Marine Insurance Act 1906

(6 Edw 7 c 41)

Marine Insurance

Marine insurance defined

1. 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.

Notes

The distinction between marine and non-marine insurance is significant for two general reasons. First, class by class authorisation for the carrying on of insurance business is required under the Financial Services and Markets Act 2000. Secondly, the law of marine and non-marine insurance varies in a number of respects. The following is a non-exhaustive list:

1. in determining the assured’s loss, marine policies value the assured’s interest at the date of the policy rather than at the date of the loss (s 16);
   
2. a marine contract is enforceable only if embodied in a policy (s 22);
   
3. marine warranties may be express or implied by operation of law (ss 36–41) whereas non-marine warranties must be expressly created;
   
4. marine voyage policies terminate automatically where the voyage is changed or there is deviation from the accepted route (ss 42–49), whereas an increase of risk does not affect a non-marine policy unless the policy otherwise provides;
   
5. marine policies, unlike non-marine policies, are freely assignable (ss 50–51);
   
6. under a marine policy the broker is responsible to the underwriters for the premium (s 53);
   
7. non-marine law recognises only total and partial losses, whereas marine insurance recognises an intermediate form of loss, constructive total loss (s 60);
   
8. it is the obligation of the assured under a marine policy to take steps to avoid or mitigate the loss, and the underwriters have the concurrent duty to indemnify the assured for the costs of “suing and labouring” of this type (s 78);
   
9. marine insurance law permits return of premium to the assured in a greater number of situations than exist in non-marine law (s 84).

A policy in marine form is not necessarily a marine policy, as the substance has to be maritime in nature (Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67 (peace policy); Re Argonaut Marine Insurance Co Ltd [1932] 2 Ch 34 (fire policy).

Mixed sea and land risks

2.—(1) A contract of marine insurance may, by its express terms, or by usage of trade, be extended so as to protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.

(2) Where a ship in course of building, or the launch of a ship, or any adventure analogous to a marine adventure, is covered by a policy in the form of a marine policy, the provisions of this Act, in so far as applicable, shall apply thereto; but, except as by this section provided, nothing in this Act shall alter or affect any rule of law applicable to any contract of insurance other than a contract of marine insurance as by this Act defined.

Notes

Subs (1) It has long been the practice for policies on cargo to cover risks other than pure maritime risks, and the standard cargo cover written in the London market—the Institute Cargo Clauses, cl 8—is on a “warehouse to warehouse” basis, although the 2009 Cargo Clauses extend cover to the loading and unloading of the goods in the warehouses of origin and destination (which has been referred to as “shelf to shelf” cover). These wordings replace earlier policy terms, which covered cargo until “safely landed” (as to which see the Marine Insurance Act 1906, Sched, r 5), “safely delivered” (Deutsch-Australische Dampfschiffsgesellschaft v. Sturge (1913) 109 LT 905) or “discharged” (G H Renton & Co Ltd v. Black Sea and Baltic General Insurance Co Ltd [1941] 1 KB 206). Wider forms of cover, stated to be from specified origin to specified destination, are also marine policies as long as the marine voyage constitutes the most significant part of the cover. Of the many illustrations of the point, see: Rodocanachi v. Elliott (1874) LR 9 CP 518; Ide and Christie v. Chalmers and White (1900) 5 Com Cas 212; Allagar Rubber Estates Ltd v. National Benefit Assurance Co (1922) 10 Ll LR 564; Leon v. Casey [1932] 2 KB 576; Cousins & Co v. D & C Carriers Ltd [1971] 2 QB 230; Fuerst Day Lawson Ltd v. Orion Insurance Co Ltd [1980] 1 Lloyd’s Rep 656; Simon, Israel & Co v. Sedgwick [1893] 1 QB 303; Wunsche International v. Tai Ping Insurance Co [1998] 2 Lloyd’s Rep 8; Hibernia Foods plc v. McAuslin, The Joint Frost [1998] 1 Lloyd’s Rep 310. A non-marine policy may itself cover marine risks which are incidental to the main cover (Moore v. Evans [1918] AC 185).

Equally, the fact that the policy covers “all risks”, including some risks which may occur only on land, does not mean that it ceases to be a marine policy (Hyderabad (Deccan) Co v. Willoughby [1899] 2 QB 530; Schloss Brothers v. Stevens [1906] 2 KB 665; British and Foreign Marine Insurance Co v. Gaunt [1921] 2 AC 41). In Con-Stan Industries of Australia Pty Ltd v. Norwich Winterthur (Australia) Ltd (1986) 160 CLR 226 the policy covered stock in trade for “transit risk—road, rail, sea, air, parcel, post”: this was held not to be a marine policy, given the variety of other forms of carriage that were also contemplated. See also Pine Ridge Golf Club v. Lombard General Insurance Co of Canada 2003 MBQB 168. A policy is within the Act even though the policy is on a vessel that does not spend all of its time voyaging: Countrywide Finance Ltd v. State Insurance Ltd [1993] 3 NZLR 745; Gate v. Sun Alliance Insurance Ltd [1995] LRLR 385; Vero Insurance NZ Ltd v. Posa [2008] 3 NZLR 701.

The provision implies, by stating that the policy may be extended to inland waterways, that only sea voyages are covered by the legislation. The difference between sea and inland waterway is not always easy to define: see Raptis & Son v. South Australia (1977) 138 CLR 356, and cf. Anchorage Marine Underwriting v. Hansen Development 1999, unreported HCA, dismissing an application for permission to appeal against a ruling ([1999] NSWCA 186) that navigation on a lake fell within the Australian legislation. The equivalent Canadian provision does not refer to sea or inland waterways. ALRC 91, Recommendation 5, was that the Act should be amended “so that, subject to the terms of the contract, marine insurance covers risks on inland waters and that where appropriate the ‘sea’ and the ‘seas’ should be read as including inland waters”.

There is no reference to air risks incidental to a sea voyage, and ALRC 91, Recommendation 3, was that s 2(1) “should be amended to refer expressly to losses arising from any air risk incidental to a sea voyage”.

Subs (2) There are many illustrations in the case of marine policies on building risks, eg, Jackson v. Mumford (1904) 9 Com Cas 114; Youell v. Bland Welch (No 1) [1992] 2 Lloyd’s Rep 127; National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582; Heesens Yacht Builders BV v. Cox Syndicate Management Ltd, The Red Sapphire [2006] Lloyd’s Rep IR 476. There is no express reference to the repair of a vessel amounting to a marine peril, although this would doubtless be regarded as the being the case (and see Secunda Marine Services Ltd v. Fabco Industries Ltd 2005 FC 1565): ALRC 91, Recommendation 4, was that s 2(2) should be amended to refer expressly to losses arising from the repair of a ship, and Recommendation 6 proposed the deletion of the words “a policy in the form of a marine policy”, replacing them with a statement that the risks referred to in the policy are covered by the Act unless the contract states otherwise.

Marine adventure and maritime perils defined

3.—(1) Subject to the provisions of this Act, every lawful marine adventure may be the subject of a contract of marine insurance.

(2) In particular there is a marine adventure where—

1. Any ship goods or other moveables are exposed to maritime perils. Such property is in this Act referred to as “insurable property”;
   
2. The earning or acquisition of any freight, passage money, commission, profit, or other pecuniary benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of insurable property to maritime perils;
   
3. Any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of maritime perils.

“Maritime perils” means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seisures, restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy.

Notes

Subs (1) A marine policy is stated to insure a marine “adventure”. This concept has no modern significance, and modern policies insure particular risks forming part of the overall adventure. There is an inclusive definition of “marine adventure” in subs (2).

The adventure must be lawful, eg, not prohibited by statute or contrary to the public interest, for the policy to be valid. If the voyage is not lawful from the outset, the assured is in breach of the warranty of legality under s 41 of the 1906 Act, and the risk will not attach. If the adventure is lawful at its inception, s 3(1) is satisfied, although the assured may be in breach of the continuing warranty in s 41 in so far as any unlawful conduct taking place during the currency of the adventure is within his control.

Subs (2) This subsection lists the most important forms of cover available under a marine policy: property damage in respect of the vessel and its cargo, loss of freight, and liability incurred to third parties. Cargo policies are commonly written on an “all risks” basis (Institute Cargo Clauses A). The B and C clauses are against specific risks, including fire, explosion, stranding and jettison.

As to fire, see: Gordon v. Rimmington (1807) 1 Camp 123 (fire to prevent vessel falling into enemy hands covered by policy); Busk v. Royal Exchange (1818) 2 B & Ald 73 (fire caused by negligence covered by policy); Symington & Co v. Union Insurance Society of Canton (1928) 31 Ll LR 179 (water damage as consequence of fire proximately caused by fire, and cf. The Knight of St Michael [1898] P 30); Watson & Son Ltd v. Firemen’s Fund Insurance Co of San Francisco [1922] 2 KB 355 (steam damage not covered, and cf. Thames and Mersey Marine Insurance Co Ltd v. Hamilton Fraser & Co (1887) 12 App Cas 484). The older forms of policy excluded partial loss unless the vessel was “burnt”, as to which see The Glenlivet [1894] P 48. Some policies extend cover to “washing overboard” (see Hua Seng Sawmill Co BHD v. QBE Insurance (Malaysia) BHD [2003] 4 SLR 449: the peril does not cover the collapse of the sidewall of a cargo enclosure, causing the goods to fall overboard).

As to stranding, see the note to the Marine Insurance Act 1906, Sched, r 14.

As to explosion, see Commonwealth Smelting Ltd v. Guardian Royal Exchange Assurance Ltd [1984] 2 Lloyd’s Rep 608, Martini Investments v. McGinn [2001] Lloyd’s Rep IR 374 and Aegis Electrical and Gas International Services Co Ltd v. Continental Casualty Co [2008] Lloyd’s Rep IR 17 (physical or chemical reaction required, and not merely equipment failure resulting in outward pressure and propulsion).

As to jettison, there is some ambiguity, for jettison of cargo is frequently encountered in the context of an attempt to preserve a vessel in distress or the remaining cargo, in which case jettison constitutes a general average sacrifice and attracts general average contributions from its beneficiaries (see s 66 and the note thereto). Some cases treat the act of throwing cargo overboard as jettison in its own right despite the fact that some other peril was the cause of the jettison (Butler v. Wildman (1820) 3 B & Ald 398; Symington & Co v. Union Insurance Society of Canton Ltd (1928) 34 Com Cas 23) whereas others have held that it is not possible to convert an uninsured peril into an insured peril by jettison (Taylor v. Dunbar (1869) LR 4 CP 206).

Under an all risks policy the underwriters are liable for all risks arising from some happening (Bevan v. Gartside Marine Engines Ltd [2000] BCJ No 528), including accidental damage (Jacob v. Gaviller (1902) 7 Com Cas 116; Schloss Brothers v. Stevens [1906] 2 KB 665; Leong Brothers Industries SDN BHD v. Jerneh Insurance Corp SDN BHD [1991] 1 MLJ 102) other than excepted risks (as to which, see the Institute Cargo Clauses, cl 4), and also that the assured’s burden of proof in the event of a loss is satisfied if he proves that the loss has occurred—the burden of proof then shifts to the underwriters to show that the loss was proximately caused by an excluded peril, although the assured may be required to rebut any evidence of the operation of an excluded peril brought forward by the underwriters (Re National Benefit Assurance Co Ltd (1933) 45 Ll LR 147; Theodorou v. Chester [1951] 1 Lloyd’s Rep 204; British and Foreign Marine Insurance Co v. Gaunt [1921] 2 AC 41; Fuerst Day Lawson Ltd v. Orion Insurance Co Ltd [1980] 1 Lloyd’s Rep 656; Techni-Chemicals Products Co Ltd v. South British Insurance Co Ltd [1977] 1 NZLR 311). See, however, Tektrol Ltd v. International Insurance Co of Hanover Ltd [2005] 2 Lloyd’s Rep 701, where Carnwath LJ criticised the use of extensive exclusions in an all risks policy and commented (at para 20) on the wording before him that: “Although it is described as an ‘all risks’ policy, one has to search long and hard, through a bewildering and apparently comprehensive list of exclusions, to discover the extent to which any risks are in fact covered” and that “One should start from the presumption that the parties intended an ‘all risks’ policy to cover all risks, except when they are clearly and unambiguously excluded”. For the scope of hulls cover, see Institute Time Clauses Hulls, cll 6–8, Institute Voyage Clauses Hulls, cll 4–8 and International Hull Clauses, cll 2–5 (sea perils including fire and explosion, mechanical breakdown, and pollution hazards—the International Hull Clauses extend cover to leased equipment and parts taken off the vessel).

Subs (2)(a) The term “movables” is defined in s 90, the term “ship” is defined in the Schedule, r 15, and the term “goods” is defined in the Schedule, r 17. Policies on ships and goods do not cover consequential losses, including loss of profits, unless specifically covered (Lucena v. Craufurd (1806) 2 Bos & PNR 269; Royal Exchange Assurance v. M’Swiney (1850) 14 QB 646; Halhead v. Young (1856) 6 E & B 312; Mackenzie v. Whitworth (1875) 1 Ex D 36; Anderson v. Morice (1875) LR 10 CP 609; Inglis v. Stock (1885) 10 App Cas 263; Yangtse Insurance Association v. Lukmanjee [1918] AC 585). Thus if the assured has no insurable interest in the subject matter, he cannot make any claim at all under a policy which does not cover loss of profits (see Stockdale v. Dunlop (1840) 6 M & W 224 and the note to s 6). It is a matter of construction whether a policy is on goods or against loss of profits, with the presumption being in favour of the former (Agra Trading Ltd v. McAuslin, The Frio Chile [1995] 1 Lloyd’s Rep 182, distinguished in Hibernia Foods plc v. McAuslin, The Joint Frost [1998] 1 Lloyd’s Rep 310 in which both cargo and profits were insured under the same clause).

Subs (2)(b) The term “freight” is defined in s 90. The other terms used here are not defined by the 1906 Act. For insurance against loss of profits see: Barclay v. Cousins (1802) 2 East 544; Wilson v. Jones (1867) LR 2 Exch 139, Asfar v. Blundell [1896] 1 QB 123; for insurance on disbursements, see: Buchanan & Co v. Faber (1899) 4 Com Cas 223; Lawther v. Black (1901) 6 Com Cas 196; New Zealand Shipping Co Ltd v. Duke [1914] 2 KB 682; and for insurance against loss of commission on freight see Ward & Co v. Weir & Co (1899) 4 Com Cas 216. The Hulls clauses (Institute Time Clauses Hulls, cl 22; Institute Voyage Clauses Hulls, cl 20, International Hull Clauses, cl 24) contain a disbursements warranty, introduced following the decision in Thames and Mersey Marine Insurance Co v. Gunford Ship Co, The Gunford [1911] AC 529. It was there held that a disbursement policy simply duplicated the cover conferred by a freight policy, and constituted double insurance. The disbursements warranty permits additional insurance for freight, return of premium, etc, only to the extent of 25% of the stated value and requires the assured to warrant that there is no insurance in excess of that amount.

Subs (2)(c) See the Institute Time Clauses Hulls, cll 8–9, the Institute Voyage Clauses Hulls, cll 6–7 and the International Hull Clauses, cll 6–7, for collision liabilities. The collision clause covers the assured in respect of 3/4ths of damages payable for loss or damage caused to any other vessel or property on any other vessel by reason of collision: damage caused to sisterships is included within the cover. The International Hull Clauses do, however, contemplate that the assured may obtain 4/4ths cover by payment of additional premium (cl 38). As to another “vessel”, see: M’Cowan v. Baine & Johnson, The Niobe [1891] AC 401; Re Margetts & Ocean Accident & Guarantee Corporation [1901] 2 KB 792 (tug is vessel, and see also The Mac (1882) 7 P 126); Bennett SS Co v. Hull Mutual SS Protecting Society [1914] 3 KB 57 (fishing nets not vessel); Merchants’ Marine Insurance Co Ltd v. North of England Protecting and Indemnity Association (1926) 26 Ll LR 201 (crane not a vessel); Polpen Shipping Co Ltd v. Commercial Union Assurance Co Ltd [1943] KB 161 (flying boat not a vessel). The International Hull Clauses permit the assured to obtain additional cover for collision liability incurred with regard to any fixed or floating object, and not merely a vessel: cl 37. Where a submerged vessel is involved, there is a collision only where the owner of the submerged vessel has a reasonable hope of successfully continuing salvage operations (Pelton SS Co Ltd v. North of England Protecting and Indemnity Association, The Zelo (1925) 22 Ll LR 510, disapproving the navigability test laid down in Chandler v. Blogg [1898] 1 QB 32). It is possible to extend the definition to encompass fixed objects such as piers (Union Marine Insurance Co v. Borwick [1895] 2 QB 279). Liability for a collision between the insured vessel and vessel A, which causes vessel A to collide with vessel B, is within the collision clause (France, Fenwick & Co Ltd v. Merchants’ Marine Insurance Co Ltd [1915] 3 KB 290).

If both vessels are to blame, the indemnity is determined by means of cross-liabilities. At common law the principle of single liability was recognised (Stoomvaart Maatschappij Nederland v. P&O Steam Navigation Co (1882) 7 App Cas 795; London Steamship Owners Insurance Co v. Grampian Steamship Co (1890) 24 QB 663). Under the single liability basis of calculation, the liability of each vessel is determined and a set off of the liabilities is applied, so that the vessel which is liable for the greater sum simply pays the balance to the other. That principle is ousted by the Institute Time Clauses Hulls, cl 8, the Institute Voyage Clauses Hulls, cl 6 and the International Hulls Clause, cl 6, in favour of cross-liabilities. Under the cross-liabilities approach, the respective liability of each vessel to the other is assessed and 3/4ths of the liability of one vessel to the other is paid by the underwriters, with the other 1/4 being borne by the assured. The collision clause appears to apply only to tort liabilities, and not to those which arise in contract (Furness Withy & Co Ltd v. Duder [1936] 2 KB 461) or under statute (Hall Brothers SS Co Ltd v. Young, The Trident [1939] 1 KB 748). The collision clause does not extend to liability for personal injury or for consequential losses (Taylor v. Dewar (1864) 5 B & S 58; Xenos v. Fox (1869) LR 4 CP 665) or the removal of obstructions (The North Britain [1894] P 77; Tatham, Bromage & Co v. Burr, The Engineer [1898] AC 382).

There is a distinction between insuring property against liability, in which case the measure of the assured’s interest is potential liability, and insuring property on a first party basis, in which case the measure of the assured’s interest is the value of the property (Hill v. Scott [1895] 2 QB 713). For the property insurable interest of a person in possession of goods, see s 5. A general public liability policy is not a marine policy: Hansen Development P/L v. MMI Ltd [1999] NSWCA 186.

“Maritime perils”: Various of the terms used in this provision are partly defined in the Schedule to the Marine Insurance Act 1906: perils of the sea (Sched, r 7); pirates (Sched, r 8); thieves (Sched, r 9); arrests, etc (Sched, r 10); barratry (Sched, r 11). The definition of ‘‘maritime perils’’ is not exhaustive (as evidenced by the words “that is to say”), and may include ancillary forms of loss, such as mortgagee’s interest insurance or mechanical failure (Continental Illinois National Bank & Trust Co of Chicago v. Bathurst, The Captain Panagos [1985] 1 Lloyd’s Rep 625). It is not possible, despite the concluding words of the definition, to convert a non-marine risk into a marine risk merely by designation (The Captain Panagos [1985] 1 Lloyd’s Rep 625).

