Marine & Transit - April 2010

Marine insurance: inherent vice or marine peril?

Global Process Systems Inc and another v Syarikat Takaful Malaysia Berhad (The "Cendor MOPU") – Court of Appeal (Waller, L.J.; Carnwath, L.J.; Patten, L.J.) [2009] EWCA Civ 1398

In our June 2009 newsletter we reported on the Commercial Court’s decision in this marine policy coverage dispute concerning the tow of an oil rig on board a barge from Galveston to Malaysia via the Cape of Good Hope, which was insured for the carriage for US$10 million under ICC (A) Clauses.

The rig was transported such that its three 300ft legs, rather than being cropped or removed for the carriage (as may have been possible) were left intact in the air and were thus subject to anticipated stresses of the ocean voyage.

Following a call at Saldahna Bay for fatigue assessment and repairs to cracking, the tow proceeded, but north of Durban the legs fell off the rig in sea conditions reasonably expected for the time of year.

Initially the rig owners were unsuccessful in claiming indemnity. The Commercial Court, in applying Soya GmbH v White [1982] 1 Lloyd’s rep 136, was satisfied that the fatigued legs were obviously unable to withstand the ordinary incidents of the voyage, and that a finding of inherent vice must follow.  Blair J. concluded that, as a matter of common sense, the legs of the rig failed not because of the repairs – which the rig owners contended – but despite them.  The real problem lay with the inherent inability of the legs to withstand the ordinary incidents of the voyage; there was always doubt that the legs would make it round the Cape and accordingly cover under the policy was excluded.

The Court of Appeal has now overturned the decision. As well as providing a useful review of the case law, the appeal court has produced a decision which debunks the common (but mistaken) view that a loss in anything other than extreme conditions will lead to an inference of inherent vice, thus excluding cover.

In this regard, the Judge had mistakenly followed the restrictive reasoning in The “Mayban” [2004] 2 Lloyd’s Rep 609 – which involved damage to a transformer in reasonably anticipated weather conditions - but should have approached matters differently. This was because, commercially, if policy coverage (or not) was determined with reference to the foreseeability of weather conditions, then “all risks” cover would be confined to loss or damage occasioned by only unusual or extreme events e.g. there would be no cover for loss caused by predictable hurricanes in tropical areas.  However, much of the point of all risks insurance would disappear if it only responded to losses which might be considered fanciful. It was precisely because there was a certain level of probability of a particular kind of loss that made insurance a sensible investment.

Therefore, having decided that the accident was not inevitable (whilst the legs were fatigued, they were not bound to fail ) the Judge must also have concluded that a “leg breaking” wave – such as caused the chain of events – was not bound to occur on the voyage. Although with hindsight it might have been probable, that was a risk against which the rig owners insured – NE Neter v Licenses and General Insurance (1944) 77 Lloyd’s Rep 20.

This decision shows that in such coverage cases, whilst the initial burden is on the insured to demonstrate the operation of a peril (here, a large wave) insurers will be unlikely to demonstrate an exception (e.g. inherent vice) by simply arguing in general terms that weather conditions were predictable.  Instead, underwriters will have to prove the causal incident (whether wave, or otherwise) was itself inevitable.