersey Marine Insurance Co Ltd v 'Gunflrd'Ship Co Ltd [1911J AC 529 at 543-4. Sed quaere. " Ikerigi Compania Naviera SA v Palmer (The W,mdrous) [1992J 2 Lloyd's Rep 566, 574. 19 Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67. 20 ibid. See also Re Overseas Marine Insurance Co (1930) 36 LlLRep 183. Roth cases involve insolvent reinsurers.
22 eg rejection of goods by buyer after passing of property or risk but before casualty occasioning loss. 23 C':"y v Harrison (1829) 10 B & C 99 (on a sale of unascertained goods with a subsequent ~tncondlti?nal aPrropriation a.nd passing of property on loading, the buyer of goods loses any msurable mterest m the goods If the unpaid seller exercises a right of stoppage in transit even after los~, since the e~ercise of the right involves a r:sumption of possession of the goods negating the delIvery on loadmg and, therefore, the unconditional appropriation). . 24 See, eg Stockdale v Dunlop (1840) 6 M & W 224 (contract of sale of goods unenforceable at time of loss because an oral contract conferred no insurable interest in the goods on the buyer); Hal~ead v }0ung(l8%) 6 E & B 312 (no insurable interest under cargo policy that attached on loadlllg when assured had purchased cargo to be carried but carrying vessel lost before arrival at loading POrt). 2S See also MIA 1906, scb 1, r 1. " ibid s 6(2). 27 Sutherkmd v Pratt (1843) 11 M & W 296. 28 Mead v Davison (1835) 3 A & E 303.

70

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Insurable Interest, Illegality, and Public Policy

a buyer of goods on FOB terms." Such a buyer acquires an insurable interest in the goods on their loading on board the carrying vessel. However, in twO situations the buyers may wish to claim on a cargo policy even though no loss can be proved to have occurred at a time when the buyer had an insurable interest. First, where it is established that the loss occurred before loading, the buyer may
wish to claim on insurance cover either because the loss does not justify rejection

Insurable Interest
subject-matter insured, or a bona fide expectation of acquiring such an interest'. Suppose, therefore, that an assured under a ppi policy, void under section 4 of the 1906 Act, can prove the policy is not illegal because in fact the assured has an insurable interest. The assured is entitled to restitution of any premium paid on the ground of tOtal failure of consideration if the contract is not honoured. 32 Moreover, an assured that has no insurable interest throughout the currency of the risk is entitled to restitution of the premium, provided the policy was not effected by way of gaming or wagering. 33

of the goods or the buyer has paid in advance and the seller is now insolvent. Secondly, it may be impossible to determine when the loss occurred so thar the buyer cannot prove a breach of contract by the seller. In either case, provided it can be established that the loss occurred during the contractual period of cover, the buyer can recover if the policy contained a 'lost or not lost' clause and the proviso to section 6(1) is satisfied."
3.15 The now obsolete SG policy, used by the London market until the early

(d) The general law on gaming and wagering contracts

As already seen, the common law recognized gaming and wagering contracts 3.17 as in principle legitimate, while refusing to enforce particular wagers that it regarded as contrary to public policy. Historically, these did not include wager policies on maritime adventures. However, one hundred years after the Marine Insurance Act 1745, the Gaming Act 1845 saw a hardening of policy against wagering contracts. Section 18 of the 1845 Act declared: 'All contracts or agreements ... by way of gaming or wagering shall be null and void.' Notwithstanding the generality of the drafting, the 1745 Act was not repealed and it appears implicit in a series of subsequent challenges to policies containing ppi or similar clauses that the validity of marine wager policies continued to be regulated exclusively by the 1745 Act. 34 The arguments in these cases all centred on the precise scope of the Marine Insurance Act 1745. This applied to ships and cargoes, while the policies in question covered financial interests such as profits on cargoes or a loan secured on a ship. In each case, the policy was held void under the 1745 Act. If, however, that Act had effectively been superseded by the Gaming Act 1845, with the latter invalidating even marine wager policies rhat remained valid under the 1745 Act, the precise scope of the 1745 Act would have been of no significance. 35 Statutory intervention in the general field of wagering contracts has lasted 160 3.18 years. However, section 18 of the Gaming Act 1845 is to be repealed wirh prospective effect by section 334(1) of the Gambling Act 2005. Sections 4 and 6

1980s,31 included 'lost or not lost' wording. The modern Institute cargo clauses do not. Instead, clause 11.2 provides as follows: 'Subject to 11.1 above, the Assured shall be entitled to recover for insured loss occurring during the period covered by this insurance, notwithstanding that the loss occurred before the contract of insurance was concluded, unless the Assured were aware of the loss and the Underwriters were not.' This sub-clause is not a 'lost or not lost' clause. Although it resembles the proviso to section 6(1) to some extent, it provides exclusively for a conditional, retrospective attachment of risk. The policy covers pre-formation loss sustained during the contractual period of cover, provided the assured did not possess an information advantage at the time the contract was concluded. However, the opening words to clause 11.2 state specifically th~~ it is subject to clause 11.1, which, as noted above, expressly requires the assured to have an insurable interest at the time ofloss.

(c) The Marine Insurance (Gambling Policies) Act 1909

3.16 The sanction imposed on wagers by section 4 of the Marine Insurance Act 1906

is to render the contract void, not illegal. However, by virtue of section 1 of the Marine Insurance (Gambling Policies) Act 1909, it is a criminal offence, inter

alia, for any person to effect a contract of marine insurance 'without having any
bona fide interest direct or indirect, either in the safe arrival of the ship in relation to which the contract is made or in the safety or preservation of the
32 Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67. On the burden of pwof, see MI(GP)A 1909, s 1(5). 33 eg because the assured had an expectation of acquiring an insurable interest: MIA 1906, s 84(3)(c). 34 Smith v Reynolds (I 856) 1 H & N 221; De Mattos v Gibson (1868) LR 3 Ex 185; Allkin, v Jupe (1877) 2 CPD 375: Berridge v Man on Insurance Co Ltd (I 887) 18 QBD 346; Gedge v Royal Exchange Assurance Corp [1900J 2 QB 214. 35 For the contrary view that the 1845 Act invalidated all wagering policies, see Hepburn v A Tomlinson (Haulim) Ltd [I966J AC 451, 477; Sharp v Sphere Drake Insurance pic (The Moonacre) [1992] 2 Lloyd's Rep 501, 510.

29 Under an FOB contract, the seller undertakes to load the contract goods safely on board a vessel procured by the buyer. Subject to contrary intention, property in the goods and risk pass from the seller to the buyer on loading. From that point, the seller has no responsibility for the goods, including for their insurance. , 30 New South 1%les Leather Co Pry Ltd v VanguardInsurance Co Ltd [l99lj NSWLR 699 (New South Wales Court of Appeal). / 31 See 7.02 below.

72

73

Insurable Interest, Illegality, and Public Policy

of the Marine Insurance Act 1906 remain unaffected. Section 335 of the Gambling Act 2005 then provides as follows:
(1) The fact that a contract relates to gambling shall not prevent its enforcement.

Imurable Interest
privateers to attack Dutch shipping. In addition, commissioners were charged by statute with taking control of Dutch vessels and cargoes detained in or brought into British ports. In Lucena v CraujUrd, the commissioners sought to recover on insurance in respect of vessels and cargoes seized by British warships but lost before reaching the United Kingdom. Having summoned the judges, the House of Lords rejected the majority's advice in holding that, pending arrival of the ships and cargoes, the commissioners had no certainty of advantage in their safety but merely an expectation and, consequently, no insurable interest. In particular, Lord Eldon rejected the idea, found in earlier case law," that there existed a level of contemplation of advantage in the continued safety of the insured property below certainty but higher than mere expectation and that sufficed for an insurable interest. He stated as follows: 40
In order to distinguish that intermediate thing between a strict right, or a r.ight derived under a contract, and a mere expectation or hope, which has been termed an insurable interest, it has been said in many cases to be that which amounts to a moral certainty. I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party.

(2) Subsection (1) is without prejudice to any rule oflaw preventing rhe enforcement of a contract on the grounds of unlawfulness (other than a rule relating

specifically to gambling).
3.19 A wager policy would fall within the definition of 'betting', which in turn falls within the definition of 'gambling'." The consequence is a removal of the statutory impediment to wagers on maritime adventures merely because they constitute wagers, but leaving it to the revived common law to determine as a matter of policy whether rhey should be enforced. Given the legislative development of puhlic policy in the field of maritime adventures, it is suggested that modern policy must deny the enforceability of wagers on maritime adventures. It would be absurd for a wager policy to be void," but a straightforward wager

to be enforceable. (2) The Concept ofInsurable Interest

3.20 Tracing the exact parameters of the concept of insurable interest is problematic. Given the historical connection with the progressive avoidance of wagering contracts, it may be tempting to suggest that the test for insurable interest is absence of wager. This, however, is incorrect. The requirement under section 6 of the Marine Insurance Act 1906 that the assured have an insurable interest at the time of loss is a pure reflection of the nature of insurance as a contract of indemnity, divorced entirely from any policy against wagers. Thus, an expect-' ation at the time ofconclusion ofthe insurance contract ofacquiring an insurable interest suffices to prevent the contract being one ofwager, but an expectation of an interest is not itself an interest. Consequently, if the expectation remains unfulfilled by the time of rhe casualty, the assured will have no claim. Likewise, an assured that divests itself of all interest in the insured property after effecting the policy cannot recover in the event of a casualty, even though the policy is not void as a wager.

Ultimately, the case turned on the scope of the commissioners' statutory author- 3.22 ity. It was clear from the terms of that authority that, pending arrival ofcaptured vessels or cargoes in a British port, the commissioners had no vested interest in the properry. The Crown retained the right to release rhe vessels back to their owners, or, alternatively, a declaration of war between Britain and the United Provinces would automatically vest ownership of the captured property in the Crown. Consequently, the commissioners had nothing more than a mere hope of interest, which denied a right of recovery on the policy. In the terms of the Marine Insurance Act 1906, they had an expectation of an interest that would prevent the insurance being a wager under secrion 4 but no perfected interest as demanded by the indemnity nature of insurance under section 6. Provided the interest takes the form of a proprietary or contractual right, how- 3.23 ever, the law is not prescriptive with respect to the nature or form of that right. In Lucena v CraujUrd, Lawrence J, advising the House of Lords, was concerned to emphasize that the nature of an insurance contract as one of indemnity does not require the concept of insurable interest to be limited to 'that interest which arises out of property'. In a celebrated passage, he stated as follows: 41
.. . interest does not necessarily imply a right to the whole, or a part of a thing, nor

(a) The concept ofinsurable interestprior to the Marine Insurance Act 1906
3.21

Prior to the 1906 Act, the leading authority on insurable interest was the decision of the House of Lords in Lucena v CraujUrd. 38 The French conquest in 1795 of the Republic of the Seven United Provinces led the British government, without declaring war on its erstwhile ally, to direct the Royal Navy and English

" Gambling Act 2005, ss 3, 9.

37 38

And indeed often criminal, although the absurdity is not predicated on criminality.
(1826) 2 Bos & Pul (NR) 269.

38 eg Le Gras v Hughes (1782) 3 Doug 81. " ibid 302-3.

40

(1826) 2 Bos & Pul (NR) 269, 321.

74

75

Insurable Interest, Illegality, and Public Policy

necessarily and exclusively that which may be the subject of privation, but the

Insurable Interest
arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

having some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to
produce a damage, detriment, or prejudice to the person insuring: and where a

man is so circumstanced with respect to matters exposed to certain risks or dangers, as to have a moral certainty of advantage or benefit, but for those risks or dangers
he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to h~ve

benefit from its existence, prejudice from its destruction. The property of a thmg and the interest deviseable from it may be very different: of the first the price is generally the measure, bur by interest in a thing every benefit and advantage arising out of or depending on such thing, may be considered as being comprehended.

The governing idea is that of interest in a marine adventure. Section 5(2) is 3.27 illustrative of that idea and does not putport to provide an exhaustive definition. 4' Moreover, it refers merely to a legal Ot equitable 'telation', a tetm that is clearly broader than proptietaty interesr. 44 Indeed, the secrion appeats to have been drafted to accommodate pte-Act case law that tecognised an insurable interest despite the absence of any proprietaty Ot equitable connection between the assured and the subject-matter insured. In Wilson v jones,4' a company was formed to lay a transatlantic telegraph cable. 3.28 The claimant shareholdet in the telegraph company was held entitled to recover under a policy that was held, on its true interpretation, to insure his interest in the adventure, namely the profits contingent upon the successful establishing of the telegraphic link. The claimant, however, had no proprietaty or contractual interest in the cable, the adventure of laying the cable, or the profits the company might make from successfully perfotming the cable-laying operation, and the profits were themselves speculative. As a shareholder, the claimant had title to his shares and an expectation of benefit in the fOtm of increased value of the shares should the operation be successful. As originally introduced to Parliament in 1906, section 5(2) of the Marine 3.29 Insurance Bill contained an extra paragraph. This provided that: 'In particular ... (b) a prospect of loss or gain which is not founded on any right or liability in, or in respect of, the subject-matter is not insurable.' This paragraph would appear to overrule Wilson v jones, since the assured in that case had an expectation of financial gain from the insured adventure bur lacked any right or liability in it. However, the paragraph was deleted at the committee stage in the House of Commons,46 leaving Wilson v jones as authority for a relaxed approach to insurable interest. Thus, according to the draftsman of the 1906 Act, Sir Mackenzie Chalmers: 4'
It is clear, since Wilson v Jones . .. that interest is not confined
to

3.24 On the facts of Lucena v Craufurd, Lawrence J formed part of the minority of

the summoned judges who advised that the scope of the commissionets' authotity denied them an insurable interest ptior to attival of the captured property at a British port. Ptior to such time, they had 'no existing concern in such property'.42 As alteady seen, the House of Lords accepted the minority's advice.
3.25 Some uncertainty surtounds the refetence by Lawrence J to 'moral certainty of

advantage or benefit' from the continuing safety of the insured propetty as sufficient to constitute an insurable interest. Given the insistence by Lawrence J
on an 'existing concern' and his conclusion that the commissioners lacked any

insurable intetest, the reference to motal certainty was clearly not intended ro extend the scope of insurable intetest into the tealm of expectation or inchoate intetest. Lawrence J appeats to contemplate an existing connection between assured and subject-matter insured, bur not necessarily a connection in the fotm of a proprietaty or contractual tight. Conversely, the judgment of Lotd Eld6n appeatS clear in requiting any insurable interest to be underpinned by property Ot contract, although a genetal proposition beyond rejection of the extension of insurable intetest into the territoty of expectation and contingent benefit as contended by the commissionets went further than tequired by rhe case.

(b) The concept ofinsurable interest in the Marine Imurance Act 1906
3.26 Insurable intetest is defined in the Marine Insurance Act 1906 by section 5.

rights in the

This provides as follows:

(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure. (2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due
43

O'Kane v Jones (The Martin P) [2003J EWHC 2158 (Comm), [2004J I Lloyd's Rep 389,

paras 145(4), 158.

44 Peasey v Sun Lift Assurance Corp ofCanada [2003J EWCA Civ 885, [2003J Lloyd's Rep lR 637, para 92. 45 (1867) LR 2 Ex 139. 46 There is no recorded explanation for the deletion. Presumably, however, either the paragraph was regarded as incorrecr in contradicting Wilson vJones, or, alternatively, the paragraph correctly reflected the fact thar Wilson v Jones was not consistent with established legal principle and was rherefore to be overruled, but on considerarion rhe approach in Wilson v Jones was viewed as preferable. 47 M Chalmers and DOwen, Marine Insurance Act 1.906(2nd edn, 1913) 13.

42

ibid 305.

76

77

Imurable Interest, Illegality, and Public Policy

nature of property or arising out of Contract, for the assured had no property in the cable nor any contract respecting it.
Suppose A is offered an appointment abroad on the condition that his acceptance

Insurable Interest
no 'relation to' or 'concern in', and, therefore. no insurable interest, in the asset. The decision stands as binding authority that an insurable interest requires some form of connection to the subject-matter insured and that the factual likelihood of a casualty involving the subject-matter insured impacting adversely on the assured's finances is not of itself a sufficient connection.

of the offer is received by return of post. Why shall he not insure the safe arrival of

the letter, although he has no legal rights in respect of it after it has heen posted?
3.30 The net result is that the concept of insurable interest that emerges from the 1906 Act resembles that advanced by Lawrence J in Lucena v CraufUrd. 48 Indeed, the passage from his advice cited above has been adopted as authoritative in subsequent case law, albeit with the reference ro moral certainty omitted.49 However, if, as suggested above, that is understood as referring to situations where there is an existing financial connection but no proprietaty or contractual link, as illustrated by Wilson v Jones, the entirety of the passage may fairly represent the concept of insurable interest adopted in the I906 Act.

(c) The relationship between insurable interest and wagering

3.31

Dicta in a number of cases suggest that the crucial question in determining whether there is an insurable interest, in the modern law at least, is whether the contract amounts to a wager. In The Moonacre,50 for example, Colman QC51 considered that the policy behind the requirement of an insurable interest was the avoidance of wagering contracts and reasoned that, accordingly, 'provided the assured has sufficient interest in the subject matter of the insurance ro prevent his contract being a wagering contract, he is entitled ro enforce that contract'. 52 It is clear, however, that this is not correct. In English law, insurance contracts fall into three categories: contracts supported by an insurable interest, wager contracts, and contracts that are not wagers but that nevertheless lack an insurable interest, notwithstanding the rejection in The Moonacre of any such third categoty.53

The policy underpinning the approach in Macaura is, with respect, not 3.33 immediately apparent, and it is noteworthy thar the Supreme Court of Canada has refused to follow the House of Lords. In Constitution Insurance Co o/Canada v Kosmopoulos,55 the Supreme Court held that the respondent, the sole shareholder and direcror of a company, had an insurable interesr in the company's assets, which had been insured in the respondent's name. Wilson J56 affirmed the factual expectarion approach of Lawrence J and refused ro follow the technical approach adopted in Macaura. As demonstrated by Wilson J, the narrower approach is justified by none of the policies underpinning the insurable interest doctrine requirement. Provided the assured will benefit from the continued safety of the insured property and sustain prejudice from its destruction, it cannot be said thar the contract is a wager, that the contract is not one of indemnity for loss, or that rhe assured will be tempted fraudulently ro destroy the subject-matter insured in order ro obtain the indemnity payable. This principled reasoning is ro be applauded, but in English law Macaura remains a precedent with House of Lords authority. Thus, in Feasey v Sun Lift Assurance Corp o/Canada,57 it was accepted by counsel 3.34 that precedent rendered the approach of The Moonacre unsustainable in indemnity insurance and the COUrt of Appeal held that in life insurance the existence of an insurable interest did not follow auromatically from a finding that the
contract was not a wager.

3.32 In Macaura v Northern Assurance Co Ltd. 54 rhe claimant sole shareholder and unsecured creditor of a company rook our a policy on the company's sole asset of any value. Clearly, the prospects for repayment of the debt depended heavily on the continued safety of the sole asset, so that the insurance could not be regarded as a wager. Nevertheless, the House of Lords held that the assured had

Nevertheless, the courts have long been alive to the absence of merit in an 3.35 insurable interest defence. In Stock v Inglis,58 Bretr MR observed as follows:
In my opinion it is the duty of a COUrt always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as

48 See 3.23 above. " Mark Rowlands Ltd v Berni Inns Ltd [1986J 1 QB 211, 228; Sharp v Sph'" Drake Insurance pic (The Moonacre) [1992J 2 Uoyd's Rep 501, 511. 50 ibid 501. 51 Sitting as a deputy judge. 52 Shalp v Sphere Drake Insuran,e pic (The Moonere) [1992J 2 Uoyd's Rep 501, 510. See also Moran, Galloway & Co v Uzielli [19051 2 KB 555, 563; Lonsdale & Thompson Ltd v Black Arrow Group pic [19931 3 All ER 648,653 per Jonathon Sumption QC: 'The whole law as to what amounts to an insurable interest and when it is required, is derived from the statutory avoidance of wagering contracts.' ' 53

55 (1987) 34 DLR (4th) 208, discussed by J Birds, 'Insurable Interests' in N Palmer and E McKendtick (cds) Interests in Goods (2nd edn, 1998) Ch 4.
56

A majority of the Supreme Court concurring.

57
58

[2003J EWCA Civ 885, [20031 Uoyd's Rep IR 637. patas 51-53.

ibid.

54

[19251 AC 619.

(1884) 12 QBD 564, 571, an approach unanimously endorsed by the Court of Appeal in Feasey v Sun Lift Assurance Corp ofCanada [20031 EWCA Civ 885, [20031 Uoyd's Rep IR 637, paras 7, 116, 140. See also Cepheus Shipping Cotp v Guardian Royal Exchange Assurance pIc (The Capricorn) [19951 I Uoyd's Rep 622, 641.

78

79

Insurable Interest, Illegality, and Public Policy

between the assured and the insurer. Of course we must not assume facts which do not exist, nor stretch the law beyond its proper limits, but we ought, 1 think, to consider the question with a mind, if the facts and the law will allow it, to find in favour of an insurable interest.

Insurable Interest
cargo ar desrinarion, the carrier's contingent right to freight is insurable as soon as the freight-earning voyage commences, and possibly earlier." Thirdly, by virtue of section 8 of the 1906 Act, partial interests of any nature are 3.39 insurable. Examples include assureds with hotchpot interests in the insured property,64 co-assureds, and secured creditors. Similarly, in Wilson v Jones, 65 the assured's interest did not exrend ro the entire adventure and the entirety of the anticipated profits. (3) Insurable Interest in Particular Types of Insurance In rhe light of the above generalized discussion of insurable interest, consider- 3.40 ation can be given to certain types of marine policy. In Glengate-KG Properties v Norwich Union Fire Insurance Society Ltd,66 AuldLJ remarked: 'Although rhe term "insurable interest" may have a constancy of meaning in the broad sense stated by Mr Justice Lawrence in Luana v Craufurd ... rhe nature of the insurable interest in each case must depend on the type of cover in issue.'

Consequently, while the category of non-wager policies where there is no insurable interest unquestionably exists, the courts are likely to confine it within narrow limits. It is suggested that fresh examples not covered by precedent are unlikely. 59 3.36 In some cases, the insurable interest difficulty arises out of an apparent mismatch between an interest possessed by the assured that is certainly susceptible ro insurance and the subject-matter of the policy in fact procured. 60 In such circumstances, it may be possible to avoid a conclusion of lack' of insurable interest by interpreting the subject-matter of the policy with care, and indeed, 'it sometimes assists to identifY the subject to ask what insurable interest the [assured] has'." Where, however, the subject-matter is clear, any apparent mismatch can be addressed, if at all, only by flexibility in rhe concept of insurable interest. 62

(a) Property insurance

In the case of hull or cargo insurance, the assured's interest will normally be 3.41 proprietary or contracrual, satisfYing even the approach of Lord Eldon in Luana

(d) Defiasible, contingent andpartial interests

3.37 The Marine Insurance Act 1906 is clear that not only full, vested, and absolute interests are insurable. First, section 7(1) of the Act provides that a defeasible interest is insurable. Section 7(2) provides the example of a buyer of goods to whom ownership and/or risk in the goods have passed bur who is entirled by reason of a breach of contract by the seller to reject the goods so that the incidence of any insured loss reverts to the seller. The defeasibility of the buyer's interest at its own option does not prejudice its insurability. 3.38 Secondly, section 7(1) of the 1906 Act also provides that contingent interests are insurable. Thus, where the right to freight is dependent upon the safe arrival of

v Craufurd
Ownership confers an insurable interest in the full value of the insured property, 3.42 even if a third party has contracted to indemnifY the ownet in respect ofsome or all of the loss covered by the policy.51 Consequenrly, neither charterparty indemnities nor another policy on the insured hull will prejudice a shipowner's ability to insure.

An insurable interest may alternatively be based on risk. This is particularly 3.43

relevant in cargo insurance, whete risk may be divorced from ptoperty. The purchaser of an undivided share in a bulk cargo to whom risk has passed has always been recognized as having an insurable interest," notwithstanding English law's former refusal to recognize that such a buyer has either a legal or equitable title to such unascertained goods. 69

S9

This is supported by developments in the field of liability cover: see 3.58ff below.
63
64

See, eg Anderson v Morice (1876) 1 App Cas 713 (see 3.44 below), where the assured buyer could have insured against lost profits under the sale contract but fatally insured the goods that were lost before property or risk could pass. Likewise, in Macaura v Northern Assurance Co Ltd [1925] AC 619 (see 3.32 above), the assured could have insured against debtor default or loss of shareholder profits but fatally insured the property of the debtor company in which he held shares. See also Deepak Fertilisers & Petrochemicals Corp v ICI Chemicals & Pofymers Ltd [1999J 1
60

The point at which an insurable interest in freight arises is discussed at 3.52ffbelow. Robertson v Hamilton (1811) 14 East 522; Ebsworth v Alliance Marine Insurance Co (1873)

Lloyd's Rep 387; see 3.63 below. 61 Feasey v Sun Lift Assurance Corp o/Canada [2003J EWCA Civ 885, [20031 Lloyd's Rep IR 637, [75J per Waller LJ. See also MIA 1906, s 26(3). 62 OKane v Jones (The Martin P) [2003J EWHC 2158 (Comm), [20041 ILIoyd's Rep 389, para 141.

LR8 CP 596. 65 (1867) LR 2 Ex 139. 66 [1996J 1 Lloyd', Rep 614, 623. See also Feasey v Sun Lift Arsurance Corp v/Canada [20031 EWCA Civ 885, [20031 Lloyd's Rep IR 637, para 66. 67 MIA 1906,,14(3). 66 Inglis v Stock (1885) 10 App Ca, 263, 69 Sale of Goods Act 1893, s 16; Re Wizitll927J 1 Ch 606. See now Sale of Goods Act 1979,
ss 16, 20A, as amended by the Sale of Goods (Amendment) Act 1995. recognizing a tenancy in common.

80

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Insurable Interest, Illegality, and Public Policy

3.44 Whether a buyer ofgoods has an insurable imerest may turn upon fine poims of

Insurable Interest
whereas the sellers had no right ro repossess and unload the goods unless rejected by the buyer. 73 A secured creditor benefits from an insurable imereSt in the property over which 3.46 the creditor has a security interest ro the value of the outstanding secured debt, while the owner!debror retains an imerest in the full value of the insured property. 74 An unsecured creditor, in contrast, has no interest in its debtor's property, but merely an expectation or a possibility of repayment from the fruits thereof." In Macaura v Northern Assurance Co Ltd,76 the owner of a timber estate sold all the timber to a timber company in return for 42,000 fully paid 1 shares, the only shares the company issued, and then insured the timber against fire. When the assured was still owed 19,000 by the company, a fire destroyed most of the timber, but the House of Lords held thar the assured had no insurable imerest in the timber as eithet sole shareholder or crediror. A shareholder has no legal or equitable interest in the company's propetty. 'He is emitled to a share in the profits while the company cominues ro carry on business and a share in the distribution of the surplus assets when the company is wound Up.'77 Thus, while amicipated profits from a marine advemure confer an insurable imerest on a shareholder in the company undertaking the advemure," even a sole shareholder has no insurable imerest in the assets of the company. Qua crediror, the assured failed because he had taken no security over the timber. Lord Buckmaster conceded that, since the timber constituted the sole asset of the company, there was a moral certainty of the assured sustaining a loss in the evem of its destruction. However, 'this moral certainry becomes dissipated and lost if the asset be regarded as only one in an innumerable number of items in a company's assets and the shareholding be spread over a large number of individual shareholders'." Lord Sumner subjected the assured's position to the following clinical analysis:'o
The debt was not exposed to fire nor were the shares, and the fact that he was virtually the company's only creditor while the timber was its only asset, seems to me to make no difference. He stood in no 'legal or equitable relation to' the timber at all. He had no 'concern in' the subject insured, His rdation was to the company,

interpretation of the contract of sale. In Anderson v Morice,70 the assured was the buyer of 'the cargo of new crop Rangoon rice, per Sunbeam . .. Payment by sellers' draft on purchaser at six momhs' sight, with documems attached'. Mter loading most of the cargo, the vessel sank and both vessel and cargo on board were lost. On the basis that the subject-matter of the contract was a complete cargo of rice on the Sunbeam, the Court of Exchequer Chamber denied the assured recovery for lack of an insurable imerest. Although the parties might have agreed rhat risk was to pass to the buyer in each bag of rice as individually loaded, such was not the true construction of the comract, pursuam ro which rhe seller had ro load a full cargo before being able to prepare shipping documems and require the buyer ro accept the goods and pay. An appeal to the House of Lords was unsuccessful, the four members of the House who heard the appeal being evenly divided.
3.45 In Colonial Insurance Co ofNew Zealand v Adelaide Marine Insurance CO,71 in contrast, the seller comracted to supply a catgo of wheat at the port of Timaru free on board the Duke of Sutherland, a vessel chartered by the buyer, who insured 'wheat cargo now on board, or to be shipped' in the Sutherland. After loading of the cargo had commenced, the vessel and the wheat on board were lost by a covered petiJ. The Privy Council observed that the word 'cargo' was susceptible of various imerpretations. In context, it referred merely to such a number of bags of wheat as the vessel could properly carty, risk passing in each bag as loaded on board, as opposed ro the indivisible bulk cargo sold and insured in Anderson which came imo existence only once the full quantity had been loaded on board. In Anderson, moteover, the carrying vessel had bee~ chartered by the sellers who were ro receive freight for the carriage of tite rice. Consequently, the loading in Anderson did not constitute delivery ro the buyers, who were to look to the shipping documems, which were ro be under the sellers' directions. In the Colonial case, in comrast, the Sutherland having been chartered by the buyer, loading on board the vessel constituted delivery ro the buyers pursuant to the comract of sale on FOB terms, the master of the Sutherland receiving the cargo on board as agem for the buyers and issuing bills of lading in accordance with their instructions. 'The sellers had nothing to do with the wheat Ot the destination rhereof after it was on board.''' The buyers in the Colonial case, moteover, had an imerest in the part delivery in that, had the sellers failed to complete delivery, the buyers would have been emitled ro retain the wheat loaded on boatd against payment of a proportionate part of the comract price,

not

to

its goods, and aftet the fire he was ditectly prejudiced by the pancity of

the company's assets, not by the fire.

As noted above, some uncertainty attends the meaning to be attached to the 3.47 reference by Lawrence J in Lucena v CraujUrd to moral certainty, yet the

70 (1874) LR 10 CP 58, rvsd (1875) LR 10 CP 609, affd (1876) 1 App Cas 713. " (1886) 12 App Cas 128. 72 ibid 137 per Sir Barnes Peacock.

73 The insurability of the buyer's defeasible interest is confirmed by MIA 1906, s 7. " ibid s 14(1); Irving v Richardson (1831)2 B & Ad 193. 75 Moran, Galwway & Co v Uzieili [190512 KB 555, 562. 76 [1925] AC 619. 77 ibid 626-7 per Lord Buckmaster. 78 Wilion vJones (1867) LR 2 Ex 139, see 3.28 above. " [1925J AC 619, 627. 80 ibid 630.

82

83

Insurable Interest, Illegality, and Public Policy

claimant in Macaura was 'so circumsranced with respect to [the timber] as to have benefit from its existence, prejudice from its destruction', In Macaura, however, the House of Lords rejected the breadth of the approach of Lawrence ] and unequivocally held thar the fact of highly probable financial prejudice from loss of or damage to property does not, of itself, suffice for an insurable interest in that property, There must in addition be some 'concern in' the subject-matrer insured in the form of a 'legal or equitable relation',
3.48 It may be nored, however, that a creditor, whether secured or unsecured, can insure against the risk of its debtor's insolvency,81 Moreover, in Moran, Galloway & Co v Uzielli,82 Walton ], while denying the unsecured creditors of a single ship company an insurable interest in the vessel by virtue of the debt, held that the creditors had an insurable interesr in the ship by reason of their right to bring in rem proceedings in a Court ofAdmiralty, 3.49 An insurable interest may arise in property if its loss or damage would deprive the assured of the opportunity ro carry our work in relation to rhe property and rhereby earn remuneration, A ship's managers, therefore, have an insurable interest in the managed vesse1. 83
3.50 A mere contracruallicence to use is probably insufficient of itself to create an

Insurable Interest
It has also become clear thar liability may form rhe basis for an insurable interest in property, Thus, in Feasey v Sun Lift Assurance Corp ofCanada," a P&I club sought ro reinsure its liability ro indemnifY its members in respecr of rheir liability for personal injuty and illness sustained by an 'original person', namely one engaged in any capacity on board a vessel or offshore rig entered with the association. It did so, however, not by a conventional reinsurance contract but by taking our a policy against injury or illness sustained by an original person. The reinsurers in rum covered their liability under a furrher reinsurance contract. Subsequently, one of the second rier of reinsurers raised the defence that the P&l club had no insurable interest in rhe original persons, Ir was held, however, that the liability of the club generated an insurable inrerest in rhe lives and wellbeing of original persons, Similarly, contractors and sub-contractors thar are contracted to work on a project have been held to have an insurable interest in the entirety of the projecr property in respecr ofwhich they may incur liability.89

(b) Insurance on feight, hire, andprofits

The rraditional approach is thar freight, even if the subject of a binding con- 3.52 tract, has no exisrence until the vessel has embarked upon the freight-earning adventure. 90 There is then said to arise an inchoate right to freight, which can support an insurable interest. The case law, however, stretches rhe concepr of an inchoate right to freight to situations where the vessel is ready, willing and able ro embark on rhe freighr-earning voyage or has at least taken prepararory steps demonstrating an intention to perform it, Such prepararory steps have been held ro include embarking upon the outward voyage to the port of loading of cargo for the freight-earning return voyage" and srarring alrerations or repairs ro enable the vessel to load cargo,92 Indeed, so elastic has the concept of an inchoate right to freight proved ro be that examples of an assured being denied recovery for want of insurable interest despite a binding contracr ro earn freight are elusive. 93 There are dicta, moreover, that suggest that a binding contract to earn freight is all that is requited for an insurable interest. 94 Given rhe evolutionary nature of rhe docrrine of insurable interest and the commendable judicial relucrance to see recovery denied for want of insurable interesr where the insurance does not offend public policy, it is tempting to suggest that today no court

insurable interest,84 bur a licence ro use coupled with acrual occupation and enjoyment of property has been held ro generate an insurable interest in rhe relevant property,85 Moreover, in The Moonacre,86 a yacht was acquired for the benefir of the claimant. For tax reasons, ownership was vested in an off-rhe-shelf company, which, by two irrevocable, fixed term powers of atrorney, granted unlimired and exclusive powers of management and disposal to the claimant, in" whose name the yachr was insured, Colman QC87 held that the powers of atrorney conferred a benefit contingent on the continued safety of thevessel sufficient ro constirute an insurable interest, Macaura was distinguished on the ground that the powers of atrorney created a direct relationship between the claimant and the yacht. The corporate veil merely disguised the claimant's genuine inrerest in the yacht, rhe reality and immediacy ofwhich was in contrasr ro the unsecured crediror's insulation from rhe assets of its debtor,

Waterkeyn v Eagle, Star & British Dominions Insurance Co Ltd(1920) 5 LlLRep 42. [1905) 2 KB 555, 83 Thames & Mersey Marine Insurance Co Ltd v Gunflrd Ship Co Ltd [1911J AC 529 549' OKane v jones (The Martin P) [2003J EWHC 2158 (Comm), [2004J 1 Uoyd's Re~ 389: paras 154-157, 84 Glengate~KG Properties Ltd v Norwich Union Fire Insurance Society Ltd (1996] 1 Lloyd's Rep 614,622,624, 85 Goulstone v Royal Insurance Co (1855) 1 F & F 276. " Sharp v Sphere Drake Insurance pic (The Moonacre) [1992J 2 Lloyd's Rep 50L 87 Sitting as a deputy judge.
81

82

88

[2003J EWCA Civ 885, [2003] Lloyd's Rep IR 637.

89

See 3.58ffbelow,

" Thompson v Taylor (1795) 6 TR 478, 91 Barber v Fleming (1869) LR 5 QB 59, 92 Truscott v Christie (I 820) 2 Brod & B 320; Devaux v j'Anson (1839) 5 Bing NC 519, 93 Arnould, Law of Marine Insurance & Average Sir Michael MustiIl and J Gilman (eds)
(l6tb edn, 1981) para 362, 94 Barber v Fleming (1869) LR 5 QB 59, 67; Foley v United Fire & Marine Insurance Co of Sydney (1870) LR 5 CP 155, 163,

84

85

Insurable Interest, Illegality, and Public Policy

would deny recovery on a freight policy where an assured with a contract to earn the insured freight had undertaken no steps whatsoever towards performance of the freight-earning contract.
3.53 In addition, by 1901 it was clear that a shipowner had an insutable interest in

Insurable Interest
The nineteenth century also saw an increasing acceptance of insurance of 3.55 profits. Their insurability had been established before Lucena v Craufurd but Lord Eldon was dear that no insurable interest could lie in speculative profits. Thus, where a vessel embarked on a voyage to seek trade in the expectation of profit, that hope of profit that might or might not be realized could not found
an insurable interest. 10l In contrast, profit secured by contract was insurable. 102

the income-generating capacity ofa ship, 'entirely independent of any particular contract for the payment of freight or hire'. 95 Today, shipowners will commonly protect the income expected to be generated by vessels by time policies covering loss of hire or loss of earnings, or business interruption policies. Issues of quantification ofloss may be addressed by including an agreed value for the financial interest at risk. Such policies give rise to issues of interpretation of the extent of
cover, rather than questions of insurable interest.
96

3.54 Such an approach provides the basis today of insurance on freight. In this sense,

HobhouseJ commented that insurance on freight 'is not a ptofits insurance bur has as its underlying concept that part of the value of a vessel or of a voyage or other adventure as its capacity to earn freights'. 97 Consequently, the technical issues of insurable interest canvassed above are unlikely to arise. Moreover, the Institute freight clauses provide that: 'In the event of the total loss (actual or constructive) of the Vessel herein named the amount insured shall be paid in full, whether the Vessel be fully or partly loaded or in ballast, chartered or unchartered.''' According to Lord Wright in Robertson v Petros M Nomikos;99
The [final] words of the clause, 'or in ballast, chartered or unchartered,' seem to be intended to exclude in the most unqualified manner any other question of an assured's insurable interest in the freight. The policy is a time policy,100 and the intention may be to secure that even if the vessel at the time of the casualty has no cargo on board (that is, in ballast) and has no charter, there shall be no question of insurable interest, though it is not likely that any underwriter would thin,k of
raising such a question in a case of this type. The intention may be to provide that the owner's interest in the profit-earning capacity of his ship, which is certainly a good interest in a business sense, should be deemed a sufficient insurable interest

Moreover, Lord Eldon's restrictions were sidestepped by regarding the potential, albeit uncertain, profitabiliry of cargo as part of the cargo itself and inflating the agreed value of cargo under a cargo policy to reflect that profit element. 'O' In Eyre v Glover,,04 Lord Ellenborougb C] asked: 'Are profits any thing more than an excrescence upon the value of the goods beyond the prime cost?' Of course, that device is available only to those entitled to procure cargo insurance by reason of an insurable interest in the cargo and is subject to the limitations on cover found in cargo policies. Thus, where the adventure becomes impossible to perform before risk attaches under a cargo policy or by reason of a casualty not covered under such a policy, as where the carrying vessel is disabled and prevented from reaching the port of loading, the assured will not be covered. 'Os However, as already discussed, it was held in Wilson vJones'O' that an anticipated financial gain through a rise in the value of the shares of a company undertaking a maritime adventure gave a shareholder in the company an insurable interest in the adventure. It appears to follow that any party with a right to gain from a profitable voyage has an insurable interest in the marine adventure and can insure anticipated, albeit uncertain, profits through an appropriately drafted policy on the adventure. '07

(c) Liability insurance

An interest in a marine adventure or in any property at risk in such an adven- 3.56 ture, such that third parry liability may be incurred by reason ofa casualty in the
course of that adventure, constitutes an insurable interest. 108 Liability cover,

for [the] purposes of this policy. 1should see no legal obstacle why this agreement
should not receive effect.

indeed, forms an indispensable aspect of a shipowner's insurance, provided in part by the hull and machinery policy bur principally through membership of a P&I club.

95 Manchester Liners Ltd v British & Foreign Marine Insurance Co Ltd(1901} 7 Com Cas 26, 33 perWaltonJ. " See, eg IF P&c Insurance Ltd (Publ) v Silversea Cruises Ltd [2004] EWCA Civ 769, [2004] Lloyd's Rep IR 696 (claim by operators of cruise liners for loss of income as a result of terrorist attacks in New York on 11 September 2001). 97 Ikerigi Compania Naviera SA v Palmer (The Wondrous) [1991] 1 Lloyd's Rep 400, 417 per Hobhouse J. 98 Institute Time Clauses Fteight (1/8/89), d 15.1; (1/11/95), d 16.1; Voyage Clauses Fteight (1/8/89), d13.l; (1111/95), dl2.1. 99 [1939] AC 371. 384. 100 Although the same provision is found in Institute voyage clauses for freight.

Lucena v CraujUrd(l802) 2 Bos & Pul (NR) 269, 326. Royal Exchange Assurance Corp v M'Swiney (1849) 14 QB 646. 103 Stockdale v Dun/op (1840) 6 M & W 224, 232-3. '" (1812) 16 East 218, 220. 105 ibid. See also Halhead v YtJUng (1856) 6 1 & Bl 312. Characterization as an insurance on goods also meant it fell within the MIA 1745, so that inclusion of a policy proofof interest clause rendered the policy void: Smith v Reynolds (1856) I H & N 221. 105 (1867) LR 2 Ex 139. 107 Cepheus Shipping Corp v Guardian Royal Exchange Assurance pic (The Capricorn) [1995] 1 Lloyd's Rep 622, 637 (loss of earnings, but profits analogous); Glengate-KG Properties Ltd v Norwich Union Hre Insurance Society Ltd [1996] 1 Lloyd's Rep 614, 622.
10'

102

108

MIA 1906, ss 3(2)(c), 5(2).

86

87

Insurable Interest, Illegality, and Public Policy

(4) Limited Interests
3.57 An insurable interest is required to enable an assured to recover in the event of a

Insurable Interest
one assured can recover in full in respect of rhe entire loss sustained. Such recovelY will be beneficially for that assured to the extent of the loss sustained by its interest and held on aCCount in respect of rhe remainder for the benefit of the other assureds that have sustained 10ss.117 The quesrion arises, however, of how a sub-contractor can claim an insurable interest in the plant or vessel itself. The answer has been the development of the 'pervasive interest'."8 This was described by Rix J in State ofthe Netherlands v Youell:' 19
The concept of separate interests under a composite insurance is ... to be distinguished from the concept of a pervasive interest which the owner of one such separate interest may have to claim in respect of all the loss suffered by all separately interested co-assureds under a single policy on property. A pervasive interest in this sense partakes ofcertain characteristics of both a separate interest and a joint interest for the very good reason that in such a case the claimant is entitled to claim

loss. However, that interest does not prescribe the extent to which insurance can be effected or indemnity recovered in the event of a casualty. 'A person having a limited interest may insure either for himself, and to cover his own interest only, or he may insure so as to cover not only his own limited interest, but the interest of all others who are interested in the ptoperty."o, Where the interests of others are also covered, in the event of a casualty, the assured can recover in excess of its insurable interest, but must then account to the other interested parties to the extent that the measure of indemnity received responds to loss in excess of the assured's interest. 110 For example, a bailee such as a warehouseman or a carrier can insure goods entrusted to its care for their full value and recover in full in the event of a total loss. A bailee is not limited to its own intetest in the goods as a secured creditor wirh a lien for its charges or with respect to its liability to the bailor."' Likewise, a mortgagee can insure mortgaged ptoperty for its full value and not merely to the extent of the mortgagee's interesr." 2 The party with the limited interest is not, however, a trustee of the policy or the right to claim for the benefit of the other interested parties to the extent of their interests. They acquire no rights against the insurer, only against the assured in respect of indemnities received in excess of the loss sustained by the assured's interest.'13 Such rights ate ptobably not confined to a petsonal obligation to account bur extend to a ptoprietaty interest by way of charge." 4
(5) Pervasive Interests 3.58 Composite policies designed to insure against the incurring of liability may be

not only for himself but also for the benefit ofhis co-assureds in the full amount of the loss. By a pervasive interest is meant the right to claim an insurable interest in the whole property, analogous to the well-known right of a bailee to insure for the total value of the property bailed and nat merely ro the extent of his liability interest as bailee:
if the property is lost or destroyed, the bailee can recover for the whole value of the

property even though he may be under no liability to the owner, and he holds the
proceeds of insurance in truSt for the owner ...

drafted in the form of property rather than liability insurance. '15 For example, a composite policy may be taken out in the context ofa construction or shipbuilding contract under which the entire plant or vessel being constructed is insured for the benefit of the head contractor and each sub-contractOr. '16 In the event of a casualty, each co-assured can claim in respect of its individual loss, but also any

As Rix J indicates, the pervasive interest is considered to be analogous to and, 3.59 indeed, a development of the ability of the holder of a limited interest to insure for the benefit of all interested parties. There is, however, a major difference. The reasoning in the limited interest cases does not involve the creation of a new category of insurable interest. Instead, it permits the holder of a limited interest to insure the property in which the holder is interested beyond the extent of that interest and recover, in the event of a loss, for the benefit of others with an interest. The concept of rhe pervasive interest, however, confers an insurable interest on parties that would otherwise lack any insurable interest in the insured property. In Petrofina (UK) Ltd v Magnaload Ltd, 120 suppliers of heavy lifting equipment 3.60 used in the construction of an extension to an oil refinery were held to have a pervasive interest under a contractors' all risks policy in the entirety of rhe contract works. In particular, they had an insurable interest in contract works

Castellain v Preston (I883) 11 QBD 380, 398 per Bowen L]. '" DG f,nance Ltd v Scott [1999J Lloyd's Rep lR 387. 111 'Waters v Monarch Fire & Life Assurance Co (1856) 5 1 & B1870; Tomlinson (Hauliers) Ltd v Heppburn [1966J AC 451. m MIA 1906, s 14(2). '" DG Finance Ltd v Scott [1999J Lloyd's Rep lR 387. '>4 Re Dibbens [1990J BCLC 577.
109
115 A court faced with a policy drafted as a property policy will not strain to construe it as a liability policy simply because the underlying commercial purpose is to address liability: 1Omlinson

(Hauliers) Ltd v Hepburn [19661 AC 451: Petrofina (UK) Ltd v Magnaload[1984J QB 127.
116 It is a question of interpretation whether the policy insures each co~assure~separately to the extent of its own interest or whether it covers the entirety of the contract works for the benefit

See the discussion oflimited interests at 3.57 above. The concept of a pervasive interest was pioneered by the Supreme Court of Canada in Commonwealth Construction Co Ltd v Imperial OilLtd (l 977) 69 DLR (3d) 558 and relied upon
117
118

separarely of each co-assured: Petrofina (UK) Ltd v Magnaload Ltd [1984J 1 QB 127, 134.

as persuasive aurhority hy Lloyd] in Petrofina (UK) Ltd v Magnaload Ltd [19841 1 QB 127, see 3.60 below. '" [199712 Lloyd's Rep 440, 448-9. 120 [19841 QB 127.

88

89

Insurable Interest, Illegality, and Public Policy

damaged in the course of dismantling the lifting equipment, despite the fact that they lacked any connection to the insured property of the type required by the House of Lords in Macaura v Northern Assurance.'21 Lloyd J acknowledged that the bailee cases had been based in part on reasons peculiar to bailment that did not apply to contractors' policies and did not address Macaura, but observed that the limited interest cases were additionally founded on commercial convenience also clearly present in the case of contract~rs'

Embodiment in a Policy
stretch as far as commercial convenience calls for the composite policy to extend. 128 National Oilwell was, thus, applied to a service provider to a construction project in Hopewell Project Management Ltd v Ewbank Preece Ltd.'" There are, nevertheless, limits. For example, once a contractor on a construction project and co-assured under a composite policy has complered its work and withdrawn its equipment, so that the only remaining connecrion between the contractor and the property is potential liability, the sub-contractor cannot have any insurable interest in the structure under construction. 130 Cover in respect of such liability will have to be provided by a genuine liability policy. A pervasive interest is consistent with the separare or severable interest analysis 3.64 of composite policies and does not compel the different assureds to be treated as joint assureds. 131

poIICles. 122
3.61 The pervasive interest docrrine has subsequently been extended to cases where a

supplier of equipment to be used in a construction project itself takes no part in on-site work. In Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd, 123 Colman J applied the doctrine to a sub-contractor that supplied a tailshaft to be incorporated into a vessel being constructed by the main contractor and principal assured. The relevant question was:
.. . whether the supplier of a part to be installed in the vessel or contract works

B. Embodiment in a Policy
Section 22 of the Marine Insurance Act 1906 provides as follows: 'Subject to the 3.65
provisions of any statute, a contract of marine insurance is inadmissible in

under construction might be adversely affected by loss of or damage to the vessel or

other works

by reason of the incidence of any of the perils insured against by the policy in question. If the arr&wer is in the affirmative there is no reason why such a
to

sub-contractor should not also have sufficient interest in the whole contract works

be included as co-assured under the protection of the head contractor's pOlicy.124

3.62 This extension of the doctrine was then reconsidered and confirmed by Colman

J in National Oilwell (UK) Ltd v Davy Offihore Ltd, 125 where a sub-contractor
who supplied part of a floaring oil production facility being constructed by the main contracror and principal assured for use in the North Sea was held to haye an insurable interest in the entirety of the insured property. Colman J observed that an insurable interest does not demand a proprietary or possessory interest in the insured property, but can arise 'from the existence of a contract between the assured and the owner of the property or from the assured's proximate physical relationship to the property in question'."'In Feasey vSun Life Assurance Corp o/Canada,127 the Court ofAppeal approved the recognition of an insurable interest in property based on a contractual connection to the property and liability for damage to it.
3.63 It may generally be expected that the doctrine of the pervasive interest will

evidence unless it is embodied in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract is concluded, or afterwards. '132 The origin of this provision lies in the levying of stamp duty, ar speci'llly enhanced rates, upon marine insurance contracts by the Stamp Act 1795. 133 Stamp duty is a tax on documents, not transactions. Consequently, in order to prevent avoidance of the duty, marine insurance contracts were subjected to various regimes of formalities, of progressively diminishing severity, until the Marine Insurance Act 1906 accepted the validity but denied the admissibility in evidence of any contracr of marine insurance not embodied in a policy 'in accordance with this Act'. Secrion 23 of the Act then required rhe policy to specify five particulars. By 3.66 virtue ofsection 23(1) the policy had to state the name of the assured or ofsome person effecting the insurance on his behalf. Secrion 23(2) to (5) required rhe policy ro specify further the subject-matter insured and the risk insured against;

121 See 3.52 above. 122 See 3.63 below. '" [199Il 2 Lloyd's Rep 288, rvsd on different grounds [1992J 2 Lloyd's Rep 578. 124 [1991] 21.l0yds Rep 288, 301. 125 [1993] 2 Lloyd's Rep 582. 126 ibid 611. For an example of insurable interest based on contract in ordinary property insurance, see Sharp v Sphere Drake Insurance pic (The Moonacre) [1992] 2 ~loyd's Rep 501, at 3.50 above. ' m [2003J EWCA Clv 885, [2003] Lloyd's Rep lR 637, see 3.51 above.

128 In National Oi/well Colman J remarked that the commercial justification for such policies was 'a sound and compelling basis for English courts to recognize an insurable interest where so to hold would not be contrary to principle': [1993] 2 Lloyd's Rep 582, 611. '" [199811 Lloyd's Rep 448, 456. 130 Dupak Fertilisers & Petrochemicals Corp v ICI Chemicals & Polymers Ltd [1999] 1 Lloyd's Rep 387. 131 State ofthe Netherlands v Youell [1997] 2 Lloyd's Rep 440. 132 The second sentence codifies the decision in Mead v Davison (1835) 3 A & E 303.

me

133 On stamp duty and marine insurance contracts, see H Bennett, 'The Role of the Slip in Marine Insurance Law' [1994] LMCLQ94.

90

91

Insurable Interest, Illegality, and Public Policy

the voyage, period of time or both covered by the insuranc~; the sum or s:,ms insured; and the name or names of the insurers. These prOVIsIons were denved from the Stamp Acr 1891.
3.67 In the Finance Act 1959 marine insurance was aligned with orher forms of insurance reducing the tariff and removing formalities. Consequently, both the ecial m~rine insurance provisions in rhe 1891 Stamp Acr and their derivatives' sP . ald 134 in section 23(2) ro (5) of the Marine Insurance Act 1906 were repe e . Ultimately, stamp duty on marine insurance contracrs was abolished by the Finance Act 1970. There is, therefore, no fiscal reason why marine insurance contracts should continue ro be excluded from evidence unless embodied in a

Illegality ofthe InsuredAdventure

C. Illegality of the Insured Adventure

The contaminating effect of an illegal voyage was clearly stated by Tindal CJ in 3.70 Redmond v Smith: 144 'A policy on an illegal voyage cannot be enforced; for it would be singular, if, the original contract being invalid and incapable to be enforced, a collateral contracr founded upon ir could be enforced. It may be laid down, therefore, as a general rule, thar, where a voyage is illegal, an insurance upon such voyage is illegal.' Accordingly, section 3(1) of the Marine Insurance Act 1906 provides that 'every lawful marine adventure may be the subjecr of a contract of marine insurance', and section 41 states as follows: 'There is an implied warranty that the adventure insured is a lawful one, and that, so far as rhe assured can control the matter, the adventure shall be carried out in a lawful
manner.'

policy.
3.68 The statutory requirement for a policy found in section 22 remains unrepealed, but the statutory requirements for a document to qualifY as a policy 'in accordance with [the 1906J Act' are few. A document need merely comply wirh section 23(1), be signed by or on behalf of the insurer,'" and designate the s:,bjectmatter insured with reasonable certainty.136 Today, moreover, should the Insurer refuse to execute a policy, then, provided the premium has been paid or tendered,137 the assured may maintain an action for breach of a collateral contracr to execute a policy. In Fisher v Liverpool Marine Insurance CO,138 rhis action was denied on the ground that it vv:as tantamount to suing on a marine insurance contract in the absence of a sramped poliey, and, in Genfimikrings Aktieselskabet (Skandinavia Reinsurance Company ofCopenhagen) v Da Costa, 139 an oral agreement to issue a stamped poliey was held unenforceable for the same reason. The abolition of stamp duty on marine insurance contracts, .however, removes the

Where, rherefore, the insured adventure is illegal ab initio, no valid conrract of 3.71 insurance is ever created. Where the adventure is initially lawful but overtaken by supervening illegality, rhe insurer's liability is automatically discharged prospectively.'45 However,. simply because rhe performance of the advenrure contravenes the law does not necessarily render rhe adventure itself unlawful. In Archbolds (Freightage) Ltd v S Spanglett Ltd, 146 a contracr for the carriage of goods was not rendered illegal by rhe carrier's failure to have a licence required by statute. The purpose of the srarure was not to prohibit carriage of goods conttacts but to regulare the providers of transport. The conrract of carriage itself was not, rherefore, illegal and rhe rights of the owner of goods would be affected only if rhat party knew the carrier could not perform the conttact wirhout violating the law. According to Pearce LJ: 147
If a contract is expressly or by necessary implication forbidden by statute, or if it is ex facie illegal, or if borh parries know that rhough ex facie legal it can only be performed by illegality or is intended to be performed illegally, the law will nor
help the plaintiff') in any way that is a direct or indirect enforcement of rights under the contract. And for this purpose both parties are presumed to know

fiscal barrier to recognition of such an action.

3.69 There is no requirement that the poliey specifY the nature and extent of any assured's interest in the subject-matter insured. 140 Where the subject-matter insured is described in general terms, the poliey is interprered as applying to rhe . . interest intended by the assured to be covered .141 Th us, earners can Insure t h' elf liability through a policy 'on goods"42 and insurers can reinsure through a

the law. In consequence, where, withour rhe knowledge or privity of the assured shipowner, a lawful voyage which can be lawfully performed is in facr performed

poIley on cotton.

<

, 143

134

Along with s 25(2) of the Act, which restricted time policies to a duration not exceeding

12 months. 135 Required by MIA 1906, s 24(1). '" Req~ired by ibid s 26(1). .. .. 137 Delivery of the policy and p~yment of the premIUm are concurrent condmons: lbld s 52. 138 (1874) LR 9 QB 418. . 139 [19111 1 KB 137. See also Re Clyde Marine Insurance Co (1924) 17 LlLRep 287. '" MIA 1906, s 26(2). '" ibid s 26(3). '" Crowley v Cohen (1832) 3 B & Ad 478. 143 Mackenzie v Whitworth (1875) 1 Ex D 36.

'44 (1844) 7 Man & G 457, 474. To that extent, the effect of illegality mirrors that of breach of a promissory warranty, discussed at 18.58 below. The use of the term 'warranty' in this context is, however, inappropriate because the insurer cannot waive illegality whereas a breach of warranty can be waived: MIA
145

QB 374. See also Redmond v Smith (1844) 7 Man & G 457; Hughes v Asset Managers pic [1995J 3 All ER 669. The effect of war on contracts of insurance is discussed below. f47 At 384. See also w"ugh v Morris (1 873) LR 8 QB 202, 208; Fielding & Platt Ltd v Najjar
[1969] 1 WLR 357.

1906, s 34(3). "6 [1961] 1

92

93

Insurable Interest, Illegality, and Public Policy

unlawfully by the master, the assured's insurance rights will be unaffected. Indeed, the master's illegal conduct may constitute the peril of barratry.'4'
3.72
148

Illegality ofthe Insured Adventure

refusing ro enforce that right'. Consequently, the gravity of the anti-social act must be weighed against the harm resulting from a refusal to enforce the right. This approach was espoused in the South Mrican case of The Morning Star'58 3.74 The assured's fishing vessel was arrested for illegal fishing outside the territorial waters but within the exclusive economic zone of Mozambique. Friedman J noted the 'rather fluid' nature of public policy 'which may vary according to rime, to place and to facts and circumstances' and declined ro recognize any principle other than that'depending upon the nature of the crime and upon all other relevant facts and circumstances, it may be against public policy ro permit a claim under a policy of insurance where the assured has been guilty of either illegal or unlawful activities. Further than that one cannot go'.'59 The claim was not attributable to the assured's wilful misconduct and Friedman J held that it would not be contrary to public policy ro permit the assured ro recover. It is consequently suggested that the term 'lawful' in sections 3(1) and 41 of the 3.75 Marine Insurance Act 1906 should be interpreted as shorrhand for that which the law will not decline to enforce on grounds of public policy, rather than that which is not technically illegal. Requisite illegality in the insured adventure ro which the assured is privy will bar 3.76 all recovery on the policy even if the illegality affects only parr of the insured risk."o Thus, where parr of an insured cargo consisted of naval stores exporred without a required licence, Lord Ellenborough remarked: 'It may be a hard case if only a small quantity of naval stores be included in a cargo which is insured: but the smallest quantity renders the adventure illegal, and I have no scales to weigh degrees ofillegality."61 However, the assured's rights are unaffected by any illegality that does not affect the insured risk. In Bird v Appleton,''' separate hull and cargo policies were effected for the 3.77 homeward voyage at and from Canton to Europe. The vessel arrived with an illegal cargo of corron, the proceeds of which were used to purchase the return cargo, which was the subject of the cargo insurance. When the vessel was subsequently lost by capture on the voyage to Europe, the assured was held entitled ro enforce the cargo policy but not the hull policy. The adventure covered by the hull insurance included the full stay at Canton and the voyage to Europe, which could not be separated from that stay. Part of that adventure

Insurance contract law and illegality are nevertheless uneasy bedfellows.'50 Many a claim on insurance contracts succeeds despite the casualty taking the form of a criminal act committed by the assured and the maxim ex turpi causa non orirur actio (a tainted source gives rise ro no cause of action) must be applied with discrimination.'51 While public policy obviously requires that the benefit ofa policy oflife assurance should not accrue to the murderer of the life assured, the legislative intent behind compulsoty third party motor insurance would be defeated wete the benefit of the insurance ro be denied in the event of the driving contravening the criminal law as at least careless. Three issues must be kept distinct. First, the assured cannot recover unless a loss is proved ro be caused by a covered peril. The illegality mayor may not deny the existence of such a peril. Thus, an accidental fire and arson are equally within the insured peril of 'fire', whereas the requirement of fortuity within the definition of 'perils of the sea' excludes deliberate sinking by the master or crew. 152 Consequently, as an issue of intetpretation of the policy, where a shipowner deliberately destroys its ship by fire, a mortgagee will recover under a separate morrgagee's interest policy which covers the peril of fire, but where the scuttling takes the form of a deliberate letting in ofwater the lack of fortuity will prevent the mortgagee from recovering for a loss by perils of the sea. m Secondly, where the illegal act is that of the assured and either intenrional or reckless, the insurer may invoke the defence of wilful misconduct.'54 Thirdly, assuming the assured is prima ficie entitled ro recover under the policy, the question arises of a public poli')' defence and authority suggests the application of a flexible rule of reason.'55 maxim is not concerned with the lawfulness of the contract but merely denies the enforceability of rights arising 'out of an act committed by the person asserting the right (or by someone who is regarded in law as his successor) 157 which is regarded by the courr as sufficiently anti-social to justifY the court's
'" Wihon v Rankin (1865) LR 1 QB 162. Australasian Insurance Co v Jackson (1875) 33 LTNS 286. Barratry is discussed at 11.43ff

3.73 In Hardy v Motor Insurers' Bureau, '56 Diplock LJ observed that the ex tufpi causa

149

below.
See Sir Michael Mustill, 'Fault and Marine Losses' [19881 LMCLQ310, 317-27. This is particularly relevant to the insurance of liability for fines by P&I clubs. 152 Perils of the sea are discussed at 10.03ffbelow. '" Samuel (P) 6- Co Ltd v Dumas [1924) AC 431, discussed at 10.16 helow. 154 Discussed at 15. 1Off below. 155 GrayvBarr[197112QB554. 156 [196412 QB 745, 767. 157 An illegal act is not, therefore, an equity binding upon a prior assignee for value: ibid at 768; Beresford v Royal Insurance Co Ltd [1938) AC 586, 600. See also White v British Empire Mutual Lift Assurance Co (1868) LR 7 Eq 394. For discussion of assignment and marine policies, see 20. 12ff, esp 20.21-20.26 below.
150
151

Shooter v Incorporated General Insurances Ltd (The Morning Star) 1984 (4) SA 269,282-4. ibid 284. The authorities relied upon included the English cases of Re Crippen [1911] p 108; Beresford v Royailnsurance Co Ltd[19381 AC 586; Gray v Barr [19711 2 QB 554. 160 Cunard v Hyde (No 1) (1859) 29 L]KB 6. 161 Parkin v Dick (1809) 2 Camp 221, 223. ,,, (1800) 8 TR 562. See also Pieschell v Allnutt (1813) 4 Taunt 792; J(cir v Andrade (1816) 6 Taunt 498.
158 159

94

95

Insurable Interest, l!!egaliry, and Public Policy

being rendered illegal by the illegal outward cargo, the entirety of the hull insurance was invalidated. In contrast, it was found that the cargo policy attached only to the legal return cargo and held rhat the origin of the money employed in its purchase was irrelevant.

The Impact a/War on Contracts a/Insurance

of war is the crippling of the enemy's commerce, and to permit such an insurance would be to relieve enemies from the loss they incur by the action of British arms and would, therefore, be detrimental to the interests of the insurer's own coumry.169

D. The Impact oEWar on Contracts ofInsurance

3.78 If the United Kingdom is not a belligerent party to the conflict, the outbreak of war has no impact upon the rights of the parries to a contract of insurance. In any litigation arising out of such a war, which of the belligerents causes the loss is irrelevant. Thus, in Aubert v Gray, "3 a Spanish subject was held entitled to recovet against an English insurer by reason of the seizure of his ship by his own government. Moreovet, outbreak of war involving the United Kingdom has no impact upon the rights of a Btitish citizen under a contract of insurance, nor upon the rights of a neutral. "4 Nor, despite the fact that assisting the enemies of the Crown is contrary to public policy, does it invalidate an insurance contract with an enemy assured."s The impact of public policy in this regard upon contracts of insurance was encapsulated by Lord Davey in three rules in Janson v

Nor mayan enemy alien maintain an action against a British insurer for loss occasioned by his own Government,170 and the prohibition extends to any United Kingdom or neutral citizen who concludes an insurance contract as the agent of an enemy alien. 171 However, as the essence of the illegality lies in assisting the enemy, it is lawful to accept and sue for premiums. 172
Thirdly, 'if a loss has taken place before the commencement of hostilities, the 3.81 right of action on a policy of insurance ... is suspended during the continuance of war and revives on the restoration of peace' .173

Driefimtein Consolidated Mines Ltd."6

3.79 First, 'the King's subjects cannot trade with an alien enemy, ie, a person owing allegiance to a Government at war with the King, without the King's licence. Every contract made in violation of this principle is void' ."7 However, this principle of public policy assumes a state of actual war and 'threatened war or anticipated war or imminent war is peace' .168 3.80 Secondly, by way of corollaty:
... no action can be maintained against an insurer of an enemy's goods or ships against capture by the British Government. One of the most effectual instruments

169 See also Furtado v Rogers (1802) 3 Bos & Pul 191; Brandon v Curling (1803) 4 East 410. The prohibition extends also to loss occasioned by a co-belligerent: Brandon v Curling. 'Every kind of communication that could relieve the pressure of hostilities would be a violation of dury': Drieftmtein Consolidated Gold Mines Ltd v janson [1900] 2 QB 339, 343 per Mathew J. 170 [19021 AC 484,502 per Lord Btampton. '" ibid 499. 172 Seligman v Eagle Star Insurance Co [1917] 1 Ch 519. 173 See also Lord Lindley at 507; Harman v Kingston (1811) 3 Camp 150; Flindt v \,%oters (1812) 15 East 260.

(1862) 3 B & S 169. 164 Visger v Prescott (1804) 5 Esp 184. Seligman v Eagle Star Insurance Co [1917J 1 Ch 519. 166 [1902] AC 484, 499. 167 See also Esposito v Bowden (I857) 7 EI & B1763, 779 per Willes J, deliveting the judgment of the Court of Exchequer Chamber: 'It is now fully established that the presumed object of war being as much to cripple the enemy's commerce as to capture his property, a declaration of war imports a prohibition of commercial intercourse and correspondence with the inhabitants of the enemy's country, and that such intercourse, except with the licence of the Crown, is illegal.' On who is an enemy alien, see also per Lord Lindley, 505-6. 168 ibid 509 per Lord Lindley. See also Lord Macnaghten, 497 and Lord Halsbury LC, 492: 'the thing done muse be in its nature an assistance to the public enemy, and if there be no public enemy there call be no aid given to him. Nor is this a mere question of words: .the importance of the whole region ofpublic policy involved makes the actual existence of war' at the time of the creation of the contract or its fulfilment necessary'.
16'
165

96

97

4
THE DOCTRINE OF UTMOST GOOD FAITH

A. Evolution and Framework of the

E. Information
4.02

4.79
4,82

Doctrine of Utmost Good Fai~

(1) Misrepresentation and

non-disclosure in general
contract law (2) Insurance as a comract uberrimae

4.03 4.05 4.08 4.10

F. Misleading or Inaccurate Circumstances G. Circumstances not Requiring

Disclosure
(l) Diminution of the risk

fidei
(3) Utmost good faith in the Marine

4.89 4.90 4.91 4.99 4.106 4.108 4.1l1 4.113 4.1l7 4.122 4.123 4.124 4.125

Insurance Act 1906

(4) Voidable, not void (5) Source of the doctrine and the

(2) Within the insurd s actual or presumed knowledge (3) Waiver

(4) Warranties (5) Application to misrepresentation

remedy of avoidance: common law or equity? (6) Avoidance and rescission

4. II 4.22 4.23 4.27

H. Knowledge of the Assured (1) Who is the assured?

(2) Constructive knowledge

B. The Definition of Materiality (1) Materiality prior to Pan Atlantic v Pine TOp in the House of Lords
(2) Materiality in the House of Lords

I. Brokers and the Doctrine of

Utmost Good Faith (I) Independent duties (2) The relevant brokers (3) Scope of disclosure duty (4) Relationship between the duties of the assured and the placing broker

in Pan Atlantic v Pine TOp and beyond

4.35 4.41

C. Inducement
(1) Establishing the requirement for

(2) (3) (4) (5)

inducement as a matter oflega! principle The meaning of inducement Proof of inducement Inducement in a subscription market Negating inducement

4.129 4.130 4.131 4.133

4.42 4.44 4.53 4.61 4.64 4.66 4.67 4.69 4.72

J.

Actionable Misrepresentations (1) Representations of fact (2) Representarions of expectation or belief Section 17: Pre-formation Utmost Good Faith Beyond Sections

K. Marine Insurance Act 1906,

D. Circumstances Requiring Disclosure (1) The physical hazard (2) The moral hazard (3) Other circumstances relevant to assessment of the risk

18-20
(1) Fraudulent misrepresentation and
non-disclosure by the assured

4.147 4.148 4.150

(2) Non-marerial misrepresentation

and non-disclosure

99

The Doctrine ofUtmost Good Faith

(3) MiStake by the insurer, known to the assured (4) The insurer's pre~formation duties of utmost good faith
(2) Damages

Evolution and Framework ofthe Doctrine ofUtmost Good Faith

4.173 4.184 4.193 4.205

(I) Misrepresentation and Non-Disclosure in General Contract Law Prior to the fusion of the administration of law and equity by the Supreme 4,03 Court of Judicature Acts 1873 and 1875,5 the availability of rescission for misrepresentation was radically different at common law and in equity. A contract could be rescinded at common law only for fraudulent misrepresentation or where the misrepresentation went to the root of the contract so as to produce a total failure of consideration. 6 For these purposes, a statement was fraudulent if, at the time of its making, the representor knew it to be false, did not believe it
to be true, or was reckless as to whether it was true or false. 7 Equity, however,

4.151

M.

Co~insurance

4.152 4.154 4.155

N. Utmost Good Faith after the Formation of the Contract

O. Basis Clauses

L. Remedies
(I) Avoidance

4.01

English law adopts an advetsarial model of contractual negotiations, requiring each party to accept responsibility for its own interests. The law will assist a party that has been induced into a cOntract by an inaccurate or misleading statement, termed a 'misrepresentation'. A contract so induced is voidable, meaning that it is liable to be set aside retrospectively through the remedy of rescission. However, there is no general duty to volunteer information, even though it may be evident that such information would be regarded as highly relevant by the other party in deciding whether to contract and, if so, upon what terms. 'Tacit acquiescence in another's self-deception does not itself amount to a misrepresentation, provided that it has not previously been caused by a positive misrepresentation:' For example, specific performance of a compromise will be granted despite the failure by the plaintiff to disclose the result, favourable to the defendant, of certain proceedings in the litigation. 2 Insurance contracts, however, constitute an exception to the rule: they are contracts uberrimae fi'dei (of the utmost good faith), and the doctrine of utmost good faith not only reaffirms a passive dury to refrain from misrepresentation' but also imposes a pro-active duty to volunteer certain information. Breach of such duties affords the innocent party the option of retrospective avoidance of the contract.' The fact that the remedy is absolute and uncompromising has led to detailed scrutiny of all aspects of the doctrine.

recognized and gave effect to rescission more widely than the common law. In
its (concurrent' jurisdiction, equity recognized rescission in cases of fraud and

total failure of consideration, but more readily than the common law in that the bar to rescission of inability to mal<e proper restitution of benefits received
under the contract was more difficult to sustain in equity.8 Moreover, in its so-

called 'auxiliaty' jurisdiction, equity recognized the remedy of rescission in cases of misrepresentation that the representee could not prove to be fraudulent (somewhat misleadingly termed 'innocent' misrepresentations) and in the absence of a total failure of consideration.' Since the Judicature Acts, while the concurrent common law and equitable jurisdictions in respect of fraudulent misrepresentation and total failure of consideration remain, the auxiliaty equitable jurisdiction may be exercised in all courts and prevails in case of conflict,1O at least in terms of the availability of the remedy. A duty of disclosure, however,
has never been recognized as a matter of general contract law either at common

law or in equity, although if, after making a statement, a representor discovers either that it was false when made or that it has subsequently been rendered untrue by a change of circumstance, there arises a duty to correct the inaccuracy." Moreover, a statement will constitute an actionable misrepresentation

where it is literally true but misleading in that it fails to convey the full truth by

A. Evolution and Framework of the Doctrine of Utmost Good Faith

4.02 This section is concerned with conceptual issues relating to the doctrine of

virtue of a material omission. 12

In the concurrent common law and equitable jurisdictions, reSCISSiOn is a 4.04

utmost good faith and structural issues arising either within insurance contract law or in relation to the law of misrepresentation in general contract law.

Chitty on Contracts (29th edo, 2004) pata 6-013. Turner v Green [189512 Ch 205. 3 The law of misrepresematio'n is not founded conceptually on any positive duty to speak: HIH Casualty o-Generallnsurance Ltd v Chase Manhattan Bank [2001] 1 Lloyd's Rep 30, pata 63. 4 Technically, they are not 'duties' at all, but conditions precedent to the enforceability of the contract: Agnew v Liinsftrsiikringsbolagens AB (2001] 1AC 223,265-6: The'language of duty is, however, customary.
1

Which entered into force together on 1 November 1875. Kennedy v Panama, New Zealand 0- Australian Royal Mail Co Ltd (1867) LR 2 QB 580. 7 Deny v Peek (1889) 14 App Cas 337. The element of subjective disregard for the truth was emphasized in Thomas Witter Ltd v TBP Industries Ltd[199612 All ER 573,586-7. 8 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1278-9; Alati v Kruger (1955) 94 CLR 216,223-4. 9 Nocton v LordAshburton 119141 AC 932 at 951-954. 10 Redgrave v Hurd (1881) 20 ChD L 11 Davies v London Provincial Marine Insurance Co (1878) 8 ChD 469; With v OF lanagan (1936] Ch 575. Such a failure to correct is not necessarily fraudulent: Thomas Witter Ltd v TBP Industries Ltd 119961 2 All ER 573. 12 Notts Patent Brick 0- Tile Co v Butler (1886) 16 QBD 778.
5
6

100

101

The Doctrine ofUtmost Good Faith

self-executing remedy that does not require rhe intervention of a court." In equity's auxiliary jurisdiction, however, it appears that rescission was considered to be a remedy granted by court order. " However, more modern authority draws no distinction between the differenr rescission jurisdictions, applying the self-executing approach even to rescission arising exclusively in equity.'S (2) Insurance as a Contract Uberrimae Fidei 4.05 Contracts of insurance, in conrrast, are treated differently. Classified as contracts uberrimae fidei, the common law courts that assumed jurisdiction in the seventeenth century" both recognized a dury of disclosure and condemned nonfraudulenr misrepresentation. The seminal statement of the doctrine of utmost good faith, emphasizing an obligation volunrarily to disclose information relating to the risk presented for insurance, remains that of Lord Mansfield on 'the
nature of concealments' in Carter v Boehm: 17 Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter truStS to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void.

Evolution and Framework ofthe Doctrine ofUtmost Good Faith

Lord Mansfield further elaborated upon the scope of the disclosure obligation, identifYing a number of circumstances that did not require disclosure. The scope of relief against misrepresenration at the Same period is illustrated by 4.06 MacDowell v Fraser,'8 in which Lord Mansfield held an underwriter not liable on a policy on the basis of a non-fraudulent misrepresentation rhat a vessel had safely completed two-thirds of the insured voyage. The rationale behind the duty of disclosure is the imbalance of information 4.07 regarding the risk between the assured, whose knowledge is considerable, and the insurer, which is traditionally depicted as knowing only what the assured reveals. 19 The duty permits the insurer, whether considering the risk for the first time or renewing cover,20 to make a decision on the acceptability of the risk and the appropriate terms of cover on the basis of at least equality of information. Even today, when insurers have considerable sources of information available to them, the assured retains the more direct connection with the risk proposed for insurance and some informational advantage will generally obrain. (3) Utmost Good Faith in the Marine Insurance Act 1906 Under the Marine Insurance Act 1906, section 17 articulates a general doctrine 4.08 of utmost good faith, while sections 18 and 20 deal specifically with nondisclosure and misrepresenration by the assured in the presentation of the risk to the insurer. Sections 17, 18(1), and 20(1) provide as follows:
17 A contract of marine insurance is a contract based upon the utmost good

Although the suppression should happen through mistake, without any fraudulent
intention; yet still the underwriter is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, atthe time of the agreement.

faith, and, if the utmost good faith be not observed by either party, the
contract may be avoided by the other party. 18(1) Subject to the provisions of this section, 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. 20(1) EvelY 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.

The policy would be equally void, against the underwriter, ifhe concealed; as, ifhe
insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium.

13 Reese Silver Mining Co v Smith (1869) LR 4 HL 64; Clough v London & North TI7estern Railway Co (1871) LR 7 Ex 26: Car & Universal Finance Co Ltd v Caldwell [1965J 1 QB 525. " Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1278. 15 Abram Steamship Co Ltd v Westville Shipping Co Ltd [1923J AC 773: Alati v Kruger (1955) 94 CLR 216,224: Horsier v Zorro [1975J Ch 302, 310: Atlantic Lines & Navigation Co Inc v Hallam Ltd (The Lucy) [19831 1 Lloyd's Rep 188,202: O'Connor v Hart [1983J NZLR 280,295: O'Sullivan v Management Agency & Music Ltd[1985J 1 QB 428, 457: Allied Irish Bank pic v Byrne [1995J 2 FLR 325, 354: TSB Bank pic v Camfield [1995J 1 WLR 430, 438. See also the

Misrepresentation Act 1967, s 2(2), granting the courts a discretion in cases of rescission for non~ fraudulent misrepresentation (where rescission operates only in equity) to declare rhe contract subsisting and award damages in lieu where 'it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded' (emphasis added). For discussion, see J O'Sullivan, 'Rescission as aSelf-help Remedy: ACritical Analysis' [2000J CLJ509: J Poole and A

Section 17 is dearly cast in broader terms than sections 18 and 20, and judges 4.09 have repeatedly stated that sections 18 and 20 articulate specific duties that form part of a more general doctrine to which section 17 speaks. In doing so, (1779) 1 Doug1260.
Lambert v Co~operative Insurance Society Ltd [1975] 2 Lloyd's Rep 485.

18

" Greenhill v Federal Insurance Co Ltd [1927J 1 KB 65, 76-7: Rozanes v Bowen (1928) 32

Keyser, 'JusrifJing Parrial Rescission in English Law' (2005) 121 LQR 273. 16 See 1.37 ahove. 17 (1766) 3 Burr 1905,1909. 102

LlLRep 98, 102.

20

103

The Doctrine ofUtmost Good Faith

however, a number of judges have also made reference 1'0 secrion 19 of rhe 1906 Act, which articulates a duty of disclosure resting on any broker that is used, as one invariably is, to place rhe risk. 21 Indispurable authority establishes that this duty of the broker is owed directly to the insurer independently of any duty resting on the assured." Section 17, however, refers specifically 1'0 the observance of utmost good faith 'by either party', and the placing broker selfevidently is not a party 1'0 the contract. Consequently, unless section 17 can be read as, in effect, two distinct subsections (the first enunciating the utmost good faith basis of marine insurance contracts, and the second speaking to the consequences of failure by the parties 1'0 observe the utmost good faith), it must follow that section 17 does not embrace the entirety of the doctrine of utmost good faith and that judicial statements placing section 19 within section 17 are misplaced. 23 (4) Voidable, Not Void
4.10 In Carter v Boehm,24 Lord Mansfield refers

Evolution and Framework ofthe Doctrine ofUtmost Good Faith

unambiguously that the policy 'may be avoided' or that the insurer 'may avoid the contract'. (5) Source of the Doctrine and the Remedy ofAvoidance: Common Law or Equity? Some difficulty surrounds the nature of the remedy of avoidance to which 4.11 sections 17,18, and 20 of the Marine Insurance Act 1906 refer. Does it arise at common law or in equity? This question has been raised in connection with the availability of damages as an alternative remedy for breach" and 1'Oday remains significant in relation to the possibility of the courts using equitable precepts 1'0 restrain the exercise of the avoidance remedy.30

As discussed elsewhere,31 the early part of the seventeenth century was a fallow 4.12
period for the development of commercial law. The common law courts seized jurisdiction in commercial matters bur lacked expertise in commercial law, resulting in merchants turning to private arbitration for dispute resolution. The advenr of Lord Mansfield as Chief Justice of the King's Bench proved the turning point. Not only was he possessed of great learning and sensitivity 1'Owards commercial practice, inducing a return to dispute resolution by litigation, but commercial law's change ofjurisdicrion confened on Lord Mansfield a rare freedom to formulate ptinciple constrained by relatively little binding precedent. It was a freedom he used to the full. In Wilson v Ducket,32 he held that premium paid to an insurer under a policy induced by fraud was forfeit to the insurer notwithstanding avoidance, departing from the established equitable rule that it should be returned 1'0 the assured. The judgment of Lord Mansfield in Carter v Boehni3 must be seen in its 4.13 historical context. Although Lord Mansfield refers to no authority, he was not advancing a new principle with no antecedents in prior case law. There are earlier authorities on urmost good faith both at common lawl4 and in equity." Instead, the judgment represents a restatement of the doctrine of utmost good faith for the common law. It is unclear 1'0 what extent the principles laid down in Carter v Boehm represent or depart from previously established law or, indeed, whether any such earlier law had been formulated at common law, in equity, or as part of the law merchant. Two propositions may, however, be advanced with some certainty. First, Lord Mansfield restated the doctrine of utmost good faith as a doctrine of the common law, which continued thereaftet to be applied and developed by common law courts. Secondly, in so far as that doctrine

a contract being 'void' for nondisclosure and indeed case law on the doctrine of utmost good faith in the eighteenth and early nineteenth centuries refers, for example, to a policy being 'rendered void' or 'avoided' for non-disclosure or misrepresentation, seemingly without the intervention of an election to avoid on the patt of the insurer. Nothing, however, turned in these cases on the distinction between a void or voidable contract." The latter part of the nineteenth century, however, witnessed the start of a change in favour of the policy being analysed as voidable,26 but the cases were not unanimous," and, in 1887, Arnould still stated that 'the contract is void, ipso jitcto, whenever misrepresentation or concealment entered into the malcing of it'.28 The matter was placed beyond doubt by sections 17, 18, and 20 of the Marine Insurance Act 1906, all of which provide
1'0

nas

This duty is discussed at 4.l22ffbelow. 22 See 4.123 below. Statements placing 55 18, 19, and 20, or some of them, within s 17 include: Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1982] 2 Lloyd', Rep 178, 187, [19841 I Lloyd', Rep 476, 492, 496, 512, 525; Socihl! Anonyme d'Intermediaries Luxembourgeois v Farex Gie [1995J LRLR 116, 142; pew Syndicates v pew Reinsurers [19961 1 WLR 1136, 1145; Group Jod Re v Walbrook Imurance Co Ltd [1996] 1 WLR 1152. 1170. " (1766) 3 Burr 1905, 1909. 2S Third party proprietary issues do not arise in insurance contracts, and the concept of waiver was accommodated by asking whether the insurer had so conducted itself as to be estopped from asserting that the policy was void. " 26 Morrison v Universal Marine Insurance Co (1872) LR 8 Ex 187; Brooking v Maudslay (1888) 38 ChD 636, 643. 27 Anderson v Pacific Fire & Marine Insurance Co (1872) LR 7 CP 65, 68. 28 Law oiMatine Imurance D MacLachlan (ed) (6th edn, 1887) 514.
Z1
23

29:
32

34

See 4.175 below. 30 See 4.169 below. 31 See 1.38 above. (1762) 3 Burr 1361, discussed at 1.42 above. 33 (1766) 3 Burr 1905. Seaman v Fonereau (1743) 2 Sfr 1183. 35 De Costa v Scandret (1723) 2 P Wins 170.

104

105

The Doctrine ofUtmost Good Faith

may have owed something to equitable origins, such ongms were not to characterize the doctrine for the future, nor to constrain rhe way it would operare or develop.
4.14

Evolution and Framework ofthe Doctrine ofUtmost Good Faith

wo~ld expect to find, as. regards misrepresentation, is that the newly available eqUItable remedy should be applied in the field of insurance, in the same way as in the law ofcontract at large. In my opinion this is just what one does find. It will be recalled that the predecessors in the Digest of what were to become sections 18(1)

In Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd, 36 the Court of Appeal held that the doctrine of utmost good faith was nor based upon a comractual term and, therefore, did not sound in damages for breach of contract. 37 One reason advanced was that the doctrine was equitable in nature. In so holding, the Court relied upon the previous obiter statement of Luxmoore LJ in Merchants & Manuftcturers Insurance Co Ltd" that 'in a case of positive misrepresentation the right to avoid a contract, whether of insurance or not,

and 20(1) of the Act did not comain any explicit refetence to the avoidance of the policy.

It is respectfully suggested that this explanation is questionable. First, the 4.17 Supreme Court ofJudicature Acts 1873 and 1875 fused the administration of common law and equity and provided that, in the event of conflict, equity should prevail. The Judicature Acts did not, however, fuse the two systems of substantive law. 45 Consequently, while no question could thereafter arise of
whether a court had jurisdiction to award rescission for innocent misrepresenta-

depends not on any implied term of the contract, but arises by reason of the jurisdiction originally exercised by the Courts ofEquity to prevent imposition'. 3' Luxmoore LJ declined to express a view regarding non-disclosure. Scott LJ distinguished between 'the equitable jurisdicrion to avoid a contract for misrepresentation', which could not be based on an implied contractual term, and 'the common law duty of disclosure', which was 'difficult to explain fully' as resting on an implied contractual term. 40 In Skandia, rhe Court of Appeal considered that non-disclosure had the same foundation as innocent misrepresentation. 41
4.15

tion, the remedy itself remained equitable. Conversely, any pre-existing relief at common law did not become equitable. Secondly, if a contract is void at common law, it does not exist and there is no 4.18 power in equity to declare it subsisting and then permit rescission. 46 The existence of the contract as a matter of common law must be determined first. It follows that the change of analysis in favour of breach of an utmost good faith duty rendering an insurance contract voidable must have occurred as a matter of
common law.

Two aspects of this analysis may perhaps be separated. The first is the origin and nature of the doctrine of utmost good faith generally. In the light of the previous discussion, it is suggested that the proposition that the doctrine of utmosr good faith is equitable is simply not tenable historically. From the time of Lord Mansfield onwards, the doctrine of utmost good faith developed within the jurisdiction of the common law courts, although an application to a court of equity mighr be needed for certain remedies not available at common law." The second is the nature of the temedy of avoidance. Could a common law doctrine somehow have acquired an equitable remedy?

4.16

Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd" is a leading case on the availability of the insurer's rights to avoid for pre-formation non-disclosure and misrepresentation, rather than the nature of rhose rights. However, having referred to the pre-Act case law that was, first, restated in the form of A Digest of the Law Relating to Marine Insurance and, then, codified in the Bill that ultimately became the 1906 Act, Lord Mustill stated as follows: 44
This law had by 1906 become a fusion of the common law and equity. What one

Thirdly, insurance contracts were considered voidable at common law before 4.19 the entty into force of the Judicature Acts. Morrison v Universal Marine Insurance Co47 concerned innocent non-disclosure, to which equity's jurisdiction to grant rescission for misrepresemation was, by definition, inapplicable. The issue was whether, on the facts, the insurers were estopped from denying the validity of the policy. The COuttS were clear that the non-disclosure gave the insurers a right of election between affirmation and avoidance, and that the contract was not automatically void. The focus upon election by estoppel, rather than affirmation, may reveal the novelty of the voidable analysis. In the context of a void contract, waiver must necessarily operate through estoppel. 48 The judgment of the Court of Exchequer Chamber in Morrison also reveals the 4.20 trigger for the change in analysis. A series of decisions had clarified the impact at common law of fraudulent misrepresentation in the general law, rendering the

-----------------45 Salt v Cooper (1880) 16 ChD 544 at 549; Bank ofBoston Connecticut v European Grain & Shipping Ltd (The Dominique) [1989] AC 1056, 1109.
46 If a fraudulent misrepresentation as to identity prevents a contract from existing on the ground of mistake, the remedy of rescission in equity's concurrent jurisdiction does not create a voidable contract. See also AssociatedJapanese Bank International Ltd v Credit du Nord SA [1989J 1

36
39
41 43

[1990] 1 QB 665. [1990] 1 QB 665, 779. [1995] 1 AC 501.

31

See 4.175
40
42

below.

38

11941] 1 KB 295.

ibid 318 per Luxmoore L].

44

ibid 312~13,

Duncan v Wo,.;.11(1822) 10 Price 31, 44.

WLR255.
47
48

ibid 544. 106

Morrison v Universal Marine Insurance Co (1873) LR 8 Ex 197. cf waiver in the context of promissory warranties: see 18.94-18.96 below.

107

The Doctrine ofUtmost Good Faith

contract voidable and giving rhe representee a right of election berween affirming and rescinding the contract. 49 If a fraudulent misrepresentation does not
render a contract void, no misrepresentation or non-disclosure can.

The Definition ofMateriality

to sections 18(2) and 20(2): 'Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.' The adoption of the judgment of a prudent underwriter, rather than the actual 4.24 underwriter, as the point of teference means that materiality is an objective concept. The hypothetical, prudent underwtiter is the embodiment of reasonable underwriting practice, normally ascertained by expert evidence. In Associated Oil Carriers Ltd v Union Insurance Society ofCanton Ltd," underwriters resisted a claim on the basis of non-disclosure of a fact which emerged as material only after the conclusion of the contract by virtue of subsequent litigation, arguing that a prudent underwtiter must be taken to know the law. Notwithstanding the declaratory theory of the common law, Atkin J rejected the underwriters' concept of the prudent underwriter. 'I think that this standard of prudence indicates an insurer much too bright and good for human nature's daily food. There seems no reason to impute to the insurer a higher degree of knowledge and foresight than that possessed by the more experienced and intelligent insurers carrying on business in that market at that time.'" Before the drafting of the Marine Insurance Act 1906, no case had demanded a 4.25 precise definition of materiality. The fotmula adopted in sections 18(2) and 20(2) accurately reproduces a number of judicial statements,56 but only comparatively recently has this formula been subjected to detailed scrutiny. Precisely what degree of significance in the mind of the hypothetical underwriter must the non-disclosure or misrepresentation assume before it will be regarded as material? This question was the subject of extensive judicial consideration by the COutt of Appeal in Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd" and by both the Court of Appeal and House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd 58

4.21

It is, therefore, suggested that the right to avoid an insurance contract for breach of a duty of utmost good faith, as codified in sections 17, 18, and 20 of the Marine Insurance Act 1906, is a right that arises at common law and not in equity. (6) Avoidance and Rescission

4.22 A further question that arises relating to the remedy referred to by the Marine

Insutance Act 1906 as avoidance is whether it is the same remedy as tescission in the general law. Thus, even if avoidance atises at common law, is it the same remedy as that granted at common law for fraudulent misrepresentation, or is it technically distinct even if functionally identical? The question is relevant to the availability of a judicial discretion to disallow or refuse to grant avoidance for non-fraudulent misrepresentation. 50 Moreover, if a rerm of the policy seeks to exclude the insurer's right(s) of retrospective cancellation, argument can arise that the exclusion contemplates only rhe good faith remedy and not the general law remedies, or vice versa. In HIH Casualty & General Insurance Ltd v Chase Manhattan Bank,51 Rix LJ rejected such an argument as a matter of interpretation. Rix LJ did not, however, dispute the existence of technically distinct remedies: 'for the purposes of the [Marine Insurance Act] 1906 itself the remedy of rescission had in practice been subsumed into the right to avoid (but only in practice. .. )' .52

B. The Definition of Materiality

4.23 The concept of materiality supplies the delimiting factor necessary to any dis-

closure obligation. No such limitation is a logically necessary requirement to a duty not to misrepresent. Nevertheless, both the disclosure and avoidance of misrepresentation duties of the assured as developed at common law and codified by the 1906 Act incorporate a delimiting concept of materiality. 53 According

49 Load v Green (1846) 15 M & W 216,221: Murray v Mann (1848) 2 Ex 538; Deposit & GeneralLift Assurance Co v Ayscough (1856) 6 EI & BI 761: NicoLS Case (1859) 3 De G & J 387, 431: Clough v London & North Wis"rn Railway Co (1871) LR 7 Ex 26.

It will be seen that the threshold ultimately set by the courts for materiality 4.26 is not high. One should not, however, conclude on that basis that the preformation doctrine of utmost good faith is unduly favourable to the insurer without taking into account the question of subjective inducement of the actual underwriter, as considered at paras 4.41 to 4.65 below, since a lower threshold of objective materiality can be counter-balanced by a meaningful requirement of subjective influence. 59 That is not to say that such a conclusion cannot be reached even taking all relevant matters into account.

See 4.162 below. " [2001] EWCA Civ 1250, 12001] 2 Lloyd's Rep 483. ibid para. 174. S3 An express disclosure obligation may, of course, set its own parameters: International Management Group (UK) Ltd v Simmonds [2003] EWHC 177 (Comm), [20(f4] [1984] 1 Lloyd's Rep 476,
50
52

54
56 S7
S9

[191712 KB 184. '5 ibid 192. eg Rioaz v Germsi Bros & Co (1880) 6 QBD 222, 229, [1984] 1 Lloyd's Rep 476. [1984] 1 Lloyd's Rep 476. 58 [1993] 1 Lloyd's Rep 496, [1995] 1 AC 501.

Pan Atlantic Insurance Co Ltd v Pine TOp Insurance Co Ltd[1995] 1 AC 501, 517-18.

108

109

The Doctrine ofUtmost Good Faith

(1) Materiality prior to Pan Atlantic v Pine Top in the House of Lords

The Definition ofMateriality

underwriters might be called as expert witnesses who might all legitimately disagree as to whether the relevant circumstance, if disclosed, would have led to a different decision and the court would have no ground for accepting the testimony of one expert witness rather than that of another.
The very choice of a prudent underwriter as the yardstick in my view indicates that the test intended was one which could sensibly be answered in relation to prudent underwriters in general. It is possible to say that prudent underwriters in general would consider a particular,circumstance as bearing on the risk and exercising an influence on their judgment towards declining the risk or loading the premium. It is not possible to say, save in extreme cases, that prudent underwriters would have

4.27 In Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd," the insurers alleged non-disclosure of part of the previous claims history. At first instance, Lloyd J held that, on the true construction of section 18(2), a non-disclosed circumstance was material only if its disclosure would have led a prudent underwriter either to decline the risk altogether or to charge a higher level of premium. The non-disclosure must, therefore, have exerted a 'decisive influence' on the judgment of the prudent insurer by inducing a 'different decision' with respect to the risk. Lloyd J reasoned as follows:"
It seems to me that this should be the general rule, if only because the defence

acted differently, because there is no absolute standard by which they would have actedin the first place or as to the precise weight they would give to the undisclosed
circumstance. 64

under s 18 is capable of working such great hardship on the assured. Take a case
where the fact is known to the assured, but not the materiality of the fact. Suppose the prudent insurer, if he had known the fact, would have accepted the risk, bur charged a small additional premium; suppose further that there is a substantial claim under the policy. In other jurisdictions, the assured could enforce the claim,

by tendering the additional premium. But not so in England. The fairness of the
English rule is not at once obvious and hardly seems to reflect the duty of utmost

Stephenson LJ extrapolated from the overarching doctrine of utmost good faith 4.30 articulated by section 17 to hold that an assured was subject to a duty of full disclosure that could not be limited to circumstances the disclosure of which would induce a different decision:
... everything is material to which a prudent insurer, if he were in the proposed insurer's place, would wish to direct his mind in the course of considering the proposed insurance with a view to deciding whether to take it up and on what terms, including premium. His mind would, I think, be influenced in the process

good faith under s 17 which, be it noted, is owed both ways. Why, if the insurer
would have accepted the risk in any event, albeit at anincreased premium, should

he be able

to avoid the claim altogether? Since the Englisb law is so favontable to the underwriter in this respect, the least that should normally be expected of

the underwriter is to show that a prudent insurer would have charged an increased rate.

of judgiug whethet

to

dn so, either temporarily where he can say that he would

ultimately have reached the same decision without it, or permanently where it would have led him to reach a different decision. 65

4.28 The insurets, however, appealed against this ruling on the definition of materi"jity, and the Court of Appeal upheld the appeal.' For Kerr LJ, the statutory phrase 'would influence the judgment of a prudent underwriter' mea!)t would have had an impact on the formation of the prudent underwriter's opinion of the risk, rather than a decisive influence upon the ultimate underwriting decision. Materiality followed from rhe relevance of the circumstance, not from its weightY 4.29 Parker LJ observed that whether a circumstance would carry sufficient influence to induce a different decision would inevitably depend upon the prudent underwriter in question. A circumstance would be material ifbearing on the risk or having a tendency towards declining the risk or raising the premium, since it would affect the judgment of the prudent underwriter in deciding whether to accept the risk and, if so, at what level of premium. A different decision test, in contrast, would be impractical. Years after the placing of the risk, a number of

In the light of the decision of the Court ofAppeal in CTI v Oceanus, therefore, it 4.31 was clear that an insurer that could establish a non-disclosure was not requited to prove that such non-disclosure would have had a decisive influence upon the judgment of the prudent underwriter. As regards the degree of impact upon the mind of the prudent underwriter that did have to be shown, the Court of Appeal seemed to have opted for proof merely that the prudent underwriter would want to have been told in connection with reaching a decision on the risk,66 a lower threshold indeed. 67 Expert witnesses called to demonstrate the view of the prudent underwriter could be asked only whether they would have wished to direct their minds to the relevant circumstance and not whether it would have made any difference to their eventual decision and, if so, precisely what difference.

60 [198212 Lloyd's " [1982] 2 Lloyd's

Rep 178, [1984J 1 Lloyd's Rep 476. Rep 178, 188-9. 62 [1984J 1 Lloyd's Rep 476.

63

ibid 492.

ibid 511. 65 ibid 529. 66 eg at 529. Thus, CTI v Oceanus was viewed as unduly favourable to the insurer and not followed by the New South Wales Court ofAppeal in Barclay Holdings (Australia) Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514, discussed in H Yeo, 'Common Law Materiality-An Australian Alrernative' [1990J ]BL 97.
64 67

110

111

The Doctrine ofUtmost Good Faith

4.32 It should be noted that also at issue in CTl v Oceanus was whether insurance contract law requires, in addition to objective materiality, that the non-disclosure Ot misrepresentation subjectively induces the actual underwriter into the contract, as is required in general contract law. The Marine Insurance Act 1906 contains no reference to inducement and the Court of Appeal duly held that it was not tequited. Inducement is discussed at paras 4.41 to 4.65 below, but the decision of the Court ofAppeal in the CTI case on inducement is relevant to the subsequent development of the law on materiality. 4.33 The definition of materiality was again the subject of judicial consideration in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd" As a matter of precedent, the Court of Appeal was, of coutse, bound by CTI v Oceanus with respect to the irrelevance of the actual underwriter and the unequivocal rejection of the different decision test of materiality. However, Steyn LJ69 considered that there existed rwo tests of materiality alternative to the different decision test, the comparative merits of which had not been discussed in CTL Consequently, while established the negative ptoposition that the different decision test was wtong, the Court ofAppeal in Pan Atlanticwas ftee to consider the positive question of what was the precise test for materiality. Certain statements in CTI could be read as favouring a 'would want to know' test. However, in Carter v Boehm, '0 Lotd Mansfield referred to non-disclosure having the effect 'that the risque run is really different ftom the risque understood and intended to be run, at the time of the agteement', indicating an 'increased risk' Or 'different tisk' test of materiality. By way of illustration," Steyn LJ postulated a shopkeeper who takes out a fire policy failing to disclose a fire rwenty yeats previously, in the light of which extensive fire precautions had been introduced. Whereas it might be proved that a prudent insurer would want to knoY' of the fire as a previous loss, greater difficulty would be encountered in proving that the risk would be viewed as increased by that fire. Steyn LJ 'unhesitatingly' adopted the mote stringent test. The question to be asked was whether a prudent underwriter would have viewed the true risk as increased or different in comparison with that which was presented for insurance" or, at least, 'whether the prudent insurer would view the undisclosed material as probably tending to increase the risk'. 73

The Definition ofMateriality

precedent as regards subjective inducement, the court sought to compensate by adopting the highest thteshold fot objective matetiality consistent with the intetptetation adopted of v Oceanus. While.a diffetent risk might ftequently attract a different decision, this would not necessarily follow. A difference, or probable difference, in the risk would not necessarily elevate the risk to a new premium level. Alternatively, commercial reasons might result in acceptance of the different risk on unaltered terms, for example as a loss leader in order

cn

to gain access to a new market. Moreover, a different risk test, according to

Steyn LJ, would involve questions of fact of no gteater difficulty and complexity than courts frequently encounter. 74 It has, however, been observed that this apptoach confuses the objective and the subjective because special circumstances, such as a preparedness to underwrite a loss leader, can impact only upon the actual insurer. Such subjective considerations 'should not affect the objective application of the prudent insurer test'." The increased risk test would appear to endeavour to introduce into the objective concept of materiality an element at least of the subjective inducement excluded in v Oceanus.

cn

cn

(2) Materiality in the House of Lords in Pan Atlantic v Pine

Top and Beyond

Pan Atlantic v Pine Top was appealed to the House of Lords,'6 proceedings 4.35 which involved a challenge to the holdings in v Oceanus on both materiality and inducement. By a bare majority, the House upheld on materiality, confirming the rejection of the decisive influence test, while unanimously reversing it with respect to inducement.

cn

cn

4.34 The Court of Appeal clearly believed that an underwrirer should face some hurdle of substance under the heading of materiality or inducement. Bound by

With respect to materiality, Lotd Mustill, who delivered the leading speech for 4.36 the majority," commenced his discussion by stating the following question for decision: 'must it be shown that full and accurate disclosure would have led the prudent underwriter to a different decision on accepting or rating the risk; or is a lesser standard of impact on the mind of the prudent underwriter sufficient; and, if so, what is that lesser standard?'" Two reasons in particular led to rejection of the diffetent decision test. Fitst, noting the absence in section 18(2) of any advetb qualifYing the vetb 'influence', such as 'decisively' or 'conclusively', Lord Mustill held that the reference to influencing the judgment of the prudent insurer in determining 'whether' to take the risk 'clearly denotes an effect on rhe thought processes of the insurer in weighing up the risk, quite

68 69

[199211 Lloyd's Rep 101, [1993J 1 Lloyd's Rep 496, [19951 1AC 501.
Nicholls V-C and Farquharson L] concurring. 70 (1766) 3 Burr 1905, 1909. Conceived earlier: see Sir lahan Steyn, 'The Role of Good Faith & Fair Dealing in Contract:

71

" ibid 505. 7S See Lord Lloyd in the House ofLords in Pan Atlantic v Pine Top [1995J 1 AC 501, 560. 76 [1995J 1 AC 501. n Lord Goff delivered a short concurring speech; Lord Slynn agreed. Lords Lloyd and
Templeman dissented.
78

A Hair-Shirr Philosophy?' [1991J Denning LJ 131, 139. 72 [1993J 1 Lloyd's Rep 496, 505. " ibid 506.

'"

[1995J 1AC 501, 521.

112

113

The Doctrine ofUtmost Good Faith

different from words which might have been used but were not, such as "influencing the insurer to take the risk" '.79 Lord Goff considered rhat the wording of section 18(2) denoted 'no more than an effect on the mind of the insurer in weighing up the tisk,.ao Secondly, the majority endorsed the view articulated in CTl v Oceanus by Parker LJ that the different decision test would present insuperable practical difficulties.
4.37 The reasoning of the majority is clearly tenable but, with respect, not self-

The Definition ofMateriality

doing no more than rejecting the different decision test. Nevertheless, three .factors indicate that the House of Lords went further and positively espoused the relatively lenient test of objective relevance to. the assessment of the risk. First, the question posed by Lord Mustill militates against interpreting the statements of Lord Mustill and Lord Goff, cited above, as metely rejecting the decisive influence test. Secondly, after discussing a number of leading textbooks, Lotd Mustill stated" that, while not decisive, 'they furnish substantial support for the view that the dury of disclosure extended to all matters which would have been taken into account by the underwritet when assessing the tisk (ie the "speculation") which he was consenting to assume. This is in my opinion what the Act was intending to convey, and what it actually says'. Thirdly, commenting on the decision of the Court of Appeal in Pan Atlantic, Lord Mustill observed that, had it not been bound by the rejection in CTI v Oceanus of any requirement of inducement of the actual underwtiter, 'the court might have felt more free in its ruling on materiality'." As discussed below, the House of Lords held that an actionable bteach of the duty of utmost good faith must induce the actual underwriter into the contract. Consequently, the House of Lords was able to enjoy this greater freedom with respect to the test for materiality, reject the incorporation therein of any element of inducement," and espouse the lower threshold.

evidently correct. As demonstrated by Lord Lloyd, as a matter of English language, an alternative interpretation of the subsection requiring the nondisclosure to affect or alter the prudent underwriter's ultimate assessment of the risk was at least equally tenable." Lord Lloyd also disagreed on the practicalities of the different tests: 'What the prudent insurer would have wanted to know is as nebulous and ill-defined as the alternative is precise and clear-cut.''' Moreover: 'Five experienced and prudent underwriters are just as likely-in my view more likely-to disagree about what they would want to know as abour what they would have done.''' Lord Mustill emphasized the plight of the prospective assured and its broker struggling with the 'almost impossible task' of determining, on the different decision test, exactly what must be disclosed. Yet this seems to abandon the assured who inadvertently fails to disclose through innocent mistake, in favour of the assured who endeavours to calculate in cold blood the bare minimum to be disclosed to the insurer.
4.38 Rejection of the decisive influence test for materiality clearly favours insurers.

In St Paul Fire & Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors 4.40
Ltd,'o the Court of Appeal confirmed that the House of Lords in Pan Atlantic had, indeed, answered in full the question posed by Lord Mustill. The Court also considered the impact of the ruling of the House of Lords on the different tisk test of the Court ofAppeal. Evans LJ expressed the view" that the Court of Appeal's focus upon the prudent underwriter's appreciation of a difference between the true risk and that ptesented was expressly approved by the House of Lords, quoting Lord Mustill stating that 'the whole object of the rules as to representation, misrepresentation and concealment is to enable the underwriters to judge accurately of the risk they undertake'. 92 With respect, for the reasons
expressed above, this interpretation seems incorrect. Subsequent cases vary in

The opinion of the prudent underwriter is garnered principally from expert testimony, bur all an expert witness can now be asked is whether a fair presentaC tion of the risk called for disclosure of the relevant circumstance, or whether the witness would have viewed that circumstance as relevant to an accurate appreciation of the risk. The wirness cannot be asked whether disclosure would have made any difference to the ultimate underwriring decision, alld to identifY any difference. On one view, moreover, 'if the expert [wirness] says "I would have wanted to know but the knowledge would not have made any difference" then there are no objecrive or rational grounds upon which this statement of belief can be tested'. 84
4.39 The answer ultimately given by Lord Mustill to the question posed concerning

the formula they espouse." The Court of Appeal in St Paul Fire & Marine did, however, reject an argument that materiality required the circumstance to

the test for materiality" confined itself to rejecting the different decision, or decisive influence, tesr. 86 Given such a rejection, however, the question required the formulation ofthe correct test. The House ofLords approved CTI v Oceanus, but that decision was interpreted by the Court of Appeal in Pan Atlantic as

79 84

ibid 531.

eo ibid 517.

81

ibid 515 per Lord Templeman.

ibid 559. 82 ibid 557-8. " ibid 558. as See 4.36 above. 86 [19951 1 AC 501, 550.

ibid 538. " ibid 527. 89 See the speech of Lord Goff at 517-18. [1995) 2 Lloyd's Rep 116, noted Bennett (1996) 112 LQR 37. " [199512 Lloyd's Rep 116, 124, Rose and Nourse LJJ concuning. 92 [1995] 1 AC 501, 538. Lord Mustill was in fact encapsulating the view expressed in, and quoting from, Parsons, A Treatise on Maritime Law (1859). 93 Contrast, eg New Hampshire Insurance Co v Oil Refineries Ltd [2002] 2 Lloyd's Rep 462, para 31 (different risk) and North Star Shipping Ltd v Sphere Drake Insurance pic [2005] EWHC 665 (Carom), [2005J 2 Lloyd's Rep 76, para 208 (objective relevance to risk assessment).
87 90

114

115

The Doctrine ofUtmost Good Faith

increase, and not merely alter, the perceived risk. Many factors may increase the risk in some respects but decrease it in others. To this extent, the test adopted by the Court ofAppeal in Pan Atlantic is clearly no longer good law.

Inducement
entitled to rely on it as a ground for avoiding the contract'. 98 The omission of .any reference to influence in section 20(1) had to be read alongside section 91 (2), which preserves the rules of the common law unless inconsistent wirh an express provision in the 1906 Act, the requirement of influence being well established in the general law of misrepresentation when the Act was drafted. Although the absence of a general common law of disclosure prevented implication of an influence requirement into section 18(1) through section 91(2), a distinction between misrepresentation and non-disclosure on the need for inducement was nor acceptable. Accordingly, nO breach of a pre-formation duty of utmost good faith, whether in the form of misrepresentation or nondisclosure, is actionable unless it induces. the actual underwriter into the
contract.

C. Inducement
4.41

In the general law of contract, objective materiality is insufficient to establish a right to rescind for misrepresentation. In addition, the representee must establish a causal link between the misrepresentation and its own agreement to
conclude the contracr. 94 This subjective requirement is termed (inducement'.

The Marine Insurance Act 1906, however, prescribes detailed rules relating to misrepresentarion and non-disclosure but makes no mention of inducement. This led to debate as to whether inducement was required in (marine) insurance contract law. Once it was established that inducement was required, attention turned to what inducement meant and also how it was proved, both generally and with respect to following underwriters in a subscription market. (1) Establishing the Reqnirement for Inducement as a Matter of Legal Principle
4.42

(2) The Meaning ofInducement In Pan Atlantic v Pine Top," Lord Mustill stated that the test for inducement in 4.44 insurance contract law was the same as that applied in general contract law. Unfortunately, there was little authority in general contract law on the precise formulation of the correct test to be applied.

In Berger & Light Diffusers Ltd v Pollock,95 Kerr J held that, to render a marine insurance contract voidable, it was not sufficient that a non-disclosure or misrepresentation was objectively material. In addition, it must have subjectively induced the underwriter to conclude the contract on the terms agreed. To allow an underwriter to avoid a policy in the absence of subjective inducement merely because a prudent underwriter would have been influenced would be 'absurd'.'6 In CTI v Oceanus, the Court of Appeal (including Kerr Ln overruled Berger v Pollock with respect to inducement on the ground that the wording of the Matine Insurance Act 1906 simply did not accommodate a subjective requirement." The House of Lords in Pan Atlantic, however, unanimously reversed v Oceanus on this point.

cn

4.43

The House of Lords held that 'if the misrepresentation or non-disclosure of a material facr did not in fact induce the contract (in rhe sense in which that expression is used in the general law of misrepresentation) the underwriter is not

It is clear that inducement by one factor does not necessarily deny inducement 4.45 also by another. In Edgington v Fitzmaurice,'00 the claimant advanced money to a company in the mistaken belief that the loan would be secured by a charge on the company's property. He averred that he would not have made the advance but for such belief. The company directors had also fraudulently misrepresented that the purpose of the loan was improve corporate assets and develop trading, whereas the money was in fact required to pay existing debts. The Court of Appeal held the directors liable in the tort of deceit, notwithstanding the claimant's own mistake. The question was whether the misstatement had in fact been relied upon, not whether it was the sole inducement. It sufficed that the misstatement was 'actively present to [the representee's] mind when he decided to advance his money' .'01 The same reasoning is equally applicable in cases not involving fraud and in an action fot avoidance for breach of a duty of utmost good faith rather than for damages in tort. 102
Different factors may, howevet, have differing motivational power. How sub- 4.46 stantial and active an inducement is required? Ascertaining the meaning of

Attwood v Small (1838) 6 Cl & F 232, 338;jEB Fasteners v Marks, Bwom & CO [1983J 1 All ER 583. 9S [197312 Lloyd's Rep 442. 96 ibid 463. See also Flinn v Headlam (1829) 9 B & Cr 693. 97 See also Zurich Genera/Accident & Liability Insurance Co Ltd v Morrison [1942] 2 KB 53, 60.
94

98 [1973] 2 Lloyd's Rep 442, 550 per Lord MustilL For critical discussion of this aspect of the decision, see Birds and Hird, 'Misrepresentation and Non~disdosure in Insurance Law-Identical Twins or Separare Issues?' (1996) 59 MLR 285. 99 [199511 AC 501, 550. 100 (1885) 29 ChD 459. '01 ibid 483 per Bowen LJ. 102 Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002J EWCA Civ 1642, [2003J 1 WLR 577, paras 59, 62.

116

117

The Doctrine ofUtmost Good Faith

inducement requires an answer to the same question as arose in the context of

Inducement
truth had been known or suspected before the decision was taken, the same decision would still have been made.

matetiality. Ptecisely what impact upon the thought processes of the underwriter, although this time the actual underwriter, is required? Must it be shown that a proper presentation of the risk would have caused the acrual underwriter either to refuse the risk or alter the terms? Or does some lesser impact suffice, and, if so, is the test formulated by reference to perception of a different risk or mere relevance to the decision-making process?
4.47

Stephenson LJ referred to the need for the misrepresentation to play 'a real and substantial part, though not by itself a decisive part, in inducing' the contract. The necessary inducement would be present if the represenree was 'motivated or influenced ... to any substantial extent' .110 The two judgmenrs differ in that Donaldson LJ seems to espouse a decisive 4.49 influence tesr of inducement whereas Srephenson LJ favours a substantial influence test. Both approaches require a genuine impact on the mind of rhe representee and sanction an enquiry into the .relative importance of multiple inducements. The larter, however, establishes a lower threshold for inducement than the former, since a misrepresenration may be a substantial inducement and yet not induce a different decision because, had the truth been known, other factors would, on balance, have outweighed rhe misrepresented circumstance. A circumstance may feature in the mind of the actual representee as significant without necessarily inducing a different decision. On the facts, since the claimants' desire to obtain .the employee's services constituted their 'primary and impelling motive for the tal<eover', the requisite inducement was absent on eirher approach, and any indication of the precise threshold to be achieved for inducement was obiter.'11 The issue of the precise rhreshold was addressed by the Court of Appeal in 4.50 Assicurazioni Generali SpA v Arab Insurance Group (BSC), 112 with a difference of opinion emerging. The majority espoused a different decision tesr for inducement. According to Clarke LJ: 113 'In order to prove inducemenr the insurer ... must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevanr non-disclosure or misrepresentarion, he would not have entered into the contract on those terms.' In Brotherton v Aseguradora Colseguros SA (No 2),'14 Mance LJ likewise affirmed 4.51 the need for the actual underwriter to have acted 'differently, either by refusing to write the risk at all or by wriring it only on different terms', referring to the

In Barton v Armstrong, 103 the Privy Council held in the context of duress to rhe person that it sufficed if the threat was 'a' reason for entering into the contract, even if the threatened party might still have concluded the contract in the absence of any threats. The relative importance of the threat in comparison with the other reason(s) for contracting was irrelevant, 'for in this field the court does
not allow an examination into the relative importance ofcontributory causes' .104

Moreover, the coercing patty had the burden of proving that the threats 'in fact contributed nothing' to the threatened party's decision. lOS This approach, according to the Privy Council, was appropriate for all situations where 'the party has been subjected to an improper motive fat action', 106 such as fraud and duress to the person. lO? Such an approach is not necessarily appropriate,
however, in the absence of such an improper motive for action, as for instance

where an underwriter seeks to rely upon a non-fraudulent misrepresentation or non-disclosure.

4.48

In lEB Fasteners Ltd v Marks, Bloom & CO,'08 a corporate takeover was motivated by a wish to acquire the services of key personnel. In the course of negotiations, rhe claimants were shown the company's audited accounts, which proved to be substantially inaccurate. The takeover having proved an expensive mistake, the claimants sued rhe auditors responsible for the accounts in negligence. The Court of Appeal held, however, thar no sufficient causal link had been proved between the negligence and the loss. Donaldson LJ stated as follows: 109
In real life decisions are made on the basis of a complex of assumptions of fact. Some of these may be fundamental to the validity of the decision. <But for' that

assumption, the decision would not be made. Others may be important factors in reaching the decision and collectively, but not individually, fundamental to its validity. Yet others may be subsidiary factors which support or encourage the taking ofthe decision. If these latter assumptions are falsified in the event, whether individually or collectively, this will be a cause for disappointment to the decisiontaker, but will not affect the essential validity of his decision in the sense that if the

--------------------[19761 AC 104, 118-19. "" ibid 118 per Lord Cross. "5 ibid 120. A phrase formulared by Holmes J in Fairbanks v Snow (1887) 13 NE 596, 598 (Supreme Court of Massachusetts) and cited at 118, 121. 107 On fraud, see Nicols Case (I 859) 3 De G &] 387, 422. 108 [19831 1 All ER 583. 109 ibid 588.
103 10'

ibid 589. lEB Fasteners was followed in Avon Insurance pic v Swire FrtlSer Ltd [2000] Lloyd's Rep IR 535, para 18, where Rix Jdrew a 'distinction between a nlCtor which is observed or considered by a [claimant), or even supports or encourages his decision, and a factor which is sufficiently important to be called a real and substantial part of what induced him to enter a transaction'. '" [2002J EWCA Ciy 1642, [2003J Lloyd's Rep IR 131. 113 ibid para 62. Also para 59. See also Sir Christopher Staughton at para 187. ,,, [2003J EWCA Ciy 705, [2003J Lloyd's Rep IR 746, para 14.
110
111

118

119

The Doctrine ofUtmost Good Faith

statement by Lord Mustill in Pan Atlantic v Pine Top'15 of rhe need for an insurer to show that the non-disclosure or misrepresentation had occasioned it 'harm
J

Inducement
judgment, in the context of holding that inducement was established on the factsaf the case, Lord Mustill stated as follows:'24
As a matter of common sense however even where tl~e underwriter is shown to ~ave been careless in other respects the assured will have an uphill task in persuadIng the court that the withholding or misstatement of circumstances satisfying the
test of materiality has made no difference. There is ample material both in the general law and in the specialist works on insurance to suggest that there is a presumption in favour of a causative effect.

116

4.52 One member of rhe Court of Appeal in Assicurazioni Generali SpA v Arab

Insurance Group (BSC)117 demurred. For Watd L], it sufficed that the misreptesentation or non-disclosure formed part of the picture on which the underwriter's decision was based so that it could fairly be described as 'a' cause of the decision. Ward L] was 'concerned if the insistence on an effective cause were to lead to an evaluation of the weight placed by the [underwriter] upon the ' . various matters W h Ieh III comb"manon Ied to t h e agreement. 118 Th'IS concern mirrors part of the reasoning that led to the rejection of a diffetent decision test for materiality,119 bur it has not prevailed in the context of inducement for non-fraudulent non-disclosure or mistepresentation.
(3) Proof ofIndncement
4.53 The legal burden of proving inducement rests on the patty allegedly induced, in

practice almost invariably the insurer,12o although it has been said that the burden 'is not a heavy one'.'21

(a) The so-called 'presumption' ofinducement 4.54 In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd, 122 in the course of tejecting an argument that the absence in the Marine Insurance Act 1906 of any reference to a causal link between misrepresentation or non-disclosure and contract formation was deliberate and reflected a disciplinaty element in (mariae) insurance contract law, Lord Mustill stated that 'the existing rules, coupled with a presumption of inducement, are already stern enough'.123 Later in his

These references to a presumption of inducement flowing from proof of materi- 4.55 ality have been taken at face value,125 but are apt to mislead. There is no formal, legal presumption that requires a court, once the insurer has proved materiality, to find inducement in the absence of convincing rebuttal evidence adduced by the assured. 126 The idea of such a formal, legal presumption is a 'heresy ... long since exploded'.127 Such a presumption would, moreover, be both illogical and undesirable. As a matter of logic, it simply does not follow that a circumstance that a prudent underwriter would consider relevant to assessing the risk would, if not disclosed or if misrepresented, cause the actual underwriter to decline the risk or accept only on different terms. 128 As a matter of policy, the introduction of the requirement of inducement by the House of Lords in Pan Atlantic purports to redress somewhat the balance between insurer and assured, a balance tipped too much in favour of the insuret by the decision of the Court ofAppeal in CTI v Oceanus. If, however, proof of materiality serves automatically as proof of inducement, subject only to a difficult burden of rebuttal by the assured, then precious little will have changed. In truth, evidence of materiality has no special status in terms of proof of 4.56 inducement. Its probative value in that tegard depends entirely on the cogency and compelling nature of the evidence in question. The stronger the case for materiality, the stronger the likelihood of inducement. Once evidence of materiality is sufficiently strong, it will logically follow that it is more likely than not that the actual underwriter would have taken a different decision in some way had the truth been known. It is in this sense, but only in this sense, that an underwritet may be said to benefit from 'a fair inference of fact' flowing ftom

115 [1995] 1 AC 501, 549. See also at 551 (need for 'an effect on the decision of the actual underwriter') . 116 Further authorities in suPPOtt of the decisive influence test of inducement include Industrial P,operties (Barton HilO Ltd vAssociatedElectrical Industries [1977] QB 580, 597, 610; Harry v Tate & Lyle Refineries Ltd [1982] 2 Lloyd's Rep 416, 422; The Lucy [1983] 1 Lloyd's Rep 188, 201.lt was assumed to be correct in St Paul Rre 6' Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd [1995] 2 Lloyd's Rep 116, 124. m [20021 EWCA Civ 1642, [20031 Lloyd's Rep lR 131. 118 ibid para 218. 119 See 4.29, 4.36 above. '" Arkw,ightv Newbold(1881) 17 CbD 201; Ma;c Rich &CoAG v Portman [199611 Lloyd's Rep 430, 442; Moo" Large & Co Ltd v Hennes Credit & Guarantee pic [2003] EWHC 26 (Comm), [200311 Lloyd's Rep 163, para 59; Drake Insurance pic v Provident Insurance pic [20031 EWCA Civ 1834, [2004] QB 601, paras 64,131. 121 Wise (Underwriting Agenry) Ltd v Grupo Nacional Provincial SA [2004} EWCA Civ 962, [2004] 2 Lloyd's Rep 483 ar [991 per Rix LJ. ~ 122 [19951 1 AC 501. m ibid 549.

ibid 551. Gunns v Par Insurance Brokers (1997] 1 Lloyd's Rep 173, 176; Aneco Reinsurance Underwriting Ltd v johnson [19981 I Lloyd's Rep 565, 590; james v CGU Insurance pic [2002] Lloyd's Rep 206, para 53. 126 Assicueazioni Generali SpA v Aeab Insueance Group (BSC) [20021 EWCA Civ 1642, [20031 1 WLR 577, para 62. 127 Pan Atlantic Insurance Co Ltd v Pine lOp Insurance Co Ltd (1995] 1 AC 501, 570 per Lord Lloyd. '" Arsicurazioni Generali SpA v Arab Insurance Group (BSC) [20021 EWCA Civ 1642, [20031 I WLR 577, para 80.
124

125

120

121

The Doctrine ofUtmost Good Faith

Inducement

evidence of materiality. '29 A tribunal of fact may, therefore, infer inducement from proof of materiality, although it may decline to do so even in the absence of rebuttal evidence since materiality does not give rise to a legal presumption of
inducement. Even such references to (inference' should not, however, be mis-

understood. Insurers are not benefiting from a conclusion of inducement in the absence of the evidence normally required for a court to arrive at such a conclusion. What is meant is merely that evidence of materiality may serve as indirect, or circumstantial, evidence of inducement and, depending on the nature and quality of the evidence in question, may suffice to discharge the insurer's burden of proving inducement on a balance of probabilities. 130
4.57 Where the actual underwriter gives evidence to the COUrt in person, there is little

room for indirect evidence. The court will normally draw a conclusion as to inducement from the underwriter's direct testimony.'31 In the subscription market, nevertheless, it may be possible for somewhat unconvincing testimony by one participating underwriter to be strengthened by clear evidence of inducement from other participating underwriters.'" Where, however, the actual underwriter does not testify, the question clearly arises of proof by indirect means. The first issue is whether the insurers have a good reason for not producing the actual underwriter. The underwriter may be incapable of testifying by reason of ill-health or may, indeed, have died. Alternatively, the underwriter may have left the insurers' employment and not be inclined to assist or subject only to unacceptable conditions."3 An unwilling witness can always be compelled by subpoena to appear,134 although the weight to be attached to unconvincing testimony will have to be judged in the light of the witne~s' s reluctance to assist the insurer.
4.58 Assuming there is a good reason for the actual underwriter's failure to testify, the

insurer may rely On evidence adduced as to objective materiality as indirect proof of inducement. In St Paul Fire <& Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd,'35 a construction risk was underwritten by fouf insurers. However, the presentation of the risk contained serious errors with regard to the nature of the intended foundations, and the insurers sought a declaration of entitlement to avoid the policy. Three underwriters gave evidence on behalf of theit insurers that cleatly established their inducement by the shortcomings in the presentation of the risk. 136 The fourth insurer, however, adduced no such evidence since the underwriter concerned had left its employment and relations between him and the company were strained. However, a factual inference of inducement could be, and was, drawn from the materiality of the non-disclosures and misrepresentations, reinforced by the proved inducement of the other three insurers.
In the absence of a good reason, the failure on the part of the actual underwriter 4.59 to testify may constitute evidence of lack of inducement. The court may infer that the reason why the insurers did not produce the underwriter as a witness was because they lacked confidence that the underwriter could testify credibly of a difference in treatment of the risk and maintain that testimony nnder cross137 examination. Again, however, there is no legal presumption,138 and the failure to produce the actual underwriter may be outweighed by other evidence. Where the insurers' explanation for the underwriter's absence is credible but not wholly satisfactory, the failure to produce the underwriter as a witness will again COUnt against the insurers but with reduced probative weight. 139

(b) Unknown inftrmation

'" Smith v Chadwick (1884) 9 App Cas 187, 196 per Lotd Blackburn. See also St Paul Fire 6Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd [1995J 2 Lloyd's Rep 116, 127. 130 Imurance Corp ofthe ChannelIslands v Royal HotelLtd [1998) Lloyd's Rep lR 151, 158; Assicurazioni Generali SpA vArab Imuranee Group (BSC) [20021 EWCA Civ 1642, [200311 WLR 577, paras 61, 62.
131 Marc Rich drCoAG v Portman (1996J 1 Lloyd's Rep 430, 442; Sirius International Insurance Corp v Oriental Assurance Corp [1999] Ll.oyd's ~ep IR 343, 351 ..If the ~nderwriter is called, and the court is left unable to reach a conclUSIOn on Inducement, the Insurer s defence falls for failure to discharge the burden of proof: Marc Rich v Portman, 442. 132 International Management Group (UK) Ltd v Simmonds [2003] EWHC 177 (Comm), [20041 Lloyd's Rep IR 247, para..l47. Inducement offoHowing underwriters is discussed at 4.61ff below. 133 In International Management Group v Simmonds, the underwriter, who had ceased to work for the insurets, demanded access to confidential information to which he/was nat entitled in return for co-operating as a witness. . 134 ibid para 148.

Some difficulty may arise where representing or disclosing the truth would lead 4.60 the underwriter to seek further information before making a decision, and it is unclear what further information would have been tevealed so that the insurer cannot prove directly how it would have responded to the additional information. In such a situation, the underwriter will have to fall back on indirect, or circumstantial, evidence of inducement. A combination of proof of materiality and proof that the underwriter would, more probably than not, have sought further information before reaching a decision on whether to accept the risk and, if so, on what terms should suffice to establish inducement on a balance of

BS

[1995J 2 Lloyd's Rep 116.

As the trial occurred before the ruling of the House of Lords in Pan Atlantic v Pine 1Op, the evidence was directed solely to materiality, but the Court of Appeal held that it also established inducement. '" Smith v Chadwick (1884) 9 App Cas 187, 196-7. ,,, ibid 197. See also M'Queen v Great Western Railway Co (1875) LR 10 QB 569. 139 Wisniewski v Central Manchester Health Authority [19981 PIQR 324, 340.
136

122

123

The Doctrine ofUtmost Good Faith

probabilities.140 Otherwise, the assured will benefit from ~ gap in information directly attributable to its material non-disclosure or misrepresentation. An insurer that seeks to prove that further information would, indeed, have been sought should be able, credibly, to indicate the enquiries that would have been made and the possible information that such enquiries would have revealed.'4'
(4) Inducement in a Subscription Market 4.61

Inducement
Instead, a seties of first instance decisions have adopted a different analysis that 4.63 concentrates on the presentation by the broker to each following underwriter. The broker may be regarded as impliedly representing to each following underwriter that a fair presentation was made to the leading underwriter, with proper disclosure of all material circumstances and containing no material misrepresentations'50 Alternatively, the fact that a fair presentation has not been made to the leading undelwriter is a material circumstance requiring disclosure to following underwriters.'51 Following underwriters will each, individually, make their own decisions as to whether to subscribe to the risk, and if so for what percentage, and whether to accept the terms as agreed by the leading underwriter. Nevertheless, considerable reliance is placed on the subscription of the leading underwriter so that it will not be hard to persuade a court that a following underwriter would have taken a different decision with respect to the risk if it had known that the leading underwriter's rating of the risk and subscription had been procured by an unfair presentation of the tisk. 152 Where a separate full and fair presentation is made to a following underwriter, it will be a question of fact whether the following underwriter is also induced by the subscription and rating of the leading underwriter.'" Equally, a following underwriter who relies on the judgment and participation of the leading underwriter may be unable to establish inducement by some misstatement made separately to the following underwriter by the broker. 154
(5) Negating Inducement

In Chapter 2 above, it was seen that the placement of insurance in the subscription market results in a seties of separate contracts that ate generally, although not necessarily, on uniform terms negotiated between the broker and the leading nnderwriter.'42 The level of presentation to. follo.win g unde,;"riters may vary bm is often minimal, with followmg underwnters mstead placmg conSiderable reliance on the repmation and jndgment of the leading nnderwriter. This raises a problem of inducement. Clearly a leading unde,;"riter ca~ avoid on the basis of any material non-disclosure or misrepresentatiOn that mduced it mto its
contract. However, can following underwriters claim to avoid their contracts in circumstances where no material non-disclosure or misrepresentation was made

specifically to them?
4.62 In the eighteenth-century case of Pawson v Wtztson, '43 it was held that a misrepresentation made to a leading underwriter rendering its contract voidable is impliedly made also to following underwriters, si~ilar~~ contaminating their contracts. Representations to intermediate underwnters were not wlthlll the rule as there was nO ground for presuming reliance on their signatures.'45 The rule was, however, acknowledged only with disfavour by Lord Ellenborough;'46 c . ' 'n,,' and supporting authonty ror 'Its eXIstenCe IS not strong. '47 In 'T'h e Z.e[ ryr, '48 1i Mustill LJ grudgingly accepted the possibility of such a rule, bm expressed doubr as to its existence and refused to recognize an analogous principle for statemenrs by the broker outside the contract.'49

Inducement will uot be present where the underwriter obtains independent 4.64 verification of the information,155 or where the breach of a duty of mmost good faith is cured before the contract is concluded,156 whether by supplying information previously omitted or by withdrawing or correcting a misrepresentation

'40 Moore Large 6- Co Ltd v Hermes Credit 6- Guarantee plc[2003] EWHC 26 (Comm), [2003] 1 Uoyd's Rep 163, paras 71,80. 141 Pedley vAvon Insurance [20031 EWHC 2007 (QB), unreported, para 123. '42 See 2.14-2.15 above. 143 (1778) 2 Cowp 785. 144 Following underwriters who initial the slip before the following undclwrirer alleging a breach of the duty of utmost good faith. 145 Bell v Carstairs (1810) 2 Camp 543; Brine v Featherstone (1813) 4 Taunt 869. '46 Bell v Carstai" (1810) 2 Camp 543; Forrester v Pigou (1813)1 M & S 9. . 147 Barber v Fletcher (1779) 1 I?oug1305 (obiter, because the representatlon was not material); Marsden v Reid (1803) 3 East 5Tl (obiter, because the relevant evidence was inadmissible); Feise v Parkinson (1812) 4 Taunt 640. 148 General Accident f"tre & Life Assurance Corp v 'lanter (The Zephyr) [1?85] 2 Lloyd's Rep 529,534, . . 149 Namely, signing indications. The case is discussed further at 5.0'8 below.

Bank Leumi Le Israel EM v British National Insurance Co Ltd [1998] 1 Lloyd's Rep 71, 76. Aneca Reinsurance Underwriting Ltd v Johnson [1998] 1 Lloyd's Rep 565; International Management Group (UK) v Simmonds [2003J EWHC 177 (Comm), [2004J Lloyd's Rep IR 247, para 150; Brotherton vAseguradora Colseguros SA (No 3) [2003] EWHC 1741, [2003] Lloyd's Rep IR 762, para 44. 152 International Management Group (UK) v Simmonds [2003] EWHC 177 (Comm), [2004] Lloyd's Rep IR 247, para 150; Brotherton v Asegmadora Colsegmos SA (No 3) [20031 EWHC 1741, [20031 Uoyd's Rep IR 762, para 44. 153 Bank Leumi Ie Israel BM v British National Insurance Co Ltd[1998] 1 Lloyd's Rep 71, 76; Brotherton v Aseguradora Colseguros SA (No 3) [2003] EWHC 1741, [2003J Lloyd's Rep IR 762, para 44. 154 Glencore International AG v Alpina Insurance Co Ltd [20031 EWHC 2792 (Corom), [2004J 1 Lloyd's Rep Ill, para 180. 155 Attwood v Small (1836) 6 C! & F 232. 156 Strover v Harrington [1988] Ch 390.
150 151

124

125

The Doctrine ofUtmost Good Faith

. previOUSlade .157 'A correction must [however] be fairly made to the .insurer ym that the corrected picture is fairly presented on behalf of the Insured ... such fd' ... and comes to the knowledge of the insurer."58 The opportuni;;, 0, Iscover. the information or inaccuracy does not negate Inducement: No-one IS ~ . entitled to make a statement which on the face of it conveys a fal'ImpressIon se and then excuse himself on the ground that the person to whom he made It had available the means a f correction.
4.65

Circumstances Requiring Disclosure

(1) The Physical Hazard

The phrase 'physical hazard' is used to denote the risk presented by attributes 4.67 of the insured property. All material aspecrs of the physical hazard must be disclosed and must not be misrepresented.

'160

to challenge a claim of inducement of the actual underwriter by seeking to establish a pattern of disregarding information of the type at .issue or even a pattern of careless underwriting generally. In Marc Rich 6- CoAG tman '61 the assureds sought to portray the underwriter as 'aman who had v p,or , . ., I '162 abrogated his underwriting functions and eXIsted In an Intellectua stupor lfi order to argue that even if certain blatantly matenal Information had been disclosed in relation to the particular risk the underwriter would have taken no notice of it. Longmore J emphasized that the question of inducem~ntwas 't~ be determined by reference to the actual risks underwntten and theIr. ImmedIate context'. The question was whether the underwriter had abrogated hIS functl~ns in relation to the policy in question 'not in relation to numerous other tlsks

An assured may wish

. ., wntten on d'[:: Illerent occaSIons. '63

Liberian Insurance Agency Inc v Mosse'65 exemplifies the physical hazard. The 4.68 assured failed to disclose three material facts relating to insured cargo described as 'enamelware (cups and plates) in wooden cases'. First, the cargo included 823 cartons that were more susceptible to water damage and, therefore, offered less protection to the enamelware than wooden cases. Secondly, a significant proportion of the enamelware had been touched up by ovetpainting. This was material because any break in the continuity of the surface rendered the enamelware more susceptible to brealcage and because, in the event of a casualty, it would be difficult to assess how much damage had been incurred in transit, as opposed to being original damage overlooked by the manufacturer and nor touched up. Thirdly, the goods were an end-of-stock purchase at a cheap price. Although the low price was not material in itself, it was indicative of the quality of the goods which was material. The goods might well contain a high proportion of substandard examples, again raising a danger of the insurer being claimed against in respect of the original state of the goods."6
(2) The Moral Hazard

D. Circumstances Requiring Disclosure

4.66 The pre-formation duties of utmost good faith embrace not ~nly circumstanses

relating to the subject-matter insured, but also any other CIrcumstance whatsoever that is material to the risk presented to the insurer. '64

The concept of materiality extends also to what has come to be known as the 4.69 'moral hazard'. This phrase embraces the human aspects of the risk, related not to any insured property but rather to the character and histoty of the assured and other persons relevant to the risk given the position they occupy in relation to the subject-matter insured."? Human circumstances fall within the moral hazard to the extent that they indicate an increased likelihood of either a loss occurring or an attempr being made to bring an illegitimare claim. Classically, rhis includes, but is not restricted to, the assured's claims history,'68 the facr that

157

Withdrawing or correcting a misrepresentation is expressly envisaged by MIA 1906,

[1977] 2 Lloyd's Rep 560. See also Greenhill v Federal Insurance Co Ltd [1927] 1 KB 65 (assured must disclose that goods already damaged). 167 Pedley v Avon Insurance [2003] EWHC 2007 (QB), unreported: status as an undischarged bankrupt material if the individual is the director, principal, or manager controlling the insured business, but not material if the individual is an employee involved in mechanical work or a consultant: at pata 18. Also Markel International Insurance Co Ltd v La Republica Compania Argentina de Seguros [2004] EWHC 1826 (Comm), [2005] Lloyd's Rep 1R 90, para 25: previous dishonest misleading of leading underwriter by producing broker probably material for disclosure since more likely to misrepresent facts or suppress information leading to deficient presentation of risk by placing broker. 168 The previous claims record was the subject of the non-disclosures and misrepresentations in both CTI v Oceanus and Pan Atlantic v Pine TOp.
165
166

s 2~16~ssicurazioni Generali SpA 0 Arab Insurance Group (BSC) [2002] EWCA Civ 1642, [2003] 1 WLR 577, para 64 per Clarke LJ. 159 ibid. See also Central Railway oJVenezuela v Kirsch (1867) LR 2 HL 99; Redgrave v Hurd (1881) 20 ChD 1. . . . '60 Norton 0 Ashburlon [1914] AC 932, 962 per Lord Dunedm. See Malh, v Abbey Life Assurance Co Ltd [1996] LRLR 237; New Hampshire Insurance Co v Oil Refine~ies Lt~ [2?02~ 2 Lloyd's Rep 462, para 21 (where a correction point is considered under the headmg of waiver). '" [1996] 1 Lloyd's Rep 430. 162 ibid44lperLongmoreJ. ., .. 163 ibid. The assureds had sQ,ught disclosure of all of the underwrltcr s wrltlngs over the revious five years, but the insurers had r~fused. Disclosure wil~, however,. be ordered o~ docur ts that relate to the writing of similar nsks and are of probative value WIth respect to mduce::~t to writing the actual risk in question: GIG Personal Investment Service} Ltd v Liverpool & London Steamship Protection & Indemnity Association Ltd (Carom Ct, ~7 November 1997). 164 Ionides 0 Pender (1874) LR 9 QB 531; Rioaz v Germsi Bros.& Co (1880) 6 QBD 222.

126

127

The Doctrine ofUtmost Good Faith

the assured is in serious financial difficulty and circumstances indicative of such difficulty,169 the history of involvement in previous casualties of the master and crew, and the criminal tecord of the assured and key personnel, such as the
master, where the crimes impact on the risk to be insured. A conviction for a

Circumstances Requiring Disclosure

the master's criminal record in Italy for drawing cheques without supporting funds. It was argued that no adverse inference regarding the master's dishonesty could be drawn from such acts because under Iralian law dishonesty was not a
necessary ingredient of the offence. However, the mastees recidivism indicated

parking offence would not require disclosure, but rhe fact that one has been charged with or convicted of a dishonesty offence would. '70 Disclosure of circumstances that relate to the moral hazard is not excused because of possible . embarrassment or preJu d'Ice t h at ro1'gh t resu1t. 171
4.70 An example of the moral hazard is provided by The Dora,172 where the assured failed to disclose in a proposal for yacht insurance that smuggling charges were pending in Italy against the crew of the vessel presented for insurance. Phillips J held the insurer entitled to avoid for non-disclosure, rejecting four arguments advanced on behalf of the assured. A submission that the charges were immaterial because they were not well-founded failed because they were. 173 Secondly, it was argued that the smuggling was insufficiently serious to be material. On the facts, however, the smuggled goods were worth US$6,OOO and dishonesty on such a scale was cleatly material. The question of whether even trivial smuggling of, for example, a solitaty bortle of alcoholic liquor, would be material provoked disagreement between expert witnesses. On one view the mere fact of a dishonesty offeuce was material, while another view accepted that de minimis dishonesty would not be material. '74 The third argument, that a criminal conviction could be avoided under Italian law by the payment of an administrative fine, was dismissed as irrelevant. Fourthly, it was argued that there was no relevant relationship between the assured and the three crew members char~"d with smuggling, since at the time of the offence they were employed by the yacht's previous owners. However, since two of the three continued to.crew the yacht for the assured, their moral standards were clearly material. 4.71

deliberation or at least an incompetence incompatible with diligent management of financial affairs. The response in evidence of the managing agent of the Dora, who was also the vessel's second hand and mechanic, that he dealt with finance while the master was employed to navigate, was rejected as unsatisfactory. Phillips J stated as follows: 175 The role ofa skipper of a yacht is well recognised and involves nverall responsibility
for the vessel. Financial competence and probity is an essential requirement. I have no doubt that any underwriter would consider it material to be told that the skipper was only competent to look after the navigational aspects ofthe running of the yacht and that his crew would be responsible for other aspects of the operation

of the vesseL
(3) Other Circumstances Relevant to Assessment of the Risk

The duties arising under the pre-formation doctrine of utmost good faith are 4.72 not confined to circumstances that fall within the physical hazard or moral hazard. These expressions are useful shorthand for certain categories of material circumstance but in no way circumscribe the scope of materiality. The duties extend to any circumstance of whatever nature that a prudent undetwriter would take into aCCount in assessing the presented risk.

An example is provided by circumstances relevant to the insurer's possibilities of 4.73

recoupment ofloss moneys through the doctrine ofsubrogation. On indemnifYing the assured for a loss covered by the policy, the insurer is entitled to be subrogated to the assured's rights against any third party legally liable for the ]OSS.'76 An agreement between the assured and the third party limiting the third party's liability will be binding on the insurer and, therefore, diminish its subrogation rights. Provided that diminution affects the acceptability of the risk or the level of premium, such a limitation of liability must be disclosed as a material circumstance. Tate & Sons v Hyslop177 concerned the insurance of goods in transit. The assured's contract with lightermen for the unloading of his goods rendered them liable only for negligence, instead of as common carriers. It was established that insurers, under such circumstances, charged a higher rate of premium. Consequently, the assured's failure to reveal the limitation of liability constituted a material non-disclosure.

The insurer was also held entitled to avoid on the ground of non-disclosure of
_____ o

o_~---

169 James v CGU Insurance pic (2002] Lloyd's Rep IR 206, paras 81-88 (disputes with revenue authorities of such a scale as to bear on financial viability of assured's business); North Star Shipping Ltd v Sphae Drake Insurante pit (No 2) [2005] EWHC 665 (Comm), [2005] 2 Lloyd's Rep 76, paras 229-236. 170 See generally PH Clarke, 'The Disclosure of Criminal Information To Insurers' (1984] LMCLQ 100. A material offence that is 'spent' under the Rehabilitation of Offenders Act 1974 need not be disclosed: see s 7(3) of the 1974 Act. 171 James v CGU Insurance pic (2002] Lloyd's Rep IR 206, para 55. 172 lnversiones Manria SA v Sphere Drake Insurance Co pic (The Dora) [1989) 1 Lloyd's Rep 69. 173 On charges that are in ttuthill-founded, see 4,82ffbelow. 174 The better view is that any act of dishonesty is capable in law of being material, whether in isolation or in combination wirh other circumstances. Ultimately, however, materiality is an issue offacr in each case: Cate v Sun Alliance Insurance Ltd[1995] LRLR 385,407 (New Zealand High Court).

175

177

The Dora (n 172 above) 95. (1885) 15 QBD 368.

176

Subrogation is discussed in eh 25 below.

128

129

The Doctrine ofUtmost Good Faith

4.74 There are however, limirs to materiality. 1n particular, materiality does nor

Circumstances Requiring Disclosure

assessed but merely to the performance of a contract to insure a risk. lB4 1n such qald terms, however, the argument is nor self-evidently correct. The insurer when assessing rhe risk and derermining a premium must make certain assumprions on when rhe premium will be paid and the time and rrouble thar may be required ro colleer rhe premium. Three facrors invite consideration. First, the proposed policy terms may contain a premium warranty, under which risk will nor attach unless premium is paid within a specified period of time. Disclosure of past default would then be superfluous and would accordingly be excused. lB5 Where, however, the policy will not necessarily contain a premium warranty, a past history may be relevant to the insurer's decision on whether such a clause should be included. Secondly, iIi marine insurance law, the obligation under rhe policy to pay premium lies on the placing broker, not on the assured.'86 It may, therefore, be argued rhat the assured's financial reliability is irrelevant. This, however, assumes that the insurer will have no qualms about pursuing a broker, ro whom it looks for future business, for possibly subsrantial sums of premium. Thirdly, delay in payment of premium is 'a common malaise in the marine insurance market' .'87 This assumes, of course, rhat the assured's history of delay is no worse than normal for the market. On that assumption, disclosure may be excused, not because of lack of materiality, bur because rhe insurer is presumed to know rhe normal workings of the market. lB8 Moreover, an insurer will find ir difficult, if not impossible, to esrablish inducemenr by non-disclosure of a normal incident of the market. Where, however, the assured's history is our of step wirh normal market experience, such difficulties subside.'8' The scope of materiality is also affecred by the risk the insurer is being asked to 4.77 accept. In the context of open covers,,90 most if nor all of the specific risks thar will be declared are unknown ro the assured ar rhe rime the open cover is concluded. Moreover, certain matrers relaring to particular risks, such as rhe underlying commercial arrangement relating to the carriage of cargoes, may vary during the period of the cover and do nor, therefore, provide a basis for
assessing the open cover risk. Underwriters, therefore, assess such an open cover

extend to 'anything that a prudent underwriter might like to know in deciding whether to undertake this piece of business. 'It does not include material whIch is relevant only to the question whether or not something is "good business", but has no bearing on the likelihood and extent of any loss to the InSUrer under
the contract.'178
4.75

In Societe Anonyme d'Intermediaries Luxembourgeois v Farex Gie,'79 a m~jority of the Court of Appeal held that where the insurer has accepred rhe rIsk at an agreed level of premium on the basis rhat the risk will be reinsured, knowledge on the part of the assured that the reinsurance is invalid need not be disclosed.'80 Hoffmann LJ acknowledged that rhe breadth of the wording of section 18(2) extended as far as the likelihood and extent of recovery via subrogation. Observing, however, that such rights 'affecr rhe insurer's potential net loss under the contract ofinsuranct! and rhat the'duty of disclosure is founded upon the likelihood that matters affecting the insurer's liability under the contracr (including arrangements which may affect rights of subrogation) will be within the peculiar knowledge of the insured', he declined to extend the duty of dISclosure to rights under contracts to which the assured was not a party and of lB which the assured could have knowledge only by pure chance. ' Saville LJ agreed but on a different ground. The state of its reinsurance was some:hing an insurer ought in the ordinary course of irs business to be aware of Itself. Consequently, the assured's non-disclosure was excused under section 18(3)(b) of the 1906 Act. lB2 Dillon LJ dissented on this question, holding that the law as laid down in Tate & Sons v Hyslop required disclosure. Withour demurring fro"1U rhe applicability of section 18(3)(b), it is respectfully suggested that Hoffmann LJ is correct in the approach to materiality. Some difficulty surrounds rhe potential for materiality of past default on payment of premium. 18 ' Clearly, significant general financial difficulty requires disclosure as relevant to rhe moral hazard and premium defaulr would require disclosure if symptomaric of such general difficulty. Of irself, however, timeliness of premium paymenr may be regarded as relating not to the risk to be

4.76

by reference to matters thar affect rhe range of risks within its terms. It follows that, should the assured happen to know of a matter affecting a particular risk ro

1 Lloyd's Rep 389, para 222 per Richard Siberry QC ~sitting as a Dep~ty Judge of the High Court). See also A/dnch v Norwich Union Lift Insurance SOCiety [2000] Lloyd s Rep IR 1, 7-8. '" 119951 LRLR 116. 180 The case in fact concerned invalid retrocession, the reinsurer alleging non-disclosure by the
178

o'Kane vJones (The Martin P) [20031 EWHC 2158 (Comm), [20041

------------------_._-cf Moore Large 6- Co Ltd v Hermes Credit 6- Guarantee pic [2003] EWHC 26 (Carom), [2003J 1 Lloyd's Rep 163, para 55: financial information relating to business turnover not material if relevant only for calculation of instalments of premium under a policy once ongoing. 185 MIA 1906, s 18(3)(d), discussed at 4.106ffbelow. 18' See 6.21 below. 18' O'Kane v Jones (The Martin P) [20031 EWHC 2158 (Comm), [2004J 1 Lloyd's Rep 389 para 226 per Richard Siberry QC, sitting as a deputy judge of the High Court. 18' MIA 1906, s 18(3)(b), discussed at 4.91 ff below. 18' Marc Rich & CoAG v Portman [1997J 1 Lloyd's Rep 225. 190 For discussion of open covers, see 2.31 above.
184

insurer. 18' ibid 149. '" MIA 1906,s 18(3)(b) is discussed at 4.91ffbelow. 183 O'Kan, vJones (The Martin P) [2003J EWHC 2158 (Comm), [200411 Lloyd's Rep 389, paras 224-230; North Star Shipping Ltd v Sphere Drake Insurance pic (No 2) [2005J EWHC 665 (Comm), [2005J 2 Lloyd's Rep 76, paras 232-236.

130

131

The Doctrine ofUtmost Good Faith

be declared, disclosure will not be required because it will not be material to the underwriter)s assessment of the open cover. 191
4.78 It should be noted that, in marine insurance law, a previous rejection of the risk by another insurer is not material, on the basis that each insurer should arrive at its own decision for itself 192 Non-marine insurance adopts a contrary view. 193

Misleading or Inaccurate Circumstances

In Brotherton v Aseguradora Colseguros SA (No 3),'99 the claimants reinsured the exposure of the defendant insurers on a policy covering, inter alia, fraud by employees of a state-owned Colombian bank. The reinsurers alleged nondlsclosure of reports in the Colombian media of alleged corruption affecting key personnelm the bank, including its president, Mr Medina. Morison J dismissed an argument that the reports were nothing more than idle rumour:200
Were the reports 'loose' or 'idle' rumours or gossip? Plainly not. The reports the~selves do not ,have the ap~earance of tittle tattle and gossip. The reports' or stones are of speCIfic matters Involving a suspension of a specified person, the reason for the suspension and the involvement of the authorities. There is evidence to suggest that both Mr Medina himself and the insurers regarded these stories as 201 apolitical. Ther~ were dates and alleged facts. The reports related to improper a,dva~ces of a spec~fied ~mount [11 billion pesos] in respect of a particular location

E. Information
4.79 The assured's duty of disclosure extends to 'any circumstance known to the assured'. The concept of a 'circumstance' is in turn defined by secrion 18(5) of the Marine Insurance Act 1906 as including 'any communicarion made to, or information received by, the assured'. A distinction is, howevet, drawn between mere 'idle rumours' or 'gossip' on the One hand, and 'commercial intelligence' on the other. Only the latter constitutes 'information' or a 'communication' within the meaning of section 18(5), non-disclosure of which will render the policy voidable. "4 'Loose rumours which have gathered together, no one knows how, need not be communicated. Intelligence, properly so called, and as it is understood by mercantile men, ought to be disclosed when known. "95 Assuming that the reporr constitutes 'intelligence' rather than 'tumour' and would, if true, be material to the risk, disclosure is required, even if the reporr is unconfirmed.'" 4.80 Accordingly, in Durrell v Bederley, '97 insurers ofa vessel with letters of marq ue as a privateer were held entitled to avoid for non-disclosure of reporrs of \WO enemy warships in the relevant area, of a capture made by them, and of a ship's binnacle seen afloat on the sea bearing a compass of a particular description. In Seaman v Fonereau,'98 the assured failed to disclose a reporr suggesting that the vessel to be insured was in a leaky condition the day before encountering a severe gale. Again, insurers were held entirled to avoid.

[ ReglOnal Bogota] whIch was eventually the subject matter of a claim ... Even if
one :~ok a cynical, view about the quality of news reporting in the press and teleVISIon, whether In Colombia or elsewhere, it would be an extreme position to cOI~clude that everything in the newspapers was wrong or could be dismissed with

a pmch of salt. This was reporting of what appeared to be hard fact.

E Misleading or Inaccurate Circumstances

An assured may seek to justify a non-disclosure on the ground that the relevant 4.82 cIrcumstance ca~ be shown by reference to post-contract formation develop~ents to have, m truth, no bearing on the insured risk. The assured may, mdeed, be able to claim with some justification that the irrelevance of the circumstance was known to the assured at the time of contract formation, although that irrelevance could not at that time be proved. Such arguments may be deployed in two ways. First, it may be contended that they deny the materialIty of the relevant CIrcumstance. Secondly, even if the circumstance remains ma~erial, it may be contended that they should deny the insurer the right to avold the policy. This section is concerned with the former argument, while the latter is addressed later. 202 Arguments seeking to deny materiality because appearances at the time of con- 4.83 tract formation were misleading founder on two connected propositions. First: 'The moral philosophical basis of the duty of disclosure in an insurance context is that a true and fair agreement for the transfer of risk on an appropriate basis

", Glencore IntemationalAG v Alpina Insurance Co Ltd [2003] EWHC 2792 (Comm), [2004]
1 Lloyd's

Rep Ill, para 129.

192 Glasgow Assurance Corp Ltd v Symondson & Co (1911) 104 LT 254; North British Fishing Boat Insurance Co Ltd v Starr (1922) 13 LlLRep 206. 193 Glicksman v Lancashire &- Genera/Assurance Co [1927] AC 139. '" Brotherton v Asegumdora Coheguros SA (No 2) [2003] EWCA Civ 705, [2003] Lloyd's Rep

IR 746, paras 16,28.

'" Durrell v Bederley(l816) Holt NP 283, 285 per Gibbs q. See also Decorum Investments Ltd vAtkin (The Elena G) [2001] 2 Lloyd's Rep 378, para 27; International Management Group (UK) Ltd v Simmonds [2003] EWHC 177 (Comm), [2004] Lloyd's Rep IR 247, para 140. 196 On non-disclosure of intelligence that -is subsequently proved to be inaccurate, see 4.82ff
below.
"7

;:: [2003J EWHC 1741 (Comm), [2003] Lloyd's Rep IR 762.

200

ibid para 34.

. .p,..ccordlng to the claimants, the investIgations formed part of a political campaign to discredIt supporters of the government, including Medina, prior to a general election: Brotherton v

(1816) Holt NP 283.

'" (1743) 2 Str 1183.

Aseguradora Coheguros SA (No 2) [2003] EWCA Civ 705, [2003] Lloyd's Rep IR 746 para 8.
202

See 4. 168ffbelow.

'

132

133

The Doctrine ofUtmost Good Faith

depends on equality of information."03 It follows that materiality is determined by reference to the time of formation of the contracr.'04 The doctti~e of u:r:'0st good faith exists to enable underwriters to take inforn:ed underwrmng declSlons and an informed decision requires disclosure of all Circumstances rhat respond to the test of materiality at the time the decision is taken.'os It follows also that no causal link is required between the breach of the duty of utmost good faith and any ensuing loss.'06 Secondly, the insurer must take the risk as it appeared at the time of contract formation. An insurer cannot revisit the terms of the contract if circumstances come to light after contract formation that indicate that a higher premium or some other change of terms would be a fair reflection of rhe true risk. Reciprocity would suggest that if an insurer cannot take advantage of post-formation developments that demonstrate that rhe risk was in truth more serious than appeared, an assured should not be able to take advantage of post-formarion developments rhat demonsrrare that the tisk was in truth less serious than indicated by circumstances at the tlme of contract formation. 4.84 Some specific examples may be given of the consequences of rhis teasoning. First, non-disclosure of a circumstance thar indicates an increased likelihood of loss is not excused if thar circumstance subsequently proves not to be true. In Seaman v Fonereau,,07 the assured failed to disclose information suggesting the insured vessel might have sustained damage, or even been lost, in a gale. It transpired that tbe vessel survived the gale but was subsequently captured. Likewise, in Lynch v Hamilton,'oS the assured failed to disclose that some of the insured goods were to be loaded on board a vessel reported at Lloyd's as at se;in a damaged condition. The reporr turned out to be erroneous, but the vessel was subsequently lost by capture. In each case, the insurer was held entitle;! to avoid the policy. 4.85 A similar issue atises where, at the time of placement of the risk, the assured or a relevant member of the crew is subject to investigation in connection with an offence that goes to moral hazard, or has been charged with such an offence, but the investigated or accused person is in fact innocent, and the investigations lead

Misleading or Inaccurate Circumstances

to no charges, charges are dropped, or a trial results in an acquittal. The fact of the investigation or charge is material and should be disclosed.'o, Disclosure would, however, include not only the fact of the investigation or charge but also all evidence available to the assured at that time of the relevant person's innocence. Accordingly, an insurer wishing to avoid the policy has to prove that it would have taken a different decision on the risk had the assured made full disclosure of both the investigation or charge and also the evidence of innocence. In other words, while the investigation or charge remains objectively material, the exculpatory evidence may deny that the non-disclosure induced the actual insurer into the contract."o The likelihood of exculpatory evidence negating inducement must, however, be assessed in the context of the realities of

marine underwriting:
.. . in the London marine market underwriters will normally expect to evaluate a

risk with some rapidity. They do not normally deliberate at length on the acceptability of such risk. They would expect to give an immediate or at least a fairly
immediate response to a broker. In particular, their approach is not usually to go behind the information presented to them . . . Underwriters simply do not have the time or the legal expertise necessary to satisfY themselves with regard to a complicated structure of disputes as to the innocence of the assured. Accordingly they have to take the risks at face value and, if there are queries going to the probity of the assured, they are unwilling or at least reluctant to rely on the broker's assurance of innocence in the absence of cogent independent evidence which is

obviously such as to dispel the adverse impact of the other (material) facts disclosed
to them. 211

Secondly, a circumstance requires disclosure if it satisfies the test of materiality 4.86 even if the assured claims it is untrue and could, if allowed, prove it. This embraces, for example, the wrongful conviction of the assured of an offence

203

Brotherton vAseguradom Cols'guros SA (No 2) [2003J EWCA Civ 705, [2003J Lloyd's Rep

IR 746 para 24 per Mance LJ.

204 ibid paras 18, 39. Or such earlier time at y:hich the i,fiSurer commits itself to an obligation binding in the eyes of the market to accept the rIsk of certam terms: see 2.21, n 46 above. 20S ibid para 40. See also Pan'Atlantic Insurance Co Ltd v Pine TOp Insurance Co Ltd [1995] 1

109 March Cabaret Club & Casino Ltd v London Assurance [I975J I Lloyd's Rep 169, 177; Inversiones Manda SA v Sphere Drake Insurance Co pIc (The Dora) [1989] 1 Lloyd's Rep 69,93-4; Strive Shipping Corp v Hellenic Mutual war Risks Association (Bermuda) Ltd (The Grecia Express) [2002J EWHC 203 (Comm), [2002J Lloyd's Rep IR 669, para 283; Brotherton v Asegumdara CohegurosSA (No 2) [2003J EWCA Civ 705, [2003J Lloyd's Rep IR 746, paras 22, 24; North Star Shipping Ltd v Sphere Drake Insurance pk (No 2) [2005J EWHC 665 (Comm). [2005J 2 Lloyd's Rep 76, paras 209-210. The contrary view espoused in Reynolds v Phoenix Assurance Co Ltd [I978J 2 Lloyd's Rep 440. 460; Gate v Sun Alliance Insurance Ltd [19951 LRLR 385, 408 (New Zealand High Court) now dearly does not represent English law. 2>0 Brotherton vAseguradora Colseguros SA (No 2) [2003J EWCA Civ 705, [2003J Lloyd's Rep IR 746. paras 22, 39; North Star Shipping Ltd v Sphere Drake Imurance pk (No 2) [2005J EWHC

665 (Comm), [2005J 2 Lloyd's Rep 76, para 210.

211 North Star Shipping Ltd v Sphere Drake Insurance pic (No 2) [2005J EWHC 665 (Comm), [2005J 2 Lloyd's Rep 76, para 256 per Colman J. cf Brotherton v Aseguradora Colseguros SA (No 2) [2003) EWCA Civ 705, [2003J Lloyd's Rep lR 746, para 28 per Mance LJ: a court 'will be able to

AC SOL 528.
206
207 108

Pan Atlantic Insurance Co Ltd v Pine TOp Insurance Co Ltd [1995] 1 AC 501, 528.

(1743) 2 5" II83. " (1810) 3 Taunt 37, .ffd (I8II) 14 East 494 sub nom Lynch v Dunsfiml.

take a realistic and even a robust view' on inducement.

134

135

The Doctrine ofUtmost Good Faith

that goes to moral hazard.'" Again, disclosure would includ; such evidence of innocence as was then available to the assured and an msurer s chum of mducement into the contract by reason of non-disclosure would fall to be considered 21 against a hypothesis of such full disclosure. '
4.87 Of course, in the converse situation of acquittal of the assured of an offence going to moral hazard when in truth the assured was guilty, the co~mission of the offence remains material and should be disclosed. Equally, disclosure is required of offences in respect ofwhich no overt sign ofsuspicion has ever fallen on, or no formal allegation has been made against, the assured. In March Cabaret Club 0- Casino Ltd v London Assurance,2" May J stated as follows: 'No one has a right to a conttact of insurance, and if a proposer has committed a criminal offence which is material and ought to be disclosed he must disclose it, despite the presumption of innocence, which is only a presumpdon, and despite the privilege of non-incrimination, which is only a privilege-or he must give

Circumstances not Requiring Disclosure

non-disclosure of these objectively material circumstances. 217 In all four cases, if the insurer does inquire, section 18(3) is irrelevant. 21 ' The assured must respond and its answer, falling within the province of the law of misrepresentation, will need to be complete and accurate. (1) Diminution of the Risk Section 18(3)(a) provides that the assured need not disclose any circumstance 4.90 that diminishes the risk. Thus, the fact that a vessel does not come on risk at the beginning of the period of cover of itself reduces insurers' exposure and does not require disdosure. 219
(2) Within the Insurer's Actual or Presumed Knowledge

up the idea of obtaining insurance at all.'

4.88 There is, however, no requirement that the assured disclose circumstances that the assured knows do not reflect upon the insured risk bur that might be regarded as suspicious by another party. An assured does not have to investigate circumstances it knows to be innocent in order to determine whether they 215 might be misconstrued by a prudent underwriter.

By vittue of section 18(3)(b), in the absence of inquiry, an assured need not 4.91 disclose any 'circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know'.

An insurer is presumed to know general matters affecting the type of business it 4.92
writes, such as the usual conditions affecting transportation in a particular country,220 and the incidence of maritime casualties affecting a particular type of vessel in a particular geographical sector. 221 Moreover, the development of vastly improved, particularly electronic, access to information, both previously recorded information and breaking news, will impact upon the boundaries of insurers' knowledge of general events, both actual and presumed. 'With modern methods of communication, [a London underwriter] can be expected to know more things than 50 or more years ago.'222 In addition, 'every underwriter is presumed to be acquainted with the practice of the trade he insures; if he does not know, he ought to inform himself'.223 Accordingly, an insurer that agrees to

G. Circumstances not Requiring Disclosure

of 4.89 Section 18(3) of the Marine Insurance Act 1906 provides that, in the absence 216 inquiiY from the insurer, four types of circumstance need not be disclosed. Their disclosure is excused, not because they are not material, but because it would be unfair to permit avoidance of the contract on the ground of

212 Reynolds v Phoenix Assurance Co Ltd [1978J 2 Lloyd's Rep 440, 460; Brotherton v Asegura~ dora Coueguros SA (No 2) [2003] EWCA Civ 705, [2003] Lloyd's Rep IR 746, para 23 (referring by error to March Cabaret r:!ub 6' c.asino .Lt~ v L,ondon Assur~nce [1975] 1 Ll~yd's Rep, 1?9 instead of Reynolds v Phoentx). cf Stnv!! Shtppmg Corp v Hellentc Mutual W0:r Rl$ks Assoctatton (Bermudo) Ltd (The Greda Express) [2002] EWHC 203 (Comm), [2002] Lloyd's Rep IR 669, para 277. > 2B Brotherton vAseguradora Coueguros SA (No 2) [2003] EWCA Civ 705, [2003] Lloyd s Rep IR 746. para 23. 214 [1975] 1 Lloyd's Rep 169, 177. 215 Strive Shipping Corp v Hellenic Mutual \..%-r Ris}~s Association (Bermuda) Ltd (The Grecia Express) [2002] EWHC 203 (Comm), [2002] Lloyd's Rep IR 669, para 284: OKane vJones (The Martin P) [2003] EWHC 2158 (Comm), [2004] 1 Lloyd's Rep 389, para 23 I. 216 The subsection is derived largely from LotdMansfield's statements on 'the nature of concealments' in Carter v Boehm (1766) 3 Burr 1905, 1910.

217 Pan Atlantic Insurance Co Ltd v Pine TOp Insurance Co Ltd[1995J 1 AC 501, 533-4; St Paul Fire & Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd [1995] 2 Lloyd's Rep 116,124. 21' Brotherton v As'guradora Coueguros SA (No 3) [2003] EWHC 1741 (Comm), 12003J Lloyd's Rep IR 762, para 35. 219 Inversiones Manria SA v Sphere Drake Insurance Co pic (The Dora) [1989] 1 Lloyd's Rep 69, 89-90. '" Schloss Bros v Stevens [1906J 2 KB 665, 668. 22\ North British Fishing Boat Insurance Co Ltd v Starr (1922) 13 LlLRep 206, 210. 221 Brotherton v Aseguradora Coueguros SA (No 3) [2003J EWHC 1741 (Comm), [2003] Lloyd's Rep IR 762, para 35 per Morison J. 223 Carter v Boehm (1766) 3 Burr 1906, 1911 per Lord Mansfield. Likewise Noble v Kennoway (1780) 2 Doug KB 510, 513.

136

137

The Doctrine ofUtmost Good Faith

cover goods in rransir is presumed ro know rhe usage of rhe carrying trade, with 224 . respect, for examp1 to carnage on dk . e, ec
4.93

Circumstances not Requiring Disclosure

insurance of the Georgia, a former Confederate cruiser of some notoriety purchased by rhe assured and converted into a merchantman. He then insured the vessel wirhout disclosing its histoty, which was a material facr since it rendered the vessel liable to capture by the Unired States Navy. The insurer admitted he knew a vessel called the Georgia had been in Confederate service and had been sold. The jury further accepted thar at the time of underwtiting he did not realize that the Georgia in question was the former Confedetate ship but found 'that he had abundant means of identifYing the ship'. The Courr of Queen's Bench held the insuret entitled to avoid the policy. It was insufficient that the insurer 'might peradventure, by an effort of memoty and of reasoning applied to the information actually communicated, have arrived at the knowledge of the [material] fact'. '30 In London General Insurance Co v General Marine Underwriters Association,231 4.96 insurers sought reinsurance of a cargo risk. Earlier that day, reinsurers had received from the market a casualty slip giving notice of a casualty involving the carrying vessel, but rhey had not read the slip. The Court of Appeal held that the reinsurers did not have deemed knowledge of the casualty. They 'could not be expected ro have always present to their minds infotmation which at the time they got ir would have no interesr for them at all'. 232 A fOrtiori, insurers are not presumed to know something about insured property merely because it has been published in the media, even when they are marine insurers and the information is published in a specialist media forum targeted at the maritime
community.233

Glencore International AG v Alpina Insurance Co Lttl" concerned open cover insurance in favour of one of the world's Iargesr international commodity traders in crude oil and oil products. Moore-Bick J held that the assured's disclosure obligarions were significanrly resrricted by the nature of the risk. This had twO essential features. First, the cover extended to transit by any means from anywhere and ro anywhere in the world and ro storage anywhere in the world. 'It is difficult ro imagine a policy on goods being written in wider terms than these."" Secondly, commodity trading required rapidity of response ro market opportunities and a preparedness to innovate in business methods. This led Moore-Bick J ro reason as follows with respect to disclosure:'"
.. . when an insurer is asked to write an open cover in favour of a commodity trader he must be taken to be aware of the whole range of circumstances that may arise in the course of carrying on a business of that kind. In the context of worldwide trading the range of circumstances likely to be encountered is inevitably very wide. That does not mean that the insured is under no dury of disclosure, of course, but it does mean that the range of circumstances that the prudent underwriter can be presumed to have in mind is very broad and that the insured's dury of disclosure, which extends only to matters which are unusual in the sense that they fall outside the contemplation of the reasonable underwriter familiar with the business of oil trading, is correspondingly limited. It also means that the insured is not bound to disclose matters which tend to increase the risk unless they are unusual in the sense just described.

4.94 It is clear, however, rhat section 18(3)(b) is not to be used to undermine funga-

mentally the assured's obligation under the docrrine of utmost good faith to make a fair presentation of the risk to be insured. 228 In particular, the case law
denies that the insurer is responsible for maintaining systems to ensure access to

information available in the market or in the public domain of relevance to risks rhat may be presented to ir. The assured's obligation to make a fair presentation of the risk requires the assured to bring all material circumstances within its knowledge to the insurer's attention. That the insurer could, with diligence, have discovered the mattet for itself does not excuse non-disclosure.
4.95 Two cases, in particular, exemplifY this approach. Bates v Hewiti''' concerned

Howevet, specialist information is increasingly made available through dedi- 4.97 cated electronic producrs. Insurers can subscribe to databases that contain extensive informarion on, for example, vessels and their owners. Is a hull insurer presumed ro know all the information on such a database if the insurer subscribes to it, or even if the insurer does not bur a prudent hull insurer would? The ability to search for and retrieve informarion with ease distinguishes e1ecttonic repositoties of infotmation from paper files, strengthens the case for developing the scope of presumed knowledge, and may serve to distinguish Bates v Hewitt were a case with similar facts to arise in the modern era.
An insurer is presumed to know matters pertaining to its own financial 4.98
arrangements. Consequently, the state of an insurer's reinsurance cover, even if

224

British & Foreign Marine Insurance Co v Gaunt [1921] 2 AC 41. See also Vallance v Dewar
"6 ibid para 34.
230

(1808) 1 Camp 503. '" [2003J EWHC 2792 (Conim), [2004J 1 Lloyd's Rep 111.
227
22e

ibid para 41. Kingscroft Insurance Co Ltd v Nissan Fire & Marine Insurance Co Ltd (No 2) [1999J Lloyd's

ibid 609 per Mellor].

231

[1921J 1 KB 104.

Rep IR 603, 629-30. 229 (1867) LR 2 QB 595.

232
233

ibid 110 per Lord Sterndale MR. Morrison v Universal Marine Insurance Co (l872) LR 8 Ex 40 (Lloyd's List).

138

139

The Doctrine ofUtmost Good Faith

material to the risk presented for direct cover,234 does not have to be disclosed to the insurer. 235 (3) Waiver
4.99 Section 18(3)(c) provides that, in the absence of inquiry, the assured need not
disclose <any circumstance as to which information is waived

Circumstances not Requiring Disclosure

of the insurer to request certain information, even where the insurer is aware of

the possibiliry of a marerial circumstance of a particular nature; it is for the

assured to disclose, not for the insurer to ask questions. 24o

by the insurer'.

Waiver may also be implied at common law, outside section 18(3)(c), from inquiry.
4.100 An insurer may waive disclosure of material circumstances rhtough an express

term of the policy. As a matter of public policy, fraudulent non-disclosure by the assured, and possibly by the assured's agent, cannot be waived. Otherwise, rhe extent of waiver is a matter for the true interpretation of the clause. 23 ' Reinsurance 'subject without notice to rhe same clauses and conditions as the original policy' waives disclosure of material terms in the original policy.237
4.101

It follows that partial disclosure does not put the insurer on inquiry of rhe 4.102 possibility of further material circumstances, so as to give rise to waiver. In New Hampshire Insurance Co v Oil Refineries Ltd,241 the broker presented a claims history for rhe five previous years, commencing in August 1989. The underwriter did nor enquire abour rhe previous history, and the broker did not disclose significant outstanding claims arising from rhe winter of 1988-89. The assured argued that rhe underwrirer knew the claims hisrory was limited to five years and should have asked for any additional information desired. Not surprisingly, HHJ Chambers rejected this argument:242
The obligation of disclosure is an active one. Silence is not disclosure. Silence by an insurer in the face of silence by the assured is not waiver. The signal sent by silence by the person seeking cover is that there is nothing to report; not that the insurer proceeds at his peril. I cannot see why limited disclosure should put the assured in any better position than total non-disclosure. If anything, the inference must be to the opposite effect because limited disclosure carries with it the implication that there has been revealed all that it is relevant to know ...

Waiver will again operate under section 18(3)(c) provided the assured communicares such informarion to the insurer 'as would put an ordinarily careful . ., 'al . insurer on mqUIry as to th ' e eXIstenCe 0 f fu rther mater! Clfcumstances. 238 A n insurer that subsequently fails to make an enquiry that common prudence demands will be taken to have waived disclosure of any circumstance such an enquiry would and should have revealed. In this context, waiver becomes part of the broad question of whether the assured has made a fair presentation of the risk, since a fair presentation will by definition disclose all material information or give fair warning to a reasonable insurer of the existence of further material circumstances not specifically disclosed. The question is not whether a failure to disclose is excused, but rather whether the assured has in fact fulfilled the disclosure obligation. Waiver will, however, be found only in a clear case:
underwriters are not detectives, and the onus remains on the assured to act with

the utmost good faith.'" A fOrtiori, waiver does not arise from the mere failure
See 4.75 above. Societe Anonyme dlntennediaries Luxembourgeois v Faro: Cie [19951 LRLR 116, 156.

Underwriters, moreover, are entitled ro take ar face value the information sup- 4.103 plied to them on the slip and in the form of brokers' summaries of the risk. Consequently, it has been held thar a statement that cargo to be shipped to a high class rourist resoft was to comprise high value 'clocks' did not invite a query rhat would have revealed rhat the goods were in facr watches. 243 An assured need not, however, disclose to a hull underwriter the precise cargo to be carried by the insured vessel during the period of cover. Provided the insurer is aware rhat cargo will be carried, and provided the cargo is norhing out of the ordinary and is lawful, the insurer is considered ro take the chance of wharever the cargo turns out ro be. 244 Outside secrion 18(3)(c), waiver may be implied from questions asked in a 4.104 proposal form on which the policy is based. The test is: 'Would a reasonable man reading the proposal form be jusrified in thinking that the insurer had

234

:m

236 Policy and interpretation with respect to waiver clauses is discussed below in the context of misrepresentation (4.110 below). Note that fraudulent non~disdosure is likely to transform some statements imo half-truths actionable as misrepresentations, is actionable in the tOrt of deceit (4.182 below), and may, therefore, also be characterized as misrepresentation for the purposes of a waiver clause and the remedy of avoidance: HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003J UKHL 6. [2003J 2 Lloyd's Rep 61, paras 20-22, 71. m Property Insurance Co Ltd v National Protector Insurance Co Ltd (1913) 18 Com Cas 119. See also Hewitt Bros v Wilson [1915] 2 KB 739 (assured need not disclose circumstances within the scope of a held covered claus~). 238 Greenhill v Federallnsuranee Co Ltd [1927] 1 KB 65, 89 perSarganr LJ. 239 Asfar v Blundell [1896] 1 QB 123, 129; C0rltainer 1ransport IrlternationalInc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984]1 Lloyd's Rep 476( Wife (Underwriting Agency) Ltd v Grupo Naeional Provincial SA [2004J EWCA Civ 962, [2004J 2 Lloyd's Rep 483.

240 Greenhill v Federal Insurance Co Ltd [1927J 1 KB 65, 85; Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd's Rep 476, 511; James v CGU Insurance pic [2002] Lloyd's Rep 206, para 85.
241

[2002] 2 Lloyd', Rep 462.

242

ibid paras 28-29.

243

Wife (Underwriting Agenry) Ltd v Grupo Nacional Provincial SA [2004J EWCA Civ 962, Mann Macneal dr Steeves Ltd v Capital & Counties Insurance Co Ltd [1921] 2 KB 300. See

[20041 2 Lloyd's Rep 483.

244

also Carter v Boehm (1766) 3 Burr 1906, 1910-11.

140

141

The Doctrine ofUtmost Good Faith

restricted his right to receive all material information, and consented to the omission of the particular information in issue?'245 A question that asks for limited information with respect to a certain matter is likely to be interpreted as waiving disclosure of other information relating to the same mattet. Conversely, a question on one matter is less likely to be interpreted as waiving disclosure of information on a different matter. Thus, questions relating to the type of trading pursued by the assured's business do not constitute waiver of disclosure of a criminal record. 246 However, a questionnaire may, through its focus, . lead a reasonable person ro believe that the insurer is interested only in information relating ro certain matters. 247 Ultimarely, it is conceivable that a vety detailed and focused questionnaire may lead a reasonable person to believe that the insurer will assess the risk exclusively on the basis of the assured's answers ro the questions asked and waives disclosure of all other information. Waiver is, however, irrelevant where the answer amounts to a misrepresentation through either . . maccuracy or mcompIeteness. 248
4.105

Circumstances not Requiring Disclosure

locks approved by insurers precludes insurers from alleging non-disclosure of the fitting ofvehicles with unapproved locks. 251 However, if a warranty normally implied by law is excluded or limited by the terms of the policy, the duty of disclosure operates to the extent that the warranty's protection has been removed. 252 Similarly, the protection prima ficie afforded by an express warranty may be reduced by other policy terms. 253 Whether disclosure is rendered superfluous will also depend upon the precise prejudice to the insurer that the warranty addresses. A premium payment warranty may protect against late payment and will excuse the assured from disclosing ptevious incidences of late payment as such. The warranty does not, however, addtess a history of financial default that indicates fundamental financial problems affecting the assured's ability to fund proper maintenance of a vessel proposed for insurance. 254 (5) Application to Misrepresentation Section 18(3) is directed to non-disclosure. However, parallel issues can arise in 4.108 the context of misreptesentation. Where approptiate, the insurer should not be abJe to avoid the policy. There is no case for avoidance by reason of a misrepresentation that makes the risk appear greater than is in fact the case, or relates to a matter covered by a promissory warranty. In the latter context, there is authority that avoidance is not available,255 although the reasoning is questionable. It was suggested that the misrepresentation would not be material. However, section 18(3) does not limit the definition of materiality.'" The better analysis, therefore, would either deny inducement or invoke an implied limitation, parallel to that implied in section 18(3) for non-disclosure. 257 Restricting a right to avoid for misrepresentation on the basis that the insurer 4.109 had actual or presumed knowledge of the truth would have to be more nuanced. A misrepresentation might deflect an underwriter's mind from considering other sources of information, enabling an insurer to establish an actionable misrepresentation entitling avoidance of the policy. The only form of waiver applicable to misrepresentation is an express waiver of 4.110 remedies for misrepresentation. Any waiver of disclosure is irrelevant if the

Provided information is made available to the insurer, the assured has no obligation to ensure the insurer takes due notice of ir. 249 The assured's obligation is fair presentation of the risk, not to guide the insurer's response to such a presentation.
(4) Warranties

4.106 A promissory warranty is a condition precedent to liability on rhe policy.

Breach triggers an automatic prospective discharge of the insurer's liability.250 Consequently, the insurer has no need of additional protecrion from the doctrine of utmost good faith in respect of matters covered by a promissOlY warranty. Section 18(3)(d), accordingly, provides rhat an assured need not disclose 'any circumstance which it is superfluous to disclose by reason of any exptess or implied warranty'.
4.107 The key concept is superfluity. A warranty that a motor vehicle is fitted with

245 MacGillivray on Insurance Law N Legh~Jones et al (cd) (lOth edn, 2003) para 17-19, approved in Hair v Prudential Assurance [1983] 2 Lloyd's Rep 667; Doheny v New India Assurance Co Ltd [20051 EWCA Civ 1705, [2005J Lloyd's Rep IR 251, paras 17-20, 37. 246 Schoo/man v Hall [1951J 1 Lloyd's Rep 139. Whether the phrasing of questions so as to apply only to natural persons indicates waiver of disclosure of the requested information with respect to legal persons raises a nice question of interpretation of the particular questionnaire: Doheny v New India Assurance Co Ltd [2005J EWCA Clv 1705, [2005] Lloyd's Rep IR 251. 247 OKane vJones (The Martin P) [2003J EWHC 2158 (Comm), [2004] 1 Lloyd's Rep 389,

paras 237-239.
24' Moore Large & Co Ltd 0 Hermes Credit & Guarantee plc[2003] EWHC 26 (Comm), [2003J I Lloyd's Rep 163, para 58. 249 Pan Atlantic Imurance Co Ltd v Pine TOp Insurance Co Ltd [1992) 1 Lloyd's Rep 101, 106. 250 For discussion of promissory warranties, see 18.54ffbelow.

De Maurier Oewels) Ltd v Bastion Insurance Co Ltd [1967) 2 Lloyd's Rep 550. Cantiere Meccanico Brindisino vJanson [1912) 3 KB 452. 253 O'K4ne vJones (The Martin P) [2003J EWHC 2158 (Comm), [2004J 1 Lloyd's Rep 389, para 240. 254 ibid. 255 De Mauries Oewe&) Ltd v Bastion Imuranee Co Ltd [I 967] 2 Lloyd's Rep 550, 557. 256 See 4.89 above. 2S7 Analogously to the way the House of Lords in Pan Atlantic Insurance Co Ltd v Pine 70p Insurance Co Ltd [1995) 1 AC 501 reasoned across from misrepresentation to non-disclosure in the COntext of inducement.
251 252

142

143

The Doctrine ofUtmost Good Faith

assured in fact makes a statemenr. 258 Moreover, an express waiver of remedies for misrepresentation is subject to certain limitations as a matter, variously, of policy or interpretation. 259 First, as a matter of public policy, liability for fraudulent misrepresentation cannot be excluded. 260 Secondly, whether liability for fraudulent misrepresentation by the assured's agent can be waived has yet to be authoritatively resolved. 261 The balance of judicial opinion appears in favour of waiver as a theoretical possibility,"2 but it is clear that only the most unequivocal of drafting, with express reference to fraud or dishonesty, will convince a COUrt that the parties intended the contract to be fully enforceable notwithstanding that it was procured by fraud. 263 Thirdly, any argument that an express waiver is intended, on its true interpretation, to apply to negligent misrepresentation will have to overcome the assumption that an insurer may agree to forgive an innocent mistake but is less likely to grant a contractual pardon for negligent

Knowledge ofthe Assured

not what the assured considered, or a reasonable assured would have considered, that a prudent underwriter would tal,e into account. However, in International Lottery Management Ltd v Dumas,2s' the proposal form declaration provided that 'to the best of [the assured's] knowledge the statements set forth in this application are true and no material information has been withheld'. This formula departed from the approach of the common law, restricting the disclosure obligarion to circumstances known by the assured to be material."8 (1) Who is the Assured? A principal may delegate aspects of its business to agents. A corporate body, by 4.113 definition, can act only through human agents. Where a legal rule requires knowledge on the part of a ptincipal, the question of attribution of knowledge has to be addressed by reference to the legal issue in question. Given the content, context, nature, and purpose of the particulat rule at issue, whose knowledge should be attributed to the principal?'" The question of attribution of knowledge in the corporate context may some- 4.114 times be resolved by seeking the company's 'directing mind and will'.270 This, however, will not respond fully to the question of attribution of knowledge fot the purposes of section 18 of the Marine Insurance Act 1906. While the knowledge of a person who enjoys that status will clearly be attributed to the assured, section 18 would appear to contemplate any person who enjoys managerial responsibility with respect to the insured property, irtespective of their role in the context of the assured's overall business. A large company with limited shipowning interests may entrust management of those interests to a person who could not be described as the directing mind and will of the company at large. That person would nevertheless exercise managerial responsibility with respect to the insured property, so that the knowledge of that person would be considered the knowledge of the company fot the purposes of secrion 18. 271 Equally, a company ditectot does not necessarily constitute the assuted. All depends on the scope of the ditector's responsibility for, and involvement in, the
relevant matters. 272

. . riSk presentatIOn. "4

H. Knowledge of the Assured

4.111

The duty of disclosure articulated by section 18(1) of the Marine Insutance Act 1906 is restticted to circumstances known to the assured, and the assured is under no obligation to carry out investigations for the purpose of discovering matetial facts outside its knowledge. 265 This raises the questions of who is the assured for the purposes of the assured's disclosure obligation, and the extent to which the assured may have constructive knowledge of material circumstances. There is also a question as to the time when the knowledge needs to exist. It may be noted, however, that the issue is knowledge of the existence of the circumstance, not knowledge of its materiality.266 Disclosure is required of whatever a prudent underwritet would take into account in assessing the risk,

4.112

258 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001] 1 Lloyd's Rep 30, para 63. (2003J UKHL 6, (2003J 2 Lloyd's Rep 61, para 6.

For discussion, see H Bennett, 'Exclusion of Rights and Remedies with respect to Misrepresentation and Non-disclosure' (2003) 19 JCL 205. 260 Pearson 6- Son Ltd v Dublin Corp (1907J AC 351. 26' HIH Casualty 6- General Insurance Ltd v Chase Manhattan Bank (2003J UKHL 6. (2003J 2 Lloyd's Rep 61. considering Pearson 6- Son Ltd v Dublin Corp (1907J AC 351. 262 HIH Casualty 6- General Insurance Ltd v Chase Manhattan Bank (2001J 1 Lloyd's Rep 30. para 33, (2001J EWCA Clv 1250, [2001J 2 Lloyd's Rep 483. paras 104-105. (2003J UKHL 6. (20031 2 Lloyd's Rep 61, para 122. cf l2003J 2 Lloyd's Rep 61, para 98. 263 (2001] EWCA Clv 1250. (2001] 2 Lloyd's Rep 483, paras 155, 160. 169, (2003J UKHL 6, (2003J 2 Lloyd's Rep 61, paras 15; 68, 97, burcfpara 126. 26' Canada Steamship Lines Ltd v The King (1952J AC 192,208; HIH Casualty 6- General Insurance Ltd v Chase Manhattan Bank (2003J UKHL 6, l2003J 2 Lloyd's Rep 61. 265 Simner v New India Assurance Co Ltd [1995] LRLR 240. 266 London Assurance v Mansel (l 879l 11 CbD 363, 368-9.
259

(2002J Lloyd's Rep lR 237. para 65. It also transformed the statements in the proposal form from statements of fact into statements of opinion, as to which, see 4. 133ffbelow. 269 Meridian Global Funds ManagementAsti'l Ltd v Securities Commission [1995] 2 AC 500. 270 Lennard's Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705,713-14 per Viscount Haldance LC. 271 The Lady Gwendolen [1965] P 294 as explained in Meriditm Global Funds ManagementAsia Ltd v Securities Commission (1995J 2 AC 500, 510-11. 272 Maniftst Shipping 6- Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) (1997J 1 Lloyd's Rep 360, 375.
267 268

144

145

The Doctrine ofUtmost Good Faith

4.115

Knowledge ofthe Assured

provision in section 18 operates by reference to 'what an honest and competent .agent would communicate to the assured in the ordinary course of business'. 278

Vessels are often owned nominally by one-ship companies, with beneficial ownership residing elsewhere and effective management being underraken by a third corporate vehicle. In such circumstances, corporate veils are disregarded and rhe search is for the person or persons wirb rbe relevant responsibiliry.273 In the context of section 18, the circle of persons whose knowledge is attributed to the assured would seem clearly to include those responsible for the vessel's effective
management.

Even where the agent's breach of dury is not fraudulent, the insurer cannot avoid the policy unless it can be concluded that an honest and competent agent would have confessed the breach to its principal.'" An insurer is also entitled to disclosure of all material circumstances known to 4.119 so-called'agents to know', such as the master of a vessel, whose authoriry is too restricted for them to be considered as the assured but to whom are committed the immediate management and conttol of the insured properry. The rationale articulated in the case law is not that the knowledge of agents to know is considered to be that of the assured, but that such agents are employed by rbe assured to keep it informed of circumstances affecting its properry, and the insurer is entitled to contract, and does contract, in reliance on the proper performance by such agents of their information duties. 28o It is unclear whether the entitlement of disclosure of circumstances known by agents to know should today be considered as forming parr of the constructive knowledge provision in section 18(1), with the Act having altered the technical basis of the insurer's entitlement to disclosure,281 or whether it constitutes a non-codified adjunct to section 18(1).282 Either way, the assured's disclosure obligarion is extended to include all material facts that come to the knowledge of such an agent in time for communication to the assured via the ordinary channels of communication in use in the mercantile world before conclusion of the insurance contract. It is irrelevant whether the agent's failure to inform the assured was an inadvertent mistake, negligent, or deliberate. 283 A leading example is provided by ProudfOot v Montefiore,284 in which the claim- 4.120 ant employed an agent to purchase and ship cargoes. On 12 January, the agent advised the claimant of one such cargo, forwarding the shipping documents on

4.116

The attribution of knowledge on the parr of agents to the assured for rhe purposes ofsection 18 involves no process of'imputing' knowledge to the assured or 'deeming' the agent's knowledge to be rhat of the assured. The knowledge of agents falling wirbin the rule of attribution for section 18 quite simply is the knowledge of the assured. For the purposes of section 18, such agents are the assured. 274 (2) Constructive Knowledge

4.117

The assured's disclosure obligation under section 18 is not confined to circumstances within the assured's actual knowledge. Section 18(1) of the Marine Insurance Act 1906 introduces constructive knowledge into commercial insurance by providing that 'the assured is deemed to know every circumstance which, in the ordinary course ofbusiness, ought to be known by him'. 275 London General Insurance Co v General Marine Underwriters Associatiori'76 concerned reinsurance of a cargo risk. On the night of 24 Seprember, it was known at Lloyd's that the carrying vessel had been involved in a casualry and that part of the cargo had been destroyed by fire. At 10.00 am on 25 September, the insurer insrructed the broker to effect reinsurance. No more than thirry minutes later, the underwriter received a market casualry notice with informarionofthe fire, but placed the notice in a drawer without reading it. The reinsurance was placed at 4.00 pm that afternoon. The insurer did not actually know of rhe casualry until the underwriter read the casualry notice two days later. It was held thar the insurer was deemed to know the contents of the casualry notice before placement of rbe reinsurance, which was consequently voidable for non-disclosure. a fraud perpetrated by an agent on the assured, its principal, of which the principal was unaware when the cover was placed.'" The deemed knowledge

4.118 An insurer cannot, however, avoid a policy on the ground of non-disclosure of

273

ibid.

'" Blackburn, Low & Co v Vigors (1887) LR 12App Cas 531, 537-8; Group Josi Re v Walbrook
[1996J I WLR 1152,1170-1. 275 MIA 1906, s 18(1). 276 [1921J I KB 104. 217 PCW Syndicates v PCWReinsurers (1996) 1 WLRl136; Group losi Re wWalbrook Insurance CoLtd[1996J I WLR 1152.

278 PCW Syndicates v PCW Reinsurers [1996J I WLR 1I36, 1144 per Staughton LJ. In addition, the rule in Re Hampshire Land Co [1896] 2 Ch 743 dictates that knowledge of an agent's fraud is not imputed to its principal. 2.79 Kingscroft Insurance Co Ltd v Nissan Fire 6' Marine Insurance Co Ltd (Corom Ct, 4 March 1996) discussed Kingscroft Insurance Co Ltd v Nissan Fire & Marine Insurance Co Ltd (1999) Lloyd's Rep IR 371, 374-5 (appeal against tefusal of leave to appeal). 280 Proudftot v Montefiore (1867) LR 2 QB 511, 521-2 (quoted below); Blackburn, Low & Co v vtgors (1887) LR I2 App Cas 531, 540. 281 See the reference to Proudfoot v Montefiore in the COntext of discussing MIA 1906, s 18 in PCW Syndicates v PCWReinsurers (1996] 1 WLR 1136, 1144. Also Kingscroft Insurance Co Ltd v Nissan Fire & Marine Insurance Co Ltd (Comm Ct, 4 March 1996), discussed [1999) Lloyd's Rep IR 371, 374-5. 282 The traditional explanation was reiterated by Diamond QC (sitting as a Deputy Judge of the High Court) in Simner v New India Assurance Co Ltd[1995J LRLR 240,254. 283 Blackburn, Low & Co v Vigors (1887) LR 12 App Cas 531, 540. 284 (1867) LR2 QB 511.

146

147

The Doctrine ofUtmost Good Faith

19 January. The ship sailed on 23 January but was srranded that same day and the cargo was totally lost. Although the agent learned of rhe casualty rhe following day, he refrained from contacting the claimant by telegraph and, instead, sent written tidings by the earliest post, so as to permit the claimant to insure the lost cargo in good faith. This the claimant duly did, but the Court ofQueen's Bench held the conrract voidable. Cockburn CJ, delivering the judgment of the COUrt, stated as follows: 285
.. . if an agent, whose duty it is, in the ordinary course of business,
to

Brokers and the Doctrine ofUtmost Good Faith

cannot claim to contract in reliance on communication of information by .agents ofthe assured with no connection to the insured property and whose very existence is, for the insurer a matter of pure conjecture.
l

I. Brokers and the Doctrine of Utmost Good Faith

The almost invariable practice of the commercial insurance markets is for risk to 4.122 be placed through a broker, acring as the agem of the assured. 28' This ttiggers additional good faith duties. Section 19 of the Marine Insurance Act 1906 provides as follows:
Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer(a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which, in the ordinary course of business, ought to be known by, or to have been communicated to, him; and (b) Every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.

communi-

cate information to his principal as to the state of a ship and cargo, omits to
discharge such duty, and the owner, in the absence of information as to any fact material to be communicated to the underwriter, effects an insurance, such insurance will be [voidable],286 on the ground of concealment or misrepresentation. The insurer is entitled to assume, as the basis of the contract between him and the assured, that the latter will communicate to him every material fact of which the assured has, or, in the ordinary course of business, ought to have knowledge; and that the latter will take the necessary measures by the employment of competent and honest agents, to obtain, through the ordinary channels of intelligence in use in the mercantile world, all due information as to the subject matter of the insurance. This condition is not complied with where, by the fraud or negligence of the agent, the party proposing the insurance is kept in ignorance of a material fact, which ought to have been made known to the underwriter, and through such ignorance fails to disclose it.

(l) Independent Duties The good faith duties attaching to the broker are wholly independent of those 4.123 owed by the assured. The effect of section 19 is not that the broker's knowledge of material circumstances is imputed to the assured, but rather disclosure is required by virtue of a distinct duty owed directly by the broker to the insurer. If the rationale underpinning section 19 were imputation of knowledge ro the assured, section 19 itselfwould become otiose since the circumstances known to the broker would then fall with the assured's duty of disclosure under section 18 of the Act. 290 (2) The Relevant Brokers More than one broker may play a part in the procuring of insurance. The 4.124 placing broker, which directly places the risk in the market, may have received

4.121

In contrast, a broker employed to place a risk in the insurance market is not an agem to know. Blackburn, Low & Co v Vigor?" is one of two cases atising out of the last voyage of the State ofFlorida. 288 When the vessel was five days overdue, insurers instructed RMT, the brokers normally employed by the shipown<crs, to effect reinsurance. While thus engaged to act for the insurers, RMT was infol'med in confidence by the shipowners of information indicating. that the State ofFlorida had been wrecked. RMT respected this confidence and did not inform the insurers. Subsequently, and after RMT's authority to act as agent for the insurers had ceased, the insurers procured a further reinsurance policy through different brokers. When it transpired that the State of Florida had indeed been lost, the reinsurers on this further policy declined to pay on the ground of non-disclosure of the information known to RMT, admittedly and indisputably material. The House of Lords, however, rejected the reinsurers' defence because RMT was not an 'agem to know'. A broker is not employed to
acquire information and communicate it to the assured. Moreover, an insurer

289

On the broker's agency

f01"

the assured, see 5.03 below.

ibid 521-2. The text of the judgment states theinsurance will be 'void', but it is indisputable that non-disclosure or misrepresentation renders a contract voidable, not void.
285 286

187

(1887) LR 12App Cas 531.

Blackburn, Low & Co v Vigors (1886) 17 QBD 553, 559, (1887) 12 App Cas 531, 541, 542-3; EI Ajou v Dollar Land Holdings plc[19941 2 All ER 685, 702; Sad,,; Anonym, dlnterm,diaries Luxembourgeois v Farex Cie [1995] LRLR 116, 142-3, 150; PCW Syndicates v PCW Reimurers [1996] 1 Uoyd's Rep 241, 244-5, [19961 1 WLR 1136, 1145, 1150. The contrary view, as expressed in Black King Shipping Corp v Massie (The Litsion Pride) [1985] 1 Lloyd's Rep 437, 513-14; Deutsche Riickversicherung AC v V0llbrook Insurance Co Ltd [19951 1 WLR 1017,
290

2" The orher is Blackburn, Low &Co v Haslam (1888) 21 QBD 144. discussed at 4.125 below.

1034 is incorrect.

148

149

The Doctrine ofUtmost Good Faith

its instructions from a producing broker or other intermediate agent, which was in turn instructed by the assured. Section 19 applies only ro the placing broker,291 although material circumstances within the knowledge of the producing broker or othet intermediary may well fall within the placing broker's deemed knowledge under section 19(a).292 (3) Scope of Disclosure Duty

Brokers and the Doctrine ofUtmost Good Faith

that which falls within the placing broker's constructive knowledge, in that it ought to have been communicated to the placing broker within the ordinary course of its busil1ess. This mirrors the constructive knowledge of the assured 296 under section 18. Whether particular infotmation should have been disclosed ro the broker within the ordinary course of business is inevitably a question of fact and will depend, inter alia, on the nature of the infotmation and the time available fOt communicating with the broker between receipt of the infotmation and placement of the risk.'" Thirdly, under section 19(b) a placing broker is expected ro disclose every 4.128 material circumstance that the assured is bound ro disclose under section 18, unless it comes to the assured's knowledge too late for it to be communicated to 298 the placing broker. This provision may indicate that where insurance is placed through an agent, section 19 displaces section 18. Instead, however, the sections are read as operating in tandem. Nothing turns on this.'" (4) Relationship Between the Duties of the Assured and the Placing Broker Although the duty of disclosure of the placing broker under section 19 is 4.129 independent of the assured's duty under section 18, the duties are connected in that any matter that the assured need not disclose because it falls within section 18(3) similarly need not be disclosed by the placing broker under section 19. 300 With respect ro waiver, however, all depends on the wording of the clause waiving disclosure by the assured. While waiver of disclosure of particular circumstances by the assured will similarly limit the placing broker's duty, a general waiver of the entirety of the assured's duty will raise a question of interpretation as to whether the waiver was intended to be confined to the assured, leaving the insurer to look ro the placing broker for disclosure, or instead a waiver of the entirety of the insurer's disclosure entitlements, including from the placing broker.'ol

4.125 Section 19 requires disclosure of three categories of material circumstance. First, there are circumstances known to the broker. Where the placement of a risk is commenced by one broker and completed by another, section 19 embraces the knowledge of both placing brokers. Thus, in Blackburn, Low & Co v Haslam,293 placing brokers (RMT) initially instructed by the assureds were informed of a material circumstance in confidence by a third party. Respecting the confidence and, therefore, not disclosing the information, RMT instructed their London agents, RTY, ro obtain rhe insurance and procured a direct relationship between the assureds and RTY, at which point RMT's authority to act as agent for the assured ceased. RTY subsequently succeeded in placing the risk. The policy was, however, held ro be voidable. The crucial question, as phrased by the Court, was as follows: 294 'Was the original negotiation [conducted by RMT] given up and a new and distinct negotiation entered upon, or was it a mere handing over by the agents to their principal of an existing negotiation, in order that the principal might take it up at the point where the agents left off, and continue it until it resulted in a contract?' The evidence justified the finding by the jury that the assureds adopted and continued RMT's negotiations, rendering RMT an agellt involved in effecting the ulrimate contract and entitling the insurers to disclosure of all material circumstances within RMT's knowledge, notwi5hstanding the fact that the information in question had been communicated to RMT in confidence.
4.126 A breach of duty on the part of the placing broker will not fall within the broker's own disclosure obligation under section 19 unless it falls also within the constructive knowledge of the assured under section 18 as something that an honest and competent broker would disclose to the assured in the ordinary course of business. 295 4.127 The second category of circumstance requiring disclosure under section 19 is

296 lnversiones Manria SA v Sphere Drake Insurance Co pic (The Dora) [1989] 1 Lloyd's Rep 69, 94-95. See Fitzherbert v Mather (1795) 1 TR 12. On the assured's constructive knowledge, see 4.117ff above. 297 Container lransport International Inc v Oceanus Mutual UnderwritingAssociation (Bermuda) Ltd[1982] 2 Lloyd's Rep 178, 197. 298 See 4.127 above. It follows that the assured's disclosure obligation under MIA 1906, s 18

PCW Syndicates v pew Reinsurers [19961 1 WLR 1136; Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152. Nor can it be argued that the knowledge of the intermediate agent is within the deemed knowledge of the assuted under MIA 1906, s 18(1), Group Josi Reat 1169-70. 29' Group Josi Re v Walbrook Insurance Co Ltd[19961 I WLR 1152, 1170.
291

'" (1888) 21 QBD 144.

295

29' ibid 150-1.

PCWSyndicates v PCWReinsurers [1996J 1 WLR 1136.

must be similarly limited. 299 Of course, should the assured bypass the placing broker and contact the insurer directly, the assured's duties of good faith under ss 18 and 20 would apply to such contact. 300 As stated by s 19 itself. By way of example, see Societi Anonyme d'intermediaries Luxembourgeois v Farex Gie[1995J LRLR 116, 157. 301 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003J UKHL 6, [2003J 2 Lloyd's Rep 61.

150

151

The Doctrine ofUtmost Good Faith

Actionable Misrepresentations
inaccurate,307 an expressed intention is not carried through, or a factual predic. ~lOn turns out to be erroneous. '08 In the general law of contract, nevertheless, such statements that are not themselves actionable .may involve or give rise to other statements of existing fact that, if untrue, will constitute actionable misrepresentations. It has, however, been held that the wording of the Marine Insurance Act compels insurance contract law to diverge from general contract law with respect to such secondary representations. A preliminary question is whether the statement, on its true interpretation, is 4.134 correctly characterized as a mere expression of belief or expectation or a statement of existing fact. 309 In the leading case of Bissett v Wilkinson,310 a vendor of land made a representation as to irs sheep-bearing capacity. Although the vendor was a sheep farmer, the land in question had never been used for sheep farming, a circumstance the Privy Council regarded as the most material in concluding that the statement was one of belief. In Bowden v lI,iughan,311 a cargo owner's statement as to the date of future sailing of the carrying vessel was held to be capable of constituting a representation of expectation only, a cargo owner having no control over the vessel's movements. 312 Similarly, in Rendal! v Combined Insurance Co ofAmerica, 313 a statement of 'estimated travel days' to be undertaken by employees in a proposal for business travel accident insurance was held to be a statement of belief

J.

Actionable Misrepresentations

4.130 Section 20(3) of the Marine Insurance Act 1906 recognizes that representations may srate a fact or an expectation or belief. Subsections (4) and (5) then prescribe a criterion for determining whether the representation is true. Section 20(4) provides that a representation of fact is true if 'substantially correct'. In contrast, section 20(5) provides that a representation of expectation or belief is true if made in good faith.
(1) Representations of Fact

4.131

Perfect truth is not required of a statement of fact. Section 20(4) of the Marine Insurance Act provides that: '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 underwriter."02 In Alexander v CambelL'o' a ship was represented as having been remetalled, whereas in fact the metal sheathing had been completely overhauled, thoroughly repaired, and replaced where necessary, with the result that the ship was as good a risk as if entirely remetalled. The representation was held to be true. Uncontradicted evidence was given that the representation, although not literally true, was substantially correct and that the difference between the representation and the reality was immaterial.

4.132 The truth or falsity of a representation is judged by reference to the time of conclusion of the contract,304 as is materiality. Prior to that time, therefore, a . representation can be withdrawn or CQrrected.'05 wIth respect to matena]'Ity"an insurer is entitled to rely on the misrepresentation of a circumstance that satis~ fies the materiality test at the time of conclusion of the insurance even if the circumstance would not be regarded as material if judged at a later date.'o' (2) Representations of Expectation or Belief 4.133 In the general law of contract, only false statements of existing Or past fact are eligible to become actionable misrepresentations. In particular, a distinction is drawn between such statements of fact and statements of belief, intention, or future fact. No contract can be vitiated simply because a belief proves

Bissett v Wilkinson [1927J AC 177. Beattie v Lord Ebury (1872) LR 7 Ch App 777, 804. Aliter if the statement is promissory and generates a contractual obligation in its own right. In Dennistoun v Lillie (1821) 3 Bl202 the
307

308

302 MacDowell v Fraser (1779) 1 Dougl 260. Contrast the doctrine of strict compliance in promissory warranties: see 18.71".below. 303 (1872) 41LJCh 478. 304 Or such earlier time at which the (re)insurer commits itself to an obligation binding in the eyes of the market to accept the risk on certain terms. 305 MIA 1906, s 20(6). See also 4.64 above. 306 See the discussion in the context of non-disclosure, at 4.83 above.

House ofLords upheld the righr of an underwriter to avoid a ship and goods policy on the basis of a bona fide statement that the insured vessel would sail on 1 May, when, unknown to the assured, the vessel in fact sailed on 23 Apri1. The statement was, however, made on 18 June and was treated as a statement of past fact in the lower COUrts (at 205) and by Lord Eldon in the House of Lords (at 209). 309 This is, potentially, a difficult exercise. Smith v Land & House Property Corp (1884) 28 ChD 7 contains analysis of a representation as both factual and of belief: at 13, 15. Subsequent authority is divided as to the correct analysis: Brown v Raphael (1958] Ch 636, 642 (belief); Economides v CommercialAssurance Co pic [1998] QB 587, 598 (fact). 310 [19271 AC 177. 311 (1809) 10 East 415. 312 It is, nevertheless, suggested that even a statement by an assured with control over compliance with the representation should equally be viewed as one of expectation. In Dennistoun v LilHe (1821) 3 B1202, which concerned a ship and goods policy, Lord Eldon distinguished Bowden on the basis of the subject-matter insured (and implicitly the power of the assured to ensure compliance with the representation) but this ground of distinction was obiter, since Dennistoun concerned a statement of past fact, and should not be regarded as persuasive. The decision of Lord Ellenborough in Bowden v Vaughan, approved by the Court of King's Bench, undermines the authority of Lord Ellenborough's earlier contrary decision in Edwards v Footner (1808) 1 Camp 530 (substantial compliance required with representation by cargo owner that the carrying vessel would sail with armed escorts and carry a certain number of guns and crew). 313 [20051 EWHC 678 (Comm), [2005J 1 CLC 565.

152

153

The Doctrine ofUtmost Good Faith

4.135

Actionable Misrepresentations
CO,314

By contrast, in lonides v Pacific Fire &- Marine Insurance

brokers received

instructions to declare to a facultative/obligatory open cover a cargo of hides shipped on the Socrates under rhe command of Captain Jean Card. The brokers consulted the alphabetical register of shipping issued by Lloyd's Register. This listed the Socrates, a new Norwegian vessel under the command of Captain Albertson, immediately followed by the Socrate, an old French vessel, commanded by Captain Jean Card. The brokers did not, however, notice that the instructions had to contain an error, still less draw the obvious conclusion that the error lay in the name of the vessel. A clerk was dispatched to the insurers' office to make the declaration. On receiving the declaration, the underwriter consulted the same register of shipping. The underwriter asked if the Socrates was the carrying vessel. The clerk replied that 'he thought so'. In.fact, it was the Socrate. Both ship and cargo were lost during the voyage. The Queen's Bench Division rejected the assured's argument that the clerk's statement as to the carrying vessel was one of belief: it was 'tantamount to an assertion' that it was the Norwegian vessel, Socrates.
315

one cannot 'simply make .a bli nd one cannot beI'leve to be true that which . guess. one has not the least idea about'.319 In addition, in the general law of contract, where a representor of belief or 4.138 as having reasonable grounds to support the belief or expectatlon or IS In a partl~ularly good position to know the truth, it impliedly represents the fact of the eXIstence of grounds justifYing the belief or expectation e~pressed and/or the absence of knowledge of any circumstances inconsistent WIth the belIef or expectation expressed. 320 Effectively, therefore, in circums~ances ,:,here such an underlying representation is inferred, the contract will be vItlated Ifthe representor is negligent in formulating the opinion expressed. The questlon IS whether such a representation can be implied in the context of msurance contracts.
expectat~on holds Itself ou;

4.136

Where the insurance policy is based on a proposal form, the form may contain a declaration that the answers given are true and complete 'to the best of the proposer's knowledge and belief. Such a declaration denies that the answers are tendered as factually correct but avers instead that they are all advanced as a matter of belief. 316 It would not, however, affect rhe characterization of misrepresentations made outside rhe proposal form,317 unless a misrepresentation rhat preceded rhe form were regarded as subsumed inro or replaced by rhe relevanr question and answer in the form. Assuming the statement to be one of belief or expectation, there will nevertheless always arise an implied statement of fact, namely that the represehtor does in truth maintain rhe expecrarion or beliefexpressed. This represenration will be untrue in either of two ways. First, the representor may have considered the 318 matter and either formed a different belief or not formed any belief. Secondly, the representor may not have addtessed its mind to the matter at all, or at least not sufficiently, so that its state of mind with tespect to the matter represenred does not wattanr the label 'belief. Thete must be 'some basis' for the statement;

In .Economides v Commercial Assurance Co pic'321 the assured stated th at, in h'is 4.139 . . OpIniOn, the replacement cost of the property insured under a household contents policy was 16,000. In fact, it was approximately 40,000. It was accepted that the stateme~t had not been made fraudulently, but the insurers argued that the assured had Imphedly represented that the opinion expressed was based on reasonable grounds and that no such grounds existed. The Court of Appeal rejected thIS argu~ent. For a majority of the Court, the insurer's argument was preclud~d by sec;iOn 20(5) of the Marine Insurance Act 1906. According to Peter GIbson LJ: Once statute deems an honest representation as to a matter of belIef t~ be. true, I cannot see that there is scope for inquiry as to whether there were obJeetlvely reasonable grounds for that belief. '322 It is respectfully submitted that the majority fell into error. First, the case law codified by section 20(5) is not concerned with, and in no 4.140 way excludes, the possibility of an underlying representation of reasonable grounds justifYing the belief or expectation expressed. Anderson v Pacific Fire & Marin: Insurance Cd'" concerned the insurance of chartered freight on a voyage JnvolvIng a stay at an anchorage called Rendez-vous Point. The insurance was effected on the basis of the following letter from the captain of the insured vessel regatdIng the anchorage at Rendez-vous Point: 'It is considered by the pilot here as a good and safe anchorage, and well sheltered. I have been out and seen the place, and consider it quite safe.' It transpired that the anchorage was protected agaInst waves but not against winds at certain times of the year. While the vessel

4.137

(lSlO LR 6 QB 674. 315 ibid 683-4. The case is discussed further below. Economides v Commercial Assurance Co pic [1998] QB 587~ See also HummingbirdMotors Ltd v Hobbs (1986] RTR276; InternationalLotteryManagement Ltd 0 Dumas (2002] L1oyd's Rep
314 316

IR 237, para 65.

317
318

International Lottery Management Ltd v Dumas (2002] Lloyd's Rep IR 237, para 66. Just as a statement of intention impliedly.represenrs the fact of the existence of the intention: Edgington v Fitzmaurice (1885) 29 ChD 459. Thus, 'the state of a man's mind is as much a fact as the srate of his digestion': 483 per Bowen LJ,

3j9 E r . conomt'des v ...,ommerciaIAssurance Co plc (1998J QB 587, 598 per Simon Brown Lj, By way of example, see International Lottery Management Ltd v Dumas (2002J Lloyd's Rep IR 237 ~rn65, ' 320 Brown oRaphael[1958] Ch 636; Esso Petta/cum Co Ltd oMardon (1976] QB 801; sumitomo Ba;,~ Ltd v Banque Bruxelles Lambert SA (1997] I Lloyd's Rep 487,515-16. (1998] QB 587. 322 ihid 606. 323 (1872) LR 7 CP 65.

154

155

The Doctrine of Utmost Good Faith

was subsequently anchored at Rendez-vous Point, a storm arose and both vessel and insured freight were lost. The jury construed the letter as a statement of opinion, which they held was true. The insurets argued on appeal that this was a misintetpretation of the letter, but the COUtt of Exchequer Chamber upheld the jury's view. The judgments are emphatic that the absence offraud precluded any liabiliry in misrepresentation, bur rhey need to be read in context. The insurers did nor argue for an implied representation of reasonable grounds to suPPOtt the belief as to rhe safery of rhe anchorage. The masrer had inspecred the anchorage in petson. Since it was conceded rhat rhe master had acted in good faith, it must be assumed that the anchorage had appeared safe in all respects when inspected. Moreover, the master had also consulted a local pilot, whom he reasonably believed to be competent. 324 Consequently, the master knew of no circumstances inconsistent with the belief expressed and reasonable grounds existed to support that belief. The only argument, therefore, open to the insurers was that the safery of the anchotage had been stated as a fact. The decisiveness of the absence of fraud followed from the COUrt'S rejection of this argument.
4.141

Actionable Misrepresentations hypothesi, the beliefwill have proved inaccurate and the fact of that inaccuracy is unaffected by the state of mind of the tepresentor. What is true is the underlying statement that the representot in rrurh has the belief or expectation expressed.
Fifthly, the crirical quesrion, thetefore, is whether section 20(5) addresses the 4.144 second possIble underlying ~tatement, namely of reasonable grounds to sUPPOtt rhe stated belIef or expectatIon, at all. The berter view, it is suggested, is that it doe~ not. Such .an underlying tepresentation is not denied by the case law c~dIfied by seetlon 20(5) and is clearly recognized by pre-Acr case law. A dIve:gence betw~en insurance contract law and general contract law should, if pOSSIble, be aVOided and the subsection's wording, at rhe very least, does not uneqUIvocally compel divergence. The underlying representation of reasonable grounds to Support the stated belief or expectation is itself a representation of fact: not a representation of belief or expectation, and, as such, falls within sectIOn 20(4) and not within section 20(5).330 Within the confin~s of the existing law as established by Economides v Com- 4.145 m:rczal Assurance, It may be possible to circumvent rhe inability to allege a mIStepresentatlon of reasonable grounds to suppOrt a representation of belief or expect~tlon by an allegation of non-disclosure. The insurer cannot simply allege n~n-dISclosure of the absence of any reasonable basis for the belief or expectation represented. SInce Economides holds thar an assured need not have such reasonable grounds, their absence cannot be considered material. It may, however, be pOSSible to allege a failure to disclose a more specific circumstance. In two cases, insurers have sought to circumvent Economides in this way. In each case, the attempt was unsuccessful on the facts, but in neirher case is thete any s~ggestion .that it should be tejected in limine as an illegitimate attempted CitCumventlng oflimitations on the dtIry to avoid misrepresentation by re-fotmulation as non-disclosure. In Economides itself, the insurer alleged not only misrepresentation of the exist- 4.146 ence of reasonable grotInds to support the opinion advanced as to the value of the i~sured properry, but also non-disclosure of the dispatiry between the actual and Insured values of that propetry. The argument failed because: first, the assured was a private individual; secondly, he lacked actual knowledge of the dISpanry between rhe real and insured values of the insured property; and, thltdly, the doctrine of constl'tIctive knowledge is confined ro circumstances that the assured ought to know in the ordinary course of its business and is, therefore, inapplicable to private individuals. In Rendall v Combined Insurance Co of

Secondly, the possibiliry of an underlying tepresentation of teasonable grounds was clearly recognized in the pte-Act case law. In Ionides v Pacific Fire 6- Marine Insurance CO,325 the facts of which have already been stated,326 Blackburn J was able to address the characrerization of the statement as to the identiry of the
carrying vessel in a summary manner because even if the statement were one of

belief there was still an actionable underlying representation: 327 'We think this
expression tantamount to an assertion that she was the Norwegian; but ev~n

were it otherwise, the letter of advice'" would, but for rhe carelessness of those who read ir, have made them aware that the ship was that of which the captain was Jean Card, and therefore rhe [claimanrs] had nor reasonable grounds for believing rhat she was rhe Norwegian ship.'
4.142 Thitdly, it is clear from the decision of the House of Lords in Pan Atlantic

Insurance Co Ltd v Pine Top Insurance Co Ltd" thar, first, section 20 is not to be read as an exhaustive code of the law of misrepresentarion for the purposes of (marine) insurance contracts, and, secondly, that section 20 should be read, if at all possible, in line with general contract law.
4.143 Fourthly, section 20(5) provides that a statement of expectation or belief 'is true'

if made in good faith. This cannot, however, be read in any literal sense. Ex

See ibid 70, judgment of Grove]. 325 (!87l) LR 6 QB 674. See 4.135 above. 327 (l87!) LR 6 QB 674. 683-4. 328 A reference to the instructions from the assured. m [1995J 1 AC 501, esp 544-5, 570-1.
324

32'

330 ,This was the view ofSteyn J in Highlands lmurance Co v Continental Insurance CO [1987J -~ Lloyd s Rep 109, 113.

156

157

The Doctrine ofUtmost Good Faith America,331 the insurer sought to avoid an employer's business travel policy on
rhe basis of a representation as to the amount of travel to be undertalren by the assured's employees. This representation was held to be one of belief. However, the insurer argued that the assured had failed to disclose rhat the figure for the estimated number of days advanced in the ptoposal was determined thtough assumptions based on employee salaries rather than by extrapolati~n fto';' historical data. This argument was rejected on the gtounds of the lnsurer s . 332 presumed knowldge and waiver. e

Marine Insurance Act 1906, Section 17

material non-disclosure and misrepresentation. If materiality is required, albeit ptesumed, fraud will be accommodated wirhin sections 18 and 20 of the 1906 Act. If, however, materiality does not form part of rhe law of fraudulent nondisclosure and misrepresentation, fraud will fall outside of sections 18 and 20, but will come within section 17. (2) Non-material Misrepresentation and Non-disclosure It is conceivable that a particular insurer might request information that is not 4.150 material so that it would not need to be disclosed in the absence of enquiry. In such a case, a response that was inaccurate or misleading would constitute a misrepresentation outside section 20, but which would render the contracr voidable under section 17.'36 (3) Mistalre by the Insurer, Known to the Assured It has been suggested that if the assured realized in the course of negotiations 4.151 that the insurer was proceeding upon a mistalren apprehension as to a material circumstance, such as a level of losses,337 or had made a material mathematical error, then the assured would be obliged under section 17 of the 1906 Act to correct the insurer's mistake. 338
(4) The Insurer's Pre-formation Duties of Utmost Good Faith

K. Marine Insurance Act 1906, Section 17: Pre-formation Utmost Good Faith Beyond Sections 18-20
4.147 As already noted, sections 18 and 20 of the Marine Insurance Act 1906 are considered to ptovide detail of twO aspects of the doctrine of utmost good faith enunciated in more general terms by section 17.333 Although the assured's duties of disclosure and avoidance of misrepresentation consritute the twO most significant aspects of the doctrine of utmost good faith, it is clear that they do not exhaust that doctrine. Other aspects may be identified that fall within section 17

alone. (1) Fraudulent Misrepresentation and Non-Disclosure by the Assured

4.148 Ptoof of materiality is not required for a fraudulent misrepresentation to be actionable in the general law,334 and the same must apply in insurance contr~ct law in respect of both misrepresentation and non-disclosure.'" An insurer that seeks to avoid on the basis of fraud in respect of a circumstance that ~ prudent underwriter would not talre into account in assessing the risk will, nevertheless, still have to prove that the non-material fraud induced it to enter the contract. 4.149 The technically correct explanation for the lack of a need to ptove materiality is unclear. It may be that materiality is not a substantive requirement in the law of fraudulent misrepresentation or non-disclosure. Alternatively, materiality may technically be required, but a fraudster not be permitted to deny the materiality of its own fraud. Materiality would be required but, in effect, irrebuttably presumed. Sections 18 and 20 of the Marine Insurance Act 1906 are confined to

Although the duties imposed by the pre-formation doctrine of utmost good 4.152 faith are most frequently encountered as owed by the assured to the insurer, section 17 of the 1906 Act clearly articulates a bilateral doctrine of utmost good faith, with reciprocal duties owed by the insurer to the assured. The insurer is, therefore, required to disclose all material circumstances to the assured and not to malre any material misrepresentations. The ambit of the insurer's disclosure obligation has been stated33 ' to include 'all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would talre into account in

336 Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984J 1 Lloyd's Rep 476, 512. See also Haywood v Rodgers (1804) 4 East 590; The Bedouin

-----_._--------~--'" [2005J EWHC 678 (ComiTI)' [2005J 1 CLC 565.

m See 4.09 above.
334 The Bedouin [1894J P 1, 12; Gordon v Street [1899J 2 QB 641; lIAfianjan Pistachio Producers Co~operative v Bank Leumi (UK) pic [1992} 1 Lloyd's Rep 512,542; Pan1tlantic Insurance Co Ltd v Pine Top Insurance Co Ltd[1995J 1 AC 501, 533. 33S

'" ibid para 105.

[1894J P 1, 12. 337 This may well mean that the assured had failed to disclose a material circumstance, but it might be that non~disclosure would be excused under the MIA 1906, s 18(3), discussed at 4.89ff above.
338 Container 7ransport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984J 1 Lloyd's Rep 476,512,522,525. 339 Banque Keyser Ullmann SA 0 Skandia (UK) Imurance Co Ltd [1990J 1 QB 665, 772 per

MIA 1906, s 91(2).

Slade L].

158

159

The Doctrine ofUtmost Good Faith

deciding whethet Ot not to place the risk for which he seeks cover with that . ,
msurer.
4.153

Remedies
litigation may subsequently confirm the insuret's right to avoid or declare the avoidance invalid.'4' The remedy of avoidance may be draconian. The assured is deprived of all cover 4.157 regardless of whether its failute to comply with the duties imposed by the doctrine of utmost good faith is culpable or grave. An inadvertent breach resulting from an innocent mistake is as fatal as a calculated concealment. Moreover, a non-disclosure or misrepresentation almost invariably comes to light in the course of investigating a claim, at which time it is too late for the assured to seek alternative cover.'44 In the Court of Appeal in Pan Atlantic v Pine Top;45 Nicholls V-C stated as follows:
Justice and fairness would suggest that when the inadvertent non-disclosure came to light what was required was an adjustment in the premium or, perhaps, in the amount of the cover. Those arc not options available under English law. The remedy is all or nothing. The contract of insurance is avoided altogether, or it

Examples of the insuret failing to comply with the doctrine of utmost good faith are rare. In Carter v Boehm;4' Lord Mansfield envisaged an insurer agreeing to cover a ship for a voyage which the insurer knows has already been safely completed, a fact it does not disclose to the assured. Insurers also owe reciptocal obligations in respect of tequested non-material infotmation, and matetial mistakes made by the assured and known to the insuret.

L. Remedies
4.154 The remedy for pre-formation non-disclosure or misrepresentation contemplated by the Marine Insurance Act 1906 is avoidance of the contract. From an

insurer's petspective, avoidance tesponds fully to any non-dlsclosute or mISrepresentation by the assured, since it retroactively exonerates the insurer f:om all liability on the conttact. Likewise, the mutual testitution of benefits tecelved under the policy that attends avoidance satisfies the assured where its gtievance
against the insurer is wasted premium. In rare cases, however, the question may

stands in its entitety. This is not the only field in which English law still seems to
adopt a fairly crude, all-or-nothing approach, when what is needed is a more sophisticated remedy more appropriate, and in that sense more proportionate, to the wrong suffered.

(b) Proportionality in general contract law

Proportionality is introduced into remedies fot misreptesentation in the gen- 4.158 etallaw of contract by section 2(2) of the Misreptesentation Act 1967. This subsection provides as follows:
Where a person has entered into a contract after a misrepresentation has been

arise of the availability of damages.

(1) Avoidance
4.155 Section 17 of the Marine Insurance Act 1906 declates that 'if the utmost good

be not observed by either party, the contract may be avoided by the other patty'. Likewise, sections 18(1) and 20(1) provide for avoidance in the event of matetial non-disclosure and misreptesentation.

made to him otherwise than ftaudulently, and he would be entitled, by teason of

the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out ofthe contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other

(a) Nature ofthe remedy 4.156 Avoidance of the contract asserts a defect in the fotmation of the conttact with the tesult that, although the conttact is not expunged ftom histoty,'41 the primary obligations are tetminated retrospectively so as to return the parties to the position they were in befote the contract was concluded. The insuret is viewed as if it had nevet come on tisk with the result that no futute liability may be incurred, any ourstanding liabilities ate discharged, and any loss moneys alteady paid are tecovetable.'4' The remedy takes effect from the moment of the insurer's election to avoid. It does not require judicial intervention, although

party. Section 2(2) of the 1967 Act, therefore, cteates a judicial disctetion, in cases 4.159 of non-fraudulent mistepresentation, to declare ineffective a rescission of the contract (or deny the remedy if not already exercised) and instead to effect a financial adjustment between the parties through an awatd of damages. In an

340 34'

(1766) 3 Burr 1905,1909.

NewtensofWembley Ltd 0 Williams [1965) 1 QB 560; Mackender v FeldiaAG [1967]2 QB

. ComhillInsurance Co Ltd v L & B Assenheim (1937) 58 LlLRep 27, 31.

'" Insurance Corp ofthe Channel Islands v McHugh [19971 LRLR 94, 138; Drake v Provident Insurance pic [20031 EWHC 109 (Comm), [2003] Lloyd's Rep lR 781, paras 31-32; Brotherton v Aseguradera Colsegures SA (No 2) [2003] EWCA Civ 705, [2003] Lloyd's Rep lR 746, para 27.
See also 4.04 above
344

590.
342

(self~executing

nature of rescission in the general law).

Kamar v Eagle Star Insurance Co Ltd [20001 Lloyd's Rep 1R 154, 157.
[1993) 1 Lloyd's Rep 496,506.

345

160

161

The Doctrine ofUtmost Good Faith

take into account the innocence or negligence of the assured's breach34' and the relative consequences of denying or allowing avoidance. Where no loss has occurred, allowing avoidance does not unfairly prejudice the assured, who can seek alternative cover. Where, as is usual, losses have already occurred, avoidance will automatically prejudice the assured by denying any indemnification. Where compliance with the duty would have resulted in merely a higher premium which the assured would have paid, the contract could be declared subsisting subject to an award of damages equivalent to that additional premium. Where the insurer would either have declined the risk altogether or would have insisted on certain limitations in the policy, it might be apptopriate to allow avoidance or, alternatively, to award a more substantial sum by way of damages.347
4.160 There are, however, three major resttictions on, or questions over, the applicability of section 2(2) in insurance contract law. First, section 2(2) requires that a 'misrepresentation' be 'made'. This wording, it has been argued348 and accepted by the Court of Appea!,34' does not include pure non-disclosure, although half-truths should be covered. This raises a problem of characterization. A proposer of insurance will not be viewed as a matter of law as impliedly making the positive representation that the disclosure obligation has been fulfilled."o If, however, an assured fails to disclose part of its claims record, the breach of duty may be classified equally as a misrepresentation of the claims record or as non-disclosure of the omitted claim. In such a situation, it cannot be denied that a misrepresentation has been made, regardless of the way the breach of duty may be pleaded, and accordingly it is suggested that the statuto,'y judicial discretion would be, prima ficie, available. 4.161
insurance context, in dedding whether to exercise its discretion, a cOurt could

Remedies
Marine Insurance Act 1906 should not be read as impliedly modified by the Misrepresentation Act 1967. Thirdly, and mOfe fundamentally, the question arises of whether the remedy of 4.162 avoidance, as prescribed by the Marine Insurance Act, for failure to act in good faith is the same remedy as rescission for misrepresentarion. If avoidance is but another label for rescission, section 2(2) will confer a discretion to refuse (to
recognize) avoidance of an insurance contract in cases of non-fraudulent mis-

representation, albeit not for non-disclosure. If, however, it is rechnically a different remedy, albeit one that operates in same way as rescission, section 2(2) will have no application. The latter view has some support.''' The dissonance that would result from a discretion that extended to misrepresentation but not to non-disclosure perhaps suggests that this view is preferable.

(c) Loss ofthe right ofavoidance

The right to avoid for non-disclosure or misrepresentation may be lost through 4.163 the doctrine of waiver. This can take effect through either affirmation or equitable estoppel. In the following discussion, it will be assumed that, as is almost invariably the case in practice, it is the insurer that is seeking to avoid the contract. Mfirmation is the exercise ofan informed choice. It has three requirements. First, 4.164 the insurer must know of the misrepresentation or non-disclosure.'54 Being put upon . . .IS msuffi' inqUiry . Clent. "55 eean dl y, th e insurer must know that, consequently, it has the right in law to avoid the contract,'" but a court will readily infer that an insurer has that knowledge."7 Thirdly, the insurer must unequivocally represent to the assured that it is exercising its right of election so as to forsake its right to avoid and instead affirm the contract."8 The representation may be by words or conduct. The insurer may expressly inform the assured ofits elecrion to affirm the contract or may communicate this decision by conduct consistent only with such a choice.'" Ultimately, whether the insurer will be held

Secondly, in Highlands Insurance Co v Continental Insurance Co,"" Steyn J expressed the view that avoidance should never be denied in commercial insurance for fear of undermining the policing function of the remedy in ensuring a fair presentation of the risk. This may, however, overstate the regulatory function of the doctrine of utmost good faith."2 It may, nevertheless, be argued that the unqualified reference to avoidance rights in sections 17 and 20 of the

346 It may be relevant whether responsibility for the breach lies with the assured Or with the broker who placed the risk. 347 In considering whether to allow avoidance in such a situation, a court would have to take into account not merely the existing losses claimed by the assured but also the prospect and scale of further losses arising under the ,~oidable policy. 348 Sir Guenter Treitel, Law of Contract (11 th edn, 2003) 402-3. cf A Hudson, 'Making Misreptesentations' (1969) 85 LQR 524. 349 Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd (1990) 1 QB 665, 790. 350 ibid 786-9. '" [198711 Lloyd's Rep 109, 118. 352 cf Pan Atlantic Insurance Co Ltd v Pine TOp Insurance Co Ltd [1995] 1 AC SOl, 549.

See 4.22 above. Motor Oil He/las (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990) 1 Lloyd's Rep 391,398. On the meaning of knowledge, see Insurance Cory o[the Channel Islands v Royal Hotel Ltd [1998) Lloyd's Rep lR 151, 162. 355 McCormick v NationalMotor & Accident Insurance Union Ltd (1934) 49 LlLRep 361, 365. 356 P,?,man v Lanjani [1985] Ch 457, in the context of the right ofelection consequential upon a repudlatory breach of contract, but there is no reason to distinguish between breaches of contract and of duties arising under the doctrine of utmost good faith: The Kanchenjunga [1990J 1 Lloyd's Rep 391, 398. See also Insurance Cory o[the Channel Islands 0 Royal HoteLLtd [1998J
353
354

Lloyd's Rep 1R 151,161.

357 358

Simner v New India Assurance Co Ltd[1995] LRLR 240,258. Motor Oil Hellm (Corinth) Refineries SA. v Shipping Corp of India (The Kancherifunga)

[1990) 1 Lloyd's Rep 391, 398. 359 ScarfvJardine (1882) 7 App Cas 345, 361; Karnmins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd[1971) AC 850, 883.

162

163

The Doctrine ofUtmost Good Faith

to have made the requisite unequivocal representation depends upon whether a reasonable person in the position of the assured would consider the insurer to be making an informed choice to affirm the contract. 360 It does not depend upon either the perception of the actual assured36 ' or the subjective intention of the insurer.'6' Once communicated,'6' the election is final and irrevocable, and does
not require perfection

Remedies
Apart from affirmatio~, rhe right to avoid may also be lost through the doctrine 4.166 of eqUitable, or promiSSOry, estoppel. While the essence of affirmation is the malting of an informed choice, the essence of equitable estoppel is the appearance 1n the eyes of the assured of making an informed choice. In practice, however, it is unlikely in the context of commercial insurance contracts that the tequirements for waiver by equitable estoppel will be fulfilled in circumstances where the. insurer will not be held to have affirmed the contract. Accordingly, the doctrlne of waiver by equitable estoppel is significant where waiver by affirmation is not available, namely in the law of promissoty warranties. The
doctrine is, therefore, discussed in that context. 374

by any consideration, reliance, or change of position. 364

Discovery of a different misrepresentation or non-disclosure will give tise to a fresh right of election, bur only if it would make 'a material difference to the reasonable insurer's decision whether to affirm or to avoid the policy'.'65
4.165

Conduct by an insurer informed as to the facts and the law that amounts to an election to affirm the contract includes: acceptance of premium;"6 renewal of ' y' . a policy;367 approval 0f measures ta ken to rect! f a mIsrepresentation; '68 CO~ operation without reservation in attempting to repair damage to the insured ship;'" requesting further information regarding a casualty and acquiescing in and inviting the assured to proceed with a lengthy investigation of the 10ss;'70 and cancelling the policy in accordance with the rerms of a cancellation clause therein. 371 Payment into court in response to a claim admits that the assured is entitled to some measure of recovery and is, therefore, inconsistent with any complete defence. '72 Purely ministerial acts, such as the issuing of a policy
document, do not constitute an election to affirm. 373

The right of election arising upon discovery of a right to avoid by reason of a 4.167 misrepresentation or non-disclosure imposes no obligation to elect. The law recognizes an entitlement to a reasonable time to decide upon the preferred
option.
375

However, even once such period of time has expired, there remains no

cover. 378

obligarion to elect, bur the right of eJection may be lost if rhe failure to exercise a right of avoidance within a reasonable time is viewed as a representation by conduct of a decision to affirm the contract. This may either constitute an " 'h 376 el ' eenon 1ll Its own ng t or amount to a representation sufficient. if relied upon, to found an equitable estoppel.'" In the insurance context, such reliance may be demonstrated through the assured refraining from seeking alternative

360

Insurance Corp o[the ChannelIslands v Royal HotelLtd[1998J Lloyd's Rep lR 151, 162-3.