Insurable Interest

Avoidance of wagering or gaming contracts

4.—(1) Every contract of marine insurance by way of gaming or wagering is void.

(2) A contract of marine insurance is deemed to be a gaming or wagering contract—

1. Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest; or
   
2. 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.

Notes

Wagers were lawful contracts at common law but a wager on a marine risk ran the risk of being rendered unenforceable where the court construed the contract as one requiring proof of loss by the assured (Whittingham v. Thornburgh (1690) 2 Vern 206; Martin v. Sitwell (1691) 1 Show 156; Goddard v. Garrett (1692) 2 Vern 269; Le Pypre v. Farr (1716) 2 Vern 516; Fitzgerald v. Pole (1754) 4 Bro Parl Cas 439). For this reason, the practice developed of specifically stating in the policy that no proof of interest was required: such policies became known as “ppi” (policy proof of interest) contracts, although the term “ppi” encompasses other forms of wording to the same effect. Wagering policies and ppi policies were outlawed by the Marine Insurance Act 1745, and wagers in general were rendered void by s 18 of the Gaming Act 1845, the latter having been repealed by the Gambling Act 2005. Section 4 of the 1906 Act replicates the effect of these two earlier provisions.

Assuming that the assured possesses an insurable interest, the nature of that interest is not a material fact for the purposes of disclosure under s 18 of the 1906 Act (Carruthers v. Sheddon (1815) 6 Taunt 14; Irving v. Richardson (1831) 2 B & Ad 193; Crowley v. Cohen (1832) 3 B & Ad 478; Mackenzie v. Whitworth (1875) LR 1 Ex D 36; O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174).

Subs (1) For a contract to contravene this provision, there must be some intention on the part of the assured to wager rather than to insure a possible future interest (Kent v. Bird (1777) 2 Cowp 583; Gedge v. Royal Exchange Assurance Corporation [1900] 2 QB 214; Coker v. Bolton [1912] 3 KB 315, and cf. Newbury International Ltd v. Reliance National Insurance Co (UK) Ltd [1994] 1 Lloyd’s Rep 83). Subs (2) sets out two specific situations in which a policy is deemed to be by way of gaming or wagering, but it would seem that subs (1) is not confined to these situations.

Subs (2) The two limbs of subs (2) are alternative grounds on which a contract may fall within s 4.

Subs (2)(a) The contract is valid if the assured either possesses an insurable interest at the outset, or has an expectation of acquiring an interest during the currency of the policy. The test for expectation is both subjective and objective, in that the assured must believe that an interest will be acquired and there must be a reasonable basis for this belief (Hodgson v. Glover (1805) 6 East 316; Knox v. Wood (1808) 1 Camp 543; Eyre v. Glover (1812) 16 East 218; Anderson v. Morice (1876) 1 App Cas 713; Buchanan & Co v. Faber (1899) 4 Com Cas 223; Moran, Galloway & Co v. Uzielli [1905] 2 KB 555). Where the assured possesses some insurable interest, overinsurance is not wagering within s 4(2)(a) (Glafki Shipping Co SA v. Pinios Shipping Co, The Maria [1984] 1 Lloyd’s Rep 660; Re Tai Sun Insurance & Banking Co Ltd (1920) 15 HKLR 80), although the assured may be required to disclose substantial overinsurance under s 18.

Subs (2)(b) Where a policy is made in this or equivalent form, the policy is void even though it is made on good interest (Cheshire & Co v. Vaughan Bros & Co [1920] 3 KB 240; Edwards & Co v. Motor Union Insurance Co [1922] 2 KB 249; Re Overseas Marine Insurance Co Ltd (1930) 36 Ll LR 183), although the premium may be recoverable in such a case (Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67, putting a gloss on s 84(3)(c) of the Marine Insurance Act 1906). It is immaterial that the ppi clause is detachable (Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67).

The Gambling Act 2005, which has repealed and replaced virtually all of the UK’s gambling legislation, appears not to affect s 4 of the Marine Insurance Act 1906. Section 335 of the Gambling Act 2005 states:

1. The fact that a contract relates to gambling shall not prevent its enforcement.
   
2. Subsection (1) is without prejudice to any rule of law preventing the enforcement of a contract on the grounds of unlawfulness (other than a rule relating specifically to gambling).”

As a result, gambling contracts are valid and enforceable under s 335(1), although any rule of law which does not relate specifically to gambling and which renders a contract unlawful remains operative under s 335(2). The starting point is that a marine insurance contract made by way of gaming or wagering is enforceable under s 335(1), and the prohibition is maintained only if s 4 of the Marine Insurance Act 1906 is preserved by s 335(2). That preservation is possible only in respect of a rule of law preventing the enforcement of a contract on the grounds of unlawfulness which is not one relating specifically to gambling. It is arguable that s 4 of the 1906 Act has been deprived of effect by s 335(1) of the 2005 Act: s 4 of the 1906 Act does not render contracts unlawful but merely void; and even if that is wrong s 4 is clearly one which relates specifically to gambling. However, the 2005 Act does not apply to activities which are regulated under the Financial Services and Markets Act 2000 and insurance business carried on in the UK, unless the insurer has its head office in another EEA State and is operating from an establishment or branch ouside the UK or where there is a co-insurance arrangement and the insurer in question is not the leading insurer (Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001 No 544, arts 10 and 11). Accordingly, even if the Gambling Act 2005 does impliedly affect s 4 of the Marine Insurance Act 1906, it does so only in these very limited situations.

In Australia, the requirement for insurable interest at the date of a non-marine policy has been repealed by the Insurance Contracts Act 1984 (Cth), ss 16–17. ALRC 91 has proposed the same regime for marine insurance: the basic requirement should be repealed (Recomendation 28), along with the specific illustrations in ss 5–13 (Recommendation 29).

Insurable interest defined

5.—(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

(2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.

Notes

Subs (1) For the definition of “marine adventure”, see s 3(2). It has been said the concept of insurable interest in a marine adventure is a broad one: Feasey v. Sun Life Assurance Corporation of Canada [2003] Lloyd’s Rep IR 640. The assured may thus invest in a marine adventure and insure the subject matter of that marine adventure even though he does not own or possess the subject matter in question: see Wilson v. Jones (1867) LR 2 Exch 139—shareholder has right to insure adventure undertaken by company.

Subs (2) The definition of insurable interest is derived from the judgment of Lord Eldon in Lucena v. Craufurd (1806) 2 Bos & PNR 269, a wide definition approved generally in Feasey v. Sun Life Assurance Corporation of Canada [2003] Lloyd’s Rep IR 640. The definition is not exhaustive, and was extended by Colman J in National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582 to cover cases in which the assured is not the owner or possessor of property but his relation to it is such that he may suffer loss or incur liability in respect of it should it be damaged. See also State of Netherlands v. Youell [1997] 2 Lloyd’s Rep 440, confirming the concept of the ‘‘pervasive insurable interest’’, Deepak Fertilisers & Petrochemical Corporation v. Davy McKee [1999] 1 Lloyd’s Rep 387 in which the Court of Appeal held that a sub-contractor may have an insurable interest in the entirety of the insured subject matter on the basis that its loss or destruction will deprive the sub-contractor of the opportunity to carry out its contract (the insurable interest by definition coming to an end when the sub-contractor’s tasks have been performed in full), and O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174 in which it was held that the manager of a vessel had an insurable interest in the vessel by reason of loss which the manager would suffer and the liability which it would face in the event of any loss. The principle that an insurable interest may go beyond a pure pecuniary interest, and may extend to these types of interest, was confirmed in Feasey v. Sun Life Assurance Corporation of Canada [2003] Lloyd’s Rep IR 640.

There are specific illustrations of insurable interest given in ss 7 to 14, but there are also many decided cases dealing with other forms of interest. What follows is a list of authorities on the insurable interest required to obtain a valid policy.

Insurance on ship or cargo: A person may insure a ship or its cargo:

1. which he owns (Herbert v. Carter (1787) 1 TR 745), even if it is mortgaged (insurance being possible under s 14(1) of the Marine Insurance Act 1906 up to the full value of the property) or chartered (Hobbs v. Hannam (1811) 3 Camp 93);
   
2. which is in his custody, in which case he may insure for the full insurable value and not merely in respect of his own liability (North British Insurance Co v. Moffatt (1871) LR 7 CP 25, and see the note to s 14(2));
   
3. which he has agreed to buy (whether or not property has passed to him) or which is at his risk (Stephens v. Australasian Insurance Co (1872) LR 8 CP 18; Allison v. Bristol Marine Insurance Co (1876) 1 App Cas 209; Wunsche International v. Tai Ping Insurance Co [1998] 2 Lloyd’s Rep 8; Sitra Wood Products Pte Ltd v. Royal & Sun Alliance (Singapore) Pte Ltd [2001] 4 SLR 121);
   
4. which he has chartered or hired (Linelevel Ltd v. Powszechny Zaklad Ubezpieczen SA, The Nore Challenger [2005] 2 Lloyd’s Rep 534);
   
5. which he has agreed to sell (Re National Benefit Assurance Co Ltd (1933) 45 Ll LR 147, and see Hong Kong Nylon Enterprises Ltd v. QBE Insurance (Hong Kong) Ltd [2003] HKEC 199 where interest was held to continue even after sale and delivery); or
   
6. over which he has a security (Wolff v. Horncastle (1798) 1 Bos & P 316—right to lien; Briggs v. Merchant Traders Association (1849) 13 QB 167—lien; Sutherland v. Pratt (1843) 11 M & W 296—pledge; Countrywide Finance Ltd v. State Insurance Ltd [1993] 3 NZLR 745—debenture). For mortgages, see s 14.

A shareholder or other unsecured creditor of a company cannot insure its assets (Manfield v. Maitland (1821) 4 B & A 582; Moran, Galloway & Co v. Uzielli [1905] 2 KB 555; Macaura v. Northern Assurance Co [1925] AC 619; Sharp v. Sphere Drake Insurance Co, The Moonacre [1992] 2 Lloyd’s Rep 501, O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174; Truran Earthmovers Pty Ltd v. Norwich Union Fire Insurance Society Ltd (1976) 17 SASR 1; although contrast the position in Canada, Constitution Insurance Co of Canada v. Kosmopoulos (1987) 34 DLR (4th) 208), and a person in possession of property but without any right to use or enjoy it has no insurable interest in it (Sharp v. Sphere Drake Insurance Co Ltd, The Moonacre [1992] 2 Lloyd’s Rep 501). However, as noted above, an assured who stands to suffer loss (whether in the form of a lost contract or the incurring of liability) in the event that the subject matter of an insured adventure is lost or damaged can insure that subject matter (Wilson v. Jones (1867) LR 2 Exch 139; Feasey v. Sun Life Assurance Corporation of Canada [2003] Lloyd’s Rep IR 640). A mere expectation is not, however, insurable: a person who hopes to benefit in the future from the arrival of a vessel or cargo has no right to insure it, as his interest is a mere expectation not recognised by the law (Price v. Maritime Insurance Co [1901] 2 KB 412, and see, on expectations: Devaux v. Steele (1840) 6 Bing NC 358; Buchanan & Co v. Faber (1899) 4 Com Cas 223).

Freight: Freight may be insured when it is at the assured’s risk: in the usual case in which the carrier of goods earns freight only when the goods arrive safely, he has insurable interest from the commencement of the voyage (Miller v. Warre (1824) 1 C & P 237; Flint v. Flemyng (1830) 1 B & Ad 45; Dakin v. Oxley (1864) 15 CBNS 646; Barber v. Fleming (1869) LR 5 QB 59). For advance freight, see s 12.

Liability: A person may insure his potential liability, whether contractual or tortious, to third parties. A policy which covers lives or property may, on its proper construction, also extend to liability which may be incurred in the event that the subject matter is damaged, injured or lost: Feasey v. Sun Life Assurance Corporation of Canada [2003] Lloyd’s Rep IR 640.

When interest must attach

6.—(1) The assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is effected:

Provided that where the subject-matter is insured “lost or not lost,” the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.

(2) Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss.

Notes

Subs (1) This subsection reflects s 4(2)(a), requiring actual or potential interest at the date of the policy. Its effect is reproduced in cl 11.1 of the Institute Cargo Clauses. If the assured fails to acquire an insurable interest, or loses that interest, during the currency of the policy, the principle of indemnity—embodied in s 6(1)—prevents recovery by him. In the case of the sale of a vessel or cargo, it will be important to know whether the assured has either the property or risk in the subject matter at the date of the loss, as either will support an insurable interest (Powles v. Innes (1843) 11 M & W 10; Joyce v. Swann (1864) 13 CBNS 84; Seagrave v. Union Marine Insurance Co (1866) LR 1 CP 305; North of England Oil Cake Co v. Archangel Insurance Co (1875) LR 10 QB 249; Anderson v. Morice (1876) 1 App Cas 713; Colonial Insurance Co of New Zealand v. Adelaide Marine Insurance Co (1886) 12 App Cas 128; Piper v. Royal Exchange Assurance (1932) 44 Ll LR 103; Re National Benefit Assurance Co Ltd (1933) 45 Ll LR 147; Hua Seng Sawmill Co BHD v. QBE Insurance (Malaysia) BHD [2003] 4 SLR 449). In New South Wales Leather Co Pty Ltd v. Vanguard Insurance Co Ltd (1991) 25 NSWLR 699 (NSWCA) it was held that a purchaser of a cargo on fob terms, and to whom neither property nor risk had passed at the time of loss even though the goods had been put into containers and shipped, had no insurable interest. ALRC 91 has recommended the repeal of the need for insurable interest but, as a fallback, Recommendation 30 has proposed that ‘‘a purchaser of insurable property acquires an insurable interest in that property by no later than the time when it pays for the property or when it becomes bound to pay for the property provided that it subsequently pays for it.”

In the case of insurance against loss of earnings in respect of a vessel, there is insurable interest only when the vessel is not off-hire, so that the question of insurable interest must be looked at on a day-to-day basis: Cepheus Shipping Corporation v. Guardian Royal Exchange Assurance plc [1995] 1 Lloyd’s Rep 622.

An agent of the assured has no insurable interest in the insured subject matter, and cannot recover in the event of its loss (Wolff v. Horncastle (1798) 1 Bos & P 316; Seagrave v. Union Marine Insurance Co (1866) LR 1 CP 305), although by way of exception the assured’s broker is permitted to sue on the policy (Provincial Insurance Co of Canada v. Leduc (1874) LR 6 PC 224; Transcontinental Underwriting Agency v. Grand Union Insurance Co Ltd [1987] 2 Lloyd’s Rep 409; Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 3 All ER 581).

If the assured has a mere expectation of obtaining an insurable interest, he has no actual insurable interest in the subject matter which can support a claim, and his only loss will be of profit which is not covered unless the policy expressly so provides (Stockdale v. Dunlop (1840) 6 M & W 224; Halhead v. Young (1856) 6 E & B 312, and see the authorities cited in the note to s 3(2)(a). On the same principle, if the unpaid vendor of goods exercises his right of stoppage in transit, under s 44 of the Sale of Goods Act 1979, the purchaser has no insurable interest and cannot sustain a claim under the policy (Clay v. Harrison (1829) 10 B & C 99), and if goods are insured and are not delivered, the assured’s loss would seem to be not the goods themselves but loss of profits (Anderson v. Morice (1876) 1 App Cas 713; Fuerst Day Lawson Ltd v. Orion Insurance Co Ltd [1980] 1 Lloyd’s Rep 656).

Proviso: The proviso deals with the situation in which property is insured on the assumption that it is undamaged at the date of the policy, eg, cargo which is thought to be in course of transit. As long as the assured is unaware of any loss, the policy is valid and the underwriters must pay even though the loss has occurred prior to the insurance becoming effective. Equally, the underwriters may bring an action for the premium (Bradford v. Symondson (1881) 7 QBD 456). The proviso is echoed by the Schedule, r 1, and is based on, inter alia; Mead v. Davison (1835) 3 Ad & El 303; Sutherland v. Pratt (1843) 11 M & W 296; Gibson v. Small (1853) 4 HL Cas 353; Gledstanes v. Royal Exchange Assurance Corporation (1864) 34 LJQB 30. The proviso is repeated in Article 11.2 of the Institute Cargo Clauses. In New South Wales Leather Co. Pty Ltd v. Vanguard Insurance Co. Ltd (1991) 25 NSWLR 699 (NSWCA) the ‘‘lost or not lost’’ provision was given an extended meaning, the court holding that if a fob buyer of goods has paid against documents but has not obtained either property or risk when the goods are lost in the course of transit, the buyer is nevertheless entitled to recover: the definition of ‘‘lost or not lost’’ in r 1 of the Schedule to the 1906 Act appears not to contemplate this extension.

Subs (2) This is based on Anderson v. Morice (1876) 1 App Cas 713.

Defeasible or contingent interest

7.—(1) A defeasible interest is insurable, as also is a contingent interest.

(2) In particular, where the buyer of goods has insured them, he has an insurable interest, notwithstanding that he might, at his election, have rejected the goods, or have treated them as at the seller’s risk, by reason of the latter’s delay in making delivery or otherwise.

Notes

Subs (1) A defeasible interest is one which is liable to be defeated by subsequent events. The principle is based on: Lucena v. Craufurd (1806) 2 Bos PNR 269; Stirling v. Vaughan (1809) 11 East 619; Colonial Insurance Co of New Zealand v. Adelaide Marine Insurance Co (1886) 12 App Cas 128.

Subs (2) For common law illustrations, see: Sparkes v. Marshall (1836) 2 Bing NC 761; Anderson v. Morice (1876) 1 App Cas 713.

Partial interest

8. A partial interest of any nature is insurable.

Notes

A partial interest will include the interest of a joint owner of property (Page v. Fry (1800) 2 B & P 240; Robertson v. Hamilton (1811) 14 East 522; Griffiths v. Bramley-Moore (1878) 4 QBD 70; Walker v. Rural and General Insurance Ltd 1995, unreported, NSWCA) and the case in which the risk in an undivided bulk cargo has passed to the purchaser (Inglis v. Stock (1885) 10 App Cas 263). Under the Sale of Goods Act 1979, s 20A (inserted by the Sale of Goods (Amendment) Act 1995), property in part of an undivided bulk will pass to a buyer who has paid for that part.

Re-insurance

9.—(1) The insurer under a contract of marine insurance has an insurable interest in his risk, and may re-insure in respect of it.

(2) Unless the policy otherwise provides, the original assured has no right or interest in respect of such re-insurance.

Notes

Subs (1) It is now settled that reinsurance is a separate contract by the reinsured on the original subject matter, and is not a contract of liability insurance: Wasa International Insurance Co Ltd v. Lexington Insurance Co [2009] UKHL 40. That principle may be ousted by agreement. In Feasey v. Sun Life Assurance Corporation of Canada [2003] Lloyd’s Rep IR 640 the Court of Appeal by a majority held that the reinsurer of a Lloyd’s syndicate, which had insured a P&I Club’s liability to indemnify shipowners against claims by injured employees, had an insurable interest in the lives of the employees: although the policy was expressed to be a life policy, the reinsurer had an insurable interest in its liability to the Syndicate, and this was covered by the policy.

