Law of Marine Insurance

Susan Hodges

• Publisher: Routledge-Cavendish
• Year: 2013
• ISBN:
  9781135426804
• Edition: 1
• Topic: Jura
• Subtopic: Rechtstheorie & -praxis

This book provides a critical and comprehensive study of the law of marine insurance. The book explores the relationship and interaction between the Marine Insurance Act 1906, the common law and the terms of the Institute Clauses.

CHAPTER 1
CONTRACT OF INDEMNITY

A CONTRACT OF INDEMNITY

The basis of a contract of marine insurance is contained in the opening section of the Marine Insurance Act 1906,¹ which reads as follows:

‘A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.’

The operative word here is ‘indemnify’. A contract of marine insurance is essentially a contract of indemnity. This is the cardinal principle upon which the whole contract is founded, and from which the rules relating to the right of claim under a policy emanate. The rights and liabilities of the parties are dictated by this basic concept, and the amount recoverable by the assured, which is measured by the extent of his pecuniary loss, is also governed by it. This should not come as a surprise, for the very purpose of effecting a policy of insurance, marine or non-marine, is for indemnity for loss.

The most incisive comment on the subject of indemnity can be found in Lord Wright’s judgment of the House of Lords in Rickards v Forestal Land, Timber and Railways Co,² where he said:

‘The object both of the legislature and of the courts have been to give effect to the idea of indemnity, which is the basic principle of insurance, and to apply in the diverse complications of fact and law in respect of which it has to operate. In this way, the law merchant has solved, or sought to solve, the manifold problems which have been presented by insurances of maritime adventures.’

In Castellain v Preston,³ Mr Justice Brett remarked:

‘The contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified.’

As will be seen, the incidents and legal consequences of the contract all stem from this ‘great principle’.⁴ Many of the main legal principles, for example, the rules relating to insurable interest; gaming and wagering policies; excessive over-valuation; double insurance, contribution, and return of premium; abandonment and right of subrogation; and the merger of losses, all spring from this concept.

Not a perfect contract of indemnity

Lord Justice Bowen in Castellain v Preston⁵ was confident that the principle of indemnity will solve all problems. His words were:

‘In all these difficult problems, I go back with confidence to the broad principle of indemnity. Apply that and an answer to the difficulty will be found … But can it be any exception to the infallible rule that a man can only be indemnified to the extent of his loss?’

Admittedly, most of the problems can be resolved by applying the principle. But this, as will be seen, is a somewhat optimistic point of view. A contract of marine insurance, though a contract of indemnity, is by no means a perfect contract of indemnity. As in all walks of life, there is always a margin of error: in some instances, the theory may more than indemnify the assured for his loss, and in others, he may be under-indemnified. That the principle is not infallible was noted by Lord Sumner in British and Foreign Insurance Co Ltd v Wilson Shipping Co Ltd⁶ where he said: ‘In practice contracts of insurance by no means always result in a complete indemnity, but indemnity is always the basis of the contract’. In similar terms, Mr Justice Patteson in Irving v Manning,⁷ who, also resigned to the fact that perfection may be difficult, if not impossible, to achieve, openly declared that: ‘A policy of assurance is not a perfect contract of indemnity.’ He acknowledged the fact that it has to be taken with qualifications, one of which is the effects of a valued policy, the problem he was asked to resolve.⁸

Ideally, an assured should be compensated only to the extent of his loss. In practice, however, this is not always easy to attain. But having said that, the principle is always at hand and may be invoked whenever judges feel that justice may be better served by its application rather than by a strict and literal adherence to rules. It is fair to say that judges have in the past employed the principle of indemnity as a fall-back whenever the main ground of their decisions needed further support or reinforcement.

GAMING AND WAGERING CONTRACTS

There are essentially two broad types of gaming or wagering contracts identified by the Act. The first relates to contracts where the assured has no insurable interest or expectation of acquiring such an interest, and the second to policies which declare that the policy itself is proof of interest, commonly referred to as ‘honour’ or ‘ppi’ policies.

No insurable interest or expectation of acquiring such an interest

As was seen, the very essence of a contract of marine insurance is that of indemnity. This necessarily means that an assured who has no insurable interest in the subject-matter insured, in the sense as defined in s 5(2), would not be able to show that he has suffered a loss. In the words of s 5(2), he is not ‘prejudiced by its loss or by damage thereto, or by the detention thereof’. Such a contract, where the assured has not an insurable interest as defined by the Act, is deemed to be a gaming or wagering contract and, therefore, void by s 4(1). Where the policy is void, the general rule is that the assured is, by s 84(3)(a), entitled to a return of premium. But as such a contract is forbidden by the Marine Insurance (Gambling Policies) Act 1909, the premium is not refundable by reason of illegality – a defence specifically laid down in the said section.