(d) Post-ftrmation revelations

Materiality is determined definirively at the rime of acceptance of the risk. An 4.168 apparent circumstance may qualify as material, yet subsequent events may reveal that the appearance was deceptive. This does not affect the materiality of the circumstance,37' but does it affect the remedy of avoidance? Is the insurer entitled to avoid for non-disclosure of a circumstance that does not itself represent the rruth, assuming that the truth involves no material circumstance requiring disclosure? Suppose that, at time the risk is placed, the master of the insured vessel is awaiting rrial on charges of smuggling. Believing the master to be innocent, the assured fails to disclose this circumstance. The existence of the charges is clearly a material circumstance, so that there is no doubt that they

No difficulty arises in the context of an election to avoid since: 'The claim to avoid demonstr~,tes of itself at one and the same time awareness of the choice and its making': at 162 per Mance J. 361 ibid 163. Contra Callaghan 0 Thompson [2000J Lloyd's Rep lR 125,134, but see Spriggs 0 Wessington Court School [2004J EWHC 1432 (QB), [2005J Lloyd's Rep lR474, pata 22 (obiret, ICCI preferred to Callaghan). 362 Scarfojardine(1882) 7 App Cas 345, 361. 363 Spriggs v Wessington Court School [2004J EWHC 1432 (QB), [20051 Lloyd's Rep lR 474, paras 39-40 (communication not required only in the case of fraud where the fraudster has made it impossible for the deceived party to communicate), 364 Scarfo jardine (1882) 7 App Cas 345. 398-9. See also Pryman v Lanjani [1985J Ch 457, 494,500. 365 Spriggs v Wessington Court School [2004J EWHC 1432 (QB), [2005J Lloyd's Rep lR 474, para 77 per Stanley Burman J. 366 Wing v Harvey (1854) 5 De G M & G 265; Jones v Bangor Mutual Shipping Insurance Society Ltd(l889) 61 LT 727; Ayrry v British Legal & United Provident Assurance Co Ltd [1918] 1 KB 136. 367 Sulphite Pulp Co Ltd v Faber (1895) 1 Com Cas 146, 153-4. 368 De Maurier Uewels) Ltd 0 Bastion Insurance Co Ltd [1967J 2 Lloyd's Rep 550. 369 Daneau v Laurent Gendron, Ltee [1964] 1 Lloyd's Rep 220 (Exchequer Court of Quebec). 370 TOronto Railway Co v National British Irish Millers Insurance Co Ltd(1914) III LT 555. 371 Mint Security Ltd v Blair [1982] 1 Lloyd's Rep 188; Iron Trades Mutual Insurance Co Ltd v Companhia de Seguras Imperio [1991J 1 Re LR 213, 225; Wise (Underwriting Agency) Ltd 0 Grnpo NacionalProvincial SA [2004J EWCA Civ 962, [2004J 2 Lloyd's Rep 483. paras 83, 134. m Harrison 0 Douglas (1835) 3 A & E 396. . 373 Morrison v Universal Marine Insurance Co (1873) LR 8 Ex 197.

'74 See 18.94-18.95 below. :;: McCormick v National Motor fir Accident Insurance Union Ltd (1934) 49 LlLRep 361. Clough 0 London & North Western Railway Co (1871) LR 7 Ex 26,35; Allen v Robles [19691 1 WLR 1193, 1196. 377 ibid. See also Morrison v Universal Marine Insurance Co (1873) LR 8 Ex 197; Simon, Haynes, Barlas & Ireland v Beer(1945) 78 LlLRep 337, 369; Liberitln Insurance Agency Inc v Mosse [1977J 2 Lloyd's Rep 560, 565. )78 Jones v Bangor Mutual Shipping Insurance Society Ltd(l889) 61 LT 727. 37S See 4.82ff above,

164

165

The Doctrine ofUtmost Good Faith

should have been disclosed and the duty of disclosure has been broken. However, assuming the master is subsequently acquitted, does the fact of the acquittal affect the insurer's right to avoid the policy?
4.169

Remedies
be contrary to the doctrine of utmost good faith for the insurer to avoid on the basis of non-disclosure of that circumstance.

It is clear that an acquittal after the insurer has avoided the policy does not undermine the legitimacy of the avoidance, even if the acquittal precedes judgment in litigation in which the right to avoid is in issue. In Brotherton v Aseguradora Colseguros SA (No 2),'80 the Court ofAppeal identified three sttands of reasoning in any contrary suggestion and rejected each of them. 381 First, the court cannot refuse to permit the insurer to avoid the policy, for the simple reason that avoidance is a remedy that is executed by the act of the assured without judicial intervention or confirmation. 382 cumstances relied upon as a basis for avoidance in order to demonstrate rhat they are without foundation and thereby disentitle rhe insurer from avoiding the policy. Three reasons may be advanced for this: (a) the possibility of such a challenge would introduce significant uncertainty into the law; (b) it might constitute a temptation for assureds not to make full disclosure of doubtful circumstances, thereby depriving insurers of rhe ability to make an informed decision on the risk that the doctrine of utmost good faith exists to confer; and (c) it would compel insurers to undertake investigations of the relevant circumstance that they could have required the assured to undertalee had disclosure been made at presentation of the risk, with an accompanying shifting of the liability for the costs of the investigations.

(e) The consequences ofavoidance

The rerrospectivity of the remedy of avoidance results in risk being viewed as 4.172 never attachmg. Any sums previously paid by the insurer in settlement of claims unde: the policy are recoverable. The consideration for the premium toral]y fails and, m the absence of fraud or illegality, the assured is entitled to restitution of any premium paid.'" (2) Damages In rare circ~msrances, the remedy of avoidance is inadequate. Suppose, prior to 4.173 the formatIOn of the contract, the insurer knows of a circumstance that will prevent th~ assured from recovering under the terms of the policy, but fails to dlsdos~ thIS fact to the ass~red. The assured may avoid and recover its premium, but, either through aVOIding rhe policy or by its terms, will be denied indemnification in respect of a loss that would have been prevented or covered had the I?~urer dIsclosed the information. In such a situation, the only remedy of any unhty to the assured lies in damages. This was the essential position in Banque Keyser Ullmann SA v Skandia (UK) 4,174 Insurance Co Ltd,''' where, at first instance, Steyn J awarded damages to the assured for breach of duty under the doctrine of utmost good faith. Accepting that the duty was not based on an implied contractual term, he held nevertheJess th~t the assured's right to disclosure could be properly protected only by :ecognltlon of a damages remedy that justice and policy required to avoid Imbalance and unfairness in the relationship between assured and insurer. A new cause of action was thereby created. Alternatively, he awarded damages in :he tort of neghgence, On the particular facts of the case, he held that rhe Insurer owed the ~ssured a duty of care, not least because it reinforced the duty of utmost good faIth and mIlitated against fraud while maintaining commercial morality.387 The Court ofAppeal upheld the finding of a breach of duty under the doctrine 4.175 of utmost good faith by the insurer but reversed the award of damages. Such a remedy was avaIlable only if the doctrine gave rise to either contractual or

4.170 Secondly, the assured is not entitled to challenge rhe truth of undisclosed cir-

4.171

Thirdly, the doctrine of utmost good faith does not require an insurer to refrain ftom avoiding a policy on the basis of non-disclosure of an apparently material circumstance, at least where the insurers (did not at the time of avoidance accept or know for certain of the incorrectness of the intelligence constituting the basis of their avoidance).383 'Where, however, the incorrectness of a circumstance is already accepted or known for certain, it was subsequently stated obiter by the Court ofAppeal in Drake Insurance pic v Provident Insurance plc 84 that it would

380
381

12003J EWCA C;v 705, [2003J Lloyd's Rep IR 746.

Thereby overruling Strive Shipping Corp v Hellenic Mutual ~r Risks Association (Bermuda) Ltd (The Creeia Express) [2002J EWHC 203 (Comm), [2002] Lloyd's Rep IR 669, paras 290-291, which had already not been followed in Drake Insurance p!cvProvident Insurance pic [2003]
EWHC 109 (Comm), [2003] Lloyd's Rep IR 781. 382 See 4.04 above. This argument is undermined if (a) contrary to consistent modern authority (4.156 above), rescission in equity requires judicial intervention, and (b) the remedy of avoidance is merely another name for equitable rescission (see 4.22 above). 383 [2003] Lloyd's Rep IR 781, para 34 per Mance LJ. 3&< [2003] EWCA Civ 1834, [2004J QB 601.

See 6.05-6.06 below. [1990] 1 QB 665. The complex facts and the litigation to the level of the Court of Appeal are noted by F Trindade (1989) 105 LQR 191. 381 [1990] 1 QB 665, 699-715.
385
386

I66

I67

The Doctrine ofUtmost Good Faith

tortious obligations. 388 Relying on dicta of Lord Esher MR and of members of rhe House of Lords in Blackburn, Low & Co v Vigors,''' the Court rejected an argument thar the duty of utmosr good faith was based upon an implied contractual term, giving rise to a claim in damages for breach, and held instead thar compliance with the utmost good faith duties was a contingent condition precedent to the right of the assured to insist on the performance of the contract that arises as an incident to the contract rarher than by reason of a term implied in the contract. Support for this view was derived from the language of the Marine Insurance Act 1906 in addressing remedies but mentioning only avoidance, together with authority that the power of the court to grant rescission of any contract in cases of innocent misrepresentation arose 'by reason of the jurisdiction originally exercised by the courtS of equity ro prevent imposition'.390 This analysis was viewed as equally applicable to non-disclosure. The characterization as a contingent condition precedent arising by law outside the contract has subsequently been accepted,'91 although, as will be discussed,392 most of the arguments advanced in support lack cogency.
4.176

Remedies
cou:t. by w~y of judicial legislation to create a new tort, effectively of absolute lIabilIty, which could expose either party to an insurance contract to a claim for substantial damages in the absence of any blameworthy conduct'.394 The reas~ns advanced by the Court of Appeal for rejecting the possibility of 4.177 damages In t~tr for a breach of a duty of utmost good faith are worthy of c~mment. It IS suggested that the first three reasons are unconvincing. First, as discussed earher, relIance upon the equitable power ro prevent imposition is rr:lsplaced.395 S~condly, the holding in CTI v Oceanus that the impact of a nondIsclosure or mIsrepresentation on the particular insurer or assured is irrelevant to establishing a breach of the duty of utmost good faith was overruled by the House of L~rds In Pan Atlantic v Pine Top.396 Thirdly, inferring an absence of ~ther remedies from the fact that the 1906 Act provides expressly for avoidance IS probably to misread the statute. According to Staughton LJ in New Hampshire Insurance Co v MGN Ltd,397 'the maxim that mention of one of twO things exclud~s the ~ther must be applied with caution when considering the draftsmanship of Sir MackenZie Chalmers. His method of codification was, at any rate at times, to state the effect of rules decided by the Courts, and not to pronounce upon points which had not been decided'. Sections 17 and 18 of the Act do not mention the remedy of damages simply 4.178 because they codifY Lord Mansfield's statements on rhe nature of concealments In Carter v Boehm. 398 Assho,;n by his illustration of the completed voyage, Lord Mansfield did not have In mInd rhe rare situation where only a damages remedy would redress the consequences of a breach of duty by the insurer. Moreover, the Court ofAppeal's reading of the relationship between sections 17 and 18 on the one hand and section 91(2) on the other is in marked contrast to that of the House of Lords in Pan Atlantic v Pine Top in the context of subjective mducement. 399 The fourth objection to tortious damages is more formidable. It is a cardinal 4.179 principle of the general law that damages are nor available for innocent mis. U "b representation. '00 1n nett, ut, Symons & Co v Buck/eton,'O! the House of Lords adamantly rejected an argument that an innocent misrepresentation should, on the facts, be recognized as constituting a collateral contract. Lord Moulton

Also rejected, for four reasons, was an argument that breach of a good faith duty
constituted a tort. First, other factors that triggered the court's equitable jurisdiction to prevent imposition, such as duress and undue influence, did not sound in damages. Secondly, damages could only be awarded for prejudice occasioned by a given individual; yet CTI v Oceanus,''' good law at the time of the decision of the Court ofAppeal in Skandia, prohibited reference ro an actual insurer or assured in the conrext of avoidance of a policy. Thirdly, sections 17 and 18(1) of the Marine Insurance Act 1906 provide expressly for the remedy of avoidance of the policy without suggesting that damages may also be available. The 'clear inference' from the sections was that Parliament did not. intend a damages remedy to be available, preventing resort to section 91 (2), which preserves the general common law save in so far as inconsistent with the Act's provisions. Fourthly, the pre-formation good faith duties do not discriminate according ro the state of mind of the party in breach. A wholly inadvertent and innocent non-disclosure is still a breach. Wete such a breach ro constitute a tort, an innocent assured could be sued for a considerably increased premium by way of damages even in the absence of any casualty: 'it would not be right for this

ibid 776, 780. Analysis as a fiduciary duty was unsuccessfully raised at first instance (at 715) and not pursued on appeal, but see P Matthews, 'Uberrima Ficlesin Modern Insurance Law' in F Rose (cd) New Foundationsflr 'nsurance Law (1987). 389 (1886) 17 QBD 553, (1887) 12 App Cas 531. 390 Merchants & Manufacturers Insurance Co Ltd v Hunt [1941] 1 KB 295, 318 per
388

394

[19901 1 QB 665. 781 per Slade LJ.

395

See 4.l1ff above.

h 396 See 4.42 above. In any event, a distinction could be drawn between ascertaining whether
t

~9~Uty has been broken and quantifYing damages for breach.

399 See 400"

[19971 LRLR24, 59. 4.43 above.

398

(1766) 3 Burr 1905, 1909.

Luxmoore LJ.
392

3" Agnew v Liinsfdrsiikringsboidgens AB [20011 1 AC 223, 240, 246,

265~6.

. Ie mlsreprese?tatl?llS . the representee cannot prove to whICh duty of care recognIzed III the tort of negligence.

be fraudulent or a breach of a

See 4.177 below.

393

Discussed at 4.42 above.

'" [1913J AC 30,51.

168

169

The Doctrine ofUtmost Good Faith

stated that it was 'of the greatest importance ... that this House should mainrain in its full integrity rhe principle that a person is not liable in damages for an 'nnocent misrepresentation, no matter in what way or under what form the 402 I . 'd' 'l attack is made'. Although subsequently undermmed m lrect1 y, t he essenrra principle remains good law today. Creating a tort of b~each of the duty of utmost good faith would involve direct refutatlOn of the pnnclple m the context
of contracts uberrimae fidei.
4.180

Co-insurance

speak is equally actionable in the tort of dec;eit,'06 permitting damages to be recovered for fraudulent non-disclosure in the context of insurance contracts. 407 In addition, a misrepresentee can invoke section 2( l) of the Misrepresentation Act 1967. This provides as follows:
Where a person has entered into a contract after a misrepresentation has been made408 to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the representation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently,

With respect to the tort of negligence,'03 the Court ofAppeal held tha.t liability for pure economic loss caused by a negligent sratement (or no~~dlsclosure) could arise only if the representor voluntarily assumed responslblhty for that statement and the representee relied on it. While such an assumprron of responsibility might readily be inferred in respect of stat~~ents made by prof~s sional people in the course of their professions, the poslrron was dIfferent :"lth respect to non-disclosure. Evidence was required of condu~t that mIght obJectively be construed as signifYing an assumption of respon,,,btllty. On the facts, there was none. Moreover, even if, by reason of specIal CIrcumstances and the relationship between the parties, a defendant could ever be deemed by law to have assumed the requisite responsibility, the law of tort could not be extended so as to impose an obligation to speak in the context of negotiating an ordinary commercial contract. Although a duty to speak was the essence of a contract uberrimae fidei, the Court repeated that granting a damages. remedy would be contraty to the clear inference to be drawn from the Marme Insurance Act 1906 that the only remedy for breach of the duty of utmost good faith was
avoidance. 404

unless he proves that he had reasonable grounds to believe and did believe up to the
time the contract was made that the facts represented were true. 409

In Royseot Trust Ltd v Rogerson,"o the Court of Appeal interpreted the fiction of 4.183 fraud in the drafting of section 2(1) as governing the measure of damages, whereas it is strongly arguable that the subsection is concerned merely with the availability of a damages remedy. This is highly controversial since any representor who fails to discharge rhe burden of proving its innocence is treated as fraudulent and liable for damages quantified as in the tort of deceit. 411

M. Co-insurance
The consistent approach of the courts to the co-insurance of separate interests 4.184 under composite policies is that a breach of obligation in respect of one interest does not affect the other insured interests. The leading case is Samuel (P) 6- Co Ltd v Dumas,''' in which the House of Lords stated, obiter but clearly, that wilful misconduct on the part of a mortgagor afforded the insurer no defence against a co-assured mortgagee.

4.181

The decision of the Court of Appeal was affirmed in the House of Lords on essentially different grounds. 40s Lord Templeman and Lord Jauncey did, however, express the view, obiter, that a breach of a duty arising under the doctrine of utmost good faith does not sound in damages. take advantage of the normal common law damages claims for misrepresentation in the torts of deceit and negligent misstatement. Moreover, any deliberate and dishonest withholding of material information where there is a duty to

Samuel v Dumas was concerned, of course, with fraud in the performance of the 4.185

4.182 Where the breach of duty consisrs of a misrepresentation, the representee can

406 Brownlie v Campbell (1880) 5 App Cas 925, 950: Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [19901 1 QB 665, 774. 401 HIH Casualty & General Imura"ce Ltd v Chase Manhattan Bank [2003) UKHL 6, [2003J 2

Lloyd's Rep 61.

408 This reference to a misrepresentation being 'made' excludes non~disclosure from the ambit of the Misrepresentation Act 1967, s 2( 1): see the discussion of s 2(2) at 4.160 above. 409 A burden difficult to discharge: Howard Marine & Dredging Co Ltd v Ogden & Sons (Excavations) Ltd[1978] QB 574 (barge owners liable under MIA 1906, s 2(1) when their marine manager misrepresented the deadweight capacity of barges in reliance on an erroneous statement in Lloyd's Register, the truth being ascertainable from the ship's documents in the owners' possession).

402

Through the shrinking of the territory of the innocent misrepresentation by the recognition

~~tac~in~ to negligent misstatem~nts

Ltd [19651 1WLR623.
403 404

. Ii dt Byrne & Co Ltd v Helier & Partners Ltd[19641 AC 465 of the possibility ofaduty of care

and the passing of s 2(1) of the Mis~eprese~tation Act. 1967 (4.182 below), and through an increasing judi?ial preparedness t? recognize the lOcOrrOratlon of misrepresentations as contractual terms: see Dtck Bentley Productlons Ltd v Harold Smtth (Motors)

'" [1991J 2 QB 297.

411 The basis of assessment is therefore tortious with the representee benefiting from generous remoteness rules: Doyle v Olby (Ironmongers) Ltd [1969J 2 QB 158; Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd[1997] AC 254. 412

[199011 QB 665, 790-805. See also Searle vA R Hales & Co Ltd [19961 LRLR 6 8 . ' " [1991] 2 AC 249.

[19241 AC 431.

170

171

The Doctrine ofUtmost Good Faith

contract. Nevertheless, it has been viewed as decisive also with respect to breach of the pre-formation duties of urmosr good faith. In New Hampshire Insurance Co v MGN Ltd,413 Potrer J, at first instance, acceded to the submlsslOn by counsel, invoking Samuel v Dumas, that 'where an independent interest is separately insured, there can be no question of avoiding rhe policy for non-disclosure quoad that interest unless rhe person so insured was privy to the nondisclosure'.414 Potter J stated that: 'While it is common to speak m terms of avoiding a policy of insurance, the right to avoid for non-disclosure relates to the contract of insurance made with the individual assured.'415 The Court of Appeal, withour discussion, upheld this approach as following from the decision of the House of Lords in Samuel v Dumas. 416 Subsequently, the decisiveness of Samuel v Dumas was accepted also by Rix J in Arab Bank pic v Zurich Insurance CO. 417
4.186

Co-insurance
However, in the COntext of the Maxwell group, the interrelationship of various of the companies and the overlapping employment and functions of a number of their servants and officers, are likely to have created situations whereby an officer of company A, as well as exercising functions in company B, would also have had knowledge of the affairs of company C and/or the actions or intentions of its

officers of such a kind that he would have been under parallel duties of disclosure and/or obligations of good faith in respect of all three. In Arab Bank pic v Zurich Insurance CO,421 however, Rix J held that a managing 4.188 director's fraud was not in general to be imputed to his company for the purposes of a professional indemnity policy insuring the company, the managing director, and the orher directors. The COntralY view would frustrare rhe clear intention of the policy.

A number of additional comments are, howevet, necessary. First, as discussed elsewhere,41' composite policies have been analysed as either giving rise to a 'bundle of separate contracts' or as a severable contract. Sections 17 to 20 of the Marine Insurance Act 1906 are clear that breach of the utmost good faith duties makes 'the contract' voidable. In order to restrict avoidance to the offending coassured, one would need to read references to <the contract' as 'the contract
Of

the relevant severable part of the contract', or, alternatively, adopt the 'bundle of contracts' analysis.
4,187

Secondly, the relationship between co-assureds may give rise to questions of attribution of knowledge for the purpose of. the pre-formation duty of disclosure. While insurance cannot be avoided against one co-assured for nohdisclosure by another, it may be that the relatiohship between the co-assureds is such that knowledge possessed by one co-assured ought to be known by a second co-as5ured in the ordinary course of its business so as to fall within the scope of the disclosure obligarion owed by that second co-assured. This is particulatly relevant where rhe co-assureds are the member companies of a gtoup, as in the Maxwell group fidelity policy in New Hampshire Insurance Co v MGN Ltd,419 or a company and its directors in the context of directors' and officers' cover. Thus, in New Hampshire, having held that non-disclosure by one co-assured would not, in and of itself, permit the insurer to avoid as against other co-assureds, Potter J noted as follows: 420

In the present case, where it follows from the definition of the 'insured' in the insuring clause in question that each separate 'person' is a separate insured, the question is similarly whether the fault, here the dishonesty, of one person is to be attributed to another person, a company, in circumstances where directors and their company are distinguished as separate insureds. In such circumstances, the logic of the policy's scheme is that even directors cannot by themselves be treated, at any rate ex officio, as the alter ego or directing mind and will of the company. It might be Otherwise if one director held all or the majority of the shares in a company, as is the case of a 'one man company', or if the director's dishonesty had been committed or condoned as part of a scheme approved by the board of directors itself: in such a case the proviso would operate and there would be no harm in describing the director's act as the act of the company.422
Thirdly, while the COurts have held that breach ofa duty ofutmosr good faith on 4.189 the part of one co-assured is not opposable against another, no theoretical explanation has been offered. Any such explanarion has to meer rhree possible
arguments:

(1) As discussed elsewhere,423 composite policies are often concluded by the principal assured on behalf of itself and the co-assureds. Where the coassured's participation in the policy is secured through being a party to the policy through the agency of the principal assured, the latter will be rhe agent of the co-assured in the formation of the contract. Consequently, any breach of rhe pre-formarion utmost good faith duties committed by the principal assured that relate to the co-assured's risk will presumably render voidable the co-assured's insurance. A fortiorz~ where participation in a voidable policy is secured through ratification, the insurer's right to avoid will remain valid after ratification. (2) Where the co-assured's participation in a composite policy is secured by way of rhird-party right under the Contracts (Rights of Third Parries) Acr

'1,
414

Although quaere whether the relevant issue is privity to the non~disdosure Or misrepresenta~ don as opposed to whether the non-disclosure or misrepresentation satisfies the requirements of materiality and inducement with respect to the severally insured interest. ~
'1,
418

[1997] LRLR24.

[1997] LRLR 24,42. See 2.77-2.78 above.

416 ibid 58. 417 [199911 Lloyd's Rep 262, 277. '" [1997] LRLR 24. 420 ibid 43.

4"

[1999] 1 Lloyd's Rep 262.

422

ibid 279.

423

See 2.79ff above.

172

173

The Doctrine ofUtmost Good Faith

1999, section 3(2) of that Act provides that the insurer will be able ro invoke against the co-assured any defence or right of set-off that:
(a) arises from or in connection with the contract and is relevant to the term,

.Utmost Good Faith after the Formation ofthe Contract

N. Utmost Good Faith after the Formation of the Contract

The duties arising under the doctrine of utmost good faith on which this chapter 4.193 has concentrated so far do not extend beyond the formation of the contract.42' As demonstrated by the definition of materiality and the requirement of inducement into the contract, the purpose of the assured's duties of disclosure and avoidance of misrepresentation is to inform the insurer's underwriting decision. Once the insurer is committed ro taking the risk on agreed terms, the assured's duties lapse. Likewise, the reciprocal duties of the insurer address the decision of the assured ro procure insurance at all and, if so, on what terms. It would, nevertheless, appear that the docttine of utmost good faith continues to playa role in insurance Contracts even after conclusion of the contract, bur the
precise import of the post-formation doctrine remains somewhat uncertain.

and (b) would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee. Accordingly, any defence arising out of, for example, pre-formation nondisclosure or misrepresentation by the principal assured will be opposable against the thitd party co-assured claiming by virtue of rhe 1999 Act. (3) An insurance contract is voidable also in case of non-disclosure or misrepresentation by a placing broker. 424 An insurer might argue that, while defences have to be applied as against co-assureds on a several basis, any breach by the placing broker of the independent duties it owes directly to the insurer can be invoked against all co-assureds.
4.190 A possible answer to these objections may be found in an implied waiver of the

right to avoid. It is clear that the right can be exptessly waived. 425 Just as the commercial nature of an insurance policy may affect questions of attribution of knowledge,42' so, it is suggested, the commercial nature of a composite policy may indicate that an insurer impliedly waives the right to avoid except in so far as the individual co-assured participates petsonally in the placement of the risk and is responsihle for the breach, whether in the context of a direct communication ro the insurer or by misrepresenting or failing to disclose material circumstances ro the placing broker. Fourthly, in the context of pervasive interests, the assured may seek to recover in respect of not just loss sustained by his interest but also loss sustained by the interests of the other co-assureds. To that extent, a co-assured with a pervasive interest cannot recover free of any defence good against another co-assured. A defence good against a particular co-assured cannot be by-passed by submirting the claim through a fellow co-assured with a pervasive interest. 427

4.191

It is clear that there is no pervasive duty on the assured to disclose to the insurer 4.194 throughout the lifetime of the policy any circumstance that the insurer would take into account in the operation of the contract in any way. In Commercial Union Assurance Co Niger,430 a system of annual renewal of cover was replaced by a continuing policy with a righr to cancel on three months' notice. The insurers argued that the assured was under a continuous duty ro disclose all material alterations in the character or extent of the risk. The argument was rejected. In the Court ofAppeal, Bankes LJ considered that insurers desirous of such protecrion should Contract expressly for it and, implicitly, that the insurers had only themselves ro blame for adopting the form of policy they had. In the House of Lords, Lord Sumner had little hesitation in rejecting an extension of the doctrine of utmost good faith to contractual cancellation clauses: 'This would turn what is an indispensable shield for the underwriter inro an engine of oppression against the insured.'431 The decision was subsequently followed, with approval also of the sentiments expressed, by the Court of Appeal in New Hampshire Insurance Co v MGN Ltd. 432

4.192 Fifthly, the several treatment of the co-assureds is subject to contrary intention in the contract. There is no reasOn of principle why an insurance contract

should not treat co-assureds as joint for specified purposes,''' or indeed generally.

It is equally clear that the doctrine of utmost good faith should, and does, attach 4.195 where the insurer has further underwriting decisions ro take. The assured may wish ro vary the policy, whether in scope or duration of cover, or exercise a contractual option ro extend cover that is subject ro payment of an addirional
premium and agreement to alteration of terms. 433 In such a case, the insurer is

being requested to make an underwriting decision on rhe acceptability of rhe

"4
426 428

MIA 1906, ss 19.20. See 4.122ff above. 425 See 4.110 above. See 4.117 above. '" State afthe Netherlands v Youell [19971 2 Uoyd's Rep 440.

See, eg General Provision B in New Hampshire Insurance Co v MGN Ltd[1997] LRLR 24,

429 Or such earlier point at which the insurer may become committed to offering insurance on agreed terms: see 2.21, n 46 above. 430 (1921) 7 LlLRep 239, (1922) 13 LlLRep 75. '" ibid 82. 432 [1997J LRLR 24,60-1. 433 For discussion of such options, known as 'held covered' clauses, see 18.11 Off below.

174

175

The Doctrine ofUtmost Good Faith

new risk and/or appropriate terms of cover. The rationale of equality of inf~r mation that underpins the assured's pre-formarion duties of utmost good faith calling for the app Iies eq ually in these contexts' . application of analogous duties. . Authority establishes, however, that the duties are moulded ro thelt ~on~ext, so
that the insurer's entitlement to disclosure and accurate representation
18

Utmost Good Faith after the Formation ofthe Contract

cover.'" There is, however, no discussion of how this is to be achieved given rhe .terms of section 17 of the 1906 Act. There would appear to be three options:

con-

fined to circumsrances matetial to the underwriting decision in respect of the requested variation or exercised option. In Iron Trades Mutual Insurance Co Ltd v Companhia de Seguros Imperio,4'4 Hobhouse J stated as follows:
Where there is an addition to a contract, as where it is var~ed, there can, b~ a furt~er d f disclosure but only to the extent that it is matenal to the vanatron bemg ury a d. If the addition does not alter the contractual rights there will be no fact propose . . ... that it is material to disclose and the same wIll apply If a vanatIon IS favourable to the insurer. It will only be when the insurer is being asked to take on some
additional risk and/or needing to reassess the premium or terms of co~er that disclosure of further facts could be material and, even then, the facts to be dlsclos~d are only those which are material to what the insllrer is being asked to do ... a.ny other conclusion would lead to an absurdity; the duty of the utmost good fa:th does not include giving the insurer an opportunity, after he has accepted the fisk and become bound, to escape from his commitment.

(I) The reference to 'the contract' in section 17 could be read as 'the COntract or severable part thereof. This might, however, be regarded as inconsistent wirh the literalism that leads.to the view that section 17 is exhaustive with respect to the range of remedies.
(2) Variation or extension ofa policy could be tegarded as involving the cteation

4.196 Some difficulty, however, arises in terms of the remedy for breach of a poStformation duty. Ifthe post-formation duties are covered by the Marine Insurance Act 1906, the only possible provision is section 17. The remedy that it conten:plates is avoidance of 'rhe contract', and the Court of Appeal has held, albeit controvetsially, that rhis is to be interpreted as an exhaustive starement of the available remedies. 435 This makes no sense in the context of contract variation"or extension. Whar should be voidable is the decision induced by the breach of duty, namely the agreement to vary or the decision as to the terms on o,yhich the option is to take effect. There should be no question of loss of the entltety of the contract. Such a remedy would be both disproportionate and conceptually bizarre. A complaint of inducement into an extension of a policy cannot sustain a tight to avoid the entirety of the policy. 4.197 The authority referred to above on moulding the scope of the good faith duties also supports, expressly or implicitly, albeit withour auth~ritative ~esolution, that the remedy for breach is similarly moulded, hmitmg rhe msurer to avoidance of the variation or extension without prejudice to the original

ofa new contract. The entire area would be moved from the post-formarion doctrine to the pte-formation doctrine and the remedial difficulty would disappear. This was the approach favoured by Longmore LJ in The Mercandian Continent,437 and is supported by the practical difficulty that may be encountered in distinguishing a variation from a fresb agreement. 438 It is, however, respectfully submitted that it cannot be accepted. There is a clear conceptual distinction between termination of a contract by mutual consent and replacement with a fresh contract, and the variation of an existing COntract with that contract continuing to apply, albeit with some changes in 43 terms. ' The sarne conceptual difference exists where the assured is merely exercising an option to extend the cover granted by the contract. If variations and extensions are not regarded as new contracts, it follows that, technically, sections 18 to 20 of the Marine Insurance Act 1906 do not apply to variations and options to extend cover, but instead indicate by analogy the extent of the utmost good faith duties that do apply.440 (3) The duties of urmost good faith that arise in the context of post-formation underwriting decisions could be regarded as falling outside section 17 altogether. It is clear that secrion 17 does not embtace the entirety of the doctrine of utmost good faith. For example, section 17 is seemingly confined to the exercise of utmost good faith by the parties to the cOntract and cannot therefore embrace the independent duty of disclosure of the placing broker under section 19. 441 This would afford the courts the freedom to

434 [1991] 1 Re LR 213, 224. See also Manifest Shipping & Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1997J 1 Uoyd's Rep 360, 370: I(JS Me;c-Scandia XXXXli v Ce:,ain Lloyds Underwriters (The Mereandian Continent) [200l! EWCA ClY 1275, [200l! 2 Uoyd, Rep 563, para 22: Agapitos Laiki Bank (Hellas) SA v Agnew (No 2) [20021 EWHC 1558 (Comm), [2003J . IJoyd's Rep IR 54. para 72. 43' Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [19901 1 QB 665 at

4.175-4.176 above.

436 See also OKane v jones (The Martin P) [2003J EWHC 2158 (Comm), [2004J 1 Uoyd', Rep 389, para 229. 437 lOS Mere-Scandia XXXXIi v Certain Lloyd's Underwriters (The Mercandian Continent) [20011 EWCA Civ 1275, [200l! 2 IJoyd's Rep 563, para 31. 438 Groupama Insurance Co Ltd v Overseas Partners Re Ltd [2003J EWHC 34 (Comm), unreported, para 32. 439 Sir Guenter Treitel, Law ofContract (11 th edn, 2003) 188-90. 440 The limits on materiality as stated in MIA 1906, s 18(3), therefore, apply equally in the context of held covered clauses (see Fraser Shipping Ltd v Colton [1997] 1 Lloyd's Rep 586), although technically s 18(3) itself does nor. 441 See 4.09 above. On the independence of the placing broker's duty, see 4.123 above. A further example of utmost good faith outside s 17 may be provided by the order for ship's papers, see 4.200 below.

176

177

The Doctrine ofUtmost Good Faith

declare that material non-disclosure or misrepresentation inducing a vari-

Utmost Good Faith after the Formation ofthe Contract

particularly acutely or commonly, in the marine context. That problem is . likely ro have been the logistical difficulty of investigating a possibly suspicious casualty occurring in a geographically remote and inaccessible location. In order to assisr insurers to formulate an informed response to a claim and avoid allegations in the defence, particularly of fraud, that might prove unfounded, the courts developed a mechanism for pre-defence disclosure. Since, however, rhe order for ship's papers was designed to rectifY an imbalance in information, it is perhaps not surprising that an association was perceived with the doctrine of utmost good faith. It is possible that the doctrine was indeed prayed in aid as a justification for inirially developing the order. Nevertheless, it is clear that failure to comply wirh an order for ship's papers does not afford the insurer the right to avoid rhe contract, so that the ship's papers jurisdiction forms no part of rhe doctrine of good faith articulated by section 17 of the Marine Insurance Act 1906.447 Either the order provides an additional example of the fact rhat section 17 does nor comprehend the entirety of the doctrine of utmost good faith or, alternatively, it does not flow from the doctrine of good faith ar all and is irrelevanr to consideration of the post-formation doctrine.

ation or extension renders voidable only the variation or extension so

induced. This, it is suggested, is the preferable approach.

4.198 Policy renewal is sometimes menrioned as another situation rhat attracts post-

formation duties of utmost good faith. In trurh, however, renewal is a cuckoo in the post-formation nest. Ir does not belong because the assuted is requesting a new policy to commence upon expiry of the existing policy. Duties of utmost good faith clearly attach, but they are rhe normal pre-formation duties. 442
4.199 Outside underwriting decisions, it is unclear whether there is any scope for a

post-formation doctrine of utmost good faith. Ir is possible rhat the making of a fraudulent claim is addressed by the post-formation doctrine. However, rhe dominanr judicial view is that avoidance of the entire policy would be a disproportionate response even to a fraudulenr claim. Moreover, in general contract law, rescission is a remedy that responds conceptually to defects in rhe creation or modification of contractual obligations, and is not available for non-performance. 443 There is no reason to regard avoidance cUfferenrly. Consequently, current judicial thinking favouts characterization of the fraudulenr claims jurisdiction as a common law rule rather than as part of the doctrine of utmost good faith-reasoning prompred, if not driven, by a desire to remove rhe possibility of avoidance as a remedy.444 An alternative way to achieve rhe same result would be to accept the fraudulenr claims jurisdiction as part of the post-formation doctrine of utmost good faith, but a part that falls outside section 17. The result would be that the doctrine of utmost good faith might ptovide a rechnical explanation for the existence of the jurisdiction, but would not constrain the way it operates.
4.200 There is some authority rhat pre-defence disclosure in the form of rhe order for
445

It has also been suggested that the post-formation docrrine of utmost good faith 4.201 may provide a basis for rhe implication of conrractual obligations448 and influence the inrerpretation of express provisions of the policy.44' It may, however, be objected with some cogency that insurance conrract law is capable of recognizing the rules it requires in the conrext of contract performance without the assistance of the doctrine of utmost good faith, a capability possibly exemplified by the fraudulenr claims jurisdiction, and that the courts do not need the
assistance of the doctrine in interpreting insurance contracts, especially given

ship's papers may be based on the doctrine of utmost good faith. 44' However, despite the applicarion of the doctrine to all forms of insurance, this form of disclosure order is confined strictly to marine insurance, suggesting rhat the order is simply a response ro a problem that was traditionally manifest only, or

the modern emphasis on giving effect to the intenrions of the parties. 450 In The Star Sea,451 Lord Hobhouse-in a comprehensive and cogent, albeit 4.202 largely obirer, review of the doctrine of utmost good fairh in rhe post-formation conrext-clearly espoused rhe view that the doctrine of utmost good fairh should be confined ro the creation or variation of obligations, and rhat the nonperformance of insurance conrracts, even in bad faith, should be sanctioned by

442

K/S Mere-Scandia XXXXII v Certain Lloyd's Underwriters (The Mercandian Continent)

[2001J EWCA Civ 1275, [2001J 2 Lloyd's Rep 563, para 31.
.,3

Manifest Shipping Co Ltd v Uni-Polaris Imurance Co Ltd (The Star Sea) [2001J UKHL 1,

447

Manifest Shipping Co Ltd v Uni-Poklris Insurance Co Ltd (The Star Sea) [1997] 1 Lloyd's Phoenix General Insurance Co a/Greece v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep

[200311 AC 469, paras 50-51.

Rep 360, 371, [20011 UKHL 1, [2003] 1 AC 469, para 60.

448

For discussion of fraudulent claims and the remedy ofavoidance, see 22.106-22.107 below. The order is discussed at 1.59 above. 446 RLlynor v Ritson (1865) 6:8' & S 888, 891 (although the reference to utmost good faith is not found in the Law Journal report: (1865) 35 LJ(QB) 59): China Traders'lmurance Co Ltd v Royal Exchange Assurance Corp [1898J 2 QB 187, 193-4: Boulton v Houldee Bros & CO [1904J 1 KB 784, 791-2: Harding v Bussell [1905J 2 KB 83, 85: Leon v CClSey [1932]'2 KB 576, 579-80: Black King Shipping Corp v MClSsie (The Iitsion Pride) [19851 1 Lloyd's Rep 437, 51 L
444 445

599,614.

Cox v Bankside [1995) 2 Lloyd's Rep 437, 451. Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (Nos 2 & 3) [2001] Lloyd's Rep IR 667, para 68. Interpretation is discussed in Ch 8 below. 451 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1,
449
450

[2003) 1 AC 469, para 52.

178

179

The Doctrine ofUtmost Good Faith

the ordinary remedies for breach of contract. 452 On rhis approach, section 17 of the Marine Insurance Act 1906 would have no post-formation application, unless the courts were prepared to read it as permitting avoidance of a severable part of a contract.
4.203 Ir is suggesred above that the duties of good fairh arising in the context of variations of cover and options to extend cover should be regarded as falling outside section 17.453 In support of the resulting confinement of section 17 to the pre-formation doctrine, three points may be made. First, the wording of section 17 may be broad enough to encompass post-formation application, but it does not compel such application. Indeed, the assertion that insurance contracts are 'based upon' the utmost good faith may be read as indicating that section 17 is concerned with the formation of the contract as opposed to its subsequenr performance. Secondly, secrion 17 introduces a group of secrions of the Marine Insurance Acr 1906 that are otherwise unequivocally concerned exclusively with contracr formarion. Thirdly, authoriry for a post-formation application of section 17 is slim. Ir consists of rhe judgment of Hirsr J in The Litsion Pride,454 much of rhe reasoning in which with respect to good fairh has since been overruled, and a small part of the reasoning of the Court ofAppeal in The Good Luck,455 in which the legitimacy of applying secrion 17 to contract performance was not in dispure. 4.204 Surprisingly, and in contrast to the approach of Lord Hobhouse, two members of the House of Lords in The Star Sea,456 Lords SCOtr and Clyde, rejected, without any explanation, the confining of section 17 to the pre-formation doctrine of urmost good faith. The comments were obiter and unaccompanied by discussion. In rhe light of rhe above discussion, it is respectfully submitted thar they should not prevail.

Basis Clauses
rhe accuracy and/or completeness of rhe presentation of the risk a condition precedent to the insurer's liabiliry on the policy. Consequently, the inaccuracy of
a representation or the omission of whatever circumstance the clause requires to

be disclosed will automatically deny cover. 457 By way of example, rule 6(2) of the Britannia P&I rules provides as follows:
All particulars and information given in the course of applying for insurance shall,

4.206

if the entry of the relevant Ship be accepted, be deemed

to

form part of the

contract of insurance between the Member and the Association and it shall be a condition precedent of such insurance that all such particulars and information were true so far as was within the Member's knowledge or could with reasonable

diligence have been ascertained.

In consequence of this provision, the inaccuracy of any representation in the course of applying for insurance denies' cover unless the inaccuracy lay in a circumstance that the member neither knew nor could have discovered with reasonable diligence. Neither materialiry nor inducement need be proved. The provision does not address non-disclosure, which is accordingly left to the underlying law, although a statement that misleads by providing an incomplete picture will not be true..

457 Dawsons Ltd v Bonnin [1922] 2 AC 413; International Management Group (UK) Ltd v Simmonds (20031 EWHC 177 (Comm), (2004J Lloyd's Rep 1R 247, para 154.

O. Basis Clauses
4.205 An insurer may evade the need to establish materialiry and inducement (and, indeed, the need to avoid the policy in order to escape liabiliry) by means of a condition precedent in a so-called 'basis clause'. While the precise impact of such clauses depends inevitably upon their wording, they generally render

452

453

"4
455

See also Bonner v COX (2005J EWCA Cly 1512, para 86. See4.197 above. Black King Shipping Corp oMassie (The Litsion Pride) (198511 Lloyd's Rep 437.

Bank ofNova Scotia v Hellenic Mutual 'War Risks Association (Bermuda) Ltd (The Good Luck)

1199011 QB 818.
456

Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sed) (200lJ UKHL 1,

(2003J 1 AC 469, para 6,81.

180

181

5
MARINE INSURANCE BROKERS

A. Agency (1) The broker as agent of the assured

(2) Liability to third parties

5.02 5.03 5.05 5.09 5.10 5.15 5.16 5.20 5.23 5.23

(3) The broker's duty in placing the

cover
(4) The broker's duty when assisting

5.36 5.40 5.42 5.43 5.50 5.51 5.52 5.58 5.62 5.74 5.76

B. Brokers and Sub-Agency (1) Contract (2) Ton

in making claims

F. Remedies for Breach of Duty

(1) Measure of damages: basis of

C. The Scope of the Broker's Duty to the Assured D. The Standard of the Broker's Dnty E. Duties of Brokers
(1) The broker's duty to obtain cover

assessment
(2) Cost of alternative insurance

G. Causation Defences
(1) The fisk was uninsurable on tefms

the assured would have accepted

(2) The 'twO defence' problem

(2) The broker's duty to ensure proper presentation of the risk

to

the insurer

5.30

H. Contributory Negligence I. Brokers' Rights to Remuneration J. Brokers' Security for Sums Due

The broker is the agent of the assured and therefore owes the assured a combin- 5.01 ation of fiduciary and contractual duries. Much of the law relating to marine insurance brokers is merely the application in a specific context of the law of agency and of professional negligence.' It is, however, necessary also to examine the role of the broker in the context of the dury of utmost good faith and the payment of premiums and indemnities.

A. Agency
The broker acts as agent of the assured, bur may occasionally incur liabiliry to 5.02 third parties.

1 See generally Bowstead and Reynolds on Agency (17th edn, 2001); R Jackson, Jackson and Powell on Professional Negligence (5th edn, 2002) Ch 14; C Henley, The Law oflmurance Broking

(2nd edn. 2004).

183

Marine Insurance Brokers

(1) The Broker as Agenr of the Assured 5.03 'It is well settled that in all matters relatiug ro the placing of insurauce the insurance broker is tbe agent of the assured, and of the assured only." The relationship, however, does not alter upon conclusion of the insurance contract. Thus, the broker remains the assured's agent in respect of any involvement in investigating a casualty and may not act for the insurer, notwithstanding any permissive market practice. While the assured is not entitled to see a confidential assessor's report obtained by the broker on behalf of the insurer, accepting such a report constitutes a breach by the broker of his dury ro the assured to avoid any conflict of interest, rendering the broker liable in damages for any loss the assured can establish was caused by the breach. If the broker wishes ro act for the insurer, the prior, express, and fully informed consent of the assured must be obtained.' 5.04 The status of the broket as the agent of the patty seeking covet is maintained at secoudary and tertiary levels of cover. In the context of reiusurance, the broker is the agent of the reassured, not the teinsurer. 4 Likewise with respect to retrocession: the reinsurer is the assured and the broker's principal. 5 (2) Liability to Third Parties 5.05 The broker's status as agent of the assured does not exclude all possibility of incurring liability ro persons other than the assured.' A party the broker knows is an intended assignee of the policy is owed a duty of care in the tort of negligence, at least in circumstances where, ro the broker's knowledge, that party actively participates in giving instructions fot the insurance.' However, mere foreseeability of harm to a third party coupled with proximity does uot necessarily give rise to a duty of care. In MacMillan v AW Knott Becker Scott Ltd,' the claimants were clients of Lloyd's brokers (KBS) who alleged that KBS had been negligent. The brokers becoming insolvent, the claimants succeeded by virtue of statute' to the brokers' rights against the latter's errors and omissions insurers. These insurers denied liability on the ground, inter alia, that the insurance was invalid and the claimants, therefore, sought ro establish that they were owed a duty of care by the errors and omissions brokers who had placed the errors and omissions cover for KBS. It was held, however, that there was no compelling reason to permit tortious liability ro overcome privity of contract. The claimants were entitled ro sue KBS and the liquidator of KBS could seek damages against the errors and omissions brokers commensurate with the liability established. The proceeds of this derivative claim would inure to the general benefit of the liquidation, but that was uo reason to allow the claimants a direct claim in tort. The errors and omissions brokers were not guarantors that third party claimants whose claims were intended to be covered by the liability insurance would uot suffer any loss in the event of insolvency of the insured brokers. Liability ro an underwriter may arise as a result of a misleading signing indica- 5.07 10 tion. Subject to clear contrary intention, a signing indication does not constitute a warranty that the indicated percentage of subscriptions will be obtained. It is a statement of the broker's professional opinion and the broker incurs no liability merely for holding an opinion that turns out to be erroneous. Nevertheless, into such a statement of professional opinion, the law implies a representation of the existence of reasonable grounds justifYing that opinion and, in the absence of such reasonable grounds, the broker will be liable in the rort of negligence for the prejudice sustained by the insurer in reliance upon this implied representation of fact." The signing indication, moreover, contains an implied promise ro use best endeavours to obtain the indicared percentage of subscriptions and the broker will be liable for breach of contract if he fails ro seek properly ro achieve the indication given." Finally,

2 McNealy v Pennine Insurance Co Ltd[1978] 2 Lloyd's Rep 18, 20 per Lord Denning MR See also Romnes v Bowen (1928) 32 LlLRep 98; Searle v AR Hales & Co Ltd [19961 LRLR 68.71. 3 Anglo-Afritan Merchants Ltd v Bayley [1970J 1 QB 311; North & South Trust Co v Berkeley [1971J 1 WLR470. 4 Genera/Accident Fire 6' Life Assurance Corp v limter (The Zephyr) [1984] 1 Lloyd's Rep 58, 80; Youell v Bland Welch & Co Ltd (The Superhulls Cover case) (No 2) [1990J 2 Lloyd's Rep 431, 445-6. Nevertheless, where reinsurance is provisionally arranged prior to placement of the primary cover, the broker is not acting on behalf of any insurers and cannot at that stage be viewed as their agent. Agency must arise retl'ospective1y once the insurer agrees to underwrite the primary cover and at the same time accepts the offer of reinsurance purveyed by the broker. S Societe Anonyme d7ntermediaries Luxembourgeois v Farex Gie [1995] LRLR 116. Subject to the caveat in n 4 above. 6 See generally M Clarke, 'Insurance Intermediaries: Liability to Third Parties' [1995] IJIL 162. 7 Punjab National Bank v de Boinville[1992J 1 WLR 1138.

8 [1990] 1 Lloyd's Rep 98. See also Verderame v Commercial Union Assurance Co pic [1992] BCLC793. 9 The Third Party (Rights against Insurers) Act 1930, discussed at 20.33ff below. 10 For discussion of signing indications in the formation of insurance contracts, see 2.16ff above. 11 Esso Petroleum Co Ltd v Mardon [1976J QB 801. " GeneralAceidetlt Fire & Liftksurance Corp v Tamer (The Zephyr) [1985] 2 Lloyd's Rep 529, 537. It is possible that such failure to use best endeavours may be concurrently actionable in the tOrt of negligence, but liability will not lie in tort where none would lie in contract: ibid 537-9.

184

185

Marine Insurance Brokers

the hroker will he liahle in the tort of deceit if the signing indication was fraudulent."
5.08 In The Zephyr,'4 the broker gave reinsurers a one-third signing indication, thus

Brokers and Sub-Agency

principal and assured, Al is the producing broker and agent of the assured, A2. is the placing broker procured by rhe producing broker, andTP is the rhird party and insurer. The common law traditionally does not recognize privity of contract between 5.11 principal and sub-agent, even where rhe principal has aurhorized the appointment of the sub-agent. 1S On this analysis, A2.'s only contractual relationship is with AI, which is in turn in privity of contract with P, In rhe event of default by A2, Al is liable to p''' This traditional analysis respects rhe contractual chain constructed by the parties, with each party extending credit to the immediate party, who will be a trusted and otten known entity. It also reflects the normal desire of an agent to maintain a position between client and sub-agent and the professional nature of the relationship between agent and sub-agent. 17 With respect to this latter point, a placing broker is entitled to trear the producing broker as familiar with insurance contracts and tailor the level of its explanations of the policy terms accordingly, leaving it to the producing broker to provide the assured with explanations and advice appropriate to its knowledge of insurance
contracts. 18

encouraging rhe reinsurers to subscribe for a risk three times rhe real desired percentage exposure, but the level ofsubscriptions ultimately obtained produced a signing down to just under 90 per cent of the initialled line, leaving rhe reinsurers with a level of exposure considerably in excess of that anticipated. At first instance, Hobhouse J held that the brokers were liable in the tort of negligence for failing to exercise sufficient care in seeking addirional subscriptions, the measure ofdamages being the difference between rhe reinsurers' actualliability to rhe primaty insurers and their liability had the signing indicarion been achieved. This aspect of the decision was not appealed, bur the Court ofAppeal indicated rhat such liability would lie in contract while leaving open the issue of concurrent tortious liability. The Court ofAppeal held, however, that no liability could lie in respect of twO reinsurers to whom no signing indication had been given, tejecting an argument that a signing indication to a leading underwriter was impliedly repeated to and relied upon by all following underwrirers.

B. Brokers and Sub-Agency

5.09 More than one broker may be involved in the placement of a risk. The broker

consulted initially by the assured may have no representation where the market is located, may not be authorized to access the market, or may lack expertise in placing the type of risk in question. In such a case, the first broker will contact a second broker with the requisite representation, access, or expertise. The first broker is known as rhe producing broker and the second as the placing broker. Questions can then arise as to the network of legal relationships and possible liabilities that results, in particular whether the placing brgker owes any legal dury, contractual or tortious, to the assured and against whom the placing broker has any rights.

This traditional refutation of contractual responsibility must now be read sub- 5.12 ject to the exception to the ptivity of contract rule created by the Contracts (Rights ofThird Parties) Act 1999. By virtue of that Act, P can enforce a term in the contract between Al and A2. iftwo conditions are satisfied. First, either the contract provides that P may enforce or 'the term purports to confer a benefit on' p,19 In the latrer case, rhe righr of P to enforce the term is subject to the interpretation of the contract overall.'o Secondly, P must be 'expressly identified in the contract by name, as a member of a class or as answering a particular description).21 On an alternarive analysis, rhe true interpretarion ofAI's authority may be that 5.13 Al is to procure a second intermediary in a direct contractual relationship with

15

(I) Contract
5.10 The intetposition of twO brokers between assured and insurer gives rise to a

16

Calico Printers Association v Barclays Bank Ltd (1930) 36 Com Cas 71. Trading & Genera/Investment Corp v Gault Armstrong & Keble Ltd (The Okeanis) [1986J 1

Lloyd's Rep 195, 201.

number of possible contractual analyses. In the following paragraphs, P is the

" hentis Donegan 6- Partners Ltd v Leeds 6- Leeds Co Inc[19981 2 Lloyd's Rep 326, 334. " PangoodLtd v Barclay Brown 6-Co Ltd[19991 Lloyd's Rep IR405, 408 (the comment in the
judgment is directed towards refuting tortious liability (see 5.15 below) but is equally apposite in the contractual context). " C(RTP)A 1999, s 1(1). 20 ibid s 1(2). Where the term purports to confer a benefit on P, there arises a presumption of enforceability by P that may be rebutted by the terms of the contract as a whole, but only if the contract is properly to be read as denying P enforcement rights. If the remainder of the contract is neutral on enforcement by P, the presumption will not be rebutted: Nisshin Shipping Co Ltd v Cleaves 6- Co Ltd [20031 EWHC 2602 (Comm), [20041 1 Lloyd's Rep 38, 23. " C(RTP)A 1999, s 1(3).

13 The broker will be fraudulent, following the test in Derry v Peek (1889) 14 App Cas 337, where the signing indication is given with knowledge that it is false, without belief in its truth, or recklessly, careless as to whether it is true or false. Subjective disregard for the truth is essential: Thomas Witter Ltd v TBP Industries [199612 All ER 573,586-7. 14 GeneralAccident Fire 6- Lift Aisurance Corp v Tanter (The Zephyr) [19841 I Lloyd's Rep 58, rvsd in part [19851 2 Lloyd's Rep 529.

186

187

Marine Insurance Brokers

The Scope ofthe Broker's Duty to the Assured

with members' agenrs acting as agenrs for the names. The managing agents held .themselves out as possessed of special expertise regarding insurance business, and the names, to the knowledge of the managing agenrs, 'placed implicit reliance on their expertise'. 29 However, in Pangood Ltd v Barclay Brown & Co Ltd,30 the Court of Appeal held that a placing Lloyd's broker engaged by a producing broker would not ordinarily owe a duty of care in tort to draw the assured's atrention to a promissory warranty in the policy. The mere accepting of insrructions from the producing broker to obtain a quotation and, subsequently, to procure a Contract on the terms of the quotation did not involve an assumption of any responsibility to the assured to explain the terms of the policy. The placing broket was entitled to assume that the assured would tely on the producing broket for such advice on tetms as was appropriate. The only obligation on the placing broker was to ensure that the producing btoker had been properly advised of the tetms ofcover, which it had.

P. A2 is a substitute agent and not a sub-agent at all. 22 A2 is placed in direct privity of contract wirh P and there is no privity between Ai and A2. However, rhis substitution analysis is 'indeed an exceprion, and a narrow one, and the burden must be on rhe defendanrs to show some special facrors''' supporring irs applicability. Possible factors would be evidence eirher of direcr relarions between the assured and placing broker 01' that the producing broker's authority was 'ro procure a comperent placing broker, bur nor ro place or procure rhe insurance itself. 24 Under a further variarion, Ai may be authorized ro procure a triparrite relationship so that P has a separare conrracr wirh both Ai and A2, which are also in privity of contract wirh each orher. 2S This analysis is also likely to be exceprional.
5.14 It is clear that the necessity of employing a placing Lloyd's broker, because of/ack

ofaccess to the market on the part ofthe producing broker, is insufficient ofitself, in the absence of special facts, to trigger an exceptional analysis and generate privity of contract between assured and placing broker." In consequence, a placing Lloyd's broker's entitlement to reimbursement of instalments of premium paid to insurers lies against the producing broker and not against the assured. 27 (2) Tort
5.15 A sub-agent may owe the principal a duty of care in the tort of negligence based

C. The Scope of the Broker's Duty to the Assured

The scope of the broker's duties to the assured, assuming priviry of contract, is 5.16 distinctly vatiable and depends entirely upon the agreement between them. On the One hand, the broker may be retained simply to place specifically requested cover; on the other hand, the client may contract for an assessment of and advice upon its insurance needs and the procuring of appropriate cover. Thus, in Fine 5 Flowers Ltd v General Acctdent Assurance Co of Canada,31 Wilson JA stated as follows:
In many instances, an insurance agent will be asked to obtain a specific type of coverage and his duty in those circumstances will be to use a reasonable degree of

on an assumption of tesponsibility. In Henderson v Merrett Syndicates Ltd," it was held that managing agents at Lloyd's owed a duty of care to Lloyd's names accepted on to syndicates undet their management, albeit through a contract

De Bussche v Alt (1878) 8 ChD 286. It is noteworthy, however, that the issue in case was whether a sub-agent was obliged to account to the principal for secret profits. Although the court found such an obligation through privity of contract, it is unclear to what extent fiduciary remedies depend on privity of contract: see Reynolds and Bowstead on Agency (17th edn, 2001) para 5-012. Were the availability of fiduciary rem~die.s to be severed from I:rivity of contract, the likelihood of the then unnecessary contract reasonmg m De Bussche v Aft belOg followed would be weakened. 23 Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc[1998] 2 Lloyd's Rep 326, 332. 24 ibid. 25 Bastone & Firminger Ltd v Nasima Enterprises (Nigeria) Ltd (1996] eLC 1902 (possibility of a tripartite relationship comprising three bilateral contracts in collections incorporating the Uniform Rules for Collections). In Prentis Donegan (} Partners Ltd v Leeds & Leeds Co Inc [1998] 2 Lloyd's Rep 326, 334 Rix J stated that, in those exceptional cases where privity can be estab~ lished between principal and sub-agent, there was no reason why concurrent privity between agent and sub~agent should necessarily be excluded. 26 Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc [1998] 2 Lloyd's Rep 326, 334; Pangood Ltd v Bare"'y Brown & CO Ltd[1999] Lloyd's Rep lR405, 408. The finding of privity in velos Group Ltd v Harbour Insurance Services Ltd (1997] 2 Lloyd's Rep 461 is to be regarded as either per incuriam or based on its special facts: see Prentis, 331. 27 Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc[1998] 2 Lloyd'dZep 326. 2S [1995] 2 AC 145.
22

skill and care in doing so

But there are other cases in which the client gives no such specific instructions but rather relies upon his agent to see that he is protected and, if the agent agrees to do business with him on those terms, then he cannot afterwards, when an uninsured loss arises, shrug off the responsibility he has assumed. If this requires him to inform himself about his dient's business in order to assess the foreseeable risks and insure his client against them, then this he must do. It goes without saying that an agent who does not have the requisite skills to understand the nature of his dient's business and assess the risks that should be insured against should not

be offering this lcind of service. Lack of liability where narrow instructions are followed is illustrated by O'Brien 5.17 v Hughes-Gibb & Co Ltd." The owners of the racehorse Shergar instructed

29 ibid 182 per Lord Goff. 30 [1999] Lloyd's Rep lR 405. " (1977) 81 DLR (3d) 139, 149 (Omario Court ofAppeal).

32

[1995] LRLR 90.

188

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Marine Insurance Brokers

brokers ro obrain 'morraliry only' cover. Ar rhar rime, bloodsrock insurers were prepared ro offer cerrain addirional elemenrs of cover ar no extra premium in order ro endeavour ro gain a markering advanrage. One such elemenr was cover againsr rhefr, which was nor rhen regarded as a serious risk. The brokers obrained rhe requesred morraliry cover wirhour any rhefr exrension. Shergar was subsequenrly srolen and the owners argued thar the brokers had been negligenr in failing ro obtain this extra cover. The brokers were held nor to be liable. The owners had not instrucred rhe brokers ro obtain the widest possible cover and rhere was no marker pracrice to obtain thefr cover when instrucred to obrain mortaliry cover. 'The facr that some brokers did regularly obrain rhefr cover as an exrension ro morraliry cover ... does not ... give rise to a dury on brokers ro do so in the absence of a generally adopted pracrice ro thar effect.''' Moreover, the facr that prior to the thefr of Shergar thefr was not considered a significant risk and rhar this view was reasonable meant that the brokers were nor negligenr in failing ro bring the absence of thefr cover ro rhe owners' atrenrion.
5.18 In contrast, liability where brokers are given a wider remit is illustrated by Mitor Investments Pty Ltd v General Accident Fire & Lift Assurance Corp Ltd. 34 The claimant arranged a meering with his insurance broker at a horel he owned on an inler adjoining the sea. They inspected rhe premises and discussed rhe danger of flooding by the warers of rhe inlet and rhe claimanr accordingly instructed the broker to procure insurance against, inter alia, damage by storm, tempest, and flood. The broker obrained a common form policy rhar excluded 'damage caused direcrly or indirecrly by rhe sea'. This policy was nor shown to the assured. As a result of a cyclone of unprecedented severiry, sea warer entered the inler, raising rhe water level and flooding and damaging rhe horel. The insurer being prorecred by rhe sea exclusion, the assured sued the broker. Burr CJ found rhat the broker had been instrucred 'in unqualified rerms ro obtain cover for all damage [which mighr be] caused by a flooding of the warers of the Inlet and rhose instrucrions were accepted and rhe [claimant] was informed thar rhey had been carried inro effecr'." The broker was consequenrly held liable. 5.19 Obtaining common form storm and flood cover was inadequate for two reasons. First, the exclusion contained therein inrroduced a qualificarion to the cover inconsistent with the instrucrions given. Secondly, however, 'a broker who is brought on site to assess the risks and ro advise his client upon appropriate cover must ... take reasonable care in assessing the particular risks to which the properry ro be covered was exposed'.36 As the broker ought to have appreciated,

The Standard ofthe Broker's Duty

the inler was connected to rhe sea and flooding could occur only by an inflow of sea water. Cover against flooding containing a sea exclusion effecrively provided no cover againsr flooding at all.

D. The Standard of the Broker's Duty

It is always open ro a broker to underrake an absolute obligation ro succeed in 5.20 the performance of its obligations. 37 Failing an express assumption of such a commitment, however," rhe law implies a qualified obligation to use best endeavours to perform its obligations." Thus, where an issue such as the identiry of the insurer or the details of the cover is lefr ro the discrerion of the broker, liabiliry will arise only where the broker fails to exercise reasonable care in exercising that discrerion. 40 'The test is the standard of the ordinary skilled man exercising and professing to have that special skill. A man need not possess the highest experr skill; it is well established law that it is sufficienr if he exercises the ordinary skill of an ordinary competenr man exercising that parricular art.'41

It does nor, however, follow that market practice is determinative of the standard 5.21 required for conduct to be reasonable. While it is acknowledged that in 'the vast majoriry of cases the fact that distinguished experrs in the field are ofa parricular opinion will demonstrate the reasonableness of that opinion'," the ulrimate decision as to whether conduct is negligenr nevertheless lies with the courts. Ifthe prevailing professional opinion is 'not capable of withstanding logical analysis, the judge is entirled to hold that the body ofopinion is not reasonable or responsible', albeit that such a case will be rare. 43 Consequenrly, it is not open ro a broker ro argue that the average broker does not exercise reasonable care in a parricular respect. The courts 'are concerned to idenritY what is called for not from a run of the mill incompetenr bur from an ordinary competenr insurance broker'.44 That which constitutes reasonable care and skill will reflect the extent to which 5.22 the broker has or professes ro have specialist knowledge with respect to the

37
38

Hood v U7est End Motor Car Packing CO (1917J 2 KB 38.

An undertaking 'to obtain a policy' does not impose an absolute obligation: TL Creda Ltd v

33

35

ibid 99 per Rattee J. 34 [1984] WAR 365 '(Supreme Court of Weitern Australia), ibid 373. 36 ibid 374.

Hay Fielding Ltd (CA, 30 October 1984), see R Jackson, jackson and Powell on Professional Negligence (5th edn, 2002) para 14-040. 39 Supply of Goods and Services Act 1982, s 13. " Chapman v Walton (1833) 10 Bing 57. 41 Bolam v Friem Barnet Hospital Management Committee [1957] 1 WLR 582, 586 per McNair j, cited in Lewis v Tressider [1985] 2 QdR 533,542. 42 Bolitho v City & Hackney Health Authority [1998] AC 232, 243 per Lotd Btowne-Wilkinson. 43 ibid. 44 Lewis v Tressider Andrews Associates Pty Ltd [1985] 2 QdR 533, 542 per Connolly J(Supreme Court of Queensland).

190

191

Marine Insurance Brokers

particular risk. 45 Brokers who venture beyond their area of expertise should make that clear to the client and advise further consultation; firm, unqualified advice will incur liability in the absence of reasonable grounds to justifY that advice.46 Where, however, brokers are employed as a mere conduit pipe between assured and insurer, simply to relay to the insurer what the assured instrucrs them to relay, no liability can arise should the assured find itselflacking in cover. 47

Duties ofBrokers
instructions to obtain cover containing a specific clause are followed by written instructions omirting any mention of the clause, ir has been held that brokers are entirled ro rely upon rhe larer written instructions on the ground thar rhe assured might have changed his mind in rhe interim, 54 although it is arguable that today the broker should, time permitting, seek c1arificarion of the assured's true intention. 55 Market practices may influence the interpretation of instructions that should or 5.25 may be adopted. An instruction to obtain 'all risks' cover will be complied with if the broker, following notmal market ptactice, obtains an 'all risks' policy even though such a policy does not confer complete cover against all losses, and regardless of rhe possibility of obtaining more extensive cover that the assured might subjectively have intended. 56 Conversely, where a broker failed to interpret instructions consistenrly with an invariable market practice so as to include a clause permitting certain deviations, this failure affording the insurer a complete defence in respect of the ensuing casualty, the broker was held liable to damages in rhe sum of the indemnity payable had the clause been included. 57

E. Duties of Brokers
(1) The Broker's Duty to Obtain Cover 5.23 A broker who obtains cover rhar does not comply wirh unambiguous instrucrions is in clear breach of duty. In Park v Hammond,48 the broker was employed to insure goods for part of a voyage from Gibraltar to Dublin as part of a voyage from Malaga to Dublin. The policy, however, insured goods 'at and from Gibraltar to Dublin, beginning the adventure from the loading thereof on board at Gibraltar', rendering the insurer liable only in respect of an adventure commencing at Gibraltar. Consequenrly, the risk never attached to the goods and the brokers were held liable for insuring rhe wrong adventure. Similarly, in General Accident Fire 6- Lift Assurance Corp Ltd v ]H Minet 6- Co Ltd,49 an insurance policy covered aircraft for a period of twelve months if declared before 31 December. The reinsurance slip prepared by the broker indicated that the insurer's liability ceased on 31 Decembet, affording the reinsurer a defence on the basis of misrepresentation or non-disclosure. Having been properly informed by rhe insurer of rhe terms of the primary cover, the broker was held liable for the absence of reinsurance cover. 50 5.24 In accordance with ordinary agency principles, a broker in receipt of ambiguous instructions is free from liability, and the assured bound by the broker's subsequenr acts, if a reasonable interpretation of those insrructions is adopted. 51 However, where a reasonably competent broker ought to notice the ambiguity, clarification should be soughr from the assured" if time permirs. 53 Where oral

It is the duty of the broker to ensure that the policy chosen contains no exclu- 5.26 sions incompatible with the assured or the insured property. Accordingly, brokers have been held liable where a motor policy excluded part-time musicians," a yacht policy excluded any period when the vessel was used as a houseboat, 59 and a hull policy excluded liability for vessels without a current survey certificate,'O rhe broker failing in each case to determine whether rhe policy was appropriate. In contrast, where a broker placed insurance subject to certain exclusions to which the assured did not actively consent bur abour which she was informed and without which the cover could not have been obtained, the broker was held not liable in respect of losses against which the insurer was protected by the exclusions. 61

54 S5

Fomin v Oswell (I813) 3 Camp 357. cf Comber v Anderson (l808) 1 Camp 523, discussed at 5.40 below.

55 Enlayde Ltd v Roberts [1917J 1 Ch 109, 121; Waterkeyn v Eagle Star 6- British Dominions Imuranee Co Ltd (I 920) 4 LlLRep 178, 5 LlLRep 42; Vale & Co v Van Oppen &Co L,d(I92!) 37 45

45

Sharp v Sphere Drake Insurance pic (The Moonacre) (1992] 2 Lloyd's Rep 501. 523. Sargimon Bros v Kei,h Moul'on & Co (1942) 73 LlLRep 104.

TLR367.
57 Mallough v Barber (I81 5) 4 Camp 150. sa McNealy v Pennine Insurance Co Ltd[1978] 2 Lloyd's Rep 18. 59 Sharp v Sphm Drake Imurance pic (The Moonacre) (1992] 2 Lloyd's Rep 501. 60 Norwest Refrigeration Services Pty L,d v Bain Dawes Pty L,d (1984) 157 CLR 149 (High Court of Australia), Liability was in fact incurred by a fisherman's co~operative that acted as

Coles v Sir Frederick lOung (Insurers) Ltd (1929) 33 LlLRep 83. 48 (1816) 6 Taunt 495. " (1942) 74 LlLRep 1. 50 See also Strong & Pearl v S Allinson & Co L,d (1926) 25 LlLRep 504; TudorJones II v Crowley Colosso Ltd (1996] 2 Lloyd's Rep 619. Sl Ireland v Livingston (1872) LR 5 HL 395; United Mills Agencies Ltd v Harvey, Bray & Co (1952] 1 All ER 225n. 52 Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd[1972] AC 741, 772; European Asian Bank v Punjab & Sind Bank (No 2) [1983] 1 WLR 642, 656. 53 CreditAgricole Indosuez v Muslim Commercial Bank Ltd [2000]1 Lloyd's Rep 275.
47

intermediary between assured and broker, the latter held to be entitled to assume the co~operative would ensure compliance with policy requirements. 6\ King (or Fiehl) v Chambers & Newman (Insurance Brokers) Ltd [1963J 2 Lloyd's Rep 130. See also Waterkeyn v Eagle Star & British Dominiom Insurance Co Ltd (1920) 4 LlLRep 178, 5 LlLRep 42.

192

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Marine Insurance Brokers

5.27 More debatable, however, is the old decision of Lord Mansfield in Moore v Mourgue. 62 The broker was instructed to insure a cargo of fruit, the assuted not specilYing an insurer. By virtue of the Bubble Act 1720, the only possible sources ofcover at the time were the London Assurance Co, the Royal Exchange Assurance Co, and the individual underwriters associated with Lloyd's Coffee House. 63 The broker placed the insurance with the London Assurance that, in accordance with its practice, accepted liability only for total losses. When the assured was unable ro recover for a subsequent partial loss, he sued the broker on the basis that, for the same premium, the Royal Exchange would have issued cover without a partial loss exclusion. The action failed, Lord Mansfield stating that the choice of insutet had been left to the broker's discretion and that the evidence of alternative terms available merely demonstrated an absence of fraud on the part of the broker, in that no greater commission had been earned by placing the business with the London Assurance. 5.28 It is suggested thar the decision is difficult to sustain. The issue is not whether the broker acted in good faith, but whether reasonable care was exercised in placing the insurance. A seller of goods is obliged to make 'such contract with the carrier on behalf of the buyer as may be reasonable having regard to rhe nature of the goods and the other circumstances of the case'.54 This obligation has been held broken where a seller sent fragile goods at owner's risk when they could have been sent at the railway company's risk at the same cost. 65 Similarly, while it may nor always be reasonable to expect a broker to know the ptecise terms on which any insurer in the London market might underwrite a particular risk, failure to obtain considerably enhanced cover on offer for the same premium from the only corporate competition must be viewed as negligent." / 5.29 The broker's duty to exercise a professional standard of care in obraining cover includes the approaching of suitable leading underwriters and, if required, arranging any reinsurance necessary to persuade underwriters to accept the risk." Should the broker's best efforts to carry out rhe assured's instructions prove unsuccessful, a duty arises to notilY the assured within a reasonable time

Duties ofBrokers
in order to enable the assured to obtain cover elsewhere or receive alternative
i,nsrructions. 68

(2) The Broker's Duty to Ensure Proper Presentation of the Risk to the Insurer The broker should exercise reasonable care to ensure that the assured complies 5.30 with the duties of disclosure and avoidance of misrepresentation arising under the pre-formation doctrine of urmost good faith." Moreover, a broker should have a reasonable basis for any representation made to the insurer in presenting the risk and ought reasonably to believe that the presentation does not omit any material circumstance." Such a basis is most obviously present if the broker has explained to its client the existence of the duties imposed by the doctrine of utmost good faith and the consequences of breach. Indeed, the Code of Practice for Lloyd's Brokers 1988 provides that: 'A Lloyd's broker should explain to a client the duty of good faith and the obligation to disclose all circumstances material to the risk which he wishes to insure and the consequences of any failure to mal<e such disclosure.''' A fOrtiori, a broker that remains silent and fails to advise its client of the need for disclosure of material circumstances of which the broker has knowledge will commit a breach of duty. 72 Nevertheless, the mere undertaking by a broker to place a risk does not involve 5.31 an assumption of tesponsibility pro-actively to investigate all relevant circumstances to ensure full compliance with the doctrine of utmost good faith. Provided the broker makes clear to the assured the existence and scope of the duties imposed, the assured is responsible for disclosing all material facts to the

68 Smith v Las"elles (1788) 2 TR 187: Smith v Cologan (1788) 2 TR 188n: Callander v Oelri"hs (1838) 5 Bing, (NC) 58: Fines Flowers Ltd v GeneralAccident Assurance Co ofCanada (1977) 81

DLR (3d) 139, 149; Eagle Star Insurance Co Ltd v National Westminster Finance Australia Ltd (1985) 58 ALR 165 (PC): Mitor Investments Pey Ltd v GeneralAcciclent Fire & Life Assurance Corp Ltd [1984) WAR, 365: Youell v Bland Welch & Co Ltd (The Superhulh Cover case) (No 2) [1990] 2 Lloyd's Rep 431, 446-7: Aneco Reinturance Underwriting Ltd v johnson [1998] 1 Lloyd's Rep
565,590.
69

Genera! Accident Fire & Life Assurance Corp v 'Emter (The Zephyr) [1984] 1 Lloyd's Rep

(1776) 2 Camp 479. 63 6 Geo 1, c 18, ss 1, 12. See 1.15 above. 64 Sale of Goods Act 1979, s 32(2). 65 Thomas Young & Sons Ltd v Hobson & Partnm (1949) 65 TLR 365. 66 Contrast O'Brien v Hughes-Gibb & Co Ltd [1995] LRLR 90, discussed at 5.17 above, where brokers were held not liable for failing to obtain cover containing an extension commonly offered for free in the market at the time. The brokers' instructions on scope of cover were specific and the extension covered a risk considered not to be significant. In Moore (n 62 above), there were no instructions regarding the type of loss to be covered and a partial loss must have been readily foreseeable as a real possibility. 67 Genera! Accident r"tre & Lift Assurance Corp v Tanter (The Zephyr) [1984] 1 Lloyd's Rep 58,67.
62

58,67.
70 warren v Sutton [1976] 2 Lloyd's Rep 276, 284. " Para 5.2. cf Fanhaven Pey Ltd v Bain Dawes Northern Pey Ltd[1982] 2 NSWLR 57 (Court of Appeal of New South Wales) in which a majority held that there was no duty to inform an assured of the duty of disclosure unless there was some basis for believing that material circumstances might not have been disclosed. The dissenting contrary judgment appears to reflect English law. The majority considered that a broker, not being a lawyer, should not be required to give legal advice. However, the business of a broker is the procuring of a product that is a legal construct the enforceability of which is subject to compliance with a unique legal duty. It is, therefore, difficult to see why brokers should not be required to provide guidance on compliance with that duty. 72 0 & Rjewellers Ltd v Terry [1999] Lloyd's Rep IR 436, 444.

194

195

Marine Insurance Brokers broker without further enquiry from the latter" and for the accuracy of facts disclosed to the broker. 74 Thus, in Bell v Tinmouth,lS the broker was held not liable when an insurer repudiated liabiliry on the insurance of paintings by reason of a misrepresentation regarding security arrangements. According to Carrothers JA:" . . . the real falsity in the facts inquired into by [the broker] which made them
inaccurate and misleading, was not an error of transmission but rather was an error of omission on the part of [the assured] to make any reference to the possibility of an unforeseeable exposure to the risk of theft through total desertion of the Gallery.

Duties o/Brokers
A dury to be pro-active may be inferred from the business context. In The 5.33 Icebird," the broker failed to disclose that responsibiliry for securing the insured cargo of four helicopters on board the carrying vessel was to be assumed by the assured, rather than the master or stevedores." The broker had no direct knowledge of this circumstance, but it was held that the broker's dury extended beyond merely disclosing circumstances of which the broker was directly aware. Especially in complex areas of insurance, brokers had a duty to inform themselves sufficiently of the business activities of their clients to carry out their duties adequately and, in particular, to prevent the avoidance ofliability under any policy written. Accordingly, the broker 'ought to have been in a position to advise his clients as to the matters which a marine insurer would wish to know, including any unusual methods of despatching or stowing the cargo'. Although in practice it is the broker and not the assured that will present the risk 5.34 to the insurers, it follows from the broker's status as agent of the assured that disclosure of a material fact by the assured to the broker does not discharge the assured's duty of disclosure to the insurer. 8o Moreover, section 19 of the Marine Insurance Act 1906 imposes a duty of disclosure upon the placing broker that is independent of the assured's disclosure obligation." The broker will incur liabiliry to the assured for any breach of a dury of utmost 5.35 good faith for which the broker is responsible. Thus, brokers have been held liable where a misrepresentation of the moral hazard was not justified by the information given to the broker by the assured" and where a material fact communicated by the assured was not passed on to the insurer." (3) The Broker's Duty in Placing the Cover The broker will be liable for any loss incurred by reason of a failure to place the 5.36 insurance within a reasonable time. In Cock, Russell & Co v Bray, Gibb & Co Ltd,84 the broker was instructed to obtain all risks cover, including leakage and pilferage, on a cargo of wine shipped partly on the deck and partly in the holds of a newly built Spanish steamer. This was an unattractive risk from the point of view of both the steamer and the cargo. The instructions were received on Friday afternoon when it was too late to do anything that day. On Saturday

This omission could not be foreseen by [the broker] nor could it be detected by the
most careful on-site inspection of the Gallery premises, which inspection inciden-

tally [the broker] was not asked ro perform and which he did not agree ro
undertake. '

5.32 Everything turns, however, upon the contract between the broker and the assured. Upon its true construction, the broker's mandate may encompass the assumption of enhanced obligations. In Ogden & Co Pry Ltd v Reliance Fire Sprinkler Co Pry Ltd,77 the broker undertook to 'prepare' proposal forms for a lay client who entrusted all his insurance affairs to the professional broker expressly so as to relieve himself of the associated workload. The Supreme Court of New South Wales held that the client was entitled to rely upon the broker's expertise, that it was inappropriate and unnecessary for the client to guide the broker's actions in assessing the risk, and that the broker assumed obligations: first, to collect such information regarding the property to be insured and the client himself as underwriters could properly require under the duty of disclosure; and, secondly, to pass that information on to the underwriters. On the facts,~the insurers rejected a claim on the ground of non-disclosure of claims history. In response to a question on the proposal form regatding prior claims, the broker had merely written 'Not known to brokers'. This was consistent with the broker's practice of never obtaining a claims history unless specifically asked by the underwriters. The statement was, however, untrue, a~ the' assured had expressly disclosed a previous claim, and negligent, given the dury on the facts pro-acrively to discover and pass on material facts, especially as the assured had authorized the broker to speak to previous insurers.

13 Lyons v]w Bentley Ltd (l 944) 77 LlLRep 335. Clearly, if a statement by the assured raises or ought to raise the suspicion of further material circumstances, the broker should enquire further, but the broker is not required to cross~examine the assured in detail on a speculative basis in order to see whether material circumstances can be uncovered. If there is no basis on which the broker ought reasonably to believe further material circumstances exist, a broker is not required to embark on a fishing expedition on the offchance that some might be revealed. 74 Commonwealth Insurance Co o/Vancouver v Groupe Spinks SA [1983J 1 Lloyd's Rep 67, 82. 7S (1988) 53 DLR (4th) 731 (COUtt ofAppeal of Btitish Columbia). / 76 ibid 741-2. 77 [1975J 1 Lloyd's Rep 52; [1973) 2 NSWLR 7 (Supteme Court of New Sourh Wales).

7S Helicopter Resources Pty Ltd v Sun Alliance Australia Ltd (The Icebid) (1991) 312 LMLN (Supreme Court of Victoria)' noted Hetherington [1992J LMCLQ21. 79 This fact was material as it limited the underwriters' subrogation rights in the event of damage through negligent stowage. 80 Roberts v P!4isted [1989J 2 Lloyd's Rep 341, 345. 81 For discussion, see 4. 122ff above. " warren v Henry Sutton 6- Co [1976) 2 Lloyd's Rep 276. 83 Coolee Ltd v WIng, Heath 6- Co (1930) 47 TLR 78. " (1920) 3 LlLRep 71.

196

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Marine Insurance Brokers

Duties ofBrokers
(4) The Broker's Duty When Assisting in Making Claims Where a broker is retained to assist in the making of claims, the usual duty to 5.40 exercise reasonable care attaches ro the broker's performance of his duties. 94 In Comber v Anderson,95 the assured shipped wheat on board a vessel that was subsequently stranded on 28 January. Although most of the wheat was saved, nearly all its value was lost, and on 2 February the assured wrote to his broker directing him 'to do the needful' with respect to the insurance and adding 'I should wish to abandon, if it be admitted of." On 4 February, the broker received this letter and replied by return of post that 'it would be imprudent to say anything to the underwrirers without learning furrher parriculars', rhe assured responding in turn on 9 February, not mentioning abandonment. Alrhough the broker subsequently served a notice of abandonment, it was held invalid by reason of lapse of time since the casualty," resulting in the assured being deprived of all indemnity under the insurance and claiming against the broker for breach of duty. The claim, however, failed. Lord Ellenborough CJ held, first, that the assured had never expressly instructed the broker to abandon rhe whear to the underwriters, and, secondly, that rhe assured's letter of 9 February tacitly sancrioned the delay in giving notice of abandonment by not instructing immediate abandonment. The decision asserrs a responsibility of the assured to be aware of the requirements of marine insurance law and to give clear insrructions to the broker. Neverrheless, given the fact that by his letter on 2 February, the assured made abundantly clear his wish to abandon, the failure of the court to condemn a delay on the patt of the broker well beyond the time by which a notice of abandonment should have been given seems tather genetous. Under such circumstances today, it is arguable that the broker should seek rimely clarification of the assured's intentions regarding abandonment. In Grace v Leslie & Godwin Financial Services Ltd," brokers who had placed 5.41
retrocession thirty years previously were unable to identify the retrocessionaires

morning, the broker approached underwriters with draft slips but without success. Before the opening of business on the Monday, the vessel arrived and it was discovered that much of the cargo had been lost. In the absence of any unreasonable delay, it was held that the brokers incurred no liability.
5.37 The broker is requited to exercise reasonable care that the policy is underwtitten

by responsible and solvent insurers." In Lewis v Tressider Andrews Associates Pty Ltd," the broker was held liable for failing properly to examine the financial statements of an insurer new to the field and was not allowed to argue thar the average broker would have made no enquiry, nor that relevant documents were beyond his understanding. It was his responsibility to obtain any assistance necessary to their appreciation: 'Mter all if the relevant documents had been in German or Japanese there can be no doubt that mere physical receipt is not sufficient: There must also be comprehension.''' Nor do the broker's responsibilities regarding the financial reliability of the cover lapse on conclusion of the policy. In Osman v J Ralph Moss Ltd," the broker negligently recommended an insurer known to be in financial difficulty, and, when proceedings were subsequently commenced compulsorily to wind up the insurer, the broker wrote to the assured merely suggesting that the insurance be transferred to a different insurer. The Court of Appeal viewed this response as completely inadequate, condemning the broker's conduct as 'crass negligence'" and, according to Phillimore LJ, 'grossly negligent and, as I suggest, dishonest'."
5.38 Upon renewal of a policy, the broker is obliged to draw any variation in terms to

the assured's attention. There is authority that this duty is discharged by sending the assured a copy of the new policy or renewal slip.91 However, consideration must always be given to whether the broker has authoriry to agree a change of terms prejudicial to the assuted. In the absence of such authority, the broker should notify the assured of his failure to comply with his instructions and seek exptess approval fot the change."
5.39 Whete the policy is cancelled, the broker is undet a duty to inform the assured 93 within a reasonable time.

when the insured reinsurers (members of a Lloyd's syndicate) sought to claim. The broker having been rerained to process claims as well as to obtain the cover, and having furnished the names with only a cover note which did not identify the retrocessionaires, Clarke J held that the brokers' contractual duty to their principals to exercise reasonable care and skill included a continuing obligation
to maintain a record of the retrocessionaires' identities for 'as long as a reasonable

85

Dixon v Hovill (1828) 4 Bing 665,668: Hurrell v Bullard (1863) 3 F & F 445, 453: Osman v
94 On the duties of Lloyd's brokers regarding the making of claims, see the Code ofPracdce for Lloyd's Brokers 1988, para 9. 95 (1808) 1 Camp 523. 96 The wheat was a constructive tOtal loss requiring service on the insurer of a notice of abandonment within a reasonable time to permit the assured to recover as for a total loss or, indeed, at all, the policy being warranted free of particular average. See 23.39 below. 97 See Anderson v Royal Exchange Assurance Co (1805) 7 East38. 98 [1995] eLC 801.

J Ralph Moss Ltd [19701

86

1 Lloyd's Rep 313. [1987J 2 QdR 533 (Supreme Comt of Queensland). "ibid 548 per Connolly ]. 86 [1970J 1 Lloyd's Rep 313. " ibid 315 per Sachs L]. 90 ibid 319. " Mirhael v valentine (1923) 16 L1LRep 244: Mint Security Ltd v Blair [1982J 1 Lloyd's Rep 188, 199 (although it would be good practice to draw the assured's attention more directly to any change), " Harvest Trucking Co Ltd v FB Davis [1991J 2 Lloyd's Rep 638. " London Borough o/Bromley v Ellis [1971J 1 Lloyd's Rep 97.

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Marine Insurance Brokers

Remedies flr Breach ofDuty

broker would regard a claim as possible'. Moreover, a broker in possession of a policy holds the document as bailee for his principal and must not only take reasonable care thereof, but must also not destroy it without the express authorization of his principal. In the absence of any documentation belonging to the assured evidencing the details of the policy, the same duties extend to such documents held by the broker as his own property, such as the slip.99

the full loss flowing from its entry into the transaction, including rhe marker fall loss.,03 This decision was reversed by the House of Lords. The crucial question was said to be the scope of the duty of care undertaken.'o, The valuer had underraken to exercise reasonable care only in assessing the market value of the property at the date of the valuation, not in advising upon the financial prospects of an investment of money in the property. The valuer's liability was therefore held to be limited to the difference between the value of the property as assessed by the valuer and its true market value. In terms of principle, therefore, a claimant must show not only the existence of a 5.45 duty ofcare bur also 'that it was a duty in respect of the kind ofloss which he has suffered' .105 Where rhere is a duty to exercise reasonable care in the provision of informarion only, the negligent information provider will be responsible for the consequences of the information being inaccurate and will not be responsible for losses that would have been incurred even if the information provided had been accurate.'o, Although such losses would not have been incurred but for the negligent inaccuracy, the scope of the duty owed does not extend to such losses and 'it is the scope of the tort which determines the extent of the remedy to which the injured party is entitled,.,07 Where, in contrast, the duty undertaken extends
to

F. Remedies for Breach of Duty

5.42 The broker's duty to the assured to exercise reasonable care in the performance

of his duties is owed both in contract and in tort. 100 Although it is unlikely that the assured will derive a benefit in terms of the measure of damages from his chosen form of action, the possibility of an extended limitation period in tort in caseS of hidden losses may be useful. 'O' (l) Measure of Damages: Basis ofAssessment
5.43 The measure of damages for breach of a duty to exercise reasonable care depends

on the scope of the duty undertaken as well as issues of causation and remoteness. Generally, this does not present any difficulty. Thus, where a ship is lost but the insurance fails because of misrepresentation in the placement of the risk for which the broker is responsible, the measure of damages is the measure of indemnity payable under the insurance in the absence of the broker's breach of duty. Difficulty can arise, however, where the insurance proves to be an unwise proposition and the assured sustains losses in excess of that attributable to the failure of the insurance to pay and that the assured would not, as a matter of factual causation, have incurred in the absence of the broker's breach Of duty.
5.44 The leading case is the decision of the House of Lords in South Australia Asset Management Corp v York Montague Ltd 102 In reliance on what proved to be a

advising upon whether to enter into a certain transaction,

negligence in the provision of such advice will render the provider liable for all losses flowing from the ently into the transaction, subject of course to the
requirements of causation and remoteness.

negligent overvaluation, a lender financed the purchase of a property the real value of which subsequently declined because of a general fall in the property market. Had the lender known the true value of the property, it would not have advanced funds at all. The Court ofAppeal held that the lender was entitled to

The application of the South Australia approach to insurance brokers arose in 5.46 Anteo Reinsurance Underwriting Ltd v Johnson 6- Higgins Ltd'08 Aneco was approached by brokers acting for Lloyd's syndicates writing marine excess of loss reinsurance to participate in reinsuring the syndicates under a facultative! obligatory treaty. Aneco agreed in principle subject to the brokers' arranging a further tier of reinsurance (retrocession) to protect it. The brokers duly placed this further tier but in doing so misrepresented the nature of the treaty as quota share instead of facultative/obligatory. When the true nature of the treaty was revealed, the retrocessionaires avoided for misrepresentation. Facultative/ obligatory cover is inherently more likely to generate losses and the risk proposed to Aneco was not reinsurable. Aneco incurred losses of approximately

99 ibid 809. Subject to contrary intention, such ancillary agency duties relating to storage of information and permitting the assured access to such information will survive the discharge for breach of the agency contract as part of the underlying agency relationship: Yasuda Fire 6' Marine Insurance Co ofEurope v Orion Marine Insurance Underwriting Agency Ltd [1995J QB 174. 100 ForsikringsaktieseMapet vesta v Butcher [19891 AC 852, 860; Youell v Bland Welch 6- Co Ltd (The Superhul& Cover case) (No 2) [1990J 2 Lloyd's Rep 431, 458-9. On concurrent liability generally, see Henderson v Merrett Syndicates Ltd [1995J 2 AC 145. 101 Limitation Act 1980, s 14A. 102 [1997J AC 191.

[1995J QB 375, sub nom Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd. Although it is probably morc appropriate to reason about extent of liability in terms of causation than scope of duty of care: Hoffmann, 'Causation' (2005) 121 LQR 592,596. 105 [1997J AC 191,211 pcr Lord Hoffmann. See also Caparo lndustriesplc v Dickman [1990) 2 AC 605, 627. Note also n 104 above. 10' [1997J AC 191, 214. 107 Platform Home Loans Ltd v Oyston Shipways Ltd [2002] lAC 190,209 per Lord Hobhouse. 108 [2000J Lloyd's Rep lR 12 (CA), affd [2001] UKHL 51, [2002J 1 Lloyd's Rep 157.
103 104

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Marine Insurance Brokers

US$35 million on the treaty. Had its retrocession held, it would have recovered US$11 million. The brokers were clearly liable for this sum, but Aneco sought to recover the entirety of its losses. The Court of Appeal held in favour of Aneco, a decision upheld by the House of Lords.
5.47 In the Court ofAppeal, Evans LJ, whose judgment was approved by a majority of the House of Lords, distinguished the valuer in South Australia on three grounds.'o, First, the brokers were not simply supplying information to Aneco, but seeking to persuade it to participate in the reinsurance treaty, a process that involved advising on the availability of retrocession without which Aneco would not participate. Secondly, Aneco had to assess the proposed reinsurance treaty. The attitude of the retrocession market was fundamental to that assessment and that attitude was being explored thtough the brokers. Thirdly, the brokers were in breach of duty not only in the way they placed the risk, but also in failing to report that the true risk could not be placed in the retrocession market. In short, the brokers assumed responsibility for discovering and advising Aneco whether the proposed reinsurance was acceptable ro the retrocession market, and thereby advising Aneco as to the commercial advisability of subscribing to the proposed reinsurance. 5.48 The same issue had also arisen prior to South Australia in the Superhulls Cover case,' 10 in which brokers had again persuaded insurers to subscribe to a risk by arranging reinsurance. The terms of the reinsurance wete such that the reinsurance did not properly back the primary cover. However, properly backing reinsurance was not available in the market. It was conceded that rhe measure of damages was the difference between the liability incurred by rhe insurers on.the primary cover and the liability they would have incurred on the reduced lines they would have written on the primary cover had they known of the tfue extent of the reinsurance. It was common ground that damages should not be assessed by reference to the reduced reinsurance recovety caused by the brokers' failure ro obtain the cover requested. In Aneco, it was stated that the Superhulls Cover case was indistinguishable and that this concession was properly made.'" 5.49 It must be concluded that this will be the appropriate basis for the assessment of damages whenever a broker persuades an insurer to accept a risk on the basis of the availability of reinsurance cover, where the requested reinsurance in truth is not available, and the broker procures reinsurance either on terms that do not match the primaty cover, as in the Superhulls Cover case, or by not observing the duties imposed by the pre-formation doctrine of utmost good faith, as in Aneco.

Causation Defences
Where, however, such reinsurance is available, but the reinsurance fails by reason of breach of duty by the broker, the failure of the reinsurance does not reflect upon the advisability of the broker's proposition to the reinsured. The measure of damages should then be simply the difference between the amount, if any, recoverable under the reinsurance and the amount that would have been recoverable but for the broker's breach of duty.

(2) Cost ofAlternative Insurance

Where the broker obtains inadequate cover and the assured, if informed of the 5.50 breach of duty, could and would have obtained alternative cover but at a higher premium, rhe measure of damages is assessed by reference to the assured's net loss, namely the indemnity thereby recoverable less the extra premium that indemnity would have cost. '12 In the absence, however, of proof of a requirement of an enhanced premium, the broker will be liable for the full measure of indemnity with no entitlement to credit for any premiums recoverable by the assured from the insurer. 113

G. Causation Defences
Assuming a breach of duty, rhe broker is liable to the assured only for such loss 5.51 as the assured can prove to have been caused by the breach. The broker may allege that, notwithstanding the broker's breach of duty, the assured is no worse off, either because the risk was in any event uninsurable or because the insurer had an addirional basis for declining to pay for which the broker was not responsible. (1) The Risk was Uninsurable on Terms the Assured would have Accepted Where the broker fails to exercise reasonable care to obtain the deSired cover, the 5.52 assured is deprived of the opportunity to seek cover elsewhere and is to be compensated for the loss of that opportunity. Account must, therefore, be taken of the likelihood of obtaining the desired cover at a level of premium the assured would have paid. If, but only if, it can be shown that cover was not available on terms the assured would have accepted, the brokers' failure to exercise reasonable care will have occasioned the assured no loss.

[2000] Lloyd's Rep IR 12 (CAl, paras 79-82. 110 Youell v Bland Welch &Co Ltd (TheSuperhulls Cover ""e) (No 2) [1990] 2 Lloyd's Rep 431. "' [20001 Lloyd's Rep IR 12, para 83; [2001] UKHL 51, [2002]1 Lloyd's Rep 157, para 19.
'09

112 Malfough v Barber(1815) 4 Camp 150; Lewis v Tressider AndrewsAssociates Pty Ltd[1985J 2 QdR 533,549 (Supreme COUrt of Queensland). 113 Eagle Star Insurtmce Co Ltd v National Westminster Finance Australia Ltd (1985) 58 ALR 165. On the recoverabiliry of premiums, see MIA 1906, S 84.

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Marine Insurance Brokers

5.53 In Cee Bee Marine Ltd v Lombard Insurance Co Ltd,'14 CBM and RIF were associated companies operating a business from premises owned by RIE In 1984, most of that business was sold and CBM leased alternatIve,mamly wooden, premises at Montreal Street from which ro carryon a fib:eglassmg business. Brokers instructed to effect the necessary alterations ro the msura~ce cover procured the issue of an indusrrial special risks policy to RIF coveting damage ro plant and srock owned by RIF at the new premises. When a fire subsequently occasioned considerable damage, rhe insurers (Lombard).declined ro pay because CBM was not a parry ro the policy and RIF had no msurable interest in the damaged property. The brokers were held to have been negligent, but they put in issue the question of the loss caused by their breach of dury. The Court of Appeal of New Zealand held that, where the desired cover would not have been readily available, an assessment was required ofwhat cover could ha;e been obtained and on what terms or, if no acceptable insurance had been avadable, ofwhat course of action the client could and would have pursued. In effecting this assessment, the standard ofproofon a bal~nce ofprobabilities reqUired of past events is necessarily abandoned, the court bemg entItled and mdeed ~bliged to accept a degree of speculation. '15 As observed by Richardson J, delivenng the judgment of the Court:" 6 'In the end it is ajudgment as ro what :he outcome would have been in the absence of the negligent conduct complamed of. The outcome is then reduced to money terms and in appropriate cases is discounted to reflect any uncertainties affecting the achievement of that outcome.'
5.54

Causation Defences
agents who placed it. The agents argued that the claimants could not prove that, had full disclosure been made, the run-off policy could have been placed at anything close to an acceptable premium. However, Potter J held that on a balance of probabilities the reinsurance could have been placed at a premium of US$750,OOO instead of US$450,OOO and that the claimants would have paid that higher premium. In a number of other cases, in contrast, it has been found that there is no causal 5.56 link between the broker's breach of duty and the assured's loss through the failure of the policy. In Avondale Blouse Co Ltd v Williamson, 118 material belonging to the assured but in the possession of an outworking company was left uninsured against burglary when the company changed premises until the new premises could be surveyed. Lynskey J held that the broker was not in fact responsible for the lacuna in cover, but that, in any event, a break in cover pending survey was unavoidable as the risk was uninsurable in the absence of a survey. Similarly, where a broker is in breach of duty by failing ro inform the assured of the scope of the duty of disclosure, there will be no liability if the assured would have concealed the circumstance even if it knew of the disclosure obligation."' Again, in Ferrcom Pty Ltd v Inbush (NSW) Pty Ltd, 120 the broker failed ro inform 5.57 insurers that the insured crane had changed status from unregistered mobile machinery to registered vehicle. That change entitled insurers to cancel rhe policy and it was found that they would have done so. It also meant that insurers were no longer liable on the policy. Subsequently, the crane was damaged by overturning, a risk covered under a policy for unregistered machinery but normally excluded under a policy fot registered vehicles. Cover was availahle with the exclusion deleted, but only at approximately treble the premium. The question, therefore, was whether there was evidence that the assured, had it known the insurance had failed, would have procured a replacemenr policy without the overturning exclusion, paying the substantial additional premium. On the facts, however, the evidence suggested the contrary. The assured had never sought to give evidence as to how it would have responded to the cancellation of the

On the facts the combination ofthe wooden building, its general condition, and the fire haza;ds associated with the fibreglass business raised serious questions_as to the availability of cover for CBM's business in the new premises. Howe,:,er, taking into account in particular the record of the owner of CBM of mamtammg full insurance cover for his companies, the Court of Appeal held that, if commercially reasonable, CBM would have paid a higher premium and complied with any conditions regarding the premises and the conduct of the busmess. Failing the obtaining of acceptable cover, CBM would have moved locatIon, not being tied to the Montreal Street premises by a fixed term lease. Consequently, the court held that the broker's breach of duty deprived CBM of effectIve insurance cover either from Lombard or from another insurer and either at Montreal Street or at alternative premises.

. d,"7 a LIoyd' s syn.d' 15.55 Similarly, in Aiken v Stewart Wrightson Members Agency Lt cate's run-off reinsurance policy was avoided for non-disclosure by the managmg

118 (1948) 81 LlLRep 492. See also King (or Piehl) v Chambers &- Newman (Insurance Brokers) Ltd [19631 2 Lloyd's Rep 130, discussed at 5.26 above. '" Joanhaven Pty Ltd v Bain Dawes Northern Pty Ltd [1982) 2 NSWLR 57, 67-8 (New South Wales Court ofAppeal). A majority ofche Court held that the broker was not in breach of duty in

failing to advise the assured of the scope of the duty, but this would appear not to represent English law: see 5.30 above. See also Stowers v GA Bonus pic [2003) Lloyd's Rep IR 402, para 30

," [199012 NZLR 1 (Court of Appeal of New Zealand). See also Harvest 1rucking Co Lcd v PE Davis [199112 Lloyd's Rep 638. 'os Mallett v McMonagle[19701 AC 166, 176. 116 [19901 2 NZLR 1,6. ," [199512 Lloyd's Rep 618.

(broker failed to query assured's incomplete answer to a question regarding claims history on a proposal form, but held that query would not have led assured to disclose daims history).
120 (1996) 9 ANZ Insurance Cases 76,728 (Supreme Court of New South Wales Court of Appeal).

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original insurance. Moreover, even after the accident, the assured accepted new cover through a new broker that still included the overturning exclusion. Consequently, there was no causal link between the broker's breach of duty and the loss sustained by the overturning of the crane. (2) The 'Two Defence' Problem
5.58 A causation issue arises also where the assured is unable ro recover against the insurer by reason not only of a breach of duty by the broker but also of a second defence, or circumstance, for which the broker is not responsible. Where the insurance that has or should have been concluded would have been illegal or contrary to public policy, the assured has no right to damages against the broker.121 Otherwise, however, the court will consider the likelihood of the insurer invoking the alternative defence and will tailor the award of damages ro

Contributory Negligence
such a case, the broker remai~s liable for the balance. Thus, in Everett v Hogg, p'obznson & Gardner (Moumazn) Insurance CO,125 it was held that, in the light of the good commercial relatIOns between the insurer and assured and the relatively trivial sum involved in comparison with their business relations as a whole.. the insurer would have compromised a claim on a policy voidable for non-diSclosure for one-rhird of the indemnity payable on a valid policy. The broker was, accordingly, held liable for two-thirds of that amount. In Grace v Leslie & Godwin Financial Services Ltd, 126 retrocessionaires could not be identified because the brokers failed to maintain a record of rheir identiries. However, smce only 43 per cent of the insurers operating in the relevant marker were still honouring claims, a circumstance for which the brokers could not be held responsible, the brokers were held liable for only 43 per cenr of rhe indemnity prima ficie recoverable. In 0 & RJewellers v Terry,'" the facts were more complex and the probabilities 5.61 harder to assess. The defendanr broker failed to inform the insurers of the criminal record of one of the direcrors of the assured company. Had this informarlOn been disclosed, the risk would have been uninsurable. The company would have sought to dismiss the relevant direcror, but it was unclear whether or how quickly this could have been done or on whar rerms insurance could have been obtained in rhe aftermath of the departure of such a director. Moreover, rhe assured was also in breach of other obligarions under the policy, but it was unclear wherher, in the absence of the non-disclosure, the insurers would have settled the claim or fought it ro a final judgmenr and, if so, with what resulr. In such circumstances, it was held rhat the correct approach was not to attempt to evaluare each posslbihty separately, but rather 'to ta!<e account of all the ifs and buts a?d come to a comprehensive estimate of the chance' of recovery. 128 On the facts, ir was held that the broker's failure to disclose the director's convictions had deprived rhe assured of a 30 per cent chance of recovery.

reflect that lil<elihood. 122

5.59 The court may conclude that the insurer would not have invoked the second defence theoretically available, leaving the broker fully liable. In Fraser v BN Furman (Productions) Ltd, 123 the brokers had failed to effect employers' liability insurance but argued thar, had they performed their duty, liability undet the policy would have been subject to a condition precedent not fulfilled by the assured. The Court of Appeal denied non-compliance with the condition ptecedent but added that the court had ro consider the probability of the insuret seeking ro invoke the defence and their chances of success were they minded so to do, holding on the facts that no reputable insurer would have sought ro rely on the defence in question. Similarly, in Dunbar v AB Painters Ltd, 124 employers' liability insurers could have declined liability because the relevant work was carried out slightly higher above the ground than the maximum stipulared in rhe policy. It was held, however, that rhe insurer would not have ta!<en this defence because the insurance was required by law and because of the damage to the insurer's reputation ifit relied upon its strict legal rights when a certificate of cover that made no mention of the height restriction was displayed at the place

H. Contributory Negligence
The broker may accepr that its breach was causarive of loss to the assured bur 5.62 contend rhar the assured could have ta!<en steps to aven or minimize the loss and that, in consequence, the measure of damages should be reduced 1'0 reflect the assured's contribution to its own loss. In rhe conrext of the professional
provision of services, as

ofwork and relied on by employees.

5.60 Alternatively, the court may conclude that the insurer would not have waived the defence totally bur would have settled the claim for a reduced amount. In

by an insurance broker, the argument in essence is that,

'" Thomas Cheshire & Co v \0ughan Bros &Co [1920] 3 KB 240. 122 Dunbar v AB Painters Ltd [1986J 2 Lloyd's Rep 38, 42. In Everett 0 Hogg, Robinson & Gardner Mountain (Insurance) Co [1973] 2 Uoyd's Rep 217, 223, Kerr J considered that the broker would incur full liability unless able to prove on a balance of probability that the dient
would have lost all or part of the benefit of the insurance as a result of the probable action of the insurer. This would appear incompatible with Dunbar. / '" [1967] 1 WLR 898. '" [1985] 2 Lloyd's Rep 616, affd[1986J 2 Lloyd's Rep 38.
125 127
128

[1973] 2 Lloyd's Rep 217. [1999] Lloyd's Rep lR 436.

126 [19951 CLC 801, 816-17.

ibid 451 per Le Quesne QC, sitting as a deputy judge of the High Court.

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on the facts, the assured assumes a supervisory role over the broker's performance of its duties and rhe loss is attriburable in whole or in parr ro a failure properly ro supervise.
5.63 Such an argument might be thought ro be of questionable merit. The broker is

Contributory Negligence
assumption by the broker of responsibility for the provision of professional services in return for reward. Thar bargain must be honoured and the broker cannot pocket the reward and unilaterally renlte that responsibility. Consequently, the assured does not owe the broker any legal duty to scrurinize the
services performed or to read contract documentation in order to verifY whether

an insurance professional paid a professional fee for professional services and the law is generally sceptical of an argument that a professional service provider has a licence ro act negligently.'29 This indeed appears to be the law's position where the broker's client is nor also an insurance professional. Where, however, the context for the dispute is the placement of reinsurance, so that the client is an insurer, the law is more sympathetic ro the broker.
5.64 In Dickson v Devitt,130 the broker was instructed ro obtain insurance on goods ro

the wording delivers the cover required similar to the duty to the assured that the broker is paid ro assume in obtaining the cover.'" The absence of any legal duty to supervise does not, however, preclude the 5.66 possibility of contributory negligence, in which Context the question is merely whether the client failed to act in a prudent manner.'34 Dickson v Devitt, moreover, was decided ar a time when any contributory negligence constituted a complete defence, law that was subsequently altered by the Law Reform (Contributory Negligence) Act 1945, so as render contributory negligence a partial defence giving rise ro an apporrionment of liability and merely an appropriate reduction of damages. The 1945 Act applies where damage is suffered as a result of the 'tlUlt' partly of 5.67 the defendant and partly of the claimant. For these purposes, 'fault' is defined as 'negligence, breach of staturory duty, or other act or omission which gives rise to liability in torr, or would, aparr from this Act, give rise to the defence of contributory negligence'.135 It is now clear that this concept of fault embraces breach of a contractual dury to take reasonable care where that breach is actionable in torr, into which category falls negligence by many providers of professional services including insurance brokers. 136 In the Superhulls Cover case,137 brokers were able to place a substantial ship 5.68 construction risk only by simultaneously offering excess of loss reinsurance. Having honoured a claim on the primary cover, however, the insurers found themselves unable to recover against the reinsurers because of a clause confining the reinsurance cover to 'the reinsured's liabiliry in respecr of risks attaching for periods as original (up to bur not exceeding 48 months)'. This clause was

be shipped on 'Suwa Maru andlor steamers'. Through an error of the broker's clerk, the policy omitred the possibility of any alternative to the named vessel. The client was sent both the debit note and the policy,13' either of which, on examination, would have revealed the error. When rhe goods were subsequently shipped on a different steamer and losr, Arkin J held rhe broker liable for failure ro comply with his instructions, rejecting an argument that the loss was due to the client's negligence in failing to check the documents. In a trenchant affirmarion of professional responsibility, he stared as follows: 132
In my opinion, when a broker is employed to effect an insurance, especially when the broker employed is a person of repute and experience, the client is entitled to

rely upon the broker carrying out his instructions, and is not bound to examine the documents drawn up in performance of those instructions and see whether his instructions have, in fact, been carried out by the broker. In many cases the principal would not understand the matter, and would not know whether the document did in fact carry out his instructions. Business could not be carried on if, when a person has been employed to use care and skill with regard to a matter, the employer is bound to use his own care and skill to see whether the person

employed has done what he was employed to do. 1 think the principal is entitled to
rely upon the reputation of the person whom he employs.

5.65

Dickson v Devitt remains good law today to the extent that a btoker who accepts instructions in the course of his business and for reward cannot deny a duty to exercise professional standards or liability for breach merely by affording the assured an opportunity to discover his breach of duty. The bargain involves an
129 See the general approach to the interpretation of exemption clauses that purpOrt to exclude or limit liability for negligence: HIH Casualty 6' General Insurance Ltd v Chase Manhattan Bank [20031 UKHL 6, [2003] 2 Lloyd's Rep 61, para 11. 130 (1916) 86 LJKB 315. . 131 There is no legal duty to provide the assured with a copy of the terms of the cover, even if it might be good business practice: United Mills Agencies Ltd v Harvey, Bray & 90 [1952] 1 All ER 225n. m (1916) 86 L]KB 315, 317-18.

m Youell v Bland Welch 6oCo Ltd (The Superhul& Coverease) (No 2) [199012 Lloyd's Rep 431, 454; National Insurance & Guarantee Corp v Imperio Reinsurance Co (UK) Ltd[1999] Lloyd's Rep IR 249, 259. Moreover, an assumption shared by assured and broker that a particular policy wording achieves certain cover found a waiver of the claim or a plea of estoppel against the assured: see 5.71 below. The assumption cannot therefore found a waiver of the claim or an estoppel against the assured. Equitable estoppel is also precluded since the breach of duty by the broker renders it equitable for the assured to insist on its strict legal rights: ibid 258-60. 134 Youell v Bland Welch & Co Ltd (The Superhul& Cover case) (No 2) [19901 2 Lloyd's Rep 431,460. 135 Law Reform (Contributory Negligence) Act 1945, s 4. 136 Forsikringsaktieselskapet V't>sta v Butcher [1989J AC 852, CA. m Youell v Bland Welch 6oCo Ltd (The Superhul& Cover case) (No 2) [199012 Lloyd's Rep 431.

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construed as a cut-off provision, by virtue of which the teinsurance of any risk automarically ceased forty-eight months after attachment,'38 as a consequence ofwhich rhe reinsurers were nor liable and the insurers sued the brokers. Phillips J held that rhe brokers had failed, inter alia, ro draft the reinsurance documents with sufficient clarity and to explain the terms of the reinsurance cover correctly, with the result that the insurers were entitled to assume that the reinsurance cover matched the primaty cover. Nevertheless, the insurers were held to have been contributorily negligent. There was no inflexible rule of law governing what could reasonably be expected of a broker's client by way of protecting its own interests. On the facts, the terms of the reinsurance offered and subsequently obtained had been made available to the insurers who conceded that they should have read them carefully, that mistakes could occur, and that the reinsurance documentation was made available to the insurers, inter alia, to enable them to verify that it accorded with their instructions. The forty-eight months' clause should have been noticed and queried, and additional reinsurance cover should have been obtained. However, the brokers' breaches of duty remained the primary cause of the insurers' loss, the latter's failure to effect customary checks on the brokers' performance of their duties not breaking the chain of causation and resulting, on the facts, only in a 20 per cent reduction in damages.
5.69 This approach was followed in Tudor Jones II v Crowley Colosso Ltd" in

Contributory Negligence
the professional position and remuneration of the brokers meant that any reduc. tion in damages should not overlook the 'primary responsibility' of the brokers
to procure cover in accordance with their instructions. 142 The insurers' damages

were reduced by 30 per cent. While it is accepted that the existence and extent of contributory negligence 5.70 must always be a question of fact, the reinsurance and inter-broker contexts of the cases discussed above were highly significant. Where the broker's client is not an insutance professional, the fundamental approach ofAtkin J in Dickson v Devitt remains relevant, notwithstanding the changes in the law of contributory negligence. In The Moonacre,'43 the brokers' argued that the assured should have detected a misinterpretation by the brokers of a term in the proposal form, a copy of which was first sent to him together with the policy. This argument was summarily rejected. The assured had given the brokers such information as was requested to enable the brokers to complete the form. Having done so, 'he was entitled to assume ... that what he had told [the brokers] was all that was needed to bring about effective cover. It was no part of his duty to secondguess his own professional adviser' .144 In Tudor Jones II v Crowley Colosso Ltd, 145 an allegation that the assured was guilty of contributory negligence in not reviewing the terms of the cover was described as 'hopeless' .'46 The assured had given clear instructions to the professional broker and had proceeded on the (legitimate) assumption that the policy conferred the cover stipulated.
It should be noted, moreover, that an assumption shared by assured and broker 5.71 that a parricular policy wording achieves certain cover does not constitute an unequivocal representation that the assured will not pursue any claim against the broker should the assumption prove mistaken. The assumption cannot, therefore, found a waiver of the claim or an estoppel against the assured barring the right to claim against the broker. '47 There is, moreover, a furthet barrier to any equitable estoppel. If the citcumstances do not justify a reduction of damages for contributory negligence, it is highly unlikely in the extreme that it will be unconscionable for the assured to insist on its strict legal rights to pursue a claim against a broker based on professional negligence. '48

apportioning liability between the defendant placing broker and the claimant producing broker, to whom the assured had assigned its rights against the defendant. The claimant was negligent in approving the terms of a contractors' all risks policy that contained exclusions denying cover for completed part; of the project while other parts remained ongoing, clearly prejudicial to t~e assured given the risk insured. The defendant was negligent in failing to draw the exclusion specifically to the claimant's attention as a matter for considetation and also in the way the risk was placed. Liability was apportioned on a onethird, two-thirds basis in favour of the claimant broker. Similarly, in National Insurance & Guarantee Corp v Imperio Reinsurance Co (UK) Ltd, 140 the defendant broker was negligent with respect to the scope of an extension of reinsurance cover. The claimants, however, represented by a Mr Rapley, were negligent in failing ro notice the defect in the cover obtained. Colman J held that the defect 'should have been obvious to any insurer in Mr Rapley's position and with his
professional experience, even on a cursory examination. This was not a matter

A different philosophy, however, surrounds the completion of proposal forms, 5.72 less commonly used in marine insurance. In O'Connor v BDB Kirby & CO,'49 a

of fine detail or great complexity' .'41 Accordingly, the insurers in Imperio were held to be more blameworthy than those in the Superhulls Cover case. However,

ibid. Sharp v Sphere Drake Insurance pIc (The Moonacre) [1992] 2 Lloyd's Rep 501. 144 ibid 527 pcrColman QC, sitting as a deputy judge of the High COUrt. '" [199612 Lloyd's Rep 619. ", ibid 637 per Langley]. 147 Nationallmurance and Guarantee Corp v Imperio Reinsurance Co (UK) Ltd [1999] Lloyd's
142 143

'38

Youell v Bland Welch & Co Ltd[1990] 2 Lloyd" Rep 423, aJfd [19921 2 Lloyd's Rep 127.
140

m [199612 Lloyd's Rep 619.

[19991 Lloyd's Rep IR 249.

'" ibid 261.

Rep IR 249,258-9. '" ibid 259-60.

'49

[19721 1 QB 90.

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Marine Insurance Brokers

proposal form for motor car insurance asked whether the car would be garaged, The assured informed the btoker that he had no garage, but the broker inadvertently stated on the form that the car would be kept in a private garage, The broker asked the assured to check the form, but the assured signed after merely glancing through it and failing to notice the inaccuracy which subsequently enabled the insurer to repudiate liability on the policy, The Court of Appeal held that the broker incurred no liability to the assured, Accotding to Davies LJ:'50
.. . it is the duty of the proposer for insurance to see and make sure that the information contained in the proposal form is accurate and not to sign if it is inaccurate, and ... he canDot be heard to say that he did not read it properly or was not fully appraised of its contents ... It would be different if the assured was unable to read or was in some degree illiterate. But there is no suggestion of that in

Brokers'Rights to Remuneration

1. Brokers' Rights to Remuneration

"The remuneration a broker is to receive in return for acting as the assured's 5.74

agent is ultimately a matter for negotiation, although placement of the risk is customarily remunerated in the form of brokerage levied on the premium'54 The trigger for rhe earning of brokerage depends upon what has been agreed between the agenr and its principal, In default of contrary agreement, however, an insurance broker who undertakes to place a risk earns brokerage once rhe risk has been placed, even if further duties fall to be performed by the broker in connection with rhe policy procured.'55 A question may arise as to whether a broker engaged to place a risk has had a 5.75 sufficient involvement in the placemenr in order to have earned brokerage, The tesr is whether the broker's involvement constituted an'56 effective cause of the procurement of the insurance. In McNeil v Law Union & Rock Insurance Co Ltd, '57 a broker introduced rhe assured to an insurer and a policy was issued, It was subsequently renewed annually through the broker receiving a renewal notice and negotiating the premium. In 1923, the assured received lower quotes from other insurers, Although the broker obtained reasons for the higher premium from the insurer, the assured adamantly declined ro renew at the higher level. At the broker's suggestion, a meeting was held between representatives of the insurer and the assured, The assured's representative suggested he be treated as agent for renewal and that his brokerage be credited to the assured so as to produce a net lower premium, This was agreed and the policy was renewed. The broker then claimed brokerage from the insurer, Branson J stated the test for sufficient intervention as follows: 158 'When an agent is asking for commission upon a certain transaction, he has got to show rhat he was an efficient cause of the transaction coming about. It is not enough to show that he was the introducer of the two parties because rhat is merely a causa sine qua non and may not be the efficienr cause.' On the facts, the broker's intervention was held to have

this case, He was fully able

to

read this proposal form, , , and there had been this

discussion about the garaging of the car and its relevance to the amount of the

premium, and it was there staring him in the face. If he did not read it properly, I

think he has only himself to blame, Karminski LJ, agreeing, held that the failure of the assured to check the proposal form properly was 'the sole, effective cause' ofthe loss, 15' Megaw LJ held that the evidence failed to establish how the inaccurate statement came to made on the form with the result that the assured had not discharged the burden of ptoving negligence on the part of the broker, The majority reasoning, however, supports the proposition that an assured is regarded as wholly responsible for the accuracy of information contained in a proposal form signed by the assured and that use of a broker as, in effect, the assured's pen does not displace this responsibility.
5.73 Where, however, a broker completes the proposal form, consulting the assured

for information necessaty ro answer the questions, the broker is responsible for exercising reasonable care in the interpretation of the questions, In The Moonacre,152 the brokers negligently interpreted a question as to whether a yacht would be used as a houseboat as confined to the assured and his family, whereas, on its correct and reasonable interpretation, it extended to members of the crew, The proposal form was completed by the brokers with some information obtained from the assured by telephone, The form was neither seen nor signed by the assured, When the insurers rejected a claim because of rhe inaccurate response to the houseboat question, the brokers were held liable for the 10ss.'53

150 ibid 99, 151 ibid 100. '" Sharp v Sphere Drake Insurance pIc (The Moonacre) [1992] 2 Lloyd's Rep 501.

153 See also the Insurance Brokers Registration Council (Code of Conduct) Approval Order 1978, example 14: 'In the completion of the proposal form, claim form, or any.other material

incorrect information may result in a claim being repudiated.' Moreover, the Code of Practice for Lloyd's Brokers 1988, para 5.3 provides as follows: 'Other than in exceptional circumstances, a Lloyd's broker should not complete a proposal form on behalf of a cliem. If a Lloyd's broker does so complete a proposal form he should disclose that fact to the insurers.' 154 It has yet to be authoritatively decided whether, in return for placement of the risk, the broker is paid brokerage by the assured, or whether, by custom and practice, the broker receives the right from the assured to negotiate brokerage from the insurer: CarvillAmerica Inc v Camperdown UK Ltd [2005] EWCA Civ 645, [2005] 2 Lloyd's Rep 457, 155 wlos Group Ltd v Harbour Insurance Services Ltd [1997] 2 Lloyd's Rep 461. 156 It is, however, rare that an agent will qualify for commission on the basis of an intervention that constitutes 'an' rather than 'the' efficient cause of the transaction. It is most likely where two agents are appointed on ,different terms. See, eg Lordsgate Properties v Balcombe [1985] 1

document, insurance brokers shall make it dear that all answers or statements,are the client's own responsibility. The client should always be asked to check the details androId that the inclusion of

EGLR20,
157

(1925) 23 LlLRep 314,

158

ibid 316,

212

213

Marine Insurance Brokers

been an efficient cause of the renewal: 'It is not a case of principals who have been introduced by an agent and brought to a certain point in negotiations setting out for themselves on a new tack altogether.'15'

Brokers' Security fOr Sums Due

While the lien is confined to the policy, authority clearly establishes that the lien 5.78 gives rise to a right of set-off in respect of claims moneys co-extensive with the lien. Consequently, a general lien will permit the broker to set off moneys received under one poliC)' against sums due in respect of services rendered in connection with other policies. 16B In the absence of any lien, the broker still enjoys a right of set-off, but confined to sums due under the policy that has generated the claim money. '69 Under a composite poliC)', the broker's lien and right of set-off apply severally 5.79 with respect to the individual co-assureds. In The Sun Tender,170 the broker was in receipt from the insurers of 297,921 by way of indemnification for repair costs. The operators of the insured vessel and a mortgagee bank, by way of assignment from the shipowners, were co-assureds under the policy. The operators owed the brokers 728,109.82 entirely in respect of other policies. The brokers sought to exercise a right of set-off of the bank's share of the repair money (279,629.42) against the operators' debt. The Court of Appeal held that section 53(2) of the 1906 Act did not permit a broker to combine the interests of co-assureds and exercise a general lien over such combined interests.

J.

Brokers' Security for Sums Due

5.76 An insurance broker enjoys security for sums due in the form of a lien upon the policy. Section 53(2) of the Marine Insurance Act 1906 provides as follows:
Unless orhervvise agreed, the broker has, as against the assured, a lien upon the

policy for the amount of the premium 160 and his charges in respect of effecting the policy; and, where he has dealt with the person who employs him as a ptincipal, he has also a lien on the policy in respect of any balance due on any insurance account which may be due to him from such person, unless when the debt was incurred he had reason to believe that such person was only an agent.

The lien is a possessory security, conferring on the broker merely a right to retain possession of the poliC)' until discharge of the secured debt.'61 It is, therefore, lost by relinquishing of possession of the poliC)'. It may also be waived by agreement, as is apparently often required by mortgagees. 162
5.77 The broker enjoys a general lien, securing the entirery of the account between

'" Eide UK Ltd v Lowndes Lambert Group Ltd (The Sun Tender) [19991 QB 199, 211.
169

ibid 214.

broker and assured, unless the broker knows at the time of effecting the policy that it is a sub-agent. 163 In that case, the lien is confined to sums arising in connection with the policy.164 The assured carries the burden of proving the broker's awareness of the sub-agency.165 If the broker discovers it is a sub-ageyt after effecting the policy, it will enjoy a general lien in respect of debts accruing until that point and a specific lien thereafter. 16' Where the broker is a sub-agent, the assured is directly responsible to the broker for payment of premium and commission. The broker can exercise the lien even if the assured. has paid an intermediate agent who has failed to pay the broker. 167

'70

E:lde UK Ltd v Lowndes Lambert Group Ltd (The Sun Tender) [1999] QB 199.

159 ibid 317. See also Harding Maughan Hambly Ltd v Compagnie Europeenne de Courtage d'Assurances 6- de Reassurances SA [2000J 1 Lloyd's Rep 316. 150 The liability of the broker for the premium, giving rise to a right of reimbursement and the need for security, is discussed at 6.21-6.23 below. '" Eide UK Ltd v Lowndes Lambert Group Ltd (7he Sun Tender) [19991 QB 199,206-7. 162 ibid211. 163 According to pre~Act case law, it suffices that the broker has reason to know of the subagency: Westwood v Belt (1815) 4 Camp 349, 353. It is unclear whether this extension beyond actual knowledge is compatible with the wording ofMlA 1906, s 53(2). ,6< See, eg Maspons y Hennano v Mildred, Goyeneche &Co (1883) 8 App Cas 874. "5 Wbtwood v Bell (1815) 4 Camp 349, 353. 166 Near East Reliefv King, Chasseur & Co Ltd [1930J 2 KB 40, 46. '" Pisher v Smith (1878) 4 App Cas 1.

214

215

6
PREMIUMS

A. Whether and When Premium

is Earned

6.02 6.09 6.13 6.14 6.18 6.21 6.21

B.

Time of Payment

(2) Consequences of the broker's liability for premium (3) The position as between broker

6.24 6.33 6.35 6.37 6.38 6.41

C. Consequences of Failure to Pay on Time (1) At common law (2) Premium default clauses

and assured
(4) Displacing the brokers'

premium liability rule

(5) Market recapitalization

D. Brokers and Premiums

(1) Liability of the broker for premium

E. Mutual Insurance F. War Risks and Additional Premium Areas

The underraking ro pay premium is rhe considerarion provided by rhe assured 6.01 in rerum for which the insurer undertakes ro indemnify the assured in rhe circumstances and manner specified in,.the insurance contract.

A. Whether and When Premium is Earned

Premium is earned for assumprion of risk. Moreover, upon inception of risk, rhe 6.02 insurer is immediarely exposed ro full liability. Subject to contrary intention, it follows that premium is earned at inception of risk 1 and that both the insured risk represented by that liability and the premium attaching to the insurance of that liability are indivisible.' Consequently, prospective discharge of the

Ve>los Group Ltd v Harbour Insurance Services Ltd [1997] 2 Lloyd's Rep 461, 463, 464, Earlier

in the judgment (also at 463), it is said that premium is earned on placement of risk. However, this appears to be a slip of the judicial pen: the text cited in support (Iempleman on Marine Insurance R Lambeth (cd) (6th edn, 1986) 447) states mat premium is earned on inception of risk. See also Swiss Reinsurance Co v United India Insurance Co Ltd [2005] EWHC 237 (Corom), [2005] Lloyd's Rep IR 341, para 57. , 1jrie v Fletcher (1777) 2 Cowp 666, 668.

217

Premiums . lllsurer,s l'tab'l'tty 0 n the policy aftet inception of risk leaves the insurer entitled t to the full premium' Even if the conttact provides fot instalment payment of premium and the discharge occurs before the date when one or mote of the . Illst al ments fall s due, the assured remains liable for the further lllstalments as they fall due.'
6.03 By way of derogation from the common law,. however, the Internari~nal hull

Whether and When Premium is Earned

In practice, however, a severable contractual structure is rare in the insurance

clauses (01/11/03) provide, in case of cancellatIon by agreemen,t, for. a pto rata monthly net return of premium for each uncommenced month, subject only to the proviso that the insured vessel has not sustallled a total loss, r~gardless of whether the cause of that loss is a covered pe:il ~nder the. policy, dunng the period of cover under the policy or any extenSlOn. The Insutute and International hull clauses also provide in respect of a number of events that trigger an automatic prospective discharge of the insu~er's liability that the assured shall receive a pro rata daily return of premIUm. Moreover, where an
insurer has the right
to

.context. The possibility is acknowledged by the Marine Insurance Act 1906," but the case law is sparse and modern examples are elusive. It is clear that the mere fact of instalment payment does not render premium divisible. Unless the risk in respect of which the premium is paid is itself severable, the instalments merely represent the mechanics by which an entire premium is to be paid." Similarly, it is insufficient that a voyage can be divided into stages for assessment of whether the vessel is properly equipped." The presence of a condition precedent to attachment of risk for a stage has been regarded as indicative of severability,14 but it is not conclusive." Moreover, if the contract does not expressly apportion premium between the severable parts of the risk, the evidence must establish a clear basis on which the premium should be apportioned." Where the insurer never comes on risk in the first place or is retrospectively 6.05 regarded as not coming on risk, there is a total failure of consideration and premium is not earned. Any premium already paid must be returned and any premium payable ceases to be payable." Thus, premium is not earned where the assured fails to comply with a condition precedent to the attachment of risk,18 unless the policy provides that the insurer's absence of liability does not prejudice entitlement to premium." Similarly, premium is not earned to the extent that either the assured lacks an insurable interest in the insured property throughout the period of covel'o or the insured property never embarks upon the insured adventure. 21 In the latter case, however, where the property is

cancel cover without reason, a pro rata rebate on

premium is likely to be implied.' The express gra~ting of a return of premium

serious breach ofobligation by the assured, for example relanng to classlficatI~n, may indicate that, as a matter of contractual interpretation, an e~uivale~t n?ht to premium return should be implied in other cases of automatIc termlllatIon where none is expressly provided.'
6.04 Contrary to the general model of indivisibility of risk and preu:ium,. an insur-

under the market clauses in the event of automatic terml~atlOn of c~ver ~or ~

ance contract may be concluded on a severable basis. The most likely llldlca:lOn f such a structure would be for the contract to divide the nsk lllsured tnto ~eparate parts (effectively separate risks) with a distinct part of thepreU:iu~ (effectively a separate premium) allocated ro a correspondlllg part of the fiSk.
-3-~IA 1906. s 84(3)(a);Annen v ll'0odman (1810) 3 Taunt 299; Langhorn v Cologan (1812) 4
T

11

MIA 1906, s 84(2); 7Jrie v Fletcher (1777) 2 Cowp 666, 668.

;o~~;nbur; (1876) 1 ExD 81;

4

330 Moses v Pratt (1815) 4 Camp 297; Stone v Marine Insurance Co, Ocean Ltd, of Swiss Reinsurance Co v United India Insurance Co Ltd [2005]

EWHC 237 (Comm), [20051 Lloyd's Rep IR 341, para 56.

Cha man OA) 6' Co Ltd v K1tdirga Demzetllk ve Ttcaret [19981 Lloyd s Rep IR 377. 5 I t Pnational Hull Clauses (01111103), el25. For return of premmm dunngpenodswhen the insure~ v:ssel is laid up and not under repair, see cl 39. S~e also Institute Time Clauses Hulls (11101 83), e122; (1/11195), e123; Insritute Time Clauses Freight (1/8/89), eI 16; (1/11/95), el17. 6 Such clauses are discussed at 19.70, 19.74, 19.81 below. 7 Sun Fire Office v Hart (1889) 14 App Cas 98; Re Drake Insurance pic [20011 Lloyd's Rep
IR 643. , See 19.73 below.
9 The contrary argument based on the maxim expressio unius exc.'usio a~terius (see 8.19 belo~) leads to the illogical result of a rebate being granted in cas~s o~ possl~ly senous default but no~ I~ cases of possibly inadvertent and minor accident, which IS unlikely to reflect the parnes

Chapman OA) 6'Co Ltd v Kadirga Denizci/ik ve Ticaret[1998] Lloyd's Rep IR 377, 389. On the facts, an indivisible analysis was clearly reinforced by the premium clause, which pi'ovided in principle for advance payment of 'the premium' with a schedule for instalments in the event of contrary agreement for payment over time. Such instalments clearly remained instalments of one indivisible premium. Afortiori, where premium is payable in one lump sum albeit calculated on the basis ofa rate per month: Loraine v Thomlinson (1781) 2 Dougl 585. 13 Bermon v ll'0odbridge (1781) 2 Dougl 781; Annen v Woodman (1810) 3 Taunr 299 (although claim for rerurn ofentire premium). For the doctrine of stages, see 19.23ffbelow. " Stevenson v Snow (176l) 3 Burr 1237; Bermon v Woodbridge (178l) 2 DougI781, 789. " Meyer v Gregson (1784) 3 Dougl402. 16 ibid. The case concerned insurance at and from Jamaica to a pan in England. On the severability of such a risk and the impact of evidence of rating usage, cf Gale v Mache!! (1781) 2 Dougl 790n; Long v Allan (1785) 4 Dougl 276.
12
17

MIA 1906. s 84(1).

intentions. ... f d h . db d I' . 10 See, by analogy, severable contractS for th: sale 0 goo s, c ara~t~nze . y e Ivery In separate instalments with each instalment separately paid for: Sale of Goods Act 1979, s 31 (2).

" Henkle v Royal Exchange Assurance Co (1749) 1 Ves Sen 317; Colby v Humer(1827) 3 Car & p 7; Thomson v Weems (1884) 9 App Cas 671, 682. 19 North Eastern JOOA Steamship Insurance Association v Red Sea Steamship Co Ltd (1906) 12 Com Cas 26. 20 MIA 1906, s 84(3)(c). Howev~r, any premium paid is not returnable if the policy is a gaming or wagering policy: ibid. " ibid s 84(3)(h). See also Martin v Sitwell (1691) I Show KB 156; Dalzell v Mair (1808) I Camp 532. See also the cases discussed at 21.84ffbelow.

218

219

Premiums
insured on a 'lost or nor losr' basis and has safely arrived at the time of contract formation, premium is earned provided the insurer is unawate of the safe arrival. Thus, in BradfOrd v Symondson," cargo was insured on a 'lost or not lost' basis. Believing the carrying vessel was overdue, the insurer reinsured at a very high premium. In fact, the vessel had already safely arrived, bur neither the insurer nor reinsurer knew this. It was held that the reinsurance policy attached and premium had been earned.
6.06 A rotal failure of consideration can also arise retrospectively through avoidance of an insurance contract for pre-formation non-disclosure or misrepresentation. The assured is generally entitled to the return of any premium paid, since the insurer is regarded as never having come on risk,23 although it is u?-clear whether the premium should be repaid gross or net of the brokerage deducted by the placing broker. 24 By way of exception, however, the premium is forfeit to the insurer either where the contracr so provides" or where the non-disclosure or misrepresentation was fraudulent.
6.07

Time ofPayment
on normal contracting parties by general contract law, justifY insurance contract law's adoption of an especially severe approach to fraud in contract formation. 30 A forfeiture rule applies also where the insurance is illegal. 31 For example, premium paid under insurance covering cargo shipped to an enemy is not returnable. 32

By reason of the indemnity principle, the assured cannot recover in excess of the 6.08 loss sustained. Consequently, where an assured over-insures, whether by insuring for a sum in excess of the insurable value under an unvalued policy" or by double insurance whether the policies are valued or unvalued,34 marine insurance law considers that there is pro tanto a failure of consideration and provides for a proportionate return of premium. 35

B. Time of Payment
Time of payment of premium is ultimately a matter of interpretation of the 6.09 contract. Subject to contrary intention, however, it is suggested that premium is payable at the time it is earned, namely on inception of risk.'6 In interpreting a payment clause, the terms 'paid' and 'payable' have been held 6.10 to carry particular significance. In Heath Lambert Ltd v Sociedad de Corretaje de Seguros,37 a marine reinsurance contract contained the following clause: 'Warranted premium payable on cash basis to London Underwriters within 90 days of attachment.' The Court ofAppeal held that this clause generated no obligation to pay before expiry ofthe ninety days. The word 'payable' as opposed

Prima facie, the fraud forfeiture rule appears anomalous, since the general law of
contract requires restitution of benefits received under a rescinded contract regardless ofwhether the ground for rescission is fraud or similarly grave conduct such as duress to the person. Indeed, the original equitable rule in insurance cases waS that premium should be returned even in cases of fraud, sometimes in the form of a set-off against liability in costs." However, Lord Mansfield declined to follow that approach at common law and adopted the forfeiture rule" that was accepted without demur in subsequent case law" and duly codified in the Marine Insurance Act 1906. 29 Forfeiture probably reflects a desire to adopt deterrent measures against fraud in an environment where contract formation is necessarily based on information transfer and olie party's susceptibility to fraudulent exploitation enhanced. In other words, essentially the same concerns that underpin the existence of the doctri!)e of utmost good faith, with requirements of disclosure that go beyond the protection conferred

22 (1881) 7 QBD 456. " MIA 1906, s 84(3)(a); Feise v Parkinson (1812) 4 Taunt 640; Anderson v Fitzgerald (1853) 4 HLC 484 ar 508; Anderson v Thornton (1853) 8 Ex 425. 24 Carvill America Inc v Camperdown UK Ltd [2005J EWCA Civ 645. [2005J 2 Lloyd's Rep 457. 25 Broad 6- Montague Ltd v South EllSt Lancashire Insurance Co Ltd(1931) 40 LlLRep 328. The survival of such clauses notwithstanding the retrospectivity of avoidance provides a further example of the true nature of avoidance: see 4.156 above. 26 Whittingham v Thornburgh(l690) 2 Vern 206; Do Costa v Scandm(l723) 2 P Wms 170. 27 Wilson v Ducket (1762) 3 Burr 1361, discussed at 1.42 above. 28 Feise v Parkinson (1812) 4 Taunt 640; Anderson v Fitzgerald (1853) 4 HLC 484, 508; Anderson v Thornton (1853) 8 Ex 425. " MIA 1906. s 84(1), (3)(a).

30 Such reasoning would imply that the premium forfeiture rule should apply to non-marine insurance as well as marine, as has recently been indicated to be the case: Swiss Reinsurance Co v United India Insurance Co Ltd [2005J EWHC 237 (Comm), [20051 Lloyd's Rep IR 341. para 53. Were forfeiture confined to marine insurance, the anomalous appearance would be confirmed. 31 MIA 1906, s84(1), (3)(a). " Vandyck v Hewitt (I 800) 1 East 96. 33 The problem cannot arise under a valued policy, since the agreed value conclusively fixes the value of the insured property as between insurer and assured: MIA 1906, s 27(3). 34 For discussion of valued and unvalued policies, see 7.24ffbelow. 35 MiA 1906, s 84(3)(e), (f). The double insurance rule is discussed in more derail at 26.2826.31 below. The recognition of a right to a proportionate return of premium in cases of overinsurance has been stated to originate in a custom peculiar to the marine market and held not to apply outside marine insurance: Wolenburg v Royal Co~operative CollectingSociety (1915) 84 L]KB 1316. 36 Heath Lambert Ltd v Sodedad de Correta}e deSeguros[2003] EWHC 2269 (Comm), [20041 1 Lloyd's Rep 495, para 25, although the policy in issue provided that premium was payable on formation of the insurance contract. On appeal, it was common ground that was the default position in any event: [2004) EWCA Civ 792, [20051 1 Lloyd's Rep 597. para 24. However, nothing turned on this, and it is respectfully suggested to be not correct. 37 [20041 EWCA Civ 792. [20051 1 Lloyd's Rep 597.

220

221

Premiums

Consequences ofFailure to Pay on Time

performance. In the absence of a repudiatory breach, the insurer will, assuming legal proceedings are initiated, be entitled bur confined to interest as compensation for late payment. Late payment before legal proceedings are initiated carries no financial penalty since English common law does not recognize loss of investment opportunity under the heading of general damages." Once legal
proceedings have been initiated, however, statute permits the court to award

to 'paid' indicated that the clause spoke to the time when the obligation arose rather than the time for performance of an already accrued obligation.
6.11

Under the LMP reforms, the contract cannot remain silent with respect to payment of premium. An LMP slip will detail the amount of the premium and premium payment terms in the risk details section. Moreover, a preferred premium payment clause, known as LSW3000, has been promulgated and is widely used. This provides the model for clause 35 in the International Hull Clauses (01/11/03) and is available for incorporation into other marine insurance contracts. With respect to time of payment, clause 35 provides as follows: 35.1 The Assured undertakes rhat the premium shall be paid 35.1.1 in full to the Underwriters within 45 days (or such other period as
may be agreed) of inception of this insurance; or

interest from the date when the premium should have been paid to the date when it is paid. 40

(aj Renunciation
Repudiation by renunciation occurs where one party to a contract declares by 6.15 words or by conduct that it no longer considers itself bound by the contract in some essential respect. The renouncing of the contract must be either by clear and specific communication or by conduct that would lead a reasonable person to conclude that the relevant party did not intend to fulfil its obligations under the contract, either at all or in some significant respect: 'It is not a mere refusal or omission ofone of the contracting parties to do something which he ought to do, that will justifY the other in repudiating the contract; but there must be an absolute refusal to perform his side of the contract.'41 There must be 'an intimation of an intention to abandon and altogether to refuse performance of the
contract'.42

35.1.2 where payment by instalment premiums has been agreed (a) the first insralment premium shall be paid within 45 days (or such orher period as may be agreed) of inceprion of rhis
insurance, and

(b) the second and subsequent instalments shall be paid by the date they are due.
35.6 Where the premium is to be paid through a Market Bureau, payment to the Underwriters will be deemed to occur on the day of delivery of a premium advice note to the Bureau.

6.12 As observed in Chapter 2 above," the defining characteristic of the London

marker is the centralized processing of money and documentation. Once a broker has completed the placement of the risk in rhe market, it sends .the relevant documentation, including a premium advice note, to the central nlarket bureau (called Ins-sure). By virtue of clause 35.6, premium is deemed to be paid on the day of delivery of the premium advice note to Ins-sure.

Non-payment of premiums is unlikely to give rise of itself to renunciation. In 6.16 Fenton Insurance Co Ltd v Gothaer Versicherungsbank WAG," Potter J stated as follows in the context of a reinsurance treaty:
In cases concerned with insurance, where accounts are rendered and paid through the medium of brokers andlor underwriting agents and delays in payment are not infrequent, it seems to me that one could rarely, if ever, infer a repudiatory intention under a treaty of this kind by reason of non-payment of balances simpliciter (by way of distinction from a failure persisted in despite receipt of demands and/or protests).

C. Consequences of Failure to Pay on Time

6.13 The consequences of failure to pay premium on time may be addressed in the

contract. The position at common law will, however, be considered first.

(1) At Common Law

There was, accordingly, no renunciation where brokers failed to account to insurers in respect of premium through error and administrative oversight,44 or where a reinsured failed to pay small periodic balances in its account with a

6.14 In accotdance with general contract law, failure to pay the premium on time

affords the insurer a right of election to treat the insurance contract as discharged only if the failure to pay constitutes a repudiatory breach of contract. This requires either tenunciationof the contracr or a substantial failure of
38

See 2.02, 2.23 above.

39 Page v Newman (1829) 9 B & C 378, 381; London, Chatham & Dover Railway Co v South Eastern &tilway Co [1893] AC 429; President o/India v La Pintada Compania Navigacion SA (La Pintada) [19851 AC 104. 40 Supreme Court Act 1981, s 35A. 41 Freeth v Burr (1878) LR 9 CP 208, 214 per Keating J. Strictly speaking, the innocent party does not repudiate but accept the repudiation of the party in breach. " ibid 213 per Lord Coleridge CJ. 43 [199 Jl 1 Lloyd's Rep 172, 180. 44 Figre Ltd v Mander 11999J Lloyd's Rep IR 193.

222

223

Premiums

Brokers and Premiums

in full to the Underwriters before the notice period expires, notice of cancellation shall automatically be revoked. If not, this insurance shall automatically terminate at the end of the notice period.
35.4 In the event of cancellation, premium is due to the Underwriters on a pro rata basis for the period that the Underwriters are 011 risk but the full premium shall be payable to the Underwriters in the event of loss, damage, liability or expense arising out of or resulting from an accident or occurrence prior to the date of termination which gives rise to a recoverable claim under this insurance.

reinsurer before the balance berween premiums and claims swnng back in its
favour. 45 In contrast, there was a clear renunciation where a provisional liquid-

ator of an insurance company failed to pay rwo insralmems of premium and srated unequivocally that he would not approve any premium payments even if that resulted in a loss of cover."

(b) Substantialftilure ofperfOrmance

6.17 A failure of performance amounts to a repudiation where it goes to the root of the contract. In respect of payment of premium, this occurs in three situations. First, the terms of the contract may provide expressly or by necessary implication that punctual payment is of the essence of the contract. Secondly, the payment obligation may be an innominate term and non-payment has occasioned the insurer serious prejudice. 47 Thirdly, there will be a tepudiation 'where time was not originally of the essence, but one parry has been guilty of undue delay, and the other party gives a notice requiring the contract to be preformed within a reasonable time'.48 This third category may be seen to shade into renunciation, since a failure to respond to a notice in circumstances of undue delay may reasonably be regarded as a statement of a refusal to consider oneself bound by the contract.

35.5 Unless otherwise agreed, the Leading Underwriter(s) designated in the slip or
policy are authorised to exercise rights under this Clause 35 on their own

behalf and on behalf of all co-subscribing Underwriters. Nothing in this

Clause 35.5 shall, however, prevent any co-subscribing Underwriter from exercising rights under this Clause 35 on its own behalf

(2) Premium Default Clauses

6.18 Many insurance conttacts contain clauses requiring premium to be paid within a certain period of time. Payment on time may be stated ro be a condition precedent of cover or, alternatively, failure to pay on time may terminate cover automatically for the future or afford the insurer the option to terminate co;er. 6.19 As already noted, clause 35 of the International Hull Clauses (01/11/03) follows the approach, and indeed adopts much of the wording, of LSW3000. The consequences of failure to pay on time are as follows:
35.2 If the premium (or the first instalment premium) has not been so paid to the

Under the International hull clauses, therefore, payment of premium is not a 6.20 condition precedent to attachment, albeit retrospective, ofrisk. Non-payment of premium gives rise to a right ro initiate a process of cancellation, which is automatically aborted if premium is paid, albeit late, before the expiry of a mandatory fifteen-days' notice period. It is clear from clause 35.4 that cancellation is prospective only and without prejudice to liability for any losses that might have arisen under the policy before the cancellation takes effect on expiry of the notice period. Clause 35.4 softens the common law approach to return of premium in favour of the assured. Regardless of attachment of risk, premium is payable on a pro rata basis only, unless a recoverable loss, whether rotal or partial, has occurred." Clause 35.5 provides for a co-ordinated approach to the instigation ofthe cancellation procedure through leading underwriters while preserving the autonomy of an individual insurer to maintain an independent position.

D. Brokers and Premiums

(1) Liability of the Broker for Premium Where a marine policy is effected through a broker, section 53(1) of the Marine 6.21 Insurance Act 1906 provides that: 'Unless otherwise agreed, the broker is directly responsible to the insurer for the premium.' This reflects a long-standing market custom, articulated by Bayley J in Power v Butcher: 50

Underwriters by the 46th day (or the day after such period as may have been
agreed) from the inception of this insurance (and, in respect of the second and subsequent instalment premiums, by the date they are due), the Underwriters shall have the right to cancel this insurance by notifying the Assured via the broker in writing

35.3 The Underwriters shall give not less than 15 days prior notice ofcancellation
to

the Assured via the broker. If the premium or instalment premium is paid
49 "Where, in contrast, the insurance is cancelled by mutual agreement, International Hull Clauses (01111/03), cl 25 provides for a pro rata monthly net return of premium for each uncommenced month, provided the vessel has not been rendered a total loss from any cause whatever during the period of cover. For return of premium where the vessel is laid up not under repair, see d 39. See also Institute Time Clauses Hulls (1110/83), d 22; Institute Time Clauses

45 Fenton Insurance Co Ltd v Gothaer Versicherungsbank WAG [1991] 1 Lloyd's Rep 172. " Pacific & General Insu,"ne, Co Ltd v Hazell [19971 LRLR 65,82-3. 47 No such prejudice was established in the analog;ous case of Glencore InternationalAG v Ryan (The Beursgracht) [2001J EWCA Civ 2051, [200211 Lloyd', Rep 574, discussed at 2.35 above. " Figre Ltd v Mander [19991 Lloyd', Rep IR 193, 199 per Cresswell ].

Hulls (1111183), cl22: (1111/95), cl23. 50 (1829) 10 B & Cr 329, 339-40.

224

225

Premiums
Now, according to the ordinary course of trade between the assured, the broker and the underwriter, the assured do not, in the first instance, pay the premium to the broker, nor does the latter pay it to the underwriter. But, as between the assured and the underwriter the premiums are considered as paid. The underwriter, to whom, in most instances, the assured are unknown, looks to the broker for payment, and he to the assured. The latter pay the premiums to the broker only, who is a middle-man between the assured and the underwriter. But he is not solely agent; he is a principal to receive the money from the assured and to pay it to the underwriters.

Brokers and Premiums

unknown and geographically remote). 55 Today, however, the custom and fiction maybe rationalized as a response to the market practice for brokers to collect premiums and pay our loss moneys via an account of the insurer, maintained by a centralized accounting system, in which premiums are credited, loss moneys are debited, and the balance of the account is settled at periodic intervals. Such a system creates the risk rhat a broker may become insolvent after receipt of premium from the assured but before settlement of the account on that policy wirh the insurer. Section 53(1) places the risk of loss of premium through the insolvency of the broker on the insurer. In other words, a risk of market failure generated by a system created by the market lies within the market rather than being placed on the market outsider (the assured). (2) Consequences of the Broker's Liability for Premium The full extent of the consequences of the rule that liability for premium rests 6.24 with the placing broker rather than the assured depends on the extent to which one can rely in the modern law upon the fiction invented to support the custom recognized at common law and codified in section 53(1), as opposed to the rule of liability itsel

The principle that the insurer takes the credit of rhe broker in place of that of the assured, enshrined in section 53(1), extends to all marine policies, whether or not containing a recital that the premium has been paid. 51 6.22 Norwithstanding the reference by Bayley J to agency, the basis of the assured's discharge as against the insurer is not technically that the broker is viewed as the insurer's agent for the purpose of receiving the premium in discharge of the paymenr obligarion. Such an analysis would suggest that the premium was regarded as paid once the assured paid the broker, whereas the custom codified in section 53(1) clearly looks upon the premiums as paid as soon as the underwtiter subscribes to the risk even though the assured has not paid the broker. 52 Instead, the broker is deemed by a fiction to have paid the insurer our of its own funds and then to have borrowed an equivalent sum from the insuter, leaving the insurer a creditor of the broker on the fictitious loan. 53 It should, however, be noted that while the fiction provides the basis for the custom that is reflected in section 53(1), it is section 53(1) itself that today governs that liability. It is content to articulate a presumptive rule of liability without reference to ally fiction and ir is doubtful to what extent, if at all, one can extrapolate from a fictitious payment and loan in the modern law. 54 6.23 The commercial custom of the insurer looking to the broker for payment and its supporting legal fiction reflect the historical preference of insurers, where premiums were not paid up front, to extend credit to brokers (who were known, trusted, and accessible should they default) rather than assureds (who were often

(a) Deftult
One clear consequence has already been stated. Where marine insurance is 6.25 placed through a broker, the insurer's sale right to premium lies against the placing broker. The assured has no liability to the insurer at all, even at a secondary level should the broker default. Consequently, the risk of loss by premium through default by the broker, whether by reason of insolvency or otherwise, lies with the insurer. As suggested above, this can be justified as a cost paid for market structures. This incidence of risk of default is illustrated by Universo Insurance Co ofMilan 6.26 v Merchants Marine Insurance Co Ltd,56 in which marine reinsurers claimed premiums in the sum of 1361 17s 6d from the defendant insurers. The latter argued that the premiums were payable to the trustees in bankruptcy of the brokers who had effected the reinsurance and against whom the defendants had an admitted set-off and counterclaim for 633 18s Id. Had the reinsurers succeeded, the defendants would have been liable to pay the premiums in full to the reinsurers and been relegated to an unsecured claim in the brokers' insolvency, there being no cross-claim with which to operate a set-off. However, the

51

Universo Insurance Co ofMilan v Merchants Marine Insurance Co Ltd [1897J 1 QB 205, affd Jenkins v Power (l817) 6 M & S 282, 287; Great Western Insurance Co v Cunliffe (1874) LR

[18971 2 QB 93.
52

9 Ch App 525, 540.

53 Power v Butcher (1829) 10 B & Cr 329, 347. Nso Xenos v Wickham (1863) 14 CB (NS) 435, 456; Universo Insurance Co ofMilan v Merchants Marine Insurance Co Ltd [1897] 1 QB 205, 209, [1897J 2 QB 93, 98-9, 99-100, 101; Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc [199812 Lloyd's Rep 326, 334. 54 Chapman JA) &Co Ltd o Kadirga Denizcilik oe Ticaret[19981 Lloyd's Rep 1R 377, 385. See further 6.24ff below.

5S A comparison may be drawn with the former presumption in general agency law that an agent that contracts on behalf of a foreign principal assumes personal liability on the contract: see Bowstead and Reynolds on Agency (17th edo, 2001) para 9-020. 56 [1897J 1 QB 205, affd [1897J 2 QB 93.

226

227

Premiums

Brokers and Premiums

there is no premium liability for the insurer to set off, since the insurer is deemed ro have been paid. In addition, the liability of the broker qua borrower
under the fictitious loan cannot impeach any entitlement under the insurance

defendants' argument was upheld, rendering them liable only ro the trustees and in respect only of the premiums net of the amount of the set-off, thereby leaving the reinsurers to prove in the brokers' insolvency.

(b) Set-off 6.27 A second consequence of the premium liability rule in section 53(1) is that an insurer is precluded from raising a defence of set-off of unpaid premium against a claim on the insurance where the policy was placed through a broker. At common law, the courts have consistently denied any set-off because common law set-off is confined ro liquidated debts or money demands ascertainable with certainty at the time of pleading, 57 while a claim under an insurance policy is classified as an action for unliquidated damages for breach of contract. 58 Equitable set-off, in contrast, is not so limited and requires only that the cross-claim be sufficiently connected ro the primaty claim as ro justify denying immediate and unabated recovery on the primaty claim. 59 A claim for unpaid premium would cleatly so impeach an action by the assured on the same policy. 60 However, both forms of set-off require mutuality of capacity in which the parties incurred the opposing obligations." In marine insurance, with the exception of mutual insurance, this mutuality is absent where the risk is placed through a broker. As between insurer and broker, the broker is liable to the insurer as a principal while loss moneys are owed by the insurer directly to the assured, although they may be collected by the broker qua agent of the assured. 6' As between insurer and assured, it is clear from section 53(1) itself that there is simply no liability for premium that the insurer can set offagainst a liability on a claim.
6.28 It might, moreover, be added that the underlying fiction would indjcate that

contract. This, however, forms no part of the reasoning in any of the set-off cases, which may suggest that one should not so extrapolate from the fiction.

(c) Premium default clauses

Premium default clauses have already been discussed in principle. 63 The ques- 6.29 tion here is whether such clauses are compatible with the broker's liability for premium. The difficulty is that, according to the fiction underpinning the liability rule stated in section 53(1), as between assured and insurer, the premium is regarded as paid, even if no value has in fact passed from the broker ro the insurer. Arguably, therefore, unless the contract contains wording displacing the liability rule, the insurer cannot raise any defence against the assured based on non-payment of premium. On this basis, indeed, in Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc,64 Rix] held that a clause terminating cover automatically for non-payment of premium was ineffective in English law. 65 Questions have been raised, however, by the Court of Appeal concerning such
reasoning.

57

Hanak v Green [1958] 2 QB 9,17; AxelJohmon Petroleum AB v MG Minerai Group AG

[1992] 1 WLR 270.

58 Castelli v Boddington (1852) 1 EI & B166; Luckie v Bushby (1853) 13 CB 864; Pellm (E) & Co v Neptune Marine Insurance Co (1879) 5 CPD 34. There would appear, however, to be no reason in principle why insurance law should reject the concept of common law abatement as recognized in the law of sale of goods: F & f( Jabbour v Custoditm Of Israeli Absentee Property [1954) lWLR 139, 144. Moreover, under valued policies, although claims for partial losses have been classified as unliquidated (Castelli; Luckie), in the context of total losses the loss is liquidated and the assured carries no burden of proving quantum: MIA 1906, s 27(3); Irving v Manning (1847) 1 HLC 287,307; Ventour;, v Mountain (The ltalia Express) (No 2) [199212 Lloyd's Rep 281, 291-2. Adjustment of an unliquidated claim does not render it liquidated because the assured must still prove the amount of the claim. The adjustment is admissible as evidence of quantum, but it may be undermined by proof ofa mistake: F & KJabbourat 143. " Rawson v Samuel(1841) Ci& Ph 161, 178-9. 60 But not an action on a different policy: Hargreaves (B) Ltd v Action 2000 Ltd[1993] BCLC 1111. " Middkton v Pollock (1875) LR 20 Eq 29; Zernco Ltd vJerrom-Pugh [1993] BCC 275. 62 See 22.116 below.

The weakness in the reasoning is that the liability rule in the modern law is 6.30 staturory and the relevant staturory provision enunciates the rule with no reference ro the fiction. 66 In Heath Lambert Ltd v Sodedad de Correta)e de Seguros,67 a marine reinsurance contract provided that the premium was warranted payable ro underwriters within 90 days of attachment of risk. The issue appealed was precisely when premium fell due on the true interpretarion of the clause for the purpose of determining when the broker's right to seek reimbursement from the assured arose and whether on the facts it was time barred. The issue, therefore, was when the obligation to pay arose under the contract, rather than when the premium was regarded as paid. Whether the warranty had any effecr was not in issue. Of course, if the ficrion were to be applied, the premium would be deemed to have been paid so that the warranty could never be broken. In this context, Clarke L], delivering the judgment of the Court, suggested that care should be taken before relying on the fiction underpinning the liability rule and was clearly sceptical that the fiction could be invoked to deny any possibility ofa breach of warranty. 68

See 6.18ff above. 64 [1998J 2 Lloyd's Rep 326, 335. See also Rix LJ in Charman v New Cap Reinsurance Corporation Ltd [2003J EWCA Civ 1372, [2004J Lloyd's Rep lR 373, para 10. 66 Chapman OA) & Co Ltd v Kadirga Denizcilik Ve Ticaret [1998] Lloyd's Rep 1R 377. 385. 67 [2004] EWCA Civ 792, [200511 Lloyd's Rep 597. 66 ibid para 23.
63
65

228

229

Premiums
6.31

Brokers and Premiums

payment h"-,, in fact been made by the broker" or of the fact that the broker, by reason of insolvency, is unlikely ever to pay the insurer.'4 The contract between broker and "-,,sured may, however, require the "-,,sured to place the broker in funds in time to pay the premium to the insurers in accordance with the
insurance contract. In an era of electronic funds transfer, subject to contrary

Moreover, the fiction of payment must yield to express contrary stipulation. Thus, where the policy contains a provision that deals expressly wirh the time when payment will be deemed to occur, rights and liabilities must be determined on the basis that premium remains unpaid until the specified time. In this connection, it is worth noting again that clause 35.6 of the International Hull Clauses (01111103) and LSW3000 provide that, where premium is to be paid through a market bureau, payment is 'deemed to occur on the day of delivery of a premium advice note to the Bureau'. It follows that, prior to such day, premium must be regarded as not paid, so that the fiction of payment can pose no impediment to the right to initiate the cancellation procedure under clause 35.2."

intention, that requires the brokers to receive the funds 'a very short time before' the premium is due to the insurers." By way of enforcement of its indemnity rights, the broker may rely on either or 6.34 both of the brokers' lien Or a brokers' cancellation clause. The former is discussed in Chapter 5 above. 76 The latter is a clause in the insurance contract that permits the broker to cancel the insurance if the assured fails to pay the premium to the broker in accordance with the contract between broker and assured. A well-drafted brokers' cancellation clause should confer authority on the broker to cancel the insurance, should specifY whether cancellation is intended to operate retrospectively, should make it clear that such a cancellation right is not taken by way of alternative to or in substitution for the brokers' lien," and should address the question of rights to premium paid and payable "-" between broker and insurer. Premium is generally regarded as earned in full as
soon as the insurer comes on rlsk78 and, unless the clause provides to the con-

(d) Payment ofpremium and issuance ofpoliey 6.32 The Marine Insurance Act 1906 envisages that the assured will pay the premium to the insurer as a condition precedent to recovering in respect of any casualty.
Thus, no contract of marine insurance is admissible in evidence unless

embodied in a policy in accordance with the Act, and the insurer is not bound to issue the policy until payment or tender of the premium.'o Section 54 of the Act provides that, where a policy is effected through a broker, an acknowledgement in the policy of receipt of premium is conclusive "-" between insurer and assured." Where the policy is placed by a broker, however, the fiction would suggest that premium is regarded as paid and the insurer must issue the policy, obviating the need for section 54. Consequently, it must again be doubted whether the simple statement ofliability in section 53(1) should be regarded as supporting this extended consequence. (3) The Position as Between Broker and Assured
6.33 A problem may arise as between broker and "-,,sured. The broker may find itself

trary, prospective cancellation will leave the insurer liable to the "-,,sured for any losses that may already have arisen and with a full entitlement as against the broker to the premium. (4) Displacing the Brokers' Premium Liability Rule The rule of the brokers' liability for premium articulated in section 53(1) 6.35 applies only subject to contrary intention. However, given that the ordinary marine rule under section 53(1) proceeds on the basis of a relationship 'between parties with independent rights and obligations, clear words are required to bring about a fundamental change in that relationship and in the status of the broker'." Thus, a term in the policy to the effect that the "-,,sured promises to

liable to the insurer for the premium and yet incur difficulty in obtaining reimbursement from the assured. On ordinaty agency principles, the broker is entitled to an indemnity from the assured, the right to which arises as soon as premium is payable under the insurance contract" regardless of whether any

" See 6.19-6.20 above. 70 MlA 1906, ss 22, 52. " jenkins v Power (1817) 6 M & S 283, 287. In the old SG policy (see 7.02 below), underwriters subscribed 'confessing ourselves paid the consideration due unto us for this assurance by the assured'. On the substantive issue, it is likely that the relaxation of the statutory requirements for a document to qualify as a policy renders oflinle import the status as concurrent conditions of the obligations of the assured to"pay the premium and the insurer to issue the policy. It is difficult to see why any preliminary memorandum ofagreement, such as a slip, would today fail to qualify as a policy 'in accordance with the Act': see 3,65ff above, 72 Heath Lambert L,d v Sodedad de Correraje de Seguros [20041 EWCA Civ 792, [2005J Lloyd's Rep 597, para 20.

73 Dalzell v Mair (1808) 1 Camp 532; Heath Lambert Ltd v Sociedad de Corretaje de Seguros [2003J EWHC 2269 (Comm), [2004J 1 Lloyd's Rep 495, para 25. 74 Chapman (fA) 6- Co Ltd v Kadirga Denizcilik Vi? Tictrre, [1998J Lloyd's Rep IR 377. 75 Hearh Lambert Ltd v Saciedad de Corrertrj, de Seguros [2004] EWCA Civ 792, [2005J 1 Lloyd's Rep 597, para 37 per Clarke LJ. 16 See 5.76ff above. 11 On loss of a security granted by law through contracting for a different security, see Capital Finance Co L,d v Stokes [1969J 1 Ch 261; Burston Finance v Speirway L,d [1974J 1 WLR 1648 (equitable lien lost by contracting for an alternative security for outstanding purchase price). 18 See 6,02 above. 79 Chapman (fA) 6- Co Ltd v Kadirga Denizcilik Vi? Ticarer [1998J Lloyd's Rep IR 377,386 per Sir Brian Neill.

230

231

Premiums
pay premium to the insurers is insufficient to displace the ordinary rule, as it will be construed as a promise that will be discharged in accordance with market custom.so In Chapman ijA) & Co Ltd v Kadirga Denizcilik 1,0 Ticaret,81 the Court of Appeal accepted that a premium warranty whereby mstalm;nts of premium were to be paid 'to underwriters within 60 days of due dates could provide the basis of an argument for displacement of sectIOn 53(1). The Court held, however, that it failed to do so in the context of the pohcy as a whole. In particular, the policy contained a brokers' cancellation clause, which would be redundant unless the ordinary rule applied."
6.36 In the conjoined appeal of Chapman ijA) & Co Ltd v C~ios Breeze Mari~e, a

Mutual Insurance
a solvent insurer might be expected to honour the agreements, an insurer's .liquidator would not be bound to do so, Moreover, the operation of section 53(1) precludes the assured from refusing reimbursement of any payment by the broker on the ground that it was made voluntarily."

E. Mutual Insurance
The essence of the agreement between a mutual insurance association and irs 6.38 members is the pooling of losses and liabilities actually sustained, in contrast with the commercial purchase of indemnity through payment of a premium which predicates no necessary connection between the money paid by the assured and the volume of losses incurred during the currency of the policy. Accordingly, it has been observed that any reference to premium in the context of mutual insurance must be treated with care: 'the foundation of the contract is not the payment ofa premium, but an agreement that each member should bear his aliquot share of the losses of the year covered by the policy'." This sharing of liabilities together with the expenses of the association is effected through a series of advance and supplementary calls on the members. Prior to the commencement of any policy year, the club directors determine the 6.39 level of advance premium payable by reference to a percentage of the club's estimated liabilities for the following year. Each member contributes according to the premium rating and tonnage of its entered vessels. 89 Should the advance calls prove inadequate to meet the liabilities that ultimately materialize in the course of that year, a supplementary call will be levied eithet during or after the end of the policy year. Since time needs to elapse after any given year of account for liabilities incurred in the course of that year to be reported to the club and quantified with certainty, individual policy years cannot be closed, and a decision made on supplementary calls, for an appropriate period of time, often three years." In order to avoid unexpectedly large supplementary calls in particularly bad years, associations may accumulate reserves of surpluses on calls in good years. 91 All calls are payable in such instalments and on such dates as specified by the directors.

deferred premiums clause provided that the brokers were speCially authonsed ... to receive payment on behalf of the underwriters', The Court ofAppeal held that the onus was on the party so alleging to demonstrate an agreement to effect fundamental change in the ordinary scheme ofobligations, and 'the presence of a few discordant words in a clause dealing with the payment 0 f'lOstal ments ' was :nadequate,83 Moreover, on the facts, the premiums clause w.as. inconsistent ,;.ith the cover note, which reaffirmed the ordinary rule by provldmg that premIUm was payable by the assured to the brokers." (5) MaIket Recapitalization
6.37 In practice, insurers mayor may not seek to enforce the liability arriculated in

section 53(1). Under market agreements in 1996 and 1997, 10 return for participation by brokers in a financial plan to recapitalize the Lloyd:s market, insurers in both the Lloyd's and companies matkets agreed for a penod ofCfive ears85 not to enforce the statutory liability except in three circumstances, ~amely where the broker: (a) knowingly did business with a client likely to default; (b) failed to inform insurers of a known hkely default; or (c) fatIed to mal<e every endeavour to collect premiums and pass them to the ins~rers wI:hout delay. Howevet, while the agreements may operate as self-de~ymg ordmances, it is unlikely that they oust section 53(1) as a matter. of law s:nce 8~hey ~re not agreements between insurer and assured as the subsection reql11res. WhIle

Universo Insurance Co ofMilan v Merchants Marine Insurance Co Ltd [1897] 2 QB 93. " [1998J Lloyd's Rep IR377, 386. 82 See also 'llelos Group Ltd v Harbour Insurance Services Ltd [1997] 2 Lloyd's Rep 461, 464; Heath Lambert Ltd v Sodedad de Corretafe de Seguro, [20021 EWHC 2269 (Comm), [20041 1 Lloyd's Rep 495, para 22. 83 [1998J Lloyd's Rep IR 377,387. . ' 84 The CMos policy also contained a brokers' cancell.ation clause, although It was not relIed on by the Court ofAppeal in rejecting the argument for displacement ofMIA 1906, s 53(1). 8S The agreement was not renewed on expiry. . , " OKane v Jones (The Ma>tin P) [2003J EWHC 2158 (Comm), [2004J 1 Lloyd s Rep 389,
80

87
88
89

Heath Lambert Ltd v Sodedad de Correta)e de Seguras [2002J EWHC 2269 (Comm), [2004J

1 Lloyd's Rep 495.

para 226.

Williams v British Marine Mutual Insurtmce Association Ltd(l886) 57 LT 27,29 per Wills J. Additional per voyage premiums may be levied in respect of certain high risk voyages. 90 Provision also exists in club rules for the levying of'carasrrophe' or 'overspill' calls in respect of any liability of the association in excess of the General Excess Loss Reinsurance Contract, as to which, see 16.11 below. 91 For a similar scheme in the cOntext of employers' liability, see Thomas v Richard Evans & Co Ltd[1927J 1 KB 33, 52-3,

232

233

Premiums
6.40 Since association members do not pay premiums as such, rhe provisions of rhe

Marine Insurance Act 1906 relating to premiums are inapplicable to murual insurance 92 The rule in section 53(1) that the insurer looks to the broker for premium and not to the assured has no relevance to mutual insurance. Financial obligations for calls are owed to the club by the members and liabiliries for losses covered by rhe terms of the club's rules are owed by the club to the members. In principle, therefore, either the association or the member can invoke a right of equitable ser-off. In Williams v British Marine Mutnal Insurance Association Ltd," the Queen's Bench Division held a club member entitled to ser off the balance of an outstanding claim against supplementary calls relating to the same policy year. Outside insolvency, however, the existence of such rights of set-off is subject to the rules of the association. Accordingly, the rules of the United Kingdom P&I club, for example, expressly preserve the association's rights of set-off against the members while denying any right to the members to set off, withhold, or delay payment of any sum due to the association by reason of any claim against it. 94

7
AN INTRODUCTION TO MODERN MARINE COVER

A. The SG Policy

7.02 7.03 7.07 7.08

B. The Separation of Marine and

War
(l) (2) (3) (4)

Risks Cover

C. Modern Cover
The policy
Cargo cover Hull insurance The euisdem generis clause

(1) The significance of an agreed value (2) Determining whether a policy is valued: agreed value v sum insured (3) Re~opening an agreed value E. Burden and Standard of Proof (1) General principles (2) 'All risks' cover (3) Exclusions

7.26 7.33 7.38 7.48 7.48 7.54 7.58

F. War Risks and Additional Premium Areas

6.41

7.10 7.15
7.23

War risks are underwritten both by the London market and mutual insurance associations, and a similar approach to premium is adopted." War risks present a relatively modest risk except in areas of military tension or actual conflict, where the risk is high, volatile, and impossible to rate on an annual basis. Consequently, war risks cover is granted in return for an appropriately modest premium, but provision is made for the exclusion of such areas of high risk as may be designated at any time. Such an area is termed an additional premium area (or APA). An owner that wishes to trade in such an area is required to notify the insurer in advance and pay the appropriate, often substantial, additional premium assessed by reference to the prevailing level of risk. Compliance with the obligation to notify is often a condition precedent to the insurers' continued liability on the policy, so that breach autOmatically terminates the assured's
cover.

D. Valued and Unvalued Policies

In the modern London market, insurance is customarily written on the basis of 7.01 a simple basic form to which is attached an appropriate standard set of more detailed clauses. It was not always thus.

A,

The SG Policy

MIA 1906,,85(2). (1886) 57 LT 27. 94 For confirmation of the right to exclude non~insolvel1CY set~off rights by contract, see Coca-Cola Financia! Corp v Finsat Internationa! Ltd [19981 QB 43, 50-3. 95 Maritime Transport Overs~as GmbH v Unitramp (The Antaios) [1981] 2 Lloyd's Rep 284, 291; Black King Shipping Corp v Massie (The Litsion Pride) [19851 1 Lloyd', Rep 437, 440.
92 93

The agreements concluded in Lloyd's coffee house in the eighteenth century for 7.02 the assumption of risk in return for payment of a premium developed into a standard form contract, the SG policy.' This policy developed on an entirely ad hoc basis, risks being amended and exceptions deVeloped in response to evolving law and practice. Moreover, a complex way of presenting the cover evolved. Although the SG policy itself spelt out the cover granted in terms of a list of risks and exceptions, ad hoc clauses were developed by individual insurers or brokers and, from the late nineteenth century, the Institute of London

1 Although there is no clear evidence, it is generally assumed that 'SG' stands for 'ship and goods'. The policy is reproduced in MIA 1906, Sch I.

234

235

An Introduction to Modern Marine Cover

Underwriters also developed and promulgated a series of standard clauses for particular types of tisk, known as 'Institute clauses'. 2 These mote detailed statements of the cover would be appended ro the SG policy. However, as both the SG policy and the standard clauses had the force merely of contractual terms, they were open ro amendment. A particulat tisk might be crossed out, or an endorsement slip might be attached to the policy or standard clauses with glue. The result was hardly a model of clarity. As early as 1791, Buller J remarked that 'it is sufficient to say that a policy of assurance has at all times been considered in courts of law as an absurd and incohetent instrument'. 3 The SG policy nevertheless survived until the 1980s.

The Separation ofMarine and war Risks Cover

United States. The watching marine underwriters were acutely aware of the power of the navies of both Ftance and the United States, and a General Meeting of Lloyd's, held on 15 June 1898, resolved to insure war and marine risks separately. In the following year it was detetmined that, in the absence of contrary agreement, all marine policies should include an FC&S clause. The insurance companies following suit, this became the practice of the London market. Although subject to revision, the FC&S clause endured until the 1980s. The principle of separation was further teinfotced, and further resttictions 7,04 on the writing of war risks insurance introduced, in the 1930s. On 26 April 1937, the German airfotce, fighting on the side of the Nationalist forces in the Spanish civil wat, attacked the defenceless, historic Basque town of Guernica. For over three hours, bombers drojJped a mixture ofhigh explosive and incendiaty devices, while fightet aircraft machine-gunned the population. The entite town was destroyed and over fifteen hundred inhabitants were killed. It was an unprecedented demonstration of the horrific and devastating impact of the use of air power against a built-up area. The atrocity was ptominently repotted in the Btitish ptess. 6 Underwriters tealized that unrestricted writing of war risks insurance could expose the market to catastrophic losses that could thteaten irs solvency. Consequently, in order to guard against unsustainable aggregation of losses, the following year the market adopted the War and Civil War Risk Exclusion Agreement. 7 This agteement stipulates that all 'loss, damage or liabilities occasioned by, contingent upon, or resulting directly or indirectly ftom War and Civil War' shall be excluded from all contracts of insurance and reinsurance by means of approved exclusion clauses. The agreement does, however, further provide for a list of exceptions, within which war risks may be insured. Marine third party liability insurance is excepted without condition. Catgo may be insured againSt war risks within the limits laid down by the War Risk Waterborne Agreement, 8 while hull wat risk insurance must comply with the War Risks on Hulls Agreement. 9 The mechanics of the sepatation were, nevertheless, far from immediately 7.05 apparent. A typical example is furnished by The Anita. lO The policy in the usual SG form had the FC&S clause deleted and incorporated the Institute War and Strikes Clauses (Hulls-Time). Clause 1 of these clauses provided that,

B. The Separation of Marine and War Risks Cover

7.03 In the seventeenth centuty, it was customary to insure against both marine and

wat tisks in the same policy. This tradition endured into the nineteenth century, when 'it was still thought to be at once the duty and the advantage of a marine underwriter to cover war as willingly as he covered collision, fire or srranding'.' By the nineteenth century, however, the market had come to appreciate that the
two categories of risk constituted separate species and a movement towards

separate coverage commenced. This fitst took the form of building upon the 'FC&S clause', an exclusion of liability for the risks of capture and seizure. 5 The exclusion dates from tension berween Britain and France in 1739 and was developed through the Napoleonic wars. In the early nineteenth century, the infant United States navy demonstrated the limits of the protection even/ the British navy could extend to merchant shipping against determined predators. 1862 saw the invention of rhe propelled torpedo and 1893 the launch by the French navy of its fitst submarine. Moreover, the value of ships and cargo had multiplied manifold since the Napoleonic Wars. There was, however, no formal market response until 1898. In that yeat, a small group of French explorers, undet the command of Captain Jean Baptiste Marchand, planted a French flag in the village of Fashoda in the Sudan, then under rhe dominion of Great Britain. The resulting diplomatic incident threatened to develop into war between Britain and France until Marchand was ordered to withdraw. In addition, the 1890s saw a period of considerable tension between Britain and the

2
3

See 1.20 above. Brough v Whitmore (1791) '4 TR 206,210. It has also described as 'perhaps past praying for'

(Trade Indemnity Co Ltd v Workington Harbour & Dock Board [19371 AC 1, 17 per Lord Atkin) and an 'obscure, loosely drawn and inaccurate instrument' (Rickards v Foresta! Land, Timber & Railways Co [19421 AC 50, 78 per Lord Wrighr. . 4 D Gibb, Lloyd's afLondon (1957) 221. S Literally, 'free of Capture and seizure',

6 Flwo of the fouf foreign journalists who were able to repOft from the scene in the immediate aftermath worked for British newspapers and a third for the Reuters agency in London. The coverage is described, and the main article in 'The Times' quoted in full, in Southworth, G'uernica! Guernica!(l974, University of California Press) Book 1, eh L : T~e current version is dated 1 April 1982, although it has been amended subsequently. DIscussed at 17.22 below. 9 Discussed at 17.49 below. 10 Panamanian Oriental Steamship Corp v Wrtght (The Anita) [1970] 2 Uoyd's Rep 365.

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subject to certain exclusions, the insurance coveted the tisks excluded ftom the SG policy by the FC&S clause. This provoked the following cry of despair from Mocatta J: 11
It is probably too late to make an effective plea that the traditional ~ethods of insuring against ordinary marine risks and what arc usually called war rIsks should be radically overhauled. The present method, certainly as regards war risks insurance, is tortuous and complex in the extreme. It cannot be beyond the wit of underwriters and those who advise them in this age of law reform to devise more straightforward and easily comprehended terms of cover. However the form taken by the war risks cover here, since clause 1 of the Institute clauses only covers the risks excluded from the SG form by the Fe and s clause, requires one to sec what

Modern Cover
specific set of war and/or strikes clauses into the policy. The cover provided by war and strikes clauses reflects the war and strikes exclusions in the marine clauses, but significant differences do exist. With respect to nomenclature, the merget in 1998 of the Institute of London Underwtiters with the London International Insurance and Reinsurance Market Association to become the International Underwriting Association of London (the IUA) led to a further revision of the policy and to subsequent standard clauses being titled (International' clauses. (1) The Policy The SG policy was replaced in 1983 by the simple Institute of London Undet- 1.08 writets 'Companies Marine Policy' and similar 'Lloyd's Marine Policy' (known as the MAR forms). These had four pages. Apart from institutional crests and legends and space for formal embossment, the fitst page cattied the insurers' promise to insure coupled with a stipulation that the liabiliry of each parricipating insurer was limited to the proportion for which it had subscribed. The second page consisted of a schedule that identified the assured, detailed the essenrial particulars of the marine adventure insured, and stated the premium and any special terms. The third page was for underwriters to initial their lines. The fourth page carried little more than institutional ctests and legends. In addition, an Institute or Lloyd's 'Matine Schedule' detailed the policy number, the name of the assured, the period of insurance and the premium. Alternative J andJ(A) forms, with complementary J andJ(a) Schedules, were similar but also contained a ftaudulent claims provision and, in the case of the J fotm and schedule, an exclusion of war risks. In 1991, both Lloyd's and the Institute of London Underwriters introduced a 1.09 revised version of the MAR forms. This contained an exclusive jurisdiction clause in favour of the English courts, reiterated in new Lloyd's and Institute Mar91 Schedules. Subsequently, in 1999, the advent of the International Underwriting Association of London saw the Insritute MAR forms (but not the Lloyd's MAR forms) replaced by a new, four-page 'IUA Marine Policy' to be used in conjunction with an IUA Marine, Mar91, JOt J(a) Schedule. The new policy contained fewer substantive provisions and less information. It contained the same basic promise to insure and space for underwtiters to initial their lines. Otherwise, the only substantive provisions were statements on both the face of the policy and the third page limiting each insurer's liability to the proportion each has underwtitten. 14 There was no jurisdiction clause in the IUA policy

cover is given by the SG form on the facts, which would be excluded from it by
the fc and s clause, for it is only in respect of such exclusion that the plaintiffs can recover under the present policy.

1.06 Thus, only if the risk in question was prima jade within the SG cover but then excluded by the FC&S clause was it within the war risks cover, subject to further exptess exclusion or modification. Further condemnation came from the United Nations Conference on Trade and Development in its 1978 report on marine

insurance: 12
The very concept of granting an insurance cover and excluding it in the same

document (the SG Form), and then excluding it again in attached clauses, which
override the first document in any case, and then granting it again (either in another document or as an additional attachment) by reinstating the original exclusion, is so complicated and contorted that the uninitiated is confused by the very procedure of insurance without even considering the complicated draftsman-

ship. The very complexity of the subject matter calls for the most simple and
straightforward procedures.

C. Modern Cover
1.01 The 1980s saw the introduction of a new system for the provision of marine cover, together with new standatd Insritute clauses. The SG policy was abandoned. In addition, while testrictions on covet against war tisks remained, the FC&S clause as the device for separating war risks insurance was also abandoned in favour of a simpler disrinction between 'marine' and 'wat and strikes' risks. All sets of clauses coveting marine risks expressly exclude enumerated war and strikes perils." War and/or strikes cover is provided by incotporating a

ibid 372. Para 123. For discussion of the report, see K Goodacre, 'The UNCTAD Report on an international legal base for marine insurance contracts, as related to Hull Claims' [1979]
11
12

LMCLQ315.
13

For discussion of the exclusions, see 15.70ffbelow.

14

See further 22.04 below.

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itself. Finally, the advent ofins-sure Services Ltd in 2003,15 saw the replacement of the IUA documentation (but, again, not rhe Lloyd's documentation) by the substantively identical Ins-sure 'Companies Marine Policy', together wirh Ins-sure Mar91, J and J(a) Schedules. 16 In modern marine practice, most hull and cargo business is underwritten on Mar91 terms, with J and J(a) documentation employed for rhe insurance of 'specie, namely fine art and antiquities. 17 (2) Cargo Cover
7.10 New cargo clauses were launched on 1 January 1982. They remain in use today.

Modern Cover
loss. This is not true in point of law, bur it is cerrainly the case that the perils covered are quite likely ro generare a total loss of the insured cargo. It is also the case thar common causes of partial loss of cargo, most norably rheft, are not covered under the (C) clauses bur are covered under rhe (A) clauses. The rypes of cargo for which the (C) clauses might be regarded as adequate include bulk commodities and items of large, second-hand machinery. Apart from rhe general cargo clauses, a range of more specialized clauses exist to 7.13 cater for cargoes that carry particular risks by reason of rheir own properries, or rhe way rhey are rraded. Specialisr clauses, often agreed wirh a relevant trade association, accordingly exist for bulk oil, coal, commodities," FOSFA rrades," frozen food (excluding frozen meat), frozen meat, jute, narural rubber, and timber. All are modelled on the general cargo clauses with appropriate amendments, usually to rhe range of covered perils or exclusions. All the cargo clauses contain exclusions covering war risks and srrikes risks. 7.14 Cover againsr such risks is provided by separate Instirure War Clauses (Cargo) and Institute Strikes Clauses (Cargo)." Unlike the position in hull insurance, the two rypes of risk are addressed independenrly because the duration of cover is shorrer for war risks than for strikes risks. 24 The specialist cargo clauses are complemented in some cases by specialist war clauses and in all cases by specialist srrikes clauses. (3) Hull Insurance Standard clauses in the hull marker have rradirionally distinguished between 7.15
insurance on a time basis and insurance on a voyage basis. 25 In practice, how-

General cover is provided by three basic sers of clauses. The Cargo Clauses (A) provide 'all risks' cover, subjecr to a significant list of specified exceptions. The Cargo Clauses (B) and (C) are confined ro named perils, subject to rhe same exclusions plus one more, the list of covered perils in (C) constituring a sub-set of the list in (B).18 In practice, the (B) clauses are never used. Also covered under all the cargo clauses are liabilities in salvage and general average, and expenditure reasonably incurred in endeavouring to averr or minimize loss or damage covered under rhe policy.19
7.11

Normally, cargo will be insured subject to the (A) clauses. Where, however, there is no appreciable risk to the cargo orher than by reason of an accident befalling the vessel or other conveyance in which it is carried, the (C) clauses will suffice. These cover:'o
1.1 loss of or damage to the subject-matter insured reasonably attributahle to

1.1.1 fire or explosion 1.1.2 vessel or craft being stranded grounded sunk or capsized 1.1.3 overturning or derailment of land conveyance
1.1.4 collision or contact of vessel craft or conveyance with any external object other than water 1.1.5 discharge of cargo at a port of distress, 1.2 loss of or damage to the subject-matter insured caused by

ever, ships are normally insured on a time basis, wirh voyage policies reserved for cases where the ship has to undertal<e a one-off voyage of a particular nature, such as a voyage to a repair yard or a last voyage to be scrapped. The new Instirute hull clauses thar were launched on 1 October 1983 to accompany the new MAR form reflected these two bases of cover. In addition to the basic Insritute Time Clauses Hulls (1/10/83) and Institure 7.16 Voyage Clauses Hulls (1110/83), a number of variants, based on these models, were promulgated to carer for particular rypes of hull risk. Fishing vessels and yachts have their own dedicated clauses. 'Port risks' clauses cater for vessels that eirher work within the defined geographical limits of a port, such as tugs and pilor boats, or will be laid up, perhaps for repair, within the port for a period of

1.2.1 general average sacrifice 1.2.2 jerrison.

7.12 It is sometimes said that the (C) clauses insure againsr toral rather than partial

15 16

See 2.23 above. The Ins~sure Companies Marine Policy and Mar91 schedule are reproduced in Appendices 4

and 5.
17 Specie is underwritten in th.e cargo market, but often requires more extended on~land cover than is permitted for standard cargo insurance (as to which, see 17,11-17.27 below). 18 The (C) perils are listed below. Some are discussed in the context of named perils in hull policies in Ch 10 below. 19 For discussion of such cover, see Ch 24 below. 20 The causation language and some of the perils listed are discussed in later chapters.

21 22
23 24

Meaning such cargoes as cocoa, coffee, fats and oils not in bulk, metals, and sugar. Oils, seeds, and fats. For discussion of the perils covered under war and strikes clauses, see Chs 13 and 14 below. See 17.22 below. 25 See 1.20 above.

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time. Further sets of clauses offer cover for resrricted ranges of perils or, conversely, elements of cover additional to that offered under the basic time and voyage clauses.
7.17 From the insurers' perspective, however, the 1983 clauses emerged as flawed in one important respect, namely that cover was often present in circumstances

Modern Cover
liabilities arising out of collisions, salvage, and general average, and the incurring . of expenditure in the course of reasonable efforts to avert or minimize the occurrence of an insured peril." A wide range ofliabilities are not insured, cover for which will be obtained from a P&1 club.'o The fact that the market policy concentrates on the ship as a physical asset rather than liability leads ro the market policy often being referred to as a 'hull and machinery' policy. While this accurately reflects the primary focus of the market policy, its extension to a number of significant liabilities and expenses should not be overlooked. Part 2, comprising clauses 34 to 44, contains 'Additional Clauses', including, inter alia, optional extra elements of cover. These clauses had no direct counterpart in the 1983 clauses, although most provisions reflect or reproduce other standard market clauses. Part 3, comprising clauses 45 to 53, contains 'Claims Provisions'. 31 These are entirely new standard clauses. While rhe Inrernarional Hull Clauses (01/11/03) have been more warmly 7.21 received rhan the 1995 clauses, ir would be erroneous to think of them as the standard London marker form. The reality is that all thtee fotms ate used in greater or lesser measure for time policies. From an underwriter's perspective. the 1995 clauses remain attractive because they offet the strongest protection against sub-standard shipping. Where, thetefore, a shipowner cannot demonsttate a proven ttack record of running a good quality fleet, eithet because of its claims record Ot because it is new to the industry, underwriters will seek to use the 1995 clauses. 32 From an assured's point of view, the International Hull Clauses offer the widest cover, a lowet thteshold for a constructive roralloss,33 and more lenient provisions relating to navigation limits. With tespect ro substandatd shipping, they offet underwriters greater protecrion than rhe 1983 clauses but less than the 1995 clauses. It remains to be seen to what extent the International hull clauses will displace the Instirute clauses. The International hull clauses are designed for standard time policies. No vari- 7.22 ants for voyage policies, specific types of vessels, or diffetent Ot mote limited perils were produced. Such insurance continues to be written on the Institute clauses. Moreover, as with cargo, all standard hull forms contain war and sttikes risks exclusion clauses. In contrast with cargo insurance, however, cover against such risks is conferred under one combined set of clauses. The clauses generally

whete the root problem waS the sub-standatd condition of the ship, often due ro inadequate maintenance. Since it is extremely difficult for insurers ro invoke a common law defence of unseaworthiness in time policies,26 the Joint Hull Committee decided to revise the standard hull clauses to insert express contractual protection against sub-standard maintenance, at the same time taking into account certain changes in the law of salvage and general average. The result was a new complete set of hull clauses launched on 1 November 1995.
7.18 The new clauses were not widely used: the drafting process had not been charac-

terized by appropriate consultation of assureds, and shipowners with high standards and good records objected to being apparently stigmatized by reason of an undifferentiated approach. Moreover, the hull market at the end of 1995 was extremely soft" and foreign competition welcoming to assureds disenchanted with London, so that insurers were unable to insist on adoption of the new clauses.
7.19 Nter the dust had settled, the Joint Hull Committee returned to the question of

new clauses under the auspices of the IDA. Nter a more sensitive drafting process involving careful consultation, a new set of clauses, the International Hull Clauses (J/11/02), was introduced for time policies. At the same time, the Joint Hull Committee made it clear that it would keep the clauses under regular review. The 2002 clauses received a warmer welcome, although their drafting gave rise to a few issues. The Joint Hull Committee responded by launching the following year the International Hull Clauses (01/11/03), a slightly modified version of the 2002 clauses.
7.20 The 2003 clauses are divided into three sections. Part 1, comprising clauses 1 to

33, contains the 'Principal Insuring Conditions'. This consists of an amended and teorganized version of the 1983 clauses. The cover granted insures against loss of or damage to the insured ship by a series of named perils,28 certain

26
21

See 19.30ff below.

29 For cover against collision liability, see Ch 12 below; for cover against salvage and general average liabilities and expenditure to avoid or minimise loss, see Ch 24 below, 30 The cover provided by P&I clubs is discussed in Ch 16 below. 31 For discussion of claims, see' Ch 22 below. 32 Albeit with the due diligence proviso curtailed: see 11.67 below. 33 See 21.80 below.

In other words, there was excessive capacity in the market for the volume of hull risks seeking cover. '" 28 The named perils are discussed in Chs 10 and 11 below. There is no standard 'all risks' policy for hulls in the London marker. Such policies are occasionally developed and offered by individual insurers or consortia of insurers, but thedominanr approach remains use of the standard forms with their named perils.

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employed in the matket ate the Institute Wat and Strikes Clauses (Hulls-Time) (1/10/83).34 (4) The Eiusdem Generi< Clause
7.23 The SG policy, having stipulated various perils, continued 'and of all other

Valued and Unvalued Policies

the acquisition of the insured propetty.41 From the insuret's perspective,42 an .agteed value that exceeds the market value, as is almost invariably the case, will produce a higher premium. Moreover, a higher agteed value may reduce an insurer's exposure. Where policies contain a franchise clause,43 rendering the insurer liable only for losses that exceed a stipulated percentage of the agreed value, the higher the agreed value the greater a loss will have ro be before the insurer is liable. Likewise, where a policy makes the standard for a constructive total loss the agreed value or a percentage thereof,44 a higher agreed value reduces the likelihood of a casualty qualifying as such a loss. (1) The Significance of an Agreed Value Where a policy is unvalued, the measure of indemnity seeks to restore the 7.26 assured to the financial position enjoyed as at the commencement of risk. The measure of indemnity is calculated by refetence to the insurable value of the insured property, and the insurable value is the market value the insured property ttuly has at the time of inception of the tisk plus certain charges and expenses. 45 An agreed value ttansfotms the financial batgain. The insurable value of the insured property is fixed by contract in a manner binding on the assured and insuret." Consequently, in the event of loss of or damage ro the insured property, the agreed value generally serves as the yardstick for calculation of the measure of indemnity'" The contract remains one of indemnity, but of indemnity according to its terms. Thus, where the property is totally lost, the measure of indemnity is the agreed value. Where the property sustains a partial loss, the measure of indemnity is generally" that proportion of the measure of the indemnity that corresponds to the proportion of the market value of the property that has been lost. It should be noted, however, that at common law the agreed value is irrelevant in determining whether the loss sustained is total or partial. Subject to contrary intention,49 that is a matter for the common law

perils, losses, and misfortunes, that have or shall come to the hurt, dettiment, or damage of the said goods and merchandises, and ship, &c, or any part thereof. This clause provided cover for any loss caused by a peril not within the foregoing list but similar thereto. 35 The presence of such a clause served on occasion to relieve the judiciary of nice questions of causation and definition of various perils. 36 Such a clause was a feature of previous versions of the Institute clauses but does not feature in any of the modern clauses produced from 1'982 onwards, commensurately reducing the cover provided.

D. Valued and Unvalued Policies

7.24 All marine insurance policies are either valued or unvalued." 'A valued policy is

a policy which specifies the agreed value of the subject-matter insured.'" In practice, the vast majority of marine policies are today valued. Section 27(3) of the Marine Insurance Act then provides that: 'Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.'
7.25 This institution of a contractual valuation rendered by law conclusive as

between assured and insurer benefits both parties. 39 From the assured's point of view, an agreed value dispenses with any need to prove the true market value of the insured property'o and allows the assured to insure for a sum in excess of the market value, guatanteeing that insurance proceeds will be adequate to finance acquisition of a replacement asset or dischatge financial obligations attached to

34 Subject to amendment to comply with the War Risks on Hulls Agreement, discussed at 17.49 below. 35 MIA 1906, Sch 1, r 12. Some instances of application of the eiusdem genens clause are mentioned in subsequent chapters. See generally Arnould, Law ofMarine Insurance and Average Sir Michael Mustill and] Gilman (eds) (16rh edn, 1981) para 823-5. " eg see Butler v Wildman (1820) 3 B & Aid 398. 37 MIA 1906, s 27( 1). Unvalued policies are sometimes referred to as 'open' policies. This is to be distinguished from open covers, discussed. at 2.31 above. " ibid, s 27(2). 39 Thames & Mersey Marine Insurance Co Ltd v Gunftrd Ship Co Ltd [1911}AC 529, 548~9. 40 Lidgett v Secretan (No 2) (1871) LR 6 CP 616, 627.

41 See Glafki Shipping Co SA v Pinios Shipping Co (The Maira) (No 2) [198612 Lloyd', Rep 12, discussed at 7.29 below. 42 See General Shipping & Forwarding Co v British Generalinsurance Co Ltd (1923) 15 LlLRep 175,176-7. 43 See, eg the Institute freight clauses. 44 As is the case with the Institute and International hull clauses: see 21.80 below. " MIA 1906" 16. 46 Lewis v Rucker (1761) 2 Burr 1167, 1171 per Lord Mansfield, in the COntext of cargo insurance where the insurable value is the prime COSt of the insured goods plus certain expenses: 'The effect of the valuation is only fixing, conclusively, the prime cost. If it be an open policy, the prime COSt must be proved: in a valued policy, it is agreed.' 47 See generally Ch 23 below. 48 Damage to a vessel that is repaired before expiry of the insurance is an exception: see 23.16 below. 49 Present in Institute and International hull clauses in the context of constructive total losses: see 21.80 below.

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principles governing the types of loss. 50 The agreed value then affects the measure of indemnity yielded by whatever loss has occurred. In addition, the presence of an agreed value does not dispense with the need for a genuine insurable
interest. 51

Valued and Unvalued Pollcies

During this time, rhe freighr market from New Orleans declined considerably, but the court refused to reopen the valuation when the vessel and most of the freight were lost on the delayed return voyage. Again, in The Maira (No 2)," a loan secured by a mortgage on a ship required 7.29 that the ship be insured for 130 per cent of the total secured amount. When the
insurance came to be renewed, the insured value so required was just under

7.27 To the extent of any discrepancy between the true loss susrained by the assured

as at the time of the casualty and the agreed value, marine insurance law clearly departs from a true indemnity principle, 52 a departure sanctioned on the ground of commercial convenience 53 and that is not viewed as infringing prohibitions
on wagering. The presence of a genuine insurable interest answers any accus-

ation of wager, and the rule against wagets does not prohibit a contractual quantification of the measure of indemnity. 54 Lord Mansfield considered that a valuation in a cargo policy merely fixed the prime cost of the goods, as if admitted by the insurer at trial. 55 An analogy was also drawn between establishing a contractual yardstick for the measure of indemnity through an agreed value and fixing the damages to be paid for breach of contract through a liquidated damages clause. While such damages in principle are assessed by reference to the loss in fact caused by the breach, the common law of contract permits the parties, subject to the constraints of the penalty jurisdiction, ro avoid disputes about loss by establishing the damages payable by express contractual stipulation. There was no reason to deny a similar convenience and freedom to the
parties to an insurance contract. 56

US$12 million while the market value of the ship was only US$4,875,000. The ship's managers obtained insurance for US$10 million. When the ship was subsequently rendered a total loss, the assured successfully claimed against the managers for the shortfall between the insurance obtained and the value required by the loan, despite rhe fact that the policy proceeds were sufficient to discharge the outstanding liabilities on the secured loan and the shortfall represented a windfall to the assured. Insurance for 30 per cent above mortgage liabilities was stated by the arbitrator to be common practice, even where the value of the insured ship was considerably less than those liabilities, and rhis practice was duly endorsed by the courts. The value of a ship fluctuates according to the freight markets. Over the lifetime 7.30 of a policy, a ship's value may rise to reflect sttong rates and fall when cargoes are rare and rares are weak. Under a valued policy, however, the measure of indemnity for a total loss remains constant. Regardless of the true value of the vessel at the time of the loss, the assured will be entitled to the agreed value. This borh avoids any dispute as to rhe precise value of rhe vessel at the time of loss and, at a time of weak freight rates, presents the unscrupulous shipowner with the rempting prospect of a financial boon if the vessel is conveniently lost. Many cases involving overt allegations ofscuttling or where insurers put assureds 1'0 proof of the cause of loss are contested against a backdrop of a general downturn in trade or parricular financial problems affecting the assured.

7.28 The result is that an assured under a valued policy may recover considerably in

excess of the loss in fact sustained. Over-valuation provides no ground of irself to defeat a claim. 57 Outside the rare circumstances where the agreed value can be reopened, 58 rhe agreed valuarion is binding upon the insurer even where considerably inflated through erroneous assumption. In Barker vJanson, 59 rhe court refused to reopen a ship's valuation agreed on an undamaged basis, despite the fact that, unknown to the parties, the vessel had been so severely damaged by a storm as to be rendered a constructive total loss. The Main" concerned insurance on return freight from New Orleans reasonably valued. On rhe outward voyage, the vessel sustained damage requiring repairs and resulting in delay.

An agreed value is conclusive of rhe insurable value of the insured property not 7.31
only in the context of calcularing the measure of indemnity but for all monetary purposes under the policy. Ir affects rhe distribution of subrogation recoveries" and the rights of the assured in cases of double insurance. 53 Ir also provides the basis for the operation of average in cases of under-insurance64 and of contracrual provisions that a certain amount or percentage of rhe insured property shall remain uninsured. 65 Moreover, when the Institute or International hull clauses refer to the 'insured value' in rhe context of derermining whether the

See 21.78-21.79, 21.85-21.86 below. MIA 1906, s 75(2); Lewis v Rucker (1761) 2 Burr 1167, 1171. 52 Irving v Manning (1847) 1 HLC287. 53 Lidgett v Secretan (No 2) (1871) LR 6 CP 616, 627-8. $4 Lewis v Rucker (l761) 2 Burr 1167. ss ibid. The prime cost together with specified expenses is the insurable value of goods: MIA 1906, s 16(3). 56 Irving v Manning (I 847) I HLC 287, 307, 57 Herringv]anson(I895) I Com Cas 177. 58 See7.38ffbelow. 59 (1868) LR3 CP 303. 60 [1894] P 320.
50

51

--- - - - - - - - - - - - - - - - - 61 Glajki Shipping Co SA v Pinios Shipping Co No 1 (The Maira) (No 2) [1985] I Lloyd's Rep 300, affd [1986] 2 Lloyd's Rep 12, 17. 62 See 25.67-25.71 below. 63 See 26.19-26.27 below. 64 See 23.49-23.50 below. 65 See 18.80 below.

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vessel has become a constructive total loss or determining the measure of 66 indemnity for untepaired damage, the reference is to the agreed value.

Valued and Unvalued Policies

while no particular form of wording is required to create an agreed value, the fact that one part of the contract contemplates an agreed value will not necessarily confer that status upon a figure in another part of the policy that does not describe itself as an agreed value or carry wording orherwise linking it to the value of the insured property, In Wilson v Nelson," the policy stated that the insured ptoperty 'shall be valued at as under', the last two words being added in handwriting. There was, however, no statement of value or any figure at all in the body of the policy, but rhe sum '1,300' was written in the margin. The Court of Queen's Bench held that this figure could not, without more, be interpreted as more than a sum insured. Thirdly, a figure expressed to be a sum insured may also operate as an agreed value alrhough clear wording to rhat effect will be required. In the non-marine case of Elcock v Thomson," a policy contained a sum insured but also ptovided rhat: 'The sum set opposire each item in this specification has been accepted by the underwriters and the assured as being the true value of the ptoperty insured and in the event of a loss the said ptoperty will be assumed to be of such value and will be assessed accordingly.' When rhe insured property was damaged by fire, Morris J held rhat the measure of indemnity should be calculated on a valued policy basis. These principles are further illusttated by Kyzuna Investments Ltd v Ocean 7.35 Marine Mutual Insurance Association (Europe).74 A yacht policy provided rhat whether the yacht had become a constructive total loss should be calculated by reference to 'the sum appearing in the schedule hereto as rhe value of the insured property'. The policy also incorporated the Institute Yacht Clauses (1111185), which twice refer to the 'insured value'. However, the main insuring clause provided that insurers would indemnifY 'up to the amounts andlor limits contained herein' and the only figure in rhe schedule was described as a 'sum insured'. The assured contended rhat, in the context of the policy as a whole, the phrase 'sum insured' was to be understood as denoting an agreed value. The argument was rejected. Authority clearly established that the phrase 'sum insured' served to denote a ceiling on recovery and was distinct from an agreed value, and there was no evidence to displace that understanding of the phrase. Despite the definition of constructive total loss, the inescapable fact was that the schedule referred to in that definition ptovided for a sum insured, the ordinary meaning of which was reinforced by the main insuring clause. Those provisions in the incorporated Institute clauses that depended for their operation on an agreed value were simply inapplicable. Similar facts presented themselves in Thor Navigation v Ingosstrakh Insurance Co 7.36

7.32 An agreed value is, however, a creature of contract and its conclusiveness is

confined to the assured and insurer as parties to the insurance contract in which it is found. As between the assured and a third party, liabilities will be quantified on market values. In Steamship Balmoral Co Ltd v Marten:' the insured vessel's liability to contribution to general average and salvage was adjusted on the basis of its market value of 40,000 rather than its agreed value of 33,000. A majority of the House of Lords had no doubt that the adjusters had been correct to employ the market value as the contributory value, since the agreed value could bind only parries to the insurance contract. (2) Determining Whether a Poliey is Valued: Agreed Value v Sum Insured

7.33 A distinction needs to be drawn between an agreed value and a sum insured. The latter serves to fix the maximum exposure of the insurer on the policy and,
as a consequence, will affect the level of premium. It also provides the basis for the division of liability between assured and insurer in cases of underinsurance.'. While an agreed value performs rhese functions, it goes further in valuing the insured property. A sum insured fulfils no valuation function and, consequently, has no role to play in calculating the measure of indemnity or in any other context where the value of the insured property is relevant. A policy containing a sum insured and no agreed value is unvalued, and the measure of indemnity will be calculated by reference to the insurable value.

7.34 Whether a particular figure in a policy represents an agreed value or a sum

insured depends upon the true interpretation of the policy in questiclll." The authorities, however, support the following propositions. Firsr, a provision that, in the event of a loss, insurers will indemnifY 'not exceeding' or 'up to' a specified amount will be interpreted as a sum insured.'o Likewise, the phrase 'amount insured' is, without more, to be equated with 'sum insured'.71 Secondly,

66

Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Association (Europe) [2000]

IJoyd's Rep IR 513. 67 [19021 AC 511. 68 Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd's Rep 440, 450; Continental Illinois National Bank 6- Trust Co ofChicago v Bathurst (The Captain Panagos DP) [1985] 1 Lloyd's Rep 625,630; Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] EWHC 19 (Comm), [20051 1 IJoyd's Rep 547, para 26,
Kyzuna lnvestmertts Ltd v Ocean Marine Mutual Insunmce Association (Europe) [2000] Lloyd's Rep IR 513; Thor Navtgation Inc v Ingosstrakh Insurance Co Ltd [2005] EWHC 19
69

(Comm), 12005] 1 IJoyd's Rep 547. 70 BlascheckvBussell(1916) 33 TLR 74; Quorum v Schramm [20021 Lloyd's Rep IR292. 71 Continental Illinois National Bank & Trust CoofChicago v Bathurst (The Captain Panagos DP) [1985J 1 IJoyd's Rep 625.

n (1864) 33 LJQB 220.

73

[1949J 2 KB 755.

74

[20001 Lloyd's Rep IR 513.

248

249

An Introduction to Modern Marine Cover Inc. 7S A leading Russian marine insurance company concluded a hull and machinery policy incorporaring the Insrirure Time Clauses (1/11195) and conraining the figure of US$1.5 million expressed ro be a 'sum insured'. The insured shipowners believed that rhe policy was valued and argued that the figure of US$1.5 million policy should be undersrood and applied as an agteed value. It was held, however, that Kyzuna was indisringuishable and rhat the policy was unvalued. In particular, the statement in rhe Institute clauses rhat 'This insurance is subject ro English law and practice', coupled with the invatiable practice of the English market ro insute hull and machinety on a valued basis, provided no basis fot displacing the clear meaning of the phtase 'sum insured' and regarding it instead as code fot an enrirely different concept. The practice, aftet all, of the English market was ro adopt a valued basis through use of phrases such as 'agreed value' or 'valued at', and not by reference ro a sum insured.
7.37

Valued and Unvalued Policies

not vety far to seek' but that commercial concerns may render 'inrelligible and legitimate' an agreed value 'going much beyond' the market value of the insured property.80 Indeed, while the statutory reference to a fraud exception is well supported by judicial dicta," examples of its application are rate. One example is provided by Haigh v de La Cour," in which the assured induced the insurer to agree ro a value by producing forged invoices and bills of lading. 83 More commonly, insurers will endeavour to re-open an excessive valuarion by 7.40 alleging that the overvaluation constituted a breach of a pre-formation duty of utmost good faith, in which context the state of mind of the assured is irrelevanr. If the extenr of the overvaluation is ro constitute an actionable nondisclosure, the insurer has ro establish three things: first, that the assured knew of the overvaluation or should have known of it in the ordinary course of business; secondly, that the overvaluarion was material according ro the standard of the prudenr underwriter; and, thirdly, that the non-disclosute of the overvaluation induced the actual insurer inro the conrract. Given that valued policies routinely overvalue insured property, it is clear that the fact of overvaluarion would not of itself sarisfY the tests of materiality and inducemenr. Overvaluation requires disclosure only where its extenr is so great that it calls for an explanation when judged against normal commercial practice. In The Grecia Express," where the insured vessel had allegedly been excessively overvalued by its managers, Colman J stated that:
.. . where the proposed value is consistent w.ith reasonably prudent ship management, the excess over market value cannot be material to the risk, whatever its precise extent. That which would render the overvaluation material would be the want of any reasonable explanation for the disparity consistent with prudent ship management. Accordingly, in cases where a reasonable explanation is established the true market value does not have to be disclosed.

The result of Kyzuna and Thor Navigation is that, where a policy contains a figure expressed to be a 'sum insured' and does not clearly provide that that figure is also ro operate as an agreed value, the policy will opetate on an unvalued basis. The only exceprions ate where the evidence establishes either that the phtase 'sum insured' was adopted by mistake and the policy should be tecrified ro substitute 'agreed value' for 'sum insured' or the phrase 'sum insured' was employed by the parties as meaning'agteed value' and an esroppel by convention tequites that it be so tead. Such argumenrs were advanced unsuccessfully in Thor Navigation. 76
(3) Re-opening an Agreed Value

7.38 Although an agreed value is generally conclusive evidence as between assured

and insurer of the insurable value of the insured property, there ate exceptions. Section 27(3) of the Marine Insurance Act 1906 provides that the conclusiveness of the agreed value is subject to the absence of fraud and to the othet provisions of the Act. It is now clear that the relevanr staturory provisions include those relating ro pre-formation utmost good faith. 77 Moreover, as noted above," valued policies remain subject ro the rules on insurable interest so that a gtOSS overvaluation that crosses the grey line ftom valuation to pure speculation will render the policy void as a waget. 79
7.39 It has been observed that 'Where there is heavy over-valuation fraud is, a priori,

More generally: 'It is only where the disparity [between the agreed and market values] cannot be justified on reasonable commercial grounds that it ought to be disclosed.'''

7S

76 77

[20051 EWHC 19 (Comm), [20051 1 Lloyd's Rep 547. On rectification, see 8.77ffbelow and on estoppel by convention, see 8.58 below. Inversiones Manria SA v Sphere Drake Insurance Co pI!: (The Dora) [1989] 1 Lloyd's Rep

80 Thames & Masey Marine Insurance Co Ltd v Gunfird Ship Co Ltd [191 I] AC 529, 542 per Lord Shaw. See also Barker v Janson (1868) LR 3 CP 303, 306 per Bovill C} 'An exorhitant valuation may be evidence of fraud, but when the transaction is bona fide, the valuation agreed upon is binding.' 81 ibid. See also Lidgett v Secretan (No 2) (1871) LR 6 CP 616, 629; Elcock v Thomson [1949J 2 KB 755, 760. 82 (1812) 3 Camp 319. 83 See also Eagle Star Insurance C'o Ltd v Games Video Co (eVe) SA (The Game Boy) [2004] EWHC 15 (Comm), [2004J 1 Lloyd's Rep 238.
M Strive Shipping Corp v Hellenic Mutual \tilr Risks Association (Bermuda) Ltd (The Grecia Express) [2002J EWHC 203 (Comm), [2002J Lloyd's Rep IR 669, para 478. 85 ibid para 479.

~n
78

See 7.26 above.

79

[onides 0 Pender (I 874) LR 9 QB 531 at 536. See 7.42 below.

250

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An Introduction to Modern Marine Cover

7.41

Valued and Unvalued Policies

insured it initially for 2,000, subsequently increasing the valuation on renewal to 2,500. Roche J held that the assured had overpaid when buying the yacht, but was prepared to accept that the initial valuation, albeir optimistic, was not commercially excessive and reflected the price the assured hoped to obtain on a resale. However, by the time of the increase of the valuation on renewal, the assured had repeatedly failed to resell the yacht and was well aware that 2,500 was at least double the true market value. Roche J held that this overvaluation was excessive and should have been disclosed. Again, in Gooding v White,90 cargo probably worth no more than 2,000 was insured at a value of 5,000. According to Pickford J, it was unnecessary to decide whether the overvaluation was part of an attempted insurance fraud, as the insurers alleged, or merely reflected an unrealistic estimate of the cargo's profitability. The overvaluation was excessive and, therefore, required disclosure whatever its explanation.

Conversely, an overvaluation that is inconsistent with reasonable commercial practice raises questions about the nature of the risk and, as such, is one that, if disclosed, a prudent insurer would take into account in assessing the risk and one that the actual insurer could legitimately claim would have led to a different decision on the acceptability of the risk or the terms on which to write it. An insurer is entitled to know that an agreed value has an abnormal basis, not least
since, without explanation, a prudent insurer would be concerned that an over-

valuation that defies explanation on commercial grounds might suggest an enhanced risk of a casualty being procured in order to claim on the policy. Indeed, it was common ground in The Grecia Express 'that the only possible basis for materiality is that excessive valuation suggesrs the risk of moral hazard'."
7.42 It should be noted that the test for materiality does not require such a level of

overvaluation as to render the agreed value pure speculation. Overvaluation to that extent transcends questions of disclosure since the insurance will be open to attack as a wager. The thresbold for materiality of overvaluation is lower. Thus, in Ionides v Pender," goods with a cost price ofJess than 8,000 were the subject of insurance on cargo and profits valued at approximately 14,000 and orher insurances worth 2,500. In particular, a quantity of spirits costing 973 was valued at 2,800. The assured argued that this valuation was justified because of the extreme ptofitability of the spirit, expected to be further enhanced by an imminent heavy import duty. The trial judge directed the jury that overvaluation was not excessive unless the contemplated level of profitability was greater than could be expected under any circumstances that could be reas~n ably contemplated. The jury found that the overvaluation was excessive, that the evidence was insufficient to establish a fraudulent intent, and that the ,excessive valuation was a material fact not disclosed to the underwriters. The Court of Queen's Bench refused the assured's application for a new trial on the ground of a misdirection with respect to overvaluation. It was held that the judge's direction was 'perhaps ... too favourable to the assured, as it makes the question, whether there was an excessive valuation or not, depend on whether the valuation was so high as to amount in part at least to a wager' .88 A distinction,

Thames & Mersey Marine Insurance Co Ltd v GunfOrd Ship Co Ltd" concerned 7.44 the analogous problem of over-insurance by double insurance instead of by an excessive valuation. A combination of hull, freight, and disbursements policies produced a cumulative overvaluation of 21,800 in excess of a true value of 11,400. The hull policy contained an agreed value of 18,500 in respect of a ship worth 9,000. The House of Lords held that this overloading of insurance was material. Indeed, even overlooking the overvaluation on the hull policy, the remaining cumulative overvaluation generated by two ppi policies on disbursements, one ofwhich benefited the ship's managers, was still material. Lord Shaw quoted a witness for the insurers as condemning the vessel as 'insured fOr loss and not againstloss'." According ro Lord Robson, once the level of insurance is such that, even allowing for any sum necessary for reinstatement, those who own and control the insured property stand to make a handsome profit in the event of a loss, 'the incentive to care over the safety of the ship begins to be substantially affected, and the insurers are entitled to form their own opinion as to how far they will trust the assured under such circumstances'. 93
In contrast, expert evidence in The Dora" established that 'an assured insuring a 7.45 yacht will put forward the value he subjectively believes the yacht ro have. More particularly, the purchaser of a yacht will naturally insure the yacht for the price he pays.''' On this basis, Phillips J concluded that 'where a yacht owner insures for the price he has paid, a discrepancy between the insured value and the open market value is not material.'96 On the facts, therefore, the insurer was unable ro avoid the policy because the assured failed to disclose that rhe market value of

therefore, arises between overvaluation that is pure speculation and renders the insutance vulnerable as a wager and that which is excessive, which, albeit not fraudulent, suffices for a defence of non-disclosure.
7.43 A number offurther examples of material overvaluation may be given. In Piper v

Royal Exchange Assurance,89 the assured purchased a yacht for 1,000 and
so (1913) 29 TLR312. " [1911] AC 529. 92 ibid 545. " ibid 550. 94 lnversiones Manria SA v Sphere Drake Insurance Co pic (The Dora) (1989J 1 Lloyd's Rep

ibid para 474. 87 (1874) LR9 QB 531. as ibid 536 per Blackburn J, delivering the judgment of the Court. " (1932) 44 ULRep 103.
86

69,92. 9S ibid per Phillips J.

96

ibid.

252

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An Introduction to Modern Marine Cover

the yacht was US$80,000 less than the agreed value of US$480,000. It is unclear to what extent the same apptoach applies to commercial vessels where the value is less a matter of personal opinion and more a reflection of trading opportunity.
7.46 Similarly, there will be no breach of the pre-formation duty of disclosure where

Burden and Standard ofProof

a non-fraudulent misrepresentation would, therefore, require that the insurer

the difference between the agreed and market values represents an honest and reasonable estimate of the consequential loss the assured is likely to susrain from the loss of the insured property. In The Grecia Express,97 a ferty with a market value ofUS$4 million was insured under a policy with an agreed value ofUS$6 million. That value was subsequenrly increased to US$8 million. Given that the vessel could be expected to generate an annual ptofit of about US$2.5 million and that wete the vessel lost at the commencement of the season, a ptemium ptice would have to paid for a teplacement, there was no basis to conclude that the incteased agteed value was matetial to the motal hazard in suggesting that the assuted was contemplating the possibility of a ftaudulent claim.
7.47 It will be appatent from the fotegoing discussion that the allegation btought

against the assured is genetally framed as non-disclosute of excessive ovetvaluation tather than being couched in terms of a misrepresentation, although in The Dare?' Phillips J referred to 'the representarion made as to the value of Dord. Ir is suggested that non-disclosure is indeed the apptopriate analytical tooL Actionable misrepresentations are divided into statements of facr or opinion. Any representation being made as to the commercial legitimacy of the proposed value can only be regarded at face value as a statement of opinion. By virtue of section 20(5) of rhe Marine Insurance Acr 1906, such a sratementis true if made in good faith. Liability for a false Statement of opinion depends, therefore, on proof of fraud. Clearly, if fraud can be esrablished, the agreed value can be re-opened. However, as demonstrated above, fraud is rately the basis for re-opening an agteed value. At common law, in approptiate citcumstances one can look behind a statement of opinion to an implied underlying reptesentation of the fact of the existence of teasonable grounds to justifY the opinion. This petmits liability to arise at least in cases whete the opinion has been attived at negligently, albeit not in cases of simple error. However, in Economides v Commercial Assurance Co plc,99 the Court of Appeal held that the wotding of section 20(5) ptecludes the implication of such an underlying representation in the context of insurance contract law. Impugning an agreed value on the basis of

esrablish rhat a facr had been wrongly stated. Bur whar is the fact represented by a proposed agreed value? Given the acceptance of considetable overvaluation as often commercially legitimate, a proposed agreed value amounts to a proposal fot the financial basis of the conttact tathet than any representation of fact regatding the matket value of the insuted propetty. The commetciallegitimacy of any overvaluation must be regatded as a matter of opinion. 1Oo Conceivably, the assured could be regarded as impliedly stating that any overvaluation lies within the tange of commetciallegitimacy. Howevet, establishing the inaccuracy of such a statement tequites a judgment on a mattet of opinion, namely what is commetcially legitimate in the citcumstances, and Economides holds in essence that an inaccurate opinion cannot be held against an assuted unless advanced ftaudulently. It seems difficult to avoid the conclusion that any attempted tefOtmulation of a ptoposed agteed value in the fOtm of a statement must fail as an inditect attempt to rendet an opinion statement actionable beyond the natrow limits that Economides holds that section 20(5) permits. No such difficulty atises in the context of the pte-fotmation duty of disclosure. The assured is required to disclose {every material circumstance' and overvaluation in excess of that which is commetcially teasonable can clearly constitute a 'citcumstance'.

E. Burden and Standard of Proof

(I) General Principles It is always incumbent upon the assuted to prove accotding to the civil law 7.48 standatd of proof of a balance of probabilities that the loss the subject of the claim was caused by a petil insuted against under the policy. Courts ate genetally reluctant to decide cases purely on the incidence of the burden of proof. 'OI However, unless an assured can demonstrate on a balance of probabilities, fitst, that an event happened that qualifies as a covered petil and, secondly, that that event was causative of the loss in the manner dictated by the causation wotding
in the contract, the insurer

will win without having even to endeavour

to

establish that the rtile cause of the loss was an event not coveted by the policy, much less to succeed in so doing. The importance of the burden of proof was teaffirmed by the House ofLotds in 7.49

97 Strive Shipping Corp v Helknit Mutual 'U'lar Risks Association (Bermuda) Ltd (The Grecia Express) [2002J EWHC 203 (Comm), [2002J Lloyd's Rep IR 669, paras 445-480. 98 Inversiones Manria SA v Sphere Drake Insurance Co pte (The Dora) [1989] 1 lloyd's Rep
~,n

99

[19981 QB 587, discussed ar 4. 139ffabove.

100 Eagle Star Insurance Co Ltd v Games Video Co (GVC) SA (The Game Boy) [2004J EWHC 15 (Comm), [2004] 1 Lloyd's Rep 238, para 118. 101 Aquarius Financial Enterprises Inc v Certain Underwriters at Lloyd's (The Delphine) [2001] 2 Lloyd's Rep 542, para 19.

254

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An Introduction to Modern Marine Cover

A vessel loaded with sugar sank in calm weather off the Algerian coast in deep water. Claiming for a loss by perils of the sea, the assured shipowners alleged a collision with an unidentified submerged submarine. It was found that the ship sank because of the inflow of water through an aperture in the shell plating in the port side. The evidence did not permit a holding as to whether the ship had been seaworthy when embarking upon the voyage. While conceding the inherent improbability of the assureds' explanation for this inflow, Bingham J held in the assureds' favour on the basis that the insurers' alternative explanation, namely a loss by ordinary wear and tear, was unsustainable on the evidence. The Court ofAppeal dismissed the insurers' appeal, albeit on the basis that it was not necessary to establish the precise nature of the operative sea peril. The insurers then appealed to the House of Lords. This time, they were successful.
102

Burden and Standard ofProof

issues through a decision on substance. In an exceptional case whete that is not possible, the court should generally provide a detailed explanation of why that is SO.105 Secondly, the detective's maxim applies only once all televant facrs are known, 7.51 petmitting elimination of all possible explanations except one. On the facts, some significant information was not available. Thitdly, 'the legal concept of proof of a case on a balance of probabilities must be applied with common sense'. If a fitst instance judge, as a tribunal of fact, finds that an explanation is improbable, it cannot then with common sense be held that the assured has established it to the requisite standatd. An explanation cannot at the same time be improbable and more likely than not. 'OG It is inhetent, however, in the standatd of proof on a balance of probabilities that 7.52 the assured is not requited expressly to disprove any alternative explanation raised by the insurer no matter how imptobable. Pute conjecture on the part of the insurer will not prevent a court ftom concluding that rhe loss has been proved by supportive citcumstantial evidence adduced by the assured. The line between surmise and legitimate inference may not be easy to draw,107 but, where the probabilities support one view, a court is both justified in drawing a firm conclusion and obliged so to do notwithstanding the existence of a contrary possibility. 1as The assured may succeed in proving only that parr of a loss sustained was caused 7.53 by a coveted peril. In such a case, it is in principle incumbent upon the assured also to establish what proportion was so caused. Thus, in Kelly v Norwich Union Fire Insurance Society Ltd, 109 damage was occasioned by two incursions of water, the tetms of the policy extending only to the second. As appottionment of loss between the two incutsions was impossible, the assured tecoveted nothing."o

The Popi M

7.50 The House of Lords accepted that the defence of ordinary wear and tear had not been substantiated. However, defending insurers were under no obligation to prove a cause ofloss not covered by the policy. On the evidence, the lowet courts had not been justified in inferring a loss by perils of the sea. Even the precept of Sherlock Holmes that 'when you have eliminated the impossible, whatever temains, however improbable, must be the ttUth"03 failed to petsuade. Fot the lawyer, the fictional detective's aphotism has thtee weaknesses. First, the judge does not always have to solve the case:
.. . the judge is not bound always to make a finding one way or the other with

regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any ,

averment made by him has failed to discharge that burden. No judge likes to decide cases on burden of proof if he can legitimately avoid having ro do so. There
are cases, however, in which, owing to the unsatisfactory state of the evidence or

otherwise, deciding on the burden of proof is the only just course for him to take. 104

Deciding a case on the burden of proof is, however, an option of last resort. A court should always strive to arrive at findings of fact to enable it to dispose of
105 106

Stephens v Cannon [20051 EWCA Civ 222, [20051 CP Rep 31, para 46. [1985) 1 WLR 948, 956. See also Lamb Head Shipping Co Ltd v Jennings (The MartI)

[19941 1 Lloyd's Rep 624, discussed at 10.30, 10.41 below. Other perils of the sea cases decided
against the assured on the burden of proof include Cobb & Jenkins v lIotga Insurance Co Ltd of Petrogrltd (1920) 4 LlLRep 130, 178; Mitrovich Bros & Co v Merchants Marine Insurance Co Ltd
102 Rhesa Shipping Co Ltd v Edmur"ls (The PopiM) [198312 Lloyd's Rep 235, affd on different grounds [198412 Lloyd's Rep 555, rvsd [198511 WLR 948. The case is discussed in more detail

in the context of proof of loss by perils of the sea at l0.33ffbelow. 103 See Sir Arthur Conan Doyle, The Sign ofFour, Ch 6, in the context of the method of entry to the deceased's bedroom adopted by his killer, an Andaman Islander named Tonga, Since he could not have entered through the"door (locked), the window (inaccessible) or the chimney (toO small) and could not have been concealed in the room (no place for concealment), it was deduced that he had to have entered through a hole in the roof. 104 [1985] 1 WLR 948, 955-6 per Lord Brandon, See also Campania Naviera Martiartu v

(1922) 12 LlLRep 451, (1923) 14 LlLRep 25; Miceli v Union Marine & GeneralImnrance Co Ltd (1938) 60 LlLRep 275; Ne"r (NE) & Co Ltd v Licemes & General Insurance Co Ltd (1944) 77 LlLRep 202.
107

As to which, see Kerr vAyr Steam Shipping Co Ltd[1915] AC 217, esp the speech of Lord
Campania Maritima afBarcelona v Wishart (1918) 23 Com Cas 264; Munro, Brice (} Co v

Shaw.
108

Royal Exchange Assurance Corp [1923) 1 KB 650, 657.

FW Marten (1920) 2 LlLRep 2, (1920) 36 TLR 241; United Scottish Insurance Co Ltd v British Fishing Vessek Musual w"r Risks Association Ltd (The Braconhush) (1945) 78 LlLRep 70. 109 [19891 2 Lloyd's Rep 333. See also Stanley v Western Insurance Co (1868) LR 3 Ex 71. 110 But see Birds Cigarette Manufacturing v Rouse (1924) 19 LlLRep 301, discussed at 15.58
below.

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An Introduction to Modern Marine Cover

(2) 'All Risks' Cover
7.54 Where insurance covers 'all risks', the assured's burden of proof is considerably eased, bur it is not lifted altogether. All risks cargo insurance is not a guarantee that the insured cargo will arrive in an undamaged condition. The very term 'risk' denotes an accidental cause of 10ss.111 Such cover is, however, 'quasiuniversal' so that the assured need not identifY the precise cause of the loss and demonstrate that that cause is properly characterized as accidental. Instead, it suffices that the assured establishes on a balance of probabilities that the cause of the loss, whatever it was, was accidental. The precise cause may remain in doubt, yet the assured will recover.'12 7.55 It is clear, therefore, that me burden of proof is considerably lighter for an assured under all risks cover than under a named perils policy. Consequently, it has been argued that where named perils policies embrace a range of perils that collectively provide an 'uninterrupted continuum' of cover, they should be treated as akin to all risks cover so that the assured need not identifY the precise cause of the loss bur merely that it was fortuitous and fell somewhere within the continuum. Such an argument has been rejected. An assured that desires seamless cover and a lighrening of rhe burden of proof musr contracr for all risks cover.' 13 7.56 Notwithstanding the easing of the assured's burden of proof under all risks cover, that burden is still present, and it seems logical that a claim may fail without the insurer establishing on a balance of probabilities that the cause of the loss fell outside the scope of cover or any other specific defence merely because the assured has failed to establish on a balance of probabilities that the loss was accidental. This reasoning has, however, been doubted. In The Delphine,' 14 the assured claimed under an all risks yacht policy in respect of a sinking caused by fire. The insurers alleged arson by the assured. Toulson J rejected the possibility of a finding in favour of the insurers on the basis of failure by the assured to discharge the burden of proving fortuity. The assured denied that he caused the fire and, if that denial was to be believed, it followed that the fire was a risk within the meaning of the policy. The burden of proving arson clearly lay on the insurers. The consequence, according to Toulson J, was

Burden and Standard ofProof

rhat, unless rhe insurers proved arson, the assured's denial would have to be accepred:'15 'the fire was eirher accidental so far as [the assured] was concerned or it was deliberate. There is no third possibility. In reality, rhe question is whether the evidence of arson is sufficiently strong for [the assured's] assertion that the fire was accidental to be disbelieved'. The Popi M was disringuished on the basis of its 'unusual facrs' and rhe need, arising out of cover against perils of the sea, to esrablish rhe precise operative peril. The House of Lords, according to Toulson J, upheld rhe insurers' appeal 'because rhere might have been some other unknown cause of rhe casualty, not due to perils of the sea' ."6

It is respecrfully suggesred that this reasoning is erroneous. First, rhe House of 7.57 Lords did not decide The Popi M on the basis of any appreciarion of alternarive
causes of rhe loss. The reasoning of Lord Brandon in his dismissal of rhe aphorism of Sherlock Holmes is that a conclusion thar an assured's explanarion for a loss is unproved does nor require any level of recognition of an alrernative explanation,117 alrhough ir cannot be denied rhat rhe likelihood of an alrernarive explanation may influence a conclusion as to wherher the assured's explanation should be rejected as unproved. Secondly, it is well esrablished that insurers under a named perils policy who suspect scurtling are not required to respond to a claim of a fortuitous loss by perils of the sea by affirmatively alleging scuttling. They are entitled simply to put the assured to proof of its claim according to the srandard of a balance of ptobabilities. Logic does not dictate a difference of principle in the context of all risks cover. The lighter evidential burden faced by an assured, in that the precise operative peril need not be proved, certainly renders less likely a conclusion that the assured has failed to discharge its burden, but it cannot eliminate the possibility. Especially, bur not uniquely, because of the cogency of evidence required before a court will uphold an affirmative defence of scurtling,'18 it must be possible for a court to conclude that, although the evidence does not warrant a positive holding of scuttling by the assured, nevertheless the accidental nature of the loss has not been established on a balance of ptobability. (3) Exclusions A distinction needs to be drawn with respect to exclusions,'19 General exclusions 7.58 qualifYing the entirety of the cover must be disproved by the assured in order to recover. Thus, in policies warranted free of particular average, the burden of proving a total loss lies on the assured. Where the cover is subject to specific exclusions, however, the burden of proof generally falls upon the insurer,12o and

111 Schloss Bros v Stevens [1906] 2 KB 665 at 673; British 6- foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41 at 46-7,52,57; PasqtulJi & Co v Traders' & Genera! Insurance Association (1921) 9 LlLRep 514 at 516: Berk (FW) 6- Co Ltd v Style[195611 QB 180. 112 British & Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41. m ShellPetroleum Co Ltd v Gibbs (The Salem) [19821 QB 946, 959: Browmville Holdings Ltd v Adam}ee Insurance Co Ltd (The Milasan) [2000]2 Lloyd's Rep 458, pata 15. 114 Aquarius Financiall::,uerprises Inc v Certain Underwriters at Lloyd's (The'Delphine) [2001J 2 Lloyd's Rep 542.

115 119

120

ibid para 21. 116 ibid para 17. 117 See 7.50 above. Munro, Brice 6- Co v w:tzr Risks Association Ltd[1918J 2 KB 78. Green v Brown (1744) 2 Str 1199. But see further below.

118

See 15.18 below.

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An Introduction to Modern Marine Cover

an insurer cannot shift rhis burden to the assured by framing rhe exception as a condition precedent to liability. It 'is axiomatic in insurance law, that, as it is always for an insurer to ptove an exception, so it is for him to prove the breach of a condition which would relieve him from liability in respect of a particular loss' .'21 However, a reverse burden clause may oblige the assured to disprove the operation of an exclusion where the insurer presents an arguable case for the operation of an exclusion and satisfaction of the causal connecrion required by the policy between the exclusion and the loss.'"
7.59 Difficulty may arise in determining whether a specific restriction on cover is

8
INTERPRETATION AND RECTIFICATION OF INSURANCE CONTRACTS

appropriately characterized as an exclusion, in which case the burden of proof falls on the insurer, or as part of the definition of a named peril or the scope of all risks cover, in which case the burden of proof falls on the assured.'" Certain restrictions on cover that in the modern Institute clauses are drafted as exclusions and form part of a clause headed 'Exclusions' previously formed part, expressly or implicitly, of the definition of the covered perils. Thus, restrictions on the scope of the perils of artest, restraint, and detainment formerly expressed as part of the definition of such terms 124 are now found within the 'Exclusions' in the Institute war and strikes clauses for hulls or freight. 125 Again, 'all risks' cover has been regarded as a marter of interpretation of the term 'risk' not to cover loss or damage caused by inherent vice or ordinary wear and tear, wirh rhe burden falling on the assured to adduce evidence rhat the loss or damage was nor so caused."6 Under the Institure Cargo Clauses (A), the absence of cover for such loss or damage is not left ro implication from the rerm 'risk' but is made the subject of express exclusions. 127 The provenance of these exclusions has led to the view, in the context of the peril of detainment, that the assured should remain subject to a burden of disproving the operation of these res,rictions notwithstanding their modern presentation as exclusions. 128 It is, however, suggested that attributing such significance to the historical provenance of a contractual provision over the apparently clear contractual allocation of status is highly questionable.

A. Principles of Interpretation (1) The intention of the parties (2) Factors taken into account in interpreting contracts (3) Contractual interpretation and the doctrine of precedent

8.02 8.04
8.06

B. The Slip as an Aid to Interpretation

of the Policy
(1) General admissibility but variable

8.63
8,64 8.72

evidential value (2) The rule of law approach

8.59

C. Rectification

8.77

This chapter is concerned with how one ascertains the content of the bargain 8.01 between insurer and assured. This necessarily involves interpretation of the terms selected by the parties, in the same way as with any commercial contract. In addition, however, the insurance context raises the question of the urility of the slip as an aid to interpretation of any subsequent policy. The availability of rectification will also be considered.

A. Principles of Interpretation
Phillips J once observed, in the context of a reinsurance dispute: 'As is the way 8.02 with hotly contested issues of construction, Counsel on each side has assured me that my task is a simple one and that the answer is obvious. I do not find the issue simple." Difficulries of interpretation should not be underestimated: 'The fact that a Court succeeds in construing a contractual provision does not

", Bond Air Services Ltd v Hill [1955J 2 QB 417, 427 per Goddard LC]. See also Simmons v Gale [1957J 2 Lloyd's Rep 4S5 (Supreme Court of New Sourh Wales) (unsuccessfully appealed to
rhe Privy Council on other grounds: [195812 Lloyd's Rep I). m Spinneyl (I948) Ltd v Royal Insurance Co Ltd[1980J 1 L1oyd's Rep 406, 426. 123 The issue of characterization is relevant also to the operation of concurrent cause rules: see 9.30-9.31 below. "4 MIA 1906, Sch 1, r 11. ", eg Institute War aod Strikes Clauses (Hulls-Time) (1111/95), ell 5.1.4-5.1.5. 126 British & Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41,52,57. 127 Institute Cargo Clauses (A), cl4.2-4. 128 Ikerigi Compania Naviera SA v Palmer (The Wondrous) [1992J 2 Lloyd's Rep 566, 572.

-~--~---------------1 Youell v Bland Welch 6- Co Ltd (No 1) [1990J 2 Lloyd's Rep 423, 427. He cootioued: 'It involves construing a single sentence, fifteen lines long, the grammatical structure of which is far

from dear.'

