Cases and Materials on Marine Insurance Law

Susan Hodges

• Publisher: Routledge-Cavendish
• Year: 2012
• ISBN:
  9781135346935
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

This book provides a comprehensive collection of Cases and Materials On Marine Insurance Law. The sources included here are not always readily accessible. Each chapter is introduced with a brief resume of the general principles, before the facts of each case are summarised and the extracts of the relevant parts of judgments reproduced.

The significance of the judicial extracts, the statutory materials and standard terms are then discussed with particular emphasis on important and problematical areas of the law.This book will be indispensable not only to postgraduate students of law, in-house lawyers, insurance brokers and claims adjusters, but also to students of maritime studies, legal practitioners and a wide range of professionals within the shipping industry who may wish to have at hand a convenient source of information.

Whilst the book is a companion to the authors The Law of Marine Insurance, it is also structured to stand as a marine insurance text in its own right.

CHAPTER 1

CONTRACT OF INDEMNITY

INSURANCE IS A CONTRACT OF INDEMNITY

The basic principle of a contract of insurance is that the indemnity recoverable from the insurer is the pecuniary loss suffered by the assured under that contract. Thus, s 1 of the Marine Insurance Act 1906,¹ in defining marine insurance, confirms that the contract is, first and foremost, a contract of indemnity:

A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in a manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to a marine adventure.

In order that the fundamental principle of indemnity is upheld, other concepts and rules have become established in insurance law; these include double insurance, the right to contribution, return of premium and subrogation, all of which are discussed in the course of this chapter.

The philosophy behind insurance and indemnification was summed up in the early case of Brotherston v Barber (1816) 5 M&S 418, where an insured ship was captured by an American privateer and then re-captured by a Royal Navy ship. Although the claimant, on hearing of the initial capture, claimed for a total loss, the court ruled that he could only be indemnified for a partial loss, as the ship had been re-captured.

Abbott J: [p 425] …But, the great principle of the law of insurance is that it is a contract for indemnity. The underwriter does not stipulate, under any circumstances, to become the purchaser of the subject matter insured; it is not supposed to be in his contemplation: he is to indemnify only. This being the principle, it seems to me that any practice or doctrine which is calculated to break in upon it ought to be narrowly watched.

Similarly, Brett LJ was moved to reiterate the fundamental concept of insurance in Castellain v Preston (1883) 11 QBD 380, CA, where a house was damaged by fire whilst it was in the process of being sold. The vendors not only received an indemnity from their insurers, but also, later, despite the fire, the full amount of the purchase money from the buyers. Not unreasonably, the underwriters sought from the vendors a return of the payment they had made to them on the basis that they, the vendors, had, in fact, suffered no pecuniary loss. In this, the insurers were successful.

Brett LJ: [p 386] …The very foundation, in my opinion, 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, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.

And, in Richards v Forestal Land, Timber and Railways Co Ltd [1941] 3 All ER 62, HL, where goods aboard a German vessel were lost at the outset of the Second World War, when the ship was scuttled in order to avoid capture, Lord Wright had occasion to consider the purpose of a contract of insurance and the part the Act had to play in the construction of that contract.

Lord Wright: [p 76] …The Act is merely dealing with a particular branch of the law of contracts—namely, those of marine insurance. Subject to various imperative provisions or prohibitions and general rules of the common law, the parties are free to make their own contracts and to exclude or vary the statutory terms. The object both of the legislature and of the courts has been to give effect to the idea of indemnity, which is the basic principle of insurance, and to apply it to the diverse complications of fact and law in respect of which it has to operate. In this way, the law merchant has solved, or sought to solve, the manifold problems which have been presented by insurances of maritime adventures.

The indemnity is not necessarily perfect

Whilst the overriding principle of insurance is that of indemnification for losses sustained, the courts accept the fact that, because there must be an element of freedom for the parties to the insurance to contract on whatever terms they deem fit, in many instances, the indemnity is unlikely to be perfect. This is largely attributable to the fact that both the common law and s 27(3) of the Act endorse the fact that the value fixed by the policy is conclusive of the insurable value of the subject matter insured. This allows the parties the freedom to set the value of the subject matter insured at whatever figure they so wish. Provided that any over-valuation is not so excessive as to offend the cardinal principle of the duty to observe utmost good faith, the law of non-disclosure of a material fact, and of misrepresentation and the rule against wager, the courts are obliged to uphold the value fixed in the policy as conclusive. It is, of course, difficult at any given time to gauge the value of any subject matter with precision, but gross or exorbitant over-valuation could be construed as evidence of fraud.² That the principle of indemnity is not perfect is illustrated in the case of Irving v Manning, below.

Irving v Manning (1847) 1 HLC 287

In a valued policy of insurance, the agreed value of a vessel, General Kyd, was put at £17,500. When General Kyd was severely damaged by storms, she was deemed a constructive total loss, because it was estimated that the cost of repairs would have amounted to £10,500, whilst her marketable value, on being repaired, was only £9,000.³ Thus, the assured was indemnified to the value of £17,500, when the true value of the ship was only £9,000.

