UK: Marine Insurance 2001 - The Year in Review

Originally published in January 2002

In this review we report on legal and market developments in 2001 likely to be of interest to marine insurers. As well as developments relevant to specific sections of the market, there were also developments of general application, of which the "BEURSGRACHT", the first judgment we consider, is a prime example.

3.1 "BEURSGRACHT"

Glencore International AG v Ryan & others

Whilst a charterers' liability dispute, this case has wider ramifications for the operation of Open Covers. Owners sued charterers for an indemnity in respect of damages that the Owners had had to pay out to the family of a stevedore killed during loading operations. Charterers paid Owners.

Charterers sought to recover those sums from their charterers' liability underwriters. Underwriters defended the claim on the basis that the assured charterers' declaration of the vessel was made more than 5 years after the charter was entered into and the casualty giving rise to liability occurred.

Having ruled that underwriters were automatically on risk when the vessel was chartered subject to declaration of the vessel, the Court of Appeal had to decide the consequences of the late declaration (found by the trial judge to be a good faith mistake). Were the consequences so serious that, as alleged by underwriters, underwriters were off risk by reason of breach? The Court of Appeal, upholding the trial judge's decision, ruled that in the absence of specific policy language making timely declarations a pre-condition of cover, the late declaration was not so serious as to entitle underwriters to treat themselves as being off risk. They were, therefore, liable to reimburse charterers for the amounts charterers had paid to owners.

3.2 "DELPHINE"

Aquarius Financial Enterprises Inc v Lloyd's underwriters

[2001] 2 Lloyd’s Rep p. 542

The vessel, a yacht, caught fire in harbour and became a total loss. She was insured for all risks of physical loss by accidental causes. The assured claimed against his hull underwriters for a total loss. Underwriters denied liability, claiming that the assured had deliberately caused the fire.

The trial judge decided that the assured had to show, on the balance of probabilities, that the fire was accidental as far as he was concerned, although the assured did not have to show exactly what caused the fire. On the evidence the assured put forward various theories as to how the fire might have started accidentally but these were rejected by the judge, who ruled that they were not credible. The evidence of arson was sufficiently strong for the assured's explanations to be discounted. The assured's claim therefore failed.

The judge also went on to conclude that there was circumstantial evidence of motive for arson, by reference to the vessel being over-insured, difficult to sell and a source of expenditure rather than income.

3.3 "MARKOS N"

Thyssen Inc. v Calypso Shipping

[2000] 2 Lloyd’s Rep p 243

Although a decision of 2000, this judgment is not widely known but merits wider attention – it is important in demonstrating the need to protect any applicable time bar.

Cargo receivers applied to Court for a declaration that their claim against the owners of the carrying ship was not time barred, alternatively for a time extension to commence arbitration proceedings pursuant to Section 12 of the Arbitration Act 1996.

The bills of lading referred to a charterparty on their face and the reverse of the bills contained a clause incorporating the charterparty (including the Charterparty Arbitration Clause). Cargo interests issued proceedings on March 1997 in Texas. The action was transferred by consent to the Southern District Court of New York in August. In March 1998 owners filed an answer acknowledging that the New York Court had jurisdiction.

There was a head time charterparty. This did not come to light until after the 12 month arbitration time limit had expired. It had been issued for a different vessel called the "BELNOR" and had at Clause 36 an English law and Arbitration clause. Owners applied for a stay of the New York proceedings on the grounds that the bills of lading incorporated a London Arbitration clause. The New York Court granted the stay on the basis the bills incorporated the clause and owners had not waived their rights to London arbitration. A few days later cargo interests appointed an arbitrator in London with owners appointing their arbitrator without prejudice to time bar.

The Judge held that the claim was time barred. The Judge considered S.12 (3) of the Arbitration Act 1996 and whether it would be just to extend time (as cargo interests had failed to protect time within the 12 month Hague Rules period), since it was not within their contemplation that a London Arbitration Clause was incorporated into the contract. In particular at S. 12(3)(b), the Court had to be satisfied that "the conduct of one party makes it unjust to hold the other party to the terms of the provision in question." The Judge found that he could detect no such unjust conduct by the owners in this case and it was not appropriate to grant the requested extension of time. Cargo interests’ claim was therefore time barred and they were left without a remedy.

3.4 " MERCANDIAN CONTINENT"

K/S Merc-Scandia XXXII v Certain Lloyd’s Underwriters

[2001] 2 Lloyd’s Rep 563

This case considered the post-contractual duty of utmost good faith and the extent of that duty (also considered by the House of Lords in the "STAR SEA" – see below). We reported in our 2000 Review on the decision of the trial judge. The Court of Appeal has since heard the appeal.

The Court of Appeal agreed that the duty of utmost good faith continues throughout the post-contract period. However the Court restricted the circumstances, in which a breach of that duty will occur to a situation where:

1. there is fraud by the assured; and
2. that fraud affects underwriters’ ultimate liability under the policy; and
3. the fraud itself or the consequences of the fraud are so grave as would, in any event, enable underwriters to terminate for breach of contract.