Subs (2) This provision merely reflects the doctrine of privity of contract: the contract of insurance and the contract of reinsurance are separate arrangements, so that the assured cannot sue on the reinsurance (see Grecoair Inc v. Tilling [2005] Lloyd’s Rep IR 151). It is doubtful, contrary to the assumption in subs (2), whether any reinsurance term permitting the assured to sue the reinsurers directly (eg, a cut-through clause operating where the reinsured becomes insolvent) is enforceable by the assured. As a matter of general law, the abolition of the privity of contract doctrine by the Contracts (Rights of Third Parties) Act 1999 has rendered a cut-through clause potentially enforceable, although English insolvency law might well treat this type of clause as a contravention of the pari passu principle which demands equal treatment of unsecured creditors in a winding up or bankruptcy. Further, the clause may be registrable as a charge on the reinsured’s assets under s 395 of the Companies Act 1985. These objections may disappear if the reinsured is a foreign company and the domestic insolvency law of the relevant country does not impose any restrictions on enforcement of cut-through clauses.

Bottomry

10. The lender of money on bottomry or respondentia has an insurable interest in respect of the loan.

Notes

These forms of security are now obsolete. Under each, the master of the vessel was permitted, in time of emergency to raise money on security of the vessel and freight (bottomry bond) or cargo (respondentia) to enable the voyage to be completed. For a fuller definition, see The James W Elwell [1921] P 351. Cf. also: Simonds v. Hodgson (1832) 3 B & Ad 50; Stainbank v. Fenning (1851) 11 CB 59; Stainbank v. Shepard (1853) 13 CB 418.

ALRC 91 has recommended that, if insurable interest is retained, s 16 should be amended to cover secured loans over insurable property generally, not just bottomry and respondentia (Recommendation 31).

Master’s and seamen’s wages

11. The master or any member of the crew of a ship has an insurable interest in respect of his wages.

Notes

At common law the wages of seamen could not be insured, on the basis that wages were payable only if freight was earned by the vessel. The link between freight and wages was severed by the Merchant Shipping Act 1854, s 183 (now s 38 of the Merchant Shipping Act 1995), thereby removing any objection to the crew insuring their wages.

Advance freight

12. In the case of advance freight, the person advancing the freight has an insurable interest, in so far as such freight is not repayable in case of loss.

Notes

This section is a specific illustration of the general rule that the person who bears the risk of the loss of freight may insure it (see the note to s 5(2) of the Marine Insurance Act 1906). If advance freight is not repayable in the event of loss of cargo, the cargo owner may insure the sum at risk. Conversely, if advance freight is repayable in the event of loss of cargo, the carrier may insure the sum at risk. The principles are discussed in Allison v. Bristol Marine Insurance Co (1876) 1 App Cas 209.

A distinction has to be drawn between advance freight, which is generally not repayable unless the contract provides to the contrary, and some other form of repayable advance to the carrier (Manfield v. Maitland (1821) 4 B & Ald 582; Droege v. Stuart, The Varnak (1869) LR 2 PC 505; Wilson v. Martin (1856) 11 Exch 684; Hicks v. Shield (1857) 26 LJQB 205; Allison v. Bristol Marine Insurance (1876) 1 App Cas 209).

Charges of insurance

13. The assured has an insurable interest in the charges of any insurance which he may effect.

Notes

This section is based on Usher v. Noble (1810) 12 East 639. Charges include the premium and the broker’s commission, assuming (contrary to the usual practice) that it is not incorporated in the gross premium (United States Shipping Co v. Empress Assurance Co [1907] 1 KB 259).

Quantum of interest

14.—(1) Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof, and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage.

(2) A mortgagee, consignee, or other person having an interest in the subject-matter insured may insure on behalf and for the benefit of other persons interested as well as for his own benefit.

(3) The owner of insurable property has an insurable interest in respect of the full value thereof, notwithstanding that some third person may have agreed, or be liable, to indemnify him in case of loss.

Notes

The interests of a mortgagor and mortgagee are distinct, even if insured under the same policy. The fact that the underwriters have a defence against one of the parties will not, therefore, mean that the other is denied a claim (Small v. United Kingdom Marine Mutual Insurance Association [1897] 2 QB 311), although if the mortgagor has been guilty of scuttling the vessel, the loss is not by perils of the sea and the mortgagee will be defeated by want of insured peril (Samuel & Co Ltd v. Dumas [1924] AC 431).

Subs (1) This provision reflects the common law principle of indemnity. See, eg, Alston v. Campbell (1779) 4 Bro Parl Cas 476; Irving v. Richardson (1831) 2 B & Ad 193; Hutchinson v. Wright (1858) 25 Beav 444; Ward v. Beck (1863) 13 CBNS 668. An assured with an equitable right to a mortgage (eg, where the mortgage has yet to be executed) has an insurable interest under the general provisions of s 5 of the 1906 Act (Samuel & Co Ltd v. Dumas [1924] AC 431; Kin Yuen Co Pte v. Lombard Insurance Co Ltd [1994] 2 SLR 887).

Subs (2) This subsection does not create any statutory authority of an interested person to insure on behalf of others, but simply provides that if such authority exists then the interested person may insure: O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174.

It is now generally accepted that a person interested in subject-matter can insure his interest as well as those of other interested parties under a single composite policy. If other interests have not been insured, the assured can recover only the amount of his own interest (Irving v. Richardson (1831) 2 B & Ad 193; Labroke v. Lee (1850) 4 De G & Sm 106; Scott v. Globe Marine Insurance Co Ltd (1896) 1 Com Cas 370), although it is established that a warehouseman or other person in possession of property can insure and recover its full value and must account to other interests for any sums in excess of his own interest (Crowley v. Cohen (1832) 3 B & Ad 478; Waters v. Monarch Fire and Life Assurance Co (1856) 5 E & B 870; North British and Mercantile Insurance Co v. Moffatt (1871) LR 7 CP 25; Joyce v. Kennard (1871) LR 7 QB 78; Stephens v. Australasian Insurance Co (1872) LR 8 CP 18; Engel v. Lancashire General Insurance Co Ltd (1925) 21 Ll LR 327; Williams v. Atlantic Assurance Co Ltd [1933] 1 KB 81; Hepburn v. Tomlinson (Hauliers) [1966] AC 451; Petrofina (UK) Ltd v. Magnaload Ltd [1984] QB 127; Ramco (UK) Ltd v. International Insurance Co of Hannover Ltd [2004] Lloyd’s Rep IR 606; Ramco Ltd v. Weller Russell & Laws Insurance Brokers Ltd [2009] Lloyd’s Rep IR 27; Re Dibbens [1990] BCLC 677—the last-mentioned case demonstrating that if there is a contractual duty to insure, the surplus proceeds are held on trust). Cf. also: Robertson v. Hamilton (1811) 14 East 522; Irving v. Richardson (1831) 2 B & Ad 193; Ebsworth v. Alliance Marine Co (1873) LR 8 CP 596). The authorities were considered by the Court of Appeal in Ramco, and that Court concluded that: (a) a policy which covers goods for which the bailee is “responsible” covers only those goods for which the assured bears a legal liability; and (b) a policy which covers goods “in trust or commission” meant goods entrusted to the assured, and was not confined to goods which were held on trust in the strict equitable sense. See also the sequel claim against the placing brokers, Ramco Ltd v. Weller Russell & Laws Insurance Brokers Ltd [2009] Lloyd’s Rep IR 27.

Where the mortgage has been paid off, the mortgagee will in the ordinary course of events not suffer any loss in the event of the occurrence of an insured peril (Levy & Co v. Merchants’ Marine Insurance Co (1885) Cab & Ell 474, where there was recovery on other grounds; Chartered Trust & Executor Co v. London & Scottish Assurance Corporation Ltd (1923) 39 TLR 608).

Subs (3) For common law authority on this point, see: Hobbs v. Hannam (1811) 3 Camp 93; Provincial Insurance Co of Canada v. Leduc (1874) LR 6 PC 224. If the third party has paid the assured, the assured has suffered no loss and cannot make any claim against his underwriters. By contrast, if the third party has yet to pay the underwriters, they will, having themselves paid, be subrogated to the assured’s rights against the third party to the extent of their payment: see the Marine Insurance Act 1906, s 79.

Assignment of interest

15. Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there be an express or implied agreement with the assignee to that effect.

But the provisions of this section do not affect a transmission of interest by operation of law.

Notes

The rule in this section is based on: Powles v. Innes (1843) 11 M & W 10; North of England Pure Oil Cake Co v. Archangel Maritime Insurance Co (1875) LR 10 QB 249. The effect of an assignment of the subject matter without the policy is to bring the policy to an end (Marine Insurance Act 1906, s 51). Equally, an assignment of the policy without a contemporaneous assignment of the subject matter terminates the policy.

For the form and consequences of assignment, see Marine Insurance Act 1906, s 50.

Insurable Value

Measure of insurable value

16. Subject to any express provision or valuation in the policy, the insurable value of the subject-matter insured must be ascertained as follows—

1. 
   

   In insurance on ship, the insurable value is the value, at the commencement of the risk, of the ship, including her outfit, provisions and stores for the officers and crew, money advanced for seamen’s wages, and other disbursements (if any) incurred to make the ship fit for the voyage or adventure contemplated by the policy, plus the charges of insurance upon the whole:

   
   

   The insurable value, in the case of a steamship, includes also the machinery, boilers, and coals and engine stores if owned by the assured, and, in the case of a ship engaged in a special trade, the ordinary fittings requisite for that trade:

   
   
2. In insurance on freight, whether paid in advance or otherwise, the insurable value is the gross amount of the freight at the risk of the assured, plus the charges of insurance:
   
3. In insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole:
   
4. In insurance on any other subject-matter, the insurable value is the amount at the risk of the assured when the policy attaches, plus the charges of insurance.

Notes

The definition of insurable value is significant where the policy is unvalued. Under a valued policy the measure of the assured’s indemnity is based on the agreed value, whereas under an unvalued policy “insurable value” determines the amount recoverable in most cases (see ss 67–70). The insurable value takes the value of the subject matter when the risk attaches and not—as in the case of non-marine insurance—immediately before the occurrence of the event causing the loss, although the presumption that this is the appropriate date is rebuttable where the evidence demonstrates that the assured’s loss is properly felt at the time and place of the casualty. The most recent cases hold that the standard London market wordings, which speak of the provision of an indemnity, are inconsistent with the basic rule in s 16, and that s 16 has been ousted by agreement: accordingly, in the vast majority of cases the principle will be that the assured’s loss is measured by the difference in the value of the subject matter immediately before and immediately after the loss (The Captain Panagos [1985] 1 Lloyd’s Rep 625, Thor Navigation Inc v. Ingosstrakh Insurance [2005] Lloyd’s Rep IR 490).

Subs (1) For the common law basis of valuation at the date of the commencement of the risk, see Herring v. Janson (1895) 1 Com Cas 177. Valuation is complex if the vessel is a “one-off”, and in such a case reinstatement cost may be the appropriate measure: Randell v. Atlantica Insurance Co 1985, unreported, NSWSC. The definition of “ship” in r 15 of the Schedule to the Marine Insurance Act, is somewhat narrower, a discrepancy which may be of significance where the policy itself does not define the limits of the cover, as indeed is the case with the Institute Hulls Clauses which refer merely to the “vessel”. For “stores and provisions” see Brough v. Whitmore (1791) 4 TR 206, Hill v. Patten (1807) 8 East 373 and Forbes v. Aspinall (1811) 13 East 323, and for ‘‘ordinary fittings’’ see Hogarth v. Walker [1900] 2 KB 283. Early cases held that fishing equipment was not covered by a hulls policy (Hoskins v. Pickersgill (1783) 3 Dougl 222; Gale v. Laurie (1826) 5 B & C 156), but the concluding words of the definition appear to reverse this position. At common law a hull and machinery policy on a steamship did not cover coal or provisions (Roddick v. Indemnity Mutual Marine Insurance Co [1895] 2 QB 380), the position under the statute being reversed. The word “disbursements” includes the cost of towing a vessel in order to make it fit for the voyage: Franke v. CIC General Insurance Co, The Coral 1994 NSW LEXIS 14305.

Subs (2) For the common law basis, see: Palmer v. Blackburn (1822) 1 Bing 61; United States Shipping Co v. Empress Assurance Corporation [1908] 1 KB 115.

Subs (3) For the common law basis, see: Usher v. Noble (1810) 12 East 639. Prima facie evidence of the prime cost of goods is the invoice price paid by the assured, but if the value has altered before the policy incepts, the value at the latter date is the relevant value (Williams v. Atlantic Assurance Co Ltd [1933] 1 KB 81; Berger and Light Diffusers Pty Ltd v. Pollock [1973] 2 Lloyd’s Rep 442).

Disclosure and Representations

Insurance is uberrimae fidei

17. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

Notes

Section 17 states the general principle of utmost good faith which has been applicable to insurance contracts since the decision of Lord Mansfield in Carter v. Boehm (1766) 3 Burr 1905.

The duty of utmost good faith is stated to be of a general nature (Container Transport International v. Oceanus Mutual [1984] 1 Lloyd’s Rep 476; Marc Rich & Co AG v. Portman [1996] 1 Lloyd’s Rep 430), but two specific illustrations of it as applied to the assured are provided by s 18 (duty to disclose material facts before the contract is made) and s 20 (duty to avoid pre-contractual misrepresentation). These are by far the most important illustrations, although there may in exceptional circumstances be a post-contractual duty owed by the assured: see below.

The underwriters’ right is to avoid the contract ab initio on an all or nothing basis. Pending avoidance, the policy is perfectly valid: Brit Syndicates Ltd v. Italaudit SpA [2008] Lloyd’s Rep IR 601. If the policy is composite in that there are two or more assureds with different interests, the position of each assured is to be considered separately: New Hampshire Insurance v. MGN Ltd [1997] LRLR 24; Arab Bank v. Zurich Insurance Ltd [1999] 1 Lloyd’s Rep 262; FNCB Ltd v. Barnet Devanney (Harrow) Ltd [1999] Lloyd’s Rep IR 459; Brit Syndicates Ltd v. Italaudit SpA [2008] Lloyd’s Rep IR 601. The assured cannot require the underwriters to reinstate the contract by proffering an additional premium, as proportionality does not form part of English law (Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 3 All ER 581). Damages are not awardable for any breach of duty (Banque Keyser Ullmann SA v. Skandia (UK) Insurance Co Ltd [1990] 1 QB 665), although if a tort is committed by the assured or the broker—in the form of a fraudulent or negligent false statement—the underwriters will have the right to claim damages for any loss they have suffered if they choose not to avoid the policy or have contracted out of their right to do so (HIH Casualty and General Insurance v. Chase Manhattan Bank [2003] Lloyd’s Rep IR 230).

The right may be lost by waiver, which may take the form of either affirmation (election) or estoppel. Affirmation arises where the insurers unequivocally elect not to exercise their right of avoidance in full knowledge of that right. Estoppel, by contrast, requires detrimental reliance by the assured on an unequivocal representation that the policy is valid (see Kammins Ballrooms Co Ltd v. Zenith Investments (Torquay) Ltd [1971] AC 850; Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India, The Kanchenjunga [1990] 1 Lloyd’s Rep. 391. In practice, there will be waiver or estoppel where the underwriters, in full knowledge of the assured’s breach of duty, act in a fashion which induces the assured to believe that the right will not be exercised (Iron Trades Mutual Insurance Co Ltd v. Companhia de Seguros Imperio [1991] 1 Re LR 225; Svenska Handelsbanken v. Sun Alliance & London Insurance Plc [1996] 1 Lloyd’s Rep 519; Insurance Corporation of the Channel Islands v. Royal Hotel [1998] Lloyd’s Rep IR 151; Callaghan and Hedges v. Thompson [2000] Lloyd’s Rep IR 125; Cape plc v. Iron Trades Employers Insurance Association Ltd [2004] Lloyd’s Rep IR 75; Spriggs v. Wessington Court School [2005] Lloyd’s Rep IR 474). At Lloyd’s, the issue of a policy is not regarded as waiver, as this act is merely ministerial and does no more than to allow the assured to contest the underwriters’ avoidance in civil proceedings (Universal Marine Insurance Co v. Morrison (1873) LR 8 Exch 197, although contrast the position where the underwriters accept further premiums and otherwise continue to operate the policy without indicating that there is any problem—Drake Insurance plc v. Provident Insurance plc [2004] Lloyd’s Rep IR 277; Scottish Coal Co Ltd v. Royal and Sun Alliance Plc [2008] Lloyd’s Rep IR 718). See also Nicholson v. Power (1869) 20 LT 580, where the policy was issued subject to a reservation of rights. An agreement by the parties to cancel the policy and treat it as never having existed is not waiver of the right to avoid it in the event that the cancellation is not effective for all purposes (O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174). Reliance on contractual rights under the policy may amount to a waiver (WISE Underwriting Agency v. Grupo Nacional Provincial SA [2004] Lloyd’s Rep IR 962—giving contractual notice of cancellation; Moore Large Co Ltd v. Hermes Credit Guarantee plc [2003] Lloyd’s Rep IR 315—reliance on policy provision to defend claim, with utmost good faith pleaded only by amendment to pleadings just before trial), unless there is some reservation of rights by the underwriters or unless the contractual rights relied upon are merely ancillary to the assured’s main obligations under the policy (eg, claims conditions—Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669, distinguishing Iron Trades Mutual Insurance Co Ltd v. Companhia de Seguros Imperio [1991] 1 Re LR 225, where the policy condition relied upon by the reinsurers was a general one requiring disclosure of information and did not relate to claims). Before there can be waiver in this form, it must be shown that the underwriters were actually aware of the assured’s breach of duty, and this may mean that information disclosed to the insurer for other reasons may be treated as not having been received for waiver purposes (Malhi v. Abbey Life Assurance Co Ltd [1996] LRLR 237). Alternatively, the underwriters may be estopped from asserting their right to avoid, where they have unequivocally represented expressly or impliedly that they intend to carry on with the policy and the assured has relied upon that representation.

If the policy provides that it is not to be voidable or cancellable, the underwriters may not rely on an innocent breach of the duty of utmost good faith, although they will always have the right to avoid for fraud as the assured cannot contract out of his liability for his own fraud (HIH Casualty and General Insurance v. Chase Manhattan Bank [2003] Lloyd’s Rep IR 230). It was held in Toomey v. Eagle Star Insurance Co (No 2) [1995] 2 Lloyd’s Rep 88 that an exclusion will not cover negligence unless the wording specifically so states, although this reasoning is probably inconsistent with the subsequent decision of the House of Lords in HIH Casualty and General Insurance v. Chase Manhattan Bank [2003] Lloyd’s Rep IR 230 in which it was held that an exclusion clause was to be construed as covering negligent as well as purely innocent breach of duty. It was further decided in Toomey that an action for damages for non-innocent misrepresentation, under s 2(1) of the Misrepresentation Act 1967, is not precluded by a clause referring only to avoidance or cancellation.

Utmost good faith may in exceptional circumstances be post-contractual, although to date the situations in which the assured owes a post-contractual duty of utmost good faith are confined to a number of clear categories, and in particular there is no general obligation on the assured to disclose facts material to the risk after the contract has been concluded (Ionides v. Pacific Fire and Marine Insurance Co Ltd (1871) LR 6 QB 674; Cory v. Patton (1872) LR 7 QB 304; Lishman v. Northern Maritime Insurance Co (1875) LR 10 CP 179; Niger Co Ltd v. Guardian Assurance Co (1922) 12 Ll LR 175; Willmott v. General Accident Fire and Life Assurance Corporation (1935) 53 Ll LR 156; Sirius International Insurance Corporation v. Oriental Assurance Corporation [1999] Lloyd’s Rep IR 343; Biggin v. British Marine Mutual Insurance Association Ltd, unreported, 1991, Newfoundland Supreme Court), although if the risk completely changes in nature then the underwriters are automatically discharged from liability as a matter of law (Kausar v. Eagle Star Insurance Co Ltd [2000] Lloyd’s Rep IR 154; Swiss Reinsurance Co v. United India Insurance Co Ltd [2005] Lloyd’s Rep IR 341; and see also Ansari v. New India Assurance Ltd [2009] EWCA Civ 93, where the assured was under a duty to disclose material changes to information presented to him in the negotiations for the policy) and if circumstances change between the presentation of the risk and its acceptance then the change must be disclosed (Assicurazioni Generali SpA v. Arab Insurance Group [2003] Lloyd’s Rep IR 131). The absence of a continuing duty is one consequence of the rule in s 21 of the Marine Insurance Act 1906, that the contract is completed when the slip is scratched. The special situations are as follows.

