Assignment

In international sales, goods frequently change hands while they are still in transit. Just as it is important for bills of lading to be made out to enable transfer,77 it is also important for the marine insurance policy78 to be assignable so that the buyer is covered in the event of loss or damage to the goods due to perils of the voyage. Assignment of the policy does not follow passing of property as a matter of course (s 15). Section 50(1) of the MIA allows assignment of the policy as long as the policy does not expressly forbid assignment. Marine policies covering cargo normally do not carry a clause prohibiting assignment, because to do so would impede international trade.

The Institute Cargo Clauses (A), (B) and (C) prevent the passing of the insurance policy to bailees or carriers in cl 15.2. The object of this clause is to stop bailees or carriers from contracting out of liability by inserting a clause in the contract of carriage that gives them the benefit of the insurance cover. Of course, such a clause would be void under the Hague-Visby Rules and the Hamburg Rules since it would lessen the liability of the carrier under these conventions.79

Endorsement is the method normally used to effect assignment,80 recognised by s 50(3). Section 50(3) also allows for the possibility of assignment through other customary means. Mere delivery of the policy to the purported assignee is, however, insufficient to establish assignment. An intention to transfer the rights under the policy also must be shown.81

A policy can be assigned before or after the loss. However, an assignment after loss is possible only as long as the implied or express agreement to assign is made when the assignor has an interest in the subject matter (s 51). North of England Pure Oil Cake Co v Archangel Maritime Bank and Insurance Co Ltd82 provides an illustration. In this case, the cargo was insured with the defendants from Istanbul to London. The insurance included the risk of lighterage. The original assured sold the goods to the plaintiffs while they were in transit. According to the sale contract, the plaintiffs were required to pay for the goods 14 days from delivery. The cargo was unloaded on to the plaintiffs’ lighters. Some of the cargo was lost when one of the lighters sank. The original assured assigned the policy after the loss, and the plaintiffs tried to recover their loss from the insurers. There was, however, no agreement to assign the policy to the plaintiffs in the sold note, nor could an intention to assign be inferred from the sold note. In these circumstances, the court held that the defendants were not liable for the loss of the cargo since the interest of the assured had ceased on delivery of the goods to the plaintiffs’ lighters and the assignment had taken place after the loss.

Warranties on the part of the insured – implied and express

A number of warranties are implied into the insurance contract by ss 39–40 of the MIA. Warranties are undertakings on the part of the insured that some particular thing shall or shall not be done, or that some condition will be fulfilled, or that a particular state of affairs does or does not exist (s 33(1)) and are construed strictly. Where there is a breach of a warranty, the insurer is not liable as from the date of the breach.

77 See Chapter 6, Bill of lading as document of title.

78An insurance policy, however, is not a negotiable instrument like a bill of exchange. See Chapter 15, pp 433–6 on bills of exchange.

79See Chapters 8 and 9.

80Note that, on assignment, according to s 50(2) ‘the defendant is entitled to make any defence arising out of the contract which he would have been entitled to make if the action had been brought in the name of person by or on behalf of whom the policy was effected’.

81Baker v Adams (1910) 15 Com Cas 227. In CIF contracts, it is customary to assign by tendering the document.

82(1875) LR 10 QB 249.

Implied warranties (seaworthiness, legality)

In every voyage policy, it is implied that the ship is seaworthy for the particular voyage – that is, that she is reasonably fit to encounter the ordinary perils of the sea (s 39(1) and (4)). Where the voyage policy relates to a voyage to be performed in stages and requires special equipment or preparation for a particular voyage, the ship must be seaworthy at the commencement of each stage and for the purposes of that stage (s 39(3)). Where the policy covers risks while the ship is in port, the ship must be reasonably fit to encounter the ordinary perils of the port. Where the policy is a voyage policy on goods, according to s 40(2), it is implied that the ship is not only seaworthy as a ship, but also reasonably fit to carry the goods to their destination.83 Warranties, implied or express, require strict compliance.This means that, where there is a breach of warranty, the insurer will not be liable on the policy as from the date of the breach (s 33(3)).

In other words, the fulfilment of the warranty is a condition precedent to the liability of the insurer.84

The implied warranty of seaworthiness places the cargo owner in an onerous position, since he has no way of knowing whether the ship can withstand the perils of the journey, is in a fit state of repair, is manned properly and so on. In these circumstances, it is common to insert a clause excluding the implied warranties of seaworthiness. Such a clause is found in the Institute Cargo Clauses. Clause 5.2 states:

The underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject matter insured to destination unless the assured or their servants are privy to such unseaworthiness or unfitness.

