James Brewer
What does it say on the tin – are lawyers reading the labels in different ways? Marine pre-policy negligence under scrutiny at IUA/AAA briefing, By James Brewer
Spanners in the works – metaphorical and real – have led to questions being raised as to the fairness and robustness of the way ship machinery damage claims are customarily settled.
Most marine claims in the London market are settled smoothly, but problems may arise when damage manifests itself, and repairs are carried out, after a policy expires.
“It can be dangerous if accepted market practice in settling the claims moves too far away from legal principles, ” warned Richard Cornah, a leading average adjuster, speaking at a briefing organised by the International Underwriting Association in co-operation with the Association of Average Adjusters.
The challenging title of the London event, which drew a substantial audience of marine insurance professionals, was: What does it say on the tin? Perhaps lawyers are just reading the labels in different ways?
The two ‘tins’ set before the meeting were: the restriction of coverage, for damage due to negligence, to the policy under which the negligence occurred; and permitting the assured to claim only on the basis of unrepaired damage if repairs are carried out after that policy expires.
Richard Cornah of Richards Hogg Lindley
Mr Cornah, chairman of Richards Hogg Lindley, part of the marine division of Charles Taylor Adjusting and a Fellow of the Association of Average Adjusters, gave an example of dilemmas arising over pre-policy negligence. “In an overhaul (during what Mr Cornah termed ‘Policy A’) a chief engineer puts his spanner down and forgets it, leaving it in the crankcase. So nothing happens during Policy A except that there is a spanner in the works…
“The negligent act goes unnoticed and only becomes apparent during the next policy (Policy B)when heavy rolling of the ship dislodges the spanner into the main engine machinery, and serious damage occurs.”
That kind of situation opened the door to complex legal arguments. According to the leading text book on marine claims, Arnould’s Law of Marine Insurance and Average, unless the policy otherwise provides, loss by inherent vice (hidden defect) is not covered. Express wording was required to cover pre-policy events or perils.
Mr Cornah said: “The London market can pat itself on the back over the fact that there is very little litigation on marine claims because things tend to get settled in a sensible way, but this does mean that there is not much case law to help us on this and similar matters. We cannot point to a case which says our practice is right, because no-one has sought to litigate.”
Mr Cornah cited Arnould’s conclusion that, in the absence of a relevant decision in the English courts, “we consider that the better view is probably that these perils [such as repair or crew negligence] are to be construed as referring to negligence taking place during the policy period.” In other words, Arnould suggests that the claim for the “spanner in the works” did not fall on Policy B, contrary to what the market had relied upon.
Lord Justice Bingham, in a 1989 judgment in Kelly v Norwich Union, over liability for water leakage damage to a building, had stated that counsel in that case unearthed no reported instance of an insurer being held liable to indemnify the insured when the peril had occurred before the insurer came on risk.
Mr Cornah admitted that when experts had deliberated on the International Hull Clauses 2003, “it never occurred to us that this was an issue, ” provided damage had occurred during the current policy.
If a vessel had changed ownership between Policy A and Policy B, the new owner under Policy B is denied any coverage for the ‘spanner damage’, on the Arnould theory.
Mr Cornah gave an example of practice under loss of hire policies where a grounding damage during Policy A is not repaired immediately and the vessel later comes off hire during Policy B; it is Policy A that pays, he said. The London hull market is used to liability matters “floating” before or after a policy, according to the type of insurance and the wording used.
Mr Cornah quoted the late Philip Birch – a respected London market figure who worked on many areas where there was doubt or lack of uniformity – as defining as universal practice that latent defect or negligence of repairers may be recovered under a policy current when the loss or damage occurs, although the cause might antedate inception of the policy.
Mr Cornah said: “We may have been lucky so far, but I think we are in an area of potential uncertainty here which really does need to be addressed.”
David Walsh of Quadrant Chambers
David Walsh of Quadrant Chambers then examined the proposition that “if repairs are not effected during the currency of the policy the assured can only claim on an unrepaired damage basis.”