260

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Interpretation and Rectification ofInsurance Contracts

mean that the provision is unambiguous, let alone that it is clear." Faced with construing the word 'flood' in a household insurance policy, Lawron LJ was moved to remark: 'This appeal raises a semantic problem which has troubled many philosophers for centuries, and it can, I think, be expressed in the aphorism that an elephant is "difficult to define but easy to recognise"." Sadly, difficulties of interpretation are often the result of inadequate attention being paid to the drafting of contracts. Judges have often been moved to remark disparagingly on the qualities of drafting displayed even in professionally prepared documents relating to commercial transactions involving considerable
sums of money.4

Principles ofInterpretation
designed to assist a court in the often challenging task of divining the intention of the parties.' (1) The Intention of the Parties The purpose of interpretation is to give effect to the intention of the parties as 8.04 revealed objectively by the available and admissible evidence 8 The focus must inevitably fall upon the words chosen by the parties to express their intention, but the meaning to be given to those words may be affected by a wide range of factors. Testimony from the parties themselves will not, however, be received as too likely to be coloured by self-interest. Both the objective narure of the process and the breadth of material available to the court were encapsulated by Lord Hoffmann in the first of five principles enunciated in the Investors Compensation case: 'Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were in at the time of the contract.'9

8.03 In construing a contract, the court seeks to give effect to the bargain concluded by the parties. 5 The modern approach to interpretation is to reject any impediment to determining and implementing the intention of the parties in concluding the contract they did in fact conclude, while remaining vigilant not to rewrite the contract. In particular, a commercial contract will be construed through the eyes of reasonable commercial parties and not via the application of abstract, technical legal rules. Thus, in comments prefacing the leading modern judicial statement of the principles governing the interpretation of contracts, Lord Hoffmann, in Investors Compensation System Scheme Ltd v W0st Bromwich Building Society: stated that: 'Almost all the old intellectual baggage of "legal" interpretation has been discarded.' That said, the process of interpretation is not entitely at large. Principles of interpretation can be formulated. However, subject to a few remaining rules of inadmissibility, these principles must be understood not as rules in any formal sense but rather as suggested thought process_es

, Youell v Bland Welch & Co Ltd (The Superhulls Cover case) (No 2) [19901 2 Lloyd's Rep 431, 440 per Phillips]. 'The court's task is to make sense of the agreement as best it can, even if the eventual answer cannot be regarded with any more enthusiasm than that it is the least unsatisfac~ tory construction': John v Price Waterhouse [2002] EWCA eiv 899, unreponed, para 75 per Robert Walker L]. 3 lOung v Sun Alliance ImdLondon Insurance Ltd [1977J 1 WLR 104,108-9. 4 eg Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1) [1997] 2 Lloyd's Rep 687, 701 per Schiemann LJ: 'The problem arises because the policy has been constructed on the kebab principle of draughtsmanship: various clauses have been garnered together from various sources and skewered together.' The case concerned the interpretation of a sue and labour clause in an aviation policy, a clause described by a witness as 'a mishmash ofNol'man French, marine doctrine and what the panies wanted in an aviation contract' (ibid 695 per Staughton LJ). See also the comments of Lord Hobhouse: [1999J 1 Lloyd's Rep 803, 808-9. Again, see Eagle Star Insurance Co Ltd v Cresswell [20031 EWHC2224 (Comm), [20041 I All ER (Comm) 508 at [171 ('dog's breakfast'); Petromec Inc v Petrako Brasileiro SA Petrobas [20041 EWCA Clv 156, [20041 I Lloyd's Rep 629, paras 21-22. 5 Reliance Marine Insurance Co v Duder [1913] 1 KB 265, 273. 6 [199811 WLR 896, 912-13.

It is often stressed that the role of the court is to interpret the contract and that 8.05 any tendency rowards rewriting is to be strenuously avoided. Judicial rewriting would constitute an improper infringement of the liberty of the parties to order their own affairs, even if in a seemingly improvident fashion. It would, moreover, be destructive of the certainty that commercial parties especially need to be able to repose in the agreements they conclude.'o Often, however, the problem posed is the application of the contract to circumstances that clearly were entirely beyond the contemplation of the parties at the time the contract was concluded. The court's task is then to determine the intention to be imputed to the parties: 'a solution should be found which is both reasonable and realistic' .'1 In Casson v Ostley Ltd, 12 in the context of the application of an exemption clause in a building contract to negligent breaches, Sedley LJ openly acknowledged that any intention ascertained is 'in most such cases a fiction'" and that the

7 Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240, 244 per Devlin J: 'A rule of construction cannot be more than a guide to enable the court to arrive at the true meaning of the panics.' See also BOC Group pic v Crntean Ilc [19991 I All ER (Comm) 970, 980 per Evans L]: '1 would guard against allowing tules, maxims or relevant factors becoming masters rather than servants'; Bank ofCredit & Commerce International SA vAli [2001] UKHL 8, [200211 AC 251, para 78 per Lord Clyde: 'The exercise is not one where there are strict rules'. 8 Bank ofCredit & Commerce InternationalSA vAli[20011 UKHL 8, [200211 AC251, para 8. 9 (1998] 1 WLR 896,913. On objectivity, see also Reardon Smith Ltd v Yngvar Hansen-Tangen [197611 WLR 989,996. 10 Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 387. 11 Per Lord Clyde, para 78. 12 [200 I] EWCA Clv 1013, [20031 BLR 147. 13 ibid para 29. cf the analysis of the doctrine of frustration by Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956] AC 696, 727.

262

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Interpretation and Rectification ofInsurance Contracts

process of interpretation of the parties' chosen terms 'is more nearly that of the concert artiste than that of the linguist' .'4 Acknowledging the creative aspect of the judicial function in such application of contracts to uncontemplated events, Sedley LJ stated as follows: 15
We mitigate the uncovenanted effects of literalism not

Principles ofInterpretation
what it says. Too ready a departure from the ordinary meaning of the words used will also undermine commercial certainty." Accordingly, subject to the possibility of technical meanings, the inquiry as rothe true interpretation of a contract 'will start, and usually finish, by asking what is the ordinary meaning of the words used.'2Q In Melanesian Mission Trust Board v Australiim Mutual Provident Society," Lord 8.08 Hope reasoned as follows:
Where ordinary words have been used they must be taken to have been used according to the ordinary meaning of those words. If their meaning is clear and unambiguous, effect must be given to them because that is what the parties are taken to have agreed to by their contract. Various rules may be invoked to assist interpretation in the event that there is an ambiguity. But it is not the function of the court, when construing a document, to search for an ambiguity ... It is of course legitimate to look at the document as a whole and to examine the context in which these words have been used, as the context may affect the meaning of the words. But unless the context shows that the ordinary meaning cannot be given to them or that there is an ambiguity, the ordinary meaning of the words which have been used in the document must prevail.

by nakedly writing a new

contract for the parties but by construing the words according to principles which
enable the contract, in effect, to be reconstructed. It is a very reasonable stopping place on the road that runs between second-guessing parties who have simply

contracted incautiously and leaving a party at the mercy of unconsidered words.

(2) Factors Taken into Account in Interpreting Contracts

8.06 In the quest for the Holy Grail of the interpretation process-the intention of

the parties-a variety of factors may affect the meaning to be attributed to the contractual words. Often, a number of factors corroborate one another in indicating the same meaning. Sometimes, different factots may point towards different meanings, in which case the court will have to decide which factor, or combination of factors, is the more persuasive in the context of the particular
contract in question.

References to 'ordinary meaning' should not, however, mislead. The court's task 8.09
is not to ascertain in isolation the abstract meaning of a word as it may be

(aJ The natural meaning ofthe words

8.07 The srarting point in interpreting the words chosen by the parties to express

their agreement is their ordinary and natural meaning." According to Lord Ellenborough in Robertson v French: 17 'The same rule of construcrion which applies to all other instruments applies equally to this insttument of a policy .of insurance, viz that it is to be construed according to its sense and meaning as collected in the first place from the terms used in it, which terms are themselves to be understood in their plain, ordinary and popular sense'. This 'reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents' .'8 Commercial insurance policies are compiled by informed professional people, namely underwriters and brokers. The natural assumption, therefore, is that the language of such patties in formal contractual documents says what it means and means

employed in the English language, but to determine and give effect to the intention of the parties behind the words chosen,22 while at all times stopping shott of judicial tewriting of the contract. An authoritative dictionary may be consulted to reveal the natural English language meaning of a term,23 but: 'One must beware confusing construction and definition.'24 As Lord Hoffmann observed in Investors Compensation:" 'The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.''' The search is for the intention of the parties as objectively revealed by their chosen words in the context of the document as a whole

" [200Ij EWCA CIv 1013, [2003J BLR 147, para 33. See also Petromec Inc vPetroleo Brasileiro SA Petrobas [2004J EWCA CIy 156, [2004J I Lloyd's Rep 629, para 21 (poor quality drafrlng

rendering the identification of parties' intentions from words used 'a search for a mare's nest'). 15 [200Ij EWCA CIy lOB, [2003J BLR 147, para 32. 16 Robertson v French (1803) 4 East 130, Stadire Diamond Rings Ltd v Angel [1962J 2 Lloyd's Rep 217; MIS Aswan Engineering Establishment Co Ltd v Iron Trades Mutual Insurance Co Ltd [1989J I Lloyd's Rep 289, 293-4. " (1803) 4 East 130, 135. 18 Part of Lord Hoffmann's fifth principle in Investors Compensation Scheme Ltd v 'West Bromwich Building Society [1998J I WLR 896, 914.

19 BP Explom'ion Operating Co Ltd v Kvaerner Oilfield Products Ltd [2004J EWHC 999 (Comm), [2005J I Lloyd's Rep 307, para 94. 20 Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 384 per Lord Mustill. See also T&N Ltd v Royal 6-SunAlliance pic [2003J EWHC 1016 (Ch), [2004J Lloyd's Rep IR 106, para 132. " [1996) UKPC 53, (1997) 74 p & CR 297, 301. " Aqua Design 6- Play International Ltd v Kier Regional Ltd [2002J EWCA CIy 797, [2003J BLR Ill, paras 9, 24. 23 eg In Spinneys (1948) Ltd v Royal Insurance [1980J I Lloyd's Rep 406, 436, Mustill J referred to the Oxford English Dictionary definition of 'rebellion', a standard war risk. 24 Lord Clyde, 'Construction of Commercial Contracts: Strict Law or Common Sense' (2000) 27 JMCL I, 10. 25 [199811 WLR 896,914. " See also Schuler (L) AG v Wickman Machine Tools Ltd [1974J AC 235, 256 per Lord Morris: 'Words are bur the instruments by which meanings or intentions are expressed.'

264

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Interpretation and Rectification ofInsurance Contracts

and the relevant background." The commercial context indicates, therefore, that the terms of a commercial conrract should be interpreted according to the understanding of commercial parties." In consequence, literalism is an unteliable guide to the interpretation of a commercial contract. To the question: 'Whar is literalism?' Lord Steyn has offered the following answer by way of example:" 'The tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried rhem all alive. That is literalism. If possible it should be resisted in the interpretative process.' Accordingly, in Hart v Standard Marine Insurance Co Ltd,'O a warranty not to exceed a specified quantity of iron was held to be infringed by an excessive quantity of steel, rhe term 'iron' being construed not according to scientific understanding but as used in commercial transacrions, all business people being aware thar sreel is merely processed iron. 31 8.10 The increasing significance paid in the modern law to context raises rhe question of the urility of the concept of an ordinary and natural meaning. Lord Hoffmann has expressed doubt, 'at least in some cases':" 'Because the natural meaning of words is so sensitive to syntax and context, the natural meaning of words in one sentence may be quite unnatural in another. Thus a starement that words have a particular natural meaning may mean no more than that in many contexts they will have that meaning. In other contexts their meaning will be different but no less natural.' 8.11 This is undoubtedly true, but the challenge is to permit context to shed light on the parties' intentions while acknowledging that the parties are not prisoners of their context. The relationship between the context of the contract and the

Principles ofInterpretation
ordinary meaning of the words was perhaps best articulated by Sir Thomas Bingham MR as follows: 33
Courts will never construe words in a vacuum. To a greater or lesser extent,

depending on rhe subjecr matter, they will wisb

to

be informed of what may

variously be described as the context, the background, the factual matrix or the mischief. To seek to construe any instrument in ignorance or disregard of the circumstances which gave rise to it or the situation in which it is expected to take effect is in my view pedantic, sterile and productive of error. But that is not to say that an initial judgment ofwhat an instrument was or should reasonably have been intended to achieve should be permitted to override the clear language of the instrument, since what an'author says is usually the surest guide to what he means. To my mind construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transport~d to the laboratory for microscopic analysis.

As Lord Steyn stated succinctly in Total Gas Marketing Ltd v Arco British Ltd," 'loyalty to the contractual text viewed against its relevant contexrual background is the first principle of construcrion'.35

(b) Specialist meaning 1: technical legal meaning

A word may carry both a technical legal meaning and a common parlance 8.12 meaning. Occasionally, technical interpretation is required by law. The peril of 'riot' is construed in marine policies in accordance with the definirion in the Public Order Act 1986 because s 10(2) of that Acr so dictates." More generally,

27
28 29

On the ordinary meaning of the words and extrinsic evidence, see further 8.42-8.43 below.

Mannai Investment Co Ltd v Eagle Star Lift Assurance Co Ltd [1997] AC 749, 771. Sirius International Insurance Co (PUBL) v FAI General Insurance Ltd [2004] UKHL 54,

[2004] 1 WLR 3251, para 19. 30 (1889) 22 QBD 499.

31 See also Kawasaki Kisen Kabushiki Kaisha ofKobe v Bantham Steamship Co Ltd [1939] 2 KB 544 (meaning of 'war' in a charrerparty cancellation clause, discussed at 13.19-13.21 below); Yorkshire Dale Steamship Co Ltd v Minister ofwar Transport (The Coxwold) [1942] AC 691. 707 (proximate cause, discussed at 9.45 below); Noten BV v Harding [1990] 2 Lloyd's Rep 283 (proximate cause, discussed at 15.57 below). This blends into the relevance ofcommercial common sense as a factor in its own right, discussed at 8.26ffbelow. 32 Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391. See also Static Control Components (Europe) Ltd v Egan [2004] 2 Lloyd's Rep 429. para 27 pc> Arden LJ: 'rhere ace not twO possible constructions in any given situation, namely a purely linguistic one and one in the light of the factual background, but only one" the true interpretation. This is because the object of interpretation is to discover the meaning of the provision in question in its context ... Thus, in principle, all contracts must be construed in the light,of their factual background, that background being ascertained on an objective basis. Accordingly,'the fact that a document appears to have a clear meaning on the face of it does not prevent, or evetiexcuse, the Court from looking at the background.'

33 Arbuthnott v Fagan [1996] Lloyd's Rep IR 135,139. See also Lord Clyde, 'Construction of Commercial Contracts: Strict Law or Common Sense' (2000) 27 JMCL 1,16: 'While the words which commercial people use are still the focus to which construction is directed, the emphasis is not on literalism, but on the expectation of commercial people.' " (1998] 2 Lloyd's Rep 209, 218. 35 See also Sirius International Insurance Co (Pub!) v FAI General Insurance Ltd [2004J UKHL 54, [20041 1 WLR 3251. para 18.1n King v Brandywine Reinsurance Co (UK) Ltd [2004] EWHC 1033 (Comm). [2004] 2 Lloyd's Rep 670, affd [2005] EWCA Civ 235. [2005] 1 Lloyd's Rep 655, one issue was whether the COStS of cleaning up oil pollution were recoverable under the heading of'removal of debris of property ... covered hereunder', which extended $600 million of cover. According to Colman J (para 86): 'In order to identify the mutually intended meaning of these words it is necessary first to identify the possible range of dictionary meanings, secondly to investigate the setting of the words in their contractual environment and thirdly to investigate the circumstances in which the contracts were negotiated, in patticular the circumstances of the parties and the mutually known features of the market in which they were negotiating.' It was held there was no cover. As a matter oflanguage, the term 'debris' was not associated with liquids; the contract dearly regarded liability for pollution as distinct from liability for removal of debris; and the extent of cover exceeded the limit of cover for pollution clean-up costs available in the London market at the time the contract was concluded. The Court of Appeal upheld this ruling, although it relied purely on the ordinary meaning of the phrase 'removal of debris'. Spilled oil or pollution from spilled oil was not 'debris' and dean-up of spilled oil involved much more than simply removal (paras 117-18). 36 See 14.12-14.14 below.

266

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Interpretation and Rectification ofInsurance Contracts

there is a rebuttable presumption that parties who employ a term of legal art in a formal legal document intend that term to carry its technical meaning,37 Thus, at common law, a technical approach was adopted by the House of Lords to the

Principles ofInterpretation
Although the SG policy is no longer used, to the extent that the defined terms
f.emain in current usage, the rules

of interpretation retain

their value as expres-

'I r ' pen 0 f" flOt'b erofe statute mtervene d.38

8.13 The technical meaning will not prevail, however, if evidence in the wording of

sions of the market's understanding and are given statutory force by section 30(2) of the 1906 Act unless the context of the policy otherwise requires and subject to the provisions of the Act.

the contract or the background to the contract persuades the court that a different meaning was intended by the parties. 39 In particular, the policy concerns that influence a particular branch oflaw to impart a particular meaning ro a word may not carry across to the interpretation of a commercial contract. Thus, various strikes risks employ terms recognized in, for example, employment law, criminal law, or extradition law, It cannot be readily assumed that the concerns of, for example, the criminal law correspond to those of the reasonable commercial person taking out a policy of marine insurance'o

(e) Context within the contract

The meaning of words can be affected by their context within the contract in 8.16 various ways. First, meaning can be affected by the function a particular term is designed to fulfil. In Charter Reinsurance Co Ltd v Fagan,44 the phrase 'actually paid' in a reinsurance contract was held not to render payment on the primary policy by the reinsured a condition precedent to entitlement to payment under the reinsurance contract. The ordinary meaning of the phrase, indicative of a condition precedent, was held to be displaced by a meaning dictared by the function of the relevant rerm within rhe contract as part of the measure of indemnity payable by the reinsurer, Secondly, rhe juxtaposition of words can influence interpretation through the 8.17 eiusdem generis principle. According to this principle, where the choice of words within a clause indicates an intention that the clause should be confined to a particular class or genus, the individual terms within the clause will be construed in a manner that conforms to that class. 45 Thus, in Young v Sun Alliance & London Insurance Ltd," an ingress of water from a natural source in a ground floor lavarory was held not to constitute a 'flood' within a policy term that covered 'storm, tempest or flood'. The householder might in common parlance have referred to the room as flooded, but the policy clearly contemplated a genus, namely unusual manifesrations of natural phenomena, and the rerm 'flood' was construed accordingly, Similarly, in Tektrol Ltd v International Insurance Co ofHanover Ltd,47 a policy covered business interruption caused, inter alia, by accidental loss of any property used at the business premises for business purposes. An exclusion that covered damage caused by loss of information on computer systems 'caused deliberately by rioters strikers locked out workmen persons taking part in labour disturbances or civil commotion Ot malicious persons' was held not to include a computer hacker who created and disseminated a virus that contributed to the loss by the assured of a valuable computer source code. According to Buxton L] :48

(c) Specialist meaning 2: custom and usage 8.14 Words may also acquire a particular meaning through the custom of a particular trade, market, or locality." To be legally recognized, a cusrom must be certain, notorious, and reasonable,42 Once established, a custom usually binds all parties. However, in the case of customs particular to the Lloyd's market and not general to the London insurance market, the courts have declined to hold assureds bound by customs prejudicial to their interests unless it could be shown that the assured knew of the custom and contracted with reference to it. 43 (d) Schedule 1 rules ofinterpretation
8.15 The old SG policy is reproduced in Schedule 1 to the Marine Insurance Act

1906 together with seventeen rules of interpretation of terms used in tb.e policy.

37 Schuler (L) AG 0 Wickman Machine Tool Sales Ltd[1974] AC 235, 264, Sunport Shipping Ltd o Tryg-Baltica International (UK) Ltd (The Kleoooulos ofRhodes) [2003J EWCA Civ 12, [2003J I

Lloyd's Rep 138, para 28.

38 London & Lancashire Fire Insurance Co Ltd v Bolands Ltd [1924] AC 836, discussed at 14.13 below.

39 The tcchnicallegal meaning of the word 'condition' as indicating a major contractual tcrm, breach ofwhich constitutes a repudiation of the contract, was rejected as the correct interpretation in Schuler (L}AG v Wickman Machine Tool Sales Ltd [19741 AC 235, discussed ar 8.23 below. 40 See also the concern to ensure that the interpretation of a contract conforms with commercial common sense: 8.26ffbelow. " Robertson 0 French (1803) 4 East 130, 135. In Smich 0 Wi&on (1832) 3 B & Ad 728 a contract to lease a rabbit warren in Suffolk provided for payment byrhe lessor for the rabbits left in the warren at the end of the lease at the fate of 60 per 1,000 rabbits. Evidence was given and accepted by the COUft of a local custom that, in respect of rabbits, '1,000' meant 1,200. 42 Cunliffe-Owen 0 Teather & Greenwood [19671 1 WLR 1421,1438. 43 Gabay v Lloyd (1825) 3 B & C 793 (limitation on cover). See also the cases on settlemerit of losses between insurer and assured by means of set-off on accounts between insurer and broker: 22.117 below.

"" [19971 AC 313.

4S 46

Chandris 0 Isbrandtsen-Moller Co Inc[195l] 1 KB 240. 246.

[1977J I WLR 104. ibid paras 11-12. " [20051 EWCA eiv 845, [2005J 2 Lloyd's Rep 701.

48

268

269

Interpretation and Rectification ofImurance Contracts

The concept of rioters, etc, causing damage to information on the computers at the insured's premises suggests strongly that the context envisaged by the draftsman is of interferences directed specifically at those computers and committed on or near the insured's premises. 'Deliberately' fits well into that context, because such persons might well damage information accidentally or carelessly in the course of other depredations. But suddenly to tag on at the end of the excepting clause a reference to remote hackers, a completely different category of person making a

Principles ofInterpretation
'inasmuch as the written words are the immediate language and rerms selecred by rhe parties themselves for the expression of their meaning'. 55 Fifthly, the courts will strive to avoid internal inconsistency. Any reasonable 8.21 interpretation that reconciles contractual clauses will be pteferred over an interpretation that prevents the clauses ftom conflicting with one another. 56 Moreover, if a literal reading of a clause would defeat rhe main objecr and intent of the contract, or alter the commercial nature of the contract, it will be read restrictively. 57 Thus, the courts will be reluctant to accept that an insurer has waived any and every defence under a contract, thereby transforming an insurance policy into an on-demand bond. 58 Similarly, if at all possible, a policy will not be construed as affording cover under one provision and then removing that cover under another. Thus, while failure to take reasonable care normally connotes negligence, a provision requiring the assured to take reasonable precautions to prevent loss or damage will be construed as confined to recklessness in a policy designed to cover industrial risks including the assured's negligence. 59 Sixthly, by virtue of the doctrine of repugnancy, a clause that can only be 8.22 construed in such a way as to reduce a contract to a declaration of intent can be disregarded and effectively deleted from the contract." This is obviously an interpretation of last resort, and a court invited to apply the repugnancy doctrine will be astute to the danger of rewriting the contract. Similarly, in rare cases, a clause that makes no sense at all in the context of the contract may be

complerely differenr kind of attack, significantly changes rhe rhtUst of rhe exception, in a way that one would expect wording.
to

be done only by much more specific

.. . If the insurer wished to exclude all damage caused however indirectly by a computer hacker he needed to place that exclusion in a separate clause, and not refer to malicious persons in the same terms as rioters or locked-out workmen.

8.18 The eiusdem generis rule will not, however, easily operate to displace a settled, normal meaning of a rerm in a commercial document. Long-standing authority cleatly establishes that the peril ofseizure embraces forcible takings ofpossession both belligerent and peaceful. 49 In Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1),50 the peril of 'seizure' was included in a series of perils of deprivation of possession by a government within its own jurisdiction. Rix J held that a government should be assumed to act peacefully within its own jurisdiction and that, in context, 'seizure' should be interpreted as confined to peaceful takings. 51 However, the Court ofAppeal and House of Lords disagreed, holding that the policy wording contained no evidence of an indication to depart from the settled extent of the peril." 8.19 Thirdly, the express reference to one matter may impliedly include another similar matter that is not mentioned. 53 Thus, where certain terms are descrilied as conditions precedent and others are not, the obvious inference is that the latter do not have condition ptecedent status, although ultimately the status of the clause will depend on the policy as a whole. 54 8.20 Fourthly, marine policies are usually based on standard clauses promulgated by the London market. These, however, are susceptible to modification according to the requitements of the parties. Should a discrepancy arise between a written endorsement on the policy and its standard terms, the former will prevail

55 Robertson v French (1803) 4 East 130, 136 per Lord Ellenborough. See Mercantile Marine Insurance Co v Titherington (1864) 5 B & S 765; Dudgeon v Pembroke (1877) 2 App Cas 284; Homburg Houtimport BV vAgeosin Private Ltd (The Stanin) [2003J UKHL 12, [2004J 1AC 71 5,

para II. 56 Pagnan SA v Tradax Ocean Iransportation SA [1987] 2 Lloyd's Rep 342; University o/Keele v

Price ViliIterhouse [2004J EWCA Ciy 583, [2004J PNLR 43. 57 Glynn v Margetson & CO 11893J AC 351; Sze Hai long Bank Ltd v Rambler Cycle Co Ltd

[1959J AC 576.
58

BIB Casualty & General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ

735, [2001J 2 Lloyd's Rep 161, para 31.

59 Fraser v BN Furman Productions Ltd [1967J 1WLR 898; Lane (W & J) v Spratt [1970J 2 QB 480. Likewise Aluminium Wire & Cable Co Ltd v Allstate Insurance Co Ltd [1985] 2 Lloyd's Rep

280; Legal & Generallnsurance Australia Ltd v Eather (1986) 6 NSWLR 390 (Court ofAppeal of New South Wales); Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR I (Court of
Appeal of New Zealand). See also the interpretation of the delay exclusion under old forms of marine policy covering perils necessarily involving loss of time: 15.38-15.41 below. For a non~ insurance, maritime parallel, see Daewoo Heavy Industries Ltd v Klipriver Shipping Ltd (The
49

See 13.47 below.

so 11996J 1 Lloyd's Rep 664, [1997J 2 Lloyd's Rep 687, [199911 Lloyd's Rep 803. S> 11996J 1 Lloyd's Rep 664, 690-1. 52 11997J 2 Lloyd's Rep 687, 695, 701, 11999J 1 Lloyd's Rep 803, 814.
53 54

!Wpitan Petko Voivoda) [2002J EWHC 1306 (Comm), [2002J 2 All ER (Comm) 560, paras 23, 27; [2003J EWCA Civ 451, [2003J 2 Lloyd's Rep 1, para 20 (in cases of unauthorized deck
carriage, the carrier cannot rely on certain defences in the Hague-Visby Rules, such as perils of the sea, that are relevant only because the cargo is carried on deck).
60 Tor Line AB vAlitrans Group ofCanada (The TFL Prosperity) [1984] 1WLR48; GreatNorth Eastern Iidilway Ltd v Avon Insurance pic [2001J EWCA Civ 780, [2001J 2 Lloyd's Rep 649,

In accordance with the maxim expressio unius est exclusio alterius. George Bunt Cranes Ltd v Scottish Boiler & General Insurance Co Ltd (2001] EWCA eiv

1964, [2002J Lloyd's Rep IR 178, para 11.

para 31.

270

271

Interpretation and Rectification ofInsurance Contracts

disregarded as incompatible with the cleat and contrary intention of the parties. 61 Thus, where a charterparty expressly incorpotated a statute that provided it did not apply to charterpatties, the section that excluded charterparties was distegarded:'

Principles ofInterpretation
restricted to being a factor in its interpretation and not transformed into a

ground for rewriting. Parties, especially commercial parties, are entitled ro make
uncompromising or unwise contracts. Courts may look again at the contract if the most obvious interpretation produces such an excessively unreasonable

(f) Excessive unreasonableness

8.23 The courts will have regard to the practical consequences of any parricular

interpretation as a factor in determining whether that is the intetpretation to be adopted. An interpretation that produces excessively unreasonable consequences is unlikely to reflect the intention of the parties. In Schuler (L) AG v Wickman Machine Tool Sales Ltd," clause 7(b) ofthe contract required exclusive sales agents to visit each of six named potential customers each week and ro ensure that the visits were all carried out by the same named representative or, in unavoidable default, by the same named alternative representative. The clause was described as a 'condition'. The question was whether the word 'condition' was employed in its technical legal sense to denote a term any breach of which was a repudiation of the contract. The House of Lords tefused to accept that the word
'condition' was used in its technical sense. Such an interpretation meant that a

resulr as ro raise the question of whethet the parties can indeed have intended that result. However, in doing so, they must be careful not 'to force upon the words a meaning which they cannot fairly beat' and thereby 'substiture for the batgain actually made one which the court believes could better have been made'.68Jt is noteworthy that, in Schuler itself, a majority of the House of Lords considered that, howevet unreasonable the consequences of a technical interpretation of clause 7(b), construed in isolation it was at least difficult to find any alternative. Ultimately, it was the relationship between clause 7(b) and another clause in the contract thar addressed termination for 'material breach' rhat permitted the rechnical interptetation of clause 7(b) to be rejected." In matine insurance law, the influence of the unteasonableness of a particulat 8.25 interpretation may be seen especially in the courts' approach to clauses that are argued to be conditions precedent, including promissory warranties. Breach of a condition precedent triggers an auromatic prospective discharge of the insurer's contingent liabiliry, a response that may be wholly disproportionate to and, indeed, unconnected with the breach. Consequently, courts will genetally scrutinize an alleged condition ptecedent with considerable care in order to determine whether the clause is amenable to interpretation as a diffetent type of
contractual term. 70

solitary failure to visit one firm in one week by the representative or alternative entitled the principal to terminate the conttact. Yet rhere was no provision in the contract for substitution of the primary or alternative represenratives even if one or both should die, retire, or otherwise leave rhe company, or to covet simultaneous illness of both eligible representatives, or to cover refusal by one of the customers to accept a visir each and every week. A technical interpretation of the word 'condition' could, therefote, have produced results described variouslyas
'so unreasonable', 64 'absurd', 65 and 'grotesque'. 66 On the issue of interpretation,

(g) Business common sense

In a similar, atguably the same, vein, the objective nature of the search fot the 8.26 intention of the parties imports that a contract should be construed in a manner consistent with what makes commercial sense. The less commercially sensible an interpretation, the less likely the parties as deemed reasonable commercial people are to have intended ir. 71 Thus, it has been said that 'if detailed semantic and syntacrical analysis of words in a commercial contract is going to lead to a conclusion that flours business commonsense, it must be made to yield to business commonsense'. 72 Moteovet, 'the pootet the quality of the dtafting, the

Lord Reid stated as follows:' 'The fact that a particulat construction Itads to a very unteasonable result must be a relevant consideration. The more unteasonable a result the more unlikely it is that the parties can have intended it, and if they do intend it the mote necessary it is that they shall make that intention abundantly clear.' However, Lord Reid went on to affirm that, in the absence of an alternative intetpretation, effect had to be given to the clause no matter how unreasonable the consequences. On the facts, the ptesence of another clause in
the contract addressing termination procedures, permitted the word 'condition'

to be construed as catrying its non-technical meaning of contract term.

8.24 It is, however, essential that the excessive unreasonableness of a contract
IS
68 69

Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 387 per Lord Mustill.

" Powell v General Electric Co [20051 EWHC 644 (QBD), unreporred. 62 Adamasto' Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1959J AC 133. 63 [1974J AC 235. 64 ibid 251 per Lord Reid. 6S ibid 265 per'Lord Simon. 66 ibid 272 per Lord Kilbrandon. 67 ibid 251.

[1974J AC 235, 251-2 (Lord Reid), 265 (Lord Simon), 271 (Lord Kilbrandon). For Lord Morris, the inter~re1ationship between the clauses reinforced the non~technical interpretation of cl 7(b). 70 See 18.79, 18.105-18.109,22.13-22.17 below.
11

12

Mannai Investments Co Ltd v Eagle Star Lift Assurance Co Ltd [1997J AC 749, 771, Antaros Compania Naviera SA v Sa/en Rederiema AB (The Antaios) [1985J AC 191,201 per

Lord Diplock.

272

273

Interpretation and Rectification ofImurance Contracts

less willing any court should be to be dtiven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention' provided the words are capable of sustaining a more sensible interpretation."
8.27 In Quorum v Schramm," in the aftermath of a fire that had probably damaged a

Principles ofInterpretation
Ultimately, if the contract on its tcue interpretation is commercially bizarre, the

painting" insured under a fine art policy, the parties agreed a clause addressing the measure of indemnity for partial loss. Part of this clause operated as an average clause, rendering the assured its own insurer for the proportion of the risk corresponding to the difference between the sum insured and the market value of the painting immediately prior to the loss. This average clause left part of the risk with the assured if the value of the painting had risen above the sum insured. This made commercial sense. However, on its wording, the clause also left part of the risk with the assured where the value of the painting had fallen
below the sum insured. This was 'an extraordinary commercial consequence, as

courts cannot rewrite it: 'any remoulding by the Court in the course of the construction process of the parties' obligations expressed in the language used must be founded on the intention of the parties whether express or implied in the document itself read in the relevant matrix of facts'.79 In Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1),80 an aviation policy 8.30 covered aircraft hulls against a range of perils set out in six paragraphs lettered (a) to (f). Paragraph (a) comprised war, invasion, hostilities, and similar perils while paragtaph (e) contained perils of deprivation of possession including seizure. An extension of the policy to aircraft spares covered the same range ofperils 'other than Paragraph (a)', which was to apply only to spares in transit. This reflected the caution with which the insurance market approaches war risks cover for goods, which in principle is to be confined to goods in transit. A considerable quantity of insured spares was then seized by Iraqi forces when they invaded Kuwait. Prima fide, this loss could be regarded as caused by any one of a range of perils listed in paragraph (a) and also by seizure. The question was
whether, in the context of the cover for spares not in transit, cover against the

premium would have been paid on the basis of the sum insured and there would be no commercial logic in this consequence'." Accordingly, and indeed at the insurers' invitation, Thomas] held that the avetage clause should be construed in accordance with the plain intention of the parties that it should apply only where the market value had risen above the sum insured.
8.28 In Kumar v AGF Insurance Ltd,77 a solicitors' liability policy contained a non-

avoidance clause under which insurers waived the right to 'avoid, repudiate or rescind this insurance upon any ground whatsoever', while conferring on the insurers a right to seek indemnification from the assured in cases of fraudulent pre-formation non-disclosure or misrepresentarion relevant to any subsequent claim. This was construed as including the right to rely upon the automatic, prospective discharge triggered by a breach of promissory warranty. The clear purpose of the policy was to provide a reliable source of indemnification for injured third parties. Moreover, at the time the policy was concluded, the law on breach of promissory warranty had not been clarified and a body of opinion assimilated such a breach to the repudiatoty breach of general contract law.
8.29 Commercial common sense is not, however, to be regarded as encouraging

further liberality of interpretation than sanctioned in Schuler v Wickman."

perils in paragraph (a) had been merely omitted from cover or, as argued by the insurers, excluded." A majority of the Court of Appeal found in favour of the insurers. 82 If insurers did not want to cover loss ofspares by war except while in transit, it made no commercial sense to cover exactly such a loss under another name. Reading the extension as merely omitting paragraph (a) would be an 'over-literal interpretation'. 83 This holding was, however, reversed by the House of Lords. Background market concerns regarding the extent of cover that it was prudent to offer for goods not in transir were irrelevant. The wording of the extension was clear. The perils in paragraph (a) were omitted, not excluded, and there was simply no licence for a court to rescue an insurer from an imprudent bargain. According to Lord Hobhouse, 'it must ... be stressed thar it is not for the Courts to rell the parties what conttaer they should have made nor, after the event, to evaluate the merits and demerits of their bargain. If, as here, the parties have used plain language to express theit intentions, that should be the end of it: the Courts should enforce the contract in accordance with its terms.'84

73 Mitsui Construction Co Ltd v Attorney-General o/Hong Kong (1986) 33 Build LR 1, 14 per Lord Bridge. See also Blackburn Rovers Football & Athletic Club pIc v Avon Insurance pic [2004J

79

Household Global Funding Inc v British Gas Trading Ltd [2001] EWHC 400 (Ch),
[1999J 1 Lloyd's Rep 803.

unreported, para 22 per Lightman J.

80 81

EWHC 2625 (Comm), [2005] Lloyd's Rep IR 239, para 13, rvsd on other gounds [20051 EWCA Civ 423, [20051 Lloyd's Rep IR 447. 74 [2001] EWHC 505 (Comm), [2002) 1 L1oyd's Rep 249.
75 76

So that the excluded perils in para (a) would prevail over the covered peril ofseizure: see 9.29 below.

'La Danse Grecque' by DegaS~

[2001) EWHC 505 (Comm), [20021 1 Lloyd's Rep 249, para 76 per Thomas J. 77 [1999) Lloyd's Rep IR 147. 78 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (Nos 2 & 3) [200l]/EWCA Civ 1047, [2001) Lloyd's Rep IR 667, para 85.

[1997] 2 Lloyd's Rep 687, 695, 701. 83 ihid 695 perSraughton LJ. [1999] 1 Lloyd's Rep 803, 816. See also Schiemann LJ, dissenting, in the COUrt of Appeal who held that there was no linguistic basis for the insurers' suggested interpretation. It was,
82
84

moreover, perfectly possible that the extension was designed not to cover hostile destruction of spares while covering ho~tile confiscation.

274

275

Interpretation and Rectification ofInsurance Contracts

8.31

Principles ofInterpretation
precise. It is accotdingly the duty of the court to construe such documents fairly and broadly, without being roo asture or subtle in finding defects.' (i) Taking advantage ofone's own wrongdoing Conttacts ate presumed not to petmit wrongdoers ro take advantage oftheir own 8.33 wrongdoing,90 although the ptesumption is rebuttable by cleat wording. 91 In the insutance context, it is thetefote unlikely that an obligation undertaken by the insurer will be construed as a promissory wattanty, a type of term that functions as a contingent condition precedent to the continued liability of the insuter on the policy. Intetpretation as a promissory warranty would petmit the insurer to commit the wrong of breaking the obligation and profit from that bteach through the discharge from liability." Any such obligation, ifsufficiently significant, is instead likely ro be construed as a condition as that term is employed in general contract law, so that breach gives rise to a right on the parr of the innocent party to elect ro treat the contract as dischatged if that patty so wishes.

Royal'& Sun Alliance Insurance pIc v Dornoch Ltd's concerned reinsurance of third party liability. A claims control clause required the reinsured, as a condition precedent to any entitlement to recover, to advise reinsurers within 72 hours of gaining knowledge of any loss or losses that might give rise to a claim. The purpose of the clause was to permit the reinsurers to exercise control over the response ro a claim falling within the tetms of the direct cover. On a literal reading, however, the clause made little sense. Under a reinsurance contract, there is no loss until liability on the ditect cover has been established. Consequently, the obligation ro notify arose only once it was too late for the reinsurers ro profit from notification. The reinsurers argued, therefore, that 'loss' meant alleged or claimed loss. However, in the context of reinsurance of financial liability, the commercial imperative fot urgent notification is elusive so that forfeiture of cover in the event of failure ro notify within three days was highly unreasonable. The underlying problem was that an inappropriate clause had been incorporated into the contract and the reinsurers were seeking a selective rewording. They were seeking ro invoke business common sense with respect to the trigger for the notification obligation in order then to benefit from the commetcially unreasonable urgency of notificarion. The Court of Appeal rejected this prayet. (h) Validity rather than invalidity

(j) Context outside the contract

The traditional approach ro the interpretation of contracts denied the admissi- 8.34 bility of extrinsic evidence, that is evidence ourside the four corners of the document, except in defined circumstances coveted under other headings in this section of this chapter. Thus, it was accepted that extrinsic evidence was admissible ro prove the existence of a specialist meaning, or to resolve problems of the applicability of the instrument, excessive unteasonableness, or ambiguity.93 Today, in contrast, language is understood as always contextual, a legal instrument as always a product of the circumstances in which it was drafted." Thus, even where rhe wording of a contract can be given meaning when read in isolation and none of the traditional grounds for admitting extrinsic evidence are operative, extrinsic evidence remains admissible ro establish the background against which the contract was concluded and, thereby, ro indicate the true intention of the parties and ro influence the interpretation of the contract. 95 It does not, however, follow from increased admissibility thar extrinsic evidence will readily be regarded as overriding the meaning otherwise attributed ro the language of the parties.

8.32 Patties are presumed ro intend their contracts to be valid and enforceable. Consequently, an interpretation that produces a valid, enforceable contract will be pteferted over one that renders the contract or part thereof invalid or unenforceable. B6 Fot example, where a guarantee has been susceptible ofbeing construed as given in teturn fot considetation that was either past or both past and future, the latrer interptetation has been preferred in order to tendet the guarantee valid. 87 Similarly, where one interptetation of the covet provided by a policy would produce an illegal contract, a court will favour an alternative interpretation." Where the problem is uncertainty of meaning, courts should again endeavour ro respect the parties' intention to conclude a binding contract and belief that they have done so. In Hillas'& Co Ltd v Arcos Ltd," Lord Wtight stated that: 'Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear ro them in the course of theit business may appeat ro those unfamiliar with the business fat from complete or

90

Alghussein Establishment v Eton College [1988] 1 WLR 587; Tesca Stores Ltd v Pook [2003]

EWHC 823 (Ch), [2004] lRLR 618.

[2005] EWCA Civ 238, [2005J 1 All ER (Comm) 590. In accordance with the maxim verba ita sunt intelligenda ut res magis valeat quam pereat. 87 Broom v Batchelor (1856) 1 H & N 255. See also Mare v Charles (1856) 5 E & B 978 (capacity in which bill ofexchange accepted). 88 Lancashire County Council v Municipal InsuranCe Ltd [1997J QB 897, 906; 910. 89 (1932) 43 L1LRep 359, 367.
85

86

Micklefield v SAC Technology Ltd [1990] 1 WLR 1002. For discussion of promissory warranties, see 18.54ffbelow. " As previously held in Shore v Wi&on (1842) 9 CI & Fin 355, 565-7. 94 Westminster City Council v NationalAsylum Support Service [2002] 1 WLR 2956, para 5. On the demise of Shore v Wilson specifically, see Chitty on Contracts Beale et al (eds) (29th edn, 2004) paras 12-117 and 12-118, acknowledged in Sykes v Forster (QB, 30 March 2001). 9S Admissibility that will be unaffected by a conventionally worded entire agreement clause: John v Price Waterhouse [2002] EWCA Civ 899, unreported, para 67.
91

92

276

277

Interpretation and Rectification ofInsurance Contracts

8.35 Evolution of the modern approach to admissibility The advent of this mote liberal approach to the consrruction of contracrs was signalled by the judgment of Lord Wilberforce in Prenn v Simmonds. 96 Lord Wilberforce stated: 'The rime has long passed when agreements, even those under seal, were isolared from rhe marrix of facrs in which they were ser and interprered purely on internal linguistic considerations' and rhar contractual interpretarion required one to 'enquire beyond the language and see whar the circumsrances were wirh reference ro which the words were used, and the object, appearing from those circumstances which the person using them had in view'. 8.36 Subsequently, in Reardon Smith Line Ltd v Yngvar Hansen-Tangen," Lord Wilberforce, wirh the concurrence of a majority of the House of Lords, emphasized that no contract was made in a vacuum and that, with respect to commercial contracts, courts were always entitled to 'know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating' . 8.37 The full width of the admissibility of evidence as to background was then reiterated" by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society." According to Lord Hoffmann, '00 with whom three further members of the House agreed, the phrase 'matrix of fact' was 'if anything, an undetstated description of what the background may include'. In principle, it included 'absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man'. Nevertheless, the evidence must be relevant'01 and cogent. Thus, according to Lord Phillips MR: 102 'Before taking extrinsic evidence into account, it is important to consider precisely why it is said to assist in deciding the meaning ofwhat was subsequently agreed and to consider whether its relevance is sufficiently cogent to the determination of the joint intention of the parties to have regard to it.' 8.38 The factual matrix of the contract does not include the merits of the underlying dispute. 103 8.39 Restrictions on admissibility of extrinsic evidence Notwithstanding the

Principles ofInterpretation

generally more liberal approach ro the admissibility of extrinsic evidence, there remain three technical, legal limits on admissibility.lO' First, the exttinsic circumstances sought to be adduced as evidence must have been reasonably within the knowledge of, or reasonably available to, both parties no later than the time of conclusion of the contract.'os The question is a broad one, namely whether reasonable people in the position of the parties would have known of the circumstance, so that it can then legitimately be regarded as part of the background against which the parties concluded the contract and relevant to illuminating their intention in doing so. Secondly, evidence relating to the course of negotiations leading up to the 8.40 conclusion of the contract is as a matter of law inadmissible as an aid to its interpretation.'06 The court is concerned with the contract ultimately concluded rather than preliminary or interim negotiating posirions or intimations of the objectives of one of the parties. Evidence ofsuch positions or objectives is simply 'unhelpful' .'07 Where the final version differs from eatlier versions, speculation on the motivation behind rhe change is pointless.'os Moreover, admissibility of negotiations might encourage the parties to generate statements favouring their desired construction for the purpose of providing evidence in the event of any subsequent dispute. 109 Consequently, such evidence is admissible only if it reveals a common intention as to the meaning of a certain term so as to found an esroppel by convention'lO or an action for rectification of the subsequent documentary record"' In practice, the line between extrinsic evidence that conttibutes to the factual matrix and evidence that merely relates to the process of negotiation is often elusive, but the modern general admissibility of

97 [1976J 1 WLR 989,996. And arguably extended. 99 [1988J 1 WLR 896. "0 ibid 913. '" Bank ofCredit and Commerce International SA v Ali [2001J UKHL 8, [2002J 1 AC 251, para 39. '" MSC Mediterranean Shipping Co SA v Polish Ocean Lines (The Tychy) (No 2) [2001] EWCA Civ 1198, [200I] 2 Lloyd's Rep 403, para 29. 103 Sirius International Insurance Co (PUBL) v PAI General Insurance Ltd [2004] UKHL 54, [2004J 1 WLR 3251, para 16.
98

" [19711 1 WLR 1381, 1383-4.

104 For discussion and criticism of the second and third limits on admissibility considered below, see G McMeel, 'Prior Negotiations and Subsequent Conduct-the Next Step Forward for Contractual Interpretation?' (2003) 119 LQR 272; Lord Nicholls, 'My Kingdom for a Horse: the Meaning of Words' (2005) 121 LQR 577. 105 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976J 1 WLR 989,997; Youell v Bland Welch & Co Ltd [1992] 2 Lloyd's Rep 127, 133; Investors Compensation Scheme Ltd v \.\:lest Bromwich Building Socicty [199811 WLR 896, 913: P&S Platt Ltd v Crouch [20031 EWCA Civ 1110, [2004J 1 p & CR 18, para 56. 106 Prenn v Simmonds [1971] 1 WLR 1381; Schuler (L) AG v Wickman Machine Thols Ltd [1974J AC 235. It is also inadmissible where the issue is whether the parties intended a document to be legally binding: Petromec Inc v Petroleo Brasileiro SA Petmhas (No 2) [2004) EWHC 127 (Comm), unreported, para 27, "7 [1971] 1 WLR 1381, 1385 per Lord Wilberforce. See also P&S Platt Ltd v Cmuch [2003J EWCA Civ 1110, [2004J 1 p & CR 18, patas 39,52; Stroude v Beazer Homts Ltd [2005J EWCA Civ 265, [2005J NPC 45. 108 Canterbury Go!fIntermuional Ltd v Yoshimoto [2002J UKPC 40, unreported, para 28. '" Sykes v Forster (QB, 30 March 2001). 110 Amalgamated Investment & Property Co Ltd v 1exas Commerce International Bank Ltd [1982]

QB84.
111

Rectification is discussed at 8.77f below.

278

279

Interpretation and Rectification ofInsurance Contracts

background evidence is no licence to undermine rhe inadmissibility of evidence of negoriations. 112 The crucial distinction was stated by Lord Phillips MR in The Tychy (No 2)"3 in the following terms: 'When a formal contract is drawn up and signed, care must be talten to distinguish between admissible background evidence relating to the nature and object of rhe contractual venture and inadmissible evidence of the terms for which each party was contending in the course of negotiations.' 8.41 The third rule of inadmissibility excludes evidence of post-formation statements or actions of rhe parties." 4 This is excluded for reasons that parallel rhe exclusion of evidence of negotiations. The court is concerned to construe the con~ rract the parties in fact concluded. The parties' beliefs in this respect may be mistaken or self-serving. In addition, if post-formation conduct could affect the interpretation of the contract, 'one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later' .'15 Such evidence is, however, admissible to support a claim for estoppel by convention,'16 as part ofthe factual matrix to evidence the purpose of the contract,117 as evidence of a term necessarily to be implied, 118 or as evidence of a variation of the contract or the making of a substitute contract. 119 8.42 The utility of extrinsic evidence Although extrinsic evidence is always admissible to illuminate the background to the contract, if the words employed by rhe parties, when read against the internal context of the contract as a whole, have an ordinary and natural meaning, it may be rare that extrinsic evidence will persuade a court that the words should instead carry a different meaning. There is no formal presumption in favour of the ordinary and natural meaning as distinct from the meaning as revealed by extrinsic evidence. On the contrary, interpretation is said always to be a contextual exercise. Nevertheless, if parties

Principles ofInterpretation

to a commercial contract have expressed themselves clearly and unambiguously, a COUrt will not lightly find by reference to extrinsic contextual matrers that they intended a different meaning. Thus, in one case, Bingham LCJ stated that the evidence failed to disclose 'such a clear consensus between the parties as would entitle the court to override what seems to me to be the clear effect of the policy wording."20 In Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1),'21 already dis- 8.43 cussed,122 iu which the assured sought to recover in respect of aircraft spares seized by invading Iraqi forces from Kuwait airport, the insurers relied on background market concerns regarding the extent to which it was prudent to grant war risks cover in respect of goods other than in transit. The House of Lords dismissed such evidence as irrelevant: 'it must in any event be stressed rhat it is not for the Courts to tell the parties what contract they should have made nor, after the event, to evaluate the merits and demerits of their bargain'.'" The parties had expressed their intentions in clear terms and 'that should be an end ofit'.124

An example from the insutance markets of extrinsic evidence having determina- 8.44
tive, or at least primary, evidential value is provided by Arbuthnott v Fagan.'" This concerned the interpretation of a clause in the contract between Lloyd's names and Lloyd's members' agents. Under clause 9 of the contract, the names owed an autonomous dury to pay such cash calls as the agents might honestly demand in order to fund the underwriting business. Clause 9(c) also ptovided that due compliance with such cash calls was a condirion precedent to the issuing of any proceedings 'in respect of any matrer arising out of or in any way connected with either the malting of such requirement lie a cash call] by the Agent or the subject matter thereof'. When the names sued the agents for breach of contract and negligence in the conduct of undetwriting, the agents argued thar meeting all cash calls was a condition precedent to the names' entitlement to sue. Construing the phtase 'in any way connected' in the abstract, it was possible to argue that underwtiting was not unrelated to the malting of calls. However, the Court of Appeal held that clause 9(c) did not apply. It was common ground between the parties, but not stated in the contract itself, that the purpose of the provision was to protect policyholders from disputes between names and agents adversely affecting the flow of funds required to meet liabilities. Whatever complaint the name might have regarding the call made, the call was first to be honoured. However, clause 9(c) was in no way designed to protect

112 See the express acknowledgement of this rule of inadmissibility by Lord Hoffmann in Investors Compensation Scheme Ltd v west Bromwich Building Society [1998] 1 WLR 896, 914. 113 MSC Mediterranean Shipping Co SA v Polish Ocean Lines (The 7jchy) (No 2) [2001] EWCA 1198. [2001] 2 Lloyd's Rep 403, para 29. See also New Hampshire Insurance Co v MGN Ltd

[1997] LRLR24, 30-1.

114 James Miller 6' Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572; Schuler (L) AG v Wickman Machine Tooh Ltd [1974] AC 235. 115 James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd[1970] AC 572, 603 per Lord Reid. 116 Amalgamated Investment & Property Co Ltdv Texas Commerce International Bank Ltd [1982]

QB84.

Dunlop 7jres Ltd v Blows [2001] EWCA Civ 1032. [2001] IRLR 629. Wihon v Maynard Shipping Comultants AS [1978] QB 665. 119 james Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572, 603; MSC Mediterranean Shipping Co SA v Polish Ocean Lines (The 7jchy) (No 2) [2001] EWCA
117

'"

120

Ham v Somak Travel Ltd[1998) EWCA eiv 153, unreported.

'" ibid.

121

123

Civ 1198, [2001] 2 Lloyd's Rep 403.

[1999] 1 Lloyd's Rep 803. '" See 8.30 above. [1999] I Lloyd's Rep 803, 816 per Lord Hobhouse. '" [1996] LRLR 135.

280

281

Interpretation and Rectification ofInsurance Contracts

Principles ofInterpretation
Thus, where the policy contains a clear misnomer, as a matter of interpretation 8,47 it will be read as evidently intended. In Nittan (UK) Ltd v Solent Steel Fabrication Ltd,'31 Sargrove Electronic Controls Ltd was tal<enover by Solent Steel, a division of which carried on the business of the taken-over company under the name of Sargrove Automation. Solent Steel's amended product liability policy, however, referred to the assured as Sargrove E]ectronic Controls Ltd, an error the Court of Appeal classified as an obvious misnomer, reading the policy as if the assured had been correctly identified. A further, arguably more controversial, example of clear error in rhe language is 8.48 provided by the Investors Compensation Scheme case itself. 132 The Scheme was established by stature to compensate victims of negligence on the part of persons authorized to carry on investment business. There was considerable mis-selling of home income plans. 133 Under the Scheme, in return for compensation, the investor transferred to the Scheme all rights and claims against the negligent adviser 'and other third parry claims'. Clause 3(b) then excluded the following from the scope of 'rhird party claims': 'Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the [mortgagee] in which you claim an abatement of sums which you would otherwise have to repay to the [mortgagee under the home income plan].' The Scheme sued one of the lenders as assignee of the investors' claims. The lender claimed that it was a third party and that, under the terms of clause 3(b), any right an investor might have against the Scheme had not been assigned. The House of Lords held, however, that the effect of clause 3(b) was to assign all claims to financial compensation while leaving the investor with any right to seek rescission of the contract with the lender. The clause was to be read as meaning 'any claims sounding in rescission (whether for undue influence or otherwise) in which you claim an abatemenr'.'34 The difficulty with rhis principle of interpretation is that the correction of errors 8.49 in recording the intention of the parties has traditionally been the province of the remedy of rectification. The latter requires proof of a clear conflict between rhe tenor of the instrument sought to be rectified and a prior outward expression

agents against the consequences of breach of their underwriting duties. The Court accordingly construed clause 9(c) as confined to complaints relating to cash calls. While it is probable that the Court would have reached the same conclusion on the wording of clause 9 even without the extrinsic evidence of the purpose of clause 9(c), Steyn and Hoffmann LJJ took that evidence as the foundation for their judgments. Their approach was not to construe clause 9 in isolation and then refer ro extrinsic matters merely by way of corroboration.'26
8.45 Extrinsic evidence may, however, go further than revealing the rrue intetpret-

ation of the words chosen by the parties. It may reveal thar the parries made a wholly inappropriate choice of words, or employed wholly inappropriate syntax to express their intention. It is now clear that the words chosen should be construed so as to give effect to the parties' intention. Thus, according to Lord Hoffmann in Investors Compensation Scheme: 127
The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ... The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties all intention which they plainly could not have had.

This principle can be seen as tying in with the principle of construing contracts consistently with commercial sense, '28 a connection that Lord Hoffmann indeed went on to make.
8.46 It is worth noting that, while Lord Hoffmann's reformulation of the rules of interpretation has attracted a certain measure of critical comment for its per~

ceived general relaxation of principles of admissibility of extrinsic evidence,129 it is only, or at least predominantly, in cases of apparent drafting error, or at least
infelicity, that the courts in practice have resorted to extrinsic evidence to over-

ride the interpretation that would otherwise be afforded the parries' language. 130

'" See also Egan v Static Con".o! Components (Europe) Ltd [2004] EWCA Civ 392, [2004] 2 Lloyd's Rep 429. 127 [1998] 1 WLR 896, 914 (part of Lord Hoffmann's fourth principle). See also Lord Hoffmann's judgment in Jumbo King Ltd v Faithful Properties Ltd [1999) 4 HKC 707, quoted in Zyxel Communications Corp v Fairbridge Communications Ltd [2004] EWHC 1388 (QBD), unreported, paras 20, 24. 128 See 8.26ff above. 129 See McKendrick, Contract Law: Text, GlSes and Materials (2nd edn, 2005) 422-4. 130 Lord Steyn, 'The Intractable Problem of the Interpretation of Legal Texts' in S Worthington (ed) Commercial Law and Commercial Practice (2003) Ch 5, 128.

131 [1981] 1 Lloyd's Rep 633. Contrast Cee Bee Marine Ltd v LombardInsurance Co Ltd[1990] 2 NZLR J. 132 See also Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[1997] AC 749. 133 These were loans secured by a morrgage on the borrower's house with the borrowed money invested in equity-linked bonds. When the stock market fell, investors incurred heavy losses. 134 See also Heritage Insurance Services Ltd v Rotch Property Group Ltd [2003] NPC 100 (Ch) (reference to Appendix 2 in a contractual definition instead of to AppendiX 1 was a clear mistake and to be read as obviously intended); Snowville UK Ltd v Holiclaybreak pic [2004J EWHC 1336 (Ch), unreported (indemnity clause).

282

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Interpretation and Rectification ofInsurance Contracts

of the common intention that the instrument purports to codifY.135 No such evidential burden exisrs in the law of interpretation. In the light of Investors Compensation Scheme, however, it would appeat that where the alleged error consists of misrepresenting the common intention, the party alleging the error may seek to have the contract read in the allegedly correct manner through either rectification or interpretation. Nevertheless, where the alleged error consists in including a provision that should not have been included or in omitting a provision that should have been included, it is hard to see that interpretation can provide an alternative to rectification.
8.50 Context excluding extrinsic evidence

Principles ofInterpretation
clause capable of either a broad or narrow interpretation, rhe clause will be construed narrowly in favour of the assured. 140

While the external context of a contract is usually invoked to broaden the range ofadmissible evidence, that context may dictate that extrinsic evidence should not be considered. A cargo policy is a document that may be passed along a chain of purchasers and through banks participating in documentary credits. This commetcial context sits ill with aids to interpretation outside rhe four corners of the document. Thus, it has been held that a negotiable bill of lading 'should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed' .'36 This excludes knowledge of circumstances surrounding rhe formation of the contraer known to the original parties but not to subsequent holders. Moreover, such a document needs to be able 'to be raken up or rejected promptly and without any opportunity for prolonged inquiry'.137 The process of examination by new holders may affect rhe interpretation of or significance to be attribured to a contractual rerm. '38

It is, however, to be emphasized that the contra profirentem rule is available only 8.52 if a clause is genuinely ambiguous and not merely difficult to interprer. '4' Merely because (expert) witnesses differ over the meaning to be ascribed ro a term does not of itself render the term ambiguous. '42 Before concluding that a clause is ambiguous, a court should first endeavour to ascertain its interpretation in accordance with the guidelines already discussed. A court should not 'move straight ro the contra profirentem rule without first looking at the context and, where appropriate, permissible aids to identifYing rhe purpose of the commercial document of which the words form part' .'43
The rule clearly requires identification of the profirens. Ironically, the term is 8.53 itself ambiguous, being capable of referring to either the party seeking to rely on the clause (the profirens coram judice) or the party responsible for introducing the ambiguity into the contract (the.profirens in contrahendo).144 It is, however, now clear that the contra profirentem rule employs the term profirens in the latter sense. 145 The wording of a policy is generally put rogether by the broker, who, as agent of 8.54 the assured, then tenders the wording in the form of a slip to the insurer for consideration of acceptability of the risk, including the precise terms, and the appropriate level of premium. Where the term that proves ambiguous is one inserted by or on behalf of the assured, the contra profirentem rule requires interpretation in favour of the insurer and against the interests of the assured. 146

(k) Ambiguity 8.51 Where the result of applying the principles of interpretation already outlined is that the relevant clause is capable of twO or more equally legitimate interpretations, the ambiguity entitles the court to invoke the contra profirentem rule. 139 Under this rule, the ambiguity is resolved against whichever party is the profirens of the ambiguous clause. Thus, if the insurer is the profirens of an exemption

140 Lawrence vAberdein (1821) 5 B & AId 107; Houghton v Traftlgar Insurance [19541 1 QB 247; Ilktrol Ltd v International Imuram'e Co ofHarlOver Ltd [2005J EWCA Civ 845, [2005J 2 Lloyd's

See 8.78-8.80 below. Dairy Containers Ltd v Tasman Orient Line CV (The Tasman Discoverer) [2004] UKPC 22, [2005J 1 WLR 215, para 12 per Lord Bingham. See also Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003J UKHL 12, [2004J 1 AC 715, para 74. 137 Hansson v Hamel & Horlry Ltd [19221 2 AC 36, 46 per Lord Sumner. 138 Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003J UKHL 12, [2004J 1 AC 715. 139 The expression' contra proferentem rule' is a convenient abbreviation 'of the maxim verba chartarum fortius accipiuntur contra proferentem.
135 136

Rep 701. 141 Higgins v Dawson [1902] AC 1; American Airlines Inc v Hope [1973J 1 Lloyd's Rep 233, 250. '" Kirkaldy OJ & Sons Ltd v Walker [1999J Lloyd's Rep lR 410,419. 143 Dirett Travel Insurance v McGeown [2003J EWCA Clv 1606, [2003J Lloyd's Rep lR 599, para 13 per Auld L]. See also Melanesian Mission Trust Board v Australian Mutual Provident Society [l996J UKPC 53, (1997) 74 P & CR 297, para 8; Gan Insurance Co Ltd v Tid Ping Insurance Co Ltd (Nos 2 & 3) [2001] EWCA Clv 1047, [2001] Lloyd's Rep IR 667, para 21 per Mance LJ: 'principle of last resort'. 144 Youell v Bland Walch & Co Ltd [1992] 2 Lloyd's Rep 127, 134. 145 See the cases cited below. Also Anderson v Fitzgerald (1853) 4 HLC 484, 507; Lancashire County Council v Municipallnsurance Ltd [I997J QB 897, 905, 910; Kirkaldy OJ & Sons Ltd v Walker [1999J Lloyd's Rep IR 410,416. It is possible that prima facie contrary statements that the

proferens is the party for whose benefit the clause in question was introduced into the contract (eg Blackett v Royal Exchange Assurance Co (1832) 2 Cr & J 244, 251) may be predicared on tbe assumption that a party who benefits from a clause wHi have been responsible for its introduction. 146 AlS Ocean v Black Sea & Baltic Generallnsurance Co Ltd (1935) 51 LlLRep 305; Bartlett & Partners Ltd v Meller [1961] 1 Lloyd's Rep 487, 494; De Maurier Oewels) Ltd v Bastion Insurance CO [1967J 2 Lloyd's Rep 550, 559; American Airlines Inc v Hope [1973J 1 Lloyd's Rep 233, 250; Dmby v English & Scottish Maritime Insurance Co Ltd [1998J Lloyd's Rep IR 343, 358.

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Interpretation and Rectification o/Insurance Contracts

Where, in conrrasr, the ambiguity resides in an amendmenr ro the slip inrroduced by the insurer, the ambiguity will be resolved against the insurer. '47
Moreover, courts

Principles 0/Interpretation
ro the insurer, the assured remains responsible for introducing the wording that .turns our ro be ambiguous, and, therefore, the ambiguity falls ro be resolved in favour of the insurer. '53 On the other hand, there is something ro be said for a second view, that documents prepared by bodies represenring the market's underwriters, such as the Joinr Hull Committee and the Joint Cargo Committee, should, if found to be ambiguous, be construed in favour of the assured. ,s4 On a third view, standard marker wordings should receive a standard inrerpretation regardless of which party proposed inclusion of the relevanr wording in the patticular case, so that the contra proftrentem rule is an inappropriate tool ro adopt. 155 The second view, although applying the contra proftrentem rule, would, of course, be consistent wirh the third in producing uniform interprerarion.

will not interpret ambiguities in insurers' own standard docu-

ments in favour of the insuret simply because of the technical analysis of insurance conrtact formation. In MIS Aswan Engineering Establishment Co Ltd v Iron Trades Mutual Insurance Co Ltd, 148 the policy adopted rhe insurer's standard liability fotm and excluded 'the cosr of replacing at making good defective materials, plant, machinery, goods at commodities'. Inadequate packing and srowage tesulted in liability fat breach of conrracr on the part of the assuted, Lupdine, for goods lost because pails ir supplied collapsed owing ro rhe mode of stowage. Lupdine being insolvenr, Aswan sued Lupdine's insutet under the Third Parties (Rights against Insurers) Act 1930 149 Hobhouse J held rhat the insurer was not protecred by the exclusion: This was not a liability for the cost of replacing or making good anything. What
the wording refers to on its natural meaning is a situation where the assured has undertaken a contracwal1iabiliry to replace or make good as under a guarantee

(I) Estoppel by convention

As already seen, pre-contractual negoriations are inadmissible as an aid to inrer- 8.58 pretation of rhe ensuing conrraer. '56 They may, nevertheless, affect rhe interpretation of the conrract by giving rise to an estoppel by convention. Where the rwo parties have concluded the contract on rhe basis, expressly or impliedly manifested by each ro the other,157 thar a particular term is to carry a particular meaning, each party will be esropped as against the orher from disputing that meaning, provided it is unconscionable to do SO.'58 Accordingly, the rerm in quesrion will be consrrued in accordance with the meaning assumed by the parties, regardless of any meaning otherwise indicated by the normal principles of interpretation. '59 In Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd, 160 C was a property company with a

clause in a contract for the sale of goods. If, contrary to my view, it is not clear that this wording has this meaning then it is at best ambiguous and capable of more than one meaning, and the ambiguity must be resolved against the defendants. 1SO

8.55 It has even been suggested rhat a rerm that benefits the insurer will not be inrerpreted in the insurer's favour even if included in wording advanced by brokers. 's, This view, however, runs counter to established authority and ignores the possibility rhat rhe clause might be deliberately inrroduced on the assured's behalf ro render the risk more acceptable to insurers. In the case in quesrion, moreover, there were other grounds for declining to inrerprer in the insurer's favour. 8.56 A third possibility is that the ambiguity might reside in a clause thar is, or must be regarded as, the deliberare acr of both parties. In such a case, the contra proftrentem rule cannot apply152 and the court will have to firid another roure to interpretation. 8.57 Where the ambiguity is found in a standard market document, such as a set of Institute or Inrernational Clauses, the position is less clear. On one view, the same principles apply so rhar where such wording is incorporared into the proposal put

'" AlS Ocean v Black Sea & Baltic Generallnmrance Co Ltd(1935) 51 LlLRep 305. 310; Ikerigi Compania Naviera SA v Palmer (The Wondrous) [1991] 1 Lloyd's Rep 400, 416. 154 MIS Aswan Engineering Establishment Co Ltd v Iron Trades Mutua! Insurance Co Ltd [1989]
1 Lloyd's Rep 289, 293-4. 155 Gan Insurance Co Ltd v Tid Ping Insurance Co Ltd (Nos 26-3) [2001] Lloyd's Rep IR 667, [20011 Lloyd's Rep IR 667, para 21; Royal & Sun Alliance Insurance pic v Dornoch Ltd [20041 EWHC 803 (Comm), [20041 Lloyd's Rep 1R 826, para 82. See also Tersons Ltd v Stevrnage Development Corp [196312 Lloyd's Rep 333, 368.
156

See 8.40 above.

W Jaglom v Excess Insurance Co Ltd [1972J 2 QB 250, 261. '"' [19891 1 Lloyd's Rep 289. . 149 The 1930 Act is discussed in Ch 20 below. 'so [19891 1 Lloyd's Rep 289, 293-4. '" Royal & Sun Alliance Insurance pic v Dornoch Ltd [20041 EWHC 803 (Comm), [2004J Lloyd's Rep 1R 826, para 82. 152 Birrell v Dryer (1884) 9 App Cas 345, 351-2, 354 (watranty defining'navigational limits under a time policy).

Sometimes referred to as conduct 'crossing the line' between the parties. 158 Norwegian American Cruises A/S v Mundy (The VistafjordJ [1988] 2 Lloyd's Rep 343, 350-2; Furness Withy (Australia) Ltd v Metal Distributors (UK) Ltd (The Amazonia) [19901 1 Lloyd's Rep 236, 251; Hiscox v Outhwaite [19921 1 AC 562, 575-6; India v India Steamship Co Ltd (The Indian Endurance & The Indian Grace) (No 2) [19981 AC 878, 891, 913. 159 The same approach was adopted as a matter of interpretation but without any reference to estoppel by convention in The Karen Oltmann [1976] 2 Uoyd's Rep 708. If extrinsic evidence revealed that the parties had applied a particular meaning to a certain word, in effect constructing their own dictionary, the court should apply that meaning as representing the intentions of the parties. For an application in a marine reinsurance context, see Allianz Marine Aviation (France) v GE Frankona Reinsurance Ltd London [2005J EWHC 101 (Comm), [20051 Lloyd's Rep IR 437. It is, however, difficult to see how this approach differs from estoppel by convention. 160 [1982J QB 84.
157

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Interpretation and Rectification ofInsurance Contracts

subsidiary, ANPP, registered in the Bahamas. D was a bank prepared to lend money to ANPP ptovided C guaranteed the loan. C duly executed a guarantee covering all sums due from time to time to D from ANPP. For exchange control purposes, however, the loan was not made directly by D to ANPP. Instead it was made through one of D's subsidiaries, called Portsokon. ANPP defaulted on the loan and D claimed against C on the guarantee. C refused to pay on the ground that the guarantee covered only sums owed to D, whereas the debt was owed to Portsokon. C sought a declaration from the courts that it was not liable. The claim failed. The Court of Appeal held that both parties had assumed that the guarantee would cover the sums advanced by Portsokon and had acted accordingly. Each was, therefore, estopped as against the other from disputing that the guarantee was to be so understood. (3) Contractual Interpretation and the Doctrine of Precedent
8.59 The doctrine of precedent artaches to propositions of law. The meaning that a word carries as a matter of language is a quesrion of facr, and therefore outside the doctrine,16' while the interpretation of a conttact is a matter of law, and potentially within.'6' In Chatenay v Brazilian Submarine Telegraph CO,163 Lindley LJ stated as follows:
The expression <construction', as applied to a document, at all events as used by English lawyers, includes twO things: first, the meaning of the words; and, sec-

The Slip tIS an Aid to Interpretation ofthe Policy

Where the parties contracting within a particular market subscribe to a standard 8.61 form promulgated for use in that market, such as the Institute or International Clauses in the London marine insurance market, .in the absence of contrary evidence, they will be taken to have intended the terms of that form to carry such meaning as has already been established by law. The accumulated case law forms part of the background against which the parties conclude their contract. After all: 'It is only if parties to commercial contracts can rely upon a uniform construction being given to standard terms that they can prudently incorporate them in their contracts without the need for detailed negotiation or discussion.'166 The applicability of the doctrine of precedent to decisions on the interpretation of standard form contracts thus produces a result in complete harmony with the ordinary principles of contractual interpretation. Decisions unwelcome to the market can be avoided by the market altering rhe form.'67 Conversely, the interpretation of one-off contracts or one-off clauses wirhin 8.62 contracts, or of clauses in standard form contracts that have nor previously been rhe subject of judicial consideration, falls outside the doctrine of precedent and rhe urility of authority, even on a persuasive basis, is confined to illustration of possible interprerations and arguments based on analogy. Ultimately, the court must focus on the contract in question.'68 Where a standard form has been marerially amended, it will be interpreted as a one-off contract. '69

ondly, their legal effect, or the effect which is to be given to them. The meaning of
the words I take to be a question of fact in all cases, whether we are dealing with a poem or a legal instrument. The effect of the words is a question of law.

B. The Slip as an Aid to Interpretation of the Policy

Insurance contracts raise a further particular issue relating to interpretation where 8.63 a slip has been followed by a policy. The question is the extent, if at all, to which the slip is admissible in evidence as an aid to interpretation of the policy. Two different approaches emerge from the case law. Fitst, a slip is always admissible although its evidential value varies depending on the circumstances. Secondly, a rule oflaw bars reference to the slip, which is consequently always inadmissible.
(1) General Admissibility But Variable Evidential Value

8.60 Of course, the issue for a court faced with a question of interpretation is always what the parties to that contract intended by that choice of words in all the circumstances surrounding the making of that choice. Nevertheless, if a subsequent choice of words contains no material distinction in terms of parties, words, or circumstances, the decision reached on the earlier occasion will act as a precedent for interpretation of the later instrument.'" In the absence of contrary intention, the reasonable businessman is tal<:en to have selected the relevant term in the light of its interpretation by the courtS. 165 This leads to a distinction between standard form contracts and contracts concluded on a one-off basis.

The most considered analysis of the admissibility of the slip as an aid to inter- 8.64 pretation of the policy is found in an obiter section of the judgment of Rix LJ,

'" Brutus v Cozem [1973J AC 854, 861. Bahamaslnternational Trust CoLtdv Threadgold(1974] 1WLR 1514,1526; Commonwealth Smelting Ltd v Guardian Royal Exchange Assurance Ltd(1986] 2 Lloyd's Rep 121.
162

'" [1891J 1 QB 79, 85.

'" Pioneer Shipping Ltd v BTP Tioxide Ltd (The Hema) [1982J AC 724,736. British Sugar pic v NEI Power Projects Ltd (1997) 87 BLR 42,50. Even if the expression of judicial opinion on the point of interpretation did not form parr of the ratio decidendi of the case: Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The Kleovoulo,"o! Rhodes) [2003J
165

EWCA Civ 21, [2003J 1 Lloyd's Rep 138, para 28.

'" Pioneer Shipping Ltd v BTP Tioxide Ltd (The Hema) [1982J AC 724, 737 per Lord Diplock. See also Federal Commerce 6' Navigation Co Ltd v Tradax Export SA [1978] AC 1, 8. '" Ijrie v Fletcher (1777) 2 Cowp 666, 668; The Annefield[197lJ P 168, 183. 168 Luxor (Eastbourne) Ltd v Cooper (1941] AC 108, 130; Ashville Investments Ltd v Elmer Contractors Ltd[1989] QB 488, 495. For a distinctly hostile response to citation of authority, see Aspden v Seddon (1874) LR 10 Ch App 394, 3960, 397-8. '" Pioneer Shipping Ltd v BTP Tioxide Ltd (The Hema) [1982J AC 724.

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Interpretation and Rectification ofInsurance Contracts

The Slip as an Aid to Interpretation ofthe Policy

The third possibility is that the parties intend the slip to prevail. In such a case, 8.68 s1.lbject ro evidence thar rhe discrepancy results from a decision to vary the contract, inconsistencies should be resolved in favour of the slip. Under this third approach, determining whether the parties intended the policy 8.69 to supersede the slip is clearly important. An intention to supersede has been stated to be the understanding of the Lloyd's market where the slip is sent ro the Lloyd's Policy Signing Office (now superseded by Ins-sure) and a policy is duly issued.'75 Indeed, according to Rix LJ in HIH v New Hampshire, this is the normal inference whenever a slip is followed by a policy.176 Ultimately, however,
in cases where the parties' intention is a matter of dispute, the dispute must be

with which Mummery and Peter Gibson LJJ agreed, in HIH Casualty & General Insurance Ltd v New Hampshire Insurance CO.'70 According ro the approach advocated by Rix LJ, no rule of law renders the slip inadmissible, but the evidential utility of the slip varies according ro whether the parties intended the contract as stated in the policy to supersede the contracr as srated in the slip.
8.65 If it is common ground or found by a tribunal that the policy was intended ro

supersede the slip then, outside any rectification action,171 the slip cannot be used ro add ro or alter the wording of the policy. It is, however, admissible as an aid ro interpretation of the contract as stated in the policy as part of the contractual
matrix or surrounding circumstances. However, the parties' intention to super-

sede will render the probative value of the slip weak indeed, since any difference in wording will be assumed ro reflect a deliberate decision to alter the terms of the contract. Consequently, 'a cautious and sceptical approach to finding any assistance in the earlier contract [in the slip] seems ... a sound principle'. 172
8.66 It is, nevertheless, suggested that the probative value of the slip may be unduly

downplayed. Clearly, any discrepancy between slip and policy will indeed be resolved in favour of the policy. However, should the policy be unclear in meaning but the slip clear, there would appear ro be no reason auromatically ro assume that a change from clear to unclear language reflects a decision ro change substance rather than an unfortunate alteration merely of expression. In consequence, the slip should be both admissible ro dispel the lack of clarity in the slip and afforded full probative value, although precisely what that value is will inevitably depend on the other evidence available.
8.67

resolved in the ordinary way on the evidence before the court. Designation of the slip as a 'slip policy' or 'slip contract' serves as an indication that rhe wording of slip is intended to be final. In HIH v New Hampshire itself, Rix LJ considered that rhe parties had not intended rhe policy ro supersede the slip for two reasons. First, the slip was designated a 'slip policy' and, secondly, the policy was incomplete as demonsrrared by its silence wirh respect to premium.'" Likewise, in Assicurazioni Generali SpA v Ege Sigorta AS,'78 the slip was stated to 8.70 be a 'slip contract'. Colman J held thar rhe subsequent tendering of wording by the broker for approval by the insurer was a 'purely ministerial exercise'. In the event that the wording did not accurately reflect the slip, its tender was not an offer ro vary the contract but an errot in completing the contract wording and
an acceptance

by the insurer was not an agreement to new wording. Moreover,

One needs then ro consider the situation where it is neither common gronnd nor found by a tribunal that the policy is intended to supersede the slip. If the intention is that the twO documents should live rogether as records of the same, unchanged, contract,173 one should strive to read the two documents together and iron out any apparent inconsistencies. 174 Irreconcilable inconsistencies will, however, have to be resolved in favour of the policy as embodying the later expression of the parties' intentions.

under the LMP200 I market reforms, wherever possible the slip should indicate final wording with clariry, arguably promoting the slip as the primary source of the terms of the contract and relegating the policy ro merely a formal record of the contract as agreed in the slip.'79 On the approach as advocated by Rix LJ, therefore, the slip is never inadmissible 8.71 in evidence as a matter of law although its probative value will vary according ro
the circumstances.

(2) The Rule of Law Approach

[2001) EWCA Civ 735, [2001) 2 Lloyd's Rep 161, paras 69-97. 171 And the intention that the slip be generally superseded will raise the need in the context of rectification for corroborative evidence that supersession in the relevant respect was not intended. m [2001] EWCA Civ 735, [20011 2 Lloyd's Rep 161, para 83 per Rix L]. 173 Rix LJ speaks of an intention that twO contracts live together; With respect, however, it is difficult to see that the assured and insurer ever intend to have twO separate insurance contracts simultaneously in play. The intention contemplated here must be one contract unchanging in content with the operative record of that contract being initially the slip and then the policy. 174 This is the approach to adopt where there is no policy but a slip that incorporates a standard Lloyd's form under the heading 'Conditions' and there are some differences between the slip and the form: Quinta Communications SA v Warrington [2000] Lloyd's Rep-IR 81.
170

An alternative approach would render the slip inadmissible as an aid ro inter- 8.72 pretation of the policy as a matter of law. There are three suggested bases for

17' New Hampshire Imuran,e Co v MGN Ltd [19971 LRLR 24, 33 (Comm Ct).

[2001] EWCA Civ 735, [2001] 2 Lloyd's Rep 161. para 85. 'In the insurance matket ... it may well by now be possible to talk ofa general presumption that a polic)' is intended to supersede a slip': ibid para 93. 177 ibid para 95. '" (20021 Lloyd's Rep lR 480,484. 179 See 2.05-2.11 above.
176

290

291

Interpretation and Rectification ofInsurance Contracts such a rule: the inadmissibility of contractual negotiations as an aid to construction of the tesulting conttact, the parol evidence rule, and the wotding of section 89 of the Marine Insurance Act 1906.

The Slip as an Aid to Interpretation ofthe Policy

interpretation of the contract as opposed to whether a particular term has been etroneously included in or omitted from the policy, a rule of inadmissibility that extends beyond exclusion of negotiations is inconsistent with the modern approach to extrinsic evidence.'87 This was, indeed, the approach of Staughton L] in Youel!.'88 At first instance, in contrast, it was suggested that this liberality should not extend to admitting earlier incarnations of the final document for fear of the 'profusion of documents' that a court might have to consider.'89

(a) Inadmissibility ofcontractual negotiations 8.73 As already seen, evidence of what the parties said in the course of negotiating a conttact is inadmissible as an aid to intetptetation of the final contract."o However, while this principle is not in dispure, it is hard to see its relevance. The market has always understood that subscription to a slip generates an immediate and binding undertaking. Once stamp duty laws ceased to restrict legal recognition of a binding contract to a stamped policy, '81 it became possible to align insurance contract law and market understanding so as to recognize that subscription to a slip genetated a binding conttact, even if production of a policy remained a condition precedent to admissibility of the contract in court and even if the parties contemplated that the contract in the slip might be superseded by a replacement conttact in a policy. The televant point in the present context, however, is that there is no doubt at all today that a slip does not
constitute merely a stage in negotiating an insurance contract. Since it is a binding contract, the evidential exclusion of contractual negotiations is irrelevant.'82

(c) Marine Insurance Act 1906, section 89

The judgment of Beldam L] in Youell v Bland Welch raises, obiter, a further 8.75 difficulty. Section 89 of the Marine Insurance Act 1906 provides that 'reference may be made, as hetetofore, to the slip or covering note, in any legal proceeding'. Interpreting the words 'as heretofore' as meaning only for the purposes already established, Beldam L] refetred to Ionides v Pacific Fire 1& Marine Insurance Co, "0 the decision codified by section 89, to ascertain those purposes. Ionides was the landmark decision in which a slip was held admissible to prove that the terms of the insurance contract were concluded at the initialling of the slip, the intention of the parties being that the subsequent stamped policy should reproduce those terms.'" In the light of the prevailing stamp duty legislation, which invalidated any contract of marine insurance not expressed in a duly stamped policy, '92 Kelly CB observed that the slip was not being introduced 'to contradict or to explain, or in any way affect the construction of the policy in question'.'93 Consequently, according to Beldam L]:'94 'If prior to the passing of the Marine Insurance Act, 1906, the slip was not admissible to explain or in any way affect the construction of the policy, in my judgment it was not admissible for the purpose of affecting the construction of the policy in question in this case: With respect, however, this reasoning can be criticized on various grounds. First, 8.76 the statement of Kelly CB is ambiguous. It was construed by Beldam L] as asserting that the admissibility recognized in Ionideswas not to be extended into the domain of interpretation. However, it may simply be a careful, and accurate, statement of the admissibility sought and accepted on the facts of Ionides, the

(b) The parol evidence rule

8.74 In Youell v Bland Welch 1& Co Ltd,"3 reinsurers sought to inttoduce the slip as evidence of the true construction of a clause in the reinsurance contract. The

insurers argued that admitting the slip for this purpose would infringe the patol evidence rule by virtue of which 'parol testimony cannot be received to contradict, vary, add to or subtract from the terms of a wtitten contract, or the terms in which the patties have deliberately agreed to record any part of their contract' .'84 It is suggested, however, that the parol evidence has little, if any, televance in the modern law. First, if the slip evidences an errot in transcription of the contract in the policy, a recognized exception ro the parol evidence rule in the form of the remedy of rectification is available."5 Moreover, the etror may be susceptible to laundering by interpretation through the modern approach to admissibility of extrinsic evidence."6 Secondly, where the concern is indeed

See 8.40 above. 181 On stamp duty and marine insurance contracts, see 3.65ff above. '" Youell v Bland Welch 6' Co Ltd [1992) 2 Lloyd's Rep 127, 133; HIH Casualty 6' General Insurance Ltd v New Hampshire Hisurance Co [200l! EWCA Civ 735, [200l! 2 Lloyd's Rep 161, para 83. '" [199212 Lloyd', Rep 127. "" Bank ofAustralasia v Palmer [J 8971 AC 540, 545 per Lord Morris. 185 Rectification is discussed at 8.77ffbelow. 186 See 8.45 ahove.
180

'" See 8.34ff above but cf Shogun Finance Ltd v Humon [20031 UKHL 62, [20041 1 AC 919, para 49. 188 [1992J 2 Lloyd's Rep 127, 133. Staughton L] concluded, however, that the slip in question lacked sufficient clarity to assist in the construction of a term in the policy. 189 [199012 Lloyd', Rep 423, 428-9 per Phillips]. 190 (1871) LR6 QB 674; (1872) LR 7 QB 517. '" See 2.08-2.09 above. 192 Customs and Inland Revenue Act 1867, ss 7, 9 (30 Viet, c 23). For the evolution of the relationship between stamp duty legislation and marine insurance law, see 3.65ff above, '" (1872) LR 7 QB 517, 526. 194 [1992J 2 Lloyd's Rep 127, 141.

292

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Interpretation and Rectification ofInsurance Contracts

Rectification
Since the remedy is equitable, undue delay in raising the discrepancy may see the remedy batred by the doctrine of laches.'" Rectification is generally confined to failures of the wtitren record accutately to 8.78 reflect the common intention of the parties. The conditions to be satisfied were summarized by Slade LJ as follows:"o
First, there must be a common intention in regard to the particular provisions of the agreement in question, together with some ourward expression of accord. Secondly, this common intention must continue up to the time of execution of the instrument. Thirdly, there must be clear evidence that the instrument as executed does not accurately represent the true agreement of the parties at the time of its execution. Fourthly, it must be shown that the instrument, if rectified as claimed, would accurately represent the true agreement of the parties at that time ...

cautious tone a product of the need to respect the then fiscal legislation."5 Secondly, lonides was an emancipating decision in which the courtS took an important step in freeing the slip from the fettets of stamp dury legislation, construing the then stamp duty legislation testrictively in order to accommodate commetcial practice. The effect of the intetptetation by Beldam LJ ofsection 89 is to transfotm lonides into a restrictive decision, prohibiring furthet emancipation. Thitdly, the statement of Kelly CB, if intended to prohibir further admissibility, is clearly obiter. Since there is no teason in ptinciple why marine insurance law should be insulated from the growing liberality of the approach ro interpretation adopted in general contract law, the dictum if so intended should not be followed unless statute so compels. Fourthly, section 89 does not so compel. It can be construed, consistenrly with the emancipating spirit of the decision in lonides, as preserving the progress made in emancipation of the slip without prejudice to further progress. It confirms that teference to the slip may indeed be made as established befote the passing of the Act. Section 89, it is suggested, is not designed to deny all possibility of furthet liberation after 1906 of the slip from its earlier fiscal chains and to freeze this aspect of matine insurance law for all time in the late nineteenth century.

C. Rectification
8.77 With all contracts, there exists the possibility of discrepancy between the agree-

ment and any subsequent written recotd thereof. With contracts of marine insurance, this possibility is exacerbated by the use of slips with a formal poticy nor being drawn up until a later date. Recrification is the equitable remedy by which a court can remedy mistakes in the recording of rhe parties' agreement.'96 Thus, it has been said that: 'Courts of equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the
terms of contracts.'197 An inaccurate representation of a common continuing

Where rhe document accurarely reflects the intention of one party but not that 8.79 of the other, the fact that transcription reflects such a unilatetal mistake does not suffice of itself for altetation of the recotd. Rectification will be granted only where the unilateral mistake has been induced by inequitable conduct or where the non-mistaken party had actual knowledge of the mistake. For these purposes, acrual knowledge includes the wilful shutting of one's eyes to the obvious and the wilful and teckless failing to make such enquiries as to whether the orher party was labouring under a misapprehension as an honest and reasonable person would. 20 ' Only such conduct justifies imposing on the non-mistaken party a contract it did not intend to make and relieving the claimant from a contract that it did malee, albeit on the basis of a mistake. 202 Generally, therefore, the key to rectification consists of evidence, adduced by 8.80 one patty, of incompatibility of the terms of a written document with a prior expression of the common intention of the parties, in the face of claims by the othet party that rhe document accurately reflects the bargain that othet patty, at

intention will, however, suffice; a ptiot concluded contract need not be proved. "a

199

Cape pIc v Iron Trades Employers Insurance Association Ltd (1999) [2004] Lloyd's Rep IR 75,

94-6. Time runs from actual knowledge of the possible discrepancy, 'Constructive knowledge is insufficient', T&N Ltd v Royal & Sun Alliancepic (20031 EWHC 1016 (Ch), (2004] Lloyd's Rep

IR 106, para 186 per Lawrence Collins J, See also ibid para 140. 200 Agip SpA v NavigazioneAlta Italia SpA (The Nai Genova and Nai Superba) (198411 Lloyd's
195 HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ 735, (2001] 2 Lloyd's Rep 161, para 92. 196 Or mistakes in the parries' shared understanding of the true import of the words they have chosen: Re Butlin's Settlement [1976] Ch 251, 260. In this respect, rectification overlaps with estoppel by convention. 197 Mackenzie v Coulson (1869) LR 8 Eq 369, 375 per Sir WM James V-CO Just as rectification cannot be used to correct mistakeS in the original agreement, nor may it be used to cure omissions in that agreement: Cape pic v Iron Trades Employers Insurance Association Ltd (1999) [2004] Lloyd's Rep IR 75,94. 198 Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA'(The Olympic Pride) (1980J 2 Lloyd's Rep 67,

n.

Rep 353, 359. See also Kiriacoulis Lines SA v Compagnie d:Assurances Maritimes Ariennes et Terrestres (CAMA'l) (The Demetrtt I!) (2002J EWCA Civ 1070, (2002] 2 Lloyd's Rep 581, para 22. 201 River/ate Properties Ltd v Paul [1975] Ch 133; Thomas Bates & Sons Ltd v Wyndham's (Lingerie) Ltd (198111 WLR 505; Agp SpA v Navigazione Alta Italia SpA (The Nai Genova and Nai Superba) (I984] 1 Lloyd's Rep 353; Commission for the New TOwns v Cooper (Great Britain) Ltd (1995] Ch 259; Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005J EWHC 19 (Comm), (20051 1 Lloyd's Rep 547; George Wimpey UK Ltd v VI Components Ltd (2005J EWCA Civ 77, (2005J BLR 135. lO' George Wimpey UK Ltd v VI Components Ltd [2005J EWCA Civ 77, (20051 BLR 135, para 75.

294

295

Interpretation and Rectification ofInsurance Contracts least, intended. Although proof is tequired only to a balance of probabilities, since it is sought to contradict the cogent evidence of the parties' intentions ptovided by the document, clear and convincing evidence of the matters outlined must be adduced. 203
8.81

Rectification binding contract between the parties or to contradict or to explain, or in any way affect the construction of the policy in question: but it was given in evidence only to shew what their intention was in preparing the policy'.'" It is unclear whether Kelly CB was being careful merely to state the extent of the admissibility being recognized on the facts of Ionides or was intending to go further and state that the concession recognized in Ionides was not to be extended into the fields of interpretation and rectification. Subsequently, however, the Stamp Act 1891 212 considerably diluted the statu- 8.83 tory consequences of the absence of a stamped policy: the insurance contract was simply invalid. The way was then clear for a slip to provide the evidence of prior agreement required for rectification of an enforceable policy. That the prior agreement might not constitute a valid contract was not germane for rectification, and, only two years later, in The Aikshaw,213 a policy was duly rectified by reference to a slip. Under the 1906 Act, the position of the slip was strengthened still further as a 8.84 policy was reduced to being a prerequisite to the admissibility in evidence of a
marine insurance contracr. 214 Today, marine insurance contracts are no longer

Much of the case law concerning rectification of insurance contracts involves claimants seeking to rectifY policies and to discharge the burden of proof by reference to the wording of a slip. Initially, the slip was recognized as capable of supporting an action for rectification of a policy,204 but the Stamp Act 1795205 then intervened to decree that, in the absence of a stamped policy, a contract of marine insurance was 'null and void to all Intents and Purposes whatever' and inadmissible in evidence. This legislation was held to relegate the slip to the status of mere pre-contractual negotiation or proposal for a future policy of insurance,206 so that it lacked the evidential value to found a rectification
action. 207

8.82 However, the Stamp Act 1795 was replaced by the similarly but not identically

worded Cusroms and Inland Revenue Act 1867. 208 In Ionides v Pacific Fire <& Marine Insurance Co,'o, the differences in statut0ty language were employed to justifY restrictive construction of the statutory invalidity and the drawing of a distinction between rhe existence and the enforceability of a contract. A slip was held admissible as evidence of the parties' intentions regarding the existence of a binding agreement even if a stamped policy was required for an enforceable contract. Ionides, however, was a case in which the slip was adduced in evidence to prove the existence of an agreement before the date of the policy, not by way of a challenge to the terms of the policy, and it is uncertain whether and to what extent it sanctioned wider admissibility. At first instance, Blackburn J stated thar a slip 'may be given in evidence whenever ir is, rhough not valid, material'.210 On appeal, in contrast, Kelly CB, delivering the leading judgment in the Courr of Exchequer Chamber, stated that the slip was not being introduced 'to prove a

subject to stamp duty and there is no impediment, fiscal or otherwise, to a slip providing the evidential base for a rectification action in accordance with general principle. The utility of the slip in any given rectification action will depend on the 8.85 intention of the parties as to whether the policy should supersede the slip. Where it is common ground or held that the policy is intended to supersede the slip, the natural inference is that any discrepancy in terms is the product of a deliberate variation of the contract agreed by the parties. 215 Rectification is not precluded in such a context, but the evidential challenge faced by the party seeking ro demonstrate that the slip contains the accurate record of the transaction will be formidable. In the absence of such intention, however, the slip represents the final terms of a binding contract, and, in the event of any discrepancy between the slip and the later policy, the slip will prevail and the policy will be rectified accordingly.216

203 Thomas Bates & Sons Ltd v wyndham' (Lingerie) Ltd [19811 1 WLR 505, 521: Agip SpA v Navigazione Alta Italia SpA (The Nai Genova and Nai Superba) [19841 1 Lloyd's Rep 353, 359: Commercial Union Assurance Co pic v Sun Alliance Insurance Group pic [1992] 1 Lloyd's Rep 475, 483; Kiriacoulis Lines SA v Compagnie d'Assurances Maritimes Ariennes et Yerrestres (CAMAT) (The Demetra KJ [2002J EWCA Civ 1070, [2002] 2 Lloyd's Rep 581, para 24: T&N Ltd v Royal &Sun Allianceplc[20031 EWHC 1016 (Ch), [2004J Lloyd's Rep lR 106, para 135: Thor Navigation Inc v Ingosstrakh Imurance Co Ltd [2005J EWHC 19 (Comm), [20051 1 Lloyd's Rep 547, para 50. 204 Motteux v London Assurance (1739) 1 Atk 545 (see 8.87 below); Henkle v Royal Exchange Assurance Co (1749) 1 Ves Sen 317. 205 35 Geo 3 c 63. 'os Parry v Great Ship Co Ltd (1864) 4 B & S 556: Xenos v Wickham (1867) LR 2 HL 296,

An example of an assured successfully relying on the slip is provided by Wilson 8.86 Holgate <& Co Ltd v Lancashire <& Cheshire Insurance Corp Ltd 217 The underwriters' defence of misdescription of the insured goods failed where the slip accurately described the goods as palm oil but the policy referred to them as

314--15,321. 207 Mackenzie v Coulson (1869) LR 8 Eq 368. 206 30 Viet c 23. 209 (1871) LR 6 QB 674, affd (1872) LR 7 QB 517. 210 ihid 685.

'" ibid 526. 212 54 & 55 Viet, c 39. 213 (1893) 9 TLR 605 (see 8.87 below). 214 MIA 1906, s 22. 215 See B.65ff above. 216 BanqueSabbagSAL v Hope[197211 Lloyd's Rep 253, 263. m (1922) 13 LlLRep 486.

296

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Interpretation and Rectification ofInsurance Contracts

Rectification

palm kernel oil, a quite different substance. According to Bailhache J, the slip represented the original and real contract and rhe error in the policy was ro be disregarded or, if necessary, rectified. Likewise, in Symington 6- Co v Union Insurance Society ofCanton Ltd (No 2),218 insurers argued rhat the slip should be read as incorporating an implied rerm that the contract was subject to the usual terms of the insurer in order ro take advantage of a marginal note in the policy restricting the cover that the slip recorded as granted. The Court ofAppeal held, however, that any intended disparity between the terms as recorded on the slip and the final policy had ro be expressly contemplated on the slip.
8.87 In similar fashion, policies have been rectified where the policy misrepresented

'Talavera, Newcastle (NSW) to WCSA, and till loaded'. The reinsurer being unwilling ro accept this risk for the premium the insurer was prepared to pay, the slip was altered, substituting rhe phrase 'and 30 days' for 'and till loaded'. Such alteration of wording, however, failed ro support the existence of an agreement on the terms alleged by the reinsurer.
It is not only the assured who may benefit from rectification of the policy. In 8.89 w"stern Assurance Co v Poole,223 expert evidence established that incorporation in the policy of a sue and labour clause224 contradicted the phtase 'no sic' in the slip and the insurer was accordingly held not liable for suing and labouring expenses. In Eagle Star 6- British Dominion Insurance Co Ltd v AV Reiner,'" a vessel was stranded while leaving the POrt of Valencia at the ourset of a voyage from Spain ro Antwerp. According .to the wording of rhe policy, the whole voyage was covered, but under the slip, as construed, risk did not attach until Gibraltar. As a result of this discrepancy, Salter J stated as follows:'" 'I am satisfied that the policy is nOt in accordance with the contract the parties made and that there was a mistake common to them both. The contract which they in fact made appears upon the slip and was a contract under which the risk attached and was meant by both parties ro attach "at and from and off' Gibraltar. ' Where the party claiming rectification cannot rely upon any discrepancy 8.90 between slip and policy, rhe onus of establishing an outward manifestation of a pre-existing common intention will be more difficult ro discharge. In The Demetra 1(,227 the insurers' unsuccessful rectification claim arose out of a change of terms on renewal. In 1995, the Demetra K was insured under a policy that incotporated the Institute Time Clauses Hulls (1110/83) modified by a so-called 'Ocrober memorandum' that added war risks and 'risks of loss or damage by acts of vandalism andlor sabotage andlor malicious mischief. In 1996, cover was renewed on a slip that again incorporated the Institute Time Clauses Hulls (1110/83), bur the terms of the October memorandum, although originally incorporated, were struck our. During the currency of the renewed cover, the vessel was seriously damaged by a fire that, for the purposes of the action, was assumed ro have been started deliberately but not by the assured owners. The assureds claimed under the insurance for loss caused by the covered peril of fire.

the duration of cover granted by the terms of the contract as evidenced by the slip. In The Aikshaw,219 according to rhe slip a vessel was covered 'at and from any port or ports and (or) place or places on wesr coast of Sourh America in any rotation, while there' and for a voyage ro Europe. On the wording of the policy, however, the cover attached only 'at and from any ports and (or) places of loading'. When the vessel was lost after arriving at a port on rhe west coasr of Sourh America bur before arrival at a port of loading, the terms of the slip prevailed as the real expression of the parties' intentions. Again, in Motteux v London Assurance,"o the policy was unclear whether it attached 'at and from' or only 'from' a port. The court read rhe policy in accordance with the clear wotding of the slip.
8.88 Rectification of a policy by reference to a slip will not, however, be ordered

unless the slip does clearly evidence an error in ttanscription. Spalding v Crocker" concerned reinsurance of a voyage of the Talavera 'at and from Newcastle (NSW) ro any ports Ot places in any order, on the West Coast of South America and for 30 days in port after arrival however employed'. The Talavera arrived and discharged its Newcastle cargo at Valparaiso, a port on the west coasr of South America. She remained at Valparaiso for thirty days and rhen sailed loaded with ballast and sugar for a voyage ro Talcahuano, another South American west coast port, where a cargo would be loaded for a voyage ro Europe. However, the Talavera was lost on the voyage to Talcahuano. The reinsurer argued that the term 'port' should be construed as meaning port of discharge of the Newcastle cargo or, alternatively, that the policy should be rectified to bear that meaning. Mathew J, however, rejected the construction atgument, following a decision on another reinsurance policy on the same voyage, worded only slightly differently,'" and held that the slip failed ro furnish the requisite evidence for rectification. As originally drafted, this had read

'" (1928) 32 LlLRep 287. 219 (1893) 9 TLR 605 (reinsurance). 220 (1739) 1 Ark 545. '" (1897) 2 Com Cas 189. 222 Crocker v Sturge (1896) 2 Com Cas 43.

m (1903) 8 Com Cas 108. A sue and labour clause extends cover by expressly aurhorizing the taking of reasonable steps in mitigation of the consequences of an insured casualry and promising indemnification in respect of expenses reasonably incurred thereby. Such clauses are discussed at 24.02ffbelow. 225 (1927) 27 LlLRep 173 (reinsurance). 226 ibid 177. 227 Kiriacoulis Lines SA v Compagnie d'Assurances Maritimes Ariennes et 7errestres (CAMAT) (The Demetra K) [2002J EWCA Civ 1070, [2002J 2 Lloyd's Rep 581. See also IF P&C Insurance Ltd v Silversea Cruises Ltd [2004J EWCA Civ 769, [2004J Lloyd's Rep IR 696, paras 87-90.
224

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Interpretation and Rectification ofInsurance Contracts

The insurers accepted thar war risks had simply not been included in the 1996 policy but argued that the underwriter and broker had agreed an express exclusion of 'loss or damage by acts of vandalism and!or sabotage and!or malicious mischief and sought rectification of the policy accordingly. The Court of Appeal held that, in the absence of the express exclusion for which the insurers contended, the loss would be covered by the policy. On balance, the evidence favoured the assureds' contention that the underwriter and broker had agreed merely to delete the October memorandum but not to add an express exclusion. Alternatively, the insurers had failed to adduce convincing evidence of an antecedent agreement conflicting with the terms of the 1996 slip as required for rectification. Although the parties had clearly agreed on the deletion, there was no evidence of any agreement as to the intended effect of that deletion on the scope of the cover provided by the policy.
8.91

9
PRINCIPLES OF CAUSATION

A.

Remote, Immediate, and

(4) Exceptions or exclusions? 9.03 9.08

9.30 9.33 9.46 9.55 9.56 9.59 9.60 9.61

Proximate Causes

E. Applying the Effectiveness

Test of Proximate Cause

Rectification of both slip and policy is possible where rhe contract they record is an inaccurate representation of the true agreement between the parties, but the party seeking the remedy faces formidable difficulty in proving a different
antecedent agreement. 228

B. Leyland Shipping v Norwich

Union

C. The Contextual Nature of

R Apprehension of a Peril G. Mistaken Belief of Peril

H. Response to Perils

Proximity; also of Complex Causes

D. Concurrent Proximate Causes (1) One proximate cause or more? (2) Concurrent causes, one cause specifically included, none specifically excluded (3) Concurrent causes, at least one specifically excluded

9.12 9.20 9.21

I. The Language of Causation

(1) The adhesiveness of the proximate cause rule (2) Displacing the proximate cause rule

--.-----_.-----------'" Pindos Shipping Corp v Raven (The Mata Hari) [19831 2 Lloyd's Rep 449. Also Henkle v Roya/Exchange Assurance Co (1749) 1 Yes Sen 317.

9.22 9.25

Causation is fundamental in defining the scope of marine insurance contracts. 9.01 The standard policies, in genetal, provide covet against losses caused by specified perils. Consequently, consideration of whethet a particular loss is covered
involves two questions. First, did an event occur or a circumstance arise that

corresponds to one of rhe perils covered under the policy? Secondly, was that event or circumsrance linked to the casualty in the manner required by the causal phrase employed by the policy to link peril to loss or damage? Moteover, the cover is invariably subject to a number of exceptions, most ofwhich are also drafted in terms of loss caused by an excepted peril, although the language of causation may be different. Again a question arises, not just of the definirion of the excepted peril, but also of the causal link between the exception and the loss.'

1 See gen~rallr' M Clar~e, 'Insuranc~: The Proximate Cause in English Law' (1981) 40 CL] ;84; M DaVIes, The ProXImate Cause 10 Insurance Law' (1995) 7 IL] 135; Sir Michael Mustill, Fault and Marine Losses' [1988J LMCLQ310.

300

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Principles ofCausation
9.02

Remote, Immediate, and Proximate Causes

What is being discussed is not a general principle of law, but the construction of words which have been in common use during the last war and this. The words are, indeed, wide, but they have to be construed in accordance with the general purpose of the contract and the common understanding of commercial men, in

In seeking to encapsulate the degree of causation oflegal significance for marine insurance contracts, the law has traditionally adopted the concept of the 'proximate cause'. Section 55(1) of the Marine Insurance Act 1906 accordingly provides as follows: 'Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, bur, subjecr as aforesaid, he is not liable for any loss which is nor proximately caused by a peril insured against.' This gives rise ro a number of quesrions, including what is meant by 'proximate': wherher there can be more than one proximate cause and, if so, how the law responds: and under what circumstances the Act or the policy will be regarded as providing for a different causation test and, if so, what that test should be.

short in the same way as any other part of the law merchant.

A. Remote, Immediate, and Proximate Causes

9.03 The concept of the proximate cause serves to indicate the drawing of a distinc-

Similarly, in Reischer v Borwick, 7 Lindley LJ stated that the proximate cause rule 9.05 'is based on the intention of the parties as expressed in the contract into which they have entered: bur the rule must be applied with good sense, so as to give effect ro, and not defeat those intentions'. Accordingly, in ascribing legal tesponsibility, the courts have eschewed philosophical tefinements in favour of 'the commonplace tests which the ordinary business man conversant with such matters would adopt'.8 Again according to Lord Wright:' 'Causation is to be understood as the man in the street, and not as either the scientist or the metaphysician, would understand it. Cause here means what a business or seafaring man would take to be the cause without roo microscopic [an] analysis but on a broad view.'
Viewed as a matter of interpretation of a commercial contract, what criteria 9.06

tion berween 'proximate' and 'remote' causes and the relegation of the latter to legal irrelevance, in accordance with the maxim causa proxima non remota spectatur. Of itself, however, this injection of terminology is of no assistance: 'the maxim ... is either meaningless or misleading until "remota" and "proxima" are defined' .2
9.04 In searching for the proximate cause, it should never be overlooked that caus-

ation issues arise because the parties have chosen to formulate rhe extent of covet in terms that include causal expressions. 3 The identification of the approptiate
causation test becomes, therefore, one of the tfue interpretation of a commercial

contract,' a process that involves attributing to the words used the meaning they would have conveyed to a reasonable shipowner or cargo owner and a reasonable insurer contracting in the context ofthe commercial Inarine market. 5'Proximate' is merely convenient shorthand for the causal significance that, in the eyes of rhe law, the parties to a commercial marine policy are understood as having intended, in the absence of evidence of contrary intention. Thus, in 1942, in the context of interpreting a formula relating to war risks, Lord Wright stated as follows:'
Monarch Steampship Co Ltd v I&rlshamm Oljefthriker[1949] AC 196,227 per Lord Wrighr.

characterize the proximate cause? Ttaditionally, reference has been made to Bacon's maxim that 'it were infinite for the law to judge the cause of causes, and theit impulsions one of another; therefore it contenteth itself with the immediate cause and judgeth of acts by that, without looking to any further degree'. This led to identification of the proximate cause with rhat which was last in time before the damage. Thus, in a personal accident case, Denman J stated that 'we must look at only the immediate and proximate cause of death, and it seems to me to be impracticable to go back cause upon cause, which would lead us back ulrimately to the birth of the person, for if he had never been born the accident would not have happened'.10 This style of reasoning assumes that in terms of causative potency the only standatd that can be applied is that of the causa sine
qua non. In time, however, the law of marine insurance came to accept, in line

with other areas of law," that it was possible to distinguish berween different

, [1894] 2 QB 548, 550

2
8 Yorkshire Dale Steamship Co Ltd v Minister o[War Transport (The Coxwold) [1942] AC 691, 702 per Lord Macmillan. 9 ibid 706. 'The interpretation to be applied does not involve any metaphysical or scientific view of causation': 698 per Viscount Simon. Likewise, in Harrisons Ltd v Shipping Controller (The Inkonka) [1921] 1 KB 122, 130-1, McCardie J observed that causation 'is a topic of profound juristic complexity. The Courts cannot act as metaphysical analysts. They can only administer or state the law in practical language upon particular aggregates of circumstances'. On avoidance of the microscope to discover the proximate cause, see also Clan Line Steamers Ltd v Board ofTrade (The Clan Matheson) [1929] AC 514, 530. 10 Lawrence v Accidental Insurance Co Ltd(1SS1) LR 7 QB 216, 221. 11 See the contrast drawn between marine insurance and carriage of goods by sea in Pink v Fleming (1890) 25 QBD 396.

3 Questions of causation cannot be answered in the abstract. An informed response requires an understanding of the purpose and context of the causation test: Scott v Copenhagen Reinsurance Co (UK) Ltd [20031 EWCA Civ 688, [2003] Lloyd's Rep lR 696, para 68. 4 ibid 713. See also Becker, Gray & Co v London 1muranee Corp [1918] AC 101, 112; Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd [200 IJ EWCA.Civ 1643, [20021 Lloyd's Rep lR 113, para 42. S Investors Compensation System Scheme Ltd v W'est Bromwich Building Society [1988] 1 WLR 896,913-14. 6 Yorkshire Dale Steamship Co Ltd v Minister of War Transport (The Coxwold) (1942] AC 691,713.

302

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Principles ofCausation
levels of causal potency with sufficient certainty to provide a foundation for legal principle. Consequently, albeit not before the twentieth centuty, it came to be settled beyond doubt that the. proximate cause is identified by effect,12 nor riming. That is not to say that the cause that is lasr in rime may not still be the proximate cause: it may, but the reason for its gaining the accolade of proximate cause will not be its timing but its dominant role in producing the loss.
9.07 The late settlement of principle has, however, bequeathed a legacy of cases

Leyland Shipping v Norwich Union

ebb tide and refloat on the flood, a process that subjected its already weakened structure to severe strain. On 2 February, the Ikaria broke its back as the tide rose. The shipowners claimed for a loss by perils of the sea, namely the repeated groundings caused by tidal action while the Ikaria was moored alongside the breakwatet. The insuters contended that the proximate cause of the loss was the torpedo and fell within the exclusion. The House of Lords held unanimously that the repeated grounding was not a 9.09
novus actus interveniens, the torpedoing was the proximate cause of the loss, and

decided on an approach to causation that no longer represents orthodoxy. Such jutisprudence requires careful handling. In terms of exposition of legal principle, it may no longer be good law. It should not, howevet, be automatically assumed that application of a different approach to proximity of cause will identifY a different proximate cause on a parricular sets of facts, or that, even if a different causation question yields a different answer in terms of identifYing a different proximate cause or set of proximate causes, this different causation analysis will in turn yield a different answer in terms ofliability on the wording of the policy in quesrion.

the underwriters were protected by the exclusion. In a seminal judgment, Lord Shaw stated as follows: 14
.. . one must be careful not to lay the accent upon the word 'proximate' in such a sense as to lose sight of or destroy altogether the idea of cause itself The true and the overruling principle is to look at a contract as a whole and to ascertain what the parties to it really meant. What was it which brought about the loss, the event, the calamity, the accident? And this not in an artificial sense, but in that real sense which parties to a contract must have had in their minds when they

spoke of cause at all.

To treat proxima causa as the cause. which is nearest in time is out of the question. Causes are spoken of as if they were as distinct from one another as beads in a row or links in a chain, but-if this metaphysical topic has to be referred to-causation is not a chain, but a net. At each point influences, forces, events, precedent and simultaneous, meet; and the radiation from each point extends infinitely. At the point where these various influences meet it is for the judgment as upon a matter of fact to declare which of the causes thus joined at the point of effect was the proximate and which was the remote cause. What does 'proximate' here mean? To treat proximate cause as if it was the cause which is proximate in time is, as I have said, out of the question. The cause which is truly proximate is that which is proximate in efficiency. That efficiency may have been preserved although other causes may meantime have sprung up which have not yet destroyed it, or truly impaired it, and it may culminate in a result of which it still remains the real efficient cause to which the event can be ascribed.

B. Leyland Shipping v Norwich Union

9.08 The leading authority on the meaning of proximate cause is the 1918 decision

of the House of Lords in Leyland Shipping Co Ltd v Norwich Union Fire Imurance Society Ltd 13 A vessel named the Ikaria was insured under a policy that covered loss by perils of the sea but excluded 'all consequences of hostilities or warlike operations', the formula then adopted to exclude war risks. On 50 January 1915, when twenty-five miles from her port of destination ofLe Havre, the Ikaria was torpedoed by a German submarine. Severe damage was sustained, No 1 hold filled with water, the fore peak half-filled with water and some water also penetrated No 2 hold. With the assistance of tugs, the vessel managed to reach Le Havre and was able to berth at a quay. Had it been allowed to stay at that berth, it might have been saved. However, when on 31 January a gale caused the Ikaria to range and bump against the quay, the harbour authorities became afraid it might sink and block the quay, which was needed for military purposes. Accordingly, they ordered it to leave and either be beached outside the harbour or moot inside a breakwater. Under the circumstances, this was a reasonable instruction and, in any event, one that had to be obeyed. It was decided to moor the Ikaria inside the breakwater. There it remained for two days, but the damage done by the torpedo meant that the Ikaria was down some seventeen feet at the head. This caused it to go aground at the head with each

Lord Shaw noted that to determine proximity exclusively by timing would be to 9.10 render it impossible for any exception to fasten upon an intervening factor between the entry ofwatet that characterizes most perils of the sea, and the loss. Such destruction of the exception was hard to teconcile with interptetation of the contract so as to respect the intentions of the parties. He continued: 15 'In my opinion, accordingly, proximate cause is an expression referring to the efficiency
as an operating factor upon the result. Where various factors or causes are concurrent, and one has to be selected, the matter is determined as one of fact,

12

Such a cause is sometimes referred to as the causa causans.

"[19181 AC 350.

" ibid 369.

" ibid 370.

304

305

Principles ofCausation
and choice falls upon the one to which may be ascribed the qualities of reality, predominance, efficiency.'
9.11 Applying the law to the unfortunate tale of the lkaria, Lotd Shaw held as

The Contextual Nature ofProximity; also ofComplex Causes

the loss. The same policies, howevet, address the ingress of water into a vessel . diffetently. Cover is granted against loss caused by petils of rhe sea. This phrase embraces all fortuitous events of a maritime nature." Clearly, the ingress of sea
water has a maritime nature. However, in this context, that cannot be the end of

follows: 16
In my opinion the real efficient cause of the sinking of this vessel was that she was torpedoed. Where an injury is received by a vessel, it may be fatal or it may be cured: it has to be dealt with. In so dealing w.ith it there may, it is true, be attendant circumstances which may aggravate or possibly precipitate the result, but which are incidents flowing from the injury, or receive from it an operative and disastrous power. The vessel, in short, is all the time in the grip of the casualty. The true and efficient cause never loses its hold. The result is produced, a result attributable in common language to the casualty as a cause, and this result, proximate as well as continuous in its efficiency, properly meets, whether under contract or under the statute, the language of the expression 'proximately caused.'

the inquity. It is necessary to trace the sequence of events leading up to the sinking in order to determine whether the ingress of water in quesrion possessed rhe requisite characteristic of fortuity. One must ascertain why the water entered. Moreover, having done so, it rhen makes no sense to regard the ingress
as constituting the proximate cause to the exclusion of the circumstance that

C. The Contextual Nature of Proximity; also of Complex Causes

9.12 Just as the concept of proximity, in the Leyland Shipping sense of effective cause,

affords it a fortuitous character. Whatever lends the ingress of water its fortuitous nature must then be recognized as part of the peril of the sea and, as such, part of the proximate cause to which the policy speaks in the context of this peril. In Leyland Shipping v Norwich Union,20 Lord Atkinson gave a salutary warning against the tendency 'to split up complex causes into their components and establish a sequence between them'. Where a policy grants cover against loss caused by a complex peril, all the elements required to constitute that peril are necessarily part of the ptoximate cause in the context of that peril.

Samuel (P) 6- Co Ltd v D1}mas 21 is the leading case on scuttling. As discussed in 9.15
the next chapter,22 the House of Lords held that the deliberate production of the loss of a vessel by those in control of it was incompatible with recovety under the heading of perils of the sea. First, however, it was necessaty to dispose of an argument that the proximate cause of the loss was the intush of water rather than the act of letting in the water. Viscount Cave did so in the following
terms: 23
There appears to me to be something absurd in saying that, when a ship is scuttled by her crew, her loss is not caused by the act of scuttling, but by the incursion of water which results from it. No doubt both are part of the chain of events which result in the loss of the ship, but the scuttling is the real and operative cause-the nearest antecedent which can be called a cause; and the subsequent events-the

is influenced by the nature of the exercise being one of interpretation of a

contract, so too which factual event or combination of events constitutes the

ptoximate cause depends on the wording of the petils clause in question.

9.13 Suppose a vessel is overwhelmed by bad weather so that both the vessel and its

cargo are lost. What is the proximate cause of the loss? Is it the entry of water into the vessel or the storm that precipitated the entry of water? Or is it the storm in combination with the entry of water that it precipitated? Such a question cannot be asked or answered in the abstract. It does not arise in the abstract but in the context of the wording of a particular policy. If the policy covers loss caused by 'entty of sea water' or 'vessel or craft being ... sunk', as standard cargo policies dO,17 all the policy asks is whether sea water entered or rhe vessel sank aud whether thar entry or sinking caused loss. Clearly, in such a
context, it is correct to say that the entry of water or sinking was the proximate

entry ofthe sea water, the slow filling ofthe hold and bilges, the failure ofthe pumps and the break-up of the vessel-are as much pans of rhe effecr as is rhe final
disappearance of the ship below the waves.

cause of the loss.

9.14 Standard hull policies treat rhe peril of fire in the same way." Cover is granted

againsr loss or damage caused by fire. The only question of any relevance, therefote, is whether there was a fire and whether the vessel was lost or damaged by that fite. If so, it is clearly correct to state that fire was the proximate cause of

The argument that the proximate cause was the inrush of water was clearly 9.16 unsustainable in the light of the demise of the last-in-time approach to proximity of causation and the fact that the policy, in the relevant context of perils of the sea, mandated an enquity into why the water entered the vessel. With respect, however, the relegation of the ingress of water to an effect goes toO far the other way. The vessel did sink because of an ingress of water (all vessels

16 17

ibid 370-1. See Institute Cargo Clauses (B), d 1.2.3; Institute Cargo Clauses (C), d 1:1.2.

18

The peril offire is discussed at lO.60ffbelow.

19 For discussion of perils of the sea, see lO.03ffbe1ow. 20 [1918) AC 350, 365. " [1924] AC 431. 22 See 10.16 below. 23 [1924J AC 431, 448.

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Principles ofCausation
ultimately do). In the context ofany discussion ofperils of the sea, rhe proximate (complex) cause of the loss was an ingress of water deliberately engineered by those in charge of the vessel. Moreover, suppose the vessel in Samuel v Dumas had been carrying cargo insured against entry ofsea water. In rhe context of such a policy, which is not concerned with how the water came to enter, is cover to be denied on the basis rhat the cause of the loss was the scuttling and not the entry of water? The answer must be no. 24 The causarion enquiry musr be affected by the contractual context.
9.17 A furrher example is provided by negligence. In the context of cover against loss

Concurrent Proximate Causes

cause of the casualry, as rhe proximate cause, or as an effect of the proximare cause is a question that arises in rhe context of a named peril (covered or excluded) under the contract and the doctrine of proximate cause necessarily operares flexibly by reference to rhe relevant peril.

D. Concurrent Proximate Causes

Although English courrs traditionally seek the proximate cause of a loss, ir is 9.20 neverrheless accepted that a loss may be proximately caused by a combination of perils, although unclear how readily such a conclusion should be reached. The question then arising is how rhe policy responds where one operative peril is covered and rhe other is either not covered or expressly excluded. The same problem can arise where the loss is caused by just one event but that evenr may be classified under the policy in issue as both a covered peril and also a peril that is either not covered or excluded. Thus, where a vessel is captured pursuant to an agreement between the master and the captor, the loss qualifies as caused by both the marine risk of barratry and rhe war risk of capture. 28

or damage caused by fire, rhat the fire was starred by negligence is irrelevant since a negligently started fire is still a fire. Standard hull policies, however, nominate the negligence of specified persons as a covered peril in its own right. Negligence is a state of mind. The loss or damage will be caused not by a state of mind but rather through some act or omission thar can be characterized as negligent. In order ro recover under rhe heading of negligence, it will be necessary to enquire into how the act or omission came about. This is not to say that the state of mind was the proximate cause to the exclusion of the act or omission, merely that a different rype of peril mandates a differently focused enquiry.
9.18 Suppose then that negligent navigation leads a vessel ro collide with another,

(l) One Proximate Cause or More?

resulting in the first vessel sinking with a loss of both vessel and cargo. It cannot be incorrect ro say that rhe proximare cause of rhe loss, depending on the contractual context of the enquiry, was negligence (a covered peril under standard hull clauses), a collision (a covered peril under the Institute Cargo Clauses (B) and (C)" and hull clauses in rhe contexr of collision liabiliry), a peril of the sea (in rhe form of an ingress of water caused by a negligently occasioned collision with the negligence supplying the forruiry)," an entry of sea water (covered under rhe Institure Cargo Clauses (B)), or even rhe sinking of rhe vessel (a covered peril under the Institute Cargo Clauses (B) and (C)).27 .
9.19 Two separate, if related, points emerge from the discussion in this section. Firsr,

all parts of a complex peril, such as a peril of the sea, form parr of rhe proximate cause when such a peril is operative. Secondly, whether a parricular event or circumstance should be regarded as background to the operation ofthe proximate

In The Aliza Glada!," Potter LJ stated that 'whenever an argument as to caus- 9.21 ation arises in respect of rival causes contended for under a policy of insurance, the first task of rhe Courr is to look to see wherher one of the causes is plainly the proximate cause of the loss.' It is not, however, clear to whar extent a finding of concurrent causes is a finding of last resorr. In principle, there is no reason why a court should approach a question of causation predisposed to arriving at the conclusion that one event or circumstance is the sale proximate cause of the loss. The proximate cause test should be applied in a neutral fashion, with as great a preparedness to find concurrent causes as not. There is, however, a tendency in English law to avoid a finding of concurrenr causes unless that is inescapable. Thus, despite staring rhat rhe first question was whether one cause was 'plainly' the proximate cause, Potter LJ also srated that it is 'only when a
Coun is driven to the conclusion' of more than one proximate cause) that the concurrent cause rules apply.'o There are, however, contrary views. In Wtiyne

24 Although the Institute Cargo Clauses (B), which include entry of sea water among the covered perils, also contain a deliberate acts exclusion: see further 10.83 below. 25 Albeit that the cargo clauses do not apply the proximate cause test to the peril of collision, see 9.63 below. 26 If the master deliberately rammed the second vessel in order to sink his command, Samuel v Dumas would prevent the cause from being described as a peril of the sea. 27 Albeit that the cargo clauses do not apply the proximate cause test to the peril of sinking of the vessel, see 9.63 below.

28 Arcangelo v Thompson (1811) 2 Camp 626. See also Kuwait Airways Corp v Kuwait Insurance CO SAK[1997J 2 Lloyd's Rep 687, 694-5, 699-700. And see the hreadth of cover under perils of

the sea: 1O.03ffbelow.

29 Svenska Handelsbanken AB v Dandridge (The Aliza Glacial) [2002J EWCA Clv 577, [2002] 2 Lloyd's Rep 421, para 48. 30 ibid, emphasis added. See also Leyland Shipping Co v Norwich Union Fire Insurance Society [1918J AC 350. 363.

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309

Principles ofCausation Tank & Pump Co Ltd v Employers' Liability Assurance Corp Ltd,31 Cairns L]
stated as follows:
I do not consider that the court should strain to find a dominant cause if, as here, there are twO causes both of which can properly be described as effective causes of the loss. [Counsel for the claimants] recognised that if there are two causes which are approximately equal in effectiveness, then it is impossible to call one rather than the other the dominant cause. I should prefer to say that unless one cause is dearly more decisive than the other, it should be accepted that there are two causes

Concurrent Proximate Causes

side the collision was immaterial. According to Lindley L], however, the case was one of concurrent causes:" 'The sinking of the ship was proximately caused by the internal injuries produced by the collision, and by water reaching and getting through the injured parts whilst she was being towed to a place of repair. The sinking was due as much to one of these causes as to the other, and it would, in my opinion, be contrary to good sense to hold that the damage by the sinking was not covered by this policy.' (3) Concurrent Causes, At Least One Specifically Excluded Where the loss has mulriple proximate causes one of which is specifically 9.25 excluded by the policy, which prevails depends on the facrual relationship berween the covered peril and the exclusion. Where the covered peril constitutes an example of perils covered by the exclusion, the covered peril is narurally understood as an exceprion to the exclusion. To hold that the exclusion prevailed would involve deleting the covered peril entirely and emitle the insurer to premium attributable to that peril while granting no cover in rerum. Such a holding would be most unlikely to give effecr to rhe intention of the parties. In The Lydia Flag,37 a hull policy incorporating the Institure Time Clause Hulls (I I 10/83) also contained a suspensive condition of seaworthiness at rhe inception of the policy and of due diligence to maimain the vessel in a seaworthy condirion throughout the duration of the risk. Mfording ptiority to the seaworrhiness clause would have drastically reduced, although not entirely eliminated, the latent defect cover normally provided under the Institute and International clauses in a manner thar, it was held, did not represent a commercially sensible interpretation of the policy. The seaworthiness clause was, therefore, read as subject to the latent defect cover. A ftrtiori, it cannot be doubted that in a voyage policy on hulls incorporating the Instirure or International hull clauses, the implied watranry of seaworthiness or any equivalent express warranty is subject to the latent defect cover under the Inchmaree clause." Similarly, where the cover and the exclusion appear co-extensive, rhe approach 9.26 in rhe case law has been to endeavour to find a route to preserving cover, on the basis thar affording cover wirh one hand while retracting it with rhe other does not reflect the likely intention of the reasonable people the parties are assumed

of the loss and no attempt should be made to give one of them the quality of
dominance.

(2) Concurrent Causes, One Cause Specifically Included, None Specifically Excluded

9.22 Provided the policy covers at least one of rhe perils qualifYing as a proximate cause of the loss and none are expressly excluded, the assured is entitled to recover. The loss is caused by a covered peril and rhere is nothing in the policy to deny cover. Thus, according to Willes] in Grill v General Iron Screw Collier Co," 'it is only necessary to see whether the loss comes within the termS of the contract and is caused by perils of the sea; the fact rhat the loss is partly caused by things not distinctly perils of rhe sea does not prevent it coming wirhin rhe contrace. 9.23 In the The Miss jay jay, 33 a yacht sank because it was unseaworthy (not a covered peril) and because of the sea conditions (an insured peril). The Court ofAppeal held the underwriters liable, citing rhe dicrum of Lord Penzance in Dudgeon v Pembroke" rhat: 'Any loss caused immediately by rhe perils of the sea is withift the policy, though it would not have occurred bur for the concurrent action of some other cause which is not within it.' 9.24 In Reischer v Borwick" the insured vessel was holed by the covered peril of collision and subsequently lost by an ingress of water when temporaly repairs gave way in the course of towage co potr for permanent repairs. Viewed in isolation, the final ingress of water was an uninsured peril of rhe sea. The Court ofAppeal held underwritets liable. Perils of rhe sea other than collision were not expressly excluded and the collision could not be denied proximate cause starus. Consequently, whether the final ingress ofwater had a causal significance along-

" [19741 QB 57, 68-9.

" (1866) LR 1 CP 600, 611-12.

33 ff LloydImtruments Ltd v Northern Star Insurance Co Ltd (The Missfay fay) [198711 Lloyd's Rep 32. " (I877) 2 App Cas 284, 297. See also CCR Fishing v Tomemon (The La Pointe) [1991) 1 Lloyd's Rep 89, 92-3 (Supreme Court of Canada); Kuwait Airways Corp v Kuwait Insurance Co SAK(No I) [1999) 1 Lloyd's Rep 803, 815. 35 [189412 QB 548.

36 ibid 551. Contrast Lopes L] at 553: the damage caused by the collision 'never ceased to exist, but constantly remained the efficient and predominating peril to which the damage now sought to be recovered was attributable'. However, as stated in the text, the only causation issue was whether the ingress of water was the sole proximate cause of the loss to the exclusion of the

collision. 37 Martin Maritime Ltd v Provident Capita/Indemnity Fund Ltd (The Lydia Flag) [1998] 2 Lloyd's Rep 652. 38 See also 19.56-19.58 below.

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Principles ofCausation
to be. The route espoused has been that of interpreting the exclusion so as to remove the conflict.
9.27 In the leading case of Fraser v Furman (EN) (Productions) Ltd," employer's liability insurance covered the negligence of the employer but also provided that: 'The insured shall tal<e reasonable precautions to prevent accident and disease.' Construing this condition, Diplock L] stated as follows: 40
'Reasonable' does not mean reasonable as between the employer and the employee. It means reasonable as between the insured and the insurer having regard to the
commercial purpose of the contract, which is inter alia to indemnifY the insured

Concurrent Proximate Causes subsequent warnings against the possibility of further terrorist attacks issued by United States authorities. The insurers argued that the terrorist attacks themselves were not an insured event and were therefore .an excluded peril and that consequently there was no liability. The Court of Appeal, however, rejected this argument. The insuring clause contemplated warnings in the light of actual events, which would often be characterized as a concurrent cause of subsequent loss in income. 'There is no intention under this policy to exclude loss directly caused by a warning concerning terrorist activities just because it can also be said that the loss was also directly and concurrently caused by the underlying terrorist . .. aCtiVItIeS thernse1 '43 Th e excl ' was, th erefore, either regarded in context Yes. USlOn as not amounting to an exclusion for rhe purposes of the concurrent cause rules or, alternatively, the interpret~tion of the contract was inconsistent with priority being afforded to the cause of the warnings as to an expressly excluded concurrent cause. Where, in contrast, the exclusion is confined to part of the scope of a covered 9.29 peril, converse reasoning dictates that the exclusion prevails and the insurers are not liable. Otherwise the exclusion would be rendered impotent, again effectively deleting part of the agreed terms. In the leading case of wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd, 44 the coverage extended to all sums the claimants might become liable to pay by way of 'damages consequent upon ... damage to property as a result of accidents'. Excluded, however, was liability for 'damage caused by the nature or condition of any goods ... sold or supplied by or on behalf of the insured'. The claimants designed and installed equipment for storing and conveying liquid wax in a plasticine factory. This equipment, having been switched on and left unattended, caused a fire to start that destroyed the factory. The claimants sued rheir insurers for indemnification against their resulting 150,000 liability. The Court of Appeal, having resolved that the equipment supplied fell within the terms of the exception, held that the fire was caused by both unsuitable material in the equipment and also the conduct of the claimants' servant in switching on the machinery before testing and in leaving it unattended overnight. Lord Denning MR and Roskill L] held the defective machinery to be the proximate cause, but stated obiter that had there been two proximate causes, the exclusion would have operated. Cairns L] held that both causes were legally proximate, with the consequence that the underwriters were protected. 'The effect of an exception is to save the insurer from liability for a loss which but for the exception would be

against liability for his (the insured's) personal negligence ... Obviously, rhe
condition cannot mean that the insured must take reasonable measures to avert

dangers which he does not himself fotesee, although the hypothetical reasonably
careful employer would foresee them. That would be repugnant to the commercial
purpose of the contract, for failure to foresee dangers is one of the commonest grounds of liability in negligence ... What, in my judgment, is reasonable as between the insured and the insurer, without being repugnant to the commercial purpose of the contract, is that the insured, where he does recognise a danger

should not deliberately court it by taking measures which he himself knows are
inadequate to avoid it. In other words, it is not enough that the employer's omission to take any particular precautions to avoid accidents should be negligent; it must be at least recldess, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted.

This approach was subsequently followed by Roskill ] with respect to a due diligence clause in a Lloyd's goods in transit policy which required the assured to take 'all reasonable precautions for the protection and safeguarding of the goods'."
9.28 In IF P&C Insurance Ltd (Pub!) v Silversea Cruises Ltd,42 a loss of earnings policy taken our by an operator of cruise liners covered, inter alia, loss of anricipated cruise income 'resulting from a State Department Advisory or similar warning by competent authority regarding acts ofwar, armed conflict, civil commotions or terrorisin, whethet actual or threatened' bur excluded such loss unless directly resulting from an insured event. The assured claimed, inter alia, for loss of earnings resulting from the downturn in the cruise market following the terrorist attack on the World Trade Center on 11 September 2001. It was found at first instance that the downturn was caused by the combination of the attacks and

[19671 1 WLR 898. ibid 905-6 (Winn and Willmer LJ] concuring), following Woolfall & Rimmer Ltd v Moyle [1942] 1 KB 66, 76-7. " Lane (W & J) v 5pra" [1970] 2 QB 480. Likewise Aluminium Wire & Cable Co Ltd v Allstate Insurance Co Ltd [1985J 2 Lloyd's Rep 280; Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 (Court of Appeal of New South Wales); Cee Bee Marine Ltd v Lombard Insurance Co Ltd [19901 2 NZLR 1 (Court ofAppeal of New Zealand). " [20041 EWCA Civ 769, [2004] Lloyd's Rep lR 696.
39

40

ibid para 104 per Rix L]. [1974] QB 57. This case is the sequel to the notorious Court of Appeal fundamental breach decision in Harbutts Tlasticine'Ltd v 1{,yne Tank & Pump Co Ltd [1970] 1 QB 447.
43

44

312

313

Principles ofCausation
covered. The effect of the cover is not to impose on the insurer liability for something which is within the exception.'45 (4) Exceptions or Exclusions?
9.30 Section 55(2) of the Marine Insurance Act 1906 amplifies the proximate cause rule of section 55(1) by providing that the insurer is not liable for certain losses. By virtue of section 55(2)(b) and (c), subject to contraty intention, insurers are not liable for losses proximately caused by delay, or for 'ordinary leakage and breakage, ordinary wear and tear, inherent vice or narure of the subject-mattet insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils'. The application of the
proximate cause test may, however, result in the conclusion that a given loss was

Applying the Effictiveness Test ofProximate Cause

Section 55(2)(a) states a further limitation on cover, ptoviding that insurers are 9.32 not liable for loss 'attributable to' the assured's wilful misconduct. This is a public policy limitation, not subject to contrary intention, to which the above approach would clearly be inappropriate. An assured should not be able to circumvent the policy limitation by arranging for the misconduct to be implemented through a covered peril and it is clear that such circumvention is indeed barred. Provided the loss is attributable to the assured's wilful misconduct, there is no recovery regardless of the proximate cause(s) of the 10ss.48

E. Applying the Effectiveness Test of Proximate Cause

Accidents generally occur because ofa combinarion of circumstances. Blackburn 9.33 ] once gave the following account: 49
The ship perished because she went ashore on the coast of Yorkshire. The cause of

caused by a covered peril and also fall within one of the limitations on. cover articulated by section 55(2). In such a case, the question arises of whether section 55(2)(b) and (c) should be read as importing exclusions into the policy, so that the insurer is not liable, or merely as clarifying the true interpretation of the cover offered under the policy. It has been srated obiter in Australia that the latter approach is correct. In HIH Casualty & General Imurance Ltd v V0tterwall Shipping Inc," the insured vessel was lost because of ordinary wear and tear in the form of corrosion to the warer circulation system and also the covered peril of negligence of master, officers, and crew. While holding that insurers were liable because the negligence was the proximate, the Court of Appeal of New South Wales considered thar insurers remained liable because, even if the corrosion was a concurrent cause, the statutory exception of wear and tear clarified the scope of coVer rather than enunciating an exclusion. It is respectfully suggested that this approach is correcr.
9.31

her going ashore was pardy that it was thick weather and she was making for Hull
in distress, and partly that she was unmanageable because full of water. The cause ofthat cause ... was, that when she laboured in the rolling sea she made water; and the cause of her making water was, that when she left London she was not in so strong and staunch a state as she ought to have been ...

The question of characterization of matters falling within section 55(2)(b) and (c) may arise also where the policy wording renders some or all of such matters the subject of express provision. It then becomes a question of contractual interpretation as to whether the policy wording transforms such matters from exception clarifying scope of cover to exclusion. The better view, it is suggested, is that the various terms headed 'exclusions' in the Institute cargo clauses that address many of the matters falling within section 55(2)(b) and (c) do effect such a transformation,47 so that insurers will not be liable for losses concurrently caused by a covered peril and falling within the relevanr rerms.
45 [1974] QB 57, 69. See also Stanley v Western Insurance Co (1868) LR 3 Ex 71, 75; Cory & Sons v Burr (1883) 8 App Cas 393 (speech of Lord Blackburn); Samuel (P) & Co Ltd v Dumas [1924] AC 431, 467; Board ofTrade v Hain Steamship Co [1929] AC 534, 541; Kuwait Airways Corp v Kuwait Insurance Co SAK [1999] 1 Lloyd's Rep 803, 815; Tektrol Ltd v International Imurance Co ofHanover Ltd [20041 EWHC 2473 (Cdrnm), [2005] Lloyd's Rep lR 358, para 17.

Such an account may be factually accurate. However, it is oflimited assistance in 9.34 resolving the question ofwhether insurers are liable for the loss of the ship under the policy in question. All the events or circumstances mentioned by Blackburn ] may be termed causes ofthe loss ofthe ship in the sense that they all contributed in greater or lesser measure to its loss. Unless, however, the policy nominates each and everyone of the contributing factors as a covered peril, the question arises of their relative legal significance and of the identification among the various factually contributory causes of the proximate cause or causes. Viscount Simon once observed'o that:
Most results are brought about by a combination of causes, and a search for 'the cause' involves a selection of the governing explanation in each case. The cause of death of a human being may, I suppose, be scientifically stated to be the failure of the supply of oxygen to the brain, but when a medical man certifies

'the cause of death' he looks for the thing which has predominantly operared to bring death about. A critical feature in identifying the proximate cause of a loss is the actual 9.35

" (1998) 146 FLR 76.

" See 7.59 above.

49 Dudgeon v Pembroke (1874) LR9 QB 581, 595. Yorkshire Dale Steamship Co Ltd v Minister o/War Tramport (The Coxwold) [1942] AC 691, 698. 'The adverb "proximately" does not greatly assist the solution of the problem, but it at least serves to emphasise that it is the predominant and determining cause that is to be sought': 702 per Lord Macmillan. 48
50

See 15. 14ffbelow.

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Principles ofCausation
infliction or rendering inevitable of loss or damage. Alternatively, even where the ultimate loss is not the inevitable consequence of the peril, where it follows from that peril in the ordinary course of events, other events intervening between the peril and the loss will not break the chain of causation and deprive the original peril of proximate cause status. In Leyland Shipping v Norwich Union, 51 the torpedo was not merely part of the background against which the repeated groundings sank the vessel. This was because the torpedo directly inflicted damage from which rhe vessel was never able to recover. Given the circumstances, including the wartime imperative that the relevant quay at Le Havre not be blocked, all that followed from the impact of the torpedo was the natural consequence of that impact. Lord Dunedin stated as follows: 'After the torpedo struck her she was a doomed ship, unless she could get into a real place of safety. She nearly got to a place of safety, bur never quite did SO.'52
9.36 Similarly, in Reischer v Borwick,53 a vessel insured against collision bur not

Applying the Effictiveness Test ofProximate Cause

ing inflicted no damage. Lord Kenyon held the loss to be by capture and not perils of the sea, 'for had the ship been driven on any other coast bur that of an enemy, she would have been in perfect safety'. 58 Likewise, where cargo survives a shipwreck but is seized by enemy forces or its salvage is prevented by the intervention of enemy forces, the cause of that loss is a war risk and not the peril of the sea that caused the initial wreck. 59 Proceedings in a Court of Prize resulting in condemnation of the insured prop- 9.38 erty, being the natural consequence of a hostile seizure, complete the loss by seizure rather than break the chain of causation, whereas salvage proceedings in a Court of Admiralty resulting in sale of the subject-matter insured cannot be viewed as the natural, and therefore the proximate, consequence of the sea peril occasioning rhe need for the salvors' services." Another way of approaching the same issue of identifYing the proximate 9.39 cause(s) is to distinguish between those events and circumstances that set the scene for the casualty to occur and those factors that constitute the operative cause of the casualty, a distinction between factors that permit a casualty to occur and those that actively trigger it. In a classic judgment in Ionides v Universal Marine Insurance Co," Kelly CB 9.40 gave four examples of the disrinction between background and operative cause in relation to a policy covering loss by perils of the sea but excluding the consequences ofhostilities. First, in seeking to escape capture, a ship runs ashore and is lost. The casualty is within the exception and the underwriter is protected. Secondly, in order to avoid seizure, a pursued ship enters a bay where there is neither harbour nOt anchorage. Unable to get our, the ship is driven ashore by the wind and lost. Again, the loss is a consequence ofhostilities. 62 The third example is a variant of the second in that the ship escapes from the bay and

against perils of the sea generally sustained a leak by reason of a collision. Temporary repairs were effected, bur, while the vessel was being towed to port for permanent repairs, the motion of water (a peril of the sea) re-opened the leak. The vessel began to sink and was, therefore, run aground and abandoned. The Court of Appeal held the undetwriters liable, rejecting an argument that the proximate cause of the loss was the motion of the water that re-opened the leak to the exclusion of the original collision. The hole was 'a continuing source of risk and danger'54 and the failure of the temporary repairs did not break the chain of causation. Again, in the non-marine case of Re Etherington and The Lancashire & Yorkshire Accident Insurance Co, 55 the policy covered death ptoximately caused by accidental injury. The assured suffered a heavy fall on V:er ground while hunting. A combination of shock and being soakedjnduced pneumonia resulting in death. The insurers argued unsuccessfully that the pneumonia broke the chain of causation. Vaughan Williams L] observed that 'the accident itself is ordinarily followed by certain results according to its nature, and if the final step in the consequences so produced is death, it seems ro me that the whole previous train of events must be regarded as the proximate cause of the death which results'. 56
9.37 Conversely, where a peril neither inflicts nor renders inevitable the damage that

is the subject of the claim and such damage is not the natural consequence of the peril, the test for proximity of causation will not be satisfied. In Green v Elmslie,57 a vessel was driven on an enemy coast and there captured. The strand-

51 [19181 AC 350, at 9.08ff above. 52 ibid 364. 53 [1894J 2 QB 548. " ibid 553 per Davey LJ. 55 1190911 KB 591. See also MardoifvAccident Imurance CO [1903J 1 KBS84. " [190911 KB 591, 599. 5" (1794) Peake 278.

ibid 279. Jonides v Universal Marine Insurance Co (1863) 14 CB (NS) 259, discussed further ac 13.0813.09 below. The contrary decision in Bondrett v Hentigg (1816) 1 Holt 149, of a total loss by perils of the sea where part of the cargo of a wrecked vessel waS lost in the sea and part was brought safely on shore where it was destroyed and plundered by the natives, appears irreconcilable and unsustainable. 60 De Mattos v Saundm (1870) LR 5 CP 570. " (1863) 14 CB (NS) 259, 286-7. 62 See also Moor Line Ltd v Isaac King (1920) 4 LlLRep 286 in which incompetent navigation ('a horrible bungling about the navigation of this ship which, on a fine day and in a calm sea, went four miles our of her course in fourteen miles') resulted in a master unwittingly sailing his vessel into a passage between sandbanks that was impassable for a vessel of that size. While in this passage, evasive aCclon was taken to avoid a mine and shortly thereafter the vessel ran aground. Rowlatt Jdismissed all arguments that the cause of the loss was a war risk rather than a peril of the sea. Either the vessel had resumed its original course after avoiding the mine or it had not resumed its original course because the master's ignorance of his true position meant that he did not know there was any need to do so. On either analysis, the mine could not be said to be the proximate cause of the vessel's running aground.
58
59

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Principles ofCausation
pursues her voyage, but is lost in a storm which would not have been encountered but for the hostile attempt at seizure. Although the loss would not have happened without the attempted seizure, the proximate cause of the loss is a peril of the sea." Fourthly, a port may be entered by two channels, in one of which torpedoes are sunk by way of defence. Unaware of this, the master of a ship enters the protected channel and the ship is lost. The proximate cause would certainly be within the consequences of hostilities exception. However, suppose the mastet, aware of the sunken torpedoes, selects the other channel, but runs aground through unskilful navigation. The loss would not fall within the exception.
9.41

Applying the Effictiveness Test ofProximate Cause

It does not follow from the above discussion that events that are interposed 9.43 between the original peril metiting the status of proximate cause and the ultimate loss and rhat do nor break rhe chain of causation are necessarily excluded
from proximate cause status. 'Where a business interruption policy covers loss of

In MidlandMainline Ltd v Eagle Star Insurance Co Ltd," the distinction between background and proximate cause surfaced in the context of business interruption insurance. Cracking in railway track caused a major accident when a train derailed at Hatfield. The cracking was a form of rolling contacr fatigue (RCF) and a clear example of wear and rear. This led to the imposition by rhe regularory authoriry of emergency speed resrricrions (ESRs) wherever the cracking was known to exist. This in turned caused disruption ro rail services and loss to the train operating companies. The policies excluded loss proximately caused by wear and rear, but the claimants contended, and it was found ar first instance, rhat the cracking was merely part of the background againsr which rhe ESRs were imposed. David Sreel J reasoned as follows:" What brought about ,he loss? ReF was a known featute of the netwo,k (albeit the scale of it was not). It was formerly dealt with as part of routine maintenance with
little, if any, disruption to the timetabled services. The losses are brought about by:

income caused by government warnings of possible terrorist risk, it would be bizatre to deny such a warning proximate cause status in favour of an actual terrorisr atrack that prompted the warning." But equally, one could not deny, were it relevant in the context of the particular policy wording, that the actual atrack was a proximate cause of the loss. Again, in Midland Mainline Ltd v Eagle Star Insurance Co Ltd," the wear and tear could not be denied status as a proximate cause of lost revenue merely because its deleterious impact on the railway infrasttucture was brought to a head by regulatory intervention. However, that should not mean that an assured that purchases cover for income lost by regulatory intervention should be denied indemnification wherever the regulator has a good reason for intervening on the ground that the proximate cause of the loss is the reason for the intervention, rather than the intervention itself" Similarly, in Leyland Shipping, the policy excluded losses caused by war risks. On 9.44 established principles," therefore, provided it was true to say that the impact of the torpedo was a proximate cause of the loss, the insurer was not liable regardless of the causal significance of other events or circumstances. Suppose, however, the vessel had been insured against loss caused by grounding with no mention of war risks. Could one then deny that the Ikaria sank because (in a proximate cause sense) of the repeared groundings? It is suggested rhat the contextual nature of the proximate cause would demand that the groundings be given full causarion credit regardless of why or how the vessel came into the posirion to be lost by grounding.'o Again, if on facts parallel to rhose in Reischer v Borwic!?' a vessel or cargo were insured simply against entry of water, it could not be denied that the ingress of water rhat sank the vessel merited proximate cause srarus for the purposes of such insurance cover. Such wording is clearly designed to avoid enquiries into why water entered. Denial of proximare cause starus to the entry of water in favour of the reason for rhe entry would frustrate ,the intention behind the wording.

the myriad of ESRs imposed to try and bring the network back to a safe shape as
soon as possible. The gradual development ofcracks in numerous ReF sites .was no more than the underlying state of affairs providing the occasion for action.

9.42 This decision on causation was reversed on appeal. While not necessarily deny-

ing the proximate causal significance of the ESRs, the Court ofAppeal held that the defective nature of the track could not be relegated to remote background but was either the proximate cause of rhe loss or a proximate cause concurrently wirh the ESRs. The Court ofAppeal also rejected an argument thar the Hatfield derailment was the sole proximate cause of rhe business interruption losses throughout rhe network. Its proximate effect was confined to closure of the line where ir happened, and even in that limited context it did not prevent rhe wear and tear in the track from having proximate cause status.

63 SeeaJsa Livievjanson (1810) 12&1st648,653. " [2003] EWHC (Camm) 1771, [2004] Lloyd's Rep IR 22, rvsd [2004] EWCA Civ 1042, [2004J 2 Lloyd's Rep 604. 6S [2003] EWHC (Camm) In!, [20041 Lloyd's Rep IR22, para 109.

66 IF P&C Insurance Ltd (PuM v Silversea Cruises Ltd [20041 EWCA Civ 769. [2004J Lloyd's Rep IR 696, see 9.28 above. 67 [2004] EWCA Civ 1042, [20041 Lloyd's Rep IR 22, see 9.41-9.42 above. 68 Such cover was indeed a feature of the policy in Midland Mainline, and no such causation argument, dearly incompatible with the intention of the parties, was raised. 69 See 9.20ff, esp 9.29 above. 70 See the statement by Vaughan Williams LJ in Re Etherington: 'the whole previous train of events must be regarded as the proximate cause of the [loss] which results': [1909] 1 KB 591> 599, see 9.36 above. 71 [1894] 2 QB 548, see 9.24, 9.36 above.

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9.45 In Yorkshire Dale Steamship Co Ltd v Minister ofWar Transport (The CoXWOld),72 the government assumed responsibility for the consequences of hostilities and warlike operations with respect to a requisitioned vessel. While sailing in convoy to a war base with a military cargo, rhe vessel altered course as ordered by the naval escort to avoid a suspecred enemy submarine, lost sight of the leading vessel in poor visibility, and ran agtound. Previous authority esrablished that the vessel was engaged on a warlike operation, the arbitrator held that the loss was proximately caused thereby, and the House of Lords held there was sufficient evidence to support the arbitrator's decision. Lord Wright stated that: 'The stranding in this case was undoubtedly a peril of the seas, but we must look behind the stranding to ascertain if the cause of the casualty was a peril which could be described as a consequence of warlike operations.''' Selecting the real or efficient cause ftom the contributing circumstances required the application of common sense. The question was 'what was the effective and predominant cause of the accident that happened, whatever the nature of that accident may be'." Again, this was a case where the question was not wherher the proximate cause of the loss was a peril of the sea. If the policy had simply covered perils of the sea with no mention of war risks, that would have been the question and the answer would have been in the affirmative. However, since the policy excluded war risks, the question became whether, regardless of the causative potency of any other matrer, there was a war risk that satisfied the proximate cause test.

Apprehension

Peril

the ship to proceed to another port where the cargo was sold at a considerable .loss. Lord Alvanley CJ held that no claim lay against the underwriters:
, . . where underwriters have insured against capture and restraint of pr.inces, and the captain, learning that if he enters the port of his destination the vessel will be

lost by confiscation, avoids that pOft, whereby the object of the voyage is defeated,
such circumstances do not amount to a peril operating to the total destruction of

the thing insured. If they could, the same principle would have applied in case
information had been received at Falmouth that the ship could not safely proceed to Naples. 78

F. Apprehension of a Peril
9.46 If the master of a vessel anticipates a covered peril, takes action to avert it and thereby incurs a loss, the assured may not recover under the policy because the covered peril is not the proximate cause of the loss. Where the owners of a vessel may not 'with reasonable prudence' order their vessel to sail because of the probability of a casualty from a hostile attack, the cause of allY resulting loss is the apprehension of the peril rarher than the peril itself. 75 Although described as 'unjust and somewhat absurd'," the principle is well established. 9.47 The rule seems to originate in rhe case of Hadkinson v Robinson," which concerned insurance on a cargo of pilchards being carried in convoy from Falmouth to Naples on a British ship. In the course of the voyage, it was learned that Naples had been closed to British ships. The commander of the convoy ordered

Observing rhat rhe peril must act 'immediately, and not circuitously'," 'directly 9.48 and not collaterally','O Lord Alvanley justified the rule on the basis that otherwise the courts would afford cargo owners 'the opportunity of creating imagin'ary dangers whenever the cargo was not likely to reach the port of destination in a sound state, and, by giving notice of abandonment to throw a loss upon the underwriters to which they were not liable by the terms of the policy.''' Again, in Lubbock v Rowcroft,82 the port of destination was found on arrival to be in hostile French hands or subject to a French blockade. Lord Ellenborough held that the ensuing abandonment of the cargo by the assured to the underwriter was 'from an apprehension of an en,emy's capture; and not from any loss within the terms of the policy: That if such was allowed, every ship about to sail from the port of London for a POrt which had fallen into the hands of the French, might be abandoned'" A policy on loss caused by capture and seizure is not a policy on loss caused by fear of capture and seizure. 84 Where, however, is the line drawn berween an apprehended peril and an opera- 9.49 tive peril? Scrutron LJ put the question: 'Is it a fear of something that will happen in the future or has the peril already happened and is so imminent that it is immediately necessary to avert the danger by action?'" In Miller v Law Accident Insurance Co," a government decree forbidding dis- 9.50 charge of a cargo of diseased cattle was held to constitute the insured peril of restraint of princes despite the absence of direct and immediate compulsion. Stirling LJ stated that:"
If, when about to enter the pOrt, the master had been informed of the existence ofa law restricting the right to land cattle, and that the Government were likely to put

72 7S
77

[19421 AC 691. 73 ibid 707. 74 ibid 698 per Viscount Simon. The Bamburi [1982] 1 Lloyd's Rep 312, 316. 76 ibid, perStaughtori J. (1803) 3 Bos & Pu1388.

ibid 392. 79 ibid. 80 ibid 393. 81 ibid. (1803) 5 Esp 50. 83 ibid 51. 84 Nickels & Co v London & Provincia!Marine & Genera! Insurance Co Ltd (1900) 6 Com Cas 15. See also Forster v Christie (1809) 11 East 205; Office Appliance 7rades Association of Great Britain & Ireland v Roylance (1940) 67 LlLRep 86. 85 Symington & Co v Union Insurance Co ofCanton Ltd (1928) 31 LlLRep 179, 182. " [19031 1 KB 712. 87 ibid 721.
78

82

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Principles ofCausation
that law into force, and he had then gone on his voyage and not entered the pOrt, the case would have been like that in Hadkinson v Robinson and similar authorities. Here the master went as far as he could towards the completion of the venture, and only desisted when the Government intervened.

Mistaken BeliefofPeril
suspending the voyage until the end of the war. Ultimately the voyage was abandoned. In the opinion of the Admiralty, had the voyage proceeded, the vessel and cargo would have been in peril of capture. The House of Lords held unanimously that the proximate cause of the lost voyage was the voluntary act of the captain in not pursuing it. 'It was self-restraint, not restraint of princes, that hindered the captain from putting to sea.''' Had the master abandoned the voyage in response ro an instruction from his government, there would have been an operative restraint of princes. 97 Under the British rules of mutual war risks associations;' the doctrine of appre- 9.54 hension of risk is mitigated by rule 2C.1.6, which covers a shipowner against loss sustained through the detention or diversion of an insured ship caused in order to avoid loss of or damage ro rhe ship by the covered perils 'but only where and to the extent that the Directors in their discretion derermine that the loss should be recoverable from the Association'.

9.51

In the leading decision of Kacianoff v China Traders Insurance Co Ltd,88 cargo was again diverted by reason of a hostile blockade and the assured claimed for a loss by capture. According ro Lush J, for capture ro be the proximate cause, the ship had ro be 'in peril of capture'. He reasoned as follows: 'Whar was done in discharging the cargo was really done to prevent the ship ever coming into the peril; it was not done ro avert the consequences of any peril in which the ship actually was. Thar being so, ir seems ro me quite impossible ro say that the one was the consequence of the other.''' on a cargo of coal. The voyage was abandoned shortly arrer its commencement because the coal started ro heat, although no fire actually broke out. GorelI Barnes J held the underwriters liable for the resulting loss of freight as caused by fire. 91 In Kacianoff, Lord Reading CJ paraphrased the reasoning of Gorell Barnes J as follows: 'was there at the time such a condition of things thar there was an actually existing peril of fire and not merely a fear rhat ir might break out? The danger was present, and if nothing had been done spontaneous combustion and fire would have followed in the natural course. That means the peril had begun
to operate'.92

9.52 To be contrasted is The Knight ofSt Michael,90 a case concerning fire insurance

G. Mistaken Belief of Peril

Underwriters who insure against perils do not insure against errors of judgment 9.55 in deciding whether a peril exists. In joseph W't'ttson & Son Ltd v Firemen Fund Insurance Co ofSan Francisco," the master of a vessel saw what he assumed to be smoke issuing from a hold and triggered fire-fighting measures that damaged the claimant's goods. In the ensuing action by the claimant on his insurance policy for, inter alia, a loss caused by fire, Rowlatt J held that what the master saw was vapour emirted by cargo that had been heated by stearn escaping from a broken pipe. Consequently, the insured peril of fire had not occurred and the insurer could not be liable. All depends, however, upon the wording of the policy. In Henry & MacGregor v Marten,100 the master of a vessel rammed what he genuinely believed to be an enemy submarine, the collision so severely damaging his vessel that it ultimately sank. Although there was insufficient evidence to determine whether what had been rammed was indeed a submarine, the loss clearly fell within the purview of war risks insurance as caused by a warlike operation or a consequence of hostilities.

9.53 In the alternative, Gorell Barnes J held the loss ro fall within the eiusdem generis

clause, an analysis that has subsequently been preferred." Should this latter approach prove correct and given the demise of the eiusdem generis clause, in such a situation the assured would not today recover on insurance against 'fire'.94 On the facts of Kacianoff, the peril of capture was not operative. A reasonable certainty of capture had the voyage been pursued was insufficient. Had the carrying vessel been met and threatened by a hostile ship or been in some danger, the result might have been different. Again, in Becker, Gray & Co v London Assurance CO,95 goods shipped on board a German vessel were covered against war risks including a restraint of princes. In the course of the voyage, war broke out between Germany and the United Kingdom. The master consequently put into a neutral POrt to avoid capture with the intention of

[191413 KB 1121. " ibid 1130. 90 [18981 P 30. " ibid 34-5_ 92 [191413 KB 1121, 1128_ " Tempus Shipping Co Ltd v Louis Dreyfts & Co Ltd[1930J 1 KB 699, 708.
88

------------------------96 ibid 111 per Lord Sumner. 97 Rickards v Forestal Land, Timber & Railways Co (The Minden) [1942J AC 50, discussed at
13.50-13.51 below. Consequently, reliance should not be placed upon the dictum of Brett J in Rodocanachi v Elliott (IS?3) LR 8 CP 649, 670 to the effect that the proximate cause of absten~ rion from entering a blockaded port in response to orders of officers of the Crown is the master's voluntary obedience to such orders, 98 See 16.14 below. 99 [192212 KB 355. "0 (1918) 34 TLR 504.

Note, however, that the Institute Coal (:::Iauses cover loss or damage 'reasonably attributable to. , , fire explosion or heating, even when caused by spontaneous combustion, inherent vice or nature of the subject matter insured': d 1.1. "
94

os [1918J AC 101.

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The Language ofCausation

ship to sail away under circumstances like these, instead of stopping until the goods could be reshipped, which would be very mischievous' .'05 Where the claim is for loss of chartered freight, the wording of the charter is 9.58 crucial. Perils of the sea that frustrate a voyage equally cause the resulring loss of freight.,06 Similarly, where rhe charter provides for automatic cessation ofhire in
certain circumstances, the proximate cause of the relevant circumstances is also

H. Response to Perils
9.56 Once a peril occurs, steps taken to prevent damage occurring or to minimize

losses do not break the chain of causation and losses of or damage to the insured property thereby incurred are recoverable as proximately caused by the peril.'o, However, once the vessel is free of the peril, if a prima facie loss can be made good but the master fails so to do, such a failure will break the chain of causation and the underwriters will not be liable. Philpott v Swann'02 concerned insurance on freight to be earned on a cargo of copper ore to be loaded at Hondeklip Bay for carriage to Swansea. Loading was interrupted by a storm that forced the ship to put to sea and caused damage. The master accordingly decided to sail to St Helena for repairs. On arrival, however, it was discovered that the relevant repairs could not be effected there and the master then sailed for Swansea without a full cargo. The master could have sailed to the Cape of Good Hope instead of St Helena where the necessaty repairs could have been completed, enabling the vessel to load a full cargo. The jury found that the master had acred thtoughout as a prudent uninsured owner would have done. Nevertheless, Willes J held that the underwriters were not liable for the loss of freight with respect to the shortfall on the cargo because it was not proximately caused by the storm. 'The damage done was not of an extraordinary charactet. It was capable of repair and the means of repair were within a reasonable distance ... The proximate cause of the loss was the course which the master pursued in going home instead of repairing at the Cape and then returning for the rest of
the cargo. '103

the cause ofthe lost freight.'o, Where, however, liability to fteight will cease upon the exercise of a contractual option to cancel, it has been held that the exercise of such an option breaks the chain ofcausation berween that which triggers the right to cancel and the ensuing loss of freight.'os A ftrtiori, where a chartered vessel is seriously damaged by stranding so as to require repairs and to permit the cancellation of the charter and a decline in the freight market renders a replacement charter less lucrative, the proximate cause of the diminished profitability of the vessel on returning to service is the decline in the market and not the stranding.'o,

I. The Language of Causation

Section 55(1) of the Marine Insurance Act 1906 adopts the proximate cause 9.59 rule as a default rule, operative unless the policy otherwise provides. Confusingly, the Institute clauses generally eschew the terminology of 'proximate cause'"0 and employ a bewildering range of alternative causal expressions: 'caused by', 'arising from', 'resulting from', 'attributable to', 'reasonably attributable to', 'by', 'consequent on'. This raises the question of whether a different
causation test is contemplated.

9.57 In Mordy vJones, '04 upon a vessel seeking repairs in an intermediate port, it was

discovered that the perils of the sea that had injured the vessel had also so damaged a part of the cargo as to render it unsafe for carriage to the port of destination without treatment involving considerable delay and expense equal to its freight. The master accordingly sold that part of the cargo and, having been unable to find a replacement, completed the voyage without a full cargo and handed the proceeds of sale to the persons interested in the sold cargo without deducrion for freight. It was held that, although on the facts the master had acted prudently and properly, nevettheless the underwriters should not be held liable for any lost freight lest 'it would open a temptation to the master of a

(1) The Adhesiveness of the Proximate Cause Rule

As already noted, the proximate cause doctrine is considered to represent the 9.60
intentions of the parties in the absence of evidence to the contrary. The courts,

105 ibid 400 per Abbott Cj. A fortiori where subsequent conduct is negligent or constitutes a breach of duty: Tanner v Bennett (1825) Ry & Mood 182: Meyer v Ralli (1876) 1 CPD 358. 106 jackson v Union Marine Insurance Co (1874) LR 10 CP 125; Rt Jamieson 6- Newcastle Steamship Freight Insurance Association [1895J 2 QB 90. '07 The Alps [1893J P 109: The Bedouin [1894J P 1. >0, Mercantile Steamship Co Ltd v 7jser (1881) 7 QBD 73, 75 per Lord Coleridge Cj; 'the

'" Stanley v Western Insurance Co (1868) LR 3 Ex 71 (fire): The Thrunst'Oe [18971 P 301: Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd [1941 J AC 55 (perils of the
sea). The cases are discussed in the context of the relevant peril, see 10.60, 10.44 below. See also Wikon v United Counties Bank [19201 AC 102, 125, explaining Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 on the basis of this_principle. For the recovery of additional expenditure incurred in averting or-minimizing losses, sec Ch 24 below. '" (1861) 11 CB (NS) 271. '" ibid 280-1. >0' (1825) 4 B & Cr 394.

freight was lost by the exercise of the cancelling option which the charterers had the right to exercise. The breakdown of the ship gave the charterers the opportunity which it was at their

pleasure to avaH themselves of or to decline ... Here it seems to me that it was not the perils of the seas which caused the freight to be lost, though it may be that these perils gave the charterers the right to cancel the charter.' But see Atlantic Maritime Co Inc v Gibbon [1954] 1 QB 88, 128. >0, Continental Grain Co Ltd v Twitchell (1945) 78 LlLRep 251. 110 By way of exception, see the delay exclusion in the Institute Cargo Clauses (A), (B), (C), d 4.5, discussed at 15.33-15.37 below.

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Principles ofCausation
however, do not readily conclude that policy wording evidences an intention to adopt a different causal test. First, it is clear that such intention will be not inferred from the mere fact of a change of causal wording.'" Precisely because the proximate cause test represents the presumed intention of the parties, its applicability 'does not depend on nice distinctions between the particular varieties of phrase used in particular policies' .'12 Secondly, the inclusion of a range of different causal phrases within the same contract equally fails to persuade. Indeed, the difficulty of formulating a wide range of different causation tests that may sensibly be regarded as responding to the intentions of parties to a commercial contract may reinforce the applicarion of the proximate cause rule where a policy adopts several causal formulae. Thirdly, the adoption of different causal formulae for covered perils and exclusions will not of irself lead to rhe application of different causation tests.'13 Fourthly, causal phrases that taken in isolation do not evidence the requisite intention to oust the proximate cause rule do nor necessarily increase in persuasive potency through cumulative use in the same exclusion.'" Ultimately, however, it is a matter of interpretation of the particular contract. (2) Displacing the Proximate Cause Rule
9.61

The Language ofCausation (a) Displ4cement by a combination ofwording and other circumstances
Although many different causal formulae have been held in and of themselves 9.62 not to evidence an intention to adopt a different causation test, the question is ultimately one of interpretation of the contract as a whole. King v Brandywine Reinsurance Co (UK) Ltd 15 concerned insurance cover relating ro the disastrous oil spill from the Exxon Valdez in Alaska. The policy covered, inter alia, liability in damages for personal injuty 'and/or loss of, damage to or loss of use of tangible property caused by or alleged ro have been caused directly or indirectly by seepage, pollution or contamination arising out of the operations of the Insured'. The question was whether the navigation of the Exxon Valdez, which was the proximate cause of the pollution, arose out of an operation of Exxon, namely the consignment of a cargo of oil for carriage on the vessel on the relevant voyage. Colman J held that, in context and especially given the contrast with the phrase 'caused by', the phrase 'arising out of imported a broader test extending to all contributing events so that a sufficient causal link was present on the facts."6 Clause 1.1 of the Institute Cargo Clauses (B) and (C) extends cover to loss or 9.63 damage 'reasonably attributable to" named perils, such as fire, in contrast to the 'caused by' test required of the perils named in clause 1.2, such as jettison. The change in causation wording is the only distinction between the two categories of peril, clearly suggesting that the phrase 'reasonably attributable to' is intended to embody a more relaxed causation requirement than proximity of cause. Similarly, clause 7 of the Institute Cargo Clauses (A), (B), and (C) contains exclusions of losses 'caused by' strikers, 'resulting from' sttikes, and 'caused by' any terrorist. The alteration in causal wording clearly reflects the difference in immediacy of impact upon cargo of the acts of people, as opposed to a withdrawal of labour."7 Two provisions of the Marine Insurance Act 1906 depart from the proximate 9.64 cause formula articulated by section 55(1). In the context of the legislation, it is clear that the departute contemplates a deliberate relaxation of the proximate cause rule. Section 55(2) (a) provides that the insurer is not liable for loss 'attributable to' the assured's wilful misconduct, in marked conttast to the adoption of the proximate cause test as a general proposition in subsecrion (1) and in specific contexts in subsections (2)(b) and (2)(c). Such a change in terminology within the same section of the Act reflects the concern that it may be necessary to look beyond the proximate cause in order to link the assured's wilful misconduct ro

Notwithstanding its encapsulation of the intentions generally expected of the contracting parries, the proximate cause rule will be displaced in two situations: firsr, where a change of formula insufficient in itself combines with other factors such as policy structure and wording to evidence the requisite intention and, secondly, where the espoused causal formula is unequivocal in adopting a different test. -

111 Lawrence vAccidental Insurance Co Ltd (I 881) 7 QBD 216 ('arising from'); Coxe v Employers' Liability Assurance Corp Ltd [1916J 2 KB 629, 634 ('caused by, arising from, or traceable to'); Symington dr Co v Union Insurance Society of Canton Ltd (I928) 34 Com Cas 23 ('reasonably attributable to'); Panamanian Oriental Steamship Corp v Wright (The Anita) [1971J 1 WLR 882 ('arising from'); Shell/nternational Petroleum Co Ltd v Gibbs (The Salem) [19821 QB 946, 998 ('attributable to'); Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd

(200lj EWCA Civ 1643, (20021 Lloyd's Rep lR 113, para 40 ('result from'). One commentaror has stated that the dropping of the adverb 'proximately' in favour of simply 'caused by' in the Institute clauses is reflective merely of a wish to render the English drafting more easily accessible to foreign assureds: K Goodacre, Goodbye to the Memorandum (1988) 21. 112 Lloyds TSB Generaiinsurance Holdings v Lloyds Bank Group Insurance Co Ltd [200 1] EWCA Civ 1643, (20021 Lloyd's Rep IR 113, para 40 per Porter LJ. 113 Handelsbanken Norwegian Branch of Svenska Handelsbanken AB v Dandridge (The Aliza Glacial) 120021 EWCA Civ 577, (2002] 2 Lloyd's Rep 421, para 60 ('arising from' imports normal proximate cause test for exclusion in war risks policy where cover granted for losses 'caused by' named perils). 114 Coxe v Employers' Liability Assurance Corp Ltd[1916] 2 KB 629."

(2004] EWHC 1033 (Comm), (20041 Lloyd's Rep IR 554. '" ibid para 235, relying on Dunthorne v Bentley (1996) (19991 Lloyd's Rep IR 560 (interpretation of Road Traffic Ace 1988). 117 See 14.04 below.
115

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Principles ofCausation
the loss it somehow induced, particularly given the nineteenth-century tendency of marine insurance law to adopt a last in time approach to proximity of causation."' Similarly, section 39(5) adopts the phrase 'attributable to' in the context of unseaworthiness in time policies. Although the modern approach to
proximity of causation would classify unseaworthiness as a proximate and not a

The Language ofCausation

damage occasioned by or through or in consequence, directly or indirectly, of any of a list of specified war risks. Having established that the general state of affairs in the Lebanon at the relevant time constituted two excluded perils, Mustill J considered the question ofcausation. The impact ofthe causation clause was as follows: 124
... it is quite clear that the draftsman has gone to great lengths to ensure that the doctrine of proximate cause does not apply. Plainly there must be some limit on the application of the clause, for the chain of causation recedes infinitely into the past. The draftsman must have intended to stop somewhere: and that place must be the point at which an event ceases to be a cause of the loss, and becomes merely an item of histOly. The draftsman has not explained how that point is to be identified, nor indeed do I believe that words can be found to do so. It is, eventually, a matter of instinct guided by the fact that this is a policy which (unlike others in which similar clauses can be found) expressly insures against violent acts. In essence the task is to assess whether the particular act of violence simply takes place against the background of a 'warlike' state of affairs, or whether it has itself (even if in a rather remote way) a warlike aspect of its own.

remote cause of any loss attributable to the vessel's unfitness for the insured adventure, such classification was not self-evident when the Act was drafted. '"

(b) Displacement by simple change oflanguage

9.65 Although fine variations of language will not displace the proximate cause rule,

this does not mean that a choice of different words can never suffice to import a
different causation test. In particular,

it is clear that a reference ,to a 'direct or indirect' cause is incompatible with the proximate cause rule. In Coxe v Employers' Liability Assurance Corp Ltd, 120 a military officer was killed by a train while

walking along a line unlit because of wartime regulations. Life insurers invoked an exclusion in respect of death 'directly or indirectly caused by, arising from, Ot traceable to ... war'. Scrutton J upheld the defence. The war had created the special danger of poor visibility, the assured had been exposed to that danger by his military duties, and the special danger had caused his death. War was, therefore, causally related to the assured's death. There had, however, to be some limits to the scope of this more relaxed causation test. The same exclusion was highly unlikely to protect the insurer where the assured was drafted into the army in time ofwar and then killed by lightning at a military camp not particularly prone to lightning strikes. 121 Again, in Tektrol Ltd v International Insurance Co ofHanover Ltd, 122 the claimants sought indemnification in respect of a lost computer source code. Five copies of the code were kept. Two were lost to a virus, while the remaining three were subsequently stolen by burglarsi Insurers were held entitled to rely on an exclusion of consequential loss 'arising directly or indirectly from' the impact of the virus. The virus was a causa sine qua non of the loss and clearly was at least an indirect cause within the meaning of the exclusion.
9.66

Given the factual background, the assured had no possibility of evading the broad drafting of the exclusion.

'" ibid 441-2.

Spinneys (1948) Ltd v RoyalImurance Co Ltdm concetned insurance on property

in Beirut against certain acts of violence. A claim for extensive looting admittedly fell prima pciewithin the cover. However, the policy excluded 'any loss or

For discussion of wilful misconduct and causation, see 15. 14ffbelow. For discussion of unseaworthiness and causation, see 19.40-19.48 below. "0 [1916J 2 KB 629. Followed in Oei v Foster[1982J 2 Lloyd's Rep 170. m ibid 634-5. 122 [2004J EWHC 2473 (Comm), [2005jLloyd's Rep 1R 358, rvsd on other grds [2005J EWCA Civ 845, [2005J 2 Lloyd's Rep 701. '" [1980J 1 Lloyd's Rep 406.
118
119

328

329

10
MARINE RISKS

A. Hull and Freight Insurance

(1) Perils of the seas, rivers, lakes or other navigable waters (2) Fire and explosion (3) Violent theft by persons from outside the vessel (4) Jettison

1000Z
10.03 10.60 10.69 10.70

(5) Piracy

10.74 10.77

B. Cargo Insurance
(1) 'All risks' cover under the

10.78 Institute Cargo Clauses (A) (2) Named perils cover under the Institute Cargo Clauses (B) and (e) 10.81

The standard market clauses for hulls and freight provide cover against loss of 10.01 or, in the case of hull insurance, damage to the insured property on a named perils basis and divide the list of covered perils into two groups, a division necessitated by the fact that cover in respect of the second group of perils, but not the first, is subject to a due diligence proviso. For convenience, the term 'marine risks' is adopted to designate the first group of perils. This chapter is concerned with that fitst group, while the second group is considered in Chapter II below. The scope of cover under the Institute cargo clauses is also briefly considered.

A. Hull and Freight Insurance

The list of marine risks is substantially the same in the various Institute and 10.02 International hulls and freight clauses. Clause 2.1 of the International Hull Clauses (01111/03), for example, provides as follows:'
This insurance covers loss of or damage to the subject-matter insured caused by 2.1.1 perils of the seas, rivers, lakes or other navigable waters

1 See also Institute Time Clauses Hulls (1/8/89 and 1/11/95), c16.1; Institute Voyage Clauses Hulls (1110183 and 1111195) cl4.1; Institute Time Clauses Freight (I110183 and 1111195), cl 7.1; Institute Voyage Clauses Freight (118189 and 1111195), cl5.I.

331

Marine Risks
2.1.2 nre, explosion 2.1.3 violent theft by persons from outside the vessel 2.1.4 jenison 2.1.5 piracy
2.1.6 2.1.7 2.1.8 2.1.9
contact with land conveyance, dock or harbour equipment or installation earthquake, volcanic eruption or lightning. accidents in loading, discharging or shifting cargo, fuel, stores or parts contact with satellites, aircraft, helicopters or similar objects, or objects

Hull and Freight Insurance

elements, as distinct from the silent, natural, gradual action of the elements upon the vessel irself, which latter phenomenon properly belonged to ordinary wear and tear. There is no peril of the sea where a vessel sinks because of its general debility, old age, or decay. 6 Such a sinking may be attendant with an element of chance in that there may be no inevitabiliry about precisely when or how it will happen. However, the assured cannot recover under the heading of peril of the sea because the operative cause of the loss is not a fortuitous maritime occurrence but merely the succumbing of the vessel to its debilitated condition.' Insurance against perils of the seas 'is not a guarantee that a ship will float'.' However, for the cause of the loss to be exclusively the state of the vessel: 'The loss must be disassociated from any peril of wind or water, even if these form the immediate context of the loss, and constitute the immediate agency (for example, the percolation of water through an existing flaw in the hull) by which the loss takes place." The vessel must be in such a condition as to sink at its moorings or in a millpond sea.'o Fortuiry is not to be equated with unforeseeabiliry." In Neter (NE) & Co Ltd v 10.07 Licenses & General Insurance Co Ltd, 12 while rounding the Cape of Good Hope in June, a vessel encountered weather rhat was rough but normal for those seas at that time of the year. A claim against cargo underwriters failed because of an absence of proof that damage to the cargo had been caused by the weather. However, Tucker J added obiter that:
... it is clearly erroneous to say that because the weather was such as might reasonably be anticipated there can be no peril of the seas. There must, of course, be some element of the fortuitous or unexpected to be found somewhere in the facts and circumstances causing the loss, and I think such an element exists when

falling therefrom. (1) Perils of the Seas, Rivers, Lakes or other Navigable Waters 10.03 Accotding to Schedule 1 rule 7 to the Marine Insurance Act 1906: 'The term "perils of the seas" tefers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves.' However, despite such quasi-statutory assisrance, the phrase 'perils of the seas' has generated a considerable body of case law. Since 1887, it has been clear rhat the phrase carries the same meaning in marine insurance law and in the law of carriage of goods by sea. 2

(a) Fortuitous accidents

10.04 Although, as a matter of interpretation, contracts of marine insurancepresumptively provide an indemniry against risks rather than certainties, fortuiry is an integral element in the definition only of perils of the seas. Rule 7 itself excludes 'the ordinary action of rhe winds and waves' precisely because such action lacks fortuiry. Yet the scope of this exclusion is narrow. 10.05 The requirement of fortuiry excludes 'rhat natural and inevitable action of the winds and waves, which results in what may be described as wear and tear'. 3 Normally, issues such as ordinary wear and tear and inherent vice are raised by the insurer by way of defence, in which case the burden of proof rests upon the' insurer. In the context of perils of rhe seas, fortuiry being part of the definition of the peril reverses rhis burden, requiring the assured to show thar the loss was not attributable to such causes. 4 10.06 In Merchants Trading Co v Universal Marine Co,' the Court of Common Pleas approved the direction of Lush J to the jury at first instance that the underwriters were 'answerable for casualties arising from the violent action of the

&

6 Dudgeon v Pembroke (1874) LR 9 QB 581, 595-6, explaining Fawcus v Sars/ield(1856) 6 EI BII92; Sassoon (ED) & Co v Western Assurance Co [1912] AC 561; Wadsworth Lighterage &

Coaling Co Ltd v Sea Insurance Co Ltd (1929) 34 LlLRep 285; Sipowicz v Wimble (The Green Lion)

[1974] 1 Lloyd's Rep 593; Capital Coastal Shipping Corp v Hartftrd Fire Insurance Co (The Cristie) [1975] 2 Lloyd's Rep 100. In Hamilton, Fraser & Co v Pandorf6oCo (1887) 12 App Cas 518, 524,
Lord Halsbury LC observed: 'You would not speak of the danger of a ship's decay; you would know that it must decay, and the destruction of a ship's bottom by vermin is assumed to be one of the natural and certain effects of an unprotected wooden vessel sailing through certain seas.'

, ]]Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss]ay]ay) [1985] 1 Lloyd's Rep 264, 272; Lamb HeadShipping Co Ltd v]ennings (The Marel) [1992] 1 Lloyd's Rep 402, 426. , Grant, Smith & Co & McDonnell Ltd v S,attl, Construction & Dry Dock Co [1920] AC 162,
172 per Lord Buckmaster.
9 ]]

Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1985] 1 Lloyd's

Thomas Wiuon, Sons & Co v Owners of the Cargo per the Xantho (The Xantho) (1887)

Rep 264, 272.

ibid. For a comparative discussion of foreseeability and perils of the sea in the context of carrier's liability, see Great China Meta! Industries Co Ltd v Malaysian International Shipping Corp Berhad
10 11

12 App Cas 503. 3 ibid 509 per Lord Herschel!.

<I Further on burdens of proof, see 7.48ffabove (assured's burden) and 19.51-19.55 below (unseaworthiness).
5

(The Bunge Sero}a) [1998] HCA 65, [1999] 1 Lloyd's Rep 512.
12

(1870) (1874) 2 Asp MC 431n. See also Dudgeon v Pembroke (1874) LR 9 QB 581, 596-7.

(1944) 77 LlLRep 202.

332

333

Marine Risks
you find that properly stowed casks, in good condition when loaded, have become stove in as a result of the straining and labouring of a ship in heavy weather. It is not the weather by itself that is fortuitous; it is the staving in due to the weather, which is something beyond the ordinary wear and tear of the voyage. 13

Hull and Freight Insurance

wind and sea. They may happen on the voyage, but it cannot be said that they mlist happen. In their Lordships' judgment, it cannot be predicated that where damage is caused by a storm, even though its incidence or force is not exceptional,

a finding of loss by perils of the sea may not be justified. In contrast, a peril that is not only foreseeable but also inevitable lacks the 10.11 requisite fortuity to qualify as a peril of the seas. The annual icing over of particular seas in winter preventing any chance of passage 'is in no sense an accident; it is part of the ordinary course of things, like the ebb and flow of the tide'." However, there is a peril of the sea where the ice causing the obsttuction is unusual for the time of year. 22 Moreover, a seasonal peril of floating ice will qualify as a peril of the sea in the same way as seasonal storms. As indicated in the previous paragraph, the normal action of the tide lacks the 10.12 fortuity necessary to give rise to a peril of the sea. In Magnus v Buttemer,23 a vessel had to wait upriver in tidal waters for a few days for a discharging berth. The mooring place was a hard, steep, and shingly beach. The vessel floated when the tide was in and went aground but not dry when the tide ebbed. The grounding of the vessel damaged the hull but could not constitute a peril of the sea. The damage was an ordinary incident of the normal operation of the vessel. 'Nothing has happened which the assured could have wished or anticipated to happen otherwise than it did happen. They intended the ship to tal<e the ground as she did. There was no accident.'24 The loss was properly regarded as ordinary wear and tear. 25 Perils of the sea embrace 'every loss by incursion of the sea, due to a vessel 10.13 coming accidentally (using that word in its popular sense) into contact with a foreign body, which penetrates it and causes a leak' .26 However, although an incursion of sea water is a common characteristic of a peril of the sea, it is neither necessary nor sufficient of itself to constitute such a peril. A collision at sea between two vessels is a peril of the sea regardless of whether the collision results in either vessel being holed and water entering. An entry of sea water, moteover, is not a peril of the sea in its own right. It mayor may not be fortuitous and the reason for the entry must be ascertained in order to determine whether it possesses the requisite fortuity.27 In this sense, in Mountain v

10.08 In the leading case of The Miss jay jay, 14 the insured yacht sustained considerable damage during a voyage across the English Channel from Deauville to Hamble. Mustill J described the conditions as follows: 15
In absolute terms neither the wind nor the waves were exceptional, being about force four and three metres in height respectively. The sea was, however, confused and these were difficult conditions for a boat of this particular type, which would deal quite adequately with larger seas having bigger intervals between crests, but which tended in shorter seas to ride up and then from time to time fall down and

bang into the troughs. Later in his judgment, Mustill J found that: 16 'The sea conditions encountered by the Miss jay jay in the Seine estuary were such as a person navigating in those waters could have anticipated that he might find, but would hope that he would not find. The conditions were markedly worse than average, but not so bad as to be exceptional.'
10.09 In the light of these findings, Mustill J held that the cause of the loss fell within the covered peril of 'external accidental means', the term 'accidental' equating with the fortuity requirement for a peril of the sea. Provided some extraneous maritime circumstance intervened to produce a result that would not otherwise have occurred, there was fortuity even if the circumstance was not exceptional or incapable of anticipation." The Court ofAppeal affirmed this holding. Acco~d ing to Slade LJ: 'Even if the occurrence of a particular unwanted event, which mayor may not occur, is a readily foreseeable risk, the event may still be properly regarded as accidental when it does occur.'" 10.10 The same point was made in Canada Rice Mills Ltd v UnionA1arine & General Insurance Co Ltd' in the context of storms that may be foreseeable in terms of both incidence and intensity. Delivering the advice of the Privy Council, Lord Wright stated as follows:"
.. . storms at sea may be frequent, in some cases seasonal, like typhoons in the China Seas, a ship may escape them, and they are outside the ordinary accidents of

21

13 ibid 205. The claimants failed to adduce evidence regarding the stowage of the cargo or the effect of inclement weather on unloading. " IJ Lloyd Imtruments Ltd v Northern Star Insurance Co Ltd (The Miss]ay]ay) [1985] 1 Lloyd's

22

Popham 6- Willett v St Petersburg Insurance Co (1904) 10 Com Cas 31, 34 per Walton J. ibid, although no claim may be made today for loss of voyage, and the insurer may have a

defence of delay, see 21.97 and 15.29ff below. 23 (1852) 11 CB 876. 24 ibid 882 per Maule].
25 Had the grounding been negligent, the negligence would have supplied the fortuity for a peril of the sea or constituted a peril in its own right, see 10.14 and 11.37ffbelow. 26 Thomas Wi&on, Sons &Co v Owners ofthe Cargo per the XAntho (The Xantho) (1887) 12 App Cas 503, 509 per Lord Herschell. 27 For further discussion of causation and perils of the sea, see 10.43ffbelow.

Rep 264, affd on different grounds, [198711 Lloyd's Rep 32. " [198511 Lloyd's Rep 264, 267. 16 ibid 270. 16 [198711 Lloyd's Rep 32, 39. See also 36 per Lawton L].
20

17

ibid 271.

" [1941] AC 55.

ibid 70.

334

335

Marine Risks Whittle,28 Viscount Finlay stated that: 'A loss caused by the entrance of sea water is not necessarily a loss by perils of the seas. There must be some special circumstance such as heavy waves causing the entrance of the sea water to make it a peril of the seas.' On the facts, a houseboat was towed by a tug too large and powerful for the task. Some side seams above the normal water line opened, but the bow wave of the tug raised that level so that the vessel took on water and eventually sank. The House of Lords held that the size and power of the tug generating a wash of an extraordinary character furnished the requisite fortuity.
10.14 Fortuity may be furnished by negligence. In The Lapwing," a vessel was negligently berthed twice. Since the berthing was deliberate, it was argued that there could be no fortuity. However, Hodson J held that the presence or absence of deliberation was not the ttue test of coverage: 'It is true that it was intended that the vessel should be docked, but not that she should be so negligently docked as to be allowed to sit on a dangerous bottom, and I think that the intervention of the negligence of those responsible for the docking provides the fortuitous circumstance which entitles the plaintiffto recover under the terms of the policy.'" As pithily observed by Lord Bramwell: 'Is not the chance of being run against by a clumsy rider one of the petils ofhunting?'31 Under the Institute and International hull and freight clauses, the negligence of certain parties is also a specified peril in its own right. 32 10,15 A peril may be fortuitous so as to qualifY as a peril of the sea even if deliberately caused. Where a vessel is deliberately sunk by enemy action in time of war, rhe consequent death by drowning of a passenger qualifies as accidental under a personal accident policy,33 and rhe loss of rhe vessel similarly qualifievas fortuitous for the putposes of a hull policy covering perils of the sea. 34

Hull and Freight Insurance

Where, however, those in control of a vessel damage it deliberately (in the sense 10.16 .of wilful damage as opposed to deliberate conduct leading to unintended consequences), rhe assured, wherher implicated or not, may not recover under the heading of perils of the sea. 35 In Samuel (P) & Co Ltd v Dumas,36 a mortgaged vessel was fraudulently sunk on the owner's instructions but wirhout the complicity of the mortgagee. The question arose of whether the co-assured mortgagee could recover for a loss by petils of the sea. A majority of the House of Lords held that scutrling was not a peril of the sea,37 chiefly because fortuity 'involves an element of chance or ill luck which is absent where those in charge of a vessel deliberately throw her away. '38 Fortuity was to be assessed in absolute terms, not relative to the assuted claiming under the policy in issue. 39 The decision preserves the distinction between perils of the sea and the peril of barratry, which occurs when the masrer and crew damage rhe insuted vessel without the complicity of the owner.'o In this light, one may disringuish the situation where a vessel is lost or damaged by reason of the deliberate but legitimate conduct of the master or crew when confronted by fortuitous

Sumner: 'if (in Leyland ShippiniJ the insurance had been against perils of the sea and no more, the loss would have fallen within it'. In Cullen v Butler (1816) 5 M & S 461 a ship was mistaken for an enemy vessel and sunk The resultant loss of ship and cargo was held not to have been caused by a peril of the sea but to be recoverable under the eiusdem generis clause. The case was, however, doubted by Lord Herscbell in The Xantho (1887) 12 App Cas 503,509. See also Samuel (P) &Co Ltd v Dumas [1924J AC431, 458-9, 466, where Lord Herschell's doubts are noted with approval.
35

Michalos (N) & Sons Maritime SA v Prudential Assurance Co Ltd (The Zinovia) [1984]

28 [1921] 1 AC 615, 626. See also Wadsworth Lighterage & Coaling Co Ltd v Sea Insurance Co Ltd (I 929) 34 LlLRep 285, 297. 29 Baxendale v Fane (The Lapwing) [19401 P 112. 30 ibid 121. 31 Thomas Wilson, Sons &Co v Owners ofthe Cargo per the ){amho (The Xantho) (1887) 12 App Cas 503, 514. For other examples of negligence being viewed as supplying fortuity and contributing to the broad pantheon of perils of the sea, see Davidson v Burnand (1868) LR 4 CP 117, explained in Samuel (P) & Co Ltd v Dumas II 9241 AC 431, 453; Blackburn v Liverpool, Brazil & River Plate Steam Navigation Co [1902] 1 KB 290; Cohen, Sons & Co v National Benefit Assurance Co Ltd (1924) 40 TLR 347; Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd [1941] AC 55, 68-9; Century Insurance Co ofCanatkt v Case Existological Laboratories Ltd (The Bamcell II) (1982) 133 DLR 727, 735 (Court of Appeal of British Columbia); affd (1984) 150 DLR (3d) 7 (Supreme Court of Canada); CCR Fishing Ltd v Tomenson Inc (The La Pointe) 119911

1 Lloyd's Rep 89 (Supreme Court of Canada). 32 See 1L37ffbelow. 33 Letts v Excess Insurance Co (1916) 32 TLR 361. See also lrim Joint District School Board of Management v Kelry [1914] AC 667 (deliberate killing of a schoolmaster by two pupils held to qualify as an accident for the purposes of the Workmen's Compensation Act 1906). 34 Leyland Shipping Co Ltd v Norwich Union Insurimce Society Ltd[19171 (KB 873, 883, 894, [1918J AC 350, 363. See also Samuel (P) & Co Ltd v Dumas [19241 AC 431, 468 per Lord

2 Lloyd's Rep 264, 271. " [19241 AC 431. 37 Overruling the contrary view expressed, probably obiter, by the Court of Appeal in Small v United Kingdom Marine Mutual Insurance Association [1897J 2 QB 311, where the deliberate act point was not argued. 38 [1924] AC 431,448 per Viscount Cave. The same view had been expressed by Collins L] in Trinder, Anderson & Co v Thames & Masey Marine Insurance Co [1898] 2 QB 114, 127-8. A further reason advanced by Viscount Finlay was that 'the possibility of scuttling is not a peril of the sea; it is a peril of the wickedness of man' (at 459). In which case, it is difficult to see why an incursion of sea water by reason of negligence is a peril of the sea rather than a peril of the carelessness of man (see Lord Sumner at 467, and text on 'Causation' at 10.43ff below, and 'Negligence' at 11.30ffbelow). 39 A relative approach was argued for in the powerful dissenting speech of Lord Sumner and is supported by earlier dicta suggesting that scuttling is a peril of the sea: Thompson v Hopper (1856) 6 El & BI 172, 192-3; Issaias (Elfie A) v Marine Insurance Co Ltd (1923) 15 LlLRep 186, 193. Such an approach would permit parties not complicit in the scuttling to recover for a fortuitous loss, while any assured complicit in the loss would be barred from recovery by the defence of wilful misconduct, although the burden of proofwould lie on the insurer to prove the misconduct of the assured rather than on the assured to prove fortuity. It also requires a causation model that regards the entry of water occasioned by the act of scuttling to be the proximate cause of the loss, with the act of scuttling relegated to the status of a remote cause. This is expressly espoused by Lord Sumner bur reiected by Lords Cave and Finlay ([19241 AC 431, 447, 455). 40 Barratry is discussed at 11.43ff below. The distinction does not, however, hold good with respect to the peril of fire. Since fortuity forms no part of the definition of the peril of fire (see 10.65 below), a barratrous fire is still a fire.

336

337

Marine Risks
circumstances. In Henry & MacGregor v Marten,41 the insured vessel was lost when the masrer deliberately rammed an object believed to be an enemy submarine. Bailhache] stated that the marine underwriters were prima ficie liable for a loss by perils of the sea, although on the facts they were entitled to rely on a war risks exclusion.
10.17 In consequence of the decision in

Hull and Freight Insurance

In consequence, ordinary wear and tear is excluded from perils of the seas, not 10.19 just by an absence of fortuity, but also because it has nothing to do with the sea. In Sassoon (ED) & Co v Western Assurance CO,47 opium stored on a wooden hulk moored in a river was damaged by water percolating through a leak caused by the rorten condition of the hull. According to Lord Mersey: 'Although sea water damaged the goods, no peril of the sea contributed either proximately or remotely to the 10ss.'48 A collision is a peril of the sea. In the carrier's liability case of Woodley v 10.20 Michell,49 it was held that a collision could not be a peril of the sea if occasioned by the fault of any of the vessels involved. This was, however, overruled by the House of Lords in The Xantho. 50 The collision must, nevertheless, still be fortuitous so that there will be no peril of the sea where collision is the chosen method for the scuttling of a vessel by its master and crew with or without the complicity of the owner. 51 It is irrelevant whether the collision results in an ingress ofwater or occasions damage to a vessel that remains watertight. Accidents in loading mayor may not possess the requisite maritime natute to 10.21 qualifY as a peril of the sea. In Stott (Baltic) Steamers Ltd v Marten,52 a floating crane lowering a boiler into the hold of a ship broke, causing the boiler to fall and damage the hull. The House of Lords held the loss to be neither attributable to a peril of the sea nor within the eiusdem generis clause. Viscount Haldane asserted that 'the accident which occurred was one which might happen in loading a railway ttuck JUSt as much as in loading a ship, so far as its general
character was concerned'. 53 The floating nature of the crane was unconnected to

Samuel v Dumas, the insurance protection of mortgagees was revised. The current Institute Mortgagees' Interest Clauses (l/ 3/97) insure against loss covered in principle by the shipowner's hull policy in the absence, inter alia, of'any deliberate or fraudulent casting away of or damage to the Mortgaged Vessel', ptovided always that the casting away Or damage occurs without the privity of the assured. 42 Consequently, where hull insurers today declined to pay on the ground of scuttling by the master or crew with or without the complicity of the owner, the assured mortgagee could still recover on the morrgagee's interest policy ptovided the mortgagee itself had not been privy to the scuttling. 43 (b) Ofthe seas

10.18 For a peril to be 'of the seas' it does nor suffice that it occurs in facr or even

customarily at sea. 'Of the seas' imports a necessary connection with the sea. In The Inchmaree," Lord Halsbury srated thar sea perils do not include 'p~rils whose only connection wirh the sea is that they arise from machinery which gives motive power to ships.'45 The air chamber of a donkey-engine used to pump water into the main boilers of a ship was broken when warer was forced into it because of a closed valve. The House of Lords held that the cause of the accident was not even eiusdem generis ro perils of rhe sea: 'The damage to the donkey-engine was not through its being in a ship or ar sea. The saI)1e thing would have happened had the boilers and engines been on land, if the same mismanagement had taken place. The sea, waves and winds had nothing to do with it.'46

the cause of the accident. By contrast, in The Stranna,54 the Court of Appeal held losses incurred in loading to be of a character to which a marine adventure was subject and, therefore, within the phrase 'perils of the sea'. While loading a deck cargo of timber, the ship suddenly and unexpectedly listed, causing a parr of the cargo to fall overboard and be lost. The list occurred because of negligent stowage or mismanagement of ballast tanks. Scott L] observed of the accident that:"
It could not have happened on land; it was a happening which is characteristic of
the sea, and of the behaviour of ships. Nothing but a ship, waterborne and moving freely under the two forces of grav.ity and buoyancy, could have listed as the
--~------

41
42

(1918) 34 TLR 504.

Institute Mortgagees' Interest Clauses (1/3/97), ell 1.1, 2.1.4. 43 The normal meaning of privity in marine insurance law is knowledge, see 19.32ff below. It does not connote any element of fault or responsibility. It is suggested, however, that mere knowledge of an intended scuttling that the mortgagee was powerless to prevent should not bar the right to recover. In this context, privity should instead be read as complicity, certainly in the sense of active involvement in the scuttling plan or, possibly, passive acquiescence in the sense of standing by and refraining from attempting to prevent a scuttling of which the mortgagee had prior information. 44 Thames & Mersey Marine Insurance Co v Hamilton, Fraser & Co (The Inchmaree) (1887) 12 App Cas 484, overruling W'est India & Panama. Telegraph Co Ltd v Home & Colonial Marine

" [1912] AC 561. 48 ibid 568. 49 (1883) LR 11 QBD 47. 50 Thomas Wilson, Sons &Co v Owners a/the Cargo per the Xantho (The Xantho) (1887) 12 App Cas 503. Damage to a vessel occasioned by a collision with a wreck is a peril of the sea: William France Fenwick & Co Ltd v North o/England Protecting & Indemnity Association [1917J 2 KB 522. 51 See 10.16 above. 52 (1916J 1 AC 304.
53 ibid 309. This type of accident would today be covered under the heading of 'accidents in loading', see 10.22 below.

Insurance Co Ltd(1880) 6 QBD 51. 45 (1887) 12 App Cas 484, 491.

" ibid 492-3 per Lord Bramwell.

54

[1938J P 69.

55

ibid 83.

338

339

Marine Risks
Stranna did ... The liability of a ship floating in the sea, and free to respond to the
changing interaction of the forces of gravity and buoyancy as the cargo is loaded,

Hull and Freight Insurance

is almost dry and a vessel placed in the dock is thrown on to its side and damaged by the violence of the wind, the loss is not caused by perils of the sea, although it used to fall within the now obsolete eiusdem generis clause. 65 Although the modern clauses embrace 'contact with ... dock or harbour equipment or installarion', it is unclear whether the structure of the dock irself falls within such phraseology. Where a vessel is hauled on to land for repairs and there bilges, the loss is not caused by a peril of the sea,66 nor, according to Thompson v Whitmore,'7 where the tide knocks away blocks supporting a vessel laid on a beach for cleaning and caulking. The reasoning in the latter case is, however, open to question. The vessel lay withour damage when the tide was out. The proximate cause of the loss was unquestionably the action of the tide, without which the loss would not have occurred. Lord Mansfield relied on rhe fact that the damage occurred on land, but it is the nature of the cause of the loss that is important, rather than the location of its immediate occurrence. The decision in Thompson may perhaps be explained by an absence of fortuity in the light of no reference to exttaordinary ride or wind action. (c) Proof
An assured claiming for a loss by perils of the sea necessarily carries the burden 10.26 of proving not only that the loss was caused by a peril of a maritime nature but also the fortuitous nature of the peril. The maritime nature of the peril is most commonly demonstrated by establishing the fact of an ingress of water. The issue is then whether that ingress was fortuitous. An assured can seek to discharge the burden of proving fortuity either directly or by inference from
circumstantial indications.

and thereunder to list sideways and so to cause a sudden loss ofdeck cargo is in my
opinion essentially one of the sea risks to which maritime commerce is exposed.

10.22 Under the modern market clauses, however, this distinction under the rubric

of petils of the sea is tendered academic by the inclusion as named perils in their own right of 'accidents in loading, discharging or shifting cargo, fuel, stores Of parts'. 56
10.23 In one ninereenth-century case, it was doubred whether a loss occurring in

harbour could be correctly described as caused by a peril of the 'seas'.'7 However, the reference in the hulls and freight clauses to 'seas, rivers, lakes or other navigable waters' should avoid such arguments. 58
10.24 The theme of necessary connection with the sea is pursued in the context of rats

and vermin. Underwriters are not liable for damage caused by rats and vermin unless the policy provides to the contrary, 59 and coverage of perils of the sea does not constitute the requisite contrary intention. Although damage by rats might be thought to be a natural incident of sea carriage, it is not peculiar ro the maritime context: it 'is a kind of destruction not peculiar to navigation, but to which commodities are liable on land or in warehouses'. 60 Rats have appetites whether on land or at sea. Thus: 'A rat eating a cheese in the hold of a vessel is not a peril of the sea; the sea, or the vessel being on the sea, has nothing to do with the destruction of the cheese.'61 In similar vein, illness has no unique maritime connection. Consequently, where perishable cargo is lost because a voyage is delayed because of illness among the crew, the cause of the loss is not eiusdem generis to petils of the sea. 62
10.25 In Fletcher v Inglis," a ship was placed in a dry dock, the bed of which \vas hard

and uneven. The ebb of the tide coincided with a considerable swell in the harbour64 causing the ship to strike the ground several times. The damage so sustained was held to be caused by perils of the sea. Where, however, a dry dock

eg International Hull Clauses (01/11/03) el2.1.8. Davidson v Burnand(1868) LR4 CP 117 (damage to cargo in course of loading on the facts within eiusdem generis clause if not within perils of the seas). 58 Note also the existence of special Institute 'port risk~' clauses. 59 MIA 1906, s 55(2)(c). 60 Laveroni v Drury (1852) 22 L] Ex 2, 3 per Pollock CB. " Hamilton, Fraser & Co v Pandoif& Co (1887) 12App Cas 518, 523 per Lotd Halsbury LC. See also Thames 6' Mersey Marine Insurance Co v Hamilton, Fraser 6' Co (The Inchmaree) (1887) 12 App Cas 484, 493. 62 west India & Panama Tt:legraph Co Ltd v Home 6' Colonial Marine Insurance Co Ltd (1880) 6 QBD 51, 61. 63 (1819) 2 B &Ald 315. 64 Supplying the element of fonuity absent in Magnus v Buttemer(1852) 11 'CB 876, discussed above.
56

57

Direct proof requires the assured to establish, on a balance of probabilities, 10.27 precisely what caused the ingress of water and its fortuitous nature. Alternatively, the assured could prove, on a balance of probabilities, that the cause of the ingress was one of a number of identified possibilities, all of which were maritime and fortuitous in nature. In such a case, although the precise cause of the loss would not have been identified, the assured would have proved loss caused by a peril of a fortuitous and maritime nature. There is nothing in policy wording covering loss by perils of the sea that, in and of itself, requires identification of the precise peril that caused the loss.

6S Phillips v Barber (1821) 5 B & Aid 161. Fletcher v Inglis is reportedly distinguished in Phillips on the unconvincing ground that in the latter case the ship was between voyages while in the former it was in the course of a voyage. A more convincing distinction suggested in the text is the absence in Phillips of any involvement of water. See also Baxendale v Fane (The Lapwing) [1940J P 112 (stranding of vessel in open-ended tidal dock by reason of negligent positioning on wooden supports held to be within an eiusdem generis clause). 66 Rowcroft v Dunmore (1801), cited 3 Taunt 228. 67 (1810) 3 Taunt 227.

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Marine Risks
10.28 Where the burden of proof cannor be discharged by direct evidence, the assured

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both at first instance and on appeal. According ro Dillon LJ, the so-called 'presumption' is an expression of, and not designed to undermine, the burden cartied by the assured to prove the cause of loss on a balance of probabilities.
If it is known that a ship was seaworthy when she set out, and she has never been seen since and nothing has been heard of her crcw, then on the balance of probabilities she must have sunk and, on the balance of probabilities, the sinking must have been due to 'perils of the sea' because she was seaworthy when she set out. The only alternative would be that she was scuttled, but members of a ship's company who scuttle their ship do not normally intend to commit suicide. They expect to be rescued. 73

may resort to circumstantial proof. Where a vessel proved to have been seaworthy when embarking on what turns out to be its final voyage subsequently sinks in unexplained circumstances, the assured is entitled to recover for a loss by perils of the sea. 68 It is traditionally said that this is because the combination of evidence of seaworthiness and an unexplained sinking gives rise to an evidential presumption of a loss by perils of the sea, the presumption serving as a risk allocation device that places the risk of loss ftom unascertainable causes on the insurers." That, however, implies that the combination of seaworthiness and unexplained sinking does not render insurers liable according to the ordinary rules of evidence and proof, but that the combination of such circumstances triggers a presumption that in turn enables the assured to discharge its burden of proof This is to abuse the concept of presumption. 70
10.29 The presumption was first judicially recognized in Green v Brown." The assured

On the facts, the sinking of the Mare! was not an event of the requisite mystety since evidence was available from the crew. Consequenrly, the presumption could nOt apply, as indeed it rarely will. 74 These two authorities reveal the true nature of the so-called presumption'. 10.31 Vessels are most likely to be lost by scuttling, by barratry, because they are unfit for rhe voyage, by reason of a piratical or other hostile attack, or because they encounter a maritime accident. Where a vessel proved to have been seaworthy is lost without trace or, a1rernatively, in waters where physical access is impossible and the master and crew must be presumed dead, the logical inference by elimination is rhat the vessel met with a maritime accident. First, the unlikelihood of crew suicide renders scuttling and barratry improbable. It is possible that a scurtling or barratrous sinking went wrong, resulting in the death ofall on board, or that the master and crew, having sunk the vessel, have been paid to disappear and have done so. It is, however, unlikely. Secondly, a seaworthy vessel by definirion is reasonably fit for the insured adventure. Although it remains possible that a seaworthy vessel might be lost by reason of a lack of fitness that it was not reasonable to expect, this eventuality is again unlikely. Thirdly, a piratical or other hostile attack is unlikely to occur without news lea1ting our. Consequently, the so-called 'presumption' is merely shorrhand for tbe normal inferential conclusion of accidental maritime loss that flows from proof of initial seaworthiness coupled with absence of further information" and the civil law standard of proof on the balance of probabilities. 76

claimed for a loss of the insured vessel by perils of the sea. The vessel was never heard of again after setting sail. The policy excluded loss by capture and seizure and the insurers argued that the assured should adduce direct evidence of accidental loss. Evidence was, however, given of market practice that in such a case loss by perils of the sea was presumed because news generally filtered back of all . other types of losses. The jury was directed that it was unreasonable to expect
unequivocal evidence in cases where everyone on board was assumed to have

died and that only the best evidence that the case allowed could be expected. The jury accordingly found for the assured.
10.30 In The Mare!," the insured vessel was lost by an ingress of sea water wirh rhe

master and crew surviving and able to give evidence of the circumstances surrounding the loss. The assured claimed for a loss by perils of the sea. The insurers advanced no specific contrary explanation for rhe loss but pur the assured to ptoof of irs case. The assured's primaty explanation of the vessel's loss was collision with a floaring or partially submerged container. In the light of expert evidence, this was rejected by the trial judge as wholly improbable and very neatly impossible. It was, however, held that the vessel had been seaworthy in all material respects when embarking on what proved to be its final voyage and the assured argued thar such seaworthiness combined with an unexplained sinking gave rise to a presumption ofloss by perils of the sea. This argumenr was rejected

" Green v Brown (744) 2 $rr 1199; Anderson v Morice (874) LR 10 CP 58, 68; Rhesa Shipping Co SA v Edmunds (The Popi M) [198511 WLR 948,953. 69 Ajum Golam Hassen &Co v Union Marine Insurance Co [1901] AC 362,371.
70 See also the discussion of the so~called 'presumption of inducement' in pre~formation utmost good faith at 4.54-4.59 above. " (744)2$rrII99. 7l Lamb Head Shipping Co Lcd vJennings (The Marel) [1994] I Lloyd's Rep 624.

ibid 629. See also Campania NavieraMartiartu v Royal Exchange Assurance Corp [1923] 1 KB 650; Brownsville Holdings Lcd v Adamjee Insurance Co Lcd (The Milasan) [2000J 2 Lloyd's Rep 458, paras 17 and 18. 75 In Rhesa Shipping Co SA v Edmunds (The Popi M) [I 985J 1 WLR 948, 953, Lord Brandon refers to the presumption arising where 'a seaworthy ship sinks in unexplained circumstances in good weather and calm sea'. With respect, however, the reference to good weather and calm seas is an uncharacteristic slip. It is dear from the case law that preofofsuch circumstances is not required. 76 A similar explanation of the 'presumption of undue influence' was given by the House of Lords in Royal Bank ofSeoclandpie v Etridge (No 2) [2001] UKHL 44, [20021 2 AC 773.
73
74

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Marine Risks
10.32 The question ofproof by circumsrantial evidence has also been raised in circumstances where the presumption cannot arise, because the seaworthiness of the vessel on embarking on what proves to be its final voyage cannot be established and/or evidence is available of the circumstances surrounding the sinking of the vessel. 10.33 In The Popi M,77 the insured vessel sank in calm waters off the coast of Algeria when a large aperrure opened in its side plating and water poured into rhe engine room. The assureds argued that the most likely explanation for the sinking was a collision with a moving submerged object. In the absence of any other suggestion, the judgments proceeded on the basis that this object was a submarine. The insurers raised the defence of ordinary wear and tear. Expert evidence was adduced by both sides. This, however, 'had one striking and novel feature: on each side there was recognition that the hypothesis for which that side contended was highly improbable; it was supported only because any other hypothesis, and in particular the hypothesis advanced by the other parry, was regarded as almost (if not altogether) impossible'." 10.34 Of course, one possible explanation of a sinking that is so hard to explain is that the vessel was scuttled. However, since a claim based on a scuttling is fraudulent and criminal, particulatly cogent and convincing evidence is tequired before a COUrt will hold that a vessel has been scuttled, and an affirmarive case of scuttling must be expressly pleaded along with particulars of how it is alleged the scuttling was carried our." Lack of evidence may, therefore, preclude insurers that suspect scuttling from raising the defence. It does not, however, follow that a failure to plead scuttling entitles the assured to claim that scuttling has been eliminated as a possible cause of the loss of the insured vessel in order to prove a fortuitous loss by a process of elimination of alternatives. Insurers may always put the assured strictly to proof of a loss caused by a covered peril, relying ultimately on the burden of proof. In such a case, insurers can lead evidence to counter the assured's case and can challenge witnesses in cross-examination. 10.35 In Regina Fur Co Ltd v Blossom,so rhe assured claimed for a loss of furs by burglary. The insurers pUt the assured to proof that the alleged burglary ever took place but did not expressly deny that it had occurred or plead fraud. The insurers nevertheless maintained that they were entitled to lead evidence demonstrating that the burglary had not occurred, and that the possibility that such evidence, if accepted, might result in some adverse reflection on the assured

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did not render such evidence inadmissible. Pearson ] upheld the insurers'
~ontention:81
.. , ~n insured person is not entitled, in a case of this' kind, by any arguments or tactIcs or manoeuvres, to force the insurer to assume a burden of proof which does not properly belong to him. SlIppase the insured person seeks to adopt the attitude of saying to the insurer: 'I have made this claim: it is either true or fraudulent. If you resist it you are charging me with fraud. Fraud must be alleged by the party relying on it, and must be proved beyond reasonable doubt. Therefore, you cannot defeat my claim unless you prove beyond reasonable doubt that my claim is fraudulent, and I am entitled to succeed if I prove a reasonable possibility that the alleged casualty may have occurred.' In my view, this attitude is untenable and involves an inversion and misstatement of the burden of proof. In this case, with

the pleadings as they are, the [claimants] have to prove on a balance ofprobabilities
that the alleged burglary and loss occurred, in other words, to prove it is more probable than not that they occurred. The presumption of innocence comes into the matter, not as a rule of law, but as a factor affecting the probabilities. It is inherently unlikely that a company which has been carrying on a respectable business in the City of London will fabricate evidence and knowingly present a false claim under an insurance policy. On the other side, it may be suggested that sometimes when a business has failed, or is failing, a fictitious fire or burglary is put forward for the purpose of obtaining payment under an insurance policy. The question is a question of fact, and all relevant considerations have to be taken into account.

The Court of Appeal affirmed the first instance judgment with only the caveat that rebuttal evidence should be catefully watched by ttial judges to ensure that defendants do not cross the line between tebuttal and establishing an affirmative case that has not been proved, albeit that the distinction may be fine. 82 Similarly, in The Dias," Buckley L] stated:
Had the underwriters rested content with putting the owners to strict proof without affirmatively pleading SCuttling they could no doubt have cross-examined the owner's witnesses at the trial to demonstrate the probability of the ship having

10.36

been lost by a peril of the sea and the possibility or probability of her having been scuttled. They could also have called evidence to disprove evidence adduced by the
owners. They could not have called evidence directed not to disproving evidence adduced by the owners but to establishing an affirmative case of scuttling which

they had not pleaded. Indeed, insurers who wish to prevent the elimination ofscuttling from the range 10.37 of possible explanations of the loss must challenge the evidence and the bona

77

Rhesa Shippi"g Co SA v Edmu"ds (In, Popi M) [19831 2 Lloyd's Rep 235, affd on different

grounds (19841 2 Lloyd's Rep 555, rvsd (19851 1 WLR 948. 78 (1983] 2 Lloyd's Rep 235, 244 per Bingham]. 79 See 15.25-1526 below. " (1957] 2 Lloyd's Rep 466, affd (195812 Lloyd's Rep 425.

(195712 Lloyd's Rep 466, 469. 'The difference between putting up an affirmative case of fraud and seeking to establish by cross-examination that the [claimant's] chief witness is putting forward a false story with perjured evidence is !feel rather fine', Rose/odge Ltd v Castle(l96612 Lloyd's Rep 113, 120 per McNair]. 83 Palamisto General Enterprises SA v Ocean Marine Co Ltd (The Dias) [1972] 2 QB 625, 640.
81 82

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Marine Risks
fides of any of the assured's witnesses who are called to establish the fortuitous natute of the sinking and who must be giving perjured evidence if the ttuth is that the vessel was scuttled. 84 In so doing, insurers are entitled to adduce any relevant evidence in rebuttal of the crew's account of the sinking and to challenge their bona fides, but not, to the extent that the distinction can be drawn, to advance an affirmative case of fraud. Whether a challenge to bona fides succeeds in preserving scuttling as at least a possible cause of the loss depends on the credibility of the challenge. Failure to challenge the bona fides of such
witnesses in cross-examination involves accepting them as witnesses of honesty

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The House of Lords disagreed. First, the burden of proof of a loss caused by a 10.40 covered peril lay on the assureds. Although insurers were free to advance alternative hypotheses, there was no onus on them to succeed in proving an alternative

explanation fot the loss. If a court was ultimately left in doubt at to whether the cause of the loss fell within the scope of policy cover, the decision had to be in the insurers' favour, since the assured would have failed to discharge its burden of proof Secondly, since it was unknown whether the vessel was seaworthy and
since there was evidence as to circumstances surrounding the sinking, the pre-

and renders inadmissible any evidence designed to suggest the contraty.85

10.38 Scuttling was not alleged in

sumption of loss by perils of the sea was unavailable. Thirdly, Lord Brandon stated as follows:"
.. . once it was shown that the water which sank the ship had entered through an aperture in her shell plating, the burden of proof was on the shipowners to show

The Popi M. At first instance, Bingham J was unable on the evidence to make a finding either way as to the seaworthiness of the insured vessel on embarking on its terminal voyage, although, on the expert evidence he was able to reject the insurers' account as to how otdinary wear and tear might have produced the inflow of water that sank the vessel. However, the assureds' contention of contact with a moving submerged object lacked plausibility. There was no indication of submarine activity in the vicinity of the insured vessel and the nature of the damage sustained was hardly compatible with the suggested collision, or ctew accounts of the impact, or damage inflicted by the crew. Consequently, the evidence failed to establish affirmatively a fortuitous sinking, but Bingham J found in favour of the assureds on the basis of inference by elimination. The result of the evidence was to set up a choice between the submarine explanation and the possibility of sinking because of weat and tear operating in a mannet not even suggested. 'My conclusion is th~t despite its inherent improbability, and despite the disbelief with which I have throughout been inclined to regard it, the owners' submarine hypoth"sis must be accepted as, on the balance ofptobabilities, the explanation of this casualty.'''
different reasoning. Provided the assureds had proved on a balance of probabilities that the loss was fortuitous and maritime, it did not marter that they could not prove precisely what peril of the sea had caused the loss: 'the inherently unlikely submarine was in ttuth an itrelevancy: the yellow submarine was no mote than a red herring'." The Court held, first, that Bingham J had considered but rejected the possibility that the evidence left in doubt whether the entry ofwater was fortuitous and, secondly, that there was sufficient evidence to sustain that rejection.

what peril of the sea, if any, could be shown, on a balance of probabilities, to have
created that aperture. The shipowners could not ... rely on a ritual incantation of the generic expression 'perils of the sea,' ,but were bound, if they were successfully to discharge the burden of proof to which I have referred, to condescend to particularity in the matter.

Fourthly, the burden of proof could not be discharged by a process of elimination where the remaining explanation was itself inherently improbable. The maxim of Sherlock Holmes that 'when you have eliminated the impossible, whatever remains, however improbable, must be the truth' overlooked the burden placed by the law on the assured to prove on a balance of probabilities that the loss was caused by a covered peril. Fifthly, Bingham J had fallen into error in overlooking the possibility of deciding that the cause of the loss was unclear and holding in favour of the insurers on a failure by the assured to discharge the burden of proof. In The Mare~89 the prospect of proof of perils of the sea by elimination of other 10.41 causes of loss was enhanced by establishing the seaworthiness of the vessel in all matetial respects when embatking on the fateful voyage. As in The Popi M, scuttling was not alleged. Moreover, no challenge was made to the bona fides of the assureds' witnesses, who consequently had to be accepted as witnesses of truth, so that on the facts any possibility of a loss by scuttling had to be considered as eliminated. Nevertheless, an atgument for proof of a fortuitous sinking by elimination failed both at first instance and on appeal. As already noted, the assureds' claim of a collision with a floating container was specifically tejected as so improbable as to be virtually impossible, and expert witnesses were unable to suggest any other explanation for the sinking. The courts also refused
---~

10,39 The Court of Appeal upheld the decision in favour of the assureds, but on

This is not a proposition confined to fraud but a general rule of evidence. A party is always bound to accept the testimony of witnesses in the absence of challenge in cross~examination. 85 Lamb Head Shipping Co Ltd vJennings (The Marel) [199211 Lloyd's Rep 402, 417-18. " [198312 Lloyd's Rep 235, 248. 87 [198412 Lloyd's Rep 555 per May LJ.
ll4

......

_-

sa [198511 WLR 948,954. " Lamb Head Shipping Co Ltd v Jennings (The Marei) [1992] 1 Lloyd's Rep 402, [19941 1 Lloyd's Rep 624.

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Marine Risks
to accept an alternative argument that it had to be accepted by a process of elimination of scuttling and unseaworthiness that on a balance of probability the cause of the loss was a peril of the sea. The idea that the vessel was lost by reason of some mechanism wholly unimaginable by expert witnesses whose best suggestion was itself wholly improbable could not satisfy the test of likelihood on a balance of probabilities. The argument sought to resurrect the maxim of Sherlock Holmes, contraty to the decision of the House of Lords in The Popi M The assured, consequently, lost on the burden of proof.
10.42 It is clear, therefore, from the The Popi M and The Marel that an assured cannot

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Similarly, damage to cargo 'due to action necessarily and reasonably taken to prevent the peril of the sea affecting the goods, is a loss due to the peril of the sea and is recoverable as such'." In The Thrunscoe,'4 ventilators were closed for abour one week because of heavy weather and for the safety of the ship. The resultant heating of air in holds nearest the engine-room damaged part of the cargo. The proximate and direct cause of the loss was held to be the severity of the weather." With respect to causation and defining the term 'perils of the sea', the question 10.45 is of the proper characterization of circumstances leading up to and occasioning a loss in the context of the contractual concept ofperils of the sea. Most perils of
the sea involve an incursion of water into a vessel. Howeverl an ingress of water

prove a fortuitous sinking purely by eliminating the possibility of loss by deliberate sinking or by reason of the unseaworthy condition of the vessel. The assured must also 'condescend to particularity' by proposing a mechanism for the fortuitous entry of water that, taken in isolation, constitutes a perfectly plausible explanation. The elimination of uninsured losses then renders it more likely than not that the proposed mechanism was indeed the cause of the loss, enabling the assured to recover for a loss by perils of the sea.

is not necessarily a peril of the sea. It qualifies as such only if it is fortuitous and, in order to determine whether it possesses the character of fortuity, one has to look behind the ingress in order to determine the reason for the ingress. In Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd," Lord Wright stated as follows:
Where there is an ac~idental incursion of seawater into a vessel at a part of the vessel, and in a manner, where seawater is not expected to enter in the ordinary course of things, and there is consequent damage to the thing insured, there is prima facie a loss by perils of the sea. The accident may consist in some negligent act, such as improper opening ofa valve, or a hole made in a pipe by mischance, or it may be that seawater is admitted by stress of weather or some like cause bringing the sea over openings not ordinarily exposed to the sea or, even without stress of weather, by the vessel heeling over owing to some accident, or by the breaking of hatches or other coverings ... It is the fortuitous entry of the seawater which is the peril of the sea in such cases.

(d) Causation
10.43 Causation issues may arise in two different ways. First, the occurrence of a peril

of the sea may not be in doubt, merely whether the loss in question was caused by the peril identified. Secondly, issues of causation may become entwined with the definition of the peril.
10.44 With respect to the causal reach of perils of rhe sea, as with any other peril, the

question becomes whether the chain of causation has been broken and common sense seems the only guide. Case law provides a number of examples. In The Catherine Chalmers,90 poor weather caused straining of a vessel leading to, first, wine oozing from casks and staining some bags of nuts and, secondly, the bursting of other bags of nurS. The proximate cause of the resnlting damage to the nuts was held to be perils of the sea. In Montoya v London Assurance Co," a vessel carrying a cargo of hides and tobacco shipped large quantities of sea water because of bad weather. Putrefaction of the hides in turn imparted a disagreeable flavour to the tobacco. The consequent loss relating to the tobacco was held to be caused by perils of the sea. Pollock CB laid down as a general rule that 'where mischief arises from perils of the seas, and the natural and almost inevitable consequence of that mischief is to create further mischievous results, the underwriters, in such case, are responsible for the further mischief so occasioned.'''

Two possible analyses of the relevant circumstances then arise. First, the peril of 10.46 the sea is solely the ingress of water. There must be a circumstance that lends the ingress a fortuitous character, but that circumstance is merely part of the background leading up to the peril. In causation terms, this may lead to the proposition that the proximate cause of the loss is the ingress of water to the exclusion of the circumstance that contributes the fortuity. Secondly, the peril of the sea may be the combination of the circumstance that contributes the fortuity and the resulting entry of water. A statement that the proximate cause of the loss was a peril of the sea would then involve ascribing proximate

90 (1874) 32 LT 847. See also Gab,lJ' v Lloyd(l825) 3 B & C 793, where, in a storm, a cargo of horses broke the partitions separating them and by their kicking injured each other so that all died. The cause was held to be pedis of the sea. " (1851) 6 Exch 451. " ibid 458. See also 460 per Platr B.

93 Canada Rice Mills Ltd v Union Marine 6- General Insurance Co Ltd [1941] AC 55, 71 per Lord Wright. Weather caused closure of ventilators and hatches which resulted in heating of the cargo of rice. The Privy Council held that the loss was caused by perils of the sea. 94 [18971 P 301. 9S Quaere whether such loss would be recoverable under the Institute Cargo Clauses (B) as 'reasonably attributable to' entry of sea water. 96 [19411 AC 55, 68-9.

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Marine Risks
cause status, for the purposes of that statement, to all the elements that combine to comprise the complex periL It is suggested that the latter approach is preferable.
10.47 First , ascribing proximate cause status to the circumstance that generates fortuity as well as the resultant ingress of water corresponds to common sense. To identilY an ingress ofwater as the proximate cause of the sinking of a vessel is both unhelpful and faintly ridiculous. Every vessel sinks because it fills up with water. It is true that marine insurance law is not concerned with exactly why an entry of water is fortuitous and, to that extent, does not need to focus upon whether water entered because of negligent navigation or adverse weather conditions. However, in the law of marine insurance, the phrase 'perils of the sea' is ultimately a turn of phrase employed by business people in insurance contracts and should be interpreted in a manner consistent with the understanding of such persons. If one asked whether the Titanic was lost by a peril of the sea, the answer would clearly have to be yes. If one then asked what was the maritime accident that caused the loss, what business person would respond that it was an entry ofwater to the exclusion of the impact with an iceberg? 10.48 Secondly, in Samuel (P) <& Co Ltd v Dumas," the House of Lords held that an innocent mortgagee could not recover for loss caused by perils of the sea where the insured vessel was deliberarely scuttled by irs master and crew with the complicity of the owner. This was not because the proximate cause of the loss was the ingress of water but this could not be regarded as fortuitous. Instead, it was because the proximate cause was the act of scurtling. Yet the causal significance of an act of scuttling is no different from that of a collision or any other event or circumstance that results in an ingress ofwater. According to Viscount Finlay: 'The entrance of water cannot be divorced from the act which occasioned it.''' That is as true of circumstances that permit the characterization of the entry as fortuitous as those that do pot. 10.49 Nevertheless, in a number of/eading cases, it has been argued that the proximate cause of the loss either was the occurrence that resulted in an ingress of water to the exclusion of the ingress itself and therefore was not a peril of the sea or, conversely, was solely an ingress of water to the exclusion of the occurrence that resulted in the ingress and therefore was a peril of the sea. Such arguments, it is suggested, are predicated on a false dichotomy. When considering whether the proximate cause of a casualty involving an ingress of water is a peril of the sea, the question is whether the ingress ofwater was fortuitous. An entry of sea water cannot be its own accident.The forruitous maritime accident, and therefore the

HuaandF~~htlmumnu

insured peril of the sea, arises from the combination of the incursion of water and circumstances or events that characterize the entry as fortuitous. As both the fortuitous circumstance and the act immediately causing the damage combine to constitute one peril of the sea, any choice between the two as the proximate cause of the loss is necessarily false. In each of the cases, the'House of Lords rejected the arguments. In each case, it 10.50 is suggested that the result is correct. However, Some of the judgments contain dicta that, divorced from their context, suggest that the ingress of water can be separated from the circumstance that produced the ingress. Wbere such dicta suggest that the ingress of water is the proximate cause in its own right, they fail, it is suggested, to take account of the requirement of fortuity as part of the definition of perils of the sea, and they reflect a last-in-time approach to proximity of causation that cannot be followed in the modern law. In The Xantho," a shipowner sought to invoke a perils of the sea exception in a 10.51 bill of lading where the carrying vessel foundered as the result of a collision. Previously, in Woodley v Michell, 100 the Court ofAppeal had held that a collision could fall within the exception only where the carrier proved it had occurred without the negligence of any vessel involved. In The Xantho, no evidence was adduced with respect to the reason for the collision and, consequently, the Court ofAppeal followed precedent in holding that the carrier could not rely on the exception. In the course of his judgment, however, Lord Esher MR also reasoned that where a collision was occasioned by negligence the doctrine of proximate cause required one to distinguish between the negligence and any ensuing ingress of water. He stated as follows: 101
It must be borne in mind that the law with regard to bills oflading is not the same as in regard to policies of insurance. In the latter, only the causa proxima is to be

looked at, but in a case depending upon the liability under a bill oflading the teal and moving cause of the loss has to be sought for. Although therefore the shipowners may have brought themselves within the terms of one of the exceptions, if the plaintiffs' case shews that which is stated to be the cause was not the real moving cause, but that something else which was not an excepted cause was what caused the loss, and that such moving cause was the consequence of the negligence of the defendants, then the loss is not occasioned by an excepted peril.

Later that same month, June 1886, litigation in a second similar case reached 10.52 the Court ofAppeal. In Hamilton, Fraser <& Co v Pandorf <& CO,'02 rats gnawed a hole in a metal pipe on a ship, as a result of which water escaped from the pipe

97

[19241 AC 431, discussed at 10.16 above.

" ibid 455.

" Thomas Wilson, Sons &Co v Owners ofthe Cargo per the Xamho (The Xantho) (1886) 11 PD 170, rvsd (1887) 12AppCas503. 100 (1883) LR 11 QBD 47. 10' (1886) 11 PD 170, 172-3. 102 (1885) LR 16 QBD 629, rvsd (1886) 17 QBD 670, rvsd (1887) 12 App Cas 518.

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Marine Risks
and damaged a cargo of rice. The question was whether the carriers were exempted from liability by a clause in the charterparty and bill of lading excluding 'accidents of the seas', a phrase taken as synonymous with perils of the sea. For the cargo owners it was argued that rats' teeth had nothing to do with the sea, that the rats were the cause of the loss, and that the entry of water was merely a consequence of the rats' actions.
10.53 At fitst instance,'03 Lopes LJ held the carriets to be protected by the accidents of

Hull and Freight Insurance

rely upon the perils of the sea exclusion was subject to the obligation to exercise reasonable care in the carriage of the cargo. A new trial was, therefore, ordered to establish whether the carriers were at fault for the collision. In Hamilton v Pandorf,'7 the House of Lords restored the decision of Lopes LJ and rejected the causation analysis of Lord Eshet MR. The phrase 'perils of the sea' encompassed all fortuitous incursions of water, and it could not be denied either that the sea had damaged the cargo or that such damage was accidental. In each case, it is respectfully submitted that the decision of the House of Lords 10.56 was clearly correct. The difficulty with these two carrier liability cases for the law of marine insurance is that, in rejecting arguments that the collision in The Xantho and the gnawing of the pipe by the rats in Hamilton v Pandorfwere the sole proximate causes of the losses to the exclusion of the resulting incursions of water, many of the speeches in the House of Lords contain statements that deny the collision and the rats any status at all as proximate causes of the losses. Thus, according to Lord Bramwell in The Xantho, the collision 'was a causa sine qua non, but it was not the causa causans. It was causa remota, but not causa proxima. The causa proxima of the loss was foundering' .108 Lord Herschell
accepted the contention ~hat, in marine insurance law, the proximate cause

the sea exclusion. On the subject of causation, he stated: 'The immediate cause of damage in this case was the incursion of salt water through the hole in the pipe eaten through by the rats. The effective cause of damage was the rar or rats.'lO' On the scope of accidents (or perils) of the seas, he observed: 105
It seems to me that, where the effective cause is beyond human control, and in consequence salt water enters which damages goods, it is an 'accident of the seas' within the meaning of the contract of affreightment and the true intention of the parties. Here, it is sea damage occurring at sea and nobody's fault ... Suppose this same pipe had burst from frost or from some cause which human care

and foresight could not have prevented, and goods damaged by entry of salt
water, could it be successfully contended that the shipowners were not protected?

I think not.
10.54 This decision was teversed by the Court of Appeal. Lord Eshet MR repeated

that marine insurance law applied a strict, temporal approach to proximity of

causation, attributing significance only to the cause immediate in time to the

loss, while in the context of bills of lading the proximate cause was the causa causans or the 'real effective cause'. He held that, 'if rats gnaw through a pipe
and let the water in, nevertheless, as the rats are the cause, and the sea is not.

a~d

the letting in of the sea-water is only an effect of the cause, the real effective cause being the rats, what the rats do is not damage caused by perils of the sea'. The other members of the Court concurred in the result, but upon the ground that the carrier had failed to prove that the damage had not been occasioned by its negligence, as required for the exclusion to operate.
10.55 Both TheXanthoand Hamilton v Pandorfwere successfully appealed to the House

alone was relevant and that one should not look behind it to discover 'the real and efficient cause'. 'If that which immediately caused the loss was a peril of the sea, it matters not how it was induced.'109 Likewise, in Hamilton v Pandorfi it was said variously that: (1) the peril was 'that the sea might get in and spoil the rice. I cannot think it was less such a peril or accident because the hole through which the sea came was made by vermin from within the vessel, and not by a sword-fish from withollt,-the sea did get in'; 110 (2) the sea was the 'immediate and efficient cause of damage';'" (3) 'the sea has damaged the goods';'12 (4) 'the remote cause was in a cettain sense the action ofthe rats on the lead pipe, but the immediate cause of the damage was the irruption of sea-water'; 113 and (5) the loss 'arose direcrly from the action of the sea' .'14 In the modern law, it is, however, clear that the proximate cause is not to be 10.57 equated as a matter of principle with the immediate, last-in-time cause. The proximate cause is precisely that which is 'real and efficient' and one can, if necessary, look behind the immediate cause in order to identifY it.'15 Moreover, as suggested elsewhere, "6 the operation of the proximate cause doctrine depends upon rhe contractual context. Where a vessel sinks because of a collision

of Lords, judgment in both cases being given on the same day, 14 July 1887. In The J&.ntho, '06 the House of Lotds held that no distinction was to be drawn
between contracts of marine insurance and contracts of affreightment with

respect to the meaning of the phrase perils of the sea. Where a vessel foundered by reason of a collision, there was a loss by perils of the sea for either class of contract. However, in the case of contracts of affreightment, the carrier's right to

"7 (1887) 12 App Cas 518.

110

'" ibid 514.

111 113 115

'09 ibid 509-10.

112
103 106

(1885) LR 16 QBD 629. (1887) 12 App Cas 503.

"" ibid 633.

,os ibid 635-6.

114 116

ibid 524-5 per Lord Halsbury. ibid 527 per Lord Bramwell. ibid 530 per Lord HerscheiL See 9. 12ffabove.

ibid 526 per Lord Watson. ibid 528 per Lord Fitzgerald. See 9.09-9.10 above.

352

353

Marine Risks
occasioned by the negligence of the mastet, there is a peril of the sea wirh the negligence supplying the requisite fortuity. Equally, however, the assured should be able to recover under the standard market hull clauses for a loss proximately caused by the negligence of the master.' 17 If one cannot look behind any incursion of water resulting from a negligent act, then one can never causally link the negligence to the loss as required by the policy. Consequently, where rhe negligence produces an immediate cause that is not a peril in its own right, there will be no cover. The result is that negligence cover would be superfluous or illusory.' 18
10.58 The converse argument arose in Samuel (P) & Co Ltd v Dumas,"9 namely that

Huil andFrnght Imumnu

combination of the entry of water and the reason for that entry that determines whether it should be characterized as fortuitous. 12 ' (2) Fire and Explosion 'Fire', it has been stated in an American case,122 'is caused by ignition or com- 10.60 bustion, and it includes the idea of visible heat or light'. In Tempus Shipping Co Ltd v DreyfUs & Co Ltd, Wright] stated that: 'Mere heating, which has not arrived at the stage of incandescence or ignition, is not within the specific words ((fire":123 Once ignition has occurred, however, recovery is not confined to damage inflicted by flames.'24 Subject to the terms of the policy, loss caused by fire includes smoke damage 125 and also damage occasioned through fire-fighting efforts. 126 In the fire insurance case of Stanley v ~stern Imurance CO,127 Kelly CB observed that the petil of fire extended to:
. . . any loss resulting from an apparently necessary and bona fide effort to put out

the cause of the loss was the ingress of water to the exclusion of that which caused the water to enter. The insured vessel was scuttled and an innocent coinsured mortgagee claimed that rhe ingress of water could be considered separately from the act of scuttling that caused it so as to constitute a peril of the sea. The argument was rejecred. Two members of the House of Lords categorically identified the act of scurtling as the proximate cause. The ingress of water was denied any status as part of the proximate cause, being relegated to the status of 120 a mere effect of the proximate cause.
10.59 Again, it is suggested that the rejection of the causation argument advanced was correct~ but the causation reasoning needs to be confined to its context. Given

a fire, whether it be by spoiling the goods by water, or throwing the articles of

furniture out of the window, or even the destroying of a neighbouring house by an explosion for the purpose of checking the progress of the flames, in a word, every loss that clearly and proximately results, whether directly or indirectly, from the fire, is within the policy.128.

that the question was whether the proximate cause of the loss was a peril of the sea, that which characterized the ingress as fortuitous (or not) attracted proximate cause sratus. However, it does not follow, it is suggested, that the entry of water is excluded from the same status. If the act of scuttling had failed ro let-in water, the vessel would not have sunk. In the context of cargo insured purely against 'entry of sea water', it could not be denied that the cargo had been lost by the entry. Moreover, just as Samuel v Dumas illustrates the shortcomings in the reasoning in The Xantho and Hamilton v Pandor/, so the converse is equally true. The navigation leading to the collision, the tats gnawing a hole in the pipe, and the act of scurtling all explained and caused the entry of water into the vessels. In each case, in the context of the contractual question posed by cover against loss caused by perils of the sea, the effective cause of the loss is the

In Symington v Union Insurance Society of Canton, 129 cork awaiting shipment 10.61 accumulated on a jetty. Fire broke our on the jetty at some distance from the cork. In order to cteate a fire break and prevent destruction of the jetty, some of the cork was thrown into the sea while water was poured on the rest. Greer L] held that the entire loss was caused by fire.'30 However, according to Scruttan and Sankey LJ], 13' while the loss ofthe cork on which water had been poured was attributable to the fire, the cork thrown into the sea was lost by a peril eiusdem generis ta jettison. On the facts, this division of causation was immaterial as both perils were covered by the policy. In principle, however, it is difficult to sustain

121 See also the warning by Lord Atkinson against the artificial splitting of complex causes: Leyland Shipping Co Ltd v Norwich Union Fire 1murance Society Ltd [1918] AC 350, 365. 122 The Buckeye State (1941) 39 F Supp 344, 347 per District Judge Knight (District Court,

New York). 123 [1930] I KB 699, 708. See also Everett v London Assurance (1865) 19 CB (NS) 126, 133. See 10.14 above, 11.29ffbelow, and 9.17-9.18 above.
But see The Knight ofSt Michael [1898] P 30 distinguished in Tempus Shlppingas a decision on the eiusdem generis clause. Sed quaere. See the discussion of imminent perils at 9.49 and 9.52 above. ,,, Tempus Shipping Co Ltd v DreyfUs & Co Ltd \1930] I KB 699, 709. 125 Ine Diamond [19061 P 282. 126 ibid. See also Symington v Union Insurance Society of Canton (1928) 31 LlLRep 179; Re Hooley Hill Rubber & Chemical Co Ltd [19201 I KB 257, 271-2.
127 128

117 118

A similar objection can be made against the decision in Covington v Roberts (1806) 2 B & PNR 378. Chased by a privateer, an unusual press of sail was hoisted enabling the Nancy to escape but causing damage. It was held that the proximate cause was 'only a common sea risk' occasioning a partial loss rather than a general ave.f3.ge loss. The court thus rejected the argument that the loss was attributable to the privateer and incurred for the common good of those interested in the adventure. This seems unsustainable in the modern law. 119 [1924] AC 431. 120 ibid 446-7 per Viscount Cave and455 per Viscount Finlay.

