The F1: A closer look at the Bacardi principle and section 11 of the Insurance Act
The Facts
MOK Petro Energy FZC v Argo (No. 604) Limited, The F1 [2024] EWHC 1935 (Comm) concerned a cargo of 11,800 MT of 92 RON unleaded gasoline (“the Cargo”) that had been loaded onto the tanker F1 (“the Vessel”) in Sohar, Oman. The Cargo was insured under an all-risks marine open cover on the ICC(A) wording (“the Policy”).
The Cargo consisted of a blend of gasoline and methanol. The gasoline and methanol used for the Cargo were drawn from four shore tanks (two gasoline, two methanol). They were loaded onto the Vessel via connecting pipelines and then blended in a tank on board the Vessel.
All gasoline-methanol blends have a phase separation temperature (PST), i.e., a temperature at or under which the blend will separate into a gasoline-rich upper layer and a methanol-rich lower layer. Phase separation is undesirable as phase-separated blends have a lower octane value and may damage the engine in which they are used. Put another way: the lower the PST, the better for the blend.
Also relevant is the fact that water increases the propensity of a gasoline-methanol blend to under phase separation. Unwanted water contamination therefore increases the PST of a blend.
The Cargo specifications, per the sale and purchase contract between MOK (the buyer) and PetroChina (the seller), required the Cargo to have a PST of 1°C or below. However, when the Vessel arrived at the discharge port, the Cargo was found to have a PST of 29°C. The Cargo was rejected by MOK’s end purchaser and ultimately sold by MOK to a salvage buyer. MOK claimed an indemnity under the Policy for the difference between (i) the value of the Cargo had it complied with specifications and (ii) the value at which it was actually sold.
Insurers declined the claim. In the ensuing trial, the Commercial Court upheld insurers’ declinature. While much of the judgment turned on the specific facts of the case, the Court’s findings on the following two issues carry wider implications for policyholders:
- Whether the mere fact that the Cargo had been defectively blended could constitute damage.
- How should a Court assess whether compliance with a warranty would reduce the risk of loss, as required under section 11 of the Insurance Act 2015.
Whether the mere fact of defective blending could constitute damage
Clause 1 of the ICC(A) wording provides that the insurance “covers all risks of loss of or damage to the subject-matter except as provided in Clauses 4, 5, 6 and 7 below”.
A policyholder seeking to obtain cover under the ICC(A) wording must generally establish (i) a fortuitous event which (ii) caused loss or damage to the insured cargo. Insured cargo is damaged only where it undergoes an adverse change in physical state.
In this case, one of MOK’s arguments was that (i) PetroChina’s decision to blend the gasoline and methanol in the proportions actually used was fortuitous, and (ii) this blending caused damage by resulting in a product that had a propensity to phase separate at 17°C, which was higher than the contractually stipulated PST of 1°C (although the blend did not actually undergo phase separation).
The question that arose was – could the blend be regarded as damaged merely because it was defective from the moment of its creation? Dias J held that it could not as there had never been a change to the physical state of the blend. The facts were on all fours with the well-known Bacardi Breezers case: Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd [2002] EWCA Civ 549 (“Bacardi”).
- In Bacardi, a drinks manufacturer mixed cardon dioxide which it did not appreciate had been contaminated with benzene with water and concentrate to form light alcoholic drinks. Unsurprisingly, the contaminated drinks were unmarketable. The issue was whether there had been “physical damage” to the drinks for the purpose of a limitation of liability clause. The English Court of Appeal held that there had been no damage – the drinks had not been subject to damage, but were merely defective from the moment of their creation.
- Similarly, in the present case, the blend was formed through the mixing of gasoline and methanol, and had a propensity to phase separate from the moment of its creation. It had never existed without this propensity. Since there was no change in the physical state of the blend to speak of, it could not, held the Court, be said to have suffered damage.
How should a Court assess whether compliance with a warranty would reduce the risk of loss?
Section 11 of IA 2015 applies to (among others) warranties which, if complied with, would tend to reduce the risk of loss of a particular kind. The general effect of section 11 is that, where an insured has breached a warranty to which section 11 applies:
- if the insured can show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”, per section 11(3); then
- the insurer would not be able to rely on the insured’s breach to exclude/limit/discharge its liability.
Put another way, section 11 obviates an insured’s breach of warranty where the warranty is not relevant to the insured’s actual loss.
In the present case, the Policy contained an express warranty requiring a surveyor to inspect and certify the connecting pipelines between the Vessel and the shore tanks. On the facts, MOK’s surveyor had done the former but not the latter. Accordingly, the Court found that MOK had not complied with the express warranty.
The issue then became whether section 11 negated MOK’s breach of warranty. This would be the case if MOK could show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”.
MOK’s primary case had been that the blend had been fortuitously contaminated with water either when the gasoline and methanol were loaded onto the Vessel via connecting pipelines, or when they were blended on board the Vessel. This water contamination in turn increased the PST of the blend (see above). The Court therefore assumed, for the purposes of its section 11 analysis, that the “loss which actually occurred” was the contamination of the blend with water as alleged by MOK.
On the facts, MOK’s surveyor had inspected the pipelines and found no water contamination, but had not issued a certificate in respect of the inspection. Arguably, the requirement to issue a certificate (when an inspection had already been carried out and no trace of water contamination had been found) was a mere formality and the failure to issue a certificate could not have increased the risk of loss (water contamination). The question then arose – in considering whether “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”:
- Should the Court consider only the effect of the particular breach of warranty committed by MOK (i.e., only the effect of its surveyor’s failure to issue a certificate)? If so, MOK’s breach arguably would not have increased the risk of water contamination, and MOK would be able to rely on section 11 to negate its breach of warranty.
- Alternatively, should the Court consider the effect of non-compliance with the warranty as a whole (i.e., the effect of both not inspecting and not certifying the pipelines)? If so, non-compliance with the warranty as a whole would probably have increased the risk of contamination, and MOK would not be able to rely on section 11.
Dias J preferred the second view, holding that section 11 was directed at the effect of compliance with the entire warranty and not with the consequences of the specific breach by the insured, and that paragraph 96 of the Explanatory Notes to IA 2015 supported this reading. Accordingly, MOK’s breach of warranty would have been fatal to its claim.
Implications for policyholders – English law
Neither of the findings discussed are policyholder-friendly.
That said, Dias J’s finding that the mere fact of defective blending cannot constitute damage intuitively accords with the reason why mere defects are not covered under all-risks insurance – namely, that all-risks insurance is not meant to guarantee the proper manufacture or construction of the property insured. A parallel can be drawn with construction all-risks policies, which typically do not cover the costs of rectifying defects in design or workmanship. Apart from this, the F1 is also significant for being the first case to explicitly endorse the applicability of Bacardi in an insurance context (Bacardi having been concerned with a dispute under a supply of goods contract).
As for section 11 of IA 2015, this case (as noted in an earlier article) is significant for being the decision to consider that section. That said, Dias J’s observations (i.e. that it is the effect of non-compliance with the entire warranty, rather than the insured’s particular breach, that should be taken into account) were obiter and it remains to be seen whether another Court would agree with her. In our view, notwithstanding Dias J’s observations, the use of the definitive article in section 11(3) (“the non-compliance”) might suggest on the contrary that it is the insured’s particular breach that should be looked at.
Implications for policyholders – Singapore Law
The authors – both of whom are APAC-based – will briefly consider the implications of this decision for Singapore law, a commonwealth jurisdiction whose law of insurance substantially reflects the English position prior to IA 2015.
