It is not uncommon for hull and cargo underwriters to reject claims by relying on excluded perils in their standard forms. This can occur at all ends of the financial spectrum. The Court of Appeal has recently had to examine the issues surrounding the "inherent vice" exception in the Institute of Cargo Clauses (A) in the case of Global Process Systems Inc v Syarikat Takaful Malaysia Berhad. (The "Cendor MOPU").
In November 2005 the oil rig Cendor MOPU was being carried on a barge around the Cape of Good Hope with its legs elevated in the air above the deck. The oil rig was on the second stage of a voyage from the Gulf of Mexico to Malaysia via the Cape of Good Hope. The legs on the oil rig suffered fatigue cracking. This was caused by the repeated bending of the legs under the wave motion of the barge as it was towed. The cracking caused the starboard leg and then two further legs to break off and be lost.
The oil rig had been insured under a cargo insurance policy for all risks which incorporated the Institute Cargo Clauses (A). The insurers rejected the claim for loss and damage under the policy. They did so because they claimed the loss had been caused by "inherent vice", i.e. metal fatigue, as an inevitable consequence of the voyage. The Court of Appeal was asked to look at the circumstances leading up to the loss before forming a view as to whether the insurers were entitled to reject the claim. The factual background was that prior to sailing from the Gulf of Mexico the claimants had engaged experts to organise transit. It had been acknowledged at that stage by the experts that if the rig was transported with its legs protruding upwards there was a risk of metal fatigue would occur due to the actions of the waves. It is not clear from the report as to how much input the claimants had when looking at the option. The consultants involved looked at various calculations/options but eventually it was decided that the rig should be carried with its legs some 300 feet in the air.
When the rig had arrived at Saldanha Bay near Cape Town the motion of the waves had already caused some cracking to the legs on the voyage from the Gulf of Mexico and repairs were carried out. The surveyors then issued a certificate of approval for the tow to proceed for the final section of the voyage. It was at that stage that the legs had broken off.
The claimants argued that the loss of the rig was accidental and fell within the terms of "the all risks" cover. The insurers on the other hand said the cause was inherent vice in the legs themselves, alternatively that the loss was an inevitable consequence of the voyage embarked. The case made its way up to the Court of Appeal who decided that this was an accident at sea and that the burden was on the insurer to establish inherent vice or that the accident was inevitable. This involved an examination as to how the loss had been caused.
In considering whether damage had been caused by inherent vice the Court had to look at whether it was a certainty that the accident would have occurred. This involved a consideration of the various factors that had caused the metal fatigue.
The Court decided that the cargo had been properly stowed. They also decided that it was in good condition in the sense that surveyors had been consulted as to how the rig should be carried. They had also certified that it was fit for the intended voyage.
They came to the view that metal fatigue was not the sole cause of the loss of the leg. A "leg breaking wave" had caused the starboard leg to fall off. That leg breaking wave was "not bound to occur in the way it did on any normal voyage around the Cape of Good Hope". That in turn had led to the other legs being at greater risk and then breaking off. It was not certain that this would happen. The Court accepted that with the benefit of hindsight "it was known that it was highly probably that that risk would happen" but that high probability was not known to the claimants. It was a risk they had insured against and they should be able to claim under the policy.
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