(1868) LR 3 Ex 71, 74.

>30

Note that under the Institute Cargo Clauses (B) and (C) the required causal link is merely that of 'reasonably attributable to' fire.

,,, (1928) 31 LlLRep 179.

ibid 183-4.

,,, ibid 182 and 184.

354

355

Marine Risks
the view that the cork thrown into the water was not lost by fire, without denying that the causal attribution to a peril euisdem generis to jettison was also correct.
10.62 A number of the above principles are articulated in fire insurance through a distincrion between 'friendly' and 'hostile' fires. The Canadian case of Young v Waterloo Mutual Fire Insurance Com concerned coverage of 'direct loss or damage by fire'. Kennedy CoCt] stated as follows: 133
... it must be a 'hostile' fire, that is, one wh.ich becomes uncontrollable and breaks
out from where it was intended to be and becomes a hostile element, and where

Hull and Freight Insurance

Once loss by fire is established, prima ficie it matters not whether that fire 10.65 started accidentally or deliberately, 'if the ship is destroyed by fire, it is of no consequence whether this is occasioned by a commo.n accident, or by lightning, or by an act done in duty to the state' .138 A negligently started fire is still a fire. 13' Even a deliberate fire is still within the peril of fire, whether started by a stranger to the vessel or by the master or a member of the crew.'4' An argument that the peril of fire in a mortgagee's interest policy is confined to accidental fires has been described as 'preposterous'.'41 Arson by the assured would, of course, be excluded by the wilful misconduct defence."2 Likewise, the assured may rely on fire occasioned by spontaneous combustion, '43 or one that ought to have been contained by fire-fighting equipment,'44 leaving a hull insurer to seek to raise a defence based on unseaworthiness.'4s The above propositions are, however, subject to rhe terms of the policy and the 10.66 doctrine of proximate cause. In Gordon v Rimmington, '4' the master deliberately set fire to his vessel in order to prevent it being taken by a faster and stronger enemy privateer. Lord Ellenborough held the assured entitled to recover for a loss caused by fire. Given that the peril of fire does not distinguish between reasons for the fire, the decision is correct; following rhe modern approach to
proximity of causation, 147 however, the causal relevance of the privateer cannot

there is such a fire the insured may recover resulting losses or damages including
losses or damages in regard to which there has been no actual ignition, such as a

loss or damage caused by smoke. On the other hand, where the fire is a 'friendly' one, such [as] a fire employed for the ordinary purpose of heating, and such fite is confined within its usual limits, it is not a fire within the usual terms of a policy
and the insured cannot recover loss or damage caused thereby, such as damage caused by heat which does not result in ignition or damage by smoke or soot. In

other words, the insurer is not responsible for the collateral effectsof a 'friendly' fire which is contained within its usual and proper limits; 134 if, however. such a 'friendly' fire gets out of control and extends beyond where it was intended to be contained, it then changes its character and becomes a 'hostile' fire, and the insurer is liable for the loss or damage which results therefrom.

10.63 A marine example of recovery for a 'friendly' fire getting our of control is provided by Busk v Royal Exchange Assurance Co. 13S A Russian ship frozen up for the winter was, in accordance with custom, left in the sole charge of the mate. He lit a fire in his cabin but failed properly to extinguish it before going aboard another vessel for the night. The fire spread and destroyed the ship. 10.64 The case of Harris v Poland}" warns, however, against relying toO heavily upon the 'friendly' fire limitation. For protection against theft, the assured concealed jewellery in a grate beneath coal and wood, which, forgetful of the jewellery, she later lit. Atkinson] held rhe assured to be entitled to recover for the resulting damage to the jewellery under a Lloyd's household policy, regardless of the fact that the fire was 'friendly', deliberately started, and confined to its usual and proper place: 'it mattered not whether the property had gone to the fire or the fire had gone to the property. There had been ignition of insured property not intended to be ignited'. 137

be denied. It is suggested that the assured in Gordon v Rimmington could have recovered under a war risks policy for loss proximately caused by the peril of attempted capture, the act of the master in duty to the state not breaking the chain of causation between the peril that prompted the master's acts and the ensuing 10ss.'48 Although section 55(1) of the Marine Insurance Act 1906 denies recovery 'for any loss not proximately caused by a peril insured against', Gordon v Rimmington should be viewed as a case where the loss could

Gordon v Rimmington (1807) 1 Camp 123, 124, discussed below. Busk v RoyalExchange Assurance Co (1818) 2 B & Aid 73; Rosa v Insurance Co ofthe State of Pennsylvania (The Belle a/Portugal) (1970] 2 Lloyd's Rep 386. 140 Continental Illinois National Bank & Trust Co ofChicago v Alliance Assurance Co Ltd (The Captain Panagos DP) (No 2) (1986] 2 Lloyd's Rep 470, 510-11; S,hiffihypothekenbank zu Luebeck AG v Compton (The Alexion Hope) (1988] 1 Lloyd's Rep 311; Kiria,oulis Lines SA v Compagnie d'Assurances Maritimes Ariennes et urrestres (CAMAJ) (The Demetra K) [2002J EWCA Civ 1070,
138

139

(1955] 5 DLR35 (County Court, Ontario). 133 ibid41-2. Thus, in Austin v Drewe (1816) 6 Taunt 436, the assured was unable to recover for heat damage to sugar caused by mismanagement of fires in a heating chimney. 135 (1818) 2 B &AJd 73. '" [1941] 1 KB 462. 137 Headnote. See especially ibid 468. At 473, Atkinson J discounts a dictum in the course of argument of Scrutton L] in Upjohn v Hitchens [1918]2 KB 48, 51 to the effect that fire in a fire policy means a fire that has broken bounds,
132 134

(2002] 2 Lloyd's Rep 581, para 19. 141 The Alexion Hope (n 140 above) 319 per Nourse L]. Contrast the position under the Institute Cargo Clauses (B) and (C), see 10,83 below. 142 But once the assured has proved a loss by fire, the- insurer bears the burden of proving the assured's wilful misconduct: National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer) (1993) 2 Lloyd's Rep 68, 71. 143 Tempus Shippi"g Co Ltd v Dreyfus & Co Ltd (1930) 1 KB 699, 708. '" Manifest Shippi"g Co Ltd v U"i-Polaris Insurance Co Ltd (The Star Sea) (2001] UKHL 1, [2003] 1 AC 469, discussed ar 19.36 below. 145 See further Ch 19 below, 146 (1807) 1 Camp 123. 147 See Ch 9 above. 148 See Rickards v Forestal Land, Timber & Railways Co (The Minden) [1942] AC 50.

356

357

Marine Risks
be described as proximately caused either by fire or attempted capture. Consequently, the assured could recover under a policy which covered either of the two perils, but equally the insurer wonld be protected by an express exclusion of either peril.'4'
10.67 The peril of explosion received consideration in Commonwealth Smelting Ltd

Hull and Freight Insurance

attributable to the explosion tather than the subsequent fire was also 'from fire' and therefore excluded. The defence failed, There was no appreciable amount of time between the commencement of the ignition and the explosion: 'Each was a part of the same event, the ignition being the first and the explosion the final stage of the disaster, There was no separate fire which burnt in the roOm before the explosion took place.'155 (3) Violent Theft by Persons from Outside the Vessel"6 There is no requirement from use ofthe word 'violent' thar an assault be commit- 10,69 ted upon a person,157 although merely unlawful behaviour would not suffice."8 Some manifestation of force is required, although it may be directed towards property. It has been observed thar 'theft' is not to be interpreted in the strict sense of the criminal Jaw, 159 Theft by a person within the vessel ranks as barratry, 160
(4) Jettison

v Guardian Royal Exchange Assurance Ltd'50 A smelting complex included a blower house containing machinery to provide a supply ofair to be blown into a furnace. The blower itself consisted of a steel impeller attached to a shaft from a gearbox, with front and back shrouds and a cast iron casing. Having developed a fatigue ctack, the impeller broke up while rotating at speed, pieces sttiking the casing with sufficient force to cause it to crack and shatter, releasing the pressurised air. Flying pieces of impeller and casing damaged the whole boiler house. Witnesses attested to 'a big cloud of fire and smoke' and a 'very loud bang' and described what they had observed as an explosion. The courts disagreed with this characterization. Staughton J held that 'explosion' meant 'an event that is violent, noisy and ... caused by a very rapid chemical or nuclear reaction, or the bursting out of gas or vapour under pressure', adding that the cause of the damage was not such an explosion but centrifugal disintegration.'s, In the Court of Appeal, Parker LJ stated 152 that the damage was 'caused by the failure of the impeller and pieces of the impeller shattering the casing. That was not an explosion'. Damage to the boiler house had possibly been contribured to by an explosion, 'namely the explosion of the air from its confinement within the casing, the casing having been shattered by the entirely independent operation of the failure of the impeller. However, even so, it appears to me that the proximate cause and effective cause of all the damage was the failure orthe impeller and not an explosion'.
10.68 One might contrast the decision of the Privy Council in Boiler Inspection &

Jettison is 'any casting over board ex justa causa'. 16' It is usually associated with 10.70 general average, being the paradigm example of a general average sacrifice. If a marine adventure is in jeopardy, cargo or patt of the ship itself may be voluntarily sacrificed by jettison in the common good, giving rise to a general average loss. Yet jettison is a puzzling peril. Inclusion of jettison in a list of covered perils is not needed ro extend cover to general average, as the Insritute and International clauses uniformly provide cover elsewhere for general average. Moreover, it is difficulr, given the modern law of proximity of causation, to contemplate a role for jettison as a nominate peril in the hulls and freight clauses independent of general average and the other specified perils. Since jettison is casting overboard fOr a reason, the peril of jettison arises when- 10.71 ever the reason justifies the casting overboard. Under rhe modern approach to proximity of causation, it will be appropriate, if relevant, to regard the reason as a proximate cause of the loss in its own right. Thus, if jettison is prompted by

Insurance Co ofCanada v Sherwin-Williams Co ofCanada. 153 In the event of an accident to the assnred's bleacher tank, the insurer undertook to pay for loss 'directly damaged by such accident ... excluding Ca) loss from fire'. An accident resulted in the door to the tank being blown off and an escape of gas which ignited and exploded, resulting in a fire. Considerable damage was occasioned by the explosion and resulting fire. That attributable to the fite was admittedly excluded from the scope of the cover.'54 The insurer's defence was that a flame must have ignited the gas, that that flame constituted fire, and that all loss

155
156

[1951] AC 319, 337. The Lloyd's SG policy referred merely to 'thieves'. However, MIA 1906, Seh 1, r 9 provides

that 'the term "thieves" does not cover clandestine theft or a theft committed by anyone of the ship's company, whether crew or passengers'. Rule 9 is now superseded by the wording of the

'" See 9.29 above. 150 [1984J 2 Lloyd's Rep 608, [1986J 1 Lloyd's Rep 121. '51 [1984] 2 Lloyd's Rep 608, 612. 1S2 [1986] 1 Lloyd's Rep 121, 126. 153 [1951] AC 319. IS4 The broad drafting, 'loss from fire', dearly rendered otiose any causation arguments uting all the loss to the explosion as the proximate cause, rather than--the resulting fire.

attrib~

Institute clauses. 157 La Fabrique de Produits Chimiques SA v Large [1923J 1 KB 203. 158 Dina Services v Prudential Assurance [1989J I Lloyd's Rep 379. 159 Nishina Trading Co Ltd v Chiyoda Fire & Marine Insurance Co Ltd (The Mandarin Star) [1969J 2 QB 449 (although no guidance was given as to where the strict criminal law and insurance law might diverge). 160 The peril ofbarrarry is discussed at 11.43ffbelow. '51 Butler v WIldman (1830) 3 B &Ald 398, 403 per Bayley J.

358

359

Marine Risks
adverse weather at sea, the proximate cause may be viewed as either jettison or

Cargo Insurance
proceeded to the nearest pOrt, where, according to the insurer's pleadings, they released the vessel. Pollock CB considered that the facts constituted piracy provided the Chinese acted animo fUrandi (with the intention of theft). In The Andreas Lemos,'67 a vessel anchored within port limirs and within the 10.76 territorial waters of Bangladesh was boarded by thieves armed with knives. When discovered by the crew, the thieves at first offered resistance by brandishing their knives but then fled. Some equipment was stolen. This did not constitute piracy, but rather clandestine theft. In the absence of any prior authority, Staughton J held that force or a threat of force waS necessary to elevate rheft to piracy under a policy of marine insurance: 'It is not necessary that the thieves must raise the pirate flag and fire a shot across the victim's bows before rhey can be called pirates. But piracy is not committed by stealth."68 He concluded thar 'the act of appropriation had finished in this case when the force or a rhrear of force was first used, or at any rate the contrary is not proved. The act ofappropriation finished when the goods were thrown into the sea' .'69 Staughton J also held that piracy is not confined to acts outside territorial waters, 'if a ship is, in rhe ordinary meaning of the phrase, "at sea" ... or if the attack on her can be described as "a maritime offence" ... rhen for the business purposes of a policy ofinsurance she is, in my judgment, in a place where piracy can be committed'.170

perils of the sea. 10.72 In Butler v Wildman,162 the captain of a Spanish ship threw a quantity of dollars into the sea to prevent them from falling into enemy hands. While the court held unanimously that the assured was entitled to recover, the judges disagreed over causation. Abbott C] and Bayley and Holroyd JJ all considered that the cause was jettison or, alternarively, a peril eiusdem generis to jettison. Bayley and Holroyd JJ also attributed the loss to the peril of enemies. Best J opted for a different cause, namely a peril eiusdem generis to enemies, in which he was joined by Holroyd J. Best J, therefore, identified one relevant cause, Abbott C] twO, Bayley J three (although also stating he rhought 'the enemy was the proximate cause of loss') and Holroyd J a grand total of four causes. Given rhe definition of jettison, and the modern doctrine of proximate cause, it is suggested that the loss did indeed fall within both jettison and enemies. 10.73 Similarly, in Symington v Union Insurance Society o/Canton,163 some cork was thrown from a quay into the water to prevent the spread of a fire. The atttibution by Scrutton and Sankey LJJ of the loss thereby caused to jettison164 was correct, as the fire provided the justification for the response. The cork was lost by events that could be correctly labelled as either fire or jettison, the two perils overlapping on the facts. (5) Piracy 10.74 For rhe purpose of insurance contracts, the term 'pirate' receives a popular and business meaning. Pirates, therefore, are people who plunder indiscriminately for their own ends rather rhan people who are simply operating against the property of a particular state for a public end. '65 Schedule 1, rule 8 of the Marine Insurance Act 1906 provides that 'the term "pirates" includes passengers who mutiny and rioters who attack the ship from the shore'. 10.75 In Naylor v Palmer,'66 insurance was taken out on money advanced to cover rhe cost of shipping emigrant Chinese workers from China to Peru. The emigrants, however, changed theit minds, murdered the captain and some of the crew, and

B. Cargo Insurance
Modern cargo insurance operates sometimes on an (all risks' basis and sornetimes on a named perils basis. Under rhe Institute Cargo Clauses (A), cover is granted against 'all risks of loss of or damage to the subjecr-matter insured except as provided' to the contrary. The Institute Cargo Clauses (B) and (C), in contrast, provide insurance against a number of specified 'Risks Covered'. One feature of the cargo clauses is that they do not employ the phrase 'perils of the sea'. The following paragraphs will consider the extent to which the cargo clauses provide cover against such risks and also the relared question of the approach of the cargo clauses to loss and damage caused by deliberate acts.

10.77

(1830) 3 B & Ald 398. 163 (1928) 31 LlLRep 179, discussed at 10.61 above with respect to fire. 164 The court actually held the cause to be a peril eiusdem generis to Jettison, possibly feeling that jettison as such is confined to casting overboard from vessels. 165 Republic of Bolivia v Indemnity Mutual Marine Assurance Co Ltd (1909) 1 KB 785 (no piracy where Brazilian insurgents sei~ed goods intended for Bolivian troops). Follow:d in Banque Moneteca 6' Carystuiaki v Motor Umon Insurance Co Ltd(1923) 14 LlLRep 48 (no pIracy where a Greek vessel was seized by a brigand actuated predominantly by nationalist motives). 166 (1853) 8 Ex 739.
162

167 Athens Maritime Enterprises Corp v Hellenic Mutual \-%r Risks Association (Bermuda) Ltd (The Andreas Lemos) [19831 1 All ER 590.

ibid 600. 169 ibid. ibid 598. The issue had elicited conflicting dicta in Republic ofBolivia v Indemnity Mutual Marine Assurance Co Ltd [1909] I KB 785, 798, 802. The view of Staughton J that piracy may occur within territorial waters is consistent with the opinion of Lord Kenyon that piracy was committed on the facts of Nesbitt v Lushington (1792) 4 TR 783. A ship carrying wheat was forced by weather into Elly harbour in Ireland where corn was very scarce. The ship was boarded 'in a tumultuous manner' by local people who took control of her, ran her aground and compelled the master to sell the wheat for 75% of the invoice price.
168

170

360

361

Marine Risks
(1) 'All Risks' Cover under rhe Institute Cargo Clauses (A) 10.78 In British & Foreign Marine Insurance Co Ltd v Gaunt,'71 the House of Lords held that an assured under an 'all risks' policy benefits from 'quasi-universal' cover and is not required to identifY the precise, operative peril. It suffices that the assured prove on a balance of probabilities that the cause of the loss was a risk, as that term is understood. In the context of cover against sea perils, since cover is graoted againsr all risks that are not excluded, the question of the maritime nature of the case of loss does not atise.'" Moreover, although the deliberate infliction of damage by the assured itself does not fall within the concepr of 'risk', 173 the deliberate act of those in charge of rhe insured property, recoverable under a hull policy only under the heading ofbarratty and not perils of the sea because of a lack of fortuity, would be regarded as a risk under 'all risks' cargo cover. In other words, the fortuiry inherent in the concept of risk is understood in a sense relative to the assured.'74 So, for example, in cases of composite insurance, loss or damage occasioned by the wilful misconduct by one co-assured is still regarded as fortuitous with respect to another co-assured 175 not complicit in the misconduct. 10.79 Perhaps paradoxically, an assured may, in certain circumstances, find it easier to recover under the named perils approach of hull insurance than the <all risks' approach of the Institute Cargo Clauses (A). Where insured property is lost or sustains damage when faced with no more than a foreseeable peril, the possibility arises that the condition of the property was at least a proximate cause of the loss. The question then atising is whether the insurer can rely on the condition of the property in order to deny recovety. Where a vessel sinks because of inability to withstand sea conditions of a type that are not unusual for the relevaot sea area at that time of year, rhe condition of the vessel will afford the hull insurer a defence, not through denying the operation of a peril of the sea,

Cargo Insurance
but only by forming the basis for a possible defence of unseaworthiness. In rime policies, under which most vessels are insured, rhis defence requires the insurer to prove not just the state of the vessel and that its condition caused the loss, but also that the assured was subjectively aware of the vessel's condirion. This is extremely difficult.'76 In contrast, 'all risks' cover is interpreted as implicitly excluding loss caused by the condition of the goods rarher than the operation upon the goods of some external circumstance.'" Moreover, rhe modern Insritute cargo clauses contain three provisions expressly denying cover where the cause of the loss is the innate condition of rhe goods, none of which require proof of awareness by the assured of the condition of the goods.'78 Consequently, a defence based on the state of the insured property presents less formidable problems of proof for a cargo insurer than a hull insurer.'79 The same contrast arises in the context of the peril of fire by spontaneous 10.80 combustion or that the insured property should have been able to withstand. A cargo insurer may invoke the defence of inherent vice while a hull insurer will have to establish an unseaworthiness defence, including, in time policies, the knowledge of rhe assured. While the cargo insurer may fail to establish thar inherent vice caused the 10ss,180 a hull insurer that succeeds in proving that the vessel was unseaworthy by reason of defective fire-fighting equipment, and that this defect caused the loss, will still fail if it cannot also prove that rhe assured knew of the unseaworthiness at the time the vessel put to sea. 181
(2) Named Perils Cover under rhe Institute Cargo Clauses (B) aod (C)

m
172
173
174

[1921] 2AC41.

It could if placed in issue by the wording of an exclusion, but there is no appropriately

worded exclusion in the Institute Cargo Clauses (A).

British & Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41,57.

Both the Institute Cargo Clauses (B) and (C) adopt a named perils approach to 10.81 the scope of cover. They do not, however, adopt the phrase 'perils of the sea' or define the scope of cover by reference to a family of perils. Instead, a number of specific perils capable ofqualifYing as perils of the sea if fortuitous are identified, and cover is granted in respect of loss of or damage to rhe insured cargo caused by those individual perils. Both the (B) and (C) clauses cover loss or damage 'reasonably attributable to ... vessel or craft being stranded grounded sunk or capsized'.182 Stranding is defined according to the nature of the contact between the vessel and the bottom rather than by reference to any degree of damage to

Prior to the advent of the new cargo clauses in 1982, cargo policies afforded cover against perils of the sea, raising the problem of how to avoid the approach to fortuity adopted by the House of Lords in Samuel (P) 6- Co Ltd v Dumas [1924] AC 431. The market response was a 'Seaworthiness Admitted Clause'. When eventually tested in the courtS in Shell International Petroleum Co Ltd v Gibbs (The Salem) [1983] 2 AC 375, the view was expressed that this clause, despite the clear intentions of the market, possibly failed on its -wording to achieve its purpose but that, because of the clear intentions of the market, could always be rectified in order to achieve its purpose. Given the emphasis today placed upon the parties' intentions in the interpretation of contracts (see generally 8.03, 8.45ff above), it is unlikely that recourse to rectification would be needed. 175 State o/the Netherlands v YOuell [1997] 2 Uoyd's Rep 440, 454. OtherWise, of course, if the policy is one of joint insurance.

176
177
178

For discussion of unseaworthiness, see Ch 19 below.

British & Foreign Marine ItlSurance Co Ltd v Gaundl921] 2 AC 41. For uncertainty surrounding the burden of proof in this context, see 7.59 above. 179 See, eg Mayban General Assurance Bhd v Alstom Power Plants Ltd [2004] EWHC 1038 (Camm). [2004J 2 Lloyd's Rep 609, discussed at 15.52-15.54 below. 180 Boyd v Dubois (1811) 3 Camp 133. 181 Manifest Shipping Co Ltd v Uni~Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1, [2003J 1 AC 469, discussed at 19.32ff. 182 cl 1.1.2.

362

363

Marine Risks
the vesseL 183 Momentary contact does not constitute stranding 184 nor does grounding in the ordinary course of navigation,185 hence rhe specific inclusion of grounding in the Institute clauses. With respect to sinking, a vessel has not sunk even if substantially awash and partly kept afloat by its buoyant cargo. 186 10.82 In addition, within the context of perils of the sea, Institute Cargo Clauses (B) and (C) also cover most collisions or comings into contact by the carrying vessel, craft, or conveyance. This is discussed in a later chapter. 187 The rarely, if ever, used Cargo Clauses (B) also cover loss or damage 'caused by ... washing overboard [or] entry of sea lake or river water into vessel craft hold conveyance container lifrvan or place of storage"88 and 'total loss of any package lost overboard or dropped whilst loading on to, or unloading from, vessel or crali:' .'89 Othet forms of 'wet' damage remain at the assured's risk. Thus, damage by rainwater will not render the insurer liable and canal water poses ptoblems of defiuition. 10.83 The various perils as enumerated in the 'risks covered' clauses of the Institute Cargo Clauses (B) and (C) do not distinguish according to whether they occur through accident or design. However, by virtue of clause 4.7, insurers are not liable for 'deliberate damage to or deliberate destruction of the subject-matter insured or any part thereof by the wrongful act of any person or persons.' This exclusion would clearly embrace the deliberate act limitation on the concept of fortuity under perils of the sea, which excludes from cover losses caused by deliberate damage to a ship by those in charge ofit, although the burden ofproof in respect of the exclusion will fall upon the insurer. The exclusion is, however, broader, since it extends to all 'deliberate' loss or damage occasioned by.the 'wrongful act ofany person'. In consequence, cover for fire will not extend to any act of arson or deliberately caused explosion. A number of other deliberate acts discussed above in the context of hull and freight insurance are not covered in any event as falling outside the risks covered clause. For example, the perils covered under the (B) and (C) clauses do not extend to violent theft or piracy.

11
THE INCHMAREE CLAUSE

Cover"d Perils under the

Inchmaree Clause (1) Bursting of boilers, breakage of shafts, and latent defects in the machinery or hull (2) Negligence

(3) Barratry of masters, officers, or crew 11.43

11.03

B. The Due Diligence Proviso

C. Relationship Between the Cover Provided under the Inchmaree Clause and that Provided in Respect of Maritime Perils

11.66

11.03 11.29

11.73

In The Inchmaree,' the House of Lords ruled that the brealcage of a piece of 11.01 machinery on a ship was recoverable neither as a peril of rhe sea nor under the eiusdem generis clause because the accident lacked the necessary maritime connection. This prompted the introduction of the Inchmaree clause, designed to provide such cover. Today, however, the clause referred to by that name is of somewhat broader scope. Thus, clause 2.2 of the International Hull Clauses (01/11103)' provides as follows:
This insurance covers loss of or damage
to 3

the subject-matter insured caused by

2.2.1 bursting of boilers or breakage ofshafts but does not cover any ofthe costs

of repairing or replacing rhe boiler which bursts or the shaft which breaks
2.2.2 any latent defect in the machinery or hull but does not cover any ofthe costs of correcting the latent defect
2.2.3 negligence of Master, Officers, Crew or Pilots

'83 Harman v 1&ux(1831) 3

184

Camp 429.

2.2.4 negligence of repairers or charterers provided such repairers or charterers are not an Assured under this insurance
2.2.5 barratry of Master, Officers or Crew,

M'Dougle v Royal Exchange Assurance Co (1815) 4 Camp 283; Bryant & May Ltd v London Assurance Corp (1886) 2 TLR 591. 185 Hearne v Edmunds (1819) 1 Brod & Bing 388; Rayn" v Godmond (1821) 5 B & Ald 225; Bishop v Pentland (1827) 7 B & C 219; Wells v Hopwood (1832) 3 B & Ad 20; KingsfOrd v Marshall (1832) 8 Bing 458; Corcoran v Gurney (1853) 20 LTOS 221. There is a stranding,
however, where the vessel is intentionally grounded in the ordinary course of navigation but the bottom proves to be in a different state from normal: Letchflrd v Oldham (1880) 5 QBD 538. 186 Bryant 6- May Ltd v London Assurance Corp (1886) 2 TLR 591. See also Jackson Oohn C) Ltd v Sun Insurance Office Ltd (1962) 38 WWR 294 (Supteme Coun of Canada). 187 See 12.02ffbelow. 188 Institute Cargo Clauses (B), dl1.2.2, 1:2.3. 189 Institute Cargo Clauses (B), d 1.3.

1 Thames & Mersey Marine Insurance Co Ltd v Hamilton, Fraser & Co (The Inchmaree) (1887) 12 App Cas 484. 2 See also Institute Time Clauses Hulls (1/8/89 and 1/11/95), cl 6.2; Institute Voyage Clauses Hulls (1/10/83 and 1111195), cl4.2; Institure Time Clauses Freight (1110183 and 1111/95), cl 7.2; Institute Voyage Clauses Freight (1/8/89 and 1111/95), d 5.2. There are, however, material differences in wording. 3 The words 'or damage to' are naturally omitted from the freight clauses as freight is not susceptible to damage, only loss.

364

365

The Inchmaree Clause

provided that such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers.

Covered Perils under the Inchmaree Clause

In jackson v Mumford, 5 a destroyer was insured 'against fire in shops and on 11.07 board on stocks, trials and all marine risks to complerion and acceptance by the Admiralry'. The policy also contained an Inchmaree clause. During trials, the connecting-rod in the engine broke so that the piston-rod flew up against the cylinder cover resulting in a large escape of sream. Kennedy J held that, in the context of the policy, 'trials' constituted a risk that covered the casualry.' However, he held also that there could have been no recovery under the Inchmaree clause on the basis that the cause of the loss was a weakness of design. According ro Kennedy J, a businessman, reading a commercial document, would not associate design defects with rhe phrase 'latent defect'. 7 That phrase did not cover 'the erroneous judgment of the designer as ro the effect of the strain which his machinery will have ro resist, the machinery itself being faultless, the workmanship faultless, and the consttuction precisely thar which the designer intended ir ro be'. 8

11.02 The presence of the 'due diligence' proviso distinguishes rhe perils covered under the Inchmaree clause from the 'stricr liabiliry' marine perils discussed in Chapter 10 above, in respect of which the cover provided is subject ro no such qualification.

A. Covered Perils under the Inchmaree Clause

(1) Bursting of Boilers, Breakage of Shafts, and Latent Defects in the

Machinery or Hull 11.03 The cover provided in respect of burst boilers, broken shafts, and latent defects raises both issues of definition, such as what is a defect and when is it latent, and also the question ofthe extent to which cover is confined ro consequential loss as opposed to replacement of the boiler or shaft or curing of the latent defect.

jackson v Mumford was considered by Robert Goff J in The Caribbean Sea" The 11.08
design of the vessel in question involved the use of a particular sort of welding that proved subsequently to lead ro a loss of farigue strengrh and the gradual development of fatigue cracks. These led ultimately ro rapid crack growth and a fracrure in a pipe through which water entered the engine room, resulting in the sinking of the vessel. The underwriters were held liable under rhe Inchmaree clause. Robert Goff] reasoned as follows: 10
It is important to appreciate that a defect of design may be relevant in more than one way. It may, for example, in due time result in a defect (eg a crack) in the material from which the hull or machinery is constructed, which in its turn may cause a casualty. On the other hand, it may, because the ship is subjected to work for which it is (by reason of the defect in design) inadequate, result in a casualty without any determinate intermediate defect developing in the material, to which the casualty can be attributed as the proximate cause. Furthermore, in considering

(a) 'Shafts'
11.04 The term 'shaft' received a restrictive interpretation in jackson v Mumford.' According ro the evidence adduced in that case, in the language of engineers connecting-rods and shafts are always distinguished, their common functions of the transmission of power being effected through strains of an essentially different character, and Kennedy J duly held that the reference to shafts in the Inchmaree clause should not exrend to connecting rods. In the absenclof authoriry, it might be questionable ro what extent the linguistic usage of engineers affords reliable evidence of the intended scope of cover under a contract between two parties neither of whom is an engineer. It is, however, to be assumed that parties roday contract on the basis of the interpretation espoused in jackson.

whether there was a defect in the hull or machinery which ditectly caused the loss
of or damage to the ship, one is concerned with the actual state of the hull or machinery and not with the historical reason why it has come about that the hull or machinery is in that state. If the hull or machinery is in such a state that there can properly be said to be a defect in it, and such a defect is the proximate cause of the casualty, it would seem to matter not that it had come into existence by virtue of (for example) poor design, or poor construction, or poor repair, unless a casualty so caused is excluded from the cover ...

(b) 'Latent defect'

11.05 The expression 'latent defect' invites enquiry both as to the nature of a 'defect' and the appropriate test for determining whether a defect is latent. 11.06 'Defect' The case law excludes design defects from the concept of latent 'defect' as employed in the Inchmaree clause. A hull and machinery underwrirer offers cover against accidental loss and damage rather than a guarantee of fitness for purpose of the insured vessel.

s (1902) 8 Com Cas 61.

6
7 9

The unsuccessful appeal was confined to this holding: (1904) 9 Com Cas 114. (1902) 8 Com Cas 61. 68. 8 ibid 69. Prudent Tankers Ltd SA v Dominion Imurance Co Ltd (The Caribbean Sea) [1980J 1 Lloyd's

, (1902) 8 Com Cas 61, 70.

Rep 338. 10 ibid 345-6.

366

367

The Inchmaree Clause

11.09 The fundamental point is that the Inchmaree clause covers loss of or damage to

Covered Perils under the Inchmaree Clause

correctly according to its design specification bur occasions damage because it is unsuitable for the purpose ascribed to it by rhe design. A defect must also be disringuished from a generally weakened state resulting 11.12 from gradual deterioration by reason of ordinary wear and tear.'4 Moreover, the opinion has also been expressed that a latent 'defect' must be present at or originate from the construction of the vessel, the installation of the relevant part, or the carrying our of some maintenance work. Where, accordingly, a vessel develops a weakness by reason, for example, of an accidental grounding and such weakness subsequently results in damage, the assured may not recover under the Inchmaree clause." 'Latent' In jackson v Mumford, 16 Kennedy J expressed the view that the mean- 11.13 ing of the term 'latent' might vary with the circumstances of the case, such as 'the legal duty and the means of knowledge for which the owner or the user of it ought in the particular case ro be held responsible'. In The Caribbean Sea, 17 Robert Goff J rejected a submission that latent should be equated with not discoverable by any known and cusromary test,18 preferring to define it as not detectable 'on such an examination as a reasonably careful skilled man would make' ,19 Such an interpretation was 'more in accordance with commercial sense, taldng into account as it does the possibility that a ship may be properly and carefully maintained and yet a defect may not be discovered although a more meticulous examination would have revealed its existence: a casualty caused by such a defect is surely covered by the Inchmaree clause'. 20 The question of whether a defect is latent then becomes synonymous with the exercise of due diligence by the assured under the due diligence proviso to the Inchmaree clause,21 although the incidence of the burden of proof may vary. An assured alleging a latent defect will have ro establish its latent nature, while the insurer

the insured vessel where the proximate cause of the loss is a latent defect, tegardless of how the latent defect was produced. There is no exclusion in respect oflatent defects caused by design defects. Provided ir can be said thar the insured vessel sustained a latent defect and that the latent defect caused the loss, the requirements of the clause for the assured to recovet are fulfilled.
11.10 In jackson

v Mumford, Kennedy J stated that 'the phrase "defect in machinery" in a business document means a defect of material, in respect either of its original composition or in respect of its original or after-acquired condition'." This does not exclude a defect of material in its after-acquired condirion resulting from a defect in design (as in The Caribbean Sea). Thus, if the defect in design causes the loss directly, the assured is not covered. If the defect in design causes a defect in the material from which the hull or machinety is constructed, which in turn causes the loss, the underwriter is liable. However, Robert GoffJ expressed misgivings concerning the view of the scope of the term 'defect' expressed by Kennedy J. If machinery were perfectly constructed but wrongly assembled, in the opinion of Robert Goff J, there would be a defect in the machinery" Nevertheless, he conceded: 'However, if the machinery were so designed or constructed that a particular piece was inadequate for the ordinary tasks for which the ship was designed ... it may be that the inadequacy of the particular part would constitute a shortcoming of, rather than a defect in, the machinery. This appeats to have been the conclusion of Mr Justice Kennedy in

jackson v Mumford . . .'

11.11

The twO cases, therefore, establish the following propositions. Where the IDSS is caused by a latent construction defect, the assured may recover under the Inchmaree clause. Where the loss is attributable to a design defect, one must determine whether the design defect in turn caused a defect in material that in law may be regarded as a proximate cause of the 10ss,13 or whether the design defect resulted in a mere shortcoming in the vessel that is not susceptible of characterization as a defect. In the former case, the assured may recover, but not in the latrer. There is a mere shortcoming where the hull or machinery functions

Sipowicz v Wimble (The Green Lion) [197411 Lloyd's Rep 593, 598. Houghton (RA) (} Mancon Ltd v Sunderland Marine Mutual Insurance Co Ltd (The Ny-Eeasteyr) [1988] 1 Lloyd's Rep 60, 63-4.
14 15

" (1902) 8 Com Cas 61, 69. 12 It is in fact unclear whether Kennedy Jwould exclude poor assembly from the concept of a defect. It would not fall within the definition as cited earlier in this paragraph, but where the assembly was not as contemplated by the designer the resultant state of affairs would not fall within the description of a design defect given earlier in his judgment: see 11.07 above. 13 The judgment of Robert ,Goff J refers to an intermediate defect that operates as 'the' proximate cause of the loss, It is, however, suggested that, where a vessel sinks because of a latent defect that developed by reason of a design defect, both the design and latent defects could be correctly characterized as proximate causes, The original design defect operates through the latent defect, but, as Robert Goff Jpoints out, its status as a proximate cause is irrefevant in the absence of an appropriately worded policy limitation,

(1902) 8 Com Cas 61, 69. [1980] 1 Lloyd's Rep 338. 18 The test adopted by the New York Supreme Court, Appellate Division in Parente v Bayville Marine Insurance (1975] 1 Lloyd's Rep 333, rejecting the argument that latent meant simply not discoverable through ordinary use and maintenance, 19 [1980] 1 Lloyd's Rep 338, 348-9. 20 ibid 348. See also Charles Brown 6' Co Ltd v Nitrate Producers' Steamship Co Ltd (1937) 58 LlLRep 188 (bill oflading): Sipowicz v Wimble (Tbe Green Lion) 11974] 1 Lloyd's Rep 593. The test propounded by Robert Goff Jwas accepted by both sides in Houghton (RA) 6' Mancon Ltd v Sunderland Marine Mutua/lmurance Co Ltd (The Ny-Etasteyr) [19881 1 Lloyd's Rep 60. For United States jurisprudence, see generally Tetreault, 'The Hull Policy: The Inchmaree Clause' (1%7) 41 Tnl LR 323, 336-8. 21 Charles Brown & Co Ltd v Nitrate Producers'Steamship Co Ltd (1937) 58 L1LRep 188. See further 11.66ffbelow.
16
H

368

369

The Inchmaree Clause

should shoulder the onus of demonstrating absence of due diligence under the
provIsO.
22

Covered Perils under the Inchmaree Clause

~he structure occurs. It will be appreciated that the presence of a fatigue crack will Itself concentrate stresses at its tip and thereby lead to an extension of that crack u~less and until those stresses are relieved. Similarly the presence of a fatigue crack WIll weaken the structure and therefore tend to cause' other fractures or failures of the structure.

(c) Requirement ofconsequential loss or damage 11.14 The Inchmaree clause is not designed to provide insurance against the bursting of a boiler, the breaking of a shaft, or the existence of a latent defect. The insurance covers 'loss of or damage to the subject"matter insured caused by' a burst boiler, broken shaft, or latent defect. Consequently, if all that happens is that a boiler bursts, a shaft breaks, or a latent defect is discovered, insurers incur no liability. For the assured to have a claim, the casualty must cause consequential loss or damage."
11.15 In the latent defect case of

The Nukila,24 Hobhouse LJ suggested that recovery depended upon a positive answer to the following three questions: '(1) Was there damage to the subject"matter insured? (2) Did that damage occur during the period covered by the policy? (3) Was that damage caused by a latent defect in the machinery or hull of the vessel?' The same approach applies to the bursting of boilers and breaking of shafts.

Nter the Nukila had been in service for about four years, a routine inspection 11.17 revealed that cracks extending most of the way around the legs had developed in the welding and that the cracking had spread into both the legs and spud cans. On the facts, the Court of Appeal had little hesitation in holding undetwriters liable under the Inchmaree clause. In doing so, the Court of Appeal rejected the argument that a latent defect could be said to have damaged the insured property only if it had caused damage to a different 'part' of the property from that containing the defect. This restriction had no basis in the wording of the Inchmaree clause and introduced fresh uncertainty in identifying what would be regarded as a separate part of the insured structure. The Court of Appeal did acknowledge the potential for evidential difficulty in 11.18 determining whether a la~ent defect had progressed so as to have occasioned damage. According to Hobhouse LJ:" 'There is potentially a factual problem involved in distinguishing between an embryonic fatigue crack as a latent defect and a system of cracking of such magnitude and severity that it significantly weakens the integrity or tensile or shear strength of the structure of the vessel
.. . it must, at least in part, be a question of degree.'

11.16

Damage With respect to latent defects, a line has to be drawn between a previ" ously latent defect simply becoming patent and the defect operating upon the insured property so as to occasion damage to it. The Nukild-' itself concerned a mobile accommodation and work platform that, when in position, stood on three legs. The foot of each leg passed through a square steel box, known as a 'spud can'. These boxes prevented the platform from sinking into the soft seabed where it was used. Unfortunately, the welding that attached the top plates of the spud cans to the legs was not properly profiled when the platform was built. The result was an excessive concentration of stress on the inetal and the development of metal fatigue. The progressive nature of the impact of metal fatigue was described by Hobhouse LJ as follows:"
Metal fatigue starts with microscopic changes in the structure of the metal which
lead to the formation of minute cracks which then grow in size. As they develop over time these fatigue cracks progressively become more detectable, initially by

scientific investigation and eventually by the naked eye. Assuming that the cycles of stress continue and that the process ofcracking does not itself relieve the stress, the fatigue crack will continue to grow until the metal shears or some other failure of

A contrast may be drawn between the damage clearly present on the facts of The 11.19 Nukila and the facts of earlier latent defect cases. In Hutchins Bros v Royal Exchange Corp,28 it was discovered that the stern frame of a vessel had not been properly cast and required replacement. While the frame was clearly defective, its condition had not altered while the vessel had been in service. Consequently, all that had happened was that the concealed defect in casting had become apparent and undetwriters were not liable. In Scindia Steamships (London) Ltd v London Assurance, 29 a propeller shaft broke because of a latent defect in the shaft. Branson J held that the underwriters were not liable for the cost of a replace" ment shaft. First, the Inchmaree clause did not cover broken shafts but damage consequential upon the breaking of a shaft. Secondly, the broken shaft could not be regarded as damage to the insured property consequential upon the breakage of the shaft itself. Thirdly, by parallel reasoning, the assured could not recover under the head of latent defect. The breaking of the shaft was merely the manifestation of the previously latent defect. If underwriters were not liable for

But see further 11.71 below on the burden of proof under the due diligence proviso. Compare the requirement -'of consequential damage in product liability insurance: Rodan International Ltd v Commercial Union Assurance Co pic (1999J Lloyd's Rep IR495; Pilkington United Kingdom Ltd v CGU Imurance pic [20041 EWCA Clv 23, [2004J Lloyd's Rep lR 891. " Promet Engineering (Singapore) Pte Ltd v Sturge (The Nukila) [1997J 2 Lloyd's Rep 146, 157. 2S [1997J 2 !.loyd's Rep 146. 26 ibid 149.
22 23

27 ibid 156. See also at 151, 157 (Ward L]: 'Where the line is to be drawn is a matter of fact and degree'). 28 [1911J 2 KB 398. 29 [1937J 1 KB 639.

370

371

The Inchmaree Clause

the cost of curing a defect in the form of a flaw in a shaft that has occasioned no consequential damage to the insured structure if rhat flaw is discovered by examination, it makes no sense for underwriters to become liable if the flaw is revealed through fracture of the defective shaft in the course of a routine operation.
11.20 In

Covered Perils under the Inchmaree Clause

The policy attached in May 1902. In October 1902, a routine examination .revealed a surface crack in a shaft. It transpired that this was caused by defective work carried out eleven years previously. There was no evidence of any change in condition of the shaft since inception of risk. It was held rhat there was no consequential damage at all: 'The crack which is the damage is really nothing but the development of the flaw-that is, of the latent defect itself and nothing more; a latent defect becoming patent is all that has happened.''' However, even if that were wrong and the crack was to be regarded as consequential damage, no such damage had been occasioned while the insurers were on risk. The trigger to liability under the Inchmaree clause was not the finding of a latent defect during the period of cover bur the occasioning of loss or damage during that time." In The Nukila," in contrast, the assured was able to establish that the cracking that necessitated the repairs occurred between the inception of risk in September 1986 and the discovery of the damage in February 1987. Causation In accordauce with the normal understanding of insurauce con- 11.24 tracts, the burst boiler, brokeu shaft, or latent defect must be the proximate cause of the loss. As established in The Caribbean Sea,39 provided that anyone of the three perils can properiy be characterized as the, or a, proximate cause of the loss or damage, ir does not marter how that peril came about unless an express policy term renders that origin of significance.

The Nukila,30 it was sought ro mal<e inroads on the need for damage by arguing that the imminenr risk of damage sufficed. The argument was, however, rejected. Actual damage is required: 'damage is physical damage which has
occurred'.31

11.21

Timing of the damage Not only must there be damage to the insured property, but that damage must have occurred during the period when the insurer was on risk. In The Nukila,32 Hobhouse LJ developed this point in the context oflatent defects:
A policy of insurance does not cover matters which already exist at the date when the policy attaches. The assured if he is to recover an indemnity has to show that

some loss or damage has occurred during the period covered by the policy. If a
latent defect has existed at the commencement of the period and all that has happened is that the assured has discovered the existence of that latent defect then there has been no loss under the policy. The vessel is in the same condition as it was at the commencement of the period.
11.22 Timing of damage may well present difficulty, especially in the context of latent

defects. 33 Three problematic factual possibilities may be envisaged. First, the damage may already have been inflicted by the time risk incepts. Secondly, the threshold for characterization of the impact of a defect as damage may/be crossed after risk terminates. Thirdly, damage may be occasioned on a progressive basis, over a period of time spanning two or more insurance policies. In each case, insurers are liable only for such damage as the assured can prove on a balance of probability was caused during the period when the insurers were on risk. In the third situation, in order successfully to claim under anyone policy, the assured will have to be able to prove the extent of damage sustained during the period of cover of that policy. If the assured is unable to establish apportionment to the required standard of proof, the assured will recover nothing."
11.23

(d) Measure ofindemnity

Just as no claim may be made under the Inchmaree clause in respect of a burst 11.25 boiler, broken shaft, or latent defect in the absence of consequential damage to the insured property, so the measure of indemnity is confined, subject to contrary intention, to the consequential loss. Clearly, where the property is totally lost, the assured recovers in respect of the entire property. Where, however, the insured property is merely damaged, the assured is prima facie entitled to be indemnified only in respect of the consequential damage and not in respect of the boiler, shaft, or defect that caused the damage. Thus, in Wills & Sons v World Marine Insurance Ltd,40 the assured recovered for damage to a dredging ladder occasioned by a latent defect in the dredger chain for hoisting the ladder, but not the cost of replacing the chain itself Likewise, in Scindia Steamships (London) Ltd v London Assurance,41 the breaking of a shaft caused a propeller to fall to the bottom of a dock and one ofthe propeller blades to break off. Liability

An example of the first situation is provided by Oceanic Steamship Co v Faber. 35

[1997J 2 Lloyd's Rep 146. " ibid 157 per Hobhonse LJ. [1997J 2 Lloyd's Rep 146. 33 In the context of burst boilers and broken shafts, it is more likely that consequential damage will occur immediately or within a shorr time of the bursting or breaking. 34 Kelly v Norwich Union Fire Insurance Sodety Ltd [-l989] 2 Lloyd's Rep 333, see 7.53 above. 35 (1906) 11 Com Cas 179, affd (1907) 13 Com Cas 28.
30
32

(1906) 11 Com Cas 179, 186. ibid 188. See also the discussion of Scindia Steamships (London) Ltd v London Assurance [1937J 1 KB 639 in Promet Engineering (Singapore) Pte Ltd vSmrge (The Nukila) [1997J 2 Lloyd's Rep 146, 156. 38 ibid 150. 39 [1980J 1 Lloyd's Rep 338, see 11.08-11.09 above. '0 (1911) [1980J 1 Lloyd's Rep 350n. 41 [193711 KB 639.
36

37

372

373

The Inchmaree Clause

was admitted with respect ro the propeller but successfully resisted with respect ro the shaft.
11.26 Some difficulty arises, however, where the only way to repair the consequential

Covered Perils under the Inchmaree Clause

(2) Negligence .Marine insurance law responds to casualties occasioned by negligence in two 11.29 ways. On the one hand, section 55(2)(a) of the Marine Insurance Act 1906 denies the insurer any defence on the basis of negligence on the part of the master or crew. On the other hand, the negligence of specified persons constitutes a covered peril in its own right under the Inchmaree clause.

damage involves curing the defect or, factually less likely, replacing the shaft or boiler that caused it. Are insurers liable for the full COSt of repair or only for such cost as is attributable solely ro the consequential loss, namely that part of the cost that exceeds the cost of repairing the defect or replacing the shaft or boiler had there been no consequential loss? The Institute hull clauses do not address the issue specifically. In The Nukila,42 the assureds claimed and recovered the full COSt of the repairs, although no objection was raised in the litigation on the basis that this sum represented in part the cost of curing the defective welding.
11.27 Subsequently, on the introduction of the International Hull Clauses (01/1 1/

(aJ No defence ofoperational negligence ofthe master or crew

The issue of negligence of the master or crew in the conduct of their duties in 11.30 the course of the insured adventure, here referred ro as 'operational negligence', arose in the first half ~f the nineteenth century. Where the policy did not expressly cover negligence and a specified peril was occasioned by the negligence of the master or crew, it was argued that the underwriters were not liable. Such a contention was invariably unsuccessful, being refuted by two different arguments. First, the policies in question covered perils of the sea and barratry, the latter 11.31 embracing fraudulent cond~ct of the master or crew to the prejudice of the shipowner. 46 Given that it was the express intention of the parties that the underwriters accept both the risk of specified perils if occurring without any fault of the master or crew and also the risk of fraud on their part (the highest species of misconduct), exonerating the underwriters in the case of the intermediare category of a peril produced by the negligence of the master and crew
was contrary to the evident contractual intention to place on the underwriters

02), the opportunity was taken to provide expressly that insurers' liability excluded the cost of repairing or replacing the burst boiler or broken shaft or correcting the latent defect." However, while insurers may have believed that this merely reaffirmed the position as they had undersrood it to be all along, it proved commercially contentious. Consequently, under the International Hull Clauses (01/11/03), insurers also accept liability for one-half of any costs common ro, on the one hand, repairing or replacing the burst boiler or broken shaft or correcting rhe latent defect and, on the other hand, repairing the consequential damage. 44

(eJ 'Additional perils' cover 11.28 In return for an additional premium, cover under the International Hull Clauses (01/11/03) can be extended via the 'Additional Perils' clause ro cover that part of the loss sustained where a burst boiler, broken shaft, or latent defect'occasions consequential damage ro the insured property that is not covered under the Inchmaree clause. This extension embraces, first, the costs attributable purely ro replacing ot repairing the boilet or shaft or correcting the latent defect and, secondly, the remaining one-half of the costs common to, on the one hand, replacing or repairing the boiler of shaft or correcting the latent defect and, on the other hand, repairing the consequential damage. This cover is expressed to 45 be subject ro the same due diligence proviso as applies to the Inchmaree clause.

the risk of all inappropriate conduct of the master or crew. 47 Secondly, negligence was classified as a remote, and rherefore legally irrelevant, cause-'the underwriters are liable for a loss, the proximate cause of which is one of the enumerated risks, though the remote cause may be traced to the negligence of the master and mariners' .48 The remote cause approach ro negligence was alive towards the end of the 11.32 nineteenth century. In The Xantho,49 Lord Herschell opined: 'If that which immediately caused the loss was a peril of the sea, it matters not how it was induced, even if it were by the negligence of those navigating the vessel.' Accotding ro AL Smith LJ in Trinder, Anderson 6- Co v Thames 6- Mersey Marine

42
43
44

[19971 2 Lloyd's Rep 146. International Hull Clauses (01/11/02), dI2.2.1, 2.2.2. International Hull Clauses (01/11/03), cIl2.3, 2.4.

46

The peril of barratry is discussed at 11.41ffbe1ow,

International Hull Clauses{01l11/03), d 41. For the corresponding extension of cover for the Institute hull clauses, see the Institute Additional Perils Clauses-Hulls (1/10183 and 1/11/ 95). No cover is provided in respect of design or c?nstruction defects in the absence of consequen~ rial loss or damage. See also the International HuH Clauses (01/11/02), d 4L The due diligence proviso is discussed at 11.66ffbelow.
45

V0l1ker v Maitland (1821) 5 B & Ald 171. Bishop v Pentland (1827) 7 B & Ct 219, 223 per Bayley J. See also Bask v Royal Exchange (1818) 2 B &Ald 73 (fire); Walker vMaitland(l821) 5 B &A1d 171 (perils of the sea); Redman v W1hon (1845) 14 M & W 476 (perils of the sea). 49 Thomas Wihon, Sons &Co 0 Owners ofthe Cargo per the Xantho (The Mntho) (1887) 12 App
47
48

Cas 503, 510.

374

375

The Inchmaree Clause Insurance Co: 50 'It cannot be doubted that a policy upon ship covering perils of
the sea covers a loss brought about by the negligenr navigation of the captain and crew, if the loss is immediately caused by a peril of the sea.' A peril would not cease ro be a peril of the sea merely because brought about by negligenr navigation.
11.33 This line of authority forms the basis of that part of section 55(2)(a) of the

Covered Perils under the Inchmaree Clause

it is discounred by a separate rule arriculated by section 55(2)(a), but because it forms parr of the risks the insurer has agreed to cover. Originally, the insurers' assumption of the risk of operational negligence was 11.36 conditional upon the owner or charrerer properly equipping the vessel at the outset, including procuring a competent master and crew. As Parke B observed in Dixon v Sadler. 53
The great principle ... is that, if the vessel, crew, and equipmenrs be originally
sufficient, the assured has done all that he contracted to do, and is not responsible for subsequent deficiency occasioned by any neglect or misconduct of the master

Marine Insurance Act 1906, which provides that, subject ro the terms of rhe policy, the insurer 'is liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct or negligence of the master or crew'. The absence of an operational negligence defence is therefore clear, but the approach ro negligence as a causal factor requires reassessmenr against the modern approach to proximity of causarion. 51
11.34 The causal significance of negligence depends ultimately on rhe peril in issue. In

or crew; and this principle prevents many nice and difficult inquiries, and causes a ~ore complete indemnity to the assured, which is the object of the contract of lilsurance.

the context of a claim for a loss by perils of the sea, it is never sufficient to asserr that the vessel was lost because it sank; one has to enquire why it sank. Where a vessel is scuttled, the proximate cause is deliberate sinking, even if the immediate cause is an incursion of water. 52 If the answer is negligenr navigation, the modern law requires the negligence to feature as parr of the proximate cause in order ro provide the essential elemenr of fortuity. In contrast, the peril of fire is construed as covering all fires, whether starred accidenrally, negligently, or deliberately. Since the contract does not distinguish between different types of fire, the cause of the fire has no conrractual significance, the only causal question the contract asks is whether the loss or damage was caused by fire, and any negligence that gave rise to the insured peril of fire has no relevance in -the contractual context.
11.35 The better approach to modern insurance contracts, therefore, is that, depend-

This translated, in terms of legal principle, inro a trade-off between the requirement of seaworthiness of a vessel at the commencemenr of the voyage and the lack of a defence of operational negligence of the master and crew. In the modern conrext, however, the developmenr of the law of unseaworrhiness renders this trade-off largely illusory. Since the vast majority of vessels are insured under time policies, -in which context the insurers' unseaworthiness defence is largely impotent, the lack of any defence of operational negligence is better seen as a simple allocation of risk rather than as part of any realistic bargain of responsibility for seaworthiness in return for assumption of risk.

(b) Negligence as a coveredperil

Negligence may give rise to a casualty without the other causative factors consti- 11.37 tuting an insured peril. In such a case, the question is whether the negligence is itself a covered peril. Under the Inchmaree clause, cover is afforded against loss or damage caused by negligence of the master, officers, or crew of the insured vessel, a pilot, and repairers or charterers provided they are not an assured under the policy. Under the Additional Perils clause, however, cover may be exrended to include loss or damage'caused by any accident or by negligence, incompetence or error of judgment of any person whatsoever'. 54 The exclusion from cover under the Inchmaree clause of repairers and charterers 11.38 who are co-assureds reflects the wish of insurers to preserve the right to seek recoupment of moneys paid out by way of indemnification. By virtue of the doctrine of subrogation, the insurer can exercise the assured's legal rights against

ing on the definition of the relevant peril, negligence is either part of the insured peril or the peril operates irrespective of negligence. Against such analysis, the denial in section 55(2)(a) of any defence based on the negligence of the master and crew has no role independent of the definition of insured perils. Where negligent navigation causes the ship to collide with another object and sustain damage, the better modern analysis is not that the vessel sustained loss by an insured peril of the sea in the form of the collision and, thus, the insurer is liable, even though the insured peril would not have occurred but for operational negligence. The collision is not a peril of the sea in the first place unless it occurred fortuitously. The negligence supplies the fortuity and constitutes part of the operative peril. Operational negligence provides no defence, not because

" (1839) 5 M &W 405,415; Walker v Maitland (1821) 5 B & AId 171, 175.176; Shore v Bentall (1828) 7 B & C 798(b). See also Tilit v Levi (1811) 14 East 481 (breacb of implied
warranty that the master was reasonably competent for the insured adventure). 54 Institute Additional Perils Clauses-Hulls 0110/83 and 1/11/95), d 1.2; International Hull Clauses (01111/03). cl41.1.3.

so [189812 QB 114.123. " See Ch 9 above, esp 9.17-9.18. " SamuellP) & Co Ltd v Dumas [1924J AC 431. 448.

376

377

The Inchmaree Clause

third parries responsible for the loss. Subrogation is, however, unavailable where the third parry is a co-assured under the policy. 55 In such a case, therefore, cover is denied. Incorporation of rhe Addirional Perils clause would, however, override this exclusion.
11.39 Case law examples of the negligence peril in the Inchmaree clause are rare. In

Covered Perils under the Inchmaree Clause Donegal." Freight insured under a policy incorporating the Institute Voyage .Clauses Freight (1/8/89) was lost by reason of a major engine failure, the proximate cause of which was held to be the negligence of the master and engineering officers in dealing with problems associated with the vessel's turbocharger. Such negligence was a covered peril under the Inchmaree clause.
Where a dury ro exercise reasonable care to avert or minimize a loss is broken, 11.42 rhe negligent actor may be a parry specified in the Inchmaree clause. In such a case, provided rhe negligence can be properly characterized as the, or a, proximate cause of the loss, the assured can recover under the Inchmaree clause. The specific negligence cover prevails over the insurer's defence under any statutory or contractual duty to exercise reasonable care to avert or minimize 10ss.63 (3) Barratry of Masters, Officers, or Crew This peril covers any fraudulent or criminal conduct by the specified persons to 11.43 rhe prejudice of the owner of a ship. In particular, it embraces the scuttling of a vessel, an event excluded from perils of the sea.

The Lapwing," a vessel had been negligently berrhed. Hodson J held the
insurers to be liable for a loss caused by a peril of the sea, bur added that the claimant succeeded also under the Inchmaree clause in respecr of the loss caused by the master's negligence 'whether or not the damage was due to a marine peril'." In Lind v Mitchel!58 a vessel damaged by ice was set on fire in order to sink it and prevent it from becoming a danger to shipping. This action was held to be premature and negligent. The Courr ofAppeal held that the underwriters should pay for a loss by perils of the sea. The impact with ice was a forruirous event and the vessel was raking in warer and eventually sank because of the inflow ofwater. That the loss could have been prevented was rendered irrelevant by section 55(2)(a) of rhe Marine Insurance Act 1906, which required the courr ro disregard the negligence enrirely. Scrutton LJ, however, added as follows: S9 'Now if it were true-and I do not think it is-thar under the existing law bur for [the Inchmaree] clause you would treat the direct cause of the loss as being the premature abandonment and not the entry of sea warer from a previously existing peril, in my view that clause requires the underwriters to pay where the negligence of the master has caused the loss of the ship.'
11.40

(a) Prejudice
Barratry, by definition, can be committed only against an owner of rhe vessel: 64 11.44 'Barratry necessarily involves a damnification of the shipowner whether he or someone else is the person insured under the policy sued upon.'65 Consequently, a shipowner who is a parry to the fraud cannot recover under the heading of barratty, not only because of the insurer's wilful misconduct defence,66 but also because there has been no battatry. The position is the same where the maSter has acted on the instructions of the owner's agent. 67 The absence of the peril is fatal also to an innocent mortgagee that has insured its mortgagee's interest under a policy incorporating standard clauses for the insuring of hulls." The same point has been made in the context of old form cargo insurance:

As suggested above,'o the primary approach adopted is inconsistent with House

of Lords aurhoriry on rhe meaning of proximate cause. Secrion 55(2)(a) is no licence to disregard negligence where ir constitutes the proximate cause of loss. If the negligence of the master and crew between the ice and the sinking qualifies as ar least a proximate cause of loss, the question is whether a sinking caused by negligence is covered by the policy. However, the obiter dictum of Scrutton LJ does support a sphere of applicabiliry for the Inchmaree clause independent of enumerared marine perils."

62

Project Asia Line Inc v Shorle (The Pride ofDonegaO [20021 EWHC 24 (Comm), [2002J

11.41

A prime example of negligence as a covered peril is provided by The Pride of

1 Lloyd's Rep 659. paras 50-51.

ss See 25.27-25.35 below. 56 Baxendale v Fane (The Lapwing) [1940J P 112. ibid 123. 58 (1928) 45 TLR 54. 59 ibid 57. 60 See 11.33-11.35 above. 61 See also 7ttnner v Bennett (1825) Ry & Mood 182 (negligent act of the owner's agents constituted the proximate cause of a loss, albeit to break the chain of causation and exonerate the underwriters); Rosa v Insurance-eo a/the State o/Pennsylvania (The Belle o/Portugal) [1970] 2
S'

S'ate of'he Netherlands v Youeli [19981 I Lloyd's Rep 236. See further 24.19-24.24 below. Nutt v Bourdieu (1786) 1 TR 323; Shell International Petroleum Co Ltd v Gibbs (The Salem) [1983] 2 AC 375, 391. It cannot be committed against cargo owners: Rickards v Forestal Land, limber & Railways Co L,d [1940J 4 All ER 96. 6S Shell Interna'ionai Petroleum Co L,d v Gibbs (The Salem) [1982J QB 946, 959 per Mustill].
63

64

Lloyd's Rep 386 (skiff used for abandonillg ship damaged allegedly by negligence of the crew of the rescuing vessel); Capital Coastal Shipping Corp v Hartford Fire Insurance Co (The Cristie) [1975J 2 Uoyd's Rep 100 (claim that loss was caused by master's negligence<defeated by breach of
warranty).

" MIA 1906, S 55(2)(a), discussed at 15.lOffbeiow. 67 Hobbs v Hannam (1811) 3 Camp 93; Commercial Trading Co v Hartford Fire Insurance CO [1974J 1 L1oyd's Rep 179. 68 Scuttling is not a peril of the sea at common law: Samuel (P) 6- Co Ltd v Dumas [1924] AC 431, discussed at 10.16 above. The Institute and International hull clauses do not contain any contrary provision, but special Institute Mortgagees Interest Clauses Hulls (1/3/97) afford cover against scuttling provided the assured is not privy thereto. See also Shell International Petroleum Co Ltd v Gibbs (The Salem) [I9831 2 AC 375, 391 on the old Institute catgo clauses.

378

379

The Inchmaree Clause

Barratry is an act of fraud not directed against the owner of the goods which a.re lost, but a fraud against the owner of the ship; and, however innocent may be the owner of the goods, who seeks to recover against the underwriter, yet, if the owner of the ship concurs in the act which caused the loss. it takes from it the character of barratry; for the very definition of barratry is, a fraud by the master and mariners against the owner of the ship.69

Covered Perils under the Inchmaree Clause

of barratry. This issue of attribution of knowledge occurs in a number of contextS and is discussed elsewhere. 74 The conduct of a master who is the owner of the vessel cannot constitute 11.48 barratry, as one cannot commit a fraud upon oneself. Neverrheless, a master who is only a part-owner can perpetrate a fraud upon the other part-owners who can recover for barratry.75 Similarly, a conspiracy between the master and one part-owner can be barratrous as against the other owners. 76 An undelwriter who wishes to dispute a daim of loss by barratry on the basis of rhe master's ownership of the vessel must so prove; an assured claiming for barratry is not required to adduce evidence ofthe vessel's ownership. 77 That the master is also a supercargo is no bar to barratrous conduct. 78 The issue ofwho is an owner for the purposes of barratly has been raised also in 11.49 the contexr of mortgages and charterparties. As barratry is a breach of duty, it cannot, in general, be committed against a mortgagee because a master's obligations are owed to the owners, including the mortgagor, and not to the mortgagee whose interesr is entirely distinct from that of the mortgagor. Consequently, if the mortgagor is a party to the fraud, the mortgagee will be unable to recover for barratry. However, in Small v United Kingdom Marine Mutual Insurance Association," Small lent money to Wilkes, his son-in-law, in order that Wilkes might purchase a part share in a vessel and become its master, with Small taking a mortgage on the vessel. The Court ofAppeal held that the realiry of the arrangement was that Wilkes became captain for Small and the other co-owners with the consequence thar the subsequent scutrling of the vessel was barratrous as against Small. 80 With respect to charterparties, Schedule 1, rule 11 of the Marine Insurance 11.50 Act 1906 recognizes that barratry may be committed against a charterer, but it is dear from the case law that a complete transfer of dominion is required. Where there is a simple voyage contract fot the carriage of goods, the shipowner remains in control of the vessel, hiring out merely space on board (locatio operis vehendarum mercium). On the other hand, a charter by demise, or bareboat charter (locatio navis), involves the furnishing of hull, machinery, and

Today, however, a cargo owner can recover under the modern Institute Cargo Clauses (A) for loss of or damage to cargo caused by scuttling of the carrying vessel by its master or crew with the compliciry of the shipowner, since the cover is not confined to a list of specified perils including barratry and there is no relevant exclusion. 70
11.45

Bartatry is excluded by knowledge on the patt of the assured or its agent even in the absence of active consent to the relevant acts. In Grauds v Dearsley,71 Mrs Gtauds, the registeted owner ofa vessel, had a purely nominal interest while her husband exercised all effective control. When the vessel was scuttled on his instructions, it was held that the delegation of responsibiliry rendered his acts hers and that she could not tteat them as batratrous. Likewise, there will be no barratry where the master of a ship abandons a voyage in compliance with a government instruction, as the shipowner will be assumed to acquiesce in the master's acts. 72 cognate principle. In Pipon v Cope,73 a vessel was seized for smuggling on three successive voyages. According to Lord Ellenborough, this constituted 'a clear case of crassa negligentia on the part of the assured. It was the claimant's dUJY to have prevented these repeated acts of smuggling by the crew. By his neglecting to do so, and allowing the risk to be so monstrously enhanced, the underwriters are discharged'. The decision establishes that an assured that turns a Nelsonian blind eye to barratrous misconduct cannot found an insurance claim based on
such conduct, even in the absence of active condonation.

11.46 That failure to prevent barratry may also bar the assured from recovering is a

(b) Who is the owner?

11.47 A determination of whether the owner was complicit in the allegedly barratrous

act may require a consideration of whether the knowledge or conduct of an agent of the assured is to be attributed to the assured for the purposes of the peril
74 See 4.113-4.116 above. For an example in the context of barratry, see Cornpania Naviera Martiartu v Royal Exchange Assurance Corp [1923J 1 KB 650. 7S Jones v Nicholson (1854) 10 Exch 28. 76 ibid 37-8. 77 Ross 0 Hunter (1790) 4 TR 33. 78 Earle v Rowcroft (1806) 8 East 126. A supercargo is someone appointed by a cargo owner with complete authority, subject to express or implied restriction, regarding the cargo and everything concerning it: Davidson v Gwynne (1810) 12 East 381. 79 [189712QB311. 80 As there were twO innocent co~owners who could establish the barratry, it is unclear why it was important to ascertain Small's status as an owner for the purposes of barratry.

" Soares 0 Thornton (1817) 7 Taunt 627,639-40 per Gibbs q. See also Samuel (P) 6oCo Ltd v Dumas [19241 AC 431, 463-4:
70 On deliberate acts and all risks cover, see further 10.78 -above. " (1935) 51 LlLRep 203, 236. 72 Rickards 0 Forestal Land, 11mber & Railways Co [19421 AC 50, 80. 13 (1808) 1 Camp 434.

380

381

The Inchmaree Clause

equipment, leaving the charterer to crew and supply the ship of which the charterer is regarded as the owner pro hac vice. Today, all forms of charter in common mercantile use fall into the above two categories. However, a third, intermediate variant, namely a hiring of the vessel with master and crew (locatio navis et operarum magistrl), used also to be frequently employed. In this context, it was a question of fact whether the charterer had sufficient dominion ovet the vessel to be the owner pro hac vice for the purposes of barratry.
11.51

Covered Perils under the Inchmaree Clause

contract and held that the policy in issue meant the de iure government officially recognized by the United States. 84

(c) Fraudulent or criminal conduct

Not every breach of duty by the master that prejudices the shipowner consti- 11.54 tutes barratry. There must be fraud or criminality: 'The innocent violation ... of a blockade or of any law, does not amount to [bartatrous] misconduct; there must be some wrong act done.''' The master must breach his obligations 'with
that perverseness required to satisfy the ancient characterization of criminal

In Soares v Thornton," the charterparty gave the shipowner the right to put goods on board for part of the voyage should the charterer not load a full cargo. The charterer, however, filled the vessel, as a result of which the shipowner was precluded from loading any goods and the charterer had the right to require the vessel to proceed free of interference to the POrt of destinarion. Consequently, the subsequent conspiracy of the shipowner and master wilfully to run the ship ashore was held to constitute barratty. law ofbarrarry be shackled by commercial practices of previous centuries. Modern practice may result in a form of charterparty not conferring the same degree of dominion as previously. The intermediate form of charterparty developed out of a desire for the charterer to have immediate control over his goods without the responsibility of a demise charter. Today, vastly improved communications enable the charterer to exercise the same degree of control without the previous direct authority over the vessel. Although the charterer may give orders to the
master, such instructions 'are essentially directed to the owner, not the master.

barratty'.86 Accordingly, in the absence of rebuttal evidence, there is no barratry where the master of a vessel seized in a blockade ZOne claims to have been driven into the zone against his will by force of weather. 87 In Bottomley v Bovil!," Abbott CJ instructed the juty that a 'mere mistake by the captain as to the meaning of his instructions, or a misapprehension of the best mode of acting under the instructions and carrying them into effect, would not amount to
barratry'.

11.52 However, in The Salem," Mustill] refused to let the operation of the modern

The charterer avails himself of a contractual liberty to insrruct the shipowner's captain what to do. The latter nevertheless remains the shipowner's captain, not the charterer's; and his duty to comply with the charterer's instructions is owed to the shipowner alone'." Consequently, while the underlying legal principle remains that a charterer may be an owner pro hac vice, such classification is today highly unlikely unless the charter is by demise.
11.53 Public law issues can also impinge on the question of ownership. A decree of

Deviation from the voyage contemplated by a voyage policy is always against the 11.55 interest of an insured shipowner as the insurer's liability will automatically be prospectively discharged." However, unless the deviation be fraudulent, there is no barratry.90 In Roscow v Corson,91 a vessel on a voyage from St Petersburgh to Liverpool artived at Yarmouth on 15 October in need of repairs. These were completed by 25 December, but the captain had gone to see his family in Ireland, where he stayed until February. Eventually the ship sailed again on 13 March, but the master fraudulently deviated from the original course and sailed to the Azores. The insurers argued that, although this deviation constituted bartatry, they were already discharged by virtue of the deviation, in the form of delay, at Yarmourh. The jury, however, found that this delay also constituted barratry, a finding held to be sustained by evidence that the deviation to the Azores was prepared and effectively commenced during the stay in Ireland. The insurers were therefore liable. According to Richardson ]: 'The detention at

nationalization or a change of government can lead to the question of whether the owner of the vessel is the old or new regime. Faced with the question of whether the regime in Taiwan or Beijing was the government of China, a United States court observed that the matter was essentially one of interpretation of the

84

Republic a/China v National Union Fire Insurance Co o/Pittsburgh (The Hai Hsuan) (1958] 1

Lloyd's Rep 351.

85 Australasian Insurance Co v Jackson (1875) 33 LTNS 286, 287 per Martin C] (Supreme Court ofNSW); Bradftrd v Levy (1825) Ry & Mood 331. 86 Commercial Irading Co v Hartford Fire Insurance Co [1974] 1 Lloyd's Rep 179, 182 per Brown Cj (US Court of Appeals 5th Circuit) (delivery of goods in absence of bills oflading not barratry in the absence of any criminal intent to defraud the shipowners).

87

Everth v Hannam (I815) 6 Taunt 375.

(1817)7 Taunt 627. See also vallejo v Wheeler (1774) 1 Cowp 143: Ross v Hunter (1790) 4 TR 33, 38. " ShellInternalional Petroleum Co Ltd v Gibbs (The Salem) [1982] QB 946, 959-65.
S1

" ibid 964.

(1826) 5 B & C 210, 212. 89 MIA 1906, s 46(1). Stamma v Brown (1743) 2 S" 1173; Phyn v Royal Exchange Assurance Co (1798) 7 TR 505: Earle v Rowcroji(1806) 8 East 126, 139. " (1819) 8 Taunt 684.
88
90

382

383

The Inchmaree Clause

Yarmouth, if done in the prosecution of a batratrous act, is part of the barratry, for which the underwriters are liable, and is not a deviation for which they are excused. 192
11.56 Barratry can arise in the absence of fraud on the shipowner where the master's

':'.- Cot/eret!: Perils'iinaer<ihe,'Inchmaree Clause i"" ".-. ........ -,:, ;:; {; i'i '
sufficient evide e of barratry to go t~ t~e!1ti.t:'T~erF i~ i:wt'gnant evidence that Brockson was c ncerned with the pri'crner?'gg, ,,"' c,"' ,J
"",~-=.== .... --e".-_=_=-,-...,,,,,,"==~...,,,,,,,'="'''"._')'''==----='''''''''''''''''''''''''~'''''"e="'~="",="""CC="'~';-":-:'-:-""":',-,:~;.',

(e) Causation
conduct is flagrantly illegal. In the leading case of Earle v Rowcroft,93 the master traded knowingly with the enemy, bur, it was argued, in the belief that he was furthering his owner's best interests (in other words, his acts were criminal but not fraudulent). Lord Ellenborough had no hesitation in classifYing the master's acts as barratrous:
to judge in cases not intrusted to his discretion, or to suppose that he is not breaking the trust reposed in him, but acting meritori~:)llsly, when he endeavours to advance the interest of his owners by means which the law forbids,

.. . it is not for him

and which his owners also must be taken to have forbidden, not only from what
ought to be, and therefore must be presumed to have been, their own sense of

In Cory & Sons v Burr,'O a barratrous act of the master of the insured vessel 11.58 (smuggling) caused it to be seized by the Spanish revenue authorities. The assured sought to tecover expenses incurred in obtaining the release of the vessel. The policy covered marine risks, including barratly, bur an FC&S clause excluded losses caused by seizure. It was argued that the proximate cause of the loss was barratry and that the FC&S clause excluded only losses proximately caused by seizure. The House of Lords held in favour of the underwriters. The decision must be correct. Clearly the FC&S clause extracted from the policy some of the coverage prima fide conferred. The reason why the vessel was seized was because of the barratry, which in the light of the modern approach to
proximity of causation,101 must be viewed as at least a proximate cause of the

public duty, but also from a consideration of the risk and loss likely to follow from
the use of such means.
94

Likewise, the requisite culpabiliry seems to have been assumed in early cases concerning barratry by leaving port either withour leave in breach of an embargo" or without paying port fees for which the master was responsible. 96
(d) Barratry ofmariners
11.57 Few reported instances of barratry involve mariners acting independently of the

loss. However, withour the seizure there would have been no loss. Consequently, the exclusion clause then operated to protect the underwriters. Such was the reasoning of Lord Blackburn, holding that both barratry and seizure wete proximate causes. Two members of the House 102 stated, however, that seizure was the

master. However, not only is the crew legally capable of committing barratry unaided," but just one crew member can give rise to the peril. In Hucks v Thornton," Spanish prisoners took over a ship, put ashore the master and all crew members except one (a man named Brockson), and escaped with the vessel. The assured claimed for a loss by barratry. Gibbs CJ ruled tha~ there was

sole proximate cause. Theit remarks must be put in the context of rhe policy as a whole, namely that it was the clear intention of the parties that the underwriters should not be liable for losses caused by seizute, and a seizure, albeit one triggered by barratry, had caused the losses. Nevertheless, Lord Fitzgerald emphatically held the cause of the loss to be seizure alone. He reasoned as follows: 'The barratry created a liabiliry to forfeirure or confiscation, but might in itself be quite harmless; bur the seizure, which was the effecrive act towards confiscation, and the direct and immediate cause of the loss, was not because the act of the master was an act of barratry but that it was a violation of the revenue laws of Spain.'103 Such an approach cannot be sustained. The master's criminal act in violating 11.59 Spanish revenue laws to the prejudice of the shipowner was a blatant instance of barratry. That criminal and barratrous act was clearly a proximate cause of the loss. In the absence of a seizure exclusion, it is not credible that the assured would have been denied recovery for a loss by barratry. Although the seizure was an essential addition to produce the loss, it cannot be viewed as breaking the

ibid 688, and see MIA 1906, s 49(1)(g), Where a voyage is illicitly interrupted in order to pursue the master's own interests, there is barratry from the moment the anchor is dropped: Ross v Hunter (1790) 4 TR 33. It is irrelevant that the master may intend to benefit both himself and the shipowner, Moss v Byrom (1795) 6 TR 379, 93 (1806) 8 East 126. " ibid 139. 95 Robertson v Ewer (1786) 1 TR 127. 96 Knight v Cambridge (1724), cited in Stamma v Brown (1743) 2 Str 1173. An extreme contrast is provided by TOdd v Ritchie (1816) 1 Stark 240, where the master broke the vessel's ceiling and end bows in order to ensure condemnation. Lord Ellenborough held, however, that: 'In order to constitute barratry, which is a crime,the captain must be proved to have acted against his better judgment; as the case stands, there is a whole ocean between you and barratry.' Presumably no evidence had been adduced as to the master's intentions and the court was not prepared to draw any inference. The decision is quer~ed by Arnould, Law ofMarine Insurance and Average Sit Michael Mustill and J Gilman (Eds) (16th edn, 1981) pata 8ll, n 25. 97 lOulmin v Inglis (1808) 1 Camp 421 (mutiny of part of the crew). 98 (1815) Holt 30.
92

ibid 33. 100 (1883) 8 App Cas 393. 101 See Ch 9 above. Lords Bramwell and Fitzgerald. The Earl of Selborne did not address the question of whether barratry could be viewed on the facts as a proximate cause, 103 (1883) 8 App Cas 393, 406.
99
102

384

385

The Inchmaree Clause

chain of causation. Thus, in Goldschmidt v Whitmore,104 where a vessel was captured by an enemy warship while trying barratrously to run a blockade, Lord Mansfield had no hesitation in finding that the loss was caused by barratry.'os If seizure was the sole proximare cause of the loss in Cory v Burr, then the proximate cause of criminals being imprisoned is their arrest by the police rather than their commission of the crimes for which they are imprisoned.

Covered Perils under the Inchmaree Clause

prove one element of the peril alleged to be the proximate cause of the loss. In The Zinovia,108 Bingham J stated persuasively that:
To succeed in a claim for loss by any insured peril, it is necessary for an owner to prove the loss and its causation by that peril. In barratry this would involve him proving a deliberate casting away and the absence of consent on his parr. In the absence of suspicious' circumstances, lack of consent might readily be inferred, and very little in the way of proof might be necessary, but it would still seem to me wrong in principle that the onus should be laid on underwriters of disproving an essential ingredient of the owner's claim.

(j) Burden ofproof

11.60 The issue of burden of proof in the context of barratry is rendered problematic

by the fact that rhe definirion ofrhe peril places in issue a marrer that is generally for the insurer to raise and prove by way of defence. There is no doubt that the burden of proof lies on the assured to demonstrate that rhe loss of or damage to the insured vessel was caused by fraudulent or criminal conduct of the master or crew. lO' However, barratry also requires absence of compliciry of the shipowner. Assuming that the assured is the shipowner, which is genetally the case in modern named perils insurance that covets barratly, complicity of the assured in procuring the casualty prevents barratry from occurring. While such complicity creates a general barrier on recovery, it normally does so through the defence of wilful misconduct, in respect of which the burden of proof falls on the insurer. This raises the question of whether the inclusion in the definition of barratty of the shipowner's involvement in the casualty places instead a burden on the assured to adduce evidence of the shipownet's lack of complicity.
11.61

In Issaias (Elfie A) v Marine Insurance Co,'o, the only issue was whethet the ownet was complicit in the scuttling of the insuted vessel by the mastet. The Courr of Appeal held unequivocally that the insurets bore the onus of proving that the loss was not to the prejudice of the owner by virtue of rhe owner's connivance. The allegation of complicity was a criminal accusation, albeit in a civil context, and the assured was entitled to the presumption of innocence.

11.62

Issaias has attracted little acclaim in dispensing the assured from the need

to

It is suggested that rhe concerns of the Court ofAppeal in Issaias are predicated 11.63 on a false assumption. Pursuing a claim on an insurance policy in respect of loss of or damage to the insured vessel in which the assured is complicit is admittedly a criminal matter. However, a finding by a court that a shipowner's innocence has not been established on a balance of probabilities in litigation to which the shipowner may not be a party'o, is far removed from a finding beyond reasonable doubt that an owner was guilty of connivance in a scuttling. Moreover, the fact that the complicity of the assured is a matter usually raised by way of defence is insufficient of itself to justify dispensing the assured from bearing the burden of proving an elemenr in the definition of the insured peril. Ordinary wear and tear is also a matter normally for the insurer to raise by way of defence. Where, however, the peril in question excludes loss by ordinary wear and tear as part of its definition, it is accepted that the evidence adduced by the assured must enable the court to discount any likelihood of ordinary wear and tear constituting the proximate cause of the loss. 11 0 It is, accordingly, submitted rhat the assured should bear the burden of proof with regard to all components of the peril of barratry as with any other. It is, nevertheless, irrefutable that, as a resuIt of Issaias, ir is 'impossible for any Court below the House of Lords to conclude that where it is common ground . .. that a stranding was caused by a deliberate act, the onus of proving an absence of consent or connivance rests on the owners' ,111 Moreover, where the insurer

1(l4

(1811) 3 Taunt 508. The question was not raised whether the loss was proximately caused

by barratry alone or in combination with capture.

105 In Atlantic Maritime Co Inc v Gibbon [1954] 1 QB 88 the act of a Chinese warship during the Chinese civil war constituted a restraint of princes resulting in a loss of voyage. The policy excluded such losses and the Court of Appeal held, clearly correctly, that the assured could not evade the exclusion by relying on the peril of civil war rather than restraint. However, Lord Evershed MR, relying on Cory v Burr, stated that, even in the absence of the exclusion, the assured could not have recovered fora loss by civil war (at 118-21). Sed quaere. The facts constituting the proximate cause of a loss may be susceptible of classification as both civil war and restraint. Where one is excluded, it is clearly right that the exclusion shall prevail, but that result should not deny the proximate cause status of the other: see the judgment of Morris L] at 137-8. 106 Compania NavieraMartiartu v Royal ExchangeAssurance Corp [1923]YKB 650. '" (1923) 15 LlLRep 186.

108 Michelos (M) & Sons Maritime SA v Prudential Assurance Co Ltd (The Zinovia) [1984] 2 Lloyd's Rep 264, 272. See also Piermay Shipping Co SA v Chester (The Michael) [1979] 1 Lloyd's Rep 55, 66-7; Continental Illinois National Bank & Trust Co ofChicago v Alliance Assurance Co Ltd (The Captain Panagos DP) (No 2) [1986] 2 Lloyd's Rep 470. 511. 109 Because the shipowner may not be the assured. 110 See 10.05 above. 111 Continental Illinois National Bank & Trust Co ofChicago v Alflance Assurance Co Ltd (The Captain Panagos DP) (No 2) [1989] 1 Lloyd's Rep 33, 40 (CA). See also Micheli" (M) & Sons Maritime SA v Prudential Assurance Co Ltd (The Zinovia) [1984] 2 Lloyd's Rep 264, 272; Houghton (RA) & Mancon Ltd v SunderfarJd Marine Mutual Imurance Co Ltd (The Ny~Eeasteyr) [1988] 1 Lloyd's Rep 60; National justice Campania Naviera SA v Prudential Assurance Co Ltd (The lkarian Ree.ftr) [1993] 2 Lloyd's Rep 68. An attempt by Kerr J at first instance in The Michael to 'explain' Issaiaswas clearly regarded on appeal asunconvincing ([1979] 2 Lloyd's Rep 1, 13)

and has not been relied upon since.

386

387

The Inchmaree Clause

alleges complicity, a standard of proof commensurate to the gravity of the allegation will be required.'12

The Due Diligence Proviso

Conversely, the 1995 Institute war and strikes clauses for hulls provide cover against 'loss of or damage to the Vessel caused by ... any person acting maliciously', provided the loss is not covered under the Institute Time Clauses Hulls (1/11195), amended to provide four-fourrhs collision liability cover and to delete any deductible.'15 Since a barratrous act will qualifY as malicious,'16 it follows that, whete the master or crew employ a weapon or an explosive to destroy or damage the vessel, the resulting loss will be excluded under the International Hull Clauses (01111103) a~d will fall instead within the war and strikes cover. 117

(g) Proofofcomplicity
11.64 The burden of proof currently placed on the insurer to prove the complicity of the owner may be difficult to discharge, although it does not require proof of parricipation in planning, srillless direction of, the operational aspects of the casualty occasioning the loss of or damage to the insured vessel. In The Captain Panagos DP (No 2), '13 Evans J stated as follows:
.. . any tendency to infer the owner's connivance from the mere fact that a casualty was deliberately caused must be resisted, even when there is no reason for supposing barratry. The allegation of connivance must be proved in the circumstances of the particular case. This requires proof of a connection between the owner and the
loss, or those persons who were directly responsible for it, which amounts to

B. The Due Diligence Proviso

The distinguishing characteristic of the cover provided by the Inchmaree clause, 11.66 as opposed to that provided in respect of the maritime perils considered in Chapter 10 above, is that it is subject to a due diligence proviso. If the loss or damage occasioned by an insured peril under the Inchmaree clause is the result of the 'want of due diligence' of specified persons, the insurer is not liable. The range of specified persons has proved controversial. Under the 1983 Insti- 11.67 tute hulls and freight clauses, the relevant lack of due diligence is that of the assured, owners, and managers. However, under the 1995 Institute clauses, pursuant to the desire to exclude liability in respect ofloss or damage attributable to the failure properly to maintain and equip vessels, the range of persons whose lack of due diligence would provide a defence was extended to include supetintendents and onshore management. This proved commercially unacceptable and the 1995 clauses have seldom, if ever, been incorporated without the reference to superintendents and onshore management being deleted. Under the International Hull Clauses (01111102), the due diligence proviso was restored to the 1983 wotding, and this remains the position under the 2003 clauses. A 'want of due diligence' is negligence. Under the Inchmaree clause, therefore, 11.68 insurers provide covet against the consequences of various types of machinery damage and damage occasioned by various types of human fault, but not where the loss, although prima ficie within the scope of the Inchmaree clause, results

connivance on his part.

In my judgment however it does not follow from this that the [insurers] must prove, by inference or otherwise, that there was a detailed plan, or any plan to

which the owner was party, for the method by which the desired loss was to be achieved. The barest signifying of assent by the owner could suffice, even if the
operation is conceived, planned and executed

by others, who mayor may not be

known to the owner himself The difficulty for the [insurers] is not so much that
the plan cannot be inferred but that the owner's connection with it may consist of
a limited number of communications, the occasion and nature of which are
to

likely

be inherently difficult to identifY and prove. Once assent is given, the owner himself need not necessarily know when, or even definitely whether, the operation is to take place.

(h) Relationship with war and strikes cover

11.65 The cover provided under the International Hulls Clauses (01/ 11 /03) is subject to three exclusion clauses stated to have paramount effect. These include an exclusion ofany 'loss, damage, liability or expense arising from ... the use ofany weapon or the detonation of an explosive by any person acting maliciously'.'14

See the discussion of the wilful misconduct defence at 15.18 below. Continental Illinois National Bank & Trust Co a/Chicago v Alliance Assurance Co Ltd (The Captain Panagos DP) (No 2) (1986] 2 Lloyd's Rep 470, 501. Likewise in Piermay Shipping Co SA v Chester (The MichaeO (1979] 1 Lloyd's Rep 55. Kerr J stated as follows (at 66): 'It is cleat that consent or privity can range from active complicity to mere passive connivance. An owner who makes it elear that he would like to see his ship at the bottom of the sea, but does not want to know any more about it, is privy to its sinking in just the same way as Henry II was privy to the murder of Thomas aBecket when he said: "Will no one rid me of this turbulent priest?" Even if the suggestion of scuttling comes from someone else and the owner implies consent by saying nothing against it, he would be privy and couldnot say that the act was "to his prejudice".' See also proofof wilful misconduct at 15.19ffbelow. '14 International Hull Clauses (01/11/03). c130.3.
112
113

\IS eg Institute War and Strikes Clauses (Hulls-Time), ell 1.5, 5,3, This could of course be amended to refer to the International Hull Clauses (01111/03), 116 For the meaning of 'malice' in this context, see 14,23-14,27 below. 117 This appears to have been overlooked in North Star Shipping Ltd v Sphere Drake Insurance pic (2005] EWHC 665 (Camm), (2005] 2 Lloyd's Rep 76, patas 82-83, in which the insured vessel was rendered a total loss by explosion. See further 15.78-15.79 below.

388

389

The Inchmaree Clause

from negligence on the part ofthe assured, owners, or managers. In the Canadian case of The Brentwood, 118 a claim under the Inchmaree clause for loss caused by negligent loading on the part of the master was unsuccessful because the assured had failed to provide adequate loading instructions regarding the stability of the vessel.
11.69 Cover against the negligence of the persons occupying certain roles but subject

Cover Provided under the Inchmaree Clause and in Respect ofMaritime Perils
was expressed rhat the lattet approach was correct, although no basis for that characterization was articulated. In the context of contracts of affreightment subject to the Hague or Hague- 11.72 Visby Rules, a carrier's obligation to exercise due diligence to make the ship seaworthy is broken by negligence on the part of not only the carrier but also any other person, including an independent contractor, to whom is delegated the task of maintaining or restoring the seaworthiness of the vessel. The obligation is personal to the carrier and is not discharged merely by exercising reasonable care in selecting persons to whom the seaworthiness of the vessel is entrusted.'" The Inchmaree clause indirectly adopts the same approach with respect to latent defects. Vessels are required to undergo a variety of periodic inspections. Consequently, shipowners enter theit vessels with a classification society, to which is delegated the task of carrying out the inspections. If a surveyor negligently fails to notice a defect, it will not qualifY as latent. It will not avail the assured that due diligence was exercised in the choice of classification society. In this context, therefore, the exercise of due diligence is nondelegable. However, in the context of the perils of negligence insured under the Inchmaree clause, the position is obviously different. Since negligence of the specified persons is itself a covered peril, it cannot be attributed to the assured so as to give rise to a defence under the due diligence proviso.

to the exercise of due diligence by persons occupying certain other roles raises the question of how the Inchmaree clause responds to a person who occupies roles in both categories, for example an owner who is also the master. In such a case, it is necessaty to determine the capacity in which that person is acting when the relevant negligence occurs. In Holm v Rice, 119 the assured was both the owner and master of the insured yacht, which broke down during a voyage and had to be left moored in a port of refuge. The assured negligently left an exhaust port open and two weeks later the yacht sank by reason of ingress of water through the open port. The Supreme Court of British Columbia held that the assured was acting qua master when negligently leaving open the port. However, it was incumbent upon the assured qua owner to have the yacht inspected by a competent person within a reasonable time, which on the facts was about three days. Failure to do so constituted negligence qua owner. Had such an inspection occurred, the yacht would not have sunk. There was, therefore, an operative failure of due diligence under the proviso.
11.70 Dual status as 'owners' for the purposes of the due diligence proviso does not

accrue to the master or to officers, crew, or pilots merely because they hold some shares in the insured vesse1. 120
11.71 The burden of ptoof in respect of the due diligence proviso has, yet to be

C. Relationship Between the Cover Provided under the Inchmaree Clause and that Provided in Respect of Maritime Perils
Where a casualty gives rise to a claim under either the Inchmaree clause or a 11.73 maritime peril not subject to the due diligence proviso, the assured is entitled to hold the insurer to either part of the bargain. Thus, where negligent navigation by the master results in the loss of the iusured vessel in a collision, the proximate cause of the loss may correctly be regatded as either a peril of the sea or the negligence of the master. If the master has a history of negligent navigation of which a reasonably prudent employer should have been aware, the assured's lack of due diligence in appointing that person as master of the insured vessel would defeat a claim under the Inchmaree clause but not a claim for loss by a peril of the sea. 124 In similar vein, a barratrous fire is still a fite, so that should a vessel be

resolved. This depends on the correct characterization of the proviso. If it constitutes an exclusion from the scope of cover, it will fall to insurers to prove a causally relevant failure of due diligence. If, however, the proviso is properly regarded as patt of the definition of each of the petils insured under the Inchmaree clause, the onus will lie on the assured to demonstrate on a balance of probabilities that the loss did not result from a failure of due diligence on the part of any relevant person. ," At first instance in The Brentwood, 122 the view

118 Coast Ferries Ltd v Century Insurance Co afCanada (The Brentwood) [1975] 2 SCR 477,48 DLR (3d) 310 (Supreme CouttofCanada), affg [1973] 2 Lloyd's Rep 232 (Court of Appeal of British Columbia), 119 (1981) 124 DLR (3d) 463 (Supreme Court of Brirish Columbia). 120 International Hull Clauses (01111103), el2.5-, 121 See 7.59 above. m (1971) 23 DLR (3d) 226, para 25 (Supreme COUrt of British Columbia).

Riverstone Meat Co Pty Ltd v Lancashire Shipping Co (The Muncaster Castle) [1961] AC 807. An incompetent master would render a vessel unseaworthy but the fact of unseaworthiness does not of itself provide insurers with a defence under time policies, under which most vessels are today insured, see 19.30ff below.
123
124

390

391

The Inchmaree Clause

lost by teason of a fite started by a ctew membet with a history of pyromania of which a teasonably prudent employer should have been aware, the assured will still be able to recover under the peril of fire, albeit that a claim for loss by barratry will be barred because of a lack of due diligence.'"

12
COLLISION AND CONTACT LOSSES

125 Continental Illinois National Bank 6- Trust Co of Chicago v Alliance Assurance Co Ltd (The Captain Panagos DP) (No 2) [19861 2 Lloyd's Rep 470, 510-11, [1989] I Lloyd's Rep 33, 41.

A. Loss of or Damage to the

Subject-matter Insured
(1) Contact

(4) Cargo insurance

12.02 12.03 12.04 12.06

12.08 12.09 12.10

B. Third Party Liability

(1) CoIlisionliabiliry under hull

(2) Aircraft, helicopters, and satellites (3) Accidents in cargo handling

policies (2) Collision liability under cargo insurance

12.23

Contact between the insured vessel under a hull policy, or the freight-earning 12.01 vessel under a freight policy, and anothet vessel or structure may produce two distinct rypes of loss. The subject-matter insured may be lost or damaged and third party liability may result.

A. Loss of or Damage to the Subject-matter Insured

For the purposes of the hulls and freight clauses, a fortuirous collision or coming 12.02 into contact of a matitime nature is a peril of the sea,' although consequential loss beyond the cost of repairs would not be viewed as caused by the collision.' In addition, the market clauses also include cover against loss of or damage to the insured property caused by 'contact' with a range of items that has vatied slightly from revision to revision. The Internarional Hull Clauses (01111103), for example, also specifY as a named peril'contact with land conveyance, dock or harbour equipment or installation' and 'contact with satellites, aircraft, helicopters at similar objects, or objects falling therefrom'.' Such contact is an insured peril regardless ofwhether it is fortuitous or has a maritime nature in the

Thomas Wilson, Sons 6- Co v Owners ofthe Cargo per the X4ntho (The Xantho) (1887) 12 App

Cas 503.

, Shetbourne 6- Co v Law Investment 6- Insurance Corp [J 898] 2 , c112.1.6,2.1.9.

QB 626.

392

393

Collision and Contact Losses

sense in which those two requirements are understood in the context of perils of the sea. Thus, contact with harbour equipment deliberately induced by those in charge of an insured vessel would not be fortuitous for the purposes of a peril of the sea,' but would be insured under the contact cover. Collision and contact damage may also be incurred in the context of cargo, fuel, and stores handling operations, which are the subject of specific provision. (1) Contact
12.03 The meaning of the term 'contact' was considered in The Nassau Bay.' Ammu-

Loss ofor Damage to the Subject-matter Insured

'aircraft' and the teturn of the contact perils provision to the list of matine tisks.'o Nevertheless, by virtue of clause 37, that the engaging of helicopters did not prejudice cover was subject to the proviso that helicopter operations were
'carried out in accordance with the recommendations and procedures contained

nition was sucked up by a dredger and exploded in the discharge pipe. Refusing to ascribe a limited meaning to the word 'contact', Walton J stated that' 'the mere fact that the typical case of contact is an external contact appears to me to be neither here nor there ... In many types of mine the vessel never actually hirs anything: rhe mine explodes acoustically or electrically ... The precise nature of the "contact" is therefore a matter of some difficulty, but nobody doubts that it has taken place'. (2) Aircraft, Helicopters, and Satellites
12.04 The matine tisks in the Institute hulls and freight clauses of the 1980s included

in the International Chamber of Shipping "Guide to HelicopterlShip Operations" dated May 1989 and any modification thereof. Most recently, however, the International Hull Clauses (01/11103) retained the expanded contact provision in the list of marine tisks but omitted any equivalent to clause 37. In consequence, no distinction is drawn under the 2003 clauses between loss of or damage to the insured vessel depending upon whether the cause is contact with a satellite Ot aircraft or object falling therefrom on the one hand, or with a helicopter or object falling therefrom on the other. Underwriters will always be liable unless they can establish a defence unconnected to the nature or origin of the item with which the vessel has come into contact, such as wilful misconduct
of the assured or unseaworthiness.

(3) Accidents in Cargo Handling The Institute hull clauses include in the list of covered perils loss ofor damage to 12.06 the insured vessel caused by 'accidents in loading discharging or shifting cargo or fuel'. In the 1983 clauses, this element of cover is subject to the due diligence proviso as part of the Inchmaree clause, while in the 1995 clauses it ranks as a marine peril not so subject." Under the International hull clauses, cover is extended to 'stores and parts' and remains in rhe list of marine perils." The damage covered under this heading is of broadly rwo types. First, there is 12.07 loss or damage to the vessel caused by the cargo, fuel, stores, or parts being dropped, escaping, or being mishandled. Whether an accident causing such loss or damage qualifies as a peril of the sea depends upon whether it possesses the
requisite maritime nature.

'contact with aircraft or similar objects or objects falling therefrom'.' Successive revisions of the market clauses have seen this cover extended and qualifications to cover introduced, modified, or reduced.
12.05 A reference to helicopters was first introduced in the 1995 clauses, recognizing

their common employment in the transportation of people and equipmen~ to and from vessels. The 1995 clauses saw 'helicopters' added to this provision immediately after 'aircraft' and the addition of a provision that 'rhe practice of engaging helicopters fot the rransportation of personnel, supplies and equipment to andlor from the Vessel shall nor prejudice this ins11rance'.' However, protection against imprudent use of helicopters was afforded by moving the contact perils provision to rhe Inchmaree clause where it was subject to the due diligence proviso.' The International Hull Clauses (01/11/02) saw the scope of cover broadened further by the addition of 'satellites' immediately befote

It is not, however, satisfactory from a shipowner's

, Samuel (P) 6- Co Ltd v Dumas [1924] AC 431, discussed at 10.16 above. Of course, if those in charge of the vessel were acting at the behest of the assured shipowner, the insurers would have the defence of wilful misconduct of the assured. S Costain-Blankevoort (UK) Dredging Co Ltd v Davenport (The Nassau Bay) 11979] I Lloyd's Rep 395. On the facts, the loss would today fall within war risks cover. 6 ibid 406. 7 eg Institute Time Clauses Hulls (1110183), d 6.1.7. , eg Institute Time Clauses Hulls (IilOI83), d 1$. 9 eg Institute Time Clauses Hulls (lIIli95), d 6.2.5.

perspective for cover to depend upon such a distinction. Secondly, the insured vessel may be damaged by collision or contact with other craft employed in loading, discharging, and shifting operations. For example, where the insured vessel is too latge to enrer the port of destination, dischatge will necessitate transhipment into smaller vessels, which may come into contact with and damage the insured vessel. Collision or contact loss or damage so occasioned should qualifY as caused by a peril of the sea, but the question need not be asked since it is cleatly caused by a cargo handling accident. Transhipment of cargo at sea

--_._--11

" International Hull Clauses (OIilli02), c12.1.9. Institute Time Clauses Hulls (1110183), c16.2.I; (1111195), c16.1.8. " International Hull Clauses (0Iilli03), c12.1.8.

394

395

Collision and Contact Losses

pursuant to normal trading operarions, as opposed to emergency operations, would in principle be similarly covered, but is specifically excluded under the Institute and Internarional hull clauses in the absence of prior agreement with insurers. 13
(4) Cargo Insurance

Third Party Liability

independent from the property cover conferred in respect of marine perils and under the Inchmaree clause. 20

(l) Collision Liability under Hull Policies

Clause 6.1 of the Internarional Hull Clauses (01/11/03)21 provides as follows:
The Undcrvvriters agree to indemnifY the Assured for ,three-fourths of any sum or sums paid by the Assured to any othe~2 person or persons by reason of the Assured

12.10

12.08 In the context of cargo insurance, collision or contact liability falls within the 'all risks' cover of the Cargo Clauses (A) as not being excluded, while clause 1.1.4 of rhe Cargo Clauses (B) and (C) specifies as a covered peril 'collision or contact of vessel craft or conveyance with any external objecr other than water'. In Union Marine Insurance Co v Borwick,'4 Mathew J rejected an argument that a 'collision' necessarily involved the upper works of a vessel srriking a foreign body as opposed merely to running aground. Although ultimately the matrer is always one of interpretation of the particular policy, 'any external object' would seem to embrace even ordinary natural objecrs in their natural places.'s 'Collision with water', which is not covered, has been said to embrace 'contact with a heavy wave or with a tidal bore or something of that kind' ." Although ice is but frozen water, it is suggested that it would rank as an object rather than water for the purposes of this peri!."

becoming legally liable by way of damages for

6.1.1 loss of or damage to any other vessel or property thereon 6.1.2 delay to or loss of use of any such other vessel or property thereon 6.1.3 general average of, salvage of, or salvage under contract of, any such other vessel or property thereon, where such payment by the Assured is in consequence of the insured vessel coming into collision with any other vesseL

(a) 'Legally liable by way ofdamages'

The reference to the incurring oflegalliability confines the underwriter's liability 12.11 under this collision clause to indemnification of 'payments the obligation to make which arises from a fault of some kind on the part of the ship insured'." In Furness, Withy & Co Ltd v Duder,24 Branson J held that underwriters were liable under the collision clause ouly in respect of torrious damages payable to third parties. In consequence, no liability lay in respect of money paid pursuant to an assumption of risk in a contract of towage by the assured shipowner regardless of fault. In Hall Bros 55 Co Ltd v Young,2S the insured vessel was involved in a collision with a pilot boat for which the vessel was blameless. Nevertheless, under French law it became liable to pay for the damage to the pilot boat. Holding that the underwriters were not liable, the Court of Appeal held that where the liability arises under a foreign law, the act generating the liabiliry need not 'necessatily be tortious by English law, but it must be at any rate of that character'.2. Moreover, MacKinnon LJ held that the phrase 'in consequence of' required the collision to be the proximate cause of the damages liability." This provided an alternative defence for the underwriters as the cause of the liabiliry lay iu French statute law rather than the collision.

B. Third Party Liability

12.09 In De Vtlux v Salvador,18 both vessels involved in a collision were to blame. Under an old Admiralty mle, the losses of the two ships were aggregated and divided equally between them." The insured vessel had done mot.e damage than it had sustained, and the balance of half the aggregate loss was paid over. An action to recover that sum from the underwriters as a loss by perils of the sea failed, as the proximate cause of that loss was the Admiralry rule. As a consequence of this decision, an express clause governing third party collision liability (often known as a 'Running Down Clause') was introduced into hull policies. The scope of this clause and the availabiliry of cover under it are

Institute Time Clauses Hulls (III 0/83), d 1.2: (1111/95), d 104; International Hull Clauses
20 Xenos v Fox (I 868) LR 3 CP 630, 635: Adelaide Steamship Co Ltd v Attorney-General (No 2) (19261 AC 172. 21 The Institute time and voyage clauses for hulls and freight all contain provisions cast in identical or similar terms. 22 Where liability is incurred as between vessels both owned by the assured, d 6 still operates subject to the quantum ofliability being assessed by a sole arbitrator: d 7. 23 Hall Bros SS Co Ltd v Young [I 9391 I KB 748, 759 per Sit Wilfred Greene MR. 24 (193612 KB 461. 25 [19391 I KB 748. 26 ibid 760 per Sir Wilfred Greene MR. 27 ibid 762.

(01Illf03), d lOA, II.

" (1895J 2 QB 279. 15 Mancomunidad del Vapor Frumiz v Royal Exchange Assurance [1927J 1 KB 567. " ibid 577 per Roche J. 17 In Mancomunidad (n 15 above), the policy referred expressly to 'collision with any object (including ice) other than water'. " (1836)4 A & E 420. 19 Apportionment in proportion to respective degrees of fault was iiltroduced by the Maritime Conventions Act 1911. See now the Merchant Shipping Act 1995,s'187.

396

397

Collision and Contact Losses

12.12 The indemnity provided under rhe collision liability clause should extend not

Third Party Liability

cover offered by murual insurance associations and the subject of an optional extension provided for by the International hull clauses. 33

only to compensatory damages bur also to exemplary, or punitive, damages. As a matter oflanguage, the reference to 'damages' in the collision liability clause is unqualified. 28 Moreover, a contrary view would produce practical difficulties. First, the award of exemplary damages would not disentitle the assured in principle from recovering in respect of the compensatory element of the award. However, the award may well not apportion the overall sum between the two types of damages, rendering the assured unable to prove the extent of the recoverable liability and providing the insurer with a fortuitous windfall in the form of unenforceable liability. Secondly, the limited liability of the insurer in respect of claims thar include exemplary damages may produce a conflict of
interest between assured and insurer so as to discourage settlement of claims.

(dJ 'Vessel'
The collision generating the damages liability must be with another 'vessel'. In 12.15 Polpen Shipping Co Ltd v Commercial Union Assurance Co Ltd, 34 Atkinson J stated: 'I do not want to attempt a definition, but I think a ship or vessel does involve two ideas. If! had to define them, I should say'a vessel was any hollow structure intended to be used in navigation, that is, intended to do its real work upon the sea or other waters, and which is capable ot free and ordered movement from one place to another.' Consequently, neither a flying-boat 35 nor a pontoon crane" may be classified as 12.16 a ship or vessel. A collision with the anchor of another vessel would be a collision with that vessel,37 but when a ship collided with nets attached to and extending from a fishing vessel abour one mile away, the Court of Appeal held there was no collision with another vessel. 38 Nets were not part of a ship in the same sense as an anchor 'nor are they things which it is necessary for her to have and withour which she could not prudently put to sea'.39 A wrecked vessel remains a vessel for the purposes of the collision clause provided 'the reasonably minded owner would continue salvage operations in the hope of completely recovering the vessel by those operations and subsequent repair.'40 The absence of the means of self propulsion," even if coupled with the absence of the means of self direction," does not disqualify from status as a vessel. However, a floating structure that is not used in navigation but moored in one place is unlikely to qualify as a vessel. 43

Thirdly, the collision liability cover extends also to certain costs incurred in contesting or limiting liability. Such cover would not extend to costs incurred in defending a claim for exemplary damages if they fell ourside the scope of insured liability. Yet the apportionment of COSts could prove problematic, especially since costs might be incurred for the purpose of defending both insured and uninsured liability."

(bJ /iny sum or sums paid'

12.13 A further restriction lies in the phrase 'any sum or sums paid'. This phrase has

been stated in England" and held in Canada" to render payment a condition precedent to entitlement to indemnification. On this basis, where the assured becomes insolvent withour malong payment, no liability will arise under the policy and the third party will be unable to invoke the Third Parties (Rights against Insurers) Act 1930."

(cJ 'Three-fturths'
12.14 The measure of indemnity under clause 6.1 is confined to three-fourths of sums

falling within its terms. There is, however, no injunction in rhe Institute or International clauses against the assured obtaining cover for the remaining onefourth. Such insurance is a standard feature of the protection and indemnity

28 The phrase 'legally liable to pay as compensation' in a public authority liability policy has been held to include exemplary damages in tort because all ton damages, whether awarded on a compensatory or exemplary basis, ultimately go to the claimant byway of compensation for harm suffered: Lancashire County Council v Municipal Insurance Ltd (1997) QB 897. 29 ibid, although the costs pr~yjsion in Lancashire County Council was differently drafted. 30 Re Nautilus Steam Shipping Co Ltd [19361 Ch 17, 31: Raiffiisen Zentralbank Osterreich AG v Five Star Trading llc [2001) QB 825, 857. cf the approach to pay first clauses in mutual insurance, see 20.62-20.64 below. 31 Conohan v Cooperators 2002 FCA 60,2004 AMC 1661 (Fedesal Couriof Appeal). 32 Discussed in Ch 20 below.

International Hull Clauses (01111103), c138, [1943] 1All ER 162, 165. CfMerchant Shipping Act 1894, s 742; International Convention on Salvage 1989, Art l(b). 3S ibid. But cf Harbours Act 1964. s 57(1). 36 Merchants'Marine Insurance v North ofEngland Protecting & Indemnity Association (1926) 26 LlLRep 201. 37 Re Margetts & Ocean Accident & Guarantee Corp [1901] 2 KB 792. 38 Bennett Steamship Co v Hull Mutual Steamship Protecting Society [1914] 3 KB 57. 39 ibid 61 per Phillimote LJ. 40 Pelton 55 Co Ltd v North ofEngland Protecting & Indemnity Association (1925) 22 LlLRep 510,513 per Greer J. 41 The Mac (1882) 7 PD 126: The Mudlark [1911J P 116: The Harlow [1922] P 175: Marine Craft Constructors Ltd v Erland Blomqvist (Engineers) Ltd [19531 1 Lloyd's Rep 514. 42 The St Machar (1939) 65 LlLRep 119, 125: Cook v Dredging & Construction Co Ltd [1958J 1 Lloyd's Rep 334. 41 Welh v Owners ofGas Flaat Whitton No 2 [1897J AC 337: The Upcern, [1912J P 160: The Craighall(1910J P 187. Quaere whether a ship permanently moored and acting as a museum but retaining motive and directional power is a vessel for collision liability purposes.
33 34

398

399

Collision and Contact Losses

12.17 Where agreed, the limitations imposed by the reference to collision with a vessel may be avoided by extending cover to contact with any fixed or floating object.

Third Party Liability

In respect of anyone collision, their maximum exposure is 'their proportionate part of three-fourths of the insured value of the Vessel' 48 Secondly, the following exclusions are inserted by clause 6.4: 49
In no case shall the Underwriters indemnify the Assured under this Clause 6 for any sum which the Assured shall pay for or in respect of
6.4.1 removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever50 6.4.2 any real or personal property or thing whatsoever except other vessels or property on other vessels
6.4.3 the cargo or other property on, or the engagements of, the insured vessel

The option of such an extension is expressly provided for by clause 37 of the International Hull Clauses (0111 1/03). Otherwise, such cover is available as part of the protection and indemnity cover offered by mutual insurance associations.

(e) 'Coming into collision'

12.18 A maritime accident may occur berween vessels without any direct contact.

Thus, negligent navigation by the insured vessel may compel another to take evasive action, as a result of which that other either runs aground or collides with a thitd vessel. 44 Hull underwriters would, however, incur no liability since the insured vessel would not have come into collision with another vessel. The optional extension of cover under clause 37 of the International Hull Clauses (01/11/03) would not avail the assured since it requires a 'striking' of a fixed or floating object. P&I clubs, however, provide cover against liability for 'non-contact damage' to ships and property carried in them.
12.19 Once, however, the requirements for the operation of the collision clause are

6.4.4 loss of life, personal injury or illness

6.4.5 pollution or contamination, or threats thereof, of any real or personal property or thing whatsoever (except other vessels with which the insured Vessel is in collision or property on such other vessels) or damage to the environment, or threat thereof, save that this exclusion shall not exclude any sum which the Assured shall pay for or in respect of salvage remuneration in which the skill and efforts of the salvors in preventing or minimising damage to the environment as is referred ro in Article 13 paragraph I(b) of the International Convention on Salvage, 1989 have been taken into account.

fulfilled, the underwriters are liable for three-fourths of all liability within clause 6.1 caused by the collision. Thus, where an insured vessel was at fault in colliding with another and that other collided in rurn with a third by reason of a proper and necessary manoeuvre as a result of the first collision, the underwriters' liability extended to the damage to both the second and third vessels. 45

Thirdly, the collision damage exclusion in respect of cargo handling at sea in the course of trading operations extends to collision liability. 51

(h) Legal costs cover

In addition to the above, by virtue of clause 6.3 the assured may recover three- 12.22 fourths" of any legal costs connected with contesting or limiting liability with the priot written consent of the underwriters. Liability in respect ofsuch costs is limited to 25 per cent of the agreed value, if any, of the insured vessel. Cover does not extend to costs incurred in claiming against the other vessel involved in the collision. 53 (2) Collision Liability under Cargo Insurance In a contract for the carriage of goods by sea, the carrier will generally exclude 12.23

(j) Basis ftr the assessment ofliability

12.20 Where both vessels involved in the collision are to blame, the question arises-of

whether the quantum of liability is to be assessed on a cross-liability or single liability basis. Fot the purposes ofAdmiralty law, liability is calculated under the latter method, a set-off being operated so as to produce a net liability from one vessel to the other. 46 The International hull clauses, however, expressly provide for the former basis,47 permitting the assured to recover in full from its insurer in respect of third party liability, the insurer being entitled by way of subrogation to the benefit of the assured's cross-claim.

(g) Limitations and exclusions

12.21

There are three restrictions on the scope of collision liability cover. First, clause 6.2.2 imposes a ceiling on the underwriters' liability under clauses 6.1 and 6.2.

"" The Eglantine, Credo & Inez[I9901 2 Lloyd's Rep 390. 4S William France Fenwick 6' Co Ltd v Merchants' Marine Insurance Co Ltd [1915] 3 KB 290. 46 Stoomvaart Maatschappy Nederland v PininsulfJ1 6' Oriental Steam ~avigation Co (The Khedine) (1882) 7 App Cas 795. .
47

International Hull Clauses (01/11103), d 6.2.1.

48 Supplementary cover against the possibility that three-fourths of the assured's liability prima facie covered under the standard hull clauses might exceed three-fourths of the agreed value of the vessel is provided for by the Institute Time Clauses-Hulls Excess Liabilities (1/11/95). 49 These exclusions would appear to be purely by way of clarification, since their subjectmatter does not fall within the cover provided under cl 6.1. 50 The exclusion operates equally whether the sum is paid directly or indirectly to the person who removes or disposes: The North Britain [1894] P 77; Tatham, Bromage 6' Co v Burr (The Engineer) [18981 AC 382. S1 Institute Time Clauses Hulls (1/10/83), cl 1.2; (1/11195), d 1.4; International Hull Clauses (0l/lIf03), clIOA, II. S2 Or four-fourths if cl 38 applies. S3 As to which, see Rules of Practice of the Association ofAverage Adjusters, r AS.

400

401

Collision and Contact Losses

liability for damage to cargo as the result of a collision. Under Unired Srares law, however, where borh vessels are to blame for the collision, the cargo owner can recover in full againsr the non-carrying vessel, which in turn is entitled to claim contribution of one-half of this liability from rhe carrier. In consequence, a carrier solely liable for the collision is fully protected by its contractual exclusions, whereas a carrier partly responsible indirectly bears one-half of the cargo loss. To attempt to reinstate the otiginal contractual division of risk, contracts of affreightment customarily contain a 'both to blame collision' clause requiring the cargo owner to indemnifY the shipowner with respect to such liability54 and the Institute cargo clauses cover such potential liability under the following 'Both to Blame Collision' clause: 55
This insurance is extended to indemnifY the Assured against such proportion of liability under the contract of affreightment 'Both to Blame Collision' Clause as is in respect of a loss recoverable hereunder. In the event of any claim by the shipowners under the said Clause the Assured agree to notify the Underwriters who shall have the right, at their own cost and expense, to defend the Assured against such claim.
A. Perils of War, Uprising, and
Hostility (1) Perils of war (2) Revolution, rebellion, and insurrection (3) Civil strife arising thereform (4) Any hostile act by or against a belligetent power
13.05 13.05 13.31 13.37 13.38 13.43

13
WAR RISKS'

(1) Capture and seizure

(2) Arrest, restraint, and detainment

(3) The consequences thereof

(4) Any attempt thereat

(5) Confiscation or expropriation (6) Restrictions on scope of cover

13.45 13.48 13.53 13.55 13.58 13.62

C. Derelict Weapons

13.84

54

55

For a fuller discussion, see JWilson, Carriage ofGoods Institute Catgo Clauses (A), (B), (C), cl 3.

by Sea (5th edn, 2004) 259-60.

B. Perils of Deprivation and

Inhibition on Use

This chapter is concerned with war perils as covered under the Institute clauses, 13.01 although it should be noted that the mutual insurance associations are important providers of war risks cover.' In the context of hull and freight insurance, war and strikes risks are insured together under the same sets of clauses. Cargo
insurance, however,_ separates war risks cover from strikes risks cover. Strikes

risks are discussed in Chapter 14 below. The advent of new Institute clauses in the I980s saw a major rethinking with 13.02 respect ro the insutance of war risks. 3 The approach of defining war risks cover by reference to an exclusion from what may, for convenience, be termed marine risks (Ie non-war risks) cover was discontinued. 4 Moreover, the opportunity was taken ro escape ftom a difficult body of case law that had developed around the traditional war risks wording by adopting, in part, new perils. The discussion of the scope of war risks cover will be based on the Institute War Clauses (Cargo). Clause 1 lists the risks covered as follows:

See generally, M Miller, Marine 1.%r Risks (3rd edn, 2005). See 16.14...16.19 below. , See M Millet, Ma,ine war Risks (3td edn, 2005) Cb 1. 4 Further on this, and on the earlier separation of war risks cover from non-war risks cover, see 7.03...7.06,7.14,7.22 above and 15.70...15.77 below.
1

402

403

War Risks
1.1 war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power 1.2 capture seizure arrest restraint or detainment, arising from risks covered under 1.1 above, and the consequences thereof or any attempt thereat 1.3 derelict mines torpedoes bombs or other derelict weapons of war.

Perils ofWar, Uprising, and Hostility

necessary or desirable by the existence of a state of war. Merchant vessels sailing withour lights, sailing in convoy, and changing course in conformity with naval instructions in time ofwar were held not to constitute warlike operations even if pursuanr to Admiralty regulations and in response to the waging of general submarine warfare by the enemy. 'To go ahead in the dark may be foolish or wise bur it is not warlike, nor is it made warlike because what would otherwise be blameworthy is done in obedience to lawful commands." 'In brief, sailing with convoy is only sailing in company and is no more a warlike operation than sailing alone." Such measures are merely precautions designed to safeguard merchanr vessels in dangerous waters, taken perhaps in anticipation or fear of a war peril but not warlike of themselves. Lord Wrenbury enunciated the essential principle: 10 'If the operation relied upon as a warlike operation is one which creates no new risk, but only aggravates or increases an existing maritime risk by removing something which, but for the war, would have been a safeguard against the risk, then the risk is not a war risk. But if the peril be direcrly due to hostile action, it is a war risk.' Accordingly, the screening of/ighrs in a town as a precaution against air raids is not a warlike operation although it might increase the danger of accidenrs in darkened streets." In similar vein, while the extinguishing by hostile forces of a shore light is a 13.07 warlike operation, where a merchant vessel not itself engaged on a warlike operation goes aground because the master is mistaken in navigation, the proximate cause of the loss is an error in navigation even though the error would nor have occurred without the warlike operation. In the American civil war case of Ionides v Universal Marine Insurance CO,12 a 13.08 neutral cargo of 6,500 bags of coffee on board the Linwood, a federal ship, was insured under a policy that excluded all consequences of hostilities. In the mistaken helief that he had passed the dangerous headland of Cape Hatteras, the master changed course and ran ashore. A light visible in ordinary weather for up to thirty miles, which had until recently burnr on the headland as a warning for shipping, had been extinguished by confederates in order to mislead federal vessels. The master and crew were taken prisoner. Officers appointed by the

13.03 Cover is granred, therefore, in respect of three groups of perils: perils of war,

uptising and hostility; perils of deprivation and inhibition on use; and derelict weapons ofwar. It will be nored thar cover in respect of the perils of deprivation and inhibition on use is restricted under the cargo clauses by the requiremenr that such perils must arise from a peril of war, uprising or hostility. There is no such restriction in the war and strikes clauses for hulls and freight.
13.04 In addition to the perils listed above, this chapter will also consider the perils of 'confiscation' and 'expropriation', which feature in the war and strikes clauses for hulls and freight but in neither the war nor the strikes clauses for cargo.

A. Perils oEWar, Uprising, and Hostility

(I) Perils ofWar
13.05 Prior to the revision of the Institute clauses in the early 1980s, war risks cover

embraced the 'consequences of hostilities and warlike operations'. This formula has now been replaced by the perils of 'war' and 'hostile act by or against a belligerent power'. The latter is discussed below' along with the old hostilities peril. The 'warlike operations' limb of the cover generated a considerable body of case law, requiring the courts to address two separate issues, namely the definition of the peril and the operation of the proximate cause doctrine in connection with the peri],' Particular difficulty was occasioned by the appropriate classification of prima ficie marine casualties involving merchant vessels but occurring in a war context. There is no judicial analysis of the relationship between 'warlike operations' and 'war'. This section reviews the authorities on the old peril before addressing the new.

(aJ Warlike operations

13.06 In the conjoined appeals in The Petersham and The Matiana,' the House ofLords,

upholding the Court of Appeal, drew a fundamental distinction between a warlike operation and a peaceful operation conducted under conditions rendeted

See 13.38ffbelow.

Yorkshire Dale Steamship Co Ltd v Minister o[War Tramport (The Coxwold) [19421 AC 691,

716.
7 Britain Steamship Co Ltd v R (The Petersham) and. Green v British India Steam Navigation Co Ltd (The Matiana) [191912 KB 670. affd [1921] 1 AC 99.

8 ibid 128 per Lord Sumner. In the Court ofAppeal, Atkin L] enquired whether the status ofa vessel's activities was supposed to alter at sunset ([1919J 2 KB 670, 696). 9 [19211 AC 99, 129 per Lord Sumner. Merely because escorting warships are engaged in the warlike operation of protecting non~combatant vessels from the enemy does not affect the classifi~ cation of the operation engaged upon by the merchant vessels, which mayor may not be warlike. 'The sheep are not the shepherd; and are not engaged in the operation of shepherding': [1919] 2 KB 670. 698 per Atkin Lj. 10 11921] AC 99,135. See also [191912 KB 670, 700. '1 [19211 AC 99.114. " (1863) 14 CB(NS) 259, 286-7.

404

405

War Risks
federal governmem salvaged 150 bags of coffee. Confederare rroops prevemed rhe removal of any more before rhe ship broke up and rhe remainder of rhe cargo was 10s1'. Had rhe rroops nor inrervened, anorher 1,000 bags could have been saved. The courr held rhar rhe insurer was liable for a parrial loss of rhe cargo. The proximate cause of the loss of the coffee on board that could not have been saved even ifthe troops had not intervened was a peril ofthe sea (namely the master being fifty miles out of his reckoning and either not keeping an adequate look-alit or not lying ro when in doubt about his position) and not the hostile act of the confederates in extinguishing the light. Byles J reasoned as follows: 13
. . . the original meritorious cause (and in popular language the cause of the loss)

Perils ofWar, Uprising, and Hostility Line Steamers Ltd v Liverpool & London War Risks Insurance Association Ltd,18
Atkinson J held that the carriage of materials destined to be used in the manufacture of munitions to a port used mainly for commercial purposes was not a warlike operation. On the concept of rhe peril, he srated: 19
... a warlike operation is one which forms parr of an actual or intended belligerent act or series of acts by combatant forces. It may be performed preparatory to the actual act or acts of belligerency, or it may be performed after such act or acts} bur there must be a connexion sufficiently dose between the act in question and the belligerent act or acts to enable a tribunal to say, with at least some modicum of ... common sense} that it formed parr of acts of belligerency.

was the captain's being out of his reckoning. He was some fifty miles to the westward of his course, without knowing it. The absence of the 'light was ...
merely the absence of an extrinsic saving power. Could that be said to bs:: the cause of the ship's destruction? Suppose a man throws himself into the Serpentine, and the means of rescuing him are not at hand, and he is drowned. Could it be said in that case that the man was drowned because of the absence of saving power? Apply

Any vessel that is engaged in acts prepararory to embarking upon a warlike operation" or is ar anchor awaiting such orders" is not yet engaged upon a warlike operation. Given that the voyage during which the loss or damage occurs is a warlike 13.11 operarion, 'almost any casualty befalling a vessel as a result of her own action in proceeding on [the] voyage' will be viewed as caused by the operation." Although collision is prima ficie a marine peril, any collision involving a vessel engaged on a warlike operation is classified as a war risk unless the other vessel is not engaged on a warlike operation and is solely to blame for the collision. Thus, the cause of the loss is a warlike adventure where the collision is the fault of a vessel pursuing a warlike operation, whether the vessel is a warship" or a merchantman. 24 Again, where both vessels are to blame for the collision and one is engaged on a warlike operation while the other is not, the cause of the loss is the warlike operation. 25 Similarly, although running aground is prima ficie a marine peril, where a merchant vessel runs aground in the course of pursuing a warlike operation, the cause of rhe loss is considered to be the warlike adventure. In The Coxwold,26 a merchant vessel sailing in convoy and engaged upon a warlike operation altered course to avoid a suspected enemy submarine and

that here. The absence of the light at Cape Hattetas was but the absence of a
warning, leaving the proximate and immediate cause of the loss, the miscalculation

of the captain which is plainly a loss by the perils of the sea.

13.09 In consequence, the underwriters were not liable for the coffee saved and rhat

which would have been saved bur for the intervention of the troops, which was lost as a consequence of hostilities. The important point in Ionides was that the confederates were not responsible for the navigation of rhe vessel: their act in extinguishing the light merely formed parr of the background against which the master ran the vessel aground.
13.10 Any movement of a warship 14 at sea on an errand of war qualifies as a warlike

operation. Merely proceeding to dock for an overhaul or re-fit does not." Whether a merchant vessel is engaged upon a warlike operation depends upon the nature of the cargo and rhe destination. In The Gee!ong,16 the House of Lords held that the transportation by sea of war materials in time of war between war bases was prima facie a warlike operation. 17 In contrast, in Clan

" [19431 KB 209.

20

19

ibid 221.

ibid 296. See also Britain Steamship Co Ltd v R (The Petersham) [1921J 1 AC 99, 135. For naval control transforming a merchant vessel into a warship, see Hindustan Steam Shipping Co v Admiralty (1921) 8 LlLRep 230.
13

14

15 Liverpool & London War Risks Insurance Association Ltd v Marine Underwriters of5S Richard de Lareinaga [1921] 2 AC 141. 16 Commonwealth Shipping Representatives v Peninsular & Oriental Branch Service (The Geelong)

[1923/ AC 191. 11 Similarly the transportation-'of trOOps (Charente Steamship v Director of Transports (1921) 9 LlLRep 355) and the evacuation of wou.qded (British & Foreign Steamship Co Ltd v R (The St Oswald) [1918J 2 KB 879), although the presence on board of only a few: soldiers, whether wounded or unwounded, does not transform a merchantman into a troop 'transport: Harrisons Ltd v Shipping Controller (The Inkonka) [19211 1 KB 122.

Admiralty Commissioners v Brynawel Steamship Co (I923) 17 LlLRep 89; Wharton UJ (Shipping) Ltd v Mortleman [194l] 2 KB 283. 21 Wynnstay Steamship Co v Board ofTrade (1925) 23 LlLRep 278. 22 YOrkshire Dale Steamship Co Ltd v Minister ofWar Transport (The CoxwoldJ [1942] AC 691, 719 per Lord Porter. See also Lord Wright at 704; Athel Line Ltd v Livapool & London War Risks Insurance Association Ltd (The Atheltemplar) [l946J KB 117. 23 Attorney-General vArd Coasters Ltd (The Ardgantock) [192l] 2 AC 141; Liverpool &- London war Risks Insurance Association Ltd v Marine Underwriters of 55 Richard de Larrinaga [1921] 2
ACI41.
24

Commonwealth Shipping Representatives v Peninsular & Oriental Branch Service (The Gee/ony Board of Irade v Hain Steamship Co Ltd [19291 AC 534. Yorkshire Dale Steamship Co Ltd v Minister ofwar Transport (The Coxwold) (1942] AC 691.

[19231 AC 191.
25
26

406

407

war Risks
subsequently ran aground. The House of Lords held that there was sufficient evidence to justifY the atbitrator's holding that the proXImate cause of the loss was the watlike operation.
13.12 The negligent execution of a warlike operation does not alter its ,:,arlike charac-

Perils ofwar, Uprising, and Hostility

moving and maintaining a zigzag course. The House of Lords held that the first category of damage was caused by the vessel's warlike operation but not the second. A distinction was drawn between loss or damage actively caused by a
vessel pursuing a warlike operation, as where the vessel is an active agent in

striking a rock or colliding with another vessel, and loss or damage sustained

terization," although should a negligent marine act break the cham of causanon the ensuing casualty will be marine in nature. 28 Both th: pervasive causal significance of a warlike operation and the irrelevance of neghgence were summanzed by Lord Wright in The Coxwold" as follows:
The warlike operation is, as it were, an umbrella which covers every active s:ep taken to carry it out, including the navigation, the course ,and hel~ actlOll intended to bring the vessel to the position required by t~e warlIke operation, ~nd that none the less because accident or mischance or negligence leads to strandmg

passively by the operation of a maritime peril upon a vessel embarked on a

warlike operation, as where a vessel so embarked is subjected to a battering from high winds and heavy waves. Similarly, there is no connection with the execution of a warlike operation 13.15 where loss is caused by an accidental fire unconnected with either the nature of the journey or a military cargo,33 a bteakdown in steering gear,34 or a defective part in the vessel." Such losses remain marine losses. The distribution of losses between war and non-war cover was, therefote, 13.16 determined by the courts in a manner that attributed most losses sustained in the course of a warlike operation, even from perils of a prima ficie marine nature, to that operation. A body of case law of daunting complexity failed to establish a sensible commercial allocation of risk berween marine cover and war risks insurance. In particular, the allocation of losses caused by stranding and
collision to war risks cover alarmed marine underwriters, who saw an unaccept-

or collision. No doubt a wilful act such as barratry or scuttling would raise different
questions.
13.13

Nevertheless, the fact that a merchant vessel is engaged on a warlike operation does not automatically render war risks underwriters liable for all losses sustained during the operation. 'To suggest the contrary would be just as illogical as to say that if a postman, while engaged in the opetation of delivering letters, meets with an accident in the street, this is necessarily the proximate consequence of his delivering letters.'30 There must be a causal link berween acts done in execution of the warlike operation and the casualty.31 In the absence of any such connection, damage occasioned by the action of the sea upon the vessel remains
a marine loss.

13.14 In the leading case of

The Priam," the insured merchant vessel was engaged on the watlike operation of catrying a cargo consisting largely of wat Stotes from one war base to another. In the course of the voyage, the vessel experienced exceptionally heavy weather and sustained damage falling into two categories. First, heavy cargo carried on deck because of militaty urgency broke loose, causing some physical damage ro hatch covers on the No 2 cargo hold, which permitted water to enter the hold. Secondly, furthet damage was occasioned by the fotce of the srotms, accentuated by the wartime imperative to keep the vessel

able diminution in scope of the financial product they were offering. The distinction drawn in The Priam" between active and passive merchant vessels in the context of prima fide marine risks while in the course ofa warlike adventure may be regarded in terms oflegal principle as subrle or desperate, depending on one's view of the earlier decision in The Coxwold. 37 For marine underwriters, however, it was too little and too late. In the light in particular of the decision in The Coxwold. marine underwriters 13.17 had already sought to redress the distribution of losses by introducing a revised version of the FC&S clause. The amended clause, introduced in 1943, classified perils of a prima ficie marine nature (such as stranding, collision, and heavy weather) as war risks only where 'caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of collision, any other vessel involved therein, is performing) by a hostile act by or against a belligerent power'. This revised clause, therefore, both removed the

" Adelaide Steamship Co Ltd v R (The Witrilda) [1923) AC 292: Eagle Oil Transport Co Ltd v Board o[Trade(I925) 23 L1LRep 301. . ' 28 Owners ofSteamship 'Larchgrove'v R (1919) 1 LlLRep 408, 498; Moor Ltne Ltd v Isaac J(tng (1920) 4 L1LRep 286: Mazarakis Bros v Furness, Withy <0 Co (1923) 17 L1LRep 113. 29 YOrkshire Dale Steamship Co Ltd v Minister of \.fa'r Transport (The Coxwold) [1942] AC 691, 704. 30 ibid 696 per Viscount Simon LC. 31 ibi,? 708, 713. 32 Liverpool 6' London 'U'ilr Risks Association Ltd v Ocean Steamship ,Co Ltd (The Priam) [1948]
~W.

33 YOrkshire Dale Steamship Co Ltd v Minister of 'U'ilr Transport (The Coxwold) [1942J AC 691, 697. " Clan Line Steamers Ltd v Board o[Trade (The Clan Matheson) [1929J AC 514. 35 Willis Steamship Co Ltd v United Kingdom Mutual 'War Risks Associatt'on Ltd (1947) 80 LlLRep 398. 36 See 13.14 a.bove. 37 See 13.11-13.12 above,

408

409

Wt!r Risks
reference ro warlike operations and required a direct causal link be"",een a hostile act and a prima ficie marine peril before the latter could be characterized as falling within war risks cover. The ttue interpretation of the revised clause was never tested in litigation.

Perils ofWt!r, Uprising, and Hostility

Sir Wilfred Greene MR then expressly refuted the argument that one should 13.20 .seek and then apply a technical meaning of war within the principles of internationallaw: 43
"Where these principles of international law for this purpose are to be found I must
confess that I remain in complete doubt, since the only source of these principles

(b) The modern perils of'war' and 'civil war'

13.18 In defining 'war' for insurance purposes, it is clear that contract law prevails over

international law." In Driefimtein Consolidated Gold Mines Ltd v janson,39 Mathew J, at first instance, quoted the following definition from Hall on International Law: 40 'When differences between States reach a point at which both parties resort ro force, or one of them does acts of violence, which the other chooses to look upon as a breach of peace, the relation ofwar is set up, in which the combatants may use regulated violence against each other, until one of the rwo has been brought ro accept such terms as his enemy is willing to grant.'
13.19 In the leading case of

suggested to us was the writings of various writers on international law. It is to be observed, as indeed it was to be expected, that these writers do not speak with one voice, and it is possible to extract from their pages definitions of 'war' which not only differ from one another, but which are inconsistent with one another in
important respects ... [T]o say that English law recognises some technical and ascertainable description of what is meant by 'wae appears to me to be a quite

impossible proposition.

Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Co Ltd," however, both the Court of Appeal and the Foreign Office

emphasized that the true issue was not a search for a term of international legal art but the construction of a commercial contract. The case concerned a charterparty which gave liberty ro cancel 'ifwar breaks out involving Japan:. Fighting broke out berween Japan and China, but there was no formal declaration ofwar and diplomatic relations remained intact. The shipowner purported ro exercise the liberty ro cancel. When consulted for its opinion, the Foreign Office responded that 'the curtent situation in China is indeterminate and anomalous and His Majesty's Government are not at present prepared ro say that in ,their view a state of war exists}. However, the statement went on to say that the meaning of the word 'war' in a charterparty may be viewed rather. as turning upon the interpretation of the contract and that the attitude of the government was not necessarily conclusive of such interpretation. Sir Wilfred Greene MR observed that the question was not whether there had broken out a war recognized by the government, otherwise the court would either have taken judicial notice of such recognition or have sought an answer from the appropnate government department. The question was left open of whether recognition by the government that war had broken out would have determined the
interpretation iSsue.
. ., 42

Similarly rejected was an argument that war requires an animus beiligerendi on 13.21 the part of both, or at least one, of the combatants. 'What precisely animus belligerendi means is again a matter of great obscurity. In fact, to define "war" as a thing for which it is requisite to have animus beiligerendi is coming very near to defining the thing by itself.'44 It was held that 'war' in its Context was ro be construed in accordance with commercial common sense, resulting in a finding of war at the relevant date: 'to suggest that, within the meaning of this charterparty, war had not broken out involving Japan on the relevant date is to attribute to the parties to it a desire to import into their contract some obscure and uncertain technicalities of international law rather than the common sense of business men'.45 The court expre~sly rejected the suggestions that war presupposed either a formal declaration of war" or the severing of diplomatic relations. 47 The distinction between war in the technical sense, formally declared at the 13.22 outset and terminated by a peace treaty, and war in the material sense, consisting of an outbreak of hostilities on a sufficient scale, nevertheless requires further comment. In New lOrk Life Insurance Co v Bennion,48 a case arising out of the Japanese attack on Pearl Harbour without a formal declaration of war, an American Circuit Court of Appeals adopted a similar approach to that of the Court of Appeal in Bantham. Whether war existed was a question of grim reality, not technical nicety, Consequently, life insurers were able ro rely upon an

38 For a discussion of the meaning of war in international law, see Y Dinstein, 1Ntr, Aggression and SelfDefence (3rd edn, 20~l) Chs 1 and 2, C Greenwood, 'The Concept of War in Modern

International Law' (1987) 36 ICLQ283. 39 [190012 QB 339, 343-4. 40 (4th ,dn, 1895),63. 41 [193912 KB 544. . 42 ibid 554-5. A government certificate is conclusive in municipal public law: R v BottrilL ex p Kuechenmeister [1947] KB 41.

43 [1939J 2 KB 544, 556, It should be noted that imernationallaw has itself moved away from a de iureconcept of 'war' to a de facto notion of 'armed conflict': C Greenwood, 'The Concept of War in Modern International Law' (I987) 36 ICLQ 283. 44 [19391 2 KB 544, 557. 45 ibid 559. 46 'Nobody would have the temerity to suggest in these days that war cannot exist without a declaration of war': ibid 556 per Sir Wilfred Greene MR. Likewise Swinnerton v Columbian Insurance Co 35 NY 174, 186-8 (1867) (American civil war). 47 [19391 2 KB 544, 557. " 158 F 2d 260 (1946), 13 ILR 224 (US Circuit Court ofAppeals, 10th Circuit).

410

411

W0r Risks
exclusion clause limiting the measure of indemnity in cases of death r~sulting from 'war or any incident thereto'. A dissenting judgment, however, articulated the view that alternative technical and material meanings of the term "war created ambiguity, that the exclusion consequently amacted the contra proftrentem rule of construction and that the technical meaning of the term was to be applied as the meaning most favourable to the assured. In the opini~n of the majority, in contrast, in the absence of any indication th~t :he partles might have intended the technical meaning, there was no ambiguity to trigger the operation of the contra proftrentem rule. 49 The distinction is between ambiguity in context, tiling into account the clear intention of the parties, as perceived by the majority, and ambiguity in the abstract meaning of the tetm. The former 50 approach corresponds to that of the English courrs.
13.23 However, the position in the United States with respect to war exclusions in life

Perils ofW0r, Uprising, and Hostility

insurance peril of 'war'. However, to the extent rhat any doubt may remain about the scope of tbe peril of 'war', a material war would certainly constitute a hostile act by a belligerent power. The precise relationship between the modem peril of war and the old peril of 13.25
warlike operation is unclear. However, marine perils which occur in a war

insurance policies is far from uniform. In a clear conflict of case law, the weight of authority favours the definition of war in the material sense,51 although the minority view in Bennion has attracted substantial support. In particular, m two cases arising out of the armed conflict between the United States and No:th Viernam, no formal declaration of war had been made and the courts, echomg the dissenting judgment in Bennion, applied the contra proftrentem rule to an exclusion of liability relating to deaths 'in time of war', confining 'war' to a formally declared war. 52
13.24 In the context of the Institute clauses, the absence of any possible distinction

context are today much less likely to be classified as war risks. The doctrine of proximate cause will not attribute marine losses to the general wat during which they are sustained, as opposed to a particular warlike operation. Moreover, the modem alternative of a 'hostile act by ... a belligerent power' probably requires an immediate hostile threat. Collisions between friendly vessels in the absence of actual attack would, therefote, appear today to be marine casualties. Similarly, a collision between an insured vessel and the wreck of a vessel sunk by enemy action will be tegarded as a peril of the sea and not a war risk, 53 unless the wreck was deliberately situated to damage passing vessels. Civil war will normally be addressed expressly in the policy, but, failing express 13.26 mention, it is included within the term 'war' unless the context clearly demonstrates a conttaty intention. 54 The leading authority on the definition of 'civil war' as an independent peril is Spinney's (1948) Ltd v Royal Insurance Co Ltd,55 in which Mustill J had to determine whether there was a civil war in Beirut in Januaty 1976. Declining to proffer a general definition, MustillJ identified and elaborated upon three relevant questions." First, can it be said that the conflict was between opposing 'sides'?
It must be possible to say of each fighting man that he owes allegiance to one side or another, and it must also be possible to identify each side by reference to a community of objective, leadership and administration. It does not necessarily follow that the objective ofall those on anyone side must be identical. There may be considerable differences and even animosities between allies. But there must be some substantial community of aim, which the allies have banded together to promote by the use of force. Nor in my view need there always be only twO sides. Two factions might fight one another, and also the state, in order to seize power. This would still be a civil war. But if the factions are tOO numerous, the struggle is no more than a melee, without the clear delineation of combatants which is one of the distinguishing factors of a war.

between material and technical wars is put beyond doubt by the extension of cover beyond the peril of 'war' to that of 'any hostile act by ... a belligerent power'. The English authorities suggest, following the natural understandmg of commercial parties, that a material war would fall within the concept of the

49 See also Gagliormella v Metropolitan Life Insurance Co 122 F Supp 246 (1954) (an alleged ambiguity of the status of the conflict in Korea in 1952 could only exist in the minds o~ lawyers, not laymen. 'And what a layman can see, is not to be looked at with a squint unfnendly to insurance companies in their capacity as amhors': per Wyzanski, District Judge, at 249). 50 See 8.51-8.57 above, 51 Langlas v Iowa Life Insurance Co 63 NW 2d 885 (1954),21 lLR 416, following New York Lift Insurance Co v Bennion, and cases therem citcd. Subsequently, the material ~pproach was adopted in Christensen v SterlingInsurance Co 284 P 2d 287 (1955), 22 ILR 893; Canus v New Thrk Life Insurance Co 124 F Supp 388 (1954); Lynch v National Life & Actident Insurance Co 278 SW 2d 32 (1955). The Supreme Court of Pennsylvania, which adopted the technical approach to 'war' in Beley v Pennsylvania Mutual Life Insurance Co 95 A 2d 202 (1953), has neverthe~ess recognized that an 'act of war' Qges not require a formally declared war: Thomas v. Metropolttan Life Insurance Co 131 A 2d 600 (1957). For adoption of the material approach With respect to cessation ofwar, see Scheiderman v Metropolitan Casualty Co ofNew Thrk220 NYS 2d 947 (1961). 52 Hammond v National Life & Actident Insurance Co 243 So 2d 902 P971), 54 ILR 522 (Court of Appeal of Louisiana); Jackson v North American Assurance SpcietX ofVirginta Inc 183 SE 2d 160 (1971), 54 ILR 525 (Supreme Court of Virginia).

Secondly, consideration needed to be given to the objectives of the 'sides' and 13.27 how those objectives were pursued. Classically, the objective should be the
----- . _ - - - - S3 William France Fenwick 6' Co Ltd v North ofEngland Protecting 6' Indemnity Association
[1917] 2 KB 522. S4 Curtis &Sons v Mathews (1918] 2 KB 825; Pesquerias y Secaderos de Bacalao de Espana SA. v Beer (1949) 82 LlLRep 501, 513, 514; Spinney; (948) Ltd v Royal Insurance Co Ltd [1980] 1 Lloyd's Rep 406, 429. 55 [1980] 1 Lloyd's Rep 406. 56 ibid 429-30.

412

413

Wilr Risks
seizure of power, but ordinary usage, which will reflect the intention of the parties, embraces '[forcing] changes in the way power is exercised without fundamentally changing the existing political structure' or conflict motivated by racial, tribal, or ethnic animosities.
Nevertheless, one should ... always begin by enquiring whether the parties have the object of seizing or retaining dominion over the whole or part of the state. If it is found that they do not, there may still be a civil war; but it will then be necessary to look closely at the events to see whether they display the degree ofcoherence and community of purpose which helps to distinguish a war from a mere tumultuous internal upheaval.

Perils ofWilT, Uprising, and Hostility

of fighting, a suspension of all normal life, a casualty list of over 1300 ... and great destruction of property.161 It was no mere riot, but civil conflict amounting to war. In United States case law,62 ir is stressed that a war, whether civil or otherwise, 13.30 must involve governments whether de iure or de jacto, that is <entities that have at least significant attributes of sovereignty'. 63 However, English law's recipe for 'war' includes no such ingredient, as the discussion in Spinney's demonstrates. Although Curtis saw the declaration of a Provisional Government, this authority can hardly be said to have enjoyed 'significanr attributes of sovereignty'. (2) 'Revolution, Rebellion and Insurrection' These perils are the modern successors to the peril of 'usurped power', which 13.31 first appeared in a fite policy in 1720 in an exclusion prompred by the 1715 ]a~~bite uprising and covering losses caused by 'invasion, foteign enemy, or any ml1ltary or usurped power whatsoever'. Given the paucity of authority on the modern perils, there follows a discussion of'usurped power' to clarify the general terntory. The concept of usurped power emerged through the Jaw of treason. A rebelli- 13.32 ous mob sought to usurp power because it sought to arrogate to itself the prerogatives of Parliament and monarch, amounting to rreason under the Treason Act 1351. In COntrast a common mob, which sought merely the tedress of private grievances, committed no treason, although the 1710 Riot Act rendered felonious the failure to disperse within one hour mer the reading of a statutory proclamation. In Drinkwater v London Assurance COrp,64 a mob in Norwich, protesting at the high cost of provisions, destroyed a quantity of flour before dispersing when the Riot Act was read. The next day, however, another mob formed and burnt down the claimant's malting house. The defendant insurer unsuccessfully soughr to rely upon the above exclusion. Wilmor C] stated as follows:" 'My idea of the words burnt by usurped power, from the context, is that they mean burnt, or set on fire by occasion of an invasion from abroad, or an internal rebellion, when armies are employed to suPPOtt it. When rhe laws are dormant and silent, and firing of towns is unavoidable, these are the outlines of the picture drawn by the idea which these words convey to my mind.'

Prospect of success is not relevant. 57

13.28 The third issue generally to be considered is the scale of the conflict and its effect

on public order and the life of the general populace. 58 In the event, Mustill ] held there was no civil war in Beirut at the relevant time by reason of the sporadic nature of the fighting and the absence of both ascertainable sides and clear purpose. Indiscriminate, random and pointless violence did not constitute a civil war.
13.29 A contrast may be drawn with rhe Easter uprising in Dublin in 1916, con-

sidered in Curtis & Sons v Mathews. 59 The General Post Office and other public buildings were occupied by persons calling themselves a Provisional Government, who proclaimed an Irish Republic. Bombardment by the British army of the post office caused a fire that spread and destroyed the claimant's premises and contents. The claimant brought an action on his policy which covered loss and damage 'directly caused by war, bombatdment, military or usurped p6wer ... and fire ... directly caused by any of the foregoing, whether originating on the premises insured or elsewhere'. Roche] entertained no doubts as to rhe existence of a connecrion berween the uprising and the World War then raging:'o 'As to the actual course of the rising in Dublin itself, there was a week

" Curtis 6- Sons v Mathews [1918J 2 KB 825, 829. 58 Some factors suggested (Spinney s (n 54 above) 430) as relevant in this context include 'the number of combatants; the number of casualties, military and civilian; the amount and nature of the armaments employed; the relative sizes of the territory occupied by the opposing sides; the extent to which it is possible to delineate the territories so occupied; the degree to which the populace as a whole is involved in the conflict; the duration and degree of continuity of the conflict; the extent to which public order and the administration of justice have been impaired; the degree of interruption to public services and private life; thequestion whether there have been movements of population as a result of the conflict; the extent to' which each faction purports to exercise exclusive legislative, a4ministrative and judicial powers over the territories which it controls'. " [191812 KB 825, affd [1919J 1 KB 425. 60 'The existence of the alliance [between Sinn Fein and Germany] thereis no reason to doubt, though the Germans lacked the gallantry to attempt to support thei! dupes by themselves ventur~ ing into thi, zone of danger', [191812 KB 825, 829.

93-5.
63

" ihid 829. 62 Pan American World Airways Inc v Aetna Casualty 6- Surety Co [1975] 1 Lloyd's Rep 77, ihid 93.
64

"._"-" " - - - -

(1767) 2 Wil, KB 363.

65

ihid 364.

414

415

mtr Risks
13.33 'Usurped power' did not, therefore, embrace the power of a common mob. A mob 'wants a universality of purpose" to destroy, to make it a rebellious mob, or high treason'." In Langdale v Mason," Lord Mansfield, in his direction to the juty concerning the meaning of 'militaty and usurped power', admitted the terms to be ambiguous but stated that they must involve rebellion where the loss is sanctioned by authority.69 13.34 'Usurped power' is more akin to wat and civil war than to mere riot.'o It is more than the action of an unorganized rabble. 71 In Spinney's (J948) Ltd v Royal Insurance Co Ltd," MustillJ stated that the English cases 'clearly establish the proposition that one of the tests for a usurped power is whether the acts in question amounted to constructive treason ... The usurpation consists of the arrogation to itself by the mob of a law-making and law-enforcing power which properly belongs to the sovereign'. It was held to be sufficient to show 'a mob in posture of war, acting with a common intent and some degree of leadership, in pursuance of aims which properly lie within the prerogative of the sovereign' as opposed to an outright rebellion or insurrection." 13.35 There is little judicial consideration of the meaning of 'revolution'. The Oxftrd English Dictionary definition involves the complete overthrow, accompanied by actual or threatened force, of an established government by its former subjects and its successful and complete substitution by another government. 'Rebellion' was alluded to briefly in Spinney's. Mustill ] referred to the OxfOrd English Dictionary definition of 'rebellion' as 'organised resistance to the ruler or government of one's country; insurrection, revolt', adding that 'the purpose of the resistance must be to supplant the existing rulers or at least to deprive them of authority over part of their territory.'74 'Insurrection' was stated in Spinney's to be similar to rebellion but encompassing also the notion of an incipient, limited or less well-organized rebellion. It still involves action with intent to change the
75

Perils ofmtr, Uprising, and Hostility

government. In Rogers v Whittaker,76 in the COntext of an exclusion covering ',insurrection, riots, civil commotion') an insurrection was stated to be a form of 'domestic disturbance' not embracing Zeppelin air raid damage. It has been said that' "rebellion") "revoluti,on" and "civil war" are progressive steps in the development of civil unrest, the most rudimentary form of which is "insurrection" ',77 In National Oil Co ofZimbabwe (Private) Ltd v Sturge,78 activities of the Renamo 13.36 movement in Mozambique were characterized as an insurrection, enabling underwriters to rely on the war risks exclusion in the Institute Cargo Clauses (Strikes). According to Saville]:" ' "Rebellion" and "insurrection" have somewhat similar meanings to each other. To my mind, each means an organised and violent internal uprising in a counrry with, as a main purpose, the object of trying to overthrow or supplant the government of that country, though "insurrection" denotes a lesser degree of organisation and size than "rebellion".' It was held that the motive behind the desire to change the government was irrelevant. 8o Saville J acknowledged that purely foreign intervention did not constitute an insurrection, but held that Renamo, although receiving considerable suppOrt and direction from external sources, was not'a force from outside exclusively carrying out foreign aims and ambitions'." (3) 'Civil Strife Arising Therefrom' Civil strife is not an insured peril in its own right. Cover is not granted 13.37 independently against civil strife as a peril in its own right but parasitically against civil strife arising from the perils of war, civil war, revolution, rebellion, and insurrection. There is no temporal limitation on when the civil strife must arise so that civil strife will remain covered even after the main peril has ceased to operate, provided that a causal link can be established. There is, however, no authoriry on the level of civil disorder required to constitute 'civil strife'. In particular, the relationship between 'civil strife' and the independenr peril of 'civil commotion' (which is insured as a strikes risk)" is unclear.

66

.As opposed to purposes connected to private grievances: Spinney's (1948) Ltd v Royal

Insurance Co Ltd [1980] 1 Lloyd's Rep 406, 436.

(1767) 2 Wils KB 363, 365. (1780) 1 Bennett's Fire Insurance Cases 16; (1780) 2 Park on Imurance965. 69 The example given by Lord Mansfield was of the 1745 Jacobite rebellion. Charles Stuart's forces reached Derby 'and if they had ordered any part of the town, or a single house, to be set on fire, that would have been by authority of a rebellion'. 70 Rogers v Whittaker [1917] 1 KB 942. 71 Curtis & Sons v Mathews[1919] 1 KB 425, 429. 72 [1980J 1 Lloyd's Rep 406. 73 ibid 435. Usurped power was held to be present on the facts of Spinney's: 'By side~stepping the government and proceeding to direct action the citizen groups arrogated to themselves the proper functions of the state, and thereby exercised (or constituted). an usu~ped power': at 436. 74 ibid 436. With respect to organization, see also the association by Lord Mansfield of a source of authority with the concept of a rebellion at 13.33 above.
67
68 75 ibid 436-7. Given the absence at the relevant time of intention to replace the government, on the facts of Spinney's Mustill J found neither rebellion nor insurrection. In Pan American World Airways Inc v Aetna Casualty & Surety Co [1975] 1 Lloyd's Rep 77, 97, a United States Circuit Court of Appeals adopted the following definition: '[1] a violent uprising by a group or movement [2] acting for the specific purpose of overthrowing the constituted government and seizing its powers'. 76 [1917] 1 KB 942, 944 per Sankey J. 77 Pan American World Airways Inc v Aetna Casualty & Surety Co [1975] 1 Lloyd's Rep 77, 96-7 (US Circuit Court ofAppeals, 2nd Circuit). 78 [1991] 2 Lloyd's Rep 281. 79 ibid 282. 80 ibid 285. 81 ibid 287. 82 See 14.15-14.17 below.

416

417

War Risks
(4) 'Any Hostile Act By or Against a Belligerent Power' 13.38 Together with the peril of 'war', this replaces the old coverage of 'hostilities or warlike operations'. There being no modern authority on the phrase 'any hostile act by or against a belligerent power', there follows a discussion of 'hostilities', which may ultimately be held to be synonymous with, or at least analogous to, the modern terminology. 13.39 On 18 February 1916, an explosion occurred in the hold of the Tennyson while in port in Brazil. This was caused by a bomb planted on the vessel by Herr Niewerth, a German citizen resident in the port. In the subsequent litigation, Atlantic Mutual Insurance Co v King,83 the defendant reinsurer successfully invoked a clause excluding 'all consequences of hostilities or warlike operations'. On the meaning of 'hostility', Bailhache J observed as follows: 84
In one sense, it is plainly true that the fire was due to a hostile act, but the plaintiffs say rightly, as I think, that the word 'hostilities' as used in the Clause, means hostile

Perils ofWar, Uprising, and Hostility

Clearly the ramming by a merchantman ofan enemy vessel would be a 'hosrility'. 13.41

It suffices also if the master of the ramming vessel has an honest belief thar he is
engaging the enemy." Whar is not known is the effect of the phrase 'by or against a belligerent power'. After 1943, the FC&S clause, not dissimilarly worded, defined 'power' as including 'any authority maintaining naval, military or air forces in association with a power'. Given the existence today of a peril of 'war', the obvious question is what the 'hostile act' peril adds ro the coverage. The phrase 'belligerent power' in inrernationallaw generally denotes a party to an armed conRier." If the same meaning is applied in the insurance conrext, 'war' might appear to swallow the 'hostile act' peril. However, were any power conrributing to hostile acrs to be viewed as 'belligerent', then this peril might extend to isolated acts of hostility, or a series of such acrs, either not amounting to a war as such or associated with but not forming part of a war. Six types of hostile act may be suggested. First, the peril may embrace hostilities, as defined above, before there can be said 13.42 to be an outbreak of war, perpetrated by or againsr a party to the war that subsequently breaks out.'o Secondly, in so far as 'war' in an insurance policy might be construed as denoting an armed confliet between powers recognized as states in international law, 'hosrile acts by or against a belligerent power' could encompass hostilities perpetrared by or against an entity constituting a power but nor recognized as a state at the time of the hostility. Thirdly, were the peril of 'war' to be inrerpreted in a technical sense as requiring a formal declaration of war, rhis peril would extend cover ro war in a material sense. Fourthly, by definition a neutral is not a belligerent, but the peril may embrace hostile acts by a belligerent party against a neutral and, conceivably, belligerent reprisals by that neutral. Fifthly, a war might result in a belligerent occupation, the peril covering hostile acrs commitred in the course thereof. Sixtbly, while terrorist organisations would not be regarded as powers for the purposes of this peril, an act of state-sponsored rerrorism could qualifY as a belligerent act by the hosrile sponsoring power. 91 Terrorism, however, constitutes an independent strikes risk.

acts by persons acting as the agents of sovereign powers, or such organised and
considerable forces as are entitled to the dignified name of rebels as contrasted with mobs or rioters, and does not convey the act of a merely private individual acting entirely on his own initiative, however hostile his actions may be.

The term 'agenr' was not, however, to be read in a rechnical sense and embraced all individuals who soughr to further the policy of the German government to destroy enemy life and property." The court had before it a circular to all German naval atraches instrucring rhe immediate mobilization of 'destruction agents', and Niewerth was duly held to be such an agent. 13.40 The leading case of The Petersham" arose out of a loss by collision between two ships in convoy when both vessels, in compliance with Admiralty regulations, were being navigated without lights as a precaution against enemy action. The lost ship had been requisitioned under the terms of a charrerparty rendering the Admiralty liable for the 'consequences ofhosrilities or warlike operations'. The House of Lords held thar merchanr ships sailing in convoy in time of war could not be regarded as a 'hostility'. Lotd Wrenbury observed" rhat:
... the word 'hostilities' does not mean 'the existence of a state of war' but means 'acts of hostility' or ... 'operations of hostility.' The sentence may be read 'all consequences of operations of hostility (or war) or operations warlike (similar to
operations of war) whether before or after declaration of war.' To attribute to the

word the longer meaning-namely, 'all consequences of the existence of a state of war'-would give the expression a scope far beyond anything which one can
conceive as intended.

83 86

[1919J I KB 309.

84

ibid 310.

as ibid 313. " ibid 133.

Britain Steamship Co v R (The Petersham) [1921] 1 AC 99.

88 Henry & MacGregor v Marten (1918) 34 TLR 504. A steamer sank after ramming what the captain thought was a German submarine. The war risks underwiters were held Hable. 89 In cases relating to capture, the word 'belligerent' is used to indicate a participant in a war: 13.45-13.46 below. 90 Once an armistice has been signed at the end of a conflict, by definition hostilities cease: Board o[Trade v Hain Steamship Co Ltd[I929J AC 534, 538, 540 (but tbete may still be a 'warlike operation') , 91 Fot differing thoughts on whether the use of hijacked airliners by adherents of the Al-Qaeda terrorist movement to destroy the twin towers of the World Ttade Center, damage the Pentagon, and unsuccessfully attempt to destroy a fourth unknown target might be regarded as an 'act of war' or 'armed conflict' for the purposes of a commercial insurance policy, see IF P&C Insurance Ltd (PUBL) v Silversea Cruises Ltd [2004j EWCA Civ 769, [2004J Lloyd's Rep 1R696, pataS 143, 147-149.

418

419

war Risks
Consequently, in the context of cargo insurance where war and strikes risks are subject to separate Institute clauses, if they are insured by separate insurers,
state-sponsored terrorism will give rise to double insurance.
92

Perils ofDeprivation and Inhibition on Use

seizing or taking by an enemy C?r belligerent. 'Seizure' seems to be a larger term than 'capture' and goes beyond it, and may reasonably be interpreted to embrace every act of taking forcible possession either by a lawful authority or byoverpowering force.

B. Perils of Deprivation and Inhibition on Use

13.43 As indicated above, war risks clauses, whether for hulls, freight or cargo, include

the following perils involving deprivation or inhibition on use: capture, seizure, arrest restraint or detainment, the consequences of such perils, and any attempt at such an intervention. In addition, the war and strikes clauses for hulls and freight specifically cover the perils of confiscation and expropriation. These are not covered eo nomine by either rhe war or the strikes clauses for cargo. Given the structure of the hulls and freight war and strikes clauses, the perils of confiscation and expropriation may perhaps be regarded as strikes risks rather than war risks." However, nothing turns on such a distinction in the context of hull or freight insurance and it is convenient to address confiscation and expropriation in this section as they also involve a seizure of property.
13.44 A particular feature of this group of perils in the war and strikes clause.s for hulls

In The Minden," Hilbery J observed that 'capture is a talting by the enemy as 13.46 prize in time of open war with intent to deprive the owners of their property in the goods. It is a belligerent act'.97 It seems clear, therefore, thar capture is but a particular aspect of the wider peril of 'war'. It is not, however, necessary for the captured vessel to have been condemned in a Court of Prize for the war risks insurer to be liable, even though, in rhe absence of such condemnation, a purchaser or recaptor of the vessel does not have good title as against the assured." Indeed, an act of talting possession is not an indispensable prerequisite to a completed capture. Obedience to a hostile force is sufficient. 99 The peril of 'capture' also extends to the taking of neutral vessels. lOa 'Seizure' is a peril of wider ambit than capture. It is characterized by forcible 13.47
dispossession,lOl is not confined at common law to belligerent acts,102 need not

and freight is that their scope is affected considerably by certain exclusions. While exclusions are generally the subject of a later chapter, a realistic picture of the extent of cover afforded in respect of deprivations of possession cannot be conveyed without full discussion of the relevant exclusions, which is accordingly included in this section after consideration of the nominate perils. Some of the exclusions are found also in the war clauses for cargo. Moreover, in the~ war clauses for cargo, but not the war and strikes clauses for hulls and reight, the perils involving deprivation or inhibition on use must arise from the perils of war, uprising and hostility.94 (1) Capture and Seizure
13.45 In Cory & Sons v Burr," a case turning on an FC&S clause, Lord Fitzgerald stated that: .
In the construction of this warranty it is observable that 'capture' and 'seizure' do not mean the same thing. 'Capture' would seem properly to include every act of

be lawful, '03 and, receiving its ordinary meaning, does not require the intention, initial or sustained, permanently to deprive the assured of its property.'04 A vessel can be seized by those on board,105 but not by the master or crew to whom it has been entrusted.'06 Such conduct constitutes the peril of barratry, which may, however, lead to seizure by, for example, customs authorities.'07 Similatly,

" Forestal Land, Timber & lIdilways Co v Ricka"ts (The Minden) [1940] 4 All ER 96, 109. 97 Part of a passage cited with approval by Kerr L] in Shell International Petroleum Co Ltd v Gibbs (The Salem) [1982] 1 QB 946, 992. sa Goss v Withers (1758) 2 Burr 683. Although note that, in the event of recovery by the
assured before commencement of proceedings against the insurer, the absence of condemnation will affect the measure of indemnity, see 21.98ffbelow. 99 La J::'speranza (1822) I Hagg 85, 91. 100 Powell v Hyde (1855) El & B1607; Anderson v Marten [1907] 2 KB 248. 101 Cory & Sons v Burr (1883) 8 App Cas 393, 405; Kuwait Airways Corp v Kuwait Insurance Co 5AK[1999] 1 Lloyd's Rep 803, 814; Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd [2002] EWCA Civ 1605, [2003J 1 Lloyd's Rep 131 (simple theft not a seizure). A latent or implicit threat afforce suffices, see 13.50 below. 102 Cory & Sons v Burr (1883) 8 App Cas 393. However, under the Institute War Clauses (Cargo), it must arise from risks covered under d 1.1. See also the restrictions on cover in the war and strikes clauses for hulls and freight discussed at 13.67ff below. "3 Powell v Hyde (1855) EI & BI 607; Lozano vJamon (1859) 2 EI & EI 160; Robimon Gold Mining Co v Alliance Assurance CO [1902J 2 KB 489. '" Johmon & Co v Hogg (1883) 10 QBD 432. 105 Kleinwortv Shepard (I 859) 1 EI & E1447. 106 Greene v Pacific Mutual Life Insurance Co (1864) 91 Mass (9 Allen) 217 (M Miller, Marine \.%r Risks (3rd edn, 2005) paras 12.50-12.52); Republic of China et at v National Union Fire Imuranee Co o/Pittsburgh (The Hai Hsuan) [1958] I Lloyd's Rep 351. ", Cory & Sons v Burr (1883) 8 App Cas 393.

Double insurance is discussed in Ch 26 below. The first three groups of perils under the war and strikes clauses for hull and freight correspond to the perils covered under ,the war clauses for cargo, while the next two groups correspond to the perils covered under the strikes clauses for cargo. The pe.J:ils of confiscation and expropriation are then added as a sixth group. 94 Institute War Clauses (Cargo), cl 1.2. 9S (1883) 8 App Cas 393, 405.
92

93

420

421

WUr R,sks
the misappropriation of cargo by those in possession of it, thus altering the character of the possession, does not amount to a seizure for the purposes of marine insurance. t08 (2) Arrest, Restraint, and Detainment
13.48 These perils replace the SG policy phrase 'arrests, restraints, and detainments of

Perils ofDeprivation and Inhibition on Use

authority. 'For the purposes of the law of insurance, in the absence of an express agreement to the contrary, a policy should not be construed as covering the ord~nary co~sequences of voluntary conduct of the assured arising out of the ordmary mCIdents of trading; it is not a risk. 1113 There is, however, no requirement of proof of either actual use of force or resistance. It suffices that the assured has no realistic alternative but to leave the insured property idle.'14 Accordmgly, where the seizing or restraining force is a government, its latent power provides the necessary compulsion." 5 Moreover, as stated by Lord Wright . . m Th e M' de n, '16' there may be a restraInt, though the physical force of the state In concerned is not immediately present. It is enough, I think, that there is an order of the state: ~ddressed to a subject of that state, acting with compelling for~e on h,u:, deCISIvely exacting his obedience and requiring him to do the act whIch effectively restrains the [subject-matter insured]. The Case itselfarose out of the order of the German government on the outbreak 13.51 of the Second World War to all German ships to take refuge in neutral pOrts, return to Germany if possible, or, as a last resort, to scuttle. The master of the Minden abandoned her planned voyage, but failed in his attempt to run the Alhed blockade and scuttled his ship. In an action by the British cargo owners, the House of Lotds held there was a restraint of princes (namely, the German government) as soon as the master seized the goods 'in the sense that he ceased to hold the~ as carrier and changed the character of his possession by taking and controllmg them as agent for the German government with the intention and effect of holding them adversely to the assured and applying them to the hostile purposes of his government'.117 The restraint may equally be imposed by the government of the assured.'" 13.52 The possibility of an indemnity from the restraining power does not negate the

all kings, princes, and people', which is srated by Schedule 1, rule 10 of the Marine Insurance Act 1906 to refer to political or executive acts and not to include losses caused by riot, which constirutes a separate peril, or ordinary judicial process. Under the modern Insritute clauses, the insuring clause refers to
'arrests, restraint and detainment' with no qualification, while a number of

restrictions on the cover prima ftcie granted are imposed by a series of express exclusions.'o, It would, therefore, appear that no additional restriction on cover is to be implied into the covered perils, although the precise analytical relationship between this group of covered perils and the relevant express exclusions has elicited conflicting views in the case law."o
13.49

Undeniably, the three perils overlap. In so far as any distinction can be discerned, 'restraint' may embrace an interdiction preventing free use of property without deprivation ofpossession, while the terms 'arrest' and ~detainment' may carry connotations of physical inhibition, either immediate or potential, should an instruction not be obeyed.'" The courts, however, have not been faced with a policy separating the three, with the result that the cases portray one combined peril. Moreover, there is considerable overlap between the combined peril and, in parricular, seizure. In Miller v Law Accident Insurance CO,'12 a prohibition on the landing of a cargo of bulls was held to be a restraint and, therefore, prima ficie covered. However, the underwriters successfully invoked a 'capture, seizure or detenrion' exclusion, which was held to remove the cover otherwise provided by the phrase 'arrests, restraints, and detainments'. detainment is that the peril should not be voluntarily incurred. Consequently, there is no insured detainment where a vessel is confined to a port for failure by an assured shipowner to pay porr dues for which the assured is liable to the port

13.50 A requirement common to the perils of capture, seizure, arrest, restraint and
'" Ikerigi Compania Naviera SA v Palmer (The Wondrous) [1991] 1 Lloyd's Rep 400, 416 per Hobhouse J. 114. In Becker, Gray o-Co v London Assurance Corp [1918J AC 101, 115, Lord Sumner expressed the v:ew that no. r~le could .be formulated 'to fix the distance from which an encircling force may be saId to restram Its enemIes'. But note the distinction between an operative restraint and mere apprehension thereof, 115 Robir;son Gold Mining Co v Alliance Assurance CO [1902J 2 KB 489; Miller v Law Accident Insurance Co [1903) 1 KB 712; Sanday v British & Foreign Marine Insurance Co [1915] 2 KB 781; Becker, Gray & Co v London Assurance Corp [19181 AC 101; The Bamburi [19821 1 Lloyd's Rep 12,315. Proof of an actual threat of force or use of force is, however, required where the restraint IS unlawful because disobedience is not illegal: Russian Bankjor Foreign Trade v Excess Insurance Co L,d[1918J 2 KB 123, 130-1. '" Rickards v ForestalLand, Timber & Railwa!ys Co (The Minden) [19421 AC 50 81-2 117 'b'd ' . l ' 79-80 per Lord Wright. 118 Rotch vE~ie(1795) 6 TR413; Sanday o-Co v British 0- Foreign Marine Insurance Co [1915] 2 KB 781; Ruman Bank for Foreign Jrade v Excess Insurance CO [1918J 2 KB 123, 130.

'08 ShellInterna,ional Petroleum Co L,d v Gibbs (The Salem) [19831 2 AC 375; Bayview Mo'ors Ltd v Mitsui Marine &Pire Imurance Co Ltd (2003] 1 Lloyd's Rep 131. 109 The relevant exclusions are discussed at 13.62-13.79 below. 110 See 13.80-13,83 below:' '" Ikerigi Compania Naviera SA v Palmer (The Wondrous) [1992] 2 Lloyd's Rep 566, 571, 577 (vessel detained for infringement of customs regulations in that any attempt to leave would have been stopped by force). .'
112

[1903J 1 KB 712.

422

423

war Risks
existence of the peril. '19 A requirement that vessels follow a particular route in time of war is not a restrainr. 120 (3) The Consequences Thereof
13.53 Obsolete forms of war tisks insurance covered, inter alia, 'the risks of capture, seizure, arrest, restraint or detainment by the King's enemies ang the con-

Perils ofDeprivation and Inhibition on Use

emphasizes exceeding that which can be preparatory only, rather than concentrating upon any degree of proximity to the act that should complete the full offence. An attempt is committed 'when the merely preparatory acts come to an end and the defendant embarks upon the crime proper',12' or, in more colloquial terms, when the defendant is 'on the job'.'" There is sufficient evidence of attempted murder to go to the jury where the defendant gets into a person's car and points a loaded sawn-off shot gun at him even though, to complete the crime of murder, it might be necessaty still to remove the safety catch and pull the trigger. 128 However, it is not an attempted theft to try unsuccessfully to render void a greyhound race in order to recover a bet laid on a losing dog. Doing X (jumping on to the race track) to try to produce effect Y (annulation of the race by the stewards) in order to produce opportunity Z (to reclaim the wagered money from a bookmaker) did not cross the frontier from mere preparation to attempted theft from the bookmaker. 12'
An analogy may be drawn with the distinction between loss caused by an 13.57 operative peril as opposed to mere apprehension of such a peril. 130 'Is it a fear of a peril that will happen in the future 01' has the peril already happened and is so imminent that it is immediately necessary to avert the danger by action?"31 Similarly, an attempt seems to imply that the main peril is under way.'" For example, the jettison of money to avoid its seizure, when under pursuit by an enemy vessel, where rhe pursued vessel subsequenrly escapes, should provide an example of loss caused by an attempted capture.'" Likewise, the proximate cause of the Joss would be attempted capture where the master, in seeking to escape, ran his vessel ashore or put into a bay where there was neither harbour nor anchorage and the vessel, unable to get out, was then driven ashore by the wind and waves. 134

sequences thereof and the 'consequences of hostilities and warlike operations'. High authority established that the term 'consequences' encapsulated the effects of the enumerated perils and represented a loss, not an independent petil. Cover waS confined to losses consequential upon the specified perils and did not extend to loss or damage caused by such consequences. 121 There is no reason to believe that the modern Institute clauses should be understood differenrly.
13.54 A likely consequence of one of the perils of deprivation is detention so as to

retard the vessel in the pursuance of its voyage or to prevent accomplishment of the voyage altogether. Such frustration ofvoyage is discussed elsewhere.'" (4) Any Attempt Thereat
13.55 There is no authority on the meaning of an attempt in the context of an insured

peril ofdeprivation or inhibition. Assistance may be found in the criminal law on attempts,123 although it should be remembered that the same considetations do not necessarily underpin the imposition of criminal liability and determination of the extent of insurance coverage.
13.56 Section 1 of the Criminal Attempts Act 1981 provides, inter alia, that a person

is guilty of an attempt if that petson 'does an act which is more than merely prepatatoty to the commission of the offence'. It is, however, difficult to draw the distinction between an act 'metely preparatory' and an attempt, which will encompass acts of preparation which are not 'merely' preparatory. In R v Gulleftr,'24 it was held to be unnecessary for the offender to 'have crossed the Rubicon and burnt his boats'.'" Moteovet, the statutory formulation

Rotch v Edie (1795) 6 TR 413. Bulchow Vaughan & Co v Campania Minera (1916) 32 TLR 404. 121 Ionides v Universal Marine Insurance Co (1863) 14 CB (NS) 259; Liverpool & London war Risks Insurance Association Ltd v Ocean Shipping Co (The Priam) [1948] AC 243, 256-7, 263-5; Costain-Blankevoort (UK) Dredging Co Ltd v Davenport (The Nassau Bay) [1979] 1 Lloyd's Rep
120

"9

395,403. 122 See 21.97 below. 123 As to which, see Smith arid Hogan, Criminal Law (10th edn, 2002) 328ff; Simester and Sullivan, Criminal Law: Theory and Doctrine (2nd edn, 2003) 295ff. 124 [1990] 1 WLR 1063n. 125 As suggested in DPP v Stonehouse [1970] AC55, 68 per Lord Diplatk. Thus, attempted murder by poisoning is committed by the administering of successive doses of poison even if the

cumulative effect is not yet fatal and the accused could still change his mind: R v White [1910] 2 KB 124. See also R v jones [1990J 1 WLR 1057; Attorney-GeneralS Reftrence (No 1 of 1992) [1993] 1 WLR 274; Rv Dagnall [2003] EWCA Crim 2441, (2003) 147 SJLB 995. '" R v Gulleftr [1990] 1 WLR 1063n, 1066 pa Lord Lane C]. m R v Osborn (1919) 84 JP 63, 64 per Rowlatt J. A decision to burgle a particular address, equipping oneself with a jemmy, dressing for burglary and setting off for the address would be insufficient to constitute attempted burglary. 128 Rvjonedl990] 1 WLR 1057. 129 Rv Gulleftr[1990] 1 WLR 10630. 130 See 9.46-9.54 above. 131 Symington & Co v Union Insurance Society ofCanton Ltd (1928) 31 LlLRep 179, 182 per Scrutton LJ. 132 Nickels v London & Provincial Marine & General Insurance Co (1900) 6 Com Cas 15, 17, 133 M Miller, Marine War Risks (3rd edn, 2005) paras 14.25-14.26. The suggestion is derived from Butler v Wildman (1820) 3 B & AId 398, although in that case the vessel was captured. 134 Ionides v Universal Marine Insurance Co (1863) 14 CB (NS) 259, 286.

424

425

war Risks
(5) Confiscation or Expropriation

Perils ofDeprivation and Inhibition on Use

The events constituted the broader peril of seizure, but confiscation could not extend to the renunciation by Prussia of all rights in the property.

13.58 'The essence of [expropriation] is the deprivation by state organs of a right of property either as such, or by permanent transfer of the power of management and control. '135 It is a manifestation of the sovereign power of a state over its territory and property found in that territory. The deprivation may be termed 'confiscation' where it is unlawful, without compensation, or by way of lawful penalty. Theft by state officials for their own benefit is not, however, an exercise of sovereign power and does not amount to confiscation. ' " In Re Barnett's Trusts,137 Kekewich J stated that 'in the ordinary sense [confiscation] applies where the Crown intervenes, not to take property because it is vacant, but to take by way of penalty in exercise of sovereign rights'. The two terms, however, clearly overlap. Thus, it would not be an abuse of language to speak of unlawful expropriation, although the taking of property by way of genuine judicial penalty would naturally be termed confiscation and not naturally termed expropriation. 13.59 The deprivation may be indirect and gradual, giving rise to 'consttuctive' or 'creeping' expropriation or conscation. 138 In such a case, an issue could arise as to when the loss occurred for the purposes of determining whether the insurer was on risk at the relevant moment. A contractual right, such as freight, is property susceptible of expropriation or confiscation. '39
13.60 In Levin v Allnutt, 140 cargo insurance was 'warranted free from confiscation by the Government in the ship's port or ports of discharge'. The vessel anchored in a Prussian port where possession was disputed by Prussian and French boarders. The Prussian government having referred the matter to the French authorities, the Imperial Court of Prizes at Paris condemned the ship and carg9 as prizes to the French, to whom they were handed over. The result clearly enured to the benefit of the French government, but had it been effected 'by' the Prussian government? Lord Ellenborough CJ stated in the course ofargument that confiscation 'must be an act done in some way on the part of the Government of the country where it takes place, and in some way beneficial to that Government; though the proceeds may not, strictly speaking, be brought into its Treasury'.'4'

As previously noted, there is no reference to confiscation or expropriation in the 13.61 war or strikes clauses for cargo. It is most unlikely that insured property can be
lost by expropriation or confiscation without the occurrence of one of the other perils of deprivation or inhibition on use. '4' However, the requirement under the Institute War Clauses (Cargo) that a peril ofdeprivation or inhibition on use must arise from a peril of war, uprising, or hostility'43 means that any expropriation or confiscation of cargo that does not so arise is irrecoverable under the cargo war clauses. Moreover, it is also irrecoverable under the marine cargo clauses. The Institute Cargo Clauses (A) have an insuring clause broad enough

to cover expropriation or confiscation, but in those clauses the exclusion of

perils of deprivation and inhibition on use is unqualified by any reference to war perils. '44 (6) Restrictions on Scope of Cover While the true extent of any aspect of cover under any policy depends on the 13.62 combination of insured risks and exclusions, this is especially true in respect of various forms of deprivation and inhibition on use. The war and strikes clauses for hulls and freight contain four provisions labelled 'exclusions' that limit the cover prima ficie granted in respect of the perils discussed in the previous paragraphs. Thus, clause 5 of the Institute War and Strikes Clauses (Hulls-Time) (l 1I 1/95) provides as follows: 145
This insurance excludes 5.1 loss damage liability or expense arising from 5.1.2 requisition, either for title or use, or pre-emption

5.1.3 capture seizure arresr restraint detainmenr confiscation or expropriation

by or under the order of the government or any public or local authority of the country in which the Vessel is owned or registered 5.1.4 arrest restraint derainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations 5,1,5 the operation of ordinary judicial process, failure to provide security or to pay any fine or penalty or any financial cause,

I Brownlie, Principles ofPublic International Law (6th edn, 2003) 508-9, Bayview Motors Ltd v Mitsui Marine 6- Fire Insurance Co Ltd (2002) EWHC 21 (Comm), [20021 1 Lloyd's Rep 652, para 32. m [1902J 1 eh 847, 858. 138 eg deprivation of effective use, control, and benefits, but not title, as in Starrett Housing Corp v Iran (1984) 4 Iran-USCTR 122, or confiscatory taxation such as a Burmese 99% profits tax. See generally D Harris, Cases and Materials on Public International Law (6th edn, 2004) 577-611. 139 Amoco International Financial Corp v Iran (1987) 15 Iran~USCTR 189, para 108. ,,, (1812) 15 East 267. ,,, ibid 269.
13S 136

See Panamanian Oriental Steamship Corp v Wright (The Anita) [1971] 1 WLR 882, 886-7, See 13.02-13.04, 13.44 above. 144 Institute Cargo Clauses (A), d 6.2. 145 Likewise the almost identically worded Institute War & Strikes Clauses (Hulls~Time) (1/10/83), clI4.1.3-4.1.6.
142

143

426

427

Wir Risks
13.63 These exclusions are not found in the Institute War Clauses (Cargo). However, as noted above,146 the scope of rhe cover prima ficie provided in respect of deprivation and inhibition on use is narrower than in rhe context of hull and freight insurance. Moreover, clause 3 of the Wat Clauses (Cargo) provides as

Perils ofDeprivation and Inhibition on Use

'The mobilisation of the industrial and financial resources of the country could not be done without statutory emergency powers. The prerogative is really a relic of a past age, not lost by disuse, but only available for a case not covered by statute."54 Subject to a contrary statutory provision, any exercise of a right of requisition attracts a right to compensation: 155 requisition 'is a right to take and pay'.156 Two other forms of requisition may be considered. The right of angary permits a 13.66 belligerent state to requisition the property of neutrals found within territory of which it is sovereign or in military occupation. 157 The right is restricted to cases of real and extreme need for the property in question'58 and compensation must be paid to the owner. 15' Requisition may also occur 'in prize', as considered by the Privy Council in The Zamora: 160
A belligerent Power has by international law the right to requisition vessels or goods in the custody of its Prize Court pending a decision of the question whether they should be condemned or released, but such right is subject to certain limitations. First, the vessel or goods in question must be urgently required for use in connection with the defence of the realm, the prosecution of the war, or other matters involving national security. Secondly there must be a real question to be tried, so that it would be improper to order an immediate release. And, thirdly, the right must be enforced by application to the Prize Court, which must determine judicially whether, under the particular circumstances of the case, the right is exercisable.

follows:
In no case shall this insurance cover

3.6 loss damage or expense ar.ising from insolvency or financial default of the
owners managers charterers or operators of the vessel 3.7 any claim based upon loss of or frustration of the voyage or adventure.

This section will now consider the exclusions set out above in the war and strikes clauses for hulls and freight. It may be noted that the causal phrase 'arising from' imports the traditional test of proximate cause.'47

(aJ Clause 5.1.2: requisition andpre-emption

13.64 In time of national emergency,'48 the Crown has a prerogative right to requisition the property of British subjects on land or seas over which the Crown exercises sovereignty.'" Although a requisition requires the taking of possession . . al or assumptIOn 0f t h e ng h t 0 f use or d'lSpOS, 150 t h 'IS not one 0 f'51 e term art. According to Lord Merriman P in The Steaua Romana: 152
Requisitioning may be, and usually is, nothing more than a hiring of the ship
which does not take the property in the ship out of the owner, though the owner has no alternative whether he will accept the proposition of hiring or not, or it may involve a taking over of the absolute dominion of the vessel, though this may nor be ascertained in any given case until the terms are finally settled. . . . ,.

13.65 The royal prerogative is 'the residue of the power of sovereignty that has not been superseded or abridged or supplanted temporarily by the power of the King in Parliament'.153 In reality, requisition is nearly always regulated by statute:

Does the requisition exclusion in the Institute war and strikes clauses for hulls 13.67 and freight cover angary and requisition in prize? Since they are forms of requisition and defined as such, it is suggested that they do fall within the exclusion, although the contrary has been asserted at least with respect to angary.'61 All requisitions fall, however, within the peril 'restraim'.'62 Consequently, any

See 13.04 above. Handelsbanken Norwegian Branch ofSvenska Handelsbanken AB (PUBL) v Dandridge (The Aliza Glacial) (2002] EWCA Civ 577, (2002] 2 Lloyd's Rep 421. para 60. 148 On the meaning of 'emergency', see Crown of Leon (Owners) v Admiralty Commissioners [I 92 I) 1 KB 595. 603-4. 149 It has been argued that the right extends to British ships anywhere in the world: W Holdsworth, 'The Power of the Crown to Requisition British Ships in a National Emergency' (1919) 35 LQR 12. However, the prerogative has also been stated obiter to be confined to the Crown's sovereign territory: Nissan v Attorney-General [1970] AC 179, 213, 236. 150 Bombay & Persia Steam Navigation Co v Shipping Controller (1921) 7 LlLRep 226 (directing of ship to a different port of destination not requisition); France Fenwick 6- Co Ltd v The King [1927] I KB 458 (refusal to allow discharge of cargo without permission not requisition). '" The Sroadmayne(l916] P 64, 73; The Suaua Romana (1944] P 43, 48. '" ibid 48, following The Saryen (19161 P 306, 317. m Surmah Oil Co L,d v LordAdvoca,e(l965] AC 75, 148 per Lord Pearce.
146

147

154 ibid 101 per Lord Reid. Moreover, where a statutory scheme for requisition exists, the Crown may not exercise the common law prerogative unless the statute so provides: Attorney~ General v De Keyser's Royal Hotel [1920] AC 508. The most important statute is the Compensation (Defence) Acr 1939. 155 Surmah Oil Co L,d v LordAdvoca,e(l965] AC 75. 156 Nissan vAttorney~General [1970] AC 179,227 per Lord Pearce. 157 The Zamora [1916J 2 AC 77, 101; Commercial 6- Estates Co of Egypt v Board of Trade (1925] 1 KB 271, 285. '58 The Zamora (1916] 2AC77, 101-2. 159 ibid 101. See also Commercial 6- Estates Co ofEgypt v Ball(1920) 36 TLR 526; Commercial & Estates Co ofEgyp, v Board ofTrade (1925J 1 KB 271. 285, 295-6; Surmah Oil Co L,d v Lord Advoca'dl965] AC 75,102. 160 (1916] 2AC77, 106. 161 M Miller, Marine war Risks (3rd edn, 2005) para 21.42. Miller draws no distinction between angary and requisition in prize. 162 Tamplin (FA) SS Co L,d vAnglo-Mexican Petroleum Produc~ Co L,d(1916] 2 AC 397 (intra vires requisition). The position is probably the same where the requisition is ultra vires: Russian Bankflr Foreign Trade v Excess Insurance Co [1919] 1 KB 39.

428

429

lVtlr Risks
requisition of cargo that arises from a peril of war, uprising, or hostility will be covered under the Instirute War Clauses (Cargo).
13.68 It may be noted that not only do the Instirute war and strikes clauses for hulls

Perils ofDeprivation and Inhibition on Use

A similar approach is adopted with respect to rhe concept of 'trading regula- 13.72 60ns'. Whether a regulation should be so characterized 'depends upon its own nature and purpose' and not upon whether it happens to impact upon the trading operation of a particular vessel.'' In The Aliza Glacial, '.8 a fishing vessel was seized and detained for illegal fishing contrary to the Australian Fisheries Management Act 1991. Although this Act clearly restricted the commercial operation of the insured vessel, the Court of Appeal held that it was not a trading tegulation within the meaning of the Institute clauses but an ecological and environmental measure, designed to' conserve fishing stocks. In contrast,
where international trading sanctions are imposed on a country, restrictions on

and freight not cover requisition of a vessel, whether for title or use, but such
requisition also automatically terminates cover, subject to certain deferrals,

under all Instirute and International marine clauses for hulls and freight and, without any deferrals, under all Institute war and strikes clauses for hulls and freight.!63
13.69 Also excluded alongside requisition is 'pre-emption'. This is the purchase from

irs neutral owner of property that, in the English view of international law, is susceptible to condemnation as prize. It has always been viewed as confined ro naval stores. Pre-emption excludes any litigation between the Crown and the neutral party.164

the commercial operation of vessels imposed by or pursuant to such sanctions would be regarded as generated by trading regulations.'' The exclusion covers deprivations 'under' quarantine regulations and 'by reason 13.73 of infringement' of customs or trading regulations. No significance is, however, to be read into this difference of expression. In particular, the reference to 'infringement' does not require an actual infringement to have been committed. In The lVtlndrous,170 the insured vessel did not have clearance to leave under customs regulations because the shipowner had failed to pay port dues and a local tax on freight, and the exporter had failed to provide a foreign currency guarantee as required by exchange control legislation. Alrhough the vessel was not arrested or restrained in any immediate way, it would have been forcibly detained had it attempted to leave without clearance. In those circumstances, a majority of the Court of Appeal upheld the decision of Hobhouse J at first instance 171 that the exclusion applied. There was no commercial sense in confining the exclusion to circumstances where the vessel attempted to sail in breach of the customs regulations. Those regulations were equally operative in immobilizing the vessel whether or not broken. For the exclusion to apply, the deprivation must be genuinely attributable to the 13.74 operation of regulations. In The Anita, 172 Vietnamese customs officials found a large quantity of goods not recorded on rhe cargo manifest concealed on board the insured vessel. A Special Court, established under emergency legislation, subsequently acquitted the mastet of smuggling, convicted five crew members, and ordered the confiscation of the smuggled goods and the insured vessel. The assured argued that the loss of the vessel did nOt arise from an infringement of

(b) Clause 5.1.3: order ofgovernment or public or local authority 13.70 This exclusion is confined to deprivation of the insured vessel o'r an inhibition on its use by order of the government or public or local authority where the vessel is owned or registered. It would include, but is not confined to, detention by the flag state for non-compliance with rules of international law regarding the safety of shipping that the flag state is charged with enfotcing. (c) Clause 5.1.4: arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason ofinfi'ingement ofany customs or trading regulations 13.71 The phrase 'customs tegulations' embtaces all rules relating to the importing Ot exporting of goods, irrespective of the nature Ot extent ofrestriction irnposed. In particular, it includes not only regulations that impose conditions such as the payment of duties or the obtaining of a licence but also teglllations that impose a total ptohibition. 16' Metely because a regulation is enforced by customs authotities does not necessarily make it a customs regulation within the meaning of the Institute clauses: the test is one of the nature of the regulation. 16

,,, eg Institute Time Clauses Hulls (/10/83), cl 4.2; (1111/95), cl 5.2: International Hull Clauses (01111/03), cl14,1: Institute War and Strikes Clauses (Hulls-Tirne) (/10/83), cl5.2.3:

(l/11195), cl 6.2.2. The contrary can, of course, always be agreed, as expressly contemplated by the International Hull Clauses. '" The Zamora [19161 2 AC 77, 105-6, 165 Panamanian Oriental Steamship Corp v Wright (The Anita) [1971] 1 WLR 882; Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The K/eovoulos ofRhodes) [20031 EWCA Civ
12, [200311 Lloyd's Rep 138, paras 41-42.

167 Hande/sbanken Norwegian Branch ofSvenska HandelsbankenAB (PUBL) v Dandridge (The Aliza G/aciaO [20021 EWCA Civ 577, [2002J 2 Lloyd's Rep 421, para 30 per Potter LJ.

"" [20021 EWCA Civ 577, [20021 2 Lloyd's Rep 421, para 31.
170

'" ibid para 30.

Ikerigi Compania Naviera SA v Palmer (The Wondrous) (1992] 2 Lloyd's Rep 566. Panamanian Oriental Steamship Corp v Wright (The Anita) [1971] 1 WLR 882.

,,, Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The'Kleovoulos of Rhodes)
[20031 EWCA Civ 12, [20031 1 Lloyd's Rep 138, para 43.

'" [1991] I Lloyd's Rep 400.

172

430

431

W0r Risks
customs regulations because the court, in ordering the confiscation ofthe vessel, had acted without jurisdiction and under the political direction of the government and not in an independent and bona fide exercise of a judicial function. The Court ofAppeal accepted that, were this indeed the case, the assured would be entitled to recover, but held that the evidence did not sustain the assured's argument.

Perils ofDeprivation and Inhibition on Use Aliza Glacia4 '79 the exclusion in principle applied where Australian authorities
that had seized the insured vessel in connection with illegal fishing and detained it in contemplation of fotfeiture in the event of a conviction of the master or crew, then offered its release in return fot the provision of security. On the facts, however, the amount of the security demanded was at least equal to the value of the vessel and its forfeiture was appatently inevitable. It was, consequently, reasonable for the assured to decline to provide the security and the exclusion did not apply. Similarly, the exclusion would not apply where the assured declined to pay a ransom demanded by pir'''es or terrorists for the release of a hijacked vessel."o Once the Australian authorities offered to release the insured vessel in return for 13.77 security, a question of causation arose. If the proximate cause of the resulting loss was the failure to provide security, there would be no loss caused by a covered peril, so that the exclusion would be irrelevant. The Courr of Appeal held, however, that the failure ro provide security was 'an effective cause operating concurrently wirh [the] original seizure and detention so as to deptive the owners of their use of the vessel'. This put the exclusion into play, although, as JUSt seen, it did not operate on the facts. In contrast, in the South Aftican case of The Morning Star,'81 it was held that 13.78 where a vessel was confiscated because of the failure, through impecuniosity, to pay a fine within the permitted time, the sole proximate cause of the confiscation was the failure to pay, to the exclusion of the otiginal arrest and detention of the vessel for the offence in respect of which the fine had subsequently been levied. If one transposes this causation analysis to the facts of The Aliza Glacia4 the proximate cause of the loss would have been the failure to provide security, regardless ofwhether that was reasonable. Since that was not a covered peril, the assured could not have recovered. It is, however, suggested that the approach of the English Court ofAppeal to causation is to be preferred."2

(d) Clause 5.1.5: ordinary judicialprocess, ftilure to provide security or to pay any fine orpenalty or any financial cause
13.75 Insurers are not liable for the consequences of normal judicial proceedings. The

origin of the exception lies in the exclusion under the SG policy of ordinary judicial process from the petil of restraints of princes. 173 In The Anita,174 Mocatta J confined 'ordinary judicial process' to civil proceedings since 'in such cases the State is merely providing a service to litigants, rather than exercising its own power through the Courts for its own purposes'.175 There would, therefore, be a covered peril of deprivation if a vessel were detained afrei either a murder on board or the discovery of illegal immigrants on board,176 or, as in The Anita itself, the insured vessel was seized after customs officials found smuggled goods on board and subsequently confiscated by judicial order.
13.76 Nevertheless, the reference ro 'failure ... to pay any fine or penalry or any

financial cause' clearly extends the exclusion beyond civil proceedings. In particular, the phrase 'any financial cause' is extremely broad and includes a failure to pay money even on the part of someone orher than the assured shipowner. 177 This extension is, however, not without limits. Notwithstanding the references to 'any' fine, penalty or 'any' financial cause, the exclusion ha's to be understood as subject to an implied limitation that the financial issue must be triggered by a reasonable and legitimate claim against the vessel."8 In The

173 MIA 1906, Sch 1, rIO; Finlay v Liverpool & Great Western 55 Co Ltd (1873) 23 LTNS 251; Crew, Wtdge/)' & Co v Great Western 55 Co Ltd[18871 WN 161. 174 Panamanian Oriental Steamship Corp v Wright (The Anita) [1970J 2 Lloyd's Rep 365 (the

proceedings of an extraordinary Vietnamese military tribunal held not to constitute 'ordinary judicial process'), rvsd on different grounds [1971] 1 WLR 882. 175 [1970J 2 Lloyd's Rep 365, 377. See also Handelsbanken Norwegian Branch of Svenska Handelsbanken AB (PUBL) v Dandridge (The Aliza Glacial) [2002J EWCA Clv 577, [20021 2 Lloyd's Rep 421, para 44. 176 Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The Kleovoulos of Rhodes) [2003J EWCA Clv 12, [200311 Lloyd's Rep 138, para 16, 177 Ikerigi Compania Naviera SA v Palmer (The Wondrous) [19921 2 Lloyd's Rep 566, 573. 178 Handelsbanken Norwegian Branch ofSvenska Handelsbanken AB (PUEL) v Dandridge (The Aliza Glacial) [20021 EWCA Clv 577, [20021 2 Lloyd's Rep 421, paras 59, 66, 72, lr had been suggested at first instance that a loss flowing from a failure to respond to an illegitimate or unreasonable financial demand in respect of a: seized vessel should be regarded as not arising f!'Om the failure to respond but from the seizure: para 52 (quoting from the firstinstance judgment of Toulson] (Comm Ct, 11 May 2001)).

[20021 EWCA Clv 577, [2002J 2 Lloyd's Rep 421. See also 21.82-21.83 below, ibid para 52. 181 Incorporated General Insurances Ltd v AR Shooter (The Morning Star) [1987] 1 Lloyd's Rep 401, 406-7 (Supreme Court ofSouth Africa, Appellate Division). The policy was an old~style SG policy that covered total loss caused by arrest and contained no express exclusion of losses caused by failure to pay any fine. 182 It is ironic thar a claim under an insurance policy is formally classified as an acrion for breach by rhe insurer of an obligation to preserve the subject-matter insured free from harm by the covered perils: see 22.65 below. The South African Court of Appeal held in effect that the assured,'s impecuniosity broke the chain of causation between the insurer's breach of contract and the confiscation of the vessel, although in the general law of both contract and tort impecuniosity is disregarded as a ground for denying recovery: A Burrows, Remedies for TOrts and Breach of Contract (3rd edn, 2004) 144-7. However, extrapolation from the formal classification of the assured's claim should perhaps be avoided.
179
180

432

433

Wtzr Risks
13.79 Financial default as excluded under rhe Institute clauses can qualify as the

Derelict Weapons
indeed of Mocana J at first instance, in The Anita. 187 It is, rherefore, contrary ro precedent. Secondly, where new clauses are inttoduced thar carefully delineate the precise scope of cover by means of a professionally drafted set of insuted perils and excluded perils, that narural inference is that provisions drafted as exclusions are intended to be treated as such. Thar inference musr be further strengthened in respect of further revisions inttoduced afrer the decision in The Anita, in rhe light of which the wording could have been modified had the market been dissatisfied with the incidence of the burden of proof. Thirdly, in the view of Lloyd LJ, only those exclusions whose provenance so dictates fall to be treated as part of the definition ofthe peril.'" Such a variable incidence of the burden of proof dependent on technical legal history is, ir is suggested, an unlikely interpretation of a commercial document designed for use in an international market. This is supported by the fact that, in more recent litigarion, it has been common ground between tbe parties thar the burden of proof in respect of all clauses drafted as exclusions falls on the insurer. 18'

proximate cause of a loss irrespective of whether the default leads to a covered peril of deprivation or inhibition on use 183 or whether such a peril in turn leads to an excluded financial default. 184

(e) Characterization and burden ofproof

13.80 Some divergence of view has emerged as to the correct characterization of rhe

limitations on cover imposed under certain of the clauses termed 'exclusions'. If genuine exclusions, it is clear that the burden of ptoofwould fallon the insurer. If, however, they are properly chatacterized as part of the definition of the covered perils, the assured will carry the burden of disproving their operation.
13.81 Marine insurance policies have never offered cover against all arrests, restraints,

and detainments. Under the old SG policy, cover was limired by providing that the insured perils were 'arrests, restraints and detainments of all kings, ptinces and peoples'. This was then construed as referring to political or executive acrs and not including loss caused by riot or by ordinary judicial process.'as The introduction of new Instirute clauses in the twentierh century saw the reference to 'kings, princes and peoples' disappear. Instead, an equivalent, and indeed progressively more extensive, curtailing of the range of covered arrests, restraints, and detainments was effected through a number of express exclusions. In terms of apparent contractual structure, therefore, that which was formerly part of the definition of the insuted perils had been telocared to the express exclusions. The question was whether this relocation was purely presentational or was accompanied by a change in legal characterization and accompanying burde!) of proof. 13.82 In the detainment case of The Wondrous,186 Lloyd LJ clearly adopted the view

C. Derelict Weapons
The peril of 'derelict mines torpedoes bombs or other derelict weapons of war' 13.84 was inserted into the Institute clauses to reverse the decision in The Nassau Bay."o A dredger off Mauritius sucked up a number of 20mm Oerlikon shells dumped in the sea by British atmed forces at the end of the Second World War. They exploded, resulting ultimately in the sinking of the vessel. On collecting the insurance money, the owners were assessed to tax under the Capital Allowances Act 1968. They appealed on rhe basis of an exemption
covering war risks,

which

were construed in accordance with normal marine

that the exclusions now found in clauses 5.1.4 to 5.1.5 of the Institute War and Strikes Clauses Hulls-Time (1/11/95) should, given their provenance as patt of the definition of the perils of arrest, restraint, and detainment, be tegarded as 'part of the definition of the petil [of detainment] itself and that 'it would ... be a mistake ro tegard [the insuring clause] as defining the perils and [clauses 5.1.4 and 5.1.5] as providing exceptions to liability in specified citcumstances'.
13.83 With respect, howevet, it is suggested that this approach cannot be supported.

insurance coverage at the rime. The quesrion, therefore, was whether the explosion could be said to be a consequence of hostilities or warlike operations. Holding that it could not, Walton J stated that the dumping of ammunition was an act of pacification not hostility. The 'derelict mines etc' peril was subsequently introduced into the war clauses and excluded from the marine

First, it is inconsistent with the conttary opinion of the Court of Appeal, and

187 Panamanian Oriental Steamship Corp v Wright (The Anita) [1970] 2 Lloyd's Rep 365, [1971] 1 WLR 882, although the Court ofAppeal reversed Mocatta] on whether the insurers had discharged that burden, see 13.74 above. '88 Ikerigi Campania Naviera SA v Palmer (The Wondrous) [1992J 2 Lloyd's Rep 566 at 572.
189 Handelsbanken Norwegian Branch ofSvenska Handelsbanken AS (PUBL) v Dandridge (The Aliza Glacial) [2002] EWCA Civ 577, [2002] 2 Lloyd's Rep 421, para 24; Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The Kleovoulos ofRhodes) [2003J EWCA Civ 12, [2003J 1 Lloyd's Rep 138, para 40. 190 Costttin-Blankevoort (UK) Dredging Co Ltd v Davenport (The Nassau Bay) [1979] 1 Lloyd's Rep 395.

183

As, eg, in Ikerigi CompaniaNaviera SA v Palmer (The Wondrous) (1992] 2 Lloyd's Rep 566. ~84 Han,delsbanken Norwegia~ Branch ofSvenska H~ndelsbanken AB (PUBL) v Dandridge (The

Al,za GlaCIal) [2002] EWCA CIV 577, [2002J 2 Lloyd s Rep 421, paras 57-60, the facts of which constitute an example of the second situation', 185 MIA 1906, Sch 1, rIO. 186 Ikerigi Campania Naviera SA v Palmer (The Wondrous) [1992J 2 Lloyd's Rep 566, 572.

434

435

mtr Risks
clauses in order to place insurance liability for such occurrences upon the war risks underwriters. 191
13.85 The equivalent provision of the rules of the mutual war risks associations refers to 'mines, torpedoes, bombs or other weapons of war, including derelict mines, torpedoes, bombs or other derelict weapons of war'. This prompts the question of which underwriters, if any, are liable under the Institute clauses for loss or damage caused by weapons that are not derelict. In so far as the loss or damage arises in the context of a named war or strikes peril, such as war, insurrection, or terrorism, '92 they will be subsumed within such a peril. However, it would be wrong ro assume that loss can be occasioned by a weapon of war only if either derelict or discharged in the context of particular war or strikes risks. Accidental and test firing in peacetime, and discharge of weapons such as mines laid deliberately but legitimately as part of national defences are but three examples that fall into neither categoty.
13.86 War or strikes risks underwriters clearly would not be liable under the heading

14
STRIKES RISKS

A. Perils of Industrial Disturbance or

Civil Unrest
(l) Loss or damage caused by

14.03
14.04 14.06 14.10
14.11

(5) Persons taking part in riOtS (6) Persons taking part in civil
commotions

14.12 14.15 14.18 14.19 14.20 14.28

of derelict weapons, although the circumsrances might reveal a political motive. The liability of marine underwriters would depend upon whether the weapon's impact upon the insured property gave rise ro an insured peril, such as fire, explosion, or a peril of the sea, with any ingress ofwater qualifying as fortuitous at least relative to the assured. 193

participants (2) Strikers (3) Locked-out workmen (4) Persons taking part in l~bour disturbances

B. Terrorism and Associated Perils

(l) Any terrorist

(2) Persons acting maliciously (3) Politically motivated persons

The strikes coverage under the various war and strikes clauses for hulls and 14.01 freight is cast in essentially uniform fashion. Clause 1 of the Institute War and Strikes Clauses Hulls-Time (1/10/83 and 1/11/95) provides as follows:
Subject always to the exclusions hereinafter referred to, this insurance covers loss

191 For further instances of peacetime loss and damage occasioned by weapons of war, see KGoodacre, GoodbyetotheMemoraudumCl988) 198-9;M Miller, Mariu, w"rRisksC3rdedn.2005), paras 15.08, 15.11. 192 Loss caused by terrorists or by persons acting maliciously or from a political motive is part of the strikes tisks coverage. / 193 See 10.15 above.

of or damage to the Vessel caused by ...

1.4 strikers, locked-out workmen, or persons taking part in labour disturbances, riots or civil commotions 1.5 any terrorist or any person acting maliciously or from a political motive 1.6 confiscation or expropriation.

However, while the freight clauses cover the same perils, they are restricted to loss of freight 'arising from loss of or damage to the Vessel' caused by the specified perils, with the result that no indemnity is payable where freight is lost by reason of damage to cargo. The cargo clauses separate strikes risks from war perils. Although cover under 14.02 the Institute Strikes Clauses (Cargo) is not dependent upon damage to the vessel, the range of perils insured is more restricted, not embracing the peril of persons acting maliciously or the perils of confiscation and expropriation.'

For cover of cargo against confiscation or expropriation, see 13.58-13.61 above.

436

437

Strikes Risks

Perils ofIndustrial Disturbance or Civil Unrest

damage by the direct action ofparticipants in, for example, a strike, or the active detention of insured property by strikers. With respect to hulls and freight insurance, although the marine clauses exclude 14.05 only participants in industrial disturbances at civil unrest with no mention of the disturbances or unrest, the list of perils covered by the corresponding war and strikes clauses is confined to participanrs. There is no 'absence shortage or withholding of labour' exclusion. The fact remains, however, that there is no covered peril that addresses the simple unavailability of an insured vessel by reason of its passive ignoring by participants in an industrial disturbance or as a result of civil unresr. Thus, damage caused by, for example, simply neglecting to maintain a vessel over the period of an extended strike by reason of that strike will not qualifY as damage 'caused by ... strikers'. It is, however, unclear whether rhe refusal to operate a vessel by reason of a strike with the result rhat the vessel remains languishing in POrt could be viewed as a detention or whether a more active intervention is required for that peril. In principle, there seems no reason to exclude from the concept of detenrion the withholding of services where it is known that this will result in the vessel being incapacirated just as effectively as by an active interdiction on movement. (2) Strikers The concept of a 'strike',' and therefore of a person on strike, is not one 14.06 susceptible of precise definition. It has changed to reflect developments in industrial relations.' The most succinct statement remains that of Sankey J, that a strike involves 'a general concerted refusal by workmen to work in consequence of an alleged grievance'.' This was amplified by Lord Denning MR in Tramp Shipping Corp v Greenwich Maritime Inc in rhe following terms: 'a strike is a concerted stoppage of work by men done with a view to improving rheir wages or conditions, or giving vent to a grievance or making a protest about something or other, or supporting or sympathising with other workmen in such
endeavour'.8

A. Perils ofIndustrial Disturbance or Civil Unrest

14.03 The scope of cover provided in respect of industrial disturbances or civil unrest

is subject to the general restriction that there must be loss of or damage to the insured property caused by a participant' in the disturbance or unresr. It does not suffice that some prejudice to the insured property can be traced to the fact of some industrial disturbance or civil unresr. This general restriction on cover will be considered before turning to the specific perils. (1) Loss or Damage Caused by Participants
14.04 The strikes risks exclusions found in the Institute Cargo Clauses (A), (B), and

(e) all extend to loss of or damage to the insured property both caused by participants in industrial disturbance or civil unrest and also resulting from the disturbance or unrest itself. In contrast, the perils of industrial distutbance or civil unrest insured under Institute Strikes Clauses (Cargo) are confined to loss of or damage to the insured property caused by participants in the disturbance or unrest. The strikes clauses are intended to provide property insurance, not business inrettuption cover. Moreover, clause 3.7 of the Institute Strikes Clauses (Cargo) specifically excludes 'loss damage or expense arising from the absence shortage or withholding of labour of any description whatsoever resulting from any strike, lockout, labour disturbance, riot or civil commotion'. This exclusion emphasizes that cover does not extend to the passive neglect of insured property atising from, for example, the absence of workers by reason of a strike, nor to the incidental immobilization of cargo. Thus, if perishable cargo deteriora!es because a strike results in a delay in cargo handling, there is no cover. In the carrier's liability case of The Arawa,' a cargo of frozen meat spent considerably longer in lighters and refrigerated barges because the dock workers responsible for unloading were taking industrial action in the form of a deliberate go-slow and a refusal to work overtime. It was held that the resulting damage to the cargo arose or resulted from a partial stoppage of labour within the meaning of article IV rule 2(j) of the Hague-Visby Rules. Similarly, where a vessel puts into a port of distress to effect repairs and is subsequently unable to depart by reason ofindustrial action and the cargo deteriorates because of this extended delay, the industrial action would break the chain of causation between the reason for the repairs and the deterioration: which would not be covered. Under the Insritute Strikes Clauses (Cargo), cover is restricted to the active infliction of loss or

s As to which, see M Summerskill, Laytime (4th edn, 1989) paras 8-31-8-33; ] Schofield, Laytime and Demurrage (5th edn, 2005) 254-8. 6 l.i-rmaas' U) ScheepvaartbedrijfNVv Association Technique de !'Importation Charbonniere (The Laga) [1966J 1 Lloyd's Rep 582, 590; Tramp Shipping Corp v Greenwich Maritimelnc[19751 ICR 261,266. 7 Williams Bros (Hull) Ltd v Naamlooze Vennootschap WH Berghuys Kolenhaandel (1916) 21 Com Cas 253, 257. 8 [1975J ICR 261, 266. In similar terms is the definition of 'strike' in the Employment Protection (Consolidation) Act 1978, 5ch 13, para 24(1). Although not a definition of general application, it contains useful guidance as to necessary ingredients: Express & StllY Ltd v Bunday [1988J ICR 379.

2 It is hoped that convenient shorthand excuses describing a locked-out workman as 'participating' in a lock-out. 3 [1977) 2 Lloyd's Rep 416, rvsd on orher grounds [1980J 2 Lloyd's Rep 135. , Shelbourne & Co v Law Investment & Insurance Corp [189812 QB'626.

438

439

Strikes Risks
14.07 There is no requirement that the strikers have ceased all work: selective bl~cking can consrirute a strike.' The relevant question is whether there IS a strike as regards a particular vessel or cargo." There need be no grievance berween the striking workers and their employer. In Williams Bros (Hull) Ltd v Naamlooze Vennootschap WH Berghuys Kolenhaande~ 11 the crew of a Dutch ship refused to sail it from Hull to Rouen because the German government had announced its intention to sink neutral ships in the North Sea. This action was held to constitute a strike. 14.08 A sympathetic strike in support of a grievance of other workers is still a strike." 13 Likewise, a strike can be an expression of political protest. Th~ stoppage need be neither continuous nor permanent. 14 It will not necessanly const~tute a breach of contract, but it has been stated that a stoppage of work wIth the 'k consent of the employer cannot amount to a stn e. 15 14.09 As discussed above,16 the search under the strikes perils is for a participant in a strike rather than for the industrial action itself. The question may arise whether a particular person or group of people is participating in what undoubtedly amounrs to a strike. In Coates v Modern Methods & Materials,17 the Court of Appeal held rhat the reasons or motives for the absence from work of an employee during a strike were irrelevant. Stephenson LJ stated as follows: 18
Participation in a strike must be judged by what the em~loyee does and not by what he thinks or why he does it. If he stopS work when hiS workrnates come ~ut
on strike and does not say or do anything to make plain his disagreement, or wh:ch

Perils ofIndustrial Disturbance or Civil Unrest

(3) Locked-out Workmen The meaning of 'lock-out' was considered in the context of employment ]egisla- 14.10 tion by the Court of Appeal in Express & Star Ltd v Bunday.'o May LJ cited the following definition from the Shorter Oxford English Dictionary:" 'An act of locking out a body of operatives; ie a refusal on the part of an employer, or employers acting in concert, to fi.lrnish work to their operatives except on conditions to be accepted by the latter collectively.' This provided 'at least a reliable indication' although the question was ultimately one to be decided on the facts of each individual case. 'What are the necessary elements of a lock-out, or for that matter of a bicycle or an elephant, is not in my opinion a question oflaw.'" In particular, there was no requirement of a breach of contract by the employer, although the existence or otherwise of such a breach was usually a 'material consideration'. On the facts, rhe employer had excluded from work employees who refused to implement a working practice as required by their contracts of employment. The union declared for industrial action and picketed the workplace. The Court ofAppeal declined to distutb the finding by the Employment Appeal Tribunal that the circumstances constituted a strike and not a lock-out. Glidewell LJ, while concurring in the result, dissented in one material respect. In his opinion, insistence by an employer upon agreed contractual obligations could not, as a matter of law, constitute a lock-out. 23 (4) Persons Taking Part in Labour Disturbances In the absence of authoriry, it is suggested that this peril encompasses rwo 14.11 categories of person. First, a strike or lock-out may attract people outside the category of striker or locked-out workman, such as political activists, who may participate in some manifestation of the dispute. Secondly, workers may be involved in a form of industrial action other than a strike or lock-out, for example a refusal to work overtime or a deliberate go-slow. 24 Again, however, it is important to note the restrictions imposed by the requirement of 'loss of or damage to the subject-matter insured' and, in the Institute Strikes Clauses (Cargo), by the 'absence shortage or withholding oflabour' exclusion. (5) Persons Taking Part in Riots 'Riot' is a legal term of art. Its technical meaning is found in section I of the 14.12 Public Order Act 1986:

could amount to a refusal to join them, he takes part in their strike. The Ime between unwilling participation and not taking part may be difficult to draw, hut those who stay away from work with the strikers without pr.otest for. whatever reason are to be regarded as having crossed that line to take part ill the stnke. In t?e field of industrial action those who are not openly against it are presumably for It.

Of course the position is different if the employee's absence is wholly unconnected with the strike, for example because the employee is ill or on holiday."

~though

in Tramp Shipping Corp v Greenwich Maritime1nc [1975] lCR 261, 266 Lord Denning MR stated of a strike: 'It is distinct from a stoppage whIch brought about by an external .. event such as a bomb scare or by apprehension of danger.' 10 Seehurg v Russian Wood Agency Ltd (1934) 50 LlLRep 146; Vermaas' OJ Schccf"aarthedrljf NV v Association Jechnique de l1mportation Charbonniere (The Laga) [1966] 1 Lloyd s Rep 582. 11 (1916) 21 Com Cas 253. " ibid. 13 Tramp Shipping Corp v Greenwich Maritime Inc [1975J ICR 261,266. 14 ibid. 15 ibid. " See 14.04-14.05 above. 17 [1982J ICR 763. . . \8 ibid 777, Kerr LJ concurring (esp at 783). Eveleigh LJ dissented on the grou~d t~at p~rtlCIpation in a strike should require a withdrawal. of labour in support o~)he st,nkers , claim, as opposed, on the facts, to a refusal to incur the abuse attendant upon crossmg a pIcket lme, " ibid 783.

[1988] ICR 379, 387. " ibid 387, Croom-Johnson LJ concurring. " ibid 388. 23 ibid 391. 24 The Arawa [1977] 2 Lloyd's 416 (discussed at 14.04 above); Power Packing Casemakers Ltd v Faust [1983] ICR292.
20

440

441

Strikes Risks
(1) Where twelve or more persons who are present together use or threaten unlawful violence for a common purpose and the conduct of them (taken

Perils ofIndustrial Disturbance or Civil Unrest

(6) Persons Taking Part In Civil Commotions In the old case of Langdale v Mason, 29 Lord Mansfield directed the jury that civil 14.15 commotion was'an insurrection of the people for general purposes, though it may not amount to a rebellion, where there is usurped power'. In Levy v Assicurazioni Generali,30 the Privy Council approved the following statement from Welford & Otter Barry's Fire Insurance: 31
Civil commotion. This phrase is used to indicate a stage between a riot and civil war. 32 It has been defined to mean an insurrection of the people for general purposes, though not amounting to rebellion; but it is probably not capable of any very precise definition. The element of turbulence or tumult is essential; an organised conspiracy to commit criminal acts, where there is no tumult or turbulence umil after the acts, does not amount to civil commotion. It is not, however, necessary to show the existence of any outside organisation at whose instigation the acts were done. 33

together) is such as would cause a person of reasonable fir~ness.present at the

scene to fear for his personal safety, each of the persons usmg v101ence for the
common purpose is guilty of riot. , (2) It is immaterial whether or not the twelve or more use or threaten VIOlence simultaneously.

(3) The common purpose may be inferred from conduct. (4) No person of teasonable firmness need actually be, or be likely ro be, present
at the scene.

(5) Riot may be committed in private as well as in public places. 14.13 In contrast with the approach of the courts ro perils such as 'war', it is cleat that the term 'riot' in insurance contracts attracts the above technical meaning. It may be not irrelevant that 'riot' is defined in law with far greater precision than 'war'. In London 6- Lancashire Fire Insurance Co Ltd v Bolantls Ltd,25 four armed men robbed the respondents' Dublin bakery. Although the employees were held at gun point, there was no public disturbance. The insurers relied successfully on an exemption clause covering 'riots'." The House of Lords adopted a technical approach, Lord Sumner stating as follows:"
It is true that the uninstructed layman probably does not think, in connection with the word 'riot" of such a scene as is described in the case stated. How he would describe it I know not, but he probably thinks of something, if not more picturesque at any rate more noisy. There is, however, no warrant here for saying that, when the proviso uses a word which is emphatically a term of legal art, it is to be confined, in me interpretation of the policy, to circumstances which are only within popular notions on the subject, but are not within the technical meaning ?f the word. ~

14.14 In The Andreas Lemos," Sraughton J followed Bolantls in applying a technical definition, albeit reluctantly, with the result that a theft accomplished in a clandestine manner with any threat of force confined to securing the thieves' escape could not give rise to a loss caused by a rior. The matter is, however, put beyond quesrion by section 10(2) of the Public Order Act 1986, which directs that the references ro 'rioters' and 'riot' in Schedule 1 to the Marine Insurance Act 1906 are to be construed in accordance wi.th section 1 of the 1986 Acr, confirming the technical approach.

These two statements were espoused by the Court of Appeal in London 6- 14.16 Manchester Plate Glass Co v Heath. 34 Suffragettes broke windows with hammers simultaneously in different parts of London. When arrested, each woman went quietly to the police station. There was no tumult, no public sympathy. The women were charged with malicious injury rather than any public order offence, The Court of Appeal held rhat these events did not justifY a claim on reinsurance covering 'damage to plate glass caused directly or indirectly by or arising from civil commotion or rioting'. The judgments suppOrt three propositions. First, an organized conspiracy to commit crimes does not of itself amount ro civil commotion. Secondly, Vaughan Williams LJ viewed the above statement of Lord Mansfield as providing a fixed definition of the peril despite the evolution since 1780 of methods of asserting rights by violence. There was 'no insurrection of the people for the purpose of general mischief, though not amounting to a rebellion'. 35 It is difficulr to reconcile such an approach with the evolving concept of a srrike. Thirdly, Buckley and Hamilton LJJ confirmed the need for public disturbance. 'Commorion connotes turbulence or tumult and, I think, violence or intention to commit violence.'36 Similarly, in the American case of HartfOrd Fire Insurance Co v war Eagle CO,37 a violent struggle for union

" (1780) 2 Park on Insurance 965.

32

30

[1940) AC 791,800.

31

3rd edn, 64.

Although note that Mustill J has warned against hierarchical thinking: Spinney's (1948) Ltd

25

[1924J AC 836.

v Royallnsurance[1980] 1 Lloyd's Rep 406, 428. 33 In Hartford Fire Insurance Co v "\-%r Eagle Co 295 F 663 (1924) (US Circuit Court of Appeals, 4th Circuit) the following definition was adopted: 'An uprising among a mass of people
which occasions a serious and prolonged disturbance and an infraction of civil order not attaining the statuS of war or an armed insurrection. A civil commotion requires the wild or irregular action of many persons assembled together.'

It should be noted that, prior to 1986, the legal concept of a riot required only three participants. 27 [1924] AC 836, 847. See also Viscount Finlay at 843 and Lord Atkinson at 845.
26

28 Athem Maritime Enterprises Corp v Hellenic Mumal U7ctr Risk AssdCiation (Bermuda) Ltd (The Andreas Lemos) [1983J 1All ER 590, 600-1.

"[1913]3KB411. 35 ibid 416. 36 ibid 417. See also at 421. 31 295 F 663 (1924) (US Circuit Court ofAppeals. 4th Circuit).

442

443

Strikes Risks
recognition in mines resulted in a declaration of a state of war, insurrection, and riot and the imposition of martial law. When, however, five conspirators secretly entered and destroyed a mine with explosives, the absence of any attendant tumult, disturbance or even demonstration led to a finding that the damage was not'caused either directly or indirectly by riot or civil commotion'.
14.17 The causal link between the civil commotion and the casualty required by the

Terrorism and Associated Perils

(I) Any Terrorist Terrorism traditionally connotes the striving for political or ideological aims by 14.19 violence. Thus, United Kingdom anti-terrorism legislation provides that terrorism means the use or threat of certain action prejudicial to people, properry, or
electronic systems, that is 'designed to influence the government or to intimi-

policy is crucial. The cases of Cooper v General Accident Fire & Life Assurance Cory" and Boggan v Motor Union Insurance Co Ltd'9 each arose out of an armed appropriation of a motor car in Ireland without public disturbance. In Cooper the owner's insnrance excluded loss or damage 'occasioned through ... civil commotion occurring within the land limits ofIreland'. The relevant exclusionary words in Boggan were 'loss or damage arising during ... or in consequence of ... civil commotion'. In each case the insnrance company was held protected by the exclusion, the House of Lords rejecting arguments that the policies required the accident to constitute civil commotion of itself or be accompanied by tumult. An undisputed state of civil commotion in the area sufficed, 'those who were engaged in this abstraction must have been acting with some fotce behind them which made them feel that they were masters of the situation'. 40
The issue, of course, was the construction of the policies in question and, in

parricular, of the words of causation. As Lord Dunedin observed in Cooper, 'when you have the expression "occasioned through" it means that there must be civil commotion somewhere, and that the act must be an act which is attributable to that commotion, but nothing more' 41

date the public or a section of the public', and is 'for the pnrpose of advancing a political, religious or ideological cause'.43 Terrorism is defined by the Oxftrd English Dictionary as 'a policy intended to strike with terror those against whom it is adopted; the employment of methods of intimidation'. Clearly a distinction needs to be drawn between frightening and violent 'ordinary' crimes, such as robbery, and acts of 'genuine' terrorism. However, adopting a definition including a reference to the intent and purpose behind the act risks placing upon the assured an unrealistic bnrden of establishing the motives behind acts any reasonable person would view as terrorist ourrages. 44 Such a bnrden can be relieved by a preparedness to infer motive from the natnre of the act. Miller" cites the attack in 1988 on the City of Poros by persons armed with and using hand grenades and machine guns. Many passengers were killed or injured and the vessel was badly damaged. The identity of the perpetrators of rhe outrage or their motive was never established, but the insurer accepted that the events constituted the peril of 'terrorists'. Such a common sense approach has much to commend it. (2) Persons Acting Maliciously In 1964, while in Miami, the Granwoodwas seriously damaged and some of her 14.20 crew injnred by a limpet mine attached by persons never identified although believed possibly to be Cuban exiles. Although the marine underwriters were persuaded to pay, a 'malicious acts exclusion' was inserred into the hulls and freight marine clauses in order to avoid any liability on similar occurrences in the futnre. 46 Accordingly, clause 30 of the International Hull Clauses (01/11/03) reads as follows:
In no case shall this insurance cover loss damage liability or expense arising from

B. Terrorism and Associated Perils

14.18 As with other strikes risks, cover against terrorists and malicious or politically

motivated persons requires loss of or damage to the insured property. Consequently, the financial consequences of, for example, a downturn in the cruise market resulting from terrorism is not covered under the property insurance offered by the Institute strikes risks clauses but is the province of business interruption insurance. 42

43

(1923) 16 LlLRep 64. 40 Cooper v General Accident, Fire 6' Life Assurance Corp (1923) 128 LT 481, 484 per Lord Finlay, cited by Lord Birkenhead in Boggan v Motor Union Insurance Co Ltd(1923) 16 LlLRep 64, 65-6. " (1923) 128 LT 481, 485. " See, eg IF P&C Imura"ce (PUBL) v Silversea Cruises Ltd [2004] EWCA Civ 769, [20041 Lloyd's Rep IR 696.
38 39

(1923) 128 LT 481.

44

Terrorism Act 2000, S 1. On the difficulty of establishing motives, see Pan American World Airways Inc v Aetna

Casualry &Surery Co [197511 Lloyd's Rep 77, 97 (US Court of Appeals, 2nd Circuir). 45 M Miller, Marine \.%r Risks (3rd edn, 2005) para 18.16.
46

ibid paras 1.20, 18.1. Given the origin of the exclusion and the structure of the strikes clauses,

the malicious acts cover is not confined to damage effected in the course of the other named perils

such as civil commotion, despite the contrary suggestion of Phillimore L] in Nishina Trading Co

Ltd v Chiyoda Fire & Marine Insurance Co Ltd (The Mandarin Star) [19691 2 QB 449, 467.

444

445

Strikes Risks
30.3 the use of any weapon or the detonation of an explosive

Terrorism and Associated Perils by any person acting

In any sta:utory de~nition of a crime, malice must be taken not in the old vague sense of wKkedness 10 general but as requiring either (1) An actual intention to do the particular kind of harm that in fact was done; or (2) Recklessness as to whether such harm ~hould occur or not (ie, the accused has foreseen that the particular kind of harm mIght be done and yet has gone on to take the risk of it). It is neither limited to nor does it indeed require any ill will towards the person injured.

maliciously ... 14.21 The purpose of this exclusion in the hulls and freight marine clauses is not to

deny insurance coverage for such acts, but instead to shift such cover to the war and strikes risks underwriters. It may be noted that the malicious actS exclusion is confined to acts involving weapons or explosives. Consequently, a barratrous sinking mayor may not fall wirhin the exclusion depending on the means used to sink the insured vessel. 47
14.22 In cargo insurance, rhe absence of any malicious acts exclusion from the Insti-

Thus, section 58 of the Malicious Damage Act 1861 provides that it is irrelevant for the purposes of crimes involving malice under that Act 'whether the offence shall be committed from malice conceived against the owner of the property in respect of which it shall be committed, or otherwise'. In the cargo insurance case of The Mandarin Star,51 a time-chartered vessel was 14.25 carrying a cargo of beans from Bangkok to Kobe. By the time the vessel arrived off Kobe, the charterer had fallen into arrears of hire. Consequently, tbe owner of the vessel ordered the master not to enter port or discharge the goods until the arrears had been paid and, subsequently, when the charterers closed their office, ordered the vessel to proceed to Hong Kong, where the cargo was discharged and mortgaged to a tbird party. The cargo owners incurred considerable expense in recovering the cargo and claimed reimbursement under a sue and labour clause. This raised the question of whether the expenses had averted a loss covered by the policy. Although the Court of Appeal beld in favour of the cargo owners on the basis that the facts constituted the insured peril of'taking at sea',52 the Court also cursorily rejected an argument that the loss had been caused by 'persons acting maliciously'. Malice required personal spite or ill will. 53 In consequence, it was subsequently held in The Salem" that fraudsters who 14.26 scuttle a vessel by way of 'a by-product of an operation carried our for the purposes of gain' rather tban out of spite are not acting maliciously within the meaning of the strikes clauses. Similarly, tbere is no malice where persons damage property in the genuine, if mistaken, belief that they have the right so
to act. 55

tute Cargo Clauses (A) results in 'malicious acts' falling within the all risks coverage provided by those clauses. This is, of course, subject to the express exclusions of war and strikes risks, bur it should be remembered that, in cargo insurance, 'malicious acts' is not a nominate war or strikes risk. The Cargo Clauses (B) and (C) also contain no malicious acts exclusion. However, although their coverage extends to fire and explosion, not only are there the same war and strikes risks exclusions, but also clause 4.7 excludes 'deliberate damage to or deliberate destruction of the subject-matter insured or any part ' thereof by the wrongful act 0 f any person or persons. 48
14.23 With respect to interpretation of the term 'maliciously', the problem is again to

know how technical an approach to adopt and to what extent analogies may be drawn with the concept of malice as understood in other areas of the law. In particular, the questions arise of the degree of foresight of harm required for an act to be malicious and whether the act need be motivated by personal spite.
14.24 Many crimes under the Offences Against the Person Act 1861 require an act

to be done maliciously. In R v Cunningham," in holding that 'the word "maliciously" in a statutory crime postulates foresight of consequence', the Court of Appeal approved the following statement from Kenny's Outlines of Criminal Law: 50

On the relationship between marine clauses and war and strikes clauses in the context of barratry, see 15.79 below. 48 For an additional premium, the Institute Malicious Damage Clause may be incorporated into the cover. This clause deems the deliberate damage exclusion to be deleted and provides cover against 'malicious acts vandalism or sabotage, subject always to the other exclusions contained in this insurance'.
47

$1 Nishina n-ading Co Ltd v Chiyoda Fire 6- Marine Insurance Co Ltd (The Mandarin Star) [196912 QB 449. 52 On which point, the decision was subsequently overruled by the House of Lords in Shell International Petroleum Co Ltd v Gibbs (The Salem) [19831 2 AC 375. 53 [196912 QB 449, 462 (Lord Denning MR, Edmund Davies LJ agreeing, and Phillimore LJ

silent on the point).

S4

Shell International Petroleum Co Ltd v Gibbs (The Salem) [19821 QB 946, 966 per Mustill J

" (1957) 41 Cr App Rep 155, 159; approved by rhe House of Lords in R v Savage[19921 1 AC
699. See also R v G [2004] 1AC 1034, holding that subjective foresight ofa risk was also essential for the crime of criminal damage and overruling Metropolitan Police Commissioner v Caldwell [1982] AC 341, where it had been held that an objectively obvious risk ,of destruction of or damage to property sufficed.
50

(l6rh edn, 1952).

(the point was not argued on appeal). 55 Reliable Distributors Ltd v Royal Insurance Co ofCanada [1984] 6 WWR 83. Occasioning damage to the interior ofa building in response to a misunderstood advertisement was held not to be a malicious act as (86 per Wood J) 'those who were responsible held a belief in a state of facts which, if true, would have constituted a legal justification or excuse for what they did. They acted, in short, with a colour of right'.