The issue of whether the assured was privy raises some interesting questions about state of knowledge of the assured. Can knowledge be imputed on the basis that any reasonable person, where the facts are plainly staring him in his face, would have known of the unseaworthiness? In other words, can we ascribe the assured with knowledge that they should have had? In Manifest Shipping Co Ltd v Uni-Polaris Insurance Co and La Réunion Européene (The Star Sea),85 The Star Sea was on a voyage from Nicaragua to Zeebrugge. She left on 27 May 1990, and, on 29 May 1990, a fire was accidentally started by an engineer using an oxyacetylene torch in the engine workshop. The crew tried to extinguish the fire for two and one-half hours after which the master decided to use the carbon dioxide (CO2) extinguishing system kept in store outside the engine room, holding four banks of bottles. Their use was ineffective and the fire continued to burn even though the crew thought the fire was extinguished. The damage to the ship was to an extent so as to make the loss a constructive total loss.86 The insurers of The Star Sea, owned by the Kollakis family, insured under a time policy, said they were not liable since the ship had been sent to sea in an unseaworthy state with the privity of the assured. The CO2 system was discharged by pulling a lever, but, because of poor maintenance, the levers on two of the banks broke, leaving only two banks operational. The judge in the lower court had found that the master was incompetent in that he was ignorant of what was required to use the system successfully. The issue that the court had to consider was whether the assured were privy to the unseaworthy state of the ship on the basis of ‘blind-eye

83As in common law, the undertaking of seaworthiness covers both the physical state of the ship and the cargoworthiness of the ship. See Chapter 7, Seaworthines.

84See Lord Goff in Bank of Nova Scotia v Hellenic Mutual War Risks Association (The Good Luck) [1992] 1 AC 233, at pp 262–3. See also Agapitos v Agnew (The Aegeon No 2) [2002] EWHC 1558 (Comm).

85[2001] 1 Lloyds’s Rep 389.

86See pp 420–1 for the meaning of constructive total loss.

knowledge’87 since it was accepted that they did not have actual knowledge of the unseaworthiness. The insurers, in support of the privity argument, drew on what had happened in the past on two other vessels, The Centaurus and the The Kastora, which were part of the fleet owned by the Kollakis family. Both of these ships were manned by Korean crew. There was fire aboard both ships. In the case of the first ship, the CO2 system was used, and, in the second, the system’s use was ineffective since the dampers did not have adequate sealing. As a result of these fires, the Korean crew of The Star Sea was replaced with a Greek crew. Regardless,Tuckey J found that the steps that had been taken were incompletely inadequate – for instance, no steps had been taken to ensure that the master was competent in using the CO2 system – and came to the conclusion that there was blind-eye knowledge on the part of the assured.

On appeal, however, the finding of the judge was reversed. As Lord Justice Legatt said ‘an allegation that they ought to know [is] not an allegation that they suspected or realised but did not make further enquiries’.88 The test to be used, therefore, is subjective. On appeal, the House of Lords agreed with the Court of Appeal.

There is also an implied undertaking that the adventure insured is a legal one. Where the adventure is illegal, the policy will be unenforceable. For instance, where goods are exported contrary to existing regulation, the policy will be unenforceable for illegality.89 It is possible that an adventure that is legal to start with becomes illegal because of a change in the circumstances – for instance, declaration of war. Where the assured abandons the adventure (i.e., acts in a lawful manner), the assured will be covered.90

Express warranties

Other than warranties that are implied into the insurance contract, it is normal for policies to include express warranties, such as a warranty that the ship will sail before a certain date, a warranty that the ship will not carry certain types of cargo and so on. Express warranties must be included in, or written on, the policy. However, where they are contained in a document other than the policy, then that document must be incorporated by reference in the policy (s 35(2)).

As with implied warranties, where there is a breach of an express warranty, the insurer is discharged from liability as from the date of the breach (s 33(3)).

Deviation

Under the MIA, it is expected that the vessel will proceed on the voyage on the usual or customary course, or the course specifically designated for the voyage (s 46). Where the vessel deviates from the voyage contemplated, without any lawful excuse, the insured loses cover from the moment of deviation.91

87 Expression used by Lord Denning in The Eurasthenes [1976] 2 Lloyd’s Rep 171 and explained in the following manner:

To disentitle the shipowner, he must, I think, have knowledge not only of the facts constituting the unseaworthiness, but also knowledge that those facts rendered the ship unseaworthy, that is, not reasonably fit to encounter the ordinary perils of the seas. And, when I speak of knowledge, I mean not only positive knowledge but also the sort of knowledge expressed in the phrase ‘turning a blind eye’. If a man, suspicious of the truth, turns a blind eye to it, and refrains from inquiry – so that he should not know it for certain – then he is to be regarded as knowing the truth. This ‘turning a blind eye’ is far more blameworthy than mere negligence. Negligence in not knowing the truth is not equivalent to knowledge of it [at p 179].