1. In the case of insurance at Lloyd’s, a duty of utmost good faith is owed to each successive subscribing underwriter, on the basis that a separate contract is made with each underwriter. A false statement made to the leading underwriter is not in principle to be treated as having been made to each underwriter in the following market (Bell v. Carstairs (1810) 2 Camp 543; Forrester v. Pigou (1813) 1 M & S 9; General Accident Fire and Life Assurance Corporation v. Tanter, The Zephyr [1984] 1 Lloyd’s Rep 58; Bank Leumi Le Israel BM v. British National Insurance Co Ltd [1988] 1 Lloyd’s Rep 71). However, there is earlier authority to the contrary, allowing all of the underwriters to avoid liability (Barber v. Fletcher (1779) 1 Doug KB 305; Pawson v. Watson (1778) 2 Cowp 785; Brine v. Featherstone (1813) 4 Taunt 869; Robertson v. Marjoribanks (1819) 2 Stark 573) and the most recent cases have consistently held that a false statement to the leading underwriter which is not repeated to the following market may nevertheless give the following market the right to avoid the policy: this may be because the fact that a false statement has been made to the leading underwriter is itself material and has to be disclosed to the following market (assuming, of course, that the assured or his broker were aware of the position), or because market practice is such that the following market are known to rely upon the judgment of the leader. See, for the modern view in favour of the following market: Aneco Reinsurance Underwriting Ltd v. Johnson & Higgins [1998] 1 Lloyd’s Rep 565; International Lottery Management v. Dumas [2002] Lloyd’s Rep IR 237; Brotherton v. Aseguradora Colseguros SA (No 3) [2003] Lloyd’s Rep IR 762; International Management Group (UK) Ltd v. Simmonds [2004] Lloyd’s Rep IR 247; Toomey v. Banco Vitalicio de Espana [2005] Lloyd’s Rep IR 423.
   
2. When a marine policy is renewed, a fresh contract is made and further disclosure is required. In particular, if statements have been made which were true at the time of original placement, but which have become untrue in a material respect, the assured is under a duty to disclose the changes (Sharp v. Sphere Drake Insurance Co Ltd, The Moonacre [1992] 2 Lloyd’s Rep 501; ERC Frankona Reinsurance v. American National Insurance Co [2006] Lloyd’s Rep IR 157, where there was no duty of disclosure on renewal because the assured was unaware that the earlier false statements had been made and relied upon). However, a statement of intention is unlikely to be construed as running beyond the year of the policy to which it related: Limit No 2 Ltd v. Axa Versicherung AG [2009] Lloyd’s Rep IR 396. Where the assured seeks to benefit from a ‘‘held covered’’ clause in a marine policy, under which cover is extended following breach of warranty or expiry of the cover, material facts must be disclosed to the underwriters (Overseas Commodities v. Style [1958] 1 Lloyd’s Rep 546; Liberian Insurance Agency v. Mosse [1977] 2 Lloyd’s Rep 560). The same principle applies where the policy is varied by endorsement: a duty of disclosure attaches to the endorsement, and the endorsement itself may be avoided if material facs are withheld or misstated (Fraser Shipping Ltd v. Colton [1997] 1 Lloyd’s Rep 586; Limit No 2 Ltd v. Axa Versicherung AG [2009] Lloyd’s Rep IR 396; Bolton v. New Zealand Insurance Co Ltd [1995] 1 NZLR 224).
   
3. Where the assured is under a contractual duty to provide information to underwriters, he is also under a duty to disclose material facts known to him which bear upon that information. If he fails to do so, the policy can be avoided ab initio. The duty is, however, extremely limited. It rests upon the assured having acted in bad faith, which means at the very least recklessness (Alfred McAlpine plc v. BAI (Run-off) Ltd [2000] Lloyd’s Rep IR 352), and it also requires the breach to be of a nature which amounts to a repudiation of the policy. Accordingly, the underwriters will have the right to avoid the policy for breach of the continuing duty of utmost good faith only when they have, as an alternative, the right to treat the policy as at an end for having been repudiated for breach of an express obligation under which the provision of information is required. This was the analysis of Longmore LJ in K/S Merc-Skandia XXXXII v. Lloyd’s Underwriters, The Mercandian Continent [2001] Lloyd’s Rep IR 802 (and cf. HLB Kidsons v. Lloyd’s Underwriters [2009] Lloyd’s Rep IR 178), where it was pointed out that the continuing duty of utmost good faith could not be a stand-alone duty and was at best an alternative remedy for breach of a fundamental contract term. This reasoning all but deprives the continuing duty of any effect, given that failure to provide information under a contract term will very rarely amount to a repudiation of the policy itself, so that the necessary trigger for the continuing duty will not be present. See also New Hampshire Insurance Co v. MGN Ltd [1997] LRLR 24, in which the Court of Appeal held that the mere fact that a policy is cancellable by the giving of notice at the option of the underwriters is not enough to put the assured under a general duty of disclosure. The Mercandian Continent disapproved an earlier line of authority for the proposition that the assured was under a generalised post-contractual duty of utmost good faith which was particularly applicable when the assured submitted details of a loss in order to make a claim (Black King Shipping Co v. Massie, The Litsion Pride [1985] 1 Lloyd’s Rep 437; The Captain Panagos [1986] 2 Lloyd’s Rep 470; Parker & Heard Ltd v. Generali Assicurazioni SpA, 1988, unreported; Bucks Printing Press Ltd v. Prudential Assurance Co, 1991, unreported; Hussain v. Brown (No 2), 1996, unreported; Orakpo v. Barclays Insurance Services Ltd [1995] LRLR 443; Transthene Packaging v. Royal Insurance (UK) Ltd [1996] LRLR 32; Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209). The earlier cases were effectively undermined by the reasoning of the House of Lords in Manifest Shipping & Co Ltd v. Uni-Polaris Insurance Co Ltd, The Star Sea [2001] Lloyd’s Rep IR 247, which doubted the existence of any generalised post-contractual duty of good faith: the case turned, however, on the proposition that any post-contractual duty comes to an end as soon as legal proceedings have been instigated, so that the duty cannot be relied upon in respect of disclosure of documents pending a hearing.
   
4. The Litsion Pride [1985] 1 Lloyd’s Rep 437 has been taken as support for the proposition that the making of a fraudulent claim—by claiming for a loss which has not occurred, seeking to recover an amount greatly in excess of actual loss or submitting false or forged proofs of loss or statements as the circumstances of the loss (fraudulent means and devices)—is a breach of the continuing duty of good faith. This proposition was doubted in The Star Sea and The Mercandian Continent, and rejected by the Court of Appeal in both Agapitos v. Agnew, The Aegeon [2002] Lloyd’s Rep IR 573 and Axa Insurance Co v. Gottlieb [2005] Lloyd’s Rep IR 369. See also Interpart Comerciao e Gestao SA v. Lexington Insurance Co [2004] Lloyd’s Rep IR 690. The position is that a fraudulent claim is now to be dealt with as a matter of contract, and is probably to be regarded as conferring upon the underwriters the right to refuse a claim, by reason of the public policy principle precluding the assured from making a profit from his own wrong. A claim may be fraudulent because (as per the judgment of Mance LJ in Agapitos v. Agnew, The Aegeon [2002] Lloyd’s Rep IR 573): the assured has deliberately caused his own loss (see the authorities cited in the note to s 55); the assured has claimed for a loss which has not occurred (Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209; Direct Line v. Khan [2002] Lloyd’s Rep IR 364; Axa Insurance Co v. Gottlieb [2005] Lloyd’s Rep IR 369); the assured has submitted a grossly inflated claim (Eagle Star Insurance Co Ltd v. Games Video Co, The Game Boy [2004] Lloyd’s Rep IR 867, Danepoint Ltd v. Underwriting Insurance Ltd [2006] Lloyd’s Rep IR 429); the assured has persisted in pursuing a claim after becoming aware that it was exaggerated (Piermay Shipping Co SA v. Chester, The Michael [1979] 2 Lloyd’s Rep 1; the assured has suppressed a defence known to him; or the assured has used fraudulent means and devices to promote a perfectly genuine loss (as in Eagle Star Insurance Co Ltd v. Games Video Co, The Game Boy [2004] Lloyd’s Rep IR 867 and Stemson v. AMP General Insurance (NZ) Ltd [2006] Lloyd’s Rep IR 852) and it may be that this last category imposes a duty on the assured to disclose the circumstances surrounding his loss—Marc Rich Agriculture Trading SA v. Fortis Corporate Insurance NV [2005] Lloyd’s Rep IR 396. There is a general statutory definition of fraud in the Fraud Act 2006, which requires knowledge or reckless disregard of the truth of a statement or dishonest withholding of information. Where a claim is tainted by fraud, either at the time of the loss itself or by reason of the assured’s subsequent conduct in relation to the claim, the entire claim is lost, including any genuine parts of the claim (see: Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209; Axa Insurance Co v. Gottlieb [2005] Lloyd’s Rep IR 369). A fraudulent claim may, arguably, have the further effect of amounting to a repudiation of the policy by the assured, giving the underwriters the right to terminate the policy as of the date of the loss giving rise to the fraudulent claim, although this is necessarily without prejudice to the obligation of the underwriters to pay valid claims for genuine losses occurring before the loss giving rise to the fraudulent claim. The underwriters cannot in any event rely upon fraud committed by the assured after proceedings have commenced, as this is a matter for the rules of the court (Agapitos v. Agnew, The Aegeon [2002] Lloyd’s Rep IR 573). Further, if a claim has been settled, and the assured submits forged invoices to claim the agreed sum, the claim itself is not fraudulent: Direct Line Insurance plc v. Fox [2009] EWHC 386 (QB). As far as hulls claims are concerned, cl 45.3–45.4 of the International Hull Clauses state that the underwriters have the right to reject any fraudulent claim, an attempt to codify the judgment in Agapitos v. Agnew, The Aegeon [2002] Lloyd’s Rep IR 573.
   
5. The assured may be ordered to produce the ships’ papers to the underwriters when a claim is made. The power to make such an order was set out in RSC, Ord 72, r 10, superseded by the Civil Procedure Rules 1998, r 58.14. As to the exercise of the discretion, see: North British Rubber Co v. Cheetham (1938) 61 L1 LR 337; Keevil and Keevil Ltd v. Boag (1940) 67 L1 LR 263; Probatina Shipping Co Ltd v. Sun Insurance Office Ltd, The Sageorge [1974] QB 635. The power was available under any marine policy, including one which involved some land transit (Leon v. Casey [1932] 2 KB 576), and could have been exercised against a mortgagee (Graham Joint Stock Shipping Co Ltd v. Motor Union Insurance Co [1922] 2 KB 563) and in reinsurance cases (China Traders Insurance Co v. Royal Exchange Assurance [1898] 2 QB 187) as well as against the assured himself. RSC, Ord 72, r 10 replaced an earlier right of the underwriters to obtain an order for the ship’s papers on demand.
   
6. Under a non-obligatory open cover, where the underwriters have the right to refuse to accept declarations made to him, a duty of disclosure attaches to each declaration (Berger v. Pollock [1973] 2 Lloyd’s Rep 442, and for floating policies see s 29 of the 1906 Act).

Section 17 further provides that the duty of utmost good faith is bilateral. This is based upon dicta of Lord Mansfield in Carter v. Boehm (1766) 3 Burr 1905, confirmed in principle by the House of Lords in La Banque Financière de la Cité v. Westgate Insurance Co [1990] 2 All ER 947. This case also decides that there is no independent duty of care in tort owed by an underwriter to the assured, a point applied in Searle v. A R Hales & Co Ltd [1996] LRLR 68. La Banque Financière decided that whatever the content of the underwriters’ duty of utmost good faith might be, the only available remedy is avoidance by the assured; of necessity this is of little use where the assured has suffered a loss and seeks to recover under the policy rather than merely to recover his premiums. The principle was applied in Norwich Union Life Insurance Society v. Qureshi [1999] Lloyd’s Rep IR 263, in which Rix J ruled that an underwriter did not owe a duty to the assured to disclose that the risk to which the policy related was a serious one, but that in any event the assured’s only remedy was avoidance of the policy. This ruling was upheld in a joined appeal, Aldrich v. Norwich Union Life Insurance Co Ltd [2000] Lloyd’s Rep IR 1. More recently, however, the courts have developed a bilateral duty of utmost good faith, not in respect of placement but in respect of claims handling. In Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669 it was held that where the underwriters had avoided a policy based on non-disclosure of facts thought to be true at the date of placement but subsequently discovered not to be true, then, based on either the equitable origins of utmost good faith or the continuing duty of utmost good faith: (a) the court could overturn the avoidance at trial; and (b) if at the time of the avoidance the underwriters knew or ought to have known that the facts had proved to be unfounded, they would be precluded from relying upon their avoidance. Ground (a) was overruled by the Court of Appeal in Brotherton v. Aseguradora Coseguros (No 2) [2003] Lloyd’s Rep IR 746, on the ground that avoidance is a self-help remedy. Ground (b) was similarly doubted in Brotherton, but in Drake Insurance plc v. Provident Insurance plc [2004] Lloyd’s Rep IR 277 the Court of Appeal dismissed its own doubts and held that an underwriter who knew or had blind eye knowledge that the material facts had proved to be immaterial would be in breach of his duty of utmost good faith in relying on those facts to deny liability. The continuing duty of good faith owed by an underwriter has also been held to require the underwriter to exercise a contractual discretion relating to claims (eg, payment of defence costs or following a settlement reached by the assured with a third party) in good faith and not for any collateral purpose (Gan Insurance Co v. Tai Ping Insurance Co [2001] Lloyd’s Rep IR 667; Eagle Star Insurance Co v. Cresswell [2004] Lloyd’s Rep IR 602; Anders & Kern Ltd v. CGU Insurance plc [2008] Lloyd’s Rep IR 460), and it has even been suggested by Rix LJ in a dissenting judgment in WISE Underwriting Agency v. Grupo Nacional Provincial SA [2004] Lloyd’s Rep IR 962 that an underwriter who fails to act in good faith in asking appropriate questions on presentation is to be treated as having waived disclosure.

The Australian Insurance Contracts Act 1984 (Cth) had replaced common law principles with an implied term of utmost good faith, and ALRC 91 has recommended its adoption in marine insurance: Recommendations 20 and 21 would amend s 17 to make utmost good faith contractual, operating for the life of the relationship between the parties except in relation to any claim or other aspect of that relationship which is the subject of litigation between the parties. Under Recommendation 18, insurers would be given rights of cancellation when the assured has failed to comply with a term of the contract, breached the duty of utmost good faith or made a fraudulent claim under the contract.

Disclosure by assured

18.—(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.

(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

(3) In the absence of inquiry the following circumstances need not be disclosed namely:

1. Any circumstance which diminishes the risk;
   
2. 
   

   Any circumstance which is known or presumed to be known to the insurer.

   
   

   The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;

   
   
3. Any circumstance as to which information is waived by the insurer;
   
4. Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

(4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.

(5) The term “circumstance” includes any communication made to, or information received by, the assured.

Notes

The drafting of s 18 is based to a large extent on the judgment of Lord Mansfield in Carter v. Boehm (1766) 3 Burr 1905.

Subs (1) The contract is concluded when offer and acceptance coincide (cf. s 21 of the Marine Insurance Act 1906): the date of the issue of the policy and the inception of the risk are irrelevant. A fact must be disclosed if the assured ought to have been aware of it in the usual course of business (London General Insurance Co v. General Marine Underwriters Association [1921] 1 KB 104). This does not mean that the assured is required to investigate matters outside his knowledge, as these are for the underwriters alone to uncover in reaching an underwriting decision (Simner v. New India Insurance Co [1995] LRLR 240; Economides v. Commercial Union [1997] 3 All ER 636; Crane v. Hannover Ruckversicherungs-Aktiengesellschaft [2008] EWHC 3165 (Comm)). The assured is generally not required to disclose facts which are known to his agent unless the agent is one whose duty was to possess that information on behalf of the assured (an “agent to know”) or the agent’s status was such that he operated as the alter ego of the assured: in each of these cases the information may be treated for the purposes of s 18 as that which the assured ought to have known in the ordinary course of business (Simner v. New India Assurance Co Ltd [1995] 1 Lloyd’s Rep 240; ERC Frankona Reinsurance v. American National Insurance Co [2006] Lloyd’s Rep IR 157) unless the information related to the agent’s own fraudulent conduct in respect of the assured (Re Hampshire Land [1896] 2 Ch 743, and see Moore Stephens v. Stone & Rolls Ltd [2009] UKHL 39 where the principle was not doubted). There is a further situation in which an agent’s knowledge may be relevant, namely where the agent is authorised to insure on behalf of the assured: an “agent to insure” must disclose material facts to the insurers under the provisions of s 19 of the Marine Insurance Act 1906. The general rule, however, is that information in the possession of a general agent or employee is not deemed to be known by the assured unless the agent’s status is that of “agent to know” (Fitzherbert v. Mather (1785) 1 TR 12; Gladstone v. King (1813) 1 M & S 35; Proudfoot v. Montefiore (1867) LR 2 QB 511; Stribley v. Imperial Marine Insurance Co (1876) 1 QBD 507; Blackburn Low & Co v. Vigors (1887) 12 App Cas 531; Blackburn Low & Co v. Haslam (1888) 21 QBD 144; Wilson v. Salamandra Assurance Co of St Petersburg (1903) 88 LT 96; St Margaret’s Trust Ltd v. Navigation General Insurance Co Ltd (1949) 82 Ll LR 752; Australia and New Zealand Bank Ltd v. Colonial and Eagle Wharves Ltd [1960] 2 Lloyd’s Rep 241; Berger v. Pollock [1973] 2 Lloyd’s Rep 442; Simner v. New India Insurance Co [1995] LRLR 240; SAIL v. Farex Gie [1995] LRLR 116; PCW Syndicates v. PCW Insurers [1996] 1 Lloyd’s Rep 241; Group Josi Re v. Walbrook Insurance Ltd [1996] 1 Lloyd’s Rep 345; Kingscroft v. Nissan Fire and Marine Insurance Co Ltd [1999] Lloyd’s Rep IR 371; Arab Bank v. Zurich Insurance Co [1999] 1 Lloyd’s Rep 262; ERC Frankona Reinsurance v. American National Insurance Co [2006] Lloyd’s Rep IR 157).

Subs (2) The test of materiality was considered by the Court of Appeal in Container Transport International Ltd v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476, where it was held that the test is purely objective and does not involve consideration of the question whether the assured appreciated the materiality of the fact or whether the underwriter in question was actually influenced by it: the only relevant point is whether a prudent underwriter would have been interested in the information. The test was given detailed consideration by the House of Lords in Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 3 All ER 581 and much of the Court of Appeal’s reasoning in CTI was overturned. In Pan Atlantic the House of Lords held that there is a two-limb test for materiality:

1. Would a prudent underwriter have been influenced by the information? In determining whether this is the case, the question is not whether the information would have had a decisive influence on a prudent underwriter, nor whether a prudent underwriter would have refused the risk or charged a higher premium, but rather whether the information would have had an effect on the underwriter’s thought processes. Cf. also the St Paul Fire case (see (ii) below). It is necessary for market evidence to be adduced to prove whether or not a prudent underwriter would have been influenced by the information. The admissibility of the evidence of other underwriters was originally denied as pure hearsay (Carter v. Boehm (1766) 3 Burr 1905; Campbell v. Rickards (1833) 5 B & Ad 840), but its admissibility was established in other cases (Berthon v. Loughman (1817) 2 Stark 258; Richards v. Murdoch (1830) 10 B & C 527).
   
