The British Maritime Law Association
CMI International Group Working Party
on Marine Insurance
This response to the Questionnaire has been prepared by the British Maritime Law Association. It represents a summary of the law in England & Wales. It is not a submission as to the benefits or disadvantages which might arise out of codification or harmonisation of laws.
This Association would like the opportunity to comment on the proposals of International Working Group in due course.
Does your countrys national law contain rules on marine insurance? If so, are they contained in an act? Please supply a copy of the relevant act.
The statutory basis of UK Marine Insurance Law is the Marine Insurance Act ("the 1906 Act") which sought to codify the pre-existing common law of marine insurance. A copy is included in the Appendix.
In 1901 it was estimated that there were over 2,000 reported cases dealing with issues of marine insurance and numerous market usages which were reflected in the 1906 Act.
Some of the provisions in the 1906 only apply "subject to any express provision in the policy" or "Unless the policy otherwise provides". Parties frequently depart from the provisions of the 1906 Act by express contractual terms.
If your countrys national law contains rules on marine insurance exclusively in the form of court decisions, what is the shortest summing up of the main rules? Please supply a copy of that document.
If your countrys national laws contains rules on marine insurance in the form of an act, does that apply to hull insurance only or to cargo insurance only or to both branches?
The 1906 Act covers both branches.
If your countrys national laws contains an act on marine insurance, please indicate which rules are obligatory. May we assume that all rules which are not obligatory are directory?
It is necessary to consider each clause. Some clauses in the 1906 Act contain definitions and others are mandatory. An example is Section 4(1).
"Every contract of marine insurance by way of gambling or wagering is void"
Has your countrys marine insurance market adopted standard insurance conditions (like the English Institute Time Clauses Hulls and Institute Cargo Clauses) If so, please supply a copy of such conditions.
Yes, standard form clauses exist for amongst others, hulls policies (time and voyage), freight policies (time and voyage), cargo policies, war and strikes policies (hulls, cargo and freight) and mortgagees interest policies.
At least 120 separate sets of clauses covering particular trades and approved by The Institute of London Underwriters are published by Witherby & Co Ltd each October. A list is included in the Appendix.
In addition, many assureds, brokers and insurers have their own special clauses which are not necessarily adopted by or approved by the major market associations.
Does your countrys national law or, in the absence of such law, do the Standard Insurance Conditions used in your insurance market
Require that the insured has an insurable interest? If so, is it required when entering into the contract of insurance or at a later stage? Has this to be an economic and legal interest?
Yes. The assured must have an insurable interest in the subject matter.
Section 4 of the 1906 Act provides:
"(1) Every contract of marine insurance by way of gaming or wagering is void.
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;"
The term Insurable Interest is defined in Section 5(1) of the 1906 Act:
"Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure"
Section 5(2) provides:
In particular a person is interested in the 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 arrival of the 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"
The test of insurable interest is not applied narrowly. (see the "Moonacre")
Section 6(1) of the 1906 Act states that the interest must be shown by the assured "at the time of loss". He cannot acquire interest by any act or election after he is aware of the loss, though he is not required to have an insurable interest at the time when the insurance was effected.
Where there is no insurable interest and also no expectation of acquiring an insurable interest at the time the contract of marine insurance is made, the contact is statutorily deemed to be a gaming and wagering contract, and therefore void. There is a limited exception to this in the proviso to Section 6(1)
As a matter of market practice, insurers have been prepared to write policies on a "Policy Proof of Interest" or "PPI" basis and not require the assured to prove an insurable interest. These are technically void and unenforceable under English law.
Result in termination of cover in the event of a breach of a warranty in the policy, regardless of whether the breach of warranty caused the loss which is the subject of the claim? If not, what is the effect of a breach of warranty?
Section 33 of the 1906 Act deals with warranties
Section 33(3) provides:
"A warranty .... must be exactly complied with, whether it be material to the risk or not. If it is not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of breach of warranty, but without prejudice to liability incurred by him before that date."