88 [1997] 1 Lloyd’s Rep 360, at p 377.

89 Parkin v Dick (1809) 11 East 502.

90Sanday v British and Foreign Marine Insurance Co Ltd [1915] 2 KB 781.

91On the drastic effect of deviation on exclusion clauses in carriage contracts, see Chapter 7, Deviation, and Chapter 8, Duty to pursue the contract voyage.

Deviation in the following circumstances is excused by s 49(1)(a)–(g):

(a)where authorised by any special term in the policy;

(b)where caused by circumstances beyond the control of the master and his employer;

(c)where reasonably necessary in order to comply with an express or implied warranty;

(d)where reasonably necessary for the safety of the ship or subject matter insured;

(e)for the purpose of saving human life, or aiding a ship in distress where human life may be in danger;

(f)where reasonably necessary for the purpose of obtaining medical or surgical aid for any person on board the ship;

(g)where caused by the barratrous conduct of master or crew, if barratry is a peril insured against.

It is common practice for insurance contracts to specify that cover does not cease on deviation. Clause 8.3 of Institute Cargo Clauses (A), (B) and (C) provides that the ‘insurance shall remain in force . . . during delay beyond the control of the Assured, any deviation, forced discharge, reshipment or transhipment and during any variation of the adventure arising from the exercise of a liberty granted to shipowners or charterers under the contract of carriage’. As is obvious, cl 8.3 covers situations other than deviation. So, where, for instance, during repairs, the goods are warehoused, the cargo will continue to be covered. Where the events listed in cl 8.3 occur, the insured has no obligation to give notice to the insurer and no extra premium is payable.

Clause 8 must not be confused with cl 10 (found in all three sets of Institute Cargo Clauses), which provides that ‘where, after attachment of this insurance, the destination is changed by the Assured, this must be notified promptly to insurers for rates and terms to be agreed. Should a loss occur prior to such agreement being obtained cover may be provided but only if cover would have been available at a reasonable commercial market rate on reasonable market terms’ (emphasis in original). This clause does not apply to deviation, but applies where there is a voluntary change of the voyage by the insured – for instance, where the assured changes the destination from Mumbai (destination on policy) to Chennai subsequent to commencement of risk. For the goods to be covered in the event of a change of destination, the insured is under an obligation to give prompt notice as expressly stated in cl 10.

Liability of insurer

Doctrine of proximate causation

According to s 55(1) of the MIA, ‘the insurer is liable for any loss proximately caused by a peril insured against’ unless the policy provides otherwise. In other words, one should look to the proximate cause, not the remote cause, to establish the liability of the insured on the policy (causa proxima non remota spectatur).

Until the decision in Leyland Shipping Co v Norwich Union Fire Insurance Soc (The Ikaria),92 there was a tendency to treat the cause closest in time to the loss as the proximate cause.93 In Leyland Shipping, a ship was torpedoed by a German boat near Le Havre. The ship managed to reach Le Havre where she put into harbour. As a result of a swell caused by a gale, the ship was moved to an outer harbour where she sank. The House of Lords held that the torpedoing of the ship was the real and efficient cause of the event. The proximity in time of the gales (perils of the sea) to the loss was totally irrelevant. According to Lord Shaw:

92[1918] AC 350. See also Brownsville Holdings v Adamjee Insurance [2000] 2 Lloyd’s Rep 458.

93See Pink v Fleming (1890) 25 QB 396.

To treat proxima causa as the cause which is nearest in time is out of the question. Causes are spoken as if they were as distinct from one another as beads in a row or links in a chain, but – if this metaphysical topic has to be referred to – it is not wholly so. The chain of causation is a handy expression, but the fi gure is inadequate. Causation is not a chain, but a net. At each point, infl uences, forces, events, precedents and simultaneous, meet, and the radiation from each point extends infi nitely. At the point where these various infl uences meet, it is for the judgment as upon a matter of fact to declare which of the causes thus joined at the point of effect was the proximate and which was the remote cause.

To treat proximate cause as if it was the cause which is proximate in time is, as I have said, out of the question. The cause which is truly proximate is that which is proximate in efficiency. That efficiency may have been preserved although other causes may meantime have sprung up which have not yet destroyed it, or truly impaired it, and it may culminate in a result of which it still remains the effi cient cause to which the event can be ascribed [at p 369].

It must be stressed that the courts are not engaging in a philosophical discourse when discussing the meaning of proximate cause or efficient cause, as Lord Shaw pointed out in Leyland Shipping. When the courts look at the issue of causation, they are doing so in common sense terms.94 Section 55(2) lists the circumstances in which an insurer will not be held liable. Unless the policy provides otherwise, the insurer is not liable for loss that is proximately caused by (1) delay, even though the delay is caused by a peril insured against; (2) ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter and (3) rats or vermin. Section 55(2)(a) provides that the insurer is also not liable for a loss that is attributable to the wilful misconduct of the assured. He is, however, liable for any loss that is proximately caused by a peril insured against, even though it would not have occurred but for the negligence, unless the terms

of the policy provide otherwise.

