Warranties in Marine Insurance

Baris Soyer

• Publisher: Routledge-Cavendish
• Year: 2016
• ISBN:
  9781134091423
• Edition: 3
• Topic: Law
• Subtopic: Maritime Law
• Index: Law

For centuries, warranties have played a significant role in the law of marine insurance and have recently sparked debate on a national and international level after calls for reform. This second edition includes a more involved analysis of law reform as well as a discussion of the recent proposals of the Australian Law Reform Commission.

Soyer lucidly analyzes the legal remedy available when a marine insurance warranty is breached as well as setting out the current law on marine insurance warranties. This new edition also includes:

• a new section on the impact of the International Ship and Port Facility Security Code (ISPS Code)
• reference to numerous decisions recently handed down by the courts eg. HIH Casualty and General Insurance Ltd. v. New Hampshire Co. and Agapitos v. Agnew (No. 2)
• a more in-depth discussion of the position in other commonwealth jurisdictions, specially Australia and Canada.

1
Warranties in general

I – Meaning of the term “warranty”

(A) The term “warranty” in contract law

1.1 The term “warranty” has been described as “one of the most ill-used expressions in the legal dictionary”.¹ This is particularly the case in the law of contract, where the term has acquired various different meanings. In its most traditional non-insurance sense, it is understood as meaning a term of the contract, the breach of which entitles the aggrieved party to damages, but not a right to treat the contract as repudiated.² Accordingly, despite the breach the injured party is still under an obligation to perform the contract. Apart from warranties, contracts might include two other terms, namely conditions and innominate (intermediate) terms. Breach of a term classified as a “condition” entitles the innocent party either to elect to terminate the contract, with the consequence that both parties are discharged from further performance,³ or to affirm the contract and claim damages. Whether breach of a term that is classified as an “innominate term” by the courts would entitle the injured party to elect to terminate the contract depends upon the nature of the event to which the breach gives rise. The injured party can elect to terminate the contract for breach of an innominate term if, but only if, the breach deprives him of the whole benefit he expects under the contract; otherwise, he can only claim damages.⁴

1.2 Sometimes, the term “warranty” is used to indicate that the injured party, in case of breach of a condition, has chosen to affirm the contract and claim damages. In such a case, the injured party is said to sue on a “warranty ex post facto”,⁵ although this expression is somewhat misleading, since the breach is still that of a condition of the contract.⁶

1.3 The term “warranty” is also used to refer to certain guarantees given by a retailer under a sale contract. For instance, in a contract for sale of a television set, the seller might agree to supply parts free of charge for a period of one year. This kind of guarantee is usually called a “warranty” and is binding on the part of the seller since it forms part of the sale contract.

1.4 It has become common in recent years for retailers to offer their customers, particularly those who buy technical equipment, the opportunity of buying a so-called “extended warranty”. This will commonly give the customer, in return for payment, a guarantee that the cost of repairs will be covered for a certain period of time.⁷ Although these types of schemes are often called “warranties”, they are, in fact, a sort of insurance against mechanical breakdown and this is the better way of describing them.⁸ The way such a scheme generally operates is that the retailer is associated with a company offering mechanical breakdown insurance. If the retailer has a franchise in relation to the mechanical breakdown insurance from the manufacturer, it may be with a company with which the manufacturer has an agreement, or it may be through the scheme operated by the retailer, or it may be through the retailer’s own contracts. Whatever the case is, the role of the retailer will generally be as an agent for the company operating the scheme and the actual contract of “insurance” is between the consumer and the operating company. This inevitably means that the retailer is not liable himself and cannot use the scheme to avoid any of his liabilities under the contract of sale.⁹

(B) The term “warranty” in insurance law

1.5 The use of the term “warranty” is more refined in insurance law than in general contract law. In insurance context, the term is occasionally used in some exclusion clauses that intend to limit the liability of the insurer under the contract. For instance, in a clause that is worded as “… warranted free from capture and seizure”, the term “warranty” means that the insurer is not liable for the perils of capture and seizure.¹⁰ It should be noted, however, that the expression “warranted free” is no longer in current use in the new policy forms and the standard Institute Clauses.¹¹

1.6 However, the word “warranty”, in a technical sense, is used to refer to a certain term of an insurance contract, breach of which has particular legal consequences. With a warranty, the assured undertakes “to do something” or “to refrain from a certain act” during the currency of the policy. It might even be possible that with a warranty he affirms or negates the existence of a certain state of affairs.¹² In this respect, warranties are used by the insurer as a shield against liability under the policy.¹³