There do not appear to be strong reasons why a Singapore Court would not consider Dias J’s findings on the issue of defective blending persuasive.
However, Dias J’s observations on section 11 of IA 2015 have less relevance. Under Singapore law, a breach of warranty has a draconian effect – the insurer is discharged from liability from the date of an insured’s breach of warranty: see section 33(3) of the Singapore Marine Insurance Act 1906. There is no equivalent of section 11 of IA 2015 that a policyholder can look to negate the breach of warranty. The Singapore law position accords with what had been the English law position prior to 2015, and its harshness was the reason behind the English reforms to insurance warranties as set out in the IA 2015.
Authors:
Toby Nabarro - Director, Singapore
Climate Risks Series, Part 3: Aloha v AIG – Liability Cover for Reckless Environmental Harm
Aloha v AIG - Liability Cover for Reckless Environmental Harm
Increasing numbers of claims are proceeding around the world alleging that the public were misled about the risks associated with climate change, resulting from fossil fuels and greenhouse gas (“GHG”) emissions.
A recent decision in the Supreme Court of Hawaii, Aloha Petroleum Ltd v National Union Fire Insurance Co. of Pittsburgh and American Home Insurance Co. [2024], held that an “occurrence” in this context included the consequences of reckless conduct, and GHG emissions were a “pollutant” for purposes of a pollution exclusion under a commercial general liability policy.
Background
The Appellant, Aloha Petroleum Ltd (“Aloha”), was insured with two subsidiaries of AIG under a series of liability policies, in respect of its business as one of the largest petrol suppliers and convenience store operators in Hawaii.
The counties of Honolulu and Maui sued several fossil fuel companies, including Aloha, claiming that the defendants knew of the effects of climate change and had a duty to warn the public about the dangers of their products. It was alleged that the defendants acted recklessly by promoting climate denial, increasing the use of fossil fuels and emitting GHGs, causing erosion, damage to water infrastructure and increased risks of flooding, extreme heat and storms.
Aloha sought indemnity under the policies and AIG refused to defend the underlying claims, alleging that the harm caused by GHGs was foreseeable and therefore not “accidental”; and alternatively, seeking to rely upon an exclusion to cover for losses arising from pollution.
Aloha issued proceedings seeking a declaration that the policies would respond, and the District Court of Hawaii referred the following questions to the Supreme Court, to assist with determining the parties’ motions for summary judgment:
- Does an “accident” include recklessness, for purposes of the policy definition of “occurrence”?
- Are greenhouse gases “pollutants” within the meaning of the pollution exclusion?
Policy Wording
The policies provided occurrence-based coverage, with two different definitions of “occurrence” for the relevant periods:
- “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”, or
- “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured”
The pollution exclusion clauses varied across the policies, but the differences were immaterial for purposes of the issues before the Supreme Court.
The 2004-2010 policy excluded cover for:
“Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.
. . . .
“Pollutants” [mean] “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Is Reckless Conduct Accidental?
Aloha argued that it was entitled to indemnity, as the allegations of recklessness were sufficient to establish an “accident” and therefore an “occurrence” under the policies. Aloha relied on Tri-S Corp v Western World Ins. Co. (2006), which held - in the context of unintentional personal injury resulting from proximity to high voltage power lines - that reckless conduct is accidental, unless intended to cause harm, or expected to with practical certainty.
AIG claimed that Aloha understood the climate science, and the environmental damage was intentional, not fortuitous. It relied on AIG Hawaii Ins. Co. v Caraang (1993), which held - in the context of torts involving obvious physical violence - that an “occurrence” requires an injury which is not the expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.
The Supreme Court agreed with Aloha, ruling that:
“when an insured perceives a risk of harm, its conduct is an ‘accident’ unless it intended to cause harm or expected harm with practical certainty … interpreting an ‘accident’ to include reckless conduct honors the principle of fortuity. The reckless insured, by definition, takes risk.”
Are GHGs “Pollutants”?
Aloha argued that GHGs are not pollutants, because they are not “irritants” (applicable in the context of personal injury, not property damage) or “contaminants”. The drafting history was said to indicate that the exclusion should be limited to clean-up costs for traditional pollution caused by hazardous waste from the insured’s operations, not liability resulting from its finished products.
The Supreme Court held that a “contaminant”, and therefore “pollutant” for purposes of the exclusion, is determined by whether damage is caused by its presence in the environment. Although a single molecule of carbon dioxide would not be viewed as pollution, a fact-specific analysis is required, and the Supreme Court was satisfied that Aloha’s gasoline production is causing harmful climate change. This approach was supported by the regulation of GHG emissions in Hawaii and the federal Clean Air Act.
Not all of the policies contained a pollution exclusion clause, however, and the question of whether AIG is required to indemnify Aloha for that policy period (covering 1986 to 1987) will now be considered by the District Court.
Impact On Policyholders
The finding that reckless conduct is covered by liability policies in the context of climate harms is highly significant and will be welcomed by energy companies.
While the issues are yet to be fully explored in European jurisdictions, it is interesting to compare the UK Supreme Court decision in Burnett v Hanover [2021], where merely reckless conduct was insufficient to engage a ‘deliberate acts’ exclusion in a public liability policy; and the recent decision in Delos Shipping v Allianz [2024], confirming that a defence based on lack of fortuity requires the insurer to establish that consequences of the insured’s actions were inevitable, i.e. “bound to eventuate in the ordinary course”.
The precise wording of any pollution or climate change exclusion should be carefully considered prior to inception of the policy period. The causative language used can significantly alter the scope of coverage and prospects of indemnity (see, for example, Brian Leighton v Allianz [2023]).
Authors:
Climate Risk Series:
Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
Part 2: Flood and Storm Risk – Keeping Policyholders Afloat
Climate Risks Series, Part 2: Flood and Storm Risk: Keeping Policyholders Afloat
Introduction
Extreme rainfall and storms have become increasingly prevalent in the UK. Figures from the Association of British Insurers (“ABI”) show that storms and heavy rain have contributed to driving up property insurance payouts to the highest level in 7 years.
During floods in September 2024, several areas of the UK experienced significant property damage. This included AFC Wimbledon’s grounds, where a sinkhole caused the football pitch to collapse, after a nearby river burst its banks due to the excessive rainfall.
This article will discuss:
- The coverage issues that policyholders could face in relation to cover for damage caused by flood and storm.
- How stakeholders can increase resilience to floods and storms.
Coverage Issues
Where policies do not clearly define what constitutes a “flood” or a “storm”
Extreme weather comes in various forms and severities. In the absence of a clear definition of “flood” or “storm”, insurers may seek to rely on metrics such as the Beaufort wind force scale, ABI definition of storm, or previous case law, to support arguments limiting the scope of policy cover depending on the particular facts.
Recent decisions from the US have held that flood exclusions did not apply to: water damage from backed-up drainage following Hurricane Ida (GEMS Partners LLC v AmGUARD Ins Co (2024), in the New Jersey district court); and water accumulating on a parapet roof after a severe storm (Zurich v Medical Properties Trust Inc (2024), in the Massachusetts Supreme Court); based on the meaning of “flood” and “surface waters” in the relevant policy wordings.
In FCA v Arch Insurance Limited [2021] UKSC 1, the UK Supreme Court confirmed that, when looking at the construction of a policy, it is necessary to consider how a reasonable person would understand the meaning of the words used, in light of the commercial context. Therefore, policyholders should ensure, prior to inception, that the policy contains appropriate and clear definitions of “flood” and/or “storm”, to prevent ambiguity in the event of a claim.