446

447

Strikes Risks
14.27 In

Terrorism and Associated Perils

polirical acts is not itself regarded as polirical." Moreover, violence disproportionate to rhe purpose allegedly furthered will deny the act a political nature. 64 The perpetrator of gratuitous violence receives no sanctuary: a political crime must promote the political purpose <in some coherent sense'.65 There is, however, no reason to suppose that many of rhe distinctions drawn by 14.29 exrradition law correspond ro the limits of cover intended by the parries to a commercial insurance contracr. While the reference to political motivation clearly serves to exclude 'ordinary' ctimes, ir is difficult to see any justificarion for denying cover because the act causing the loss of or damage to the insured properry formed part of a conventional political campaign or was committed against a state other than the srate where rhe act was committed. In either case, a political morive is present and rhat is all the wording of rhe Insriture and International clauses requires. Likewise, while the absence of a particular government as a rarget may deprive the acts of an anarchisr of political character for the purposes of exrradirion law,66 such acts have a political agenda and would, it is suggested, be regarded as polirically morivared for the purposes of the Insrirure and International clauses. However, the remoteness concept may have some resonance in the insurance context. Wholly disproportionate violence will not deny the existence of the political motive, even if it denies political characterization for exrradirion purposes. However, it is possible that where the act is not itself designed to advance a political agenda bur is intended to enable political acts to be committed in the future, it may be too remore from any polirical morive to be irself classified as polirically morivared. For example, it is unclear whether the hijacking of a vessel for ransom in order to finance political acriviries would itself be regarded as polirically morivared.

the possibility that spite might be direcred at the insured property rather than the assured, so that vandals who randomly destroy or damage property could be said to act maliciously for the purposes of an insurance policy. This possibility was accepted by Colman J in The Grecia Express,57 in which the insured car ferry was sunk at night by unknown persons cutting the mooring ropes. Drawing an analogy with the Malicious Damage Act 1861, Colman J held that spite directed rowards the owner of the property, or even knowledge of rhar person's identity, was nor required. Moreover, for Colman J this exrension of malice ro wanron vandalism carried with it an extension to reckless, as opposed to intentional, acts that result in loss of or damage to insured property. Ar the conceptual level, this does not necessarily follow. In the insurance context, however, it has the considerable practical benefit of obviating any need for the assured ro undertake the highly problematic, if not impossible, task of proving the precise state of mind of a conceivably unidentified perpetrator. (3) Politically Motivated Persons

The Salem,56 however, Mustill

J raised

14.28

In the phrase 'persons acting from a political motive' within the International and Institute clauses, it is unlikely that the term 'political' is employed in any technical sense. In the law of extradition, a distinction is drawn between the ordinaty criminal and the political refugee. 58 A fugitive is safe from extradition and may invoke habeas corpus if 'the offence of which that person is accused or was convicted is an offence of a political character'. 59 In this context, it is insufficient that the act was committed in the furtherance of a political c~m paign; rather the individual must be in a confrontation with the requesting state over fundamental polirical ideology,60 although open revolt againsr the government of that state is not required. 51 Moreover, theac! must have been commit-

red against rhe requesring srate62 and be not roo conceptually remote from the cause it seeks to further. The commission of a bank robbery in order to finance

ShellInterna,ional Petroleum Co Ltd v Gibbs (The Salem) [1982) QB 946, 966. Strive Shipping Corp v Hellenic Mutual "War Risks Association (Bermuda) Ltd (The Grecia Express) [20021 EWHC 203 (Comm), [2002) Lloyd's Rep 88, paras 26-33. 58 R v GovernorofWimon Green Prison, Birmingham, ex p Littlejohn [1975] 1 WLR 893, 897; Cheng v Governor ofPentonville Prison [1973) AC 931.
56

57

59 Extradition Act 1989, s 6(l)(a). A similarly worded immunity was granted under the Extradition Act 1870, s 3. Provisions derived therefrom and remaining in force may be found in Sch 1 to the 1989 Act. 60 Schtraks v Governmentoffsrae! [19641 AC 556, 591-2. 61 ibid 583. Generally, see C Amerasinghe, 'The Schtraks Case, Defining Political Offences and Extradition' (1965) 28 MLR27. 62 Cheng v Governor ofPentonville Prison [1973] ,AC 931 (the attemptedmurder in New York of the vice-premier of Taiwan by an opponent of the Taiwanese gov~rnmerit was held not to be a political offence against the United States of America, the requesting state).

ibid 945. T v Secretary of State for the Home Department [1996] AC 742, 787. Political asylum was refused to a person involved in the bombing of an Algerian airport resulting in the loss of ten lives. Allegedly parr of the efforts of a revolutionary movement to overthrow the government by destabilizing the national economy, the airpore bombing was 'an atrocious act, grossly out of proportion to any genuine political objective. There was simply no sufficiently dose or direct causal link between it and [the) alleged political purpose' ([1995] 1 WLR 545,559 per Glidewell LJ), In contrast, sabotaging an aircraft carrying the president of a country will be classified as political despite the deaths thereby caused of innocent passengers: 'the atrocity is designed to produce a direct, immediate and fundamental political result': at 558. 65 [1995) 1 WLR 545,559-60 per Glidewell LJ. 66 Re Meunier(1894) 2 QB 415.
63
64

448

449

15
EXCLUDED LOSSES

A. VolWltary Conduct of the Assured 15.04

(1) The general voluntary conduct

limitation (2) Wilful misconduct (3) Co~insurance

15.05 15.10 15.27

(2) Inherent vice or nature of the subject~matter insured (3) Rats or vermin

15.50 15.61 15.64 15.70

D. Inevitable Losses

B. Delay

E. War and Strikes Risks

15.29 (1) Losses 'consequent on' delay 15.30 (2) Delay and the proximate cause rule 15.33 (3) Perils of deprivation and inhibition on use 15.38 15.42

(1) Effecting the distinction between marine and non-marine risks 15.72 (2) The war and strikes risks exclusions 15.74

C. Losses that Occur in the Natural Course of Events

(1) Ordinary wear and tear, ordinary breakage, and ordinary leakage

F. The Marine Risks Exclusion in War and Strikes Clauses for Hulls or Freight G. Radioactivity and
Non-Conventional Weapons

15.78 15.80

15.46

Section 55(1) of the Marine Insurance Act 1906 states the ptesumptive caus- 15.01 adon rule of the proximate cause. The three patagraphs of secdon 55(2) then provide that the insurer is not liable for certain losses. Technically, these patagraphs do not imply exclusion clauses into marine policies. Rather, they create rules of interpretation as to the scope of cover gtanted in the first place. This could have led to the assured cattying the burden of disproving the applicability of the losses listed in section 55(2) as part ofproving a loss covered by the policy. It is, however, cleat that the burden of proofin respect of the section 55(2) losses lies on the insurer, as if they were indeed contractual exclusions. 1 The limitations on cover articulated by section 55(2) embrace losses attributable 15.02 to the wilful misconduct of the assured, losses proximately caused by delay,

1 Sassoon (ED) & Co Ltd v YorkshireInsurance Co Ltd (1923) 14 LlLRep 167, 173. (1923) 16 LlLRep 129, 132; Soya GmbH Mainz KG v White [198011 Lloyd's Rep 491,503.

451

Excluded Losses
ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject-matter insured, and loss proximately caused by rats or vermin. Apart from wilful misconduct, from which the parties are not permitted to derogate, the limitations represent presumptive rules of interpretation as to the scope of cover ptovided. In hull and freight insurance, the inherent vice limitation is replaced by the more limited rules on unseaworthiness of the relevant vessel, from which the Institute and International hulls and freight clauses in turn derogate through the latent defect cover in the Inchmaree clause. In contrast, the Institute cargo clauses incorporate most of the statutory limitations of section 55(2) as express exclusions. In all cases, a range of further exclusions are included.
15.03 An exclusion of a peril generally serves to restrict coverage otherwise conferred by rhe policy. Given that the primary cover depends upon the relevant peril constituting the proximate cause of the loss, either the exclusion must operate
through a less stringent causation test
Of,

Voluntary Conduct ofthe Assured

contracts and public policy. The defence of wilful misconduct constitutes the most significant manifestation of public policy in this context. (1) The General Voluntary Conduct Limitation In BeresfOrd v Royal Insurance Co Ltd, 5 Lord Atkin stated as follows:
On ordinary principles of insurance law an assured cannot by his own deliberate act cause the event upon which the insurance money is payable. The insurers have not agreed to pay on that happening. The fire assured cannot fe'cover if he intentionally burns down his house, nor a marine assured ifhe scuttles his ship, nor the

15.05

life assured if he deliberately ends his own life. This is not the result of public
policy, bur of the correct construction of the contract.

alternatively, it must constitute a sub-

species of the primary peril and amount to a concurrent cause of the loss. In this latter case, both primary peril and exclusion will rank as the proximate cause with the exclusion being accorded priority.' Thus, where the master of an insured vessel unsuccessfully attempts to smuggle contraband resulting in the vessel being seized and detained by customs authorities, the better view is that the barratry of the master and the seizure of the vessel are concurrent causes of the loss.' As a result, marine underwriters are protected by the standard war risks exclusion that includes rhe peril of seizure, for which war and srrikes risks underwrirers will be liable. An alrernative function of an exclusion is clari/i.carory, putting beyond doubt the underwriter's lack of liability for a los; nor intended to be covered anyway. In the context of the Institute clauses, rhe possibility of such insertion ex abundanti cautela is logical outside the all risks cover of the Institute Cargo Clauses (A). An example is furnished by the exclusions attached to the collision liability clauses. 4

Where the cover granted is described in terms of 'risks', this principle of inter- 15.06 preration is reinforced by the fact that occasioning damage through an intentional or reckless act does not involve exposing insured property to a chance of damage.' Outside the 'all risks' cover of the Institute Cargo Clauses (A), the insured perils provisions in the Institute and International clauses do not refer to 'risks', and the inclusion of fortuity as an essential element in the definition of perils of the sea is an exception. The peril of fire, for example, includes third parry arson. Nevertheless, the same limitation, a more limited concept of fortuity, is still implicit. 7 While the formulation in BeresfOrd is confined to deliberately induced losses, it 15.07 has been held that the voluntary conduct exclusion extends to losses that follow in the ordinary course of events from the assured's voluntary acts and as consequences foreseen and accepted by the assured. In The Wondrous, 8 a vessel was insured against 'the risks enumerated in the Institute War and Strikes Clauses Hulls-Time 1.10.83', which included the peril of detainment. The vessel was detained by Iranian customs authorities in part because of non-payment of certain dues and taxes for which the assureds were responsible under Iranian law. The assureds, however, were not prepared to make payment pending resolution of a dispute with charterers. Hobhouse J held that the insurers were not liable for the detainment of the vessel during this period. Establishing the insured peril of detainment was not sufficient:
.. . it was still necessary for the [claimants] to show that the detention was fortuitous. How to characterize the element of fortuity in this context is not easy. If the owners had asked themselves at the time of placing the cover or at the time of

A. Voluntary Conduct of the Assured

15.04 The prospects of an assured being able to base a successful claim on its own voluntary conduct, that is deliberate acts with intended or at leasr subjectively appreciated consequences, are restricted by both the interpretation of insurance

3
4

See 9.29 above. See the discussion of Cory 6- Sons v Burr(1883)SApp Cas 393 at 11:58-11.59 above. eg International HuH Clauses (01111103), d 6.4, see 12.21 above.

, (1938] AC 586, 595. See also Charlton v Fi;/Jer (20011 EWCA Ciy 112, (20021 QB 578, para 51. 6 British & Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41, 57, 7 Charlton v Fisherl200lj EWCA Civ 112, (20021 QB 578, pata 52. , Ikerigi Compania Naviera SA v Palmtr (The Wondrous) (1991] 1 Lloyd's Rep 400.

452

453

Excluded Losses
making the charter-party whether detention for any substantial period after loading a cargo at Bandar Abbas was to be anticipated or likely to occur in the ordinary course, they would have correctly answered that it was not. But, on the other hand, where a situation comes about as a result of the voluntary conduct ofthe assured, it

Voluntary Conduct ofthe Assured

Uniquely among the restrictions on cover stated in section 55(2), this limitation nOt expressed to be subject to contrary intention. This is probably because the publIc policy limitation of cover in respect of voluntary conduct of the assured extends to all instances of wilful misconduct. Indeed, the term 'misconduct' may merely be convenient shorthand for acts of a sufficiently anti-social nature as to invoke the public policy limitation. No express reiteration of the defence is, thetefore, needed in individual policies, although express wilful misconduct exclusions extending ro any and all loss, damage, and expense so atttibutable are included in all the Institute cargo clauses. 12
IS

would not normally be described as fortuitous. It did not happen by chance but by the choice of the assured. Put another way, it would be in the ordinary course that,
if the owners of the vessel do not pay the port dues for which they are liable to the port authority in respect of the stay ofthe vessel in that porr (or provide acceptable security), the vessel will not be cleared. For the purposes of the law of insurance, in the absence of an express agreement to the contrary, a policy should not be construed as covering the ordinary consequences of voluntary conduct of the assured arising out of the ordinary incidents of trading; it is not a risk.
By this criterion, I _consider that, on any view, it is not correct to characterize the period of detention [during the relevant period] as fortuitous. The dominant and, in my judgment, only proximate cause was the fact that to that date the owners had neither discharged nor acceptably secured their liabilities. 9

(a) Wilfitl
The term 'wilful' clearly 'imports that the misconduct was deliberate, not 15.11 merely a thoughrless act on the spur of the moment'.13 It extends, however, not only to intentional acts but also to recklessness, although the insurer takes the risk of the assured's negligence: 'wilful misconduct is something entirely different from negligence, and far beyond it, whether the negligence be culpable, or gross, or howsoever denominated'.'4 The essential elements of wilful misconduct 'are that the assured intended to achieve a loss or the damage or that he was recklessly indifferent whether such loss or damage was caused and that his immediate purpose was to claim on his insurers or that he subsequently
advanced such a claim'. 15

15.08 The final sentence of the first patagraph suggests that this restriction on cover arises as a matter of interpretation of a commercial insurance contract in the

form of an implied term. The final sentence of the second paragraph invokes the doctrine of causation. Loss caused by a detainment that was in turn caused by the assured's voluntary conduct is regarded as proximately caused by the assured's conduct, which is not of itself a covered peril. On the facts, cover was expressed in terms of 'risks', but it does not appear that this affected the
reasoning.
15.09 In addition to issues of interpretation, a flexible rule of public policy denies the

assured the right to enforce the policy where the assuted's voluntary act is sufficiently anti-social and enforcement would encourage such acts. 1O Thus, in Beresftrd v Royal Insurance Co Ltd, 11 public policy prohibited recovery under a life policy in respect of suicide, although the policy as a matter of interpretarion covered such a demise. Similarly, public policy bats an assured from tecovering in respect of the deliberate sinking of a vessel by Ot on the instructions of the assured itself for fear of jeopardizing human life, the property of cargo ownets, and the environment in the particular case, as well as for fear of encouraging
others to act in a like manner.

In Morley v United Friendly Insurance pic," the deceased, who had drul1k a few 15.12 pints of beer, stepped on to the bumper of a car driven by his sober fiancee. She drove off, accelerated to a speed of approximately fifteen miles per hour, and steered in a zig-zag fashion, causing the deceased to falloff and sustain the injuries from which he died. The Court ofAppeal held the insurers liable under an accident insurance policy which excluded 'wilful exposure to needless peril'. Beldam LJ stated that negligent exposure to a needless peril was not within the exclusion. 'Deliberate risk taking or recklessness of injury' was required." 'It

12

eg Institute Cargo Clauses (A), (B), (C),

Clauses (Cargo), cl 3.1.

13

c1 4.1; Institute War Clauses (Cargo), Strikes

(2) Wilful Misconduct

15.10 Section 55(2)(a) of the Matine Insurance Act 1906 provides that: 'The insurer is

not liable for any loss attributable to the wilful misconduct of the assured.'

johmon v Marshall, Sons &Co Ltd [1906j AC 409, 411 per Lord Loreburn. Lewis v Great Western Railway Co (1877) 3 QB 195,213 per Cotton LJ. See also ar 206-7; Graham v Belfast & Northern Counties Railway Co [1901] 2 IR 13; Forderv Great U:!estern Railway CO [1905J 2 KB 532: Wood v Associated National 1murance Co Ltd [1984J 1 QdR 507, [1985J 1 QdR 297; National Oilwell (UK) Ltd v Davy Offihore Ltd [1993J 2 Lloyd's Rep 582. 15 National Oilwell (UfO Lt~ v Davy Offihore Ltdl1993J 2 Lloyd's Rep 582, 622 perColmanJ. See also Thnder; Anderson & Co v Thames & Mersey Marine lmurance Co (1897) 8 Asp MLC 30G, 311, aJfd 11898J 2 QB 114: Wood v Associated Nationallmuranee Co Ltdl1985J 1 QdR 297.
14 16

[1993J 1 WLR 996.

ibid 1004. Neill L], at 1000, contrasted Candler v London & Lancashire Guarantee &

" Hardy v Motor Insurers Bureau [1964J 2 QB 745, 767-8. , ibid 415-16. 11 [1938J AC 586, 595. See also Gray v Barr [l971J 2 QB 554; Charlton v Fisher [2001J EWCA Ciy 1I2, [2002J QB 578, para 51.

17

Accident Co ofCanada (1963) 40 DLR (2d) 408 (Ontario High Court). The deceased deliberarely balanced on the coping of a pano on the thmeenth floor of a hotel in order to demonstrate to a

454

455

Excluded Losses
must be shown that at the time of his actions the insuted was mindful of a real tisk of the kind of injury for which benefit was provided by the policy and that he intended to run that risk or exposed himself to it not caring whether he sustained such injury or not.'
15.13 In the matine context, failure to interrupt a voyage so as to avoid a risk of

Voluntary Conduct ofthe Assured

vessel. The actual act of scutding is not performed by the assured, who is geographically remote from the scene even if still the moving spirit. Applying the proximate cause doctrine in such a case is less self-evident.
It is clear that the planning of a scuttling cannot be tegarded as the sole proxim- 15.16 ate cause to the exclusion of the carrying out of the plan. In The Salem,23 a vessel was scutded in the coutse of a cargo ftaud, which resulted in the loss of the cargo remaining on boatd. It was atgued that the proximate cause of the loss was the fraudulent conspiracy itself, as distinct ftom (and to the exclusion of) a peril of the sea in theJorm of scutding. 24 This was rejected. Lord Roskill observed that 'the concept offraud or fraudulent conspiracy as distinct from overt acrs done in furtherance of that fraud Ot conspiracy as the proximate cause of a loss is one which I find difficult to accept'. 25 It does not, however, necessatily follow that the proximate cause of the loss in such cases is the execution of the fraudulent conspiracy to the exclusion of the conspiracy itself." Indeed, it is suggested that distinguishing between the conspiracy and its execution involves the sort of splitting of complex causes against which Lotd Atkinson warned in Leyland Shipping v Norwich Union." Overt acts done in furtherance of a fraudulent conspiracy are not separate from that conspiracy; they are a manifestation of the conspiracy. It is accordingly suggested that the modern approach to proximiry of causation is capable of accommodating the conspiracy as part of the proximate cause of the loss. Be that as it may, the adoption of the causal phrase 'attributable to' avoids the difficulry.

capture does not constitute wilful misconduct on the part of the ownet unless the vessel was 'obviously running into danger'.18 Where, however, the owner delibetately sends the vessel to run a blockade or fails to avoid a hostile vessel with knowledge of the latter's location, an inference may be drawn that rhe
owner is endeavouring, not to carry out the voyage, but to procure the capture

of the vessel, which would amount to wilful misconduct. '9 Likewise, in Wood v Associated National Insurance Co Ltd," the assured left his vessel exposed to a known danger of severe weather manned by a crew that he knew was not competent to tespond to such conditions in order to go shopping with his wife. This 'reckless exposure of the vessel to the perils of navigation knowing that she was not in a condition to encountet them' clearly amounted to wilful misconducr. 21

(b) Causation 15.14 Section 55(2)(a) abandons the usual test of proximiry of causation: it suffices that loss is 'attributable to' the assured's wilful misconduct. This has the advantage that the implementation of public policy is not hostage to the vagaries of the doctrine of proximate cause.
15.15 There is no doubt that wilful misconduct can be the proximate cause of ,,"loss.

The reckless abandonment of the vessel with an inadequate crew in Wood v Associated National Insurance Co Ltd' was held to be the 'opetative cause' of the vessel's subsequent loss. However, many cases of wilful misconduct lack such a direct involvement of the assured with the casualry. Commonly, rhe assured shipowner induces the master Ot other crew member to scuttle the insured

Moreover, the involvement of the assured may be even further removed. The 15.17 assured may do litde more than let the master know that it would be in the master's financial interests for the vessel to be lost and then leave it entirely to the master to procure that resulL" The assured may have no involvement at all in the choice of method, the planning of the loss and the execution of the plan. To the extent that even the modern doctrine of proximate cause might hesitate before regarding rhe assured's original setting in motion of the chain of events that led to the loss of the vessel as patt of the proximate cause, again the phrase

friend that he had not lost his nerve. He fell and lost his life. The deliberate nature of the
deceased's acts coupled with the foreseeability of the consequences prevented recovery under a policy covering death 'caused solely by accidental means'. Aliter had the coping unexpectedly

given way. 18 Papademitriou v Henderson (1939) 64 LlLRep 345, 348 per Goddard LJ. Ho,:",ever, where the vessel is neutral, prosecution ofa voyage involving a risk of capture is not wilful misconduct, as war risks insurance is designed to cover such risks. 19 ibid 349. 20 [19851 1 QdR 297. 21 ibid 305 per McPherson J(Supreme Court of Queensland, Full Court). At first instance, the assured was also denied recovery for loss by perils of the seas because of a lack of fortuity, recovery under the Inchmaree clause was denied for failure to comply with the due diligence proviso, and the insurers also had an unseaworthiness defence: [1984] 1 QdR 507. " [198511 QdR 297,307.

SheilInternational Petroleum Co Ltd v Gibbs (The Salem) [1983) 2 AC 375. Fortuity was addressed by a Seaworthiness Admitted Clause, see 10.78 above. 2S [1983J 2 AC 375,392-3. 26 Although it is doubtless the case that the last-in-time approach to proximity of causation would produce that result, leading to the pre~Act comment that the proximate cause doctrine does not apply to wilful misconduct: Irinder, Anderson 6' Co v Thames 6' Mersey Marine Insurance Co [18981 2 QB 114, 124. This may explain the dtafting of s 55(2)(a) but does not require wilful misconduct to remain isolated from subsequent developments in the doctrine of proximate cause. 27 [19181 AC 350, 365. See 9.14 above. 28 See the discussion of complicity in the context of barratry at 11.64 above.
23
24

456

457

Excluded Losses
'attributable to' permits the law to link the assured to the loss so as to deny
recovery.

Voluntary Conduct ofthe Assured

and still Jess participation in rhe act of scuttling itself." Where the assured daims for a loss by periJs of the sea and the insurers suspect a fraudulent sinking, rwo courses of action are open, 'rhey can simply traverse the allegarions in rhe points of daim or they can make an affirmative allegation of scuttling. If they adopt the former course they can cross-examine and call evidence to show that rhe vessel was nor lost by a fortuitous accident, but cannot set up an affirmative case that she was cast away with the privity of the owner', 35

(c) Standard ofproof

15.18 Where the insurer raises the defence of complicity of the assured, it introduces a criminal matter intO civil litigation. The required standard of proof thar musr be sarisfied remains that of the civil law but reflects the gravity of the allegation." A finding of connivance 'blasts a man's character and may involve financial ruin'. 30 On one interpreration, the civil srandard of proof is flexible and requires rhe insurer to prove complicity on 'a balance of probabiliries appropriate to rhe seriousness of the charge, a standard falling not far shorr ofthe rigorous criminal standard',31 The prevalenr approach, however, is to affirm the applicability of a uniform civil standard of a balance of probabilities. However, in determining wherher the evidence adduced satisfies rhis standard, account is to be raken of the likelihood of people, such as those involved, conspiring to perpetrate a fraud of the type alleged." There may be lirde practical difference berween the rwo

An assured cannor recover on a policy withour discharging rhe burden of prov- 15.20
ing, to the civil law standard of a balance of probabilities, thar rhe casualty was caused by a covered peril. Since, by definition, a Joss by perils of the sea musr be accidental, ir is incumbent upon an assured daiming under this head to adduce some evidence of rhe fortuity,36 The sinking ofa seaworthy vessel in unexplained circumstances may provide circumstantial proof of loss by perils of the sea, albeit rarely in rhe modern wotld," but the insurer may counter with evidence suggesting a deliberate throwing away by the masrer or crew. Even if successful in so establishing, however, the insurer will temain liable if rhe assured is covered against barratry unless the insurer can demonstrare rhat the assured connived in the sinking. 38 Where the insurer alleges wilful misconducr but fails to adduce the convincing 15.21 evidence required, the evidence adduced may, nevertheless, prevent the assured from establishing a loss by perils of the sea on a balance of probabilities. 39 Where, however, fortuity is no parr of the definition of the peril on which the assured relies, rhe insurer must succeed in proving wilful misconducr. If, therefore, the assured daims for a loss by fire and rhe evidence is equally consisrent with arson by the assured or a fire orherwise originaring, the assured must recover. The peril of fire calls for no proof of fortuity and rhe insurer has failed to establish its defence. 40 Direct evidence ofdeliberate sinking and complicity cannot be expected and the 15.22

approaches,33 (d) Scuttling 15.19 The paradigm example of wilful misconducr is connivance on the part of the owner in the scutding of an insured vessel wirh a view to making a claim on rhe insurance policy. Connivance, or complicity, connotes authorization or assent but does nor require involvement in planning how rhe scurding is to be effecred,

Michelos (M) & Sons Maritime SA v Prudential Assurance Co Ltd (The Zinovia) [1984] 2 Lloyd's Rep 264, 272; Continental/flinois National Bank 6- Trust Co of Chicago, v Allian,ce Assurance Co L,d (The Cap,ain Panagos DP (No 2)) [1989) 1 Lloyd's Rep 33, 41; Nauonaljusuce Compania Naviera SA v Prudential Assurance Co Ltd (The lkarian Reefir) [1995] 1 Lloyd's Rep 455,459. Generally, see Hornal v Neuberger Products L,d[1957) 1 QB 247; Re H[1996) AC 563, 586. Marine insurance cases decided before Hornal v Neuberger favoured the strict criminal standard: Campania Naviera Vascongada v British & Foreign Marine Insurance Co Ltd (The Gloria) (1936) 54 LlLRep 35, 50; Issaias (Elfie A) v Marine Insurance Co (1922) 13 LlLRep 381, 386, affd
29

(1923) 15 LlLRep 186, 187.

Issaias (Elfie A) v Marine Insurance Co (1922) 13 LlLRep 381, 386. Michelos (M) & Sons Maritime SA v Prudential Assurance Co Ltd (The Zinovia) (1984] 2 Lloyd's Rep 264, 272 per Bingham J. Likewise Houghton (RA) & Mancon Ltd v Sunderland Marine Mutuallnsurance Co Ltd (The Ny-Eeasteyr) [1988] 1 Lloyd's Rep 60, 62. 32 Anonima Petroli Italiana SpA v Marlueidez Armadora SA (The Filiatra Legacy) [1991] 2 Lloyd's Rep 337, 365-6; National justice Campania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reeftr) [1995) Lpoyd's Rep 455, 459, nored N Legh-Jones [1995] LMCLQ 305; Trans,hene Packaging Co Ltd v Royal Insurance (UK) Ltd [1996] LRLR 32, 37; James v CGU Insurance plc(2002) Lloyd's Rep IR 206,.211. 33 Brownsville Holdings Ltd v Adamjee Insurance Ca Ltd [2000] 2 Lloy~'s Rep 458, para 28; Strive Shipping Corp v Hellenic Mutual 'W'ttr Risks Association (Bermuda) Ltd (The Grecia Express)
30 3\

34 Continental Illinois National Bank & Trust Co ofChicago v Alliance Assurance Co Ltd (The Captain Panagos DP) (No 2) [1986] 2 Lloyd's Rep 470, 501. See 11.64 ahove. 35 Palamisto General Enterprises SA v Ocean Marine Insurance Co Ltd [1972] 2 QB 625, 647 per Cairns L]. 36 Compania Naviera Santi SA v Indemnity MutualAssurance Co Ltd (The Tropaioforos) [1960] 2 Lloyd's Rep 469, 473; Aitrovlanis Compania Naviera SA v Linard (The Gold Sky) [1972]

2 Lloyd's Rep 187.

[2002) EWHC 203 (Comm), [2002] 2 Lloyd's Rep 88, para 45.

See 10.28-10.30 above. On the burden of proof in cases of barratry, see 11.60-11.63 above. " Pateras v Royal Exchange Assurance (The Sappho) (1934) 49 LlLRep 400, 407; Compania Naviera Vascongada v British & Foreign Marine Insurlmce Co Ltd (The Gloria) (1936) 54 LlLRep 35,50-1; Palamisto General Enterprises SA v Ocean Marine Insurance Ltd [1972] 2 QB 625, 647; Aitrovlanis Compania Naviera SA v Linard (The Gold Sky) [1972] 2 Lloyd's Rep 187. 40 Slattery v Mance [1962] 1 QB 676.
37 38

458

459

Excluded Losses
courts will draw conclusions from appropriate facts and circumstances." In Lemos v British & Foreign Marine Insurance Co Ltd, 42 MacKinnon J identified three material enquiries: the nature of the casualty involving the loss of the ship,
the nature and extent of opportunities for communication between the owner

VOluntary Conduct ofthe Assured

and maintain his character, 50 as well as an investigation by the owner to attempt

to discover what happened. 51 With respect to motive, one starts with the proposition that: 'Ships are not cast 15.24 away out of Jighrness of heart or sheer animal spirits. There must be some strong motive at work; and this is usually the hope of gain. '52 The master and crew may scuttle the vessel out of spite, but such conduct endangers their livelihoods and is therefore unlikely. 53 In contrast, the owner may stand to reap considerable financial gain. The First World War produced a boom in the freight market, an influx of inexperienced people and capital into the shipowning business, and inflation in ship prices. The subsequent slump in demand saw a number of shipowners with older, depreciated assets trading at a loss and facing financial
ruin. However, the measure of indemnity on a marine insurance policy is the

and the master together with the nature of any such communications, and the
presence of any motive to induce either the owner or the master to scuttle

the vessel. Motive, however, need not be proved if 'the facts are sufficiently
. '43 unamb19UOUS agamst t he owners.
15.23 A number of circumstances typical of a fraudulent sinking may be identified.

These include calm weather, a sinking in deep water impeding investigation by diver, and a minimum of risk to the crew through sinking conveniently close to shore or main shipping lanes. 44 Naturally considerable attention is given to the credibility of the account of the masrer and crew. 45 An alleged collision with what musr have been a substanrial hazard but ofwhich nothing else is ever heard elicits suspicion," as does premature abandonment of the vessel without genuine attempts to assess the damage or save the vessel 47 Credibility is of course weakened by inconsistencies between the stories of different members of the crew or between the offered explanation of the casualty and physical or expert evidence as to the vessel's demise. 48 It is also expected that the master will endeavour to preserve the ship's papers as evidence of his good faith and to maintain his professional reputation. Their loss may indicate misconduct. 4 ' Moreover, where a vessel is lost innocently, one would expecr the master to fotward a rapid, apologetic explanation to attempt to vindicate his seamanship

insured value of the subject-matter, or its value at the inception of the risk, not its actual value when lost. The vessels having been insured at the height of the market, not infrequently the mathematics proved irresistable. 54 Nevertheless, the mere existence of a choice between financial ruin and a sunken ship proves nothing by itself. 55 'An ovet-insured ship owned by a scoundrel may yet meet her end by perils of the sea'," but suspicious circumstances surrounding the sinking coupled with the owner's financial predicament and the absence of any motive on the part of the master to scuttle voluntarily may combine to justify a judicial inference of wilful misconduct on the part of the assured shipowner.

41 Issaias (Elfie A) v Marine Imurance Co (923) 15 L1LRep 186, 187; Campania Naviera Martiartu v Royal Exchange Assurance Corp (The Arnus) (1924) 19 LlLRep 95. 96: Angheuuos v Northern Assurance Co Ltd (The Olympia) (1924) 19 LlLRep 255, 257-8: NationalJustice Compania Naviera SA v Prudential Assurance Co Ltd (The lkarian Reef'r) [1995J 1 Lloyd's Rep 455, 484.

50 Anghelatos v Northern Assurttnce Co Ltd (The Olympia) (1924) 19 LlLRep 255, 259-60: Bank ofAthens v Royal Exchange Assurance (The Eftychia) (1937) 57 L1LRep 37, affd (1937) 59 LlLRep 67. Contrast Maim v London Assurance (1935) 52 LlLRep 211. 51 Coulouras v British Genera/Insurance Co Ltd (The Katina) (No 2) (1922) 12 LlLRep 220 and

266 at 280-1.
52

Compania Naviera Martiartu v Royal Exchange Assurance Corp (The Arnus) (1924)

19 LlLRep 95, 99 per Lord Sumner.

53 Visscherij Maatschappij Nieuw Onderneming v Scottish Metropolitan Assurance Co (1922) 10 LlLRep 579; Compania Naviera Martiartu v Royal Exchange Assurance Corp (The Arnus) (1924) 19 LlLRep 95, 99. 54 For particularly acute examples, see Ansoleaga Y Cia v Indemnity Mutua! Marine Insurance Co Ltd (The Leonita) (1922) 13 LlLRep 231 (vessel worth 55,000, assured still owed 200,000 of the purchase price of 250,000 and facing premiums of 16,000 on renewal of insurance, insurance worth 270,000); Anghelatos v Northern Assurance Co Ltd (The Olympia) (924) 19 LlLRep 255 (vessel worth 17,500, assured's debts rotalled 203,000, insurance worth 223,000). " Bank ofAthem v Roya! Exchange Assurance (The Eftychia) (1937) 57 LlLRep 37, 62. For instances of the insurer failing ro prove that a profitable sinking constituted wilful misconduct on the part of the assured, see Doriga Y Sanudo v Roya! Exchange Assurance Corp (The Marianela) (1922) 13 LlLRep 126 and 166: Issaias (Elfie A) v Marine Insurance Co (1923) 15 LlLRep 186: Comumdad Navzera Baracaldo v Norwich Union Fire Insurance Society (The Bara Bi) (1923) 16 LlLRep 45, 93 and 156: Lemos v British & Foreign Marine Insurance Co Ltd (1931) 39 LlLRep 275. 56 Compania Naviera Vascongada v British 6- Foreign Marine Insurance Co Ltd (The Gloria) (1936) 54 LlLRep 35, 51 per Branson J.

41

(1931) 39 LlLRep 275, 283.

43 Browmville Holdings Ltd v Adamjee Imurance Co Ltd (The Milasan) [2000] 2 Lloyd's Rep 458, para 28(10) per Aikens J. 44 Ansoleaga Y Cia v Indemnity Mutual Marine lmurance Co Ltd (The Leanita) (1922) 13 LlLRep 231, 246-7. 45 For an extraordinary tale, see Domingo Murnbru SA v Laurie (1924) 20 LlLRep 122 and 189. 46 Couinuras v British Generallmurance Co L,d (The Katina) (No 2) (1922) 12 LlLRep 220 and 266 at 278; Comunidad Naviera Baracaldo v Norwich Union Fire Insurance Society (The Bam Bi) (1923) 16 LlLRep 45,93 and 156 at 159. 47 Ansoleaga Y Cia v Indemnity Mutual Marine Insurance Co Ltd (The Leonita) (1922) 13 LlLRep 231. 48 eg Aquarius Financial Enterprises Inc v Certain Underwriters at Lloyd's (The Delphine) [2001] 2 Lloyd's Rep 542 (spread of fire inconsistent with assured's version of events). " Anghelatos v Northern Assurance Co Ltd (The Olympia) (1924) 19 LlLRep 255, 259: Societe d'Avances Commerciales (SA Egyptierme) v Merchants'Marine Insurance Co (The Palitana) (924) 20 LlLRep 74, 140, 161.

460

461

Excluded Losses (e) Pleading 15.25 It was formerly the practice that an insurer who pleaded the defence of wilful
misconduct was not required to furnish particulars of the conduct upon which the insurer relied. The practice was, however, disapproved in 1972. In Astrovlanis Compania Naviera SA v Linard,57 the assured's application for particulars was denied by reason of his inexcusable delay in applying, but a majoriry of the Court ofAppeal expressed the view that, in principle, such particulars should be pleaded. According to Edmund Davies LJ:S8
In marine insurance cases such as the present the [insurer] already has the almost (if

the matters relied on (other than those given under (a) and (b) above) to suppott the allegation that the casting away of the Dias was wilfully procured or connived at by the [claimants]. (3) Co-insurance It is clear that a defence based on the voluntary conduct of one co-assured under 15.27 a composite policy cannot be opposed against other co-assureds who ate not parry to that conduct. In the case of joint insurance, in contrast, the uniry of interest necessarily denies the several application of the defence. The leading case of Samuel (P) & Co Ltd v Duma!" concerned a composite 15.28 policy on a ship covering the interests of mortgagor and mortgagee. The ship was deliberately sunk by the malter at the behest of the mortgagor. This denied recovery even to the mortgagee because the only covered peril available under the policy was 'perils of sea', and the House of Lords ruled that a deliberate sinking by those in charge of the lost vessel could not be regarded as fortuitous. However, the House of Lotds was clear that otherwise the mortgagee could have recovered.

not wholly) unique advantage of not being obliged to plead until after discovery,59
and that has been completed in the present case. If the ship's documents thereby obtained afC his only source of information and they afford no substantiation of complicity in scuttling, such a grave allegation should not have been advanced.

15.26 Authoritative resolution of the issue was promptly sought. In The Dias,60 a claim in respect of the loss of the insured vessel by petils of the sea was met by a defence that put the assured to strict proof of the claim and included, in paragraph 4, an unembroidered allegation that 'the loss of the vessel was caused by the wilful misconduct ofthe [claimants] in procuring or conniving at the casting away of the vessel'. A differently constituted Court ofAppeal acknowledged that the insurer should not be tequired to provide advance notice of its entire case but, nevertheless, held that particulars of acts or omissions alleged to have resulted in the deliberate sinking ot the ship should be pleaded. The assured was entitled to know 'not why his opponent will say that the ship should be found to have been scuttled, but how his opponent will say that the ship was scuttled, if the circumstances are such that it is realistic to suppose that his opponents can furnish such particulars'. 61 The court made the following order:"
That without (i) limiting the right of the defendants to investigate matters not specifically pleaded by cross-examination or otherwise on the issue raised by their general traverse, and (ii) requiring the defendants to give pard'culars under (a) and (b) below of circumstantial matters from which they will invite the court to infer that Dias was not lost fortuitously, the defendants do give within 10 days the best

B. Delay
By virtue of section 55(2)(b) of the Marine Insurance Act 1906, 'the insurer on 15.29 ship or goods is not liable for any loss proximately caused by delay, although the delay be caused by a peril insured against'. Although section 55 is silent as to freight, the Institute freight clauses exclude 'any claim consequent on loss of time whethet arising from a petil ofthe sea or otherwise'.64 A particular difficulry is presented by perils that necessarily involve a delay. (1) Losses 'Consequent On' Delay The Institute freight clauses do not invoke the proximate cause rule. Instead 15.30 they exclude claims for losses 'consequent on loss of time'. Such phraseology, or similat, has been the subject of judicial consideration. It enables the insurer to avoid liabiliry even where delay is not itself the ptoximate cause of the loss. In Bensaude v Thames & Mersey Marine Insurance Co Ltd,6s a steamer's main 15.31 shaft broke because of a peril of the sea, necessitating a return to the port of loading for repairs. The resulting delay to the ptosecution of the voyage

particulars they can of paragraph 4 of the points of defence herein as follows: (a) of the manner in which it is alleged (if it be so alleged) the fire on board Dias was
started deliberately or was deliberately not brought under control, or otherwise

stating the nature of rhe case; (b) of the manner in which it is alleged (if it be so alleged) that the entry of water into Dias was procured deliberately or was deliberately not brought under control, or otherwise stating the nature ofthe case; (c) of

57

[1972]2QB611. ibid 644 per Buckley LJ.

56

ibid621.
63
64

S9
60

A reference to the order for ship's papers, discussed at 1.59 above. Palamisto Genera/Enterprises SA v Ocean Marinelnsurance Ltd (TheDias) [1972] 2 QB 625.
62

61

ibid 650.

65

[19241 AC 431. Institute Time Clauses Freight (1/11/95), cl14; Voyage Clause Freight (1/11/95), cl12. [18971 AC 609.

462

463

Excluded Losses
frustrated the adventure aud the charterers terminated the contract as permitted by the governing law. A claim for loss of freight was successfully resisted on the basis of a clause in the policy excluding 'any claim consequent upon loss of time, whether arising from a peril of the sea or otherwise'. Lord Herschel! construed this phrase as follows: 'It must mean that although the subject-matter has been lost, and although it has been lost by a peril insured against, if the claim depends on loss of time in the prosecution of the voyage so that the adventure cannot be completed within the time contemplated, then the underwriter is to be exempt from liability.'''
15.32 In The Playa de las Nieves,67 a time chatter provided that hire would cease during time lost from specified reasons. The shipowners insured the freight under a policy which excluded 'any claim consequent on loss of time whether arising from a peril of the sea or otherwise'. The vessel went off-hire under the terms of the charter and the shipowners sought to recover the lost freight from the insurers. Lord Diplock, delivering the judgment of the House of Lords, accepted the shipowners' contention that the proximate cause of the lost freight was the occurrence that triggered the off-hire clause (a breakdown of machinery and stranding necessitating repairs). This was stated to be unexceptionable as a proposition of marine insurance law and would have been relevant to any question of whether the proximate cause of the loss was a peril insured against, 'as it must have been if there were to be any loss upon which the time charter clause as au exceptions clause could bite'. 68 However, the next and vital stage of the shipowners' argument, that the phrase 'consequent on' in the exclusion meant proximately caused by, was rejected. As impeccably analysed by Lord Diplock," the exclusiou: .. . contemplates a chain of events expressed
to

Delay
(2) Delay and the Proximate Cause Rule Both the default rule of section 55(2)(b) of the Marine Insurance Act 1906 and 15.33 the delay exclusions found in the Institute cargo clauses 70 are drafted to exclude only losses proximately caused by delay. These reflect case law that is questionable today.

Pink v Fleming' concerned collision insurance. A collision occurred necessitat- 15.34 ing the discharge of parr of the insured cargo of fruit into lighters in otder to effect repaits to the vessel. Nter completion of the repairs, the goods were reshipped and the vessel continued to the port of destinatiou. There it was discovered that some of the fruit had gone bad by reason of the handling necessaty for dischatge and re-shipment and because of the delay. The Court of Appeal held that the collision was not the proximate cause of this loss. Lord Esher MR, from whose comments the other judges in no way dissented, accepted that the collision was an effective cause bur stated that proximate meant last in time. Losses caused by repaits or delay necessitated by collision could not be viewed as proximately caused by the collision. 'According to the English law of marine insurance only the last cause can be regarded ... To connect the loss with any mentioned in the policy, the plaintiffs must go back two steps, aud that, accotding to English law, they are not entitled to do.'''
According to this reasoning, whete a peril necessitates delay which causes loss, it 15.35 is the delay, not the peril, which is envisaged as the proximate cause. This is the approach to delay and causation reflected in both section 55(2)(b) of the Marine Insurance Act 1906 and the Instirute cargo clauses. However, in LeylandShipping Co v Norwich Union Fire Insurance Sodet!' the House of Lotds expressly tejected the last-in-time approach to proximity of causation. In Jackson v Union Marine Imurance Co Ltd,74 moreover, it was held that where a vessel tan aground necessitating repairs of such a duration that the adventure was frustrated, the proximate cause of the lost freight was perils of the sea. In the light of these decisions and the House of Lotds' judgment in The Playa de las Nieves, and given Lord Esher's concession in Pink v Fleming that the collision was an effective cause, the causation analysis in Pink v Fleming appeats unsustainable. 75 The only delay in prosecution of the voyage was the necessary and direct

be either 'consequent oO'-'or 'aris-

ing from' one another. It expressly makes the operation of the clause dependent

upon the presence in the chain of an intermediate event (viz 'loss of time') between

the loss fot which the claim is made (viz loss of freight) and the event which in
insurance law is the 'proximate cause' of that loss (viz a peril insured against), The intermediate event, 'loss oftime/ is not itselfa peril though it may be the result ofa peril. That is why the words 'whether arising from a peril of the sea or otherwise' are not mere surplusage ... They are there to make it plain that the clause is concerned with an intermediate event between the occurrence of a peril insured against and the loss of freight of which the peril was, in insurance law, the proximate cause.

66 ibid 614. See also Lord Watson at 613: 'but for the delay occasioned by the breaking of the shaft there would have been no loss to claim'. 67 Naviera de Canarias SA v Nacional HispanicaAseguradora SA (The Playa de las Nieves) [1978] AC853. " ibid 881. 69 ibid 882.

70 Institute Cargo Clauses (A), (B), (C), cl4.5; War Clauses (Catgo), Strikes Clauses (Cargo), cl3.5. 71 (1890) 25 QBD 396. n ibid 398. 73 [19181 AC 350. 74 (1874) LR 10 CP 125. See also Owners of the Steamship Gracie v Owners of the Steamship Argentino (The Argentino) (1889) 14 App Cas 519 (in collision law, loss of earnings while a vessel is undergoing necessary repairs are the direct and natural consequence and the proximate result of the collision). 75 Similar doubts must attach in the modern law of causation to remarks of Collins LJ in Field Steamship Co Ltd v Burr [1899J 1 QB 579, 591.

464

465

Excluded Losses
consequence of the collision, and this, it is suggested, cannOt break the chain of causation. Put another way, the absence of any possibility of repair without delay and cargo handling no more broke the chain of causation than the absence of an appropriate available place of refuge in Leyland Shipping v Norwich Union. In contrast, had the vessel been further delayed beyond the time ordinarily required for the repairs in question, for example by industrial action of dock workers, the additional delay could fairly be viewed as the sole proximate cause of any loss attributable thereto.
15.36 All members of the Court of Appeal in Pink v Fleming viewed themselves as simply applying the earlier case of Taylor v Dunbar. 76 A wholesale butcher insured cargoes of pig and cattle carcasses. Adverse weather did not damage the cargo but caused considerable and repeated delays, as a result of which the meat became putrid and had ro be thrown overboard. According ro 'rhe common understanding both of assured and assurers',77 such a delay in the voyage was no peril of the sea. Alrhough there can be no quarrel with such a contractual allocation of risk, the language of causation again creates difficulty. Given the modern approach to causation, it is clearly arguable that the loss in Taylor v Dunbarwas proximately caused by the inability to pursue the voyage by reason of the conditions at sea, which should qualifY as a peril of the sea. 15.37 It is, therefore, suggested that the collision in Pink v Fleming and the adverse weather in Taylor v Dunbar should properly be regarded as proximate causes of the respective 10sses.78 However, insurers will still be protected in such circumstances if the delay can also be correctly characterized as a proximate cause of the loss. The statutory and contractual delay exclusions depend on the causal status of the delay, regardless of that of any insured peril that causes the delay." If both such a peril and delay constitute proximate causes, the exclusions will prevail. 80 In both Pink v Fleming and Taylor v Dunbar, delay was clearly the immediate cause of the loss and it may be that the loss could correctly be regarded as proximately caused by delay.81 To the extent that the proximate cause status of delay in such circumstances is doubtful in the modern law, the solution for

Delay
underwriters wishing to avoid such liability is to dilute the required causal link between the delay and the loss.
(3) Perils of Deprivation and Inhibition on Use

The causal relevance of a delay must respond to the conttactual context. In the 15.38 context of insured perils involving a deprivation or inhibition on use, a loss of time is required for the peril to operate. There cannot be a caprure, seizure, arrest, restraint, or detainment without the insured vessel or cargo suffering a delay or a delay being incurred in pursuing the adventure that is to earn insured freight. A failure carefully to delineate any exclusion based on delay or loss of time will lead to the commercially bizarre result that the exclusion will entirely negate the cover prima facie granted in respect of such perils. This point was initially overlooked. In Russian Bank fOr Foreign Trade v Excess 15.39 Insurance Co Ltd," cargo was ICladed on a vessel for carriage from a Black Sea port to Falmouth. The vClyage was frustrated by closure of the Dardanelles upon declaration ofwar against Turkey by the United Kingdom. Although the loss fell within the covered peril of restraint of princes, the insurer successfully invoked a clause excluding 'all claims due to delay'. Bailhache J held the exclusion to be indistinguishable from that in Bensaude and the case to be covered by that decision. 'In both cases it was a delay due to a peril insured against, which caused in one case the total loss of the freight, and in the other the constructive total loss of the cargo.'3 Doubt was, however, cast upon this reasoning in Atlantic Maritime Co Inc v 15.40 Gibbon. 84 During the Chinese civil war, a vessel was prevented from entering the port ofTaku Bar by a Chinese government warship, resulting in loss of freight. The insurer successfully invoked a clause excluding 'loss of, or frustration of, any voyage or adventure caused by' restraints of princes. Some consideration was, however, also given to a second exclusion invoked by the insurer, worded as in Bensaude. Withour expressing a final view, Lord Evershed MR suggested a distinction between twO categories of case. In the first, the peril is complete and distinct from the loss of time which ensues, as in Bensaude: 'The shaft is broken: that of itself does not give rise to any claim, since it may be capable of being repaired the next morning; bur it is then followed by a definite, ascertained loss of time, and it is that loss of time, distinct from though consequent upon the accident itself, which gives rise to the loss of the bargain.'' In contrast, according to Lord Evershed the correct analysis of cases such as Russian Bank and Atlantic Maritime was different:

(1869) LR 4 CP 206. 77 ibid 211 per Montague Smith]. 78 This is the view of the US Supreme Court: Lanasa Fruit Steamship & Importing Co Inc v Universal Insurance Co 302 US 556 (1938). Note also that the causation analysis in Jackson v Union Manne Insurance Co Ltd explains why s 55(2)(b) does not refer to freight. 79 Compare the causation approach to design defects and latent defects, sec 11.08-11.09
76

- - - - - - - - ---'-'-'-

above. 80 The contractual exclusions"benefit from the priority accorded to exclusion over concurrent insured causes (see 9.29 above) and s 55(2)(b) is worded to override any priority otherwise accorded to express insured perils over concurrent causes not mentioned in the policy. 81 Although that was not the analysis adopted by Lord Diplock in The Playa de las Nieves (n 67 above), 15.32 above,

82

[191812 KB 123.

83

ibid 128.

[195411 QB 88.

85

ibid 127.

466

467

Excluded Losses
.. . the time element is relevant, not as a consequence of the mishap, but to ascertain correctly the nature and quality of the accident. If because of the length of

Losses that Occur in the Natural Course ofEvents

In the context of marine insurance, section 55(2)(c) of the 1906 Act articulates 15.43 the presumption of non-insurance with respect to natural losses in the form of ordinary wear and tear, ordinary breakage and ordinary leakage, inherent vice, and loss proximately caused by rats Ot vetmin. The presumption does not have the status of an express exclusion, so that the assured will recover in the event of a loss being concurrently caused by a covered peril and falling within section 55(2)(c).91 Natural losses should not be equated with inevitable losses. That which 15.44 ordinarily occurs does not have ro occur. 9' The concept of 'ordinary' leal<age relates to that which might naturally be expected to occur, not that which will necessarily occur. A voyage might be accomplished without such a level of leakage. In that sense, even ordinary leakage is fortuitous, but the likelihood of the risk materializing is such as ro be assumed unacceptable to insurers. Losses that are inevitable, in that they are factually certain ro occur in the course of the policy, present a further dimension, which is considered below. 93 . In the context of hull cover, losses arising from the condition of the insured 15.45 vessel are addressed through the doctrine of seaworthiness. This doctrine and its relationship with natural loss defences are discussed elsewhere."'

time which is likely to subsist during which the peril lasts, it is justifiable to say 'This finally disposes of the bargain,' then the freight is lost then and there immediately upon the happening of the insured peril and is attributable solely to
that peril. The time element has only been essential in order to estimate correctly

the extent of the peril; and if, in point of fact, the peril ceased a week or two afterwards, that fact would be quite immaterial, provided that the original decision was held, in the circumstances to have been reasonably justified. 86
15.41

The perils covered by the policy in Atlantic Maritime included arrests, restraints, and detainments. As noted above, loss of freight by reason of such perils necessarily involves a loss of time. Without the distinction postulated by Lord Evershed, the cover thereby granted would have been totally withdrawn by the loss of time exclusion. 87 It is noteworthy that the modern Institute clauses that give cover against losses caused by capture, seizure, arrest, restraint, and detainment do not contain general delay or loss of time exclusions. However, 'expenses arising from delay' are excluded except for those recoverable in general average. 88

C. Losses that Occur in the Natural Course of Events

15.42 Sensible underwriting accommodates with difficulry losses that occur in the

natural course of events ('natural losses) withour the intervention of any fortuitous circumstance. If a loss will naturally occur while the insurer is on risk and the insurer is asked to assume liabiliry for that loss, the logical response is to adjust the premium to include an element corresponding to the measure. of indemnity for that loss89 Moreover, unless the insurer can assume a level of fitness for the insured adventure of the property to be covered, there is .no logical basis for the setting of a premium or the agreeing of terms generally. As a mattet of commercial reality, it is, therefore, unlikely that an insurer will agree ro cover natural losses or inherently unfit property. There is, however, no rule of public policy that prohibits an insurer from accepting such risks. Whether such losses are covered by a policy is, therefore, a matter of interpretation, albeit thar the commercial reality supports a strong presumption against such cover. 90

(I) Ordinary Wear and Tear, Ordinary Breakage, and Ordinary Leakage
The Institute cargo clauses routinely exclude 'ordinary leakage, ordinary loss in 15.46 weight or volume, or ordinary wear and tear of the subject-matter insured'."' Loss caused by the ordinary wear and tear, leakage, or breakage of anything other than the subject-matter insured is, thus, covered under the Institute Cargo Clauses (A)." 'Leakage' has been defined as 'any stealthy escape either through a small hole which might be discernible, or through the pores of the material of which the cask is composed'."' It may be distinguished from loss by evaporation

86

ibid.

87 Obiter suppOrt for thus restricting the protection given by the exclusion may be found in Robertson v Petros M Homikos Ltd[19391 AC 371,377. 8B eg Institute War and Strikes Clauses (Hulls-Time) (1/10/83). c14.4; (1/11/95). c15. 1.5. The phrase 'arising from' imports the proximate cause test: Handelsbanken Norwegian Branch of Svemka Handelsbanken AB (PUBL) v Dandridge (The A/iza Glacial) [2002] EWCA Ciy 577. [200212 Lloyd's Rep 421, para 60. 89 For an example of premium adjustment to reflect different excess levels of leakage, see De Monchy v Phoenix Imurance Co ofHartfOrd (1929) 34 L1LRep 201, 204. ~ " Shell UK Ltd v CLM Engineering Ltd [2000] 1 Lloyd's Rep 612,617.

91 HfH Casualty & Generalfnsurance Ltd v Waterwell Shipping fnc (1998) 146 FLR 76 (New South Wales Court of Appeal). See 9.30 above. Otherwise, where the losses mentioned in s 55(2)(c) are made the subject of express contractual exclusions: see 9.31 above. " Soya GmbH Mainz KG v White [1982] 1 Lloyd's Rep 136, 150. 93 See 15.64-15.69 below. 94 See Ch 19 below, esp 19.60. 95 Institute Cargo Clauses (A), (B), (C), d 4.2; War Clauses (Cargo) and Strikes Clauses (Cargo), cl3.2. 96 The condition of the carrying vessel is addressed through the law on seaworthiness and

cargworthiness: see Ch 19 below. 97 De Monch) v Phoenix Insurance Co ofHartford (1929) 34 LlLRep 201, 204 per Viscount Dunedin.

468

469

Excluded Losses
or natural wastage,98 but such losses would be caught by the reference in the Institute cargo clauses to 'loss in weight or volume'.
15.47 Even where insurance is tal<en out to cover leakage, the clearest wording

Losses that Occur in the Natura! Course ofEvents

the cause of the loss will not be a covered peril.'02 Section 55(2)(c) of the 1906 Act articulates this causation extrapolation from section 55(1).'03 If ordinary wear and tear and the further event are concurrent causes, the insurer will not be liable if the policy contains an express ordinary wear and tear exclusion.'o, In the absence of such an exclusion, however, the insurer will be liable. Once an insured peril has proximate cause status, the insurer is liable under section 55(1) and section 55(2)(c) does not detract from that. (2) Inherent Vice or Natnre of the Snbject-matter Insured The presumptive non-insurance of 'inherent vice or nature of the subject-matter 15.50 insured' articulated by section 55(2)(c) of the Marine Insurance Act 1906 is reiterated as an express exclusion by the Institute cargo clauses.'os In the context of hull and freight insurance, however, the circumstances in which the substandard condition of the relevant vessel affords the insurer a defence to a claim are addressed by the law on unseaworthiness of ships. '06

will be required before a court will accept that ordinary leakage is insured. Dodwe!! & Co Ltd v British Dominions & Genera! Insurance Co Ltt/' concerned twO policies that expressly embraced leakage. The first covered leakage without any particular wording. Insurers were held liable only to the extent that the leakage that occurred exceeded the normal level of leakage to be expected. The second, however, was drafted by the insurer as 'including risk of leakage ftom any source whatever'. This was held to mean exactly what it said, rendering the insurers liable for the entirety of the leakage thar had occurred. Similarly, where a policy covers leal<age, breakage, or evaporation in excess of a specified amount, the policy will be construed as covering any and all such loss subject only to the specified deduction.'oo Insurers will nor be allowed to argue rhar in reality the ordinary loss is higher and that an additional deducrion should be made under secrion 55(2)(c) of the 1906 Act. In effect, the deductible operates as an agreed contractual quantification of the measure of ordinary loss.
15.48 Modern cargo policies may contain an exrension of cover in the form of a 'full

(a) The meaning ofinherent vice

In Soya GmbH Mainz KG v White,'07 Lord Diplock stated that inherent vice 15.51 'is not desctiptive of the loss itself. It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty'.

outturn guarantee' or (guaranteed outturn extension'. Prima facie, such an

extension indemnifies against any loss in transit by covering any shortfall between rhe quantity dispatched and the quantity received. In pracrice, however, such extensions are usually qualified by a deductible equivalent to the loss, whether by leakage, breakage, or evaporation, to be normally expected in~the course of the transit in question.
15.49 Where ordinary wear and tear induces a futther insured peril that conttibutes to

loss or damage, a causation issue may arise. Where the ordinary wear and tear

sufficiently jeopardizes the insured property, the further event may aggravate the problem and precipitate the casualty but will not break the chain of causation between the ordinary wear and rear and the loss.'o, If the ordinary wear and tear is then the sole proximate cause of the loss, the insurer will not be liable because

An alternative approach allows insurers to invoke inherent vice whenever the 15.52 goods prove unfit to withstand the normal incidents of the insured adventure.'os Whether the two formulations are substantively different depends on the meaning attached to the concept of fortuity in the Diplock formula. In the context of hull insurance against perils of the sea, the inclusion of fortuity in the definition of the peril serves largely to reverse the burden of proof relating to otdinary wear and tear. It excludes losses caused by the debilitated condition of the insured

" ibid 206. See also in rbe Courr of Appeal: (1928) 30 LlLRep 194, 198. Whether such a
distinction should be drawn is a matter of interpretation of the policy, as in De Monchy v Phoenix itself.

'02 ff Lloyd Imtruments Ltd v Northern Star Insumnce Co Ltd (The Miss fay }tty) (1985J 1 Lloyd's Rep 264, 272. see 10.06 above. 103 Glowrange Ltd v CGU insurance pic (Comm Ct, 29]une 2001) para 15. 104 Wilyne Tank & Pump Co Ltd v Employers Liability Assurtmce Cory Ltd (1974J 1 QB 57, 68, 74; Midland Mainline Ltd v Eagle Sw Insurance Co Ltd (20041 EWCA Civ 1042, (2004J 2 Lloyd's Rep 604, para 12. 105 Institute Cargo Clauses (A), (B), (C), d 4.4; War Clauses (Cargo) and Strikes Clauses (Cargo), cl 3.4.
106 Unseaworthiness is considered in Ch 19 below. On the usurping of inherent vice by unseaworthiness in the context of hull insurance, see 19.60 below.

" (1918) (1955J 2 Lloyd's Rep 391n. Traders 6- GeneralInsurance Association v Bankers & General Insurance Co (1921) 9 LlLRep 223; De Monchy v Phoenix Insurance Co ofHartftrd(1929) 34 LlLRep 201. 101 Wilyne Tank & Pump Co Ltd v Employers Liability Assurance Cory Ltd (19741 1 QB 57, 66, 74; Midland Mainline Ltd v Eagle Star Insurance Co Ltd (20041 EWCA Ciy 1042, [2004J 2 Lloyd's Rep 604, para 12.
100

107

[198311 Lloyd's Rep 122, 126. See also Sassoon (ED) & Co Ltd v Yorkshire Imurance Co

(l923) 16 LlLRep 129, 132. No difference is to be drawn between marine insurance and con-

rracts of affreighrment: Soya v White (1982J 1 Lloyd's Rep 136, 149.

108

See below.

470

471

Excluded Losses
vessel but does not address the fitness of the vessel to encounter the ordinaty perils of the insured marine adventute.'o, That is left to the law on seaworth,ness. The question is whether inherent Vice aligns wlth otdmary wear and tear ~r with unseaworthiness in the architecture of marine insurance law. If a parallel IS to be drawn with ordinary wear and teat, fortuiry in the context of mherent VIce should be construed in a narrow fashion. The second fotmulation, in contrast, would see inherent vice perform for cargo insurance the tole played by unseaworthiness in the context of hull insurance. This would exclude, for example, damage to cargo sustained by reason of the pitching ~nd rolhng of the carrying vessel in sea conditions that are not mevltable bur wlthm the normal range for the relevant seas at the relevant time of year.
15.53 In Mayban General Assurance Bhd v Alstom Power Plants Ltd, 110 a large electrical transformer insured under a policy incorporating the InstItute Cargo Clauses (A) for a voyage from Liverpool to Malaysia with transhipment in Amsterdam was seriously damaged by the straining of joints caused by the motion of the carrying vessels in heavy seas."' The vessels had encountered winds of gale force eight or more and waves of six metres or higher on a number of occaSlOllS, including one instance off the west coast of England between Milford Haven and Land's End when such conditions continued wlthout respIte for over twenry-four hours. Such an extended period of such conditions in those waters occurs on average one year in every two-and-a-half years. A vessel plymg such seas on a random basis might expect to be caught m such prolonged adverse conditions in those waters abour once in evelY eight-and-a-half years. Moore-Bick J cited the Diplock formulation of inherent vice and accepted )hat the advetse weather was, in a sense, fortuitous and external to the goods. He considered, however, that the inherent vice exclusion required cargo be fit to withstand the full range of conditions that a commercial person with experience of the relevant waters would regard as reasonably to be expected for the relevant time of year. 'Conditions or events which are well known to occur from time to rime but which are nonetheless relatively uncommon may well be properly regarded as ordinary incidents of the voyage.'112 'Goods tendered for ~hip:nent must therefore be capable of withstanding the forces that they can ordmanly be expected to encounter in the course of the voyage and these may vary greatly . depending on the route and the time 0 f year. '113 Accord'mgIy, I~ ,,:as, surpnsingly, held that even the rare, sustained petiod of heavy seas was wlthm the range of conditions to be expecred and that cargo had to be fit to encounter. Other

Losses that Occur in the Natural Course ofEvents

shorter periods of such heavy seas were more common and clearly to be expected. On the facts, the damage could have been occasioned by the sustained period alone or by two or three of the shorter periods. Consequently, even if exposute to the sustained period of heavy seas fell outside the scope of inherent vice, the evidence demonstrated an inabiliry to withstand the ordinary incidents of the voyage. The Mayban case clearly applies a broad concept of fortuiry to the Diplock 15.54 formulation of inherent vice. The controvetsial result is that cover under the Institute Cargo Clauses (A), the most generous standard cargo cover, is confined in respect of bad weather damage to wholly exceptional adverse conditions. Despite criticism by Arnould,"4 it is clear that at common law inherent vice 15.55 encompasses both packaging and the cargo packaged. 11S The Institute cargo clauses expressly exclude, separately from inherent vice, 'loss damage or expense caused by insufficiency or unsuitabiliry ofpacking or preparation of the subjectmatter insured'. The term 'pa:dcing' includes 'stowage in a container or liftvan but only when such stowage is carried our prior to attachment of rhis insurance or by the Assured or their servants' .'16 Subjecr to this proviso, 'packing' does not include loading or stowing. The exclusion is directed 'to those steps which are necessary to prepare the cargo for the loading process, not to the very acts which result in the cargo being stowed on board' .'17 This careful and distinct treatment of packaging requires, as a matter of interpretation of the Institute cargo clauses, that either packaging be understood as outside inherent vice or at least that inherent vice be confined so fat as packaging is concerned to the parameters laid down by the express packaging exclusion. Where a number of consignments are made in similar conditions and goods are 15.56 occasionally damaged, it may be possible to infer that a fortuitous event caused the damage. 'But it will only be safe to draw that inference if the conditions affecting each consignment are established to be comparable save in respect of the allegedly fortuitous event."18

,0

----------------109

See 10.07-10.10 above. '" [2004J EWHC 1038 (Comm), [2004] 2 Lloyd's Rep 609;" .. . 111 There was no problem With stowage: Ibid para 10. IbId para 30. 113 ibid para 21.

114 Law ofMarine Insurance 6' Average Sir Michael Mustill and J Gilman (eds) (l6th edn, 1981) para 782 ('an unnecessary extension of meaning of the phrase' inherent vice). n, Berk (FW! 6- Co Ltd v Style [1956J 1 QB 180; Gee 6- Garnham Ltd v Whitta!! [1955J 2 Lloyd', Rep 562; Soya GmbH Mainz KG v White [1982J 1 L1oyd's Rep 136, 149 (rejeering Arnauld's criticisms), 116 Institute Cargo Clauses (A), (B), (C), d 4.3; War Clauses (Cargo), Strikes Clauses (Cargo), c13.3. 117 Per Ormiston J in Helicopter Resources Pty Ltd v Sun Alliance Australia Ltd (The Icebird) (1991) 312 LMLN (Supreme Court ofVictotia) as noted by S Hetherington [19921 LMCLQ21, 24. '18 Noten (TM) BV v Harding [1990J 2 Lloyd's Rep 283, 289.

472

473

Excluded Losses (b) Causation

15.57 The operation of the modern doctrine of proximate callse, as established by the HOllse of Lords in Leyland Shipping OJ Ltd v Norwich Union Fire Insurance Society Ltd, 119 is well illustrated in the context of inherent vice by Noten (TM) BV v Harding. no The case concerned insurance on leather gloves manufactured in India and shipped in containers. The leather was exposed to and absorbed moisture before packaging. Cooling of the outside of the container in the course of transit caused warm air carrying moisture from the gloves to rise. This moisture condensed on the inside of the top of the containers and fell back in droplets on the gloves, rendering them a tOtal loss. Phillips J held that the insurers' defence of inherent vice failed because the cause of the loss was the dropping of water from a source external to the insured goods on to those goods. In the Court of Appeal, Bingham LJ121 sought 'the real or dominant cause' of the damage. 'Unchallenged and unchallengeable authority shows that this is a question to be answered applying the common sense of a business or seafaring man.'''' On the facts, the gloves were the sole source of the water and the business or seafaring man would 'regard the suggested distinction based on the intermediate migration of moisture on the roofs of the containers as owing more to the subtlety of the legal mind than to the common sense of the mercantile'.123 Although the gloves were not defective, the cause of the loss was inherent vice or nature of the goods in the sense defined above by Lord Diplock. 15.58 A plea of inherent vice may be only partly successful. Birds Cigarette Manuftcturing v Rouse'24 concerned insurance on cigarettes shipped from London ro Cologne and found on arrival to be mildewed. Bailhache J found thar SOn;te of the cigarettes contained considerably more moisture than the maximum percentage for safe keeping in rransit with the result that they 'were foredoomed to mildew and were practically rendered useless by the excess of moisture that was in them."25 However, other cigarettes were lost by some combinarion of salt water damage and initial, lower level, moisture content. In respect of these cigarettes, Bailhache J allowed recovery of 80 per cent of the loss, the figute representing a wish to be fair between the parties given impossibility of scientific accuracy in apportionment of loss. Evidently the insurer was not unduly

Losses that Occur in the Natural Course ofEvents

aggrieved as there was no appeal. However, it is worth noting that later authority underlines the need, in cases where loss is caused in part by covered perils and in part by perils not covered, for the assured to establish the proportion of the loss that can properly be attributed to perils covered under the policy. According to such authoriry, if the evidence does not permit an apportionment to be made, the assured has failed to discharge its burden of proof and recovers nothing.'2.

(c) Insuring against inherent vice

Whether inherent vice is covered inevitably depends on the precise language of 15.59 127 the policy in question. However, two propositions emerge from the decided cases. First, insuring perils that could encompass both externally induced damage and inherent vice are likely to be construed as confined to the former. Sassoon (ED) & Co Ltd v Yorkshire Insurance CO'28 concerned insurance against 'the risk of theft and/or pilferage, and/or damage by fresh water, mould, mildew ... irrespective of percentage'. This wording was considered at first instance'29 and on appeal by Scrutton LJ130 to cover only such mould or mildew as was caused by SOme external fortuity, although Atkin LJ considered, without deciding, that the wording might be apt to cover mould or mildew irrespective of the cause. 131 Secondly, where a peril that could encompass externally or internally caused 15.60 damage is insured alongside one or more other perils that can only be manifestations of inherent vice, it will be construed as covering internally caused damage. In Soya GmbH Mainz KG v White, '32 insurance of soya beans against 'the risks of Heat, Sweat and Spontaneous Combustion only' was held to cover heating occasioned by microbiological activity caused in turn by a level of moisture content within the beans. Since both sweating and spontaneous combustion necessarily refer to an internal process, the peril ofheat was to be read in context as covering heating by virtue of an internal process. It is unclear whether such a context would confine the ambiguous peril to inherent vice, so as to confine, on the facts of Soya v White, the peril of heat to internal heating only and not the heating of the soya beans by reason of some external occurrence.'"

'" [1918] AC 350.

121

120

[1989] 2 Lloyd's Rep 527, rvsd [1990] 2 Lloyd's Rep 283.

Crooro~Johnson

With whose judgment Glidewell L] and Sir David

agreed.

[199012 Lloyd's Rep 283, 286-7. 123 ibid 287. Phillips J relied on Bowring (eT) & Co Ltd v Amsterdam London Insurance Co (1930) 36 LlLRep 309, 327, v.:here Wright Jheld that, if moisture that condensed and fell on the goods originated from the goods, such sweat water would have 'set up a life of its own and ... achieved an identity of its own' so as to constitute an 'external cause' of rheloss. This holding elicited puzzled doubt from Bingham L] in'Noten v Harding (at 288). It was not to be viewed as establishing any proposition of law. '" (1924) 19 LlLRep 301. '" ibid 303.
122

See 7.53 above. Soya C,mbH Mai~z KG v White (1983] 1 Lloyd's Rep 122, 126. For an example of express Insurance of mherent Vice, see Overseas Commodities Ltd v Style [1958] 1 Lloyd's Rep 546. 12. (1923) 16 LlLRep 129. 129 (1923) 14 LlLRep 135 and 167 at 172. 130 (1923) 16 LlLRep 129, 132. . 131 ibid 133. The thitd member of the Court ofAppeal, Bankes L], refrained from expressing a View, 132 [1983] I Lloyd's Rep 122. '" In tbe Court of Appeal in Soya GmbH Mainz KG v White [1982] 1 Lloyd's Rep 136, 140, Waller LJ stated that the HSSC clause covered inherent vice 'and may well also cover heat or sweat damage from extraneous causes'.
. 127

474

475

Excluded Losses
(3) Rats Ot Vermin
15.61

Inevitable Losses
with risks and not certainties,138 the factual inevitabiliry of a loss does not render it uninsurable. Thus, a marine policy may be concluded on a 'lost or not losr' basis, in which case the insurer is liable even if rhe insured property has already been lost, which constitutes the ultimate example of inevitable 10ss. 139 Secondly, however, at the level of interpretation, inevitability of loss does oper- 15.66 ate ar a more fundamental level in rhat, just as insurers are less likely to intend ro cover natural losses than losses caused by an external fortuity, so they are even less likely to intend to cover inevirable losses rhan natural losses that mayor may not occur. As a result, language that is amenable to cover borh natural and inevitable losses but does not clearly cover the latter may be construed as confined to the former. Thirdly, a distinction may be drawn according to whether the assured is aware at 15.67 the time of conclusion of rhe coimact of insurance that loss is inevitable. Such a circumsrance is clearly mateiial and, where it is known to rhe assured or ought to be known to the assured in the ordinary course of its business, requires disclosure to the insurer under the pre-formation doctrine of utmost good faith. Provided, however, disclosure is made, there is no reason of public policy to prohibit insurance of such a risk,'40 although, at the level of interpretation, clear wording will again be required given the improbability of an insurer agreeing to cover such risks. 141 Thus, where property is insured 'lost or not losr', the assured may not recover if aware at the time the contract was concluded that the property had already been lost and the insurer was unaware. '42 Where the assured has neither actual nor construcdve knowledge of the inevit- 15.68 ability of loss, no quesdon of disclosure can arise and, indeed, the loss may be considered fortuitous as againsr the assured. 'In practical terms there is as much a risk if the inevitability of a loss is not known as if the loss itself mayor may not occur.'143 Thus, a latent defect, as covered in hull policies under the Inchmaree

Section 55(2)(c) of the Marine Insurance Act 1906 provides that, subject to contrary intention, 'the insurer is not liable ... fo: any loss proximately caused by rats or vermin'. This exclusion is not repeared 111 any of rhe Inrernanonal or Instirute clauses.

15.62 In Hamilton, Fraser & Co v Pandor[ & CO,'34 Lord Halsbury stated that 'the destruction of the ship's bottom by vermin is assumed to be one of the ~arura~ and certain effects of an unprotected wooden vessel saili~g through certam seas and not a peril of the sea. Such normal vermin damage IS regarded, m effect, as ordinary wear and tear and would not, therefore, be covered by the modern

hulls and freight clauses.

15.63

affreightment. It was held that the carrier was not liable where r~ts gnawed a hole in a pipe through which sea water entered the vessel. As dlscussd elsewhere 135 the rats at least conrributed to the peril of the sea by provldmg the neces:ary forruitous character to the entry of water. 136 The specific inclusion of perils of the sea as a covered peril under the hulls and f:e1ght clauses would permit recovelY for damage falling within that penl contrlbuted to by verm111, 137 albeit not for direct vermin predarion not involving sea damage. M.oreover, the Instirute Cargo Clauses (A) are unequivocal in embracmg. all nsks not expressly mendoned in the exclusion clauses, which are s11enr wlth respect to
vermIn.

Hamilton v Pandorfitself concerned a perils of the sea exclusion in a conrract of

D. Inevitable Losses
15.64 As already noted, losses that occur in the narural course of events without the intervendon of any external fortuity do not necessanly have to occut. A f~r:her issue adses in cases where the loss is in fact inevirable. A number of proposltlons

may be advanced.
15.65 First, despite dicta rhat associate insurance at a fundamental conceprual level
138 eg Patterson v Harris (1861) 1 B & S 336, 353 per Cockburn C]: 'the purpose of insurance is to afford protection against contingencies and dangers which mayor may nOt occur: it cannot properly apply to a case where the loss or injmy must inevitably take place in the ordinary course of things'. The context was a claim for loss by perils of the sea (see 10.03ff above), confined by definition to fortuitous casualties.

ns See 10.57-10.59 above.. . 136 In Hunter v Potts (1815) 4 Camp 203, a ship waS det~1Ued at ~ntlgua by reason of sickness amon the crew. During this enforced stay, the rats multiplIed and did,such damage to the ves~el that itgwas rendered a rotalloss,)md the cargo sold. An action on cargo Insurance for loss by penIs of the sea failed. The report, however, contains no reasoning. It ~~y be that the vessel was laId up
134

(1887) 12App Cas 518, 524.

140

'" Soya GmbH Mainz KG v White [1982J 1 Lloyd's Rep 136, 149. Sphere Drake Insurance Ltd v Euro International Underwriting Ltd [2003J EWHC 1636

(Comm), [2003J Lloyd's Rep IR 525, paras 7-9,174,329,331.336,1862. 141 Soya GmbH Mainz KG v White [1982J 1 Lloyd's Rep 136, 149. For the possibility of a
contrary view that known inevitable losses may be uninsurable, see Sassoon (ED) & Co Ltd

so as to sever any connection with the sea. Alternatively, the

deCiSiOn

may rest on a now obsolete

v Yorkshire Insurance Co (1923) 16 LlLRep 129, 133; Soya GmbH Mainz KG v White [1980J
I

approach to delay and causation. , 1 L!4 d 137 .As the operative peril would lack a maritim~ nature, see 19.24 above. See a so try n

Lloyd's Rep 491,504. '" MIA 1906, s 6(1), Sch 1, r I.

Shipping Co Ltd v Norwich Union Fire Insurance SOCiety Ltd[1918J AC 350, 364.

14'

Soya GmbH Mainz KG v White [1982J 1 Lloyd's Rep 136, 149 pa Donaldson LJ.

476

477

Excluded Losses
clause and the Additional Perils clause,'44 may render damage during the insured period factually inevitable, but its existence 'is, by definition, unknown to the assured and whether or not there is such a defect and whether or not it will during a given period of time or maritime adventure have an impact or cause any damage is fortuitous from the point ofview of the assured' .'45 It is, however, unclear whether fortuity that exists only in the context of the assured's ignorance of the factual inevitability of loss is sufficient to amount to a risk for the . . ' purposes 0 f insurance cover d raft ed In terms 0 f' flS ks. 146
15.69 Fourthly, while known inevitability oftoss poses no barrier to insurability, the

It'lJr and Strikes Risks

designed to ensure that marine policies respond only to marine risks. A reciprocal exclusion is contained in the Institute war and strikes clauses for hulls and freight, but the Institute cargo clauses for wat and strikes risks delineate the
scope of their cover without any corresponding exclusion of marine risks.

In the various Institute marine clauses, separate exclusions address war risks and 15.71 strikes risks. The International hulls clauses distinguish between, on the one
hand, war and strikes risks and, on the other, terrorists, persons acting from a

nature of the subject-matter insured may raise public policy objections to enforceability of a policy covering known inevitable loss. Where the circumstances are such that consigning doomed insured property to their certain fate in order to obtain payment under the policy involves jeopardizing lives or other propetty, public policy requites that recovery be denied. Thus, an assured should not be able to recover under a floating policy or open cover in respect of goods shipped in the knowledge not only that their condition renders deterioration during transit inevitable but that the goods in their inevitable detetiorated condition will be dangerous to the crew of the vessel or liable to contaminate other cargo. The tesult of no liability could be achieved either by recognizing an implied restriction in the policy'47 or, perhaps, by considering the proximate cause of the loss in such cases to be the wilful exposure ofthe goods to certain loss by the assured rather than the peril that inflicts the coup de grace. In the context of time policies on hulls, this result is achieved by the law on unseaworthiness.'" Conversely, known inevitable loss in the form of evaporation may be entirely harmless and an appropriately worded policy should be fully enforceable. -

political motive, and malicious acts. In the Institute clauses, this second group of perils is included within the category of strikes risks. In this section, the exptession 'strikes risks' will be employed in the extended sense of the Insritute clauses. (1) Effecting the Distinction between Marine and Non-marine Risks Traditionally, the exclusion of war risks from marine policies was effected by 15.72 the FC&S clause. This generated twO difficulties. In terms of property cover, the scope of the excluded peril of 'warlike operations' in conjunction with the operation of the doctrine of proximate cause 151 was regarded as characterizing too many losses as war risks.'52 Conversely, in the context of collision liability cover, the FC&S clause as originally drafted left marine insurers liable even where the collision was proximately caused by a war risk. First, the FC&S clause operated by reference to the comprehensive marine and war cover prima ftcie granted under the traditional marine policy, removing the war cover. However, the cover granted did not include collision liability cover, which was introduced as an independent limb of cover and was not subject to the FC&S clause. Secondly, the FC&S was confined to losses proximately caused by wat risks whereas liability under the collision liability clause arose purely by virtue of the
insured vessel's negligence, irrespective of the war or non-war context. 153

'4.

E. War and Strikes Risks

15.70 The strict distinction between insurance of marine risks and insurance of war

and strikes risks 150 is given effect by a series of exclusions in marine policies

144

See 11.03-11.28 above.

'" Promet Engineering (Singapore) Pte Ltd v Sturge (The Nukila) [19971 2 Lloyd's Rep 146, 151 per Hobhouse LJ. 146 In Soya GmbH Mainz KG v White [19821 1 Lloyd's Rep 136, 140, Waller LJ appears to
consider that factually inevitable loss cannot constitute a risk, although he does not address the distinction between known and unknown inevitability.
147 See Bonner v Cox Dedicated Corporate Member Ltd [2004J EWHC 2963, [2005] Lloyd's Rep IR 569, paras 255(5)-(6). .. 148 This would not be covered because (a). it would constitute wilful misconduct, and (b) in the context ofapolicy insuring against 'risks' it would lack the fortuity inherent in ~he concept ofa risk. 14' MIA 1906, s 39(5), discussed ar 19.30-19.50 below. . 150 See 7.03-7.06, 7.14, 7.22 above.

In conttast, three features of the modern Institute and International hulls and 15.73 freight marine clauses ensure a reliable and appropriate division between marine risks and both war and strikes risks. First, the war perils that occasioned such difficulty have been replaced. Secondly, the exclusions are free-standing and drafted to cover any and all 'loss, damage, liability or expense' but only where a war or strikes risk is at least a proximate cause. Thirdly, it is stated that the war and strikes risks exclusions 'shall be paramount and shall override anything contained in this insurance inconsistent therewith'. The war and strikes

151

Once the last-in-time approach to proximity of causation had been abolished by the House

of Lords in Leyland Shipping Co Ltd v Norwich Union Fire lmurance Society Ltd [1918] AC 350, discussed at 9.08-9.11 above.
152 153

The complex case law is discussed at 13.06-13.17 above. Adelaide Steamship Co Ltd v Attorney-General (No 2) [1926J AC 172.

478

479

Excluded Losses
exclusions, consequently, override any contrary provision incorporated in the insurance contract in any way whatsoever. In particular, the paramount clause

The Marine Risks Exclusion in war and Strikes Clauses ftr Hulls or Freight
Thirdly, the war and sttikes exclusions extend to not only loss and damage to the 15.77 insured property, but also liability and expense. The Institute war and strikes
clauses, however, provide property insurance, not .liability insurance or cover

displaces the normal priority afforded to bespoke terms over standard clauses. 154 (2) The War and Strikes Risks Exclusions
15.74 The meaning of the various war and strikes perils enumerated in the exclusions is discussed elsewhere.'" It suffices to make rhe following comments about the scope of the exclusions, in particular in contrast with the scope of the cover provided under the war and strikes clauses.
15.75 First, the exclusion of 'capture, seizure, arrest, restraint and detainment' itself

against consequential expenditure. Moreover, expenditure incurred by reason of an excluded war or strikes risk cannot be claimed under a sue and labour clause
since such clauses are confined to expenditure incurred to avert or minimize a

loss otherwise recoverable under the policy.

F. The Marine Risks Exclusion in War and Srrikes Clauses for Hulls or Freight
While the marine clauses adopt the approach ofexcluding a list of nominate war 15.78 and strikes risks, the Institute war and strikes clauses for hulls or freight simply exclude all loss within the corresponding marine clauses, assuming full collision liability cover and no deductible or franchise. Accordingly, for example, clause 4.2 of the Institute War and Strikes Clauses (Hulls-Time) (1110/83) provides for the exclusion of 'loss damage liability or expense covered by the Instirute Time Clauses-Hulls 1/10/83 (including 4/4ths Collision Clause) or which would be recoverable thereunder but for Clause 12 thereoL 15' The resulting interplay between the marine clauses and the war and strikes 15.79 clauses is perhaps best illustrated by a barratrous sinking. Barratry is, of course, a covered peril under the marine cover provided by the Inchmaree clause. It is also a malicious act. As such, depending on rhe means used to sink the vessel, it is capable of falling within the paramount exclusion of loss arising from the use of any weapon or the detonation of any explosive by a person acting maliciously. This exclusion, it should be noted, is not, unlike the exclusion of capture,
seizure, arrest, restraint, and detainment, itself subject to an exception for piracy

excepts barratry and piracy. A barratrous or piratical seizure remains a marine peril. Moreover, the war and strikes clauses for hulls and freight expressly exclude 'loss damage liability or expense arising from ... piracy', but without prejudice to cover in respect of loss or damage caused by persons taking part in
riots or civil commotion. 156 This is because the concepts of riot and civil com-

motion encompass certain acts of piracy. 157 Consequently, an act of piracy that also constitutes a riot will not be covered under marine clauses because of the exclusion of the strikes peril of riot. Conversely, it will be covered under strikes clauses as an insured peril of riot, with the piracy exclusion in the hulls and freight clauses inapplicable by reason of the riot exception in that exclusion.
15.76 Secondly, the strikes risks exclusion in the Institute Cargo Clauses (A), (B), and (C) extends to loss, damage, or expense not only 'caused by' participants in perils of industrial disturbance and civil unrest, but also 'resulting from' the industrial disturbance or civil unrest itself. The third sub-clause in the exclusion th~n reverts to the link of'caused by' in the context ofterrorists or persons acting from a political motive. It is clear that adoption of the causal phrase 'resulting from' is designed to overcome any difficulty in applying the traditional test of proximate cause to damage that may be passively sustained by cargo as a consequence of a .strike rather than being actively inflicted by a striker. 158

154 It must be possible by specific agreement to override even a paramount standard exclusion, but only by specific reference and in the dearest terms. 155 War risks are discussed in Ch 13 above and strikes risks in Ch 14 above. 156 eg Institute War and Strikes Clauses (Hulls-Time) (1I10/83), cl4.1.7; (l/11l95), cl5.1.6. The exception from the exclusion in fact extends to loss or damage caused by strikers, locked-out workmen, persons taking part in labour disturbances, riots, or civil commotion. 157 This is dear from Athens Maritime Enterprises Corp v Hellenic Mutual "War Risks Associatiorl (Bermuda) Ltd (The Andreas Lemos) [1983J 1 All ER 590, although neither piracy nor riot were operative on the facts. 158 Although such a departure from the phrase '(proximately) caused by' is insufficient in and ofitself to displace the traditional test of proximity of causation. However, the change of wording is here supplemented by the juxtaposition of the.'resulting from' sub-clause between two

and barratry. Conversely, malicious acts, without qualification as to the means used to inflict loss or damage, constitute an insured peril under war and strikes cover. The effect of the marine risks exclusion in war and strikes clauses is, therefore, that any barratrous sinking that does not fall foul of the paramount exclusion of malicious act in the marine clauses falls to the account of the marine underwriters. 16o Conversely, any barratrous sinking within the malicious acts exclusion falls to the account of the war and strikes insurers. 161

sub~dauses that retain the traditional causation test.

cl12 provides for the deductible. Strive Shipping Corp v Hellenic Mutual Witr Risks Association (Bermuda) Ltd (The Grecia Express) [20021 EWHC 203 (Corom), [2002] 2 Lloyd's Rep 88, para 39; North Star Shipping Ltd v Sphere Drake lmurance pic [2005J EWHC 665 (Comm), [2005J 2 Lloyd's Rep 76, para 82. 161 This appears to have been overlooked in North Star Shipping Ltd v Sphere Drake Insurance pic [2005J EWHC 665 (Comm), [20051 2 Lloyd's Rep 76, paras 82-83, in which rhe insuted
159

160

480

481

Excluded Losses

G. Radioactivity and Non-Conventional Weapons

15.80 The Institute clauses introduced in the 1980s contained provisions relating to

nuclear weapons, but do not addtess radioactive pollurion generally.'62 In 1990, however, the Institute introduced the Radioactive Contamination Exclusion Clause which might be incorporated into any marine policy and was included in the 1995 Institute hulls and freight clauses, for both marine cover and war and strikes cover. An extended version of that clause is now incorporated as clause 31 in the International Hull Clauses (01111103).163 This clause, which also has paramount status, provides as follows:
In no case shall this insurance cover loss damage liability or expense directly or indirectly caused by or contributed to by or arising from 31.1 ionising radiations from or contamination by radioactivity from any nuclear

16
COVER PROVIDED BY MUTUAL INSURANCE ASSOCIATIONS

fuel or from any nuclear waste or from the combustion of nuclear fuel
31.2 the radioactive, toxic, explosive or other hazardous or contaminating properties of any nuclear installation, reactor or other nuclear assembly or nuclear component thereof 31.3 any weapon of war employing atomic or nuclear fission and/or fusion or

A. Protection and Indemnity Cover

B. War Risks (1) Government reinsurance (2) Queen's enemy risks

16.03 16.14 16.14 16.15

(3) Further cover available under the British War Risks Rules

16.19 16.20

C. Defence Cover

other like reaction or radioactive force or matter

31.4 the radioactive, toxic, explosive or other hazardous or contaminating properties of any radioactive matter. The exclusion in this Clause 31.4 does not extend to radioactive isotopes, other than nuclear fuel, when such isotopes are being prepared, carried, stored, or used for commercial, agricultural, medical, scientific or other similar purposes 31.5 any chemical, biological, bio-chemical or electromagnetic weapon.

15.81

This exclusion is designed to cover all forms of radioacrive .contamination whatever the source and whether originating from land, such as the explosion of the Chernobyl nudear reacror, sea, as with leakage from a cargo of nuclear.waste, or air and. space, as with the falling to earth of nuclear powered satellites. It encompasses not only traditional nuclear weapons but also so-called 'dirty bombs', which combine radioactive material with conventional explosives. The language of causation (especially the reference to 'indirectly caused by') displaces the need for proximity of cause.

The principal cover provided by the mutual insurance associations, or clubs, 16.01 falls into three broad categories: protection and indemnity, war risks, and defence costs. A club may cover all three classes of risk, albeit clearly distinguishing between the different classes,' or restrict its cover to just one class. An example of the former is provided by the Britannia Steam Ship Insurance Association Ltd.' while the three United Kingdom clubs 3 provide an example of the latter structure. The precise scope of the cover provided by any given club depends ultimately 16.02 upon the true interpretation of the rules of that club, which in effect constitute the policy of insurance between the dub and the club member. These can be complex documents of some length. The following discussion, outlining the cover provided, is based upon the rules of the Britannia club. 4

vessel was rendered a total loss by a maliciously caused explosion. Colman J considered that war risks insurers were not liable if the perpetrator was a member of the crew since barratly is not a covered peril under war risks insurance. With respect, however, this both reads a restriction into the scope of the strikes petil of'person acting maliciously' (discussed at 14.20-14.27 above) that is not there, and also ignores the paramount nature of the malicious acts exclusion in the marine risks policies.
162 163

eg Institute War Clauses (Cargo), cl3.8; Strikes Clauses (Cargo), cl3.9: The extension is the addition of c1131.4 and 31.5.

A vessel being entered separately under each class. P&I, war, and defence cover constitute classes 3, 4, and 6 respectively. Class 1 (sailing ship hull and machinery) and 2 (freighr) ceased underwriting in 1897. Class 5 (strikes) ceased under~ writing in 1988. 3 The United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Ltd, the United Kingdom Mutual War Risks Association Ltd, and the United Kingdom Freight Demurrage and Defence Association Ltd. 4 Appendix 18 below reproduces extracts from the P&I rules.
1
2

482

483

Cover Provided by Mutual Insurance Associations

Protection and Indemnity Cover

Institute clauses is confined to collisions and a collision can occur only between two vessels. While the club rules adopr rhe same approach to collisions, P&I cover exrends under a separate caregory to liabiliries arising from loss of or damage to any property on land or warer and wherher fixed or moveable. Finally, rhe Institute clauses indemnifY only in respect of payments in the nature of or akin ro rort damages, while P&I cover has no such resrriction. Apart from collision liability, P&I cover provides shipowners and other club 16.06 members with insurance against a wide range of liabilities, costs, and expenses arising from or incurred in respecr of the operation of their vessels. Again, it should be emphasized that the precise scope of cover depends upon the wording of the club rules in question. The following are some ofthe liabilities covered. In respect of people, they range from liabilities and expenses in respect of death, personal injury, or illness of passengers or crew to liabilities incurred in connection with stowaways, refugees, and other persons who may come on board an entered vessel, such as pilots and customs officials. As regards goods, clnb members are covered against, inter alia, a range of carriers' liabiliries and loss of or damage to the effects of passengers or crew. Of increasing importance in the modern world is the cover provided against 16.07 pollution risks. This embraces liabiliries, losses, costs, and expenses incurred in connection with the discharge or escape or rhreatened discharge or escape from an entered ship of oil or any orher substance. A further head of cover is liability for fines imposed by any court, tribunal, or authority in respect of
an entered ship for, inter alia, infringements of customs or immigration law, or

A. Protection and Indemnity Covers

16.03 While the essence of protection and indemnity (P&I) cover is insurance against

third party liability, it is axiomaric that P&I cover operares as indemnity not liability insurance. Whereas rhe risks covered comprise a wide range of third party liabilities, all P&I club rules contain a 'pay first', or 'pay to be paid', clause by virtue of which the club's liability is restricted to reimbursing the member in respecr of sums paid to third parties in respect of covered liabilities. 6 Thus, clause 5(1) of the Brirannia P&I rules provides that 'unless the Committee in irs discretion otherwise determines, it shall be a condition precedent of a Member's right to recovet from the funds of the Association in respect of any liability, costs or expenses rhat the Member shall first have discharged or paid them'.
16.04 P&I cover is designed to complement hull insurance available from the market.

For example, Rule 24 of the Britannia P&I rules provides that, unless orherwise agreed in writing and subject to certain limited exceptions, liability is excluded to rhe exrent thar cover is available under a hull policy on the Uoyd's Marine Policy MAR form incorporating rhe Instirure Time Clauses Hulls (1110/83). This complementary aspect ofP&I insurance is exemplified by the comparative cover for collision liability.'
16.05 First, the Institute clauses provide only a three-fourths indemnificarion in

respect of rhe collision liabilities covered, rhe clubs covering rhe remaining one fourth. Secondly, whereas the hull clauses expressly exclude a number of liabiliries arising out of a collision, suth as liability for wreck removal and loss of life or personal injury, such liabiliries are expressly covered under club rules. Thirdly, the measure of indemnity under a valued policy incorporating the Institute clauses will be limited to a sum equal to the agreed value. To the extent thar the assured is nor fully indemnified by reason of the liabilities exceeding the proper market value of the vessel at the time of rhe casualty, the clubs insure rhe excess. Fourrhly, the Institute clauses insure against the covered vessel 'coming into collision wirh' another vessel, but P&I cover extends ro liabilities arising out of non-contact damage to another vessel, for example where negligent navigation of the insured vessel forces another vessel to take evasive acrion in the course ?f which it runs aground. Fifrhly, third party liability cover under rhe

in respect of an actual or threatened discharge or escape of oil or other substance. Cover extends also to liability to compensate seamen for unemployment resuIting from the total loss of the entered vessel, liability arising out of towage of or by an entered ship, and costs and expenses relating to the member's legal liability for the raising, removal, destruction, lighting, or marking of the wreck of an entered ship or property carried on board and liabilities incidental thereto. Cover may be unqualified and unconditional or subject to exceptions, the 16.08 approval of the managers, or the discretion of the committee. Thus, where a member enters into a contract for the supply of services to the entered ship, the member is covered against liability for death, personal injury, or illness arising under such contract, provided that the contract has been approved by the managers and any additional call in respect thereof has been paid, or the committee in its discretion decides the member should be reimbursed. P&I insurance is designed to provide comprehensive mutual cover of liabilities 16.09 incidental to the ownership and operation of ships. Since it is possible that such a liability may not be expressly covered, club rules contain an 'omnibus'

5 Outlined by T Coghlin, 'Protecrion & Indemnity Clubs' [19841 LMCLQ 403. See furrher S Hazelwood, P6'1 Clubs: Law 6' Practice (3rd edn, 2000) Chs 8-9. <> Although in practice the dub may waive this pre-condition: see Firma C- Trade SA v Newcastle Protection 6- Indemnity Association (The Faf1:ti) [1991J 2 AC 1,39. On the pay first clause and the Third Parties (Rights against Insurers) Act 1930, see 20.62-20.63 below. 7 For discussion of collision liability cover underthe Institute and International hull clauses, see 12.10-12.22 above.

484

485

Cover Provided by Mutual Insurance Associations

provlslOn affording rhe directors a discretion to grant cover in whole or in part in respect of liabilities, costs, and expenses 'within the scope of the
Association l. 8
16.10 A maritime casualty is capable of generating vast liabilities. A nightmare scen-

Wilr Risks
percentage contribution successfully collected from its members by the claiming club. There has never as yet been an overspill claim." In respecr of oil pollution, the clubs restrict the cover they offer to U5$1 billion 16.12 each accident or occurrence in respect of each ship entered by an owner.'4 Cover under the General Excess Loss Reinsurance in respect of oil pollution is limited to U5$1 billion in excess ofU5$50 million. The pooling of liabilities between member clubs of the International Group 16.13 requires confidence rhat all the clubs are managed in a prudent manner. While the clubs compete against one anorher for tonnage, competition based on rate cutting is liable to undermine financial prudence. Consequently, the International Group Agreemenr is designed to ensure that competition is based more on factors such as quality of service. It provides, therefote, that, where a vessel is moved to a new club, that club cannot charge less than the previous club for one year beyond the existing policY year, unless either the shipowner concluded a binding agreement with the new club no later than 30 5eptember or the rate of the previous club is adjudged to be unreasonably high. This restriction on rates is prima ficie contrary to European competition law, but exemptions can be granted where the overall benefir of the restriction outweighs the anticompetitive effect. Given the extent of maritime liability cover it permits, the International Group Agreement was granted a ten-year exemption to run from 20 February 1999 to 20 February 2009. Accordingly, the International Group
will need to secure a new exemption in due course.

ario might involve a chemical tanker colliding with a large cruise liner in circumstances denying any right to limit liability and resulting in a dreadful explosion that destroys both vessels, kills or seriously injures the majority of the passengers and crew, and occasions significant onshore damage and pollution. In order to accommodate casualties generating substantial liabilities, the leading P&I clubs form the International Groupin order to pool claims in a mutual excess of loss insurance and reinsurance scheme! Collectively, the thirteen International Group members insure in excess of 90 per cent of the world's ocean-going tonnage. The International Group is underpinned by two legal documents, namely the International Group Agreement 1999 and the Pooling Agreement, which is revised each year.
16.11

Under the Pooling Agreement relating to 2005-06, the individual clubs retain liability for the first U5$6 million in respect of anyone casualty'O while the next U5$44 million (in excess of the individual clubs' retention) is murually reinsured by the members of the International Group." Moreover, to accommodate casualties generating even greater liabilities, the International Group collectively purchases the General Excess Loss Reinsurance Contract. This provides the International Group with U5$2 billion reinsurance in excess of U5$50 million anyone occurrence, anyone vessel. This reinsurance is placed in layers, with the Internarional Group retaining 25 per cent of the first layer of U5$500 million in excess of U5$50 million." There are three further layers, each of U5$500 million, with limited reinstatements in respect of the two top layers. 5hould the losses in respect of one casualty exceed U5$2,050,000,000, the overspill reverts to the pool up to a limit of 2.5 per cent of the limit of liability under the 1976 Limitation of Liability for Maritime Claims Convention in respect of property claims of all vessels entered with International Group member clubs. This works our at abour another U5$2.2 billion. However, the liability in respect of such overspill of each contributing club is limired to the

B. War Risks
(1) Government Reinsurance Towards the end of the nineteenth century, the incidence of revolutions in 50uth 16.14 American republics resulted in market underwriters requiring enhanced premiums for war risks cover for vessels operating in their waters. As a result, mutual war risks associations were formed to provide cover at more competitive rates

For an example, see 24.28 below. The International Group was first formed in 1899 by six dubs based in London. 10 In excess of the assured's deductible. 11 This mutually reinsured pool is in turn divided into a lower pool of US$24m excess of US$6m and an upper pool of US$20m excess of US$30m. The upper pool is reinsured by a captive reinsurance vehicle, named Hydra, established by the International Group lllembers. 12 This additional exposure of the International Group is again prorecredby separate reinsurance through Hydra, which purchases reinsurance protection in the market for this exposure.
8
9

than those offered by the London market. Today, the war risks cover provided by the associations is backed in part by government reinsurance. It should be noted that, whereas each club drafts its own rules with respect to P&I and defence cover, British mutual war risks associations operate almost identically worded rules. It is, therefore, appropriate to refer to the 'British war risks rules'.

13 Club rules provide for an additional 'catastrophe' or 'overspill' call to meet the dub's contribution to the pooled excess. However, an International Group member dub may individually obtain reinsurance cover for some or all of its projected share of the Group's overspillliability. 14 Members can purchase further cover on an individual basis.

486

487

Cover Provided by Mutual Insurance Associations

(2) Queen's Enemy Risks
16.15 Pursuant to section 1 of the Marine and Aviation (War Risks) Act 1952,15 since

war Risks
2.A.2.3 mines, torpedoes, bombs, or other weapons of war, including derelict mines, torpedoes, bombs, or other derelict weapons of war.

1954 there have been standing reinsurance agreements between the government and mutual insurance associations. The current agreements, officially between the Secretary of State for Transport16 and ten British mutual war risks associarions, date from 18 February 1988. 17 Their principle provisions are as follows. They provide 95 per cent reinsurance" on British ships" and other vessels the Secrerary of State is prepared to accept for reinsurance (known as 'reinsured ships')'O against 'Queen's enemy risks'. 21 If the Secretary of State considers that reinsured ships are or may be exposed to Queen's enemy risks, he may serve a premium notice on the Association. 22 In the event of service of a premium notice, the Secretary of State will determine the level of (additional) premium the Association will charge the owners of reinsured ships." Only if such a notice is served is any premium payable by the Association, in which case it will be 95 per cent of the premium the Secretary of State determines shall be charged to the shipowners. 24 The Association has to obtain the written consent of the Secretary of State before accepting or paying any claim, but block authorizations may be given. In any event, however, the Secretary of State is bound by any final judgment obtained by a shipowner against the Association. 25
16.16 The definition of 'Queen's enemy risks' is left to the British war risks rules,'6

The assured is covered also in respect of collision and wreck liability where the collision of the entered ship with another ship or the wrecking of the entered ship results from one or more of the risks stated in rule 2.A.2. 28 By virtue of rule 2.A.3, where an entered ship is captured, seized, arrested, 16.17 restrained, or detained, the owner is entitled to recover the daily running expenses of the ship during the ensuing detainment, subject to a deductible of the first seven days' expenses, and other consequential expenditure. Moreover, if the detention lasts longer than ninery days, the assured is entitled to an additional ten per cent per annum of the ship's insured value calculated on a pro rata basis over the entire period of the detention. Naturally, no indemniry is recoverable in respect of any period of detention after the vessel has become an actual or constructive total loss. ~9 Where a vessel is requisitioned or chattered on behalf of the United Kingdom 16.18 government, cover is provided against an enhanced range of perils including, in addition to the above, civil war, revolution, rebellion, civil strife arising therefrom, and piracy.30 Cover is provided also for requisitioned and chartered ships and suing and labouring expenses. Two overriding provisos generally restrict Queen's enemy risks to risks arising out of hostilities involving the United Kingdom and to the definition of 'war risks' in section 10(1) of the Marine and Aviation (War Risks) Act 1952. (3) Further Cover Available under the British War Risks Rules Apart from cover against Queen's enemy risks, rule 2 of the British mutual war 16.19 risks associations embraces three other categories of insurance. First, 'nonQueen's enemy' cover provides insurance outside the scope of the government reinsurance scheme, embracing loss of or damage to hull and machinery caused by any of the perils covered by the Institute War and Strikes Clauses Hulls-Time (1/10/83), or, in addition, by non-derelict mines, torpedoes, bombs, or other weapons of war, or by piracy or violent theft by persons coming from outside the entered ship. Secondly, the member is insured against a range of protection and indemnity losses, liabilities, costs and expenses arising or incurred in respect of loss or damage, injury, illness or death, or accident caused by the same extended range of war and strikes risks. Thirdly, cover is provided against loss sustained through the detention or diversion of an entered ship caused by a war peril or conditions brought about thereby or in various other specified

and is found in rule 2A. The ship's hull and machinery is insured against loss or damage caused by the following perils listed in rule 2.A.2: 27
2.A.2.1 war or any hostile act by or against a belligerent power 2.A.2.2 capture, seizure, arrest, restraint or detainment and the consequences thereof or any attempt thereat;

The Act is discussed at 1.31-1.33 above. Empowered to exercise the functions of the Board of Trade, but whose functions have since passed to the Secretary of State for the Environment, Transport and the Regions. 17 The text is contained in the Department ofTransport Press Notice No 88, dated 18 February 1988.
15
16

18
19

d 2.

Which is agreed between the Secretary of State and the Association to mean ships registered in the UK, the Isle of Man, any of the Channel Islands or any British Colony. Note, however, thar an improperly registered vessel is liable to be struck off the register: The Polzeath [1916] P 117. 20 d 4. 21 d 1. 22 d 13. The notice will be 'general' if the danger is not confined to any particular geographical area, or 'special' if it is so confined, in which case the notice will specify the relevant area or areas: ibid. A general premium notice has never been issued since 1954. Special premium notices were issued at the time of the Korean War, theAnglo~French invasion of Egypt, and the Falklands War. 23 d115, 16. In the exercise of the powers conferred under dl15 and 16, the Secretary of State and the Associations are to consult each with the other and seek the other's guidance: cl 17. " ell 12, 14. 25 ell 18, 19. 26 ell. 27 For discussion of the meaning of these perils, see Ch 13 above.

28

rr 2.A.5, 2.A.6.

29

r 2.A.4.3.

30

r2.A.7.

488

489

Cover Provided by Mutual Insurance Associations

circumstances. An omnibus provision endows the directors with a discretion to extend cover to losses not specifically included in the rules hut within the general scope of rule 2. By virtue of rule 3, an owner may enter his vessel for cover against loss of freight and other financial interests caused by a war or strikes risk not including war or hostilities, actual or threatened, involving the United Kingdom.

Defince Cover
example by contracting with a party renowned for failing to keep its bargains. Should the managers entertain doubt as to the advisability of commencing or continuing any proceedings, the matter will be referred to the committee, to whom the member can always appeal an adverse decision of the managers. The committee has the sole discretion to decide whether to pursue or defend a claim and as to the conduct, discontinuance, and settlement of any claim. Should the committee decline to pursue or defend a claim solely because the sum in issue does not justifY the costs likely to be incurred, the committee may nevertheless pay the member the whole or part of the sum in issue. Its discretion further extends to indemnifYing in whole or in parr certain ofthe costs expressly excluded under the rules.

C. Defence Cover
16.20 Formally 'freight, demurrage and defence cover', this category of club cover offers insurance against legal costs, ptovision of legal advice, and a claims handling service. A 'pay first' provision is standatd. 16.21

Under the defence rules of the Britannia club, the cover extends generally to cOSts of or incidental to legal or other proceedings taken or defended by a member with the support of the committee or rhe managers and which arise in connection with claims specified in the rules. The cover includes liability for the COSts of other parties, and the costs incurred, with the approval of the managers, in the obtaining of legal or other advice in connection with such claims. To accommodate the advent of new heads of legal liability being imposed upon shipowners, the list of specified claims concludes with an omnibus provision affording the club committee a discretion to extend cover in whole or in part to claims not specified but that fall within the scope of the cover afforded by the club.

16.22 In return for indemnification, the club has rhe right to control rhe handli~g of the claim. When a claim occurs which is likely to give rise to costs r.ecoverable from the club, the member must notifY the club promptly. The club managers have the right to control or direct the conduct of the claim and to require the member to settle, compromise, or otherwise dispose of the claim as and upon such terms as the managers think fit. Costs are recoverable from rhe club only if incurred in action approved by the managers, except for costs incurred in circumstances of urgency rendering consultation with the managers impracticable. The managers have the power to appoint and discontinue the appointment of any legal or other experts they think fit. 16.23 When advised of a claim, the managers must determine the appropriate course of conduct. This involves a consideration of: the legal merits of the claim; where the member is the claimant, the prospecrs of recovery of any judgment in the light of the defendant's solvency and its amenability to enfotcement of judgment; whether the remedy sought is worth the expenditure required; and the extent to which the member has itself to blame for needing reCOurse to law. Mutual insurance is no licence fot the careless conduct of one's affairs, for

490

491

17
DURATION OF COVER

A. Time and Contracts of Marine

Insurance B. Cargo Insurance C. War and Strikes Risks Cargo Insurance D. Voyage Policies on Hulls E. Voyage Policies on Freight
17.02 17.11 17.22 17.28 17.38

F. TIme Policies on Hulls

and Freight
G. War Risks Hull Insurance H. Continuation Clauses

17.46 17.49
17.51 17.55

1. Mutual Insurance

A marine adventure, the subject-matter of a marine insurance contract, consists 17.01 in principle of rhe exposure of a ship, goods, or freighr to marine perils.' The relevant adventure is, however, further defined by reference to duration and nature.

A. Time and Contracts of Marine Insurance

Seerion 25(1) of the Marine Insurance Act 1906 provides as follows:
Where the contract is to insure the subject-matter at and from, or from one place to another or others, the policy is called a 'voyage policy,' and where the contract is to insure the subject-matter for a definite period of time the policy is called a 'time policy.' A contract for both voyage and time may be included in the same policy.

17.02

The classification adopted by section 25(1) is exhaustive; marine insurance 17.03 always operates on a voyage or time basis, although a so-called 'mixed' policy may include both. 2 An example of a mixed policy is provided by Gambles v

MlA 1906, ss 1, 3.

Compania Maritima San Basilio SA v Oceanus Mutual Underwriting Association (Bermuda) Ltd (The Eurysthenes) [197612 !.loyd's Rep 171, 182.
2

493

Duration ofCover

Time and Contracts ofMarine Insurance Insurance Co Ltd, 10 asparagus and mushrooms were canned at plants in two provinces of China and then -transported to Shenzhen, where the cans were packed into containers for transportation to Europe via Hong Kong. Insurance was generally taken out the day before loading on board the ocean-going vessel at Hong Kong. The goods were insured 'ex factoty in People's Republic of China to warehouse Hamburg'. It was held that once a consignment of goods was insured, risk attached retrospectively as from the moment the goods left the canning plants for transportation to Shenzhen. The only resrriction was that the goods had to exist at the time the insurance was taken out." Consequently, retrospective artachment did not work with respect to goods stolen en roure between the canning plants and Shenzhen, since the assured no longer had them to insure. The same reasoning would appear to apply in any instance of total loss, however caused.

Ocean Marine Insurance Co ofBombay,' in which the vessel was insured 'at and from the port of Pomaron to Newcastle-on-Tyne and for fifteen days whilst there after arrival'. The vessel arrived and unloaded cargo safely, bur was then lost in the POtt in a storm within the fifteen-day period. Ar first instance, it was held rhat the policy was a voyage policy covering a voyage that had been completed before the casualty occurred. The reference to a furrher fifteen-day period could be invoked only wirh respect to risks referable to the voyage. The assured, however, appealed successfully to the Court of Appeal. In the absence of argument that the relevant words had acquired a particular customary meaning,
once the voyage was over there arose (an addition to, an excrescence upon, the

voyage policy' in the form of a fifteen-day time policy. 'There is therefore a stipularion for a voyage, and engrafted upon that a further petiod of fifteen days during which the loss of the ship is insured against.'4
17.04 According ro section 25(1), a time policy provides cover for a 'definite' period. The Eurysthene? concerned mutual insurance under which cover was provided

initially for one year, bur continuing from year to year unless notice to terminate was given' The Court of Appeal held thar the cover constituted a time policy. The word 'definite' was first used by Sit Mackenzie Chalmers in drafting the 1906 Act. According to Lord Denning MR, it required the period to be specified: 'But ir is, I think, sufficiently specified if it specifies a stated period, even though that period is determinable on notice, and even though the assurance will be renewed or continued auromatically at the end of the period unless
determined; or will continue under a continuation clause.'7
17.05 Of course, all marine policies provide cover for a period of time. Under a voyage

Retrospective attachment of risk is also expressly contemplated by the Insritute 17.07 cargo clauses, although it is conditional on the assured not being aware of pre-formation losses of which the insurer was unaware. Such retrospective attachment does not, however, dispense with the need for the assured to have an insurable interest at the time of loss. 12
In voyage policies, duration is frequently defined by reference to a 'port', a tetm 17.08 to be construed in accordance with commercial common sense. 13 In essence, a port is simply a place where cargo is habitually loaded and unloaded. In Cockey v Atkinson,14 a vessel insured for four months at and from a particular place 'to

policy, that time is determined by reference ro rhe commencement and termination of a marine adventure, whereas a time policy refers to hours and dates. In the words of Erie J, 'the durarion of the insurance ... in voyage policies, is measured by the motion ofthe ship: in time policies, by rhe. motion ofthe earth'. 8
17.06 The period to be covered is for the parties to determine. A rime policy may be

any port or ports' whatsoever, visited an island and was lost at an open roadstead that served as the island's usual place ofloading. The insurer's attempt to deny liability on the basis that the roadstead did not qualifY as a 'porr' within the meaning of the policy was unsuccessful. A port is frequently characterized as a place of safety for vessels by reason of either the natural configuration of land Ot artificial construction. The term 'port', in the singular, will not be construed as extending to more than one port." Anywhere clearly within the jurisdiction of the authorities of a particular port 17.09 will be viewed as within that port for marine insurance purposes, bur fiscal and

taken out on freight for only part of rhe time required for the freight to be earned. Provided the freight is lost by an insured peril during rhe time covered, the insurer is liable. 9 Again, a policy may be drafted so as to artach retrospectively. In Wunsche Handelsgesellschaft International MBH v Tai Ping

(1876) I ExD 141. 4 ibid 144 per Lord Cairns LC. Compania Maritima San. Basilio SA v Oceanus Mutual Underwriting Association (Bermuda) Ltd (The Eurysthenes) [1976J:!. Lloyd's 171. 6 See further 17.55 below. 7 [1976] 2 Lloyd's Rep 171, 177. Continuation clauses are discussed a~ 17.51-17;54 below. S Gibson v Small (1853) 4 HLC 353,384. 9 Taylor v Wihon (1812) 15 East 324: Michael v Gillespy (1857)2 CB(NS) 627.
3

Rep

2 Lloyd's 8. also Hucks v Thornton (1815) Holt 30, 33. 'lost or not lost' wording: 3.13 above. above. In Wumche v Tai Ping, the claimants were assignees of the original assured, had an insurable interest at the time of loss. ;,altmg;'h.ip Garston Co v Hickie & Co (1885) 15 QBD 580. AId 460. also Brown v Tayleur(1835) 4 A & E 241. Tay!eur (1835) 4 A & E 241. For policies expressly contemplating more than one Pi~d~;~it~::tsee Bragg v Anderson (1812) 4 Taunt 229: Lambert v Liddard(1814) 5 Taunt 480 (i: for vessels lost in transit between loading POrtS within the policies).

Rep See See

494

495

Duration ofCover
pilotage boundaries are disregarded." In Constable v Noble,17 the insurance covered a voyage at and from Lyme to London. The cargo was loaded at Bridport, a different port but within rhe legal limits of the town of Lyme. In the absence of evidence of usage that ships insured at and from Lyme cusromarily loaded at Bridport, it was held that the policy never attached to the cargo. In Moxon v Atkins in contrast,18 insurance at and from Amelia Island was held to attach to cargo loaded nearby at Tiger Island. Amelia Island had no port and, by usage, cargo therefrom was loaded at Tiger Island."
17.10 The manner in which the scope of cover is defined has frequently given rise to

Cargo Insurance
This insurance attaches from the time the goods leave the warehouse or place of storage23 at the place named herein for the commencement of the transit, continues during the ordinary course of transit and terminates either
8.1.1 on delively to the ~onsignees' or other final war~house or place of storage at the destination named herein, 8.1.2 on delivery to any other warehouse or place of storage, whether prior to or at the destination named herein, which the Assured elect to use either 8.1.2.1 for storage other than in the ordinary course of transit or 8.1.2.2 for allocation or distribution,24

or 8.1.3 on the expiry of 60 days after completion of discharge overside of the goods
hereby insured from the oversea vessel at the final port of discharge, whichever shall first occur. 25

fine points of interpretation. Although the remainder of this chapter seeks to state principles of general applicability, ultimately rhe duration of a policy is always a matter of interpretation ofthe particular contract in question. Maritime Insurance Co v Allianza Insurance Co ofSantande?O concerned hull reinsurance 'at port or ports, place or places in New Caledonia'. The vessel hit a reef taken to be in New Caledonia. According to Walton], the reference to 'places' had been added to avoid the more restricted cover associated with the word 'port'. However, the use of the two terms in conjuncrion affected rhe meaning to be attached to 'place'. The policy was confined to places which the vessel visited for a particular purpose, as opposed to providing cover anywhere wirhin the geographical limits of New Caledonia. The suggestion by Walton] rhat reinsurance simply 'at New Caledonia' mighr have provided such extensive cover is supported by Cruikshank vJanson, 21 where insurance 'at and from Jamaica' was held to cover a vessel lost in transit between two Jamaican POfts.

Clause 8 contemplates risk attaching as soon as the goods embark upon the 17.12
commencement of the transit. Where, however, cargo is insured from Port A to

Port B, risk does not attach until and unless the carrying vessel sails from Port A bound for Port B with the insured cargo (or at least some of ir) on board, even if the policy contains an extension of cover to inland transit incidental to the sea voyage." Provided the insured cargo does embark upon the insured sea voyage, clause 8 then backdates rhe attachment of risk ro the commencement of the transit. It would appear to follow that, surprisingly, rhe Instirute cargo clauses do not afford cover againsr total losses prior to commencement of the sea voyage. A key concept determining the duration of the cover is the 'ordinary course 17.13 of transit'." Thus, coverage of loading risks" is confined to usual methods of loading ar the port in question." Once the customary method of loading is departed from, the cargo is no longer embarked upon the adventure accepted by the insurer. The Institute cargo clauses expressly permit reshipment and

B. Cargo Insurance
17.11

The durarion of cover under rhe Institure clauses is governed by the 'ttansit clause', rhe successor to the 'warehouse to warehouse clause'. Clause 8.1 of the Insritute Cargo Clauses (A)" provides as follows:

23 The phraseology avoids any problems with the definition of 'warehouse', an issue raised in John Martin ofLondon L,d v Russell [1960] 1 Lloyd's Rep 554 (see 17.16 below). For use ofa barge as a floating depot for storage of bunker coal, see Lindsay Elee Depots v Motor Union Insurance Co

(1930) 46 TLR 572.

24 There is no obligation on the assured to decide the role of the place of storage before placement of the cargo therein: Westminster Fire Office v Reliance Marine Insurance Co (1903) 19

16 Sailing Ship Carston Co v Hickie & Co (1885) 15 QED 580; Hunter v Northern Marine Insurance Co L,d(1888) 13 App Cas 717.

TLR668.
25 Where, however, the goods are forwarded to a new destination, in no case can the insurance extend beyond the commencement of transit thereto: cl 8.2. 26 Simon, Israel 6' Co v Sedgwick [1893] 1 QB 303; Nima SAIIL v Deves Insurance pic (The Pmtrioka) [20021 EWCA Ciy 1132; [2002] Lloyd's Rep IR 752. For discussion, see 18.11-18.18 below. 27 Helicopter Resources Pty Ltd v Sun Alliance Australia Ltd (The Icebt'rd) (1991) 312 LMLN,

" (1810) 2 Taunr403.

18

(1812) 3 Camp 200.

19 See also Uhde v Walters (1811) 3 Camp 16 (GulfofFinland considered by commercial usage to be part of the Baltic Sea although viewed as distinct by geographers); Lang v Anderden (1824) 3 B & Cr 495 (by mercantile usage, compliance with a warranty to 'sail from' Demerara depended upon draught of vessel).

20 (1907) 13 Com Cas 46. " (1810) 2 Taunr 301; I%rrevMil!<r(1825)4B&Cr538.

noted S Hetberington [1992] LMCLQ21.

28 Loading risks are covered by Institute Cargo Clauses (A) as not excluded, and by (B) by virtue of c11.3. 29 Hurry v Royal Exchange Assurance Co (1801) 2 Bos & Pu1430; Matthie v Potts (1802) 3 Bos

n Likewise Institute Cargo Clauses (B), (C), cI 8, but the transit clauses in the specialized Institute commodity clauses often prescribe different limits of cover. Fo{the extent of cover 'in transit', see Crows Transport Ltd v Phoenix Assurance Co Ltd [196Sl 1 WLR 383.

&

Pu123.

496

497

Duration ofCover
transhipment,30 but it has been held rhat a conrractuallicence ro rranship will be construed as limired to methods of transhipmenr usual in the relevanr port." According to Lord Mansfield:"
The insurer, in estimating the price at which he is willing to indemnify the trader against all risques, must have under his consideration the nature ofthe voyage to be performed, and the usual course and manner of doing it. Every thing done in the usual course must have been foreseen and in contemplation, at the time he engaged. He rook the risque upon a supposition that what was usual or necessary

Cargo Insurance

clause 8.1.1. 37 Delivery of goods to a non-qualifYing place would, neverrheless, lead to termination of cover under clause 8.1.2 if and when accompanied by rhe apptopriate intention of the assured. Clause 8.1.2 develops rhe theme of ordinary course of transir. An example, 17.17 albeit on older and different wording, may be provided by Deutsch-Australische Dampfichiffigesellschaft v Sturge. 38 A replacement stern frame arrived at Hamburg before borh the vessel for which it was intended and the conclusion of any contract with a shipbuilding yard for its fitting. It was discharged on to a quay. Once a contract for the fitting work had been concluded, the frame was moved to that company's quay, but was rendered a total loss in the ptocess. It was held that, once discharged on to the original quay for an indefinite period pending the outcome of contractual negotiations, the frame could no longer be regarded as in transit under the policy. Clause 8.1.3 may be regarded as a longstop provision. If no orher provision 17.18 within clause 8 operates, cover will terminare 60 days after discharge from rhe carrying vessel at the final port of discharge. Where the insured goods are the subject of a contract of sale, are rejected after inspecrion at the porr of discharge, and are to be returned to their place of origin or sent to another destinarion, clause 8.1.3 may prevenr the ourward cover from bridging the full duration of storage before the goods embark on their next journey and cover for that journey
can attach. 39

would be done.
17.14 The relationship berween rhe differenr circumsrances identified in clause 8.1 for

terminarion of risk was discussed by the Court ofAppeal in Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd 33 Clause 8.1.1 applied where the destination named in the policy was the final desrination of the goods. It did not apply where the desrinarion named in the policy was a place of rranshipmenr. Cover would cease at thar place only under clause 8.1.2 or 8.1.3. This inrerpretarion was supported by the commercial inconvenience rhar would otherwise flow from the need to procure separate insurance conrracts for the different legs of any transit involving rranshipmenr. This was regardless of wherher the insurance conrracr conremplated transhipmenr: the ttansit clause was a srandard provision designed ro carer for a variety of possible cargo advenrures and insurers were taken ro accept whichever type of adventure ensued.
17.15 Whar constitures a 'final' warehouse or place of storage under clause 8.1.1 is a

question of fact ro be determined according ro the circumsrances of each case. 34 It may coincide with a warehouse or place of srorage falling within clause 8.1.2. In Overseas Commodities Ltd v Style,35 McNair J considered on the facrs ;har the final warehouse was that at which the goods were made available to the claimants for distribution as part of their srock as importers.
17.16 A rransit shed inro which goods are placed immediately on discharge for

Clause 8,1.3 has no direct application where goods remain at a place of tran- 17.19 shipment for an undue length of time. Just as a place of transhipment cannot constitute a 'final' warehouse or place of storage, similarly it cannot constitute a 'final' port of discharge. 4o While a policy on goods in transit does not extend to unlimited storage, the limiting mechanism is supplied by the'ordinary course of transit'.41 It is conceivable that clause 8.1.3 might provide some indication of when storage in connection with transhipment exceeds that which is ordinary. Where cargo is discharged at the final porr of discharge but then forwarded to a 17.20 further destination before the termination of the insurance in accordance with

temporary storage pending movement elsewhere does nor qualifY as a 'final' warehouse, regardless of whether rhe assured inrends at any time to send the goods on for srorage in a srructure that can qualifY as a final warehouse. 36 Similarly, a cusroms compound is an area for temporary holding of goods for cusroms purposes and cannot qualifY as a final place of storage within

37 Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd [2002] EWCA Civ 1605, [200311 Lloyd's Rep 131, para 20. 38 (1913) 30 TLR 137. 39 Hibernia Foods pIc v McAuslin General Accident Fire & Life Assurance Corp pic (The Joint Frost) [1998] 1 Lloyd's Rep 310 (Institute Frozen Meat Clauses (A), under which the primary trigger for termination of cover is the expiry of a specified number of days after final discharge from the oversea vessel at the port of discharge). 40 Pace the apparent contrary indication in Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd [2002] EWCA Civ 1605, [200311 Lloyd's Rep 131, para 13. 41 See the suggestion by counsel in Eurodale Manufacturing Ltd v Ecclesiastical Insurance Office

eg Institute Cargo Clauses (A), c! 8.3. Tierney v Etherington (1743), cited 1 Burr 348. 32 Pelly v Royal Exchange Assuranc, Co (1757) 1 Burr 341, 348. See also Stew"rt v Bell (1821) 5 B &Ald238. 33 [2002] EWCA Clv 1605, [20031 1 Lloyd's Rep 131, paras 12-16. 34 Renton (GH) 6- Co Ltd v Black Sea 6- Baltic Generallmurance Co Ltd[194l] I KB 206. 35 [1958j I Lloyd's Rep 546, 561. 36 John Martin ofLondon Ltd v Russell [196011 Lloyd's Rep 554.
30

31

pic [2003] EWCA Civ 203, [20031 Lloyd's Rep IR 444, para II.

498

499

Duration ofCover

war and Strikes Risks Cargo Insurance

5.1.1 attaches only as the subject-matter insured and as to any part as that part is loaded on an, oversea vessel (being a vessel on which the goods are to be carried on a voyage involving a sea passage]45

clause 8.1, the adventure upon which the cargo is embarked has changed and,
accordingly, the insurance terminates upon the commencement of transit to the new destination. 42

and
5.1.2 terminates, subject to 5.2 and 5.3 below, either as the subject-matter insured and as to any part as that part is discharged from an oversea vessel at the final

17.21

Different insurance policies may cover outward and homeward cargoes. The insurance relating to the former will continue to apply thereto until its discharge in full. The homeward catgo will be subject to its own insurance even if loaded before full discharge of me outward cargo. 43

porr or place of discharge, or on expiry of 15 days counting from midnight of the day of the arrival" of the vessel at the final port or place of discharge,
whichever shall first occur; nevertheless,
subject to prompt notice to the Underwriters and to an additional premium, such insurance

C. War and Strikes Risks Cargo Insurance

17.22 By virtue of the War and Civil War Risk Exclusion Agreement; cargo may only be insured against war risks and strikes risks in accordance with the War Risk Waterborne Agreement. 44 The main effect of this agreement is threefold. First, all marine cargo policies will incorporate specified war and strikes exclusion clauses. The specified wording corresponds to the war and strikes exclusion clauses in the standard Institute catgo clauses. Secondly, all war risks catgo insurance will be written under the revision of the Institute War Clauses (Cargo), or other clauses apptoved by the Joint War Committee, current as at the date of attachment of risk. Thirdly, all open covers that include either war or strikes risks will contain a right to give notice of cancellation for war or strikes as appropriate. Unless otherwise decided by the Joint War Committee, the period of notice is not to exceed seven days, except for strikes in the context of shipments to or from the United States, in which case the maximum is 48 hours. 17.23 The significance ofwriting war risks cargo insurance subject to the Institute War Clauses (Cargo) lies in the ttansit clause (clause 5). This is more restricted than the transit clause found in the Institute Cargo Clauses (A), (B), and (C). In essence, clause 5 of the War Clauses (Cargo) does not extend cover to the full duration of the ttansit bur restricts cover to the period when the goods are waterborne. The Institute Strikes Clauses (Cargo) adopt the same transit clause as the general cargo clauses and, indeed, lack any distinctive restriction. Consequently, the Waterborne Agteement does nOt require catgo strikes cover to be written undet the Institute Strikes Clauses (Cargo).
17.24

5.1.3 reattaches when, without having discharged the subject-matter insured at

the final porr or place of discharge, the vessel sails thetefrom, and
5.1.4 terminates, subject to 5.2 and 5.3 below} either as the subject-matter insured and as to any part as that part is thereafter discharged from the vessel at the

final (or substituted) porr or place of discharge, or on expiry of 15 days counting from midnight of the day of re-arrival of the
vessel at the -final port or place of discharge or arrival of the vessel at a

substituted porr or place of discharge,

whichever shall first occur.

Under clause 5, therefore, attachment of risk depends on loading on board a 17.25 vessel that will undertake sea carriage. If, therefore, goods are loaded on an inland vessel for carriage to a sea port for transhipment to another vessel for the sea carriage, risk will not attach until transhipment. If, however, the same vessel is to undertake the inland waterborne carriage as well as the sea carriage, the goods will, primaficie, be covered against war risks for the inland waterborne carriage. 47 Further provisions cater for discharge of the cargo at an intermediate port for 17.26 on-carriage by vessel or aircraft or for discharge at a port of tefuge (clause 5.2) and tetmination of the voyage other than at the contractual destination together, if appropriate, with subsequent re-shipment in the same or another vessel to the original or a substituted destination (clause 5.3).

As just indicated, the distinctive patameters of cover under me Institute War

Clauses (Catgo) are contained in the transit clause. Clause 5.1 provides as follows:
This insurance

45 Supplementary definitions to cl 5. Inland river transit is thereby excluded from cover.

46 'Arrival' is deemed to mean (supplementary definitions to cl 5): 'that the vessel is anchored, moored or otherwise secured at a berth or place within the Harbour Authority area. If such berth or place is not available, arrival is deemed to have occurred when the vessel first anchors, moors or otherwise secures either at or off the intended port or place of discharge'. 47 'Where, however, goods are rendered a total loss during the inland voyage so that they never embark upon the sea carriage, it appears that risk cannot attach: 18.16 below.

" clS.l. 43 Rickman v Carstairs(lS33) 5 B & Ad 651. 44 The current agreement is dated 19 December1997. For discussiowofthe War and Civil War Risk Exclusion Agreement, see 7.04 above.

500

501

Duration ofCover
17.27 Cover againsr mines and derelicr torpedoes, floating or submerged, is extended

Voyage Policies on Hulls

held that insurance on a return voyage at and from the outward pan did not attach to a vessel that arrived severely damaged and was lost shortly thereafter. According to Lord Ellenborough: 53
. . . while the ship remains at the place, a state of repair and equipment may be sufficient, which would constitute unseaworthiness after the commencement of the voyage.. But while in port, she must be in such a condition as to enable her to lie in reasonable security till she is properly repaired and equipped for the voyage. She must have once been at the place in good safety. If she arrives at the outward porr so shattered as to be a mere wreck, a policy on the homeward voyage never attaches.

by clause 5.4 while the insured cargo 'is on craft whilst in transit to or from the oversea vessel, but in no case beyond the expiry of 60 days after discharge from the oversea vessel unless otherwise specially agreed by the Underwtiters'. Despite the initial impression, however, cover against mines remains confined to derelict mines, as stated in clause 1.3,48 since clause 5.4 is purely a temporal extensIon.

D. Voyage Policies on Hulls

17.28 A number of the rules for construction contained in Schedule 1 to the Marine

Insurance Act 1906 relate to the attachment and duration of risk under voyage policies. Although they relate specifically to phrases used in the now obsolete SG policy, their embodiment of accepted commercial meaning preserves their authority as regards modern use of the phrases.
17.29 Where insurance is expressed to be 'from' a particular place, the risk attaches

Where a vessel unseaworthy for a sea voyage but seaworthy for harbour sank in 17.32 the harbour, the assured was unable to recover premium money paid to the insurer as the risk had attached. 54 In contrast, underwriters were held liable, the risk not having terminated, where a vessel arrived at her port of discharge 'a perfect wreck, having received her death's wound at sea', was kept afloat during unloading of passengers only by being lashed to a hulk, and then sank. 55 The leading case, however, on the meaning of 'in good safety' is Lidgett v 17.33 Seeretan." The insurance covered a voyage to Calcutta 'and for thirty days after arrival' and also until the vessel 'had moored at anchor twenty-four hours in good safety'. Serious damage was sustained by collision with a reef or bank, necessitating considerable repairs. Extraordinary pumping was required to keep the vessel afloat, first by troops on board and, after arrival at Calcutta, by a fire engine while the cargo was unloaded. This lightened the vessel, enabling its own pumps to cope. It was then taken to dry dock for repairs, where it was destroyed by fire thirty-eight days after arrival. The assured argued unsuccessfully that the vessel was still on risk because it had never been moored in good safery. The Court held that 'in good safety' clearly could not mean in perfect condition, otherwise the loss of a rope would preserve the underwriters' liability. On the other hand, cover would continue in respect of a vessel 'moored in a sinking state or as a mere wreck'. According to Bovill C]:57
In the present case, the vessel, though considerably damaged and leaky, and with one compartment full of water, existed as a ship at the time of her arrival, and she

when the ship starrs on the voyage insured. 49 Where cover ro hull insurance is expressed to be 'at and from', rule 3 provides as follows:
(a) Where a ship is insured 'at and from' a particular place, and she is at that place in good safety when the contract is concluded, the risk attaches immediately.

(b) If she be not at that place when the comract is concluded, the risk attaches
as soon as she arrives there in good safety, and, unless the policy otherwise provides, it is immaterial that she is covered by another policy for a specified time after arrival.

17.30 The 1906 Act is silent with respect to the termination of a voyage. Traditionally,

vessels are insured 'until moored at anchor twenty-foul' hours in good safety', insurance pracrice viewing the twenty-four hours after arrival in the pan of discharge as part of rhe voyage. 50 In the absence of any such clause, the risk terminates upon the vessel anchoring safely at the port of destination in the usual place and manner."
17.31 The phrase 'in good safery' is relevant to both inception and termination of risk.

In each instance, the vessel must be in a cenain physical condition. Insurance'at and from' will attach even though the vessel is not seaworthy to put to sea, but not if it is little more than a floating wreck. Thus, in Parmeter v Cousins, S2 it was

was able to keep afloat and did keep afloat as a ship for more than twenty-four
hours after being moored, by ex~rting the means within the power of the captain. She arrived and moored at the ordinary place for unloading, and was so moored as a ship in the possession or control of her owners for more than twenty-four hours ...

For discussion of the peril, see 13.84-13.86 above. MIA 1906, Sch 1, r 2. For the meaning of 'starts on', see the cases on sailing warranties, discussed at 18.87-18.88 below. 50 Mercantile Marine Insurance Co v Titherington (1864) 5 B & S 765. 51 Stone v Marine Insurance Co, Ocean Ltd, ofGothenburg (1876) 1 ExD 81.
48
49

52

(1809) 2 Camp 235.

ibid 237. Annen v Woodman (1810) 3 Taunt 299. See also Haughten v Empire Marine lmurance Co Ltd (1866) LR 1 Ex 206. 55 Shawe v Felton (1801) 2 East 109. 56 (1870) LR 5 CP 190. 53 ibid 200.
53

54

502

503

Duration ofCover
17.34 Where the issue relates to termination of the risk, 'in good safety' embraces not

voyage Policies on Freight

the words used. In CornfOot v Royal Exchange Assurance COrp,67 it was not dispured that insurance 'for thirty days in POrt after arrival' commences at the precise hour the insured vessel moors in good safety. Where, however, the policy contains a twenty-four hours in good safety clause and also covers the vessel 'during thirty days' sray in her port of discharge', rhe rhirty days do not commence unril rhe twenty-four hours have expired. 6s As a general rule, a voyage policy is unlikely to be construed as extending 17.37 beyond the termination of the described voyage to a further voyage preparatory
to the next trading venture. Thus insurance 'to any port or ports ... in France

just the physical but also the political safety of the vessel. When, by reason of an embargo imposed by French authorities, an English vessel was detained as a prize upon arrival, the insurer was liable and the absence of any guard upon the vessel until some days later was irrelevant. 'She could not be said to be twentyfour hours, or a minute moored in safety ... for immediately she entered the port she was to all intents and purposes captured by the French.'58 The element of political safety does not apply, however, to the initial attachment of risk. 59
17.35 Insurance 'at and ftom Havana' has been held to attach to a vessel upon first

arrival at the outward port of Havana. 60 Consequently, underwriters on the return voyage were liable in respect of damage occurring within the port of Havana but before the vessel moored at the place where the outward cargo was ultimately discharged. Arrival was not to be equated with dropping anchor, nor was it relevant that insurance on the outward voyage had not terminated. In contrast, it was held in Waples v Eame!' that the phrase 'in good safery' in connection with the termination of risk includes 'the opportunity of unloading and discharge'. Having arrived and moored on 8 July, within twenty-four hours the vessel was ordered elsewhere into quarantine. The underwriters were held liable for damage caused by fire on 23 August, while the vessel was still in
quarantine. 62 Moreover) where a vessel is instructed to discharge its cargo at a

and/or the United Kingdom (final pOrt)' does not cover a voyage to bunkers after discharge of cargo at two French ports. 69 The matter is, however, one of interpretation of the words used. Crocker v SturglO concerned insurance 'to any port or ports ... in any order on the West Coast of South America and for thirty days after arrival in final port, however employed'. After discharging the ourward cargo, the vessel was lost while sailing to another port for loading of a rerum cargo. The underwriters were held liable as othelwise the clear distinction drawn between 'port and ports' and the 'final port' would have been defeated.

E. Voyage Policies on Freight

Chartered freight is freight to be earned by a shipowner nnder rhe terms of a 17.38 charterparty for the use of the chartered ship in accordance with the charterparty. According to rule 3(c) of rhe rules for construction in Schedule 1 to the Marine Insurance Act 1906: 'Where chartered freight is insured "at and from" a particular place, and the ship is at that place in good safety when the contract is concluded, the risk attaches immediately. If she be not there when the contract is concluded, the risk attaches as soon as she arrives there in good safety.' It is important to distinguish the subject-matter insured, namely freight to be 17.39 earned according to the terms of the charterparty, from the duration of the insurance, which depends upon the terms of the insurance contract. Thus, chartered freight under a voyage from C to D may be insured against risks in the course of a prior voyage from A to B. 71 The cases encapsulated by rule 3(c) may be divided into twO categories. First, a charterparty for a voyage from A to B to C may be matched by insurance on freight at and from A for the full voyage.

particular place within a port, the twenty-four hours will not commence before mooring at that place,63 unless the dimensions of the vessel dictate at least partial unloading elsewhere, even if merely to reduce the draft of the vessel so as to enable it to proceed to the instructed place of discharge. 64 Insurance to 'port or ports of discharge' in principle covers the vessel until its final port of discharge. Where, however, it has become illegal" for the vessel to pr,?ceed to one port prima jacie within the cover, the insurance is read as if that port were expressly excluded. 66
17.36 Twenty-four hours generally being inadequate for discharge of the cargo, voyage

policies are frequently extended for a longer period after arrival, although ascertainment of the precise petiod covered may require careful consideration of

58

59

60

Minett v Anderson (1794) Peake 277, 278 per Lord Kenyon. Bell v Bell (1810) 2 Camp 475. Haughten v Empire Marine Insurance Co Ltd (1866) LR 1 Ex 206.

" (1746) 2 Str 1243.

62 It has been suggested that Waples v Eames should be viewed simply as illustrating an aspect of political safety: Arnauld, Law ofMarine Insurance and Average Sir Michael Mustill and J Gilman

67

[19041 I KB 40.

(eds) (16th edu, 1981) pata 554. n 26. 63 Samuel v Royal Exchange Assurance Co (1828) 8 B & Cr 119. 60 Whitwell v Harrison (1848) 2 Ex 127.
65

66

As opposed to merely dangerous and inadvisable: Oliverson v Brightman (1846) 8 QB 781. Brown v Vigne (1810) 12 East 283.

Mercantile Marine Insurance Co v Titherington (1864) 5 B & S 765, (1864) 34 L]QB II. 69 Marren v vestry [19201 AC 307. 70 [1897J I QB 330. See also Crocker v GeneratInsurance Co LtdofTrieste (1897) 3 Com Cas 22. 71 Rankin v Potter(1873) LR 6 HL 83; Scottish Shire Line Ltd v London & ProvincialMarirte & Generallnsurance Co Ltd[19121 3 KB 51.
68

504

505

Duration ofCover
The insurer will be liable even though the vessel is lost on the voyage from A ro B and the cargo generating the freight was to be carried from B to C. 72 Secondly, the same result is produced where the above charterparty is accompanied by insurance at and from B to C and the vessel is lost afrer arrival at B even if cargo being carried from A to B has not been fully discharged. 73 In addition, freight under a charterparty from B ro C is recoverable under a policy on freight from A to B to C where the casualty occurs on the voyage from A to B. 74 17.40 Classic freight is earned through the simple carriage of anorher's goods. Such freight can be lost only once there is a legal entitlement to demand its payment subject only to carriage ro the agreed destination. With respect to the attachment of risk, rule 3(d) of the rules for construction treats classic freight identically to the third categoty of freight, consisting of profits the shipowner expects to make through cartying his own goods." Insurance upon freight 'at and from' a particular place is stated to attach pro rata as the goods are loaded, 'provided that if there be cargo in readiness which belongs to the shipowner, or which some other person has contracted with him to ship, the risk attaches as soon as the ship is ready to receive such cargo'. 17.41 Although, in the absence of conttary intention, rule 3(d) muSt represent the meaning to be attributed today to insurance so phrased, some difficulty arises in reconciling its provisions with older case law. In Montgomery v Eggington,76 the assured was held entitled to recover the whole freight insured where only part of the goods had been loaded when the ship was lost, the remainder of the cargo lying on the quay waiting to be loaded. Under rule 3(d), however, the insurer's risk would attach only pro rata with respect to the loaded goods. With respect to the readiness of the vessel to receive the cargo, eatly decisions either proceed upon the basis that readiness to receive is nor a prerequisite to the attachment of risk or provide a broad understanding of the concept. Thus, an assured has been held entitled to recover despire the need for further work on rhe vessel before loading could be complered" and even though the vessel was lost berween ports ofdischarge of rhe ourward cargo. 78 It has also been held thar lack of readiness to load does nor include disability of the vessel caused by an insured periL 79 17.42 The basis of rule 3(d) is rhe judgment of Lord Ellenborough in Forbes v

J.0yage Policies on Freight Aspinall. ao In this case, a ship sailed to Haiti with an ourward cargo for barrer. Afrer exchanging a quantity thereof for part of a return cargo, the vessel was lost while seeking further return cargo. In an action on a valued policy on the return freight, the assured was held entitled to recover only such proportion of the agreed indemnity for a total loss as was referable to the return cargo on board. Montgomery v Eggington was distinguished on the grounds that there a full cargo was ready to be loaded, the ship was ready to receive it, and nothing but the perils insured against could have prevented the freight from being earned. On the facts of Forbes v Aspinall, in contrast, there was no legal entitlement to earn full freight since the balance of the return cargo had not been procured by the time the vessel was lost, and the ourward cargo needed to be discharged before the homeward cargo, once procured, could have been loaded.
In principle, it is difficult to see why the readiness of the vessel to load the cargo 17.43 should affect the attachment of risk. Provided there is a legal entitlement to earn classic freight, which was absent in Forbes v Aspinall rendering Lord Ellenborough's remarks concerning readiness to load obiter dicta, risk should attach. If the assured is then prevented from earning that freight by an insured peril, the assured should recover in fulL 81 Whether, as an issue of fact, the cause of the lost freight is indeed a covered peril may be affected by whether rhe cargo was ready to be loaded. With respect to insurance of freight derived from carrying one's own goods, such readiness should ttigger the attachment of risk. In Devaux v j'Anson,82 Tindal C] held that readiness to load does not require 17.44 presence at the POrt ofloading, only that the cargo be held'actually in a state of readiness, reference being had to the nature and description of the voyage insured, to be put on board, when the ship arrives at the place of deposit'." Recovery was accordingly allowed in respect of freight on cargo stored seven miles from the port ofloading. All the rules of construction contained in Schedule 1 to the Marine Insurance 17.45 Act 1906 are subject to contrary intention. Thus, in a policy on chartered freight 'at and from Lagos' a statement that the insurance 'shall commence ... ftom the loading' of cargo prevented liabiliry from attaching where the vessel arrived safely but was lost before loading any return cargo. 84 Where freight is insured at and from the port of origin to a port of discharge with a liberry to

72 Thompson v Taylor(1795) 6 TR 478; Mackenzie v Shedden (1810) 2 Camp 431. See alsoAtty v Lindo (1805) I Bos & Pul (NR) 236. 73 Horncastle v Stuart (1806) 7 East 400; Davidson v Willasey (1813) I M & S 313; Foley v United Fire & Marine Insurance Co ofSydney (1870) LR 5 CP 155. 14 Barber v Fleming (1869) LR 5 QB 59. " See 1.53-1.54 above. 76 (1789) 3 TR362. 77 Truscott v Christie (1820) 2 Brod & B 320. 78 ~rre v Miller (1825) 4 B & C 538 (althoughattachmenr of the policy was not in dispute). 79 Devaux vjAnson (1839) 5 Bing NC 519.

80 (1811) 13 East 323, 331. " Truscott v Christie (1820) 2 Brad & B 320; Flint v Flemyng (1830) I B & Ad 45. 82 (1839) 5 Bing NC 519. 83 ibid 539. " Beckett v West ofEngland Insurance Co Ltd (1872) 25 LTNS 739 (queried in Hydarnes SS Co v Indemnity Mutual Marine Assuranl'e Co [1895] 1 QB 500, 509). See also jones v Neptune Marine Insurance Co (1872) LR 7 QB 702 ('from' overridden by 'beginning from the loading of the vessel') but contrast The Copernicus [1896] P 237.

506

507

Duration ofCover
touch and stay at intermediate ports, the insurance, once attached, covers any

IVtzr Risks Hull Insurance

on Hulls Agreement. The main features of the current hull agreement94 are .twofold. First, hull insurance ofwar risks will incorporate the Institute Notice of Cancellation, Automatic Termination of Cover and War and Nuclear Exclusions Clause-Hulls (1/11/95) or corresponding clauses approved by the Joint War Committee. Such incqrporation is optional only in the case of insurance on a voyage basis for a period of no more than three months. Secondly, the maximum duration of a policy of war risks insurance is in principle twelve months. Extensions of cover up to a cumulative maximum of six months may be agreed but only once risk has attached for at least six months. Moreover, an initial grant of cover for longer than twelve months is permitted provided cover for the period in excess of twelve months is subject to a right to cancel at any time on giving thirty days' notice. The Institute NotiCe of Cancellation, Automatic Termination of Cover and War 17.50 and Nuclear Exclusions Clause-Hulls (1/11/95) ascribes to itself paramount status, overriding any contrary provision in the contract into which it is
incorporated, and contains fouf operative provisions. First, cover is subject to

freight which would, but for the covered perils, have been earned in the course of any part of the voyage. 85

F. Time Policies on Hulls and Freight

17.46 Most modern hull and freight insurance is written on a time basis. Under

English law, references to a particular time are presumed to refer to Greenwich mean time,86 subject to the provisions of the Summer Time Act 1972.
17.47 Where insurance is effected 'from' a particular date, it seems beyond argument

that the cover commences the day after. 8 ' Thus, where cover was issued 'for twelve calendar months from November 24, 1887' the assured recovered in respect of a casualty on 24 November 1888. 88 The rule may be avoided by 'fi . . expressIng t h e cover as commencmg "89 or ' at and f rom '90 a spec! ed d ate, or at by stipulating that a date is to be inclusive. Insurance 'until' a specified date expires at midnight at the end of that day.91
17.48 The cover extended under a time policy may be confined not just by time limits

cancellation by either party on giving seven days' notice, although underwriters

agree to reinstate cover subject to agreement, priof to the expiry of such notice,

but also by constraints upon the form ofadventure insured or by geography." In Wilson v Boag," a motot launch was insured for four months on the waters of Port Stephens and within a radius of fifty miles. A claim arose in respect of a casualty incurred within that radius but on a voyage to Sydney, some ninety miles away. The Supreme Court of New South Wales held that the insurance took the form of a time policy further delimited by reference to a geographical
area, rejecting the insurers' argument that cover was limited to voyages to

on additional premium and any alteration of terms." Secondly, an automatic termination clause is ttiggered either by outbreak of war between any of five named powers, namely the United Kingdom, United States ofAmerica, France, the Russian Federation, and the People's Republic of China, or requisition for title or use of the relevant vessel. Thirdly, any loss, damage liability, or expense caused by either war between any of the five powers or requisition is excluded. The fourth element of the Institute Notice of Cancellation etc Clause is a
radioactive contamination exclusion clause. 96 These fouf provisions are all

destinations within the specified radius undertaken during the relevant time.

G. War Risks Hull Insurance

17.49 With respect to hull insurance, the War and Civil War Risk Exclusion Agree-

included within the 1995 Institute war and sttikes clauses for hulls and freight," so that policies incorporating such clauses are automatically compliant with that aspect of the War Risks on Hulls Agreement.

ment provides that war risks may be covered in accordance with the War Risks

Barclay v Stirling (1816) 5 M & S 6. 86 Interpretarion Act 1978, ss 9, 23(3). Although the contrary was held, in persuasive terms, by Rowlatt J in Scottish Metropolitan Assurance Co Ltd v Stewart (1923) 39 TLR 407. 88 South Staffirdshire Tramways Co Ltd v Sickness & Accideht Assurance Association Ltd [1891] 1 QB 402; Cartwright v MacConnack [196212 Lloyd's Rep 328. so BalfOur v Beaumont [198411 Lloyd's Rep 272. so As in Heinrich Hirdes GmbH v Edmund [19911 2 Lloyd's Rep 546. 91 Isaacs v Royal Insurance Co (1870) LR5 Ex 296; Heinrich Hirdes GmbH v Edmund [19911 2 Lloyd's Rep 546. 92 Cock")' v Atkimon (1819) 2 B & AId 460. 93 [1956j2Lloyd's Rep 564.
85
87

94 Dated 24 October 1997. Its full name is the War Risks on Hulls (Including Rigs and Marine Structures), Shipowners' Other Interest, Charterers' Interest (Other than Cargo), Builders' Risks, or Second Seamen's Insurances for Time or Voyage Agreement. 95 On the limitation of such variations to that which is reasonable, see 18.115-18.118 below. 96 Incorporated in the International Hull Clauses (01111103) as cl 31.1-3, see 15.80-15.81 above. 97 See, eg Institute War and Strikes Clauses (Hulls-Time) (lill/95), ell 5.1.1-5.1.2 (five powers war and requisition exclusion), 5.2 (radioactive contamination exclusion), 6.1 (seven days' notice of cancellation clause), 6.2 (five powers war and requisition automatic termination clause).

508

509

Duration ofCover

Mutual Insurance
Underwriters as soon as possible.' The difference between the continuation clauses in the 1995 and 2003 clauses lies in the notice requirement. In the 2003 clauses it applies whether the vessel is at sea or in port. However, there is no longer any requirement that notice be given before expiry of risk. Instead, notice must be given 'as soon as possible'. Consequently, where the relevant circumstances arise shortly before expiry of risk and the assured gains knowledge of them only after risk has expired, notice can still be given and cover can be continued. Conversely, where the citcumstances arise well before expiry of risk, the assured must notify underwriters without delay and cannot wait until JUSt before risk is due to expire.

H. Continuation Clauses
17.51

Clauses continuing cover beyond the expiry date of a time policy are standard provisions of the Institute marine clauses for hulls and freight and the International hull clauses. Such provisions do not feature in voyage clauses or war and strikes clauses whether for time or voyage." The wording of the continuation clause has, however, been altered through successive revisions.

17.52 Clause 2 of the Institute Time Clauses Hulls (1/10/83) reads as follows: 'Should

the Vessel at the expiration of this insurance be at sea or in distress or at a port of refuge or of call, she shall, provided previous notice be given to the Underwtiters, be held covered at a pro rata monthly premium to her port of destination.' Cover is, therefore, extended at a pro rata monthly premium where the insured vessel is in anyone of four situations at expiry of risk, namely at sea, in distress, at a port of refuge, or at a port of call. In such circumsrances, cover is continued until arrival at the port of desrination provided underwriters are notified prior to expiry of risk.
17.53 In rhe Institute Time Clauses Hulls (1/11/95), clause 2 provides as follows:

I. Mutual Insurance
The period of cover provided by the mutual insurance associations runs from 17.55 noon Greenwich mean time on 20 February until noon on the same date the following year, and continues from year to year unless terminated in accordance with the association rules. Such termination, whether by the association or the member, is normally required to be by written notice no later than noon on 20 January in any policy year, the cover terminating on the expiry of that policy year. Power may, however, be reserved to the Committee or the Managers to terminate the entry of a ship on thirty days' notice.

'Should the Vessel at the expiration of this insurance be at sea and in distress or missing, she shall, provided norice be given to rhe Underwriters prior to rhe expiration of this insurance, be held covered until arrival at the next port in good safery, or if in port and in distress until the Vessel is made safe, at a pro rata monthly premium.' In contrast wirh the 1983 hull clauses, the 1995 continuation clause is narrower in two respects. Cover is extended in only two situ-

ations: fitst, where the insured vessel is both at sea and also eithet in distress or missing; secondly, where the vessel is both in port and in distress. The extension of cover is then not until arrival at the port of destination but only until, in the first case, arrival at the next port in good safery, or, in the second case, until made safe. The requirement of prior notice to underwriters is confined to the first situation, where the vessel is at sea. The phrase 'in good safety' has traditionally been employed in voyage policies on hulls and is discussed above in
that context. 99

17.54 The continuation clause in the International Hull Clauses (01111103) (clause

12) is wotded as follows: 'Should the vessel at the expiration of this insurance be at sea and in distress or missing, she shall be held covered until arrival at the next port in good safety, or if in port and in distress until the vessel is made safe, at a pro rata monthly premium of call, ptovided that notice be given to the

98 With respect to war and strikes cover, the list of clauses excluded under the incorporation clause includes the continuation clause: see,-egthe reference to cl 2 of the 1983 or 1995 marine hulls clauses in el2 of the InstitUte War and Strikes Clauses (Hulls-Time) (1/10/83 and 1/11/95). 99 See 17.31-17.34 above.

510

511

18
ATTACHMENT AND ALTERATION OF RISK

A. Failure of Risk to Attach in Voyage

Policies
(1) Failure to embark upon the route of

18.02
18.03 18.20

the designated voyage (2) Delayed commencement of the designated voyage

B. The General Doctrine of Alteration of Risk 18.27

(2) (3) (4) (5) (6) (7) (8) (9)

C. Alteration of Risk in Voyage Policies

(1) Change of voyage

Identifying promissory warranties Interpretation and breach Causation Materiality Cure Breach excused Waiver Mitigating the law of promissory warranties

18.61 18.66 18.89 18.90 18.92 18.93 18.94 18.97 lS.ll0 18.1ll lS.114 18.115 18.117 18.119 18.123 18.125

(2) Deviation (3) Delay

(4) Excuses for deviation or delay

18.30 18.31 18.34 18.38 18.41 18.54 18.55

E. Held Covered Clauses

(1) Examples ofhe1d covered clauses

(2) Scop'
(3) (4) (5) (6) Additional premium Amendment of terms Notice Option or obligation? (7) Utmost good [";lith

D. Promissory Warranties (1) The legal characterization of

promissory warranties

The docttine of urmost good faith requires a full and accurate presentation of 18.01 the risk, the marine adventure, to be insured. A resulting contract of insurance covers that adventure and none other on the agreed terms.' Should the insured adventure not ensue, liability on the policy will nevet attach. Should the insured adventure commence bur subsequently be departed from, the insuter's liability on the policy is automatically prospectively dischatged. The all-embracing question traditionally asked was whether the adventure embarked upon or pursued constituted a deviation from that insured.

One of the reasons why a bill oflading contains a contract for a specific voyage is to facilitate

the obtainiog of insuranc" Leduc & Co v Witrd (1888) 20 QBD 475, 481.

513

Attachment and Alteration ofRisk

Failure ofRisk to Attach in v"yage Policies

cargo from Demerara to Berbice, the vessel could not be said to be engaged upon the insured adventure. Similarly, Wly v Modiglianf' concerned insurance from any port in Newfound- 18.05 land to Falmouth or ports of discharge in England at and from 20 October. The vessel left port in Newfoundland on 1 October, spent a week fishing, sailed for England on 7 October and was lost on 30 November in the course of the voyage. The underwriters were not liable, despite the fact that from 20 October the ship was engaged solely upon a voyage to England from Newfoundland waters, since the vessel left Newfoundland on a fishing voyage instead of sailing directly to England. 4 The normal route to the destination named in the policy and thar in fact taken 18.06 by the relevant vessel when sailing for a different destination may coincide for a certain distance and then divide. In such a case, the insurer cannor be liable even with respect to a casualry occurring before rhe dividing point because the vessel will already have departed from the insured adventure. In Wloldridge v Boydell,s a vessel insured at and from Maryland to Cadiz apparently sailed for Falmouth and was lost on the initial common route. The assured argued thar the facts disclosed a loss before an intended deviation from the insured voyage, which, not having occurred, furnished the insurers with no defence. The argument, a1rhough correct in principle,' failed for irrelevance. Strong evidence showed that Cadiz had never been contemplated as the vessel's port of destination. Consequently, the vessel never having been engaged on the insured voyage, the question of deviation from rhat voyage could not arise. 'There cannot be a deviation from what never existed.'7 Similarly, Simon, Israel & Co v Sedgwicll' concerned open cover cargo insurance 18.07 on the adventure 'at and from the Mersey ... to any port or ports in Portugal and/or Spain, this side Gibraltar, and/or ar or from thence by any inland conveyance, to any place or places in the interior', any deviarion or change ofvoyage being covered on payment of an additional premium. Certain cargo, being transported from Bradford to Madrid and intended by the assured to be shipped from Liverpool to Seville, as had been the case with similar cargo previously, was

A. Failure of Risk to Attach in Voyage Policies

18.02 Risk will fail to attach under voyage policies if the insured properry fails

to embatk upon the voyage designated in the policy in terms of either the route to be followed or the time at which the voyage is to take place.

(I) Failure to Embark upon the Route of the Designated Voyage

18.03 The tisk subscribed by an insuret under a voyage policy is a particular marine

adventure consisting of a voyage from a named point of departure (the terminus a quo) to a specified destination (the terminus ad quem). There is no right to substitute another voyage, no mattet how similar in geography, nature of peril, and level of risk. It follows thar if the insured cargo or hull commences its journey from a different point of departure, risk cannot attach since it is never embarked upon the insured adventure. Likewise, if the insured subject-matter commences its journey from the named point of departure but that journey is to a destination other than that named in the policy, again risk cannot attach for the same reason that the journey upon which it is embarked is not that which the insurer agreed to cover. These two simple propositions are addressed by sections 43 and 44 of the Marine Insurance Act 1906 in the following terms:

43 Where the place of departure is specified by the policy, and the ship instead of
sailing from that place sails from any other place, the risk does not attach.

44 Where the destination is specified in the policy and the ship, instead of sailing
for that destination, sails for any other destination, the risk does not attach.

It is noteworthy that these provisions do not speak of the subject-matter insured embarking upon its journey but of the ship sailing. A significant problem, discussed below, is how these sections, especially section 44, apply ifrthe context of multimodal transport of cargo.
18.04 The case law contains a number of illustrations of vessels embarking upon a

different voyage. In Sellar v M'Vicar,' freight was insured 'at and from Demerara, Berbice, and the Windward and Leeward Islands to London'. The vessel having discharged its outward cargo at Demerara, the master agreed to take a cargo from Demerara to Berbice and there load a different cargo for London. Mter loading the cargo for Berbke, the vessel was lost by a covered peril while still ar Demerara. The underwriters were held not liable because the vessel was not engaged upon the voyage insured, namely at and from anyone of Demerara, Berbice, or the Windward or Leeward Islands to London, not a voyage between them prior to sailing for London. Given that Berbice did not lie on rhe narural course of a voyage from Demerara to London, as soon as rhe master agreed a

(1804) 1 Bos & Pul (NR) 23.

(1787) 2 TR 30. Alternatively, it was held that the policy did attach but the underwriters were discharged because of a deviation from the insured adventure, In Vallance v Dewar (I808) 1 Camp 503, in contrast, evidence was adduced ofa trade usage that ships arriving at Newfoundland would either be employed for some time in fishing or making an intermediate voyage and that only upon the expiry thereof would risk attach on homeward voyage policies 'at and from' Newfo.undl~d. Consequently, the duty of utmost good faith did not require the assured to disclose an mtentlon to use the insured vessel for fishing while at Newfoundland. , (1778) 1 Dougll7. 6 See 18.37 below. 7 (1778) 1 Dougll7, 18 per Buller J. 8 [18931 1 QB 303.
3
4

514

515

Attachment and Alteration ofRisk

in fact shipped by error to Cartagena, a porr beyond Gibralrar. When rhe vessel was lost before reaching rhe wesr coast of Spain, rhe assured discovered rhe misrake and rendered rhe appropriate extra premium for Cartagena. The Court ofAppeal upheld rhe insurers' right ro refuse this additional premium. The bills of lading in respect of the cargo were made out for Cartagena with the result that the goods could never be said ro have been appropriated ro rhe advenrure at and from the Mersey to a port this side of Gibraltar. The goods were never on the insured voyage, the policy never attached ro the lost cargo, and the deviation clause could not be invoked.'
18.08 In such cases where risk never attaches, it follows rhat, if the insurer has received

Failure ofRisk to Attach in Voyage Policies

Should the goods at some stage depart from that journey in favour of a differenr advehture the insurer remains liable for losses until rhat poinr, but is prospectively discharged from liability as from that poinr. Such is not, however, the law. The facts of Simon, Israel <& Co v Sedgwick13 are set Out above. 14 The cargo was 18.11 insured not only 'at and from the Mersey ... to any port or pons in Portugal and/or Spain, this side Gibralrar' and inland to any place, but also 'including all risks by any conveyance whatever, from the rime of leaving the warehouse in the United Kingdom until on board'. It was argued that risk attached as soon as the goods left the claimants' warehouse in Bradford, so that the subsequenr erroneous loading on a vessel bound for a POrt beyond Gibraltar constituted a deviarion within the purview of a clause permitting deviation on payment of additional premium. The argument was rejected both at first instance and on appeal. The reasoning, translated into the terms of the 1906 Act, is as follows. The subject-matter of a marine policy is a marine adventure, which, with respect to cargo, consists of the t;X-posure of the insured cargo to maritime perils, namely the perils consequent on or incidental to the navigation of the seas. A contract ofmarine insurance may be extended to cover incidental land or inland water transit, but the core subject-matter of the policy remains the designated sea voyage.!S If the insured cargo never embarks upon thar voyage, it never embarks upon rhe insured adventure." This reasoning again defeated the assureds in the phantom vessel" case of The 18.12 Prestrioka.!8 A cargo of rice was insured for a voyage 'from Kohsichang, Thailand to Dakar port, Senegal' under a policy incorporating the Insritute Cargo Clauses (A). A contract for carriage was duly concluded and the goods were rransported to Kohsichang and there loaded on board the Prestrioka. Bills of lading were issued and the Prestrioka sailed, osrensibly for Dakar. It never arrived and was never found. The evidence suggested rhat the Prestrioka was a 'a phantom vessel destined before departure for disappearance and/or destrucrion having carried irs cargo to a port far from rhar anticipated by rhe cargo owners'." The claimant CIF purchasers of the rice claimed under the insurance and sought leave to serve the claim form outside rhe jurisdiction on the defendant Thai insurers. The Court of Appeal refused leave. There was no real

the premium, the assured becomes entitled to restitution by reason of a rotal failure of consideration." A distinction is ro be drawn with cases where the subject-matter insured embarks upon rhe insured adventure but then departs from that advenrure." Such departure from the insured adventure produces an automatic prospective discharge of the insurer's liabiliry on the policy, but it does not deny rhe initial artachmenr of risk, the insurer's liability for casualties before the departure from the insured risk, and the insurer's consequent
entitlement to premium.

18.09 Where a policy is drafted to attach 'from' a named port and does not contem-

plate cover unril the momenr of departure, the principle articulated in section 44 presents no difficulty. Many policies, however, provide for the subject-matter insured ro be covered from an earlier time. In that context, section 44 codifies reasoning that may surprise unwary assureds, especially under cargo policies.
18.10 Since the nineteenth centuty, it has been cusromaty ro insure cargo not t~r an

isolated sea voyage but for the entirety of a rransir, for example fr<Jm a seller's inland factory by road, rail, or canal ro the port ofloading, from there by sea to an overseas port, and inland from that POrt ro a buyer's place of business. Cargo policies initially expressed their coverage of the full journey through 'warehouse to warehouse' clauses, replaced in the modern Institute cargo clauses by 'transit' clauses." The perhaps natural impression created by such clauses is that risk attaches once the goods embark upon their journey as defined by the warehouse ro warehouse or transit clause. Ar that poinr, the insurer becomes liable for any losses caused by insured perils at any poinr during the insured journey.

In Maritime Insurance Co v Stearns [1901) 2 KB 912 the insurer was held not entitled

to

claim on reinsurance effected on 2 August in respect of a voyage which did not commence until

25 September. The risk was altered (see below) and postponement of the insured voyage was not within the terms of a clause holding the assured covered in respect of a 'change of voyage'. 10 MIA 1906,,84(1). 11 Classically, by reason of a change of voyage, deviation, or delay. These are discussed below. 12 The transit clauses are discussed at 17.IIff above.

(I892) 67 LTNS 352, affd [1893J 1 QB 303. " See 18.07 above. " MIA 1906, ss 1-3. 16 See also Kallis (George) Manuftcturers Ltd v Success Insurance Ltd [1985] 2 Lloyd's Rep 8 (PC). 17 A phantom vessel is a ship with no traceable registration. controlled by frauclsters, and used to steal cargoes. 18 Hima SARL v Dwes Insurance pic (The Prestrioka) [2002] EWCA Civ 1132; [2003J 2 Lloyd', Rep 327. 19 ibid para 59 per Potter LJ.
13

516

517

Attachment and Alteration ofRisk

prospect of the claimants' succeeding at trial because ir was clear from section 44 of rhe Marine Insurance Act 1906 that risk had never attached. The claimants argued that section 44 was displaced by the transir clause in the Institute cargo clauses, which srates that risk 'attaches from the time the goods leave the warehouse or place of srorage ... for rhe commencement of the transir'. Following Simon, Israel v Sedgwick, however, the Court held that under a voyage policy on cargo from a named port, the insured marine adventure did not commence until the carrying vessellefi: the named port of departure and embarked upon the insured voyage. Although section 2(1) of the Marine Insurance Act 1906 permitted the contract to be extended to incidental land risks and the transit clause took advantage of that permission, that clause could nOt change the fundamental nature of the policy. Instead, it 'operates on the assumption that the insured adventure takes place and on that basis addresses the question of the
commencement and termination of the risk'. 20

Failure ofRisk to Attach in v"yage Policies

... it is the plain import. of the judgment in the Simon Israel case that, despite the effective extension of the voyage insured from the moment of sailing back to the moment of leaving the warehouse for the purposes of attachment of risk, the overall voyage or adventure assured is still properly characterized as a voyage from A to B and, if that adventure is never in fact embarked upon, the insurer w.ill not be liable ... Where an insurer invokes s 44, the court will conduct an ex post facto exercise to determine not simply the contractual, but the actual, destination of the ship at the time of sailing, which exercise depends upon the acts and intentions of the owners andlor Master at the time of its departure.
If the court determines that, at the time of sailing, vessel and cargo were in truth bound for a terminus ad quem other than that identified in the policy as definitive of the voyage insured, then s 44 will apply and the risk which prima ficie attached when the goods left t?e warehouse will in the event be held not to have attached.

18.13 In the light of the decisions in Simon, Israel v Sedgwick and The Prestrioka, the

question arises of whether the assured can recover in respect of losses incurred during the journey in the event that the contemplated sea voyage never occurs. The goods might be totally lost so that there are none to embark on the insured voyage. The intended carrying vessel might duly sail on that insured voyage or might not. Alternatively, some goods might be lost in transit between the warehouse of origin and the port of loading, where the remainder are loaded on board a phantom vessel. Again, the assured might incur expenses in principle recoverable under a sue and labour clause, but the goods are subsequently loaded on a phantom vessel.
18.14 Where the goods, or some of them, are loaded on a vessel that sails for a

Where, in contrast, the goods are totally lost and never arrive at the port of 18.16 loading, Potter LJ was prepared to contemplate that the assured might recover, 'since the vessel has not sailed fot another destination at the time of the loss or theft, s 44 has no application and the risk which prima facie attaches to the goods on leaving the warehouse should not be subject to ex post facto invalidation as a result of an event (ie commencement of the voyage) which has not occurred at the time of the 10ss'.23 With respect, however, the reasoning codified in section 44 and the wording of that provision consider embarking on the designated sea voyage to be a condition precedent to the attachment of risk, not 24 to the continuation of liability under a policy where risk has already attached. If the goods never arrive at the port of loading, it is hard to see how that condition precedent can be fulfilled. The solution to the reasoning in Simon, Israel v Sedgwick may lie in the drafting 18.17 of the policy. The assureds' argument that the insured adventure was a journey from Bradford to Madrid foundered on the wording of the policy, which dearly insured a voyage from Liverpool to a port this side of Gibraltar to which was superadded inland transit to Liverpool. Consequently, the voyage in fact undertaken by the goods would colour the initial transit to Liverpool. Had the policy clearly insured a through journey from Bradford to Madrid to be undertaken in a multimodal fashion, the insurers would seemingly not have contested liability.25 On its wording, section 44 denies the attachment of risk whenever the ship sails for a destination other than that specified in the policy. If, however, the 'destination' in the policy is clearly identified as the final inland terminus of the

destination other than that contemplated by the policy, as in the second and third suggested hypotheses, it seems clear, although it has not been decided, that the assured cannot escape from section 44. Thus, at first instance in Simon, Israel v Sedgwick,21 Wright J considered that: 'If the substance of the policy is the maritime risk, I think that the character of the preliminary conveyance before the ship is reached must be determined by that of the voyage on which the goods were actually shipped, and that the goods must, until shipment, be taken to have started for the voyage for which they were afterwards in fact shipped.'
18.15 Similarly, in The Prestrioka,22 Potter LJ stated as follows:

20

ibid para 48 per Potter L]. See also Nam Kwong Medicines & Health Products Co Ltd v China

Insurance Co Ltd [20021 2 Lloyd's Rep 591 (Hong Kong High Court).
22

" (1892) 67 Lf(NS) 352, 353-4. [2002J EWCA Civ 1132, [20031 2 Lloyd's Rep 327, paras 53~54.

ibid para 56. Although see the discussion of 'at and from policies' at 18.19 b~low.. . 25 [18931 1 QB 303, 306. It might be questioned whether a pohcy that demed the defining nature of the sea leg of the journey was still, technically, a policy of ~arine insuran~e. Although such a question could have practical relevance (eg whether the docmne of constructive tOtal loss applied), it would be clear that the assured was covered against the loss.
23
24

518

519

Attachment and Alteration ofRisk

entire journey, it would not marter for which interim port on the journey the vessel sailed as long as it was still on a route ro the final inland terminus.
18.18 This would still leave assureds exposed to the phantom ship problem. There

Failure ofRisk to Attach in Voyage Policies

and from' a named place, the marine adventure insured is still in substance a voyage to a destination. Thus, although the policy will attach at the place of departure, the vessel will not be covered there indefinitely. According to Lord Hardwicke in Chitty v Selwyn," 'if all thoughts of the voyage are laid aside, and the ship lies there five, six or seven years, with the owner's privity, it shall never be said that the insurer is liable; for it would be absurd to make him suffer for the whim or caprice of the owner, who chases to let the ship lie and rot there'. This approach, requiring an abandonment of the adventure, was adopted also 18.21 by Lord Ellenborough in Grant v King. 30 'To discharge the policy, there musr be a clear imputation of waste of time. Mere length of time elapsing between the sailing of the vessel and the underwriring of rhe policy, is not of itself sufficient to avoid the policy; ir is capable of explanation.' The question would be posed whether the delay was 'for the purpose of the voyage'." An alternative analysis, however, focused increasingly not on whether the assured could satisfactorily explain the delay but on whethet the delayed voyage was compatible with or a deviation ftom the policy.

appears to be no intrinsic merit in the decision in The Prestrioka. The insured cargo embarked upon the contemplated journey, albeit not technically upon rhe insured adventure. It was lost by the insured peril of theft. Had ir been stolen in any other way, even by being driven away in a 'phantom lorry' at the port of destination, the insurers would have been liable. Instead, they escaped liability on what must be considered a technicality. The only solution appears to be a clause drafted specifically to disapply section 44 and make ir clear thar insurers accept liability for rhefts involving phantom vessels.
18.19 It is also possible, although in pracrice much less likely, for section 44 to spring a

surprise in hull insurance. A policy 'at and from' a named port is designed to offer cover not only once the contemplated voyage commences but also while rhe vessel is at the named port of departure prior to commencing rhe contemplated voyage.'6 Suppose the vessel lies at the named port of departure and takes on cargo for the contemplated voyage. Once loading has been completed, the owners resolve to send the vessel to a different port and so instruct the master. The vessel duly sails for a different port. According to section 44, risk does not attach, with the result that insurers are not entitled to any premium and are not liable for any damage sustained while at the port of departure prior to sailing. Apparently, exposure to port risks while the vessel is 'at' the port of departure does not constitute part of the core marine adventure thar the policy insures." Suppose, however, that a vessel insured under an 'at and from' policy is reasonably fit for the stay in port but unseaworthy for the voyage from thar port. The unseaworthiness will prevent the insurer from being on risk once the vessel sails. Consequently, there should be no artachment of risk. It has, however, been held thar risk does artach and the insurer is liable for casualties while the vessel is in port so that the premium is earned. 28 This cannot be reconciled with section 44 as a condition precedent to attachment of risk and, it is suggested, exposes the flaw in that section. (2) Delayed Commencement of the Designated Voyage
18.20 A philosophy of different risk also underpins the law's approach to delayed

Hull v Cooper' concerned insurance effected on 13 August on a return voyage, 18.22 the vessel not commencing its outward voyage to the terminus a quo of the policy until 27 August. The underwriters argued a change of risk by protracting the insured voyage further into the winter and that the inevitable lapse of time before commencement of the insured voyage should have been disclosed by the assured. The jury found, however, that this delayed attachment of cover did not marerially vary the risk. The Court of King's Bench refused to order a new trial as insurance 'at and from' a particular place had never required rhat the insured vessel be at the terminus a quo at the time of effecting rhe policy, provided it arrived there shortly thereafter. Hull v Cooper was followed in the leading case of Mount v Larkins." On 28 18.23 February 1824, insurance was effecred at and from Singapore for a vessel's homeward voyage. At the time, the vessel was in Australia, not arriving in Singapore until March 1825. The jury held this delay to be unreasonable and unjustifiable, although attributable in part to adverse wearher. Initially, the vessel had remained at Hobart Town, Australia, while the master built himself a house and purchased a schooner, which, manned by crew from the insured

commencements of the insured voyage. Where a vessel is insured for a voyage 'at
29 (1742) 2 Ark 359. 30 (1802) 4 Esp 175, 176-7. " Palmer v Fenning(1833) 9 Bing 460. 32 (1811) 14 East 479. See also Palmer v Marshall (1832) 8 Bing 317 (insurer discharged by delay in sailing in excess of three months 'during which, in addition, to the risk of the voyage, the underwriter is exposed to the risk of every accident which may happen in port': per Tindal C] at

See 17.29 above. Compare the distinction between seaworthiness and portworthiness in MIA 1906, S 39(1), (2), discussed at 19.23-19.24 below. 28 Annen v Woodman (1810) 3 Taunt 299.
2.6

27

319).
33

(1831) 8 Bing 108.

520

521

Attachment and Alteration ofRisk

vessel, he used for seal-hunting voyages. 34 Holding that the risk never attached, Tindal CJ stated that'a delay in the arrival of the vessel at the place where the risk is to attach, alters the risk of the insurer'." The underlying principles were elaborated in the following terms:
The reason upon which a deviation discharges the insurer} is not that the risk is thereby increased, but because the insured has, without necessity, substituted

Failure ofRisk to Attach in Voyage Policies

vessel being delayed so long as to vary the risks by perils of the sea or otherwise on its passage to the POrt where the risk is to attach'," and, consequently, that 'in a policy "at and from a port" it is an implied understanding that the vessel shall be there within such a time that the risk shall not be materially vatied, otherwise the risk does not attach'." On the facts, a vessel insured on 13 July at and from Montreal to Monte Video did nor arrive at Montreal until 30 August. Evidence was adduced and accepted that this delay, assumed to be occasioned by matters beyond the assured's control, materially affected the risk and rate of premium by changing a summer voyage to a winrer voyage. The assured unsuccessfully argued for a new trial on the ground that the jury had been misdirected to consider only whether rhe delay altered the risk and not whether the delay had been justified by necessity. The judgment of Blackburn J in De Wolfsupplies the basis for section 42 of the 18.25 Marine Insurance Act 1906, which provides as follows:
(I) Where the subject-matter is insured by a voyage policy 'at and from' or 'from'
a particular place, it is not necessary that the ship should be at that place when the contract is concluded, but there is an implied condition that the adventure shall be commenced within a reasonable time, and that if the adventure be not so commenced the insurer may avoid the contract.

another voyage for that which was insured, and thereby varied the risk which the underwriter rook upon himself. It must be admitted that, if the policy had been
effected upon this ship at and from Sincapore, the ship then being at Sincapore,

unreasonable and unjustifiable delay at Sincapore would have avoided the policy.
Why, but because the voyage, commenced after an unreasonable interval of time, would have become a voyage at a different period of the year, at a more advanced

age of the ship, and, in short, a different voyage than if it had been prosecuted with

proper and ordinary diligence; that is the risk would have been altered from that which was intended by all parties when the policy was effected.
But what is the difference with respect to the alteration of the voyage, whether the

unreasonable and unjustifiable delay takes place in the course of the ship's voyage
Sincapore, or after the ship is at Sincapore? The underwriter has as much right to calculate upon the outward voyage ... being performed in a reasonable time and without unnecessary delay, in order that the risk may attach, as he has that the voyage insured shall be commenced within a reasonable time, after the risk has attached. In either case the effect is the same, as to the underwriter, who has another risk substituted instead of that which he has insured against; and in both cases, the alteration is occasioned by the wrongful act of the assured himself.
to

(2) The implied condition may be negatived by showing that the delay was caused
by circumstances known to the insurer before the contract was concluded, or by showing that he waived the condition.

18.24 Despite the implication from this laSf statement, in De Wolf v Archangel

Maritime Bank & Insurance Co Ltd,'6 Blackburn J held rhar it is 'not material whether the delay which varies rhe risk was occasioned by the fault or the misfortune of the assured. In either case the risk is equally varied;. Once the voyage has commenced, certain delays and deviations are excused." A vessel may be forced to run before a storm in deviation from the direct course of the voyage, or be damaged and incur a lengthy delay in order to effect necessary repairs. The risk is not varied because rhe underwriter assumes the risk of the ordinary course of the agreed voyage and in such circumstances the ordinary and proper course is not the direct and uninterrrupted course. Moreover, if the risk does not attach until the vessel arrives at the terminus a quo, its locarion ar the time of conclusion of the policy is immaterial to the insurer and no term pertaining thereto need be implied into the insurance contract. However, given the possible impact of passage of time upon the nature of a voyage, Blackburn J held that 'the underwriter does not take upon himself any part of the risk of the

The remedy conferred upon the insurer by section 42(1), namely the right to 18.26 avoid rhe contract, is a curiosiry. It is unclear why the draftsman of the Act ignored the non-attachment of risk approach of the common law, clearly based upon deviation from the insured adventure. The Act alters the pre-existing law by imposing an implied condition, breach ofwhich permits retrospective avoidance of the contract. Remedially, tberefore, failure to commence the adventure within a reasonable time is assimilated to a breach of the duty of utmost good faith. The assured must seek to prove waiver of the breach by the insurer. In Bah Lias Tobacco & Rubber Estates v Vo~a Insurance CO,40 acceptance by the insurer of an additional premium in respect of the delay compromised any defence to liability of the insurer based upon deferred commencement of the adventure.

In fact, the schooner returned from. its second voyage to find the insured vessel had lett Australia. There was no reunion.
34
35
37

38
39

(1874) LR 9 QB 451, 456.

ibid 457, following Hull v Cooper(1811) 14 East 479, above. See also Maritime Insurance Co

(1831) 8 Bing 108, 123. 36 (1874) LR 9 QB 451, 456. MIA 1906, s 49(1), discussed at 18.41ffbelow.

v Stearns [190112 KB 912.

40

(1920) 3 LlLRep 155.

522

523

Attachment and Alteration ofRisk

The General Doctrine ofAlteration ofRisk

that the change of terms would have been material for the purposes of the precontractual duty of urmOSt good faith, but argued that as a post-formation matter it had no relevance. Rejecting this argument, Lloyd J held that what was material to the risk before formation remained material thereafter, that the concession had been properly made, and that there had been a material variation of risk, with the result that 'just as in a marine policy the insurer is discharged in the eVent of a change of voyage, unless there is a held covered clause, so the insurers were discharged here. Non haec in foedera veni'.47 Alteration of risk should not, however, be confused with mere increase in risk. 18.29 The insurer remains on risk where the identity of the risk is unaltered bur the probability of a loss occurring is increased by a change of circumstances. 48 'If a person who insures his life goes up in a balloon, that does not vitiate the policy.'49 Raine v BeitO concerned hull and freight insurance from the port of loading in Spain to London with liberty to touch and stay at any POft. 51 Having loaded a full cargo at various Spanish ports, the ship incurred a necessary stop at Gibraltar to take on board sufficient provisions for the London voyage. In the course of this stop, the ship loaded additional cargo in the form of chests of dollars. The vessel subsequently being lost by perils of the sea, the insurers sought, unsuccessfully, to argue alteration of risk. Lord Ellenborough stated as follows:" If the taking in the dollars at Gibtaltar matetially varied the risk of the underwriters, they would be discharged by it; bur that it did not vary the risk by occasioning any delay of the voyage was exptessly found by the jury ... I have turned it in my mind whether the risk might not have been increased by
the particular kind of cargo, namely, treasure, taken in there: if it were known at the time to an enemy, it might hold Out an additional temptation for him to seek for and attack the ship. But I do not know that a mere temptation of this SOrt has ever been held a sufficient ground to avoid a policy if the original act itself were

B. The General Doctrine of Alteration of Risk

18.27 Deviation from the insured adventure auromatically discharges the insurer's liability on the policy. 'The underwriter insures a parricular risk, and the assured has no right ro change it. Whether he increases or diminishes it is immaterial; if he varies it the underwriter is discharged.'41 In Denison v Modigliani,42 a vessel on its outward voyage was captured by a French privateer. The vessel was carrying a letter of marque despite the insurers' refusal of permission. 43 The assured argued that the letter of marque was intended for the homeward voyage only, although it was not so confined on its wording. However, according ro Lotd Kenyon, rejecting this argument, it sufficed that 'the captain had a strong temptation to deviate; and that this is such an essential alteration of circumstances from the condition of the vessel at the time of the insurance, as ought to dischatge the underwriters, unless it were done with their consent'.44 Grose J held that the presence of the letter of marque was 'a direct deparrure from the nature of the contract as undersrood between the parries'. Although avowedly intended for use exclusively on the homeward voyage, 'being a general letter of marque, the captain had the power to make use of it if he pleased; and it cerrainly held our a temptation which was altogether repugnant to the nature of the contract entered into and contrary to the professed understanding of the contracting parties).45 18.28 In Hadenftyre Ltd v British National Insurance Society Ltd,46 contingency insurance covered the risk of default on a contract for the purchase of a site under which the purchaser was ro pay 6,000 per week, concluding the paymet>ts in just over one year. The sale contract ultimately concluded provided fOf 154 weeldy instalments of 3,000. In an action on the policy, the assured conceded

lawful.
Company ofAftican Merchants Ltd v British & Foreign Marine Insurance Co Ltd (1873) LR 8 Ex 154, 157 per Blackburn J. Also Hartley v Buggin (1781) 3 Dougl39, discussed at 18.40 below; Shaw v Robberds (1837) 6 A & E 75,83.
41

42
43.

(1794) 5 TR 580.

A letter of marque is a special authorization of hostile acts against a designated state or person, effectively a licence to carry out acts of privateering. It thus transforms the nature of the risk from exclusively peaceful trading to including involvement in hostilities.
44

(1794) 5 TR 580.581.

" ibid 398. See also Kausar v Eagle Star Insurance Co Ltd (1996) [2000] Lloyd's Rep 1R 154,
156. Change of voyage is discussed at 18.31ffbe1ow. " Pim v Reid (I 843) 6 Man & G 1; Thompson v Hopper (1858) EI BI & El1038. " Baxendale v Harvey (1859) 4 H & N 445. 449 per Pollock CB arguendo. See also Hussain v

ibid 582. It is, however, a fine question of construction whether the presence of a letter of marque transforms the voyage into one properly regarded as immediately different or merely promises a departure from the covered voyage at some future stage: see Oswell v Vigne (1812) 15 East 70 (and see 18.37 below for discussion of intended deviations). Denison v Modigliani was distinguished in Moss v Byro",! (1795) 6 TR 379 where the assured had no intention to use the letter of marque, obtained it only to encourage seamen to sign on for the voyage and, consequently, did not obtain a certificate necessary to its validity. It was held the policy remained valid and that any use by the master of the invalid letter of marque against the wishes of the owner would constitute barratry. '
45

Brown [199611 Lloyd's Rep 627, 631; K4usarv Eagle Star Insurance Co Ltd(l996) [2000] Lloyd's Rep lR 154, 156-7. 50 (1808) 9 East 195.
51 A 'liberty to touch and stay' clause constitutes contractual permission to deviate to some extent from the ordinary and proper course of the voyage, enlarging the risk covered. The extent of the permission is a matter of construction of the clause and policy in question.
52

" [1984] 2 Lloyd's Rep 393.

(1808) 9 East 195, 199-200. See also Laroche v Oswin (1810) 12 East 133.

524

525

Attachment and Alteration ofRisk

Alteration ofRisk in v"yage Policies

As already seen, where a ship sails for a different destination, the risk never 18.32 attaches, regardless ofwhether the route of the insured voyage coincides to some extent with that of the new voyage. Similarly, where it is resolved to change a voyage after inception of the risk, the insurer's discharge is not postponed to the point of physical departure from the route of the insured voyage, By virtue of secrion 45(2) of the Marine Insurance Act 1906: 'Unless the policy orhetwise provides, where there is a change of voyage, the insurer is discharged from liability as from the time of change, thar is to say, as from the time when the determination to change it is manifested; and it is immaterial that the ship may not in fact have left the course of voyage contemplated by the policy when the loss occurs.' This provision codifies the decision of the House of Lords in Tasker v 18.33 Cunninghame. 60 In response to a suggestion of their agents at Cadiz that the destination of the vessel on the homeward voyage be altered, the assured took out insurance incorporating this variation. Subsequently, rhe agents determined upon a second change of destination. A letter notifYing the assured of this further change arrived on the same day the vessel was lost while still at Cadiz. Having initially indemnified the assured in ignorance of rhese facts, the insurers then successfully sought restitution on the basis of a change ofvoyage before the loss, The circumstances surrounding the first change of destination evidenced a conferment of authoriry upon the agents to alter the destination of rhe vessel. Moreover, the second change had taken effect although the vessel had not sailed before the loss or even completed loading of cargo. 'Undoubtedly a mere meditated change does not affect a policy. But circumstances are to be taken as evidence of a determination, and what better evidence can we have, than that those who were authorised had derermined to change the voyage.'61
(2) Deviation

C. Alteration of Risk in Voyage Policies

18.30 This section is concerned with the three docrrines of change of voyage, deviation, and delay. In rhis context, the term 'deviation' is employed in the most restrictive of its three meanings. In a very general sense, it indicates any departure from the insured adventure sufficient to constitute a variation of tisk. 53 Its narrow meaning, adopted by the Marine Insurance Act 1906, is confined to a temporary departure from the contractual route for the insured voyage. An intermediate meaning includes delays in the prosecution of the insured voyage.'4 Pre-Act case law adopted either the first or third of these meanings. The drafting of the Institute clauses unfortunately creates confusion. 'Held covered' clauses maintain the policy, subject to certain conditions, notwithstanding specified alterations of risk. 55 However, whereas clause 8.3 of rhe Institute Cargo Clauses (A), (B), and (C) refers expressly to both delay and deviation, clause 2 ofthe 1983 and 1995 Institute Voyage Clauses Hulls and clause 3 of the 1989 and 1995 Institute Voyage Clauses Freight expressly menrion deviation alone while remaining confusingly silenr with respect to delay.
(1) Change of Voyage

18.31

The Marine Insurance Act 1906 defines a change of voyage as a voluntary change of the destination of the ship from that contemplated by rhe policy after the commencemenr of the risk. 56 Consequently, determining whether there is a change ofvoyage requires precise identification of the voyage insured, including the proper limits of any liberty to touch and stay clause. 57 The requiremenr of volunrariness requires differenriation between the volunrary apprehension of a peril and rhe insured war peril of restraint." Accordingly, orders ofthe German government on the outbreak of the Second World War, obedience to which involved abandonment of the voyage, constituted a restraint of princes. There was no change of voyage since the master 'was not acting on his own initiative, but on orders which . .. morally as a good subjecr he ought not to have

resisted) .59

53 See, eg Oswell v Vigne (1812) 15 East 70; Birrell v Dryer (1884) 9 App Cas 345. " See, eg Mount v Larkins (1831) 8 Bing 108. 55 For discussion of held covered clauses, see 18.110ffbelow. 56 MIA 1906, s 45(1). 57 Bottomley v Bovill 082,6) 5 B & C 210 (widely drafted liberty to touch and stay clause held confined to intermediate voyages 'subordinate to or connected with either of the voyages contemplated by the parties as the principal objects of the contracts': per Abbott CJ at 219,) 58 See 9.46ff and 13.50-13.52 above. 59 Rickards v Forestal Land, Timber & Railway Co Ltd (The Mindin) [1942l AC 50, 109 per Lord Porter. See also Viscount Maugham at 73 and Lord Wright at 82.

A marine adventure insured by reference to a voyage conremplates not merely 18.34 specified termini a quo and ad quem but also a particular route rhe vessel will follow between them. Any departure, withour lawful excuse, of rhe vessel from this insured route, without a change of the terminus ad quem,62 constitutes a deviation in the sense in which this term is employed by the Marine Insurance Act 1906, automatically discharging the insurer prospectively from liability

60

(1819) 1 Bligh 87.

" ibid 102-3 per Lord Eldon LC. 62 Thames & MerseyMarine Insurance Co Ltd v HTVtm Laun &Co (1905) (1917) 23 Com Cas 104, 110-11 per Lord Davey: 'It is otten a nice question on the facts whether an interruption of
the voyage amounts to a deviation only or is a change of voyage, The usual test is whether the ultimate terminus ad quem remains the same.'

526

527

Attachment and Alteration ofRisk

under the contract without prejudice to liability for previous 10sses. 63 Such a discharge is irreversible; risk does not attach once more if the vessel regains the insured route. 64 This discharge stemming from the simple fact of a change of risk, it is unaffected by any lack of a causal link between rhe deviation and a subsequent loss:5
18.35 In the absence of specific designation by the policy, the insured route the vessel

Alteration ofRisk in Voyage Policies

merely by a manifestation of the determination to change the terminus ad quem. In such cases, viewed as a whole, the actual voyage is never or immediately ceases to be that which was presented to the insurer and which the insurer agreed to cover. Firm evidence of a present determination to depart temporarily from the insured route would seem to present a parallel situarion, discharging the insurer without any need for an actual departute. Viewed as a whole, the actual voyage again would no longer seem to correspond with the insured voyage. Such, however, is not English law. Where a vessel sails on the insured voyage having already resolved to deviate and sustains a loss prior to the dividing point between the insured voyage and the deviation, the insurer is liable. Provided the termini ad quem of the insured and actual voyages coincide, the vessel will be regarded as having embarked upon rhe insured voyage and the risk will anach. Only as and when the intended deviation materializes will the insurer be discharged. 74 'The intention to deviate is immaterial; there must be a deviation in fact to discharge the insurer from his liability under the contract.'''
(3) Delay

is bound to follow is the usual and customary route. 66 According to Lord Porter in Reardon Smith Line Ltd v Black Sea 6- Baltic General Insurance Co Ltd:"
It is the duty of a ship, at any rate when sailing upon an ocean voyage from one port to another, to take the usual route between those two ports. If no evidence be given, that route is presumed to be the direct geographical route, but it may be

modified in many cases for navigation or other reasons, and evidence may always be given to show what the usual route is, unless a specific route be prescribed by the

[contracr].
18.36 Some leeway may be introduced by a clause giving 'liberty to touch and stay' at

specified ports. Such express freedom, however, in turn constitutes a specific route to which the vessel must adhere, refraining from calling at any port not comprehended by the contract, including a port at which usage would sanction a call in the absence of any express contractual term. 68 Moreover, the courts will construe such a clause as confined to permitting the visiting of ports only for purposes connected with the voyage:' Liberty to touch and stay clauses are no longer used in the standatd market clauses.'o Where the policy specifies several ports of discharge, the vessel must proceed to such of them as are visited71 in the order designated in the policy" or, if the policy stipulates merely 'ports of discharge' within a given area, in their geographical order. 73
18.37 Ai; already seen, where a vessel sails for a destination other than the insured

By virtue of section 48 of the Marine Insurance Act 1906, the adventure insured 18.38 under a voyage policy 'must be prosecuted throughout its course with reasonable dispatch, and, ifwithout lawful excuse it is not so prosecuted, the insurer is discharged from liability as from the time when the delay became unreasonable'.76 Although the issue may be settled by the contract," what constitutes a reason- 18.39 able delay is in principle a question offact." In Phillips v Irving," a ship insured as seeking a cargo was held to act reasonably in posrponing sailing by reason of a locally depressed freight market caused by empty troop ships all seeking return cargoes. Reasonableness was to be determined 'not by any positive and arbitrary rule, but by the state of things existing at the time at the port where the ship happens to be'. 80 A delay is reasonable if occasioned by the need to obtain a permit from consular authorities" or by shortage of tonnage in

terminus ad quem, the insurer is on risk for no part of the passage even to the extent the actual and insured routes coincide. A change of voyage is ttiggered

6l MIA 1906, s 46(1); Green v Young (1702) 2 Salk 444. Deviation may arise also through infringement of geographica1limits imposed by the insurance contract: Tait v Levi (1811) 14 East 481. 64 MIA 1906, s 46(1); Elliott v Wi&on (1776) 4 Bra PC 470. 65 Elliott v Wi&on (1776) 4 Bra PC 470; Davis v Garrett (1830) 6 Bing 716. " MIA 1906, s 46(2). 67 [1939] AC 562, 584 (evidence of usual commercial practice to bunker at a particular port denied deviation in bill of lading case). 68 Elliott v Wi&on (1776) 4 Bra PC 470. 69 Hammond v Reid (1820) 4 B & AId 72. See also MIA 1906, Sch 1, r 6. 70 Bur cf held covered clauses, discussed at 18.110 below. 71 There is no obligation to visit them all. n MIA 1906, s 47(1); Beatson v Haworth (1796) 6 TR 531; Marsden v Reid(1803) 3 East 572. 73 MIA 1906, s 47(2); The Dunbeth [1897J P 133.

74 Hare v Travis (1827) 7 B & Cr 14, esp 17-18. See also Foster v Wilmer (1746) 2 Str 1249; Thellusson v Ferguson (1780) 1 DougI 231; Kewley v Ryan (1794) 2 HBI 343; Kingston v Phelps cited (1795) 7 TR 165; Heselton v Allnutt (1813) 1 M & S 46. cf Thames 6- Masey Marine Insurance Co Ltd v HT Van Laun 6-Co (1905) (1917) 23 Com Cas 104 (obiter). 75 MIA 1906, s 46(3). 76 Even if the delay is reasonable or excused under MIA 1906, s 49, discussed below, the

insurer may not be liable for losses caused by delay, see 15.29ffabove. 77 Doyle v Powell (1832) 4 B & Ad 267. 78 MIA 1906, s 88; Bain v Cove (1829) 3 Car & P 496. 79 (1844) 7 Man & G 325. 80 ihid 328 per Tindal q. " British-American Tobacco Co Ltd v HG Poland (1921) 7 LlLRep 108.

528

529

Attachment and Alteration ofRisk

wartime. 82 Again, underwriters are not discharged where a vessel, delayed eighteen months by an embargo, could have departed in ballast but in breach of the terms of the chartetparty that required a return cargo of timber." The delay must, however, promote the insured adventure. A delay enabling one vessel's crew to assist in salving the cargo of another of the assured's vessels is unreasonable under a policy with a liberty only to stay and trade. 84
18.40 Similarly, in Hartley v Buggin,85 a vessel sent to Mrica with liberty to exchange

Alteration ofRisk in VOyage Policies

excusing, there must be no lawful excuse and, in the context of delay, the . enquiry as to a lawful excuse does not arise unless the voyage has not been prosecuted with reasonable dispatch. Since, in the. circumsrances laid down by section 49, there would almost certainly be no discharging deviation or delay in the first place, section 49 would appear merely to provide clarification of what constitutes lawful excuse and reasonableness. The nature of section 49 is illustrated by the first excuse, namely authorization 18,43 by a special term in the policy. Yet for a deviation to discharge the insurer, it must constitute a departure from the voyage contemplated by the policy. Express authority to visit a port outside the usual route serves to define the voyage insured and exercising that authority cannot amount to a deviation requiring excuse. Again, deviation or delay is excused under section 49(1)(g) where caused by barratrous conduct of the master or crew if barratry is an insured peril. However, barratrous conduct frequently involves deviation and, as a matter of contractual interpretation, specific inclusion of barratry as a named peril in the policy must limit any g~neral deviation defence." And where the policy positively requires a deviation or delay as reasonably necessary for compliance with an express or implied warranty,90 specific excusing by section 49(1)(c) seems superfluous. The remaining excuses constitute examples of involuntary deviations and 18.44 delays. Thus, the insurer is not discharged where the deviation or delay is caused by circumstances beyond the control of the master and his employer,91 such as compulsion by the crew" or force of weather," or, according to section 49(I)(d), where reasonably necessaty for the safety of the ship or subject-marter insured:
Nothing is more clear than the general principle that a deviation never puts an end
to the insurance, unless it be the voluntalY act of those who have the management

goods for slaves remained for several months acting as a receiving ship for slaves subsequently transferred to other vessels. Lord Mansfield, articulating also the change of risk rationale behind discharge for all forms of deviation, had no hesitation in holding the underwriters discharged for a deviation in the form of this delay:
It is not material, to constitute a deviation, that the risk should be increased. The voyage is to the coast of Mrica, and thence to the West Indies, which includes an
insurance on the ship while she stays and trades at Mrica, and it is w.ith liberty
to

exchange goods and slaves; but that exchange is for the benefit of the ship, one

slave for another. If a ship insured for a trade is turned into a factory ship, or
a floating warehouse, the risk is different; it vades the stay, for while she is used as

a warehouse no cargo is bought for her. 86

(4) Excuses for Deviation or Delay

18.41

Section 49 of the Marine Insurance Act 1906 states that certain deviations or delays are excused provided the vessel resumes the insured route,87 and prosecutes the voyage, with reasonable dispatch once the exculpatory circumstances cease to operate. 88 In essence, the insurer is not discharged where such "';ould appear to be the intention of the parties or where necessity prompted a departure from the contemplated route or schedule. The preelse role of section 49 is, however, not entirely clear. For eirher a deviation or delay prima ficie to discharge an insurer, and, therefore, to require

18.42

of the ship ... Deviation occasioned by force, and deviation occasioned by necessity are the same, for necessity is force. It is no matter whether it be the want of repair, or any other immediate danger, which renders the deviation necessary. When the deviation is necessary and unavoidable, it has no effect on the obligation of the insurer. 94

82

Niger Co Ltd v Guardian Assurance Co (1922) 13 LlLRep 75 (the policy evidenced contem~

plation by the parries of some delay).

83
84

Schroder v Thompson (1817) 7 Taunt 462. Company ofAftican Merchants Ltd v British & Foreign Marine Insurance Co Ltd (1873) LR 8

Ex 154. as (1781) 3 Dougl39. 86 ibid 40. 87 Although not necessarily at the point where the vessel left the insured route: Delany v Stoddart (1785) 1 TR 22. 88 Although, where the dev'iation or delay is occasioned by necessary repairs to the vessel, a court should adopt a reasonable approach to calculating the rime necessary for the repairs viewed as a whole rather than descending to an enquiry at the level of each individual item of repair:

Almojil (M) Establishment v Malayan Motor & Gimera! Underwriters (Private) Ltd (The AI-Jubail
IV) [1982] 2 Lloyd's Rep 637, 641 (Court of Appeal of Singapore).

89 As it did before the Act: Ross v Hunter (1790) 4 TR 33. so As in Bouillon v Lupton (1863) 15 CB(NS) 113, discussed at 19.25 below. 91 MIA 1906, s 49(1)(b). 92 Elton v Brogden (1747) 2 Str 1264 (insistence by crew of vessel with letter of marque on returning to POrt with captured prize); Driscol v Bovi! (1798) 1 B & P 313 (refusal to proceed on insured voyage for fear of Moorish cruisers). 93 Delany v Stoddart (1785) 1 TR22. 94 Scott v Thompson (1805) 1 B & P (NR) 181, 186 per Sir James Mansfield C). Tbe emphasis being upon freedom, a deviation occasioned by a master's incompetence is voluntary: Phyn v Royal Exchange Assurance Co (1798) 7 TR 505.

530

531

Attachment andAlteration ofRisk

18.45 In Hyderabad (Deccan) Co v Willoughby," a station-master wrongly insisted that

Alteration ofRisk in v"yage Policies

reported, is authority for the proposition that compulsion must be oven, it cannot stand with a number of more recent authotities, of which The Minden is one, regatding the perils of restraint and detainment.,03 Alternatively, evidence may have been adduced rhat the master of the merchantman was actuated by the opportunity to capture a prize, so thar any latent compulsion, physical or moral, was consequently inoperative on the facts. Involuntary deviations and delays reasonably necessary for rhe safety of the ship 18.48 or subject-matter insured, as excused by section 49(1)(d) of the 1906 Act, typically include the repairing of damage to the vessel to enable it to proceed safely,'04 reasonable necessity being judged by reference to the standard of the reasonably competent and skilful master. lOS Where, however, the cargo in peril is not 'the subject-matter insured' under the policy at issue, a deviation to save it is not excused by section 49(1)(d). This raises rwo issues. The first is whether section 49(1) is exhaustive or merely illustrative of the reasons that may excuse a deviation or delay. It is suggested rbat section 49 need not and, in the light of the above scenario, should not be read .as exhaustive. The governing provisions are sections 46 and 48, and section 49 may be read merely as illustrative of their concepts of lawful excuse and reasonableness. It is scarcely credible that either Sir Mackenzie Chalmers or Parliament intended to exclude the possibility that an instance of lawful excuse might not have been litigated or contemplated by the time the Act was drafted. The second issue is compatibility berween matine insurance law and the law of the carriage of goods by sea. It is unclear whether the master's duty to take reasonable care of the cargo entrusted to him extends to an obligation to deviate in the intetests of its preservation in the absence of any danger to rhe vessel,'06 although such a deviation would probably be justified.,o'To the extent that such a duty or liberty does exist under a contract of affreightment, the law should avoid placing the master in the position of choosing berween such a duty and the insurance of all parties interested in the voyage. A further problem of compatibility, however, remains intractable. Where a mas- 18.49 ter reasonably apprehends that an existing peril'o, not currently threatening the

a quantity of gold, in transit from a mine in India to London, be consigned for transport to the port of loading at rbe owner's risk. The gold was, therefore, taken to the assured company's head office where one bar was stolen before the mistake could be rectified. According to Bigham J, in the circumstances rhis detour was 'a jusrifiable deviation, if, indeed, it was a deviation at all; ir was a necessary act done in the prosecution of the insured journey':"
.. . it is as if a master had steered his ship out of her course in order to escape the dangers of a storm; such things have to be done as occasion arises, and though in a sense they may be called deviations, they really are merely incidents in the prosecution of the voyage. [The detour] was in the circumstances within the scope of the adventure. It was done in the prosecution of the adventure, and properly done in order to secure its safe accomplishment. S?
18.46

Deviation occasioned by submission to authority is likewise involuntary." The Minden" arose in consequence of the instructions given by rhe German government to German ships upon the outbreak of war in 1939 to take refuge in neutral ports and return to Germany if possible or scuttle as a last resort. The lirigation concerned rbree German vessels that abandoned their insured voyages and attempted to return to Germany, one successfully, the remaining rwo scurt1ing in the presence of Allied warships. The House of Lords held thar the government instructions constituted the insured peril of restraint of princes and the vessels' obedience not only negated the underwriters' defence of change of voyage, as already noted, but also that of deviarion. The deviarion 'was clearly in furtherance of German war policy and under German government control. Thus, it was not the voluntary act of the masrer ... Ir was rhe direct effect of the restraint' .100

18.47 In Phelps v Auldjo,'01 in contrast, the master of an armed merchantman was

ordered by the captain of an English warship ro put to sea to examine a srrange sail bearing enemies' colours. Without remonstraring and in the absence of any overt force or threars, the master obeyed. The strange sail proved to be neurral and the merchantman returned safely to POrt but was subsequently lost by fire. Lord Ellenborough held the deviation to be unjustified: 'If a degree of force was exercised towards [the master] which either physically he could not resisr, or morally as a good subject he ought not to have resisted, the deviation was justified. But if he chose to go out in the hope of making a prize, he could not rhereby extend rbe risk of the underwriters."o, If the decision, only briefly

103

See 13.50 above.

104
lOS

Motteux v London A<surance Co (1739) 1 Atk 545; Smith v Surridge (1801) 4 Esp 25. Phelps, james & Co v Hill(1891) 1 QB 605. . .

" [1899] 2 QB 530. ibid 534. " ibid. " Scott v Thompson (1805) I B & P (NR) 181 (detention by naval vessel). 99 Rickards v Forestal Land Timber & Railways Co Ltd (The Minden) [1942] AC 50. 100 ibid 82 per Lord Wright. '0' (1809) 2 Camp 350. '" ibid 351.

At common law, contrast dicta in Notara v Henderson In the Court of Exchequer Chamber (1872) LR 7 QB 225, favouring a broadly interpreted duty to cargo owners possibly including deviation or delay, with a firm view to the contrary at first instance: (1870) LR 5 QB 346. . 107 Nobels Explosives Co v Jenkins & Co [1896]2 QB 326 (where the relevance of the uncertam threat to the vessel, as opposed to the goods, to the holding of justification at common law is unclear); Stag Line Ltd v Foseoto, Mango & Co Ltd [1932] AC 328.. . 108 \f!atts, \.Wttts & Co v Mitsui & Co Ltd [1917) AC 227 (apprehenSion of future penl cannot justify a deviation).
106

532

533

Attachment and Alteration ofRisk

vessel will do so if the voyage is continued, a deviation to avoid the peril will be excused in carriage law and rhe carrier will incur no liability for any resulting 10SS.'09 Moreover, where the apprehended peril constitutes a restraint, the deviation will further be excused under the traditional war risks exclusion in contracts of affreightment."o This excusing by rhe law of carriage of goods of deviations caused by reasonable apprehension of perils provides a stark contrast to the harsh refusal of the proximate cause doctrine of marine insurance law to attribute losses caused by such a deviation to the apprehended peril. '" Should a vessel deviate reasonably in order to avoid hosrile warships but losses be incurred through the ensuing retardation of the voyage, rhe carrier will incur no liability for such losses and the deviation will not discharge any insurance policies. However, the proximate cause doctrine operated by marine insurance law denies any recovery for the losses caused by the master's reasonable and prudent response to avoid the apprehended peril.
18.50 A final question wirh respect ro section 49(I)(d) is wherher an uninsured peril may excuse a deviation. In the absence of aurhority,112 ir is suggested rhat the insurers should not be discharged since whether a peril is insured is irrelevanr to wherher it generates a necessiry denying volunrariness. 18.51

Alteration ofRisk in Voyage Policies

and shocking to the sentiments ofmankind, that the shipowner should be deterred from endeavouring to save life by the fear, lest any disaster to ship or cargo, consequent on so doing, should fallon himself Yet it would be unjust to expect

that he should be caHed upon to satisfy the call of humanity at his own entire risk.
Moreover, the uniform practice of the mariners of every nation ... of succouring others who are in danger, is so universal and well known, that there is neither injustice nor hardship in treating both the merchant and the insurer as making their contracts with the shipowner as subject to this exception to the general rule of not deviating from the appointed course.

The preservation ofproperty as distinct from human life may be in the common 18.52
interest of merchants, shipowners, and insurers, but it does not attract the same

Involunrariness may be generated by a moral imperative. Secrion 49(1)(e) provides that deviations are excused for the purpose of saving human life, or aiding a ship in disrress where human life may be in danger. Deviarion ro preserve cargo in the absence of rhreat to human life is not exonerated by rhe srarure. This disrincrion was articulated and explained by Cockburn C] in Scaramanga

moral imperative and is legally catered for through the law of salvage, which rewards successful.salvors generously. 'It would obviously be most unjust if the shipowner could thus take rhe chance of highly remunerative gain ar the risk and possible loss of the merchanr or the insurer, neither of whom would derive any benefit from the preservation of rhe property saved."14 This disrinction is, nevertheless, subject to contrary intention. Thus, clause 1.1 of the Institure Voyage Clauses Hulls (1110/83) and (1111195) expressly confers liberty 'to assist and toW vessels or craft in distress', although rhe provision should not be interpreted as permitting unrestricted towage and salvage services. First, the clause includes a warranty prohibiting rhe performance of such services pursuanr to a contract previously agreed between the assured and those in control of the vessel assisted. Secondly, in John Potter & Co v Burrell & Son,'15 a liberry to tow and
assist 'in all situations' was construed as silent on the amount of towing con-

& Co v Stamp: 113

The impulsive desire to save human life when in peril is one of the most beneficial instincts of humanity, and is nowhere more salutary in its results than in' bringing
help to those who, exposed to destruction from the fury of the winds and waves, would perish if left without assistance ... It would be against ~he common good,

>09 The TeuMnia (1872) LR 4 PC 171, 179: The Wilhelm Schmidt (1871) 25 LT 34: The San Roman (I 873) LR 5 PC 301,305 per Sir Montague Smith: 'an apprehension of capture founded on circumstances calculated to affect the mind of a master of ordinary courage, judgment, and

templared and confined to towage services consistent with the objects of the contract. This test was satisfied on rhe facts since the rhree-week delay incurred in deviating to tow a vessel in distress to a porr of safety was no longer than the delay that would have resulred from towing the vessel on the insured route to the insured terminus ad quem. Likewise, Stuart v British & African Steam Navigation CO" 6 concerned an action on insurance of cargo lost when the carrying vessel was wrecked while deviaring some three miles and rendering assisrance to a stranded ship. Despite the absence of any threat to human life, the insurers were held liable under an express liberty 'to tow and assist vessels in all situarions', although the court conceded thar some limits had to be implied-'you must not
so construe a condition as to make it eat up the contract'.117

experience, would justifY delay': Nobels Explosives Co v Jenkim & Co [1896] 2 QB 326; Hague! Visby Rules, art rv, r 4. "0 Nobels Explosives Co vJenkins & Co [1896] 2 QB 326. 111 See 9.46 above.
112 Two cases often cited in connection with this issue provide no answer. Both arise out of a vessel prematurely putting to sea to avoid seizure by approaching hostile forces in a state unfit for

the voyage and deviating to effect repairs and complete its cargo. In O'Reilly v Royal Exchange Assurance (1815) 4 Camp 246,'an FC&S clause protected a cargo insurer. In O'Reilly v Gonne (1815) 4 Camp 249, a freight policy cont~ining no such clause produced the opposite result. The premature departure and deviation being attributable to a covered peril, the case falls within MIA

Section 49(l)(f) excuses deviarions reasonably necessary for the purpose of 18.53 obtaining medical or surgical aid for any person on board the ship. This clarifies, and conceivably modifies, the common law position established by Woolf v Claggett. '18 In rhis case, Lord Eldon is reported as denying that sickness of the

1906, s 49(1)(b). 113 (1880) 5 CPD 295, 304-5.

'" ibid. m [1897) I QB 97. '" (1875) 32 LT 257. m ibid 262 per Pollock B. 118 (1800) 3 Esp 257.

534

535

Attachment and Alteration ofRisk

crew would justify a deviation unless two conditions wete satisfied. First, such a propottion of the crew had to be afflicted as to render it impossible to navigate the vessel. Secondly, evidence bad to be adduced that the vessel pur to sea wIth adequate medical provision for the voyage, including a surgeon where appropriate. On the facts, the insurer was discharged in the absence of such evidence. The relevance of this decision to the modern law is, however, doubtful. Illness afflicting even a single person, whether crew or passenger, clearly excuses a deviation under section 49(l)(f). Moreovet, a distinction should be drawn
between the circumstances that excuse a deviation and the extent of the war~

Promissory "Warranties

policy, the insurer is discharged from liability as from the date of the breach of warranty, bur withour prejudice to any liability incurred by him before that date'. The auromatic nature of the discharge was, nevertheless, challenged in The Good Luck'24 This challenge raised the question of the technically correct characterization of the promissory warranty. The Good Luck was owned by the Good Faith group, mortgaged to the appellant 18.56 bank, and entered with the respondent murual insurance association. The association's rules provided for rhe declaration of prohibited areas and contained an express warranty of compliance with such ptohibitions. When the appellant bank advanced money to the owners on the primary security of mortgages of a number of vessels including the Good Luck, it obtained an undertaking from'the association 'to advise you promptly if the association ceases to insure' the vessel. In November 1981, the association discovered that the Good Luck was being operated in a prohibited area, in breach of the warranty, but did not inform the bank. In 1982, while the owners were renegotiating and seeking to inctease the bank loan, the vessel was rendered a constructive total loss while inside the prohibited atea. The ownets lodged a claim with the association, pretending ignorance of the prohibition. In July 1982, the bank extended Good Faith's credit facilities, with the maximum total indebtedness being limited to 67 per cent of the value of the security furnished. The valuation of the security included US$4.8 million attribured to the Good Luck and the insurance claim, the bank talcing an assignment of the insurance proceeds. 125 On 4 August, the association rejected the owners' claim, leaving the bank with US$4.8 million of unsecured debt. The bank sued the association for breach of the undertalcing, arguing that the 18.57 association's cover 'ceased' immediately the warranty had been broken, relying on a literal reading of section 33(3). The association contended that it was not until 4 August that the club had ceased to insure the Good Luck. It argued that bteach of an insurance warranty should be assimilated to the general contract law concept of a tepudiatory breach, which triggets no automatic discharge but merely affords the innocent party the right to accept the breach, such acceptance prospectively discharging the parties from future performance of the primaty contractual obligations.'26 This argument found favour in the Court of

ranty of seaworthiness implied into all voyage policies. Thus, where a ship is inadequately medically provisioned, any resulting deviation is excused although the insurer may have a defence based upon unseawotthiness. In Kish v Taylor, Sons 6- CO,'19 chatterers failed to load a full cargo as required by a chatterparty. To minimize the loss, the master procured additional cargo, overloaded the deck, rendered the vessel unseaworthy, and was compelled to deviate for repairs before safely completing the voyage. The deviation was held to be justified but without prejudice to the shipowner's right to damages for breach of the terms of the charterparty.

D. Promissory Warranties
18.54 In the general law of contract, the term 'warranty' is associated with minor

conttactual terms, breach of which sounds in damages alone and may not lead to discharge of the contract. In insurance law, however, the phrase 'promisory wattanty' signifies that the term serves to define the risk insured. Breach of such a warranty renders the risk materially different from that which the insurer
agreed to cover. 120 In this sense,121 a warranty 'is a condition on which the contract is founded' .122 Where, however, the promissory warranty relates to a

claim, it will be considered as defining the circumstances in which the insurer is liable for that claim, rather than defining the entirety of the risk under the policy. 123 (1) The Legal Characterization of Promissory Warranties
18.55 Section 33(3) of the Marine Insurance Act 1906 ptovides that, in the event of non-compliance with a warranty, 'then, subject to any express provision in the

'"

[19121 AC 604.

124

Bank ofNova Scotia v Hellenic Mutual W'tlr Risks Association (Bermuda) Ltd (The Good Luck)

no Newcastle Fire Insurance Co v Macmorran & Co (1815) 3 Dow 255, 265. 121 For other usages of the term 'warranty', see 18.105ffbelow. >22 Bean v Stupart (1778) 1 Douglll, 14 per Lord Mansfield. 123 On promissory warranties in the claims context, see 22.13-22.17 below.

1199211 AC 233. 125 For further discussion of a.ssignment in the context of insurance, see 20.07ffbelow. 126 Heyman v Darwins Ltd [1942] AC 356; Photo Production Ltd v Securicor Iransport Ltd [1980J AC 827.

536

537

Attachment and Alteration ofRisk

Appeal'" but was rejected by the House of Lords. Delivering the leading judgment, Lotd Goff declined to depart from the 'plain meaning' of section 33(3), stating that:
.. . if a promissory warranty is not complied with, the insurer is discharged from liability as from the date of the breach of warranty, for the simple reason that
fulfilment of the warranty is a condition precedent to the liability of the insurer. This moreover reflects the fact that the rationale of warranties in insurance law is

Promissory warranties
damages for breach. There is no authority in favour of insurers being able to sue assureds fot damages for breach of a promissory warranty, for example to reimburse expenses incurred in investigating _ claim that were wasted a because the insuret was in any event not liable. The promissory warranty is a terminologically disguised contingent condition precedent.
(2) IdentifYing Promissory Warranties

that the insurer only accepts the risk provided that the warranty is fulfilled ... In
the case of conditions precedent, the word 'condition' is being used in its classical sense in English law, uncler which the coming into existence of (for example) an obligation, or the duty or further duty to perform an obligation, is dependent

upon the fulfilment of the specified condition.'" From the time of the breach ofwarranty, the Good Luck had thetefore ceased to be insuted by the club, which had broken its undertaking to the bank.
18.58 The decision of the House of Lords in The Good Luck settles definitively the question of the legal chatacterization of the promissory warranty in insurance contract law. The term 'promissory warranty' is merely a label used in insurance law for the condition precedent of general contract law. A promissory warranty is a condition precedent to the insuter's liability on the conttact. Once btoken, the insutet automatically ceases to be liable. If the breach pre-dates the attachment of tisk, the insutet will nevet come on tisk, producing a total failute of consideration fot premium putposes. 129 If the breach occurs after inception of risk, the insurer remains liable for any casualties within the scope of the policy, but has no liability for any subsequent casualty. There is no total failure of consideration for premium purposes. 130 18.59 This feature of the operation of promissory warranties derive from and teinforces the function of the promissory warranty as defining the risk insured. A breach ofwarranty constitutes an alteration of risk. The insurer does not come on tisk or is automatically discharged from liability because the risk is no longer within the policy. 18.60 Confusingly, the promissory wattanty is almost certainly not a promissory obligation as understood by general contract law, namely an obligation sounding in

According to section 33(1) of the Marine Insurance Act 1906, a promissory 18.61 warranty is 'a warranty by which the assured undertakes that some particulat thing shall be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts'. A warranty must, however, relate to the risk. A promise to pay the premium by a particular date might be an undertalcing to do a patticular thing, but the obligation would be classified as a normal contractual obligation and not as a promissory insurance warranty.131 Whether a term constitutes a promissory warranty depends upon the intention 18.62 of the patties as revealed by the contract as a whole.'" No particular form of words is required and, inde,d, the word 'warranty' need not be used. 133 The test for detetmining whether a given term is properly characterized as a promissory warranty has been put as follows: 134 'It is a question of construction, and the presence or absence of the word "warranty" or "warranted" is not conclusive. One test is whethet it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears matetially on the risk of loss; and third, whether damages would be an unsatisfactory or inadequate remedy.' In Yorkshire Insurance Co Ltd v Campbell 135 a proposal form misstated the 18.63 pedigree of the insured horse. The policy incorporated the proposal form and contained a warranty of the truth of all statements rherein. Deliveting the judgment of the Ptivy Council, Lotd Sumnet observed: 'Prima facie, words qualifying the subject matter of the insurance will be words ofwarranty"36-t he pedigree so qualifying as it alone indicated what kind of horse was insured and defining the risk. Similarly, a requirement in a floating policy that a declaration

m [1990J 1QB 818. See also CTN Cash 6- Carry Ltd v GenmllAccident Fire 6- Lift Assurance Corp pic [1989J 1 Lloyd's Rep 299, 303. '" [1992J 1 AC 233, 262-3, approving Hobhouse J at first instance [1988J 1 Lloyd's Rep 514, 544 and Kerr LJ in State Trading Corp of India Ltd v M GoilJdetz Ltd [I989J 2 Lloyd's Rep 277, 287.
129 Where the warranty necessarily relates in time to circumstances at the inception of the risk, breach will result in the insurer never coming on risk. Such a warranty may be said to be a condition precedent to attachment of the risk: Thomson v \.%ems (1884), 9'App Cas 671, 684. 130 For discussion of attachment of risk and the earning of premium, see 6.02 above.

131 That is not to say that appropriate wording could not transform the obligation into a promissory warranty, merely that in the absence of such wording a premium payment obligation

would not be characterized as a promissory warranty.

'" 1omson v Weems (1884) 9 App Cas 671, 683. '" MIA 1906, s 35(1); Dawsons Ltd v Bonnin [1922J 2 AC 413, 428-9; Kirkaldy UJ 6- Sons Ltd v walker [1999J Lloyd's Rep lR 410,421. 134 HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co [2001] 2 Lloyd's Rep 161, para 101 per Rix L]. See also 100mey v Banco Vittzlicio de Espana SA de Seguras y Reasseguros

[2004J EWCA Civ 622, [20051 Lloyd's Rep IR 423, paras 40-42. 135 [1917JAC218. '" ibid 224.

538

539

Attachment and Alteration ofRisk

be made 'as soon as possible' after the sailing of the relevant vessel has been held to be a warranty in the light of evidence that compliance affected the insurer's opportunity to obtain reinsurance and, therefore, the risk assumed."'ln Kirkaldy (]) & Sons Ltd v Walker,138 a policy for the insurance of a floating dock for towage labelled certain terms as 'conditions' and others as 'warranties'. One of the terms labelled a condition required the dock to undergo a condition survey. Notwithstanding the normal contraty inference ro be drawn from the labelling, the term was accepted to be a warranty. The term made no sense unless it operated as a condition precedent to insurers' liability.139
18.64 In contrast, where the purpose of a requirement that insured property be

Promissory "Wa'rranties only if inconsistent.'" The implied warranty of seaworthiness will not be excluded by an express provision relating to one aspect of seaworthiness.'" (3) Interpretation and Breach Assuming that a term is a promissory warranty, a question of interpretation 18.66 arises to determine precisely what it requires and, thereby, what amounts to a breach.

(a) Interpretation generally

Promissoty warranties should in principle be interpreted in the same way as any 18.67 other contractual term, in accordance with the intention of the parries to the contract as revealed by the words chosen in the light of the context in which the conrract was concluded. Accordingly, where cargo that was warranted surveyed 'immediately' prior to shipment was in fact surveyed up to two weeks earlier, it was held that the term 'immediately' could not be read literally. Such a construction 'would be unrealistic and would overlook the actual operating conditions under which goods are surveyed and shipped. Although warranties in marine
insurance are to be strictly construed, the word "immediately" must be given a reasonable interpretation l 15o

marked in a certain way is solely to identifY which property is insured rather than to describe the nature of that property, there is no warranty, and noncompliance results merely in the non-attachment of the policy to the property not duly marked. 140 A statement that a vessel is an 'American ship' constitutes a warranty that the vessel is of that nationality'41 and also that the vessel has on board all documentation that a vessel of that narionality ought to carry.'42 In The Tiburon, '43 a warranty thar a vessel was under German flag, ownership or management was broken as the flag was Liberian, the owner a Panamanian company, '44 and the management Swiss. However, the language or style of the name of a vessel cannot be construed as a warranty of its nationality. "5
18.65 An express warranty must be stated in the policy or in a document incorporated

in the policy in accordance with ordinaty contract law principles."6 Warranties may, however, be implied, "7 an express warranty excluding an implied warranty

Union Insurance Society o/Canton Ltd v George Wills & Co (1916] 1 AC 281. [1999] Lloyd's Rep IR410. 139 See also Zeus Tradition Marine Ltd v Bell (The Zeus) [2000] 2 Lloyd's Rep 587. 140 Overseas Commodities Ltd v Style[1958] 1 Lloyd's Rep 546. 141 Baring v Cklggett (1802) 3 Bos & Pu1201; Lothian v Henderson (1803) 3 Bos & Pu1499; Baring v Christie (1804) 5 East 398. No warranty of nationality or that nationality will not be changed during the currency of the policy will be implied: MIA 1906, s 37; Dent v Smith
137
138

(1869) LR 4 QB 414. Institute and International hull clauses, however, provide for automatic

termination on change of a vessel's flag, see 19.67 below. 142 Lothian v Henderson (1803) 3 Bas & Pul 499. An express warranty of the neutrality of a vessel imports a condition that the assured will ensure so far as possible that papers establishing neutral status will be carried: MIA 1906, s 36(2). 143 Seavision Investment SA v Evenett & Clarkson Puckle Ltd (The Tiburon) [1990) 2 Lloyd's Rep 418. 144 It was argued that the corporate veil should be pierced bur held that, even if it were, the beneficial owner of the vessel was French. 145 Cklpham v Cologan (1813) 3 Camp 382. 146 MIA 1906, s 35(2); Bensaude v Thames & Mersey Marine Insurance Co Ltd [1897J AC 609. 147 MIA 1906, s 33(2). However, outside the established implied warranties codified in the 1906 Act, implied warranties are conspicuous by'their absence, and it is/difficult to imagine a condition precedent satisfying any of the bases for implication of terms ioro contracts.

Likewise, in Colby v Hunter,'51 a vessel insured at and from Hamburg was 18.68 warranted 'in port' on 19 October, on which date the ship was in the port of Cuxhaven, some ninety miles below Hamburg. Lord Tenretden CJ held that the warranty should be construed as requiring the vessel to be in the port of Hamburg on 19 October. The phraseology 'safe on the 19th of October' would have been appropriate for the literal interpretation suggested by the assured. Such literalism did not, however, represent the true interpretation of the warranty. Again, in Overseas Commodities Ltd v Style,152 tins of pork were warranted 'marked by manufacturers with a code for verification of date of manufacture'. McNair J rejected an argument that the code did not need to be accurate. 'Verification, in its ordinaty sense, means the establishment of the truth or correctness of a particular facr.'''' The assured was unsuccessful also in arguing that the warranty should be applied severally, rendering the insurer liable in respect of those tins correctly marked. The contract of insurance was not several

,., MIA 1906, s 35(3). Sleigh v 7jser [1900] 2 QB 333. See also Quebec Marine Insurance Co v Commercial Bank of Canada (1870) LR 3 PC 234. Seaworthiness is discussed in Ch 19 below. 150 Berm 6' Koppstein Inc v Orion Insurance Co Ltd (1960) 1 Lloyd's Rep 276, 280 per District Judge Herlands (District Court of New York). See also Havelock v HanciLl (1789) 3 TR 277; Australian Agricultural Co v Saunders (1875) LR 10 CP 668; Simmonds v Cockel! [1920] 1 KB 843. 151 (1827) M & M 81. 152 [1958J 1 Lloyd's Rep 546. 153 ibid 557.
149

540

541

Attachment and Alteration ofRisk

and the broken warranty discharged the liability of the insurer on that contract. Similatly, breach of a warranty of 'no contraband of war' discharges the insurer in respecr of the whole cargo, including such goods as are nor contraband. 154
18.69 In Pittegrew v Pringle,155 a vessel was warranted not ro sail after I September, the

Promissory Warranties
broken, Ashurst J remarking that the 'very meaning of a warranty is to preclude all questions whether it has been substantially complied with; it must be literally so' .'62 Strict compliance is, however, a double-edged sword; it is required, bur it suffices. Laing v Glover163 concerned a statutory requirement to sail in convoy,164 likened by the court to a warranty. Having initially sailed witb a convoy, the vessel was driven back into the port of clearance by adverse weather and then sailed again in isolation. It was held that the initial sailing satisfied the warranty and subsequent events were irrelevant. In Hyde v Bruce, 165 a warranty that a ship had twenty guns was held satisfied by the presence of the guns despite a crew of less than half the number required to man them.
It is unclear whether the maxim de minimis non curat lex applies to breaches of 18.72 promissory warranties. That its application is at least not unarguable was indicated in Overseas Commodities Ltd v Style.'66 A warranry requiring marking of insured tins of pork burts was broken in respect of a substantial number, said to exceed 'any number which could be disregarded under the de minimis rule'.'67

policy providing that the vessel was deemed ro sail when ir cleared customs provided ir was then 'ready for sea'. The vessel duly cleared customs in time and sailed down river with sufficiently light ballast ro cross the bar at the river mouth after which further ballast necessary for the sea would be loaded. It ran aground in the river and did not load the extra ballast until 4 September, ultimately proceeding our ro sea on 8 September. The Court of King's Bench held the sailing warranty broken because the vessel had not been 'ready for sea' in respect of ballast until after I September. It is, however, strongly arguable that the phrase 'ready for sea' should have been construed by reference ro the port in question, the construction adopted rendering the deemed sailing provision
otiose.

18.70 The courtS will not, however, extend a warranty beyond the requirements

demanded by its rerms and any ambiguity in a warranty for which the insurer is responsible will be resolved in the assured's favour under rhe contra proftrentem rule. 15' Consequently, a warranty that a vessel will be pur ro a certain use will not be construed as excluding other uses 157 and insurance'on the cargo, being 1031 hogsheads of wine' imports no warranty that the wine is the only cargo.'58 In Hyde v Bruce,159 the insurer argued in vain rhat a warranty rhat a ship had twenry guns meant the ship was of the force of twenty guns, including a crew sufficient ro work that number. Insread, the court held that the mere presence of the guns sufficed.

A breach of warranry must be actual and not intended. In Simpson SS Co v 18.73 Premier Underwriting Association Ltd.,168 a vessel was warranted lnat to proceed east of Singapore except to Java and Australasia'. The vessel embarked upon a voyage to an unauthorized place east of Singapore and was lost by perils of the sea off the coast of Tunis. Bigham J held that there had been at most an intention to proceed into prohibited waters 'and an intention to commit a breach of course does not itself constitute a breach'. Construing the warranry tightly, he remarked that 'the only prohibition was that the vessel should not navigate watets east of Singapore, and she never did' .169 Similarly, in Baines v Holland, '70 a warranry that a vessel should sail from 18.74 Quebec upon the second part of a voyage by a certain date was held not to be infringed by a failure to commence the first part in reasonably sufficient time to arrive at Quebec by the stipulated departute date. The court held that the warranry simply had no application to the first part of the voyage during which

(b) Breach 18.71 Once the requirements of a promissory warranty have been ascertained, any departure will constitute a breach. A warranty must be strictly complied wirh. 160 In De Hahn v Hartley,16' a vessel was warranted to sail with a crew numbering at least fifty. Having safely completed the first part of the voyage wirh a crew of only forty-six, six more crew were taken on. The warranty was held to be

154
ISS

Seymour v London & Provincial Marine Insurance Co (1872) 41 LJCP 193.

(1832)3B&Ad514.

156 Provincial Insurance Co v Morgan [1933J AC 240. Ambiguities must, however, be genuinely present and not manufactured to enable the term to be restricted through the contra proferentem rule: see 8.51 ff above. '" [1933J AC 240. See also Shaw v Robberds (1837) 6 A & E 75. IS' Muller v Thompson (1811) 2 Camp 610. 15' (1782) 3 Doug1213. The case is queried below. 160 MIA 1906,,33(3). '" (1786) 1 TR 343.

ibid 346. 163 (1813) 5 Taunr 49. Pursuant to the Convoy Act 1803, 43 G3, C 57. 165 (1782) 3 Doug1213. The case is queried below. '" [1958J 1 Lloyd's Rep 546. 167 ibid 557 per McNair]. Application of the rule to a promissory warranty was raised in argument but did not require resolution in Bennett v Axa Insurance pic [2003] EWHC 86 (Camm), [2004J Lloyd's Rep IR 615. For an application of the de minimis rule to a proviso in a consequential loss policy, see Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society Ltd [199611 Lloyd's Rep 614, 620. 16' (1905) 10 Com Cas 198. >6, ibid 201. cfMIA 1906, s 46(3). "0 (1855) 10 Exch 802.
162
164

542

543

Attachment and Alteration 0/Risk

the vessel was lost after the date stipulated for leaving Quebec. On such reasoning, promissOly warranties are not susceptible ro anticipatory breach.

Promissory Warranties

(c) Timing 18.75 Whether a warranty has been broken may depend upon the time at which compliance is required. In Forshaw v Chabert,171 a vessel was insured on a voyage from Cuba to Liverpool. The insured vessel sailed with a crew of ten, only eight of whom had signed on for the whole voyage. The other two left the ship at Jamaica, two replacements for the remainder of the voyage being taken on. When the vessel was subsequently lost, it was held that an implied warranty of seaworthiness required the vessel ro commence its voyage with a full complement for the whole voyage. The warranty had, therefore, been .broken and the underwriters were not liable.
18.76 In Blackhurstv Cockell,172 a vessel was insured lost or not lost, 'warranted well

Thornton'76 concerned insurance of a building where the description of the premises was held to be a warranty. This description was accurate when transmitted to brokers for the purpose of procuring insurance, but an extra srorey was thereafter added ro the building, the insurance being concluded while such work was in process. The building was subsequently destroyed by fire. The court held that rhe warranted description had to be true at the time of conclusion of the insurance, or at least that any alteration should not have increased the risk. Moreover, it was further held rhat rhe description constituted a warranty 'that rhe assured would not, during the time specified in the policy, volunrarily do any thing to make the condition of the building vary from this description, so as thereby to increase the risk or liability of the underwriter'.177 Otherwise the assured could change the nature of the insured property, recovering in the event of loss an enhanced indemnity, whilst paying a premium calculated on a different risk.
A continuing warranty, which requires the assured to guarantee a state of facts or 18.79 performance of certain acts throughout the duration of the policy, clearly carries a greater threat of breach and consequent deprivation of cover. It is regarded as a draconian term, with the result that a warranty will not be interpreted as of continuing effect in the absence of the clearest wording. '78

December 9th'. It transpired that the vessel had been lost at about 8.00 am on 9 December, the insurance being effected that afternoon. Buller J held that a warranty 'must he literally complied with; and if it be so, that is sufficient'. Consequently, the vessel having been safe at some time on the day in question, the warranty was satisfied and the undetwriters were liable. CodifYing this decision, section 38 of the Marine Insurance Act 1906 now provides that:
''Where the subject-matter insured is warranted "well or "in good safety" on a

(d) 'Uninsured' warranties

Insurers may require the assured to retain a proportion of rhe risk in order to 18.80 encourage solicitude over the safe prosecution of the insured adventure. This purpose would be defeared if the assured were free to cover rhe retained proporrion under a separate policy. Consequently, the specified proportion will be (warranted uninsured'. A condirion in a hull policy 'that the assured shall keep one-fifth uninsured' 18.81 requires the assured ro remain its own insurer for one-fifth of the value of the insured vessel, breach affording the insurer a complete defence to a claim arising out of a subsequent casualty.'79 In derermining whether the assured under a valued policy has broken a warranty to mainrain uninsured a specified proportion of the value of the property, the court will have regard to the agreed rather than the real value. '80 In General Insurance Co o/Trieste Ltd v Cory,'" a vessel valued at 12,000 was 18.82

particular day, it is sufficient if it be safe at any time during that day.'

18.77 Similatly, an express warranty of neutrality is satisfied if the insured property is

neutral at the time of inception of the risk, even if thereafter it changes status: 173 'The warranty is, that things stand so at the time: not that they shall continue"74 and no continuing neutrality warranty will be implied, although there is an implied condition that 'so far as the assured can control the matter, its neutral character shall be preserved during the risk'. 175
18.78 A warranty may, however, be construed to have a continuing effecr. Sillem v

171 (1821) 3 Brad & B 158, approved in Quebec Marine Insurance Co v Commercia! Bank of Canada (1870) LR 3 PC 234. 172 (I789) 3 TR 360. The nature of the implied condition is open to doubt. Since it gives effect to a promissory warranty, the neutrality of the vessel may be an implied condition precedent to the attachment of risk. However, the language of s 36(2), according to which breach of a second implied condition relating to a promissory warranty of neutrality affords the insurer the right to avoid the contract, militates against construing a breach of an implied condition as automatically discharging the insurer's Habilit}dn principle, automatic discharge is preferable as consistent with the doctrine of promissory warranties, but the natural reading of the Act favoW's the alternative analysis. 173 MIA 1906, s 36(1); Eden v Parkison (1781) 2 Dougl 732. '7' ibid 736 per Lord Mansfield. 175 MIA 1906, s 36(1).