2. Was the actual underwriter influenced by the assured’s failure to disclose the information in question? The underwriter must thus show that there was an inducement upon which he relied. Although there is no mention of this requirement in the Act itself, their Lordships held that it should be implied in order to bring insurance law into line with the general law. The view was expressed by Lord Mustill in Pan Atlantic that, where materiality has been demonstrated, the underwriter can rely on a presumption that he has been induced to enter the contract. That approach was followed by the Court of Appeal in St Paul Fire and Marine Insurance Co (UK) Ltd v. McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep 116. However, Lord Lloyd in Pan Atlantic rejected the notion that there was a presumption of inducement, and more recent cases have confined that presumption to the situation in which the underwriter is for good reason unable to give evidence as to his state of mind. If the underwriter is available, he must give evidence and is thus open to cross-examination on the matter: Marc Rich Co AG v. Portman [1996] 1 Lloyd’s Rep 430; Sirius International Insurance Corporation v. Oriental Assurance Corporation [1999] Lloyd’s Rep IR 343. A broker sued for breach of duty may in certain circumstances argue that the risk was uninsurable so that no loss was suffered by reason of any breach (Gunns v. Par Insurance Brokers [1997] 1 Lloyd’s Rep 173), although that defence is a weak one because the assured may be able to show that some steps could have been taken by him to make the risk insurable (O & R Jewellers Ltd v. Terry [1999] Lloyd’s Rep IR 436) and there is always the possibility that other cover could have been obtained from elsewhere in the market (Standard Life Assurance Ltd v. Oak Dedicated Ltd [2008] Lloyd’s Rep IR 552). The link between materiality and inducement in cases where the underwriter is available to give evidence was finally severed by the Court of Appeal in Assicurazioni Generali SpA v. Arab Insurance Group [2003] Lloyd’s Rep IR 131, where it was confirmed that the assured’s false or incomplete presentation of the risk has to be an effective cause of the underwriter’s decision to enter into the contract, and that there is no general presumption in favour of inducement simply because a fact is material. Evidence of the underwriter’s previous imprudence in relation to other risks is inadmissible, as what matters is how the risk itself was underwritten: see Marc Rich & Co AG v. Portman [1996] 1 Lloyd’s Rep 430. Even where evidence of actual inducement is presented, it is open to the court to take the view that the underwriter could not have been influenced by the fact in question (Kausar v. Eagle Star Insurance Co Ltd [2000] Lloyd’s Rep IR 154; Laker Vent Engineering Ltd v. Templeton Insurance Ltd [2009] EWCA Civ 62; Nuvo Electronics Inc v. London Assurance (2000) 49 OR (3d)—no proof that past marine losses would have affected the underwriter). If the underwriter who wrote the risk is available to give evidence but is not called, the insurers cannot rely upon any presumption of inducement and in particular will not prove inducement by showing that another underwiter in the same organisation would have been induced: Lewis v. Norwich Union Healthcare Ltd [2009] EW Misc 2 (EWCC)). When the underwriter asserts that on the hypothesis that had the true facts been presented to him he would have acted differently, it is open to the assured to adduce evidence to substantiate the further hypothesis that commercial considerations or further disclosures on the part of the assured following the underwriter’s response would have in fact negatived the underwriter’s alleged decision to refuse the risk or to offer different terms (Drake Insurance plc v. Provident Insurance plc [2004] Lloyd’s Rep IR 277; Bonner v. Cox Dedicated Corporate Member [2006] Lloyd’s Rep IR 385). The presumption of inducement has to date been limited to cases in which the leading underwriter has been induced but others in the following market have not been able to give evidence to demonstrate inducement (as in St Paul Fire itself), and ALRC 91, Recommendation 27, would extend this principle by suggesting that following market insurers should be deemed to have been induced to enter into a contract if the leading underwriter was induced.

The views of the assured himself or those of a prudent assured are irrelevant to the test of materiality (Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 3 All ER 581).

Materiality has to be assessed at the date of the making of the contract, and not in the light of subsequent events (Seaman v. Fonnereau (1743) 2 Str 1183; Lynch v. Hamilton (1810) 3 Taunt 37; Inversiones Manria SA v. Sphere Drake Insurance Co Ltd, The Dora [1989] 1 Lloyd’s Rep 69). These cases also demonstrate that there is no need for any connection between the information withheld and the loss, as breach of the duty of utmost good faith rests upon the underwriter having been given a false impression (Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 3 All ER 581).

Material facts: There are numerous reported cases in which the materiality of facts, for the purposes of both non-disclosure and misrepresentation (see s 20(2) of the Marine Insurance Act 1906), has been discussed by the courts. The following list is illustrative of the position.

1. Any fact which affects directly the risk insured (“physical hazard”) is material.
   
   
   
   1. Any physical attributes of the insured subject matter which render it a greater risk than would normally be assumed must be disclosed (Da Costa v. Scandret (1723) 2 P Wms 170; Seaman v. Fonnereau (1743) 2 Str 1183; Lynch v. Hamilton (1810) 3 Taunt 37; Lynch v. Dunsford (1811) 14 East 494; Kirby v. Smith (1818) 1 B & Ald 672; Westbury v. Aberdein (1837) 2 M & W 267; Russell v. Thornton (1860) 6 H & N 140; Bates v. Hewitt (1867) LR 2 QB 595; Ionides v. Pacific Fire and Marine Insurance Co (1872) LR 7 QB 517; Bird’s Cigarette Manufacturing Co Ltd v. Rouse (1924) 19 Ll LR 301; Neue Fischmehl VertriebsGesellschaft Haselhorst mbH v. Yorkshire Insurance Co Ltd (1934) 50 Ll LR 151; Berger and Light Diffusers Pty Ltd v. Pollock [1973] 2 Lloyd’s Rep 442; Liberian Insurance Agency v. Mosse [1977] 2 Lloyd’s Rep 560; Inversiones Manria SA v. Sphere Drake Insurance Co Ltd, The Dora [1989] 1 Lloyd’s Rep 69; International Lottery Management v. Dumas [2002] Lloyd’s Rep IR 237; Helicopter Resources Pty Ltd v. Sun Alliance Australia Ltd 1991 Vic LEXIS 524; Countrywide Finance Ltd v. State Insurance Ltd [1993] 3 NZLR 745; Akedian Co Ltd v. Royal Insurance Australia Ltd [1999] 1 VR 80; Hongkong & Shanghai Insurance Co Ltd v. Hong Sun Chun Josiah [2000] HKCU 437. Similarly, in a reinsurance case, the fact that the direct policy is valued rather than one paying only an indemnity is a material fact if the agreed value is greater than the maximum potential loss calculated on an indemnity basis (Toomey v. Banco Vitalicio de Espana [2005] Lloyd’s Rep IR 423).
      
   2. Previous losses and claims may constitute material facts. It is the circumstances of a loss rather than its amount which is the relevant fact (Sharp v. Sphere Drake Insurance Co Ltd, The Moonacre [1992] 2 Lloyd’s Rep 501; Noblebright Ltd v. Sirius International Corporation [2007] Lloyd’s Rep IR 584, where it was held that attempted robberies were material facts).
      
   3. Any particular hazards of the voyage constitute material facts if the underwriter could not have discovered those facts or if they have been misstated (Middlewood v. Blakes (1797) 7 TR 162; Edwards v. Footner (1808) 1 Camp 530; Feise v. Parkinson (1812) 4 Taunt 640; Sawtell v. Loudon (1814) 5 Taunt 359; Westbury v. Aberdein (1837) 2 M & W 267; Anderson v. Thornton (1853) 8 Exch 425; Harrower v. Hutchinson (1870) LR 5 QB 584; Leigh v. Adams (1871) 25 LT 566; Ionides v. Pacific Fire and Marine Insurance Co (1871) LR 6 QB 674; Laing v. Union Marine Insurance Co Ltd (1895) 1 Com Cas 11). This would include the manner in which insured cargo is being carried or has been treated prior to the voyage (Blackett v. Royal Exchange Assurance Co (1832) 2 Cr & J 244; Hood v. West End Motor Car Packing Co [1917] 2 KB 38; Alluvials Mining Machinery Co v. Stowe (1922) 10 Ll LR 96; Greenhill v. Federal Insurance Co [1927] 1 KB 65), the time at which the vessel sailed or was due to sail, provided that the time of sailing affected the risk (Fillis v. Bruton (1782) 1 Park’s Marine Insurances 414; Macdowall v. Fraser (1779) 1 Doug KB 260; M’Andrew v. Bell (1795) 1 Esp 373; Fort v. Lee (1811) 3 Taunt 381; Foley v. Moline (1814) 5 Taunt 430; Bridges v. Hunter (1813) 1 M & S 15; Stribley v. Imperial Marine Insurance (1876) 1 QBD 507; Scottish Shire Line Ltd v. London and Provincial Marine and General Insurance Co [1912] 3 KB 51; Harper & Co Ltd v. Mackechnie & Co (1925) 22 Ll LR 514); port risks (Kingston v. Knibbs (1808) 1 Camp 508n; Stewart v. Bell (1821) 5 B & Ald 238; Marc Rich & Co AG v. Portman [1996] 1 Lloyd’s Rep 430; Fraser Shipping Ltd v. Colton [1997] 1 Lloyd’s Rep 586; Jaggar v. Lyttelton Marina Holdings Ltd [2006] 2 NZLR 87) and war risks dangers which were not of common knowledge (Beckwaite v. Nalgrove (1810) 3 Taunt 41n). The disclosure must be made even if the policy is written on an all risks or all losses basis (Cheshire & Co v. Thompson (1919) 24 Com Cas 198).
      
   4. The assured must disclose that he has entered into a contract with a third party, not found in the ordinary course of commerce, which potentially increases the underwriter’s liability or diminishes its right of subrogation in the event of a loss (Mercantile Steamship Co v. Tyser (1881) 7 QBD 73; Tate v. Hyslop (1885) 15 QBD 368; The Bedouin [1894] P 1; Scottish Shire Line v. London and Provincial Marine Insurance Co [1912] 3 KB 51; Marc Rich & Co AG v. Portman [1996] 1 Lloyd’s Rep 430; Helicopter Resources Pty Ltd v. Sun Alliance Australia Ltd 1991 Vic LEXIS 524).
   
   
2. Any fact which goes to the “moral hazard” is material. Moral hazard is relevant to both marine and war risks policies alike, even though in the latter case there is a lesser risk of the assured being able to carry out a fraud on his underwriters: North Star Shipping Ltd v. Sphere Drake Insurance plc [2005] 2 Lloyd’s Rep 76, affirmed on other grounds [2006] Lloyd’s Rep IR 519.

1. If the assured has overinsured to an excessive amount so that fraud is indicated, the overinsurance must be disclosed, although this is less significant in an unvalued policy as the assured is unable to recover more than his actual loss (Ionides v. Pender (1874) LR 9 QB 531; Herring v. Janson (1895) 1 Com Cas 177; Thames & Mersey Marine Insurance Co Ltd v. Gunford Ship Co [1911] AC 529; Pickersgill v. London and Provincial Marine Insurance Co [1912] 3 KB 614; Gooding v. White (1913) 29 TLR 312; Visscherij Maatschappij Nieuw Onderneming v. Scottish Metropolitan Assurance Co Ltd (1922) 27 Com Cas 198; Piper v. Royal Exchange Assurance (1932) 44 Ll LR 103; Williams v. Atlantic Assurance Co Ltd [1933] 1 KB 81; Slattery v. Mance [1962] 1 Lloyd’s Rep 60; Berger v. Pollock [1973] 2 Lloyd’s Rep 442). The most recent cases have made it clear that some overvaluation is not material, and that the test is whether the disparity between the insured value and the market value is consistent with prudent ship management: Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669; Eagle Star Insurance Co Ltd v. Games Video Co, The Game Boy [2004] Lloyd’s Rep IR 867; Biggin v. British Marine Mutual Insurance Association Ltd, unreported, 1991, Newfoundland Supreme Court; Fudge v. Charter Marine Insurance Co Ltd 1991, unreported, Newfoundland Supreme Court). However, in North Star Shipping Ltd v. Sphere Drake Insurance plc [2006] Lloyd’s Rep IR 519 the Court of Appeal cast doubt on the earlier authorities, and held that overvaluation was not necessarily a material fact insofar as underwriters might prefer to take a higher premium in return for the risk of having to make a payment greater than the actual value of the vessel. The fact that the assured has unsuccessfully failed to sell the vessel is not a material fact: Vero Insurance NZ Ltd v. Posa [2008] 3 NZLR 701.
   
2. Information as to other policies on the same risk is material if it converts the risk from genuine to speculative (Sibbald v. Hill (1814) 2 Dow 263; Thames & Mersey Marine Insurance Co Ltd v. Gunford Ship Co [1911] AC 529; Mathie v. Argonaut Insurance Ltd (1925) 21 Ll LR 145), as is information as to previous losses or claims under other policies (Container Transport International Inc v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476; Stowers v. G A Bonus plc [2003] Lloyd’s Rep IR 402). Policies on related but separate risks need not be disclosed (Wilson, Holgate & Co Ltd v. Lancashire & Cheshire Insurance Corporation Ltd (1922) 13 Ll LR 486).
   
3. The master’s qualifications or previous conduct are immaterial (Anon (1699) 12 Mod Rep 325; Thames & Mersey Marine Insurance Co Ltd v. Gunford Ship Co [1911] AC 529) unless they relate directly to the hazard. The master’s past criminal conduct may be material if it increases the risk of the vessel’s seizure (The Dora [1989] 1 Lloyd’s Rep 69).
   
4. There is authority for the proposition that the nationality of the shipowner or the vessel may be a material fact (Steel v. Lacy (1810) 3 Taunt 285; Campbell v. Innes (1821) 4 B & Ald 423; Associated Oil Carriers Ltd v. Union Insurance Society of Canton Ltd [1917] 2 KB 184; Demetriades & Co v. Northern Assurance Co, The Spathari (1926) 21 Ll LR 265). Quaere whether it is now permissible under the Race Relations Act 1976 for an underwriter to take the view that higher premiums are to be charged depending upon the assured’s nationality, at least unless the assured is an enemy alien.
   
5. The assured’s criminal convictions may be material if they are of dishonesty, or are recent and relate to the risk (Allden v. Raven, The Kylie [1983] 2 Lloyd’s

1. 
   
   
   
   1. Rep 444, although contrast Norwich Union Insurance Ltd v. Meisels [2007] Lloyd’s Rep IR 69) as are those of the master (The Dora [1989] 2 Lloyd’s Rep 69). Outstanding criminal charges, and civil proceedings in which dishonesty has been alleged, are material: Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669; North Star Shipping Ltd v. Sphere Drake Insurance plc [2005] 2 Lloyd’s Rep 76, affirmed on this point [2006] Lloyd’s Rep IR 519. It would also seem from The Dora that criminal conduct which has not been the subject of any charge is also a material fact. Criminal convictions are, however, to be disregarded if they are spent under the Rehabilitation of Offenders Act 1974.
      
   2. General dishonesty on the assured’s part is material, eg, where the assured has fraudulently prepared invoices intended to be used to defraud its bankers (Insurance Corporation of the Channel Islands v. Royal Hotel [1998] Lloyd’s Rep IR 151) or has defrauded customers or the tax authorities (James v. CGU Insurance plc [2002] Lloyd’s Rep IR 206). Specific allegations of dishonesty are also material: Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669; Brotherton v. Aseguradora Colseguros SA (No 2) [2003] 1 Lloyd’s Rep 746; North Star Shipping Ltd v. Sphere Drake Insurance plc [2006] Lloyd’s Rep IR 519.
   
   
2. Hard intelligence as to the existence of a material fact is of itself material, although mere loose or idle rumours are not material (Durrell v. Bederley (1816) Holt NP 283; Da Costa v. Scandret (1723) 2 P Wms 170; Seaman v. Fonnereau (1743) 2 Str 1183; Lynch v. Hamilton (1810) 3 Taunt 37; Lynch v. Dunsford (1811) 14 East 494; Durrell v. Bederley (1816) Holt NP 283; Morison v. Universal Marine Insurance Co (1873) LR 8 Ex 197; Decorum Investments Ltd v. Atkin, The Elena G [2002] Lloyd’s Rep IR 450; Brotherton v. Aseguradora Coseguros (No 2) [2003] Lloyd’s Rep IR 746; Brotherton v. Aseguradora Coseguros (No 3) [2003] Lloyd’s Rep IR 762; International Management Group (UK) Ltd v. Simmonds [2004] Lloyd’s Rep IR 247. Underwriters who have avoided the policy for non-disclosure of hard intelligence cannot be treated as having acted wrongfully in the event that the intelligence proves at some point after avoidance to have been inaccurate (Brotherton v. Aseguradora Coseguros (No 2) [2003] Lloyd’s Rep IR 746, overruling on this point Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669) although if the intelligence has been shown to be untrue before avoidance then the underwriters may be in breach of their own duty of utmost good faith in seeking to rely upon discredited information as justifying the making of a decision to avoid (Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669, Drake Insurance plc v. Provident Insurance plc [2004] Lloyd’s Rep IR 277, the latter decision disagreeing with the contrary view expressed on this point in Brotherton v. Aseguradora Coseguros (No 2) [2003] Lloyd’s Rep IR 746).
   
3. Matters held to be immaterial include the following.
   
   
   
   1. The assured under a marine policy does not have to disclose rejections of cover by other underwriters (Lebon & Co v. Straits Insurance Co (1894) 10 TLR 517; Glasgow Assurance Corporation Ltd v. William Symondson Co (1911) 16 Com Cas 109; North British Fishing Boat Insurance Co v. Starr (1922) 13 Ll LR 206) or the fact that he has previously been guilty of non-disclosure (Container Transport International v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1982] 2 Lloyd’s Rep 178, reversed on other grounds [1984] 1 Lloyd’s Rep 476), but previous claims against other underwriters are material.

1. Assuming that there are no facts affecting the moral hazard (as to which, see Intermunicipal Realty & Development Corporation v. Gore Mutual Insurance Company [1981] 1 FC 151), the identity of the assured is not a material fact, so that an agent can insure on behalf of the assured and the assured may take the benefit of the policy on the basis of the undisclosed principal doctrine (National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582; Siu v. Eastern Insurance Ltd [1994] 1 Lloyd’s Rep 616; O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174; Talbot Underwriting Ltd v. Nausch, Hogan & Murray Inc [2006] Lloyd’s Rep IR 531). See also Norwich Union Insurance Ltd v. Meisels [2007] Lloyd’s Rep IR 69, where the assured’s use of an alias was held not to be material.
   
2. The nature of the assured’s interest is not material (see the note to s 4 of the 1906 Act).
   
3. Fraud by the assured’s agent perpetrated on the assured himself is a material fact only if it relates directly to the risk: it cannot form part of the moral hazard if unconnected to the risk in question (Deutsche Ruckversicherung Akt v. Wal-book Insurance Co Ltd [1996] 1 Lloyd’s Rep 345).