Where the weather event is a combination of “flood” and “storm”
Where a weather event may appear to be a combination of both a flood and a storm, identifying the proximate cause of the loss, i.e. the dominant cause, may be difficult without meteorological expert evidence. This can raise two separate issues.
Firstly, policies contain different sub-limits for flood or storm damage. For example, if “flood” has a lower sub-limit compared to “storm” perils, a policyholder would likely seek to argue that storm damage has occurred, to maximise cover under the policy.
Secondly, if a policy excludes either flood or storm damage, the principles derived from Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 and The Miss Jay Jay [1987] 1 Lloyd's Rep 32 may apply. This means that where two concurrent proximate causes operate together to bring about a loss, if one is insured under the policy and one is excluded, the loss will not be covered. If one concurrent proximate cause is an insured peril and the other is not insured, but not excluded, the loss will be covered.
Flood management measures
After the damage to its pitch, AFC Wimbledon was reportedly exploring ways to improve its flood management and infrastructure, to reduce the risk of future floods. It is likely that insurers will seek to introduce more conditions within property insurance policies, requiring certain flood management measures to be in place as a prerequisite to cover.
Flood resistance measures aim to “resist” or reduce the amount of water that enters a property. This can include the installation of flood gates or airbrick covers. Flood resilience measures purely mitigate the level of damage to property. This would include having concrete floor tiles, as opposed to carpets, and placing plug sockets away from entrances close to water.
Some property policies will contain a stillage condition precedent to liability. This will state that a policyholder will not be covered for loss caused by a flood, storm or escape of water, if it does not keep stock or other items a certain distance above floor level.
Furthermore, insurers could potentially restrict cover offered to policyholders whose buildings are situated in areas at a higher risk of flooding, or where businesses do not have mechanisms in place to deal with potential flood damage.
Why is Climate Change causing more Floors and Storms?
It is thought that the increase in the number of extreme weather events is a result of climate change.
Climate change contributes to more floods and storms because the increase in greenhouse gases in the atmosphere has allowed carbon dioxide to trap the sun’s rays. This has resulted in an increase in the planet’s temperature and the level of moisture that is held in the atmosphere. The warmer the atmosphere, the quicker the water can evaporate and fall, resulting in more intense and voluminous rainfall.
Improving Industry Resilience to Floor and Storm
The increase in natural disasters such as earthquakes, floods and hurricanes has led to some insurers pulling out of international catastrophe insurance markets. This is because of the unpredictable nature of these events and the severity of the losses suffered. This has resulted in limited options and more expensive premiums for catastrophe policies available to policyholders.
Similarly, insurers in the UK are becoming more reluctant to provide cover for damage caused by storm and flood, as the number of these types of claims increases, giving rise to the risk of a protection gap for policyholders.
Parametric Insurance
One of the tools available to help mitigate this effect is parametric insurance. This is a type of insurance cover where claims are paid on a predetermined basis. For example, cover for a storm would have parameters such that, if there is damage to property and a certain wind-speed or water depth is reached, then the policy would be triggered.
Traditional insurance policies are based on the actual loss that is sustained by the policyholder, whereas parametric insurance policies are triggered by the occurrence of an event and when certain parameters are reached. One of the main benefits of parametric insurance is the greater certainty of insurers paying out. This is especially important where there is a need for an urgent financial resource, allowing for a quicker payment to be made to policyholders.
Flood/Storm specific reinsurance schemes
For flood damage in the UK, there is a scheme in place for homeowners known as Flood Re. This scheme operates in a way where insurers can pay a premium to reinsurers and they would have access to a “pool” of indemnity when a claim arises. If the pool is exhausted, then the government can step in to pay the remainder of any losses.
The scheme is expected to provide cover until 2039 as Flood Re anticipates there will then be a “free market” for flood risk insurance. However, one can argue that this is unlikely if we see a similar pattern in the increase in extreme weather events and insurance claims over the next decade. Therefore, an alternative scheme may be needed, for businesses as well as homeowners, to ensure all policyholders have a safety net in the event of claims arising out of floods and storms.
Broader Risk Management
Increased industry resilience is likely to come from broader risk management. Currently, the UK does not have a robust plan in place to tackle flood risk. It is the responsibility of organisations such as the Environment Agency, the UK Climate Change Committee and DEFRA to collaborate and mitigate flood risk.
There have been calls for the Government to set specific flood risk targets as a result of climate change and the increase in extreme weather events. This would be an example of an initiative where input from a variety of organisations could help to reduce the risk of property damage and lead to increased resilience.
Conclusion
With the rise in extreme weather events, insurers will look to mitigate exposures and robustly defend claims arising from flood and storm damage, leaving policyholders in a potentially vulnerable position.
A collaborative response is needed to ensure that the insurance industry can adapt to emerging risks and ensure that appropriate cover is available for policyholders, in the event of floods and storms.
Author
Ayo Babatunde, Associate
When adjectives matter: How ‘Accidental’, ‘Sudden’ and ‘Unforeseen’ affect all-risks insurance cover
Construction and engineering projects, being subject to a wide variety of risks, are invariably insured on an all-risks basis via Construction All-Risks (“CAR”) or, in the case of projects involving the installation of plant or machinery, Erection All-Risks (“EAR”) policies. Following practical completion, the relevant works are typically insured via property damage and/or machinery breakdown insurance; such cover is similarly procured on an all-risks basis.
All-risks policies often comprise (at least) two sections:
- Section 1, which covers damage to insured property (i.e., material damage cover); and
- Section 2, which covers liability of insureds to third parties (i.e., third party liability cover).
This article is concerned with the material damage cover section of all-risks policies and considers how the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ modify the scope of cover under that section.
MATERIAL DAMAGE COVER: THE PRINCIPLE OF FORTUITY
Material damage cover does not indemnify against all forms of loss to insured property. Instead, it covers only fortuitous loss or damage. The principle of fortuity has been equated with ‘accidental damage’; an event would be ‘accidental’ if it occurred by chance and was non-deliberate: see Leeds Beckett University v Travelers Insurance Company Limited [2017] EWHC 558 (TCC) (“Leeds Beckett”) at [199].
The principle of fortuity applies regardless of whether the words ‘all-risks’ appear in the insuring clause. The insuring clause of the material damage section of a CAR policy might therefore simply state that:
“… insurers will indemnify the Insured in respect of physical loss or damage to the Insured Property arising from any cause except as hereafter provided.”
It is, however, not uncommon for an insuring clause to include the adjectives ‘accidental’, ‘sudden’ or ‘unforeseen’ (or some combination of the three). For CAR policies, the requirement for ‘sudden’ and/or ‘unforeseen’ loss is less commonly seen in the UK, but is still often encountered in the APAC region. For instance, the insuring clause of the material damage section of the Munich Re standard form CAR wording, which is commonly used in Singapore and Malaysia, provides that:
“… if at any time during the period of cover the items or any part thereof entered in the Schedule shall suffer any unforeseen and sudden physical loss or damage from any cause, other than those specifically excluded, in a manner necessitating repair or replacement, the [insurer] will indemnify the Insured in respect or such loss or damage …” (emphasis added)
We consider below whether the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ introduce any further requirements (in addition to the basic requirement of fortuity) for there to be cover for material damage.
‘ACCIDENTAL’
It is less common for the insuring clause for material damage cover to impose a requirement for ‘accidental’ damage. This stands in contrast to the insuring clause for third party liability cover, which frequently responds to damage or injury ‘accidentally’ caused by the insured.
