Perils of the Seas and Inherent Vice in Marine Insurance Law

Ayça Uçar

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000207804
• Edition: 1
• Topic: Jura
• Subtopic: Seerecht

The Supreme Court ruling in Global Process System Inc. v Syarikat Takaful Malaysia Berhad (The Cendor MOPU) created a shock wave in the London marine insurance market, as the Supreme Court decision changed the boundaries of doctrine with respect to the meaning of 'perils of the sea' and 'inherent vice'. Both phrases play an important role in the insurance market, affecting both assureds and insurers and their respective interests under all classes of marine insurance policies.

This book reviews the origin of the clauses 'perils of the sea' and 'inherent vice' by tracing back through the early cases in order to understand the origin and noting how and why the changes occurred. It will examine how the law has been developed in the recent cases and discuss whether the Supreme Court case The Cendor MOPU has overruled the previous cases in terms of the clauses 'inherent vice' and 'perils of the sea'.

Considering the impact of The Cendor MOPU decision with respect to the Marine Insurance Act 1906, as well as the standard Institute Cargo Clauses, it evaluates whether the decision is consistent with these things and discusses the effect of the decision on recent cases and on the insurance market.

1 Introduction to ‘perils of the seas’ and ‘inherent vice’ in marine insurance law

Introduction

The expressions ‘perils of the sea’ and ‘inherent vice’ have long been used to express insured and excluded risks by both assureds and insurers, and are stipulated in both the Institute Cargo Clauses and the Marine Insurance Act (MIA) 1906. They have a profound impact in the insurance market, as they affect both the assured’s and the insurer’s respective interests under all types of marine insurance policies. The meaning of ‘inherent vice’ and the concept of ‘perils of the sea’ has changed dramatically since the Supreme Court decision of The Cendor MOPU where the ruling created a shock wave in the London marine insurance market due to it appearing to run counter to accepted learning. The Supreme Court reclassified how inherent vice is viewed. Although it is expressed in the legislation and in policy wordings as an excluded peril, the Supreme Court treated it as an alternative to ‘perils of the sea’. Likewise, The Cendor MOPU introduced a new rule to the issue of causation in the context of marine insurance and highlighted that loss cannot be caused by both: it must be by one or the other. Therefore, if there is a peril of the sea, there cannot be inherent vice. In other words, inherent vice is not an exclusion but is, instead, a statement of the circumstances in which there is no peril of the sea. This new interpretation has led to heated discussions in later cases. Accordingly, concurrent causes were abolished, and the ‘sole cause’ test was adopted by the Supreme Court.

In addition, the meaning of the word ‘ordinary’ has become more complex than ever, as has the issue around the word ‘fortuity’. This is due to ‘the older extraordinary incidents arising from the sea and weather conditions test’ no longer being applicable. However, the Supreme Court emphasised the extraordinary effect of the ‘action’ rather than the appearance of the winds and waves. More importantly, after the Supreme Court decision of The Cendor MOPU, the insured was only required to show that the cause of loss was accidental and not intentional, in other words, the cause of loss was not inevitable.¹

It has long been settled that there can be perils of the sea even though the weather conditions confronted by the insured were reasonably predicted² and even though those conditions were not unprecedented.³ Fortuity is therefore to be found in the unforeseeable outcomes of the actions of the wind and waves.

The purpose of this chapter is to provide a general introduction to this book by providing a broad summary of the important elements of perils of the sea, inherent vice and causation in marine insurance law.

General outline on the meaning of ‘perils of the sea’

The meaning of ‘perils of the sea’ is the oldest definition in marine insurance law and is broadly interpreted from ‘of marine risk’.⁴ Thus, there is a vast amount of case law dating back to the seventeenth century on the meaning of this phrase.⁵ The attempted definition of the term ‘perils of the sea’ has been varied throughout the centuries. The ancient definition was raised by the seventeenth-century charter party case of Pickering v Barclay⁶ in which the phrase ‘dangers of the sea’ was used as a synonym with ‘perils of the sea’. Lloyd’s Ship and Goods (SG) policy⁷ surfaced the phrase in a wider concept, namely, ‘all other perils and misfortunes’. The term ‘perils of the sea’ was not used in the standard Institute Cargo Clauses. Rule 7 of the MIA 1906⁸ defines the term ‘perils of the sea’ in the following way:

The term … refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves.