Subs (2) by its terms treats a fact as material if it would influence the decision of a prudent underwriter in fixing the premium or accepting the risk. This wording on its face encompasses facts which may have nothing to do with the actual risk run by the underwriter but which may nevertheless influence the making of the contract. In North Star Shipping Ltd v. Sphere Drake Insurance plc [2006] Lloyd’s Rep IR 519 the Court of Appeal, reversing the decision of Colman J, [2005] Lloyd’s Rep IR 76, held that these words apply only to the risk and not to other matters such as the creditworthiness of the assured (cf. Jaggar v. Lyttelton Marina Holdings Ltd [2006] 2 NZLR 87). Thus the fact that an earlier policy has been cancelled for non-payment of premiums is not a material fact, an approach adopted in the earlier decision O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174, and see also Norwich Union Insurance Ltd v. Meisels [2007] Lloyd’s Rep IR 69. Micro Design Group Ltd v. Norwich Union Insurance Ltd [2006] Lloyd’s Rep IR 235, which turns on inducement rather than materiality, appears to proceed on the incorrect premise of materiality. It may be that the North Star ruling affects earlier authorities, namely: The Dora [1989] 1 Lloyd’s Rep 69 (the number of vessels to be declared to the underwriter is material, as this affects the premium charged for each vessel); and Sharp v. Sphere Drake Insurance Co Ltd, The Moonacre [1992] 2 Lloyd’s Rep 501 (the fact that the assured has not personally signed the proposal is material, as the proposal is a personal undertaking by the assured).

Subs (3) lists the situations in which material facts need not be disclosed. The four exceptions operate only ‘‘in the absence of inquiry’’ so that if the underwriters have sought to obtain the relevant information then the assured cannot rely upon any of the statutory defences: Brotherton v. Aseguradora Colseguros SA (No 3) [2003] Lloyd’s Rep IR 762.

Subs (3)(a) See: Inversiones Manria SA v. Sphere Drake Insurance Co plc, The Dora [1989] 1 Lloyd’s Rep 69 (vessel insured against marine risks not completed when risk attached); Decorum Investments Ltd v. Atkin, The Elena G [2002] Lloyd’s Rep IR 450 (yacht moored under conditions of security); Jaggar v. Lyttelton Marina Holdings Ltd [2006] 2 NZLR 87 (moving boats to safer place).

Subs (3)(b) The underwriters need not be told what they actually know. There is some authority for the proposition that each branch or department of an underwriter is a distinct entity for the purpose of ascertaining its knowledge—Stone v. Reliance Mutual Insurance Association [1972] 1 Lloyd’s Rep 469; Malhi v. Abbey Life Assurance Co Ltd [1996] LRLR 237; Gunns v. Par Insurance Brokers [1997] 1 Lloyd’s Rep 173—but these cases should be treated with some caution. Two forms of information are presumed to be known to the underwriters.

1. Matters of general knowledge (Planche v. Fletcher (1779) 1 Doug KB 251; Bates v. Hewitt (1867) LR 2 QB 595; Schloss Brothers v. Stevens [1906] 2 KB 665). The mere fact that information has been published in overseas media is not enough to give the underwriters actual knowledge of that information (Brotherton v. Aseguradora Colseguros SA (No 3) [2003] Lloyd’s Rep IR 763).
   
2. Matters relating specifically to the class of business insured under the policy and to the nature of the subject matter insured (Noble v. Kennaway (1780) 2 Doug 510; Moxon v. Atkins (1812) 3 Camp 200; Da Costa v. Edmonds (1815) 4 Camp 142; Stewart v. Bell (1821) 5 B & Ald 238; Gandy v. Adelaide Insurance Co (1871) LR 6 QB 746; The Bedouin [1894] P 1; Cantiere Meccanico Brindisino v. Janson [1912] 3 KB 452; British and Foreign Marine Insurance Co v. Gaunt [1921] 2 AC 41; North British Fishing Boat Insurance Co Ltd v. Starr (1922) 13 Ll LR 206; George Cohen, Sons & Co v. Standard Marine Insurance Co Ltd (1925) 21 Ll LR 30; Kingscroft v. Nissan Fire and Marine Insurance Co (No 2) [1999] Lloyd’s Rep IR 596; Glencore International AG v. Alpina Insurance Co Ltd [2004] 1 Lloyd’s Rep 111; Frans Maas (UK) Ltd v. Sun Alliance & London Insurance plc [2004] Lloyd’s Rep 649; MacDonald v. Liverpool & London & Globe Insurance Co Ltd (1978) 22 NBR (2d) 172). There is a conflict of authority on whether the fact that information appears in Lloyd’s lists containing shipping information dispenses with the duty of disclosure. This was held to be so in some cases (Friere v. Woodhouse (1817) Holt NP 572) but not in others (Elton v. Larkins (1832) 8 Bing 198; Universal Marine Insurance Co v. Morrison (1873) LR 8 Exch 197; London General Insurance Co v. General Marine Underwriters Association [1921] 1 KB 104). The true principle would appear to be that a misrepresentation is not overridden by the availability of the information from Lloyd’s (Mackintosh v. Marshall (1843) 11 M & W 116; Strive Shipping Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Grecia Express [2002] Lloyd’s Rep IR 669).

Falling within this heading are matters which are deemed to be known to the underwriters due to trade usage relating, eg, to route to be taken or method of loading cargo: a series of decisions has raised the question whether a practice was sufficiently widespread and notorious to amount to a usage (Salvador v. Hopkins (1765) 3 Burr 1707; Noble v. Kennaway (1780) 2 Doug KB 510; Vallance v. Dewar (1808) 1 Camp 503; Tennant v. Henderson (1813) 1 Dow 324; Da Costa v. Edmonds (1815) 4 Camp 142; Stewart v. Bell (1821) 5 B & Ald 238).

Subs (3)(c) In general, underwriters are entitled to rely upon the risk as presented to them at face value, and are not required to undertake their own investigations: WISE Underwriting Agency v. Grupo Nacional Provincial SA [2004] Lloyd’s Rep IR 962; Noblebright Ltd v. Sirius International Corporation [2007] Lloyd’s Rep IR 584. Accordingly, there can be waiver only where the underwriters have been presented with material which is capable of alerting them that there are additional material facts (New Hampshire Insurance Co v. Oil Refineries Ltd [2003] Lloyd’s Rep IR 386; Stowers v. G A Bonus plc [2003] Lloyd’s Rep IR 402). Waiver may nevertheless arise in the following ways:

1. blanket waiver of all disclosure on the part of the assured (HIH Casualty and General Insurance Co v. Chase Manhattan Bank [2003] Lloyd’s Rep IR 230);
   
2. disclaimer by the underwriters of the relevance of the facts at issue, particularly by policy terms (Cantiere Meccanico Brindisino v. Janson [1912] 3 KB 452; Kumar v. AGF Insurance Ltd [1999] Lloyd’s Rep IR 147; Rothschild v. Collyear [1999] Lloyd’s Rep IR 6) or by an authorised agent (Allden v. Raven, The Kylie [1983] 2 Lloyd’s Rep 444); limited requests by the underwriters for information which excludes facts otherwise material (Norwich Union Insurance Ltd v. Meisels [2007] Lloyd’s Rep IR 69), although not all limited express questions amount to waiver (Svenska Handelsbanken v. Sun Alliance & London Insurance plc [1996] 1 Lloyd’s Rep 519; Doheny v. New India Assurance Co Ltd [2005] Lloyd’s Rep IR 251; Noblebright Ltd v. Sirius International Corporation [2007] Lloyd’s Rep IR 584; United Oriental Assurance SDN BHD Kuantan v. WM Mazzarol, The Melanie [1984] 1 MLJ 260; Jaggar v. Lyttelton Marina Holdings Ltd [2006] 2 NZLR 87);
   
3. failure by the underwriters to seek further information when alerted by existing disclosures (Court v. Martineau (1782) 2 Doug KB 161; Freeland v. Glover (1806) 7 East 457; Weir v. Aberdeen (1819) 2 B & Ald 320; Inman SS Co v. Bischoff(1882) 7 App Cas 670; Asfar & Co v. Blundell [1896] 1 QB 123; Cantiere Meccanico Brindisino v. Janson [1912] 3 KB 452; Mann, MacNeal and Steeves Ltd v. General Marine Underwriters Ltd [1921] 2 KB 300; J Kirkaldy & Sons v. Walker [1999] Lloyd’s Rep IR 410; Rendall v. Combined Insurance Co of America [2006] Lloyd’s Rep IR 732). There is no waiver by failure to ask a material question (Marc Rich & Co AG v. Portman [1996] 1 Lloyd’s Rep 430; WISE Underwriting Agency v. Grupo Nacional Provincial SA [2004] Lloyd’s Rep IR 962; Scottish Coal Co Ltd v. Royal and Sun Alliance Plc [2008] Lloyd’s Rep IR 718. The contrary comments in GMA v. Unistorebrand [1995] LRLR 333 probably do not represent the law).

The assured bears the burden of proving waiver: Roberts v. Plaisted [1989] 2 Lloyd’s Rep 341; Noblebright Ltd v. Sirius International Corporation [2007] Lloyd’s Rep IR 584.

Subs (3)(d) If the matter is covered by a warranty, the underwriters are discharged from liability as from the date of the breach, and thus need not rely upon utmost good faith. The cases are largely concerned with the failure of the assured under a voyage policy to disclose the unseaworthiness of the vessel (Haywood v. Rodgers (1804) 4 East 590; Gandy v. Adelaide Insurance Co (1871) LR 6 QB 746; The Dora [1989] 1 Lloyd’s Rep 69; Cape plc v. Iron Trades Employers Insurance Association Ltd [2004] Lloyd’s Rep IR 75).

ALRC 91 has recommended that the duty of disclosure should be modified to match the provisions of the Insurance Contracts Act 1984 (Cth). That would mean: (a) the only duty of disclosure on the assured would be pre-contractual, although the insurers could impose post-contractual duties by express term (Recommendation 26); the assured would be under a duty to disclose circumstances that he knew, or that a reasonable person in his position would know, to be material (Recommendation 22); the automatic right to avoid would be lost other than in cases of fraud, and in other cases the insurers would have a remedy designed to put them in the position that they would have been in but for the non-disclosure (Recommendations 23 and 25).

Disclosure by agent effecting insurance

19. Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer—

1. Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and
   
2. Every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.

Notes

The broker is the agent of the assured for most purposes, so that information disclosed to the broker by the assured (Stowers v. G A Bonus plc [2003] Lloyd’s Rep IR 402; Hazel v. Whitlam [2005] Lloyd’s Rep IR 168), or notice of loss given to the broker by the assured (Friends Provident Life and Pensions Ltd v. Sirius International Insurance Corporation [2006] Lloyd’s Rep IR 45; Tioxide Europe Ltd v. CGU International plc [2006] Lloyd’s Rep IR 31), is not to be treated as having been received by the underwriters. In the same way, information held in the broker’s placing and claims file belongs to the assured and cannot be provided to the underwriters without the assured’s consent, although such consent is implied in the contract between the assured and the underwriters (Goshawk Dedicated Ltd v. Tyser [2007] Lloyd’s Rep IR 224). It is nevertheless the case that the broker owes an independent duty of utmost good faith to the underwriters, as set out in s 19. That duty is to disclose facts which the broker himself knows even though not known to the assured (see s 19(a)), and facts which the assured knows which have been or which could have been notified to the broker prior to placement (s 19(b)). Waiver by the underwriters of the assured’s duty of disclosure does not, therefore, operate to waive the broker’s duty of disclosure, at least if it is clear that the risk is to be presented by the broker and not by the assured (HIH Casualty and General Insurance Co v. Chase Manhattan Bank [2003] Lloyd’s Rep IR 230). If the broker breaks his own duty and fails to disclose material facts, the underwriters will have the right to avoid the policy and—in the case of misrepresentation—the underwriters may have an action for damages against the broker where the underwriters decide not to avoid the policy. For the broker’s independent duty, see HIH Casualty and General Insurance Co v. Chase Manhattan Bank [2003] Lloyd’s Rep IR 230.

Subs (a) An “agent to insure” is an agent authorised by the assured to obtain insurance, as opposed to a general agent of the assured: In PCW Syndicates v. PCW Insurers [1996] 1 Lloyd’s Rep 241 and Group Josi Re v. Walbrook Insurance [1996] 1 Lloyd’s Rep 345, Saville LJ held that an agent to insure is the placing broker, a principle applied in ERC Frankona Reinsurance v. American National Insurance Co [2006] Lloyd’s Rep IR 157 (but contrast Blackburn Low & Co v. Haslam (1888) 21 QBD 144 where an intermediate agent was held to be an agent of this type). A fact need be disclosed by an agent to insure only if he is in possession of it in his capacity as agent, and in particular if the agent has defrauded the assured, the agent’s knowledge of that fraud need not be disclosed to the underwriters for the policy to be valid: Re Hampshire Land [1896] 2 Ch 743; Simner v. New India Insurance [1995] LRLR 240; SAIL v. Farex Gie [1995] LRLR 116; PCW Syndicates v. PCW Insurers [1996] 1 Lloyd’s Rep 241; Group Josi Re v. Walbrook Insurance [1996] 1 Lloyd’s Rep 345; Arab Bank v. Zurich Insurance Co [1999] 1 Lloyd’s Rep 262; Moore Stephens v. Stone & Rolls Ltd [2009] UKHL 39 (which leaves open the question whether information fraudulently withheld by the placing broker is to be imputed the assured given that the assured is only a secondary victim of the fraud); although see Markel International Insurance Co Ltd v. La Republica Compania Argentine de Seguros [2005] Lloyd’s Rep IR 90, where it was held to be arguable that the earlier misconduct of the producing broker was a material fact to be disclosed by placing brokers. It was further held in Markel that “premium-skimming” by a broker in the form of taking commission not disclosed to underwriters could be a material fact, in that the assured was willing to pay a far higher premium for the risk than had been disclosed to the underwriters.

For an illustration of the situation in which information is in the possession of the agent but is not passed to the underwriters by the agent when placing the insurance, see Russell v. Thornton (1860) 6 H & N 140.

ALRC 91, Recommendation 24, has recommended that s 25(a) be amended to provide that an agent must disclose all circumstances that it knows, or a reasonable person in its position would know, to be material, and to remove from the agent the obligation to disclose what ought to have been communicated by the assured.

Subs (b) For an illustration of the situation in which information known to the assured is not passed on to the broker, see Republic of Bolivia v. Indemnity Mutual Assurance Co [1909] 1 KB 785.

Representations pending negotiation of contract

20.—(1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.

(2) A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

(3) A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief.

(4) A representation as to matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.

(5) A representation as to a matter of expectation or belief is true if it be made in good faith.

(6) A representation may be withdrawn or corrected before the contract is concluded.

(7) Whether a particular representation be material or not is, in each case, a question of fact.

Notes

This section reflects ordinary principles of misrepresentation, a position confirmed by Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 3 All ER 581, in which it was held—overruling earlier authority—that the underwriter himself must have been influenced by the misrepresentation. Any statement by the assured has to be construed reasonably. Thus, if the assured insures a vessel with an English name, he is not taken to be representing that it is an English vessel (Clapham v. Cologan (1813) 3 Camp 382). The general principle here is that express statements made by the assured are not to be construed as implying other statements: the courts have rejected the concept of implied misrepresentation (Feasey v. Sun Life Assurance Corporation of Canada [2002] Lloyd’s Rep IR 835, affirmed on other grounds [2003] Lloyd’s Rep IR 640; ERC Frankona Reinsurance v. American National Insurance Co [2006] Lloyd’s Rep IR 157; Crane v. Hannover Ruckversicherungs-Aktiengesellschaft [2008] EWHC 3165 (Comm)). The statement must also be one which is intended to be relied upon, as opposed to a mere “puff” (Limit No 2 Ltd v. Axa Versicherung AG [2008] Lloyd’s Rep IR 330). As is the case with the general law, a misstatement may be material irrespective of the representor’s state of mind (Dennistoun v. Lillie (1821) 3 Bli 202; Hamilton & Co v. Eagle Star and British Dominions Insurance Co Ltd (1924) 19 Ll LR 242). Equally, express questions asked by underwriters are to be construed reasonably, so that an answer given by the assured following genuine misapprehension by the assured as to the information being sought from him is not to be treated as a false statement (cf. Doheny v. New India Assurance Co Ltd [2005] Lloyd’s Rep IR 251; United Oriental Assurance SDN BHD Kuantan v. WM Mazzarol, The Melanie [1984] 1 MLJ 260).

Statements made by a broker are to be regarded as having been made by the assured himself (see, eg: Arbory Group Ltd v. West Craven Insurance Services [2007] Lloyd’s Rep IR 491; Limit No 2 Ltd v. Axa Versicherung AG [2009] Lloyd’s Rep IR 396).

Subs (1) See also the note to s 18. If there is a misrepresentation, the underwriters’ right to avoid is not removed by the fact that the truth of the matter could have been discovered by the underwriters by consulting Lloyd’s lists (Mackintosh v. Marshall (1843) 11 M & W 116). Not every pre-contractual statement is a representation: Kingscroft v. Nissan Fire and Marine Insurance Co Ltd (No 2) [1999] Lloyd’s Rep IR 596.

The misrepresentation must be by the assured or his agent, and not by an independent expert appointed by the underwriters to give advice on the risk: International Lottery Management v. Dumas [2002] Lloyd’s Rep IR 237.

The underwriters’ right to avoid is tempered by s 2(2) of the Misrepresentation Act 1967, which authorises the court to refuse to avoid the contract and instead to award damages to the innocent party. The section is for the benefit of the misrepresentor, and is intended to mitigate the hardships of avoidance. It has been held that s 2(2) of the 1967 Act ought not in principle to be used in reinsurance cases (Highlands Insurance Co v. Continental Insurance Co [1987] 1 Lloyd’s Rep 109n), although its use in marine insurance remains possible.

There is some difficulty in applying this provision to insurances formed at Lloyd’s, as the slip presented to successive underwriters gives rise to a fresh contract on each occasion on which an underwriter subscribes to it. The practice at Lloyd’s is that any exchange of information takes place primarily between the leading underwriter and the broker and that subsequent underwriters do not ask questions in the same amount of detail. Consequently, it is likely that any false statements will be made to the leading underwriter only. In such a case, the leading underwriter can clearly avoid liability, but it is unclear whether the subsequent underwriters are the deemed recipients of false information or whether they remain bound by the contract. The authorities were discussed in the note to s 17.

Subs (2) For the general meaning of materiality, see s 18(2). A post-contractual misrepresentation is immaterial (Ionides v. Pacific Insurance Co (1871) LR 6 QB 674). There is authority for the proposition that a fraudulent misrepresentation always gives the underwriters the right to avoid, whether or not it is material (Sibbald v. Hill (1814) 2 Dow 263; The Bedouin [1894] P 1), but this principle has not been incorporated into the statute and did not form part of the actual decisions.

Subs (3) The distinction between a representation of fact and one of expectation is hard to draw, but in general, an unequivocal statement is likely to be construed as one of fact (Dennistoun v. Lillie (1821) 3 Bli 202; Highlands Insurance v. Continental Insurance [1987] 1 Lloyd’s Rep 109n; Sirius International Insurance Corporation v. Oriental Assurance Corporation [1999] Lloyd’s Rep IR 343) whereas a statement as to a matter over which the assured has no control is more likely to be construed as a matter of expectation (Bowden v. Vaughan (1809) 10 East 415; Hubbard v. Glover (1812) 3 Camp 313). As far as opinions are concerned, see: Brine v. Featherstone (1813) 4 Taunt 869.