That said, a requirement for ‘accidental’ damage may in some cases find its way into the material damage cover section of a policy. For instance, in Leeds Beckett, the word ‘damage’ was defined for the purposes of the relevant CAR policy as “accidental loss or destruction of or damage”; this meant that the material damage cover of that policy would respond only in the event of ‘accidental’ damage.
The requirement for ‘accidental’ damage would not usually change the default scope of cover. In other words, it remains the case that the loss need only be fortuitous in order for the material damage section of a policy to respond. As noted in Leeds Beckett, the principle of fortuity already encompasses the concept of accidental loss, and common law jurisdictions have generally been content to treat the two as being synonymous.
‘SUDDEN’
‘Sudden’ imports a different meaning than ‘fortuitous’. Accordingly, the use of the word ‘sudden’ in the material damage section of a policy narrows the scope of cover; the loss or damage must at minimum be ‘sudden’ (in addition to being ‘fortuitous’) in order for the policy to respond. Case law sheds the following light on the meaning of ‘sudden’.
First, it is the loss or damage itself, rather than the cause of said loss or damage, which must be ‘sudden’.
An example of the distinction between a cause and the resulting loss and damage can be seen in the Singapore High Court case of Pacific Chemicals Pte Ltd v MSIG Insurance [2012] SGHC 198 (“Pacific Chemicals”), where the sudden malfunction of a measuring gauge (the cause) led to the gradual solidification of phthalic acid stored in a tank (the loss or damage). The Court found that the loss or damage suffered, having taken place “over a period of time”, was not ‘sudden’ in nature.
Secondly, ‘sudden’ is frequently used in conjunction with ‘unforeseen’ (see again the Munich Re wording above). In such cases, it is clear that ‘sudden’ must connote something other than ‘unforeseen’ or ‘unexpected’ (as to construe it otherwise would render ‘sudden’ superfluous). The tenor of relevant case law, as noted by Paul Reed KC in the textbook Construction All-Risks Insurance, suggests that ‘sudden’ should be construed in this context as importing a need for “dramatic change to have occurred during a relatively short period of time”.
‘Sudden’ may, however, have a different meaning when used alone. The New Zealand and Australian Courts have understood the word ‘sudden’ (when used alone) to mean ‘unforeseen’ or ‘unexpected’: see New Zealand Municipalities Co-Operative Insurance Co Ltd v City of Tauranga (unreported) and Sun Alliance & London Insurance Group v North West Iron Co Ltd [1974] 2 N.S.W.L.R. 625.
Thirdly, ‘sudden’ (when used in the context of ‘sudden and unforeseen’) should not be equated with ‘instantaneous’.
In Pacific Chemicals, the Court found that the caving-in of a storage tank that had occurred rapidly (but not necessarily instantaneously) should be regarded as ‘sudden’ loss or damage.
That said, in appropriate cases, much longer periods of time could still be considered ‘sudden’. As noted in Construction All-Risks Insurance, the interpretation of the word ‘sudden’ is a context-sensitive exercise. For instance, in assessing whether there has been ‘sudden’ damage under a mining project policy in the form of a change in ground conditions, it may be appropriate to apply a geological timescale; on this interpretation, a change in ground conditions taking place over several days (or possibly even months) might well still be considered ‘sudden’.
‘UNFORESEEN’
‘Unforseen’ also imports a different meaning from ‘fortuitous’. Accordingly, the express inclusion of ‘unforeseen’ narrows the scope of cover; the loss or damage must at minimum be ‘unforeseen’ (in addition to being ‘fortuitous’) in order for the policy to respond.
Nevertheless, it is not generally difficult to establish that an occurrence was unforeseen; all that needs to be shown is that the loss or damage was ‘unanticipated’ or ‘unexpected’ from the perspective of the insured. Thus in Pacific Chemicals, one head of damage, namely the solidification of phthalic acid (see above), was caused by the lowering of the temperature in the relevant tank. The Court found that the solidification was not an expected consequence of that process and the damage thus fell within the ambit of ‘unforeseen’.
It should be noted that fortuity and foreseeability are separate concepts. The question of whether damage is fortuitous hinges on whether the damage was caused by chance (rather than being inevitable) and was non-deliberate. Foreseeability is an entirely separate requirement that has no part to play in determining whether damage was fortuitous.
CONCLUSION
While there is not a large body of case law concerning the ambit of the words ‘sudden’ and ‘unforeseen’ (which is perhaps unsurprising given the prevalence of arbitration clauses in non-consumer insurance policies), the authorities would suggest that neither word should be read restrictively, and that considerable latitude should be afforded to insureds in establishing that an occurrence was ‘sudden’ and ‘unforeseen’.
Eugene Lee is an Associate at Fenchurch Law
A “WIN WIN” for Policyholders
Background
Delos Shipholding S.A. v Allianz Global Corporate and Specialty S.E. [2024] EWHC 719 (Comm) is one of several recent judgments to consider the scope of an insured’s duty of fair presentation under the English Insurance Act 2015 (the “Act”) and helpfully applies that duty in a manner likely to favour policyholders; also noteworthy are the Commercial Court’s observations on the concept of fortuity and on the duty to sue and labour. The Court additionally considered and rejected the insureds’ claim under section 13A of the Act for damages arising from late payment, which is not covered in this article.
Facts
The bulk carrier ‘WIN WIN’ (the “Vessel”) was insured under a policy (the “Policy”) incorporating an amended form of the American Institute Hull War Risks and Strikes clause.
In February 2019, the Master unknowingly anchored the Vessel in Indonesian territorial waters without permission. Some days later, the Indonesian Navy detained the Vessel for having done so illegally. The Master was prosecuted for contravening Indonesian shipping law, with the Vessel only being redelivered to the insureds in January 2020. The insureds alleged that the Vessel had become a constructive total loss and served several Notices of Abandonment on insurers, all of which were rejected. The insureds then commenced suit to claim for total loss of the Vessel under the Policy, as well as damages for late payment of their claim under section 13A of the Act.
At trial, insurers accepted that the conditions for a total loss had had been met, but alleged that (i) they were entitled to avoid the Policy for material non-disclosure, (ii) the detainment was not fortuitous, and (iii) the delay in release was materially caused by the insureds’ unreasonable conduct in breach of their duty to sue and labour. None of the defences succeeded and the Court allowed the insureds’ claim. The insureds’ claim for damages under section 13A of the Act was, however, dismissed.
Material non-disclosure
At the time the Policy was renewed on 29 June 2018, one Mr Bairactaris, who was the sole director of the first claimant (the shipowner), was being prosecuted by the Greek authorities on charges relating to a shipment of heroin (the “Charges”). Mr Bairactaris was also at all material times a nominee director of the first claimant. In other words, he exercised no independent judgment as director and instead acted on the instructions of other persons, who in this case where the second claimant (the Vessel’s commercial managers) and its owner.
Insurers sought to avoid the Policy on the basis that the insureds had breached their duty of fair presentation. Accordingly, Insurershad to establish that:
- the insureds had actual or constructive knowledge of the Charges;
- the Charges were a material circumstance that should have been (but was not) disclosed at the time of renewal; and
- the relevant underwriter had been induced by the non-disclosure of the Charges to write the risk.
(i) Knowledge
So far as actual knowledge was concerned, since Mr Bairactaris was the only individual within the claimants who knew of the Charges, the key issue was whether the first claimant had been fixed with knowledge of the Charges via section 4(3)(a) of the Act, which attributes to an insured “what is known to ... the insured’s senior management”. Section 4(8)(c) of the Act defines senior management as “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.