Despite the legislative definition of ‘perils of the sea’, the phrase remained tentative. It would seem that although the phrase comprehends two important elements, ‘fortuity’ and ‘ordinary’, various definitions have been used in cases throughout the centuries. It is one of those phrases that involve facts of no very certain character, and therefore, a strict definition is extremely challenging indeed.⁹ It would seem that ‘perils of the sea’ is something distinct from the natural and ordinary operations of the forces of the sea.¹⁰ Surfacing the meaning and the contents of the term ‘perils of the sea’ is therefore complex. Over the years the majority of cases have endeavoured to distinguish between ‘perils of the sea’ and other enumerated perils in all-risk policies; these have been less than satisfactory. They would assume that the statutory definition failed to define the term explicitly. Despite Sir Mackenzie Chalmers’s¹¹ definition of ‘perils of the sea’ in MIA 1906 r.7, the draftsman left the words ‘fortuity’ and ‘ordinary’ open to criticism in the subsequent case law. Although he stated that certain rules must be set up in the commercial transaction, this led to flexibility and uncertainty both in the insurance market and in the judicial arena.

As the key purpose of certainty was not achieved by Sir Mackenzie Chalmers and the phrase ‘perils of the sea’ does not appear in the Institute Cargo Clauses, it becomes necessary to revert to a discussion of the pre-1906 authorities where there has been a mass of case law since the 1906 Act that has demonstrated uncertainty and ambiguity in the legislation.¹² It would seem that all-risk policies must include ‘perils of the sea’ in order to avoid unpredictable judgements in marine cases. Rule 7 of the Australian Marine Insurance Act 1909 (“MIA Cth”) repeated Chalmer’s notion in the MIA 1906. Thus, ‘perils of the sea’ must contain fortuity but does not include the ordinary action of winds and waves. However, in the Australian case of Skandia Insurance Co Ltd v Skoljarev (‘Skandia’)¹³ the judge did not consider the fact that weather conditions were extraordinary and unforeseeable. In this case the insured was required to prove the initial seaworthiness of the vessel and that the loss was accidental, not intentional or inevitable. Thus, there is no denying that the unsatisfactory meaning of ‘perils of the sea’ contained in both the MIA 1909 (Cth) and the MIA 1906 UK, is mirrored in the case law.

Likewise, in The Cendor MOPU, the insured wished to transport an oil rig from Texas to Malaysia. The platform of the oil rig could be jacked up and down on its three tubular legs so that it reached the correct height in the water wherever it happened to be located. Rather than remove the legs, it was decided to transport the oil rig lying flat on a towed barge, with its three legs extending 300 metres into the air. The insured obtained an insurance policy on the oil rig as cargo in transit, and the policy incorporated the Institute Cargo Clauses A (ICC (A)) (1982). The ICC (A) clauses insured against ‘all risks’, subject to various exclusions, one of which, Clause 4.4, is for loss, damage or expense caused by ‘inherent vice’. That phrase, as construed in previous case law, referred to the situation where the subject matter, by reason of its characteristics or defects, effectively damaged itself. The insured disregarded strong advice that transporting the rig in this way exposed it to a risk of fatigue cracking where the legs joined the platform. For the first 70 or so days of the transport, all was well. The towing vessel with its cargo faced weather “within the range that could reasonably have been contemplated”. However, the vibration caused by the action of the wind and waves caused cracking at the weakest points, and a leg fell off. The following day, by reason of the instability of the oil rig, the remaining legs broke off due to fatigue cracking and thereafter fell into the sea. The judge at first instance contended that the proximate cause of the loss was inherent vice, as the cargo was capable of withstanding the ordinary voyage. However, the Court of Appeal reversed the earlier decision and considered that the loss resulted from ‘perils of the sea’. The decision in the Court of Appeal was unanimously upheld by the Supreme Court justices.

In The Cendor MOPU the Supreme Court highlighted that the severity of the weather is no longer important. Lord Mance¹⁴ stated that it was a question of fact as to whether the wind and waves had an ordinary effect or whether they were extraordinary in themselves. In particular, recent case law indicates that it is sufficient that winds and waves have an extraordinary effect, even when their presence is not extraordinary, in order to prove ‘perils of the sea’.

In addition, the most debatable question with respect to what is ordinary and what is not has been decided in the unusual case of The Cendor MOPU and has become settled law. It is submitted that the phrase ‘ordinary action of the winds and waves’ has compounded the uncertainty. Each of the conclusions is arguably out of line with established authority. The Supreme Court adopted Mustill J’s observation in The Miss Jay Jay.¹⁵ In this definit...