Ensuring you have the right insurance is vital and understanding the limits of your policies is especially vital for project forwarders and shippers. Angus Galbraith of FP Marine Risks explains to Voice of the Independent the definition of ‘All Risks’ in Marine Cargo Insurance policies as defined in the Institute Cargo Clauses A and discloses a few of the often misunderstood exclusions.
MARINE cargo policies may be written on ‘All Risks’ conditions, the broadest coverage available under a cargo insurance policy. However, ‘All Risks’ does not cover all losses. The major exclusions include war and misconduct of the assured. Ordinary leaking/ loss of weight, wear & tear, unsuitable packing and inherent vice are also exclusions but are often overlooked by the shipper/ forwarder or are misunderstood. Inherent vice is a hidden defect of the cargo, which causes or contributes to its deterioration, damage, or wastage and may apply to cargo that is susceptible to high or low temperatures or humidity.
If the loss does not occur by accident or “fortuitous” circumstances, then one of the exclusions may apply. For example, rust or metal fatigue causing damage to the machinery may not be covered if there are no other proximate causes.
One judgment which has had a bearing on marine cargo insurance may be taken from a case brought before the UK Supreme Court. In this case, the subject matter was an oil rig that was being towed from Texas to Malaysia. The height of the jack house on the rig could be raised or lowered as needed and secured with pins in holes drilled in each of the three legs that supported the platform. For the purposes of transporting the rig, the jack house was lowered so that the legs extended 300ft in the air above it.
The insurer was made aware of the nature of the cargo and its risks, and it was known by all parties that the legs could be subject to stress on this journey and might break off due to metal fatigue. Consequently, prior to accepting the risk, the insurer asked for an expert’s report to be prepared outlining the state of the rig and recommendations for its transportation. The expert explained the risk that the rig was likely to suffer weakening during transit and recommended that the rig be re-inspected and, if necessary, repaired halfway through its journey. This was done and not long after the rig departed for the second half of the journey, the starboard leg broke off the rig and fell into the sea. This caused additional stress on the two remaining legs, which also broke off and fell into the sea.
The owner of the rig, the assured, made a claim with its insurers for the loss. The insurers rejected the claim and the assured sued. The insurers contended that since the loss was not caused by any unexpected accident or casualty, the loss was proximately caused by inherent vice and argued that they were not liable for the loss because inherent vice is excluded.
The law in the UK states: “Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils.”
An important aspect that had bearing on the case was that the risk of fatigue was well known to the insurers and the insured. Therefore, the insurers insisted that the rig be inspected again in Cape Town, South Africa and necessary remedial operations be conducted. On this condition, the insurers granted a certificate approving the voyage. Thus, both parties knew that the voyage was risky for the rig.
The Commercial Court determined that the proximate cause of the loss was due to metal fatigue from repeated stress on the legs from the pitching and rolling motion of the barge during transit and since the legs were not capable of withstanding the normal incidents of the voyage due to its inherent nature, the insurers were not liable for the claim.
The Assured then brought the case before the Court of Appeals. The Court of Appeals disagreed with the prior judgment and held that the proximate cause of the loss was a “leg breaking wave” which resulted in the starboard leg breaking off, thereby increasing stress on the other two legs, which in turn broke off as well.
The insurers then appealed this decision and the matter came before the Supreme Court. The Supreme Court had to decide what the proximate cause of the loss was, and in doing so, had to decide on the scope of the inherent vice exclusion.
The insurer’s appeal was unanimously dismissed by the Supreme Court, all holding that the proximate cause of the loss was a peril insured rather than inherent vice. The Court made it clear that this was a difficult case with a fine line between inherent vice and peril of the seas. Nevertheless, it was recognized that the insured had disclosed the history of the rig and had complied with all the conditions imposed by the insurer for the transportation of the rig from Texas to Malaysia.
These factors demonstrated to the Court that the parties’ attention was focused on the risks associated with transporting the rig and if it were to be decided that the policy did not cover such a loss, there would be little point in businesses taking out such insurance. Insurers are always free to decline the insurance proposal or set the premium at such a rate it felt appropriate for the high level of risks if the transport was deemed a risky venture.
This case highlights the lengths insurers look into the cause of the loss to determine any applicable exclusion and stresses the importance for shippers and freight forwarders to have adequate cargo insurance policies in place. Furthermore, shippers should disclose all risks and take precautions to ensure the policy remains in effect.
Copyright 2013, Voice of the independent (excerpt from volume 24).