Patteson J: [p 307] …A policy of assurance is not a perfect contract of indemnity. It must be taken with this qualification, that the parties may agree beforehand in estimating the value of the subject assured, by way of liquidated damages, as indeed they may in any other contract to indemnify.

In Goole and Hull Steam Towing Co Ltd v Ocean Marine Insurance Co [1927] 29 LlL Rep 242, McKinnon J noted that: [p 244] ‘…the real question in the case is: what is the measure of indemnity that, by the convention of the bargain, has been promised to the assured? That may in some cases be less than an ideal pecuniary indemnity, in some cases it may be more.’⁴

However, although it is conceded that a contract of indemnity is not always perfect, the principle of indemnification for actual pecuniary loss remains in the forefront of the minds of judges. This was confirmed by Lord Sumner, in British and Foreign Insurance Co Ltd v Wilson Shipping Co Ltd [1921] 1 AC 188, HL, who observed that: [p 214] ‘…In practice, contracts of insurance by no means always result in a complete indemnity, but indemnity is always the basis of the contract.’

GAMING AND WAGERING CONTRACTS

The Act, in s 4(1), states that:

Every contract of marine insurance by way of gaming or wagering is void.

Although the Act, in itself, does not specify that the effecting of a gaming or wagering contract of insurance is illegal, only that it is void, attention is also drawn to the Marine Insurance (Gambling Policies) Act 1909,⁵ which is also relevant. The 1909 Act affirms that:

(1) If:

(a) any person effects 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 subject matter insured, or a bona fide expectation of acquiring such an interest; or

(b) any person in the employment of the owner of a ship, not being a part owner of the ship, effects a contract of marine insurance in relation to the ship, and the contract is made ‘interest or no interest’, or ‘without further proof of interest than the policy itself’, or ‘without benefit of salvage to the insurer’, or subject to any other like term,

the contract shall be deemed to be a contract by way of gambling on loss by maritime perils, and the person effecting it shall be guilty of an offence…

Thus, despite the Marine Insurance Act 1906 stating, in s 4(1), that a gaming or wagering contract of insurance is merely void, under the Marine Insurance (Gambling Policies) Act 1909 it is also a criminal offence to effect insurance when the assured has no insurable interest in the adventure.

There are, essentially, two forms of gaming and wagering contracts contemplated by s 4(2) of the 1906 Act, namely:

(a) policies where the assured has no insurable interest or expectation of acquiring such an interest; and

(b) ‘honour’ or ‘ppi’ (policy proof of interest) policies.

Assured has no insurable interest or expectation of acquiring such an interest

Section 4(2)(a) of the Act states that:

A contract of marine insurance is deemed to be a gaming or wagering contract:

(a) where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest…

In defining ‘insurable interest,’ s 5(2) stipulates that a person having an insurable interest would be one who ‘…may benefit by the safety or due 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’.

Notably, that insurable interest is only relevant ‘…at the time of the loss, though he need not be interested when the insurance is effected…’.⁶

The premium, with respect to a policy which is void, is, under s 84(3)(a) of the Act, only returnable if ‘…there has been no fraud or illegality on the part of the assured…’⁷

‘Honour’ or ‘ppi’ policies

A ‘ppi’ policy (policy proof of interest), often referred to as an ‘honour’⁸ policy, is also deemed to be a gaming or wagering contract by the Act when it confirms, in s 4(2)(b), that:

A contract of marine insurance is deemed to be a gaming or wagering contract:

(b) where the policy is made ‘interest or no interest’, or ‘without further proof of interest than the policy itself’, or ‘without benefit of salvage to the insurer’, or subject to any other like term,

provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.

It is emphasised that this sub-section is aimed directly at the wording contained within a contract of insurance. It is immaterial, when such words as ‘interest or no interest’, ‘without further proof of interest than the policy itself’, ‘without benefit of salvage to the insurer’, or any other like term, are used, whether the assured has or has not an insurable interest in the subject matter insured. Just the use of the words themselves, or any other like term, is sufficient to render the contract void. This was particularly well illustrated in the case of Cheshire and Co v Vaughan Brothers and Co, below.

Thomas Cheshire and Co v Vaughan Brothers and Co [1920] 3 KB 240, CA

The plaintiffs were the owners of warehouses at Liverpool, Birkenhead and Newport, where they were in the habit of storing nitrate of soda. At the time, the First World War was in progress, and the British Government controlled all shipments of nitrate from South America. When the plaintiffs anticipated a shipment of nitrate from South America, they reserved space in their warehouses and instructed their brokers to effect a policy of insurance (ppi) with the defendants on anticipated profits; the policy to cover marine and war risks, and the risk of the cargo of nitrate being diverted to another port by the Government. At the time the policy was effected, the insurers were not made aware of the real risk of the shipment being diverted by the Government. So, when the shipment of nitrate was diverted by the Government and the plaintiffs claimed on their policy, the insurers refused payment on the basis that the policy had attached to it a slip which stated that the policy was made ‘without further proof of interest than the policy itself’, thereby making the contract void by s 4(2)(b) of the Marine Insurance Act 1906.