Where the loss is attributable to a number of proximate causes, and one of them is excepted, the insurer is not liable for the loss.95

It is for the insured to make out a prima facie case that a loss was proximately caused by a peril insured against.96 The burden then shifts to the insurer to show that the loss falls within one of the exceptions listed in the policy.

The requirement that the cause of loss be proximate for the purposes of liability is not an absolute requirement – the parties may agree otherwise. Where Institute Cargo Clauses (B) and

(C) are used, it is enough to show that loss or damage to goods was reasonably attributable to perils listed in cl 1.97

Types of losses

Under s 56(1) of the MIA, a loss can be a total loss or a partial loss. The question of whether the insured is covered for a total loss or a partial loss will depend on the terms of the policy. The Institute Cargo Clauses (A), (B) and (C) cover the insured for partial, as well as total, loss, except for cl 1.3 of Institute Cargo Clause (B), which covers the insured only for ‘total loss of any package lost overboard or dropped whilst loading on to, or unloading from, the vessel or craft’.98

94Yorkshire Dales Steamship Co Ltd v Minister of War Transport [1942] AC 691, at p 706.

95Wayne Tank and Pump Co Ltd v Employers Liability Association Corp Ltd [1973] 2 Lloyd’s Rep 237; Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1985] 1 Lloyd’s Rep 264; [1987] 1 Lloyd’s Rep 32.

96See Cobb and Jenkins v Volga Insurance Co of Petrograd (1920) 4 LlL Rep 178.

97See Table 14.1.

98See Table 14.1.

Total loss

According to s 56(2), a total loss can be an actual total loss or a constructive total loss.

Actual total loss

Under s 57(1), a claim for actual total loss arises (a) where the entire subject matter is destroyed – for example, where the cargo is destroyed by fire; (b) where the subject matter is destroyed to an extent that it ceases to be a thing of the kind insured – for example, where a cargo of dates was found unfit for human consumption when it was retrieved from a ship that sank, as in Asfar v Blundell99 and (c) where the insured is irretrievably deprived of the subject matter – for example, where a vessel is captured and there is no likelihood of it being returned.100 Goods may also be presumed to be a total loss where a vessel concerned in the adventure goes missing for a reasonable period of time (s 58).

An obliteration of marks, due to a peril insured against which renders the goods unidentifiable, will not give rise to a claim for actual total loss. It will give rise only to a claim for partial total loss (s 56(5)).

Where the insurer pays for total loss, he becomes entitled to take over the interest of the assured in whatever may remain of the subject matter (s 79). In practice, insurers hardly ever take over what remains of the subject matter and may come to some arrangement with the insured.

Constructive total loss

According to s 60(1), there is a constructive total loss (a) where it is reasonable to abandon the subject matter insured since actual total loss seems to be unavoidable or (b) where the cost of preserving the subject matter insured from actual total loss is far in excess of the value of the subject matter.

Where the owner is deprived of goods, there is constructive total loss only if it is unlikely that he will recover them or the cost of recovering them would exceed the value of the goods when recovered (s 60(2)(i)). The meaning of ‘unlikely’ was examined in Polurrian SS Co Ltd vYoung101 where a vessel from Newport to Constantinople (Istanbul) was captured by the Greeks during the war between the Turks and the Greeks. According to Pickford J, ‘unlikely’ did not mean ‘unlikely that it could ever be recovered’ but ‘unlikely that it could be recovered within a reasonable time’.102 Where there is damage to the cargo, there is constructive total loss if the cost of making good the damage and forwarding it to its destination exceeds its value on arrival (s 60(2)(iii)).103

The three sets of Institute Cargo Clauses – (A), (B) and (C) – in cl 13 provide that ‘no claim for Constructive Total Loss shall be recoverable . . . unless the subject matter insured is reasonably abandoned either on account of its actual total loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subject matter to the destination to which it is insured would exceed its value on arrival’. Although worded differently, the effect of this clause is the same as that of s 60, in that the constructive total loss is determined in terms of the value of the goods on arrival.

99[1896] 1 QB 123.

100See also Roux v Salvador (1836) 3 Bing NC 266.

101[1915] 1 KB 922.

102[1915] 1 KB 922 (CA), at p 938, affirming Pickford J. See also The Bamburi [1982] 1 Lloyd’s Rep 312.

103See Vacuum Oil Co v Union Insurance Society of Canton (1926) 25 LIL Rep 546.