The barrister said that the question for lawyers was: “under a hull and machinery policy, what measure of indemnity is an assured entitled to, where, following a partial loss, he repairs his vessel, but only after the policy has expired?”
Put another way, within the meaning of section 69 of the Marine Insurance Act, at what time should we look to see if a vessel has been repaired, partially repaired, or not repaired? Mr Walsh said that English law cases suggested that the correct point was when the policy comes to an end, or the termination of the risk.
He referred to the judgment in a 76-day trial of a 1965 case known as the Medina Princess when the main question was which repairs counted towards the overall cost of repairs for the purpose of seeing if the vessel was a CTL. Mr Justice Roskill said that section 69 was silent as to the point in time when the measure of indemnity is to be ascertained and quantified, but he construed the opening words of sub-section 3 of section 69 as determining that only when the risk is ended could it be predicted for certain that neither repair nor sale would take place during the risk and that this was therefore the right point in time to determine which measure of indemnity an assured was entitled to under the section.
In the 1997 Catariba case, a claim for a constructive total loss failed. Again it was said that the relevant time to assess the measure of indemnity was at the termination of cover. That was also a moment to assess depreciation. The judge in that case took the Medina Princess finding as authoritative.
Arnould appeared to support that view on timing in saying: “The qualification of the measure of indemnity for a particular average loss is to be assessed as at the termination of the cover.”
Mr Walsh said that the authorities suggest that the answer to the proposition he was considering was therefore that if an assured repairs his vessel following a partial loss, but only after the policy has expired, he is only entitled to be compensated for the diminution in value of the vessel under section 69 (3) of the Act, not the reasonable costs of repair.
This would often mean that, where repairs have been carried out after the policy has expired, the assured will recover far less than their actual cost. Although where there was an increase in the cost of raw materials or labour, that might work against underwriters, he suspected that, more often than not, the one who loses would be the assured.
Mr Walsh said that he understood that the position he had articulated was heretical to many in the London market but that relying on market practice in the courts was very difficult. Citing a 1967 case, Mr Walsh said to make use of the ‘market practice’ argument, the practice had to be certain, clearly established, and so well known that those who conduct business would contract with the usage as an implied term; the market practice also had to be ‘reasonable.’ “This is a very high threshold to obtain, ” commented Mr Walsh.
Mr Walsh said that while some commentators have said it is acceptable for a shipowner to defer the repairs to the next suitable opportunity, such as a drydocking, it might be unsafe to rely on this as a legally binding custom or practice to displace the views articulated by the courts in the cases of the Medina Princess and the Catariba.
Mr Cornah returned to the podium to say he suspected that the suggestion (that the last day of the policy was the last opportunity to be indemnified on the basis of the actual cost of repairs) would be particularly disturbing and create considerable uncertainty for all concerned. It was going to be commercially impractical for the owners and expensive for the underwriters who would often be paying in full the key incidental costs such as removal expenses, gas-freeing and dry-docking.
Coming back to the imagery of the ‘tins’ considered by the meeting, Mr Cornah said that while the two propositions set out on the labels might reflect legal theory, longstanding market practice suggested that the parties were comfortable with the status quo and were happy with the contents of ‘the tins’ as they are.
Mr Cornah is a former chairman of the Association of Average Adjusters.
Mr Walsh has acted in disputes over insurance and reinsurance, shipping, commodities, energy and aviation. He was recommended by The Legal 500 2013 as a “rising star” in the field of insurance and reinsurance who is “a ‘go-to’ junior for marine insurance.”
Keith Jones of Aon chaired the discussion. Mr Jones, current chairman of the Association, quoted the late Lord Donaldson, a former Master of the Rolls and specialist in maritime law, as saying: “Marine insurance is a technical matter and marine policies for large commercial vessels are not intended for the do-it-yourself enthusiast, ” advising those in the industry to avail themselves of skilled advisers.
Mr Jones praised Deborah Finch, events manager of the IUA, for her dedicated work in organising the event.