Notwithstanding his position as nominee director, the Court found that Mr Bairactaris was not part of senior management. It was the substance of the role played by him which was determinative, and since his responsibilities as sole nominee director were confined to executing administrative formalities (rather than the organisation of the first claimant’s activities), he could not be regarded as senior management.
This case thus demonstrates the key principles regarding the “knowledge” of a corporate policyholder and re-states the balance under English insurance law between the rights of the insurer to be provided with the material facts prior to inception of a policy against the practical challenges faced by those responsible for the insurance of corporate policyholders in ensuring they are in possession of the material facts in the first place.
As the Court also found that the insureds also did not have any constructive knowledge of the Charges, the defence of material non-disclosure failed at the first hurdle. The Court nevertheless continued to consider the remaining issues
(ii) Materiality
The parties agreed that the test for materiality was substantively unchanged by the Act, i.e. it was whether a prudent underwriter would have wanted to take the undisclosed circumstances (here, the Charges) into account.
The more controversial issue was whether the hypothetical prudent underwriter could also take into account exculpatory circumstances under the test for materiality. These consisted of information that the insureds would also have made known to insurers had the Charges been disclosed, including in this case:
- Mr Bairactaris’ firm belief that the charges were without foundation; and
- the fact that Mr Bairactaris was a nominee director fulfilling only an administrative function and had no role in the operation of the Vessel.
The Court observed that, had it been necessary to decide, it would have held that that exculpatory circumstances could be taken into account; were it otherwise, an insurer “could … be as selective as it liked in how it defined the circumstances which it alleged could be disclosed”. On the facts, the Court observed that the Charges (considered with the said exculpatory circumstances) would have been material and would have led a prudent underwriter to consider imposing a condition, e.g. that Mr Bairactaris should be replaced as a nominee director.
(iii) Inducement & Remedy
The Court found that, had the Charges been disclosed, the actual underwriter would have imposed a condition requiring replacement of Mr Bairactaris as nominee director. The test for inducement under section 8(1)(b) of the Act would thus have been satisfied – the situation was one where, but for the non-disclosure of the Charges, insurers would only have entered into the Policy on different terms.
Insurers would thus have been entitled to treat the Policy as though it included the above condition (per paragraph 5 of Schedule 1 of the Act). The more interesting issue was whether, in this case, it was equally open to the insured to then prove that it could and would have complied with the condition. The Court, accepting that “sauce for the goose [was] … equally sauce for the gander”, opined that insureds could, and that on the facts the insureds would, have complied with a condition requiring replacement of Mr Bairactaris in any event; as such, insurers would have been without a remedy even if they had successfully proved knowledge of the Charges.
Other issues
This wide-ranging judgment covered several other issues, two of which are dealt with below.
(i) Fortuity
Insurers relied on the proposition set out in The Wondrous [1991] 1 Lloyd’s Rep 400, that the ordinary consequences of an assured’s deliberate and voluntary conduct are not fortuitous and do not fall within the cover provided by all risks policies. Insurers argued that, by anchoring in Indonesian waters, the Vessel had voluntarily exposed herself to the operation of local law. The consequent detention was simply an ordinary consequence of that voluntary conduct.
These arguments failed. The Court declined to read the proposition in The Wondrous so widely and instead clarified that the proposition had two aspects:
- First, there must be some choice by the insured. This implies awareness that a decision is being made between two or more options which are different in some relevant sense.
- Second, the consequences must be such as to flow in the ordinary course of events. This requires the consequence to be “inevitable in the sense that it is bound to eventuate in the ordinary course”.
Neither aspect was satisfied on the facts. Since the Master did not realise that the Vessel was in Indonesian waters to begin with, there was no conscious choice by the Master to anchor there. Further, since at the time of detention the Indonesian navy had only just begun to arrest vessels that had been anchored in Indonesian waters without permission (whereas previously there no reported cases of such detention), the detention was neither inevitable nor an ordinary consequence of the Vessel’s conduct.
(ii) Sue and Labour
Both the terms of the Policy and section 78(4) of the Marine Insurance Act 1906 imposed on the insureds a duty to sue and labour. In simple terms, this duty is analogous to a contract party’s duty to mitigate its losses caused by a breach of contract and in the same way, the duty to Sue and Labour requires the insured to make every attempt to reduce the possible exposure to loss.
Insurers argued that, by being side-tracked into discussions with the Navy which involved considerations of a bribe or something similar (which the insureds were ultimately not prepared to do), the insureds had unreasonably protracted Indonesian Court proceedings against the Master and delayed the release of the Vessel.
The Court reiterated the well-established principle that an alleged breach of the duty to sue and labour would only afford insurers a defence where the breach breaks the chain of causation between the insured peril and the loss. This required the insured to act in a way in which no prudent uninsured would have acted; a mere error of judgment or negligence would not suffice. On the facts, there was no breach of the duty – given the uncertain circumstances faced by the insureds, there was no way of their knowing that engaging in discussions with the Navy would “slow things down”, so it could not be said that the insureds had acted in a way that no prudent uninsured would have acted.
Comment
The Court’s policyholder-friendly reading of both the elements of the duty of fair presentation, as well as of the meaning of the “ordinary consequences of an assured’s deliberate and voluntary conduct”, are welcome developments for policyholders. That said, many of the Court’s observations – particularly in relation to the issues of materiality and insurers’ remedies – were obiter, and it remains to be seen if future judgments will follow the lead established here.
Eugene Lee is a Senior Associate, and Toby Nabarro is a Director at Fenchurch Law.
Lithium Battery Fires – Not so Lit?
Introduction
Lithium batteries (also known as lithium-ion batteries) have become commonplace in devices such as mobile phones, cameras, laptops, e-cigarettes, tablets and e-bikes. They are popular because, unlike alkaline batteries, they are rechargeable and can be used multiple times, making them a comparatively sustainable energy source.
This article will outline the key risks and coverage issues associated with lithium batteries for policyholders.
Why are Lithium Batteries so dangerous?
The London Fire Brigade has said that lithium battery fires are the fastest growing cause of fires in London in 2024. That is because of the phenomenon of ‘thermal runaway’, which occurs when flammable materials within lithium batteries break down. This is usually due to manufacturing defects or when the battery cells overcharge, which can lead to the release of a cloud of flammable gases which, in turn, can cause vapour cloud explosions. The vapour cloud explosions exacerbate the ignition of the battery and the speed at which a fire spreads.
Lithium battery fires can be unpredictable, and it is common for batteries to reignite days after the initial ignition. That is why they can cause such large fires, as seen at the Suez Recycling Centre in July 2024, where the most likely cause of the fire was thought to be the improper disposal of a lithium battery, which ignited in a pile of waste of around 100sqm (and it took 15 fire engines and 100 firefighters to quell the blaze). As a further example, a fire was allegedly caused at a home in Wales in September 2024, by a mobility scooter that was charging. Firefighters were present at the blaze for more than 12 hours.
The Wider Problem
The unpredictable nature of lithium battery fires may result in some building and property insurers declining and restricting cover for fires caused by them, or charging additional premium to cover this risk.
Further, it may be more difficult for companies whose businesses rely heavily on lithium batteries, such as those in the manufacture, supply and retail of products which utilise lithium batteries to obtain cover from their product liability insurers.
The legal climate around lithium batteries is changing, as we have seen with the introduction of the Lithium-ion Battery Safety Bill which aims to regulate the safe storage, use and disposal of lithium batteries in the UK. However, as we have seen with other emerging risks such as climate change, further discussion may be required between the relevant stakeholders to ensure that lithium battery risks do not become “uninsurable”.
