Excluded Losses In Marine Insurance

By Anonymous

INTRODUCTION

Maritime law is one of the most established and oldest types of law. It generally covers laws or rules that govern tort, contract, marine commerce, ships, shipping, and worker compensation claims that arise on the world’s navigable waters.

Admiralty law, also referred to as maritime law is a distinct body of law which governs maritime questions and offences. It is a body of both domestic law governing maritime activities, and private international law governing the relationships between private entities which operate vessels on the oceans. It deals with matters including marine commerce, marine navigation, shipping, sailors, and the transportation of passengers and goods by sea. Admiralty law also covers many commercial activities, although land based or occurring wholly on land, they are considered as maritime in character.

The earliest authenticated insurance contract (i.e. that which displays the characteristics of insurance in the sense of a transfer of risk of loss due to a fortuitous uncertain event in lieu of payment of consideration /premium), is a marine insurance contract on a ship. Marine Insurance is not of recent origin. Its existence can be traced back to several centuries. Questions concerning it have naturally been coming up for a number of years and the law concerning it had taken a definite shape much prior to 1906 when the English Marine Insurance Act was passed with a view to codify that law.

Way back in Babylonian times, around 2100 B.C., the Code of Hammurabi was the first basic insurance policy. This policy was paid by the traders in the form of a loan to guarantee the safe arrival of their goods by caravan. As history progressed, the needs for insurance increased. The Phoenicians and the Greeks wanted the same type of insurance with their seaborne commerce. In medieval times, the guilds protected their members from loss by fire and shipwreck, paid ransoms to pirates, and provided respectable burials as well as support in times of sickness and poverty.

Then was introduced the very first actual insurance contract, signed in Genoa in 1347. “The Santa Clara” dated 1347 in Genoa. The policy is in the Italian language and appears in the form a maritime loan to avoid the canon (church) prohibition against usury.

By this time, the practice of getting the cargo insured while being shipped was widespread throughout the maritime nations of Europe. Then in London, in 1688, the first insurance company was formed. In India, the law of marine insurance has been put in a statutory from since 1963.

The Preamble to the Indian Act states that it is “an Act to codify the law relating to marine insurance.” The canon of construction generally applicable to a codifying statute is well known: the language of the statute must be given its natural meaning, regard being had to the previous state of the law only in cases of doubt or ambiguity.

Excluded Losses

Section 55(i) of the Marine Insurance Act of 1906 provides for the framework for all included and excluded losses under Marine Insurance. It is the same provision under the Indian Marine Insurance Act of 1963. It applies the principle of proximate cause as the underlying rule for determining the liability of the insurer.

Section 55 specifically states that there are particular exclusions for which the insurer is not liable.

Clause (a) says that “the insurer is not liable for any loss attributable to the wilful misconduct of the assured….”

Clause (b) says that “Unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately caused by delay, although the delay be caused by a peril insured against.”

Section 55(2)(c) deals with the issues of wear and tear and inherent vice. Again the Act prefaces the exclusion with: ‘Unless the policy provides,’ then goes on to state that ‘… the insurer is not liable for any loss caused by ordinary wear and tear ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss caused proximately by vermin or rats, or any injury to machinery not proximately caused by maritime perils.’ Reliance is therefore placed on the Act itself to provide for the necessary defenses to the insurer.

Proximate Cause

It will be noted that the insurer is only liable for losses proximately caused by a peril insured against. The question of proximate cause has been discussed in many legal cases over the centuries, and under English law, the legal authorities are clear on the point that it is the cause proximate in effect which must be looked to rather than that necessarily proximate in time.

This was considered in the case of Reischer v Borwich (1894) where a tug had been insured against the risk of collision and damage received in a collision with any other object, but not against perils of the sea. It was held that the assured could recover a total loss under the policy since the proximate cause of the loss was the collision, on the grounds that the consequences of the collision (the broken pipe) had never ceased to operate and that this was, therefore, the cause proximate in effect, if not in time.

Burden of proof

As to the question of where the responsibility lies for proving that the loss has been proximately caused by a peril insured against, under most legal systems the burden of proof is upon the party making a claim or making an assertion to prove that their allegation is correct. In order to discharge the burden of proof, the assured does not have to exclude all possibilities as to how the particular damage has occurred.

He is, however, required to demonstrate that the balance of probabilities is in favor of the loss being proximately caused by a peril insured against. If a particular loss is equally likely to have been caused by a peril not covered by the policy, then the assured will have failed to discharge the burden of proof and will, therefore, be unable to sustain a claim against his insurers.

Once the assured has made out a prima facie case that the loss or damage has occurred as a result of a peril insured against, the burden of proof then shifts to the underwriters to set up a counter-argument; that the loss or damage resulted from a peril not insured against. Alternatively, the insurers have to prove the wilful misconduct of the assured or his privity to wilful misconduct, a breach of warranty or that the loss or damage comes within the terms of an exceptions clause.

Wilful Misconduct

Section 55(2)(a) excludes the liability of an insurer for the wilful misconduct of the assured.

Firstly, as improper conduct could range from mere negligence, gross indifferent negligence, reckless disregard, and wilful misconduct, it is necessary to identify the qualities of an act which would amount to ‘wilful conduct’.