The Court of Appeal upheld the decision of the trial judge, and ruled that the policy amounted to a ppi policy and was, therefore, void.

Bankes LJ: [p 248] …The second point [raised by counsel for the plaintiffs] is that this policy is not within s 4(2)(b). The section speaks of contracts of marine insurance being deemed to be gaming or wagering contracts where the policy is made ‘interest or no interest’, etc. The contention is that, as the plaintiffs had an insurable interest, the section does not apply. It seems to me that the language of the section does not permit of that construction. The section is drawn for the purpose, as it seems to me, of excluding any inquiry into the question whether or not an insurable interest exists. Sub-section 2(b) is directed to the form of the instrument and, if it is directed to the form, it must include everything which forms part of the instrument, whether it is pasted on or pinned on. In my opinion, when the section says that a contract of marine insurance is to be deemed a gaming or wagering contract where the policy is made ‘interest or no interest’, or subject to any other like term, it makes void a contract where the instrument contains one of those objectionable clauses.

Scrutton LJ: [p 254] …The argument, if I understand it rightly, is that subs 2 means that the contract is prima facie deemed to be a gaming and wagering contract, but that inference may be rebutted by showing that the assured had either an insurable interest or an expectation of acquiring one. That is, in effect, to read cl (a) of sub-s 2 into cl (b). I see no ground for cutting down the section in that way. It seems to me Parliament has said that, if this clause is in the policy, it is to be deemed to be a gaming and wagering policy, because it is a gaming and wagering clause.

Nor is it of any consequence whether a ppi clause, once attached to the policy, has since been detached, as was shown in Re London County Commercial Reinsurance Office Ltd, below.

Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67

A reinsurance company was being wound up and a committee of creditors was appointed. The liquidator, whilst investigating claims against the company, noted that there were outstanding claims made under ppi policies amounting to £97,538; these included some marine policies. The issue before the court was whether the policies, which included ppi slips, were valid under the Act; in particular, those policies where the ppi slips had become detached.

The court ruled that the policies were void. The fact that the ppi slips had become detached was immaterial; the real issue was whether they were part of the policy when the contract was entered into.

Lawrence J: [p 81] …In my judgment, there is no differe...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Dedication
• Preface
• Contents
• Table of Cases
• Table of Statutes
• 1 Contract of Indemnity
• 2 Insurable Interest
• 3 Subject Matter Insured
• 4 Time and Voyage Policies
• 5 Valued and Unvalued Policies
• 6 Utmost Good Faith, Disclosure and Representations
• 7 Warranties
• 8 The Cause of Loss
• 9 Marine Risks
• 10 Excluded Losses
• 11 Burden and Standard of Proof
• 12 The Inchmaree Clause
• 13 The 3/4Ths Collision Liability Clause
• 14 War and Strikes Risks
• 15 Actual Total Loss
• 16 Constructive Total Loss
• 17 Partial Loss-1
• 18 Partial Loss—2
• Appendix 1 Marine Insurance Act 1906
• Appendix 2 Marine Insurance (Gambling Policies) Act 1909
• Appendix 3 Third Parties (Rights Against Insurers) Act 1930
• Appendix 4 Lloyd's Marine Policy [Mar 91]
• Appndix 5 Institute of London Underwriters— Companies Marine Policy [Mar 91]
• Appendix 6 Institute Time Clauses Hulls (1995) [ITCH(95)]
• Appendix 7 Institute Voyage Clauses Hulls (1995) [IVCH(95)]
• Appendix 8 Institute Time Clauses—Hulls—Restricted Perils (1995)
• Appendix 9 Institute Additional Perils Clauses—Hulls (1995)
• Appendix 10 Institute Cargo Clauses (A) [ICC(A)]
• Appendix 11 Institute Cargo Clauses (B) [ICC(B)]
• Appendix 12 Institute Cargo Clauses (C) [ICC(C)]
• Appendix 13 Institute Time Clauses Freight (1995) [ITCF(95)]
• Appendix 14 Institute Voyage Clauses Freight (1995) [IVCF(95)]
• Appendix 15 Institute Dual Valuation Clause
• Appendix 16 Institute Warranties
• Appendix 17 Institute Malicious Damage Clause
• Appendix 18 Institute Theft, Pilferage and Non-delivery Clause
• Appendix 19 Institute War and Strikes Clauses Hulls—Time (1995) [IWSC(H)(95)]
• Appendix 20 Institute War Clauses (Cargo) (1982) [IWC(C)(82)]
• Appendix 21 Institute Strikes Clauses (Cargo) (1982) [ISC(C)(82)]
• Appendix 22 The York-Antwerp Rules 1994
• Appendix 23 Lloyd's Standard Form of Salvage Agreement 1995 [LOF1995]
• Index