The following section sets out some of the key coverage issues that may arise.
Coverage Issues for Policyholders
Breach of the duty of fair presentation
Policyholders are required to make a fair presentation of the risk under the Insurance Act 2015 (“the Act”). To make a fair presentation, a policyholder must disclose all “material circumstances” to the insurer that the policyholder knows or ought to know. Failing that, an insured can satisfy the duty by giving the insurer sufficient information to put it on notice that it needs to make further enquiries for the purpose of revealing those material circumstances (section 3(4)(b) of the Act). A circumstance or representation is ‘material’ if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. The duty is not limited to answering questions asked by the insurer in a proposal form.
So, for example, say a policyholder deliberately discloses to an insurer that it has a sophisticated strategy in place for mitigating the risk of fire due to the high number of products containing lithium batteries at its premises when, in fact, the position is otherwise. In that situation, an insurer would probably be entitled to refuse to indemnify the policyholder for a claim on the basis that, had the true position been disclosed, it would have provided insurance on different terms, if at all.
A more difficult position may arise when an insurer does not ask any specific questions about the extent to which lithium batteries are used in an insured’s business, and an insured inadvertently fails to disclose the true position on inception or renewal. Is the use or storage of products which contain lithium batteries itself a material circumstance? If so, will disclosure of the type of products supplied or stored be sufficient to put the insurer on notice and discharge the duty owed under section 3(4)(b), or will an insured have to spell out that the products contain lithium batteries?
It should be borne in mind that not all lithium batteries necessarily pose a fire risk. In that regard, the Fire Protection Association has provided guidance that each fire protection and mitigation strategy should be assessed on a case-by-case basis. That will include a consideration of the battery type, the Battery Energy Storage System (“BESS”) and layout.
Breach of Condition Precedent to Liability
Insurance policies frequently contain terms known as ‘conditions precedent to liability’. Subject to certain provisions in the Act, such terms must be complied with strictly, otherwise there is no cover for the claim.
In Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC), the policy contained a condition precedent that combustible waste had to be stored at least 6m from any fixed plant. On the evidence, the court found there was no breach of the condition precedent, and that “storage” meant a degree of permanence and a deliberate decision to designate an area to place and keep material.
Guidance from the Fire Protection Association states that the BESS should be (a) located in non-combustible containers or enclosures, (b) placed at least 3 metres from other equipment, buildings, structures and storage, and (c) the distance should only be reduced when there is a suitable-fire barrier, where exposed surfaces and fire-resisting, or where BESS enclosures have fire-resisting walls and roofs. If insurers impose conditions relating to storage in compliance with this guidance, the decision in Wheeldon is potentially relevant as to what “storage” means.
It is open to a policyholder to rely on section 11 of the Act and show that the breach could not have increased the risk of loss which occurred in the circumstances in which it occurred. For example, if there was a fire at a policyholder’s premises, and it had breached a condition requiring it to store lithium batteries in a particular way, to escape the consequences of breach, the policyholder would need to prove, in effect, that compliance would not have impacted the general risk of fire.
Concluding Thoughts
There is no UK specific guidance or legislation to govern lithium battery use, storage or disposal. Policyholders should therefore consult reliable guidance to ensure that fire risk strategies are sufficient on a case-by-case basis, and compliant with the terms of the policy.
If in doubt, policyholders should consult with their brokers on inception and renewal to ensure that they have complied with their disclosure obligations and are able to satisfy the applicable policy terms to maximise the chance of policy coverage in the event of a lithium battery fire.
Ayo Babatunde is an Associate at Fenchurch Law.
(Not) the new LEG clauses.
Let me start by making something clear. The clauses referred to below are NOT the new LEG clauses.
Whilst I have made no secret of my view that the LEG committee does need to amend LEG3 (and, perhaps, should have done so before now), and that the decisions in SCB and Archer have provided a golden opportunity to overhaul not just the LEG clauses, but the DE clauses too, I have no involvement in the decision about whether the LEG committee will, in fact, produce new versions of the LEG clauses or, if they do decide to do so, in determining what those clauses will look like. As a result, what is set out below represents nothing more than my own suggestions about how the existing LEG clauses could be amended in order to preserve what I believe to be the general market understanding of their meaning, whilst being expressed in clear language that would be easily understood not only by those who specialise in CAR / Builder’s Risk, but also by those who have no involvement in this particularly fascinating area of insurance.
I have been asked, not unreasonably, whether it is misleading of me even to refer to my own draft clauses by reference to the official LEG clauses. However, after careful consideration I have maintained the view that I originally took instinctively, that it is appropriate for me to do so, for two reasons.
The first is that my proposed clauses are not intended to alter the meaning of the existing clauses but, rather, to express what I regard as the meaning of the existing clauses in a clear way. Whilst I am happy to be challenged about my understanding of the meaning of the existing clauses, it would make no sense for me not to explicitly link my drafts to the current clauses, because my re-drafts of each clause only make sense when considered in the context of the original. I don’t consider it to be my place, as a lawyer, to be suggesting that the intention of the existing clauses should be changed in order to provide more (or less) cover. That is for underwriters and brokers to decide.
The second reason is that, although the LEG clauses are officially maintained by the London Engineering Group (i.e. “LEG”), the existing clauses have become, in my view, public property as a result of their popularity, and by their wide usage across the world. For better or for worse, the scope of cover provided by Builder’s Risk policies in every insurance market needs to be considered in the context of the defects exclusions produced by the LEG committee, whether an official LEG clause is used, or whether a different form of defects exclusion is used (whether from the DE suite, or bespoke clauses).
That being the case, it seems to me that anyone with a serious interest in the health of the Builder’s Risk market has the right to contribute to the debate about what the market-leading suite of defects exclusions (which is what the LEG clauses are) should look like in the next generation of Builder’s Risk policies. I don’t claim to have any unique insight into that debate, or to be writing the last word on the subject, but I do hope that what I say can be a useful contribution to what should be a market-wide conversation about these important clauses.
What would be worse even than the unsatisfactory position that we are in today (where SCB and Archer have raised considerable uncertainty about the meaning of the clauses, and arguably called into question whether their meaning can reliably be ascertained at all), would be for insurers to fragment and begin to provide a multiplicity of their own defects exclusions. These clauses have layers of meaning, and there is beauty in their individual and collective complexity. But if we move away from standard defects exclusions, then beautiful complexity may give rise to unfathomable chaos in which brokers, policyholders and, if we’re honest, even the Builder’s Risk underwriters themselves, will have little chance of achieving a clear common understanding of the cover that their policies are providing. In that situation it would only be the lawyers who would be the only winners, and no-one wants that.
So, what is the problem with the existing clauses?
Firstly, they are overly long and convoluted. There are numerous phrases (most notably, but not only, the words in brackets in the 2006 version of LEG3) which I understand to have been introduced “for the avoidance of doubt”, but which have had precisely the opposite effect. Rather than bringing clarity to the meaning of the clauses, these superfluous phrases have instead obscured that meaning.
Secondly, the word “defect” is used to describe two quite different things in different contexts. Sometimes the word defect is intended to describe the condition of the insured property. At other times it appears to be intended to refer to a mistake (whether a mistake concerning design, or workmanship, etc).