(1854) 3 El & B1868. 177 ibid 882 per Lord Campbell q. Hussain v Brown [1996] 1 Lloyd's Rep 627 (question on a proposal form in the present tense interpreted as not having continuing import); Kler Knitwear Ltd v Lombard General Insurance Co Ltd [20001 Lloyd's Rep IR 47. 179 Muirhead v Forth & North Sea Steamboat Mutual Insurance Association [1894] AC 72. '80 ibid. 181 [18971 1 QB 335.
'76 178

544

545

Attachment and Alteration ofRisk

insured under time policies for 9,600 with the balance of 2,400 being warranted uninsured. A syndicate that had subscribed to a policy in the sum of 5,000 then ceased business and the assured, estimating the value of that policy as no more than 2,000, took our a further policy for 3,000 to make good the shortfall. Mathew J declined to hold that the resulting nominal possibility of recovety in excess of 9,600 broke the warranty. Given the circumsrances, the extra policy in no way contradicred the purpose of the warranty, namely that the assured should retain for his own account a certain proportion of the risk. Were
the undelwriterS' argument correct, no matter what proportion of the cover

Promissory Warranties

law. 186 The issue remains to be resolved authoritatively, although a later dictum of Lord Alverstone CJ supports the view of Kennedy J. '.7

(e) The additional insurances warranty under the Institute and International hull clauses
The Institute and International hull clauses stipulate certain permitted additional 18.84
insurances,188 These cover: disbursements, managers' commissions, pronts) or

failed in reality, rhe assured ought to do norhing, although any prudent assured would maintain the real value of his insurance cover. A literal interpretation of the warranty might have favoured the underwrirers, 'but it is possible by a strict construction to reach the point of absurdity, which would be done if the construction were so strict as to put the owner under a greater liability than that imposed upon him under the original policy'.182
18.83 Some doubt surrounds the question of whether a 'warranted uninsured' term is broken by obtaining a policy binding in honour only. In Roddick v Indemnity Mutual Marine Insurance Co Ltd, ,as the issue arose of whether a warranty of 5,000 'uninsured' in a 5,000 valued policy on property valued at 10,000 was infringed by a 2,600 honour policy on disbursements. The assured won on the basis that the cover of the two policies did not overlap, but different views emerged obiter as to whether conclusion of an honour policy would in principle break an 'uninsured' warranty. At first instance, Kennedy J persuasively argued that the warranty would be broken by any insurance treated in practic) as effective:
The main, if not the whole, object of the warranty is to give the insurer a pledge of

excess or increased value of hull and machinery; freight, chartered freight, or anticipated freight, insured for time; freight or hire under voyage contracts; anticipated freight where the vessel sails in ballast and not under charter; time charter hire or charter hire for a series of voyages; premiums; returns of premiums; and insurance of certain excluded risks. In respect of most of these insurances, a limit is placed on rhe value of the additional insurance permitted. It is a breach of promissory warranty for any insurance on the specified interesrs in excess ofthe permitted amounts or any other ppi or similar honour insurance that includes the total loss ofthe vessel'' to be effected to operate during the currency of the hull policy by or for the account of the assured, owners, managers, or mortgagees."o Thus, where a hull policy contained a warranty that freight insurance should not exceed a certain value, it was no defence that the transgressing freight insurance covered war risks excluded under the hull policy. '" For the warranty ro be infringed, the additional insurance must be 'effected'. 18.85 Where a second insurance provides that it will not come into force nor liability attach until payment of the premium, the Privy Council has held that the second insurance is not 'effected' until the premium is paid. '92 However, once the additional insurance has been effected, it would appear irrelevant that the insurer has a defence ro any claim. '93 Even retrospective avoidance of a policy does not expunge it from history and deny it has ever been 'effected'.'"

the good faith of the assured and of his diligence in preserving rhe thing assured by
reason of his remaining his own insurer to the extent specified in the warranty. It was admitted in the course of argument, and could not but be admitted, that a

claim under an 'honour' policy is regularly recognised and discharged by the underwriter as faithfully and as promptly as a claim under a policy which is not open to the same legal objection. 184 In the Court ofAppeal, however, Eve LJ observed that, even if the assured were certain to be paid, it was 'plain that [honour] policies did not constitute any legal security'.185 AL Smith LJ accepted that the warranty should be construed as requiring the assured to remain his own insurer for the stipulated amount, but was not satisfied that it would be contravened by a policy unenforceable at

186

ibid 387. Lord Esher MR reserved his opinion.

'" Thames & Mersey Marine Insurance Co Ltd v 'Gunftrd'Ship Co Ltd[191l] AC 529,538. 188 Institute Time Clauses HuUs (1/10/83), d 21.1; International HuH Clauses (01/11/03),
d 24.1.
189 An additional ppi or other honour policy that covered only damage to the vessel falling short of a total loss would not constitute a breach of the warranty. An honour policy that covered damage without limitation would, however, break the warranty if, on its true interpretation, it covered such damage as would render the insured vessel a constructive total10s5. 190 Institute Time Clauses Hulls (l/10/83), cl21.2; International Hull Clauses (01111103), d24.2. 19' Samuel (P) & Co Ltd v Dumas [1924) AC 431. '" Equitable Fire & Accident Office Ltd v Ching W0 Hong [1907) AC 96. 193 Comrast]enkins v Deane (1934) 47 LlLRep 342 where a 'subsisting' second insurance was stated to require a policy under which the insurer could be called upon to pay. See also Home Imurance Co ofNew York v Gavel (I 928) 30 L1LRep 139, 194 Mackender v Feldia AG [1967] 2 QB 590, 603-4; Newtons of Wembley Ltd v Williams [1965] 1 QB 560.

182

ibid 342. 183 [1895] 1 QB 836, [1895] 2 QB 380. '" [1895] 1 QB 836, 839. 185 [18951 2 QB 380, 384.

546

547

Attachment and Alteration ofRisk

18.86 In contrast, potential overlap of a second insurance in a prohibited manner will

Promissory "Warranties
movement occasioned by the partial weighing of a second anchor before delaying departure by reason of adverse weather conditions.'99 Even movement prima facie sufficient will not satisfY the warranty unless effected with the intention of prosecuting the voyage. In Sea Insurance Co v Blogg,2O the insurance covered steamers 'sailing on or afterMarch 1'. By 10.00 pm on 29 Februaty, the vessel in question was ready to proceed to sea. The master, therefore, moved the vessel some 500 yards from the wharf into the river and anchored until morning, purring to sea after dark being prohibited by pilotage regulations. Although this manoeuvre saved some thirty minutes on 1 March, the sole purpose of the
master's actions, according to the evidence, was to prevent his crew from going

not necessarily be held to break the warranty. In Australian Agricultural Co v Saunders,'95 wool was insured under a fire policy 'in transit to Sydney by land only, or in any shed or store, or any wharf in Sydney, until placed on ship'. The policy provided that no claim was recoverable 'if the property insured be previously or subsequenrly insured elsewhere' unless wrirren notice of the second insurance was given to the insurer. The assured subsequently concluded a marine policy on the wool 'at and from the River Hunter to Sydney per ship and steamers and thence per ship or ships to London, including rhe risk of craft from the time that the wools are first waterborne and of transhipment or landing and re-shipment at Sydney'. The wool having been damaged by fire while warehoused at Sydney, the fire insurer sought ro evade liability on the basis that no notice ofthe marine policy had been given. The Courr ofExchequer Chamber held, however, that the clause in the fire policy was directed to genuine double insurance and should be construed as limited thereto. A conceivable overlap, for example with respect to damage sustained by fire on landing the wool, was insufficient. Bramwell B stated: 'I doubt whether a mere possibility rhat some portion of the risk covered by both policies might accidentally coincide constitutes such a double insurance as was meant. >196

ashore and getting drunk. In consequence, it was held that the ship sailed on I March, rendering the insurers liable for the subsequent casualty. Where the warranty requires the vessel ro 'deparr', the vessel must actually leave 18.89 port, resulting in a breach of warranty even where there is sufficient prosecution of the voyage within the porr to constitute a sailing. The warranty effectively excludes port risks. 2o ' (4) Causation There is no requirement of any causal link between a breach of promissoty 18.90 warranty and the loss in respect ofwhich the assured claims. 202 Thus, a failure to provide a twenty-four hour watch, as warranted, will afford an underwriter an unassailable defence against a claim for storm damage, regardless of the inability of any watchman, had one been present, to prevent the damage. 203 Although described as 'one of the less attractive features of English insurance law',204 the absence of any causation requirement merely reflects again the role of the warranty in insurance contracts. Promissory warranties serve to define the risk

18.87 The warranty is subject to a proviso that protects any mortgagee 'who has

accepted this insurance without knowledge of the breach. The precise meaning of the term 'acceptance' in this context is unclear. In The Sea Breeze, '97 the warranty was infringed by a policy for the account of the ship's managers and a mortgagee bank sought to avail itself of the proviso. However, two letters from the bank to the insurer asserring its entitlement to the insurance proceeds ';"ere held not to constitute 'acceptance' of the policy. Staughton J commented upon the 'vague' drafting of the proviso: 198 'The notion of the draughtsman may have been that it would be unfair if a mortgagee having advanced money to the shipowner, or left it outstanding on the faith of an apparently valid policy, were affected by a breach of warranty unconnected with the trading or operation of the vessel. But if that was the intention the draughtsman has by no means succeeded in saying it.'

covered and breach simply renders the adventure no longer that which the insurer agreed to cover. The insurer no longer being on risk, no question of a causal link between the breach and subsequent casualty can arise.

(j) Sailing warranties

18.88 Litigation has also arisen concerning promissoty warranties requiring a voyage to commence at a certain time. A requirement that a vessel 'sail' on or before a
200

'" Ne&on v Salvador (1829) M & M 309. [1898] 2 QB 398. Contrast Cockran, v Fisher (1834) 2 Ct & M 581, affd (1835) 1 Cr M &

R809.

cerrain date will not be satisfied by the weighing of one anchor and slight

'" (1875) LR 10 CP 668. 196 ibid 674. 197 Outhwaite v Commercia! Bank afGreece SA (The Sea Breeze) [1987] l'Lloyd's Rep 372.
198

ibid 377.

'" Moir v Royal Exchange Assurance Co (1814) 4 Camp 84, affd (1815) 3 M & S 461. Also another action on the same policy: (1815) 6 Taunt 241. Likewise if the warranty is to 'sail from' a port: Lang v Anderdm (1824) 3 B & Cr 495. '" Christin v Ditthell (1797) Peake Add Cas 141; Thomson v Weems (1884) 9 App Cas 671, 685; Wedderburn v Bell (1807) 1 Camp 1: Lane v Nixon (1866) LR 1 CP 412, 422-3. 203 Forsikringsaktieselskapet lIesta v Butcher [1989) AC 852. 204 ibid 893 per Lord Griffiths.

548

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Attachment and Alteration ofRisk

Promissory Warranties

(5) Materiality
18.91

A promissory warranty serves to define the risk insured. Moreover, freedom of contract admits of no objective constraint on what the parties can make the subject-matter of a promissory warranty. Provided the term, on its true interpretation, is indeed a promissory warranty, it is irrelevant how remote from risk definition the subjecr-marrer of the rerm would be in the absence of such
characterization. In this connection, a strict distinction must be drawn between

Hartlej08 that the warranted number of crew had been recruited before rhe vessel sailed on the leg of the voyage during which the casualty occurred.
(7) Breach Excused

promissory warranties and rhe doctrine of urmost good faith. The concept of materiality, which serves to delineate the scope of duties of utmost good faith by reference to an objective standard of relevance, has no role to play in the context of warranties:
.. . it is a first principle of the law of insurance, on all occasions, that where a representation is material it must be complied with-if immaterial, that immateriality may be inquired into and shown; but that if there is a warranty it is part of the contract that the matter is such as it is represented to be. Therefore the materiality or immateriality signifies nothing. The only question is as to the mere fact. 20s

In principle there is no excuse for breach of a promissoty warranty since, 18.94 regardless of the reason for non-compliance, the risk has altered. It was accordingly irrelevant in Hore v Whitmoreo, that the Governor of Jamaica restrained the vessel from sailing by the warranted date. Nevertheless, by virtue of section 34(1) of the Marine Insurance Act 1906, non-compliance is excused where either a change of circumstances renders a warranty inapplicable to the circumstances of the contract or compliance becomes unlawful. (8) Waiver In The Good Luck,210 rhe Court of Appeal assimilated breach of a promissoty 18.95 warranty with a repudiatory breach in general contract law, holding that breach gave rise to a righr of election rather than triggering an automatic discharge. As already seen, the House of Lords overruled that decision in favour of a literal reading of section 33(3) of the Marine Insurance Acr 1906. For the Court of Appeal, a significant difficulty with a literal reading of section 33(3) was the statement in section 34(3) of the Act that the insurer can waive a breach of warranty. If the remedy for breach is automatic discharge, there would appear to be nothing to waive. According ro Lord Goff, however, the effect of a waiver as contemplated by section 34(3) is simply that 'to the exrent of the waiver, the insurer cannot rely upon the breach as having discharged him from liability'.211 In other words, the waiver referred to in section 34(3) is waiver by equitable estoppel barring the insurer from raising the breach of warranty against the assured.'" There is no scope for waiver by election.'" In the context of breach of promissory warranty, waiver by equitable estoppel 18.96 requires the insurer to represent unequivocally that it will not invoke the automatic discharge against the assured. Such a representation requires the insurer to lmow of the assured's actual breach, or the representation will need to be that the insurer will not rely on any breach whatsoever of the warranty.214 The latter

18.92 In Mackay v London General Insurance Co Ltd,20' answers ro questions on a

proposal form constituted warranties in the resulting contract of third party motor liability insurance. The assured stated that no other insurer had ever refused the assured such insurance or required an increased premium or special conditions. In fact, three years previously, the assured's motor bicycle insurer had required an excess. This qualified as an increased premium or special condition. Swift J held that, consequently, the insurer had an unimpeachable defence, despite the fact that, had the information been disclosed prior to conclusi~n of the contract, ir would have been disregarded by the insurer as irrelevant. (6) Cure
18.93 Consistently with the irrelevance of an absence of any causal link, breach of

a promissory warranty cannot be cured. Section 34(2) of the Marine Insurance Acr 1906 states that: 'Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and rhe warranty complied with, before Ioss.'207 It was, for example, no defence in De Hahn v

.------_._-_.
Newcastle Fire Insurance Co. v Macmorran 6- Co (1815) 3 Dow 255, 262 per Lord Eldon LC. See also Kenyon v Berthon (1778) 1 Dougl 12n; Pawson v watson (1778) 2 Cowp 785: Blackhurst v Cockell(1789) 3 TR 360; Anderson v Fitzgerald(1853) 4 HLC 484; Thomson v Weems (1884) 9 App Cas 671, 683-4, 689; Yorkshire Imuranee Co Ltd v Campbell [1917J AC 218; Cadogianis v Guardian Assurance Co [1921] 2 AC 125; Dawsom Ltd v Bonnin [1922] 2 AC 413, 429; Allen v UniversalAutomobile Imuranee Co Ltd(1933) 45 LlLRep 55. 20' (1935) 51 LlLRep 201. 207 cf MfA 1906, s 46(1) (deviation discharges an insurer regardless of whether the ship regains the route before occurrence of a casualty).
20$

(1786) 1 TR 343. 209 (1778) 2 Cowp 784. 210 Bank of Nova Scotia v Hellenic Mutual W0r Risks Association (Bennuda) Ltd (The Good Luck) [1990J 1 QB 818, rvsd [1992J 1 AC 233.
208
211 ibid 263. m Kirkaldy UJ & Sons Ltd v walker [1999J Lloyd's Rep 410, 422; HIH Casualty & General Insurance Ltd v AXA Corporate Soludom [2002J EWCA Civ 1253, [2003J Lloyd's Rep lR 1.

213

Contrast the doctrine of waiver in the context of the avoidance for breach of a
duty of utmost good faith, see 4.113-4.116 above.

pre~formation
214

Agapitos LaW Bank (He/las) SA v Agnew (The Aegean) (No 2) [2002J EWHC 1556

(Comm), [2003J Lloyd's Rep lR 54, para 73.

550

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Attachment andAlteration ofRisk

is unlikely. The insurer need not in fact know that in law its liability under the policy is discharged, but must appear in the eyes of the assured to know this legal consequence of the assured's act. There can be no apparent waiver of a right that one does not appear to know one enjoys. The assured must then rely 215 on the representation so that it would be inequitable to go back on it. This reliance requires an understanding of the insurer's legal position. The need for an apparent appreciation of its legal position on the part of the insurer and knowledge of the assured was discussed by Tuckey LJ in HIH Casualty & General Insurance Ltd v AXil Corporate Solution?-" as follows: As the Judge put it 'the essence of the plea [of estoppel] must go to the willingness of the representor to forego its rights'. Unless the representation carries with it
some apparent awareness of rights it goes nowhere: the representee will not understand the representation to mean that the representor is not going to insist upon

Promissory "Warranties

unforgiving, and disproportionate. A variety of different responses have emerged.

(a) Contractual drafting

Apart from promissoty warranties implied by statute, terms have the status of 18.99 promissory warranties only ifsuch is the true interpretation of the contract. The
parties may, therefore, elect not to make a particular term a warranty, or may

reduce the impact of the common law of warranties. Navigation limits Hull policies are subject to limitations on navigation, deny- 18.100 ing cover in the event rhat the insured vessel should enter specified waters. Such limitations have traditionally been expressed as promissoty warranties. Under the International Hull Clauses (01111103), these limitations are set out as part of the srandard clauses and operate as suspensive conditions. 21 ' Consequently, the entry of an insured vessel into prohibited waters without the prior agreement of insurers suspends cover for the duration of the vessel's sray in such waters but cover resumes once the vessel leaves such waters. A similar approach applies to towage. The International Hull Clauses (011111 18.101 03) deny cover in the event of the insured vessel being towed 'except as is customaty (including customary towage in connection with loading or discharging) or to the first safe port or place when in need of assistance' or undertaking towage (or indeed any salvage) services 'under a contract previously arranged by the Assured andlor Owners andlor Managers andlor Charterers'.220 The insured vessel remains free to offer emergency salvage services either withOut any contract or on the basis of a salvage contract concluded on the spot, normally by the master. The equivalent limitation on cover under the Institute hull clauses takes the form of a promissoty warranty,22! while under the International Hull Clauses (01111103) it is again a suspensive condition.222 Severable cover A policy may be structured on a severable basis, with the 18.102 discharge of liability triggered by a breach of promissory warranty confined to the severable part of cover to which it relates and leaving cover intact with respect to the remainder of the policy. Such confined operation of a warranty
may arise in three ways.

his rights because he has said or done nothing to suggest that he has any.

What I have said illustrates the difficulty in establishing this type of estoppel when
neither party is aware of the right which is to be foregone. A representor who is

unaware that he has rights is unlikely to make a representation which carries with it
some apparent awareness that he has rights. Conversely a representee who is not aware that the representor has a particular right is unlikely to understand the representation to mean that the representor is not going to insist on that right or abandon any rights he might have unless he expressly says so.

18.97 In Kirkaldy OJ & Sons Ltd v Walker,'" a warranty required both a towage survey

and a condition survey. Only a towage survey was carried out. The towage survey report was tendered to the insurers and acknowledged by the deputy underwriter (the underwriter being away on holiday) as 'Noted and Agreed'. This was held not to be a waiver of the requirement for a condition sUrvey. According to Longmore J: 218 'The clause did not require the surveyor surveys to be shown to underwriters: no insurer (let alone his deputy) can be~expected to carry in his mind all the terms of all the insurances currently operative. It will only be if the insurer (or his deputy) addressed his mind to the question of the absence of a condition survey that any unequivocal representation could begin
to anse.

. ,

(9) Mitigating the Law of Promissory Warranties

18.98 As the preceding discussion illustrates, a promissory warranty, like any condi-

First, under a composite policy, each co-assured has the benefit of a separate 18.103
insurance contract or severable cover under the same contract. 223 The automatic

tion precedent, is capable of operating in a manner that may appear harsh,

21S Motor Oil He/las (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd's Rep 391, 399. '" [2002] EWCA Civ 1253, [2003] Lloyd's Rep IR 1, paras 21-22. '" [1999] Lloyd's Rep IR 410. '" ibid 423.

'" International Hull Clauses (OIl! lI03), clIIO.I, 32, I l.

220
221
222

ibid d 10.2.

Institute Time Clauses Hulls (1/10/83 and lIII/95), cI I. I.

International Hull Clauses (01111/03), d 11.
223

See 2.78 above.

552

553

Attachment and Alteration ofRisk

discharge of cover triggered by a breach of warranty by one co-assured is confined to the insurance of that co-assured. Secondly, the composite policy approach may be adopted in respect of several items of property insured under the same policy. At common law, infringement of a warranty in a fleet policy by one vessel will terminate cover for the entire fleet, preventing the assured from recovering in respect of the loss of a different vessel entirely. However, this is negated by clause 26 of the International Hull Clauses (01111/03), which deems each vessel insured under the policy to be the subject of a separate contract.
18.104 Thirdly, where different categories of cover are offered under the Same policy, promissoty warranties contained in the policy may, on the true interpretation of the policy, apply selectively to the different categories of cover. In Printpak v AGF Insurance Ltcl,22' a 'commercial inclusive policy' comprised a number of sections, each offering different cover. Insurers sought to reject a claim under section A of the policy, which offered cover on stock and goods against fire and associated perils, by reason ofa breach ofa burglar alarm warranty. The Court of Appeal held, however, in favour of the assured. According to Hirst L], 'it does not follow from the fact that the policy is a single contract that it is ro be treated as a seamless contractual instrument'. 225 The structure of the policy indicated that the burglar alarm warranty applied only to section B, which offered cover

Promissory Warranties
A suspensive condition stipulates preconditions to cover. Should the precondi- 18.108 don cease to be satisfied, cover is suspended until it is satisfied once more, at which point cover reattaches. Coutts are attracted by this interpretation as a means of mitigating the harsh, although logical, effecrs of the promissory warranty doctrine. Thus, in Dawson v Mercantile Mutual Insurance Co Ltcl,22' the Supreme Court ofVictoria declined to view a term as a promissory warranty in view of:
. . . the utter unreasonableness of a provision forfeiting the entire policy for an act which may not in any degree increase the risk of loss or accident and which may have no relation to the loss in fact claimed for. On the other hand, if the condition simply means to exclude liability for accidents not within the risk, it gives an

intelligible meaning to the [policy] and is in itself a reasonable and natural safeguard. Likewise, in The Barneell 11,229 it was regarded as 'significant' that noncompliance with a 'warranted' requirement had no bearing on the loss.

It should be noted, however, that the suspensive condition does not respond to 18.109
the full perceived harshness of the promissory warranty. Cover is indeed suspended rather rhan terminated, but causation is irrelevant to both types of term. Under a suspensive condition, an insurer is not liable for any loss or damage incurred during the suspension of cover irrespective of whether rhere is any causal link between rhe reason for the suspension and the Joss or damage incurred. A suspensive condition responds only to the inability to cure a breach of warranty. A suspensive condition interpretation has been applied to requirements, drafted 18.110 as warranties, that a road vehicle be fitted with a specified security system,"O that a cash kiosk be attended and locked at aU times during business hours,231 that a night watchman be stationed on board a vessel between certain hours,232 and that fire-fighting equipment is inspected by a specified date. 233 Similarly, courts have construed restrictions on the use of insured property as prescribing the circumstances during which the insurer is on risk rather than as a condition precedent to all furure liability on the contract. In such a case, whether the

against theft.
18.105 Held covered clauses These clauses, which preserve cover (usually subjecr to certain conditions) notwirhstanding an event that triggers an automatic discharge of liability, are discussed later in this chapter. 226

(b) Alternative interpretations

18.106 The term 'warranty' is ambiguous and its true meaning in context may require careful consideration. 227 Although a promissory warranty defines the essence of the risk covered, other terms, which may be described ;as warranties, serve

different functions.
18.107 Exclusion clauses traditionally were drafted as warranties. Thus, the phrase 'warranted free from capture and seizure' means simply that the insurer excludes liability for the perils of capture and seizure, but the occurrence of such a peril does not discharge the insurer's liability. The assured remains entitled to claim in respect of losses outside the exclusion whether arising before or after the events which constitute the excluded peril. The insurer is never completely off risk, either temporarily or permanently.

228
229

[1932) ViR 380, 388 per Mann J.

Century Insurance Co o/Canada v Case Existological Laboratories Ltd (The BamcellI!) (1984) De Maurier Oewels) Ltd v Bastion Insurance Co Ltd [l967] 1 Lloyd's Rep 550. CTN Cash & Carry Ltd v GeneralAccident Fire 6- Life Assurance Corp pic [1989] 1 Lloyd's Century Insurance Co ofCanada v Case Existological Laboratories Ltd (The Bamcellll) (1982)

150 DLR (3d) 7, 15 (Supreme Court of Canada).

230
231

Rep 299.
m

'" [1999] Lloyd's Rep lR 542.

225

ibid 546.

226

See 18. 11 Off below.

133 DLR (3d) 727 (Court of Appeal of British Columbia), affd (1984) 150 DLR (3d) 7
(Supreme Court of Canada). 233 Kler Knitwear Ltd v Lombard General Insurance Co Ltd [lOGO] Lloyd's Rep IR 47.

227 Roberts v Anglo-Saxon Insurance Association 'Ltd (1926) 26 LlLRep'154, 157; Morgan v Provinciallmurance Co Ltd [1932] 2 KB 70, 79-80.

554

555

Attachment and Alteration ofRisk

insurer is liable depends upon whether the restriction on use is being infringed at the time of the casualty.234 This approach may be contrasted with the older case of Colledge v Harty,235 in which a restriction on the sailing of a ship ro or

Held Covered Clauses

exercise of a liberty granted to shipowners or charterers under the contract of affreightment. Where, by reason of circumstances beyond the control of the Assured either the contract of carriage is terminated at a port or place other than the destination named therein or the transit is otherwise terminated before delivery of

from certain ports was construed as a warranty despite argument that its true interpretation was as an exception. The vessel having infringed the restriction, the COUtt was influenced by, as it saw, the impossibility of the policy ever subsequently attaching, despite the fact that, having sailed for a prohibited POtt, the vessel might thereafter have altered destination in favour of a voyage to 236 which the policy might have attached.

the goods as provided for in Clause 8 above, tben this insurance shall also terminate unless prompt notice is given to the Underwriters and continuation of cover is requested when the insurance shall remain in fOrce, subject to an additionalpremium if required by the Underwriters, either 9.1 until the goods are sold and delivered at such POft or place, or, unless otherwise specially agreed, until the expiry of 60 days after arrival of the
goods hereby insured at such POft or place, whichever shall first occur,

E. Held Covered Clauses

18.111 Although the doctrine of alteration of risk, as developed by the common law and pattially enshrined in the Marine Insurance Act 1906, may be viewed as inflexible and weighted heavily in the insurer's favour, ultimately it serves to provide cleat and cettain prima ficie rules and a basis for negotiation of tetms relaxing the severity of the default position. The 'held covered' clause is such a tetm. Undet a held covered clause, in the event of a stipulated occurrence, typically one that constitutes an alteration of tisk, the insurer's liability is not prospectively dischatged. Instead, the assured temains ('is held') coveted provided any specified conditions are fulfilled, usually notification of the event by the assuted to the insurer and agreement upon any appropriate additional premium and change of terms. (1) Examples of Held Covered Clauses 18.112 The modern Institute clauses contain a numbet of clauses that mitigate the a1retation of risk doctrine. With respect to the Institute Cargo Clauses (A), (B), and (C), the following three provisions must be consideted collectively:
8.3 This insurance shall remain in force (subject to termination as provided for

or 9.2 if tbe goods are forwarded within- the said period of 60 days (or any
agreed extension thereof) to the destination named herein or to any other destination, until termination in accordance with the provisions of

Clause 8 above. 10 Where, after attachment of this insurance, the destination is changed by the Assured, held covered at a premium and on conditions to be arranged subject to prompt notice being given to the Underwriters. Clause 10 is a classic held covered clause embtacing changes of voyage by the 18.113 assured, maintaining covet provided certain conditions are fulfilled. 23' Othet changes of voyage ate the subject of clause 9, which operates in a similar fashion although differently drafted ('shall also terminate, unless .. .'). Clause 8.3 is simply a waivet of certain alterations of tisk: the assured is held covered without
any

conditions. 24o

The Institute Voyage Clauses Hulls contain the following 'Change of Voyage' clause: 241
2 Held covered in case of deviation or change of voyage or any breach of warranty as to tOwage or salvage services, provided notice be given to the Underwriters immediately after receipt of advices and any amended terms of cover and any additional premium required by them be agreed.

18.114

above 237 and to the provisions of Clause 9 below) during delay beyond the
control of the Assured, any deviation, forced discharge, reshipment or transhipmen-0 38 and during any variation of the adventure arising from the

The Institute Time Clauses Hulls contain the following 'Breach of Warranty'
clause: 242 3 Held covered in case of any breach of warranty as to cargo, trade, locality, towage, salvage services or date of sailing, provided notice be given to the

234 Roberts vAnglo-Saxon Insurance Association Ltd (1927) 27 LlLRep 313; Dawson v Mercantile Mutua/Insurance Co Ltd [1932J VLR 380 (Supreme Court of Victoria, Full Court); Morgan v Provincial Insurance Co Ltd [1932] 2 KB 70, m (1851) 6 Ex 205. 236 See also Birrell v Dryer (I 884} 9 App Cas 345 where the term 'warranted no St Lawrence between the 1st of October and'the 1st ofApril' was -assumed to be a promissory warranty and not merely a clause circumscribing the risk. Sed quaere were the point argued today. 237 For discussion of c1 8.1, see 17.11ff above.
.236 The landing and re-shipping or transhipment of goods necessitated by an insured peril does not terminate cover even in the absence of an express term: MIA 1906, s 59.

:239 See also Institute War Clauses (Cargo), d 6; Institute Strikes Clauses (Cargo), d 7.
240

See also Institute Strikes Clauses (Cargo), d 5.3, but contrast Institute War Clauses

(Cargo), el 5.5.
24' (1110/83 and 1111195), el2. Likewise Insrirure Voyage Clauses Freight (1/8/89 and 1111/ 95), el3. 242 (1/10/83 and 1111195), el 3. Likewise lnsritute Time Clauses Freight (1/8/89 and 11111 95), el 4.

556

557

Attachment and Alteration ofRisk

Underwriters immediately after receipt of advices and any amended terms of

Held Covered Clauses prima fiele liable under a clause holding the assured covered in the event of a breach of warranty. Bigham J held, however, that, where the breach was not discovered until after the ensuing loss, 'the parties must assume that the breach was known to the parties at the time it happened, and must ascertain what premium it would then have been reasonable to charge'.250 The unseaworthiness having rendered the resulting sacrifice inevitable, it would have been reasonable for the underwriter to charge a premium equal to at least the probable value of the sacrifice and, indeed, a further sum in respect of the increased risk of loss of the vessel itself. In the circumstances, therefore, the held covered clause was self-defeating.
(4) Amendment ofTerms Where the held covered clause expressly so provides, continuation of cover may 18.118 be dependent upon amending the terms of the policy other than the rate of premium. In Liberian Insurance Agenry Inc v Mosse,251 the clause did not expressly envisage such an alteration and Donaldson J accordingly held that
an amendment other than to the premium, on the facts an insertion of a free

cover and any additional premium required by them be agreed.

(2) Scope
18.115 The departures from rhe agreed adventure against which a held covered clause

offers protection inevitably depend upon the wording of the clause in question. Thus, a clause covering change of voyage and deviation cannot be invoked 243 where risk never attaches. (3) Additional Premium
18.116 Since held covered clauses maintain the underwriter's potential liability despite a departure from the risk agreed to be covered, not unnaturally the assured is

required by such clauses to pay an additional premium. The underwriter may not, however, demand an exrortionate further payment in order to escape from liability under the clause. The enritlement is ro a reasonable extra premium, commensurate with any increase in the risk,244 assessed by reference to the time of the event triggering the held covered clause. 245 Where no reasonable commercial rate exists for the altered risk, given full disclosure of all relevant circumstances, the held covered clause cannot operate. 246 What is reasonable on
the facts 247 may entitle the insurer, at one extreme, to no additional premium
Of,

at the other extreme, to a further premium so high as to prevent the held covered clause from operating.
18.117 In

from particular average exception, could not be effected in order to make the held covered clause work. In the modern Institute cargo clauses, clause 10 envisages amendment of the policy terms other than the premium, whereas clause 9 does not. Although there is no authority in point, it seems clear that an insurer may not 18.119 insist upon unreasonable amendments to the terms of the cover or take advantage of a held covered clause so as effectively to renegotiate the insurance ab initio in the light of developments since the formation of the contract. Just as the common law recognized that the insurer was confined to a reasonable additional premium commensurate to the alteration in the risk created by the event triggering the held covered clause, so amendments of othet terms of the cover should likewise reflect the enhanced risk and be proportionate and appropriate thereto. An unrestricted right to require amended terms of cover would be contrary to the natural interpretation of held covered clauses. 252 (5) Notice Old wordings of held covered clauses contained no mention of any notice 18.120 requirement. 253 Given, however, that such clauses can be invoked retrospectively

Hewitt v London Generallnsurance Co Ltd,24' the deviation was less significant than variations of the voyage permitted under the terms of the policy without any additional premium. Accordingly, the assured was able ro invoke a held covered clause without incurring any financial prejudice. In contrast, in Greenock Steamship Co v Maritime Insurance Co Ltd,24' the additional premium to which the insurer was entitled under the held covered clause exceeded the indemnity the assured sought to recover. The vessel embarked upon a stage of the voyage unseaworthy by reason of inadequate fuel. Consequently, to avert a danger of a total loss, the mastet burnt a quantity of the ship's fittings, spars and cargo. This constituted a general average sacrifice for which the insurer was

Wooldridge v Boydell (1778) I Dougll7; Simon, Israel 6- Co v Sedguiek [189311 QB 303; Maritime Insurance Co v Stearns [1901J 2 KB 912. See 18.06-18.07 above. 244 MIA 1906, S 31(2); Hyderabad (De""an) Co v Willoughby [18991 2 QB 530; Greenock Steamship Co v Maritimelnsurance Co Ltd [1903] 1 KB 367; Hewitt v London General Insurance Co Ltd(1925) 23 LlLRep 243: 245 Greenock Steamship Co v Maritime Insurance Co Ltd [1903] 1 KB 367, see below. 246 Liberian Insurance Agency Inc v Mosse' [1977] 2 Lloyd's Rep 560, 568. 247 What is a reasonable premium is always a question of fact: MIA 1966, s 88.
243

248

(1925) 23 LlLRep 243.

249

[190311 KB 367.

250 ibid 375. Followed in Mentz, Decker 6' Co v Maritime Insurance Co [1910] 1 KB 132. '" [1977J 2 Lloyd's Rep 560. 252 And also, to the extent there exists any post~formation duty of utmost good faith, contrary to the continuing obligation of the insurer to act with the utmost good faith towards the assured. 253 See, eg Hyderabad (Deccan) Co v Willoughby [18991 2 QB 530.

558

559

Attachment and Alteration ofRisk

by the assured even after loss,254 and indeed even after the period covered by rhe policy has expired,255 rhere arises a potential two-fold prejudice to the insurer. First, the insurer may be deprived of extra premium income in that the assured may naturally be tempted to refrain from giving notice unless a casualty in fact occurs. Secondly, additional information coming to light or an alteration of circumstances in the interval between the assured learning of the alteration of risk and giving notice may render it either impossible or more expensive for the insurer to obtain reinsurance on the altered risk. Consequently, mOst modern held covered clauses not only provide for the giving of notice but also deal expressly with the required rapidity of such notice. In the absence of such provision, the courts will imply a term to the effect that the benefit of a held covered clause is conditional upon the giving of notice within a reasonable time.
18.121

Held Covered Clauses

nothing practicable could be done by the insurer were the giving of notice .accelerated. 257 In Liberian Insurance Ageney Inc v Mosse,258 Donaldson J stated as follows:
What time is reasonable will depend on all the circumstances. Thus if the assured learns the true facts while the risk is still current, a reasonable time will usually be a shorter period than if this occurs when the adventure has already ended. If the assured learns the true facts when the insured property is in the grip of a peril, which is likely to cause loss or damage, a reasonable time will be very short indeed.

Thames & Mersey Marine Insurance Co Ltd v HT van Laun & Cil" concerned two differently worded cargo policies. The 'Liverpool policy' held rhe assured covered in case of deviation or change of voyage 'provided notice be given and any additional premium required be agreed immediately after receipt of advices'. The 'London policy' contained a held covered clause confined to deviarions but silent with respect to notifYing the insurer. The insured adventure involved the transportation of a cargo of cattle and sheep to a Chinese port, the bill of lading specifYing Taku. After the vessel had sailed, the consignees repudiated the contract of sale and, on 16 December, the master found Taku blocked by ice, a fact known to the assured on 17 December. That same day, and repeatedly during the following week, the assured direcred the master to hold his position. Appalling conditions on board, however, compelled the master to depart for a different porr on 25 December, the entire cargo ultimately being destroyed at sea for health reasons. Notice of deviation was communicated to the insurers on 30 December. The House of Lords held that such delay in communication inftinged both the express immediate notification requirement of the Liverpool policy and a requirement of norification within a reasonable time to be implied into the London policy.

The modern Institute hulls and freight clauses, however, override such consider- 18.123 ations by expressly providing for the assured to give notice 'immediately after receipt of advices'o Notice under the hull. clauses of a change of voyage one month after the change is clearly too lare and ineffective in the absence ofwaiver of lateness, such waiver being dependent on knowledge by the insurer of the delay in notification. 259 The modern cargo clauses contain a requirement of 'prompt notice', reinforced by rhe following appended note: 'It is necessaty for the Assured when they become aware of an event which is "held covered" under this insurance to give prompt notice to the Underwriters and the right to such cover is dependent upon compliance with this obligation.' Although whether such a note has contractual effect has been doubted, it has been stated to reflect the law accurately."o It may be that the phrase 'prompt notice' introduces a requirement of quick, although not necessarily immediate, notification that is independent of the availability of practicable measures to the insurer. 261 (6) Option or Obligation? In Mentz, Decker & Co v Maritime Insurance CO,262 the clause stated as follows: 18.124 'In the event of the vessel making any deviation or change of voyage it is mutual]y agreed that such deviation or change ofvoyage shall be held covered at a premium to be arranged provided due notice be given by rhe assured on receipt of advice of such deviation or change of voyage.' Obiter, Hamilton J agreed wirh counsel for the insurers that 'it is impossible to construe the clause as giving an oprion to the assured to be covered or not as he chooses',263 but did not elaborate upon his reasons for adopting this interpretation. Certainly, counsel for the insurets pointed to the inequity of an assured giving notice and paying an additional premium only in the event of a loss, the insurer thus assuming a different and greater risk without either knowledge permitting the

18.122 What constitutes a reasonable rime in this context reflects the reinsurance opportunities available to the insurer on the facts. Where the loss has already occurred before the assured learns of rhe departure from the agreed adventure, notice may be considerably delayed and still remain reasonable simply because

254 Greenock Steamship Co v Maritime Insurance Co Ltd(1903]1 KB 367; Mentz, Decker &Co v Maritime Insurance Co [1910] 1 KB 132. 255 Overseas Commodities Ltd v Style[1958] 1 Lloyd's Rep 546, 559. 256 (1905) (1917) 23 Com Cas 104; [\917] 2 KB 48n. Followed in Hood v West EndMotor Car Packing Co [1917] 2 KB 38 and see generally Black King Shipping Corp v Massie (The Litsion Pride)

257 Mentz, Decker & Co v Maritime Insurance Co [1910] 1 KB 132 ('due notice'); Hewitt v London C,n"alinsurance Co Ltd(I925) 23 LlLRep 243, 246.

258

[1977] 2 Lloyd's Rep 560, 566.

[1985] 1 Lloyd's Rep 437, 462-71 (no extension to express warranties ohhe implied condition precedent of giving notice within a reasonable time).

'" has" Shipping Ltd v Colton [1997] 1 Lloyd's Rep 586, 594. 260 Liberian Insurance Agency Inc v Mosse [197712 Lloyd's Rep 560, 566.
261

ibid 566-7.

262

[1910] 1 KB 132.

263

ibid 135.

560

561

Attachment and Alteration ofRisk

seeking of reinsurance or rhe certain benefit of an appropriately enhanced premium. Such a consideration is clearly relevant to all held covered clauses, but the law has responded hy rendering the benefit of the clause conditional upon the giving of notice at least within a reasonable time of discovery by the assured of the alteration of risk. Moreover, the wording of the clause in Mentz, Decker ('it is mutually agreed that such deviation or change of voyage shall be held covered') could he read as stating that the assured had already agreed that deviations and changes of voyage were to be covered with the result that, simply upon the true interpretation of the clause, while failure to give notice as required had the result of depriving the assured of cover, there was no contractual entitlement conferred upon the assured to elect not to give notice. The assured had the power to exercise an option by his inaction, and thereby decline deviation and change of voyage cover, but no right to do so.
18.125 Thete appears to be no justification for a rule of law that held covered clauses

Held Covered Clauses

An example of non-disclosure in the context of held covered clauses is provided 18.127 .by Overseas Commodities Ltd v Style. 265 The assured under a cargo policy was held coveted 'at a premium to be arranged in case of change of voyage or of any
omission or error in the description of the interest vessel or voyage'. This clause

was held inapplicable in respect of certain misdescriptions of the cargo as the error could not be rectified. However, when the problem surfaced, enquiries by the assured elicited two conflicting explanations, only that containing the explanation most favourable to the assured being passed on to the underwriters. McNair J stated, obiter, that in order to 'obtain the protection of the "held covered" clause, the assured must act with the utmost good faith towards the underwriters, this being an obligation which rests upon them thtoughour the currency of the policy'. 266 In the absence of any explanation for the failure to pass on the other explanation, the held covered clause could not be invoked.

impose obligations. The status of the clause must be a matter of interpretation. It is suggested that a perceived inequity of burden resulting from the option interpretation of held covered clauses is relevant, if ar all, as an indication of the intention of the parties, at most giving rise to a rebuttable presumption in favour of the obligation interpretation. Thus, clause 9 of the modern Institute cargo clauses, set out in full at para 18.111 above, provides that, where the
contract of carriage or transit terminates in certain circumstances, the insurance

'shall also terminate unless prompt notice is given to the Underwriters and continuation of cover is requested'. Such language, admittedly not that of the classic held covered clause, is hardly redolent of an obligation to give notice and should be read as affording the assured the opportunity, in the relevant circumstances, to assess its needs and determine whether or not they are be~t served by continuation of the insurance. . (7) Utmost Good Faith
18.126 The operation of the doctrine of utmost good faith once the contract has been

Fraser Shipping Ltd v Coltort" concerned hull insurance on terms incorporating 18.128 the Institute Voyage Clauses Hulls (Total Loss, General Average and 3/4ths Collision Liability) (1/10/83) ou a voyage to Shanghai under tow for demolition. Notice of a change ofvoyage to Huang Pu was given to insurers toO late to be valid. However, the assured also failed to inform the insurers that: (a) the vessel had arrived off Huang Pu twenty-four hours before notice was given, during which time it had already been involved in a minor collision; (b) the porr of Huang Pu was congested so that the vessel was compelled to anchor precariously in an outer anchorage; (c) de-ballasting and work on the anchor were needed before the vessel could proceed to its delivery point; and (d) a hurricane was threatening the port. These circumstances were self-evidenrly material and induced the subscribing underwriters into agreeing an extension of cover under the held covered clause.

concluded is discussed in Chapter 4 ahove. In the context of held covered clauses, it seems clear that: (a) the doctrine of utmost good faith attaches hecause the insurer is being asked to make an underwriting decision; (h) the scope of the utmost good faith duties is limited in that circumstances are material only if they would influence the prudent underwriter in assessing the extension of cover under the clause; and (c) the remedy for breach of a good faith duty is avoidance only of the extension of cover, leaving the original policy unaffected, although the precise legal reasoning that leads to this result has yet to be authoritatively resolved. 264
See 4.193-4.204 above.

[1958J 1 Lloyd's Rep 546. ibid 559. See also Donaldson], again obiter, in Liberian Insurance Agenry Inc v Mosse [1977] 2 Lloyd's Rep 560. 267 [1997J 1 Lloyd's Rep 586.
26S

266

264

562

563

19
SUB-STANDARD SHIPPING

A. The Concepts of Seaworthiness and Cargoworthiness (l) Seaworthiness (2) Cargoworchiness

(3) Stowage (4) The relative nature of

D. Proof of Unseaworthiness
19.Q3 19.03 19.11 19.14

1951

E. The Relationship Between

Unseaworthiness and Cover under the Inchmaree Clause F. The Relationship Between Unseaworthiness, Inherent Vice, and Ordinary Wear and Tear G. Cargo Policies H. Contractual Responses to Sub-srandard Shippiug (1) The due diligence proviso to the Inchmaree clause
(2) Ownership, management,

19.56

seaworthiness and cargoworthiness

19.18 19.20 19.22 19.23 19.30 19.32 19.39 19.40 19.49

19.60 19.61 19.64 19.65 19.66 19.71 19.78

B. Seaworthiness in Voyage Policies (1) Rationale for the warranty

(2) Time of compliance and the

doctrine of stages
C. Seaworthiness in Time Policies (1) Privity (2) Who is the assured?
(3) Causation (4) Multiple instances of unseaworthiness

and flag
(3) Classification (4) The International Safety Management Code

The safety of human life, the confidence of catgo intetests and parties with 19.01 financial intetests, whether insurets 01' banks, and the protection of the environment all demand certain standards of construction, maintenance, and operation of shipping. Marine insurance law establishes required standards by affording insurets defences where vessels ate unseaworthy 01', in catgo insurance only, unfit to catry theit catgo. Fot hull underwritets, howevet, the law is unsatisfactory. The unseaworthiness defence vaties between voyage and time policies. The vast majotity of vessels ate insured on a time basis, but the unseaworthiness defence in time policies requires not merely that the sub-standard condition of the vessel causes loss but also that the assured knows of the vessel's condition. Whete the condition of the vessel is attributable to the negligence of the owner in, fot example, employing a sub-standatd crew or failing to maintain the vessel properly, the insurer remains liable unless such negligent

565

Sub-standard Shipping
conduct is accompanied by knowledge of the consequences for the condition of the vessel. In practice, proof of such knowledge is extremely difficult.
19.02 Dissatisfaction with the underlying law has led insurers to seek protection against sub-standard shipping through express contractual terms. In particular, attention has focused on the due diligence proviso to the Inchmaree clause and clauses relating to the vessel's flag, to classification, and to the International Safety Management Code.

The Concepts o/Seaworthiness and Cargoworthiness

is a question of fact.' The notion of being curable must, however, include overt .need for attention. A latent defect that is in principle easy to cure bur that cannot reasonably be discovered must render a vessel unseaworthy.

(b) Master and crew'

The seaworthiness of a vessel also includes the adequacy of the crew, in terms of 19.06 both numbers and competence, with respect to readily foreseeable circumstances of the adventure." Unseaworthiness by reason of inadequate ability of the master or crew in handling the vessel may stem from a disabling want ofskill in matters of seamanship generally, which may in turn flow from an inherent lack of abiliry or a lack of appropriate training. Equally, however, a vessel will be unseaworthy if the master or crew are generally competent but suffer from a disabling lack of knowledge of the behavioural characteristics of the particular vessel or its equipment," irrespective of whether that Jack of knowledge results from failure by the master or crew to inform themselves or the owner's failure to impart information to them. In any such case, the result is that the vessel is unfit for the adventure. Competence, moreover, is not an abstract quality to be appreciated divorced 19.07 from the insured adventure. The question is not simply whether the master or relevant crew member is generally capable and fully knowledgeable of the particular vessel, but whether that person can reasonabJy be relied upon to apply the skill and knowledge possessed in an appropriate fashion as circumstances may dictate. Consequently, a vessel will still be unseaworthy if, for example, the master, although highly qualified and knowledgeable, nevertheless cannot be reasonably trusted to respond appropriately by reason of physical disability, illhealth or addiction," mental incapacity, or even a simple disinclination through laziness or any other reason to perform a mastee S functions properly.13 Unseaworthiness is, nevertheless, a condition ofthe vessel and such a condition is 19.08 not to be equated with the occurrence of one or more acts of poor seamanship.

A. The Concepts of Seaworthiness and Cargoworthiness

(I) Seaworthiness
19.03 The Marine Insurance Act 1906 states simply that: 'A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured." It may be noted that the required standard is not fitness but reasonable fitness.

(a) Physical condition

19.04 The concept of seaworthiness clearly embraces the physical condition of the insured vessel and its equipment. Accordingly, vessels have been held unseaworthy by reason of a diverse range of problems, including an excessively leaking hull, 2 inadequate or defective anchors, 3 engineering defects, 4 and defects in fire-fighting equipment. 5 The precise nature of the problem need not be identified.' 19.05 It has been suggested that a vessel is less likely to be rendered unseaworthy by defects easily curable by those on board,' but the remediable nature of a defect is not incompatible with unseaworthiness. The same may be said of minor defects. Ultimately, whether a remediable or minor defect renders. vessel unseaworthy

, MiA 1906, s 39(4). See also Hedley v Pinkney 6-Sons Steamship Co Ltd[1894J AC 222, 227. A vessel is seaworthy if 'in a condition to encounter whatever perils of the sea a ship of that kind and laden in that way may be fairly expected to encounter on the voyage': Steel v State Line Steamship Co (1877) 3 App Cas 72, 77, cited in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1995J 1 Lloyd's Rep 651, 657. , Hoffinann (C) 6- Co v British General Insurance Co (1922) 10 LlLRep 434: Neue Fischmehl Vertriebsgesel~chafi Haselhorst mbH v Yorkshire Insurance Co Ltd (1934) 50 LlLRep 151. 3 Wilkie v Geddes (1815) 3 Dow 57. , Project Asia Line Inc v Shone (The Pride o[ Donegal) [2002J EWEC 24 (Comm), [2002J 1 Lloyd's Rep 659. See also wedderburn v Bell (1807) 1 Camp 1 (defective sails). S Manifist Shipping Co LtIv Uni-Polaris Insurance Co Ltd (The Star Sea) [20011 UKEL 1, [2003J 1 AC 469. , Project Asia Line Inc v Shone (The Pride o[Donegal) [2002J EWHC 24 (Comm), [2002J 1 Lloyd's Rep 659, paras 39,82-85. 7 Ajum Goolam Hossen & Co v Union Marine Insurance Co Ltd[1901] AC 362, 371.

, Project Asia Line Inc v Shorle (The Pride o[Donegal) [2002J EWHC 24 (Comm), [2002J 1 Lloyd's Rep 659, para 38. 9 R White, 'The Human Factor in Unseaworthiness Claims' [1995] LMCLQ221. 10 U700d v Associated National Insurance Co Ltd [1984J 1 QdR 507,553 (Supreme Court of Queensland), Competence is determined in fact and not by reference to formal qualifications, although their presence or absence may be relevant to any question of the assured's knowledge of the crew's incompetence or to the operation of the due diligence proviso in the Inchmaree clause. " Marlifist Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001J UKHL 1, [2003] 1 AC 469 (vessel unseaworthy by reason, inter alia, of the master's 'massive ignorance' with respect to operating the fireNfighting equipment). " Moore v Lunn (1923) 15 L1LRep 155, 161 (alcoholism).
13

Papera Iraders Co Ltd v Hyundai Merchant Marine Co Ltd (The Eurasian Dream) [2002]

EWEC 118 (Comm), [2002J 1 Lloyd's Rep 719, para 129(3)(d).

566

567

Sub-standard Shipping
A competent and fully able master or crew member may make an error or commir an act of negligence. Conversely, an isolated acr may of itself evidence the incompetent condirion of the crew. There is no requirement of legal principle for a series of acts of sub-standard seamanship before the conclusion can be drawn that there is incompetence amounting to unseaworthiness,14 although the existence of such a series may increase the likelihood of a finding
of unseaworthiness.

The Concepts ofSeaworthiness and Cargoworthiness

extend to the vessel's suitability as a floating warehouse for certain goods. A ship will remain seaworthy despite blocked ventilation causing unfitness to receive
cargo, 19

19.09 With respect to crew numbers and composition, it was held in Forshaw v

Chabert15 that seaworthiness requires a vessel to have a crew sufficient in number for the whole voyage 16 at the commencement thereof. Moreover, it may be that a vessel will not be adequately manned unless, at least in the case of voyages of a substantial length, the crew includes persons capable of substituting in case of need for leading personnel. In CliffOrd v Hunter,17 a vessel on a voyage from Mauritius to England turned back because the master fell ill and no other member of the crew could perform a master's duties. On these facts, the issue of seaworthiness was left to the jury, which decided in the insurer's favour. (c) Documentation 19.10 Vessels are required to carry a significant and increasing number of documents in accordance with international conventions and national regulations. Indeed, the growing volume and diversiry of documentary requirements led to the Convention on Facilitation ofInternational Maritime Ttaffic 1965, designed to reduce, simplifY, and harmonize the documentary requirements to which vessels are subject. Pursuant to the Convention, a Facilitation Committee produce;; and regularly revises a list of certificates and documents required to be carried on board ships in order to comply with certain international converltions. The absence of such a document that is necessary to fulfil the insured adventure
renders a vessel unseaworthy.18

In the law of carriage of goods by sea, in contrast, the concept of seaworthiness 19.12 extends beyond the suitabiliry of the vessel to encounter the waters through which it will pass and embraces the fitness of the vessel to carry cargo. For the owner of cargo, the fitness of a vessel for its cargo is as relevant as the vessel's abiliry to withstand the perils of the adventure. While the same is true of a cargo insurer, a hull and machinery insurer has no interest i~ the experience of the cargo. To accommodate this limited interest of a hull insurer, marine insurance law distinguishes between seaworthiness and cargoworthiness, with the latter forming no part of the law relating to hull policies but featuring in cargo insurance law. In the context of cargo policies, therefore, the carrying vessel is in principle 19.13 required as at the commencement of the voyage to be reasonably fit for the carriage of its cargo to the destination contemplated by the policy.'o Accordingly, a vessel that has carried a cargo of cattle infected with foot and mouth disease is unfit to embark a further cargo of cattle unless properly cleansed and disinfected. 21 Where health regulations are in force at a particular port, any vessel embarking cargo for that port must be able to comply therewith without damage to the cargo. 22 Refrigeration machinery on board a ship should, in its original state at the inception of the voyage, be suitable for the voyage in question23 and a bullion room should be reasonably fit to withstand thieves. 24 A vessel carrying livestock must have sufficient ventilation and stockmen to care for the cargo. 25

19

(2) Cargoworthiness
19.11

Reed (AE) & Co v Page, Son & Eas' L'd [1927] 1 KB 743, 754. The term 'seaworthiness'

It is important to distinguish the fitness of the vessel to commence the contemplated adventure of navigation from its fitness to receive particular cargo. In the law of marine insurance, seaworthiness is confined ro the former and does not

is sometimes employed (0 cover fitness to receive cargo, but such usage has been deplored as apt to create confusion: Eldet; Dempster (} Co Ltd v Paterson, Zochonis 6- Co Ltd [1924] AC 522,

539-40.
20 MIA 1906, s 40(2). In practice, the requirement is considerably diluted by express contractual term: see 19.61-19.63 below. 21 lkttersall v National Steamship Co Ltd (1884) 12 QBD 297. See also Mediterranean Freight Services Ltd v BP Oil International Ltd (The Fiona) [19931 1 Lloyd's Rep 257, affd on other grounds [1994] 2 Lloyd's Rep 506.

" ManiftstShipping Co L'd v Uni-Polaris Insurance Co L,d (The S'ar Sea} [199711 L1oyd's Rep
360.373-4. " (1821) 3 Brod & B 158. 16 Or, should the voyage be"divided into stages, for the next stage. 17 (1827) Moo & M 103. 18 Projec' Asia Line Inc v Shone (The Pride ofDonegal) [20021 EWHC 24 (Comm), [20021 1 Lloyd's Rep 659, para 41; Papera Traders Co Ltd v Hyundai Merchant Marif/e Co Ltd (The Eurasian Dream) (No I) [2002] EWHC 118 (Comm), [200211 L1oyd's Rep719, para 128.

22

Ciampa v British India Steam Navigation Co Ltd [1915] 2 KB 774 (vessel originally from a

plague-contaminated port picked up a cargo of lemons from Naples for Marseilles, where,

by

reason oflong-standing French regulation, the ship was subject to a compulsory procedure for the extermination of rats, which procedure damaged the lemons). 23 Owners ofCargo on Ship 'Maori King' v Hughes (The Maori King) [1895J 2 QB 550. 24 Queensland National Bank Ltd v Peninsular 6- Oriental Steam Navigation CO [1898J QB 567. 25 Sleigh v :lYser [1900] 2 QB 333.

568

569

Sub-standard Shipping
(3) Stowage
19.14 Both seaworthiness and cargoworthiness are attributes of the vessel. As a result,

The Concepts ofSeaworthiness and Cargoworthiness

tharthe ability of the vessd to survive the ordinary perils of the insured voyage is .contingent upon sacrificing the cargo. Daniels v Harris 31 concerned insurance on deck cargo that jeopardized the safety of the cartying vessel even in ordinary rough weather. lt was argued, however, that the vessel was seaworthy as the cargo had been stowed so as to permit easy jettisoning should such weather be encountered. Such a concept of seaworthiness conditional upon destruction of the subject-matter insured was roundly rejected by the court. The case has been regarded as authority for the proposition that seaworthiness as a quality of the vessel reflects the particular adventure insured, but it is suggested instead that it illustrates the warranty of cargoworthiness. (4) The Relative Nature of Seaworthiness and Cargoworthiness Seaworthiness and cargoworthiness are not fixed or abstract concepts. The 19.18 standards to be met for a vessel to be seaworthy or cargoworthy develop over time to reflect evolving knowledge and standards of ship construction, operation, and certification. 32 Moreover, the requisite condition of a vessel may

where the adverse consequences of the manner ofstowage of cargo are confined to the cargo, the stowage does not render the vessel unseaworthy or unfit for its cargo.
19.15

In The Thorsa,26 cases of chocolate deteriorated in transit by rea.<;on of stowage in the same hold as gorgonzola cheeses. The Court ofAppeal held that stowage of two items of cargo so that one could damage the other in transit could not render the vessel unseaworthy. This principle received House of Lords apptoval in Elder, Dempster 6- Co Ltd v Paterson, Zochonis 6- Co Ltd," where casks of palm oil stowed in the bottom of holds of a ship structurally fit for their carriage were damaged by the weight of very heavy bags of palm kernels stowed immediately on top of them. In an action against the carrier on the contract of affreightment, it was held that the cause of the loss was superincumbent weight by reason of poor stowage rather than the condition of the ship, which was in no way rendered unseaworthy by the stowage. According to Lord Sumner;" 'Bad stowage, which endangers the safety of the ship, may amount to unseaworthiness, of course, but bad stowage, which affects nothing but the cargo damaged by it, is bad stowage and nothing more, and still leaves the ship seaworthy for the adventure, even though the adventure be the carrying of that cargo.' In contrast, stowage will render a vessel unseaworthy where it affects the firness of the vessel for the insured adventure. In Kopito/f v Wilson," the ship was loaded with three armour plates each weighing between fifteen and eighteen tons. In rough weather, one plate broke free, crashing through the side of the ship, which duly sank. The trial judge, in a direction upheld on appeal, left to the jury the issue ofwhether the vessel at the time of sailing was reasonably fit in respect of the stowing of the plates to encounter the ordinary perils which might be expected on the voyage at that season. The jury found the vessel unfit. Similarly, a wooden ship was held unseaworthy when loaded with sulphuric acid in such a way that the acid could escape and render the ship incapable of performing the voyage in ordinary weather. 30 Moreover, a vessel will not be cargoworthy where the manner of stowage is such

vary according to the demands of the particular adventure. Certain waters present different challenges depending upon the time of year, as maya stay in port. Should the insured adventure embrace more than one such environment, seaworthiness may vary between the different parts of the one adventure. 33 In addition, seaworthiness and cargoworthiness reflect the risk as presented to 19.19 insurers. Burges v Wickham" arose out of the loss of the Ganges, a vessel built in the United Kingdom for use on the river Indus and, therefore, generally unfit for ocean navigation. Nevertheless, everything possible was done temporarily to strengthen and equip the vessel for the rigours of the passage to India. The assured disclosed to the insurer both the original construction and character of the Ganges and the temporary work, and an additional premium was paid to teflect the risk represented by an ocean voyage for a river vessel. When the Ganges was lost, the undetwriters unsuccessfully sought to avoid liability on the basis of unseaworthiness. The court held that seaworthiness was to be judged flexibly and by reference to the insured adventure, namely the exposure to ocean perils of a river vessel. According to Blackburn J:35
.. . on such an adventure as this, viz, sending a river steamer across the ocean, the warranty of seaworthiness was complied with if as much was done to make her fit

19.16

19.17

26 [1916J P 257. " [1924J AC 522. See also Wade v Cockerlinc (1905) 10 Com Cas 115: Steamship Calcutta Co Ltd v Andrew w"ir & Co (1910) 15 Com Cas 172, 191. 28 [1924J AC 522, 561-2. 29 (1876) 1 QBD 37730 Firemans Fund Insurance Co v \.%stern Australian Insurance Co Ltd (1927) 33 Com Cas 36. See also Foley v Tt:tbor (1861) 2 F & F 663; 672; Paterson Steamships Ltd v Canadian Co-operative Wheat Producers Ltd [1934J AC 538: Smith Hogg & Co Ltd v Black Sca &Baltic GeneraiInsurance Co Ltd [1940J AC 997.

" (1874) LR 10 CP 1. 32 Burges v Wickham (1863) 3 B & S 669, 693--4: Bradley (FC) & Sons Ltd v Federal Steam Navigation Co (1926) 24 LlLRep 446, (1927) 27 LlLRep 395: w"stem Canada Steamship Co Ltd v Canadian Commercial Corp [196012 Lloyd's Rep 313 (Supreme Court of Canada). 33 See further below for discussion of time of compliance and the doctrine of stages. 34 (1863) 3 B & S 669. 3S ibid 696.

570

571

Sub-standard Shipping
for the voyage as was in such adventure usual and proper; though it might not

Seaworthiness in Voyage Policies

vessel and the safery of the master and crew. 4' This is, however, ro impute a
regulatory function to marine insurance law inconsistent with its general private

make her as fit for the voyage as would have been usual and proper if the adventure had been that of sending out an ordinary seagoing vessel.

Having disclosed all material facrs, the assured did not warrant the prudence of the adventure; rather, thar was for the underwrirer to judge in deciding whether to accept the risk and the level of premium. 36

B. Seaworthiness in Voyage Policies

19.20 Into every voyage policy," whether on cargo, hull, freight, or other interest," there is implied a warranry of seaworthiness of the vessel. Although the basis of the warranty today is section 39(1 )-(4) of the Marine Insurance Act 1906, the classic exposition of the warranry remains thar of Parke B in Dixon v Sadler:"
In the case of an insurance for a certain voyage, it is clearly established that there is an implied warranty that the vessel shall be seaworthy, by which it is meant that she shall be in a fit state as to repairs, equipment, and crew, and in all other respects, to encounter the ordinary perils of the voyage insured, at the time of salling upon it. If the assurance attaches before the voyage commences, it is enough that the state
of the ship be commensurate to the then risk; and, if the voyage be such as to require a different complement of men, or state of equipment, in different parts of it, as, if it were a voyage down a canal or river, and thence across the open sea, it would be enough if the vessel were, at the commencement of each stage of the navigation, properly manned and equipped for it. But the assured makes no warranty to the underwriters that the vessel shall continue seaworthy, or that the master or crew shall do their duty during the voyage, ..

law character and capricious in its operation, since it applies regardless of whether the assured has any control over the vessel at the time the warranry attaches. 43 The true explanation seems ro relate to the nature of the adventure insured under a voyage policy. The underwriter, when assessing the risk of a particular voyage, must have the right to assume a certain fitness of the vessel ro encounter the ordinary hazards of the adventure in order to fix an appropriate premium. It is importanr to remember that the law on seaworthiness was established when the ]ast-in-time concept of proximiry prevailed. Simply ro exclude losses caused by unseaworthiness would have failed to protect the insurer, as unseaworthiness leading ro rhe loss of a vessel would have been disregarded as remote and irrelevant, leaving the insurer liable for a loss by perils of the sea." Hence the resort to the warranry, a blunderbuss of an instrument for the purpose, as the absence of any requiremenr of a causal link between a breach of
warranty and a casualty protects the insurer even where the unseaworthiness contributes in no way to the 10ss,45

(2) Time of Compliance and the Doctrine of Stages The implied warranry of seaworthiness is prima ftcie confined to the com- 19.23 mencement of the voyage. Supervening unseaworthiness affords the underwriter no defence. 46 Nor can it be argued in freight insurance that the warranry attaches at the time of conclusion of the freight-generating contract." Where, however, different legs of rhe one voyage embrace differenr maritime condirions, requiring the vessel to be seaworthy for all such conditions at the inception of the voyage could impose an impossible burden. Consequently, the seaworthiness warranry is relaxed by the doctrine of stages, permitring one to distinguish,
for example, a stay in porr, a river voyage, and a sea voyage. 48 In such a case, the

19.21

Notwithstanding the general applicabiliry of rhe warranry ro all voyage policies, a cargo owner is unlikely to have any control over the condition of the carrying vessel. Consequently, modern cargo policies severely restrict the circumstances in which a cargo underwriter can invoke breach of the seaworthiness warranry.40 (1) Rationale for the Warranry

19.22 The basis of the implication of the warranry41 has been stated as being a desire to ensure rhat persons with an insurable interest arising out of the adventure do nor, by reason of their insurance cover, grow careless of the condition of the

" Wilkie v Ceddes (1815) 3 Dow 57; Douglas v Scougall (1816) 4 Dow 269. cf Christie v Secretan (1799) 8 TR 192, 198.
43 Thus, rhe warranty may attach to the ship when in a foreign port, and, although the position is mitigated by the modern Institute cargo clauses, applies equally to policies taken out by those with interests only in cargo or freight and, consequently, with little or no control over the vessel. See Thompson v Hopper (1856) 6 EI & BI 172, 188. 44 For discussion of causation in the context of unseaworthiness, see 19 AOf[ below. 45 Foley v Tabor (1861) 2 F & F 663,673. For a contrary earlier view that did not survive, see weir v Aberdeen (1819) 2 B & Aid 320. 46 MIA 1906, s 39(1); Bermon v Woodbridge (1781) 2 Dougl 781; Wotson v Clark (1813) 1 Dow 336; Sadler v Dixon (1841) 8 M & W 895; McFadden v Blue Star Line[190511 KB 697. 47 Project Asia Line Inc v Shone (The Pride ofDonegal) [2002] EWHC 24 (Comm), [2002] 1 Lloyd's Rep 659, para 43. 48 Quebec Marine Insurance Co v Commercial Bank of Canada (1870) LR 3 PC 234, 241 ('definite, well-recognised, and distinctly separate stages of the voyage').

36 Burges v Wickham Was followed in Clapham v Langton (1864) 34 LJQB 46; Turnbull v Janson (1877) 36 LT 635 (where the assured failed to render the vessel as seaworthy as possible). 37 There is no implied seaworthiness warranry in time policies: see 19.30 below. 38 DanielsvHarris(l874)LRI0CPl,5. 39 (l839)5M&W405,414. 40 See 19.61-19.63 below. . 41 See Sir Michael Musrill, 'Fault and Marine Losses' [1988] LMCLQ310, 345-6.

572

573

Sub-standard Shipping
seaworrhiness of a vessel will be judged ar rhe commencement of each stage by reference to the circumsrances of that stage. Section 39(3) of rhe Marine Insurance Act 1906 thus provides that: 'Whete the policy telates to a voyage which is petformed in diffetent stages, during which the ship tequires different kinds of or further preparation or equipment, there is an implied wattanty that at the commencement of each stage the ship is seaworthy in respect of such prepatation or equipment fot the purposes of that stage.'
19.24 One particular manifestation of the doctrine of stages occurs where the policy

Seaworthiness in Voyage Policies

from Portneuf, about thirty-six miles up tiver from Quebec, warranted to sail on or before 28 October. Before that date, the vessel sailed from Portneuf with a crew adequate for river navigation. On 29 October, the vessel cleared customs at Quebec and took on extra crew for the sea voyage, continuing the voyage on 30 Octobet. Lord Ellenborough held that the sailing warranty required commencement of the voyage with a crew competent to work the ship to the port of destination and that, consequently, the departure ftom Quebec was too late and that from Portneuf did not comply for want of a crew sufficient for the whole voyage. Ridsdale was distinguished in Bouillon v Lupton on the ground that it was not necessary to perform the river voyage to Quebec with a ctew insufficient for the sea part of the voyage, a test of necessity of different provision derermining whether a voyage was divided inro stages. 52 Since the decision in Bouillon, however, the emphasis has shifted in two tespects. 19.27 First, the enquiry today is whethet a different leg of the voyage requires different or further equipment as opposed to whether it was necessaty nor to carry the differenr Ot further equipment from the ourset. Secondly, a test of necessity has given way to a tesr of commercial reasonableness, a development spurred by the emergence ofsteamships and the need ro stop for coaling. In The Vortigern,53 Collins L] stated rhat:
The custom of a particular trade ... or the convenience of the parties to a particular adventure, may make it reasonable that the vessel should be equipped up to a different standard at different stages of the voyage, and the warranty of seaworthiness has to be adjusted accordingly ... I regard this not so much as a concession to the shipowner as an adjustment of the standard of seaworthiness to the requirements which the conditions of the adventure, according to the understanding and convenience of both parties, demand.

attaches to a ship in port. Clearly the demands of a stay in port differ markedly from those of a voyage. Consequently, by virtue of section 39(2) of the Matine Insurance Act 1906, where tisk attaches while the ship is in port, the assured impliedly warrants that the ship 'shall, at the commencement of the tisk, be reasonably fit to encounter the otdinary petils of the POtt'. Although expressed by the statute as a second warranty additional to that of seaworthiness at the commencement of the voyage, section 39(2) effectively renders a stay in port at the inception of the tisk a different stage. According to Scrutton L]:49
A ship when she sails on her voyage, must be seaworthy for that voyage, that is, fit to encounter the ordinary perils which a ship would encounter on such a voyage. But she need not be fit for the voyage before it commences, and when she is

loading in pOrt. It is enough if, before she sails, she has completed her equipment and repair. But she must be fit as a ship for rhe ordinary petils of lying alloat in
harbour, waiting to sail. She must, in my view, be fit as a ship, as distinguished from a carrying warehouse, at each stage of her contract adventure, which may ... commence before loading.

19.25 Clearly it is important to know wherher a voyage is divided into stages. Bouillon

v Luptor!' concerned insurance on a voyage from Lyons to Galatz, the vessel being warranted to sail before a stipulated date. It left Lyons in time fully equipped for the tiver voyage to Marseilles, bur not fot the sea voyage thence ro Galatz. In accordance with usual practice, the vessel was then tigged our for the sea voyage at Marseilles, whence the ship sailed after the warranted sailing date. The Court of Common Pleas held that it was impossible not ro divide the voyage into two stages and customaty so to do. It was necessary to complete the rivet navigation with different equipment than that requited for the sea voyage. No seaworthiness warranty had been inftinged as the vessel had been fit for each stage at the commencement thereof Moreover, the sailing warranty had been fulfilled as the voyage had commenced from Lyons in time.
19.26 To be conttasted is Ridsdale v Newnham,51 a case that involved insurance at and

The warranty must teflect the evolution of commerce and 'be made to conform to modern exigencies-that is, to the rules of convenience which regulate the practice of merchanrs in respect of particular voyages', having regatd to the ordinary course of business. 54 In the context of bunkering, it has been stated that the shipownet has a discretion to fix any reasonable and convenient stages for the voyage. 55

52 See also Quebec Marine Insurance Co v Commercial Bank ofCanada (I870) LR 3 PC 234, 241. Pittegrew v Pringle (1832) 3 B & Ad 514 (discussed at 18.69 above) was similarly dis~ tinguished in Bouillon v Lupton on the basis of an absence of necessity, but far less convincingly

since different quantities of ballast were necessary for different stretches of the voyage. The decision in Pittegrew can only be defended on the basis of the wording of the policy which required that the vessel be 'ready for sea', but it is strongly arguable that this should have been interpreted as 'ready to proceed on the voyage' (see the discussion of reasonable interpretation of warranties at 18.67ff above).
53
54

49

Reed (AE) & Co v Page, Son & East Ltd [1927] 1 KB 743, 754. See also Annen v Woodman
" (1815) 4 Camp lll.

(1810) 3 Taunt 299. 50 (1863) 15 CB(NS) 113.

55

[1899] P 140, 159. ibid 160. See also Northumbrian Shipping Co Ltd v Timm (E) & Son Ltd[1939] AC 397, 404. Northumbrian Shipping Co Ltd v Timm (E) & Son Ltd [1939] AC 397, 409, 412.

574

575

Sub-standard Shipping
19.28 Where the risk attaches ro a vessel before loading is commenced and continues throughout a voyage, it might be possible to divide the voyage into a considerable number of periods during which the risks ro be faced are different. The ship may initially lie in port awaiting loading, then proceed to a loading phase followed by a further delay whilst awaiting departure. A voyage through calm waters to the open sea may be followed by a sea voyage, perhaps calling at one or more intermediate ports, and a further passage up river to the port of destination, followed in turn by a period of unloading. One should, however, beware treating each of these parts of the voyage as a separate stage. Thus, while it is possible that the loading and sea voyage stages may on the facts be separated by an intermediate period of lying in port or proceeding in sheltered waters, it is undesirable to multiply unduly stages of seaworthiness unless circumstances so require. 56 Merely because a vessel may legitimately call at an intervening port does not produce a voyage in stages, 57 and it has been stated that landing goods 58 by lighter at destination does not constitute a separate stage in the voyage. The burden of proving that a voyage is divided into stages, in order to defeat the underwriter's defence of unseaworthiness by reference ro the voyage as a whole,

Seaworthiness in Time Policies

refused to imply any seaworthiness warranty into time policies but recognized .a defence based upon knowledge of the assured."' As a result, section 39(5) of the Marine Insurance Act 1906 provides as follows: 'In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the ptivity ofthe assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.' In contrast with the position under voyage policies, the unseaworthiness may be 19.31
present at any time the vessel puts to sea, whether or not at the commencement

of a voyage or stage thereof, but the assured must be privy to .the unseaworthiness and the loss in respect ofwhich the claim is made must be causally linked ro the unseaworthiness. Of course, where the vessel receives its death wound before the time when a time policy is due ro attach, the insurer will never come on risk by reason of the ab initio impossibility of the insured adventure. 63
(I) Privity

lies on the assured. 59

19.29 It should be noted thar the doctrine of stages does not produce a continuing warranty of seaworthiness. Instead, the warranty operates at several isolated points during the voyage, requiring the vessel ro be seaworthy by reference ro the circumsrances of each stage at the commencement thereof'o but not thereafter. Accordingly, the warranty was not broken where a vessel was seaworthy at the commencement of loading but became unseaworthy during loading by reason of excessive deck cargo that caused the vessel to list and cargo to fall overboard. 61

The requirement of privity of the assured ro the unseaworthiness denotes that ir 19.32 must be known to the assured. In particular, it does not suffice that it be attributable ro the negligence of the assured, with the result that the law on unseaworthiness provides a hull insurer under a time policy with no defence against negligent failure properly to maintain the insured vessel. In The Gloria,64 Branson J, although rejecting an argument that privity was 19.33 confined ro actual knowledge of the unseaworthiness, stated his opinion as follows:
I think that if it were shown that an owner had reason to believe that his ship was in fact unseaworthy, and deliberately refrained from an examination which would

C. Seaworthiness in Time Policies

19.30 The approach ro seaworthiness in time policies is radically different from that adopted with respect to voyage policies. A line of nineteenth-century case law

have turned his belief into knowledge, he might ptOperly be held privy to the unseaworthiness of his ship. But the mere omission to take precautions against the possibility of the ship being unseaworthy cannot, I think, make the Owner privy to any unseaworthiness which such precaution might have disclosed. This approach was subsequently adopted and elaborated upon by the Court of 19.34 Appeal in The Eurysthenes. 65 It was emphasized that mere negligence in not

56

57
58

Svenssons Travaruaktiebolag v Cliffe Steamsbip Co [19321 1 KB 490, 493. Thin v Richards & Co [1892]2 QB 141. Lane v Nixon (1866) LR 1 CP 412. Quaerewhether transhipment by lighter in the course of

62

Gibson v Small (1853) 4 rILe 353, discussed by Sir Michael MustiH, 'Fault and Marine

the voyage constitutes a separate stage. " The Vbrtigern [18991 P 140, 155. 60 MIA 1906, s 39(3); Quebec Marine Insurance Co v Commercial Bank afCanada (1870) LR3

PC 234,241.

Losses' [19881 LMCLQ310. 347-9; Michael v Tredwin (1856) 17 CB 551; Thompson v Hopper (1856) 6 EI & BII72; rvsd on orher grounds (1858) El BI & EII038; Faw,us vSarsfield(1856) 6 E1 & BII92; Dudgeon v Pembroke (1877) 2 App Cas 284. 63 Fawcns v Sarsfield (1856) 6 EI & B1192, 203, 64 Compania Naviera Vascongada v British 6- Foreign Marine Insurance Co Ltd (The Gloria) (1935) 54 L1LRep 35, 58.
6S Compania Maritima San Basilio SA v Oceanus Mutual Underwriting Association (Bermuda) Lcd (The Eurysthenes) [1977] QB 49.

61 Svenssons TYavaruaktiebolag v Cliffe Steamship Co [1932] 1 KB 490: See also McFadden v Blue Star Line[190511 KB 697.

576

577

Sub-standard Shipping
knowing the truth was insnfficient, bnt equally that the concept of privity was not ro be equated with wilful misconduct. Privity is not synonymous with any species of fault, but connotes instead knowledge of the vessel's unseaworthiness, and an assured that, correctly, suspects unseaworthiness and refrains from enquiry in order ro avoid having suspicion transformed into certainty is taken as having the requisite knowledge. Thus, according ro Roskill L]: ... knowledge does not only mean positive knowledge, but includes that type of knowledge which is exptessed in the phtase 'turning a blind eye.' If the facts
amounting to unseaworthiness are there staring the assured in the face so that he must ... have realised their implication upon the seaworthiness of the ship, he

Seaworthiness in Time Policies

vessel was equipped with a carbon dioxide fire-fighting system. This worked by releasing the entirety of the gas into a sealed area so as to deprive the fire of oxygen. However, an engine-room fire rendered the vessel a constructive total loss because defective fire dampers meant that the room could not be properly sealed and because the master waited for too long to release the carbon dioxide and then did so only in stages. The defective dampers and the lack ofknowledge of the master rendered the insured vessel unseaworthy, but the question was whether the assured was privy to that unseaworthiness. The Star Sea was one of a fleet of over thirty vessels beneficially owned by the 19.37 assureds. The previous year, two other vessels in the fleet, the Centaurus and the Kastora, had been rendered constructive total losses by fires. Defective dampers were a cause in both cases and the Korean crew of the Centaurus had also failed to release the carbon dioxide until too late because of an 'extraordinary belief that it would damage the ship's engines.'o The assureds responded by replacing their Korean crews with Greek officers and Maldivian ratings. They did not, however, ensure that the insured vessel's safety equipment was thoroughly checked in the light of what was known abour the earlier fires, nor did they ensure that the vessel's new Greek master was properly trained in the operation of the vessel's carbon dioxide fire-fighting system. This was clearly an inadequate response but provided no basis for inferring knowledge about the state of the Star Sea itself At first instance, Tuckey J made no express finding of a deliberate decision to refrain from seeking confirmatory evidence of a subjective belief of unseaworthiness," and the higher courts reaffirmed the inadmissibility of inferring subjective knowledge from objective negligence. It was of course possible, as Tuckey] observed, that the assured failed to respond properly through an unwillingness to incur substantial repair costs." However, that inadequate response was consistent also with other states of mind and could not of itself establish priviry.73 To what must the assured be privy? Despite an earlier dictum of Buckley L] 19.38 suggesting that mere privity to the state of things that in fact rendered the vessel unseaworthy sufficed," it was held in The Eurysthenes 75 that the assured must know also rhat those facts had the consequence of rendering the vessel unseaworthy. Roskin L] accepted the phrase, suggested by counsel, 'conscious realisation of the implication of the facts making the ship unseaworthy'. 76

cannot escape from being held ptivy to that unseaworthiness by blindly or blandly ignoring those facts or by refraining from asking relevant questions regarding them in the hope that by his lack of inquity he will not know for certain that which any inquiry must have made plain beyond possibility of doubt."
19.35 It is important ro resist any temptation ro shade blind eye knowledge into negligence. The phrase 'blind-eye knowledge' originates in the refusal by ViceAdmiral Nelson at the Batrle of Copenhagen to recognize a signal from a superior officer. Nelson had lost an eye in an earlier engagement. Informed that the flagship had signalled ro disengage, Nelson raised a telescope ro his blind eye and is reported as saying: 'I have only one eye; I have a right ro be blind sometimes!' He continned with the engagement and won a famous vicrory. The important point for legal principle is that Nelson was well aware of what the flagship was signalling but deliberately ignored confirmarory evidence. A person wirh blind-eye knowledge has a clear and conscions suspicion of the existence of the relevant circumstances and deliberately refrains from seeking or receiving confirmation that the firm suspicion is true. In contrast, a failure to pursue 'an untargeted or speculative suspicion' amounts ro negligence only and cannot sustain a finding of privity.67 According ro Lord Hobhouse, whether the suspicion is sufficiently strong may be revealed by asking why the assured failed to seek further information. There is privity if the reason was to avoid suspicion being transformed into certainty. 'If, on the other hand, he did not enquire because he was roo lazy or he was grossly negligent or believed that there was nothing wrong, then privity has not been made out.'68 19.36 The limits of blind-eye knowledge are illustrated by The Star Sea:' The insured

66 ibid 76. See also Lord Denning MRat 68 and Geoffrey Lane LJ at 81. The ellipsis represents the clause 'had he thought of it', which conveys an incorrect connotation of an objective standard: Maniftst Shipping Co Ltd v Uni'Polaris Insurance Co Ltd (The Star Sea) [2001J UKHL I, [2003J I AC 469, paras 25, 114. 67 The Star Sea [2001J UKHL 1, [2003J lAC 469, para 116. 68 ibid para 25.

" ManifistShipping Co Ltd v Uni-Polaris Imurance Co Ltd (The StarSea)[199511 Lloyd's Rep
651, rvsd in part [1997J I Lloyd's Rep 360. affd [2001J UKHL I; [2003J lAC 469.

[2001] UKHL 1, [20031 lAC 469, para 28 per Lord Hobhouse. Something Lord SCOtt considered essential for a finding ofblind~eye knowledge: para 115. 72 [199511 Lloyd's Rep 651, 664. 73 [2001J UKHL I, [2003J lAC 469, para 35. 74 Thomas (M) & Son Shipping Co Ltd v London & Provincia! Marine & Genera! Insurance Co Ltd (1930) 30 TLR 595, 596. 7S [1977J QB 49. 76 ibid 76.
70 71

578

579

Sub-standard Shipping
According ro Geoffrey Lane LJ, the wording of section 39(5) was clear: 'It
says "unseaworthiness, not "facts which in the upshot prove to amount to

Seaworthiness in Time Policies

restraint upon the outbreak of the Second World War. The shipowner sought to evade liability to cargo owners by invoking a war risks exclusion covering such restraints, but the House of Lords held that the dominant cause of the loss was the vessel's unseaworthiness. Lord Wright observed that although a vessel might be unseaworthy and in breach of warranty at the commencement of the voyage, pending the casualty the unseaworthiness remains inoperative and possibly latent; once the casualty occurs, however, the unseaworthiness 'operates

unseaworthiness". '77

(2) Who is the Assured?

19.39 In determining who is the assured for the purposes of section 39(5), one adopts

the usual approach to attribution of rhe acts or knowledge of agents of identifYing the person or persons with responsibility with respect to the relevant marters such that their knowledge can fairly be attributed to the assured, bearing in mind the purpose of the legal rule in question." In the context ofsection 39(5), the appropriate question becomes 'who was involved in the decision-malting processes required for sending the [insured vessel] to sea?'79
(3) Causation

directly as a cause and, indeed, a dominant cause'. Noting that, following Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd,'4 causation
is not a matter of immediacy in time, he continued:
But unseaworthiness as a cause, operates immediately whenever it comes inw effect; it has until then only been dormant. The maxim causa proxima non remota spectatur is either meaningless or misleading until 'remota' and 'proxima' are defined. Thus unseaworthiness as a cause cannot from its very nature operate by itself; it needs the 'peril' in order to evince that the vessel or some part or quality of

19.40 Unlike the position with respect to voyage policies where the warranty renders causation irrelevant, unseaworthiness under time policies affords insurers no

it, is less fit than it should have been and would have been if it had been seaworthy, and hence the casualty ensues. A fitter ship would have passed through the peril
unscathed. In this way unseaworthiness is a decisive cause or as it is called a dominant cause. 85 ...

defence unless causally linked to the loss. Thus, inoperative fire-fighting equipment may render a vessel unseaworthy, but unless it could, if functioning, have been used successfully to combat the fire that in fact occurred, such unseaworthiness has no significance under section 39(5).'0

(a) Unseaworthiness and the doctrine ofproximate cause

19.41 A blueprint for analysing causation in the context of unseaworthiness may be

found in the law of carriage of goods by sea." Under rhe Hague-Visby Rules, where goods are shipped in good condition but arrive damaged, the shipowner is prima ficie liable ro the cargo owner but may seek to rely upon an exclusion in the contract of affreightment relating, for example, to loss caused by perils of the sea or negligence. The cargo owner in turn may seek to displace the exclusion by proving the vessel was unseaworthy at the commencement of the voyage and that the unseaworthiness caused the 10ss.82
19.42 In Monarch Steamship Co Ltd v Karlshamns Oljeftbriker,83 delay caused by

Accordingly, where a vessel is unseaworthy by virtue of negligent loading of 19.43 cargo and the master in consequence departs from his proper course and strands the vessel, the unseaworthiness is 'the real cause' of the casualty." Again, the dominant cause of an explosion resulting from contamination of a cargo of oil by the remains ofthe previous cargo is the unseaworthiness ofthe vessel by reason of the failure properly to clean the cargo tanks after discharging the previous
cargo. S7 In the law of marine insurance, nineteenth-century cases on causation in the 19.44

unseaworthiness resulted in a vessel being caught by a British government

context of seaworthiness inevitably require careful consideration in the light of the modern abandonment of the last-in-time approach to proximity of causation in favour of the dominant cause. In Redman v Wilson,88 a vessel insured under a voyage policy was rendered unseaworthy by negligent loading of the homeward cargo. In order to prevent it from sinking and to preserve the cargo, the ship was run ashore. Parke B held the insurers liable for a loss proximately caused by a peril of the sea, namely stranding. The negligence was viewed as
causally remote and unseaworthiness received no causation mention.

77

ibid 81.

78

For fuller discussion of attribution, see 4.113-4.116 aboves.

Manifist Shipping 6- Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) (19971 1 Lloyd's Rep 360, 375 per Leggatt LJ. 80 Manifist Shipping 6- Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) (19951 1 Lloyd's Rep 651. 659. 81 See Leyhnd Shipping Co Ltd v Norw.ich Union F'ire Insurance Society Ltd[1918] AC 350, 368. 82 The Hellenic Dolphin [19781 2 Lloyd's Rep 336, 339. However, the shipownet is liable only in respect of loss caused by unseaworthiness attributable to its negligence; 83 (19491 AC 196.
79

(19181 AC 350. (19491 AC 196, 227. See also Smith, Hogg 6- Co Ltd v Black Sea 6- Baltie General Insurance Co Ltd (19401 AC 997, 1005. 86 Paterson Steamships Ltd v Canadian Co-operative Wheat Producers Ltd [1934] AC 538. 87 Mediterranean Freight Services Ltd v BP Oillnternationtd Ltd (The Fiona) [1993] 1 Lloyd's Rep 257. 88 (1845) 14 M & W 476.
84 85

580

581

Sub-standard Shipping
19.45

Seaworthiness in Time Policies

only ordinary risks simply because of the defective character of the hull, the assured cannot recover under the heading of perils of the sea,97 although the assured should be able to recover under the Inchmaree clause where the unseaworthiness constitutes a latent defect or has been caused by the negligence of a relevant person. 98

In Dudgeon v Pembroke," a vessel insured under a time policy underwent an examination in harbour by reason of having made more water than the weather justified. No explanation having been discovered, another voyage was commenced during which bad weather was encountered. The vessel tried unsuccessfully to reach port and was run ashore. The House of Lords held the underwriters liable for a loss by perils of the sea, rejecting their argument that the cause of the loss was unseaworthiness rather than a peril of the sea. In rejecting this argument, however, Lord Penzance adopted two differing approaches to causation and unseaworthiness. On the one hand, he referred to 'a loss proximarely caused by the sea, but more remotely and substantially brought abour by the condition of the ship',90 whereas, on the other hand, he stated that, by virtue of the causa proxima maxim, 'any loss caused immediately by the perils of the sea is within the policy, though it would not have occurred bur for the concurrent action of some other cause which is not within it'.91 Although the second approach recognizes that unseaworthiness and perils of the sea may be concurrent causes, with the insurer liable for the covered peril in the absence of any express exclusion of losses caused by unseaworthiness,92 both approaches favour the last-in-time view of proximity of causation. Warnings against equating marine insurance with carriage of goods in the context of causation and
unseaworthiness93 reflect such instances of this now obsolete insurance law

(b) The causation test ofsection 39(5)

Section 39(5) avoids the phrase 'proximately caused by' in favour of 'attribut- 19.47 able to', the phrase also adopted in the context of the wilful misconducr defence." This responds to the last-in-time approach to proximity of causation by permitting the courts to consider an orherwise legally remote if factually significant cause. Thus, if unseaworthiness necessarily increased the danger which led to the loss, the insurer would have a good defence even if, when rhe accident overtook the vessel, rhe accident was the cause of the loss most immediate in rime. 1Oo The position is the same today, except that, as discussed above, causation doctrine does nor today deny the unseaworthiness status as the, or a) proximate cause. 101 Where unseaworrhiness consritutes the proximate cause of a loss, insurers of 19.48 course do not need an unseaworthiness defence, since the assured's claim will fail for want of an operative covered peril. ,o2 In the context of the last-in-time approach to proximity of causation, section 39(5) established an important exceprion to the irrelevance of temporally, and therefore Jegally, remote causes. Given the modern dominanr cause approach to the concept of proximate cause, however, section 39(5) has been partly overraken by the transformation of
unseaworthiness from remote to proximate cause. The significance of section

approach to proximate cause.

19.46 It is suggested that, today, the causation dichotomy between marine insurance

law, given its modern 'dominant' approach to proximity, and the law of carriage of goods by sea should be formally abrogated. Where a vessel insured against perils of the sea sinks in weather which ranks as such a peril and does so because unseaworthiness rendered the vessel incapable of surviving, both unseaworthiness and perils of the sea should be classified as proximate causes. 94 In the absence of an express exclusion,95 the assured may recover for loss by perils of the sea." Unseaworthiness of itself is not, however, a peril of the sea. Where a vessel with an unseaworthy hull takes on water or sustains damage on encountering

39(5) in the modern law of marine insurance lies in irs requirement of privity. Where the unseaworthiness and a covered peril constitute joint causes of the casualty, the insurer will be liable unless it can establish the section 39(5)
unseaworthiness defence. 103

(1877) 2 App Cas 284. 90 ibid 295. 91 ibid 297. See generally 297-8. See]] Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1987J 1 Lloyd's Rep 32,37.
89
92

93

eg Thomas Wilson, Sons & Co v Owners ofthe Cargo per the Xantho (The Xantho) (1887) 12

App Ca, 503, 510.

S4 Frangos v Sun Insurance Office Ltd (1934) 49 LlLRep 354; JJ I.loyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss]ay]ay) [1987J 1 Lloyd', Rep 32; Manifist Shipping Cv Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1995J 1 Lloyd', Rep 651, 659 (fire and

unseaworthiness concurrent causes).

ss Where the unseaworthiness results from ordinary wear and tear, the insurer may invoke an exclusion cast in such terms. " JJ I.loyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss]ay]ay) [1987J 1 Lloyd's Rep 32.

97 ibid 41. See also Fawcus v Sarsfield (1856) 6 EI & B1 192; Mountain v Whittle[1921J 1 AC 615, 626; Capital Coastal Shipping Corp v Hartftrd Fire Insurance Co (The Cristie) [1975J 2 Lloyd's Rep 100. " The Cristie [1975J 2 Lloyd's Rep 100, 105. 99 MIA 1906, s 55(2)(a), discussed at 15.14-15.17 above. 100 Thompson v Hopper (1856) 6 EI & Blln; (1858) EI BI & EII038. 101 For reference to the proximate cause in connection with unseaworthiness and time policies, see Manifist Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1995J 1 Lloyd's Rep 651, 659. 102 Ballantyne v Mackinnon [1896J 2 QB 457. 103 ] ] I.loyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1987J 1 Lloyd's Rep 32; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1995J 1 Lloyd's Rep 651, 653-4.

582

583

Sub-standard Shipping
(4) Multiple Instances of Unseaworthiness 19.49 A vessel might be unseaworthy in several respects with the assured privy to some but not all. On a literal reading, section 39(5) of the Marine Insurance Act 1906 would provide an insurer with a defence regardless of the absence of any causal link between the unseaworthiness to which the assured was privy and the loss in respect of which the claim is made. This is not how the subsection has been interpreted. In Thomas v Tjne & wear Steamship Freight Insurance Association, 104 a vessel put to sea unseaworthy by reason of the state of the hull and also an inadequate crew. An arbitrator found that the subsequent loss of the vessel was caused by the state of the hull but that the assured was privy only to the inadequacy of the crew. In these circumstances, the insurers were held liable for the loss, Atkin J observing that the intention behind section 39(5) was that the assured should be unable to recover in respect of a loss occasioned by its own fault. ' s

ProofofUnseaworthiness
where the copper sheathing had worn off and the vessel was declared unseaworthy on 15 July. The trial judge cortectly direcred the juty that, as a matter of law) there was a prima facie presumption in favour of seaworthiness with the burden of proving unseaworthiness lying on the insuter. However, he continued that, if the inability of the ship to proceed on the voyage became evident within a short time of sailing, as a marter of law it was then presumed that this inability was present at the time of sailing and the burden of proof shifted to the assured to prove the vessel seaworthy at that time. He further directed the jury that, again as a matter oflaw, the period of time from 4 June to 15 June was sufficiently short to shift the burden of proof The Queen's Bench Division, upheld by the Court of Appeal, ordered a new 19.53 trial on the grounds of a misdirection. Although it was possible to read earlier authority as supporting a shifting legal burden of proof,'l0 an unexplained inability to prosecute the voyage, even if rapidly manifested, was held to give rise merely to an inference of fact. The judgment of the Queen's Bench Division was deliveted by Cockburn CJ: 111
If a vessel very shortly after leaving POrt founders, or becomes unable to prosecute her voyage, in the absence of any external circumstances to account for such disaster or inability rhe irresistible inference arises, that her misfortune has been clue to inherent defects existing at the time at which the risk attached. But this is

19.50 In a second case arising out of the same casualty,'06 brought on a different policy, it was held at first instance that the srate of the hull and the inadequacy of the crew were joint causes of the loss. The Court of Appeal held that the insurers had a defence, provided the unseaworthiness to which the assured was privy was a cause of the 10ss.'07

not by reason of any legal presumption or shifting of the burden of proof but

D. Proof of Unseaworthiness
19.51 The insurer carries the burden of proving a vessel unseaworthy at the relevant s rime. ' Discharging this burden may, however, be facilitated by a factual-infer. ence arising from an unexplained deterioration in the condition of the vessel. 19.52 In the leading case of Pickup v Thames & Mersey Marine Insurance Co Ltd, 109 a vessel sailed on 4 June and encountered severe weather from 9 June until 15 June. Such a quantity of water was raken on that the master feared for the safety of rhe vessel and put back to the port of loading, which it made despite running aground. Surveys showed the hull to be badly strained and wormeaten

'" [1917] 1 KB 938.

105

This reference to fault must now be read subject to the judgment of the Court ofAppeal in

The Eurysthenes, discussed at 19.34 above.

106 Thomas (M) & Son Shipping Co Ltd v London & Provincial Marine & Genera/Insurance Co Ltd(1929) 29 TLR 736; affd (1930) 30 TLR 595. 107 See also Cohen (George)-Sons 6' Co v Standard Marine Insurance Co Ltd (1925) 30 Com Cas 139. 108 Davidson v Burnand(1868) LR 4CP 117; Hoffmann (C) & Co v British Genera/Insurance Co (1922) 10 LlLRep 434. '" (1878) 3 QBD 594.

simply as a matter of reason and common sense brought to bear upon the question as one of fact, inasmuch as in the absence of evelY other possible cause the only conclusion, which can -be arrived at, is that inherent unseaworthiness must have occasioned the result. Indeed, on closer examination, it becomes apparent that time enters to a very limited extent only into the question in arriving at this conclusion. If the vessel strikes on a rock or a sandbank immediately after. leaving port, or, while still in sight of it, is overpowered by a storm, the shortness of the time which has elapsed since she started becomes at once immaterial. On the other hand, though the vessel may have been at sea days, or even weeks, if during the whole of the time she has had favourable weather, fair winds, and calm seas, and yet goes down, or proves unable to continue on her course, the same inference as to inherent unseaworthiness presents itself as in the former case, though, perhaps, with diminished cogency in proportion as the interval has been longer. But in the latter case, as in the former, the inference arises from the impossibility of ascribing the result to any other cause than the condition of the vessel on starting the voyage, the interval of time being matter of very secondary consideration, if any. It is from the entire absence of any other cause than inherent unseaworthiness that the probative value of such a combination of circumstances is derived. Time can enter to a very limited extent only, if it enters at all, into the question as a factor in leading to the result. It certainly cannot be said of itself and without more, to give

110

11&"on v Chrk(1813) 1 Dow 336.

", (1878) 3 QBD 594, 597-8.

584

585

Sub-standard Shipping
rise to any new presumption oflaw, or as a matter of law to shift the onus of proof from the parry on whom the law has cast it.

Unseaworthiness and Cover under the Inchmaree Clause

E. The Relationship between Unseaworthiness and Cover under the Inchmaree Clause
Unseaworthiness of the insured vessel may give rise to loss falling within the 19.56 tetms of the Inchmaree clause. A latent defect may render a vessel unseaworthy and a shaft may break or a boiler burst because it, and thetefore the vessel, was not reasonably fit to withstand the ordinary perils of the insured adventure. To what extent do the unseaworthiness defences and the Inchmaree clause conflict and, in the event of conflict, which prevails? In The Lydia Flag, '17 the relevant provisions of the Inchmaree clause were held, 19.57 as a matter of contractual interpretation, to constitute exceptions from an express suspensive condition of seaworthiness at the inception of cover and of due diligence to maintain seaworthiness through the duration of the policy. If the suspensive condition wete read as overriding the Inchmatee clause, the result would be considetably to reduce, although not to eliminate, the cover ostensibly conferred by the televant parts of the Inchmaree clause. This was not a commercially sensible interpretation. A similar approach is appropriate for the relationship between the warranry of 19.58 unseaworthiness implied into voyage policies and the express provisions of the Inchmaree clause. Were the warranty to ovetride, the relevant provisions of the Inchmaree clause would be largely deleted. Latent defect cover, fot example, would be confined to defects that arose after rhe commencement of the voyage or wete sufficiently minor and unlikely to progress during the insured adventure so as to avoid a breach of warranty. It is suggested that this, too, would not be a commercially sensible interpretation. 118 In the context of time policies, there is unlikely to be a conflict. The privity of 19.59 the assured requited by the unseaworthiness defence is incompatible with latency. Moteover, cover under the Inchmaree clause is subject to the due diligence proviso. If, for example, an assured knows when the vessel purs to sea that a shaft is liable to bteak or a boiler is liable to burst and fails to intervene, it is unlikely that any loss resulting from such a casualty will not result from a want of due diligence by the assured, so that recovery will be denied. A conflict could arise only in the unlikely situation that citcumstances ofemergency mandated the vessel sailing notwithstanding its unseawotthy condition known to the assured. '19

19.54 This factual inference derived from appropriate circumstances has been likened to the res ipsa laquitur doctrine, of value only if no competing evidence of any credibility is adduced'12 Where a vessel capsized and sank within twenty-four hours of leaving port, apparently without encountering any external cause for the casualty, the possibility of a factual inference of unseaworthiness was overridden by evidence of mismanagement of the vessel aftet sailing.'" In The Tatjana,114 in contrast, a vessel's after feed pump, which served the boilers with fresh water, broke down within a few hours of putting to sea and two other pumps that might have been expected to substitute wete unable to do so, necessitating feeding of the boilers with sea water. The shipowner sought general average contribution to consequential expenditute from cargo owners, who resisted on the basis that the vessel was unseaworthy at the commencement of the voyage. The House of Lords held that, in the circumstances, the shipowner bore an onus of proving seaworthiness, which had not been discharged. Lord Shaw fully acknowledged that the burden of proving unseaworthiness lay on the party so alleging, but affirmed that this principle of law in no way impaired 'certain presumptions of fact' arising from, for example, the age, admitted defects, and classification or absence of classification or survey of the ship, a generally poor and deterioraring recotd of the vessel, and breakdown of machinery 'immediately, or almost immediately,' after sailing."' In other wotds, in the absence of rebuttal evidence from the shipowners, the known facts

provided circumstantial evidence sufficient to prove unseaworthiness.

19.55 It should, of course, always be recollected that, even if an insurer is unable to persuade a court of the unseaworthiness of a vessel, whether by direct or circumstantial evidence, the assured will not recover unless able to prove on a balance of probabilities that the casualty was caused by a covered petil. The insurer's evidence may be insufficent to establish unseaworthiness yet sufficient to prevent the assured from discharging its burden of proof '16

m Waddle v Wallsend Shipping Co Ltd[1952J 2 Lloyd's Rep 105, 139. Ajum Goolam Hossen & Co v Union Marine Insurance Co Ltd [190 IJ AC 362. '" Lindsay v Klein (The Tatjana) [1911] AC 194 115 ibid 203. According to the American case of Capital Coastal Shipping Corp v Hartford Fire Insurance Co (The Crfstie) [197512 Lloyd's Rep 100, 105, thesinking of a vessel in calm water
113

gives rise to a presumption of unseaworthiness that denies recovery unless either the assured can adduce rebuttal evidence of seaworthiness, which will in turn raise a counter~presumption ofloss by perils of the sea, or the unseaworthin~s was caused by a latent defect or act covered by the Inchmaree clause, This American formulation goes beyond English law,

117 Martin Maritime Ltd v Provident Capital Indemnity Fund Ltd (The Lydia Flag) (1998] 2 Lloyd's Rep 652.

'" Rhesa Shipping Co SA v Eamunds (The Popi M) [1985J 1 WLR 948, dIscussed at 7.49-7.51
above. '

See also 9.25 above. eg a hostile invasion or revolution threatens to destroy the vessel or detain it for an extended period.
118
119

586

587

Sub-stand4rd Shipping
In such a case, there appears no reason to deny insurers the benefit of the section 39(5) defence.

Cargo Policies
vessel. US Moreover, although seaworthiness does not extend to fitness to receive particular cargo, secrion 40(2) of the Marine Insurance Acr 1906 implies into

F. The Relationship between Unseaworthiness, Inherent Vice, and Ordinary Wear and Tear
19.60 Both unseaworthiness and lack of cargoworthiness on the one hand and inher-

ent vice and ordinary wear and tear on the other hand afford insurers defences based on the lack of fitness for the insured adventure. The relationship between them depends on the type of cover. In cargo insurance, the doctrines complement one another. Seaworthiness and cargoworthiness relate to the carrying vessel, while inherent vice and ordinary wear and tear concern the insured goods. In principle, the cargo insurer is at large to invoke any of the doctrines, although in practice the abiliry to invoke seaworthiness and cargoworthiness is severely circumscribed by the terms of the policy.120 The posirion is different in hull insurance. The unseaworthiness defences are confined by various limitations. The warranty is confined to the condition of the vessel at the commencement of rhe insured voyage or any stage of that voyage. The time policy defence is confined to the condition ofthe vessel when it puts to sea and is also subject to ptoofofprivity and causation. To allow a hull undetwriter to circumvent limitations of timing or privity by invoking inherent vice would be to ignore the balance of risk struck by marine insurance law and codified by Parliament with respecr to the condition of an insured vessel. 121 The result is that the doctrine of inherent vice has no role to play in hull insurance. 122 The same is true of the defence of ordinary wear and tear.'"

cargo policies a further warranty that 'ar the commencement of rhe voyage rhe ship is ... reasonably fit to carry the goods or other moveables to the destination contemplared by the policy'. The common law is, however, capable of considerable unfairness to cargo owners, since they will generally have little, if any, knowledge ofor control over the condirion of rhe carrying vessel. Consequently, modern cargo policies heavily dilute the common law on seaworthiness and cargoworthiness by express contractual provision. Clause 5 of the Institute Cargo Clauses (A), (B), and (C)126 provides as follows:
5.1 In no case shall this insurance cover loss damage or expense arising from unseaworthiness of vessel or craft, unfitness of vessel craft conveyance container or liftvan for the safe carriage of the subject-matter insured, where the Assured or their servants are privy to such unseaworthiness or unfitness, at the time the subject-matter is loaded therein. 5.2 The Underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject-matter insured to destination, unless the Assured or their servants are privy to such unseaworthiness or unfitness.

G. Cargo Policies
19.61

In a voyage policy on cargo, it is not a condition precedent to the attachment of the risk, and the assured does not warrant, that the cargo is fit at the commencement of the voyage to encounter the ordinary vicissitudes of the voyage. 124 Voyage policies on cargo do attract the warranty of seaworthiness of the carrying

Clause 5.2 relaxes rhe common law in the assured's favour by providing for 19.62 waiver of a breach of the seaworthiness and firness for cargo wartanties unless the assured is privy to such breach.'" The rime at which such privity must exist is not stipulated. It might be suggesred rhat it includes all moments during the voyage when the wartanties attach. It would, however, be commercially sensible, and consistent wirh the purpose behind the waiver, to limit privity under clause 5.2 to such time when the assured could prevent the cargo from being (further) exposed to the shortcomings of the vessel and it would be commercially sensible for the assured to do so, in the sense rhat a reasonable uninsured cargo owner would so act. '28 It remains irrelevant under clause 5.2 that there may be no causal link between the breach of warranty and the casualty. Clause 5.1, in contrasr, is an exclusion clause that operates independently 19.63 of the warranties. The exclusion again requires the assured's privity to the
125 MIA 1906, s 40(2); Gibson v Small(l853) 4 HLC 353, 373; Biceard v Shepherd(1861) 14 Moo PC 471; Daniels v Harris (1874) LR 10 CP 1. In accordance with general warranty principles, the unseaworthiness of the vessel need not cause the loss of or damage to the goods: Koebel v Saunders (1864) 17 CB(NS) 71. 126 Also the Institute War Clauses (Cargo) and Strikes Clauses (Catgo), d 4. 127 For the meaning of privity in this context, see the discussion of seaworthiness in time policies at 19.32-19.37 above. Note that cl 5.2 is not a seaworthiness admitted clause, as to which see Parfitt v Thompson (1844) 13 M & W 392. In the Institute Commodity Trades Clauses (A), (B), (C) the equivalent waiver is not subject to any privity qualification: d 5.3 theteof. 128 See amher the discussion of d 5.1, in 19.63 below.

See 19.61-19.63 below. 121 Dudgeon v Pembroke (1877) 2 App Cas 284; Frangos v Sun Insurance Office Ltd (1934) 49 LlLRep 354, 359. 122. A possible exception is the rare case where unseaworthiness is the sole proximate cause of the loss: JJ Lloyd Imtruments Ltd vNorthern Star Insurance Co Ltd (The Missjay jay) [1987J 1 Lloyd's Rep 32, 37. Ofcourse, the insurer will in any event not be liable simply because the proximate cause is not an insured peril. Inherent vice is, therefore,~n unnecessary inclusion in the legal analysis. 123 Anderson v Morice (1874) LR 10 CP 58, 68-9. . 124 MIA 1906, s 40(1); Koebel v Saunders (1864) 17 CB(NS) 71:
120

588

589

Sub-standard Shipping
unseaworthiness or unfimess, but expressly ties that privity to the time of loading of rhe goods on board the unseaworthy or unfit craft. Although, by virtue of the comma in the last line of clause 5.1, the phrase 'at the rime the subjectmatter is loaded thereon' qualifies the time of the unseaworthiness or unfitness rather than the time of loading, the excluding privity of the assured must relate
to 'such' unseaworthiness or unfitness, namely unseaworthiness
Or

Contractual Responses to Sub-standard Shipping

(2) Ownership, Management, and Flag The primary responsibility for the operation of well built, equipped, manned, 19.66 and maintained vessels naturally falls on the vessel's owners and managers. Shortcomings in the approaches of individual shipowners and managers, together with the practical need of international shipping for harmonized standards, have led to a significant number of safety standards being prescribed by international maritime law with the primary responsibility for enforcement being allocated to the vessel's flag state. For hull and freight underwriters, therefore, the identity of the owner, managers, and flag state is of critical importance in the assessment of the risk. A change of identity represents a material alteration of risk, which may signal a less diligent attitude towards standards. A change of flag, for example, may indicate a desire by the owner to move the vessel to a flag state with a more relaxed approach to compliance. The Institute hull and freight clauses and International hull clauses respond 19.67 to underwriters' concerns through a clause accorded paramount status that
provides for automatic termination of cover, unless underwriters agree to the

unfitness at

that time. Such an interpretation would again serve to confine relevant knowledge of the state of the carrying vessel on the part of the cargo owner to a time when it is more likely to be able to respond by instructing that the cargo not be exposed to the inadequacies of the vessel. A furrher restriction in compatison with the statutory warranties is introduced in the form of causation by requiring the casualty to 'arise from' the unseaworthiness or unfitness. On the other hand, the exclusion is not confined to the ship, but extends to all forms of conveyance on which the goods are loaded in the course of transit.'29

H. Contractual Responses to Sub-standard Shipping

19.64 The weakness in the law on seaworthiness under time policies has prompted

insurers to address the problem posed by sub-standard shipping by a variety of express contractual terms. (1) The Due Diligence Proviso to the Inchmaree Clause
19.65 Inadequate maintenance may surface as a claim under rhe Inchmaree clause in

contrary in writing, upon the occurrence of any of the following four events indicative of a change of control over or effective supervision of the vessel's opetation or condition: (a) any change, voluntaty or otherwise, of ownership or flag; (b) any transfer of the vessel to new management; (c) any bareboat charter of the vessel; or (d) any requisition of the vessel for title or use. The instantaneous termination of cover is, however, subject to two provisos. First,

if the

respect of loss or damage caused by a broken shaft, burst boiler, or latent defect. The insurers' protection lies in the proviso to the Inchmaree clause, whereby liability is excluded if it results from the want of due diligence of specified persons. In the 1983 Institute hulls clauses, the specifed persons are rhe assured, owners, or managers. The 1995 clauses saw an extension of the proviso to include 'superintendents or any of their onshore management'. This extension was designed to catch lower level management to whom might be delegated immediate responsibility for maintenance. However, it proved commercially unacceptable, and it is understood that the 1995 clauses are highly unlikely to be used without amendment of the proviso so as to delete the reference to superintendents and onshore management. The International Hull Clauses (01111103) revert to the 1983 wording.

vessel is at sea with cargo or in ballast at the time of the relevant event, it remains covered, if requested, for its planned voyage until arrival at the final port of discharge of cargo or destination if in ballast. Secondly, if the vessel is requisitioned for title or use without the prior written agreement of the assured, cover terminates fifteen days after requisition irrespective of the location ofthe vessel. "0 In addition, the International hull clauses also provide, subject to contrary 19.68
written agreement

by underwriters, for automatic termination the moment that

a vessel sails, with Or wirhout cargo, with the intention that it be broken up or sold for breaking Up.'" Where the owners of a vessel have decided it has only scrap value, that vessel clearly presents a different risk in terms of condition and attitude towards safety standards. In the event of termination, the Institute and International hull and freight 19.69 clauses provide for a pro rata daily return of premium unless the

129

Contrast, in the context of the warranties, Lane v Nixon (1866) LR 1 CP 412.

130 Institute Time Clauses Hulls (1110/83), cI 4.2; (1111/95), cI 5.2; International Hull Clauses (1/11/03), c114.1. 131 International Hull Clauses (1111/03), c114.2.

590

591

Sub-standard Shipping
vessel is rendered a total loss by insured or orher perils during the period of cover. 132
19.70 In addition, clause 14.4 of the International Hull Clauses (01111/03) imposes a

Contractual Responses to Sub-standard Shipping

only classification societies can meet. Consequently, it is classification societies ~hat carry out the vast quantity of survey and inspection work required under international maritime law. The 1995 Institute hull and freight clauses and the International hull clauses 19.73 seek to reinforce the work of rhe International Maritime Organization and lACS, while at the same time providing additional protection for underwriters by including new and enhanced provisions relating to classification. The main provision in the International Hull Clauses (01/11/03) is clause 13, which has paramount status. Clause 13.1 provides as follows:
At the inception of and throughout the period of this insurance and any extension thereof

continuing duty on the assured, owners, and managers:

.. . at the inception of and throughout the period of this insurance and any
extension thereof to 14.4.2 comply with all statutory requirements of the vessel's .flag state relating to

construction, adaptation, condition, fitness, equipment, operation and manning of the vesseL

Underwriters are not liable for any loss, damage, liability, or expense artributable to any breach. (3) Classification
19.71

13.1.1 the vessel shall be classed with a Classificarion Sociery agreed by the
Underwriters 13.1.2 there shall be no change, suspension, discontinuance, withdrawal or expiry of the vessel's class with the Classification Society 13.1.3 any recommendations, requirements or restrictions imposed by the vessel's Classification Society which relate to the vessel's seaworthiness or to her maintenance in a seaworthy condition shall be complied with by the dates

Marine insurance pre-dares the advent of international maritime standards for the condition and operation ofvessels, and marine insurers rapidly realized both the need for expert and objective inspection of vessels. Classification societies evolved to meet this need. A shipowner will enter its vessel with a classification society to have the society perform a variety of surveys and inspections of the hull and equipment. The leading classification societies are members of the International Association of Classification Societies (lACS), which promulgates new technical specifications for vessels 133 and oversees members' internal quality management systems and compliance with a code of ethics."4 Certification that a vessel is classed by certain classification societies, especially lACS memhers, will be used by a shipowner as evidence of the good condition of its vessel when seeking insurance cover. requiring a variety of surveys and inspections of vessels permit the national authotities ofsuch states to delegate the carrying out of such surveys and inspections to 'recognized organizations'. In practice, delegationrepresents the routine approach. The International Maritime Organization has adopted resolutions addressing eligibility for status as a recognized organization that, in practice,

required by that Sociery ... Subject to contrary written agreement by underwriters, breach of clause 13.1 19.74 triggers immediate and automatic termination of cover. However, by vtrtue of clause 13.2, if the vessel is at sea at the time of breach, termination is postponed until arrival at the next port. Moreover, a breach of clause 13.1.2 that results from loss of or damage to the insured vessel covered under the International Hull Clauses (01111/03) themselves or under the current Institute War and Strikes Clauses (Hulls-Time) triggers termination only if and when the vessel sails from its next port without the prior approval of the classification society. In the event of termination under clause 13, the assured is entitled to a pro rata 19.75 daily return of premium provided the vessel has not been rendered a total loss while insured under the policy or any extension of cover. 135 In addition to the termination provision of clause 13, clause 14.4 imposes a 19.76 duty on the assured, owners, and managers
.. . at the inception of and throughout the period of this insurance and any extension thereof to

19.72 In addition, international conventions that impose oblig~tions on flag states

14.4.1 comply with all requirements of rhe vessel's Classification Sociery regardInstitute Time Clauses Hulls (1/10/83), cl4; (I/ll/95), d 5; International Hull Clauses (1111103), cl14.3. 133 Known as 'Unified Requirements'. 134 A classification society surveyor may, eg, face a conflict of interest between the fundamental duty to act impartially and ethically as req,uired by lACS and pressure from a shipowner to waive certain standards or adopt a less rigorous approach in the interests of COSt. lACS auditors, independent from member societies, often accompany surveyors to ensure that standatds are
132

ing the reporting to the Classification Society of aCCIdents to and defects the vessel.

III

upheld.

135

1nternarional Hull Clauses (1111103), cl13.2.

592

593

Sub-standard Shipping
Underwriters are not liable for any loss, damage, liability, or expense attributable to a breach of this duty.
19.77 The classification provisions in the 1995 Institute hull clauses are broadly simi-

Contractual Responses to Sub-standard Shipping

the vessel in question. The flag state is then responsible for verifying compliance with the ISM Code and then certifying that compliance through the issue of two key documents. First, a Document of Compliance is issued to an ISM Code-compliant com- 19.80 pany. This 'should be accepted as evidence that the Company is capable of complying with the requitements of the Code' .'39 In othet wotds, a Document of Compliance evidences the existence of a confotming safety-management system. Each vessel should carty a copy of the Document of Compliance. Secondly, a Safety Management Certificate is issued ro a specific ship, attesting to the fact that on inspection the company and the shipboard management of that vessel were found to operate in accordance with the ISM Code-compliant safety-management system.'40 Clause 13 of the International Hull Clauses (01/Il/03), which has paramount 19.81 status, imposes continuing obligations at the inception of and throughout the period of cover that the vessel owners, or party assuming responsibility from the owners for operating the vessel, hold a valid Document of Compliance in respect of the insured vessel and that the vessel has a valid Safety Management Certificate.'41 In the event of breach, cover terminates auromatically, subject to deferment of termination if the vessel is at sea at the date of breach until arrival at the next port. Such termination results in a pro rata daily return of premium unless the vessel has been rendered a total loss by whatever cause during the period of cover.'42 Clause 13 confines itself, therefore, to the holding of the twO key documents. It 19.82 is indeed illegal for a company ro operate a vessel unless it holds a Document of Compliance and a Safety Management Certificate has been issued in respect of the ship. Clause 13, however, obviates any need for an underwriter to invoke an illegality defence. Clause 13 does not, however, enquire into the reality behind the documents. Where the reality is that the company and shipboard management do not in fact operate the vessel in accordance with an ISM Codecompliant safety-management system, the company is operating illegally and underwritets may invoke the wartanty oflegality under section 41 of the Marine Insurance Act 1906.'43 An isolated breakdown in the system would not, however, support an illegality defence.

lar although differently structured. However, the 1983 clauses contain no express requirement that the vessel's classification society is agreed by underwriters, a provision added to prevent an owner from entering the vessel with a

less reputable society, nor any equivalent to clauses 13.1.3 or 14.4 of the 2003 International hull clauses. (4) The International Safety Management Code
19.78 The International Management Code for the Safe Operation of Ships and for

Pollution Prevention (known as the International Safety Management (ISM) Code) was adopred by the International Maritime Organisation on 4 November 1993'36 and incorporated the following year into the Safety of Law at Sea Convention 1974 (SaLAS) as Chapter IX. This rendered compliance with the ISM code mandatoty for all states that adhere to SaLAs. The Code was adopted into domestic English law by the Merchant Shipping (Inrernational Safety Management (ISM) Code) Regulations 1998. 137 It came into force at staggered dates for different classes of vessels, finally becoming binding for all vessels within its remit as from 1 July 2002.
19.79 The core requirement of the ISM Code is set our in paragraph 1.4 as follows:

Every company138 should develop, implement and maintain a safety-management system (SMS) which includes the following functional requirements: 1 a safety and environmental-protection policy; 2 instructions and procedures to ensure safe operation ofships and prot~ction of the environment in compliance with relevant international and flag state legislation; 3 defined levels ofauthority and lines ofcommunication bet:':\Tccn, and amongst,
4 5 6 shore and shipboard personnel; procedures for reporring accidents and non-conformities with the provisions

of this Code;
procedures to prepare for and respond to emergency situations; and procedures for internal audits and management reviews.

Further provisions of the Code elaborate in general terms on specific aspects of the required safety-management system while leaving any individual company flexibility ro design rhe particular system most appropriare for the company and ResolurionA.74I(l8).
SI 199811561.

139
140

14'
n6 138 137

Meaning 'the owner of the ship or any other organisation or person such as the manager, or th~ bareboat charterer, who has, assumed the re.sponsibility for operation of the ship from the shipowner and who, on assumlllg such responsibility, has agreed to take,'over all duties and responsibility imposed by the Code': ISM Code, para 1.1.2.

143 It is unclear whether exposing a vessel to maritime perils in the absence o~ an operative safety-management system as required under the ISM Code renders the adventure Itself unlawful or renders unlawful the manner of performance of a lawful adventure. However, the MIA 1906, s 41 warranty of legality covers both.

Safety of Life at Sea Convention 1974, Ch IX, reg 4; ISM Code, paras 13.2-13.4. International Hull Clauses (01111103), clI13.1.4-13.1.5. '" Internarional Hull Clauses (01111/03), cl13.2.

ISM Code, para 13.2.

594

595

20
RIGHTS OF THIRD PARTIES

A. Contracts (Rights of Third Parries) Acr 1999

20.02 20.07 20.08 20.12 20.14 20.21 20.27 20.33 20.36

B. Assignment (1) Assignment of the subject-matter insured

(2) Assignment of the benefit of the contraCt of insurance (3) Assignment of the policy (4) Protection of the insurer (5) Contractual restrictions on assignment

(2) QualifYing events for a transfer of rights (3) The timing of a transfer of rights (4) Ant)-avoidance provisions (5) The rights that arc transferred

C. Third Parties (Rights against Insurers) Act 1930 (I) Insurance policies covered

(6) Distribution of inadequate fund (7) Provision of information (8) Relationship between assured and third party in the light of a statutory transfer of rights (9) Relationship between insurer and assured in the light of a statutory transfer of fights (10) Recovery of the assured

20.40 20,42 20.44 20.48 20.73 20.74

20.81

20.82 20.83

The doctrine of privity of contract applies to insurance contracts as a matter of 20.01 common law as it applies to all other contracts. In principle, therefore, only the assured is entitled to the benefit of the insurer's promise of indemnification. For example, a 'loss payable' (or 'loss payee') clause that directs the insuter to pay the proceeds of any claim to a designated third party confers no rights on that third party as against the insurer. Payment to the third party will generate a good discharge of the insurer's indemnification obligation owed to the assured under the insurance contract' and failure to pay the designated third party will constitute a breach of contract by the insurer actionable by the assured, but the third party receives no tight to claim payment from the insurer.' The privity rule is, however, subject to a number of exceptions both at common law and by virtue

For express provision to this effect, see International Hull Clauses (01/11/03), d 48.

, Iraqi Ministry ofDeftnee v Arcepey Shipping Co SA (The Angel BeZO [1979J 2 Uoyd's Rep 491,
497 (unless the clause constitutes or evidences an assignment of the assured's rights to the third parry); Canadian Imperial Bank ofCommerce v Insurance Corp ofIreland Ltd (1991) 75 DLR (4rh) 482 (Court of Appeal of British Columbia).

597

Rights ofThird Parties

of statute. Three such exceptions are of particular significance for contracts of
marine insurance. First, there is the general statutory exception to the privity

Contracts (Rights ofThird Parties) Act 1999

into.' Thus, in the case of a contractor's all risks policy taken out by a head contractor for the benefit of itself and, inter alia, all sub-contractors, any subcontractor, even if engaged only after the insurance was procured, would qualifY as an identified third party under the 1999 Act. Where these two conditions are satisfied, rhe third party is entitled to enforce 20.05 the term and claim such remedies for breach as would be available were the third party a party to the contracr.' Moreover, by virtue of section 2(1) of the Act, the
parties to the contract are not permitted to rescind or vary the contract so as to

rule arising under the Contracts (Rights of Third Parties) Act 1999. Secondly, a third party may receive righrs by virtue of an assignment, rhe general law of assignment being supplemented by marine insurance law. Thirdly, a third party with a claim against the assured may benefir from a statutory rransfer of rights under a liability policy under the Third Parties (Rights against Insurers) Act 1930.

A. Contracts (Rights of Third Parties) Act 1999

20.02 At common law, the privity of contraer rule prevents a third party to a contract

from being entitled to enforce that contract even if the intention of the contracting parties is to benefit the thitd party and even if the contract itself provides that the third party is to have the right to enforce it.' The Contracts (Rights of Third Parties) Act 1999 was designed to bring an end to such frustration of the parties' intentions. It does so not by abolishing the privity of contract rule but rather by creating a statutory exception to the rule.
20.03 Section I (1) of the 1999 Act confers upon a third party to a contract a right to

extinguish or alter the third party's rights without the third party's consent,' provided rhe third party either has communicated its assent to the term or has relied on the term and the promisor is aware of that reliance or could reasonably be expected to have foreseen such reliance. Under section 2(3)(a), however, the contract may dispense with the requirement for the third party's consent. Accordingly, clause 36.2 of the International Hulls Clauses (01111/03) provides
for rescission or variation

by agreement between assured and underwriters with-

out the consent ofany third party that is granted a right ofenforcement and falls therefore within section 1(1)(a). Importantly, the statutory right of enforcement under section 1 is, by virtue of 20.06 section 3, subject to all the defences and rights of set-off, first, that arise from or in connection with the contract and are relevant to the term, or that the contract provides can be invoked against the third party and also, secondly, rhat the promisor could have raised against the promisee. 7 Assuming therefore that an
insurance contract contains a loss payee clause and a casualty occurs, an insurer-

enforce a term of that contract provided two conditions are fulfilled. First, either the contract so provides (section 1(1)(a)) or the term in question purports to confer a benefit on the third party (secrion 1(1)(b)). This latter alrernative is subject to the proviso, stated in section 1(2), that the proper interpreration of the contract as a whole reveals an intention that the third party should nOt be able to enforce. If the rest of the contract on its true interpretation is neutral as to third party enforceability, the proviso does not apply.4 One effect of section 1(2), therefore, is that parties may contract out of the operation of the 1999 Act. Accordingly, clause 36.1 of the International Hull Clauses (1/11103) provides that: 'No benefit of this insurance is intended to be conferred on or enforceable by any party other than the Assured, save as may be expressly provided herein to the contrary.' The effect of this is that no third party can avail itself of the 1999 Act merely because it falls within section 1(1)(b). An express grant of a right of enforcement, which would fall under section 1(I)(a), is required.
20.04 The second condition, srated by section 1(3), is rhat: 'The third party must be

promisor can assert against the designared third party payee (by way of extinction or reduction of the measure of indemnity) any defence or righr of set-off available if the assured itself were the payee and bringing the claim. The third party's claim would therefore be defeated entirely should the insurer, for example, be entitled to avoid for non-disclosure or misrepresentation,' or have a defence of dischatgefor breach of warranty or other alteration of risk or breach of condition precedent or serious breach of an innominate term, or should, for example, the cause of the loss be the wilful misconduct of rhe assured or the

, C(RTP)A 1999,,1(5).
6 Unless the contract provides that consent is not required (C(RTP)A 1999, s 2(3)(a or, in the circumstances stated in s 2(4), (5), the court or arbitral tribunal exercises its discretion to dispense with the requirement of consent. 7 In the case of defences arising from or in connection with the contract, the contract may provide that any or all such defences cannot be invoked against a third parry: C(RTP)A 1999, s

identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered

3(5).

Tweddle v Atkimon (186I) 1 B&5393. 4 Hirshin Shipping Co Ltd v Cleaves 6- Co Ltd [20031 EWHC 2602 (Carom), [2004J 1 Lloyd', Rep 38, pa,a 23.
3

8 The reference in C(RTP)A 1999 to defences arising 'from or in connection with the contract' removes any conceivable problem created by the nature of the duties of pre-formation disclosure and avoidance of misrepresentation. Compare the position in the law of assignment discussed

at 20.21-20.23 below.

598

599

Rights ofThird Parties

assured submit a fraudulent claim. Similarly, a tight of set-off of unpaid premium or ofdamages for a non-repudiatory bteach of an innominate term would be opposable against the third party. In this respe~t, the po~ition of a third party under the statute is analogous to that of an assIgnee taking the benefit of an assigned contractual ptomise 'subject to equities'. 9 In addition, the ptomisot can also invoke against the third party action under the 1999 Act any defences or rights of set-off and any counter-claims not ~rising ftom the contract that, in either case, arise directly between the promIsor and thltd party. An msurer would, therefore, be able to teject a claim brought by the third party in case of thitd party fraud with which the assured was not complicit. In addition, the insurer would be able to assert a right of set-off not opposable against the assured, for example for unpaid premiums on a different policy.

Assignment
:he absence of an adequate and contempotaneous agreement to ttansfer the msuran~e, any later assignment of the insurance is invalid. 12 In North ofEngland Pure Ozl~Cake Co v Archangel Maritime Insurance Co, 13 S insured a catgo of Im~eed 011 with the defendants. While in transit, the cargo was sold by S to the clalman;s on term~ that payment fell due on delivety. Part of the cargo was lost dunng unloadmg and before the claimanrs paid the price. Four months later, S handed the insurance policy to the claimants, and, aftet anorhet four months, S purported to endorse an assignment on the poliey. It was held that the claimants could sustain no action on the poliey. On delivery, S's interest in the subject-matter ceased and the poliey lapsed. No latet assignment was pos14 sible. Moteovet, since S maintained an interest in the subject-matter after the concltlsion of the conttact fot its sale because entitlement to payment was deferred tlntil delivety, it was impossible to imply an agreement to assign the pohey contemporaneous with formation of the sale contract. According to Cockburn C]: 15 parts WIth and the buyer tak~ at once the property, and all risks. In such a case, the policy, according to the established practice, passes as part of the shipping documents, and on asSIgnment the vendee can sue upon it in case of loss. And there is This is .not like the commOn case of the sale of a floating cargo, where the seller

B. Assignment
20.07 Matine insurance cases use the term 'assignment' to tefer to thtee diffetent types

of transfer, namely transfer of the subject-marter insured, of the benefit of the contract, and of the policy. Each of these transactions tequires separate consideration. (1) Assignment of the Subject-matter Insured
20.08 In the general law of personal property, the term 'assignment' is employed to

no hardship in this on the insurers, because they insured the safety of the cargo to the end of the voyage, and it is immaterial to them in whom the interest rests at the tim~ of the loss; and ther~ is great convenience in the practice, as it obviates
the neceSSIty of the vendee gettmg a fresh policy and facilitates the sale of cargoes at sea.

denote the mechanism for rhe transfer of interests in choses in action. It may, therefore, be an unfortunate choice of terminology in the context of hull Ot cargo insurance, albeit appropriate for freight.
20.09 CodifYing a principle well established in the case law,1O section 15 of the Marine

Insutance Act 1906 provides as follows: 'Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the conttact of insurance, unless there be an express or implied agreement with the assignee to that effect.'
20.10 Once the subject-matter insured has been ttansferred, the principle that insur-

In the case of a hull poliey incorporating either the Institute Ot International 20.11 hull clauses, a change of ownership automatically terminates at the time of the change, unless insurers have agreed to the contrary in writing. 16 Consequently, a contemporaneous agreement between vendor and purchaset of an insured vessel to ttansfer the institance is ineffective unless the institers' agteement is obtained.

~4 Whe~e policy and subject-matte,r arc ~eparated at the time of the loss, the insurer can dearly
resiSt a c1alffi because, of absence of eIther Insurable interest or insurance. This does not explain, however, why the pohcy should lapse upon such separation so as to preclude a later reunification. Presumably, the explanation is that separation produces a gambling policy rendered void under MIA 1906, s 4. It has also been suggested that an attempted assignment of the insurance before tran~fer of the subject-matter w~uld be 'inoperative' because insurance is a contract of indemnity and 10 the event of a loss .the aSSIgnee w?uld have sustained no prejudice: Lloyd v Fleming (1872) LR 7 qB 299, 30.2: It IS,. however,. dIfficult to see why an assignment to a person with an expectatIon of acqumn? an ms~rable mte~est (see s 4) would be 'inoperative' and why the assignee could nOt recover proVIded an msurable mterest were acquired subsequently and by the time of the loss. " (1875) LR 10 QB 249, 254. 16 Institute Time Clauses Hulls 0/10/83), cl4; (1/11/95), d 5.2; International Hull Clauses (01/11/03), cl14.1.

" MIA 1906, s 51.

13

(1875) LR 10 QB 249.

ance is a contract of indemnity prevents the transferor from recoveting on the policy except quattustee for the transferee where it has been agteed that the policy of the thitd party will be maintained fot the transfetee's benefir." Moteover, in

See 20.21-20.23 below. See Powles v Innes (1843) 11 M & W 10; North ofEngland Pure Oil-Cake Co v Archangel Maritime Insurance Co (1875) LR 10 QB 249, eSp 255; &tyner v Pres,on (1881) 18 ChD 1, 11-12. 11 Powles v Innes (1843) 11 M & W 10.
9
10

600

601

Rights ofThird Parties

(2) Assignment of the Benefit of the Conttact of Insutance

Assignment
assignor may no longer give a good discharge. 24 Secondly, in the event of more than one assignment, prioriry goes to the first assignee to give notice to the insurer." Both equitable and statutory assignment take effect 'subject to equities' and rights of set-off. As discussed below, therefore, the insurer may oppose against the assignee any defence or right of set-off valid as against the assured."
(3) Assignment of the Policy

20.12 The common law has a historical hostility to third party involvement in con-

tracts. By the process of novation, it permits the replacement of a contract between A and B with a new contract between A and C. However, novation requires the consent of all three parties. The common law still refuses to recognize the assignment by B to C of the benefit of a promise by A to B. Assignment is, nevertheless, recognized in equity and. since 1873, has been authorized by sratute. 17 It creates no new contract between A and C, nor does it render the assignee a full party to the contract between A and B." Where A is the insurer and B the assuted, the contract of insurance remains a contract between A and B, bur the assignee becomes entitled to the benefit of the insurer's promise of indemnity,19 either generally or in relation to a specific claim.'o The only difference between the consequences of the two types of assignment is that an equitable assignee must join the assignor in any action against the insurer,21 whereas a statutory assignee need nor do so. writing and under the hand of the assured as assignor. Express writren notice must be given to the insuter, although the insurer's consent ,is not required. Finally. the assignment must be absolute in the sense that the assured must divest itself of all legal title to the benefit of the promise assigned." In the absence of any of these requirements, the assignment will nevertheless take effect in equiry provided the intention to assign is clear. Even in the context of equity, however, notice to the insurer is significant. First, once the insurer. has notice, payment of any loss moneys must be made to the assignee.') The

20.13 A statutory assignment of the benefit of an insurance contract must be in

It is a truism of the general law that one assigns the benefit of a contract rather 20.14 than the contract itself. 27 Marine insurance law, however, recognizes a blend of assignment and novation, referred to as assignment of the policy, governed by section 50 of the Marine Insurance Act 1906. It combines the absence of formality of equitable assignment with the right to sue in the assignee's own name of statutory assignment and operates slightly differently from either form of assignment with respect to set-off. In the modern law, it exists as a third form of assignment, additional to equitable and statutory assignment," although historically pre-daring the Jatter."
The concept of assignment of the poJicy is designed to respond to the demands 20.15 of international sale of goods contracts, especially on CIF terms. Under such contracts the price paid by the buyer covers three items: the goods, their insurance, and the freight payable for their carriage. The seller contracts to supply goods, see to their shipment, and insure them in transit. Alternatively, the seller may procure a cargo already afloat which was shipped within the agreed shipment period. Moreover, the sellet undertakes to produce a document responding to each of the three elements that provides evidence of petformance by the seller of its contractual undertalcings. Traditionally, the required documents are a bill of lading in respect of the goods, a carrier's invoice fot the freight, and an insurance policy. The importance of these documents cannot be overemphasized. If one of the documents is missing or inadequate in some respect, they may be rejected and the goods along with them, even if there is in fact nothing wrong with the goods.'o Transfer of the documents triggers the passing of property in the goods and a passing of risk retrospectively as from the time of shipment. As between seller and buyer, therefore, the risk ofloss ofor damage to

17
18

Currently by the Law of Property Act 1925, s 136.

Consequently, the insurer does not owe the assignee any continuing duty of good faith that might exist: Bank ofNova Scotia v Heftenic Mutual \.%r Risks Association (Bermuda) Ltd (The Good

Luck) [1988J 1 Lloyd's Rep 514, 546-7, affd [1990J 1 QB 818, 890.
19 After assignment, the assured cannot recover against the insurer for its own benent. The courts will not even permit the assured to obtain judgment without joining the assignee as a party to the proceedings, even where only part of the benefit has been assigned and the assured wishes to

recover in respect of the balance: Walter & Sullivan Ltd v Murphy [19551 2 QB 584. 20 Raijfiisen Zentralbank Osterreich AG v Five Star General 'Hading lie [200lj EWCA Civ 68, [2001] 1 Lloyd's Rep 597, para 74. . .. ' .
21 Although the requirement of joinder may be overlooked If there IS no rIsk of a confhcnng claim by the assignor: Raijftisen Zentralbank Osterreich AG v Five Star General Trading lle [2001] EWCA Civ68, [2001] 1 Lloyd's Rep 597, para 60. The assignor is joined as co~daimant if willing or as co~defendant if unwilling. For an example of the latter, see Laurie v west Hartlepool Steamship

24

2S

Swan v Maritime Insurance Co (1907] 1 KB 116. By virtue of the rule in Dearie v Hall (1823) 3 Russ 1.

26

See 20.21-20.26 below.

Thirds Indemnity Association (1899) 15 TLR 486. 22 Hughes v Pump House Hotel [1902] 2 KB 190. Contrast Durham Bros v Robertson [1898] 1 QB 765. See further 20.16--20.18 below.
23

Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd[1994] 1 AC 85, 103. 28 Raiffiisen Zentralbank Osterreich AG v Five Star General 'Hading llc (2001] EWCA Civ 68, [2001J 1 Lloyd's Rep 597, paras 58-60.
27
29 Assignment of the policy waS introduced into marine insurance by the Policies of Marine Assurance Act 1868, 31 & 32 Viet, c 86, s 1 of which is re~enacted without substantial amend~ ment by MIA 1906, s 50(2). Marine policies are assignable subject to contrary intention: s 50(1).

Although it is higWy questionable whetl1~r the account debtor should be affected by a communication from a purported assignee in the absence of corroboration from the assignor. See

further 20.29 below.

30

Orien' Co Ltd v Brekke & Howlid [1913J 1 KB 531.

602

603

Rights o/Third Parties

the goods during the entire transit after loading on board the carrying vessel lies with the buyer. Ifthe carrying vessel sinks, the buyer must pay the seller, rake the
documents, and claim on the insurance. 31 Consequently, marine policies are

Assignment
and entered with the defendant P&I club. It was agreed that the club should pay loss moneys to the assured shipowners unless the bank gave notice to the club of default by the shipowners on the mottgage loan, which they failed to do. Mocatta J considered that there was nO assignment within section 50 nor any statutoty aSSIgnment, but the assignment was effective in equity. Again, in RaiffitSen Zentralbank Osterreieh A G v Five Star General Trading lIe,39 the insured vessel was mortgaged to the claimant bank, which sought a declaration that it was entitled qua assignee to the proceeds ofa collision claim. It was held that the assignment had not transferred the entirety of the assured's beneficial interest in the policy and therefore could not take effect under section 50. There were three
reasons. First, the assignor remained covered under the ongoing insurance as

assignable after 10ss.32

20.16 Assignment of a marine policy requires transfer of the whole beneficial interest

in the policy." In Raiffeisen Zentralbank Osterreich AG v Five Star General Trading llc,34 Mance LJ distinguished between assignments before and after a loss. An assignment before loss could not satisfy section 50 unless the assured were also ttansferring the entirety of its interest in the subject-matter insured: 'A person cannot be said to have parted with his beneficial interest in ongoing
insurance cover, if he remains the person whose interest is insured, even if (for

example) he has assigned the entire right to the benefit of any claims which arise in respect of his interest.''' Conversely, after a total loss the entire beneficial interest in the policy lay in the claim for indemnification for the total loss." Section 50 was complied with by an assignment of the benefit of such claim or claims. In the case of a partial loss, once the policy had expired so that no new claims could arise, a post-expiry assignment of the benefit of the partial loss claim would again comprise the entirety of the assured's interest in the policy.
20.17 The requirement for a transfer of the assignor's entire beneficial interest was

not satisfied in Williams v Atlantic Assurance Co Ltd." The assured assigned the benefit of a claim on an expired cargo policy for 7,000 on terms that the assignee would also pay the assured the first 1 ,000 recovered from insurers, or such lesser sum as might be tecovered. The Court ofAppeal held that this right to a possible additional payment out of insurance proceeds represented a continuing equitable interest on the part of the assignor in the insurance. Consequently, the assignee's claim brought in its own name withoutjoining the assignor failed. In two furthet cases, however, although section 50(2) was again not satisfied, the assignee was not prejudiced since it was able to pursue its claim equally effectively as an equitable assignee.
20.18 In The Evelpidis Era," the insured vessel was mortgaged to the claimant bank

mortgagot and operator of the insured vessel. Secondly, the insutance cover extended beyond hull and machinery cover to collision covet and protection and indemnity covet. With respect to such liability cover, the assignment could transfer, at most, only the benefit of such future claims as might arise. 'The insutable interest in the subject-matter to which such cover related, namely [the assured's] pecuniary interest in maintaining its patrimony free of the butden of such expenditute or liability, must then have remained with [the assured] .'40 If the assignment did not in fact embrace such liability cover, a fOrtiori section 50 co~ld nOt apply, since the policy could not 'be split into a series of sub-policies'. Thltdly, by vmue of a loss payable clause, the proceeds of claims were split between aSSIgnor and assignee until notice of default on the mortgage loan. These same factors prevented the assignment from being'absolute' as required by section 136 of the Law of Property Act 1925, but none of them ptevented the assignee from invoking the docttine of equitable assignment. Section 50(3) of the Matine Insurance Act 1906 provides that assignment of a 20.19 marine policy may be effected 'by indorsement thereon or in other customary manner'." Although it has been held that mere delivery is normally inadequate to transfer title to the policy," equally the opinion has been expressed that delivery without indorsement is almost certainly an established customary method of assigning policies in connection with CIF contracts." Evidence was tendered in one case that the giving of an unsigned and undated notice to assignment of a policy was accepted in the cargo market as effecting an assignment. 44 Under the Institute and International hull clauses, in contrast,

31

32

Manbrt Saccharine Co Ltd v Corn Products Co Ltd[1919] 1 KB 198. Lloyd v Fleming (l 872) LR 7 QB 299. at 303: MIA 1906. ss 50(1). 51 (proviso).

33 ibid s 50(2). " [20011 EWCA Civ 68, [2001] I Lloyd's Rep 597 paras 63-66. See also Lloyd v Fleming (1872) LR 7 QB 299, 303. 3S [2001] EWCA Civ 68. [?001l 1 Lloyd's Rep 597, para 63. 36 Together, presumably, with any pardallosses not merged into the total loss and any liabilities covered by the insurance. 37 [1933] I KB 81.

38 First National Bank ofChicago v \.Vest afEngland Shipowners Mutua! Protection and Indemnity A.5sociation (Luxembvurg) (Tbe Evelpidis Era) [1981] I Lloyd's Rep 54.

[2001] EWCA Civ 68, [2001] 1 Lloyd's Rep 597. ibid pm 70 pcr Mance LJ. 41 MIA 1906,,50(3). 42 Baker v Adam (1910) 15 Com Cas 227 (aliter with respect to transfer by way of security) " Saftdi v Wistern Assurance Co (1933) 46 LlLRep 140, 144. . " Iraqi Ministry ofDeftn" v Arcepey Shipping Co SA (The Angel Bell) [1979] 2 Lloyd', Rep 491,497. Donaldson J remarked: 'It would not have required much to rebut this evidence.' But no rebuttal evidence was introduced: ibid.
39 40

604

605

Rights ofThird Parties

underwriters will not recognize the claim of any assignee ro any loss moneys or return of premium unless, before payment, the assignee produces the policy endorsed with a dated notice of assignment signed by the assured. 45 The validity of assignment as between assured and assignee is not challenged, but the assignee acquires no rights against the insurer unless the policy is produced with the stipulated endorsement.
20.20 Assignment of a marine policy so as ro pass the whole beneficial interest in the

Assignment
expressed the view that the phrase'arising our of the policy' in section 50(2) had 'a vety wide connotation', embracing 'fraudulent claims made under rhe very contract of insurance itself, even if the obligation not to make them were not to be treated strictly as an implied term'.51 While post-formation duties may yet be regarded as based on contractual terms implied in law, the expansive approach ro the interpretation of section 50(2) applies equally to the pre-formarion doctrine. Since any proposition rhat assignment launders the benefit of a promise under an insurance contract of a defence of avoidance of the policy is commercially unsustainable, the approach of Hirsr J is to be welcomed. Where the outbreak of war renders the assured an enemy alien, an assignee is 20.23 barred from recovety.52 This barrier is based on public policy. However, in so far as it falls within the wording of section 50(2), it provides support for an expansive reading of the phrase'arising out of the contracr'. Thus far, it appears both logical and possible to draw a direct parallel between 20.24 equitable and statutory assignment on the one hand and assignment ofthe policy under section 50 on the other. With respect ro set-off, however, section 50 is slightly more limired. A desire for procedural simplicity prompted the introduction by statute of 20.25 common law ser-off, confined to 'liquidated debts or money demands which could be ascertained with certainty at the time of pleading'.53 Although a set-off jurisdiction developed in equity that admitred of an unliquidated cross-claim,s4 the mere existence of a cross-claim was an insufficient reason for equity to grant protection against the primaty claim. Equitable set-off evolved where 'the equity of the [cross-claim] impeached the title ro the legal demand'." No such connection is required at common law. 56 As against assignees, the availability of set-off rights was stated as follows by Templeman J in Business Computers Ltd v

policy entitles the assignee to bring proceedings in its own name."

(4) Protection of the Insurer

20.21 All forms of assignment have in common that the assent of rhe insurer is nor

required. In return, it is a fundamental principle of all forms of assignment rhat the insurer is not ro be prejudiced. In the context of equitable and statutory assignment, this is effected by the rule that the assignee takes the benefit of the assigned promise subject to the insurer's equities and rights of set-off valid as against the original assured." With respect to assignment of the policy, section 50(2) of the Marine Insurance Act 1906 provides that 'the defendant is entitled to make any defence arising out of the contract which he would have been entitled to make if the action had been brought in the name of the person by or on behalf of whom the policy was effected'.
20.22 In William Pickersgill & Sons Ltd v London & Provincial Marine & General

that a breach of a pre-formation duty of utmost good faith on the part of the assured provided a defence good against an assignee of the policy. The duty, it was said, rested upon an implied contractual term, consequently genetating a defence 'arising out of the contract'. The Court of Appeal has now determined that the pre-formation doctrine rests on a contingent condition precedent ro the enforceability of the COntract, and not upon a term implied inro rhe contract. 4' Nevertheless, in The Litsion Pride, so Hirst J

Insurance Co Ltd,., Hamilton

J held

Anglo-African Leasing Co:"

Institute Time Clauses Hulls (1/10/83), cl 5; (1111/95), d 21; International Hull Clauses (01/11103), el23. 46 MIA 1906, s 50(2) (in the sense that the assignor need oot be joined in the proceedings). 47 However, a~signment does not release the assignor from its obligation to perform the contract (and the assignee does nOt assume the burden of the contract), with the result that the insurer cannot actively sue the assignee. The subject to equities rule operates purely by way of defence. An eq~ity such a.s the right to rescind the contract ror misrepresentation can negate the assignee's claIm and a nght of.set-off ~n reduce or extinguish that claim, but any excess (eg arising where the amount of unpaid premium exceeds the value of a claim) must be claimed from the assignor. On illegality and assignment, see 20.23 below. 48 [1912J 3 KB 614. 49 Banque Key,er Ullmann SA v Skandia (UK) Imurance Co Ltd [1990J 1 QB 665. See further 4.175 ahove. so Black King Shipping Corp v Mas,ie (The Litsion Pride) [1985) 1 Lloyd's Rep 437, 519.
45

51 On fraud, see also Graham Joint Stock Shipping Co v Merchants Marine Insurance Co [1924] AC 294 (owner's connivance in the scuttling of insured vessel prevented recovery by innocent mortgagee assignee). 52 Bank a/New South Wales v South British Imurance Co (1920) 4 LlLRep 266, 384. 53 Hanak v Green [1958] 2 QB 9, 17 per Morris L]. Common law set-offwas introduced by the Statutes of Set-off, 1729 and 1735, 2 Geo II, c 22; 8 Geo II, c 24. Although these statutes were repealed by the Civil Procedure Acts Repeal Act 1879, the jurisdiction created thereby was preserved. The concept of a money claim has received a broad interpretation: BICC pic v Bumdy Corp [1985) Ch 232. 54 eg a quantum meruitdaim: Hanak v Green [195812 QB 9. " Rawson v Samuel (184l) Cr & Ph 161, 179 per Lord Cortenham LC. 56 Contrast the sale of goods doctrine of 'abatement': Mondel v Steel (1841) 8 M & W 858, codified in the context of sale of goods by the Sale of Goods Act 1979, s 53(l)(a). See generally Aries Tanker Corp v Total Tran,port Ltd [1977] 1 WLR 185. 57 [1977) 1 WLR 578,585.

606

607

Rights ofThird Parties

... a debt which accrues due before notice of an assignment is received, whether or not it is payable before that date, or a debt which arises out of the same contract as
that which gives rise to the assigned debt, or is closely connected with that contract, may be set off against the assignee. But a debt which is neither accrued nor

Assignment
convince a court that the clause indeed purports to invalidate the assignment as between the assignor and the assignee. 60 Moreover, a clause that is confined to assignments leaves the assured free to undertake a personal obligation to account to a third parry for the policy proceeds Ot to declare itself a ttustee of the benefit of the policy or any policy proceeds in favour of a third patry beneficiary.61 Even a clause so worded as to deny any possibiliry of obligation to account, 20.28
assignment, or trust may be ineffective to achieve its aim. First, it has been

connected may not be set off even though it arises from a contract made before the assignment.

20.26 Three categories of cross-claim may be identified: those arising out of the insur-

ance contract that generates the primary claim, rhose not so arising bur closely connected to the insurance contract, and money claims due before notice of the
assignment is given to the insurer that mayor may not have a connection with

the insurance contract. The first two categoties may be taken as representing equitable set-off, which appeats equally opetative with respect to assignment of the benefit of insurance and assignment of the policy under section 50. The third category may be viewed as encompassing common law set-off claims.
However, where the cross-claim is unconnected to the insurance contract which generates the primary claim, it cannot be viewed as 'arising out of the contrace and, to that extent, the insurer's protection under section 50 is narrower

than that enjoyed in the context of assignment of the benefit of the contract. Thus, in Baker v Adam,58 mutual debts under coincidental, unconnected crossreinsurances gave rise
to

no set-off rights under section 50 as against an assignee

of the policy. (5) Contractual Restrictions on Assignment

20.27 The effect of contractual restrictions on assignment depends upon their true

construction, legal ptinciple, and, possibly, public policy. As between the insurer and the assignee, a prohibition on assignment will provide the insurer with an absolute right to refuse to pay the assignee. 59 There is, however, doubt
as to whether a term in an insurance contract can prevent the transfer of a

suggested that it is contrary to public policy for an account debtor to attempt to control the disposition of proceeds once in the hands of its creditor. 62 Secondly, it is uncleat whether a contractual promise not to assign or create a trust can, as a matter of legal principle, be effective to render a promise nonassignable or incapable of forming the subject-matter of a trust." As a matter of marine insurance law, the Marine Insurance Act 1906 appears to contemplate that an appropriately worded non-assignment clause would be effective to render the policy non-assignable. Section 50(1) provides that: 'A marine policy is assignable unless it contains terms expressly prohibiting assignment.' It should be noted, however, that the case purportedly so codified" confirmed merely that an assignment in breach of a clause that required assignment to be apptoved by the insurer conferred no right on the assignee to claim against the insurer. It was not concerned with the validiry of the assignment as between assured and assignee and it may be that section 50(1) should be read as similarly confined. Section 50, moreovet, does not speak to the possibiliry of cteating a trust of the policy or its proceeds. While the constitution of a trust may
amount to a breach of contract if carried out contrary to a no-constitution

clause, it is suggested that it will still take effect as between trustee and beneficiary.65 Standard market wordings vary in their approach to assignment. As already 20.29

proprietary interest in the policy proceeds by the assured to a third parry. Provided the insuret is not obliged to treat with the assignee, the insurer would seem to have no legitimate interest in restricting the application of the insurance proceeds after payment and, in particular, in affecting the distribution of those proceeds upon the assignor's insolvency. Consequently, as a matter of interpretation of the restrictive clause, the clearest wording will be required to

60

ibid 108.

58 (1910) 15 Com Cas 227. Likewise. in Pe/las (E) &Co v Neptune Marine Insurante Co (1879) 5 CPD 34 set-off was denied as between the insurer and the assignee of premium debts incurred on separate policies by the assured to insurer after the date of assignment but before notice of the assignment was given to the insurer. 59 HeMan Securities Ltd v Hertflrdshire County Council [1978] 3 All ER 262; R Goode, 'Inalienable Rights?' (1979) 42 MLR 553; Linden Gardem Trust Ltd v Le"esta Sludge Disposals Ltd [1994J 1 AC 85.

" Re Turean (1888) 40 ChD 5; Don King Produetiom Inc v ""'rren [2000J Ch 291. 52 R Goode, (Inalienable Rights?' (1979) 42 MLR 553; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994J 1 AC 85,108. 53 That the benent of a contract retains the character of assignability notwithstanding a no-assignment clause, see Shaw v Moss Empires & Bastow (1908) 25 TLR 190 as interpreted in Linden Gardem Trust Ltd v Lenesta Sludge Disposals Ltd [1994J 1 AC 85; Re Griffin [18991 1 Ch 408; Anning v Anning (1907) 4 CLR 1049, 1067; Re Westereon [19191 2 Ch 104. Fot a contrary dictum, see Helstan Securities Ltd v Hertflrdshire County Council [1978J 3 All ER 262,
266.

Laurie v U7est Hartlepool Steamship Thirds Indemnity Association (1899) 15 TLR 486. MIA 1906, s 50(1) is also directed to the assignability of the policy as a whole. It is, perhaps, debatable whether an express contractual term can deny more limited assignability in equity of part of the benefit of a matine policy.
64

55

608

609

Rights o/Third Parties

seen, the Institute and International hull clauses and the Institute freight clauses do not contain any restrictions on the freedom of the assured to assign the benefit or rhe proceeds of the policy. However, for underwriters to become bound to make any payment that may be due under the policy to rhe assignee, they do require the assignment ro be endorsed on the policy and that the policy so endorsed be produced ro rhe undelwrirers.
20.30 The rules of some mutual insurance associations contain prohibitions on

Third Parties (Rights agaimt Insurers) Act 1930

C. Third Parries (Rights against Insurers) Act 193066

The Third Parties (Rights against Insurers) Act 1930 is the Parliamentary 20.33 response to a mischief highlighted by two cases decided in 1928.67 In each case, the assured under a third parry liability policy incurred liability to a third party, but became insolvent before discharging that liability. Although the insolvency of the assured in no way prejudiced the liabiliry of the insurer to the assured, the assured's claim against the insurer constituted an asset of the assured, the proceeds ofwhich were available to the assured's liquidator or trustee in bankruptcy for distribution in accordance with the priorities dictated by insolvency law. In insolvency law, however, the third parry ranked merely as one unsecured creditor in the assured's insolvency with no prior claim to an asset generated solely by its loss. Judicial dissatisfaction68 was answered by: 'An Act to confer on third parties rights against insurers of third-party risks in the event of the insured
becoming insolvent, and in certain other events. '69

assignment. Rule 42(1) of the Britannia Club for Class 3 (P&I) provides as follows: 'No insurance given by the Association, and no interest under these Rules or under any contract between the Association and any Member, may be assigned without the written consent of the Managers, who shall have the right
in their discretion to give or refuse such consent without stating any reason or

to give such consent upon any such terms or conditions as they may think fit.' In case of an assignment in breach of such a rule, in the light of the case law discussed above, the assignee would clearly be denied any claim against the club, but the rule would not be interpreted as affecting the rights of the assignee as against the assignor. The Britannia rule therefore mirrots in effect the more economically worded equivalent provision of rhe British war risks rules, which provides only that an unauthorized assignment 'shall, unless the Managets in their discretion otherwise detetmine, be unenforceable against the
Association'.
20.31

Occasionally, club rules go further. Rule 15A of the United Kingdom P&I Club not only prohibits assignment without consent of the club managers, who have the right to grant consent subject to conditions, but also goes on to declare that any purported assignment without consent or in breach of conditions 'shall, unless the Managers in their discretion otherwise decide, be void and of no effect'. Such a provision seeks to take advantage of section 50(1) of rhe 1906 Act. However, while any assignment may be of no effect, the prohibition does not address the possibility of declaration of a trust. ptovide for an extended right of set-off against any payment to embracing such amount as the managers may think necessary at the payment to cover any liabilities or potential liabilities of the the club. Thus, rule 15B of the United Kingdom P&I Club follows:
Whether or not the Managers shall expressly so stipulate as a condition for giving their consent to any assignment, the Association shall be entitled in settling any claim presented by the assignee to deduct or retain such amount as the Managers may then estimate to be sufficient to discharge any liabilities of the assignor to the Association, whether existing at the time of the assignment orh'aving accrued or being likely to accrue thereafter.

The mischief giving rise to the Act lies, therefore, in the approach of insolvency 20.34 law to the distribution of liability insurance proceeds. The Act does not, however, simply confer a prior right on the third party to the proceeds of the insurance in the hands of the assured's liquidator to the extent of the third party's claim. Instead, upon the occurrence of anyone of a number of specified events, the assured's rights under the policy in respect of the liability are transferred to the third parry. In order to facilitate the exercise of any such ttansferred 6ght, the third party is also given rights to obtain information regarding the Insurance cover. In the 1990s, a number of apparent shortcomings led to the operation of the 20.35 1930 Act being referred to the Law Commission. The resulting repott, in July 2001, recommended that the 1930 Act be repealed and replaced by fresh legislation. 70 The report has yet to be implemented, although some of the problems identified have since been addressed by case law.
(1) Insurance Policies Covered

20.32 In the event of club managers consenting to an assignment, club rules often

an assignee the time of member to provides as

The 1930 Act applies to any contract of insurance against 'liabilities to third 20.36 parties'. This is defined by section 1(5) as excluding 'any liability of [the

See generally, Sir Jonathan Mance, 'Insolvency at Sea' [1995] LMCLQ 34. Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105; Hoods Trustees v Southern Union Generallnsurance Co ofAustralia Ltd[1928] Ch 793. See also Bradley v Eagle Star Insurance Co Ltd [1989] AC 957,967-8. 68 R, Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105, 111, 116-17. 69 The long title of the Third Parties (Rights against Insurers) Act 1930. 70 Law Com No 272.
66

67

610

611

Rights o[Third Parties

assured] in the capacity of insurer under some other contract of insurance), with the tesult that reinsurance contracts are excluded. Moreover, where suppliets of property provide aftet-sales packages and then insure against their liability under such packages, any attempt to invoke the 1930 Act in respect of such insurance may require consideration of the legal nature of the package in quesrion so as to ascertain whether it is properly characterized as insurance. If so, the supplier's own cover will fall within secrion 1(5) and the 1930 Act will not be available. 71
20.37 The question has also arisen ofwhether the 'liabilities' referred to encompass all liabilities howsoever arising or ate testricted to liabilities that arise on a secondaty basis by way of a remedy for a legal wrong, such as a tort or breach of contract. In Tarbuck v Avon Insurance pic," Toulson J adopted a restrictive reading, excluding the operation of the 1930 Act in cases where the policy covered non-performance of a reimbursement liability voluntarily incurred, namely a contracrualliability fot legal costs, non-payment of which resulted in an action in debt not damages. This was followed in T6'N Ltd v Royal 6' Sun Alliancepic," where the insurance covered a contractual liability ro reimburse an employers' liability insurer. As in Tarbuck, the insurance covered a voluntarily incurred reimbursement liability, bur, unlike Tarbuck, the reimbursement debt was generated by an employment liability imposed by law sounding in damages for bteach. Lawrence Collins J held that this disrincrion was immaterial and that the 1930 Act did not apply to any insurance of voluntarily incurred liabilities, including non-payment of any contract debt. 20.38 Such a limiting interptetation was, however, rejected by the Court of Appeal in Re OT Computers Ltd. 74 The policy in quesrion covered liability on an after-sales warranty operated by compurer suppliers. This was indistinguishable from T6'N, in that the liability was voluntarily undettaken bur would sound in damages for breach. Overruling T6'N, the Court of Appeal held that thete was no reason to import any limitarion into the prima ficie general wording of the 1930 Act. The Act applied to any liability sounding in damages for breach, no matter how arising. 20.39 Since the liability in Re OT Computers sounded in damages rather than debt, it was not necessary to rule on the correctness of the decision in Tarbuck. Nevertheless, the Court of Appeal expressed the clear, albeit obiter, view that the generality of the wotding of the 1930 Act was 'apt to include liabilities in debt

Third Parties (Rights against Insurers) Act 1930

just as much as liabilities in damages'. 75 While Tarbuck was not formally overruled, it is highly unlikely to be followed by any first instance court. (2) QualifYing Events for a Transfer of Rights A transfer of rights under the 1930 Act requires the occurrence of anyone of a 20.40 list of events specified in secrion 1 of the Act. Whete the assured is an individual, the events ate the assured becoming bankrupt or making a composition or arrangement with creditors. 76 Where the assured is a company, the events are the making of a winding-up ordet, the passing of a tesolution for a voluntary winding-up,n the company enteting administrarion, the appointment of a receiver or manager of the company's business or undertaking, the taking of possession by the holders ofdebentures secuted by a floating charge of the whole or patt of the propetty encompassed by the charge,78 and the approval of a company voluntary arrangement undet Part I of the Insolvency Act 1986." The Act applies to limited liability partnerships as it does to companies. Bo Four observations may be made of this list. First, the 1930 Act is not confined to 20.41 insolvent assureds. The listed events encompass cases of solvent winding-up and of certain enforcement of security irrespective of the solvency of the assured. According to Bingham LJ:81 'The legislative intention was, I think, that .. , the provisions of the 1930 Act. should apply upon an insured losing the effecrive power to enforce its own rights and dispose of its own assets.' Secondly, the 1930 Act contemplates only three types of legal person as assureds, namely natural persons susceptible to bankruptcy, companies, and limited liability partnerships. Partnetships other than limited liability partnerships are not included. Consequently, while an appropriate event affecting an individual partner can trigger a transfer of that partner's insurance rights,82 orders against non-limited liability partnetships as legal entities made under the Insolvent

" See Re OT Computers Ltd [2004J EWCA Civ 653, [2004J Lloyd's Rep IR 669.
72

73 74

[2002J QB 571. [2003J EWHC 1016 (Ch), [2004] Lloyd's RepIR 106, pa,as 586-601. [2004J EWCA Civ 653, [2004] Lloyd's Rep IR 669.

ibid para 19 perLongmoreLJ. Any form of composition or arrangement is envisaged, including an Individual Voluntary Arrangement under the Insolvency Act 1986, Pt VIII. 77 But TP(RI)A 1930 does not apply in the case of a voluntary winding-up 'merely for the purposes of reconstruction or of amalgamation with another company': s 1(6) (a). This exception would be removed under the Law Commission's proposals. 78 But crystallization of a floating charge is not in and of itself a qualifying event. 79 Approval takes effect from the time of the creditors' meeting: Insolvency Act 1986, s 5(2)(a). Likewise for individual voluntary arrangements: s 260(2)(a). 80 TP(Rl)A 1930, s 3A(1). In this context, references to a resolution for voluntary winding-up being passed should be read as references to a determination for voluntary winding-up being made: s 3A(2). 81 Firma C- Trade SA v Newcastle Protection & Indemnity Association (The Fanti); Socony Mobil Oil Co Inc v U1est ofEngland Ship Owners Mutual Insurance Association (London) Ltd (The Padre Island) (No 2) [1989J I Lloyd's Rep 239, 247. 82 Jackson v Greenfield [1998] BPIR 699 proceeds on that assumption.
7S

76

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Rights o/Third Parties

Partnerships Order 1994 fall outside the Act. Thirdly, the list of qualifYing events under section 1 is a closed list and is not to be intetpreted as merely indicative of the relevant types of events. Events that are similar in type but that are not listed (such as the appointment of a provisional liquidator under section 135 of the Insolvency Act 1986, the striking of a company off the register under section 651 or 653 of the Companies Act 1985, or the entry by a company into a composition with creditors under section 425 of the Companies Act 1985) cannot trigger a statutory transfer of rights. Fourthly, the 1930 Act does not expressly state whether the qualifYing events are procedures governed by English law alone or whether, for example, the winding-up of a company under a foreign law would trigger the application of the 1930 Act against an insurance policy governed by English law. However, the restriction of the Act to specified events and the exclusion of similar events indicates that parallel events and procedures under foreign laws are not covered." (3) The Timing of a Transfer of Rights
20.42 An enforceable right to claim under a liability policy requires that the existence and extent of the liability be established by judgment, arbitral award, or agreement between the parties."' The statutory transfer, however, is not dependent upon such establishment of liability and occurs at the time of a qualifYing event. In Re OT Computers Ltd," the assured incutred liability but then became insolvent before liability could be established so as to enable the assured to bring a valid claim against the insurer. The Court of Appeal held that a statutory transfer occutred on the onset of insolvency. 'The rights so transferted may be contingent or inchoate in the sense that the rights may not give tise to legal liability on the part of the insurer until the existence and amount of the liability is established bur the transfer nevertheless takes place on the insolvency.'8' 20.43 The transfer of (inchoate) rights is not postponed even if at the time of the qualifYing event losses have yet to reach some contractual threshold for recovery, such as a deductible Ot franchise clause. 8'

Third Parties (Rights against Insurers) Act 1930

(4) Anti-avoidance Provisions

The 1930 Act contains two anti-avoidance provisions. First, by virtue of section 20,44 1(3), any provisi~n in the insurance contract that 'purports, whether directly or mdlfectly, to aVOid the contract or to alter the rights of the parties thereunder upon the happening to the insured of [a qualifYing event] shall be of no effect'," The subsection must be read in a purposive manner, Read literally, it invalidates any alteration of rights, whether the alteration has a detrimental, beneficial, or neutral impact on the assured's position. It has, however, been held that section 1(3) is to be construed as confined to provisions that have a detrimental impact upon the assured's rights'" Consequently, a clause that transfers c1aimshandling responsibilities to the insurer should the assured become insolvent which is neutral with respect to the value of any claims, is unaffected b; section 1(3).'0 The scope ofsection 1(3) is also controlled by timing. It is not sufficient that the 20.45 cla~s~ affects the position of the third party; it must effect a change in that p~slt1on at the time of the qualifYing event, The assured's rights after the qualifYmg event must be rendered different from what they were before that event. Thus, a contractual term that prevents any rights from arising in rhe first place is
unaffected. 91 However, an insistence upon an exact temporal coincidence would

result in the 1930 Act being susceptible to evasion, Contract terms could be drafted so as to effect a detrimental change to the assured's rights upon the o~currence of an evenr technically distinct from and perhaps occurring at a slIghtly different time from a qualifYing event, yet an event that clearly contemplates the occurrence of a qualifYing event. Consequently, in Centre Reinsurance International Co v Curzon Insurance Ltd," Blackburne J held that section 1(3) would apply provided there was a 'sufficient connection' in the form of a 'direct factual link' between the contractual event and the statutory qualifYing event," In Curzon itself, the relevant clause was triggered by either an 'insolvency event' 20.46 or the ultimate net loss reaching the policy excess. The phrase 'insolvency event' was defined to include, inter alia, the presentation of a petition for an administration order. The making of an administration order is a statutory qualifYing event and an administration order must be applied for by petition!4 but

83 See also Centre Reinsurance International Co v Curzon Insurance Ltd [2004] EWHC 200 (Ch), (2004] Lloyd's Rep IR 622, para 67 (foreign proceedings similar or analogous to various English proceedings listed in a policy had no equivalent in the qualifying events listed in s 1(1. " See 21.14-21.17 below. as 120041 EWCA Civ 653,120041 Lloyd's Rep IR 669. 86 ibid para 28 per Longmore L], overruling Nigel Upchurch Associates v Aldridge Estates Investment Co Ltd 11993] 1 Lloyd's Rep 535. See also Cox v Bankside Members Agency Ltd [1995] 2 Lloyd's Rep 437, 443, 467. 87 Centre Reinsurance International Co v Curzon Insurance Ltd (2004] EWHC 200 (Ch), [2004] Lloyd's Rep lR 622. Tbe point was not appealed: [2005] EWCACiv 115, [2005] Lloyd's Rep IR 303, para 55. On deductibles and franchise clauses, see 23;40-23.48 below.

88 See also TP(RI)A 1930, s 3, which invalidates certain agreements between the insurer and assured which would otherwise operate to defeat the third party's rights under the Act. 89 The Allobrogia [1979J 1 lloyd's Rep 190, 198; Centre Reinsurance International Co v Fretlkley [2005] EWCA Civ 115, [2005] Lloyd's Rep lR 303. 90 Centre Reinsurance International Co v Curzon Insurance Ltd [2004] EWHC 200 (Ch) [2004] Lloyd's Rep lR 622, patas 43-44. ' 91 See 20.63 below. 92 [2004] EWHC 200 (Cb), [2004] Lloyd's Rep lR 622 93 ibid para 63. 94 Insolvency Act 1986, s 9. .

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Rights o[Third Parties

section 1(I) read literally does not include the necessary preliminary application. However, Blackburne J held that 'it is artificial in the extreme to maintain that the presentation of the administration petition can operate as a freestanding event, entirely divorced from the administration to which it necessarily relates, and that it is apt therefore to trigger [an alteration of rights] without risk of avoidance under section 1(3) by reason of the making of the administration order'.9S Conversely, an alteration ttiggered by the attainment of the policy excess by the ultimate net loss had no connection with a statutory qualitying event and was, therefore, immune from challenge undet section 1(3). 20.47 The second anti-avoidance provision is section 3 of the 1930 Act, which addresses a number of other events that might prejudice the assured's rights and thereby the rights transferred to the third party. It applies, however, only in the event of a narrower range of qualitying events than that acknowledged by section 1(I), being confined to the bankruptcy of an assured who is a natural person or, in the case of an assured company, to the making of a winding-up order or an administration order or the passing of a resolution for a voluntary winding-up. Section 3 then provides that the rights transferred to the third party are unaffected by any agreement between insurer and assured after the assured incurred liability to the third patty and the qualitying event occurred. Any earlier settlement is unaffected." Similarly ineffective as against the third party are 'any waiver, assignment or other disposition made by, or payment made to' the assured after the qualitying event.

Third Parties (Rights against Insurers) Act 1930

been established by legal judgment, arbitral award, or binding agreement?' Consequently, the mere fact that an assured incurs a legal liability and is then subject to a qualitying event is insufficient for the 1930 Act to confer upon the third party an enforceable right against the insurer. Since the assured would have no claim until the fact and extent of liability had been definitively established, neither has the third party. This leads to the need for the third party to establish liability, if necessary by instituting proceedings against the assured, in order to invoke the 1930 Act against the insurer. In the leading case of Post Office v Norwich Union Fire Insurance CO,99 the policy 20.50 conferred an indemnity against all sums which the assured became 'legally liable to pay' third parties. The assured became insolvent before the third party commenced litigation. The Court ofAppeal held rhat the 1930 Act was inoperative. In a passage subsequently approved by the House of Lords as 'unassailably correct',100 Lord Denning stated as follows: 101
Under [section 1] the injured" person steps into the shoes of the wrongdoer. There are transferred to him the wrongdoer's 'rights against the insurers under the contract.' What are those rights? When do they arise? So far as the 'liability' of the insured is concerned, there is no doubt that his'liability to the injured person arises at the time of the accident, when negligence and damage coincide. But the 'rights' of the insured person against the insurers do not arise at that time. The policy says that 'the company will indemnifY the insured against all sums which the insured

sball become legally liable to pay as compensation in tespect of loss of or damage to

property.' It seems to me that the insured only acquires a right to sue for the money when his liability to the injured person has been established so as to give rise to a right of indemnity. His liability to the injured person must be ascertained and determined to exist, either by judgment of the court or by an arbitration or by agreement. Until that is done, the right to an indemnity does not arise. I agree with the statement by Devlin J, in West Wilke Price & Co v Ching [1957] 1 WLR 45 at 49: 'The assured cannot recover anything under the main indemnity clause or make any claim against underwriters until they have been found liable and so sustained a loss.' Under [section 1J it is clear to me that the injured person cannot sue the insurance company except in such circumstances as the insured himself could have sued the insurance company. The insured could only have sued for an indemnity when his liability to the third person was established and the amount of the loss ascertained.

(5) The Rights that are Transferred

20.48 Whete the assured under a liability policy incurs a third party liability and a qualitying event occurs, the 1930 Act operates to transfer to the third party the 'rights [of the assured] under the contract in respect of the liability'.9? The Act operates, therefore, metely to ttansfer the assured's rights to the third party and not to create new rights or improve existing rights.

(a) An enftrceable right to claim under a liability policy

20.49 Subject to conttary intention, an assured under a liability policy has no enforceable claim against the insurer until the existence and amount of the liability has

The correct procedure, therefore, is for the third party to proceed against the 20.51 assured to establish liability and quantum and then to use the 1930 Act against
95 [2004J EWHC 200 (Ch), [2004J Lloyd's Rep IR 622, para 62. The policy also contained a number of other contractual insolvency events upon which Blackburne J commented without making any decision as to whether there was a sufficient connection with a statutory qualifYing event: at para 67. 96 Normld Housing Association Ltd v Ralphs [1989J 1 Lloyd's Rep 265. Quaere whether such a settlement might be vulnerable to challenge under the Insolvency Act 1986, s 423 as a transaction aran undervalue: Normid Housing Association Ltd v Ralphs (No 2) [19891 1. Lloyd's Rep 274, 277. S7 TP(R1)A 1930, s 1(1).

98 See 21.14 below. Note that in the case of a global settlement of a variety ofclaims against the assured, an individua11iability will not be established so as to give rise to a claim unless the settlement is btoken down so as to attach a figure to the insured liability, see 21.16 below. 99 [196712 QB 363. '00 Bradley v Eagle Star Imurance Co Ltd [19891 AC 957, 966 per Lord Brandon. '" [1967J 2 QB 363, 373-4. See also Salmon LJ ar 377-8.

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Rights ofThird Parties

the insuter, effectively by way of enforcement of judgment or recovery of the settlement figure.'o, This raises the problem of either suing an insuted company which is in the process of being wound up or resutrecting a dissolved company for the putposes of rhe required litigation pteliminary to using the 1930 Act.
20.52 Where a company is being wound up by the COutt, in the interim between

Third Parties (Rights agaimt Imurers) Act 1930

Where the qualifying event is entry into an individual or company voluntary 20.54 arrangement, rhe third party may find itself precluded by the terms of the atrangement from establishing the assured's liability. In such a case, rhe thitd party may challenge the voluntary arrangement on rhe ground thar such preclusion 'unfairly prejudices' irs interests.'" In Sea Voyager Maritime Inc v Bielecki, '12 it was held that the removal of the privileges of enforceability of claim and prioriry over other creditors with respect to proceeds conferred by the 1930 Act would consritute unfair prejudice. On the facts, it was further held thar the terms of rhe arrangement, on rheir true interpretation, precluded the third party from bringing proceedings against the assured in order to establish liabiliry or, alrernatively, thar judgment could be obtained for the equivalent of a dividend rather than the full amount of the claim. This consrituted unfair prejudice. In the case of a company voluntary arrangement, directors proposing an 20.55 arrangement may seek a moratorium on proceedings against the company.'13 Such a moratorium would require a third party who wished to take proceedings to esrablish liability in order to invoke the 1930 Act to obtain the leave of the court. 114 However, since such proceedings are neutral with respect to other creditors, it is anticipated thar leave would be forthcoming.

presentation of the winding-up petition and making of the winding-up order, an application may be made to the court to restrain any proceedings against the company.'03 Once a winding-up otder has been made or a provisional liquidator appointed, no action may be commenced or continued against the company except with the leave of the COutt.'o, Howevet, a court will gtant leave to a third party seeking to establish liabiliry as a preliminary step ro pursuing an insurer under the 1930 Act,'05 and ptesumably will not restrain any such action.
20.53 If the assured company has already been dissolved, the COutt has the power

under section 651(1) of the Companies Acr 1985 to make an order declaring the dissolution void.,06 'Thereupon such proceedings may be taken as might have been taken if the company had not been dissolved."o, In general, however, the court may make an order under section 651 only on an application made no later than two years from the date of the dissolution.'os Consequently, the third party may find itself out of time to establish liabiliry againsr a dissolved assured even if srill within the limiration period governing such action.'o, The 1930 Act was 'not passed to remedy any injustice which might arise as a result of the dissolution of a company making it impossible to establish the existence and amount of the liability of such company to a third parry'."0

(b) Definces
The fundamental proposition that the third party receives only rhose rights 20.56 which have accrued to the assured permits the insurer to invoke against the third party any defences that would have been available against the assured. 'You cannot rake rhe righrs under the contract separate from the defences under the contract."15 Apart from substantive defences, such as the right to avoid the policy for non-disclosure or misrepresentation116 or the automatic discharge from liability rriggered by a breach of warranty, assureds have been held bound by a variety of contractual limitations to rhe insuter's liability. Notification and claims co-operation provisions Liability policies routinely 20.57 contain clauses requiring the assured to notify the insurer of any occurrence that may give rise to a claim or of the making of a claim against the assured. Thereafter, rhe assured may be required to co-operate with the insurer in various

102 Post Office v Norwich Union was fought by the insurance company to the C9urt of Appeal to establish this procedural point for reasons of publicity. The result avoids the necessity for an

insurer that wishes to resist liability to do so in its own name and perhaps gain a reputation,

whether merited or not, for always repudiating liability: ibid 378. On joinder of the insurer to defend the third party's action against the assured, see U700d v Perfection Travel Ltd (1996) LRLR 293. '" IA 1986, s 126(1). 104 ibid S 130(2). The appointment of a provisional liquidator is not, however, a qualiiying event under the 1930 Act, see 20.41 above. 105 Post Office v Norwich Union Fire Insurance (1967] 2 QB 363, 375, 378. 106 It would appear that the coun will never decline to exercise the restorative power: Law Com No 272, para 2.11. 107 CA 1985, s 651(2). When making a s 651 order, the cOUrt may direct that the period between dissolution and the making of the order shall not count for limitation purposes: s 651 (6). '" CA 1985. s 651(4), as inserted by rbe CA 1989, s 141. 109 Where, however, the action against the assured would be for damages for personal injuries or under the Fatal Accidents Act 1976, proceedings seeking an order under CA 1985, s 651 may be brought at any time within--rhe limitation period governing the main cause of action: s 651 (5), as inserted by the Companies Act 1989, S 141(3). This is subject to the proviso that the company was dissolved no earlier than 16 November 1969: CA 1989, s 141(4). On the operation of s 651(5), see Re Workvale Ltd (No 2) [19921 1 WLR 416, noted H Bennett (1993) 12 C]Q 326. "0 Bradley v Eagle Star Insurance Co Ltd [1989] AC 957, 968 per Lord Brandon.

'" Insolvency Act 1986, 55 6 (CVA), 262 (IVA). m [19991 Lloyd's Rep lR 356. 113 Insolvency Act 1986, s lA, Sch AI. 1M ibid Sch AI, para 12(I)(h). 115 McCormick v National Motor & Accident Insurance Union Ltd (1934) 49 LlLRep 361, 365 per Scrutton LJ. 'The rights assigned . . . by the statute must be coupled with the rest of the particular rights and obligations which make up the contract of insurance. One cannot pick our one bit-pick out the plums and leave the duff behind': Post Office v Norwich Union Fire Insurance Society Ltd [19671 2 QB 363, 376 per Harman LJ. 116 McCormick v National Motor & Accident Insurance Union Ltd(1934) 49 LlLRep 361.

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Rights ofThird Parties

ways. Where such a clause ranks on irs rrue interprerarion as a condition precedenr ro rhe insurer's liability under rhe contracr, non-compliance will consrirure a complere defence ro any claim by the assured and, therefore, ro any right ro claim transferred ro a third party under the 1930 Act. Thus, in Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd, 117 rhe insurer was protected by rhe failure of the assured to give immediate norice of a third party claim as required by the policy, even though a similarly required notice of the accident had been given. That the insurers were in no way prejudiced by the absence of a second notice was irrelevant, since the requirement of a second notice was drafted as a condition precedent ro rhe insurer's liability. Likewise, in The Vainqueur jose,"8 the claimant rhird party was unsuccessful because rhe assured failed ro norify the club of the claim within a stipulated time period as required by the rules. Breach of that rule gave rhe club the right ro reject any claim by the assured or reduce the sum payable by way of indemnity.
20.58 Notification and co-operation provisions are especially problematic in rhe con~asis' that

Third Parties (Rights against Insurers) Act 1930

time the claim was made, the assured company had been wound up. On the

it is 'not '\easonably possible" to report an occurrence of which one is

unaware',122 the claim was made too late to fall within the ambit of the clause. By the time the claim was made, the assured did not exist and could not become awate of it. Dispute resolution procedures Where rhe policy contains provisions relating 20.60 to dispute resolution, these will bind the third party to the same extent that they are obligatory for the assured. The Padre Island''' concerned a claim against a mutual insurance association under the rules of which any dispute had to be referred to the association's committee and subsequently to arbitration before being litigated before the courts. The thitd party was held to be bound by such procedural prerequisites to the club's liability to the assured. Restrictions on rhe scope of cover In The Vainqueur jose,'24 the relevant 20.61 club rule excluded certain cover unless the club committee should 'in its sole discretion' otherwise determine. The third party's attempt to invoke the 1930 Act in respect of liability within the exclusion foundered upon refusal by the committee to exercise its discretion in the third party's favour. There was no ground for holding that this refusal had been 'improper or unjustified or misguided' .125 Pay first clauses A pay first clause restricts an insurer's liability to reimburse- 20.62 ment of such sums as the assured may have become liable to pay and has in fact paid to the third party. Payment to rhe third party is rendered a condition precedent to any right to claim against the insurer and insurance against third party liability is transformed into indemnity cover against the making of payment in respect of liability. Pay first clauses are found in the rulebooks of all
mutual insurance associations, and the reference to 'sum or sums paid' in the

text of the 1930 Act, since an assured rhat is, or is likely to be, subject ro a qualifying event such as insolvency may be less concerned with the preservation of the third party's insurance rights. The question arises, therefore, ofwhether it is open to the third parry to fulfil rhe requirements of a notification provision by itself supplying the insurer with the requisite information. This question can be approached from rwo angles. First, even where a clause requires information to be supplied by the assured, it is a matter of interpretation whether the assured is so designated ro the exclusion of anyone else.' 19 Secondly, it has been suggested that a staturory transfer of a right to claim against an insurer might catry wirh it the right ro fulfil notification and co-operation provisions. 120 Although' such clauses might be regarded as embodying obligations rather than righrs, so that they fall outside the scope of any statutory transfer, it would be in the spirit of the legislation ro regard them rather as shaping the transferred rights.
20.59 Notification and co-operation clauses pose furrher problems where the assured

has ceased to exist, since compliance may obviously be impossible. Where possible, however, the courrs will construe such clauses as inapplicable in such cases. In Horne v Prudential Assurance Co Ltd, '21 the policy required the assured ro notify the insurer of a rhird party claim 'as soon as reasonably possible'. By the

collision liability clause of the International and Institute hull clauses may also import a pay first principle. 126 Obviously, it is only where the assured becomes insolvent without discharging its liability that the third party will wish to invoke the 1930 Act. If pay first clauses are effective, they will prevent the Act from applying. The conjoined appeals to the House of Lords in The Fanti and The Padre Island 20.63

'" (1985J 1 Uoyd's Rep 274. 118 CVG Siderurgicia del Orinoco SA v London Steamship Owners) Mutual Insurance Association (The Vainqueur Jose) [1979] 1 Lloyd's Rep 557. For an additional ground of rejection of the claim, see further, 20.61 below. 119 This, it is suggested, is the preferable explanation of Barrett Bros (Taxis) Ltd v Davies [1966] 1 WLR 1335. 120 Sir Jonathan Mance, 'Insolvency at sea' [1995] LMCLQ 34, 44. '" 1997 SLT (Sh Ct) 75.

122
123

ibid 77 per Sheriff Principal Macleod QC.

Socony Mobil Oil Co Inc v 'West of England Ship Owners Mutual Insurance Association (London) Ltd (The Padre Island) (1984J 1 Lloyd's Rep 408. 124 CVG Siderurgicia del Orinoco SA v London Steamship Owners' Mutual Insurance Association (The v"inqueurjose) (1979] 1 Lloyd's Rep 557. 125 ibid 580. 126 Re Nautilus Steam Shipping Co Ltd[1936] Ch 17, 31. cf Charter Reinsurance Co Ltd v Fagan (1997J AC 313, see 8.16 above.

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Rights ofThird Parties (No 2)127 concerned the 'pay first' clauses of twO P&I clubs. The House held that the clubs were protected by the clauses, which did not fall within the mischief the 1930 Act was designed to address. In particular, the clauses were not invalidated by section 1(3), which was confined to provisions altering the assured's rights against the insurer upon the occurrence of the events specified in section 1(1). The pay first clauses applied equally before and after such events. That upon such an event a club member would in all likelihood be unable ro discharge third party liability and be thereby prevented from obtaining an indemnity from the club resulted not from any alteration of rights by the clause but from the assured's financial predicament and probable insolvency.'2'
20.64 It is noteworthy that while the Law Commission's proposals generally involve disapplying any pay first provision once there has been a statutory transfer, an exception is proposed in the case of marine insurance on the basis that direct action against marine insurers should be left to international measures. Pay first clauses would remain effective except to the extent that the third party liability arises in respect of death or personal injury. This is said to reflect current best

Third Parties (Rights against Insurers) Act 1930

transferred' .'31 In contrast, in Cox v Bankside Members Agenry Ltd, 132 insurers covered not only liability but also defence costs subject to an excess. In practice, however, insurers bore the entirety of the costs of defending third party claims where the assured was insolvent and thereby acquired a right of reimbursement of a sum equal to the excess. Under rhose circumstances, Phillips J held that insurers were entitled to set off that sum against a third party claimant under the 1930 Act. The decision in Cox is clearly distinguishable from that in Murray, in that the expenses in Cox were clearly referable to the particular liability in respect of which the third party sought to exercise transferred rights. Nevertheless, Phillips J asserted that'" 'the rights transferred under the Act must be subject to any defences that would have be.en available had those rights been asserted by the assured from whom they are transferred. Insofar as the decision in Murray v Legal & General Assurance Society Ltd . .. is inconsistent with this conclusion, I decline to follow it'. Given that the facts of Cox were distinguishable from those in Murray, it is 20.67 unclear to what extent PhilJips J intended to question the decision in Murray.
However, the categorical reference to t any defences' must raise a question as to

practice. 129
20.65 Liabilities and set-off The effect of a statutory transfer is limited to vesting in the third party the assuted's 'rights against the insurer under the contract in respect of the liability'. The third party receives only rights and there is no question of any transfer ofliabilities. The third party cannot, therefore, be sued by way of claim or counter-claim for unpaid premium. The availabiliry of any defence of set-off is less clear. 20.66 In Murray v Legal & General Assurance Society Ltd, 130 the insurer sought to invoke a defence of set-off of unpaid premium against a third p~rry's claim under the 1930 Act. Cumming-Bruce J denied any such set-off, observing that the statutory transfer is limited 'to the rights under the contract in respect of the liabiliry incurred by the insured to the third parry. Rights which are not referable to the particular liabiliry of the insured to the particular third party are not

whether the decision in Murray wilJ be followed. It is suggested that it should not be for two reasons. First, the decision in Murray runs counter to the general assimilation of the position of the third party to that of the assured. It is difficult to see why a statutory transfer should have the effect of laundering the assured's rights of the stain of any right of set-off not direcrly related to the liabiliry in question when it is powerless to launder it of the stain of other non-specifically related defences, such as voidability for non-disclosure. 134 Secondly, it is also difficult to see why the duty of disclosure of infotmation regarding transferred rights, discussed below,'35 should extend to receipts for premiums if unpaid premium cannot be set off against a third party.13' Limitation The operation of the doctrine of limitation in the context of 20.68 the 1930 Act ought not to cause difficulty. The Act transfers to the third party the rights of the assured; it does not create new rights and vest such new rights in the third party. Consequently, the relevant limitation period should be that governing the assured's claim, and ifa qualifYing event does not occur until after the limitation period expires, any atrempt by the third party to invoke the 1930 Act against the insurer will be time barred. The 1930 Act was designed to address the distribution of assets upon insolvency, not to alter the law of limitation so as to preserve an asset that would otherwise be lost.

127 Firma C-Jrade SA v Newcastle Protection & Indemnity Association (The Fanti); Sacany Mobil Oil Co Inc v W0st ofEngland Ship Owners Mutua! Insurance Association (London) Ltd (The Padre Island) (No 2) [1991] 2AC 1. 128 In response to this decision, the question arises whether money can be lent to the insolvent

club member impressed with a Quistclose trust to be employed in satisfaction of the pay first condition. The rules of some dubs, however, deny any such possibility by providing that the condition precedent to the member's right of recovery against the dub is payment by the member out of funds belonging unconditionally .to the member and not by way of loan or otherwise, 129 Law Com No 272, para 5.37, However, for an example of pay first provisions being invoked in a personal injury case, see Lloyd's List; 10 September 1999. 130 [1970J 2 QB 495, 503.

131 ibid 503, The question was also raised how of set~off would operate in a case of multiple statutory transferees. m [1995J 2 Lloyd', Rep 437. 13' ibid 451. '" See 20.56 above. '" See 20.75-20.79 below. 13' TP(Rl)A 1930,,2(3).

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20.69 In Leflore 0 White,137 the assured's liability was established by judgment on 16 December 1981. On 8 December 1987 the assured issued proceedings against the insurer, the following day the assured was made bankrupt, on 16 December 1987 the limitation period for the assured to sue the insurer expired, and on 3 June 1988 the third party issued proceedings against the insurer under the 1930 Act. Popplewell J held that the third party's claim was time barred. The 1930 Acr transferred to the third party the right to bring proceedings againsr the insurer in its own name and for its own benefit; it did not vest the assured's action in the third party. Moreover, Popplewell J also summarily rejected an argument that the third party had the benefit of an independent limitation period running from the date of the qualifYing event: 138 'I confess that I find neither logic nor sense in that argument. It would enable a [claimant] to bring an action under the 1930 Act years ourside any limitation period contemplated by the Limitation Act. It would undermine totally the concept that liability under the policy is the starting point for determining when the cause of action arises.' 20.70 A somewhat different sentiment was, however, suggested by Phillips J in The Felicie.'39 The assured's liability was established by judgment on 21 July 1981. Arbitration proceedings against the insuring P&I club, as required by the club rules, were commenced in time by the assured. However, the assured was wound up on 29 July 1987, on which day the third party instituted fresh arbitration ptoceedings. Phillips J held that the third party did not automatically succeed under the 1930 Act to the proceedings commenced by the assured. Those proceedings, if pursued, would inevitably result in an award in the club's favour, since the right to claim in respect of the liability had been transferred t';' the third party. It was for the third party to pursue the fresh proceedings. 20.71

Third Parties (Rights against Insurers) Act 1930

considered the point, I have not felt it necessary to reconsider the conclusion that I have reached in this case.

While Phillips J did not elaborate upon the reasoning that led him to the view 20.72 that the club would not have a limitation defence, the obvious inference is that Phillips J believed that a fresh limitation period commenced from the date of the qualifYing event, perhaps subject to the proviso that the assured had commenced proceedings in time. In this respect, there is a clear conflict with the express, later ruling in Leflore 0 White, '42 in which The Fetide was not mentioned and which, it is respectfully suggested, is correct. If a third party claim in the circumstances of The Fetide is defeated by limitation, the defeat is inflicted not by the 1930 Act bur by the timing of the qualifYing event. As stated above, the purpose of the 1930 Act is not to guarantee payment to the third party regardless of the course of events aftet the incurting of liability.'4' (6) Distribution ofInadequate Fund The value of third party claims under the 1930 Act may exceed the fund 20.73 available for distriburion under the policy. In such a case, claimants rank in the order in which they succeed in establishing the existence and quantum of the assured's liability to them by judgment, arbitral award, 01' settlement.'44 (7) Provision of Information If the 1930 Act is to achieve its purpose and third parties are to recover 20.74 indemnification from liability insurers, third parties need to be able to find out enough abour the insurance to decide whether 01' not to pursue a claim against the insurer. Consequently, section 2 of the 1930 Act creates a duty on specified persons on the occurrence of a qualifYing event to provide information to thitd parties. The section has given rise to a number of difficulties.

Thus far, the decision is consistent with Leflore 0 White. However, Phillips J, in the final paragtaph of the judgment, alluded to the issue of limitation that could consequently arise. Whether the fresh proceedings were time barred was not a point before the court and had not been argued. Consequently, Phillips J made no ruling on limitation but stated that, had he believed that his decision would have afforded the club an insuperable limitation defence, he 'would have felt it 'd .. . necessary to reconSl er 'h' d eClSlOn. '40 H e continued :'4' IS It would be absurd if the effect of the 1930 Act, in circumstances such as those of
this case, were to be to defeat what might otherwise have been a good claim by the

(a) Section 2(1): disclosure by persons other than an insurer

Once a qualifying event has occurred, section 2(1) of the 1930 Act provides that 20.75 any third party that claims the bankrupt or deceased debtor or the company is liable to it is entitled to requite of certain specified persons that they disclose

insured. Such a result would be diametrically opposed to the purpose of the Act. A decision which produced this result would be suspect. Suffice it to say that, having

[1990J 1 Lloyd's Rep 569. 138 ibid 578-9. London Steamship Owners Mutua! Insurance Association Ltd v Bombay Trading Co Ltd (The Felicie) [1990J 2 Lloyd's Rep 210. ' 140 ibid 27. 141 ibid.
137
139

142 The Felicie (n 140 above) was decided in 1987, albeit not reported umi11990, while Lefevre v White (0 138 above) was decided in 1989. 143 It is perhaps noteworthy that, in its repon on the 1930 Act, the Law Commission doubts the legal basis for the suggestion of Phillips J in The Fe/ide and, withom referring to Lefevre v White, considers that the better view of the current law is that the third parry is bound by the same limitation period as the assured. Moreover, it proposes no change, except where the third party has commenced proceedings against the assured before a qualifying event: Law Com No 272, paras 5.51-5.58. '44 Cox v Bankside Members Agency Ltd[1995J 2 Lloyd's Rep 437.

624

625

Rights ofThird Parties

'such information as may be reasonably required by him for the purpose of ascertaining whether any rights have been transferred to and vested in him by this Act, and for the purpose of enforcing such rights, if any'. The disclosure duty is mandatoty: any provision of an insurance contract that purporrs to derogate from the duty is 'of no effect'.
20.76 A major issue is the time at which the right to require information arises. It was

Third Parties (Rights against Insurers) Act 1930

the duty extends to any terms of cover and to any aspect of the relationship between assured and insurer or anything else that impacts on the existence and enforceability of any transferred rights. Thus, section 2(3) provides that the duty to give information includes 'a duty to allow all contracts of insurance,
receipts for premiums, and other relevant documents in the possession or power

previously thought that the subsection was subject to the grave disadvantage that the duty of disclosure required first that the third party establish the assured's liability. This might require the third party to engage in timeconsuming and expensive litigation against a defendant of dubious solvency in order to establish liability, only to discover, assuming success, that the defendant had neither the means to meet nor insurance to cover the liability. Such a prospect could prove a serious deterrent to a third party and, therefore, a serious impediment to the statutory ambition to provide third parries with access to the benefits ofliability insurance. Nevertheless, in two first instance cases it was held that the establishing of liability was a condition precedent to the right to information on the basis either that prior thereto there was no transfer of rights to the third party'45 or that there was a transfer of inchoate rights as soon as a qualifYing event occurred bur that no information could exist that could serve the designated purpose of ascertaining whether any rights against an insurer had been transferred until it had first been determined what those . rIghrs were. 146
20.77 In Re OT Computers Ltd,'47 however, the Court of Appeal rejected both lines of

of the person on whom the duty is so imposed to be inspected and copies to be taken'. Moreover, it is consistent with the approach of Re OT Computers that the duty will extend to any matters germane to decisions about whether it is worth pursuing the insurer. One difficulty with section 2(1) lies in the fact that a duty of disclosure is 20.79 imposed on a limited number of specified persons, namely 'the bankrupt, debtor, personal representative of the deceased debtor or company and ... the trustee in bankruptcy, trustee,150 liquidator, administrator, receiver, or manager, or person in possession of the property'. Other persons who may possess relevant information, such as brokers, owe no duty.

(b) Section 2(2): disclosure by an insurer

By virtue ofsection 2(2) of the 1930 Act, a parallel duty of disclosure is imposed 20.80 on any insurer where information disclosed 'in pursuance of subsection (I) of this section discloses reasonable ground for supposing that there have or may have been' a staturory transfer of rights against that insurer. This wording contains two preconditions for the insurer to come under a disclosure obligation. First, the third party must have reasonable grounds for supposing there has been or may have been a statut0ty transfer. There is scope for dispute over the meaning of 'reasonable ground'. However, the threshold imported by that phrase is limited by the requirement that the third party need only 'suppose' that there 'may have been' a statutory transfer. There is no need for the third party to 'know' or 'have established' that rights have been transferred. Secondly, the reasonable ground should be based on information disclosed by virtue of section 2(1). It would appear that should the third party's reasonable grounds for the relevant supposition be based upon information otherwise obtained, section 2(2) cannot apply. There would appear to be no logical reason for this restriction. Indeed, in one case where the third party's information had not been gained through section 2(1), insurers commendably refrained from taking the
point. 151

reasoning. As already seen, it held that a transfer of rights, albeit possibly inchoate, occurs on a qualifYing event.'4' With respect to the provision of information, the key lay in the phrase 'reasonably required'. Information regarding rhe existence and terms of insurance cover could be reasonably required to enable the third party to decide whether to instigate or pursue liability proceedings. This view was supported, inter alia, by the fact that the duty to disclose information is owed to any third party 'claiming' that liability has been incurred (rather than 'having established' liability), and that the information relates to rights 'if any', therefore clearly contemplating that information sought may reveal that no rights exist to have been transferred.'4'
20.78 With respect to rhe scope of the duty, the third party is entitled to information

relating to the existence and enforcement of transferred rights. It is clear that

145

Nigel Upchurch Associates v Aldridge.Estates Investment Co Ltd[1993J 1 Lloyd's Rep 535. '" Woolwich BuildingSociery v Taylor [199511 BCLC 132.
[20041 EWCA Civ 653, [20041 Lloyd's Rep IR 669. '" See 20.42 above. [20041 EWCA Civ 653, [20041 Lloyd's Rep IR 669, pa,as 33~38.

147 149

150 Defined to include the supervisor of a voluntary arrangement under the Insolven<..)' Act 1986, Pt 1 0' VlII, s 2(IA). '" Woolwich BuildingSociery v Taylor [199511 BCLC 132, 137.

626

627

Rights ofThird Parties

(8) Relationship between Assured and Third Party in the Light of a Statutory Transfer of Rigbts 20.81 Should the transferred insurance righrs yield a measure of indemniry less rhan rhe assured's liability ro rhe third party, section 1(4) (b) of the 1930 Act provides that the third party's rights against the assured are unaffected with respect to the shortfall. There is, however, no provision that expressly addresses the third party's rights against the assured to the extent that the transferred rights do yield indemnification. It seems uncontroversial that the third party should not be permitted ro recover and retain any measure of double recovery by enforcing both its transferred rights against the insurer and its liability claim against the assured. It is suggested that section 1(4) (b) should be read as providing implicitly that, apart from any shortfall after enforcement of the transferred rigbts, successful recovety pursuant to such rights pro tanto discharges the assured's liability to the third party. The alternative leaves the assured liable to pay the thitd party in full, with double recovety being avoided through the insurer claiming the benefit of such recovery as reducing the insured 10ss.'52 This approach, however, results in loss as between insurer and assured lying with the assured rather than the insurer that has been paid a premium to carry that risk'53 and, generally, at the expense of the assured's credirors. The 1930 Act was designed to address the disttibution of the assured's assets between the assured's creditors, not to diminish the assets available for distribution by reducing the insurer's net payment. 154 (9) Relationship between Insurer And Assured in the Light of a Statutory Transfer of Rights 20.82 The statut0ty transfer is confined to the assured's rights in respect of the third patty liability. The assured's rights remain vested in the assured in respect of other casualties covered by the policy and in respect of other losses arising out of the same casualty that generates the statutory transfer. 155 Moreover, any liabilities of the assured undet the insurance contract are ~naffected. No claim or counter-claim for unpaid premium can be brought against a statutory transferee. 156

Third Parties (Rights against Insurers) Act I930

(10) Recovery of the Assured While the various qualifYing events under section 1(1) of the 1930 Act all signal 20.83 a loss of control on the part of the assured over its rights and assets, thar loss is not necessarily permanent. An administrator may succeed in restoring a company to health so that the order can be discharged and the company resume trading under its directors, There is, however, no indication that such a recovery of the assured would reverse a prior statutory transfer. In conttast, once the company has recovered, there is no reason why any subsequent incurring of liability should trigger a statutory transfer simply because at some time in the company's histoty a qualifYing event had occurred. The 1930 Act is designed to ensure that the benefit of liability insurance enures to the third party suffering the loss that generates the claim. If any qualifYing event is history, there is no operative mischief for the Act to address. It is, accordingly, suggested that any qualifYing event is implicitly exhausted for the purposes of the 1930 Act once the assured recovers from that event.

'" See 25.36ffbelow.

153

The assured cannot complete the circle and recover in turn from the insurer because a

statutory transfer leaves the assured with no rights against the insurer in respect of the third party's

loss.
154 The issue is canvassed in Centre Reinsurance International Co v Freakley [2005J EWCA Civ 115, [20051 Lloyd's Rep lR 303, paras 39, 138-139. 155 TP(Rl)A 1930, s 1(4)(a). Unless and to the extent that such other casualties or losses give

rise to statutory transfers in favour of other third parties.

156 The more difficult question of the availability of set-off against a ,statutory transferee is discussed at 20,66-20.67 above.

628

629

21
LOSSES

A. The Concept of a Loss (1) Property insurance (2) Liability insurance

21.02 21.03 2J.l4 21.18 2J.l9 21.31 21.36 21.37 21.53 21.84 21.90 21.91

B. Attaching Losses to Periods

afCover (1) Property insurance (2) Liability insurance

of freight and loss of vessel or cargo (3) W'hecher total loss of freight is actual or constructive

21.93 21.96 21.97 21.98 2J.109 2J.l1O 2J.l12 2J.l15 2J.l23

E. Loss of Adventure E Finality of Losses and the Doctrine of Ademption of Loss

G. Successive Losses (1) Successive losses: cumulative
recovery

C. The Classification of Losses

(1) Actual total loss

(2) Constructive roealloss (3) Partia1losses

D. Loss of Freight
(1) Whether freight lost

(2) Relationship between loss

(2) Successive unrepaired losses (3) The doctrine of merger of unrepaired paniallosses (4) Successive total losses

Marine policies afford cover in respecr of differenr rypes of loss. First, there is 21.01 physical damage to or loss of the subject-matrer insured. Secondly, the assured may also recover losses, charges, or expenditure incurred voluntarily or as a matter oflaw in order to avert or minimize a loss. Cover for such losses, charges, or expenditure is discussed in Chapter 24 below. Thirdly, the assured may incur loss in the form of liabiliry to a third parry, although commonly the relevant entitlement under a marine policy will be to indemnification of payment made in satisfaction of that liabiliry. This chapter is concerned predominantly with loss in the first sense, although certain issues relating to liability cover are also considered.

A. The Concept of a Loss

What counts as a loss for the purposes of an insurance contract depends on the 21.02 rype of insurance and, ultimately, on the wording of the contract in question.

631

Losses

The Concept ofa Loss

could be almost impossible for the underwriters proportionate to the risk.
to

(1) Property Insurance 21.03 Contracts for the insurance of property usually cover 'loss of or damage to the subject-matter insured'. This is the approach of the Institute and International marine clauses. This wording is interpreted as confining cover to direct, physical loss and damage. 21.04 Standard wording does not limit rhe nature of the damage. There is an insured loss even if the damage is not apparent to the naked eye and a sophisticated enquiry is required in order to ascertain the existence and extent of the damage. In Quorum v Schramm, ' a valuable painting was exposed to rapid and considerable increases in heat and humidity by reason of a fire in the warehouse where it was stored. The policy covered 'direct physical loss or ditect physical damage of wharsoever nature'. Alrhough the pastel sustained no visible damage, Thomas J concluded that rhe pastel had sustained sub-molecular damage causing advanced ageing and enhanced risk of deterioration. The assured accordingly succeeded in claiming for a partial loss.' 21.05 Loss or damage cannot, however, be equated with suspicion of loss or damage. In Cator v lVt'stern Insurance Co ofNew York,' bad weather damaged part of a cargo of tea, namely 449 packages. The remaining 1,711 arrived in perfect condition and were sold. However, as was customary in the rrade, the packages were numbered and sold in order ofconsecutive numbers. Any departure from a normal and complete sequence aroused suspicion as to the state of the contents and depressed the price. Consequently, the assured sustained a considetable financial loss even with respect to the undamaged packages. The Court of Common Pleas held, however, that such loss was irrecoverable from the insurers. Delivering the judgment of the court, Bovill CJ explained as follows: 4
The underwriters insure against damage to the goods by the perils insured against; but they do not, in our opinion, insure against damage by prejudice or suspicion, though such prejudice or suspicion be reasonable and be general in fact in business, when there is no damage in fact to the goods themselves; and, if this policy were to be so construed, it would make them insurers, not only against direct damage to the goods insured, but against damage to other goods in the same ship affecting the credit and thereby the value of the goods insured, and would create indirect and collateral and consequential liabilities from suspicion and prejudice, which it
--_._---------------~---

estimate in fixing a premium

Even where the subject-marrer insured incurs physical loss or damage, the insur- 21.06 ance cover does not, unless the contract otherwise provides, extend to consequential loss. In the hull insurance case of Field Steamship Co Ltd v Burr, s a collision occasioned setious damage to the insured vessel that resulred in putrefaction of the cargo and lawful rejection by the consignee at the port of destination. A claim against hull and machinery underwritets for the cost of unloading and disposal of the putrid cargo failed simply because the claim was not in respect of loss of or damage to the insured property.' Nor does hull insurance extend to 'business connexion', so that detention of the ship by a belligerent party to a war gives rise to no claim on a war risks policy on the ship. 7 Where insurance on cargo includes the packaging of that cargo, loss caused by 21.07 damage to the packaging is recoverable even though the goods themselves are undamaged. In Brown Bros v Fleming, 8 insurance on cases of whisky was held to cover damage occasioned by an insured peril to the bottles, labels on the bottles or corks, and even straw used to pack the bottles in the cases, as reflected in a reduced sale value of the cases, even though the whisky itself was unaffected. However, where, on its true interpretation, the policy covers the goods alone and their value is unaffected by damage to packing, such damage will not constitute a loss of insured property.' The assured clearly cannot recover for physical loss or damage within the scope 21.08 of a property policy unless the assured can prove on a balance of probabilities that the property allegedly lost did embark upon the insured adventure. In Fuerst Day Lawson Ltd v Orion Insurance Co Ltd, 10 the assured was unable to prove on a balance of probabilities that oil drums contained oil at the commencement of the insured adventure, the evidence leaving open the realistic possibility, at least, that the drums had only ever been filled with water with a thin film of oil to create a deceptive impression. In Coven SpA v Hong Kong

5
6

[1899J 1 QB 579.

, [20011 EWHC 505 (Comm), [20021 1 Lloyd's Rep 249.

It does not appear that the phrase 'of whatsoever nature' was significant in that the assured would otherwise have been unable to recover on the facts. Thomas J was satisfied that the painting
2

had been physically damaged. , (1873) LR8 CP 552. See also LysaghtW Ltdv Coleman [1895J 1 QB 49; Overseas Commodities Ltd v Style [1958J 1 Lloyd's Rep 546, 561-2.
<1 ibid 559. Such extension of liability would also extend the potential scope of the duty of utmost good faith.

The cost of unloading of cargo at a pore of distress necessary for the effecting of repairs to the vessel would be recoverable under the sue and labour clause, discussed at 24.02ff below. 7 Polurrian Steamship Co Ltd v Ytmng(l913) 19 Com Cas 143 (although should the detention endure sufficiently, it may become a constructive total loss). For other examples of lack of correspondence between loss and subject-matter of insurance, see Robertson v Ewer (1786) 1 TR 127 (wages and provisions not covered by insurance on body, tackle, and furniture of a vessel); Xenos v Fox (1869) LR 4 CP 665 (costs incurred in successfully defending action brought as a result of a collision not covered by third party collision liability policy nor by sue and labour clause therein). 8 (1902) 7 Com Cas 245. Although where the packing is defective, insurers will have a defence of inherent vice: see 15.55 above. 9 Vttcuum Oil Co v Union Insurance Society afCanton Ltd (l925) 24 L1LRep 188.
10

[1980] 1 Lloyd's Rep 656.

632

633

Losses Chinese Insurance CO,11 a cargo of broad beans was insured under a contract
incorporating the Institute Commodity Trade Clauses (A). No cargo was lost in transit, bur measurement error on loading led to a bill oflading being issued for 385,891.09 metric tonnes more beans than were in fact shipped. It was common gtound, and accepted as correct by the Court of Appeal, that the concept of loss of insured ptoperty could not embrace such a 'paper loss'. 21.09 In Coven, moreover, the Court of Appeal rejected the assured's argument that a paper loss was covered by the particular policy wording, which ptovided that the goods were insured subject to the Institute Commodity Trade Clauses (A) 'CoveringAIl Risks ... including shortage in weight'. The term 'including' indicated that the contemplated shortage was not designed to extend cover beyond the physical losses covered under the all risks cover of the Institute clauses. The context of a typical marine cargo policy, moreover, rendered it unlikely that the insurance was intended to guarantee the accuracy of the bill of lading or insure goods that never existed. 21.10 Protection against measurement ertors for purchasers who rely on bills oflading in entering into international sale contracts Can be obtained by means of a 'full outrurn guarantee'. The insurer is liable for any disparity between loading and discharge figures and is not entitled to require the assured to prove any physical

The Concept ofa Loss

such cases, it is necessary. to wait and see what transpires, and whether a total loss occurs depends on how the facts unfold. Thus, captures in time of war tend to constitute total losses immediately. In contrast, where ptoperty is hijacked by terrorists or held to ransom, it is necessary to wait and see how the circumstances develop in order to characterize the loss sustained."

It may, therefore, take some time before a dererminarion of total loss can be 21.13
made. In rhe meantime, rhe policy may expire." While a period of loss of possession not amounting to a total loss constitutes a partial loss, marine hull and catgo policies offer propetty insurance rather than loss of earnings insurance. Any claim is, therefore, confined to particular charges, salvage charges, and sue and labour expenses." (2) Liability Insurance Insurance against 'liability' is interpreted, subject to contrary intention, as cover- 21.14 ing legal liability. 18 This is incurred, so as to constitute a loss recoverable from an insurer, not when the assured commits a legal wrong giving rise to a right on the part of the injured third party to seek redress ftom the assured, bur at the later time when the existence and quantum of liability is established by judgment, arbitral award, or settlement." Liability may be established by a foreign court ptovided four conditions are satisfied: 20 (I) That the foreign court should in the eyes of the English Court he a Court of
competent jurisdiction.

10ss. 12
21.11 In the context of time insurance offreight, a peril may occur during the period of cover which results in a loss of freight but not rhe freight insured. In Hough v Head, 13 the insurance covered loss of chartered freighr ftom 15 April to 14 October caused by accidenrs occurring between 15 April and 15 October. On 27 June, the vessel was involved in a collision bur was able to complete rhe voyage. On arrival in November, ir was discovered rhat considerable repairs were needed, resulting in the rriggering by the charterers of an off-hire clause. This, however, did not relate to the insured period, freight for which was fully paid.

(2) That judgment should not have heen obtained in the foreign Court in breach of an exclusive jurisdiction clause or other clause by which the original insured
was contractually excluded from proceeding in that Court.

(3) That the [assured] took all proper defences. (4) That the judgment was not manifestly perverse.

21.12 A rotalloss may arise through a deprivation of possession where insured property is either irretrievable or unlikely to be recovered wirhin a reasonable time.'4 Wherher and when such a loss has occurred depends ultimately upon the facrs of the parricular case. Where rhe circumsrances reveal an intention immediately to deprive rhe assured of possession for rhe requisite period of time and success in achieving that aim, rhe loss occurs immediarely. Orher deprivarions, however, occur in circumstances that do nor supporr such an immediate prognosis. In

IS Kuwait Airways Corp v Kuwait 1murance Co SAl( (No 1) [199611 Lloyd's Rep 664, 688-9; Scott v Copenhagen Reinsurance Co (UK) Ltd [2003J EWCA Civ 688, [20031 Lloyd's Rep IR 696,

paras 73-77. On the attribution of such losses to particular policies, see 21.22ff below. 16 Until repeal by the Finance Act 1959, s 25(2) of MIA 1906 invalidated time policies in excess of 12 months. The provision remains in force in some jurisdictions that have adopted the

1906 Act.
17 Integrated Containers Service Inc v British Traders Insurance Co [1984] 1 Lloyd's Rep 154; Empresa Cubana de Fletes v Kissavos Shipping Co SA (The Agathon) (No 2) [1984J I Lloyd's Rep

183, 190.
Smit Tak Offihore Services v Youell [l992J 1 Lloyd's Rep 154. Versicherungs und IransportAC Daugava v Henderson (1934) 39 Com Cas 312 (reinsurance); Post Office v Norwich Union Fire Insurance [1967] 2 QB 363; Bradley v Eag!eStar Insurance Co Ltd [1989] AC 957, 966; Halvanon Insurance Co Ltd v Compania de Seguros do Estado de Sao Paulo
18
19

11
12

[1999J Lloyd's Rep 1R 565. (1885) 55 L]QB 43. 14 See 21.46-21.51 and 21.59~21.73 below.

If a full outturn guarantee is an insurance contract, it may be unenforceable in law for want of insurable interest: Coven v Hong Kong [1999] Uoyd's Rep IR 565,569.
13

[1995J LRLR 303 (reinsurance).

20

Commercial Union Assurance Co v NRC Victory Reinsurance [1998] 2 Lloyd's Rep 600,

610-11 per Potter L].

634

635

Losses
21.15 Subject to any contrary provision in the insurance contract, a settlement between the assured and the aggrieved third party is not binding on the insurer, which is entitled to contest both the fact of the assured's liabiliry and the amount for which the rhird parry's claim was settled. If the assured cannot prove that the third parry's claim falls within the terms of the cover, the insurer is not liable: a liability policy does not impliedly extend beyond liabilities expressly covered to others for which the assured agrees to pay in a settlement. 21 With respect to quantum, the question is whether the agreed amount is reasonable given rhe damages payable if legal proceedings had ensued. The settlement will be regarded as reasonable provided rhe assured's liability in damages would at least equal the sum payable under the settlement. 22 21.16 Where insured liability is addressed in a global settlement that also addresses other claims outside the scope of the insurance, there is no establishment of rhe insured liability so as to give rise to a claim against the insurer unless the settlement is broken down so as to attach a specific figure to the insured liability. In Lumbermens Mutual Casualty Co v Bovis Lend Lease Ltd, 23 Bovis brought proceedings against Braehead Glasgow Ltd for 37,778,266, being the balance payable on building contract. Braehead counter-claimed for 103,594,367, comprising claims for mismanagement of the project in various respects, defective and non-compliant work, and liquidated damages. The action was settled on terms that Braehead would pay Bovis 15 million in full and final settlement of all disputes under the contract. The settlement did not indicate how that figure had been determined. In particular, there was no indication to what extent, if at all, the ovetall figure represented a settlement of claims against Bovis that fell within the scope of Bovis's Iiabiliry insurance. Consequently, it was held that the settlement did not give rise to a claim by Bovis on those policies as liability thereunder had not been established. Colman J stated as follows: 24
... I have no doubt that a global settlement agreement of the Il_3ture of that found in the present case does not satisfy the requirement of ascertainment of loss under these liability insurance policies. It does not impose on the assured any identifiable loss in respect of any identifiable insured eventuality. It merely identifies the overall

Attaching Losses to Periods ofCover

Subject to contrary intention, which is invariably present in the context of rhe 21.17 cover provided by mutual insurance associations,25 there is no requirement that the assured should have satisfied the liabiliry so established before becoming entitled to claim against the insurer. 26

B. Attaching Losses to Periods of Cover

Assuming that the assured has incurred a loss caused by a covered peril, the 21.18 question is whether that loss falls within the temporal parameters of the policy. Again, a distinction needs to be drawn between property and Iiabiliry insurance.

(l) Property Insurance

Although the issue is ultimately one of construction of the policy in question, it 21.19 is extremely unlikely that a properry insurer will be held liable in respect of a loss occasioned by a peril that occurs outside rhe period covered. Thus, subject to contrary intention, there is no liability in property insurance where a peril occurs before rhe insurer comes on risk, but the consequences of the peril manifest themselves only during the covered period. 27 The policy may provide to the contrary, rendering the insurer liable for damage manifested during the period of cover even ifcaused by a peril occurring before attachment ofrisk, bur this would be 'contrary to common understanding' and require 'compelling language'." Assuming an insured peril occurs while the insurer is on risk, the insurer will be 21.20 liable, subject to contrary intention, only for such loss or damage as is thereby caused during the covered period. 29 Thus, the mere discovery of a latent defect while the insurer is on risk does not give rise to a claim under the Inchmaree clause. Without any change in the physical condition of the insured vessel, there is no 10ss.30 Likewise, the measure of indemnity for damage to a vessel responds only to damage incurred while the insurer is on risk. 31 And again, cargo insurance under the Institute cargo clauses does not cover a 'paper loss' arising where a

price paid by the assured as consideration for a contract which conferred on the assured various different benefirs including the dropping by Braehead of all claims
in respect of the project.
25

By virtue of 'pay to be paid' clauses, see 16.03 above.

21 MDIS 0 Swinbank [1999J Uoyd's Rep IR 516; Lumbermens Mutual Casualty Co 0 Boois Lend Lease Ltd [2004J EWHC 2197 (Comm), [2005J I Uoyd's Rep 494, paras 44-45. " Structural Polymer Systems Ltd v Brown [2000J Lloyd's Rep IR 64,72; Lumbermens Mutual Casualty Co v Boois Lend Lease Ltd [2004J EWHC 2197 (Comm), [2005J 1 Lloyd's Rep 494, para 44. 23 [2004J EWHC 2197 (Comm), [2005] I Lloyd's Rep 494. 24 ibid para 55.

North Atlantic Insurance Co Ltd v Bishopsgate Insurance Ltd [1998] 1 Lloyd's Rep 459, 462. Kelly v Norwich Union Fire Insurance Society Ltd [1989] 2 Lloyd's Rep 333. See also Promet Engineering (Singapore) Pte 0 Sturge (The Nukila) [1997J 2 Lloyd's Rep 146, 151. 28 [1989J 2 Lloyd's Rep 333, 339, 340 per Bingham LJ. See also Reinhart Co 0 Joshua Hoyle & Sons Ltd[I961J 1 Lloyd's Rep 346, 358, 361.
26 27

29 Aside from representing the natural interpretation of the contract, this promotes financial certainty for insurers by facilitating a more reliable financial assessment of liabilities at an earlier

dare, Lockyer v OjJley (1786) 1 TR 252, 261.

30

Promet Engineering (Singapore) Pte

Sturge (The Nukila) [1997J 2 Lloyd's Rep 146, 151.

See 11.21ff above. 31 MIA 1906, s 69, discussed at 23. 15ff, esp 23.21 below. 637

636

Losses

Attaching Losses to Periods

to serve a notice of abandonment immediately after seizure of the carrying vessel in favour of contesting a condemnation action brought by the Ametican captor in the hope of recovering the goods and exploiting a profitable market. The American Prize Court ruled in favour of the assured and the captors decided to appeal. The cargo was subsequently sold by dectee of rhe Prize Court, a sale that the assured could have prevented by pledging the full value of the cargo in American paper currency. The Court of Exchequer Chamber held that this failure did not break the chain of causation as no prudent uninsured owner would have acted differently given the deteriorated condition of the goods and the volatile state of the American currency. The sale, which stripped the assured of both the property in the goods and all possibility of repossession, constituted a total loss in respect ofwhich the assured was entitled to recover. On the facts it was irrelevant whether this total loss was actual or constructive as the assured had served a fresh notice of abandonment immediately thereafter." On the causation point, Kelly CB observed that the total loss by the sale 'arose, though not directly, out of the original capture ... through a series of consequences, viz the institution, the different stages, and the continuence of the [prize] suir until the decree was pronounced; and the sale under the decree was ... a completion of the total loss'." In London & Provincial Leather Processes Ltd v Hudson," the liquidator of an 21.25 insolvent company to which the assured had entrusted goods for processing refused to return the goods to the assured and instead unlawfully sold them. The seizure occurred during the risk although it was unclear whether the sale occurred before or aftet the expiry ofthe policy. However, Goddard LJ considered that the timing of the sale did not matter. This decision was subsequently relied on at first instance in Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd. 40 Goods were insured under a policy expiring, inter alia, sixty days after completion of discharge at the final port of discharge. Within that period, customs officets unlawfully removed them from a customs compound and converted them to their own use. David Steel J held that there was a constructive total loss of the goods within the policy period. AJternatively, he held there was a partial loss during the currency of the risk that ripened after expiry of risk into an actual total loss, which was recoverable under the policy.41

weighing error on shipment results in the issue of a bill of lading for a larger quantity of goods than were in fact loaded. There is no physical loss during the period of covet as delineated under the transit clause."
21.21

The occurrence of a loss may be presumed. According to section 58 of the Marine Insurance Act 1906: 'Where the ship concerned in the adventure is missing, and after the lapse of a reasonable time no news has been received, an actual total loss may be presumed.' The statutory provision, however, creates no ptesumption regarding the ptecise timing of the loss. It remains for the assured to adduce evidence to convince the court on a balance of probabilities that the vessel was lost within the insured period. 33 Notth J once recollected a case34 involving a man who left Singapore by ship two days before his twenty-first birthday and was presumed dead when not heard of again for seven years. James V-C held that he had died before his twenty-first birthday on the basis of evidence that the ship had encountered a violent storm the night after leaving Singapore and never been heard of again, and that several othet vessels wete known to have been lost in the stotm. of the tisk is subject to the 'gtip of the peril' doctrine." Accotding to this doctrine, whete the insuted property falls into the grip of an insured petil during the currency of the risk, the insurer is liable for any total loss proximately caused by that peril after the expiry of risk.

21.22 The confinement of the insurer's liability to loss sustained during the currency

21.23 The doctrine operates most readily in the context of perils of deprivation of

possession. The policy may expire between the insured property falling into the grip of a peril of deprivation of possession and that deprivation maturing i~to a total loss. However, provided the peril of deprivation ofpossession thar grips the ptopetty while the insurer is on risk qualifies as the proximate cause of a total loss that ultimately matures, the insurer will and should be liable fOt that total loss. Otherwise, the apparent extent of cover againsr perils of deprivation of possession would be misleading and there would be a significant gap in a shipowner's cover, since renewal or alternarive cover is unlikely to be available except at prohibitive rates once the vessel is known to have been seized.
21.24 A leading example of the grip of the peril doctrine is provided by Stringer

v English & Scottish Marine Insurance Co." The assured cargo owner elected not
Although the court seemed to favour an actual total loss: ibid 606. ibid 603-4. See also Mellish v Andrews (I812) 15 East 13; Cossman v ","st (1887) 13 App Cas 160. 39 [193912 KB 724. 40 [20021 EWHC 21 (Comm), [20021 1 Lloyd's Rep 652. " An appeal was unsuccessful ([20021 EWCA Civ 1605, [2003] 1 Lloyd's Rep 131), although the Court of Appeal noted the unreserved nature of the judgment in Hudson and expressly reserved any opinion on the grip of the peril doctrine. The doctrine does, however, appear to be well supported by authority.
31
38

32 33

34

Coven SPA v Hong Kong Chinese Insurance Co [19991 Lloyd's Rep IR 565, 569. Reid v Standard Marine Assurance Co Ltd (I 886) 2 TLR 807. In the course of his judgment in Re Rhodes (I887) 36 ChD 586, 591. Notth J appeated as

counsel in the otherwise unreported decision. 3S The phrase was suggested by Rix L] in'Scottv Copenhagen Reinsurance Co (UK) Ltd (2003J EWCA Civ 688, [20031 Lloyd's Rep IR 696, pata 47. . 36 (I870) LR 5 QB 599.

638

639

Losses
21.26 In contrasr, the grip of the peril docrrine was held inapplicable on the facts of Fooks v Smith,42 a case concerning insurance of cargo carried on an Austrian ship. Because of an imminent outbreak of war, the Austrian government directed that Austrian ships should seek safety, resulting in the insured vessel failing to complete its voyage. Although this constituted a constructive total loss by the insured peril of restraint of princes, the assured failed to serve a notice of abandonment." A year later, and after the policy had expired, the Ausrrian government requisitioned the goods and sold them, acts constituting an actual total loss. Bailhache J held that the underwriters could not be held liable for a total loss based on the requisition and sale as rhey were not a 'natural or direct consequence of the peril insured against'.44 As a marter of proximate causation, 'the seizure and sale were not so nearly connected with the restraint of princes that I can hold that the total loss was a completion of what was begun by the restraint of princes' ,45 21.27 In Lockyer v Offley,46 barratty during the insured voyage resulted in the vessel being arrested approximately one month after the termination of the voyage and, therefore, the expiry of risk. Insurers were held not liable. The case has been explained on the basis that the proximate cause of the loss was the seizure and not the barrarry.47 While that approach has some support in pre-Leyland Shipping case law, it is suggested elsewhere that it is unsustainable in the modern law." The result may, nevertheless, be sustainable. It is clear that the barratry occasioned no loss at all during the currency of the policy. Consequenrly, any claim would have to be based on the grip of the peril doctrine. However, the absence even of any investigation of the vessel at the time of expiry of risk may preclude a finding that the vessel was in the grip of the peril of barratry rarher than merely being the scene for barratrous conduct. Such a limitatiop. may find support in the financial uncertainty arising from the potential, emphasized by the Court in Lockyer,49 for liability to arise long after the period of cover has expired, a concern that even today may be relevant in property insurance. 21.28 The grip of the peril doctrine is sometimes referred to as the 'death's blow doctrine', but this label is potentially misleading. It conveys the idea that the insured property must have sustained a terminal injury during the currency of the policy and all that happens after the expiry of risk is that the injury takes its

Attaching Losses to Periods ofCover

inevitable course. This sets the threshold too high. The liquidator in Hudson might have realized any sale would have been unlawful and returned the goods. The correct threshold is that of proximate causation. Provided the subsequent loss was proximately caused by the insured peril, the insurer is liable. The grip of the peril cases all contain an initial partial loss maturing into a total 21.29 loss or an initial constructive total loss maturing into an actual total loss. There is, indeed, no scope or need for the grip of the peril doctrine where the property is afflicted with a partial loss that will continue to develop but not into a total loss. The progressive narure of the loss will be factored into the normal measure of indemnity. For example, the measure of indemnity for unrepaired damage to a ship is measured by reference to its diminution in value as at the time of expiry of risk. 50 However, the -value of a vessel that has sustained a certain amount of damage will be less where the problem will develop further than in the case where the full extent of the damage has been sustained. Provided an insured loss is sustained duting the period of cover, it is immarerial 21.30 that either the Joss or irs full extent is not discovered or ascertained until after rhe time has expired. 51 In Knight v Faith,52 a vessel insured under a time policy sustained a partial loss by stranding during the period covered. The damage was sufficiently serious to result in the sale of the vessel outside the covered period, although not in circumstances permitting the assured to claim for a total loss. 53 The insurer was held liable for the partial loss, as reflected in the reduced price obtained on the sale of the damaged ship.54 (2) Liability Insurance Under liability insurance, a distinction needs to be drawn between the incurring 21.31 of loss by establishing the existence and quantum of a liability of the type covered by the policy, and the occurrence that determines in point of time whether that liability falls within the policy. It is for the contract to stipulate the
relevant occurrence.

The rule books of the P&I clubs identifY the original casualty that gives rise to 21.32 the liability as the relevant event. For example, the P&1 rules ofthe Britannia club
See 23.21 below. ~his proposition is sometimes associated with the grip of the peril doctrine: Scott v Copenhagen Reinsurance Co (UK) Ltd [2003J EWCA Civ 688, [2003J Lloyd's Rep IR 696, para 47. It is, however, distincr. 52 (1850) 15 QB 649. S3 The casualty did not render the vessel an actual total loss and the assured failed to serve a notice of abandonment, barring recovery for a tota11oss. 54 Although the measure of indemnity is assessed by reference to the time when risk expires, the post-expiry sale price provided evidence of the loss sustained at that time. The loss in Knight v Faith now falls witbin MIA 1906, s 69(3).
50

S1

[1924J 2 KB 508. Thereby forfeiting th~ right ~o claim the. measure of indemnity for a total loss and being relegated to the measure of mdemOity for a partlalloss. No notice ofabandonment need be served in respect of an actual total loss. For discussion of the notice of abandonment procedure, see 22.33ffbelow. 44 [1924J2 KB 508, 515. 4S ibid 516. 45 (1786) 1 TR 252. 47 Knight v Faith (1850) 15 QB 649, 668. 48 See 11.58-11.59 above. " (1786) 1 TR252,261.
42

43

640

641

Losses

The Classification ofLosses

period of exposure spenr on ships enrered with the association bears to the tOtal period of exposure.

provide generally that cover is against 'loss, damage, liability or expense incurred by [a Member] which arises ... our of events occurring during the period of enrty of the Ship in the Association'. 55 Such a general rule may be supplemenred by specific reinforcement in the context of individual perils. The rules of the United Kingdom P&I club require in respect of wreck liability thar 'the enrered ship became a wreck as tbe result of a casualty or event occurring during the period of that ship's entry in the Association'.56 Subject to this proviso, the club conrinues to cover wreck liabiliries notwithstanding thar cover might otherwise have terminated by reason of the vessel being rendered a rotalloss.
21.33 IdentifYing the time at whicb a relevanr evenr occurs may presenr difficulty.

C. The Classification of Losses

Marine insurance law divides losses into total and parriallosses and subdivides 21.36 total losses inro acrual and consrrucrive tOtal losses:' In this latter respect,
marine insurance differs from non-marine, which does not recognize the con-

Consequently, club rules may conrain deeming provisions, creating conclusive or rebuttable presumptions as to the time of certain evenrs. Tllus, defence cover rules of mutual insurance associations deem all claims and disputes arising
under contract, tort, or statute to arise at the date of the cause of action and

all claims and disputes concerning salvage or towage to arise at the date of
commencement of the salvage or towage services.

structive total loss62 The concept of a partial loss is residuary, embracing all losses that do not qualifY as total, as defined by the Act:' This classification affects the procedure to be followed in making a claim (for a constructive total loss to be indemnified as a total rather than a partial loss, rhe assured must generally serve a notice of abandonment on the insurer):' the measure of indemnity to which the assured is entitled, and the possibilities of recoupmenr by the insurer of moneys paid to the assured. (1) Actual Total Loss
An exhaustive65 definition of the concept of actual total loss is provided by 21.37 section 57(1) of the Marine Insurance Act in the following terms: 'Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss.' The subsection clearly conremplates three categories of actual total loss, each of which will now be considered.

21.34 The Gard P&I rules also create a rebuttable presumption with respect to carrier's

liability" that all loss of or damage to cargo on the same cargo-carrying voyage arose out of one evenr that occutred at the first place of discharge or port where such loss or damage was ascertained. Specifically with respect to riming, the loss or damage is deemed to have occurred at the earlier of the time of ascertainmenr of the loss or damage or discharge of the cargo. 58 The presumption may be rebutted by the association (but not rhe member) proving when the loss or damage occurred. Consequently, the associarion is not liable where a vessel is withdrawn from rhe association after commencing the voyage but before arriving at the port where the loss or damage is first ascertained, even if the member can show that the carrier's liability was incurred before withdrawal of the vessel.
21.35 A further rebuttable presumption in the Gard P&I rules" was introduced in

(aJ Destruction
Actual total loss in the form of destruction or damage involves a loss of char- 21.38 acter. In the conrext of hull insurance, the question has been asked whether the insured vessel remained a ship or had been reduced to a mere collection of planks and become a mere wreck: 6 However greatly damaged, there is no actual total loss of a ship if it remains safe in the conrrol of the owner and still bears the characrer of a ship.6'

response to asbestosis claims. 60 Difficulty arises where a seaman has been exposed to an illness over a prolonged period, but he worked on ships enrered with the association during only part of this period of exposure, and it is impossible to establish when he contracted asbesrosis. The rules deem the member's liability for death, disease, or personal injury to be incurred at a uniform rate throughout rhe total period of exposure. The association then agrees to cover such proportion of the member's liability as thar part of the

55 58

r3(I}.

56

r2,s15;'

57

r80.1.

A further limb of l' 80.1 addresses the sale or other disposition by the member of its interest

in the ship in the course of a cargo-carrying voyage. 59 r 80.2. 60 Poland and Rooth, Gard Handbook on P&lInsurance (4th cdn, 1996) 579-80.

MIA 1906,,56(1). (2). Moore v Evans [1918) AC 185; Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kast.r Too) [2004) EWCA Civ 277, [2004) 2 Lloyd', Rep 119, para 8. " MIA 1906, , 56(1). 64 For discussion of the notice of abandonment procedure, see 22.33ffbelow. 65 Sanday & Co v British & Foreign Marine Insurance Co [1915] 2 KB 781,831. 66 Cambridge vAndmon (1824) 2 B & C 691. 67 Lohre v Aitchison (l878) 3 QBD 558, 562, Although there may be a constructive total loss: Bell v Nixon (1816) Holt 423.
61 62

642

643

Losses

The Classification ofLosses

dissipated that its role and function as a dead ship susceptible of being towed away for scrap had been destroyed'. 7S Had the vessel already broken in two rendering it incapable of being the subject of a single tow for scrapping, there might have been a loss of commercial identity. The evidence, however, demonstrated that the vessel retained its character as a single vesseL That salvage might necessarily involve separation into two halves went to the modalities and economics of salvage rather than loss of commercial identity. Consequently, insurers were not liable under a policy that covered actual total loss only. Insured property may be so damaged as to render its sale the sensible com- 21.42 mercial response, but insurers are not liable for loss by sale. Where property constitutes an actual total loss or is in imminent danger of becoming one, commercial necessity may justifY an immediate sale for rhe benefit of the underwriters, but where sale is merely the response of a prudent uninsured owner, the property is at most a constructive total loss requiring the giving of notice of abandonment." In Roux v Salvador," a leak in the carrying vessel caused the insured cargo of hides to arrive at an intermediate porr in a state of progressive putrefaction. By the time of arrival at the port of destination, the process, being impossible to contain, would have destroyed the character of the hides and rendered them unsaleable as such. In consequence, they were sold at the intermediate port, realizing 27 per cent of their agreed value. Under these circumstances, it was held that the assured could recover for an actual total loss. The existence of the hides in specie at the intermediate port was neither inconsis- 21.43 tent with a total loss nor required notice of abandonment. In the course of a seminal judgment, Lord Abinger CB stated as follows:"
In the case before us the jury have found that the hides were so far damaged by a peril of the sea, that they never could have arrived in the form of hides. By the process of fermentation and putrefaction, which had commenced, a total destruction of them before their arrival at the porr of destination became as inevitable as if they had been cast into the sea or consumed by fire. Their destruction not being consummated at the time they were taken out of the vessel, they became in that state a salvage for the benefit of the party who was to sustain the loss, and were accordingly sold; and the facts of the loss and the sale were made known at the same time to the assured. Neither he nor the underwriters could at that time exercise any control over them, or by any interference alter the consequences. It appears to us, therefore, that this was not the case of what has been called a

(b) Damage so as to cease to be a thing ofthe kind insured

21.39 When considering wherher insured property has ceased 'ro be a rhing of the kind insured', the question is whether the insured property has undergone a change of commercial identity. The leading case of Asfizr 6- Co v Blundell" involved a cargo of dates shipped to London on board a vessel that sank in rhe river Thames. When the vessel was subsequently raised and docked, the dates were found to be 'a mass ofpulpy matter impregnated with sewage and in a state offermentation'." Although condemned as unfit for human consumption, they retained considerable value and were sold fot 2,400 for distillarion into spirit. The issue was whether there was a loss of freight. This raised in turn the question ofwhether the dates had been lost. The Court ofAppeal held there was a toralloss of the dates. According to Lord Esher MR,'o the test to be applied:
.. . is whether, as a matter of business, the nature of the thing has been altered. The nature of a thing is not necessarily altered because the thing itself has been damaged; wheat or rice may be damaged, but may still remain the things dealt with as wheat or rice in business. But if the nature of the thing is altered, and it becomes for business purposes something else, so that it is not dealt with by business people as the thing which it originally was, the question for determination is whether the thing insured, the original article of commerce, has become a total loss. If it is so changed in its nature by the perils of the sea as to become an unmerchantable

thing, which no buyer would buy and no honest seller would sell, then there is a
total loss.