Secondly, a more focused issue – whether the shipowner has sent an unseaworthy ship to sail with reckless disregard constitutes an act of wilful misconduct – has to be examined. It was discussed in the case of Thomson v. Hopper in relation to marine insurance. It needs to be examined along with the concept of privity of the assured and unseaworthiness under Section 39(5).

It is found that under both the sections, the common phrase is ‘attributable to’ and the rule of causation is to be found in that. Thus any loss attributable to unseaworthiness to which the assured is privy or any loss attributable to the wilful misconduct of the assured will prevent recovery under the insurance policy.

Whether a negligent act can be wilful is questionable. However, the main controversy is whether reckless indifference or reckless disregard can be construed as wilful misconduct. This issue was raised in the case of Thomson v. Hopper, where the Court held that the inaction of the assured in showing disregard and indifference can also amount to wilful misconduct.

Similarly, the position of the innocent mortgagee is also affected if there is wilful misconduct on the part of the assured and it is seen in the case of Graham Joint Stock Shipping Co. Ltd. v. Merchants’ Marince Insurance Co., ‘Ioanna’. But then the Courts held that a mortgagee could not recover money under an insurance policy as they had no independent interest under the policy.

Loss caused by delay

Section 55(2)(b) with clarity excuses the insurer from any loss caused due to delay even if the delay is caused by an act insured against. The proximate cause rule applies here. There might be multiple causes for the delay but the aptest cause must be looked into.

According to the law of marine insurance, only the last cause needs to be looked into and others neglected even though the result might have not occurred without them. But when it is an ‘all risks’ policy even a loss caused by a delay can be recoverable under it.

But the term ‘risk’ needs to be examined carefully before attributing something as recoverable under the insurance policy. Thus if the event causing the delay/loss is accidental, then it would fall within the meaning of the expression ‘risk’. But if the delay is expected by usual wear and tear, it could not be brought within the ambit of ‘risk’.

Ordinary wear and tear

The insurer is not liable for ordinary wear and tear as per Section 55(2)(c). This is simple enough to understand and there are many case laws which have repeatedly defined what ordinary wear and tear is and what is not. In the case of Miss Jay Jay, the Court held that the damage caused due to ordinary action of wind and waves was ordinary wear and tear.

No ship can navigate the ocean even under the most favorable circumstances without suffering a little decay or depreciation in value which is a part of the ordinary wear and tear if it arises from the ordinary operations of the usual causalities of the voyage. The insurer is liable only when the loss is beyond this ordinary wear and tear.

Similarly, ordinary leakage and breakage also come within this exclusion. Unless there is an express clause saying that the insurer is liable under the policy for ordinary leakage and breakage, in the normal course of events, the assured is not entitled to a claim under the same.

Inherent Vice

The term ‘Inherent Vice’ refers to a loss arising from “qualities inherent” in the goods insured.  In ocean cargo transit with over 15,000 different types of cargo being shipped around the world, the application of inherent vice is a strong possibility in certain cargoes, i.e. hydroscopic cargo, fruits and vegetables, wine, cocoa and coffee beans, iron and steel products, wood products, fish meal, leather goods, hides and skins, flour, soybeans, plantains, potatoes, pistachio nuts, walnuts, rubber, rugs, carpet backing, others.

As inherent vice is an exception to liability, the burden of proof is on the insurer to support the declination of any cargo claim.

An insurer does not agree to insure against damage that is bound to happen or inevitable as a result of the natural tendency of the cargo to deteriorate or sustain damage without an external fortuitous accident triggering the damage.

The “inherent vice” exclusion can also apply to a loss which, due to the manner in which the cargo is shipped, is regarded as inevitable. A good example is given by cargoes that are susceptible to high and/or low temperatures. Fresh eggs, chocolate, cocoa cake, wine, beer, etc, that are shipped in regular ocean containers during certain times of year when weather conditions are expected to be hot or cold, and without the use of a heated and/or insulated container, are bound to sustain losses.

The damage that occurs in the course of ordinary handling and transportation of cargoes, without the intervention of a fortuity, can be due to Inherent Vice and would be excluded from coverage.  Also, one of the 17 exceptions to an ocean carrier’s liability in an ocean Bill of Lading is “inherent vice”.

Rats and vermin

Another aspect that is excluded from insurance is rats and vermin. If the cargo owners prefer a claim under marine insurance if the claim is under a suitable clause in the policy, then it is recoverable. But if the claim is the cargo is gnawed away by rats, the sea has no role in producing the damage and hence it is not a risk wholly peculiar to the sea.

CONCLUSION

The purpose of marine insurance has been to enable the shipowner and the buyer and seller of goods to operate their respective business while relieving themselves, at least partly, of the burdensome financial consequences of their property’s being lost or damaged as a result of the various risks of the high seas. Marine insurance is quite an old insurance term which is meant to cover the loss pertaining to shipment; ship etc.

Marine insurance typically fulfills all your overseas transportation requirements and give you complete peace of mind. But at the same time, it is essential that the ship owners don’t take the insurer for a ride and hold them liable and recover money for losses caused by sheer negligence, and other natural causes which are inevitable. Thus excluded losses in marine insurance are an important aspect to keep in mind while dealing with marine insurance.

Formatted on February 16th, 2019.

Bibliography

1. Howard Bennet, Law of Marine Insurance, Second Edn., 2006, Oxford University Press.
2. Arnould’s Law of Marine Insurance and General Average, Seventeenth Edn., 2008, Sweet and Maxwell.

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