Apart from the case of a fraudulent claim, it is now clear that there is only limited scope for the operation of an independent duty of utmost good faith after the insurance contract has been concluded.

3.5 "MOANA"

Glowrange Limited v CGU Insurance Plc

Owners' yacht sank. Owners claimed on their yacht underwriters for a total loss and applied for summary judgment.

In order to decide the summary judgment application, the Court reviewed existing case law authority, notably the "POPI M". It held that where evidence established that the vessel was in a seaworthy condition before the insured voyage and she sank in an unknown fashion, it might be possible to infer that the vessel had been lost by perils of the sea - the assured's claim would therefore be recoverable since the assured would have satisfied the burden of proof upon the assured. This is in line with the "POPI M".

However, this set of circumstances is likely to be rare. There will normally be some evidence of how the vessel sank. Thus, the Court continued, where, as in this case, there was evidence showing where water had entered the vessel (even though the evidence did not show why the water ingress occurred) the burden of proof was on the assured to put forward a credible explanation for that water ingress in order to rule out other possible, but uninsured, causes of loss. Underwriters did not advance any positive case as to what caused the loss but alleged that the assured had failed to satisfy that burden of proof. At the summary judgment stage, where evidence before the court is in the form of witness statements, it will rarely be appropriate to rule on the application without disclosure of documents and the hearing of factual and expert witness evidence in person at trial. The summary judgment application was therefore rejected, but the assured’s case allowed to proceed to trial.

3.6 "PALAQUIN"

In the "STAR SEA" – see below - underwriters failed to make good before the House of Lords their defence to the assured owners' constructive total loss claim based on Section 39(5) of the Marine Insurance Act 1906 – underwriters not to be liable for loss attributable to a vessel being sent to sea in an unseaworthy state with privity of the assured. Underwriters failed to show privity of the assured.

By contrast, in this case, decided by the Canadian Federal Court after the English Court of Appeal judgment had been given but before the House of Lords’ decision in the "STAR SEA", the Canadian Court ruled that on the evidence the assured was privy to the vessel's unseaworthiness and could not therefore recover in respect of the loss of an excavator. This was in relation to the Canadian equivalent to Section 39(5).

The distinguishing feature of this case was that the assured was a small time owner operator, heavily involved in the day-to-day running and operation of the vessel concerned and without the benefit of professional managers. It will generally be easier for underwriters in these circumstances to be able to point to knowledge by the assured sufficient to demonstrate privity.

3.7 James Edward Perks v H.M. Inspector of Taxes ("Perks")

Increasingly offshore oil and gas activities depend on mobile floating production facilities. Questions often arise as to the precise legal status of such facilities. The Court of Appeal has recently given guidance on this issue in a tax case but which has ramifications for the insurance industry.

Employees working on a jack-up drilling rig outside the United Kingdom were seeking to take advantage of special rules for seafarers, which allow the deduction of foreign earnings for income tax purposes. However, to claim this deduction, the employees must perform their duties on a ship. Therefore, the Court had to consider the statutory definition of "ship" in Section 313 of the Merchant Shipping Act 1995.

Section 313 includes "every description of vessel used in navigation". The rig at the centre of the case was the Santa Fe Magellan, and its virtually identical sister rig, the Santa Fe Monarch. On an evaluation of each rig against the statutory definition, the Court held that each rig was indeed a ship.

The Court of Appeal ruled that the fact that navigation of the rig was ancillary to the real function of drilling for oil does not

mean that it would not constitute a ship. Navigation did not necessarily connote anything more than "movement across water". The function of "conveying persons and cargo from place to place" was not an essential characteristic. In this case the rigs were capable of, and used for, navigation.

In reaching its decision the Court referred to an Irish case: "Von Rocks" ([1998] 2 Lloyd’s Rep.), which concerned a dredger, and also to a Scottish Employment Appeal Tribunal decision, Addison v. Denholm Ship Management (UK) Ltd. ([1997] ICR 770.) which concerned "flotels" (workers’ accommodation at sea). In these cases the dredger and accommodation were held to be used in navigation although their "real work" was something other than this.

The implications of this decision for insurers particularly concern, first, potential liability for oil pollution: the law on criminal and civil liability for oil pollution may be applicable in the case of a rig to be classified as a ship; and, secondly, the concept of sistership arrest may now apply, so that in a case where a claim is made against a rig, which is also a ship, a sistership may be subject to arrest in respect of that liability.

3.8 "PIPER ALPHA"

Caledonia North Sea v London Bridge Engineering

This case involved claims for death and personal injury following the explosion on the Piper Alpha platform in 1988. It went before the Outer House of the Court of Session in Scotland in 1993 and was appealed to the Inner House in 1999. The House of Lords heard a part appeal from that judgment in November last year. The House of Lords’ judgment was published on 7 February 2002, upholding the Inner House’s decision. This will be the subject of a separate update.