Biologically the dates remained: commercially they had been lost. Similarly, on immersion in water, the metamorphosis undergone by a cargo of cement" and the destruction by rust of the entire value of steel injection moulds" conssitute an acrual total loss.
21.40 In contrast, in Francis v Boulton," a cargo of rice with a declared value of 450 which was submerged in the river Thames for two tides, recovered, kiln-dried at a cost of 68, and sold for Ill as rice, albeit river-damaged, was held to have sustained only a partial loss. 21.41 Any question of change of commercial identity necessarily requires that the original identity be ascertained and chatacterized. In The Shakir III,74 the insured vessel was a 'dead ship' being towed for demolition when it broke loose and stranded. Albeit almost broken in two and incapable ofcompleting irs voyage without salvage and repair, 'its essential components were not so damaged or
._---_._68
71

[1896J I QB 123. 69 Ibid 127. Duthrie v Hilton (1868) LR 4 CP 138.

70

ibid 127-8.

7S

ibid 591 per Potter Lj.

n Berger 6- Light DiffUsers Pry Ltd v Pollock [1973J 2 Lloyd's Rep 442 (retained value as scrap but lost commercial identity as steel injection moulds).
73 74

(1895) 65 LJQB 153.

Fraser Shipping Ltd v Colton (The Shakir III) [1997J 1 Lloyd's Rep 586.

Gardner v Salvador (1831) 1 M & Rob 116; Farnworrh v Hyde (1865) 34 LJCP 207; Cobequid Marine Insurance Co v Barteaux (1875) LR 6 PC 319; Saunders v Baring (1876) 34 LTNS 419. 77 (1836) 3 Bing NC 266. 78 ibid 281. See also Dyson v Rowcrofi (1803) 3 Bas & Pul 473.
16

644

645

Losses
constructive loss, but ofan absolute total loss of the goods: they could never arrive; and, at the same moment when the intelligence of the loss arrived, all speculation was at an end.

The Classification ofLosses

the vessel's release, one Maitre Rochon, described the task confronting him as attempting the impossible. The scheme he was working on involved procuring a survey report showing the vessel to be of little value in order to persuade the Vietnamese government to sell it by aucrion. Assuming no other bidders, the vessel could then be bought back. Bribery of certain officials would be necessary. The scheme, if successful, would take several months to come to fruition. As of 2 June, it had not been put in motion. By 29 August 1967, when the assured issued proceedings alleging an actual total loss, the vessel had been detained for 17 months. Ultimately, the scheme appears to have succeeded, in that the vessel was tecovered by auction purchase on 21 May 1968. Judged by reference to the earlier date of issuing of proceedings,83 Mocarra J stated obiter that, despite the very pessimistic prospects of recovery, the test of irretrievable deprivation was not satisfied. This test, he said, was 'clearly far mote sevete' than that for unlikelihood of recovery.84 Whether sinking or stranding results in irretrievable deprivarion of an insured 21.48 vessel depends upon the possibility, and not the cost, of its being raised or refloated given its condition and location, and given available salvage facilities. 85 If salvage of a sunken or stranded vessel is uneconomic, the vessel is a constructive and not an actual totalloss. 86 Although improved salvage techniques render it decreasingly likely that salvage will be impossible rather than uneconomic, in The Shakir II!,87 Potter LJ declined to reconsider the dividing line between the two rypes of total loss. Irretrievable deprivation does not result even from a forcible seizure and sale of a 21.49 vessel, unless pursuant to judicial condemnarion of the vessel, since the property in the vessel is not altered. 88 In Cossman v west,89 the master and crew abandoned

21.44 Were such an eventuality to arise today, modern communications render it significantly less likely that the cargo-owner could not be contacted for instructions and accordingly exercise control over the cargo. Nevertheless, if the circumstances were such that the cargo-owner could not 'by any interference alter the consequences', following Roux v Salvador there would still be an actual total loss and, therefore, no need to give notice of abandonment to the underwriters. Any sale by the master ought to be authorized by the cargo-owner, since modern communications are likely to deny any commercial imperative for the master to exetcise an agency of necessity and sell without obtaining actual authorization. By virtue of the doctrine of abandonment, however, the insutet would be entitled to the ptoceeds. 79 21.45 As a marter of ptinciple, it is arguable thar damage resulting in a loss of commercial identity should produce a consrructive, rarher than actual, roral loss. Since, by definition, there remains something that might retain some value, an insurer ought to be permitted to decide upon such steps as should be taken to realize that value. This seems to call for the insurer to be notified of the loss by service of a notice of abandonment, 80 which is confined to cases of constructive total losses. As a matter of law, no such argument is tenable. Such concerns might, nevertheless, indicate that in borderline cases a court should err towards holding that badly damaged property is a constructive rather than an actual total loss.

(c) Irretrievable deprivation

21.46 Irretrievable deprivation does not require certainty that the property will not be recovered. Unless the property has been destroyed, certainty is impossible to attain. In insurance law, therefore, the notion that deprivation is irretrievable connotes a degree of probability of non-recovery. Where the facts are that it is unlikely that the assured will recover the insured property within a reasonable time, there is a constructive and not an actual totalloss. 81 In marine insurance law, irretrievable deptivation necessarily involves a lower possibility of recovery. 21.47 In The Anita," the insured vessel was seized by Vietnamese customs authorities and subsequently confiscated by order ofa special military tribunal. On 13 March 1967, the principal intermediary employed by underwriters to attempt to secure

79 For discussion of the doctrine of abandonment, see 22.31, 22.36ffbelow. so See 22.34-22.35 below. 81 For discussion of this type of constructive total loss, see 21.59ffbelow: 82 Panamanian Oriental Steamship Corp v Wright (The Anita) [1970] 2 Lloyd's Rep 365.

83 For the significance of that date as the date by reference to which the existence of actual total losses are determined, see 21,102-21.105 below. 84 [1970J 2 Lloyd's Rep 365, 383. In non~marine insurance, which does not have a concept of constructive total loss, there is some authority that the concept of irretrievable deprivation is interpreted more generously and requires nothing more than that the assured has taken all reasonable steps to recover the property and recovery remains uncertain or unlikely: Holmes v Payne [193012 KB 301; Webster v GeneralAccident Fire & Life Assurance Corp Ltd[1953] 1 QB 520; KuwaitAirways Corp 0 Kuwait Insurance Co SAK (No 1) [199611 Lloyd's Rep 664, 686. Put another way, there will be an actual total loss where an informed observer would conclude that there was only a mere chance of recovery as opposed to any realistic likelihood of recovery: Wikon o jones (1867) LR 2 Ex 139, 152; Moore 0 Eoam [1917] 1 KB 458, 472-3. These tests do not apply to actual total loss in marine insurance law. es Cates (CaptainjA) Tug & Wharfage Co Ltd 0 Franklin 1murance Co [1927] AC 698, 704-5. explaining the comments of Lord Halsbury in Sailing Ship 'Blairmore' Co Ltd v Macredie [1898] AC 593, 597; Cohen (George), Som & Co v Standard Marine Insurance Co Ltd (1925) 21 LlLRep 30; Fraser Shipping Ltd v Colton (The Shakir III) [19971 1 Lloyd's Rep 586. 86 Fraser Shipping Ltd v Colton (The Shakir III) [1997] 1 Lloyd's Rep 586, 592. 87 ibid. " Wilson v Forster (1815) 6 Taollt 25. 89 (1887) 13 App Cas 160.

646

647

Losses
the insured vessel having bored holes in the hull in an attempted scuttling. The vessel, however, was salved, sold under an Admiralty Court decree with the proceeds being paid to the salvors, and subsequently restored to good condition. The assured shipowner, who was innocent of any complicity in the fraud of the master, claimed for an actual total loss." According to Sir Barnes Peacock, delivering the advice of the Privy Council:
To constitute a total loss within the meaning of a policy of marine insurance, it is not necessary that a ship should be actually annihilated or destroyed; it may, as in the case of capture and sale upon condemnation, remain in its original state and

The Classification ofLosses

Under the Institute cargo clauses, where a covered peril causes termination of 21.51 .the insured transit at a port other than the conrractual destination, 'the Underwriters will reimburse the Assured for any extra charges properly and reasonably incurred in unloading storing and forwarding the subject-matter to the
destination to which it is insured hereunder'. 96

(d) Applicability ofthe de minimis principle

It is unclear whether the maxim de minimis non curat lex (the law does not 21.52 concern itselfwith very small matters) applies to the concept ofactual toralloss. If it does, the surviving proportion of the insured property must be truly minimal. Where a cargo ofrice was delivered so damaged as to sell for less than ten per cent of its sound arrived value but, nevertheless, yielded 972, the court held the loss partial. 97 In Hedburg v Pearson,98 less than three per cent of the cargo remained, but the court refused to find a total loss, seemingly disliking the maxim on principle as incapable of reasoned and conrrolled application. This, however is a criticism that can be levelled at the maxim in any context, yet effect is given to it. A] though the maxim has never been applied to actual total losses, that may be simply because appropriate facts have yet to present themselves. Where all but twelve of a cargo of 668 steel pipes were lost by perils of the sea and the twelve were delivered damaged, the High Court of Malaysia held the de minimis rule inapplicable on the facts as the delivered pipes constituted toO high a proportion of the total cargo and were themselves insured for $16,000. It was conceded, however, that the rule might have applied had only one or two pipes survived."
(2) Constructive Total Loss

condition; it may be capable of being repaited if damaged; it may be actually

repaired by the purchaser, or it may not even ~eq~ire repairs. If it is lost to :he owner by an adverse valid and legal transfer of hiS nght of property ~n~ P~Ss~ssl~n to a purchaser by a sale under a decree of a Court of competent J~r~SdICtlOn III consequence of a peril insured against, it is as much a total loss as If It had been

totally annihilated ..

91

Accordingly, the sale of the vessel pursuant to judicial decree constitured an actual total loss as it removed all speculation upon the possibility of redemption and restoration of the vessel. 92 Likewise, plundering of wrecked cargo renders it an actual total loss."
21.50 Retardation of the voyage may result in deterioration of the goods so as to render them a totalloss. 94 However, it follows from the concepr of irretrievable deprivation that mere retardation of itself cannot constitute an actual total loss. In Roux v Salvador,95 Lord Abinger CB stated the principle as follows:
If the goods are of an imperishable nature, if the assured become poss~ssed or san

have the control of them, if they have still an opportunity ofsending them to theit
destination, the mere retardation of their arrival at their original POrt may be of no prejudice to them beyond the expense of re-shipment in another vesse1. In such a case, the loss can be but a partial loss, and must be so deemed, even though the assured should, for some real or supposed advantage to themselves, elect to sell the goods where they have been landed, instead of taking measures to transmit them to their original destination.

Section 60 of the Marine Insurance Act provides the following exhaustive 1O ' definition of the concept of constructive total loss:
(1) Subject
to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it cbuldnot be preserved from actual total loss without an expenditure which wbuldexceed its value when the expenditure had been incurred. (2) In particular, there is a constructive total loss-

21.53

90 When abandoned by the master and crew, the condition of the vessel was such as to constitute a constructive tota110ss, but no notice of abandonment was served, precluding a claim for a constructive total loss. " ibid 169-70. See also Mullett v Sheddon (l8ll) 13 East 304. 92 In Panamanian Oriental Steamship Corp v U::7right (The Anita) [1970] 2 Lloyd's Rep 365, 383, Mocatta J considered that divesting of legal ownership by judicial confiscation did not necessarily resulr in irretrievable deprivation. However, first; the comment was obiter; secondly, no authority is cited on this point in the judgment and it is unclear whether Cossman v w:'estwas brought to the court's attention; and, thirdly, in the opinion of Mocatta J (not shared by the Court ofAppeal: [1971] 1 WLR 882), the confiscation order exceeded the tribunal's jurisdiction and was, therefore, invalid, 93 Bondrett v Hentigg (1816) Holt 149. " Lozano vJanson (1859) 2 EI & El 160. os (1836) 3 Bing NC 266,278-9.

(i) Where the assured is deprived of the possession of his peril insuted against, and (a) it is unlikely that he can goods, as the case may be, or (b) the Cost as the case may be, would exceed their value when rec;ov,ewd;

96

97

Institute Cargo Clauses (A), (B), (C), cI12. Glennie v LondonAssurance Co (1814) 2 M & S 371. 99 Boon & Cheah Steel Pipes Sdn Bhd v Asia Insurance Co 100 Robertson v Petros M Nomikos Ltd [1939] AC 371,392; Irvin v

648

649

Losses
(ii) In the case ofdamage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired. . . . In estimating the cost of repairs, no deductl?n IS to be made In r~spect of neral average contributions to those repairs payable by other Interests, ~:t account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired; or (iii) In the case of damage to goods where the cost of repairing the ?amage and forwarding the goods to their destination would exceed thelf value on arrival.

The Classification ofLosses

to cease on the vessel becoming a constructive total loss, it became necessary to determine when that had occurred.

Despite the phrase 'in particular' that introduces subsection (2), to some e~tent at least the categories of constructive total loss contamed therem are addmonal to rather than illustrative of subsection (1).101 A total of six categories may be identified within the statutory wording. In four categories, there is a constructive total loss when it is uneconomic to preserve, repair, or recover the insured roperty. The various categories of consrrucrive total loss will be considered before addressing how economic viability is determined.

On the facts, a majority of the Court ofAppeal held in favour of the shipowners, 21.56 although their argument that abandonment in section 60(1) meant abandonment by the assured to the underwriters was unanimously rejected. Scott LJ and Stable J noted that abandonment to the insurer is not an ingredient of a constructive total loss but the manifestation of the assured's election for treatment as a total loss in the light of such a loss, necessarily later in time and different in quality from the reasonable abandonment contemplated in section 60. 103 The test for a section 60 abandonment 'in fact' was the same as that adopted in salvage, namely 'an abandonment animo derelinquendi sine animo revertendi et sine spe recuperandi', 104 the test being applied at the time when the decision to leave the ship is taken and acted on.'os According to du Parcq LJ, however, to abandon in section 60(1) meant to give 21.57 up for lost in the sense of renunciation of all rights, both proprietary and possessory, in the insured property.'o, The act of the master in ordering the crew to leave the ship satisfied neither approach to abandonment. The master's decision to order the entire crew to leave the vessel was motivated by a legitimate concern for their safety and not by a belief that the vessel waS doomed. On the contrary, he expressed the view that the vessel would not sink for a considerable time, and he and the commander of the naval escort concluded that salvage was a realistic possibility if it could be undertaken immediately. On those facts, neither was there the requisite intention to give up the vessel as lost nor did the actual total loss of the vessel at that time appear inevitable to the master. The reason why du Parcq LJ adopted a less specific approach to the definition 21.58 of abandonment lies in the drafting of section 60(1). The clause 'where the subject-matter is reasonably abandoned' also introduces a second category of constructive total loss, namely reasonable abandonment of the insured property because the cost of preservation from actual total loss would exceed its preserved value. Scott LJ acknowledged that the salvage test of abandonment was frequently inappropriate to this second limb of section 60(1) because the latter involves a financial judgment unaccompanied by any physical manifestation on the insured property. du Parcq LJ was not prepared to accept that the word 'abandoned', used only once in section 60(1), had a different meaning

(aJ Constructive total loss based on reasonable abandonment

21.54 The firsr twO categories of constructive total loss involve reasonable abandonment of the insured subjecr-matter because an actual total loss either appears navoidable or cannot be avoided without an expenditure in excess of the value u 102 f of the subject-matter once preserved. In The Lavington Court, the Court 0 Appeal considered the meaning of abandonment in this context. 21.55 A vessel requisitioned by the Crown was torpedoed on 18 July while part of a convoy. Neither navigation nor towing were possible and the strickel1 vessel was at the mercy of enemy submarines. Accordingly, the master ordered the entire crew to transfer to another vessel and leave the vessel behind, war conditions necessarily rendering salvage the concern of the naval authorities. A tug was sen l' and duly took the vessel in tow, bur on 1 August the vessel sank after bemg towed more than 600 miles. The shipowners recovered from hull insurers as for a total loss on 18 July, but further claimed hire from the Crown for the period from 18 July to 1 August. Since the charterparty of requisition provided for hire

--------------_._-_._--IWbertson v Petros M Nomikos Ltd [1939] AC 371, 392; Rickards v Forestal Land, Timber & Railways Co Ltd (The Minden) [1942] AC 50, 84; The Bamburi [1982] 1 Lloyd's Rep 312, 31 Court Line Ltd v R (The Lavington Court) [1945] 2 All ER 357. Apart from The Lavington Court, other examples of constructive totallos~by reasonable abandonment are pro:ided by cases of frustration ofvoyage: British & Foreign Manne Insurance Co Ltd v Sanday,& Co [1916] AC 605. On frustration of voyage generally, see 21.97 below.
101

1;,

103 On abandonment to the insurer as the making of an election in the light of a constructive total loss, see 22.33 below. 104 Intending to leave the vessel permanently, without any intention of returning either per~ sonally or through a salvor acting on the shipowners' behalf, and without any hope of the owner ever recovering the vessel. 105 [1945] 2 All ER 357,369 perSrable]. See also ar 362-3. 106 ibid 365.

650

651

Losses
depending upon the limb ofthe subsection with which it was read in conjunction and, accordingly, adopted a formula suitable for both limbs.

The Classification ofLosses

continued work on the project, although progress was delayed resulting in completion at the end of October. In the meantime, in response to the imposition of sanctions on Iraq, the Iraqi authorities introduced Law No 57, which came into force on 24 Seprember but with retrospective effect to 6 August. This law opetated to attach automatically in a manner aldn to a freezing order the assets of all companies of countries that had implemented sanctions against Iraq. These included the Netherlands. The question was wherher there was a deprivation of possession as of 21 or 25 September and 11 October.' 11 Rix J held there was no deprivation of possession. The companies remained free ro use the fleet in the completion of the project and any restriction on redeployment of the fleet prior to completion stemmed essentially from the contractual obligation to complete. Law No 57 raised the prospect of demobilization of the fleer being impeded even after completion, thereby preventing the assureds ftom planning future use of rhe vessels. While this was accepted as consrituting a present interference in use and disposal, it did not amount to the tOtal physical loss of control or use and disposal that was present in The Bamburi. Had the law been invoked once the projecr was complete so as to detain the vessels and prevent demobilization and redeployment, at that stage there would have been a deprivation of possession. However, as of the relevant dates this had not occurred, and, in fact, demobilization was negotiated and occurred later in the year. 112 Unlil<elihood of recovery The reference in section 60(2)(i)(a) of the Marine 21.62 Insurance Act 1906 to unlikelihood of recovery deliberately modifies the preAct test of uncertainty of recovery to the disadvantage of the assuted, bur the unlikelihood need extend only to a reasonable time. This qualification was implied into the statut0ty wording by Pickford J in Polurrian Steamship Co Ltd v Young'13 and has been accepted ever since. The difference between the two tests was described, and some guidance given as 21,63 to application of rhe new law, by Lord Wright in The Minden:'14
There is a real difference in logic between saying that a future happening is uncertain and saying that it is unlikely. In the former the balance is even; no one can say one way or another. In the later there is some balance against the event. It is true that there is nothing in the Act to show what degree of unlikelihood is required. If on the test of uncertainty the scales are level, any degree of unlikelihood would seem to shift the balance, however slightly; it is not required that the

(b) Constructive total loss based on deprivation ofpossession

21.59 The third and fourth categories of constructive total loss, enunciated by section 60(2) (i) of the 1906 Act, ate confined to hull and cargo insurance and occur where an insured peril deprives the assured of possession of the insured property and either (a) recovety is 'unlikely' or (b) the COSt of recovery would exceed the recovered value. The financial threshold in (b) is discussed below."7 This secrion considers the meaning of deprivation of possession and when recovery is unlikely. The assessment of rhese elements, especially the probability inherenr in unlikelihood, may naturally vary over time. It is, therefore, important to note that the requirements fot a constructive total loss are required ro be present both when the assured serves a notice of abandonment and also at the date, if different, when the assured commences, Ot is deemed to have commenced, legal

proceedings by issuing a claim form.

108

21.60 Deprivation of possession In the context of constructive total losses, deprivation of possession does not require loss of actual physical possession. It suffices thar the assured has been wholly deprived of control or free use and disposal of the insured property. Consequently, in The Bamburi, 109 there was a constructive total loss when, on rhe outbreal< of rhe Iran-Iraq war, the Iraqi POrt aurhorities at Umm Qasr denied a vessel permission to leave. There was a loss of possession wirhin the meaning of section 62(2)(i), despite the fact that the vessel was not confiscated, the owners retained a skeleton crew on board, and there was no Iraqi presence on board or interference in any way with life on board. The ~essel had completed dischatge of its cargo. All movement was prohibited and it was fotced to 'remain as idle as a painted ship'. 21.61 A contrast may be dtawn with Royal Boskalis Westmimter v Mountain. 110 In this case, a fleet of dredgets owned by Durch companies was engaged on a project at Umm Qasr wirh an expected completion date of the end of September 1990. On 2 August 1990, Iraq invaded Kuwait, but the invasion did nor prevent

lVV

See 21,77-21.81 below. loa A valid notice of abandonment requires an existing, and not merely an anticipated, constructive total loss. Moreover, the doctrine of ademption of 105$ requires the circumstances constituting a constructive total loss to persist umil the (deemed) commencement of proceedings. See further 21.1 02 below. t09 [1982)1 Lloyd's Rep 312, 320-1. 110 [l997J LRLR 523. Strictly speaking, the case concerned the interpretation of the phrase 'free use and disposal' in the detainment clause of the 1983 Institute war and strikes clauses for huUs (see 21.70 below). However, the detainment clause is based on The Bamburi and it cannot be doubted that the contractual phrase is intended to' cany the same meaning as the statutory. No distinction was drawn in the judgment ofRix J.
107

scale should spring up and kick the heam.

111 Being the dates of twO notices of abandonment and of when the assured was deemed to have commenced proceedings against the insurer. m Albeit at a cost: see 24.38 below. 113 (1913) 19 Com Cas 143, 155. '" Rickards v Forestal Land, Timber & Railways Co Ltd (The Minden) [1942) AC 50, 87.

652

653

Losses

The Classification ofLosses

was unlikely, albeit that it was uncertain.'" In Royal Boskalis Westminster NV v Mountain,124 the facts ofwhich are set our above,125 the Iraqi authorities' attitude to demobilization of the dtedging fleet was ultimately based on the contract governing the project and they always held our the prospect of the fleet being exempted from Law No 57, albeit at a price. Ultimately, this is what happened. Consequently, while recovery of possession126 within a teasonable time was uncertain on the relevant dates, it was not unlikely. Similarly, there is no constructive tatalloss where a vessel is trapped by seasonal ice but will be released
once the ice thaws. 127

" . f C115 I'T''hBb' l16 n 1 J e am un, 21.64 What constitutes a reasona ble tIme 1S a questlon 0 lact. Staughton J, acting as a sole atbittator, noted that the policy in question covered the loss of a vessel tather than delay or loss of earnings and held on the facts that a reasonable time was twelve months from the giving of notice of abandonment.
21.65 The test of unlikelihood of recovery within a reasonable time was described on appeal in Polurrian" 7 with some distaste as 'very difficult to apply with any
sense ofsatisfaction, because it necessarily involves conjecture and speculation as

. ., to what is likely to be the ourcome 0 f anum ber 0 f POSSl'ble contmgencles . 118 It is to be applied objectively by reference to the time of service of the notice of abandonment and the time, if later, when the assured commences proceedings or is deemed to commence them119 and by reference to the true facts. The question is whether a reasonable person as at those times and with knowledge of the true facts would regatd recovery as unlikely, not whether it appears to the assured to be unlikely.120 Thus, in Bayview Motors Ltd v Mitsui Marine 6- Fire Insurance Co Ltd, 121 on arrival at the port of destination, insured motor cars were placed in a fenced customs compound from which they were unlawfully removed by customs officers and distributed among theit families and friends. It was clear on the evidence that, from the ourset, customs officers had resolved to appropriate the motor cars for their own benefit. Accordingly, there was a constructive total loss from an early stage, notwithstanding that at that time the assureds still entertained false hopes of recovering their goods.
21.66 On the facts of the Polurrian case itself, the test of unlikelihood of recovery was not satisfied. War having broken our between Greece and Turkey, a Greek warship seized a neutral vessel for carrying contraband. The assured gave notice of abandonment, but six weeks later the vessel was released. The relevant date for determining whether the vessel had been a constructive total loss was that of commencement of the action, deemed to be the date notice of abandonment was given. 122 The claim failed, however, because it was not proved on a balance of probability that at that time recovery of possession within a reasonable time

In conttast, the tequisite unlikelihood was held to be present in Roura ,& Forgas 21.67 v Townend.'" Having sailed on 4 Novembet, 1917, the Igor Mendiwas not heatd of again until 27 February 1918. It transpired that the vessel had been captured by a German warship, the Wolf, on 10 Novembet. Theteaftet, the Igor Mendi had been manned by a prize crew until abandoned when it stranded and sustained considetable damaged. Having been tefloated in Match by a salvage company employed by the otiginal shipownets, the vessel was under repair until September. Roche J held that the vessel had been a constructive total loss within section 60(2) (i) (a) on captute:
It was conceded that in this case the ship was out of the owners' possession for three-and-a-half months, but it was contended that it was never securely in the possession of the Germans. It was asserted, I hope and believe with truth, that the squadrons and patrols of the navies of Great Britain, her allies and associates, were numerous and vigilant, and her recapture was probable or not unlikely. On the other hand, it is to be remembered that the seas are wide and the nights were dark and long during the critical stages of this voyage, and apart from any knowledge which may be permitted to a Court with regard to German practice in the destruction of merchant shipping, the evidence as to the sinking of all other prizes by the Wolf and as to the placing of bombs on board of the Igor Mendi convinces me that the Igor Mendi would not} save by some unexpected accident, have survived to be recaptured. I regard her actual recovery as due to a somewhat surprising combination of circumstances, , ,129

116 [1981/ 1 Lloyd's Rep 312. '" [1915J 1 KB 922. ibid 937. The words are those of Kennedy LJ who died the day after completing his judgment, which was then adopted as the jud~ment of the C:::0urt of Appeal an~ read by Warrington LJ, It would appear that Kennedy LJ did not regard with favour the change m the law from uncertainty to unlikelihood of recovery. 119 See the discussion of finality of losses and ademption of loss at 21.102 below. 120 Marstrand Fishing Co Ltd v Beer [19371 1 All ER 158, 164--5; Kuwait Airways Corp v Kuwait Insurance Corp SAK (No 1) [19961 1 Lloyd's Rep 664, 686; Royal Baskalis Westmimter NV v Mountain [1997] LRLR 523, 534. Subsequent events are admissible to prove what the probability of recovery truly was: KuwaitAirway.r, Royal Boskalis. 121 120021 EWHC 21 (Comm), [20021 1 Lloyd's Rep 652, para 30; 12002] EWCA Civ 1605, [200311 Lloyd's Rep 131, para 25. 122 Because underwriters so agreed.

m MfA 1906, s 88.

118

In The Minden,130 British cargo was on board a German vessel at the outbreak of 21.68 the Second World Wat. A constructive total loss occurred as soon as the mastet, in response to otdets of the Getman government, abandoned the voyage in favour of returning to Germany, thereby deptiving the assuted of possession of

123 124 126

See also Marstrand fishing Co Ltd v Beer (The Girl Pat) (1936) 56 LlLRep 163. [1997] LRLR 523,551-4. 125 See 21.61 above. Assuming it had been lost, which ir had nor: [1997J Lloyd's Rep IR 523, 551-4 (see 21.61

above). '" Hall v Hayman (1911) 17 Com Cas 81. Likewise Shepherd v Henderson (1874) 7 App Cas 49 (monsoon rains). 12' [1919] 1 KB 189. '" ibid 193-4. 130 Rickards v Forestal Land, Timber & lIdilways Co (The Minden) [1942] AC 50.

654

655

Losses the goods. Recovery was unlikely even were the vessel caught by the British blockade, since the master was under orders to scuttle rather than allow the vessel to be recaptured.
21.69 Whether a vessel that is stranded or sinks is a constructive total loss under either limb ofsection 60(2)(i) depends entirely upon the circumstances of the casualty. In Cohen (George), Sons & Co v Standard Marine Insurance Co Ltd, 131 an obsolete battleship on its break-up voyage ran aground on the Dutch coast, coming to reSt upon part of the support of a groyne that protected land from inundation by sea. The ship was held to be a constructive total loss on two bases: first, removal would have been prohibitively expensive, and, secondly, the risk to the protected land posed by any removal operation was such thar it was disrinctly unlikely that any such operation would have been permitred by the Durch authorities and courts. In Cates (Captain JA) Tug & Wharfage Co Ltd v Franklin Insurance C0132 in contrast, a tug sank in circumstances such that raising was perfectly feasible and economically viable, and consequently did not qualifY as a constructive total loss. 21.70 The common law approach remains productive of uncertainty. What is a reasonable rime depends on the facts. Moreover, the precise point at which recovery of possession within that time satisfies the criterion of unlikelihood may well be open to dispure.'" A measure ofcertainty is, however, introduced by the Institure war and strikes clauses for hulls through the following 'detainment

The Classification ofLosses

loss within section 60(2)(i)(a) is presumed to occur at that moment and the assured can serve a notice of abandonment. This does not, however, preclude a claim for a constructive total loss at an earlier date if the assured can sarisfY the common law and prove at that earlier date thar it is then unlikely that possession will be recovered within a reasonable time. Indeed, if a construcrive total loss does arise earlier, the assured will prima facie be obliged to serve a notice of abandonment at that earlier time and the time available for service is likely to have expired before the detainment clause applies. 137 However, since under the clause there is deemed to be no likelihood of recovery at all, service of a notice of abandonment should be unnecessary.13' This twelve-months deeming principle is adopted also by the rules of the British 21.72 war risks associations, which nlrther provide, however, that no claim for a total loss, whether actual or constructive, can arise from any detention 'before the expiry of a period of 183 days (or such shorter period as the Directors may in their discretion decide) from the commencement of such detention'. In order to succeed in a claim for a constructive tOtal loss under the detainment 21.73
clause, the assured must prove not only that a capture, seizure, arrest, restraint, detainment, confiscation or expropriation was the proximate cause of the ori-

clause': 134
In the event that the Vessel shall have been the subject of capture seizure arrest restraint detainment [confiscation or expropriation], and the Assured shall thereby have lost the free use and disposal of the Vessel for a continuous period of 12 months then for the purpose of ascertaining whether the Vessel is a constructive

ginal loss of free use and disposal, bur also that such a peril continued as the proximate cause of that ongoing loss throughout the full twelve-month period. 13 ' Where the ongoing loss may legitimately be regarded as proximately caused both by an insured peril and an expressly excluded peril, following ordinary principles of causation, 140 the insurer will not be liable. 141

(c) Constructive total loss based on damage to insuredproperty

Damage to a ship such that the cost of repair exceeds the repaired value consti- 21.74 tutes the fifth category of constructive tOtal loss. A question of some historical controversy is whether the repaired value of the vessel should be compared with the cost of repairs alone or with the value of the unrepaired vessel added to the cost of repairs. In Angel v Merchants' Marine Insurance CO,I42 rhe Court of Appeal held that the unrepaired value should be excluded, a view which represented the common law at the time the Marine Insurance Act 1906 was drafted and enacted. Although Angelwas subsequently overruled as a matter of common

total loss the Assured shall be deemed to have been deprived of the possession of the Vessel without any likelihood of recovery.
21.71

By virtue of this clause, therefore, once the assured has suffered a loss of free use and disposal 135 for a continuous period of twelve months,l36 a constructive total

'" (1925) 21 ULRep 30. 132 [I927] AC 698. Moreover, the assured has a limited time in which to serve a notice of abandonment, see 22.53-22.57 above. ,,, Institute War and Strikes Clauses (Hulls-Time) (1/10/83 and 1111/95), (Hulls-Voyage) (1/10/83 and 1/11/95), cl 3. The words in brackets were introduced in the 1995 clauses. A similar provision is found in the war and strikes clauses for freight. The detainment clause is based on the decision in The Bamburi [1982] 1 Uoyd's Rep 312. 135 Meaning complete loss ofphysical control, see 21.60-21.61 above. 136 In both Royal Boskalis WestmirlSter NV v Mountain [1997] LRLR 523 and Sunport Shipping Ltd v Tryg-Baltica Internatiorial (UK) Ltd (The Kleovoulos of Rhodes) 12003] EWCA Civ 12, [2003] 1 Lloyd's Rep 138, the equivalent clause had been amended toreduce the relevant period to 6 months.
133

On time for service of a notice of abandonment, see 22.53-22.57 below. MIA 1906, s 62(7). See 22.35 below. 139 Handelsbanken Norwegian Branch ofSvenska Handelsbanken AB (PUEL) v Dandridge (The Aliut Glacial) [2002] EWCA Civ 577, [2002] 2 Uoyd's Rep 421, para 61. 140 See 9.29 above. 14' The Aliut Glacial [2002J EWCA Civ 577, [2002] 2 Uoyd's Rep 421, paras 60, 62. See further 21.82-21.83 below. 142 [1903] I KB 811.
137
'38

656

657

Losses
law by the House of Lords, 143 section 60(2)(ii) has been held to enact Angel and, therefore, to exclude the unrepaired value of the vessel ftom the equation,'44 an exclusion confirmed by the Institute and International hulls clauses. '45
21.75 The final category of constructive total loss recognized by the 1906 Act arises where the cost of repairing damaged goods and fOlwarding them to their destination exceeds their value on arrival. Some doubt still surrounds the question of whether the equation takes into account the whole cost of completing the voyage or merely such part of the cost that exceeds the original freight. Ar common law, only the excess was included. '46 The statutory wording ('cost of ... forwarding the goods to their destination') seems to contemplate the entire forwarding cost, as does clause 13 of the Institute Cargo Clauses (A), (B), and (C) which provides as follows: 'No claim for Constructive Total Loss shall be recoverable hereunder unless the subject-matter insured is reasonably abandoned either on account of its actual total loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subjectmatter to the destination to which it is insured would exceed its value on arrival.' This wording appears to contemplate the entire cost of forwarding, although it could conceivably be interpreted as contemplating the cost to the assured (in other words, the net cost) in accordance with the common law. 21.76 Clause 13 of the Institute cargo clauses clarifies the meaning in section 60(2) (iii) of 'repairing' so that it clearly includes both recovery and reconditioning, but also defines the concept of constructive total loss less generously than the 1906 Act by excluding the third category therein contemplated, namely deprivation of possession coupled with unlikelihood of recovery. However, the Institute cargo clauses covering war and strikes risks, which are more likely to give rise to this type of constructive total loss, 147 contain no such restriction.

The Classification ofLosses

thereby achieved. This gain is generally measured by reference to the value realized if the preserved, recovered, or repaired property were to be sold on the open market,'48 although an exception is recognized in the case of a ship with particular features and characteristics or employed in a particular way so that no market exists. In such a case, the value adopted is the value the vessel had to the assured at the time of the casualty, based on the original cost of the vessel with an allowance for depreciation. '4' Otherwise, in the absence of any market for the vessel once repaired, the relevant figure would be the scrap value, which would dearly be inappropriate. The comparison between cost of preservation, recovety, or repair and market 21.78 value applies in principle whether the policy is unvalued or valued. The conclusive nature of an agreed value as berween assured and insurer often dictates the measure of indemnity once the loss sustained has heen classified as total or partial. Subject to contrary intention, however, the classification of the loss is not affected by whether the policy contains an agreed value. Thus, according to section 27(4) of the Marine Insurance Act 1906: 'Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there is a constructive total loss. ' This subsection codifies a consistent line of authority'50 culminating in the 21.79 definitive ruling of the House of Lords in Irving v Manning. 1S1 A vessel insured under a valued policy containing an agreed value of 17,500 was so damaged as to be rendered unseaworthy. Repairs costing 10,500 were needed to restore the vessel to seaworthiness, in which condition the market value of the vessel would have been 9,000. The House of Lords summoned the judges and accepted their unanimous advice that the vessel was a total loss. Under an unvalued policy, the vessel was clearly a constructive total loss and there was no reason why the insertion of an agreed value into the policy should reduce the legal classification of the same damage to a partial loss. An agreed value was designed merely to avoid disputes about the measure of indemnity once the nature of the loss sustained had been determined. As section 27(4) expressly acknowledges, however, the policy may displace the 21.80 market value in favour of the agreed value. From the insurers' perspective, this is desirable. Since the measure of indemnity for a total loss under a valued policy is the agreed value and since agreed values almost always exceed, sometimes
- - - - - - ----------", SailingShip 'Blairmore' Co v Macredie [18981 AC 593, 603. '" Grainger v Martin (I 862) 2 B & S 456; The Harmonides [19031 p 1. 150 Allen v Sugrue (1828) 8 B & Cr 561; Edington vJackson (1832) unreported, cited in Irving v Manning (I 847) I HLC 287, 297: Herne v Bay (1842) unreported, ibid: Young v Turing(1841)
2 M & Gr 593. '" (1847) I HLC 287.

(d) Calculating whether imuredproperty is a constructive total loss

21.77 The second limb of section 60(1) of the 1906 Act and three of the four categories ofconstructive total loss envisaged by section 60(2) all ask in essence whether the insured property is worth preserving, recovering, or repairing. In order to make this determination, the courts traditionally invoked the standard of the prudent uninsured owner, which necessarily involved a comparison of the cost of repairing the loss sustained or preserving the property against the gain

143

144

Macbeth & Co Ltd v Maritime Insurance Co Ltd[1908]AC144. Hail v Hayman [19121 2 KB 5.

145 Institute Time Clauses Hulls 0110/83 and 1/11195), d 19.1; Institute Voyage Clauses Hulls (1/10/83 and 1111195), elI7.1: International Hull Clauses (1111/03), el21.1. 146 Farnworth v Hyde (1866) LR 2 CP 204, approving Rosetto v Gurney (1851) 11 CB 176 in preference to Reimer v Ringrose (I 851) 6 Exch 263. ' 147 But deprivation of possession through piracy falls within the Institute Cargo Clauses (A).

658

659

Losses

The Classification ofLosses

depended upon whether it was reasonable to expect the assuted to provide the security in the sum required given the likelihood of its recovety and judged as against the vessel's actual value. The Court rejected the submission that the yardstick should be the agreed value. Any claim for a constructive total loss under the detainment clause is not 'based upon the cost of recovery' as required by the contractual adoption of the agreed value, which is consequently inapplicable. 159 On the facts of The Aliza Glacia4 the insured vessel was seized and detained 21.83 by Australian authotities fot illegal fishing. Charges were brought against the master and fishing master. These stated that an application would be made for forfeiture of the vessel in the event of conviction. Subsequently, the Australian aurhorities offered to release the vessel in return for security in the sum of approximately A$lO million. The assured did not accept this offet. In response
to a claim for a constructive tOtal loss under the detainment clause, the insurers

considerably, the market value of the insured property, there is a clear danger of insurers frequently being called upon to pay the agreed value when a significantly lesser sum would suffice to repair the insured property. It makes finanCial sense for insurers not to behave as a prudent uninsured ownet would, and pay mote fot tepaits than the tepaired propetty is worth, if the alternative is to pay an even higher sum, namely the agreed value. Moreovet, an assured who knows that damage to irs property will yield a measure of indemnity sufficient to repair the propetty and provide a significant surplus may, perhaps, be tempted to engineer such damage. Consequently, the Institute hull clauses provide that the agreed insuted value is to displace the actual value for the purpose of derermming whether the insuted ptoperty has become a constructive total loss on the basis of the cost of recovety or repait. 152 A compromise position is adopted by the International hull clauses, undet which the threshold is set at 80 per cent of the agteed value.'"
21.81

In effecting the relevant calculation, 'only the cost relating ro a single accident Ot sequence of damages arising from the same accident shall be taken into account' .154 A series of partial losses cannot, therefore, be aggtegated to produce
a cumulative constructive total loss.

21.82 The contractual adoption of the agreed value as the yardstick fot a constructive

total loss is also incorporated into the Institute war and strikes clauses for hulls
and freight. 155 However, under such clauses, a constructive total loss may not

only occur in accordance with genetal principle but may also be deemed to occur undet the detainment clause. This clause provides that a constructive tOtal loss is deemed to occur when the assuted is deprived of the ftee use and disposal of the insured vessel fot a period of twelve months.'56 The deptivation of free use and disposal must, however, be proximately caused by an insured peril. Under the Institute war and strikes clauses for hulls and freight, cover against petils involving loss of free use and disposal is subject, inter alia, to an exclusion covering loss proximately caused by 'failure to provide security or to pay any fine Ot penalty'. In The Aliza Glacia4 157 the Court of Appeal held that whethet a failure to provide secutity could constitute a proximate cause of the loss' 58

contended that a concutrent proximate cause of the ongoing detention was a 'failure to provide security'. However, the market value of the vessel was no more than A$6 million. Even allowing for the possibility of some negotiation, the amount of the security required to secure release of the vessel was at least equal to its value. Moreover, a conviction of the mastet and fishing master and the consequent forfeiture of the security were seemingly inevitable. It was, therefore, reasonable fot the assuted not to provide the requited security and the sole proximate cause of the ongoing detention was the original seizure. (3) Partial Losses Any loss that does not satisfY the criteria for a total loss is partial.'60 An assured 21.84 that unsuccessfully alleges a total loss may, unless the policy otherwise provides, recover fot a partialloss. 16 ' As a tesidual category, the concept of a partial loss does not present many problems. Some difficulty does, however, arise under valued policies where only part of the intetest valued is at risk at the time of a coveted peril and the entirety of that part is lost. Is the loss to be treated as total or patrial? Suppose, fot example, that a valued policy is taken out on the goods to be catried on a specified voyage. The valuation is based on a specific quantity of goods of a specified matket value, but this basis is not incorpotated as a term of the insurance contract. Some of the anticipated quantity of goods commence the insured adventure and ate rendered a total loss by an insured peril. Thete is a total loss of the entirety of the goods at tisk but the quantity of goods at risk does not teflect the interest valued.

152 Institute Time Clauses Hulls (1/10/83 and 1/11/95), cl 19; Institute Voyage Clauses Hulls (1110/83 and 1/11/95). d 17. 153 International Hull Clauses (Ill 1/03), d 21. 154 Institute Time Clauses Hulls (1I10/83 and l/11/95), cl 19.2; Institute Voyage Clauses Hulls (1/10/83 and 1/11/95). d 17.2; International Hull Clauses (1/11/03), d 21.2. 155 eg Institute War and Strikes Clauses Hulls-Time (l/1/95), cl 2. 156 See 21.70 above. 157 Handelsbanken Norwegian Branch ofSvenska Hande/sbanken AB (PUEL) v Dandridge (The Aliza Glacial) [2002J EWCA Civ 577, [20021 2 Lloyd's Rep 421. 158 So that the excluded peril of failure to provide security could prevail over the covered peril of detainment (a concurrent proximate cause) in accordance with general causation rules.

159 160

[20021 EWCA Civ 577. [200212 Lloyd's Rep 421, patas 70-71. MIA 1906, s 56(1). 161 ibid s 56(4); Benson v Chapman (1849) 2 HLC 696.

660

661

Losses
21.85 With respect to the classification of the loss, the law is clear that inclusion of an

The Classification ofLosses

balance of probability. Where the facts are such that it cannot be determined, it is no longer possible for the agreed value to function as a conclusive yardstick for determining the measure of indemnity. It is conclusive evidence of the value of an interest that has not been lost, while the interest lost bears no ascertainable relationship to the interest that was valued. The only option is to calculate the measure of indemnity as for a partial loss on an unvalued policy,'67 subject to a maximum liability of the agreed value, operating, in effect, as a sum insured. In Denoon v Home & Colonial Assurance CO,'68 a valued policy on freight contained an agreed value of 2,000 and a sum insured of 1,000. The vessel was wrecked with only a part cargo resulting in 1 ,412 lost freight. Willes J held that an agreed value on freight referred, subject to contrary intention, to a full cargo, so that apportionment was required. However, there was no evidence of the true value of freight on a full cargo. Apportionment, consequently, was not possible and the policy had to be treated as unvalued with a sum insured of 1,000. Since the freight was underinsured by 50 per cent, the insurer was liable for 706. Some uncertainty attaches to the question of what degree of departure from the 21.88 valued interest need be present before apportionment is required. In the case of a valued policy on freight where the valuation is based on a full cargo, what level of shortfall can be tolerated before a total loss of the freight at risk must be treated as a partial loss of the freight insured? While there is no conclusive resolution of this question, dicta favour a margin of tolerance that the interest at risk should not be 'substantially less' than the interest valued without clarifYing exactly what is meant by substantial. '6' Care must be taken to ensure that legitimate apportionment of an agreed value 21.89 to reflect rhe fact that part of the interest valued was not in truth at risk is not transformed into illegitimate reopening of the agreed value. In Loders & Nicoline Ltd v Bank ofNew Zealand,'70 a contract for the sale of goods on CIF terms included in the contract price an element attributable to freight payable only on arrival at destination. This freight was, therefore, at the seller's risk. The sale contract required insurance in the value of the contract price plus five per cent.

agreed value in a policy cannot transform a partial loss into a total loss. As in the
context of constructive total losses,162 the agreed value serves as a conclusive

basis for quantifYing the measure of indemnity once the nature of the loss has been ascertained. Placing in issue the extent of the interest in fact at risk at the time of the loss does not involve reopening the agreed value and offending its conclusive nature. Accordingly, section 75(2) of the Marine Insurance Act 1906 provides as follows: 'Nothing in the provisions of this Act relating to the measure of indemnity shall ... prohibit the insurer ... from showing that at the time of the loss the whole or any part of the subject-matter insured was not at risk under the policy.'
'63 a vessel 21.86 This subsection codifies established case law. In Forbes v Aspinal4

loaded a part cargo of fifty-five bales of cotton for a return voyage but was lost while seeking further cargo. The assured under a valued policy on freight claimed a total loss and, therefore, payment of the agreed value. The Court of King's Bench held, however, that where a valuation was based upon a full cargo but only part of a full cargo was lost, the indemnity principle demanded that the assured's entitlement be confined to an appropriate portion of the agreed value. In Williams v North China Insurance Co, 164 a valued policy on freight was held to include advances against freight not in fact at risk, so that the insurer's liability was limited to the proportion of the agreed value as represented by the net freight at risk after deduction of the advances. Similarly, in The Main, 165 a policy on return freight at and from New Orleans was insured by the defendant insurers under a valued policy with an agreed value based on a full carg" of 5,500 and a sum insured of 1,500. The actual value of the freight ultimately to be earned on the voyage was 3,250 ofwhich 925 was paid in advance and, therefore, not at risk. When the ship and freight at risk were totally lost by an insured peril, the assureds collected 3,250 under other policies and claimed 1 ,500 from the defendants. It was held, however, that the agreed value had to be apportioned to reflect the fact that part of the interest valued in the policy was not at risk. As the assured had in fact lost 2,298 out of 3,250, the assured's prima ftcie entitlement under the defendants' policy was 3,889,'66 against which credit had to been given for the 3,250 already recovered.
21.87 This approach of settling the measure of indemnity by apportioning the agreed

value assumes that an appropriate portion can be ascertained, at least on a

See 21.78-21.79 above. '" (1876) 1 CPD 757, 769. 2298 '" - - x 5500 = 3889. 3250
162

'" (1811) 13 East 323. "s [1894J P 320.

167 Tobin v Harford (1863) 13 CB(NS) 791, 803, affd (1864) 34 L]CP 37. The prohlem had previously been recognized in Rickman v Carstairs (1833) 5 B & Ad 651, 665. The solution adopted is consistent with Forbes v Aspinall (1811) 13 East 323, where there was no evidence of what proportion ofa full cargo was represented by the 55 bales of cotton lost and the insurer paid the freight lost on those lost bales. '" (1872) LR 7 CP 341. '" Tobin v Harford (1863) 13 CB(NS) 791, 802 per Williams], delivering the judgment of the Court of Common Pleas. See also Denoon v Home & Colonial Assurance Co (1872) LR 7 CP 341,351. ;70 (1929) 33 LlLRep 70.

662

663

Losses The seller tendered a policy covering an amount that excluded rhe freight. The seller argued thar this breach occasioned the buyer no loss since the shortfall in value represented property not at the buyer's risk and in tespect of which the buyer could not therefore claim. This atgument was rejected. The insurance did not cover goods and freight under one agreed value. Instead, the policy covered the goods alone. How the price of the goods under the contract, and therefore the value ro be insured, was calculated was irrelevant to the question of what interest was at tisk. Since the insurance coveted the goods and there was no shortfall in the quantity of goods that provided the basis for the agreed value, there could be no apportionment.

Loss ofFreight
freight turns upon whether the underlying charterparty is frustrated. Jackson v Union Marine Insurance Co Ltd'" concerned chartered freight insured at and from Liverpool to Newport, while there, and thence to San Francisco. On 4 Januaty, before arriving at Newport, the vessel hit rocks in Carnarvon Bay, sustaining such damage that, after refloating, it returned to Liverpool. Before the vessel was refloated, the charterers cancelled and the assured shipowners claimed successfully against the freight underwriters. Despite the absence of satisfactoty evidence of a constructive total loss of the vessel, the jury found that the delay involved in refloating and repairing the vessel was too long reasonably to require the charterers to remain ready to supply the agreed cargo and, in a commercial sense, terminated the adventure entered upon by the shipowners and charterers. In consequence, it was held that the charterparty was frustrated, the chartered freight was lost, and the freight underwriters were liable. (2) Relationship Between Loss of Freight and Loss ofVessel or Cargo Where the insured freight is to be earned by a named vessel, an actual total loss 21.93 of the vessel inevitably results also in an actual tOtal loss of the freight,174 as does a constructive total loss that prevents the named vessel from completing the adventute. 175 An actual or constructive total loss of cargo will result in an actual toralloss of freight only where the insured freight is for the carriage of that cargo and none other or where the insurance is on general freight and no substitute cargo can be found. 176 At common law, however, a total loss of freight is neither coincidental with nor dependent upon an actual or constructive total loss of the vessel.'" If a vessel rhat is rightly abandoned to hull underwriters as being a constructive total loss is in fact recovered or repaired and subsequently earns the freight, the fact that no freight has been lost denies the original shipowner any claim at common law against freight underwriters even though it is the hull underwriters as abandonees and new owners of the vessel who are entitled to that freight. 178 Similarly, freight earned only on the safe carriage to destination of specified cargo on an unspecified vessel depends upon the continued existence of the cargo rather than the vessel on which the cargo happens to be loaded, unless the carrying vessel is unable to complete the voyage and no

D. Loss of Freight
21.90 The insurance of fteight raises the same total loss questions as the insurance of

ships or goods. However, the preliminary question ofwhether any loss offreight
has occurred assumes greater prominence, and it is also necessary to consider the

relationship berween loss of freight and loss of the ship or cargo. (1) Whether Freight Lost
21.91

fu already noted, freight may be earned on commencement of the voyage and

thus not be jeopardized by any casualty arising in the course of the voyage. Moreover, where insurance is effected on freight generally and freight is earned, underwriters incur no liability even if the freight in fact earned is not the freighr the assured intended. In Everth v Smith,171 homeward freight was insured atcand from a Balric port not beyond Riga. The vessel was detained by government order while in Riga and prevented from loading for five weeks. Only'a few days into the detention, however, the Baltic iced up and the vessel was detained until the following spring when an alternative cargo was obtained and the vessel completed its return voyage. Although the policy had attached and the expenses of detention exceeded the freight earned, homeward freighr had been earned and the underwriters incurred no liability. In contrast, where the freight insured can be earned only by a specific vessel performing a stipulated voyage and the vessel is prevented from so performing by a peril insured against, the underwriters are liable for the freight thereby 10st. 172
21.92 In the context of chartered freight, whether a vessel is prevented from earning

171 (1814) 2 M & S 278. See also M'Carthy v Abel (1804) 5 East 388; Brocklebank v Sugrue (1831) 1 M & Rob 102. 172 Rankin v Potter (1872) LR 6 HL 83; Scottish Shire Line Ltd v London & Provincial Marine 6' General Insurance Co Ltd [1912] 3 KB 51; Carras v London & Scottish Assurance Corp Ltd [193611 KB 291, 299.

'" (1873) LR 8 CP 572, affd (1874) LR 10 CP 125. Cossman v ~st (1887) 13 App Cas 160. 11'5 Roura & Fourgas v Thwnend[1918] I KB 189. 116 Rankin v Potter (1872) LR 6 HL 83, 99; Associated Oil Carriers Ltd v Union Insurance Society o/Canton Ltd [1917J 2 KB 184. For a total loss of cargo producing a total loss of freight, seeAsfitrvBlundell[1896J 1 QB 123. m Carras v London & Scottish Assurance Corp Ltd [1936] I KB 291; Kulukundis v Norwich Union Fire Insurance Society [1937] I KB I. 178 See the discussion of abandonment and freight, including the treatment of freight in the Institute and International hull clauses, at 23.37ffbe1ow.
114

664

665

Losses
alternative vessel is available. Conversely, the adventure may be frustrated and the freight lost even where the damage sustained by the vessel is insufficient to constitute a constructive total loss. Whether a charterparty or contract of affreightment is discharged does not depend upon whether the vessel is a conC . structlve totalloss ror Insurance purposes. 179
21.94 The common law position is much modified by the Institute freight clauses. Clause 15 of the Institute Time Clauses Freight (1/8/89) provides as follows: 180
15.1 In the event of the total loss (actual or constructive) of the vessel named

Loss ofAdventure
adventure,'84 although frustration of an adventure does not involve a 'cancellation' of the charterparty for the purposes of an exclusion so drafted. 185 (3) Whether Total Loss of Freight is Actual or Constructive Since section 60(2) of the Marine Insurance Act 1906 is concerned only with 21.96 hull and catgo insurance, a constructive total loss of freight can fall only within section 60(1) and will be rare. Where freight is to be earned by a named ship that is rendered a constructive total loss and the shipowner elects not to repair or redeem, the insured freight cannot be earned and is an actual totalloss.' 86 If a vessel insured for freight generally loses its cargo, there will be an actual total loss if no replacement can be obtained, or a constructive total loss if substitute freight can be obtained only by an expenditure in excess of its value once earned. 187 Should a vessel become a constructive total loss but its cargo be saved with the possibility of freight being earned through shipment in a substitute vessel, any total loss of freight can only be constructive. ISS Generally, however, the distinction between a constructive and an actual total loss of freight will be academic by reason of the absence of any possibiliry of benefit accruing to the insurer through notice of abandonment and the consequent dispensing with that formality.'89 The theoretical possibility of freight underwriters co-operating with the hull underwriters to arrange for repair of the vessel, sharing the expense and subsequently earned freight, is too speculative a benefit to require the giving of a notice of abandonment. "0

herein the amount insured shall be paid in full, whether tbe Vessel be fully
or partly loaded or in ballast, chartered or unchartered.

15.3

Should the Vessel be a constructive total loss but the claim on the insurance on hull and machinery be settled as a claim for partial loss, nO payment

shall be due under this Clause 15. Consequently, any total loss of the vessel, but not a constructive total loss settled as a partial loss, is treated as producing a total loss of fteight. "t Moreover, the effect of quantifYing the measure of indemnity by reference to an agteed value ptecludes the insuret from requiting proof of the freight that, but for the loss of the vessel, the assured would indeed have earned. '"
21.95 In the context of war and strikes cover, rhe Institute freight clauses follow the hulls clauses by providing for payment in full of the amount insured, subject to interim claims and sums recoverable under insurances subject to the ordinary freight clauses, where hull underwriters pay on a constructive total loss of the vessel pursuant to the detainment clause in the hulls clauses. '" On the other hand, exclusion clauses covering loss of time and loss or frusttation of adventure protect underwriters against claims for freight lost by frustrarion of the

E. Loss of Adventure
An insured peril may prevent a ship and cargo from reaching their destination so 21.97
as to destroy the insured adventure despite inflicting no physical loss or damage on the insured properry. In such circumstances, the common law of marine insurance recognizes a claim for loss of the marine adventure with respect to

n, Jackson v Union Marine Imurancc Co Lsd (1873) LR 8 CP 572, affd (1874) LR 10 CP 125; Kulukundis v Norwich Union Fire Insurance Society [1937] 1 KB 1. 180 See also Institute Time Clauses Freight (1/11/95), cll 16.1, 16.3; Institute Voyage Clauses Freight (1/8/89). clI13.1, 13.3; (1/11195), clI12.1, 12.3. 181 The freight clauses follow the hull clauses in determining whether a vessel is a constructive total loss: eg Institute Time dauses Freight (1/8/89), cl 15.2. The requirement that a constructive total loss of the vessel be indemnified under the hull policy as a total loss was introduced in response to the decision of the House of Lords in Robertson v Petros M Nomikos [1939] AC 371 that an unqualified reference to constructive total loss included all circumstances in which the vessel qualified as such a loss even if t~e loss was then treated as merely partial, whether by agreement or by reason of failure to serve a notice of abandonment. 182 For the huther relevance of the total loss clause for insurable interest; see 3.54 above. 183 Institute War and Strikes Clauses Freight~Time, Freight~ Voyage (1/10/83 and 1111195), cl 3.

184 Institute Time Clauses Freight (118/89 and 1111/95), cl 14; Institute Voyage Clauses Freight (1/8/89 and 1111195), cl 12; Institute War and Strikes Clauses (Freight~Time (Freight-Voyage) (l/10/83 and 1/ll/95), cl4.5. 185 Re]amieson & Newcastle Steamship Freight Insurance Association [1895] 2 QB 90. '" Rankin v Potter (1872) LR 6 HL 83, 99. 187 Associated Oil Carriers Ltd v Union Insurance Society a/Canton Ltd[1917] 2 KB 184. '" (1872)LR6HL83, 102-3. 189 MIA 1906, s 62(7); ninder, Anderson &Co v Thames & Mersey Marine Insumnce Co [1898] 2 QB 114. See generally 22.35 below. 190 &nkin v Potter (1872) LR 6 HL 83, 158, 166-7.

666

667

Losses
cargo insurance 191 or freight insurance,192 but not with respect to hulls. 193 In other words, the subject-matter of a cargo or freight policy is taken as being, not just the insuted property itself, but also the adventure upon which the property is embarked. '94 However, the war and strikes clauses for cargo and freight expressly exclude 'any claim based upon loss of or frustration of the voyage or adventure'.'95 This so-called 'frusttation clause' bars any claim that cannot be brought without relying on the loss of the adventure while leaving intact the right to claim for loss of or damage to the insured property itself 196 Where, nevertheless, cargo is insured against war risks and against marine risks to an extent not less than the cover provided by the Institute Cargo Clauses (C), the consequences of such frustration can be mitigated by extra cover incorporating the Institute Additional Expenses Clauses (Catgo-War Risks).

Finality ofLosses and the Doctrine ofAdemption ofLoss

The [claimant's] demand is for an indemnity. His action, then, must be founded up'on the nature of his damnification, as it really is, at the time the action is brought. It is repugnant, upon a contract ofindemnity,to recover as for a rotalloss, when the final event has decided that the damnification, in truth, is an average, or

perhaps no loss at all.

Whatever undoes the damnification, in whole or in part, must operate upon the indemnity in the same degree. It is a contradiction in terms, to bring an action for indemnity, when, upon the whole event, no damage has been sustained. 198

E Finality of Losses and the Doctrine ofAdemption of Loss

21.98 By virtue of the indemnity principle, an assured may recover only for the loss sustained, but the initial impact of a casualty may be reversed or reduced by subsequent events. Thus, a captured vessel may be redeemed by re-capture or ransom or a casualty may result in an initial prognosis that proves unduly pessimistic. The question arises as to the point in time for insurance purposes by which to judge definitively whether the assured has suffered a loss and, if so, the measure of that loss. 21.99 In Hamilton v Mendes,'97 the assured was informed simultaneously of the capture and re-taking of the insured vessel resulting factually in a partial loss. Notice of abandonment was given on the basis that in law the assuted's rights against the insurer crystallized on the occurrence of the capture, whIch, at the time it happened, constituted a constructive total loss. Lord Mansfield held, however, that the insuter's liability was limited to a partial loss:

The principle was further enshrined in Bainbridge v Neilson 199 where the insured 21.100 vessel was captured by a French privateer and re-captured by a British privateer. The assured gave notice of abandonment upon receiving news of the initial capture and only subsequently learned of the te-capture. The vessel completed its voyage, incurring only a small partial loss. In a seminal judgment, Lord Ellenborough CJ denied the finality of appearances as at the time of the notice of abandonment:
And the question is, whether that which in the result turns Out to be only a partial loss to a trifling extent shall, because of the notice of abandonment given when a total loss appeared to exist, be now recovered as a total loss? To give effect to such an attempt would grievously enlarge the responsibility of underwriters: it would be to make them answerable, not for the acrualloss sustained by the assured whom

they have undertaken to indemnify against the risks stated in the policy, but for a
supposed total loss, which had in fact ceased to exist. It has been said in argument, that the offer to abandon having been rightly made at the time, a right of action vested in the assured, which could not be defeated by the subsequent events. But that proposition is not only not true in the whole, but it is not true in its parts. The effect on an offer to abandon is truly this, that if the offer appear to have been properly made, upon certa!n supposed facts, which turn out to be true, the assured has put himself in a condition to insist upon his abandonment: but it is not enough that it was properly made, upon facts which were supposed to exist at the time, if it turns out that no such facts existed, or that other circumstances had

occurred which did not justify such abandonment. It may be said to be properly
made upon notice received, and bona fide credited, by an assured, of his ship having been wrecked, whether such intelligence were true or not, and though the letter conveying it turned out to be a forgery; and yet dearly no right of action would vest in him founded upon an abandonment made upon false intelligence, and without any thing in fact to warrant the giving of such notice. What is an abandonment more than this, that the assured having had notice of circumstances, which, if true, entitle him to treat that adventure as a total loss, he, in contemplation of those circumstances, casts a desperate risk on the underwriter, who is to save himself as well he can. But .does not all this presume the existence of those facts on which the right accrues to him to call upon the underwriter for an indemnity; and if they be all imaginary, or founded in misconception, or if at the

191 Rodocanachi v Elliott (1874) LR 9 CP 518; British and Foreign Marine Insurance Co Ltd v Sanday 6- Co [191512 KB 781, [191611 AC 650. 192 Associated Oil Caniers Ltd v Union Insurance Society ofCanton [1917J 2 KB 184. 193 Rickards v Forestal Land, Timber 6- &zilways Co (The Minden) [19421 AC 50, 69-70; The Bambnri [198211 Lloyd's Rep 312, 318. 194 An insurer that paid for a total loss of goods that remained intact despite the loss of the adventure would then be entitled to those goods by virtue of the doctrine of abandonment: see

22.31 below.
195

Institute War Clauses (Cargo), d 3.7 (and note d 7); Institute Strikes Clauses (Cargo), cl

3.8; Institute War and Strikes Clauses (Freight-Time), (Freight-Voyage) (111 0183), cl 4.5; (11111 95), cl4.6. 196 Rickards v Forestal Land. 17mber 6- Railways Co (The Minden) [1942]-AC 50. 197 (1761) 2 Burr 1l98.

&

ibid 1210. See also Goss v Withers (1758) 2 Burr 683; Falkner v Ritchie (1814) 2 M S290. 199 (1808) 10 Easr 329.
198

668

669

Losses
time it had ceased to be a total loss, and there be no damage to the assured, or at least if the only damnification arise out of the very act, (the recapture) which saves the thing insured from sustaining a total loss; the whole foundation of the

Finality ofLosses and the Doctrine ofAdemption ofLoss

23 May 1966, 12 October 1966, 12 May 1967, and 10 August 1967 and issued a writ on 29 August 1967. Underwriters agreed to put the assured in the same position as if a claim form had been issued in the case of the first notice but not in the case of each of the others. In consequence, the assured was entitled to rely on the facts as on the date of service of each of the notices but, with the exception of the first, subject to the possibility of circumstances changing so as to adeem the loss up to the date of the claim form. In Royal Boskalis Westminster NV v Mountain,"O notices of abandonment in 21.104 respect of a fleet of dredgers detained by Iraqi authorities soon after the Iraqi invasion of Kuwait in August 1990 were served on 21 and 25 September. Underwriters formally rejected them on I 1 October, agreeing to put the assured in the same position as if a writ had been issued. In consequence, for a constructive total loss claim to succeed it had to be established thar the ingredients for such a claim both were present at one of the September dates and also persisred through until 1I October. However, the crystallization of the assured's rights as on 11 October meant that the subsequent release of the fleet could not affect those rights.'" There is some doubt as to whether the doctrine of ademption of loss applies to 21.105 actual as well as constructive total loss. '12 As a matter of principle, it is difficult ro see why there should be any difference, although in practice the test for an actual total loss is such that it is highly unlikely that such a loss will be adeemed. In particular, the threshold of unlikelihood of recovery for loss by irretrievable deprivation is sufficiently high'13 as to render remote indeed the possibility of recovety before a claim form is issued.'14 The Marine Insurance Bill when introduced into Parliament contained a clause 21.106 codifying the doctrine of ademprion of loss. For unknown reasons, this clause was deleted and the 1906 Act makes no reference ro the doctrine. While the question has been raised of whether the doctrine should be understood as

abandonment fails. 20o

21.101

Later case law exrends this doctrine of ademprion of loss, permitting the insurer to take the benefit of a change of circumstances even afrer notice of abandonment. 201 Of course, whether recovery of the insured property negates a total loss depends upon its condition. Property recovered in specie may still be so damaged as to constitute a constructive total loss. 202 Any lesser amount of damage caused by a covered peril will, of course, be recoverable as a partial loss. There must, however, be some point beyond which recoveries do not affect the
assured's right to claim under the insurance contract. A (line of convenience' is,

21.102

therefore, drawn upon issue of a claim form'o' by rhe assured, rhe existence and extent of any loss at that time being determinative at common law of the insuter's liability. '04 This is 'the date at which the assured's rights finally crystallize'.'os Acceptance of a notice of abandonment is similarly definitive. 20' In practice, moteover, underwritets who reject a norice of abandonment will generally agree to place the assured in the same position as if a claim fotm had been issued at the time of the rejection'O' or, less commonly, at the earlier time of service of the notice of abandonment. '08
21.103

In The Anita,'O' the assured served a series of four notices of abandonment on

200 ibid 341-2. See also Naylor v Taylor (1829) 9 B & C 718, confirming that reliance should not be placed upon the doubts expressed by Lord Eldon in Smith v Robertson (1814) 2 Dow 474. 20' Patterson v Ritchie (1815) 4 M & S 392; Brotherston v Barber (1816) 5 M & S Al8; Cologan v London Assurance Co (1816) 5 M & S 447, 454; Lozano v Jamon (1859) 2 EI & El 160. The question had been expressly left open in Hamilton v Mendes. This post~notice of abandonment extension is, however, negated by market practice, see 21.102 below. 202 Mill" v FI"ther (1779) 1 DougI231; Cologan v London Assurance (1816) 5 M & S 447; Holdsworth v Wtse (1828) 7 B & C 794; Parry v Aberdein (1829) 9 B & C 411; Lozano vJanson (1859) 2 EI & EI160; Shepherd v Henderson (1874) 7 App Cas 49, 70-J. 203 Formerly known as a wrir. 204 Rodocanachi v Elliott (1873) LR 8 CP 649; Roys v Royal Exchange Assurance Corp [1897J 2 QB 135; Polurrian Steamship Co Ltd v Young [1915J I KB 922. 205 Royal Boskalis westminster NV v Mountain [1997J LRLR 523,534 per Rix]. In the absence of acceptance of the notice of abandonment, however, the assured may still revoke the notice and elect to claim for a partial loss: at 555-8. 206 MIA 1906, s 62(6); Roura & Fourgas v Townend[1918J 1 KB 189, 195. 207 Polurrian Steamship Co Ltd v }'aung [1915J 1 KB 922; Marstrand Fishing Co Ltd v Beer (The Girl Pat) (1936) 56 LlLRep 163; The Bamburi [19821 1 Lloyd's Rep 312, 321; Royal Boskalis westminster NVv Mountain [1997J 1 Lloyd's Rep IR 523, 527; Scott v Copenhagen Reinsurance Co (UK) Ltd [2003J EWCA Civ 688, [2003J Lloyd's Rep 1R 696, para 40. Even if an insurer refused so to agree, the assured could simply serye a claim form that same day and produce the same result: Polurrian (1919) 19 Com Cas 143, 153. 208 Royal Baskalis Westminster NV v Mountain [1997J 1 Lloyd's Rep IR 523, 534. 209 Panamanian Oriental Steamship Corp v Wright (The Anita) [1970] 2 Lloyd's Rep 365.

co

[1997] LRLR 523,527,534. Instead, insurers would be entitled to the assured's rights in the fleet by virtue of the doctrine of abandonment, discussed at 22.31-22.32, 22.36ff below. Note, however, that the assured's conduct in respect of insured property after rejection of a notice of abandonment could amount to revocation of the notice, see 22.61 below. On the facts, it was held that there was no constructive total loss at either of the September dates, see 21.61 above. '" Scott v Copenhagen Reimurance Co (UK) Ltd [2003J EWCA Civ 688, [20031 Lloyd's Rep IR 696, para 40. 213 See 21.46ff above. 214 Since there is no notice of abandonment in cases of actual total loss, the relevant cut-off point for finality of loss must be the date of issue of the claim form. However, where the assured alleges constructive and actual total losses in the alternative and has served a notice of abandon~ ment and obtained the insurer's agreement to treat the assured as having served a claim form, that agreement should finalize any and all forms of total loss as at that date.
2>0
211

670

671

Losses

Successive Losses

implicitly repealed,'15 it seems clear that the doctrine survives as part of the undetlying common law.'"
21.107 The indemnity principle and the doctrine of ademption of loss cannot be

into a total loss, because those who have the conttol ovet the goods may act prudently in selling them at an intermediate port, tathet than incur the expense of cleansing and te-shipping them.''''

sttetched so as ta permit intervention on the part of the underwritets to rransform a tatalloss inta a partial loss and reduce the measure of indemnity accordingly. In Sailing Ship 'Blairmore' Co Ltd v Macredie,217 the assured served a notice of abandonment in respect of the insured vessel, which had sunk in harbour. Before the commencement of ptoceedings, the insurers raised the vessel at their own expense. The cost of raising and repairing the vessel when compared with its repaired value rendered it a constructive total loss, whereas the cost of repairs on their own amounted only to a partial loss. The House of Lords held the insurers liable for a total loss. They had undertaken a contractual obligation to
pay as on a total loss in circumstances constituting a constructive tOtal loss and

G. Successive Losses
Insured ptoperty may be subject to more than one loss while an insurer is on 21,109 risk. The question atising is whethet and how the occurtence of one loss may impact upon another. (1) Successive Losses: Cumulative Recovery The inclusion of a sum insuted in a policy may fix the maximum sum tecover- 21.110 able eithet in respect of anyone loss or in rhe aggregate in respecr of all losses incurred. Where the sum insured is confined to individual losses and the insuret is liable for successive casualties, section 77( 1) of the Matine Insurance Act 1906 codifies a principle of cumulative recovery, providing, as is the logical interpretation of the conttact, that the assured may recover in tespect of each casualty that occasions the assured loss even though the aggtegate tecovery exceeds the
sum insured.

when such a loss occurred they could not defeat that obligation by their own act. Otherwise, insurers could avoid paying on many total losses by the simple expedient of effecting some minor repairs, although there can be no objection ta insurers effecting a complete reversal of a loss, for example by ptocuring the release of a detained vessel."8
21.108

By parallel reasoning, any loss that fails to satisfY the criteria specified in the Marine Insurance Act 1906 for a total loss, whether actual or constructive, can only constitute a partial loss and the assured cannot treat it as or convert it into a total loss.'" In Navone v Haddon,220 bales of silk were insured against total loss only. Bad weather so damaged some bales that it was thought advisable to sell them at an intetmediate port, although a modest expenditure would have would have enabled the bales to be te-shipped to their destination still bearing the mercantile chatacter of silk, albeit damaged. The remainder either escaped damage altogether or sustained only minor damage permitting completion of transit. Since no bale was so damaged as to render its entire contents unfit for any commercial purpose, the Court of Common Pleas held the assured unable to recover as on a total loss of any individual bales. 'A partial loss cannot be rurned

This principle covers two sequences of losses, namely whete the insured prop- 21.111 erty sustains successive partial losses in respect of which the assured incurs expenditure in effecting repaits'" and where rhe insured property incuts such a parrialloss followed by a total loss. 223 (2) Successive Unrepaired Losses Where insured property sustains successive partial losses fat which the measure 21.112 of indemnity is calculated by reference to depreciation in the value of the ptoperty at the time the policy expires, the cumulative recovery to which the assured is entitled cannot exceed the agreed value in a valued policy. Whete a vessel sustains damage, in so fat as the damage remains unrepaired when the policy expires, the measute of indemnity is the 'teasonable depreciation, if any, arising from the unrepaited damage' judged at the time of expiry. 224 lt is, howevet, conceptually impossible to incur more rhan 100 per cent depteciation and, therefore, impossible fat untepaired damage to generate cumulatively gteatet

---21'

----~_._---------- - - - - -

See CaptainJA Cates Tug & Wharftge Co v Franklin Insurance Co [19271 AC 698, 704. 21' MIA 1906, , 91(2). Polurrian Steamship Co Ltd v Young [19151 1 KB 915; Marstrand Fishing Co Ltd v Beer [19371 I All ER 158, 164; Rickards v Forestal Land, Timber & Railways Co Ltd (The Minden) [19501 AC 50, 85; &stor Navigation Co Ltd vAxa Global Risks (UK) Ltd (The Kastor Too) [20041 EWCA Civ 277, [2004J 2 Lloyd's Rep 119, para 38. m [1898J AC 593. 218 See the efforts of the insurers in Polurrian Steamship Co Ltd v J'Oung [1915] 1 KB 922. '" Cazalet v St Barbe (1786) 1 TR 187; Thelluson v Fletcher (1793) 1 Esp 73; Gardner v Salvador (1831) 1 M & Rob 116; Lohre v Aitchison (1878) 3 QBD 558. This does not detract from the possibility that a partial loss may subsequently be overtaken by a toralloss: see 21.115ff below. 22' (1850) 9 CB 30.

221

ibid 44 per Maule J.

m Brooks v MacDonnell (1835) 1 Y & C Ex 500, 515; Kusel v Atkin (The Catariba) [1997J 2

Lloyd's Rep 749, 757-8.

m

Ie Cheminant v Pearson (1812) 4 Taunt 367. m MIA 1906, s 69(2), (3): see 23.19-23.21 below.

672

673

Losses

Successive Losses

loss than is incurred in one blow by a total loss. It follows that the cumulative recovety for successive unrepaired partial losses cannot exceed the agreed value in a valued policy or the insurable value in an unvalued policy. The principle of cumulative recovery is subject to the indemnity principle. 225
21.113 A separate question arises where a vessel is insured for a sum less than the agreed

or insurable value and the measure of indemnity for successive unrepaired losses exceeds the sum insured. In such a case, it would need to be determined whether the sum insured applied to each loss independently or to the aggregate of all recoveries under the policy. Assuming independent application, there is no reason in principle why the principle of cumulative recovery as stated in section 77(1) of the 1906 Act should not permit recovery in excess of the sum insured subject to the upper limit of the agreed or insurable value.
21.114

the assured able to recover, so far as the insured property itself is concerned, only in respect of the total loss. The result is that, where the total loss is caused by a covered peril under the same policy that covers the initial partial loss, the assured is entitled to indemnification for the total loss only. This aspect of the merger doctrine is codified by section 77(2) of the Marine Insurance Act 1906. However, there is still a merger at common law where the tOtal loss is not covered by the policy that covers the initial partial loss, so that the assured recovers nothing under that policy and, indeed, if there is no alternative operative policy, does not recover at alL'" In either case, any payment mistakenly made in respect of the inirial partial loss will be recoverable from the assured. 230 Any merger is, however, confined to claims in respect of the insured property itself and is without prejudice to claims under other heads of liability under the policy, such as the sue and labour clause. 231 The leading illustrations ofthe doctrine of merger ofloss are Iivie vjanson'" and 21.116 British & Foreign Insurance Co Ltd v Wilson Shipping Co Ltd.'" Both are examples ofthe common law doctrine since, in each case, the range ofperils covered by the policy extended to the initial partial loss but not to the superseding total Joss. In Livie vjanson,'" a vessel sailed at night in an unsuccessful attempt to evade 21.117 an American embargo. The vessel collided with ice and was forced ashore, sustaining large holes in its side and bottom. Four feet of water entered the hold and, as the tide left, the vessel fell on its side. The following morning, American customs authoriries seized the ship, and both ship and cargo were condemned for breach of the embatgo. The policy was warranted free ofsuch condemnation. The court held that the later seizure deprived the assured of any right to an indemnity for the initial partial loss by perils of the sea. Lotd Ellenborough ruled as foJIows: 235
.. . where the property deteriorated is afterwards totally lost to the assured, and the previous deterioration becomes ultimately a matter of perfect indifference to his interests, he cannot make it the ground of a claim upon the underwriters. The object of a policy is indemnity to the assured; and he can have no claim to indemnity where there is ultimately no damage to him by any peril insured against.

In Kusel v Atkin (The Catariba),226 Colman J confined the principle of cumulative recovety to successive repaired losses in order to prevent the assured from invoking it to obtain recovery for successive unrepaired losses in excess of an agreed value. With respect, however, it is suggested that such confinement is unnecessary since a conflict between the cumulative recovery principle and the agreed value concept could arise only if the former yielded a measure of indemnity in excess of the latter. As demonstrated in paragraph 21.112 above, there is no conflict since indemnification in the sum of the agreed value must by definition indemnifY in full for any amount of depreciation occasioned by successive unrepaired losses.'"
(3) The Doctrine of Merger ofUnrepaired Partial Losses

21.115 The principle of cumulative recovety reflects the simple proposition that where

an assured incurs expenditure in respect of one partial loss, the occurrence of a subsequent loss, whether partial or total, in no way diminishes the loss to the assured occasioned by the first casualry. Where, however, the assuted does not incur any expenditure in respect of a partial loss and the insured property is subsequently rendered a total loss, the assured cannot sustain a claim for repairs that will never be carried out or for depreciation assessed by reference to the expity of the policy''' in the value of property that has been totally lost before that time. The initial partial loss is said to merge into the later total loss, leaving

If the property, whether damaged or undamaged, would have been equally taken away from him, and the whole loss would have fallen upon him had the property been ever so entire, how can he be said to have been injured by its having been antecedently damaged?

'" Kusel v Atkin (The Catariba) [1997J 2 Lloyd's Rep 749, 756.
ibid 757-8. m The proposition advanced by Colman Jmay have been influenced by a misconception that MIA 1906, s 77(1) permits recovery in excess ofthe agreed value. The subsection refers, however, to the sum insured. 228 For the time of assessment of depreciation, see 23.21 below.
226

229

British 6- Foreign Insurance Co Ltd v Wilson Shipping Co Ltd [1921] 1 AC 188, see

21.118-21.119 below.

The Dora Forster [1900J P 241. MIA 1906, s 77(2) proviso: Iivie vjanson (1810) 12 East 648, 655. m (1810) 12 East 648. 233 [1921] 1 AC 188. '" (1810) 12 East 648. 235 ibid 654. See also Knight v Faith (1850) 15 QB 649.
230 231

674

675

Losses 21.118 In British 6' Foreign Insurance Co Ltd v Wilson Shipping Co Ltd,'36 a ship that

Successive Losses

was insured against marine risks was chartered to the Admiralty under an agreement by which the Admiralty assumed liability for war risks, with the measure of indemnity to be ascertained at the date of the casualty. Mter a partial loss by a matine risk, the assured left unrepaired damage to the value of 1,770. During the currency of the marine policy, the ship was subsequently totally lost by war perils. The Admiralty paid the shipowners 1,770 less than they would have done had the earlier damage been fully repaired. The shipowners, therefore, claimed a further 1,770 from the marine underwriters. The House of Lords held the underwriters not liable on the basis of merger of loss, Lord Birkenhead LC reaffirming the doctrine in the following terms: 237 'When a vessel, insured against perils of the sea, is damaged by one of the risks covered by the policy and before that damage is repaired she is losr, during the currency of the policy, by a risk which is not covered by the policy, then the insurer is not liable for such unrepaired damage.'
21.119 The assured argued that the doctrine of merger ofloss had no relevance unless

crystallizes. In Lidgett v Secretan (No 2),'41 the insurer of the outward voyage sought to escape liabiliry for an untepaired partial loss by virtue of an alleged merger with a subsequent total loss that occurred after expiry of the outward insurance and that was covered by insurance on the return voyage. The Court held that there was no merger of loss. Montague Smith J stated as follows:'42
No doubt, when both the partial and total losses occur during the same voyage, and during the period covered by the same policy, the former is merged in the latter. That is so upon obvious principles of justice. The underwriter insures against accidents happening during the voyage; and the whole voyage must be regarded before it can be ascertained whether and to what extent the assured are damnified. But I am at a loss to see how anything which may occur after the expiration of the risk can alter or affect the rights of the parties.

Where insured ptoperty is rendered a constructive total loss but that loss falls to 21.121 be treated as a partial loss either because the assured so elects or because the assured fails to serve a notice of abandonment where one is required, the partial loss can be subsumed into a subsequent total loss, under either rhe statutory
doctrine or the wider common law doctrine. 243 However the doctrine is conl

recovery for the partial loss would infringe the indemnity principle and all that was sought ftom the marine underwriters was the sum necessary to produce a full indemnity for an admittedly total loss. However, upon a tOtal loss, an insurer under a contract of marine insurance is liable for either the agreed value of the insured property''' or its value at the inception of the risk.'" Payment of that sum indemnifies the assured fully in respect of the lost property no matter how much untepaired damage the property was carrying when it met its terminal casualty. On the facts, the shortfall in the assured's receipt was caused by the terms of the Admiralty's charrerparty and had nothing ro do witJ1' the marine underwriters. Livie v]amon was both correct and indistinguishable. The marine policy cleatly disclaimed liability for war risks. Had the assured chosen to cany the war risks itself or had full cover been obtained from a war risks insurer that subsequently became insolvent, the assured would have had no rights against the marine underwriters. It made no difference that the shortfall arose from the terms of the war risks cover.
21.120 The doctrine of merger of loss, whether common law or statutory, does not

fined to partial losses so that a constructive total loss that falls to be treated as a total loss is not liable to merger into any subsequent total loss. 244 Conversely, where umepaired damage is followed by a constructive total loss that falls to be treated as a parrialloss for indemnification purposes, the merger will still operate. The fact of the later total loss nullifies the earlier damage as a cause ofloss to the assured. If the assured consciously elects or simply fails to elect to receive indemnification as for a total loss in respect of the second casualry, that will not revive the earlier casualry as a cause ofloss. A doctrine of merger of loss is incorporated expressly into the Institute 21.122 and International hull clauses. Clause 20.2 of the International Hull Clauses (01111/03) ptovides as follows:'45 'In no case shall the Underwriters be liable for umepaired damage in the event of a subsequent total loss of the vessel (whether by perils insured under this insurance or otherwise) sustained during the period of this insurance or any extension thereof.' This contractual doctrine of merger of loss reflects rhe common law rather than the statutory doctrine in that it is

apply where the subsequent total loss is caused by a peril that occurs after the policy has expired. This is the time at which it is determined whether a partial loss is repaired or unrepaired'40 and at which the insurer's liability on the policy

236

238 239 240

[1921] 1 AC 188. '" ibid 199. Such a valuation being conclusive between the parties: MIA 1906, s 27(3). The measure of indemnity for a total loss is discussed at 23.12 below; See 23.15 below.

241 (1871) LR 6 CP 616. See also Kastor Navigation Co Ltd v AGF MAT (The Kastor Too) [2002] EWHC 2601 (Comm), [2003] 1 Lloyd's Rep 296, para 12. 242 (1871) LR6 CP 616, 630. 243 Kastor Navigation Co Ltd vAGF MAT (The Kastor Too) [2004] EWCA Ciy 277, [2004J 2 Lloyd's Rep 119, paras 69,114, This may also be the explanation of Woodside v Globe Marine Irlsurance Co Ltd [1896] 1 QB 105"" The Kastor Too at paras 64-67, 112. 244 See 21.124 below. 245 For the equivalent provision containing no material change in wording, see Institute Time Clauses Hulls (1110/83 and 1111/95), clI8.2; Institute Voyage Clauses Hulls (1/10/83 and 1111/ 95), clI6.2.

676

677

Losses
irrelevant whether the subsequent total loss is covered under the policy. It also follows the underlying law, both statutory and contractual, in applying only where the subsequent total loss OCCUtS before expiry of the policy. (4) Successive Total Losses
21.123 It is possible for insured property to be rendered a total loss on mote than one occasion by distinct casualties. While it is technically possible for rhe first total loss to be an actual total loss, it is generally to be expecred thar it will be consttuctive. If that first, constructive total loss falls to be treated as partial, the rules in the previous paragraphs apply. Where, however, the assured elects to treat the loss as total and duly serves a notice of abandonment Ot the circumstances are such as to dispense with that requitement, the rules discussed in this

Successive Losses
policy.251 The assured would, therefore, appeat to be similarly denied tecovery where the cause of the initial total loss simply falls ourside the tetms of the policy, rather than being exptessly excluded, while the second total loss is caused by a covered peril.
'" Kastor Navigation Co Ltd v AGF MAT (The Kastor Too) [2004J EWCA Civ 277, [2004J 2 Lloyd's Rep 119, para 116.

section apply.
21.124 Provided the cause of the first total loss is a covered peril, the assured has the right to claim for the total loss so caused regardless of any ensuing casualty. In particulat, the doctrine of metger of loss is confined to unrepaired partial losses and does not extend to unrepaired damage amounting to a constructive total loss. Accordingly, in The Kastor Too,246 the assured was entitled to recover where a constructive total loss caused by a covered peril was followed by an actual total loss that could not be proved to be caused by a covered peril. Again, in Hahn v Corbett,247 the assured recoveted in respect of a total loss of cargo where a total loss by a covered peril248 was followed by a total loss caused by an exptessly excluded peril. 21.125 Where the initial total loss is caused by an excluded peril, the assured cannot recover in respect of any subsequent casualty. In Anderson v Marten,249 a neurral vessel was captured by a combatant and then wrecked while being navigated to a Court of Prize. The House of Lords held that the vessel had been rendered a total loss by capture,250 so that the assured could not recover under a policy covering loss by perils of the sea bur 'warranted free from capture'. The principle has been stated to be that the establishment of a total loss exhausts the

246 Kastor Navigation Co Ltd v AGF MAT (The Kastor Too) [2004J EWCA Civ 277, [2004J 2 Lloyd's Rep 119. W (1824) 2 Bing 205. 248 It is unclear whether the first total loss of the cargo (the carrying vessel was stranded on a shoal and disabled so as itself to be totally lost) was actual or constructive, but it should probably be regarded as constructive: Kastor Navigation Co Ltd v AGF MAT (The Kastor 100) [2004] EWCA Civ 277. [2004J 2 Lloyd's Rep 119, para 45. ,<9 [1908J AC 334. 250 A constructive total loss: Pesquerias y Secaderos de Bacafao de Espana/SA v Beer (1945) 79 LlLRep 417, 434.

678

679

22
CLAIMS AND CLAIMS HANDLING

A.

Claims Handling in a Subscription Market Liabilities in a Subscription Market Occurrence Notification Obligations
(l) Notification provisions in marine policies (l) The consequences of non~compliance with notification provisions (3) Non-compliance under marine wordings

E. .Limitation
22,02 (1) Property insurance (2) Liability insurance (3) Contract terms and accrual of the cause of action

B. C.

22.62 22.64 22.68 22.69 22.73 22.73 22.74 22.75 22.76 22.77 22.78 22.80

22.04

22.05 22.06

F. Insurers' Rights in Connection with Claims

(1) Claims co-operation dauses (2) Appointment of surveyor and average adjuster (3) Approval provisions (4) MutUal insurance

22.12 22.25

G. F.raudulent Claims
(1) The concept of fraud (2) Fraud of the assured (3) Types of fraudulent conduct in the making of a claim (4) Relevance to the claim (5) Temporal limits on the fraudulent claims jurisdiction (6) Joint and composite policies (7) Remedies for fraud in a claim (8) Fraudulent claims clauses

D. The Doctrine of Abandonment and the Notice of Abandonment Procedure

(1) The doctrine of abandonment (2) Abandonment and notice of abandonment distinguished (3) "When notice of abandonment is not required (4) Insurers' rights upon acceptance of abandonment (5) The impact of abandonment on the assured's rights (6) Form of notice of abandonment (7) Time for giving a notice of abandonment (8) Acceptance and refusal of a notice of abandonment (9) Changing an election

22.30 22.31 22.33 22.35 22.36 22.45 22.52 2253 22.58 22.61

22.81 22.90 22.96 22.100 22.101 22.109 22.113 22.115 22.115 22.120

H. Good Faith io the Making

of Claims

I. Making Payment of Loss

Moneys (1) Method of payment (2) Time of payment

This chapter is concerned with the process of making a claim under an insur- 22.01 anee policy and the handling of claims by insurers. A more developed set of clauses addressing claims and their handling is a feature, and constitures Part 3, 681

Claims and Claims Handling

of the International Hull Clauses (01111103). After highlighting the potentially significant role of the leading underwriter, the chapter considers assureds' obligations to inform the insurer of the possibility of a claim, the doctrine of abandonment and the notice of abandonment procedure, the time limits for bringing a claim, obligations that arise in connection with claims, the fraudulent claims doctrine, and issues relating to payment of claims.

Occurrence Notification Obligations

Marine Insurance Act 1906 and reiterated both in the standard market forms' and the International hull clauses. 4

C. Occurrence Notification Obligations

Insurance policies commonly contain provisions requiring the assured to notify 22.05 the insurer of any occurrence that may give rise to a claim under the policy. Such clauses have a clear commercial purpose:'
The obvious purpose of such provisions is to enable the insurers to take steps to

A. Claims Handling in a Subscription Market

22.02 Since the subscription method of contract formation generates a seties of independent contracts, ' it follows that in principle each participating insurer is entitled to separate notification and consideration of any claim. The attendant administrative inconvenience may be addressed by affording leading underwriters the authority to act in relation to claims on behalf of all subscribing insurers. The extent ofsuch authority necessarily depends on the wording of any leading underwritet clause. 22.03 Under clause 42.1 of the International Hull Clauses (01111103), the leading underwtiter designated in the slip or policy is granted authority to bind the following market in respect of:
42.1.1 the appointment of surveyors, experts, average adjusters and lawyers, in

investigate claims or occurrences which may giv~,rise to claims, in order to minimize their exposure under the policy. They may wish to set in motion independent
investigations or cause repair or reinstatement' of insured property to be under-

taken and, in the case of a liability policy, to take over the defence of claims against the assured or negotiate direct with the third party claimants. Very often it may be
in the interests of the insurer under a liability policy to be able to take steps to

investigate circumstances which may give rise to a claim against the assured before any such claim has been made against or by the assured under the policy. Undcr such a policy an insurer may be better able to protect himself if evidence as to the occurrence can be obtained as early as possible, for, if delay occurs, witnesses may disappear and memories may fade and, if a claim is then made, an insurer may be

severely prejudiced by having lost the opportunity of defeating or diminishing the third party claim.

relation to matters which may give rise to a claim under this insurance 42.1.2 the duties and obligations to be undertaken by the Underwriters including, but not limited to, the provision of security

(I) Notification Provisions in Marine Policies

The precise requirements imposed by any given notification clause depend, 22.06 inevitably, on the true interpretation of the language of the clause and questions
may arise, in particular, as to the event that triggers the requirement to notifY

42.1.3 claims procedures, the handling of any claim . .. and the pursuit
recoveries
42.1.4 all payments or settlements
to

~of

the Assured or to third parties under this

insurance other than those agreed on an 'ex-gratia' basis.

and the time within which notification must occur. The standard hull clauses contain a seties of differently worded provisions: Clause 10.1 of the Institute Time Clauses Hulls (1/10/83) provides as follows: 'In the event of accident whereby loss or damage may result in a claim under this insurance, notice shall be given to the Underwriters prior to survey and also, if the Vessel is abroad, to the nearest Lloyd's Agent so that a sutveyor may be appointed to represent the Underwriters should they so desire.' The 1995 hull clauses saw a significant change in wording. Clause 13.1 provides that: 'In the event of accident whereby loss or damage may result in a
22.07

Accordingly, for example, it would suffice in cases of constructive total loss for a notice of abandonment to be served on the leading underwriter.'

B. Liabilities in a Subscription Market

22.04 An insurer that subscribes to a risk does so for a specified percentage. In the event of a loss, its liability is limited to that percentage of the measure of indemnity payable. Participation on a risk in a subscription market in no sense involves offering a guarantee of payment by other insurers that subscribe to the same risk. This principle of several liability is stated in section 67(2) of the

See 2.14 above.

Notice ofabandonment is discussed a(22.33ff below.

3 eg the Ins~sure Companies Marine Policy contains a statement of severaIliability on both the front and the third page. See Appendix 4. 4 International Hull Clauses (01/11/03), el2? S Alfred McAlpine pic v BAI (Run-Of/) Ltd (1998J 2 Lloyd's Rep 694, 698-9 per Colman].

682

683

Claims and Claims Handling

claim under this insurance, notice shall be given to the Underwtiters promptly after the date on which the Assured, Owners or Managers become Ot should have become awate of the loss or damage and prior to survey so thar a surveyot may be appointed if the Underwriters so desire.' Under the International Hull Clauses (01/11/02), clause 46.1 provides that: 'In the event of an accident Ot OCCUttence which may result in a claim undet this insurance, notice must be given to the Leading Underwriter(s) as soon as possible after the date on which the Assured, Owners Ot Managers become aware of the accident or occurrence so that a surveyor may be appointed if the Leading Underwriter(s) so desire.' Finally, clause 43.1 of the International Hull Clauses (01/11/03) provides as follows: 'In the event of an accident or occurrence wheteby loss, damage, liability or expense may result in a claim under this insurance, notice must be given to the Leading Underwriter(s) as soon as possible after the date on which the Assured, Owners or Managers become aware of such loss, damage, liability or expense so that a surveyor may be appointed if the Leading Underwriter(s) so desire.'
22.08 Three differences between the various clauses may be identified. First, the ttigger fOt the obligation to give notice varies. Under the 2002 clauses, the assured is faced with the potentially difficult judgment of whethet an accident Ot occurrence may result in a claim. Recognizing the commercial difficulty, the 2003 clauses adopt the ttigger of awareness of loss, damage, liability, or expense that may result in a claim. This is redolent of the approach of the 1995 clauses, although they contain no reference to liability Ot expense but are stricter in extending the trigger beyond knowledge to constructive knowledge. The 1983 clauses refer simply to an 'accident whereby loss or damage may give tise to a claim', but notification cannot be given of something of which one is ignorant. 22.09 The threshold oflikelihood ofa claim in all the notification clauses is set at a low level. It suffices that the accident or occurrence or the resulting damage, liability, loss, Ot expense 'may' result in a claim. It is not necessary that a claim is likely; it suffices that it is a realistic, rather than fanciful, possibility." Evidence of how circumstances in fact subsequently unfold is admissible 'to assist in showing what the probabilities really were'. 7 22.10 A second difference between the clauses relates to the required speed of notification. The 1995 clauses require 'prompt' notification, while the International hull clauses adopt the more urgent formula of 'as soon as possible'. Under the

Occurrence Notification Obligations

more relaxed 1983 clauses, the only requirement is that notice be given prior to survey. A third difference relates to the persons to whom notice must be given. Under the 1983 clauses, notice is required to all subscribing underwtiters and, if the vessel is outside the United Kingdom, to the nearest Lloyd's agent. No reference to a Lloyd's agent is included in the other clauses, and the Intetnational hull clauses dispense with notice to all underwriters in favour of just the leading underwriter(s). Notification provisions are also standard in the rule books of mutual insurance 22.11 associations. For example, the Btitannia P&I rules adopt a threefold approach. First, rule 30(1) requires a member 'to give prompt notice in wtiting to the managers of every incident likely to give rise to a claim under these Rules and of any legal or arbitration proceedings commenced against him'. Secondly, rule 30(4) provides that any claim made against a member in connection with a rule 30(1) incident has to be notified to the association 'as soon as possible, but in no case later than twelve months after the Member has received notice that the claim is being, or may be, made against him in tespect of the incident'. In addition, notice of the commencement of any legal or arbittal proceedings against the membet must be given to the association 'as soon as possible, but in no case later than 30 days after the Member has teceived service of the said proceedings'. Thirdly, all requests for reimbursement of any losses, costs, or expenses recoverable from the associationS are required by rule 30(5) to be made to the association 'within twelve months of the incurring of the loss or the payment of the cost or expense by the Member'. (2) The Consequences of Non-compliance with Notification Provisions The consequences for an assured of failing to comply with a notification obliga- 22.12 tion may be specified in the insurance contract. Alternarively they depend on the classification of that obligation and breach thereof as a matter of general contract law. A number of possibilities arise.

(aj Condition precedent A notification clause may constirute a condition precedent to the insurer's 22.13 liability for claims arising out of the event or casualty requiring notification so that non-compliance affords the insurer an absolute and unimpeachable defence to such claims, although not to any other. There is no requirement that an insurer prove that non-compliance with a condition precedent has occasioned it any prejudice, still less serious prejudice; the consequences of non-compliance

Rothschild OJ Assurance pic v CottY,ar lJ 999] Lloyd's Rep IR 6, 22-3. Bank Lin' Ltd vArthur Capel &Co [1919] AC435, 454 per Lord Sumrier, cited in Rothschild v Collyearat 23.
6 7

8 The language of 'reimbursement' follows from the pay first clause (see 16.03 above), so that a claim against the association is for reimbursement of money paid out by the member rather than indemnification of liability incurred.

684

685

Claims and Claims Handling

in fact ate irrelevant to the consequences of the non-compliance in law' However, given the drastic consequences to the assured of non-compliance and the possible lack of any proportionality between the prejudice, if any, caused to the insurer by the non-compliance and the total loss of indemnity to the assured, the courts will scrutinize the interpretation of the clause with considerable care before accepting that it constitutes a condition precedent.
22.14 Ptovided the tenor of the clause is clearly that of a condition precedent, effect

Occurrence Notification Obligations

and then declare that all the conditions listed are conditions precedent. 16 Where $uch an approach is adopted, however, if an individual condition indicates that it is not intended to be a condition precedent, the wording of the individual condition will prevail over the general clause covering the list of conditions. 17 Where the policy simply contains a seties of conditions, some of which state they are conditions precedent while others do not, the latter will not be construed as conditions precedent." Where one clause declares itself to be a condition precedent by using that label while another clause adopts a form of words making clear the intention that it should have condition precedent status but without using the label, the absence of the label in the second clause is no impediment to giving effect to the intention clearly stated.'9 In Alfred McAlpine plc v BAJ (Run-Off) Ltd,'o Colman

will, indeed must, be given to it. lO It is not, however, necessary that the phrase 'condition precedent' be used provided the intention is clear." In insurance
contract law, conditions precedent are often termed 'promissory warranties' or

simply 'warranties', 12 although the term 'warranty' may carry a variety of meanings. 13 In Re Williams,14 the clause contained mandatory language ('shall give immediate notice', 'shall also forward to the company ... within thtee days aner receipt') and the statement that 'Time shall be deemed to be the essence of this condition'. Bigham J had no hesitation in concluding that the clause constituted a condition ptecedent. In the absence of such clear language, the draconian consequences of non-compliance for the assured militate, as a matter of

J concluded

that the 22.16

occurrence notification clause in question was not a condition precedent for the

interpretation, against condition ptecedent status when set against the possibly trivial consequences of bteach for the insurer, the adequacy of damages as a remedy for the insuter, and, depending on the wording, the ease with which the assured might find itself in breach."
22.15 It is not necessary for the individual clause, construed in isolation, to proclaim

itself a condition precedent. It suffices for a policy to list a number of conditions

following reasons. First, the possibility that failure to notifY might occasion little if any prejudice to the insurers coupled with the probable adequacy of a damages remedy for any loss sustained by the insurers militated against a mutual intention that any non-compliance should afford the insurers a complete defence to the claim. Secondly, neither the clause itself nor the policy contained any statement to the effect that compliance with the notification clause was a condition precedent. Thirdly, clause 4 of the policy provided for arbitration on disputes as to quantification of any admitted loss and that an arbitration award was a condition precedent to any right ofaction against the insurers, Such express stipulation of a condition precedent within one condition was a clear indication that other conditions lacking such stipulation were not to be construed as conditions precedent. 21 In Scott Lithgow Ltd v Secretary o/Statefor Defence,22 the relevant clause provided 22.17 (emphasis added) as follows: 'In the event of incident whereby loss, damage or liability may result in a claim under the Indemniry, the contractors should report the circumstances of the incident to the principal naval overseer immediately

Pioneer Concrete (UK) Ltd v National Emp!oyers Mutual Genera! Insurance Association Ltd

[19851 1 Lloyd's Rep 274; Motor 6' General Insurance Co Ltd v Fary [1994] 1 WLR 462, 469 (PC); Alfred McAlpine pic v BAI (Run-Off) Ltd [1998] 2 Lloyd's Rep 694, 702. 10 London Guarantee Co v Fearnley (1880) 5 App Cas 911; Cawley v National Employers'

Accident & Genera/Assurance Association Ltd (1885) 1 TLR 255; Welch v Royal Exchange Assurance [1939] 1 KB 294 (obligation to supply the insurer with all proofs and information). This is subject to the obvious proviso that the clause is capable of operating as a condition precedent. Thus, in Feamley an employees' fidelity policy purported to render a condition precedent to payment of the claim by the insurer, inter alia, an obligation on the assured to assist the insurer in recovering reimbursement from the employee. However, that particular obligation could not constitute a condition precedent to payment no matter how expressed since reimbursement could not occur until after payment.

" Alfred McAlpine pic v BAI (Run-Off) Ltd [19981 2 Lloyd's Rep 694, 699; George Hunt Cranes Ltd v Scottish Boiler 6' Generallmurance Co Ltd [2001] EWCA Civ 1964, [20021 Lloyd's Rep lR 178.
12
15

See 18.54-18.60 above.

13

See 18.105-18.109 above.

" (1902) 19 TLR 82.

16 London Guarantee Co v Fearnley (1880) 5 App Cas 911; Cawley v National Employers' Accident & General Assurance Association Ltd (1885) 1 TLR 255; Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd[1985) 1 Lloyd's Rep 274. " Re Bradley [191211 KB 415. 18 Stoneham v Ocean, Railway & GeneralAccident Imurance Co (1887) 19 QBD 237. See also Re Colemans Depositaries Ltd [19071 2 KB 798, 812-13 per Buckley L], obiter, alrhough cf Fletcher Moulton L], dissenting, at 809. 19 George Hunt Cranes Ltd v Scottish Boiler & General Insurance Co Ltd [2001] EWCA eiv

Cox v Bankside Members Ageney Ltd [19951 2 Lloyd's Rep 437, 454; Alfred McAlpine pic v BAl (Run-Off) Ltd [199812 Lloyd's Rep 694, 699-701. See also Stoneham v Ocean, Railway & General Accident Imurance Co (1887) 19 QI3D 237. Difficulty of compliance cannot, however, override unambiguous condition precedent language as a matter of common law: Cassel v Lancashire & Yorkshire Accident Imurance Co Ltd (1885) 1 TLR 495.

1964, [2002J Lloyd's Rep IR 178. 20 [1998J 2 Lloyd's Rep 694, 699-701.
21 Following Stoneham v Ocean, Railway & GeneralAccident Insurance Co (1887) 19 QBD 237: see 22.15 above.

22

(989) 45 BLR 1.

686

687

Claims and Claims Handling

and, in the interests ofprompt settlement, should submit his priced claim as soon as possible theteafter.' The House of Lords held that this clause did not constitute a condition precedent bur was merely of an administrative character, providing guidance as to the procedure to be followed in making a claim. This conclusion was supported by three factors. First, the clause lacked mandarory language ('should report' and 'should submir'). Secondly, the clause lacked any precision as ro the time by when the report and priced claim should be provided, as might reasonably be expected of obligations on which the validity of a claim depended. 23 Thirdly, the reference to settlement (understood as meaning payment) indicated rhat an obligation ro pay already existed so that the submission of a priced claim could not be a condition precedent to such an obligation.

Occurrence Notification Obligations

repudiatory breach is a denial of at least substantially the whole of the contract. Accordingly, a notification clause will not qualifY by virtue of its substance as
either a condition or an innominate term. 26 Failure. to ,notify could constitute a

repudiatory breach only if the notification clause were drafted in unequivocal terms as a condition of the contract or if the clause clearly specified that breach
was to constitute a repudiation of the contract.

(e) Severable innominate term

In Alfted McAlpine pic v BAJ (Run-OjJ) Ltd,27 an occurrence notification clause 22.21 was held not to be a condition precedent. Nevertheless, the Court of Appeal considered that the clause could operate as an' innominate term within the severable context of the claims arising from the occurrence that should have been notified. In consequence, breach would entitle the insurer to reject the claim provided the insurer could establish that the failure to notifY had occasioned it serious prejudice with respect to the handling of claims resulting ftom the occurrence. Since the prejudice would not extend beyond such claims, the policy would otherwise remain in force. The possibility of a severable innominate term was innovative" but was initially 22.22 accepted without demur in subsequent litigation. However, in McAlpine itself and in two cases that subsequently reached the Court of Appeal,'9 there was on the facts no serious prejudice. Consequently, the result in each case was the same as if a severable innominate term analysis was not available and the clause was a warranty. Authority at the level of the Court of Appeal supporting the new possibility was, therefore, obiter. In Bankers Insurance Co Ltd v South,'O the assured, under a consumer travel 22.23 insurance policy, failed to report an accident as soon as reasonably possible. The notification requirement was drafted as a condition precedent. However, the possibility that a procedural breach might deprive the assured of cover in the absence of any prejudice to the insurer was held to be unfair under the Unfair Terms in Consumer Contracts Regulations 1994 in so far as it permitted the

(b) Suspensive condition

22.18 Where a notification clause operates as a suspensive condition, non-compliance merely suspends the insurer's obligation to pay the claim so that the insurer can rightfully decline to pay so long as non-compliance persists; however, the insurer remains liable to pay once the assured complies with the clause. Accordingly, where a clause states that no claim shall be payable 'until' or 'unless and until' notice has been given, non-compliance merely suspends the insurer's obligation to pay pending cure and does not extinguish it. 24

(c) warranty
22.19 A third possible analysis of a notification clause is as a warranty in the sense in which that term is employed in general contract law." In such a case, noncompliance does not affect the insurer's liability under the policy bur affordHhe insurer a cross-claim against the assured for damages compensating for such loss, if any, as the insurer can prove ro have been caused by the breach. The insurer can set off the amount of the cross-claim against its liability under the policy, even to the extent of extinguishing the claim.

(d) Condition or innominate term

22.20 Theoretically, a notification obligation could constitute a condition or innominate term, so that breach would or could amount to a repudiation of the contract as a whole. This is highly unlikely. By definition, breach of a notification provision relates to an individual event or casualty and the essence of a

23 In isolation, the absence of such precision cannot override dear condition precedent wording, but is supportive of the clause not embodying a condition precedent in the context of the contract at issue in Scott Lithgow. 24 w:'eir v Northern Counties ofEngland, Insurance Co 4 LR It 689; \\7estern Australian Bank v Royal Insurance Co (1908) 5 CLR 533, 573. 25 As distinct from the promissory warranty of insurance contract law, 'Which operates as a condition precedent to the insurer's continued liability on the policy, 'see 18.54-18.60 above.

" Alfred McAlpine pit: v BAI (Run-Of!) Ltd [1998] 2 Lloyd's Rep 694, 700, [2000] 1 Lloyd's Rep 437, para 22. 27 [2000] 1 Lloyd's Rep 437. 28 Although not unprecedented, in that a similar approach had been adopted in a different insurance context in Phoenix Genera! Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599, 614.
29

K/S Mere-Scandia XXXXJI v Certain Lloyd's Underwriters (The Mercandian Continent) [2001]

2 Lloyd's Rep 563; Glenco", International AG v Ryan (The Beursgracht) [2001] EWCA Civ 2051, [2002] 1 Lloyd's Rep 574. 30 [2003] EWHC 380 (QB), [2004] Lloyd's Rep IR 1.

688

689

Claims and Claims Handling

insurer to deny cover in rhe absence of serious prejudice." On the facts, Buckley ] held that a delay of some three-and-a-half years in notilYing the insurers of an accident in another country would occasion serious prejudice through difficulry of tracing witnesses and the likely diminished abiliry of witnesses to assist given fading of memory over such a length of time coupled with a possible diminished willingness to assist. A severable innominate term approach was therefore essential to the disposition of the issue. However, that analysis of the term was reached not as a marter of common law, bur as the result of the intervention of regulatory legislation.
22.24 Subsequently, however, in Friends Provident Lift & Pensions Ltd v Sirius International Insurance," a majority of the Court of Appeal rejected the idea of a severable innominate term as a legal concept thar could be applied to notification clauses." First, as a marter of principle, while a notification clause is ancillary to the central bargain to indemnilY in respect ofspecified losses in return for the premium and operates separately in respect of each occurrence that requires notification, the central bargain is indivisible and does not operate on a severable basis in respect of the claims arising out of each notifiable occurrence. Secondly, a severable innominate term could always be created by express wording. However, there was no basis for implying into notification clauses that would otherwise be interpreted as ordinary contractual warranties an option to reject a claim in cases of serious prejudice. Thirdly, the concept of serious prejudice was itselfproblematic. For example, delay in notification might cause insurers to lose an opportunity to recoup 50,000 by way of a subrogation action. That might be serious in the abstract. Bur how should it be viewed inthe context of a claim for 1 million? Fourthly, the severable innominate ternlwas unnecessary in so far as the serious prejudice occasioned on the facts pf any case could be quantified, since the damages awarded for breach would compensate for the loss and could be set off against any indemnity payable under the policy. The utility of the concept was, therefore, confined to those cases where serious prejudice had been occasioned but could not be quantified in a damages awatd. However, that utility did not justilY extension of the severable obligation concept. Insurers that desired such a clause would have to contract for it.

Occurrence Notification
1983 clauses, failure to notilY as required results in the measure of indemnity .being reduced by 15 per cent. 34 The notification obligation is, therefore, considered to be a warranty with the 15 per cent reduction operating as liquidated damages. The International hull clauses adopt a different approach. Following on from 22.26 the notification obligation in clause 43.1, clause 43.2 of the International Hull Clauses (01111/03) provides that: 'If notice is not given to the Leading Underwriter(s) within 180 days of the Assured, Owners or Managers becoming aware of such loss, damage, liability or expense, no claim shall be recoverable under this insurance in respect of such loss, damage, liabiliry or expense, unless the Leading Underwriter(s) agree to the contrary in writing.' Clause 43.2, therefore, renders notification pursuant to clause 43.1 within 180 22.27 days of the assured, owners, or managers becoming aware of the loss, damage liability, or expense that may result in a claim on the insurance a condition precedent to recovery in respect ofany such claim. However, clause 43.1 requires
notification'as soon as possible' after the assured, owners, or managers become

so aware. That period will expire long before 180 days have elapsed. The International Hull Clauses (01111/03) are silent with respect to the consequences of a notification that is late bur not in breach of the condition precedent contained in clause 43.2. That clause clearly precludes the norification obligation in clause 43.1 from ranking as a condition precedent. 35 Moreover, given the rejection by the Court of Appeal in Friends Provident Life & Pensions Ltd v Sirius International Insuranc1" of the possibility of a severable innominate term analysis, such a breach of clause 43.1 can only sound in damages for such loss, if any, as the insurer can prove has been caused by the delay in notification. The approach of the 1995 hull clauses is the same as that of the International 22.28 hull clauses, except that reference is to all subscribing underwriters rather than just the leading underwriter, and the time beyond which late notification becomes breach of a condition precedent is twelve months from the date when the assured, owners, or managers became or should have become aware of the relevant loss or damage. 37 The P&I rules of the Britannia club are silent as to the consequences of failure 22.29 to comply with the various notification requirements in the rules. In the absence

(3) Non-compliance under Marine Wordings

22.25 The various Institute and International hull clauses address the consequences of non-compliance but not always completely and in differing ways. Under the

31 Quaere whether, having concluded _ that the clause was unfair on its wording, Buckley should not have held that it was not bindingat.all on the assured, rather than reworded. 12 (20051 EWCA Civ 601, (2005J 2 All ER (C6mm) 145. 33 ibid paras 31-33.

Institute Time Clauses Hulls (1110/83), d lOA. Thus, where a policy requires immediate notice but also provides that the insurer will not be liable for losses that have not been notified within 14 days of occurrence, the latter provision is inconsistent with condition precedent status for the former: Adamson 6' Sons v Liverpool & London & Globe Insurance Co Ltd[1953] 2 Lloyd's Rep 355, upholding the 14 days' provision. 36 (2005J EWCA Civ 601, (2005J 2 All ER (Comm) 145. " Institute Time Clauses Hulls (III II95), d 13.1.
34
35

690

691

Claims and Claims Handling

of any wording indicating a contrary status, they rank as warranties with the association's remedies for breach confined to damages.

The Doctrine ofAbandonment and the Notice ofAbandonment Procedure

to accept or decline that offer. 41 In this respect, the 1906 Act altered the preexisting common law, under which property passed automatically to the insurer. 42 Should the insurer elect to take the assured's rights, the transfer occurs on, and indeed is contingent upon, payment of the measure of indemnity fot a totalloss. 43 It then takes effect retrospectively from the time of the casualty.44 Accordingly, section 79(1) of the Marine Insurance Act 1906 provides that: 'Where the insuret pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to tal<e over the interest of the assured in whatever may remain of the subject-matter so paid for'. Similarly, section 63(1) of the 1906 Act provides that: 'Where there is a valid abandonment, the insurer is entitled to take over the interest of the assured in whatever may remain of the subjectmatter insured, and all proprietary rights incidental thereto.' (2) Abandonment and Notice of Abandonment Distinguished Abandonment is a necessaty aspect of every claim for a total loss, whether actual 22.33 or constructive,45 and should not be confused with the procedural requirement of notice of abandonment. In the event of a constructive total loss, the assured enjoys a right of election between, on the one hand, treating the loss as a partial loss and, on the other hand, abandoning the subject-matter insured to the insurer and treating the loss as total. 46 If electing to abandon, the assured must, as a condition ptecedent to being able to recovet as for a toral loss, comply with the procedural requirement to give the insurer notice of abandonment with teasonable diligence after learning of the 10ss.47 The giving of norice of abandonment is, therefore, a cond.ition precedent not to the existence of a

D. The Doctrine of Abandonment and the Notice of Abandonment Procednre

22.30 In the context of constructive total losses, a distinct notification requirement is

imposed by law. This serves the doctrine ofabandonment, a docttine that is not, however, confined to constructive total losses.
(l) The Doctrine ofAbandonment
22.31 According to Lord Abinger in Roux v Salvador: 38 'The obligation of abandon-

ment was the necessary consequence of confining the object of the [insurance] contract to a strict indemnity.' That which ranks in insurance law as a total loss does not necessarily involve the complete annihilation of the subject-matter insured so as to leave nothing ofvalue. Where a ship is physically destroyed by a storm so as to constitute an actual total loss, value may remain in the form of salvage ofthe wteck for scrap. This is all the more so in the case of a constructive total loss. By virtue of this concept, marine insurance law permits the assuted to recover the measure of indemnity for a total loss where, from a commercial viewpoint, the subject-matter insured is as good as totally lost, albeit still in existence. For example, there is a constructive total loss where the subject-matter insured is so damaged that the cost ofrepairs necessaty to prevent an actual total loss would exceed its value once repaired. 39 The measure of indemnity for a tbtal loss is taken, however, as indemnifYing the assured in respect of the full value of the insured property. Since, by virtue of the indemnity principle, an assured's right of indemnification is confined to the loss sustained, it follows that to permit the assured both receipt of the total loss measure. of indemnity and retention of any value remaining of the subject-matter insured would produce unjust entichment to the extent of such value. Consequently, a claim for indemnification for a total loss, or in catgo insurance a tOtal loss of a part,'O necessarily involves an abandonment by the assured to the insurer of such rights as the assured continues to have in whatever remains of the insured property.
22.32 There is, however, no automatic transfer of rights. An abandonment is an offer

41

Allgemeine versicherungs-Gesellschaft Helvetia v Administrator of German Property [1931]

by the assured of its rights in the remaining property and the insurer is entitled

" (1836) 3 Bing (NC) 266, 283. 39 For discussion of the concept of constructive tOtal loss, sec 21.53ff above. 40 See 23.29-23.30 below.

1 KB 672, 688; Pesquerias ySecaderos de Bacalao de Espana SA v Beer (1946) 79 LlLRep 417, 433: Royal Boskalis Westminster BV v Mountain [1997] LRLR 523, 557; Kastor NamgatlOn Co Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) [2004J EWCA Civ 277, [2004J 2 Lloyd's Rep 119, para 76, 42 Simpson & Co v Thomson (1877) 3 App Cas 279, 292. .. 43 Kaltenbach v Mackenzie (1878) 3 CPD 467, 471: Kastor Naotgatton Co Ltd v Axa Global Risks (UK) Ltd (The Kastor 7oo) [2004J EWCA Civ 277, [2004J 2 Lloyd's Rep 119, para 76. . 44 K'dstor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kastor 7oo) [2004J EWCA CIV 277, [2004J 2 Lloyd's Rep 119, para 76. 4S RAnkin v Potter (1872) LR 6 HL 83, 156: Kaltenbach v Mackenzie (1878) 3 CPD 467, 471: K'dstor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) [2004J EWCA CIV 277, [2004J 2 Lloyd's Rep 119, paras 58, 93. 46 MIA 1906, s 61. b . 47 ibid S 62(1), (3). In the subscription market, notice of abandonment will need to ~ given. to each subscribing underwriter unless authority is given to the leading underwrit~r to receive notice of abandonment on behalf of all underwriters, as is the case under the International Hull Clauses (01111103): see 22.03 above.

692

693

Claims and Claims Handling

, total loss but to the insurer's liability as for a total loss in respecr of

The Doctrine ofAbandonment and the Notice ofAbandonment Procedure

the insurer to intervene before the property becomes an actual total loss or, a ftrtiori, it has already become an actual tOtal loss, 56 Similarly, rhe requirement of a notice of abandonment is dispensed with if it is. too late to prevent insured goods from dissipating, 57 or salvage of insured property is rendered impracticable by reason of rhe casualry occurring wirhin a war zone. 58 lt is also open to the insurer to waive the requirement of notice of abandonment. 59 The notice of abandonment procedure does not apply to contracts of reinsurance:o (4) Insurers' Rights upon Acceptance of Abandonment If accepted by the insurers, abandonment altets the property in the subject- 22.36 matter insured and does so retrospectively as from the time of the casualty that generates the abandonment. lt has often been likened to a sale or assignment of the insured property immediately after the casualty. In Rankin v Potter:' Martin B described an abandonment under a hull policy as involving:
... a cession or transfer of the ship to the underwriter, and of all his property and interest in it) with all the claims that may arise from its ownership, and all the profits that may arise from it, including the freight then being earned. Its operation is as effectually to transfer the property of the ship to the underwriter as a sale for valuable consideration, so that of necessity it vests in the underwriter a chattel of

serves the indemnity principle in all cases of total loss, whereas .uandonment is the vehicle whereby the assured makes an offer of <4oandonment in cases where the insured property remains in specie. 49 Abandonment contemplates the divesting of interest by the assured required by rhe indemnity principle in all cases of total loss, whereas notice of abandonment puts the insurer on norice of the assured's intention ro claim for a total loss in a case where the insured property still exists. 50 The notice procedure responds to the interests of equity in the case of a constructive total loss in compelling the assured to make and communicate its election promptly so as ro enable the insurer to obtain maximum benefit from what remains. 51 (3) When Notice of Abandonment is not Required 22.35 It follows from the purpose ofa notice of abandonment in alerting the insurer to the possibility of exercising tights over what remains of the insured property that no notice is required in respect of either an actual total loss, 52 since by definition a prompt intervention cannot benefit the insurer, 53 or a constructive total loss where 'at the time the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him'. 54 In this context, the term 'benefit' imports a realistic possibility of exercising control over salvage rather than an inevitable financial advantage had notice of abandonment been given. 55 No notice will, accordingly, be required where, by the time the assured becomes aware of the constructive total loss, it is too late-for

more or less value, as the case may be. Accordingly, where underwriters pay on an actual total loss presumed by virtue 22.37 of section 58 of the Marine Insurance Act 1906:' if the vessel is subsequently discovered it belongs to the underwriters:' Similarly, an abandonee of a vessel is entitled to any freight in the course of being earned at the time of the casualty that generated the abandonment and that was subsequently earned: 'The abandonees are considered as purchasers of the ship at the moment of the casualty to which the abandonment refers: and although the contract of the shipowner does not run with the ship, it is well settled that, as incident to the ship, the right to the whole freight, pending at rhe time of the sale and subsequently earned, belongs to the purchaser of the ship. '64

48 Roura & Forgas v Townend [1919) I KB 189: Robertson v Petros M Nomikos Ltd [1939) AC 371: Court Line Ltd v R (The Lavington Court) [194512 All ER 357. 49 Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) [2004) EWCA Civ 277, [2004] 2 Lloyd's Rep 119, para 77. Consequently, notice of abandonment can be given only by the person in whom is vested the interest abandoned: Jardine v Leathley (1863) 32 LJQB 132. so Rankin v Potter (1872) LR 6 HL 83, 156. A notice of abandonment is not conclusive evidence of the assured's intention to claim for a total loss, as there stated, since the assured may revoke the notice until accepted by the insurer: MIA 1906, s 62(6). Sl Fleming v Smith (1848) 1 HLC 513, 535; Stringer v English & Scottish Marine Insurance Co (1870) LR 5 QB 599, 606; Kaltenbach v Mackenzie (1878) 3 CPD 467, 471-2, 480; Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) [2004] EWCA Civ 277, [2004] 2 Lloyd's Rep 119, para 9. 52 MIA 1906, s 57(2), S3 Rankin v Potter (1872) LR 6 HL 83,106. Such, at least, is the legal presumption. In cases involving a loss of commercial identity, however, property of considerable value may remain even if the property contemplated by the policy has ceased to be: see 21.39-21.45 above. 54 MIA 1906; s 62(7); Rankin v Potter (1872) LR 6 HL 83. Arguably, in such a case the loss is or has become an actual total loss. No analogy should be drawn between notice of abandonment and notice of dishonour of a bill of exchange: ibid 125-31. 55 Utcuum Oil Co v Union Insurance Society ofCanton Ltd (1926) 25 LILRep 546.

56

Kastor Navigation Co Ltd v Axa GWbal Risks (UK) Ltd (The Kastor Too) [20041 EWCA Civ Utcuum Oil Co v Union Insurance Society ofCanton Ltd(1926) 25 LlLRep 546. Black King Shipping Corp v Massie (The Litsion Pride) [1985) 1 Lloyd's Rep 437, 478. MIA 1906, s 62(8); Rickards v Forestal Land, 7Imber & Railways Co Ltd (The Minden) [1942]

277, [20041 2 Lloyd's Rep 119.

57
58 59

AC 50. Certainty of rejection of the notice by the insurer provides no foundation for a claim of waiver: Black King Shipping Corp v Massie (The Litsion Pride) [19851 1 Lloyd's Rep 437, 478. 60 MIA 1906, s 62(9); Uzielli 6- Co v Boston Marine Insurance Co (1884) 15 QBD 11. " (873) LR6 HL83, 144. See also Glen Line LtdvAttorney-GeneraI(930) 36 Com Cas I, 13; Allgemeine Versicherungs-Gesellschaft Helvetia vAdministratorofGerman Property [1931] 1 KB 672. 62 See 21.21 above. 63 Houstman v Thornton (1816) Holt 242. 64 Miller v Woodfill (1857) 8 El & Bl 493, 503 per Lord Campbell CJ; MIA 1906, s 63(2).

694

695

Claims and Claims Handling

22.38 This principle originates from Case v Davidson,65 where a ship and irs freight were separately insured. The ship having been captured, the ship and the freight were abandoned to the respective underwriters who paid as on a total loss. When, subsequently, the ship was re-captured, completed its voyage, and earned freight, the benefit of the freight was held to inure to the ship underwriters. Lord Ellenborough srated the principle as follows:" 'An abandonment to rhe underwriter on ship, transfers to him nor merely rhe hull, but the use of the ship, and the advantages resulting from the completion of rhe voyage. If, upon the complerion of the voyage, the abandonee may withhold the goods until the freighr is paid, he musr have aoquired an indefeasible title to it. I consider his ritle as derived out of the use of the ship.' 22.39 Where freight is payable on delivery of the goods ar the porr of destination, no freighr will have been earned ar the time of a casualty in the course of the voyage leading to an abandonment. Where the voyage is subsequently completed, the cargo owner would be unjustly enriched if entitled to the benefit of carriage without payment and the person who must be paid is the owner of the vessel at rhe time when the right to payment of freight accrues. Upon abandonment of the ship, this becomes rhe ship underwriter. Moreover, in the absence of appropriate wording, the assured cannot claim on a freight policy since the freight insured has nor been lost; it has been earned by someone other t.han rhe assured, but it has not been 10st.67 22.40 Where, in contrast, freight is paid to the shipowner before rhe casualty to which the abandonment relates and is not contingent upon the safe arrival of the ship ar the porr of destination, that freight is earned by the shipowner and not by the use of the ship by the underwriter after the abandonment. 68 In lvIiller v Woodfill" the assured loaded his own ship with goods on his own accbunt for a voyage from St John, New Brunswick, to Liverpool, insuring ship and freighr separately. The ship stranded at Southport, only rwenty miles shorr of Liverpool. The assured abandoned the ship to the ship underwriters and, at his own expense, had parr of rhe cargo conveyed by lighrer ro Liverpool and rhen procured completion of rhe voyage by the ship togerher wirh rhe remainder of rhe cargo. The ship underwriters rhen claimed credir for freight for rhe full cargo for rhe whole voyage. Had the cargo belonged to a third parry, their claim would have succeeded. However, on the facts, ar rhe rime of rhe casualty no freight was pending. That the increase in the value of rhe assured's goods arrributable to

The Doctrine ofAbandonment and the Notice ofAbandonment Procedure

:heir rransportation had been insured under rhe designarion of freighr'O was melevant. No purchaser of rhe ship would have had a claim againsr rhe assured qua cargo owner. Moreover, rhe increased value of the goods ar rhe time of rhe casualty artributable to rhe subsranrially complered carriage, as reflected by rheir enhanced price had rhey been sold afloar, was analogous ro freighr earned before rhe casualty. The ship underwrirers were, rherefore, held entitled only ro an allowance for the carriage from Southporr to Liverpool in respect of rhat parr of the cargo left in rhe vessel, this being the only benefit in the nature offreight the assured, qua cargo owner, derived from use of rhe ship after the casualty to which the abandonment related. Abandonment transfers to insurers only rights attached to the property aban- 22.41 doned. It does not transfer rights vesred in.rhe person of the assured even ifsuch rights vest by reason of the events that give rise ro the toralloss and the abandonmenr. In Glen Line Ltd v Attorney-General" the insured vessel was seized by the German government on the outbreak of the First World War, compensation being paid at the end of the war pursuant to the peace treaty. The underwriters, who had indemnified the assured as on a toral loss, unsuccessfully soughr to claim that compensation." Lord Warrington" observed that a wrongful act occasioning a rotal loss of a ship gives rise to rwo distinct causes of action. The owner has a right to claim damages for the loss of the ship, a right which passes upon abandonment along with any claim for freight in the Course of being earned at the date of the casualty. Secondly, however, the owner has an entirely personal claim for damages for loss of profits. Not being a right connected or incidental to the ship, it remains vested in the owner notwithstanding any abandonment. Upon the true construction of the treaty, the compensation was paid for lost profits and, alrhough more generous than rhat recoverable under English law, belonged to the assured. Likewise, in Sea Insurance Co v Hadden," the assured's ship was rendered a 22.42 constructive total loss in a collision for which the other vessel was at fault. The hull underwriters having paid for the total loss and the assured having recovered damages in respect of rhe lost ship and lost freighr, rhe question arose ofwhether rhe ship underwriters were entitled to the freight damages. The Courr ofAppeal held that such damages could be salvage only for freight underwriters.

70

The meaning of freight in marine insurance law is discussed at 1.53-1.54 above.

(1816) 5 M & S 79, afFd (1820) 2 Bwd & B 379. 66 (1816) 5 M & S 79, 82-3. See also Stewart v Greenock Marine Insurance Co (1848) 2 HLC 159. 67 Scottish Marine lmurance v Turner(1855) 4 HLC 312. " The Red Sea [1896] P 20. 69 (1857) 8 El & Bl493.
55

(1930) 36 Com Cas 1. n The claimant was in fact the British government, which had assumed 80 per cent of the loss ?y way of reinsurance and was claiming an entitlement of 80 per cent of the compensation for Itself and o~ 20 per cent for the primary underwriters, who, however, declined to support the government s claIm. 73 (1930) 36, Com Cas 1,7. " (1884) 13 QBD 706.
71

696

697

Claims and Claims Handling

22.3P
:ase law continues to illustrate the nature of abandonment. However,

The Doctrine ofAbandonment and the Notice ofAbandonment Procedure

removal" as referring to the owner at the rime of the removal as opposed to the .rime when the vessel became a wreck. Mter the casualty and before the disposal operations, the appellant shipowners gave notice of abandonment to the underwriters who paid as on a total loss and also gave written notice to the harbour authorities that they had abandoned the vessel as a wreck. In these circumstances, it was held rhat the owners had successfully divesred themselves of ownership so as to escape the statutory liability. Lord Herschell observed that they 'had abandoned the vessel as derelict on the high seas, without any intention of resuming possession or ownership. They had also given notice of abandonment to the underwriters' ,80 Lord Watson, however, made no reference to

nee's right to subsequently earned freight is today expressly waived ~2 of the International Hull Clauses (1/11103) in the following a total or constructive total loss of the vessel has been admitted lerwriters, they shall make no claim for freight whether notice of abandonment has been given or not.'
22.44 The efficacy of such a contractual waiver is confirmed by Coker v Bolton.

Hull and freight were separarely insured. The freight policy was valued and contai~ed an underwriters' freight waiver clause. The vessel was rendered a constructlve toralloss but was towed to its destination where its cargo was discharged and freighr less than the valuation in the freight policy was paid to the assured. It was held that the parties could contract out of the abandonee's right to freight leaving intact the assured's rights against the cargo owners and freight underwriters, the latter on the facts being liable for the balance of the agreed value. (5) The Impact ofAbandonment on the Assured's Rights

76

22.45 As already seen, abandonment as between assured and insurer constitutes an

offer to transfer such rights as the assured may have in whatever may remain of the subject-matter insured. That offer mayor may not be accepted. Three questions arise. First, is it possible for the assured to relinquish all rights in the insured property by a unilateral act of abandonment without the rights being taken up by another party? Secondly, if that is possible, does it prejudice the assured's rights on the contract of insurance? Thirdly, if the assured's rights are prejudiced, what form does that prejudice take? There is no clear answer to/any of these questions.

the notice of abandonment to the insurers, while stating his agreement with Lord Herschell that the 'abandonment of the sunken ship in the open sea, sine animo recuperandi, had divested the appellants of all proprietary interest in rhe wreck before the respondents commenced operations with a view to its removal'." Lord Ashbourne queried, without expressing an opinion, whether avoidance of liabiliry could be achieved by 'a mere assignment'." Lord Macnaghten expressly disregarded the appellants' dealings with the underwriters and held that by rheir letter to the harbout authorities the appellants 'declared that rhey had abandoned all rights of property and given up all interest in rhe vessel', thereby ceasing to be owners within the meaning of rhe statute, but left open the question of whether such abandonment divested the appellants of ownership for all purposes." Lord Morris agreed that the appellants had abandoned the vessel although without clarifYing exactly how. The decision inclines towards the proposition, although not without hesitation, that an owner can divest itselfof proprietary rights by a unilateral act of abandonment without any reciprocal assumption of the divested rights by a third party." Moreover, again for the purpose of liability for rhe expenses of wreck removal, it 22.48 has been held that the assured is divested ofownership rights not only where the insuter has accepted the notice of abandonment, rendering abandonment irrevocable,85 but also where it has been rejected before incurral of the removal expenses. 86 The latter is difficult to reconcile with the status of abandonment in the modern Jaw as an offer of rights. Rejection of a notice of abandonment is

(aJ Unilateral divesting ofrights 22.46 It appears to be possible for an owner of property unilaterally to divest itself of all rights in the owned property even in the absence of assumption of those rights by a counterparty." Such property is then res nullius and available to be raken into ownership by any finder.
22.47 The issue of unilareral divesring of rights in vessels has arisen in rhe context of

liability for wreck removal. In The Crystal," the House of Lords construed legislation imposing liability on the owner of a wreck for the expenses of

79

Harbours, Docks and Piers Clauses Act 1847, s 56.

80

[1894] 508, 519.

" See also Institute Time Clauses Hulls (1110/83 and lilI/95), cl20. 76 [191213 KB 315. 77 For discussion, see A Hudson, 'Abandonment' in N Palmer and E McKendrick (cds) Interests in Goods (2nd edn, 1998) Ch 23. /
78

Arrow Shipping Co Ltd v Ijme Improvement Commissioners (The Crystal) [1894J AC 508.

" ibid 52!. " ibid 527. 83 ibid 532. 84 Britannia P&I rules, r 31 (3) provides that: 'In the event of an Entered Ship becoming an actual or constructive total loss, the Association shall, subject to the hull underwriters' rights in the matter, be entitled to request the Member concerned to abandon the Ship to the Association or to such other person (including the world at large) as the Association shall nominate.' Failure to comply exonerates the Association from responsibility for any claim, eg for wreck removal, that could have been avoided by the requested abandonment. 8S Barraclough v Brown (1895) 1 Com Cas 262,1 Com Cas 329, [18971 AC 615. 86 Mayor, &c, ofBoston v France Fenwick &Co Ltd (1923) 28 Com Cas 367, 375-6.

698

699

Claims and Claims Handling

merely rejection of the offet. The modern law does not require a divesting of 87 rights by the assured as a necessary incident to indemnification for a totalloss.

The Doctrine ofAbandonment and the Notice ofAbandonment Procedure

for a total loss but entitled to damages for breach of an implied contractual term quantified by reference to the sum that exercise of transferred rights would have recouped and a set-off of such sum against rhe measure of indemnity? The former would appear disproportionate to the assured's conduct. (6) Form of Notice ofAbandonment There is no prescribed form for a notice of abandonment, but its terms must 22.52 'indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer'." (7) Time for Giving a Notice ofAbandonment The time for giving a notice of abandonment is the subject of a line of authority 22.53 codified by section 62(3) of the Marine Insurance Act 1906 as follows: 'Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful charactet the assured is entitled to a reasonable time to make enquity.' The concept of a reasonable time, ultimately a question of fact," was discussed 22.54 by Lord Chelmsford in Currie (MR) 1& Co v Bombay Native Insurance Co:'o
What is a reasonable time ... must depend upon the particular circumstances of each case. On the one hand, the assured is not to delay his notice when a total loss

(b) Does abandonment deny unilateral divesting?

22.49 The doctrine of abandonment reinforces the indemnity principle. Clearly, the

assured is not permitted to transfer rights in the remaining insured property to a third party for value withour first offering them to the insurer. Otherwise, as between assured and insurer, the assured would receive both indemnification for a total loss and the third party receipt and be unjustly enriched by double recovery to the extent of the latter. Where, however, an assured divests itself of all rights in the insured property by unilateral abandonment (assuming this is possible), any danger of double recovery is eliminated. The question arising, therefore, is whether the insurance law doctrine of abandonment is designed to serve a further purpose, namely to afford insurets a possibility of recouping some of the indemnity for which they are liable to the assured. It is clear that it
can so serve, but the question is whether, subject to contrary intention, insur~

ance contracts are to be understood as conferring such recoupment rights on the insurer, denying the assured the right ro defeat the insurer's recoupment opportunities by unilateral divesting of rights.
22.50 The Marine Insurance Act 1906 is equivocal. Section 61 provides that an

assured that wishes to treat a constructive total loss as a total loss must'abandon the subject-matter insured to the insurer'. Similarly, section 62(1) links the notice of abandonment procedure with an election 'to abandon the subjectmatter insured to the insurer'. It is unclear, however, whether the contemplated rights in the subject-matter that are to be offered to the insurer are those existing at the rime of the casualty, at the time of the claim for a total loss, or even at the time of the transfer of rights (namely payment by the insurer).

occurs, in order to keep his chance of doing better for himself by keeping the
subject insured, and then, when he finds it will be more to his advantage to do so, throwing the burden upon the underwriters; while, on the other, the underwriters cannot complain of a suspense of judgment fairly exercised on the part of the assured, to enable him to determine whether the circumstances are such as to entitle him to abandon.

(c) Consequences ofimproper divesting 22.51 Assuming that marine insurance contract law does require the assured to offer the insurer such rights as existed in the insured property as at the date of casualty, the further question arises of the consequences of failure to do so. Is the assured thereby barred from a total loss claim or does the insurer remain liable

In effect, once the assured knows of the casualty," notice of abandonment must 22.55 be given to the underwrirers promptly unless time is required to clarifY the state of the insured property in order to determine whether the casualty has rendered it a constructive total loss and/or whether to exercise the right of election in favour of abandonment to the underwriters." It is to be emphasized that the
assured's sole concern in so deferring communication of a decision to abandon

must be the physical condition of the relevant property. In particular, the assured is not permitted to delay in order to judge the state of the markets and
87 Oceanic Steam Navigation Co Ltd v Evans (1934) 40 Com Cas 108, 11 1. The res nullius analysis was also doubted in Blane Steamships Ltd v Minister a/Transport [1951] 2 KB 965. 990-1 as incompatible with the assured's option to treat a constructive total loss as a total or partial loss and with the doctrine of ademption. The former objection depends on precisely what rights the doctrine of abandonment requires the as~ured to offer to the insurer, see 22.49-22.50 below. With respect to ademption, this reverses the total loss and negates the basis of the abandonment. Similarly, becoming res nullius need not be a final, in'evocable change of stare. The property may be claimed by a third party and restored to the assured.

8S MiA 1906, s 62(2). See Russian Bank ofForeign Trade v excess Insurance Co Ltd (1919) 24 Com Cas 55, 56; Norwich Union Fire Insurance Society Ltd v Price (WH) Ltd [1934] AC 455; Panamanian Oriental SS Corp v Wright [1970] 2 Lloyd's Rep 365, 379; Black King Shipping Corp v Massie (The Litsion Pride) [1985] I Lloyd's Rep 437, 478. " MIA 1906, s88. 90 (1869) LR3 pcn, 79. 91 Abel v Potts (1800) 3 Esp 242. " Read v Bonham (1821) 3 Brod & B 147.

700

701

Claims and Claims Handling

whether abandonment to the underwriters is to its financial advantage. 93 Indeed, the requirement for a notice of abandonment is derived 'from a consensually recognised need in the international and uncertain context ofa marine adventure to protect underwriters from an insured's attempt to play the market'. 94
22.56 Once the assured has the necessary information, an election to abandon the insured property to the underwriters must be communicated by notice of abandonment at the first opportunity.95 In Anderson v Royal Exchange Assurance CO,96 an insured cargo of corn was damaged by immersion in water following the srranding of the carrying vessel on 28 January. The assured commenced salvage operations on 31 Januaty, the greater part of the corn being recovered and kilndried. Notice of abandonment given on 18 February was held too late, the court stating that an assured cannot endeavour to mal,e the best of the casualty for its own benefit and then abandon. In Hunt v Royal Exchange Assurance;' a delay of five days was held unreasonable." The improved communication systems of the modern world can only shorten what is regarded as a reasonable time. 22.57 Given that the assured is not prejudiced by an invalid notice of abandonment and the difficulty that may attend determining precisely when the insured property is rendered a constructive total loss, the imperative of serving a timely notice may prompt a succession of notices. 99

The Doctrine ofAbandonment and the Notice ofAbandonment Procedure

abandonment is a nullity by reason ofbeing based on a fundamental mistal<e, the nullity extends to an acceptance thereof and the insurer is entitled to restitution of any indemnity paid.'o, Acceptance of the notice of abandonment by the insurer may be express or 22.59 implied from conduct consistent only with having accepted the abandonment.'04 Naturally, conduct will give rise to such an implication if compatible only with an assumption of ownership in the insured property.'os Two Privy Council decisions may be contrasted. In Provincial Insurance Co of Canada v Leduc,106 the insurers' agent took possession pursuant to instructions in May to look after any interest the insurers might have in an abandoned vessel. The agent disposed of cargo, floated and repaired the vessel, and retained possession until sale in salvage proceedings in September. This conduct over such a period combined with a failure either to repudiate the notice of abandonment or to state to the assured that such acts were not effected qua owner of the insured property constituted evidence of acceptance. In Cates (Captain fA) Tug & Wharfitge Co Ltd v Franklin Insurance Co, '0' tentative negotiations with salvors were held not ro imply the power to make title should a contract be concluded, even a concluded agreement being only execurory and not of itself an act of ownership. Mere silence of the insurer after receipt of a notice of abandonment does not 22.60 connote acceptance.'OB Moreover, the modern Institute and International hulls clauses provide that: '09 'Measures taken by the Assured or the Underwriters with the object of saving, protecting or recovering the subject-matter insured shall not be considered as a waiver or acceptance of abandonment or otherwise prejudice the rights of either party.' It has, nevertheless, been observed that, while such measures may not constitute an actual acceptance of abandonment, this provision does nor of itself prevent such measures from constituting evidence of an election by the insurer to accept."o

(8) Acceptance and Refusal of a Notice ofAbandonment

22.58 Service of a proper notice of abandonment is generally'OO a condition precedent ro the assured's right to indemnification as for a rotalloss in the event of a constructive total loss. However, at least in the hull market, a notice of abandon~ent is almost invariably refused for fear of liabilities that may attach ro the insured property. Refusal of the notice does not prejudice the assured's rights.'o, The significance of acceptance is that the insurer thereby'conclusively admits liability for the loss and the sufficiency of the notice' .'02 However, where a notice of

93 Abel v Potts (1800) 3 Esp 242; Gernon v Royal Exchange Assurance (I815) 6 Taunt 383. Service of a notice of abandonment, however, merely communicates the assured's decision to abandon the insured property to the underwriters. The abandonment may be withdrawn by the assured unless the notice is accepted by the underwriters.

94 Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) [20041 EWCA Civ 277, [200412 Lloyd's Rep 119, para 62 per Rix LJ. 95 Mitchell v Edie(1787) 1 TR 608. " (1805) 7 EaSt 38. 97 (1816) 5 M & S 47. " A fortiori the longer delays in Barker v Blakes (1808) 9 EaSt 283: Aldridge v Bell (1816) 1 Stark 498; Fleming v Smith (i848) 1 HLC 513. 99 For an example of multiple notices of abandonment, see Panamanian Oriental S5 Corp v Wright (The Anita) [1970J 2 Lloyd's Rep 365. 100 Subject to MIA 1906, s 62(7), (8), see 22.35 above. '" ibid s 62(4). '02 ibid s 62(6).

Norwich Union Fire Insurance Society Ltd v Price (WH) Ltd[1934] AC 455. '" MIA 1906, s 62(5). 105 Shepherd v Henderson (I 874) 7 App Cas 49, 64; Robertson v Royal Exchange Assurance Corp (1924) 17 LlLRep 17 (Court ofSession). '06 (1874) LR 6 PC 224. '07 [1927J AC 698. 108 MIA 1906, s 62(5); Provincial Insurance Co o[Canada v Leduc (1874) LR 6 PC 224. This overrules the holding in Hudson v Harrison (1821) 3 Brod & B97 that just as the assured must
103

give notice of abandonment within a reasonable time, so reciprocity of obligation restricts the insurer to rejecting within a reasonable time.
to, Institute Time Clauses Hulls (1110183) cl 13.3: (1111195), cl 11.3; International Hull

Clauses (01/11103), d 9.3. The reference to the assured relates to the sue and labour doctrine, discussed at 24.02ffbelow. ,to Stringer v English & Scottish Marine Insurance Co Ltd(1869) LR 4 QB 676, 686.

702

703

Claims and Claims Handling

(9) Changing an Election
22.61 An election in favour of treatment as a total loss may be revoked until acceptance

Limitation

(I) Property Insurance

of notice of abandonment by the insurer,'" even after the assured has commenced proceedings.'" Conversely, an election to treat the loss as partial is irrevocable. The measure of indemnity will accordingly be reduced unless the insured ptoperty subsequently degenerates into or is overtaken by an actual total loss.'" In either case, the election may be express or implied ftom conduct consistent only with the assured dealing with the property beneficially for itsel'14

E. Limitation
22.62 The assured's claim against the insurer is classified in law as an action fot

damages for breach of contract.'15 By virtue of section 5 of the Limitation Act 1980: 'An action founded on a simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.' The cause of action in contract accrues on the date of breach of the primary obligation,''' regardless of whether the innocent party knows of the breach'17 The question arising, therefore, is when the assured)s cause of action on an insurance contraer accrues. A distinction needs to be drawn between properry and liability insurance, and the impact of express contractual provision on the accrual of a cause of action requires consideration.
22.63 It may be noted that nO limitation issue will arise in connection with a \,on-

A contract of property insurance being a contract of indemnity, honouring 22.64 the promise of indemnification might, at first sight, be viewed as the insurer's primary obligation, constituting performance of the contract as opposed to a remedial measure for breach. 'A right to indemnity as such is given by the original bargain between the parties. The right to damages is given in consequence of the bteach of the original contract between the parties.'''' On this approach, the insurer should not be in breach of this primary obligation pending communication of the assured's claim and lapse of a reasonable time for the insurer to investigate and verifY the claim. Failure of the insurer to pay would amount to a breach of conttact only upon the expiry of such a period of time. At that point and no earlier, the iL'sured would have the right to enforce a secondary obligation sounding in damages for breach of contract and the six-year limitation period would commence. Indeed, in Pickersgill & Sons Ltd v London & Provincial Marine & General Insurance Co,''' Hamilton J observed that 'a polis:y of insurance is only a promise of indemnity giving a right of action for unliquidated damages in case of non-payment'. The weight of authority, however, favours a different analysis. Although it is ultimately a matter of the true construction of the contract,"O an 22.65 indemnitor has been held to promise to keep the indemnitee free from the specified loss or expense. On the occurrence of such Joss or expense, therefore, the indemniror is in breach of its primary obligation.'" The ensuing claim upon the contract of indemnity is consequently for damages pursuant ro the secondary obligation to compensate for breaching a primary obligation. Applying this
analysis, the cause of action under marine property insurance accrues on the

srmctive total loss whete the assured validly elects to claim for a total loss by serving a notice of abandonment, since the notice will inevitably be served very eatly during the limitation period and insurers will then commonly agree to treat the assured as if a claim form has been served.

'" MIA 1906, s 62(6). 112 Royal Boskalis Westminster NV v Mountain [1997J LRLR 523,555-8. 113 Roux v Salvador (1836) 3 Bing (NC) 266, 287. Or, conceivably, is subject to another constructive total loss. "4 Fleming v Smith (1848) 1 HLC 513; Benson v Chapman (1849) 2 HLC 696; Stringer v English 6- Scottish Marine/nsurance Co Ltd (1869) LR 4 QB 676, 688; &nkm v Potter (1872) LR 6 HL 83. 119. 115 Albeit that the term 'cia'mages' may be used in an unusual sense: Jabbour (F 6' K) v Custodian ofIsraeli Absentee Property [1954J 1 WLR 139, 143-4. '16 Battley v Faulkner (1820) 3 B & Ald 288; East India Co v Oditehu~ Paul (1849) 7 Moo . 85. Ill. 117 ShortvMcCarthy (1820) 3 B & Ald 626; Brown v Howard (1820) 2 Brad & B 73.

occurrence of the casualty giving rise to the claim. In Chandris v Argo Insurance Co Ltd,''' the assured claimed against the insurer in respect of general and particuJar average losses more than six years after rhe losses had occurred but less than six years afrer completion of the average adjustments. Since authority in the context of set-offviews the assured's claim as unliquidared,123 with the result that the quantification ofloss is a matter to be established at trial, Megaw J held that ascertainment ofliability by adjustment could not be a condition precedent to accrual of the cause of action. Moreover, citing the dictum of Hamilton J

118

Binningham 6- District Land Co v London 6- North-western &ilway Co (1886) 34 ChD Ftrma C-Trade SA v Newcastle Protection 6- Indemnity Association (The Fanti) [1989]

261.274--5 per Bowen LJ. '" [1912J 3 KB 614, 622.

120

1 Lloyd's Rep 239. 255. 121 Re Richardson, ex p Governors ofSt Thomas's Hospital [1911] 2 KB 705; Firma C-Trade SA v Newcastle Protection 6- Indemnity Association (The Fanti) [1991] 2 AC 1,35-36. 122 [1963J 2 Lloyd's Rep 65. 123 See 6.27 above.

704

705

Claims and Claims Handling

in Pickersgill but without addressing the distinction between indemnity and damages, he held also that a demand for payment was not a condition precedent to accrual of the cause of action.
22.66 This approach to limitation was subsequently approved by the Privy Council in The Potoi Chau'24 and followed in The Kyriaki,125 where the assured argued unsuccessfully that in a case of a constructive total loss the commencement of the limitation period was postponed until the giving of notice of abandonment. 22.67 In The Italia Express (No 2),126 the assured argued that subjecting the insurer ro an obligation to hold the subject-matter insured free from harm from the covered perils was absurd. On the facts, the insurer was thereby deemed to promise that the ship would not sink, a promise that it was beyond its power ro keep. Instead, the insurer should be regarded as promising ro indemnilY the assured upon receipt of a claim. For Hirst J, however, the assured's suggestion produced an equal absurdity since no insurer would pay a claim in full and without investigation, and, in practice therefore, would invariably break the obligation suggested by the assured. This problem would be avoided were the insurer viewed as under an obligation to pay, not forthwith, but within a reasonable time, taking into account the time required for any prudent enquiries. Such an approach would, however, inevitably introduce a regrettable element of uncertainty in ascettaining precisely when the assured's cause of action accrued and the limitation period commenced. The overwhelming merit of regarding the cause of action, in property insurance, as accruing on the date of the casualty is the avoidance of such uncertainty.

Limitation
liability have been established and ascertained by judgment, arbitral award, or binding settlement."8 (3) Contract Terms and Accrual of the Cause of Action The rule under both property and liability policies that occurrence of an insured 22.69 loss triggers the limitation period requires identification of what qualifies as a loss under the policy. Ultimately, this depends on the policy wording. The limitation period is not postponed by the need to fulfil procedural or 22.70 evidential conditions precedent to the insurer's liability on the policy. In cases of constructive total loss, time starts to run as soon as the casualty occurs; commencement of the limitation period is not postponed until service of a notice of abandonment, '29 Moreovet, in Callaghan v Dominion Insurance Co Ltd, '30 a series of contractual provisions were held not to define the insured loss under a fire policy. First, an option to pay the value of the destroyed property or the damage or to reinstate Ot replace merely created an alternative means of satislYing the insurer's liability.'31 Secondly, clauses postponing liability to pay until ascertainment of the cost of reinstatement and providing for arbitration in the event of a dispute as to the quantification ofliability went only to quantification of liability. Thirdly, the requitement of cover for an alternative head of loss served only to provide the insurer with a defence in its absence. Fourthly, conditions precedent to 'the rigbt of the insured to recover', including notification obligations and obligations to provide information, qualified the assured's secondaty right to claim rather than defining the circumstances in which the primary right to indemnification arose. In contrast, liability insurance may, on its true interpretation, provide an 22.71 indemnity not against the liabilities flowing from a casualty, but against the incurring of such a liability. Under such a policy, the assured is damnified and the limitation period commences as soon as the casualty occurs.'" Again, in Virk v Can Life Holdings pIc,'" the critical illness section of a life policy, first,

(2) Liability Insurance

22.68 In the context of liability insurance, thete is no cause of action at common law until the assured has actually paid the third party, because the action is for indemnification of loss and only upon such payment is a loss unequivocally sustained.'" In equity, howevet, the assured is not compelled to incur the expense before recovering on the indemnity designed to avoid it, with the result that the cause of action is recognized as accruing once the fact and extent of the

124

Castle Insurance Co Ltd v Hong Kong lsidnds Shipping Co Ltd (The Potoi Chau) (19831

2 Lloyd', Rep 376, 381.

125 Bank ofAmerica National Trust & Savings Association vChrismas (The Kyriaki) [1993] 1 Lloyd', Rep 137. See also Callaghan v Dominion Insurance Co Ltd (199712 Lloyd's Rep 541; Virk v Gan Lift Holdings pic (2000) Lloyd's Rep lR 159, para 10. Possible doubts expressed in Transthene Packaging Co Ltd v Royallnsuratlce (UK) Ltd [1996) LRLR 32, 41 cannot stand against the dear authority. 126 Ventouris v Mountain (The ltalia Express) (No 2) [1992] 2 Lloyd's Rep'2SI. m Collinge v Heywood(1839) 9 A & E 633.

128 Re Richardson, ex p Governors o[St Thomas's Hospital [1911] 2 KB 705; County & District Properties Ltd vJenner (C) & Son Ltd (1976] 2 Lloyd's Rep 729; Telfti,shipping Corp v Inersea Carriers SA (19851 1 WLR 553. 129 Bank afAmerica National Trust & Savings Association v Chrismas (The Kyriaki) [1993] 1 Lloyd's Rep 137. The contrary obiter suggestion in Insurance Corp afthe Channel Islands Ltd v McHugh [1997J LRLR 94, 134 is, with respect, incorrect.

no (19971 2 Lloyd's Rep 541. cf the inconsistent decision in Transthene Packaging Co Ltd v Royal Insurance (UK) Ltd (1996) LRLR 32, which appears wrongly decided.
131 132 Bosma v Larsen [1966J 1 Lloyd's Rep 22, discussed in Telfair Shipping Corp v Inersea Carrim SA (19851 1 W1.R 553,563-6.

B3

(20001 Lloyd's Rep lR 159.

706

707

Claims and Claims Handling

defined the term 'Critical Illness' and, secondly, provided that the insurers would pay a sum of money to the assured 'thirty days after the confirmed diagnosis of Critical Illness provided that the Life Assured is then alive'. The Court of Appeal held that the insured event was not merely the incurring of critical illness as defined but thirty days' survival. In other words, the policy distinguished between morral critical illness, which fell under a separate section of the life policy, and critical illness that the assured survived. Consequently, the survival provision clearly defined the insured event and the limitation period commenced upon expiry of the survival period. 22.72 Whether a particular provision defines the insured loss or merely constirutes a procedural or evidential precondition to liability may not always be easy to determine. The rule books of murual insurance associations contain a 'pay first' provision, under which ir is a condition precedent of recovery by the member against the association that rhe member shall first have discharged the insured liabiliry.'" Commercially, this provision defines rhe narure of the cover provided by the mutual insurance associarions. The associations do not provide liabiliry cover in the normal way; instead they indemnify payments made pursuant to liabilities incurred. The law is likely to reflect this commercial understanding by characterizing discharge of liability as required by the pay first clause as the insured event, rathet than as merely a procedural step in the process of making a claim. 135

Insurers'Rights in Connection with Claims

45.2.1 interview(s) of any employee, ex-employee or agent of the Assured 45.2.2 interview(s) of any third party whom the Leading Underwriter(s)
consider may have knowledge of matters relevant to the claim

45.2.3 survey(s) of the subject-matter insured . 45.2.4 inspection(s) of the classification records of the vessel. (2) Appoinrment of Surveyor and Average Adjuster Under clause 46.\ of the Internatioual Hull Clauses (0\/\\/03), upon the 22.74 notification of any loss, damage, liability, or expense arising from an accident or occurrence rhat may tesult in a claim, leading underwriter(s) have rhe right, although no obligation, '36 to instruct a surveyor and confirm the appointment of an independent average adjuster. The function of the surveyor is to 'reporr to the Leading Underwrirer(s) concerning she cause and extent of damage, the necessary repairs and the fair and reasonable cost thereof and any other marrer which the Leading Underwrirer(s) or the surveyor consider reasonable'. The average adjuster, in contrast, is to assist the assured in preparing the claim. Neirher appointment constitures an admission of liability for the claim or a waiver of any rights or defences. 137 (3) Approval Provisions Where rhe insurer reserves a right of approval in the policy, there arises a 22.75 correlative obligation to give proper considerarion to a request for approval and 138 to respond within a reasonable rime. Under the Institure and International hull clauses, insurers have the right to decide the porr of repair.'39 Should they fail, on request by the assured, to respond wirhin a reasonable time, the assured would be free to acr as a reasonable uninsured person and selecr an appropriare repair porro Insurers would then be disqualified from subsequently declining indemnification on the basis rhat the porr was not approved.'40 (4) Mutual Insurance The rules of mutual insurance associations rourinely provide that the club man- 22.76 agers have the right to control or direct rhe conduct of any claim or proceeding relevant to any potential liability of the club and to require the member to settle, compromise, or otherwise dispose of the claim as and upon such terms as the managers think fir. The managers have the power to appoint and discontinue the appointment of any legal or orher experts rhey think fit. The party to the

E Insurers' Rights in Connection with Claims

(\) Claims Co-operation Clauses 22.73 In order to enable an insurer berrer to evaluare a claim, commercial insurance contracts commonly contain clauses requiring the assured to co-operate with the insurer in various ways, in parricular by providing the insurer wirh information or the means of obtaining information. Clause 45 of the International Hull Clauses (0\/ll/03) provides as follows:
45.1 The Assured shall, upon request and at their own expense, provide the

Leading Underwrirer(s) with all relevant information that rhey might

reasonably require to consider any claim.

45.2 Upon reasonable request, rhe Assured shall also assisr the Leading Undetwriter(s) or their authorized agents in the investigation of any claim,
including, but not limited to

136

Notwithstanding that d 46 is headed 'Duties of the Underwriters in Relation to Claims'.

See 16.03 above. Firma C~ 7Yade SA v Newcastle Protection & Indemnity Association (The Fanu); Socany Mobil Oil Co Inc v U7est ofEngln.nd Ship Owners Mutuallnsurance Association Ltd (The Padre Island (No 2)) [1989) 1 Lloyd's Rep 239, 255-6. .
134

137

135

International Hull Clauses (DIll 1/03), cl46.3. '" Sprung v Royallnsurance (UK) Ltd[I9991 L1oyd's Rep IR III, Ill.
See 23.17 below.

139

>4' Sprung v Royallnsurance (UK) Ltd [19991 Lloyd's Rep IR III, 118.

708

709

Claims and Claims Handling

claim, however, remains the assured and parties appointed by rhe managers act for the assured. 14' Consequently, COsfs incurred are for the account of the assured, and the club has no obligation ro indemnifY the assured unless and ro the extent that the policy so provides. However, the club is under an obligation, sounding in damages for breach, ro conducr the claim with due regard ro the
interests of the assured.
142

Fraudulent Claims
he believed must have happened' .146 A reckless disregard for the truth was, however, established: '47
Anxious to persuade Underwriters and their representatives that the container

had been packed properly, he made the statements in question, careless of whether
they were true or false, without bothering to consider whether or not they were

accurare. It may well be rhe case rhat Mr Graham had convinced himself that the
container must have been properly packed and that what he said resulted from this conviction, but this only goes towards rebutting an allegation of deliberate deceit. It does not excuse or rebut the fact that Mr Graham simply gave no thought to the

G. Fraudulent Claims
22.77 A fraudulent claim made by the assured is regarded by the law, as one might expect, with particular severity. Stringent sanctions require the scope of the fraudulenr claims jurisdiction to be traced with care.
(1) The Concept Of Fraud

trurh or falsity of whar he was saying. (2) Fraud of the Assured The fraud must be that of the assured. For these purposes, the assured is those 22.80 people with decision-making responsibiliryo with respect to the making and handling of a claim such that their fraud can legitimately be attributed to the assured.'48 People who constitute the assured with respect to operational matters may well not constitute the assured for the purposes of rhe fraudulent

22.78 In the context of the fraudulent claims jurisdiction, the concept of fraud mirrors that adopted in the rorr of deceit. In Derry v Peek,''' the House of Lords held that liability in the tort of deceit required a statement made in the knowledge that it was false, or without belief in its truth, or recklessly, careless as ro whether the statement was true or false. The hallmark of deceit is dishonesty, so that a person who honestly believes the statement ro be true but lacks reasonable grounds for that belief is not deceitful. Most of the case law on fraudulent claims involves starements the assured knows are false. However, authority establishes that fraud in the claims context extends to recklessness.'44 22.79 In Bucks Printing Press Ltd v Prudential Assurance CO,145 reconditioned printing machinery packed in a container was damaged beyond repair in transit. The question was whether the cause of the damage was improper packaging or an accident in transit. A certain Mr Graham, a ditector of the sellers, stated ro insurers that he had been the foreman in charge of rhe packing and gave what purported to be a first-hand accounr of how the goods had been packed in the container. In fact, he had not been the foreman and the process he described was materially inaccurate. Saville J considered that Graham had not deliberately sought to deceive the insurers but rhat he 'was one of those people who give nO real thought ro what they are saying and who consequently ... failed to distinguish between first-hand recollection of what really happened and what

claims jurisdicrion. 149

(3) Types of Fraudulent Conduct in the Making of a Claim

A claim is fraudulent when made or maintained with conducr that is frauduJent 22.81 in the sense described in the previous section. Three typical examples of such conduct are recognized in the case law. It is fraud to bting a claim where the assured knows that the insurer is not liable 22.82 for the loss and deliberately or recklessly either misrepresents circumstances relating to the casualty or suppresses information that in either case would reveal the insurer's lack of liability. It is, moreover, irrelevant whether rhe lack of liability results from the scope of cover or a defence such as breach of warranty or breach of a duty arising out of the doctrine of utmost good faith. 1So The classic example of such a fraud would be a claim for the Joss of a vessel that has in truth been scutded. While scutding one's own vessel is not fraudulent, since desrruction of property is one of the privileges of ownership, it is fraud subsequently to bring a claim on the vessel's hull poJicy deliberately or recklessly misrepresenting or concealing the nature of the sinking. 1S '

Groom v Crocker[1939J 1 KB 194. 142 Cox v Bankside MembersAgency Ltd[199512 Lloyd's Rep 437, 462-3. 143 (1889) 14 App Cas 337. 14' Lek v Mathews (1927) 29 L1LRep 141, 145, 167; Agapitos v Agnew (The Aegeorl) [2002J EWCA Civ 247, [2003J QB 556, para 30. 145 (1994) 3 Re LR 219.
14'

ibid 223, 147 ibid. Manifest Shipping & Co Ltd v Uni-Polaris Imurance Co Ltd (The Star Sea) [1997] 1 Lloyd's Rep 360, 366. cf 4.112-4.115 above. '" [1997J 1 Lloyd's Rep 360, 366. 150 Agapitos v Agnew (The Aegeon) [2002J EWCA Civ 247, [2003] QB 556, para 18. 151 National Oilwell (UK) Ltd v Davy Offihore Ltd[1993J 2 Lloyd's Rep 582, 622.
146
14$

710

711

Claims and Claims Handling

22.83 There is, however, no general duty ofdisclosure requiring the assured to alert the insurer to the possibility of a defence or to the existence of a known defence. Suppose an assured under a policy incorporating the International Hull Clauses (01111103) notifies the insurer of a claim more than 180 days after learning of the loss, thereby failing to comply with the condition precedent to liability found in clause 43.2. Even if the assured knows that it is in breach of the condition precedent, it is suggested that the assured is not fraudulent if it fails to draw this fact to the insurer's attention. There is no misrepresentation and no deliberate suppression. 22.84 A second type of fraudulent conduct arises where the assured has suffered a genuine loss within the terms of the policy but then claims an indemnity greater than is payable in respect of the genuine loss. This may be done, for example, by exaggerating the value of lost or damaged ptoperty or alleging that certain ptoperty has been lost or damaged when in truth it has not. 22.85 It is not, however, any level of false inflating of the value of the claim that will render it fraudulent. In Lek v Mathews,'52 Viscount Sumner stated that a claim was fraudulent ifthe assured claimed falsely for 'anything not so unsubstantial as to make the maxim de minimis applicable'. This idea is sometimes translated into the proposition that only 'substantial fraud' will suffice for the fraudulent claims jurisdiction to apply.'" That, however, is to inflate the very limited tolerance granted under the de minimis maxim and runs counter to the repugnance with which the law has always regarded fraud and the deterrent funcrion of the fraudulent claims rule. 15' The de minimis threshold is not determined as a percentage of the overall claim, as a proportionate licence to be fraudulent would be absurd. Instead, the fraudulent excess should be considered in isolation. 155 22.86 A further issue arises from the tendency of assureds to inflate an initi,;r claim in order to provide a margin for negoriation. Such inflation is not necessarily frauduJent. In Orakpo v Barclays Insurance Services,156 Hoffmann L] considered that 'provided nothing is misrepresented or concealed, and the loss adjuster is in

Fraudulent Claims
as good a position to form a view of the validity of the claim as the insured, it will be a legitimate reason that the assured was merely putting forward a starting figure for negotiation'. The caveats are important. A conclusion of fraud is avoided not merely by an absence of subjective intention on the part of the assured to obtain money to which it is not entitled, but by the status of the figure advanced as a matter of objective interpretation as an initial bargaining position rather than a representation as to the value of the insured loss. Where an assured inserted the catalogue price of new replacements in a claim for loss of used goods, the resulting figure was 'preposterous' but not fraudulent. The prices fot the individual items were clearly from producers' catalogues and represented an inirial bargaining figure. 157 If, however, a claim were put forward with an inflated figure where the status of the figure as merely an initial bargaining position was not apparent, so that the figure apparently constituted a representation by the assured as to the value of the insured loss, it is difficult to see on what basis the claim might not be regarded as fraudulent. An obvious question is how the assured would respond if the insurer happened to offer to settle for a sum in excess of the true loss. Unless the assured could credibly explain how it would decline such an offer, it is hard to avoid a conclusion rhat the inflated claim is fraudulent. There are, moreover, limits to the level of exaggeration that can plausibly be alleged to be an initial bargaining position. An excessive level of exaggeration may be regarded as evidence of fraudulent intent. '58 A third type of fraud arises where the assured makes a legitimate claim 159 but 22.87 then seeks to support that claim with a fraudulent communication with a view to obtaining payment more quickly or settling the claim on more favourable terms. This is known as a 'fraudulent device'. Despite dicta recognizing a fraudulent device as rendering a claim fraudulent,'60 22.88 the issue appears not to have arisen for decision until The Litsion Pride'61 in 1985. In this case, the assuted decided to trade the insured vessel in an additional premium area without notifYing insurers, as the policy required, in order to avoid paying an additional premium. When the vessel was rendered a constructive tOtal loss inside the additional premium area, the assured posted a fraudulently backdated letter of notification to the insurers. As a matter of

152 (1927) 29 LlLRep 141, 145. The statement is aimed at the corrcct interpretation ofa clause in the policy, but applies equally to the common law. 153 See the argument advanced on behalf of the assured in Galloway v Guardian Royal Exchange (UK) Ltd[1999J Lloyd's Rep IR209, invoking references to substantial fraud in Orakpo v Barclays Insurance Services [1995] LRLR 443, although the relevant passages merely reflect the extent of the fraud on the facts of that case ramer than prescribing a threshold to be achieved before the fraudulent claims jurisdiction can apply.

'" See Galloway v Guardian Royal Exchange (UK) Ltd [19991 Lloyd's Rep IR 209, 214,
dishonest insurance claims have-become all too common, and the fraudulent claims rule is 'a necessary and salutary rule which deserves to be better known by the public' and should not

157 Ewer v National Employers' Mutua/Insurance Association [1937] 2 All ER 193, 203. See also Orakpo v Barclays Insurance Services [1995] LRLR 443,450. ,sa Central Bank ofIndia Ltd v Guardian Assurance Co Ltd (I 936) 54 LlLRep 247. 159 ~amely: for these purposes, a claim for which the insurer is liable under the policy or a claim for which the Insurer is not in fact liable, or not liable in full, but that is not made fraudulently.

be diluted, per Millett LJ.

155

ibid.

os, [1995J LRLR443, 451. See also Norton o RoyalFire 6- LifiAssurance Co (1886) I TLR460.

'60 Lek v Mathews (1927) 29 LlLRep 141, 164; Wisenthal v World Auxiliary Imurance Corp Ltd (1930) 38 LlLRep 54, 62; Dome Mining Corp Ltd v Drysdale (1931) 41 LlLRep 109, 122; Piermay Shtppmg Co SA 0 Chester (The Michael) [19791 2 Lloyd's Rep 1,21-2. 161 Black King Shipping Corp 0 Massie (The Dtsion Pride) [19851 1 Lloyd's Rep 437, 513.

712

713

Claims and Claims Handling

interpretation, Hirst] held that compliance with the notification requirement was not a condition precedent to the continuation of cover. Consequently, the vessel remained insured when inside the additional premium area and rhe assured had a good claim. However, the assured had forfeited the benefit of the policy through rhe fraudulent letter.

Fraudulent Claims
The issue is, however, confined to fraudulent devices because no qualification i.s needed or acknowledged wirh respect to fraudulent claims stricto sensu, or alternatively is builr into the concept of such a fraudulent claim.'68 The fraudulent element in any attempt to obtain money from an insurer that is not due under the policy will, ex hypothesi, sarisfY any objective rest of marerialiry to the claim, however phrased. In rhe context, however, of a genuine claim under the policy, one can contemplate 'an obviously irrelevant lie-one which, whatever the insured may have thought, could nor sensibly have had any significant impact on any insurer or judge'.169 With respect to the objective limitation to apply, in The Aegeon,170 Mance L] 22.92 advanced the tentative suggestion that 'the courts should only apply the fraudulent claim rule to the use of fraudulent devices or means which would, if believed, have tended, objectively but prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects-whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial'. While the language of judgments should not be dissected in the manner of starutes, taken at its wording, this formulation operates on an objective basis and sets a standard of a tendency to yield a not insignificant improvement in the insured's prospects of a favourable receprion for the claim. A contrasr may be drawn with the concept of materialiry in the context of the pre-formation doctrine of utmost good faith, which requires merely that the relevant circumstance would have been taken into account by the prudent insurer in deciding how to respond to the proposed risk. There is no requirement rhat the prudent insurer would consider, for example, an undisclosed circumstance as probably tending to increase the risk.

22.89 Subsequently, rhis extension of rhe fraudulent claims jurisdiction attracted differing responses in the House of Lords in The Star Sea.'62 Lord Hobhouse described the decision as 'questionable' while Lord SCOtt considered it uncontroversial.'63 It was accepted as good law by the Court of Appeal in The Mercandian Continent.'64 In The Aegeon, '65 Mance L] conducted an extensive, albeit obiter, review of rhe aurhoriries leading ro the 'tentative' conclusion that a fraudulent device should be regarded as a sub-species of fraudulenr claim, clearly reflecring the balance of judicial opinion, while advocating or at least leaving open the possibiliry of differences between fraudulenr claims stricto sensu and fraudulenr devices with respecr to materialiry and remedies.'66 The inclusion of fraudulent devices wirhin rhe fraudulent claims jurisdicrion has since been followed at first instance. 167
(4) Relevance to the Claim

22.90 In the context of the pre-formation docrrine of urmost good faith, fraudulent non-disclosure or misrepresentation gives rise to a right to avoid the contract only if ir induces the actual underwriter into the contract, although a fraudulent assured cannot defeat an underwriter's claim to avoid on the gtound of lack of objective materiality. The question arises of whether the fraudulent claims jurisdiction acknowledges any limitations in the form of or akin to objective materialiry or subjecrive inducement. 22.91
It is clear that nor all fraudulent conduct on the part of the assured surrounding or in connection with the making of a claim will rrigger the fraudulent claims jurisdiction, and the line between fraud that does and fraud that does not trigger that jurisdicrion is drawn by an objective test of materialiry to the claim.

It is unclear whether the formulation of Mance L] will come to be accepted 22.93

as articularing the requisite connection between the device and the claim. The law on this point is currently regarded as insufficiently settled to permit the awarding of summary judgment. 171

162 Maniftst Shipping Co L,d v Uni-Polaris Insurance Co L,d (The Star Sea) [2001] UKHL 1, [20031 1 AC 469. 163 ibid paras 71, 106. Lords Steyn and Hoffmann agreed with both Lords Hobhouse and Scott, while Lord Clyde delivered a shore concurring judgment without commenting on fraudulent devices.
164

KlS Mere-Scandia XXXXlI v Certain Lloyd's Underwriters (The Mercandian Continent)

[2001] EWCA Civ 1275, [2001] 2 Lloyd's Rep 563, pata 29. 105 Agapi'os v Agnew (The Aegeon) [2002J EWCA Civ 247, [2003J QB 556, paras 45. 166 See furrher 22.91, 22.108 below. 167 Eagle Star Insurance Co Ltd v Games Video Co (GVC) SA (The Game'Boy) [2004] EWHC 15 (Comm), [2004J Lloyd's Rep IR 867.

168 Roya! Boskalis Westminster BV v Mountain [1997] LRLR 523, 599; Agapitos v Agnew (The Aegeon) [2002J EWCA Civ 247, [2003] QB 556, para 36. 169 Agapi'os v Agnew (The Aegeon) [2002J EWCA Civ 247, [2003J QB 556, para 38 per Mance LJ. 170 ibid. 171 See the refusal to grant summary judgment in Interpart Comerciao e Gestao SA v Lexington Insurance Co [2004] Lloyd's Rep IR 690 because of the unsettled state of the law on this point. In Eagle Star Insurance Co L,d v Games Video Co (GVC) SA (The Game Boy) [2004J EWHC 15 (Comm), [2004] Lloyd's Rep IR 867, Simon J referred not to The Aegeon but to Wisenthal v World Auxiliary Insurance Corp L,d (1930) 38 LlLRep 54, whese Roche J directed the jury rhat

fraud in the claims context included the use of deceit to secure payment or quicker payment. This could be interpreted purely as a test of subjective intention, and Simon J indeed analysed the tendering offraudulent documents in the case in terms ofthe assureds' intentions and expectations.

714

715

Claims and Claims Handling

22.94 An example of fraud by the assured in the broad context of a claim that falls

Fraudulent Claims
(5) Temporal Limits on the Fraudulent Claims Jurisdiction A claim may be honestly made bur dishonestly pursued or maintained. Such 22.96 fraud also attracts the fraudulent claims jurisdictiori. An assured that honestly attaches a certain figure to the insured loss is fraudulent if it fails to inform the insurer on subsequently learning that the true loss is a lower figure. Similarly, whether a fraudulent device attracts the fraudulent claims rule does not depend on whether it happens to be deployed before or after the claim is made. 177

outside the fraudulent claims jurisdiction as clearly not being material to the claim, however the test is formulated, is provided by the facts of The Mercandian Continent.'" Ship repairers in Trinidad incurred liability to the claimant shipowners. Mr K Baboodal and his brother Dr R Baboodal were managing director and chairman of the insured repair company. Legal advice was obtained that the tonnage limitation regime applicable in Trinidad was less generous than that applicable in England, but the claimants contended for English jurisdiction on rhe basis of a jurisdiction agreement concluded with one Mr Totressen, the assureds' assistant general manager. One of the Baboodal brothers, therefore, forged a letter stating that only the two brothers had the aurhority to discuss the claim, also forging a countersignature on the letter of the claimants' technical director. The forgety was, however, rapidly discovered. The Coutr of Appeal concluded that the ftaud had no relevance to the insurers' liability on the policy. The fraud was confined to jurisdiction and jurisdiction did not affect liability.'" The fraud also was directed not at the insurers but at the claimants. The only adverse consequence for the insurers was that they opposed English jurisdiction for longer than otherwise would have been the case.'74
22.95 In contrast to an objective limitation, subjective inducement of the actual

It has, however, been suggested that fraud cannot attract the fraudulent claims 22.97 rule unless the assured has a right to make a claim on the policy at the time of the fraud. In the liability insurance case of The Mercandian Continent, "8 the sequence of events was as follows:
(1) incurring of liability by the assured; (2) concocting by the the assured of a fraudulent letter designed to assist the msurers; (3) discovety of the fraud by the insurers; (4) purported avoidance of the policy by the insurers in reliance on the fraud; (5) ascertainment and quantification by litigation of the assured's liability to the third party; (6) insolvency of the assured; (7) claim by the third party against the insurers under the Third Party (Rights against Insurers) Act 1930. The policy contained a clause that provided for the policy to be void and all claims to be forfeit 'if the assured shall make any claim knowing the same to be false and fraudulent'. Under liability insurance, it is clear that ascertainment and quantification of the assured's liability by litigation, arbitration, or binding settlement is required for there to be a loss and for the limitation period to commence."9 The insurers conceded that the fraudulent claims clause was irrelevant on the basis that, until liability had been ascertained and quantified, there could not be a claim. This was noted withour demur by the Court of Appeal, adding the comment that rhe position was the same at common law. This approach, however, has the undesirable result of rendering the con- 22.98 sequences of fraud dependent on an accident of timing. The same conduct would escape sanction if before liability was ascertained and quantified but severely sanctioned if after that point. Moreover, a fraudulent communication

insurer has no role to play in the context of fraudulent claims. The moral culpability of an assured that malees a fraudulent claim is not purged merely because the fraud is discovered before the insurer can be induced to respond to the claim in some way differently from the way it would have responded without the fraud. Pragmatically, moreover: 'Whether insurers are misled or not is in this context beside the point. The principle only arises for consideration where they have not been misled into paying or settling the claim,175 and its application could not sensibly depend upon proof that they were temporarily misled.'176

However, there was no doubt that an objective materiality test would have been passed on the

facts. Wisenthal had previously been rejected in Khan v Abbey Lift Assurance Co (2002) NPC 5, para 85 as inconsistent with a different decision test of materiality adopted by the Court ofAppeal in KlS Mere-Scandia XXXXIl v Certain Lloyd's Underwriters (The Mercandian Continent) [2001J EWCA Civ 1275, [2001J 2 Lloyd's Rep 563. However, the Court ofAppeal was there addressing not the fraudulent claims jurisdiction but a possibly wider doctrine of utmost good faith: see 22.113-22.114 below. 172 KlS Mere-Scandia XXXX11 v Certain Lloyd's Underwriters (The Mercandian Continent) [2001J EWCA Civ 1275, [200l] 2 Lloyd's Rep 563. In fact, insurers in this case did not seek to invoke the fraudulent claims jurisdiction (see 22.97 below) but to invoke a broader postformation docuine of utmost good faith, see 22.113-22,114 below: 173 k it transpired, it did not even affect quantum since the legal advice on limitation proved erroneous. '" [200l] EWCA Clv 1275, [2001J 2 ~loyd's Rep 563, pata 42. 175 Or have been misled, but have since discovered that fact. H' Agapitos v Agnew (The Aegeon) [20021 EWCA Civ 247, [2003J QIi 556, para 36 per ManeeL].

ibid paras 15-17. K/S Mere-Scandia XXXXJl v Certain Lloyd's Underwriters (The Mercandian Continent) [2001J EWCA Civ 1275, [200l] 2 Lloyd's Rep 563, para 10. 17S See 21.14, 22.68 above,
177
178

716

717

Claims and Claims Handling

must be regarded not only as effective when initially communicated but also as perpetrating fraud on a continuing basis at least until the fraud is discovered and possibly until the insurer has rejected the claim or waived the right to invoke the fraud. The element ofchance in timing is thereby accentuated. More fundamentally, there is no distinction in terms of moral culpability between an assured that seeks fraudulently to pave the way for a claim and one that seeks fraudulently to bolster a claim already made. It is noteworthy thar, in The Aegeon,'80 Mance L] btoached the possibility of a distinction between the making of a claim and the accrual of a cause of action. It is suggested that a srrict temporal apptoach to the making ofa claim and fraud is unnecessaty. It should suffice that the fraud is material to the claim. 22.99 Once, however, litigation or arbitration has formally commenced, rhe conduct of the parties falls to be governed by rules of civil procedure or the relevant rules ofarbitral process. There is no scope for supplementary, common law regulation through the fraudulent claims jurisdiction of the conduct of parties thar by definition are now in an adversarial relationship.18t (6) Joint and Composite Policies 22.100 A fraudulent claim by any assured under a joint policy provides a defence operative in respect of the entirety of the unitary interest insured under the policy and, therefore, against each joint assured. In contrast, a fraudulent claim by a co-assured under a composite policy provides, subject to contrary intention, a defence confined to the separate, or severable, cover of the particular coassured that has made the fraudulent claim. In Samuel (PJ & Co Ltd v Dumas;''' a fraudulent claim by the insured vessel's owner did not affect a claim brought by the co-insured mortgagee. However, where a fraudulent claim on behalf of a co-assured is brought by an agent that is ignorant of the fraud, the fact that the agent is another co-assured under the policy does not prevent the fraud from corrupting the claim. ' " (7) Remedies for Fraud in a Claim 22.101 Fraud in a claim gives the insurer the right to reject the claim. In addition, consideration needs to be given to the possibility of the fraud being regarded as a repudiatory breach of contract affording the insurer a right to elect to treat the conttact as discharged or as an infringement ofa duty arising under the doctrine of urmost good faith giving rise to a right to avoid the entire policy.

Fraudulent Claims (aJ Rejection ofthe claim

A fraudulent claim, whether the fraud relates to the loss in respect of which the 22.102 claim is made or takes rhe form of a fraudulenr device, forfeits the right of the assured to be indemnified in respect of rhat claim. It is to be emphasized that the forfeiture relates not juSt to such part of the claim as may be fraudulent bur to the entirety of the claim. For example, the fraudulent exaggeration of a genuine claim, the fraudulent suppression of a defence with respect to part of a claim, or the use of a fraudulent device relevant only to part of the loss allegedly sustained forfeits cover in respect of not just that part of the claim that is fraudulent or ro which the fraud directly relates but also such part of the claim that, considered in isolation, is genuine and legitimately recoverable under the policy.lB' That the entire claim is forfeit means also rhar any payments already made pursuant to the claim before the fraud is discovered are recoverable and any settlements concluded cease to bind. Thus, a payment on account in respect of a genuine loss covered by the policy will be recoverable if the assured later uses a fraudulent device in order to influence the final settlement of the claim even in the absence of any fraud at the time of the payment on account. '85 'The logic of the law is simple. The fraudulent insured must not be allowed to think: if rhe fraud is successful then I will gain: if it is unsuccessful, I will lose nothing.'18' If fraud carried no risk, there would be no deterrent. On the contrary, there would be a perverse incentive to be fraudulent. While it is clear that fraud forfeits the entire benefit of rhe claim, ir has been 22.103 suggested that ir goes furrher and removes or bars the assured's cause of acrion on the policy.'87 If this is correcr, it would answer rhe question of whether the dishonest presentation of a claim on one basis would taint an otherwise genuine claim that might be brought on a separate basis in respect of the same loss. Suppose, for example, that the assured knows that the insured vessel has been sunk by its master. Concerned that the insurer mighr respond to a claim for bartatry by invoking the due diligence proviso in the Inchmaree clause and arguing that the assured was negligent in employing the master in the first place,

180
181

182
183

Agapitos vAgnew (The Aegeon) [2002J EWCA Civ 247, [2003J QB 556, para 23. ibid paras 47-52. 11924J AC 431. See al,o Arab Bank pic v Zurich Insurance CO [1999J rtloyd's Rep 262. Direct Line Insurance v Khan [2002J Lloyd's Rep IR 364.

184 Orakpo v Barclays Insurance Services [1995] LRLR 443 (fraudulent exaggeration of amount of rent lost by insured fire and fraudulent inclusion of other loss not caused by insured perils); Galkway v Guardian Royal Exchange (UK) Ltd [1999J Lloyd's Rep IR 209 (fraudulent addirion of computer to list of goods genuinely stolen); Direct Line Insurance v Khan [2002] Lloyd's Rep IR 364 (fraudulent claim for rent for alternative accommodation added to genuine claim for property lost by fire). 185 Axa General Insuran", Ltd v Gottleb [2005J EWCA Civ 112, [2005J Lloyd's Rep IR 369. 186 Manifest Shipping Co Ltd v Uni-Pokrir Insurance Co Ltd (The Star Sea) [2001J UKHL I, [2003] 1 AC 469, para 62 per Lord Hobhouse. See also Orakpo v Barclays Insurance Services [1995J LRLR 443,452: Axa General Insurance Ltd v Gottlieb [2005J EWCA Civ 112, [2005J Lloyd's Rep IR 369, paras 28, 31. 187 ibid para 26.

718

719

Claims and Claims Handling

the assured suppresses rhe fact that the master sank the vessel and claims for a loss by perils of the sea, despite being aware that such a sinking cannot be considered fortuitous for the purpose of perils of the sea.'88 Assuming that the fraud comes to light, the question is whether the assured is thereby precluded from rhen claiming for a loss by barratry and endeavouring ro refute the defence based on the due diligence proviso.'89 If the fraud removes the assured's cause of action in respect of the loss, the assured is indeed precluded. This is consistent with the policy against encouraging settled expectations in a fraudulent assured. An assured should not be able to endeavour by means of fraud to sidestep an insurer's defence, safe in the knowledge that should the fraud be discovered the only consequence will be ro require the assured to advance the claim that should have been advanced all along.
22.104 It also follows that in cases of double insurance a fraudulent claim under one policy bars the right to recover under any other, since an assured should not be able to employ fraud under one policy without any risk, safe in the knowledge that, if discovered, it can recover under another. 22.105 Greater difficulry arises where the same casualry gives tise to more than one claim. Suppose the insured vessel is involved in a collision and borh sustains physical damage and incurs third parry collision liability. Does a fraudulent claim in respecr of the physical damage vitiate the liabiliry claim? The punitive ethos of the fraudulent claims rule might indicate that it should, although the policy against settled expectations would not so demand.

Fraudulent Claims
While the matter has not been authoritatively resolved, judicial opinion appears 22.107
.to favour analysing the fraudulent claims jurisdiction as a rule of common law

thar is independent from the doctrine of utmost good faith.'" This avoids what may be regarded as overly punitive retrospective forfeiture of cover and also the lack of orthodoxy of a rettospective response to misconduct during the life of a properly concluded contract. Conversely, it has been asked why the law should treat an innocent failure to disclose during pre-formation presentation of the risk more severely than 'rhe most heinous fraud in the malcing of a claim on the policy'.'92 This, however, is merely ro highlight the distinction drawn by contract law generally between problems with formation of a contract and problems
in the performance of a contract. In general contract law, innocent misrepresen-

tation generates a right to rescind while the most fraudulent and malicious breach of contract can only ever prompt a prospective discharge ofliability. Analysed as a rule of common law, the question arises of whether a fraudulent 22.108 claim can lead to a discharge of the contract. This may happen in either of two ways. The fraudulent claims jurisdiction could be based on an implied term of the contract, with fraud eligible for status as a repudiatory breach, or it could constitute a rule of general law applicable ro insurance contracts but not forming part of rhe contract, in the manner of the doctrine of frustration in general contract law."3 As a matter of principle, it is difficult to see why a fraudulent claim should not be capable of constituting a discharging event, whether as a breach of contract or extra-conrractual act. Fraud is 'fundamentally inconsistent with rhe bargain and the continuarion of the contractual relationship between the insurer and the assured' ,194 It is conceivable, however, that a fraudulent device will not necessarily amount to a repudiation of rhe contracr."s (8) Fraudulent Claims Clauses Insurance policies have long contained clauses addressing the consequences of a 22.109 fraudulent claim. Indeed, the prevalence of such clauses explains the absence of

(b) Contract termination

22.106 It has been persuasively stated that the right to reject a claim arises by virtue of a common law rule independenrly of any right to terminate the contract, either prospectively or retrospectively."o If a fraudulent claim also constitures a repudiatory breach of contract, the insurer will have the right to elect to accept the breach and treat the contract as discharged, so that no primaty obligations can be incurred from the moment of acceptance of the breach. If it constitutes a breach of a dury arising under the doctrine of utmost good faith but not based juridically on a contractual term and not remedially controlled by the principles of general contract law, the insurer will have the right to avoid the entire conttact retrospectively. In such a case, the insurer will be entitled to recover all sums paid out under the policy in respect of previous claims, even if their legitimacy and honesry is unimpeachable.

191 ibid paras 50-52, 61, 66; Agapitos v Agnew (The Aegeon) [2002] EWCA Ciy 247, [20031 QB 556, para 45(g}. This approach was favoured, albeit that the law was regarded as toO uncertain for summary judgment, in Marc Rich Agriculture Trading SA v Fortis Corporate Insurance NV [20041 EWHC 2632 (Comm), [2005] Lloyd's Rep IR 396. The point was [eft open in The Star

Sea, para 110.

192 Orakpo v Barclays Insurance Services [1995] LRLR 443, 452 per Sir Roger Parker. See also the reference to good faith by Millett Lj in GalkJway v Guardian Royal Exthange (UK) Ltd [19991 Lloyd's Rep IR 209,214. 193 Or the requirement to serve a notice of abandonment in most cases of constructive total loss as a condition precedent to entitlement to indemnification for a total10ss. 194 Manifest Shipping Co Ltd v Uni~Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1, [200311 AC 469, para 66 per Lotd Hobhouse. '" Agapitos v Agnew (TheAegeon) [20021 EWCA Ciy 247, [20031 QB 556, para 45(b).

See 10.16 above. r" Agapitos v Agnew (The Aegeon) [2002J EWCA Ciy 247, [20031 QB 556, para 28. 190 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sed) [2001] UKHL 1, [20031 1 AC 469, para 62.
188

720

721

Claims and Claims Handling

a fully developed position at common law with respect to remedies for making a fraudulent claim.
22.110 In the marine context, the J and J(a) Schedules to rhe Lloyd's and Ins-sure policies ptovide that: 'If the Insured shall make any claim knowing the same to be false and fraudulent, as regards amount or otherwise, this Policy shall become void and all claim hereunder shall be forfeited.' Clause 45.3 of the International Hull Clauses (01111/03) is more comprehensive:
It shall be a condition precedent to the liability of the UndelWriters that the Assured shall not at any stage prior to the commencement of legal proceedings

Good Faith in the Making ofClaims

H. Good Faith in the Making of Claims

In The Star Sea,]97 the insurers contended that in the claims contexr rhe doctrine 22.113 of utmost good faith as articulated by section 17 of rhe Marine Insurance Acr 1906 imposed a duty of fair dealing and disclosure beyond the fraudulent claims jurisdiction. Initially, it was argued thar the docrrine imposed strict liability obligations parallel to those rhat apply at the pre-formation srage. At the stage of oral argument before the House of Lords, however, counsel for the insurers limited the suggested duty to one to refrain from unconscionable conduct. This argument was rejected. The House of Lords held rhat the assured's only duty was one of honesry."8 The House of Lords did nor need to go so far as to hold thar section 17 of rhe 22.114 1906 Acr is confined to the pre-formation doctrine of urmost good faith. The remedy of avoidance, however, is both extremely serious and not a remedy acknowledged by general contract law for failure to perform a duty arising under a validly formed contract. In The Mercandian Continent,'99 therefore, the Coun of Appeal held that section 17 applied at the post-formation stage only where (1) the assured was guilty of fraud, (2) the fraud was material in that the matter concealed or misrepresented justified a defence to the claim, and (3) the fraud or its consequences are sufficiently serious as to render the fraudulent conduct also a repudiatoty breach of contract. However, if it is correct, as has subsequently been stated, albeit obiter, that the fraudulent claims jurisdiction itself forms no pan of the doctrine of utmost good faith and does not, therefore, attract the remedy of retrospective avoidance of the contract under section 17,200 it is difficult to see how conduct that can be no more reprehensible can attract that remedy. The logical conclusion is that section 17 of the Marine Insurance Act 1906 has no post-formation application. This does not preclude the exisrence of a posr-formarion dimension to the doctrine of utmost good faith. means only that section 17 does not comprehend the entirety of the good faith doctrine. 20]

knowingly or recklessly:
45.3.1 mislead or attempt to mislead the Underwriters in the proper consideration of the claim or the settlement thereof by relying on any evidence

which is false;
45.3.2 conceal any circumstance or matter from the Underwriters material to the proper consideration of a claim or defence to such a claim.

22.111

Several points of difference may be nored. Clause 45.3 mirrors the common law in extending beyond intentional deceit to recklessness, including fraudulent devices, and embracing fraud at any srage until legal proceedings commence. In contrasr, the clause in the Schedules is confined to knowledge, requires the fraud to exist in the claim when made, and does not embrace fraudulent devices.]96 The reference in clause 45.3.1 to the proper consideration of the claim performs the function of the common law's requirement of materiality to the claim. This is explicit in clause 45.3.2. With respect to the consequences of a fraudulent claim, clause 45.3 declares the insurer free from liability, presumably in respect of the casualty that gave rise to the fraud, while the clause in the Schedules also declares that the policy 'shall become void'. It is suggested, however, that clause 45.3 should not be read as exhaustive of the consequences of malting a fraudulent claim and precluding the fraud from also constituting a repudiatory breach
of contract.

22.112 The disclosure obligation in clause 45.3.2 has to be read subject to clause 45.4, whi~h provides that: 'Clause 45.3 does not require the Assured ar any stage to d,sclose to rhe Underwriters any document of matrer which under English law is protected from disclosure by legal advice privilege or litigation privilege.' A document that is privileged under the law of the jurisdiction where it is created but not privileged under English law would have to be disclosed under clause 45.3.

197

Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea)

[2003J 1 AC 469. 198 Overruling the proposition of a wider duty to refrain at least from '",In,hle able' misrepresentation or non-disclosure as advanced in Blaek King Shipping v 1'"'''.''' Litsion Pride) [1985] 1 Lloyd's Rep 437, 511-12.
199

KlS Mere-Scandia XXXXlI v Certain Lloyd's Underwriters (The Mercandian Continent)

This follows from rhe requirement that the ftaud must exist at 'making' of the claim.
196

of and in the

[2001] EWCA Civ 1275, [2001] 2 Lloyd's Rep 563, paras 26, 35. 200 See 22.107 above. 20' See 4.197(3), 4.199 above.

722

723

Claims and Claims Handling

Making Payment ofLoss Moneys

a settlement by set-off has occurred and the broket subsequently goes into insolvency without paying the assured, the question arises of whether this method of claims settlement is binding upon the assured. The market custom amounts to ousting the broker's aurhority to colleer a claim for the benefit of the assured in favour of discharging the broker's personal obligation to the underwriter to pay premium due on any of its clients' policies. It is not surprising, therefore, that the Custom has been viewed with some disfavour and held binding only on an assured that both knows of the custom and adopts it. 207 With respect to knowledge, a clause in a policy providing that 'all losses and claims arising hereon are to be recoverable only according to the custom and usages of Lloyd's' will not suffice to bind an assured otherwise ignorant of the set-off settlement CUStom. 208 It is unlikely that the statement in the International hull 2o clauses , that payment of a sum 'whether in account or otherwise' shall to that amount discharge the insurers' obligations is any more effective. Once a broker has become insolvent, the availability of set-off as between the 22.118 broker and the undetwriter is governed by mandatory rules of insolvency law. 210 Set-off is denied in the absence of muruality of capacity in which the parries incurred liability on the opposing claims. Consequently, there can be no insolvency set-off between premiums and loss moneys in the case of marine policies placed by a broket. By virrue of section 53(1) of the Marine Insurance Act 1906, subject to contrary intention, the broket is personally indebted to the insurer but is to receive loss moneys qua agent of the assured. 211 The previous paragraph focuses upon insolvency of the broker. Should the 22.119 broker pay loss moneys to the assured and then discovet that one or more parricipating insurers had become insolvent before such payment, no action will lie against the assured to recover the loss moneys on the basis of mistaken payment. 212
(2) Time of Payment

I. Making Payment of Loss Moneys

(1) Method of Payment
22.115 In principle, loss moneys should be paid to the assured or an agent of the

assured authorized to receive payment of such money. Alternatively, the policy may nominate a designated loss payee, or the benefit of the insurer's promise to indemnifY (or of the entire policy) may have been assigned and notice given to the insurer. In such a case, the insurer should pay the loss payee or assignee, as the case may be. 202
22.116 It is standard practice in the London market for loss moneys to be paid through

the placing broker. The question arises of whether the broker has authority to give a good discharge of the insurer's indemnification obligation and, if so, what fotm of payment the broker has authority to receive. Consistent with the principle that the assured should not bear the risk of the broker's insolvency flowing from a system of accounting between the broker and insurer designed for the convenience of the insurance market,203 the insurer is directly responsible to the assured in respect of loss moneys and returnable premium and does not discharge its liability to the assured by payment to the broker as principal. 204 Nevertheless, the assured may, and frequently will, constitute the broker as its agent to receive money from the insurer, the broker's authority usually being evidenced by possession of the policy.205 It is not, however, inferred from the circumstance of having been the placing broker.
22.117 With respect to the form of payment, aurhority to receive payment does not

confet authority to make judgments regarding the creditworthiness of the debtor, with the result that the agent should accept only payment in cash. 20B Much litigation has resulted from the practice of the London market, pioneered at Lloyd's, of underwritets and brokers operaring general accounts, debiting indemnities against premiums, and periodically striking a Qalance with only the net surplus being actually paid by the appropriate party. Underwriters thus settle claims in whole or in part by set-off against premiums payable on any policy placed by that broker, regardless of any absence of muruality. Where such

At common law, there is no obligation on an insurer to process a claim and pay 22.120 the appropriate measure of indemnity within any particular period of time. There is no cause of action that permits an assured to sue an insurer for undue

202 For express provision to this effect, see International HuH Clauses (01111103), cl 48. On loss payees, see 20.01 above. 203 See 6.23 above. 204 MIA 1906, S 53(1), The rule is subject to contrary intention, but this is not evidenced by a clause in the policy providing for the broker to collect all claims: Stolos Campania SA v Ajax Insurance Co Ltd (The Admiral C) [1981] 1 Lloyd's Rep 9. 205 I-line Bros v Steamship Insurance Syndicate Ltd(1895) 72 LT 79; Legge v Byas, Mosley & Co (1901) 7 Com Cas 16. 206 Trading & General Investment Corp v Gault Armstrong & Keble Ltd (The Okeanis) [1986J 1 Lloyd's Rep 195. See generally Bowstead & Reynolds on Ageney (17th edn, 2001) Art 28.

207 Bartlett v Pentland (1830) 10 B & Cr 760; Scott v Irving (1830) 1 B & Ad 605; Stewart v Aberdein (1838) 4 M & W 211; Sweeting v Pearce (1861) 30 LJCP 109; MatviefJ v Crosfield

(1903) 8 Com Cas 120. 20a McCowin Lumber & Export Co Inc v Pacific Marine Insurance Co Ltd(1922) 38 TLR 901. 209 International Hull Clauses (01/11/03), d 48. 210 Insolvency Act 1986, s 323; Insolvency Rules 1986, r 4.90. 2" Wihon v Creighton (1782) 3 Doug1132. '" Edgar v Bumstead (1808) I Camp 411.

724

725

Claims and Claims Handling

delay in the paying of a claim and recover damages for consequential loss caused by the delay.
22.121 In The Italia Express (No 2),213 the assured sought to recover various consequentiallosses in addirion to the statutory indemnity for the total loss of the insured vessel. The assured argued that the insurer's primary obligation was to pay rhe statut0ty measure of indemnity on the assured's demand for payment subsequent to the casualty. In default of payment forthwith, the insurer incurred a secondaty liability to pay damages at large and not limited to the statutory measure. Hirst] held in favour of rhe insurer. First, the Act'" was 'conclusively definitive' of the extent of the insurer's liability and not merely of that liability during the brief petiod following an assured's demand during which the insurer might discharge his liability by paying the statutory measure. Secondly, Hirst ] accepted the analysis of a contract of indemnity as involving a primary obligarion to hold the assured free from the specified harm. Consequently, the statutory measure of indemnity was the measure of the secondary obligation. Moreover, on this analysis, rhe assured's claim for addirional compensation necessarily amounted to a claim for damages for late payment of damages, a claim not genetally recognized under English law."s 22.122 There is, nevertheless, no impediment to rhe parries agreeing express contractual rime limits for processing and paying claims. Under the Internarional Hull Clauses (01/11/03), clause 46.7 provides that:
The Leading Unclerwriter(s) shall make a decision in respect of any claim within
28 days of receipt by tbem of the appointed average adjuster's final adjustment or, if no adjuster is appointed, a fully documented claim presentation sufficient t6

Making Payment ofloss Moneys

resulting in the loss of profits that would have been made from trading the vessel, the insurer will be liable to reimburse the assured for the financial loss. No objection can be raised that the cause of rhe loss is the impecuniosity of the assured.'16 Of course, a voluntary decision of the assured not to effect repairs will brealc the chain of causarion.

'" Lagden v O'Connor [2003J UKHL 64, [20041 1 AC 1067. In so far as rhe decision in Sprung v Royallnsurance (UK) Ltd[1999] Lloyd's Rep IR 111 rests on causation (see 118), it is no
longer good law.

enable the Underwriters to determine their liability in relation to coverage and quantum. If the Leading Underwriter(s) request additional information to make a decision, they shall make a decision within a reasonable time after receipt of the additional documents or information requested, or of a satisfactory explanation as to why such documents and information are not available.

22.123 Non-compliance by the insurer would generate liability in damages nor for late payment of damages but for breach of the expressly agreed, ancillary obligation to pay by a certain time. Consequently, where the failure to pay within the agreed time prevents the assured from effecting repairs to an insured vessel

Ventauris v Mountain (The Italia Express) (No 2) [1992] 2 Lloyd's Rep 281. MIA 1906, s 67 and, on the facts, s 68. 215 President afIndia v La Pintada Campania Navigacion SA [1985J AC 104; President ofIndia v Lips Maritime Corp (The Lips) [19881 AC 395. See also Sprung v Royaiinsurance (UK! Ltd 11999J Lloyd's Rep 111; England v Guardian Insurance Ltd [2000J Lloyd's Rep lR 404; Normhurst Ltd v Dornoch Ltd [2004J EWHC 567 (Comm), [2005J Lloyd's Rep lR 27. Otherwise, where responsibility is specifically assumed for the consequences of late payment:/Wadsworth v Lydal! [1981J 1 WLR 598.
213
214

726

727

23
MEASURES OF INDEMNITY

A. Loss of or Damage to Property (1) The yardstick for calculating the measure of indemnity (2) Total lasses (3) Partial losses

23.02 23.03 23.12 23.14

B. Thresholds to Recovery (I) Particular average warranties

(2) Deductib1es

(3) Franchise clauses

23.38 23.39 23.40 23.48 23.49

C. Under~insurance

The phrase 'measure of indemnity' denotes the quantum of the payment 23.01 required of the insurer to discharge its liability under an insurance contract in respect of a recoverable loss. This chapter considers the law governing measures of indemnity for various types of loss as well as the thresholds to recovery and reductions from the prima fide measure often found in marine policies.

A. Loss of or Damage to Property

In a claim for loss of or damage to property, such as hull, cargo, or freight, the 23.02 measure of indemnity depends upon whether the loss is total or partial and whether the policy is valued or unvalued. The different types of loss are considered in Chapter 21 above, while the concept of a valued policy is discussed in Chapter 7 above. 1 (1) The Yardstick for Calculating the Measure ofIndemnity

(aJ Agreed and insurable values

Marine insurance law subscribes to the indemnity principle, but does not in 23.03 principle attempt to calculate measures of indemnity in property claims by reference to the precise financial loss in fact suffered by the assured. Instead, the

See 7.24ffabove.

729

Measures ofIndemnity
measure of indemnity is, subject to contrary intention,' calculated by tefetence to the insurable value of the insured property, and, in a valued policy, the agreed value provides conclusive evidence as between insurer and assured of the in~ur able value. 3 Under valued policies, therefore, where the Insured property IS a tatalloss, the assured receives the agreed value, and where it is a partial loss, the assured generally receives an appropriate proportion of the agreed value. In the London market today, the vast majority of marine policies are valued. However, insurance on an unvalued basis, often incorporating Institute or International clauses and subject to English law, is more common in some other markets.'
23.04 The insurable value, as such, applies only where the policy is unvalued and even then may be displaced by the policy wording. Subject to contrary express provision or valuation in the policy, section 16 of the Marine Insurance Act 1906 provides that the insurable interest should be ascertained as follows:
(1) In insurance on ship, the insurable value is the value, at the commencement of

Loss ofor Damage to Property

provide for the measure of indemnity to be quantified by reference to the agreed or insurable value, they are all expressed to be subject to contrary intention. In the case of unvalued policies, it appears that modern policy wordings will readily displace the insurable value in favour of the market value of the insured ptoperty at the time of loss, thus aligning marine and non-marine insurance. In The Captain Panagos DP,' a mortgagee's interest policy provided that in the 23.07 event of loss of or damage to or liabiliry of the mortgaged vessel and subsequent non-payment by underwriters under the hull policy, insurers would pay the insured mortgagee the lesser of 'the amount of such damage or liability' and the total indebtedness. Mustill J held that the policy was an unvalued marine policy on the mortgaged ship, with the quoted phrase denoting the pecuniary consequences of physical loss of or damage to the ship. Moreover: 'To keep the policy in tune with what I believe to be its purpose, this must surely mean the real pecuniary consequence, not a conventional measure, which was once thought appropriate for application to a type of policy which has nothing in common with a policy of the kind now under consideration, save that they are both policies of marine insnrance.' In consequence, the measure of indemnity was quantified by reference to the market value of the mortgaged vessel at the time and place of the loss.

the risk, of the ship, including her outfit, provisions and store~ for the office~s and crew, money advanced for seamen's wages, and other dIsbursements (If any) incurred to make the ship fit for the voyage or adventure contemplated

by the policy, plus the charges of insurance upon the whole:

The insurable value, in the case of a steamship, includes also the machmery. boilers, and coals and engine stores if owned by the assured, and, in the case of a ship engaged in a special trade, the ordinary fittings requisi:e for ch.at trade: (2) In insurance on freight, whether paid in advance or otherwise, the Insurable value is the gross amount of the freight at the risk of the assured, plus the charges of insurance: (3) In insurance on goods or merchandise, the insurable value is the prime cost?f

the property insured, plus the expenses of and incidental

to

shipping and the

charges of insurance upon the whole: (4) In insurance on any other subject-matter, the insurable value is the ~mount at the risk of the assured when the policy attaches, plus the charges of Insurance.

23.05 It is clear from section 16 that, in calculating the insurable value, the value at the time of loss is discarded in favour of value at the inception of the risk. In the context of cargo insurance, this results from the concept of 'prime cost' referring 5 to the invoice or market value at or near the time of shipment.

Thor Navigation Inc v Ingosstrakh Insurance Co Ltd' concerned insutance 23.08 incotporating the Institute Time Clauses Hulls (1/11195). Under the heading 'Interest' the subject-matter of the policy was stated to be 'Hull and Machinery' and the perils clause provided that 'this insurance covers loss of or damage to the subject-matter insured', with no mention of the other items mentioned in section 16(1). Following the approach adopted in The Captain Panagos DP, this wording was held to displace the section 16 insurable valve as the yardstick for the measure of indemnity, again in favour of the market value of the vessel at the time and place oftoss.
With respect, however, it is suggested that it is by no means self-evident that the 23.09 reasoning in The Captain Panagos DP should be so extended into cases of ordinary hull and machinery cover. The Captain Panagos DP concerned a property policy used ta reinforce a security interest over a vessel. The mortgagee's commercial interest was confined to the adverse consequences to its prospects of repayment of the secured loan flowing from a casualry affecting the secured asset. That was the interest the insurance was designed to protect. It made no commercial sense, therefore, to quantifY the measure of indemniry by reference to a loss that the mortgagee had not incurred (namely a diminution in the value

(b) Displacing the insurable value in modern unvaluedpolicies

23.06 Specific statutory provisions govern the measure of indemniry in cases of total loss and partial loss in the context of different types of insurance. While they

3 MIA 1906, , 27(3). , See 23.06-23.10 below. 4 See Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] EWHC 19 (Comm), [20051 1 . Lloyd', Rep 547, para 8.
5

codifies

Williams v Atlantic Assuran" Co Ltd[l93311KB 81, 90-2.102-3. MIA 1906.,16(3) Usher v Noble (J 81 0) 12 East 639.

Continental Illinois National Bank & Trust Co ofChicago v Bathurst [1985] 1 Lloyd's Rep 625. , [20051 EWHC 19 (Comm), [200511 Lloyd's Rep 547.

730

731

Measures ofIndemnity
of the asset as at the time of inception of risk) or by reference to assets not covered by the security interest, such as crew wages.
23.10

Loss ofor Damage to Property

is valued or the insurable value if the policy is unvalued,lO regardless of whether a greater sum would be required or a lesser sum would suffice to indemnifY for the loss actually suffered. As discussed above," in the context ofunvalued policies, it may be that a modern 23.13 policy will be construed as displacing the insurable value in favour of the market of the insured property at the time of loss. (3) Partial Losses

Thor Navigation, in contrasr, concerned insurance of the vessel itself fo~' the benefit of irs owner. In that context, section 16(1) may be regarded as provldlllg an extended definition of 'ship', avoiding the need to contract expressly to extend cover to the other items mentioned in secrion 16(1), which, one may assume, a shipowner would always wish to cover. In economic terms, section 16(1) avoids transaction costs. The decision in Thor Navigation means that any assured today that wishes to obtain an unvalued policy that extends to the full range of items mentioned in section 16 will need to contract expressly to that effect. The merits of this are, with respect, elusive. To the extent that the decision represents an instinctive dislike for indemnification by reference to the section 16 insurable interest, one can only respond that section 16 represents the settled position of pre-Act case law and the will of Parliament. (c) Vessels intendedfor scrap

An assured that unsuccessfully alleges a total loss, may, unless the policy other- 23.14 wise ptovides, reCOver for a partialloss. 12 The Marine Insurance Act 1906 does not, however, provide an exhaustive code for calculating the measure of indemnity with respect to all forms of partial loss. By virtue of section 75(1), where the Act is silent 'the measure of indemnity shall be ascertained, as nearly as may be, in accordance with those provisions, in so far a~ applicable to the particular case'.
(a) Damage to a vessel
Where a vessel is damaged but not totally lost, section 69 ofthe Marine Insurance 23.15 Act 1906 envisages three eventualities: where the vessel is fully repaired (subsection (1), where it is partially repaired (subsection (2, and where it is untepaired and not sold during the risk (subsection (3. In addition, there arises a fourth possibility, not addressed by the Act, namely where the vessel is sold in its damaged condition at a time when the insurer is still on risk. It is clear from section 69(3) that whethet or not a vessel has been repaired is judged for these purposes by reference to the time of expiry of the risk." Where the damage is fully repaired, section 69(1) provides that the measure of 23.16 indemnity is 'the reasonable cost of the repairs, less the customary deductions, but not exceeding the sum insured in respect of anyone casualty'. The limit of a sum insured in respect of anyone casualty reflects the possibility of a policy containing a maximum sum payable on any single casualty. The cost of repairs includes additional costs incurred in reasonably removing the vessel to another port for repairs and also dry dock expenses. 14 The measure of indemnity is confined to the reasonable cost of repairs." The 23.17

23.11

By way of detogation from indemnification by reference to the agreed or insurable value, the 1983 and 1995 Institute hull clauses provide that where the insured vessel should sail '(with or without cargo) with an intention of being (a) broken up or (b) sold for brealdng up' the measure of indemnity for loss or damage should, subject to prior contrary agreement with the insurers, be limited to the vessel's marker value as scrap at the time of the casualty." The wording has, however, been criticized for uncertainty. If a shipowner accepts a charter that will leave the vessel near a scrapping centre and contemplates}he possibility of scrapping the vessel at the end of the charter depending on the then freight rates and scrap prices, does the vessel sail on that char;er voyage 'with an intention' of being scrapped? What level of firmness of contemplation must be proved in order to arrive at 'an intention'? Moreover, where the vessel is lost or damaged between two different scrapping centres with different price levels, how is the market value to be determined?9 (2) Total Losses

23.12 Where the subject-matrer insured is the subject of an actual total loss Or a constructive total loss and, in rhe case of a constructive total loss, the assured has either served a valid notice of abandonment or no such no rice is required, then, subject to contrary intention, the assured receives the agreed value if the policy

8 Institute Time Clauses Hulls (1110/83), cl 1.3; (1111195), cl 1.5. Under the International Hull Clauses (01/11103), sailing with such an intention without prior agreement of the underwriters triggers immediate termination of cover: d 1 4 . 2 , . _ ' 9 N Hudson and J Allen, The Institute Clauses (3rd edn, 1999) 93'-4.

MIA 1906, s 68. 11 See 23.06-23.10 above. MIA 1906, s 56(4); Benson v Chapman (1849) 2 HLC 696. 13 In the context of a voyage policy, the risk terminates when the ship is abandoned in circumstances and in language evidencing a clear intention not to pursue the voyage to its destination: Irvin v Hine [I950J 1 KB 555, 571. 14 Rules of Practice of the Association of Average Adjusters, 1986 (amended 1992), rr Dl, 5, 15 On reasonableness in this context, see R Cornah, 'Reasonable COSt of Repairs under Hull and Machinery Policies' (2005) 11 JIML 288.
10

12

732

733

Measures ofIndemnity
cOSt may vary considerably depending upon where and by whom the repairs are effected. Insurers will naturally want repairs to be undertaken where and by whom they can most cheaply be ptoperly carried our. Consequently, clause 44.1 of the International Hull Clauses (01111/03) confers upon the leading underwriter the right to decide 'the port to which the vessel shall proceed for docking or repair ... and shall have a right of veto concerning a place of repair or a repairing firm'." The assured is entitled to indemnification of any additional expense incurred by the assured in underraking a voyage to the port of docking or repair nominated by the leader. In addition, clause 44.2 entitles the leading underwriter to take tenders or require the taking of further tenders for the repair work." The obtaining of such tenders may, however, extend the time during which the vessel is unavailable to the assured. Consequently, clause 44.2 provides in such a case, and where a tender for the repairs has been accepted with the leading underwriter's approval, that 'an allowance shall be made at the rate of 30% per annum on the insured value for the time lost berween the despatch of rhe invitations to tender required by the Underwriters and the acceptance of a tender to the extent that such time is lost solely as the result of renders having been taken and provided that the tender is accepted without delay after receipt of the Leading Underwriter(s)' approval'."
23.18 The reference in section 69(1) of the Marine Insurance Act 1906 to customary

Loss ofor Damage to Property

Vessel fr~m one porr to ~nother for the repair of damage covered by the Underwmers, or fo~ tnal tnps for such repairs, and then only for such wages and mamtenance as are mcurred whilst the Vessel is under way'. 22 If the vessel is only partially repaired, by virtue of section 69(2) the measure of 23.19 indemnity is the reasonable cost of such repairs, calculated as in section 69(1), and also llldemnificati?n 'for the reasonable depreciation, if any, arising from the unrepalred damage. Where the assured elects not to repair and the vessel is no: sold u.nrep~ired during the risk, secrion 69(3) entitles the assured again to llldemnlficatlOn for the reasonable depreciation arising from the untepaired damage." However, rhe measures of indemnity recoverable under subsections (2) and (3) cannot exceed the measure recoverable under subsection (1) had the assured e1ecred for full repairs. Should the assured sell the ship untepaired dun~g th: nsk, sectlOn 69 is silent with respect to the measure of indemnity, but, III P,tman v Universal Marine Imurance CO,24 it was held by Lindley J and ~ffirmed by the Court of Appeal that the assured is entitled to the depreciation III the value of the vessel occasioned by the damage. It follows, however, from ~eCflon 75(1) that even in this situation the assured cannot recover an indemnity III excess of the estimated cost of repairs. In three of the. above four situations, therefore, the measure of indemnity 23.20 reflects, or takes llltO account, the depreciation in the value of the insured vessel and two questions arise with respect to calculation of such a measure of indemnity. First, how is the actual depreciation sustained to be calculated? Secondly, must the depreciation so calculated then be related to the agreed or insurable value, depending on whether the policy is valued or unvalued, in order to determine the precise measure for which the insurer is liable and, if so, how exactly should it be so related? With respect to the calculation of depreciation, the choice falls between, on the 23.21 one hand, the difference between the market value of the vessel if undamaged (the sound value) and the market of the vessel in its damaged condition (the damaged value) and, on the other hand, the estimated cost of repairing the damage sustained. It is clear that at common law the former is the correct appr~ach.25 Damaged and sound market values are ascertained by reference to the time of expiry of risk, 'whether that expiry is by effluxion of time in the case of a time policy, or by the completion of or abandonment of the voyage in the

deductions reflects the fact rhat the courts evolved a rule in the context of wooden vessels that the assured could recover only rwo-thirds of the repair costs." The one-third deduction served both the indemnity principle and convenience, as a repaired vessel might be rendered stronger and more valuable than if no casualty had been encountered and the uniform percentage deduc~ion 20 obviated the need for detailed enquiry in every case. The Ins,itute and International hull clauses, however, provide expressly that claims are payable 'without deduction new for old', although claims for bottom treatment are restricted." The assured may claim for the wages and maintenance of the master, officers, and crew 'when incurred solely for the necessary removal of the

" See also Institute Time Clauses Hulls (1/10/83), el 10.2; (III 1/95), d 13.2, although reference is to underwriters rather than juSt the leading underwriter. 17 See also the right to instruct a surveyor and connrm the appointment of an independent average adjuster under International Hull Clauses (01111103), cl 46.1: see further 22.74 above. 18 The allowance is subject to certain deductions in accordance with cll 44.3, 44.4. For insurers' parallel rights in respect of tenders under the Institute clauses, see Institute Time Clauses Hulls (1I10/83), d 10.3; (l/11195), d 13.3, although reference is again to underwriters rather than just the leading underwrit~r. 19: For full details of the one-third new for old deduction, see the Rules of Practice of the Association of Average Adjusters, 1986 (amended 1992), r D7. 20 Loh" v Aitchison (I878) 3 QBD 558, 563-4. 21 Institute Time Clauses Hulls (1I10/83 and 1I11195), dll4-15; Internatio,nal Hull Clauses (I/l I/03), ell 16-17.

22 Institute Time Clauses Hulls (1/10/83 and 1111195), d 16 International Hull Clauses (Ill I/03), cI 18. ' :: See Knight v Faith (1850) 15 QB 649. 20 (1882) 9 QBD 192. Lit/gett v Secretan (No 2) (1871) LR 6 CP 616; Pitman v Universal Marine Insurance Co (188~) 9 QBD 192. The contrary statement in Goole & Hull Steam TOwing Co Ltd v Ocean Manne Insurance Co Ltd [1928], 1 KB 589, 595 is, with respect, clearly incorrect.

734

735

Measures ofIndemnity
case of a voyage policy or by sale in the case of either type of policy or otherwise'.26 The estimated cost of repairs remains relevant in two respects. First, it may shed light upon the amount of diminution in market value in the absence of more cogent evidence." Secondly, as noted above, ir limits the measure recoverable from the insurer. This has been explained as follows: an assured rhat has suffered a loss by depreciation has the opportunity to mitigate that loss by effecting repairs where that would be cost-effective and the assured cannot decline so as to minimize loss at the insurer's expense. 28
23.22 Where a damaged vessel is sold in an unrepaired condition before expiry of

Loss ofor Damage to Property

~ommon law may be represented as follows:

the agreed and insurable value, the measure of indemnity for depreciation at AV or IV X (SV - DV) SV

the risk, the assured cannot claim in respect of depreciation a sum greater than the difference between the sound value and the sale price. 29 To the extent that the sale price exceeds the damaged value, the assured may be regarded as having minimized its loss, any costs reasonably incurred in making the sale being recoverable as sue and labour expenses. Were the property sold at an unteasonably low price, the shortfall would be irrecoverable as not caused by a covered peril and the sale would infringe any contractual duty to minimize losses.
23.23 Turning to the significance of the agreed or insurable value, afier some initial

Thus, in the non-marine ca~e of Elcock v Thomson,32 fire-damaged buildings 23.24 lllsured under a valued poltcy were neither reinstated nor sold during the currency of the risk. The agreed value was 106,850, the marker value of the buildings before the nre was 18,000, while their market value in their damaged condition was 12,600, and reinstatement would have cost over 40,000. Morns Jheld that the principles stated in section 69(3) applied equally to a non-manne cas:, that the agreed value operated as a yardstick for quantifYing the ',"easure of ,?demn,ty ror depreciation loss as for any other, and that this reqUIred calculatlon of the proportion of the market value lost by depreciation and the award to the assured of rhat proportion of the agreed value. The assured was, therefore, entitled to three-tenths of the agreed value nam I 32,055. ' ey Ultimately, however, rhe measure of indemnity is a matter for contract. Clause 23.25 18 of the Institute Time Clauses Hulls (1110/83 and 1/11195)33 'd C II provl es as
18 UNREPAJRED DAMAGE 18.1 The measure of indemnity in respeCt of claims for unrepaired damage shall
be. t~e reasonable depreciation in the market value of the Vessel at the time thIS lU.surance terminates arising from such unrepaired damage, but not exceedlng the reasonable COst of repairs.

hesitation,'O the case law has consistently held that calculating the amount of actual depreciation, according to sound and damaged market values, is only the first step. The amount of actual depreciation must then be expressed as a percentage of the sound value of the vessel in order to give the proportion of the vessel's value lost by reason of the depreciation. The measure of indemnity for depreciation is that proportion of the agreed or insurable value. 31 Consequently, where SV is the sound value, DV is the damaged value, and AV and IV are

ro ows:

18.2 18.3 The underwrit,ers shall nOt be liable in respect of unrepaired damage for
more than the Insured value at the time this insurance terminates.

26 Helmsville Ltd v YOrkshire Insurance Co Ltd (The Medina Princess) [1965] 1 Lloyd's Rep 361, 517 per Roskill J. 27 Lidgett v Secretan (No 2) (1871) LR 6 CP 616, 626-7; Pitman v UniversaL Marine Insurance OJ (1882) 9 QBD 192,201. 28 Kusel vAtkin (The Catariba) [1997J 2 Lloyd's Rep 749, 755. On duties to minimize loss, see 24.02ffbelow. 29 Pitman v Universal Marine Insurance Co (1882) 9 QBD 192,202. 30 See the judgment of Jesse! MR in Pitman v Universal Marine Insurance Co (1882) 9 QBD 192. 31 Pitman v Universal Marine Insurance Co (1882) 9 QBD 192 (Lindley J); Steamship Salmoral Co Ltd v Marten (1902J AC 511, 521; Elcock v Thomson (1949J 2 KB 755; Kusel v Atkin (The Catariba) [1997J 2 Lloyd's Rep 749, 755-6. See also Compania Maritime Astra SA v Archdale (TheArmar) (1954J 2 Lloyd's Rep 95, 101-2 (Supreme Court of New York). That the measure of indemnity should reflect the agreed value was also upheld in Irvin v Hine [1950) 1 KB 555, although it was left open whether that should be by the proportion method or by subtraction of the damaged value from the agreed value, The latter was, however, expressly rejected in Elcock v Thomson, For full discussion ofthe case law, see H Bennett, 'Valued Policies' irfD Thomas (ed) The Modern Law ofMarine Insumnce. Volume 2 (2002) Cb 3, 109-14.

Clause 20 of the International Hull Clauses (01111/03) is in identical terms. The contractual approach is identical to that of the ~ommon law in that first 23.26 depreciation is assessed by reference to the time when the policy expire~ and: secondly, the assured cannot recover mOre than the agreed value at that time or the reasonable cost of repairs. However, the contractual approach departs from the common law by assessing depreciation purely by reference to market values. The market value of the vessel in its damaged condition at the time the policy expires is subtracted from the market value the vessel would have had at that time if undamaged. This does not vary if the vessel is sold unrepaired before

32 33

[1949J 2 KB 755. See also Institute Voyage Clauses Hulls (1110/83 and 1/11/95). el16.

736

737

Measures ofIndemnity
the policy was otherwise due to expire, since such a sale automatically terminates the policy."
23.27 The rejection of the common law by the market clauses avoids the inflation in

Loss ofor Damage to I'r,oh"''',

partial and not total'. This provision codifies the decision in Spence v Union Marine I~surance Co Ltd,39 in which a cargo of cotton was shipped in 2,493 bales specIfically marked to indicate the ownership of each bale. In the course of the :,oyage, the ship was wrecked, 231 bales were lost or so damaged as to require sale and the remainder were conveyed to the destination in another ;es.'e1. Th~ marks on many of the bales were obliterated by sea water, rendering It ImpraCtIcable to identifY their owners by any reasonable means. Of the assured's forty-three bales, two remained identifiable and were delivered. The market in cotron having fallen materially, the assured then claimed as for a total loss of the remaining forty-one. It was held, however, that while the loss and sal~ of 231 bales constituted a total loss of a part of each owner's goods, the vanous owners should be tteated as tenants in common of the unidentifiable delivered cotton which could be regarded as subject only to a partial loss. Each owner, including the assured, was accordingly held entitled to a ptoportlon of the value of the cotton lost and of the damage to the unidentifiable cotton. The share for each owner of this compensation was determined by the proportion of the quantity shipped by that owner to rhe whole quantity shipped. . Where g~ods are delivered in a damaged condition, as opposed to a part of the 23.31 goods being totally lost, computation of the measure of indemnity is set out in slightly more complicated terms. By virtue of section 71 (3) of the 1906 Act: 'Where the whole or any part of the goods or merchandise insured has been delivered damaged ar its destination, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value.' This subsection reflects the fundamental principle laid down by Lord Mansfield 23.32 that .the insurance contract indemnifies only against the perils of the voyage and the Insurer IS concerned solely with the safety of the subject-matter insured, not with fluctuations in the market price of the commodity in question. 40 Consequently, the basis of the measure of indemnity is provided, not by any market value of the goods, but by their agreed or insurable value (AV or IV). The appropriate proportion thereof is then calculated by reference to values of the goods at the place of arrival where all relevant information will be available. The loss to the assured is initially represented by the difference between the gross sound value (GSV) and the gross damaged value (GDV) of the goods at

the measure of indemnity caused by the tendency for agreed values to exceed actual values. Thus, on the facts of Elcock v Thomson, for example, the assured's loss in terms of market value was 5,400. This, however, represented a 30 per cent fall in market value and incorporating the agreed value by the proportion method produced a measure of indemnity of 32,055. Although the estimated cost of reinstatement presumably placed a ceiling of just over 40,000 on the measure of indemnity regardless of the proportion of market value lost, the common law approach inflated rhe insurets liability considerably. Since high agreed values for vessels are common, a substantial level' of inflation in the measure of indemnity would not be untypical in hull insurance and is unacceptable to hull insurers. 35

(b) Partialloss ofgoods

23.28 A partial loss of goods may take anyone or a combination of three different

forms: total loss of a part, delivery at destination in a damaged condition, and damage preventing some of the goods from completion of transit.
23.29 It is convenient to commence with a total loss of a part of the insured goods,

'capable of several and distinct valuation at rhe outset'. 36 Where the policy is unvalued, the measure of indemnity is the insurable value of the part lost. 37 Where the policy is valued, section 7l(l) of the Marine Insurance Act 1906 provides for the assured to receive an appropriate proportion of the agreed vallie, namely the proportion the insurable value of the part (IVP) lost bears to the insurable value of the whole (IVW)." This may be represented as follows: IVP AVx--

IVW

23.30 A total loss of a part requires the severable part of the insured goods to be

rendered an actual or constructive total loss. A mere loss of identification does not suffice. According to section 56(5) of the Marine Insurance Act 1906, 'Where goods reach their destination in specie, but by reason of obliteration of marks, or otherwise, they are incapable of identification, the loss, if any, is

34

Institute Time Clauses Hulls (1/10/83), cI 4; (1111/95), d 5; International Hull Clauses See D O'May, Marine Insurance Law and Policy (1993) 446-8. Lewis v Rucker (1761) 2 Burr 1167, 1170 per Lord Mansfield.
MIA 1906, s 71(2). For the insurable value of goods, see s 16(3), 23.04'above.

(01/11/03), cl14.
35

36 37
38

See, eg Anstey v Ocean Marine Insurance Co Ltd(1913) 19 Coin-Cas 8.

" (1868) LR 3 CP 427.

" Lewis v Rucker (176l) 2 Butr 1167,1170.

738

739

Measures ofIndemnity
the place of arrivaL 41 However, this figure is unsatisfactory "" a me""ure of indemnity because it is affected by the state of the market in the goods. Consequently, that figure is then expressed as a proportion of the gross sound arrived value and the assured is entitled to rhat proporrion of the agreed or insurable value. The resulring measure of indemniry, encapsulated in section 71 (3), may be expressed"" follows: (GSV -GOY) AVorlVx GSV This is, of course, the same equation as favoured ar common law for calculating the measure of indemniry for depreciarion loss in rhe case of damaged bur unrepaired vessels, discussed at paragraph 23.23 above. The gross damaged value does not include the cost of any necessary conditioning of the goods prior to sale in their damaged state. Such expenses are recoverable separarely as suing and labouring charges. 42
23.33 The thitd form of partial loss of goods occurs where part is necessarily sold at an intermediate port because of unfitness to continue to the destination by virtue ofa casualry caused by a covered peril. The 1906 Act is silent with respect to this situation. Logically the insurer should pay as for a total loss of a parr less rhe proceeds of sale. Expenses incurred in the sale will again be recoverable as suing and labouring charges. 23.34 Should different parts of rhe same insured cargo suffer different forms of partial loss, the appropriate measures of indemnity will require separare calculation.

Thresholds to Recovery
paid in advance and was earned on shipment. The vessel subsequently being a total loss, the measure of indemnity reflected a reduction in the agreed valuation to take accounr of rhe advance freight not at risk, giving the following equation: 5500 x (3250 - 925) 3250 = 3,889

Consequently, a true loss of 2,325 generated a measure of indemnity, after factoring in rhe agreed value, of 3,889. However, the Institute freight clauses impose a ceiling on recovety of the gross freight actually lost in order to avoid such inflation. 45

(d) One agreed value covering several species ofproperty

In a valued policy, a single valuation may cover different species of property, 23.37 in which case, unless a casualty results in a total loss of all the insured property, it will be necessaty to apportion the valuarion berween rhe different species before adjusring parriallosses. According to rhe Marine Insurance Act 1906, such apportionment is effecred by reference to the insurable values of the whole property and of the various differenr species. Where absence of relevant information prevents determinarion of rhe insurable values, the Act provides for apportionment to follow net sound arrived values, qualities, or 46 descriptions of goods. However, the practice of average adjusters is to apportion different qualities or descriptions of cargo on invoice values wherever possible and otherwise, bur only in default, to rely upon net arrived sound values. 47

(c) Partial loss offreight

23.35 In the case of a partial loss of fteight, the measure of indemnity is such proportion of the agreed or insutable value as the proporrion of freighr lost by rhe assured (FL) bears to the total freight at the risk of the assured under the policy (TF).43 This may be represented as follows:

B. Thresholds to Recovery
An insurer may be unwilling to accept liability for the full extent of losses and 23.38 for all losses no matter how trivial for three reasons. First, the administrative costs of investigation and adjustment are not economically viable in the context of small claims. Secondly, where a portion of the risk remains with the assured, it provides an added incentive to avoid and minimize losses. Thirdly, the nature of certain goods may render it difficult to determine whether the true cause of damage is a covered peril or inherent vice. Accordingly, a variery of clauses have evolved excluding or limiting an insurer's liabiliry.

FL AVorIVxTF
23.36

The Main" concerned a policy on return freight with an agreed value of 5,500. A casualty on the ourward voyage delayed the return voyage, the freight rates fell and the vessel ultimately sailed with a total freight of 3,250, ofwhich 925 was

41

That gross rather than net values should be used was established in Johnson v Sheddon (1802)

2 East 581, where it is shown that use of net values would permit the state of the market to affect

the measure of indemnity. For the meaning of gross value, see MIA 1906, s 71(4). 42 Francis v Boulton (I 895) 65 LJQB 153. 43 MIA 1906, s70. . .. [1894] P 320.

4S InStitute Time Clauses Fteight (lf8189), cI 13.1; (1111195), cI 14.1; InStitute Voyage Clauses Freight (118189), cI 11.1; (1!l1195), cI 10.1. Compare the approach of the hull clauses to the measure of indemnity for depreciation, see 23.23-23.24 above. 46 MIA 1906, s 72. 47 Rules of Practice of the Association of Average Adjusters 1986 (amended 1992), r E3.