Subs (4) This is based on, eg, Pawson v. Watson (1778) 2 Cowp 785 and Nonnen v. Kettlewell (1812) 16 East 176. The meaning of the assured’s statement must be judged in accordance with the custom and practice of the trade in question (Chaurand v. Angerstein (1791) Peake 43). See, for a recent illustration, Crane v. Hannover Ruckversicherungs-Aktiengesellschaft [2008] EWHC 3165 (Comm).

Subs (5) There is no objective element in the application of this subsection, and the question is purely whether the assured believed what he said, so that an objective mistake cannot be relied upon by the underwriters: Economides v. Commercial Union [1998] QB 587; Eagle Star Insurance Co Ltd v. Games Video Co, The Game Boy [2004] Lloyd’s Rep IR 867; Rendall v. Combined Insurance Co of America [2006] Lloyd’s Rep IR 732; Zeller v. British Caymanian Insurance Co Ltd [2008] UKPC 4. For illustrations of this provision, see: Brine v. Featherstone (1813) 4 Taunt 869; Grant v. Aetna Insurance Co (1862) 15 Moo PC 516; Anderson v. Pacific Fire and Marine Insurance Co (1872) LR 7 CP 65; Cleveland v. Sunderland Mutual Marine Insurance Co Ltd (1987) 81 NSR (2d) 1. An assured who has not addressed his mind to the correctness or otherwise of his statement cannot be said to have acted in good faith: International Lottery Management v. Dumas [2002] Lloyd’s Rep IR 237, and cf. M’Phee v. Royal Insurance Co Ltd 1979 SC 304, where the assured misstated the dimensions of his vessel without checking them.

Subs (6) See, eg, Edwards v. Footner (1808) 1 Camp 530.

ALRC 91 has recommended that the rules relating to misrepresentation should be modified to match the provisions of the Insurance Contracts Act 1984 (Cth). That would mean: (a) the only duty on the assured would be pre-contractual, although the insurers could impose post-contractual duties by express term (Recommendation 26); the assured would be under a duty not to misstate circumstances that he knew, or that a reasonable person in his position would know, to be material (Recommendation 22); the automatic right to avoid would be lost other than in cases of fraud, and in other cases the insurers would have a remedy designed to put them in the position that they would have been in but for misrepresentation (Recommendations 23 and 25).

When contract is deemed to be concluded

21. A contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not; and, for the purpose of showing when the proposal was accepted, reference may be made to the slip or covering note or other customary memorandum of the contract,…

Notes

Section 21 was amended by the Finance Act 1959, Sched 8.

A marine policy placed in the London market will typically be preceded by the presentation of a slip by the broker to the potential subscribing underwriters. An underwriter who wishes to subscribe “scratches” the slip by appending his signature to it and adding the stamp of the Lloyd’s syndicate or company which he represents. An underwriter who merely wishes to give a quotation, or who otherwise seeks to impose conditions before the contract is concluded, may qualify his scratch in some way, although this must be done in a manner recognised by the market: the addition of the letters “TBE” (“to be entered”) taken alone merely signifies that the underwriter did not have his records available to mark up his entry, and not that the scratching is conditional: ERC Frankona Reinsurance v. American National Insurance Co [2006] Lloyd’s Rep IR 157. A slip can be validly scratched in pencil (Bonner v. Cox Dedicated Corporate Member [2006] Lloyd’s Rep IR 385). For the contractual effect of a slip, see the note to section 89.

Although a slip is the usual method for placing marine risks in the London market, a slip is not essential providing that the parties can be shown to have reached agreement on all material terms. The presumption, however, is that the parties do not intend to be bound until a slip has been scratched: New England Reinsurance Corporation v. Messoghios Insurance Co [1992] 2 Lloyd’s Rep 251; Assicurazioni Generali SpA v. Arab Insurance Group [2003] Lloyd’s Rep IR 131; Sun Life Assurance Co v. CX Reinsurance Co Ltd [2004] Lloyd’s Rep IR 58.

The Policy

Contract must be embodied in policy

22. Subject to the provisions of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodied in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract is concluded, or afterwards.

Notes

Although a contract of insurance may exist independently of a policy, eg, where a slip has been scratched, the contract is unenforceable until a policy has been issued, as only the policy itself may be sued upon in the court (Fisher v. Liverpool Marine Insurance Co (1874) LR 9 QB 418; Genforsikrings & Co v. Da Costa [1911] 1 KB 137; Re National Benefit Assurance Co Ltd [1931] 1 Ch 46). However, there are cases in which an action has been heard at the instance of an assured not in possession of the policy (Swan v. Maritime Insurance Co [1907] 1 KB 116) and in Eide UK Ltd v. Lowndes Lambert Group Ltd, The Sun Tender [1998] 1 Lloyd’s Rep 389 the Court of Appeal left open the question whether s 22 has the effect of rendering a marine contract unenforceable if the assured cannot produce the policy unless the policy itself so provided. The point is of the greatest significance where the broker has retained possession of the policy as security for premiums advanced by him on the assured’s behalf in accordance with s 53 of the 1906 Act). It is the practice of an underwriter who has not issued a policy at the date of the loss not to plead s 22 as a defence but to issue a policy in order to allow the assured the right to commence proceedings (Mead v. Davison (1835) 3 Ad & El 303). Documents may be joined to satisfy the statuory requirements: Theaker v. Sun Hung Kai Insurance Co Ltd, 1984, unreported, HKDC.

Section 22 does not apply to contracts of reinsurance or insurance falling within ss 1 and 2 of the Marine and Aviation (War Risks) Insurance Act 1952: see s 7 of the 1952 Act.

In Australia, the equivalent section (s 28) expressly provides that the assured must have a policy “in an action for the recovery of a loss under the contract”, a substantive difference between English and Australian law. ALRC 91, Recommendation 37, in effect proposes the repeal of the entire section.

What policy must specify

23. A marine policy must specify—

(1) The name of the assured, or of some person who effects the insurance on his behalf:

(2)–(5)…

Notes

Section 23 was amended by the Finance Act 1959, Sched 8. A policy which does not comply with these requirements is invalid: Green Forest Lumber Ltd v. General Security Insurance Co of Canada [1978] 2 FC 773. The section recognises the practice of a broker insuring in his own name on behalf of various persons interested in the policy (Bell v. Gibson (1798) 1 Bos & P 345). Where a policy is procured by an agent, the mere fact that a person is named in the policy as an assured is not sufficient to make him such: a person in this position may claim the benefit of the insurance only by demonstrating that the agent was authorised to insure on his behalf and intended to do so (Sutherland v. Pratt (1843) 12 M & W 16; Boston Fruit Co v. British and Foreign Marine Insurance Co [1905] 1 KB 637; National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582; O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174). Conversely, where the agent is authorised to act on the assured’s behalf, the assured’s name need not appear in the policy and the assured is entitled to the benefit of the policy on the basis of the undisclosed principal doctrine provided that the agent intended to effect the policy on the assured’s behalf (Yangtse Insurance Association v. Lukmanjee [1918] AC 585; National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582) but not if the policy, by specifically limiting the classes of persons who may become assureds, excludes the possibility of the agent becoming a party (Talbot Underwriting Ltd v. Nausch, Hogan & Murray Inc [2006] Lloyd’s Rep IR 531.

For the form of policies now issued in the London Market, see the Market Reform Contract and the Contract Certainty Code of Practice, both issued in 2007. The documents are online at http://www.lmalloyds.com/AM/Template.cfm?Section=Underwriting_General&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=8061

ALRC 91, Recommendation 39, has recommended that it should be made clear that a marine policy is not invalid by reason only that it does not comply with the existing formal requirements.

Signature of insurer

24.—(1) A marine policy must be signed by or on behalf of the insurer, provided that in the case of a corporation the corporate seal may be sufficient, but nothing in this section shall be construed as requiring the subscription of a corporation to be under seal.

(2) Where a policy is subscribed by or on behalf or two or more insurers, each subscription, unless the contrary be expressed, constitutes a distinct contract with the assured.

Notes

Subs (2) The notion that a policy constitutes a bundle of individual contracts was confirmed by the House of Lords in Touche Ross v. Baker [1992] 2 Lloyd’s Rep 207, where it was held that each subscribing underwriter was separately bound by the obligations in the policy. The point is further illustrated by the Lloyd’s rule that each separate “scratching” of the slip constitutes a separate contract, made when the slip is scratched: this is now expressly stated in the International Hull Clauses, cl 27 (see generally the note to s 21).

Voyage and time policies

25.—(1) Where the contract is to insure the subject-matter “at and from”, or from one place to another or others, the policy is called a “voyage policy”, and where the contract is to insure the subject-matter for a definite period of time the policy is called a “time policy”. A contract for both voyage and time may be included in the same policy.

(2)…

Notes

Section 25 was amended by the Finance Act 1959, Sched 8.

The distinction between voyage and time policies is important for the following reasons:

1. a voyage policy is subject to the warranty of seaworthiness in s 39(1), whereas a time policy is subject to the rather lesser seaworthiness constraints of s 39(5);
   
2. different rules apply to the commencement and termination of the risk under the two types of policy (see s 42 of the Marine Insurance Act 1906);
   
3. voyage policies are avoided where the assured deviates, delays or changes the voyage (Marine Insurance Act 1906, ss 44–49, whereas no such limits are placed upon time policies).

A policy may contain both time and voyage elements (Way v. Modigliani (1787) 2 TR 30), eg, where a policy is for a fixed time but the assured is held covered if the voyage has not been completed by the expiry of the policy and the vessel is in distress or missing (Institute Time Clauses Hulls, cl 2; International Hull Clauses, cl 12): such a policy is to be treated as “mixed” and takes effect as a time policy followed by a voyage policy, so that, for example, rules as to deviation do not apply once the policy has been converted from voyage to time (Gambles v. Ocean Insurance Co (1876) 1 Ex D 141; Maritime Insurance Co v. Alianza Insurance Co of Santander (1907) 13 Com Cas 46; Royal Exchange Assurance Corporation v. Sjoforsakrings Aktibolaget Vega [1902] 2 KB 384; Malayan Motor & General Underwriter (Pte) Ltd v. MH Almojil [1982–1983] 1 SLR 52). In Marina Offshore Pte Ltd v. China Insurance Co (Singapore) Pte Ltd [2007] 1 Lloyd’s Rep 66 it was held that a policy written for a year, with the intention of covering a voyage from Kobe to Singapore and subsequent trading by the vessel, was a time policy only.

A policy remains a time policy despite the fact that it is renewable and that it may be determined by notice prior to the stated date of termination (Compania Maritima San Basilio SA v. Oceanus Mutual Underwriting Association (Bermuda) Ltd, The Eurysthenes [1976] 2 Lloyd’s Rep 171). Equally, it is perfectly consistent for a time policy to contain geographical specifications or restrictions on the area of trading (Wilson v. Boag [1957] SR (NSW) 384; Hutton v. Royal Exchange Assurance Corporation [1971] NZLR 1045; Kin Yuen Co Pte Ltd v. Lombard Insurance Co Ltd (1995) Lloyd’s List, 26 April).

In Australia the equivalent provision (s 31) defines a time policy as one of 12 months’ duration. ALRC 91, Recommendation 38, has recommended the repeal of that time limit on the basis that it is unduly restrictive.

Designation of subject-matter

26.—(1) The subject-matter insured must be designated in a marine policy with reasonable certainty.

(2) The nature and extent of the interest of the assured in the subject-matter insured need not be specified in the policy.

(3) Where the policy designates the subject-matter insured in general terms, it shall be construed to apply to the interest intended by the assured to be covered.

(4) In the application of this section regard shall be had to any usage regulating the designation of the subject-matter insured.

Notes

Subs (1) For illustrations, see: Le Mesurier v. Vaughan (1805) 6 East 382; Ionides v. Pacific Insurance Co (1871) LR 6 QB 674; Denoon v. Home and Colonial Assurance Co (1872) LR 7 CP 341; Mackenzie v. Whitworth (1875) 1 Ex D 36; Overseas Commodities Ltd v. Style [1958] 1 Lloyd’s Rep 546 (cover applying only to subject matter complying with policy description).

Subs (2) Neither is such interest a material fact: see the note to s 4 of the 1906 Act.

Subs (3) The effect of this subsection is unclear, as in some cases the intention of the assured has overriden policy wording (Janson v. Poole (1915) 20 Com Cas 232) whereas in others the assured has been allowed the benefit of the wording despite want of intention to insure that widely (Reliance Marine Insurance Co v. Duder [1913] 1 KB 265). In the case of a floating policy which designates the subject matter in general terms, subs (3) confines the assured’s recovery to his own interest (Stephens v. Australasian Insurance Co (1872) LR 8 CP 18; Scott v. Globe Marine Insurance Co (1896) 1 Com Cas 370; Dunlop Brothers v. Townend [1919] 2 KB 127). The subsection does not have the effect of making a named person a party to the policy, in the absence of the necessary agency relationship between the agent taking out the policy and that person (National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582; O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174).

Valued policy

27.—(1) A policy may be either valued or unvalued.

(2) A valued policy is a policy which specifies the agreed value of the subjectmatter insured.

(3) Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.

(4) Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss.

Notes

Subs (1) The validity of valued policies was confirmed by Lewis v. Rucker (1761) 2 Burr 1167, where it was held that an agreement by the parties as to the basis of indemnity did not render the contract void as a wager. In practice most marine policies are valued. It is now clear that a valued policy is perfectly valid even though the indemnity given to the assured is far from perfect (Irving v. Manning (1847) 1 HL Cas 287).

Subs (2) Under a valued policy the value of the subject matter is agreed and the premium is calculated on that value (Bousfield v. Barnes (1815) 4 Camp 228). A policy is not valued merely because the assured is required to state the value of the insured subject matter (Wilson v. Nelson (1864) 33 LJQB 220; Randell v. Atlantica Insurance Co 1985, unreported, NSWSC). No precise form of words is required to create a valued policy, although there is a consistent line of authority for the proposition that the phrase “sum insured” does not operate as a valued policy but rather merely designates the maximum amount recoverable by the assured on proof of loss: Kyzuna Investments Ltd v. Ocean Marine Mutual Insurance Assoc (Europe) [2000] 1 Lloyd’s Rep 505, Quorum AS v. Schramm (No 1) [2002] Lloyd’s Rep IR 293; Thor Navigation Inc v. Ingosstrakh Insurance [2005] Lloyd’s Rep IR 490 Vero Insurance NZ Ltd v. Posa [2008] 3 NZLR 701. A policy which is stated to have financial limits on the amount recoverable is not a valued policy for the purposes of this section (Continental Illinois National Bank and Trust Co of Chicago v. Bathurst [1985] 1 Lloyd’s Rep 625).

Subs (3) Once the underwriters have accepted the premium based on the agreed value, it is not open to the underwriters to contest the valuation for any reason (Barker v. Janson (1868) LR 3 CP 303; Herring v. Janson (1895) 1 Com Cas 177; Muirhead v. Forth & North Sea Steamboat Mutual Insurance Association [1894] 2 AC 72; The Main [1894] P 320) unless:

1. the assured has been guilty of fraud in presenting the valuation (Lewis v. Rucker (1761) 2 Burr 1167, Haigh v. De La Cour (1812) 3 Camp 319—overvaluation is not enough, as is demonstrated by General Shipping and Forwarding Co v. British General Insurance Co Ltd (1923) 15 Ll LR 175 and Papademetriou v. Henderson (1939) 64 Ll LR 345); or
   
2. the assured has overvalued the subject matter in a material fashion and has failed to disclose, or has misrepresented, the valuation (see the note to s 18(2) of the Marine Insurance Act 1906); or
   
3. in the case of a floating policy, the value of each declaration has not been honestly stated (Marine Insurance Act 1906, s 29(3), below).

In the event of a total loss, the assured recovers the full value of the subject matter, subject to policy limits (Steamship Balmoral Co v. Marten [1902] AC 511). If the assured is overinsured by double insurance, he recovers only a sum representing the agreed value (Marine Insurance Act 1906, s 32(2)(a)). In the event of a partial loss, the assured recovers the proportion of the agreed value representing the degree of loss. Thus, if subject matter valued at £100,000 suffers a 50% loss, the assured recovers £50,000, irrespective of the actual market value of the subject matter (Thompson v. Reynolds (1857) 26 LJQB 93; The Main [1894] P 320). This measure is, however, subject to the other provisions of the 1906 Act: see in particular s 69 of the Act, which lays down market value rules for calculating indemnity for a damaged vessel. The agreed value is also disregarded in determining the underwriters’ subrogation rights: see the note to s 79.

Subs (4) The definition of constructive total loss in s 60 of the 1906 Act, refers to repaired and unrepaired values. The effect of subs (4) is to require market values rather than the agreed value to be used as the basis of calculation. See: Irving v. Manning (1847) 1 HL Cas 287; Woodside v. Globe Marine Insurance Co Ltd [1896] 1 QB 105; Helmville Ltd v. Yorkshire Insurance Co Ltd, The Medina Princess [1965] 1 Lloyd’s Rep 361, and Marine Insurance Act 1906, s 60(2)(ii).

Unvalued policy

28. An unvalued policy is a policy which does not specify the value of the subjectmatter insured, but, subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained, in the manner herein-before specified.

Notes

For the meaning of this term, see the note to s 27. The amount recoverable in the absence of a valuation for indemnity purposes is based on the insurable value, as set out in s 16 of the Marine Insurance Act 1906.

Floating policy by ship or ships

29.—(1) A floating policy is a policy which describes the insurance in general terms, and leaves the name of the ship or ships and other particulars to be defined by subsequent declaration.

(2) The subsequent declaration or declarations may be made by indorsement on the policy, or in other customary manner.

(3) Unless the policy otherwise provides, the declarations must be made in the order of dispatch or shipment. They must, in the case of goods, comprise all consignments within the terms of the policy, and the value of the goods or other property must be honestly stated, but an omission or erroneous declaration may be rectified even after loss or arrival, provided the omission or declaration was made in good faith.

(4) Unless the policy otherwise provides, where a declaration of value is not made until after notice of loss or arrival, the policy must be treated as an unvalued policy as regards the subject-matter of that declaration.

Notes

Subs (1) A floating policy is a framework agreement under which the underwriters agree to insure subject matter of a given description which is subsequently at the assured’s risk. A floating cover will become exhausted when the financial limits are reached, and it is common for the assured to arrange a further policy covering excess risks. The assured merely has to declare each risk as and when it incepts, and the underwriters are liable for any loss following declaration. In the absence of any declaration, the underwriters are not on risk in respect of that particular subject matter (Union Insurance Society of Canton Ltd v. Wills & Co [1916] 1 AC 281). Floating policies are used primarily for cargo insurance, and may be procured by warehousemen and carriers.

The application of the doctrine of utmost good faith depends upon the nature of the policy. If the underwriters are obliged to cover any risk declared by the assured, the assured’s duty of utmost good faith attaches to the open cover itself but not to subsequent declarations (Glasgow Assurance Corporation Ltd v. William Symondson & Co (1911) 16 Com Cas 109), but if the floating policy gives the underwriters the right to reject individual declarations the duty of utmost good faith is relevant only at declaration stage (SAIL v. Farex Gie [1995] LRLR 116). Cf. the note to s 17 of the 1906 Act. In the same way, if the grant of cover for any risks accepted by the assured is obligatory from the point of view of the underwriters, then unless there is a notification clause expressed as a condition precedent they cannot rely upon any failure by the assured to notify them of the attachment of any risk and must pay even though notification is not made until after the loss has occurred (Glencore International AG v. Ryan, The Beursgracht [2002] Lloyd’s Rep IR 335; Limit No 2 Ltd v. Axa Versicherung AG [2008] Lloyd’s Rep IR 330; BC Enterprise SDN BHD v. Bank of China Group Insurance Co Ltd [2003] HKEC 712). Contrast the position where the underwriters are not obliged to accept a risk, as in such a case failure by the assured to make a declaration means that they have not been given the opportunity to decide whether or not to accept the risk (Glencore International AG v. Alpina Insurance Co Ltd [2004] 1 Lloyd’s Rep 111).