Thirdly, the clauses have encouraged some users to take the view that they treat “damage” on the one hand, and a “defect” on the other, as binary concepts, so that one should be concerned with the question of whether insured property is damaged OR defective. However, that is plainly not right. As I remember being explained to me when I began to work with Builder’s Risk policies, when you refer to “damage” you are concerned with a happening, whereas when you refer to a “defect” you are concerned with a condition.
Knowing that insured property is in a condition that the owner would preferred it not to be in, today (so that it can therefore be described as being defective, today), tells you nothing at all about whether the insured property underwent an adverse change in physical condition which impaired the value or usefulness of the property. If it did undergo that change (i.e. it suffered damage in order to reach its defective state or, to put it another way, it become “damaged”), then that would trigger the insuring clause of a Builder’s Risk policy. If, on the other hand, the insured property was simply built badly, it should never trigger the insuring clause of a Builder’s Risk policy.
So, what am I intending to achieve in my proposed re-drafts of the clauses? As set out above I am not intending to suggest any alteration of the cover which I believe is intended by the existing clauses. Rather, my only intention is to express, in as clear language as possible, my understanding of the meaning of the existing clauses.
With that in mind, my re-drafts have largely retained the existing language of the current LEG clauses, and primarily removed the words which in my view serve to obscure the meaning of the existing clauses. The exception to that approach is in my proposed amendment to LEG1, where in order to avoid using the word “defect” to refer to a mistake, I have instead introduced that word into the clause even though it doesn’t appear anywhere in the existing suite of exclusions. However, in my view, the natural and ordinary meaning of the word “mistake” accurately reflects the meaning of the (in my view) misleading word that it replaces in the original clause.
A final point in relation to the clauses. As I explained in my article on the SCB decision, the urgent need to amend LEG3 (and, by extension, the other LEG clauses) presents an opportunity to move away from the current unhelpful position where we have two separate suites of defects exclusions (LEG, and DE).
Each suite can be broken down in three categories: clauses that are concerned with causation (LEG1 and DE1); clauses that are concerned with improvements (LEG3 and DE5); and clauses that are concerned with the condition of the insured property before damage occurred (DE2-4, and LEG2). Of those three categories, the clauses relating to two of them are materially the same in each suite, despite differences in drafting (i.e. LEG1 and DE1 do the same thing, as do LEG3 and DE5 - there may be technical arguments that they operate slightly differently, but those technical arguments should not, in my view, be taken seriously).
The only difference between the two suites is in the intermediate clauses which are concerned with the condition of the property before the damage occurred. In that regard LEG2 operates materially differently from DE2-4. That is due to the different origin of the two suites: the DE clauses were intended to be general Builder’s Risk clauses, whereas the LEG clauses were introduced specifically to cater for engineering risks (i.e. EAR as opposed to CAR). Unfortunately, the DE clauses have not been as successfully exported as the LEG clauses (perhaps because there are more of the DE clauses and so they are perceived as being more difficult to understand), with the result that in some important markets, including the US, the LEG clauses are used as standard for civils projects, whereas the DE clauses would be more appropriate for projects of that type.
So, rather than simply amending the LEG clauses, it seems to me to be much more sensible to introduce a single suite of clauses which are based on the existing LEG clauses, but which re-brand LEG2 in the way it was intended (i.e. as applying to EAR) and amending DE3 as a civils alternative to LEG2.
And with that rather long introduction, and with thanks for the patience of anyone who has taken the time to read this far rather than jumping straight to the draft clauses themselves, here are my suggestions for a new single suite of defects exclusions, modelled on the current LEG clauses, but with an amended version of DE3 introduced as an alternative to LEG2 (and branded LEG2 (CAR)).
| Original clauses | My draft clauses |
| LEG1
“The Insurer(s) shall not be liable for Loss or Damage due to defects of material workmanship design plan or specification.” |
LEG1
The Insurer shall not be liable for the cost of fixing any damage caused by mistakes of any kind. |
| LEG2
“The Insurer(s) shall not be liable in respect of: All costs rendered necessary by defects of material workmanship design plan or specification and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the said portion of the Insured Property had been put in hand immediately prior to the said damage. For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property … shall not be regarded as damaged solely by virtue of the existence of any defect or material workmanship design plan of specification”. |
LEG2 (EAR)
Should damage occur to any portion of the Insured Property which was in a defective condition before the damage occurred the Insurer shall not be liable for the cost that would have been incurred to fix the defects in that portion of the Insured Property immediately before the damage occurred.
|
| DE3
“This policy excludes loss of or damage to and the cost necessary to replace repair or rectify: i. Property insured which is in a defective condition due to a defect in design plan specification materials or workmanship of such property insured or any part thereof; ii. Property insured lost or damaged to enable the replacement repair or rectification of Property insured excluded by (i) above. Exclusion (i) above shall not apply to other Property insured which is free of the defective condition but is damaged in consequence thereof.” |
LEG2 (CAR)
The Insurer shall not be liable for the cost incurred to fix any portion of the Insured Property which was in a defective condition immediately before the damage occurred.
|
| LEG 3/06
“The Insurer(s) shall not be liable in respect of: All costs rendered necessary by defects of material workmanship design plan or specification and should damage (which for the purposes of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost incurred to improve the original material workmanship design plan or specification. For the purpose of the policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship design plan or specification.” |
LEG 3
The insurer shall not be liable for the cost incurred to improve the original material workmanship design plan or specification.
|
I would love to hear from anyone who either agrees or disagrees with what I’ve set out above. The market would benefit from a debate on this important issue, and we have an opportunity to create a better situation than the one in which we find ourselves today. Please feel free to email me either at david.pryce@fenchurchlaw.co.uk, or at david.pryce@fenchurchlaw.com.sg.
David Pryce is a Senior Partner at Fenchurch Law.
MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale
MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale
MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) [2024] EWHC 1813 (Comm) is the latest in a string of recent cases that confirm the court’s reluctance to interfere with the wording of an insurance contract where the wording is clear. In this case, the wording was no ‘fox in the henhouse’, hidden away in the ‘thickets of the policy’ but front and centre.
Background
King Trader was the owner of a ship, Solomon Trader, which was chartered to Bintan Mining Corporation (“BMC”). MS Amlin issued a charterers’ liability policy to BMC (“the Policy”). In a run of bad luck, the ship became grounded in the Solomon Islands in 2019, BMC became insolvent in 2021, and an arbitration award in excess of US$47m (including interest) was made against BMC in 2023.
As BMC was no longer in the picture, King Trader and its P&I Club sought to recover under the Policy via the Third Parties (Rights Against Insurers) Act 2010.
You would be forgiven for thinking that is the end of the tale - a clear liability had been established, the policyholder had a liability policy, presumably the policy would respond? Sadly not, the wording contained a "pay first" clause, and MS Amlin therefore issued proceedings against King Trader and its P&I Club, seeking a declaration that there could be no indemnity in circumstances where the policyholder had not first discharged their legal liability.
The terms of the Policy
The relevant terms of the Policy for the purposes of this case were set out across various sections of a policy wording that was sub-divided into five parts, and accompanied the insurance certificate, as follows:
Part 1 provided that "The Company shall indemnify the Assured against the Legal Liabilities, costs and expenses under this Class of Insurance which are incurred in respect of the operation of the Vessel, arising from Events occurring during the Period of Insurance as set out in sections 1 to 17 below".
"Legal Liability" was defined as "Liability arising out of a final unappealable judgment or award from a competent Court, arbitral tribunal or other judicial body".
Section 25 of Part 5 stated "It is a condition precedent to the Assured's right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability."