740

741

Measures ofIndemnity
(1) Particular Average Warranties 23.39 A warranty that insurance is free from particular average confines ~e insurels liability to total losses together with certain expendi:ure ~nd charges ill~~rred by the assured in connection with the avoidance or mlllimizlllg of losses. Where . I ded such a clause affords added significance to the correct classification of lllCU , . . f a loss as total or partial and, where appropriate, the proper ~e,:,,:ce of a notIce 0 abandonment. Flexibility is, however, provided by the possIbility of warrantlllg free from particular average below a percentage approptiate to the commodity h in question, such as three or five per cent. ~ Moreover, were t h' e Insurance contract is apportionable, the assured may recover for a to.tal loss of any apportionable part. 50 The contract is apportionable .where It .covers either different species of property, even if not llldlVldually IdentIfied III the policy, or separate parcels of the same species separately valued or otherwise separately insured. 51 General insurance of goods shipped ill bulk IS nor rendered apportionable by rhe mere facr rhat rhe goods. are packed in a n~mber of separate containers. 52 Particular average warranties ha~e not fallen lllto tOtal obsolescence, 53 bur have been discarded III the InstItute and International clauses in favour of deductibles and franchise clauses. (2) Deductibles" 23.40 By virtue of a deductible, rhe assured retains a specified proportion of the risk. The insurer's liability is limited to the amount, If any, by whiCh the measure of indemnity exceeds the stipulated amount. In the International Hull Clauses (01111/03), clause IS provides for a deductible. Clause 15.1 provIdes as follows:"
Subject to Clause 15.2, no claim arising from a peril insured under, this i~~urance shall be payable under this insurance unless the aggregate of all claIms ansmg out of each separate accident or occurrence (including claims under: Clauses 2, 3, 4, 5,

Thresholds to Recovery
6 (including, if applicable. Clause 6 as amended by Clauses 37 or 38), Clauses 8 and 9 and, if applicable, Clause 41) exceeds the deductible amount agreed in whIch case thIS sum shall be deducted. Neverrheless the expense of sighting the botrom after stranding, if reasonably incurred specially for that putpose, shall be paid even if no damage is found. The essence of the clause is that the value of all claims under the policy of any 23.41 nature whatsoever should be aggregated and the total subject to the agreed deductible. Thus, suppose the insured vessel is responsible for colliding with another vessel, as a result of which the ins.ured vessel requires the assistance of a salvage tug and has to put into a port of refuge for emergency repairs before completing its voyage. The insured shipowner will have claims under clause 2 for damage to the insured vessel, clause 6 for collision liability (as extended if applicable by clause 38 to four-fourths liability), clause 8 for the vessel's share of any salvage award under Article 13 of the International Convention on Salvage 1989 and also for general average losses (as extended if applicable by the general average absorption provision in clause 40) and clause 9 for any suing and labouring expenses. The measure of indemnity for each of these claims is calculated and the measures are then aggregated. The deductible falls to be subtracted from the total so generated. Clause 15.2 provides for the possibility of a separate 'machinety damage 23.42 deductible''' applicable to claims fot 'loss of or damage to any machinery, shaft, electrical equipment or wiring, boiler, condenser, heating coil or associated pipework' where, first, the claim either arises under the Inchmaree clause" or from a fire or explosion that has originated in a machinery space and, secondly, the policy incorporates the additional perils clause58 and no claim arises under it. Where such a machinery damage deductible has been agreed, it is applied to the aggregate valLle of all eligible machinety damage claims arising out of the same 'separate accident or occurrence' and the balance, if any, is then brought into account under clause 15.1 and subject to the main policy deductible. Both the main policy deductible under clause 15.1 and the machinety damage 23.43 deductible under clause 15.2 provide for aggregation of claims 'arising out of each separate accident or occurrence'. Otherwise, whether a new accident or occurrence has arisen, requiring application of a second deductible, depends upon whether there has been a break in the chain of causation so that the claim can no longer be said to arise from (in the sense, presumably, of being proximately caused by) the first accident or occurrence. S9

48 The expenditure and charges fall into three cate~ori.e~, n.amely general average, salvage charges and particular charges (including contractual habIltty 10 salvage) and other expens~s recover~ble under a sue and labour clause. These are discussed in Ch 24 below. For thelr recoverabiliry notwithstanding a particular average warranty, see MIA 1906, s 76(1), (2). 49 On calculating whether such percentages have been reached, see MIA 1906, s 76(3), (4). so ibid s 76(1). . . " Ralti v janson (1856) 6 El & B1422; Duffv Mackenzie (1857) 3 CB(NS) 16; Wilk,mon v

Hyde(1858) 3 CB(NS) 30. .' 52 Ralli vJamon (1856) 6 EI & B1422. Despite consIderable ove.dap, ~ ~otalloss of a part under , MIA 1906, s 71 (1), (2) is nOt, therefore, synonymous with apport10nabI~Ity under s 76(1). 53 For an example of a particular average warranty i~ a ,modern pohcy, ~ee Bank ofAmenca National Trust dr Savings Association v (nri!mas .(Thef(yrtakiJ (1993J / L1oy~ s ,~ep 1.37.
54 55

Termed an 'excess clause' in non~manne direct Insurance and a retentIon In reinsurance. See also Institute Time Clauses Hulls (1/10/83 and 1111195); cI 12.1.

There is no corresponding provision in the Institute hull clauses. d 2.2, discussed in eh 11 above. 58 d 44, discussed at 11.28 above. 59 For the views of the Committee of the Association of Average Adjusters, see N Hudson and T Madge, Marine Insurance Clauses (4th edn, 2005) 133-5.
56 57

742

743

Measures ofIndemnity
23.44 In order ro provide a measure of cerrainry, clause 15 expressly addresses two readily foreseeable areas of porential difficulry in applying rhe norian of a separare accident or occurrence. First, clause 15.460 addresses 'heavy wearher', an expression stated to include conracr with floating ice. All claims for heavy wearher damage incurred 'during a single sea passage between two successive ports' are deemed ro arise from one and rhe same accident. Purting inro any parr for any ordinary purpose, wherher for bunkering or cargo handling, will rerminate rhe sea passage with a new such passage commencing on departure for another port. Where, however, a vessel mal,es an extraordinary, unscheduled srop, for example for emergency medical assistance for a crew member, it is unclear whether the scheduled single sea passage would be divided. 23.45 Should the policy expire in the course of such a voyage, clause 15.4 provides for the aggregated claims for which the insurer is liable to be subject ro a reduced deductible. This is calculated on a proportionate basis according ro the proportion that the number of heavy weather days falling within the period of cover bears to the rotal number of heavy weather days during the single sea passage in

Under-insurance
'This insurance does not cover partial loss, other than general average loss, under 3% unless caused by fire, sinking, stranding or collision with another vessel. Each craft and/or lighter ro be deemed a separate insurance if required by the assured.' The franchise restriction does not apply, thetefore, in cases of total loss, to claims in respect of general average, and ro parriallosses where the cause of the loss is fire, sinking, stranding, or collision with another vessel. The second sentence of the clause permits the assured to apply the franchise clause severally where the insurance covers freight to be earned by a number of craft and/or lighters and the loss amounrs to three per cent in respect of one or more individual craft and/or lighter bur not with respect ro the whole freight insured.

C. Under-insurance
There is no obligation to insure properry for its full value. In order to obtain a 23.49 lower premium or to spread cover among a number of differenr insurers, the assured may decide to insure for only a proporrion of the properry's value. In such a case, section 81 of the Marine Insurance Acr 1906 provides as follows: 'Where the assured is insured for an amounr less than the insurable value or, in the case of a valued policy, for an amount less than rhe policy valuation, he is deemed to be his own insurer in respect of rhe uninsured balance.' For its parr, the insurer is, accordingly, liable only for such proportion of the loss as the amounr of its subscription bears ro the agreed value in a valued policy (AV) or the insurable value in an unvalued policy (IV)." This is known as the principle of average. Assume, therefore, a valued policy under which properry is valued at 100 and 23.50 insured for 80. By virrue of section 27(3), the contractual value of the insured properry at 100 will be presumed conclusive. A toralloss under a valued policy prima ficie enrides the assured ro indemnification in the sum of the agreed value, namely 100. However, section 81 renders the assured its own insurer for the 20 per cenr under-insurance and it must, therefore, carry one-fifth of the loss itself. The insurer's liabiliry is limited to 80. The result of section 81 is that the measure of indemniry, whether for a total or parrial loss, is derived as follows: Measure of indemniry where fully insured Sum insured
X -----

question.
23.46 Further assistance on aggregation is provided, secondly, in the conrext of operations to lighten the insured vessel or to load or discharge cargo from or to another vessel while at sea. Clause 15.5 provides that claims fat damage during any such separate operation are ro be treated as due to one accident. 23.47 The deductibles do not apply ro all claims. By virtue of clause 15.3, neither the main policy deductible under clause 15.1 nor any machinery damage deducrible under clause 15.2 applies to a claim for an actual or constructive total loss of the insured vessel, nor to any claim for suing and labouring expenses unde~ clause 9 arising from the same accident or occurrence thar gives rise ro a roralloss. 61 In addition, clause 15.! itself provides thar ir does not apply to claims for reasonable expenses in sighting the botrom after a stranding regardless of whether the srtanding has occasioned the vessel any damage.

(3) Franchise Clauses

23.48 The difference between a deductible and a franchise clause is rhat, whereas under a deducrible the assured always bears a proporrion of the risk, under a franchise clause the insurer pays the loss in full once the designated threshold has been achieved. The Institute freight clauses conrain the following franchise clause:"

AV/IV

In cases of total loss, this will give the assured the sum for which the properry is insured. The real effect of average, therefore, is felt in cases of parrialloss.
60 See also Institute Time Clauses Hulls (1110/83 and 1/11/95), cI 12.2. " See also Institute Time Clauses Hulls (1/10/83 and 1/11/95), cI 12.1.

62

Institute Time Clauses Freight (1/8/89 and 1111/95), cl12; Institute Voyage Clauses Freight
63

(1/8/89 and 1/11/95), clIO.

MIA 1906. s 67(2).

744

745

Measures ofIndemnity
23.51

The principle of average does not generally apply to liability insurance. Where a policy ot a section of a policy covers the thitd patty liability of the assured, if covet is limited by a sum insuted and liability on the facts exceeds that figure, the assured is entitled to a measute of indemnity equal to the sum insured and not metely such ptoportion of that figure as the sum insured beats to the liability incurred. 64 Average does apply, however, to liability in genetal average 'b' contn utton and sal vage. 65

24
AVERTING AND MINIMIZING LOSS

65

" Joyce v Kennard (l 87 I} LR 7 QB 78; Cunard Steamship Co Ltd v Marten [1902J 2 KB 624. See 24.73-24.74 below.
A. Sue and Labour Expenses (1) Comractual wordings (2) Required standard of conduct (3) Persons falling within the sue and labour doctrine (4) OUt)' or liberty? Consequences of non~compliance with section 78(4) (5) Joint and composite insurance (6) Negligence cover and the sue and labour doctrine (7) Entitlement to reimbursement of expenses (8) Supplementary nature of the sue and labour reimbursement undertaking (9) Suing and labouring in anticipation of a peri! (10) Relationship between the period
24.02

24.03 24.07
24.09

of cover and the sue and labour doctrine (11) Expenses recoverable under a reimbursement undertaking

24.33 24.37 24.41 24.44 24.48 24.56 24.58 24.62 24.70 24.71 24.73 24.75

B. General Average
(1) General average losses

24.10 24.18 24.19 24.25

and liabilities (2) Insurance of general average losses and liabilities

C. Salvage
(1) Salvors' remuneration (2) Insurance of liability for salvage remuneration D. Under-insurance (1) Sue and labour (2) General average and salvage (3) Insutance against a shortfall by reason of under-insurance

24.29
24.30

This chapter is concerned with ancillary heads of cover undet which an assured 24.01 can recovet in tespect of losses and liabilities incuned voluntatily Ot by law in order to avert or minimize loss. It addresses the tecoverability of sue and labour expenses, of losses and liabilities arising in general avetage, and of liability for the diffetent awards that may be made at law and undet conttact to salvors. A final section then considets the issue of undet-insutance in respect of each of these heads of ancillary loss.

A. Sue and Labour Expenses

It is clearly in the intetest of the insutet that an assured should take all reason- 24.02 able measures to minimize Ot, prefetably, avoid entirely any loss falling within

746

747

Averting and Minimizing Loss

the tetms of the policy. Most modern marine policies follow in the tradition of the SG policy and address this interest through express contractual terms. Section 78 of the Marine Insurance Act 1906 contains three presumptive rules of intetpretation of such so-called 'sue and labour clauses', but subsection (4) provides that: 'lt is the duty of the assured and his agents, in all cases, to talce such measures as may be reasonable for the purpose of averting or minimizing a loss.' This statut0ty duty to sue and labour appears to exist alongside any express
contractual term.
1

Sue and Labour Expenses

16.1 to take such measures as may be reasonable for the purpose of averting or

minimising such loss)

and
16.2 to ensure that all rights against carriers, bailees or other third parties are

properly preserved and exercised and the Underwriters will, in addition to any loss recoverable hereunder, reimburse the Assured for any charges properly and reasonably incurred in pursuance of these
duties.

(1) Contractual Wordings

24.03 The SG policy contained the following 'sue and labour' clause:
And in case of any loss or misfortune it shall be lawful to the assured, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence,
safeguards, and recovery of the said goods and merchandises, and ship, &c, or any part thereof, without prejudice to this insurance: to the charges whereof we, the assurers, will contribute each one according to the rate and quantity of his sum herein assured.

This clause amalgamates the traditional sue and labour clause with the so-called 'bailee clause', designed to protect insurers' subrogation rights. 4 The rules of mutual insurance associations contain similar provisions requiring 24.06 the taking of reasonable measures to avoid insured losses. No such clause is, however, found in the Institute fteight clauses. 5 (2) Required Standard of Conduct As indicated by the reference to 'reasonable' measures in section 78(4) of the 24.07 1906 Act and the express sue and labour clauses, a plea of failure to sue and labour requires proof of negligence by a televant person, negligence being assessed by reference to the conduct that might reasonably be expected of a person of normal competence in the circumstances of the peril that occurred. In The Talisman: the assuted was required to 'use all reasonable endeavours to save his vessel' from loss or damage. The master found a quantity of water in the engine room bilge. Believing he had a choice berween closing the seacocks or leaving them open and allowing the pumps to eject the water, he took the latter course. The vessel, however, sank. The insurets contended that expert evidence demonsttated that the loss could have been averted by opening the seacocks. The House of Lords held that this evidence failed to address the relevant issue, namely whether 'an ordinary competent skipper, in citcumstances in which the pursuet was placed, would teasonably be expected to attempt to close the seacocks'. It proved only that 'a more knowledgeable individual, viewing the situation dispassionately' might have realized that closing the seacocks would have offeted a significant prospect of saving the vessel. 7 In Bayview Motors Ltd v Mitsui Marine'& Fire Insurance Co Ltd,' insurets argued 24.08 that the assureds had failed to sue and labour in failing to institute ptoceedings

24.04 The Institute and International hull clauses contain rhe following clause entirled 'Duty of the Assured (Sue and Labour)':' 'In case of any loss or misfortune it is the duty of the Assured and their servants and agents to talce such measures as may be reasonable for the purpose of avetting or minimising a loss which would be recoverable under this insurance.' This is complemented by an express promise to contribute to charges 'properly and reasonably incurred' in connection with such measures. 24.05 In the Institute Cargo Clauses (A), (B), and (C), clause 16 is termed in the margin a 'Duty ofAssured Clause', is entitled 'Minimising Losses', and provides as follows:'
It is the duty of the Assured and their servants and agents in respect of loss recoverable hereunder

1 Strive Shipping Corp v Hellenic Mutual W'ar Risks Association (Bermuda) Ltd (The Grecia Express) [2002] Lloyd's Rep IR 669, paras 481-501. In Cunard Steamship Co Ltd v Marten

[1903J 2 KB 511, the sue and labour clause was held inapplicable on its wording to the policy in question, but no possibility was mentioned of recovery instead at common law. The case, however, pre-dates the 1906 Act and the generality of the sue and labour doctrine as subsequently articulated by s 78(4} may not have been appreciated. Assuming the dual analysis is correct, the true interpretation of an express sue and labour clause may, of course, be to exclude any residual statutory duty. " , Institute Time Clauses Hulls (1IIO/83), cl 13.1; (1/11/95), cl 11.1; International Hull Clauses (01111103), cl9. L The sue and labour clauses in the Institute hull clauses are incorporated by reference into the corresponding war and strikes clauses. ." 3 Also the Institute War Clauses (Cargo}, Strikes Clauses (Cargo), d 11.

See 25.20 below. See also the loss of hire policy in Ikerigi Campania Naviera SA v Palmer (The WOndrous) [1992] 2 Lloyd's Rep 566, 576. 6 Stephen v Scottish Boatowners Mutual Insurance Association (The Talisman) [1989J 1 Lloyd's Rep 535. , ibid 540 per Lord Keith. 8 [2002] EWHC 21 (Comm), [2002] 1 Lloyd's Rep 652.
4
5

748

749

Averting and Minimizing Loss

for the recovery of insured property stolen by local customs officials. However, the insurers' own agents had stated that such proceedings would be 'lengthy and fruitless' and the argument was duly rejected. (3) Persons Falling within the Sue and Labour Doctrine
24.09 The staturory sue and labour doctrine requires the taking of reasonable measures to avert or minimize a loss by the assured and its agents. Contractual sue and labour clauses commonly refer also to the assured's servants. Such formulae do not embrace, or are at least unlikely to embrace, independent contractors. In State o/the Netherlands v Youell' insurers sought to resist a claim brought by the Dutch navy in respect of the defective painting of rwo submarines built by a shipyard, on the basis that the deficiency was occasioned by negligence on the part of the yard amounting to a breach of section 78(4). It was held, however, rhar the yard could not be regarded as the navy's agent for the purposes ofsection 78(4), or even at all. According to Rix J, in a passage approved on appeal: 10
.. . the yard was dealing with the submarines not as the navy's agent but as the submarines' builder under a building contract. It would in my judgment be a misuse of language to call the yard in such a case an 'agent'. The navy was not

Sue and Labour Expenses

charge the defendant by way of damages with any greater sum than that which he reasonably needs to expend for the purpose of making good the loss. In short, he is fully entitled to be as extravagant as he pleases bur not at the expense of the defendant'. Accordingly, whereas the victim of a breach of contract owes no genuine duty to take reasonable steps to minimize the consequences of the breach, any loss that would have been averted by such steps is not recoverable from the perpetrator of the breach. Mitigation is not a duty bur a liberty or privilege, and the innocent party enjoys rhe freedom not to mitigate, albeit not at the expense of the contract breaker." In Currie (MR) & Co v Bombay Native Insurance CO,15 the master of a wrecked 24.12 and aground vessel gave notice of abandonment of the cargo and sold it by auction. He had, however, unjustifiably taken no steps whatever to save the cargo, a large portion of which was subsequently saved. The cargo was insured against toralloss only. The Privy Council held that under such circumstances there was no total loss and the notice of abandonment was invalid. However, it was stared obiter that the omission of the master to attempt to save the cargo 'at a time when it was probable that his endeavours would be successful, in their Lordships' judgment, precludes the Assured from claiming for a total loss of the cargo into whatever condition it might have been brought afterwards', 16 dicta that constitute the basis of section 78(4) of the 1906 Act. Such dicta are entirely consistent with a doctrine analogous to mitigation and with the permissive language of the traditional suing and labouring clause." A further difficulty with regarding section 7S(4) as imposing a genuine duty lies 24.13 in the inclusion in the subsection of the assured's agents.'s In the absence of any clear legislative intent, it would, it is suggested, be unsatisfacrory for the dicta in Currie v Bombay to be transfotmed into a statutory duty owed to the insuter by persons who are not patty ro the insurance contracr and sounding in damages for breach. 19 Its derivation suggests that section 78(4) is intended to render the assured's right to recover under the contract subjecr to the taking of reasonable

delegating anything to the yatd, let alone a duty to sue and labour. Under that building contract the yard was responsible for building the submarines without
defects and thus for repairing any defects prior to delivery: the latter was part of its
obligations as builder, both in common sense and under the express terms of the

policy. (4) Duty or Liberty? Consequences of Non-compliance with Secrion 7S(oi)

24.10 Section 78(4) of the Marine Insurance Act 1906 is concerned with avoiding and minimizing losses otherwise falling on the insurer, which is viewed ~as having broken a contractual obligation to keep the assured free from the specified loss or expense." The general law of contract recognizes a doctrine of mitigation of loss, under which the victim of a breach of contract is often said to be under a 'duty' to miuimize losses flowing from the breach. However, it is well established that 'the duty to mitigate is not in any sense an obligation, contractual or otherwise. It is a condition attached to the right to claim damages'. " 24.11

In Darbishire v WtZrran,13 Pearson LJ observed that a claimant 'is not entitled to

9 [1998J 1 Lloyd's Rep 236. " [1997J 2 Lloyd's Rep 440, 459. approved [1998J 1 Lloyd's Rep 236, 246, 247. 11 See 22.65 above. ' 12 Soriros Shipping Inc v Sameiet Solhoit (The Soihoit) [J9811 2 Lloyd's Rep 574, 580 per Staughton]. affd [1983J 1 Lloyd's Rep 605, 608. 13 [1963] 1WLR 1067, 1075, applied Koch Marine Inc v D'Amica Societl,rDi NavigazioneARL (The Elena D'Amico) [1980J 1 Lloyd's Rep 75, 88.

14 Similarly, ownership of a vessel imports the privilege of deliberate destruction. The law on wilful misconduct and fraudulent claims in no way detracts from the privileges of ownership, but ensures that such privilege cannot be exercised at the expense of the insurer. The fraud lies not in the destruction of the vessel but in the basing of a claim against the insurer upon such a loss. ,s (1869) LR 3 PC 72. " ibid 82-3. 17 See also Lord Blackburn in Aitchison v Lohre (1879) 4 App Cas 755, 765 (object of the sue and labour clause was 'to encourage exertion' by the assured). " F Rose, 'Failure to Sue and Labour' [1990J ]BL 190. 19 It is no answer to say thar damages will not in practice be recoverable since the indemnity payable to the assured will simply be pro tanto reduced. Damages payable by X to Y cannot be set off against a sum payable by Y to Z. It is conceivable, moreover, that the insurer might pay the assured by mistake and then seek reimbursement from the agent for breach of duty, the assured having become insolvent: ibid 197.

750

751

Averting and Minimizing Loss

steps to avert or minimize loss by both the assured and the assured's agents. The subsection might perhaps be interpreted as rendering the assured, but only the assured, answerable for any failure to sue and labour on the part of either itself or its agents, with the insurer entitled to set off damages for breach against the indemnity payable under the policy. It is, however, suggested rhat analysis of section 78(4) as creating a condition to recovery analogous to the doctrine of mitigation in general contract law is a more natural way of achieving this result. 24.14 Such an analysis was indeed adopted by Colman J in National Oilwell (UK) Ltd v Davy Offihore Ltd,20 where it was specifically held that damages are not available for a breach of section 78(4). Focusing on the reference to 'duty' in section 78(4), Colman J reasoned as follows:"
On the construction of this provision which I consider to be correct the assured is

Sue and Labour Expenses

Interpretation of section 78(4) as imposing a condition on recovery rather than 24.16 a genuine duty does not, of course, prevent an express sue and labour clause from imposing a genuine duty if such is its true interpreration. In The Vasso,24 clause 16 of the Institute Cargo Clauses (A) was regarded as imposing a contractual duty sounding in damages for breach. There was, however, no consideration of how the reference to persons other than the assured was to be accommodated in terms oflegal principle." A sue and labour provision may, of course, address the consequences of non- 24.17 compliance. Such provisions in the rules of mutual insurance associations often state that non-compliance entitles, at the discretion of the association's directors, rejection of the claim in its entirety or reduction in the measure of indemnity. (5) Joint and Composite Insurance The unity of interest insured under a joint policy means that a failure by one 24.18 joint assured to sue and labour as required by statute or contract is opposable against all joint assureds. In contrast, the severable or separate interests of coassureds under composite policies means that a failure to sue and labour by one co-assured does not prejudice the cover of other co-assured interests.
(6) Negligence Cover and the Sue and Labour Doctrine

certainly under a duty in the sense that in cases where an omission to act as a
prudent uninsured might be the proximate cause of an insured loss, he fails to act at his peril. However, the consequence of his omission to act is that no insured loss occurs. Ex hypothesi no such loss can occur because the proximate cause of any such loss would not be an insured peril but rather the uninsured peril of the assured's or this agent's omission to act. In such a case the insurers would have a defence to the claim, but they would have no set-off or counterclaim unless they had already paid on the assured's claim and were seeking to recover what they

had paid. 24.15 A causation-based approach to section 78(4) was adopted also at first instance by Rix J, drawing a parallel with the doctrine of mitigation, and on appeal by Phillips LJ in State ofthe Netherlands v Youell." On this approach, therefore, failure to sue and labour confers on the insurer no cause of action by way"of primary or cross-claim. Instead, the insurer is simply not liable in respect of losses it can prove" were caused by the failure to take reasonable steps by any of the specified parties. Where the effect of a failure to take reasonable steps is to aggravate damage thar would inevitably have been incutred, the measure of indemnity is pro tanto reduced to the extent that the insurer can prove the extent of the aggravation.

Section 55(2)(a) of the Marine Insurance Act 1906 provides that the assured is 24.19 not to be denied recovery because the loss would not have occurred but for the negligence of the master or crew. This requires reconciling with section 78(4), which denies recovery or reduces the measure of indemnity where the assured has negligently failed to avoid or minimize loss.

It is clear that section 78(4) cannot be read as undermining section 55(2)(a). 24.20 In British & Foreign Marine Insurance Co v Gaunt," Lord Sumner dismissed a
contrary argument as follows:
There remains an argument based on a reading of s 78 sub-s 4, of the Act which is very novel. It is one of the disadvantages of codification that new terms used or even unfamiliar sequences of propositions suggest that the law has been changed, where those familiar with the old decisions would not have suspected it. The argument affords a striking instance of this. The secrion obviously refers to suing

20

[199312 Lloyd's Rep 582.

ibid 619. Also 623. Colman J thereby declined to follow the dicta of Mocatta J, apparently recognizing an actionable duty, in Astrovlanis Compania Naviera SA v Linard (The Gold Sky)
21

[197212 Lloyd's Rep 187, 221. A contractual dury approach to MIA 1906, s 78(4) was indicated obiter by Hobhouse J in Noble Resources Ltd v Greenwood (The VdS.io) [19931 2 Lloyd's Rep 309, 314, but Colman] reiterated and applied his analysis in Strive Shipping Corp v Hellenic Mutual Wilr Risks Association (Bermuda) ltd (The Grecia Express) [2002J Lloyd's Rep IR 669, paras 484, 499-501. 22 [199712 Lloyd's Rep 440, 458, [199811 Lloyd's Rep 236, 245. 23 Roper vJohnson (1873) LR 8 CP 167 (the contract breaker carries the o~rden of proving a
failure to mitigate).

and labouring. It cannot possibly be read as meaning that if the agems of the

20 Noble Resources Ltd v Greenwood (The Vasso) [199312 Lloyd's Rep 309, 314. See also Strive Shipping Corp v Hellenic Mutua! \Vtzr Risks Association (Bermuda) Ltd (The Grecia Express) [2002J Lloyd's Rep IR 669, para 489. 2S See 24.13 above. 25 [192l]2AC41,65.

752

753

Averting and Minimizing Loss

assured are not reasonably careful throughout the transit he cannot recover for anything to which their want of care contributes. The point therefore fails.

Sue and Labour Expemes

The complete solution to the apparent conflict lies in the causation-based 24.24 analysis of the sue and labour doctrine as a condition upon recovety.35 On this analysis, rhe assured will be denied recovery by a failure to sue and labour only where the negligent failure to avert or minimize loss constitutes the proximate cause of the 10ss.36 Where the chain of causation is broken, the insurer is not liable simply because the cause of the loss is not a covered peril (thus accommodating section 55(2)(a), which does not make negligence a covered peril) unless under the wording of the particular policy the negligence itself constitutes a covered peril. Thus, in Lind v Mitchel4 37 Scrutton LJ considered that, if the master's conduct broke the chain of causation, the insurers remained liable because negligence was also a covered peril under the Inchmaree clause. The net result is that section 78(4) will rarely afford insurers a defence to a claim. It is highly unlikely that negligent conduct of the assured, its agents, or some other party specified under a sue and labour clause will be held to break the chain of causation so as to constitute the proximate cause of the loss and highly likely that the negligence of any such person that does achieve proximate cause status will be a covered peril under the Inchmaree clause. 38
(7) Entitlement to Reimbursement of Expenses

24.21 Moreover, in the leading case of Lind v Mitchel4 27 section 55(2)(a) was held to prevail over secrion 78(4) where a master, in response to an insured peril, unreasonably and negligently abandoned the vessel. Scrutton LJ quoted the above statement of Lord Sumner, expressed his agreement, and held that section 78(4) was therefore excluded from the case.'s The insurers were, accordingly, liable as the proximare cause of the loss was the insured peril. 24.22 One possible basis for reconciling cover in respect of negligence and requirements to exercise reasonable care to avoid loss lies in the rule that a contract is not

to be construed in a manner repugnant to its commercial purpose. In order to avoid the effecrive deletion of cover, requirements of 'reasonable care' have been interpreted as infringed by subjective recklessness rather than the objective negligence traditionally associated with failure to act reasonably.29 In Lane (W & J) v Spratt,30 this approach was adopted by Roskill J with respect to a due diligence clause in a Lloyd's goods in transit policy thar required the assured to take 'all reasonable precautions for the protection and safeguarding of the goods'. However, while this remains a possible interpretation of a particular express sue and labour clause, the endorsement by the House of Lords of a negligence standard in the sue and labour conrext in The Talisman" would appear to exclude the repugnancy rule ftom providing a general solution to the conflict between negligence cover and the sue and labour doctrine in marine insurance law. 24.23 It is also not possible to draw a temporal distinction between negligence cover and suing and labouring on the basis that the former is concerned with how a loss is caused while the latter addresses the aftermath ofand response to a loss. The sue and labour doctrine is not so confined. It is true that one can only sue arid labour in response to the advent ofa peril or the threat ofa peril. 32 Consequently, certain negligent conduct that leads to a peril will indeed be too remote from the loss to fall within the purview of the sue and labour doctrine. There remains, nevertheless, considerable temporal overlap while a peril threatens" or indeed while the insured property is in the grip of a sustained peril. 34

The sue and labour provisions in the Institute and International clauses 24.25 contain express undertakings to reimburse expenses reasonably incurred in averting or minimizing a loss. In default of such a reimbursement undertaking in an express sue and labour clause, an entitlement to recover is implied by statute. 39 In contrast, the Marine Insurance Act 1906 is silent as to whether an assured that has incurred expenditure pursuant to section 78(4) in taking reasonable steps to avert or minimize a loss, or has incurred a liabiliry to reimburse an agent for such expenditure, is entitled to seek reimbursement from the insurer. In Emperor Goldmining Co Ltd v Switzerland General Insurance Co Ltd,40 the 24.26 Supreme Court of New South Wales held that expenses can be recovered when incurred pursuant to section 78(4). Notwithstanding the contrary view adopted

(1928) 34 Com Cas 81. Lawrence L] agreed and Sankey L] delivered a shorr concurring judgment. " See 8.21 above. 30 [197012 QB 480. 31 Stephen v Scottish Boatowners Mutual Insurance Association (The Jalisman) [1989J 1 Lloyd's Rep 535, discussed at 24.07 above. 32 State ofthe Netherlands v Youell [19981 1 Lloyd's Rep 236, 249. 33 .A:; in Integrated Container Services Inc v British Traders Insurance Co [1984] 1 Lloyd's Rep 154, discussed at 23.31 above. 34 As in Stephen v Scottish Boatowners Mutual Insurance Association (The" Talisman) [1989J 1 Lloyd's Rep 535, discussed at 24.07 above.
27 28

See 24.14-24.15 above. State ofthe Netherlands v Youell [1997J 2 Lloyd's Rep 440, 458, [199811 Lloyd's Rep 236, 244-5. 37 (I928) 34 Com Cas 81.
3S 36

For negligence cover under the Inchmaree clause, see 11.37~11.42 above. MIA 1906, S 78(1). The rules of mutual insurance associations often contain provisions requiring the taking of reasonable measures to avert or minimize losses without any express corresponding reimbursement undertaking.
38 39
40

[19641 1 Lloyd's Rep 348.

754

755

Averting and Minimizing Loss

obiter by Neill J in Integrated Container Service Inc v British Traders Insurance Co Ltd,41 mis, it is suggested, must be correct. 42 First, if the law denied the assured
recovery in the event of failure to exercise reasonable care to avoid or minimize

Sue and Labour Expenses

is partial under a policy that covers only totallosses,48 where the cause of the loss is a peril excluded or simply not covered by the policy,49 or where the insurer has a defence to any claim in respect of the avoided 10ss.50 Where expenses
are incurred in parr to avert or minimize an insured loss and in part to avert or

an insured loss yet required the assured to carry the cost of reasonable steps taken, the net effect would be to deny the assured full indemnification wherever reasonable steps involving some coSt could be taken. This is hard to justifY or to accept as a sensible commercial interpretation. Secondly, law that is prepared to imply an entitlement to reimbursement of expenses into any exptess sue and labour clause, should not deny a similar entitlement where the underraking of reasonable steps is not expressly agreed but implied by law. Thirdly, in The Mammoth Pine,4' the Privy Council held that a 'bailee clause' that required the assured to ensure that all third party rights were ptoperly preserved gave rise to an implied undertaking to reimburse expenses reasonably incurred by the assured in so acting for the insurers' benefit. Fourthly, further suppOrt, if needed, may be found in the analogy with mitigation. In return for exercising reasonable care in mitigating the consequences of a breach of contract, the innocent party benefits from an implied correlative right of reimbursement of reasonable expenses incurred. 44
24.27 Any right to reimbursement is triggered by the taking of reasonable steps within

minimize an uninsured loss, liability for such expenses is apportioned proportionately between assured and insurer. 51 Provided, however, expenses are

incurred to avert a covered loss, no apportionment is required by the fact that

the same expenses serve also to avert another loss that is not covered. 52

the scope of the relevant contractual or Statutory sue and labour duty, not by
success in averting or minimizing an insured
1085. 45

Where, however, the cir-

cumstances are such that insurers cannot derive any benefit in that the insured loss cannot be averted or minimized, it is ex hypothesi not reasonable for the
assured to seek to avert or minimize the loss at the insurers' expense and any

expense incurred is irrecoverable by way of the sue and labour doctrine." Consequently, an undertaking to reimburse sue and labour expenses is confined
to expenses incurred in order to avert or minimize a loss for which the insurer

A particular example of expenses for mixed purposes arises where an insured 24.28 vessel toget~er with other property on board are in a position of grave peril such that successful salvage is unlikely and the only basis on which a contractor will endeavour to save the property at risk is payment for work irrespective of result rather than the salvage basis of 'no cure-no pay'. Assume then that the effons to save the property fail in that the vessel is a total loss and such property as is recovered possesses a lower collective value than the cost of the services. For the shipowner, recovering the cost of the services is problematic. There is a gap in insurance cover. The contributory values in general average are zero or inadequate to meet the cost. The contractual basis of the work denies the cost status as a salvage charge. Viewed as sue and labour expenses, the contractor's services were engaged for the benefit of both vessel and other property on board so that a hull insurer's liability is confined to an appropriate proportion of the expenses and the sue and labour clauses in the Institute and International hull clauses so provide. 53 However, although P&I club rules do not specifically cover the resulting shortfall, it would be eligible for consideration under the omnibus rule. (8) Supplementary Nature of me Sue and Labour Reimbursemenr Undertaking The undertaking to teimburse sue and labour expenses, whether implicit in 24.29 section 78(4) or express or implied in an express sue and labour clause, is

would otherwise be liable. 47 Expenses are irrecoverable where me threatened loss

" [198112 Lloyd's Rep 460, 465. 42 In non-marine insurance, it has been held that sue and labour expenses are irrecoverable unless the contract expressly or by necessary implication provides for recovery: YOrkshire \\?titer Services Ltd v Sun Alliance & Lontlan Insurance pic [1997J 2 Lloyd's Rep 21; King v Brandywine Reinsurance Co (UK) Ltd (20041 EWHC 1033 (Comm), (20041 Lloyd's Rep lR 554, para 143. In non~marine insurance, however, there is no equivalent to MIA 1906, s 78(4). 43 Netherlands Insurance Co Est 1845 Ltd v Karl Lijungberg & Co AB (The Mammoth Pine) (198613 All ER 767. '" Lloyd) & Scottish Finance Ltd v Modern Cars & Caravans (Kingston) Ltd (196611 QB 764, 782-3; Andros Springs (Owners) v World Beauty (Owners) (The World Beauty) [19701 P 144, 156. 45 KuwaitAirways Corp v Kuwait Insurance Co SAK (No 1) (199911 Lloyd's Rep 803, 816. 46 Kuwait Airways Corp v Kuwait Insurance Co SAK (No I) (19961 1 Lloyd's Rep 664, 698, (199712 Lloyd's Rep 687, 697. 47 MIA 1906, s 78(3).

48

Great Indian Peninsuhr Co v Saunders (1861) 2 B & S 266; Booth v Gair (1863) 15

CB(NS) 291.
49 Weissherg v Lamh (1950) 84 LlLRep 509; Berk (FW) & Co Ltd v Style (19551 2 Lloyd', Rep 382; Ikerigi Compania Naviera SA v Palmer (The Wondrous) (19921 2 Lloyd', Rep 566, 576. 50 Fraser Shipping Ltd v Colton (19971 1 Lloyd's Rep 586, 598. .. . 51 Royal Boskalis Westminster BV v Mountain [1997] LRLR 523, 602. LikeWise In cases of under~insurance,at least at common law: see 24.71-24.72 below. 52 Royal Boskalis Westminster BV v Mountain (1999) QB 674, 738 (expenses incurred both to save insured vessels and to gain the freedom and safety of their crew). 53 Institute Time Clauses Hulls (1/10/83), cl 13.5; (1/11/95), cl 11.5; International Hull Clauses (01/11/03), cl 9.4. Under the Institute hull clauses, para 5 provides for proportionate reduction of the measure of indemnity in case of under-insurance.

756

757

Averting and Minimizing Loss

supplementary to the main insurance cover. This has a number ofconsequences. First, expenses incurred are recoverable on top of the measure of indemniry payable in respecr of losses sustained by the insured properry or liabilities covered by the policy. 54 Under the Institute and Inrernational hull clauses, however, the amount recoverable is limited to the amount for which the vessel is insured under the policy. 55 Secondly, where recovery in respect of damage to the subject-matter insured is subject to the loss achieving a threshold figure, the recovery of sue and labour expenses is not subject to that threshold. 5' Thirdly, in litigation a claim for sue and labour expenses must be specifically pleaded and particulars must be given of the measures carried, the basis on which such measures are alleged to be reasonable, and the COStS incurred in connection with each measure. 57 (9) Suing and Labouring in Anticipation of a Peri!
24.30 An injunction to sue and labour, whether statutory or contractual is not con-

Sue and Labour Expenses

activiry by the [assureds] under the sue and labour clause' and that the requisite degree of risk was one of high probabiliry. The assured had to inrervene to averr or minimize a loss that otherwise would 'very probably' fallon the insurers. The Court of Appeal held that the expendirure was recoverable. Dillon L] did not specifically address the level of probabiliry required. While rhere was no 'immediate danger' of the conrainers being losr, ir was 'inevitable' that the assureds would lose the conrainers if rhey did nothing. 60 Eveleigh L], however, held that a stringenr rest of likelihood of covered loss was in principle inappropriate:"
Whether or not the assured can recover should depend upon the reasonableness of

his assessment of the situation and the action taken by him. It should not be
possible for insurers to be able to contend that, upon an ultimate investigation and analysis of the facts, a loss, while possible or even probable, was not 'very probable'. As the right to recover expenses is a corollary to the duty to act, in my opinion the assured should be entitled to recover all extraordinary expenses reasonably incurred by him where he can demonstrate that a prudent assured

fined to the aftermath of rhe peril. It makes no commercial sense to tempt an assured to sustain a recoverable loss rather than incur irrecoverable expenditure in endeavouring to avoid it. The question arises, however, of rhe degree of likelihood of loss by a covered peri! thar musr be present before expenditure incurred iu successfully averting it will be recoverable as sue and labour expenses.
24.31

person, mindful of an obligation to prevent a loss, would incur expense of an unusual kind.

It sufficed that there was'a risk' of an insured loss materializing, although the level of risk would affect the reasonableness of measures raken by the assured in response. 62
Undeniably commercially reasonable, the effect of the decision in Integrated 24.32 Container Services was to render insolvency of the lessee an insured peril, the assured being permitted indirectly to recover in respect of the consequences of that insolvency, arguably subverting the scope of the primary cover. The insurer agreed to cover damage to or loss of the containers, not the assured's costs of administering rhe leasing contract. It is also curious that expenditure incurred nor in response to a peril but in apprehension thereof is recoverable, whereas a loss of insured properry reasonably incurred under the same circumstances is not. It is well established in marine insurance law thar a loss from fear or in anticipation of an insured peril is not proximarely caused by that peril. 63 Admittedly, rhe sue and labour clause embodies a separate contracr'4 and the causarion rule might itself be questioned, but the distinction appears paradoxical.

In Integrated Container Servia Inc v British Traders Insurance Co Ltd, 58 a lessee of 1,016 containers became insolvent and the lessor incurred almost US$54,000 expenditure in tracing and recovering all but rwo of rhe containers. Insolvency of the lessee was not a covered peril under the assured lessor's all risks policy, but it entitled the lessor to resume possession of the containers. The containers were in the possession of port authorities and agents of the lessee. There was, accordingly, a danger of insured losses ensuing through the containers being sold in satisfaction of unpaid charges or appropriated as abandoned. It was accepted that no dury to sue and labour arose 'until the assured is faced by the incidence of a peril'.59 The insurers, however, argued inter alia that 'the risk of loss was too remote at the time the expense was incurred to warrant

78(1). Subject, of course, to the policy otherwise providing: Kuwait Airways . 55 Institute Time Clauses Hulls (1110/83), cl 13.6; (1111195), cl 11.6; Intetnatlonal Hull Clauses (01/11/03). cl9.5. " MIA 1906, s 78(1); Kimton v Empire Marine1murance Co (1866) LR 1 CP 535, 544-7. 57 North Star Shipping Ltd v Sphere Drakefmurance pk: (The North Star) [2004J EWHC 2457 (Comm), [2005J Lloyd's Rep IR 404. 58 [1984J I Lloyd's Rep 154. " ibid 249 per Buxton LJ.
54

MIA 1906,

Corp v Kuwait Insurance Co SAK(No 1) [19991 I Lloyd's Rep 803, 816.

50

61
62

64

ibid 161. ibid 158. Followed, Royal Boskalis Westminster NV v Mountain [1997] LRLR 523, 607. ibid. 63 See 9.46-9.54 above. Royal Roskalis Westminster NV v Mountain [1997] LRLR 523, 607.

758

759

Averting and Minimizing Loss

(10) Relationship between the Period of Cover and the Sue and

Sue and Labour Expenses

a factual proposition, avoid the loss cannot break the chain of causation' and (c) me~ures taken by the assured cannot benefit the insurer so that exp~nses thereby lllcurred cannot be for the insurer's account. For example, once it is too late for the assured ro adeem a rotalloss, it is ex hypothesi impossible in law to avoid the loss. It cannot then be reasonable to expect rhe assured to take any ~easures. even if they would, as a factual proposition, reduce the loss and any intervention on the part of rhe assured cannot, in default ofcontrary agreement, be at the insurer's expense. (11) Expenses Recoverable under a Reimbursement Undertaking The existence and precise extent of the assured's entitlement to indemnification 24.37 under a p~rticular sue and labour clause depends, naturally, upon the true interpretation of the clause and the policy in question. The usual reference to averting and minimizing a loss does not include ascertaining its existence ~r e~tent. 70 The SG policy sue and labour clause, referring to suing and labour~ng in connection with ships and goods, has been held inapplicable when in~orporated without modification into liabiliry insurance, denying the insured reimbursement of expenses incurred." The three-fourths collision liabiliry clause in the Institute and International hull clauses has been held ro be self-contained and independent of the remainder of the contract so that legal expenses incurred in denying liabiliry are recoverable only ro the extent that the collision liabiliry clause so provides and not under the sue and labour clause." This is now express in the sue and labour provisions of the Institute and International hull clauses." Moreover, as already seen, it is express or alternatively ImplIed In the absence of contrary intention that the expenses should have been incurred in order ro prevent a loss for which insurers would otherwise have been liable. 74
Th~ ~~ncept of sue and labour expense is broad enough ro embrace not only 24.38 lIabI1mes for. servIces but also payments by way of ransom and the relinquishing ofvaluable rIghts. In the latter context, however, the assured will suffer no loss if the agreement to abandon rights is unenforceable. In Royal Boskalis Westminster BVv M~untain,75 the assureds owned a fleet of dredgers contracted to a dredging project In Iraq. In response ro sanctions imposed by the United Nations on the Iraqi invasion of Kuwait, the Iraqi authorities seized properry including the

Labour Doctrine
24.33 Insurers are liable only in respect oflosses that occur during the period of cover. The question arises of the relationship between the duration of cover and the sue and labour doctrine. Three situations may be distinguished. 24.34 First, loss may occur after the period of cover has commenced bur it could have been avoided in whole or in parr by reasonable measures taken before inception of risk. Tbe insurer is not liable for the loss that could have been avoided because such loss is not proximately caused by an insured peril. Where, however, the assured does avoid loss by taking reasonable steps before inception of risk, expenses thereby incurred cannot be recoverable, despite the benefit to the insurer, since there is no basis for the obligation to reimburse sue and labour

expenses ro attach retrospectively.

24.35 Secondly, expenses may be incurred during the period of cover that avoid loss occurring once the policy has expired. The question here is whether the expenses were incurred for the benefit of the insurer. If the loss, although perfected after the expiry of tisk, would nevertheless be regarded as falling within the period of cover by reason of the grip of the peril doctrine,65 the expenses are recoverable. Moreover, while the grip of the peril doctrine renders insurers liable for total losses that mature after expiry of risk, the impact of the peril during the period of cover will often occasion an immediate partial loss for which insurers are liable and in respect of which the assured may legitimately sue and labour." An insurer is not, however, liable for expenses incurred/in avoiding loss that is not itself recoverable under the policy because it occurs after risk has expired, or indeed for any other reason." 24.36 Thirdly, expenses may be incutted after expiry of risk that avoid a loss caused by an insured peril. Although it has been said that such expenses are 'clearly within' a sue and labour clause,68 it is suggested that a distinction should be drawn according, again, ro whether the expenses inure ro the benefit of the insurer. Once insurance contract law considers the loss ro be final, so that a change of circumstance cannot alter the insurer's liability for that 10ss:69 (a) the sue and labour doctrine musr expire; (b) a failure ro take reasonable steps that would, as

6S

Or, possibly, the likelihood of a loss maturing that would fall within the policy by virtue of
70 Dixon v Whitworth (1879) 4 CPD 371; Irvin v Hine [19501 1 KB 555 571-2 ;; Cunard Steamship Co Ltd v Marten [190212 KB 624, affd [190312 51!. . 73 Xenos v Fox (1869) LR 4 CP 655. On recovery of costs, see 12.22 above.

the grip of the peril doctrine wo~ld be such as to render intervention by the assured reasonable, see 24.30-24.32 above. For discussion of the grip of the peril doctrine, see 21.22-21.28 above. 66 Integrated Container Services Inc v British Traders Insurance Co [1984] 1 Lloyd's Rep 154, 160, 162-3. 67 See 24.27 above. " [1984J 1 Lloyd's Rep 154, 162 per Dillon LJ. 69 For discussion of finality of losses, see 21.98ff above.

KB

Institute Time Clauses Hulls (1110/83), cl 13.2; (1 II 1/95), cl I1.2; International Hull Clauses (OIII 1/03), cl9.2. 74 See 24.27 above. 75 [1999) QB 674.

760

761

Averting and Minimizing Loss

dredgers. In order to obtain the release of the vessels, the assureds concluded a 'finalisation agreement', under which they agreed to relinquish all claims under the dredging contracr and return a sum held in the Netherlands by way of security for payments due under the contract. Once the agreement had been implemented, the fleet was allowed ro leave Iraq. The assureds then claimed the value of the relinquished claims as sue and labour expenses. The Courr of Appeal held thar a ransom payment was in principle recoverable as a sue and labour expense, rejecting the argument that such an expense had ro be capable of assessment on a quantum meruit basis. 76 It was also irrelevant whether the ranSom rook the form of a payment or the relinquishing of a valuable right. However, the assureds were unable to show thar the finalization agreement occasioned them a loss. The dredging contract provided for disputes to be tesolved by arbitration in Paris and the assureds could pursue their claims by arbitration after the finalization agreement just as they could have done beforehand. The finalization agreement caused the assureds a loss only if the agreement ro relinquish claims would be upheld in such arbitration. On the facts, no arbitral tribunal would uphold the agreement because of the duress under which it had been concluded and because it was illegal in circumventing the sanctions legislation.
24.39 The reimbursement of expenses under the sue and labour doctrine is confined to expenses reasonably incurred, reasonableness necessarily being a quesrion of fact that is judged by reference ro the exigencies of the situarion. Where the expenditure incurred by rhe assured exceeds that which would have been reasonable the assured is limited ro the latrer figure. Lee v Southern Insurance Co" concer~ed a claim against freight underwriters in respect of 213, being"the costs incurred in forwarding a cargo of palm oil by rail to its destination, the carrying vessel having stranded. However, although it had been necessary to unload rhe cargo, it could reasonably have been stored locally and, once the vessel had been repaired, re-shipped at an extra cost of only 70. Only this laner sum was recoverable under rhe sue and labour clause. 24.40 The indemnity payable under the sue and labour clause in the Institute and International hull clauses is subject to the deductible incorporated therein, unless the sue and labour claim is associated with a claim for an actual or constructive total loss of the vessel arising from the same accident or occurrence. 78

General Average

B. General Average 79
The essential concept of general average is both ancient and simple, namely that 24.41 loss sustained or expenditure incurred in time of peril and fot the common good of all interests embarked upon a common maritime adventure should be shared between those interests in proportion according ro the benefit derived from that loss or expenditure. The law of general average developed on a national basis, with resulting 24.42 divergences in the losses and expenses that were admissible in general average. A uniform approach was promoted through the promulgation by the Comite Maritime International of a set of rules, known as the York-Antwerp Rules. These rules apply by virrue of incorporation into a contract for the carriage of goods and have gained widespread acceptance. They are revised periodically, with the degree of uniformity that operates in practice being diminished by the possibility of contractual incorporation of any revision. Since the Rules are creatures of contract, it is not possible to repeal an earlier revision. After their initial promulgation in 1877,80 the Rules were revised in 1890, 1924, 1950, 1974,1994, and most recently in 2004. Modern marine policies refer currently to either the 1974 or 1994 revisions. Although general average does not form part of marine insurance law, section 66 24.43 of the Marine Insurance Act 1906 codifies basic concepts of general average for the purposes of English law. It does so in terms that do not differ materially from the York-Antwerp Rules. The section also considers issues relating ro the insurance of general average liabilities. (1) General Average Losses and Liabilities Rule A of the York-Antwerp Rules 1974 and 1994 provides as follows:" 'There 24.44 is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred in time for the common safety for the purpose of preserving from peril the property involved in
a common maritime adventure.}

A loss directly consequential on a general average act, whether in the form of 24.45 expenditure or sacrifice, is termed a general average loss.82 The party on whom such a loss falls is entitled ro general average contribution from all other parries

76 Not following the dictum of Lord Cairns LC in- Aitchison v Lohre (1879) 4 App Cas 755.766. 77 (1870) LR 5 CP 397. See also Wiuon Bros Bobbin Co Ltd v Green [191711 KB 860; Promet Engineering (Singapore) Pte Ltd v Sturge (The Nukila) [19961 1 Lloyd's Rep 85. 78 Institute Time Clauses Hulls (1/10183), ell 132, 12.1: (1111195), ell 11.2, 12.1: International Hull Clauses (01111103), ell 9.2, 15.3.

79 For discussion of the law of general average, see Lowndes and Rudo[f, General Average & }Ork Antwerp Rules D Wilson and J Cooke (eds) (12th edn, 1997); F Rose, Genera/Average: Law & Practice (2nd edn, 2005); Arnauld, Law ofMarine Insurance & Average Sir Michael MustiIl and ) Gilman (eds) (16th edn, 1981) Ch 26; D O'May, Marine Imurance Law 6- Policy (l993) Ch 12. so Succeeding the York Rules of 1864. 81 In similar terms, see MIA 1906, S 66(2). 82 Yotk-Antwerp Rules 1974 and 1994. rule C; MIA 1906, s 66(1).

762

763

Averting and Minimizing Loss

interesred in rhe advenrure and thar have benefired from the general average loss." Contribution is not, however, recoverable where the contract of affreight84 ment excludes liability for general average contribution or where the general 85 average loss arose by reason of the acrionable fault of the claimant. Contribution is assessed on the basis of the value of rhe Interest ar the time and place where the common matitime adventure ends." All interests benefired by the general average loss contribure on a proportionate basis,87 with the right to contribution secured by a lien over the property. This hen IS usually hfted 10 exchange for aI ternative secutity.

General Average
contract of carriage is not frustrared. It is also usual ro include a Bigham clause, whereby rhe cargQ owners' potential liability under the non-separation agreement is limited to rhe cost rhey would have incurred in forwarding the goods to the port of desrinarion had they received rhe goods back from the carrier at rhe port of refuge. So widespread was the practice rhat a non-separarion agreement wirh a Bigham clause was incorporated into Rule G of the York-Antwerp Rules 1994. (2) Insurance of General Average Losses and Liabilities The liability of an insurer for general average does not depend on an express 24.48 insuring clause in rhe policy. Instead, a rule of underlying law renders insurers liable for general average provided the general average loss was caused by a peril insured under the policy. The policy may derogate from rhe underlying law by granting cover thar is more extensive or more limired or by excluding general average cover a1together. 89 In rhe Institure and Internarional clauses, general average is usually the subject of express provision, but not always. The war and strikes clauses for hulls and freighr do not provide directly rhat general average is covered," but such is rhe effect of rhe underlying law. Unless rhe policy orherwise provides, where the loss rakes the form of a general 24.49 average expenditure, rhe party primarily liable can recover against the insurer only in respecr of its net loss after contribution. Where, however, rhe loss rakes rhe form of a general average sacrifice, the parry primarily liable can claim rhe entirety of rhe loss direcrly from rhe insurer. 91 Although rhe doctrine ofsubrogation entitles rhe insurer subsequently to exercise rhe assured's contribution rights, rhe risk ofa conrribution claim failing because of, for example, an actionable fault defence or insolvency of a contributing party is thereby placed on the insurer in the conrext of general average sacrifice. This position is retained by the Institure and International clauses, by rhe hull clauses rhrough express sripularion," and by the cargo clauses through not providing to the contrary." Where a defence of actionable faulr in rhe form of a breach of contract causes a shortfall in recovery of contriburion to general average expenditure, rhe shortfall may be recoverable under P&I cover.

88

24.46 The impact of a peril upon the vessel may be to require a stay iu a port of refuge for repairs. Such a delay may frustrate the contract ofcarriage b~t ~nly if it will destroy the commetcial purpose of the voyage and If the ca:r~er IS unable or unwilling to exercise a right of ttanshipment. Whether the anticipated length of any delay is sufficient to frustrate the contract of carnage may be a matrer of some uncertainty. Where the contract is frustrated or the carrier exercises a transhipment right, it is clear that the common maritime adventure in principle terminates as far as the vessel is concerned on discharge of the cargo at the port of refuge. Consequenrly, cargo escapes from liability t~ c~ntribute t~wards expenses subsequently incurred by the vessel and 10 pnnclple admissible 10 general average even where, in case of transhipment, the. carrier incurs increased cost in performing the contract. Where the contract IS not frustrated Ot the correct analysis is unclear, a carrier will be deterred from agreeing to forwarding by other means because of the resulrant reducrion in general average expenses. 24.47 In order to allow forwarding of cargo withour prejudicing the carrier, ir has long been customaty to conclude a 'non-separation agreemenr' whereby cargo agrees to contribure in general average as if the cargo had remained at d,e port of refuge while repairs to the original carrying vessel were carried out and rhen completed the voyage in rhat vessel. This is subject ro the proviso that the

83
&4

York.Antwerp Rules 1974, rule B; 1994, rule A; MIA 1906, s 66(1), (3). Clear wording is needed; Burton v English (1883) 12 QBD 218; Crooks v Allan (1879) 5

85 Strang v Scott (1889) 14 App Cas 601. In practice, t?e scope for resisting ~ claim [or contribution on the ground of actionable fault is severely restr1~ted by reason of the wlde~rangtng defences available to sea carriers under the Hague and Hague-Vlsby Rules, although such defences are not available where the loss was caused by unseaworthiness of the vessel that is attributable to the lack of due diligence on the part of the carrier. 86 York~Antwerp Rules 1974 ~nd 1994, rule <?; rule 87 Including any interest that consists of nothmg but a right to claim contnbutlon: Republtc of India v India Steamship Co Ltd (No 2) (The Indian Endurance and The Indian Grace) [1998] AC 878,886. .' 88 Castle Insurance Co Ltd v Hong Kong Islands Shipping Co Ltd (The Potoi Chau) [1984] AC 226,236,

QBD38.

XV!I.

..

Brandeis, Goldschmidt 6- Co v Economic Insurance Co Ltd(1922) 11 LlLRep 42, 43. Although they do so indicate indirectly by excluding expenses arising from delay unless such expenses are admissible in general average: Institute War and Strikes Clauses HuUs~Time (1110183), d 4.4; (1111195), d 5.5. " MIA 1906, s 66(4). 92 Institute Time Clause, Hulls (111 0/83), cl 11.1; (111 1195), d 10.1; International Hull Clauses (01111103), d 8.1. 93 eg Institute Cargo Clauses (A), cl 2.
89

90

764

765

Averting and Minimizing Loss

24.50 Subject to contrary stipulation, a marine policy indemnifies against liabiliry for
general average contribution.
94

General Average
may not be recoverable in full because they exceed the limit of the Bigham clause. This sum that reverts to the account of the vessel is termed the 'Bigham excess amount' or simply the 'Bigham excess'. Although it.exceeds the vessel's rateable proportion of general average loss, a Bigham excess is recoverable in full under a hull policy. The limitation in section 66(4) of the Marine Insurance Act 1906 of an insurer's liability for general average expenditure to the assured's 'proportion' of the loss is not to be construed as referring to a rateable proportion. 101 Under rule C of the York-Anrwerp Rules 1994, expenses incurred in respect of 24.54 damage to the environment or in consequence of the escape or release of pollutant substances from rhe property involved in the common adventure are not, as a general proposition, admissible in general average. By virtue of rule XI(d),
however, an exception is made in respect of certain expenses incurred in prevent-

There is no contrary stipulation in the Institute

and International clauses.

24.51

As noted above, general average may be adjusted in accordance with a revision

of the York-Anrwerp Rules or in accordance with domestic law. Under the Institute .hull and freight clauses and the International hull clauses, cover is granted for general average adjusted in accordance with the York-Anrwerp Rules if so provided in the contract of affreightment, and in such a case in accordance with whichever revision of the Rules is there specified, or, in default of such provision, according to the law and practice at rhe place where the common matitime adventure ends ro the exclusion of any special terms relating to general average in the contract of affreightment." Under the Insritute cargo clauses, adjustment is according to the contract of affreightment, including any special terms, and/or the governing law and practice."

24.52 Except where the policy otherwise provides, the insurer's liabiliry in respect of either a general average loss or contribution is confined to where the loss was
incurred in order to avoid, or in connection with avoiding, an insured peril.
97

This limitation is maintained by the Institute and International hull clauses and the Institute freight clauses." However, the Institute cargo clauses render the insuter liable for general average 'incurred to avoid or in connection with the avoidance ofloss from any cause except those excluded' in the insurance. 99 The same limitation is express in the Institute war clauses and strikes clauses for cargo,'00 but not in the Institute Cargo Clauses (A), (B), and (C). In the context of the Cargo Clauses (A), the provision of covet against all risks not expressly excluded means that clause 2 does not alter the common law. In the context of the Cargo Clauses (B) and (C), in contrast, the effect ofclause 2 is to divorce the insurer's liability for general average from the covered perils. Even if the cause of the general average loss is not a covered peril, the insurer will be liable unless that cause is specifically excluded.
24.53 Where a non-separation agreement applies, either expressly agreed or by virtue of Rule G ofthe 1994 York-Anrwerp Rules, the expenses brought into general average by the agreement and prima ficie falling within cargo's rateable proportion

ing or minimizing damage to the environment. These must be incurred in connection with the entry into or stay ar a POrt of refuge or the handling of cargo whete the cosrs thereof ate admissible in genetal average Ot in connection wirh measures that would have qualified as salvage if undertaken by a party outside the common maririme adventure. The general average clauses of borh the 1995 Institute hull clauses and the International hull clauses contain an exclusion drafted in identical terms ro rule C of the York-Anrwerp Rules. '02 The International hull clauses, however, contain an exception to the exclusion fot expenses falling within rule XI, so that cover extends to all expenses admissible in general average under rhe 1994 Rules. '03 The 1995 Institute hull clauses contain no such exceprion. Under those clauses, an assured that wishes cover for rule XI(d) expenses must contract for the incorporation of rhe Institute General Average-Pollution Expenditure Clause-Hulls (1/11/95). The International Hull Clauses (01/11103) contain, in clause 40, an optional 24.55 general average absotption clause. The clause extends covet to the full amount of general average, salvage, and special charges 104 withour the assured needing to claim contribution from any orher party. This extended cover applies norwithstanding any defence available to a contribution claim. Moreover, rights of subrogation are waived except where the general average loss is occasioned by fault of the potential contributor.

" MIA 1906, s 66(5). 9S Institute Time Clauses Hulls (1/10/83), cl 11.2; 0/11/95), d 10.2; Institute Time Clauses Freight (1/8/89 and 1/11/95), d1l.2; International Hull Clauses (01111/03). d 8.2. S6 eg Institute Cargo Clauses (A), d 2. 97 MIA 1906, s 66(6); HarriSv Scaramanga (1872) LR 7 CP 481.
911

Institute Time Clauses Hulls (1/10/83), clll.4; (1/11/95), d 10.4; Institute Time Clauses eg Institute Cargo Clauses (A), d 2 . .

The Abt Rasha [2000J 2 Lloyd's Rep 575. Institute Time Clauses Hulls (1/11/95), cl 10.5.2; International Hull Clauses (01/11/03), d8.5.2. 10' ibid (01/11/03), d8.6.2.
101
102
104 These are charges incurred by the assured for the benefit of a particular interest in the adventure but for which the assured is not responsible under the contract of affreightment:

Freight (118/89 and 1111/95), d1l.3; 1nternationalHull Clauses (01111/03), d8.4.

99 100

Institute War Clauses (Cargo), el2; Institute Strikes Clauses (Cargo), el2.

International Hull Clauses (01111103). d40.10.

766

767

Averting and Minimizing Loss

Salvage
The concern to protect the environment is further reflected in the regime of 24.59 special compensation introduced by Article 14 of the Convention, designed to prevent salvors from being deterted from intervening where thete is a threat to the environment but the vessel and its cargo are in such a state of jeopardy that the salvor risks receiving little or norhing under Article 13. In practice, however, Arricle 14 proved unsatisfactory to salvors in several respects. The response was the introduction of the SCOPIC clause,'10 the current revision of which is SCOPIC 2005. The incorporation ofSCOPIC into the salvage contract excludes any claim under Article 14 in favour of the compensation regime contained in SCOPIC itself Liability for compensation under Article 14 or SCOPIC rests exclusively with the owner of the salved vessel. "1 No liability attaches to cargo. SCOPIC provides for the appointment of representatives with the aim of 24.60 improving the flow of information to relevant parties. The Special Casualty Representative 112 (SCR) is appointed by the shipowners, with the primary obligation to assist the salvage operation and protect the environment. The SCR is entitled to be kept fully informed regarding the salvage operation and disseminates information regarding the operation together with comments, where appropriate, to interested parties, including the owners, the P&I club, the leading hull underwriter and cargo insurers. '13 In addition, the hull underwriter, or the leading hull underwriter on a subscription risk, can appoint a Special Hull Representative and one cargo owner or underwriter can appoint a Special Cargo Representative in order to receive and transmit information. 114 Life salvage presents a difficulty for international salvage law that has yet to be 24.61 fully resolved. The International Convention on Salvage 1989 provides that a life salvor has no claim against the persons whose lives are saved." s Where,
however, a salvor succeeds in saving property so as to earn an award under

C. Salvage 105
24.56 Maritime law traditionally and understandably looks with benevolence and '1 . favour upon a person wh 0 vo 1untan y 106 mtervenes to 1 d aSSlS t anee to propen erty in danger at sea. 107 Provided such salvage services are successful, the salvor is entitled to a generous reward. The modern law, moreover, recognizes an entitlement of the salvor to (special compensation' in certain circumstances where an attempt to save property has proved unsuccessful or met with limited success. An award may also be made for, or may reflect, assistance in the saving of human life, known as 'life salvage'. 24.57 A right to a salvage award or to special compensation does not depend on contract. It depends solely on the rendering of services under appropriate circumstances and arises by way of maritime law. Nevertheless, salvage is commonly undertaken on a contractual basis, most notably using the Lloyd's Standard Form of Salvage Agreement (known as 'LOF', the current revision

being LOF 2000).

(1) Salvors' Remuneration

24.58 A salvor's entitlement to a reward for its services, whether under general maritime law or conrract, is traditionally contingent upon success. A salvor's reward is taken out of the value preserved by the salvor's services and secured by a lien over the saved property. A salvor that endeavours to save property but fails receives nothing, a principle traditionally encapsulated in the phrase 'no cureno pay'. In return, a salvor is rewarded generously for a successful interventipn, . ., (with a view to encouragmg salvage operatiOns. 108 Th e reward' fi xe d .t aki ng IS into account a range of factors listed in Article 13(1) of the International Convention on Salvage 1989. These include factors traditionally taken into account relating to the equipment used, the services rendered, and the results of the services, and a new factor, namely 'the skill and efforrs of the salvors in preventing or minimising damage to the environment'. Each element of salved property contributes towards the salvage award in proportion according to its salved value,'09 namely its value at the time the salvage services cease.

Article 13 of the Salvage Convention, that award may be enhanced to take into account 'skill and efforts of the salvors in salving ... life' .'16 Where two or more salvors participate in the same salvage operation, a salvor that rescues exclusively human life is entitled to a fair share of any salvage award or special compensation awarded to the other salvors. ll7 However, in a case of pure life salvage, in that no salvage award or special compensation is earned in a salvage operation, remuneration of the salvor is remitted by the Convention to
nationallaw. 118

105 For discussion, see Brice on Maritime Law of S,l/vage, J Reeder (cd) (4th edn, 2003) and F Rose, Kennedy and Rose, Law ofSalvage (6th edo, 2002). 106 A volunteer in this context is one who has no duty to assist or-who goes beyond any existing dUly. 107 Under the International Convention on Salvage 1989, the scope of salvage is prima facie extended to all waters but subject to reservation by individual states in cases of salvage on inland waters where either no vessel is involved or all vessels involved are of inland navigation: Arts 1(a), 30. The UK has made such a reservation: Merchant Shipping Act 1995, Sch/l1, Pt II, para 2. 108 International Convention on Salvage 1989, Art 13(1). 109 ibid Art 13(2).

'Special Compensation P&I Club' clause. International Convention on Salvage 1989, Art 14(1) ('entitled to special compensation from the owner of that vessel'); SCOPIC, para 14. 112 Formerly known as the Shipowner's Casualty Representative 113 SCOPIC, para 11, appendix B. 114 SCOPIC, para 12, appendix C. 11S International Convention on Salvage 1989, Art 16(1). 116 ibid Art 13(l)(e). '" ibid Att 16(2). '" ibid Att 16(1).
110 111

768

769

Averting and Minimizing Loss

(2) Insurance of Liability for Salvage Remuneration
24.62 Insurance covet fot liability fot the various types of salvage remuneration is divided between hull and catgo property insurers and P&I clubs.

Salvage
caused by insuted perils. 125 Insurets are liable for the full extent of any Article 13 award, notwithstanding that it might be inflated in accordance with Article 13(1)(b) ro take account of efforts ro prevent or minimize damage to the environment. The Institute cargo clauses address salvage chatges independently of suing and labouring but not salvage. '26 The Institute and International hull clauses and the Institute freight clauses all 24.66 provide that insurers ate not liable 'where the loss was not incurred to avoid or in connection with the avoidance of a peril insured under this insurance'.127 This is a causation requirement that the assured must prove. In The v"rgina (No 2),'28 a vessel insured under a policy incorporating the Institute Time Clauses (Hulls) (1110/83) developed a slight list that subsequently worsened, was abandoned by its crew, and was prevented from capsizing only by the intervention of salvors. The insurers denied liability fot the vessel's share of salvage liabilities on the ground that the salvage operations were not entered into to avoid a loss caused by a covered peril. The defence failed on the facts. The causation requirement was part of the definition of the cover for salvage liability and not an exclusion. Accordingly, the burden lay on the assured to prove that the salvage operations avoided a loss otherwise proximately caused by a covered peril. On the facts, howevet, the assured was able to discharge that burden. The intervention of the salVOtS prevented the v"rgina from sinking because of the concurrent proximate causes of the negligent operation of rhe hallast control system by the chief engineer and a fortuitous enrry of water. These were each recoverable under the policy, the former under the negligence provision of the Inchmaree clause and the latter as a peril of the sea.

(a) Article 13 salvage award 24.63 In Aitchison v Lohre,'19 the House of Lords held that liahility

to salvage under

maritime law was not recoverable under the suing and labouting clause. This clause was designed to encourage the assured to exert himself to avoid or minimize a peril and 'not ro provide an additional remedy for the recovery, by the assured, of indemnity for a loss which was, by the maritime law, a consequence of the peri!'.120 In consequence, section 65(1) of the Marine Insurance Act 1906 provides that, subject to contraty provision, 'salvage charges incurted in preventing a loss by perils insured against may be recovered as a loss bythose perils'. As section 65(2) makes clear, however, this section is not concerned with salvage charges voluntarily incurred pursuant to a contract with the salvor: 'Salvage charges' [for the purposes of section 65(1)J means the chatges tecovetable
under maritime law by a salvor independently ofcontract. They do not mclude the expenses of services in the nature of salvage rendered by the assured or his agents, or any person employed for hire by them) for the purpose of averting a peril insured against. Such expenses, where properly incurred, may be recovered as particular charges or as a general average loss, according to the circumstances under which they were incurred.

24.64 Consequently, unless the policy otherwise provides, an Article 13 salvage award at common law is considered to be a loss caused by the peril that created the danget necessitating the salvage services. Whether it is recoverable depends~on whether that peril is a peril insured against under the policy. It is not recoverable under a sue and labour clause. '21 An Article 13 salvage award pursuant ro a
salvage contract, in contrast, may constitute a sue and labour expense depending

(b) Special compensation

The 1995 Institute hull clauses and the International hull clauses exclude 24.67 liability fot 'special compensation payable to a salvor under Article 14 of the Intetllational Convention on Salvage, 1989 or under any other provision in any
statute, rule,

upon whether it qualifies as a genetal average loss. That depends on the applicable revision of the Yotk-Anrwerp Rules. Under the 1974 and 1994 revisions, an Article 13 salvage award is allowable in general average 122 and would not, thetefore, be recovetable under a sue and labour clause.'" Under the 2004 revision, howevet, it is excluded from general average124 and would, therefore, be recovetable under a sue and labour clause.
24.65 In practice, however, the Institute and International hull clauses and the Institute freight clauses provide cover in respect of the vessel's ptoportion of salvage and salvage charges separately from suing and labouring expenses and loss

law or contract which is similar in substance'. 129 Special compensa-

tion is not admissible in general average. 130 Instead, liability for special compen-

125 Institute Time Clauses Hulls (1110/83), ell!; (1/11/95), d 10; International Hull Clauses (01111/03), d 8; Institute Time Clauses Freight (1/8/89), d 11. Although the exclusion of salvage from the sue and labour clause does not catch contractual salvage where general average is adjusted

'" (1879) 4 App Cas 755, rvsg (1878) 3QBD 558. 120 ibid 765 per Lord Blackbum. '" MIA 1906, s 78(2). '" York-Antwetp Rules 1974 and 1994, r VI. m MIA 1906,,78(2). '24 York-Antwetp Rules 2004, r VI.

according to the York~Antwerp Rules 2004. 126 eg Institute Cargo Clauses (A), cl 2. m Institute Time Clauses Hulls (1110/83), el 11.4; (1111/95), elIOA; International Hull Clauses (01111/03), el8.4; Institute Time Clauses Fteight (1/8/89), d 11.3. 128 Seashore Marine SA v Phoenix Assurance pic (The Vergina) (No 2) [200112 Lloyd's Rep 698. 129 Institute Time Clauses Hulls (1/11/95), d 10.5.1; International Hull Clauses (0 llll/03), el8.5.I; SCOPIC, para 14. 130 Yotk-Antwetp Rules 1974, and 2004, t VI; SCOPIC, para 14.

770

771

Averting and Minimizing Loss

sation, whether under Article 14 of the 1989 Convention or SCOPIC, IS covered by P&I clubs.
24.68 Responsibility fot paying the SCR's fees and expenses lies in principle with rhe shipowners.'" However, recognizing the value of rhe information obtained through the SCR, a non-legally binding code of practice between huH underwriters in London and the International Group of P&I Clubs provides for reimbursement of those fees in equal proportions between the vessel's hull undetwriters and the vessel's P&I club.'" Special representatives ate appointed ' at t h e so1 expense 0 fh e appOIntor. 133 e t

Under-insurance
(1) Sue and Labour As a matter of common law, the principle of average applies to sue and labour 24.71 expenses in cases of under-insurance. To the extent of under-insurance, suing and labouring cannot benefit the insurer, with the result that liability is apportioned between assured and insurer in accordance with their respective interests at stake at the time the expense was incurred. 137 Under the Institure hull clauses, the indemnity for sue and labour expenses is 24.72 proportionately reduced where the value insured under the policy is less than the agreed value or, if higher, the sound value of the vessel at the time of the occurrence giving rise to the expenditure. A different rule applies, however, where insurers admit liability for a total loss and insured property is recovered. In such a case, the reduction applies only to the extent, if any, by which the suing and labouring expenses exceed the value of the recovered property.138 No provision for reduction is included in the sue and labour clause in the International hull clauses or the duty of the assured clause in the Institute cargo clauses. The common law would, therefore, appear to apply.13' (2) General Average and Salvage The measure of indemnity for a general average loss, whether in the form of a 24.73 sacrifice or the incurring of expenditure, falls to be proportionately reduced in accordance with the principle of average where the subject-matter of the policy is insured for less than its agreed or insurable value. With respect to cover for general average contribution or salvage charges, section 73 of the Marine Insurance Act 1906 provides for a proportionate reduction in indemnity where the subject-matter insured is not covered for its full contributory value. In Balmoral Steamship Co Ltd v Marten,140 a vessel wirh an actual value of 40,000 was insured under a valued policy with an agreed value of 33,000. The insurers argued successfully thar rheir liability in respect of the vessel's contriburion in general average and salvage should be limited to such proportion of the adjusted contribution as the agreed value bore to the rrue value. 14 ' While section 73 does not apply to contractual salvage that is not admissible in general average, there seems no reason to adopt a different approach.

(c) Life salvage

24.69 P&I clubs provide covet for awards made by way of life salvage, bur only if and to the extent that such sums are not recoverable under hull or cargo insurance. Liability for pure life salvage is not recoverable under a hull or cargo policy.'34 Liability for an award under Article 13 of the International Convention on Salvage 1989 enhanced to reBect the saving of human life is recoverable in fall under a hull or cargo policy; there is no apportionment between hull insurers

and the P&I club.'"

D. Under-insurance
24.70 Marine insurance adopts the principle of average, whereby the assured is considered, subject to contrary intention, to be its own insurer for the extent to which the subject-matter of the policy is insured for less than its agreed or insurable value and the measure of indemnity recoverable under the policy is proportionately reduced.'36 The principle does not apply to liability insurance unless the amount for which the subject-matter is insured under the policy, whether that sum is fixed as an agreed value, insurable value, or lesser sum insured, differs from the value of rhe subject-matter that is employed for the purposes of determining the liability. This may occur in the context of general average and salvage. Under-insurance may also affect cover for sue and labour

expenses.

131

132

SCOPIC, appendix B, para 7. Code of Practice Between International Group of P&I Clubs and London Property

Underwriters Regarding the Payment of the Fees and Expenses of the SCR under SCOPIC.

SCOPIC, para 12. Grand Union (Shipping) Ltd v London Steamship Owners Mutual Insurance Association Ltd (The Bo,worth (No 3)) [1962J I Lloyd's Rep 483, 491. 135 ibid. See also Nourse v Liverpool Sailing S'hip Owners' Mutual Protection & Indemnity A<sociation [1896J 2 QB 16.
B3 134 136

137 KuwaitAirways Corp v Kuwait 1muran,e Co W(No I) [1996J I Lloyd's Rep 664, 6907, [1997J 2 Lloyd's Rep 687, 697; Royal Bo,kalis Westmimter NV v Mountain [1999J QB 674, 738. Likewise under the Lloyd's SG policy: Cunard Steamship Co Ltd v Marten [1902J 2 KB 624, 629. 138 Insrirute Time Clauses Hulls (1/10/83), cl13A; (111 1195), cilIA.

139 Conttast the position in general average and salvage under the International Hull Clauses (01/11/03), where it is specifically stated that there is to be no reduction in case of under~ insurance, see 24.74 below.

'" [19021 AC 511.

141

See 23.49-23.51 above.

Note that the contributory values in general average and salvage may not be the same.

772

773

Averting and Minimizing Loss

24.74 The principle of proportionate teduction by teason of undet-insutance applies

to covet fot general avetage, salvage chatges, and salvage under the Institute hull and fteight clauses by virtue of exptess stipulation'42 and under the Institute catgo clauses because thete is no contrary provision.'43 The International hull clauses, howevet, detogate ftom rhe common law and provide for no reduction in cases of under-insurance. 144
(3) Insurance Against a Shortfall by Reason of Under-insurance

25
SUBROGATION

24.75 A possible shottfall in indemnification of sue and labour expenses, general

avetage losses, and salvage liabilities by reason of under-insurance can be covered to some extent at least by insurance. Insurance incorporating the Insrirure Time Clause-Hulls Excess Liabilities (1/10/83 or 1/11/95)'45 pays rhe assuted such proportion of rhe shortfall as rhe amount insured under excess liabilities cover beats to the amount of the under-insurance.'" Alternatively, P&I cover extends to the full value of the shortfall occasioned by the conttibutory value exceeding the insured value undet the hull policy Ot, if highet, the proper value at which the vessel should have been insured.

142 Institute Time Clauses Hulls (1/10183), elII.!; (1/11/95), dID.!; Institute Time Clallses Freighr (1/8/89 and III 1/95), clll.l. 143 eg Institute Cargo Clauses (A), d 2. 144 International Hull Clauses (01111103), d 8.1. 145 Or the Institute Time Clauses-Hulls Disbursements and Increased Value (Total Loss only, including Excess l.iabilities) (1/10/83 and III 1/95).

A. The Doctrine of Subrogation (1): Access to the Assured's Rights Against Third Parties 25.09 (1) Actual payment a pre-requisite to operative subrogation rights 25.10 (2) Subrogation affords the insurer access to the assured's cause of action 25.12 (3) Control and conduct of claims against third parties 25.16 (4) Third party defences to subrogation actions 25.25 (5) Joint insumnce and co-insurance 25.27

(2) Benefits voluntarily conferred on the assured (3) Non-monetary benefits (4) Mixed purpose benefits (5) Settlements

25.38 25.42 25.43 25.44

C. The Distribution of Sums

Received or Recovered from Third Parties (I) A%ured fully compensated by the insurance indemnity (2) Assured not fully compensated in fact by the insurance indemnity D. The Nature of the Insurer's Restitution Rights Against the Assured

25.46 25.47
25.49

B.

146 Adopting the principle in Holmes 6- Sons Ltd v Merchants' Marine Insurance Co Ltd (The Neftli) [1919J 1 KB 383.

The Doctrine of Subrogation (2): Insurer's Entitlement to the Benefit of Diminutions

25.73

of Loss
(1) Proceeds of third party action

25.36 25.37

E.

by the assured

The Nature of the Assured's Restitution Rights Against the Insurer

25.80

The occurrence of a casualty may present an assured with more than one avenue 25.01 of recov~ty. Apart from a claim under its insurance policy, the assured may also have a nght to tecover compensation from a third parry legally responsible fot the casualty Ot a contractual right to claim an indemnity irrespective of legal tesponslbJllty for the casualry. This raises the prospect of double recovery by the assured. A nght to compensation Ot indemnity from a thitd parry is no barrier to an ~ssured tecovering against the insuret under the policy.' Similarly an assured s nght to recover as againsr a third party is in no way prejudiced by

, Cullen v Butler (1816) 5 M & S 461, 466; Dickenson v Jardine (1868) LR 3 CP 639' Collmgrtdge v Royal Exchange Assurance (1877) 3 QBD 173.

774

775

Subrogation
either a right of indemnity under an insurance policy" or actual payment by rhe insurer. 3 The prospect of double recovery arises also where the assured receIves some voluntary benefit that diminishes the insured loss.
25.02 Insurance law regards this possibility of double recovery by the assured with abhorence and responds througb the doctrine of subrogation, whereby the insurer is substituted, or 'subrogated' to the position of the assured.' The doctrine of subrogation has twO limbs. First, indemnification of an assured confers upon the insurer the right to be subrogated to the assured's rights against the third party. The law considers that primary responsibility for the assured's loss should fall with the third party. Where the assured elects to claIm agamst the insurer rather than the third party, subrogation gives effect to the secondary nature of the insurer's responsibility. 5 Moreover, assuming the assured, having been indemnified, to be disinclined to sue the third party, an absence of subrogation rights would confer upon the third party the benefit of an insurance contract that is res inter alios acta and without even the concomitant burden of

Subrogation
insurer, the net effect is pro tanto to reduce the insurer's liability. Where it accrues after indemnification, the insurer is entitled to the benefit. The unrestricted breadth of the doctrine of subrogation was stated by Brett LJ in 25.05 seminal terms in Castellain v Preston:'
The very foundation ... of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a
contract of indemnity, and of indemnity only, and that this contract means that

the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, Ot which will give to the assured mote than a full
indemnity, that proposition must certainly be wrong. .. . Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the undelwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way Qf condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been, diminished.

paying the premium.'

25.03 No distinction is drawn depending on whether the assured's rights against the third party arise by way of recourse for a legal wrong or by virtue of a contractual indemnity. 7 The only exception arises where the contractual indemnity is drafted so as to be on an equal footing with or secondary to any insurance. In such a case, the insurer's rights against the third party would lie in contribution

rather than subrogation. 8

25.04 The second limb of the doctrine of subrogation confers on the insurer an entitlement to benefits in any form whatsoever that accrue to the assured' in diminution of the insured loss to the extent that they represent doublerecovery. Whether such a benefit accrues to the assured before or after indemnification from the insurer, the insurer is substituted to the position of the assured and entitled to that benefit. Where the benefit accrues before indemnification by the

2 Bradbourn v Great western Railway (1874) LR 10 Ex 1; Parry v Cleaver [1970J AC 1; Eley v Bradflrd[1972J 1QB 155; The Yasin [197912 Lloyd's Rep 45. 3 Morley v Moore [1936J 2 KB 359 (even where the insurer has disclaimed any interest in pursuing subrogation rights); Hobbs v Marlowe [1978J AC 16, 37. 4 On subrogation generally, see R Derham, Subrogation in Insurance Law (1985); Lord Goff and GJones, The Law ofRestitution (6th edn, 2002) Ch 31. 5 Mason v Sainsbury (1782) 3 Dougl61; Caledonia North Sea Ltd v British Telecommunications plc[2002] UKHL 4, [200211 Lloyd's Rep 553. . ,,' 6 At [131. See also Yates v Whyte (1838) 4 Bing (NC) 272; Brtstol6- west ButldmgSomty v May May & Merrimans (No 2) [199811 WLR 336, 35 6., ' , 7 Caledonia North Sea Ltd v British Telecommunlcattons pic [2002] UKHL 4, [2002J I Lloyd s

The technical scope of the doctrine of subrogation came to the fore in Colonia 25.06 Versit'herung AG v Amoco Oil Co.'o The defendant sellers paid rhe assured buyer its full loss in respect of a contaminared cargo of naphrha. In return for rhe settlemenr payment, the assured assigned to the defendants its rights under a cargo policy and released irs claim against the defendants. The release stared that it did 'not affect the subrogation rights of rhe insurance underwriters of the Insurance, which such underwriters have or by virtue of any payments to any person, firm or corporation shall acquire'. The assignment of rights to the defendant excluded 'the insurance underwriter's subrogation rights, if any, as specified above'. The defendants sought to claim from the cargo insurers qua assignees. The insurers argued that the settlement payment discharged the insured loss and that they were entitled to the benefit of that discharge through the preserved subrogation tights. The defendants argued that the doctrine of 'subrogation', properly understood, was confined to substitution to the assured's causes of action against third parties and did not encompass the right to benefits (1883) II QBD 380, 386. See also Bowen LJ at 403, making it clear that should some [1997] 1 Lloyd's Rep 261.

Rep 553.

8 ibid paras 59, 92. The rights of the parties would then be resolved as In double Insurance, discussed in Ch 26 below.

,,

benefit in diminution ofloss arise that did not fall within the terms adopted by Brett LJ, the latter was not to be regarded as exhaustive and the issue ultimately was one ofsubstance rather than label.
10

776

777

Subrogation
received from rhird parries in diminurion of the loss. The Court of Appeal, following Castellain v Preston, held that the term 'subrogation' encompassed any way whatsoever in which the loss might be reduced. The defendants' argument could succeed only if the settlement payment was not made in diminution of the insured loss. This was not the case."
25.07 As stated in Caste/lain v Preston, the doctrine of subrogation derives from and

Access to the Assured's Rights Against Third Parties

assured's third party action is inherent in an insurance contract but contingent

upon payment by the insurer to the assured. This ptinciple was arriculated most effectively by McCardie J as follows: 14
.. . the principle of subrogation is ever a latent and inherent ingredient of the contract of indemnity, but . . . it does not become operative or enforceable until

teinforces the fundamental ptinciple of indemnity that undetpins and defines contracts of insurance. The indemnity principle applies to reinsurance as it does to primary insurance,12 but is inapplicable ro ppi policies because they are wagering contracts as opposed to contracts of indemnity. Accordingly, payment by an insuret of its debt undet a ppi policy does not entitle the insuret to exercise subrogation righrs."
25.08 This chapter considers the twO limbs of the docttine of subrogation before

actual payment be made by the insurer. It derives its life from the original contract. It gains its operative force from payment under that contract. Not till payment is
made does the equity. hitherto in suspense, grasp and operate upon the assured's choses in action. In my view the essence of the matter is that subrogation springs

not from payment only but from actual payment conjointly with the fact that it is made pursuant to the basic and original contract of indemnity.

turning to two questions common to both limbs: first, apporrionment of subrogation proceeds and benefitS received in diminution of loss as between assured and insuret and, secondly, whethet the insuret's right ro its share is personal Ot whether the insurer also enjoys a ptoprietary claim. Finally, the chapter considers the reciprocal question of the nature of the assured's rights to its share of the proceeds of a subrogation action.

The insurer must discharge its full liability under the policy arising out of 25.11 the casualty before being entitled ro subrogation. In Page v Scottish Insurance COrp,15 the insurer sought through subtogation to exetcise a right of set-off against the third party. A claim on the insurance arising out of the casualty was outstanding at the time of commencement of the subrogation proceedings, although it was subsequently settled by the insurer. This proved fatal, the Court of Appeal holding rhat the entitlement to subrogation was contingent upon full indemnification of all claims on the insurance atising out of the casualty. Sctutton LJ stated as follows:
I think the right to be subrogated to the rights of the assured does not pass to the underwriter until he has satisfied all the claims under the policy in respect of the particular subject-matter and that if you get one car, one accident, one policy, one premium, I do not think the underwriter can claim to be subrogated until he has

A. The Doctrine of Subrogation (1): Access to the Assured's Rights Against Third Parties
25.09 The docttine of subrogation permits the insurer ro access the assured's rights to

satisfied all the claims atising under that policy and paid for by that one ptemium
in respect of that one accident and that one car. 16

hold third parties tesponsible fot the insured loss. Its theoretical nature as an aspect of the indemnity ptinciple has alteady been noted. In practical terms, it affords the insuret an opportunity to recoup some or all of the indemnity paid out ro the assured. (1) Actual Payment a Pre-requisite to Operative Subrogation Rights
25.10 The doctrine ofsubrogation being concerned ro prevent a contract of indemnity

Subsequent satisfaction of the claim was irrelevant: at the time the insurer brought the subrogation action in the assured's name, it had no right so to do. Howevet, in the case of a valued policy, the conclusive nature of the valuation 17 means that payment of a sum equal to the agteed valuation entitles the insurer to subrogation notwithstanding that the assured's true loss might exceed the measure of indemnity."

yielding double recovery, it follows that the insurer's tight of subrogation to the
14 Edwards Uohn) & Co v Motor Union Insurance Co [1922] 2 KB 249, 254-5. See also Dickenson vJardine (1868) LR 3 CP 639; Simpson & Co v Thomson (1877) 3 App Cas 279, 284; Castellain v Preston (1883) II QBD 380, 389; MIA 1906, s 79. " (1929) 140 iT 571. " ibid 576. " MIA 1906, S 27(3). 18 Goole & Hull Steam lOwing Co Ltd v Ocean Marine Insurance Co Ltd [1928] 1 KB 589,

See further 25.39-25.40 below. 12 Assicurazioni Genemli di Trieste v Empress Assurance Corp Ltd [1907] 2 KB 184. 13 Edwards Uohn) & Co v Motor Union Insurance Co [1922] 2 KB 249. 'This equity [of subrogation] springs 1conceive solely from the fact that the ordinary and valid contract of marine insurance is a contract of indemnity only' (per McCardie Jat 253). Acceptance of payment under a ppi policy does not constitute an election by the assured to treat the policy as binding and prevent the assured from denying the insurer subrogation. The assure~ claims on the ground that the insurer has lost the wager and ought to pay, not that the policy is valid in law: ibid 258-9.
11

594--5. On the impact of an agreed value on the apportionment of subrogation recoveries as between assured and insurer, see 25.67-25.71 below.

778

779

Subrogation
(2) Subrogation Affords rhe Insurer Access to rhe Assured's Cause ofAction 25.12 The doctrine of subrogation vests no cause of action in the insurer. Instead, it permits the insurer to exercise the assured's rights against the responsible third party. The fundamental point that the action brought is that of the assured has a number of consequences. 25.13 The real claimants in Wilson v Raffilovich" were insurers who had paid on a total loss of cargo and who were suing the shipowner in the name of the assured firm, Raffalovich & Co ofOdessa. A first and then a further order for discovery" were made against the nominal claimants. In response to the second order, the insurers' solicitors deposed that the brothers Raffalovich were both abroad and would not give further discovery," that the insurers as the real claimants had done everything possible to comply with the discovery order, and that it was believed the brothers Raffalovich possessed no further documents of relevance. This stratagem failed. The Court of Appeal was adamant that the nominal claimants had to be treated as the real claimants and that compliance with the order for further discovery was mandatory. According to Brett LJ:
The undctwriters are, in the sense in which the phrase is always used, the real [claimants], that is, they are the persons instructing the solicitors, the persons paying for the action, the persons to benefit by the action, and the persons to lose by the action if it is lost; but in point of law they are not the [claimants], the [claimants] on the record being the only persons who can be recognised as

Access to the Assured's Rights Against Third Parties

leave to amend the writ and statement of claim by joining the assured to the proceedmgs faded because, by this stage, the assured's claim against the carriers was time barred under the Hague Rules. Similarly, dissolution of a corporate assu:ed prOVIdes a complete defence to the third party," although in such a case the msure: may apply for restoration of the assured company to the register under sectlOn 651 of the Companies Act 1985. The insurer may, however, take an assignment of the assured's cause of 25.15 action," in which case there vests in the insurer a right to sue the third party qua aSSIgnee. A statutory assignment" permits the action to be brought in the insurer's own name, without joining the assured as a party to the action. 29 An equitable assignee must join the assignor in the proceedings, but this is purely procedural and leave may be obtained to amend pleadings even after expIry of the limitation period. Thus, in The Aiolos,'o although the insurer's subrogation action in the assured's name failed because the assured's claim was time barred, leave was granted to amend the pleadings to join the assured qua assignor so as to permit the insurer to claim against the third party qua equitable assignee. (3) Control and Condnct of Claims against Third Parties Discharge by the insurer of its full liability to the assured under the policy in no 25.16 way prejudices the assured's right of action against the third party. However, the right to control that action (to be dominus litis) depends upon whether the indemnity received by the assured from the insurer compensates fully for the loss suffered. The action brought against the third party being that of the assured, unless the policy otherwise provides, the insurer is entitled to control thereof only if it has fully indemnified the assured in respect of all claims arising under the policy in respect of the casualty" and if such indemnity satisfies in full the assured's claim against the third party." Thus, where the assured is only partly insured, even after payment by the insurer the assured retains the right to control the litigation against the third party, although, where the shortfall results

[claimants]." 25.14 The nominal claimant must always be the assured." The insurer has no locus standi to sue in its own name and any action brought in the insurer's name will fail. The only possible claim is that of the assured and the only possible claimant is the assured. 24 Subrogation affects the control and conduct of the"litigation and the right to the fruits of the action, but it creates no new cause of action. In The Aiolos,25 cargo insurers paid on a short delivery and brought an action against the carriers 'in respect of righrs of subrogation' in their own name. A summons to strike out the proceedings succeeded because the insurers themselves had no claim against the carriers. The insurers' subsequent action for

:: Smith(MH) (Plant Hire) Ltd v DL Mainwaring [1986] 2 Lloyd's Rep 244. Re MtI!er, Gtbb 6- Co Ltd [1957) 1 WLR 703 (the claim form on its terms effected an
(1881) 7 QBD 553. 20 Known as disclosure under the Civil Procedure Rules. Theodore was travelling on the continent of Europe while Gregoire was an invalid and confined in an asylum in Paris. 22 (1881) 7 QBD 553, 558 per Brett LJ. Nevertheless, that the real claimant is a subrogated insurer may be taken into acc0l!,nt when deciding whether to order security for costs: Slazengers Ltd v Seaspeed Ferries International Ltd (The Seaspeed Dora) [1988J 1 WLR 221. 23 London Assurance Co v Sainsbury (1783) 3 Doug 245. " Simpson & Co 0 Thompson (1877) 3 ApI' Cas 279: Hobbs v Marlowe[1978J AC 16, 37; Sso Petroleum Co Ltd v Hall Russell & Co Ltd (The Esso Bernieia) [19891 AC 643: 25 Centrallnsurance Co Ltd v SeacalfShipping Corp (The Aiolos) [1983J 2 Lloyd's Rep 25.
19

21

assignment of the assured's rights). ~: O~e that.fulfi,ls the requirements laid down by the Law of Property Act 1925, S 136. . J<j~g v Vtctorza Insurance Co ft1 (1896) AC 250; Compania Columbiana de Seguros v Pacific NaVIgatIOn Co [196511 QB 101; Smith (MI-I) (Plant Hire) Ltdo DLMainwaring[1986] 2 Lloyds Rep 244. 30 Centrallmurance Co Ltd 0 SeacalfShipping Corp (The Aioks) [19831 2 Lloyd's Rep 25. 31 See above. 32 Commercitd Union Assurance Co v Lister (1874) LR 9 ChApp 483, 484; Globe 6- Rutgers Fire Insurance Co v Truedell (1927) 2 DLR 659, 669; Arthur Barnett Ltd v National Insurance Co of NewZealandLtd[I965J NZLR874, 885.

780

781

Subrogation
from a deductible, such a clause is likely to be construed as contractually subordinating the assured's interests to those of the insurer. 33
25.17 In the subscriprion marker, the exercise of rights to control a recovery action may give rise to dispute among the subscribing insurers. Consequently, clause 42.1.3 of the International Hull Clauses (01/1 I103) confers aurhority on the leading underwriter designated in the slip or policy to bind the following market with respect, inter alia, to all matters concerning the pursuit of recoveries. 25.18 Where the assured pursues its rights against the rhird party, the assured owes an equitable duty to the insurer to act in good faith to safeguard the benefits the insurer might obtain through subtogation. Even if the insurer has no right to be consulted regarding the conduct or settlement of the action, all steps taken, including the conclusion of any compromise, must be consistent with this equitable obligation. 34 Accordingly, the assured must sue for the entire loss, not merely such part of the loss that remains outstanding after payment by the insurer. 35 In West ofEngland Fire Insurance Co v Isaacs,36 a landlord covenanted to insure the demised premises against fire and expend any moneys received under the insurance on reinstatement of fire damage. A fire occurred as a result ofwhich the tenant had the choice of calling upon either the landlord under the covenant or upon his own insurer. Having chosen the latter course of action and the insurer having paid, the tenant then renounced his rights as against the landlord, thus destroying the insurer's subrogation rights. As a result, the insurer was held entitled to restitution ftom the assured of the indemnity paid. 25.19 Where the casualty occurs in the performance by the third party of a contractLlal obligation owed to the assured, liability may be excluded or limited by the te"ms of the contract. Since subrogation merely provides the insuret with aCCeSS to the assured's action, such exclusion or limitation is binding on the insurer. However, where the contract pre-dates conclusion of the insurance contract, agreement to terms prejudicial to the exercise of subrogation rights constitutes a material circumstance requiring disclosure in compliance with the pre-formation doctrine of utmost good faith." 25.20 It is Ul1clear whether the assured's equitable duty to safegnard the insurer's subrogation interest extends both to actions and omissions. The assured is

Access to the Assureds Rights Against Third Parties

clearly liable for improper compromise of an action, but can there be liability, for example, for failing to initiate proceedings within a limitation period? Depending upon the time available, the assured, it is suggested, need merely invite the insurer to pay the claim and initiate subrogation proceedings or alternatively initiate the litigation himself and then invite the insurer to pay and assume control of the litigation. 38 The matter is, however, often addressed expressly in modem marine policies. Thus, all Institute cargo clauses expressly impose upon the assured 'the duty ... to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised'." Moreover, clause 49.1 of the International Hull Clauses (0l/II/03), if incorporated, imposes the following more comprehensive obligations on the assured, designed to enhance the prospects of recovery from third parties:
The Assured shall, whether or not the Underwriters have paid a claim or agreed to pay a claim or potential claim under this insurance, take reasonable steps to 49.1.1 assess as soon as possible whether there are any prospects of a recovery from third parties in respect of matters giving rise to a claim or to a potential claim under this insurance 49.1.2 protect any claims against such third parties if necessary by the commencement of proceedings and the taking of appropriate steps to obtain security for the claim from third parties

49.1.3 keep the Leading Underwriter(s) and the appointed average adjuster (if
any) advised of the recovery prospects and any action taken against third parties

49.1.4 co-operare with the Leading Underwrirer(s) in the raking of such sreps as
may be reasonably required to pursue any claims against third parries.

Both the Institute cargo clauses and the International hull clauses are silent with 25.21 respect to the consequences of breach. The obligations imposed with respect to third party claims will not, therefore, be construed as conditions precedent and will rank as warranties, confining the insurer by way of remedies for breach to damages and set-olPO

38

See MacGillivray

On

Insurance Law N Legh-Jones, J Birds, and DOwen (eds) (10th edn,

2003) para 22-51.

39 Institute Cargo Clauses (A), (B), (C), cl 16.2; Institute War Clauses (Cargo) and Strikes Clauses (Cargo), cl 11.2. Such 'duty of assured' clauses are considered in more detail at 24.05, 24.07ff above. The underwriters accept an express correlative obligation to reimburse the assured for any charges properly and reasonably incurred in connection therewith. 111 default thereof, a correlative obligation will be implied: 24.25-24.26 above. 40 Using the term 'warranty' in the sense of the general law of contract and not in the sense of the promissory warranty of insurance contract law. For full discussion of the classification of terms relating to claims, see 22.12-22.24 above. The severable innominate term analysis of Alfred

33 See the dictum ofLord]auncey in Napier 6- Ettrick (Lord) v Hunter [1993J AC 713, 747 in the context of priority as regards money recovered from third parties, as to which see 25.56 below. 34 Raux v Salvador (1836) 3 Bing (NC) 266, 288-9; Commercial Union Assurance Co v Lister

(1874) LR 9 Ch App 483, 484; Saunders v Baring (1876) 34 LT(NS) 419; Dufturcet & Co v Bishop (1886) 18 QBD 373, 378-9.
35

Phoenix Assurance Co v Spooner(1905] 2 KB 753.

McAlpine pic v BAl (Run-Off) Ltd [2000J Lloyd's Rep IR 352 would have permitted tbe insurer to
reject the assured's claim ifit could prove that the breach occasioned it serious prejudice, but the possibility of such analysis was rejected in the absence of an appropriately drafted express term in Friends Provident Life & Pensions Ltd v Sirius International Insurance [2005] EWCA Civ 601,

" [189612 QB 377, affd [1897J 1 QB 226. 37 Tate 6' Sons v Hyslop (1885) 15 QBD 368, discussed at 4.73 above.

782

783

Subrogation
25.22

Access to the Assured's Rights Against Third Parties

proportion of the reasonable costs incurred by the assured under clause 49.1, quoted above, as rhe insured losses bear to the uninsured 10sses. 46 Whether interest may be claimed in a subrogation action was the question in 25.24 Cousins (H) & Co Ltd v D & C Carriers Ltd. 47 The pivotal issue was again held to be double recovery. If an assured already indemnified by the insurer could retain interest paid by the third party, then double recovety would ensue to the extent of the interest attributable to the period after receipt of the indemnity. The Court of Appeal held that such interest had ro be paid over ro the insurer and could, therefore, be claimed by an insurer exercising subrogation rights. (4) Third Party Defences to Subrogation Actions

If the assuted tefuses to lend its name willingly to subrogation ptoceedings, equity will so compel it on such terms as are just, typically upon rhe insurer fumishing an indemnity againsr costs." The assured's duty under the Insriture cargo clauses ro safeguard rhird party rights is accompanied by a matching undertaking by the underwritets to reimburse 'any charges properly and reasonably incurred' thereby." The International Hull Clauses (01/11/03) likewise provide for reimbutsement of the assured's 'reasonable costs'.43 Similarly, where an insurer conducts a subrogation action as dominus litis, it must indemnify the assured against costs accruing formally to the assured's name. 44 Where, however, the third party action is genuinely a joint enterprise, both assured and insurer having a financial interest in its outcome, liability for costs will be apportioned appropriately. assessed at 46 while in a lighterman's barge. Suing and labouring charges of 30 were incurred. At the assured's suggestion, the underwriters agreed ro an action against the lighterman. The action, brought by the assured, failed and COSts of 481 were incurred. The insured value of the goods was 184 while their sound artived value was 220. Walton] held that the underwriters' and assured's respective liability for cosrs depended upon the tetms of their agreement that the action be brought. In the absence of any express provision, it was to be inferred that they tacitly undettook to appottion liability in proportion ro their interests in the litigation. On the facts, the assured's interest represenred his share of the loss by virrue of the undervaluing of the goods, namely thirty-six 220ths of 46. The underwriters' interest represented the balance of the I()ss of 46 plus their sole liability for the suing and labouring charges. Similarly, under the International hull clauses, insurers undertake to pay the assl.\red such

25.23 In Duus Brown & Co v Binning," goods partly insured sustained damage

An insurer's subrogation action being the assured's action, albeit controlled by 25.25 the insurer, any limitations upon the assured's action equally bind the insurer. Simpson & Co v Thomson4' concerned a collision berween two ships owned by the assured. The underwriters, having paid in respect of one ship that was lost, claimed to rank paripassu with owners of cargo lost through the collision in the distriburion of funds paid inro court by the assured as owner of the vessel at fault. The claim failed, since subrogation involved the underwriters in exercising the assured's claim and it was legally impossible for rhe assured to sue himself. Similarly, subrogation is denied where the assured has contracted with the third party on terms that the assured will seek reimbursement from his insurer to the exclusion of the third party.4' In Canadian Transport Co Ltd v Court Line Ltd,50 a charterparty provided for the shipowners 'to give time charterers the benefit of their Protection and Indemnity Club Insurance as far as club rules allow'. The rules stated, however, that the club was not bound by any assignment of cover ro any extent whatever, thus saving the club's subrogation righrs against the charterers, which otherwise would have been denied.
The third party may not, however, seek to undermine the insurer's righr to 25.26 subrogation by contesting rhat the casualty in quesrion did nor fall within the rerms of the policy, rendering the insurer's indemnification of rhe assured a volunrary payment. Such an argument was rejected in King v Victoria Insurance Co Ltd. 51 Lord Haldane obsetved that in the absence of a policy no payment would have been made and that it would be 'extravagant' ro classify it as voluntaty and 'an excess of refinement' to deny it was a payment on the policy. 'To hold otherwise would convett tules of law framed for the purpose of checking

[2005J 2 All ER (Carom) 145: 22.24 above. In any event, the severable innominate term approach might have produced undesirable consequences. Where the third party claim will permit only partial recoupment, allowing the insurer to reject the entirety of the claim affords the insurer an unjustified windfall to the extent that the value of the claim exceeds the lost recoupment. It would also present difficulty in the cargo context where the obligation to preserve third parry claims is combined with a dury to sue and labour as two limbs of one 'Duty of the Assured' clause. It has never been suggested that the sue and labour clause should constitute anything more than a warranty.
41 john Edwards & Co v Motor Union Insurance Co (1922] 2 KB 249, 254; YOrkshire Insurance Co v NisbetShippiug Co Ltd[I962J 2 QB 330, 339; Monis v FordMotor Co Ltd[l97311 QB 792,

800-1. Permission to use the assured's name against an indemnity in respect of COSts may be conferred by an express subrogation clause in the policy. 42 See, eg Institute Cargo Clauses (A), cl 16. In Netherlands Insurance Co Est 1845 Ltd v Karl Lijungberg & Co AS (1986] 3 Alf'ER 767, the reimbursement obligation, absent from a policy which imposed a duty to preserve and exercise third party rights, was implied by the Privy Council. " International Hull Clauses (01/11/03), clI49.2-49.3. " Netherlands Insurance Co Est 1845 Ltd v KarlLijungberg & CoAB [19861 3 All ER 767. <5 (1906) 11 Com Cas 190.

International Hull Clauses (01111103), cl49.2. 47 [1971] 2 QB 230. (1877) 3 App Cas 279. 49 Thomas & Co v Brown (1899) 4 Com Cas 186; Mark Rowlands Ltd v Bernilnns Ltd[19861 QB 211. 50 [1940J AC 934. 51 [1896J AC 250.
46
48

784

785

Subrogation
speculations in law-suits into instruments for promoting law-suits which the
parties interested are wise enough to avoid

Access to the Assured's Rights Against Third Parties

negligence. For the insurers who had paid the principal to assert that they were now free to exercise rights of subrogation and thereby sue the party at fault would be to subject the co-assured to a liability for loss and damage caused by a peril insured for his benefit. As I said in Stone Vickers, it is riecessaly to imply a term into the policy of insurance to avoid this unsatisfactory possibility. The implication of such a term is needed to give effect to what must have been the mutual intention (on this hypothesis) of the principal assured and the insurers, as to the risks covered by the policy. On this basis the purported exercise by insurers of rights of subrogation against the co-assured would be in breach of such a term and would accordingly provide the co-assured with a defence to the subrogated claim ...

by agreement. '52

(5) Joint Insurance and Co-insurance

25.27 In cases of joint insurance, subrogation is never available. The unity of interest

insured under a joint policy means that there is no defendant to sue. 53 No such basic theoretical objection arises in cases of co-insurance. Nevertheless, the doctrine of subrogation has the potential to frustrate policies of co-insurance: if an insurer that has indemnified one co-assured (CI) is entitled to recoupment from another co-assured (C2), the result is that C2 ends up bearing a loss against which it is supposed to be protected by the policy. Thtee separate lines of legal reasoning have sought to explain how and to what extent rhe doctrine is
restricted in cases of co-insurance.

Circuity of action is relevant only in that bringing the subrogation action would break the implied term in the insurance contract so that the proceeds of rhe subrogation claim could be recovered as damages in an action for breach of the implied term. Two limits on an implied term excluding subrogation may be noted. First, 25.30 implicarion will occur only in the absence of contrary intention. Thus, if a composite policy contains a subrogation waiver clause, subrogation will remain available to the extent that it is not waived. 58 Secondly, the implied term is designed only to ensure that a co-assured does not end up indirectly liable for rhat which is supposed to be covered by the insurance. Thus, a co-assured that causes insured loss by conduct that would bar a claim cannot resist a subrogation action via an implied term designed to ensure that the contractual cover is not subverted. 59 Similarly, where the cover under the policy is not co-terminous, C2 will not be able to resist a subrogation acrion in respect of a loss that falls within crs cover but outside its own. This was the case in National Oi/well (UK) Ltd v Davy Offihore Ltd,'O where C2's cover terminated on delivery of a piece of equipment but the claim arose in respect of post-delivery 10ss.61 A further line of reasoning focuses on the relationship between the co-assureds 25.31 and enquires as to whethet they have agteed that, in the event of a certain loss, they will look only to the insutance fat teimbursement to the exclusion of pursuing any legal rights inter se. Of coutse, the mere existence of an insurance policy covering a loss does not of itself compromise any rights of the victim of the loss to pursue rights of recourse against the party responsible in law for the loss. But such rights of recourse can always be relinquished by agreement. Since

25.28 Initially, it was suggested by Lloyd J in twO first instance decisions that circuity

of action barred subrogation. 54 C2 could in turn call upon the insurer for reimbursement since the policy covered C2 against liability to CI. However, as Lloyd J realized, a difficulty emerges since policies of co-insurance, although designed to deal with liability, are often drafted as properry policies, and the circuiry result is not so apparent.
25.29 A different explanation was advanced in two further first instance decisions,

those of Colman J in Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd" and National Oilwell (UK) Ltd v Davy Offihore Ltd." Colman J agreed that an insurer could not in general exercise subrogation rights against a co-assured but preferred to invoke an implied term in the insurance contract, implied of nec~s sity to avoid frustration of the commercial purpose of the contract. In National Oi/wel~ Colman J explained as follows:"
The explanation for the insurers' inability to cause one co-assure;d [Q sue another co~assured is that in as much as the policy on goods covers all the 'assureds on an all

risks basis for loss and damage, even if caused by their own negligence, any attempt by an insurer after paying the claim ofone assured to exercise rights of subrogation against another would in effect involve the insurer seeking to reimburse a loss caused by a peril (1oss or damage even if caused by the assured's negligence) against

which he had insured for rhe benefir of the very party against whom he now sought
to exercise rights of subrogation. That parry could stand in the same position as the principal assured as regards a loss caused by his own breach of contract or

. _ - - - - - - - - - - - - - _ .._-52

ibid 255.

53

Commonwealth Comtruction Co Ltd v Imperial Oil Ltd (1976) 69 DLR (3d) 558, 561

At least, so far as the insurance contract is concerned. A further hurdle may still arise: see below. 59 'Samuel & Co Ltd v Dumas [19241 AC 431, 445: Nation'" Oilwe!l (UK) Ltd v Davy Offihore
58

(Supreme Court of Canada).

Ltd11993] 2 Lloyd's Rep 582 at 612.

ibid 615. See also Deepak fertilisers & Petrochemicals Corp v leI Chemicals & Porymers Ltd [1999] 1 Lloyd's Rep 387.
60
61

'" The Yasin [197912 Lloyd's Rep 45: Petrofina (UK) Ltd v Magnaload Ltd [1984] QB 127.
ss [1991] 2 Lloyd's Rep 288, rvsd on different grounds [199212 Lloyd's R~p 578. 56 [199312 Lloyd's Rep 582. 57 ibid 613-14.

786

787

Subrogation
an insurer can only exercise such rights as the victim has against the responsible party, if those rights have been waived, there is nothing for the insurer to
exerCIse.

Insurers Entitlement to the Benefit ofDiminutions ofLoss

25.32 In Mark Rowlands Ltd v Berni Inns Ltd," Kerr LJ held that a landlord's covenant

in a lease to insure against fire was to be construed as meaning that should the premises be damaged by fire, whether accidental or negligent, the landlord would look to the insurance for reimbursement to the exclusion of the tenant. The case is not, however, to be construed as holding that a covenant to insure against a particular loss amounts necessarily to an agreement to relinquish any legal rights against the other party to the contract in respect of the insured losses. In Surrey Heath Borough Council v Lovell Construction Ltd," Dillon LJ stated of Mark Rowlands as follows: 64
So
Elf

Co-operative Retail Services was appealed to the House of Lords." While it was 25.34 not necessary to decide the subrogation point, a majotity of the House of Lords expressed agreement with the views of the Court of Appeal. Clearly, therefore, reasoning based on circuity of action is no longer to be used. However, it was common ground in Co-operative Retail Services that a co-assured insured under the same policy against the same risk could not be sued by way of subrogation by the insurer. 58 Yet the approach based on the underlying contract will not necessarily deny subrogation to an insurer on a composite policy.
The difficulty with Co-operative Retail Services is that the emphasis placed on 25.35 Surrey Heath directs one to the underlying contract between the co-assureds. 'The contract' referred to by Dillon LJ is not the insurance contract, which is not surprising since, as already noted, Dillon LJ was not concerned with subrogation. It is, nevertheless, highly unlikely that the implied term approach of Colman J has been jettisoned along with the circuity of action reasoning of Lloyd J. The underlying relationship between co-assureds may provide no evidence of intent and it would be contrary to principle were the insurer's subrogation rights to depend on the underlying relationship to the exclusion of the terms of the insurance contract itself." The two approaches may, of course, co-exist. It may be that subrogation will be denied where either a term can be implied to that effect or alternatively on a true construction of the underlying contract it has been agreed that there shall be no rights of recourse against the co-assured responsible for the loss.

as covenants in the lease were concerned, which were the relevant con-

tractual provisions, the case affords no foundation whatsoever for any submission
that an insurance provision necessarily and

by rule of law overrides any other

contractual agreement between the parties. The effect of the contractual agreement must always be a matter of construction. People are free to contract as they like. It may be the true construction that a provision for insurance is to be taken as satisfYing or curtailing a contractual obligation, or it may be the true construction that a contractual obligation is to be backed by insurance with the result that the contractual obligation stands or is enforceable even if for some reason the insurance fails or proves inadequate.

25.33 It should be noted that the issue in Surrey Heath v Lovell was purely whether the existence of an insurance covenant denied recourse as between the co-assureds.

It was not a subrogation case, and the Court ofAppeal disregarded subrogation cases on co-insurance as irrelevant. The above extract from the judgment of Dillon LJ in Surrey Heath was, nevertheless, cited and relied upon in the Court of Appeal in the contribution case of Co-operative Retail Services Ltd v Taylor Young Partnership Ltd. 65 Brooke LJ cited all the earlier authorities and disapproved the reasoning of Lloyd J based on circuity of action. This reasoning
assumes that an insurer that exercises a subrogation action makes itself a direct

B. The Doctrine of Subrogation (2): Insurer's Entitlement to the Benefit of Diminutions of Loss
The indemnity principle prohibits double recovety in respect of all insured 25.36 loss. It follows that benefits received by the assured from third parties in diminution of the insured loss must be taken into account as between assured and
msurer.

party to a counter-action by the co-assured. But circuity of action:

.. . is an inappropriate plea if the insurer has provided a full indemnity to one co-assured because it will have discharged its liability under the policy in respect of the losses in question and a second co-assured cannot look to it to pay him those losses a second time. In my judgment it would be much safer to jettison the

(1) Proceeds of Third Party Action by the Assured

language of circuity of action and

to

address the question asked by Dillon LJ in

the Surrey Heath case: What does the contract provide?66

The assured's third party action is maintainable by the assured regardless of 25.37 whether the measure of indemnity payable under the insurance policy compensates fully for the loss suffered, although the assured will normally sue only in cases of a shortfall between the indemnity recoverable under the insurance and

" [1986J 1 QB 211. 63 (1990) 48 BLR 108. 64 ibid 121. 65 [2001J Lloyd's Rep IR 122 (Brooke L], Robert Walker and Peter Gibson L]] concurring). 66 ibid 137.

[20021 UKHL 17, [2002J Lloyd's Rep IR 555. 68 [2001J Lloyd's Rep IR 122, 127. Liability may certainly arise as between co-assureds: Yarm Road Ltd v Hewden TOwer Cranes Ltd 120021 EWHC 2265 (TCC), (2002) 85 Con LR 142.
67
69

788

789

Subrogation
the true loss. To the extent necessary to prevent double recovery by the assured, the insurer is entitled to the benefits of the action either through reduced exposure on the policy if it has not already indemnified the assured?O or through an entitlement to an appropriate part of the proceeds if it has. 71 The only question is whether the profit accruing to the assured through the exercise of its third party right is in diminution of the loss covered by the policy. Thus, a reinsurer is entitled to recoupment out of damages recovered against the assured by primary insurers in respect of fraudulent misrepresentation by employees of rhe assured that induced payment on the primary policies and triggered a claim on the reinsurance. It is irrelevant that the source of the damages is a personal tort committed by someone othet than the assured. They are received in diminution of the 10ss.72 A contrast should be drawn with, for example, damages for a libel published incidentally to, although arising out of, the loss." If a third parry libellously alleges a vessel to have been fraudulently scuttled by the assured, the hull insurer will not be enritled to the benefit of the assured's defamation action as the damages recovered go to compensaring for injury to the assured's reputation, and not in diminution of the loss sustained through the sinking of its ship. Similarly, a hull insurer is not entitled to be subrogated to the assured's rights regarding freight. 74 However, a CIF buyer that has been fully indemnified by insurers is entitled, in an action on their behalf against negligent carriers in respect of the lost goods, to recover as part of the damages advance freight included in the price paid and the loss indemnified. 75 Consistently with the allocation of liability for costs of subrogation actions, the assured in such a situation is permitted to deduct from the sums received expenses reasonably and ptoperly incurred in the recovery." (2) Benefits Voluntarily Conferred on the Assured
25.38 Particular difficulty has been occasioned by voluntary and allegedly voluntary benefits. In Randal v Cockran,77 insured properry having been seized by the Spanish, the assured who had been indemnified by his insurer received a voluntary payment from the King. The purpose behind this gift being to

. Insurers Entitlement to the Benefit ofDiminutions ofLoss

provide relief from the effects of the Spanish acts, it was held that entitlement ro the gift should lie with those who ultimately carried the burden of those acts. The insurers having satisfied the assured's loss, they had 'the plainest equity [of restitution] there could be'.78 A contrast may be drawn with Burnand v Rodocanachi Sons & Co," which concerned a valued policy on cargo destroyed by a Confederate cruiser. The insurer paid a sum equal to the agreed valuation on a total loss. This sum being less than the true value of the cargo, the balance was voluntarily paid by the United States government out of a compensation fund established by an Act of Congress. In contrast with the proclamation in Randa4 80 this Act excluded both compensation in respect of insured losses to the extent of the indemnity and also any claim for compensation by or on behalf of any insurer. The insurer's claim to this compensation" was rejected by the House of Lords. The money was paid in diminution of the loss not indemnified by the insurer and clearly with the intention of benefiting the assured to the exclusion of the insurer. In Caste/lain v Preston," however, a majority of the Court of Appeal placed a 25.39 different interpretation upon the decision in Burnand v Rodocanachi. The assured contracted to sell a house insured against fire. The house being damaged by fire before completion, the assured received an indemnity from the insurer and the purchase price, with no abatement in respect of the fire damage, from the purchaser. The question arose of whether this benefit of absence of abatement of the price should accrue to the insurer. Chitty J held in favour of the assured,83 on the basis that subrogation was confined to the assured's remedies against third parties and the right under the contract of sale to payment by the purchaser in no way represented a remedy for the loss. The Court ofAppeal was, therefore, faced with the question of whether diminution of the loss by payment pursuant to a contractual obligation accrued to the insurer. Holding that the insurer was entitled to the benefit of the price maintenance, the Court of Appeal emphasized the unfettered nature of the insurer's subrogation rights." Faced with a need to explain Burnand, Brett and Cotton LJJ concentrated upon 25.40 the notion of subrogation being confined to rights and emphasized the voluntary natute of the payment in Burnand According to this reasoning, gifts could never operate to diminish the loss and enure through subrogation to the benefit

70 Saunders v Baring (1876) 34 LT(NS) 419. See also the doctrine of ademption of loss at 21.99-21.107 above. 11 Row: v Salvador (1836) 3 Bing (NC) 266, 288. The distribution between assured and insurer of the proceeds of third party litigation is discussed at 25.46-25.72 below. 72 Assicurazioni Generali di Trieste v EmpressAssurance Corp Ltd [1907j 2 KB 814. 73 ibid 820. 74 Sea Insurance Co v Hadden (1884) 13 QBD 706. cf abandonment: 22.36 ff above. 75 DufiJUrcet eYCo v Bishop (1886) 18 QBD 373. 76 Hatch, Mansfield 6- Co Ltd v U7eingott (1906) 22 TLR 366; Assicurazioni Generali di 7neste v Empress Assurance Corp Ltd [1907] 2 KB 814. 77 (1748) 1 Yes Sen 98.

ibid per Lord Hardwicke LC. 79 (1882) 7 App Cas 333. The terms of which are set out ibid 337, n 3. 81 Under English law, an insurer having paid the agreed value under a valued policy is thereupon entitled to subrogation regardless of the measure of the actual loss: MIA 1906, s 79(1) (see further 25.67-25.71 below). 82 (1883) 11 QBD 380. 83 (1882) 8 QBD 613. 84 See 25.05 above.
78
80

790

791

Subrogation
of the insurer. In the only judgment to address Randal v Cockran, however, Bowen LJ adopted a different approach, focusing upon whether the intention of the donor was to benefit the assured personally or to benefit both assured and insurer. If the former, the payment would not be in diminution of the loss. Such also was the approach of the Court of Appeal, obiter, in the later case of Stearns v Village Main Reef Gold Mining Co. as It is suggested, therefore, that the statements of Brett and Cotton LJJ in Castellain v Preston, while understandable in the context of that case, should not be read as overruling Randal v Cockran. At most, given the unlikelihood of a voluntary payment to an assured being intended to benefit its insurer," voluntariness may give rise to a presumption against any such intention, rebuttable by proof that the donor's intention was to reduce the loss generally rather than benefit the assured personally.
25.41

, Insurers Entitlement to the Benefit ofDiminutions ofLoss

damage. In ignorance of the tenant's reinstatement obligation, the insurer paid but subsequently brought a successful restitution action against the landlord. (4) Mixed Purpose Benefits A benefit might be received by the assured that in part diminishes the insured 25.43 loss and in part is intended to benefit the assured personally. Where apportionment is possible, the insurer's entitlement will be confined to such benefit as diminishes the insured loss. Where, however, apportionment is nOt possible, the strength of the rule against double recovery dictates that the entirety of the benefit accrue to the insurer. In Horse, Carriage 6- General Insurance Co Ltd v Petch,90 the assured was killed and his car damaged in an accident for which a railway company was responsible. The deceased's executor accepted a single lump sum of 1 ,250 in full settlement of the claims against the railway company for death and damage to property. The claimant insurance company then sought restimtion of some 82 paid to the deceased's estate in respect of the car. Since it was impossible to apportion the money recovered between the death and ptoperty claims, it was presumed that the property action had been settled in full. The adoption of this presumption that a full 82 of the settlement went in diminution of the property loss served to guard against any possibility of double recovery. (5) Settlements Settlements potentially raise a number of the issues discussed in previous 25.44 paragraphs. Even where liability is unclear, a settlement may be agreed in part to preserve a valued trading relationship. To the extent that a third party payment to an assured is motivated by such extra-legal concerns, it may faitly be characterized as intended to benefit the assured to the exclusion of the insurer and not, therefore, paid in diminution of the insured loss. However, while the voluntary nature of a payment is a factor that may indicate an intention not to diminish insured loss, settlement documentation will refer to the release of any possible claim. Unless such language is to be rejected as contrary to an otherwise clearly proved donative intent, it must be fatal to voluntaty status. Moreover, unless the evidence reveals a reasonable basis for apportionment, the entirety of the payment will have to be presumed to be made in diminution of the loss. In Colonia Versicherung AG v Amoco Oil Co," the defendant head sellers, who 25.45 were responsible for the contamination ofa cargo of naphtha, settled the insured sub-sub-buyers' claim in full, took an assignment of the sub-sub-buyers' rights

Such a focus upon donative intent was confirmed and illustrated in Merrett v Capitol Indemnity Corp." The claimant underwriter obtained an arbitration
award against the defendant reinsurer on a number of reinsurance contracts.

The arbitrators found in favour of the claimant in the sum of approximately US$113,000, but then disallowed US$45,000 paid to the claimant by the claimant's btoker on the ground that this payment had pro tanto indemnified the claimant for his losses. However, the brokers had acred under no legal obligario n . They were actuated by a desire to retain the claimant's goodwill and paid the claimant in the expectation of reimbursement by the reinsurer. Holding that the claimant's claim for the part of the loss funded by the brokers should have been upheld, Steyn J rejected the argument that commercial motivation was compatible only with a desire to reduce loss.
The contracts of reinsurance are contracts of indemnity. The question is, therefore, whether the payment diminishes the loss, Not every gift to an assured by a broker diminishes his loss. It is a question of fact in each case whether a gift has or has not been paid in diminution of the loss, and if it is established that the payment was intended solely for the benefit of the assured, it has not been paid in diminution of the loss. In that event it must be disregarded in assessing the assured's recoverable 10ss.88

(3) Non-monetary Benefits

25.42 It is irrelevant whether the loss is diminished in money or in specie. In Darrell v

Tibbitts," a house was damaged by a gas explosion in circumstances where the local authority compensated the tenant who was contractually bound to reinstate the premises. Thelandlord claimed on his insurance in respect of the

85 (1905) 10 Com Cas 89. " [199111 Lloyd's Rep 169.

86

See Castellain v Preston (1883) 11 QBD 380, 404. " ibid 171. 89 (1880) 5 QBD 560.

90

(1917) 33 TLR 131.

" [1997/ 1 Lloyd's Rep 261.

792

793

Subrogation
under rhe cargo insurance, and soughr reimbursement from rhe insurers. While accepting that the relevant issue was the parries' intentions with respect to the payment, the sellers argued that theit settlement payment was by way of gift and was not in diminution of the loss, consequently leaving intact that loss and the right to indemnification under the policy. The insurers, however, successfully claimed a declaration of absence of liability to the defendants. Although there was no direct claim by the sub-sub-buyers against the head sellers and restrictive clauses in the chain of sale contracts might have limited the head sellers' contractual exposure to its immediate buyer, the settlement document on its terms addressed the resolution of disputes between the head sellers and the sub-subbuyers and provided for rhe release by the sub-sub-buyers of all possible claims against the head sellers. It was, therefore, a genuine commercial settlement of possible claims in respect of rhe insured loss and not an ex gratia payment. Moreover, the settlement document provided expressly for the preservation of the insurers' subrogation tights. These saving provisions made no sense if the settlement payment was intended to benefit the assured alone.

The Distribution OJ urns Recetved or Recoveredftom Third Parties ,.,s . . _

naval vessel. The insurer aid 72 app al d h . P ,000 and the assureds, with the insurer's rov , sue th e CanadIan government ror d amages. They recovered the value r ' I of th e vesse w en I t C d'Ian dollars, then worth 75,500. Before the . os In ana money was paId, however' th e poun d sterI'Ing was devalued rendering the sum 'd w h en pal worth. 125 ' 000 . The assureds accounted to the 'insurer for 72 000 b Ut t h e Iatter clalmed the b I ' . a ance. Th'Insurer lost. Regardless of any payment e b y t h e Insurer, the third" . . law and not J' ust in form that of pal ty actIOn remaInS In t h e assured and .the assured IS entttied to ltS fruits. Subrogation merely provides . , . . a IegaI.mech anlsm to ptevent t h ' . h e unjust ennchment that would flow from permItting t e. assured to retaIn an Ind ' under the, Insurance policy as ' . emnlty . weII as t h e frutts of third party l'" h ItJganon were such retention would amount to ' d ou bie recovety In no way d 'It transfer to the insurer the benefit of the I. .' oes th m party acnon. In this tespect, sub " . . roganon IS to be contrasted WIth assignment 0 f t h e actIOn to th e Insurer. AsSlgnment transfers the benefit of the action . ' . to t h e Insurer . Ing . . ' et:ntr 'It to retaIn the full measure of third party damages d recovere93 , IncludIng an Y surpIus over t h e IndemnIty paId by the insurer to the . . . assured . (2) Assured not Fully C d ' Facr by the Insurance Indemnity ompensate In Should rthe measure 0 f'Ind emnlty [;. to compensate the assured in full for the 25.49 . all I . . . . oss In lact sustaIned ' the questIon aflSes 0 f wh eth er the assured is entitled to such.part 0 f hh e third party d amages as IS requited to make good the shortfall in t " . pnonty to t e insurer's recoupment calm. The quesnon may be considered I' . f' . .. rom vanous perspectives . FItSt, t h ere IS t h e pnonty position of general prin. I Th' [; CIP e. 'bIIS hav~urs the assured. Secondly, where the shortfall results from a d d e uetl e, t e lllsurer has . . , Th' dl . pnonty as a matter 0 f generaI contractual interpretanon. tr .. 'In cases of un d er-msurance, manne lnsurance law displaces the y . . . . generaI posltJon In favour 0 f pro rata apportlonment. Fourthly there is the . . . ' IImItanOn on general princ'Ip1e t h at app I'les as a matter of insurance contract law ' . h In 11 cl Context of valued pol"lCles. FInaIIy, un d er t h e I nstiture and International t e h .
~ auses, pnority where the shortfall results from a deductible is the subject o express contractual provision.

C. The Distribution of Sums Received or Recovered

from Third Parties
25.46 Assuming that a subrogation action is successfully pursued or that some benefit in diminution ofloss is received from a thitd party, the question arises as to how the proceeds of the action or the benefit received should be divided between the assured and the insurer. In the following discussion, for simplicity, reference will generally be made to recoveries in legal action against third parties, whether brought by the assured for its own benefit or by the insurer by way of subrogation. However, the same concerns apply to other benefits received in diminution ofloss. (1) Assnred Fully Compensated by the Insurance Indemnity 25.47 Where the measure of indemnity under the insurance policy compensates the assured fully for the loss actually suffered, it is clear that all sums recovered from the third party diminish the loss suffered and the insurer is consequently entitled to this money. This entitlement is, however, limited to the amount of the insurees payment. 25.48 In Yorkshire Imurance Co v Nisbet Shipping Co Ltd," a vessel insured for 72,000 was rendered an actual total loss by a collision with and caused by a Canadian

(a) Generalprinciple

As a matter of general pnnclpIe, t h e case lOr the assured is simply that until it 25.50 . . r .
h as recovered Its loss in u th ere IS no d anger of the unjust enrichment through Ii 11 . . d oubi e tecovery. that the do' 0 f su brogation IS d eSlgned to prevent. To the . . . ctnne extent t h at the Indemnity un d er th e lnsurance contract is inadequate to meet .

92

[196212 QB 330.

93

Compania Columbiana de Seguros v Pacli c Navtgation CO [1965J 1 QB 101, 121. fi'

794

795

Subrogation
the full loss sustained, the assured should have priority with respect to the third patty ptOceeds.
25.51

The Distribution olSums Received or Recoveredftom Third Parties

an overpayment bur he is entitled to full payment before the subrogation claimant is paid anything'. 98 This authority, therefore, clearly pOstpones in principle any question of a claim 25.53 by way of subrogation to third party recoveries until indemnification in full of the Joss sustained by the assured. It does not, of course, impinge upon the freedom of the parties to allocate priority by express or implied agreement in the COntract. However, insurance contracts are not to be read as agreeing that an entitlement to subrogation arises as a matter of implicit contractual bargain as soon as the insurer has indemnified the assured for the insured loss. It is likely, bur not entirely clear, that this approach represents English Jaw. In Napier & Ettrick (Lord) v Hunter," the litigation resulted from an action by 25.54 Lloyd's names, members of the Ourhwaite syndicate, against the syndicate's managing agents fot negligence and breach of duty causing aggravated losses. This action having been settled for 116 million, a question arose between the Outhwaite names and their stop loss insurers as to their respective rights to the settlement money. The House of Lords considered a hypothetical name incur~ ring 'a loss of 160,000 with Stop loss insurance in excess of 25,000 and limited to 100,000. On those figures, the stop loss insurers incurred their full potential liability of 1 00,000 leaving the name our of pocket to the extent of the excess of 25,000 and the uninsured losses above 125,000, namely 35,000. The settlement yielding a total of 130,000 in respect of this name, how was this sum to be apportioned? Specifically, and importantly, the precise question addressed to the House of Lords Was whether the insured name was entitled to appropriate settlement money to the slice of loss within the 25,000 excess in priority as against the insurer's subrogation rights. As discussed below, the House answered this question in the negative. The House was not asked abour the priority of the third layer of loss above the limit of the stop loss insurance, the insurers accepting that the settlement moneys should be applied first towards this layer. However, the reasoning in the two judgments that address priority issues leads to differem conclusions with respect to such a third layer. Lord Templeman drew an analogy with thtee separate insurance policies cover~ 25.55 ing the three successive layers of loss.'o As policy three, covering the last Jayer of

This logical principle of the assured's priority is well established in foreign case law. In Re Driscol~94 the assured was a tenant of premises that were damaged by fire. The insurance indemnity being insufficient to enable the assured to meet his reinstatement obligations, the assured sued a sub~tenant for breach of the latter's repair obligations. The insurer claimed to be entitled to the ptOce~ds of this claim in priotity over full indemnification to the assured, a claim emphatically rejected by the Irish High Court:"
[The claim of the insurance company] is based on the right ofsubroga:ion, and the contention of the Company is that whatever sum is recovered by the Insured must
go to recoup the Company the amount paid on foot

?f the ~olicy, ir~espective of

the consideration whether the assured has been fully mdemmfied agamst the loss sustained. This is met by the insured's contention that until he is fully indemniie~ he is not bound to contribute anything to the Company. I have no doubt that this latter view is correct. A contract of insurance against fire is only a contract of
indemnity, and I think that the foundation of the doctrine of subrogation is to be found in the pr.incip1e that no man should be paid twice ov~r in co~pens~tion for the same loss. The corollary to this is that a contract of mdemlllty agamst loss

should not have the effect of preventing the insured from being paid in full. I do
not think that this can be disputed.

25.52 A strong line of Canadian aurhority adopts the same approach. In National Fire Insurance Co v McLaren," it was stated that:
In cases of insurance where a third party is liable to make good the loss, the right

ofsubrogation depends upon and is regulated by tbe broad underlying principle of

securing full indemnity to the insured, on the one hand, and on t,he other of holding him accountable as trustee for any advantage h~ ma~ ob:am over and above compensation for his loss .. , The primary conSIderation IS to see that the insured gets full compensation for the property destroyed and the expenses incurred in making good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company.

Similarly, it has been observed that it 'would be patently unfair to deny the insured all his rights and remedies respecting the loss when he had not been fully indemnified for the loss''' and that an assured 'is not to be unjustly enriched by
----~-~~-- .~~ .. _--[1918] 1 IR 152. See also Arthur Barnett Ltd v National Insurance Co ofNew Zealand Ltd [1965) NZLR 874, 885 (COUrt of Appeal); Ledingham v Ontario Hospital Services Commission (1979) 46 DLR (3d) 699 (Supreme Court of Canada), applied FireStone v Chubb Insurance Co of Canada (1995) 21 OR (3d) 370., 95 [1918J IlR 152,159 perO'C0l1110r MR 96 (1886) 12 OR 682, 687 per Chancellor Boyd, cited with approval in Ledingham v Ontario Hospital Services Commission (974) 46 DLR (3d) 699 (Supreme Court ofCaI).ada). " Confideration Lift Insurance Co v Causton (1989) 60 DLR (4th) 372, 375 per Wallace]A (Court of Appeal of British Columbia).
94

98 Bigl Estate v Alberta (1989) 60 DLR (4th) 438, 441 per Laycraft C]A (Court ofAppeal of Alherta). " [1993J AC 713, discussed C Mirchell [19931 LMCLQ 192 and noted W Gummow (1993) LQR 159; Alanes (1993) 57 Cony 391. 100 In fact, it is unclear whether the top~down principle should apply in a case where each layer

is the subject of a separate policy, even if it is correct where the layers arise under one poli,-!, as in Napier & Ettrick itself In Boag v Standard Marine Insurance Co Ltd [1937J 2 KB 113, a policy of cargo insurance was supplemented by increased value insurance and the question arose as to

796

797

Subrogation
35,000, On its terms would bite only if the loss was not covered by the first two policies, it would enjoy the prior right to subrogation. Similarly: 'The second insuret is entitled to be the second to be subrogated because he only agreed to pay if the first insurance cover proved insufficient."01 This might be termed a 'top-down' principle. On the hypothetical facts, therefore, the name was entitled to the first 35,000 of the settlement money, the remaining 95,000 would be applied to the stop loss insurance, and the name remained without indemnity for the excess.
25.56 Lord Jauncey, in contrast, held the insurers to be entitled in principle to

Th.e Distribution o/Sums Received or Recoveredfrom Th.ird Parties

with both Lords Templeman and Jauncey, while Lord Slynn agreed with Lord Templeman. Subsequently, the issue of a shortfall in cover arose in the aviation context in 25.58 Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1).'03 Fifteen aircraft belonging to the assured were removed from Kuwait airport by invading Iraqi forces. On the true interpretation of the policy, the insurers' liability was limited to US$300 million, which they duly paid, leaving the assured underinsured by US$392 million. The question was whether the value of recoveries subsequently made should be allocated to the assured until fully indemnified or whether the recoveries should be divided between insurer and assured in proportion to the sums insured and uninsured. This would yield 300/692 parts to the insurers and 392/692 parts to the assured. Rix J rejected apportionment in favour of priority for the assured. In so holding, he relied on the 'top-down' principle of Lord Templeman in Napier & Ettrick as 'the principle which most closely conforms to the underlying rationale of subrogation' .'04
As discussed below, lOS it is debatable whether a 'top-down' principle can 25.59 appropriately be applied in a case of under-insurance as opposed to vertical layers of cover. However, Rix J clearly favoured an approach in principle to subrogation recoveries that yields full indemnification for the assured. There is no reference to the reasoning of Lord Jauncey, but the rejection of sharing of recoveries holds no encouragement for an argument that the insurer should have pnonty.

recoupment in priority over both the excess and the surplus third layer of loss. As between the name and his stop loss insurers, only 1 00,000 was insured. Once the insurers had fully satisfied their liability on the policy, they were entitled to recoupment in priority over any of the uninsured losses. 'If an assured has suffered an insured loss and an uninsured loss full indemnification of the former subrogates the insurers irrespective of the fact that the assured has not yet recovered the uninsured 10ss."02 This would have afforded the insurers, had they not conceded priority with respect to losses above the Stop loss limit, an additional 5,000.
25.57 The top-down principle was articulated by Lord Templeman in the context of

an assumed express contractual arrangement of three vertical layers of risk. Lord Jauncey was speaking in general terms, albeit addressed to the specific issue of cover subject to a deductible. Lords Goff and Browne-Wilkinson agreed

(b) Deductibles
priority between the subrogation rights of the cargo insurers and the increased value in~urers. The Court ofAppeal held that the effecting of the cargo policy vested contingent subrogation rights in the insurers which could not be prejudiced by a contract between the assured and a third party, being res inter alios acta. Consequently, the cargo insurers were entitled to the entirety of a general average contribution received by the assured and the increased value insurer's claim to part of the contribution failed. (Aliter had there been double insurance, in which case the proceeds of subrogation would be shared in due proportion: ibid 123.) Dicta in a later Australian decision (State Government Insurance Office (QId) v Br~bane Stevedoring Pry Ltd (1969) 123 CLR 228, 240-3) go further, holding the insurer's subrogation rights to be fully vested, and capable of protection by injunction, from the moment of conclusion of the contract of indemnity. Boagwas not cited to the House of Lords in Napier & Ettrick and the Brisbane Stevedoring case seems not to have been cited on this point. It is difficult to reconcile these decisions with Lord Templeman's three policy analogy. On their authority, the conclusion of the stop loss insurance would have conferred upon the insurers (at least contingent) subrogation rights that could not have been prejudiced by any subsequent policy. Moreover, suppose the assured- first obtained Stop loss cover for the initial slice of 25,000 (5Ll) and then obtained furrher Stop loss insurance with a 25,000 excess (5L2). Following Boag, 5L1 would have priority over 5L2 with respect to subrogation. Later insurers would be protected by the doctrine of utmost good faith, which would require the assured to disclose its full portfolio of existing insurance cover as material to thesubrogation rights to be enjoyed by the later insurers.
101

Assuming that, in principle, recoveries accrue ro the assured until full 25.60 indemnification, an example of contractual derogation arises where the shortfall in indemnification of the assured's loss reflects a deductible. Such a clause
represents an agreement between insurer and assured that, to the extent of the

deductible, the assured will carry the first slice of any insured loss to which the deductible applies. If the assured took priority with respect to the proceeds of a subrogation action, this would violate the agreement implicit in the deductible. In Napier & Ettrick (Lord) v Hunter,'06 the House of Lords duly held that an insuter did indeed enjoy priority. On the assumed figures in that case, had the third party proceeds amounted to only 25,000, awarding that sum to the assured names would have been irreconcilably inconsistent with their bargain that the first 25,000 of loss should fall upon them.

103 10'

[199611 Lloyd's Rep 664.

'04

ibid 695.

105

See 25.61-25.66 below.

[1993] AC 713, 730.

'" ibid 747.

[19931 AC 713.

798

799

The Distribution ofSums Received or Recoveredfrom Third Parties (c) Under-insurance 25.61 Where the assured is undet-insured by reference to the agreed value in a valued policy or by reference to the insurable value in an unvalued policy, section 81 of the Marine Insurance Act 1906 ptovides that 'he is deemed to be his own insurer in respect of the uninsured balance'. The language of section 81 is not expressly concerned with the priority to third party spoils but with the division of risk between insurer and assured, determining the quantum of the assured's entitlement against the insurer. Nevertheless, section 81 has been held to produce an apportionment of third party proceeds between insurer and assured in proportion to the sums insured and uninsured. In The Commonwealth,'07 a vessel named Welsh Girl and worth 1,350 was insured for 1 ,000. When the vessel was sunk in a collision, the insurer paid on a total loss and brought a subrogation action against the owners of the other vessel. This action yielded a payment into court of a sum including 1 ,000 in respect of the Welsh Girl The question arose as to how that sum should be apportioned between the insurer and assured. Sir Gorell Barnes held as follows: 108
.. . when the underwriter pays the assured he is subrogated to his rights having

monwealth considers that insured and uninsured risk rank equally and, as it were, horizontally. A top-down principle has no application where there are no vertical tiers. At a different level, however, the top-down principle affords the assured priority with respect to subrogation recoveries, provided the policy on its true interpretation does not provide to the contrary. It may be in this respect that Rix J considered that the top-down principle 'most closely conforms to the underlying rationale of subrogation', 110 assuming that rationale is the avoidance of unjust enrichment. In this way, rhe top-down principle would support priority to the assured in cases of under-insurance until full indemnification was achieved.
In one other respect, however, Rix J's reliance on Napier & Ettrick is, with 25.65 respect, certainly misplaced. According to Rix J, Lord Templeman contemplated the top-down approach applying to competing claims to recoveries in the
context of 'under-insurance or partial insurance or layers of insurance', This is

regard to the risk he has taken-that is

to

say: in the ~resent ~ase, when the

assured's name is used for the purpose of enforcmg an acnon agaInst the wrongdoer, the remedy is sought for the underwriter to the extent to which he had

insured, and for the assured

to

rhe extent to which he had left himself uninsured.

to

That being so, it seems logically to follow that when the money which is recovered

is in hand it ought to be divided in proportion

their respective interests.

25.62 On this approach, the insurer's entitlement in respect of the proceeds of the

subrogation action is given as follows: . ___ Sum insured value x SubrogatIOn proceeds Policy valuation/Insurable
-==:2==~:-_;_-

not the case. In Napier & Ettrick, the assured argued that any proposition that denied an assured a full indemnity ran counter to rhe fundamental nature of insurance and was necessarily wrong, relying on the celebrated judgment of Brett LJ in Castellain v Preston. '11 Lord Templeman dismissed such a general proposition as of little assistance in addressing the specific issue of subrogation recoveries and a deductible. 'When Brett LJ delivered his judgment ... he was not concerned with competing claims to subrogation or with any problem arising from under-insurance or partial insurance or layers of insurance.'112 Lord Templeman did not suggest what approach should apply in these contexts, apart from that relating to layers of cover in which the top down principle denied the assured full indemnification. For Lord Templeman, therefore, under-insurance was a context in which the normal proposition that insurance as a contract of indemnity should afford the assured a full indemnity might not apply.
If it is correct that in non-marine insurance an under-insured assured has prior- 25.66

On the facts, therefore, the insurer was entitled to 1000/1350 parts of the recovered 1,000.
25.63 The authority of The Commonwealth is, however, open to question. In the nonmarine case of Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1),'09 Rix J

ity with respect to subrogation recoveries until full indemnification is achieved, a different approach may be justified in marine insurance only through the principle of average, by virtue of which the assured is deemed ro be its own
insurer to the extent of any under-insurance. Average is implied into marine

held that the assured should have priority with respect to recoveries until full indemnification had been achieved. In so doing, he relied on the top-down principle articulated by Lord Templeman in Napier & Ettrick v Hunter.
25.64 On one level, this reliance appears misplaced. Napier & Ettrick concerned a

policies by virtue of section 81 of the Marine Insurance Act 1906, but it does
not operate in non-marine insurance unless the policy contains an express aver-

policy that expressly created three vertical layers of risk. In and of itself, underinsurance does not expressly generate any vertical layering of risk. The Com-

age clause. If, therefore, the principle of average dictares apportionment of subrogation recoveries, the different approaches of marine and non-marine insurance are logical. As already noted, the principle could be confined to the

110

107

[19071 P 216.

108

ibid 223.

109

[199611

Lloyd's Rep 664, 695.

ibid. 111 (1883) 11 QBD 380, 386, ,n [19931 AC 713, 731.

quoted at 25.05 below.

800

801

Subrogation
question of the measute of indemnity recoverable from the insurer by the assured, bur The Commonwealth holds that it extends to the distriburion of subrogation recoveries.

The Distribution ofSums Received or Recoveredfrom Third Parties

that cost 5,000 to repair. The assured recovered 2,500 ftom the ownets of the other vessel on a both to blame basis and claimed from the insurers the remaining 2,500 by which the assured was in fact our of pocket. MacKinnon J upheld the insurer's contention that their liability was limited to 1,500, being the difference between the sum tecovered and their maximum exposure on the valued policy. The measure of indemnity for the damage could not, under section 69(1) of the Marine Insurance Act 1906, exceed the sum insured in respect of anyone casualty, which in the context of a valued policy denotes the agreed value unless the policy states to the contraty."' Viewed another way, had the assured claimed first on the insurets and been paid 4,000, the insurers would then have been entitled to all the damages tecovered from the owners of the other vessel. The assured could not alter the financial position as between assured and insurer merely by claiming first against the third party.'19

(d) Valued policies 25.67 A valued policy is a contract of conventional rather than true indemnity. 113 The measure of indemnity for a total loss is a sum equal ro the agreed valuation, which is conclusive of the insurable value of the subject-matter insured. '14 Consequently, an assured that has received this sum from the insurer cannot dispure that it has received full indemnification for its loss, whatever the reality. This means that an insurer that has paid the assured the agreed value has priority with respect ro the proceeds of an action against the third party for restitution of that sum. Moreover, where the assured elects to pursue the third party action before claiming on the insurance, the insurer's liability is limited to the balance of the agreed value, if any, after giving credit for the proceeds of the third party action.
25.68 In North ofEngland Iron Steamship Insurance Association v Armstrong, 115 a vessel

with an agreed value of6,000 was insured for that sum. The vessel having been rendered a total loss in a collision, the underwriters paid the agreed sum. The real value of the vessel was 9,000. The assured then recovered 5,000 from the owners of the other ship involved in the collision. On general principles, the assured should have been entitled to make up the shortfall in indemnification out of those damages, retaining 3,000. The presence of an agreed value of 6,000 and indemnification in that amount from the insurets, however, meant that the assured was ptecluded as against the underwriters from claiming aflY shortfall. Consequently, the underwriters were held entitled to the full 5,060. This decision was followed in Thames & Mmey Marine Insurance Co v fJritish & Chilean Steamship CO." 6 Alier a vessel with an agreed value of 45,000 and insured for that sum was sunk in a collision, the underwtiters paid for a total loss. The true value of the vessel was 65,000. Both vessels being to blame for the collision, rhe assured recovered damages equivalent to five-twelfths of the true value of the vessel. Scrutron J held the underwriters entitled to all the damages recovered despite quantum being calculated by reference to a sum greater than the agreed value.
25.69 The agreed valuation is similarly decisive in the event of a partial loss. In Goole

It is conceivable that the amount recovered in a third party action may exceed 25.70 the agreed value. 120 The question then arises as to whether the assured Ot insurer is entitled to any surplus recovery once the insurer's priotity to the extent of the agreed value has been satisfied. As already seen, in ptinciple surplus recoveties belong to the assured. '21 Subrogation is designed to prevent unjust enrichment by double recovery. Once the insurer has recouped in full the indemnity paid to the assured, there can be no double recovery and the fact that the third party action is the assured's action must give the assured any surplus proceeds. The presence of an agreed value should change nothing. An agreed value provides conclusive evidence of the insurable value of the insured property (and thereby of the sum required to indemnify the assured), over which questions of double recovery can arise. However, it does not transform the doctrine of subrogation

& Hull Steam Towing Co Ltd v Ocean Marine Insurance Co Ltd, 117 a vessel with an agreed value of 4,000 and insured for that sum incurred collision damage

113 Coole & Hull Steam TOwing Co Ltd v Ocean Marine Insurance Co Ltd [1928] I KB 589, 594-5. '" MIA 1906, 55 68(1), 27(3). '" (1870) LR 5 QB 244. '" [191512 KB 214. m 11928] 1 KB 589.

118 Reliance was also placed on the wording of MIA 1906, S 79(2), which entitles the insurer to subrogation in cases of partial loss upon indemnifying the assured for that loss 'according to this Act', thus importing the conclusiveness of the agreed valuation through s 27(3). Such reasoning may be valid. However, s 79(1), which provides for subrogation in cases of total loss, contains no equivalent wording, but this does not prevent the agreed value from operating conclusively in total loss cases. It may be, therefore, that the impact of the conclusive nature of the agreed value in subrogation cases does not depend on s 79 in either total or partial loss cases. 119 See North ofEngland Iron Steamship Insurance Association v Armstrong (1870) LR 5 QB 244, 249 where Cockburn CJ described any such argument as 'altogether monstrous'. In Coole, a suggestion that the 2,500 should be apportioned 4: 1 between insurer and assured On proportion to their respective liabilities as regards the 5,000 loss) was dismissed as having 'no possible legal basis' (at 594). This is dearly correct. Such apportionment suggests the assured was under-insured (see 25,61 above), but an agreed value is binding on the insurer as well as the assured so that the insurer is precluded from alleging under-insurance by reference to the market value. 120 Since the conclusiveness of the agreed value applies only as between assured and insurer, it is the market value that serves to determine loss as between the assured and a third party: see 7.32 above. Should the agreed value prove to be less than the market value, the recovered damages may exceed the agreed value. 121 See 25.47-25.48 above.

802

803

Subrogation
of the insurer to the assured's rights and remedies into an assignment to the insurer of those rights and remedies.'" Consequently, an agreed value says nothing about priority between assured and insurer once the assured has been fully indemnified according to the conventions of valued policies and rhe insurer has recouped in full any indemnity paid. The surplus belongs to the assured because ir is part of rhe proceeds of claim that belongs to the assured.
25.71 fu a matter of principle, therefore, the position appears clear. However, in North

The Nature ofthe Insurer's Restitution Rights Against the Assured

on the insurer by way of restitution of the indemnity paid, '26 adopting expressly the approach held to be implicit by the House of Lords in Napier 1& Ettrick (Lord) v Hunter.'" The International hull clauses, in contrast, adopt by way of concession to the assured a principle of pro rata division, as held applicable to under-insurance in The Commonwealth.'28 Recoveries ate applied first in repayment of reasonable costs and expenses incurred in realizing recoveries and the balance is then apportioned between assured and insurers in such proportion as uninsured losses, including any deductible, arising out of covered perils bear to
insured losses. 129

ofEngland Iron Steamship Insurance Association v Armstrong,123 Cockburn C] suggested that surplus recoveries should accrue to the insurer, stating that if rhe
insured vessel was equal to 'or worth more' than the agreed value, the insurer

would be entitled ro 'all that can be recovered in respect of the loss of the vessel'. This dictum was, however, obiter since there was no surplus in Armstrong, and appears to have been prompted by confusion between the concepts of subrogarion and abandonmenr.'24 The doctrine of abandonment serves the indemnity principle by affording an insurer that indemnifies in respect of a total loss the oprion to assume proprietary rights in whatever remains of the insured property, together with all rights attaching to such property. A hull insurer that pays the agreed value on a total loss of the insured vessel is entitled to whatever remains of the hull and to any freight that is earned after rhe 10ss.125 A cause of action against a third party responsible for the casualty, however, is personal to the assured in the sense that, while it may be expressly assigned to the insurer, it does not automatically attach to the insured property and pass with it to the insurer. Subrogation, in contrast, involves no transfer of rights but merely access to rights of the assured to the extent necessary to avoid double recovety. To the extent, therefore, that the dictum of Cockburn C] suggests that the ins';rer should be entitled to surplus recoveries, it is suggested that it shoul.d not be followed.

D. The Nature of the Insurer's Restitution Rights Against the Assured

Where third party damages in the hands of the assured represent double 25.73 recovery, unjust enrichment is prevented by affording the insurer a personal action against the assured for money had and teceived by the assured to the use of the insurer. 130 Where the assured's loss is diminished in kind, doubt has been cast upon the appropriate form of action but not upon the restitutionary result to be achieved. 13 ' Moreover, where an assured recovers first from a third party and subsequently from insurers, generating double recovery, there is a mistaken
overpayment and the insurers are entitled to restitution to that extent, but such

(e) Deductibles in the Institute and International hull clauses

25.72 The Institute and International hull clauses expressly address the question of

rights are purely personal. Thus, in Stearns v Village Main Reef Gold Mining CO,132 insurers who paid as on the total loss of gold commandeered by the South Mrican government, in ignorance ofthe fact that a large sum had been returned, were held entitled to restitution of a sum equal to the value returned on the basis of mistaken payment. 133 Whether such personal remedies represent all that the indemnity principle confers upon an insurer was the main issue before the House of Lords in Napier 1& Ettrick (Lord) v Hunter. 134

priority with respect to proceeds ofsubrogation actions in the context of deductibles. They adopt differing approaches. The Institute hull clauses confer priority

126 Institute Time Clauses Hulls (1110/83 and 1111195), clI2.3. On apportionment ofinterest recovered from third parties, see d 12.4. The scope of the deductible is discussed at 23.40-23.47 above.
127
129

[19931 AC 713.

128

[19071 P 216, discussed at 25.61-25.62 above.

On subrogation and assignment, see 25.48 above. 123 (1870) LR 5 QB 244, 249. See Cockburn C] ibid 249-50 and Lush Jat 251; Thames & Mersty Marine Insurance Co v British & Chilean Steamship Co [1915] 2 KB 214, 221 (dicta in Armstrong obiter and based on confusion with abandonment); Goo!e & Hull Steam TOwing Co Ltd v Ocean Marine Insurance (0 Ltd[1928] 1 KB 589, 598 (dictum of Cockburn C] in Armstrong 'can only be right ifit rests upon the cession of property to the underwriter lipan payment for a total loss'and is, therefore, certainly inapplicable in cases of partial loss).
122 124
125

International Hull Clauses (01/11103), c149.4. 130 Assicurazioni Generali di Trieste v Empress Assurance Corp Ltd [1907] 2 KB 814; Yorkshire Insurance Co v Nisbet Shipping Co Ltd [1962] 2 QB 330, 341. 131 Darrel! v Tibbitts (1880) 5 QBD 560. A fortiori in the light of the increased acceptance of unjust enrichment as a general cause of action in modern English law.
132
133

(1905) 10 Com Cas 89.

See 22.31-22.32,22.36-22.44 above.

Although the judgments confusingly speak of subrogation, the analysis of the restitution action as for mistaken payment is unavoidable and confirmed by Lord Browne~Wi1kinson in Napier & Ettrick (Lord) v Hunter [1993] AC 713, 751-2. 134 [1993] AC 713. For the background facts, see 25.54 above.

804

805

Subrogation
25.74 The settlement money had been paid by the syndicate's managing agents to

The Nature ofthe Insurer's Restitution Rights Against the Assured

assured was awarded 800 damages against the third parry shipowner liable for the collision. Lord Lyndhurst, expressly rejecting an argument that the insurer's remedies lay solely at common law, granted an interlocutory injunction restraining the assured from receiving and the third parry from paying the damages awarded without first paying or providing for the sum of 205 to which the insurer was now entitled by way of subrogation. Moreover, authoriry also supported the existence of an equitable proprietary right in the proceeds ofsubrogation actions. Dicta in a number of cases 141 were reinforced by the decision in Re Miller Gibb 6- Co Ltd. 142 The Board of Trade paid an export company 90 per cent of the price of goods exported to Brazil pursuant to an export credit guarantee. The price of the goods was ultimately paid to the company's bank atter the company had gone into liquidation.' Wynn-Parry J held the Board to be entitled to 90 per cent of the money as against the liquidator. Had the money been paid to the company, such sum would have been received on truSt for the Board. Accordingly, in Napier 6- Ettrick (Lord) v Hunter, the House of Lords upheld the 25.77 stop loss insurers' claim to a proprietaty right in the settlement moneys. Since making the assured a trustee of the money might have proved unduly onerous, the House imposed an equitable lien upon the fund, being 'the more appropriate form of proprietary right in circumstances where, as here, its function is to
protect the interest of the insurer in an asset only to the extent that its retention

Richards Butler, solicitors to the names. Before distribution to the names could occur, the names' stop loss insurers claimed an equitable proprietary interesr in that parr of the money to which they were entitled by way of subrogation. The names did not deny the insurers' better ultimate right, as against themselves, to the money. Nevettheless, it appears rhat they resisted the proprietary claim from a desire to improve their cash flow, postponing the insurers' testiturion pending actions by the insurers againsr the individual names for money had and teceived. The insurers thus faced rhe unpleasant prospect ofseeking tecoupment from each of the names, their common law personal rights being of little value in the event of bankruptcy of any given name. Moreover, accotding to Lotd Templeman: 135
There are 246 names, some of whom are resident in the United States of America and elsewhere abroad. In order to succeed in an action for money had and received stop loss insurers might be obliged to pursue litigation at considerable expense and subject to a considerable delay in a country which knows nothing of an action for money had and received or does not recognise the doctrine of subrogation or confines its civil litigation to the tender mercies of juries who are unsympathetic towards insurers.

25.75 The ptincipal obstacle facing the insurers was the ptedilection of Lord Diplock

fot explaining the doctrine of subrogation in insurance law through implied contractual terms, leaving little if any scope for the operation of equity aside from, if necessary, compelling the assured to lend his name to third parry actions btought by the subrogated insurer. 136 This view of an insurer's subrogation rights, as created exclusively by the common law of contract, was emphatically rejected by the House of Lords. According to Lord Goff, 'there is no reason why . .. the principle of subrogation in the field of insurance should 'not have developed as a purely common law principle. But as a matrer of history it did not do SO'.137 The House of Lords acknowledged the development of subrogation by the courts of common law,138 bur pointed equally to parallel authority in courtS of equity. 139
25.76 Particular imporrance was ascribed to the decision by Lord Lyndhurst in the

by the assured will have the effect that he is more than indemnified undet the
policy of insurance' .143 The insurers were granted an injunction restraining the

solicitors holding the fund from paying, and each name from teceiving, any part of the fund towards the excess losses until the amount owing to the insurers by way of subrogation had been paid. Subrogated insurers, therefore, have an equitable proprietary interest in any 25.78 fund of third parry damages whether held independently or in the hands of the assured 'so long as it is traceable and has not been acquired by a bona fide purchaser for value without notice' ,144 Beyond those limits, the insurers are relegated to their personal restitutionaty remedy in the form of the common law action for money had and received. Whether insurers enjoy a proprietary interest in the assured's cause of action which may generate a fund subject

High Court of Chancery in White v Dobinson. '4o A vessel having been damaged in a collision, the assured received 205 from his insurer. Subsequently, the

"5
137

[19931 AC 713, 737.

'" Yorkshire Insurance Co v Nisbet Shipping Co Ltd [1962] 2 QB 330: Hobbs v Marlowe [1978] AC 16,39: Orakpo v Manson Investments Ltd [1978] AC 95, 104,
11993] AC 713, 740. Mason v Sainshury (1782) 3 Doug 61; KItes v Whyte (1838) 4 Bing (NC) 272. '" Randal v Cockran (1748) 1 Ves Sen 98: Blaauwpot v Da Costa (1758) I Ed 130. 140 (1844) 14 Sim 273; 116 ["[OS 233. This decision was not cited to Diplock J in Yorkshire Insurance Co v Nisbet Shipping Co Ltd[I962] 2 QB 330.
138

141 Randal v Cockran (1748) 1 Yes Sen 98; Blaauwpotv Da Costa (1758) 1 Ed 130; Commercial Union Assurance Co v Lister (1874) LR 9 Ch App 483; King v Victoria Insurance Co Ltd [1896] AC250. '" 11957] 1 WLR 703. '" [19931 AC 713, 745 per Lord Goff. 144 ibid 752 per Lord Browne-Wilkinson. It cannot be right (pace Lord Templeman at 738-9)

that mere payment

by the solicitors to the names out of the fund impressed with an equitable

proprietary right would have reduced the insurers to theif personal remedy even where the money remained traceable.

806

807

Subrogation
to a lien was left open by the House of Lords in Napier & Ettrick (Lord) v Hunter. Nevertheless, both Lord Templeman 14' (strongly) and Lord Goff (more tentatively) indicated an opinion in favour of such an interest. 25.79 Such judicial recognition of proprietary rights affords insurers priority in the bankruptcy of any assured, as was acknowledged by the House of Lords in Napier & Ettrick (Lord) v Hunter. No concrete justification for such an interest was articulated, although Lord Goff drew an analogy with the trusteeship imposed on agents in respect of money received from third parties in their capacity as agents.'4' It is noteworthy that it required an Act of Parliament'47 to safeguard the proceeds of third party liability policies for their intended beneficiaries as against marauding liquidators, yet subrogated insurers reap the benefits of judge-made security. That without the equitable lien an insurer's subrogation rights will be a mockery upon an assured's insolvency is no justification for the lien.'48 Such potential jeopardy is the hallmark of an unsecured creditor; it does not of itself warrant raising insurers to a state of secured grace. Nevertheless, the decision of the Honse of Lords stands and has, naturally, been applied since.'4'

26
DOUBLE INSURANCE AND CONTRIBUTION

A. The Concept of Double

Insurance

26.02 26.05 26.06 26.07 26.16 26.19 26.28 26.32 26.33

B. Double Insurance and

(2) Time when the right to contribution arises: impact on contribution of defences to claim

Policy Terms
(1) Terms relating to cover

by assured
(3) Primacy of liability (4) Voluntary payments (5) Non-satisfaction of a contribution

E. The Nature of the Assured's Restitution Rights Against the Insurer

25.80 Where the insurer has successfully pursued a subrogation action and recovered a sum in respect of which it is liable to account in part to the assured, it is clear that the assured benefits from a proprietary, and not just a personal, claim. The third party recoveries represent the fruits of the assured's cause of action.'50 Thar the law may permit the insurer to exercise that right of suit and that the principle of unjust enrichment may dictate that part of the recovered sums should accrue to the insurer do not require denying that rhe fruits of the assured's property that accrue to the benefit of the assured are also the property of the assured.

(2) Rateable proportion clauses (3) Clauses excluding liability if loss covered by another insurance

26.40 26.57 26.58 26.61 26.62

26.63

claim by reason of insolvency

C. Valued and Unvalued Policies and Double Insurance

F. QuantifYing Liability in Contribution

(l) Bases for quantifYing liability in contribution (2) Marine Insurance Act 1906 (3) The case law

D. Return of Premium E. The Right to Contribution (1) Sources of law

26.69 26.73

With whose speech Lord Slynn agreed. ibid 744. Contrast the detailed arguments advanced by counsel for the names against recognition of a proprietary interest (at 720-2) and the specific findings in the lower courts that nothing justified the recognition of a proprietalY right: (1993] 1. Lloyd's Rep 10. 147 The Third Parties (Rights against Insurers) Act 1930, discussed at 20.33ff above. 148 [1993] AC 713, pace Lord, Templeman at 737. And see the cautionary remarks of Lord Musti!l, laudably evincing a reluctance to recognize equitable proprietary rights in the absence of clear rarionalizarion, in Re Goldeorp Exchange Ltd [19951 1 AC 74,104-5,109-10. '49 England v Guardian Insurance Ltd [2000J Lloyq's Rep IR 404. , 150 Lonhro Exports Ltd v Export Credits Guarantee Department [1999] Ch 158, 181-2.
145 14(;

Over-insurance by taking out two or more policies on the same risk is lawful, 26.01 although excessive over-insurance is a material circumstance requiring disclosure,' but the assured is entitled to satisfaction of its loss only once 'lest the remptation of gain should occasion unfair and wilful losses" and because the indemnity principle precludes double recovety. The assured may, at its unfettered election, proceed against anyone insurer or combination of insurers for the whole sum due according to the principles governing measures of indemnity. Any insuret that pays more than its rateable proportion of the loss is then entitled to contribution from the other insurers.'

, Thames & Mersey Marine Insurance Co Ltd v 'Gunflrd'Ship Co Ltd[191l1 AC 529, see 7.44
above.
2:
3

Godin v London Assurance Co (1758) 1 Burr 489, 492 per Lord Mansfield. ibid. See also Newby v Reed (l 763) 1 Black W 416; MIA 1906, ss 32(2)(a), 80.

808

809

Double Insurance and Contribution

Double Insurance and Policy Terms

A. The Concept of Double Insurance

26.02 Only where rhe same interest in the same marine adventure is insured against

the same risks for the benefit of the same person and the policies yield an indemnity in excess of that permitted by marine insurance law does overinsurance by double insurance arise' There is no question of double insurance where policies are taken out to cover different interests, such as those of a morrgagor and mortgagee, nor as between property insurance on the one hand and liability insurance on the other. 5
26.03

In Godin v London Assurance Co,' M owed money to both A, his factor, and T. M shipped goods to A on a ship ptovided by A but indorsed the bill oflading, promised to A, to T. Consequently, both A and T insured the goods under separate policies. When the goods were lost, T claimed against his underwriters who asserred that they were liable only for 50 per cent of the loss and rhat the balance should be recovered by T from A's insurers. Lord Mansfield held in favour of T. Even had there been double insurance, T would still have been entitled to recover in full from his own underwriters, although they would then have been able to seek contribution from A's insurers. 7 According to Lord Mansfield, however, there was no double insurance because A had insured in his own right his interest as M's factor with a lien upon the goods for money owed by M. Even if A had effected the insurance qua agent of M, A still had a lien on the policy as M's factor.' In any event, T would not have received the benefit of A's insurance as M did not expressly assign it togerher with the subject-matter insured. 9 It is, nevertheless, unlikely thar A could have recovered on his policy. As A's insurable interesr derived from his Status as agent ofM, that interest must necessarily have lapsed upon M's disposal of rhe goods to T.

contribution from the defendant, a representative Lloyd's underwriter. The latter admitted liability and the only issue was quantum. Hamilton J, however, expressed doubt as to whether the concession was rightly made. The different risks covered and differences in the structure of the policies produced a situation very different from the classic double insurance ovetlap of 'same interest, same adventure, same risk and different amounts', rendering it 'desirable to leave open whether anything that can be called contriburion in the nature of double insurance arises in such a case as this'.11 It is suggested, however, that overinsurance by double insurance spawns a right to contribution from any factual ovetlap rather than the mirroring of one policy by another. There is double
insurance wherever two insurers are liable to the ~ame assured for the same

casualty affecring the same interest so that satisfaction of the assured's claim by one insurer constitutes a defence for the other against any parallel claim by the assured. 12

B. Double Insurance and Policy Terms

Whether there is over-insurance by double insurance often depends upon the 26.05 true interpretation of the relevant policies. Double insurance may be prevented by terms relating to cover, by rateable proportion clauses, or by clauses excluding liability if another insurance exists. (1) Terms Relating to Cover Double insurance does not arise where the two policies on their true interpret- 26.06
arion do not cover the same interest against the same risk at the same time.

26.04 The scope of double insurance was quesrioned in American Surety Co v Wrightson. 1O Ar issue was the appropriate rate of contriburion between an

employee fidelity policy issued by an American insurance company and a Lloyd's policy covering nor only employee fidelity bur also dishonesty of nonemployees, losses by fire and burglaty, and losses to goods in transir wirhin a specified geographical area. A loss being occasioned by the dishonesty of an employee, rhe claimant American insurer settled the claim in full and claimed

Double insurance is, therefore, avoided where rwo contemporaneous policies, although covering the same assured againsr rhe same risks, are drafted so as to avoid any temporal ovetlap,13 or where, properly construed, only one of rhe policies covers the relevant interest." In Union Marine Insurance Co Ltd v

4 ibid s 32(1); North British 6- Mercantile Insurance Co v London, Liverpool, 6- Globe Insurance Co (1877) 5 ChD 569. s Petrofina (UK) Ltd v Magnaload Ltd[1984J QB 127, 140-1; Wimpey Construction UK Ltd v Poole [1984J 2 Lloyd's Rep 499,516.
6 (1758) I Burr 489. 7 See above. s See also West ofEngland Bank v Batchelor (1882) 51 LJCh 199. 9 MIA 1906, s 15, discussed ar 20.09-20.10 above. " (1910) 16 Com Cas 37, discussed further at 26.74--26.76 below.

ibid 56. Albion Insurance Co Ltd v Government Insurance Office ofNew South Wales (1969) 121 CLR 342; Bovis Construction Ltd v Commercial Union Assurance Co pic [2001] Lloyd's Rep IR321, para 1 L See also Zurich Insurance Co v Shield Insurance Co (1988] IR 174, 185: 'insurance companies do not lose their right to contribution because one policy extends to a far greater variety of risks than another' (per McCarthy J). Moreover, the statutory requirement that the assured should have the benefit of two or more policies 'on the same adventure and interest or any part thereof (MIA 1906, s 32(1)), while admittedly ambiguous, does not appear to require the policies to be co-terminous. 13 National Emp/oyers Mutual Genera/Insurance Association Ltd v Haydon [1980] 2 Lloyd's Rep 149. For criticism of the actual decision, see R Merkin Colinvaux & Merkin s Insurance Contract Law (looseleaf) para C-0648. 14 Boag v Economic Insurance Co Ltd[1954] 2 Lloyd's Rep 581.
11

12

810

811

Double Insurance and Contribution Martin,15 the first insurance policy covered a vessel from Bombay to Calcutta and for thirry days afrer mooring in good safery, while the second policy gave cover at and from Calcutta to Bombay. Although both policies were taken out with the same insurer, only the risk covered by the second policy was reinsured. The vessel having become a total loss while at Calcutta and apparently while the two policies overlapped, the insurer paid under the second policy and claimed on the reinsurance. The reinsurer argued that double insurance between the two policies reduced exposure on the second policy by virtue of contribution and, consequently, reduced the reinsurance liabiliry. The Court held, however, that, upon its true construction, the second policy substituted for the first, thus avoiding any double insurance.
(2) Rateable Proportion Clauses
26.07 A rateable proportion clause reduces insurers' liabilities in respect of the insured

Double Insurance and Policy Terms

Such clauses pose a number of questions of interpretation.'o

(a) Time ofdouble insurance

The relevant time at which double insurance should be present under the 26.09 quoted clauses is the time that either a claim arises or a loss occurs. This will often be uncontroversial and should, subject to any contrary terms, coincide with the moment at which the limitation period commences. Nevertheless, difficulties could arise. In cases of, for example, progressive development of a latent defect, it may be problematic to identify the moment at which the threshold is crossed between the embryonic existence of a defect and its development to such an extent that one can conclude that the vessel has been damaged so that an insured loss has occurred and a claim has arisen.

(b) 'Existence' ofanother insurance

The two clauses quoted in paragraph 26.08 above require that, at the relevant 26.10
time, another insurance either 'exists' or 'is current'. Alternatively, a rateable

loss on a proportionate basis. The purpose is to avoid over-insurance by double insurance on rhe basis that the assured cannot recover from the insurers a total sum greater than the measure of indemniry allowed by the Marine Insurance Act 1906. '6 The efficacy ofsuch a clause, however, depends inevitably on its true interpretation and the facts of the case."
26.08 Clause 13.2 of the Institute Time Clauses Freight (118/89) 18 provides as follows:
Where insurances on freight other than this insurance are current at the time of the loss, all such insurances shall be taken into consideration in calculating the liability
under this insurance and the amount recoverable hereunder shall not exceed the

proportion clause may require simply that 'there is' another insurance." The import of such wording should, it is suggested, be determined by reference to the function of a rateable proportion clause. Such a clause is designed to ensure merely that an insurer is not called upon to pay more that its proportionate share of the measure of indemniry for the loss that has occurred. It is not designed to diminish the overall measure of recovery by the assured. Certain consequences flow from this. First, the issue is the enforceabiliry rather than the literal existence of another 26.11 insurance. A breach of a promissory warranry or orher condition precedent before the relevant rime produces an automatic prospective discharge of the insurer's liabiliry yet, as a matter of technical contract law, the contract does not cease to exist. Neverrheless, it is suggested that the insurance would no longer be current or even exist for the purposes of a rateable proportion clause. A contrast may be drawn with a repudiatory breach of contract by the assured unaccepted at the relevant time. The discharge that flows from acceptance of a repudiatory breach is purely prospective and will not prejudice an accrued liabiliry to indemnify in respect of an insured loss. Consequently, no question can arise of an unaccepted repudiation denying the existence or currency of the broken
contract.

rateable proportion of the gross freight lost, notwithstanding any valuation in this/ or any other insurance.

In Drake Insurance pic v Provident Insurance pic, 19 a rateable proportion clause provided that:
If at any time any claim arises under this policy there is any other existing insurance covering the same loss damage or liability the company shall not be liable to payor contribute more than its rateable proportion of such claim.

15

(1866) 35 LJCP 181.

MIA 1906, s 32(1); Legal & General Assurance Society Ltd v Drake Insurance Co Ltd [1992]

16

QB 887, discussed below. 17 It may also be overridden by statute so that over~insurance arises: Drake Insurance pic v Provtdent Insurance pic [2003J EWCA Clv 1834, [2004J QB 601, paras 31, 114 (motor insurance) . 18 Also (1/11/95), cl 14.2; lostirure Voyage Clauses Freighr (1/8/89), cl 11.2; (1/11/95), cl 10.2. Similarly, over~insurance cannot arise as between primary and increased value cargo insurers: Institute Cargo Clauses (A), (B),' (C), cl 14; Institute War Clauses (Cargo), Strikes Clauses (Cargo), cl 9. 19 [2003J EWCA Civ 1834, [20041 QB 601.

A second consequence relates to the significance of an insurance contract being 26.12 voidable for pre-formation non-disclosure or misrepresentation at the relevant

20

21

The following discussion draws upon the judgment ofRix LJ at paras 118-121. See, eg the clauses in Legal & GeneralAssurance Society Ltd v Drake Insurance Co Ltd [1992]

QB 887.

812

813

Double Insurance and Contribution

time without having yet been avoided. Such a voidable contract should fulfil any requirement for currency or existence, since a voidable contract has full effect until and unless avoided. Its existence may be precarious through its susceptibility to being avoided but such existence or currency cannor be denied. Where the right to avoid a voidable contract is lost, such contract does not come into existence as from the moment of loss of the right to avoid. Loss of the right to avoid merely ensures the future of an already existing contract.
26.13 Suppose, however, that the voidable contract is avoided after the relevant time. Since the consequences of avoidance have retrospective effect, does this mean that retrospectively the avoided contract did not exist or was not current ar the relevant time? The purpose behind rateable proportion clauses indicares that subsequent avoidance should indeed have that effect. Where one insurer (Inl) has avoided, the assured should recover in full from the other insurer (lnl). The presence of a rateable proportion clause should not reduce In I's liabiliry by half where rhe assured's rights against Inl are subjecr to a subsequently exercised right of avoidance." 26.14 Since existence or currency is required only at rhe relevant time, it is clear that a subsequent failure by the assured to comply with a condition precedent to the making of a claim can have no impact upon the operation of a rateable proportion clause. 23

Double Insurance and Policy Terms

cover the loss and one contains a referential exclusion ofliabiliry clause while the other does nor, over-insurance is prevented. The insurer whose policy lacks the clause is liable in full, while rhe insurer whose policy contains the clause is not liable at all. No question of contribution can arise. Where, however, each policy contains a referential exclusion of liabiliry clause, if each clause were applied in isolarion the net effect would be to deny the assured any recovery despite payment of two premiums. Consequently, the courts intetpret a referential exclusion of liabiliry clause as ;eferring to another insurance that does not in turn exclude liabiliry by return referral,24 the insurer bearing the burden of ptoving the existence of such a policy." Where each policy contains such a clause, the net effect, therefore, is that they cancel each other out. The assured is over-insured by double insurance and an insurer called upon to pay more than a proportionate share is entitled to seek contribution from the other insurer.
It is worth emphasizing that this result is achieved through interpretation. The 26.17 fundamental assumption is that refetential exclusion of liabiliry clauses share with rateable proportion clauses the purpose of regulating liability as between insurers. This may not be the case. Instead, the insurer may genuinely wish to exclude a1lliabiliry wherever the assured takes out a second policy that prima jacie covers the same risk. Nothing in the decided case law prevents In 1 from excluding liability to make any contribution towards a loss prima jacie covered by Inl even if Inl excludes liability because of lnl's policy," but it will be necessary to state cleatly that this exclusion operates notwithstanding the inability to recover against Inl. Thus, rule 51 of the United Kingdom P&I club provides as follows:
The Association shall not, unless and to the extent that the Directors in their discretion otherwise decide, be liable for any liabilities, costs or expenses recoverable under any other insurance or which would have been so recoverable:
i. apart from any terms in such other insurance excluding or limiting liability
on the ground of double insurance; and ii. if the ship had not been entered in the Association with cover against the risks set Out in these Rules.

(c) 'Covering the same loss'

26.15 A similar question of interpretation is posed by a requirement such as that in the Drake clause that the other insurance should 'cover the same loss'. Does this wording require merely that cover technically exists ar rhe relevant time or rhat the assured have an enforceable claim againsr the insurer nor liable to be defeated by a righr of avoidance or to treat tbe contract as discharged? In the light of rhe purpose behind a rateable proportion clause, ir is suggested rhat the latter is correct, with the impact of the contract being liable to avoidance for breach ofa pre-formarion duty of utmost good faith or discharge for repudiatoty breach as outlined above.

(3) Clauses Excluding Liability if Loss Covered by Another Insnrance

26.16 A clause in an insutance contract may exclude all liability in the event that indemnification is available under another policy. Where two policies exist that

This provision makes it clear that in deciding whether there is cover from Inl,

22 Confirmation of avoidance by a court or arbitral tribunal should not be required, since avoidance is a se1fexecuting remedy not requiring any such confirmation to take full effect: see 4.04, 4.156 above. 23 Weddell v Road Transport & Genera/Insurance Co Ltd[1932] 2 KB563.

24 ibid. See also Austin v Zurich General Accident 6- Liability Insurance Co Ltd (1944) 77 ULRep 409; National Employers Mutual General Insurance Association Ltd v Haydon [1980] 2 Lloyd's Rep 149, at 152. 25 Jenkins v Deane (I934) 47 LlLRep 342. . 26 cf the doctrine of 'mutual repugnancy' in US law, whereby it is considered contrary to publtc policy for 'other insurance' clauses to leave the assured with no cover: R Force, 'Overlapping Insurance Coverages' in M Huybrechts (ed) Marine Insurance at the Turn o/the Mil!enium (1999) Vol 1, 223, 236-42.

814 815

Double Insurance and Contribution

so that In1's liability is excluded, one disregards any referential exclusion in the Inl cover and, indeed, the existence of In1's cover.
26.18 A referential exclusion of liability clause may raise questions of interpreration

Valued and Unvalued Policies and Double Insurance

underwriters on a parricular policy to shew that the assured has received from another quarter the amount of the valuation in that policy, unless this amounts m pomt of fact to a complete indemnity'." A comparison between the real value of the lost .ship and the sum received from the London Assurance yielded an outstandmg Interest of 2,000 without indemnity, in respect of which the second insurer was liable to the sum subscribed of 600. The difficulty with this reasoning is that the assured was entitled to recover 26.21 under the second policy only because he was permitted to say that the tru al . . e v ue was m excess of the agreed value under that policy. The agreed value ceased to be conclusive as ~he value ofthe property, therefore, and was relegated to beIng merely a sum Insured, servIng only to indicate the maximum sum recoverable .under the policy. This fails to do full justice to the significance and p~rvasive impOrtance of an agreed value as today understood. This approach did not survive m the case law and is not adopted in the Marine Insurance Act 1906 . Initially, Bousfield ;vas distinguished on the somewhat dubious ground that 26.22 it concerned poliCies that incorporated differing agreed values. In I rvtng v . 29 hardson, a vessel was valued at 3,000 under each of two policies and Ric insured for 1,700 under one and 2,000 under the other. The assured was a mortgagee of the vessel for a sum less than 3,000. When the vessel was lost the assured recovered in full under both policies, the second insurer bein~ unaware of the first policy. On learning of the assured's recovety under the first policy, rhe second insurer sought restitution to the extent that the assured's cu.mulative recovety exceeded the agreed value under the second policy. The pnmary issue was whether, on its true interpretation, the second policy covered only the assured's interest as mortgagee or also the mortgagor's interest. The assured argued that the second policy covered both interests and that, following Bousfield v Bar~es, recovery under :hat policy was not constrained by the agreed value stated In it. The argument failed, with the jury finding against the assured on the issue of interpretation. Lord Tenterden CJ, however, stated that, had ir been necessaty, he would have disringuished Bousfield v Barnes On rhe basis that the agreed values in the two policies were the same: 'I am of opinion that where a person effects two insurances, declaring the same value in each, he is bound by that sum, and cannot receive beyond that extent. '30 The true rule in cases where valued policies on the sarne interest contain the 26.23 same agreed value arose fot decision in Morgan v Price." The insured ship and cargo were valued at 2,500 in two policies. The vessel and cargo having been

identical ro those already discussed in the context of rateable proportion clauses. Whether they should be resolved in the same way will depend on whether the
clause on its true interpretation is concerned to prevent over-insurance from

arising or to exclude liability. Thus, it is suggested above that a second insurance that is retrospectively avoided after a casualty should not be regarded as existing or current for the purposes of a rateable proportion clause, since the purpose of such a clause is not to reduce the measure of indemnity recoverable in respect of the loss. Where, however, a referential exclusion clause is designed ro deter an assured from taking out a second insurance, the same argument does not apply. The United Kingdom P&I rules refer to liabilities 'recoverable' against Jnl. Whether post-casualty avoidance of the Inl cover would prevent it from being raken into account would depend on the point in time by reference to which recoverability was judged.

C. Valued and Unvalued Policies and Double Insurance

26.19 An agreed value is conclusive evidence as between assured and insurer of the

insurable value of the insured property. Consequently, an assured with double

insurance cannot recover from any insurer more than the agreed value in that

policy. Suppose, however, that the insured property is in fact worth more t]:lan the agreed value under either policy and is rendered a total loss or otherwise sustains damage, causing market value depreciation in excess of either agreed value. Having recovered the agreed value under the first policy, is the assured entitled to claim against the second insurer the balance of the market value up to a maximum of the agreed value under the second policy or must the assured give credit against the agreed value under the second policy for the sum recovered under the first?
26.20 In Bousfield v Barnes,27 a ship was insured with the London Assurance for

6,000 under a policy containing a valuation of 8,000. When the ship was wrecked, the London Assurance paid the full 6,000. The ship was also insured for 600 under another policy containing a valuation of 6,000. There was evidence that the ship was worth in excess of 8,000 when lost. In an action on the second policy, Lord Ellenborough held that the 6,000 valuation was conclusive only in settling a loss on that policy. It was 'not enough for the

28

" (1815) 4 Camp 228.

31

ibid 230. 29 (1831) 1 M & Rob 153. (1850) 4 Exch 615.

30

ibid 154.

816

817

Double Insurance and Contribution

lost by a covered peril, it was held that payment of 2,500 on one policy provided the assured with the nlll indemnity for which he had bargained and constituted satisfaction under both policies. Although there appears to have been no claim that the market value of the ship and cargo was greater than 2,500, leaving the assured in fact partially without indemnity, the tenor of the judgments does not suggest that such a circumstance would have any legal significance.
26.24 Having been rejected in cases involving policies with the same agreed value, the

Return ofPremium
initial distribution ofloss as between the insurers. 35 However, the amount ultimately recovered by the assured will indeed vary according to the order of claims where property is insured for less than the agreed values. The policy containing the hlghest valuatiOn should be the last under which a claim is made.'6 Such an unsatisfactoty possibility was acknowledged in Bruce v jones," but it 26.26 was regarded as an unavoidable consequence of the conclusive nature of the ~greed value. Each insurance contract had to be considered individually, the rnsured loss :,as capped by the agreed value, and, if that loss had already been rndemnrfied In whole or in part from some other source, the assured's right of recovety was necessarily pro tanto reduced or extinguished. Although nOt meeting with universal approval,38 the approach adopted in 26.27 Bruce v jones was subsequently codified in the Marine Insurance Act 1906 and undoubtedly represents the law. Section 32(2) reads as follows:
Where the assured is over-insured by double insurance~

approach in Bousfield v Barnes received its death knell in Bruce v jones. 32 A ship was insured for four different sums under four policies containing three different valuations. 33 The assured having recovered a total of 3,126 13s 6d under three of the policies, the issue was the measure of indemnity recoverable under the fourth policy under which the vessel was valued at 3,200. The assured argued either that no credit should be given for recoveries under the other policies or, alternatively, that the figure against which credit should be given was not the agreed value in the policy but the average of the agreed values across the four policies, which on the facts was 3,600. The Court of Exchequer, however, rejected these arguments, holding that the assured was bound by the agreed valuation in the policy at issue, had to give credit for the sums already received under the other policies, and was, therefore, entitled only to the balance of 3,200. The agreed value bound both assured and insuter in a reciprocal fashion. Just as the insurer could not invoke the market value of the insured property to go behind the agreed value in order to reduce the measure of indemnity, so the assured was bound by the agreed value as the maximum amount payable by way of indemnification of a loss covered under a property policy regardless of the source of payment.
26.25 The approach adopted in Bruce vjones clearly gives full effect to an agreed value

(b) Where the policy under which the assured claims is a valued policy, the
assured must gIve c~ed!t ~s against the valuation, for any sum received by him under any other poltey WIthout regard to the actual value ofthe subject-matter insured ...

Section 32(2)(c) prescribes a parallel rule for unvalued policies, except that credlt must be given against the full insurable value. In either case, should the assured receive more than the measure of indemnity allowed under the 1906 Act, the excess is held in trust for the insurers in proportion according to their contribution rights."

as more than JUSt a sum insured. However, the result in this context is open to the criticism that the amount the assured receives in total may vary depending upon the order in which claims are made under the various policies. Provided the property is insured under each policy for the agreed value, no such problem should arise. The assured will be indemnified by reference to the highest valuation, regardless of the order in which claims are made.'4 All that alters is the

D. Return of Premium
Section 84(3)(f) of the Marine Insurance Act 1906 provides as follows:
.. . where the assured has over-insured by double insurance, a proportionate part of the several premiums is returnable:

26.28

(1863) 1 H & C 769. Two policies valued the ship at 3,000, the third at 5,000, and the fourth, under which the case was brought, at 3,200. 34 Assume a total loss of property insured under two policies, PI and P2, with agreed values of 3,000 and 5,000 respectively. If the assured claims first under PI, the policy will pay 3,000, full credit for which will have to be given in a claim under Pl, so that P2 will be liable for 2,000. If the assured claims first under P2, the policy will pay 5,000 with the result that nothing will be payable under PI. In either case, however, the assured receives 5,000.
32
33

Subsequently adjusted by way of contribution, discussed at 26.32ffbelow. Assume that property is insured under three policies, PI, P2, and P3, Assume further that both PI and P2 have a sum insured of 1,000 and an agreed value of 3,000 while P3 has a sum insured of 3,000 and a? agreed value of ~5,0~0. Claims under PI first, then P2, and finally P3 produce ov~rall ~eco~enes of 5,000, claIms m the reverse order produce recoveries of only 3,000, whIle claIms III the order ofP2, P3, PI produce recoveries of 4,000. 37 (1863) 1 H & C 769, 777. 38 See the approval in principle of Bousfield v Barnes expressed by Slee J in Wilson v Nelson (1864) 33 LJQB 220, 223. See also North of England Iron Steamship Insurance Association v Annstrong(1870) LR 5 QB 244. 249. 39 MIA 1906, s 32(2)(d).
35 36

818

819

Double Insurance and Contribution

Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk, or if a claim has been paid on the policy in respect ofthe full sum insured thereby, no premium is returnable in respect of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable.

The Right to Contribution

E. The Right to Contribution

The right to contribution flows from the discharge by one debtor of a liability 26.32 owed by itself and one or more co-debtors. A debtor that has charged itselfwith the entirety of a debt remains bound as against the creditor to the full extent of that undertalcing. However, where more than one debtor has so charged itself, as between such debtors it is inequitable that the final incidence of liability should depend on how the creditor chooses to seek payment. The solution is to grant any debtor that is called upon by the creditor to pay, and does pay, a disproportionate share of the debt a right to contribution from all co-debtors so that the final incidence of liability is incurred by each debtor on a proportionate basis. 43 Thus, according to Hamilton ],'4 'the object, hoth with regard to contribution of sureties and the rule with regard to double insurances, is to put people who have guaranteed or insured in common in the same position as if the principal creditor or the assured had pursued his remedies rateably among them, instead of doing, as he is entitled to do, exhausting them to suit himself against one or other of them'. The right to contribution is based on equity rather than contract,45 although it can be modified by contract. 46 (1) Sources of Law The right to contribution was recognized both at common law and in equity. 26.33 Although the common law rules governing contribution differed in certain respects from those developed in equity, since the fusion of the administration of law and equity it is clear that the equitable rules prevail so that it is possible to state, without prejudice to the technical availability of the separate common law right to contribution, that 'the doctrine of equitable contribution applies both
at common law and in equity' ,47

By virtue of this provision, in cases of over-insurance by double insurance, the assured is entitled to the return of a proportion of the premium corresponding
to

the extent of the over-insurance except in three situations.

26.29 Firsr, where the contracrs creating the over-insurance are concluded at different times and the entire risk has been carried at any time by one or more earlier contracts, no return of premium can be claimed on such earlier contracts because of that assumption of risk. Liability for rhe return of premium falls solely on the later insurers. Thus, in the cargo case of Fisk v Masterman,4o five policies were talcen out on 12 April, the day preceeding the cargo's safe arrival, and a further six were concluded bona fide after arrival. Cumulatively, the eleven policies produced over-insurance. As the insured adventure had terminated before conclusion of the second group of policies, no risk ever attached under them. Consequently, to the extent that this second group generated overinsurance when added to the earlier policies, the assured was entitled to a rebate of premium on those policies to which the underwriters who had subscribed thereto were obliged to contribute rateably. No rebate was due from the underwriters who subscribed to the first group of five policies because the risk had attached. Had the cargo been lost on 12 April, they would have been liable to the full amount insured. They were, therefore, entitled to the full premium as compensation for assumption of the risk. 41 26.30 Secondly, no return of premium can be claimed on any policy that has paid a claim in respect of the full sum insured. Although the insurer can then claim
contribution in respect of the over-insurance, the insurer runs the risk that such

claim may not be satisfied, for example by reason of insolvency.

26.31

Thirdly, seemingly in order to discourage over-insurance, no return of premium can be claimed on any policy where the double insurance is effected knowingly by the assured. This may happen where the assured is concerned about the reliability of existing insurance, perhaps because of the financial position of the insurer or because the insurer or the broker has threatened to cancel the insurance. 42
" (1841) 8 M & W 165. 41 The issue in Fisk v Masterrrl:,an was solely whether the underwriters on the first group of
policies should contribute to the rebate of premium. The assured apparently did not claim restitution of the entire premium under the second group of policies on the ground of a total failure of consideration. " As in O'Kane v Jones (The Martin P) [2003J EWHC 2158 (Comm):[2004J 1 Lloyd's

In the modern law, however, contribution is to a considerable extent a matter 26.34 of statute. For the purposes specifically of marine insurance law, the right to contribution is codified in section 80 ofthe 1906 Act. 48 This provides as follows:

Rep 389.

Insolvency of one or more co~debtors is addressed at 26.61 below. American Surety Co v Wrightson (l910) 16 Com Cas 37, 55. With respect to contribution between sureties, see also Deering v Earl ofWinchelsea (1787) 2 Bas & P 270, 273; Pendlebury v 1v.llker (1841) 4 Y & C Ex 424, 441. 45 Deering v Earl of Winchelsea (1787) 2 Bas & P 270, 272; American Surety Co v Wrightson (1910) 16 Com Cas 37 at 49,51; Legal & Genera/Assurance Society Ltd v Drake Insurance Co Ltd 119921 QB 887, 891-2. " Swain v 1v.lll(1649) 1 Rep Ch 149. " Burke v LFOT Pty Ltd [2002J HCA 17, para 15 per Gaudron A-C] and Hayne J. 48 There is, indeed, no reason why MIA 1906 should not, in s 80, be regarded as codifying principles applicable to all insurance contracts: O'Kane v Jones (The Martin P) (2003] EWHC (Comm) 2158, [2004J 1 Lloyd's Rep 389, para 200.
43

44

820

821

Double Insurance and Contribution by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract. (2) If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers, and is entitled to the like remedies as a surety who has paid morc than his proportion of
(1) Where the assured is over-insured

The Right to Contribution

1978 Act" the. level of contribution is 5uch as the court, may consider just and equitable havmg regard to the extent of [the contributor s] responsibility for the damage in question'. Itrespective of the technical classification of an assured's cause of acti~n against an insurer, it is suggested that insurers afe inappropriately regarded as m any way 'responsible' for loss, damage, or liability incurred by insured property in the sense contemplated by section 2(1). In Bovis Lend Lease Ltd v Saillard Fuller & Partners, 52 HHJ Thornton held that 26.38 the liability of an indemnity insurer did fall within section 6 of the 1978 Act, invoking both the classification of insurer's liability as sounding in damages for breach of contract and the breadth of the section's wording Cor otherwise'). Conversely, in Bovis Construction Ltd v Commercial Union Assurance Co plc,53 David Steel J held that an insurer could not be held liable to contribution undet the 1978 Act, inter alia, because of the wording of section 2(1), and, in The Martin P,54 Richard Siberry QC, obiter, expressed 'grave doubts' that property insurers feU within the 1978 Act notwithstanding the classification of their liability. It is submitted that those doubts were fi.tlly juStified and extend to insurers generally. Should it, nevertheless, be the case that insurers do have contribution rights 26.39 undet the Civil Liability (Contribution) Act 1978, the question would then arise as to whether those rights replaced or were additional to the rights codified in section 80 of the Marine Insurance Act 1906. It is suggested that they would be additional, as was indeed common ground in The Martin P.55 As there noted, section 80 does not feature in the list of statutory provisions dealing with conttibution that ate expressly repealed by virtue of section 9(2) and Schedule 2 to the 1978 Act. While rhe impact of section 7(3) is not expressly limited to the repeals so expressly effected, the presence of such a list clearly indicates that provisions not so included are intended to survive. 56 (2) Time When rhe Right to Contribution Arises: Impact on Contribution of Defences to Claim by Assured The right to contribution arises out of liability of co-debtors to a common 26.40 demand that is satisfied by at least one co-debtOt in a disproportionate amount. Although the creditor may freely choose to claim satisfaction from anyone or
[200lj 77ConLR 134,paras 136-139. "[2001]Lloyd'sRepIR321,326. O'KLtne vJones (The Martin P) [2003J EWHC 2158 (Corom), [2004] I Lloyd's Rep 389,

the debt.

26.35 A more general right to contribution for 'any person liable in tespect of any damage suffered by another person' has subsequenrly been enacted by section 1(1) of the Civil Liability (Contribution) Act 1978. Section 7(3), moreover, provides that this right 'supersedes any right, other than an express contractual right, to recover contribution (as distinct from indemnity) otherwise than under this Act in corresponding circumstances'. The relationship between section 80 of the Marine Insutance Act 1906 and the Civil Liability (Contribution) Act 1978 gives rise to two questions: first, do insurers fall within the 1978 Act, and, secondly, if so, does the 1978 Act repeal section 80 or create an additional right of contribution for insurers? 26.36 For the Civil Liability (Contribution) Act 1978 to apply to insurance, under section 1(1) an insurer needs to be 'liable in respect of any damage'. By virtue of section 6(1), this requires that the person who suffeted rhe damage be 'entirled to recover compensation from him in respect of that damage (whatevet the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise)'. The question is whether the liability of an indemnity insurer is proPerly regarded as 'compensation' within rhe meaning of section 6. As discussed elsewhete, the classification of rhe liability of an indemnity insurer is difficult. LogiC dictates classification as liability in debt but a line of authority tegards aninsurer as liable in damages for breach of a contractual obligation ro hold the assured free from harm by a covered peril. The latter approach might place indemnity insurers within the 1978 Act. The former would not. 49 26.37 It is suggested that both the background to and the wotding of the 1978 Act indicate that insurers are properly regarded as falling outside the 1978 Act. The 1978 Act was intended to extend rights of and liability to contribution to 'wrongdoers other than tortfeasors',50 extending earlier legislation confined to contribution between tortfeasors. 51 However, although the drafting of section 6 is admittedly wide, it is not all-encompassing. As already noted, contribution to liability in debt is not covered. Moreover, by virtue of section 2( 1) of the

52

S4

para 188.
49

Royal Brompton NHS Trust v Hammond (No 3) [20021 UKHL 14, [20021 I WLR 1397, Law Com No 79,1977, para 58.
Law Reform (Married Women and Tortfeasors) Act 1935, s 6(1)(c).

para 37.
50

ibid paras 187, 189. Another example would have been the Maritime Conventions Act 1911 dealing with contribution in cases of maritime accidents involving two or more ships at fault. The existence of a separate regime is confirmed by the subsequent enactment of the Merchant Shipping
55
55

51

Act 1995, s 187.

822

823

,
Double Insurance and Contribution
combination of co-debtors in any combination of amounts the creditor wishes, contribution as between co-debtors depends on the creditor having an enforceable right to claim satisfaction against each of them. At what point in time must this enforceable tight exist? This in turn raises the question of the impact on rights to contribution of defences that could have been invoked by co-debtors had the creditor sought to claim directly against them. There is a divergence of authority on this point and also a question as to whether the Marine Insurance Act 1906 resolves the issue. In the following discussion, it will be assumed that rhere are two insurers (Inl and In2), that the assured elects to claim against Inl, and that In I wishes to claim conttibution against In2.

The Right to Contribution

Suppose that each of two policies providing double insurance contains an obligation ro notifY the insurer of any event that might give rise to a claim within a specified period of time of the assured learning of such event. Suppose that the assured duly gives notice to In I and In I admits liability. Since the assuted will be fully indemnified by In I, the assured does not then bother to serve notice on In2, such a notice being entirely pointless from the assured's perspective. Failure to serve such a notice results in the loss of rhe assured's tighr to claim against In2. Can In2 resist a claim to contribution from In I on the ground that In2 could not now be called upon to pay the assured so that there is no liability to a common demand? Alternatively, does it suffice that, as at the time of loss, In2 was potentially liable in that the assured was then entitled to require indemnification from In2 subject to making a claim in accordance with the terms of the policy? There is a divergence of view in the case law. In Monksfield v Vehicle & General Insurance Co Ltd,59 In2's policy provided that, 26.44 as a condition precedent to the insurer's liability, the assured was obliged to
notify the insurer in writing of any accident as soon as possible after its occur-

(aj Marine Insurance Act 1906, section 80 26.41 Section 80(1) of the Marine Insurance Act 1906 provides for contribution 'where the assured is over-insured by double insurance'. In The Martin P," Richard Siberry QC held that the focus of this subsection is the time of loss. There is no relevant over-insurance unless the conditions for double insurance as stated in section 32 are fulfilled at the time of loss. If they are then fulfilled, section 80(1) stipulates the consequence of liability in contribution. That accrued liability cannot be affected by post-loss events that prejudice the right of the assured to claim against one of the insurers.
26.42 With respect, however, it is doubtful whether the wording of section 80(1) does resolve this question. Clearly there can be no relevant double insurance unless there is double insurance at the time of loss. However, section 80 provides that double insurance means that each insurer must contribute 'in proportion to t!}e amount for which he is liable under his contract'. This phrase, it is submitted, is ambiguous in terms ofwhether the relevant liability is that under rhe contract as at the time of loss or that under the contract taking into account all the terms of the contract. In Legal & General Assurance Society Ltd v Drake Insurance Co Ltd," In2 sought to resist a contribution claim on the basis that the assured had failed ro comply with a contractual requirement to notifY the insurer of any event that might give rise to a claim. Ralph Gibson LJ referted to section 80 and stated that the phrase 'for which he is liable under his contract' was 'of course, not decisive of the point'.

rence. The assured having failed so to do, HHJ Graham Rogers held that Inl was unable to seek contribution despite having settled the claim in full. Defences valid as against the assured were not to be circumvented through double insurance and contribution:
.. . it cannot be an equitable result that an insurance company which had no notice of an accident, had no say in the handling of the claim, and for whom ... there was no opportunity 'to investigate the rights and wrongs of it',60 should be called upon to make a contribution in a case in which it would quite clearly have

had the tight to tepudiate if the claim had been brought undet the tetms of its own policy."

Monksfield was subsequently overruled by a majority of the Court of Appeal 26.45 in Legal & General Assurance Society Ltd v Drake Insurance Co Ltd." By the time Inl sought contriburion, In2 was again protected against any direct claims by the assured by a notification clause ranking as a condition precedent to liability. Nevertheless, although contribution cannot be enforced until an insurer has paid more than a proportionate share, according to Lloyd LJ63 it did not follow that:
.. . the conditions for the existence of the equity [upon which the right to contribution is based] are determined at the same date. Since the existence of the equity

(b) The common law

26.43 In the case law, the issue of the time at which the right to contribution accrues has arisen primarily in the context of occurrence notification obligations.

57

OKane vJones (The Martin P) [2003J EWHC ((:omm) 2158, [2004J

I~Lloyd's Rep 389,

paras 198-199.
sa [1992J QB 887, 902.

[1971] 1 Lloyd's Rep 139. Quoting Lord Denning MR in Farrell v Federated Employers> Insurance Association Ltd [1970] 1 WLR 1400, 1406. " [1971] 1 Lloyd's Rep 139, 141. 62 [1992J QB 887 (Lloyd and Nourse LJJ, Ralph Gibson L] dissenring on tbis point). 63 ibid 892.
59

60

824

825

Double Insurance and Contribution

depends on the ability of the assured to claim against either [insurer] at his choice, the obvious date at which to determine whether the conditions are satisfied
is the date when the assured is assumed to exercise his choice, namely the date of

The Right to Contribution

accident. Disagreeing with the Court ofAppeal in Legal & General, Lord Woolf considered that they did not:
If the contractual approach is adopted, then there can be no justification for departing from the contractual position by creating for the purposes of contribution 'between the co-insurers a special cut-off point which requires the position to be judged at the date of the loss. Having such a cut-off point could produce results which do not reflect the contractual situation so far as liability to the assured is concerned. Looking at the issue from the insurer's and insured's standpoint, it makes no difference if an insurer defeats a claim by relying on action taken before or after the loss has occurred.

the loss.
26.46 For the equity to be satisfied, it sufficed that In2 was 'potentially' liable in that

the assured could have claimed against In2 had he so wished. In circumstances where the assured could have claimed against eirher insurer 'it would be inequitable for eirher of the insurers to receive the benefit of the premium wirhout being liable for rheir share of the loss'. 64 Lloyd LJ acknowledged the possible unfairness to In2 of finding itself indirectly liable through the doctrine of contribution for a claim to which it thought ir had a clear defence and rhat notwithstanding the lapse of some considerable time. Moreover, In2 might have lost the opportunity to investigate the claim and perhaps uncover a defence overlooked by lnl. Nevertheless, for both Lloyd and Nourse LJJ, the 'balance of equity' favoured denying In2 its accrued ptocedural defence rather than denying contribution to In I merely because of an omission over which In I had no control.
26.47 A different view was, however, espoused by the Privy Council in Eagle Star

Monksfieldwas stated to have been correctly decided. Lord Woolf acknowledged 26.49 that an inevitable consequence of permitting an insurer to take advantage of any defences to contractual liabilities was that the acts of the assured could affect an insurer's right to contribution. However, 'before suggesting this could be unfair ir has to be remembered that it is unlikely that the existence of the other insurer would have been known at the time that the contract of insutance was made'. 66 On the facts, as neither insurer was liable to the assured whereas both were fully liable to the third party, 50 per cent contribution was advised.
The competing approaches of the Court of Appeal in Legal & General and rhe 26.50 Privy Council in Eagle Star were subsequently consideted at fitst instance in The Martin P. 67 In response to threatened cancellation of the policy with In I for non-payment of premium, the insured owners procured a second policy with lnl. The Martin P was rendered a consrrucrive total loss. On discovering rhar the Inl policy had not been cancelled, the owners claimed againsr Inl and soughr and obrained cancellarion of the In2 policy. In I honoured the claim and sought contriburion from In2. Richard Siberty QC68 held rhar In1's right ro contribution had accrued at the rime of loss and was nor defeated by the posrloss cancellation. The approach of the Court of Appeal in Legal & General was not only binding as a matter of precedent" but also preferable in principle. A right to contribution should not depend on whether the assured bothers to give a notice of claim to In2 notwithstanding that such a notice might appear to the assured to be commercially pointless. Moreover, the contraty view could even lead to the assured agreeing not to serve a notice of claim or to a cancellation of the policy, pethaps in return for some inducement, deliberately to bar a right to contribution. For equity so to permit would be 'extraordinaty'.70

Insurance Co Ltd v Provincial Insurance pic:' a case concerning third party liability under motor insurance policies. Both insurers had valid defences against the assured: Inl had cancelled the policy before the accident while In2's policy contained a post-accident notification requirement with which the assured had failed to comply. By virtue of road traffic legislation, however, neither defence was opposable against the third party. While the third party could enforce in fyll against either insurer, at issue was the distribution ofliability as between the two insurers. The first instance judge focused on the time of the accident. At that time, only In2's policy was enforceable by the assured, with the result that In2 should carry full liability. The Court of Appeal of the Bahamas upheld In2's appeal and allowed 50 per cent contribution from In 1. The Privy Council upheld this judgment.
26.48 Given that statute rendered both insurers liable to the third party, Lord Woolf,

delivering the opinion of the Privy Council, stated that contribution could only be assessed by reference to the extent of their liability either under the legislation or under their respective contracts. Of these alternatives, the contractual approach was preferable 'since the extent of their respective liabilities to the person insured will indicate the scale of the double insurance'. That approach then raised directly the impact of the differing contractua! defences and whether the respective liabilities fell to be determined as at the time of the

66

ibid 141. See also the dissenting judgment of Ralph Gibson LJ in Legal & General [1992]

QB 887, 90S: Commercial Union Assurance Co Ltd v Hayden [19771 QB 804, 815. 67 o 'Kane v Jones (The Martin P) [2003J EWHC (Comm) 2158, [2004J 1 Lloyd's Rep 389.
68 69

Sitting as a deputy judge of the High Court. A view since confirmed: see 26.52 below.

64

ibid 892 per Lloyd LJ, See also Nourse LJ at 898.

6S

[199411 AC 130.

" [20031 EWHC (comm) 2158, [2004J Lloyd's Rep 389, para 203.

826

827

Double Insurance and Contribution

26.51

The Right to Contribution

right to contriburion could ever arise where In2's policy was eirher prospectively discharged or rerrospectively avoided prior to loss. This would cover any repudiatory breach accepted prior to loss, any breach of a promissory warranty, rhe complered exercise of any contracrual cancellation right, any consensual cancellation of the policy,75 and any avoidance for pre-contractual misrepresentation or non-disclosure. Moreover, even if as at the time of loss In2's policy is merely voidable and is not avoided unril a later date, the retrospecrive consequences of avoidance should mean that In2 will be treated as not having been on risk as at the time of loss so that there will again be no double insurance. Lloyd LJ was even inclined to the view that In2 would be able to invoke a repudiatory breach even where not accepted at the time of loss 'though this is not so clear." If, however, a right to contriburion accrues as at the dare of loss, it is difficult to see how it can be prevented from arising by 'a thing writ in water'77 or subsequently prejudiced by a purely prospective discharge. The position under the Civil Liability (Contribution) Act 1978 is also instruc- 26.54 tive. The liabiliry in respect of the same damage that affords a right of contribution under section 1(1) falls to be established at the time contribution is claimed." However, by virtue of section 1(3):
A person shall be liable to make contribution under subsection above ~o~ith standing that he has ceased to be liable in respect of the damage 1ll question SInce
the time when the damage occurred) unless he ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right on

The approach adopted in Legal & General is indeed preferable. The whole point of the doctrine of contribution, acknowledged both at common law and in equity and recognized and extended by starute, is that the final incidence of liability should be shared as if rhe creditor pursued recoveries from the various
co-debtors on a proportionate basis. 71 In the insurance context, that must

ttanslate into distribution between insurers on the assumption that the assured duly complied with all procedural requirements for the bringing of claims. The Privy Council in Eagle Star would seem to view any right to contriburion as a forruitous windfall, justifying rendering the adjustment of incidence of liability as between insurers subject to the vagaries of the assured's actions againsr the various insurers. That, however, is to deny tbe policy of proportionate sharing of liability rhat lies behind the existence of the doctrine of contriburion. The important point is that Inl's claim for contribution from In2 is not derivative of the assured's righrs against In2. 'The equity is one that arises between co-insurers simply because they were co-insurers.'72 That the assured elects for whatever reason not to claim against In2 cannot affect the equity between the co-insurers. Moreover, one of the main reasons why an assured is likely nor to pursue rights against In2 is because recovety has proceeded smoothly against Inl. It is hard to see why Inl should be prejudiced in rerms of contribution righrs because it has behaved wirh good faith and honoured its policy promptly.
26.52 The Court ofAppeal has subsequently held rhat a contraty decision of the Privy

(l?

Council does not entitle rhe Court of Appeal to depart from one of its own earlier decisions. 73 Consequently, regardless of the merits, the approach of rhS' Court of Appeal in Legal & General is binding on all courts below the House of Lords. It must, therefore, be raken that the right to contriburion accrues at the time of the loss, and consideration must be given to the application of that approach.
26.53 It is clear from Legal & General itself that In2 would not be allowed to rely on

which the claim against him in respect of the damage was based.

non-compliance with any procedural requirement, such as any clause requiring notification of an occurrence or the making of a claim or any claims cooperation clause. However, in Legal & Genera!," Lloyd L] acknowledged a 'sharp distinction between steps required to enforce a valid claim under a policy in force at the time of rhe loss and a claim which never was valid, and never could be enforced'. Thus, rhere would be no relevant double insurance and no

This subsection would appear to cover the cessation of liability of an insurer by teason of the assured's non-compliance wirh a procedural pre-requisite to the making of a valid claim in respecr of a liability otherwise covered by the terms of the insurance." There would appear to be no reason for separate contriburion rights of (marine) insurance law to be less generous than those granred under the 1978 Act. If, contrary to the view previously expressed, the approach of the Privy Council 26.55

American Surety Co v Wrightso~ (1910) 16 Com Cas 37, 55. Legal & GeneralAssuranceSociety Ltd v Drake Insurance Co Ltd[1989] 3 All ER 923, 925 per Roger Buckley QC, sitting as a Deputy Judge of the High Court. , " lie Spectrum Pins Ltd [20041 EWCA Civ 670, [2004] Ch 337, paras 57-58. " [1992] QB 887, 893.
71

72

" As in O'K4ne v Jones (The Martin P) [2003] EWHC 2158 (Comm), [20041 1 Lloyd's Rep 389. 76 [19921 QB 887, 893. 77 As an unaccepted repudiation was famously described in Howard v Pickford TOol Co Ltd [195111 KB 417, 421 per Asquith LJ. . , 78 Co-operative Retail Services Ltd v Taylor lOung Partnershtp [2002] UKHL 17, [2002] Lloyd s ~ffi555. , . 79 A contractual notification period would not, it is suggested, be regarded as a penod of
limitation or prescription' and, in any event, its expiry dearly does not extinguish the right on

which the assured's claim is based.

828

829

Double Insurance and Contribution

in Eagle Star were to be preferred, the further question would arise of whether InI would have the right to sue rhe assured for damages for prejudicing contribution rights, analogous ro the established righr ofan insurer to claim against an assured for prejudicing rights ofsubrogation.'o There is no authority on wherher an assured can be so liable as a marrer of common law," alrhough it suggested that the law should hesitate before subjecting an assured to potential liability for omirring to rake a step that might appear ro have no commercial point. There can, however, be no objection ro creating an express contractual obligation to take all necessary steps ro preserve all righrs ro claim against all potentially liable insurers and, indeed, the wording of the Duty ofAssured clause in the Institute cargo clauses is broad enough so ro do."
26.56 Where the In2 policy is void under section 4 of the Marine Insurance Act 1906

The Right to Contribution

entitled by way ofsubrogation to exercise Q's right to recoupment from D, which liabiliry D in turn could have passed on ro In 1. Ulrimate liability as between In I and In2 lay, therefore, with In I, negating any right to contribution. (4) Voluntary Payments Contribution cannot be claimed ro rhe extent rhat InI's payment in excess of 26.58 irs proportionate share is voluntary. Thus, an insurer that, in the absence of staturory compulsion, indemnifies the assured in full despite the presence in its policy of a rateable proportion clause and knowing of the existence of another relevant insurance is a volunteer in respect of the payment in excess of its
proportionate share and canilot claim contribution from another insurer also

liable for the 10ss.85 There is, however, a difference of view in the authorities as
to how voluntariness is determined.

as a gaming or wagering contracr, it has been srated rhar the principles of double insurance and conrribution should operate as normal since such policies are honoured in practice." If correer, rhis should apply whichever approach is preferred. (3) Primacy of Liability
26.57 The equity of contribution assumes rhat rhere is no primacy of liability for rhe

loss as between InI and In2. On this basis, contribution was denied in the Irish case of Zurich Insurance Co v Shield Insurance Co. 84 S, an employee of Q, was injured in a road accident caused by the negligence of a fellow employee, D. Consequently, Q was vicariously liable ro S and entitled to indemnity from D in respect of such liability. S's acrion against Q was settled in full by InI, Q's road accident insurer. Under this policy, Inl's liability embraced all claims against D qua driver and also againsr Q qua employer of D. Q also had employers' liability insurance wirh In2 that covered Q as against S but which in no way benefited D. InI unsuccessfully sought contribution from In2. Had In2 been called upon to indemnifY Q against Q's liability ro S, In2 would have been

so For the right to sue for occasioning prejudice to subrogation rights, see 25.18 above. 81 The question of whether such liability exists was raised in OKane v Jones (The Martin P) (20031 EWHC 2158 (Comm), (2004J 1 Lloyd's Rep 389 but, given the decision on accrual of contribution rights as at the time of loss, did not require resolution and accordingly was not discussed: ibid paras 251-253. 82 Institute Cargo Clauses (A), (B), (C), cl 16: 'It is the duty of the Assured and their servants and agents in respect ofloss recoverable hereunder .. , [2] to ensure that all fights against carriers, bailees or other third parties are prQperly preserved and exercised .. .' Likewise Institute Strikes Clauses (Cargo) and Institute War Clauses (Cargo), ell!. 83 Thames & Mmty Marinelnsurance Co Ltd v 'GunfOrd' Ship Co Ltd (1911J AC 529, 536, 549-50. Sed quaere. see 25.07 above. The invalidity ofinsurance policies under)vlIA 1906, s 4 is discussed in Ch 3 above. 84 [1988J lR 174.

In Drake Insurancepic v Provident Insurancepic," rhe Court ofAppeal emphasized 26.59 rhat voluntariness was to be assessed as between the insurers. The assured injured a third party in a road traffic accident. InI settled the third party's claim in full and sought 50 per cent contribution from In2. However, In2 argued rhar a rateable proportion clause in Inl's policy meant that InI did nor have ro pay the assured more than its proportionate share, so rhat In 1 was seeking contribution in respect of a voluntary over-payment. From Inl's perspective, however, the rareable proportion clause was of doubtful efficacy. This was because of issues surrounding the true interpretation of the clause and because an arbitraror, in an award binding on the assured but not InI, had held that In2 was entitled to avoid its policy. This holding was highly debatable in point of law and ultimarely held by the Court of Appeal to have been wrong. It was, nevertheless, 'a fact in the world' rhat rhe assured would have invoked againsr InI had InI sought to limit the extent of irs indemniry." Accordingly, in correspondence between the two insurers, In1 cleatly disputed In2's denial of liability and made clear both that it was dealing with the third party's claim in order to avoid adverse publicity for rhe insurance indusrry and rhat it intended to pursue a claim againsr In2. Under these circumstances, the Court of Appeal held that Inl's settlement in full of the assured's claim was not voluntary. In so holding, the Court of Appeal distinguished the earlier decision in Legal & 26.60 General Assurance Society Ltd v Drake Insurance Co Ltd." Each case concerned

-----------------~--

Bovis Construction Ltd v Commercia! Union Assurance Co pic [2001] Lloyd's Rep IR 321, paras 13-14. 86 [2003J EWCA Civ 1834, [2004J QB 601. " ibid pata 122 per Rix LJ. 86 (1992J QB 887.
85

830

831

Double Insurance and Contribution

motor insurance policies and in each case In]'s policy contained a rateable proportion clause. In each case, In 1 settled the third party claim knowing of the existence of the other policy.89 By virtue of stature, such a clause could not be invoked against any third party obtaining judgment against the assured so that the presence of the clause, combined with knowledge of the other insurance, could not of itself render the over-payment voluntary. However, statute also enabled the insurer then to recover from the assured the excess over its rateable proportion which it had been compelled to pay the third party. In Legal & General, the Court of Appeal held that this source of restitution of the excess rendered the over-payment voluntaty as against In2 denying any right of contriburion. This holding is, with respect, highly questionable, and it is noteworthy that the issue was raised late in proceedings to the detriment of the fullness of argument. 90 It is difficult to see the relevance of an alternative source of recoupment. A co-surety that pays more than its due share on demand of the creditor is entitled to contribution from its fellow sureties despite its right to be indemnified by the principal debtor." In Drake v Provident;' the Court of Appeal, while distinguishing Legal & General on the basis of In 1's protests, expressed considerable doubt as to the relevance ofIn!'s statutory rights against the assured. (5) Non-satisfaction of a Contribution Claim by Reason of Insolvency 26.61 At common law, the co-debtor that has paid the creditor carries the risk that any co-debtor will be unable to meet its liability in contribution. In the event of such inability, the share of the defaulting co-debtor is not shared among the remaining co-debtors." In equity, however, the share of any insolvent co-deht6r is redistributed among those co-debtors who are solvent as at the time when contribution is sought," and it is, of course, the equitable rule that prevails." This rule is well established for sureties and the parallel between insurers and sureties who are entitled to seek conttibution is confirmed by section 80(2) of the Marine Insurance Act 1906.

Quantifying

in Contribution

R Quantifying Liability in Contribution

There are three recognized possible methods for quantifYing liability in contri- 26.62 bution. There is little authority on which method is correct, altbough one is favoured by the balance of such authority as exists. (1) Bases for QuantifYing Liability in Contribution Three bases for quantifYing liability in contribution are discussed in the case 26.63 law, namely the common, independent, and maximum liability bases. Under the common liability basis, co-insurers carty loss equally up to the lower 26.64 of the policy liability limits (that is, for the loss for which there is common liability) with the surplus carried alone by the insurer that would alone be liable for it. Thus, if twO policies (PI and P2) contain liability limits of 100,000 and 10,000, the first 10,000 of loss would be shared equally, with the balance being carried by PI alone. On a loss of 50,000, rherefore, PI would be liable for 45,000 and P2 for 5,000. According to one commentator," the common liability basis is favoured in the 26.65 cargo market, it being considered that double insurance exists only to the extent that both policies respond to the loss. Above the lower policy limit, it is said there is no double insurance at all. This is hard to sustain." However, the impact of approaches to calculation of contribution on agreed values does raise serious questions most easily answered by the common liability basis." Under the independent liability basis, loss is divided between co-insurers in 26.66 proportion to the insurers' respective liabilities on the particular claim had each been the sole insurer. Consequently, provided the loss does not exceed the lower of the policy limits, there will be equal sharing. Once the loss exceeds the lower limit, liability will be weighted towards the policy with the higher limit. Taking the same example as in the previous paragraph, if each insurer were the sole insurer, on a loss of 50,000, PI would be liable for the full 50,000 while P2 would be liable for 10,000. The loss would accordingly be divided between PI and P2 in rhe ratio of five to one. PI would be liable for 41,666.7 and P2 for 8,333.3.

89 With respect to Legal & Genera4 the fact of this knowledge is stated in the judgment at first instance: [1989J 3 All ER 923,924. 90 [1992J QB 887, 897. 91 The analogy between a co~surety and a co-insurer is confirmed by MIA 1906, s 80(2). " [2003J EWCA Civ 1834, [2004J QB 601, paras 128, 186. " Batard v Hawes (1853) 2 EI & B1287. " Hitchman v Stewart (1855) 3 Drew 271; Lowe & Sam v Dixon & Sons (1885) 16 QBD 455. 9S Lowe & Sam v Dixon & Sons (1885) 16 QBD 455; Re a Debtor (No 627 of 1936) [1937J Ch 156, 165.

96 97

D O'May, Marine Insurance Law and Policy (1993) 501-2. If over-insurance by double insurance is indeed so confined, then the common liability basis

is not only an acceptable method for calculating liability in contribution but other suggested methods must be wrong. However, case law discussed below that favours the independent liability method must be taken as rejecting such a constrained concept of double insurance. There is, it is therefore suggested, nothing inherent in the notion of double insurance that mandates the common liability basis. 98 See 26.72 and 26.82-26.83 below.

832

833

Double Insurance and Contribution 26.67 Under the maximum liability basis, loss is divided between co-insurers in proporrion to their maximum potential exposure under their respective policies. A loss of any size is divided in that way. Taking the same example again, loss would be divided in the proporrions of ten ro one. P I would, therefore, be liable for 45,454.5 and P2 for 4,545.5. 26.68 The extenr to which it is necessary ro determine precisely which basis for determining conrriburion is correer depends on the facts. As already seen, provided rhe loss does not exceed the lowest policy limit, the independent and common liability bases always produce the same result, namely equal contribution. Moreover, where the loss is equal to or exceeds the higher policy limit, the maximum and independent liability bases always produce the same result, namely division in proportion according to the respective policy limits.

Quantifying Liability in Contribution

(a% X b)

+ (c% X d) + (e% X f) etc,

where a%, c%, e%, etc represent the percentage ofloss for the relevant tranche dependent on the number ofco-insurers for that tranche and b, d, f, etc represent the loss, in whatever currency, covered by that tranche. Is such liability in contribution proportionate to the amount of liability under 26.71 the contract? Th~ answer must be yes. There may be no one fixed proportion. That depends on the limits in the various policies and the number of coinsurers, but contribution is determined as a proportion of contractual liability for each tranche. The question then is whether such a proportionate liability involves contributing rateably. Since co-insurers contribute on a pro rata basis for each tranche, it is difficult to see why not. 'OO It is, therefore, suggested that the wording of section 80(1) does not exclude the common liability basis as a possible method ofcalculating liability in contribution. As a marrer of principle, moreover, the decision in The Martin Pis regrerrable 26.72 because it leads to the sidestepping of agreed values in valued policies. In The Martin P, two hull policies contained different agreed values of US$5 million and US$2.5 million. The insured vessel was rendered a roralloss and the assured recovered US$5 million from Inl, which then sought contribution from In2 on eirher the independent or maximum liability bases. Since the measure of ind~mnity. in respect of which contribution was sought equalled the higher policy limIt, these bases provided the same result, namely one-third contribution. Given the decision that the wording of the Marine Insurance Act 1906 excluded the common liability basis for which In2 contended, In2 was compelled ro contribute rowards an indemnity double that which In2 had agreed should be conclusive evidence of the insurable value as between itself and the assured. In such circumstances, Inl may of course argue that it is not bound by the agreed value in In2's Contract. However, it is difficult to see why a value agreed on the basis that it will operate as a conclusive yardstick for the assessment of measures of indemnity and a conclusive limitation on liability should be overtidden with an insurer forced to contribute to an indemnity calculated on the basis of a higher value simply because another insurer elects, perhaps in return for a higher premium that is not shared in rerum, to agree ro such higher value. If presented with that value, In2 might have declined the risk or at least required a higher premium. Instead, ir is being compelled indirectly to participate in insuring a risk on a fundamentally different financial basis for no increase in premium. This consideration, it is suggested, provides a reason for

(2) Marine Insurance Act 1906

26.69 Section 89(1) of the Marine Insurance Act 1906 provides that, in the event of over-insurance by double insurance, each co-insurer shall 'conrribute rateably ro the loss in proportion ro the amount for which he is liable under his conrract'. Does this wording mandate or exclude the adoption of one of the bases outlined above? In The Martin P," Richard Siberry QC held that this wording excluded the common liability basis because, under this method, an insurer's level of contribution does not adjust according ro the amount of liability under that insurer's policy whereas it does on both the independent and maximum liability bases. On the facrs, however, since the amount of loss exceeded the limits under the twO policies, ir was not necessary ro choose between the larrer ~o approaches. 26.70 With respect, however, it is not clear that this exclusion of the common liability basis is correct. The common liability basis amounts to equal, pro rata division for any tranche of loss where there is a co-insurer and full liability for any rranche where there is no co-insurer. Assume four policies with limits of 10,000 (PI), 20,000 (P2), 30,000 (P3) and 40,000 (P4). On a loss of 35,000, each insurer would incur liability for 2,500 on the first tranche of 10,000. The second rranche from 10,001 to 20,000 would be divided in thirds between P2, P3, and P4, the third tranche from 20,00 I to 30,000 would be divided in halves between P3 and N, while the last tranche of 5,000 would be carried by P4 alone. The liability of any given co-insurer in respect of the tranches of loss covered by its contract can be represented as

99 O'l6ne vlanes (The Martin P) [20031 EWHC 2158 (Comm), [2004J.I Uoyd's Rep 389, para 263.

100

The common liability basis was regarded as rateable by Lawton LJ in Commercial Union

Assurance Co Ltd v Hayden [19771 QB 804, 822.

834

835

Double Insurance and Contribution

construing section 80(1) with such latitude as is necessary to admit ofcalculation of contribution on a common liability basis. ' ' (3) The Case Law
26.73 Two cases have considered the question of the appropriate method for quantifY-

QuantifYing Liability in Contribution

s independently have heen liable. ' Hamilton] rejected In2's fitst method as disregarding the limitation of liability in In l's policy and chose the independent liability basis without stating any reason fot rejecting the common liability basis.

ing liability in contribution free from any staturory constraints. It should, nevertheless, be observed that there is no reason of principle why the classification of rhe insurance contracts as marine should necessarily lead to a distinctive method for quantifYing contribution. It may, however, be appropriate to dis" tinguish between property and liability insurance. The two decided cases both concern liability insurance.
/

26.74 In American Surety Co v Wrightson,'02 Inl insured the fidelity of named

employees up 1'0 a specified figure. For the relevanr employee, Kohler, the maximum liability was US$2,500. In2, a representative Lloyd's underwriter, had subscribed to a policy covering a range of risks including employee fidelity under which the maximum liability was 40,000. Kohler commitred defalcations to the extent of US$2,680. The assured claimed and received US$2,500 from Inl and US$180 from Lloyd's underwriters. InI then claimed contribution from In2.
26.75 Inl argued unsuccessfully for the maximum liability basis, subject to an allow-

Commercial Union Assurance Co Ltd v Hayden'06 concerned contribution between 26.77 two public liability insurers. The maximum exposures under the policies were 100,000 (Inl) and 10,000 (In2). Each policy contained a rateable proportion clause. With In2's consent and without prejudice to the question of contribution, InI settled in full a claim of 4,425.45 but the appropriate level of contribution became a matter of dispute. In2 (a representative Lloyd's underwriter) argued for the maximum liability basis, producing a ratio of 10:1 and rendering In2 liable for only one-eleventh of the loss. In I, conversely, argued for the independent liability basis. As noted above, under this approach, the loss is divided in proportion to the insurers' respective liabilities on the particular claim had each been the sole insurer. On the facts, as the amount of the claim did not exceed the lower limit, each insurer would have been fully liable and, therefore, the loss should be shared equally. The Court of Appeal upheld In1's claim for 50 per cent contribution, albeit on differing
reasoning.

ance to In2 in respect of the US$180 paid by In2 and in respect of which In2 was solely responsible. Although the 40,000 maximum liability accepted by In2 could not be distributed between the various risks covered 'as one would do if it were an insurance on a row of cotrages', In2 clearly never contemplated an exposure of 40,000 for any employee as opposed to general liability for . employees' infidelities to a cumulative maximum of 40,000. '03
26.76 In2 suggested three differenr methods of calculating contribution. The first

was to divide the loss equally. The second was the independent liability basis. Viewing each insurer independently, Inl was liable to the assured for US$2,500, In2 for US$2,680. On this basis, rherefore, liability was to he apportioned 2,500:2,680. '04 The third was the common liability basis. This left In2 solely liable for the US$180 by which the loss exceeded the limit on Inl's policy and divided equally the liability for that part for which they would both

On the common liability basis and respect for agreed values; see 26.82-26.83 below. (1910) 16 Com Cas 37. 103 ibid 57. Hamilton Jnoted (at58) that the Lloyd's omnibus insurance was incompatible with the method adopted by In 1, an American in~urer, of attaching a figure to each employee covered. Had In1's arguments succeeded, Lloyd's would have been compelled to cease underwriting
101 102

The Court was unanimous in rejecting the maximum liability basis. Various 26.78 reasons were advanced. First, the maximum liability in a liability policy bore little relation to the risk run. The low level of premium on each policy demonstrated the expectation that any claims would be relatively low. This was reinforced by the premiums charged. Although the maximum liability accepted by In I was ten times higher than rhat accepted by In2, the premium charged by In 1 was only 20 per cent higher than that charged by In2. Assessing contribution by reference to a figure that in no way reflected the claims expectation or, in most cases, the claims experience made little commercial sense. Secondly, for Cairns L], the issue was one of construction of the rateable proportion clause, since it was common ground that In2's liability in contribution should match In2's liability to the assured had the assured claimed against In2. The policies were concluded independently of one another, the limit under the Lloyd's policy and the premium payable being determined without knowledge of any other insurance. Consequently, it was difficult to accept an intention that contribution should be determined according to maximum liabilities. The sole purpose of the maximum liability limit was protection against exceptionally large claims. Thirdly, all three members of the Court alluded to the general problem of applying the maximum liability basis where one policy contained no

omnibus policies and adopt the American practice.

104

On this basis, Inl is liable for US$I,293.45, In2 for US$1,386;55.

105

On this basis, Inl is liable for US$I.250, In2 for US$I.430.

'06

IJ 977) QB 804.

836

837

Double lmurance and Contribution

Quantifying Liability in Contribution

limit. At first instance in Commerd'al Union v Hayden, it was suggested that in such a case a limit should be determined by reference to the likely maximum claim, an approach condemned as a 'distortion' of the maximum liability principle and difficult, if not impossible, to apply.t07 Fot Stephenson LJ, indeed, this was the decisive consideration in rejecting the maximum liabihty baSiS, which otherwise he would have been inclined to accept.
26.79 Rejection of the maximum liability basis decided the case in favour of Inl.

open the possibility rhat a method of apportioning liability based on the risk assumed as revealed by the policy limit would be adopted by the courts in cases of property insurance. Both the maximum and common liability bases focus on the policy limit, albeit in different ways. If The Martin P is correct that the wording of the Marine Insurance Act 1906 26.82 precludes the common liability basis,112 the maximum liability basis becomes the only alternative to the independent liability basis. However, in marine insurance, property policies are usually valued policies. As discussed above,113 the independent and maximum liability bases fail to respect agreed values in that, where the measure of indemnity is calculated as a sum equal to or a proportion of the agreed value, they compel a co-insurer with a lower agreed value to contribute to a measure of indemnity assessed by reference to a figure higher than that agreed with the assured on a conclusive basis. Full respect for the concept of the agteed value would require that an insuret 26.83 could not be asked to contribute to a level of indemnification in excess of that dictated by the agreed value in its own policy. In cases of total loss, this would be achieved by the common liability basis. In cases of partial loss, a modified common liability basis may be needed, whereby the limit of common liability would be the measute of indemnity on the insuter's own policy. This is because, under a valued policy, it follows from the conclusive natute of the agreed value not only that the measure of indemnity for a total loss is a sum equal to the agreed value, but also sometimes114 that the measute of indemnity for a partial loss is a proportion of the agreed value. Thus, if a catgo insurer undet a valued policy should not have to contribute to an indemnity in excess of the agreed value in a case of total loss, so, if half the cargo is lost, it should not have to contribute to an indemnity in excess of half the agreed value. Outside those cases where the measure of indemnity is dictated by an agreed 26.84 value, it is difficult to perceive any compelling reason in favour of one or other basis for the calculation of contribution. Howevet, simplicity might suggest maintaining the same rule. Otherwise, for example, the threshold for constructive total loss of a damaged ship might decide not only the measure of indemnity received by the assured but also, which might be thought odd, the basis for calculation of contribution between insuters, since, under a valued policy, the measure of indemnity for a total loss of a ship is dictated by the agreed value while that for repaired damage to a ship is not. 1t5

Since the value of daim was below the lower of the policy limits, both the independenr and common liability bases produced a result of 50 per cent contribution. In 1 argued its case on the independent liability basis and Cairns and Stephenson LJJ accepted that case. However, Lawton LJ, who was the o?ly judge to address contribution to claims that exceeded the lower of the pohcy limits, reasoned differently.tOs Different upper limits generated the inference that the insurers were accepting the same level of risk up to the lower of the limits. Contribution should then be assessed on the basis of equal liability up to the lower limit, with the burden of meeting the excess of the claim above that limit falling on the insurer who had contracted for the higher limit. This is the common liability approach.
26.80 As a matter of common law, therefore, the Court of Appeal decision in Hayden

provides dear authority for rejecting the maximum liability approach as a basis for calculating contribution in liability insurance. However, the apparent endorsement by a majority of the Court of the independent liability basis is tempered by the fact that the common liability basis, which would have produced the same result on the facts, was not argued as an alternarive yet attracted the support of Lawton LJ. Of course, if The Martin Pis correct to hold that the wording of the Marine Insurance Act 1906 excludes the common liability basis,,09 the independent liability basis must necessarily be correct for marine liability insutance. ' 10
26.81

With respect to property insurance, the position is less clear. Insurers approach property and liability insurance in fundamentally different ways. In property insurance, the policy limit, whether expressed as a value or sum insured, is a better reflection of the risk assumed and premiums are based on a percentage of thar limit. All three judges in Hayden 1t1 noted this difference and refrained from expressing decided views on contribution in property insurance. This leaves

107
110

ibid 816.

lOS

ibid 822.

109

See 26.69-26.71 above.

favour, of

And also for non-marine

liability insurance, unless an argument ofprinciple in

the common liability basis could override t1).e inconsistency of having different rules for manne and non-marine insurance when there is nothing <tbour the marine classification of the insurance to suggest a justification for such a distinction. n, [19771 QB 804, 814-15, 819, 822.

See 26.69-26.71 above. 113 See 26.72 above. The measure of indemnity for damage to ships generally ignores the agreed value, whether as a matter of statute or contract, see 23.15-23.27 above.
112
114

115

ibid.

838

839

APPENDICES
1. MarineInsurance Acr 1906 2. Marine Insurance (Gambling Policies) Acr 1909 3. Third Parries (Rights againsr Insurers) Act 1930 4. Ins-sure Companies Marine Policy 5. Ins-sure Mar91 Schedule 6. Institute Cargo Clauses (A) (1/1/82) 7. Institute Cargo Clauses (B) (1/1/82) 8. Instirute Cargo Clauses (C) (1/1/82) 9. Insritute War Clauses (Cargo) (1/1/82) 10. Institute Strikes Clauses (Cargo) (1/1/82) I!. Institute Time Clauses Hulls (1/10/83) 12. Institute Time Clauses Hulls (1/11/95) 13. International Hull Clauses (01/11/03) 14. Institute Voyage Clauses Hulls (1/11/95) 15. Institure War and Strikes Clauses Hulls-Time (1/10/83) 16. Insrirute War and Srrikes Clauses Hulls-Time (1/11/95) 17. Institure Time Clauses Freighr (1/8/89) 18. Rules of tbe Britannia Steam Ship Murual Insurance Association Ltd 843 863 865 868 869 870 875 880 885 889 893 902 912 932 941 943 946 952

841