If a promissory warranty is not complied with, the insurer is discharged from liability as from the date of the breach of warranty (s. 33 of the 1906 Act), for the reason that fulfilment of the warranty is a condition precedent to the liability or further liability of the insurer.
Discharge of the insurer from liability is automatic and is not dependant upon any decision by the insurer to treat the contract or the insurance at an end; although, under Section 34(3), the insurer may waive the breach of the warranty.
The remedial consequences of breach of warranty are in line with the non-attachment of risk and cessation of risk under provisions relating to voyage policies in Sections 43-46.
Regard should be had to Section 34(1) and (2)
Impose upon the insured a duty of disclosure and, if so, only before the commencement of cover or during the currency of cover? If so, what is the nature and extent of that duty and what is the sanction for its violation?
There is a duty of disclosure of material circumstances set out in Sections 18 of the 1906 Act .Section 18 relates to disclosure by the assured, and Section 19 to disclosure by agents effecting the insurance.
Section 18(1) provides:
"...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."
Section 18(2) provides:
"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."
Materiality is an objective concept, judged by the standard of the hypothetical, prudent underwriter. The statutory definition of materiality has been construed as requiring merely that the circumstance in question would have been regarded by the prudent underwriter as relevant to assessing the risk. It is not necessary that the prudent underwriter would have taken a different decision regarding the acceptability of the risk or the terms on which cover was to be written had the circumstance been disclosed. There is, however, implied into the statute a requirement of a casual link between the non-disclosure and the conclusion of the contract, in that it must have induced the actual insurer into the contract (a subjective requirement). This definition of materiality and the requirement of inducement apply to both non-disclosure under Section 18 and misrepresentation under Section 20, see below.
Section 18(3) sets out those matters which need not be disclosed
The duty of disclosure is a positive and not a negative duty; it is for the assured to take the initiative to reveal all material circumstances to the insurer, not for the insurer to inquire although the insurer may waive full disclosure if he limits his inquiries of the assured. The assured is not required to disclose circumstances known or presumed to be known to the insurer. However, a narrow view has been taken of the extent of the insurers presumed knowledge.
Section 20(1) of the 1906 Act deals with representations made during the negotiation of the contract and provides:
"Every material representation made by the assured or his agent to the insurer during the negotiation of a contract must be true. If it is untrue the insurer may avoid the contract..."
Material non-disclosure or misrepresentation renders a contract voidable at common law. An assured may by mistake or inadvertence, and without any fraudulent intention conceal material information which he ought to have disclosed.
There is no need for a causal link between the cause of the loss and the material non-disclosure or misrepresentation.
Section 18 provides that the duty to disclose every material circumstance arises before the contract is concluded. Under Section 21
"A contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not..."
It may well be the case that, if a policy is varied by agreement during its course, fresh obligations of disclosure arise at that stage.
On obligations to disclose after conclusion of the contract, see qn. 6.6, below.
Provide a rule on misconduct of the insured during the period of cover; if so, please outline what is considered misconduct and what is the sanction
Section 55(2) provides that the insurer is not liable for losses "attributable to the wilful misconduct of the assured."
Wilful clearly "imports that the misconduct was deliberate, not merely a thoughtless act on the spur of the moment". (see Johnson v. Marshall, Sons & Co.Ltd.)
A subjectively reckless assumption of risk will also suffice.
The insurer takes the risk of the assureds negligence
Where the proximate cause of the loss is the assureds fraud, there can be no recovery since no covered peril will have occurred and the claim will be unrecoverable on common law principles.
6.5 Provide that the insured has to take responsibility for the conduct of others including an insurance broker? If so, for whom
Under English law, the broker is the agent of the assured. The assured is bound by the acts of his agents although he may have rights of action against the broker for breach of contract or fiduciary duty.
6.6 Provide that either the insured or the insurer or both of them have a duty of good faith? If so outline the extent of that duty
Section 17 of the 1906 Act enunciates a general doctrine of utmost good faith.