And finally, Section 30 of Part 5 contained the all-important “pay first” clause- “It is a condition precedent to the Assured's right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability.”
Third Parties (Rights against Insurers) Act 2010
It is worth noting that in most circumstances the usual position under section 9(5) of the Act is that transferred rights are not subject to a condition requiring the prior discharge by the policyholder of its liability to the third party (i.e. a “pay first” clause). However, there is a significant caveat to the usual position, which applies in most circumstance except where the policy is a “contract of marine insurance”, as set out in section 9(6) of the Act.
The Issues for the Court
Without the protection of the Act, the third party’s only hope was to persuade the court that the “pay first” clause either (i) did not form part of the Policy; or (ii) as a matter of construction does not apply where a third party seeks to enforce the Policy, or (iii) is inoperative where the insured is unable to discharge the liability or is insolvent.
The court summarised the relevant considerations as being:
- Where there is inconsistency between a clause specifically agreed for the contract vs. a provision in an incorporated set of pre-existing printed terms, the court may find that the second clause is either not incorporated at all, or if it is, the court may read it down.
- Where there is inconsistency between two clauses that appear in the same document, the court may conclude that the clauses co-exist.
- When considering if two clauses can co-exist, attention will be paid to whether giving effect to the “repugnant” clause leaves the more substantive clause with a real and sensible content, and, if the subsidiary clause is to be read down, whether it will be left with a meaningful and sensible content.
- The court may be more willing to read down or read out a subsidiary clause which is inconsistent with a provision that forms part of the main purpose of the contract, or which is inapposite to the main contract.
The Judgment
In respect of arguments on inconsistency / repugnancy, the court held that it was not possible to establish any inconsistency between the “pay first” clause and the terms of the insurance certificate on the basis that the certificate clearly incorporated and attached the entirety of the wording.
Furthermore, there was not an inherent inconsistency between MS Amlin’s promise to provide liability cover and a clause making enforcement of the obligation to pay the indemnity conditional on prior discharge of that liability by the insured.
Nor was there a conflict between sections of the Policy that allowed MS Amlin to terminate the Policy on BMC's insolvency but preserve BMC's rights to indemnity in respect of incidents occurring prior to termination, and the “pay first” clause, which would require an insolvent insured to discharge its liability as a condition precedent to an indemnity.
Finally, the court considered that the “pay first” clause was not “hidden away in the thickets of the Policy”, as it was clear from the insurance certificate and the index of the wording that it included general provisions effecting the scope of rights under the Policy. Furthermore, the “pay first” clause appeared in a section which imposed a number of obligations, which left the judge unpersuaded that the clause “in this context is in the nature of a fox in the henhouse (or a wolf in the flock)”.
As for the arguments on construction and implied terms, the court held that there was no legitimate process of contractual construction that could subject the clear language of the “pay first” clause to restrictions such as only being applicable in circumstances where the insured has the means to pay a claim or in the event that a third party must pursue a claim under the Act, nor could it be argued that necessity or business efficacy required the implication of words limiting the operation of the clause.
Comments
Perhaps not a surprising outcome, especially in the context of a number of recent commercial court and appellate level decisions such as Bellini v Brit and Project Angel Bidco v Axis, that have reinforced that the courts generally will be reluctant to interfere with clear wording in an insurance contract.
In this case, and in circumstances where there is an absence of statutory control for “contracts of marine insurance”, there was little support at common law that would assist these third parties under this particular wording.
That being said, the judge’s parting remarks certainly leave the reader with the impression that this can be seen as a particularly ugly outcome for parties involved, “The state of English law on this issue in the light of the 2010 Act is not particularly satisfactory… Prudent operators seek to insure against those liabilities, and a range of third parties who suffer loss and damage as a result of accidents at sea will look to insurances of this kind to be made whole. "Pay first" clauses reduce the efficacy of that protection when it is most needed”.
Anthony McGeough is a Senior Associate at Fenchurch Law.
Affected by the Riots? Insurance and Other Remedies
Insurance
If your property has been damaged due to the recent nationwide spate of riots, your first port of call for remedy should be your insurers.
Affected individuals should notify their insurers of any damage as a result of the riots, as soon as possible.
Most property policies will include standard cover for physical damage to property. However, some policies may contain an exclusion for losses caused by, or in consequences of riot.
The definition of a riot (unless otherwise defined) in an insurance policy is its technical legal meaning as per The Public Order Act 1986 s.1, which requires a minimum of 12 people for the offence of riot.
The Riot Compensation Act 2016
In the event that a claim is declined, for example, due to a riot exclusion or a vehicle only being insured for third-party losses, the Riot Compensation Act 2016 (“RCA”) may provide an alternative route for compensation.
The RCA was introduced to help communities recover more quickly from the impact of rioting where the affected individuals are either inadequately insured or have had their claim declined by their insurer.
If your property is insured, the RCA requires an affected person first to claim via their insurers. However, If the claim is declined in full or part, the affected person can seek further remedy under the RCA.
What the RCA will cover:
- Owners of a building may claim for damage to the buildings structure;
- Tenants/Occupiers may claim for damaged/stolen contents;
- Damaged or stolen business items stored in a vehicle;
- Damaged or stolen stock-in-trade vehicles; and
- Damaged or stolen underinsured vehicles.
What the RCA will not cover:
- personal items held outside of a building;
- consequential loss e.g. loss of trade or rent; and
- personal injury - this is dealt with by the Criminal Injuries Compensation Authority (CICA).
Deadlines:
- An affected individual will have 42 days from the date of the riot ending to claim under the RCA, unless;
- The affected individual has first made their claim under their insurance, in which case they will have 42 days from the date the insurer declines/partially declines the claim.
How to claim via the RCA:
- Claimants should complete and send the GOV.UK dedicated claim form via post or email to the claims authority for the police force in the area where the riot took place.
- The details of where to send the claim form will be found on the police force’s website.
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Chloe Franklin is an Associate at Fenchurch Law
First decision on s11 Insurance Act (causation test for breach of warranty)
Ever since the introduction of the Insurance Act 2015, there has been debate about how causation works in the context of section 11 and in particular the provision in sub-section 11(3) whereby the policyholder is excused from the usual consequences of a breach of warranty if it can show that its “non-compliance with the [warranty] could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”
Policyholders had thus argued, despite the Law Commission having said this was not what it had intended, that this introduced a strict causation test. For example, where the policyholder had warranted that it had a burglar alarm but it failed to set it, it would (it argued) be open to it to show that this particular burglary was undertaken by thieves so sophisticated that setting the alarm would have made no difference - even if setting the alarm would decrease the risk of burglary in general.
Likewise, a policyholder would wish to argue that, on the actual facts of its loss, a warranty had been breached in only a minor respect, which made no difference, even if a more serious non-compliance would unquestionably have affected the likelihood of that particular loss.
This argument has now been considered, and rejected, by Mrs Justice Dias in her decision on 26 July in Mok Petro v Argo. This was a highly complex case concerning contaminated commodities, and the breach of warranty issue features only briefly at the end of the judgment. On that issue, the Judge said as follows:
“There is nothing in the wording of the section to suggest that where a term can be breached in more than one way, it is only the particular breach which must be looked at. On the contrary, it seems to me that section 11 is directed at the effect of compliance with the entire term and not with the consequences of the specific breach. … I therefore conclude that [Counsel for the Insurers] is right about this. There was no serious dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination … and that therefore non-compliance could have increased the risk of the loss which actually occurred.”
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Comm/2024/1555.pdf
Jonathan Corman is a Partner at Fenchurch Law.