There are two parts to s 4(2)(a): the first refers to the case discussed above, where the assured has not an insurable interest, and the second to ‘where the contract is entered into with no expectation of acquiring such an interest’. The corollary of the latter is that if the assured has a genuine expectation of acquiring an interest, then the policy is not a wager policy. Naturally, this has to be read with s 6(1) where it is laid down that the crucial moment when the assured must have an insurable interest in the subject-matter insured is at the time of the loss; ‘he need not be interested when the insurance is effected’.

‘Honour’ or ppi policy

Section 4(2)(b) states:

‘A contract of marine insurance is deemed to be a gaming or wagering contract:
Where the policy is made “interest or no interest” or “without further proof of interest than the policy itself,” or “without benefit of salvage to the insurer”, or subject to any other like term:

Provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.’

It is to be noted that such a policy does not automatically rule out the possibility of the assured having, in fact, an insurable interest. The fact that the wording of the policy dispenses with proof of interest does not necessarily mean that the assured does not or cannot have an interest in the subject-matter insured.

Cheshire & Co v Vaughan Bros & Co⁹ has ruled that such a policy is still void even though the assured may, in fact, have an interest. In an action brought by the assured against their brokers, the defendants, for negligence in failing to make full disclosure to the insurers, the defendants pleaded that the suit was not maintainable because the policy was void. This contention was upheld by both the trial judge and the Court of Appeal. The wording of s 4 clearly covers not only contracts of insurance where there is no insurable interest, but also those which use words that might well suggest that no insurable interest exists.¹⁰

But whether an action arising from such a contract may be adjudicated upon by a court of law is questionable. It is submitted that a court should not lend its hand to the parties by trying a case where the contract is void in law, and all the more so if the contract is illegal by reason of the assured not having in fact an insurable interest.¹¹

The fact that the ppi clause may have been detached by the assured at the time of claim makes no difference to the validity of the contract. In Re London County Commercial Reinsurance Office Ltd,¹² it was held that the crucial moment for consideration is at the time when the policy was issued.

Though void in law, such policies are not illegal.¹³ Thus, the assured is entitled to a return of premium, if he is able to prove that he has in fact an insurable interest in the subject-matter insured.¹⁴

Lord Robson, in Thames and Mersey Marine Insurance Co Ltd v ‘Gunford’ Ship Co,¹⁵ observed that, ‘The sums insured under such policies are, under ordinary circumstances, paid with the same regularity as if they were legally due’. By reason of this fact, ppi policies have earned the ‘much-abused’ name of ‘honour’ policies.

‘Without benefit of salvage’

A policy ‘without benefit of salvage’ is a gaming or wagering policy and, therefore, void. But if the nature of the subject-mater insured is such that there is no possibility of salvage (eg, commission, unsecured loan or anticipated profit to be earned from the sale of cargo on its arrival at the port of destination), the policy, though ‘without benefit of salvage’, is valid.

DOUBLE INSURANCE, CONTRIBUTION AND RETURN OF PREMIUM

The legal rules on double insurance and the return of premium therefor, and contribution all emanate from the principle of indemnity that the assured is entitled only to indemnity and not profit. Just as the assured is not allowed to profit from a marine policy, the same applies to the insurer, who is not allowed to retain the premium for a policy where he runs no risk or where the subject-matter insured is not exposed to maritime perils.

Double insurance

Over-insurance by double insurance occurs when ‘two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by … [the] Act’. The same assured is insuring the same subject-matter, for the same adventure, for the same interest, and for the same perils. There is no double insurance where one or more of these subjects are different, or where one of the policies is, for whatever reason, unenforceable.

The common law definition provided by Lord Justice Mellish in North British and Mercantile Insurance Co v London, Liverpool and Globe Insurance Co,¹⁶ albeit a fire policy, clearly explains the basis of the rule. He said:

‘The rule is perfectly established in the case of a marine policy that contribution only applies where it is an insurance by the same person having the same rights, and does not apply where different persons insure in respect of different rights.’

As two or more policies with different insurers are in operation, the assured is permitted by s 32(2)(a) to ‘claim payment from the insurers in such order as he may think fit, provided that he is not entitled to receive any sum in excess of the indemnity allowed by … [the] Act’. Should he receive more than full indemnity under either policy, valued or unvalued, he must give credit for the sum in excess of the indemnity and is deemed to hold such sum in trust for the insurers, according to their right of contribution among themselves.¹⁷

Double insurance on a ship is said to be extremely rare, but occasionally arises, inadvertently rather than intentionally, in practice in respect of insurance of cargo. In this regard, it has to be said that ‘Increased Value Policies’, common in cargo insurance, do not give rise to double insurance. This is because the subject-matter under such a policy is not on the goods themselves but the increased value thereof.

Over-insurance by ppi policies

An assured may over-insure by taking up a ppi policy in addition to the standard hull, cargo or freight policy. This occurred in The Gunford Case, where, in addition to the hull and freight policies, additional valued policies on disbursements, and on hull and disbursements, were also taken out by the assured.¹⁸ The House of Lords held that even though the in...