3.9 "STAR SEA"

Manifest Shipping v Uni-Polaris Insurance

[2000] 1 Lloyd’s Rep p. 389

This landmark decision of the House of Lords was the subject of a separate update in 2001. If you would like a further copy, please let us know.

Hamburg Houtimport BV v Agrosin Private Limited

[2001] 1 Lloyd’s Rep p. 437

In one of the most important cargo cases of recent years, the English Courts have once more been called upon to consider the question of whether a bill of lading is an owners' or charterers' bill.

We reported on the trial judgment in this case in our review of 2000. We now report on the Court of Appeal’s decision, although the House of Lords has granted leave to appeal and the appeal is due to be heard in 2002.

Owners maintained that the bills of lading in dispute, which contained an identity of carrier and a demise clause, nonetheless evidenced contracts of carriage between charterers (not owners) and cargo interests. The Commercial Court agreed but decided that owners had obligations towards cargo interests in negligence/bailment anyway, independent of any contractual relationship. For that reason, owners were liable to cargo for contamination damage.

The Court of Appeal overturned the trial judge's decision and held that the bills evidenced contracts with the owners but that no obligations continued in negligence/bailment.

Seashore Marine SA v Phoenix Assurance & Others

[2001] 2 Lloyd’s Rep p. 698

The vessel suffered a casualty. Owners were liable to pay salvors for salving the vessel. Owners sought to recover those sums from their underwriters. The Court was required to determine what the assured owners had to establish in order to recover from underwriters.

The Court ruled that the assured had to do more than simply prove that salvage had been incurred – rather, under the 1.10.83 Institute Clauses the assured was required to demonstrate that the salvage was incurred in relation to the avoidance of loss by an insured peril. Having established that a salvage liability had been incurred, the assured could not simply argue that it was for underwriters to prove that those liabilities were not incurred in relation to the avoidance of loss by an insured peril.

On the facts the key issue was whether the vessel would have been lost by an insured peril. The assured asserted that there were two insured perils in operation, perils of the sea (Clause 6.1.1) and/or crew negligence (Clause 6.2.3). The Court agreed, enabling the assured to recover its salvage liabilities from underwriters.

Following a number of high profile disasters, including the "HERALD OF FREE ENTERPRISE" and the Southall rail crash, the UK Government has intended to introduce new legislation on corporate manslaughter. Whilst a draft Bill was published, a new Act remains a long way off.

Phase 1 of the International Safety Management Code came into force on 1 July 1998. Phase 2 comes into force on 1 July 2002. No extensions of time will be granted. From that date cargo ships not caught by Phase 1 (e.g. reefers, container and dry cargo vessels) and mobile offshore drilling units over 500 GRT will need to be compliant. The impact goes beyond mainstream commercial shipping since commercial yachts over 500 GRT must also be compliant.

There have been recent changes to the 1976 London Convention on Limitation of Liability for Maritime Claims (the "Convention"). The Convention provides for limitation of liability for a shipowner in respect of certain types of claim for damage caused by a ship, limitation being calculated by reference to the ship’s tonnage. Article 15(5) of the Convention expressly excludes "floating platforms constructed for the purpose of exploring or exploiting the natural resources of the sea-bed or the subsoil thereof".

However, as a result of a recent amendment to the Convention by a 1996 Protocol to be brought into effect in the United Kingdom by Statutory Instrument, the exclusion relating to floating platforms will become obsolete. The right to limit liability shall apply in relation "to any ship whether seagoing or not". A ship shall include "references to any structure (whether completed or in course of completion) launched and intended for use in navigation as a ship…". Confusingly, the Statutory Instrument in question is not yet effective as the Protocol has only been signed by 4 of the required minimum number of 10 countries. When the time comes and the amendments have been incorporated into English law, in the light of the Court of Appeal’s decision in Perks, the Convention will apply to rigs and similar structures.

In the cargo insurance market, as a result of the tragic events of 11 September 2001, a new Clause has been introduced to clarify the extent of terrorism cover provided within the marine cargo account. Cargo underwriters will continue to cover terrorism risks whilst cargo is in the ordinary course of transit but will not cover goods in storage as, for example, under stock-throughput policies. The intention is to avoid a build-up of various cargoes at one storage location with a consequent excessive aggregation of risk if terrorists should attack a particular port or location.

The above review provides an overview of the issues raised by the various cases and other developments. We should be pleased to supply further information upon request.

In the "PRIDE OF DONEGAL", judgment published 24 January 2002, following a trial late last year underwriters successfully defended the assured’s claim under a freight policy on grounds of breach of the implied warranty of seaworthiness applicable to the policy as a voyage policy. A separate update is to follow on this judgment.