1.7 Warranties are said to serve two fundamental functions in the law of marine insurance. The main function of insurance warranties is to protect the insurer against alteration of the risk by the assured during the currency of the policy. Take, for example, a warranty that prohibits the vessel from navigating to a particular region where there is intense piracy activity. The apparent purpose of a warranty of this kind is to ensure that the assured does not alter the risk by sending the insured vessel to an area where the likelihood of loss is high. In common law, in the absence of such control mechanisms, the assured has the freedom to alter the risk.¹⁴ It is worth noting that this is not the case in continental legal systems where the assured faces legal consequences automatically in a case where the risk is altered by him during the policy period.¹⁵

Some warranties, on the other hand, might have a different function. Imagine that the policy contains a warranty to the effect that the insured yacht has been surveyed by the SA within the last six months and all of its recommendations have been complied with. A warranty of this nature assists an underwriter in rating the scope of the proposed insured risk. The insurer agrees to undertake the risk relying on the contractual undertaking that forms the basis of such a warranty. In case of breach, therefore, the insurer is misled as to the extent of the risk. Therefore, the role of a warranty of this nature is to assist an underwriter in assessing the scope of the risk he is undertaking.

1.8 Warranties are quite commonly used in marine insurance, and the MIA 1906 provides the legal framework.¹⁶ In fact, warranties are the only legal term that has been regulated in the Act, possibly due to the fact that there is a sheer volume of case law on such terms dating back to the early seventeenth century. However, this does not mean that the use of such terms is unique solely to marine insurance contracts. Warranties also appear in all types of non-marine insurance contracts.¹⁷ Generally speaking, the rules laid down by the MIA 1906 for marine warranties are applicable to non-marine warranties by analogy. It has, in fact, been observed on numerous occasions that the judges refer to marine insurance principles, or the provisions of the MIA 1906, when a non-marine warranty is involved.¹⁸

1.9 There are certain differences between marine and non-marine warranties. First, implied warranties, which have been incorporated into marine insurance contracts by the MIA 1906, do not exist in non-marine insurance. For example, the implied warranty of legality does not feature in non-marine insurance.¹⁹ The main reason for this peculiarity is the distinct lack of the additional element of marine adventure in non-marine insurance contracts. Accordingly, in non-marine insurance, warranties must be created with express wording. Secondly, in marine insurance, it is a statutory rule that an express warranty must be stated in the policy, or incorporated into it by words of reference appearing in the policy itself.²⁰ This does not, however, appear to be the general rule in non-marine insurance. Whether this is a distinction that creates a practical difference is debatable, as almost all non-marine policies warranties are clearly stipulated in the policy (e.g. Market Reform Contract) for evidential purposes.

(C) Warranty needs to be distinguished from misrepresentation

1.10 Section 3(3)(c) of the Insurance Act 2015 stipulates as follows:

A fair presentation of the risk is one… in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.

Accordingly, if during negotiations, the assured, in response to a question, states that the majority shareholders of the insured company are German citizens, but this does not hold true, the insurer might be entitled to avoid the contract for misrepresentation if the breach is deliberate or reckless.²¹ The nature of some representations, like the one above, is such that the existence of certain facts are affirmed by the assured. Since with a warranty the assured may affirm or deny the existence of certain facts,²² there is a similarity between some types of express warranties and representation. However, the distinction between these two concepts is a fine one and has been drawn categorically by Lord Mansfield more than 200 years ago.²³ The case commonly cited to illustrate one aspect of this distinction is Pawson v Watson,²⁴ where Lord Mansfield emphasised that a warranty “makes part of written policy”, whereas a representation is made outside the written contract.²⁵ Eight years after he delivered the above judgment, In De Hahn v Hartley,²⁶ Lord Mansfield offered further clarification on the matter:

There is a material distinction between a warranty and a representation. A representation may be equitably or substantially answered; but a warranty must be strictly complied with.²⁷

The point has been stressed again by Lord Eldon LC in Newcastle Fire Insurance Co v Macmorran & Co:²⁸

It is a first principle of the law of insurance, on all occasions, that where a representation is material it must be complied with – if immaterial, that immateriality may be inquired into and shown; but that if there is a warranty it is a part of the contract that the matter is such as it is represented to be. Therefore, the ma...