ALRC 91, Recommendation 40, has proposed that the section should be amended to include open covers (which, unlike floating covers, are not exhausted when financial limits are reached) and annual policies.

Subs (3) As to the common law basis for the rule as to the order of declaration, see: Henchman v. Offley (1782) 3 Doug KB 135; Kewley v. Ryan (1794) 2 Hy Bl 343; Gledstanes v. Royal Exchange Assurance Co (1864) 5 B & S 797; Ionides v. Pacific Fire and Marine Insurance Co Ltd (1871) LR 6 QB 674; Dunlop Bros & Co v. Townend [1919] 2 KB 127. The right to rectify a declaration, even after a loss, is based upon: Robinson v. Touray (1811) 3 Camp 158; Stephens v. Australasian Insurance Co (1872) LR 8 CP 18; Imperial Marine Insurance Co v. Fire Insurance Corporation (1879) 4 CPD 166.

ALRC 91, Recommendation 41, has proposed that the section should be amended to make it clear that the words “Unless the policy otherwise provides” extend to the opening clause of the second sentence so that they apply to the requirement that all declarations under floating, open or annual policies must comprise all consignments within the terms of the policy.

Subs (4) See: Harman v. Kingston (1811) 3 Camp 150; Gledstanes v. Royal Exchange Assurance Corporation (1864) 34 LJQB 30; Union Insurance Society of Canton Ltd v. George Wills & Co [1916] 1 AC 281.

Construction of terms in policy

30.—(1) A policy may be in the form in the First Schedule to this Act.

(2) Subject to the provisions of this Act, and unless the context of the policy otherwise requires, the terms and expressions mentioned in the First Schedule to this Act shall be construed as having the scope and meaning in that schedule assigned to them.

Notes

The form of policy set out in the First Schedule was abandoned in the UK in 1983, after usage of some 200 years. The modern practice is to attach to a simple front-sheet a set of standard terms published by the Institute of London Underwriters (modified where appropriate).

The construction of a marine policy is governed by a series of well developed rules, which indicate that the starting point is that the intentions of the parties must prevail. The meaning of individual words or phrases may depend upon context, the ejusdem generis rule and the principle that legal terms of art are afforded their technical meaning by way of exception to the general rule that the ordinary and natural meaning of words should prevail. Further, where a term has acquired a recognised meaning in the courts, the doctrine of precedent will apply in order to ensure consistency, and it will be permissible to introduce evidence of custom and usage for the construction of particular terminology provided it can be shown that both parties were aware of the custom or usage of the market, that the parties have not expressly agreed to the contrary and that the custom is reasonable (Brough v. Whitmore (1791) 4 TR 206; Blackett v. Royal Exchange Assurance Co (1832) 2 Cr & J 244; Gabay v. Lloyd (1825) 3 B & C 793, Carvill American Inc v. Camperdown UK Ltd [2006] Lloyd’s Rep IR 1 and Goshawk Dedicated Ltd v. Tyser Co Ltd [2005] Lloyd’s Rep IR 379, and cf. s 87 of the Marine Insurance Act 1906. Contrast Durham v. BAI (Run Off) Ltd [2009] Lloyd’s Rep IR 295, where no custom was shown). Within an individual policy, the courts will give priority to added words as opposed to printed words (Robertson v. French (1803) 4 East 130; Dudgeon v. Pembroke (1877) 2 App Cas 284). In the event of a genuine ambiguity the doctrine of contra proferentem will be applied (as in Lawrence v. Aberdein (1821) 5 B & Ald 107, Durham v. BAI (Run Off) Ltd [2009] Lloyd’s Rep IR 295 and Pratt v. Aigaion Insurance Co SA [2009] Lloyd’s Rep IR 149), although this is likely to be of limited import in commercial cases (cf. Youell v. Bland Welch (No 1) [1990] 2 Lloyd’s Rep 423), and it should also be remembered that if the ambiguity arises in wording proposed by the assured or his broker the ambiguity is to be construed in favour of the underwriters (A/S Ocean v. Black Sea & Baltic General Insurance Co Ltd (1935) 51 Ll LR 305; Abrahams v. Mediterranean Insurance and Reinsurance Co Ltd [1991] 1 Lloyd’s Rep 216).

For the significance of the “factual matrix” as an aid to construction, see Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896. Note also Sirius International Insurance Co (Publ) v. FAI General Insurance Ltd [2005] Lloyd’s Rep IR 294, in which Lord Steyn, perhaps prematurely, announced the death of literalism. Construction is an objective process, based on the factual matrix of the market, so that expert market evidence is admissible (Zeus Tradition Marine Ltd v. Bell [1999] 1 Lloyd’s Rep 703, reversed on other grounds [2000] 2 Lloyd’s Rep 587; Outokumpu Stainless Ltd v. Axa Global Risks (UK) Ltd [2008] Lloyd’s Rep IR 147). The courts will not admit evidence of the parties’ earlier negotiations, particularly deletions (Mopani Copper Mines Plc v. Millennium Underwriting Ltd [2009] Lloyd’s Rep IR 158), and subjective intention is also not relevant. However, by way of limited exception, if the parties have agreed in the course of their negotiations that a particular word or phrase is to have a specific meaning, their ‘‘private dictionary’’ definition may be admissible if it does not contradict the clear wording of the policy itself: Chartbrook Ltd v. Persimmon Homes Ltd [2009] UKHL 38; Excelsior Group Productions Ltd v. Yorkshire Television Ltd [2009] EWHC 1751 (Comm).

Premium to be arranged

31.—(1) Where an insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable premium is payable.

(2) Where an insurance is effected on the terms that an additional premium is to be arranged in a given event, and that event happens but no arrangement is made, then a reasonable additional premium is payable.

Notes

The principle of s 31, that in the absence of agreement a reasonable premium is payable, is one familiar in the English law of sale of goods (Sale of Goods Act 1979, s 8) and the supply of services (Supply of Goods and Services Act 1982, s 15). Despite the wording of s 31, it remains open to the courts to find that the absence of any agreement on the premium renders the entire arrangement between the parties void for uncertainty, although s 31 indicates that that conclusion is likely to be exceptional. In any event, failure by the parties to agree a premium will not render a policy void for uncertainty if there is an agreed mechanism whereby the premium can be determined (RSA Pursuit Test Cases, 27 May 2005, unreported; Allianz Insurance Co Egypt v. Agaion Insurance Co SA [2008] EWHC 1127 (Comm)). What is reasonable is a question of fact (Marine Insurance Act 1906, s 88). If the premium due is not paid, the underwriters are not obliged to issue the policy (Marine Insurance Act 1906, s 52).

Subs (1) This deals with the case in which the premium is not agreed at the outset.

Subs (2) This deals with the case in which the underwriters agree, under a “held covered” clause, to accept an additional risk during the currency of the policy, eg, where the policy has expired before the voyage has been completed (Institute Cargo Clauses, cl 9, Institute Time Clauses Hulls, cl 2, International Hulls Clause, cl 12), or where the assured has broken a warranty (Institute Time Clauses Hulls, cl 3) or has deviated or changed voyage (Institute Cargo Clauses, cl 10—extended to sailing for the wrong destination in 2009; Institute Voyage Clauses Hulls, cl 2). In the case of extension of cover, it is usual for the underwriters to agree to be held covered on payment of a pro rata premium, but in other cases the held covered clause requires the assured to meet two conditions.

1. To give prompt notice of the event bringing the clause into operation (the old contractual requirement to give notice within a reasonable time having been discontinued in 1983 in the light of decisions to the effect that notice could be given after loss: Mentz, Decker & Co v. Maritime Insurance Co (1909) 15 Com Cas 17; Hewitt v. London General Insurance Co (1925) 23 Ll LR 243, and cf. Australia and New Zealand Banking Group v. Compagnie d’Assurances Maritimes Aeriennes et Terrestres [1996] 1 VR 561 where an absence of notice was held not to affect the operation of the clause)—for a discussion of the meaning of “prompt”, see Liberian Insurance Agency v. Mosse [1977] 2 Lloyd’s Rep 560.
   
2. To agree on an additional premium or, in the case of the continuation of an existing policy for an additional period, a pro rata premium. If additional premium has to be agreed upon, and no agreement is reached, the court will look to the market rate for the risk as affected by the variation (Greenock SS Co v. Maritime Insurance Co Ltd [1903] 1 KB 367; Australia and New Zealand Banking Group v. Compagnie d’Assurances ances Maritimes Aeriennes et Terrestres [1996] 1 VR 561). If there is no market rate for the risk, the held covered clause cannot operate (Liberian Insurance Agency v. Mosse [1977] 2 Lloyd’s Rep 560; Everbright Commercial Enterprises Pte Ltd v. Axa Insurance Singapore Pte Ltd [2001] 2 SLR 316).

Double Insurance

Double insurance

32.—(1) Where 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 this Act, the assured is said to be over-insured by double insurance.

• 2. Where the assured is over-insured by double insurance—
  
  
  
  1. The assured, unless the policy otherwise provides, may 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 this Act;
     
  2. Where the policy under which the assured claims is a valued policy, the assured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subjectmatter insured;
     
  3. Where the policy under which the assured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any other policy;
     
  4. Where the assured receives any sum in excess of the indemnity allowed by this Act, he is deemed to hold such sum in trust for the insurers, according to their right of contribution among themselves.

Notes

Subs (1) The definition of double insurance requires the same interest and the same assured, so that if persons with different interests (eg, a shipowner and the ship’s managers) there is no double insurance: O’Kane v. Jones, The Martin P [2005] Lloyd’s Rep IR 174. A distinction has also to be drawn between double insurance as here defined (based on Godin v. London Assurance Co (1758) 1 Burr 489 and North British & Mercantile Insurance Co v. London, Liverpool & Globe Insurance Co (1877) 5 Ch D 569) and the issue of one policy in substitution for another, as in Union Marine Insurance v. Martin (1866) 35 LJCP 181. Equally, an increased value policy does not overlap with the original policy (Boag v. Economic Insurance Co Ltd [1954] 2 Lloyd’s Rep 581). Double insurance requires concurrent policies and not consecutive policies: Phillips v. Syndicate 992 Gunner [2004] Lloyd’s Rep IR 426; Bolton Metropolitan Borough Council v. Municipal Mutual Insurance Ltd [2007] Lloyd’s Rep IR 173.

Subs (2)(a) The purpose of this provision is to allow the assured the benefit of double insurance in the event that one of the underwriters becomes insolvent (Newby v. Reed (1763) 1 W Bl 416; Bousfield v. Barnes (1815) 4 Camp 228; Morgan v. Price (1849) 4 Exch 615; Bruce v. Jones (1863) 1 H & C 769). Where the assured has claimed a disproportionate sum from one of the underwriters, that underwriter has a right of contribution from the others, so that each will ultimately pay its proportionate part of the loss (see s 80 of the Marine Insurance Act 1906). As is anticipated by subs (2)(a), policies commonly provide that the assured is unable to recover from the underwriters in the event that some other policy covers the loss. Alternatively, a policy may contain a rateable proportion clause, under which the assured is restricted to recovering from that underwriter its own proportion of the loss, ie, the amount which it would have paid net of contribution recoveries (Legal & General Assurance Society v. Drake Insurance Co Ltd [1992] 1 All ER 283).

Subs (2)(b) The effect here is that if the assured is underinsured under a valued policy, and first claims part of his loss from another valued or unvalued policy, the amount recoverable under the valued policy is the difference between the agreed value and the sum previously recovered, thereby leaving a potential shortfall. This is based on: Irving v. Richardson (1831) 2 B & Ad 193; Bruce v. Jones (1863) 1 H & C 769 (contra Bousfield v. Barnes (1815) 4 Camp 228). To avoid this, the first claim must be made on any valued policy.

Subs (2)(c) See the note to subs (2)(b) above.

Subs (2)(d) For the right of contribution, see Marine Insurance Act 1906, s 80.

Warranties, etc

Nature of warranty

33.—(1) A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.

2. A warranty may be express or implied.

3. A warranty, as above defined, is a condition which must be exactly complied

with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.

Notes

Subs (1) The word “promissory” encompasses both warranties as to existing facts or intentions (present warranties), and warranties as to future conduct (continuing warranties). In the absence of clear wording, a warranty will not be construed as relating to the assured’s future conduct (Hussain v. Brown [1996] 1 Lloyd’s Rep 627). However, if the warranty is designed to give continuing protection to the underwriters, it will be construed accordingly (Eagle Star Insurance Co Ltd v. Games Video Co, The Game Boy [2004] Lloyd’s Rep IR 867). A warranty by the assured that a permit or certificate has been obtained must be complied with at the time of the statement, and the assured does not have a reasonable period in which to comply with the promise (Agapitos v. Agnew (No 2) [2003] Lloyd’s Rep IR 55). If the warranty is in the nature of an opinion or statement of intention by the assured, breach of warranty depends upon whether the assured held that opinion or intention and not on the assured’s actual conduct at a later date; Gerling-Konzern General Insurance Co v. Polygram Holdings [1998] 2 Lloyd’s Rep 544; Arab Bank v. Zurich Insurance Ltd [1999] 1 Lloyd’s Rep 262. There is no need for a warranty to relate in any way to the likelihood of loss or the nature of the risk (Woolmer v. Muilman (1763) 1 Wm Bl 427; Rich v. Parker (1798) 7 TR 705; Yorkshire Insurance Co Ltd v. Campbell [1917] AC 218). A warranty on its proper construction may be restricted to material facts (see the discussion in Unipac (Scotland) Ltd v. Aegon Insurance Co (UK) Ltd [1999] Lloyd’s Rep IR 502) or to a specific part of the policy (Printpak v. AGF Insurance [1999] Lloyd’s Rep IR 542, but contrast James v. CGU Insurance plc [2002] Lloyd’s Rep IR 206 and International Management Group (UK) Ltd v. Simmonds [2004] Lloyd’s Rep IR 247). A warranty is to be given a reasonable construction consistent with its purposes: thus a warranty by the assured that a yacht would be “fully crewed” required a member of crew on board at all times other than in the case of emergencies making his departure necessary or where temporary departure was necessary to enable him to fulfil his crewing duties (GE Frankona Reinsurance Ltd v. CMM Trust No 1400, The Newfoundland Explorer [2006] Lloyd’s Rep IR 704, and cf. Brownsville Holdings Ltd v. Adamjee Insurance Co Ltd, The Milasan [2000] 2 Lloyd’s Rep 458). These cases were distinguished in Pratt v. Aigaion Insurance Co SA [2009] Lloyd’s Rep IR 149, in which the assured warranted, under a policy on a fishing vessel: “Warranted Owner and/or Owner’s experienced skipper on board and in charge at all times and one experienced crew member.” This was held to mean that the vessel had to be fully crewed while it was at sea, not when it was in port: compliance while the vessel was in port would have been impossible, not the least because no member of the three-man crew could have left the vessel to sell its catches. Judicial dislike of warranties is apparent: see the disparaging comments of the House of Lords in Wasa International Insurance Co Ltd v. Lexington Insurance Co [2009] UKHL 40. See: Sumpiles Investments Pte Ltd v. Axa Insurance Singapore Pte Ltd [2006] 3 SLR 12, where a warranty relating to a floating crane barge was limited to the barge rather than the crane; Bolton v. New Zealand Insurance Co Ltd [1995] 1 NZLR 224, where a vessel ‘‘Warranted no coastal cruising/voyages in coastal waters except during daylight hours’’, wording which was held to be ambiguous and meant no coastal cruising at night but the prohibition did not apply when a sea voyage took the vessel close to the coast at night; Brady v. Irish National Insurance Co Ltd [1986] IR 708—seaworthiness warranty not applicable while the vessel was laid up.

It is also necessary to distinguish a warranty proper from the description of the insured subject matter in the policy. If the subject matter fails to comply with its description the underwriters are off risk for the duration of the default, whereas if a warranty is involved the underwriters’ liability is discharged and cannot be reinstated (cf. s 33(3), below, and see: Provincial Insurance Co v. Morgan [1933] AC 240; Kler Knitwear Ltd v. Lombard General Insurance Co Ltd [2000] Lloyd’s Rep IR 47. The Canadian courts have held on a number of occasions that terms described as warranties are no more than suspensory conditions, so that a loss occurring at a time when the warranty did not apply or was being complied with was covered: Century Insurance Company of Canada v. Case Existological Laboratories Ltd, The Bamcell II [1984] 1 WWR 97 (obligation for watchman to be on board from 2200 hours to 0600 hours); Federal Business Development Bank v. Commonwealth Insurance (1983) 2 CCLI 200 (‘‘Warranted vessel to be laid up at the north foot of Columbia Street”; Shearwater Marine Ltd v. Guardian Insurance Co (1997) 29 BCLR (3d) 13 (warranty requiring daily inspection of vessel and pumped as necessary); Britsky Building Movers v. Dominion Insurance Corporation (1971) 7 Man R (2d) 402 (limits of navigation). Some policies provide that the insurers are discharged from liability only if the assured was in breach of warranty at the date of the loss (see the Newfoundland decision, Ocean Masters Inc v. Allianz AGF MAT Ltd 2007 NLCA 35). In other cases insurers have been willing to concede that the warranty is suspensory only, although in those cases if the assured was in breach then it was at the time of the loss so that the concession has made no difference to the outcome: GE Frankona Reinsurance Ltd v. CMM Trust No 1400, The Newfoundland Explorer [2006] Lloyd’s Rep IR 704; Pratt v. Aigaion Insurance Co SA [2009] Lloyd’s Rep IR 149.

The law on express warranties was developed in a series of old cases—now largely redundant in the light of the modern Institute wordings—concerning matters such as the number of crew (Bean v. Stupart (1778) 1 Doug 11; De Hahn v. Hartley (1786) 1 TR 343), the safety of the ship when the risk was to commence (Kenyon v. Berthon (1778) 1 Doug 12n; Macdowell v. Fraser (1779) 1 Doug 260; Blackhurst v. Cockell (1789) 3 TR 360; Colby v. Hunter (1827) 3 C & P 7), the time by or after which the vessel was to sail (as to which, see s 42 and the note thereto), the course of the voyage (Colledge v. Harty (1851) 6 Exch 205, and cf. the rules on deviation and change of voyage, in ss 44–49) and the requirement for the vessel to sail in convoy (Hibbert v. Pigou (1783) 3 Doug KB 224; Anderson v. Pitcher (1800) 2 Bos & P 164; Sanderson v. Busher (1814) 4 Camp 54n; Warwick v. Scott (1814) 4 Camp 62); and the identity of the master (Tulloch v. Canada [1989] 96 NR 51). The assured may also be required to warrant that the vessel will be used for specific purposes only (Lobb v. Phoenix Assurance Co Ltd [1998] 1 NZLR 285—vessel to be used for cruising in New Zealand territorial waters; Brady v. Irish National Insurance Co Ltd [1986] IR 708, Marler v. Schmucki (1996) 18 OTC 272—vessel warranted laid up; McIntosh v. Royal & Sun Alliance