"A contract of marine insurance is a contract based upon the utmost good faith, and if the utmost good faith be not observed by either party, the contract may be avoided by either party"
This principle applies to all policies whatever the risk or the subject-matter insured and is a mutual obligation.
It should be noted that there is no remedy in damages for breach. The only remedy is for the party prejudiced to avoid the contract.
The duty of utmost good faith embraces not only circumstances material to the subject matter insured (the physical hazard), but also any other circumstance material in any way to the risk presented to the insurer (the moral hazard), such as the assureds claims record.
In Banque Keyser Ullmann v. Skandia at p.93 it was held that the duty is
"... not only to abstain from bad faith but to observe in a positive sense the utmost good faith"
The duty of good faith embraces the obligations of disclosure and avoidance of misrepresentation under Sections 18 and 20 referred to in question 6.3. Those obligations attach prior to the initial formation of the contract and at renewal. It is clear, however, that the overall doctrine of good faith is not confined to those obligations and may to some extent continue after the contract has been concluded. It attaches to the giving notice under held covered clauses and English law uses the doctrine of good faith to deal with fraudulent claims. However, the precise scope of the post-formation doctrine of good faith, its remedial structure and its relation to Section 17 are still not clear. A pending appeal to the House of Lords may provide some answers.
6.7 Provide rules on the insured value? If so please state at which time the subject of insurance is to be valued and how.
Section 27 of the 1906 Act provides:
" 1. A policy may be either valued or unvalued.
A valued policy is a policy which specifies the agreed value of the subject matter insured.
Subject to the provision 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.
Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss."
A valued policy is defined in s. 27(2) as a policy which specifies the agreed value of the subject matter insured. The purpose of fixing in advance the amount of compensation to be paid to the assured is to avoid disputes as to the value of the subject matter insured.
If the policy is unvalued, the amount of the assureds loss is determined by reference to the commercial value of the subject matter calculated as at the date of the inception of the risk (Sections 28 and 16).
6.8 Allow the insured to increase the risk during the currency of cover with or without informing the insurer and with or without obligation to pay an additional premium?
Not unless there is a specific term in the policy entitling the assured to do so.
6.9 Provide for exclusions from cover, in particular
6.9.1 For political risks like war, mines, strikes
Yes. Marine policies commonly exclude losses caused by specific named perils
For nuclear risks
Yes. This is routinely done by the Institute Radioactive Contamination Exclusion Clause which may be incorporated into any marine policy. A Copy is included in the Appendix.
The Radioactive Contamination Exclusion Clause is incorporated into the latest revision of the Institute War and Strikes clauses for hulls.
For arrest or detainment
For ordinary wear and tear (or, in cargo insurance, inherent vice)
Section 55 (2) (c) of the 1906 Act provides that unless the policy otherwise provides, the insurer is not liable for "ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured ..". The Institute Cargo Clauses (A) which are commonly used do contain an express inherent vice exclusion..
For inadequate maintenance, fault in design, construction or material
In Thames & Mersey Marine Insurance Co. Ltd. v. Hamilton, Fraser and Co. (The Inchmaree) the House of Lords ruled that the breakage of a piece of machinery on a ship was recoverable neither as a peril of the sea nor under the eiusdem generis clause because the accident lacked the necessary maritime connection.
This prompted the introduction of the Inchmaree Clause which is now incorporated (in a slightly modified form) in Clause 6.2 of the Institute Time Clauses Hulls. This provides as follows:
"6.2.1 This insurance covers loss of the subject matter insured caused by bursting of boilers breakage of shafts or any latent defect in the machinery or hull..".
The cases of Jackson v. Mumford and Prudent Tankers Ltd. S.A v. Dominion Insurance Co. Ltd. (The Caribbean Sea) establish that where the loss is caused by a latent construction defect, the assured may recover under clause 6.2.
Where the loss is attributable to a design defect, it may be necessary to determine whether the design defect in turn caused damage to the vessel. Mere discovery of the latent defect and replacement of the defective part is not (usually) covered.
6.9.6 In hull insurance for unseaworthiness, loss of class or in hull or cargo insurance breach of safety regulations,
Section 39(1) of the MIA 1906 imposes an implied warranty of seaworthiness in respect of voyage policies. These are rare except for voyages when a ship is on a voyage to a scrap yard.
There is no absolute standard of seaworthiness. The vessel must be reasonably fit to encounter the ordinary perils of the insured adventure (Section 39(4)) Seaworthiness is a relative term, which extends not only to the physical condition of the vessel, but also to other aspects of the ship such as adequacy of fuel, sufficiency of the crew and even stability.
A time policy (which is of course the most common form) does not contain any seaworthiness warranty, but is subject to the provisions of Section 39(5) of the 1906 Act. This provides that
" .where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness."
A failure, for whatever reason, to maintain the vessels class with the agreed classification society would constitute a breach of the warranty in the Institute Time Clauses Clause 4.1.1.
A failure to maintain the vessels class with the agreed society would normally discharge the underwriters from liability from the date of breach.
In hull insurance for change of flag, ownership or management,
The Institute Time Clauses which are in common use contain provisions (which vary slightly depending on the particular clauses) providing for automatic termination of cover in the event of
change, voluntary or otherwise, in the ownership or flag,
transfer to a new management,
charter on a bareboat basis,
requisition for the title or use of the vessel,
change of class
The primary objective is to protect the insurer from material changes in the risk on significant and fundamental matters such as ownership, class, flag, management and use of the vessel. The occurrence of any one of the above events, voluntary or otherwise would automatically terminate the insurance at the time of change. The automatic termination may be deferred in certain circumstances.
For management issues (like non-compliance with the ISM code)
The ISM Code has been made mandatory by the SOLAS Convention, the standard of seaworthiness with which the vessel must now comply is now to be tested against the requirements of the code. Thus, there is a strong possibility that a failure to comply with the requirements of the ISM Code will be evidence of unseaworthiness with potential consequences under Section 39 of the 1906 Act.
The policy could exclude liability for losses where the ISM certification was defective or make the possession throughout the period of the policy of such certification an express warranty.
There are also some arguments that wilful breach of ISM requirements might be in breach of Section 41 of the 1906 Act.
Provide cover for total or partial loss or damage to the subject matter insured, contribution in general average and expense for ascertaining or averting or reducing loss or damage
Cover can be provided for partial and total losses as provided for in the policy.
Liability for General Average is provided under the market Institute Clauses. Provisions are also made in Sections 64 and 65 of the 1906 Act
Under Section 78(4) of the 1906 Act
"It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss."
A failure to take steps would give the insurers a counterclaim in damages for breach of the duty. In addition, unless there is a specific term in the policy, the costs of preventative measures (or sue & labour expenses) are not necessarily recoverable from the insurers.
As a consequence, although the duty to sue and labour is contained as an express term in the Institute Clauses which are commonly used, there is also an express term giving the assured the right to recover those expenses which are reasonably incurred from the insurers.
Provide that the insurer is automatically subrogated to any claim against a third party the insured may have because of loss or damage covered or has the insured to assign such claim to the insurer?
Section 79 of the 1906 Act provides that an insurer can exercise subrogation rights in the name of the assured once he has settled the loss.
There is no need for the insurer to take an assignment from the assured to bring a recovery action in England against third parties in the name of the assured although he could do so if he wished and sue in his own name. He might wish to secure an assignment in order to meet the procedural requirements of a foreign country
What is the period of limitation for a claim under a policy?
The assureds claim against the insurer is classified in law as an action for damages for breach of contract. By virtue of the Limitation Act 1980, "an action founded on 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 under marine property insurance accrues on the occurrence of the casualty giving rise to the claim. Under a liability policy time normally starts to run when the liability of the assured is established.
Marine Insurance Act 1906
Index to Institute Clauses and Forms 1998 (70th edition Witherby Publishing)
The Institute Radioactive Contamination Exclusion Clause